Company Quick10K Filing
Quick10K
Fifth Third Bancorp
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$27.83 739 $20,580
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-06-18 Amend Bylaw, Other Events, Exhibits
8-K 2019-06-11 Regulation FD
8-K 2019-06-11 Regulation FD, Exhibits
8-K 2019-05-30 Other Events, Exhibits
8-K 2019-05-22 Other Events
8-K 2019-05-17 Officers, Exhibits
8-K 2019-04-25 Enter Agreement, Off-BS Arrangement
8-K 2019-04-23 Earnings, Regulation FD, Exhibits
8-K 2019-04-16 Officers, Shareholder Vote, Exhibits
8-K 2019-04-16 Regulation FD, Exhibits
8-K 2019-03-21 Other Events, Exhibits
8-K 2019-03-14 Other Events
8-K 2019-03-14 Officers
8-K 2019-03-12 Regulation FD, Exhibits
8-K 2019-03-11 Enter Agreement, Off-BS Arrangement
8-K 2019-01-25 Other Events, Exhibits
8-K 2019-01-23 Other Events, Exhibits
8-K 2019-01-22 Earnings, Regulation FD, Exhibits
8-K 2018-12-28 Other Events, Exhibits
8-K 2018-12-03 Regulation FD, Exhibits
8-K 2018-11-09 Regulation FD
8-K 2018-11-07 Regulation FD, Exhibits
8-K 2018-10-23 Earnings, Regulation FD, Exhibits
8-K 2018-09-19 Code of Ethics, Exhibits
8-K 2018-09-11 Regulation FD, Exhibits
8-K 2018-08-15 Regulation FD
8-K 2018-07-23 Other Events, Exhibits
8-K 2018-07-19 Earnings, Regulation FD, Exhibits
8-K 2018-06-28 Other Events, Exhibits
8-K 2018-06-27 Other Events
8-K 2018-06-14 Enter Agreement, Off-BS Arrangement
8-K 2018-06-08 Other Events, Exhibits
8-K 2018-06-05 Other Events, Exhibits
8-K 2018-05-23 Enter Agreement, Off-BS Arrangement
8-K 2018-05-20 Enter Agreement, Exhibits
8-K 2018-05-10 Regulation FD
8-K 2018-04-24 Earnings, Regulation FD, Exhibits
8-K 2018-04-17 Shareholder Vote
8-K 2018-03-26 Enter Agreement, Off-BS Arrangement
8-K 2018-03-15 Enter Agreement, Off-BS Arrangement
8-K 2018-03-12 Other Events, Exhibits
8-K 2018-03-02 Regulation FD
8-K 2018-02-27 Other Events, Exhibits
8-K 2018-02-08 Enter Agreement, Off-BS Arrangement
8-K 2018-02-01 Other Events, Exhibits
8-K 2018-01-23 Earnings, Regulation FD, Exhibits
DFS Discover Financial Services 25,570
NGL NGL Energy Partners 1,670
BOOT Boot Barn Holdings 823
AXTI AXT 217
EYPT Eyepoint Pharmaceuticals 172
APEN Apollo Endosurgery 72
NM Navios Maritime Holdings 44
CSAF Campbell Strategic Allocation Fund 0
HRGG Heritage Nola Bancorp 0
ACLZ Accelerize 0
FITB 2019-03-31
Part II. Other Information
EX-3.2 d738212dex32.htm
EX-10.1 d738212dex101.htm
EX-31.(I) d738212dex31i.htm
EX-31.(II) d738212dex31ii.htm
EX-32.(I) d738212dex32i.htm
EX-32.(II) d738212dex32ii.htm

Fifth Third Bancorp Earnings 2019-03-31

FITB 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 d738212d10q.htm FORM 10-Q Form 10-Q
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 March 31, 2019

Commission File Number 001-33653

 

 

LOGO

(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)

Registrant’s 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 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 Share of 6.625% Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series I    FITBI    The NASDAQ Stock Market LLC

There were 734,386,147 shares of the Registrant’s common stock, without par value, outstanding as of April 30, 2019.


Table of Contents

LOGO

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

     7  

Recent Accounting Standards

     9  

Critical Accounting Policies

     9  

Statements of Income Analysis

     10  

Balance Sheet Analysis

     17  

Business Segment Review

     24  

Risk Management—Overview

     30  

Credit Risk Management

     31  

Market Risk Management

     44  

Liquidity Risk Management

     48  

Operational Risk Management

     51  

Compliance Risk Management

     51  

Capital Management

     52  

Off-Balance Sheet Arrangements

     54  

Quantitative and Qualitative Disclosures about Market Risk (Item 3)

     55  

Controls and Procedures (Item 4)

     55  

Condensed Consolidated Financial Statements and Notes (Item 1)

  

Balance Sheets (unaudited)

     56  

Statements of Income (unaudited)

     57  

Statements of Comprehensive Income (unaudited)

     58  

Statements of Changes in Equity (unaudited)

     59  

Statements of Cash Flows (unaudited)

     60  

Notes to Condensed Consolidated Financial Statements (unaudited)

     61  

Part II. Other Information

  

Legal Proceedings (Item 1)

     118  

Risk Factors (Item 1A)

     118  

Unregistered Sales of Equity Securities and Use of Proceeds (Item 2)

     118  

Exhibits (Item 6)

     118  

Signature

     119  

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 Report 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; (23) 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 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.

 

1


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

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: United States 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

DTI: Debt-to-Income

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

LIHTC: Low-Income Housing Tax Credit

LLC: Limited Liability Company

LTV: Loan-to-Value

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

MSR: Mortgage Servicing Right

N/A: Not Applicable

NAV: Net Asset Value

NII: Net Interest Income

NM: Not Meaningful

NPR: Notice of Proposed Rulemaking

NSFR: Net Stable Funding Ratio

OAS: Option-Adjusted Spread

OCC: Office of the Comptroller of the Currency

OCI: Other Comprehensive Income (Loss)

OREO: Other Real Estate Owned

OTTI: Other-Than-Temporary Impairment

PCA: Prompt Corrective Action

PCI: Purchased Credit Impaired

RCC: Risk Compliance Committee

ROU: Right-of-Use

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

TDR: Troubled Debt Restructuring

TILA: Truth in Lending Act

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


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 subsidiaries are referred to as Fifth Third Bank and MB Financial Bank, N.A.

 

TABLE 1: Selected Financial Data

                         
     For the three months
ended March 31,
    

%

Change

 
($ in millions, except for per share data)    2019     2018  

Income Statement Data

       

Net interest income (U.S. GAAP)

   $ 1,082       996        9  

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

     1,086       999        9  

Noninterest income

     1,101       909        21  

Total revenue(a)

     2,187       1,908        15  

Provision for credit losses(c)

     90       13        592  

Noninterest expense

     1,097       1,010        9  

Net income attributable to Bancorp

     775       701        11  

Net income available to common shareholders

     760       686        11  

Common Share Data

       

Earnings per share - basic

   $ 1.14       0.98        16  

Earnings per share - diluted

     1.12       0.96        17  

Cash dividends declared per common share

     0.22       0.16        38  

Book value per share

     24.77       21.44        16  

Market value per share

     25.22       31.75        (21

Financial Ratios

       

Return on average assets

     2.11     2.01        5  

Return on average common equity

     19.6       18.8        4  

Return on average tangible common equity(b)

     23.9       22.6        6  

Dividend payout

     19.3       16.3        18  

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

     11.43       11.41        -  

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

     8.21       9.03        (9

Net interest margin(a)(b)

     3.28       3.18        3  

Net interest rate spread (a)(b)

     2.87       2.88        -  

Efficiency(a)(b)

     50.2       52.9        (5

Credit Quality

       

Net losses charged-off

   $ 77       81        (5

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

     0.32     0.36        (11

ALLL as a percent of portfolio loans and leases

     1.02       1.24        (18

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

     1.14       1.40        (19

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

     0.45       0.55        (18

Average Balances

       

Loans and leases, including held for sale

   $ 98,362       92,869        6  

Securities and other short-term investments

     36,101       34,677        4  

Total Assets

     148,968       141,450        5  

Transaction deposits(e)

     100,647       97,018        4  

Core deposits(f)

     105,507       100,874        5  

Wholesale funding(g)

     22,187       20,558        8  

Bancorp shareholders’ equity

     17,025       16,146        5  

Regulatory Capital and Liquidity Ratios

  

CET1 capital(h)

     9.60     10.82        (11

Tier I risk-based capital(h)

     10.67       11.95        (11

Total risk-based capital(h)

     13.68       15.25        (10

Tier I leverage

     10.32       10.11        2  

Modified LCR

     113       113        -  
(a)

Amounts presented on an FTE basis. The FTE adjustment for the three months ended March 31, 2019 and 2018 was $4 and $3, respectively.

(b)

These are non-GAAP measures. For further information, refer to the Non-GAAP Financial Measures section of MD&A.

(c)

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.

(d)

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

(e)

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

(f)

Includes transaction deposits and other time deposits.

(g)

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

(h)

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 resulting in the Bancorp’s total risk-weighted assets.

(i)

Excludes unrealized gains and losses.

 

3


Table of Contents

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

OVERVIEW

Fifth Third Bancorp is a diversified financial services company headquartered in Cincinnati, Ohio. At March 31, 2019, the Bancorp had $167.9 billion in assets and operated 1,207 full-service banking centers and 2,559 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.

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 Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2018. Each of these items could have an impact on the Bancorp’s financial condition, results of operations and cash flows. In addition, refer to the Glossary of Abbreviations and Acronyms in this report for a list of terms included as a tool for the reader of this 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 Bancorp’s revenues are dependent on both net interest income and noninterest income. For the three months ended March 31, 2019, net interest income on an FTE basis and noninterest income each provided 50% of total revenue. 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 the three months ended March 31, 2019. 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, technology and communication costs, net occupancy expense, card and processing expense, equipment expense and other noninterest expense.

Acquisition of MB Financial, Inc.

On March 22, 2019, Fifth Third Bancorp completed its acquisition of MB Financial, Inc. in a stock and cash transaction valued at approximately $3.6 billion. MB Financial, Inc. was headquartered in Chicago, Illinois with reported assets of approximately $20 billion and 86 branches as of December 31, 2018 and is the holding company of MB Financial Bank, N.A. Under the terms of the agreement, the Bancorp acquired 100% of the common stock of MB Financial, Inc. In exchange, common shareholders of MB Financial, Inc. received 1.45 shares of Fifth Third Bancorp common stock and $5.54 in cash for each share of MB Financial, Inc. common stock, for a total value per share of $42.49, based on the $25.48 closing price of Fifth Third Bancorp’s common stock on March 21, 2019. Upon closing of the transaction, MB Financial, Inc. became a subsidiary of the Bancorp. However, MB Financial, Inc.’s preferred stock with a fair value of $197 million remains outstanding and is recognized as a noncontrolling interest on the Condensed Consolidated Balance Sheets. Through its ownership of all of the common stock, the Bancorp controls 95% of the voting equity interests in MB Financial, Inc.

The acquisition of MB Financial, Inc. constituted a business combination and was accounted for under the acquisition method of accounting. Accordingly, the assets acquired, liabilities assumed and noncontrolling interest recognized were recorded at their estimated fair values as of the acquisition date. These fair value estimates are considered preliminary as of March 31, 2019 due to the timing of the close of the acquisition. For more information on the acquisition of MB Financial, Inc., refer to Note 3 of the Notes to Condensed Consolidated Financial Statements.

Worldpay Holding, LLC Transactions

On March 18, 2019, the Bancorp exchanged its remaining 10,252,826 Class B Units of Worldpay Holding, LLC for 10,252,826 shares of Class A common stock of Worldpay, Inc., and subsequently sold those shares. As a result of this transaction, the Bancorp recognized a gain of $562 million in other noninterest income during the first quarter of 2019. As a result of the sale, the Bancorp no longer beneficially owns any of Worldpay, Inc.’s equity securities.

 

4


Table of Contents

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

Accelerated Share Repurchase Transaction

During the three months ended March 31, 2019, the Bancorp entered into an accelerated share repurchase transaction. As part of this transaction, the Bancorp entered into a forward contract in which the final number of shares delivered at settlement will be based generally on a discount to the average daily volume weighted-average price of the Bancorp’s common stock during the term of the repurchase agreement. For more information on the accelerated share repurchase program, refer to Note 18 of the Notes to Condensed Consolidated Financial Statements. For a summary of the Bancorp’s accelerated share repurchase transaction that was entered into during the three months ended March 31, 2019, refer to Table 2.

 

TABLE 2: Summary of Accelerated Share Repurchase Transaction

         
Repurchase Date   

        Amount    

        ($ in millions)    

     Shares Repurchased on
Repurchase Date
     Shares Received from
Forward Contract
Settlement
   Total Shares    
Repurchased    
   Settlement Date        

March 27, 2019

   $             913        31,779,280      (a)    (a)    (a)
(a)

This accelerated share repurchase transaction consists of two supplemental confirmations each with a notional amount of $456.5 million. The settlement of the transaction is expected to occur on or before June 28, 2019.

Senior Notes Offerings

On January 25, 2019, the Bancorp issued and sold $1.5 billion of 3.65% senior fixed-rate notes, with a maturity of five years, due on January 25, 2024. 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 up to, but excluding, the redemption date.

On February 1, 2019, Fifth Third Bank issued and sold, under its bank notes program, $300 million of senior floating-rate notes, with a maturity of three years, due on February 1, 2022. Interest on the floating-rate notes is 3-month LIBOR plus 64 bps. These notes will be redeemable by Fifth Third Bank, in whole or in part, on or after the date that is 30 days prior to the maturity date at a redemption price equal to 100% of the principal amount of the notes to be redeemed plus accrued and unpaid interest up to, but excluding, the redemption date.

GS Holdings and GreenSky, Inc. 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 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 were exchangeable on a one-to-one basis for Class A common stock or cash.

During the first quarter of 2019, all of the Bancorp’s units in GS Holdings were converted for Class A common stock on a one-to-one basis and the Bancorp sold 85,000 shares for an immaterial gain that was recognized in the Condensed Consolidated Statements of Income. During the second quarter of 2019, the Bancorp sold its remaining shares of Class A common stock for a gain of approximately $1 million that will be recognized in the second quarter of 2019 Condensed Consolidated Statements of Income. As a result of the sale in the second quarter of 2019, the Bancorp no longer beneficially owns any of GreenSky, Inc.’s equity securities.

Earnings Summary

The Bancorp’s net income available to common shareholders for the first quarter of 2019 was $760 million, or $1.12 per diluted share, which was net of $15 million in preferred stock dividends. The Bancorp’s net income available to common shareholders for the first quarter of 2018 was $686 million, or $0.96 per diluted share, which was net of $15 million in preferred stock dividends.

Net interest income on an FTE basis (non-GAAP) was $1.1 billion and $999 million for the three months ended March 31, 2019 and 2018, respectively. Net interest income was positively impacted by increases in yields on average loans and leases of 62 bps for the three months ended March 31, 2019 compared to the three months ended March 31, 2018. Net interest income also benefited from an increase in average commercial and industrial loans of $4.3 billion for the three months ended March 31, 2019 compared to the three months ended March 31, 2018. 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 March 2018, June 2018, September 2018 and December 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 the three months ended March 31, 2019 compared to the three months ended March 31, 2018. Due to the timing of the close of the MB Financial, Inc. acquisition, amortization and accretion of premiums and discounts on acquired loans and deposits had an immaterial impact on net interest income for the three months ended March 31, 2019. Net interest margin on an FTE basis (non-GAAP) was 3.28% for the three months ended March 31, 2019 compared to 3.18% for the three months ended March 31, 2018.

Noninterest income increased $192 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to increases in other noninterest income and corporate banking revenue. Other noninterest income increased $132 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to the gain on sale of WorldPay, Inc. shares and a decrease in the loss on the swap associated with the sale of Visa, Inc. Class B shares partially offset by the gain related to Vantiv, Inc.’s acquisition of Worldpay Group plc. recognized during the first quarter of 2018. Corporate banking revenue increased $24 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018. The increase from the prior year was primarily driven by increases in institutional sales, lease remarketing fees and business lending fees of $9 million, $9 million and $6 million, respectively. These increases were partially offset by a decrease in foreign exchange fees of $2 million.

Noninterest expense increased $87 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to increases in personnel costs (salaries, wages and incentives plus employee benefits), technology and communications expense and other noninterest expense.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

The increase in noninterest expense included the recognition by the Bancorp of $76 million of merger-related expenses related to the MB Financial, Inc. acquisition for the three months ended March 31, 2019. Personnel costs increased $53 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily driven by $35 million of merger-related expenses, the addition of personnel costs from the acquisition of MB Financial, Inc. and higher deferred compensation expense. Technology and communications expense increased $15 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily driven by $11 million of merger-related expenses and increased investment in regulatory, compliance and growth initiatives. Other noninterest expense increased $18 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to the recognition of $30 million of merger-related expenses related to the acquisition of MB Financial, Inc. Those expenses included $20 million in acquisition expenses recorded in other, net, $6 million in professional service fees and $4 million in marketing expense. These increases were partially offset by a decrease in FDIC insurance and other taxes.

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 credit losses was $90 million and $13 million for the three months ended March 31, 2019 and 2018, respectively. Net losses charged-off as a percent of average portfolio loans and leases were 0.32% during the first quarter of 2019 compared to 0.36% during the first quarter of 2018. At March 31, 2019, nonperforming portfolio assets as a percent of portfolio loans and leases and OREO increased to 0.45% compared to 0.41% at December 31, 2018. For further discussion on credit quality, refer to the Credit Risk Management subsection of the Risk Management section of MD&A.

Capital Summary

The Bancorp’s capital ratios exceed the “well-capitalized” guidelines as defined by the PCA requirements of the U.S. banking agencies. As of March 31, 2019, as calculated under the Basel III standardized approach, the CET1 capital ratio was 9.60%, the Tier I risk-based capital ratio was 10.67%, the Total risk-based capital ratio was 13.68% and the Tier I leverage ratio was 10.32%.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

NON-GAAP FINANCIAL MEASURES

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
March 31,
 
($ in millions)    2019     2018  

Net interest income (U.S. GAAP)

   $ 1,082       996  

Add: FTE adjustment

     4       3  

Net interest income on an FTE basis (1)

   $ 1,086       999  

Net interest income on an FTE basis (annualized) (2)

     4,404       4,052  

Interest income (U.S. GAAP)

   $ 1,433       1,206  

Add: FTE adjustment

     4       3  

Interest income on an FTE basis

   $ 1,437       1,209  

Interest income on an FTE basis (annualized) (3)

     5,828       4,903  

Interest expense (annualized) (4)

   $ 1,424       852  

Noninterest income (5)

     1,101       909  

Noninterest expense (6)

     1,097       1,010  

Average interest-earning assets (7)

     134,463       127,546  

Average interest-bearing liabilities (8)

     97,137       87,607  

Ratios:

    

Net interest margin on an FTE basis (2) / (7)

     3.28     3.18  

Net interest rate spread on an FTE basis ((3) / (7)) - ((4) / (8))

     2.87       2.88  

Efficiency ratio on an FTE basis (6) / ((1) + (5))

     50.2       52.9  

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.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

The following table reconciles the non-GAAP financial measure of return on average tangible common equity to U.S. GAAP for the three months ended:

 

TABLE 4: Non-GAAP Financial Measures - Return on Average Tangible Common Equity

 

($ in millions)    March 31,
2019
    March 31,
2018
 

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

   $ 760       686  

Add: Intangible amortization, net of tax

     2       1  

Tangible net income available to common shareholders

   $ 762       687  

Tangible net income available to common shareholders (annualized) (1)

     3,090       2,786  

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

   $ 17,025       16,146  

Less: Average preferred stock

     (1,331     (1,331

          Average goodwill

     (2,682     (2,455

          Average intangible assets

     (58     (27

Average tangible common equity (2)

   $ 12,954       12,333  

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

     23.9     22.6  

The Bancorp considers various measures when evaluating capital utilization and adequacy, including the tangible equity ratio and tangible common equity ratio, in addition to capital ratios defined by the U.S. banking 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.

The following table reconciles non-GAAP capital ratios to U.S. GAAP:

 

TABLE 5: Non-GAAP Financial Measures - Capital Ratios

 

As of ($ in millions)    March 31,
2019
    December 31,
2018
 

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

   $ 19,647       16,250  

Less: Preferred stock

     (1,331     (1,331

          Goodwill

     (4,321     (2,478

          Intangible assets

     (218     (40

          AOCI

     (409     112  

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

     13,368       12,513  

Add: Preferred stock

     1,331       1,331  

Tangible equity (2)

   $ 14,699       13,844  

Total Assets (U.S. GAAP)

   $ 167,853       146,069  

Less: Goodwill

     (4,321     (2,478

          Intangible assets

     (218     (40

          AOCI, before tax

     (518     142  

Tangible assets, excluding unrealized gains / losses (3)

   $ 162,796       143,693  

Ratios:

    

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

     9.03     9.63  

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

     8.21       8.71  

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

RECENT ACCOUNTING STANDARDS

Note 4 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.

CRITICAL ACCOUNTING POLICIES

The Bancorp’s 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 Bancorp’s financial position, results of operations and cash flows. The Bancorp’s critical accounting policies include the accounting for the ALLL, reserve for unfunded commitments, income taxes, valuation of servicing rights, fair value measurements, goodwill and legal contingencies. These accounting policies are discussed in detail in the Critical Accounting Policies section of the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2018. There have been no material changes to the valuation techniques or models during the three months ended March 31, 2019.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

STATEMENTS OF INCOME ANALYSIS

Net Interest Income

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

Table 6 presents the components of net interest income, net interest margin and net interest rate spread for the three months ended March 31, 2019 and 2018, 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 $1.1 billion and $999 million for the three months ended March 31, 2019 and 2018, respectively. Net interest income was positively impacted by increases in yields on average loans and leases of 62 bps for the three months ended March 31, 2019 compared to the three months ended March 31, 2018. Net interest income also benefited from an increase in average commercial and industrial loans of $4.3 billion for the three months ended March 31, 2019 compared to the three months ended March 31, 2018. 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 March 2018, June 2018, September 2018 and December 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 the three months ended March 31, 2019 compared to the three months ended March 31, 2018. The rates paid on average interest-bearing core deposits and average long-term debt increased 47 bps and 49 bps, respectively, for the three months ended March 31, 2019 compared to the same period in the prior year. Due to the timing of the close of the MB Financial, Inc. acquisition, amortization and accretion of premiums and discounts on acquired loans and deposits had an immaterial impact on net interest income for the three months ended March 31, 2019.

Net interest rate spread on an FTE basis (non-GAAP) was 2.87% during the three months ended March 31, 2019 compared to 2.88% in the same period in 2018. Rates paid on average interest-bearing liabilities increased 49 bps, partially offset by a 48 bps increase in the yields on average interest-earning assets for the three months ended March 31, 2019 compared to the three months ended March 31, 2018.

Net interest margin on an FTE basis (non-GAAP) was 3.28% for the three months ended March 31, 2019 compared to 3.18% for the three months ended March 31, 2018. The increase from the three months ended March 31, 2018 was driven primarily by the increase in net interest income attributable to increases in average interest-earning assets and the yields on interest-earning assets, partially offset by a decrease in average free funding balances. The decrease in average free funding balances was driven by a decrease in average demand deposits of $3.3 billion for the three months ended March 31, 2019 compared to the three months ended March 31, 2018.

Interest income on an FTE basis from loans and leases (non-GAAP) increased $206 million during the three months ended March 31, 2019 compared to the three months ended March 31, 2018 driven by the previously mentioned increase in yields on average loan and leases, as well as increases in the balance of average commercial and industrial loans, average other consumer loans and average commercial mortgage loans. For more information on the Bancorp’s loan and lease portfolio, refer to the Loans and Leases subsection of the Balance Sheet Analysis section of MD&A. Interest income from investment securities and other short-term investments increased $22 million during the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily as a result of increases in average taxable securities and yields on average taxable securities.

Interest expense on core deposits increased $97 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to an increase in the cost of average interest-bearing core deposits to 99 bps for the three months ended March 31, 2019 from 52 bps for the three months ended March 31, 2018. The increase in the cost of average interest-bearing core deposits was primarily due to an increase in the cost of average interest checking deposits and average money market deposits. Refer to the Deposits subsection of the Balance Sheet Analysis section of MD&A for additional information on the Bancorp’s deposits.

Interest expense on average wholesale funding increased $44 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to increases in the rates paid on average long-term debt and average other short-term borrowings, partially offset by a decrease in average other short-term borrowings. Refer to the Borrowings subsection of the Balance Sheet Analysis section of MD&A for additional information on the Bancorp’s borrowings. During both the three months ended March 31, 2019 and 2018, average wholesale funding represented 23% of average interest-bearing liabilities. For more information on the Bancorp’s interest rate risk management, including estimated earnings sensitivity to changes in market interest rates, see the Market Risk Management subsection of the Risk Management section of MD&A.

 

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Management’s 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    March 31, 2019     March 31, 2018     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

   $ 46,070       530        4.67   $ 41,799       409        3.96   $ 44       77       121  

Commercial mortgage loans

     7,417       88        4.80       6,588       68        4.20       10       10       20  

Commercial construction loans

     4,838       66        5.55       4,671       53        4.59       2       11       13  

Commercial leases

     3,555       27        3.08       3,960       27        2.78       (3     3       -  

Total commercial loans and leases

     61,880       711        4.66       57,018       557        3.96       53       101       154  

Residential mortgage loans

     16,150       147        3.71       16,086       143        3.60       (1     5       4  

Home equity

     6,356       84        5.34       6,889       78        4.62       (6     12       6  

Indirect secured consumer loans

     9,176       86        3.79       9,064       70        3.12       1       15       16  

Credit card

     2,396       75        12.63       2,224       68        12.36       5       2       7  

Other consumer loans

     2,404       44        7.49       1,588       25        6.58       15       4       19  

Total consumer loans

     36,482       436        4.85       35,851       384        4.35       14       38       52  

Total loans and leases

   $ 98,362       1,147        4.73   $ 92,869       941        4.11   $ 67       139       206  

Securities:

                    

Taxable

     34,320       281        3.32       33,133       263        3.21       9       9       18  

Exempt from income taxes(b)

     28       -        4.80       73       -        1.40       -       -       -  

Other short-term investments

     1,753       9        1.97       1,471       5        1.37       2       2       4  

Total interest-earning assets

   $ 134,463       1,437        4.33   $ 127,546       1,209        3.85   $ 78       150       228  

Cash and due from banks

     2,217            2,175             

Other assets

     13,391            12,924             

Allowance for loan and lease losses

     (1,103                      (1,195                                         

Total assets

   $ 148,968                      $ 141,450                                           

Liabilities and Equity:

                    

Interest-bearing liabilities:

                    

Interest checking deposits

   $ 33,697       97        1.18   $ 28,403       44        0.63   $ 9       44       53  

Savings deposits

     13,052       5        0.15       13,546       3        0.07       (1     3       2  

Money market deposits

     23,133       59        1.03       20,750       27        0.53       4       28       32  

Foreign office deposits

     208       -        0.60       494       -        0.13       -       -       -  

Other time deposits

     4,860       22        1.80       3,856       12        1.25       4       6       10  

Total interest-bearing core deposits

     74,950       183        0.99       67,049       86        0.52       16       81       97  

Certificates $100,000 and over

     3,358       18        2.13       2,284       8        1.49       6       4       10  

Other deposits

     726       4        2.43       379       1        1.44       2       1       3  

Federal funds purchased

     2,019       12        2.43       692       2        1.43       7       3       10  

Other short-term borrowings

     646       6        3.62       2,423       8        1.34       (9     7       (2

Long-term debt

     15,438       128        3.35       14,780       105        2.86       4       19       23  

Total interest-bearing liabilities

   $ 97,137       351        1.46   $ 87,607       210        0.97   $     26       115       141  

Demand deposits

     30,557            33,825             

Other liabilities

     4,227                        3,852                                           

Total liabilities

   $ 131,921          $ 125,284             

Total equity

   $ 17,047                      $ 16,166                                           

Total liabilities and equity

   $     148,968                      $     141,450                                           

Net interest income (FTE)(c)

     $     1,086          $ 999        $ 52       35         87  

Net interest margin (FTE)(c)

          3.28          3.18      

Net interest rate spread (FTE)(c)

          2.87            2.88        

Interest-bearing liabilities to interest-earning assets

 

             72.24                        68.69                          
(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 $3 for the three months ended March 31, 2019 and 2018, 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 Credit Losses

The Bancorp provides as an expense an amount for probable credit losses within the loan and lease portfolio and the portfolio of unfunded loan commitments and letters of credit that is based on factors previously discussed in the Critical Accounting Policies section of the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2018. The provision is recorded to bring the ALLL and reserve for unfunded commitments to a level deemed appropriate by the Bancorp to cover losses inherent in the portfolios. 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 are referred to as charge-offs. Net charge-offs include current period charge-offs less recoveries on previously charged-off loans and leases.

The provision for credit losses was $90 million and $13 million for the three months ended March 31, 2019 and 2018, respectively. The increase in provision expense for the three months ended March 31, 2019 compared to the same period in the prior year was primarily due to the impact of lower commercial criticized assets and overall reserve rates during the three months ended March 31, 2018, combined with an increase in total outstanding loan balances as of March 31, 2019, exclusive of loans and leases acquired in the MB Financial, Inc. acquisition.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

The ALLL increased $12 million from December 31, 2018 to $1.1 billion at March 31, 2019. At March 31, 2019, the ALLL as a percent of portfolio loans and leases decreased to 1.02%, compared to 1.16% at December 31, 2018. This decrease reflects the impact of the MB Financial, Inc. acquisition, which added approximately $13.5 billion in portfolio loans and leases at the acquisition date. Loans acquired by the Bancorp through a purchase business combination are recorded at fair value as of the acquisition date. The Bancorp does not carry over the acquired company’s ALLL, nor does the Bancorp add to its existing ALLL as part of purchase accounting. The reserve for unfunded commitments increased $2 million from December 31, 2018 to $133 million at March 31, 2019. This increase reflects the impact of the MB Financial, Inc. acquisition, which included approximately $1 million in reserves for unfunded commitments at the acquisition date.

Refer to the Credit Risk Management subsection of the Risk Management section of MD&A as well as Note 7 of the Notes to Condensed Consolidated Financial Statements for more detailed information on the provision for credit losses, including an analysis of loan 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, ALLL and reserve for unfunded commitments.

Noninterest Income

Noninterest income increased $192 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018.

The following table presents the components of noninterest income:

 

TABLE 7: Components of Noninterest Income                          
     For the three months ended    
     March 31,    
($ in millions)      2019        2018       % Change  

Service charges on deposits

   $ 131        137       (4

Wealth and asset management revenue

     112        113       (1

Corporate banking revenue

     112        88       27  

Card and processing revenue

     79        79       -  

Mortgage banking net revenue

     56        56       -  

Other noninterest income

     592        460       29  

Securities gains (losses), net

     16        (11     NM  

Securities gains (losses), net - non-qualifying hedges on MSRs

     3        (13     NM  

Total noninterest income

   $ 1,101        909       21  

Service charges on deposits

Service charges on deposits decreased $6 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to decreases of $5 million in commercial deposit fees and $1 million in consumer deposit fees.

Wealth and asset management revenue

Wealth and asset management revenue decreased $1 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018. The decrease from the prior year included a $2 million decrease in securities and broker income driven by market volatility and a $2 million decrease in institutional fees as a result of restructuring the Bancorp’s investment management business to focus on core client strategies. These decreases were partially offset by a $3 million increase in private client services driven by acquisitions since the quarter ended March 31, 2018. The Bancorp’s trust and registered investment advisory businesses had approximately $394 billion and $363 billion in total assets under care as of March 31, 2019 and 2018, respectively, and managed $44 billion and $37 billion in assets for individuals, corporations and not-for-profit organizations as of March 31, 2019 and 2018, respectively.

Corporate banking revenue

Corporate banking revenue increased $24 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018. The increase from the prior year was primarily driven by increases in institutional sales, lease remarketing fees and business lending fees of $9 million, $9 million and $6 million, respectively. These increases were partially offset by a decrease in foreign exchange fees of $2 million.

Mortgage banking net revenue

Mortgage banking net revenue was flat for the three months ended March 31, 2019 compared to the three months ended March 31, 2018.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

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

 

TABLE 8: Components of Mortgage Banking Net Revenue              
    For the three months ended
March 31,
 
($ in millions)   2019     2018  

Origination fees and gains on loan sales

  $ 25       24  

Net mortgage servicing revenue:

   

Gross mortgage servicing fees

    55       53  

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

    (24     (21

Net mortgage servicing revenue

    31       32  

Total mortgage banking net revenue

  $ 56       56  

Origination fees and gains on loan sales increased $1 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily driven by an increase in the positive fair value adjustments on portfolio loans held at fair value due to the interest rate environment. Residential mortgage loan originations remained flat at $1.6 billion for both the three months ended March 31, 2019 and 2018.

Net mortgage servicing revenue decreased $1 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to an increase in net negative valuation adjustments of $3 million, partially offset by an increase in gross mortgage servicing fees of $2 million. Refer to Table 9 for the components of net valuation adjustments on the MSR portfolio and the impact of the non-qualifying hedging strategy.

 

TABLE 9: Components of Net Valuation Adjustments on MSRs              
    For the three months ended
March 31,
 
($ in millions)   2019     2018  

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

  $ 60       (49

Changes in fair value:

   

Due to changes in inputs or assumptions

    (57     57  

Other changes in fair value

    (27     (29

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

  $ (24     (21

Mortgage rates decreased during the three months ended March 31, 2019 which caused modeled prepayment speeds to rise. The fair value of the MSR portfolio decreased $57 million due to changes to inputs to the valuation model including prepayment speeds and OAS spread assumptions and decreased $27 million due to the passage of time, including the impact of regularly scheduled repayments, paydowns and payoffs during the three months ended March 31, 2019. Mortgage rates increased during the three months ended March 31, 2018 which caused modeled prepayment speeds to slow. The fair value of the MSR portfolio increased $57 million due to changes to inputs to the valuation model including prepayment speeds and OAS spread assumptions and decreased $29 million due to the passage of time, including the impact of regularly scheduled repayments, paydowns and payoffs during the three months ended March 31, 2018.

Further detail on the valuation of MSRs can be found in Note 14 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 15 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 gains of $3 million and net losses of $13 million during the three months ended March 31, 2019 and 2018, respectively, recorded in securities gains (losses), net - non-qualifying hedges on MSRs in the Bancorp’s Condensed Consolidated Statements of Income.

The Bancorp’s total residential mortgage loans serviced as of March 31, 2019 and 2018 were $101.3 billion and $77.2 billion, respectively, with $83.9 billion and $61.0 billion, respectively, of residential mortgage loans serviced for others.

 

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Management’s 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 10: Components of Other Noninterest Income

 

   
     For the three months ended
March 31,
($ in millions)      2019       2018      

Gain on sale of Worldpay, Inc. shares

   $ 562       -    

Operating lease income

     21       23    

Cardholder fees

     14       14    

BOLI income

     14       13    

Insurance income

     6       6    

Consumer loan and lease fees

     5       5    

Banking center income

     5       5    

Private equity investment income

     4       20    

Equity method income (loss) from interest in Worldpay Holding, LLC

     2       (1  

Net gains (losses) on loan sales

     1       (1  

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

     (31     (39  

Net losses on disposition and impairment of bank premises and equipment

     (20     (8  

Gain related to Vantiv, Inc.’s acquisition of Worldpay Group plc.

     -       414    

Other, net

     9       9      

Total other noninterest income

   $ 592       460      

Other noninterest income increased $132 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to the gain on sale of WorldPay, Inc. shares and a decrease in the loss on the swap associated with the sale of Visa, Inc. Class B shares partially offset by the gain related to Vantiv, Inc.’s acquisition of Worldpay Group plc. recognized during the first quarter of 2018. Additionally, the increase in other noninterest income was partially offset by a decrease in private equity investment income and an increase in the losses on disposition and impairment of bank premises and equipment.

The Bancorp recognized a $562 million gain related to the sale of WorldPay, Inc. shares during the three months ended March 31, 2019. The Bancorp recognized a $414 million gain related to Vantiv, Inc’s acquisition of WorldPay Group plc. during the three months ended March 31, 2018. For additional information, refer to Note 21 of the Notes to Condensed Consolidated Financial Statements.

The Bancorp recognized a $31 million loss on the swap associated with the sale of Visa, Inc. Class B shares during the three months ended March 31, 2019 compared with a $39 million loss during the three months ended March 31, 2018.

Private equity investment income decreased $16 million for the three months ended March 31, 2019 compared to the same period in the prior year primarily due to the recognition of positive net valuation adjustments on certain private equity investments in the first quarter of 2018. For additional information on the valuation of private equity investments, refer to Note 25 of the Notes to Condensed Consolidated Financial Statements. Net losses on disposition and impairment of bank premises and equipment increased $12 million for the three months ended March 31, 2019 compared to the three months ended 2018. The increase was driven by the impact of impairment charges of $20 million during the three months ended March 31, 2019 compared to $8 million during the three months ended March 31, 2018. For additional information, refer to Note 8 of the Notes to Condensed Consolidated Financial Statements.

Noninterest Expense

Noninterest expense increased $87 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to increases in personnel costs (salaries, wages and incentives plus employee benefits), technology and communications expense and other noninterest expense. The following table presents the components of noninterest expense:

 

TABLE 11: Components of Noninterest Expense                       
     For the three months ended
March 31,
        
($ in millions)      2019       2018        % Change  

Salaries, wages and incentives

   $ 479       447        7  

Employee benefits

     131       110        19  

Technology and communications

     83       68        22  

Net occupancy expense

     75       75        -  

Card and processing expense

     31       29        7  

Equipment expense

     30       31        (3

Other noninterest expense

     268       250        7  

Total noninterest expense

   $ 1,097       1,010        9  

Efficiency ratio on an FTE basis(a)

     50.2     52.9           
(a)

This is a non-GAAP measure. For further information, refer to the Non-GAAP Financial Measures section of MD&A.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

The Bancorp recognized $76 million of merger-related expenses related to the MB Financial, Inc. acquisition for the three months ended March 31, 2019. The following table provides a summary of merger-related expenses recorded in noninterest expense for the three months ended March 31, 2019:

 

TABLE 12: Merger-Related Expenses

        
($ in millions)   

Merger-Related    

Expense    

 

Salaries, wages and incentives

   $ 32      

Employee benefits

     3      

Technology and communications

     11      

Other noninterest expense

     30      

Total

   $ 76      

Personnel costs increased $53 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily driven by $35 million of merger-related expenses, the addition of personnel costs from the acquisition of MB Financial, Inc. and higher deferred compensation expense. Full-time equivalent employees totaled 20,115 at March 31, 2019 compared to 18,344 at March 31, 2018.

Technology and communications expense increased $15 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily driven by $11 million of merger-related expenses and 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    
March 31,    
 
($ in millions)    2019      2018      

Marketing

   $ 36        32      

Loan and lease

     27        26      

Losses and adjustments

     22        17      

FDIC insurance and other taxes

     20        32      

Professional service fees

     19        13      

Operating lease

     18        21      

Data processing

     16        14      

Travel

     14        13      

Recruitment and education

     11        8      

Postal and courier

     9        9      

Donations

     3        3      

Supplies

     3        3      

Insurance

     3        3      

Loss on partnership investments

     -        2      

Other, net

     67        54      

Total other noninterest expense

   $ 268        250      

Other noninterest expense increased $18 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to the recognition of $30 million of merger-related expenses related to the acquisition of MB Financial, Inc. Those expenses included $20 million in acquisition expenses recorded in other, net, $6 million in professional service fees and $4 million in marketing expense. These increases were partially offset by a decrease in FDIC insurance and other taxes.

FDIC insurance and other taxes decreased $12 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to the elimination of the FDIC surcharge in the fourth quarter of 2018.

Applicable Income Taxes

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

 

TABLE 14: Applicable Income Taxes                 
     For the three months ended    
March 31,    
 
($ in millions)    2019     2018      

Income before income taxes

   $ 996       882      

Applicable income tax expense

     221       181      

Effective tax rate

     22.2     20.5      

Applicable income tax expense for all periods includes the benefit from tax-exempt income, tax-advantaged investments and tax credits (and other related tax benefits), partially offset by the effect of proportional amortization of qualifying LIHTC investments and certain nondeductible expenses. The tax credits are primarily 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.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

The increase in the effective tax rate for the three months ended March 31, 2019 compared to the same period in the prior year was primarily related to an increase in state income tax expense and a decrease in expected low-income housing tax credits and other tax benefits, partially offset by a decrease of proportional amortization of qualifying LIHTC investments.

For stock-based awards, U.S. GAAP requires that the tax consequences for the difference between the expense recognized for financial reporting and the Bancorp’s 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 March 31, 2019, the Bancorp estimates that it may be necessary to recognize $4 million of additional income tax benefit over the next twelve months related to the settlement of stock-based awards, primarily in the second quarter of 2019. However, the amount of income tax expense or benefit recognized upon settlement may vary significantly from expectations based on the Bancorp’s stock price and the number of SARs exercised by employees.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

BALANCE SHEET ANALYSIS

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, Table 16 summarizes loans acquired in the MB Financial, Inc. acquisition and Table 17 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)

 

    March 31, 2019     December 31, 2018  
As of ($ in millions)   Carrying Value      % of Total     Carrying Value      % of Total  

Commercial loans and leases:

         

Commercial and industrial loans

  $ 51,925        47   $ 44,407        46

Commercial mortgage loans

    10,689        10       6,977        7  

Commercial construction loans

    5,231        5       4,657        5  

Commercial leases

    3,909        3       3,600        4  

Total commercial loans and leases

    71,754        65       59,641        62  

Consumer loans:

         

Residential mortgage loans

    17,437        16       16,041        17  

Home equity

    6,435        6       6,402        7  

Indirect secured consumer loans(a)

    10,031        9       8,976        9  

Credit card

    2,388        2       2,470        3  

Other consumer loans

    2,489        2       2,342        2  

Total consumer loans

    38,780        35       36,231        38  

Total loans and leases

  $ 110,534        100   $ 95,872        100

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

  $ 109,842              $ 95,265           
(a)

The Bancorp acquired indirect motorcycle, powersports, recreational vehicles and marine loans in the acquisition of MB Financial, Inc. These loans are included in addition to automobile loans in the line item “indirect secured consumer loans”.

Total loans and leases, including loans and leases held for sale, increased $14.7 billion from December 31, 2018. The increase in total loans and leases was primarily driven by the impact of the MB Financial, Inc. acquisition, which added $13.5 billion in total loans and leases upon acquisition. Table 16 summarizes the detail of loans and leases acquired from MB Financial, Inc. on March 22, 2019.

 

TABLE 16: Loans and Leases Acquired

            

($ in millions)

            

Commercial loans and leases:

    

Commercial and industrial loans

   $ 6,604    

Commercial mortgage loans

     3,531    

Commercial construction loans

     496    

Commercial leases

     436      

Total commercial loans and leases

     11,067      

Consumer loans:

    

Residential mortgage loans

     1,397    

Home equity

     174    

Indirect secured consumer loans

     802    

Credit card

     19    

Other consumer loans

     43      

Total consumer loans

     2,435      

Total loans and leases

   $ 13,502      

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

   $             13,490      

The following discussion excludes the impact of the MB Financial, Inc. acquisition. Commercial loans and leases increased $1.0 billion from December 31, 2018 due to increases in commercial and industrial loans, commercial mortgage loans and commercial construction loans, partially offset by a decrease in commercial leases. Commercial and industrial loans increased $914 million, or two percent, from December 31, 2018 primarily as a result of an increase in loan originations as well as a decrease in payoffs during the three months ended March 31, 2019. Commercial mortgage loans increased $181 million, or three percent, from December 31, 2018 primarily as a result of an increase in loan originations and increases in permanent financing from the Bancorp’s commercial construction loan portfolio. Commercial construction loans increased $78 million, or two percent, from December 31, 2018 primarily as a result of lower payoffs and paydowns as well as increases in draw levels on existing commitments as a result of seasonal trends. Commercial leases decreased $127 million, or four percent, from December 31, 2018 primarily as a result of a planned reduction in indirect non-relationship based lease originations.

The following discussion excludes the impact of the MB Financial, Inc. acquisition. Consumer loans increased $114 million from December 31, 2018 primarily due to increases in indirect secured consumer loans and other consumer loans, partially offset by decreases in home equity and credit card. Indirect secured consumer loans increased $253 million, or three percent, from December 31, 2018 primarily as a result of loan production exceeding payoffs. Other consumer loans increased $104 million, or four percent, from December 31, 2018 primarily as a result of growth in point-of-sale loan originations. Home equity decreased $141 million, or two percent, from December 31, 2018 as payoffs exceeded loan production. Credit card decreased $101 million, or four percent, from December 31, 2018 primarily as a result of decreases in balance-active customers and average balance per active customer, driven by seasonal paydowns in year-end balances.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

TABLE 17: Components of Average Loans and Leases (including loans and leases held for sale)

 

    March 31, 2019     March 31, 2018  
For the three months ended ($ in millions)   Carrying Value     % of Total     Carrying Value     % of Total  

Commercial loans and leases:

       

Commercial and industrial loans

  $ 46,070       48   $ 41,799       45

Commercial mortgage loans

    7,417       8       6,588       7  

Commercial construction loans

    4,838       5       4,671       5  

Commercial leases

    3,555       4       3,960       4  

Total commercial loans and leases

    61,880       65       57,018       61  

Consumer loans:

       

Residential mortgage loans

    16,150       16       16,086       18  

Home equity

    6,356       6       6,889       7  

Indirect secured consumer loans(a)

    9,176       9       9,064       10  

Credit card

    2,396       2       2,224       2  

Other consumer loans

    2,404       2       1,588       2  

Total consumer loans

    36,482       35       35,851       39  

Total average loans and leases

  $ 98,362       100   $ 92,869       100

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

  $ 97,773             $ 92,334          
(a)

The Bancorp acquired indirect motorcycle, powersports, recreational vehicles and marine loans in the acquisition of MB Financial, Inc. These loans are included in addition to automobile loans in the line item “indirect secured consumer loans”.

Average loans and leases, including loans and leases held for sale, increased $5.5 billion from March 31, 2018 as a result of a $4.9 billion, or nine percent, increase in average commercial loans and leases as well as a $631 million, or two percent, increase in average consumer loans.

Average commercial loans and leases increased from March 31, 2018 due to increases in average commercial and industrial loans, average commercial mortgage loans and average commercial construction loans, partially offset by a decrease in average commercial leases. Average commercial and industrial loans increased $4.3 billion, or 10%, from March 31, 2018 primarily as a result of an increase in loan originations as well as a decrease in payoffs and the impact of the acquisition of MB Financial, Inc. Average commercial mortgage loans increased $829 million, or 13%, from March 31, 2018 primarily as a result of an increase in loan origination activity and the impact of the acquisition of MB Financial, Inc. Average commercial construction loans increased $167 million, or four percent, from March 31, 2018 primarily as a result of an increase in draw levels on existing commitments. Average commercial leases decreased $405 million, or 10%, from March 31, 2018 primarily as a result of a planned reduction in indirect non-relationship based lease originations.

Average consumer loans increased from March 31, 2018 due to increases in average other consumer loans, average credit card, average indirect secured consumer loans and average residential mortgage loans, partially offset by a decrease in average home equity loans. Average other consumer loans increased $816 million, or 51%, from March 31, 2018 primarily due to growth in point-of-sale loan originations. Average credit card increased $172 million, or eight percent, from March 31, 2018 primarily due to increases in balance-active customers and average balance per active customer. Average indirect secured consumer loans increased $112 million, or one percent, from March 31, 2018 primarily due to the acquisition of MB Financial, Inc. Average residential mortgage loans increased $64 million from March 31, 2018 primarily driven by the acquisition of MB Financial, Inc. Average home equity decreased $533 million, or eight percent, from March 31, 2018 as payoffs exceeded loan production.

Investment Securities

The Bancorp uses investment securities as a means of managing interest rate risk, providing collateral for pledging purposes and for liquidity to satisfy regulatory requirements. Total investment securities were $35.8 billion and $33.6 billion at March 31, 2019 and December 31, 2018, respectively. The taxable available-for-sale debt and other investment securities portfolio had an effective duration of 4.8 years at March 31, 2019 compared to 5.0 years at December 31, 2018.

Debt securities are classified as available-for-sale when, in management’s judgment, they may be sold in response to, or in anticipation of, changes in market conditions. 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 March 31, 2019, the Bancorp’s investment portfolio consisted primarily of AAA-rated available-for-sale debt and other securities. The Bancorp held an immaterial amount in below-investment grade available-for-sale debt and other securities at both March 31, 2019 and December 31, 2018. During both the three months ended March 31, 2019 and 2018 the Bancorp did not recognize any OTTI on its available-for-sale debt and other securities.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

The following table summarizes the end of period components of investment securities:

TABLE 18: Components of Investment Securities

As of ($ in millions)    March 31,
2019
       December 31,
2018
 

Available-for-sale debt and other securities (amortized cost basis):

       

U.S. Treasury and federal agency securities

   $ 796          98  

Obligations of states and political subdivisions securities

     6          2  

Mortgage-backed securities:

       

Agency residential mortgage-backed securities

     15,614          16,403  

Agency commercial mortgage-backed securities

     12,382          10,770  

Non-agency commercial mortgage-backed securities

     3,338          3,305  

Asset-backed securities and other debt securities

     2,067          1,998  

Other securities(a)

     581          552  

Total available-for-sale debt and other securities

   $         34,784                  33,128  

Held-to-maturity securities (amortized cost basis):

       

Obligations of states and political subdivisions securities

   $ 16          16  

Asset-backed securities and other debt securities

     5          2  

Total held-to-maturity securities

   $ 21          18  

Trading debt securities (fair value):

       

U.S. Treasury and federal agency securities

   $ 7          16  

Obligations of states and political subdivisions securities

     25          35  

Agency residential mortgage-backed securities

     66          68  

Asset-backed securities and other debt securities

     227          168  

Total trading debt securities

   $ 325          287  

Total equity securities (fair value)

   $ 426          452  
(a)

Other securities consist of FHLB, FRB and DTCC restricted stock holdings of $137, $442 and $2, respectively, at March 31, 2019 and $184, $366 and $2, respectively, at December 31, 2018, that are carried at cost.

On an amortized cost basis, available-for-sale debt and other securities increased $1.7 billion from December 31, 2018 primarily due to increases in agency commercial mortgage-backed securities and U.S. Treasury and federal agency securities, partially offset by a decrease in agency residential mortgage-backed securities. The increase in available-for-sale debt and other securities includes the impact of the MB Financial, Inc. acquisition, which added approximately $832 million of available-for-sale debt and other securities at the acquisition date.

On an amortized cost basis, available-for-sale debt and other securities were 23% and 25% of total interest-earning assets at March 31, 2019 and December 31, 2018, respectively. The estimated weighted-average life of the debt securities in the available-for-sale debt and other securities portfolio was 6.1 years at March 31, 2019 compared to 6.5 years at December 31, 2018. In addition, at March 31, 2019, the debt securities in the available-for-sale debt and other securities portfolio had a weighted-average yield of 3.27%, compared to 3.25% at December 31, 2018.

Trading debt securities increased $38 million from December 31, 2018 primarily due to an increase in asset-backed securities and other debt securities.

Information presented in Table 19 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 gains on the available-for-sale debt and other securities portfolio were $264 million at March 31, 2019 compared to net unrealized losses of $298 million at December 31, 2018. The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. The fair value of investment securities generally increases when interest rates decrease or when credit spreads contract.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

TABLE 19: Characteristics of Available-for-Sale Debt and Other Securities

 

   
As of March 31, 2019 ($ in millions)    Amortized Cost    Fair Value    Weighted-Average
Life (in years)
   Weighted-Average
Yield
    

U.S. Treasury and federal agency securities:

                     

Average life of 1 year or less

     $ 647        648        0.2        2.38 %  

Average life 1 – 5 years

       149        149        2.7        2.30    

Total

     $ 796        797        0.7        2.37 %  

Obligations of states and political subdivisions securities:(a)

                     

Average life of 1 year or less

       1        1        0.1        5.85  

Average life 1 – 5 years

       -        -        2.3        5.90  

Average life 5 – 10 years

       4        4        5.2        0.82  

Average life greater than 10 years

       1        1        10.0        2.86    

Total

     $ 6        6        5.0        2.53 %  

Agency residential mortgage-backed securities:

                     

Average life 1 – 5 years

       7,130        7,203        3.7        3.46  

Average life 5 – 10 years

       8,229        8,230        6.9        3.18  

Average life greater than 10 years

       255        256        11.2        3.20    

Total

     $ 15,614        15,689        5.5        3.31 %  

Agency commercial mortgage-backed securities:

                     

Average life of 1 year or less

       171        169        0.9        2.54  

Average life 1 – 5 years

       2,998        3,039        3.6        3.09  

Average life 5 – 10 years

       6,197        6,273        7.5        3.19  

Average life greater than 10 years

       3,016        3,032        12.2        3.15    

Total

     $ 12,382        12,513        7.6        3.15 %  

Non-agency commercial mortgage-backed securities:

                     

Average life of 1 year or less

       1        1        0.8        3.85  

Average life 1 – 5 years

       1,051        1,069        4.3        3.35  

Average life 5 – 10 years

       2,286        2,305        6.4        3.25    

Total

     $ 3,338        3,375        5.7        3.28 %  

Asset-backed securities and other debt securities:

                     

Average life of 1 year or less

       14        14        0.5        3.40  

Average life 1 – 5 years

       1,226        1,248        3.4        4.17  

Average life 5 – 10 years

       715        713        7.1        3.90  

Average life greater than 10 years

       112        112        10.2        4.33    

Total

     $ 2,067        2,087        5.0        4.08 %  

Other securities

       581        581                          

Total available-for-sale debt and other securities

     $ 34,784        35,048        6.1        3.27 %    
(a)

Taxable-equivalent yield adjustments included in the above table are 0.15%, 0.00%, 0.22%, 0.76% and 0.31% for securities with an average life of 1 year or less, 1-5 years, 5-10 years, greater than 10 years and in total, respectively.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

Deposits

The Bancorp’s deposit balances represent an important source of funding and revenue growth opportunity. The Bancorp continues to focus on core deposit growth in its retail and commercial franchises by improving customer satisfaction, building full relationships and offering competitive rates. Average core deposits represented 71% and 72% of the Bancorp’s average asset funding base at March 31, 2019 and December 31, 2018, respectively.

The following table presents the end of period components of deposits:

 

TABLE 20: Components of Deposits

                                  
     March 31, 2019     December 31, 2018      
        
As of ($ in millions)    Balance      % of Total     Balance      % of Total      

Demand

   $ 35,963        29   $ 32,116        30 %     

Interest checking

     35,746        29       34,058        31  

Savings

     14,451        12       12,907        12  

Money market

     25,942        21       22,597        21  

Foreign office

     154        -       240        -  

Total transaction deposits

     112,256        91       101,918        94  

Other time

     5,539        4       4,490        4  

Total core deposits

     117,795        95       106,408        98  

Certificates $100,000 and over(a)

     5,569        5       2,427        2  

Other deposits

     300        -       -        -  

Total deposits

   $     123,664        100   $     108,835        100 %     
(a)

Includes $3.2 billion and $1.2 billion of institutional, retail and wholesale certificates $250,000 and over at March 31, 2019 and December 31, 2018, respectively.

Total deposits increased $14.8 billion, or 14%, from December 31, 2018 primarily due to the MB Financial, Inc. acquisition as the Bancorp assumed commercial and consumer deposit balances of $14.5 billion at acquisition. Table 22 summarizes the detail of deposits assumed as a result of the MB Financial, Inc. acquisition on March 22, 2019.

 

TABLE 21: Deposits Assumed

        
($ in millions)        

Demand

   $ 6,010      

Interest checking

     2,408      

Savings

     1,175      

Money market

     2,571      

Total transaction deposits

     12,164      

Other time

     546      

Total core deposits

     12,710      

Certificates $100,000 and over

     1,779      

Total deposits

   $ 14,489      

The following discussion excludes the impact of the MB Financial, Inc. acquisition. Core deposits decreased $1.3 billion, or one percent, from December 31, 2018 primarily as a result of a decrease in transaction deposits. Transaction deposits decreased $1.8 billion, or two percent, from December 31, 2018 primarily due to decreases in demand deposits and interest checking deposits, partially offset by an increase in money market deposits. Demand deposits decreased $2.2 billion, or seven percent, from December 31, 2018 primarily as a result of balance migration into interest checking deposits. Interest checking deposits decreased $720 million, or two percent, from December 31, 2018 primarily as a result of lower balances per commercial customer account partially offset by balance migration from demand deposit accounts. Money market deposits increased $774 million, or three percent, from December 31, 2018 primarily as a result of promotional product offerings, which drove consumer customer acquisition.

Certificates $100,000 and over increased $1.4 billion, or 56%, from December 31, 2018 primarily due to an increase in retail brokered certificates of deposit issued since December 31, 2018 to offset a seasonal decrease in core deposits.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

The following table presents the components of average deposits for the three months ended:

 

TABLE 22: Components of Average Deposits

                                  
     March 31, 2019     March 31, 2018      
        
($ in millions)    Balance      % of Total     Balance      % of Total      

Demand

   $ 30,557        28   $ 33,825        34 %     

Interest checking

     33,697        31       28,403        27  

Savings

     13,052        12       13,546        13  

Money market

     23,133        21       20,750        20  

Foreign office

     208        -       494        -  

Total transaction deposits

     100,647        92       97,018        94  

Other time

     4,860        4       3,856        4  

Total core deposits

     105,507        96       100,874        98  

Certificates $100,000 and over(a)

     3,358        3       2,284        2  

Other deposits

     726        1       379        -  

Total average deposits

   $         109,591        100   $ 103,537        100 %     
(a)

Includes $2.0 billion and $878 million of average institutional, retail and wholesale certificates $250,000 and over for the three months ended March 31, 2019 and 2018, respectively.

On an average basis, core deposits increased $4.6 billion, or five percent, from March 31, 2018 primarily due to an increase of $3.6 billion in average transaction deposits and an increase of $1.0 billion in average other time deposits. The increase in average transaction deposits was driven primarily by increases in average interest checking deposits and average money market deposits, partially offset by a decrease in average demand deposits. Average interest checking deposits increased $5.3 billion, or 19%, from March 31, 2018, primarily due to balance migration from demand deposit accounts and an increase in average balances per commercial customer account. Average money market deposits increased $2.4 billion, or 11%, from March 31, 2018 primarily as a result of promotional product offerings, which drove consumer customer acquisition. Average demand deposits decreased $3.3 billion, or 10%, from March 31, 2018 primarily due to commercial customer balance migration into interest checking deposits. Average other time deposits increased from March 31, 2018 primarily as a result of promotional offers.

Average certificates $100,000 and over increased $1.1 billion from March 31, 2018 primarily due to an increase in retail brokered certificates of deposit issued during the first quarter of 2019 to offset a seasonal decrease in core deposits. Average other deposits increased $347 million from March 31, 2018 primarily due to an increase in average Eurodollar trade deposits.

Contractual maturities

The contractual maturities of certificates $100,000 and over as of March 31, 2019 are summarized in the following table:

 

TABLE 23: Contractual Maturities of Certificates $100,000 and Over

        

($ in millions)

        

Next 3 months

   $ 1,007   

3-6 months

     1,257   

6-12 months

     2,013   

After 12 months

     1,292   

Total certificates $100,000 and over

   $         5,569   

The contractual maturities of other time deposits and certificates $100,000 and over as of March 31, 2019 are summarized in the following table:

 

TABLE 24: Contractual Maturities of Other Time Deposits and Certificates $100,000 and Over

        

($ in millions)

        

Next 12 months

   $ 7,685   

13-24 months

     2,664   

25-36 months

     575   

37-48 months

     106   

49-60 months

     39   

After 60 months

     39   

Total other time deposits and certificates $100,000 and over

   $         11,108   

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. Average total borrowings as a percent of average interest-bearing liabilities were 19% and 20% at March 31, 2019 and December 31, 2018, respectively.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

The following table summarizes the end of period components of borrowings:

 

TABLE 25: Components of Borrowings

                     
As of ($ in millions)    March 31, 2019    December 31, 2018    

Federal funds purchased

     $ 2,630        1,925    

Other short-term borrowings

       1,329        573    

Long-term debt

       15,483        14,426    

Total borrowings

     $         19,442        16,924    

Total borrowings increased $2.5 billion, or 15%, from December 31, 2018 due to increases in long-term debt, other short-term borrowings and federal funds purchased. Long-term debt increased $1.1 billion from December 31, 2018 primarily driven by the issuance of $1.5 billion of unsecured senior fixed-rate notes, $300 million of unsecured senior floating-rate bank notes and $53 million of fair value adjustments associated with interest rate swaps hedging long-term debt during the three months ended March 31, 2019. The increase in long-term debt since December 31, 2018 also included the impact of $713 million of long-term debt assumed in the MB Financial, Inc. acquisition. These increases were partially offset by the maturities of $750 million of unsecured senior bank notes and $500 million of unsecured senior notes and $92 million of paydowns on long-term debt associated with automobile loan securitizations. For additional information regarding long-term debt issuances, refer to Note 17 of the Notes to Condensed Consolidated Financial Statements. Other short-term borrowings increased $756 million from December 31, 2018 primarily as a result of other short-term borrowings assumed in the MB Financial, Inc. acquisition as well as an increase 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 16 of the Notes to Condensed Consolidated Financial Statements. Federal funds purchased increased $705 million from December 31, 2018.

The following table summarizes components of average borrowings for the three months ended:

 

TABLE 26: Components of Average Borrowings

                     
($ in millions)    March 31, 2019          March 31, 2018    

Federal funds purchased

     $ 2,019        692    

Other short-term borrowings

       646        2,423    

Long-term debt

       15,438        14,780    

Total average borrowings

     $         18,103        17,895    

Total average borrowings increased $208 million, or one percent, compared to March 31, 2018, due to increases in average federal funds purchased and average long term debt partially offset by a decrease in average other short-term borrowings. Average federal funds purchased increased $1.3 billion due to a reallocation of other short-term borrowings compared to March 31, 2018. Average long-term debt increased $658 million compared to March 31, 2018. The increase was primarily driven by the issuances of $1.5 billion of unsecured senior fixed-rate notes, $1.3 billion of unsecured senior fixed-rate bank notes and $600 million of unsecured senior floating-rate bank notes since March 31, 2018, partially offset by the maturities of $2 billion in unsecured senior bank notes, $500 million in unsecured senior notes and $500 million of unsecured subordinated bank debt since March 31, 2018. Average other short-term borrowings decreased $1.8 billion compared to March 31, 2018, 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 Bancorp’s liquidity management.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

BUSINESS SEGMENT REVIEW

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 26 of the Notes to Condensed Consolidated Financial Statements. Results of the Bancorp’s business segments are presented based on its management structure and management accounting practices. The structure and accounting practices are specific to the Bancorp; therefore, the financial results of the Bancorp’s business segments are not necessarily comparable with similar information for other financial institutions. The Bancorp refines its methodologies from time to time as management’s accounting practices 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 cash flows for each transaction. Assigning the FTP rate based on matching the duration of cash flows allocates interest income and interest expense to each business segment so its resulting net interest income is insulated from future changes in benchmark interest rates. The Bancorp’s FTP methodology also allocates the contribution to net interest income of the asset-generating and deposit-providing businesses on a duration-adjusted basis to better attribute the driver of the performance. As the asset and liability durations are not perfectly matched, the residual impact of the FTP methodology is captured in General Corporate and Other. The charge and credit rates are determined using the FTP rate curve, which is based on an estimate of Fifth Third’s marginal borrowing cost in the wholesale funding markets. The FTP curve is constructed using the U.S. swap curve, brokered CD pricing and unsecured debt pricing.

The Bancorp adjusts the FTP charge and credit rates as dictated by changes in interest rates for various interest-earning assets and interest-bearing liabilities and by the review of behavioral assumptions, such as prepayment rates on interest-earning assets and the estimated durations for indeterminate-lived deposits. Key assumptions, including the credit rates provided for deposit accounts, are reviewed annually. Credit rates for deposit products and charge rates for loan products may be reset more frequently in response to changes in market conditions. The credit rates for several deposit products were reset January 1, 2019 to reflect the current market rates and updated market assumptions. These rates were generally higher than those in place during 2018, thus net interest income for deposit-providing business segments was positively impacted during 2019. FTP charge rates on assets were affected by the prevailing level of interest rates and by the duration and repricing characteristics of the portfolio. As overall market rates increased, the FTP charge increased for asset-generating business segments during 2019.

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

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

 

TABLE 27: Net Income (Loss) by Business Segment

               
    For the three months ended     
    March 31,     
($ in millions)   2019     2018     

Income Statement Data

   

Commercial Banking

  $ 294       256     

Branch Banking

    217       134     

Consumer Lending

    8       (10)    

Wealth and Asset Management

    26       9     

General Corporate and Other

    230       312     

Net income

  $ 775       701     

 

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Management’s 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 28: Commercial Banking

                 
     For the three months ended     
     March 31,     
($ in millions)    2019      2018     

Income Statement Data

             

Net interest income (FTE)(a)

   $ 513        422     

Provision for (benefit from) credit losses

     20        (20)    

Noninterest income:

     

Corporate banking revenue

     112        86     

Service charges on deposits

     66        71     

Other noninterest income

     49        62     

Noninterest expense:

     

Personnel costs

     109        88     

Other noninterest expense

     247        250     

Income before income taxes (FTE)

     364        323     

Applicable income tax expense(a)(b)

     70        67     

Net income

   $ 294        256     

Average Balance Sheet Data

     

Commercial loans and leases, including held for sale

   $         58,655        53,953     

Demand deposits

     14,409        18,131     

Interest checking deposits

     16,214        10,273     

Savings and money market deposits

     3,638        4,443     

Other time deposits and certificates $100,000 and over

     282        611     

Foreign office deposits

     208        492     
(a)

Includes FTE adjustments of $4 and $3 for the three months ended March 31, 2019 and 2018, respectively.

(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 $294 million for the three months ended March 31, 2019 compared to $256 million for the same period in the prior year. The increase was primarily due to increases in net interest income on an FTE basis and noninterest income partially offset by increases in the provision for credit losses and noninterest expense.

Net interest income on an FTE basis increased $91 million for the three months ended March 31, 2019 compared to the same period in the prior year primarily driven by increases in yields on average commercial loans and leases, increases in FTP credits on interest checking deposits and increases in FTP credit rates on demand deposits. These increases were partially offset by increases in FTP charge rates on loans and leases, increases in the rates paid on core deposits and decreases in average demand deposit balances.

Provision for credit losses increased $40 million for the three months ended March 31, 2019 compared to the same period in the prior year primarily due to an increase in criticized asset levels partially offset by a decrease in net charge-offs. Net charge-offs as a percent of average portfolio loans and leases decreased to 8 bps for the three months ended March 31, 2019 compared to 14 bps for the same period in the prior year.

Noninterest income increased $8 million for the three months ended March 31, 2019 compared to the same period in the prior year driven primarily by an increase in corporate banking revenue partially offset by decreases in other noninterest income and service charges on deposits. Corporate banking revenue increased $26 million for the three months ended March 31, 2019 compared to the same period in the prior year primarily driven by increases in institutional sales revenue, lease remarketing fees and business lending fees. Other noninterest income decreased $13 million for the three months ended March 31, 2019 compared to the same period in the prior year driven by a decrease in private equity investment income related to the recognition of positive net valuation adjustments on certain private equity investments in the first quarter of 2018. Service charges on deposits decreased $5 million for the three months ended March 31, 2019 compared to the same period in the prior year primarily driven by a decrease in commercial deposit fees.

Noninterest expense increased $18 million for the three months ended March 31, 2019 compared to the same period in the prior year primarily driven by an increase in personnel costs partially offset by a decrease in other noninterest expense. Personnel costs increased $21 million for the three months ended March 31, 2019 compared to the same period in the prior year primarily due to increases in incentive compensation, base compensation and employee benefits expense. Other noninterest expense decreased $3 million for the three months ended March 31, 2019 compared to the same period in the prior year primarily due to a decrease in FDIC insurance and other taxes.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

Average commercial loans and leases increased $4.7 billion for the three months ended March 31, 2019 compared to the same period in the prior year primarily due to increases in average commercial and industrial loans and average commercial mortgage loans partially offset by a decrease in average commercial leases. Average commercial and industrial loans increased $4.1 billion for the three months ended March 31, 2019 compared to the same period in the prior year primarily as a result of an increase in loan originations as well as a decrease in payoffs and the impact of the acquisition of MB Financial, Inc. Average commercial mortgage loans increased $827 million for the three months ended March 31, 2019 compared to the same period in the prior year primarily as a result of an increase in loan origination activity and the impact of MB Financial, Inc. Average commercial leases decreased $406 million for the three months ended March 31, 2019 compared to the same period in the prior year primarily as a result of a planned reduction in indirect non-relationship based lease originations.

Average core deposits increased $1.2 billion for the three months ended March 31, 2019 compared to the same period in the prior year. The increase was primarily driven by an increase in average interest checking deposits of $5.9 billion for the three months ended March 31, 2019 compared to the same period in the prior year primarily due to balance migration from demand deposits accounts and an increase in average balances per commercial customer account. This increase was partially offset by decreases in average demand deposits and average savings and money market deposits for the three months ended March 31, 2019 compared to the same period in the prior year. Average demand deposits decreased $3.7 billion for the three months ended March 31, 2019 compared to the same period in the prior year primarily due to commercial customer balance migration into interest checking deposits. Average savings and money market deposits decreased $805 million for the three months ended March 31, 2019 compared to the same period in the prior year primarily due to lower average balances per account.

Branch Banking

Branch Banking provides a full range of deposit and loan products to individuals and small businesses through 1,207 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 29: Branch Banking

                 
     For the three months ended     
     March 31,     
($ in millions)    2019      2018     

Income Statement Data

     

Net interest income

   $ 584        466     

Provision for credit losses

     52        44     

Noninterest income:

     

Service charges on deposits

     64        66     

Card and processing revenue

     63        64     

Wealth and asset management revenue

     36        37     

Other noninterest income

     20        17     

Noninterest expense:

     

Personnel costs

     143        136     

Net occupancy and equipment expense

     55        56     

Card and processing expense

     29        29     

Other noninterest expense

     213        216     

Income before income taxes

     275        169     

Applicable income tax expense

     58        35     

Net income

   $ 217        134     

Average Balance Sheet Data

     

Consumer loans

   $         13,205        13,036     

Commercial loans

     2,027        1,873     

Demand deposits

     14,563        14,055     

Interest checking deposits

     9,933        10,315     

Savings and money market deposits

     30,927        28,427     

Other time deposits and certificates $100,000 and over

     6,429        5,031     

Net income was $217 million for the three months ended March 31, 2019 compared to net income of $134 million for the same period in the prior year. The increase in net income was primarily due to an increase in net interest income partially offset by an increase in the provision for credit losses.

Net interest income increased $118 million for the three months ended March 31, 2019 compared to the same period in the prior year primarily due to an increase in FTP credits on core deposits as well as an increase in interest income on other consumer loans driven by higher average balances. These benefits were partially offset by an increase in the rates paid on savings and money market deposits and other time deposits and an increase in FTP charge rates on loans and leases.

Provision for credit losses increased $8 million for the three months ended March 31, 2019 compared to the same period in the prior year primarily due to an increase in net charge-offs on credit card and other consumer loans. Net charge-offs as a percent of average portfolio loans and leases increased to 139 bps for the three months ended March 31, 2019 compared to 121 bps for the same period in the prior year.

Noninterest expense increased $3 million for the three months ended March 31, 2019 compared to the same period in the prior year primarily due to an increase in personnel costs partially offset by a decrease in other noninterest expense. Personnel costs increased $7 million for the three months ended March 31, 2019 compared to the same period in the prior year primarily due to higher base compensation. Other noninterest expense decreased $3 million primarily driven by a decrease in FDIC insurance and other taxes partially offset by an increase in corporate overhead allocations.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

Average consumer loans increased $169 million for the three months ended March 31, 2019 compared to the same period in the prior year. The increase was driven by an increase in average other consumer loans of $993 million primarily due to growth in point-of-sale loan originations. This increase was partially offset by decreases in average home equity loans and average residential mortgage loans of $434 million and $284 million, respectively, for the three months ended March 31, 2019 compared to the same period in the prior year as payoffs exceeded new loan production. Average commercial loans increased $154 million for the three months ended March 31, 2019 compared to the same period in the prior year primarily driven by an increase in average commercial and industrial loans primarily due to core relationship growth.

Average core deposits increased $3.6 billion for the three months ended March 31, 2019 compared to the same period in the prior year primarily driven by growth in average savings and money market deposits and average other time deposits and certificates $100,000 and over. Average savings and money market deposits increased $2.5 billion for the three months ended March 31, 2019 compared to the same period in the prior year primarily as a result of promotional product offerings, which drove consumer customer acquisition. Average other time deposits and certificates $100,000 and over increased $1.4 billion primarily due to an increase in average other time deposits as a result of promotional offers.

Consumer Lending

Consumer Lending includes the Bancorp’s residential mortgage, home equity, automobile, specialty 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, automobile dealers, motorcycle dealers, powersport dealers, recreational vehicle dealers and marine dealers.

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

 

TABLE 30: Consumer Lending

                 
     For the three months ended     
     March 31,     
($ in millions)    2019      2018     

Income Statement Data

     

Net interest income

   $ 63        59     

Provision for credit losses

     13        12     

Noninterest income:

     

Mortgage banking net revenue

     55        55     

Other noninterest income

     6        (9)     

Noninterest expense:

     

Personnel costs

     45        50     

Other noninterest expense

     56        56     

Income (loss) before income taxes

     10        (13)     

Applicable income tax expense (benefit)

     2        (3)     

Net income (loss)

   $ 8        (10)     

Average Balance Sheet Data

     

Residential mortgage loans, including held for sale

   $ 11,896        11,678     

Home equity

     222        261     

Indirect secured consumer loans

     8,921        8,702     

Net income was $8 million for the three months ended March 31, 2019 compared to a net loss of $10 million for the same period in the prior year. The increase was primarily driven by an increase in noninterest income and a decrease in noninterest expense.

Net interest income increased $4 million for the three months ended March 31, 2019 compared to the same period in the prior year primarily driven by increases in yields on average indirect secured consumer loans and average residential mortgage loans as well as an increase in FTP credit rates on demand deposits. These benefits were partially offset by an increase in FTP charge rates on loans and leases.

Noninterest income increased $15 million for the three months ended March 31, 2019 compared to the same period in the prior year primarily due to an increase in other noninterest income primarily driven by the recognition of a $3 million gain on securities related to non-qualifying hedges on MSRs in the first quarter of 2019 compared to the recognition of a $13 million loss in the first quarter of 2018.

Noninterest expense decreased $5 million for the three months ended March 31, 2019 compared to the same period in the prior year primarily due to a decrease in personnel costs as a result of decreases in base compensation and employee benefits expense.

Average consumer loans and leases increased $398 million for the three months ended March 31, 2019 compared to the same period in the prior year primarily due to increases in average indirect secured consumer loans and average residential mortgage loans. Average indirect secured consumer loans increased $219 million for the three months ended March 31, 2019 compared to the same period in the prior year primarily driven by new loan production as well as by the impact of the MB Financial, Inc. acquisition. Average residential mortgage loans, including held for sale, increased $218 million for the three months ended March 31, 2019 compared to the same period in the prior year primarily driven by the continued retention of certain agency conforming ARMs and certain other fixed-rate loans as well as by the impact of the MB Financial, Inc. acquisition.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

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 four main businesses: FTS; 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 table contains selected financial data for the Wealth and Asset Management segment:

 

TABLE 31: Wealth and Asset Management                  
     For the three months ended
March 31,
 
($ in millions)    2019      2018  

Income Statement Data

     

Net interest income

   $ 49        43  

Provision for credit losses

     -        16  

Noninterest income:

     

Wealth and asset management revenue

     108        109  

Other noninterest income

     6        7  

Noninterest expense:

     

Personnel costs

     56        54  

Other noninterest expense

     74        77  

Income before income taxes

     33        12  

Applicable income tax expense

     7        3  

Net income

   $ 26        9  

Average Balance Sheet Data

     

Loans and leases, including held for sale

   $ 3,405        3,335  

Core deposits

     9,473        9,649  

Net income was $26 million for the three months ended March 31, 2019 compared to net income of $9 million for the same period in the prior year. The increase in net income was primarily due to a decrease in the provision for credit losses and an increase in net interest income.

Net interest income increased $6 million for the three months ended March 31, 2019 compared to the same period in the prior year primarily due to increases in FTP credit rates on interest checking deposits and savings 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 credit losses decreased $16 million for the three months ended March 31, 2019 compared to the same period in the prior year driven by lower commercial criticized asset levels as well as a decrease in net charge-offs on commercial and industrial loans.

Noninterest income decreased $2 million for the three months ended March 31, 2019 compared to the same period in the prior year primarily driven by a decrease in wealth and asset management revenue as a result of decreases in institutional sales revenue and securities and broker income partially offset by an increase in private client service fees.

Noninterest expense decreased $1 million for the three months ended March 31, 2019 compared to the same period in the prior year driven by a decrease in other noninterest expense partially offset by an increase in personnel costs. Other noninterest expense decreased $3 million for the three months ended March 31, 2019 compared to the same period in the prior year primarily driven by decreases in FDIC insurance and other taxes and corporate overhead allocations. Personnel costs increased $2 million for the three months ended March 31, 2019 compared to the same period in the prior year primarily driven by higher employee benefits expense and base compensation.

Average loans and leases increased $70 million for the three months ended March 31, 2019 compared to the same period in the prior year primarily due to an increase in average residential mortgage loans due to an increase in loan origination activity. This increase was partially offset by a decline in average home equity balances.

Average core deposits decreased $176 million for the three months ended March 31, 2019 compared to the same period in the prior year primarily due to a decrease in average interest checking deposits partially offset by an increase in average savings deposits.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

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 credit 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 $132 million for the three months ended March 31, 2019 compared to the same period in the prior year. The decrease was primarily driven by increases in the FTP credit rates on deposits allocated to the business segments as well as increases in interest expense on long-term debt and federal funds purchased. These negative impacts were partially offset by an increase in the benefit related to the FTP charge rates on loans and leases and an increase in interest income on taxable securities.

Provision for credit losses increased $44 million for the three months ended March 31, 2019 compared to the same period in the prior year primarily due to an increase in total outstanding loan balances, exclusive of loans and leases acquired in the MB Financial, Inc. acquisition, an increase in consumer reserve rates and an increase in the reserve for unfunded commitments. These increases were partially offset by an increase in the allocation of provision expense to the business segments driven by an increase in commercial criticized assets.

Noninterest income increased $171 million for the three months ended March 31, 2019 compared to the same period in the prior year primarily driven by the recognition of a $562 million gain related to the sale of Worldpay, Inc. shares during the three months ended March 31, 2019. The increase was partially offset by the recognition of a $414 million gain related to Vantiv, Inc’s acquisition of Worldpay Group plc. during the three months ended March 31, 2018. Additionally, noninterest income was positively impacted by a decrease in the loss on the swap associated with the sale of Visa, Inc. Class B shares for the three months ended March 31, 2019 compared to the same period in the prior year.

Noninterest expense increased $71 million for the three months ended March 31, 2019 compared to the same period in the prior year. The increase was primarily due to merger-related expenses related to the MB Financial, Inc. acquisition during the three months ended March 31, 2019. Refer to the Noninterest Expense subsection of the Statements of Income Analysis section of MD&A for additional information on the merger-related expenses. The increase in noninterest expense for the three months ended March 31, 2019 compared to the same period in the prior year also included the impact of an increase in losses and adjustments partially offset by an increase in corporate overhead allocations from General Corporate and Other to the other business segments.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

RISK MANAGEMENT – OVERVIEW

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 the Bancorp’s brand and reputation. Further, risk management is integral to the Bancorp’s strategic and capital planning processes. It is essential that the Bancorp’s business strategies consistently align to its overall risk appetite and capital considerations. Maintaining risks within the Bancorp’s 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 Bancorp’s 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 Bancorp’s 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 Third’s core values and culture provide a foundation for supporting sound risk management practices by setting expectations for appropriate conduct and accountability across the organization.

All employees are expected to conduct themselves in alignment with Fifth Third’s core values and Code of Business Conduct & Ethics, which may be found on www.53.com, while carrying out their responsibilities. Fifth Third’s Corporate Responsibility and Reputation Committee provides oversight of business conduct policies, programs and strategies, and monitors reporting of potential misconduct, trends or themes across the enterprise. Prudent risk management is a responsibility that is expected from all employees across the first, second and third lines of defense and is a foundational element of Fifth Third’s culture.

Below are the Bancorp’s core principles of risk management that are used to ensure the Bancorp is operating in a safe and sound manner:

   

Understand the risks taken as a necessary part of business; however, the Bancorp ensures risks taken are in alignment with its strategy and risk appetite.

   

Provide transparency and escalate risks and issues as necessary.

   

Ensure Fifth Third’s products and services are designed, delivered and maintained to provide value and benefit to its customers and to Fifth Third, and that potential opportunities remain aligned to the core customer base.

   

Avoid risks that cannot be understood, managed or 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 Bancorp’s reputation by thoroughly understanding the consequences of business strategies, products and processes.

   

Conduct business in compliance with all applicable laws, rules and regulations, and in alignment with internal policies and procedures.

Fifth Third’s success is dependent on effective risk management and understanding and controlling the risks taken in order to deliver sustainable returns for employees and shareholders. The Bancorp’s goal is to ensure that aggregate risks do not exceed its risk capacity, and that risks taken are supportive of the Bancorp’s portfolio diversification and profitability objectives.

Fifth Third’s Risk Management Framework states its risk appetite and the linkage to strategic and capital planning, defines and sets the tolerance for each of the eight risk types, explains the process used to manage risk across the enterprise and sets forth its risk governance structure.

   

The Board of Directors (the “Board”) and executive management define the risk appetite, which is considered in the development of business strategies, and forms the basis for enterprise risk management. The Bancorp’s risk appetite is set annually in alignment with the strategic, capital and financial plans, and is reviewed by the Board on an annual basis.

   

The Risk Management Process provides a consistent and integrated approach for managing risks and ensuring appropriate risk mitigants and controls are in place, and risks and issues are appropriately escalated. Five components are utilized for effective risk management; identifying, assessing, managing, monitoring and independent governance reporting of risk.

   

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 business 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.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

   

The Bancorp’s risk governance structure includes management committees operating under delegation from, and providing information directly or indirectly to, the Board. The Bancorp Board delegates certain responsibilities to 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 Bancorp’s risk appetite and fosters a risk culture to ensure appropriate escalation and transparency of risks.

   

Fifth Third’s risk management framework and programs are being utilized throughout the integration of MB Financial, Inc. to ensure appropriate identification, assessment, management, monitoring and reporting of risks.

CREDIT RISK MANAGEMENT

The objective of the Bancorp’s credit risk management strategy is to quantify and manage credit risk on an aggregate portfolio basis, as well as to limit the risk of loss resulting from the failure of a borrower or counterparty to honor its financial or contractual obligations to the Bancorp. The Bancorp’s credit risk management strategy is based on three core principles: conservatism, diversification and monitoring. The Bancorp believes that effective credit risk management begins with conservative lending practices 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 Bancorp’s credit risk management strategy also emphasizes diversification on a geographic, industry and customer level as well as ongoing portfolio monitoring and timely management reviews of large credit exposures and credits experiencing deterioration of credit quality. Credit officers with the authority to extend credit are delegated specific authority amounts, the utilization of which is closely monitored. Underwriting activities are centrally managed, and ERM manages the policy and the authority delegation process directly. The Credit Risk Review function provides independent and objective assessments of the quality of underwriting and documentation, the accuracy of risk grades and the charge-off, nonaccrual and reserve analysis process. The Bancorp’s credit review process and overall assessment of the adequacy of the allowance for credit losses is based on quarterly assessments of the probable estimated losses inherent in the loan and lease portfolio. The Bancorp uses these assessments to promptly identify potential problem loans or leases within the portfolio, maintain an adequate 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 7 of the Notes to Condensed Consolidated Financial Statements for further information on the Bancorp’s credit grade categories, which are derived from standard regulatory rating definitions. In addition, stress testing is performed on various commercial and consumer portfolios using the CCAR model and for certain portfolios, such as real estate and leveraged lending, the stress testing is performed by Credit department personnel at the individual loan level during credit underwriting.

The following tables provide a summary of potential problem portfolio loans and leases:    

 

TABLE 32: Potential Problem Portfolio Loans and Leases

 

        

As of March 31, 2019 ($ in millions)

 

    

 

Carrying
Value

 

 
 

 

    

 

Unpaid
Principal
Balance

 

 
 
 

 

    

 

Exposure

 

 

 

Commercial and industrial loans

   $ 949        985        1,214  

Commercial mortgage loans

     413        470        413  

Commercial construction loans

     10        11        10  

Commercial leases

     40        41        40  

Total potential problem portfolio loans and leases(a)

   $         1,412        1,507        1,677  

(a)   Includes $414 million of PCI and $ 224 million of non-PCI loans and leases as of March 31, 2019 acquired in the MB Financial, Inc. acquisition.

    

TABLE 33: Potential Problem Portfolio Loans and Leases

 

        

As of December 31, 2018 ($ in millions)

 

 

    

 

Carrying
Value

 

 
 

 

    

 

Unpaid
Principal
Balance

 

 
 
 

 

    

 

Exposure

 

 

 

Commercial and industrial loans

   $ 646        647        854  

Commercial mortgage loans

     152        152        152  

Commercial leases

     31        31        31  

Total potential problem portfolio loans and leases

   $            829        830        1,037  

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 borrower’s creditworthiness. A “through-the-cycle” rating philosophy uses a grading scale that assigns ratings based on average default rates through an entire business cycle for borrowers with similar financial performance. The dual risk rating system includes thirteen probabilities of default grade categories and an additional 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 Bancorp’s ALLL as part of the Bancorp’s adoption of ASU 2016-13Measurement 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 Bancorp’s homogenous consumer and small business loan portfolios.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

Overview

U.S. economic conditions remained generally stable during the first quarter of 2019. Overall, manufacturing activity increased, but there was expressed concern about weakening global demand, higher costs due to tariffs and the continued uncertainty surrounding trade. Consumer spending was mixed across the country. Nonfinancial services activity increased at a modest-to-moderate rate as the professional, scientific and technical services sub-sectors served as catalysts for growth. Even though prices continued to rise at a modest-to-moderate pace, only a few Federal Reserve Districts reported tariffs causing upward price pressures on goods and services.

The advance estimates indicated real GDP increased at an annual rate of 3.2% for first quarter of 2019, reflecting strong consumption, increased net exports of goods and services, as well as elevated nonresidential fixed investments. The FOMC has recently left the federal funds target rate range unchanged between 2.25% to 2.50%, stating that the current target strikes the right balance between strong U.S. economic growth including a continued strong labor market, offset by both low inflation and continued global economic uncertainty.

Although the effects of the fiscal stimulus are fading, the strong labor market should propel consumer spending higher later this year. Consumer credit continued to build on its strong start to 2019. Retail sales have been rather weak since December 2018, and there are several explanations for the weakness over this period, including the partial government shutdown, bad weather and consumers shifting their spending from goods to services. Going forward, retail sales should experience a rebound as economic fundamentals remain strong, most notably a healthy labor market. The National Federation of Independent Business’s small business optimism index notched its second consecutive monthly increase, rising from 101.7 to 101.8, following five straight monthly declines.

Housing starts suffered another setback in February, falling 8.7% from January led by a 17% decline in single family housing starts. Housing permits also fell month-over-month but not by as much as starts, indicating that the choppiness in the housing market should continue for the foreseeable future despite the tailwind of lower mortgage rates.

Commercial Portfolio

The Bancorp’s 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 MB Financial, Inc. commercial and industrial portfolio is comprised primarily of small business and middle market commercial loans but also includes specialty lending products, including lease banking, small business leasing and asset-based lending. These products serve distinct client needs and broaden Fifth Third’s lending capabilities. The portfolios have been evaluated for credit quality and will be managed within Fifth Third’s credit risk framework to ensure adherence to risk appetite.

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), 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. The following table excludes commercial mortgage loan greater than $1 million acquired from MB Financial, Inc.

 

TABLE 34: Commercial Mortgage Loans Outstanding by LTV, Loans Greater Than $1 Million

 

As of March 31, 2019 ($ in millions)

 

  

LTV > 100%

 

    

LTV 80-100%

 

    

LTV < 80%

 

 

Commercial mortgage owner-occupied loans

   $ 146            196            2,126      

Commercial mortgage nonowner-occupied loans

     13            67            2,876      

Total

   $         159            263            5,002      

 

TABLE 35: Commercial Mortgage Loans Outstanding by LTV, Loans Greater Than $1 Million

 

As of December 31, 2018 ($ in millions)

 

  

LTV > 100%

 

    

LTV 80-100%

 

    

LTV < 80%

 

 

Commercial mortgage owner-occupied loans

   $ 126            172            2,119      

Commercial mortgage nonowner-occupied loans

     40            29            2,731      

Total

   $         166            201            4,850      

 

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Management’s 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 Bancorp’s commercial loans and leases as of:

 

TABLE 36: Commercial Loan and Lease Portfolio (excluding loans and leases held for sale)

     
       March 31, 2019        December 31, 2018  
($ in millions)      Outstanding       Exposure        Nonaccrual        Outstanding        Exposure        Nonaccrual  
By Industry:                 

Manufacturing

   $ 13,114       22,630        76        10,387        19,290        48  

Real estate

     11,732       16,936        10        8,327        13,055        10  

Financial services and insurance

     8,071       17,183        -        6,805        13,192        1  

Business services

     5,252       8,499        21        4,426        7,161        17  

Healthcare

     5,083       6,967        40        4,343        6,198        36  

Wholesale trade

     4,479       7,144        19        3,127        5,481        14  

Retail trade

     3,957       7,624        6        3,726        7,496        6  

Accommodation and food

     3,656       5,799        46        3,435        5,626        28  

Transportation and warehousing

     2,975       5,001        23        2,807        4,729        19  

Communication and information

     2,878       5,181        5        2,923        5,111        -  

Construction

     2,752       5,070        3        2,498        4,718        4  

Mining

     2,460       4,305        45        2,427        4,363        38  

Entertainment and recreation

     1,916       3,328        5        1,798        3,354        1  

Other services

     1,190       1,614        4        855        1,104        4  

Public administration

     881       1,114        -        465        669        -  

Utilities

     862       2,259        -        835        2,531        -  

Agribusiness

     332       551        10        323        511        2  

Individuals

     61       138        -        64        130        -  

Other

     37       38        -        -        -        -  
Total    $         71,688       121,381        313        59,571        104,719        228  
By Size:                 

Less than $200,000

     1  %      1        4        1        1        5  

$200,000 - $1 million  

     4       3        8        2        2        9  

$1 million - $5 million  

     10       9        18        6        6        18  

$5 million - $10 million  

     8       7        19        6        5        19  

$10 million - $25 million  

     20       17        51        19        16        38  

Greater than $25 million

     57       63        -        66        70        11  
Total      100  %      100        100        100        100        100  
By State:                 

Illinois

     13  %      12        9        6        5        8  

Ohio

     12       12        17        13        14        10  

Florida

     7       7        12        8        8        21  

Michigan

     6       6        11        7        6        10  

Indiana

     4       4        6        4        4        8  

Georgia

     4       5        8        5        5        11  

North Carolina

     3       3        -        3        3        -  

Tennessee

     2       2        -        3        3        -  

Kentucky

     2       2        1        2        3        2  

Other

     47       47        36        49        49        30  

Total

     100  %      100        100        100        100        100  

The Bancorp’s nonowner-occupied commercial real estate portfolios have been identified by the Bancorp as loans which it believes represent a higher level of risk compared to the rest of the Bancorp’s commercial loan portfolio due to economic or market conditions within the Bancorp’s key lending areas.

 

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Management’s 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 37: Nonowner-Occupied Commercial Real Estate (excluding loans held for sale)(a)

 

As of March 31, 2019 ($ in millions)                                         
For the three months ended
March 31, 2019
 
 
       Outstanding        Exposure       

90 Days

Past Due

 

 

     Nonaccrual        Net Recoveries  
By State:               

Illinois

   $ 2,342        2,783        5        -        -  

Ohio

     1,653        2,021        -        -        (1

Florida

     983        1,530        -        -        -  

Michigan

     807        926        -        2        -  

North Carolina

     644        861        -        -        -  

Indiana

     577        995        8        -        -  

All other states

     4,161        6,310        -        1        -  

Total

   $ 11,167        15,426        13        3        (1

(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 38: Nonowner-Occupied Commercial Real Estate (excluding loans held for sale)(a)

 

        

As of March 31, 2018 ($ in millions)

                                   For the three months ended
March 31, 2018
 
       Outstanding        Exposure       

90 Days

Past Due

 

 

     Nonaccrual        Net Charge-Offs  

By State:

              

Illinois

   $ 806        1,000        -        -        -  

Ohio

     1,609        2,058        -        1        -  

Florida

     1,011        1,512        -        -        -  

Michigan

     573        740        -        -        -  

North Carolina

     538        793        -        -        -  

Indiana

     552        800        -        -        -  

All other states

     2,661        4,447        -        3        1  

Total

   $ 7,750        11,350        -        4        1  
(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.

 

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Management’s 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 Bancorp’s consumer portfolio is materially comprised of five categories of loans: residential mortgage loans, home equity, indirect secured consumer 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 March 31, 2019, consumer real estate loans, consisting of residential mortgage loans and home equity loans, originated from 2005 through 2008 represent approximately 11% of the consumer real estate portfolio. These loans accounted for 38% of total consumer real estate secured losses for the three months ended March 31, 2019. 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 indirect secured consumer portfolio performance, which includes automobile loans. 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 mitigate 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 residential 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 $723 million of ARM loans will have rate resets during the next twelve months. Of these resets, 50% are expected to experience an increase in rate, with an average increase of approximately one percent. Underlying characteristics of these borrowers are relatively strong with a weighted average origination DTI of 32% and weighted average origination LTV of 72%.

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 an 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 92% of the portfolio as of March 31, 2019 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 39: Residential Mortgage Portfolio Loans by LTV at Origination

 

     March 31, 2019      December 31, 2018  
($ in millions)    Outstanding      Weighted-
Average LTV
     Outstanding      Weighted-
Average LTV
 

LTV £ 80%

   $ 12,641            66.4%      $ 11,540        66.7%  

LTV > 80%, with mortgage insurance(a)

     2,123            95.2            2,010        95.1     

LTV > 80%, no mortgage insurance

     2,047            93.8            1,954        94.2     

Total

   $       16,811            73.9%      $       15,504        74.3%  
(a)

Includes loans with both borrower and lender paid mortgage insurance.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

The following tables provide an analysis of the residential mortgage portfolio loans outstanding by state with a greater than 80% LTV ratio and no mortgage insurance:

 

TABLE 40: Residential Mortgage Portfolio Loans, LTV Greater than 80%, No Mortgage Insurance

 

As of March 31, 2019 ($ in millions)                            For the three months ended
March 31, 2019
 
      Outstanding      90 Days    
Past Due    
     Nonaccrual          Net Charge-offs  
By State:            

Ohio

   $ 419        3        2        -  

Illinois

     402        1        1        -  

Florida

     280        -        1        -  

Michigan

     226        2        1        -  

Indiana

     142        1        1        -  

North Carolina

     89        -        -        -  

Kentucky

     82        -        1        -  

All other states

     407        3        3        -  

Total

   $         2,047        10        10        -  
TABLE 41: Residential Mortgage Portfolio Loans, LTV Greater than 80%, No Mortgage Insurance

 

As of March 31, 2018 ($ in millions)                            For the three months ended
March 31, 2018
 
      Outstanding     

90 Days    

Past Due    

     Nonaccrual          Net Charge-offs  
By State:            

Ohio

   $ 435        3        3        -  

Illinois

     384        1        3        -  

Florida

     285        4        4        -  

Michigan

     222        1        -        -  

Indiana

     140        1        1        -  

North Carolina

     87        -        1        -  

Kentucky

     77        1        -        -  

All other states

     303        2        1        -  

Total

   $ 1,933        13        13        -  

Home equity portfolio

The Bancorp’s home equity portfolio is primarily comprised of home equity lines of credit. Beginning in the first quarter of 2013, the Bancorp’s newly originated home equity lines of credit have 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 25% 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 determined 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 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 in its footprint and the volatility of collateral valuation 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 an LTV of 80% or less based upon appraisals at origination. For additional information on these loans, refer to Table 43 and Table 44. Of the total $6.4 billion of outstanding home equity loans:

   

89% reside within the Bancorp’s Midwest footprint of Ohio, Michigan, Kentucky, Indiana and Illinois as of March 31, 2019;

   

36% are in senior lien positions and 64% are in junior lien positions at March 31, 2019;

   

80% of non-delinquent borrowers, excluding home equity loans acquired from MB Financial, Inc., made at least one payment greater than the minimum payment during the three months ended March 31, 2019; and

   

The portfolio, excluding home equity loans acquired from MB Financial, Inc., had an average refreshed FICO score of 745 at March 31, 2019.

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.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

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.

The following table provides an analysis of home equity portfolio loans outstanding disaggregated based upon refreshed FICO score as of:

 

TABLE 42: Home Equity Portfolio Loans Outstanding by Refreshed FICO Score

 

     March 31, 2019     December 31, 2018  
($ in millions)    Outstanding      % of Total     Outstanding      % of Total  
Senior Liens:           
FICO £ 659    $ 226            3   $ 218            4
FICO 660-719      331            5       318            5  
FICO ³ 720      1,789            28       1,791            28  

Total senior liens

     2,346            36       2,327            37  
Junior Liens:           
FICO £ 659      490            8       469            7  
FICO 660-719      790            12       769            12  
FICO ³ 720      2,809            44       2,837            44  

Total junior liens

     4,089            64       4,075            63  

Total

   $ 6,435            100   $ 6,402            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 as of:

 

TABLE 43: Home Equity Portfolio Loans Outstanding by LTV at Origination

 

                
     March 31, 2019     December 31, 2018  
($ in millions)    Outstanding      Weighted-
Average LTV
    Outstanding      Weighted-
Average LTV
 
Senior Liens:           
LTV £ 80%    $ 2,033            54.5   $ 2,022            54.5
LTV > 80%      313            89.2       305            88.8  

Total senior liens

     2,346            59.3       2,327            59.2  
Junior Liens:           
LTV £ 80%      2,407            66.7       2,367            67.2  
LTV > 80%      1,682            90.1       1,708            90.1  

Total junior liens

     4,089            77.4       4,075            78.0  

Total

   $         6,435            70.5   $ 6,402            70.9

The following tables provide an analysis of home equity portfolio loans by state with a combined LTV greater than 80%:

 

TABLE 44: Home Equity Portfolio Loans Outstanding with an LTV Greater than 80%

 

        
As of March 31, 2019 ($ in millions)                                    For the three months ended
March 31, 2019
 
      Outstanding      Exposure      90 Days
Past Due
     Nonaccrual      Net Charge-offs  
By State:               

Ohio

   $         1,090        2,222        -        9        1  

Michigan

     284        476        -        5        -  

Illinois

     208        335        -        4        1  

Indiana

     126        223        -        2        -  

Kentucky

     111        217        -        2        -  

Florida

     57        85        -        2        -  

All other states

     119        183        -        3        -  

Total

   $ 1,995        3,741        -        27        2  

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

TABLE 45: Home Equity Portfolio Loans Outstanding with an LTV Greater than 80%

 

        
As of March 31, 2018 ($ in millions)                                    For the three months ended
March 31, 2018
 
      Outstanding          Exposure         

90 Days    

Past Due    

     Nonaccrual      Net Charge-offs  

By State:

              

Ohio

   $         1,034        1,968        -        8        1  

Michigan

     339        550        -        5        1  

Illinois

     219        349        -        4        1  

Indiana

     148        256        -        3        -  

Kentucky

     136        250        -        2        -  

Florida

     66        95        -        2        -  

All other states

     142        210        -        3        -  

Total

   $ 2,084        3,678        -        27        3  

Indirect secured consumer portfolio

The indirect secured consumer portfolio is comprised of $9.2 billion of automobile loans and $806 million of indirect motorcycle, powersports, recreational vehicles and marine loans which were acquired in the MB Financial, Inc. acquisition. For additional information on indirect secured consumer loans, refer to Note 6 of the Notes to Condensed Consolidated Financial Statements.

The Bancorp’s automobile portfolio balances have increased since December 31, 2018 due to an increase in loan origination activity. Additionally, the concentration of lower FICO (£690) origination balances remained within targeted credit risk tolerance during the three months ended March 31, 2019. 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 46: Automobile Portfolio Loans Outstanding by FICO Score at Origination

 

     March 31, 2019(a)     December 31, 2018  
($ in millions)    Outstanding      % of Total     Outstanding      % of Total  

FICO £ 690

   $ 1,617            18   $ 1,604            18

FICO > 690

     7,607            82       7,372            82  

Total

   $         9,224            100   $         8,976            100
(a)

Excludes indirect motorcycle, powersports, recreational vehicles and marine loans that were acquired in the acquisition of MB Financial, Inc.

As of March 31, 2019, 43% 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 47: Automobile Portfolio Loans Outstanding by LTV at Origination

 

     March 31, 2019(a)     December 31, 2018  
($ in millions)    Outstanding      Weighted-
Average LTV
    Outstanding      Weighted-
Average LTV
 

LTV £ 100%

   $         5,766            82.2   $         5,591            82.3

LTV > 100%

     3,458            112.9       3,385            112.9  

Total

   $ 9,224            94.1   $ 8,976            94.2
(a)

Excludes indirect motorcycle, powersports, recreational vehicles and marine loans that were acquired in the acquisition of MB Financial, Inc.

The following table provides an analysis of the Bancorp’s automobile portfolio loans with an LTV at origination greater than 100%:

 

TABLE 48: Automobile Portfolio Loans Outstanding with an LTV Greater than 100%

 

        
As of ($ in millions)    Outstanding     

90 Days Past

Due and Accruing

     Nonaccrual     

Net Charge-offs for the

Three Months Ended

 
March 31, 2019(a)    $         3,458            6        2        9  

March 31, 2018

     3,316            5        1        8  
(a)

Excludes indirect motorcycle, powersports, recreational vehicles and marine loans that were acquired in the acquisition of MB Financial, Inc.

Credit card portfolio

The credit card portfolio consists of predominately prime accounts with 97% of loan balances existing within the Bancorp’s footprint as of both March 31, 2019 and December 31, 2018. At March 31, 2019 and December 31, 2018, 70% and 71%, respectively, of the outstanding balances were originated through branch-based relationships with the remainder coming from direct mail campaigns and online acquisitions.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

The following table provides an analysis of credit card portfolio loans outstanding disaggregated based upon FICO score as of:

 

TABLE 49: Credit Card Portfolio Loans Outstanding by FICO Score at Origination

 

     March 31, 2019     December 31, 2018  
($ in millions)    Outstanding      % of Total     Outstanding      % of Total  

FICO £ 659

   $ 84            4   $ 82            3

FICO 660-719

     719            30       711            29  

FICO ³ 720

     1,585            66