Fifth Third Bancorp — Q1 2022 Form 10-Q
Business context and period. Fifth Third Bancorp is a U.S. regional financial services company headquartered in Cincinnati, Ohio, with $211.5 billion in assets at March 31, 2022. It reports Commercial Banking, Branch Banking, Consumer Lending, and Wealth and Asset Management. This unaudited report covers the three months ended March 31, 2022; year-over-year comparisons are with Q1 2021 unless otherwise stated.
Key financial results
| Metric | Q1 2022 | Comparison / change |
|---|---|---|
| Total revenue, FTE basis (non-GAAP) | $1.882 billion | Down 2% from $1.928 billion |
| Net interest income (U.S. GAAP) | $1.195 billion | Up 2% from $1.176 billion |
| Net interest income, FTE basis (non-GAAP) | $1.198 billion | Up 2% from $1.179 billion |
| Net interest margin, FTE (non-GAAP) | 2.59% | 2.62% in Q1 2021 |
| Provision for credit losses | $45 million expense | Compared with a $173 million benefit |
| Noninterest income | $684 million | Down 9% from $749 million |
| Noninterest expense | $1.222 billion | Up 1% from $1.215 billion |
| Net income | $494 million | Down 29% from $694 million |
| Net income available to common shareholders | $474 million | Down 30%; diluted EPS $0.68 versus $0.93 |
| Efficiency ratio, FTE (non-GAAP) | 64.9% | 63.0% in Q1 2021 |
Balance sheet, credit, liquidity, and capital
- Loans and deposits: Portfolio loans and leases were $115.9 billion at quarter-end, up $3.8 billion from December 31, 2021. Total deposits were $170.6 billion, up $1.3 billion. Total assets were $211.5 billion.
- Funding and debt: Total borrowings were $11.9 billion, down $1.1 billion from year-end; long-term debt was $10.8 billion. Approximately $79.7 billion of domestic deposits were estimated to be uninsured.
- Credit quality: Net charge-offs were 0.12% of average portfolio loans, versus 0.27% a year earlier. Nonperforming assets were $570 million, and nonperforming portfolio assets were 0.49% of portfolio loans, leases, and OREO, versus 0.47% at year-end. The allowance for credit losses was $2.085 billion, including a $1.908 billion loan and lease allowance and $177 million for unfunded commitments; total ACL was 1.80% of portfolio loans.
- Liquidity: Management reported over $100 billion of available liquidity. The parent company stated it could meet obligations and dividends for 21 months without capital-market access or upstream Bank dividends. The Bank had approximately $53.1 billion of available secured borrowing capacity.
- Regulatory capital: CET1 was 9.31%, Tier 1 risk-based capital 10.63%, total risk-based capital 12.93%, and leverage 8.32%. CET1 was 9.54% at year-end. Ratios include the CECL transition benefit; full phase-in would reduce CET1 by 22 basis points.
- Cash flow: Operating activities provided $1.687 billion, compared with $366 million used in Q1 2021; investing activities used $1.617 billion, and financing activities used $15 million. Cash and due from banks ended the quarter at $3.049 billion.
Material changes and management commentary
- Common earnings fell mainly because the prior-year quarter included a substantial credit-loss reserve release, while Q1 2022 recorded a provision. Lower noninterest income also weighed on results. Net interest income rose modestly, supported by larger average earning assets and lower funding costs, partly offset by lower loan yields and reduced PPP income.
- Mortgage banking net revenue declined to $52 million from $85 million, as origination fees and gains fell with lower volumes and margins. Residential mortgage originations were $3.5 billion versus $4.7 billion. Leasing revenue and commercial banking revenue also declined.
- Management said net interest margin is expected to increase as interest rates rise and short-term investments are redeployed into longer-duration assets. Its rate-sensitivity model estimated NII increases of 5.64% over 12 months and 13.59% over months 13–24 under a gradual 200-basis-point increase, subject to modeling assumptions and actual conditions.
- Management expected indirect secured consumer loan production to be lower in 2022, particularly auto lending, as it sought improved returns on capital. No overall full-year earnings or revenue guidance is stated in the provided filing text.
- Inflation, rising interest rates, commodity-price shocks, Russia’s invasion of Ukraine, supply-chain constraints, and COVID-19 uncertainty were identified as economic and credit risks. The downside credit scenario assumed a recession beginning in Q2 2022; applying that scenario alone would increase the modeled quantitative ACL by approximately $1.1 billion, before any further qualitative adjustments.
Unusual items, contingencies, and other risks
- Rapid rate increases drove available-for-sale securities from $1.2 billion of net unrealized gains at December 31, 2021 to $1.3 billion of net unrealized losses at March 31, 2022. AOCI shifted from $1.207 billion of income to a $1.096 billion loss, contributing to the decline in shareholders’ equity.
- The Bancorp had substantial LIBOR exposure at quarter-end: approximately $103 billion of derivative notional, $47 billion of loans, $1.4 billion of preferred stock, and $237 million of long-term debt. It was transitioning affected contracts to alternatives, including SOFR, by June 30, 2023.
- Legal matters include payment-card interchange litigation, the CFPB’s account-opening case, and shareholder litigation. Management estimated reasonably possible aggregate legal and regulatory losses of up to approximately $60 million above accruals, while noting some matters’ potential loss ranges could not be estimated. Mortgage representation-and-warranty losses of up to about $10 million above the $9 million reserve were considered reasonably possible.
- On April 25, 2022, after quarter-end, the Bancorp issued $1 billion of fixed-to-floating-rate senior notes. The filing reported no material change in risk factors during Q1 2022.
Most important facts for investors to verify
- Whether deposit growth, deposit costs, and customer balances remain favorable as market rates rise, and how actual deposit betas compare with modeled assumptions.
- Whether loan growth and credit performance hold up amid inflation, higher rates, geopolitical uncertainty, and the downside economic scenario; monitor nonperformers, charge-offs, and ACL coverage.
- How securities-related unrealized losses and AOCI evolve, and their implications for reported equity and regulatory capital.
- Whether mortgage banking, leasing, and commercial banking fee income recover or continue to decline, and whether expense growth improves the efficiency ratio.
- Progress on LIBOR transition, legal proceedings and potential losses, and the impact of the post-quarter $1 billion debt issuance on funding costs and liquidity.