Fifth Third Bancorp — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Fifth Third is a diversified U.S. bank headquartered in Cincinnati, Ohio, with $206.8 billion in assets at quarter-end.
Financial performance
| Metric | Q2 2022 | Prior-year comparison |
|---|---|---|
| Net interest income, GAAP | $1.339 billion | Up 11% |
| Net interest income, FTE | $1.342 billion | Up 11% |
| Total revenue, FTE | $2.018 billion | Up 3% |
| Provision for credit losses | $179 million | Compared with a $115 million benefit |
| Noninterest expense | $1.112 billion | Down 4% |
| Net income | $562 million | Down 21% |
| Net income available to common shareholders | $526 million | Down 22% |
| Diluted EPS | $0.76 | $0.94 in Q2 2021 |
| Net interest margin, FTE | 2.92% | 2.63% in Q2 2021 |
| Efficiency ratio, FTE | 55.1% | 59.1% in Q2 2021 |
For the first six months, FTE revenue was $3.900 billion, essentially unchanged year over year; net income was $1.056 billion, down 25%, and diluted EPS was $1.44 versus $1.87. The six-month FTE net interest margin was 2.75%, compared with 2.62%.
Q2 revenue benefited from higher interest rates and increased average commercial and industrial and indirect consumer loans. Lower mortgage banking and commercial banking revenue, net securities losses, and the swing from prior-year credit-loss benefits to current-year provision expense weighed on results. Mortgage banking net revenue fell 52% to $31 million, while noninterest income overall declined 9% to $676 million.
Balance sheet, liquidity and capital
- Portfolio loans and leases were $118.8 billion, up $6.8 billion from year-end 2021; total loans including loans held for sale were $121.4 billion.
- Total deposits were $161.2 billion, down $8.2 billion from year-end. Core deposits fell 6% to $159.0 billion; estimated uninsured domestic deposits were $67.1 billion.
- Total borrowings were $18.8 billion, up $5.7 billion from year-end, largely reflecting higher short-term funding as deposits declined and securities and loans grew. Long-term debt was $11.0 billion.
- Available-for-sale securities had a fair value of $52.8 billion and net unrealized losses of $3.3 billion, compared with net unrealized gains of $1.2 billion at year-end. Accumulated other comprehensive loss was $2.6 billion.
- Cash and due from banks were $3.4 billion; management reported more than $95 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.
- Regulatory capital ratios: CET1 8.95%, Tier 1 10.23%, total risk-based capital 12.47%, and leverage 8.30%. CET1 was 9.54% at year-end 2021. The reported ratios include the CECL transition benefit; full phase-in would reduce CET1 by 22 basis points.
- Common dividends declared were $0.30 per share for Q2, up from $0.27. No shares were repurchased under the public program during the quarter.
Cash flow and material changes
- First-half operating cash flow was $2.645 billion, compared with $123 million in 2021. Investing activities provided $627 million; financing activities used $2.829 billion.
- First-half investing activity included $25.3 billion of securities purchases, $6.2 billion of net portfolio loan growth and $918 million of net cash paid for acquisitions. Financing included an $8.2 billion net deposit decline, $6.5 billion of net short-term borrowing proceeds, $1.0 billion of debt issuance and $1.6 billion of long-term debt repayments.
- Fifth Third completed the acquisition of a national point-of-sale lender focused on home improvement and solar loans. Preliminary acquisition accounting included $452 million of goodwill; fair-value estimates remained subject to change.
- Fifth Third issued $1.0 billion of fixed-to-floating-rate senior notes in April. It issued a further $1.0 billion in July, after quarter-end.
Outlook, commentary and risks
Management said net interest margin was expected to continue increasing as rates rise and assets reprice faster than liabilities. The filing provides no specific earnings or revenue guidance. Management highlighted inflation, labor shortages, supply-chain constraints, Federal Reserve tightening, market volatility and the possibility of recession. Its credit-loss baseline assumed 2.8% real GDP growth in 2022; the downside scenario assumed a recession beginning in Q3 2022. Applying 100% weight to that downside scenario would increase modeled quantitative ACL by approximately $1.8 billion, before any additional qualitative adjustments.
- Provision for credit losses was higher as loan balances grew, forecast economic conditions deteriorated and acquired loans required initial reserves. The allowance for loan and lease losses was $2.014 billion, or 1.70% of portfolio loans; total ACL was 1.85%.
- Nonperforming assets were $559 million, with the nonperforming portfolio asset ratio unchanged at 0.47%. Net charge-offs were 0.21% of average portfolio loans in Q2 versus 0.16% a year earlier.
- Rising rates supported net interest income but reduced securities values and mortgage refinancing activity. Management reported Q2 net interest income sensitivity near neutral in year one and positive in year two under parallel rate increases; modeled NII declined under a 100-basis-point rate decrease.
- LIBOR exposure remained substantial: approximately $107 billion of derivative notional, $39 billion of loans, $1.4 billion of preferred stock and $237 million of long-term debt. The bank aimed to transition relevant exposures by June 30, 2023.
- Legal proceedings included the CFPB account-opening case, the Early Access cash-advance litigation and shareholder matters. The company estimated reasonably possible aggregate legal and regulatory losses of up to approximately $60 million above accruals, while noting some loss ranges could not be estimated. Mortgage representation-and-warranty losses could be up to approximately $10 million above the $9 million reserve.
- A $25 million cash payment to the Visa swap counterparty was made July 15, 2022 following Visa litigation-escrow funding. The filing states management did not consider it probable that Visa litigation exposure would exceed the value of the Class B shares underlying the swap.
Important facts for investors to verify
- Whether deposit declines and increased wholesale funding continue, and how funding costs respond as rates rise.
- Whether the securities portfolio’s unrealized losses, AOCI and regulatory capital ratios change materially with interest rates.
- Credit trends, including commercial borrower performance, consumer delinquencies, acquired point-of-sale loans and future ACL assumptions.
- Whether net interest margin improves as management expected, and how mortgage banking and other fee income perform.
- Acquisition integration, final purchase-price allocations and the acquired lender’s credit performance.
- Developments in LIBOR transition exposures, legal matters and contingent-loss estimates.