Fifth Third Bank

Investor Relations

Fifth Third Announces Third Quarter 2016 Net Income to Common Shareholders of $501 Million, or $0.65 Per Diluted Share

  • 3Q16 net income available to common shareholders of $501 million, or $0.65 per diluted common share
    • Reported results included the following items which had a net positive $0.22 impact on reported 3Q16 EPS:
      • A $280 million pre-tax (~$182 million after-tax) gain from the termination and settlement of gross cash flows from existing Vantiv tax receivable agreements (TRA) and the expected obligation to terminate and settle the remaining TRA cash flows upon the exercise of put or call options
      • A $28 million pre-tax (~$18 million after-tax) non-cash impairment charge related to previously announced plans to sell or consolidate certain bank branches and land acquired for future branch expansion
      • A $12 million pre-tax (~$8 million after-tax) charge related to the valuation of the Visa total return swap
      • An $11 million pre-tax (~$7 million after-tax) gain on the sale of a non-branch facility
      • A $9 million pre-tax (~$6 million after-tax) charge from the transfer of certain nonconforming investments affected by the Volcker Rule to held-for-sale
      • An $8 million beneficial tax impact in connection with certain commercial lease terminations
  • 3Q16 return on average assets (ROA) of 1.44%; return on average common equity of 12.8%; return on average tangible common equity** of 15.2%
  • Pre-tax income of $694 million and pre-provision net revenue (PPNR)** of $774 million in 3Q16
    • Net interest income (NII) of $907 million and NII on a fully taxable equivalent (FTE) basis** of $913 million, up 1 percent from both 2Q16 and 3Q15; net interest margin (on an FTE basis)** of 2.88%, flat sequentially and down 1 bp year-over-year
    • Average portfolio loans and leases of $93.5 billion, down $420 million sequentially and up $138 million from 3Q15; Period end portfolio loans and leases of $93.2 billion decreased $758 million sequentially and $423 million from 3Q15 primarily driven by decreases in automobile, C&I, and home equity loans
    • Noninterest income of $840 million compared with $599 million in the prior quarter; primarily driven by the gain from the termination and settlement of the Vantiv tax receivable agreement and other items previously mentioned
    • Noninterest expense of $973 million was $10 million, or 1 percent, lower than the prior quarter primarily driven by lower compensation and benefit-related expenses and lower card and processing expense
  • Credit trends
    • 3Q16 net charge-offs of $107 million (0.45% of loans and leases) increased from 2Q16 NCOs of $87 million (0.37% of loans and leases)
    • Portfolio nonperforming asset (NPA) ratio of 0.73% down 13 bps from 2Q16, nonperforming loan (NPL) ratio of 0.63% down 11 bps from 2Q16; total NPAs of $783 million, including loans held-for-sale (HFS), decreased $42 million sequentially
    • 3Q16 provision expense of $80 million; $91 million in 2Q16 and $156 million in 3Q15
  • Strong capital ratios*
    • Common equity Tier 1 (CET1) ratio 10.16%; fully phased-in CET1 ratio** of 10.08%
    • Tier 1 risk-based capital ratio 11.26%, Total risk-based capital ratio 14.87%, Leverage ratio 9.80%
    • Tangible common equity ratio of 9.24%**; 8.78%** excluding unrealized gains/losses
  • 11 million reduction in common shares outstanding during the quarter due to the $240 million accelerated share repurchase transaction initially settled on August 5, 2016
  • Book value per share of $20.44 up 2% from 2Q16 and up 12% from 3Q15; tangible book value per share** of $17.22 up 2% from 2Q16 and up 13% from 3Q15

* Capital ratios estimated; presented under current U.S. capital regulations.
** Non-GAAP measure; see discussion of non-GAAP and Reg. G reconciliation beginning on page 33 in Exhibit 99.1 of 8-K filing dated 10/20/16.

Category:

Thursday, October 20, 2016 6:30 am EDT

Dateline:

CINCINNATI

Public Company Information:

NASDAQ:
FITB
US3167731005
"Our third quarter results were strong despite the tepid economic environment. Higher net interest income, stable underlying fee revenue, and lower expenses helped us achieve improved returns for our shareholders"

CINCINNATI--(BUSINESS WIRE)--Fifth Third Bancorp (Nasdaq: FITB) today reported third quarter 2016 net income of $516 million versus net income of $333 million in the second quarter of 2016 and $381 million in the third quarter of 2015. After preferred dividends, net income available to common shareholders was $501 million, or $0.65 per diluted share, in the third quarter of 2016, compared with $310 million, or $0.40 per diluted share, in the second quarter of 2016, and $366 million, or $0.45 per diluted share, in the third quarter of 2015.

Third quarter 2016 included:

Income

  • $280 million gain from the termination and settlement of gross cash flows from existing Vantiv tax receivable agreements (TRA) and the expected obligation to terminate and settle the remaining TRA cash flows upon the exercise of put or call options
  • $11 million gain on the sale of a non-branch facility
  • ($28 million) non-cash impairment charge related to previously announced plans to sell or consolidate certain bank branches and land acquired for future branch expansion
  • ($12 million) charge related to the valuation of the Visa total return swap
  • ($9 million) charge from the transfer of certain nonconforming investments affected by the Volcker Rule to held-for-sale
  • ($2 million) negative valuation adjustment on the Vantiv warrant

Expense

  • ($4 million) in severance expense

Results also included an $8 million beneficial tax impact in connection with certain commercial lease terminations

Second quarter 2016 included:

Income

  • $19 million positive valuation adjustment on the Vantiv warrant
  • $11 million gain on sale of Pennsylvania branches as part of the previously announced branch consolidation and sales plan
  • $11 million gain on the sale of the non-strategic agented bankcard loan portfolio
  • ($50 million) charge related to the valuation of the Visa total return swap, primarily reflecting the rejection of the merchant litigation settlement

Expense

  • ($9 million) in compensation-related expenses due to retirement eligibility changes
  • ($3 million) in severance expense

Third quarter 2015 included:

Income

  • $130 million positive valuation adjustment on the Vantiv warrant
  • ($8 million) charge related to the valuation of the Visa total return swap

Expense

  • ($9 million) charge associated with executive retirement and severance costs

Results also included $35 million of provision expense related to the restructuring of a student loan backed commercial credit originally extended in 2007.

Earnings Highlights              
                                       
For the Three Months Ended   % Change
September June March December September
2016   2016   2016   2015   2015   Seq   Yr/Yr
Earnings ($ in millions)
Net income attributable to Bancorp $ 516 $ 333 $ 327 $ 657 $ 381 55 % 35 %
Net income available to common shareholders $ 501 $ 310 $ 312 $ 634 $ 366 62 % 37 %
 
Common Share Data
Earnings per share, basic $ 0.66 $ 0.40 $ 0.40 $ 0.80 $ 0.46 65 % 43 %
Earnings per share, diluted 0.65 0.40 0.40 0.79 0.45 63 % 44 %
Cash dividends per common share 0.13 0.13 0.13 0.13 0.13 - -
 
Financial Ratios
Return on average assets 1.44 % 0.94 % 0.93 % 1.83 % 1.07 % 53 % 35 %
Return on average common equity 12.8 8.2 8.3 17.2 10.0 56 % 28 %
Return on average tangible common equity(b) 15.2 9.7 9.9 20.6 12.0 57 % 27 %
CET1 capital(c) 10.16 9.94 9.81 9.82 9.40 2 % 8 %
Tier I risk-based capital(c) 11.26 11.03 10.91 10.93 10.49 2 % 7 %
CET1 capital (fully-phased in)(b)(c) 10.08 9.86 9.72 9.72 9.30 2 % 8 %
Net interest margin(a)(b) 2.88 2.88 2.91 2.85 2.89 - -
Efficiency(a)(b) 55.5 65.3 63.8 48.0 58.2 (15 %) (5 %)
 
Common shares outstanding (in thousands) 755,582 766,346 770,471 785,080 795,439 (1 %) (5 %)
Average common shares outstanding
(in thousands):
Basic 750,886 759,105 773,564 784,855 795,793 (1 %) (6 %)
Diluted 757,456 765,080 778,392 794,481 805,023 (1 %) (6 %)
 

(a) Presented on a fully taxable equivalent basis.

(b) Non-GAAP measure; see discussion of non-GAAP and Reg. G reconciliation beginning on page 33.

(c) Under the 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 used in the calculation of the tier I risk-based capital and common equity tier 1 ratios. Current period regulatory capital ratios are estimated.

NA: Not applicable.

 

“Our third quarter results were strong despite the tepid economic environment. Higher net interest income, stable underlying fee revenue, and lower expenses helped us achieve improved returns for our shareholders,” said Greg D. Carmichael, President and CEO of Fifth Third Bancorp.

“During the quarter, we executed on several initiatives which will help us continue to drive improved shareholder returns. While we continue to invest in areas like technology, we plan to improve our operating leverage through an ongoing review of expenses in all business units and staff functions and renegotiations of key vendor contracts. In September, we announced the plan to sell and consolidate certain bank branches which will generate additional operating efficiency.

“We remain focused on improving our profitability without relying on the expectation that economic conditions will improve. We recently launched Project North Star, which has aligned the entire organization toward reaching this objective. Through Project North Star, controlled expenses, opportunities to enhance fee revenue, and actions to optimize the balance sheet should help us achieve our long-term financial targets.”

Income Statement Highlights              
                             
For the Three Months Ended   % Change
September June March December September
2016   2016   2016   2015   2015   Seq   Yr/Yr
Condensed Statements of Income ($ in millions)
Net interest income (taxable equivalent)(a) $ 913 $ 908 $ 909 $ 904 $ 906 1 % 1 %
Provision for loan and lease losses 80 91 119 91 156 (12 %) (49 %)
Total noninterest income 840 599 637 1,104 713 40 % 18 %
Total noninterest expense     973     983       986     963     943   (1 %)   3 %
Income before income taxes (taxable equivalent)(a)   $ 700   $ 433     $ 441   $ 954   $ 520   62 %   35 %
 
Taxable equivalent adjustment 6 6 6 5 5 - 20 %
Applicable income tax expense     178     98       108     292     134   82 %   33 %
Net income $ 516 $ 329 $ 327 $ 657 $ 381 57 % 35 %
Less: Net income attributable to noncontrolling interests     -     (4 )     -     -     -   100 %   -  
Net income attributable to Bancorp $ 516 $ 333 $ 327 $ 657 $ 381 55 % 35 %
Dividends on preferred stock     15     23       15     23     15   (35 %)   -  
Net income available to common shareholders   $ 501   $ 310     $ 312   $ 634   $ 366   62 %   37 %
Earnings per share, diluted   $ 0.65   $ 0.40     $ 0.40   $ 0.79   $ 0.45   63 %   44 %
(a) Non-GAAP measure; see discussion of non-GAAP and Reg. G reconciliation beginning on page 33.
 
Net Interest Income              
                             
For the Three Months Ended   % Change
September June March December September
2016   2016   2016   2015   2015   Seq   Yr/Yr
Interest Income ($ in millions)
Total interest income (taxable equivalent)(a) $ 1,063 $ 1,052 $ 1,044 $ 1,035 $ 1,031 1 % 3 %
Total interest expense     150       144       135       131       125     4 %   20 %
Net interest income (taxable equivalent)(a)   $ 913     $ 908     $ 909     $ 904     $ 906     1 %   1 %
 
Average Yield bps Change
Yield on interest-earning assets (taxable equivalent) 3.36 % 3.34 % 3.34 % 3.26 % 3.29 % 2 7
Rate paid on interest-bearing liabilities     0.70 %     0.67 %     0.64 %     0.61 %     0.58 %   3     12  
Net interest rate spread (taxable equivalent)     2.66 %     2.67 %     2.70 %     2.65 %     2.71 %   (1 )   (5 )
Net interest margin (taxable equivalent)(a) 2.88 % 2.88 % 2.91 % 2.85 % 2.89 % - (1 )
 
Average Balances ($ in millions) % Change
Loans and leases, including held for sale $ 94,417 $ 94,807 $ 94,078 $ 94,587 $ 94,329 - -
Total securities and other short-term investments 31,675 32,040 31,573 31,256 30,102 (1 %) 5 %
Total interest-earning assets 126,092 126,847 125,651 125,843 124,431 (1 %) 1 %
Total interest-bearing liabilities 85,193 86,145 85,450 85,381 85,171 (1 %) -
Bancorp shareholders' equity     16,883       16,584       16,376       15,982       15,815     2 %   7 %
(a) Non-GAAP measure; see discussion of non-GAAP and Reg. G reconciliation beginning on page 33.
 

Net interest income of $907 million and net interest income (FTE)* of $913 million both increased $5 million from the second quarter of 2016, primarily driven by improving investment portfolio yields, an increase in 1-month LIBOR, and day count, partially offset by the full quarter impact of $1.25 billion of unsecured debt issued in the second quarter and lower average C&I loan balances.

The net interest margin (FTE)* was 2.88 percent, stable from the previous quarter, as the impact of higher yielding investments and an increase in 1-month LIBOR were offset by the full quarter impact of the debt issuance and day count.

Compared to the third quarter of 2015, net interest income and net interest income (FTE)* increased by $6 million and $7 million, respectively. The net interest margin (FTE)* decreased by 1 bp year-over-year. The increase in net interest income was driven by the impact of higher investment securities balances, as well as short-term market rate improvements from the December 2015 Fed funds rate increase. The decrease in the net interest margin from the prior year was primarily driven by an increase in long-term debt, lower commercial loan yields, and a decrease in cash flow hedges, partially offset by the December 2015 Fed funds rate increase.

* Non-GAAP measure; see discussion of non-GAAP and Reg. G reconciliation beginning on page 33 in Exhibit 99.1 of 8-K filing dated 10/20/16.

Securities

Average securities and other short-term investments were $31.7 billion in the third quarter of 2016 compared to $32.0 billion in the previous quarter and $30.1 billion in the third quarter of 2015. Average balances of other short-term investments decreased by $126 million sequentially to $1.8 billion.

Loans              
                             
For the Three Months Ended   % Change
September June March December September
2016   2016   2016   2015   2015   Seq   Yr/Yr
Average Portfolio Loans and Leases ($ in millions)
Commercial:
Commercial and industrial loans $ 43,116 $ 43,876 $ 43,089 $ 43,154 $ 43,149 (2 %) -
Commercial mortgage loans 6,888 6,831 6,886 7,032 7,023 1 % (2 %)
Commercial construction loans 3,848 3,551 3,297 3,141 2,965 8 % 30 %
Commercial leases     3,962     3,898     3,874     3,839     3,846   2 %   3 %
Total commercial loans and leases   $ 57,814   $ 58,156   $ 57,146   $ 57,166   $ 56,983   (1 %)   1 %
Consumer:
Residential mortgage loans $ 14,455 $ 14,046 $ 13,788 $ 13,504 $ 13,144 3 % 10 %
Home equity 7,918 8,054 8,217 8,360 8,479 (2 %) (7 %)
Automobile loans 10,508 10,887 11,283 11,670 11,877 (3 %) (12 %)
Credit card 2,165 2,134 2,179 2,218 2,277 1 % (5 %)
Other consumer loans and leases     651     654     662     676     613   -     6 %
Total consumer loans and leases   $ 35,697   $ 35,775   $ 36,129   $ 36,428   $ 36,390   -     (2 %)
Total average portfolio loans and leases $ 93,511 $ 93,931 $ 93,275 $ 93,594 $ 93,373 - -
 
Average loans held for sale   $ 906   $ 876   $ 803   $ 993   $ 956   3 %   (5 %)
 

Average loan and lease balances (excluding loans held-for-sale) decreased $420 million sequentially and increased $138 million from the third quarter of 2015. The sequential decrease was primarily driven by declines in commercial and industrial (C&I) and automobile loans, partially offset by an increase in residential mortgage and commercial construction loans. The year-over-year increase in average loans and leases was driven by increased residential mortgage and commercial construction, partially offset by decreases in automobile and home equity loans. Period end loans and leases (excluding loans held-for-sale) of $93.2 billion decreased $758 million sequentially and $423 million from a year ago. The decrease sequentially was primarily due to decreases in automobile and C&I loans, partially offset by increases in residential mortgage and commercial construction loans. The year-over-year decline was primarily driven by decreases in automobile and home equity loans, partially offset by increases in residential mortgage and commercial construction loans.

Average commercial portfolio loan and lease balances decreased $342 million, or 1 percent, sequentially and increased $831 million, or 1 percent, from the third quarter of 2015. Average C&I loans decreased $760 million, or 2 percent, from the prior quarter and were flat from the third quarter of 2015. Average commercial real estate loans increased $354 million, or 3 percent, from the prior quarter and increased $748 million, or 7 percent, from the third quarter of 2015. Within commercial real estate, average commercial mortgage balances increased $57 million and average commercial construction balances increased $297 million sequentially. Commercial line usage, on an end of period basis, decreased 57 bps from the second quarter of 2016 and decreased 69 bps from the third quarter of 2015.

Average consumer portfolio loan and lease balances decreased $78 million, sequentially and decreased $693 million, or 2 percent, from the third quarter of 2015. This was primarily driven by average automobile loans which decreased 3 percent sequentially and 12 percent from a year ago. Average residential mortgage loans increased 3 percent sequentially and 10 percent from the previous year. Average home equity loans declined 2 percent sequentially and 7 percent from the third quarter of 2015. Average credit card loans increased 1 percent sequentially and decreased 5 percent from the third quarter of 2015.

Deposits              
                               
  For the Three Months Ended   % Change
September June March December September
2016   2016   2016   2015   2015   Seq   Yr/Yr
Average Deposits ($ in millions)
Demand $ 35,918 $ 35,912 $ 35,201 $ 36,254 $ 35,231 - 2 %
Interest checking 24,475 24,714 25,740 25,296 25,590 (1 %) (4 %)
Savings 14,232 14,576 14,601 14,615 14,868 (2 %) (4 %)
Money market 19,706 19,243 18,655 18,775 18,253 2 % 8 %
Foreign office(a)     524     484     483     736     718   8 %   (27 %)
Total transaction deposits $ 94,855 $ 94,929 $ 94,680 $ 95,676 $ 94,660 - -
Other time     4,020     4,044     4,035     4,052     4,057   (1 %)   (1 %)
Total core deposits $ 98,875 $ 98,973 $ 98,715 $ 99,728 $ 98,717 - -
Certificates - $100,000 and over 2,768 2,819 2,815 3,305 2,924 (2 %) (5 %)
Other     749     467     -     7     222   60 %   NM
Total average deposits   $ 102,392   $ 102,259   $ 101,530   $ 103,040   $ 101,863   -     1 %

(a)   Includes commercial customer Eurodollar sweep balances for which the Bancorp pays rates comparable to other commercial deposit accounts.

 

Average core deposits decreased $98 million sequentially but increased $158 million from the third quarter of 2015. Average transaction deposits decreased $74 million from the second quarter of 2016 and increased $195 million from the third quarter of 2015. Sequential performance was primarily driven by lower savings and interest checking account balances, partially offset by higher money market account balances. The year-over-year increase was primarily driven by higher money market and demand deposit account balances, partially offset by lower interest checking, savings and foreign office account balances. Other time deposits decreased 1 percent sequentially and year-over-year. Average deposit balances were affected by the full quarter impact of $302 million in deposits from the sale of Pennsylvania branches in April of 2016. Excluding the impact of the branch sales in Pennsylvania and St. Louis, average core deposits were flat sequentially and up 1 percent from the third quarter of 2015.

Average commercial transaction deposits of $44 billion were flat sequentially and decreased 4 percent from the third quarter of 2015. The year-over-year decline reflected lower interest checking, savings, and foreign office account balances, partially offset by higher demand deposit account balances.

Average consumer transaction deposits of $51 billion were flat sequentially and increased 4 percent from the third quarter of 2015. Year-over-year growth was driven by higher money market and interest checking account balances, partially offset by lower savings account balances.

Wholesale Funding              
                               
  For the Three Months Ended   % Change
September June March December September
2016   2016   2016   2015   2015   Seq   Yr/Yr
Average Wholesale Funding ($ in millions)
Certificates - $100,000 and over $ 2,768 $ 2,819 $ 2,815 $ 3,305 $ 2,924 (2 %) (5 %)
Other deposits 749 467 - 7 222 60 % NM
Federal funds purchased 446 693 608 1,182 1,978 (36 %) (77 %)
Other short-term borrowings 2,171 3,754 3,564 1,675 1,897 (42 %) 14 %
Long-term debt     16,102     15,351     14,949     15,738     14,664   5 %   10 %
Total average wholesale funding   $ 22,236   $ 23,084   $ 21,936   $ 21,907   $ 21,685   (4 %)   3 %
 

Average wholesale funding of $22.2 billion decreased $848 million, or 4 percent, sequentially, and increased $551 million, or 3 percent, compared with the third quarter of 2015. The sequential decrease in average wholesale funding was primarily driven by the declines in short-term borrowings reflecting the decline in interest-earning assets. The year-over-year increase reflected an increase in long-term debt to fund the growth in interest-earning assets.

Noninterest Income              
                             
For the Three Months Ended   % Change
September June March December September
2016   2016   2016   2015   2015   Seq   Yr/Yr
Noninterest Income ($ in millions)
Service charges on deposits $ 143 $ 138 $ 137 $ 144 $ 145 4 % (1 %)
Corporate banking revenue 111 117 102 104 104 (5 %) 7 %
Mortgage banking net revenue 66 75 78 74 71 (12 %) (7 %)
Wealth and asset management revenue 101 101 102 102 103 - (2 %)
Card and processing revenue 79 82 79 77 77 (4 %) 3 %
Other noninterest income 336 80 136 602 213 NM 58 %
Securities gains, net     4     6     3     1     -   (33 %)   100 %
Total noninterest income   $ 840   $ 599   $ 637   $ 1,104   $ 713   40 %   18 %
 

Noninterest income of $840 million increased $241 million sequentially and increased $127 million compared with prior year results. The sequential and year-over-year comparisons reflect the impacts described below.

Noninterest Income excluding certain items
                     
  For the Three Months Ended   % Change
September   June   September    
2016   2016   2015   Seq   Yr/Yr
Noninterest Income excluding certain items ($ in millions)
Noninterest income (U.S. GAAP) $ 840 $ 599 $ 713

Gain from termination and settlement of Vantiv TRA and the expected obligation to terminate and settle the remaining TRA cash flows upon exercise of put or call options

(280 ) - -
Gain on sale of a non-branch facility (11 ) - -
Vantiv warrant valuation 2 (19 ) (130 )
Transfer of certain nonconforming investments under Volcker to HFS 9 - -
Valuation of Visa total return swap 12 50 8
Branch / land impairment charge 28 - -
Gain on sale of certain branches - (11 ) -
Gain on sale of the non-strategic agented bankcard loan portfolio - (11 ) -
Securities (gains) / losses     (4 )     (6 )     -          
Noninterest income excluding certain items(a)   $ 596     $ 602     $ 591     (1 %)   1 %
(a) Non-GAAP measure; see discussion of non-GAAP on page 33
 

Excluding the items in the table above, noninterest income of $596 million decreased $6 million, or 1 percent, from the previous quarter and increased $5 million, or 1 percent, from the third quarter of 2015. The sequential decrease was primarily due to the change in net mortgage servicing rights (MSR) valuation adjustments and corporate banking revenue, partially offset by an increase in service charges on deposits. The year-over-year increase was driven by increases in corporate banking revenue and card and processing revenue.

Service charges on deposits of $143 million increased 4 percent from the second quarter of 2016, and decreased 1 percent compared with the same quarter last year. The sequential increase primarily reflected a 6 percent increase in retail service charges due to seasonally higher overdraft occurrences, as well as a 3 percent increase in commercial service charges. The decrease from the third quarter of 2015 was primarily due to a 6 percent decrease in retail service charges due lower checking fees driven by a change in product offering.

Corporate banking revenue of $111 million decreased $6 million compared to the second quarter of 2016 and increased $7 million from the third quarter of 2015. The sequential comparison reflects decreases in loan syndication revenue and foreign exchange fees, partially offset by an increase in institutional sales revenue. The year-over-year increase was primarily driven by higher institutional sales revenue and loan syndication revenue, partially offset by lower foreign exchange fees and interest rate derivative fees.

Mortgage banking net revenue was $66 million in the third quarter of 2016, down $9 million from the second quarter of 2016 and down $5 million from the third quarter of 2015. Originations were $2.9 billion in the current quarter, increasing 7 percent sequentially and 27 percent from the same quarter last year. Third quarter 2016 originations resulted in $61 million of origination fees and gains on loan sales, compared with $54 million during the previous quarter and $46 million during the third quarter of 2015. Mortgage servicing fees were $49 million this quarter, $50 million in the second quarter of 2016, and $54 million in the third quarter of 2015. Mortgage banking net revenue is also affected by net servicing asset valuation adjustments, which include MSR amortization and MSR valuation adjustments (including mark-to-market adjustments on free-standing derivatives used to economically hedge the MSR portfolio). These adjustments resulted in a negative $44 million in the third quarter of 2016 (reflecting MSR amortization of $35 million and net MSR valuation adjustments of negative $9 million); negative $29 million in the second quarter of 2016 (MSR amortization of $35 million and net MSR valuation adjustments of positive $6 million); and negative $29 million in the third quarter of 2015 (MSR amortization of $37 million and net MSR valuation adjustments of positive $8 million). The mortgage servicing asset, net of the valuation reserve, was $619 million at quarter end on a servicing portfolio of $55 billion.

Wealth and asset management revenue of $101 million was flat from the second quarter of 2016 and decreased 2 percent from the third quarter of 2015. The year-over-year decline was primarily driven by lower securities and brokerage fees, partially offset by an increase in personal asset management fees.

Card and processing revenue of $79 million in the third quarter of 2016 decreased 4 percent sequentially and increased 3 percent from the third quarter of 2015. The sequential decrease reflected a decline in the number of actively used cards and lower spend volume. The year-over-year increase reflected an increase in customer transactions and a higher number of actively used cards.

Other noninterest income totaled $336 million in the third quarter of 2016, compared with $80 million in the previous quarter and $213 million in the third quarter of 2015. As previously described, the results included the adjustments in the table on page 9 with the exception of securities gains in all comparable periods. Excluding these items, other noninterest income of $96 million increased approximately $7 million, or 8 percent, from the second quarter of 2016 and increased approximately $5 million, or 5 percent, from the third quarter of 2015.

Net gains on investment securities were $4 million in the third quarter of 2016, compared with $6 million in the previous quarter and an immaterial gain in the third quarter of 2015.

Noninterest Expense              
                             
For the Three Months Ended   % Change
September June March December September
2016   2016   2016   2015   2015   Seq   Yr/Yr
Noninterest Expense ($ in millions)
Salaries, wages and incentives $ 400 $ 407 $ 403 $ 386 $ 387 (2 %) 3 %
Employee benefits 78 85 100 74 72 (8 %) 8 %
Net occupancy expense 73 75 77 83 77 (3 %) (5 %)
Technology and communications 62 60 56 59 56 3 % 11 %
Equipment expense 29 30 30 32 31 (3 %) (6 %)
Card and processing expense 30 37 35 40 40 (19 %) (25 %)
Other noninterest expense     301     289     285     289     280   4 %   8 %
Total noninterest expense   $ 973   $ 983   $ 986   $ 963   $ 943   (1 %)   3 %
 

Noninterest expense of $973 million declined $10 million, or 1 percent, compared with the second quarter of 2016 and increased $30 million, or 3 percent, compared with the third quarter of 2015. The sequential comparison reflected a decrease in compensation-related expenses and employee benefits resulting from the impact of the second quarter of 2016 retirement eligibility change, the previously disclosed review of business units and staff functions, as well as reduced card and processing expense. The year-over-year increase reflected higher compensation expense as a result of personnel additions primarily in risk and compliance and information technology, as well as the change in provision for unfunded commitments. This increase was partially offset by a decrease in card and processing expense primarily due to contract renegotiations and $6 million in executive retirement expense in the third quarter of 2015.

Credit Quality          
                               
  For the Three Months Ended
September June March December September
2016   2016   2016   2015   2015
Total net losses charged-off ($ in millions)
Commercial and industrial loans ($61 ) ($39 ) ($46 ) ($30 ) ($128 )
Commercial mortgage loans (2 ) (6 ) (6 ) (3 ) (11 )
Commercial construction loans - - - - (3 )
Commercial leases - (1 ) (2 ) (1 ) -
Residential mortgage loans (2 ) (2 ) (2 ) (3 ) (3 )
Home equity (7 ) (6 ) (8 ) (9 ) (9 )
Automobile loans (9 ) (8 ) (9 ) (9 ) (7 )
Credit card (20 ) (21 ) (20 ) (19 ) (21 )
  Other consumer loans and leases   (6 )     (4 )     (3 )     (6 )     (6 )
Total net losses charged-off ($107 ) ($87 ) ($96 ) ($80 ) ($188 )
 
Total losses charged-off ($137 ) ($105 ) ($116 ) ($105 ) ($209 )
Total recoveries of losses previously charged-off   30       18       20       25       21  
Total net losses charged-off ($107 ) ($87 ) ($96 ) ($80 ) ($188 )
Ratios (annualized)

Net losses charged-off as a percent of average portfolio loans and leases (excluding held for sale)

0.45 % 0.37 % 0.42 % 0.34 % 0.80 %
Commercial 0.43 % 0.32 % 0.38 % 0.24 % 0.99 %
  Consumer   0.49 %     0.45 %     0.48 %     0.49 %     0.51 %
 

Net charge-offs were $107 million, or 45 bps of average portfolio loans and leases on an annualized basis, in the third quarter of 2016 compared with net charge-offs of $87 million, or 37 bps, in the second quarter of 2016 and $188 million, or 80 bps, in the third quarter of 2015. Net charge-offs in the third quarter of 2015 included $102 million related to the restructuring of a student loan backed commercial credit originally extended in 2007. Excluding this credit, net charge-offs were $86 million, or 37 bps, in the third quarter of 2015.

Commercial net charge-offs were $63 million, or 43 bps, and were up $17 million sequentially. The increase was primarily due to higher charge-offs of C&I loans, which increased by $22 million from the second quarter of 2016. Commercial real estate net charge-offs were down $4 million from the previous quarter.

Consumer net charge-offs were $44 million, or 49 bps, and were up $3 million sequentially. Compared with the previous quarter, net charge-offs on residential mortgage loans in the portfolio were flat and net charge-offs on the home equity portfolio increased $1 million. Net charge-offs on the auto portfolio were up $1 million and net charge-offs on credit card loans were down $1 million from the second quarter of 2016. Net charge-offs on other consumer loans of $6 million were up $2 million sequentially.

     
  For the Three Months Ended
September   June   March   December   September
2016   2016   2016   2015   2015
Allowance for Credit Losses ($ in millions)
Allowance for loan and lease losses, beginning $ 1,299 $ 1,295 $ 1,272 $ 1,261 $ 1,293
Total net losses charged-off (107 ) (87 ) (96 ) (80 ) (188 )
Provision for loan and lease losses     80         91         119         91         156  
Allowance for loan and lease losses, ending $ 1,272 $ 1,299 $ 1,295 $ 1,272 $ 1,261
 
Reserve for unfunded commitments, beginning $ 151 $ 144 $ 138 $ 134 $ 132
Provision for unfunded commitments     11         7         6         4         2  
Reserve for unfunded commitments, ending $ 162 $ 151 $ 144 $ 138 $ 134
 
Components of allowance for credit losses:
Allowance for loan and lease losses $ 1,272 $ 1,299 $ 1,295 $ 1,272 $ 1,261
Reserve for unfunded commitments     162         151         144         138         134  
Total allowance for credit losses $ 1,434 $ 1,450 $ 1,439 $ 1,410 $ 1,395
Allowance for loan and lease losses ratio
As a percent of portfolio loans and leases 1.37 % 1.38 % 1.38 % 1.37 % 1.35 %
As a percent of nonperforming loans and leases(a) 217 % 188 % 185 % 252 % 275 %
As a percent of nonperforming assets(a) 186 % 161 % 157 % 197 % 208 %
 
(a) Excludes nonaccrual loans in loans held for sale.
 

Provision for loan and lease losses totaled $80 million in the third quarter of 2016. The allowance represented 1.37 percent of total portfolio loans and leases outstanding as of quarter end, compared with 1.38 percent last quarter, and represented 217 percent of nonperforming loans and leases, and 186 percent of nonperforming assets.

Provision for loan and lease losses decreased $11 million from the second quarter of 2016 impacted by improving nonperforming loans and criticized assets and decreased $76 million from the third quarter of 2015 impacted by improving criticized assets. The third quarter of 2015 included a $35 million impact related to the aforementioned student loan backed commercial credit. The allowance for loan and lease losses decreased $27 million sequentially. As of September 30, the reserve allocated to the energy portfolio was approximately 4.95%, down from approximately 5.97% last quarter.

         
      As of
September   June   March   December   September
Nonperforming Assets and Delinquent Loans ($ in millions) 2016   2016   2016   2015   2015
Nonaccrual portfolio loans and leases:
Commercial and industrial loans $ 220 $ 254 $ 278 $ 82 $ 47
Commercial mortgage loans 31 39 51 56 60
Commercial construction loans - - - - -
Commercial leases - 4 4 - 2
Residential mortgage loans 19 27 25 28 31
  Home equity     59       61       61       62       65  
Total nonaccrual portfolio loans and leases (excludes restructured loans) $ 329 $ 385 $ 419 $ 228 $ 205
Nonaccrual restructured portfolio commercial loans and leases(b) 194 242 210 203 177
  Nonaccrual restructured portfolio consumer loans and leases     63       66       72       75       76  
Total nonaccrual portfolio loans and leases $ 586 $ 693 $ 701 $ 506 $ 458
Repossessed property 13 15 17 18 17
OREO     84       97  

 

  107  

 

  123  

 

  131  
Total nonperforming portfolio assets(a) $ 683 $ 805 $ 825 $ 647 $ 606
Nonaccrual loans held for sale 91 20 3 1 1
Nonaccrual restructured loans held for sale     9       -       2       11       1  
Total nonperforming assets   $ 783     $ 825     $ 830     $ 659     $ 608  
 
Restructured Portfolio Consumer loans and leases (accrual) $ 972 $ 982 $ 998 $ 979 $ 973
Restructured Portfolio Commercial loans and leases (accrual)(b) $ 408 $ 431 $ 461 $ 491 $ 571
 
Total loans and leases 90 days past due $ 76 $ 65 $ 73 $ 75 $ 70

Nonperforming portfolio loans and leases as a percent of portfolio loans, leases and other assets, including OREO(a)

0.63 % 0.74 % 0.75 % 0.55 % 0.49 %

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

0.73 % 0.86 % 0.88 % 0.70 % 0.65 %
 
(a) Does not include nonaccrual loans held for sale.
(b) Excludes $20 million of restructured nonaccrual loans and $7 million of restructured accruing loans as of September 30, 2016, June 30, 2016, March 31, 2016 and December 31, 2015. Excludes $21 million of restructured nonaccrual loans and $7 million of restructured accruing loans as of September 30, 2015.

Total nonperforming assets, including loans held-for-sale, decreased $42 million, or 5 percent, from the previous quarter to $783 million. Nonperforming loans (NPLs) at quarter-end decreased $107 million, or 15 percent, from the previous quarter to $586 million or 0.63 percent of total loans, leases and OREO.

Commercial NPAs decreased $103 million from the second quarter to $499 million, or 0.87 percent of commercial loans, leases and OREO. Commercial NPLs decreased $94 million from last quarter to $445 million, or 0.77 percent of commercial loans and leases. C&I NPAs decreased $72 million from the prior quarter to $405 million. Commercial mortgage NPAs decreased $28 million from the previous quarter to $86 million. Commercial construction NPAs decreased $2 million from the previous quarter to $5 million. Commercial lease NPAs were $3 million, down $1 million from the previous quarter. Commercial NPAs included $194 million of nonaccrual troubled debt restructurings (TDRs), compared with $242 million last quarter.

Consumer NPAs decreased $19 million from the second quarter to $184 million, or 0.52 percent of consumer loans, leases and OREO. Consumer NPLs decreased $13 million from last quarter to $141 million, or 0.39 percent of consumer loans and leases. Residential mortgage NPAs decreased $12 million from the second quarter to $57 million. Home equity NPAs decreased $5 million, sequentially, to $89 million. Consumer nonaccrual TDRs were $63 million in the third quarter of 2016, compared with $66 million in the second quarter of 2016.

Third quarter OREO balances included in NPA balances were down $13 million from the second quarter to $84 million, and included $47 million in commercial OREO and $37 million in consumer OREO. Repossessed personal property decreased $2 million from the prior quarter to $13 million.

Loans over 90 days past due and still accruing increased $11 million from the second quarter of 2016 to $76 million. Commercial balances over 90 days past due were $7 million compared with $2 million in the prior quarter, and consumer balances 90 days past due increased $6 million from the previous quarter to $69 million. Loans 30-89 days past due of $205 million were up $9 million from the previous quarter. Commercial balances 30-89 days past due increased $4 million sequentially to $21 million and consumer balances 30-89 days past due were up $5 million from the second quarter at $184 million. The above delinquency figures exclude nonaccruals described previously.

Capital and Liquidity Position          
                             
For the Three Months Ended
September June March December September
2016   2016   2016   2015   2015
Capital Position
Average total Bancorp shareholders' equity to average assets 11.83 % 11.60 % 11.57 % 11.26 % 11.24 %
Tangible equity(a) 9.73 % 9.59 % 9.51 % 9.55 % 9.29 %
Tangible common equity (excluding unrealized gains/losses)(a) 8.78 % 8.64 % 8.55 % 8.59 % 8.33 %
Tangible common equity (including unrealized gains/losses)(a) 9.24 % 9.18 % 8.97 % 8.71 % 8.65 %
 

Regulatory capital ratios:

 
CET1 capital(b) 10.16 % 9.94 % 9.81 % 9.82 % 9.40 %
Tier I risk-based capital(b) 11.26 % 11.03 % 10.91 % 10.93 % 10.49 %
Total risk-based capital(b) 14.87 % 14.66 % 14.66 % 14.13 % 13.68 %
Tier I leverage 9.80 % 9.64 % 9.57 % 9.54 % 9.38 %
 
CET1 capital (fully phased-in)(a)(b) 10.08 % 9.86 % 9.72 % 9.72 % 9.30 %
 
Book value per share $ 20.44 $ 20.09 $ 19.46 $ 18.48 $ 18.22
Tangible book value per share(a) $ 17.22 $ 16.93 $ 16.32 $ 15.39 $ 15.18
 
Modified liquidity coverage ratio (LCR)(c)(d) 115 % 110 % 118 % N/A N/A
 
(a) Non-GAAP measure; see discussion of non-GAAP and Reg G. reconciliation beginning on page 33.
(b) Under the banking agencies Basel III Final Rule, assets and credit equivalent amounts of off-balance sheet exposures are calculated based upon the standardized approach for risk-weighted assets. The resulting values are added together resulting in the Bancorp's total risk-weighted assets.
(c) Current period regulatory capital and liquidity ratios are estimated.
(d) The Bancorp became subject to the Modified LCR regulations effective January 1, 2016.

Capital ratios remained strong during the quarter. The CET1 ratio was 10.16 percent, the tangible common equity to tangible assets ratio* was 8.78 percent (excluding unrealized gains/losses), and 9.24 percent (including unrealized gains/losses). The Tier I risk-based capital ratio was 11.26 percent, the Total risk-based capital ratio was 14.87 percent, and the Tier I leverage ratio was 9.80 percent.

Book value per share at September 30, 2016 was $20.44 and tangible book value per share* was $17.22, compared with the June 30, 2016 book value per share of $20.09 and tangible book value per share* of $16.93.

On August 5, 2016, Fifth Third initially settled a share repurchase agreement whereby Fifth Third would purchase $240 million of its outstanding stock. This reduced third quarter share count by 10.98 million shares. Settlement of the forward contract related to this agreement is expected to occur on or before November 2, 2016.

* Non-GAAP measure; see discussion of non-GAAP and Reg. G reconciliation beginning on page 33 in Exhibit 99.1 of 8-K filing dated 10/20/16.

Tax Rate

The effective tax rate was 25.6 percent in the third quarter of 2016 compared with 22.8 percent in the second quarter of 2016 and 26 percent in the third quarter of 2015. The tax rate in the third quarter of 2016 was impacted by Vantiv-related gains, which were partially offset by an $8 million tax benefit in connection with certain commercial lease terminations. The tax rate in the second quarter of 2016 reflected an $8 million tax benefit related to a change in the estimated deductibility of a prior expense.

Other

On July 27, 2016, Fifth Third Bancorp entered into an agreement with Vantiv, Inc. under which a portion of its Tax Receivable Agreement (“TRA”) with Vantiv was terminated and settled in full for consideration of a cash payment in the amount of $116 million from Vantiv. Under the agreement, Fifth Third Bancorp terminated and settled certain TRA cash flows totaling an estimated $331 million. These cash flows were originally payable to Fifth Third from 2019 - 2035. This sale does not impact the TRA payment expected to be recognized in the fourth quarter of 2016 and the fourth quarter of 2017. Fifth Third will also have the ability to terminate and settle another $394 million of future cash flows for a total of $171 million dollars payable to Fifth Third in 2017 and 2018 in 8 separate quarterly optional executions, which resulted in a $163 million pre-tax gain recognized in the third quarter of 2016. For more detail, see the 8-K dated July 28, 2016.

Fifth Third Bank owns approximately 35 million units representing an 18.3 percent interest in Vantiv Holding, LLC, convertible into shares of Vantiv, Inc., a publicly traded firm. Based upon Vantiv’s closing price of $56.27 on September 30, 2016, our interest in Vantiv was valued at approximately $2.0 billion. Next month in our 10-Q, we will update our disclosure of the carrying value of our interest in Vantiv stock, which was $390 million as of June 30, 2016. The difference between the market value and the book value of Fifth Third’s interest in Vantiv’s shares is not recognized in Fifth Third’s equity or capital. Additionally, Fifth Third has a warrant to purchase approximately 7.8 million additional shares in Vantiv which is carried as a derivative asset at a fair value of $325 million as of September 30, 2016.

Conference Call

Fifth Third will host a conference call to discuss these financial results at 9:00 a.m. (Eastern Time) today. This conference call will be webcast live by Thomson Financial and may be accessed through the Fifth Third Investor Relations website at www.53.com (click on “About Fifth Third” then “Investor Relations”). Institutional investors can access the call via Thomson Financial’s password-protected event management site, StreetEvents (www.streetevents.com).

Those unable to listen to the live webcast may access a webcast replay through the Fifth Third Investor Relations website at the same web address. Additionally, a telephone replay of the conference call will be available beginning approximately two hours after the conference call until Thursday, November 3, 2016 by dialing 855-859-2056 for domestic access or 404-537-3406 for international access (passcode 83768757#).

Corporate Profile

Fifth Third Bancorp is a diversified financial services company headquartered in Cincinnati, Ohio. As of September 30, 2016, the Company had $143 billion in assets and operates 1,191 full-service Banking Centers, including 94 Bank Mart® locations, most open seven days a week, inside select grocery stores and 2,497 ATMs in Ohio, Kentucky, Indiana, Michigan, Illinois, Florida, Tennessee, West Virginia, Georgia and North Carolina. Fifth Third operates four main businesses: Commercial Banking, Branch Banking, Consumer Lending, and Wealth & Asset Management. Fifth Third also has an 18.3% interest in Vantiv Holding, LLC. Fifth Third is among the largest money managers in the Midwest and, as of September 30, 2016, had $314 billion in assets under care, of which it managed $27 billion for individuals, corporations and not-for-profit organizations. Investor information and press releases can be viewed at www.53.com. Fifth Third’s common stock is traded on the NASDAQ® Global Select Market under the symbol “FITB.”

FORWARD-LOOKING STATEMENTS

This release 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,” “anticipates,” “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 from time to time by our Quarterly Reports on Form 10-Q. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements we may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to us. There is a risk that additional information may become known during the company’s quarterly closing process or as a result of subsequent events that could affect the accuracy of the statements and financial information contained herein.

There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) general economic conditions or real estate market conditions, either nationally or in the states in which Fifth Third, one or more acquired entities and/or the combined company do business, weaken or are less favorable than expected; (2) deteriorating credit quality; (3) political developments, wars or other hostilities may disrupt or increase volatility in securities markets or other economic conditions; (4) changes in the interest rate environment reduce interest margins; (5) prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions; (6) Fifth Third’s ability to maintain required capital levels and adequate sources of funding and liquidity; (7) maintaining capital requirements and adequate sources of funding and liquidity may limit Fifth Third’s operations and potential growth; (8) changes and trends in capital markets; (9) problems encountered by larger or similar financial institutions may adversely affect the banking industry and/or Fifth Third; (10) competitive pressures among depository institutions increase significantly; (11) effects of critical accounting policies and judgments; (12) changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board (FASB) or other regulatory agencies; (13) legislative or regulatory changes or actions, or significant litigation, adversely affect Fifth Third, one or more acquired entities and/or the combined company or the businesses in which Fifth Third, one or more acquired entities and/or the combined company are engaged, including the Dodd-Frank Wall Street Reform and Consumer Protection Act; (14) ability to maintain favorable ratings from rating agencies; (15) fluctuation of Fifth Third’s stock price; (16) ability to attract and retain key personnel; (17) ability to receive dividends from its subsidiaries; (18) potentially dilutive effect of future acquisitions on current shareholders’ ownership of Fifth Third; (19) effects of accounting or financial results of one or more acquired entities; (20) difficulties from Fifth Third’s investment in, relationship with, and nature of the operations of Vantiv, LLC; (21) loss of income from any sale or potential sale of businesses; (22) difficulties in separating the operations of any branches or other assets divested; (23) losses or adverse impacts on the carrying values of branches and long-lived assets in connection with their sales or anticipated sales; (24) inability to achieve expected benefits from branch consolidations and planned sales within desired timeframes, if at all; (25) ability to secure confidential information and deliver products and services through the use of computer systems and telecommunications networks; and (26) the impact of reputational risk created by these developments on such matters as business generation and retention, funding and liquidity.

You should refer to our periodic and current reports filed with the Securities and Exchange Commission, or “SEC,” for further information on other factors, which could cause actual results to be significantly different from those expressed or implied by these forward-looking statements.

In this release, we may sometimes provide non-GAAP financial information. Please note that although non-GAAP financial measures provide useful insight to analysts, investors and regulators, they should not be considered in isolation or relied upon as a substitute for analysis using GAAP measures. We provide GAAP reconciliations for non-GAAP measures in our earnings release and presentation, both of which are available in the investor relations section of our website, www.53.com.

Contact:

Fifth Third Bancorp
Sameer Gokhale (Investors), 513-534-2219
or
Larry Magnesen (Media), 513-534-8055