UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2018
Commission File Number 001-33653
(Exact name of Registrant as specified in its charter)
Ohio | 31-0854434 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
Fifth Third Center
Cincinnati, Ohio 45263
(Address of principal executive offices)
Registrants telephone number, including area code: (800) 972-3030
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of large accelerated filer, accelerated filer, smaller reporting company and emerging growth company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ☒ | Accelerated filer | ☐ | |||
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 if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
There were 668,092,149 shares of the Registrants common stock, without par value, outstanding as of July 31, 2018.
Part I. Financial Information |
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2 | ||||
Managements Discussion and Analysis of Financial Condition and Results of Operations (Item 2) |
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3 | ||||
4 | ||||
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30 | ||||
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54 | ||||
Quantitative and Qualitative Disclosures about Market Risk (Item 3) |
55 | |||
55 | ||||
Condensed Consolidated Financial Statements and Notes (Item 1) |
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56 | ||||
57 | ||||
58 | ||||
59 | ||||
60 | ||||
Notes to Condensed Consolidated Financial Statements (unaudited) |
61 | |||
117 | ||||
117 | ||||
Unregistered Sales of Equity Securities and Use of Proceeds (Item 2) |
118 | |||
118 | ||||
120 |
FORWARD-LOOKING STATEMENTS
This report contains statements that we believe are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended, and Rule 3b-6 promulgated thereunder. These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. They usually can be identified by the use of forward-looking language such as will likely result, may, are expected to, is anticipated, potential, estimate, forecast, projected, intends to, or may include other similar words or phrases such as believes, plans, trend, objective, continue, remain, or similar expressions, or future or conditional verbs such as will, would, should, could, might, can, or similar verbs. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including but not limited to the risk factors set forth in the Risk Factors section in Item 1A in our most recent Annual Report on Form 10-K as updated by our Quarterly Reports on Form 10-Q . When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements we may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to us. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) deteriorating credit quality; (2) loan concentration by location or industry of borrowers or collateral; (3) problems encountered by other financial institutions; (4) inadequate sources of funding or liquidity; (5) unfavorable actions of rating agencies; (6) inability to maintain or grow deposits; (7) limitations on the ability to receive dividends from subsidiaries; (8) cyber-security risks; (9) Fifth Thirds 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 Thirds capital plan; (20) regulation of Fifth Thirds derivatives activities; (21) regulatory objections to Fifth Thirds 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 Thirds 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) risks relating to the potential merger with MB Financial, Inc. and Fifth Thirds ability to realize the anticipated benefits of the merger; (36) difficulties in identifying, acquiring or integrating suitable strategic partnerships, investments or acquisitions; (37) potential dilution from future acquisitions; (38) loss of income and/or difficulties encountered in the sale and separation of businesses, investments or other assets; (39) results of Vantiv Holding, LLC, a subsidiary of Worldpay, Inc. or other investments or acquired entities; (40) difficulties from or changes in Fifth Thirds investment in, relationship with, and nature of the operations of Vantiv Holding, LLC, a subsidiary of Worldpay, Inc.; (41) changes in accounting standards or interpretation or declines in the value of Fifth Thirds goodwill or other intangible assets; (42) inaccuracies or other failures from the use of models; (43) effects of critical accounting policies and judgments or the use of inaccurate estimates; (44) weather related events or other natural disasters; and (45) the impact of reputational risk created by these or other developments on such matters as business generation and retention, funding and liquidity.
1
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 Managements Discussion and Analysis of Financial Condition and Results of Operations, the Condensed Consolidated Financial Statements and the Notes to Condensed Consolidated Financial Statements.
ALCO: Asset Liability Management Committee ALLL: Allowance for Loan and Lease Losses AOCI: Accumulated Other Comprehensive Income (Loss) APR: Annual Percentage Rate ARM: Adjustable Rate Mortgage ASF: Available Stable Funding ASU: Accounting Standards Update ATM: Automated Teller Machine BCBS: Basel Committee on Banking Supervision BHC: Bank Holding Company BOLI: Bank Owned Life Insurance BPO: Broker Price Opinion bps: Basis Points CCAR: Comprehensive Capital Analysis and Review CDC: Fifth Third Community Development Corporation CET1: Common Equity Tier 1 CFPB: Consumer Financial Protection Bureau C&I: Commercial and Industrial DCF: Discounted Cash Flow DFA: Dodd-Frank Wall Street Reform & Consumer Protection Act DTCC: Depository Trust & Clearing Corporation ERM: Enterprise Risk Management ERMC: Enterprise Risk Management Committee EVE: Economic Value of Equity FASB: Financial Accounting Standards Board FDIC: Federal Deposit Insurance Corporation FHA: Federal Housing Administration FHLB: Federal Home Loan Bank FHLMC: Federal Home Loan Mortgage Corporation FICO: Fair Isaac Corporation (credit rating) FINRA: Financial Industry Regulatory Authority FNMA: Federal National Mortgage Association FOMC: Federal Open Market Committee FRB: Federal Reserve Bank FTE: Fully Taxable Equivalent FTP: Funds Transfer Pricing FTS: Fifth Third Securities GDP: Gross Domestic Product GNMA: Government National Mortgage Association GSE: United States Government Sponsored Enterprise |
HQLA: High Quality Liquid Assets IPO: Initial Public Offering IRC: Internal Revenue Code IRLC: Interest Rate Lock Commitment 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: Managements Discussion and Analysis of Financial Condition and Results of Operations MSR: Mortgage Servicing Right N/A: Not Applicable NII: Net Interest Income NM: Not Meaningful NSFR: Net Stable Funding Ratio OAS: Option-Adjusted Spread OCI: Other Comprehensive Income (Loss) OREO: Other Real Estate Owned OTTI: Other-Than-Temporary Impairment PCA: Prompt Corrective Action RCC: Risk Compliance Committee RSF: Required Stable Funding SAR: Stock Appreciation Right SBA: Small Business Administration SCB: Stress Capital Buffer SEC: United States Securities and Exchange Commission SLB: Stress Leverage Buffer TBA: To Be Announced TCJA: Tax Cuts and Jobs Act TDR: Troubled Debt Restructuring TILA: Truth in Lending Act TRA: Tax Receivable Agreement U.S.: United States of America U.S. GAAP: United States Generally Accepted Accounting Principles VA: United States Department of Veteran Affairs VIE: Variable Interest Entity VRDN: Variable Rate Demand Note |
2
Managements Discussion and Analysis of Financial Condition and Results of Operations (Item 2)
The following is Managements Discussion and Analysis of Financial Condition and Results of Operations of certain significant factors that have affected Fifth Third Bancorps (the Bancorp or Fifth Third) financial condition and results of operations during the periods included in the Condensed Consolidated Financial Statements, which are a part of this filing. Reference to the Bancorp incorporates the parent holding company and all consolidated subsidiaries. The Bancorps banking subsidiary is referred to as the Bank.
TABLE 1: Selected Financial Data
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For the three months ended June 30, |
% | For the six months ended June 30, |
% | |||||||||||||||||||||||||
($ in millions, except for per share data) | 2018 | 2017 | Change | 2018 | 2017 | Change | ||||||||||||||||||||||
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Income Statement Data |
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Net interest income (U.S. GAAP) |
$ |
1,020 | 939 | 9 | $ |
2,016 | 1,872 | 8 | ||||||||||||||||||||
Net interest income (FTE)(a)(b) |
1,024 | 945 | 8 | 2,023 | 1,884 | 7 | ||||||||||||||||||||||
Noninterest income |
743 | 564 | 32 | 1,652 | 1,087 | 52 | ||||||||||||||||||||||
Total revenue(a) |
1,767 | 1,509 | 17 | 3,675 | 2,971 | 24 | ||||||||||||||||||||||
Provision for loan and lease losses |
33 | 52 | (37) | 56 | 126 | (56) | ||||||||||||||||||||||
Noninterest expense |
1,037 | 957 | 8 | 2,083 | 1,943 | 7 | ||||||||||||||||||||||
Net income attributable to Bancorp |
586 | 367 | 60 | 1,290 | 672 | 92 | ||||||||||||||||||||||
Net income available to common shareholders |
563 | 344 | 64 | 1,252 | 634 | 97 | ||||||||||||||||||||||
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Common Share Data |
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Earnings per share - basic |
$ |
0.81 | 0.46 | 76 | $ |
1.80 | 0.84 | 115 | ||||||||||||||||||||
Earnings per share - diluted |
0.80 | 0.45 | 78 | 1.77 | 0.83 | 113 | ||||||||||||||||||||||
Cash dividends declared per common share |
0.18 | 0.14 | 29 | 0.34 | 0.28 | 21 | ||||||||||||||||||||||
Book value per share |
21.97 | 20.42 | 8 | 21.97 | 20.42 | 8 | ||||||||||||||||||||||
Market value per share |
28.70 | 25.96 | 11 | 28.70 | 25.96 | 11 | ||||||||||||||||||||||
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Financial Ratios |
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Return on average assets |
1.66 % | 1.05 | 58 | 1.84 % | 0.97 | 90 | ||||||||||||||||||||||
Return on average common equity |
15.3 | 9.0 | 70 | 17.0 | 8.4 | 102 | ||||||||||||||||||||||
Return on average tangible common equity(b) |
18.4 | 10.7 | 72 | 20.4 | 10.0 | 104 | ||||||||||||||||||||||
Dividend payout ratio |
22.2 | 30.4 | (27) | 18.9 | 33.3 | (43) | ||||||||||||||||||||||
Average total Bancorp shareholders equity as a percent of average assets |
11.38 | 11.84 | (4) | 11.45 | 11.78 | (3) | ||||||||||||||||||||||
Tangible common equity as a percent of tangible assets(b)(h) |
9.33 | 9.02 | 3 | 9.33 | 9.02 | 3 | ||||||||||||||||||||||
Net interest margin(a)(b) |
3.21 | 3.01 | 7 | 3.19 | 3.01 | 6 | ||||||||||||||||||||||
Net interest rate spread (a)(b) |
2.86 | 2.75 | 4 | 2.86 | 2.77 | 3 | ||||||||||||||||||||||
Efficiency(a)(b) |
58.7 | 63.4 | (7) | 56.7 | 65.4 | (13) | ||||||||||||||||||||||
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Credit Quality |
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Net losses charged-off |
$ |
94 | 64 | 47 | $ |
175 | 153 | 14 | ||||||||||||||||||||
Net losses charged-off as a percent of average portfolio loans and leases |
0.41 % | 0.28 | 46 | 0.38 % | 0.34 | 12 | ||||||||||||||||||||||
ALLL as a percent of portfolio loans and leases |
1.17 | 1.34 | (13) | 1.17 | 1.34 | (13) | ||||||||||||||||||||||
Allowance for credit losses as a percent of portfolio loans and leases(c) |
1.31 | 1.52 | (14) | 1.31 | 1.52 | (14) | ||||||||||||||||||||||
Nonperforming portfolio assets as a percent of portfolio loans and leases and OREO |
0.52 | 0.72 | (28) | 0.52 | 0.72 | (28) | ||||||||||||||||||||||
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Average Balances |
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Loans and leases, including held for sale |
$ |
93,232 | 92,653 | 1 | $ |
93,051 | 92,721 | - | ||||||||||||||||||||
Total securities and other short-term investments |
34,935 | 33,481 | 4 | 34,806 | 33,329 | 4 | ||||||||||||||||||||||
Total assets |
141,529 | 140,344 | 1 | 141,547 | 140,243 | 1 | ||||||||||||||||||||||
Transaction deposits(d) |
97,574 | 95,825 | 2 | 97,298 | 96,419 | 1 | ||||||||||||||||||||||
Core deposits(e) |
101,592 | 99,570 | 2 | 101,235 | 100,205 | 1 | ||||||||||||||||||||||
Wholesale funding(f) |
20,464 | 20,665 | (1) | 20,511 | 19,900 | 3 | ||||||||||||||||||||||
Bancorp shareholders equity |
16,108 | 16,615 | (3) | 16,209 | 16,522 | (2) | ||||||||||||||||||||||
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Regulatory Capital and Liquidity Ratios |
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CET1 capital(g) |
10.91 % | 10.63 | 3 | 10.91 % | 10.63 | 3 | ||||||||||||||||||||||
Tier I risk-based capital(g) |
12.02 | 11.76 | 2 | 12.02 | 11.76 | 2 | ||||||||||||||||||||||
Total risk-based capital(g) |
15.21 | 15.22 | - | 15.21 | 15.22 | - | ||||||||||||||||||||||
Tier I leverage |
10.24 | 10.07 | 2 | 10.24 | 10.07 | 2 | ||||||||||||||||||||||
Modified LCR |
116 | 115 | 1 | 116 | 115 | 1 | ||||||||||||||||||||||
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(a) | Amounts presented on an FTE basis. The FTE adjustment for the three months ended June 30, 2018 and 2017 was $4 and $6, respectively, and for the six months ended June 30, 2018 and 2017 was $7 and $12, respectively. |
(b) | These are non-GAAP measures. For further information, refer to the Non-GAAP Financial Measures section of MD&A. |
(c) | The allowance for credit losses is the sum of the ALLL and the reserve for unfunded commitments. |
(d) | 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 of off-balance sheet exposures are calculated according to the standardized approach for risk-weighted assets. The resulting values are added together in the Bancorps total risk-weighted assets. |
(h) | Excludes unrealized gains and losses. |
3
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Fifth Third Bancorp is a diversified financial services company headquartered in Cincinnati, Ohio. At June 30, 2018, the Bancorp had $140.7 billion in assets and operated 1,158 full-service banking centers and 2,458 Fifth Third branded ATMs in ten 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 Wealth and Asset Management. The Bancorp also has an approximate 3.3% interest in Vantiv Holding, LLC. The carrying value of the Bancorps investment in Vantiv Holding, LLC was $426 million at June 30, 2018.
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 as well as the Bancorps Annual Report on Form 10-K for the year ended December 31, 2017. Each of these items could have an impact on the Bancorps 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 quarterly report on Form 10-Q. The abbreviations and acronyms identified therein are used throughout this MD&A, as well as the Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements.
Net interest income, net interest margin, net interest rate spread and the efficiency ratio are presented in MD&A on an FTE basis. The FTE basis adjusts for the tax-favored status of income from certain loans and securities held by the Bancorp that are not taxable for federal income tax purposes. The Bancorp believes this presentation to be the preferred industry measurement of net interest income as it provides a relevant comparison between taxable and non-taxable amounts. The FTE basis for presenting net interest income is a non-GAAP measure. For further information, refer to the Non-GAAP Financial Measures section of MD&A.
The Bancorps revenues are dependent on both net interest income and noninterest income. For the three months ended June 30, 2018, net interest income on an FTE basis and noninterest income provided 58% and 42% of total revenue, respectively. For the six months ended June 30, 2018, net interest income on an FTE basis and noninterest income provided 55% and 45% of total revenue, respectively. The Bancorp derives the majority of its revenues within the U.S. from customers domiciled in the U.S. Revenue from foreign countries and external customers domiciled in foreign countries was immaterial to the Condensed Consolidated Financial Statements for both the three and six months ended June 30, 2018. 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 loss on its loan and lease portfolio, as a result of changing expected cash flows caused by borrower credit events, such as loan defaults and inadequate collateral.
Noninterest income is derived from service charges on deposits, wealth and asset management revenue, corporate banking revenue, card and processing revenue, mortgage banking net revenue, net securities gains or losses and other noninterest income. Noninterest expense includes personnel costs, net occupancy expense, technology and communication costs, equipment expense, card and processing expense and other noninterest expense.
Vantiv, Inc. and Vantiv Holding, LLC Transactions
On January 16, 2018, Vantiv, Inc. completed its previously announced acquisition of Worldpay Group plc. with the resulting combined company named Worldpay, Inc. As a result of this transaction, the Bancorp recognized a gain of $414 million in other noninterest income during the first quarter of 2018 associated with the dilution in its ownership interest in Vantiv Holding, LLC from approximately 8.6% to approximately 4.9%.
On June 27, 2018, the Bancorp completed the sale of 5 million shares of Class A common stock of Worldpay, Inc., formerly Vantiv, Inc. The Bancorp had previously received these Class A shares in exchange for Class B Units of Vantiv Holding, LLC. The Bancorp recognized a gain of $205 million related to the sale. As a result of the sale, the Bancorp beneficially owns approximately 3.3% of Worldpays equity through its ownership of approximately 10.3 million Class B Units. The Bancorps remaining interest in Vantiv Holding, LLC of $426 million continues to be accounted for as an equity method investment given the nature of Vantiv Holding, LLCs structure as a limited liability company and contractual arrangements between Vantiv Holding, LLC and the Bancorp.
GS Holdings Transactions
In May 2018, GreenSky, Inc. launched an IPO and issued 38 million shares of Class A common stock for a valuation of $23 per share. In connection with this IPO, the Bancorps investment in GreenSky, LLC, which was comprised of 252,550 membership units, was converted to 2,525,498 units of the newly formed GreenSky Holdings, LLC (GS Holdings), representing a 1.4% interest in GS Holdings. The Bancorps units in GS Holdings are exchangeable on a one-to-one basis for Class A common stock or cash after the initial 180-day lock-up period expires.
4
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
At the time of the IPO, the Bancorp recognized a $16 million gain on its investment in GreenSky, LLC, which was included in other noninterest income in the Condensed Consolidated Statements of Income for the three and six months ended June 30, 2018. At June 30, 2018, the investment in GS Holdings was $53 million, which was included in equity securities in the Condensed Consolidated Balance Sheets.
Accelerated Share Repurchase Transactions
During the six months ended June 30, 2018, the Bancorp entered into or settled accelerated share repurchase transactions. As part of these transactions, the Bancorp entered into forward contracts in which the final number of shares delivered at settlement was based generally on a discount to the average daily volume weighted-average price of the Bancorps common stock during the term of the repurchase agreements. For more information on the accelerated share repurchase program, refer to Note 14 of the Notes to Condensed Consolidated Financial Statements. For a summary of the Bancorps accelerated share repurchase transactions that were entered into or settled during the six months ended June 30, 2018, refer to Table 2.
TABLE 2: Summary of Accelerated Share Repurchase Transactions
Repurchase Date | Amount ($ in millions) |
Shares Repurchased on Repurchase Date |
Shares Received from Forward Contract Settlement |
Total Shares Repurchased |
Settlement Date | |||||||||||||||
December 19, 2017 |
$ | 273 | 7,727,273 | 824,367 | 8,551,640 | March 19, 2018 | ||||||||||||||
February 12, 2018 |
318 | 8,691,318 | 1,015,731 | 9,707,049 | March 26, 2018 | |||||||||||||||
May 25, 2018 |
235 | 6,402,244 | 1,172,122 | 7,574,366 | June 15, 2018 |
Senior Notes Offering
On March 14, 2018, the Bancorp issued and sold $650 million of 3.95% senior fixed-rate notes, with a maturity of ten years, due on March 14, 2028. These notes will be redeemable by the Bancorp, in whole or in part, on or after the date that is 30 days prior to the maturity date at a redemption price equal to 100% of the principal amount of the notes to be redeemed plus accrued and unpaid interest thereon to, but excluding, the redemption date.
On June 5, 2018, the Bancorp issued and sold $250 million of senior floating-rate notes, with a maturity of three years, due on June 4, 2021. Interest on the floating-rate notes is 3-month LIBOR plus 47 bps. These notes will be redeemable, in whole or in part, on or after the date that is 30 days prior to the maturity date at a redemption price equal to 100% of the principal amount of the notes to be redeemed plus accrued and unpaid interest thereon to, but excluding, the redemption date.
2018 Branch Optimization Plan
Customer interactions and service and sales activity in Branch Banking continue to evolve with changing demographics and technology applications. Customers are increasingly utilizing digital tools to interact with their financial institutions in conducting their transactions while still utilizing physical branches for consultations and new product and service initiation. During the past three years, these developments and other business strategies led to a net decrease of 141 in the number of retail branches, or 11% of the Bancorps total branch count, through consolidations and sales.
The Bancorp continues to evaluate its retail network distribution in light of changes in customer behavior while developing new analytical tools that provide enhanced capabilities to optimize the profitability and growth potential of branches. In slower growth mature markets these developments enable the Bancorp to achieve efficiencies through well-executed branch consolidations without materially impacting deposit flows and/or revenue growth while maintaining the service quality standards. While continuing to evaluate such actions, the Bancorp is also focused on achieving higher retail household and deposit growth in other parts of its footprint mainly in markets that exhibit faster economic growth and where the Bancorp has significant opportunities to capture higher market share. To that extent, based on the strategic business evaluation that was performed during the second quarter of 2018, over the next 2-3 years, as part of the 2018 Branch Optimization Plan, the Bancorp plans to close between 100-125 branches in more mature markets and open between 100-125 new branches in higher growth markets where the Bancorp already has a strong and high performing retail branch presence. With the existing local presence and familiarity with the customer demographics, and with newly developed analytical tools, the Bancorp expects to achieve higher growth rates as a result of these actions.
As of June 30, 2018, the Bancorp had identified 29 specific branches for closure under the 2018 Branch Optimization Plan with these closures expected to be completed prior to December 31, 2018. The Bancorp expects to identify the remaining branches to be closed under the 2018 Branch Optimization Plan over the next 12 to 18 months. Additionally, the Bancorp has elected to sell 21 parcels of land which had previously been held for future branch expansion.
The adoption of the 2018 Branch Optimization Plan during the second quarter of 2018 required the Bancorp to perform assessments of the recoverability of the long-lived assets for which the Bancorp believes that it is more likely than not that the assets will be disposed of significantly before the end of their previously estimated useful lives. As a result, during the second quarter of 2018 the Bancorp recognized impairment losses of $33 million associated with these lower of cost or market adjustments in other noninterest income in the Condensed Consolidated Statements of Income. For further information about the 2018 Branch Optimization plan, refer to Note 7 of the Notes to Condensed Consolidated Financial Statements.
Earnings Summary
The Bancorps net income available to common shareholders for the second quarter of 2018 was $563 million, or $0.80 per diluted share, which was net of $23 million in preferred stock dividends. The Bancorps net income available to common shareholders for the second quarter of 2017 was $344 million, or $0.45 per diluted share, which was net of $23 million in preferred stock dividends. The Bancorps net income available to common shareholders for the six months ended June 30, 2018 was $1.3 billion, or $1.77 per diluted share, which was net of $38 million in preferred stock dividends. For the six months ended June 30, 2017, the Bancorps net income available to common shareholders was $634 million, or $0.83 per diluted share, which was net of $38 million in preferred stock dividends.
5
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Net interest income on an FTE basis (non-GAAP) was $1.0 billion and $2.0 billion for the three and six months ended June 30, 2018, respectively, an increase of $79 million and $139 million compared to the same periods in the prior year. Net interest income was positively impacted by increases in yields on average loans and leases and increases in average taxable securities for the three and six months ended June 30, 2018 compared to the same periods in the prior year. Additionally, net interest income was positively impacted by the decisions of the FOMC to raise the target range of the federal funds rate 25 bps in December 2017, March 2018 and June 2018. These positive impacts were partially offset by increases in the rates paid on average interest-bearing core deposits and average long-term debt for both the three and six months ended June 30, 2018 compared to the same periods in the prior year. Net interest margin on an FTE basis (non-GAAP) was 3.21% and 3.19% for the three and six months ended June 30, 2018, respectively compared to 3.01% for both periods in the prior year.
Noninterest income increased $179 million for the three months ended June 30, 2018 compared to the same period in the prior year primarily due to increases in other noninterest income and corporate banking revenue. Other noninterest income increased $165 million during the three months ended June 30, 2018 compared to the three months ended June 30, 2017 primarily due to the gain on sale of Worldpay, Inc. shares, partially offset by an increase in the net losses on disposition and impairment of bank premises and equipment and a reduction in the equity method income from the Bancorps interest in Vantiv Holding, LLC. Corporate banking revenue increased $19 million for the three months ended June 30, 2018 compared to the same period in the prior year primarily due to increases in institutional sales revenue, contract revenue from commercial customer derivatives and foreign exchange fees, partially offset by a decrease in letter of credit fees.
Noninterest income increased $565 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017 primarily due to increases in other noninterest income and corporate banking revenue. Other noninterest income increased $548 million during the six months ended June 30, 2018 compared to the same period in the prior year primarily due to the gain related to Vantiv, Incs acquisition of Worldpay Group plc. that was recognized in the first quarter of 2018 and the aforementioned gain on sale of Worldpay, Inc. shares, partially offset by an increase in the net losses on disposition and impairment of bank premises and equipment, an increase in the loss on the swap associated with the sale of Visa, Inc. Class B Shares and reduction in the equity method income from the Bancorps interest in Vantiv Holding, LLC. Corporate banking revenue increased $33 million during the six months ended June 30, 2018 compared to the same period in the prior year primarily due to increases in lease remarketing fees, institutional sales revenue, contract revenue from commercial customer derivatives and foreign exchange fees, partially offset by decreases in business lending fees and letter of credit fees.
Noninterest expense increased $80 million for the three months ended June 30, 2018 compared to the same period in the prior year primarily due to increases in personnel costs and technology and communications expense. Personnel costs increased $66 million for the three months ended June 30, 2018 compared to the same period in the prior year driven by an increase in base compensation, variable compensation, long-term incentive compensation and severance costs. Technology and communications expense increased $10 million for the three months ended June 30, 2018 compared to the same period in the prior year driven primarily by increased investment in regulatory, compliance and growth initiatives.
Noninterest expense increased $140 million for the six months ended June 30, 2018 compared to the same period in the prior year primarily due to increases personnel costs, technology and communications expense and other noninterest expense. Personnel costs increased $102 million for the six months ended June 30, 2018 compared to the same period in the prior year driven by an increase in base compensation, variable compensation, long-term incentive compensation and severance costs. Technology and communications expense increased $19 million for the six months ended June 30, 2018 compared to the same period in the prior year driven primarily by increased investment in regulatory, compliance and growth initiatives. Other noninterest expense increased $17 million for the six months ended June 30, 2018 compared to the same period in the prior year primarily due to increases in the impairment on affordable housing investments, marketing expense and donations expense, partially offset by an increase in the benefit for the reserve for unfunded commitments.
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 $33 million and $56 million for the three and six months ended June 30, 2018, respectively, compared to $52 million and $126 million for the comparable periods in 2017. Net losses charged-off as a percent of average portfolio loans and leases increased to 0.41% during the three months ended June 30, 2018 compared to 0.28% during the same period in the prior year and increased to 0.38% for the six months ended June 30, 2018 compared to 0.34% for the same period in the prior year. At June 30, 2018, nonperforming portfolio assets as a percent of portfolio loans and leases and OREO decreased to 0.52% compared to 0.53% at December 31, 2017. For further discussion on credit quality refer to the Credit Risk Management subsection of the Risk Management section of MD&A.
Capital Summary
The Bancorps capital ratios exceed the well-capitalized guidelines as defined by the PCA requirements of the U.S. banking agencies. As of June 30, 2018, as calculated under the Basel III standardized approach, the CET1 capital ratio was 10.91%, the Tier I risk-based capital ratio was 12.02%, the Total risk-based capital ratio was 15.21% and the Tier I leverage ratio was 10.24%.
6
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
The following are non-GAAP measures which provide useful insight to the reader of the Condensed Consolidated Financial Statements but should be supplemental to primary U.S. GAAP measures and should not be read in isolation or relied upon as a substitute for the primary U.S. GAAP measures.
The FTE basis adjusts for the tax-favored status of income from certain loans and securities held by the Bancorp that are not taxable for federal income tax purposes. The Bancorp believes this presentation to be the preferred industry measurement of net interest income as it provides a relevant comparison between taxable and non-taxable amounts.
The following table reconciles the non-GAAP financial measures of net interest income on an FTE basis, interest income on an FTE basis, net interest margin, net interest rate spread and the efficiency ratio to U.S. GAAP:
TABLE 3: Non-GAAP Financial Measures - Financial Measures and Ratios on an FTE basis
|
||||||||||||||||||||||||
For the three months ended June 30, |
For the six months ended June 30, |
|||||||||||||||||||||||
($ in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||
|
||||||||||||||||||||||||
Net interest income (U.S. GAAP) |
$ | 1,020 | 939 | 2,016 | 1,872 | |||||||||||||||||||
Add: FTE adjustment |
4 | 6 | 7 | 12 | ||||||||||||||||||||
|
||||||||||||||||||||||||
Net interest income on an FTE basis (1) | $ | 1,024 | 945 | 2,023 | 1,884 | |||||||||||||||||||
Net interest income on an FTE basis (annualized) (2) | 4,107 | 3,790 | 4,080 | 3,768 | ||||||||||||||||||||
Interest income (U.S. GAAP) | $ | 1,269 | 1,106 | 2,474 | 2,192 | |||||||||||||||||||
Add: FTE adjustment | 4 | 6 | 7 | 12 | ||||||||||||||||||||
|
||||||||||||||||||||||||
Interest income on an FTE basis |
$ | 1,273 | 1,112 | 2,481 | 2,204 | |||||||||||||||||||
Interest income on an FTE basis (annualized) (3) |
|
5,106 | 4,460 | 5,003 | 4,445 | |||||||||||||||||||
Interest expense (annualized) (4) |
$ | 999 | 670 | 924 | 645 | |||||||||||||||||||
Noninterest income (5) |
743 | 564 | 1,652 | 1,087 | ||||||||||||||||||||
Noninterest expense (6) |
|
1,037 | 957 | 2,083 | 1,943 | |||||||||||||||||||
Average interest-earning assets (7) |
|
128,167 | 126,134 | 127,857 | 126,050 | |||||||||||||||||||
Average interest-bearing liabilities (8) |
89,222 | 85,320 | 88,419 | 85,106 | ||||||||||||||||||||
Ratios: |
||||||||||||||||||||||||
Net interest margin on an FTE basis (2) / (7) |
3.21 % | 3.01 | 3.19 | 3.01 | ||||||||||||||||||||
Net interest spread on an FTE basis (3) / (7) - (4) / (8) |
2.86 | 2.75 | 2.86 | 2.77 | ||||||||||||||||||||
Efficiency ratio on an FTE basis (6) / (1) + (5) |
58.7 | 63.4 | 56.7 | 65.4 | ||||||||||||||||||||
|
The Bancorp believes return on average tangible common equity is an important measure for comparative purposes with other financial institutions, but is not defined under U.S. GAAP, and therefore is considered a non-GAAP financial measure. This measure is useful for evaluating the performance of a business as it calculates the return available to common shareholders without the impact of intangible assets and their related amortization.
The following table reconciles the non-GAAP financial measure of return on average tangible common equity to U.S. GAAP:
TABLE 4: Non-GAAP Financial Measures - Return on Average Tangible Common Equity
|
||||||||||||||||||||||||
For the three months ended June 30, |
For the six months ended June 30, |
|||||||||||||||||||||||
($ in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||
|
||||||||||||||||||||||||
Net income available to common shareholders (U.S. GAAP) |
$ | 563 | 344 | 1,252 | 634 | |||||||||||||||||||
Add: Intangible amortization, net of tax |
1 | - | 2 | 1 | ||||||||||||||||||||
|
||||||||||||||||||||||||
Tangible net income available to common shareholders | $ | 564 | 344 | 1,254 | 635 | |||||||||||||||||||
Tangible net income available to common shareholders (annualized) (1) | 2,262 | 1,380 | 2,529 | 1,270 | ||||||||||||||||||||
Average Bancorp shareholders equity (U.S. GAAP) | $ | 16,108 | 16,615 | 16,209 | 16,522 | |||||||||||||||||||
Less: Average preferred stock | (1,331) | (1,331) | (1,331) | (1,331) | ||||||||||||||||||||
Average goodwill |
(2,462) | (2,424) | (2,458) | (2,420) | ||||||||||||||||||||
Average intangible assets |
(30) | (18) | (28) | (14) | ||||||||||||||||||||
|
||||||||||||||||||||||||
Average tangible common equity (2) | $ | 12,285 | 12,842 | 12,392 | 12,757 | |||||||||||||||||||
Return on average tangible common equity (1) / (2) |
18.4 % | 10.7 | 20.4 | 10.0 | ||||||||||||||||||||
|
The Bancorp considers various measures when evaluating capital utilization and adequacy, including the tangible equity ratio and tangible common equity ratio, in addition to capital ratios defined by the U.S. banking agencies. These calculations are intended to complement the capital ratios defined by the U.S. banking agencies for both absolute and comparative purposes. Because U.S. GAAP does not include capital ratio measures, the Bancorp believes there are no comparable U.S. GAAP financial measures to these ratios. These ratios are not formally defined by U.S. GAAP or codified in the federal banking regulations and, therefore, are considered to be non-GAAP financial measures. The Bancorp encourages readers to consider its Condensed Consolidated Financial Statements in their entirety and not to rely on any single financial measure.
7
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
The following table reconciles non-GAAP capital ratios to U.S. GAAP:
TABLE 5: Non-GAAP Financial Measures - Capital Ratios
|
||||||||||
As of ($ in millions) | June 30, 2018 |
December 31, 2017 |
||||||||
|
||||||||||
Total Bancorp Shareholders Equity (U.S. GAAP) |
$ | 16,232 | 16,365 | |||||||
Less: Preferred stock |
(1,331) | (1,331) | ||||||||
Goodwill |
(2,462) | (2,445) | ||||||||
Intangible assets |
(30) | (27) | ||||||||
AOCI |
552 | (73) | ||||||||
|
||||||||||
Tangible common equity, excluding unrealized gains / losses (1) |
12,961 | 12,489 | ||||||||
Add: Preferred stock |
1,331 | 1,331 | ||||||||
|
||||||||||
Tangible equity (2) |
$ | 14,292 | 13,820 | |||||||
|
||||||||||
Total Assets (U.S. GAAP) |
$ | 140,695 | 142,193 | |||||||
Less: Goodwill |
(2,462) | (2,445) | ||||||||
Intangible assets |
(30) | (27) | ||||||||
AOCI, before tax |
699 | (92) | ||||||||
|
||||||||||
Tangible assets, excluding unrealized gains / losses (3) |
$ | 138,902 | 139,629 | |||||||
|
||||||||||
Ratios: |
||||||||||
Tangible equity as a percentage of tangible assets (2) / (3) |
10.29 % | 9.90 | ||||||||
Tangible common equity as a percentage of tangible assets (1) / (3) |
9.33 | 8.94 | ||||||||
|
8
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Note 3 of the Notes to Condensed Consolidated Financial Statements provides a discussion of the significant new accounting standards applicable to the Bancorp and the expected impact of significant accounting standards issued, but not yet required to be adopted.
The Bancorps Condensed 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 Bancorps financial position, results of operations and cash flows. The Bancorps 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. These accounting policies are discussed in detail in the Critical Accounting Policies section of the Bancorps Annual Report on Form 10-K for the year ended December 31, 2017. There have been no material changes to the valuation techniques or models during the six months ended June 30, 2018.
9
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Net Interest Income
Net interest income is the interest earned on loans and leases (including yield-related fees), securities and other short-term investments less the interest paid for core deposits (includes transaction deposits and other time deposits) and wholesale funding (includes certificates $100,000 and over, other deposits, federal funds purchased, other short-term borrowings and long-term debt). The net interest margin is calculated by dividing net interest income by average interest-earning assets. Net interest rate spread is the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities. Net interest margin is typically greater than net interest rate spread due to the interest income earned on those assets that are funded by noninterest-bearing liabilities, or free funding, such as demand deposits or shareholders equity.
Tables 6 and 7 present the components of net interest income, net interest margin and net interest rate spread for the three and six months ended June 30, 2018 and 2017, as well as the relative impact of changes in the balance sheet and changes in interest rates on net interest income. Nonaccrual loans and leases and loans and leases held for sale have been included in the average loan and lease balances. Average outstanding securities balances are based on amortized cost with any unrealized gains or losses included in other assets.
Net interest income on an FTE basis (non-GAAP) was $1.0 billion and $2.0 billion for the three and six months ended June 30, 2018, respectively, an increase of $79 million and $139 million compared to the same periods in the prior year. Net interest income was positively impacted by an increase in yields on average loans and leases of 56 bps and 49 bps for the three and six months ended June 30, 2018, respectively and increases in average taxable securities of $1.3 billion for both the three and six months ended June 30, 2018 compared to the same periods in the prior year. Additionally, net interest income was positively impacted by the decisions of the FOMC to raise the target range of the federal funds rate 25 bps in December 2017, March 2018 and June 2018. These positive impacts were partially offset by increases in the rates paid on average interest-bearing core deposits and average long-term debt for both the three and six months ended June 30, 2018 compared to the same periods in the prior year. The rates paid on average interest-bearing core deposits increased 31 bps and 25 bps, respectively, for the three and six months ended June 30, 2018 compared to the same periods in the prior year. The rates paid on average long-term debt increased 35 bps and 27 bps for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year.
Net interest rate spread on an FTE basis (non-GAAP) was 2.86% during both the three and six months ended June 30, 2018 compared to 2.75% and 2.77% in the same periods in the prior year. Yields on average interest-earning assets increased 44 bps and 38 bps for the three and six months ended June 30, 2018, respectively, partially offset by a 33 bps and 29 bps increase in rates paid on average interest-bearing liabilities for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year.
Net interest margin on an FTE basis (non-GAAP) was 3.21% and 3.19% for the three and six months ended June 30, 2018, respectively, compared to 3.01% for both the three and six months ended June 30, 2017. The increase for both periods was driven primarily by the previously mentioned increases in the net interest rate spread partially offset by decreases in average free funding balances. The decreases in average free funding balances for both periods were driven by a decrease in average demand deposits of $2.1 billion and $1.7 billion for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year.
Interest income on an FTE basis from loans and leases (non-GAAP) increased $136 million and $232 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year. The increases were primarily due to the aforementioned increases in yields on average loans and leases, as well as increases in the volume of average other consumer loans. For more information on the Bancorps 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 $25 million and $45 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year primarily as a result of the aforementioned increases in average taxable securities.
Interest expense on core deposits increased $56 million and $91 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year. The increases were primarily due to increases in the cost of average interest-bearing core deposits to 65 bps and 58 bps for the three and six months ended June 30, 2018, respectively, from 34 bps and 33 bps for the three and six months ended June 30, 2017, respectively. The increases in the cost of average interest-bearing core deposits for both periods were primarily due to increases in the rates paid on average interest checking deposits and average money market deposits. Refer to the Deposits subsection of the Balance Sheet Analysis section of MD&A for additional information on the Bancorps deposits.
Interest expense on average wholesale funding increased $26 million and $47 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year primarily due to the aforementioned increases in the rates paid on average long-term debt coupled with increases in average long-term debt. Refer to the Borrowings subsection of the Balance Sheet Analysis section of MD&A for additional information on the Bancorps borrowings. During both the three and six months ended June 30, 2018, average wholesale funding represented 23% of average interest-bearing liabilities compared to 24% and 23% during the three and six months ended June 30, 2017, respectively. For more information on the Bancorps interest rate risk management, including estimated earnings sensitivity to changes in market interest rates, see the Market Risk Management subsection of the Risk Management section of MD&A.
10
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
TABLE 6: Condensed Average Balance Sheets and Analysis of Net Interest Income on an FTE Basis |
| |||||||||||||||||||||||||||||||||||
For the three months ended | June 30, 2018 | June 30, 2017 | Attribution of Change in Net Interest Income(a) |
|||||||||||||||||||||||||||||||||
($ in millions) | Average Balance |
Revenue/ Cost |
Average Yield/ Rate |
Average Balance |
Revenue/ Cost |
Average Yield/ Rate |
Volume | Yield/Rate | Total | |||||||||||||||||||||||||||
Assets: |
||||||||||||||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||||||||||||||
Loans and leases:(b) |
||||||||||||||||||||||||||||||||||||
Commercial and industrial loans |
$ | 42,327 | 449 | 4.26 | % | $ | 41,656 | 374 | 3.60 | % | $ | 6 | 69 | 75 | ||||||||||||||||||||||
Commercial mortgage loans |
6,521 | 72 | 4.43 | 6,861 | 63 | 3.65 | (4) | 13 | 9 | |||||||||||||||||||||||||||
Commercial construction loans |
4,743 | 59 | 4.94 | 4,306 | 43 | 4.01 | 5 | 11 | 16 | |||||||||||||||||||||||||||
Commercial leases |
3,847 | 27 | 2.82 | 4,039 | 27 | 2.73 | (1) | 1 | - | |||||||||||||||||||||||||||
Total commercial loans and leases |
57,438 | 607 | 4.24 | 56,862 | 507 | 3.57 | 6 | 94 | 100 | |||||||||||||||||||||||||||
Residential mortgage loans |
16,213 | 144 | 3.56 | 16,024 | 141 | 3.54 | 2 | 1 | 3 | |||||||||||||||||||||||||||
Home equity |
6,672 | 81 | 4.85 | 7,385 | 77 | 4.20 | (7) | 11 | 4 | |||||||||||||||||||||||||||
Automobile loans |
8,968 | 73 | 3.26 | 9,410 | 67 | 2.87 | (3) | 9 | 6 | |||||||||||||||||||||||||||
Credit card |
2,221 | 66 | 11.96 | 2,080 | 57 | 10.95 | 4 | 5 | 9 | |||||||||||||||||||||||||||
Other consumer loans |
1,720 | 29 | 6.75 | 892 | 15 | 6.63 | 14 | - | 14 | |||||||||||||||||||||||||||
Total consumer loans |
35,794 | 393 | 4.40 | 35,791 | 357 | 4.01 | 10 | 26 | 36 | |||||||||||||||||||||||||||
Total loans and leases |
$ | 93,232 | 1,000 | 4.30 | % | $ | 92,653 | 864 | 3.74 | % | $ | 16 | 120 | 136 | ||||||||||||||||||||||
Securities: |
||||||||||||||||||||||||||||||||||||
Taxable |
33,380 | 266 | 3.20 | 32,092 | 244 | 3.05 | 10 | 12 | 22 | |||||||||||||||||||||||||||
Exempt from income taxes(b) |
81 | 1 | 4.03 | 68 | 1 | 5.10 | - | - | - | |||||||||||||||||||||||||||
Other short-term investments |
1,474 | 6 | 1.62 | 1,321 | 3 | 0.99 | 1 | 2 | 3 | |||||||||||||||||||||||||||
Total interest-earning assets |
$ | 128,167 | 1,273 | 3.98 | % | $ | 126,134 | 1,112 | 3.54 | % | $ | 27 | 134 | 161 | ||||||||||||||||||||||
Cash and due from banks |
2,179 | 2,175 | ||||||||||||||||||||||||||||||||||
Other assets |
12,320 | 13,272 | ||||||||||||||||||||||||||||||||||
Allowance for loan and lease losses |
(1,137) | (1,237) | ||||||||||||||||||||||||||||||||||
Total assets |
$ | 141,529 | $ | 140,344 | ||||||||||||||||||||||||||||||||
Liabilities and Equity: |
||||||||||||||||||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||||||||||||||
Interest checking deposits |
$ | 28,715 | 55 | 0.76 | % | $ | 26,014 | 25 | 0.38 | % | $ | 3 | 27 | 30 | ||||||||||||||||||||||
Savings deposits |
13,618 | 3 | 0.10 | 14,238 | 2 | 0.06 | - | 1 | 1 | |||||||||||||||||||||||||||
Money market deposits |
22,036 | 39 | 0.71 | 20,278 | 17 | 0.34 | 2 | 20 | 22 | |||||||||||||||||||||||||||
Foreign office deposits |
371 | 1 | 0.45 | 380 | - | 0.18 | 1 | - | 1 | |||||||||||||||||||||||||||
Other time deposits |
4,018 | 13 | 1.34 | 3,745 | 11 | 1.23 | 1 | 1 | 2 | |||||||||||||||||||||||||||
Total interest-bearing core deposits |
68,758 | 111 | 0.65 | 64,655 | 55 | 0.34 | 7 | 49 | 56 | |||||||||||||||||||||||||||
Certificates $100,000 and over |
2,155 | 7 | 1.35 | 2,623 | 9 | 1.36 | (2) | - | (2 | ) | ||||||||||||||||||||||||||
Other deposits |
198 | 1 | 1.80 | 264 | 1 | 0.98 | (1) | 1 | - | |||||||||||||||||||||||||||
Federal funds purchased |
1,080 | 5 | 1.76 | 311 | 1 | 0.94 | 3 | 1 | 4 | |||||||||||||||||||||||||||
Other short-term borrowings |
2,452 | 11 | 1.84 | 4,194 | 10 | 0.93 | (6) | 7 | 1 | |||||||||||||||||||||||||||
Long-term debt |
14,579 | 114 | 3.11 | 13,273 | 91 | 2.76 | 11 | 12 | 23 | |||||||||||||||||||||||||||
Total interest-bearing liabilities |
$ | 89,222 | 249 | 1.12 | % | $ | 85,320 | 167 | 0.79 | % | $ | 12 | 70 | 82 | ||||||||||||||||||||||
Demand deposits |
32,834 | 34,915 | ||||||||||||||||||||||||||||||||||
Other liabilities |
3,345 | 3,467 | ||||||||||||||||||||||||||||||||||
Total liabilities |
$ | 125,401 | $ | 123,702 | ||||||||||||||||||||||||||||||||
Total equity |
$ | 16,128 | $ | 16,642 | ||||||||||||||||||||||||||||||||
Total liabilities and equity |
$ | 141,529 | $ | 140,344 | ||||||||||||||||||||||||||||||||
Net interest income (FTE)(c) |
$ | 1,024 | $ | 945 | $ | 15 | 64 | 79 | ||||||||||||||||||||||||||||
Net interest margin (FTE)(c) |
3.21 | % | 3.01 | % | ||||||||||||||||||||||||||||||||
Net interest rate spread (FTE)(c) |
2.86 | 2.75 | ||||||||||||||||||||||||||||||||||
Interest-bearing liabilities to interest-earning assets |
|
69.61 | 67.64 |
(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. |
(b) | The FTE adjustments included in the above table were $4 and $6 for the three months ended June 30, 2018 and 2017, respectively. |
(c) | Net interest income (FTE), net interest margin (FTE) and net interest rate spread (FTE) are non-GAAP measures. For further information, refer to the Non-GAAP Financial Measures section of MD&A. |
11
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
TABLE 7: Condensed Average Balance Sheets and Analysis of Net Interest Income on an FTE Basis
For the six months ended |
June 30, 2018 |
June 30, 2017 |
Attribution of Change in Net Interest Income(a) |
|||||||||||||||||||||||||||||||||
($ in millions) |
Average Balance |
Revenue/ Cost |
Average Yield/ Rate |
Average Balance |
Revenue/ Cost |
Average Yield/ Rate |
Volume |
Yield/Rate |
Total |
|||||||||||||||||||||||||||
Assets: |
||||||||||||||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||||||||||||||
Loans and leases:(b) |
||||||||||||||||||||||||||||||||||||
Commercial and industrial loans |
$ | 42,064 | 858 | 4.11 | % | $ | 41,773 | 732 | 3.53 | % | $ | 5 | 121 | 126 | ||||||||||||||||||||||
Commercial mortgage loans |
6,555 | 140 | 4.32 | 6,903 | 123 | 3.60 | (7) | 24 | 17 | |||||||||||||||||||||||||||
Commercial construction loans |
4,707 | 111 | 4.77 | 4,147 | 80 | 3.89 | 12 | 19 | 31 | |||||||||||||||||||||||||||
Commercial leases |
3,903 | 54 | 2.80 | 3,972 | 54 | 2.71 | (2) | 2 | - | |||||||||||||||||||||||||||
Total commercial loans and leases |
57,229 | 1,163 | 4.10 | 56,795 | 989 | 3.51 | 8 | 166 | 174 | |||||||||||||||||||||||||||
Residential mortgage loans |
16,150 | 287 | 3.58 | 15,912 | 280 | 3.55 | 5 | 2 | 7 | |||||||||||||||||||||||||||
Home equity |
6,780 | 159 | 4.74 | 7,482 | 152 | 4.09 | (16) | 23 | 7 | |||||||||||||||||||||||||||
Automobile loans |
9,016 | 143 | 3.19 | 9,597 | 135 | 2.84 | (8) | 16 | 8 | |||||||||||||||||||||||||||
Credit card |
2,223 | 134 | 12.16 | 2,111 | 125 | 11.95 | 7 | 2 | 9 | |||||||||||||||||||||||||||
Other consumer loans |
1,653 | 54 | 6.67 | 824 | 27 | 6.57 | 27 | - | 27 | |||||||||||||||||||||||||||
Total consumer loans |
35,822 | 777 | 4.38 | 35,926 | 719 | 4.04 | 15 | 43 | 58 | |||||||||||||||||||||||||||
Total loans and leases |
$ | 93,051 | 1,940 | 4.21 | % | $ | 92,721 | 1,708 | 3.72 | % | $ | 23 | 209 | 232 | ||||||||||||||||||||||
Securities: |
||||||||||||||||||||||||||||||||||||
Taxable |
33,257 | 529 | 3.21 | 31,954 | 488 | 3.08 | 21 | 20 | 41 | |||||||||||||||||||||||||||
Exempt from income taxes(b) |
77 | 1 | 2.79 | 61 | 2 | 5.41 | - | (1) | (1 | ) | ||||||||||||||||||||||||||
Other short-term investments |
1,472 | 11 | 1.50 | 1,314 | 6 | 0.86 | - | 5 | 5 | |||||||||||||||||||||||||||
Total interest-earning assets |
$ | 127,857 | 2,481 | 3.91 | % | $ | 126,050 | 2,204 | 3.53 | % | $ | 44 | 233 | 277 | ||||||||||||||||||||||
Cash and due from banks |
2,177 | 2,190 | ||||||||||||||||||||||||||||||||||
Other assets |
12,679 | 13,248 | ||||||||||||||||||||||||||||||||||
Allowance for loan and lease losses |
(1,166) | (1,245) | ||||||||||||||||||||||||||||||||||
Total assets |
$ | 141,547 | $ | 140,243 | ||||||||||||||||||||||||||||||||
Liabilities and Equity: |
||||||||||||||||||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||||||||||||||
Interest checking deposits |
$ | 28,560 | 99 | 0.70 | % | $ | 26,385 | 45 | 0.34 | % | $ | 4 | 50 | 54 | ||||||||||||||||||||||
Savings deposits |
13,582 | 6 | 0.08 | 14,178 | 4 | 0.05 | - | 2 | 2 | |||||||||||||||||||||||||||
Money market deposits |
21,397 | 66 | 0.62 | 20,440 | 34 | 0.33 | 1 | 31 | 32 | |||||||||||||||||||||||||||
Foreign office deposits |
432 | 1 | 0.27 | 417 | - | 0.15 | 1 | - | 1 | |||||||||||||||||||||||||||
Other time deposits |
3,937 | 25 | 1.30 | 3,786 | 23 | 1.23 | 1 | 1 | 2 | |||||||||||||||||||||||||||
Total interest-bearing core deposits |
67,908 | 197 | 0.58 | 65,206 | 106 | 0.33 | 7 | 84 | 91 | |||||||||||||||||||||||||||
Certificates $100,000 and over |
2,220 | 16 | 1.42 | 2,601 | 17 | 1.36 | (2) | 1 | (1 | ) | ||||||||||||||||||||||||||
Other deposits |
288 | 2 | 1.57 | 213 | 1 | 0.85 | - | 1 | 1 | |||||||||||||||||||||||||||
Federal funds purchased |
887 | 7 | 1.63 | 474 | 2 | 0.78 | 2 | 3 | 5 | |||||||||||||||||||||||||||
Other short-term borrowings |
2,438 | 19 | 1.60 | 3,050 | 12 | 0.81 | (3) | 10 | 7 | |||||||||||||||||||||||||||
Long-term debt |
14,678 | 217 | 2.98 | 13,562 | 182 | 2.71 | 16 | 19 | 35 | |||||||||||||||||||||||||||
Total interest-bearing liabilities |
$ | 88,419 | 458 | 1.05 | % | $ | 85,106 | 320 | 0.76 | % | $ | 20 | 118 | 138 | ||||||||||||||||||||||
Demand deposits |
33,327 | 34,999 | ||||||||||||||||||||||||||||||||||
Other liabilities |
3,571 | 3,589 | ||||||||||||||||||||||||||||||||||
Total liabilities |
$ | 125,317 | $ | 123,694 | ||||||||||||||||||||||||||||||||
Total equity |
$ | 16,230 | $ | 16,549 | ||||||||||||||||||||||||||||||||
Total liabilities and equity |
$ | 141,547 | $ | 140,243 | ||||||||||||||||||||||||||||||||
Net interest income (FTE)(c) |
$ | 2,023 | $ | 1,884 | $ | 24 | 115 | 139 | ||||||||||||||||||||||||||||
Net interest margin (FTE)(c) |
3.19 | % | 3.01 | % | ||||||||||||||||||||||||||||||||
Net interest rate spread (FTE)(c) |
2.86 | 2.77 | ||||||||||||||||||||||||||||||||||
Interest-bearing liabilities to interest-earning assets |
|
69.15 | 67.52 |
(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. |
(b) | The FTE adjustments included in the above table were $7 and $12 for the six months ended June 30, 2018 and 2017, respectively. |
(c) | Net interest income (FTE), net interest margin (FTE) and net interest rate spread (FTE) are non-GAAP measures. For further information, refer to the Non-GAAP Financial Measures section of MD&A. |
Provision for Loan and Lease Losses
The Bancorp provides as an expense an amount for probable loan and lease losses within the loan and lease portfolio that is based on factors previously discussed in the Critical Accounting Policies section of the Bancorps Annual Report on Form 10-K for the year ended December 31, 2017. 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 Condensed Consolidated Balance Sheets is referred to as a charge-off. Net charge-offs include current period charge-offs less recoveries on previously charged-off loans and leases.
The provision for loan and lease losses was $33 million and $56 million for the three and six months ended June 30, 2018, respectively, compared to $52 million and $126 million during the same periods in the prior year. The decrease in provision expense for both the three and six months ended June 30, 2018 was primarily due to a decrease in the level of commercial criticized assets combined with overall improved credit quality. The ALLL decreased $119 million from December 31, 2017 to $1.1 billion at June 30, 2018. At June 30, 2018, the ALLL as a percent of portfolio loans and leases decreased to 1.17% compared to 1.30% at December 31, 2017.
12
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Refer to the Credit Risk Management subsection of the Risk Management section of MD&A as well as Note 6 of the Notes to Condensed 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.
Noninterest Income
Noninterest income increased $179 million and $565 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year.
The following table presents the components of noninterest income:
TABLE 8: Components of Noninterest Income
For the three months ended June 30, |
For the six months ended June 30, |
|||||||||||||||||||||||||||
($ in millions) | 2018 | 2017 | % Change | 2018 | 2017 | % Change | ||||||||||||||||||||||
Service charges on deposits |
$ | 137 | 139 | (1) | $ | 275 | 277 | (1) | ||||||||||||||||||||
Wealth and asset management revenue |
108 | 103 | 5 | 221 | 211 | 5 | ||||||||||||||||||||||
Corporate banking revenue |
120 | 101 | 19 | 208 | 175 | 19 | ||||||||||||||||||||||
Card and processing revenue |
84 | 79 | 6 | 163 | 153 | 7 | ||||||||||||||||||||||
Mortgage banking net revenue |
53 | 55 | (4) | 109 | 108 | 1 | ||||||||||||||||||||||
Other noninterest income |
250 | 85 | 194 | 708 | 160 | 343 | ||||||||||||||||||||||
Securities (losses) gains, net |
(5) | - | NM | (15) | 1 | NM | ||||||||||||||||||||||
Securities (losses) gains, net - non-qualifying hedges on MSRs |
(4) | 2 | NM | (17) | 2 | NM | ||||||||||||||||||||||
Total noninterest income |
$ | 743 | 564 | 32 | $ | 1,652 | 1,087 | 52 |
Wealth and asset management revenue
Wealth and asset management revenue increased $5 million and $10 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year. The increase for both the three and six months ended June 30, 2018 compared to the same periods in the prior year was primarily due to increases of $3 million and $8 million, respectively, in private client service fees driven by an increase in assets under management as a result of strong market performance and increased asset production. The Bancorps trust and registered investment advisory businesses had approximately $368 billion and $330 billion in total assets under care at June 30, 2018 and 2017, respectively, and managed $37 billion and $34 billion in assets for individuals, corporations and not-for-profit organizations at June 30, 2018 and 2017, respectively.
Corporate banking revenue
Corporate banking revenue increased $19 million and $33 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year. The increase for the three months ended June 30, 2018 compared to the same period in the prior year was primarily driven by increases in institutional sales revenue, contract revenue from commercial customer derivatives and foreign exchange fees of $11 million, $5 million and $4 million, respectively. These benefits were partially offset by a decrease in letter of credit fees of $2 million. The increase for the six months ended June 30, 2018 compared to the same period in the prior year was primarily driven by increases in lease remarketing fees, institutional sales revenue, contract revenue from commercial customer derivatives and foreign exchange fees of $26 million, $7 million, $6 million and $5 million, respectively. The increase in lease remarketing fees for the six months ended June 30, 2018 included the impact of a $31 million impairment charge related to certain operating lease assets that was recognized during the first quarter of 2017. These benefits were partially offset by decreases in business lending fees and letter of credit fees of $6 million and $4 million, respectively.
Card and processing revenue
Card and processing revenue increased $5 million and $10 million for the three and six months ended June 30, 2018 compared to the same periods in the prior year. The increases for both the three and six months ended June 30, 2018 compared to the same periods in the prior year were primarily driven by an increase in the number of actively used cards and customer spend volume.
Mortgage banking net revenue
Mortgage banking net revenue decreased $2 million for the three months ended June 30, 2018 and increased $1 million for the six months ended June 30, 2018 compared to the same periods in the prior year.
13
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
The following table presents the components of mortgage banking net revenue:
TABLE 9: Components of Mortgage Banking Net Revenue
| ||||||||||||
For the three months ended June 30, |
For the six months ended | |||||||||||
($ in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||
| ||||||||||||
Origination fees and gains on loan sales |
$ | 28 | 37 | 52 | 66 | |||||||
Net mortgage servicing revenue: |
||||||||||||
Gross mortgage servicing fees |
54 | 49 | 106 | 97 | ||||||||
Net valuation adjustments on MSRs and free-standing derivatives purchased to economically hedge MSRs |
(29 | ) | (31) | (49) | (55) | |||||||
Net mortgage servicing revenue |
25 | 18 | 57 | 42 | ||||||||
Mortgage banking net revenue |
$ | 53 | 55 | 109 | 108 |
Origination fees and gains on loan sales decreased $9 million and $14 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year driven by a decrease in originations and lower margins due to the interest rate environment. Residential mortgage loan originations decreased to $2.1 billion and $3.6 billion during the three and six months ended June 30, 2018, respectively, compared to $2.3 billion and $4.2 billion during the same periods in the prior year.
Net mortgage servicing revenue increased $7 million and $15 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year. The increases for the three and six months ended June 30, 2018 compared to the same periods in the prior year included increases in gross mortgage servicing fees of $5 million and $9 million, respectively, and decreases in net negative valuation adjustments of $2 million and $6 million, respectively. Refer to Table 10 for the components of net valuation adjustments on the MSR portfolio and the impact of the non-qualifying hedging strategy:
TABLE 10: Components of Net Valuation Adjustments on MSRs
| ||||||||||||
For the three months ended June 30, |
For the six months ended | |||||||||||
($ in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||
Changes in fair value and settlement of free-standing derivatives purchased to economically hedge the MSR portfolio |
$ | (16) | 16 | (65) | 15 | |||||||
Changes in fair value: |
||||||||||||
Due to changes in inputs or assumptions |
21 | (17) | 78 | (13) | ||||||||
Other changes in fair value |
(34) | (30) | (62) | (57) | ||||||||
Net valuation adjustments on MSR and free-standing derivatives purchased to economically hedge MSRs |
$ | (29) | (31) | (49) | (55) |
Mortgage rates increased during both the three and six months ended June 30, 2018 which caused modeled prepayment speeds to slow. The fair value of the MSR increased $21 million and $78 million, respectively, due to changes to inputs to the valuation model including prepayment speeds and OAS spread assumptions and decreased $34 million and $62 million, respectively, due to the passage of time, including the impact of regularly scheduled repayments, paydowns and payoffs for the three and six months ended June 30, 2018.
Mortgage rates decreased during both the three and six months ended June 30, 2017 which caused modeled prepayments speeds to increase, which led to fair value adjustments on servicing rights. The fair value of the MSR decreased $17 million and $13 million, respectively, due to changes to inputs to the valuation model including prepayment speeds and OAS spread assumptions and decreased $30 million and $57 million, respectively, due to the passage of time, including the impact of regularly scheduled repayments, paydowns and payoffs for the three and six months ended June 30, 2017.
Further detail on the valuation of MSRs can be found in Note 10 of the Notes to Condensed Consolidated Financial Statements. The Bancorp maintains a non-qualifying hedging strategy to manage a portion of the risk associated with changes in the valuation of the MSR portfolio. Refer to Note 11 of the Notes to Condensed Consolidated Financial Statements for more information on the free-standing derivatives used to economically hedge the MSR portfolio.
In addition to the derivative positions used to economically hedge the MSR portfolio, the Bancorp acquires various securities as a component of its non-qualifying hedging strategy. The Bancorp recognized net losses of $4 million and $17 million during the three and six months ended June 30, 2018, respectively, and net gains of $2 million during both the three and six months ended June 30, 2017, recorded in securities (losses) gains, net - non-qualifying hedges on MSRs in the Bancorps Condensed Consolidated Statements of Income.
The Bancorps total residential mortgage loans serviced at June 30, 2018 and 2017 were $78.5 billion and $78.0 billion, respectively, with $62.2 billion and $61.8 billion, respectively, of residential mortgage loans serviced for others.
14
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Other noninterest income
The following table presents the components of other noninterest income:
TABLE 11: Components of Other Noninterest Income
For the three months ended June 30, |
For the six months ended June 30, |
|||||||||||||||||
($ in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||||
Gain related to Vantiv, Inc.s acquisition of Worldpay Group plc. |
$ | - | - | 414 | - | |||||||||||||
Gain on sale of Worldpay, Inc. shares |
205 | - | 205 | - | ||||||||||||||
Operating lease income |
22 | 24 | 45 | 49 | ||||||||||||||
Private equity investment income |
16 | 12 | 35 | 26 | ||||||||||||||
Cardholder fees |
14 | 13 | 27 | 27 | ||||||||||||||
BOLI income |
14 | 13 | 27 | 25 | ||||||||||||||
Insurance income |
5 | 2 | 11 | 3 | ||||||||||||||
Consumer loan and lease fees |
6 | 6 | 11 | 11 | ||||||||||||||
Banking center income |
6 | 5 | 11 | 10 | ||||||||||||||
Loss on swap associated with the sale of Visa, Inc. Class B Shares |
(10 | ) | (9) | (49) | (22) | |||||||||||||
Net losses on disposition and impairment of bank premises and equipment |
(33 | ) | (1) | (41) | (2) | |||||||||||||
Net losses on loan sales |
- | - | (1) | (2) | ||||||||||||||
Equity method (loss) income from interest in Vantiv Holding, LLC |
- | 12 | (1) | 24 | ||||||||||||||
Other, net |
5 | 8 | 14 | 11 | ||||||||||||||
Total other noninterest income |
$ | 250 | 85 | 708 | 160 |
Other noninterest income increased $165 million during the three months ended June 30, 2018 compared to the same period in the prior year primarily due to the gain on sale of Worldpay, Inc. shares, partially offset by an increase in the net losses on disposition and impairment of bank premises and equipment and a reduction in the equity method income from the Bancorps interest in Vantiv Holding, LLC.
The Bancorp recognized a $205 million gain on the sale of Worldpay, Inc. shares during the three months ended June 30, 2018. For more information, refer to Note 17 of the Notes to Condensed Consolidated Financial Statements. Net losses on disposition and impairment of bank premises and equipment for the three months ended June 30, 2018 included the impact of branch impairment charges of $33 million. For more information, refer to Note 7 of the Notes to Condensed Consolidated Financial Statements. Equity method income from the Bancorps interest in Vantiv Holding, LLC decreased $12 million for the three months ended June 30, 2018 compared to the same period in the prior year primarily due to a decrease in the Bancorps ownership percentage in Vantiv Holding, LLC from approximately 17.7% as of June 30, 2017 to approximately 3.3% as of June 30, 2018 and the impact of a reduction in Vantiv Holding, LLC net income for the three months ended June 30, 2018 compared to the same period in the prior year.
Other noninterest income increased $548 million during the six months ended June 30, 2018 compared to the same period in the prior year primarily due to the gain related to Vantiv, Incs acquisition of Worldpay Group plc. and the gain on sale of Worldpay, Inc. shares, partially offset by an increase in the net losses on disposition and impairment of bank premises and equipment, an increase in the loss on the swap associated with the sale of Visa, Inc. Class B Shares and a reduction in the equity method income from the Bancorps interest in Vantiv Holding, LLC.
The Bancorp recognized a $414 million gain related to Vantiv, Inc.s acquisition of Worldpay Group plc. during the six months ended June 30, 2018. For more information, refer to Note 17 of the Notes to Condensed Consolidated Financial Statements. The increase for the six months ended June 30, 2018 also included the impact of the previously mentioned $205 million gain on the sale of Worldpay, Inc. shares. Net losses on disposition and impairment of bank premises and equipment for the six months ended June 30, 2018 included the impact of the previously mentioned branch impairment charges of $33 million. During the six months ended June 30, 2018, the Bancorp recognized negative valuation adjustments of $49 million related to the Visa total return swap compared to negative valuation adjustments of $22 million during the six months ended June 30, 2017. The increase from the prior period was attributable to litigation developments and an increase in Visa, Inc.s share price during the six months ended June 30, 2018. 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 15, Note 16 and Note 21 of the Notes to Condensed Consolidated Financial Statements. Equity method earnings from the Bancorps interest in Vantiv Holding, LLC decreased $25 million compared to the six months ended June 30, 2017 primarily due to a decrease in the Bancorps ownership percentage in Vantiv Holding, LLC and the impact of Worldpay, Inc.s acquisition and integration costs.
Noninterest Expense
Noninterest expense increased $80 million for the three months ended June 30, 2018 compared to the same period in the prior year primarily due to increases in personnel costs (salaries, wages and incentives plus employee benefits) and technology and communications expense. Noninterest expense increased $140 million for the six months ended June 30, 2018 compared to the same period in the prior year primarily due to increases personnel costs, technology and communications expense and other noninterest expense.
15
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
The following table presents the components of noninterest expense:
TABLE 12: Components of Noninterest Expense
For the three months ended June 30, |
For the six months ended June 30, |
|||||||||||||||||||||||
($ in millions) | 2018 | 2017 | % Change | 2018 | 2017 | % Change | ||||||||||||||||||
Salaries, wages and incentives |
$ | 471 | 397 | 19 | $ | 918 | 808 | 14 | ||||||||||||||||
Employee benefits |
78 | 86 | (9) | 188 | 196 | (4) | ||||||||||||||||||
Net occupancy expense |
74 | 70 | 6 | 149 | 148 | 1 | ||||||||||||||||||
Technology and communications |
67 | 57 | 18 | 135 | 116 | 16 | ||||||||||||||||||
Equipment expense |
30 | 29 | 3 | 61 | 57 | 7 | ||||||||||||||||||
Card and processing expense |
30 | 33 | (9) | 60 | 63 | (5) | ||||||||||||||||||
Other noninterest expense |
287 | 285 | 1 | 572 | 555 | 3 | ||||||||||||||||||
Total noninterest expense |
$ | 1,037 | 957 | 8 | $ | 2,083 | 1,943 | 7 | ||||||||||||||||
Efficiency ratio on an FTE basis(a) |
58.7 | % | 63.4 | 56.7 | % | 65.4 |
(a) | This is a non-GAAP measure. For further information, refer to the Non-GAAP Financial Measures section of MD&A. |
Personnel costs increased $66 million and $102 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year driven by an increase in base compensation, variable compensation, long-term incentive compensation and severance costs. The increase in base compensation was primarily due to personnel additions in information technology as well as an increase in the Bancorps minimum wage as a result of benefits received from the TCJA. Full-time equivalent employees totaled 18,163 at June 30, 2018 compared to 17,744 at June 30, 2017.
Technology and communications expense increased $10 million and $19 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year driven primarily by increased investment in regulatory, compliance and growth initiatives.
The following table presents the components of other noninterest expense:
TABLE 13: Components of Other Noninterest Expense
| ||||||||||||||
For the three months ended June 30, |
For the six months ended June 30, | |||||||||||||
($ in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||
Impairment on affordable housing investments |
$ |
47 | 38 | 95 | 77 | |||||||||
FDIC insurance and other taxes |
34 | 32 | 66 | 65 | ||||||||||
Marketing |
30 | 30 | 62 | 49 | ||||||||||
Loan and lease |
29 | 24 | 55 | 46 | ||||||||||
Operating lease |
20 | 21 | 40 | 46 | ||||||||||
Losses and adjustments |
16 | 11 | 33 | 26 | ||||||||||
Professional service fees |
16 | 22 | 30 | 44 | ||||||||||
Data processing |
15 | 15 | 28 | 28 | ||||||||||
Travel |
13 | 12 | 26 | 23 | ||||||||||
Postal and courier |
8 | 11 | 18 | 23 | ||||||||||
Donations |
13 | 3 | 16 | 6 | ||||||||||
Recruitment and education |
8 | 9 | 16 | 17 | ||||||||||
Supplies |
4 | 4 | 7 | 7 | ||||||||||
Insurance |
3 | 3 | 6 | 6 | ||||||||||
(Benefit from) provision for the reserve for unfunded commitments |
(20) | 3 | (30 | ) | 1 | |||||||||
Other, net |
51 | 47 | 104 | 91 | ||||||||||
Total other noninterest expense |
$ |
287 | 285 | 572 | 555 |
Other noninterest expense increased $2 million for the three months ended June 30, 2018 compared to the same period in the prior year primarily due to increases in donations expense and impairment on affordable housing investments, partially offset by an increase in the benefit from the reserve for unfunded commitments. Donations expense increased $10 million for the three months ended June 30, 2018 compared to the same period in the prior year primarily due to a contribution to the Fifth Third Foundation. Impairment on affordable housing investments increased $9 million for the three months ended June 30, 2018 compared to the same period in the prior year primarily driven by the change in the federal statutory corporate tax rate pursuant to the TCJA. The benefit from the reserve for unfunded commitments was $20 million for the three months ended June 30, 2018 compared to a provision for the reserve for unfunded commitments of $3 million for the same period in the prior year as a result of overall improved credit quality.
Other noninterest expense increased $17 million for the six months ended June 30, 2018 compared to the same period in the prior year primarily due to increases in the impairment on affordable housing investments, marketing expense and donations expense, partially offset by an increase in the benefit for the reserve for unfunded commitments. Impairment on affordable housing investments increased $18 million for the six months ended June 30, 2018 compared to the same period in the prior year primarily driven by the change in the federal statutory corporate tax rate pursuant to the TCJA. Marketing expense increased $13 million for the six months ended June 30, 2018 compared to the same period in the prior year primarily due to promotional offers during the six months ended June 30, 2018. Donations expense increased $10 million for the six months ended June 30, 2018 compared to the same period in the prior year primarily due to a contribution to the Fifth Third Foundation. The benefit from the reserve for unfunded commitments was $30 million for the six months ended June 30, 2018 compared to a provision for the reserve for unfunded commitments of $1 million for the same period in the prior year as a result of overall improved credit quality.
16
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Applicable Income Taxes
The following table presents the Bancorps income before income taxes, applicable income tax expense and effective tax rate:
TABLE 14: Applicable Income Taxes
For the three months ended |
For the six months ended | |||||||||
($ in millions) | 2018 | 2017 | 2018 | 2017 | ||||||
|
| |||||||||
Income before income taxes |
$ |
693 | 494 | 1,529 | 890 | |||||
Applicable income tax expense |
107 | 127 | 239 | 218 | ||||||
Effective tax rate |
15.5% | 25.9 | 15.7 | 24.5 |
Applicable income tax expense for all periods includes the benefit from tax-exempt income, tax-advantaged investments, and tax credits, partially offset by the effect of certain nondeductible expenses. The tax credits are associated with the Low-Income Housing Tax Credit program established under Section 42 of the IRC, the New Markets Tax Credit program established under Section 45D of the IRC, the Rehabilitation Investment Tax Credit program established under Section 47 of the IRC, and the Qualified Zone Academy Bond program established under Section 1397E of the IRC.
The decreases in the effective tax rates for the three and six months ended June 30, 2018 compared to the same periods in the prior year were primarily related to the reduction in the federal statutory corporate tax rate partially offset by changes to previously deductible items associated with the enactment of the TCJA.
For stock-based awards, U.S. GAAP requires that the tax consequences for the difference between the expense recognized for financial reporting and the Bancorps actual tax deduction for the stock-based awards be recognized through income tax expense in the interim periods in which they occur. The Bancorp cannot predict its stock price or whether and when its employees will exercise stock-based awards in the future. Based on its stock price at June 30, 2018, the Bancorp estimates that it may be necessary to recognize $15 million of additional income tax benefit over the next twelve months related to the settlement of stock-based awards primarily in the first half of 2019. However, the amount of income tax expense or benefit recognized upon settlement may vary significantly from expectations based on the Bancorps stock price and the number of SARs exercised by employees.
17
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Loans and Leases
The Bancorp classifies its commercial loans and leases based upon primary purpose and consumer loans based upon product or collateral. Table 15 summarizes end of period loans and leases, including loans and leases held for sale and Table 16 summarizes average total loans and leases, including loans and leases held for sale.
TABLE 15: Components of Total Loans and Leases (including loans and leases held for sale)
June 30, 2018 | December 31, 2017 | |||||||||||||
As of ($ in millions) | Carrying Value | % of Total | Carrying Value | % of Total | ||||||||||
Commercial loans and leases: |
||||||||||||||
Commercial and industrial loans |
$ |
41,447 | 45 |
$ | 41,170 | 45 | ||||||||
Commercial mortgage loans |
6,697 | 7 |
6,610 | 7 | ||||||||||
Commercial construction loans |
4,687 | 5 |
4,553 | 5 | ||||||||||
Commercial leases |
3,797 | 4 | 4,068 | 4 | ||||||||||
Total commercial loans and leases |
56,628 | 61 | 56,401 | 61 | ||||||||||
Consumer loans: |
||||||||||||||
Residential mortgage loans |
16,298 | 18 | 16,077 | 17 | ||||||||||
Home equity |
6,599 | 7 | 7,014 | 8 | ||||||||||
Automobile loans |
8,938 | 10 | 9,112 | 10 | ||||||||||
Credit card |
2,270 | 2 | 2,299 | 2 | ||||||||||
Other consumer loans |
1,982 | 2 | 1,559 | 2 | ||||||||||
Total consumer loans |
36,087 | 39 | 36,061 | 39 | ||||||||||
Total loans and leases |
$ |
92,715 | 100 | $ | 92,462 | 100 | ||||||||
Total portfolio loans and leases (excluding loans and leases held for sale) |
$ |
91,932 | $ | 91,970 |
Loans and leases, including loans and leases held for sale, increased $253 million from December 31, 2017. The increase from December 31, 2017 was the result of a $227 million increase in commercial loans and leases as well as a $26 million increase in consumer loans.
Commercial loans and leases increased from December 31, 2017 due to increases in commercial and industrial loans, commercial construction loans and commercial mortgage loans, partially offset by a decrease in commercial leases. Commercial and industrial loans increased $277 million, or 1%, from December 31, 2017 primarily as a result of an increase in new loan originations as well as a decrease in payoffs during the six months ended June 30, 2018. Commercial construction loans increased $134 million, or 3%, from December 31, 2017 primarily due to increases in demand and draw levels on existing commitments. Commercial mortgage loans increased $87 million, or 1%, from December 31, 2017 primarily due to an increase in permanent financing from the Bancorps commercial construction loan portfolio. Commercial leases decreased $271 million, or 7%, from December 31, 2017 primarily as a result of a planned reduction in indirect non-relationship based lease originations.
Consumer loans increased from December 31, 2017 due to increases in other consumer loans and residential mortgage loans, partially offset by decreases in home equity, automobile loans and credit card. Other consumer loans increased $423 million, or 27%, from December 31, 2017 primarily due to growth in point-of-sale loan originations. Residential mortgage loans increased $221 million, or 1%, from December 31, 2017 primarily due to the continued retention of certain agency conforming ARMs and certain other fixed-rate loans originated during the six months ended June 30, 2018. Home equity decreased $415 million, or 6%, from December 31, 2017 as payoffs exceeded new loan production. Automobile loans decreased $174 million, or 2%, from December 31, 2017 as payoffs exceeded new loan production due to a strategic shift focusing on improving risk-adjusted returns. Credit card decreased $29 million, or 1%, from December 31, 2017 primarily due to seasonal trends from the paydown of year-end balances which were higher due to holiday spending.
TABLE 16: Components of Average Loans and Leases (including loans and leases held for sale)
June 30, 2018 | June 30, 2017 | |||||||||||||||
For the three months ended ($ in millions) | Carrying Value | % of Total | Carrying Value | % of Total | ||||||||||||
Commercial loans and leases: |
||||||||||||||||
Commercial and industrial loans |
$ | 42,327 | 45 | $ | 41,656 | 45 | ||||||||||
Commercial mortgage loans |
6,521 | 7 | 6,861 | 7 | ||||||||||||
Commercial construction loans |
4,743 | 5 | 4,306 | 5 | ||||||||||||
Commercial leases |
3,847 | 4 | 4,039 | 4 | ||||||||||||
Total commercial loans and leases |
57,438 | 61 | 56,862 | 61 | ||||||||||||
Consumer loans: |
||||||||||||||||
Residential mortgage loans |
16,213 | 18 | 16,024 | 18 | ||||||||||||
Home equity |
6,672 | 7 | 7,385 | 8 | ||||||||||||
Automobile loans |
8,968 | 10 | 9,410 | 10 | ||||||||||||
Credit card |
2,221 | 2 | 2,080 | 2 | ||||||||||||
Other consumer loans |
1,720 | 2 | 892 | 1 | ||||||||||||
Total consumer loans |
35,794 | 39 | 35,791 | 39 | ||||||||||||
Total average loans and leases |
$ | 93,232 | 100 | $ | 92,653 | 100 | ||||||||||
Total average portfolio loans and leases (excluding loans and leases held for sale) |
$ | 92,557 | $ | 91,972 |
18
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Average loans and leases, including loans and leases held for sale, increased $579 million from June 30, 2017. The increase from June 30, 2017 was the result of a $576 million, or 1%, increase in average commercial loans and leases as well as a $3 million increase in average consumer loans.
Average commercial loans and leases increased from June 30, 2017 due to an increase in average commercial and industrial and commercial construction loans, partially offset by a decrease in average commercial mortgage loans and commercial leases. Average commercial and industrial loans increased $671 million, or 2%, from June 30, 2017 primarily as a result of an increase in new loan origination as well as a decrease in payoffs. Average commercial construction loans increased $437 million, or 10%, from June 30, 2017 primarily due to increases in demand and draw levels on existing commitments. Average commercial mortgage loans decreased $340 million, or 5%, from June 30, 2017 primarily due to a decline in new loan origination activity driven by increased competition and an increase in paydowns. Average commercial leases decreased $192 million, or 5%, from June 30, 2017 primarily as a result of a planned reduction in indirect non-relationship based lease originations.
Average consumer loans increased from June 30, 2017 primarily due to increases in average other consumer loans and average residential mortgage loans, partially offset by decreases in average home equity and average automobile loans. Average other consumer loans increased $828 million, or 93%, June 30, 2017 primarily due to growth in point-of-sale loan originations. Average residential mortgage loans increased $189 million, or 1%, from June 30, 2017 primarily driven by the continued retention of certain agency conforming ARMs and certain other fixed-rate loans. Average home equity decreased $713 million, or 10%, from June 30, 2017 as payoffs exceeded new loan production. Average automobile loans decreased $442 million, or 5%, from June 30, 2017 as payoffs exceeded new loan production due to a strategic shift focusing on improving risk-adjusted returns.
Investment Securities
The Bancorp uses investment securities as a means of managing interest rate risk, providing both collateral for pledging purposes and liquidity for satisfying regulatory requirements. Total investment securities were $32.7 billion at both June 30, 2018 and December 31, 2017. The taxable investment securities portfolio had an effective duration of 5.2 years at June 30, 2018 compared to 4.7 years at December 31, 2017.
Debt securities are classified as available-for-sale when, in managements judgment, they may be sold in response to, or in anticipation of, changes in market conditions. Securities that management has the intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost. Debt securities are classified as trading when bought and held principally for the purpose of selling them in the near term. At June 30, 2018, the Bancorps investment portfolio consisted primarily of AAA-rated available-for-sale debt securities. The Bancorp held $8 million in below investment grade securities at June 30, 2018 and an immaterial amount as of December 31, 2017. For the three and six months ended June 30, 2018 the Bancorp did not recognize OTTI on any of its available-for-sale debt and other securities. For the three and six months ended June 30, 2017 the Bancorp recognized $14 million and $24 million, respectively, of OTTI on its available-for-sale debt and other securities, included in securities (losses) gains, net, in the Condensed Consolidated Statements of Income.
The following table summarizes the end of period components of investment securities:
TABLE 17: Components of Investment Securities
As of ($ in millions) | June 30, 2018 |
December 31, 2017 |
||||||
Available-for-sale debt and other securities (amortized cost basis): |
||||||||
U.S. Treasury and federal agencies securities |
$ | 98 | 98 | |||||
Obligations of states and political subdivisions securities |
34 | 43 | ||||||
Mortgage-backed securities: |
||||||||
Agency residential mortgage-backed securities(a) |
16,405 | 15,281 | ||||||
Agency commercial mortgage-backed securities |
10,308 | 10,113 | ||||||
Non-agency commercial mortgage-backed securities |
3,149 | 3,247 | ||||||
Asset-backed securities and other debt securities |
1,981 | 2,183 | ||||||
Other securities(b) |
614 | 612 | ||||||
Total available-for-sale debt and other securities |
$ | 32,589 | 31,577 | |||||
Held-to-maturity securities (amortized cost basis): |
||||||||
Obligations of states and political subdivisions securities |
$ | 17 | 22 | |||||
Asset-backed securities and other debt securities |
2 | 2 | ||||||
Total held-to-maturity securities |
$ | 19 | 24 | |||||
Trading debt securities (fair value): |
||||||||
U.S. Treasury and federal agencies securities |
$ | 19 | 12 | |||||
Obligations of states and political subdivisions securities |
58 | 22 | ||||||
Agency residential mortgage-backed securities |
75 | 395 | ||||||
Asset-backed securities and other debt securities |
128 | 63 | ||||||
Total trading debt securities |
$ | 280 | 492 | |||||
Total equity securities |
$ | 475 | 439 |
(a) | Includes interest-only mortgage-backed securities of $34 as of December 31, 2017 recorded at fair value with fair value changes recorded in securities gains, net in the Condensed Consolidated Statements of Income. |
(b) | Other securities consist of FHLB, FRB and DTCC restricted stock holdings of $248, $364 and $2, respectively, at June 30, 2018 and $248, $362, and $2, respectively, at December 31, 2017, that are carried at cost. |
19
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
On an amortized cost basis, available-for-sale debt and other securities increased $1.0 billion from December 31, 2017 primarily due to increases in agency residential mortgage-backed securities and agency commercial mortgage-backed securities, partially offset by a decrease in asset-backed securities and other debt securities.
On an amortized cost basis, available-for-sale debt and other securities were 26% and 25% of total interest-earning assets at June 30, 2018 and December 31, 2017, respectively. The estimated weighted-average life of the debt securities in the available-for-sale debt and other securities portfolio was 6.7 years at June 30, 2018 compared to 6.5 years at December 31, 2017. In addition, at June 30, 2018, the debt securities in the available-for-sale debt and other securities portfolio had a weighted-average yield of 3.22%, compared to 3.18% at December 31, 2017.
Trading debt securities decreased $212 million from December 31, 2017 primarily due to a decrease in agency residential mortgage-backed securities.
Information presented in Table 18 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 total available-for-sale debt and other securities portfolio exclude other securities that have no stated yield or maturity. Total net unrealized losses on the available-for-sale debt and other securities portfolio were $628 million at June 30, 2018 compared to net unrealized gains of $174 million at December 31, 2017. The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. The fair value of investment securities generally decreases when interest rates increase or when credit spreads expand.
TABLE 18: Characteristics of Available-for-Sale Debt and Other Securities
As of June 30, 2018 ($ 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 |
$ | - | - | - | 3.65 % | |||||||||||
Average life 1 5 years |
98 | 96 | 4.6 | 2.16 | ||||||||||||
Total |
$ | 98 | 96 | 4.6 | 2.16 % | |||||||||||
Obligations of states and political subdivisions securities:(a) |
||||||||||||||||
Average life of 1 year or less |
27 | 28 | 0.8 | 3.91 | ||||||||||||
Average life 1 5 years |
5 | 5 | 1.0 | 3.77 | ||||||||||||
Average life 5 10 years |
2 | 2 | 6.2 | - | ||||||||||||
Total |
$ | 34 | 35 | 1.1 | 3.69 % | |||||||||||
Agency residential mortgage-backed securities: |
||||||||||||||||
Average life of 1 year or less |
1 | 1 | 0.2 | 4.43 | ||||||||||||
Average life 1 5 years |
5,869 | 5,799 | 4.3 | 3.43 | ||||||||||||
Average life 5 10 years |
9,490 | 9,290 | 7.3 | 3.18 | ||||||||||||
Average life greater than 10 years |
1,045 | 1,004 | 11.0 | 3.09 | ||||||||||||
Total |
$ | 16,405 | 16,094 | 6.5 | 3.26 % | |||||||||||
Agency commercial mortgage-backed securities: |
||||||||||||||||
Average life of 1 year or less |
197 | 189 | 0.9 | 2.56 | ||||||||||||
Average life 1 5 years |
2,443 | 2,395 | 3.4 | 3.12 | ||||||||||||
Average life 5 10 years |
5,299 | 5,177 | 7.8 | 3.06 | ||||||||||||
Average life greater than 10 years |
2,369 | 2,277 | 11.6 | 3.12 | ||||||||||||
Total |
$ | 10,308 | 10,038 | 7.5 | 3.08 % | |||||||||||
Non-agency commercial mortgage-backed securities: |
||||||||||||||||
Average life of 1 year or less |
- | - | 0.4 | 4.53 | ||||||||||||
Average life 1 5 years |
338 | 334 | 4.5 | 3.25 | ||||||||||||
Average life 5 10 years |
2,811 | 2,752 | 6.7 | 3.26 | ||||||||||||
Total |
$ | 3,149 | 3,086 | 6.5 | 3.26 % | |||||||||||
Asset-backed securities and other debt securities: |
||||||||||||||||
Average life of 1 year or less |
31 | 31 | 0.5 | 3.38 | ||||||||||||
Average life 1 5 years |
839 | 838 | 3.6 | 3.93 | ||||||||||||
Average life 5 10 years |
914 | 930 | 6.6 | 3.46 | ||||||||||||
Average life greater than 10 years |
197 | 199 | 10.5 | 3.41 | ||||||||||||
Total |
$ | 1,981 | 1,998 | 5.6 | 3.65 % | |||||||||||
Other securities |
614 | 614 | ||||||||||||||
Total available-for-sale debt and other securities |
$ | 32,589 | 31,961 | 6.7 | 3.22 % |
(a) | Taxable-equivalent yield adjustments included in the above table are 1.04%, 0.98%, 0.00% and 0.98% for securities with an average life of 1 year or less, 1-5 years, 5-10 years and in total, respectively. |
20
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Deposits
The Bancorps deposit balances represent an important source of funding and revenue growth opportunity. The Bancorp continues to focus on core deposit growth in its retail and commercial franchises by improving customer satisfaction, building full relationships and offering competitive rates. Average core deposits represented 72% and 71% of the Bancorps average asset funding base at June 30, 2018 and December 31, 2017, respectively.
The following table presents the end of period components of deposits:
TABLE 19: Components of Deposits
June 30, 2018 | December 31, 2017 | |||||||||||||||||
As of ($ in millions) | Balance | % of Total | Balance | % of Total | ||||||||||||||
Demand |
$ | 32,680 | 32 | $ | 35,276 | 34 | ||||||||||||
Interest checking |
29,452 | 28 | 27,703 | 27 | ||||||||||||||
Savings |
13,455 | 13 | 13,425 | 13 | ||||||||||||||
Money market |
21,593 | 21 | 20,097 | 19 | ||||||||||||||
Foreign office |
336 | - | 484 | 1 | ||||||||||||||
Transaction deposits |
97,516 | 94 | 96,985 | 94 | ||||||||||||||
Other time |
4,058 | 4 | 3,775 | 4 | ||||||||||||||
Core deposits |
101,574 | 98 | 100,760 | 98 | ||||||||||||||
Certificates $100,000 and over(a) |
2,557 | 2 | 2,402 | 2 | ||||||||||||||
Total deposits |
$ | 104,131 | 100 | $ | 103,162 | 100 |
(a) | Includes $1.4 billion and $1.3 billion of institutional, retail and wholesale certificates $250,000 and over at June 30, 2018 and December 31, 2017, respectively. |
Core deposits increased $814 million, or 1%, from December 31, 2017 primarily driven by an increase of $531 million in transaction deposits. Transaction deposits increased from December 31, 2017 primarily due to increases in interest checking deposits and money market deposits, partially offset by a decrease in demand deposits. Interest checking deposits increased $1.7 billion, or 6%, from December 31, 2017 driven primarily by balance migration from demand deposit accounts and higher balances per commercial customer account. Money market deposits increased $1.5 billion, or 7%, from December 31, 2017 primarily as a result of promotional rate offers facilitated by the rising-rate environment which drove consumer customer acquisition. Demand deposits decreased $2.6 billion, or 7%, from December 31, 2017 primarily as a result of the aforementioned commercial customer balance migration into interest checking deposits and lower balances per commercial customer account due to commercial customer seasonality.
The following table presents the components of average deposits for the three months ended:
TABLE 20: Components of Average Deposits
June 30, 2018 | June 30, 2017 | |||||||||||||||||
($ in millions) | Balance | % of Total | Balance | % of Total | ||||||||||||||
Demand |
$ | 32,834 | 32 | $ | 34,915 | 34 | ||||||||||||
Interest checking |
28,715 | 28 | 26,014 | 25 | ||||||||||||||
Savings |
13,618 | 13 | 14,238 | 14 | ||||||||||||||
Money market |
22,036 | 21 | 20,278 | 20 | ||||||||||||||
Foreign office |
371 | - | 380 | - | ||||||||||||||
Transaction deposits |
97,574 | 94 | 95,825 | 93 | ||||||||||||||
Other time |
4,018 | 4 | 3,745 | 4 | ||||||||||||||
Core deposits |
101,592 | 98 | 99,570 | 97 | ||||||||||||||
Certificates $100,000 and over(a) |
2,155 | 2 | 2,623 | 3 | ||||||||||||||
Other |
198 | - | 264 | - | ||||||||||||||
Total average deposits |
$ | 103,945 | 100 | $ | 102,457 | 100 |
(a) | Includes $1.1 billion and $1.3 billion of average institutional, retail and wholesale certificates $250,000 and over for the three months ended June 30, 2018 and 2017, respectively. |
On an average basis, core deposits increased $2.0 billion from June 30, 2017 primarily due to an increase of $1.7 billion in average transaction deposits. The increase in average transaction deposits was driven by increases in average interest checking deposits and average money market deposits, partially offset by decreases in average demand deposits and average savings deposits. Average interest checking deposits increased $2.7 billion, or 10%, from June 30, 2017, primarily due to balance migration from demand deposit accounts and an increase in average balances per commercial customer account. Average money market deposits increased $1.8 billion, or 9%, from June 30, 2017 primarily as a result of promotional rate offers facilitated by the rising-rate environment which drove consumer customer acquisition. Average demand deposits decreased $2.1 billion, or 6%, from June 30, 2017 primarily due to commercial customer balance migration into interest checking deposits and a decrease in average balances per commercial customer account.
Average certificates $100,000 and over decreased $468 million from June 30, 2017 primarily due to the maturity and run-off of commercial certificates of deposit since June 30, 2017.
21
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Contractual maturities
The contractual maturities of certificates $100,000 and over as of June 30, 2018 are summarized in the following table:
TABLE 21: Contractual Maturities of Certificates $100,000 and Over
|
||||
($ in millions) |
||||
|
||||
Next 3 months |
$ | 411 | ||
3-6 months |
328 | |||
6-12 months |
950 | |||
After 12 months |
868 | |||
Total certificates $100,000 and over |
$ | 2,557 |
The contractual maturities of other time deposits and certificates $100,000 and over as of June 30, 2018 are summarized in the following table:
TABLE 22: Contractual Maturities of Other Time Deposits and Certificates $100,000 and Over
|
||||
($ in millions) |
||||
|
||||
Next 12 months |
$ | 3,575 | ||
13-24 months |
2,115 | |||
25-36 months |
731 | |||
37-48 months |
163 | |||
49-60 months |
23 | |||
After 60 months |
8 | |||
Total other time deposits and certificates $100,000 and over |
$ | 6,615 |
Borrowings
The Bancorp accesses a variety of short-term and long-term funding sources. Borrowings with original maturities of one year or less are classified as short-term and include federal funds purchased and other short-term borrowings. As of June 30, 2018, average total borrowings as a percent of average interest-bearing liabilities were 20% compared to 21% at December 31, 2017.
The following table summarizes the end of period components of borrowings:
TABLE 23: Components of Borrowings
As of ($ in millions) | June 30, 2018 | December 31, 2017 | ||||||
Federal funds purchased |
$ | 597 | 174 | |||||
Other short-term borrowings |
1,763 | 4,012 | ||||||
Long-term debt |
14,321 | 14,904 | ||||||
Total borrowings |
$ | 16,681 | 19,090 |
Total borrowings decreased $2.4 billion, or 13%, from December 31, 2017 primarily due to a decrease in other short-term borrowings. Other short-term borrowings decreased $2.2 billion from December 31, 2017 driven by a decrease in FHLB advances. The level of other short-term borrowings can fluctuate significantly from period to period depending on funding needs and which sources are used to satisfy those needs. For further information on the components of other short-term borrowings, refer to Note 12 of the Notes to Condensed Consolidated Financial Statements. Long-term debt decreased $583 million from December 31, 2017 primarily driven by the maturity of $600 million of unsecured senior bank notes and $500 million of unsecured subordinated debt, $264 million of paydowns on long-term debt associated with automobile loan securitizations and $86 million of fair value adjustments associated with interest rate swaps hedging long-term debt during the six months ended June 30, 2018. These decreases were partially offset by the issuance of $650 million of unsecured fixed-rate senior notes and $250 million of unsecured floating-rate senior notes since December 31, 2017. For additional information regarding the long-term debt issuance, refer to Note 13 of the Notes to Condensed Consolidated Financial Statements.
The following table summarizes components of average borrowings for the three months ended:
TABLE 24: Components of Average Borrowings
($ in millions) | June 30, 2018 | June 30, 2017 | ||||||
Federal funds purchased |
$ | 1,080 | 311 | |||||
Other short-term borrowings |
2,452 | 4,194 | ||||||
Long-term debt |
14,579 | 13,273 | ||||||
Total average borrowings |
$ | 18,111 | 17,778 |
Total average borrowings increased $333 million, or 2%, compared to June 30, 2017, due to increases in average long-term debt and average federal funds purchased partially offset by decreases in other short-term borrowings. Average long-term debt increased $1.3 billion compared to June 30, 2017. The increase was primarily driven by the issuance of $1.1 billion and $650 million of unsecured senior bank notes during the fourth quarter of 2017 and the first quarter of 2018, respectively, partially offset by the maturity of $500 million of unsecured subordinated debt during the second quarter of 2018. Average federal funds purchased increased $769 million due to additional borrowings. Average other short-term borrowings decreased $1.7 billion compared to June 30, 2017, primarily driven by the decrease in FHLB advances. Information on the average rates paid on borrowings is discussed in the Net Interest Income subsection of the Statements of Income Analysis section of MD&A. In addition, refer to the Liquidity Risk Management subsection of the Risk Management section of MD&A for a discussion on the role of borrowings in the Bancorps liquidity management.
22
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
The Bancorp reports on four business segments: Commercial Banking, Branch Banking, Consumer Lending and Wealth and Asset Management. Additional information on each business segment is included in Note 22 of the Notes to Condensed Consolidated Financial Statements. Results of the Bancorps 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 Bancorps business segments are not necessarily comparable with similar information for other financial institutions. The Bancorp refines its methodologies from time to time as managements accounting practices and businesses change.
The Bancorp manages interest rate risk centrally at the corporate level. By employing an FTP methodology, the business segments are insulated from most benchmark interest rate volatility, enabling them to focus on serving customers through the origination of loans and acceptance of deposits. The FTP methodology assigns charge rates and credit rates to classes of assets and liabilities, respectively, based on the estimated amount and timing of the cash flows for each transaction. Assigning the FTP rate based on matching the duration of cash flows allocates interest income and interest expense to each business segment so its resulting net interest income is insulated from future changes in benchmark interest rates. The Bancorps FTP methodology also allocates the contribution to net interest income of the asset-generating and deposit-providing businesses on a duration-adjusted basis to better attribute the driver of the performance. As the asset and liability durations are not perfectly matched, the residual impact of the FTP methodology is captured in General Corporate and Other. The charge and credit rates are determined using the FTP rate curve, which is based on an estimate of Fifth Thirds marginal borrowing cost in the wholesale funding markets. The FTP curve is constructed using the U.S. swap curve, brokered CD pricing and unsecured debt pricing.
The Bancorp adjusts the FTP charge and credit rates as dictated by changes in interest rates for various interest-earning assets and interest-bearing liabilities and by the review of behavioral assumptions, such as prepayment rates on interest-earning assets and the estimated durations for indeterminate-lived deposits. Key assumptions, including the credit rates provided for deposit accounts, are reviewed annually. Credit rates for deposit products and charge rates for loan products may be reset more frequently in response to changes in market conditions. The credit rates for several deposit products were reset January 1, 2018 to reflect the current market rates and updated market assumptions. These rates were generally higher than those in place during 2017, thus net interest income for deposit-providing business segments was positively impacted during 2018. FTP charge rates on assets were affected by the prevailing level of interest rates and by the duration and repricing characteristics of the portfolio. As overall market rates increased, the FTP charge increased for asset-generating business segments during 2018.
The Bancorps methodology for allocating provision for loan and lease losses expense to the business segments includes charges or benefits associated with changes in criticized commercial loan levels in addition to actual net charge-offs experienced by the loans and leases owned by each business segment. Provision for loan and lease losses expense attributable to loan and lease growth and changes in ALLL factors is captured in General Corporate and Other. The financial results of the business segments include allocations for shared services and headquarters expenses. Additionally, the business segments form synergies by taking advantage of cross-sell opportunities and funding operations by accessing the capital markets as a collective unit.
The results of operations and financial position for the three and six months ended June 30, 2017 were adjusted to reflect changes in internal expense allocation methodologies.
The following table summarizes net income (loss) by business segment:
TABLE 25: Net Income (Loss) by Business Segment
For the three months ended June 30, |
For the six months ended June 30, | |||||||||||
($ in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||
Income Statement Data |
||||||||||||
Commercial Banking |
$ | 289 | 237 | 547 | 453 | |||||||
Branch Banking |
147 | 111 | 282 | 215 | ||||||||
Consumer Lending |
(3) | 3 | (14) | 1 | ||||||||
Wealth and Asset Management |
33 | 17 | 44 | 33 | ||||||||
General Corporate and Other |
120 | (1) | 431 | (30) | ||||||||
Net income |
$ | 586 | 367 | 1,290 | 672 |
23
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
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 26: Commercial Banking
For the three months ended June 30, |
For the six months ended June 30, | |||||||||||
($ in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||
Income Statement Data |
||||||||||||
Net interest income (FTE)(a) |
$ | 431 | 421 | 853 | 851 | |||||||
(Benefit from) provision for loan and lease losses |
(10) | 22 | (29) | 29 | ||||||||
Noninterest income: |
||||||||||||
Corporate banking revenue |
119 | 100 | 205 | 173 | ||||||||
Service charges on deposits |
70 | 73 | 139 | 146 | ||||||||
Other noninterest income |
40 | 55 | 103 | 110 | ||||||||
Noninterest expense: |
||||||||||||
Personnel costs |
80 | 69 | 168 | 154 | ||||||||
Other noninterest expense |
278 | 261 | 575 | 535 | ||||||||
Income before income taxes (FTE) |
312 | 297 | 586 | 562 | ||||||||
Applicable income tax expense(a)(b) |
23 | 60 | 39 | 109 | ||||||||
Net income |
$ | 289 | 237 | 547 | 453 | |||||||
Average Balance Sheet Data |
||||||||||||
Commercial loans and leases, including held for sale |
$ | 54,267 | 53,747 | 54,110 | 53,703 | |||||||
Demand deposits |
16,593 | 19,227 | 17,358 | 19,555 | ||||||||
Interest checking deposits |
11,099 | 8,821 | 10,689 | 9,030 | ||||||||
Savings and money market deposits |
4,663 | 5,533 | 4,554 | 5,942 | ||||||||
Other time deposits and certificates $100,000 and over |
329 | 927 | 469 | 947 | ||||||||
Foreign office deposits |
370 | 379 | 431 | 391 |
(a) | Includes FTE adjustments of $4 and $6 for the three months ended June 30, 2018 and 2017, respectively, and $7 and $12 for the six months ended June 30, 2018 and 2017, respectively. This is a non-GAAP measure. |
(b) | Applicable income tax expense for all periods includes the tax benefit from tax-exempt income, tax-advantaged investments and tax credits, partially offset by the effect of certain nondeductible expenses. Refer to the Applicable Income Taxes subsection of the Statements of Income Analysis section of MD&A for additional information. |
Net income was $289 million for the three months ended June 30, 2018 compared to net income of $237 million for the three months ended June 30, 2017. Net income was $547 million for the six months ended June 30, 2018 compared to net income of $453 million for the six months ended June 30, 2017. The increase for both periods was driven by decreases in the provision for loan and lease losses and increases in net interest income on an FTE basis and noninterest income partially offset by increases in noninterest expense.
Net interest income on an FTE basis increased $10 million and $2 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year primarily driven by increases in yields on average commercial loans and leases and increases in FTP credits on interest checking deposits due to an increase in FTP credit rates. These increases were partially offset by increases in FTP charge rates on loans and leases and increases in the rates paid on core deposits.
Provision for loan and lease losses decreased $32 million and $58 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year primarily driven by decreases in criticized asset levels partially offset by increases in net charge-offs. Net charge-offs as a percent of average portfolio loans and leases increased to 33 bps and 23 bps for the three and six months ended June 30, 2018 compared to 14 bps and 20 bps for the same periods in the prior year.
Noninterest income increased $1 million and $18 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year primarily due to increases in corporate banking revenue partially offset by decreases in other noninterest income and service charges on deposits. Corporate banking revenue increased $19 million for the three months ended June 30, 2018 compared to the same period in the prior year driven by increases in institutional sales revenue, contract revenue from commercial customer derivatives and foreign exchange fees partially offset by letter of credit fees. Corporate banking revenue increased $32 million for the six months ended June 30, 2018 compared to the same period in the prior year driven by increases in lease remarketing fees, institutional sales revenue, contract revenue from commercial customer derivatives and foreign exchange fees partially offset by decreases in business lending fees and letter of credit fees. The increase in lease remarketing fees for the six months ended June 30, 2018 included the impact of a $31 million impairment charge related to certain operating lease assets that was recognized during the first quarter of 2017. Other noninterest income decreased $15 million and $7 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year driven by decreases in private equity investment income. Additionally, service charges on deposits decreased $3 million and $7 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year.
24
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Noninterest expense increased $28 million and $54 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year as a result of increases in other noninterest expense and personnel costs. Other noninterest expense increased $17 million and $40 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year primarily due to increases in corporate overhead allocations and impairment on affordable housing investments. Personnel costs increased $11 million and $14 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year due to increased incentive compensation and base compensation.
Average commercial loans and leases increased $520 million and $407 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year primarily due to increases in average commercial and industrial loans and average commercial construction loans partially offset by decreases in average commercial mortgage loans. Average commercial and industrial loans increased $586 million and $210 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year as a result of an increase in new loan originations as well as a decrease in payoffs. Average commercial construction loans increased $421 million and $558 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year primarily due to an increase in demand and draw levels on existing commitments. Average commercial mortgage loans decreased $288 million and $289 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year due to a decline in new loan origination activity driven by increased competition and an increase in paydowns.
Average core deposits decreased $1.2 billion and $1.9 billion for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year. The decrease for the three and six months ended June 30, 2018 was driven by decreases in average demand deposits of $2.6 billion and $2.2 billion, respectively, and average savings and money market deposits of $870 million and $1.4 billion, respectively, compared to the same periods in the prior year primarily due to lower average balances per account. These decreases were partially offset by increases in average interest checking deposits of $2.3 billion and $1.7 billion for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year primarily due to balance migration from demand deposit accounts and increases in average balances per account.
Branch Banking
Branch Banking provides a full range of deposit and loan products to individuals and small businesses through 1,158 full-service banking centers. Branch Banking offers depository and loan products, such as checking and savings accounts, home equity loans and lines of credit, credit cards and loans for automobiles and other personal financing needs, as well as products designed to meet the specific needs of small businesses, including cash management services.
The following table contains selected financial data for the Branch Banking segment:
TABLE 27: Branch Banking
For the three months ended June 30, |
For the six months ended June 30, |
|||||||||||||||||||||||
($ in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||
Income Statement Data |
||||||||||||||||||||||||
Net interest income |
$ | 499 | 437 | 965 | 867 | |||||||||||||||||||
Provision for loan and lease losses |
47 | 39 | 90 | 80 | ||||||||||||||||||||
Noninterest income: |
||||||||||||||||||||||||
Service charges on deposits |
67 | 66 | 134 | 130 | ||||||||||||||||||||
Card and processing revenue |
69 | 64 | 133 | 122 | ||||||||||||||||||||
Wealth and asset management revenue |
37 | 35 | 74 | 71 | ||||||||||||||||||||
Other noninterest income |
(6 | ) | 24 | 12 | 51 | |||||||||||||||||||
Noninterest expense: |
||||||||||||||||||||||||
Personnel costs |
137 | 130 | 273 | 261 | ||||||||||||||||||||
Net occupancy and equipment expense |
56 | 56 | 113 | 116 | ||||||||||||||||||||
Card and processing expense |
30 | 33 | 59 | 62 | ||||||||||||||||||||
Other noninterest expense |
209 | 197 | 426 | 390 | ||||||||||||||||||||
Income before income taxes |
187 | 171 | 357 | 332 | ||||||||||||||||||||
Applicable income tax expense |
40 | 60 | 75 | 117 | ||||||||||||||||||||
Net income |
$ | 147 | 111 | 282 | 215 | |||||||||||||||||||
Average Balance Sheet Data |
||||||||||||||||||||||||
Consumer loans |
$ | 12,873 | 12,966 | 12,953 | 13,069 | |||||||||||||||||||
Commercial loans |
1,910 | 1,942 | 1,891 | 1,934 | ||||||||||||||||||||
Demand deposits |
14,467 | 13,980 | 14,262 | 13,820 | ||||||||||||||||||||
Interest checking deposits |
10,318 | 10,304 | 10,317 | 10,233 | ||||||||||||||||||||
Savings and money market deposits |
29,551 | 27,778 | 28,993 | 27,472 | ||||||||||||||||||||
Other time deposits and certificates $100,000 and over |
5,236 | 4,945 | 5,135 | 4,992 |
Net income was $147 million for the three months ended June 30, 2018 compared to net income of $111 million for the three months ended June 30, 2017. Net income was $282 million for the six months ended June 30, 2018 compared to $215 million for the six months ended June 30, 2017. The increase for both periods was driven by increases in net interest income partially offset by decreases in noninterest income and increases in noninterest expense and provision for loan and lease losses.
25
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Net interest income increased $62 million and $98 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year. The increase in net interest income for both periods was primarily due to increases in FTP credit rates on core deposits as well as increases in interest income on other consumer loans driven by higher average balances. These benefits were partially offset by increases in FTP charge rates on loans and leases and increases in the rates paid on money market deposits. Additionally, for the six months ended June 30, 2018, the increase in net income interest was partially offset by the impact of a $12 million benefit in the first quarter of 2017 related to a revised estimate of refunds to be offered to certain bankcard customers.
Provision for loan and lease losses increased $8 million and $10 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year primarily due to increases in net charge-offs on credit card as well as the negative impact from higher criticized asset levels. Net charge-offs as a percent of average portfolio loans and leases increased to 112 bps and 117 bps for the three and six months ended June 30, 2018, respectively, compared to 104 bps and 106 bps for the three and six months ended June 30, 2017, respectively.
Noninterest income decreased $22 million and $21 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year primarily due to decreases in other noninterest income partially offset by increases in card and processing revenue. Other noninterest income decreased $30 million and $39 million for the three and six months ended June 30, 2018, respectively, compared to the same period in the prior year primarily due to the impact of impairment on bank premises and equipment. Card and processing revenue increased $5 million and $11 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year primarily driven by an increase in the number of actively used cards and customer spend volume.
Noninterest expense increased $16 million and $42 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year primarily due to increases in other noninterest expense and personnel expense. Other noninterest expense increased $12 million and $36 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year primarily due to increases in corporate overhead allocations, marketing expense and loan and lease expense. Personnel expense increased $7 million and $12 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year primarily due to higher base compensation.
Average consumer loans decreased $93 million and $116 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year. The decrease for both periods was primarily driven by decreases in average home equity loans of $560 million and $546 million for the three and six months ended June 30, 2018, respectively, and decreases in average residential mortgage loans of $321 million and $320 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year as payoffs exceeded new loan production. The decrease for both periods was partially offset by increases in average other consumer loans of $944 million and $918 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year primarily due to growth in point-of-sale loan originations.
Average core deposits increased $2.6 billion and $2.2 billion for the three and six months ended June 30, 2018 compared to the same periods in the prior year. The increase for both periods was primarily driven by growth in average savings and money market deposits of $1.8 billion and $1.5 billion and growth in average demand deposits of $487 million and $442 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year primarily due to increases in average balances per customer account and the acquisition of new customers.
Consumer Lending
Consumer Lending includes the Bancorps residential mortgage, home equity, automobile and other indirect lending activities. Lending activities include the origination, retention and servicing of residential mortgage and home equity loans or lines of credit, sales and securitizations of those loans, pools of loans or lines of credit and all associated hedging activities. Indirect lending activities include extending loans to consumers through correspondent lenders and automobile dealers.
26
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
The following table contains selected financial data for the Consumer Lending segment:
TABLE 28: Consumer Lending
For the three months ended June 30, |
For the six months ended June 30, |
|||||||||||||||||||||||
($ in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||
Income Statement Data |
||||||||||||||||||||||||
Net interest income |
$ | 59 | 59 | 118 | 120 | |||||||||||||||||||
Provision for loan and lease losses |
8 | 7 | 20 | 22 | ||||||||||||||||||||
Noninterest income: |
||||||||||||||||||||||||
Mortgage banking net revenue |
52 | 54 | 106 | 105 | ||||||||||||||||||||
Other noninterest income |
- | 8 | (10 | ) | 11 | |||||||||||||||||||
Noninterest expense: |
||||||||||||||||||||||||
Personnel costs |
52 | 50 | 102 | 97 | ||||||||||||||||||||
Other noninterest expense |
55 | 59 | 109 | 116 | ||||||||||||||||||||
(Loss) income before income taxes |
(4 | ) | 5 | (17 | ) | 1 | ||||||||||||||||||
Applicable income tax (benefit) expense |
(1 | ) | 2 | (3 | ) | - | ||||||||||||||||||
Net (loss) income |
$ | (3 | ) | 3 | (14 | ) | 1 | |||||||||||||||||
Average Balance Sheet Data |
||||||||||||||||||||||||
Residential mortgage loans, including held for sale |
$ | 11,838 | 11,429 | 11,758 | 11,296 | |||||||||||||||||||
Home equity |
249 | 301 | 254 | 307 | ||||||||||||||||||||
Automobile loans |
8,638 | 8,921 | 8,670 | 9,080 |
Consumer Lending incurred a net loss of $3 million for the three months ended June 30, 2018 compared to net income of $3 million for the three months ended June 30, 2017. Consumer Lending incurred a net loss of $14 million for the six months ended June 30, 2018 compared to net income of $1 million for the six months ended June 30, 2017. The decrease for both periods was driven by decreases in noninterest income partially offset by decreases in the noninterest expense.
Provision for loan and lease losses increased $1 million and decreased $2 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year. Net charge-offs as a percent of average portfolio loans and leases increased to 16 bps for the three months ended June 30, 2018 compared to 14 bps for the same period in the prior year and decreased to 20 bps for the six months ended June 30, 2018 compared to 22 bps for the same period in the prior year.
Noninterest income decreased $10 million and $20 million for the three and six months ended June 30, 2018, respectively, compared to the same period in the prior year driven by decreases in other noninterest income. Other noninterest income decreased $8 million and $21 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year primarily due to increases in losses on securities related to non-qualifying hedges on MSRs resulting from increased interest rates.
Noninterest expense decreased $2 million for both the three and six months ended June 30, 2018 compared to the same periods in prior year driven by decreases in other noninterest expense partially offset by increases in personnel expense. Other noninterest expense decreased $4 million and $7 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in prior year primarily due to decreases in operational losses. Personnel expense increased $2 million and $5 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in prior year primarily due to increases in base compensation.
Average consumer loans increased $74 million and decreased $1 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year. Average automobile loans decreased $283 million and $410 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year as payoffs exceeded new loan production due to a strategic shift focusing on improving risk-adjusted returns. Average residential mortgage loans increased $409 million and $462 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year primarily driven by the continued retention of certain agency conforming ARMs and certain other fixed-rate loans.
Wealth and Asset Management
Wealth and Asset Management provides a full range of investment alternatives for individuals, companies and not-for-profit organizations. Wealth and Asset Management is made up of five main businesses: FTS; ClearArc Capital, Inc.; Fifth Third Insurance Agency, Inc.; Fifth Third Private Bank; and Fifth Third Institutional Services. FTS offers full service retail brokerage services to individual clients and broker-dealer services to the institutional marketplace. ClearArc Capital, Inc. provides asset management services. Fifth Third Insurance Agency, Inc. assists clients with their financial and risk management needs. Fifth Third Private Bank offers holistic strategies to affluent clients in wealth planning, investing, insurance and wealth protection. Fifth Third Institutional Services provides advisory services for institutional clients including states and municipalities.
27
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
The following table contains selected financial data for the Wealth and Asset Management segment:
TABLE 29: Wealth and Asset Management
For the three months ended June 30, |
For the six months ended June 30, |
|||||||||||||||||||||||
($ in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||
Income Statement Data |
||||||||||||||||||||||||
Net interest income |
$ | 45 | 37 | 88 | 75 | |||||||||||||||||||
Provision for (benefit from) loan and lease losses |
(11 | ) | (1) | 5 | 3 | |||||||||||||||||||
Noninterest income: |
||||||||||||||||||||||||
Wealth and asset management revenue |
104 | 100 | 214 | 205 | ||||||||||||||||||||
Other noninterest income |
5 | 1 | 13 | 4 | ||||||||||||||||||||
Noninterest expense: |
||||||||||||||||||||||||
Personnel costs |
50 | 44 | 104 | 92 | ||||||||||||||||||||
Other noninterest expense |
73 | 69 | 150 | 139 | ||||||||||||||||||||
Income before income taxes |
42 | 26 | 56 | 50 | ||||||||||||||||||||
Applicable income tax expense |
9 | 9 | 12 | 17 | ||||||||||||||||||||
Net income |
$ | 33 | 17 | 44 | 33 | |||||||||||||||||||
Average Balance Sheet Data |
||||||||||||||||||||||||
Loans and leases, including held for sale |
$ | 3,446 | 3,266 | 3,391 | 3,252 | |||||||||||||||||||
Core deposits |
9,124 | 8,577 | 9,386 | 8,810 |
Net income was $33 million for the three months ended June 30, 2018 compared to net income of $17 million for the three months ended June 30, 2017. Net income was $44 million for the six months ended June 30, 2018 compared to $33 million for the six months ended June 30, 2017. The increases for both periods were driven primarily by increases in net interest income and noninterest income partially offset by increases in noninterest expense. Additionally, net income for the three months ended June 30, 2018 was positively impacted by the decrease in provision for loan and lease losses compared to the same period in the prior year.
Net interest income increased $8 million and $13 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year primarily due to increases in FTP credit rates on interest checking deposits and money market deposits as well as increases in yields on average loans and leases. These positive impacts were partially offset by increases in the rates paid on interest checking deposits as well as an increase in FTP charge rates on loans and leases.
Provision for loan and lease losses decreased $10 million for the three months ended June 30, 2018 compared to the same period in the prior year driven by the impact of the benefit of lower criticized assets. Provision for loan and lease losses increased $2 million for the six months ended June 30, 2018 compared to the same period in the prior year driven by an increase in net charge-offs partially offset by the impact of the benefit of lower criticized assets.
Noninterest income increased $8 million and $18 million for the three and six months ended June 30, 2018 compared to the same periods in the prior year driven by increases in wealth and asset management revenue and other noninterest income. Wealth and asset management revenue increased $4 million and $9 million for the three and six months ended June 30, 2018 compared to the same periods in the prior year primarily due to increases in private client service fees driven by an increase in assets under management as a result of strong market performance and increased asset production. Other noninterest income increased $4 million and $9 million for the three and six months ended June 30, 2018 compared to the same periods in the prior year due to increases in insurance income as a result of acquisitions in 2017.
Noninterest expense increased $10 million and $23 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year. Personnel costs increased $6 million and $12 million for the three and six months ended June 30, 2018 compared to the same periods in the prior year driven by an increase in base compensation and incentive compensation as a result of the aforementioned acquisitions in 2017. Other noninterest expense increased $4 million and $11 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year primarily driven by increases in corporate overhead allocations.
Average loans and leases increased $180 million and $139 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year driven by increases in average residential mortgage loans due to increases in new loan origination activity. These increases were partially offset by a decline in average home equity balances.
Average core deposits increased $547 million and $576 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year primarily due to increases in average interest checking deposits.
General Corporate and Other
General Corporate and Other includes the unallocated portion of the investment securities portfolio, securities gains and losses, certain non-core deposit funding, unassigned equity, unallocated provision for loan and lease losses expense or a benefit from the reduction of the ALLL, the payment of preferred stock dividends and certain support activities and other items not attributed to the business segments.
Net interest income decreased $1 million for the three months ended June 30, 2018 compared to the same period in the prior year driven by increases in FTP credit rates on deposits allocated to the business segments and increases in interest expense for long-term debt and federal funds purchased. The decrease for the three months ended June 30, 2018 was partially offset by an increase in the benefit related to the FTP charges on loans and leases as well as an increase in interest income on taxable securities.
28
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Net interest income increased $28 million for the six months ended June 30, 2018 compared to the same period in the prior year primarily driven by an increase in the benefit related to the FTP charges on loans and leases as well as an increase in interest income on taxable securities. The increase for the six months ended June 30, 2018 was partially offset by increases in FTP credit rates on deposits allocated to the business segments and an increase in interest expense on long-term debt and federal funds purchased.
The provision for loan and lease losses increased $14 million for the three months ended June 30, 2018 compared to the same period in the prior year primarily due to the decrease in the allocation of provision expense to the business segments driven by a decrease in commercial criticized assets. The provision for loan and lease losses decreased $22 million for the six months ended June 30, 2018 compared to the same period in the prior year primarily due to the benefit from the reduction of the ALLL.
Noninterest income increased $203 million and $572 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year primarily driven by the recognition of a $205 million gain on the sale of Worldpay, Inc. shares during the second quarter of 2018. The increase during the six months ended June 30, 2018 also included a $414 million gain related to Vantiv, Inc.s acquisition of Worldpay Group plc. during the first quarter of 2018. Both periods were negatively impacted by an increase in the negative valuation adjustments related to the Visa total return swap which were $10 million and $49 million for the three and six months ended June 30, 2018, respectively, compared with $9 million and $22 million for the same periods in the prior year. Additionally, equity method earnings from the Bancorps interest in Vantiv Holding, LLC decreased $12 million and $25 million compared to the three and six months ended June 30, 2017, respectively, primarily due to a decrease in the Bancorps ownership percentage in Vantiv Holding, LLC and the impact of Worldpay, Inc.s acquisition and integration costs.
Noninterest expense increased $29 million and $25 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year. The increase for both periods was primarily due to increases in personnel costs and technology and communications expense partially offset by 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. Additionally, both periods included an increase of $10 million in donations expense compared to the same period in the prior year as a result of a contribution to the Fifth Third Foundation in the second quarter of 2018.
29
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Risk management is critical for effectively serving customers financial needs while protecting the Bancorp and achieving strategic goals. It is also essential to reducing the volatility of earnings and safeguarding our brand and reputation. Further, risk management is integral to the Bancorps strategic and capital planning processes. It is essential that the Bancorps business strategies consistently align to its overall risk appetite and capital considerations. Maintaining risks within the Bancorps risk appetite requires that risks are understood by all employees across the enterprise, and appropriate risk mitigants and controls are in place to limit risk to within the risk appetite. To achieve this, the Bancorp implements a framework for managing risk that encompasses business as usual activities and the utilization of a risk process for identifying, assessing, managing, monitoring and reporting risks.
Fifth Third uses a structure consisting of three lines of defense in order to clarify the roles and responsibilities for effective risk management.
The risk taking functions within the lines of business comprise the first line of defense. The first line of defense originates risk through normal business as usual activities; therefore, it is essential that they monitor, assess and manage the risks being taken, implement controls necessary to mitigate those risks and take responsibility for managing their business within the Bancorps risk appetite.
Control functions, such as the Risk Management organization, are the second line of defense and are responsible for providing challenge, oversight and governance of activities performed by the first line.
The Audit division is the third line of defense and provides an independent assessment of the Bancorps internal control structure and related systems and processes. The Credit Risk Review division provides an independent assessment of credit risk, which includes evaluating the sufficiency of underwriting, documentation and approval processes for consumer and commercial credits, the accuracy of risk grades assigned to commercial credit exposure, nonaccrual status, specific reserves and monitoring for charge-offs.
Fifth Thirds 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 Thirds core values and Code of Business Conduct & Ethics, which may be found on www.53.com, while carrying out their responsibilities. Fifth Thirds 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 Thirds culture.
Below are the Bancorps 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 Thirds 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 core customer base. |
● | Avoid risks that cannot be understood, managed and monitored. |
● | Act with integrity in all activities. |
● | Focus on providing operational excellence by providing reliable, accurate and efficient services to meet customers needs. |
● | Maintain a strong financial position to ensure that the Bancorp meets its strategic objectives through all economic cycles and is able to access the capital markets at all times, even under stressed conditions. |
● | Protect the Bancorps 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 Thirds 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 Bancorps goal is to ensure that aggregate risks do not exceed its risk capacity, and that risks taken are supportive of the Bancorps portfolio diversification and profitability objectives.
Fifth Thirds Risk Management Framework states its risk appetite and the linkage to strategic and capital planning, defines and sets the tolerance for each of the eight risk types, explains the process used to manage risk across the enterprise and sets forth its risk governance structure.
● | The Board of Directors (the Board) and executive management define the risk appetite, which is considered in the development of business strategies, and forms the basis for enterprise risk management. The Bancorps risk appetite is set annually in alignment with the strategic, capital and financial plans, and is reviewed by the Board on an annual basis. |
● | The Risk Management Process provides a consistent and integrated approach for managing risks and ensuring appropriate risk mitigants and controls are in place, and risks and issues are appropriately escalated. Five components are utilized for effective risk management; identifying, assessing, managing, monitoring and reporting risks. |
● | The Board and executive management have identified eight risk types for monitoring the overall risk of the Bancorp; Credit Risk, Market Risk, Liquidity Risk, Operational Risk, Regulatory Compliance Risk, Legal Risk, Reputation Risk and Strategic Risk, and have also qualitatively established a risk tolerance, which is defined as the maximum amount of risk the Bancorp is willing to take for each of the eight risk types. These risk types are assessed on an ongoing basis and reported to the board each quarter, or more frequently, if necessary. In addition, each business and operational function (first line of defense) is accountable for proactively identifying and managing risk using its risk management process. Risk tolerances and risk limits are also established, where appropriate, in order to ensure that businesses and operational functions across the enterprise are able to monitor and manage risks at a more granular level, while ensuring that aggregate risks across the enterprise do not exceed the overall risk appetite. |
30
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
● | The Bancorps 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 Board sub-committees, including the RCC as outlined in each respective Committee Charter, which may be found on www.53.com. The ERMC, which reports to the RCC, comprises senior management from across the Bancorp and reviews and approves risk management frameworks and policies, oversees the management of all risk types to ensure that aggregated risks remain within the Bancorps risk appetite and fosters a risk culture to ensure appropriate escalation and transparency of risks. |
The objective of the Bancorps 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 Bancorps 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 which are described below. These practices include the use of intentional risk-based limits for single name exposures and counterparty selection criteria designed to reduce or eliminate exposure to borrowers who have higher than average default risk and defined weaknesses in financial performance. The Bancorp carefully designed and monitors underwriting, documentation and collection standards. The Bancorps 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 the charge-off, nonaccrual and reserve analysis process. The Bancorps credit review process and overall assessment of the adequacy of the allowance for credit losses is based on quarterly assessments of the probable estimated losses inherent in the loan and lease portfolio. The Bancorp uses these assessments to promptly identify potential problem loans or leases within the portfolio, maintain an adequate allowance for credit losses and take any necessary charge-offs. The Bancorp defines potential problem loans and leases as those rated substandard that do not meet the definition of a nonaccrual loan or a restructured loan. Refer to Note 6 of the Notes to Condensed Consolidated Financial Statements for further information on the Bancorps credit grade categories, which are derived from standard regulatory rating definitions. In addition, stress testing is performed on various commercial and consumer portfolios using the CCAR model and for certain portfolios, such as real estate and leveraged lending, the stress testing is performed by Credit department personnel at the individual loan level during credit underwriting.
The following tables provide a summary of potential problem portfolio loans and leases:
TABLE 30: Potential Problem Portfolio Loans and Leases | ||||||||||||||||
As of June 30, 2018 ($ in millions) | Carrying Value |
Unpaid Principal Balance |
Exposure | |||||||||||||
Commercial and industrial loans |
$ 590 | 591 | 845 | |||||||||||||
Commercial mortgage loans |
129 | 129 | 130 | |||||||||||||
Commercial leases |
57 | 57 | 57 | |||||||||||||
Total potential problem portfolio loans and leases |
$ 776 | 777 | 1,032 | |||||||||||||
TABLE 31: Potential Problem Portfolio Loans and Leases | ||||||||||||||||
As of December 31, 2017 ($ in millions) | Carrying Value |
Unpaid Principal Balance |
Exposure | |||||||||||||
Commercial and industrial loans |
$ 911 | 912 | 1,370 | |||||||||||||
Commercial mortgage loans |
138 | 138 | 138 | |||||||||||||
Commercial leases |
70 | 70 | 70 | |||||||||||||
Total potential problem portfolio loans and leases |
$ 1,119 | 1,120 | 1,578 |
In addition to the individual review of larger commercial loans that exhibit probable or observed credit weaknesses, the commercial credit review process includes the use of two risk grading systems. The risk grading system currently utilized for allowance for credit loss analysis purposes encompasses ten categories. The Bancorp also maintains a dual risk rating system for credit approval and pricing, portfolio monitoring and capital allocation that includes a through-the-cycle rating philosophy for assessing a borrowers 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 eleven grade categories for estimating losses given an event of default. The probability of default and loss given default evaluations are not separated in the ten-category risk rating system. The Bancorp has completed significant validation and testing of the dual risk rating system as a commercial credit risk management tool. The Bancorp is assessing the necessary modifications to the dual risk rating system outputs to develop a U.S. GAAP compliant ALLL model and will evaluate the use of modified dual risk ratings for purposes of determining the Bancorps ALLL as part of the Bancorps adoption of ASU 2016-13 Measurement of Credit Losses on Financial Instruments, which will be effective for the Bancorp on January 1, 2020. Scoring systems, various analytical tools and portfolio performance monitoring are used to assess the credit risk in the Bancorps homogenous consumer and small business loan portfolios.
31
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Overview
Inflationary expectations by market professionals continue with increasing focus on wages, interest rates, input costs, tariffs, trade negotiations and foreign exchange. In light of higher inflationary expectations and a strong employment outlook, the FOMC enacted a 25 bp increase in the target rate for Federal Funds target rate in June 2018 and indicated a positive outlook on the economy. The Federal Reserve median forecast for change in 2018 real GDP was raised to 2.8%.
The TCJA was enacted at a point in the cycle where the economy appeared to be growing, the unemployment rate was low and market professionals believed that it was likely to continue falling and there was increasing confidence in the market that inflation may move to 2% over the medium term.
The Bancorp maintains a focus on commercial real estate exposure. Market data and vacancies remain positive; however credit markets in commercial real estate are becoming more selective around certain asset types and geographies. The Bancorp is also monitoring potential increased risks in the Retail sector as a result of changes in distribution models with increasing levels of online purchasing and recent weakness in certain specialty retailers.
Commercial Portfolio
The Bancorps credit risk management strategy seeks to minimize concentrations of risk through diversification. The Bancorp has commercial loan concentration limits based on industry, lines of business within the commercial segment, geography and credit product type. The risk within the commercial loan and lease portfolio is managed and monitored through an underwriting process utilizing detailed origination policies, continuous loan level reviews, monitoring of industry concentration and product type limits and continuous portfolio risk management reporting.
The Bancorp provides loans to a variety of customers ranging from large multi-national firms to middle market businesses, sole proprietors and high net worth individuals. The origination policies 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 and pro-forma analysis requirements and interest rate sensitivity. The Bancorp requires a valuation of real estate collateral, which may include third-party appraisals, be performed at the time of origination and renewal in accordance with regulatory requirements and on an as-needed basis when market conditions justify. Although the Bancorp does not back test these collateral value assumptions, the Bancorp maintains an appraisal review department to order and review third-party appraisals in accordance with regulatory requirements. Collateral values on criticized assets with relationships exceeding $1 million are reviewed quarterly to assess the appropriateness of the value ascribed in the assessment of charge-offs and specific reserves.
The Bancorp assesses all real estate and non-real estate collateral securing a loan and considers all cross-collateralized loans in the calculation of the LTV ratio. The following tables provide detail on the most recent LTV ratios for commercial mortgage loans greater than $1 million, excluding impaired commercial mortgage loans individually evaluated. The Bancorp does not typically aggregate the LTV ratios for commercial mortgage loans less than $1 million.
TABLE 32: Commercial Mortgage Loans Outstanding by LTV, Loans Greater Than $1 Million | ||||||||||||
As of June 30, 2018 ($ in millions) | LTV > 100% | LTV 80-100% | LTV < 80% | |||||||||
Commercial mortgage owner-occupied loans |
$ | 111 | 177 | 2,213 | ||||||||
Commercial mortgage nonowner-occupied loans |
15 | 176 | 2,180 | |||||||||
Total |
$ | 126 | 353 | 4,393 | ||||||||
TABLE 33: Commercial Mortgage Loans Outstanding by LTV, Loans Greater Than $1 Million | ||||||||||||
As of December 31, 2017 ($ in millions) | LTV > 100% | LTV 80-100% | LTV < 80% | |||||||||
Commercial mortgage owner-occupied loans |
$ | 79 | 110 | 2,222 | ||||||||
Commercial mortgage nonowner-occupied loans |
14 | 169 | 2,208 | |||||||||
Total |
$ | 93 | 279 | 4,430 |
32
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
The following table provides detail on commercial loans and leases by industry classification (as defined by the North American Industry Classification System), by loan size and by state, illustrating the diversity and granularity of the Bancorps commercial loans and leases as of:
TABLE 34: Commercial Loan and Lease Portfolio (excluding loans and leases held for sale) | ||||||||||||||||||||||||
June 30, 2018 | December 31, 2017 | |||||||||||||||||||||||
($ in millions) | Outstanding | Exposure | Nonaccrual | Outstanding | Exposure | Nonaccrual | ||||||||||||||||||
By Industry: |
||||||||||||||||||||||||
Manufacturing |
$ | 10,155 | 19,284 | 47 | 10,044 | 18,948 | 74 | |||||||||||||||||
Real estate |
7,692 | 12,540 | 31 | 7,713 | 12,493 | 25 | ||||||||||||||||||
Financial services and insurance |
5,895 | 12,309 | 2 | 5,792 | 11,933 | 1 | ||||||||||||||||||
Healthcare |
4,449 | 6,416 | 34 | 4,712 | 6,486 | 35 | ||||||||||||||||||
Business services |
4,132 | 6,739 | 31 | 4,147 | 6,512 | 42 | ||||||||||||||||||
Retail trade |
3,407 | 7,242 | 3 | 3,617 | 7,950 | 3 | ||||||||||||||||||
Accommodation and food |
3,388 | 5,560 | 33 | 3,268 | 5,321 | 4 | ||||||||||||||||||
Wholesale trade |
3,276 | 5,387 | 4 | 3,017 | 5,363 | 6 | ||||||||||||||||||
Communication and information |
2,960 | 5,240 | 6 | 3,322 | 5,308 | - | ||||||||||||||||||
Transportation and warehousing |
2,935 | 4,857 | 49 | 3,012 | 4,621 | 29 | ||||||||||||||||||
Construction |
2,422 | 4,508 | 2 | 2,374 | 4,449 | 2 | ||||||||||||||||||
Mining |
1,964 | 3,642 | 50 | 1,454 | 3,001 | 56 | ||||||||||||||||||
Entertainment and recreation |
1,581 | 3,178 | 1 | 1,624 | 2,911 | 7 | ||||||||||||||||||
Utilities |
756 | 2,141 | - | 869 | 2,333 | - | ||||||||||||||||||
Other services |
750 | 1,010 | 10 | 714 | 1,017 | 16 | ||||||||||||||||||
Public administration |
443 | 663 | - | 370 | 474 | - | ||||||||||||||||||
Agribusiness |
267 | 441 | 2 | 304 | 478 | 2 | ||||||||||||||||||
Individuals |
29 | 67 | - | 27 | 57 | - | ||||||||||||||||||
Other |
2 | 2 | - | 15 | 15 | 4 | ||||||||||||||||||
Total |
$ | 56,503 | 101,226 | 305 | 56,395 | 99,670 | 306 | |||||||||||||||||
By Size: |
||||||||||||||||||||||||
Less than $200,000 |
1 | % | 1 | 5 | 1 | 1 | 5 | |||||||||||||||||
$200,000 - $1 million |
3 | 2 | 6 | 3 | 2 | 8 | ||||||||||||||||||
$1 million - $5 million |
7 | 6 | 14 | 7 | 6 | 15 | ||||||||||||||||||
$5 million - $10 million |
6 | 5 | 12 | 6 | 5 | 10 | ||||||||||||||||||
$10 million - $25 million |
20 | 17 | 54 | 21 | 18 | 57 | ||||||||||||||||||
Greater than $25 million |
63 | 69 | 9 | 62 | 68 | 5 | ||||||||||||||||||
Total |
100 | % | 100 | 100 | 100 | 100 | 100 | |||||||||||||||||
By State: |
||||||||||||||||||||||||
Ohio |
14 | % | 15 | 6 | 14 | 15 | 7 | |||||||||||||||||
Florida |
8 | 8 | 12 | 8 | 8 | 6 | ||||||||||||||||||
Michigan |
7 | 7 | 9 | 7 | 7 | 13 | ||||||||||||||||||
Illinois |
7 | 6 | 8 | 7 | 6 | 9 | ||||||||||||||||||
Indiana |
4 | 4 | 9 | 4 | 4 | 3 | ||||||||||||||||||
Georgia |
4 | 5 | - | 4 | 5 | 2 | ||||||||||||||||||
North Carolina |
3 | 3 | 1 | 3 | 3 | 1 | ||||||||||||||||||
Tennessee |
3 | 3 | - | 3 | 3 | 8 | ||||||||||||||||||
Kentucky |
2 | 2 | 1 | 3 | 3 | 1 | ||||||||||||||||||
Other |
48 | 47 | 54 | 47 | 46 | 50 | ||||||||||||||||||
Total |
100 | % | 100 | 100 | 100 | 100 | 100 |
The Bancorps nonowner-occupied commercial real estate portfolios have been identified by the Bancorp as loans which it believes represent a higher level of risk compared to the rest of the Bancorps commercial loan portfolio due to economic or market conditions within the Bancorps key lending areas.
33
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
The following tables provide an analysis of nonowner-occupied commercial real estate loans by state (excluding loans held for sale):
TABLE 35: Nonowner-Occupied Commercial Real Estate (excluding loans held for sale)(a)
As of June 30, 2018 ($ in millions) | Net Charge-offs for June 30, 2018 | |||||||||||||||
Outstanding | Exposure | 90 Days Past Due |
Nonaccrual | Three Months Ended |
Six Months Ended | |||||||||||
By State: |
||||||||||||||||
Ohio |
$ | 1,604 | 2,013 | - | 1 | - | - | |||||||||
Florida |
1,024 | 1,651 | - | - | - | - | ||||||||||
Illinois |
693 | 903 | - | - | - | - | ||||||||||
North Carolina |
683 | 892 | - | - | - | - | ||||||||||
Michigan |
576 | 738 | - | - | 1 | 1 | ||||||||||
Indiana |
501 | 763 | - | - | - | - | ||||||||||
All other states |
2,652 | 4,649 | - | 2 | - | 1 | ||||||||||
Total |
$ | 7,733 | 11,609 | - | 3 | 1 | 2 | |||||||||
(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 36: Nonowner-Occupied Commercial Real Estate (excluding loans held for sale)(a) | ||||||||||||||||
As of June 30, 2017 ($ in millions) | Net Charge-offs for June 30, 2017 | |||||||||||||||
Outstanding | Exposure | 90 Days Past Due |
Nonaccrual | Three Months Ended |
Six Months Ended | |||||||||||
By State: |
||||||||||||||||
Ohio |
$ | 1,562 | 1,974 | - | 3 | 5 | 8 | |||||||||
Florida |
949 | 1,501 | - | 1 | - | - | ||||||||||
Illinois |
755 | 1,179 | - | - | - | - | ||||||||||
North Carolina |
581 | 815 | - | - | - | - | ||||||||||
Michigan |
570 | 741 | - | 1 | - | - | ||||||||||
Indiana |
550 | 955 | - | - | - | - | ||||||||||
All other states |
2,690 | 4,567 | - | 4 | - | - | ||||||||||
Total |
$ | 7,657 | 11,732 | - | 9 | 5 | 8 |
(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. |
34
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
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 Bancorps consumer portfolio is materially comprised of five categories of loans: residential mortgage loans, home equity, automobile loans, credit card and other consumer loans. The Bancorp has identified certain credit characteristics within these five categories of loans which it believes represent a higher level of risk compared to the rest of the consumer loan portfolio. The Bancorp does not update LTV ratios for the consumer portfolio subsequent to origination except as part of the charge-off process for real estate secured loans. Among consumer portfolios, legacy underwritten residential mortgage and brokered home equity portfolios exhibited the most stress during the past credit crisis. As of June 30, 2018, 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 52% of total consumer real estate secured losses for the six months ended June 30, 2018. Current loss rates in the residential mortgage and home equity portfolios are below pre-crisis levels. In addition to the consumer real estate portfolio, credit risk management continues to closely monitor the automobile portfolio performance. The automobile market has exhibited industry-wide gradual loosening of credit standards such as lower FICOs, longer terms and higher LTVs. The Bancorp has adjusted credit standards focused on improving risk-adjusted returns while maintaining credit risk tolerance. The Bancorp actively manages the automobile portfolio through concentration limits, which mitigates credit risk through limiting the exposure to lower FICO scores, higher advance rates and extended term originations.
Residential mortgage portfolio
The Bancorp manages credit risk in the residential mortgage portfolio through underwriting guidelines that limit exposure to higher LTV ratios and lower FICO scores. Additionally, the portfolio is governed by concentration limits that ensure geographic, product and channel diversification. The Bancorp may also package and sell loans in the portfolio.
The Bancorp does not originate mortgage loans that permit customers to defer principal payments or make payments that are less than the accruing interest. The Bancorp originates both fixed-rate and ARM loans. Within the ARM portfolio, approximately $621 million of ARM loans will have rate resets during the next twelve months. Of these resets, 91% are expected to experience an increase in rate, with an average increase of approximately one percent.
Certain residential mortgage products have contractual features that may increase credit exposure to the Bancorp in the event of a decline in housing values. These types of mortgage products offered by the Bancorp include loans with high LTV ratios, multiple loans on the same collateral that when combined result in a LTV greater than 80% and interest-only loans. The Bancorp has deemed residential mortgage loans with greater than 80% LTV ratios and no mortgage insurance as loans that represent a higher level of risk.
Portfolio residential mortgage loans from 2010 and later vintages represented 91% of the portfolio as of June 30, 2018 and had a weighted-average LTV of 73% and a weighted-average origination FICO of 760.
The following table provides an analysis of the residential mortgage portfolio loans outstanding by LTV at origination as of:
TABLE 37: Residential Mortgage Portfolio Loans by LTV at Origination | ||||||||||||||||||||
June 30, 2018 | December 31, 2017 | |||||||||||||||||||
($ in millions) | Outstanding | Weighted- Average LTV |
Outstanding | Weighted- Average LTV |
||||||||||||||||
LTV £ 80% |
$ | 11,692 | 66.6 % | $ | 11,767 | 66.4% | ||||||||||||||
LTV > 80%, with mortgage insurance(a) |
1,897 | 94.8 | 1,890 | 94.8 | ||||||||||||||||
LTV > 80%, no mortgage insurance |
2,051 | 94.7 | 1,934 | 94.7 | ||||||||||||||||
Total |
$ | 15,640 | 74.1 % | $ | 15,591 | 73.7% |
(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 38: Residential Mortgage Portfolio Loans, LTV Greater than 80%, No Mortgage Insurance | ||||||||||||||||||||
As of June 30, 2018 ($ in millions) | Net Charge-offs for June 30, 2018 | |||||||||||||||||||
Outstanding | 90 Days Past Due |
Nonaccrual | Three Months Ended |
Six Months Ended |
||||||||||||||||
By State: |
||||||||||||||||||||
Ohio |
$ | 456 | 3 | 3 | - | - | ||||||||||||||
Illinois |
408 | - | 2 | - | - | |||||||||||||||
Florida |
297 | 2 | 3 | - | - | |||||||||||||||
Michigan |
228 | 1 | 1 | - | - | |||||||||||||||
Indiana |
154 | - | 1 | - | - | |||||||||||||||
North Carolina |
99 | - | 1 | - | - | |||||||||||||||
Kentucky |
90 | 1 | - | - | - | |||||||||||||||
All other states |
319 | 2 | 1 | 1 | 1 | |||||||||||||||
Total |
$ | 2,051 | 9 | 12 | 1 | 1 |
35
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
TABLE 39: Residential Mortgage Portfolio Loans, LTV Greater than 80%, No Mortgage Insurance | ||||||||||||||||||
As of June 30, 2017 ($ in millions) | Net Charge-offs for June 30, 2017 | |||||||||||||||||
Outstanding | 90 Days Past Due |
Nonaccrual | Three Months Ended |
Six Months Ended | ||||||||||||||
By State: |
||||||||||||||||||
Ohio |
$ | 561 | 2 | 5 | 1 | 1 | ||||||||||||
Illinois |
511 | - | - | - | - | |||||||||||||
Florida |
349 | 1 | 2 | - | 1 | |||||||||||||
Michigan |
278 | 1 | 1 | - | - | |||||||||||||
Indiana |
165 | 1 | 1 | - | - | |||||||||||||
North Carolina |
117 | - | 1 | - | - | |||||||||||||
Kentucky |
98 | 1 | - | - | - | |||||||||||||
All other states |
398 | - | - | - | - | |||||||||||||
Total |
$ | 2,477 | 6 | 10 | 1 | 2 |
Home equity portfolio
The Bancorps home equity portfolio is primarily comprised of home equity lines of credit. Beginning in the first quarter of 2013, the Bancorps newly originated home equity lines of credit have a 10-year interest-only draw period followed by a 20-year amortization period. The home equity line of credit previously offered by the Bancorp was a revolving facility with a 20-year term, minimum payments of interest-only and a balloon payment of principal at maturity. Peak maturity years for the balloon home equity lines of credit are 2025 to 2028 and approximately 26% of the balances mature before 2025.
The ALLL provides coverage for probable and estimable losses in the home equity portfolio. The allowance attributable to the portion of the home equity portfolio that has not been restructured in a TDR is calculated on a pooled basis with senior lien and junior lien categories segmented in the determination of the probable credit losses in the home equity portfolio. The modeled loss factor for the home equity portfolio is based on the trailing twelve month historical loss rate for each category, as adjusted for certain prescriptive loss rate factors and certain qualitative adjustment factors to reflect risks associated with current conditions and trends. The prescriptive loss rate factors include adjustments for delinquency trends, LTV trends and refreshed FICO score trends. The qualitative factors include adjustments for changes in policies or procedures in underwriting, monitoring or collections, economic conditions, portfolio mix, lending and risk management personnel, results of internal audit and quality control reviews, collateral values and geographic concentrations. The Bancorp considers home price index trends when determining the collateral value qualitative factor.
The home equity portfolio is managed in two primary groups: loans outstanding with a combined LTV greater than 80% and those loans with a LTV of 80% or less based upon appraisals at origination. For additional information on these loans, refer to Table 41 and Table 42. Of the total $6.6 billion of outstanding home equity loans:
● | 88% reside within the Bancorps Midwest footprint of Ohio, Michigan, Kentucky, Indiana and Illinois as of June 30, 2018; |
● | 37% are in senior lien positions and 63% are in junior lien positions at June 30, 2018; |
● | 81% of non-delinquent borrowers made at least one payment greater than the minimum payment during the three months ended June 30, 2018; and |
● | The portfolio had an average refreshed FICO score of 745 at June 30, 2018. |
The Bancorp actively manages lines of credit and makes adjustments in lending limits when it believes it is necessary based on FICO score deterioration and property devaluation. The Bancorp does not routinely obtain appraisals on performing loans to update LTV ratios after origination. However, the Bancorp monitors the local housing markets by reviewing various home price indices and incorporates the impact of the changing market conditions in its ongoing credit monitoring processes. For junior lien home equity loans which become 60 days or more past due, the Bancorp tracks the performance of the senior lien loans in which the Bancorp is the servicer and utilizes consumer credit bureau attributes to monitor the status of the senior lien loans that the Bancorp does not service. If the senior lien loan is found to be 120 days or more past due, the junior lien home equity loan is placed on nonaccrual status unless both loans are well-secured and in the process of collection. Additionally, if the junior lien home equity loan becomes 120 days or more past due and the senior lien loan is also 120 days or more past due, the junior lien home equity loan is assessed for charge-off. Refer to the Analysis of Nonperforming Assets subsection of the Risk Management section of MD&A for more information.
36
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
The following table provides an analysis of home equity portfolio loans outstanding disaggregated based upon refreshed FICO score as of:
TABLE 40: Home Equity Portfolio Loans Outstanding by Refreshed FICO Score | ||||||||||||||||||||
June 30, 2018 | December 31, 2017 | |||||||||||||||||||
($ in millions) | Outstanding | % of Total | Outstanding | % of Total | ||||||||||||||||
Senior Liens: |
||||||||||||||||||||
FICO £ 659 |
$ 231 | 4 % | $ 246 | 4 % | ||||||||||||||||
FICO 660-719 |
330 | 5 | 358 | 5 | ||||||||||||||||
FICO ³ 720 |
1,851 | 28 | 1,976 | 28 | ||||||||||||||||
Total senior liens |
2,412 | 37 | 2,580 | 37 | ||||||||||||||||
Junior Liens: |
||||||||||||||||||||
FICO £ 659 |
500 | 7 | 541 | 8 | ||||||||||||||||
FICO 660-719 |
785 | 12 | 853 | 12 | ||||||||||||||||
FICO ³ 720 |
2,902 | 44 | 3,040 | 43 | ||||||||||||||||
Total junior liens |
4,187 | 63 | 4,434 | 63 | ||||||||||||||||
Total |
$ 6,599 | 100 % | $ 7,014 | 100 % |
The Bancorp believes that home equity portfolio loans with a greater than 80% combined LTV ratio present a higher level of risk. The following table provides an analysis of the home equity portfolio loans outstanding in a senior and junior lien position by LTV at origination:
TABLE 41: Home Equity Portfolio Loans Outstanding by LTV at Origination | ||||||||||||||||||||
June 30, 2018 | December 31, 2017 | |||||||||||||||||||
($ in millions) | Outstanding | Weighted- Average LTV |
Outstanding |
Weighted- Average LTV |
||||||||||||||||
Senior Liens: |
||||||||||||||||||||
LTV £ 80% |
$ 2,109 | 54.8 % | $ 2,266 | 54.9 % | ||||||||||||||||
LTV > 80% |
303 | 88.9 | 314 | 88.9 | ||||||||||||||||
Total senior liens |
2,412 | 59.3 | 2,580 | 59.3 | ||||||||||||||||
Junior Liens: |
||||||||||||||||||||
LTV £ 80% |
2,441 | 67.4 | 2,603 | 67.5 | ||||||||||||||||
LTV > 80% |
1,746 | 90.3 | 1,831 | 90.4 | ||||||||||||||||
Total junior liens |
4,187 | 78.2 | 4,434 | 78.3 | ||||||||||||||||
Total |
$ 6,599 | 70.9 % | $ 7,014 | 70.9 % |
The following tables provide an analysis of home equity portfolio loans by state with a combined LTV greater than 80%:
TABLE 42: Home Equity Portfolio Loans Outstanding with a LTV Greater than 80% | ||||||||||||||||||||||||
As of June 30, 2018 ($ in millions) | Net Charge-offs for June 30, 2018 | |||||||||||||||||||||||
Outstanding | Exposure | 90 Days Past Due |
Nonaccrual | Three Months Ended |
Six Months Ended |
|||||||||||||||||||
By State: |
||||||||||||||||||||||||
Ohio |
$ 1,037 | 1,994 | - | 8 | 1 | 2 | ||||||||||||||||||
Michigan |
325 | 531 | - | 4 | - | 1 | ||||||||||||||||||
Illinois |
214 | 339 | - | 3 | - | 1 | ||||||||||||||||||
Indiana |
143 | 247 | - | 3 | - | - | ||||||||||||||||||
Kentucky |
130 | 243 | - | 2 | - | - | ||||||||||||||||||
Florida |
65 | 93 | - | 2 | - | - | ||||||||||||||||||
All other states |
135 | 202 | - | 3 | - | - | ||||||||||||||||||
Total |
$ 2,049 | 3,649 | - | 25 | 1 | 4 |
TABLE 43: Home Equity Portfolio Loans Outstanding with a LTV Greater than 80% | ||||||||||||||||||||||||
As of June 30, 2017 ($ in millions) | Net Charge-offs for June 30, 2017 | |||||||||||||||||||||||
Outstanding | Exposure | 90 Days Past Due |
Nonaccrual | Three Months Ended |
Six Months Ended |
|||||||||||||||||||
By State: |
||||||||||||||||||||||||
Ohio |
$ 1,031 | 1,870 | - | 7 | 1 | 2 | ||||||||||||||||||
Michigan |
393 | 616 | - | 5 | - | 1 | ||||||||||||||||||
Illinois |
246 | 378 | - | 4 | 1 | 1 | ||||||||||||||||||
Indiana |
169 | 282 | - | 2 | - | 1 | ||||||||||||||||||
Kentucky |
156 | 276 | - | 2 | - | 1 | ||||||||||||||||||
Florida |
73 | 105 | - | 2 | - | - | ||||||||||||||||||
All other states |
165 | 236 | - | 3 | - | - | ||||||||||||||||||
Total |
$ 2,233 | 3,763 | - | 25 | 2 | 6 |
37
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Automobile portfolio
The Bancorps automobile portfolio balances have declined since December 31, 2017 as payoffs exceeded new loan production due to a strategic shift focusing on improving risk-adjusted returns. Additionally, the concentration of lower FICO (<690) origination balances remained within targeted credit risk tolerance during the six months ended June 30, 2018. All concentration and guideline changes are monitored monthly to ensure alignment with original credit performance and return projections.
The following table provides an analysis of automobile portfolio loans outstanding disaggregated based upon FICO score as of:
TABLE 44: Automobile Portfolio Loans Outstanding by FICO Score at Origination | ||||||||||||||
June 30, 2018 | December 31, 2017 | |||||||||||||
($ in millions) | Outstanding | % of Total | Outstanding | % of Total | ||||||||||
FICO £ 690 |
$ | 1,545 | 17 % | $ 1,563 | 17 % | |||||||||
FICO > 690 |
7,393 | 83 | 7,549 | 83 | ||||||||||
Total |
$ | 8,938 | 100 % | $ 9,112 | 100 % |
The automobile portfolio is characterized by direct and indirect lending products to consumers. As of June 30, 2018, 44% of the automobile loan portfolio is comprised of loans collateralized by new automobiles. It is a common industry practice to advance on automobile loans an amount in excess of the automobile value due to the inclusion of negative equity trade-in, maintenance/warranty products, taxes, title and other fees paid at closing. The Bancorp monitors its exposure to these higher risk loans.
The following table provides an analysis of automobile portfolio loans outstanding by LTV at origination as of:
TABLE 45: Automobile Portfolio Loans Outstanding by LTV at Origination | ||||||||||||||
June 30, 2018 | December 31, 2017 | |||||||||||||
($ in millions) | Outstanding |
Weighted- Average LTV |
Outstanding |
Weighted- Average LTV | ||||||||||
LTV £ 100% |
$ 5,606 | 82.3 % | $ 5,814 | 82.1 % | ||||||||||
LTV > 100% |
3,332 | 112.7 | 3,298 | 112.4 | ||||||||||
Total |
$ 8,938 | 94.1 % | $ 9,112 | 93.5 % |
The following table provides an analysis of the Bancorps automobile portfolio loans with a LTV at origination greater than 100%:
TABLE 46: Automobile Portfolio Loans Outstanding with a LTV Greater than 100% | ||||||||||||||||||||
As of ($ in millions) | Net Charge-offs for the | |||||||||||||||||||
Outstanding | 90 Days Past Due and Accruing |
Nonaccrual | Three Months Ended |
Six Months Ended |
||||||||||||||||
June 30, 2018 |
$ 3,332 | 6 | 1 | 5 | 13 | |||||||||||||||
June 30, 2017 |
3,248 | 4 | 1 | 4 | 12 |
Credit card portfolio
The credit card portfolio consists of predominately prime accounts with 97% of loan balances existing within the Bancorps footprint as of both June 30, 2018 and December 31, 2017. At June 30, 2018 and December 31, 2017, 74% and 76%, respectively, of the outstanding balances were originated through branch-based relationships with the remainder coming from direct mail campaigns and online acquisitions.
The following table provides an analysis of credit card portfolio loans outstanding disaggregated based upon FICO score as of:
TABLE 47: Credit Card Portfolio Loans Outstanding by FICO Score at Origination | ||||||||||||
June 30, 2018 | December 31, 2017 | |||||||||||
($ in millions) | Outstanding | % of Total | Outstanding | % of Total | ||||||||
FICO £ 659 |
$ | 65 | 3 % | $ 61 | 3 % | |||||||
FICO 660-719 |
605 | 27 | 581 | 25 | ||||||||
FICO ³ 720 |
1,600 | 70 | 1,657 | 72 | ||||||||
Total |
$ | 2,270 | 100 % | $ 2,299 | 100 % |
Other consumer portfolio loans
The other consumer portfolio loans are comprised of secured and unsecured loans originated through the Bancorps branch network as well as point-of-sale loans originated in connection with third-party financial technology companies. Outstanding balances for other consumer loans increased approximately $423 million, or 27%, from December 31, 2017 primarily due to an increase in originations in connection with third-party financial technology companies. Additionally, the Bancorp has approximately $275 million in unfunded commitments associated with loans originated in connection with third-party financial technology companies as of June 30, 2018. Fifth Third closely monitors the credit performance of these point-of-sale loans which is impacted by the credit loss protection coverage provided by the third-party financial technology companies.
38
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
The following table provides an analysis of other consumer portfolio loans outstanding by product type at origination as of:
TABLE 48: Other Consumer Portfolio Loans Outstanding by Product Type at Origination
June 30, 2018 | December 31, 2017 | |||||||||||||||||||||||
($ in millions) | Outstanding | % of Total | Outstanding | % of Total | ||||||||||||||||||||
Unsecured |
$ | 495 | 25 | % | $ | 461 | 30 | % | ||||||||||||||||
Other secured |
494 | 25 | 482 | 31 | ||||||||||||||||||||
Point-of-sale |
993 | 50 | 616 | 39 | ||||||||||||||||||||
Total |
$ | 1,982 | 100 | % | $ | 1,559 | 100 | % |
Analysis of Nonperforming Assets
Nonperforming assets include nonaccrual loans and leases for which ultimate collectability of the full amount of the principal and/or interest is uncertain; restructured commercial and credit card loans which have not yet met the requirements to be classified as a performing asset; restructured consumer loans which are 90 days past due based on the restructured terms unless the loan is both well-secured and in the process of collection; and certain other assets, including OREO and other repossessed property. A summary of nonperforming assets is included in Table 49. For further information on the Bancorps 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 included in the Bancorps Annual Report on Form 10-K for the year ended December 31, 2017.
Nonperforming assets were $503 million at June 30, 2018 compared to $495 million at December 31, 2017. At June 30, 2018, $23 million of nonaccrual loans were held for sale, compared to $6 million at December 31, 2017.
Nonperforming portfolio assets as a percent of portfolio loans and leases and OREO were 0.52% as of June 30, 2018 compared to 0.53% as of December 31, 2017. Nonaccrual loans and leases secured by real estate were 27% of nonaccrual loans and leases as of June 30, 2018 compared to 33% as of December 31, 2017.
Commercial portfolio nonaccrual loans and leases were $305 million at June 30, 2018, a decrease of $1 million from December 31, 2017. Consumer portfolio nonaccrual loans and leases were $132 million at June 30, 2018, an increase of $1 million from December 31, 2017. Refer to Tables 50 and 51 for rollforwards of the portfolio nonaccrual loans and leases.
OREO and other repossessed property was $43 million at June 30, 2018, compared to $52 million at December 31, 2017. The Bancorp recognized $1 million in losses on the sale or write-down of OREO properties for both the three months ended June 30, 2018 and 2017 and $4 million and $5 million in losses on the sale or write-down of OREO properties for the six months ended June 30, 2018 and 2017, respectively.
For the three and six months ended June 30, 2018, approximately $7 million and $15 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. For the three and six months ended June 30, 2017 approximately $9 million and $19 million, respectively, of interest income would have been recognized. Although these values help demonstrate the costs of carrying nonaccrual credits, the Bancorp does not expect to recover the full amount of interest as nonaccrual loans and leases are generally carried below their principal balance.
39
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
TABLE 49: Summary of Nonperforming Assets and Delinquent Loans
As of ($ in millions) | June 30, 2018 | December 31, 2017 | ||||
Nonaccrual portfolio loans and leases: |
||||||
Commercial and industrial loans |
$ | 99 | 144 | |||
Commercial mortgage loans |
8 | 12 | ||||
Commercial leases |
25 | - | ||||
Residential mortgage loans |
13 | 17 | ||||
Home equity |
54 | 56 | ||||
Automobile loans |
3 | - | ||||
Other consumer loans |
1 | - | ||||
Nonaccrual portfolio restructured loans and leases: |
||||||
Commercial and industrial loans |
164 | 132 | ||||
Commercial mortgage loans |
5 | 14 | ||||
Commercial leases |
4 | 4 | ||||
Residential mortgage loans |
15 | 13 | ||||
Home equity |
17 | 18 | ||||
Automobile loans |
2 | 1 | ||||
Credit card |
27 | 26 | ||||
Total nonaccrual portfolio loans and leases(b) |
437 | 437 | ||||
OREO and other repossessed property |
43 | 52 | ||||
Total nonperforming portfolio assets |
480 | 489 | ||||
Nonaccrual loans held for sale |
5 | 5 | ||||
Nonaccrual restructured loans held for sale |
18 | 1 | ||||
Total nonperforming assets |
$ | 503 | 495 | |||
Total portfolio loans 90 days past due and still accruing |
||||||
Commercial and industrial loans |
$ | 4 | 3 | |||
Residential mortgage loans(a) |
44 | 57 | ||||
Automobile loans |
10 | 10 | ||||
Credit card |
31 | 27 | ||||
Total portfolio loans 90 days past due and still accruing |
$ | 89 | 97 | |||
Nonperforming portfolio assets as a percent of portfolio loans and leases and OREO |
0.52 % | 0.53 | ||||
ALLL as a percent of nonperforming portfolio assets |
224 | 245 |
(a) | Information for all periods presented excludes advances made pursuant to servicing agreements for GNMA mortgage pools whose repayments are insured by the FHA or guaranteed by the VA. These advances were $237 as of June 30, 2018 and $290 as of December 31, 2017. The Bancorp recognized losses of $1and $3 for both the three and six months ended June 30, 2018 and 2017. |
(b) | Includes $4 and $3 of nonaccrual government insured commercial loans whose repayments are insured by the SBA at June 30, 2018 and December 31, 2017, respectively, of which $2 and $3 were restructured nonaccrual government insured commercial loans at June 30, 2018 and December 31, 2017, respectively. |
The following tables provide a rollforward of portfolio nonaccrual loans and leases, by portfolio segment:
TABLE 50: Rollforward of Portfolio Nonaccrual Loans and Leases
|
||||||||||||||||
For the six months ended June 30, 2018 ($ in millions) | Commercial | Residential Mortgage |
Consumer | Total | ||||||||||||
Balance, beginning of period |
$ |
306 | 30 | 101 | 437 | |||||||||||
Transfers to nonaccrual status |
172 | 19 | 70 | 261 | ||||||||||||
Transfers to accrual status |
- | (12) | (30) | (42) | ||||||||||||
Transfers to held for sale |
(25) | - | - | (25) | ||||||||||||
Loan paydowns/payoffs |
(88) | (3) | (16) | (107) | ||||||||||||
Transfers to OREO |
(2) | (5) | (4) | (11) | ||||||||||||
Charge-offs |
(89) | (1) | (17) | (107) | ||||||||||||
Draws/other extensions of credit |
31 | - | - | 31 | ||||||||||||
Balance, end of period |
$ | 305 | 28 | 104 | 437 | |||||||||||
TABLE 51: Rollforward of Portfolio Nonaccrual Loans and Leases |
|
|||||||||||||||
|
||||||||||||||||
For the six months ended June 30, 2017 ($ in millions) | Commercial | Residential Mortgage |
Consumer | Total | ||||||||||||
Balance, beginning of period |
$ | 523 | 34 | 103 | 660 | |||||||||||
Transfers to nonaccrual status |
212 | 24 | 61 | 297 | ||||||||||||
Transfers to accrual status |
(13) | (12) | (26) | (51) | ||||||||||||
Transfers to held for sale |
(13) | - | - | (13) | ||||||||||||
Loan paydowns/payoffs |
(149) | (7) | (16) | (172) | ||||||||||||
Transfers to OREO |
(2) | (5) | (3) | (10) | ||||||||||||
Charge-offs |
(87) | (2) | (22) | (111) | ||||||||||||
Draws/other extensions of credit |
14 | - | - | 14 | ||||||||||||
Balance, end of period |
$ | 485 | 32 | 97 | 614 |
40
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
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-month payment history is sustained.
Consumer restructured loans on accrual status totaled $1.0 billion and $927 million at June 30, 2018 and December 31, 2017, respectively. As of June 30, 2018, the percent of restructured residential mortgage loans, home equity loans and credit card loans that were past due 30 days or more from their modified terms were 26%, 11% and 35%, respectively.
The following tables summarize portfolio TDRs by loan type and delinquency status:
TABLE 52: Accruing and Nonaccruing Portfolio TDRs | ||||||||||||||||||||||
Accruing | ||||||||||||||||||||||
As of June 30, 2018 ($ in millions) | Current | 30-89 Days Past Due |
90 Days or More Past Due |
Nonaccruing | Total | |||||||||||||||||
Commercial loans(b) |
$ |
103 | 1 | - | 173 | 277 | ||||||||||||||||
Residential mortgage loans(a) |
583 | 44 | 146 | 15 | 788 | |||||||||||||||||
Home equity |
217 | 10 | - | 17 | 244 | |||||||||||||||||
Automobile loans |
6 | - | - | 2 | 8 | |||||||||||||||||
Credit card |
15 | 3 | - | 27 | 45 | |||||||||||||||||
Total |
$ |
924 | 58 | 146 | 234 | 1,362 | ||||||||||||||||
(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 June 30, 2018, these advances represented $353 of current loans, $37 of 30-89 days past due loans and $124 of 90 days or more past due loans. (b) Excludes restructured nonaccrual loans held for sale. |
| |||||||||||||||||||||
TABLE 53: Accruing and Nonaccruing Portfolio TDRs | ||||||||||||||||||||||
Accruing | ||||||||||||||||||||||
As of December 31, 2017 ($ in millions) | Current | 30-89 Days Past Due |
90 Days or More Past Due |
Nonaccruing | Total | |||||||||||||||||
Commercial loans(b) |
$ |
249 | - | - | 150 | 399 | ||||||||||||||||
Residential mortgage loans(a) |
478 | 52 | 122 | 13 | 665 | |||||||||||||||||
Home equity |
236 | 12 | - | 18 | 266 | |||||||||||||||||
Automobile loans |
8 | - | - | 1 | 9 | |||||||||||||||||
Credit card |
16 | 3 | - | 26 | 45 | |||||||||||||||||
Total |
$ |
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 of December 31, 2017, these advances represented $282 of current loans, $40 of 30-89 days past due loans and $108 of 90 days or more past due loans. |
(b) | Excludes restructured nonaccrual loans held for sale. |
Analysis of Net Loan Charge-offs
Net charge-offs were 41 bps and 28 bps of average portfolio loans and leases for the three months ended June 30, 2018 and 2017, respectively, and were 38 bps and 34 bps of average portfolio loans and leases for the six months ended June 30, 2018 and 2017, respectively. Table 54 provides a summary of credit loss experience and net charge-offs as a percent 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 increased to 34 bps and 27 bps during the three and six months ended June 30, 2018, respectively, compared to 17 bps and 23 bps during the three and six months ended June 30, 2017, respectively. The increases for both the three and six months ended June 30, 2018 were primarily due to increases in net charge-offs on commercial and industrial loans of $29 million and $22 million during the three and six months ended June 30, 2018, respectively, compared to the same period in the prior year.
Consumer loan net charge-offs as a percent of average portfolio consumer loans and leases were 52 bps and 56 bps during the three and six months ended June 30, 2018, respectively, compared to 46 bps and 51 bps for the three and six months ended June 30, 2017, respectively. The increases for both the three and six months ended June 30, 2018 were primarily due to increases in net charge-offs on credit cards of $4 million and $9 million during the three and six months ended June 30, 2018, respectively, compared to the same period in the prior year.
41
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
TABLE 54: Summary of Credit Loss Experience | ||||||||||||||||||||
For the three months ended June 30, |
For the six months ended June 30, |
|||||||||||||||||||
($ in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||
Losses charged-off: |
||||||||||||||||||||
Commercial and industrial loans |
$ | (51 | ) | (34) | (83 | ) | (72) | |||||||||||||
Commercial mortgage loans |
(3 | ) | (6) | (4 | ) | (12) | ||||||||||||||
Commercial leases |
- | (1) | - | (2) | ||||||||||||||||
Residential mortgage loans |
(4 | ) | (4) | (7 | ) | (10) | ||||||||||||||
Home equity |
(5 | ) | (9) | (12 | ) | (18) | ||||||||||||||
Automobile loans |
(13 | ) | (12) | (30 | ) | (29) | ||||||||||||||
Credit card |
(29 | ) | (24) | (58 | ) | (48) | ||||||||||||||
Other consumer loans(a) |
(13 | ) | (5) | (28 | ) | (11) | ||||||||||||||
Total losses charged-off |
$ | (118 | ) | (95) | (222 | ) | (202) | |||||||||||||
Recoveries of losses previously charged-off: |
||||||||||||||||||||
Commercial and industrial loans |
$ | 4 | 16 | 9 | 20 | |||||||||||||||
Commercial mortgage loans |
1 | 1 | 2 | 1 | ||||||||||||||||
Residential mortgage loans |
2 | 2 | 3 | 3 | ||||||||||||||||
Home equity |
3 | 4 | 5 | 7 | ||||||||||||||||
Automobile loans |
5 | 6 | 11 | 11 | ||||||||||||||||
Credit card |
3 | 2 | 6 | 5 | ||||||||||||||||
Other consumer loans(a) |
6 | - | 11 | 2 | ||||||||||||||||
Total recoveries of losses previously charged-off |
$ | 24 | 31 | 47 | 49 | |||||||||||||||
Net losses charged-off: |
||||||||||||||||||||
Commercial and industrial loans |
$ | (47 | ) | (18) | (74 | ) | (52) | |||||||||||||
Commercial mortgage loans |
(2 | ) | (5) | (2 | ) | (11) | ||||||||||||||
Commercial leases |
- | (1) | - | (2) | ||||||||||||||||
Residential mortgage loans |
(2 | ) | (2) | (4 | ) | (7) | ||||||||||||||
Home equity |
(2 | ) | (5) | (7 | ) | (11) | ||||||||||||||
Automobile loans |
(8 | ) | (6) | (19 | ) | (18) | ||||||||||||||
Credit card |
(26 | ) | (22) | (52 | ) | (43) | ||||||||||||||
Other consumer loans |
(7 | ) | (5) | (17 | ) | (9) | ||||||||||||||
Total net losses charged-off |
$ | (94 | ) | (64) | (175 | ) | (153) | |||||||||||||
Net losses charged-off as a percent of average portfolio loans and leases: |
||||||||||||||||||||
Commercial and industrial loans |
0.44 | % | 0.17 | 0.36 | 0.25 | |||||||||||||||
Commercial mortgage loans |
0.11 | 0.33 | 0.09 | 0.31 | ||||||||||||||||
Commercial leases |
- | 0.06 | - | 0.07 | ||||||||||||||||
Total commercial loans and leases |
0.34 | % | 0.17 | 0.27 | 0.23 | |||||||||||||||
Residential mortgage loans |
0.05 | 0.04 | 0.06 | 0.08 | ||||||||||||||||
Home equity |
0.12 | 0.27 | 0.19 | 0.30 | ||||||||||||||||
Automobile loans |
0.33 | 0.27 | 0.42 | 0.38 | ||||||||||||||||
Credit card |
4.73 | 4.22 | 4.69 | 4.13 | ||||||||||||||||
Other consumer loans |
1.85 | 2.31 | 2.00 | 2.58 | ||||||||||||||||
Total consumer loans |
0.52 | % | 0.46 | 0.56 | 0.51 | |||||||||||||||
Total net losses charged-off as a percent of average portfolio loans and leases |
0.41 | % | 0.28 | 0.38 | 0.34 |
(a) For the three and six months ended June 30, 2018, the Bancorp recorded $6 and $10, respectively, in both losses charged-off and recoveries of losses charged-off related to customer defaults on point-of-sale loans for which the Bancorp obtained recoveries under third-party credit enhancements.
Allowance for Credit Losses
The allowance for credit losses is comprised of the ALLL and the reserve for unfunded commitments. The ALLL provides coverage for probable and estimable losses in the loan and lease portfolio. The Bancorp evaluates the ALLL each quarter to determine its adequacy to cover inherent losses. Several factors are taken into consideration in the determination of the overall ALLL, including an unallocated component. These factors include, but are not limited to, the overall risk profile of the loan and lease portfolios, net charge-off experience, the extent of impaired loans and leases, the level of nonaccrual loans and leases, the level of 90 days past due loans and leases and the overall level of the ALLL as a percent of portfolio loans and leases. The Bancorp also considers overall asset quality trends, credit administration and portfolio management practices, risk identification practices, credit policy and underwriting practices, overall portfolio growth, portfolio concentrations and current economic conditions that might impact the portfolio. More information on the ALLL can be found in the Critical Accounting Policies section of the Bancorps Annual Report on Form 10-K for the year ended December 31, 2017.
During the three months ended June 30, 2018, the Bancorp did not substantively change any material aspect of its overall approach in the determination of the ALLL and there have been no material changes in assumptions or estimation techniques as compared to prior periods that impacted the determination of the current period allowance. In addition to the ALLL, the Bancorp maintains a reserve for unfunded commitments recorded in other liabilities in the Condensed Consolidated Balance Sheets. The methodology used to determine the adequacy of this reserve is similar to the Bancorps methodology for determining the ALLL. The provision for unfunded commitments is included in other noninterest expense in the Condensed Consolidated Statements of Income.
The ALLL attributable to the portion of the residential mortgage and consumer loan and lease portfolio that has not been restructured is determined on a pooled basis with the segmentation based on the similarity of credit risk characteristics. Loss factors for consumer loans are developed for each pool based on the trailing twelve month historical loss rate, as adjusted for certain prescriptive loss rate factors and certain qualitative adjustment factors.
42
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
The prescriptive loss rate factors and qualitative adjustments are designed to reflect risks associated with current conditions and trends which are not believed to be fully reflected in the trailing twelve month historical loss rate. For real estate backed consumer loans, the prescriptive loss rate factors include adjustments for delinquency trends, LTV trends, refreshed FICO score trends and product mix, and the qualitative factors include adjustments for changes in policies or procedures in underwriting, monitoring or collections, economic conditions, portfolio mix, lending and risk management personnel, results of internal audit and quality control reviews, collateral values and geographic concentrations. The Bancorp considers home price index trends in its footprint and the volatility of collateral valuation trends when determining the collateral value qualitative factor.
The Bancorps 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 $155 million at June 30, 2018. In addition, the Bancorps determination of the ALLL for residential mortgage loans and consumer loans is sensitive to changes in estimated loss rates. In the event that estimated loss rates would increase by 10%, the ALLL for residential mortgage loans and consumer loans would increase by approximately $32 million at June 30, 2018. As several qualitative and quantitative factors are considered in determining the ALLL, these sensitivity analyses do not necessarily reflect the nature and extent of future changes in the ALLL. They are intended to provide insights into the impact of adverse changes to risk grades and estimated loss rates and do not imply any expectation of future deterioration in the risk ratings or loss rates. Given current processes employed by the Bancorp, management believes the risk grades and estimated loss rates currently assigned are appropriate.
TABLE 55: Changes in Allowance for Credit Losses
For the three months ended June 30, |
For the six months ended June 30, |
|||||||||||||||||
($ in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||||
ALLL: |
||||||||||||||||||
Balance, beginning of period |
$ | 1,138 | 1,238 | 1,196 | 1,253 | |||||||||||||
Losses charged-off(a) |
(118) | (95) | (222) | (202) | ||||||||||||||
Recoveries of losses previously charged-off(a) |
24 | 31 | 47 | 49 | ||||||||||||||
Provision for loan and lease losses |
33 | 52 | 56 | 126 | ||||||||||||||
Balance, end of period |
$ | 1,077 | 1,226 | 1,077 | 1,226 | |||||||||||||
Reserve for unfunded commitments: |
||||||||||||||||||
Balance, beginning of period |
$ | 151 | 159 | 161 | 161 | |||||||||||||
(Benefit from) Provision for unfunded commitments |
(20) | 3 | (30) | 1 | ||||||||||||||
Balance, end of period |
$ | 131 | 162 | 131 | 162 |
(a) For the three and six months ended June 30, 2018, the Bancorp recorded $6 and $10, respectively, in both losses charged-off and recoveries of losses charged-off related to customer defaults on point-of-sale loans for which the Bancorp obtained recoveries under third-party credit enhancements.
Certain inherent but unconfirmed losses are probable within the loan and lease portfolio. The Bancorps 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 of the ALLL is maintained to recognize the imprecision in estimating and measuring loss. The unallocated allowance as a percent of total portfolio loans and leases was 0.12% and 0.13% at June 30, 2018 and December 31, 2017, respectively. The unallocated allowance was 10% of the total allowance at both June 30, 2018 and December 31, 2017.
As shown in Table 56, the ALLL as a percent of portfolio loans and leases was 1.17% and 1.30% at June 30, 2018 and December 31, 2017, respectively. The ALLL was $1.1 billion and $1.2 billion at June 30, 2018 and December 31, 2017, respectively.
43
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
TABLE 56: Attribution of Allowance for Loan and Lease Losses to Portfolio Loans and Leases
As of ($ in millions) | June 30, 2018 | December 31, 2017 | ||||||
Attributed ALLL: |
||||||||
Commercial and industrial loans |
$ | 545 | 651 | |||||
Commercial mortgage loans |
65 | 65 | ||||||
Commercial construction loans |
21 | 23 | ||||||
Commercial leases |
23 | 14 | ||||||
Residential mortgage loans |
86 | 89 | ||||||
Home equity |
39 | 46 | ||||||
Automobile loans |
39 | 38 | ||||||
Credit card |
124 | 117 | ||||||
Other consumer loans |
27 | 33 | ||||||
Unallocated |
108 | 120 | ||||||
Total ALLL |
$ | 1,077 | 1,196 | |||||
Portfolio loans and leases: |
||||||||
Commercial and industrial loans |
$ | 41,403 | 41,170 | |||||
Commercial mortgage loans |
6,625 | 6,604 | ||||||
Commercial construction loans |
4,687 | 4,553 | ||||||
Commercial leases |
3,788 | 4,068 | ||||||
Residential mortgage loans |
15,640 | 15,591 | ||||||
Home equity |
6,599 | 7,014 | ||||||
Automobile loans |
8,938 | 9,112 | ||||||
Credit card |
2,270 | 2,299 | ||||||
Other consumer loans |
1,982 | 1,559 | ||||||
Total portfolio loans and leases |
$ | 91,932 | 91,970 | |||||
Attributed ALLL as a percent of respective portfolio loans and leases: |
||||||||
Commercial and industrial loans |
1.32 % | 1.58 | ||||||
Commercial mortgage loans |
0.98 | 0.98 | ||||||
Commercial construction loans |
0.45 | 0.51 | ||||||
Commercial leases |
0.61 | 0.34 | ||||||
Residential mortgage loans |
0.55 | 0.57 | ||||||
Home equity |
0.59 | 0.66 | ||||||
Automobile loans |
0.44 | 0.42 | ||||||
Credit card |
5.46 | 5.09 | ||||||
Other consumer loans |
1.36 | 2.12 | ||||||
Unallocated (as a percent of total portfolio loans and leases) |
0.12 | 0.13 | ||||||
Attributed ALLL as a percent of total portfolio loans and leases |
1.17 % | 1.30 |
Market risk is the day-to-day potential for the value of a financial instrument to increase or decrease due to movements in market factors. The Bancorps market risk includes risks resulting from movements in interest rates, foreign exchange rates, equity prices and commodity prices. Interest rate risk, a component of market risk, primarily impacts the Bancorps NII and interest sensitive fee income categories through changes in interest income on earning assets and cost of interest bearing liabilities, and through fee items that are related to interest sensitive activities such as mortgage origination and servicing income. Management considers interest rate risk a prominent market risk in terms of its potential impact on earnings. Interest rate risk may occur for any one or more of the following reasons:
● Assets and liabilities mature or reprice at different times;
● Short-term and long-term market interest rates change by different amounts; or
● The expected maturities of various assets or liabilities shorten or lengthen as interest rates change.
In addition to the direct impact of interest rate changes on NII, interest rates can indirectly impact earnings through their effect on loan and deposit demand, credit losses, mortgage originations, the value of servicing rights and other sources of the Bancorps earnings. Stability of the Bancorps net income is largely dependent upon the effective management of interest rate risk. Management continually reviews the Bancorps 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 Bancorps risk tolerance.
Interest Rate Risk Management Oversight
The Bancorps ALCO, which includes senior management representatives and is accountable to the ERMC, monitors and manages interest rate risk within Board approved policy limits. In addition to the risk management activities of ALCO, the Bancorp has a Market Risk Management function as part of ERM that provides independent oversight of market risk activities.
Net Interest Income Sensitivity
The Bancorp employs a variety of measurement techniques to identify and manage its interest rate risk, including the use of an NII simulation model to analyze the sensitivity of NII to changes in interest rates. The model is based on contractual and assumed cash flows and repricing characteristics for all of the Bancorps assets, liabilities and off-balance sheet exposures and incorporates market-based assumptions regarding the effect of changing interest rates on the prepayment rates of certain assets and attrition rates of certain liabilities. The model also includes senior managements 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 changes in market conditions and management strategies.
44
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
As of June 30, 2018, the Bancorps interest rate risk exposure is evaluated by measuring the anticipated change in NII over 12-month and 24-month horizons assuming 100 bps and 200 bps parallel ramped increases and a 100 bps parallel ramped decrease in interest rates. The analysis would typically include a 200 bps parallel ramped decrease in interest rates; however, this analysis is currently omitted due to the current levels of certain interest rates.
In order to recognize the risk of noninterest-bearing demand deposit balance run-off in a rising interest rate environment, the Bancorps NII sensitivity modeling assumes that approximately $1 billion of balances run-off over 24 months above what is included in senior managements baseline projections for each 100 bps increase in short-term market interest rates. Similarly, the Bancorps NII sensitivity modeling incorporates approximately $1 billion of growth in noninterest-bearing deposit balances over 24 months above senior managements baseline projections for each 100 bps decrease in short-term market interest rates. The balance run-off and growth are modeled to flow into and out of funding products that reprice in conjunction with market rate changes.
Another important deposit modeling assumption is the amount by which interest-bearing deposit rates will increase or decrease when market interest rates increase or decrease. This deposit repricing sensitivity is known as the beta, and it represents the expected amount by which Bancorp deposit rates will change for a given change in short-term market rates. The Bancorps NII sensitivity modeling assumes a weighted-average rising rate interest-bearing deposit beta of 70% at June 30, 2018, which is approximately 20 percentage points higher than the average beta that the Bancorp experienced in the last FRB tightening cycle from June 2004 to June 2006.
The Bancorp continually evaluates the sensitivity of its interest rate risk measures to these important deposit modeling assumptions. The Bancorp also regularly monitors the sensitivity of other important modeling assumptions, such as loan and security prepayments and early withdrawals on fixed-rate customer liabilities.
The following table shows the Bancorps estimated net interest income sensitivity profile and ALCO policy limits as of:
TABLE 57: Estimated NII Sensitivity Profile and ALCO Policy Limits
June 30, 2018 |
June 30, 2017 | |||||||||||||||||||||
% 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 |
1.24 % | 5.19 | (4.00) | (6.00) | 1.90 | 5.85 | (4.00) | (6.00) | ||||||||||||||
+100 Ramp over 12 months |
0.74 | 2.92 | - | - | 1.13 | 3.74 | - | - | ||||||||||||||
-100 Ramp over 12 months |
(3.75) | (9.11) | (8.00) | (12.00) | N/A | N/A | N/A | N/A | ||||||||||||||
-62.5 Ramp over 7 months |
N/A | N/A | N/A | N/A | (4.04) | (7.51) | (6.00) | (8.00) |
At June 30, 2018, the Bancorps NII would benefit in both year one and year two under the parallel rate ramp increases. The Bancorps NII would decline in both year one and year two under the parallel 100 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 FRB has increased its target range for the federal funds rate, the sensitivity to declining rates has increased, which is a reflection of the balance sheet mix 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 changes in the estimated NII sensitivity profile as of June 30, 2018 compared to June 30, 2017 were primarily attributable to an increase in outstanding taxable securities balances, the addition of receive-fixed swaps against floating-rate commercial loans, increased utilization of short-term funding and growth in fixed-rate consumer loans. These items were partially offset by an increase in core deposit balances and a reduction in fixed-rate commercial leases.
Tables 58 and 59 provide the Bancorps estimated NII profile at June 30, 2018 with changes to certain deposit balances and deposit repricing sensitivity (betas) assumptions.
45
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
The following table includes the Bancorps estimated NII sensitivity profile at June 30, 2018 with an immediate $1 billion decrease and an immediate $1 billion increase in demand deposit balances:
TABLE 58: Estimated NII Sensitivity Profile at June 30, 2018 with a $1 Billion Change in Demand Deposit Assumption
% Change in NII (FTE) | ||||||||||||||||||||
Immediate $1 Billion Balance |
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 |
1.00 | % | 4.73 | 1.48 | 5.65 | |||||||||||||||
+100 Ramp over 12 months |
0.62 | 2.69 | 0.86 | 3.15 | ||||||||||||||||
-100 Ramp over 12 months |
(3.87 | ) | (9.34 | ) | (3.64) | (8.88) | ||||||||||||||
The following table includes the Bancorps estimated NII sensitivity profile at June 30, 2018 with a 25% increase and a 25% decrease to the rising rate deposit beta assumptions as of June 30, 2018. The resulting weighted-average interest-bearing deposit betas included in this analysis were approximately 88% and 53%, respectively, as of June 30, 2018:
TABLE 59: Estimated NII Sensitivity Profile at June 30, 2018 with Deposit Beta Assumptions 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 |
(1.66) | % | (0.25) | 4.14 | 10.63 | |||||||||||||||
+100 Ramp over 12 months |
(0.71) | 0.22 | 2.18 | 5.61 |
Economic Value of Equity Sensitivity
The Bancorp also uses EVE as a measurement tool in managing interest rate risk. Whereas the NII sensitivity analysis highlights the impact on forecasted NII on an FTE basis (non-GAAP) over one and two year time horizons, EVE is a point in time analysis of the economic sensitivity of current positions that incorporates all cash flows over their estimated remaining lives. The EVE of the balance sheet is defined as the discounted present value of all asset and net derivative cash flows less the discounted value of all liability cash flows. Due to this longer horizon, the sensitivity of EVE to changes in the level of interest rates is a measure of longer-term interest rate risk. EVE values only the current balance sheet and does not incorporate the balance growth assumptions used in the NII sensitivity analysis. As with the NII simulation model, assumptions about the timing and variability of existing balance sheet cash flows are critical 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 Bancorps estimated EVE sensitivity profile as of:
TABLE 60: Estimated EVE Sensitivity Profile
June 30, 2018 | June 30, 2017 | |||||||||||||||||
Change in Interest Rates (bps) | % Change in EVE | ALCO Policy Limit |
% Change in EVE |
ALCO Policy Limit |
||||||||||||||
+200 Shock |
(5.37) | % | (12.00) | (4.85) | (12.00) | |||||||||||||
+100 Shock |
(2.38) | - | (1.87) | - | ||||||||||||||
+25 Shock |
N/A | - | (0.30) | - | ||||||||||||||
-100 Shock |
0.02 | - | (1.31) | - |
The EVE sensitivity to the +200 bps rising rate scenario is moderately negative at June 30, 2018 and slightly positive to a 100 bps decline in market rates. The changes in the estimated EVE sensitivity profile from June 30, 2017 were primarily related to the addition of receive-fixed swaps against commercial loans, an increase in the floating-rate debt portion of the wholesale funding position and an increase in the outstanding taxable securities balances. These items were partially offset by an increase in core deposit balances and the net run-off of the fixed-rate commercial lease portfolio.
While an instantaneous shift in interest rates is used in this analysis to provide an estimate of exposure, the Bancorp believes that a gradual shift in interest rates would have a much more modest impact. Since EVE measures the discounted present value of cash flows over the estimated lives of instruments, the change in EVE does not directly correlate to the degree that earnings would be impacted over a shorter time horizon (e.g., the current fiscal year). Further, EVE does not take into account factors such as future balance sheet growth, changes in product mix, changes in yield curve relationships and changing product spreads that could mitigate or exacerbate the impact of changes in interest rates. The NII simulations and EVE analyses do not necessarily include certain actions that management may undertake to manage risk in response to actual changes in interest rates.
The Bancorp regularly evaluates its exposures to a static balance sheet forecast, LIBOR, Prime Rate and other basis risks, yield curve twist risks and embedded options risks. In addition, the impacts on NII on an FTE basis and EVE of extreme changes in interest rates are modeled, wherein the Bancorp employs the use of yield curve shocks and environment-specific scenarios.
46
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Use of Derivatives to Manage Interest Rate Risk
An integral component of the Bancorps interest rate risk management strategy is its use of derivative instruments to minimize significant fluctuations in earnings caused by changes in market interest rates. Examples of derivative instruments that the Bancorp may use as part of its interest rate risk management strategy include interest rate swaps, interest rate floors, interest rate caps, forward contracts, forward starting interest rate swaps, options, swaptions and TBA securities.
As part of its overall risk management strategy relative to its residential mortgage banking activities, the Bancorp enters into forward contracts accounted for as free-standing derivatives to economically hedge IRLCs that are also considered free-standing derivatives. Additionally, the Bancorp economically hedges its exposure to residential mortgage loans held for sale through the use of forward contracts and mortgage options.
The Bancorp also enters into derivatives contracts with major financial institutions to economically hedge market risks assumed in interest rate derivative contracts with commercial customers. Generally, these contracts have similar terms in order to protect the Bancorp from market volatility. Credit risk arises from the possible inability of counterparties to meet the terms of their contracts, which the Bancorp minimizes through collateral arrangements, approvals, limits and monitoring procedures. For further information including the notional amount and fair values of these derivatives, refer to Note 11 of the Notes to Condensed Consolidated Financial Statements.
Portfolio Loans and Leases and Interest Rate Risk
Although the Bancorps 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 Bancorps portfolio loans and leases expected cash flows, excluding interest receivable, as of June 30, 2018:
TABLE 61: Portfolio Loans and Leases Expected Cash Flows
($ in millions) | Less than 1 year | 1-5 years | Over 5 years | Total | ||||||||||||||||||||||||
Commercial and industrial loans |
$ | 22,452 | 17,918 | 1,033 | 41,403 | |||||||||||||||||||||||
Commercial mortgage loans |
2,655 | 3,378 | 592 | 6,625 | ||||||||||||||||||||||||
Commercial construction loans |
2,029 | 2,587 | 71 | 4,687 | ||||||||||||||||||||||||
Commercial leases |
840 | 1,783 | 1,165 | 3,788 | ||||||||||||||||||||||||
Total commercial loans and leases |
27,976 | 25,666 | 2,861 | 56,503 | ||||||||||||||||||||||||
Residential mortgage loans |
2,329 | 6,411 | 6,900 | 15,640 | ||||||||||||||||||||||||
Home equity |
1,678 | 3,386 | 1,535 | 6,599 | ||||||||||||||||||||||||
Automobile loans |
3,792 | 4,794 | 352 | 8,938 | ||||||||||||||||||||||||
Credit card |
454 | 1,816 | - | 2,270 | ||||||||||||||||||||||||
Other consumer loans |
1,198 | 517 | 267 | 1,982 | ||||||||||||||||||||||||
Total consumer loans |
9,451 | 16,924 | 9,054 | 35,429 | ||||||||||||||||||||||||
Total portfolio loans and leases |
$ | 37,427 | 42,590 | 11,915 | 91,932 |
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 June 30, 2018:
TABLE 62: Portfolio Loans and Leases Expected Cash Flows Occurring After 1 Year
Interest Rate | ||||||||||
($ in millions) | Fixed | Floating or Adjustable | ||||||||
Commercial and industrial loans |
$ | 2,441 | 16,510 | |||||||
Commercial mortgage loans |
953 | 3,017 | ||||||||
Commercial construction loans |
29 | 2,629 | ||||||||
Commercial leases |
2,948 | - | ||||||||
Total commercial loans and leases |
6,371 | 22,156 | ||||||||
Residential mortgage loans |
10,038 | 3,273 | ||||||||
Home equity |
455 | 4,466 | ||||||||
Automobile loans |
5,114 | 32 | ||||||||
Credit card |
501 | 1,315 | ||||||||
Other consumer loans |
529 | 255 | ||||||||
Total consumer loans |
16,637 | 9,341 | ||||||||
Total portfolio loans and leases |
$ | 23,008 | 31,497 |
Residential Mortgage Servicing Rights and Interest Rate Risk
The fair value of the residential MSR portfolio was $959 million and $858 million at June 30, 2018 and December 31, 2017, respectively. The value of servicing rights can fluctuate sharply depending on changes in interest rates and other factors. Generally, as interest rates decline and loans are prepaid to take advantage of refinancing, the total value of existing servicing rights declines because no further servicing fees are collected on repaid loans. The Bancorp maintains a non-qualifying hedging strategy relative to its mortgage banking activity in order to manage a portion of the risk associated with changes in the value of its MSR portfolio as a result of changing interest rates.
Mortgage rates increased during both the three and six months ended June 30, 2018 which caused modeled prepayment speeds to slow. The fair value of the MSR increased $21 million and $78 million, respectively, due to changes to inputs to the valuation model including prepayment speeds and OAS spread assumptions and decreased $34 million and $62 million, respectively, due to the passage of time, including the impact of regularly scheduled repayments, paydowns and payoffs for the three and six months ended June 30, 2018.
47
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Mortgage rates decreased during the three and six months ended June 30, 2017 which caused modeled prepayment speeds to increase which led to fair value adjustments on servicing rights. The fair value of the MSR decreased $17 million and $13 million, respectively, due to changes to inputs to the valuation model including prepayment speeds and OAS spread assumptions and decreased $30 million and $57 million, respectively, due to the passage of time, including the impact of regularly scheduled repayments, paydowns and payoffs for the three and six months ended June 30, 2017.
The Bancorp recognized net losses of $20 million and $82 million, respectively, on its non-qualifying hedging strategy for the three and six months ended June 30, 2018 compared to net gains of $18 million and $17 million, respectively, during the three and six months ended June 30, 2017. These amounts include net losses on securities related to the Bancorps non-qualifying hedging strategy which were $4 million and $17 million, respectively, during the three and six months ended June 30, 2018 and net gains of $2 million during both the three and six months ended June 30, 2017. The Bancorp may adjust its hedging strategy to reflect its assessment of the composition of its MSR portfolio, the cost of hedging and the anticipated effectiveness of the hedges given the economic environment. Refer to Note 10 of the Notes to Condensed Consolidated Financial Statements for further discussion on servicing rights and the instruments used to hedge interest rate risk on MSRs.
Foreign Currency Risk
The Bancorp may enter into foreign exchange derivative contracts to economically hedge certain foreign denominated loans. The derivatives are classified as free-standing instruments with the revaluation gain or loss being recorded in other noninterest income in the Condensed Consolidated Statements of Income. The balance of the Bancorps foreign denominated loans at June 30, 2018 and December 31, 2017 was $932 million and $939 million, respectively. The Bancorp also enters into foreign exchange contracts for the benefit of commercial customers to hedge their exposure to foreign currency fluctuations. Similar to the hedging of interest rate risk from interest rate derivative contracts, the Bancorp also enters into foreign exchange contracts with major financial institutions to economically hedge a substantial portion of the exposure from client driven foreign exchange activity. The Bancorp has risk limits and internal controls in place to help ensure excessive risk is not being taken in providing this service to customers. These controls include an independent determination of currency volatility and credit equivalent exposure on these contracts, counterparty credit approvals and country limits performed by 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.
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 15 of the Notes to Condensed Consolidated Financial Statements.
The Bancorps Treasury department manages funding and liquidity based on point-in-time metrics as well as forward-looking projections, which incorporate different sources and uses of funds under base and stress scenarios. Liquidity risk is monitored and managed by the Treasury department, and a series of Policy Limits and Key Risk Indicators are established to ensure risks are managed within the Bancorps risk tolerance. The Bancorp maintains a contingency funding plan that provides for liquidity stress testing, which assesses the liquidity needs under varying market conditions, time horizons, asset growth rates and other events. The contingency plan provides for ongoing monitoring of unused borrowing capacity and available sources of contingent liquidity to prepare for unexpected liquidity needs and to cover unanticipated events that could affect liquidity. The contingency plan also outlines the Bancorps response to various levels of liquidity stress and actions that should be taken during various scenarios.
Liquidity Risk Management Oversight
The Bancorps 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 Bancorps 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.
48
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Table 61 of the Market Risk Management subsection of the Risk Management section of MD&A illustrates the expected maturities from loan and lease repayments. Of the $32.0 billion of securities in the Bancorps available-for-sale debt and other securities portfolio at June 30, 2018, $3.7 billion in principal and interest is expected to be received in the next 12 months and an additional $3.2 billion is expected to be received in the next 13 to 24 months. For further information on the Bancorps securities portfolio, refer to the Investment Securities subsection of the Balance Sheet Analysis section of MD&A.
Asset-driven liquidity is provided by the Bancorps ability to sell or securitize loans and leases. In order to reduce the exposure to interest rate fluctuations and to manage liquidity, the Bancorp has developed securitization and sale procedures for several types of interest-sensitive assets. A majority of the long-term, fixed-rate single-family residential mortgage loans underwritten according to FHLMC or FNMA guidelines are sold for cash upon origination. Additional assets such as certain other residential mortgage loans, certain commercial loans, home equity loans, automobile loans and other consumer loans are also capable of being securitized or sold. The Bancorp sold or securitized loans totaling $1.5 billion and $2.6 billion during the three and six months ended June 30, 2018, respectively, compared to $1.6 billion and $3.2 billion during the three and six months ended June 30, 2017, respectively. For further information on the transfer of financial assets, refer to Note 10 of the Notes to Condensed Consolidated Financial Statements.
Core deposits have historically provided the Bancorp with a sizeable source of relatively stable and low cost funds. The Bancorps average core deposits and average shareholders equity funded 83% of its average total assets for both the three and six months ended June 30, 2018 and 2017, respectively. 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 Bancorps 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 June 30, 2018, $7.3 billion of debt or other securities were available for issuance under the current Bancorps Board of Directors authorizations and the Bancorp is authorized to file any necessary registration statements with the SEC to permit ready access to the public securities markets; however, access to these markets may depend on market conditions. During the six months ended June 30, 2018, the Bancorp issued and sold $900 million of senior notes. At June 30, 2018, the Bancorp has approximately $42.5 billion of borrowing capacity available through secured borrowing sources including the FHLB and FRB.
The Banks global bank note program has a borrowing capacity of $25.0 billion, of which $17.3 billion was available for issuance as of June 30, 2018. For further information on a subsequent event related to long-term debt, refer to Note 24.
Liquidity Coverage Ratio and Net Stable Funding Ratio
The Bancorp is subject to the Modified LCR requirement, which stipulates that BHCs with at least $50 billion but less than $250 billion in total consolidated assets that are not internationally active, such as the Bancorp, maintain HQLA equal to their calculated net cash outflows over a 30 calendar-day stress period multiplied by a factor of 0.7. The Bancorps Modified LCR was 116% at June 30, 2018.
On June 1, 2016, the U.S. banking agencies published a notice of proposed rulemaking to implement a modified NSFR for certain bank holding companies with at least $50 billion but less than $250 billion in total consolidated assets and with less than $10 billion in on-balance sheet foreign exposures, including the Bancorp. Generally consistent with the BCBS framework, under the proposed rule banking organizations would be required to hold an amount of ASF over a one-year time horizon that equals or exceeds the institutions amount of RSF, with the ASF representing the numerator and the RSF representing the denominator of the NSFR. Banking organizations subject to the modified NSFR would multiply the RSF amount by 70%, such that the RSF amount required for these institutions would be equivalent to 70% of the RSF amount that would be required pursuant to the full NSFR generally applicable to institutions with at least $250 billion in total consolidated assets or $10 billion or more in on-balance sheet foreign exposures under the proposed rule. The comment period for this proposal ended on August 5, 2016. The Bancorp is currently awaiting the final rule from the U.S. banking agencies.
Credit Ratings
The cost and availability of financing to the Bancorp and Bank are impacted by its credit ratings. A downgrade to the Bancorps or Banks credit ratings could affect its ability to access the credit markets and increase its borrowing costs, thereby adversely impacting the Bancorps or Banks financial condition and liquidity. Key factors in maintaining high credit ratings include a stable and diverse earnings stream, strong credit quality, strong capital ratios and diverse funding sources, in addition to disciplined liquidity monitoring procedures.
The Bancorps and Banks credit ratings are summarized in Table 63. The ratings reflect the ratings agencys view on the Bancorps and Banks 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.
49
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
TABLE 63: Agency Ratings | ||||||||||||||||||||
As of August 8, 2018 | Moodys | Standard and Poors | Fitch | DBRS | ||||||||||||||||
Fifth Third Bancorp: |
||||||||||||||||||||
Short-term borrowings |
No rating | A-2 | F1 | R-1L | ||||||||||||||||
Senior debt |
Baa1 | BBB+ | A- | A | ||||||||||||||||
Subordinated debt |
Baa1 | BBB | BBB+ | AL | ||||||||||||||||
Fifth Third Bank: |
||||||||||||||||||||
Short-term borrowings |
P-2 | A-2 | F1 | R-1M | ||||||||||||||||
Short-term deposit |
P-1 | No rating | F1 | No rating | ||||||||||||||||
Long-term deposit |
Aa3 | No rating | A | AH | ||||||||||||||||
Senior debt |
A3 | A- | A- | AH | ||||||||||||||||
Subordinated debt |
Baa1 | BBB+ | BBB+ | A | ||||||||||||||||
Rating Agency Outlook for Fifth Third Bancorp and Fifth Third Bank: |
Stable | Stable | Stable | Stable |
50
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
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 Bancorps 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 Bancorps risk management goal is to keep operational risk at appropriate levels consistent with the Bancorps risk appetite, financial strength, the characteristics of its businesses, the markets in which it operates and the competitive and regulatory environment to which it is subject.
To control, monitor and govern operational risk, the Bancorp maintains an overall Risk Management Framework which comprises governance oversight, risk assessment, capital measurement, monitoring and reporting as well as a formal three lines of defense approach. ERM is responsible for prescribing the framework to the lines of business and corporate functions, and to provide independent oversight of its implementation (second line of defense). Business Controls groups are in place in each of the lines of business to ensure consistent implementation and execution of managing day-to-day operational risk (first line of defense).
The Bancorps 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 Bancorps 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 Bancorps goals to minimize future operational losses and strengthen the Bancorps 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.
Regulatory compliance risk is defined as the risk of legal or regulatory sanctions, financial loss or damage to reputation as a result of noncompliance with (i) applicable laws, regulations, rules and other regulatory requirements (including but not limited to the risk of consumers experiencing economic loss or other legal harm as a result of noncompliance with consumer protection laws, regulations and requirements); (ii) internal policies and procedures, standards of best practice or codes of conduct; and (iii) principles of integrity and fair dealing applicable to Fifth Thirds activities and functions. Fifth Third focuses on managing regulatory compliance risk in accordance with the Bancorps integrated risk management framework, which ensures consistent processes for identifying, assessing, managing, monitoring and reporting risks. The Bancorps risk management goal is to keep compliance risk at appropriate levels consistent with the Bancorps risk appetite.
To mitigate compliance risk, Compliance Risk Management provides independent oversight to ensure consistency and sufficiency in the execution of the program, and ensures that lines of business, regions and support functions are adequately identifying, assessing and monitoring compliance risks and adopting proper mitigation strategies. The lines of business and enterprise functions are responsible for managing the compliance risks associated with their areas. Additionally, the Chief Compliance Officer is responsible for establishing and overseeing the Compliance Risk Management program which implements key compliance processes, including but not limited to, executive- and board-level governance and reporting routines, compliance-related policies, risk assessments, key risk indicators, issues tracking, regulatory compliance testing and monitoring, anti-money laundering, privacy and, in partnership with the Community and Economic Development team, oversees the Bancorps 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.
51
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Management regularly reviews the Bancorps capital levels to help ensure it is appropriately positioned under various operating environments. The Bancorp has established a Capital Committee which is responsible for making capital plan recommendations to management. These recommendations are reviewed by the ERMC and the annual capital plan is approved by the Board of Directors. The Capital Committee is responsible for execution and oversight of the capital actions of the capital plan.
Regulatory Capital Ratios
The Basel III Final Rule sets minimum regulatory capital ratios as well as defines the measure of well-capitalized.
TABLE 64: 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, 2016, the Bancorp became subject to a capital conservation buffer which will be phased in over a three-year period ending January 1, 2019. Once fully phased-in, the capital conservation buffer will be 2.5% in addition to the minimum capital ratios, in order to avoid limitations on certain capital distributions and discretionary bonus payments to executive officers. The capital conservation buffer was 0.625% in 2016, 1.25% in 2017 and is 1.875% in 2018. The Bancorp exceeded these well-capitalized and capital conservation buffer ratios for all periods presented.
In April 2018, the federal banking regulators proposed transitional arrangements to permit banking organizations to phase in the day-one impact of the adoption of ASU 2016-03, referred to as the current expected credit loss model, on regulatory capital over a period of three years. For additional information on ASU 2016-03, refer to Note 3 of the Notes to Condensed Consolidated Financial Statements. The Bancorp is evaluating the impact of this proposal.
The following table summarizes the Bancorps capital ratios as of:
TABLE 65: Capital Ratios
($ in millions) | June 30, 2018 | December 31, 2017 | ||||||||
Quarterly average total Bancorp shareholders equity as a percent of average assets |
11.38 % | 11.69 | ||||||||
Tangible equity as a percent of tangible assets(a) |
10.29 | 9.90 | ||||||||
Tangible common equity as a percentage of tangible assets(a)(c) |
9.33 | 8.94 | ||||||||
Basel III(b) | ||||||||||
|
|
|||||||||
CET1 capital |
$ | 1 | 2,986 | 12,517 | ||||||
Tier I capital |
1 | 4,317 | 13,848 | |||||||
Total regulatory capital |
1 | 8,116 | 17,887 | |||||||
Risk-weighted assets |
11 | 9,073 | 117,997 | |||||||
Regulatory capital ratios: |
||||||||||
CET1 capital |
10.91 % | 10.61 | ||||||||
Tier I risk-based capital |
12.02 | 11.74 | ||||||||
Total risk-based capital |
15.21 | 15.16 | ||||||||
Tier I leverage |
10.24 | 10.01 |
(a) | These are non-GAAP measures. For further information, refer to the Non-GAAP Financial Measures section of MD&A. |
(b) | Under the U.S. banking agencies Basel III Final Rule, assets and credit equivalent amounts of off-balance sheet exposures are calculated according to the standardized approach for risk-weighted assets. The resulting weighted values are added together resulting in the total risk-weighted assets. Under the banking agencies Final Rule published in November 2017 pertaining to certain regulatory items for banks subject to the standardized approach, the Bancorp is no longer subject to certain transition provisions and phase-outs beyond 2017. |
(c) | Excludes unrealized gains and losses. |
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 BHCs internal processes for assessing capital adequacy; the policies governing capital actions such as common stock issuances, dividends and share repurchases; and all planned capital actions over a nine-quarter planning horizon. Further, each BHC must also report to the FRB the results of stress tests conducted by the BHC under a number of scenarios that assess the sources and uses of capital under baseline and stressed economic scenarios. The FRB launched the 2018 stress testing program and CCAR on February 1, 2018, with submissions of stress test results and capital plans to the FRB due on April 5, 2018, which the Bancorp submitted as required.
The FRBs 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 Bancorps ability to maintain capital above each minimum regulatory capital ratio on a pro forma basis under expected and stressful conditions throughout the planning horizon.
52
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
On June 28, 2018, the Bancorp announced the results of its capital plan submitted to the FRB as part of the 2018 CCAR. For BHCs that proposed capital distributions in their plans, the FRB either objected to the plan or provided a non-objection whereby the FRB permitted the proposed capital distributions. The FRB indicated to the Bancorp that it did not object to the following capital actions for the period beginning July 1, 2018 and ending June 30, 2019:
● | The increase in the quarterly common stock dividend to $0.22 from $0.18 beginning in the fourth quarter of 2018 and to $0.24 beginning in the second quarter of 2019, a 33% increase over the current dividend rate; |
● | The repurchase of common shares in an amount up to $1.651 billion, or a 42% increase over the 2017 capital plan. These repurchases include $81 million in repurchases related to share issuances under employee benefit plans and $53 million in repurchases related to previously-recognized TRA transaction after-tax gains; |
● | The additional ability to repurchase common shares in the amount of any after-tax capital generated from the sale of Worldpay, Inc. common stock; |
● | The additional ability to repurchase common shares in the amount of any after-tax cash income generated from the termination and settlement of gross cash flows from existing TRAs with Worldpay, Inc. or potential future TRAs that may be generated from additional sales of Worldpay, Inc. |
On May 21, 2018, the Bancorp announced an acquisition of MB Financial. As a result, a resubmission of Fifth Thirds capital plan to the FRB is pending. However, this resubmission will not delay the implementation of the previously approved 2018 CCAR capital distributions.
Additionally, as a CCAR institution, the Bancorp is required to disclose the results of its company-run stress test under the supervisory adverse and supervisory severely adverse scenarios and to provide information related to the types of risk included in its stress testing, a description of the methodologies used, estimates of certain financial results and pro forma capital ratios, and an explanation of the most significant causes of changes in regulatory capital ratios. On June 21, 2018, the Bancorp publicly disclosed the results of its company-run stress test as required by the DFA stress testing rules, which are available on Fifth Thirds website at https://www.53.com. With Fifth Thirds designation as a Large and Non-complex Bank, it is no longer subject to the qualitative aspects of the CCAR program. It is, however, subject to the FRBs Horizontal Capital Review, which will be conducted in the third quarter of 2018.
In April 2018, the FRB proposed to introduce stress buffer requirements. Under the proposal, a SCB would replace the 2.5% capital conservation buffer. The SCB would reflect stressed losses in the supervisory severely adverse scenario of the FRBs CCAR stress tests plus four quarters of planned common stock dividends, subject to a floor of 2.5%. The proposal would also introduce a SLB requirement, analogous to the SCB, that would apply to the Tier I leverage ratio. In addition, the proposal would require BHCs to reduce their planned capital distributions if those distributions would not be consistent with the applicable capital buffer constraints based on the BHCs own baseline scenario projections. The proposal is applicable for BHCs with $50 billion or more in total consolidated assets, including the Bancorp. Under the proposal, a BHCs first SCB and SLB requirements would become effective on October 1, 2019. The Bancorp is evaluating the impact of this proposal.
Dividend Policy and Stock Repurchase Program
The Bancorps 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 $0.18 and $0.14 for the three months ended June 30, 2018 and 2017, respectively, and $0.34 and $0.28 for the six months ended June 30, 2018 and 2017, respectively. As contemplated by the 2017 CCAR, during the second quarter of 2018, the Bancorp entered into and settled a $235 million accelerated share repurchase transaction. Refer to Note 14 of the Notes to Condensed Consolidated Financial Statements for additional information on the accelerated share repurchases.
The following table summarizes the monthly share repurchase activity for the three months ended June 30, 2018:
TABLE 66: Share Repurchases
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) | ||||||||||
April 1, 2018 - April 30, 2018 |
721,491 | $ | 31.47 | - | 100,000,000 | |||||||||
May 1, 2018 - May 31, 2018 |
6,482,285 | 31.41 | 6,402,244 | 93,597,756 | ||||||||||
June 1, 2018 - June 30, 2018 |
1,221,018 | 29.04 | 1,172,122 | 92,425,634 | ||||||||||
Total |
8,424,794 | $ | 31.07 | 7,574,366 | 92,425,634 |
(a) | Includes 850,428 shares repurchased during the second quarter of 2018 in connection with various employee compensation plans. These purchases do not count against the maximum number of shares that may yet be purchased under the Board of Directors authorization. |
(b) | During the first quarter of 2018, the Bancorp announced that its Board of Directors had authorized management to purchase 100 million shares of the Bancorps common stock through the open market or in any private party transactions. The authorization does not include specific price targets or an expiration date. |
53
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
OFF-BALANCE SHEET ARRANGEMENTS
In the ordinary course of business, the Bancorp enters into financial transactions that are considered off-balance sheet arrangements as they involve varying elements of market, credit and liquidity risk in excess of the amounts recognized in the Bancorps Condensed Consolidated Balance Sheets. The Bancorps off-balance sheet arrangements include commitments, guarantees, contingent liabilities and transactions with non-consolidated VIEs. A brief discussion of these transactions is as follows:
Commitments
The Bancorp has certain commitments to make future payments under contracts, including commitments to extend credit, letters of credit, forward contracts related to residential mortgage loans held for sale, noncancelable operating lease obligations, purchase obligations, capital commitments for private equity investments, capital expenditures and capital lease obligations. Refer to Note 15 of the Notes to Condensed 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 15 of the Notes to Condensed Consolidated Financial Statements for additional information on guarantees and contingent liabilities.
Transactions with Non-consolidated VIEs
The Bancorp engages in a variety of activities that involve VIEs, which are legal entities that lack sufficient equity to finance their activities, or the equity investors of the entities as a group lack any of the characteristics of a controlling interest. The investments in those entities in which the Bancorp was determined not to be the primary beneficiary but holds a variable interest in the entity are accounted for under the equity method of accounting or other accounting standards as appropriate and not consolidated. Refer to Note 9 of the Notes to Condensed Consolidated Financial Statements for additional information on non-consolidated VIEs.
54
Quantitative and Qualitative Disclosure about Market Risk (Item 3)
Information presented in the Market Risk Management section of Managements Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference.
Controls and Procedures (Item 4)
The Bancorp conducted an evaluation, under the supervision and with the participation of the Bancorps management, including the Bancorps Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Bancorps disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on the foregoing, as of the end of the period covered by this report, the Bancorps Chief Executive Officer and Chief Financial Officer concluded that the Bancorps 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 the Bancorps management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
The Bancorps management also conducted an evaluation of internal control over financial reporting to determine whether any changes occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Bancorps internal control over financial reporting. Based on this evaluation, there has been no such change during the period covered by this report.
55
Fifth Third Bancorp and Subsidiaries
Condensed Consolidated Financial Statements and Notes (Item 1)
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
As of | ||||||||||
($ in millions, except share data) | June 30, 2018 |
December 31, 2017 |
||||||||
Assets |
||||||||||
Cash and due from banks |
$ | 2, | 052 | 2,514 | ||||||
Other short-term investments(a) |
1, | 636 | 2,753 | |||||||
Available-for-sale debt and other securities(b) |
31, | 961 | 31,751 | |||||||
Held-to-maturity securities(c) |
19 | 24 | ||||||||
Trading debt securities |
280 | 492 | ||||||||
Equity securities |
475 | 439 | ||||||||
Loans and leases held for sale(d) |
783 | 492 | ||||||||
Portfolio loans and leases(a)(e) |
91, | 932 | 91,970 | |||||||
Allowance for loan and lease losses(a) |
(1, | 077) | (1,196 | ) | ||||||
Portfolio loans and leases, net |
90, | 855 | 90,774 | |||||||
Bank premises and equipment(f) |
1, | 915 | 2,003 | |||||||
Operating lease equipment |
606 | 646 | ||||||||
Goodwill |
2, | 462 | 2,445 | |||||||
Intangible assets |
30 | 27 | ||||||||
Servicing rights |
959 | 858 | ||||||||
Other assets(a) |
6, | 662 | 6,975 | |||||||
Total Assets |
$ | 140, | 695 | 142,193 | ||||||
Liabilities |
||||||||||
Deposits: |
||||||||||
Noninterest-bearing deposits |
$ | 32, | 680 | 35,276 | ||||||
Interest-bearing deposits |
71, | 451 | 67,886 | |||||||
Total deposits |
104, | 131 | 103,162 | |||||||
Federal funds purchased |
597 | 174 | ||||||||
Other short-term borrowings |
1, | 763 | 4,012 | |||||||
Accrued taxes, interest and expenses |
1, | 206 | 1,412 | |||||||
Other liabilities(a) |
2, | 425 | 2,144 | |||||||
Long-term debt(a) |
14, | 321 | 14,904 | |||||||
Total Liabilities |
$ | 124, | 443 | 125,808 | ||||||
Equity |
||||||||||
Common stock(g) |
$ | 2, | 051 | 2,051 | ||||||
Preferred stock(h) |
1, | 331 | 1,331 | |||||||
Capital surplus |
2, | 833 | 2,790 | |||||||
Retained earnings |
16, | 143 | 15,122 | |||||||
Accumulated other comprehensive (loss) income |
( | 552) | 73 | |||||||
Treasury stock(g) |
(5, | 574) | (5,002 | ) | ||||||
Total Bancorp shareholders equity |
$ | 16, | 232 | 16,365 | ||||||
Noncontrolling interests |
20 | 20 | ||||||||
Total Equity |
16, | 252 | 16,385 | |||||||
Total Liabilities and Equity |
$ | 140, | 695 | 142,193 |
(a) | Includes $47 and $62 of other short-term investments, $908 and $1,297 of portfolio loans and leases, $(5) and $(6) of ALLL, $5 and $7 of other assets, $2 and $2 of other liabilities, and $830 and $1,190 of long-term debt from consolidated VIEs that are included in their respective captions above at June 30, 2018 and December 31, 2017, respectively. For further information refer to Note 9. |
(b) | Amortized cost of $32,589 and $31,577 at June 30, 2018 and December 31, 2017, respectively. |
(c) | Fair value of $19 and $24 at June 30, 2018 and December 31, 2017, respectively. |
(d) | Includes $658 and $399 of residential mortgage loans held for sale measured at fair value and $8 and $0 of commercial loans held for sale measured at fair value at June 30, 2018 and December 31, 2017, respectively. |
(e) | Includes $162 and $137 of residential mortgage loans measured at fair value at June 30, 2018 and December 31, 2017, respectively. |
(f) | Includes $37 and $27 of bank premises and equipment held for sale at June 30, 2018 and December 31, 2017, respectively. For further information refer to Note 7. |
(g) | Common shares: Stated value $2.22 per share; authorized 2,000,000,000; outstanding at June 30, 2018 678,161,855 (excludes 245,730,726 treasury shares), December 31, 2017 693,804,893 (excludes 230,087,688 treasury shares). |
(h) | 446,000 shares of undesignated no par value preferred stock are authorized and unissued at June 30, 2018 and December 31, 2017; fixed-to-floating rate non-cumulative Series H perpetual preferred stock with a $25,000 liquidation preference: 24,000 authorized shares, issued and outstanding at June 30, 2018 and December 31, 2017; fixed-to-floating rate non-cumulative Series I perpetual preferred stock with a $25,000 liquidation preference; 18,000 authorized shares, issued and outstanding at June 30, 2018 and December 31, 2017; and fixed-to-floating rate non-cumulative Series J perpetual preferred stock with a $25,000 liquidation preference: 12,000 authorized shares, issued and outstanding at June 30, 2018 and December 31, 2017. |
Refer to the Notes to Condensed Consolidated Financial Statements.
56
Fifth Third Bancorp and Subsidiaries
Condensed Consolidated Financial Statements and Notes (continued)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
For the three months ended June 30, |
For the six months ended June 30, |
|||||||||||||||||
|
|
|||||||||||||||||
($ in millions, except share data) | 2018 | 2017 | 2018 | 2017 | ||||||||||||||
Interest Income |
||||||||||||||||||
Interest and fees on loans and leases |
$ | 996 | 858 | 1,933 | 1,696 | |||||||||||||
Interest on securities |
267 | 245 | 530 | 490 | ||||||||||||||
Interest on other short-term investments |
6 | 3 | 11 | 6 | ||||||||||||||
Total interest income |
1,269 | 1,106 | 2,474 | 2,192 | ||||||||||||||
Interest Expense |
||||||||||||||||||
Interest on deposits |
119 | 65 | 215 | 124 | ||||||||||||||
Interest on federal funds purchased |
5 | 1 | 7 | 2 | ||||||||||||||
Interest on other short-term borrowings |
11 | 10 | 19 | 12 | ||||||||||||||
Interest on long-term debt |
114 | 91 | 217 | 182 | ||||||||||||||
Total interest expense |
249 | 167 | 458 | 320 | ||||||||||||||
Net Interest Income |
1,020 | 939 | 2,016 | 1,872 | ||||||||||||||
Provision for loan and lease losses |
33 | 52 | 56 | 126 | ||||||||||||||
Net Interest Income After Provision for Loan and Lease Losses |
987 | 887 | 1,960 | 1,746 | ||||||||||||||
Noninterest Income |
||||||||||||||||||
Service charges on deposits |
137 | 139 | 275 | 277 | ||||||||||||||
Wealth and asset management revenue |
108 | 103 | 221 | 211 | ||||||||||||||
Corporate banking revenue |
120 | 101 | 208 | 175 | ||||||||||||||
Card and processing revenue |
84 | 79 | 163 | 153 | ||||||||||||||
Mortgage banking net revenue |
53 | 55 | 109 | 108 | ||||||||||||||
Other noninterest income |
250 | 85 | 708 | 160 | ||||||||||||||
Securities (losses) gains, net |
(5 | ) | - | (15 | ) | 1 | ||||||||||||
Securities (losses) gains, net - non-qualifying hedges on mortgage servicing rights |
(4 | ) | 2 | (17 | ) | 2 | ||||||||||||
Total noninterest income |
743 | 564 | 1,652 | 1,087 | ||||||||||||||
Noninterest Expense |
||||||||||||||||||
Salaries, wages and incentives |
471 | 397 | 918 | 808 | ||||||||||||||
Employee benefits |
78 | 86 | 188 | 196 | ||||||||||||||
Net occupancy expense |
74 | 70 | 149 | 148 | ||||||||||||||
Technology and communications |
67 | 57 | 135 | 116 | ||||||||||||||
Equipment expense |
30 | 29 | 61 | 57 | ||||||||||||||
Card and processing expense |
30 | 33 | 60 | 63 | ||||||||||||||
Other noninterest expense |
287 | 285 | 572 | 555 | ||||||||||||||
Total noninterest expense |
1,037 | 957 | 2,083 | 1,943 | ||||||||||||||
Income Before Income Taxes |
693 | 494 | 1,529 | 890 | ||||||||||||||
Applicable income tax expense |
107 | 127 | 239 | 218 | ||||||||||||||
Net Income |
586 | 367 | 1,290 | 672 | ||||||||||||||
Less: Net income attributable to noncontrolling interests |
- | - | - | - | ||||||||||||||
Net Income Attributable to Bancorp |
586 | 367 | 1,290 | 672 | ||||||||||||||
Dividends on preferred stock |
23 | 23 | 38 | 38 | ||||||||||||||
Net Income Available to Common Shareholders |
$ | 563 | 344 | 1,252 | 634 | |||||||||||||
Earnings per share - basic |
$ | 0.81 | 0.46 | 1.80 | 0.84 | |||||||||||||
Earnings per share - diluted |
$ | 0.80 | 0.45 | 1.77 | 0.83 | |||||||||||||
Average common shares outstanding - basic |
683,344,844 | 741,400,700 | 686,564,682 | 744,516,799 | ||||||||||||||
Average common shares outstanding - diluted |
696,209,943 | 752,328,298 | 700,133,642 | 756,545,341 | ||||||||||||||
Cash dividends declared per common share |
$ | 0.18 | 0.14 | 0.34 | 0.28 |
Refer to the Notes to Condensed Consolidated Financial Statements.
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Condensed Consolidated Financial Statements and Notes (continued)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
For the three months ended June 30, |
For the six months ended June 30, | |||||||||
($ in millions) | 2018 | 2017 | 2018 | 2017 | ||||||
Net Income |
$ | 586 | 367 | 1,290 | 672 | |||||
Other Comprehensive (Loss) Income, Net of Tax: |
||||||||||
Unrealized (losses) gains on available-for-sale debt securities: |
||||||||||
Unrealized holding (losses) gains arising during period |
(167) | 93 | (627) | 108 | ||||||
Reclassification adjustment for net losses included in net income |
- | - | 7 | 1 | ||||||
Unrealized (losses) gains on cash flow hedge derivatives: |
||||||||||
Unrealized holding (losses) gains arising during period |
3 | 5 | (4) | 2 | ||||||
Reclassification adjustment for net gains included in net income |
- | (4) | (1) | (9) | ||||||
Defined benefit pension plans, net: |
||||||||||
Reclassification of amounts to net periodic benefit costs |
1 | 1 | 2 | 2 | ||||||
Other comprehensive (loss) income, net of tax |
(163) | 95 | (623) | 104 | ||||||
Comprehensive Income |
423 | 462 | 667 | 776 | ||||||
Less: Comprehensive income attributable to noncontrolling interests |
- | - | - | - | ||||||
Comprehensive Income Attributable to Bancorp |
$ | 423 | 462 | 667 | 776 |
Refer to the Notes to Condensed Consolidated Financial Statements.
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Fifth Third Bancorp and Subsidiaries
Condensed Consolidated Financial Statements and Notes (continued)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (unaudited)
Bancorp Shareholders Equity | ||||||||||||||||||||||||||||||||||||
($ in millions, except per share data) | Common Stock |
Preferred Stock |
Capital Surplus |
Retained Earnings |
Accumulated Other Comprehensive (Loss) Income |
Treasury Stock |
Total Bancorp Shareholders Equity |
Non- Controlling Interests |
Total Equity | |||||||||||||||||||||||||||
Balance at December 31, 2016 |
$ | 2,051 | 1,331 | 2,756 | 13,441 | 59 | (3,433 | ) | 16,205 | 27 | 16,232 | |||||||||||||||||||||||||
Net income |
672 | 672 | 672 | |||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax |
104 | 104 | 104 | |||||||||||||||||||||||||||||||||
Cash dividends declared: |
||||||||||||||||||||||||||||||||||||
Common stock at $0.28 per share |
(210 | ) | (210 | ) | (210) | |||||||||||||||||||||||||||||||
Preferred stock(a) |
(38 | ) | (38 | ) | (38) | |||||||||||||||||||||||||||||||
Shares acquired for treasury |
(26 | ) | (316 | ) | (342 | ) | (342) | |||||||||||||||||||||||||||||
Impact of stock transactions under stock compensation plans, net |
21 | 8 | 29 | 29 | ||||||||||||||||||||||||||||||||
Other |
(3 | ) | 2 | (1 | ) | (1) | ||||||||||||||||||||||||||||||
Balance at June 30, 2017 |
$ | 2,051 | 1,331 | 2,751 | 13,862 | 163 | (3,739 | ) | 16,419 | 27 | 16,446 | |||||||||||||||||||||||||
Balance at December 31, 2017 |
$ | 2,051 | 1,331 | 2,790 | 15,122 | 73 | (5,002 | ) | 16,365 | 20 | 16,385 | |||||||||||||||||||||||||
Impact of cumulative effect of change in accounting principles(b) |
6 | (2 | ) | 4 | 4 | |||||||||||||||||||||||||||||||
Balance at January 1, 2018 |
$ | 2,051 | 1,331 | 2,790 | 15,128 | 71 | (5,002 | ) | 16,369 | 20 | 16,389 | |||||||||||||||||||||||||
Net income |
1,290 | 1,290 | 1,290 | |||||||||||||||||||||||||||||||||
Other comprehensive loss, net of tax |
(623 | ) | (623 | ) | (623) | |||||||||||||||||||||||||||||||
Cash dividends declared: |
||||||||||||||||||||||||||||||||||||
Common stock at $0.34 per share |
(235 | ) | (235 | ) | (235) | |||||||||||||||||||||||||||||||
Preferred stock(a) |
(38 | ) | (38 | ) | (38) | |||||||||||||||||||||||||||||||
Shares acquired for treasury |
41 | (594 | ) | (553 | ) | (553) | ||||||||||||||||||||||||||||||
Impact of stock transactions under stock compensation plans, net |
2 | 20 | 22 | 22 | ||||||||||||||||||||||||||||||||
Other |
(2 | ) | 2 | - | - | |||||||||||||||||||||||||||||||
Balance at June 30, 2018 |
$ | 2,051 | 1,331 | 2,833 | 16,143 | (552 | ) | (5,574 | ) | 16,232 | 20 | 16,252 |
(a) | For both the six months ended June 30, 2018 and 2017, dividends were $637.50 per preferred shares for Perpetual Preferred Stock, Series H, $828.12 per preferred share for Perpetual Preferred Stock, Series I and $612.50 per preferred share for Perpetual Preferred Stock, Series J. |
(b) | Related to the adoption as of January 1, 2018 of ASU 2016-01, ASU 2017-12 and ASU 2018-02. Refer to Note 3 for additional information. |
Refer to the Notes to Condensed Consolidated Financial Statements.
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Fifth Third Bancorp and Subsidiaries
Condensed Consolidated Financial Statements and Notes (continued)
Refer to the Notes to Condensed Consolidated Financial Statements. Note 2 contains cash payments related to interest and income taxes in addition to non-cash investing and financing activities.
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Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
1. Basis of Presentation
The Condensed 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 and not consolidated. Those entities in which the Bancorp does not have the ability to exercise significant influence are generally accounted for utilizing the measurement alternative to fair value which permits carrying the investment at its cost basis, as adjusted for impairments and observable price changes. Intercompany transactions and balances have been eliminated.
In the opinion of management, the unaudited Condensed Consolidated Financial Statements include all adjustments, which consist of normal recurring accruals, necessary to present fairly the results for the periods presented. In accordance with U.S. GAAP and the rules and regulations of the SEC for interim financial information, these statements do not include certain information and footnote disclosures required for complete annual financial statements and it is suggested that these Condensed Consolidated Financial Statements be read in conjunction with the Bancorps Annual Report on Form 10-K. The results of operations and comprehensive income for the three and six months ended June 30, 2018 and 2017 and the cash flows and changes in equity for the six months ended June 30, 2018 and 2017 are not necessarily indicative of the results to be expected for the full year. Financial information as of December 31, 2017 has been derived from the Bancorps Annual Report on Form 10-K.
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.
2. Supplemental Cash Flow Information
Cash payments related to interest and income taxes in addition to non-cash investing and financing activities are presented in the following table for the six months ended June 30:
($ in millions) | 2018 | 2017 | ||
Cash Payments: |
||||
Interest |
$ 451 | 334 | ||
Income taxes |
120 | 399 | ||
Transfers: |
||||
Portfolio loans to loans held for sale |
171 | 140 | ||
Loans held for sale to portfolio loans |
67 | 7 | ||
Portfolio loans to OREO |
20 | 19 |
3. Accounting and Reporting Developments
Standards Adopted in 2018
The Bancorp adopted the following new accounting standards effective January 1, 2018:
ASU 2014-09 Revenue from Contracts with Customers (Topic 606)
In May 2014, the FASB issued ASU 2014-09 which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most contract revenue recognition guidance, including industry-specific guidance. The core principle of the amended guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Subsequent to the issuance of ASU 2014-09, the FASB issued additional guidance to clarify certain implementation issues, including ASUs 2016-08 (Principal versus Agent Considerations), 2016-10 (Identifying Performance Obligations and Licensing), 2016-12 (Narrow-Scope Improvements and Practical Expedients), and 2016-20 (Technical Corrections and Improvements) in March, April, May and December 2016, respectively. These amendments did not change the core principles in ASU 2014-09 and follow the same effective date and transition requirements. The Bancorp adopted the amended guidance on January 1, 2018, using a modified retrospective approach. Because the amended guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other U.S. GAAP, the adoption of this amended guidance did not have a material impact on the Bancorps Condensed Consolidated Financial Statements. However, the Bancorp is subject to expanded disclosure requirements and has updated its revenue recognition policies and procedures. While the Bancorp has concluded the following changes are not material to its Condensed 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. Neither change impacts income before income taxes or net income.
In conjunction with adoption of ASU 2014-09, the Bancorp is providing the following additional disclosures about its significant accounting and reporting policies related to revenue recognition.
Revenue Recognition
The Bancorp generally measures revenue based on the amount of consideration the Bancorp expects to be entitled for the transfer of goods or services to a customer, then recognizes this revenue when or as the Bancorp satisfies its performance obligations under the contract, except in transactions where U.S. GAAP provides other applicable guidance.
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Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
When the amount of consideration is variable, the Bancorp will only recognize revenue to the extent that it is probable that the cumulative amount recognized will not be subject to a significant reversal in the future. Substantially all of the Bancorps contracts with customers have expected durations of one year or less and payments are typically due when or as the services are rendered or shortly thereafter. When third parties are involved in providing goods or services to customers, the Bancorp recognizes revenue on a gross basis when it has control over those goods or services prior to transfer to the customer; otherwise, revenue is recognized for the net amount of any fee or commission. The Bancorp excludes sales taxes from the recognition of revenue and recognizes the incremental costs of obtaining contracts as an expense if the period of amortization for those costs would be one year or less.
The Bancorps interest income is derived from loans and leases, securities and other short-term investments. The Bancorp recognizes interest income in accordance with the applicable guidance in U.S. GAAP for these assets. Refer to the Portfolio Loans and Leases and Securities sections in Note 1 of the Bancorps Annual Report on Form 10-K for the year ended December 31, 2017 for further information. The following provides additional information about the components of noninterest income:
● | Service charges on deposits consist primarily of treasury management fees for commercial clients, monthly service charges on consumer deposit accounts, transaction-based fees (such as overdraft fees and wire transfer fees), and other deposit account-related charges. The Bancorps performance obligations for treasury management fees and consumer deposit account service charges are typically satisfied over time while performance obligations for transaction-based fees are typically satisfied at a point in time. Revenues are recognized on an accrual basis when or as the services are provided to the customer, net of applicable discounts, waivers and reversals. Payments are typically collected from customers directly from the related deposit account at the time the transaction is processed and/or at the end of the customers statement cycle (typically monthly). |
● | Wealth and asset management revenue consists primarily of service fees for investment management, custody, and trust administration services provided to commercial and consumer clients. The Bancorps performance obligations for these services are generally satisfied over time and revenues are recognized monthly based on the fee structure outlined in individual contracts. Transaction prices are most commonly based on the market value of assets under management or care and/or a fee per transaction processed. The Bancorp offers certain services, like tax return preparation, for which the performance obligations are satisfied and revenue is recognized at a point in time, when the services are performed. Wealth and asset management revenue also includes trailing commissions received from investments and annuities held in customer accounts, which are recognized in revenue when the Bancorp determines it is probable that the commission will be received. |
● | Corporate banking revenue consists primarily of service fees and other income related to loans and leases to commercial clients, underwriting revenue recognized by the Bancorps broker-dealer subsidiary and fees for other services provided to commercial clients. Revenue related to loans and leases is recognized in accordance with the Bancorps policies for portfolio loans and leases. Underwriting revenue is generally recognized on the trade date, which is when the Bancorps performance obligations are satisfied. |
● | Card and processing revenue consists primarily of ATM fees and interchange fees earned when the Bancorps credit and debit cards are processed through card association networks. The Bancorps performance obligations are generally complete when the transactions generating the fees are processed. Revenue is recognized on an accrual basis as such services are performed, net of certain costs not controlled by the Bancorp (primarily interchange fees charged by credit card associations and expenses of certain transaction-based rewards programs offered to customers). These costs reduced card and processing revenue by approximately $31 million and $60 million for the three and six months ended June 30, 2018, respectively. |
● | Mortgage banking net revenue consists primarily of origination fees and gains on loan sales, mortgage servicing fees and the impact of MSRs. Refer to the Loans and Leases Held for Sale and Loan Sales and Securitizations sections in Note 1 of the Bancorps Annual Report on Form 10-K for the year ended December 31, 2017 for further information. |
● | Other noninterest income includes income from operating leases, certain fees derived from loans and leases, BOLI income, gains and losses on other assets, and other miscellaneous revenues and gains. |
ASU 2016-01 Financial InstrumentsOverall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued ASU 2016-01 which revises an entitys 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 OCI 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. In February 2018, the FASB also issued ASU 2018-03 which makes technical corrections and improvements to the amendments in ASU 2016-01. The Bancorp adopted the amended guidance on January 1, 2018. As permitted, the Bancorp elected to early adopt ASU 2018-03 on January 1, 2018, concurrent with the adoption of ASU 2016-01. The adoption did not have a material impact on the Condensed Consolidated Financial Statements. However, equity securities affected by the amended guidance which were previously classified as trading or available-for-sale have been reclassified in the Condensed Consolidated Balance Sheets as equity securities. For certain equity securities without a readily determinable fair value that are not accounted for using the equity method, the Bancorp has elected to use the permitted measurement alternative, which is to adjust the cost basis of the investment upon either the occurrence of an observable price change or the identification of an impairment. For these securities, the amended guidance was applied prospectively to investments that existed on or after January 1, 2018. The other portions of the amended guidance were applied on a modified retrospective basis.
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Notes to Condensed Consolidated Financial Statements (unaudited)
ASU 2016-04 LiabilitiesExtinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products
In March 2016, the FASB issued ASU 2016-04 which permits proportional derecognition of the liability for unused funds on certain prepaid stored-value products (known as breakage) to the extent that it is probable that a significant reversal of the recognized breakage amount will not subsequently occur. The amendments do not apply to any prepaid stored-value products that are attached to a segregated customer deposit account or products for which unused funds are subject to unclaimed property remittance laws. The Bancorp adopted the amended guidance on January 1, 2018 using a modified retrospective approach. The adoption did not have a material impact on the Condensed Consolidated Financial Statements.
ASU 2016-15 Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued ASU 2016-15 to clarify the classification of certain cash receipts and payments within an entitys statement of cash flows. These items include debt prepayment or extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of BOLI policies, distributions received from equity method investees, and beneficial interests in securitization transactions. The amended guidance also specifies how to address classification of cash receipts and payments that have aspects of more than one class of cash flows. The Bancorp adopted the amended guidance retrospectively on January 1, 2018. The adoption did not have a material impact on the Condensed Consolidated Financial Statements.
ASU 2016-16 Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
In October 2016, the FASB issued ASU 2016-16 which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Current U.S. GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. The Bancorp adopted the amended guidance on January 1, 2018 using a modified retrospective approach. The adoption did not have a material impact on the Condensed Consolidated Financial Statements.
ASU 2017-01 Business Combinations (Topic 805): Clarifying the Definition of a Business
In January 2017, the FASB issued ASU 2017-01 which clarifies the definition of a business in order to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amended guidance provides a screen which states that when substantially all of the fair value of assets acquired (or disposed) is concentrated in a single asset or group of similar assets, then the set of assets and activities would not be considered a business. The Bancorp adopted the amended guidance prospectively on January 1, 2018 and will apply this amended guidance to future transactions to determine if they should be accounted for as acquisitions (or disposals) of assets or businesses.
ASU 2017-05 Other IncomeGains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets
In February 2017, the FASB issued ASU 2017-05 which clarifies the scope of Subtopic 610-20 and defines the term in substance nonfinancial asset. The amendments require that an entity should initially identify each distinct nonfinancial asset or in substance nonfinancial asset promised to a counterparty and derecognize each asset when a counterparty obtains control of it. The amendments provide specific guidance on accounting for partial sales of nonfinancial assets, which require an entity to derecognize a distinct nonfinancial asset or in substance nonfinancial asset in a partial sale transaction when it 1) does not have (or ceases to have) a controlling financial interest in the legal entity that holds the asset and 2) transfers control of the asset. Once an entity transfers control of a distinct nonfinancial asset or distinct in substance nonfinancial asset, it is required to measure any noncontrolling interest it receives (or retains) at fair value. The Bancorp adopted the amended guidance on January 1, 2018 using a modified retrospective approach. The adoption did not have a material impact on the Condensed Consolidated Financial Statements.
ASU 2017-09 CompensationStock Compensation (Topic 718): Scope of Modification Accounting
In May 2017, the FASB issued ASU 2017-09 which provides guidance about which changes to the terms or conditions of a share-based payment award require the application of modification accounting in Topic 718. The amendments specify that an entity should account for the effects of such changes as a modification unless the fair value, vesting conditions and classification (as an equity or liability) of the awards are all unaffected by the change. The Bancorp adopted the amended guidance prospectively on January 1, 2018. The adoption did not have a material impact on the Condensed Consolidated Financial Statements.
ASU 2017-12 Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
In August 2017, the FASB issued ASU 2017-12 which makes several amendments to existing guidance for hedge accounting. As permitted, the Bancorp elected to early adopt the amended guidance on January 1, 2018. For certain fair value hedges of interest rate risk, the Bancorp elected to modify the measurement methodology for the hedged item to be the benchmark rate component of the contractual coupon cash flows and also elected to de-designate a portion of the existing hedging relationship, as permitted. Upon adoption, changes in the fair value of cash flow hedges are recorded in AOCI and then subsequently reclassified into earnings when the hedged item affects earnings. Also, for both fair value hedges and cash flow hedges, changes in the fair value of the derivative instrument are recorded in the same income statement line item as the effects of the hedged item, eliminating the separate measurement of hedge ineffectiveness. The Bancorp recorded a cumulative-effect adjustment to retained earnings for the impact of these elections as well as the elimination of the separate measurement of ineffectiveness from AOCI for cash flow hedges existing at January 1, 2018, the amount of which was not material. The amended presentation and disclosure guidance was applied prospectively.
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Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
ASU 2018-02 Income StatementReporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued ASU 2018-02 which allows for reclassification from AOCI to retained earnings of stranded tax effects resulting from the TCJA. Stranded tax effects result from the reduction in the top federal statutory income tax rate from 35 percent to 21 percent as deferred tax assets and liabilities are adjusted for the impact of a change in tax rate through income tax expense, even in situations when the related items giving rise to the deferred taxes are components of AOCI, which are carried net of tax. As permitted, the Bancorp elected to early adopt this amended guidance and recorded a reclassification adjustment from AOCI to retained earnings as of January 1, 2018, the amount of which was not material.
Standards Issued but Not Yet Adopted
The following accounting standards were issued but not yet adopted by the Bancorp as of June 30, 2018:
ASU 2016-02 Leases (Topic 842)
In February 2016, the FASB issued ASU 2016-02 which establishes a new accounting model for leases. The amended guidance requires lessees to record lease liabilities on the lessees balance sheets along with corresponding right-of-use assets for all leases with terms longer than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the lessees 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 entitys lease arrangements. The amended guidance is effective for the Bancorp on January 1, 2019, with early adoption permitted. The amendments should be applied to each prior reporting period presented using a modified retrospective approach, although the amended guidance contains certain transition relief provisions that, among other things, permit an entity to elect not to reassess the classification of leases which existed or expired as of the date the amendments are effective. In January 2018, the FASB issued ASU 2018-01 which provides a practical expedient for transition related to land easements. The FASB has also proposed additional amendments to the new guidance which, among other things, include an option to recognize a cumulative effect adjustment to retained earnings in the period of adoption instead of applying the guidance to prior comparative periods, but these additional amendments are not yet final. The Bancorp will adopt the amended guidance on the required effective date of January 1, 2019, and expects to elect the transition relief provisions. From a lessee perspective, the Bancorp is currently finalizing its inventory of all leases, accumulating the lease data necessary to apply the amended guidance, and evaluating the business process and technology requirements which will be necessary after adoption. The Bancorp is continuing to evaluate the impact of the amended guidance on its Condensed Consolidated Financial Statements, but the effects of recognizing most operating leases on the Condensed Consolidated Balance Sheets are expected to be material. The Bancorp expects to recognize right-of-use assets and lease liabilities for substantially all of its operating lease commitments based on the present value of unpaid lease payments as of the date of adoption, but does not expect a material impact to expense recognition. From a lessor perspective, given the limited changes, the Bancorp does not expect adoption of the amended guidance to have a material impact based on its preliminary analysis. However, the Bancorp is continuing to evaluate the impact of the amended guidance, particularly related to the deferral of costs incurred in originating leases. The Bancorp also expects to record a cumulative-effect adjustment to retained earnings upon adoption to recognize any remaining deferred gains on sale-leaseback transactions that occurred prior to the date of initial application. The Bancorp had approximately $13 million of such deferred gains recorded as of June 30, 2018. These expectations may change as the implementation process continues.
ASU 2016-13 Financial InstrumentsCredit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU 2016-13 which establishes a new approach to estimate credit losses on certain types of financial instruments. The new approach changes the impairment model for most financial assets, and will require the use of an expected credit loss model for financial instruments measured at amortized cost and certain other instruments. This model applies to trade and other receivables, loans, debt securities, net investments in leases, and off-balance-sheet credit exposures (such as loan commitments, standby letters of credit, and financial guarantees not accounted for as insurance). This model requires entities to estimate the lifetime expected credit loss on such instruments and record an allowance that represents the portion of the amortized cost basis that the entity does not expect to collect. This allowance is deducted from the financial assets amortized cost basis to present the net amount expected to be collected. The new expected credit loss model will also apply to purchased financial assets with credit deterioration, superseding current accounting guidance for such assets. The amended guidance also amends the impairment model for available-for-sale debt securities, requiring entities to determine whether all or a portion of the unrealized loss on such securities is a credit loss, and also eliminating the option for management to consider the length of time a security has been in an unrealized loss position as a factor in concluding whether or not a credit loss exists. The amended model states that an entity will recognize an allowance for credit losses on available-for-sale debt securities as a contra account to the amortized cost basis, instead of a direct reduction of the amortized cost basis of the investment, as under current guidance. As a result, entities will recognize improvements to estimated credit losses on available-for-sale debt securities immediately in earnings as opposed to in interest income over time. There are also additional disclosure requirements included in this guidance. The amended guidance is effective for the Bancorp on January 1, 2020. Early adoption is permitted as soon as January 1, 2019, but the Bancorp currently expects to adopt on the mandatory effective date. The amended guidance is to be applied on a modified retrospective basis with the cumulative effect of initially applying the amendments recognized in retained earnings at the date of initial application. However, certain provisions of the guidance are only required to be applied on a prospective basis. While the Bancorp is currently in the process of evaluating the impact of the amended guidance on its Condensed 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 Bancorps loan and lease portfolio at the time of adoption.
64
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
ASU 2017-04 IntangiblesGoodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued ASU 2017-04 which simplifies the test for goodwill impairment by removing the second step, which measures the amount of impairment loss, if any. Instead, the amended guidance states that an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units fair value, except that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This would apply to all reporting units, including those with zero or negative carrying amounts of net assets. The amended guidance is effective for the Bancorp on January 1, 2020, with early adoption permitted, and is to be applied prospectively to all goodwill impairment tests performed after the adoption date.
ASU 2017-08 ReceivablesNonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities
In March 2017, the FASB issued ASU 2017-08 which shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amended guidance is effective for the Bancorp on January 1, 2019, with early adoption permitted, and is to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Bancorp shall provide a disclosure regarding the change in accounting principle. The Bancorp plans to adopt the amended guidance on its required effective date of January 1, 2019 and is currently in the process of evaluating the impact of the amended guidance on its Condensed Consolidated Financial Statements. However, the Bancorp does not currently expect the impact of adoption to be material.
65
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
4. Investment Securities
The following tables provide the amortized cost, unrealized gains and losses and fair value for the major categories of the available-for-sale debt and other securities and held-to-maturity investment securities portfolios as of:
June 30, 2018 ($ in millions) | Amortized Cost |
Unrealized Gains |
Unrealized Losses |
Fair Value | ||||||||||||
Available-for-sale debt and other securities: |
||||||||||||||||
U.S. Treasury and federal agencies securities |
$ | 98 | - | (2 | ) | 96 | ||||||||||
Obligations of states and political subdivisions securities |
34 | 1 | - | 35 | ||||||||||||
Mortgage-backed securities: |
||||||||||||||||
Agency residential mortgage-backed securities |
16,405 | 35 | (346 | ) | 16,094 | |||||||||||
Agency commercial mortgage-backed securities |
10,308 | 7 | (277 | ) | 10,038 | |||||||||||
Non-agency commercial mortgage-backed securities |
3,149 | 5 | (68 | ) | 3,086 | |||||||||||
Asset-backed securities and other debt securities |
1,981 | 26 | (9 | ) | 1,998 | |||||||||||
Other securities(a) |
614 | - | - | 614 | ||||||||||||
Total available-for-sale debt and other securities |
$ | 32,589 | 74 | (702 | ) | 31,961 | ||||||||||
Held-to-maturity securities: |
||||||||||||||||
Obligations of states and political subdivisions securities |
$ | 17 | - | - | 17 | |||||||||||
Asset-backed securities and other debt securities |
2 | - | - | 2 | ||||||||||||
Total held-to-maturity securities |
$ | 19 | - | - | 19 |
(a) | Other securities consist of FHLB, FRB and DTCC restricted stock holdings of $248, $364 and $2, respectively, at June 30, 2018, that are carried at cost. |
December 31, 2017 ($ in millions) | Amortized Cost |
Unrealized Gains |
Unrealized Losses |
Fair Value | ||||||||||||
Available-for-sale debt and other securities: |
||||||||||||||||
U.S. Treasury and federal agencies securities |
$ | 98 | - | - | 98 | |||||||||||
Obligations of states and political subdivisions securities |
43 | 1 | - | 44 | ||||||||||||
Mortgage-backed securities: |
||||||||||||||||
Agency residential mortgage-backed securities(a) |
15,281 | 118 | (80 | ) | 15,319 | |||||||||||
Agency commercial mortgage-backed securities |
10,113 | 92 | (38 | ) | 10,167 | |||||||||||
Non-agency commercial mortgage-backed securities |
3,247 | 51 | (5 | ) | 3,293 | |||||||||||
Asset-backed securities and other debt securities |
2,183 | 46 | (11 | ) | 2,218 | |||||||||||
Other securities(b) |
612 | - | - | 612 | ||||||||||||
Total available-for-sale debt and other securities |
$ | 31,577 | 308 | (134 | ) | 31,751 | ||||||||||
Held-to-maturity securities: |
||||||||||||||||
Obligations of states and political subdivisions securities |
$ | 22 | - | - | 22 | |||||||||||
Asset-backed securities and other debt securities |
2 | - | - | 2 | ||||||||||||
Total held-to-maturity securities |
$ | 24 | - | - | 24 |
(a) | Includes interest-only mortgage-backed securities of $34 as of December 31, 2017, recorded at fair value with fair value changes recorded in securities gains, net, in the Consolidated Statements of Income. |
(b) | Other securities consist of FHLB, FRB and DTCC restricted stock holdings of $248, $362 and $2, respectively, at December 31, 2017, that are carried at cost. |
The following table provides the fair value of trading debt securities and equity securities as of:
| ||||||||||
($ in millions) | June 30, 2018 |
December 31, 2017 | ||||||||
| ||||||||||
Trading debt securities |
$ | 280 | 492 | |||||||
Equity securities |
475 | 439 | ||||||||
|
66
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
The following table presents net realized gains and losses that were recognized in income from available-for-sale debt and other securities as well as total (losses) gains that were recognized in income from trading debt securities and equity securities:
For the three months ended June 30, |
For the six months ended June 30, | |||||||||
($ in millions) | 2018 | 2017 | 2018 | 2017 | ||||||
Available-for-sale debt and other securities: |
||||||||||
Realized gains |
$ | 22 | 21 | 56 | 30 | |||||
Realized losses |
(22) | (7) | (65) | (8) | ||||||
OTTI(a) |
- | (14) | - | (24) | ||||||
Net realized losses on available-for sale debt and other securities(b) |
$ | - | - | (9) | (2) | |||||
Total trading debt securities (losses) gains(c) |
$ | (4) | 2 | (18) | 3 | |||||
Total equity securities (losses) gains(d)(e) |
$ | (5) | 2 | (8) | 3 | |||||
Total (losses) and gains recognized in income from available-for-sale debt and other securities, trading debt securities and equity securities |
$ | (9) | 4 | (35) | 4 |
(a) | Included in securities (losses) gains, net in the Condensed Consolidated Statements of Income. |
(b) | Excludes net gains on interest-only mortgage-backed securities of $0 and $1 for the three and six months ended June 30, 2018, respectively, and net losses of $2 and $1 for the three and six months ended June 30, 2017, respectively. |
(c) | Includes an immaterial net loss and a net loss of $2 for the three and six months ended June 30, 2018, respectively, and immaterial net gains for both the three and six months ended June 30, 2017, respectively, recorded in corporate banking revenue and wealth and asset management revenue in the Condensed Consolidated Statements of Income. |
(d) | Includes immaterial net gains for both the three and six months ended June 30, 2018 and 2017 recorded in corporate banking revenue and wealth and asset management revenue in the Condensed Consolidated Statements of Income. |
(e) | Includes net unrealized losses of $5 and $6 for the three and six months ended June 30, 2018, respectively, and net unrealized gains of $2 and $3 for the three and six months ended June 30, 2017, respectively. |
At June 30, 2018 and December 31, 2017, investment securities with a fair value of $6.8 billion and $7.8 billion, respectively, were pledged to secure borrowings, public deposits, trust funds, derivative contracts and for other purposes as required or permitted by law.
The expected maturity distribution of the Bancorps mortgage-backed securities and the contractual maturity distribution of the remainder of the Bancorps available-for-sale debt and other securities and held-to-maturity investment securities as of June 30, 2018 are shown in the following table:
Available-for-Sale Debt and Other | Held-to-Maturity | |||||||||||||||||
|
|
| ||||||||||||||||
($ in millions) | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||
Debt securities:(a) |
||||||||||||||||||
Less than 1 year |
$ | 214 | 207 | 1 | 1 | |||||||||||||
1-5 years |
8,923 | 8,800 | 16 | 16 | ||||||||||||||
5-10 years |
18,047 | 17,669 | - | - | ||||||||||||||
Over 10 years |
4,791 | 4,671 | 2 | 2 | ||||||||||||||
Other securities |
614 | 614 | - | - | ||||||||||||||
Total |
$ | 32,589 | 31,961 | 19 | 19 |
(a) | Actual maturities may differ from contractual maturities when a right to call or prepay obligations exists with or without call or prepayment penalties. |
The following table provides the fair value and gross unrealized losses on available-for-sale debt and other securities in an unrealized loss position, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position as of:
Less than 12 months | 12 months or more | Total | |||||||||||||||||||||||||||||||||
($ in millions) | Fair Value | Unrealized Losses |
Fair Value | Unrealized Losses |
Fair Value | Unrealized Losses | |||||||||||||||||||||||||||||
June 30, 2018 |
|||||||||||||||||||||||||||||||||||
U.S. Treasury and federal agencies |
$ | 96 | (2) | - | - | 96 | (2) | ||||||||||||||||||||||||||||
Agency residential mortgage-backed securities |
12,456 | (313) | 478 | (33) | 12,934 | (346) | |||||||||||||||||||||||||||||
Agency commercial mortgage-backed securities |
8,719 | (247) | 547 | (30) | 9,266 | (277) | |||||||||||||||||||||||||||||
Non-agency commercial mortgage-backed securities |
2,540 | (59) | 140 | (9) | 2,680 | (68) | |||||||||||||||||||||||||||||
Asset-backed securities and other debt securities |
284 | (2) | 395 | (7) | 679 | (9) | |||||||||||||||||||||||||||||
Total |
$ | 24,095 | (623) | 1,560 | (79) | 25,655 | (702) | ||||||||||||||||||||||||||||
December 31, 2017 |
|||||||||||||||||||||||||||||||||||
U.S. Treasury and federal agencies |
$ | 98 | - | - | - | 98 | - | ||||||||||||||||||||||||||||
Agency residential mortgage-backed securities |
7,337 | (59) | 479 | (21) | 7,816 | (80) | |||||||||||||||||||||||||||||
Agency commercial mortgage-backed securities |
2,900 | (22) | 526 | (16) | 3,426 | (38) | |||||||||||||||||||||||||||||
Non-agency commercial mortgage-backed securities |
449 | (2) | 145 | (3) | 594 | (5) | |||||||||||||||||||||||||||||
Asset-backed securities and other debt securities |
317 | (2) | 386 | (9) | 703 | (11) | |||||||||||||||||||||||||||||
Total |
$ | 11,101 | (85) | 1,536 | (49) | 12,637 | (134) |
At both June 30, 2018 and December 31, 2017, an immaterial amount of unrealized losses in the available-for-sale debt and other securities portfolio were represented by non-rated securities.
67
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
5. Loans and Leases
The Bancorp diversifies its loan and lease portfolio by offering a variety of loan and lease products with various payment terms and rate structures. Lending activities are generally concentrated within those states in which the Bancorp has banking centers and are primarily located in the Midwestern and Southeastern regions of the U.S. The Bancorps commercial loan and lease portfolio consists of lending to various industry types. Management periodically reviews the performance of its loan and lease products to evaluate whether they are performing within acceptable interest rate and credit risk levels and changes are made to underwriting policies and procedures as needed. The Bancorp maintains an allowance to absorb loan and lease losses inherent in the portfolio. For further information on credit quality and the ALLL, refer to Note 6.
The following table provides a summary of commercial loans and leases classified by primary purpose and consumer loans classified based upon product or collateral as of:
($ in millions) | June 30, 2018 |
December 31, 2017 | ||||||||||
Loans and leases held for sale: |
||||||||||||
Commercial and industrial loans |
$ | 44 | - | |||||||||
Commercial mortgage loans |
72 | 6 | ||||||||||
Commercial leases |
9 | - | ||||||||||
Residential mortgage loans |
658 | 486 | ||||||||||
Total loans and leases held for sale |
$ | 783 | 492 | |||||||||
Portfolio loans and leases: |
||||||||||||
Commercial and industrial loans |
$ | 41,403 | 41,170 | |||||||||
Commercial mortgage loans |
6,625 | 6,604 | ||||||||||
Commercial construction loans |
4,687 | 4,553 | ||||||||||
Commercial leases |
3,788 | 4,068 | ||||||||||
Total commercial loans and leases |
$ | 56,503 | 56,395 | |||||||||
Residential mortgage loans |
$ | 15,640 | 15,591 | |||||||||
Home equity |
6,599 | 7,014 | ||||||||||
Automobile loans |
8,938 | 9,112 | ||||||||||
Credit card |
2,270 | 2,299 | ||||||||||
Other consumer loans |
1,982 | 1,559 | ||||||||||
Total consumer loans |
$ | 35,429 | 35,575 | |||||||||
Total portfolio loans and leases |
$ | 91,932 | 91,970 |
Total portfolio loans and leases are recorded net of unearned income, which totaled $496 million as of June 30, 2018 and $523 million as of December 31, 2017. Additionally, portfolio loans and leases are recorded net of unamortized premiums and discounts, deferred direct loan origination fees and costs and fair value adjustments (associated with acquired loans or loans designated as fair value upon origination) which totaled a net premium of $286 million and $282 million as of June 30, 2018 and December 31, 2017, respectively.
The Bancorps FHLB and FRB advances are generally secured by loans. The Bancorp had loans of $13.3 billion and $13.0 billion at June 30, 2018 and December 31, 2017, respectively, pledged at the FHLB, and loans of $40.4 billion and $39.8 billion at June 30, 2018 and December 31, 2017, respectively, pledged at the FRB.
68
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
The following table presents a summary of the total loans and leases owned by the Bancorp as of:
Carrying Value | 90 Days Past Due and Still Accruing | |||||||||||||||||
|
|
| ||||||||||||||||
($ in millions) | June 30, 2018 |
December 31, 2017 |
June 30, 2018 |
December 31, 2017 | ||||||||||||||
Commercial and industrial loans |
$ | 41,447 | 41,170 | 4 | 3 | |||||||||||||
Commercial mortgage loans |
6,697 | 6,610 | - | - | ||||||||||||||
Commercial construction loans |
4,687 | 4,553 | - | - | ||||||||||||||
Commercial leases |
3,797 | 4,068 | - | - | ||||||||||||||
Residential mortgage loans |
16,298 | 16,077 | 44 | 57 | ||||||||||||||
Home equity |
6,599 | 7,014 | - | - | ||||||||||||||
Automobile loans |
8,938 | 9,112 | 10 | 10 | ||||||||||||||
Credit card |
2,270 | 2,299 | 31 | 27 | ||||||||||||||
Other consumer loans |
1,982 | 1,559 | - | - | ||||||||||||||
Total loans and leases |
$ | 92,715 | 92,462 | 89 | 97 | |||||||||||||
Less: Loans and leases held for sale |
|
783 |
|
492 | ||||||||||||||
Total portfolio loans and leases |
$ | 91,932 | 91,970 | |||||||||||||||
The following table presents a summary of net charge-offs:
|
|
|||||||||||||||||
For the three months ended June 30, |
For the six months ended June 30, | |||||||||||||||||
($ in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||||
Commercial and industrial loans |
$ | 47 | 18 | 74 | 52 | |||||||||||||
Commercial mortgage loans |
2 | 5 | 2 | 11 | ||||||||||||||
Commercial construction loans |
- | - | - | - | ||||||||||||||
Commercial leases |
- | 1 | - | 2 | ||||||||||||||
Residential mortgage loans |
2 | 2 | 4 | 7 | ||||||||||||||
Home equity |
2 | 5 | 7 | 11 | ||||||||||||||
Automobile loans |
8 | 6 | 19 | 18 | ||||||||||||||
Credit card |
26 | 22 | 52 | 43 | ||||||||||||||
Other consumer loans |
7 | 5 | 17 | 9 | ||||||||||||||
Total net charge-offs |
$ | 94 | 64 | 175 | 153 |
69
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
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 three months ended June 30, 2018 ($ in millions) | Commercial | Residential Mortgage |
Consumer | Unallocated | Total | |||||||||||||||
Balance, beginning of period |
$ | 713 | 89 | 222 | 114 | 1,138 | ||||||||||||||
Losses charged-off(a) |
(54) | (4) | (60 | ) | - | (118) | ||||||||||||||
Recoveries of losses previously charged-off(a) |
5 | 2 | 17 | - | 24 | |||||||||||||||
Provision for (benefit from) loan and lease losses |
(10) | (1) | 50 | (6 | ) | 33 | ||||||||||||||
Balance, end of period |
$ | 654 | 86 | 229 | 108 | 1,077 | ||||||||||||||
(a) For the three months ended June 30, 2018, the Bancorp recorded $6 in both losses charged-off and recoveries of losses charged-off related to customer defaults on point-of-sale consumer loans for which the Bancorp obtained recoveries under third-party credit enhancements.
|
| |||||||||||||||||||
For the three months ended June 30, 2017 ($ in millions) | Commercial | Residential Mortgage |
Consumer | Unallocated | Total | |||||||||||||||
Balance, beginning of period |
$ | 826 | 96 | 204 | 112 | 1,238 | ||||||||||||||
Losses charged-off |
(41) | (4) | (50 | ) | - | (95) | ||||||||||||||
Recoveries of losses previously charged-off |
17 | 2 | 12 | - | 31 | |||||||||||||||
Provision for (benefit from) loan and lease losses |
15 | (1) | 40 | (2 | ) | 52 | ||||||||||||||
Balance, end of period |
$ | 817 | 93 | 206 | 110 | 1,226 | ||||||||||||||
For the six months ended June 30, 2018 ($ in millions) | Commercial | Residential Mortgage |
Consumer | Unallocated | Total | |||||||||||||||
Balance, beginning of period |
$ | 753 | 89 | 234 | 120 | 1,196 | ||||||||||||||
Losses charged-off(a) |
(87) | (7) | (128 | ) | - | (222) | ||||||||||||||
Recoveries of losses previously charged-off(a) |
11 | 3 | 33 | - | 47 | |||||||||||||||
Provision for (benefit from) loan and lease losses |
(23) | 1 | 90 | (12 | ) | 56 | ||||||||||||||
Balance, end of period |
$ | 654 | 86 | 229 | 108 | 1,077 | ||||||||||||||
(a) For the six months ended June 30, 2018, the Bancorp recorded $10 in both losses charged-off and recoveries of losses charged-off related to customer defaults on point-of-sale consumer loans for which the Bancorp obtained recoveries under third-party credit enhancements.
|
| |||||||||||||||||||
For the six months ended June 30, 2017 ($ in millions) | Commercial | Residential Mortgage |
Consumer | Unallocated | Total | |||||||||||||||
Balance, beginning of period |
$ | 831 | 96 | 214 | 112 | 1,253 | ||||||||||||||
Losses charged-off |
(86) | (10) | (106 | ) | - | (202) | ||||||||||||||
Recoveries of losses previously charged-off |
21 | 3 | 25 | - | 49 | |||||||||||||||
Provision for (benefit from) loan and lease losses |
51 | 4 | 73 | (2 | ) | 126 | ||||||||||||||
Balance, end of period |
$ | 817 | 93 | 206 | 110 | 1,226 | ||||||||||||||
The following tables provide a summary of the ALLL and related loans and leases classified by portfolio segment:
|
| |||||||||||||||||||
As of June 30, 2018 ($ in millions) | Commercial | Residential Mortgage |
Consumer | Unallocated | Total | |||||||||||||||
ALLL:(a) |
||||||||||||||||||||
Individually evaluated for impairment |
$ | 75 | 65 | 38 | - | 178 | ||||||||||||||
Collectively evaluated for impairment |
579 | 21 | 191 | - | 791 | |||||||||||||||
Unallocated |
- | - | - | 108 | 108 | |||||||||||||||
Total ALLL |
$ | 654 | 86 | 229 | 108 | 1,077 | ||||||||||||||
Portfolio loans and leases:(b) |
||||||||||||||||||||
Individually evaluated for impairment |
$ | 400 | 788 | 297 | - | 1,485 | ||||||||||||||
Collectively evaluated for impairment |
56,103 | 14,690 | 19,492 | - | 90,285 | |||||||||||||||
Total portfolio loans and leases |
$ | 56,503 | 15,478 | 19,789 | - | 91,770 |
(a) | Includes $1 related to leveraged leases at June 30, 2018. |
(b) | Excludes $162 of residential mortgage loans measured at fair value and includes $650 of leveraged leases, net of unearned income at June 30, 2018. |
70
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
As of December 31, 2017 ($ in millions) | Commercial | Residential Mortgage |
Consumer | Unallocated | Total | |||||||||||||||
ALLL:(a) |
||||||||||||||||||||
Individually evaluated for impairment |
$ | 94 | 64 | 42 | - | 200 | ||||||||||||||
Collectively evaluated for impairment |
659 | 25 | 192 | - | 876 | |||||||||||||||
Unallocated |
- | - | - | 120 | 120 | |||||||||||||||
Total ALLL |
$ | 753 | 89 | 234 | 120 | 1,196 | ||||||||||||||
Portfolio loans and leases:(b) |
||||||||||||||||||||
Individually evaluated for impairment |
$ | 560 | 665 | 320 | - | 1,545 | ||||||||||||||
Collectively evaluated for impairment |
55,835 | 14,787 | 19,664 | - | 90,286 | |||||||||||||||
Loans acquired with deteriorated credit quality |
- | 2 | - | - | 2 | |||||||||||||||
Total portfolio loans and leases |
$ | 56,395 | 15,454 | 19,984 | - | 91,833 |
(a) | Includes $1 related to leveraged leases at December 31, 2017. |
(b) | Excludes $137 of residential mortgage loans measured at fair value and includes $674 of leveraged leases, net of unearned income at December 31, 2017. |
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 managements 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 Bancorps credit position.
The Bancorp assigns a substandard rating to loans and leases that are inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged. Substandard loans and leases have well-defined weaknesses or weaknesses that could jeopardize the orderly repayment of the debt. Loans and leases in this grade also are characterized by the distinct possibility that the Bancorp will sustain some loss if the deficiencies noted are not addressed and corrected.
The Bancorp assigns a doubtful rating to loans and leases that have all the attributes of a substandard rating with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors that may work to the advantage of and strengthen the credit quality of the loan or lease, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include a proposed merger or acquisition, liquidation proceeding, capital injection, perfecting liens on additional collateral or refinancing plans.
Loans and leases classified as loss are considered uncollectible and are charged-off in the period in which they are determined to be uncollectible. Because loans and leases in this category are fully charged-off, they are not included in the following tables.
The following tables summarize the credit risk profile of the Bancorps commercial portfolio segment, by class:
As of June 30, 2018 ($ in millions) | Pass | Special Mention |
Substandard | Doubtful | Total | |||||||||||||||
Commercial and industrial loans |
$ | 39,601 | 899 | 885 | 18 | 41,403 | ||||||||||||||
Commercial mortgage owner-occupied loans |
3,217 | 40 | 134 | - | 3,391 | |||||||||||||||
Commercial mortgage nonowner-occupied loans |
3,200 | 21 | 13 | - | 3,234 | |||||||||||||||
Commercial construction loans |
4,652 | 35 | - | - | 4,687 | |||||||||||||||
Commercial leases |
3,649 | 54 | 85 | - | 3,788 | |||||||||||||||
Total commercial loans and leases |
$ | 54,319 | 1,049 | 1,117 | 18 | 56,503 |
71
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
As of December 31, 2017 ($ in millions) | Pass | Special Mention |
Substandard | Doubtful | Total | |||||||||||||||
Commercial and industrial loans |
$ | 38,813 | 1,115 | 1,235 | 7 | 41,170 | ||||||||||||||
Commercial mortgage owner-occupied loans |
3,207 | 75 | 80 | - | 3,362 | |||||||||||||||
Commercial mortgage nonowner-occupied loans |
3,117 | 28 | 97 | - | 3,242 | |||||||||||||||
Commercial construction loans |
4,553 | - | - | - | 4,553 | |||||||||||||||
Commercial leases |
3,922 | 72 | 74 | - | 4,068 | |||||||||||||||
Total commercial loans and leases |
$ | 53,612 | 1,290 | 1,486 | 7 | 56,395 |
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. The Bancorps 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 of the Notes to Consolidated Financial Statements included in the Bancorps Annual Report on Form 10-K for the year ended December 31, 2017 for additional delinquency and nonperforming information.
The following table presents a summary of the Bancorps residential mortgage and consumer portfolio segments, by class, disaggregated into performing versus nonperforming status as of:
June 30, 2018 | December 31, 2017 | |||||||||||||||||
($ in millions) | Performing | Nonperforming | Performing | Nonperforming | ||||||||||||||
Residential mortgage loans(a) |
$ | 15,450 | 28 | 15,424 | 30 | |||||||||||||
Home equity |
6,528 | 71 | 6,940 | 74 | ||||||||||||||
Automobile loans |
8,933 | 5 | 9,111 | 1 | ||||||||||||||
Credit card |
2,243 | 27 | 2,273 | 26 | ||||||||||||||
Other consumer loans |
1,981 | 1 | 1,559 | - | ||||||||||||||
Total residential mortgage and consumer loans |
$ | 35,135 | 132 | 35,307 | 131 |
(a) | Excludes $162 and $137 of residential mortgage loans measured at fair value at June 30, 2018 and December 31, 2017, respectively. |
Age Analysis of Past Due Loans and Leases
The following tables summarize the Bancorps recorded investment in portfolio loans and leases, by age and class:
Current | Past Due | 90 Days Past | ||||||||||||||||||||||||||||
As of June 30, 2018 ($ in millions) | Loans and Leases(b)(c) |
30-89 Days(c) |
90 Days or More(c) |
Total Past Due |
Total Loans and Leases |
Due and Still Accruing | ||||||||||||||||||||||||
Commercial loans and leases: |
||||||||||||||||||||||||||||||
Commercial and industrial loans |
$ | 41,281 | 19 | 103 | 122 | 41,403 | 4 | |||||||||||||||||||||||
Commercial mortgage owner-occupied loans |
3,384 | 1 | 6 | 7 | 3,391 | - | ||||||||||||||||||||||||
Commercial mortgage nonowner-occupied loans |
3,228 | 3 | 3 | 6 | 3,234 | - | ||||||||||||||||||||||||
Commercial construction loans |
4,687 | - | - | - | 4,687 | - | ||||||||||||||||||||||||
Commercial leases |
3,784 | - | 4 | 4 | 3,788 | - | ||||||||||||||||||||||||
Residential mortgage loans(a) |
15,382 | 24 | 72 | 96 | 15,478 | 44 | ||||||||||||||||||||||||
Consumer loans: |
||||||||||||||||||||||||||||||
Home equity |
6,482 | 66 | 51 | 117 | 6,599 | - | ||||||||||||||||||||||||
Automobile loans |
8,840 | 84 | 14 | 98 | 8,938 | 10 | ||||||||||||||||||||||||
Credit card |
2,198 | 36 | 36 | 72 | 2,270 | 31 | ||||||||||||||||||||||||
Other consumer loans |
1,972 | 8 | 2 | 10 | 1,982 | - | ||||||||||||||||||||||||
Total portfolio loans and leases |
$ | 91,238 | 241 | 291 | 532 | 91,770 | 89 |
(a) | Excludes $162 of residential mortgage loans measured at fair value at June 30, 2018. |
(b) | Information includes advances made pursuant to servicing agreements for GNMA mortgage pools whose repayments are insured by the FHA or guaranteed by the VA. As of June 30, 2018, $71 of these loans were 30-89 days past due and $237 were 90 days or more past due. The Bancorp recognized $1 and $3 of losses during the three and six months ended June 30, 2018 due to claim denials and curtailments associated with these insured or guaranteed loans. |
(c) | Includes accrual and nonaccrual loans and leases. |
72
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
Current | Past Due | 90 Days Past | ||||||||||||||||||||||
As of December 31, 2017 ($ in millions) | Loans and Leases(b)(c) |
30-89 Days(c) |
90 Days or More(c) |
Total Past Due |
Total Loans and Leases |
Due and Still Accruing |
||||||||||||||||||
Commercial loans and leases: |
||||||||||||||||||||||||
Commercial and industrial loans |
$ | 41,027 | 42 | 101 | 143 | 41,170 | 3 | |||||||||||||||||
Commercial mortgage owner-occupied loans |
3,351 | 3 | 8 | 11 | 3,362 | - | ||||||||||||||||||
Commercial mortgage nonowner-occupied loans |
3,235 | - | 7 | 7 | 3,242 | - | ||||||||||||||||||
Commercial construction loans |
4,552 | 1 | - | 1 | 4,553 | - | ||||||||||||||||||
Commercial leases |
4,065 | 3 | - | 3 | 4,068 | - | ||||||||||||||||||
Residential mortgage loans(a) |
15,301 | 66 | 87 | 153 | 15,454 | 57 | ||||||||||||||||||
Consumer loans: |
||||||||||||||||||||||||
Home equity |
6,888 | 70 | 56 | 126 | 7,014 | - | ||||||||||||||||||
Automobile loans |
8,992 | 107 | 13 | 120 | 9,112 | 10 | ||||||||||||||||||
Credit card |
2,230 | 36 | 33 | 69 | 2,299 | 27 | ||||||||||||||||||
Other consumer loans |
1,554 | 5 | - | 5 | 1,559 | - | ||||||||||||||||||
Total portfolio loans and leases |
$ | 91,195 | 333 | 305 | 638 | 91,833 | 97 |
(a) | Excludes $137 of residential mortgage loans measured at fair value at December 31, 2017. |
(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, 2017, $95 of these loans were 30-89 days past due and $290 were 90 days or more past due. The Bancorp recognized $1 and $3 of losses during the three and six months ended June 30, 2017, respectively, due to claim denials and curtailments associated with these insured or guaranteed loans. |
(c) | Includes accrual and nonaccrual loans and leases. |
Impaired Portfolio Loans and Leases
Larger commercial loans and leases included within aggregate borrower relationship balances exceeding $1 million that exhibit probable or observed credit weaknesses are subject to individual review for impairment. The Bancorp also performs an individual review on loans and leases that are restructured in a TDR. The Bancorp considers the current value of collateral, credit quality of any guarantees, the loan structure and other factors when evaluating whether an individual loan or lease is impaired. Other factors may include the geography and industry of the borrower, size and financial condition of the borrower, cash flow and leverage of the borrower and the Bancorps evaluation of the borrowers management. Smaller-balance homogenous loans or leases that are collectively evaluated for impairment are not included in the following tables.
The following tables summarize the Bancorps impaired portfolio loans and leases, by class, that were subject to individual review, which includes all portfolio loans and leases restructured in a TDR:
As of June 30, 2018 ($ in millions) | Unpaid Principal Balance |
Recorded Investment |
ALLL | ||||||||||||
With a related ALLL: |
|||||||||||||||
Commercial loans and leases: |
|||||||||||||||
Commercial and industrial loans |
$ | 248 | 204 | 63 | |||||||||||
Commercial mortgage owner-occupied loans |
4 | 3 | 1 | ||||||||||||
Commercial mortgage nonowner-occupied loans |
2 | 1 | - | ||||||||||||
Commercial leases |
29 | 29 | 11 | ||||||||||||
Restructured residential mortgage loans |
497 | 494 | 65 | ||||||||||||
Restructured consumer loans: |
|||||||||||||||
Home equity |
158 | 157 | 22 | ||||||||||||
Automobile loans |
6 | 6 | 1 | ||||||||||||
Credit card |
48 | 45 | 15 | ||||||||||||
Total impaired portfolio loans and leases with a related ALLL |
$ | 992 | 939 | 178 | |||||||||||
With no related ALLL: |
|||||||||||||||
Commercial loans: |
|||||||||||||||
Commercial and industrial loans |
$ | 147 | 124 | - | |||||||||||
Commercial mortgage owner-occupied loans |
15 | 12 | - | ||||||||||||
Commercial mortgage nonowner-occupied loans |
28 | 27 | - | ||||||||||||
Restructured residential mortgage loans |
314 | 294 | - | ||||||||||||
Restructured consumer loans: |
|||||||||||||||
Home equity |
90 | 87 | - | ||||||||||||
Automobile loans |
3 | 2 | - | ||||||||||||
Total impaired portfolio loans with no related ALLL |
$ | 597 | 546 | - | |||||||||||
Total impaired portfolio loans and leases |
$ | 1,589 | 1,485 (a) | 178 |
(a) | Includes $104, $773 and $251, respectively, of commercial, residential mortgage and consumer portfolio TDRs on accrual status and $173, $15 and $46, respectively, of commercial, residential mortgage and consumer portfolio TDRs on nonaccrual status at June 30, 2018. |
73
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
As of December 31, 2017 ($ in millions) | Unpaid Principal Balance |
Recorded Investment |
ALLL | |||||||||
With a related ALLL: |
||||||||||||
Commercial loans and leases: |
||||||||||||
Commercial and industrial loans |
$ | 433 | 358 | 87 | ||||||||
Commercial mortgage owner-occupied loans |
16 | 14 | 7 | |||||||||
Commercial mortgage nonowner-occupied loans |
4 | 3 | - | |||||||||
Commercial leases |
4 | 4 | - | |||||||||
Restructured residential mortgage loans |
469 | 465 | 64 | |||||||||
Restructured consumer loans: |
||||||||||||
Home equity |
172 | 172 | 27 | |||||||||
Automobile loans |
8 | 7 | 1 | |||||||||
Credit card |
52 | 45 | 14 | |||||||||
Total impaired portfolio loans and leases with a related ALLL |
$ | 1,158 | 1,068 | 200 | ||||||||
With no related ALLL: |
||||||||||||
Commercial loans: |
||||||||||||
Commercial and industrial loans |
$ | 151 | 131 | - | ||||||||
Commercial mortgage owner-occupied loans |
18 | 15 | - | |||||||||
Commercial mortgage nonowner-occupied loans |
35 | 35 | - | |||||||||
Restructured residential mortgage loans |
218 | 200 | - | |||||||||
Restructured consumer loans: |
||||||||||||
Home equity |
97 | 94 | - | |||||||||
Automobile loans |
2 | 2 | - | |||||||||
Total impaired portfolio loans with no related ALLL |
$ | 521 | 477 | - | ||||||||
Total impaired portfolio loans and leases |
$ | 1,679 | 1,545 | (a) | 200 |
(a) | Includes $249, $652 and $275, respectively, of commercial, residential mortgage and consumer portfolio TDRs on accrual status and $150, $13 and $45, respectively, of commercial, residential mortgage and consumer portfolio TDRs on nonaccrual status at December 31, 2017. |
The following tables summarize the Bancorps average impaired portfolio loans and leases, by class, and interest income, by class:
For the three months ended June 30, 2018 |
For the six months ended June 30, 2018 | |||||||||||||||||
|
|
|
|
|
| |||||||||||||
($ in millions) | Average Recorded Investment |
Interest Income |
Average Recorded Investment |
Interest Income Recognized | ||||||||||||||
Commercial loans and leases: |
||||||||||||||||||
Commercial and industrial loans |
$ | 417 | 5 | 439 | 10 | |||||||||||||
Commercial mortgage owner-occupied loans |
16 | - | 20 | - | ||||||||||||||
Commercial mortgage nonowner-occupied loans |
29 | - | 32 | - | ||||||||||||||
Commercial leases |
18 | - | 14 | - | ||||||||||||||
Restructured residential mortgage loans |
799 | 8 | 732 | 14 | ||||||||||||||
Restructured consumer loans: |
||||||||||||||||||
Home equity |
248 | 3 | 253 | 6 | ||||||||||||||
Automobile loans |
8 | - | 9 | - | ||||||||||||||
Credit card |
46 | 1 | 47 | 2 | ||||||||||||||
Total average impaired portfolio loans and leases |
$ | 1,581 | 17 | 1,546 | 32 |
74
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
For the three months ended June 30, 2017 |
For the six months ended June 30, 2017 | |||||||||||||||||
|
|
|
|
|
| |||||||||||||
($ in millions) | Average Recorded Investment |
Interest Income |
Average Recorded Investment |
Interest Income Recognized | ||||||||||||||
Commercial loans and leases: |
||||||||||||||||||
Commercial and industrial loans |
$ | 635 | 1 | 668 | 2 | |||||||||||||
Commercial mortgage owner-occupied loans(a) |
38 | - | 42 | - | ||||||||||||||
Commercial mortgage nonowner-occupied loans |
66 | - | 73 | 1 | ||||||||||||||
Commercial leases |
2 | - | 3 | - | ||||||||||||||
Restructured residential mortgage loans |
654 | 6 | 653 | 12 | ||||||||||||||
Restructured consumer loans: |
||||||||||||||||||
Home equity |
287 | 3 | 293 | 6 | ||||||||||||||
Automobile loans |
12 | - | 13 | - | ||||||||||||||
Credit card |
49 | 1 | 51 | 2 | ||||||||||||||
Total average impaired loans and leases |
$ | 1,743 | 11 | 1,796 | 23 |
(a) | Excludes five restructured loans associated with a consolidated VIE in which the Bancorp had no continuing credit risk due to the risk being assumed by a third party, with an average recorded investment of $26 for both the three and six months ended June 30, 2017. An immaterial amount of interest income was recognized during the six months ended June 30, 2017. Refer to Note 9 for further discussion on the deconsolidation of the VIE associated with these loans in the third quarter of 2017. |
Nonperforming Assets
Nonperforming assets include nonaccrual loans and leases for which ultimate collectability of the full amount of the principal and/or interest is uncertain; restructured commercial and credit card loans which have not yet met the requirements to be classified as a performing asset; restructured consumer loans which are 90 days past due based on the restructured terms unless the loan is both well-secured and in the process of collection; and certain other assets, including OREO and other repossessed property.
The following table presents the Bancorps nonaccrual loans and leases, by class, and OREO and other repossessed property as of:
($ in millions) | June 30, 2018 |
December 31, 2017 | ||||||||||
Commercial loans and leases: |
||||||||||||
Commercial and industrial loans |
$ | 263 | 276 | |||||||||
Commercial mortgage owner-occupied loans |
10 | 19 | ||||||||||
Commercial mortgage nonowner-occupied loans |
3 | 7 | ||||||||||
Commercial leases |
29 | 4 | ||||||||||
Total nonaccrual portfolio commercial loans and leases |
305 | 306 | ||||||||||
Residential mortgage loans |
28 | 30 | ||||||||||
Consumer loans: |
||||||||||||
Home equity |
71 | 74 | ||||||||||
Automobile loans |
5 | 1 | ||||||||||
Credit card |
27 | 26 | ||||||||||
Other consumer loans |
1 | - | ||||||||||
Total nonaccrual portfolio consumer loans |
104 | 101 | ||||||||||
Total nonaccrual portfolio loans and leases(a)(b) |
$ | 437 | 437 | |||||||||
OREO and other repossessed property |
43 | 52 | ||||||||||
Total nonperforming portfolio assets(a)(b) |
$ | 480 | 489 |
(a) | Excludes $23 and $6 of nonaccrual loans held for sale at June 30, 2018 and December 31, 2017, respectively. |
(b) | Includes $4 and $3 of nonaccrual government insured commercial loans whose repayments are insured by the SBA at June 30, 2018 and December 31, 2017, respectively, of which $2 and $3 are restructured nonaccrual government insured commercial loans at June 30, 2018 and December 31, 2017, respectively. |
The Bancorps 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 $189 million and $235 million as of June 30, 2018 and December 31, 2017, 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 Bancorps loan classes, TDRs typically involve either a reduction of the stated interest rate of the loan, an extension of the loans 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 loans 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 of the Notes to Consolidated Financial Statements included in the Bancorps Annual Report on Form 10-K for the year ended December 31, 2017 for information on the Bancorps ALLL methodology. Upon modification of a loan, the Bancorp measures the related impairment as the difference between the estimated future cash flows expected to be collected on the modified loan, discounted at the original effective yield of the loan, and the carrying value of the loan. The resulting measurement may result in the need for minimal or no allowance because it is probable that all cash flows will be collected under the modified terms of the loan.
75
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
In addition, if the stated interest rate was increased in a TDR, the cash flows on the modified loan, using the pre-modification interest rate as the discount rate, often exceed the recorded investment of the loan. Conversely, upon a modification that reduces the stated interest rate on a loan, the Bancorp recognizes an impairment loss as an increase to the ALLL. If a TDR involves a reduction of the principal balance of the loan or the loans accrued interest, that amount is charged off to the ALLL.
The Bancorp had commitments to lend additional funds to borrowers whose terms have been modified in a TDR, consisting of line of credit and letter of credit commitments of $29 million and $69 million, respectively, as of June 30, 2018 compared with $53 million and $78 million, respectively, as of December 31, 2017.
The following tables provide a summary of loans and leases, by class, modified in a TDR by the Bancorp during the three months ended:
June 30, 2018 ($ in millions)(a) | Number of Loans Modified in a TDR During the Period(b) |
Recorded Investment in a TDR During the Period |
(Decrease) to ALLL Upon |
Charge-offs Recognized Upon Modification |
||||||||||||
Commercial loans: |
||||||||||||||||
Commercial and industrial loans |
13 | $ 64 | (4) | - | ||||||||||||
Residential mortgage loans |
537 | 91 | 2 | - | ||||||||||||
Consumer loans: |
||||||||||||||||
Home equity |
29 | 2 | - | - | ||||||||||||
Automobile loans |
19 | - | - | - | ||||||||||||
Credit card |
1,675 | 9 | 2 | 1 | ||||||||||||
Total portfolio loans |
2,273 | $ 166 | - | 1 |
(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. |
June 30, 2017 ($ in millions)(a) | Number of Loans Modified in a TDR During the Period(b) |
Recorded Investment in a TDR During the Period |
Increase to ALLL Upon |
Charge-offs Recognized Upon Modification |
||||||||||||
Commercial loans: |
||||||||||||||||
Commercial and industrial loans |
17 | $ 56 | 1 | 4 | ||||||||||||
Commercial mortgage owner-occupied loans |
2 | 6 | 5 | - | ||||||||||||
Commercial mortgage nonowner-occupied loans |
1 | - | - | - | ||||||||||||
Residential mortgage loans |
199 | 28 | 1 | - | ||||||||||||
Consumer loans: |
||||||||||||||||
Home equity |
44 | 3 | - | - | ||||||||||||
Automobile loans |
15 | - | - | - | ||||||||||||
Credit card |
2,152 | 10 | 2 | 1 | ||||||||||||
Total portfolio loans |
2,430 | $ 103 | 9 | 5 |
(a) | Excludes all loans and leases held for sale and loans acquired with deteriorated credit quality which were accounted for within a pool. |
(b) | Represents number of loans post-modification and excludes loans previously modified in a TDR. |
The following tables provide a summary of loans and leases, by class, modified in a TDR by the Bancorp during the six months ended:
June 30, 2018 ($ in millions)(a) | Number of Loans Modified in a TDR During the Period(b) |
Recorded Investment in a TDR During the Period |
Increase (Decrease) to ALLL Upon Modification |
Charge-offs Recognized Upon Modification |
||||||||||||
Commercial loans: |
||||||||||||||||
Commercial and industrial loans |
25 | $ 135 | 9 | - | ||||||||||||
Commercial mortgage owner-occupied loans |
2 | - | - | - | ||||||||||||
Residential mortgage loans |
784 | 124 | 3 | - | ||||||||||||
Consumer loans: |
||||||||||||||||
Home equity |
54 | 4 | - | - | ||||||||||||
Automobile loans |
39 | - | - | - | ||||||||||||
Credit card |
3,640 | 19 | 4 | 1 | ||||||||||||
Total portfolio loans |
4,544 | $ 282 | 16 | 1 |
(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. |
76
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
June 30, 2017 ($ in millions)(a) | Number of Loans Modified in a TDR During the Period(b) |
Recorded Investment in Loans and Leases Modified in a TDR During the Period |
Increase to ALLL Upon |
Charge-offs Recognized Upon Modification |
||||||||||||
Commercial loans and leases: |
||||||||||||||||
Commercial and industrial loans |
50 | $ 153 | 2 | 6 | ||||||||||||
Commercial mortgage owner-occupied loans |
7 | 8 | 5 | - | ||||||||||||
Commercial mortgage nonowner-occupied loans |
2 | - | - | - | ||||||||||||
Residential mortgage loans |
402 | 57 | 3 | - | ||||||||||||
Consumer loans: |
||||||||||||||||
Home equity |
75 | 5 | - | - | ||||||||||||
Automobile loans |
45 | - | - | - | ||||||||||||
Credit card |
3,908 | 17 | 3 | 1 | ||||||||||||
Total portfolio loans and leases |
4,489 | $ 240 | 13 | 7 |
(a) | Excludes all loans and leases held for sale and loans acquired with deteriorated credit quality which were accounted for within a pool. |
(b) | Represents number of loans post-modification and excludes loans previously modified in a TDR. |
The Bancorp considers TDRs that become 90 days or more past due under the modified terms as subsequently defaulted. For commercial loans not subject to individual review for impairment, loss rates that are applied for purposes of determining the ALLL include historical losses associated with subsequent defaults on loans previously modified in a TDR. For consumer loans, the Bancorp performs a qualitative assessment of the adequacy of the consumer ALLL by comparing the consumer ALLL to forecasted consumer losses over the projected loss emergence period (the forecasted losses include the impact of subsequent defaults of consumer TDRs). When a residential mortgage, home equity, automobile or other consumer loan that has been modified in a TDR subsequently defaults, the present value of expected cash flows used in the measurement of the potential impairment loss is generally limited to the expected net proceeds from the sale of the loans underlying collateral and any resulting impairment loss is reflected as a charge-off or an increase in ALLL. The Bancorp recognizes an ALLL for the entire balance of the credit card loans modified in a TDR that subsequently default.
The following tables provide a summary of TDRs that subsequently defaulted during the three months ended June 30, 2018 and 2017 and were within twelve months of the restructuring date:
June 30, 2018 ($ in millions)(a) | Number of Contracts |
Recorded Investment |
||||||
Commercial loans: |
||||||||
Commercial and industrial loans |
2 | $ | 28 | |||||
Residential mortgage loans |
62 | 13 | ||||||
Consumer loans: |
||||||||
Credit card |
137 | 1 | ||||||
Total portfolio loans |
201 | $ | 42 |
(a) | Excludes all loans and leases held for sale and loans acquired with deteriorated credit quality. |
June 30, 2017 ($ in millions)(a) | Number of Contracts |
Recorded Investment |
||||||
Commercial loans: |
||||||||
Commercial and industrial loans |
2 | $ | 15 | |||||
Commercial mortgage nonowner-occupied loans |
3 | 1 | ||||||
Residential mortgage loans |
26 | 3 | ||||||
Consumer loans: |
||||||||
Home equity |
6 | 1 | ||||||
Credit card |
387 | 2 | ||||||
Total portfolio loans |
424 | $ | 22 |
(a) | Excludes all loans and leases held for sale and loans acquired with deteriorated credit quality. |
The following tables provide a summary of TDRs that subsequently defaulted during the six months ended June 30, 2018 and 2017 and were within twelve months of the restructuring date:
June 30, 2018 ($ in millions)(a) | Number of Contracts |
Recorded Investment |
||||||
Commercial loans: |
||||||||
Commercial and industrial loans |
3 | $ | 29 | |||||
Commercial mortgage owner-occupied loans |
2 | - | ||||||
Residential mortgage loans |
110 | 20 | ||||||
Consumer loans: |
||||||||
Home equity |
2 | - | ||||||
Credit card |
379 | 2 | ||||||
Total portfolio loans |
496 | $ | 51 |
(a) | Excludes all loans and leases held for sale and loans acquired with deteriorated credit quality. |
77
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
June 30, 2017 ($ in millions)(a) | Number of Contracts |
Recorded Investment |
||||||
Commercial loans: |
||||||||
Commercial and industrial loans |
4 | $ | 16 | |||||
Commercial mortgage nonowner-occupied loans |
3 | 1 | ||||||
Residential mortgage loans |
83 | 12 | ||||||
Consumer loans: |
||||||||
Home equity |
11 | 2 | ||||||
Credit card |
837 | 4 | ||||||
Total portfolio loans |
938 | $ | 35 |
(a) | Excludes all loans and leases held for sale and loans acquired with deteriorated credit quality. |
78
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
7. Bank Premises and Equipment
The following table provides a summary of bank premises and equipment as of:
($ in millions) | June 30, 2018 | December 31, 2017 | ||||||||||
Land and improvements(a) |
$ | 599 | 644 | |||||||||
Buildings(a) |
1,616 | 1,679 | ||||||||||
Equipment |
1,936 | 1,876 | ||||||||||
Leasehold improvements |
396 | 399 | ||||||||||
Construction in progress(a) |
85 | 93 | ||||||||||
Bank premises and equipment held for sale: |
||||||||||||
Land and improvements |
24 | 17 | ||||||||||
Buildings |
10 | 9 | ||||||||||
Equipment |
3 | 1 | ||||||||||
Accumulated depreciation and amortization |
(2,754) | (2,715) | ||||||||||
Total bank premises and equipment |
$ | 1,915 | 2,003 |
(a) | At June 30, 2018 and December 31, 2017, land and improvements, buildings and construction in progress included $55 and $91, respectively, associated with parcels of undeveloped land intended for future branch expansion. |
The Bancorp monitors changing customer preferences associated with the channels it uses for banking transactions to evaluate the efficiency, competitiveness and quality of the customer service experience in its consumer distribution network. As part of this ongoing assessment, the Bancorp may determine that it is no longer fully committed to maintaining full-service branches at certain of its existing banking center locations. Similarly, the Bancorp may also determine that it is no longer fully committed to building banking centers on certain parcels of land which had previously been held for future branch expansion.
During the second quarter of 2018, the Bancorp adopted a plan to close approximately 100 to 125 branches over the next three years (the 2018 Branch Optimization Plan). As of June 30, 2018, the Bancorp had identified 29 specific branches for closure under the 2018 Branch Optimization Plan with these closures expected to be completed prior to December 31, 2018. The Bancorp expects to identify the remaining branches to be closed under the 2018 Branch Optimization Plan over the next 12 to 18 months. As part of the adoption of the 2018 Branch Optimization Plan, the Bancorp has also elected to sell 21 parcels of land which had previously been held for future branch expansion.
As a result of the adoption of the 2018 Branch Optimization Plan during the second quarter of 2018, the Bancorp performed assessments of the recoverability of the following long-lived assets for which the Bancorp believes that it is more likely than not that the assets will be disposed of significantly before the end of their previously estimated useful lives:
| 29 branches specifically identified for closure prior to December 31, 2018 |
| 128 branches from which the remaining closures under the 2018 Branch Optimization Plan are expected to be selected |
| 21 parcels of land that the Bancorp has elected to sell |
Impairment losses associated with such assessments and lower of cost or market adjustments were $33 million and $41 million for the three and six months ended June 30, 2018, respectively, and $2 million and $5 million for the three and six months ended June 30, 2017, respectively. The recognized impairment losses were recorded in other noninterest income in the Condensed Consolidated Statements of Income.
8. Intangible Assets
Intangible assets consist of core deposit intangibles, customer relationships, non-compete agreements, trade names and rent intangibles. Intangible assets are amortized on either a straight-line or an accelerated basis over their estimated useful lives. The increase in gross carrying amount of intangible assets from the year ended December 31, 2017 primarily reflects acquisition activity during the first quarter of 2018.
The details of the Bancorps intangible assets are shown in the following table:
($ in millions) | Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
|||||||||
As of June 30, 2018 |
||||||||||||
Core deposit intangibles |
$ | 34 | (29) | 5 | ||||||||
Customer relationships |
20 | (1) | 19 | |||||||||
Non-compete agreements |
14 | (11) | 3 | |||||||||
Other |
6 | (3) | 3 | |||||||||
Total intangible assets |
$ | 74 | (44) | 30 | ||||||||
As of December 31, 2017 |
||||||||||||
Core deposit intangibles |
$ | 34 | (29) | 5 | ||||||||
Customer relationships |
16 | - | 16 | |||||||||
Non-compete agreements |
13 | (10) | 3 | |||||||||
Other |
6 | (3) | 3 | |||||||||
Total intangible assets |
$ | 69 | (42) | 27 |
As of June 30, 2018, all of the Bancorps intangible assets were being amortized. Amortization expense recognized on intangible assets was $1 million and immaterial for the three months ended June 30, 2018 and 2017, respectively, and $2 million and $1 million for the six months ended June 30, 2018 and 2017, respectively. The Bancorps projection of amortization expense shown in the following table is based on existing balances as of June 30, 2018. Future amortization expense may vary from these projections.
79
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
Estimated amortization expense for the remainder of 2018 through 2022 is as follows:
($ in millions) | Total | |||||||
Remainder of 2018 |
$ | 3 | ||||||
2019 |
5 | |||||||
2020 |
3 | |||||||
2021 |
3 | |||||||
2022 |
2 |
80
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
9. Variable Interest Entities
The Bancorp, in the normal course of business, engages in a variety of activities that involve VIEs, which are legal entities that lack sufficient equity at risk to finance their activities without additional subordinated financial support or the equity investors of the entities as a group lack any of the characteristics of a controlling interest. The Bancorp evaluates its interest in certain entities to determine if these entities meet the definition of a VIE and whether the Bancorp is the primary beneficiary and should consolidate the entity based on the variable interests it held both at inception and when there is a change in circumstances that requires a reconsideration. If the Bancorp is determined to be the primary beneficiary of a VIE, it must account for the VIE as a consolidated subsidiary. If the Bancorp is determined not to be the primary beneficiary of a VIE but holds a variable interest in the entity, such variable interests are accounted for under the equity method of accounting or other accounting standards as appropriate.
Consolidated VIEs
The following tables provide a summary of the classifications of consolidated VIE assets, liabilities and noncontrolling interests included in the Condensed Consolidated Balance Sheets as of:
June 30, 2018 ($ in millions) | Automobile Loan Securitizations |
CDC Investments |
Total | |||||||||||||||||
Assets: |
||||||||||||||||||||
Other short-term investments |
$ | 47 | - | 47 | ||||||||||||||||
Commercial mortgage loans |
- | 20 | 20 | |||||||||||||||||
Automobile loans |
888 | - | 888 | |||||||||||||||||
ALLL |
(5) | - | (5 | ) | ||||||||||||||||
Other assets |
5 | - | 5 | |||||||||||||||||
Total assets |
$ | 935 | 20 | 955 | ||||||||||||||||
Liabilities: |
||||||||||||||||||||
Other liabilities |
$ | 2 | - | 2 | ||||||||||||||||
Long-term debt |
830 | - | 830 | |||||||||||||||||
Total liabilities |
$ | 832 | - | 832 | ||||||||||||||||
Noncontrolling interests |
$ | - | 20 | 20 | ||||||||||||||||
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 |
Automobile loan securitizations
In a securitization transaction that occurred in the third quarter 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. 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 has consolidated these VIEs. The assets of the VIEs are restricted to the settlement of the asset-backed securities and other obligations of the VIEs. Third-party holders of the notes do not have recourse to the general assets of the Bancorp.
The economic performance of the VIEs is most significantly impacted by the performance of the underlying loans. The principal risks to which the VIEs are exposed include credit risk and prepayment risk. The credit and prepayment risks are managed through credit enhancements in the form of reserve accounts, overcollateralization, excess interest on the loans and the subordination of certain classes of asset-backed securities to other classes.
81
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
CDC investments
CDC, a wholly-owned indirect subsidiary of the Bancorp, was created to invest in projects to create affordable housing, revitalize business and residential areas and preserve historic landmarks. CDC generally co-invests with other unrelated companies and/or individuals and typically makes investments in a separate legal entity that owns the property under development. The entities are usually formed as limited partnerships and LLCs and CDC typically invests as a limited partner/investor member in the form of equity contributions. The economic performance of the VIEs is driven by the performance of their underlying investment projects as well as the VIEs ability to operate in compliance with the rules and regulations necessary for the qualification of tax credits generated by equity investments. The Bancorps subsidiaries serve as the managing member of certain LLCs invested in business revitalization projects and have the right to make decisions that most significantly impact the economic performance of the LLCs. Additionally, the investor members do not hold substantive kick-out rights or substantive participating rights over the managing member. The Bancorp has provided an indemnification guarantee to the investor member of these LLCs related to the qualification of tax credits generated by the investor members investment. Accordingly, the Bancorp concluded that it is the primary beneficiary and, therefore, has consolidated these VIEs. As a result, the investor members interests in these VIEs are presented as noncontrolling interests in the Condensed Consolidated Financial Statements. This presentation includes reporting separately the equity attributable to the noncontrolling interests in the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Changes in Equity and reporting separately the comprehensive income attributable to the noncontrolling interests in the Condensed Consolidated Statements of Comprehensive Income and the net income attributable to the noncontrolling interests in the Condensed Consolidated Statements of Income.
During the third quarter of 2017, the Bancorps 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 Bancorps maximum exposure related to the remaining indemnifications at June 30, 2018 and December 31, 2017 was $19 million and $17 million, respectively, which is based on an amount required to meet the investor members defined target rate of return.
Non-consolidated VIEs
The following tables provide a summary of assets and liabilities carried on the Condensed Consolidated Balance Sheets related to non-consolidated VIEs for which the Bancorp holds an interest, but is not the primary beneficiary of the VIE, as well as the Bancorps maximum exposure to losses associated with its interests in the entities as of:
June 30, 2018 ($ in millions) |
Total Assets |
Total Liabilities |
Maximum Exposure |
|||||||||
CDC investments |
$ 1,213 | 363 | 1,213 | |||||||||
Private equity investments |
70 | - | 112 | |||||||||
Loans provided to VIEs |
1,885 | - | 3,124 | |||||||||
December 31, 2017 ($ in millions) |
Total Assets |
Total Liabilities |
Maximum Exposure |
|||||||||
CDC investments |
$ 1,376 | 355 | 1,376 | |||||||||
Private equity investments |
102 | - | 150 | |||||||||
Loans provided to VIEs |
1,845 | - | 2,910 |
CDC investments
As noted previously, CDC typically invests in VIEs as a limited partner or investor member in the form of equity contributions and has no substantive kick-out or substantive participating rights over the managing member. The Bancorp has determined that it is not the primary beneficiary of these VIEs because it lacks the power to direct the activities that most significantly impact the economic performance of the underlying project or the VIEs ability to operate in compliance with the rules and regulations necessary for the qualification of tax credits generated by equity investments. This power is held by the managing members who exercise full and exclusive control of the operations of the VIEs. Accordingly, the Bancorp accounts for these investments under the equity method of accounting.
The Bancorps funding requirements are limited to its invested capital and any additional unfunded commitments for future equity contributions. The Bancorps 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 Condensed Consolidated Balance Sheets, and the liabilities related to the unfunded commitments, which are included in other liabilities in the Condensed 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 Bancorps risk.
At June 30, 2018 and December 31, 2017, the Bancorps CDC investments included $1.2 billion and $1.3 billion, respectively, of investments in affordable housing tax credits recognized in other assets in the Condensed Consolidated Balance Sheets. The unfunded commitments related to these investments were $362 million and $355 million at June 30, 2018 and December 31, 2017, respectively. The unfunded commitments as of June 30, 2018 are expected to be funded from 2018 to 2034.
82
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
The Bancorp has accounted for all of its investments in qualified affordable housing tax credits using the equity method of accounting. The following table summarizes the impact to the Condensed Consolidated Statements of Income relating to investments in qualified affordable housing investments:
Condensed Consolidated | For the three months ended June 30, |
For the six months ended June 30, |
||||||||||||||||||
($ in millions) | Statements of Income Caption | 2018 | 2017 | 2018 | 2017 | |||||||||||||||
Pre-tax investment and impairment losses(a) |
Other noninterest expense | $ | 46 | 35 | 91 | 72 | ||||||||||||||
Tax credits and other benefits |
Applicable income tax expense | (51) | (56) | (103) | (112) |
(a) | The Bancorp did not recognize impairment losses resulting from the forfeiture or ineligibility of tax credits or other circumstances during both the three and six months ended June 30, 2018 and 2017. |
Private equity investments
The Bancorp, through Fifth Third Capital Holdings, a wholly-owned indirect subsidiary of the Bancorp, invests as a limited partner in private equity investments which provide the Bancorp an opportunity to obtain higher rates of return on invested capital, while also creating cross-selling opportunities for the Bancorps commercial products. Each of the limited partnerships has an unrelated third-party general partner responsible for appointing the fund manager. The Bancorp has not been appointed fund manager for any of these private equity investments. The funds finance primarily all of their activities from the partners capital contributions and investment returns. The Bancorp has determined that it is not the primary beneficiary of the funds because it does not have the obligation to absorb the funds expected losses or the right to receive the funds expected residual returns that could potentially be significant to the funds and lacks the power to direct the activities that most significantly impact the economic performance of the funds. The Bancorp, as a limited partner, does not have substantive participating or substantive kick-out rights over the general partner. Therefore, the Bancorp accounts for its investments in these limited partnerships under the equity method of accounting.
The Bancorp is exposed to losses arising from the negative performance of the underlying investments in the private equity investments. As a limited partner, the Bancorps 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 Condensed Consolidated Balance Sheets, are included in the previous tables. Also, at June 30, 2018 and December 31, 2017, the unfunded commitment amounts to the funds were $42 million and $48 million, respectively. As part of previous commitments, the Bancorp made capital contributions to private equity investments of $2 million and an immaterial amount during the three months ended June 30, 2018 and 2017, respectively and $5 million and $7 million during the six months ended June 30, 2018 and 2017, respectively. The Bancorp recognized $2 million and zero of OTTI primarily associated with certain nonconforming investments affected by the Volcker Rule during the three months ended June 30, 2018 and 2017, respectively, and $6 million and zero during the six months ended June 30, 2018 and 2017. Refer to Note 21 for further information.
Loans provided to VIEs
The Bancorp has provided funding to certain unconsolidated VIEs sponsored by third parties. These VIEs are generally established to finance certain consumer and small business loans originated by third parties. The entities are primarily funded through the issuance of a loan from the Bancorp or a syndication through which the Bancorp is involved. The sponsor/administrator of the entities is responsible for servicing the underlying assets in the VIEs. Because the sponsor/administrator, not the Bancorp, holds the servicing responsibilities, which include the establishment and employment of default mitigation policies and procedures, the Bancorp does not hold the power to direct the activities that most significantly impact the economic performance of the entity and, therefore, is not the primary beneficiary.
The principal risk to which these entities are exposed is credit risk related to the underlying assets. The Bancorps maximum exposure to loss is equal to the carrying amounts of the loans and unfunded commitments to the VIEs. The Bancorps outstanding loans to these VIEs are included in commercial loans in Note 5. As of June 30, 2018 and December 31, 2017, the Bancorps unfunded commitments to these entities were $1.2 billion and $1.1 billion, respectively. The loans and unfunded commitments to these VIEs are included in the Bancorps overall analysis of the ALLL and reserve for unfunded commitments, respectively. The Bancorp does not provide any implicit or explicit liquidity guarantees or principal value guarantees to these VIEs.
83
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
10. Sales of Receivables and Servicing Rights
Residential Mortgage Loan Sales
The Bancorp sold fixed and adjustable-rate residential mortgage loans during both the three and six months ended June 30, 2018 and 2017. In those sales, the Bancorp obtained servicing responsibilities and provided certain standard representations and warranties, however the investors have no recourse to the Bancorps other assets for failure of debtors to pay when due. The Bancorp receives annual servicing fees based on a percentage of the outstanding balance. The Bancorp identifies classes of servicing assets based on financial asset type and interest rates.
Information related to residential mortgage loan sales and the Bancorps mortgage banking activity, which is included in mortgage banking net revenue in the Condensed Consolidated Statements of Income, is as follows:
For the three months ended June 30, |
For the six months ended June 30, | |||||||||||
($ in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||
Residential mortgage loan sales(a) |
$ | 1,474 | 1,518 | 2,474 | 3,147 | |||||||
Origination fees and gains on loan sales |
28 | 37 | 52 | 66 | ||||||||
Gross mortgage servicing fees |
54 | 49 | 106 | 97 |
(a) | Represents the unpaid principal balance at the time of the sale. |
Servicing Rights
The Bancorp measures all of its servicing rights at fair value with changes in fair value reported in mortgage banking net revenue in the Condensed Consolidated Statements of Income.
The following table presents changes in the servicing rights related to residential mortgage loans for the six months ended June 30:
($ in millions) | 2018 | 2017 | ||||||
Balance, beginning of period |
$ | 858 | 744 | |||||
Servicing rights originated - residential mortgage loans |
35 | 66 | ||||||
Servicing rights acquired - residential mortgage loans |
50 | 109 | ||||||
Changes in fair value: |
||||||||
Due to changes in inputs or assumptions(a) |
78 | (13) | ||||||
Other changes in fair value(b) |
(62) | (57) | ||||||
Balance, end of period |
$ | 959 | 849 |
(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. |
The Bancorp maintains a non-qualifying hedging strategy to manage a portion of the risk associated with changes in the value of the MSR portfolio. This strategy may include the purchase of free-standing derivatives and various available-for-sale and trading securities. The interest income, mark-to-market adjustments and gain or loss from sale activities associated with these portfolios are expected to economically hedge a portion of the change in value of the MSR portfolio caused by fluctuating OAS spreads, earnings rates and prepayment speeds. The fair value of the servicing asset is based on the present value of expected future cash flows.
The following table presents activity related to valuations of the MSR portfolio and the impact of the non-qualifying hedging strategy:
For the three months ended June 30, |
For the six months ended June 30, | |||||||||||||||
($ in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Securities (losses) gains, net - non-qualifying hedges on MSRs |
$ | (4 | ) | 2 | (17 | ) | 2 | |||||||||
Changes in fair value and settlement of free-standing derivatives purchased to economically hedge the MSR portfolio(a) |
(16 | ) | 16 | (65 | ) | 15 | ||||||||||
MSR fair value adjustment due to changes in inputs or assumptions(a) |
21 | (17) | 78 | (13) |
(a) | Included in mortgage banking net revenue in the Condensed Consolidated Statements of Income. |
The key economic assumptions used in measuring the interests in residential mortgage loans that continued to be held by the Bancorp at the date of sale, securitization or purchase resulting from transactions completed during the three months ended June 30, 2018 and 2017 were as follows:
June 30, 2018 | June 30, 2017 | |||||||||||||||||||||||||||||
Rate | Weighted- Average Life (in years) |
Prepayment (annual) |
OAS Spread (bps) |
Weighted- Average Life (in years) |
Prepayment (annual) |
OAS Spread (bps) |
||||||||||||||||||||||||
Residential mortgage loans: |
||||||||||||||||||||||||||||||
Servicing rights |
Fixed | 6.8 | 10.0 % | 519 | 7.0 | 10.3 % | 492 | |||||||||||||||||||||||
Servicing rights |
Adjustable | - | - | - | 3.0 | 29.8 | 659 |
84
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
Based on historical credit experience, expected credit losses for residential mortgage loan servicing rights have been deemed immaterial, as the Bancorp sold the majority of the underlying loans without recourse. At June 30, 2018 and December 31, 2017, the Bancorp serviced $62.2 billion and $60.0 billion, respectively, of residential mortgage loans for other investors. The value of MSRs that continue to be held by the Bancorp is subject to credit, prepayment and interest rate risks on the sold financial assets.
At June 30, 2018, the sensitivity of the current fair value of residual cash flows to immediate 10%, 20% and 50% adverse changes in prepayment speed assumptions and immediate 10% and 20% adverse changes in OAS spread are as follows:
Prepayment Speed Assumption |
OAS Spread Assumption |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair | Weighted- (in years) |
Impact of Adverse Change on Fair Value |
OAS Spread (bps) |
Impact of Adverse Change on Fair Value |
||||||||||||||||||||||||||||||||||||||||||||||||||||||
($ in millions)(a) | Rate | Value | Rate | 10% | 20% | 50% | 10% | 20% | ||||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage loans: |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Servicing rights |
Fixed | $ | 944 | 6.5 | 9.5 | % | $ | (37) | (71) | (164) | 543 | $ | (19) | (37) | ||||||||||||||||||||||||||||||||||||||||||||
Servicing rights |
Adjustable | 15 | 3.4 | 23.6 | (1) | (2) | (4) | 817 | - | (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.
85
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
11. 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 Bancorps 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 Bancorps net interest margin and cash flows. Derivative instruments that the Bancorp may use as part of its interest rate risk management strategy include interest rate swaps, interest rate floors, interest rate caps, forward contracts, forward starting interest rate swaps, options, swaptions and TBA securities. Interest rate swap contracts are exchanges of interest payments, such as fixed-rate payments for floating-rate payments, based on a stated notional amount and maturity date. Interest rate floors protect against declining rates, while interest rate caps protect against rising interest rates. Forward contracts are contracts in which the buyer agrees to purchase, and the seller agrees to make delivery of, a specific financial instrument at a predetermined price or yield. Options provide the purchaser with the right, but not the obligation, to purchase or sell a contracted item during a specified period at an agreed upon price. Swaptions are financial instruments granting the owner the right, but not the obligation, to enter into or cancel a swap.
Prepayment volatility arises mostly from changes in fair value of the largely fixed-rate MSR portfolio, mortgage loans and mortgage-backed securities. The Bancorp may enter into various free-standing derivatives (principal-only swaps, interest rate swaptions, interest rate floors, mortgage options, TBAs and interest rate swaps) to economically hedge prepayment volatility. Principal-only swaps are total return swaps based on changes in the value of the underlying mortgage principal-only trust. TBA securities are a forward purchase agreement for a mortgage-backed securities trade whereby the terms of the security are undefined at the time the trade is made.
Foreign currency volatility occurs as the Bancorp enters into certain loans denominated in foreign currencies. Derivative instruments that the Bancorp may use to economically hedge these foreign denominated loans include foreign exchange swaps and forward contracts.
The Bancorp also enters into derivative contracts (including foreign exchange contracts, commodity contracts and interest rate contracts) for the benefit of commercial customers and other business purposes. The Bancorp economically hedges significant exposures related to these free-standing derivatives by entering into offsetting third-party contracts with approved, reputable and independent counterparties with substantially matching terms and currencies. Credit risk arises from the possible inability of counterparties to meet the terms of their contracts. The Bancorps 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 Condensed Consolidated Balance Sheets while derivative instruments with a negative fair value are reported in other liabilities in the Condensed 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 Bancorps 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 June 30, 2018 and December 31, 2017, the balance of collateral held by the Bancorp for derivative assets was $367 million and $409 million, respectively. For derivative contracts cleared through certain central clearing parties who have modified their rules to treat variation margin payments as settlement of the derivative contract, the payments for variation margin of $99 million were applied to reduce the respective derivative contracts and were also not included in the total amount of collateral held as of June 30, 2018. The credit component negatively impacting the fair value of derivative assets associated with customer accommodation contracts as of both June 30, 2018 and December 31, 2017 was $3 million.
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 Bancorps credit risk. As of June 30, 2018 and December 31, 2017, the balance of collateral posted by the Bancorp for derivative liabilities was $401 million and $365 million, respectively, and $130 million of variation margin payments were applied to the respective derivative contracts to reduce the Bancorps derivative liabilities as of June 30, 2018 and were also not included in the total amount of collateral posted. Certain of the Bancorps derivative liabilities contain credit risk related contingent features that could result in the requirement to post additional collateral upon the occurrence of specified events. As of June 30, 2018 and December 31, 2017, the fair value of the additional collateral that could be required to be posted as a result of the credit risk related contingent features being triggered was immaterial to the Condensed Consolidated Financial Statements. The posting of collateral has been determined to remove the need for further consideration of credit risk. As a result, the Bancorp determined that the impact of the Bancorps credit risk to the valuation of its derivative liabilities was immaterial to the Condensed Consolidated Financial Statements.
The Bancorp holds certain derivative instruments that qualify for hedge accounting treatment and are designated as either fair value hedges or cash flow hedges. Derivative instruments that do not qualify for hedge accounting treatment, or for which hedge accounting is not established, are held as free-standing derivatives. All customer accommodation derivatives are held as free-standing derivatives.
86
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
The following tables reflect the notional amounts and fair values for all derivative instruments included in the Condensed Consolidated Balance Sheets as of:
Fair Value | ||||||||||||||||
June 30, 2018 ($ in millions) | Notional Amount |
Derivative Assets |
Derivative Liabilities |
|||||||||||||
Derivatives Designated as Qualifying Hedging Instruments: |
||||||||||||||||
Fair value hedges: |
||||||||||||||||
Interest rate swaps related to long-term debt |
$ | 3,205 | 229 | 4 | ||||||||||||
Total fair value hedges |
229 | 4 | ||||||||||||||
Cash flow hedges: |
||||||||||||||||
Interest rate swaps related to C&I loans |
6,150 | 1 | 15 | |||||||||||||
Total cash flow hedges |
1 | 15 | ||||||||||||||
Total derivatives designated as qualifying hedging instruments |
230 | 19 | ||||||||||||||
Derivatives Not Designated as Qualifying Hedging Instruments: |
||||||||||||||||
Free-standing derivatives - risk management and other business purposes: |
||||||||||||||||
Interest rate contracts related to MSR portfolio |
11,475 | 52 | 13 | |||||||||||||
Forward contracts related to residential mortgage loans held for sale |
1,450 | - | 4 | |||||||||||||
Swap associated with the sale of Visa, Inc. Class B Shares |
2,207 | - | 164 | |||||||||||||
Foreign exchange contracts |
153 | 2 | - | |||||||||||||
Total free-standing derivatives - risk management and other business purposes |
54 | 181 | ||||||||||||||
Free-standing derivatives - customer accommodation: |
||||||||||||||||
Interest rate contracts |
48,949 | 247 | 280 | |||||||||||||
Interest rate lock commitments |
596 | 11 | - | |||||||||||||
Commodity contracts |
5,087 | 284 | 270 | |||||||||||||
TBA securities |
58 | - | - | |||||||||||||
Foreign exchange contracts |
10,842 | 119 | 109 | |||||||||||||
Total free-standing derivatives - customer accommodation |
661 | 659 | ||||||||||||||
Total derivatives not designated as qualifying hedging instruments |
715 | 840 | ||||||||||||||
Total |
$ | 945 | 859 | |||||||||||||
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 | 5 | ||||||||||||
Total fair value hedges |
297 | 5 | ||||||||||||||
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 MSR portfolio |
11,035 | 54 | 15 | |||||||||||||
Forward contracts related to residential mortgage loans held for sale |
1,284 | 1 | 1 | |||||||||||||
Stock warrant |
20 | 20 | - | |||||||||||||
Swap associated with the sale of Visa, Inc. Class B Shares |
1,900 | - | 137 | |||||||||||||
Foreign exchange contracts |
112 | - | 1 | |||||||||||||
Total free-standing derivatives - risk management and other business purposes |
75 | 154 | ||||||||||||||
Free-standing derivatives - customer accommodation: |
||||||||||||||||
Interest rate contracts |
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 |
87
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
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 designated fair value hedges of interest rate risk as of June 30, 2018, the Bancorp performed an assessment of hedge effectiveness using regression analysis (quantitative approach) with changes in the fair value of the derivative instrument and changes in the fair value of the hedged asset or liability attributable to the hedged risk recorded in the same income statement line in current period net income.
The following table reflects the change in fair value of interest rate contracts, designated as fair value hedges, as well as the change in fair value of the related hedged items attributable to the risk being hedged, included in the Condensed Consolidated Statements of Income:
Condensed Consolidated | For the three months ended June 30, |
For the six months ended June 30, |
||||||||||||||||||||||
($ in millions) | Statements of Income Caption | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
Change in fair value of interest rate swaps hedging long-term debt |
Interest on long-term debt | $ | (18) | 14 | (81 | ) | (6) | |||||||||||||||||
Change in fair value of hedged long-term debt attributable
to the |
Interest on long-term debt | 19 | (15) | 83 | 5 |
The following amounts were recorded in the Condensed Consolidated Balance Sheets related to cumulative basis adjustments for fair value hedges as of:
($ in millions) |
Condensed Consolidated Balance Sheets Caption |
June 30, 2018 | ||||||||||
Carrying amount of the hedged item |
Long-term debt | $ | 3,701 | |||||||||
Cumulative amount of fair value hedging adjustments
included in the carrying |
Long-term debt | (212) |
Cash Flow Hedges
The Bancorp may enter into interest rate swaps to convert floating-rate assets and liabilities to fixed rates or to hedge certain forecasted transactions for the variability in cash flows attributable to the contractually specified interest rate. The assets or liabilities may be grouped in circumstances where they share the same risk exposure that the Bancorp desires to hedge. The Bancorp may also enter into interest rate caps and floors to limit cash flow variability of floating-rate assets and liabilities. As of June 30, 2018, all hedges designated as cash flow hedges were assessed for effectiveness using regression analysis. The entire change in the fair value of the interest rate swap included in the assessment of hedge effectiveness is recorded in AOCI and reclassified from AOCI to current period earnings when the hedged item affects earnings. As of June 30, 2018, the maximum length of time over which the Bancorp is hedging its exposure to the variability in future cash flows is 73 months.
Reclassified gains and losses on interest rate contracts related to commercial and industrial loans are recorded within interest income in the Condensed Consolidated Statements of Income. As of June 30, 2018 and December 31, 2017, $16 million and $9 million, respectively, of net deferred losses, net of tax, on cash flow hedges were recorded in AOCI in the Condensed Consolidated Balance Sheets. As of June 30, 2018, $7 million in net unrealized gains, net of tax, recorded in AOCI are expected to be reclassified into earnings during the next twelve months. This amount could differ from amounts actually recognized due to changes in interest rates, hedge de-designations, and the addition of other hedges subsequent to June 30, 2018.
During both the three and six months ended June 30, 2018 and 2017, there were no gains or losses reclassified from AOCI into earnings associated with the discontinuance of cash flow hedges because it was probable that the original forecasted transaction would no longer occur by the end of the originally specified time period or within the additional period of time as defined by U.S. GAAP.
The following table presents the pretax net gains (losses) recorded in the Condensed Consolidated Statements of Income and in the Condensed Consolidated Statements of Comprehensive Income relating to derivative instruments designated as cash flow hedges:
For the three months ended June 30, |
For the six months ended June 30, |
|||||||||||||||||||||||
($ in millions) | 2018 | 2017(a) | 2018 | 2017(a) | ||||||||||||||||||||
Amount of pretax net (losses) gains recognized in OCI |
$ | 4 | 8 | (5) | 3 | |||||||||||||||||||
Amount of pretax net gains reclassified from OCI into net income |
- | 6 | 1 | 14 |
(a) | For both the three and six months ended June 30, 2017, the amount of pretax net losses recognized in OCI represented the effective portion of the cumulative gains or losses on cash flow hedges and ineffectiveness was reported within noninterest income. Upon the adoption of ASU 2017-12, the Bancorp recorded a cumulative effect adjustment to retained earnings effective January 1, 2018 related to the elimination of the separate measurement of ineffectiveness. Refer to Note 3 for additional information. |
Free-Standing Derivative Instruments Risk Management and Other Business Purposes
As part of its overall risk management strategy relative to its mortgage banking activity, the Bancorp may enter into various free-standing derivatives (principal-only swaps, interest rate swaptions, interest rate floors, mortgage options, TBA securities and interest rate swaps) to economically hedge changes in fair value of its largely fixed-rate MSR portfolio. Principal-only swaps hedge the mortgage-LIBOR spread because these swaps appreciate in value as a result of tightening spreads. Principal-only swaps also provide prepayment protection by increasing in value when prepayment speeds increase, as opposed to MSRs that lose value in a faster prepayment environment. Receive fixed/pay floating interest rate swaps and swaptions increase in value when interest rates do not increase as quickly as expected.
88
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
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 Condensed Consolidated Statements of Income.
In conjunction with the sale of Visa, Inc. Class B Shares in 2009, the Bancorp entered into a total return swap in which the Bancorp will make or receive payments based on subsequent changes in the conversion rate of the Class B Shares into Class A Shares. This total return swap is accounted for as a free-standing derivative. Refer to Note 21 for further discussion of significant inputs and assumptions used in the valuation of this instrument.
The net gains (losses) recorded in the Condensed Consolidated Statements of Income relating to free-standing derivative instruments used for risk management and other business purposes are summarized in the following table:
Condensed Consolidated Statements of Income Caption |
For the three months | For the six months | ||||||||||||||||||||||
ended June 30, | ended June 30, | |||||||||||||||||||||||
($ in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||
Interest rate contracts: |
||||||||||||||||||||||||
Forward contracts related to residential mortgage loans held for sale |
Mortgage banking net revenue | $ | (3) | 5 | (4) | (16) | ||||||||||||||||||
Interest rate contracts related to MSR portfolio |
Mortgage banking net revenue | (16) | 16 | (65) | 15 | |||||||||||||||||||
Foreign exchange contracts: |
||||||||||||||||||||||||
Foreign exchange contracts for risk management purposes |
Other noninterest income | 3 | (3) | 5 | (4) | |||||||||||||||||||
Equity contracts: |
||||||||||||||||||||||||
Swap associated with sale of Visa, Inc. Class B Shares |
Other noninterest income | (10) | (9) | (49) | (22) |
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 Condensed 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 either corporate banking revenue or other noninterest income in the Condensed 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 June 30, 2018 and December 31, 2017, the total notional amount of the risk participation agreements was $3.7 billion and $2.8 billion, respectively, and the fair value was a liability of $8 million and $5 million at June 30, 2018 and December 31, 2017, respectively, which is included in other liabilities in the Condensed Consolidated Balance Sheets. As of June 30, 2018, the risk participation agreements had a weighted-average remaining life of 3.6 years.
The Bancorps maximum exposure in the risk participation agreements is contingent on the fair value of the underlying interest rate derivative contracts in an asset position at the time of default. The Bancorp monitors the credit risk associated with the underlying customers in the risk participation agreements through the same risk grading system currently utilized for establishing loss reserves in its loan and lease portfolio.
Risk ratings of the notional amount of risk participation agreements under this risk rating system are summarized in the following table as of:
($ in millions) | June 30, 2018 |
December 31, 2017 |
||||||
Pass |
$ | 3,590 | 2,748 | |||||
Special mention |
77 | 66 | ||||||
Substandard |
10 | 24 | ||||||
Total |
$ | 3,677 | 2,838 |
89
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
The net gains (losses) recorded in the Condensed Consolidated Statements of Income relating to free-standing derivative instruments used for customer accommodation are summarized in the following table:
For the three months | For the six months | |||||||||||||||||||||||
Condensed Consolidated | ended June 30, | ended June 30, | ||||||||||||||||||||||
($ in millions) | Statements of Income Caption | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
Interest rate contracts: |
||||||||||||||||||||||||
Interest rate contracts for customers (contract revenue) |
Corporate banking revenue | $ | 9 | 5 | 16 | 9 | ||||||||||||||||||
Interest rate lock commitments |
Mortgage banking net revenue | 22 | 26 | 35 | 48 | |||||||||||||||||||
Commodity contracts: |
||||||||||||||||||||||||
Commodity contracts for customers (contract revenue) |
Corporate banking revenue | 2 | 1 | 4 | 2 | |||||||||||||||||||
Commodity contracts for customers (credit losses) |
Other noninterest expense | - | 1 | - | 1 | |||||||||||||||||||
Commodity contracts for customers (credit portion of fair value adjustment) |
Other noninterest expense | (1 | ) | - | (1 | ) | - | |||||||||||||||||
Foreign exchange contracts: |
||||||||||||||||||||||||
Foreign exchange contracts for customers (contract revenue) |
Corporate banking revenue | 13 | 9 | 27 | 22 | |||||||||||||||||||
Foreign exchange contracts for customers (contract revenue) |
Other noninterest income | 7 | - | 5 | - | |||||||||||||||||||
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 | - | - | 1 | 1 |
Offsetting Derivative Financial Instruments
The Bancorps derivative transactions are generally governed by ISDA Master Agreements and similar arrangements, which include provisions governing the setoff of assets and liabilities between the parties. When the Bancorp has more than one outstanding derivative transaction with a single counterparty, the setoff provisions contained within these agreements generally allow the non-defaulting party the right to reduce its liability to the defaulting party by amounts eligible for setoff, including the collateral received as well as eligible offsetting transactions with that counterparty, irrespective of the currency, place of payment, or booking office. The Bancorps policy is to present its derivative assets and derivative liabilities on the Condensed Consolidated Balance Sheets on a gross basis, even when provisions allowing for setoff are in place. However, for derivative contracts cleared through certain central clearing parties who have modified their rules to treat variation margin payments as settlements, the fair value of the respective derivative contracts are reported net of the variation margin payments.
Collateral amounts included in the tables below consist primarily of cash and highly-rated government-backed securities and do not include variation margin payments for derivative contracts with legal rights of setoff for both periods shown.
The following tables provide a summary of offsetting derivative financial instruments:
Gross Amount | Gross Amounts Not Offset in the | |||||||||||||||||||
Recognized in the | Condensed Consolidated Balance Sheets | |||||||||||||||||||
As of June 30, 2018 ($ in millions) | Condensed Consolidated Balance Sheets(a) |
Derivatives | Collateral(b) | Net Amount | ||||||||||||||||
Assets: |
||||||||||||||||||||
Derivatives |
$ | 934 | (258) | (300) | 376 | |||||||||||||||
Total assets |
934 | (258) | (300) | 376 | ||||||||||||||||
Liabilities: |
||||||||||||||||||||
Derivatives |
859 | (258) | (234) | 367 | ||||||||||||||||
Total liabilities |
$ | 859 | (258) | (234) | 367 | |||||||||||||||
(a) Amount does not include IRLCs because these instruments are not subject to master netting or similar arrangements. (b) Amount of collateral received as an offset to asset positions or pledged as an offset to liability positions. Collateral values in excess of related derivative amounts recognized in the Condensed Consolidated Balance Sheets were excluded from this table.
|
| |||||||||||||||||||
Gross Amount | Gross Amounts Not Offset in the | |||||||||||||||||||
Recognized in the | Condensed Consolidated Balance Sheets | |||||||||||||||||||
As of December 31, 2017 ($ in millions) | Condensed Consolidated Balance Sheets(a) |
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 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 Condensed Consolidated Balance Sheets were excluded from this table. |
90
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
12. Other Short-Term Borrowings
Borrowings with original maturities of one year or less are classified as short-term. The following table presents a summary of the Bancorps other short-term borrowings as of:
($ in millions) | June 30, 2018 |
December 31, 2017 |
||||||||||
FHLB advances |
$ | 1,200 | 3,125 | |||||||||
Securities sold under repurchase agreements |
300 | 546 | ||||||||||
Derivative collateral |
263 | 341 | ||||||||||
Total other short-term borrowings |
$ | 1,763 | 4,012 |
The Bancorps securities sold under repurchase agreements are accounted for as secured borrowings and are collateralized by securities included in available-for-sale debt and other securities in the Condensed Consolidated Balance Sheets. These securities are subject to changes in market value and, therefore, the Bancorp may increase or decrease the level of securities pledged as collateral based upon these movements in market value. As of both June 30, 2018 and December 31, 2017, all securities sold under repurchase agreements were secured by agency residential mortgage-backed securities with an overnight remaining contractual maturity.
13. Long-Term Debt
On March 14, 2018, the Bancorp issued and sold $650 million of 3.95% senior fixed-rate notes, with a maturity of ten years, due on March 14, 2028. These notes will be redeemable by the Bancorp, in whole or in part, on or after the date that is 30 days prior to the maturity date at a redemption price equal to 100% of the principal amount of the notes to be redeemed plus accrued and unpaid interest thereon to, but excluding, the redemption date.
On June 5, 2018, the Bancorp issued and sold $250 million of senior floating-rate notes, with a maturity of three years, due on June 4, 2021. Interest on the floating-rate notes is 3-month LIBOR plus 47 bps. These notes will be redeemable, in whole or in part, on or after the date that is 30 days prior to the maturity date at a redemption price equal to 100% of the principal amount of the notes to be redeemed plus accrued and unpaid interest thereon to, but excluding, the redemption date.
For further information on a subsequent event related to long-term debt, refer to Note 24.
14. Capital Actions
Accelerated Share Repurchase Transactions
During the six months ended June 30, 2018, the Bancorp entered into or settled accelerated share repurchase transactions. As part of these transactions, the Bancorp entered into forward contracts in which the final number of shares delivered at settlement was based generally on a discount to the average daily volume weighted-average price of the Bancorps common stock during the term of these repurchase agreements. The accelerated share repurchases were treated as two separate transactions, (i) the acquisition of treasury shares on the repurchase date and (ii) a forward contract indexed to the Bancorps common stock.
The following table presents a summary of the Bancorps accelerated share repurchase transactions that were entered into or settled during the six months ended June 30, 2018:
Repurchase Date |
Amount ($ in millions) |
Shares Repurchased on Repurchase Date |
Shares Received from Forward Contract Settlement |
Total Shares Repurchased |
Settlement Date | |||||||||||||||||||
December 19, 2017 |
$ | 273 | 7,727,273 | 824,367 | 8,551,640 | March 19, 2018 | ||||||||||||||||||
February 12, 2018 |
318 | 8,691,318 | 1,015,731 | 9,707,049 | March 26, 2018 | |||||||||||||||||||
May 25, 2018 |
235 | 6,402,244 | 1,172,122 | 7,574,366 | June 15, 2018 |
For further information on a subsequent event related to capital actions, refer to Note 24.
91
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
15. 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 Condensed Consolidated Balance Sheets. The creditworthiness of counterparties for all instruments and agreements is evaluated on a case-by-case basis in accordance with the Bancorps credit policies. The Bancorps significant commitments, contingent liabilities and guarantees in excess of the amounts recognized in the Condensed Consolidated Balance Sheets are discussed in the following sections.
Commitments
The Bancorp has certain commitments to make future payments under contracts. The following table reflects a summary of significant commitments as of:
June 30, | December 31, | |||||||||||
($ in millions) | 2018 | 2017 | ||||||||||
Commitments to extend credit |
$ | 70,915 | 68,106 | |||||||||
Letters of credit |
2,092 | 2,185 | ||||||||||
Forward contracts related to residential mortgage loans held for sale |
1,450 | 1,284 | ||||||||||
Noncancelable operating lease obligations |
568 | 568 | ||||||||||
Purchase obligations |
120 | 144 | ||||||||||
Capital commitments for private equity investments |
43 | 48 | ||||||||||
Capital expenditures |
27 | 37 | ||||||||||
Capital lease obligations |
23 | 26 |
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 Bancorps exposure is limited to the replacement value of those commitments. As of June 30, 2018 and December 31, 2017, the Bancorp had a reserve for unfunded commitments, including letters of credit, totaling $131 million and $161 million, respectively, included in other liabilities in the Condensed Consolidated Balance Sheets. The Bancorp monitors the credit risk associated with commitments to extend credit using the same standard regulatory risk rating system utilized for its loan and lease portfolio.
Risk ratings under this risk rating system are summarized in the following table as of:
June 30, | December 31, | |||||||||||
($ in millions) | 2018 | 2017 | ||||||||||
Pass |
$ | 70,340 | 67,254 | |||||||||
Special mention |
306 | 330 | ||||||||||
Substandard |
269 | 522 | ||||||||||
Total commitments to extend credit |
$ | 70,915 | 68,106 |
Letters of credit
Standby and commercial letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party and expire as summarized in the following table as of June 30, 2018:
($ in millions) | ||||
Less than 1 year(a) |
$ | 1,070 | ||
1 - 5 years(a) |
1,009 | |||
Over 5 years |
13 | |||
Total letters of credit |
$ | 2,092 |
(a) | Includes $7 and $2 issued on behalf of commercial customers to facilitate trade payments in U.S. dollars and foreign currencies which expire less than 1 year and between 1 - 5 years, respectively. |
Standby letters of credit accounted for approximately 99% of total letters of credit at both June 30, 2018 and December 31, 2017, and are considered guarantees in accordance with U.S. GAAP. Approximately 63% and 61% of the total standby letters of credit were collateralized as of June 30, 2018 and December 31, 2017, respectively. In the event of nonperformance by the customers, the Bancorp has rights to the underlying collateral, which can include commercial real estate, physical plant and property, inventory, receivables, cash and marketable securities. The reserve related to these standby letters of credit, which was included in the total reserve for unfunded commitments, was $5 million and $6 million at June 30, 2018 and December 31, 2017, respectively. The Bancorp monitors the credit risk associated with letters of credit using the same standard regulatory risk rating system utilized for its loan and lease portfolio.
92
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
Risk ratings under this risk rating system are summarized in the following table as of:
($ in millions) |
June 30, 2018 |
December 31, 2017 |
||||||||||
Pass |
$ | 1,897 | 1,830 | |||||||||
Special mention |
46 | 67 | ||||||||||
Substandard |
149 | 218 | ||||||||||
Doubtful |
- | 70 | ||||||||||
Total letters of credit |
$ | 2,092 | 2,185 |
At June 30, 2018 and December 31, 2017, the Bancorp had outstanding letters of credit that were supporting certain securities issued as VRDNs. The Bancorp facilitates financing for its commercial customers, which consist of companies and municipalities, by marketing the VRDNs to investors. The VRDNs pay interest to holders at a rate of interest that fluctuates based upon market demand. The VRDNs generally have long-term maturity dates, but can be tendered by the holder for purchase at par value upon proper advance notice. When the VRDNs are tendered, a remarketing agent generally finds another investor to purchase the VRDNs to keep the securities outstanding in the market. As of June 30, 2018 and December 31, 2017, total VRDNs in which the Bancorp was the remarketing agent or were supported by a Bancorp letter of credit were $560 million and $602 million, respectively, of which FTS acted as the remarketing agent to issuers on $540 million and $508 million, respectively. As remarketing agent, FTS is responsible for actively remarketing VRDNs to other investors when they have been tendered. If another investor is not identified, FTS may choose to purchase the VRDNs into inventory at its discretion while it continues to remarket them. If FTS purchases the VRDNs into inventory, it can subsequently tender back the VRDNs to the issuers trustee with proper advance notice. The Bancorp issued letters of credit, as a credit enhancement, to $299 million and $331 million of the VRDNs remarketed by FTS, in addition to $20 million and $94 million in VRDNs remarketed by third parties at June 30, 2018 and December 31, 2017, respectively. These letters of credit are included in the total letters of credit balance provided in the previous table. The Bancorp held $2 million and $1 million of these VRDNs in its portfolio and classified them as trading securities at June 30, 2018 and December 31, 2017, respectively.
Forward contracts related to residential mortgage loans held for sale
The Bancorp enters into forward contracts to economically hedge the change in fair value of certain residential mortgage loans held for sale due to changes in interest rates. The outstanding notional amounts of these forward contracts are included in the summary of significant commitments table for all periods presented.
Noncancelable operating lease obligations and other commitments
The Bancorps subsidiaries have entered into a number of noncancelable lease agreements. The minimum rental commitments under noncancelable lease agreements are shown in the summary of significant commitments table. The Bancorp has also entered into a limited number of agreements for work related to banking center construction and to purchase goods or services.
Contingent Liabilities
Legal claims
There are legal claims pending against the Bancorp and its subsidiaries that have arisen in the normal course of business. Refer to Note 16 for additional information regarding these proceedings.
Guarantees
The Bancorp has performance obligations upon the occurrence of certain events under financial guarantees provided in certain contractual arrangements as discussed in the following sections.
Residential mortgage loans sold with representation and warranty provisions
Conforming residential mortgage loans sold to unrelated third parties are generally sold with representation and warranty provisions. A contractual liability arises only in the event of a breach of these representations and warranties and, in general, only when a loss results from the breach. The Bancorp may be required to repurchase any previously sold loan, indemnify or make whole the investor or insurer for which the representation or warranty of the Bancorp proves to be inaccurate, incomplete or misleading. For more information on how the Bancorp establishes the residential mortgage repurchase reserve, refer to Note 1 of the Notes to Consolidated Financial Statements included in the Bancorps Annual Report on Form 10-K for the year ended December 31, 2017.
As of June 30, 2018 and December 31, 2017, the Bancorp maintained reserves related to loans sold with representation and warranty provisions totaling $7 million and $9 million, respectively, included in other liabilities in the Condensed 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 June 30, 2018 are reasonably possible. The Bancorp currently estimates that it is reasonably possible that it could incur losses related to mortgage representation and warranty provisions in an amount up to approximately $9 million in excess of amounts reserved. This estimate was derived by modifying the key assumptions to reflect managements judgment regarding reasonably possible adverse changes to those assumptions. The actual repurchase losses could vary significantly from the recorded mortgage representation and warranty reserve or this estimate of reasonably possible losses, depending on the outcome of various factors, including those previously discussed.
93
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
For both the three months ended June 30, 2018 and 2017, the Bancorp paid an immaterial amount in the form of make whole payments and repurchased $5 million and $3 million, respectively, in outstanding principal of loans to satisfy investor demands. For both the six months ended June 30, 2018 and 2017, the Bancorp paid immaterial amounts in the form of make whole payments and repurchased $7 million and $5 million, respectively, in outstanding principal of loans to satisfy investor demands. Total repurchase demand requests during the three months ended June 30, 2018 and 2017 were $6 million and $5 million, respectively. Total repurchase demand requests during the six months ended June 30, 2018 and 2017 were $11 million and $8 million, respectively. Total outstanding repurchase demand inventory was $3 million and $1 million at June 30, 2018 and December 31, 2017, respectively.
The following table summarizes activity in the reserve for representation and warranty provisions:
For the three months ended June 30, |
For the six months ended June 30, |
|||||||||||||||
|
|
|||||||||||||||
($ in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Balance, beginning of period |
$ | 8 | 12 | 9 | 13 | |||||||||||
Net reductions to the reserve |
(1) | (1) | (2) | (2) | ||||||||||||
Balance, end of period |
$ | 7 | 11 | 7 | 11 |
The following tables provide a rollforward of unresolved claims by claimant type for the six months ended:
GSE | Private Label | |||||||||||||||
|
|
|
|
|||||||||||||
June 30, 2018 ($ in millions) | Units | Dollars | Units | Dollars | ||||||||||||
Balance, beginning of period |
6 | $ | 1 | 1 | $ | - | ||||||||||
New demands |
62 | 11 | - | - | ||||||||||||
Resolved demands |
(54 | ) | (9) | - | - | |||||||||||
Balance, end of period |
14 | $ | 3 | 1 | $ | - | ||||||||||
GSE | Private Label | |||||||||||||||
June 30, 2017 ($ in millions) | Units | Dollars | Units | Dollars | ||||||||||||
Balance, beginning of period |
13 | $ | 2 | - | $ | - | ||||||||||
New demands |
58 | 8 | - | - | ||||||||||||
Loan paydowns/payoffs |
(1 | ) | - | - | - | |||||||||||
Resolved demands |
(54 | ) | (8) | - | - | |||||||||||
Balance, end of period |
16 | $ | 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 $289 million and $312 million at June 30, 2018 and December 31, 2017, respectively, and the delinquency rates were 2.5% and 3.0% at June 30, 2018 and December 31, 2017, respectively. The Bancorp maintained an estimated credit loss reserve on these loans sold with credit recourse of $5 million at both June 30, 2018 and December 31, 2017 recorded in other liabilities in the Condensed 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 balances held by the brokerage clearing agent were $15 million at both June 30, 2018 and December 31, 2017. 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 June 30, 2018 and December 31, 2017.
Visa litigation
The Bancorp, as a member bank of Visa prior to Visas reorganization and IPO (the IPO) of its Class A common shares (the Class A Shares) in 2008, had certain indemnification obligations pursuant to Visas certificate of incorporation and by-laws and in accordance with their membership agreements. In accordance with Visas by-laws prior to the IPO, the Bancorp could have been required to indemnify Visa for the Bancorps proportional share of losses based on the pre-IPO membership interests. As part of its reorganization and IPO, the Bancorps 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.
94
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
In conjunction with the IPO, the Bancorp received 10.1 million of Visas Class B common shares (the Class B Shares) based on the Bancorps 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 Bancorps 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 Visas litigation committee determined that the escrow account was insufficient; Visa issued additional Class A Shares and deposited the proceeds from the sale of the Class A Shares into the litigation escrow account. When Visa funded the litigation escrow account, the Class B Shares were subjected to dilution through an adjustment in the conversion rate of Class B Shares into Class A Shares.
In 2009, the Bancorp completed the sale of Visa, Inc. Class B Shares and entered into a total return swap in which the Bancorp will make or receive payments based on subsequent changes in the conversion rate of the Class B Shares into Class A Shares. The swap terminates on the later of the third anniversary of Visas IPO or the date on which the Covered Litigation is settled. Refer to Note 21 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 Bancorps 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 Bancorps sale of the Visa Class B Shares and through June 30, 2018, the Bancorp has concluded that it is not probable that the Visa Litigation Exposure will exceed the Class B value. Based on this determination, upon the sale of 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 $164 million at June 30, 2018 and $137 million at December 31, 2017. Refer to Note 11 and Note 21 for further information.
After the Bancorps sale of the Class B Shares, Visa has funded additional amounts into the litigation escrow account which have resulted in further dilutive adjustments to the conversion of Class B Shares into Class A Shares, and along with other terms of the total return swap, required the Bancorp to make cash payments in varying amounts to the swap counterparty as follows:
Period ($ in millions) | Visa Funding Amount |
Bancorp Cash Payment Amount |
||||||||
Q2 2010 |
$ | 500 | 20 | |||||||
Q4 2010 |
800 | 35 | ||||||||
Q2 2011 |
400 | 19 | ||||||||
Q1 2012 |
1,565 | 75 | ||||||||
Q3 2012 |
150 | 6 | ||||||||
Q3 2014 |
450 | 18 | ||||||||
Q2 2018 |
600 | (a) |
(a) The Bancorp made a cash payment of $26 million to the swap counterparty on July 17, 2018 as a result of the Visa escrow funding in the second quarter of 2018.
95
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
16. Legal and Regulatory Proceedings
Litigation
Visa/MasterCard Merchant Interchange Litigation
In April 2006, the Bancorp was added as a defendant in a consolidated antitrust class action lawsuit originally filed against Visa®, MasterCard® and several other major financial institutions in the United States District Court for the Eastern District of New York (In re: Payment Card Interchange Fee and Merchant Discount Antitrust Litigation). The plaintiffs, merchants operating commercial businesses throughout the U.S. and trade associations, claimed that the interchange fees charged by card-issuing banks were unreasonable and sought injunctive relief and unspecified damages. In addition to being a named defendant, the Bancorp is also subject to a possible indemnification obligation of Visa as discussed in Note 15 and has also entered into judgment and loss sharing agreements with Visa, MasterCard and certain other named defendants. In October 2012, the parties to the litigation entered into a settlement agreement. On January 14, 2014, the trial court entered a final order approving the class settlement. A number of merchants filed appeals from that approval. The U.S. Court of Appeals for the Second Circuit held a hearing on those appeals and on June 30, 2016, reversed the district courts approval of the class settlement, remanding the case to the district court for further proceedings. On March 27, 2017, the Supreme Court of the United States denied a petition for writ of certiorari seeking to review the Second Circuits decision. Pursuant to the terms of the overturned settlement agreement, the Bancorp previously paid $46 million into a class settlement escrow account. Because the appellate court ruling remands the case to the district court for further proceedings, the ultimate outcome in this matter is uncertain. Approximately 8,000 merchants requested exclusion from the class settlement, and therefore, pursuant to the terms of the overturned settlement agreement, approximately 25% of the funds paid into the class settlement escrow account were already returned to the control of the defendants. The remaining approximately 75% of the settlement funds paid by the Bancorp are maintained in the escrow account. More than 500 of the merchants who requested exclusion from the class filed separate federal lawsuits against Visa, MasterCard and certain other defendants alleging similar antitrust violations. These individual federal lawsuits were transferred to the United States District Court for the Eastern District of New York. While the Bancorp is only named as a defendant in one of the individual federal lawsuits, it may have obligations pursuant to indemnification arrangements and/or the judgment or loss sharing agreements noted above. On June 5, 2018, the defendants in the consolidated class action reached an agreement to settle in principle with the proposed plaintiffs class seeking monetary damages, with the Bancorps portion of the settlement amount (above the existing escrow) within reserves. The settlement in principle is subject to finalization and District Court approval. This settlement does not resolve the claims of the separate proposed plaintiffs class seeking injunctive relief or the claims of merchants who are pursuing separate lawsuits. Refer to Note 15 for further information.
Klopfenstein v. Fifth Third Bank
On August 3, 2012, William Klopfenstein and Adam McKinney filed a lawsuit against Fifth Third Bank in the United States District Court for the Northern District of Ohio (Klopfenstein et al. v. Fifth Third Bank), alleging that the 120% APR that Fifth Third disclosed on its Early Access program was misleading. Early Access is a deposit-advance program offered to eligible customers with checking accounts. The plaintiffs sought to represent a nationwide class of customers who used the Early Access program and repaid their cash advances within 30 days. On October 31, 2012, the case was transferred to the United States District Court for the Southern District of Ohio. In 2013, four similar putative class actions were filed against Fifth Third Bank in federal courts throughout the country (Lori and Danielle Laskaris v. Fifth Third Bank, Janet Fyock v. Fifth Third Bank, Jesse McQuillen v. Fifth Third Bank, and Brian Harrison v. Fifth Third Bank). Those four lawsuits were transferred to the Southern District of Ohio and consolidated with the original lawsuit as In re: Fifth Third Early Access Cash Advance Litigation. On behalf of a putative class, the plaintiffs seek unspecified monetary and statutory damages, injunctive relief, punitive damages, attorneys fees, and pre- and post-judgment interest. On March 30, 2015, the court dismissed all claims alleged in the consolidated lawsuit except a claim under the TILA. On January 10, 2018, plaintiffs filed a motion to hear the immediate appeal of the dismissal of their breach of contract claim. On March 28, 2018, the court granted plaintiffs motion and stayed the TILA claim pending that appeal. On April 26, 2018, plaintiffs filed their notice of appeal for the breach of contract claim with the U.S. Court of Appeals for the Sixth Circuit.
Helton v. Fifth Third Bank
On August 31, 2015, trust beneficiaries filed an action against Fifth Third Bank, as trustee, in the Probate Court for Hamilton County, Ohio (Helen Clarke Helton, et al. v. Fifth Third Bank). The plaintiffs allege breach of the duty to diversify, breach of the duty of impartiality, breach of trust/fiduciary duty, and unjust enrichment, based on Fifth Thirds alleged failure to diversify assets held in two trusts for the plaintiffs benefit. The lawsuit seeks over $800 million in alleged damages, attorneys fees, removal of Fifth Third as trustee, and injunctive relief. Fifth Third denies all liability. On April 20, 2018, the Court denied plaintiffs motion for summary judgment and granted summary judgment to Fifth Third, dismissing the case in its entirety. The plaintiffs filed a notice of appeal on May 5, 2018.
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 plaintiffs authorized employee who allegedly was the victim of fraud by a third party. Plaintiff asserts claims for breach of contract and the implied covenant of good faith and fair dealing under Article 4A-202 of the Uniform Commercial Code, with losses allegedly totaling almost $40 million, plus interest. Fifth Third denies all liability in this matter. On March 3, 2016, Fifth Third removed the case to the United States District Court for the District of Minnesota. No trial date has been scheduled.
Other litigation
The Bancorp and its subsidiaries are not parties to any other material litigation. However, there are other litigation matters that arise in the normal course of business. While it is impossible to ascertain the ultimate resolution or range of financial liability with respect to these contingent matters, management believes that the resulting liability, if any, from these other actions would not have a material effect upon the Bancorps consolidated financial position, results of operations or cash flows.
96
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
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 or reputational harm to the Bancorp, its affiliates and/or their respective directors, officers and other personnel, including adverse judgments, findings, settlements, fines, penalties, orders, injunctions or other actions, amendments and/or restatements of the Bancorps SEC filings and/or financial statements, as applicable, and/or determinations of material weaknesses in our disclosure controls and procedures. Investigations by regulatory authorities may from time to time result in civil or criminal referrals to law enforcement. Additionally, in some cases, regulatory authorities may take supervisory actions that are considered to be confidential supervisory information which may not be publicly disclosed.
Reasonably Possible Losses in Excess of Accruals
The Bancorp and its subsidiaries are parties to numerous claims and lawsuits as well as threatened or potential actions or claims concerning matters arising from the conduct of its business activities. The outcome of claims or litigation and the timing of ultimate resolution are inherently difficult to predict. The following factors, among others, contribute to this lack of predictability: claims often include significant legal uncertainties, damages alleged by plaintiffs are often unspecified or overstated, discovery may not have started or may not be complete and material facts may be disputed or unsubstantiated. As a result of these factors, the Bancorp is not always able to provide an estimate of the range of reasonably possible outcomes for each claim. An accrual for a potential litigation loss is established when information related to the loss contingency indicates both that a loss is probable and that the amount of loss can be reasonably estimated. Any such accrual is adjusted from time to time thereafter as appropriate to reflect changes in circumstances. The Bancorp also determines, when possible (due to the uncertainties described above), estimates of reasonably possible losses or ranges of reasonably possible losses, in excess of amounts accrued. Under U.S. GAAP, an event is reasonably possible if the chance of the future event or events occurring is more than remote but less than likely and an event is remote if the chance of the future event or events occurring is slight. Thus, references to the upper end of the range of reasonably possible loss for cases in which the Bancorp is able to estimate a range of reasonably possible loss mean the upper end of the range of loss for cases for which the Bancorp believes the risk of loss is more than slight. For matters where the Bancorp is able to estimate such possible losses or ranges of possible losses, the Bancorp currently estimates that it is reasonably possible that it could incur losses related to legal and regulatory proceedings in an aggregate amount up to approximately $5 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 Bancorps 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 Bancorps 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 Bancorps 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.
17. Related Party Transactions
Vantiv Holding, LLC
On January 16, 2018, Vantiv, Inc. completed its previously announced acquisition of Worldpay Group plc. with the resulting combined company named Worldpay, Inc. As a result of this transaction, the Bancorp recognized a gain of $414 million in other noninterest income during the first quarter of 2018 associated with the dilution in its ownership interest in Vantiv Holding, LLC from approximately 8.6% to approximately 4.9%.
On June 27, 2018, the Bancorp completed the sale of 5 million shares of Class A common stock of Worldpay, Inc., formerly Vantiv, Inc. The Bancorp had previously received these Class A shares in exchange for Class B Units of Vantiv Holding, LLC. The Bancorp recognized a gain of $205 million related to the sale. As a result of the sale, the Bancorp beneficially owns approximately 3.3% of Worldpays equity through its ownership of approximately 10.3 million Class B Units. The Bancorps remaining interest in Vantiv Holding, LLC of $426 million continues to be accounted for as an equity method investment given the nature of Vantiv Holding, LLCs structure as a limited liability company and contractual arrangements between Vantiv Holding, LLC and the Bancorp.
GS Holdings
In May 2018, GreenSky, Inc. launched an IPO and issued 38 million shares of Class A common stock for a valuation of $23 per share. In connection with this IPO, the Bancorps investment in GreenSky, LLC, which was comprised of 252,550 membership units, was converted to 2,525,498 units of the newly formed GreenSky Holdings, LLC (GS Holdings), representing a 1.4% interest in GS Holdings. The Bancorps units in GS Holdings are exchangeable on a one-to-one basis for Class A common stock or cash after the initial 180-day lock-up period expires.
At the time of the IPO, the Bancorp recognized a $16 million gain on its investment in GreenSky, LLC, which was included in other noninterest income in the Condensed Consolidated Statements of Income for the three and six months ended June 30, 2018. At June 30, 2018, the investment in GS Holdings was $53 million, which was included in equity securities in the Condensed Consolidated Balance Sheets.
97
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
18. Income Taxes
The applicable income tax expense was $107 million and $127 million for the three months ended June 30, 2018 and 2017, respectively, and $239 million and $218 million for the six months ended June 30, 2018 and 2017, respectively. The effective tax rates for the three months ended June 30, 2018 and 2017 were 15.5% and 25.9%, respectively, and 15.7% and 24.5% for the six months ended June 30, 2018 and 2017, respectively. The decrease in the effective tax rate for both the three and six months ended June 30, 2018 compared to the same periods in the prior year was primarily related to the reduction in the federal statutory corporate tax rate partially offset by changes to previously deductible items associated with the enactment of the TCJA.
While it is reasonably possible that the amount of the unrecognized tax benefits with respect to certain of the Bancorps uncertain tax positions could increase or decrease during the next 12 months, the Bancorp believes it is unlikely that its unrecognized tax benefits will change by a material amount during the next 12 months.
98
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
19. Accumulated Other Comprehensive Income
The tables below present the activity of the components of OCI and AOCI for the three months ended:
Total OCI | Total AOCI | |||||||||||||||||||||||||
June 30, 2018 ($ in millions) |
Pretax |
Tax Effect |
Net Activity |
Beginning Balance |
Net Activity |
Ending Balance |
||||||||||||||||||||
Unrealized holding losses on available-for-sale debt securities arising during period |
$ | (217) | 50 | (167) | ||||||||||||||||||||||
Reclassification adjustment for net gains on available-for-sale debt securities included in net income |
- | - | - | |||||||||||||||||||||||
Net unrealized losses on available-for-sale debt securities |
(217) | 50 | (167) | (318) | (167) | (485) | ||||||||||||||||||||
Unrealized holding gains on cash flow hedge derivatives arising during period |
4 | (1) | 3 | |||||||||||||||||||||||
Reclassification adjustment for net gains on cash flow hedge derivatives included in net income |
- | - | - | |||||||||||||||||||||||
Net unrealized losses on cash flow hedge derivatives |
4 | (1) | 3 | (19) | 3 | (16) | ||||||||||||||||||||
Reclassification of amounts to net periodic benefit costs |
1 | - | 1 | |||||||||||||||||||||||
Defined benefit pension plans, net |
1 | - | 1 | (52) | 1 | (51) | ||||||||||||||||||||
Total |
$ | (212) | 49 | (163) | (389) | (163) | (552) | |||||||||||||||||||
Total OCI | Total AOCI | |||||||||||||||||||||||||
June 30, 2017 ($ in millions) |
Pretax |
Tax Effect |
Net Activity |
Beginning Balance |
Net Activity |
Ending Balance |
||||||||||||||||||||
Unrealized holding gains on available-for-sale securities arising during period |
$ | 148 | (55) | 93 | ||||||||||||||||||||||
Reclassification adjustment for net gains on available-for-sale securities included in net income |
- | - | - | |||||||||||||||||||||||
Net unrealized gains on available-for-sale securities |
148 | (55) | 93 | 117 | 93 | 210 | ||||||||||||||||||||
Unrealized holding gains on cash flow hedge derivatives arising during period |
8 | (3) | 5 | |||||||||||||||||||||||
Reclassification adjustment for net gains on cash flow hedge derivatives included in net income |
(6) | 2 | (4) | |||||||||||||||||||||||
Net unrealized gains on cash flow hedge derivatives |
2 | (1) | 1 | 2 | 1 | 3 | ||||||||||||||||||||
Reclassification of amounts to net periodic benefit costs |
2 | (1) | 1 | |||||||||||||||||||||||
Defined benefit pension plans, net |
2 | (1) | 1 | (51) | 1 | (50) | ||||||||||||||||||||
Total |
$ | 152 | (57) | 95 | 68 | 95 | 163 |
99
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
The tables below present the activity of the components of OCI and AOCI for the six months ended:
Total OCI | Total AOCI | |||||||||||||||||||||||||||
June 30, 2018 ($ in millions) | Pretax Activity |
Tax Effect |
Net Activity |
Beginning Balance(a) |
Net Activity |
Ending Balance |
||||||||||||||||||||||
Unrealized holding losses on available-for-sale debt securities arising during period |
$ | (811) | 184 | (627) | ||||||||||||||||||||||||
Reclassification adjustment for net losses on available-for-sale debt securities included in net income |
9 | (2) | 7 | |||||||||||||||||||||||||
Net unrealized losses on available-for-sale debt securities |
(802) | 182 | (620) | 135 | (620) | (485) | ||||||||||||||||||||||
Unrealized holding losses on cash flow hedge derivatives arising during period |
(5) | 1 | (4) | |||||||||||||||||||||||||
Reclassification adjustment for net gains on cash flow hedge derivatives included in net income |
(1) | - | (1) | |||||||||||||||||||||||||
Net unrealized losses on cash flow hedge derivatives |
(6) | 1 | (5) | (11) | (5) | (16) | ||||||||||||||||||||||
Reclassification of amounts to net periodic benefit costs |
2 | - | 2 | |||||||||||||||||||||||||
Defined benefit pension plans, net |
2 | - | 2 | (53) | 2 | (51) | ||||||||||||||||||||||
Total |
$ | (806) | 183 | (623) | 71 | (623) | (552) | |||||||||||||||||||||
(a) The Bancorps AOCI balance was adjusted as of January 1, 2018 to reflect the adoption of new accounting standards. Refer to Note 3 for additional information.
|
| |||||||||||||||||||||||||||
Total OCI | Total AOCI | |||||||||||||||||||||||||||
June 30, 2017 ($ in millions) |
Pretax Activity |
Tax Effect |
Net Activity |
Beginning Balance |
Net Activity |
Ending Balance |
||||||||||||||||||||||
Unrealized holding gains on available-for-sale securities arising during period |
$ | 170 | (62) | 108 | ||||||||||||||||||||||||
Reclassification adjustment for net losses on available-for-sale securities included in net income |
2 | (1) | 1 | |||||||||||||||||||||||||
Net unrealized gains on available-for-sale securities |
172 | (63) | 109 | 101 | 109 | 210 | ||||||||||||||||||||||
Unrealized holding gains on cash flow hedge derivatives arising during period |
3 | (1) | 2 | |||||||||||||||||||||||||
Reclassification adjustment for net gains on cash flow hedge derivatives included in net income |
(14) | 5 | (9) | |||||||||||||||||||||||||
Net unrealized gains on cash flow hedge derivatives |
(11) | 4 | (7) | 10 | (7) | 3 | ||||||||||||||||||||||
Reclassification of amounts to net periodic benefit costs |
3 | (1) | 2 | |||||||||||||||||||||||||
Defined benefit pension plans, net |
3 | (1) | 2 | (52) | 2 | (50) | ||||||||||||||||||||||
Total |
$ | 164 | (60) | 104 | 59 | 104 | 163 |
100
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
The table below presents reclassifications out of AOCI:
Components of AOCI: ($ in millions) |
Condensed Consolidated Statements of Income Caption |
For the three months ended June 30, |
For the six months ended June 30, |
|||||||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
Net unrealized losses on available-for-sale debt securities:(b) |
||||||||||||||||||||||
Net losses included in net income |
Securities (losses) gains, net | $ | - | - | (9 | ) | (2 | ) | ||||||||||||||
Income before income taxes | - | - | (9 | ) | (2 | ) | ||||||||||||||||
Applicable income tax expense | - | - | 2 | 1 | ||||||||||||||||||
Net income | - | - | (7 | ) | (1 | ) | ||||||||||||||||
Net unrealized gains on cash flow hedge derivatives:(b) |
||||||||||||||||||||||
Interest rate contracts related to C&I loans |
Interest and fees on loans and leases | - | 6 | 1 | 14 | |||||||||||||||||
Income before income taxes | - | 6 | 1 | 14 | ||||||||||||||||||
Applicable income tax expense | - | (2) | - | (5 | ) | |||||||||||||||||
Net income | - | 4 | 1 | 9 | ||||||||||||||||||
Net periodic benefit costs:(b) |
||||||||||||||||||||||
Amortization of net actuarial loss |
Employee benefits expense(a) | (1 | ) | (2) | (2 | ) | (3 | ) | ||||||||||||||
Income before income taxes |
(1 | ) | (2) | (2 | ) | (3 | ) | |||||||||||||||
Applicable income tax expense | - | 1 | - | 1 | ||||||||||||||||||
Net income | (1 | ) | (1) | (2 | ) | (2 | ) | |||||||||||||||
Total reclassifications for the period |
Net income | $ | (1 | ) | 3 | (8 | ) | 6 |
(a) | This AOCI component is included in the computation of net periodic benefit cost. Refer to Note 21 of the Notes to Consolidated Financial Statements included in the Bancorps Annual Report on Form 10-K for the year ended December 31, 2017 for further information. |
(b) | Amounts in parentheses indicate reductions to net income. |
101
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
20. Earnings Per Share
The following tables provide the calculation of earnings per share and the reconciliation of earnings per share and earnings per diluted share:
2018 | 2017 | |||||||||||||||||||||||||
For the three months ended June 30, (in millions, except per share data) |
Income | Average Shares |
Per Share Amount |
Income | Average Shares |
Per Share Amount |
||||||||||||||||||||
Earnings Per Share: |
||||||||||||||||||||||||||
Net income available to common shareholders |
$ |
563 | 344 | |||||||||||||||||||||||
Less: Income allocated to participating securities |
6 | 4 | ||||||||||||||||||||||||
Net income allocated to common shareholders |
$ |
557 | 683 | 0.81 | 340 | 741 | 0.46 | |||||||||||||||||||
Earnings Per Diluted Share: |
||||||||||||||||||||||||||
Net income available to common shareholders |
$ |
563 | 344 | |||||||||||||||||||||||
Effect of dilutive securities: |
||||||||||||||||||||||||||
Stock-based awards |
- | 13 | - | 11 | ||||||||||||||||||||||
Net income available to common shareholders plus assumed conversions |
563 | 344 | ||||||||||||||||||||||||
Less: Income allocated to participating securities |
6 | 4 | ||||||||||||||||||||||||
Net income allocated to common shareholders plus assumed conversions |
$ |
557 | 696 | 0.80 | 340 | 752 | 0.45 | |||||||||||||||||||
2018 | 2017 | |||||||||||||||||||||||||
For the six months ended June 30, (in millions, except per share data) |
Income | Average Shares |
Per Share Amount |
Income | Average Shares |
Per Share Amount |
||||||||||||||||||||
Earnings Per Share: |
||||||||||||||||||||||||||
Net income available to common shareholders |
$ |
1,252 | 634 | |||||||||||||||||||||||
Less: Income allocated to participating securities |
15 | 7 | ||||||||||||||||||||||||
Net income allocated to common shareholders |
$ |
1,237 | 687 | 1.80 | 627 | 745 | 0.84 | |||||||||||||||||||
Earnings Per Diluted Share: |
||||||||||||||||||||||||||
Net income available to common shareholders |
$ |
1,252 | 634 | |||||||||||||||||||||||
Effect of dilutive securities: |
||||||||||||||||||||||||||
Stock-based awards |
- | 13 | - | 12 | ||||||||||||||||||||||
Net income available to common shareholders plus assumed conversions |
1,252 | 634 | ||||||||||||||||||||||||
Less: Income allocated to participating securities |
14 | 7 | ||||||||||||||||||||||||
Net income allocated to common shareholders plus assumed conversions |
$ |
1,238 | 700 | 1.77 | 627 | 757 | 0.83 |
Shares are excluded from the computation of earnings per diluted share when their inclusion has an anti-dilutive effect on earnings per share. The diluted earnings per share computation for both the three and six months ended June 30, 2018 excludes 2 million of SARs and an immaterial amount of stock options because their inclusion would have been anti-dilutive. The diluted earnings per share computation for the three and six months ended June 30, 2017 excludes 4 million and 5 million, respectively, of SARs and an immaterial amount of stock options because their inclusion would have been anti-dilutive.
The diluted earnings per share computation for the three and six months ended June 30, 2017 excludes the impact of the forward contract related to the May 1, 2017 accelerated share repurchase transaction. Based upon the average daily volume weighted-average price of the Bancorps common stock during the second 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 June 30, 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.
102
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
21. 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. 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 instruments categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the instruments fair value measurement. For more information regarding the fair value hierarchy, refer to Note 1 of the Notes to Consolidated Financial Statements included in the Bancorps Annual Report on Form 10-K for the year ended December 31, 2017.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables summarize assets and liabilities measured at fair value on a recurring basis as of:
|
||||||||||||||||
Fair Value Measurements Using | ||||||||||||||||
|
|
|||||||||||||||
June 30, 2018 ($ in millions) | Level 1(c) | Level 2(c) | Level 3 | Total Fair Value | ||||||||||||
Assets: |
||||||||||||||||
Available-for-sale debt and other securities: |
||||||||||||||||
U.S. Treasury and federal agencies securities |
$ | 96 | - | - | 96 | |||||||||||
Obligations of states and political subdivisions securities |
- | 35 | - | 35 | ||||||||||||
Mortgage-backed securities: |
||||||||||||||||
Agency residential mortgage-backed securities |
- | 16,094 | - | 16,094 | ||||||||||||
Agency commercial mortgage-backed securities |
- | 10,038 | - | 10,038 | ||||||||||||
Non-agency commercial mortgage-backed securities |
- | 3,086 | - | 3,086 | ||||||||||||
Asset-backed securities and other debt securities |
- | 1,998 | - | 1,998 | ||||||||||||
Available-for-sale debt and other securities(a) |
96 | 31,251 | - | 31,347 | ||||||||||||
Trading debt securities: |
||||||||||||||||
U.S. Treasury and federal agencies securities |
10 | 9 | - | 19 | ||||||||||||
Obligations of states and political subdivisions securities |
- | 58 | - | 58 | ||||||||||||
Agency residential mortgage-backed securities |
- | 75 | - | 75 | ||||||||||||
Asset-backed securities and other debt securities |
- | 128 | - | 128 | ||||||||||||
Trading debt securities |
10 | 270 | - | 280 | ||||||||||||
Equity securities |
474 | 1 | - | 475 | ||||||||||||
Residential mortgage loans held for sale |
- | 658 | - | 658 | ||||||||||||
Residential mortgage loans(b) |
- | - | 162 | 162 | ||||||||||||
Commercial loans held for sale |
- | 8 | - | 8 | ||||||||||||
MSRs |
- | - | 959 | 959 | ||||||||||||
Derivative assets: |
||||||||||||||||
Interest rate contracts |
- | 529 | 11 | 540 | ||||||||||||
Foreign exchange contracts |
- | 121 | - | 121 | ||||||||||||
Commodity contracts |
34 | 250 | - | 284 | ||||||||||||
Derivative assets(d) |
34 | 900 | 11 | 945 | ||||||||||||
Total assets |
$ | 614 | 33,088 | 1,132 | 34,834 | |||||||||||
Liabilities: |
||||||||||||||||
Derivative liabilities: |
||||||||||||||||
Interest rate contracts |
$ | 4 | 305 | 7 | 316 | |||||||||||
Foreign exchange contracts |
- | 109 | - | 109 | ||||||||||||
Equity contracts |
- | - | 164 | 164 | ||||||||||||
Commodity contracts |
95 | 175 | - | 270 | ||||||||||||
Derivative liabilities(e) |
99 | 589 | 171 | 859 | ||||||||||||
Short positions(e) |
88 | 51 | - | 139 | ||||||||||||
Total liabilities |
$ | 187 | 640 | 171 | 998 |
(a) | Excludes FHLB, FRB and DTCC restricted stock holdings totaling $248, $364 and $2, respectively, at June 30, 2018. |
(b) | Includes residential mortgage loans originated as held for sale and subsequently transferred to held for investment. |
(c) | During both the three and six months ended June 30, 2018, no assets or liabilities were transferred between Level 1 and Level 2. |
(d) | Included in other assets in the Condensed Consolidated Balance Sheets. |
(e) | Included in other liabilities in the Condensed Consolidated Balance Sheets. |
103
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
Fair Value Measurements Using | ||||||||||||||||
|
|
|||||||||||||||
December 31, 2017 ($ in millions) | Level 1(c) | Level 2(c) | Level 3 | Total Fair Value | ||||||||||||
Assets: |
||||||||||||||||
Available-for-sale debt and other securities: |
||||||||||||||||
U.S. Treasury and federal agencies securities |
$ | 98 | - | - | 98 | |||||||||||
Obligations of states and political subdivisions securities |
- | 44 | - | 44 | ||||||||||||
Mortgage-backed securities: |
||||||||||||||||
Agency residential mortgage-backed securities |
- | 15,319 | - | 15,319 | ||||||||||||
Agency commercial mortgage-backed securities |
- | 10,167 | - | 10,167 | ||||||||||||
Non-agency commercial mortgage-backed securities |
- | 3,293 | - | 3,293 | ||||||||||||
Asset-backed securities and other debt securities |
- | 2,218 | - | 2,218 | ||||||||||||
|
||||||||||||||||
Available-for-sale debt and other securities(a) |
98 | 31,041 | - | 31,139 | ||||||||||||
Trading debt securities: |
||||||||||||||||
U.S. Treasury and federal agencies securities |
1 | 11 | - | 12 | ||||||||||||
Obligations of states and political subdivisions securities |
- | 22 | - | 22 | ||||||||||||
Residential mortgage-backed securities |
- | 395 | - | 395 | ||||||||||||
Asset-backed securities and other debt securities |
- | 63 | - | 63 | ||||||||||||
|
||||||||||||||||
Trading debt securities |
1 | 491 | - | 492 | ||||||||||||
Equity securities |
438 | 1 | 439 | |||||||||||||
Residential mortgage loans held for sale |
- | 399 | - | 399 | ||||||||||||
Residential mortgage loans(b) |
- | - | 137 | 137 | ||||||||||||
MSRs |
- | - | 858 | 858 | ||||||||||||
Derivative assets: |
||||||||||||||||
Interest rate contracts |
1 | 505 | 8 | 514 | ||||||||||||
Foreign exchange contracts |
- | 124 | - | 124 | ||||||||||||
Equity contracts |
- | 20 | - | 20 | ||||||||||||
Commodity contracts |
39 | 126 | - | 165 | ||||||||||||
Derivative assets(d) |
40 | 775 | 8 | 823 | ||||||||||||
Total assets |
$ | 577 | 32,707 | 1,003 | 34,287 | |||||||||||
Liabilities: |
||||||||||||||||
Derivative liabilities: |
||||||||||||||||
Interest rate contracts |
$ | 1 | 172 | 5 | 178 | |||||||||||
Foreign exchange contracts |
- | 120 | - | 120 | ||||||||||||
Equity contracts |
- | - | 137 | 137 | ||||||||||||
Commodity contracts |
38 | 129 | - | 167 | ||||||||||||
|
||||||||||||||||
Derivative liabilities(e) |
39 | 421 | 142 | 602 | ||||||||||||
Short positions(e) |
25 | 6 | - | 31 | ||||||||||||
|
||||||||||||||||
Total liabilities |
$ | 64 | 427 | 142 | 633 | |||||||||||
|
(a) | Excludes FHLB, FRB, and DTCC restricted stock holdings totaling $248, $362 and $2, respectively, at December 31, 2017. |
(b) | Includes residential mortgage loans originated as held for sale and subsequently transferred to held for investment. |
(c) | During the year ended December 31, 2017, no assets or liabilities were transferred between Level 1 and Level 2. |
(d) | Included in other assets in the Condensed Consolidated Balance Sheets. |
(e) | Included in other liabilities in the Condensed Consolidated Balance Sheets. |
The following is a description of the valuation methodologies used for significant instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.
Available-for-sale debt and other securities, trading debt securities and equity securities
Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include U.S. Treasury securities and equity securities. If quoted market prices are not available, then fair values are estimated using pricing models, quoted prices of securities with similar characteristics or DCFs. Level 2 securities may include federal agencies securities, obligations of states and political subdivisions securities, agency and non-agency residential mortgage-backed securities, agency and non-agency commercial mortgage-backed securities, asset-backed securities and other debt securities and equity securities. These securities are generally valued using a market approach based on observable prices of securities with similar characteristics.
Residential mortgage loans held for sale
For residential mortgage loans held for sale for which the fair value election has been made, fair value is estimated based upon mortgage-backed securities prices and spreads to those prices or, for certain ARM loans, DCF models that may incorporate the anticipated portfolio composition, credit spreads of asset-backed securities with similar collateral and market conditions. The anticipated portfolio composition includes the effect of interest rate spreads and discount rates due to loan characteristics such as the state in which the loan was originated, the loan amount and the ARM margin. Residential mortgage loans held for sale that are valued based on mortgage-backed securities prices are classified within Level 2 of the valuation hierarchy as the valuation is based on external pricing for similar instruments. ARM loans classified as held for sale are also classified within Level 2 of the valuation hierarchy due to the use of observable inputs in the DCF model. These observable inputs include interest rate spreads from agency mortgage-backed securities market rates and observable discount rates.
104
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
Commercial loans held for sale
For commercial loans held for sale for which the fair value election has been made, fair value is estimated based upon quoted prices of identical or similar assets in an active market, which are reviewed and approved by the Market Risk department, which reports to the Bancorps Chief Risk Officer. These loans are generally valued using a market approach based on observable prices and are classified within Level 2 of the valuation hierarchy.
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 Bancorps policy to value any transfers between levels of the fair value hierarchy based on end of period fair values. For residential mortgage loans for which the fair value election has been made, and that are reclassified from held for sale to held for investment, the fair value estimation is based on mortgage-backed securities prices, interest rate risk and an internally developed credit component. Therefore, these loans are classified within Level 3 of the valuation hierarchy. An adverse change in the loss rate or severity assumption would result in a decrease in fair value of the related loan. The Secondary Marketing department, which reports to the Bancorps Head of the Consumer Bank, in conjunction with the Consumer Credit Risk department, which reports to the Bancorps 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.
MSRs
MSRs do not trade in an active, open market with readily observable prices. While sales of MSRs do occur, the precise terms and conditions typically are not readily available. Accordingly, the Bancorp estimates the fair value of MSRs using internal OAS models with certain unobservable inputs, primarily prepayment speed assumptions, OAS and weighted-average lives, resulting in a classification within Level 3 of the valuation hierarchy. Refer to Note 10 for further information on the assumptions used in the valuation of the Bancorps MSRs. The Secondary Marketing department and Treasury department are responsible for determining the valuation methodology for MSRs. Representatives from Secondary Marketing, Treasury, Accounting and Risk Management are responsible for reviewing key assumptions used in the internal OAS model. Two external valuations of the MSR portfolio are obtained from third parties quarterly that use valuation models in order to assess the reasonableness of the internal OAS model. Additionally, the Bancorp participates in peer surveys that provide additional confirmation of the reasonableness of key assumptions utilized in the MSR valuation process and the resulting MSR prices.
Derivatives
Exchange-traded derivatives valued using quoted prices and certain over-the-counter derivatives valued using active bids are classified within Level 1 of the valuation hierarchy. Most of the Bancorps 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 June 30, 2018 and December 31, 2017, derivatives classified as Level 3, which are valued using models containing unobservable inputs, consisted primarily of a total return swap associated with the Bancorps 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 Visas 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 managements 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 Bancorps 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 Bancorps 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 June 30, 2018 was $11 million. Immediate decreases in current interest rates of 25 bps and 50 bps would result in increases in the fair value of the IRLCs of approximately $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 $6 million and $12 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 $2 million, respectively. These sensitivities are hypothetical and should be used with caution, as changes in fair value based on a variation in assumptions typically cannot be extrapolated because the relationship of the change in assumptions to the change in fair value may not be linear.
The Consumer Line of Business Finance department, which reports to the Bancorps Chief Financial Officer, and the aforementioned Secondary Marketing department are responsible for determining the valuation methodology for IRLCs. Secondary Marketing, in conjunction with a third party valuation provider, periodically review loan closing rate assumptions and recent loan sales to determine if adjustments are needed for current market conditions not reflected in historical data.
105
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
Short positions
Where quoted prices are available in an active market, short positions are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated using pricing models, quoted prices of securities with similar characteristics or DCFs and therefore are classified within Level 2 of the valuation hierarchy.
The following tables are a reconciliation of assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
||||||||||||||||||||
For the three months ended June 30, 2018 ($ in millions) |
Residential Mortgage Loans |
MSRs | Interest Rate Derivatives, Net(a) |
Equity Derivatives |
Total Fair Value |
|||||||||||||||
Balance, beginning of period |
$ | 136 | 926 | 4 | (165) | 901 | ||||||||||||||
Total (losses) gains (realized/unrealized): |
||||||||||||||||||||
Included in earnings |
(1) | (13) | 22 | (10) | (2) | |||||||||||||||
Purchases/originations |
- | 46 | (1) | - | 45 | |||||||||||||||
Settlements |
(5) | - | (21) | 11 | (15) | |||||||||||||||
Transfers into Level 3(b) |
32 | - | - | - | 32 | |||||||||||||||
Balance, end of period |
$ | 162 | 959 | 4 | (164) | 961 | ||||||||||||||
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 June 30, 2018(c) |
$ | (1) | (13) | 12 | (10) | (12) | ||||||||||||||
(a) Net interest rate derivatives include derivative assets and liabilities of $11 and $7, respectively, as of June 30, 2018. (b) Includes certain residential mortgage loans originated as held for sale that were transferred to held for investment. (c) Includes interest income and expense.
|
| |||||||||||||||||||
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
||||||||||||||||||||
For the three months ended June 30, 2017 ($ in millions) |
Residential Mortgage Loans |
MSRs |
Interest Rate Derivatives, Net(a) |
Equity Derivatives, Net |
Total Fair Value |
|||||||||||||||
|
||||||||||||||||||||
Balance, beginning of period |
$ | 141 | 776 | 11 | (97) | 831 | ||||||||||||||
Total (losses) gains (realized/unrealized): |
||||||||||||||||||||
Included in earnings |
1 | (47) | 26 | (9) | (29) | |||||||||||||||
Purchases/originations |
- | 120 | - | - | 120 | |||||||||||||||
Settlements |
(4) | - | (28) | 8 | (24) | |||||||||||||||
Transfers into Level 3(b) |
4 | - | - | - | 4 | |||||||||||||||
|
||||||||||||||||||||
Balance, end of period |
$ | 142 | 849 | 9 | (98) | 902 | ||||||||||||||
|
||||||||||||||||||||
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 June 30, 2017(c) |
$ | 1 | (47) | 14 | (9) | (41) | ||||||||||||||
|
(a) | Net interest rate derivatives include derivative assets and liabilities of $14 and $5, respectively, as of June 30, 2017. |
(b) | Includes certain residential mortgage loans held for sale that were transferred to held for investment. |
(c) | Includes interest income and expense. |
106
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||
For the six months ended June 30, 2018 ($ in millions) | Residential Mortgage Loans |
MSRs(d) | Interest Rate Derivatives, Net(a) |
Equity Derivatives |
Total Fair Value |
|||||||||||||||||
|
||||||||||||||||||||||
Balance, beginning of period |
$ | 137 | 858 | 3 | (137) | 861 | ||||||||||||||||
Total (losses) gains (realized/unrealized): |
||||||||||||||||||||||
Included in earnings |
(4) | 16 | 36 | (49) | (1) | |||||||||||||||||
Purchases/originations |
- | 85 | (4) | - | 81 | |||||||||||||||||
Settlements |
(8) | - | (31) | 22 | (17) | |||||||||||||||||
Transfers into Level 3(b) |
37 | - | - | - | 37 | |||||||||||||||||
|
||||||||||||||||||||||
Balance, end of period |
$ | 162 | 959 | 4 | (164) | 961 | ||||||||||||||||
|
||||||||||||||||||||||
The amount of total (losses) gains for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at June 30, 2018(c) |
$ | (4) | 16 | 12 | (49) | (25) | ||||||||||||||||
|
(a) | Net interest rate derivatives include derivative assets and liabilities of $11 and $7, respectively, as of June 30, 2018. |
(b) | Includes certain residential mortgage loans held for sale that were transferred to held for investment. |
(c) | Includes interest income and expense. |
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||
For the six months ended June 30, 2017 ($ in millions) | Residential Mortgage Loans |
MSRs | Interest Rate Derivatives, Net(a) |
Equity Derivatives(a) |
Total Fair Value |
|||||||||||||||||
|
||||||||||||||||||||||
Balance, beginning of period |
$ | 143 | 744 | 8 | (91) | 804 | ||||||||||||||||
Total (losses) gains (realized/unrealized): |
||||||||||||||||||||||
Included in earnings |
1 | (70) | 49 | (22) | (42) | |||||||||||||||||
Purchases/originations |
- | 175 | (1) | - | 174 | |||||||||||||||||
Settlements |
(9) | - | (47) | 15 | (41) | |||||||||||||||||
Transfers into Level 3(b) |
7 | - | - | - | 7 | |||||||||||||||||
|
||||||||||||||||||||||
Balance, end of period |
$ | 142 | 849 | 9 | (98) | 902 | ||||||||||||||||
|
||||||||||||||||||||||
The amount of total (losses) gains for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at June 30, 2017(c) |
$ | 1 | (70) | 15 | (22) | (76) | ||||||||||||||||
|
(a) | Net interest rate derivatives include derivative assets and liabilities of $14 and $5, respectively, as of June 30, 2017. |
(b) | Includes certain residential mortgage loans originated as held for sale that were transferred to held for investment. |
(c) | Includes interest income and expense. |
The total losses included in earnings for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) were recorded in the Condensed Consolidated Statements of Income as follows:
For the three months ended June 30, |
For the six months ended June 30, |
|||||||||||||||||||||
($ in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||
Mortgage banking net revenue |
$ |
8 | (21) | 47 | (21) | |||||||||||||||||
Corporate banking revenue |
- | 1 | 1 | 1 | ||||||||||||||||||
Other noninterest income |
(10) | (9) | (49 | ) | (22) | |||||||||||||||||
|
||||||||||||||||||||||
Total losses |
$ |
(2) | (29) | (1 | ) | (42) | ||||||||||||||||
|
||||||||||||||||||||||
The total losses included in earnings attributable to changes in unrealized gains and losses related to Level 3 assets and liabilities still held at June 30, 2018 and 2017 were recorded in the Condensed Consolidated Statements of Income as follows:
|
| |||||||||||||||||||||
For the three months ended June 30, |
For the six months ended June 30, |
|||||||||||||||||||||
($ in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||
Mortgage banking net revenue |
$ |
(2) | (33) | 23 | (55) | |||||||||||||||||
Corporate banking revenue |
- | 1 | 1 | 1 | ||||||||||||||||||
Other noninterest income |
(10) | (9) | (49 | ) | (22) | |||||||||||||||||
Total losses |
$ |
(12) | (41) | (25 | ) | (76) |
107
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
The following tables present information as of June 30, 2018 and 2017 about significant unobservable inputs related to the Bancorps material categories of Level 3 financial assets and liabilities measured at fair value on a recurring basis:
|
||||||||||||||||
As of June 30, 2018 ($ in millions) | ||||||||||||||||
|
||||||||||||||||
Financial Instrument | Fair Value | Valuation Technique | Significant Unobservable Inputs |
Ranges of Inputs |
Weighted-Average | |||||||||||
Residential mortgage loans |
$ | 162 | Loss rate model | Interest rate risk factor | (13.3) - 11.9% | -0.1% | ||||||||||
Credit risk factor | 0 - 40.3% | 0.7% | ||||||||||||||
MSRs |
959 | Discounted cash flow | Prepayment speed | 0.5-97.0% | |
(Fixed) 9.5% (Adjustable) 23.6% |
| |||||||||
OAS spread (bps) | 461-1,513 |
|
(Fixed) 543 (Adjustable) 817 |
| ||||||||||||
IRLCs, net |
11 | Discounted cash flow | Loan closing rates | 12.2 - 96.6% | 80.9% | |||||||||||
Swap associated with the sale of Visa, Inc. Class B Shares |
(164) | Discounted cash flow | Timing of the resolution of the Covered Litigation |
|
1/31/2021 - 11/30/2023 |
|
9/6/2021 | |||||||||
|
||||||||||||||||
As of June 30, 2017 ($ in millions) | ||||||||||||||||
|
||||||||||||||||
Financial Instrument | Fair Value | Valuation Technique | Significant Unobservable Inputs |
Ranges of Inputs |
Weighted-Average | |||||||||||
Residential mortgage loans |
$ | 142 | Loss rate model | Interest rate risk factor | (9.6) - 15.0% | 2.9% | ||||||||||
Credit risk factor | 0 - 46.2% | 1.0% | ||||||||||||||
MSRs |
849 | Discounted cash flow | Prepayment speed | 1.2-100% | |
(Fixed) 11.5% (Adjustable) 24.8% |
| |||||||||
OAS spread (bps) | 430-1,515 |
|
(Fixed) 530 (Adjustable) 773 |
| ||||||||||||
IRLCs, net |
14 | Discounted cash flow | Loan closing rates | 9.6- 96.8% | 73.0% | |||||||||||
Swap associated with the sale of Visa, Inc. Class B Shares |
(98) | Discounted cash flow | Timing of the resolution of the Covered Litigation |
|
6/30/2019 - 12/31/2022 |
|
9/30/2020 |
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.
The following tables provide the fair value hierarchy and carrying amount of all assets that were held as of June 30, 2018 and 2017 and for which a nonrecurring fair value adjustment was recorded during the three and six months ended June 30, 2018 and 2017, and the related gains and losses from fair value adjustments on assets sold during the period as well as assets still held as of the end of the period:
Fair Value Measurements Using | Total (Losses) Gains | Total (Losses) Gains | ||||||||||||||||||||||||||||||
As of June 30, 2018 ($ in millions) | Level 1 | Level 2 | Level 3 | Total |
For the three months ended June 30, 2018 |
For the six months ended June 30, 2018 |
||||||||||||||||||||||||||
Commercial loans held for sale |
$ | - | - | 4 | 4 | - | (1) | |||||||||||||||||||||||||
Commercial and industrial loans |
- | - | 161 | 161 | 14 | (30) | ||||||||||||||||||||||||||
Commercial mortgage loans |
- | - | 3 | 3 | 1 | 6 | ||||||||||||||||||||||||||
Commercial leases |
- | - | 14 | 14 | (9) | (10) | ||||||||||||||||||||||||||
OREO |
- | - | 17 | 17 | (1) | (4) | ||||||||||||||||||||||||||
Bank premises and equipment |
- | - | 37 | 37 | (33) | (41) | ||||||||||||||||||||||||||
Operating lease equipment |
- | - | 10 | 10 | (1) | (3) | ||||||||||||||||||||||||||
Private equity investments |
- | 50 | 31 | 81 | 11 | 30 | ||||||||||||||||||||||||||
Total |
$ | - | 50 | 277 | 327 | (18) | (53) | |||||||||||||||||||||||||
Fair Value Measurements Using | Total Losses | Total Losses | ||||||||||||||||||||||||||||||
As of June 30, 2017 ($ in millions) | Level 1 | Level 2 | Level 3 | Total | For the three months ended June 30, 2017 |
For the six months ended June 30, 2017 |
||||||||||||||||||||||||||
Commercial loans held for sale |
$ | - | - | 45 | 45 | (13) | (32) | |||||||||||||||||||||||||
Commercial and industrial loans |
- | - | 405 | 405 | (32) | (58) | ||||||||||||||||||||||||||
Commercial mortgage loans |
- | - | 26 | 26 | (9) | (11) | ||||||||||||||||||||||||||
Commercial leases |
- | - | 3 | 3 | (1) | (2) | ||||||||||||||||||||||||||
OREO |
- | - | 11 | 11 | (1) | (5) | ||||||||||||||||||||||||||
Bank premises and equipment |
- | - | 16 | 16 | (2) | (5) | ||||||||||||||||||||||||||
Operating lease equipment |
- | - | 56 | 56 | - | (20) | ||||||||||||||||||||||||||
Total |
$ | - | - | 562 | 562 | (58) | (133) |
108
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
The following tables present information as of June 30, 2018 and 2017 about significant unobservable inputs related to the Bancorps material categories of Level 3 financial assets and liabilities measured on a nonrecurring basis:
As of June 30, 2018 ($ in millions) | ||||||||||||||||
Financial Instrument | Fair Value | Valuation Technique | Significant Unobservable Inputs | Ranges of Inputs |
Weighted-Average | |||||||||||
Commercial loans held for sale |
$ | 4 | Appraised value | Appraised value | NM | NM | ||||||||||
Costs to sell | NM | 10.0% | ||||||||||||||
Commercial and industrial loans |
161 | Appraised value | Collateral value | NM | NM | |||||||||||
Commercial mortgage loans |
3 | Appraised value | Collateral value | NM | NM | |||||||||||
Commercial leases |
14 | Appraised value | Collateral value | NM | NM | |||||||||||
OREO |
17 | Appraised value | Appraised value | NM | NM | |||||||||||
Bank premises and equipment |
37 | Appraised value | Appraised value | NM | NM | |||||||||||
Operating lease equipment |
10 | Appraised value | Appraised value | NM | NM | |||||||||||
Private equity investments |
28 | Liquidity discount applied to funds net asset value |
Liquidity discount | 0-43.0% | 12.9% | |||||||||||
3 | Comparable company analysis | Market comparable transactions | NM | NM | ||||||||||||
As of June 30, 2017 ($ in millions) |
|
|||||||||||||||
Financial Instrument | Fair Value | Valuation Technique | Significant Unobservable Inputs | Ranges of Inputs |
Weighted-Average | |||||||||||
Commercial loans held for sale |
$ | 45 | Appraised value | Appraised value | NM | NM | ||||||||||
Costs to sell | NM | 10.0% | ||||||||||||||
Commercial and industrial loans |
405 | Appraised value | Collateral value | NM | NM | |||||||||||
Commercial mortgage loans |
26 | Appraised value | Collateral value | NM | NM | |||||||||||
Commercial leases |
3 | Appraised value | Collateral value | NM | NM | |||||||||||
OREO |
11 | Appraised value | Appraised value | NM | NM | |||||||||||
Bank premises and equipment |
16 | Appraised value | Appraised value | NM | NM | |||||||||||
Operating lease equipment |
56 | Appraised value | Appraised value | NM | NM |
Commercial loans held for sale
During the three and six months ended June 30, 2018, the Bancorp transferred an immaterial amount and $1 million, respectively, of commercial loans from the portfolio to loans held for sale that upon transfer were measured at lower of cost or fair value. During the three and six months ended June 30, 2017, the Bancorp transferred $57 million and $75 million, respectively, of commercial loans from the portfolio to loans held for sale that upon transfer were measured at lower of cost or fair value. These loans had an immaterial amount of fair value adjustments during the three and six months ended June 30, 2018 and $13 million and $30 million of fair value adjustments during the three and six months ended June 30, 2017, respectively. The fair value adjustments were generally based on appraisals of the underlying collateral and were, therefore, classified within Level 3 of the valuation hierarchy. Additionally, fair value adjustments on existing loans held for sale were immaterial for both the three months ended June 30, 2018 and 2017 and $1 million and immaterial for the six months ended June 30, 2018 and 2017, respectively. The fair value adjustments were also based on appraisals of the underlying collateral. The Bancorp recognized an immaterial amount of gains and losses on the sale of commercial loans held for sale during both the three and six months ended June 30, 2018. The Bancorp recognized an immaterial amount of losses and $2 million in losses on the sale of commercial loans held for sale for the three and six months ended June 30, 2017, respectively.
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 Bancorps Chief Risk Officer, in conjunction with the Commercial Line of Business, reviews the third party appraisals for reasonableness. Additionally, the Commercial Line of Business Finance department, which reports to the Bancorps Chief Financial Officer, in conjunction with the Accounting department reviews all loan appraisal values, carry values and vintages.
Commercial loans held for investment
During the three and six months ended June 30, 2018 and 2017, the Bancorp recorded nonrecurring impairment adjustments to certain commercial and industrial loans, commercial mortgage loans and commercial leases held for investment. Larger commercial loans included within aggregate borrower relationship balances exceeding $1 million that exhibit probable or observed credit weaknesses are subject to individual review for impairment. The Bancorp considers the current value of collateral, credit quality of any guarantees, the guarantors 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 Bancorps Chief Risk Officer, is responsible for preparing and reviewing the fair value estimates for commercial loans held for investment.
109
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
OREO
During the three and six months ended June 30, 2018 and 2017, the Bancorp recorded nonrecurring adjustments to certain commercial and residential real estate properties classified as OREO and measured at the lower of carrying amount or fair value. These nonrecurring losses were primarily due to declines in real estate values of the properties recorded in OREO. These losses included $1 million and $2 million in losses, recorded as charge-offs on new OREO properties transferred from loans during the three and six months ended June 30, 2018, respectively, and $1 million and $3 million for the three and six months ended June 30, 2017, respectively. These losses also included an immaterial amount of losses and $2 million in losses for the three and six months ended June 30, 2018, respectively, and an immaterial amount of losses and $2 million in losses for the three and six months ended June 30, 2017, respectively, recorded as negative fair value adjustments on OREO in other noninterest expense in the Condensed Consolidated Statements of Income subsequent to their transfer from loans. As discussed in the following paragraphs, the fair value amounts are generally based on appraisals of the property values, resulting in a classification within Level 3 of the valuation hierarchy. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized. The previous tables reflect the fair value measurements of the properties before deducting the estimated costs to sell.
The Real Estate Valuation department is solely responsible for managing the appraisal process and evaluating the appraisal for commercial properties transferred to OREO. All appraisals on commercial OREO properties are updated on at least an annual basis.
The Real Estate Valuation department reviews the BPO data and internal market information to determine the initial charge-off on residential real estate loans transferred to OREO. Once the foreclosure process is completed, the Bancorp performs an interior inspection to update the initial fair value of the property. These properties are reviewed at least every 30 days after the initial interior inspections are completed. The Asset Manager receives a monthly status report for each property which includes the number of showings, recently sold properties, current comparable listings and overall market conditions.
Bank premises and equipment
The Bancorp performs assessments of the recoverability of long-lived assets when events or changes in circumstances indicate that their carrying values may not be recoverable. These properties were written down to their lower of cost or market values. At least annually thereafter, the Bancorp will review these properties for market fluctuations. The fair value amounts were generally based on appraisals of the property values, resulting in a classification within Level 3 of the valuation hierarchy. Corporate Facilities, which reports to the Bancorps Chief Administrative Officer, in conjunction with Accounting, are responsible for preparing and reviewing the fair value estimates for bank premises and equipment. For further information on bank premises and equipment refer to Note 7.
Operating lease equipment
During the three and six months ended June 30, 2018 and 2017, 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. As part of this ongoing assessment, the Bancorp determined that the carrying values of certain operating lease equipment were not recoverable and as a result, the Bancorp recorded an impairment loss equal to the amount by which the carrying value of the assets exceeded the fair value. The fair value amounts were generally based on appraised values of the assets, resulting in a classification within Level 3 of the valuation hierarchy. The Bancorp recorded net losses of $1 million and $3 million for the three and six months ended June 30, 2018, respectively, and net losses of an immaterial amount and $20 million for the three and six months ended June 30, 2017, respectively, as a reduction to corporate banking revenue in the Condensed Consolidated Statements of Income. The Commercial Leasing department, which reports to the Bancorps Chief Operating Officer, is responsible for preparing and reviewing the fair value estimates for operating lease equipment.
Private equity investments
As a result of adopting ASU 2016-01, effective January 1, 2018, the Bancorp accounts for its private equity investments using the measurement alternative to fair value, except for those accounted for under the equity method of accounting. Under the measurement alternative, the Bancorp carries each investment at its cost basis minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. The Bancorp recognized gains of $16 million and $51 million resulting from observable price changes during the three and six months ended June 30, 2018, respectively. The carrying value of the Bancorps private equity investments as of June 30, 2018 includes a cumulative $35 million of positive adjustments as a result of observable price changes. Because these adjustments are based on observable transactions in inactive markets, they are classified in Level 2 of the fair value hierarchy.
For private equity investments which are accounted for using the measurement alternative to fair value, the Bancorp qualitatively evaluates each investment quarterly to determine if impairment may exist. If necessary, the Bancorp then measures impairment by estimating the value of its investment and comparing that to the investments carrying value, whether or not the Bancorp considers the impairment to be temporary. These valuations are typically developed using a discounted cash flow method, but other methods may be used if more appropriate for the circumstances. These valuations are based on unobservable inputs and therefore are classified in Level 3 of the fair value hierarchy. The Bancorp recognized impairments of $1 million and $11 million during the three and six months ended June 30, 2018, respectively. The carrying value of the Bancorps private equity investments as of June 30, 2018 includes a cumulative $11 million of impairment charges recognized since adoption of the measurement alternative to fair value on January 1, 2018.
The Bancorp recognized $4 million and $10 million of OTTI primarily associated with certain nonconforming investments affected by the Volcker Rule during the three and six months ended June 30, 2018, respectively. The Bancorp performed nonrecurring fair value measurements on a fund by fund basis to determine whether OTTI existed. The Bancorp estimated the fair value of the funds by applying an estimated market discount to the reported net asset value of the fund or through a discounted cash flow analysis. Because the length of time until the investment will become redeemable is generally not certain, these funds were classified within Level 3 of the valuation hierarchy. An adverse change in the reported 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 Bancorps Private Equity department, which reports to the Head of Payments, Strategy and Digital Solutions, in conjunction with Accounting, is responsible for preparing and reviewing the fair value estimates.
110
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
Fair Value Option
The Bancorp elected to measure certain residential mortgage and commercial loans held for sale under the fair value option as allowed under U.S. GAAP. Electing to measure residential mortgage loans held for sale at fair value reduces certain timing differences and better matches changes in the value of these assets with changes in the value of derivatives used as economic hedges for these assets. Electing to measure certain commercial loans held for sale at fair value reduces certain timing differences and better reflects changes in fair value of these assets that are expected to be sold in the short term. Managements intent to sell residential mortgage or commercial loans classified as held for sale may change over time due to such factors as changes in the overall liquidity in markets or changes in characteristics specific to certain loans held for sale. Consequently, these loans may be reclassified to loans held for investment and maintained in the Bancorps loan portfolio. In such cases, the loans will continue to be measured at fair value.
Fair value changes recognized in earnings for residential mortgage loans held at June 30, 2018 and 2017 for which the fair value option was elected, as well as the changes in fair value of the underlying IRLCs, included gains of $18 million and $26 million for the six months ended June 30, 2018 and 2017, respectively. These gains are reported in mortgage banking net revenue in the Condensed Consolidated Statements of Income. Fair value changes recognized in earnings for commercial loans held at June 30, 2018 for which the fair value option was elected included gains of an immaterial amount for both the three and six months ended June 30, 2018. The Bancorp did not hold any commercial loans held for sale during the six months ended June 30, 2017. These gains are reported in corporate banking revenue in the Condensed 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 $1 million and $2 million at June 30, 2018 and December 31, 2017, respectively. Valuation adjustments related to instrument-specific credit risk for commercial loans measured at fair value had an immaterial impact on the fair value of those loans at June 30, 2018. The Bancorp did not hold any commercial loans held for sale at December 31, 2017. Interest on loans measured at fair value is accrued as it is earned using the effective interest method and is reported as interest income in the Condensed Consolidated Statements of Income.
The following table summarizes the difference between the fair value and the unpaid principal balance for residential mortgage and commercial loans measured at fair value as of:
June 30, 2018 ($ in millions) | Aggregate Fair Value |
Aggregate Unpaid Principal Balance |
Difference | |||||||
Residential mortgage loans measured at fair value |
$ | 820 | 802 | 18 | ||||||
Past due loans of 90 days or more |
2 | 2 | - | |||||||
Nonaccrual loans |
1 | 1 | - | |||||||
Commercial loans measured at fair value |
8 | 8 | - | |||||||
December 31, 2017 |
||||||||||
Residential mortgage loans measured at fair value |
$ | 536 | 522 | 14 | ||||||
Past due loans of 90 days or more |
5 | 5 | - | |||||||
Nonaccrual loans |
1 | 1 | - |
111
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
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 Amount |
Fair Value Measurements Using | Total Fair Value | ||||||||||||||||
As of June 30, 2018 ($ in millions) | Level 1 | Level 2 | Level 3 | |||||||||||||||
Financial assets: |
||||||||||||||||||
Cash and due from banks |
$ | 2,052 | 2,052 | - | - | 2,052 | ||||||||||||
Other short-term investments |
1,636 | 1,636 | - | - | 1,636 | |||||||||||||
Other securities |
614 | - | 614 | - | 614 | |||||||||||||
Held-to-maturity securities |
19 | - | - | 19 | 19 | |||||||||||||
Loans and leases held for sale |
117 | - | - | 117 | 117 | |||||||||||||
Portfolio loans and leases: |
||||||||||||||||||
Commercial and industrial loans |
40,858 | - | - | 41,825 | 41,825 | |||||||||||||
Commercial mortgage loans |
6,560 | - | - | 6,493 | 6,493 | |||||||||||||
Commercial construction loans |
4,666 | - | - | 4,710 | 4,710 | |||||||||||||
Commercial leases |
3,765 | - | - | 3,355 | 3,355 | |||||||||||||
Residential mortgage loans |
15,392 | - | - | 15,697 | 15,697 | |||||||||||||
Home equity |
6,560 | - | - | 6,936 | 6,936 | |||||||||||||
Automobile loans |
8,899 | - | - | 8,632 | 8,632 | |||||||||||||
Credit card |
2,146 | - | - | 2,518 | 2,518 | |||||||||||||
Other consumer loans |
1,955 | - | - | 2,047 | 2,047 | |||||||||||||
Unallocated ALLL |
(108 | ) | - | - | - | - | ||||||||||||
Total portfolio loans and leases, net |
$ | 90,693 | - | - | 92,213 | 92,213 | ||||||||||||
Financial liabilities: |
||||||||||||||||||
Deposits |
$ | 104,131 | - | 104,064 | - | 104,064 | ||||||||||||
Federal funds purchased |
597 | 597 | - | - | 597 | |||||||||||||
Other short-term borrowings |
1,763 | - | 1,763 | - | 1,763 | |||||||||||||
Long-term debt |
14,321 | 14,223 | 429 | - | 14,652 | |||||||||||||
| ||||||||||||||||||
Net Carrying Amount |
Fair Value Measurements Using | Total Fair Value | ||||||||||||||||
As of December 31, 2017 ($ in millions) | Level 1 | Level 2 | Level 3 | |||||||||||||||
Financial assets: |
||||||||||||||||||
Cash and due from banks |
$ | 2,514 | 2,514 | - | - | 2,514 | ||||||||||||
Other short-term investments |
2,753 | 2,753 | - | - | 2,753 | |||||||||||||
Other securities |
612 | - | 612 | - | 612 | |||||||||||||
Held-to-maturity securities |
24 | - | - | 24 | 24 | |||||||||||||
Loans and leases held for sale |
93 | - | - | 93 | 93 | |||||||||||||
Portfolio loans and leases: |
||||||||||||||||||
Commercial and industrial loans |
40,519 | - | - | 41,718 | 41,718 | |||||||||||||
Commercial mortgage loans |
6,539 | - | - | 6,490 | 6,490 | |||||||||||||
Commercial construction loans |
4,530 | - | - | 4,560 | 4,560 | |||||||||||||
Commercial leases |
4,054 | - | - | 3,705 | 3,705 | |||||||||||||
Residential mortgage loans |
15,365 | - | - | 15,996 | 15,996 | |||||||||||||
Home equity |
6,968 | - | - | 7,410 | 7,410 | |||||||||||||
Automobile loans |
9,074 | - | - | 8,832 | 8,832 | |||||||||||||
Credit card |
2,182 | - | - | 2,616 | 2,616 | |||||||||||||
Other consumer loans |
1,526 | - | - | 1,621 | 1,621 | |||||||||||||
Unallocated ALLL |
(120 | ) | - | - | - | - | ||||||||||||
Total portfolio loans and leases, net |
$ | 90,637 | - | - | 92,948 | 92,948 | ||||||||||||
Financial liabilities: |
||||||||||||||||||
Deposits |
$ | 103,162 | - | 103,123 | - | 103,123 | ||||||||||||
Federal funds purchased |
174 | 174 | - | - | 174 | |||||||||||||
Other short-term borrowings |
4,012 | - | 4,012 | - | 4,012 | |||||||||||||
Long-term debt |
14,904 | 15,045 | 529 | - | 15,574 |
112
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
22. Business Segments
The Bancorp reports on four business segments: Commercial Banking, Branch Banking, Consumer Lending and Wealth and Asset Management. Results of the Bancorps 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 Bancorps business segments are not necessarily comparable with similar information for other financial institutions. The Bancorp refines its methodologies from time to time as managements accounting practices and businesses change.
The Bancorp manages interest rate risk centrally at the corporate level. By employing an FTP methodology, the business segments are insulated from most benchmark interest rate volatility, enabling them to focus on serving customers through the origination of loans and acceptance of deposits. The FTP methodology assigns charge rates and credit rates to classes of assets and liabilities, respectively, based on the estimated amount and timing of the cash flows for each transaction. Assigning the FTP rate based on matching the duration of cash flows allocates interest income and interest expense to each business segment so its resulting net interest income is insulated from future changes in benchmark interest rates. The Bancorps FTP methodology also allocates the contribution to net interest income of the asset-generating and deposit-providing businesses on a duration-adjusted basis to better attribute the driver of the performance. As the asset and liability durations are not perfectly matched, the residual impact of the FTP methodology is captured in General Corporate and Other. The charge and credit rates are determined using the FTP rate curve, which is based on an estimate of Fifth Thirds marginal borrowing cost in the wholesale funding markets. The FTP curve is constructed using the U.S. swap curve, brokered CD pricing and unsecured debt pricing.
The Bancorp adjusts the FTP charge and credit rates as dictated by changes in interest rates for various interest-earning assets and interest-bearing liabilities and by the review of behavioral assumptions, such as prepayment rates on interest-earning assets and the estimated durations for indeterminate-lived deposits. Key assumptions, including the credit rates provided for deposit accounts, are reviewed annually. Credit rates for deposit products and charge rates for loan products may be reset more frequently in response to changes in market conditions. The credit rates for several deposit products were reset January 1, 2018 to reflect the current market rates and updated market assumptions. These rates were generally higher than those in place during 2017, thus net interest income for deposit-providing business segments was positively impacted during 2018. FTP charge rates on assets were affected by the prevailing level of interest rates and by the duration and repricing characteristics of the portfolio. As overall market rates increased, the FTP charge increased for asset-generating business segments during 2018.
The Bancorps methodology for allocating provision for loan and lease losses expense to the business segments includes charges or benefits associated with changes in criticized commercial loan levels in addition to actual net charge-offs experienced by the loans and leases owned by each business segment. Provision for loan and lease losses expense attributable to loan and lease growth and changes in ALLL factors is captured in General Corporate and Other. The financial results of the business segments include allocations for shared services and headquarters expenses. Additionally, the business segments form synergies by taking advantage of cross-sell opportunities and funding operations by accessing the capital markets as a collective unit.
The results of operations and financial position for the three and six months ended June 30, 2017 were adjusted to reflect changes in internal expense allocation methodologies.
The following is a description of each of the Bancorps business segments and the products and services they provide to their respective client bases.
Commercial Banking offers credit intermediation, cash management and financial services to large and middle-market businesses and government and professional customers. In addition to the traditional lending and depository offerings, Commercial Banking products and services include global cash management, foreign exchange and international trade finance, derivatives and capital markets services, asset-based lending, real estate finance, public finance, commercial leasing and syndicated finance.
Branch Banking provides a full range of deposit and loan and lease products to individuals and small businesses through 1,158 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 Bancorps 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.
Wealth and Asset Management provides a full range of investment alternatives for individuals, companies and not-for-profit organizations. Wealth and Asset Management is made up of five main businesses: FTS, an indirect wholly-owned subsidiary of the Bancorp; ClearArc Capital, Inc., an indirect wholly-owned subsidiary of the Bancorp; Fifth Third Insurance Agency, Inc., an indirect wholly-owned subsidiary of the Bancorp; Fifth Third Private Bank; and Fifth Third Institutional Services. FTS offers full service retail brokerage services to individual clients and broker-dealer services to the institutional marketplace. ClearArc Capital, Inc. provides asset management services. Fifth Third Insurance Agency, Inc. assists clients with their financial and risk management needs. Fifth Third Private Bank offers holistic strategies to affluent clients in wealth planning, investing, insurance and wealth protection. Fifth Third Institutional Services provides advisory services for institutional clients including states and municipalities.
113
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
The following tables present the results of operations and assets by business segment for the three months ended:
June 30, 2018 ($ in millions) | Commercial Banking |
Branch Banking |
Consumer Lending |
Wealth and Asset |
General Corporate and Other |
Eliminations | Total | |||||||||||||||||||||
Net interest income |
$ | 427 | 499 | 59 | 45 | (10 | ) | - | 1,020 | |||||||||||||||||||
Provision for (benefit from) loan and lease losses |
(10 | ) | 47 | 8 | (11 | ) | (1 | ) | - | 33 | ||||||||||||||||||
Net interest income after provision for loan and lease losses |
437 | 452 | 51 | 56 | (9 | ) | - | 987 | ||||||||||||||||||||
Noninterest income: |
||||||||||||||||||||||||||||
Service charges on deposits |
70 | 67 | - | - | - | - | 137 | |||||||||||||||||||||
Wealth and asset management revenue |
1 | 37 | - | 104 | - | (34)(a) | 108 | |||||||||||||||||||||
Corporate banking revenue |
119 | 1 | - | - | - | - | 120 | |||||||||||||||||||||
Card and processing revenue |
14 | 69 | - | 1 | - | - | 84 | |||||||||||||||||||||
Mortgage banking net revenue |
- | 1 | 52 | - | - | - | 53 | |||||||||||||||||||||
Other noninterest income(b) |
25 | (8 | ) | 4 | 4 | 225 | - | 250 | ||||||||||||||||||||
Securities losses, net |
- | - | - | - | (5 | ) | - | (5 | ) | |||||||||||||||||||
Securities losses, net - non-qualifying hedges on MSRs |
- | - | (4 | ) | - | - | - | (4 | ) | |||||||||||||||||||
Total noninterest income |
229 | 167 | 52 | 109 | 220 | (34 | ) | 743 | ||||||||||||||||||||
Noninterest expense: |
||||||||||||||||||||||||||||
Salaries, wages and incentives |
71 | 111 | 42 | 43 | 204 | - | 471 | |||||||||||||||||||||
Employee benefits |
9 | 26 | 10 | 7 | 26 | - | 78 | |||||||||||||||||||||
Net occupancy expense |
6 | 44 | 3 | 3 | 18 | - | 74 | |||||||||||||||||||||
Technology and communications |
2 | 1 | 1 | - | 63 | - | 67 | |||||||||||||||||||||
Equipment expense |
6 | 12 | - | - | 12 | - | 30 | |||||||||||||||||||||
Card and processing expense |
1 | 30 | - | - | (1 | ) | - | 30 | ||||||||||||||||||||
Other noninterest expense |
263 | 208 | 51 | 70 | (271 | ) | (34 | ) | 287 | |||||||||||||||||||
Total noninterest expense |
358 | 432 | 107 | 123 | 51 | (34 | ) | 1,037 | ||||||||||||||||||||
Income (loss) before income taxes |
308 | 187 | (4 | ) | 42 | 160 | - | 693 | ||||||||||||||||||||
Applicable income tax expense (benefit) |
19 | 40 | (1 | ) | 9 | 40 | - | 107 | ||||||||||||||||||||
Net income (loss) |
289 | 147 | (3 | ) | 33 | 120 | - | 586 | ||||||||||||||||||||
Total goodwill |
$ | 630 | 1,655 | - | 177 | - | - | 2,462 | ||||||||||||||||||||
Total assets |
$ | 58,763 | 60,281 | 22,128 | 9,270 | (9,747)( | c) | - | 140,695 |
(a) | Revenue sharing agreements between wealth and asset management and branch banking are eliminated in the Condensed Consolidated Statements of Income. |
(b) | Includes impairment charges of $33 for branches and land. For more information refer to Note 7 and Note 21. |
(c) | Includes bank premises and equipment of $37 classified as held for sale. For more information refer to Note 7. |
June 30, 2017 ($ in millions) | Commercial Banking |
Branch Banking |
Consumer Lending |
Wealth and Asset |
General Corporate and Other |
Eliminations | Total | |||||||||||||||||||||
Net interest income |
$ | 415 | 437 | 59 | 37 | (9 | ) | - | 939 | |||||||||||||||||||
Provision for (benefit from) loan and lease losses |
22 | 39 | 7 | (1 | ) | (15 | ) | - | 52 | |||||||||||||||||||
Net interest income after provision for loan and lease losses |
393 | 398 | 52 | 38 | 6 | - | 887 | |||||||||||||||||||||
Noninterest income: |
||||||||||||||||||||||||||||
Service charges on deposits |
73 | 66 | - | - | - | - | 139 | |||||||||||||||||||||
Wealth and asset management revenue |
1 | 35 | - | 100 | - | (33)( | a) | 103 | ||||||||||||||||||||
Corporate banking revenue |
100 | 1 | - | - | - | - | 101 | |||||||||||||||||||||
Card and processing revenue |
14 | 64 | - | 1 | - | - | 79 | |||||||||||||||||||||
Mortgage banking net revenue |
- | 1 | 54 | - | - | - | 55 | |||||||||||||||||||||
Other noninterest income(b) |
40 | 22 | 6 | - | 17 | - | 85 | |||||||||||||||||||||
Securities gains, net - non-qualifying hedges on MSRs |
- | - | 2 | - | - | - | 2 | |||||||||||||||||||||
Total noninterest income |
228 | 189 | 62 | 101 | 17 | (33 | ) | 564 | ||||||||||||||||||||
Noninterest expense: |
||||||||||||||||||||||||||||
Salaries, wages and incentives |
60 | 104 | 40 | 37 | 156 | - | 397 | |||||||||||||||||||||
Employee benefits |
9 | 26 | 10 | 7 | 34 | - | 86 | |||||||||||||||||||||
Net occupancy expense |
7 | 43 | 3 | 2 | 15 | - | 70 | |||||||||||||||||||||
Technology and communications |
2 | 1 | 1 | - | 53 | - | 57 | |||||||||||||||||||||
Equipment expense |
4 | 13 | - | - | 12 | - | 29 | |||||||||||||||||||||
Card and processing expense |
1 | 33 | - | - | (1 | ) | - | 33 | ||||||||||||||||||||
Other noninterest expense |
247 | 196 | 55 | 67 | (247 | ) | (33 | ) | 285 | |||||||||||||||||||
Total noninterest expense |
330 | 416 | 109 | 113 | 22 | (33 | ) | 957 | ||||||||||||||||||||
Income before income taxes |
291 | 171 | 5 | 26 | 1 | - | 494 | |||||||||||||||||||||
Applicable income tax expense |
54 | 60 | 2 | 9 | 2 | - | 127 | |||||||||||||||||||||
Net income (loss) |
237 | 111 | 3 | 17 | (1 | ) | - | 367 | ||||||||||||||||||||
Total goodwill |
$ | 613 | 1,655 | - | 155 | - | - | 2,423 | ||||||||||||||||||||
Total assets |
$ | 57,766 | 57,396 | 22,442 | 8,238 | (4,775)( | c) | - | 141,067 |
(a) | Revenue sharing agreements between wealth and asset management and branch banking are eliminated in the Condensed Consolidated Statements of Income. |
(b) | Includes impairment charges of $2 for branches and land. For more information refer to Note 7 and Note 21. |
(c) | Includes bank premises and equipment of $41 classified as held for sale. For more information refer to Note 7. |
114
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
The following tables present the results of operations and assets by business segment for the six months ended:
June 30, 2018 ($ in millions) |
Commercial Banking |
Branch Banking |
Consumer Lending |
Wealth and Asset Management |
General Corporate and Other |
Eliminations |
Total |
|||||||||||||||||||||
Net interest income |
$ | 846 | 965 | 118 | 88 | (1) | - | 2,016 | ||||||||||||||||||||
Provision for (benefit from) loan and lease losses |
(29) | 90 | 20 | 5 | (30) | - | 56 | |||||||||||||||||||||
Net interest income after provision for loan and lease losses |
875 | 875 | 98 | 83 | 29 | - | 1,960 | |||||||||||||||||||||
Noninterest income: |
||||||||||||||||||||||||||||
Service charges on deposits |
139 | 134 | - | 1 | 1 | - | 275 | |||||||||||||||||||||
Wealth and asset management revenue |
2 | 74 | - | 214 | - | (69)(a) | 221 | |||||||||||||||||||||
Corporate banking revenue |
205 (c) | 2 | - | 1 | - | - | 208 | |||||||||||||||||||||
Card and processing revenue |
28 | 133 | - | 2 | - | - | 163 | |||||||||||||||||||||
Mortgage banking net revenue |
- | 3 | 106 | - | - | - | 109 | |||||||||||||||||||||
Other noninterest income(b) |
73 | 7 | 7 | 9 | 612 | - | 708 | |||||||||||||||||||||
Securities losses, net |
- | - | - | - | (15) | - | (15) | |||||||||||||||||||||
Securities losses, net - non-qualifying hedges on MSRs |
- | - | (17 | ) | - | - | - | (17) | ||||||||||||||||||||
Total noninterest income |
447 | 353 | 96 | 227 | 598 | (69) | 1,652 | |||||||||||||||||||||
Noninterest expense: |
||||||||||||||||||||||||||||
Salaries, wages and incentives |
141 | 220 | 82 | 87 | 388 | - | 918 | |||||||||||||||||||||
Employee benefits |
27 | 53 | 20 | 17 | 71 | - | 188 | |||||||||||||||||||||
Net occupancy expense |
13 | 88 | 5 | 6 | 37 | - | 149 | |||||||||||||||||||||
Technology and communications |
4 | 3 | 2 | - | 126 | - | 135 | |||||||||||||||||||||
Equipment expense |
11 | 25 | - | - | 25 | - | 61 | |||||||||||||||||||||
Card and processing expense |
2 | 59 | - | - | (1) | - | 60 | |||||||||||||||||||||
Other noninterest expense |
545 | 423 | 102 | 144 | (573) | (69) | 572 | |||||||||||||||||||||
Total noninterest expense |
743 | 871 | 211 | 254 | 73 | (69) | 2,083 | |||||||||||||||||||||
Income (loss) before income taxes |
579 | 357 | (17 | ) | 56 | 554 | - | 1,529 | ||||||||||||||||||||
Applicable income tax expense (benefit) |
32 | 75 | (3 | ) | 12 | 123 | - | 239 | ||||||||||||||||||||
Net income (loss) |
547 | 282 | (14 | ) | 44 | 431 | - | 1,290 | ||||||||||||||||||||
Total goodwill |
$ | 630 | 1,655 | - | 177 | - | - | 2,462 | ||||||||||||||||||||
Total assets |
$ | 58,763 | 60,281 | 22,128 | 9,270 | (9,747)(d) | - | 140,695 |
(a) | Revenue sharing agreements between wealth and asset management and branch banking are eliminated in the Condensed Consolidated Statements of Income. |
(b) | Includes impairment charges of $41 for branches and land. For more information refer to Note 7 and Note 21. |
(c) | Includes impairment charges of $2 for operating lease equipment. For more information refer to Note 21. |
(d) | Includes bank premises and equipment of $37 classified as held for sale. For more information refer to Note 7. |
115
Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
June 30, 2017 ($ in millions) |
Commercial Banking |
Branch Banking |
Consumer Lending |
Wealth and Asset Management |
General Corporate and Other |
Eliminations |
Total |
|||||||||||||||||||||
Net interest income |
$ | 839 | 867 | 120 | 75 | (29 | ) | - | 1,872 | |||||||||||||||||||
Provision for (benefit from) loan and lease losses |
29 | 80 | 22 | 3 | (8 | ) | - | 126 | ||||||||||||||||||||
Net interest income after provision for loan and lease losses |
810 | 787 | 98 | 72 | (21 | ) | - | 1,746 | ||||||||||||||||||||
Total noninterest income |
||||||||||||||||||||||||||||
Service charges on deposits |
146 | 130 | - | 1 | - | - | 277 | |||||||||||||||||||||
Wealth and asset management revenue |
2 | 71 | - | 205 | - | (67)(a | ) | 211 | ||||||||||||||||||||
Corporate banking revenue |
173 (c) | 3 | - | - | (1 | ) | - | 175 | ||||||||||||||||||||
Card and processing revenue |
28 | 122 | - | 3 | - | - | 153 | |||||||||||||||||||||
Mortgage banking net revenue |
- | 3 | 105 | - | - | - | 108 | |||||||||||||||||||||
Other noninterest income(b) |
80 | 45 | 9 | - | 26 | - | 160 | |||||||||||||||||||||
Securities gains, net |
- | - | - | - | 1 | - | 1 | |||||||||||||||||||||
Securities gains, net - non-qualifying hedges on MSRs |
- | - | 2 | - | - | - | 2 | |||||||||||||||||||||
Total noninterest income |
429 | 374 | 116 | 209 | 26 | (67) | 1,087 | |||||||||||||||||||||
Noninterest expense |
||||||||||||||||||||||||||||
Salaries, wages and incentives |
127 | 208 | 77 | 76 | 320 | - | 808 | |||||||||||||||||||||
Employee benefits |
27 | 53 | 20 | 16 | 80 | - | 196 | |||||||||||||||||||||
Net occupancy expense |
13 | 90 | 5 | 5 | 35 | - | 148 | |||||||||||||||||||||
Technology and communications |
5 | 2 | 1 | - | 108 | - | 116 | |||||||||||||||||||||
Equipment expense |
8 | 26 | - | - | 23 | - | 57 | |||||||||||||||||||||
Card and processing expense |
2 | 62 | - | - | (1 | ) | - | 63 | ||||||||||||||||||||
Other noninterest expense |
507 | 388 | 110 | 134 | (517 | ) | (67) | 555 | ||||||||||||||||||||
Total noninterest expense |
689 | 829 | 213 | 231 | 48 | (67) | 1,943 | |||||||||||||||||||||
Income (loss) before income taxes |
550 | 332 | 1 | 50 | (43 | ) | - | 890 | ||||||||||||||||||||
Applicable income tax expense (benefit) |
97 | 117 | - | 17 | (13 | ) | - | 218 | ||||||||||||||||||||
Net income (loss) |
453 | 215 | 1 | 33 | (30 | ) | - | 672 | ||||||||||||||||||||
Total goodwill |
$ | 613 | 1,655 | - | 155 | - | - | 2,423 | ||||||||||||||||||||
Total assets |
$ | 57,766 | 57,396 | 22,442 | 8,238 | (4,775)(d | ) | - | 141,067 |
(a) | Revenue sharing agreements between wealth and asset management and branch banking are eliminated in the Condensed Consolidated Statements of Income. |
(b) | Includes impairment charges of $5 for branches and land. For more information refer to Note 7 and Note 21. |
(c) | Includes impairment charges of $31 for operating lease equipment. For more information refer to Note 21. |
(d) | Includes bank premises and equipment of $41 classified as held for sale. For more information refer to Note 7. |
23. Pending Acquisition
On May 21, 2018, Fifth Third Bancorp and MB Financial, Inc. jointly announced the signing of a definitive merger agreement under which, on the terms and conditions set forth therein, MB Financial, Inc. (MB Financial) will merge with a subsidiary of Fifth Third Bancorp in a transaction valued at approximately $4.7 billion based on the closing price of Fifth Thirds common shares on May 18, 2018. MB Financial is headquartered in Chicago, Illinois with reported assets of approximately $20 billion as of March 31, 2018 and is the holding company of MB Financial Bank, N.A. In conjunction with the closing of the transaction, two members of MB Financials Board of Directors are expected to join the Fifth Third Bancorp Board.
Under the terms of the agreement, common shareholders of MB Financial will receive 1.45 shares of Fifth Third common stock and $5.54 in cash for each share of MB Financial common stock, which had an implied value of $54.20 per share of MB Financial common stock, based on the closing price of Fifth Thirds common shares on May 18, 2018. The exchange ratio of Fifth Third common shares for MB Financial common shares is fixed and will not adjust based on changes in Fifth Thirds share trading price.
The transaction is subject to the satisfaction of all customary closing conditions, including regulatory approval as well as the approval of MB Financial shareholders. The transaction is expected to close in the first quarter of 2019.
24. Subsequent Events
On July 26, 2018 the Bank issued and sold $1.55 billion in aggregate principal amount of unsecured senior bank notes. The bank notes consisted of $500 million of 3.35% senior fixed-rate notes, with a maturity of three years, due on July 26, 2021; $300 million of senior floating-rate notes at three-month LIBOR plus 44 bps, with a maturity of three years, due on July 26, 2021; and $750 million of 3.95% senior fixed-rate notes, with a maturity of seven years, due July 28, 2025. The Bank entered into interest rate swaps to convert the fixed-rate notes due in 2021 and 2025 to a floating-rate, which resulted in an effective interest rate of one-month LIBOR plus 53 bps and 104 bps, respectively. These bank notes will be redeemable by the Bank, in whole or in part, on or after the date that is 30 days prior to the maturity date at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest up to, but excluding, the redemption date.
Between July 20, 2018 and August 2, 2018, the Bancorp entered into repurchase transactions of 16,945,020 shares, or approximately $500 million, of its outstanding common stock through the open market, which settled between July 24, 2018 and August 6, 2018.
116
Refer to Note 16 of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 for information regarding legal proceedings.
The following is a change to the risk factors as previously disclosed in the Registrants Annual Report on Form 10-K for the year ended December 31, 2017.
The acquisition of MB Financial may dilute current shareholders ownership of Fifth Third and may cause Fifth Third to become more susceptible to adverse economic events.
Fifth Third will issue a substantial number of additional shares of stock in its merger with MB Financial, which will dilute current shareholders ownership interests. Fifth Third will also use substantial cash or other liquid assets or incur debt to fund the merger. In those events, Fifth Third could become more susceptible to economic downturns, market conditions and competitive pressures.
Fifth Third and MB Financial will incur transaction and integration costs in connection with the merger.
Each of Fifth Third and MB Financial has incurred and expects that it will incur significant, non-recurring costs in connection with consummating the merger. In addition, Fifth Third will incur integration costs following the completion of the merger as Fifth Third integrates the businesses of the two companies, including facilities and systems consolidation costs and employment-related costs. There can be no assurances that the expected benefits and efficiencies related to the integration of the businesses will be realized to offset these transaction and integration costs over time. See the risk factor entitled Fifth Third May Fail to Realize the Anticipated Benefits of the Merger below. Fifth Third and MB Financial may also incur additional costs to maintain employee morale and to retain key employees. Fifth Third and MB Financial will also incur significant legal, financial advisor, accounting, banking and consulting fees, fees relating to regulatory filings and notices, SEC filing fees, printing and mailing fees and other costs associated with the merger. Some of these costs are payable regardless of whether the merger is completed.
Fifth Third may fail to realize the anticipated benefits of the merger.
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 its acquisition of MB Financial, Inc. Additionally, integration of MB Financial may require Fifth Third to devote substantial time and resources and may cause this acquisition to be unprofitable or cause Fifth Third to be unable to pursue other business opportunities.
Fifth Third and MB Financial have operated and, until the completion of the merger, will continue to operate, independently. The success of the merger, including anticipated benefits and cost savings, will depend on, among other things, Fifth Thirds ability to combine the businesses of Fifth Third and MB Financial in a manner that permits growth opportunities, including, among other things, enhanced revenues and revenue synergies, an expanded market reach and operating efficiencies, and does not materially disrupt the existing customer relationships of Fifth Third or MB Financial or result in decreased revenues due to any loss of customers. If Fifth Third is not able to successfully achieve these objectives, the anticipated benefits of the merger may not be realized fully or at all or may take longer to realize than expected. Failure to achieve these anticipated benefits could result in increased costs, decreases in the amount of expected revenues and diversion of managements time and energy and could have an adverse effect on the combined companys business, financial condition, operating results and prospects.
Certain employees may not be employed by Fifth Third after the merger. In addition, employees that Fifth Third wishes to retain may elect to terminate their employment as a result of the merger, which could delay or disrupt the integration process. It is possible that the integration process could result in the disruption of Fifth Thirds or MB Financials ongoing businesses or cause inconsistencies in standards, controls, procedures and policies that adversely affect the ability of Fifth Third or MB Financial to maintain relationships with customers and employees or to achieve the anticipated benefits of the merger.
After completing the acquisition, Fifth Third may find 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 Thirds risk of regulatory action or restrictions related to the operations of the acquired business.
Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated or cannot be met.
Before the transactions contemplated in the merger agreement can be completed, various approvals must be obtained from the bank regulatory and other governmental authorities. In deciding whether to grant these approvals, the relevant governmental entities will consider a variety of factors, including the regulatory standing of each of the parties and the effect of the merger on competition. An adverse development in either partys regulatory standing or other factors could result in an inability to obtain one or more of the required regulatory approvals or delay receipt of required approvals.
117
The Federal Reserve Board has stated that if supervisory issues arise during processing of an application for approval of a merger transaction, a banking organization will be expected to withdraw its application pending resolution of such supervisory concerns. Accordingly, if there is an adverse development in either partys regulatory standing, Fifth Third may be required to withdraw its application for approval of the proposed merger and, if possible, resubmit it after the applicable supervisory concerns have been resolved.
The terms of the approvals that are granted may impose conditions, limitations, obligations or costs, or place restrictions on the conduct of the combined companys business or require changes to the terms of the transactions contemplated by the merger agreement. There can be no assurance that regulators will not impose any such conditions, limitations, obligations or restrictions and that such conditions, limitations, obligations or restrictions will not have the effect of delaying the completion of any of the transactions contemplated by the merger agreement, imposing additional material costs on or materially limiting the revenues of the combined company following the merger or otherwise reduce the anticipated benefits of the merger if the merger were consummated successfully within the expected timeframe. Nor can there be any assurance that any such conditions, terms, obligations or restrictions will not result in the delay or abandonment of the merger. Additionally, the completion of the merger is conditioned on the absence of certain orders, injunctions or decrees by any court or regulatory agency of competent jurisdiction that would prohibit or make illegal the completion of any of the transactions contemplated by the merger agreement.
Fifth Third and MB Financial believe that the proposed transactions should not raise significant regulatory concerns and that Fifth Third will be able to obtain all requisite regulatory approvals in a timely manner. However, the processing time for obtaining regulatory approvals for mergers of banking institutions, particularly for larger institutions, has increased since the financial crisis. In addition, despite the parties commitments to use their reasonable best efforts to comply with conditions imposed by regulatory entities, under the terms of the merger agreement, Fifth Third and MB Financial will not be required to take actions that would reasonably be expected to have a material adverse effect on Fifth Third and its subsidiaries, taken as a whole, after giving effect to the merger (measured on a scale relative to MB Financial and its subsidiaries, taken as a whole).
The merger agreement may be terminated in accordance with its terms and the merger may not be completed.
The merger agreement is subject to a number of conditions which must be fulfilled in order to complete the merger. Those conditions include: approval of the merger and charter amendment by the MB Financial common stockholders, receipt of requisite regulatory approvals, absence of orders prohibiting completion of any of the proposed transactions, effectiveness of the registration statement of which this proxy statement/prospectus is a part, approval of the Fifth Third common shares to be issued in connection with the merger for listing on the NASDAQ, the accuracy of the representations and warranties by both parties (subject to the materiality standards set forth in the merger agreement) and the performance by both parties of their covenants and agreements, and the receipt by both parties of legal opinions from their respective tax counsels. These conditions to the closing of the merger may not be fulfilled in a timely manner or at all, and, accordingly, the merger may not be completed. In addition, the parties can mutually decide to terminate the merger agreement at any time, before or after stockholder approval, or Fifth Third or MB Financial may elect to terminate the merger agreement in certain other circumstances.
Unregistered Sales of Equity Securities and Use of Proceeds (Item 2)
Refer to the Capital Management section within Managements Discussion and Analysis in Part I, Item 2 for information regarding purchases and sales of equity securities by the Bancorp during the second quarter of 2018.
Defaults Upon Senior Securities (Item 3)
None.
Mine Safety Disclosures (Item 4)
Not applicable.
Other Information (Item 5)
None.
2.1 |
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3.1 |
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3.2 |
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4.1 |
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4.2 |
||
10.1 |
||
12.1 |
Computations of Consolidated Ratios of Earnings to Fixed Charges. | |
12.2 |
118
31(i) |
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer. | |
31(ii) |
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer. | |
32(i) |
||
32(ii) |
||
101 |
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Changes in Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) the Notes to Condensed Consolidated Financial Statements tagged as blocks of text and in detail. |
*An application for confidential treatment for selected portions of this exhibit has been filed with the Securities and Exchange Commission.
119
Pursuant to the requirements 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 |
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Date: August 8, 2018 |
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/s/ Tayfun Tuzun |
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Tayfun Tuzun |
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Executive Vice President and |
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Chief Financial Officer |
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(Duly Authorized Officer & Principal Financial Officer) |
120
Exhibit 10.1
A MARK OF [**] IN THE TEXT OF THIS EXHIBIT INDICATES THAT CONFIDENTIAL
MATERIAL HAS BEEN OMITTED. THIS EXHIBIT, INCLUDING THE OMITTED PORTIONS, HAS
BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE
24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
SCHEDULE A
SUPPLEMENTAL CONFIRMATION
To: | Fifth Third Bancorp Fifth Third Center Cincinnati, Ohio 45263 |
|||
From: | Morgan Stanley & Co. LLC | |||
Subject: | Accelerated Stock Buyback | |||
Date: | May 23, 2018 |
The purpose of this Supplemental Confirmation is to confirm the terms and conditions of the Transaction entered into between Morgan Stanley & Co. LLC(MSCO) and Fifth Third Bancorp (Counterparty) (together, the Contracting Parties) on the Trade Date specified below. This Supplemental Confirmation is a binding contract between MSCO and Counterparty as of the relevant Trade Date for the Transaction referenced below.
1. This Supplemental Confirmation supplements, forms part of, and is subject to the Master Confirmation dated as of July 29, 2015 (the Master Confirmation) between the Contracting Parties, as amended and supplemented from time to time. All provisions contained in the Master Confirmation govern this Supplemental Confirmation except as expressly modified below.
2. The terms of the Transaction to which this Supplemental Confirmation relates are as follows:
Trade Date: |
May 23, 2018 | |||
Forward Price Adjustment Amount: |
[**]* | |||
Calculation Period Start Date: |
May 24, 2018 | |||
Scheduled Termination Date: |
June 15, 2018 | |||
First Acceleration Date: |
[**]* | |||
Prepayment Amount: |
$235,000,000 | |||
Prepayment Date: |
May 25, 2018 | |||
Initial Shares: |
6,402,244 Shares; provided that if, in connection with the Transaction, MSCO is unable to borrow or otherwise acquire a number of Shares equal to the Initial Shares for delivery to Counterparty on the Initial Share Delivery Date, the Initial Shares delivered on the Initial Share Delivery Date shall be reduced to such number of Shares that MSCO is able to so borrow or otherwise acquire, and MSCO shall use reasonable good faith efforts to borrow or otherwise acquire a number of Shares equal to the shortfall in the Initial Share Delivery and to deliver such additional Shares as soon as reasonably practicable. The aggregate of all Shares delivered to Counterparty in respect of the Transaction pursuant to this paragraph shall be the Initial Shares for purposes of Number of Shares to be Delivered in the Master Confirmation. |
* CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
A - 1
Initial Share Delivery Date: |
May 25, 2018 | |||
Ordinary Dividend Amount: |
[**]* | |||
Scheduled Ex-Dividend Dates: |
June 28, 2018 | |||
Termination Price: |
[**]* | |||
Additional Relevant Days: |
The 5th Exchange Business Days immediately following the Calculation Period. |
3. Counterparty represents and warrants to MSCO that neither it nor any affiliated purchaser (as defined in Rule 10b-18 under the Exchange Act) has made any purchases of blocks pursuant to the proviso in Rule 10b-18(b)(4) under the Exchange Act during either (i) the four full calendar weeks immediately preceding the Trade Date or (ii) during the calendar week in which the Trade Date occurs.
4. This Supplemental Confirmation may be executed in any number of counterparts, all of which shall constitute one and the same instrument, and any party hereto may execute this Supplemental Confirmation by signing and delivering one or more counterparts.
[Remainder of Page Intentionally Blank]
* CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
A - 2
Counterparty hereby agrees (a) to check this Supplemental Confirmation carefully and immediately upon receipt so that errors or discrepancies can be promptly identified and rectified and (b) to confirm that the foregoing (in the exact form provided by MSCO) correctly sets forth the terms of the agreement between MSCO and Counterparty with respect to any particular Transaction to which this Master Confirmation relates, by manually signing this Master Confirmation or this page hereof as evidence of agreement to such terms and providing the other information requested herein and immediately returning an executed copy to MSCO Bank Securities Inc., Facsimile No (212) 507-4338
Yours faithfully, |
MORGAN STANLEY & CO. LLC |
By: /s/ DARREN MCCARLEY |
Name: Darren McCarley |
Title: Managing Director |
Agreed and Accepted By: | ||
FIFTH THIRD BANCORP | ||
By: | /s/ JAMES C. LEONARD | |
Name: James C. Leonard | ||
Title: Treasurer |
[Signature Page to Supplemental Confirmation]
Exhibit 12.1
Fifth Third Bancorp
Computations of Consolidated Ratios of Earnings to Fixed Charges
($ in millions)
Three Months Ended June 30, 2018 |
Six Months Ended June 30, 2018 |
|||||||||||
Excluding Interest on Deposits: |
||||||||||||
Fixed Charges: |
||||||||||||
Interest Expense (Excluding Interest On Deposits) |
$130 | $243 | ||||||||||
One-Third of Rents, Net of Income from Subleases |
8 | 15 | ||||||||||
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|
|
|
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Total Fixed Charges |
$138 | $258 | ||||||||||
|
|
|
|
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Earnings: |
||||||||||||
Income Before Income Taxes |
$693 | $1,529 | ||||||||||
Fixed Charges |
138 | 258 | ||||||||||
|
|
|
|
|||||||||
Total Earnings |
$831 | $1,787 | ||||||||||
|
|
|
|
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Ratio of Earnings to Fixed Charges, Excluding Interest on Deposits |
6.02x | 6.93x | ||||||||||
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|
|
|
|||||||||
Including Interest on Deposits: |
||||||||||||
Fixed Charges: |
||||||||||||
Interest Expense |
$249 | $458 | ||||||||||
One-Third of Rents, Net of Income from Subleases |
8 | 15 | ||||||||||
|
|
|
|
|||||||||
Total Fixed Charges |
$257 | $473 | ||||||||||
|
|
|
|
|||||||||
Earnings: |
||||||||||||
Income Before Income Taxes |
$693 | $1,529 | ||||||||||
Fixed Charges |
257 | 473 | ||||||||||
|
|
|
|
|||||||||
Total Earnings |
$950 | $2,002 | ||||||||||
|
|
|
|
|||||||||
Ratio of Earnings to Fixed Charges, Including Interest on Deposits |
3.70x | 4.23x | ||||||||||
|
|
|
|
Exhibit 12.2
Fifth Third Bancorp
Computations of Consolidated Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements
($ in millions)
Three Months Ended June 30, 2018 |
Six Months Ended June 30, 2018 |
|||||||||||
Excluding Interest on Deposits: |
||||||||||||
Fixed Charges: |
||||||||||||
Interest Expense (Excluding Interest On Deposits) |
$130 | $243 | ||||||||||
One-Third of Rents, Net of Income from Subleases |
8 | 15 | ||||||||||
Preferred Stock Dividends |
23 | 38 | ||||||||||
|
|
|
|
|||||||||
Total Fixed Charges |
$161 | $296 | ||||||||||
|
|
|
|
|||||||||
Earnings: |
||||||||||||
Income Before Income Taxes |
$693 | $1,529 | ||||||||||
Fixed Charges, Excluding Preferred Stock Dividends |
138 | 258 | ||||||||||
|
|
|
|
|||||||||
Total Earnings |
$831 | $1,787 | ||||||||||
|
|
|
|
|||||||||
Ratio of Earnings to Fixed Charges, Excluding Interest on Deposits |
5.16x | 6.04x | ||||||||||
|
|
|
|
|||||||||
Including Interest on Deposits: |
||||||||||||
Fixed Charges: |
||||||||||||
Interest Expense |
$249 | $458 | ||||||||||
One-Third of Rents, Net of Income from Subleases |
8 | 15 | ||||||||||
Preferred Stock Dividends |
23 | 38 | ||||||||||
|
|
|
|
|||||||||
Total Fixed Charges |
$280 | $511 | ||||||||||
|
|
|
|
|||||||||
Earnings: |
||||||||||||
Income Before Income Taxes |
$693 | $1,529 | ||||||||||
Fixed Charges, Excluding Preferred Stock Dividends |
257 | 473 | ||||||||||
|
|
|
|
|||||||||
Total Earnings |
$950 | $2,002 | ||||||||||
|
|
|
|
|||||||||
Ratio of Earnings to Fixed Charges, Including Interest on Deposits |
3.39x | 3.92x | ||||||||||
|
|
|
|
Exhibit 31(i)
CERTIFICATION PURSUANT
TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Greg D. Carmichael, certify that:
1. | I have reviewed this report on Form 10-Q of Fifth Third Bancorp (the Registrant); |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; |
4. | The Registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
c) | Evaluated the effectiveness of the Registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the Registrants internal control over financial reporting that occurred during the Registrants most recent fiscal quarter (the Registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrants internal control over financial reporting; and |
5. | The Registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrants auditors and the audit committee of the Registrants board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrants internal control over financial reporting. |
/s/ Greg D. Carmichael |
||
Greg D. Carmichael | ||
Chairman, President and Chief Executive Officer | ||
August 8, 2018 |
Exhibit 31(ii)
CERTIFICATION PURSUANT
TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Tayfun Tuzun, certify that:
1. | I have reviewed this report on Form 10-Q of Fifth Third Bancorp (the Registrant); |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; |
4. | The Registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
c) | Evaluated the effectiveness of the Registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the Registrants internal control over financial reporting that occurred during the Registrants most recent fiscal quarter (the Registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrants internal control over financial reporting; and |
5. | The Registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrants auditors and the audit committee of the Registrants board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrants internal control over financial reporting. |
/s/ Tayfun Tuzun |
||
Tayfun Tuzun | ||
Executive Vice President and | ||
Chief Financial Officer | ||
August 8, 2018 |
Exhibit 32(i)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Fifth Third Bancorp (the Registrant) on Form 10-Q for the period ended June 30, 2018 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Greg D. Carmichael, Chairman, President and Chief Executive Officer of the Registrant, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | |
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
/s/ Greg D. Carmichael |
||
Greg D. Carmichael | ||
Chairman, President and Chief Executive Officer | ||
August 8, 2018 |
Exhibit 32(ii)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Fifth Third Bancorp (the Registrant) on Form 10-Q for the period ended June 30, 2018 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Tayfun Tuzun, Executive Vice President and Chief Financial Officer of the Registrant, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
/s/ Tayfun Tuzun |
||
Tayfun Tuzun | ||
Executive Vice President and | ||
Chief Financial Officer | ||
August 8, 2018 |
For both the six months ended June 30, 2018 and 2017 , dividends were $ 6 37.50 per preferred shares for Perpetual Preferred Stock, Series H, $ 828.12 per preferred share for Perpetual Preferred Stock, Series I and $ 612.50 per preferred share for Perpetual Preferred Stock, Series J.
Includes interest-only mortgage-backed securities of $ 34 as of December 31, 2017 , recorded at fair value with fair value changes recorded in securities gains, net, in the Consolidated Statements of Income.
Excludes $ 137 of residential mortga ge loans measured at fair value and includes $ 674 of leveraged leases, net of unearned income at December 31, 2017 .
(a) Excludes $ 162 and $ 137 of residential mortgage loans measured at fair value at June 30, 2018 and December 31, 2017 , resp ectively.
Includes accrual and nonaccrual loans and leases.
Includes accrual and nonaccrual loans and leases.
Includes $ 104 , $ 773 and $ 251 , respectively, of commercial, residential mortgage and consumer portfolio TDRs on accrual status and $ 173 , $ 15 an d $ 46 , respectively, of commercial, residential mortgage and consumer portfolio TDRs on nonaccrual status at June 30, 2018 .
Includes $ 249 , $ 652 and $ 275 , respectively, of commercial, residential mortgage and consumer portfolio TDR s on accrual status and $ 150 , $ 13 and $ 45 , respectively , of commercial, residential mortgage and consumer portfolio TDRs on nonaccrual status at December 31, 2017 .
Includes $ 4 and $ 3 of nonaccrual government insured commercial loans whose repayments are insured by the SBA a t June 30, 2018 and Dec ember 31, 2017 , respectively, of which $ 2 and $ 3 are restructured nonaccrual government insured commercial loans a t June 30, 2018 and December 31, 2017 , respectively .
Represents number of loans post-modification and excludes loans previously modified in a TDR .
Represents number of loans post-modification and excludes loans previously modified in a TDR .
(a ) At June 30, 2018 and December 31, 2017 , land and improvements , buildings and construction in progress included $ 55 and $ 9 1 , respectively, associated w ith parcels of undeveloped land intended for future branch expansion.
(a) The Bancorp did not recognize impairment losses resulting from the forfeiture or ineligibility of tax credi ts or other circumstances during both the three and six months ended June 30, 2018 and 2017 .
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 Condensed Consolidated Balance Sheets were excluded from this table.
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 Condensed Consolidated Balance Sheets were excluded from this table.
( a) Includes $ 7 and $ 2 issued on behalf of c ommercial customers to facilitate trade payments in U.S. dollars and foreign currencies which expire less than 1 year and between 1 - 5 years, respectively.
Amounts in parentheses indicate reductions to net income
During both the three and six months ended June 30, 2018 , no assets or liabilities were transferred between Level 1 and Level 2.
Included in other assets in the Condensed Consolidated Balance Sheets.
Included in other liabilities in the Condensed Consolidat ed Balance Sheets.
Includes certain residential mortgage loans originated as held for sale that were transferred to held for invest ment.
Includes interest income and expense .
Net interest rate derivatives include derivative assets and liabilities of $14 and $5 , respectively, as of June 30, 2017 .
Includes $ 1 related to leveraged leases at June 30, 2018 .
Excludes $ 162 of residential mortgage loans measured at fair value and includes $ 65 0 of leveraged leases, net of unearned income at June 30, 2018 .
Excludes $ 23 a nd $ 6 of nonaccrual loans held for sale at June 30, 2018 and December 31, 2017 , respectively.
Includes $ 47 and $ 62 of other short-term investments , $ 908 and $ 1,297 of portfolio loans and leases, $ (5) and $ (6) of ALLL, $ 5 and $ 7 of other assets, $ 2 and $ 2 of other liabilities, and $ 830 and $ 1,190 of long-term debt from consolidated VIEs that are included in their respe ctive captions above at June 30, 2018 and December 31, 2017 , respectively. For further information refer to Note 9 .
Amortized cost of $ 32,589 and $ 31,577 at June 30, 2018 and December 31, 2017 , respectively.
Fair value of $ 19 and $ 24 at June 30, 2018 and December 31, 2017 , respectively.
Includes $ 658 and $ 399 of residential mortgage loans held for sale measured at fair value and $ 8 and $ 0 of commercial loans held for sale measured at fair value at June 30, 2018 and December 31, 2017 , respectively.
Includes $ 162 and $ 137 of residential mortgage loans measured at fair value at June 30, 2018 and December 31, 2017 , respectively.
Includes $ 37 and $ 27 of bank premises and equipment held for sale at June 30, 2018 and December 31, 2017 , respectively. For further information refer to Note 7 .
Common shares: Stated value $2.22 per share; authorized 2,000,000,000 ; outstanding at June 30, 2018 – 678,161,855 (excludes 245,730,726 treasury shares), Decemb er 31, 2017 – 693,804,893 (excludes 230,087,688 treasury shares).
446,000 shares of undesignated no par value preferred stock are authorized and unissued at June 30, 2018 and December 31, 2017 ; fixed-to-floating rate non-cumulative Series H perpetual preferred stock with a $25,000 li quidation preference: 24,000 authorized shares, issued and outstanding at June 30, 2018 and December 31, 2017 ; fixed-to-floating rate non-cumulative Series I perpetual preferred stock with a $25,000 liquidation preference; 18,000 authorized shares, issue d and outstanding at June 30, 2018 and December 31, 2017 ; and fixed-to-floating rate non-cumulative Series J perpetual preferred stock with a $25,000 liquidation preference: 12,000 authorized shares, issued and outstanding at June 30, 2018 and December 31 , 2017 .
Excludes FHLB, FRB , and DTCC restricted stock holdings totaling $ 248 , $ 362 and $ 2 , respectively, at December 31, 2017 .
During the year ended December 31, 2017 , no assets or liabilities were transferred between Level 1 and Level 2.
Includes $ 1 related to leveraged leases at December 31, 2017 .
(a) Excludes all loans and leases held for sale and loans acquired with deteriorated credit quality.
Amount does not includ e IRLCs because these instruments are not subject to master netting or similar arrangements .
Amount does not include IRLCs because these instruments are not subject to master netting or similar arrangements .
(a) Actual maturities may differ from contractual maturities when a right to call or prepay obligations exists with or without call or prepayment penalties .
Includes impairment charges of $ 33 for branches and land. For more information refer to Note 7 and Note 21 .
Includes impairment charges of $ 2 for branches and land. For more information refer to Note 7 and Note 21 .
Includes impairment charges of $ 41 for branches and land. For more information refer to Note 7 and Note 21 .
Includes impairment charge s of $ 5 for branches and land. For more information refer to Note 7 and Note 21 .
Includes impairment charges of $ 31 for operating lease equipment. For more information refer to Note 21 .
Revenue sharing agreements between wealth and asset management and branch banking are eliminated in the Condensed Consolidated Statements of Income.
(a) The impact of the weighted-average default rate on the current fair value of residual cash flows for all scenarios is immaterial .
Represents number of loans post-modification and excludes loans previously modified in a TDR .
Represents number of loans post-modification and excludes loans previously modified in a TDR .
Net interest rate derivatives include derivative assets and liabilities of $ 14 and $ 5 , respectively, as of June 30, 2017 .
Represents the unpaid principal balance at the time of the sale.
Primarily reflects changes in prepayment speed and OAS spread assumptions which are updated based on market interest rates
Pr imarily reflects changes due to collection of contractual cash flows and the passage of time
(a) Included in mortgage banking net revenue in the Condensed Consolidated Statements of Income.
Related to the adopt ion as of January 1, 2018 of ASU 2016-01, ASU 2017-12 and ASU 2018-02 . Refer to Note 3 for additional information.
Excludes five restructured loans associated with a consolidated VIE in which the Bancorp had no continuing credit risk due to the risk being assumed by a third party, with an average recorded investment of $ 26 for both the three and six months ended June 30, 2017. An immaterial amount of interest income was recognized during the six months ended June 30, 2017. Refer to Note 9 for further discussion on the deconsolidation of the VIE associated with these loans in the third quarter of 2017.
Included in securities (losses) gains, net in the Condensed Consolidated Statements of Income.
Includes an immaterial net loss and a net loss of $ 2 for the three and six months ended June 30, 2018 , respectively, and immaterial net gains for both the three and six months ended June 30, 2017 , respectively, recorded in corporate banking
Includes net unrealized losses of $ 5 and $ 6 for the three and six months ended June 30, 2018 , respectively, and net unrealized gains of $ 2 and $ 3 for the three and six months ended June 30, 2017 , respectively.
For both the three and six months ended June 30, 2017, the amount of pretax net losses recognized in OCI represented the effective portion of the cumulative gains or losses on cash flow hedges and ineffectiveness was reported within noninterest income. Upon the adoption of ASU 2017-12, the Bancorp recorded a cumulative effect adjustment to retained earnings effective January 1, 2018 related to the elimination of the separate measurement of ineffect iveness. Refer to Note 3 for additional information.
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Includes
$
47
and $
62
of
other short-term investments
,
$
908
and $
1,297
of portfolio loans and leases,
$
(5)
and $
(6)
of ALLL,
$
5
and $
7
of other assets,
$
2
and $
2
of other liabilities, and
$
830
and $
1,190
of long-term debt from consolidated VIEs
that are included in their respe
ctive captions above at
June 30, 2018
and December 31,
2017
, respectively. For further information refer to Note
9
.
Amortized cost of
$
32,589
and $
31,577
at
June 30, 2018
and December 31,
2017
, respectively.
Fair value
of
$
19
and $
24
at
June 30, 2018
and December 31,
2017
, respectively.
Includes
$
658
and $
399
of residential mortgage loans held for sale measured at fair value
and
$
8
and $
0
of commercial loans held for sale measured at fair value
at
June 30, 2018
and December 31,
2017
, respectively.
Includes
$
162
and $
137
of residential mortgage loans measured
at fair value at
June 30, 2018
and December 31,
2017
, respectively.
Includes
$
1
related to leveraged leases at
June 30, 2018
.
Includes $
1
related to leveraged leases
at December 31,
2017
.
Includes
$
37
and $
27
of bank premises and equipment held for sale at
June 30, 2018
and December 31,
2017
, respectively. For further information refer to
Note
7
.
Common shares: Stated value $2.22 per share; authorized
2,000,000,000
; outstanding at
June 30, 2018
–
678,161,855
(excludes
245,730,726
treasury shares), Decemb
er 31,
2017
–
693,804,893
(excludes
230,087,688
treasury shares).
446,000
shares of undesignated no par value preferred stock are authorized and unissued at
June 30, 2018
and
December 31,
2017
;
fixed-to-floating rate non-cumulative Series H perpetual preferred stock with a $25,000 li
quidation preference:
24,000
authorized shares,
issued and outstanding at
June 30, 2018
and December 31,
2017
; fixed-to-floating rate non-cumulative Series I perpetual preferred stock with a $25,000 liquidation preference;
18,000
authorized shares, issue
d and outstanding at
June 30, 2018
and December 31,
2017
; and
fixed-to-floating rate non-cumulative Series J perpetual preferred stock with a $25,000 liquidation preference:
12,000
authorized shares,
issued and outstanding at
June 30, 2018
and December 31
,
2017
.
Includes
$
47
and $
62
of
other short-term investments
,
$
908
and $
1,297
of portfolio loans and leases,
$
(5)
and $
(6)
of ALLL,
$
5
and $
7
of other assets,
$
2
and $
2
of other liabilities, and
$
830
and $
1,190
of long-term debt from consolidated VIEs
that are included in their respe
ctive captions above at
June 30, 2018
and December 31,
2017
, respectively. For further information refer to Note
9
.
Includes
$
162
and $
137
of residential mortgage loans measured
at fair value at
June 30, 2018
and December 31,
2017
, respectively.
Includes
$
1
related to leveraged leases at
June 30, 2018
.
Includes $
1
related to leveraged leases
at December 31,
2017
.
For both
the
six
months ended
June 30, 2018
and
2017
, dividends were
$
6
37.50
per preferred shares for Perpetual Preferred Stock, Series H,
$
828.12
per preferred share for Perpetual Preferred Stock, Series
I and
$
612.50
per preferred share for Perpetual Preferred Stock, Series J.
Related to the adopt
ion as of January 1, 2018 of ASU 2016-01, ASU 2017-12 and ASU 2018-02
. Refer to Note 3 for additional information.
1. Basis of Presentation The Condensed 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 and not consolidated. Those entities in which the Bancorp does not have the ability to exercise significant influence are generally accounted for utilizing the measurement alternative to fair value which permits carrying the investment at its cost basis, as adjusted for impairments and observable price changes. Intercompany transactions and balances have been eliminated. In the opinion of management, the unaudited Condensed Consolidated Financial Statements include all adjustments, which consist of normal recurring accruals, necessary to present fairly the results for the periods presented. In accordance with U.S. GAAP and the rules and regulations of the SEC for interim financial information, these statements do not include certain information and footnote disclosures required for complete annual financial statements and it is suggested that these Condensed Consolidated Financial Statements be read in conjunction with the Bancorp’s Annual Report on Form 10-K. The results of operations and comprehensive income for the three and six months ended June 30, 2018 and 2017 and the cash flows and changes in equity for the six months ended June 30, 2018 and 2017 are not necessarily indicative of the results to be expected for the full year. Financial information as of December 31, 2017 has been derived from the Bancorp’s Annual Report on Form 10-K. 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. 2. Supplemental Cash Flow Information 3. Accounting and Reporting Developments Standards Adopted in 2018 The Bancorp adopted the following new accounting standards effective January 1, 2018: ASU 2014-09 – Revenue from Contracts with Customers (Topic 606) In May 2014, the FASB issued ASU 2014-09 which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most contract revenue recognition guidance, including industry-specific guidance. The core principle of the amended guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Subsequent to the issuance of ASU 2014-09, the FASB issued additional guidance to clarify certain implementation issues, including ASUs 2016-08 (Principal versus Agent Considerations), 2016-10 (Identifying Performance Obligations and Licensing), 2016-12 (Narrow-Scope Improvements and Practical Expedients), and 2016-20 (Technical Corrections and Improvements) in March, April, May and December 2016, respectively. These amendments did not change the core principles in ASU 2014-09 and follow the same effective date and transition requirements. The Bancorp adopted the amended guidance on January 1, 2018, using a modified retrospective approach. Because the amended guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other U.S. GAAP, the adoption of this amended guidance did not have a material impact on the Bancorp’s Condensed Consolidated Financial Statements. However, the Bancorp is subject to expanded disclosure requirements and has updated its revenue recognition policies and procedures. While the Bancorp has concluded the following changes are not material to its Condensed 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. Neither change impacts income before income taxes or net income. In conjunction with adoption of ASU 2014-09, the Bancorp is providing the following additional disclosures about its significant accounting and reporting policies related to revenue recognition. Revenue Recognition The Bancorp generally measures revenue based on the amount of consideration the Bancorp expects to be entitled for the transfer of goods or services to a customer, then recognizes this revenue when or as the Bancorp satisfies its performance obligations under the contract, except in transactions where U.S. GAAP provides other applicable guidance. When the amount of consideration is variable, the Bancorp will only recognize revenue to the extent that it is probable that the cumulative amount recognized will not be subject to a significant reversal in the future. Substantially all of the Bancorp’s contracts with customers have expected durations of one year or less and payments are typically due when or as the services are rendered or shortly thereafter. When third parties are involved in providing goods or services to customers, the Bancorp recognizes revenue on a gross basis when it has control over those goods or services prior to transfer to the customer; otherwise, revenue is recognized for the net amount of any fee or commission. The Bancorp excludes sales taxes from the recognition of revenue and recognizes the incremental costs of obtaining contracts as an expense if the period of amortization for those costs would be one year or less. The Bancorp’s interest income is derived from loans and leases, securities and other short-term investments. The Bancorp recognizes interest income in accordance with the applicable guidance in U.S. GAAP for these assets. Refer to the Portfolio Loans and Leases and Securities sections in Note 1 of the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2017 for further information. The following provides additional information about the components of noninterest income: ASU 2016-01 – Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities In January 2016, the FASB issued ASU 2016-01 which revises an entity’s accounting related to 1) the classification and measurement of investments in equity securities, 2) the presentation of certain fair value changes for financial liabilities measured at fair value, and 3) certain disclosure requirements associated with the fair value of financial instruments. The amendments require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes as a result of an observable price change. The amendments also simplify the impairment assessment of equity investments for which fair value is not readily determinable by requiring an entity to perform a qualitative assessment 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 OCI 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. In February 2018, the FASB also issued ASU 2018-03 which makes technical corrections and improvements to the amendments in ASU 2016-01. The Bancorp adopted the amended guidance on January 1, 2018. As permitted, the Bancorp elected to early adopt ASU 2018-03 on January 1, 2018, concurrent with the adoption of ASU 2016-01. The adoption did not have a material impact on the Condensed Consolidated Financial Statements. However, equity securities affected by the amended guidance which were previously classified as trading or available-for-sale have been reclassified in the Condensed Consolidated Balance Sheets as equity securities. For certain equity securities without a readily determinable fair value that are not accounted for using the equity method, the Bancorp has elected to use the permitted measurement alternative, which is to adjust the cost basis of the investment upon either the occurrence of an observable price change or the identification of an impairment. For these securities, the amended guidance was applied prospectively to investments that existed on or after January 1, 2018. The other portions of the amended guidance were applied on a modified retrospective basis. ASU 2016-04 – Liabilities—Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products In March 2016, the FASB issued ASU 2016-04 which permits proportional derecognition of the liability for unused funds on certain prepaid stored-value products (known as breakage) to the extent that it is probable that a significant reversal of the recognized breakage amount will not subsequently occur. The amendments do not apply to any prepaid stored-value products that are attached to a segregated customer deposit account or products for which unused funds are subject to unclaimed property remittance laws. The Bancorp adopted the amended guidance on January 1, 2018 using a modified retrospective approach. The adoption did not have a material impact on the Condensed Consolidated Financial Statements. ASU 2016-15 – Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments In August 2016, the FASB issued ASU 2016-15 to clarify the classification of certain cash receipts and payments within an entity’s statement of cash flows. These items include debt prepayment or extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of BOLI policies, distributions received from equity method investees, and beneficial interests in securitization transactions. The amended guidance also specifies how to address classification of cash receipts and payments that have aspects of more than one class of cash flows. The Bancorp adopted the amended guidance retrospectively on January 1, 2018. The adoption did not have a material impact on the Condensed Consolidated Financial Statements. ASU 2016-16 – Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory In October 2016, the FASB issued ASU 2016-16 which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Current U.S. GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. The Bancorp adopted the amended guidance on January 1, 2018 using a modified retrospective approach. The adoption did not have a material impact on the Condensed Consolidated Financial Statements. ASU 2017-01 – Business Combinations (Topic 805): Clarifying the Definition of a Business In January 2017, the FASB issued ASU 2017-01 which clarifies the definition of a business in order to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amended guidance provides a screen which states that when substantially all of the fair value of assets acquired (or disposed) is concentrated in a single asset or group of similar assets, then the set of assets and activities would not be considered a business. The Bancorp adopted the amended guidance prospectively on January 1, 2018 and will apply this amended guidance to future transactions to determine if they should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-05 – Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets In February 2017, the FASB issued ASU 2017-05 which clarifies the scope of Subtopic 610-20 and defines the term “in substance nonfinancial asset.” The amendments require that an entity should initially identify each distinct nonfinancial asset or in substance nonfinancial asset promised to a counterparty and derecognize each asset when a counterparty obtains control of it. The amendments provide specific guidance on accounting for partial sales of nonfinancial assets, which require an entity to derecognize a distinct nonfinancial asset or in substance nonfinancial asset in a partial sale transaction when it 1) does not have (or ceases to have) a controlling financial interest in the legal entity that holds the asset and 2) transfers control of the asset. Once an entity transfers control of a distinct nonfinancial asset or distinct in substance 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 Condensed Consolidated Financial Statements. ASU 2017-09 Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting In May 2017, the FASB issued ASU 2017-09 which provides guidance about which changes to the terms or conditions of a share-based payment award require the application of modification accounting in Topic 718. The amendments specify that an entity should account for the effects of such changes as a modification unless the fair value, vesting conditions and classification (as an equity or liability) of the awards are all unaffected by the change. The Bancorp adopted the amended guidance prospectively on January 1, 2018. The adoption did not have a material impact on the Condensed Consolidated Financial Statements. ASU 2017-12 Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities In August 2017, the FASB issued ASU 2017-12 which makes several amendments to existing guidance for hedge accounting. As permitted, the Bancorp elected to early adopt the amended guidance on January 1, 2018. For certain fair value hedges of interest rate risk, the Bancorp elected to modify the measurement methodology for the hedged item to be the benchmark rate component of the contractual coupon cash flows and also elected to de-designate a portion of the existing hedging relationship, as permitted. Upon adoption, changes in the fair value of cash flow hedges are recorded in AOCI and then subsequently reclassified into earnings when the hedged item affects earnings. Also, for both fair value hedges and cash flow hedges, changes in the fair value of the derivative instrument are recorded in the same income statement line item as the effects of the hedged item, eliminating the separate measurement of hedge ineffectiveness. The Bancorp recorded a cumulative-effect adjustment to retained earnings for the impact of these elections as well as the elimination of the separate measurement of ineffectiveness from AOCI for cash flow hedges existing at January 1, 2018, the amount of which was not material. The amended presentation and disclosure guidance was applied prospectively. ASU 2018-02 Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income In February 2018, the FASB issued ASU 2018-02 which allows for reclassification from AOCI to retained earnings of stranded tax effects resulting from the TCJA. Stranded tax effects result from the reduction in the top federal statutory income tax rate from 35 percent to 21 percent as deferred tax assets and liabilities are adjusted for the impact of a change in tax rate through income tax expense, even in situations when the related items giving rise to the deferred taxes are components of AOCI, which are carried net of tax. As permitted, the Bancorp elected to early adopt this amended guidance and recorded a reclassification adjustment from AOCI to retained earnings as of January 1, 2018, the amount of which was not material. Standards Issued but Not Yet Adopted The following accounting standards were issued but not yet adopted by the Bancorp as of June 30, 2018: ASU 2016-02 – Leases (Topic 842) In February 2016, the FASB issued ASU 2016-02 which establishes a new accounting model for leases. The amended guidance requires lessees to record lease liabilities on the lessees’ balance sheets along with corresponding right-of-use assets for all leases with terms longer than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the lessee’s statements of income. From a lessor perspective, the accounting model is largely unchanged, except that the amended guidance includes certain targeted improvements to align, where necessary, lessor accounting with the lessee accounting model and the revenue recognition guidance in ASC Topic 606. The amendments also modify disclosure requirements for an entity’s lease arrangements. The amended guidance is effective for the Bancorp on January 1, 2019, with early adoption permitted. The amendments should be applied to each prior reporting period presented using a modified retrospective approach, although the amended guidance contains certain transition relief provisions that, among other things, permit an entity to elect not to reassess the classification of leases which existed or expired as of the date the amendments are effective. In January 2018, the FASB issued ASU 2018-01 which provides a practical expedient for transition related to land easements. The FASB has also proposed additional amendments to the new guidance which, among other things, include an option to recognize a cumulative effect adjustment to retained earnings in the period of adoption instead of applying the guidance to prior comparative periods, but these additional amendments are not yet final. The Bancorp will adopt the amended guidance on the required effective date of January 1, 2019, and expects to elect the transition relief provisions. From a lessee perspective, the Bancorp is currently finalizing its inventory of all leases, accumulating the lease data necessary to apply the amended guidance, and evaluating the business process and technology requirements which will be necessary after adoption. The Bancorp is continuing to evaluate the impact of the amended guidance on its Condensed Consolidated Financial Statements, but the effects of recognizing most operating leases on the Condensed Consolidated Balance Sheets are expected to be material. The Bancorp expects to recognize right-of-use assets and lease liabilities for substantially all of its operating lease commitments based on the present value of unpaid lease payments as of the date of adoption, but does not expect a material impact to expense recognition. From a lessor perspective, given the limited changes, the Bancorp does not expect adoption of the amended guidance to have a material impact based on its preliminary analysis. However, the Bancorp is continuing to evaluate the impact of the amended guidance, particularly related to the deferral of costs incurred in originating leases. The Bancorp also expects to record a cumulative-effect adjustment to retained earnings upon adoption to recognize any remaining deferred gains on sale-leaseback transactions that occurred prior to the date of initial application. The Bancorp had approximately $13 million of such deferred gains recorded as of June 30, 2018. These expectations may change as the implementation process continues. ASU 2016-13 – Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments In June 2016, the FASB issued ASU 2016-13 which establishes a new approach to estimate credit losses on certain types of financial instruments. The new approach changes the impairment model for most financial assets, and will require the use of an “expected credit loss” model for financial instruments measured at amortized cost and certain other instruments. This model applies to trade and other receivables, loans, debt securities, net investments in leases, and off-balance-sheet credit exposures (such as loan commitments, standby letters of credit, and financial guarantees not accounted for as insurance). This model requires entities to estimate the lifetime expected credit loss on such instruments and record an allowance that represents the portion of the amortized cost basis that the entity does not expect to collect. This allowance is deducted from the financial asset’s amortized cost basis to present the net amount expected to be collected. The new expected credit loss model will also apply to purchased financial assets with credit deterioration, superseding current accounting guidance for such assets. The amended guidance also amends the impairment model for available-for-sale debt securities, requiring entities to determine whether all or a portion of the unrealized loss on such securities is a credit loss, and also eliminating the option for management to consider the length of time a security has been in an unrealized loss position as a factor in concluding whether or not a credit loss exists. The amended model states that an entity will recognize an allowance for credit losses on available-for-sale debt securities as a contra account to the amortized cost basis, instead of a direct reduction of the amortized cost basis of the investment, as under current guidance. As a result, entities will recognize improvements to estimated credit losses on available-for-sale debt securities immediately in earnings as opposed to in interest income over time. There are also additional disclosure requirements included in this guidance. The amended guidance is effective for the Bancorp on January 1, 2020. Early adoption is permitted as soon as January 1, 2019, but the Bancorp currently expects to adopt on the mandatory effective date. The amended guidance is to be applied on a modified retrospective basis with the cumulative effect of initially applying the amendments recognized in retained earnings at the date of initial application. However, certain provisions of the guidance are only required to be applied on a prospective basis. While the Bancorp is currently in the process of evaluating the impact of the amended guidance on its Condensed Consolidated Financial Statements, it currently expects the ALLL to increase upon adoption given that the allowance will be required to cover the full remaining expected life of the portfolio upon adoption, rather than the incurred loss model under current U.S. GAAP. The extent of this increase is still being evaluated and will depend on economic conditions and the composition of the Bancorp’s loan and lease portfolio at the time of adoption. ASU 2017-04 – Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment In January 2017, the FASB issued ASU 2017-04 which simplifies the test for goodwill impairment by removing the second step, which measures the amount of impairment loss, if any. Instead, the amended guidance states that an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, except that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This would apply to all reporting units, including those with zero or negative carrying amounts of net assets. The amended guidance is effective for the Bancorp on January 1, 2020, with early adoption permitted, and is to be applied prospectively to all goodwill impairment tests performed after the adoption date. ASU 2017-08 Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities In March 2017, the FASB issued ASU 2017-08 which shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amended guidance is effective for the Bancorp on January 1, 2019, with early adoption permitted, and is to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Bancorp shall provide a disclosure regarding the change in accounting principle. The Bancorp plans to adopt the amended guidance on its required effective date of January 1, 2019 and is currently in the process of evaluating the impact of the amended guidance on its Condensed Consolidated Financial Statements. However, the Bancorp does not currently expect the impact of adoption to be material. 4. Investment Securities Other securities consist of FHLB, FRB and DTCC restricted stock holdings of $248, $364 and $2, respectively, at June 30, 2018, that are carried at cost. At June 30, 2018 and December 31, 2017, investment securities with a fair value of $6.8 billion and $7.8 billion, respectively, were pledged to secure borrowings, public deposits, trust funds, derivative contracts and for other purposes as required or permitted by law. (a) Actual maturities may differ from contractual maturities when a right to call or prepay obligations exists with or without call or prepayment penalties. At both June 30, 2018 and December 31, 2017, an immaterial amount of unrealized losses in the available-for-sale debt and other securities portfolio were represented by non-rated securities. 5. Loans and Leases The Bancorp diversifies its loan and lease portfolio by offering a variety of loan and lease products with various payment terms and rate structures. Lending activities are generally concentrated within those states in which the Bancorp has banking centers and are primarily located in the Midwestern and Southeastern regions of the U.S. The Bancorp’s commercial loan and lease portfolio consists of lending to various industry types. Management periodically reviews the performance of its loan and lease products to evaluate whether they are performing within acceptable interest rate and credit risk levels and changes are made to underwriting policies and procedures as needed. The Bancorp 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. Total portfolio loans and leases are recorded net of unearned income, which totaled $496 million as of June 30, 2018 and $523 million as of December 31, 2017. Additionally, portfolio loans and leases are recorded net of unamortized premiums and discounts, deferred direct loan origination fees and costs and fair value adjustments (associated with acquired loans or loans designated as fair value upon origination) which totaled a net premium of $286 million and $282 million as of June 30, 2018 and December 31, 2017, respectively. The Bancorp’s FHLB and FRB advances are generally secured by loans. The Bancorp had loans of $13.3 billion and $13.0 billion at June 30, 2018 and December 31, 2017, respectively, pledged at the FHLB, and loans of $40.4 billion and $39.8 billion at June 30, 2018 and December 31, 2017, respectively, pledged at the FRB. 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. CREDIT RISK PROFILE Commercial Portfolio Segment For purposes of analyzing historical loss rates used in the determination of the ALLL and monitoring the credit quality and risk characteristics of its commercial portfolio segment, the Bancorp disaggregates the segment into the following classes: commercial and industrial, commercial mortgage owner-occupied, commercial mortgage nonowner-occupied, commercial construction and commercial leases. To facilitate the monitoring of credit quality within the commercial portfolio segment, and for purposes of analyzing historical loss rates used in the determination of the ALLL for the commercial portfolio segment, the Bancorp utilizes the following categories of credit grades: pass, special mention, substandard, doubtful and loss. The five categories, which are derived from standard regulatory rating definitions, are assigned upon initial approval of credit to borrowers and updated periodically thereafter. Pass ratings, which are assigned to those borrowers that do not have identified potential or well-defined weaknesses and for which there is a high likelihood of orderly repayment, are updated at least annually based on the size and credit characteristics of the borrower. All other categories are updated on a quarterly basis during the month preceding the end of the calendar quarter. The Bancorp assigns a special mention rating to loans and leases that have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may, at some future date, result in the deterioration of the repayment prospects for the loan or lease or the Bancorp’s credit position. The Bancorp assigns a substandard rating to loans and leases that are inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged. Substandard loans and leases have well-defined weaknesses or weaknesses that could jeopardize the orderly repayment of the debt. Loans and leases in this grade also are characterized by the distinct possibility that the Bancorp will sustain some loss if the deficiencies noted are not addressed and corrected. The Bancorp assigns a doubtful rating to loans and leases that have all the attributes of a substandard rating with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors that may work to the advantage of and strengthen the credit quality of the loan or lease, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include a proposed merger or acquisition, liquidation proceeding, capital injection, perfecting liens on additional collateral or refinancing plans. Loans and leases classified as loss are considered uncollectible and are charged-off in the period in which they are determined to be uncollectible. Because loans and leases in this category are fully charged-off, they are not included in the following tables. 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. 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 of the Notes to Consolidated Financial Statements included in the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2017 for additional delinquency and nonperforming information. (a) Excludes $162 and $137 of residential mortgage loans measured at fair value at June 30, 2018 and December 31, 2017, respectively. 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. Includes $104, $773 and $251, respectively, of commercial, residential mortgage and consumer portfolio TDRs on accrual status and $173, $15 and $46, respectively, of commercial, residential mortgage and consumer portfolio TDRs on nonaccrual status at June 30, 2018. Includes $249, $652 and $275, respectively, of commercial, residential mortgage and consumer portfolio TDRs on accrual status and $150, $13 and $45, respectively, of commercial, residential mortgage and consumer portfolio TDRs on nonaccrual status at December 31, 2017. Excludes five restructured loans associated with a consolidated VIE in which the Bancorp had no continuing credit risk due to the risk being assumed by a third party, with an average recorded investment of $26 for both the three and six months ended June 30, 2017. An immaterial amount of interest income was recognized during the six months ended June 30, 2017. Refer to Note 9 for further discussion on the deconsolidation of 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 $189 million and $235 million as of June 30, 2018 and December 31, 2017, 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 of the Notes to Consolidated Financial Statements included in the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2017 for information on the Bancorp’s ALLL methodology. Upon modification of a loan, the Bancorp measures the related impairment as the difference between the estimated future cash flows expected to be collected on the modified loan, discounted at the original effective yield of the loan, and the carrying value of the loan. The resulting measurement may result in the need for minimal or no allowance because it is probable that all cash flows will be collected under the modified terms of the loan. In addition, if the stated interest rate was increased in a TDR, the cash flows on the modified loan, using the pre-modification interest rate as the discount rate, often exceed the recorded investment of the loan. Conversely, upon a modification that reduces the stated interest rate on a loan, the Bancorp recognizes an impairment loss as an increase to the ALLL. If a TDR involves a reduction of the principal balance of the loan or the loan’s accrued interest, that amount is charged off to the ALLL. The Bancorp had commitments to lend additional funds to borrowers whose terms have been modified in a TDR, consisting of line of credit and letter of credit commitments of $29 million and $69 million, respectively, as of June 30, 2018 compared with $53 million and $78 million, respectively, as of December 31, 2017. The Bancorp considers TDRs that become 90 days or more past due under the modified terms as subsequently defaulted. For commercial loans not subject to individual review for impairment, loss rates that are applied for purposes of determining the ALLL include historical losses associated with subsequent defaults on loans previously modified in a TDR. For consumer loans, the Bancorp performs a qualitative assessment of the adequacy of the consumer ALLL by comparing the consumer ALLL to forecasted consumer losses over the projected loss emergence period (the forecasted losses include the impact of subsequent defaults of consumer TDRs). When a residential mortgage, home equity, automobile or other consumer loan that has been modified in a TDR subsequently defaults, the present value of expected cash flows used in the measurement of the potential impairment loss is generally limited to the expected net proceeds from the sale of the loan’s underlying collateral and any resulting impairment loss is reflected as a charge-off or an increase in ALLL. The Bancorp recognizes an ALLL for the entire balance of the credit card loans modified in a TDR that subsequently default. (a) Excludes all loans and leases held for sale and loans acquired with deteriorated credit quality. (a) Excludes all loans and leases held for sale and loans acquired with deteriorated credit quality. (a) Excludes all loans and leases held for sale and loans acquired with deteriorated credit quality. (a) Excludes all loans and leases held for sale and loans acquired with deteriorated credit quality. 7. Bank Premises and Equipment (a) At June 30, 2018 and December 31, 2017, land and improvements, buildings and construction in progress included $55 and $91, respectively, associated with parcels of undeveloped land intended for future branch expansion. The Bancorp monitors changing customer preferences associated with the channels it uses for banking transactions to evaluate the efficiency, competitiveness and quality of the customer service experience in its consumer distribution network. As part of this ongoing assessment, the Bancorp may determine that it is no longer fully committed to maintaining full-service branches at certain of its existing banking center locations. Similarly, the Bancorp may also determine that it is no longer fully committed to building banking centers on certain parcels of land which had previously been held for future branch expansion. During the second quarter of 2018, the Bancorp adopted a plan to close approximately 100 to 125 branches over the next three years (the “2018 Branch Optimization Plan”). As of June 30, 2018, the Bancorp had identified 29 specific branches for closure under the 2018 Branch Optimization Plan with these closures expected to be completed prior to December 31, 2018. The Bancorp expects to identify the remaining branches to be closed under the 2018 Branch Optimization Plan over the next 12 to 18 months. As part of the adoption of the 2018 Branch Optimization Plan, the Bancorp has also elected to sell 21 parcels of land which had previously been held for future branch expansion. As a result of the adoption of the 2018 Branch Optimization Plan during the second quarter of 2018, the Bancorp performed assessments of the recoverability of the following long-lived assets for which the Bancorp believes that it is more likely than not that the assets will be disposed of significantly before the end of their previously estimated useful lives: Impairment losses associated with such assessments and lower of cost or market adjustments were $33 million and $41 million for the three and six months ended June 30, 2018, respectively, and $2 million and $5 million for the three and six months ended June 30, 2017, respectively. The recognized impairment losses were recorded in other noninterest income in the Condensed Consolidated Statements of Income. 8. Intangible Assets Intangible assets consist of core deposit intangibles, customer relationships, non-compete agreements, trade names and rent intangibles. Intangible assets are amortized on either a straight-line or an accelerated basis over their estimated useful lives. The increase in gross carrying amount of intangible assets from the year ended December 31, 2017 primarily reflects acquisition activity during the first quarter of 2018. As of June 30, 2018, all of the Bancorp’s intangible assets were being amortized. Amortization expense recognized on intangible assets was $1 million and immaterial for the three months ended June 30, 2018 and 2017, respectively, and $2 million and $1 million for the six months ended June 30, 2018 and 2017, respectively. The Bancorp's projection of amortization expense shown in the following table is based on existing balances as of June 30, 2018. Future amortization expense may vary from these projections. 9. Variable Interest Entities The Bancorp, in the normal course of business, engages in a variety of activities that involve VIEs, which are legal entities that lack sufficient equity at risk to finance their activities without additional subordinated financial support or the equity investors of the entities as a group lack any of the characteristics of a controlling interest. The Bancorp evaluates its interest in certain entities to determine if these entities meet the definition of a VIE and whether the Bancorp is the primary beneficiary and should consolidate the entity based on the variable interests it held both at inception and when there is a change in circumstances that requires a reconsideration. If the Bancorp is determined to be the primary beneficiary of a VIE, it must account for the VIE as a consolidated subsidiary. If the Bancorp is determined not to be the primary beneficiary of a VIE but holds a variable interest in the entity, such variable interests are accounted for under the equity method of accounting or other accounting standards as appropriate. Consolidated VIEs Automobile loan securitizations In a securitization transaction that occurred in the third quarter 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. 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 has consolidated these VIEs. The assets of the VIEs are restricted to the settlement of the asset-backed securities and other obligations of the VIEs. Third-party holders of the notes do not have recourse to the general assets of the Bancorp. The economic performance of the VIEs is most significantly impacted by the performance of the underlying loans. The principal risks to which the VIEs are exposed include credit risk and prepayment risk. The credit and prepayment risks are managed through credit enhancements in the form of reserve accounts, overcollateralization, excess interest on the loans and the subordination of certain classes of asset-backed securities to other classes. CDC investments CDC, a wholly-owned indirect subsidiary of the Bancorp, was created to invest in projects to create affordable housing, revitalize business and residential areas and preserve historic landmarks. CDC generally co-invests with other unrelated companies and/or individuals and typically makes investments in a separate legal entity that owns the property under development. The entities are usually formed as limited partnerships and LLCs and CDC typically invests as a limited partner/investor member in the form of equity contributions. The economic performance of the VIEs is driven by the performance of their underlying investment projects as well as the VIEs’ ability to operate in compliance with the rules and regulations necessary for the qualification of tax credits generated by equity investments. The Bancorp’s subsidiaries serve as the managing member of certain LLCs invested in business revitalization projects and have the right to make decisions that most significantly impact the economic performance of the LLCs. Additionally, the investor members do not hold substantive kick-out rights or substantive participating rights over the managing member. The Bancorp has provided an indemnification guarantee to the investor member of these LLCs related to the qualification of tax credits generated by the investor members’ investment. Accordingly, the Bancorp concluded that it is the primary beneficiary and, therefore, has consolidated these VIEs. As a result, the investor members’ interests in these VIEs are presented as noncontrolling interests in the Condensed Consolidated Financial Statements. This presentation includes reporting separately the equity attributable to the noncontrolling interests in the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Changes in Equity and reporting separately the comprehensive income attributable to the noncontrolling interests in the Condensed Consolidated Statements of Comprehensive Income and the net income attributable to the noncontrolling interests in the Condensed 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 the remaining indemnifications at June 30, 2018 and December 31, 2017 was $19 million and $17 million, respectively, which is based on an amount required to meet the investor member’s defined target rate of return. CDC investments As noted previously, CDC typically invests in VIEs as a limited partner or investor member in the form of equity contributions and has no substantive kick-out or substantive participating rights over the managing member. The Bancorp has determined that it is not the primary beneficiary of these VIEs because it lacks the power to direct the activities that most significantly impact the economic performance of the underlying project or the VIEs’ ability to operate in compliance with the rules and regulations necessary for the qualification of tax credits generated by equity investments. This power is held by the managing members who exercise full and exclusive control of the operations of the VIEs. Accordingly, the Bancorp accounts for these investments under the equity method of accounting. 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 Condensed Consolidated Balance Sheets, and the liabilities related to the unfunded commitments, which are included in other liabilities in the Condensed 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 June 30, 2018 and December 31, 2017, the Bancorp’s CDC investments included $1.2 billion and $1.3 billion, respectively, of investments in affordable housing tax credits recognized in other assets in the Condensed Consolidated Balance Sheets. The unfunded commitments related to these investments were $362 million and $355 million at June 30, 2018 and December 31, 2017, respectively. The unfunded commitments as of June 30, 2018 are expected to be funded from 2018 to 2034. (a) The Bancorp did not recognize impairment losses resulting from the forfeiture or ineligibility of tax credits or other circumstances during both the three and six months ended June 30, 2018 and 2017. Private equity investments The Bancorp, through Fifth Third Capital Holdings, a wholly-owned indirect subsidiary of the Bancorp, invests as a limited partner in private equity investments which provide the Bancorp an opportunity to obtain higher rates of return on invested capital, while also creating cross-selling opportunities for the Bancorp’s commercial products. Each of the limited partnerships has an unrelated third-party general partner responsible for appointing the fund manager. The Bancorp has not been appointed fund manager for any of these private equity investments. The funds finance primarily all of their activities from the partners’ capital contributions and investment returns. The Bancorp has determined that it is not the primary beneficiary of the funds because it does not have the obligation to absorb the funds’ expected losses or the right to receive the funds’ expected residual returns that could potentially be significant to the funds and lacks the power to direct the activities that most significantly impact the economic performance of the funds. The Bancorp, as a limited partner, does not have substantive participating or substantive kick-out rights over the general partner. Therefore, the Bancorp accounts for its investments in these limited partnerships under the equity method of accounting. The Bancorp is exposed to losses arising from the negative performance of the underlying investments in the private equity 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 Condensed Consolidated Balance Sheets, are included in the previous tables. Also, at June 30, 2018 and December 31, 2017, the unfunded commitment amounts to the funds were $42 million and $48 million, respectively. As part of previous commitments, the Bancorp made capital contributions to private equity investments of $2 million and an immaterial amount during the three months ended June 30, 2018 and 2017, respectively and $5 million and $7 million during the six months ended June 30, 2018 and 2017, respectively. The Bancorp recognized $2 million and zero of OTTI primarily associated with certain nonconforming investments affected by the Volcker Rule during the three months ended June 30, 2018 and 2017, respectively, and $6 million and zero during the six months ended June 30, 2018 and 2017. Refer to Note 21 for further information. Loans provided to VIEs The Bancorp has provided funding to certain unconsolidated VIEs sponsored by third parties. These VIEs are generally established to finance certain consumer and small business loans originated by third parties. The entities are primarily funded through the issuance of a loan from the Bancorp or a syndication through which the Bancorp is involved. The sponsor/administrator of the entities is responsible for servicing the underlying assets in the VIEs. Because the sponsor/administrator, not the Bancorp, holds the servicing responsibilities, which include the establishment and employment of default mitigation policies and procedures, the Bancorp does not hold the power to direct the activities that most significantly impact the economic performance of the entity and, therefore, is not the primary beneficiary. The principal risk to which these entities are exposed is credit risk related to the underlying assets. The Bancorp’s maximum exposure to loss is equal to the carrying amounts of the loans and unfunded commitments to the VIEs. The Bancorp’s outstanding loans to these VIEs are included in commercial loans in Note 5. As of June 30, 2018 and December 31, 2017, the Bancorp’s unfunded commitments to these entities were $1.2 billion and $1.1 billion, respectively. The loans and unfunded commitments to these VIEs are included in the Bancorp’s overall analysis of the ALLL and reserve for unfunded commitments, respectively. The Bancorp does not provide any implicit or explicit liquidity guarantees or principal value guarantees to these VIEs. 10. Sales of Receivables and Servicing Rights Residential Mortgage Loan Sales The Bancorp sold fixed and adjustable-rate residential mortgage loans during both the three and six months ended June 30, 2018 and 2017. In those sales, the Bancorp obtained servicing responsibilities and provided certain standard representations and warranties, however the investors have no recourse to the Bancorp’s other assets for failure of debtors to pay when due. The Bancorp receives 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. Represents the unpaid principal balance at the time of the sale. Servicing Rights The Bancorp measures all of its servicing rights at fair value with changes in fair value reported in mortgage banking net revenue in the Condensed Consolidated Statements of Income. The Bancorp maintains a non-qualifying hedging strategy to manage a portion of the risk associated with changes in the value of the MSR portfolio. This strategy may include the purchase of free-standing derivatives and various available-for-sale and trading securities. The interest income, mark-to-market adjustments and gain or loss from sale activities associated with these portfolios are expected to economically hedge a portion of the change in value of the MSR portfolio caused by fluctuating OAS spreads, earnings rates and prepayment speeds. The fair value of the servicing asset is based on the present value of expected future cash flows. (a) Included in mortgage banking net revenue in the Condensed Consolidated Statements of Income. Based on historical credit experience, expected credit losses for residential mortgage loan servicing rights have been deemed immaterial, as the Bancorp sold the majority of the underlying loans without recourse. At June 30, 2018 and December 31, 2017, the Bancorp serviced $62.2 billion and $60.0 billion, respectively, of residential mortgage loans for other investors. The value of MSRs that continue to be held by the Bancorp is subject to credit, prepayment and interest rate risks on the sold financial assets. (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. 11. Derivative Financial Instruments The Bancorp maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce certain risks related to interest rate, prepayment and foreign currency volatility. Additionally, the Bancorp holds derivative instruments for the benefit of its commercial customers and for other business purposes. The Bancorp does not enter into unhedged speculative derivative positions. The Bancorp’s interest rate risk management strategy involves modifying the repricing characteristics of certain financial instruments so that changes in interest rates do not adversely affect the Bancorp’s net interest margin and cash flows. Derivative instruments that the Bancorp may use as part of its interest rate risk management strategy include interest rate swaps, interest rate floors, interest rate caps, forward contracts, forward starting interest rate swaps, options, swaptions and TBA securities. Interest rate swap contracts are exchanges of interest payments, such as fixed-rate payments for floating-rate payments, based on a stated notional amount and maturity date. Interest rate floors protect against declining rates, while interest rate caps protect against rising interest rates. Forward contracts are contracts in which the buyer agrees to purchase, and the seller agrees to make delivery of, a specific financial instrument at a predetermined price or yield. Options provide the purchaser with the right, but not the obligation, to purchase or sell a contracted item during a specified period at an agreed upon price. Swaptions are financial instruments granting the owner the right, but not the obligation, to enter into or cancel a swap. Prepayment volatility arises mostly from changes in fair value of the largely fixed-rate MSR portfolio, mortgage loans and mortgage-backed securities. The Bancorp may enter into various free-standing derivatives (principal-only swaps, interest rate swaptions, interest rate floors, mortgage options, TBAs and interest rate swaps) to economically hedge prepayment volatility. Principal-only swaps are total return swaps based on changes in the value of the underlying mortgage principal-only trust. TBA securities are a forward purchase agreement for a mortgage-backed securities trade whereby the terms of the security are undefined at the time the trade is made. Foreign currency volatility occurs as the Bancorp enters into certain loans denominated in foreign currencies. Derivative instruments that the Bancorp may use to economically hedge these foreign denominated loans include foreign exchange swaps and forward contracts. The Bancorp also enters into derivative contracts (including foreign exchange contracts, commodity contracts and interest rate contracts) for the benefit of commercial customers and other business purposes. The Bancorp economically hedges significant exposures related to these free-standing derivatives by entering into offsetting third-party contracts with approved, reputable and independent counterparties with substantially matching terms and currencies. Credit risk arises from the possible inability of counterparties to meet the terms of their contracts. The Bancorp’s exposure is limited to the replacement value of the contracts rather than the notional, principal or contract amounts. Credit risk is minimized through credit approvals, limits, counterparty collateral and monitoring procedures. The fair value of derivative instruments is presented on a gross basis, even when the derivative instruments are subject to master netting arrangements. Derivative instruments with a positive fair value are reported in other assets in the Condensed Consolidated Balance Sheets while derivative instruments with a negative fair value are reported in other liabilities in the Condensed 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 June 30, 2018 and December 31, 2017, the balance of collateral held by the Bancorp for derivative assets was $367 million and $409 million, respectively. For derivative contracts cleared through certain central clearing parties who have modified their rules to treat variation margin payments as settlement of the derivative contract, the payments for variation margin of $99 million were applied to reduce the respective derivative contracts and were also not included in the total amount of collateral held as of June 30, 2018. The credit component negatively impacting the fair value of derivative assets associated with customer accommodation contracts as of both June 30, 2018 and December 31, 2017 was $3 million. 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 June 30, 2018 and December 31, 2017, the balance of collateral posted by the Bancorp for derivative liabilities was $401 million and $365 million, respectively, and $130 million of variation margin payments were applied to the respective derivative contracts to reduce the Bancorp’s derivative liabilities as of June 30, 2018 and were also not included in the total amount of collateral posted. Certain of the Bancorp’s derivative liabilities contain credit risk related contingent features that could result in the requirement to post additional collateral upon the occurrence of specified events. As of June 30, 2018 and December 31, 2017, the fair value of the additional collateral that could be required to be posted as a result of the credit risk related contingent features being triggered was immaterial to the Condensed Consolidated Financial Statements. The posting of collateral has been determined to remove the need for further consideration of credit risk. As a result, the Bancorp determined that the impact of the Bancorp’s credit risk to the valuation of its derivative liabilities was immaterial to the Condensed 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. 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 designated fair value hedges of interest rate risk as of June 30, 2018, the Bancorp performed an assessment of hedge effectiveness using regression analysis (quantitative approach) with changes in the fair value of the derivative instrument and changes in the fair value of the hedged asset or liability attributable to the hedged risk recorded in the same income statement line in current period net income. Cash Flow Hedges The Bancorp may enter into interest rate swaps to convert floating-rate assets and liabilities to fixed rates or to hedge certain forecasted transactions for the variability in cash flows attributable to the contractually specified interest rate. The assets or liabilities may be grouped in circumstances where they share the same risk exposure that the Bancorp desires to hedge. The Bancorp may also enter into interest rate caps and floors to limit cash flow variability of floating-rate assets and liabilities. As of June 30, 2018, all hedges designated as cash flow hedges were assessed for effectiveness using regression analysis. The entire change in the fair value of the interest rate swap included in the assessment of hedge effectiveness is recorded in AOCI and reclassified from AOCI to current period earnings when the hedged item affects earnings. As of June 30, 2018, the maximum length of time over which the Bancorp is hedging its exposure to the variability in future cash flows is 73 months. Reclassified gains and losses on interest rate contracts related to commercial and industrial loans are recorded within interest income in the Condensed Consolidated Statements of Income. As of June 30, 2018 and December 31, 2017, $16 million and $9 million, respectively, of net deferred losses, net of tax, on cash flow hedges were recorded in AOCI in the Condensed Consolidated Balance Sheets. As of June 30, 2018, $7 million in net unrealized gains, net of tax, recorded in AOCI are expected to be reclassified into earnings during the next twelve months. This amount could differ from amounts actually recognized due to changes in interest rates, hedge de-designations, and the addition of other hedges subsequent to June 30, 2018. During both the three and six months ended June 30, 2018 and 2017, there were no gains or losses reclassified from AOCI into earnings associated with the discontinuance of cash flow hedges because it was probable that the original forecasted transaction would no longer occur by the end of the originally specified time period or within the additional period of time as defined by U.S. GAAP. For both the three and six months ended June 30, 2017, the amount of pretax net losses recognized in OCI represented the effective portion of the cumulative gains or losses on cash flow hedges and ineffectiveness was reported within noninterest income. Upon the adoption of ASU 2017-12, the Bancorp recorded a cumulative effect adjustment to retained earnings effective January 1, 2018 related to the elimination of the separate measurement of ineffectiveness. Refer to Note 3 for additional information. Free-Standing Derivative Instruments – Risk Management and Other Business Purposes As part of its overall risk management strategy relative to its mortgage banking activity, the Bancorp may enter into various free-standing derivatives (principal-only swaps, interest rate swaptions, interest rate floors, mortgage options, TBA securities and interest rate swaps) to economically hedge changes in fair value of its largely fixed-rate MSR portfolio. Principal-only swaps hedge the mortgage-LIBOR spread because these swaps appreciate in value as a result of tightening spreads. Principal-only swaps also provide prepayment protection by increasing in value when prepayment speeds increase, as opposed to MSRs that lose value in a faster prepayment environment. Receive fixed/pay floating interest rate swaps and swaptions increase in value when interest rates do not increase as quickly as expected. The Bancorp enters into forward contracts and mortgage options to economically hedge the change in fair value of certain residential mortgage loans held for sale due to changes in interest rates. IRLCs issued on residential mortgage loan commitments that will be held for sale are also considered free-standing derivative instruments and the interest rate exposure on these commitments is economically hedged primarily with forward contracts. Revaluation gains and losses from free-standing derivatives related to mortgage banking activity are recorded as a component of mortgage banking net revenue in the Condensed Consolidated Statements of Income. In conjunction with the sale of Visa, Inc. Class B Shares in 2009, the Bancorp entered into a total return swap in which the Bancorp will make or receive payments based on subsequent changes in the conversion rate of the Class B Shares into Class A Shares. This total return swap is accounted for as a free-standing derivative. Refer to Note 20 for further discussion of significant inputs and assumptions used in the valuation of this instrument. 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 Condensed 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 either corporate banking revenue or other noninterest income in the Condensed 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 June 30, 2018 and December 31, 2017, the total notional amount of the risk participation agreements was $3.7 billion and $2.8 billion, respectively, and the fair value was a liability of $8 million and $5 million at June 30, 2018 and December 31, 2017, respectively, which is included in other liabilities in the Condensed Consolidated Balance Sheets. As of June 30, 2018, the risk participation agreements had a weighted-average remaining life of 3.6 years. The Bancorp’s maximum exposure in the risk participation agreements is contingent on the fair value of the underlying interest rate derivative contracts in an asset position at the time of default. The Bancorp monitors the credit risk associated with the underlying customers in the risk participation agreements through the same risk grading system currently utilized for establishing loss reserves in its loan and lease portfolio. Offsetting Derivative Financial Instruments The Bancorp’s derivative transactions are generally governed by ISDA Master Agreements and similar arrangements, which include provisions governing the setoff of assets and liabilities between the parties. When the Bancorp has more than one outstanding derivative transaction with a single counterparty, the setoff provisions contained within these agreements generally allow the non-defaulting party the right to reduce its liability to the defaulting party by amounts eligible for setoff, including the collateral received as well as eligible offsetting transactions with that counterparty, irrespective of the currency, place of payment, or booking office. The Bancorp’s policy is to present its derivative assets and derivative liabilities on the Condensed Consolidated Balance Sheets on a gross basis, even when provisions allowing for setoff are in place. However, for derivative contracts cleared through certain central clearing parties who have modified their rules to treat variation margin payments as settlements, the fair value of the respective derivative contracts are reported net of the variation margin payments. Collateral amounts included in the tables below consist primarily of cash and highly-rated government-backed securities and do not include variation margin payments for derivative contracts with legal rights of setoff for both periods shown. 12. Other Short-Term Borrowings The Bancorp’s securities sold under repurchase agreements are accounted for as secured borrowings and are collateralized by securities included in available-for-sale debt and other securities in the Condensed Consolidated Balance Sheets. These securities are subject to changes in market value and, therefore, the Bancorp may increase or decrease the level of securities pledged as collateral based upon these movements in market value. As of both June 30, 2018 and December 31, 2017, all securities sold under repurchase agreements were secured by agency residential mortgage-backed securities with an overnight remaining contractual maturity. 13. Long-Term Debt On March 14, 2018, the Bancorp issued and sold $650 million of 3.95% senior fixed-rate notes, with a maturity of ten years, due on March 14, 2028. These notes will be redeemable by the Bancorp, in whole or in part, on or after the date that is 30 days prior to the maturity date at a redemption price equal to 100% of the principal amount of the notes to be redeemed plus accrued and unpaid interest thereon to, but excluding, the redemption date. On June 5, 2018, the Bancorp issued and sold $250 million of senior floating-rate notes, with a maturity of three years, due on June 4, 2021. Interest on the floating-rate notes is 3-month LIBOR plus 47 bps. These notes will be redeemable, in whole or in part, on or after the date that is 30 days prior to the maturity date at a redemption price equal to 100% of the principal amount of the notes to be redeemed plus accrued and unpaid interest thereon to, but excluding, the redemption date. For further information on a subsequent event related to long-term debt, refer to Note 24. 14. Capital Actions Accelerated Share Repurchase Transactions During the six months ended June 30, 2018, the Bancorp entered into or settled 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 these repurchase agreements. The accelerated share repurchases were treated as two separate transactions, (i) the acquisition of treasury shares on the repurchase date and (ii) a forward contract indexed to the Bancorp's common stock. For further information on a subsequent event related to capital actions, refer to Note 24. 15. 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 Condensed Consolidated Balance Sheets. The creditworthiness of counterparties for all instruments and agreements is evaluated on a case-by-case basis in accordance with the Bancorp’s credit policies. The Bancorp’s significant commitments, contingent liabilities and guarantees in excess of the amounts recognized in the Condensed Consolidated Balance Sheets are discussed in the following sections. 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 June 30, 2018 and December 31, 2017, the Bancorp had a reserve for unfunded commitments, including letters of credit, totaling $131 million and $161 million, respectively, included in other liabilities in the Condensed Consolidated Balance Sheets. The Bancorp monitors the credit risk associated with commitments to extend credit using the same standard regulatory risk rating system utilized for its loan and lease portfolio. Letters of credit (a) Includes $7 and $2 issued on behalf of commercial customers to facilitate trade payments in U.S. dollars and foreign currencies which expire less than 1 year and between 1 - 5 years, respectively. Standby letters of credit accounted for approximately 99% of total letters of credit at both June 30, 2018 and December 31, 2017, and are considered guarantees in accordance with U.S. GAAP. Approximately 63% and 61% of the total standby letters of credit were collateralized as of June 30, 2018 and December 31, 2017, respectively. In the event of nonperformance by the customers, the Bancorp has rights to the underlying collateral, which can include commercial real estate, physical plant and property, inventory, receivables, cash and marketable securities. The reserve related to these standby letters of credit, which was included in the total reserve for unfunded commitments, was $5 million and $6 million at June 30, 2018 and December 31, 2017, respectively. The Bancorp monitors the credit risk associated with letters of credit using the same standard regulatory risk rating system utilized for its loan and lease portfolio. At June 30, 2018 and December 31, 2017, the Bancorp had outstanding letters of credit that were supporting certain securities issued as VRDNs. The Bancorp facilitates financing for its commercial customers, which consist of companies and municipalities, by marketing the VRDNs to investors. The VRDNs pay interest to holders at a rate of interest that fluctuates based upon market demand. The VRDNs generally have long-term maturity dates, but can be tendered by the holder for purchase at par value upon proper advance notice. When the VRDNs are tendered, a remarketing agent generally finds another investor to purchase the VRDNs to keep the securities outstanding in the market. As of June 30, 2018 and December 31, 2017, total VRDNs in which the Bancorp was the remarketing agent or were supported by a Bancorp letter of credit were $560 million and $602 million, respectively, of which FTS acted as the remarketing agent to issuers on $540 million and $508 million, respectively. As remarketing agent, FTS is responsible for actively remarketing VRDNs to other investors when they have been tendered. If another investor is not identified, FTS may choose to purchase the VRDNs into inventory at its discretion while it continues to remarket them. If FTS purchases the VRDNs into inventory, it can subsequently tender back the VRDNs to the issuer’s trustee with proper advance notice. The Bancorp issued letters of credit, as a credit enhancement, to $299 million and $331 million of the VRDNs remarketed by FTS, in addition to $20 million and $94 million in VRDNs remarketed by third parties at June 30, 2018 and December 31, 2017, respectively. These letters of credit are included in the total letters of credit balance provided in the previous table. The Bancorp held $2 million and $1 million of these VRDNs in its portfolio and classified them as trading securities at June 30, 2018 and December 31, 2017, respectively. Forward contracts related to residential mortgage loans held for sale The Bancorp enters into forward contracts to economically hedge the change in fair value of certain residential mortgage loans held for sale due to changes in interest rates. The outstanding notional amounts of these forward contracts are included in the summary of significant commitments table for all periods presented. Noncancelable operating lease obligations and other commitments The Bancorp’s subsidiaries have entered into a number of noncancelable lease agreements. The minimum rental commitments under noncancelable lease agreements are shown in the summary of significant commitments table. The Bancorp has also entered into a limited number of agreements for work related to banking center construction and to purchase goods or services. Contingent Liabilities Legal claims There are legal claims pending against the Bancorp and its subsidiaries that have arisen in the normal course of business. Refer to Note 16 for additional information regarding these proceedings. Guarantees The Bancorp has performance obligations upon the occurrence of certain events under financial guarantees provided in certain contractual arrangements as discussed in the following sections. Residential mortgage loans sold with representation and warranty provisions Conforming residential mortgage loans sold to unrelated third parties are generally sold with representation and warranty provisions. A contractual liability arises only in the event of a breach of these representations and warranties and, in general, only when a loss results from the breach. The Bancorp may be required to repurchase any previously sold loan, indemnify or make whole the investor or insurer for which the representation or warranty of the Bancorp proves to be inaccurate, incomplete or misleading. For more information on how the Bancorp establishes the residential mortgage repurchase reserve, refer to Note 1 of the Notes to Consolidated Financial Statements included in the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2017. As of June 30, 2018 and December 31, 2017, the Bancorp maintained reserves related to loans sold with representation and warranty provisions totaling $7 million and $9 million, respectively, included in other liabilities in the Condensed 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 June 30, 2018 are reasonably possible. The Bancorp currently estimates that it is reasonably possible that it could incur losses related to mortgage representation and warranty provisions in an amount up to approximately $9 million in excess of amounts reserved. This estimate was derived by modifying the key assumptions to reflect management's judgment regarding reasonably possible adverse changes to those assumptions. The actual repurchase losses could vary significantly from the recorded mortgage representation and warranty reserve or this estimate of reasonably possible losses, depending on the outcome of various factors, including those previously discussed. For both the three months ended June 30, 2018 and 2017, the Bancorp paid an immaterial amount in the form of make whole payments and repurchased $5 million and $3 million, respectively, in outstanding principal of loans to satisfy investor demands. For both the six months ended June 30, 2018 and 2017, the Bancorp paid immaterial amounts in the form of make whole payments and repurchased $7 million and $5 million, respectively, in outstanding principal of loans to satisfy investor demands. Total repurchase demand requests during the three months ended June 30, 2018 and 2017 were $6 million and $5 million, respectively. Total repurchase demand requests during the six months ended June 30, 2018 and 2017 were $11 million and $8 million, respectively. Total outstanding repurchase demand inventory was $3 million and $1 million at June 30, 2018 and December 31, 2017, respectively. 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 $289 million and $312 million at June 30, 2018 and December 31, 2017, respectively, and the delinquency rates were 2.5% and 3.0% at June 30, 2018 and December 31, 2017, respectively. The Bancorp maintained an estimated credit loss reserve on these loans sold with credit recourse of $5 million at both June 30, 2018 and December 31, 2017 recorded in other liabilities in the Condensed 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 balances held by the brokerage clearing agent were $15 million at both June 30, 2018 and December 31, 2017. 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 June 30, 2018 and December 31, 2017. Visa litigation The Bancorp, as a member bank of Visa prior to Visa’s reorganization and IPO (the “IPO”) of its Class A common shares (the “Class A Shares”) in 2008, had certain indemnification obligations pursuant to Visa’s certificate of incorporation and by-laws and in accordance with their membership agreements. In accordance with Visa’s by-laws prior to the IPO, the Bancorp could have been required to indemnify Visa for the Bancorp’s proportional share of losses based on the pre-IPO membership interests. As part of its reorganization and IPO, the Bancorp’s indemnification obligation was modified to include only certain known or anticipated litigation (the “Covered Litigation”) as of the date of the restructuring. This modification triggered a requirement for the Bancorp to recognize a liability equal to the fair value of the indemnification liability. In conjunction with the IPO, the Bancorp received 10.1 million of Visa’s Class B common shares (the “Class B Shares”) based on the Bancorp’s membership percentage in Visa prior to the IPO. The Class B Shares are not transferable (other than to another member bank) until the later of the third anniversary of the IPO closing or the date which the Covered Litigation has been resolved; therefore, the Bancorp’s Class B Shares were classified in other assets and accounted for at their carryover basis of $0. Visa deposited $3 billion of the proceeds from the IPO into a litigation escrow account, established for the purpose of funding judgments in, or settlements of, the Covered Litigation. Since then, when Visa’s litigation committee determined that the escrow account was insufficient; Visa issued additional Class A Shares and deposited the proceeds from the sale of the Class A Shares into the litigation escrow account. When Visa funded the litigation escrow account, the Class B Shares were subjected to dilution through an adjustment in the conversion rate of Class B Shares into Class A Shares. In 2009, the Bancorp completed the sale of Visa, Inc. Class B Shares and entered into a total return swap in which the Bancorp will make or receive payments based on subsequent changes in the conversion rate of the Class B Shares into Class A Shares. The swap terminates on the later of the third anniversary of Visa’s IPO or the date on which the Covered Litigation is settled. Refer to Note 21 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 June 30, 2018, the Bancorp has concluded that it is not probable that the Visa Litigation Exposure will exceed the Class B value. Based on this determination, upon the sale of 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 $164 million at June 30, 2018 and $137 million at December 31, 2017. Refer to Note 11 and Note 21 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: 16. Legal and Regulatory Proceedings Litigation Visa/MasterCard Merchant Interchange Litigation In April 2006, the Bancorp was added as a defendant in a consolidated antitrust class action lawsuit originally filed against Visa®, MasterCard® and several other major financial institutions in the United States District Court for the Eastern District of New York (In re: Payment Card Interchange Fee and Merchant Discount Antitrust Litigation). The plaintiffs, merchants operating commercial businesses throughout the U.S. and trade associations, claimed that the interchange fees charged by card-issuing banks were unreasonable and sought injunctive relief and unspecified damages. In addition to being a named defendant, the Bancorp is also subject to a possible indemnification obligation of Visa as discussed in Note 15 and has also entered into judgment and loss sharing agreements with Visa, MasterCard and certain other named defendants. In October 2012, the parties to the litigation entered into a settlement agreement. On January 14, 2014, the trial court entered a final order approving the class settlement. A number of merchants filed appeals from that approval. The U.S. Court of Appeals for the Second Circuit held a hearing on those appeals and on June 30, 2016, reversed the district court’s approval of the class settlement, remanding the case to the district court for further proceedings. On March 27, 2017, the Supreme Court of the United States denied a petition for writ of certiorari seeking to review the Second Circuit’s decision. Pursuant to the terms of the overturned settlement agreement, the Bancorp previously paid $46 million into a class settlement escrow account. Because the appellate court ruling remands the case to the district court for further proceedings, the ultimate outcome in this matter is uncertain. Approximately 8,000 merchants requested exclusion from the class settlement, and therefore, pursuant to the terms of the overturned settlement agreement, approximately 25% of the funds paid into the class settlement escrow account were already returned to the control of the defendants. The remaining approximately 75% of the settlement funds paid by the Bancorp are maintained in the escrow account. More than 500 of the merchants who requested exclusion from the class filed separate federal lawsuits against Visa, MasterCard and certain other defendants alleging similar antitrust violations. These individual federal lawsuits were transferred to the United States District Court for the Eastern District of New York. While the Bancorp is only named as a defendant in one of the individual federal lawsuits, it may have obligations pursuant to indemnification arrangements and/or the judgment or loss sharing agreements noted above. On June 5, 2018, the defendants in the consolidated class action reached an agreement to settle in principle with the proposed plaintiffs’ class seeking monetary damages, with the Bancorp’s portion of the settlement amount (above the existing escrow) within reserves. The settlement in principle is subject to finalization and District Court approval. This settlement does not resolve the claims of the separate proposed plaintiffs’ class seeking injunctive relief or the claims of merchants who are pursuing separate lawsuits. Refer to Note 15 for further information. Klopfenstein v. Fifth Third Bank On August 3, 2012, William Klopfenstein and Adam McKinney filed a lawsuit against Fifth Third Bank in the United States District Court for the Northern District of Ohio (Klopfenstein et al. v. Fifth Third Bank), alleging that the 120% APR that Fifth Third disclosed on its Early Access program was misleading. Early Access is a deposit-advance program offered to eligible customers with checking accounts. The plaintiffs sought to represent a nationwide class of customers who used the Early Access program and repaid their cash advances within 30 days. On October 31, 2012, the case was transferred to the United States District Court for the Southern District of Ohio. In 2013, four similar putative class actions were filed against Fifth Third Bank in federal courts throughout the country (Lori and Danielle Laskaris v. Fifth Third Bank, Janet Fyock v. Fifth Third Bank, Jesse McQuillen v. Fifth Third Bank, and Brian Harrison v. Fifth Third Bank). Those four lawsuits were transferred to the Southern District of Ohio and consolidated with the original lawsuit as In re: Fifth Third Early Access Cash Advance Litigation. On behalf of a putative class, the plaintiffs seek unspecified monetary and statutory damages, injunctive relief, punitive damages, attorney’s fees, and pre- and post-judgment interest. On March 30, 2015, the court dismissed all claims alleged in the consolidated lawsuit except a claim under the TILA. On January 10, 2018, plaintiffs filed a motion to hear the immediate appeal of the dismissal of their breach of contract claim. On March 28, 2018, the court granted plaintiffs’ motion and stayed the TILA claim pending that appeal. On April 26, 2018, plaintiffs filed their notice of appeal for the breach of contract claim with the U.S. Court of Appeals for the Sixth Circuit. Helton v. Fifth Third Bank On August 31, 2015, trust beneficiaries filed an action against Fifth Third Bank, as trustee, in the Probate Court for Hamilton County, Ohio (Helen Clarke Helton, et al. v. Fifth Third Bank). The plaintiffs allege breach of the duty to diversify, breach of the duty of impartiality, breach of trust/fiduciary duty, and unjust enrichment, based on Fifth Third’s alleged failure to diversify assets held in two trusts for the plaintiffs’ benefit. The lawsuit seeks over $800 million in alleged damages, attorney’s fees, removal of Fifth Third as trustee, and injunctive relief. Fifth Third denies all liability. On April 20, 2018, the Court denied plaintiffs’ motion for summary judgment and granted summary judgment to Fifth Third, dismissing the case in its entirety. The plaintiffs filed a notice of appeal on May 5, 2018. Upsher-Smith Laboratories, Inc. v. Fifth Third Bank On February 12, 2016, Upsher-Smith Laboratories, Inc. (“Upsher-Smith”) filed suit against Fifth Third Bank in the Fourth Judicial District, Hennepin County, Minnesota (Upsher-Smith Laboratories Inc. v. Fifth Third Bank), alleging that Fifth Third improperly implemented foreign exchange transactions requested by plaintiff’s authorized employee who allegedly was the victim of fraud by a third party. Plaintiff asserts claims for breach of contract and the implied covenant of good faith and fair dealing under Article 4A-202 of the Uniform Commercial Code, with losses allegedly totaling almost $40 million, plus interest. Fifth Third denies all liability in this matter. On March 3, 2016, Fifth Third removed the case to the United States District Court for the District of Minnesota. No trial date has been scheduled. Other litigation The Bancorp and its subsidiaries are not parties to any other material litigation. However, there are other litigation matters that arise in the normal course of business. While it is impossible to ascertain the ultimate resolution or range of financial liability with respect to these contingent matters, management believes that the resulting liability, if any, from these other actions would not have a material effect upon the Bancorp’s consolidated financial position, results of operations or cash flows. 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 or reputational harm to the Bancorp, its affiliates and/or their respective directors, officers and other personnel, including adverse judgments, findings, settlements, fines, penalties, orders, injunctions or other actions, amendments and/or restatements of the Bancorp’s SEC filings and/or financial statements, as applicable, and/or determinations of material weaknesses in our disclosure controls and procedures. Investigations by regulatory authorities may from time to time result in civil or criminal referrals to law enforcement. Additionally, in some cases, regulatory authorities may take supervisory actions that are considered to be confidential supervisory information which may not be publicly disclosed. Reasonably Possible Losses in Excess of Accruals The Bancorp and its subsidiaries are parties to numerous claims and lawsuits as well as threatened or potential actions or claims concerning matters arising from the conduct of its business activities. The outcome of claims or litigation and the timing of ultimate resolution are inherently difficult to predict. The following factors, among others, contribute to this lack of predictability: claims often include significant legal uncertainties, damages alleged by plaintiffs are often unspecified or overstated, discovery may not have started or may not be complete and material facts may be disputed or unsubstantiated. As a result of these factors, the Bancorp is not always able to provide an estimate of the range of reasonably possible outcomes for each claim. An accrual for a potential litigation loss is established when information related to the loss contingency indicates both that a loss is probable and that the amount of loss can be reasonably estimated. Any such accrual is adjusted from time to time thereafter as appropriate to reflect changes in circumstances. The Bancorp also determines, when possible (due to the uncertainties described above), estimates of reasonably possible losses or ranges of reasonably possible losses, in excess of amounts accrued. Under U.S. GAAP, an event is “reasonably possible” if “the chance of the future event or events occurring is more than remote but less than likely” and an event is “remote” if “the chance of the future event or events occurring is slight.” Thus, references to the upper end of the range of reasonably possible loss for cases in which the Bancorp is able to estimate a range of reasonably possible loss mean the upper end of the range of loss for cases for which the Bancorp believes the risk of loss is more than slight. For matters where the Bancorp is able to estimate such possible losses or ranges of possible losses, the Bancorp currently estimates that it is reasonably possible that it could incur losses related to legal and regulatory proceedings in an aggregate amount up to approximately $5 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. 17. Related Party Transactions Vantiv Holding, LLC On January 16, 2018, Vantiv, Inc. completed its previously announced acquisition of Worldpay Group plc. with the resulting combined company named Worldpay, Inc. As a result of this transaction, the Bancorp recognized a gain of $414 million in other noninterest income during the first quarter of 2018 associated with the dilution in its ownership interest in Vantiv Holding, LLC from approximately 8.6% to approximately 4.9%. On June 27, 2018, the Bancorp completed the sale of 5 million shares of Class A common stock of Worldpay, Inc., formerly Vantiv, Inc. The Bancorp had previously received these Class A shares in exchange for Class B Units of Vantiv Holding, LLC. The Bancorp recognized a gain of $205 million related to the sale. As a result of the sale, the Bancorp beneficially owns approximately 3.3% of Worldpay’s equity through its ownership of approximately 10.3 million Class B Units. The Bancorp’s remaining interest in Vantiv Holding, LLC of $426 million 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. GS Holdings In May 2018, GreenSky, Inc. launched an IPO and issued 38 million shares of Class A common stock for a valuation of $23 per share. In connection with this IPO, the Bancorp’s investment in GreenSky, LLC, which was comprised of 252,550 membership units, was converted to 2,525,498 units of the newly formed GreenSky Holdings, LLC (“GS Holdings”), representing a 1.4% interest in GS Holdings. The Bancorp’s units in GS Holdings are exchangeable on a one-to-one basis for Class A common stock or cash after the initial 180-day lock-up period expires. At the time of the IPO, the Bancorp recognized a $16 million gain on its investment in GreenSky, LLC, which was included in other noninterest income in the Condensed Consolidated Statements of Income for the three and six months ended June 30, 2018. At June 30, 2018, the investment in GS Holdings was $53 million, which was included in equity securities in the Condensed Consolidated Balance Sheets. 18. Income Taxes The applicable income tax expense was $107 million and $127 million for the three months ended June 30, 2018 and 2017, respectively, and $239 million and $218 million for the six months ended June 30, 2018 and 2017, respectively. The effective tax rates for the three months ended June 30, 2018 and 2017 were 15.5% and 25.9%, respectively, and 15.7% and 24.5% for the six months ended June 30, 2018 and 2017, respectively. The decrease in the effective tax rate for both the three and six months ended June 30, 2018 compared to the same periods in the prior year was primarily related to the reduction in the federal statutory corporate tax rate partially offset by changes to previously deductible items associated with the enactment of the TCJA. 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 12 months, the Bancorp believes it is unlikely that its unrecognized tax benefits will change by a material amount during the next 12 months. 18. Accumulated Other Comprehensive Income The Bancorp’s AOCI balance was adjusted as of January 1, 2018 to reflect the adoption of new accounting standards. Refer to Note 3 for additional information. 19. Earnings Per Share Shares are excluded from the computation of earnings per diluted share when their inclusion has an anti-dilutive effect on earnings per share. The diluted earnings per share computation for both the three and six months ended June 30, 2018 excludes 2 million of SARs and an immaterial amount of stock options because their inclusion would have been anti-dilutive. The diluted earnings per share computation for the three and six months ended June 30, 2017 excludes 4 million and 5 million, respectively, of SARs and an immaterial amount of stock options because their inclusion would have been anti-dilutive. The diluted earnings per share computation for the three and six months ended June 30, 2017 excludes the impact of the forward contract related to the May 1, 2017 accelerated share repurchase transaction. Based upon the average daily volume weighted-average price of the Bancorp’s common stock during the second 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 June 30, 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. 21. 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. 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 more information regarding the fair value hierarchy, refer to Note 1 of the Notes to Consolidated Financial Statements included in the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2017. The following is a description of the valuation methodologies used for significant instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy. Available-for-sale debt and other securities, trading debt securities and equity securities Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include U.S. Treasury securities and equity securities. If quoted market prices are not available, then fair values are estimated using pricing models, quoted prices of securities with similar characteristics or DCFs. Level 2 securities may include federal agencies securities, obligations of states and political subdivisions securities, agency and non-agency residential mortgage-backed securities, agency and non-agency commercial mortgage-backed securities, asset-backed securities and other debt securities and equity securities. These securities are generally valued using a market approach based on observable prices of securities with similar characteristics. Residential mortgage loans held for sale For residential mortgage loans held for sale for which the fair value election has been made, fair value is estimated based upon mortgage-backed securities prices and spreads to those prices or, for certain ARM loans, DCF models that may incorporate the anticipated portfolio composition, credit spreads of asset-backed securities with similar collateral and market conditions. The anticipated portfolio composition includes the effect of interest rate spreads and discount rates due to loan characteristics such as the state in which the loan was originated, the loan amount and the ARM margin. Residential mortgage loans held for sale that are valued based on mortgage-backed securities prices are classified within Level 2 of the valuation hierarchy as the valuation is based on external pricing for similar instruments. ARM loans classified as held for sale are also classified within Level 2 of the valuation hierarchy due to the use of observable inputs in the DCF model. These observable inputs include interest rate spreads from agency mortgage-backed securities market rates and observable discount rates. Commercial loans held for sale For commercial loans held for sale for which the fair value election has been made, fair value is estimated based upon quoted prices of identical or similar assets in an active market, which are reviewed and approved by the Market Risk department, which reports to the Bancorp’s Chief Risk Officer. These loans are generally valued using a market approach based on observable prices and are classified within Level 2 of the valuation hierarchy. Residential mortgage loans Residential mortgage loans held for sale that are reclassified to held for investment are transferred from Level 2 to Level 3 of the fair value hierarchy. It is the Bancorp’s policy to value any transfers between levels of the fair value hierarchy based on end of period fair values. For residential mortgage loans for which the fair value election has been made, and that are reclassified from held for sale to held for investment, the fair value estimation is based on mortgage-backed securities prices, interest rate risk and an internally developed credit component. Therefore, these loans are classified within Level 3 of the valuation hierarchy. An adverse change in the loss rate or severity assumption would result in a decrease in fair value of the related loan. The Secondary Marketing department, which reports to the Bancorp’s Head of the Consumer Bank, in conjunction with the Consumer Credit Risk department, which reports to the Bancorp’s Chief Risk Officer, are responsible for determining the valuation methodology for residential mortgage loans held for investment. The Secondary Marketing department reviews 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. MSRs MSRs do not trade in an active, open market with readily observable prices. While sales of MSRs do occur, the precise terms and conditions typically are not readily available. Accordingly, the Bancorp estimates the fair value of MSRs using internal OAS models with certain unobservable inputs, primarily prepayment speed assumptions, OAS and weighted-average lives, resulting in a classification within Level 3 of the valuation hierarchy. Refer to Note 10 for further information on the assumptions used in the valuation of the Bancorp’s MSRs. The Secondary Marketing department and Treasury department are responsible for determining the valuation methodology for MSRs. Representatives from Secondary Marketing, Treasury, Accounting and Risk Management are responsible for reviewing key assumptions used in the internal OAS model. Two external valuations of the MSR portfolio are obtained from third parties quarterly that use valuation models in order to assess the reasonableness of the internal OAS model. Additionally, the Bancorp participates in peer surveys that provide additional confirmation of the reasonableness of key assumptions utilized in the MSR valuation process and the resulting MSR prices. Derivatives Exchange-traded derivatives valued using quoted prices and certain over-the-counter derivatives valued using active bids are classified within Level 1 of the valuation hierarchy. Most of the Bancorp’s derivative contracts are valued using DCF or other models that incorporate current market interest rates, credit spreads assigned to the derivative counterparties and other market parameters and, therefore, are classified within Level 2 of the valuation hierarchy. Such derivatives include basic and structured interest rate, foreign exchange and commodity swaps and options. Derivatives that are valued based upon models with significant unobservable market parameters are classified within Level 3 of the valuation hierarchy. At June 30, 2018 and December 31, 2017, derivatives classified as Level 3, which are valued using models containing unobservable inputs, consisted primarily of a total return swap associated with the Bancorp’s sale of Visa, Inc. Class B Shares. Level 3 derivatives also include IRLCs, which utilize internally generated 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 June 30, 2018 was $11 million. Immediate decreases in current interest rates of 25 bps and 50 bps would result in increases in the fair value of the IRLCs of approximately $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 $6 million and $12 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. Short positions Where quoted prices are available in an active market, short positions are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated using pricing models, quoted prices of securities with similar characteristics or DCFs and therefore are classified within Level 2 of the valuation hierarchy. 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. Commercial loans held for sale During the three and six months ended June 30, 2018, the Bancorp transferred an immaterial amount and $1 million, respectively, of commercial loans from the portfolio to loans held for sale that upon transfer were measured at lower of cost or fair value. During the three and six months ended June 30, 2017, the Bancorp transferred $57 million and $75 million, respectively, of commercial loans from the portfolio to loans held for sale that upon transfer were measured at lower of cost or fair value. These loans had an immaterial amount of fair value adjustments during the three and six months ended June 30, 2018 and $13 million and $30 million of fair value adjustments during the three and six months ended June 30, 2017, respectively. The fair value adjustments were generally based on appraisals of the underlying collateral and were, therefore, classified within Level 3 of the valuation hierarchy. Additionally, fair value adjustments on existing loans held for sale were immaterial for both the three months ended June 30, 2018 and 2017 and $1 million and immaterial for the six months ended June 30, 2018 and 2017, respectively. The fair value adjustments were also based on appraisals of the underlying collateral. The Bancorp recognized an immaterial amount of gains and losses on the sale of commercial loans held for sale during both the three and six months ended June 30, 2018. The Bancorp recognized an immaterial amount of losses and $2 million in losses on the sale of commercial loans held for sale for the three and six months ended June 30, 2017, respectively. 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, reviews the third party appraisals for reasonableness. Additionally, the Commercial Line of Business Finance department, which reports to the Bancorp’s Chief Financial Officer, in conjunction with the Accounting department reviews all loan appraisal values, carry values and vintages. Commercial loans held for investment During the three and six months ended June 30, 2018 and 2017, the Bancorp recorded nonrecurring impairment adjustments to certain commercial and industrial loans, commercial mortgage loans and commercial leases held for investment. Larger commercial loans included within aggregate borrower relationship balances exceeding $1 million that exhibit probable or observed credit weaknesses are subject to individual review for impairment. The Bancorp considers the current value of collateral, credit quality of any guarantees, the guarantor’s liquidity and willingness to cooperate, the loan structure and other factors when evaluating whether an individual loan is impaired. When the loan is collateral dependent, the fair value of the loan is generally based on the fair value of the underlying collateral supporting the loan and therefore these loans were classified within Level 3 of the valuation hierarchy. In cases where the carrying value exceeds the fair value, an impairment loss is recognized. The fair values and recognized impairment losses are reflected in the previous tables. Commercial Credit Risk, which reports to the Bancorp’s Chief Risk Officer, is responsible for preparing and reviewing the fair value estimates for commercial loans held for investment. OREO During the three and six months ended June 30, 2018 and 2017, the Bancorp recorded nonrecurring adjustments to certain commercial and residential real estate properties classified as OREO and measured at the lower of carrying amount or fair value. These nonrecurring losses were primarily due to declines in real estate values of the properties recorded in OREO. These losses included $1 million and $2 million in losses, recorded as charge-offs on new OREO properties transferred from loans during the three and six months ended June 30, 2018, respectively, and $1 million and $3 million for the three and six months ended June 30, 2017, respectively. These losses also included an immaterial amount of losses and $2 million in losses for the three and six months ended June 30, 2018, respectively, and an immaterial amount of losses and $2 million in losses for the three and six months ended June 30, 2017, respectively, recorded as negative fair value adjustments on OREO in other noninterest expense in the Condensed Consolidated Statements of Income subsequent to their transfer from loans. As discussed in the following paragraphs, the fair value amounts are generally based on appraisals of the property values, resulting in a classification within Level 3 of the valuation hierarchy. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized. The previous tables reflect the fair value measurements of the properties before deducting the estimated costs to sell. The Real Estate Valuation department is solely responsible for managing the appraisal process and evaluating the appraisal for commercial properties transferred to OREO. All appraisals on commercial OREO properties are updated on at least an annual basis. The Real Estate Valuation department reviews the BPO data and internal market information to determine the initial charge-off on residential real estate loans transferred to OREO. Once the foreclosure process is completed, the Bancorp performs an interior inspection to update the initial fair value of the property. These properties are reviewed at least every 30 days after the initial interior inspections are completed. The Asset Manager receives a monthly status report for each property which includes the number of showings, recently sold properties, current comparable listings and overall market conditions. Bank premises and equipment The Bancorp performs assessments of the recoverability of long-lived assets when events or changes in circumstances indicate that their carrying values may not be recoverable. These properties were written down to their lower of cost or market values. At least annually thereafter, the Bancorp will review these properties for market fluctuations. The fair value amounts were generally based on appraisals of the property values, resulting in a classification within Level 3 of the valuation hierarchy. Corporate Facilities, which reports to the Bancorp’s Chief Administrative Officer, in conjunction with Accounting, are responsible for preparing and reviewing the fair value estimates for bank premises and equipment. For further information on bank premises and equipment refer to Note 7. Operating lease equipment During the three and six months ended June 30, 2018 and 2017, 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. As part of this ongoing assessment, the Bancorp determined that the carrying values of certain operating lease equipment were not recoverable and as a result, the Bancorp recorded an impairment loss equal to the amount by which the carrying value of the assets exceeded the fair value. The fair value amounts were generally based on appraised values of the assets, resulting in a classification within Level 3 of the valuation hierarchy. The Bancorp recorded net losses of $1 million and $3 million for the three and six months ended June 30, 2018, respectively, and net losses of an immaterial amount and $20 million for the three and six months ended June 30, 2017, respectively, as a reduction to corporate banking revenue in the Condensed 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. Private equity investments As a result of adopting ASU 2016-01, effective January 1, 2018, the Bancorp accounts for its private equity investments using the measurement alternative to fair value, except for those accounted for under the equity method of accounting. Under the measurement alternative, the Bancorp carries each investment at its cost basis minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. The Bancorp recognized gains of $16 million and $51 million resulting from observable price changes during the three and six months ended June 30, 2018, respectively. The carrying value of the Bancorp’s private equity investments as of June 30, 2018 includes a cumulative $35 million of positive adjustments as a result of observable price changes. Because these adjustments are based on observable transactions in inactive markets, they are classified in Level 2 of the fair value hierarchy. For private equity investments which are accounted for using the measurement alternative to fair value, the Bancorp qualitatively evaluates each investment quarterly to determine if impairment may exist. If necessary, the Bancorp then measures impairment by estimating the value of its investment and comparing that to the investment’s carrying value, whether or not the Bancorp considers the impairment to be temporary. These valuations are typically developed using a discounted cash flow method, but other methods may be used if more appropriate for the circumstances. These valuations are based on unobservable inputs and therefore are classified in Level 3 of the fair value hierarchy. The Bancorp recognized impairments of $1 million and $11 million during the three and six months ended June 30, 2018, respectively. The carrying value of the Bancorp’s private equity investments as of June 30, 2018 includes a cumulative $11 million of impairment charges recognized since adoption of the measurement alternative to fair value on January 1, 2018. The Bancorp recognized $4 million and $10 million of OTTI primarily associated with certain nonconforming investments affected by the Volcker Rule during the three and six months ended June 30, 2018, respectively. The Bancorp performed nonrecurring fair value measurements on a fund by fund basis to determine whether OTTI existed. The Bancorp estimated the fair value of the funds by applying an estimated market discount to the reported net asset value of the fund or through a discounted cash flow analysis. Because the length of time until the investment will become redeemable is generally not certain, these funds were classified within Level 3 of the valuation hierarchy. An adverse change in the reported 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 Head of Payments, Strategy and Digital Solutions, in conjunction with Accounting, is responsible for preparing and reviewing the fair value estimates. Fair Value Option The Bancorp elected to measure certain residential mortgage and commercial loans held for sale under the fair value option as allowed under U.S. GAAP. Electing to measure residential mortgage loans held for sale at fair value reduces certain timing differences and better matches changes in the value of these assets with changes in the value of derivatives used as economic hedges for these assets. Electing to measure certain commercial loans held for sale at fair value reduces certain timing differences and better reflects changes in fair value of these assets that are expected to be sold in the short term. Management’s intent to sell residential mortgage or commercial loans classified as held for sale may change over time due to such factors as changes in the overall liquidity in markets or changes in characteristics specific to certain loans held for sale. Consequently, these loans may be reclassified to loans held for investment and maintained in the Bancorp’s loan portfolio. In such cases, the loans will continue to be measured at fair value. Fair value changes recognized in earnings for residential mortgage loans held at June 30, 2018 and 2017 for which the fair value option was elected, as well as the changes in fair value of the underlying IRLCs, included gains of $18 million and $26 million for the six months ended June 30, 2018 and 2017, respectively. These gains are reported in mortgage banking net revenue in the Condensed Consolidated Statements of Income. Fair value changes recognized in earnings for commercial loans held at June 30, 2018 for which the fair value option was elected included gains of an immaterial amount for both the three and six months ended June 30, 2018. The Bancorp did not hold any commercial loans held for sale during the six months ended June 30, 2017. These gains are reported in corporate banking revenue in the Condensed 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 $1 million and $2 million at June 30, 2018 and December 31, 2017, respectively. Valuation adjustments related to instrument-specific credit risk for commercial loans measured at fair value had an immaterial impact on the fair value of those loans at June 30, 2018. The Bancorp did not hold any commercial loans held for sale at December 31, 2017. Interest on loans measured at fair value is accrued as it is earned using the effective interest method and is reported as interest income in the Condensed Consolidated Statements of Income. 22. Business Segments The Bancorp reports on four business segments: Commercial Banking, Branch Banking, Consumer Lending and Wealth and Asset Management. Results of the Bancorp’s business segments are presented based on its management structure and management accounting practices. The structure and accounting practices are specific to the Bancorp; therefore, the financial results of the Bancorp’s business segments are not necessarily comparable with similar information for other financial institutions. The Bancorp refines its methodologies from time to time as management’s accounting practices and businesses change. The Bancorp manages interest rate risk centrally at the corporate level. By employing an FTP methodology, the business segments are insulated from most benchmark interest rate volatility, enabling them to focus on serving customers through the origination of loans and acceptance of deposits. The FTP methodology assigns charge rates and credit rates to classes of assets and liabilities, respectively, based on the estimated amount and timing of the cash flows for each transaction. Assigning the FTP rate based on matching the duration of cash flows allocates interest income and interest expense to each business segment so its resulting net interest income is insulated from future changes in benchmark interest rates. The Bancorp’s FTP methodology also allocates the contribution to net interest income of the asset-generating and deposit-providing businesses on a duration-adjusted basis to better attribute the driver of the performance. As the asset and liability durations are not perfectly matched, the residual impact of the FTP methodology is captured in General Corporate and Other. The charge and credit rates are determined using the FTP rate curve, which is based on an estimate of Fifth Third’s marginal borrowing cost in the wholesale funding markets. The FTP curve is constructed using the U.S. swap curve, brokered CD pricing and unsecured debt pricing. The Bancorp adjusts the FTP charge and credit rates as dictated by changes in interest rates for various interest-earning assets and interest-bearing liabilities and by the review of behavioral assumptions, such as prepayment rates on interest-earning assets and the estimated durations for indeterminate-lived deposits. Key assumptions, including the credit rates provided for deposit accounts, are reviewed annually. Credit rates for deposit products and charge rates for loan products may be reset more frequently in response to changes in market conditions. The credit rates for several deposit products were reset January 1, 2018 to reflect the current market rates and updated market assumptions. These rates were generally higher than those in place during 2017, thus net interest income for deposit-providing business segments was positively impacted during 2018. FTP charge rates on assets were affected by the prevailing level of interest rates and by the duration and repricing characteristics of the portfolio. As overall market rates increased, the FTP charge increased for asset-generating business segments during 2018. The Bancorp’s methodology for allocating provision for loan and lease losses expense to the business segments includes charges or benefits associated with changes in criticized commercial loan levels in addition to actual net charge-offs experienced by the loans and leases owned by each business segment. Provision for loan and lease losses expense attributable to loan and lease growth and changes in ALLL factors is captured in General Corporate and Other. The financial results of the business segments include allocations for shared services and headquarters expenses. Additionally, the business segments form synergies by taking advantage of cross-sell opportunities and funding operations by accessing the capital markets as a collective unit. The results of operations and financial position for the three and six months ended June 30, 2017 were adjusted to reflect changes in internal expense allocation methodologies. The following is a description of each of the Bancorp’s business segments and the products and services they provide to their respective client bases. Commercial Banking offers credit intermediation, cash management and financial services to large and middle-market businesses and government and professional customers. In addition to the traditional lending and depository offerings, Commercial Banking products and services include global cash management, foreign exchange and international trade finance, derivatives and capital markets services, asset-based lending, real estate finance, public finance, commercial leasing and syndicated finance. Branch Banking provides a full range of deposit and loan and lease products to individuals and small businesses through 1,158 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. Wealth and Asset Management provides a full range of investment alternatives for individuals, companies and not-for-profit organizations. Wealth and Asset Management is made up of five main businesses: FTS, an indirect wholly-owned subsidiary of the Bancorp; ClearArc Capital, Inc., an indirect wholly-owned subsidiary of the Bancorp; Fifth Third Insurance Agency, Inc., an indirect wholly-owned subsidiary of the Bancorp; Fifth Third Private Bank; and Fifth Third Institutional Services. FTS offers full service retail brokerage services to individual clients and broker-dealer services to the institutional marketplace. ClearArc Capital, Inc. provides asset management services. Fifth Third Insurance Agency, Inc. assists clients with their financial and risk management needs. Fifth Third Private Bank offers holistic strategies to affluent clients in wealth planning, investing, insurance and wealth protection. Fifth Third Institutional Services provides advisory services for institutional clients including states and municipalities. Includes bank premises and equipment of $37 classified as held for sale. For more information refer to Note 7. 23. Pending Acquisition On May 21, 2018, Fifth Third Bancorp and MB Financial, Inc. jointly announced the signing of a definitive merger agreement under which, on the terms and conditions set forth therein, MB Financial, Inc. (“MB Financial”) will merge with a subsidiary of Fifth Third Bancorp in a transaction valued at approximately $4.7 billion based on the closing price of Fifth Third’s common shares on May 18, 2018. MB Financial is headquartered in Chicago, Illinois with reported assets of approximately $20 billion as of March 31, 2018 and is the holding company of MB Financial Bank, N.A. In conjunction with the closing of the transaction, two members of MB Financial’s Board of Directors are expected to join the Fifth Third Bancorp Board. Under the terms of the agreement, common shareholders of MB Financial will receive 1.45 shares of Fifth Third common stock and $5.54 in cash for each share of MB Financial common stock, which had an implied value of $54.20 per share of MB Financial common stock, based on the closing price of Fifth Third’s common shares on May 18, 2018. The exchange ratio of Fifth Third common shares for MB Financial common shares is fixed and will not adjust based on changes in Fifth Third’s share trading price. The transaction is subject to the satisfaction of all customary closing conditions, including regulatory approval as well as the approval of MB Financial shareholders. The transaction is expected to close in the first quarter of 2019. 24. Subsequent Events On July 26, 2018 the Bank issued and sold $1.55 billion in aggregate principal amount of unsecured senior bank notes. The bank notes consisted of $500 million of 3.35% senior fixed-rate notes, with a maturity of three years, due on July 26, 2021; $300 million of senior floating-rate notes at three-month LIBOR plus 44 bps, with a maturity of three years, due on July 26, 2021; and $750 million of 3.95% senior fixed-rate notes, with a maturity of seven years, due July 28, 2025. The Bank entered into interest rate swaps to convert the fixed-rate notes due in 2021 and 2025 to a floating-rate, which resulted in an effective interest rate of one-month LIBOR plus 53 bps and 104 bps, respectively. These bank notes will be redeemable by the Bank, in whole or in part, on or after the date that is 30 days prior to the maturity date at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest up to, but excluding, the redemption date. Between July 20, 2018 and August 2, 2018, the Bancorp entered into repurchase transactions of 16,945,020 shares, or approximately $500 million, of its outstanding common stock through the open market, which settled between July 24, 2018 and August 6, 2018. In conjunction with adoption of ASU 2014-09, the Bancorp is providing the following additional disclosures about its significant accounting and reporting policies related to revenue recognition. Revenue Recognition The Bancorp generally measures revenue based on the amount of consideration the Bancorp expects to be entitled for the transfer of goods or services to a customer, then recognizes this revenue when or as the Bancorp satisfies its performance obligations under the contract, except in transactions where U.S. GAAP provides other applicable guidance. When the amount of consideration is variable, the Bancorp will only recognize revenue to the extent that it is probable that the cumulative amount recognized will not be subject to a significant reversal in the future. Substantially all of the Bancorp’s contracts with customers have expected durations of one year or less and payments are typically due when or as the services are rendered or shortly thereafter. When third parties are involved in providing goods or services to customers, the Bancorp recognizes revenue on a gross basis when it has control over those goods or services prior to transfer to the customer; otherwise, revenue is recognized for the net amount of any fee or commission. The Bancorp excludes sales taxes from the recognition of revenue and recognizes the incremental costs of obtaining contracts as an expense if the period of amortization for those costs would be one year or less. The Bancorp’s interest income is derived from loans and leases, securities and other short-term investments. The Bancorp recognizes interest income in accordance with the applicable guidance in U.S. GAAP for these assets. Refer to the Portfolio Loans and Leases and Securities sections in Note 1 of the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2017 for further information. The following provides additional information about the components of noninterest income: Other securities consist of FHLB, FRB and DTCC restricted stock holdings of $248, $364 and $2, respectively, at June 30, 2018, that are carried at cost. (a) Actual maturities may differ from contractual maturities when a right to call or prepay obligations exists with or without call or prepayment penalties. (a) Excludes $162 and $137 of residential mortgage loans measured at fair value at June 30, 2018 and December 31, 2017, respectively. Includes $104, $773 and $251, respectively, of commercial, residential mortgage and consumer portfolio TDRs on accrual status and $173, $15 and $46, respectively, of commercial, residential mortgage and consumer portfolio TDRs on nonaccrual status at June 30, 2018. Includes $249, $652 and $275, respectively, of commercial, residential mortgage and consumer portfolio TDRs on accrual status and $150, $13 and $45, respectively, of commercial, residential mortgage and consumer portfolio TDRs on nonaccrual status at December 31, 2017. Excludes five restructured loans associated with a consolidated VIE in which the Bancorp had no continuing credit risk due to the risk being assumed by a third party, with an average recorded investment of $26 for both the three and six months ended June 30, 2017. An immaterial amount of interest income was recognized during the six months ended June 30, 2017. Refer to Note 9 for further discussion on the deconsolidation of the VIE associated with these loans in the third quarter of 2017. (a) Excludes all loans and leases held for sale and loans acquired with deteriorated credit quality. (a) Excludes all loans and leases held for sale and loans acquired with deteriorated credit quality. (a) Excludes all loans and leases held for sale and loans acquired with deteriorated credit quality. (a) Excludes all loans and leases held for sale and loans acquired with deteriorated credit quality. (a) At June 30, 2018 and December 31, 2017, land and improvements, buildings and construction in progress included $55 and $91, respectively, associated with parcels of undeveloped land intended for future branch expansion. (a) The Bancorp did not recognize impairment losses resulting from the forfeiture or ineligibility of tax credits or other circumstances during both the three and six months ended June 30, 2018 and 2017. Represents the unpaid principal balance at the time of the sale. (a) Included in mortgage banking net revenue in the Condensed Consolidated Statements of Income. (a) The impact of the weighted-average default rate on the current fair value of residual cash flows for all scenarios is immaterial. For both the three and six months ended June 30, 2017, the amount of pretax net losses recognized in OCI represented the effective portion of the cumulative gains or losses on cash flow hedges and ineffectiveness was reported within noninterest income. Upon the adoption of ASU 2017-12, the Bancorp recorded a cumulative effect adjustment to retained earnings effective January 1, 2018 related to the elimination of the separate measurement of ineffectiveness. Refer to Note 3 for additional information. (a) Includes $7 and $2 issued on behalf of commercial customers to facilitate trade payments in U.S. dollars and foreign currencies which expire less than 1 year and between 1 - 5 years, respectively. 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: The Bancorp’s AOCI balance was adjusted as of January 1, 2018 to reflect the adoption of new accounting standards. Refer to Note 3 for additional information. Includes bank premises and equipment of $37 classified as held for sale. For more information refer to Note 7.
Amortized cost of
$
32,589
and $
31,577
at
June 30, 2018
and December 31,
2017
, respectively.
Fair value
of
$
19
and $
24
at
June 30, 2018
and December 31,
2017
, respectively.
Includes interest-only mortgage-backed securities of
$
34
as of
December 31, 2017
, recorded at fair value with fair value changes recorded
in securities gains, net, in the
Consolidated Statements of Income.
Excludes FHLB,
FRB
,
and DTCC
restricted stock
holdings
totaling
$
248
,
$
362
and $
2
, respectively, at
December 31, 2017
.
Amortized cost of
$
32,589
and $
31,577
at
June 30, 2018
and December 31,
2017
, respectively.
Included in securities (losses) gains, net in the Condensed Consolidated Statements of Income.
Includes an immaterial net loss and a net loss of
$
2
for the three and
six
months ended
June 30, 2018
, respectively,
and immaterial net gains for both the three and
six
months ended
June 30, 2017
, respectively, recorded in corporate banking
Includes net unrealized losses of
$
5
and
$
6
for the three and
six
months ended
June 30, 2018
,
respectively, and net unrealized gains of $
2
and $
3
for the three and
six
months ended
June 30, 2017
, respectively.
Includes an immaterial net loss and a net loss of
$
2
for the three and
six
months ended
June 30, 2018
, respectively,
and immaterial net gains for both the three and
six
months ended
June 30, 2017
, respectively, recorded in corporate banking
Includes net unrealized losses of
$
5
and
$
6
for the three and
six
months ended
June 30, 2018
,
respectively, and net unrealized gains of $
2
and $
3
for the three and
six
months ended
June 30, 2017
, respectively.
(a)
Actual maturities may differ from contractual maturities when
a right to call or prepay obligations
exists
with or without call or prepayment penalties
.
Amortized cost of
$
32,589
and $
31,577
at
June 30, 2018
and December 31,
2017
, respectively.
Fair value
of
$
19
and $
24
at
June 30, 2018
and December 31,
2017
, respectively.
Includes interest-only mortgage-backed securities of
$
34
as of
December 31, 2017
, recorded at fair value with fair value changes recorded
in securities gains, net, in the
Consolidated Statements of Income.
Includes
$
658
and $
399
of residential mortgage loans held for sale measured at fair value
and
$
8
and $
0
of commercial loans held for sale measured at fair value
at
June 30, 2018
and December 31,
2017
, respectively.
Includes
$
162
and $
137
of residential mortgage loans measured
at fair value at
June 30, 2018
and December 31,
2017
, respectively.
Includes
$
47
and $
62
of
other short-term investments
,
$
908
and $
1,297
of portfolio loans and leases,
$
(5)
and $
(6)
of ALLL,
$
5
and $
7
of other assets,
$
2
and $
2
of other liabilities, and
$
830
and $
1,190
of long-term debt from consolidated VIEs
that are included in their respe
ctive captions above at
June 30, 2018
and December 31,
2017
, respectively. For further information refer to Note
9
.
Includes
$
1
related to leveraged leases at
June 30, 2018
.
Includes
$
47
and $
62
of
other short-term investments
,
$
908
and $
1,297
of portfolio loans and leases,
$
(5)
and $
(6)
of ALLL,
$
5
and $
7
of other assets,
$
2
and $
2
of other liabilities, and
$
830
and $
1,190
of long-term debt from consolidated VIEs
that are included in their respe
ctive captions above at
June 30, 2018
and December 31,
2017
, respectively. For further information refer to Note
9
.
Includes $
1
related to leveraged leases
at December 31,
2017
.
Includes
$
1
related to leveraged leases at
June 30, 2018
.
Includes $
1
related to leveraged leases
at December 31,
2017
.
Includes
$
47
and $
62
of
other short-term investments
,
$
908
and $
1,297
of portfolio loans and leases,
$
(5)
and $
(6)
of ALLL,
$
5
and $
7
of other assets,
$
2
and $
2
of other liabilities, and
$
830
and $
1,190
of long-term debt from consolidated VIEs
that are included in their respe
ctive captions above at
June 30, 2018
and December 31,
2017
, respectively. For further information refer to Note
9
.
Excludes
$
162
of residential mortgage loans measured at fair value and includes
$
65
0
of leveraged leases, net of unearned income at
June 30, 2018
.
Excludes $
137
of residential mortga
ge loans measured at fair value
and includes $
674
of leveraged leases, net of unearned income
at December 31,
2017
.
Includes
$
1
related to leveraged leases at
June 30, 2018
.
Includes
$
47
and $
62
of
other short-term investments
,
$
908
and $
1,297
of portfolio loans and leases,
$
(5)
and $
(6)
of ALLL,
$
5
and $
7
of other assets,
$
2
and $
2
of other liabilities, and
$
830
and $
1,190
of long-term debt from consolidated VIEs
that are included in their respe
ctive captions above at
June 30, 2018
and December 31,
2017
, respectively. For further information refer to Note
9
.
Includes $
1
related to leveraged leases
at December 31,
2017
.
Excludes
$
162
of residential mortgage loans measured at fair value and includes
$
65
0
of leveraged leases, net of unearned income at
June 30, 2018
.
Excludes $
137
of residential mortga
ge loans measured at fair value
and includes $
674
of leveraged leases, net of unearned income
at December 31,
2017
.
Represents number of loans post-modification
and excludes loans previously modified in a TDR
.
Represents number of loans post-modification
and excludes loans previously modified in a TDR
.
Represents number of loans post-modification
and excludes loans previously modified in a TDR
.
Represents number of loans post-modification
and excludes loans previously modified in a TDR
.
Includes
$
104
,
$
773
and
$
251
,
respectively, of commercial, residential mortgage and consumer portfolio TDRs on accrual status and
$
173
,
$
15
an
d
$
46
,
respectively, of commercial, residential mortgage and consumer portfolio
TDRs on nonaccrual status at
June 30, 2018
.
Includes $
249
, $
652
and $
275
, respectively, of commercial, residential mortgage and consumer
portfolio
TDR
s on accrual status and
$
150
, $
13
and $
45
, respectively
, of commercial, residential mortgage and consumer
portfolio
TDRs on nonaccrual status
at December 31,
2017
.
Excludes
$
162
of residential mortgage loans measured at fair value and includes
$
65
0
of leveraged leases, net of unearned income at
June 30, 2018
.
Excludes $
137
of residential mortga
ge loans measured at fair value
and includes $
674
of leveraged leases, net of unearned income
at December 31,
2017
.
Excludes
$
162
of residential mortgage loans measured at fair value and includes
$
65
0
of leveraged leases, net of unearned income at
June 30, 2018
.
Excludes $
137
of residential mortga
ge loans measured at fair value
and includes $
674
of leveraged leases, net of unearned income
at December 31,
2017
.
(a)
Excludes
$
162
and $
137
of residential mortgage
loans measured at fair value at
June 30, 2018
and December
31,
2017
, resp
ectively.
Includes accrual and nonaccrual loans and leases.
Includes accrual and nonaccrual loans and leases.
Excludes
$
162
of residential mortgage loans measured at fair value and includes
$
65
0
of leveraged leases, net of unearned income at
June 30, 2018
.
Excludes $
137
of residential mortga
ge loans measured at fair value
and includes $
674
of leveraged leases, net of unearned income
at December 31,
2017
.
Includes accrual and nonaccrual loans and leases.
Includes accrual and nonaccrual loans and leases.
Includes
$
104
,
$
773
and
$
251
,
respectively, of commercial, residential mortgage and consumer portfolio TDRs on accrual status and
$
173
,
$
15
an
d
$
46
,
respectively, of commercial, residential mortgage and consumer portfolio
TDRs on nonaccrual status at
June 30, 2018
.
Includes $
249
, $
652
and $
275
, respectively, of commercial, residential mortgage and consumer
portfolio
TDR
s on accrual status and
$
150
, $
13
and $
45
, respectively
, of commercial, residential mortgage and consumer
portfolio
TDRs on nonaccrual status
at December 31,
2017
.
Includes
$
104
,
$
773
and
$
251
,
respectively, of commercial, residential mortgage and consumer portfolio TDRs on accrual status and
$
173
,
$
15
an
d
$
46
,
respectively, of commercial, residential mortgage and consumer portfolio
TDRs on nonaccrual status at
June 30, 2018
.
Includes $
249
, $
652
and $
275
, respectively, of commercial, residential mortgage and consumer
portfolio
TDR
s on accrual status and
$
150
, $
13
and $
45
, respectively
, of commercial, residential mortgage and consumer
portfolio
TDRs on nonaccrual status
at December 31,
2017
.
Represents number of loans post-modification
and excludes loans previously modified in a TDR
.
Represents number of loans post-modification
and excludes loans previously modified in a TDR
.
Represents number of loans post-modification
and excludes loans previously modified in a TDR
.
Represents number of loans post-modification
and excludes loans previously modified in a TDR
.
Excludes five restructured loans associated with a consolidated VIE in which the Bancorp had no continuing credit risk due to the risk being assumed by a third party, with an average recorded investment of $
26
for both
the three and
six months ended June 30, 2017.
An immaterial amount of interest income was recognized during the
six months ended June 30, 2017.
Refer to Note
9
for further discussion on the deconsolidation of the VIE associated with these loans in the third quarter of 2017.
Represents number of loans post-modification
and excludes loans previously modified in a TDR
.
Represents number of loans post-modification
and excludes loans previously modified in a TDR
.
Represents number of loans post-modification
and excludes loans previously modified in a TDR
.
Represents number of loans post-modification
and excludes loans previously modified in a TDR
.
Excludes five restructured loans associated with a consolidated VIE in which the Bancorp had no continuing credit risk due to the risk being assumed by a third party, with an average recorded investment of $
26
for both
the three and
six months ended June 30, 2017.
An immaterial amount of interest income was recognized during the
six months ended June 30, 2017.
Refer to Note
9
for further discussion on the deconsolidation of the VIE associated with these loans in the third quarter of 2017.
Excludes
$
23
a
nd $
6
of nonaccrual loans held for sale at
June 30, 2018
and December 31,
2017
, respectively.
Includes
$
4
and $
3
of nonaccrual government insured commercial loans whose repayments are insured by the SBA a
t
June 30, 2018
and Dec
ember 31,
2017
, respectively,
of which
$
2
and
$
3
are
restructured nonaccrual government insured commercial loans a
t
June 30, 2018
and December 31,
2017
, respectively
.
Includes
$
658
and $
399
of residential mortgage loans held for sale measured at fair value
and
$
8
and $
0
of commercial loans held for sale measured at fair value
at
June 30, 2018
and December 31,
2017
, respectively.
Excludes
$
162
of residential mortgage loans measured at fair value and includes
$
65
0
of leveraged leases, net of unearned income at
June 30, 2018
.
Excludes $
137
of residential mortga
ge loans measured at fair value
and includes $
674
of leveraged leases, net of unearned income
at December 31,
2017
.
(a)
Excludes
$
162
and $
137
of residential mortgage
loans measured at fair value at
June 30, 2018
and December
31,
2017
, resp
ectively.
Represents number of loans post-modification
and excludes loans previously modified in a TDR
.
Represents number of loans post-modification
and excludes loans previously modified in a TDR
.
Represents number of loans post-modification
and excludes loans previously modified in a TDR
.
Represents number of loans post-modification
and excludes loans previously modified in a TDR
.
(a) Excludes all loans and leases
held for sale and loans acquired with deteriorated credit quality.
(a
) At
June 30, 2018
and December 31,
2017
, land and
improvements
, buildings and construction in progress
included
$
55
and $
9
1
, respectively,
associated w
ith parcels of undeveloped land
intended for future branch expansion.
Includes
$
37
and $
27
of bank premises and equipment held for sale at
June 30, 2018
and December 31,
2017
, respectively. For further information refer to
Note
7
.
(a
) At
June 30, 2018
and December 31,
2017
, land and
improvements
, buildings and construction in progress
included
$
55
and $
9
1
, respectively,
associated w
ith parcels of undeveloped land
intended for future branch expansion.
Includes
$
47
and $
62
of
other short-term investments
,
$
908
and $
1,297
of portfolio loans and leases,
$
(5)
and $
(6)
of ALLL,
$
5
and $
7
of other assets,
$
2
and $
2
of other liabilities, and
$
830
and $
1,190
of long-term debt from consolidated VIEs
that are included in their respe
ctive captions above at
June 30, 2018
and December 31,
2017
, respectively. For further information refer to Note
9
.
Includes
$
1
related to leveraged leases at
June 30, 2018
.
Includes $
1
related to leveraged leases
at December 31,
2017
.
Included in securities (losses) gains, net in the Condensed Consolidated Statements of Income.
Includes
$
1
related to leveraged leases at
June 30, 2018
.
Includes
$
47
and $
62
of
other short-term investments
,
$
908
and $
1,297
of portfolio loans and leases,
$
(5)
and $
(6)
of ALLL,
$
5
and $
7
of other assets,
$
2
and $
2
of other liabilities, and
$
830
and $
1,190
of long-term debt from consolidated VIEs
that are included in their respe
ctive captions above at
June 30, 2018
and December 31,
2017
, respectively. For further information refer to Note
9
.
Includes $
1
related to leveraged leases
at December 31,
2017
.
(a)
The Bancorp did not recognize impairment losses resulting from the forfeiture or ineligibility of tax credi
ts or other circumstances during both the three and
six
months ended
June 30, 2018
and
2017
.
Represents the unpaid principal balance at the time of the sale.
Primarily reflects changes in prepayment speed and OAS spread assumptions which are updated based on market interest rates
Pr
imarily reflects changes due to collection of contractual cash flows and the passage of time
(a)
Included in mortgage banking net revenue in the Condensed Consolidated Statements of Income.
(a)
The impact of the weighted-average default rate on the current fair value of residual cash flows for all scenarios is immaterial
.
For both the three and six months ended June 30, 2017, the amount of pretax net losses recognized in OCI represented the effective portion of the cumulative gains or losses on cash flow hedges and
ineffectiveness was reported within noninterest income. Upon the adoption of ASU 2017-12, the Bancorp recorded a cumulative effect adjustment to retained earnings effective January 1, 2018 related to the elimination of the separate measurement of ineffect
iveness. Refer to Note
3
for additional information.
Amount does not includ
e
IRLCs because these instruments are not subject to master netting or similar arrangements
.
Amount does not include
IRLCs because these instruments are not subject to master netting or similar arrangements
.
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 Condensed Consolidated Balance Sheets were excluded from this table.
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 Condensed Consolidated Balance Sheets were excluded from this table.
Includes
$
1
related to leveraged leases at
June 30, 2018
.
Includes
$
47
and $
62
of
other short-term investments
,
$
908
and $
1,297
of portfolio loans and leases,
$
(5)
and $
(6)
of ALLL,
$
5
and $
7
of other assets,
$
2
and $
2
of other liabilities, and
$
830
and $
1,190
of long-term debt from consolidated VIEs
that are included in their respe
ctive captions above at
June 30, 2018
and December 31,
2017
, respectively. For further information refer to Note
9
.
Includes $
1
related to leveraged leases
at December 31,
2017
.
(
a)
Includes
$
7
and
$
2
issued
on
behalf
of c
ommercial customers to facilitate trade payments in U.S. dollars and foreign currencies which expire less than 1 year and between 1 - 5 years, respectively.
(
a)
Includes
$
7
and
$
2
issued
on
behalf
of c
ommercial customers to facilitate trade payments in U.S. dollars and foreign currencies which expire less than 1 year and between 1 - 5 years, respectively.
Amounts in parentheses indicate reductions to net income
Amortized cost of
$
32,589
and $
31,577
at
June 30, 2018
and December 31,
2017
, respectively.
Excludes FHLB,
FRB
,
and DTCC
restricted stock
holdings
totaling
$
248
,
$
362
and $
2
, respectively, at
December 31, 2017
.
For both
the
six
months ended
June 30, 2018
and
2017
, dividends were
$
6
37.50
per preferred shares for Perpetual Preferred Stock, Series H,
$
828.12
per preferred share for Perpetual Preferred Stock, Series
I and
$
612.50
per preferred share for Perpetual Preferred Stock, Series J.
Included in other assets in the Condensed Consolidated Balance Sheets.
Included in other liabilities in the Condensed Consolidat
ed Balance Sheets.
Includes interest-only mortgage-backed securities of
$
34
as of
December 31, 2017
, recorded at fair value with fair value changes recorded
in securities gains, net, in the
Consolidated Statements of Income.
During
both
the three
and
six
months ended
June 30, 2018
, no assets or liabilities were transferred between Level 1 and Level
2.
During the
year ended December 31,
2017
, no assets or liabilities were transferred between Level 1 and Level 2.
Included in securities (losses) gains, net in the Condensed Consolidated Statements of Income.
Includes
certain
residential mortgage loans
originated as
held for
sale that were transferred to held for invest
ment.
Includes interest income and expense
.
Net interest rate derivatives include derivative assets and
liabilities of $14 and $5
, respectively, as of
June 30, 2017
.
Net interest rate derivatives include derivative assets and liabilities of $
14
and $
5
, respectively, as of
June 30, 2017
.
Includes
$
47
and $
62
of
other short-term investments
,
$
908
and $
1,297
of portfolio loans and leases,
$
(5)
and $
(6)
of ALLL,
$
5
and $
7
of other assets,
$
2
and $
2
of other liabilities, and
$
830
and $
1,190
of long-term debt from consolidated VIEs
that are included in their respe
ctive captions above at
June 30, 2018
and December 31,
2017
, respectively. For further information refer to Note
9
.
Fair value
of
$
19
and $
24
at
June 30, 2018
and December 31,
2017
, respectively.
Includes
$
658
and $
399
of residential mortgage loans held for sale measured at fair value
and
$
8
and $
0
of commercial loans held for sale measured at fair value
at
June 30, 2018
and December 31,
2017
, respectively.
Amortized cost of
$
32,589
and $
31,577
at
June 30, 2018
and December 31,
2017
, respectively.
Revenue sharing agreements between wealth and asset management and branch banking are eliminated in the Condensed Consolidated Statements of Income.
Includes impairment charges of $
31
for operating lease equipment. For more information refer to Note
21
.
Includes impairment charges
of
$
41
for branches and
land. For more information refer to Note
7
and Note
21
.
Includes impairment charges of
$
33
for branches
and land. For more information refer to Note
7
and Note
21
.
Includes impairment
charge
s
of
$
5
for branches and land. For more information refer to Note
7
and Note
21
.
Includes impairment charges of $
2
for branches and land. For more information
refer to Note
7
and Note
21
.
=BXX2)GW
MK(7OX'[T)^,M,K/47(*R7"MDH"GP[>9PW(7X&/#(8;2+,PJ5G+5^#L;7NL!9
M$ 0"*A<8F-\N< ="!"(OXV?BQ'/* %R>W]@_Q]I]+6=FX4Z+)UZ[KL![C&IH
MV"#<@QZ_0*KG&J-4_#>X@/#A08G/46EAXXJJP3HM$XN7(MG+M',5]S'=[!-L
M'4 3@,Z ? PD< 6!#H8A CG"2$Q
MN60X/ELEIHD$-&'9*CDH%+U_@49[P"8]"S7$$IJMDF."YLB@I&\$ 3G2=$UT"EI^I0]A/7YW38[V]/9_J\^ 66]]V.IN%P$'TV@GGGN&'[%,&8Q
M:\!^KT)FST/Y(N%%89$W]Q@W#E,#E1+"<")03
MXP!S&&!.[]88!H@)W1H[4R&9E%:#K$F41A2+/)]0-L/6FQ'ZM8<&1[*M-XIH
M@'A.,/,8FA$ZMH<&B5CUK ##YG9!+A-9%6T HSRR8-#V3XR[)?D B3W:;X\_\!4$L#!!0 ( +F#"$TL[XJ^!@8 ,L? 9
M>&PO=V]R:W-H965T 6L]]9ADAQ%'&")OB)D!S! Q
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ML<[5B!5= T=>I(%N/E[1(,LASG((/&BX]EK*ZHMIB'P0,TBA%&E6,W'M7
M1DU74"O=,\O/'.<2>$W*CC?QSYY\'IGB_"2
M1K)2,@HX>Y15D];:/&PO=V]R:W-H965T
6 Months Ended
Document Entity Information
Document Type
10-Q
Amendment Flag
false
Document Period End Date
Jun. 30, 2018
Document Fiscal Year Focus
2018
Document Fiscal Period Focus
Q2
Trading Symbol
FITB
Entity Registrant Name
FIFTH THIRD BANCORP
Entity Central Index Key
0000035527
Current Fiscal Year End Date
--12-31
Entity Filer Category
Large Accelerated Filer
Entity Common Stock, Shares Outstanding
668,092,149
Entity Current Reporting Status
Yes
Entity Voluntary Filers
No
Entity Well-known Seasoned Issuer
Yes
$ in Millions
Assets
Cash and due from banks
$ 2,052
$ 2,514
Other short-term investments
[1]
1,636
2,753
Available-for-sale debt and other securities
[2]
31,961
31,751
Held-to-matury securities
[3]
19
24
Trading debt securities
280
492
Equity securities
475
439
Loans and leases held for sale
[4]
783
492
Portfolio loans and leases
[1],[5]
91,932
91,970
ALLL
[1]
(1,077)
[6]
(1,196)
[7]
Portfolio loans and leases, net
90,855
90,774
Bank premises and equipment
[8]
1,915
2,003
Operating lease equipment
606
646
Goodwill
2,462
2,445
Intangible assets
30
27
Servicing rights
959
858
Other assets
[1]
6,662
6,975
Total Assets
140,695
142,193
Deposits
Noninterest-bearing deposits
32,680
35,276
Interest-bearing deposits
71,451
67,886
Total deposits
104,131
103,162
Federal funds purchased
597
174
Other short-term borrowings
1,763
4,012
Accrued taxes, interest and expenses
1,206
1,412
Other liabilities
[1]
2,425
2,144
Long-term debt
[1]
14,321
14,904
Total liabilities
124,443
125,808
Equity
Common stock
[9]
2,051
2,051
Preferred stock
[10]
1,331
1,331
Capital surplus
2,833
2,790
Retained earnings
16,143
15,122
Accumulated other comprehensive income
(552)
73
Treasury stock
[9]
(5,574)
(5,002)
Total Bancorp Shareholders' Equity
16,232
16,365
Noncontrolling interests
20
20
Total Equity
16,252
16,385
Total Liabilities and Equity
$ 140,695
$ 142,193
[1]
[2]
[3]
[4]
[5]
[6]
[7]
[8]
[9]
[10]
$ in Millions
Other short-term investments
[1]
$ 1,636
$ 2,753
Portfolio loans and leases
[1],[2]
91,932
91,970
ALLL
[1]
(1,077)
[3]
(1,196)
[4]
Other assets
[1]
6,662
6,975
Other liabilities
[1]
2,425
2,144
Long-term debt
[1]
14,321
14,904
Available-for-sale debt securities, amortized cost
32,589
31,577
Held-to-maturity securities, fair value
19
24
Bank premises and equipment held for sale
$ 37
$ 27
Common stock, stated value
$ 2.22
$ 2.22
Common stock, authorized
2,000,000,000
2,000,000,000
Common stock, outstanding
678,161,855
693,804,893
Common stock, treasury shares
245,730,726
230,087,688
Residential Mortgage
Loans held for sale measured at FV
$ 658
$ 399
Loans measured at FV
162
137
Commercial
Portfolio loans and leases
56,503
56,395
ALLL
(654)
[3]
(753)
[4]
Loans held for sale measured at FV
8
0
Variable Interest Entities
Other short-term investments
47
62
Portfolio loans and leases
908
1,297
ALLL
(5)
(6)
Other assets
5
7
Other liabilities
2
2
Long-term debt
$ 830
$ 1,190
Preferred Stock
Preferred stock, authorized
446,000
446,000
Preferred stock Series H
Preferred stock, authorized
24,000
24,000
Preferred stock, liquidation preference
$ 25,000
$ 25,000
Preferred stock, issued
24,000
24,000
Preferred stock, outstanding
24,000
24,000
Preferred stock Series I
Preferred stock, authorized
18,000
18,000
Preferred stock, liquidation preference
$ 25,000
$ 25,000
Preferred stock, issued
18,000
18,000
Preferred stock, outstanding
18,000
18,000
Preferred stock Series J
Preferred stock, authorized
12,000
12,000
Preferred stock, liquidation preference
$ 25,000
$ 25,000
Preferred stock, issued
12,000
12,000
Preferred stock, outstanding
12,000
12,000
[1]
[2]
[3]
[4]
$ in Millions
Beginning Balance at Dec. 31, 2016
$ 16,232
$ 2,051
$ 1,331
$ 2,756
$ 13,441
$ 59
$ (3,433)
$ 16,205
$ 27
Net income (loss)
672
672
672
Other comprehensive income (loss), Net of Tax
104
104
104
Cash dividends declared:
Common stock at $0.34 in 2018 and $0.28 in 2017 per share
(210)
(210)
(210)
Preferred stock
[1]
(38)
(38)
(38)
Shares acquired for treasury
(342)
(26)
(316)
(342)
Impact of stock transactions under stock compensation plans, net
29
21
8
29
Other
(1)
(3)
2
(1)
Ending Balance at Jun. 30, 2017
16,446
2,051
1,331
2,751
13,862
163
(3,739)
16,419
27
Beginning Balance at Dec. 31, 2017
16,385
2,051
1,331
2,790
15,122
73
(5,002)
16,365
20
Net income (loss)
1,290
Other comprehensive income (loss), Net of Tax
(623)
Cash dividends declared:
Other
0
(2)
2
0
Ending Balance at Jun. 30, 2018
16,252
2,051
1,331
2,833
16,143
(552)
(5,574)
16,232
20
Impact of cumulative effect of change in accounting principles
[2]
4
6
(2)
4
Beginning Balance at Jan. 01, 2018
16,389
2,051
1,331
2,790
15,128
71
(5,002)
16,369
20
Net income (loss)
1,290
1,290
1,290
Other comprehensive income (loss), Net of Tax
(623)
(623)
(623)
Cash dividends declared:
Common stock at $0.34 in 2018 and $0.28 in 2017 per share
(235)
(235)
(235)
Preferred stock
[1]
(38)
(38)
(38)
Shares acquired for treasury
(553)
41
(594)
(553)
Impact of stock transactions under stock compensation plans, net
22
2
20
22
Ending Balance at Jun. 30, 2018
$ 16,252
$ 2,051
$ 1,331
$ 2,833
$ 16,143
$ (552)
$ (5,574)
$ 16,232
$ 20
[1]
[2]
6 Months Ended
Common stock, per share
$ 0.34
$ 0.28
Preferred stock Series H
Preferred stock, per share
637.5
637.5
Preferred stock Series I
Preferred stock, per share
828.12
828.12
Preferred stock Series J
Preferred stock, per share
$ 612.5
$ 612.5
6 Months Ended
Basis of Presentation
Basis of Presentation
6 Months Ended
Supplemental Cash Flow
Supplemental Cash Flow Information
Cash payments related to interest and income taxes in addition to non-cash investing and financing activities are presented in the following table for the six months ended June 30: ($ in millions) 2018 2017 Cash Payments: Interest $ 451 334 Income taxes 120 399 Transfers: Portfolio loans to loans held for sale 171 140 Loans held for sale to portfolio loans 67 7 Portfolio loans to OREO 20 19
6 Months Ended
Accounting and Reporting Developments
Accounting and Reporting Developments
6 Months Ended
Securities
Securities
The following tables provide the amortized cost, unrealized gains and losses and fair value for the major categories of the available-for-sale debt and other securities and held-to-maturity investment securities portfolios as of: Amortized Unrealized Unrealized Fair June 30, 2018 ($ in millions) Cost Gains Losses Value Available-for-sale debt and other securities: U.S. Treasury and federal agencies securities $ 98 - (2) 96 Obligations of states and political subdivisions securities 34 1 - 35 Mortgage-backed securities: Agency residential mortgage-backed securities 16,405 35 (346) 16,094 Agency commercial mortgage-backed securities 10,308 7 (277) 10,038 Non-agency commercial mortgage-backed securities 3,149 5 (68) 3,086 Asset-backed securities and other debt securities 1,981 26 (9) 1,998 Other securities(a) 614 - - 614 Total available-for-sale debt and other securities $ 32,589 74 (702) 31,961 Held-to-maturity securities: Obligations of states and political subdivisions securities $ 17 - - 17 Asset-backed securities and other debt securities 2 - - 2 Total held-to-maturity securities $ 19 - - 19 Amortized Unrealized Unrealized Fair December 31, 2017 ($ in millions) Cost Gains Losses Value Available-for-sale debt and other securities: U.S. Treasury and federal agencies securities $ 98 - - 98 Obligations of states and political subdivisions securities 43 1 - 44 Mortgage-backed securities: Agency residential mortgage-backed securities(a) 15,281 118 (80) 15,319 Agency commercial mortgage-backed securities 10,113 92 (38) 10,167 Non-agency commercial mortgage-backed securities 3,247 51 (5) 3,293 Asset-backed securities and other debt securities 2,183 46 (11) 2,218 Other securities(b) 612 - - 612 Total available-for-sale debt and other securities $ 31,577 308 (134) 31,751 Held-to-maturity securities: Obligations of states and political subdivisions securities $ 22 - - 22 Asset-backed securities and other debt securities 2 - - 2 Total held-to-maturity securities $ 24 - - 24 The following table provides the fair value of trading debt securities and equity securities as of: June 30, December 31, ($ in millions) 2018 2017 Trading debt securities $ 280 492 Equity securities 475 439 The following table presents net realized gains and losses that were recognized in income from available-for-sale debt and other securities as well as total (losses) gains that were recognized in income from trading debt securities and equity securities: For the three months ended For the six months ended June 30, June 30, ($ in millions) 2018 2017 2018 2017 Available-for-sale debt and other securities: Realized gains $ 22 21 56 30 Realized losses (22) (7) (65) (8) OTTI(a) - (14) - (24) Net realized losses on available-for sale debt and other securities(b) $ - - (9) (2) Total trading debt securities (losses) gains(c) $ (4) 2 (18) 3 Total equity securities (losses) gains(d)(e) $ (5) 2 (8) 3 Total (losses) and gains recognized in income from available-for-sale debt and other securities, trading debt securities and equity securities $ (9) 4 (35) 4 The expected maturity distribution of the Bancorp’s mortgage-backed securities and the contractual maturity distribution of the remainder of the Bancorp’s available-for-sale debt and other securities and held-to-maturity investment securities as of June 30, 2018 are shown in the following table: Available-for-Sale Debt and Other Held-to-Maturity ($ in millions) Amortized Cost Fair Value Amortized Cost Fair Value Debt securities:(a) Less than 1 year $ 214 207 1 1 1-5 years 8,923 8,800 16 16 5-10 years 18,047 17,669 - - Over 10 years 4,791 4,671 2 2 Other securities 614 614 - - Total $ 32,589 31,961 19 19 The following table provides the fair value and gross unrealized losses on available-for-sale debt and other securities in an unrealized loss position, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position as of: Less than 12 months 12 months or more Total Unrealized Unrealized Unrealized ($ in millions) Fair Value Losses Fair Value Losses Fair Value Losses June 30, 2018 U.S. Treasury and federal agencies $ 96 (2) - - 96 (2) Agency residential mortgage-backed securities 12,456 (313) 478 (33) 12,934 (346) Agency commercial mortgage-backed securities 8,719 (247) 547 (30) 9,266 (277) Non-agency commercial mortgage-backed securities 2,540 (59) 140 (9) 2,680 (68) Asset-backed securities and other debt securities 284 (2) 395 (7) 679 (9) Total $ 24,095 (623) 1,560 (79) 25,655 (702) December 31, 2017 U.S. Treasury and federal agencies $ 98 - - - 98 - Agency residential mortgage-backed securities 7,337 (59) 479 (21) 7,816 (80) Agency commercial mortgage-backed securities 2,900 (22) 526 (16) 3,426 (38) Non-agency commercial mortgage-backed securities 449 (2) 145 (3) 594 (5) Asset-backed securities and other debt securities 317 (2) 386 (9) 703 (11) Total $ 11,101 (85) 1,536 (49) 12,637 (134)
6 Months Ended
Loans and Leases Receivable
Loans and Leases
The following table provides a summary of commercial loans and leases classified by primary purpose and consumer loans classified based upon product or collateral as of: June 30, December 31, ($ in millions) 2018 2017 Loans and leases held for sale: Commercial and industrial loans $ 44 - Commercial mortgage loans 72 6 Commercial leases 9 - Residential mortgage loans 658 486 Total loans and leases held for sale $ 783 492 Portfolio loans and leases: Commercial and industrial loans $ 41,403 41,170 Commercial mortgage loans 6,625 6,604 Commercial construction loans 4,687 4,553 Commercial leases 3,788 4,068 Total commercial loans and leases $ 56,503 56,395 Residential mortgage loans $ 15,640 15,591 Home equity 6,599 7,014 Automobile loans 8,938 9,112 Credit card 2,270 2,299 Other consumer loans 1,982 1,559 Total consumer loans $ 35,429 35,575 Total portfolio loans and leases $ 91,932 91,970 The following table presents a summary of the total loans and leases owned by the Bancorp as of: 90 Days Past Due Carrying Value and Still Accruing June 30, December 31, June 30, December 31, ($ in millions) 2018 2017 2018 2017 Commercial and industrial loans $ 41,447 41,170 4 3 Commercial mortgage loans 6,697 6,610 - - Commercial construction loans 4,687 4,553 - - Commercial leases 3,797 4,068 - - Residential mortgage loans 16,298 16,077 44 57 Home equity 6,599 7,014 - - Automobile loans 8,938 9,112 10 10 Credit card 2,270 2,299 31 27 Other consumer loans 1,982 1,559 - - Total loans and leases $ 92,715 92,462 89 97 Less: Loans and leases held for sale 783 492 Total portfolio loans and leases $ 91,932 91,970 The following table presents a summary of net charge-offs: For the three months ended For the six months ended June 30, June 30, ($ in millions) 2018 2017 2018 2017 Commercial and industrial loans $ 47 18 74 52 Commercial mortgage loans 2 5 2 11 Commercial construction loans - - - - Commercial leases - 1 - 2 Residential mortgage loans 2 2 4 7 Home equity 2 5 7 11 Automobile loans 8 6 19 18 Credit card 26 22 52 43 Other consumer loans 7 5 17 9 Total net charge-offs $ 94 64 175 153
6 Months Ended
Credit Quality and the Allowance for Loan and Leases Losses
Credit Quality and the Allowance for Loan and Lease Losses
Allowance for Loan and Lease Losses The following tables summarize transactions in the ALLL by portfolio segment: Residential For the three months ended June 30, 2018 ($ in millions) Commercial Mortgage Consumer Unallocated Total Balance, beginning of period $ 713 89 222 114 1,138 Losses charged-off(a) (54) (4) (60) - (118) Recoveries of losses previously charged-off(a) 5 2 17 - 24 Provision for (benefit from) loan and lease losses (10) (1) 50 (6) 33 Balance, end of period $ 654 86 229 108 1,077 (a) For the three months ended June 30, 2018, the Bancorp recorded $6 in both losses charged-off and recoveries of losses charged-off related to customer defaults on point-of-sale consumer loans for which the Bancorp obtained recoveries under third-party credit enhancements. Residential For the three months ended June 30, 2017 ($ in millions) Commercial Mortgage Consumer Unallocated Total Balance, beginning of period $ 826 96 204 112 1,238 Losses charged-off (41) (4) (50) - (95) Recoveries of losses previously charged-off 17 2 12 - 31 Provision for (benefit from) loan and lease losses 15 (1) 40 (2) 52 Balance, end of period $ 817 93 206 110 1,226 Residential For the six months ended June 30, 2018 ($ in millions) Commercial Mortgage Consumer Unallocated Total Balance, beginning of period $ 753 89 234 120 1,196 Losses charged-off(a) (87) (7) (128) - (222) Recoveries of losses previously charged-off(a) 11 3 33 - 47 Provision for (benefit from) loan and lease losses (23) 1 90 (12) 56 Balance, end of period $ 654 86 229 108 1,077 (a) For the six months ended June 30, 2018, the Bancorp recorded $10 in both losses charged-off and recoveries of losses charged-off related to customer defaults on point-of-sale consumer loans for which the Bancorp obtained recoveries under third-party credit enhancements. Residential For the six months ended June 30, 2017 ($ in millions) Commercial Mortgage Consumer Unallocated Total Balance, beginning of period $ 831 96 214 112 1,253 Losses charged-off (86) (10) (106) - (202) Recoveries of losses previously charged-off 21 3 25 - 49 Provision for (benefit from) loan and lease losses 51 4 73 (2) 126 Balance, end of period $ 817 93 206 110 1,226 The following tables provide a summary of the ALLL and related loans and leases classified by portfolio segment: Residential As of June 30, 2018 ($ in millions) Commercial Mortgage Consumer Unallocated Total ALLL:(a) Individually evaluated for impairment $ 75 65 38 - 178 Collectively evaluated for impairment 579 21 191 - 791 Unallocated - - - 108 108 Total ALLL $ 654 86 229 108 1,077 Portfolio loans and leases:(b) Individually evaluated for impairment $ 400 788 297 - 1,485 Collectively evaluated for impairment 56,103 14,690 19,492 - 90,285 Total portfolio loans and leases $ 56,503 15,478 19,789 - 91,770 Residential As of December 31, 2017 ($ in millions) Commercial Mortgage Consumer Unallocated Total ALLL:(a) Individually evaluated for impairment $ 94 64 42 - 200 Collectively evaluated for impairment 659 25 192 - 876 Unallocated - - - 120 120 Total ALLL $ 753 89 234 120 1,196 Portfolio loans and leases:(b) Individually evaluated for impairment $ 560 665 320 - 1,545 Collectively evaluated for impairment 55,835 14,787 19,664 - 90,286 Loans acquired with deteriorated credit quality - 2 - - 2 Total portfolio loans and leases $ 56,395 15,454 19,984 - 91,833 The following tables summarize the credit risk profile of the Bancorp’s commercial portfolio segment, by class: Special As of June 30, 2018 ($ in millions) Pass Mention Substandard Doubtful Total Commercial and industrial loans $ 39,601 899 885 18 41,403 Commercial mortgage owner-occupied loans 3,217 40 134 - 3,391 Commercial mortgage nonowner-occupied loans 3,200 21 13 - 3,234 Commercial construction loans 4,652 35 - - 4,687 Commercial leases 3,649 54 85 - 3,788 Total commercial loans and leases $ 54,319 1,049 1,117 18 56,503 Special As of December 31, 2017 ($ in millions) Pass Mention Substandard Doubtful Total Commercial and industrial loans $ 38,813 1,115 1,235 7 41,170 Commercial mortgage owner-occupied loans 3,207 75 80 - 3,362 Commercial mortgage nonowner-occupied loans 3,117 28 97 - 3,242 Commercial construction loans 4,553 - - - 4,553 Commercial leases 3,922 72 74 - 4,068 Total commercial loans and leases $ 53,612 1,290 1,486 7 56,395 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: June 30, 2018 December 31, 2017 ($ in millions) Performing Nonperforming Performing Nonperforming Residential mortgage loans(a) $ 15,450 28 15,424 30 Home equity 6,528 71 6,940 74 Automobile loans 8,933 5 9,111 1 Credit card 2,243 27 2,273 26 Other consumer loans 1,981 1 1,559 - Total residential mortgage and consumer loans $ 35,135 132 35,307 131 Age Analysis of Past Due Loans and Leases The following tables summarize the Bancorp’s recorded investment in portfolio loans and leases, by age and class: Current Past Due 90 Days Past Loans and 30-89 90 Days Total Total Loans Due and Still As of June 30, 2018 ($ in millions) Leases(b)(c) Days(c) or More(c) Past Due and Leases Accruing Commercial loans and leases: Commercial and industrial loans $ 41,281 19 103 122 41,403 4 Commercial mortgage owner-occupied loans 3,384 1 6 7 3,391 - Commercial mortgage nonowner-occupied loans 3,228 3 3 6 3,234 - Commercial construction loans 4,687 - - - 4,687 - Commercial leases 3,784 - 4 4 3,788 - Residential mortgage loans(a) 15,382 24 72 96 15,478 44 Consumer loans: Home equity 6,482 66 51 117 6,599 - Automobile loans 8,840 84 14 98 8,938 10 Credit card 2,198 36 36 72 2,270 31 Other consumer loans 1,972 8 2 10 1,982 - Total portfolio loans and leases $ 91,238 241 291 532 91,770 89 Current Past Due 90 Days Past Loans and 30-89 90 Days Total Total Loans Due and Still 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 $ 41,027 42 101 143 41,170 3 Commercial mortgage owner-occupied loans 3,351 3 8 11 3,362 - Commercial mortgage nonowner-occupied loans 3,235 - 7 7 3,242 - Commercial construction loans 4,552 1 - 1 4,553 - Commercial leases 4,065 3 - 3 4,068 - Residential mortgage loans(a) 15,301 66 87 153 15,454 57 Consumer loans: Home equity 6,888 70 56 126 7,014 - Automobile loans 8,992 107 13 120 9,112 10 Credit card 2,230 36 33 69 2,299 27 Other consumer loans 1,554 5 - 5 1,559 - Total portfolio loans and leases $ 91,195 333 305 638 91,833 97 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: Unpaid Principal Recorded As of June 30, 2018 ($ in millions) Balance Investment ALLL With a related ALLL: Commercial loans and leases: Commercial and industrial loans $ 248 204 63 Commercial mortgage owner-occupied loans 4 3 1 Commercial mortgage nonowner-occupied loans 2 1 - Commercial leases 29 29 11 Restructured residential mortgage loans 497 494 65 Restructured consumer loans: Home equity 158 157 22 Automobile loans 6 6 1 Credit card 48 45 15 Total impaired portfolio loans and leases with a related ALLL $ 992 939 178 With no related ALLL: Commercial loans: Commercial and industrial loans $ 147 124 - Commercial mortgage owner-occupied loans 15 12 - Commercial mortgage nonowner-occupied loans 28 27 - Restructured residential mortgage loans 314 294 - Restructured consumer loans: Home equity 90 87 - Automobile loans 3 2 - Total impaired portfolio loans with no related ALLL $ 597 546 - Total impaired portfolio loans and leases $ 1,589 1,485 (a) 178 Unpaid Principal Recorded As of December 31, 2017 ($ in millions) Balance Investment ALLL With a related ALLL: Commercial loans and leases: Commercial and industrial loans $ 433 358 87 Commercial mortgage owner-occupied loans 16 14 7 Commercial mortgage nonowner-occupied loans 4 3 - Commercial leases 4 4 - Restructured residential mortgage loans 469 465 64 Restructured consumer loans: Home equity 172 172 27 Automobile loans 8 7 1 Credit card 52 45 14 Total impaired portfolio loans and leases with a related ALLL $ 1,158 1,068 200 With no related ALLL: Commercial loans: Commercial and industrial loans $ 151 131 - Commercial mortgage owner-occupied loans 18 15 - Commercial mortgage nonowner-occupied loans 35 35 - Restructured residential mortgage loans 218 200 - Restructured consumer loans: Home equity 97 94 - Automobile loans 2 2 - Total impaired portfolio loans with no related ALLL $ 521 477 - Total impaired portfolio loans and leases $ 1,679 1,545 a(a) 200 The following tables summarize the Bancorp’s average impaired portfolio loans and leases, by class, and interest income, by class: For the three months ended For the six months ended June 30, 2018 June 30, 2018 Average Interest Average Interest Recorded Income Recorded Income ($ in millions) Investment Recognized Investment Recognized Commercial loans and leases: Commercial and industrial loans $ 417 5 439 10 Commercial mortgage owner-occupied loans 16 - 20 - Commercial mortgage nonowner-occupied loans 29 - 32 - Commercial leases 18 - 14 - Restructured residential mortgage loans 799 8 732 14 Restructured consumer loans: Home equity 248 3 253 6 Automobile loans 8 - 9 - Credit card 46 1 47 2 Total average impaired portfolio loans and leases $ 1,581 17 1,546 32 Nonperforming Assets Nonperforming assets include nonaccrual loans and leases for which ultimate collectability of the full amount of the principal and/or interest is uncertain; restructured commercial and credit card loans which have not yet met the requirements to be classified as a performing asset; restructured consumer loans which are 90 days past due based on the restructured terms unless the loan is both well-secured and in the process of collection; and certain other assets, including OREO and other repossessed property. The following table presents the Bancorp’s nonaccrual loans and leases, by class, and OREO and other repossessed property as of: June 30, December 31, ($ in millions) 2018 2017 Commercial loans and leases: Commercial and industrial loans $ 263 276 Commercial mortgage owner-occupied loans 10 19 Commercial mortgage nonowner-occupied loans 3 7 Commercial leases 29 4 Total nonaccrual portfolio commercial loans and leases 305 306 Residential mortgage loans 28 30 Consumer loans: Home equity 71 74 Automobile loans 5 1 Credit card 27 26 Other consumer loans 1 - Total nonaccrual portfolio consumer loans 104 101 Total nonaccrual portfolio loans and leases(a)(b) $ 437 437 OREO and other repossessed property 43 52 Total nonperforming portfolio assets(a)(b) $ 480 489 For the three months ended For the six months ended June 30, 2017 June 30, 2017 Average Interest Average Interest Recorded Income Recorded Income ($ in millions) Investment Recognized Investment Recognized Commercial loans and leases: Commercial and industrial loans $ 635 1 668 2 Commercial mortgage owner-occupied loans(a) 38 - 42 - Commercial mortgage nonowner-occupied loans 66 - 73 1 Commercial leases 2 - 3 - Restructured residential mortgage loans 654 6 653 12 Restructured consumer loans: Home equity 287 3 293 6 Automobile loans 12 - 13 - Credit card 49 1 51 2 Total average impaired loans and leases $ 1,743 11 1,796 23 The following tables provide a summary of loans and leases, by class, modified in a TDR by the Bancorp during the three months ended: Recorded Investment (Decrease) Number of Loans in Loans Modified Increase Charge-offs Modified in a TDR in a TDR to ALLL Upon Recognized Upon June 30, 2018 ($ in millions)(a) During the Period(b) During the Period Modification Modification Commercial loans: Commercial and industrial loans 13 $ 64 (4) - Residential mortgage loans 537 91 2 - Consumer loans: Home equity 29 2 - - Automobile loans 19 - - - Credit card 1,675 9 2 1 Total portfolio loans 2,273 $ 166 - 1 Recorded Investment Number of Loans in Loans Modified Increase Charge-offs Modified in a TDR in a TDR to ALLL Upon Recognized Upon June 30, 2017 ($ in millions)(a) During the Period(b) During the Period Modification Modification Commercial loans: Commercial and industrial loans 17 $ 56 1 4 Commercial mortgage owner-occupied loans 2 6 5 - Commercial mortgage nonowner-occupied loans 1 - - - Residential mortgage loans 199 28 1 - Consumer loans: Home equity 44 3 - - Automobile loans 15 - - - Credit card 2,152 10 2 1 Total portfolio loans 2,430 $ 103 9 5 The following tables provide a summary of TDRs that subsequently defaulted during the three months ended June 30, 2018 and 2017 and were within twelve months of the restructuring date: Number of Recorded June 30, 2018 ($ in millions)(a) Contracts Investment Commercial loans: Commercial and industrial loans 2 $ 28 Residential mortgage loans 62 13 Consumer loans: Credit card 137 1 Total portfolio loans 201 $ 42 Number of Recorded June 30, 2017 ($ in millions)(a) Contracts Investment Commercial loans: Commercial and industrial loans 2 $ 15 Commercial mortgage nonowner-occupied loans 3 1 Residential mortgage loans 26 3 Consumer loans: Home equity 6 1 Credit card 387 2 Total portfolio loans 424 $ 22 The following tables provide a summary of loans and leases, by class, modified in a TDR by the Bancorp during the six months ended: Recorded Investment Increase Number of Loans in Loans Modified (Decrease) Charge-offs Modified in a TDR in a TDR to ALLL Upon Recognized Upon June 30, 2018 ($ in millions)(a) During the Period(b) During the Period Modification Modification Commercial loans: Commercial and industrial loans 25 $ 135 9 - Commercial mortgage owner-occupied loans 2 - - - Residential mortgage loans 784 124 3 - Consumer loans: Home equity 54 4 - - Automobile loans 39 - - - Credit card 3,640 19 4 1 Total portfolio loans 4,544 $ 282 16 1 Recorded Investment Number of Loans in Loans and Leases Increase Charge-offs Modified in a TDR Modified in a TDR to ALLL Upon Recognized Upon June 30, 2017 ($ in millions)(a) During the Period(b) During the Period Modification Modification Commercial loans and leases: Commercial and industrial loans 50 $ 153 2 6 Commercial mortgage owner-occupied loans 7 8 5 - Commercial mortgage nonowner-occupied loans 2 - - - Residential mortgage loans 402 57 3 - Consumer loans: Home equity 75 5 - - Automobile loans 45 - - - Credit card 3,908 17 3 1 Total portfolio loans and leases 4,489 $ 240 13 7 The following tables provide a summary of TDRs that subsequently defaulted during the six months ended June 30, 2018 and 2017 and were within twelve months of the restructuring date: Number of Recorded June 30, 2018 ($ in millions)(a) Contracts Investment Commercial loans: Commercial and industrial loans 3 $ 29 Commercial mortgage owner-occupied loans 2 - Residential mortgage loans 110 20 Consumer loans: Home equity 2 - Credit card 379 2 Total portfolio loans 496 $ 51 Number of Recorded June 30, 2017 ($ in millions)(a) Contracts Investment Commercial loans: Commercial and industrial loans 4 $ 16 Commercial mortgage nonowner-occupied loans 3 1 Residential mortgage loans 83 12 Consumer loans: Home equity 11 2 Credit card 837 4 Total portfolio loans 938 $ 35
6 Months Ended
Bank Premises and Equipment
Bank Premises and Equipment
The following table provides a summary of bank premises and equipment as of: ($ in millions) June 30, 2018 December 31, 2017 Land and improvements(a) $ 599 644 Buildings(a) 1,616 1,679 Equipment 1,936 1,876 Leasehold improvements 396 399 Construction in progress(a) 85 93 Bank premises and equipment held for sale: Land and improvements 24 17 Buildings 10 9 Equipment 3 1 Accumulated depreciation and amortization (2,754) (2,715) Total bank premises and equipment $ 1,915 2,003
6 Months Ended
Intangible Assets
Intangible Assets
The details of the Bancorp’s intangible assets are shown in the following table: Gross Carrying Accumulated Net Carrying ($ in millions) Amount Amortization Amount As of June 30, 2018 Core deposit intangibles $ 34 (29) 5 Customer relationships 20 (1) 19 Non-compete agreements 14 (11) 3 Other 6 (3) 3 Total intangible assets $ 74 (44) 30 As of December 31, 2017 Core deposit intangibles $ 34 (29) 5 Customer relationships 16 - 16 Non-compete agreements 13 (10) 3 Other 6 (3) 3 Total intangible assets $ 69 (42) 27 Estimated amortization expense for the remainder of 2018 through 2022 is as follows: ($ in millions) Total Remainder of 2018 $ 3 2019 5 2020 3 2021 3 2022 2
6 Months Ended
Variable Interest Entities
Variable Interest Entities
The following tables provide a summary of the classifications of consolidated VIE assets, liabilities and noncontrolling interests included in the Condensed Consolidated Balance Sheets as of: Automobile Loan CDC June 30, 2018 ($ in millions) Securitizations Investments Total Assets: Other short-term investments $ 47 - 47 Commercial mortgage loans - 20 20 Automobile loans 888 - 888 ALLL (5) - (5) Other assets 5 - 5 Total assets $ 935 20 955 Liabilities: Other liabilities $ 2 - 2 Long-term debt 830 - 830 Total liabilities $ 832 - 832 Noncontrolling interests $ - 20 20 Automobile Loan CDC December 31, 2017 ($ in millions) Securitizations 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 Non-consolidated VIEs The following tables provide a summary of assets and liabilities carried on the Condensed Consolidated Balance Sheets related to non-consolidated VIEs for which the Bancorp holds an interest, but is not the primary beneficiary of the VIE, as well as the Bancorp’s maximum exposure to losses associated with its interests in the entities as of: Total Total Maximum June 30, 2018 ($ in millions) Assets Liabilities Exposure CDC investments $ 1,213 363 1,213 Private equity investments 70 - 112 Loans provided to VIEs 1,885 - 3,124 Total Total Maximum December 31, 2017 ($ in millions) Assets Liabilities Exposure CDC investments $ 1,376 355 1,376 Private equity investments 102 - 150 Loans provided to VIEs 1,845 - 2,910 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 Condensed Consolidated Statements of Income relating to investments in qualified affordable housing investments: Condensed Consolidated For the three months ended June 30, For the six months ended June 30, ($ in millions) Statements of Income Caption 2018 2017 2018 2017 Pre-tax investment and impairment losses(a) Other noninterest expense $ 46 35 91 72 Tax credits and other benefits Applicable income tax expense (51) (56) (103) (112)
6 Months Ended
Sales of Receivables and Servicing Rights
Sales of Receivables and Servicing Rights
Information related to residential mortgage loan sales and the Bancorp’s mortgage banking activity, which is included in mortgage banking net revenue in the Condensed Consolidated Statements of Income, is as follows: For the three months ended For the six months ended June 30, June 30, ($ in millions) 2018 2017 2018 2017 Residential mortgage loan sales(a) $ 1,474 1,518 2,474 3,147 Origination fees and gains on loan sales 28 37 52 66 Gross mortgage servicing fees 54 49 106 97 The following table presents changes in the servicing rights related to residential mortgage loans for the six months ended June 30: ($ in millions) 2018 2017 Balance, beginning of period $ 858 744 Servicing rights originated - residential mortgage loans 35 66 Servicing rights acquired - residential mortgage loans 50 109 Changes in fair value: Due to changes in inputs or assumptions(a) 78 (13) Other changes in fair value(b) (62) (57) Balance, end of period $ 959 849 The following table presents activity related to valuations of the MSR portfolio and the impact of the non-qualifying hedging strategy: For the three months ended For the six months ended June 30, June 30, ($ in millions) 2018 2017 2018 2017 Securities (losses) gains, net - non-qualifying hedges on MSRs $ (4) 2 (17) 2 Changes in fair value and settlement of free-standing derivatives purchased to economically hedge the MSR portfolio(a) (16) 16 (65) 15 MSR fair value adjustment due to changes in inputs or assumptions(a) 21 (17) 78 (13) The key economic assumptions used in measuring the interests in residential mortgage loans that continued to be held by the Bancorp at the date of sale, securitization or purchase resulting from transactions completed during the three months ended June 30, 2018 and 2017 were as follows: June 30, 2018 June 30, 2017 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: Servicing rights Fixed 6.8 10.0 % 519 7.0 10.3 % 492 Servicing rights Adjustable - - - 3.0 29.8 659 At June 30, 2018, the sensitivity of the current fair value of residual cash flows to immediate 10%, 20% and 50% adverse changes in prepayment speed assumptions and immediate 10% and 20% adverse changes in OAS spread are as follows: Prepayment OAS Speed Assumption Spread Assumption OAS Spread Impact of Weighted- Impact of Adverse Change Adverse Change Fair Average Life on Fair Value on Fair Value ($ in millions)(a) Rate Value (in years) Rate 10% 20% 50% (bps) 10% 20% Residential mortgage loans: Servicing rights Fixed $ 944 6.5 9.5 % $ (37) (71) (164) 543 $ (19) (37) Servicing rights Adjustable 15 3.4 23.6 (1) (2) (4) 817 - (1)
6 Months Ended
Derivative Financial Instruments
Derivative Financial Instruments
The following tables reflect the notional amounts and fair values for all derivative instruments included in the Condensed Consolidated Balance Sheets as of: Fair Value Notional Derivative Derivative June 30, 2018 ($ in millions) Amount Assets Liabilities Derivatives Designated as Qualifying Hedging Instruments: Fair value hedges: Interest rate swaps related to long-term debt $ 3,205 229 4 Total fair value hedges 229 4 Cash flow hedges: Interest rate swaps related to C&I loans 6,150 1 15 Total cash flow hedges 1 15 Total derivatives designated as qualifying hedging instruments 230 19 Derivatives Not Designated as Qualifying Hedging Instruments: Free-standing derivatives - risk management and other business purposes: Interest rate contracts related to MSR portfolio 11,475 52 13 Forward contracts related to residential mortgage loans held for sale 1,450 - 4 Swap associated with the sale of Visa, Inc. Class B Shares 2,207 - 164 Foreign exchange contracts 153 2 - Total free-standing derivatives - risk management and other business purposes 54 181 Free-standing derivatives - customer accommodation: Interest rate contracts 48,949 247 280 Interest rate lock commitments 596 11 - Commodity contracts 5,087 284 270 TBA securities 58 - - Foreign exchange contracts 10,842 119 109 Total free-standing derivatives - customer accommodation 661 659 Total derivatives not designated as qualifying hedging instruments 715 840 Total $ 945 859 Fair Value Notional Derivative Derivative December 31, 2017 ($ in millions) Amount Assets Liabilities Derivatives Designated as Qualifying Hedging Instruments: Fair value hedges: Interest rate swaps related to long-term debt $ 3,705 297 5 Total fair value hedges 297 5 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 MSR portfolio 11,035 54 15 Forward contracts related to residential mortgage loans held for sale 1,284 1 1 Stock warrant 20 20 - Swap associated with the sale of Visa, Inc. Class B Shares 1,900 - 137 Foreign exchange contracts 112 - 1 Total free-standing derivatives - risk management and other business purposes 75 154 Free-standing derivatives - customer accommodation: Interest rate contracts 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 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 Condensed Consolidated Statements of Income: For the three months For the six months Condensed Consolidated ended June 30, ended June 30, ($ in millions) Statements of Income Caption 2018 2017 2018 2017 Change in fair value of interest rate swaps hedging long-term debt Interest on long-term debt $ (18) 14 (81) (6) Change in fair value of hedged long-term debt attributable to the risk being hedged Interest on long-term debt 19 (15) 83 5 The following amounts were recorded in the Condensed Consolidated Balance Sheets related to cumulative basis adjustments for fair value hedges as of: Condensed Consolidated ($ in millions) Balance Sheets Caption June 30, 2018 Carrying amount of the hedged item Long-term debt $ 3,701 Cumulative amount of fair value hedging adjustments included in the carrying amount of the hedged items Long-term debt (212) The following table presents the pretax net gains (losses) recorded in the Condensed Consolidated Statements of Income and in the Condensed Consolidated Statements of Comprehensive Income relating to derivative instruments designated as cash flow hedges: For the three months ended For the six months ended June 30, June 30, ($ in millions) 2018 2017(a) 2018 2017(a) Amount of pretax net (losses) gains recognized in OCI $ 4 8 (5) 3 Amount of pretax net gains reclassified from OCI into net income - 6 1 14 The net gains (losses) recorded in the Condensed 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 three months For the six months Condensed Consolidated ended June 30, ended June 30, ($ in millions) Statements of Income Caption 2018 2017 2018 2017 Interest rate contracts: Forward contracts related to residential mortgage loans held for sale Mortgage banking net revenue $ (3) 5 (4) (16) Interest rate contracts related to MSR portfolio Mortgage banking net revenue (16) 16 (65) 15 Foreign exchange contracts: Foreign exchange contracts for risk management purposes Other noninterest income 3 (3) 5 (4) Equity contracts: Swap associated with sale of Visa, Inc. Class B Shares Other noninterest income (10) (9) (49) (22) Risk ratings of the notional amount of risk participation agreements under this risk rating system are summarized in the following table as of: June 30, December 31, ($ in millions) 2018 2017 Pass $ 3,590 2,748 Special mention 77 66 Substandard 10 24 Total $ 3,677 2,838 The net gains (losses) recorded in the Condensed Consolidated Statements of Income relating to free-standing derivative instruments used for customer accommodation are summarized in the following table: For the three months For the six months Condensed Consolidated ended June 30, ended June 30, ($ in millions) Statements of Income Caption 2018 2017 2018 2017 Interest rate contracts: Interest rate contracts for customers (contract revenue) Corporate banking revenue $ 9 5 16 9 Interest rate lock commitments Mortgage banking net revenue 22 26 35 48 Commodity contracts: Commodity contracts for customers (contract revenue) Corporate banking revenue 2 1 4 2 Commodity contracts for customers (credit losses) Other noninterest expense - 1 - 1 Commodity contracts for customers (credit portion of fair value adjustment) Other noninterest expense (1) - (1) - Foreign exchange contracts: Foreign exchange contracts for customers (contract revenue) Corporate banking revenue 13 9 27 22 Foreign exchange contracts for customers (contract revenue) Other noninterest income 7 - 5 - 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 - - 1 1 The following tables provide a summary of offsetting derivative financial instruments: Gross Amount Gross Amounts Not Offset in the Recognized in the Condensed Consolidated Balance Sheets Condensed Consolidated As of June 30, 2018 ($ in millions) Balance Sheets(a) Derivatives Collateral(b) Net Amount Assets: Derivatives $ 934 (258) (300) 376 Total assets 934 (258) (300) 376 Liabilities: Derivatives 859 (258) (234) 367 Total liabilities $ 859 (258) (234) 367 Gross Amount Gross Amounts Not Offset in the Recognized in the Condensed Consolidated Balance Sheets Condensed Consolidated As of December 31, 2017 ($ in millions) Balance Sheets(a) 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
6 Months Ended
Other Short Term Borrowings
Other Short Term Borrowings
Borrowings with original maturities of one year or less are classified as short-term. The following table presents a summary of the Bancorp's other short-term borrowings as of: June 30, December 31, ($ in millions) 2018 2017 FHLB advances $ 1,200 3,125 Securities sold under repurchase agreements 300 546 Derivative collateral 263 341 Total other short-term borrowings $ 1,763 4,012
6 Months Ended
Long-Term Debt
Long-Term Debt
6 Months Ended
Capital Actions
Capital Actions
The following table presents a summary of the Bancorp's accelerated share repurchase transactions that were entered into or settled during the six months ended June 30, 2018: Repurchase Date Amount ($ in millions) Shares Repurchased on Repurchase Date Shares Received from Forward Contract Settlement Total Shares Repurchased Settlement Date December 19, 2017 $ 273 7,727,273 824,367 8,551,640 March 19, 2018 February 12, 2018 318 8,691,318 1,015,731 9,707,049 March 26, 2018 May 25, 2018 235 6,402,244 1,172,122 7,574,366 June 15, 2018
6 Months Ended
Commitments, Contingent Liabilities and Guarantees
Commitments, Contingent Liabilities and Guarantees
Commitments The Bancorp has certain commitments to make future payments under contracts. The following table reflects a summary of significant commitments as of: June 30, December 31, ($ in millions) 2018 2017 Commitments to extend credit $ 70,915 68,106 Letters of credit 2,092 2,185 Forward contracts related to residential mortgage loans held for sale 1,450 1,284 Noncancelable operating lease obligations 568 568 Purchase obligations 120 144 Capital commitments for private equity investments 43 48 Capital expenditures 27 37 Capital lease obligations 23 26 Risk ratings under this risk rating system are summarized in the following table as of: June 30, December 31, ($ in millions) 2018 2017 Pass $ 70,340 67,254 Special mention 306 330 Substandard 269 522 Total commitments to extend credit $ 70,915 68,106 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 June 30, 2018: ($ in millions) Less than 1 year(a) $ 1,070 1 - 5 years(a) 1,009 Over 5 years 13 Total letters of credit $ 2,092 Risk ratings under this risk rating system are summarized in the following table as of: June 30, December 31, ($ in millions) 2018 2017 Pass $ 1,897 1,830 Special mention 46 67 Substandard 149 218 Doubtful - 70 Total letters of credit $ 2,092 2,185 The following table summarizes activity in the reserve for representation and warranty provisions: For the three months ended For the six months ended June 30, June 30, ($ in millions) 2018 2017 2018 2017 Balance, beginning of period $ 8 12 9 13 Net reductions to the reserve (1) (1) (2) (2) Balance, end of period $ 7 11 7 11 The following tables provide a rollforward of unresolved claims by claimant type for the six months ended: GSE Private Label June 30, 2018 ($ in millions) Units Dollars Units Dollars Balance, beginning of period 6 $ 1 1 $ - New demands 62 11 - - Resolved demands (54) (9) - - Balance, end of period 14 $ 3 1 $ - GSE Private Label June 30, 2017 ($ in millions) Units Dollars Units Dollars Balance, beginning of period 13 $ 2 - $ - New demands 58 8 - - Loan paydowns/payoffs (1) - - - Resolved demands (54) (8) - - Balance, end of period 16 $ 2 - $ - Visa Bancorp Cash Period ($ in millions) Funding Amount Payment Amount Q2 2010 $ 500 20 Q4 2010 800 35 Q2 2011 400 19 Q1 2012 1,565 75 Q3 2012 150 6 Q3 2014 450 18 Q2 2018 600 (a) i (a) The Bancorp made a cash payment of $26 million to the swap counterparty on July 17, 2018 as a result of the Visa escrow funding in the second quarter of 2018.
6 Months Ended
Legal And Regulatory Proceedings
Legal and Regulatory Proceedings
6 Months Ended
Related Party Transactions Abstract
Related Party Transactions
6 Months Ended
Income Taxes
Income Taxes
6 Months Ended
Accumulated Other Comprehensive Income
Accumulated Other Comprehensive Income
The tables below present the activity of the components of OCI and AOCI for the three months ended: Total OCI Total AOCI Pretax Tax Net Beginning Net Ending June 30, 2018 ($ in millions) Activity Effect Activity Balance Activity Balance Unrealized holding losses on available-for-sale debt securities arising during period $ (217) 50 (167) Reclassification adjustment for net gains on available-for-sale debt securities included in net income - - - Net unrealized losses on available-for-sale debt securities (217) 50 (167) (318) (167) (485) Unrealized holding gains on cash flow hedge derivatives arising during period 4 (1) 3 Reclassification adjustment for net gains on cash flow hedge derivatives included in net income - - - Net unrealized losses on cash flow hedge derivatives 4 (1) 3 (19) 3 (16) Reclassification of amounts to net periodic benefit costs 1 - 1 Defined benefit pension plans, net 1 - 1 (52) 1 (51) Total $ (212) 49 (163) (389) (163) (552) Total OCI Total AOCI Pretax Tax Net Beginning Net Ending June 30, 2017 ($ in millions) Activity Effect Activity Balance Activity Balance Unrealized holding gains on available-for-sale securities arising during period $ 148 (55) 93 Reclassification adjustment for net gains on available-for-sale securities included in net income - - - Net unrealized gains on available-for-sale securities 148 (55) 93 117 93 210 Unrealized holding gains on cash flow hedge derivatives arising during period 8 (3) 5 Reclassification adjustment for net gains on cash flow hedge derivatives included in net income (6) 2 (4) Net unrealized gains on cash flow hedge derivatives 2 (1) 1 2 1 3 Reclassification of amounts to net periodic benefit costs 2 (1) 1 Defined benefit pension plans, net 2 (1) 1 (51) 1 (50) Total $ 152 (57) 95 68 95 163 The tables below present the activity of the components of OCI and AOCI for the six months ended: Total OCI Total AOCI Pretax Tax Net Beginning Net Ending June 30, 2018 ($ in millions) Activity Effect Activity Balance(a) Activity Balance Unrealized holding losses on available-for-sale debt securities arising during period $ (811) 184 (627) Reclassification adjustment for net losses on available-for-sale debt securities included in net income 9 (2) 7 Net unrealized losses on available-for-sale debt securities (802) 182 (620) 135 (620) (485) Unrealized holding losses on cash flow hedge derivatives arising during period (5) 1 (4) Reclassification adjustment for net gains on cash flow hedge derivatives included in net income (1) - (1) Net unrealized losses on cash flow hedge derivatives (6) 1 (5) (11) (5) (16) Reclassification of amounts to net periodic benefit costs 2 - 2 Defined benefit pension plans, net 2 - 2 (53) 2 (51) Total $ (806) 183 (623) 71 (623) (552) Total OCI Total AOCI Pretax Tax Net Beginning Net Ending June 30, 2017 ($ in millions) Activity Effect Activity Balance Activity Balance Unrealized holding gains on available-for-sale securities arising during period $ 170 (62) 108 Reclassification adjustment for net losses on available-for-sale securities included in net income 2 (1) 1 Net unrealized gains on available-for-sale securities 172 (63) 109 101 109 210 Unrealized holding gains on cash flow hedge derivatives arising during period 3 (1) 2 Reclassification adjustment for net gains on cash flow hedge derivatives included in net income (14) 5 (9) Net unrealized gains on cash flow hedge derivatives (11) 4 (7) 10 (7) 3 Reclassification of amounts to net periodic benefit costs 3 (1) 2 Defined benefit pension plans, net 3 (1) 2 (52) 2 (50) Total $ 164 (60) 104 59 104 163 The table below presents reclassifications out of AOCI: For the three months For the six months Condensed Consolidated ended June 30, ended June 30, Components of AOCI: ($ in millions) Statements of Income Caption 2018 2017 2018 2017 Net unrealized losses on available-for-sale debt securities:(b) Net losses included in net income Securities (losses) gains, net $ - - (9) (2) Income before income taxes - - (9) (2) Applicable income tax expense - - 2 1 Net income - - (7) (1) Net unrealized gains on cash flow hedge derivatives:(b) Interest rate contracts related to C&I loans Interest and fees on loans and leases - 6 1 14 Income before income taxes - 6 1 14 Applicable income tax expense - (2) - (5) Net income - 4 1 9 Net periodic benefit costs:(b) Amortization of net actuarial loss Employee benefits expense(a) (1) (2) (2) (3) Income before income taxes (1) (2) (2) (3) Applicable income tax expense - 1 - 1 Net income (1) (1) (2) (2) Total reclassifications for the period Net income $ (1) 3 (8) 6
6 Months Ended
Earnings Per Share
Earnings Per Share
The following tables provide the calculation of earnings per share and the reconciliation of earnings per share and earnings per diluted share: 2018 2017 For the three months ended June 30, Average Per Share Average Per Share (in millions, except per share data) Income Shares Amount Income Shares Amount Earnings Per Share: Net income available to common shareholders $ 563 344 Less: Income allocated to participating securities 6 4 Net income allocated to common shareholders $ 557 683 0.81 340 741 0.46 Earnings Per Diluted Share: Net income available to common shareholders $ 563 344 Effect of dilutive securities: Stock-based awards - 13 - 11 Net income available to common shareholders plus assumed conversions 563 344 Less: Income allocated to participating securities 6 4 Net income allocated to common shareholders plus assumed conversions $ 557 696 0.80 340 752 0.45 2018 2017 For the six months ended June 30, Average Per Share Average Per Share (in millions, except per share data) Income Shares Amount Income Shares Amount Earnings Per Share: Net income available to common shareholders $ 1,252 634 Less: Income allocated to participating securities 15 7 Net income allocated to common shareholders $ 1,237 687 1.80 627 745 0.84 Earnings Per Diluted Share: Net income available to common shareholders $ 1,252 634 Effect of dilutive securities: Stock-based awards - 13 - 12 Net income available to common shareholders plus assumed conversions 1,252 634 Less: Income allocated to participating securities 14 7 Net income allocated to common shareholders plus assumed conversions $ 1,238 700 1.77 627 757 0.83
6 Months Ended
Fair Value Measurements
Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis The following tables summarize assets and liabilities measured at fair value on a recurring basis as of: Fair Value Measurements Using June 30, 2018 ($ in millions) Level 1(c) Level 2(c) Level 3 Total Fair Value Assets: Available-for-sale debt and other securities: U.S. Treasury and federal agencies securities $ 96 - - 96 Obligations of states and political subdivisions securities - 35 - 35 Mortgage-backed securities: Agency residential mortgage-backed securities - 16,094 - 16,094 Agency commercial mortgage-backed securities - 10,038 - 10,038 Non-agency commercial mortgage-backed securities - 3,086 - 3,086 Asset-backed securities and other debt securities - 1,998 - 1,998 Available-for-sale debt and other securities(a) 96 31,251 - 31,347 Trading debt securities: U.S. Treasury and federal agencies securities 10 9 - 19 Obligations of states and political subdivisions securities - 58 - 58 Agency residential mortgage-backed securities - 75 - 75 Asset-backed securities and other debt securities - 128 - 128 Trading debt securities 10 270 - 280 Equity securities 474 1 - 475 Residential mortgage loans held for sale - 658 - 658 Residential mortgage loans(b) - - 162 162 Commercial loans held for sale - 8 - 8 MSRs - - 959 959 Derivative assets: Interest rate contracts - 529 11 540 Foreign exchange contracts - 121 - 121 Commodity contracts 34 250 - 284 Derivative assets(d) 34 900 11 945 Total assets $ 614 33,088 1,132 34,834 Liabilities: Derivative liabilities: Interest rate contracts $ 4 305 7 316 Foreign exchange contracts - 109 - 109 Equity contracts - - 164 164 Commodity contracts 95 175 - 270 Derivative liabilities(e) 99 589 171 859 Short positions(e) 88 51 - 139 Total liabilities $ 187 640 171 998 Fair Value Measurements Using December 31, 2017 ($ in millions) Level 1(c) Level 2(c) Level 3 Total Fair Value Assets: Available-for-sale debt and other securities: U.S. Treasury and federal agencies securities $ 98 - - 98 Obligations of states and political subdivisions securities - 44 - 44 Mortgage-backed securities: Agency residential mortgage-backed securities - 15,319 - 15,319 Agency commercial mortgage-backed securities - 10,167 - 10,167 Non-agency commercial mortgage-backed securities - 3,293 - 3,293 Asset-backed securities and other debt securities - 2,218 - 2,218 Available-for-sale debt and other securities(a) 98 31,041 - 31,139 Trading debt securities: U.S. Treasury and federal agencies securities 1 11 - 12 Obligations of states and political subdivisions securities - 22 - 22 Residential mortgage-backed securities - 395 - 395 Asset-backed securities and other debt securities - 63 - 63 Trading debt securities 1 491 - 492 Equity securities 438 1 439 Residential mortgage loans held for sale - 399 - 399 Residential mortgage loans(b) - - 137 137 MSRs - - 858 858 Derivative assets: Interest rate contracts 1 505 8 514 Foreign exchange contracts - 124 - 124 Equity contracts - 20 - 20 Commodity contracts 39 126 - 165 Derivative assets(d) 40 775 8 823 Total assets $ 577 32,707 1,003 34,287 Liabilities: Derivative liabilities: Interest rate contracts $ 1 172 5 178 Foreign exchange contracts - 120 - 120 Equity contracts - - 137 137 Commodity contracts 38 129 - 167 Derivative liabilities(e) 39 421 142 602 Short positions(e) 25 6 - 31 Total liabilities $ 64 427 142 633 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 three months ended June 30, 2018 ($ in millions) Loans MSRs Net(a) Derivatives Fair Value Balance, beginning of period $ 136 926 4 (165) 901 Total (losses) gains (realized/unrealized): Included in earnings (1) (13) 22 (10) (2) Purchases/originations - 46 (1) - 45 Settlements (5) - (21) 11 (15) Transfers into Level 3(b) 32 - - - 32 Balance, end of period $ 162 959 4 (164) 961 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 June 30, 2018(c) $ (1) (13) 12 (10) (12) Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Residential Interest Rate Equity Mortgage Derivatives, Derivatives, Total For the three months ended June 30, 2017 ($ in millions) Loans MSRs Net(a) Net Fair Value Balance, beginning of period $ 141 776 11 (97) 831 Total (losses) gains (realized/unrealized): Included in earnings 1 (47) 26 (9) (29) Purchases/originations - 120 - - 120 Settlements (4) - (28) 8 (24) Transfers into Level 3(b) 4 - - - 4 Balance, end of period $ 142 849 9 (98) 902 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 June 30, 2017(c) $ 1 (47) 14 (9) (41) Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Residential Interest Rate Mortgage Derivatives, Equity Total For the six months ended June 30, 2018 ($ in millions) Loans MSRs(d) Net(a) Derivatives Fair Value Balance, beginning of period $ 137 858 3 (137) 861 Total (losses) gains (realized/unrealized): Included in earnings (4) 16 36 (49) (1) Purchases/originations - 85 (4) - 81 Settlements (8) - (31) 22 (17) Transfers into Level 3(b) 37 - - - 37 Balance, end of period $ 162 959 4 (164) 961 The amount of total (losses) gains for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at June 30, 2018(c) $ (4) 16 12 (49) (25) Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Residential Interest Rate Mortgage Derivatives, Equity Total For the six months ended June 30, 2017 ($ in millions) Loans MSRs Net(a) Derivatives(a) Fair Value Balance, beginning of period $ 143 744 8 (91) 804 Total (losses) gains (realized/unrealized): Included in earnings 1 (70) 49 (22) (42) Purchases/originations - 175 (1) - 174 Settlements (9) - (47) 15 (41) Transfers into Level 3(b) 7 - - - 7 Balance, end of period $ 142 849 9 (98) 902 The amount of total (losses) gains for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at June 30, 2017(c) $ 1 (70) 15 (22) (76) The total 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 Condensed Consolidated Statements of Income as follows: For the three months ended For the six months ended June 30, June 30, ($ in millions) 2018 2017 2018 2017 Mortgage banking net revenue $ 8 (21) 47 (21) Corporate banking revenue - 1 1 1 Other noninterest income (10) (9) (49) (22) Total losses $ (2) (29) (1) (42) The total losses included in earnings attributable to changes in unrealized gains and losses related to Level 3 assets and liabilities still held at June 30, 2018 and 2017 were recorded in the Condensed Consolidated Statements of Income as follows: For the three months ended For the six months ended June 30, June 30, ($ in millions) 2018 2017 2018 2017 Mortgage banking net revenue $ (2) (33) 23 (55) Corporate banking revenue - 1 1 1 Other noninterest income (10) (9) (49) (22) Total losses $ (12) (41) (25) (76) The following tables present information as of June 30, 2018 and 2017 about significant unobservable inputs related to the Bancorp’s material categories of Level 3 financial assets and liabilities measured at fair value on a recurring basis: As of June 30, 2018 ($ in millions) Financial Instrument Fair Value Valuation Technique Significant Unobservable Inputs Ranges of Inputs Weighted-Average Residential mortgage loans $ 162 Loss rate model Interest rate risk factor (13.3) - 11.9% -0.1% Credit risk factor 0 - 40.3% 0.7% MSRs 959 Discounted cash flow Prepayment speed 0.5-97.0% (Fixed) 9.5%(Adjustable) 23.6% OAS spread (bps) 461-1,513 (Fixed) 543(Adjustable) 817 IRLCs, net 11 Discounted cash flow Loan closing rates 12.2 - 96.6% 80.9% Swap associated with the sale of Visa, Inc. (164) Discounted cash flow Timing of the resolution 1/31/2021 - 9/6/2021 Class B Shares of the Covered Litigation 11/30/2023 As of June 30, 2017 ($ in millions) Financial Instrument Fair Value Valuation Technique Significant Unobservable Inputs Ranges of Inputs Weighted-Average Residential mortgage loans $ 142 Loss rate model Interest rate risk factor (9.6) - 15.0% 2.9% Credit risk factor 0 - 46.2% 1.0% MSRs 849 Discounted cash flow Prepayment speed 1.2-100% (Fixed) 11.5%(Adjustable) 24.8% OAS spread (bps) 430-1,515 (Fixed) 530(Adjustable) 773 IRLCs, net 14 Discounted cash flow Loan closing rates 9.6- 96.8% 73.0% Swap associated with the sale of Visa, Inc. (98) Discounted cash flow Timing of the resolution 6/30/2019 - 9/30/2020 Class B Shares of the Covered Litigation 12/31/2022 The following tables provide the fair value hierarchy and carrying amount of all assets that were held as of June 30, 2018 and 2017 and for which a nonrecurring fair value adjustment was recorded during the three and six months ended June 30, 2018 and 2017, and the related gains and losses from fair value adjustments on assets sold during the period as well as assets still held as of the end of the period: Fair Value Measurements Using Total (Losses) Gains Total (Losses) Gains For the three months ended June 30, 2018 For the six months ended June 30, 2018 As of June 30, 2018 ($ in millions) Level 1 Level 2 Level 3 Total Commercial loans held for sale $ - - 4 4 - (1) Commercial and industrial loans - - 161 161 14 (30) Commercial mortgage loans - - 3 3 1 6 Commercial leases - - 14 14 (9) (10) OREO - - 17 17 (1) (4) Bank premises and equipment - - 37 37 (33) (41) Operating lease equipment - - 10 10 (1) (3) Private equity investments - 50 31 81 11 30 Total $ - 50 277 327 (18) (53) Fair Value Measurements Using Total Losses Total Losses For the three months For the six months As of June 30, 2017 ($ in millions) Level 1 Level 2 Level 3 Total ended June 30, 2017 ended June 30, 2017 Commercial loans held for sale $ - - 45 45 (13) (32) Commercial and industrial loans - - 405 405 (32) (58) Commercial mortgage loans - - 26 26 (9) (11) Commercial leases - - 3 3 (1) (2) OREO - - 11 11 (1) (5) Bank premises and equipment - - 16 16 (2) (5) Operating lease equipment - - 56 56 - (20) Total $ - - 562 562 (58) (133) The following tables present information as of June 30, 2018 and 2017 about significant unobservable inputs related to the Bancorp’s material categories of Level 3 financial assets and liabilities measured on a nonrecurring basis: As of June 30, 2018 ($ in millions) Financial Instrument Fair Value Valuation Technique Significant Unobservable Inputs Ranges of Inputs Weighted-Average Commercial loans held for sale $ 4 Appraised value Appraised value NM NM Costs to sell NM 10.0% Commercial and industrial loans 161 Appraised value Collateral value NM NM Commercial mortgage loans 3 Appraised value Collateral value NM NM Commercial leases 14 Appraised value Collateral value NM NM OREO 17 Appraised value Appraised value NM NM Bank premises and equipment 37 Appraised value Appraised value NM NM Operating lease equipment 10 Appraised value Appraised value NM NM Private equity investments 28 Liquidity discount applied Liquidity discount 0-43.0% 12.9% to fund's net asset value 3 Comparable company analysis Market comparable transactions NM NM As of June 30, 2017 ($ in millions) Financial Instrument Fair Value Valuation Technique Significant Unobservable Inputs Ranges of Inputs Weighted-Average Commercial loans held for sale $ 45 Appraised value Appraised value NM NM Costs to sell NM 10.0% Commercial and industrial loans 405 Appraised value Collateral value NM NM Commercial mortgage loans 26 Appraised value Collateral value NM NM Commercial leases 3 Appraised value Collateral value NM NM OREO 11 Appraised value Appraised value NM NM Bank premises and equipment 16 Appraised value Appraised value NM NM Operating lease equipment 56 Appraised value Appraised value NM NM The following table summarizes the difference between the fair value and the unpaid principal balance for residential mortgage and commercial loans measured at fair value as of: Aggregate Aggregate Unpaid June 30, 2018 ($ in millions) Fair Value Principal Balance Difference Residential mortgage loans measured at fair value $ 820 802 18 Past due loans of 90 days or more 2 2 - Nonaccrual loans 1 1 - Commercial loans measured at fair value 8 8 - December 31, 2017 Residential mortgage loans measured at fair value $ 536 522 14 Past due loans of 90 days or more 5 5 - Nonaccrual loans 1 1 - Fair Value of Certain Financial Instruments The following tables summarize the carrying amounts and estimated fair values for certain financial instruments, excluding financial instruments measured at fair value on a recurring basis: Net Carrying Fair Value Measurements Using Total As of June 30, 2018 ($ in millions) Amount Level 1 Level 2 Level 3 Fair Value Financial assets: Cash and due from banks $ 2,052 2,052 - - 2,052 Other short-term investments 1,636 1,636 - - 1,636 Other securities 614 - 614 - 614 Held-to-maturity securities 19 - - 19 19 Loans and leases held for sale 117 - - 117 117 Portfolio loans and leases: Commercial and industrial loans 40,858 - - 41,825 41,825 Commercial mortgage loans 6,560 - - 6,493 6,493 Commercial construction loans 4,666 - - 4,710 4,710 Commercial leases 3,765 - - 3,355 3,355 Residential mortgage loans 15,392 - - 15,697 15,697 Home equity 6,560 - - 6,936 6,936 Automobile loans 8,899 - - 8,632 8,632 Credit card 2,146 - - 2,518 2,518 Other consumer loans 1,955 - - 2,047 2,047 Unallocated ALLL (108) - - - - Total portfolio loans and leases, net $ 90,693 - - 92,213 92,213 Financial liabilities: Deposits $ 104,131 - 104,064 - 104,064 Federal funds purchased 597 597 - - 597 Other short-term borrowings 1,763 - 1,763 - 1,763 Long-term debt 14,321 14,223 429 - 14,652 Net Carrying Fair Value Measurements Using Total As of December 31, 2017 ($ in millions) Amount Level 1 Level 2 Level 3 Fair Value Financial assets: Cash and due from banks $ 2,514 2,514 - - 2,514 Other short-term investments 2,753 2,753 - - 2,753 Other securities 612 - 612 - 612 Held-to-maturity securities 24 - - 24 24 Loans and leases held for sale 93 - - 93 93 Portfolio loans and leases: Commercial and industrial loans 40,519 - - 41,718 41,718 Commercial mortgage loans 6,539 - - 6,490 6,490 Commercial construction loans 4,530 - - 4,560 4,560 Commercial leases 4,054 - - 3,705 3,705 Residential mortgage loans 15,365 - - 15,996 15,996 Home equity 6,968 - - 7,410 7,410 Automobile loans 9,074 - - 8,832 8,832 Credit card 2,182 - - 2,616 2,616 Other consumer loans 1,526 - - 1,621 1,621 Unallocated ALLL (120) - - - - Total portfolio loans and leases, net $ 90,637 - - 92,948 92,948 Financial liabilities: Deposits $ 103,162 - 103,123 - 103,123 Federal funds purchased 174 174 - - 174 Other short-term borrowings 4,012 - 4,012 - 4,012 Long-term debt 14,904 15,045 529 - 15,574
6 Months Ended
Segment Reporting
Business Segments
The following tables present the results of operations and assets by business segment for the three months ended: Wealth General Commercial Branch Consumer and Asset Corporate June 30, 2018 ($ in millions) Banking Banking Lending Management and Other Eliminations Total Net interest income $ 427 499 59 45 (10) - 1,020 Provision for (benefit from) loan and lease losses (10) 47 8 (11) (1) - 33 Net interest income after provision for loan and lease losses 437 452 51 56 (9) - 987 Noninterest income: Service charges on deposits 70 67 - - - - 137 Wealth and asset management revenue 1 37 - 104 - (34)(a) 108 Corporate banking revenue 119 1 - - - - 120 Card and processing revenue 14 69 - 1 - - 84 Mortgage banking net revenue - 1 52 - - - 53 Other noninterest income(b) 25 (8) 4 4 225 - 250 Securities losses, net - - - - (5) - (5) Securities losses, net - non-qualifying hedges on MSRs - - (4) - - - (4) Total noninterest income 229 167 52 109 220 (34) 743 Noninterest expense: Salaries, wages and incentives 71 111 42 43 204 - 471 Employee benefits 9 26 10 7 26 - 78 Net occupancy expense 6 44 3 3 18 - 74 Technology and communications 2 1 1 - 63 - 67 Equipment expense 6 12 - - 12 - 30 Card and processing expense 1 30 - - (1) - 30 Other noninterest expense 263 208 51 70 (271) (34) 287 Total noninterest expense 358 432 107 123 51 (34) 1,037 Income (loss) before income taxes 308 187 (4) 42 160 - 693 Applicable income tax expense (benefit) 19 40 (1) 9 40 - 107 Net income (loss) 289 147 (3) 33 120 - 586 Total goodwill $ 630 1,655 - 177 - - 2,462 Total assets $ 58,763 60,281 22,128 9,270 (9,747)(c) - 140,695 Wealth General Commercial Branch Consumer and Asset Corporate June 30, 2017 ($ in millions) Banking Banking Lending Management and Other Eliminations Total Net interest income $ 415 437 59 37 (9) - 939 Provision for (benefit from) loan and lease losses 22 39 7 (1) (15) - 52 Net interest income after provision for loan and lease losses 393 398 52 38 6 - 887 Noninterest income: Service charges on deposits 73 66 - - - - 139 Wealth and asset management revenue 1 35 - 100 - (33)(a) 103 Corporate banking revenue 100 1 - - - - 101 Card and processing revenue 14 64 - 1 - - 79 Mortgage banking net revenue - 1 54 - - - 55 Other noninterest income(b) 40 22 6 - 17 - 85 Securities gains, net - non-qualifying hedges on MSRs - - 2 - - - 2 Total noninterest income 228 189 62 101 17 (33) 564 Noninterest expense: Salaries, wages and incentives 60 104 40 37 156 - 397 Employee benefits 9 26 10 7 34 - 86 Net occupancy expense 7 43 3 2 15 - 70 Technology and communications 2 1 1 - 53 - 57 Equipment expense 4 13 - - 12 - 29 Card and processing expense 1 33 - - (1) - 33 Other noninterest expense 247 196 55 67 (247) (33) 285 Total noninterest expense 330 416 109 113 22 (33) 957 Income before income taxes 291 171 5 26 1 - 494 Applicable income tax expense 54 60 2 9 2 - 127 Net income (loss) 237 111 3 17 (1) - 367 Total goodwill $ 613 1,655 - 155 - - 2,423 Total assets $ 57,766 57,396 22,442 8,238 (4,775)(c) - 141,067 The following tables present the results of operations and assets by business segment for the six months ended: Wealth General Commercial Branch Consumer and Asset Corporate June 30, 2018 ($ in millions) Banking Banking Lending Management and Other Eliminations Total Net interest income $ 846 965 118 88 (1) - 2,016 Provision for (benefit from) loan and lease losses (29) 90 20 5 (30) - 56 Net interest income after provision for loan and lease losses 875 875 98 83 29 - 1,960 Noninterest income: Service charges on deposits 139 134 - 1 1 - 275 Wealth and asset management revenue 2 74 - 214 - (69)(a) 221 Corporate banking revenue 205 (c) 2 - 1 - - 208 Card and processing revenue 28 133 - 2 - - 163 Mortgage banking net revenue - 3 106 - - - 109 Other noninterest income(b) 73 7 7 9 612 - 708 Securities losses, net - - - - (15) - (15) Securities losses, net - non-qualifying hedges on MSRs - - (17) - - - (17) Total noninterest income 447 353 96 227 598 (69) 1,652 Noninterest expense: Salaries, wages and incentives 141 220 82 87 388 - 918 Employee benefits 27 53 20 17 71 - 188 Net occupancy expense 13 88 5 6 37 - 149 Technology and communications 4 3 2 - 126 - 135 Equipment expense 11 25 - - 25 - 61 Card and processing expense 2 59 - - (1) - 60 Other noninterest expense 545 423 102 144 (573) (69) 572 Total noninterest expense 743 871 211 254 73 (69) 2,083 Income (loss) before income taxes 579 357 (17) 56 554 - 1,529 Applicable income tax expense (benefit) 32 75 (3) 12 123 - 239 Net income (loss) 547 282 (14) 44 431 - 1,290 Total goodwill $ 630 1,655 - 177 - - 2,462 Total assets $ 58,763 60,281 22,128 9,270 (9,747)(d) - 140,695 Wealth General Commercial Branch Consumer and Asset Corporate June 30, 2017 ($ in millions) Banking Banking Lending Management and Other Eliminations Total Net interest income $ 839 867 120 75 (29) - 1,872 Provision for (benefit from) loan and lease losses 29 80 22 3 (8) - 126 Net interest income after provision for loan and lease losses 810 787 98 72 (21) - 1,746 Total noninterest income Service charges on deposits 146 130 - 1 - - 277 Wealth and asset management revenue 2 71 - 205 - (67)(a) 211 Corporate banking revenue 173 (c) 3 - - (1) - 175 Card and processing revenue 28 122 - 3 - - 153 Mortgage banking net revenue - 3 105 - - - 108 Other noninterest income(b) 80 45 9 - 26 - 160 Securities gains, net - - - - 1 - 1 Securities gains, net - non-qualifying hedges on MSRs - - 2 - - - 2 Total noninterest income 429 374 116 209 26 (67) 1,087 Noninterest expense Salaries, wages and incentives 127 208 77 76 320 - 808 Employee benefits 27 53 20 16 80 - 196 Net occupancy expense 13 90 5 5 35 - 148 Technology and communications 5 2 1 - 108 - 116 Equipment expense 8 26 - - 23 - 57 Card and processing expense 2 62 - - (1) - 63 Other noninterest expense 507 388 110 134 (517) (67) 555 Total noninterest expense 689 829 213 231 48 (67) 1,943 Income (loss) before income taxes 550 332 1 50 (43) - 890 Applicable income tax expense (benefit) 97 117 - 17 (13) - 218 Net income (loss) 453 215 1 33 (30) - 672 Total goodwill $ 613 1,655 - 155 - - 2,423 Total assets $ 57,766 57,396 22,442 8,238 (4,775)(d) - 141,067
6 Months Ended
Business Combinations
Pending Acquisition
6 Months Ended
Subsequent Event
Subsequent Event
6 Months Ended
Policy Text Block [Abstract]
Revenue Recognition
6 Months Ended
Supplemental Cash Flow
Noncash Investing and Financing Activities
Cash payments related to interest and income taxes in addition to non-cash investing and financing activities are presented in the following table for the six months ended June 30: ($ in millions) 2018 2017 Cash Payments: Interest $ 451 334 Income taxes 120 399 Transfers: Portfolio loans to loans held for sale 171 140 Loans held for sale to portfolio loans 67 7 Portfolio loans to OREO 20 19
6 Months Ended
Investments, Debt and Equity Securities [Abstract]
Investment Securities
The following tables provide the amortized cost, unrealized gains and losses and fair value for the major categories of the available-for-sale debt and other securities and held-to-maturity investment securities portfolios as of: Amortized Unrealized Unrealized Fair June 30, 2018 ($ in millions) Cost Gains Losses Value Available-for-sale debt and other securities: U.S. Treasury and federal agencies securities $ 98 - (2) 96 Obligations of states and political subdivisions securities 34 1 - 35 Mortgage-backed securities: Agency residential mortgage-backed securities 16,405 35 (346) 16,094 Agency commercial mortgage-backed securities 10,308 7 (277) 10,038 Non-agency commercial mortgage-backed securities 3,149 5 (68) 3,086 Asset-backed securities and other debt securities 1,981 26 (9) 1,998 Other securities(a) 614 - - 614 Total available-for-sale debt and other securities $ 32,589 74 (702) 31,961 Held-to-maturity securities: Obligations of states and political subdivisions securities $ 17 - - 17 Asset-backed securities and other debt securities 2 - - 2 Total held-to-maturity securities $ 19 - - 19 Amortized Unrealized Unrealized Fair December 31, 2017 ($ in millions) Cost Gains Losses Value Available-for-sale debt and other securities: U.S. Treasury and federal agencies securities $ 98 - - 98 Obligations of states and political subdivisions securities 43 1 - 44 Mortgage-backed securities: Agency residential mortgage-backed securities(a) 15,281 118 (80) 15,319 Agency commercial mortgage-backed securities 10,113 92 (38) 10,167 Non-agency commercial mortgage-backed securities 3,247 51 (5) 3,293 Asset-backed securities and other debt securities 2,183 46 (11) 2,218 Other securities(b) 612 - - 612 Total available-for-sale debt and other securities $ 31,577 308 (134) 31,751 Held-to-maturity securities: Obligations of states and political subdivisions securities $ 22 - - 22 Asset-backed securities and other debt securities 2 - - 2 Total held-to-maturity securities $ 24 - - 24 The following table provides the fair value of trading debt securities and equity securities as of: June 30, December 31, ($ in millions) 2018 2017 Trading debt securities $ 280 492 Equity securities 475 439
Realized Gains and Losses Recognized in Income from Investment Securities
The following table presents net realized gains and losses that were recognized in income from available-for-sale debt and other securities as well as total (losses) gains that were recognized in income from trading debt securities and equity securities: For the three months ended For the six months ended June 30, June 30, ($ in millions) 2018 2017 2018 2017 Available-for-sale debt and other securities: Realized gains $ 22 21 56 30 Realized losses (22) (7) (65) (8) OTTI(a) - (14) - (24) Net realized losses on available-for sale debt and other securities(b) $ - - (9) (2) Total trading debt securities (losses) gains(c) $ (4) 2 (18) 3 Total equity securities (losses) gains(d)(e) $ (5) 2 (8) 3 Total (losses) and gains recognized in income from available-for-sale debt and other securities, trading debt securities and equity securities $ (9) 4 (35) 4
Amortized Cost and Fair Value of Available-for-Sale Debt and Other and Held-to-Maturity Securities
The expected maturity distribution of the Bancorp’s mortgage-backed securities and the contractual maturity distribution of the remainder of the Bancorp’s available-for-sale debt and other securities and held-to-maturity investment securities as of June 30, 2018 are shown in the following table: Available-for-Sale Debt and Other Held-to-Maturity ($ in millions) Amortized Cost Fair Value Amortized Cost Fair Value Debt securities:(a) Less than 1 year $ 214 207 1 1 1-5 years 8,923 8,800 16 16 5-10 years 18,047 17,669 - - Over 10 years 4,791 4,671 2 2 Other securities 614 614 - - Total $ 32,589 31,961 19 19
Fair Value and Gross Unrealized Loss of Securities Available for Sale
The following table provides the fair value and gross unrealized losses on available-for-sale debt and other securities in an unrealized loss position, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position as of: Less than 12 months 12 months or more Total Unrealized Unrealized Unrealized ($ in millions) Fair Value Losses Fair Value Losses Fair Value Losses June 30, 2018 U.S. Treasury and federal agencies $ 96 (2) - - 96 (2) Agency residential mortgage-backed securities 12,456 (313) 478 (33) 12,934 (346) Agency commercial mortgage-backed securities 8,719 (247) 547 (30) 9,266 (277) Non-agency commercial mortgage-backed securities 2,540 (59) 140 (9) 2,680 (68) Asset-backed securities and other debt securities 284 (2) 395 (7) 679 (9) Total $ 24,095 (623) 1,560 (79) 25,655 (702) December 31, 2017 U.S. Treasury and federal agencies $ 98 - - - 98 - Agency residential mortgage-backed securities 7,337 (59) 479 (21) 7,816 (80) Agency commercial mortgage-backed securities 2,900 (22) 526 (16) 3,426 (38) Non-agency commercial mortgage-backed securities 449 (2) 145 (3) 594 (5) Asset-backed securities and other debt securities 317 (2) 386 (9) 703 (11) Total $ 11,101 (85) 1,536 (49) 12,637 (134)
6 Months Ended
Loans and Leases Receivable
Loans and Leases Classified by Primary Purpose
The following table provides a summary of commercial loans and leases classified by primary purpose and consumer loans classified based upon product or collateral as of: June 30, December 31, ($ in millions) 2018 2017 Loans and leases held for sale: Commercial and industrial loans $ 44 - Commercial mortgage loans 72 6 Commercial leases 9 - Residential mortgage loans 658 486 Total loans and leases held for sale $ 783 492 Portfolio loans and leases: Commercial and industrial loans $ 41,403 41,170 Commercial mortgage loans 6,625 6,604 Commercial construction loans 4,687 4,553 Commercial leases 3,788 4,068 Total commercial loans and leases $ 56,503 56,395 Residential mortgage loans $ 15,640 15,591 Home equity 6,599 7,014 Automobile loans 8,938 9,112 Credit card 2,270 2,299 Other consumer loans 1,982 1,559 Total consumer loans $ 35,429 35,575 Total portfolio loans and leases $ 91,932 91,970
Total Loans And Leases Owned By The Bancorp
The following table presents a summary of the total loans and leases owned by the Bancorp as of: 90 Days Past Due Carrying Value and Still Accruing June 30, December 31, June 30, December 31, ($ in millions) 2018 2017 2018 2017 Commercial and industrial loans $ 41,447 41,170 4 3 Commercial mortgage loans 6,697 6,610 - - Commercial construction loans 4,687 4,553 - - Commercial leases 3,797 4,068 - - Residential mortgage loans 16,298 16,077 44 57 Home equity 6,599 7,014 - - Automobile loans 8,938 9,112 10 10 Credit card 2,270 2,299 31 27 Other consumer loans 1,982 1,559 - - Total loans and leases $ 92,715 92,462 89 97 Less: Loans and leases held for sale 783 492 Total portfolio loans and leases $ 91,932 91,970 The following table presents a summary of net charge-offs: For the three months ended For the six months ended June 30, June 30, ($ in millions) 2018 2017 2018 2017 Commercial and industrial loans $ 47 18 74 52 Commercial mortgage loans 2 5 2 11 Commercial construction loans - - - - Commercial leases - 1 - 2 Residential mortgage loans 2 2 4 7 Home equity 2 5 7 11 Automobile loans 8 6 19 18 Credit card 26 22 52 43 Other consumer loans 7 5 17 9 Total net charge-offs $ 94 64 175 153
6 Months Ended
Credit Quality and the Allowance for Loan and Leases Losses
Summary of Transactions in the ALLL
Allowance for Loan and Lease Losses The following tables summarize transactions in the ALLL by portfolio segment: Residential For the three months ended June 30, 2018 ($ in millions) Commercial Mortgage Consumer Unallocated Total Balance, beginning of period $ 713 89 222 114 1,138 Losses charged-off(a) (54) (4) (60) - (118) Recoveries of losses previously charged-off(a) 5 2 17 - 24 Provision for (benefit from) loan and lease losses (10) (1) 50 (6) 33 Balance, end of period $ 654 86 229 108 1,077 (a) For the three months ended June 30, 2018, the Bancorp recorded $6 in both losses charged-off and recoveries of losses charged-off related to customer defaults on point-of-sale consumer loans for which the Bancorp obtained recoveries under third-party credit enhancements. Residential For the three months ended June 30, 2017 ($ in millions) Commercial Mortgage Consumer Unallocated Total Balance, beginning of period $ 826 96 204 112 1,238 Losses charged-off (41) (4) (50) - (95) Recoveries of losses previously charged-off 17 2 12 - 31 Provision for (benefit from) loan and lease losses 15 (1) 40 (2) 52 Balance, end of period $ 817 93 206 110 1,226 Residential For the six months ended June 30, 2018 ($ in millions) Commercial Mortgage Consumer Unallocated Total Balance, beginning of period $ 753 89 234 120 1,196 Losses charged-off(a) (87) (7) (128) - (222) Recoveries of losses previously charged-off(a) 11 3 33 - 47 Provision for (benefit from) loan and lease losses (23) 1 90 (12) 56 Balance, end of period $ 654 86 229 108 1,077 (a) For the six months ended June 30, 2018, the Bancorp recorded $10 in both losses charged-off and recoveries of losses charged-off related to customer defaults on point-of-sale consumer loans for which the Bancorp obtained recoveries under third-party credit enhancements. Residential For the six months ended June 30, 2017 ($ in millions) Commercial Mortgage Consumer Unallocated Total Balance, beginning of period $ 831 96 214 112 1,253 Losses charged-off (86) (10) (106) - (202) Recoveries of losses previously charged-off 21 3 25 - 49 Provision for (benefit from) loan and lease losses 51 4 73 (2) 126 Balance, end of period $ 817 93 206 110 1,226
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 As of June 30, 2018 ($ in millions) Commercial Mortgage Consumer Unallocated Total ALLL:(a) Individually evaluated for impairment $ 75 65 38 - 178 Collectively evaluated for impairment 579 21 191 - 791 Unallocated - - - 108 108 Total ALLL $ 654 86 229 108 1,077 Portfolio loans and leases:(b) Individually evaluated for impairment $ 400 788 297 - 1,485 Collectively evaluated for impairment 56,103 14,690 19,492 - 90,285 Total portfolio loans and leases $ 56,503 15,478 19,789 - 91,770 Residential As of December 31, 2017 ($ in millions) Commercial Mortgage Consumer Unallocated Total ALLL:(a) Individually evaluated for impairment $ 94 64 42 - 200 Collectively evaluated for impairment 659 25 192 - 876 Unallocated - - - 120 120 Total ALLL $ 753 89 234 120 1,196 Portfolio loans and leases:(b) Individually evaluated for impairment $ 560 665 320 - 1,545 Collectively evaluated for impairment 55,835 14,787 19,664 - 90,286 Loans acquired with deteriorated credit quality - 2 - - 2 Total portfolio loans and leases $ 56,395 15,454 19,984 - 91,833
Loan and leases balances by credit quality indicator
The following tables summarize the credit risk profile of the Bancorp’s commercial portfolio segment, by class: Special As of June 30, 2018 ($ in millions) Pass Mention Substandard Doubtful Total Commercial and industrial loans $ 39,601 899 885 18 41,403 Commercial mortgage owner-occupied loans 3,217 40 134 - 3,391 Commercial mortgage nonowner-occupied loans 3,200 21 13 - 3,234 Commercial construction loans 4,652 35 - - 4,687 Commercial leases 3,649 54 85 - 3,788 Total commercial loans and leases $ 54,319 1,049 1,117 18 56,503 Special As of December 31, 2017 ($ in millions) Pass Mention Substandard Doubtful Total Commercial and industrial loans $ 38,813 1,115 1,235 7 41,170 Commercial mortgage owner-occupied loans 3,207 75 80 - 3,362 Commercial mortgage nonowner-occupied loans 3,117 28 97 - 3,242 Commercial construction loans 4,553 - - - 4,553 Commercial leases 3,922 72 74 - 4,068 Total commercial loans and leases $ 53,612 1,290 1,486 7 56,395 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: June 30, 2018 December 31, 2017 ($ in millions) Performing Nonperforming Performing Nonperforming Residential mortgage loans(a) $ 15,450 28 15,424 30 Home equity 6,528 71 6,940 74 Automobile loans 8,933 5 9,111 1 Credit card 2,243 27 2,273 26 Other consumer loans 1,981 1 1,559 - Total residential mortgage and consumer loans $ 35,135 132 35,307 131
Summary by Age and Class of the Recorded Investment in Delinquencies Included in the Bancorp's Portfolio of Loans and Leases
Age Analysis of Past Due Loans and Leases The following tables summarize the Bancorp’s recorded investment in portfolio loans and leases, by age and class: Current Past Due 90 Days Past Loans and 30-89 90 Days Total Total Loans Due and Still As of June 30, 2018 ($ in millions) Leases(b)(c) Days(c) or More(c) Past Due and Leases Accruing Commercial loans and leases: Commercial and industrial loans $ 41,281 19 103 122 41,403 4 Commercial mortgage owner-occupied loans 3,384 1 6 7 3,391 - Commercial mortgage nonowner-occupied loans 3,228 3 3 6 3,234 - Commercial construction loans 4,687 - - - 4,687 - Commercial leases 3,784 - 4 4 3,788 - Residential mortgage loans(a) 15,382 24 72 96 15,478 44 Consumer loans: Home equity 6,482 66 51 117 6,599 - Automobile loans 8,840 84 14 98 8,938 10 Credit card 2,198 36 36 72 2,270 31 Other consumer loans 1,972 8 2 10 1,982 - Total portfolio loans and leases $ 91,238 241 291 532 91,770 89 Current Past Due 90 Days Past Loans and 30-89 90 Days Total Total Loans Due and Still 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 $ 41,027 42 101 143 41,170 3 Commercial mortgage owner-occupied loans 3,351 3 8 11 3,362 - Commercial mortgage nonowner-occupied loans 3,235 - 7 7 3,242 - Commercial construction loans 4,552 1 - 1 4,553 - Commercial leases 4,065 3 - 3 4,068 - Residential mortgage loans(a) 15,301 66 87 153 15,454 57 Consumer loans: Home equity 6,888 70 56 126 7,014 - Automobile loans 8,992 107 13 120 9,112 10 Credit card 2,230 36 33 69 2,299 27 Other consumer loans 1,554 5 - 5 1,559 - Total portfolio loans and leases $ 91,195 333 305 638 91,833 97
Summarizes the Bancorp's Recorded Investment in Impaired Loans and Related Allowance by Class
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: Unpaid Principal Recorded As of June 30, 2018 ($ in millions) Balance Investment ALLL With a related ALLL: Commercial loans and leases: Commercial and industrial loans $ 248 204 63 Commercial mortgage owner-occupied loans 4 3 1 Commercial mortgage nonowner-occupied loans 2 1 - Commercial leases 29 29 11 Restructured residential mortgage loans 497 494 65 Restructured consumer loans: Home equity 158 157 22 Automobile loans 6 6 1 Credit card 48 45 15 Total impaired portfolio loans and leases with a related ALLL $ 992 939 178 With no related ALLL: Commercial loans: Commercial and industrial loans $ 147 124 - Commercial mortgage owner-occupied loans 15 12 - Commercial mortgage nonowner-occupied loans 28 27 - Restructured residential mortgage loans 314 294 - Restructured consumer loans: Home equity 90 87 - Automobile loans 3 2 - Total impaired portfolio loans with no related ALLL $ 597 546 - Total impaired portfolio loans and leases $ 1,589 1,485 (a) 178 Unpaid Principal Recorded As of December 31, 2017 ($ in millions) Balance Investment ALLL With a related ALLL: Commercial loans and leases: Commercial and industrial loans $ 433 358 87 Commercial mortgage owner-occupied loans 16 14 7 Commercial mortgage nonowner-occupied loans 4 3 - Commercial leases 4 4 - Restructured residential mortgage loans 469 465 64 Restructured consumer loans: Home equity 172 172 27 Automobile loans 8 7 1 Credit card 52 45 14 Total impaired portfolio loans and leases with a related ALLL $ 1,158 1,068 200 With no related ALLL: Commercial loans: Commercial and industrial loans $ 151 131 - Commercial mortgage owner-occupied loans 18 15 - Commercial mortgage nonowner-occupied loans 35 35 - Restructured residential mortgage loans 218 200 - Restructured consumer loans: Home equity 97 94 - Automobile loans 2 2 - Total impaired portfolio loans with no related ALLL $ 521 477 - Total impaired portfolio loans and leases $ 1,679 1,545 a(a) 200 The following tables summarize the Bancorp’s average impaired portfolio loans and leases, by class, and interest income, by class: For the three months ended For the six months ended June 30, 2018 June 30, 2018 Average Interest Average Interest Recorded Income Recorded Income ($ in millions) Investment Recognized Investment Recognized Commercial loans and leases: Commercial and industrial loans $ 417 5 439 10 Commercial mortgage owner-occupied loans 16 - 20 - Commercial mortgage nonowner-occupied loans 29 - 32 - Commercial leases 18 - 14 - Restructured residential mortgage loans 799 8 732 14 Restructured consumer loans: Home equity 248 3 253 6 Automobile loans 8 - 9 - Credit card 46 1 47 2 Total average impaired portfolio loans and leases $ 1,581 17 1,546 32 For the three months ended For the six months ended June 30, 2017 June 30, 2017 Average Interest Average Interest Recorded Income Recorded Income ($ in millions) Investment Recognized Investment Recognized Commercial loans and leases: Commercial and industrial loans $ 635 1 668 2 Commercial mortgage owner-occupied loans(a) 38 - 42 - Commercial mortgage nonowner-occupied loans 66 - 73 1 Commercial leases 2 - 3 - Restructured residential mortgage loans 654 6 653 12 Restructured consumer loans: Home equity 287 3 293 6 Automobile loans 12 - 13 - Credit card 49 1 51 2 Total average impaired loans and leases $ 1,743 11 1,796 23
Summary of the Bancorp's Nonperforming Loans and Leases by Class
Nonperforming Assets Nonperforming assets include nonaccrual loans and leases for which ultimate collectability of the full amount of the principal and/or interest is uncertain; restructured commercial and credit card loans which have not yet met the requirements to be classified as a performing asset; restructured consumer loans which are 90 days past due based on the restructured terms unless the loan is both well-secured and in the process of collection; and certain other assets, including OREO and other repossessed property. The following table presents the Bancorp’s nonaccrual loans and leases, by class, and OREO and other repossessed property as of: June 30, December 31, ($ in millions) 2018 2017 Commercial loans and leases: Commercial and industrial loans $ 263 276 Commercial mortgage owner-occupied loans 10 19 Commercial mortgage nonowner-occupied loans 3 7 Commercial leases 29 4 Total nonaccrual portfolio commercial loans and leases 305 306 Residential mortgage loans 28 30 Consumer loans: Home equity 71 74 Automobile loans 5 1 Credit card 27 26 Other consumer loans 1 - Total nonaccrual portfolio consumer loans 104 101 Total nonaccrual portfolio loans and leases(a)(b) $ 437 437 OREO and other repossessed property 43 52 Total nonperforming portfolio assets(a)(b) $ 480 489
Summary of Loans Modified in a TDR
The following tables provide a summary of loans and leases, by class, modified in a TDR by the Bancorp during the three months ended: Recorded Investment (Decrease) Number of Loans in Loans Modified Increase Charge-offs Modified in a TDR in a TDR to ALLL Upon Recognized Upon June 30, 2018 ($ in millions)(a) During the Period(b) During the Period Modification Modification Commercial loans: Commercial and industrial loans 13 $ 64 (4) - Residential mortgage loans 537 91 2 - Consumer loans: Home equity 29 2 - - Automobile loans 19 - - - Credit card 1,675 9 2 1 Total portfolio loans 2,273 $ 166 - 1 Recorded Investment Number of Loans in Loans Modified Increase Charge-offs Modified in a TDR in a TDR to ALLL Upon Recognized Upon June 30, 2017 ($ in millions)(a) During the Period(b) During the Period Modification Modification Commercial loans: Commercial and industrial loans 17 $ 56 1 4 Commercial mortgage owner-occupied loans 2 6 5 - Commercial mortgage nonowner-occupied loans 1 - - - Residential mortgage loans 199 28 1 - Consumer loans: Home equity 44 3 - - Automobile loans 15 - - - Credit card 2,152 10 2 1 Total portfolio loans 2,430 $ 103 9 5 The following tables provide a summary of loans and leases, by class, modified in a TDR by the Bancorp during the six months ended: Recorded Investment Increase Number of Loans in Loans Modified (Decrease) Charge-offs Modified in a TDR in a TDR to ALLL Upon Recognized Upon June 30, 2018 ($ in millions)(a) During the Period(b) During the Period Modification Modification Commercial loans: Commercial and industrial loans 25 $ 135 9 - Commercial mortgage owner-occupied loans 2 - - - Residential mortgage loans 784 124 3 - Consumer loans: Home equity 54 4 - - Automobile loans 39 - - - Credit card 3,640 19 4 1 Total portfolio loans 4,544 $ 282 16 1 Recorded Investment Number of Loans in Loans and Leases Increase Charge-offs Modified in a TDR Modified in a TDR to ALLL Upon Recognized Upon June 30, 2017 ($ in millions)(a) During the Period(b) During the Period Modification Modification Commercial loans and leases: Commercial and industrial loans 50 $ 153 2 6 Commercial mortgage owner-occupied loans 7 8 5 - Commercial mortgage nonowner-occupied loans 2 - - - Residential mortgage loans 402 57 3 - Consumer loans: Home equity 75 5 - - Automobile loans 45 - - - Credit card 3,908 17 3 1 Total portfolio loans and leases 4,489 $ 240 13 7
Summary of Subsequent Defaults
The following tables provide a summary of TDRs that subsequently defaulted during the three months ended June 30, 2018 and 2017 and were within twelve months of the restructuring date: Number of Recorded June 30, 2018 ($ in millions)(a) Contracts Investment Commercial loans: Commercial and industrial loans 2 $ 28 Residential mortgage loans 62 13 Consumer loans: Credit card 137 1 Total portfolio loans 201 $ 42 Number of Recorded June 30, 2017 ($ in millions)(a) Contracts Investment Commercial loans: Commercial and industrial loans 2 $ 15 Commercial mortgage nonowner-occupied loans 3 1 Residential mortgage loans 26 3 Consumer loans: Home equity 6 1 Credit card 387 2 Total portfolio loans 424 $ 22 The following tables provide a summary of TDRs that subsequently defaulted during the six months ended June 30, 2018 and 2017 and were within twelve months of the restructuring date: Number of Recorded June 30, 2018 ($ in millions)(a) Contracts Investment Commercial loans: Commercial and industrial loans 3 $ 29 Commercial mortgage owner-occupied loans 2 - Residential mortgage loans 110 20 Consumer loans: Home equity 2 - Credit card 379 2 Total portfolio loans 496 $ 51 Number of Recorded June 30, 2017 ($ in millions)(a) Contracts Investment Commercial loans: Commercial and industrial loans 4 $ 16 Commercial mortgage nonowner-occupied loans 3 1 Residential mortgage loans 83 12 Consumer loans: Home equity 11 2 Credit card 837 4 Total portfolio loans 938 $ 35
6 Months Ended
Bank Premises and Equipment
Bank Premises and Equipment
The following table provides a summary of bank premises and equipment as of: ($ in millions) June 30, 2018 December 31, 2017 Land and improvements(a) $ 599 644 Buildings(a) 1,616 1,679 Equipment 1,936 1,876 Leasehold improvements 396 399 Construction in progress(a) 85 93 Bank premises and equipment held for sale: Land and improvements 24 17 Buildings 10 9 Equipment 3 1 Accumulated depreciation and amortization (2,754) (2,715) Total bank premises and equipment $ 1,915 2,003
6 Months Ended
Intangible Assets
Intangible Assets
The details of the Bancorp’s intangible assets are shown in the following table: Gross Carrying Accumulated Net Carrying ($ in millions) Amount Amortization Amount As of June 30, 2018 Core deposit intangibles $ 34 (29) 5 Customer relationships 20 (1) 19 Non-compete agreements 14 (11) 3 Other 6 (3) 3 Total intangible assets $ 74 (44) 30 As of December 31, 2017 Core deposit intangibles $ 34 (29) 5 Customer relationships 16 - 16 Non-compete agreements 13 (10) 3 Other 6 (3) 3 Total intangible assets $ 69 (42) 27
Estimated Amortization Expense
Estimated amortization expense for the remainder of 2018 through 2022 is as follows: ($ in millions) Total Remainder of 2018 $ 3 2019 5 2020 3 2021 3 2022 2
6 Months Ended
Variable Interest Entities
Consolidation of Variable Interest Entities Disclosure
The following tables provide a summary of the classifications of consolidated VIE assets, liabilities and noncontrolling interests included in the Condensed Consolidated Balance Sheets as of: Automobile Loan CDC June 30, 2018 ($ in millions) Securitizations Investments Total Assets: Other short-term investments $ 47 - 47 Commercial mortgage loans - 20 20 Automobile loans 888 - 888 ALLL (5) - (5) Other assets 5 - 5 Total assets $ 935 20 955 Liabilities: Other liabilities $ 2 - 2 Long-term debt 830 - 830 Total liabilities $ 832 - 832 Noncontrolling interests $ - 20 20 Automobile Loan CDC December 31, 2017 ($ in millions) Securitizations 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
Assets and Liabilities Related to Non-consolidated VIEs and Maximum Exposure to Losses
Non-consolidated VIEs The following tables provide a summary of assets and liabilities carried on the Condensed Consolidated Balance Sheets related to non-consolidated VIEs for which the Bancorp holds an interest, but is not the primary beneficiary of the VIE, as well as the Bancorp’s maximum exposure to losses associated with its interests in the entities as of: Total Total Maximum June 30, 2018 ($ in millions) Assets Liabilities Exposure CDC investments $ 1,213 363 1,213 Private equity investments 70 - 112 Loans provided to VIEs 1,885 - 3,124 Total Total Maximum December 31, 2017 ($ in millions) Assets Liabilities Exposure CDC investments $ 1,376 355 1,376 Private equity investments 102 - 150 Loans provided to VIEs 1,845 - 2,910
Investments in Qualified Affordable Housing Tax Credits
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 Condensed Consolidated Statements of Income relating to investments in qualified affordable housing investments: Condensed Consolidated For the three months ended June 30, For the six months ended June 30, ($ in millions) Statements of Income Caption 2018 2017 2018 2017 Pre-tax investment and impairment losses(a) Other noninterest expense $ 46 35 91 72 Tax credits and other benefits Applicable income tax expense (51) (56) (103) (112)
6 Months Ended
Sales of Receivables and Servicing Rights
Activity Related to Mortgage Banking Net Revenue
Information related to residential mortgage loan sales and the Bancorp’s mortgage banking activity, which is included in mortgage banking net revenue in the Condensed Consolidated Statements of Income, is as follows: For the three months ended For the six months ended June 30, June 30, ($ in millions) 2018 2017 2018 2017 Residential mortgage loan sales(a) $ 1,474 1,518 2,474 3,147 Origination fees and gains on loan sales 28 37 52 66 Gross mortgage servicing fees 54 49 106 97
Changes in the Servicing Assets
The following table presents changes in the servicing rights related to residential mortgage loans for the six months ended June 30: ($ in millions) 2018 2017 Balance, beginning of period $ 858 744 Servicing rights originated - residential mortgage loans 35 66 Servicing rights acquired - residential mortgage loans 50 109 Changes in fair value: Due to changes in inputs or assumptions(a) 78 (13) Other changes in fair value(b) (62) (57) Balance, end of period $ 959 849
Activity Related to the MSR Portfolio
The following table presents activity related to valuations of the MSR portfolio and the impact of the non-qualifying hedging strategy: For the three months ended For the six months ended June 30, June 30, ($ in millions) 2018 2017 2018 2017 Securities (losses) gains, net - non-qualifying hedges on MSRs $ (4) 2 (17) 2 Changes in fair value and settlement of free-standing derivatives purchased to economically hedge the MSR portfolio(a) (16) 16 (65) 15 MSR fair value adjustment due to changes in inputs or assumptions(a) 21 (17) 78 (13)
Servicing Assets and Residual Interests Economic Assumptions
The key economic assumptions used in measuring the interests in residential mortgage loans that continued to be held by the Bancorp at the date of sale, securitization or purchase resulting from transactions completed during the three months ended June 30, 2018 and 2017 were as follows: June 30, 2018 June 30, 2017 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: Servicing rights Fixed 6.8 10.0 % 519 7.0 10.3 % 492 Servicing rights Adjustable - - - 3.0 29.8 659
Sensitivity of the Current Fair Value of Residual Cash Flows to Immediate 10%, 20% and 50% Adverse Changes in Assumptions
At June 30, 2018, the sensitivity of the current fair value of residual cash flows to immediate 10%, 20% and 50% adverse changes in prepayment speed assumptions and immediate 10% and 20% adverse changes in OAS spread are as follows: Prepayment OAS Speed Assumption Spread Assumption OAS Spread Impact of Weighted- Impact of Adverse Change Adverse Change Fair Average Life on Fair Value on Fair Value ($ in millions)(a) Rate Value (in years) Rate 10% 20% 50% (bps) 10% 20% Residential mortgage loans: Servicing rights Fixed $ 944 6.5 9.5 % $ (37) (71) (164) 543 $ (19) (37) Servicing rights Adjustable 15 3.4 23.6 (1) (2) (4) 817 - (1)
6 Months Ended
Derivative Financial Instruments
Notional Amounts and Fair Values for All Derivative Instruments Included in the Consolidated Balance Sheets
The following tables reflect the notional amounts and fair values for all derivative instruments included in the Condensed Consolidated Balance Sheets as of: Fair Value Notional Derivative Derivative June 30, 2018 ($ in millions) Amount Assets Liabilities Derivatives Designated as Qualifying Hedging Instruments: Fair value hedges: Interest rate swaps related to long-term debt $ 3,205 229 4 Total fair value hedges 229 4 Cash flow hedges: Interest rate swaps related to C&I loans 6,150 1 15 Total cash flow hedges 1 15 Total derivatives designated as qualifying hedging instruments 230 19 Derivatives Not Designated as Qualifying Hedging Instruments: Free-standing derivatives - risk management and other business purposes: Interest rate contracts related to MSR portfolio 11,475 52 13 Forward contracts related to residential mortgage loans held for sale 1,450 - 4 Swap associated with the sale of Visa, Inc. Class B Shares 2,207 - 164 Foreign exchange contracts 153 2 - Total free-standing derivatives - risk management and other business purposes 54 181 Free-standing derivatives - customer accommodation: Interest rate contracts 48,949 247 280 Interest rate lock commitments 596 11 - Commodity contracts 5,087 284 270 TBA securities 58 - - Foreign exchange contracts 10,842 119 109 Total free-standing derivatives - customer accommodation 661 659 Total derivatives not designated as qualifying hedging instruments 715 840 Total $ 945 859 Fair Value Notional Derivative Derivative December 31, 2017 ($ in millions) Amount Assets Liabilities Derivatives Designated as Qualifying Hedging Instruments: Fair value hedges: Interest rate swaps related to long-term debt $ 3,705 297 5 Total fair value hedges 297 5 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 MSR portfolio 11,035 54 15 Forward contracts related to residential mortgage loans held for sale 1,284 1 1 Stock warrant 20 20 - Swap associated with the sale of Visa, Inc. Class B Shares 1,900 - 137 Foreign exchange contracts 112 - 1 Total free-standing derivatives - risk management and other business purposes 75 154 Free-standing derivatives - customer accommodation: Interest rate contracts 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
Net Gains (Losses) Recognized in the Income Statement Related to Derivatives in Fair Value Hedging Relationships
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 Condensed Consolidated Statements of Income: For the three months For the six months Condensed Consolidated ended June 30, ended June 30, ($ in millions) Statements of Income Caption 2018 2017 2018 2017 Change in fair value of interest rate swaps hedging long-term debt Interest on long-term debt $ (18) 14 (81) (6) Change in fair value of hedged long-term debt attributable to the risk being hedged Interest on long-term debt 19 (15) 83 5 The following amounts were recorded in the Condensed Consolidated Balance Sheets related to cumulative basis adjustments for fair value hedges as of: Condensed Consolidated ($ in millions) Balance Sheets Caption June 30, 2018 Carrying amount of the hedged item Long-term debt $ 3,701 Cumulative amount of fair value hedging adjustments included in the carrying amount of the hedged items Long-term debt (212)
Net Gains (Losses) Relating to Derivative Instruments Designated as Cash Flow Hedges
The following table presents the pretax net gains (losses) recorded in the Condensed Consolidated Statements of Income and in the Condensed Consolidated Statements of Comprehensive Income relating to derivative instruments designated as cash flow hedges: For the three months ended For the six months ended June 30, June 30, ($ in millions) 2018 2017(a) 2018 2017(a) Amount of pretax net (losses) gains recognized in OCI $ 4 8 (5) 3 Amount of pretax net gains reclassified from OCI into net income - 6 1 14
Schedule of Price Risk Derivatives
The net gains (losses) recorded in the Condensed 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 three months For the six months Condensed Consolidated ended June 30, ended June 30, ($ in millions) Statements of Income Caption 2018 2017 2018 2017 Interest rate contracts: Forward contracts related to residential mortgage loans held for sale Mortgage banking net revenue $ (3) 5 (4) (16) Interest rate contracts related to MSR portfolio Mortgage banking net revenue (16) 16 (65) 15 Foreign exchange contracts: Foreign exchange contracts for risk management purposes Other noninterest income 3 (3) 5 (4) Equity contracts: Swap associated with sale of Visa, Inc. Class B Shares Other noninterest income (10) (9) (49) (22)
Risk Ratings of the Notional Amount of Risk Participation Agreements
Risk ratings of the notional amount of risk participation agreements under this risk rating system are summarized in the following table as of: June 30, December 31, ($ in millions) 2018 2017 Pass $ 3,590 2,748 Special mention 77 66 Substandard 10 24 Total $ 3,677 2,838
Net Gains (Losses) Recognized in the Income Statement Related to Free-Standing Derivative Instruments Used For Customer Accomodation
The net gains (losses) recorded in the Condensed Consolidated Statements of Income relating to free-standing derivative instruments used for customer accommodation are summarized in the following table: For the three months For the six months Condensed Consolidated ended June 30, ended June 30, ($ in millions) Statements of Income Caption 2018 2017 2018 2017 Interest rate contracts: Interest rate contracts for customers (contract revenue) Corporate banking revenue $ 9 5 16 9 Interest rate lock commitments Mortgage banking net revenue 22 26 35 48 Commodity contracts: Commodity contracts for customers (contract revenue) Corporate banking revenue 2 1 4 2 Commodity contracts for customers (credit losses) Other noninterest expense - 1 - 1 Commodity contracts for customers (credit portion of fair value adjustment) Other noninterest expense (1) - (1) - Foreign exchange contracts: Foreign exchange contracts for customers (contract revenue) Corporate banking revenue 13 9 27 22 Foreign exchange contracts for customers (contract revenue) Other noninterest income 7 - 5 - 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 - - 1 1
Offsetting Derivative Financial Instruments
The following tables provide a summary of offsetting derivative financial instruments: Gross Amount Gross Amounts Not Offset in the Recognized in the Condensed Consolidated Balance Sheets Condensed Consolidated As of June 30, 2018 ($ in millions) Balance Sheets(a) Derivatives Collateral(b) Net Amount Assets: Derivatives $ 934 (258) (300) 376 Total assets 934 (258) (300) 376 Liabilities: Derivatives 859 (258) (234) 367 Total liabilities $ 859 (258) (234) 367 Gross Amount Gross Amounts Not Offset in the Recognized in the Condensed Consolidated Balance Sheets Condensed Consolidated As of December 31, 2017 ($ in millions) Balance Sheets(a) 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
6 Months Ended
Short-term Debt
Schedule Of Short Term Debt
Borrowings with original maturities of one year or less are classified as short-term. The following table presents a summary of the Bancorp's other short-term borrowings as of: June 30, December 31, ($ in millions) 2018 2017 FHLB advances $ 1,200 3,125 Securities sold under repurchase agreements 300 546 Derivative collateral 263 341 Total other short-term borrowings $ 1,763 4,012
6 Months Ended
Capital Actions
Summary of the Bancorp's Accelerated Share Repurchase Transactions
The following table presents a summary of the Bancorp's accelerated share repurchase transactions that were entered into or settled during the six months ended June 30, 2018: Repurchase Date Amount ($ in millions) Shares Repurchased on Repurchase Date Shares Received from Forward Contract Settlement Total Shares Repurchased Settlement Date December 19, 2017 $ 273 7,727,273 824,367 8,551,640 March 19, 2018 February 12, 2018 318 8,691,318 1,015,731 9,707,049 March 26, 2018 May 25, 2018 235 6,402,244 1,172,122 7,574,366 June 15, 2018
6 Months Ended
Commitments, Contingent Liabilities and Guarantees
Summary of Significant Commitments
Commitments The Bancorp has certain commitments to make future payments under contracts. The following table reflects a summary of significant commitments as of: June 30, December 31, ($ in millions) 2018 2017 Commitments to extend credit $ 70,915 68,106 Letters of credit 2,092 2,185 Forward contracts related to residential mortgage loans held for sale 1,450 1,284 Noncancelable operating lease obligations 568 568 Purchase obligations 120 144 Capital commitments for private equity investments 43 48 Capital expenditures 27 37 Capital lease obligations 23 26
Credit Risk Associated With Commitments
Risk ratings under this risk rating system are summarized in the following table as of: June 30, December 31, ($ in millions) 2018 2017 Pass $ 70,340 67,254 Special mention 306 330 Substandard 269 522 Total commitments to extend credit $ 70,915 68,106
Standby and Commercial Letters of Credit, Conditional Commitments Issued to Guarantee the Performance of a Customer to a Third Party
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 June 30, 2018: ($ in millions) Less than 1 year(a) $ 1,070 1 - 5 years(a) 1,009 Over 5 years 13 Total letters of credit $ 2,092
Credit Risk associated with Letters of Credit
Risk ratings under this risk rating system are summarized in the following table as of: June 30, December 31, ($ in millions) 2018 2017 Pass $ 1,897 1,830 Special mention 46 67 Substandard 149 218 Doubtful - 70 Total letters of credit $ 2,092 2,185
Activity in Reserve for Representation and Warranty Provisions
The following table summarizes activity in the reserve for representation and warranty provisions: For the three months ended For the six months ended June 30, June 30, ($ in millions) 2018 2017 2018 2017 Balance, beginning of period $ 8 12 9 13 Net reductions to the reserve (1) (1) (2) (2) Balance, end of period $ 7 11 7 11
Schedule of Liability for Unpaid Claims and Claims Adjustment Expense
The following tables provide a rollforward of unresolved claims by claimant type for the six months ended: GSE Private Label June 30, 2018 ($ in millions) Units Dollars Units Dollars Balance, beginning of period 6 $ 1 1 $ - New demands 62 11 - - Resolved demands (54) (9) - - Balance, end of period 14 $ 3 1 $ - GSE Private Label June 30, 2017 ($ in millions) Units Dollars Units Dollars Balance, beginning of period 13 $ 2 - $ - New demands 58 8 - - Loan paydowns/payoffs (1) - - - Resolved demands (54) (8) - - Balance, end of period 16 $ 2 - $ -
Visa Funding and Bancorp Cash Payments
Visa Bancorp Cash Period ($ in millions) Funding Amount Payment Amount Q2 2010 $ 500 20 Q4 2010 800 35 Q2 2011 400 19 Q1 2012 1,565 75 Q3 2012 150 6 Q3 2014 450 18 Q2 2018 600 (a) i (a) The Bancorp made a cash payment of $26 million to the swap counterparty on July 17, 2018 as a result of the Visa escrow funding in the second quarter of 2018.
6 Months Ended
Accumulated Other Comprehensive Income
Activity of the Components of Other Comprehensive Income and Accumulated Other Comprehensive Income
The tables below present the activity of the components of OCI and AOCI for the three months ended: Total OCI Total AOCI Pretax Tax Net Beginning Net Ending June 30, 2018 ($ in millions) Activity Effect Activity Balance Activity Balance Unrealized holding losses on available-for-sale debt securities arising during period $ (217) 50 (167) Reclassification adjustment for net gains on available-for-sale debt securities included in net income - - - Net unrealized losses on available-for-sale debt securities (217) 50 (167) (318) (167) (485) Unrealized holding gains on cash flow hedge derivatives arising during period 4 (1) 3 Reclassification adjustment for net gains on cash flow hedge derivatives included in net income - - - Net unrealized losses on cash flow hedge derivatives 4 (1) 3 (19) 3 (16) Reclassification of amounts to net periodic benefit costs 1 - 1 Defined benefit pension plans, net 1 - 1 (52) 1 (51) Total $ (212) 49 (163) (389) (163) (552) Total OCI Total AOCI Pretax Tax Net Beginning Net Ending June 30, 2017 ($ in millions) Activity Effect Activity Balance Activity Balance Unrealized holding gains on available-for-sale securities arising during period $ 148 (55) 93 Reclassification adjustment for net gains on available-for-sale securities included in net income - - - Net unrealized gains on available-for-sale securities 148 (55) 93 117 93 210 Unrealized holding gains on cash flow hedge derivatives arising during period 8 (3) 5 Reclassification adjustment for net gains on cash flow hedge derivatives included in net income (6) 2 (4) Net unrealized gains on cash flow hedge derivatives 2 (1) 1 2 1 3 Reclassification of amounts to net periodic benefit costs 2 (1) 1 Defined benefit pension plans, net 2 (1) 1 (51) 1 (50) Total $ 152 (57) 95 68 95 163 The tables below present the activity of the components of OCI and AOCI for the six months ended: Total OCI Total AOCI Pretax Tax Net Beginning Net Ending June 30, 2018 ($ in millions) Activity Effect Activity Balance(a) Activity Balance Unrealized holding losses on available-for-sale debt securities arising during period $ (811) 184 (627) Reclassification adjustment for net losses on available-for-sale debt securities included in net income 9 (2) 7 Net unrealized losses on available-for-sale debt securities (802) 182 (620) 135 (620) (485) Unrealized holding losses on cash flow hedge derivatives arising during period (5) 1 (4) Reclassification adjustment for net gains on cash flow hedge derivatives included in net income (1) - (1) Net unrealized losses on cash flow hedge derivatives (6) 1 (5) (11) (5) (16) Reclassification of amounts to net periodic benefit costs 2 - 2 Defined benefit pension plans, net 2 - 2 (53) 2 (51) Total $ (806) 183 (623) 71 (623) (552) Total OCI Total AOCI Pretax Tax Net Beginning Net Ending June 30, 2017 ($ in millions) Activity Effect Activity Balance Activity Balance Unrealized holding gains on available-for-sale securities arising during period $ 170 (62) 108 Reclassification adjustment for net losses on available-for-sale securities included in net income 2 (1) 1 Net unrealized gains on available-for-sale securities 172 (63) 109 101 109 210 Unrealized holding gains on cash flow hedge derivatives arising during period 3 (1) 2 Reclassification adjustment for net gains on cash flow hedge derivatives included in net income (14) 5 (9) Net unrealized gains on cash flow hedge derivatives (11) 4 (7) 10 (7) 3 Reclassification of amounts to net periodic benefit costs 3 (1) 2 Defined benefit pension plans, net 3 (1) 2 (52) 2 (50) Total $ 164 (60) 104 59 104 163
Reclassification Out of Accumulated Other Comprehensive Income to Net Income
The table below presents reclassifications out of AOCI: For the three months For the six months Condensed Consolidated ended June 30, ended June 30, Components of AOCI: ($ in millions) Statements of Income Caption 2018 2017 2018 2017 Net unrealized losses on available-for-sale debt securities:(b) Net losses included in net income Securities (losses) gains, net $ - - (9) (2) Income before income taxes - - (9) (2) Applicable income tax expense - - 2 1 Net income - - (7) (1) Net unrealized gains on cash flow hedge derivatives:(b) Interest rate contracts related to C&I loans Interest and fees on loans and leases - 6 1 14 Income before income taxes - 6 1 14 Applicable income tax expense - (2) - (5) Net income - 4 1 9 Net periodic benefit costs:(b) Amortization of net actuarial loss Employee benefits expense(a) (1) (2) (2) (3) Income before income taxes (1) (2) (2) (3) Applicable income tax expense - 1 - 1 Net income (1) (1) (2) (2) Total reclassifications for the period Net income $ (1) 3 (8) 6
6 Months Ended
Earnings Per Share
Calculation of Earnings Per Share and the Reconciliation of Earnings Per Share to Earnings Per Diluted Share
The following tables provide the calculation of earnings per share and the reconciliation of earnings per share and earnings per diluted share: 2018 2017 For the three months ended June 30, Average Per Share Average Per Share (in millions, except per share data) Income Shares Amount Income Shares Amount Earnings Per Share: Net income available to common shareholders $ 563 344 Less: Income allocated to participating securities 6 4 Net income allocated to common shareholders $ 557 683 0.81 340 741 0.46 Earnings Per Diluted Share: Net income available to common shareholders $ 563 344 Effect of dilutive securities: Stock-based awards - 13 - 11 Net income available to common shareholders plus assumed conversions 563 344 Less: Income allocated to participating securities 6 4 Net income allocated to common shareholders plus assumed conversions $ 557 696 0.80 340 752 0.45 2018 2017 For the six months ended June 30, Average Per Share Average Per Share (in millions, except per share data) Income Shares Amount Income Shares Amount Earnings Per Share: Net income available to common shareholders $ 1,252 634 Less: Income allocated to participating securities 15 7 Net income allocated to common shareholders $ 1,237 687 1.80 627 745 0.84 Earnings Per Diluted Share: Net income available to common shareholders $ 1,252 634 Effect of dilutive securities: Stock-based awards - 13 - 12 Net income available to common shareholders plus assumed conversions 1,252 634 Less: Income allocated to participating securities 14 7 Net income allocated to common shareholders plus assumed conversions $ 1,238 700 1.77 627 757 0.83
6 Months Ended
Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and Liabilities Measured at Fair Value on a Recurring Basis The following tables summarize assets and liabilities measured at fair value on a recurring basis as of: Fair Value Measurements Using June 30, 2018 ($ in millions) Level 1(c) Level 2(c) Level 3 Total Fair Value Assets: Available-for-sale debt and other securities: U.S. Treasury and federal agencies securities $ 96 - - 96 Obligations of states and political subdivisions securities - 35 - 35 Mortgage-backed securities: Agency residential mortgage-backed securities - 16,094 - 16,094 Agency commercial mortgage-backed securities - 10,038 - 10,038 Non-agency commercial mortgage-backed securities - 3,086 - 3,086 Asset-backed securities and other debt securities - 1,998 - 1,998 Available-for-sale debt and other securities(a) 96 31,251 - 31,347 Trading debt securities: U.S. Treasury and federal agencies securities 10 9 - 19 Obligations of states and political subdivisions securities - 58 - 58 Agency residential mortgage-backed securities - 75 - 75 Asset-backed securities and other debt securities - 128 - 128 Trading debt securities 10 270 - 280 Equity securities 474 1 - 475 Residential mortgage loans held for sale - 658 - 658 Residential mortgage loans(b) - - 162 162 Commercial loans held for sale - 8 - 8 MSRs - - 959 959 Derivative assets: Interest rate contracts - 529 11 540 Foreign exchange contracts - 121 - 121 Commodity contracts 34 250 - 284 Derivative assets(d) 34 900 11 945 Total assets $ 614 33,088 1,132 34,834 Liabilities: Derivative liabilities: Interest rate contracts $ 4 305 7 316 Foreign exchange contracts - 109 - 109 Equity contracts - - 164 164 Commodity contracts 95 175 - 270 Derivative liabilities(e) 99 589 171 859 Short positions(e) 88 51 - 139 Total liabilities $ 187 640 171 998 Fair Value Measurements Using December 31, 2017 ($ in millions) Level 1(c) Level 2(c) Level 3 Total Fair Value Assets: Available-for-sale debt and other securities: U.S. Treasury and federal agencies securities $ 98 - - 98 Obligations of states and political subdivisions securities - 44 - 44 Mortgage-backed securities: Agency residential mortgage-backed securities - 15,319 - 15,319 Agency commercial mortgage-backed securities - 10,167 - 10,167 Non-agency commercial mortgage-backed securities - 3,293 - 3,293 Asset-backed securities and other debt securities - 2,218 - 2,218 Available-for-sale debt and other securities(a) 98 31,041 - 31,139 Trading debt securities: U.S. Treasury and federal agencies securities 1 11 - 12 Obligations of states and political subdivisions securities - 22 - 22 Residential mortgage-backed securities - 395 - 395 Asset-backed securities and other debt securities - 63 - 63 Trading debt securities 1 491 - 492 Equity securities 438 1 439 Residential mortgage loans held for sale - 399 - 399 Residential mortgage loans(b) - - 137 137 MSRs - - 858 858 Derivative assets: Interest rate contracts 1 505 8 514 Foreign exchange contracts - 124 - 124 Equity contracts - 20 - 20 Commodity contracts 39 126 - 165 Derivative assets(d) 40 775 8 823 Total assets $ 577 32,707 1,003 34,287 Liabilities: Derivative liabilities: Interest rate contracts $ 1 172 5 178 Foreign exchange contracts - 120 - 120 Equity contracts - - 137 137 Commodity contracts 38 129 - 167 Derivative liabilities(e) 39 421 142 602 Short positions(e) 25 6 - 31 Total liabilities $ 64 427 142 633
Reconciliation of Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
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 three months ended June 30, 2018 ($ in millions) Loans MSRs Net(a) Derivatives Fair Value Balance, beginning of period $ 136 926 4 (165) 901 Total (losses) gains (realized/unrealized): Included in earnings (1) (13) 22 (10) (2) Purchases/originations - 46 (1) - 45 Settlements (5) - (21) 11 (15) Transfers into Level 3(b) 32 - - - 32 Balance, end of period $ 162 959 4 (164) 961 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 June 30, 2018(c) $ (1) (13) 12 (10) (12) Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Residential Interest Rate Equity Mortgage Derivatives, Derivatives, Total For the three months ended June 30, 2017 ($ in millions) Loans MSRs Net(a) Net Fair Value Balance, beginning of period $ 141 776 11 (97) 831 Total (losses) gains (realized/unrealized): Included in earnings 1 (47) 26 (9) (29) Purchases/originations - 120 - - 120 Settlements (4) - (28) 8 (24) Transfers into Level 3(b) 4 - - - 4 Balance, end of period $ 142 849 9 (98) 902 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 June 30, 2017(c) $ 1 (47) 14 (9) (41) Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Residential Interest Rate Mortgage Derivatives, Equity Total For the six months ended June 30, 2018 ($ in millions) Loans MSRs(d) Net(a) Derivatives Fair Value Balance, beginning of period $ 137 858 3 (137) 861 Total (losses) gains (realized/unrealized): Included in earnings (4) 16 36 (49) (1) Purchases/originations - 85 (4) - 81 Settlements (8) - (31) 22 (17) Transfers into Level 3(b) 37 - - - 37 Balance, end of period $ 162 959 4 (164) 961 The amount of total (losses) gains for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at June 30, 2018(c) $ (4) 16 12 (49) (25) Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Residential Interest Rate Mortgage Derivatives, Equity Total For the six months ended June 30, 2017 ($ in millions) Loans MSRs Net(a) Derivatives(a) Fair Value Balance, beginning of period $ 143 744 8 (91) 804 Total (losses) gains (realized/unrealized): Included in earnings 1 (70) 49 (22) (42) Purchases/originations - 175 (1) - 174 Settlements (9) - (47) 15 (41) Transfers into Level 3(b) 7 - - - 7 Balance, end of period $ 142 849 9 (98) 902 The amount of total (losses) gains for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at June 30, 2017(c) $ 1 (70) 15 (22) (76)
Total Gains and Losses Included in Earnings for Assets and Liabilites Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
The total 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 Condensed Consolidated Statements of Income as follows: For the three months ended For the six months ended June 30, June 30, ($ in millions) 2018 2017 2018 2017 Mortgage banking net revenue $ 8 (21) 47 (21) Corporate banking revenue - 1 1 1 Other noninterest income (10) (9) (49) (22) Total losses $ (2) (29) (1) (42) The total losses included in earnings attributable to changes in unrealized gains and losses related to Level 3 assets and liabilities still held at June 30, 2018 and 2017 were recorded in the Condensed Consolidated Statements of Income as follows: For the three months ended For the six months ended June 30, June 30, ($ in millions) 2018 2017 2018 2017 Mortgage banking net revenue $ (2) (33) 23 (55) Corporate banking revenue - 1 1 1 Other noninterest income (10) (9) (49) (22) Total losses $ (12) (41) (25) (76)
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The following tables provide the fair value hierarchy and carrying amount of all assets that were held as of June 30, 2018 and 2017 and for which a nonrecurring fair value adjustment was recorded during the three and six months ended June 30, 2018 and 2017, and the related gains and losses from fair value adjustments on assets sold during the period as well as assets still held as of the end of the period: Fair Value Measurements Using Total (Losses) Gains Total (Losses) Gains For the three months ended June 30, 2018 For the six months ended June 30, 2018 As of June 30, 2018 ($ in millions) Level 1 Level 2 Level 3 Total Commercial loans held for sale $ - - 4 4 - (1) Commercial and industrial loans - - 161 161 14 (30) Commercial mortgage loans - - 3 3 1 6 Commercial leases - - 14 14 (9) (10) OREO - - 17 17 (1) (4) Bank premises and equipment - - 37 37 (33) (41) Operating lease equipment - - 10 10 (1) (3) Private equity investments - 50 31 81 11 30 Total $ - 50 277 327 (18) (53) Fair Value Measurements Using Total Losses Total Losses For the three months For the six months As of June 30, 2017 ($ in millions) Level 1 Level 2 Level 3 Total ended June 30, 2017 ended June 30, 2017 Commercial loans held for sale $ - - 45 45 (13) (32) Commercial and industrial loans - - 405 405 (32) (58) Commercial mortgage loans - - 26 26 (9) (11) Commercial leases - - 3 3 (1) (2) OREO - - 11 11 (1) (5) Bank premises and equipment - - 16 16 (2) (5) Operating lease equipment - - 56 56 - (20) Total $ - - 562 562 (58) (133)
Quantitative Information About Significant Unobservable Level 3 Fair Value Measurement Inputs
The following tables present information as of June 30, 2018 and 2017 about significant unobservable inputs related to the Bancorp’s material categories of Level 3 financial assets and liabilities measured at fair value on a recurring basis: As of June 30, 2018 ($ in millions) Financial Instrument Fair Value Valuation Technique Significant Unobservable Inputs Ranges of Inputs Weighted-Average Residential mortgage loans $ 162 Loss rate model Interest rate risk factor (13.3) - 11.9% -0.1% Credit risk factor 0 - 40.3% 0.7% MSRs 959 Discounted cash flow Prepayment speed 0.5-97.0% (Fixed) 9.5%(Adjustable) 23.6% OAS spread (bps) 461-1,513 (Fixed) 543(Adjustable) 817 IRLCs, net 11 Discounted cash flow Loan closing rates 12.2 - 96.6% 80.9% Swap associated with the sale of Visa, Inc. (164) Discounted cash flow Timing of the resolution 1/31/2021 - 9/6/2021 Class B Shares of the Covered Litigation 11/30/2023 As of June 30, 2017 ($ in millions) Financial Instrument Fair Value Valuation Technique Significant Unobservable Inputs Ranges of Inputs Weighted-Average Residential mortgage loans $ 142 Loss rate model Interest rate risk factor (9.6) - 15.0% 2.9% Credit risk factor 0 - 46.2% 1.0% MSRs 849 Discounted cash flow Prepayment speed 1.2-100% (Fixed) 11.5%(Adjustable) 24.8% OAS spread (bps) 430-1,515 (Fixed) 530(Adjustable) 773 IRLCs, net 14 Discounted cash flow Loan closing rates 9.6- 96.8% 73.0% Swap associated with the sale of Visa, Inc. (98) Discounted cash flow Timing of the resolution 6/30/2019 - 9/30/2020 Class B Shares of the Covered Litigation 12/31/2022 The following tables present information as of June 30, 2018 and 2017 about significant unobservable inputs related to the Bancorp’s material categories of Level 3 financial assets and liabilities measured on a nonrecurring basis: As of June 30, 2018 ($ in millions) Financial Instrument Fair Value Valuation Technique Significant Unobservable Inputs Ranges of Inputs Weighted-Average Commercial loans held for sale $ 4 Appraised value Appraised value NM NM Costs to sell NM 10.0% Commercial and industrial loans 161 Appraised value Collateral value NM NM Commercial mortgage loans 3 Appraised value Collateral value NM NM Commercial leases 14 Appraised value Collateral value NM NM OREO 17 Appraised value Appraised value NM NM Bank premises and equipment 37 Appraised value Appraised value NM NM Operating lease equipment 10 Appraised value Appraised value NM NM Private equity investments 28 Liquidity discount applied Liquidity discount 0-43.0% 12.9% to fund's net asset value 3 Comparable company analysis Market comparable transactions NM NM As of June 30, 2017 ($ in millions) Financial Instrument Fair Value Valuation Technique Significant Unobservable Inputs Ranges of Inputs Weighted-Average Commercial loans held for sale $ 45 Appraised value Appraised value NM NM Costs to sell NM 10.0% Commercial and industrial loans 405 Appraised value Collateral value NM NM Commercial mortgage loans 26 Appraised value Collateral value NM NM Commercial leases 3 Appraised value Collateral value NM NM OREO 11 Appraised value Appraised value NM NM Bank premises and equipment 16 Appraised value Appraised value NM NM Operating lease equipment 56 Appraised value Appraised value NM NM
Difference Between the Aggregate Fair Value and the Aggregate Unpaid Principal Balance for Residential Mortgage Loans Measured at Fair Value
The following table summarizes the difference between the fair value and the unpaid principal balance for residential mortgage and commercial loans measured at fair value as of: Aggregate Aggregate Unpaid June 30, 2018 ($ in millions) Fair Value Principal Balance Difference Residential mortgage loans measured at fair value $ 820 802 18 Past due loans of 90 days or more 2 2 - Nonaccrual loans 1 1 - Commercial loans measured at fair value 8 8 - December 31, 2017 Residential mortgage loans measured at fair value $ 536 522 14 Past due loans of 90 days or more 5 5 - Nonaccrual loans 1 1 -
Carrying Amounts and Estimated Fair Values for Certain Financial Instruments
Fair Value of Certain Financial Instruments The following tables summarize the carrying amounts and estimated fair values for certain financial instruments, excluding financial instruments measured at fair value on a recurring basis: Net Carrying Fair Value Measurements Using Total As of June 30, 2018 ($ in millions) Amount Level 1 Level 2 Level 3 Fair Value Financial assets: Cash and due from banks $ 2,052 2,052 - - 2,052 Other short-term investments 1,636 1,636 - - 1,636 Other securities 614 - 614 - 614 Held-to-maturity securities 19 - - 19 19 Loans and leases held for sale 117 - - 117 117 Portfolio loans and leases: Commercial and industrial loans 40,858 - - 41,825 41,825 Commercial mortgage loans 6,560 - - 6,493 6,493 Commercial construction loans 4,666 - - 4,710 4,710 Commercial leases 3,765 - - 3,355 3,355 Residential mortgage loans 15,392 - - 15,697 15,697 Home equity 6,560 - - 6,936 6,936 Automobile loans 8,899 - - 8,632 8,632 Credit card 2,146 - - 2,518 2,518 Other consumer loans 1,955 - - 2,047 2,047 Unallocated ALLL (108) - - - - Total portfolio loans and leases, net $ 90,693 - - 92,213 92,213 Financial liabilities: Deposits $ 104,131 - 104,064 - 104,064 Federal funds purchased 597 597 - - 597 Other short-term borrowings 1,763 - 1,763 - 1,763 Long-term debt 14,321 14,223 429 - 14,652 Net Carrying Fair Value Measurements Using Total As of December 31, 2017 ($ in millions) Amount Level 1 Level 2 Level 3 Fair Value Financial assets: Cash and due from banks $ 2,514 2,514 - - 2,514 Other short-term investments 2,753 2,753 - - 2,753 Other securities 612 - 612 - 612 Held-to-maturity securities 24 - - 24 24 Loans and leases held for sale 93 - - 93 93 Portfolio loans and leases: Commercial and industrial loans 40,519 - - 41,718 41,718 Commercial mortgage loans 6,539 - - 6,490 6,490 Commercial construction loans 4,530 - - 4,560 4,560 Commercial leases 4,054 - - 3,705 3,705 Residential mortgage loans 15,365 - - 15,996 15,996 Home equity 6,968 - - 7,410 7,410 Automobile loans 9,074 - - 8,832 8,832 Credit card 2,182 - - 2,616 2,616 Other consumer loans 1,526 - - 1,621 1,621 Unallocated ALLL (120) - - - - Total portfolio loans and leases, net $ 90,637 - - 92,948 92,948 Financial liabilities: Deposits $ 103,162 - 103,123 - 103,123 Federal funds purchased 174 174 - - 174 Other short-term borrowings 4,012 - 4,012 - 4,012 Long-term debt 14,904 15,045 529 - 15,574
6 Months Ended
Segment Reporting
Results of Operations and Average Assets by Segment
The following tables present the results of operations and assets by business segment for the three months ended: Wealth General Commercial Branch Consumer and Asset Corporate June 30, 2018 ($ in millions) Banking Banking Lending Management and Other Eliminations Total Net interest income $ 427 499 59 45 (10) - 1,020 Provision for (benefit from) loan and lease losses (10) 47 8 (11) (1) - 33 Net interest income after provision for loan and lease losses 437 452 51 56 (9) - 987 Noninterest income: Service charges on deposits 70 67 - - - - 137 Wealth and asset management revenue 1 37 - 104 - (34)(a) 108 Corporate banking revenue 119 1 - - - - 120 Card and processing revenue 14 69 - 1 - - 84 Mortgage banking net revenue - 1 52 - - - 53 Other noninterest income(b) 25 (8) 4 4 225 - 250 Securities losses, net - - - - (5) - (5) Securities losses, net - non-qualifying hedges on MSRs - - (4) - - - (4) Total noninterest income 229 167 52 109 220 (34) 743 Noninterest expense: Salaries, wages and incentives 71 111 42 43 204 - 471 Employee benefits 9 26 10 7 26 - 78 Net occupancy expense 6 44 3 3 18 - 74 Technology and communications 2 1 1 - 63 - 67 Equipment expense 6 12 - - 12 - 30 Card and processing expense 1 30 - - (1) - 30 Other noninterest expense 263 208 51 70 (271) (34) 287 Total noninterest expense 358 432 107 123 51 (34) 1,037 Income (loss) before income taxes 308 187 (4) 42 160 - 693 Applicable income tax expense (benefit) 19 40 (1) 9 40 - 107 Net income (loss) 289 147 (3) 33 120 - 586 Total goodwill $ 630 1,655 - 177 - - 2,462 Total assets $ 58,763 60,281 22,128 9,270 (9,747)(c) - 140,695 Wealth General Commercial Branch Consumer and Asset Corporate June 30, 2017 ($ in millions) Banking Banking Lending Management and Other Eliminations Total Net interest income $ 415 437 59 37 (9) - 939 Provision for (benefit from) loan and lease losses 22 39 7 (1) (15) - 52 Net interest income after provision for loan and lease losses 393 398 52 38 6 - 887 Noninterest income: Service charges on deposits 73 66 - - - - 139 Wealth and asset management revenue 1 35 - 100 - (33)(a) 103 Corporate banking revenue 100 1 - - - - 101 Card and processing revenue 14 64 - 1 - - 79 Mortgage banking net revenue - 1 54 - - - 55 Other noninterest income(b) 40 22 6 - 17 - 85 Securities gains, net - non-qualifying hedges on MSRs - - 2 - - - 2 Total noninterest income 228 189 62 101 17 (33) 564 Noninterest expense: Salaries, wages and incentives 60 104 40 37 156 - 397 Employee benefits 9 26 10 7 34 - 86 Net occupancy expense 7 43 3 2 15 - 70 Technology and communications 2 1 1 - 53 - 57 Equipment expense 4 13 - - 12 - 29 Card and processing expense 1 33 - - (1) - 33 Other noninterest expense 247 196 55 67 (247) (33) 285 Total noninterest expense 330 416 109 113 22 (33) 957 Income before income taxes 291 171 5 26 1 - 494 Applicable income tax expense 54 60 2 9 2 - 127 Net income (loss) 237 111 3 17 (1) - 367 Total goodwill $ 613 1,655 - 155 - - 2,423 Total assets $ 57,766 57,396 22,442 8,238 (4,775)(c) - 141,067 The following tables present the results of operations and assets by business segment for the six months ended: Wealth General Commercial Branch Consumer and Asset Corporate June 30, 2018 ($ in millions) Banking Banking Lending Management and Other Eliminations Total Net interest income $ 846 965 118 88 (1) - 2,016 Provision for (benefit from) loan and lease losses (29) 90 20 5 (30) - 56 Net interest income after provision for loan and lease losses 875 875 98 83 29 - 1,960 Noninterest income: Service charges on deposits 139 134 - 1 1 - 275 Wealth and asset management revenue 2 74 - 214 - (69)(a) 221 Corporate banking revenue 205 (c) 2 - 1 - - 208 Card and processing revenue 28 133 - 2 - - 163 Mortgage banking net revenue - 3 106 - - - 109 Other noninterest income(b) 73 7 7 9 612 - 708 Securities losses, net - - - - (15) - (15) Securities losses, net - non-qualifying hedges on MSRs - - (17) - - - (17) Total noninterest income 447 353 96 227 598 (69) 1,652 Noninterest expense: Salaries, wages and incentives 141 220 82 87 388 - 918 Employee benefits 27 53 20 17 71 - 188 Net occupancy expense 13 88 5 6 37 - 149 Technology and communications 4 3 2 - 126 - 135 Equipment expense 11 25 - - 25 - 61 Card and processing expense 2 59 - - (1) - 60 Other noninterest expense 545 423 102 144 (573) (69) 572 Total noninterest expense 743 871 211 254 73 (69) 2,083 Income (loss) before income taxes 579 357 (17) 56 554 - 1,529 Applicable income tax expense (benefit) 32 75 (3) 12 123 - 239 Net income (loss) 547 282 (14) 44 431 - 1,290 Total goodwill $ 630 1,655 - 177 - - 2,462 Total assets $ 58,763 60,281 22,128 9,270 (9,747)(d) - 140,695 Wealth General Commercial Branch Consumer and Asset Corporate June 30, 2017 ($ in millions) Banking Banking Lending Management and Other Eliminations Total Net interest income $ 839 867 120 75 (29) - 1,872 Provision for (benefit from) loan and lease losses 29 80 22 3 (8) - 126 Net interest income after provision for loan and lease losses 810 787 98 72 (21) - 1,746 Total noninterest income Service charges on deposits 146 130 - 1 - - 277 Wealth and asset management revenue 2 71 - 205 - (67)(a) 211 Corporate banking revenue 173 (c) 3 - - (1) - 175 Card and processing revenue 28 122 - 3 - - 153 Mortgage banking net revenue - 3 105 - - - 108 Other noninterest income(b) 80 45 9 - 26 - 160 Securities gains, net - - - - 1 - 1 Securities gains, net - non-qualifying hedges on MSRs - - 2 - - - 2 Total noninterest income 429 374 116 209 26 (67) 1,087 Noninterest expense Salaries, wages and incentives 127 208 77 76 320 - 808 Employee benefits 27 53 20 16 80 - 196 Net occupancy expense 13 90 5 5 35 - 148 Technology and communications 5 2 1 - 108 - 116 Equipment expense 8 26 - - 23 - 57 Card and processing expense 2 62 - - (1) - 63 Other noninterest expense 507 388 110 134 (517) (67) 555 Total noninterest expense 689 829 213 231 48 (67) 1,943 Income (loss) before income taxes 550 332 1 50 (43) - 890 Applicable income tax expense (benefit) 97 117 - 17 (13) - 218 Net income (loss) 453 215 1 33 (30) - 672 Total goodwill $ 613 1,655 - 155 - - 2,423 Total assets $ 57,766 57,396 22,442 8,238 (4,775)(d) - 141,067
$ in Millions6 Months Ended
Interest paid
Interest
$ 451
$ 334
Income taxes paid, net
Income taxes
120
399
Transfers:
Portfolio loans to loans held for sale
171
140
Loans held for sale to portfolio loans
67
7
Portfolio loans to OREO
$ 20
$ 19
$ in Millions3 Months Ended
6 Months Ended
Accounting Policies [Abstract]
Deferred gains on sale-leaseback transactions
$ 13
$ 13
Reduction to card and processing revenue
$ 31
$ 60
$ in Millions
Investment Holdings
Available-for-sale debt securities, fair value
[1]
$ 31,961
$ 31,751
Available-for-sale debt securities, unrealized losses
(702)
(134)
Available-for-sale debt securities, unrealized gains
74
308
Available-for-sale debt securities, amortized cost
32,589
31,577
Held-to-maturity securities, fair value
19
24
Held-to-maturity, unrealized losses
0
0
Held-to-maturity, unrealized gains
0
0
Held-to-maturity securities, amortized cost
[2]
19
24
Trading debt securities, fair value
280
492
Equity securities, fair value
475
439
U.S. Treasury and federal agencies
Investment Holdings
Available-for-sale debt securities, fair value
96
98
Available-for-sale debt securities, unrealized losses
(2)
0
Available-for-sale debt securities, unrealized gains
0
0
Available-for-sale debt securities, amortized cost
98
98
Obligations of states and political subdivisions
Investment Holdings
Available-for-sale debt securities, fair value
35
44
Available-for-sale debt securities, unrealized losses
0
0
Available-for-sale debt securities, unrealized gains
1
1
Available-for-sale debt securities, amortized cost
34
43
Held-to-maturity securities, fair value
17
22
Held-to-maturity, unrealized losses
0
0
Held-to-maturity, unrealized gains
0
0
Held-to-maturity securities, amortized cost
17
22
Agency mortgage-backed securities | Residential mortgage backed securities
Investment Holdings
Available-for-sale debt securities, fair value
16,094
15,319
[3]
Available-for-sale debt securities, unrealized losses
(346)
(80)
[3]
Available-for-sale debt securities, unrealized gains
35
118
Available-for-sale debt securities, amortized cost
16,405
15,281
Agency mortgage-backed securities | Commercial mortgage backed securities
Investment Holdings
Available-for-sale debt securities, fair value
10,038
10,167
Available-for-sale debt securities, unrealized losses
(277)
(38)
Available-for-sale debt securities, unrealized gains
7
92
Available-for-sale debt securities, amortized cost
10,308
10,113
Non-agency mortgage-backed securities | Commercial mortgage backed securities
Investment Holdings
Available-for-sale debt securities, fair value
3,086
3,293
Available-for-sale debt securities, unrealized losses
(68)
(5)
Available-for-sale debt securities, unrealized gains
5
51
Available-for-sale debt securities, amortized cost
3,149
3,247
Asset-backed securities and other debt securities
Investment Holdings
Available-for-sale debt securities, fair value
1,998
2,218
Available-for-sale debt securities, unrealized losses
(9)
(11)
Available-for-sale debt securities, unrealized gains
26
46
Available-for-sale debt securities, amortized cost
1,981
2,183
Held-to-maturity securities, fair value
2
2
Held-to-maturity, unrealized losses
0
0
Held-to-maturity, unrealized gains
0
0
Held-to-maturity securities, amortized cost
2
2
Other securities
Investment Holdings
Available-for-sale debt securities, fair value
614
[4]
612
[5]
Available-for-sale debt securities, unrealized losses
0
[4]
0
[5]
Available-for-sale debt securities, unrealized gains
0
[4]
0
[5]
Available-for-sale debt securities, amortized cost
$ 614
[4]
$ 612
[5]
[1]
[2]
[3]
[4]
[5]
$ in Millions
Investment Holdings
FHLB, restricted stock holdings
$ 248
$ 248
FRB, restricted stock holdings
364
362
Available-for-sale debt and other securities
[1]
31,961
31,751
DTCC, restricted stock holdings
$ 2
2
Interest-Only Mortgage-Backed Securities
Investment Holdings
Available-for-sale debt and other securities
$ 34
[1]
$ in Millions3 Months Ended
6 Months Ended
Securities
Available-for-sale debt and other securities, realized gains
$ 22
$ 21
$ 56
$ 30
Available-for-sale debt and other securities, realized losses
(22)
(7)
(65)
(8)
OTTI
[1]
0
(14)
0
(24)
Net realized gains (losses) on available-for-sale debt and other securities
[2]
0
0
(9)
(2)
Total trading debt securities gains (losses)
[3]
(4)
2
(18)
3
Total equity securities gains (losses)
[4],[5]
(5)
2
(8)
3
Total available for sale debt and other, trading debt and equity securities gains (losses) recognized in income
$ (9)
$ 4
$ (35)
$ 4
[1]
[2]
[3]
[4]
[5]
$ in Millions3 Months Ended
6 Months Ended
Investment Holdings
Total trading debt securities gains (losses)
[1]
$ (4)
$ 2
$ (18)
$ 3
Total equity securities gains (losses)
[2],[3]
(5)
2
(8)
3
Equity securities unrealized gains (losses)
(5)
2
(6)
3
Corporate Banking Revenue and Wealth and Asset Management Revenue
Investment Holdings
Total trading debt securities gains (losses)
(2)
Interest-Only Mortgage-Backed Securities
Investment Holdings
Net gains/losses on interest-only mortgage-backed securities
$ 0
$ (2)
$ 1
$ (1)
[1]
[2]
[3]
$ in Billions
Investment Holdings
Securities with a fair value, pledged as collateral
$ 6.8
$ 7.8
$ in Millions
Debt securities:
Less than 1 year
[1]
$ 214
1-5 years
[1]
8,923
5-10 years
[1]
18,047
Over 10 years
[1]
4,791
Other securities
614
Available-for-sale debt securities, amortized cost
32,589
$ 31,577
Debt securities:
Less than 1 year
[1]
207
1-5 years
[1]
8,800
5-10 years
[1]
17,669
Over 10 years
[1]
4,671
Other securities
614
Available-for-sale debt and other securities, fair value
[2]
31,961
31,751
Debt securities:
Less than 1 year
[1]
1
1-5 years
[1]
16
5-10 years
[1]
0
Over 10 years
[1]
2
Other securities
0
Held-to-maturity securities, amortized cost
[3]
19
24
Debt securities:
Under 1 year
[1]
1
1-5 years
[1]
16
5-10 years
[1]
0
Over 10 years
[1]
2
Other securities
0
Held-to-maturity securities, fair value
$ 19
$ 24
[1]
[2]
[3]
$ in Millions
Investments, Unrealized Loss Position
Less than 12 months Fair Value
$ 24,095
$ 11,101
Less than 12 months Unrealized Losses
(623)
(85)
12 months or more Fair Value
1,560
1,536
12 months or more Unrealized Losses
(79)
(49)
Total Fair Value
25,655
12,637
Total Unrealized Losses
(702)
(134)
U.S. Treasury and federal agencies
Investments, Unrealized Loss Position
Less than 12 months Fair Value
96
98
Less than 12 months Unrealized Losses
(2)
0
12 months or more Fair Value
0
0
12 months or more Unrealized Losses
0
0
Total Fair Value
96
98
Total Unrealized Losses
(2)
0
Agency mortgage-backed securities | Residential mortgage backed securities
Investments, Unrealized Loss Position
Less than 12 months Fair Value
12,456
7,337
Less than 12 months Unrealized Losses
(313)
(59)
12 months or more Fair Value
478
479
12 months or more Unrealized Losses
(33)
(21)
Total Fair Value
12,934
7,816
Total Unrealized Losses
(346)
(80)
[1]
Agency mortgage-backed securities | Commercial mortgage backed securities
Investments, Unrealized Loss Position
Less than 12 months Fair Value
8,719
2,900
Less than 12 months Unrealized Losses
(247)
(22)
12 months or more Fair Value
547
526
12 months or more Unrealized Losses
(30)
(16)
Total Fair Value
9,266
3,426
Total Unrealized Losses
(277)
(38)
Non-agency mortgage-backed securities | Commercial mortgage backed securities
Investments, Unrealized Loss Position
Less than 12 months Fair Value
2,540
449
Less than 12 months Unrealized Losses
(59)
(2)
12 months or more Fair Value
140
145
12 months or more Unrealized Losses
(9)
(3)
Total Fair Value
2,680
594
Total Unrealized Losses
(68)
(5)
Asset-backed securities and other debt securities
Investments, Unrealized Loss Position
Less than 12 months Fair Value
284
317
Less than 12 months Unrealized Losses
(2)
(2)
12 months or more Fair Value
395
386
12 months or more Unrealized Losses
(7)
(9)
Total Fair Value
679
703
Total Unrealized Losses
$ (9)
$ (11)
[1]
$ in Millions
Loans held for sale:
Loans and leases held for sale
[1]
$ 783
$ 492
Portfolio loans and leases:
Commercial and industrial loans
41,403
41,170
Commercial mortgage loans
6,625
6,604
Commercial construction loans
4,687
4,553
Commercial leases
3,788
4,068
Residential mortgage loans
15,640
15,591
Home equity
6,599
7,014
Automobile loans
8,938
9,112
Credit card
2,270
2,299
Other consumer loans and leases
1,982
1,559
Portfolio loans and leases
[2],[3]
91,932
91,970
Commercial Portfolio Segment
Portfolio loans and leases:
Portfolio loans and leases
56,503
56,395
Commercial Portfolio Segment | Commercial and industrial loans
Loans held for sale:
Loans and leases held for sale
44
0
Commercial Portfolio Segment | Commercial mortgage loans
Loans held for sale:
Loans and leases held for sale
72
6
Commercial Portfolio Segment | Commercial leases
Loans held for sale:
Loans and leases held for sale
9
0
Residential Mortgage Loans | Residential mortgage loans
Loans held for sale:
Loans and leases held for sale
658
486
Consumer Portfolio Segment
Portfolio loans and leases:
Portfolio loans and leases
$ 35,429
$ 35,575
[1]
[2]
[3]
$ in Millions
Accounts, Notes, Loans and Financing Receivable
Unamortized premiums and discounts, deferred direct loan origination fees and costs, and fair value adjustments
$ 286
$ 282
Unearned Income
496
523
Loans pledged at the FHLB
13,300
13,000
Loans pledged at the FRB
$ 40,400
$ 39,800
$ in Millions3 Months Ended
6 Months Ended
Assets that Continue to be Recognized, Securitized or Asset-backed Financing Arrangement Assets and any Other Financial Assets Managed Together
Balance
$ 92,715
$ 92,715
$ 92,462
Balance of Loans 90 days or More Past Due
89
89
97
Net Charge-Offs
94
$ 64
175
$ 153
Commercial and Industrial Loans | Commercial Portfolio Segment
Assets that Continue to be Recognized, Securitized or Asset-backed Financing Arrangement Assets and any Other Financial Assets Managed Together
Balance
41,447
41,447
41,170
Balance of Loans 90 days or More Past Due
4
4
3
Net Charge-Offs
47
18
74
52
Commercial Mortgage Loans | Commercial Portfolio Segment
Assets that Continue to be Recognized, Securitized or Asset-backed Financing Arrangement Assets and any Other Financial Assets Managed Together
Balance
6,697
6,697
6,610
Balance of Loans 90 days or More Past Due
0
0
0
Net Charge-Offs
2
5
2
11
Commercial Construction Loans | Commercial Portfolio Segment
Assets that Continue to be Recognized, Securitized or Asset-backed Financing Arrangement Assets and any Other Financial Assets Managed Together
Balance
4,687
4,687
4,553
Balance of Loans 90 days or More Past Due
0
0
0
Net Charge-Offs
0
0
0
0
Commercial Leases | Commercial Portfolio Segment
Assets that Continue to be Recognized, Securitized or Asset-backed Financing Arrangement Assets and any Other Financial Assets Managed Together
Balance
3,797
3,797
4,068
Balance of Loans 90 days or More Past Due
0
0
0
Net Charge-Offs
0
1
0
2
Residential Mortgage | Residential Mortgage
Assets that Continue to be Recognized, Securitized or Asset-backed Financing Arrangement Assets and any Other Financial Assets Managed Together
Balance
16,298
16,298
16,077
Balance of Loans 90 days or More Past Due
44
44
57
Net Charge-Offs
2
2
4
7
Home Equity | Consumer Portfolio Segment
Assets that Continue to be Recognized, Securitized or Asset-backed Financing Arrangement Assets and any Other Financial Assets Managed Together
Balance
6,599
6,599
7,014
Balance of Loans 90 days or More Past Due
0
0
0
Net Charge-Offs
2
5
7
11
Automobile Loans | Consumer Portfolio Segment
Assets that Continue to be Recognized, Securitized or Asset-backed Financing Arrangement Assets and any Other Financial Assets Managed Together
Balance
8,938
8,938
9,112
Balance of Loans 90 days or More Past Due
10
10
10
Net Charge-Offs
8
6
19
18
Credit Card | Consumer Portfolio Segment
Assets that Continue to be Recognized, Securitized or Asset-backed Financing Arrangement Assets and any Other Financial Assets Managed Together
Balance
2,270
2,270
2,299
Balance of Loans 90 days or More Past Due
31
31
27
Net Charge-Offs
26
22
52
43
Other Consumer Loans | Consumer Portfolio Segment
Assets that Continue to be Recognized, Securitized or Asset-backed Financing Arrangement Assets and any Other Financial Assets Managed Together
Balance
1,982
1,982
1,559
Balance of Loans 90 days or More Past Due
0
0
0
Net Charge-Offs
7
$ 5
17
$ 9
Loans Held For Sale
Assets that Continue to be Recognized, Securitized or Asset-backed Financing Arrangement Assets and any Other Financial Assets Managed Together
Balance
783
783
492
Loans and Leases Managed and Securitized
Assets that Continue to be Recognized, Securitized or Asset-backed Financing Arrangement Assets and any Other Financial Assets Managed Together
Balance
$ 91,932
$ 91,932
$ 91,970
$ in Millions3 Months Ended
6 Months Ended
FinancingReceivableAllowanceForCreditLossesLineItems
Balance, beginning of period
$ 1,138
[1],[2]
$ 1,238
$ 1,196
[2],[3]
$ 1,253
[2],[3]
Losses charged-off
(118)
[4]
(95)
(222)
[5]
(202)
Recoveries of losses previously charged- off
24
[4]
31
47
[5]
49
Provision for (benefit from) loan and lease losses
33
52
56
126
Balance, end of period
1,077
[1],[2]
1,226
1,077
[1],[2]
1,226
Commercial Portfolio Segment
FinancingReceivableAllowanceForCreditLossesLineItems
Balance, beginning of period
713
[1]
826
753
[3]
831
[3]
Losses charged-off
(54)
(41)
(87)
(86)
Recoveries of losses previously charged- off
5
17
11
21
Provision for (benefit from) loan and lease losses
(10)
15
(23)
51
Balance, end of period
654
[1]
817
654
[1]
817
Residential Mortgage Loans
FinancingReceivableAllowanceForCreditLossesLineItems
Balance, beginning of period
89
[1]
96
89
[3]
96
[3]
Losses charged-off
(4)
(4)
(7)
(10)
Recoveries of losses previously charged- off
2
2
3
3
Provision for (benefit from) loan and lease losses
(1)
(1)
1
4
Balance, end of period
86
[1]
93
86
[1]
93
Consumer Portfolio Segment
FinancingReceivableAllowanceForCreditLossesLineItems
Balance, beginning of period
222
[1]
204
234
[3]
214
[3]
Losses charged-off
(60)
[4]
(50)
(128)
[5]
(106)
Recoveries of losses previously charged- off
17
[4]
12
33
[5]
25
Provision for (benefit from) loan and lease losses
50
40
90
73
Balance, end of period
229
[1]
206
229
[1]
206
Unallocated
FinancingReceivableAllowanceForCreditLossesLineItems
Balance, beginning of period
114
[1]
112
120
[3]
112
[3]
Losses charged-off
0
0
0
0
Recoveries of losses previously charged- off
0
0
0
0
Provision for (benefit from) loan and lease losses
(6)
(2)
(12)
(2)
Balance, end of period
$ 108
[1]
$ 110
$ 108
[1]
$ 110
[1]
[2]
[3]
[4]
[5]
$ in Millions3 Months Ended
6 Months Ended
Financing Receivable, Allowance for Credit Losses [Line Items]
Losses charged-off
$ 6
$ 10
Allowance for Loan and Lease Losses, Recoveries of Bad Debts
$ 6
$ 10
$ in Millions[1]
[2]
FinancingReceivableAllowanceForCreditLossesLineItems
Individually evaluated for impairment
$ 178
[1]
$ 200
[2]
Collectively evaluated for impairment
791
[1]
876
[2]
Unallocated
108
[1]
120
[2]
Total allowance for loan and lease losses
1,077
[1],[3]
$ 1,138
[3]
1,196
[2],[3]
$ 1,226
$ 1,238
$ 1,253
[3]
Individually evaluated for impairment
1,485
[4]
1,545
[5]
Collectively evaluated for impairment
90,285
[4]
90,286
[5]
Loans acquired with deteriorated credit quality
[5]
2
Total portfolio loans and leases
91,770
[4],[6]
91,833
[5],[7]
Commercial Portfolio Segment
FinancingReceivableAllowanceForCreditLossesLineItems
Individually evaluated for impairment
75
[1]
94
[2]
Collectively evaluated for impairment
579
[1]
659
[2]
Unallocated
0
[1]
0
[2]
Total allowance for loan and lease losses
654
[1]
713
753
[2]
817
826
831
Individually evaluated for impairment
400
[4]
560
[5]
Collectively evaluated for impairment
56,103
[4]
55,835
[5]
Loans acquired with deteriorated credit quality
[5]
0
Total portfolio loans and leases
56,503
[4]
56,395
[5]
Residential Mortgage Loans
FinancingReceivableAllowanceForCreditLossesLineItems
Individually evaluated for impairment
65
[1]
64
[2]
Collectively evaluated for impairment
21
[1]
25
[2]
Unallocated
0
[1]
0
[2]
Total allowance for loan and lease losses
86
[1]
89
89
[2]
93
96
96
Individually evaluated for impairment
788
[4]
665
[5]
Collectively evaluated for impairment
14,690
[4]
14,787
[5]
Loans acquired with deteriorated credit quality
[5]
2
Total portfolio loans and leases
15,478
[4]
15,454
[5]
Consumer Portfolio Segment
FinancingReceivableAllowanceForCreditLossesLineItems
Individually evaluated for impairment
38
[1]
42
[2]
Collectively evaluated for impairment
191
[1]
192
[2]
Unallocated
0
[1]
0
[2]
Total allowance for loan and lease losses
229
[1]
222
234
[2]
206
204
214
Individually evaluated for impairment
297
[4]
320
[5]
Collectively evaluated for impairment
19,492
[4]
19,664
[5]
Loans acquired with deteriorated credit quality
[5]
0
Total portfolio loans and leases
19,789
[4]
19,984
[5]
Unallocated
FinancingReceivableAllowanceForCreditLossesLineItems
Individually evaluated for impairment
0
[1]
0
[2]
Collectively evaluated for impairment
0
[1]
0
[2]
Unallocated
108
[1]
120
[2]
Total allowance for loan and lease losses
108
[1]
$ 114
120
[2]
$ 110
$ 112
$ 112
Individually evaluated for impairment
0
[4]
0
[5]
Collectively evaluated for impairment
0
[4]
0
[5]
Loans acquired with deteriorated credit quality
[5]
0
Total portfolio loans and leases
$ 0
[4]
$ 0
[5]
[1]
[2]
[3]
[4]
[5]
[6]
[7]
$ in Millions3 Months Ended
6 Months Ended
12 Months Ended
[1],[2]
[2],[3]
FinancingReceivableAllowanceForCreditLossesLineItems
Allowance for loan and lease losses
$ 1,077
[1],[2]
$ 1,226
$ 1,077
[1],[2]
$ 1,226
$ 1,196
[2],[3]
$ 1,138
$ 1,238
$ 1,253
Portfolio loans and leases
$ 91,770
[4],[5]
$ 91,770
[4],[5]
91,833
[6],[7]
Number of contracts
2,273
[8],[9],[10],[11]
2,430
[12],[13],[14],[15]
4,544
[8],[9],[10],[11]
4,489
[12],[13],[14],[15]
Recorded investment
$ 1,485
[16]
$ 1,485
[16]
1,545
[17]
Variable Interest Entity, Primary Beneficiary
FinancingReceivableAllowanceForCreditLossesLineItems
Allowance for loan and lease losses
5
5
$ 6
Commercial | Variable Interest Entity, Primary Beneficiary
FinancingReceivableAllowanceForCreditLossesLineItems
Number of contracts
5
Leveraged Leases
FinancingReceivableAllowanceForCreditLossesLineItems
Allowance for loan and lease losses
1
1
$ 1
Portfolio loans and leases
650
650
674
Residential Mortgage Loans
FinancingReceivableAllowanceForCreditLossesLineItems
Portfolio loans and leases at fair value
$ 162
$ 162
$ 137
[1]
[2]
[3]
[4]
[5]
[6]
[7]
[8]
[9]
[10]
[11]
[12]
[13]
[14]
[15]
[16]
[17]
$ in Millions
Financing Receivable, Modifications
Total loans and leases
$ 91,770
[1],[2]
$ 91,833
[3],[4]
Commercial Portfolio Segment
Financing Receivable, Modifications
Total loans and leases
56,503
56,395
Commercial Portfolio Segment | Commercial and Industrial Loans
Financing Receivable, Modifications
Total loans and leases
41,403
41,170
Commercial Portfolio Segment | Commercial Mortgage Loans, Owner-occupied
Financing Receivable, Modifications
Total loans and leases
3,391
3,362
Commercial Portfolio Segment | Commercial Mortgage Loans, Nonowner-Occupied
Financing Receivable, Modifications
Total loans and leases
3,234
3,242
Commercial Portfolio Segment | Commercial Construction Loans
Financing Receivable, Modifications
Total loans and leases
4,687
4,553
Commercial Portfolio Segment | Commercial Leases
Financing Receivable, Modifications
Total loans and leases
3,788
4,068
Pass | Commercial Portfolio Segment
Financing Receivable, Modifications
Total loans and leases
54,319
53,612
Pass | Commercial Portfolio Segment | Commercial and Industrial Loans
Financing Receivable, Modifications
Total loans and leases
39,601
38,813
Pass | Commercial Portfolio Segment | Commercial Mortgage Loans, Owner-occupied
Financing Receivable, Modifications
Total loans and leases
3,217
3,207
Pass | Commercial Portfolio Segment | Commercial Mortgage Loans, Nonowner-Occupied
Financing Receivable, Modifications
Total loans and leases
3,200
3,117
Pass | Commercial Portfolio Segment | Commercial Construction Loans
Financing Receivable, Modifications
Total loans and leases
4,652
4,553
Pass | Commercial Portfolio Segment | Commercial Leases
Financing Receivable, Modifications
Total loans and leases
3,649
3,922
Special Mention | Commercial Portfolio Segment
Financing Receivable, Modifications
Total loans and leases
1,049
1,290
Special Mention | Commercial Portfolio Segment | Commercial and Industrial Loans
Financing Receivable, Modifications
Total loans and leases
899
1,115
Special Mention | Commercial Portfolio Segment | Commercial Mortgage Loans, Owner-occupied
Financing Receivable, Modifications
Total loans and leases
40
75
Special Mention | Commercial Portfolio Segment | Commercial Mortgage Loans, Nonowner-Occupied
Financing Receivable, Modifications
Total loans and leases
21
28
Special Mention | Commercial Portfolio Segment | Commercial Construction Loans
Financing Receivable, Modifications
Total loans and leases
35
0
Special Mention | Commercial Portfolio Segment | Commercial Leases
Financing Receivable, Modifications
Total loans and leases
54
72
Substandard | Commercial Portfolio Segment
Financing Receivable, Modifications
Total loans and leases
1,117
1,486
Substandard | Commercial Portfolio Segment | Commercial and Industrial Loans
Financing Receivable, Modifications
Total loans and leases
885
1,235
Substandard | Commercial Portfolio Segment | Commercial Mortgage Loans, Owner-occupied
Financing Receivable, Modifications
Total loans and leases
134
80
Substandard | Commercial Portfolio Segment | Commercial Mortgage Loans, Nonowner-Occupied
Financing Receivable, Modifications
Total loans and leases
13
97
Substandard | Commercial Portfolio Segment | Commercial Construction Loans
Financing Receivable, Modifications
Total loans and leases
0
0
Substandard | Commercial Portfolio Segment | Commercial Leases
Financing Receivable, Modifications
Total loans and leases
85
74
Doubtful | Commercial Portfolio Segment
Financing Receivable, Modifications
Total loans and leases
18
7
Doubtful | Commercial Portfolio Segment | Commercial and Industrial Loans
Financing Receivable, Modifications
Total loans and leases
18
7
Doubtful | Commercial Portfolio Segment | Commercial Mortgage Loans, Owner-occupied
Financing Receivable, Modifications
Total loans and leases
0
0
Doubtful | Commercial Portfolio Segment | Commercial Mortgage Loans, Nonowner-Occupied
Financing Receivable, Modifications
Total loans and leases
0
0
Doubtful | Commercial Portfolio Segment | Commercial Construction Loans
Financing Receivable, Modifications
Total loans and leases
0
0
Doubtful | Commercial Portfolio Segment | Commercial Leases
Financing Receivable, Modifications
Total loans and leases
$ 0
$ 0
[1]
[2]
[3]
[4]
$ in Millions
Total loans and leases
$ 91,770
[1],[2]
$ 91,833
[3],[4]
Home Equity | Consumer Portfolio Segment
Total loans and leases
6,599
7,014
Automobile Loans | Consumer Portfolio Segment
Total loans and leases
8,938
9,112
Credit Card | Consumer Portfolio Segment
Total loans and leases
2,270
2,299
Other consumer loans | Consumer Portfolio Segment
Total loans and leases
1,982
1,559
Performing Financing Receivable
Total loans and leases
[5]
35,135
35,307
Performing Financing Receivable | Residential Mortgage | Residential Mortgage Loans
Total loans and leases
[5]
15,450
15,424
Performing Financing Receivable | Home Equity | Consumer Portfolio Segment
Total loans and leases
6,528
6,940
Performing Financing Receivable | Automobile Loans | Consumer Portfolio Segment
Total loans and leases
8,933
9,111
Performing Financing Receivable | Credit Card | Consumer Portfolio Segment
Total loans and leases
2,243
2,273
Performing Financing Receivable | Other consumer loans | Consumer Portfolio Segment
Total loans and leases
1,981
1,559
Nonperforming Financing Receivable
Total loans and leases
[5]
132
131
Nonperforming Financing Receivable | Residential Mortgage | Residential Mortgage Loans
Total loans and leases
[5]
28
30
Nonperforming Financing Receivable | Home Equity | Consumer Portfolio Segment
Total loans and leases
71
74
Nonperforming Financing Receivable | Automobile Loans | Consumer Portfolio Segment
Total loans and leases
5
1
Nonperforming Financing Receivable | Credit Card | Consumer Portfolio Segment
Total loans and leases
27
26
Nonperforming Financing Receivable | Other consumer loans | Consumer Portfolio Segment
Total loans and leases
$ 1
$ 0
[1]
[2]
[3]
[4]
[5]
$ in Millions
Residential Mortgage Loans
Fair Value, Balance Sheet Grouping, Financial Statement Captions
Portfolio loans and leases at fair value
$ 162
$ 137
$ in Millions
Financing Receivable, Recorded Investment, Past Due
Current Loans and Leases
$ 91,238
[1],[2]
$ 91,195
[3],[4]
Total Past Due
532
[2]
638
[4]
Total portfolio loans and leases
91,770
[2],[5]
91,833
[4],[6]
90-Days past Due and Still Accruing
89
[2]
97
[4]
30-89 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due
241
[1],[2]
333
[3],[4]
90 Days and Greater Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due
291
[1],[2]
305
[3],[4]
Commercial Portfolio Segment
Financing Receivable, Recorded Investment, Past Due
Total portfolio loans and leases
56,503
56,395
Commercial Portfolio Segment | Commercial and Industrial Loans
Financing Receivable, Recorded Investment, Past Due
Current Loans and Leases
41,281
[1]
41,027
[3]
Total Past Due
122
143
Total portfolio loans and leases
41,403
41,170
90-Days past Due and Still Accruing
4
3
Commercial Portfolio Segment | Commercial and Industrial Loans | 30-89 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due
19
[1]
42
[3]
Commercial Portfolio Segment | Commercial and Industrial Loans | 90 Days and Greater Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due
103
[1]
101
[3]
Commercial Portfolio Segment | Commercial Mortgage Loans, Owner-occupied
Financing Receivable, Recorded Investment, Past Due
Current Loans and Leases
3,384
[1]
3,351
[3]
Total Past Due
7
11
Total portfolio loans and leases
3,391
3,362
90-Days past Due and Still Accruing
0
0
Commercial Portfolio Segment | Commercial Mortgage Loans, Owner-occupied | 30-89 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due
1
[1]
3
[3]
Commercial Portfolio Segment | Commercial Mortgage Loans, Owner-occupied | 90 Days and Greater Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due
6
[1]
8
[3]
Commercial Portfolio Segment | Commercial Mortgage Loans, Nonowner-Occupied
Financing Receivable, Recorded Investment, Past Due
Current Loans and Leases
3,228
[1]
3,235
[3]
Total Past Due
6
7
Total portfolio loans and leases
3,234
3,242
90-Days past Due and Still Accruing
0
0
Commercial Portfolio Segment | Commercial Mortgage Loans, Nonowner-Occupied | 30-89 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due
3
[1]
0
[3]
Commercial Portfolio Segment | Commercial Mortgage Loans, Nonowner-Occupied | 90 Days and Greater Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due
3
[1]
7
[3]
Commercial Portfolio Segment | Commercial Construction Loans
Financing Receivable, Recorded Investment, Past Due
Current Loans and Leases
4,687
[1]
4,552
[3]
Total Past Due
0
1
Total portfolio loans and leases
4,687
4,553
90-Days past Due and Still Accruing
0
0
Commercial Portfolio Segment | Commercial Construction Loans | 30-89 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due
0
[1]
1
[3]
Commercial Portfolio Segment | Commercial Construction Loans | 90 Days and Greater Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due
0
[1]
0
[3]
Commercial Portfolio Segment | Commercial Leases
Financing Receivable, Recorded Investment, Past Due
Current Loans and Leases
3,784
[1]
4,065
[3]
Total Past Due
4
3
Total portfolio loans and leases
3,788
4,068
90-Days past Due and Still Accruing
0
0
Commercial Portfolio Segment | Commercial Leases | 30-89 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due
0
[1]
3
[3]
Commercial Portfolio Segment | Commercial Leases | 90 Days and Greater Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due
4
[1]
0
[3]
Residential Mortgage
Financing Receivable, Recorded Investment, Past Due
Current Loans and Leases
15,382
[1],[2],[7]
15,301
[3],[4],[8]
Total Past Due
96
[2],[7]
153
[4],[8]
Total portfolio loans and leases
15,478
[2],[7]
15,454
[4],[8]
90-Days past Due and Still Accruing
44
[2],[7]
57
[4],[8]
Residential Mortgage | 30-89 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due
24
[1],[2],[7]
66
[3],[4],[8]
Residential Mortgage | 90 Days and Greater Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due
72
[1],[2],[7]
87
[3],[4],[8]
Consumer Portfolio Segment | Home Equity
Financing Receivable, Recorded Investment, Past Due
Current Loans and Leases
6,482
[1]
6,888
[3]
Total Past Due
117
126
Total portfolio loans and leases
6,599
7,014
90-Days past Due and Still Accruing
0
0
Consumer Portfolio Segment | Home Equity | 30-89 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due
66
[1]
70
[3]
Consumer Portfolio Segment | Home Equity | 90 Days and Greater Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due
51
[1]
56
[3]
Consumer Portfolio Segment | Automobile Loans
Financing Receivable, Recorded Investment, Past Due
Current Loans and Leases
8,840
[1]
8,992
[3]
Total Past Due
98
120
Total portfolio loans and leases
8,938
9,112
90-Days past Due and Still Accruing
10
10
Consumer Portfolio Segment | Automobile Loans | 30-89 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due
84
[1]
107
[3]
Consumer Portfolio Segment | Automobile Loans | 90 Days and Greater Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due
14
[1]
13
[3]
Consumer Portfolio Segment | Credit Card
Financing Receivable, Recorded Investment, Past Due
Current Loans and Leases
2,198
[1]
2,230
[3]
Total Past Due
72
69
Total portfolio loans and leases
2,270
2,299
90-Days past Due and Still Accruing
31
27
Consumer Portfolio Segment | Credit Card | 30-89 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due
36
[1]
36
[3]
Consumer Portfolio Segment | Credit Card | 90 Days and Greater Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due
36
[1]
33
[3]
Consumer Portfolio Segment | Other Consumer Loans
Financing Receivable, Recorded Investment, Past Due
Current Loans and Leases
1,972
[1]
1,554
[3]
Total Past Due
10
5
Total portfolio loans and leases
1,982
1,559
90-Days past Due and Still Accruing
0
0
Consumer Portfolio Segment | Other Consumer Loans | 30-89 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due
8
[1]
5
[3]
Consumer Portfolio Segment | Other Consumer Loans | 90 Days and Greater Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due
$ 2
[1]
$ 0
[3]
[1]
[2]
[3]
[4]
[5]
[6]
[7]
[8]
$ in Millions3 Months Ended
6 Months Ended
Financing Receivable, Recorded Investment, Past Due
Total Past Due
$ 532
[1]
$ 532
[1]
$ 638
[2]
30-89 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due
241
[1],[3]
241
[1],[3]
333
[2],[4]
90 Days and Greater Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due
291
[1],[3]
291
[1],[3]
305
[2],[4]
Residential Mortgage Loans
Financing Receivable, Recorded Investment, Past Due
Portfolio loans and leases at fair value
162
162
137
Residential Mortgage Loans | Federal Housing Administration Loan
Financing Receivable, Recorded Investment, Past Due
Losses Due To Claim Denials And Curtailments
1
$ 1
3
$ 3
Residential Mortgage Loans | Federal Housing Administration Loan | 30-89 Days Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due
71
71
95
Residential Mortgage Loans | Federal Housing Administration Loan | 90 Days and Greater Past Due
Financing Receivable, Recorded Investment, Past Due
Total Past Due
$ 237
$ 237
$ 290
[1]
[2]
[3]
[4]
$ in Millions
Impaired Financing Receivable Unpaid Principal Balance
Impaired Financing Receivable With Related Allowance Unpaid Principal Balance
$ 992
$ 1,158
Impaired Financing Receivable With No Related Allowance Unpaid Principal Balance
597
521
Unpaid Principal Balance
1,589
1,679
Impaired Financing Receivable Recorded Investment Abstract
Impaired Financing Receivable With Related Allowance Recorded Investment
939
1,068
Impaired Financing Receivable With No Related Allowance Recorded Investment
546
477
Recorded investment
1,485
[1]
1,545
[2]
Allowance
178
200
Commercial Portfolio Segment | Commercial and Industrial Loans
Impaired Financing Receivable Unpaid Principal Balance
Impaired Financing Receivable With Related Allowance Unpaid Principal Balance
248
433
Impaired Financing Receivable With No Related Allowance Unpaid Principal Balance
147
151
Impaired Financing Receivable Recorded Investment Abstract
Impaired Financing Receivable With Related Allowance Recorded Investment
204
358
Impaired Financing Receivable With No Related Allowance Recorded Investment
124
131
Allowance
63
87
Commercial Portfolio Segment | Commercial Mortgage Loans, Owner-occupied
Impaired Financing Receivable Unpaid Principal Balance
Impaired Financing Receivable With Related Allowance Unpaid Principal Balance
4
16
Impaired Financing Receivable With No Related Allowance Unpaid Principal Balance
15
18
Impaired Financing Receivable Recorded Investment Abstract
Impaired Financing Receivable With Related Allowance Recorded Investment
3
14
Impaired Financing Receivable With No Related Allowance Recorded Investment
12
15
Allowance
1
7
Commercial Portfolio Segment | Commercial Mortgage Loans, Nonowner-Occupied
Impaired Financing Receivable Unpaid Principal Balance
Impaired Financing Receivable With Related Allowance Unpaid Principal Balance
2
4
Impaired Financing Receivable With No Related Allowance Unpaid Principal Balance
28
35
Impaired Financing Receivable Recorded Investment Abstract
Impaired Financing Receivable With Related Allowance Recorded Investment
1
3
Impaired Financing Receivable With No Related Allowance Recorded Investment
27
35
Allowance
0
0
Commercial Portfolio Segment | Commercial Leases
Impaired Financing Receivable Unpaid Principal Balance
Impaired Financing Receivable With Related Allowance Unpaid Principal Balance
29
4
Impaired Financing Receivable Recorded Investment Abstract
Impaired Financing Receivable With Related Allowance Recorded Investment
29
4
Allowance
11
0
Residential Mortgage Loans
Impaired Financing Receivable Unpaid Principal Balance
Impaired Financing Receivable With Related Allowance Unpaid Principal Balance
497
469
Impaired Financing Receivable With No Related Allowance Unpaid Principal Balance
314
218
Impaired Financing Receivable Recorded Investment Abstract
Impaired Financing Receivable With Related Allowance Recorded Investment
494
465
Impaired Financing Receivable With No Related Allowance Recorded Investment
294
200
Allowance
65
64
Consumer Portfolio Segment | Home Equity
Impaired Financing Receivable Unpaid Principal Balance
Impaired Financing Receivable With Related Allowance Unpaid Principal Balance
158
172
Impaired Financing Receivable With No Related Allowance Unpaid Principal Balance
90
97
Impaired Financing Receivable Recorded Investment Abstract
Impaired Financing Receivable With Related Allowance Recorded Investment
157
172
Impaired Financing Receivable With No Related Allowance Recorded Investment
87
94
Allowance
22
27
Consumer Portfolio Segment | Automobile Loans
Impaired Financing Receivable Unpaid Principal Balance
Impaired Financing Receivable With Related Allowance Unpaid Principal Balance
6
8
Impaired Financing Receivable With No Related Allowance Unpaid Principal Balance
3
2
Impaired Financing Receivable Recorded Investment Abstract
Impaired Financing Receivable With Related Allowance Recorded Investment
6
7
Impaired Financing Receivable With No Related Allowance Recorded Investment
2
2
Allowance
1
1
Consumer Portfolio Segment | Credit Card
Impaired Financing Receivable Unpaid Principal Balance
Impaired Financing Receivable With Related Allowance Unpaid Principal Balance
48
52
Impaired Financing Receivable Recorded Investment Abstract
Impaired Financing Receivable With Related Allowance Recorded Investment
45
45
Allowance
$ 15
$ 14
[1]
[2]
$ in Millions3 Months Ended
6 Months Ended
12 Months Ended
[7],[8],[9],[10]
Financing Receivable, Impaired
Unpaid principal balance
$ 1,589
$ 1,589
$ 1,679
Recorded investment
1,485
[1]
1,485
[1]
1,545
[2]
Allowance
$ 178
$ 178
200
Number of contracts
2,273
[3],[4],[5],[6]
2,430
[7],[8],[9],[10]
4,544
[3],[4],[5],[6]
4,489
Commercial Portfolio Segment | Commercial Mortgage Loans, Owner-occupied
Financing Receivable, Impaired
Allowance
$ 1
$ 1
$ 7
Number of contracts
2
[7],[8],[9],[10]
2
[3],[4],[5],[6]
7
Commercial Portfolio Segment | Commercial Mortgage Loans, Owner-occupied | Variable Interest Entity, Primary Beneficiary
Financing Receivable, Impaired
Number of contracts
5
5
Commercial Portfolio Segment | Troubled Debt Restructuring On Accrual Status
Financing Receivable, Impaired
Recorded investment
104
$ 104
$ 249
Commercial Portfolio Segment | Troubled Debt Restructuring On Nonaccrual Status
Financing Receivable, Impaired
Recorded investment
173
173
150
Residential Mortgage Loans
Financing Receivable, Impaired
Allowance
$ 65
$ 65
64
Number of contracts
537
[3],[4],[5],[6]
199
[7],[8],[9],[10]
784
[3],[4],[5],[6]
402
Residential Mortgage Loans | Troubled Debt Restructuring On Accrual Status
Financing Receivable, Impaired
Recorded investment
$ 773
$ 773
652
Residential Mortgage Loans | Troubled Debt Restructuring On Nonaccrual Status
Financing Receivable, Impaired
Recorded investment
15
15
13
Consumer Portfolio Segment | Troubled Debt Restructuring On Accrual Status
Financing Receivable, Impaired
Recorded investment
251
251
275
Consumer Portfolio Segment | Troubled Debt Restructuring On Nonaccrual Status
Financing Receivable, Impaired
Recorded investment
$ 46
$ 46
$ 45
[1]
[2]
[3]
[4]
[5]
[6]
[7]
[8]
[9]
[10]
$ in Millions3 Months Ended
6 Months Ended
Financing Receivable, Impaired
Average Recorded Investment
$ 1,581
$ 1,743
$ 1,546
$ 1,796
Interest Income Recognized
17
11
32
23
Commercial Portfolio Segment | Commercial and Industrial Loans
Financing Receivable, Impaired
Average Recorded Investment
417
635
439
668
Interest Income Recognized
5
1
10
2
Commercial Portfolio Segment | Commercial Mortgage Loans, Owner-occupied
Financing Receivable, Impaired
Average Recorded Investment
16
38
[1]
20
42
[1]
Interest Income Recognized
0
0
0
0
[1]
Commercial Portfolio Segment | Commercial Mortgage Loans, Nonowner-Occupied
Financing Receivable, Impaired
Average Recorded Investment
29
66
32
73
Interest Income Recognized
0
0
0
1
Commercial Portfolio Segment | Commercial Construction Loans
Financing Receivable, Impaired
Average Recorded Investment
0
0
Interest Income Recognized
0
0
Commercial Portfolio Segment | Commercial Leases
Financing Receivable, Impaired
Average Recorded Investment
18
2
14
3
Interest Income Recognized
0
0
0
0
Residential Mortgage Loans
Financing Receivable, Impaired
Average Recorded Investment
799
654
732
653
Interest Income Recognized
8
6
14
12
Consumer Portfolio Segment | Home Equity
Financing Receivable, Impaired
Average Recorded Investment
248
287
253
293
Interest Income Recognized
3
3
6
6
Consumer Portfolio Segment | Automobile Loans
Financing Receivable, Impaired
Average Recorded Investment
8
12
9
13
Interest Income Recognized
0
0
0
0
Consumer Portfolio Segment | Credit Card
Financing Receivable, Impaired
Average Recorded Investment
46
49
47
51
Interest Income Recognized
$ 1
$ 1
$ 2
$ 2
[1]
$ in Millions3 Months Ended
6 Months Ended
12 Months Ended
Financing Receivable, Impaired
Average Recorded Investment
$ 1,581
$ 1,743
$ 1,546
$ 1,796
Number of contracts
2,273
[1],[2],[3],[4]
2,430
[5],[6],[7],[8]
4,544
[1],[2],[3],[4]
4,489
[5],[6],[7],[8]
Commercial Portfolio Segment | Commercial Mortgage Loans, Owner-occupied
Financing Receivable, Impaired
Average Recorded Investment
$ 16
$ 38
[9]
$ 20
$ 42
[9]
Number of contracts
2
[5],[6],[7],[8]
2
[1],[2],[3],[4]
7
[5],[6],[7],[8]
Commercial Portfolio Segment | Commercial Mortgage Loans, Owner-occupied | Variable Interest Entity, Primary Beneficiary
Financing Receivable, Impaired
Average Recorded Investment
$ 26
Number of contracts
5
5
[1]
[2]
[3]
[4]
[5]
[6]
[7]
[8]
[9]
$ in Millions
Financing Receivable, Modifications
Nonaccrual portfolio loans and leases
[1],[2]
$ 437
$ 437
OREO and other repossessed property
43
52
Nonperforming portfolio assets
[1],[2]
480
489
Commercial Portfolio Segment
Financing Receivable, Modifications
Nonaccrual portfolio loans and leases
305
306
Commercial Portfolio Segment | Commercial and Industrial Loans
Financing Receivable, Modifications
Nonaccrual portfolio loans and leases
263
276
Commercial Portfolio Segment | Commercial Mortgage Loans, Owner-occupied
Financing Receivable, Modifications
Nonaccrual portfolio loans and leases
10
19
Commercial Portfolio Segment | Commercial Mortgage Loans, Nonowner-Occupied
Financing Receivable, Modifications
Nonaccrual portfolio loans and leases
3
7
Commercial Portfolio Segment | Commercial Leases
Financing Receivable, Modifications
Nonaccrual portfolio loans and leases
29
4
Residential Mortgage Loans
Financing Receivable, Modifications
Nonaccrual portfolio loans and leases
28
30
Consumer Portfolio Segment
Financing Receivable, Modifications
Nonaccrual portfolio loans and leases
104
101
Consumer Portfolio Segment | Home Equity
Financing Receivable, Modifications
Nonaccrual portfolio loans and leases
71
74
Consumer Portfolio Segment | Automobile Loans
Financing Receivable, Modifications
Nonaccrual portfolio loans and leases
5
1
Consumer Portfolio Segment | Credit Card
Financing Receivable, Modifications
Nonaccrual portfolio loans and leases
27
26
Consumer Portfolio Segment | Other Consumer Loans
Financing Receivable, Modifications
Nonperforming portfolio assets
$ 1
$ 0
[1]
[2]
$ in Millions
Financing Receivable, Modifications
Loans and leases held for sale
[1]
$ 783
$ 492
OREO and other repossessed property
43
52
Portfolio loans and leases
91,770
[2],[3]
91,833
[4],[5]
Commercial Portfolio Segment
Financing Receivable, Modifications
Portfolio loans and leases
56,503
56,395
Commercial Portfolio Segment | Commercial Mortgage Loans, Owner-occupied
Financing Receivable, Modifications
Portfolio loans and leases
3,391
3,362
Nonperforming Financing Receivable
Financing Receivable, Modifications
Loans and leases held for sale
23
6
Portfolio loans and leases
[6]
132
131
Nonperforming Financing Receivable | Government Insured | Commercial Portfolio Segment | Small Business Administration
Financing Receivable, Modifications
Portfolio loans and leases
4
3
Restructured nonaccrual loans and leases
$ 2
$ 3
[1]
[2]
[3]
[4]
[5]
[6]
$ in Millions
Troubled Debt Restructuring
Line of credit commitments for modified troubled debt restructurings
$ 29
$ 53
Letter of credit commitments for modified troubled debt restructurings
69
78
Mortgage loans in process of foreclosure amount
189
$ 235
Commercial aggregate borrower relationship subject to individual review for impairment
$ 1
$ in Millions3 Months Ended
6 Months Ended
[3],[4]
[3],[4]
[7]
Financing Receivable, Modifications
Number of Loans Modified in a TDR During the Period
2,273
[1],[2]
2,430
[5],[6],[7],[8]
4,544
[1],[2]
4,489
[5],[6],[8]
Recorded Investment in Loans Modified in a TDR During the Period
$ 166
$ 103
[7],[8]
$ 282
$ 240
[8]
Increase (Decrease) to ALLL Upon Modification
0
9
[7],[8]
16
13
[8]
Charge-offs Recognized Upon Modification
$ 1
$ 5
[7],[8]
$ 1
$ 7
[8]
Commercial Portfolio Segment | Commercial and Industrial Loans
Financing Receivable, Modifications
Number of Loans Modified in a TDR During the Period
13
[1],[2]
17
[5],[6],[7],[8]
25
[1],[2]
50
[5],[6],[8]
Recorded Investment in Loans Modified in a TDR During the Period
$ 64
$ 56
[7],[8]
$ 135
$ 153
[8]
Increase (Decrease) to ALLL Upon Modification
(4)
1
[7],[8]
9
2
[8]
Charge-offs Recognized Upon Modification
0
$ 4
[7],[8]
$ 0
$ 6
[8]
Commercial Portfolio Segment | Commercial Mortgage Loans, Owner-occupied
Financing Receivable, Modifications
Number of Loans Modified in a TDR During the Period
2
[5],[6],[7],[8]
2
[1],[2]
7
[5],[6],[8]
Recorded Investment in Loans Modified in a TDR During the Period
$ 6
[7],[8]
$ 0
$ 8
[8]
Increase (Decrease) to ALLL Upon Modification
5
[7],[8]
0
5
[8]
Charge-offs Recognized Upon Modification
$ 0
[7],[8]
$ 0
$ 0
[8]
Commercial Portfolio Segment | Commercial Mortgage Loans, Nonowner-Occupied
Financing Receivable, Modifications
Number of Loans Modified in a TDR During the Period
1
0
[1],[2]
2
[6]
Recorded Investment in Loans Modified in a TDR During the Period
$ 0
[7]
$ 0
$ 0
Increase (Decrease) to ALLL Upon Modification
0
[7]
0
0
Charge-offs Recognized Upon Modification
$ 0
$ 0
[7]
$ 0
$ 0
Residential Mortgage Loans
Financing Receivable, Modifications
Number of Loans Modified in a TDR During the Period
537
[1],[2]
199
[5],[6],[7],[8]
784
[1],[2]
402
[5],[6],[8]
Recorded Investment in Loans Modified in a TDR During the Period
$ 91
$ 28
[7],[8]
$ 124
$ 57
[8]
Increase (Decrease) to ALLL Upon Modification
2
1
[7],[8]
3
3
[8]
Charge-offs Recognized Upon Modification
$ 0
$ 0
[7],[8]
$ 0
$ 0
[8]
Consumer Portfolio Segment | Home Equity
Financing Receivable, Modifications
Number of Loans Modified in a TDR During the Period
29
[1],[2]
44
[5],[6],[7],[8]
54
[1],[2]
75
[5],[6],[8]
Recorded Investment in Loans Modified in a TDR During the Period
$ 2
$ 3
[7],[8]
$ 4
$ 5
[8]
Increase (Decrease) to ALLL Upon Modification
0
0
[7],[8]
0
0
[8]
Charge-offs Recognized Upon Modification
$ 0
$ 0
[7],[8]
$ 0
$ 0
[8]
Consumer Portfolio Segment | Automobile Loans
Financing Receivable, Modifications
Number of Loans Modified in a TDR During the Period
19
[1],[2]
15
[5],[6],[7],[8]
39
[1],[2]
45
[5],[6],[8]
Recorded Investment in Loans Modified in a TDR During the Period
$ 0
$ 0
[7],[8]
$ 0
$ 0
[8]
Increase (Decrease) to ALLL Upon Modification
0
0
[7],[8]
0
0
[8]
Charge-offs Recognized Upon Modification
$ 0
$ 0
[7],[8]
$ 0
$ 0
[8]
Consumer Portfolio Segment | Credit Card
Financing Receivable, Modifications
Number of Loans Modified in a TDR During the Period
1,675
[1],[2]
2,152
[5],[6],[7],[8]
3,640
[1],[2]
3,908
[5],[6],[8]
Recorded Investment in Loans Modified in a TDR During the Period
$ 9
$ 10
[7],[8]
$ 19
$ 17
[8]
Increase (Decrease) to ALLL Upon Modification
2
2
[7],[8]
4
3
[8]
Charge-offs Recognized Upon Modification
$ 1
$ 1
[7],[8]
$ 1
$ 1
[8]
[1]
[2]
[3]
[4]
[5]
[6]
[7]
[8]
$ in Millions3 Months Ended
6 Months Ended
Financing Receivable, Modifications
Number of contracts
[1]
201
424
496
938
Recorded Investment in Loans Modified in a TDR During the Period
[1]
$ 42
$ 22
$ 51
$ 35
Commercial Portfolio Segment | Commercial and Industrial Loans
Financing Receivable, Modifications
Number of contracts
[1]
2
2
3
4
Recorded Investment in Loans Modified in a TDR During the Period
[1]
$ 28
$ 15
$ 29
$ 16
Commercial Portfolio Segment | Commercial Mortgage Loans, Owner-occupied
Financing Receivable, Modifications
Number of contracts
[1]
2
Recorded Investment in Loans Modified in a TDR During the Period
[1]
$ 0
Commercial Portfolio Segment | Commercial Mortgage Loans, Nonowner-Occupied
Financing Receivable, Modifications
Number of contracts
[1]
3
3
Recorded Investment in Loans Modified in a TDR During the Period
[1]
$ 1
$ 1
Residential Mortgage Loans
Financing Receivable, Modifications
Number of contracts
[1]
62
26
110
83
Recorded Investment in Loans Modified in a TDR During the Period
[1]
$ 13
$ 3
$ 20
$ 12
Consumer Portfolio Segment | Home Equity
Financing Receivable, Modifications
Number of contracts
[1]
6
2
11
Recorded Investment in Loans Modified in a TDR During the Period
[1]
$ 1
$ 0
$ 2
Consumer Portfolio Segment | Credit Card
Financing Receivable, Modifications
Number of contracts
[1]
137
387
379
837
Recorded Investment in Loans Modified in a TDR During the Period
[1]
$ 1
$ 2
$ 2
$ 4
[1]
$ in Millions
Bank Premises and Equipment
Land and improvements
[1]
$ 599
$ 644
Buildings
[1]
1,616
1,679
Equipment
1,936
1,876
Leasehold improvements
396
399
Construction in progress
[1]
85
93
Land and improvements held for sale
24
17
Branches held for sale
10
9
Equipment held for sale
3
1
Accumulated depreciation and amortization
(2,754)
(2,715)
Total bank premises and equipment
[2]
$ 1,915
$ 2,003
[1]
[2]
$ in Millions
Bank Premises and Equipment
Land and improvements
[1]
$ 599
$ 644
Branches and undeveloped parcels of land
Bank Premises and Equipment
Land and improvements
$ 55
$ 91
[1]
$ in Millions3 Months Ended
6 Months Ended
Bank Premises and Equipment
Bank premises impairment
$ 33
$ 2
$ 41
$ 5
Disposal group classified as held for sale | Branch Banking | Bank Premises And Equipment | 2018 Branch Optimization
Bank Premises and Equipment
Parcels Of Undeveloped Land Held for Sale
21
21
Branches and undeveloped parcels of land | Disposal group classified as held for sale | Branch Banking | Bank Premises And Equipment | 2018 Branch Optimization
Bank Premises and Equipment
Parcels Of Undeveloped Land Held for Sale
29
29
Branches and undeveloped parcels of land | Potential branch closures to be selected | Branch Banking | Bank Premises And Equipment | 2018 Branch Optimization
Bank Premises and Equipment
Operating Branch Locations held for sale
128
128
$ in Millions6 Months Ended
Operating Lease Equipment
Other Asset Impairment Charges
$ (2)
$ (19)
$ in Millions3 Months Ended
6 Months Ended
Intangible Assets by Major Class [Abstract]
Amortization of Intangible Assets
$ 1
$ 2
$ 1
$ in Millions
Finite-Lived Intangible Assets
Gross Carrying Amount
$ 74
$ 69
Accumulated Amortization
(44)
(42)
Net Carrying Amount
30
27
Core Deposits
Finite-Lived Intangible Assets
Gross Carrying Amount
34
34
Accumulated Amortization
(29)
(29)
Net Carrying Amount
5
5
Other Intangible Assets
Finite-Lived Intangible Assets
Gross Carrying Amount
6
6
Accumulated Amortization
(3)
(3)
Net Carrying Amount
3
3
Noncompete Agreements
Finite-Lived Intangible Assets
Gross Carrying Amount
14
13
Accumulated Amortization
(11)
(10)
Net Carrying Amount
3
3
Customer Relationships
Finite-Lived Intangible Assets
Gross Carrying Amount
20
16
Accumulated Amortization
(1)
0
Net Carrying Amount
$ 19
$ 16
$ in Millions
Finite-Lived Intangible Assets
Remainder of 2018
$ 3
2019
5
2020
3
2021
3
2022
$ 2
$ in Millions[1],[2]
[1]
Assets
Cash and due from banks
$ 2,052
$ 2,514
$ 2,203
$ 2,392
Other short-term investments
[1]
1,636
2,753
Commercial mortgage loans
6,625
6,604
Automobile loans
8,938
9,112
ALLL
(1,077)
[1],[2]
$ (1,138)
(1,196)
[1],[3]
$ (1,226)
$ (1,238)
$ (1,253)
[3]
Other assets
[1]
6,662
6,975
Liabilities
Other liabilities
[1]
2,425
2,144
Long-term debt
[1]
14,321
14,904
Noncontrolling interests
20
20
Variable Interest Entity, Primary Beneficiary
Assets
Other short-term investments
47
62
Commercial mortgage loans
20
20
Automobile loans
888
1,277
ALLL
(5)
(6)
Other assets
5
7
Total Assets
955
1,360
Liabilities
Other liabilities
2
2
Long-term debt
830
1,190
Total liabilities
832
1,192
Noncontrolling interests
20
20
Variable Interest Entity, Primary Beneficiary | Automobile Loans
Assets
Other short-term investments
47
62
Commercial mortgage loans
0
0
Automobile loans
888
1,277
ALLL
(5)
(6)
Other assets
5
7
Total Assets
935
1,340
Liabilities
Other liabilities
2
2
Long-term debt
830
1,190
Total liabilities
832
1,192
Noncontrolling interests
0
0
Variable Interest Entity, Primary Beneficiary | Fifth Third Community Development Corporation Investments
Assets
Other short-term investments
0
0
Commercial mortgage loans
20
20
Automobile loans
0
0
ALLL
0
0
Other assets
0
0
Total Assets
20
20
Liabilities
Other liabilities
0
0
Long-term debt
0
0
Total liabilities
0
0
Noncontrolling interests
$ 20
$ 20
[1]
[2]
[3]
$ in Millions3 Months Ended
6 Months Ended
[2],[3]
[3],[4]
Variable Interest Entity
OTTI
[1]
$ 0.0
$ (14.0)
$ 0.0
$ (24.0)
Allowance for loan and lease losses
1,077.0
[2],[3]
1,226.0
1,077.0
[2],[3]
1,226.0
$ 1,138.0
$ 1,196.0
[3],[4]
$ 1,238.0
$ 1,253.0
Commercial mortgage loans
6,625.0
6,625.0
6,604.0
Variable Interest Entity, Primary Beneficiary
Variable Interest Entity
Allowance for loan and lease losses
5.0
5.0
6.0
Commercial mortgage loans
20.0
20.0
20.0
Variable Interest Entity, Primary Beneficiary | Automobile Loans
Variable Interest Entity
Carry value of automobile loans securitized
1,100.0
1,100.0
Face amount of notes issued or redeemed
1,000.0
1,000.0
Long-term debt retained
261.0
261.0
Allowance for loan and lease losses
5.0
5.0
6.0
Commercial mortgage loans
0.0
0.0
0.0
Variable Interest Entity, Primary Beneficiary | Fifth Third Community Development Corporation Investments
Variable Interest Entity
Maximum Exposure
1.0
1.0
17.0
Allowance for loan and lease losses
0.0
0.0
0.0
Commercial mortgage loans
20.0
20.0
20.0
Variable Interest Entity, Not Primary Beneficiary | Loans Provided to VIEs
Variable Interest Entity
Unfunded commitment amounts
1,200.0
1,200.0
1,100.0
Variable Interest Entity, Not Primary Beneficiary | Fifth Third Community Development Corporation Investments
Variable Interest Entity
Maximum Exposure
1,213.0
1,213.0
1,376.0
Bancorp's Investment in Affordable Housing Tax Credits
1,213.0
1,213.0
1,376.0
Variable Interest Entity, Not Primary Beneficiary | Fifth Third Community Development Corporation Investments | Qualified Affordable Housing Tax Credits
Variable Interest Entity
Bancorp's Investment in Affordable Housing Tax Credits
1,200.0
1,200.0
1,300.0
Unfunded commitments
$ 362.0
362.0
355.0
Unfunded commitments expected funding date
2034
Variable Interest Entity, Not Primary Beneficiary | Private Equity Investments
Variable Interest Entity
Maximum Exposure
$ 112.0
112.0
150.0
Bancorp's Investment in Affordable Housing Tax Credits
70.0
70.0
102.0
Unfunded commitment amounts
42.0
42.0
$ 48.0
Capital Contribution To Private Equity Investments
2.0
5.0
7.0
OTTI
2.0
$ 0.0
6.0
$ 0.0
Deconsolidated Variable Interest Entity, Primary Beneficiary | Fifth Third Community Development Corporation Investments
Variable Interest Entity
Maximum Exposure
18.0
18.0
Allowance for loan and lease losses
20.0
20.0
Commercial mortgage loans
$ 27.0
$ 27.0
[1]
[2]
[3]
[4]
$ in Millions
Fifth Third Community Development Corporation Investments
Variable Interest Entity
Total Assets
$ 1,213
$ 1,376
Total Liabilities
363
355
Maximum Exposure
1,213
1,376
Private Equity Investments
Variable Interest Entity
Total Assets
70
102
Total Liabilities
0
0
Maximum Exposure
112
150
Loans Provided to VIEs
Variable Interest Entity
Total Assets
1,885
1,845
Total Liabilities
0
0
Maximum Exposure
$ 3,124
$ 2,910
$ in Millions3 Months Ended
6 Months Ended
Other noninterest expense
Schedule of Equity Method Investments
Pre-tax investment and impairment losses
[1]
$ 46
$ 35
$ 91
$ 72
Applicable income tax expense
Schedule of Equity Method Investments
Tax credits and other benefits
$ (51)
$ (56)
$ (103)
$ (112)
[1]
$ in Millions3 Months Ended
6 Months Ended
Securitization or Asset-backed Financing Arrangement, Financial Asset for which Transfer is Accounted as Sale
Residential mortgage loan sales
[1]
$ 1,474
$ 1,518
$ 2,474
$ 3,147
Origination fees and gains on loan sales
28
37
52
66
Gross Mortgage Servicing Fees
$ 54
$ 49
$ 106
$ 97
[1]
$ in Millions6 Months Ended
Servicing Assets at Fair Value
Fair value at beginning of period
$ 858
$ 744
Servicing rights originated
35
66
Servicing rights acquired
50
109
Changes in fair value due to changes in inputs or assumptions
78
(13)
[1]
Changes in fair value due to other changes in fair value
(62)
(57)
[2]
Fair value at end of period
$ 959
$ 849
[1]
[2]
$ in Millions3 Months Ended
6 Months Ended
Servicing Assets at Fair Value
Securities gains (losses), net - non-qualifying hedges on mortgage servcing rights
$ (4)
$ 2
$ (17)
$ 2
MSR fair value adjustments due to change in inputs or assumptions
[1]
21
(17)
78
(13)
Interest Rate Contract | Servicing Rights | Mortgage Banking Revenue
Servicing Assets at Fair Value
Changes in fair value and settlement of free-standing derivatives purchased to economically hedge the MSR portfolio (Mortgage banking net revenue)
[1]
$ (16)
$ 16
$ (65)
$ 15
[1]
3 Months Ended
Fixed Rate Residential Mortgage Loans
Servicing Assets at Amortized Value
Weighted- Average Life (in years)
6 years 9 months 18 days
7 years
Prepayment Speed (annual)
10.00%
10.30%
OAS spread (bps)
5.19%
4.92%
Adjustable Rate Residential Mortgage Loans
Servicing Assets at Amortized Value
Weighted- Average Life (in years)
0 years
3 years
Prepayment Speed (annual)
0.00%
29.80%
OAS spread (bps)
0.00%
6.59%
$ in Billions
Disclosure - Activity Related to Mortgage Banking Net Revenue [Abstract]
Sevicing of residential mortgage loans for other investors
$ 62.2
$ 60.0
$ in Millions3 Months Ended
[1]
Fixed Rate Residential Mortgage Loans
Sensitivity Analysis of Fair Value of Interests Continued to be Held by Transferor, Servicing Assets or Liabilities, Impact of Adverse Change in Assumption
Fair Value
$ 944
Weighted- Average Life (in years)
6 years 6 months
Prepayment Speed (annual)
9.50%
Impact of Adverse Change on Fair Value 10%
$ (37)
Impact of Adverse Change on Fair Value 20%
(71)
Impact of Adverse Change on Fair Value 50%
$ (164)
OAS spread (bps)
5.43%
Impact of Adverse Change on Fair Value 10%
$ (19)
Impact of Adverse Change on Fair Value 20%
(37)
Adjustable Rate Residential Mortgage Loans
Sensitivity Analysis of Fair Value of Interests Continued to be Held by Transferor, Servicing Assets or Liabilities, Impact of Adverse Change in Assumption
Fair Value
$ 15
Weighted- Average Life (in years)
3 years 4 months 24 days
Prepayment Speed (annual)
23.60%
Impact of Adverse Change on Fair Value 10%
$ (1)
Impact of Adverse Change on Fair Value 20%
(2)
Impact of Adverse Change on Fair Value 50%
$ (4)
OAS spread (bps)
8.17%
Impact of Adverse Change on Fair Value 10%
$ 0
Impact of Adverse Change on Fair Value 20%
$ (1)
[1]
$ in Millions3 Months Ended
Derivative
Valuation adjustments related to the credit risk associated with counterparties of customer accomodation derivative contracts
$ 3
$ 3
Notional amount of the risk participation agreements
$ 3,677
2,838
Interest Rate Contract | Credit Risk
Derivative
Credit Risk Derivatives Average Remaining Life
3 years 7 months 6 days
Fair value of risk participation agreements
$ 8
5
Interest Rate Contract | Cash Flow Hedging
Derivative
Maximum length of time hedged in cash flow hedge
6 years 1 month
Deferred gains or losses, net of tax, on cash flow hedges were recorded in accumulated other comprehensive income
$ 16
9
Net deferred gains or losses, net of tax, recorded in accumulated other comprehensive income are expected to be reclassified into earnings during the next twelve months
7
Total collateral
Derivative
Derivative Asset, Fair Value, Amount Not Offset Against Collateral
367
409
Derivative Liability, Fair Value, Amount Offset Against Collateral
401
$ 365
Amount of variation margin payment applied to derivative asset contracts
99
Amount of variation margin payment applied to derivative liability contracts
$ 130
$ in Millions
Derivatives, Fair Value
Fair value - Derivative Assets
$ 945
$ 823
Fair value - Derivative Liabilities
859
602
Accumulated Net Gain (Loss) from Designated or Qualifying Hedges
Derivatives, Fair Value
Fair value - Derivative Assets
230
297
Fair value - Derivative Liabilities
19
17
Accumulated Net Gain (Loss) from Designated or Qualifying Hedges | Fair Value Hedging
Derivatives, Fair Value
Fair value - Derivative Assets
229
297
Fair value - Derivative Liabilities
4
5
Accumulated Net Gain (Loss) from Designated or Qualifying Hedges | Fair Value Hedging | Interest Rate Swap | Long-Term Debt
Derivatives, Fair Value
Notional amount
3,205
3,705
Fair value - Derivative Assets
229
297
Fair value - Derivative Liabilities
4
5
Accumulated Net Gain (Loss) from Designated or Qualifying Hedges | Cash Flow Hedging
Derivatives, Fair Value
Fair value - Derivative Assets
1
0
Fair value - Derivative Liabilities
15
12
Accumulated Net Gain (Loss) from Designated or Qualifying Hedges | Cash Flow Hedging | Interest Rate Swap | Commercial and Industrial Loans
Derivatives, Fair Value
Notional amount
6,150
4,475
Fair value - Derivative Assets
1
0
Fair value - Derivative Liabilities
15
12
Nondesignated
Derivatives, Fair Value
Fair value - Derivative Assets
715
526
Fair value - Derivative Liabilities
840
585
Nondesignated | Risk Management and Other Business Purposes
Derivatives, Fair Value
Fair value - Derivative Assets
54
75
Fair value - Derivative Liabilities
181
154
Nondesignated | Risk Management and Other Business Purposes | Interest Rate Contract | Servicing Rights
Derivatives, Fair Value
Notional amount
11,475
11,035
Fair value - Derivative Assets
52
54
Fair value - Derivative Liabilities
13
15
Nondesignated | Risk Management and Other Business Purposes | Forward Contracts | Assets Held For Sale
Derivatives, Fair Value
Notional amount
1,450
1,284
Fair value - Derivative Assets
0
1
Fair value - Derivative Liabilities
4
1
Nondesignated | Risk Management and Other Business Purposes | Warrant
Derivatives, Fair Value
Notional amount
20
Fair value - Derivative Assets
20
Fair value - Derivative Liabilities
0
Nondesignated | Risk Management and Other Business Purposes | Swap
Derivatives, Fair Value
Notional amount
2,207
1,900
Fair value - Derivative Assets
0
0
Fair value - Derivative Liabilities
164
137
Nondesignated | Risk Management and Other Business Purposes | Foreign Exchange Contract
Derivatives, Fair Value
Notional amount
153
112
Fair value - Derivative Assets
2
0
Fair value - Derivative Liabilities
0
1
Nondesignated | Customer Accommodation
Derivatives, Fair Value
Fair value - Derivative Assets
661
451
Fair value - Derivative Liabilities
659
431
Nondesignated | Customer Accommodation | Interest Rate Contract
Derivatives, Fair Value
Notional amount
48,949
42,216
Fair value - Derivative Assets
247
154
Fair value - Derivative Liabilities
280
145
Nondesignated | Customer Accommodation | Interest Rate Lock Commitments
Derivatives, Fair Value
Notional amount
596
446
Fair value - Derivative Assets
11
8
Fair value - Derivative Liabilities
0
0
Nondesignated | Customer Accommodation | Commodity Contract
Derivatives, Fair Value
Notional amount
5,087
4,125
Fair value - Derivative Assets
284
165
Fair value - Derivative Liabilities
270
167
Nondesignated | Customer Accommodation | TBAs
Derivatives, Fair Value
Notional amount
58
26
Fair value - Derivative Assets
0
0
Fair value - Derivative Liabilities
0
0
Nondesignated | Customer Accommodation | Foreign Exchange Contract
Derivatives, Fair Value
Notional amount
10,842
12,654
Fair value - Derivative Assets
119
124
Fair value - Derivative Liabilities
$ 109
$ 119
$ in Millions3 Months Ended
6 Months Ended
Long-Term Debt
Derivatives, Fair Value
Carrying amount of hedged item
$ 3,701
$ 3,701
Cumulative amount of fair value hedging adjustments included in the carrying amount of hedged items
(212)
(212)
Interest Rate Contract | Interest Expense, Long-Term Debt
Derivatives, Fair Value
Change in fair value of interest rate swaps hedging long-term debt
(18)
$ 14
(81)
$ (6)
Change in fair value of hedged long-term debt
$ 19
$ (15)
$ 83
$ 5
$ in Millions3 Months Ended
6 Months Ended
[1]
[1]
Derivative Instruments, Gain (Loss)
Amount of pretax net (losses) gains recognized in OCI
$ 4
$ 8
$ (5)
$ 3
Interest Income (Expense) Net
Derivative Instruments, Gain (Loss)
Amount of pretax net gains reclassified from OCI into net income
$ 0
$ 6
$ 1
$ 14
[1]
$ in Millions3 Months Ended
6 Months Ended
Interest Rate Contract | Forward Contracts | Loans Held For Sale | Mortgage Banking Revenue
Derivative Instruments, Gain (Loss)
Net gains (losses) recorded in earnings
$ (3)
$ 5
$ (4)
$ (16)
Interest Rate Contract | Servicing Rights | Mortgage Banking Revenue
Derivative Instruments, Gain (Loss)
Net gains (losses) recorded in earnings
(16)
16
(65)
15
Foreign Exchange Contract | Forward Contracts | Other Noninterest Income
Derivative Instruments, Gain (Loss)
Net gains (losses) recorded in earnings
3
(3)
5
(4)
Equity Contract | Swap | Other Noninterest Income
Derivative Instruments, Gain (Loss)
Net gains (losses) recorded in earnings
$ (10)
$ (9)
$ (49)
$ (22)
$ in Millions
Derivatives, Fair Value
Notional amount of the risk participation agreements
$ 3,677
$ 2,838
Pass
Derivatives, Fair Value
Notional amount of the risk participation agreements
3,590
2,748
Risk Level, Special Mention
Derivatives, Fair Value
Notional amount of the risk participation agreements
77
66
Risk Level, Substandard
Derivatives, Fair Value
Notional amount of the risk participation agreements
$ 10
$ 24
$ in Millions3 Months Ended
6 Months Ended
Interest Rate Contract | Customer Contracts | Corporate Banking Revenue
Derivative Instruments, Gain (Loss)
Net gains (losses) recorded in earnings
$ 9
$ 5
$ 16
$ 9
Interest Rate Contract | Interest Rate Lock Commitments | Mortgage Banking Revenue
Derivative Instruments, Gain (Loss)
Net gains (losses) recorded in earnings
22
26
35
48
Commodity Contract | Customer Contracts | Corporate Banking Revenue
Derivative Instruments, Gain (Loss)
Net gains (losses) recorded in earnings
2
1
4
2
Commodity Contract | Customer Contracts | Other noninterest expense
Derivative Instruments, Gain (Loss)
Net gains (losses) recorded in earnings
0
1
0
1
Commodity Contract | Fair Value Adjustments on Hedges and Derivative Contracts | Other noninterest expense
Derivative Instruments, Gain (Loss)
Net gains (losses) recorded in earnings
(1)
0
(1)
0
Foreign Exchange Contract | Customer Contracts | Corporate Banking Revenue
Derivative Instruments, Gain (Loss)
Net gains (losses) recorded in earnings
13
9
27
22
Foreign Exchange Contract | Customer Contracts | Other noninterest expense
Derivative Instruments, Gain (Loss)
Net gains (losses) recorded in earnings
0
2
0
2
Foreign Exchange Contract | Fair Value Adjustments on Hedges and Derivative Contracts | Other noninterest expense
Derivative Instruments, Gain (Loss)
Net gains (losses) recorded in earnings
$ 0
$ 0
$ 1
$ 1
$ in Millions
Derivative Fair Value Gross Amount Assets Not Offset Against Collateral Net
Gross amount recognized in the balance sheet
$ 945
$ 823
Derivative, Collateral, Obligation to Return Cash
(263)
(341)
Derivative Fair Value Gross Amount Liabilities Not Offset Against Collateral Net
Gross amount recognized in the balance sheet
859
602
Assets
Derivative Fair Value Gross Amount Assets Not Offset Against Collateral Net
Gross amount recognized in the balance sheet
934
[1]
815
[2]
Derivative Asset, Fair Value, Amount Not Offset Against Collateral
(258)
(213)
Derivative, Collateral, Obligation to Return Cash
(300)
[3]
(362)
[4]
Derivative, Fair Value, Amount Offset Against Collateral, Net
376
240
Liability
Derivative Fair Value Gross Amount Liabilities Not Offset Against Collateral Net
Gross amount recognized in the balance sheet
859
[1]
602
[2]
Derivative Liability, Fair Value, Amount Not Offset Against Collateral
(258)
(213)
Derivative, Collateral, Right to Reclaim Cash
(234)
[3]
(155)
[4]
Derivative Fair Value Amount Offset Against Collateral Net
367
234
Derivative | Assets
Derivative Fair Value Gross Amount Assets Not Offset Against Collateral Net
Gross amount recognized in the balance sheet
934
[1]
815
[2]
Derivative Asset, Fair Value, Amount Not Offset Against Collateral
(258)
(213)
Derivative, Collateral, Obligation to Return Cash
(300)
[3]
(362)
[4]
Derivative, Fair Value, Amount Offset Against Collateral, Net
376
240
Derivative | Liability
Derivative Fair Value Gross Amount Liabilities Not Offset Against Collateral Net
Gross amount recognized in the balance sheet
859
[1]
602
[2]
Derivative Liability, Fair Value, Amount Not Offset Against Collateral
(258)
(213)
Derivative, Collateral, Right to Reclaim Cash
(234)
[3]
(155)
[4]
Derivative Fair Value Amount Offset Against Collateral Net
$ 367
$ 234
[1]
[2]
[3]
[4]
$ in Millions
Short Term Debt
FHLB advances
$ 1,200
$ 3,125
Securities sold under repurchase agreements
300
546
Derivative collateral
263
341
Total other short-term borrowings
$ 1,763
$ 4,012
$ in Millions
Short Term Debt
Securities sold under repurchase agreements
$ 300
$ 546
$ in Millions6 Months Ended
Capital Actions
Shares acquired for treasury
$ 553
$ 342
December 15, 2017 ASR | March 2017 Repurchase Program
Capital Actions
Redemption Date
Dec. 19, 2017
Shares acquired for treasury
$ 273
Shares repurchased
7,727,273
Shares received from forward contract settlement
824,367
Total shares repurchased
8,551,640
Settlement date
Mar. 19, 2018
February 8, 2018 ASR | March 2017 Repurchase Program
Capital Actions
Redemption Date
Feb. 12, 2018
Shares acquired for treasury
$ 318
Shares repurchased
8,691,318
Shares received from forward contract settlement
1,015,731
Total shares repurchased
9,707,049
Settlement date
Mar. 26, 2018
May 23, 2018 ASR | March 2018 Repurchase Program
Capital Actions
Redemption Date
May 25, 2018
Shares acquired for treasury
$ 235
Shares repurchased
6,402,244
Shares received from forward contract settlement
1,172,122
Total shares repurchased
7,574,366
Settlement date
Jun. 15, 2018
$ in Millions6 Months Ended
Fixed Rate 3.95 Percent Senior Notes Due 2028
Debt Instrument
Face amount of notes issued or redeemed
$ 650
Maturity date(s) Start
Mar. 14, 2018
Maturity date(s) End
Mar. 14, 2028
Floating-Rate 3 Month LIBOR Plus 47 bps Notes Due 2021
Debt Instrument
Face amount of notes issued or redeemed
$ 250
Maturity date(s) Start
Jun. 05, 2018
Maturity date(s) End
Jun. 04, 2021
$ in Millions
Commitments to extend credit
Long-term Purchase Commitment
Commitments
$ 70,915
$ 68,106
Letters of credit
Long-term Purchase Commitment
Commitments
2,092
2,185
Forward contracts related to residential mortgage loans held for sale
Long-term Purchase Commitment
Commitments
1,450
1,284
Noncancelable operating lease obligations
Long-term Purchase Commitment
Commitments
568
568
Purchase obligations
Long-term Purchase Commitment
Commitments
120
144
Capital commitments for private equity investments
Long-term Purchase Commitment
Commitments
43
48
Capital expenditures
Long-term Purchase Commitment
Commitments
27
37
Capital lease obligations
Long-term Purchase Commitment
Commitments
$ 23
$ 26
$ in Millions
Line of Credit Facility
Commitments
$ 70,915
$ 68,106
Pass
Line of Credit Facility
Commitments
70,340
67,254
Special Mention
Line of Credit Facility
Commitments
306
330
Substandard
Line of Credit Facility
Commitments
$ 269
$ 522
shares in Millions, $ in Millions3 Months Ended
6 Months Ended
12 Months Ended
Loss Contingencies
Letters of credit
$ 2,092
$ 2,092
$ 2,185
Margin account balance held by the brokerage clearing agent
15
15
15
Amount in excess of amounts reserved
5
5
Credit loss reserve
1,077
[1],[2]
$ 1,226
1,077
[1],[2]
$ 1,226
1,196
[2],[3]
$ 1,138
[1],[2]
$ 1,238
$ 1,253
[2],[3]
Residential Mortgage
Loss Contingencies
Amount in excess of amounts reserved
9
9
Outstanding balances on residential mortgage loans sold with representation and warranty provisions
7
11
7
11
9
$ 8
$ 12
$ 13
Outstanding balances on residential mortgage loans sold with credit recourse
$ 289
$ 289
$ 312
Delinquency Rates
2.50%
2.50%
3.00%
Credit loss reserve
$ 5
$ 5
$ 5
Repurchased Outstanding Principal
5
3
7
5
Repurchase Demand Request
6
$ 5
11
$ 8
Outstanding Repurchase Demand Inventory
3
1
Secured Debt
Loss Contingencies
Fully and unconditionally guaranteed certain long-term borrowing obligations issued by wholly-owned issuing trust entities
62
62
62
Standby Letters of Credit
Loss Contingencies
Reserve for unfunded commitments
$ 5
$ 5
$ 6
Standby letters of credit as a percentage of total letters of credit
99.00%
99.00%
99.00%
Standby Letters of Credit | Secured Debt
Loss Contingencies
Standby letters of credit as a percentage of total letters of credit
63.00%
63.00%
61.00%
Variable Rate Demand Note
Loss Contingencies
Fifth Third Securities, Inc. (FTS) acted as the remarketing agent to issuers of VRDNs
$ 540
$ 540
$ 508
Letters of credit
20
20
94
Total Variable Rate Demand Notes
560
560
602
Letters of credit issued by the Bancorp related to variable rate demand notes
299
299
331
Variable Rate Demand Note | Trading Securities
Loss Contingencies
Total Variable Rate Demand Notes
2
2
1
Other Liabilities
Loss Contingencies
Reserve for unfunded commitments
131
131
161
Other Liabilities | Residential Mortgage
Loss Contingencies
Outstanding balances on residential mortgage loans sold with representation and warranty provisions
7
7
9
Visa
Loss Contingencies
Recorded share of litigation formally settled by Visa and for probable future litigation settlements
164
164
$ 137
Visa IPO, shares of Visa's Class B common stock received
10.1
Visa Class B shares carryover basis
$ 0
Escrow Deposit
$ 600
$ 600
$ 450
$ 150
$ 1,565
$ 400
$ 800
$ 500
$ 3,000
[1]
[2]
[3]
$ in Millions
Line of Credit Facility
Commitments
$ 2,092
Less Than One Year From The Balance Sheet Date
Line of Credit Facility
Commitments
1,070
[1]
More than One and within Five Years from Balance Sheet Date
Line of Credit Facility
Commitments
1,009
[1]
More than Five Years from Balance Sheet Date
Line of Credit Facility
Commitments
$ 13
[1]
$ in Millions
Line of Credit Facility
Commitments
$ 2,092
Less Than One Year From The Balance Sheet Date
Line of Credit Facility
Commitments
1,070
[1]
Less Than One Year From The Balance Sheet Date | Commercial
Line of Credit Facility
Commitments
7
More than One and within Five Years from Balance Sheet Date
Line of Credit Facility
Commitments
1,009
[1]
More than One and within Five Years from Balance Sheet Date | Commercial
Line of Credit Facility
Commitments
2
More than Five Years from Balance Sheet Date
Line of Credit Facility
Commitments
$ 13
[1]
$ in Millions
Fair Value, Off-balance Sheet Risks, Disclosure Information
Letters of credit
$ 2,092
$ 2,185
Pass
Fair Value, Off-balance Sheet Risks, Disclosure Information
Letters of credit
1,897
1,830
Special Mention
Fair Value, Off-balance Sheet Risks, Disclosure Information
Letters of credit
46
67
Substandard
Fair Value, Off-balance Sheet Risks, Disclosure Information
Letters of credit
149
218
Doubtful
Fair Value, Off-balance Sheet Risks, Disclosure Information
Letters of credit
$ 0
$ 70
$ in Millions3 Months Ended
6 Months Ended
Valuation And Qualifying Accounts Disclosure
Balance, beginning of period
$ 8
$ 12
$ 9
$ 13
Net (reductions) additions to the reserve
(1)
(1)
(2)
(2)
Balance, end of period
$ 7
$ 11
$ 7
$ 11
$ in Millions6 Months Ended
GSE
Loss Contingencies Dollars
Balance, beginning of period
$ 1
$ 2
New demands
11
8
Loan paydowns/payoffs
0
Resolved demands
(9)
(8)
Balance, end of period
$ 3
$ 2
Loss Contingencies Units
Balance, beginning of period
6
13
New demands
62
58
Loan paydowns/payoffs
(1)
Resolved demands
(54)
(54)
Balance, end of period
14
16
Private Label
Loss Contingencies Dollars
Balance, beginning of period
$ 0
$ 0
New demands
0
0
Loan paydowns/payoffs
0
Resolved demands
0
0
Balance, end of period
$ 0
$ 0
Loss Contingencies Units
Balance, beginning of period
1
0
New demands
0
0
Loan paydowns/payoffs
0
Resolved demands
0
0
Balance, end of period
1
0
$ in Millions1 Months Ended
3 Months Ended
Visa Funding
Loss Contingencies
Escrow Deposit
$ 450
$ 150
$ 1,565
$ 400
$ 800
$ 500
$ 600
$ 3,000
Bancorp Cash Payment
Loss Contingencies
Reduction of liability in cash to the swap counterparty
$ 26
$ 18
$ 6
$ 75
$ 19
$ 35
$ 20
$ in Millions1 Months Ended
3 Months Ended
Bancorp Cash Payment
Loss Contingencies [Line Items]
Reduction of liability in cash to the swap counterparty
$ 26
$ 18
$ 6
$ 75
$ 19
$ 35
$ 20
$ in Millions3 Months Ended
12 Months Ended
Loss Contingencies
Amount in excess of amounts reserved
$ 5
APR Percentage Allegedly Misleading
120.00%
Number Of Putative Class Actions Filed
4
Damages Claimed By Plaintiff
$ 800
$ 40
Federal Lawsuits
Loss Contingencies
Number of merchants requesting exclusion
500
Class Action Settlement
Loss Contingencies
Number of merchants requesting exclusion
8,000
Percentage of escrow funds returned to defendants
25.00%
Escrow Deposit
$ 46
$ / shares in Units, $ in Millions3 Months Ended
6 Months Ended
Related Party Transactions
Gain on sale of Worldpay, Inc. shares
$ (205.0)
$ 0.0
Vantiv Holding, LLC
Related Party Transactions
Class B common shares held in Worldpay, Inc,
$ 10.3
$ 10.3
Equity Method Investment, Ownership Percentage
3.30%
3.30%
4.90%
8.60%
Gain in noninterest income as a result of Worldpay Transaction
$ 414.0
Equity method investments, carrying value
$ 426.0
426.0
Gain on sale of Worldpay, Inc. shares
$ (205.0)
Class A common shares sold
5,000,000
GS Holdings
Related Party Transactions
Gain in noninterest income subsequemt to GreenSky, Inc IPO
$ 16.0
Investment in Equity Securities
$ 53.0
$ 53.0
Class A common stock shares issued at IPO
38,000,000
38,000,000
Class A common stock valuation
$ 23
$ 23
Economic interest percentage
1.40%
1.40%
Membership units that were converted to GS Holdings units
252,550
252,550
Class B common shares held in GreenSky, Inc.
2,525,498
2,525,498
$ in Millions3 Months Ended
6 Months Ended
Income Taxes
Applicable income tax expense
$ 107
$ 127
$ 239
$ 218
Effective tax rate
15.50%
25.90%
15.70%
24.50%
$ in Millions3 Months Ended
6 Months Ended
Net activity for accumulated net unrealized gain (loss) on available-for-sale securities
Unrealized holding gains (losses) on available-for-sale securities arising during period
$ (167)
$ 93
$ (627)
$ 108
Reclassification adjustment for net (gains) losses included in net income
0
0
7
1
Net activity for net unrealized gain (loss) on cash flow hedge derivatives
Unrealized holding gains (losses) on cash flow hedge derivatives arising during period
3
5
(4)
2
Reclassification adjustment for net gains on cash flow hedge derivatives included in net income
0
(4)
(1)
(9)
Net activity for defined benefit plans, net
Reclassification of amounts to net periodic benefit costs
(1)
(1)
(2)
(2)
Total Other Comprehensive Activity
Pre-tax activity total
(212)
152
(806)
164
Total, Tax
49
(57)
183
(60)
Other comprehensive income (loss)
(163)
95
$ (623)
(623)
104
Total Accumulated Other Comprehensive Income
Total Accumulated Other Comprehensive Income - Beginning Balance
(389)
68
73
59
Other comprehensive income (loss), Net of Tax
(163)
95
(623)
(623)
104
Total Accumulated Other Comprehensive Income - Ending Balance
(552)
163
(552)
(552)
163
Accumulated Net Unrealized Investment Gain (Loss)
Pre-tax activity for accumulated net unrealized gain (loss) on available-for-sale securities
Unrealized holding gains (losses) on available-for-sale securities arising during period
(217)
148
(811)
170
Reclassification adjustment for net losses (gains) included in net income
0
0
9
2
Net unrealized gains on available-for-sale securities
(217)
148
(802)
172
Tax effect for accumulated net unrealized gain (loss) on available-for-sale securities
Unrealized holding gains (losses) on available-for-sale securities arising during period
50
(55)
184
(62)
Reclassification adjustment for net losses (gains) included in net income
0
0
(2)
(1)
Net unrealized gains on available-for-sale securities
50
(55)
182
(63)
Net activity for accumulated net unrealized gain (loss) on available-for-sale securities
Unrealized holding gains (losses) on available-for-sale securities arising during period
(167)
93
(627)
108
Reclassification adjustment for net (gains) losses included in net income
0
0
7
1
Net unrealized gains on available-for-sale securities
(167)
93
(620)
109
Total Other Comprehensive Activity
Other comprehensive income (loss)
(167)
93
(620)
109
Total Accumulated Other Comprehensive Income
Total Accumulated Other Comprehensive Income - Beginning Balance
(318)
117
135
101
Other comprehensive income (loss), Net of Tax
(167)
93
(620)
109
Total Accumulated Other Comprehensive Income - Ending Balance
(485)
210
(485)
(485)
210
Accumulated Net Gain (Loss) from Designated or Qualifying Cash Flow Hedges
Pre-tax activity for net unrealized gain (loss) on cash flow hedge derivatives
Unrealized holding gains (losses) on cash flow hedge derivatives arising during period
4
8
(5)
3
Reclassification adjustment for net gains on cash flow hedge derivatives included in net income
0
(6)
(1)
(14)
Net unrealized gains on cash flow hedge derivatives
4
2
(6)
(11)
Tax effect for net unrealized gain (loss) on cash flow hedge derivatives
Unrealized holding gains (losses) on cash flow hedge derivatives arising during period
(1)
(3)
1
(1)
Reclassification adjustment for net gains on cash flow hedge derivatives included in net income
0
2
0
5
Net unrealized gains on cash flow hedge derivatives
(1)
(1)
1
4
Net activity for net unrealized gain (loss) on cash flow hedge derivatives
Unrealized holding gains (losses) on cash flow hedge derivatives arising during period
3
5
(4)
2
Reclassification adjustment for net gains on cash flow hedge derivatives included in net income
0
(4)
(1)
(9)
Net unrealized gains on cash flow hedge derivatives
3
1
(5)
(7)
Total Other Comprehensive Activity
Other comprehensive income (loss)
3
1
(5)
(7)
Total Accumulated Other Comprehensive Income
Total Accumulated Other Comprehensive Income - Beginning Balance
(19)
2
(11)
10
Other comprehensive income (loss), Net of Tax
3
1
(5)
(7)
Total Accumulated Other Comprehensive Income - Ending Balance
(16)
3
(16)
(16)
3
Accumulated Defined Benefit Plans Adjustment
Pre-tax activity for defined benefit plans, net
Reclassification of amounts to net periodic benefit costs
1
2
2
3
Defined benefit plans, net
1
2
2
3
Tax effect for defined benefit plans, net
Reclassification of amounts to net periodic benefit costs
0
(1)
0
(1)
Defined benefit plans, net
0
(1)
0
(1)
Net activity for defined benefit plans, net
Reclassification of amounts to net periodic benefit costs
1
1
2
2
Defined benefit plans, net
1
1
2
2
Total Other Comprehensive Activity
Other comprehensive income (loss)
(1)
(1)
(2)
(2)
Total Accumulated Other Comprehensive Income
Total Accumulated Other Comprehensive Income - Beginning Balance
(52)
(51)
(53)
(52)
Other comprehensive income (loss), Net of Tax
(1)
(1)
(2)
(2)
Total Accumulated Other Comprehensive Income - Ending Balance
$ (51)
$ (50)
$ (51)
$ (51)
$ (50)
$ in Millions3 Months Ended
6 Months Ended
Reclassifications Out Of Accumulated Other Comprehensive Income
Income Before Income Taxes
$ 693
$ 494
$ 1,529
$ 890
Applicable income tax expense
107
127
239
218
Net income
586
367
1,290
672
Total Reclassifications For The Period
Reclassifications Out Of Accumulated Other Comprehensive Income
Net income
(1)
3
(8)
6
Net Unrealized Gains On Available For Sale Securities
Reclassifications Out Of Accumulated Other Comprehensive Income
Reclassification adjustment for net losses (gains) included in net income
0
0
(9)
(2)
Income Before Income Taxes
[1]
0
0
(9)
(2)
Applicable income tax expense
[1]
0
0
2
1
Net income
[1]
0
0
(7)
(1)
Net Unrealized Gains On Available For Sale Securities | Net (Losses) Gains Included In Net Income
Reclassifications Out Of Accumulated Other Comprehensive Income
Reclassification adjustment for net losses (gains) included in net income
[1]
0
0
(9)
(2)
Net Unrealized Gains On Cash Flow Hedge Activities
Reclassifications Out Of Accumulated Other Comprehensive Income
Reclassification adjustment for net gains on cash flow hedge derivatives included in net income
0
6
1
14
Income Before Income Taxes
[1]
0
6
1
14
Applicable income tax expense
[1]
0
(2)
0
(5)
Net income
[1]
0
4
1
9
Net Unrealized Gains On Cash Flow Hedge Activities | Interest Rate Contracts Related To C&I Loans
Reclassifications Out Of Accumulated Other Comprehensive Income
Reclassification adjustment for net gains on cash flow hedge derivatives included in net income
[1]
0
6
1
14
Amortization Of Defined Benefit Pension Items
Reclassifications Out Of Accumulated Other Comprehensive Income
Income Before Income Taxes
[1]
(1)
(2)
(2)
(3)
Applicable income tax expense
[1]
0
1
0
1
Net income
[1]
(1)
(1)
(2)
(2)
Amortization Of Defined Benefit Pension Items | Net Actuarial Loss
Reclassifications Out Of Accumulated Other Comprehensive Income
Net periodic pension cost
[1],[2]
$ (1)
$ (2)
$ (2)
$ (3)
[1]
[2]
$ / shares in Units, $ in Millions3 Months Ended
6 Months Ended
Earnings per share:
Net income (loss) available to common shareholders
$ 563
$ 344
$ 1,252
$ 634
Less: Income allocated to participating securities
6
4
15
7
Earnings per share - basic
557
340
1,237
627
Earnings per diluted share:
Net income available to common shareholders
563
344
1,252
634
Stock-based awards
0
0
Net income available to common shareholders plus assumed conversions
563
344
1,252
634
Less: Income allocated to participating securities
6
4
14
7
Net income allocated to common shareholders
$ 557
$ 340
$ 1,238
$ 627
Earnings per share:
Net income allocated to common shareholders
683,344,844
741,400,700
686,564,682
744,516,799
Effect of dilutive securities:
Stock-based awards
13,000,000
11,000,000
13,000,000
12,000,000
Net income allocated to common shareholders
696,209,943
752,328,298
700,133,642
756,545,341
Earnings per share:
Earnings per share - basic
$ 0.81
$ 0.46
$ 1.8
$ 0.84
Earnings per diluted share:
Earnings per share - diluted
$ 0.8
$ 0.45
$ 1.77
$ 0.83
shares in Millions3 Months Ended
6 Months Ended
Stock Appreciation Rights
Earnings Per Share Disclosure
Anti-dilutive securities
2
4
2
5
$ in Millions
Assets:
Available-for-sale debt securities, fair value
[1]
$ 31,961
$ 31,751
Trading debt securities
280
492
Equity securities
475
439
Commercial
Assets:
Loans held for sale measured at FV
8
0
Residential mortgage loans
Assets:
Loans measured at FV
162
137
Fair value, recurring
Assets:
Available-for-sale debt securities, fair value
31,347
[2]
31,139
[3]
Trading debt securities
280
492
Equity securities
475
439
Residential mortgage loans held for sale
658
399
Loans measured at FV
[4]
162
137
Loans held for sale measured at FV
8
Mortgage servicing rights
959
[2],[5]
858
Derivative assets
[6]
945
823
Total assets
34,834
34,287
Liabilities:
Derivative liabilities
[7]
859
602
Short positions
[7]
139
31
Total liabilities
998
633
Interest Rate Contract | Fair value, recurring
Assets:
Derivative assets
540
514
Liabilities:
Derivative liabilities
316
178
Foreign Exchange Contract | Fair value, recurring
Assets:
Derivative assets
121
124
Liabilities:
Derivative liabilities
109
120
Equity Contract | Fair value, recurring
Assets:
Equity securities
20
Liabilities:
Derivative liabilities
164
137
Commodity Contract | Fair value, recurring
Assets:
Derivative assets
284
165
Liabilities:
Derivative liabilities
270
167
U.S. Treasury and federal agencies
Assets:
Available-for-sale debt securities, fair value
96
98
U.S. Treasury and federal agencies | Fair value, recurring
Assets:
Available-for-sale debt securities, fair value
96
98
Trading debt securities
19
12
Obligations of states and political subdivisions
Assets:
Available-for-sale debt securities, fair value
35
44
Obligations of states and political subdivisions | Fair value, recurring
Assets:
Available-for-sale debt securities, fair value
35
44
Trading debt securities
58
22
Agency mortgage-backed securities | Residential mortgage backed securities
Assets:
Available-for-sale debt securities, fair value
16,094
15,319
[8]
Agency mortgage-backed securities | Residential mortgage backed securities | Fair value, recurring
Assets:
Available-for-sale debt securities, fair value
16,094
15,319
Trading debt securities
75
395
Agency mortgage-backed securities | Commercial mortgage backed securities
Assets:
Available-for-sale debt securities, fair value
10,038
10,167
Agency mortgage-backed securities | Commercial mortgage backed securities | Fair value, recurring
Assets:
Available-for-sale debt securities, fair value
10,038
10,167
Non-agency mortgage-backed securities | Commercial mortgage backed securities
Assets:
Available-for-sale debt securities, fair value
3,086
3,293
Non-agency mortgage-backed securities | Commercial mortgage backed securities | Fair value, recurring
Assets:
Available-for-sale debt securities, fair value
3,086
3,293
Asset-backed securities and other debt securities
Assets:
Available-for-sale debt securities, fair value
1,998
2,218
Asset-backed securities and other debt securities | Fair value, recurring
Assets:
Available-for-sale debt securities, fair value
1,998
2,218
Trading debt securities
128
63
Fair Value, Inputs, Level 1 | Fair value, recurring
Assets:
Available-for-sale debt securities, fair value
96
[2],[9]
98
[3],[10]
Trading debt securities
10
[9]
1
[10]
Equity securities
474
438
Derivative assets
[6]
34
[9]
40
[10]
Total assets
614
[9]
577
[10]
Liabilities:
Derivative liabilities
[7]
99
[9]
39
[10]
Short positions
[7]
88
[9]
25
[10]
Total liabilities
187
[9]
64
[10]
Fair Value, Inputs, Level 1 | Interest Rate Contract | Fair value, recurring
Assets:
Derivative assets
0
[9]
1
[10]
Liabilities:
Derivative liabilities
4
[9]
1
[10]
Fair Value, Inputs, Level 1 | Commodity Contract | Fair value, recurring
Assets:
Derivative assets
34
[9]
39
[10]
Liabilities:
Derivative liabilities
95
[9]
38
[10]
Fair Value, Inputs, Level 1 | U.S. Treasury and federal agencies | Fair value, recurring
Assets:
Available-for-sale debt securities, fair value
96
[9]
98
[10]
Trading debt securities
10
[9]
1
Fair Value, Inputs, Level 2 | Fair value, recurring
Assets:
Available-for-sale debt securities, fair value
31,251
[2],[9]
31,041
[3],[10]
Trading debt securities
270
[9]
491
[10]
Equity securities
1
1
Residential mortgage loans held for sale
658
[9]
399
[10]
Loans held for sale measured at FV
[9]
8
Derivative assets
[6]
900
[9]
775
[10]
Total assets
33,088
[9]
32,707
[10]
Liabilities:
Derivative liabilities
[7]
589
[9]
421
[10]
Short positions
[7]
51
[9]
6
[10]
Total liabilities
640
[9]
427
[10]
Fair Value, Inputs, Level 2 | Interest Rate Contract | Fair value, recurring
Assets:
Derivative assets
529
[9]
505
[10]
Liabilities:
Derivative liabilities
305
[9]
172
[10]
Fair Value, Inputs, Level 2 | Foreign Exchange Contract | Fair value, recurring
Assets:
Derivative assets
121
[9]
124
[10]
Liabilities:
Derivative liabilities
109
[9]
120
[10]
Fair Value, Inputs, Level 2 | Equity Contract | Fair value, recurring
Assets:
Equity securities
20
Fair Value, Inputs, Level 2 | Commodity Contract | Fair value, recurring
Assets:
Derivative assets
250
[9]
126
[10]
Liabilities:
Derivative liabilities
175
[9]
129
[10]
Fair Value, Inputs, Level 2 | U.S. Treasury and federal agencies | Fair value, recurring
Assets:
Available-for-sale debt securities, fair value
0
[9]
0
[10]
Trading debt securities
9
[9]
11
[10]
Fair Value, Inputs, Level 2 | Obligations of states and political subdivisions | Fair value, recurring
Assets:
Available-for-sale debt securities, fair value
35
[9]
44
[10]
Trading debt securities
58
[9]
22
[10]
Fair Value, Inputs, Level 2 | Agency mortgage-backed securities | Residential mortgage backed securities | Fair value, recurring
Assets:
Available-for-sale debt securities, fair value
16,094
[9]
15,319
[10]
Trading debt securities
75
[9]
395
[10]
Fair Value, Inputs, Level 2 | Agency mortgage-backed securities | Commercial mortgage backed securities | Fair value, recurring
Assets:
Available-for-sale debt securities, fair value
10,038
[9]
10,167
[10]
Fair Value, Inputs, Level 2 | Non-agency mortgage-backed securities | Commercial mortgage backed securities | Fair value, recurring
Assets:
Available-for-sale debt securities, fair value
3,086
[9]
3,293
[10]
Fair Value, Inputs, Level 2 | Asset-backed securities and other debt securities | Fair value, recurring
Assets:
Available-for-sale debt securities, fair value
1,998
[9]
2,218
[10]
Trading debt securities
128
[9]
63
[10]
Fair Value, Inputs, Level 3 | Fair value, recurring
Assets:
Loans measured at FV
[4]
162
137
Mortgage servicing rights
959
858
Derivative assets
[6]
11
8
Total assets
1,132
1,003
Liabilities:
Derivative liabilities
[7]
171
142
Total liabilities
171
142
Fair Value, Inputs, Level 3 | Interest Rate Contract | Fair value, recurring
Assets:
Derivative assets
11
8
Liabilities:
Derivative liabilities
7
5
Fair Value, Inputs, Level 3 | Equity Contract | Fair value, recurring
Liabilities:
Derivative liabilities
$ 164
$ 137
[1]
[2]
[3]
[4]
[5]
[6]
[7]
[8]
[9]
[10]
$ in Millions
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Federal Home Loan Bank Stock
$ 248
$ 248
Federal Reserve Bank Stock
364
362
DTCC Stock
$ 2
$ 2
$ in Millions3 Months Ended
6 Months Ended
12 Months Ended
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Net fair value of the interest rate lock commitments
$ 11
$ 11
Change in the fair value of the interest rate lock commitments, due to decrease in current interest rates of 25 bp
6
6
Change in the fair value of the interest rate lock commitments, due to decrease in current interest rates of 50 bp
11
11
Change in the fair value of the interest rate lock commitments, due to increase in current interest rates of 25 bp
6
6
Change in the fair value of the interest rate lock commitments, due to increase in current interest rates of 50 bp
12
12
Change in fair value of interest rate lock commitments, due to 10% adverse changes in the assumed loan closing rates
1
1
Change in fair value of interest rate lock commitments, due to 20% adverse changes in the assumed loan closing rates
2
2
Change in fair value of interest rate lock commitments, due to 10% favorable changes in the assumed loan closing rates
1
1
Change in fair value of interest rate lock commitments, due to 20% favorable changes in the assumed loan closing rates
2
2
Portfolio loans to loans held for sale
171
$ 140
Fair value changes included in earnings for instruments for which the fair value option was elected
18
26
Net Losses On Operating Lease Equipment
1
3
20
Larger commercial loans, subject to impairment review
1
1
OTTI
[1]
0
$ (14)
0
(24)
Commercial Loans Held For Sale
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Portfolio loans to loans held for sale
57
1
75
Net impact related to fair value adjustments
(13)
(30)
Gain Loss On Sales Of Loans Net
(2)
Fair value adjustment on existing loans
1
Other Real Estate Owned
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Net impact related to fair value adjustments
2
2
Nonrecurring Losses Included As Charge-Offs
1
$ 1
2
$ 3
Residential Mortgage Loans
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair value of loans
1
$ 2
Fair value measurements nonrecurring | Private Equity Investments
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
OTTI
4
10
Positive fair value adjustment, observable price changes | Private Equity Investments
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair value adjustment
16
51
Cumulative Fair Value Adjustment Related to Assets Held at End of Period
35
Fair value adjustment, impairment | Private Equity Investments
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair value adjustment
$ 1
11
Cumulative Fair Value Adjustment Related to Assets Held at End of Period
$ 11
[1]
$ in Millions3 Months Ended
6 Months Ended
Fair Value, Assets and Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation
Beginning Balance
$ 901
$ 831
$ 861
$ 804
Included in earnings
(2)
(29)
(1)
(42)
Purchases/originations
45
120
81
174
Settlements
(15)
(24)
(17)
(41)
Transfers Into Level 3
[1]
32
4
37
7
Ending Balance
961
902
961
902
The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held
[2]
(12)
(41)
(25)
(76)
Residential Mortgage
Fair Value, Assets and Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation
Beginning Balance
136
141
137
143
Included in earnings
(1)
1
(4)
1
Purchases/originations
0
0
0
0
Settlements
(5)
(4)
(8)
(9)
Transfers Into Level 3
[1]
32
4
37
7
Ending Balance
162
142
162
142
The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held
[2]
(1)
1
(4)
1
Mortgage servicing rights
Fair Value, Assets and Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation
Beginning Balance
926
776
858
744
Included in earnings
(13)
(47)
16
(70)
Purchases/originations
46
120
(85)
175
Settlements
0
0
0
0
Transfers Into Level 3
0
[1]
0
0
[1]
0
Ending Balance
959
849
959
849
The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held
(13)
[2]
(47)
(16)
[2]
(70)
Interest Rate Contract
Fair Value, Assets and Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation
Beginning Balance
[3],[4],[5]
4
11
3
8
Included in earnings
22
[5]
26
[3],[4]
36
[5]
49
[3],[4]
Purchases/originations
(1)
[5]
0
[3],[4]
(4)
[5]
(1)
[3],[4]
Settlements
(21)
[5]
(28)
[3],[4]
(31)
[5]
(47)
[3],[4]
Transfers Into Level 3
[1]
0
[5]
0
[3],[4]
0
[5]
0
[3],[4]
Ending Balance
4
[5]
9
[3],[4]
4
[5]
9
[3],[4]
The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held
[2]
12
[5]
14
[3],[4]
12
[5]
15
[3],[4]
Equity Contract
Fair Value, Assets and Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation
Beginning Balance
[3],[4]
(165)
(97)
(137)
(91)
Included in earnings
(10)
(9)
[3],[4]
(49)
(22)
[3],[4]
Purchases/originations
0
0
[3],[4]
0
0
[3],[4]
Settlements
11
8
[3],[4]
22
15
[3],[4]
Transfers Into Level 3
[1]
0
0
[3],[4]
0
0
[3],[4]
Ending Balance
(164)
(98)
[3],[4]
(164)
(98)
[3],[4]
The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held
[2]
$ (10)
$ (9)
[3],[4]
$ (49)
$ (22)
[3],[4]
[1]
[2]
[3]
[4]
[5]
$ in Millions
Fair Value, Assets and Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation
Derivative assets
$ 961
$ 901
$ 861
$ 902
$ 831
$ 804
Interest Rates
Fair Value, Assets and Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation
Derivative assets
11
14
Derivative liabilities
$ 7
$ 5
$ in Millions3 Months Ended
6 Months Ended
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Gains and losses included in earnings
$ (2)
$ (29)
$ (1)
$ (42)
Mortgage Banking Revenue
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Gains and losses included in earnings
8
(21)
47
(21)
Corporate Banking Revenue
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Gains and losses included in earnings
0
1
1
1
Other Noninterest Income
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Gains and losses included in earnings
$ (10)
$ (9)
$ (49)
$ (22)
$ in Millions3 Months Ended
6 Months Ended
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Gain and losses included in earnings
$ (12)
$ (41)
$ (25)
$ (76)
Mortgage Banking Revenue
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Gain and losses included in earnings
(2)
(33)
23
(55)
Corporate Banking Revenue
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Gain and losses included in earnings
0
1
1
1
Other Noninterest Income
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Gain and losses included in earnings
$ (10)
$ (9)
$ (49)
$ (22)
$ in Millions3 Months Ended
Quantitative Information About Level 3 Fair Value Measurements
Derivative instruments
$ 945
$ 823
Residential mortgage loans
Quantitative Information About Level 3 Fair Value Measurements
Loans measured at FV
162
$ 142
Mortgage servicing rights
Quantitative Information About Level 3 Fair Value Measurements
Mortgage servicing rights
959
849
IRLCs, net
Quantitative Information About Level 3 Fair Value Measurements
Derivative instruments
11
14
Swap associated with the sale of Visa, Inc. Class B shares
Quantitative Information About Level 3 Fair Value Measurements
Derivative instruments
$ (164)
$ (98)
Minimum | Residential mortgage loans
Quantitative Information About Level 3 Fair Value Measurements
Interest rate risk factor
(13.30%)
(9.60%)
Credit risk factor
0.00%
0.00%
Minimum | Mortgage servicing rights
Quantitative Information About Level 3 Fair Value Measurements
Prepayment speed
0.50%
1.20%
OAS spread (bps)
4.61%
4.30%
Minimum | IRLCs, net
Quantitative Information About Level 3 Fair Value Measurements
Loan closing rates
12.20%
9.60%
Minimum | Swap associated with the sale of Visa, Inc. Class B shares
Quantitative Information About Level 3 Fair Value Measurements
Timing of the resolution of the covered litigation
Jan. 31, 2021
Jun. 30, 2019
Maximum | Residential mortgage loans
Quantitative Information About Level 3 Fair Value Measurements
Interest rate risk factor
11.90%
15.00%
Credit risk factor
40.30%
46.20%
Maximum | Mortgage servicing rights
Quantitative Information About Level 3 Fair Value Measurements
Prepayment speed
97.00%
100.00%
OAS spread (bps)
15.13%
15.15%
Maximum | IRLCs, net
Quantitative Information About Level 3 Fair Value Measurements
Loan closing rates
96.60%
96.80%
Maximum | Swap associated with the sale of Visa, Inc. Class B shares
Quantitative Information About Level 3 Fair Value Measurements
Timing of the resolution of the covered litigation
Nov. 30, 2023
Dec. 31, 2022
Weighted average | Residential mortgage loans
Quantitative Information About Level 3 Fair Value Measurements
Interest rate risk factor
(0.10%)
2.90%
Credit risk factor
0.70%
1.00%
Weighted average | Mortgage servicing rights | Fixed
Quantitative Information About Level 3 Fair Value Measurements
Prepayment speed
9.50%
11.50%
OAS spread (bps)
5.43%
5.30%
Weighted average | Mortgage servicing rights | Adjustable
Quantitative Information About Level 3 Fair Value Measurements
Prepayment speed
23.60%
24.80%
OAS spread (bps)
8.17%
7.73%
Weighted average | IRLCs, net
Quantitative Information About Level 3 Fair Value Measurements
Loan closing rates
80.90%
73.00%
Weighted average | Swap associated with the sale of Visa, Inc. Class B shares
Quantitative Information About Level 3 Fair Value Measurements
Timing of the resolution of the covered litigation
Sep. 06, 2021
Sep. 30, 2020
$ in Millions3 Months Ended
6 Months Ended
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair Value Measurements
$ 327
$ 562
$ 327
$ 562
Fair Value Measured On Nonrecurring Basis Gains Losses
(18)
(58)
(53)
(133)
Commercial Loans Held-for-Sale | Commercial
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair Value Measurements
4
45
4
45
Fair Value Measured On Nonrecurring Basis Gains Losses
0
(13)
(1)
(32)
Commercial and Industrial Loans | Commercial
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair Value Measurements
161
405
161
405
Fair Value Measured On Nonrecurring Basis Gains Losses
14
(32)
(30)
(58)
Commercial Mortgage Loans | Commercial
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair Value Measurements
3
26
3
26
Fair Value Measured On Nonrecurring Basis Gains Losses
1
(9)
6
(11)
Commercial Leases | Commercial
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair Value Measurements
14
3
14
3
Fair Value Measured On Nonrecurring Basis Gains Losses
(9)
(1)
(10)
(2)
Other Real Estate Owned
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair Value Measurements
17
11
17
11
Fair Value Measured On Nonrecurring Basis Gains Losses
(1)
(1)
(4)
(5)
Bank premises and equipment
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair Value Measurements
37
16
37
16
Fair Value Measured On Nonrecurring Basis Gains Losses
(33)
(2)
(41)
(5)
Operating lease equipment
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair Value Measurements
10
56
10
56
Fair Value Measured On Nonrecurring Basis Gains Losses
(1)
0
(3)
(20)
Private Equity Investments
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair Value Measurements
81
81
Fair Value Measured On Nonrecurring Basis Gains Losses
11
30
Fair Value, Inputs, Level 3
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair Value Measurements
277
562
277
562
Fair Value, Inputs, Level 3 | Commercial Loans Held-for-Sale | Commercial
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair Value Measurements
4
45
4
45
Fair Value, Inputs, Level 3 | Commercial and Industrial Loans | Commercial
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair Value Measurements
161
405
161
405
Fair Value, Inputs, Level 3 | Commercial Mortgage Loans | Commercial
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair Value Measurements
3
26
3
26
Fair Value, Inputs, Level 3 | Commercial Leases | Commercial
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair Value Measurements
14
3
14
3
Fair Value, Inputs, Level 3 | Other Real Estate Owned
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair Value Measurements
17
11
17
11
Fair Value, Inputs, Level 3 | Bank premises and equipment
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair Value Measurements
37
16
37
16
Fair Value, Inputs, Level 3 | Operating lease equipment
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair Value Measurements
10
$ 56
10
$ 56
Fair Value, Inputs, Level 3 | Private Equity Investments
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair Value Measurements
31
31
Fair Value, Inputs, Level 2
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair Value Measurements
50
50
Fair Value, Inputs, Level 2 | Private Equity Investments
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair Value Measurements
$ 50
$ 50
$ in Millions3 Months Ended
Commercial Loans Held For Sale | Commercial
Quantitative Information About Level 3 Fair Value Measurements
Fair value measurements nonrecurring assets
$ 4
$ 45
Commercial and Industrial Loans | Commercial
Quantitative Information About Level 3 Fair Value Measurements
Fair value measurements nonrecurring assets
161
405
Commercial Mortgage Loans | Commercial
Quantitative Information About Level 3 Fair Value Measurements
Fair value measurements nonrecurring assets
3
26
Commercial Leases | Commercial
Quantitative Information About Level 3 Fair Value Measurements
Fair value measurements nonrecurring assets
14
3
OREO Property
Quantitative Information About Level 3 Fair Value Measurements
Fair value measurements nonrecurring assets
17
11
Bank premises and equipment
Quantitative Information About Level 3 Fair Value Measurements
Fair value measurements nonrecurring assets
37
16
Operating lease equipment
Quantitative Information About Level 3 Fair Value Measurements
Fair value measurements nonrecurring assets
10
$ 56
Private Equity Investments
Quantitative Information About Level 3 Fair Value Measurements
Comparable company analysis, fair value
3
Liquidity discount, fair value
$ 28
Minimum | Private Equity Investments
Quantitative Information About Level 3 Fair Value Measurements
Liquidity discount
0.00%
Maximum | Private Equity Investments
Quantitative Information About Level 3 Fair Value Measurements
Liquidity discount
43.00%
Weighted average | Commercial Loans Held For Sale
Quantitative Information About Level 3 Fair Value Measurements
Cost to sell
10.00%
10.00%
Weighted average | Private Equity Investments
Quantitative Information About Level 3 Fair Value Measurements
Liquidity discount
13.70%
$ in Millions
Residential mortgage loans
Aggregate fair value
Loans measured at fair value
$ 820
$ 536
Past due loans of 90 days or more
2
5
Nonaccrual loans
1
1
Aggregate unpaid principal balance
Loans measured at fair value
802
522
Past due loans of 90 days or more
2
5
Nonaccrual loans
1
1
Difference
Loans measured at fair value
18
14
Past due loans of 90 days or more
0
0
Nonaccrual loans
0
$ 0
Commercial loans
Aggregate fair value
Loans measured at fair value
8
Aggregate unpaid principal balance
Loans measured at fair value
8
Difference
Loans measured at fair value
$ 0
$ in Millions[1]
Financial assets:
Cash and due from banks
$ 2,052
$ 2,514
$ 2,203
$ 2,392
Held-to-maturity securities, amortized cost
[2]
19
24
Other short-term investments
[1]
1,636
2,753
Loans and leases held for sale
[3]
783
492
Portfolio loans and leases, net
90,855
90,774
Other securities, fair value
[4]
31,961
31,751
Held-to-maturity securities, fair value
19
24
Financial liabilities:
Deposits
104,131
103,162
Federal funds purchased
597
174
Other short-term borrowings
1,763
4,012
Long-term debt
[1]
14,321
14,904
Commercial
Financial assets:
Loans held for sale
8
0
Residential Mortgage
Financial assets:
Portfolio loans and leases at fair value
162
$ 142
Carrying (Reported) Amount, Fair Value Disclosure
Financial assets:
Cash and due from banks
2,052
2,514
Held-to-maturity securities, amortized cost
19
24
Other short-term investments
1,636
2,753
Loans and leases held for sale
117
93
Portfolio loans and leases, net
90,693
90,637
Unallocated Allowance For Loan And Lease Losses
(108)
(120)
Financial liabilities:
Deposits
104,131
103,162
Federal funds purchased
597
174
Other short-term borrowings
1,763
4,012
Long-term debt
14,321
14,904
Carrying (Reported) Amount, Fair Value Disclosure | FHLB, FRB and DTCC restricted stock holdings
Financial assets:
Other securities
614
612
Carrying (Reported) Amount, Fair Value Disclosure | Commercial and Industrial Loans | Commercial
Financial assets:
Portfolio loans and leases, net
40,858
40,519
Carrying (Reported) Amount, Fair Value Disclosure | Commercial Mortgage Loans | Commercial
Financial assets:
Portfolio loans and leases, net
6,560
6,539
Carrying (Reported) Amount, Fair Value Disclosure | Commercial Construction Loans | Commercial
Financial assets:
Portfolio loans and leases, net
4,666
4,530
Carrying (Reported) Amount, Fair Value Disclosure | Commercial Leases | Commercial
Financial assets:
Portfolio loans and leases, net
3,765
4,054
Carrying (Reported) Amount, Fair Value Disclosure | Residential Mortgage
Financial assets:
Portfolio loans and leases, net
15,392
15,365
Carrying (Reported) Amount, Fair Value Disclosure | Home Equity
Financial assets:
Portfolio loans and leases, net
6,560
6,968
Carrying (Reported) Amount, Fair Value Disclosure | Automobile Loans
Financial assets:
Portfolio loans and leases, net
8,899
9,074
Carrying (Reported) Amount, Fair Value Disclosure | Credit Card
Financial assets:
Portfolio loans and leases, net
2,146
2,182
Carrying (Reported) Amount, Fair Value Disclosure | Other Consumer Loans
Financial assets:
Portfolio loans and leases, net
1,955
1,526
Total Fair Value
Financial assets:
Cash and due from banks, fair value
2,052
2,514
Held-to-maturity securities, fair value
19
24
Other short term investments, fair value
1,636
2,753
Portfolio loans and leases at fair value
92,213
92,948
Financial liabilities:
Deposits, fair value
104,064
103,123
Federal funds purchased, fair value
597
174
Other short-term borrowings, fair value
1,763
4,012
Long term debt, fair value
14,652
15,574
Total Fair Value | Non Fair Value Option HFS Loans
Financial assets:
Loans held for sale
117
93
Total Fair Value | FHLB, FRB and DTCC restricted stock holdings
Financial assets:
Other securities, fair value
614
612
Total Fair Value | Commercial and Industrial Loans | Commercial
Financial assets:
Portfolio loans and leases at fair value
41,825
41,718
Total Fair Value | Commercial Mortgage Loans | Commercial
Financial assets:
Portfolio loans and leases at fair value
6,493
6,490
Total Fair Value | Commercial Construction Loans | Commercial
Financial assets:
Portfolio loans and leases at fair value
4,710
4,560
Total Fair Value | Commercial Leases | Commercial
Financial assets:
Portfolio loans and leases at fair value
3,355
3,705
Total Fair Value | Residential Mortgage
Financial assets:
Portfolio loans and leases at fair value
15,697
15,996
Total Fair Value | Home Equity
Financial assets:
Portfolio loans and leases at fair value
6,936
7,410
Total Fair Value | Automobile Loans
Financial assets:
Portfolio loans and leases at fair value
8,632
8,832
Total Fair Value | Credit Card
Financial assets:
Portfolio loans and leases at fair value
2,518
2,616
Total Fair Value | Other Consumer Loans
Financial assets:
Portfolio loans and leases at fair value
2,047
1,621
Total Fair Value | Fair Value, Inputs, Level 1
Financial assets:
Cash and due from banks, fair value
2,052
2,514
Other short term investments, fair value
1,636
2,753
Financial liabilities:
Federal funds purchased, fair value
597
174
Long term debt, fair value
14,223
15,045
Total Fair Value | Fair Value, Inputs, Level 2
Financial liabilities:
Deposits, fair value
104,064
103,123
Other short-term borrowings, fair value
1,763
4,012
Long term debt, fair value
429
529
Total Fair Value | Fair Value, Inputs, Level 2 | FHLB, FRB and DTCC restricted stock holdings
Financial assets:
Other securities, fair value
614
612
Total Fair Value | Fair Value, Inputs, Level 3
Financial assets:
Held-to-maturity securities, fair value
19
24
Portfolio loans and leases at fair value
92,213
92,948
Total Fair Value | Fair Value, Inputs, Level 3 | Non Fair Value Option HFS Loans
Financial assets:
Loans held for sale
117
93
Total Fair Value | Fair Value, Inputs, Level 3 | Commercial and Industrial Loans | Commercial
Financial assets:
Portfolio loans and leases at fair value
41,825
41,718
Total Fair Value | Fair Value, Inputs, Level 3 | Commercial Mortgage Loans | Commercial
Financial assets:
Portfolio loans and leases at fair value
6,493
6,490
Total Fair Value | Fair Value, Inputs, Level 3 | Commercial Construction Loans | Commercial
Financial assets:
Portfolio loans and leases at fair value
4,710
4,560
Total Fair Value | Fair Value, Inputs, Level 3 | Commercial Leases | Commercial
Financial assets:
Portfolio loans and leases at fair value
3,355
3,705
Total Fair Value | Fair Value, Inputs, Level 3 | Residential Mortgage
Financial assets:
Portfolio loans and leases at fair value
15,697
15,996
Total Fair Value | Fair Value, Inputs, Level 3 | Home Equity
Financial assets:
Portfolio loans and leases at fair value
6,936
7,410
Total Fair Value | Fair Value, Inputs, Level 3 | Automobile Loans
Financial assets:
Portfolio loans and leases at fair value
8,632
8,832
Total Fair Value | Fair Value, Inputs, Level 3 | Credit Card
Financial assets:
Portfolio loans and leases at fair value
2,518
2,616
Total Fair Value | Fair Value, Inputs, Level 3 | Other Consumer Loans
Financial assets:
Portfolio loans and leases at fair value
$ 2,047
$ 1,621
[1]
[2]
[3]
[4]
3 Months Ended
Organization, Consolidation and Presentation of Financial Statements
Full-service Banking Centers
1,158
Number of business segments
4
4
$ in Millions3 Months Ended
6 Months Ended
Segment Reporting Information
Total Assets
$ 140,695
$ 141,067
$ 140,695
$ 140,695
$ 141,067
$ 142,193
Net interest income
1,020
939
2,016
1,872
Provision for (benefit from) loan and lease losses
33
52
56
126
Net interest income after provision for loan and lease losses
987
887
1,960
1,746
Service charges on deposits
137
139
275
277
Wealth and asset management revenue
108
103
221
211
Corporate banking revenue
120
101
208
175
Card and processing revenue
84
79
163
153
Mortgage banking net revenue
53
55
109
108
Other noninterest income
250
85
708
160
Securities gains (losses), net
(5)
0
(15)
1
Securities gains (losses), net - non-qualifying hedges on mortgage servcing rights
(4)
2
(17)
2
Total noninterest income
743
564
1,652
1,087
Salaries, wages and incentives
471
397
918
808
Net occupancy expense
74
70
149
148
Card and processing expense
30
33
60
63
Other noninterest expense
287
285
572
555
Employee benefits
78
86
188
196
Equipment expense
30
29
61
57
Technology and communications
67
57
135
116
Total noninterest expense
1,037
957
2,083
1,943
Income (Loss) Before Income Taxes
693
494
1,529
890
Net income (loss)
586
367
1,290
1,290
672
Applicable income tax expense (benefit)
107
127
239
218
Total goodwill
2,462
2,423
2,462
2,462
2,423
$ 2,445
Intersegment Elimination
Segment Reporting Information
Wealth and asset management revenue
(34)
[1]
(33)
[1]
(69)
(67)
Total noninterest income
(34)
[1]
(33)
[1]
(69)
[1]
(67)
Other noninterest expense
(34)
(33)
[1]
(69)
(67)
Total noninterest expense
(34)
(33)
(69)
(67)
Commercial Banking
Segment Reporting Information
Total Assets
58,763
57,766
58,763
58,763
57,766
Net interest income
427
415
846
839
Provision for (benefit from) loan and lease losses
(10)
22
(29)
29
Net interest income after provision for loan and lease losses
437
393
875
810
Service charges on deposits
70
73
139
146
Wealth and asset management revenue
1
1
2
2
Corporate banking revenue
119
100
205
173
Card and processing revenue
14
14
28
28
Mortgage banking net revenue
0
0
0
0
Other noninterest income
25
40
73
80
Securities gains (losses), net
0
0
0
Securities gains (losses), net - non-qualifying hedges on mortgage servcing rights
0
0
0
0
Total noninterest income
229
[2]
228
[2]
447
[2]
429
Salaries, wages and incentives
71
60
141
127
Net occupancy expense
6
7
13
13
Card and processing expense
1
1
2
2
Other noninterest expense
263
247
545
507
Employee benefits
9
9
27
27
Equipment expense
6
4
11
8
Technology and communications
2
2
4
5
Total noninterest expense
358
330
743
689
Income (Loss) Before Income Taxes
308
291
579
550
Net income (loss)
289
237
547
453
Applicable income tax expense (benefit)
19
54
32
97
Total goodwill
630
613
630
630
613
Branch Banking
Segment Reporting Information
Total Assets
60,281
57,396
60,281
60,281
57,396
Net interest income
499
437
965
867
Provision for (benefit from) loan and lease losses
47
39
90
80
Net interest income after provision for loan and lease losses
452
398
875
787
Service charges on deposits
67
66
134
130
Wealth and asset management revenue
37
35
74
71
Corporate banking revenue
1
1
2
3
Card and processing revenue
69
64
133
122
Mortgage banking net revenue
1
1
3
3
Other noninterest income
(8)
22
7
45
Securities gains (losses), net
0
0
0
Securities gains (losses), net - non-qualifying hedges on mortgage servcing rights
0
0
0
0
Total noninterest income
167
[3],[4]
189
[5],[6]
353
[3],[4]
374
Salaries, wages and incentives
111
104
220
208
Net occupancy expense
44
43
88
90
Card and processing expense
30
33
59
62
Other noninterest expense
208
196
423
388
Employee benefits
26
26
53
53
Equipment expense
12
13
25
26
Technology and communications
1
1
3
2
Total noninterest expense
432
416
871
829
Income (Loss) Before Income Taxes
187
171
357
332
Net income (loss)
147
111
282
215
Applicable income tax expense (benefit)
40
60
75
117
Total goodwill
1,655
1,655
1,655
1,655
1,655
Consumer Lending
Segment Reporting Information
Total Assets
22,128
22,442
22,128
22,128
22,442
Net interest income
59
59
118
120
Provision for (benefit from) loan and lease losses
8
7
20
22
Net interest income after provision for loan and lease losses
51
52
98
98
Service charges on deposits
0
0
0
0
Wealth and asset management revenue
0
0
0
0
Corporate banking revenue
0
0
0
0
Card and processing revenue
0
0
0
0
Mortgage banking net revenue
52
54
106
105
Other noninterest income
4
6
7
9
Securities gains (losses), net
0
0
0
Securities gains (losses), net - non-qualifying hedges on mortgage servcing rights
(4)
2
(17)
2
Total noninterest income
52
62
96
116
Salaries, wages and incentives
42
40
82
77
Net occupancy expense
3
3
5
5
Card and processing expense
0
0
0
0
Other noninterest expense
51
55
102
110
Employee benefits
10
10
20
20
Equipment expense
0
0
0
0
Technology and communications
1
1
2
1
Total noninterest expense
107
109
211
213
Income (Loss) Before Income Taxes
(4)
5
(17)
1
Net income (loss)
(3)
3
(14)
1
Applicable income tax expense (benefit)
(1)
2
(3)
0
Total goodwill
0
0
0
0
0
Wealth and Asset Management
Segment Reporting Information
Total Assets
9,270
8,238
9,270
9,270
8,238
Net interest income
45
37
88
75
Provision for (benefit from) loan and lease losses
(11)
(1)
5
3
Net interest income after provision for loan and lease losses
56
38
83
72
Service charges on deposits
0
0
1
1
Wealth and asset management revenue
104
100
214
205
Corporate banking revenue
0
0
1
0
Card and processing revenue
1
1
2
3
Mortgage banking net revenue
0
0
0
0
Other noninterest income
4
0
9
0
Securities gains (losses), net
0
0
0
Securities gains (losses), net - non-qualifying hedges on mortgage servcing rights
0
0
0
0
Total noninterest income
109
101
227
209
Salaries, wages and incentives
43
37
87
76
Net occupancy expense
3
2
6
5
Card and processing expense
0
0
0
0
Other noninterest expense
70
67
144
134
Employee benefits
7
7
17
16
Equipment expense
0
0
0
0
Technology and communications
0
0
0
0
Total noninterest expense
123
113
254
231
Income (Loss) Before Income Taxes
42
26
56
50
Net income (loss)
33
17
44
33
Applicable income tax expense (benefit)
9
9
12
17
Total goodwill
177
155
177
177
155
General Corporate and Other
Segment Reporting Information
Total Assets
(9,747)
(4,775)
(9,747)
(9,747)
(4,775)
Net interest income
(10)
(9)
(1)
(29)
Provision for (benefit from) loan and lease losses
(1)
(15)
(30)
(8)
Net interest income after provision for loan and lease losses
(9)
6
29
(21)
Service charges on deposits
0
0
1
0
Wealth and asset management revenue
0
0
0
0
Corporate banking revenue
0
0
0
(1)
Card and processing revenue
0
0
0
0
Mortgage banking net revenue
0
0
0
0
Other noninterest income
225
17
612
26
Securities gains (losses), net
(5)
(15)
1
Securities gains (losses), net - non-qualifying hedges on mortgage servcing rights
0
0
0
0
Total noninterest income
220
17
598
26
Salaries, wages and incentives
204
156
388
320
Net occupancy expense
18
15
37
35
Card and processing expense
(1)
(1)
(1)
(1)
Other noninterest expense
(271)
(247)
(573)
(517)
Employee benefits
26
34
71
80
Equipment expense
12
12
25
23
Technology and communications
63
53
126
108
Total noninterest expense
51
22
73
48
Income (Loss) Before Income Taxes
160
1
554
(43)
Net income (loss)
120
(1)
431
(30)
Applicable income tax expense (benefit)
40
2
123
(13)
Total goodwill
$ 0
$ 0
$ 0
$ 0
$ 0
[1]
[2]
[3]
[4]
[5]
[6]
$ in Millions3 Months Ended
6 Months Ended
Segment Reporting Information
Impairment of Branches and Land
$ 33
$ 2
$ 41
$ 5
Other Asset Impairment Charges
(2)
(19)
Bank premises and equipment held for sale
37
37
$ 27
Commercial Banking | Operating lease equipment
Segment Reporting Information
Other Asset Impairment Charges
2
31
General Corporate and Other
Segment Reporting Information
Bank premises and equipment held for sale
$ 37
$ 41
$ 37
$ 41
$ / shares in Units, $ in Billions6 Months Ended
Business Acquisition
MB Financial Total Assets at 3/31/2018
$ 20.0
May 18, 2018
Business Acquisition
Total implied consideration transferred
$ 54.2
Share consideration transferred
1.45
Implied value of merger transaction
$ 4.7
Cash consideration transferred per share
$ 5.54
$ in Millions3 Months Ended
Subsequent Event
Subsequent Event [Line Items]
Subsequent Event Date
Jul. 26, 2018
Face amount of notes issued or redeemed
$ 1,550
Fixed Rate 3.35 Percent Senior Notes Due 2021
Subsequent Event [Line Items]
Face amount of notes issued or redeemed
$ 500
Maturity date(s) Start
Jul. 26, 2018
Maturity date(s) End
Jul. 26, 2021
Floating Rate 3ML Plus 44 bps Senior Notes Due 2021
Subsequent Event [Line Items]
Face amount of notes issued or redeemed
$ 300
Maturity date(s) Start
Jul. 26, 2018
Maturity date(s) End
Jul. 26, 2021
Fixed Rate 3.95 Percent Senior Notes Due 2025
Subsequent Event [Line Items]
Face amount of notes issued or redeemed
$ 750
Maturity date(s) Start
Jul. 26, 2018
Maturity date(s) End
Jul. 28, 2025
Open Market Share Repurchase
Subsequent Event [Line Items]
Subsequent Event Start Date
Jul. 20, 2018
Subsequent Event End Date
Aug. 02, 2018
Shares repurchased | shares
16,945,020
Repurchased common stock through open market repurchase transactions
$ 500
Settlement Start Date
Jul. 24, 2018
Settlement End Date
Aug. 06, 2018
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