Fifth Third Bancorp — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Unless noted otherwise, income and cash-flow comparisons are against Q1 2022; balance-sheet comparisons are against December 31, 2022. Fifth Third is a Cincinnati-based regional financial-services company with $208.7 billion in assets and three reportable segments: Commercial Banking, Consumer and Small Business Banking, and Wealth and Asset Management.
Financial results and position
| Metric | Q1 2023 / March 31, 2023 | Comparison |
|---|---|---|
| Net interest income (GAAP) | $1.517 billion | Up 27% from $1.195 billion |
| Net interest income (FTE, non-GAAP) | $1.522 billion | Up 27% from $1.198 billion |
| Net interest margin (FTE, non-GAAP) | 3.29% | 2.59% in Q1 2022 |
| Noninterest income | $696 million | Up 2% from $684 million |
| Total revenue (FTE, non-GAAP) | $2.218 billion | Up 18% from $1.882 billion |
| Provision for credit losses | $164 million | Up from $45 million |
| Noninterest expense | $1.331 billion | Up 9% from $1.222 billion |
| Net income / common net income | $558 million / $535 million | Common net income up 13% from $474 million |
| Diluted EPS | $0.78 | $0.68 in Q1 2022 |
| Efficiency ratio (FTE, non-GAAP) | 60.0% | Improved from 64.9% |
| Return on average assets | 1.10% | 0.96% in Q1 2022 |
| Return on average tangible common equity (non-GAAP) | 20.5% | 13.4% in Q1 2022 |
FTE figures are non-GAAP measures. Net interest income growth primarily reflected higher asset yields and growth in commercial and other consumer lending; higher deposit and wholesale-funding costs partly offset the benefit. The effective tax rate rose to 22.3% from 19.2%.
- Loans: Total loans and leases, including held-for-sale loans, were $123.6 billion, up $1.1 billion from year-end. Commercial and industrial loans and point-of-sale solar loans contributed to growth. Portfolio loans and leases were $122.9 billion.
- Deposits and borrowings: Deposits were $163.0 billion, down $715 million from year-end. Core deposits fell 2%, while certificates of deposit increased as customers shifted toward higher-yielding products. Total borrowings were $20.4 billion, up $1.7 billion; other short-term borrowings, mainly FHLB advances, increased $2.5 billion.
- Credit: Net charge-offs were 0.26% of average portfolio loans, versus 0.12% in Q1 2022. Nonperforming assets were $623 million, or 0.51% of portfolio loans and leases plus OREO, compared with $539 million and 0.44% at year-end. The allowance for credit losses was $2.447 billion, including a $2.215 billion loan-loss allowance and $232 million for unfunded commitments.
- Cash flow: Operating activities provided $1.321 billion, investing activities used $2.363 billion, and financing activities provided $356 million. Cash and due from banks declined $686 million to $2.780 billion.
- Capital and shareholder returns: CET1 was 9.28%, Tier 1 risk-based capital 10.53%, total risk-based capital 12.64%, and leverage 8.67%. The quarterly common dividend was $0.33 per share. Fifth Third completed a $200 million accelerated share repurchase and said it did not currently expect common-stock repurchases in Q2 2023 other than under employee compensation plans.
Material changes and notable items
- Higher rates drove substantial year-over-year net interest income growth, but deposit repricing and funding costs accelerated: interest expense on deposits was $478 million versus $11 million in Q1 2022. Management said margin was expected to stabilize or decline modestly as liability costs caught up with asset repricing.
- Provision expense increased alongside higher charge-offs, loan balances, and specific reserves on certain commercial credits. The allowance ratio on portfolio loans was 1.80%, versus 1.81% at year-end; total ACL coverage was 1.99%.
- Available-for-sale securities had $5.258 billion of gross unrealized losses at quarter-end, down from $6.046 billion at year-end. The portfolio’s fair value was $50.719 billion against $55.958 billion amortized cost. The company reported no credit-loss allowance for these securities. AOCI improved by $865 million during the quarter, primarily reflecting securities and cash-flow-hedge valuation changes.
- Uninsured domestic deposits were estimated at $64.6 billion, or approximately 40% of domestic deposits, at March 31. The filing reports approximately $100 billion of current available liquidity and $59.5 billion of secured borrowing capacity, including FRB and FHLB sources. The parent company said it could meet contractual obligations and dividends for 21 months without capital-market access or upstream Bank dividends.
- On January 1, 2023, Fifth Third adopted ASU 2022-02; adoption reduced the allowance by $49 million and increased retained earnings by $37 million, net of tax.
- The company closed 23 banking centers during the quarter. It also noted an increased FDIC assessment rate, contributing to higher insurance and tax expense.
Outlook, risks, and contingencies
The filing provides no specific full-year earnings or revenue guidance. Management described a slowing economic outlook, persistent inflation, tighter credit conditions, and the possibility of a recession beginning as early as late 2023. It highlighted volatility and heightened market and regulatory attention to bank liquidity, asset-liability management, and unrealized securities losses.
- Interest-rate sensitivity modeling estimated that a gradual 200-basis-point rate increase would reduce net interest income by 3.11% over the next 12 months and 5.16% over months 13–24, relative to a static-rate scenario. These are risk-model outputs, not forecasts.
- The allowance model’s downside scenario assumed a recession; applying a 100% weighting to that scenario would increase the quantitative ACL by approximately $2.2 billion, before any additional qualitative adjustments.
- LIBOR-linked exposures remained substantial at quarter-end, including approximately $87 billion in derivative notional, $18 billion in loans, $1.4 billion in preferred stock, and $62 million in long-term debt. The company expected transition by June 30, 2023 and did not expect cessation to materially affect results.
- Legal and regulatory matters include ongoing CFPB litigation, government investigations into electronic communications record-keeping, and other proceedings. The company estimated reasonably possible legal and regulatory losses of up to approximately $151 million above accruals, while noting some outcomes cannot be estimated. A separate mortgage representation-and-warranty exposure was estimated at up to $12 million above its $9 million reserve.
Important facts for investors to verify
- Whether deposit outflows, uninsured-deposit levels, deposit pricing, and wholesale funding continue to evolve; verify liquidity availability and funding costs in subsequent filings.
- Whether credit deterioration, particularly in commercial criticized assets and consumer/solar point-of-sale lending, leads to higher charge-offs, nonperforming assets, or ACL requirements.
- How net interest margin and net interest income respond to rate changes and deposit migration, compared with the filing’s modeled sensitivities and management’s stated outlook.
- How unrealized securities losses, AOCI, capital ratios, and any regulatory capital treatment change as interest rates and market conditions move.
- Developments in the CFPB case, electronic-communications investigations, Visa-related exposure, and other legal contingencies, including any change in estimated losses.
- Reconcile non-GAAP FTE and tangible-equity measures with GAAP results, and review the full cash-flow and liquidity disclosures before drawing conclusions about cash generation or funding strength.