Fifth Third Bancorp — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Fifth Third is a Cincinnati-based regional financial services company with $207.3 billion in assets at quarter-end, operating across 11 Midwestern and Southeastern states. Its segments are Commercial Banking, Consumer and Small Business Banking, and Wealth and Asset Management.
Financial results and position
| Metric | Q2 2023 | Prior comparable period | Change |
|---|---|---|---|
| Net interest income, FTE | $1.463 billion | $1.342 billion | +9% |
| Total revenue, FTE | $2.189 billion | $2.018 billion | +8% |
| Provision for credit losses | $177 million | $179 million | -1% |
| Noninterest expense | $1.231 billion | $1.112 billion | +11% |
| Net income | $601 million | $562 million | +7% |
| Net income available to common shareholders | $562 million; $0.82 diluted EPS | $526 million; $0.76 diluted EPS | +7% income; +8% EPS |
| Net interest margin, FTE | 3.10% | 2.92% | +18 bps |
| Efficiency ratio, FTE | 56.2% | 55.1% | Worsened 1.1 percentage points |
First-half results: FTE revenue was $4.407 billion, up 13%; net income was $1.159 billion, up 10%; and diluted EPS was $1.59, up 10%. FTE net interest margin was 3.20%, versus 2.75% in the first half of 2022.
Cash flow: For the six months, operating activities provided $1.801 billion, investing activities used $1.962 billion, and financing activities used $711 million. Cash and due from banks declined $872 million to $2.594 billion. These cash-flow movements should be viewed alongside the bank’s short-term investments and available borrowing capacity.
Balance sheet and liquidity: At June 30, deposits were $164.1 billion, portfolio loans and leases were $121.9 billion, total borrowings were $18.3 billion, and total assets were $207.3 billion. Available-for-sale securities had a $49.3 billion fair value and $6.1 billion of net unrealized losses. The company reported approximately $100 billion of available liquidity and said the parent company could meet obligations and dividends for 24 months without capital-market access or upstream bank dividends.
Capital: CET1 was 9.49%, Tier 1 risk-based capital 10.73%, total risk-based capital 12.83%, and leverage 8.81%. The company’s reported ratios include the regulatory CECL transition benefit; fully phased-in CECL would reduce CET1 by 13 basis points, according to the filing.
Material changes and drivers
- Higher market rates and growth in commercial and consumer lending supported net interest income. However, deposit and wholesale funding costs rose sharply: Q2 interest expense was $913 million versus $125 million a year earlier. The net interest rate spread declined to 2.32% from 2.76%.
- Deposits were broadly stable in total versus year-end 2022, but their mix shifted: demand deposits fell $7.9 billion, while certificates of deposit of $250,000 or less rose $5.0 billion. Estimated insured domestic deposits were 60% at quarter-end; estimated uninsured domestic deposits were $66.0 billion.
- Noninterest income rose 7%, helped by mortgage banking, commercial banking revenue, and securities gains. Mortgage originations and residential mortgage loan sales were lower year over year.
- Noninterest expense rose 11%, primarily from compensation, technology, occupancy, marketing, and other expenses. The FTE efficiency ratio increased, indicating weaker expense efficiency.
- Credit indicators weakened from year-end: nonperforming assets rose to $663 million from $539 million, and the nonperforming portfolio asset ratio increased to 0.54% from 0.44%. Net charge-offs were 0.29% of average loans in Q2, versus 0.21% a year earlier. The allowance for loan and lease losses was $2.327 billion, or 1.91% of portfolio loans, versus 1.81% at year-end.
Outlook, risks, and unusual items
- Management said net interest margin is expected to stabilize or decrease modestly as higher asset yields are more than offset by rising deposit and other funding costs. The filing does not provide specific earnings or revenue guidance.
- The company estimated a roughly $208 million FDIC special assessment under the proposed rule following bank failures. It expected to recognize the amount in earnings when the final rule is issued; the final assessment was uncertain.
- Management discussed recession risks, persistent inflation, potentially higher-for-longer interest rates, tighter credit conditions, market volatility, and possible deposit migration or pressure on funding costs. Its credit-loss baseline assumed modest GDP growth; a downside scenario modeled a recession beginning in Q3 2023. Applying that downside scenario alone would increase modeled quantitative ACL by approximately $2.3 billion, before any additional qualitative adjustments.
- In Q1, Fifth Third completed a $200 million accelerated share repurchase. It did not expect common-stock repurchases in Q3 2023 other than those related to employee compensation plans. The common dividend declared for Q2 was $0.33 per share.
- After quarter-end, on July 27, the company issued $1.25 billion of senior notes due 2029, with a 6.339% fixed rate through July 2028 and a subsequent floating rate tied to SOFR.
- Legal and regulatory matters include the CFPB account-opening case, card interchange litigation, and investigations into business-related electronic communications recordkeeping. The company estimated reasonably possible legal and regulatory losses of up to approximately $78 million above accruals, while noting that outcomes and timing remain uncertain. It also estimated up to approximately $10 million of possible mortgage representation-and-warranty losses above reserves.
- The filing identifies new regulatory capital proposals and possible deposit-insurance assessments as risks. Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether deposit outflows or migration into higher-cost products continue, and how that affects funding costs, liquidity, and net interest margin.
- Whether unrealized securities losses, deposit concentrations, and available borrowing capacity change materially; reported liquidity should be assessed against the bank’s stressed funding needs.
- Whether consumer and commercial credit deterioration—particularly charge-offs, nonperforming loans, and solar/point-of-sale lending—continues, and whether reserves remain adequate.
- The final FDIC special assessment and the effect of proposed capital and liquidity rules, including any implications for dividends or repurchases.
- Developments in the disclosed litigation and regulatory investigations, including potential costs not captured in current accruals.
FTE net interest income, margin, revenue, and efficiency ratio are non-GAAP measures; the filing provides reconciliations to GAAP where applicable.