Fifth Third Bancorp — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Fifth Third is a diversified U.S. financial services company operating across commercial banking, branch banking, consumer lending, and wealth and asset management.
Financial performance and condition
| Metric | Q1 2019 | Comparable period / change |
|---|---|---|
| Net interest income, GAAP | $1.082 billion | $996 million; up 9% |
| Net interest income, FTE | $1.086 billion | $999 million; up 9% |
| Noninterest income | $1.101 billion | $909 million; up 21% |
| Total revenue, FTE | $2.187 billion | $1.908 billion; up 15% |
| Provision for credit losses | $90 million | $13 million |
| Noninterest expense | $1.097 billion | $1.010 billion; up 9% |
| Net income attributable to Bancorp | $775 million | $701 million; up 11% |
| Net income available to common shareholders | $760 million | $686 million; up 11% |
| Diluted EPS | $1.12 | $0.96; up 17% |
| Net interest margin, FTE | 3.28% | 3.18% |
| Efficiency ratio, FTE | 50.2% | 52.9% |
| Net charge-offs / average portfolio loans | 0.32% | 0.36% |
The $562 million gain from selling Worldpay shares was a major contributor to noninterest income. Q1 2018 included a $414 million gain related to Vantiv’s acquisition of Worldpay Group. The filing does not provide a single adjusted earnings figure excluding these items.
- Cash flow: Operating activities provided $534 million, versus $265 million in Q1 2018. Investing activities used $1.121 billion, versus providing $163 million; financing activities provided $655 million, versus using $904 million. Cash and due from banks ended at $2.749 billion.
- Balance sheet at March 31: Assets were $167.853 billion, versus $146.069 billion at year-end 2018. Portfolio loans and leases were $109.842 billion; deposits were $123.664 billion; total borrowings were $19.442 billion, including $15.483 billion of long-term debt.
- Funding and liquidity: Core deposits were $117.795 billion. Modified LCR was 113%. Fifth Third reported $44.9 billion of available secured borrowing capacity at Fifth Third Bank and $5.6 billion at MB Financial Bank, in addition to other market funding access.
- Capital: CET1 ratio was 9.60%, Tier 1 risk-based capital 10.67%, total risk-based capital 13.68%, and Tier 1 leverage 10.32%. The company said it exceeded well-capitalized guidelines.
Material changes and notable items
- Fifth Third completed its approximately $3.6 billion stock-and-cash acquisition of MB Financial on March 22. The acquired business added approximately $13.5 billion of portfolio loans and $14.5 billion of deposits. Acquisition fair values were preliminary. Only post-close results were included in reported Q1 earnings; acquired operations contributed $13 million of net income attributable to common shareholders from closing through quarter-end, excluding specified merger charges.
- Merger-related expenses were $76 million. Total loans and deposits increased substantially from year-end, primarily due to the acquisition. Goodwill rose to $4.321 billion, including $1.843 billion recorded for MB Financial.
- The company recognized a $562 million gain on the Worldpay share sale and no longer owned Worldpay equity securities. It also completed a $913 million accelerated share repurchase, with settlement expected by June 28, 2019. Common dividends declared were $0.22 per share, compared with $0.16 a year earlier.
- Fifth Third issued $1.5 billion of 3.65% senior fixed-rate notes due 2024 and Fifth Third Bank issued $300 million of floating-rate notes due 2022 at three-month LIBOR plus 64 basis points.
- Nonperforming assets rose to $512 million from $411 million at year-end; nonperforming portfolio assets were 0.45% of portfolio loans and leases plus OREO, versus 0.41%. Net charge-offs were lower year over year, but the credit-loss provision rose to $90 million. The allowance for loan and lease losses was $1.115 billion; its ratio to portfolio loans fell to 1.02%, partly because acquired loans are recorded at fair value without carrying over the acquired allowance.
Outlook, management commentary, and risks
- The filing gives no specific full-year earnings or revenue guidance. Management described U.S. economic conditions as generally stable in Q1, while citing uncertainty around global demand, tariffs and trade, mixed consumer spending, and continued choppiness in housing. The FOMC had held its target range at 2.25%–2.50%.
- Interest-rate sensitivity modeling indicated near-neutral net interest income impact in year one and a benefit in year two under a 200-basis-point rate increase; a 150-basis-point decline was projected to reduce net interest income in both periods. Results depend on assumptions, including deposit betas and deposit behavior.
- Fifth Third expects to adopt the CECL credit-loss standard on January 1, 2020 and currently expects the allowance to increase; the amount remained under evaluation. The acquisition integration, preliminary purchase accounting, credit quality, funding costs, interest rates, mortgage servicing rights, cyber and operational risks, and regulatory changes are material uncertainties.
- The company planned to close 100–125 branches over three years under its existing optimization plan; 31 had closed by March 31. It also identified 21 additional closures under that plan and 46 acquired Chicago-area branches for closure in the second half of 2019. Related Q1 premises impairment charges were $20 million.
- Legal proceedings include payment-card interchange litigation, with final approval of an amended damages settlement scheduled for November 2019, and other matters. The company estimated reasonably possible legal and regulatory losses of up to approximately $54 million above accruals, while noting some exposures cannot be estimated. Mortgage representation-and-warranty losses were estimated at up to $11 million above the $8 million reserve.
- A new risk factor addresses potential climate-change-related effects on customers, collateral values, costs, and demand for financial services. Management reported disclosure controls were effective and was extending financial-reporting controls to MB Financial during integration.
Most important facts for investors to verify
- How much reported earnings growth depends on the Worldpay gain and other nonrecurring items, and how the bank performs after those items are excluded.
- Whether MB Financial integration, preliminary purchase accounting, merger costs, and planned branch closures produce the expected costs, savings, and Chicago-market benefits.
- Whether the rise in nonperforming assets and criticized commercial credits continues, and how acquired-loan credit performance affects provisions and allowance coverage.
- Deposit pricing, wholesale funding costs, liquidity measures, and capital ratios following the acquisition, debt issuance, and share repurchase.
- The eventual CECL allowance impact, material legal or regulatory developments, and sensitivity of earnings and mortgage servicing rights to changing rates and prepayments.