Fifth Third(FITB) - 2023 Q1 - Quarterly Report

Part I. Financial Information Overview of Fifth Third Bancorp's financial performance, condition, and key accounting policies for the period Management's Discussion and Analysis of Financial Condition and Results of Operations (Item 2) Analysis of Fifth Third Bancorp's Q1 2023 financial results, including income, expenses, balance sheet changes, and risk management Overview Q1 2023 saw increased net income and net interest income, alongside higher credit loss provisions and strong capital ratios Q1 2023 Key Financial Performance | ($ in millions, except for per share data) | For the three months ended March 31, 2023 | For the three months ended March 31, 2022 | % Change | | :--- | :--- | :--- | :--- | | Net interest income (U.S. GAAP) | $1,517 | $1,195 | 27% | | Provision for credit losses | $164 | $45 | 264% | | Noninterest expense | $1,331 | $1,222 | 9% | | Net income available to common shareholders | $535 | $474 | 13% | | Earnings per share - diluted | $0.78 | $0.68 | 15% | | Return on average assets | 1.10% | 0.96% | 15% | | Return on average common equity | 13.7% | 10.0% | 37% | - The Bancorp is managing its transition from LIBOR, with significant exposures as of March 31, 2023, including derivative contracts with a notional value of approximately $87 billion and loans outstanding of about $18 billion, expecting no material financial impact from its cessation[39][473] - Regulatory capital ratios as of March 31, 2023, remained strong under the Basel III standardized approach, with a CET1 capital ratio of 9.28%, Tier 1 risk-based capital ratio of 10.53%, and a Leverage ratio of 8.67%[45] - Recent high-profile bank failures have increased regulatory and market focus on liquidity and unrealized securities losses, leading the FRB to initiate the Bank Term Funding Program in March 2023, which the Bancorp is monitoring[36] Critical Accounting Policies Discussion of key accounting policies, particularly the Allowance for Loan and Lease Losses, and recent accounting standard updates - The Bancorp's critical accounting policies include the ALLL, reserve for unfunded commitments, valuation of servicing rights, fair value measurements, goodwill, and legal contingencies[63] - The ALLL is determined through a combination of collective evaluation for loan pools and individual evaluation for specific loans, such as larger commercial loans on nonaccrual status, requiring significant management judgment[70][488] - Expected credit loss models consider historical data, current conditions, and a reasonable and supportable forecast period of up to three years, after which the model reverts to historical loss information over a two-year phase-in[59][493] - On January 1, 2023, the Bancorp adopted ASU 2022-02, which amended its accounting policy for the ALLL, specifically related to Troubled Debt Restructurings and vintage disclosures[64] Statements of Income Analysis Detailed analysis of Q1 2023 income statement components, including net interest income, noninterest income, and expenses Net Interest Income Analysis (FTE, YoY) | ($ in millions) | Q1 2023 | Q1 2022 | Change | | :--- | :--- | :--- | :--- | | Interest Income (FTE) | $2,218 | $1,292 | $926 | | Interest Expense | $696 | $94 | $602 | | Net Interest Income (FTE) | $1,522 | $1,198 | $324 | | Net Interest Margin (FTE) | 3.29% | 2.59% | +70 bps | - The provision for credit losses increased to $164 million in Q1 2023 from $45 million in Q1 2022, driven by higher net charge-offs and loan growth, particularly in commercial & industrial and point-of-sale solar energy loans[505] Noninterest Income Breakdown (YoY) | ($ in millions) | Q1 2023 | Q1 2022 | % Change | | :--- | :--- | :--- | :--- | | Commercial banking revenue | $161 | $135 | 19% | | Wealth and asset management revenue | $146 | $149 | (2)% | | Service charges on deposits | $137 | $152 | (10)% | | Mortgage banking net revenue | $69 | $52 | 33% | | Other noninterest income | $22 | $52 | (58)% | - Noninterest expense increased by $109 million year-over-year, primarily due to a $46 million rise in compensation and benefits and a $17 million increase in technology and communications expense[98][99][516] Balance Sheet Analysis Examination of Q1 2023 balance sheet changes, focusing on loans, investments, deposits, and borrowings - Total loans and leases grew by 1% from December 31, 2022, reaching $123.6 billion, with commercial loans increasing by $801 million and consumer loans rising by $318 million[105][527][106] - Total investment securities were stable at $52.2 billion, primarily consisting of AAA-rated available-for-sale debt securities, with net unrealized losses decreasing to $5.2 billion from $6.0 billion at year-end 2022[108][273][531] - Total deposits decreased by $0.7 billion from year-end 2022 to $163.0 billion, reflecting a $3.1 billion fall in core deposits and a $2.8 billion growth in higher-rate CDs[115][274] - Total borrowings increased by $1.7 billion from year-end 2022 to $20.4 billion, driven by a $2.5 billion increase in other short-term borrowings to enhance liquidity, partially offset by an $821 million decrease in long-term debt[275][543] Business Segment Review Review of Q1 2023 financial performance across Commercial, Consumer, Wealth, and General Corporate segments Net Income by Business Segment (YoY) | ($ in millions) | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Commercial Banking | $580 | $341 | | Consumer and Small Business Banking | $659 | $112 | | Wealth and Asset Management | $74 | $29 | | General Corporate and Other | ($755) | $12 | | Total Net Income | $558 | $494 | - Commercial Banking's performance was driven by higher yields and balances on commercial loans and increased Funds Transfer Pricing (FTP) credits on deposits, though partially offset by a higher provision for credit losses[277][549][136] - Consumer and Small Business Banking's net income growth was fueled by a $740 million increase in net interest income and a $17 million rise in noninterest income, primarily from mortgage banking[690][554][555] - Wealth and Asset Management's net income increased due to a $66 million rise in net interest income, which more than offset a slight decrease in noninterest income and a small increase in expenses[691][559][566] Risk Management Overview of the Bancorp's management of credit, interest rate, liquidity, and capital risks in Q1 2023 - Credit Risk: Nonperforming assets increased to $623 million at Q1 2023 from $539 million at year-end 2022, with the net charge-off ratio rising to 0.26% from 0.12% year-over-year[187][189][597] - Interest Rate Risk: As of March 31, 2023, a +200 bps ramp in interest rates is estimated to decrease Net Interest Income (NII) by 3.11% over 12 months, a shift from the positive sensitivity a year prior, reflecting higher deposit repricing expectations[214][628] - Liquidity Risk: The Bancorp maintains a strong liquidity profile with approximately $100 billion in available liquidity and has access to $59.5 billion in secured borrowing from the FRB and FHLB[654][653] - Capital Risk: The CET1 capital ratio was stable at 9.28% at Q1 2023, exceeding the regulatory minimum plus the 2.5% stress capital buffer requirement[236][652] Condensed Consolidated Financial Statements and Notes (Item 1) Presentation of Fifth Third Bancorp's Q1 2023 unaudited financial statements and comprehensive accompanying notes Notes to Condensed Consolidated Financial Statements Detailed disclosures on accounting policies, financial instruments, credit quality, and segment information for Q1 2023 - The Bancorp adopted ASU 2022-02 on January 1, 2023, eliminating Troubled Debt Restructuring (TDR) accounting, which resulted in a $49 million decrease to the Allowance for Credit Losses (ACL) and a $37 million cumulative-effect adjustment to retained earnings, net of tax[261] Available-for-Sale Securities Unrealized Losses (March 31, 2023) | ($ in millions) | Fair Value | Unrealized Losses | | :--- | :--- | :--- | | Less than 12 months | $20,356 | ($1,438) | | 12 months or more | $28,511 | ($3,820) | | Total | $48,867 | ($5,258) | Allowance for Loan and Lease Losses (ALLL) Rollforward (Q1 2023) | ($ in millions) | Amount | | :--- | :--- | | Balance, beginning of period | $2,194 | | Impact of adoption of ASU 2022-02 | ($49) | | Net Charge-offs | ($78) | | Provision for loan and lease losses | $148 | | Balance, end of period | $2,215 | - As of March 31, 2023, the Bancorp had significant derivative positions, including qualifying hedging instruments and free-standing derivatives for risk management and customer accommodation, with total derivative assets at $2.8 billion and liabilities at $3.3 billion[355] Part II. Other Information Contains disclosures on legal proceedings, risk factors, and a list of exhibits filed with the report Legal Proceedings (Item 1) Cross-references detailed information on ongoing legal matters and governmental investigations in the financial statement notes - Information regarding legal proceedings is detailed in Note 18 of the Notes to Condensed Consolidated Financial Statements[17] Risk Factors (Item 1A) Confirms no material changes to the risk factors previously disclosed in the 2022 Annual Report on Form 10-K - There were no material changes to risk factors during the first quarter of 2023 from those disclosed in the 2022 Annual Report on Form 10-K[884] Exhibits (Item 6) Lists all documents filed as exhibits, including corporate governance, share repurchase, and regulatory certifications - The exhibits filed with the report include certifications from the CEO and CFO pursuant to the Sarbanes-Oxley Act, corporate governance documents, and XBRL data files[19][887]