Fifth Third Bancorp — Q3 2023 Form 10-Q
Business context and reporting period. The report covers the quarter and nine months ended September 30, 2023. Fifth Third is a Cincinnati-based regional financial services company with $213.0 billion in assets, operating across 11 states. It reports Commercial Banking, Consumer and Small Business Banking, and Wealth and Asset Management.
Financial performance and position
| Metric | Q3 2023 | Comparable period / change |
|---|---|---|
| Net interest income (GAAP) | $1.438 billion | $1.498 billion; down 4% |
| Net interest income (FTE, non-GAAP) | $1.445 billion | $1.502 billion; down 4% |
| Noninterest income | $715 million | $672 million; up 6% |
| Total revenue (FTE, non-GAAP) | $2.160 billion | $2.174 billion; down 1% |
| Provision for credit losses | $119 million | $158 million |
| Noninterest expense | $1.188 billion | $1.167 billion; up 2% |
| Net income | $660 million | $653 million |
| Net income available to common shareholders; diluted EPS | $623 million; $0.91 | $631 million; $0.91 |
| Net interest margin (FTE, non-GAAP) | 2.98% | 3.22% |
| Efficiency ratio (FTE, non-GAAP) | 55.0% | 53.7% |
For the first nine months, net income was $1.819 billion, up 6%; diluted EPS was $2.50, up 7%. FTE net interest income rose 10% to $4.429 billion and FTE margin increased to 3.12% from 2.91%. The nine-month provision increased 20% to $460 million; noninterest expense rose 7% to $3.750 billion. These FTE measures are non-GAAP.
Balance sheet and funding, September 30, 2023: Assets were $212.967 billion; loans and leases were $120.088 billion; deposits were $167.672 billion; borrowings were $21.109 billion, including $16.310 billion of long-term debt. Total shareholders’ equity was $16.544 billion. Available-for-sale securities had a fair value of $47.893 billion and net unrealized losses of $7.668 billion; accumulated other comprehensive loss was $6.839 billion.
Cash flow, nine months: Operating activities provided $2.437 billion; investing activities used $8.655 billion; financing activities provided $5.589 billion. Cash and due from banks ended at $2.837 billion.
Capital and liquidity: Regulatory ratios were CET1 9.80%, Tier 1 11.06%, total risk-based capital 13.13%, and leverage 8.85%. Management reported more than $100 billion of available liquidity, including approximately $59.6 billion of secured borrowing capacity. The parent company said it could meet obligations and dividends for 29 months without capital-market access or upstream bank dividends.
Material changes versus comparable periods
- Q3 net interest income and margin declined year over year as deposit and wholesale funding costs rose and balances shifted from demand deposits to higher-yielding products. Deposit expense was $844 million in Q3 versus $112 million a year earlier.
- Average loan yields improved, partly offsetting funding pressure. Management said net interest margin was expected to decrease modestly in the next quarter, reflecting cash levels and continued liability repricing, partly offset by asset repricing.
- Credit indicators weakened: Q3 net charge-offs were 0.41% of average loans versus 0.21% a year earlier; nonperforming portfolio assets were 0.51% of loans and leases plus OREO, versus 0.44% at year-end 2022. The allowance for loan and lease losses was $2.340 billion, or 1.95% of portfolio loans, versus 1.81% at year-end.
- Deposits increased 2% from year-end to $167.672 billion, but noninterest-bearing deposits fell to $43.844 billion from $53.125 billion. Total loans and leases declined 1% from year-end to $120.702 billion, including loans held for sale.
- Noninterest income benefited from higher commercial banking revenue and lower securities losses. Mortgage banking revenue fell 17% in Q3, with lower originations as higher rates reduced refinancing activity.
Outlook, risks, contingencies and unusual items
- Management described persistent inflation, elevated interest rates, volatile markets and tighter bank-sector liquidity as risks to asset values and economic activity. A recession could pressure business investment, employment, consumer spending and credit quality.
- The FDIC’s proposed special assessment was estimated to cost Fifth Third approximately $208 million; the company expected to recognize it in earnings upon issuance of a final rule. The final amount and timing were not established in the filing.
- Proposed capital-rule changes could increase requirements for large banks, including Fifth Third. Proposed long-term debt requirements may also apply; the company was evaluating both proposals.
- In July, Fifth Third issued $1.25 billion of senior notes due 2029, initially bearing 6.339% fixed interest and then floating at compounded SOFR plus 2.340%. An August auto-loan securitization generated approximately $1.5 billion of third-party asset-backed notes; the trust was consolidated, and those notes have no recourse to the Bancorp’s general assets.
- Unrealized securities losses remain significant and increased from $6.046 billion at year-end 2022. The filing says the portfolio was primarily AAA-rated and no credit-loss allowance was recorded for securities in unrealized loss positions.
- Legal and regulatory matters include the CFPB’s unauthorized-accounts case, which remained in discovery; the Early Access case, with post-trial motions pending after a jury verdict for the Bank; and ongoing solar-lending-related state inquiries. The company estimated reasonably possible legal and regulatory losses of up to $96 million above accruals, while noting some matters could not be estimated. It also estimated up to $11 million of possible mortgage representation-and-warranty losses above its reserve.
- Fifth Third Securities agreed to pay an $8 million SEC penalty in September to resolve an electronic-communications recordkeeping investigation; a similar CFTC investigation was ongoing. The Visa total-return-swap liability was $172 million at quarter-end, and a $6 million cash payment related to Q3 Visa escrow funding was made October 11, 2023.
- The company repurchased $200 million of shares through an accelerated repurchase in Q1. It said it did not currently expect common-stock repurchases in Q4 2023 other than purchases under employee compensation plans. The common dividend declared for Q3 was $0.35 per share.
Important facts for investors to verify
- Whether deposit migration and higher funding costs continue to pressure net interest margin and whether the indicated modest near-term decline materializes.
- Trends in consumer and commercial charge-offs, nonperforming assets, and allowance coverage, particularly in other consumer, auto and commercial lending.
- The final FDIC special assessment, its timing, and any resulting earnings impact.
- The carrying value and potential effects of the securities portfolio’s unrealized losses, AOCI, and interest-rate sensitivity.
- Developments in the CFPB, solar-lending, Visa and other legal matters, including whether losses exceed current accruals.
- Potential capital and funding effects of proposed regulatory rules, and the sustainability of liquidity and capital ratios under stress.