Business Segments

3 Months Ended

Mar. 31, 2020

Business Segments

Business Segments

24. Business Segments

The Bancorp reports on four business segments: Commercial Banking, Branch Banking, Consumer Lending and Wealth and Asset Management. Results of the Bancorp’s business segments are presented based on its management structure and management accounting practices. The structure and accounting practices are specific to the Bancorp; therefore, the financial results of the Bancorp’s business segments are not necessarily comparable with similar information for other financial institutions. The Bancorp refines its methodologies from time to time as management’s accounting practices and businesses change.

The Bancorp manages interest rate risk centrally at the corporate level. By employing an FTP methodology, the business segments are insulated from most benchmark interest rate volatility, enabling them to focus on serving customers through the origination of loans and acceptance of deposits. The FTP methodology assigns charge and credit rates to classes of assets and liabilities, respectively, based on the estimated amount and timing of the cash flows for each transaction. Assigning the FTP rate based on matching the duration of cash flows allocates interest income and interest expense to each business segment so its resulting net interest income is insulated from future changes in benchmark interest rates. The Bancorp’s FTP methodology also allocates the contribution to net interest income of the asset-generating and deposit-providing businesses on a duration-adjusted basis to better attribute the driver of the performance. As the asset and liability durations are not perfectly matched, the residual impact of the FTP methodology is captured in General Corporate and Other. The charge and credit rates are determined using the FTP rate curve, which is based on an estimate of Fifth Third’s marginal borrowing cost in the wholesale funding markets. The FTP curve is constructed using the U.S. swap curve, brokered CD pricing and unsecured debt pricing.

The Bancorp adjusts the FTP charge and credit rates as dictated by changes in interest rates for various interest-earning assets and interest-bearing liabilities and by the review of behavioral assumptions, such as prepayment rates on interest-earning assets and the estimated durations for indeterminate-lived deposits. Key assumptions, including the credit rates provided for deposit accounts, are reviewed annually. Credit rates for deposit products and charge rates for loan products may be reset more frequently in response to changes in market conditions. In general, the charge rates on assets have declined since December 31, 2019 as they were affected by the prevailing level of interest rates and by the duration and repricing characteristics of the portfolio. The credit rates for deposit products also declined due to interest rates and modified assumptions. Thus net interest income for asset-generating business segments improved while deposit-providing business segments were negatively impacted during the three months ended March 31, 2020.

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

The following is a description of each of the Bancorp’s business segments and the products and services they provide to their respective client bases.

Commercial Banking offers credit intermediation, cash management and financial services to large and middle-market businesses and government and professional customers. In addition to the traditional lending and depository offerings, Commercial Banking products and services include global cash management, foreign exchange and international trade finance, derivatives and capital markets services, asset-based lending, real estate finance, public finance, commercial leasing and syndicated finance.

Branch Banking provides a full range of deposit and loan and lease products to individuals and small businesses through 1,123 full-service banking centers. Branch Banking offers depository and loan products, such as checking and savings accounts, home equity loans and lines of credit, credit cards and loans for automobiles and other personal financing needs, as well as products designed to meet the specific needs of small businesses, including cash management services.

Consumer Lending includes the Bancorp’s residential mortgage, automobile and other indirect lending activities. Residential mortgage activities within Consumer Lending include the origination, retention and servicing of residential mortgage loans, sales and securitizations of those loans and all associated hedging activities. Residential mortgages are primarily originated through a dedicated sales force and through third-party correspondent lenders. Automobile and other indirect lending activities include extending loans to consumers through automobile dealers, motorcycle dealers, powersport dealers, recreational vehicle dealers and marine dealers.

Wealth and Asset Management provides a full range of investment alternatives for individuals, companies and not-for-profit organizations. Wealth and Asset Management is made up of four main businesses: FTS, an indirect wholly-owned subsidiary of the Bancorp; Fifth Third Insurance Agency; Fifth Third Private Bank; and Fifth Third Institutional Services. FTS offers full service retail brokerage services to individual clients and broker-dealer services to the institutional marketplace. Fifth Third Insurance Agency assists clients with their financial and risk management needs. Fifth Third Private Bank offers wealth management strategies to high net worth and ultra-high net worth clients through wealth planning, investment management, banking, insurance, trust and estate services. Fifth Third Institutional Services provides advisory services for institutional clients including middle market businesses, non-profits, states and municipalities.

The following tables present the results of operations and assets by business segment for the three months ended:

March 31, 2020 ($ in millions)	Commercial Banking			Branch Banking		Consumer Lending		Wealth and Asset Management		General Corporate and Other			Eliminations			Total
Net interest income	$	507			505		89		37		91			-			1,229
Provision for credit losses		45			62		13		1		519			-			640
Net interest income after provision for credit losses		462			443		76		36		(428	)		-			589
Noninterest income:
Service charges on deposits		84			65		-		-		(1	)		-			148
Wealth and asset management revenue		1			44		-		129		-			(40) (a)			134
Commercial banking revenue		124			1		-		-		(1	)		-			124
Mortgage banking net revenue		-			2		117		1		-			-			120
Card and processing revenue		16			67		-		-		3			-			86
Leasing business revenue		73 (c)			-		-		-		-			-			73
Other noninterest income(b)		(11	)		19		4		5		(10	)		-			7
Securities losses, net		-			-		-		-		(24	)		-			(24	)
Securities gains, net - non-qualifying hedges on MSRs		-			-		3		-		-			-			3
Total noninterest income		287			198		124		135		(33	)		(40	)		671
Noninterest expense:
Compensation and benefits		150			168		51		61		217			-			647
Technology and communications		3			1		2		-		87			-			93
Net occupancy expense(e)		7			44		2		3		26			-			82
Leasing business expense		35			-		-		-		-			-			35
Equipment expense		7			11		-		-		14			-			32
Marketing expense		2			13		1		1		14			-			31
Card and processing expense		2			30		-		-		(1	)		-			31
Other noninterest expense		274			221		66		78		(350	)		(40	)		249
Total noninterest expense		480			488		122		143		7			(40	)		1,200
Income (loss) before income taxes		269			153		78		28		(468	)		-			60
Applicable income tax expense (benefit)		45			32		17		6		(86	)		-			14
Net income (loss)		224			121		61		22		(382	)		-			46
Total goodwill	$	1,961			2,047		-		253		-			-			4,261
Total assets	$	84,576			70,283		27,132		11,653		(8,253) (d)			-			185,391

(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 $3 for branches and land. For more information refer to Note 8 and Note 23.

(c) Includes impairment charges of $3 for operating lease equipment. For more information refer to Note 9 and Note 23.

(d) Includes bank premises and equipment of $36 classified as held for sale. For more information refer to Note 8.

(e) Includes impairment losses and termination charges of $2 for ROU assets related to certain operating leases. For more information refer to Note 10.

March 31, 2019 ($ in millions)	Commercial Banking		Branch Banking		Consumer Lending		Wealth and Asset Management		General Corporate and Other			Eliminations			Total
Net interest income	$	509		584		63		49		(123	)		-			1,082
Provision for credit losses		20		52		13		-		5			-			90
Net interest income after provision for credit losses		489		532		50		49		(128	)		-			992
Noninterest income:(e)
Service charges on deposits		66		64		-		-		1			-			131
Wealth and asset management revenue		1		36		-		108		-			(33)(a)			112
Commercial banking revenue		103		1		-		-		(1	)		-			103
Mortgage banking net revenue		-		1		55		-		-			-			56
Card and processing revenue		15		63		-		1		-			-			79
Leasing business revenue		32		-		-		-		-			-			32
Other noninterest income(b)		10		18		3		5		533			-			569
Securities gains, net		-		-		-		-		16			-			16
Securities gains, net - non-qualifying hedges on MSRs		-		-		3		-		-			-			3
Total noninterest income		227		183		61		114		549			(33	)		1,101
Noninterest expense:(e)
Compensation and benefits		109		143		45		56		257			-			610
Technology and communications		2		1		2		-		78			-			83
Net occupancy expense		7		43		2		3		20			-			75
Leasing business expense		19		-		-		-		-			-			19
Equipment expense		6		12		-		-		12			-			30
Marketing expense		1		14		1		1		19			-			36
Card and processing expense		2		29		-		-		-			-			31
Other noninterest expense		210		198		51		70		(283	)		(33	)		213
Total noninterest expense		356		440		101		130		103			(33	)		1,097
Income before income taxes		360		275		10		33		318			-			996
Applicable income tax expense		66		58		2		7		88			-			221
Net income		294		217		8		26		230			-			775
Total goodwill	$	630		1,655		-		193		(1,843)(d)			-			4,321
Total assets	$	74,377		69,599		24,662		9,916		(10,701)(c)			-			167,853

(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 $20 for branches and land. For more information refer to Note 8.

(c) Includes bank premises and equipment of $78 classified as held for sale. For more information refer to Note 8.

(d) Due to the timing of the MB Financial, Inc. acquisition, the Bancorp was in the process of completing its analysis of the allocation of the goodwill across its four business segments, therefore goodwill was presented as part of General Corporate and Other as of March 31, 2019.

(e) During the first quarter of 2020, certain noninterest income and noninterest expense line items were reclassified to better align disclosures to business activities. These reclassifications were retrospectively applied to all prior periods presented. Total noninterest income and noninterest expense did not change as a result of these reclassifications.