Fifth Third Bancorp — 2022 Q3 Form 10-Q
Business context and reporting period. Fifth Third Bancorp is a Cincinnati-based diversified financial services company with $205.5 billion in assets at September 30, 2022, operating across 11 states. It reports Commercial Banking, Consumer and Small Business Banking, and Wealth and Asset Management. This filing covers the quarter and nine months ended September 30, 2022; balance-sheet comparisons are primarily with December 31, 2021.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Change |
|---|---|---|---|
| Total revenue, FTE | $2.174 billion | $2.028 billion | Up 7% |
| Net interest income, GAAP | $1.498 billion | $1.189 billion | Up 26% |
| Net interest income, FTE | $1.502 billion | $1.192 billion | Up 26% |
| Noninterest income | $672 million | $836 million | Down 20% |
| Provision for credit losses | $158 million expense | $42 million benefit | Higher expense |
| Noninterest expense | $1.167 billion | $1.172 billion | Down slightly |
| Net income | $653 million | $704 million | Down 7% |
| Net income available to common shareholders | $631 million | $684 million | Down 8% |
| Diluted EPS | $0.91 | $0.97 | Down 6% |
- Margins and efficiency: Q3 FTE net interest margin was 3.22%, versus 2.59% a year earlier; FTE net interest rate spread was 2.91%, versus 2.45%. The FTE efficiency ratio improved to 53.7% from 57.8%. These are non-GAAP measures.
- Nine-month results: FTE revenue was $6.074 billion, up 3%; net income was $1.709 billion, down 19%; diluted EPS was $2.34, down 17%. Noninterest income fell 13%, while provision moved to $383 million expense from a $330 million benefit in 2021.
- Cash flow: For the first nine months, operating activities provided $4.355 billion, versus $1.362 billion in 2021. Investing activities used $1.097 billion and financing activities used $3.184 billion. Cash and due from banks ended at $3.068 billion, up $74 million from year-end.
- Loans and deposits: Period-end loans and leases, including held-for-sale, were $121.9 billion, up $5.5 billion (5%) from year-end. Deposits were $161.7 billion, down $7.7 billion (5%); core deposits fell $9.8 billion, partly offset by higher large CDs. Approximately $64.9 billion of domestic deposits were estimated uninsured.
- Debt and liquidity: Borrowings totaled $18.3 billion, up $5.2 billion from year-end, including $6.4 billion of other short-term borrowings. The company reported more than $95 billion in available liquidity and about $49.2 billion of Bank borrowing capacity through secured sources. The parent company said it could meet obligations and dividends for 23 months without capital-market access or upstream Bank dividends.
- Credit and capital: The allowance for credit losses was $2.298 billion, including $2.099 billion for loan and lease losses and $199 million for unfunded commitments. The allowance was 1.91% of portfolio loans and leases. Net charge-offs were 0.21% of average portfolio loans in Q3, versus 0.08% a year earlier; nonperforming portfolio assets were 0.46% of loans and leases and OREO, versus 0.47% at year-end. CET1 was 9.14%; Tier 1, total risk-based, and leverage ratios were 10.40%, 12.64%, and 8.44%, respectively.
Material changes versus comparable periods
- Higher market rates, loan growth, and increased yields lifted Q3 FTE net interest income by $310 million year over year. Higher deposit costs and greater FHLB advances partly offset the benefit. Management said margin was expected to continue increasing as rates rose and assets repriced faster than liabilities.
- Credit costs rose as loan balances grew and forecasted economic conditions deteriorated; nine-month provision also included initial reserves on acquired loans. Net charge-offs increased in Q3, particularly in commercial and industrial and indirect consumer lending.
- Noninterest income declined, led by lower mortgage banking, commercial banking, leasing, and other income. Mortgage origination fees and gains fell as higher rates reduced refinance activity; Q3 residential mortgage originations were $4.0 billion versus $5.0 billion.
- Investment securities increased to $51.3 billion fair value from $38.1 billion at year-end, following deployment of short-term investments into longer-duration securities. The available-for-sale portfolio had $6.1 billion of net unrealized losses, compared with $1.2 billion of net unrealized gains at year-end. Accumulated other comprehensive loss was $5.306 billion, versus income of $1.207 billion at year-end.
- Fifth Third acquired a point-of-sale consumer lender focused on home improvement and solar loans in Q2 2022. The acquisition contributed to growth in other consumer loans and goodwill; purchase accounting estimates remained preliminary. Fifth Third also completed the disposition of LaSalle Solutions in Q2.
- Q3 declared common dividends were $0.33 per share, versus $0.30 a year earlier. No shares were repurchased under the public program in Q3; reported purchases related to employee compensation plans.
Outlook, risks, contingencies, and unusual items
- Management described persistent inflation, labor shortages, supply-chain constraints, aggressive Federal Reserve rate increases, market volatility, and rising recession risk. These conditions may affect borrower credit, deposit balances and funding costs, securities values, loan demand, and mortgage activity.
- Interest-rate simulations showed the company was liability-sensitive under parallel rising-rate scenarios: estimated FTE net interest income fell 2.36% over 12 months and 2.13% over months 13–24 in a +200-basis-point ramp. The model is sensitive to deposit repricing and balance assumptions and is not a forecast; actual deposit repricing had been slower than prior-cycle experience.
- LIBOR transition remains a material operational and contractual undertaking. At quarter-end, exposures included about $102 billion of derivatives, $31 billion of loans, $1.4 billion of preferred stock, and $237 million of long-term debt; remaining USD LIBOR settings were scheduled to cease after June 30, 2023.
- Legal and regulatory matters include the CFPB action concerning alleged unauthorized accounts, the Early Access class action with plaintiffs’ alleged damages exceeding $280 million plus interest, and payment-card interchange litigation. The company estimated reasonably possible legal and regulatory losses up to approximately $73 million above accruals, while noting some possible losses could not be estimated. A separate mortgage representation-and-warranty reserve was $9 million, with up to approximately $10 million of reasonably possible losses above reserve.
- On October 27, 2022, after quarter-end, Fifth Third issued $1 billion of senior notes and its Bank issued $1 billion under its global bank note program. The Inflation Reduction Act’s 15% corporate alternative minimum tax was noted as effective for qualifying corporations beginning in 2023; the filing does not quantify its expected impact on Fifth Third.
Important facts for investors to verify
- Whether margin expansion continues and how deposit betas, deposit migration, and wholesale funding costs evolve as rates change.
- Whether credit quality and provision expense worsen under the filing’s downside economic scenario; the company estimated that weighting that scenario at 100% would increase quantitative ACL by about $2.0 billion, before any related qualitative adjustments.
- The implications of the $6.1 billion unrealized AFS securities loss for capital, liquidity, and any potential securities sales, including the distinction between AOCI marks and realized losses.
- The pace and cost of deposit outflows, the level of uninsured deposits, and the increased reliance on short-term borrowings.
- Acquisition integration and credit performance of home-improvement and solar point-of-sale lending; Fifth Third discontinued new originations with one third-party lender in September 2022.
- Developments in the CFPB, Early Access, interchange, and other legal matters, as well as LIBOR transition execution and post-quarter debt issuance costs.