Fifth Third Bancorp : Quarterly report with a continuing view of a company's financial position

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FORM10-Q

FIFTH THIRD BANCORP - FITB

Filed: August 08, 2019 (period: June 30, 2019)

Quarterly report with a continuing view of a company's financial position

The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.

Table of Contents

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, 2019

Commission File Number 001-33653

(Exact name of Registrant as specified in its charter)

Ohio	31-0854434
(State or other jurisdiction	(I.R.S. Employer
of incorporation or organization)	Identification Number)

Fifth Third Center

Cincinnati, Ohio 45263

(Address of principal executive offices)

Registrant's telephone number, including area code: [phone]

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 every Interactive Data File required to be submitted 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 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	☐	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 ☒

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:	Trading Symbol(s):	Name of each exchange on which registered:
Common Stock, Without Par Value	FITB	The NASDAQ Stock Market LLC
Depositary Shares Representing a 1/1000th Ownership Interest in a	FITBI	The NASDAQ Stock Market LLC
Share of 6.625% Fixed-to-Floating Rate Non-Cumulative Perpetual
Preferred Stock, Series I

There were 730,485,823 shares of the Registrant's common stock, without par value, outstanding as of July 31, 2019.

Source: FIFTH THIRD BANCORP, 10-Q, August 08, 2019

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The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.

Table of Contents

FINANCIAL CONTENTS
Part I. Financial Information
Glossary of Abbreviations and Acronyms	2
Management's Discussion and Analysis of Financial Condition and Results of Operations (Item 2)
Selected Financial Data	3
Overview	4
Non-GAAP Financial Measures	8
Recent Accounting Standards	10
Critical Accounting Policies	10
Statements of Income Analysis	11
Balance Sheet Analysis	19
Business Segment Review	26
Risk Management-Overview	33
Credit Risk Management	34
Market Risk Management	48
Liquidity Risk Management	53
Operational Risk Management	55
Compliance Risk Management	55
Capital Management	56
Off-Balance Sheet Arrangements	59
Quantitative and Qualitative Disclosures about Market Risk (Item 3)	60
Controls and Procedures (Item 4)	60
Condensed Consolidated Financial Statements and Notes (Item 1)
Balance Sheets (unaudited)	61
Statements of Income (unaudited)	62
Statements of Comprehensive Income (unaudited)	63
Statements of Changes in Equity (unaudited)	64
Statements of Cash Flows (unaudited)	66
Notes to Condensed Consolidated Financial Statements (unaudited)	67
Part II. Other Information
Legal Proceedings (Item 1)	129
Risk Factors (Item 1A)	129
Unregistered Sales of Equity Securities and Use of Proceeds (Item 2)	129
Exhibits (Item 6)	129
Signature	130

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 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 Third's ability to secure confidential information and deliver products and services through the use of computer systems and telecommunications networks; (10) failures by third-party service providers; (11) inability to manage strategic initiatives and/or organizational changes; (12) inability to implement technology system enhancements; (13) failure of internal controls and other risk management systems; (14) losses related to fraud, theft or violence; (15) inability to attract and retain skilled personnel; (16) adverse impacts of government regulation; (17) governmental or regulatory changes or other actions; (18) failures to meet applicable capital requirements; (19) regulatory objections to Fifth Third's capital plan; (20) regulation of Fifth Third's derivatives activities; (21) deposit insurance premiums; (22) assessments for the orderly liquidation fund;

1. replacement of LIBOR; (24) weakness in the national or local economies; (25) global political and economic uncertainty or negative actions; (26) changes in interest rates; (27) changes and trends in capital markets; (28) fluctuation of Fifth Third's stock price; (29) volatility in mortgage banking revenue; (30) litigation, investigations and enforcement proceedings by governmental authorities; (31) breaches of contractual covenants, representations and warranties; (32) competition and changes in the financial services industry; (33) changing retail distribution strategies, customer preferences and behavior; (34) risks relating to the merger with MB Financial, Inc. and Fifth Third's ability to realize the anticipated benefits of the merger; (35) difficulties in identifying, acquiring or integrating suitable strategic partnerships, investments or acquisitions; (36) potential dilution from future acquisitions; (37) loss of income and/or difficulties encountered in the sale and separation of businesses, investments or other assets; (38) results of investments or acquired entities; (39) changes in accounting standards or interpretation or declines in the value of Fifth Third's goodwill or other intangible assets; (40) inaccuracies or other failures from the use of models; (41) effects of critical accounting policies and judgments or the use of inaccurate estimates; (42) weather-related events or other natural disasters; and (43) the impact of reputational risk created by these or other developments on such matters as business generation and retention, funding and liquidity.

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Source: FIFTH THIRD BANCORP, 10-Q, August 08, 2019

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The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.

Table of Contents

Glossary of Abbreviations and Acronyms

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

ALCO: Asset Liability Management Committee
ALLL: Allowance for Loan and Lease Losses	HQLA: High Quality Liquid Assets
AOCI: Accumulated Other Comprehensive Income (Loss)	IPO: Initial Public Offering
APR: Annual Percentage Rate	IRC: Internal Revenue Code
ARM: Adjustable Rate Mortgage	IRLC: Interest Rate Lock Commitment
ASF: Available Stable Funding	ISDA: International Swaps and Derivatives Association, Inc.
ASU: Accounting Standards Update	LCR: Liquidity Coverage Ratio
ATM: Automated Teller Machine	LIBOR: London Interbank Offered Rate
BCBS: Basel Committee on Banking Supervision	LIHTC: Low-Income Housing Tax Credit
BHC: Bank Holding Company	LLC: Limited Liability Company
BOLI: Bank Owned Life Insurance	LTV: Loan-to-Value
BPO: Broker Price Opinion	MD&A: Management's Discussion and Analysis of Financial
bps: Basis Points	Condition and Results of Operations
CCAR: Comprehensive Capital Analysis and Review	MSR: Mortgage Servicing Right
CDC: Fifth Third Community Development Corporation	N/A: Not Applicable
CECL: Current Expected Credit Loss	NAV: Net Asset Value
CET1: Common Equity Tier 1	NII: Net Interest Income
CFPB: United States Consumer Financial Protection Bureau	NM: Not Meaningful
C&I: Commercial and Industrial	NPR: Notice of Proposed Rulemaking
DCF: Discounted Cash Flow	NSFR: Net Stable Funding Ratio
DFA: Dodd-Frank Wall Street Reform & Consumer Protection Act	OAS: Option-Adjusted Spread
DTCC: Depository Trust & Clearing Corporation	OCC: Office of the Comptroller of the Currency
DTI: Debt-to-Income	OCI: Other Comprehensive Income (Loss)
ERM: Enterprise Risk Management	OREO: Other Real Estate Owned
ERMC: Enterprise Risk Management Committee	OTTI: Other-Than-Temporary Impairment
EVE: Economic Value of Equity	PCA: Prompt Corrective Action
FASB: Financial Accounting Standards Board	PCI: Purchased Credit Impaired
FDIC: Federal Deposit Insurance Corporation	RCC: Risk Compliance Committee
FHA: Federal Housing Administration	ROU: Right-of-Use
FHLB: Federal Home Loan Bank	RSF: Required Stable Funding
FHLMC: Federal Home Loan Mortgage Corporation	SAR: Stock Appreciation Right
FICO: Fair Isaac Corporation (credit rating)	SBA: Small Business Administration
FINRA: Financial Industry Regulatory Authority	SEC: United States Securities and Exchange Commission
FNMA: Federal National Mortgage Association	TBA: To Be Announced
FOMC: Federal Open Market Committee	TDR: Troubled Debt Restructuring
FRB: Federal Reserve Bank	TILA: Truth in Lending Act
FTE: Fully Taxable Equivalent	U.S.: United States of America
FTP: Funds Transfer Pricing	U.S. GAAP: United States Generally Accepted Accounting Principles
FTS: Fifth Third Securities	VA: United States Department of Veteran Affairs
GDP: Gross Domestic Product	VIE: Variable Interest Entity
GNMA: Government National Mortgage Association	VRDN: Variable Rate Demand Note
GSE: United States Government Sponsored Enterprise	2

Source: FIFTH THIRD BANCORP, 10-Q, August 08, 2019

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The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.

Table of Contents

Management's Discussion and Analysis of Financial Condition and Results of Operations (Item 2)

The following is Management's Discussion and Analysis of Financial Condition and Results of Operations of certain significant factors that have affected Fifth Third Bancorp's (the "Bancorp" or "Fifth Third") financial condition and results of operations during the periods included in the 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 Bancorp's banking subsidiary is referred to as the Bank.

TABLE 1: Selected Financial Data		For the three months			For the six months
		ended June 30,	%		ended June 30,	%
($ in millions, except for per share data)		2019	2018	Change		2019	2018	Change
Income Statement Data
Net interest income (U.S. GAAP)	$	1,245	1,020	22	$	2,327	2,016	15
Net interest income (FTE)(a)(b)		1,250	1,024	22		2,336	2,023	15
Noninterest income		660	743	(11)		1,761	1,652	7
Total revenue(a)		1,910	1,767	8		4,097	3,675	11
Provision for credit losses(c)		85	14	507		175	27	548
Noninterest expense		1,243	1,001	24		2,341	2,011	16
Net income attributable to Bancorp		453	602	(25)		1,228	1,303	(6)
Net income available to common shareholders		427	579	(26)		1,187	1,265	(6)
Common Share Data
Earnings per share - basic	$	0.57	0.84	(32)	$	1.68	1.82	(8)
Earnings per share - diluted		0.57	0.82	(30)		1.66	1.79	(7)
Cash dividends declared per common share		0.24	0.18	33		0.46	0.34	35
Book value per share		26.17	21.75	20		26.17	21.75	20
Market value per share		27.90	28.70	(3)		27.90	28.70	(3)
Financial Ratios
Return on average assets		1.08 %	1.71	(37)		1.56 %	1.86	(16)
Return on average common equity		9.1	15.9	(43)		13.9	17.3	(20)
Return on average tangible common equity (including AOCI)(b)		12.3	19.2	(36)		17.8	20.9	(15)
Return on average tangible common equity (excluding AOCI)(b)		12.9	18.3	(30)		18.2	20.1	(9)
Dividend payout		42.1	21.4	97		27.4	18.7	47
Average total Bancorp shareholders' equity as a percent of average assets		12.02	11.28	7		11.74	11.34	4
Tangible common equity as a percent of tangible assets (including AOCI)(b)		8.27	9.23	(10)		8.27	9.23	(10)
Net interest margin(a)(b)		3.37	3.21	5		3.33	3.19	4
Net interest rate spread (a)(b)		2.95	2.86	3		2.91	2.86	2
Efficiency(a)(b)		65.1	56.7	15		57.1	54.7	4
Credit Quality
Net losses charged-off	$	78	94	(17)	$	156	175	(11)
Net losses charged-off as a percent of average portfolio loans and leases		0.29 %	0.41	(29)		0.30 %	0.38	(21)
ALLL as a percent of portfolio loans and leases		1.02	1.17	(13)		1.02	1.17	(13)
Allowance for credit losses as a percent of portfolio loans and leases(d)		1.15	1.31	(12)		1.15	1.31	(12)
Nonperforming portfolio assets as a percent of portfolio loans and leases
and OREO		0.51	0.52	(2)		0.51	0.52	(2)
Average Balances
Loans and leases, including held for sale	$	110,993	93,232	19	$	104,712	93,051	13
Securities and other short-term investments		37,797	34,935	8		36,953	34,806	6
Total assets		167,578	141,420	18		158,324	141,433	12
Transaction deposits(e)		112,847	97,574	16		106,780	97,298	10
Core deposits(f)		118,525	101,592	17		112,051	101,235	11
Wholesale funding(g)		23,633	20,464	15		22,915	20,511	12
Bancorp shareholders' equity		20,135	15,947	26		18,588	16,044	16
Regulatory Capital and Liquidity Ratios
CET1 capital(h)		9.57 %	10.91	(12)		9.57 %	10.91	(12)
Tier I risk-based capital(h)		10.62	12.02	(12)		10.62	12.02	(12)
Total risk-based capital(h)		13.53	15.21	(11)		13.53	15.21	(11)
Tier I leverage		9.24	10.24	(10)		9.24	10.24	(10)
Modified LCR		119	116	3		119	116	3

1. Amounts presented on an FTE basis. The FTE adjustments for the three months ended June 30, 2019 and 2018 were $5 and $4, respectively, and for the six months ended June 30, 2019 and 2018 were $9 and $7, respectively.
2. These are non-GAAP measures. For further information, refer to the Non-GAAP Financial Measures section of MD&A.
3. The provision for credit losses is the sum of the provision for loan and lease losses and the provision for (benefit from) the reserve for unfunded commitments.
4. The allowance for credit losses is the sum of the ALLL and the reserve for unfunded commitments.
5. Includes demand deposits, interest checking deposits, savings deposits, money market deposits and foreign office deposits.
6. Includes transaction deposits and other time deposits.
7. Includes certificates $100,000 and over, other deposits, federal funds purchased, other short-term borrowings and long-term debt.
8. 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 Bancorp's total risk-weighted assets.

3

Source: FIFTH THIRD BANCORP, 10-Q, August 08, 2019

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The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.