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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2023
Commission File Number 001-33653
(Exact name of Registrant as specified in its charter)
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Ohio | | 31-0854434 |
(State or other jurisdiction | | (I.R.S. Employer |
of incorporation or organization) | | Identification Number) |
38 Fountain Square Plaza
Cincinnati, Ohio 45263
(Address of principal executive offices)
Registrant’s telephone number, including area code: (800) 972-3030
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☒ | | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
| | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered: |
Common Stock, Without Par Value | | FITB | | The | NASDAQ | Stock Market LLC |
Depositary Shares Representing a 1/1000th Ownership Interest in a Share of | | | | | | |
6.625% Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series I | | FITBI | | The | NASDAQ | Stock Market LLC |
Depositary Shares Representing a 1/40th Ownership Interest in a Share of | | | | | | |
6.00% Non-Cumulative Perpetual Class B Preferred Stock, Series A | | FITBP | | The | NASDAQ | Stock Market LLC |
Depositary Shares Representing a 1/1000th Ownership Interest in a Share of | | | | | | |
4.95% Non-Cumulative Perpetual Preferred Stock, Series K | | FITBO | | The | NASDAQ | Stock Market LLC |
There were 681,016,616 shares of the Registrant’s common stock, without par value, outstanding as of October 31, 2023.
FINANCIAL CONTENTS
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Part I. Financial Information | |
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Part II. Other Information | |
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FORWARD-LOOKING STATEMENTS
This report contains statements that we believe are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended, and Rule 3b-6 promulgated thereunder. All statements other than statements of historical fact are forward-looking statements. These statements relate to our financial condition, results of operations, plans, objectives, future performance, capital actions or business. They usually can be identified by the use of forward-looking language such as “will likely result,” “may,” “are expected to,” “is anticipated,” “potential,” “estimate,” “forecast,” “projected,” “intends to,” or may include other similar words or phrases such as “believes,” “plans,” “trend,” “objective,” “continue,” “remain,” or similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” or similar verbs. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including but not limited to the risk factors set forth in our most recent Annual Report on Form 10-K, as updated by our Quarterly Reports on Form 10-Q. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to us. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) effects of the global COVID-19 pandemic; (2) deteriorating credit quality; (3) loan concentration by location or industry of borrowers or collateral; (4) problems encountered by other financial institutions; (5) inadequate sources of funding or liquidity; (6) unfavorable actions of rating agencies; (7) inability to maintain or grow deposits; (8) limitations on the ability to receive dividends from subsidiaries; (9) cyber-security risks; (10) Fifth Third’s ability to secure confidential information and deliver products and services through the use of computer systems and telecommunications networks; (11) failures by third-party service providers; (12) inability to manage strategic initiatives and/or organizational changes; (13) inability to implement technology system enhancements; (14) failure of internal controls and other risk management systems; (15) losses related to fraud, theft, misappropriation or violence; (16) inability to attract and retain skilled personnel; (17) adverse impacts of government regulation; (18) governmental or regulatory changes or other actions; (19) failures to meet applicable capital requirements; (20) regulatory objections to Fifth Third’s capital plan; (21) regulation of Fifth Third’s derivatives activities; (22) deposit insurance premiums; (23) assessments for the orderly liquidation fund; (24) replacement of LIBOR; (25) weakness in the national or local economies; (26) global political and economic uncertainty or negative actions; (27) changes in interest rates and the effects of inflation; (28) changes and trends in capital markets; (29) fluctuation of Fifth Third’s stock price; (30) volatility in mortgage banking revenue; (31) litigation, investigations, and enforcement proceedings by governmental authorities; (32) breaches of contractual covenants, representations and warranties; (33) competition and changes in the financial services industry; (34) changing retail distribution strategies, customer preferences and behavior; (35) difficulties in identifying, acquiring or integrating suitable strategic partnerships, investments or acquisitions; (36) potential dilution from future acquisitions; (37) loss of income and/or difficulties encountered in the sale and separation of businesses, investments or other assets; (38) results of investments or acquired entities; (39) changes in accounting standards or interpretation or declines in the value of Fifth Third’s goodwill or other intangible assets; (40) inaccuracies or other failures from the use of models; (41) effects of critical accounting policies and judgments or the use of inaccurate estimates; (42) weather-related events, other natural disasters, or health emergencies (including pandemics); (43) the impact of reputational risk created by these or other developments on such matters as business generation and retention, funding and liquidity; (44) changes in law or requirements imposed by Fifth Third’s regulators impacting our capital actions, including dividend payments and stock repurchases; and (45) Fifth Third’s ability to meet its environmental and/or social targets, goals and commitments. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations or any changes in events, conditions or circumstances on which any such statement is based, except as may be required by law, and we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The information contained herein is intended to be reviewed in its totality, and any stipulations, conditions or provisos that apply to a given piece of information in one part of this report should be read as applying mutatis mutandis to every other instance of such information appearing herein.
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PART I. FINANCIAL INFORMATION |
Glossary of Abbreviations and Acronyms |
Fifth Third Bancorp provides the following list of abbreviations and acronyms as a tool for the reader that are used in Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Condensed Consolidated Financial Statements and the Notes to Condensed Consolidated Financial Statements.
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ACL: Allowance for Credit Losses | FTS: Fifth Third Securities, Inc. |
AFS: Available-For-Sale | GDP: Gross Domestic Product |
ALCO: Asset Liability Management Committee | GNMA: Government National Mortgage Association |
ALLL: Allowance for Loan and Lease Losses | GSE: United States Government Sponsored Enterprise |
AOCI: Accumulated Other Comprehensive Income (Loss) | HTM: Held-To-Maturity |
APR: Annual Percentage Rate | IPO: Initial Public Offering |
ARM: Adjustable Rate Mortgage | IRC: Internal Revenue Code |
ASC: Accounting Standards Codification | IRLC: Interest Rate Lock Commitment |
ASU: Accounting Standards Update | ISDA: International Swaps and Derivatives Association, Inc. |
ATM: Automated Teller Machine | LIBOR: London Interbank Offered Rate |
BHC: Bank Holding Company | LIHTC: Low-Income Housing Tax Credit |
BOLI: Bank Owned Life Insurance | LLC: Limited Liability Company |
bps: Basis Points | LTV: Loan-to-Value Ratio |
CD: Certificate of Deposit | MD&A: Management’s Discussion and Analysis of Financial |
CDC: Fifth Third Community Development Corporation and Fifth Third | Condition and Results of Operations |
Community Development Company, LLC | MSR: Mortgage Servicing Right |
CECL: Current Expected Credit Loss | N/A: Not Applicable |
CET1: Common Equity Tier 1 | NII: Net Interest Income |
CFPB: United States Consumer Financial Protection Bureau | NM: Not Meaningful |
CME: Chicago Mercantile Exchange | OAS: Option-Adjusted Spread |
C&I: Commercial and Industrial | OCC: Office of the Comptroller of the Currency |
DCF: Discounted Cash Flow | OCI: Other Comprehensive Income (Loss) |
DTCC: Depository Trust & Clearing Corporation | OREO: Other Real Estate Owned |
DTI: Debt-to-Income Ratio | PPP: Paycheck Protection Program |
ERM: Enterprise Risk Management | ROU: Right-of-Use |
ERMC: Enterprise Risk Management Committee | SBA: Small Business Administration |
EVE: Economic Value of Equity | SEC: United States Securities and Exchange Commission |
FASB: Financial Accounting Standards Board | SOFR: Secured Overnight Financing Rate |
FDIC: Federal Deposit Insurance Corporation | TBA: To Be Announced |
FHA: Federal Housing Administration | TDR: Troubled Debt Restructuring |
FHLB: Federal Home Loan Bank | TILA: Truth in Lending Act |
FHLMC: Federal Home Loan Mortgage Corporation | U.S.: United States of America |
FICO: Fair Isaac Corporation (credit rating) | U.S. GAAP: United States Generally Accepted Accounting |
FINRA: Financial Industry Regulatory Authority | Principles |
FNMA: Federal National Mortgage Association | VA: United States Department of Veterans Affairs |
FOMC: Federal Open Market Committee | VIE: Variable Interest Entity |
FRB: Federal Reserve Bank | VRDN: Variable Rate Demand Note |
FTE: Fully Taxable Equivalent | |
FTP: Funds Transfer Pricing | |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 2) |
The following is Management’s Discussion and Analysis of Financial Condition and Results of Operations of certain significant factors that have affected Fifth Third Bancorp’s (the “Bancorp” or “Fifth Third”) financial condition and results of operations during the periods included in the Condensed Consolidated Financial Statements, which are a part of this filing. Reference to the Bancorp incorporates the parent holding company and all consolidated subsidiaries. The Bancorp’s banking subsidiary is referred to as the Bank.
OVERVIEW
Fifth Third Bancorp is a diversified financial services company headquartered in Cincinnati, Ohio. At September 30, 2023, the Bancorp had $213 billion in assets and operated 1,073 full-service banking centers and 2,101 Fifth Third branded ATMs in eleven states throughout the Midwestern and Southeastern regions of the U.S. The Bancorp reports on three business segments: Commercial Banking, Consumer and Small Business Banking and Wealth and Asset Management.
This overview of MD&A highlights selected information in the financial results of the Bancorp and may not contain all of the information that is important to you. For a more complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources and critical accounting policies and estimates, you should carefully read this entire document as well as the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2022. Each of these items could have an impact on the Bancorp’s financial condition, results of operations and cash flows. In addition, refer to the Glossary of Abbreviations and Acronyms in this report for a list of terms included as a tool for the reader of this Quarterly Report on Form 10-Q. The abbreviations and acronyms identified therein are used throughout this MD&A, as well as the Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements.
Net interest income, net interest margin, net interest rate spread and the efficiency ratio are presented in MD&A on an FTE basis. The FTE basis adjusts for the tax-favored status of income from certain loans and leases and securities held by the Bancorp that are not taxable for federal income tax purposes. The Bancorp believes this presentation to be the preferred industry measurement of net interest income as it provides a relevant comparison between taxable and non-taxable amounts. The FTE basis for presenting net interest income is a non-GAAP measure. For further information, refer to the Non-GAAP Financial Measures section of MD&A.
The Bancorp’s revenues are dependent on both net interest income and noninterest income. For both the three and nine months ended September 30, 2023, net interest income on an FTE basis and noninterest income provided 67% and 33% of total revenue. The Bancorp derives the majority of its revenues within the U.S. from customers domiciled in the U.S. Revenue from foreign countries and external customers domiciled in foreign countries was immaterial to the Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2023. Changes in interest rates, credit quality, economic trends and the capital markets are primary factors that drive the performance of the Bancorp. As discussed later in the Risk Management section of MD&A, risk identification, measurement, monitoring, control and reporting are important to the management of risk and to the financial performance and capital strength of the Bancorp.
Net interest income is the difference between interest income earned on assets such as loans, leases and securities, and interest expense incurred on liabilities such as deposits, other short-term borrowings and long-term debt. Net interest income is affected by the general level of interest rates, the relative level of short-term and long-term interest rates, changes in interest rates and changes in the amount and composition of interest-earning assets and interest-bearing liabilities. Generally, the rates of interest the Bancorp earns on its assets and pays on its liabilities are established for a period of time. The change in market interest rates over time exposes the Bancorp to interest rate risk through potential adverse changes to net interest income and financial position. The Bancorp manages this risk by continually analyzing and adjusting the composition of its assets and liabilities based on their payment streams and interest rates, the timing of their maturities and their sensitivity to changes in market interest rates. Additionally, in the ordinary course of business, the Bancorp enters into certain derivative transactions as part of its overall strategy to manage its interest rate and prepayment risks. The Bancorp is also exposed to the risk of loss on its loan and lease portfolio as a result of changing expected cash flows caused by borrower credit events, such as loan defaults and inadequate collateral.
Noninterest income is derived from commercial banking revenue, wealth and asset management revenue, service charges on deposits, card and processing revenue, mortgage banking net revenue, leasing business revenue, other noninterest income and net securities gains or losses. Noninterest expense includes compensation and benefits, technology and communications, net occupancy expense, equipment expense, marketing expense, leasing business expense, card and processing expense and other noninterest expense.
Current Economic Conditions
Economic growth accelerated in the third quarter of 2023. Inflation has remained persistent and continues to be above the FRB’s target, which may lead to interest rates remaining elevated for a sustained period of time. In response to inflationary pressures, FRB officials have raised benchmark interest rates several times since March 2022 and have signaled that they will continue to monitor the cumulative economic effects of their policy actions, including tighter credit conditions for households and businesses, when determining future monetary actions. Amidst the rapid pace of interest rate increases, several financial markets have experienced heightened volatility. In addition, the rise in longer-term rates during the third quarter of 2023 has the potential to adversely impact asset prices and economic activity.
Changes in interest rates can affect numerous aspects of the Bancorp’s business and may impact the Bancorp’s future performance. If financial markets remain volatile, this may impact the future performance of various segments of the Bancorp’s business, in addition to the
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
value of the Bancorp’s investment securities portfolio. The Bancorp continues to closely monitor the pace of inflation and the impacts of inflation on the broader market.
The bank failures that have occurred since March 2023 generated significant market volatility and increased regulatory and market focus on the liquidity, asset-liability management and unrealized securities losses of banks. In May 2023, the FDIC proposed a special deposit insurance assessment on banking organizations with greater than $5 billion in assets to recover the costs associated with protecting uninsured depositors following these closures. As proposed, the special assessment would be collected by the FDIC over an anticipated total of eight quarterly assessments beginning with the first quarter of 2024. The comment period for the proposed rule has ended and the final rule is expected to be issued later in 2023. While the ultimate impact of the special assessment will be dependent on the final rule, the Bancorp has estimated that its special assessment under the provisions of the proposed rule would be approximately $208 million, which is expected to be recognized in earnings upon issuance of the final rule. The Bancorp continues to monitor regulatory changes related to these developments.
For more information on current economic conditions, refer to the Credit Risk Management subsection of the Risk Management section of MD&A. Additionally, refer to the Interest Rate and Price Risk Management and Liquidity Risk Management subsections of the Risk Management section of MD&A for additional information about the Bancorp’s interest rate risk management and liquidity risk management activities.
Proposed Updates to Regulatory Requirements for Capital and Long-Term Debt
On July 27, 2023, the U.S. banking agencies released a notice of proposed rulemaking to revise the Basel III Capital Rules, which would replace its existing risk-based capital framework for large banks with a new framework that implements international capital standards. The proposed rulemaking would increase capital requirements applicable to banking organizations with total assets of $100 billion or more, including Fifth Third, and would align the calculation of regulatory capital and the calculation of risk-weighted assets across large banking organizations. As proposed, the rules would be effective for the Bancorp on July 1, 2025 and phased in over a three-year transition period. The Bancorp is in the process of evaluating this proposed rulemaking and assessing its potential impact.
On August 29, 2023, the U.S. banking agencies issued a notice of proposed rulemaking to require that certain banking organizations with $100 billion or more in consolidated assets, including Fifth Third, comply with certain long-term debt requirements at the holding company and insured depository institution levels. These proposed requirements are intended to absorb losses in the event of the failure of a banking organization. As proposed, the rules would be phased in over a three-year period after their effective date. The Bancorp is in the process of evaluating this proposed rulemaking and assessing its potential impact.
LIBOR Transition
In July 2017, the Chief Executive of the United Kingdom Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that the FCA would stop persuading or compelling banks to submit rates for the calculation of LIBOR to the administrator of LIBOR after 2021.
In the United States, SOFR was identified as the preferred alternative rate. SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on directly observable U.S. Treasury-backed repurchase transactions. As a secured borrowing rate, SOFR may not exhibit similar behavior in response to market and economic volatility as LIBOR, which was an unsecured rate.
As of September 30, 2023, substantially all contracts have transitioned to alternative reference rates. Refer to Note 16 and Note 17 of the Notes to Condensed Consolidated Financial Statements for additional information about certain exposures which were transitioned to an alternative reference rate.
For more information of the various risks the Bancorp faces in connection with the replacement of LIBOR on its operations, refer to “Risk Factors—Market Risks—The replacement of LIBOR could adversely affect Fifth Third’s revenue or expenses and the value of those assets or obligations.” in Item 1A. Risk Factors of the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2022.
Senior Notes Offering
On July 27, 2023, the Bancorp issued and sold $1.25 billion of fixed-rate/floating-rate senior notes which will mature on July 27, 2029. The senior notes bear interest at a rate of 6.339% per annum to, but excluding, July 27, 2028. From, and including, July 27, 2028 until, but excluding, July 27, 2029, the senior notes will bear interest at a rate of compounded SOFR plus 2.340%. The senior notes are redeemable in whole at par plus accrued and unpaid interest one year prior to their maturity date, or may be wholly or partially redeemed on or after 30 days prior to maturity. Additionally, the senior notes are redeemable at the Bancorp’s option, in whole or in part, beginning 180 days after the issue date and prior to July 27, 2028, at the greater of: (a) the aggregate principal amount of the senior notes being redeemed, or (b) the discounted present value of the remaining scheduled payments of principal and interest that would be due if the senior notes being redeemed matured on July 27, 2028.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Automobile Loan Securitization
In a securitization transaction that occurred in August of 2023, the Bancorp transferred $1.74 billion in aggregate automobile loans to a bankruptcy remote trust which subsequently issued approximately $1.58 billion of asset-backed notes, of which approximately $79 million were retained by the Bancorp, resulting in approximately $1.5 billion of outstanding notes included in long-term debt in the Condensed Consolidated Balance Sheets. As discussed in Note 12, the bankruptcy remote trust was deemed to be a VIE and the Bancorp, as the primary beneficiary, consolidated the VIE. The third-party holders of the asset-backed notes do not have recourse to the general assets of the Bancorp.
Accelerated Share Repurchase Transaction
During the first quarter of 2023, the Bancorp entered into and settled an accelerated share repurchase transaction. As part of the transaction, the Bancorp entered into a forward contract in which the final number of shares delivered at settlement was based generally on a discount to the average daily volume weighted-average price of the Bancorp’s common stock during the term of the repurchase agreement. Refer to Note 17 of the Notes to Condensed Consolidated Financial Statements for additional information on share repurchase activity.
Key Performance Indicators
The Bancorp, as a banking institution, utilizes various key indicators of financial condition and operating results in managing and monitoring the performance of the business. In addition to traditional financial metrics, such as revenue and expense trends, the Bancorp monitors other financial measures that assist in evaluating growth trends, capital strength and operational efficiencies. The Bancorp analyzes these key performance indicators against its past performance, its forecasted performance and with the performance of its peer banking institutions. These indicators may change from time to time as the operating environment and businesses change.
The following are some of the key indicators used by management to assess the Bancorp’s business performance, including those which are considered in the Bancorp’s compensation programs:
•CET1 Capital Ratio: CET1 capital divided by risk-weighted assets as defined by the Basel III standardized approach to risk-weighting of assets
•Return on Average Tangible Common Equity (non-GAAP): Tangible net income available to common shareholders divided by average tangible common equity
•Return on Average Common Equity, Excluding AOCI (non-GAAP): Net income available to common shareholders divided by total equity, excluding AOCI and preferred stock
•Net Interest Margin (non-GAAP): Net interest income on an FTE basis divided by average interest-earning assets
•Efficiency Ratio (non-GAAP): Noninterest expense divided by the sum of net interest income on an FTE basis and noninterest income
•Earnings Per Share, Diluted: Net income allocated to common shareholders divided by average common shares outstanding after the effect of dilutive stock-based awards
•Nonperforming Portfolio Assets Ratio: Nonperforming portfolio assets divided by portfolio loans and leases and OREO
•Net Charge-off Ratio: Net losses charged-off divided by average portfolio loans and leases
•Return on Average Assets: Net income divided by average assets
•Loan-to-Deposit Ratio: Total loans divided by total deposits
•Household Growth: Change in the number of consumer households with retail relationship-based checking accounts
The list of indicators above is intended to summarize some of the most important metrics utilized by management in evaluating the Bancorp’s performance and does not represent an all-inclusive list of all performance measures that may be considered relevant or important to management or investors.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
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TABLE 1: Earnings Summary |
| For the three months ended September 30, | % | For the nine months ended September 30, | % |
($ in millions, except for per share data) | 2023 | 2022 | Change | 2023 | 2022 | Change |
Income Statement Data | | | | | | |
Net interest income (U.S. GAAP) | $ | 1,438 | | 1,498 | | (4) | $ | 4,411 | | 4,032 | | 9 |
Net interest income (FTE)(a)(b) | 1,445 | | 1,502 | | (4) | 4,429 | | 4,043 | | 10 |
Noninterest income | 715 | | 672 | | 6 | 2,137 | | 2,031 | | 5 |
Total revenue (FTE)(a)(b) | 2,160 | | 2,174 | | (1) | 6,566 | | 6,074 | | 8 |
Provision for credit losses | 119 | | 158 | | (25) | 460 | | 383 | | 20 |
Noninterest expense | 1,188 | | 1,167 | | 2 | 3,750 | | 3,501 | | 7 |
Net income | 660 | | 653 | | 1 | 1,819 | | 1,709 | | 6 |
Net income available to common shareholders | 623 | | 631 | | (1) | 1,719 | | 1,631 | | 5 |
Common Share Data | | | | | | |
Earnings per share - basic | $ | 0.91 | | 0.91 | | — | $ | 2.51 | | 2.37 | | 6 |
Earnings per share - diluted | 0.91 | | 0.91 | | — | 2.50 | | 2.34 | | 7 |
Cash dividends declared per common share | 0.35 | | 0.33 | | 6 | 1.01 | | 0.93 | | 9 |
Book value per share | 21.19 | | 21.30 | | (1) | 21.19 | | 21.30 | | (1) |
Market value per share | 25.33 | | 31.96 | | (21) | 25.33 | | 31.96 | | (21) |
Financial Ratios | | | | | | |
Return on average assets | 1.26 | % | 1.25 | | 1 | 1.18 | % | 1.10 | | 7 |
Return on average common equity | 16.3 | | 14.9 | | 9 | 14.6 | | 12.3 | | 19 |
Return on average tangible common equity(b) | 24.7 | | 21.9 | | 13 | 21.8 | | 17.3 | | 26 |
Dividend payout | 38.5 | | 36.3 | | 6 | 40.2 | | 39.2 | | 3 |
(a)Amounts presented on an FTE basis. The FTE adjustments were $7 and $4 for the three months ended September 30, 2023 and 2022, respectively, and $18 and $11 for the nine months ended September 30, 2023 and 2022, respectively.
(b)These are non-GAAP measures. For further information, refer to the Non-GAAP Financial Measures section of MD&A.
Earnings Summary
The Bancorp’s net income available to common shareholders for the third quarter of 2023 was $623 million, or $0.91 per diluted share, which was net of $37 million in preferred stock dividends. The Bancorp’s net income available to common shareholders for the third quarter of 2022 was $631 million, or $0.91 per diluted share, which was net of $22 million in preferred stock dividends. The Bancorp’s net income available to common shareholders for the nine months ended September 30, 2023 was $1.7 billion, or $2.50 per diluted share, which was net of $100 million in preferred stock dividends. The Bancorp’s net income available to common shareholders for the nine months ended September 30, 2022 was $1.6 billion, or $2.34 per diluted share, which was net of $78 million in preferred stock dividends.
Net interest income on an FTE basis (non-GAAP) was $1.4 billion for the three months ended September 30, 2023, a decrease of $57 million compared to the same period in the prior year. Net interest income was negatively impacted by higher funding costs due to increases in market interest rates and deposit balance migration into higher yielding products. Rates paid on average interest-bearing core deposits, average long-term debt and average FHLB advances increased for the three months ended September 30, 2023 compared to the same period in the prior year. The balance migration impacting net interest income was primarily due to decreases in the average balances of demand deposits and increases in the average balances of interest-bearing core deposits and CDs over $250,000 for the three months ended September 30, 2023 compared to the same period in the prior year. These negative impacts were partially offset by increases in yields on average loans and leases and average other short-term investments for the three months ended September 30, 2023 compared to the same period in the prior year. Net interest income also benefited from increases in average other short-term investments and average other consumer loans for the three months ended September 30, 2023 compared to the same period in the prior year. Net interest margin on an FTE basis (non-GAAP) was 2.98% for the three months ended September 30, 2023 compared to 3.22% for the same period in the prior year.
Net interest income on an FTE basis (non-GAAP) was $4.4 billion for the nine months ended September 30, 2023, an increase of $386 million compared to the same period in the prior year. Net interest income benefited from increases in market interest rates, resulting in increases in yields on average loans and leases, average other short-term investments and average taxable securities for the nine months ended September 30, 2023 compared to the same period in the prior year. Net interest income also benefited from increases in average other consumer loans, average taxable securities and average commercial and industrial loans for the nine months ended September 30, 2023 compared to the same period in the prior year. These positive impacts were partially offset by increases in rates paid on average interest-bearing core deposits, average long-term debt and average FHLB advances as well as decreases in the average balances of demand deposits and increases in the average balances of interest-bearing core deposits, CDs over $250,000 and long-term debt for the nine months ended September 30, 2023 compared to the same period in the prior year. Net interest margin on an FTE basis (non-GAAP) was 3.12% for the nine months ended September 30, 2023 compared to 2.91% for the same period in the prior year.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
The provision for credit losses was $119 million and $460 million for the three and nine months ended September 30, 2023, respectively, compared to $158 million and $383 million during the same periods in the prior year. The provision for credit losses for the three months ended September 30, 2023 included the impacts of decreases to specific reserves on individually evaluated commercial loans and decreases in period-end loan and lease balances, which were partially offset by the impact of slight deterioration in the economic forecast. The provision for credit losses for the nine months ended September 30, 2023 included the impacts of increases in period-end loan and lease balances, increases in specific reserves on individually evaluated commercial loans and deterioration in the economic forecast. The provision for credit losses for the three and nine months ended September 30, 2022 included the impacts of increases in period-end loan and lease balances and deterioration in forecasted macroeconomic conditions. The provision for credit losses for the nine months ended September 30, 2022 also included the initial recognition of provision for credit losses on loans acquired as part of a business acquisition completed in the second quarter of 2022. Net losses charged off as a percent of average portfolio loans and leases were 0.41% and 0.21% for the three months ended September 30, 2023 and 2022, respectively, and 0.32% and 0.18% for the nine months ended September 30, 2023 and 2022, respectively. At September 30, 2023 and December 31, 2022, nonperforming portfolio assets as a percent of portfolio loans and leases and OREO were 0.51% and 0.44%, respectively. For more information on credit quality, refer to the Credit Risk Management subsection of the Risk Management section of MD&A as well as Note 6 of the Notes to Condensed Consolidated Financial Statements.
Noninterest income increased $43 million and $106 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year. The increase for the three months ended September 30, 2023 was primarily due to a decrease in net securities losses and an increase in commercial banking revenue, partially offset by a decrease in mortgage banking net revenue. The increase for the nine months ended September 30, 2023 was primarily due to net securities gains in the current year compared to net securities losses in the prior year, as well as increases in commercial banking revenue and mortgage banking net revenue, partially offset by decreases in other noninterest income, service charges on deposits and leasing business revenue.
Noninterest expense increased $21 million and $249 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year. The increase for the three months ended September 30, 2023 was primarily due to increases in compensation and benefits expense, net occupancy expense and technology and communications expense, partially offset by a decrease in other noninterest expense. The increase for the nine months ended September 30, 2023 was primarily due to increases in compensation and benefits expense, technology and communications expense, other noninterest expense, net occupancy expense and marketing expense.
For more information on net interest income, provision expense, noninterest income and noninterest expense refer to the Statements of Income Analysis section of MD&A.
Capital Summary
The Bancorp calculated its regulatory capital ratios under the Basel III standardized approach to risk-weighting of assets and pursuant to the five-year transition provision option to phase in the effects of CECL on regulatory capital as of September 30, 2023. As of September 30, 2023, the Bancorp’s capital ratios, as defined by the U.S. banking agencies, were:
•CET1 capital ratio: 9.80%;
•Tier 1 risk-based capital ratio: 11.06%;
•Total risk-based capital ratio: 13.13%;
•Leverage ratio: 8.85%.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
NON-GAAP FINANCIAL MEASURES
The following are non-GAAP financial measures which provide useful insight to the reader of the Condensed Consolidated Financial Statements but should be supplemental to primary U.S. GAAP measures and should not be read in isolation or relied upon as a substitute for the primary U.S. GAAP measures. The Bancorp encourages readers to consider the Condensed Consolidated Financial Statements in their entirety and not to rely on any single financial measure.
The FTE basis adjusts for the tax-favored status of income from certain loans and leases and securities held by the Bancorp that are not taxable for federal income tax purposes. The Bancorp believes this presentation to be the preferred industry measurement of net interest income as it provides a relevant comparison between taxable and non-taxable amounts.
The following table reconciles the non-GAAP financial measures of net interest income on an FTE basis, interest income on an FTE basis, net interest margin, net interest rate spread and the efficiency ratio to U.S. GAAP:
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TABLE 2: Non-GAAP Financial Measures - Financial Measures and Ratios on an FTE basis | | | |
| | | | For the three months ended September 30, | | For the nine months ended September 30, |
($ in millions) | | | | 2023 | 2022 | | 2023 | 2022 |
Net interest income (U.S. GAAP) | | | | $ | 1,438 | | 1,498 | | | 4,411 | | 4,032 | |
Add: FTE adjustment | | | | 7 | | 4 | | | 18 | | 11 | |
Net interest income on an FTE basis (1) | | | | $ | 1,445 | | 1,502 | | | 4,429 | | 4,043 | |
Net interest income on an FTE basis (annualized) (2) | | | | 5,733 | | 5,959 | | | 5,922 | | 5,405 | |
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Interest income (U.S. GAAP) | | | | $ | 2,529 | | 1,760 | | | 7,113 | | 4,512 | |
Add: FTE adjustment | | | | 7 | | 4 | | | 18 | | 11 | |
Interest income on an FTE basis | | | | $ | 2,536 | | 1,764 | | | 7,131 | | 4,523 | |
Interest income on an FTE basis (annualized) (3) | | | | 10,061 | | 6,998 | | | 9,534 | | 6,047 | |
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Interest expense (annualized) (4) | | | | $ | 4,328 | | 1,039 | | | 3,613 | | 642 | |
Noninterest income (5) | | | | 715 | | 672 | | | 2,137 | | 2,031 | |
Noninterest expense (6) | | | | 1,188 | | 1,167 | | | 3,750 | | 3,501 | |
Average interest-earning assets (7) | | | | 192,216 | | 185,378 | | | 189,578 | | 185,883 | |
Average interest-bearing liabilities (8) | | | | 139,779 | | 119,773 | | | 134,588 | | 117,344 | |
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Ratios: | | | | | | | | |
Net interest margin on an FTE basis (2) / (7) | | | | 2.98 | % | 3.22 | | | 3.12 | | 2.91 | |
Net interest rate spread on an FTE basis ((3) / (7)) - ((4) / (8)) | | | | 2.13 | | 2.91 | | | 2.35 | | 2.70 | |
Efficiency ratio on an FTE basis (6) / ((1) + (5)) | | | | 55.0 | | 53.7 | | | 57.1 | | 57.6 | |
The Bancorp believes return on average tangible common equity is an important measure for comparative purposes with other financial institutions, but is not defined under U.S. GAAP, and therefore is considered a non-GAAP financial measure. This measure is useful for evaluating the performance of a business as it calculates the return available to common shareholders without the impact of intangible assets and their related amortization.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
The following table reconciles the non-GAAP financial measure of return on average tangible common equity to U.S. GAAP:
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TABLE 3: Non-GAAP Financial Measures - Return on Average Tangible Common Equity | | | |
| | | | For the three months ended September 30, | | For the nine months ended September 30, |
($ in millions) | | | | 2023 | 2022 | | 2023 | 2022 |
Net income available to common shareholders (U.S. GAAP) | | | | $ | 623 | | 631 | | | 1,719 | | 1,631 | |
Add: Intangible amortization, net of tax | | | | 8 | | 10 | | | 26 | | 27 | |
Tangible net income available to common shareholders | | | | $ | 631 | | 641 | | | 1,745 | | 1,658 | |
Tangible net income available to common shareholders (annualized) (1) | | | | 2,503 | | 2,543 | | | 2,333 | | 2,217 | |
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Average Bancorp shareholders’ equity (U.S. GAAP) | | | | $ | 17,305 | | 18,864 | | | 17,873 | | 19,829 | |
Less: Average preferred stock | | | | 2,116 | | 2,116 | | | 2,116 | | 2,116 | |
Average goodwill | | | | 4,919 | | 4,926 | | | 4,917 | | 4,729 | |
Average intangible assets | | | | 141 | | 188 | | | 152 | | 165 | |
Average tangible common equity (2) | | | | $ | 10,129 | | 11,634 | | | 10,688 | | 12,819 | |
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Return on average tangible common equity (1) / (2) | | | | 24.7 | % | 21.9 | | | 21.8 | | 17.3 | |
The Bancorp considers various measures when evaluating capital utilization and adequacy, including the tangible equity ratio and tangible common equity ratio, in addition to capital ratios defined by the U.S. banking agencies. These calculations are intended to complement the capital ratios defined by the U.S. banking agencies for both absolute and comparative purposes. As U.S. GAAP does not include capital ratio measures, the Bancorp believes there are no comparable U.S. GAAP financial measures to these ratios. These ratios are not formally defined by U.S. GAAP or codified in the federal banking regulations and, therefore, are considered to be non-GAAP financial measures.
The following table reconciles non-GAAP capital ratios to U.S. GAAP:
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TABLE 4: Non-GAAP Financial Measures - Capital Ratios |
As of ($ in millions) | September 30, 2023 | December 31, 2022 |
Total Bancorp Shareholders’ Equity (U.S. GAAP) | $ | 16,544 | | 17,327 | |
Less: Preferred stock | 2,116 | | 2,116 | |
Goodwill | 4,919 | | 4,915 | |
Intangible assets | 136 | | 169 | |
AOCI | (6,839) | | (5,110) | |
Tangible common equity, excluding AOCI (1) | $ | 16,212 | | 15,237 | |
Add: Preferred stock | 2,116 | | 2,116 | |
Tangible equity (2) | $ | 18,328 | | 17,353 | |
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Total Assets (U.S. GAAP) | $ | 212,967 | | 207,452 | |
Less: Goodwill | 4,919 | | 4,915 | |
Intangible assets | 136 | | 169 | |
AOCI, before tax | (8,657) | | (6,468) | |
Tangible assets, excluding AOCI (3) | $ | 216,569 | | 208,836 | |
| | |
Ratios: | | |
Tangible equity as a percentage of tangible assets (2) / (3) | 8.46 | % | 8.31 | |
Tangible common equity as a percentage of tangible assets (1) / (3) | 7.49 | | 7.30 | |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
RECENT ACCOUNTING STANDARDS
Note 3 of the Notes to Condensed Consolidated Financial Statements provides a discussion of the significant new accounting standards applicable to the Bancorp and the expected impact of significant accounting standards issued, but not yet required to be adopted.
CRITICAL ACCOUNTING POLICIES
The Bancorp’s Condensed Consolidated Financial Statements are prepared in accordance with U.S. GAAP. Certain accounting policies require management to exercise judgment in determining methodologies, economic assumptions and estimates that may materially affect the Bancorp’s financial position, results of operations and cash flows. The Bancorp’s critical accounting policies include the accounting for the ALLL, reserve for unfunded commitments, valuation of servicing rights, fair value measurements, goodwill and legal contingencies. These accounting policies are discussed in detail in the Critical Accounting Policies section of the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2022.
As further discussed in Note 3 of the Notes to Condensed Consolidated Financial Statements, on January 1, 2023, the Bancorp adopted ASU 2022-02 (“Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures”). In conjunction with the adoption of this amended guidance, the Bancorp has revised its Critical Accounting Policies for the ALLL as described below. Refer to the Critical Accounting Policies section of the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2022 for discussion on the accounting policy for the ALLL for periods prior to January 1, 2023. There have been no other material changes to the valuation techniques or models during the nine months ended September 30, 2023.
ALLL
The Bancorp disaggregates its portfolio loans and leases into portfolio segments for purposes of determining the ALLL. The Bancorp’s portfolio segments include commercial, residential mortgage and consumer. The Bancorp further disaggregates its portfolio segments into classes for purposes of monitoring and assessing credit quality based on certain risk characteristics. For an analysis of the Bancorp’s ALLL by portfolio segment and credit quality information by class, refer to Note 6 of the Notes to Condensed Consolidated Financial Statements.
The Bancorp maintains the ALLL to absorb the amount of credit losses that are expected to be incurred over the remaining contractual terms of the related loans and leases. Contractual terms are adjusted for expected prepayments but are not extended for expected extensions, renewals or modifications except in circumstances where extension or renewal options are embedded in the original contract and not unconditionally cancellable by the Bancorp. Accrued interest receivable on loans is presented in the Condensed Consolidated Financial Statements as a component of other assets. When accrued interest is deemed to be uncollectible (typically when a loan is placed on nonaccrual status), interest income is reversed. The Bancorp follows established policies for placing loans on nonaccrual status, so uncollectible accrued interest receivable is reversed in a timely manner. As a result, the Bancorp has elected not to measure a reserve for accrued interest receivable as part of its ALLL. However, the Bancorp does record a reserve for the portion of accrued interest receivable that it expects to be uncollectible. For additional information on the Bancorp’s accounting policies related to nonaccrual loans and leases, refer to Note 3 of the Notes to Condensed Consolidated Financial Statements.
Credit losses are charged and recoveries are credited to the ALLL. The ALLL is maintained at a level the Bancorp considers to be adequate and is based on ongoing quarterly assessments and evaluations of the collectability of loans and leases, including historical credit loss experience, current and forecasted market and economic conditions and consideration of various qualitative factors that, in management’s judgment, deserve consideration in estimating expected credit losses. Provisions for credit losses are recorded for the amounts necessary to adjust the ALLL to the Bancorp’s current estimate of expected credit losses on portfolio loans and leases. The Bancorp’s strategy for credit risk management includes a combination of conservative exposure limits significantly below legal lending limits and conservative underwriting, documentation and collections standards. The strategy also emphasizes diversification on a geographic, industry and customer level, regular credit examinations and quarterly management reviews of large credit exposures and loans experiencing deterioration of credit quality. Refer to the Credit Risk Management section of MD&A for additional information.
The Bancorp’s methodology for determining the ALLL requires significant management judgment and includes an estimate of expected credit losses on a collective basis for groups of loans and leases with similar risk characteristics and specific allowances for loans and leases which are individually evaluated.
Larger commercial loans and leases included within aggregate borrower relationship balances exceeding $1 million on nonaccrual status are individually evaluated for an ALLL. The Bancorp considers the current value of collateral, credit quality of any guarantees, the guarantor’s liquidity and willingness to cooperate, the loan or lease structure (including modifications, if any) and other factors when determining the amount of the ALLL. Other factors may include the borrower’s susceptibility to risks presented by the forecasted macroeconomic environment, the industry and geographic region of the borrower, size and financial condition of the borrower, cash flow and leverage of the borrower and the Bancorp’s evaluation of the borrower’s management. Significant management judgment is required when evaluating which of these factors are most relevant in individual circumstances, and when estimating the amount of expected credit losses based on those factors. When loans and leases are individually evaluated, allowances are determined based on management’s estimate of the borrower’s ability to repay the loan or lease given the availability of collateral and other sources of cash flow, as well as an evaluation of legal options available to the Bancorp. Allowances for individually evaluated loans and leases that are collateral-dependent are measured based on the fair
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
value of the underlying collateral, less expected costs to sell where applicable. Individually evaluated loans and leases that are not collateral-dependent are measured based on the observable market value of the loan or lease or the present value of expected cash flows, discounted at the loan’s effective interest rate. Specific allowances on individually evaluated commercial loans and leases are reviewed quarterly and adjusted as necessary based on changing borrower and/or collateral conditions and actual collection and charge-off experience.
The Bancorp considers loans to be collateral-dependent when it becomes probable that repayment of the loan will be provided through the sale or operation of the collateral instead of from payments made by the borrower. The expected credit losses for these loans are typically estimated based on the fair value of the underlying collateral, less expected costs to sell where applicable. Specific allowances on individually evaluated consumer and residential mortgage loans are reviewed quarterly and adjusted as necessary based on changing borrower and/or collateral conditions and actual collection and charge-off experience.
Expected credit losses are estimated on a collective basis for loans and leases that are not individually evaluated. For collectively evaluated loans and leases, the Bancorp uses models to forecast expected credit losses based on the probability of a loan or lease defaulting, the expected balance at the estimated date of default and the expected loss percentage given a default. The estimate of the expected balance at the time of default considers prepayments and, for loans with available credit, expected utilization rates. The Bancorp’s expected credit loss models were developed based on historical credit loss experience and observations of migration patterns for various credit risk characteristics (such as internal credit risk ratings, external credit ratings or scores, delinquency status, loan-to-value trends, etc.) over time, with those observations evaluated in the context of concurrent macroeconomic conditions. The Bancorp developed its models from historical observations capturing a full economic cycle when possible.
The Bancorp’s expected credit loss models consider historical credit loss experience, current market and economic conditions, and forecasted changes in market and economic conditions if such forecasts are considered reasonable and supportable. Generally, the Bancorp considers its forecasts to be reasonable and supportable for a period of up to three years from the estimation date. For periods beyond the reasonable and supportable forecast period, expected credit losses are estimated by reverting to historical loss information without adjustment for changes in economic conditions. This reversion is phased in over a two-year period. The Bancorp evaluates the length of its reasonable and supportable forecast period, its reversion period and reversion methodology at least annually, or more often if warranted by economic conditions or other circumstances.
The Bancorp also considers qualitative factors in determining the ALLL. These considerations inherently require significant management judgment to determine the appropriate factors to be considered and the extent of their impact on the ALLL estimate. Qualitative factors are used to capture characteristics in the portfolio that impact expected credit losses but that are not fully captured within the Bancorp’s expected credit loss models. These include adjustments for changes in policies or procedures in underwriting, monitoring or collections, lending and risk management personnel and results of internal audit and quality control reviews. These may also include adjustments, when deemed necessary, for specific idiosyncratic risks such as geopolitical events, natural disasters and their effects on regional borrowers and changes in product structures. Qualitative factors may also be used to address the impacts of unforeseen events on key inputs and assumptions within the Bancorp’s expected credit loss models, such as the reasonable and supportable forecast period, changes to historical loss information or changes to the reversion period or methodology. When evaluating the adequacy of allowances, consideration is also given to regional geographic concentrations and the closely associated effect that changing economic conditions may have on the Bancorp’s customers.
Overall, the collective evaluation process requires significant management judgment when determining the estimation methodology and inputs into the models, as well as in evaluating the reasonableness of the modeled results and the appropriateness of qualitative adjustments. The Bancorp’s forecasts of market and economic conditions and the internal risk ratings assigned to loans and leases in the commercial portfolio segment are examples of inputs to the expected credit loss models that require significant management judgment. These inputs have the potential to drive significant variability in the resulting ALLL.
Refer to the Allowance for Credit Losses subsection of the Risk Management section of MD&A for a discussion on the Bancorp’s ALLL sensitivity analysis.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
STATEMENTS OF INCOME ANALYSIS
Net Interest Income
Net interest income is the interest earned on loans and leases (including yield-related fees), securities and other short-term investments less the interest incurred on core deposits and wholesale funding. The net interest margin is calculated by dividing net interest income by average interest-earning assets. Net interest rate spread is the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities. Net interest margin is typically greater than net interest rate spread due to the interest income earned on those assets that are funded by noninterest-bearing liabilities, or free funding, such as demand deposits or shareholders’ equity.
Tables 5 and 6 present the components of net interest income, net interest margin and net interest rate spread for the three and nine months ended September 30, 2023 and 2022, as well as the relative impact of changes in the average balance sheet and changes in interest rates on net interest income. Nonaccrual loans and leases and loans and leases held for sale have been included in the average loan and lease balances. Average outstanding securities balances are based on amortized cost with any unrealized gains or losses included in average other assets.
Net interest income on an FTE basis (non-GAAP) was $1.4 billion for the three months ended September 30, 2023, a decrease of $57 million compared to the same period in the prior year. Net interest income was negatively impacted by higher funding costs due to increases in market interest rates and deposit balance migration into higher yielding products. Increases in rates paid on average interest-bearing core deposits, average long-term debt and average FHLB advances were 224 bps, 197 bps and 296 bps, respectively, for the three months ended September 30, 2023 compared to the same period in the prior year. The balance migration impacting net interest income was primarily due to decreases in the average balances of demand deposits of $15.3 billion and increases in the average balances of interest-bearing core deposits of $17.8 billion and CDs over $250,000 of $3.7 billion for the three months ended September 30, 2023 compared to the same period in the prior year. These negative impacts were partially offset by increases in yields of 189 bps on average loans and leases and 354 bps on average other short-term investments for the three months ended September 30, 2023 compared to the same period in the prior year. Net interest income also benefited from increases in average other short-term investments and average other consumer loans of $7.2 billion and $2.5 billion, respectively, for the three months ended September 30, 2023 compared to the same period in the prior year.
Net interest income on an FTE basis (non-GAAP) was $4.4 billion for the nine months ended September 30, 2023, an increase of $386 million compared to the same period in the prior year. Net interest income benefited from increases in market interest rates, resulting in increases in yields of 214 bps on average loans and leases, 481 bps on average other short-term investments and 27 bps on average taxable securities for the nine months ended September 30, 2023 compared to the same period in the prior year. Net interest income also benefited from increases in average other consumer loans, average taxable securities and average commercial and industrial loans of $2.7 billion, $5.6 billion and $2.9 billion, respectively, for the nine months ended September 30, 2023 compared to the same period in the prior year. These positive impacts were partially offset by increases in rates paid on average interest-bearing core deposits of 201 bps, average long-term debt of 188 bps and average FHLB advances of 295 bps. Net interest income was also negatively impacted by decreases in the average balances of demand deposits of $14.9 billion and increases in the average balances of interest-bearing core deposits of $9.5 billion, CDs over $250,000 of $4.2 billion and long-term debt of $2.1 billion for the nine months ended September 30, 2023 compared to the same period in the prior year. Additionally, interest income recognized from PPP loans decreased to $3 million for the nine months ended September 30, 2023 compared to $38 million for the same period in the prior year.
Net interest rate spread on an FTE basis (non-GAAP) was 2.13% and 2.35% during the three and nine months ended September 30, 2023, respectively, compared to 2.91% and 2.70% in the same periods in the prior year. Rates paid on average interest-bearing liabilities increased 223 bps and 213 bps, partially offset by increases in yields on average interest-earning assets of 145 bps and 178 bps for the three and nine months ended September 30, 2023, respectively, compared to the three and nine months ended September 30, 2022.
Net interest margin on an FTE basis (non-GAAP) was 2.98% and 3.12% for the three and nine months ended September 30, 2023, respectively, compared to 3.22% and 2.91% for the comparable periods in the prior year. Net interest margin for the three months ended September 30, 2023 was negatively impacted by the migration of average balances of deposits from demand deposits to interest-bearing deposits and increases in rates paid on and balances of average wholesale funding, partially offset by higher market interest rates on interest-earning assets, growth in average balances of loans and leases and average investment portfolio balances. Net interest margin for the nine months ended September 30, 2023 was positively impacted by the benefit of higher market interest rates on interest-earning assets, growth in average balances of loans and leases and average investment portfolio balances, partially offset by the migration of average balances of deposits from demand deposits to interest-bearing deposits and increases in rates paid on and balances of average wholesale funding. Net interest margin results are expected to modestly decrease over the next quarter driven by increasing levels of cash and continued liability repricing, partially offset by the impact of rising rates on the repricing of the Bancorp’s asset portfolios.
Interest income on an FTE basis (non-GAAP) from loans and leases increased $586 million and $2.1 billion during the three and nine months ended September 30, 2023, respectively, compared to the three and nine months ended September 30, 2022 driven by increases in market interest rates and average balances of other consumer loans and commercial and industrial loans. For more information on the Bancorp’s loan and lease portfolio, refer to the Loans and Leases subsection of the Balance Sheet Analysis section of MD&A. Interest income on an FTE basis (non-GAAP) from investment securities and other short-term investments increased $186 million and $536 million during the three and
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
nine months ended September 30, 2023, respectively, compared to the three and nine months ended September 30, 2022 primarily due to increases in yields on average other short-term investments and average taxable securities. The increase for the three months ended September 30, 2023 was also driven by the previously mentioned increase in average balances of other short-term investments. The increase for the nine months ended September 30, 2023 also benefited from the previously mentioned increase in average balances of taxable securities.
Interest expense on average core deposits increased $670 million and $1.7 billion for the three and nine months ended September 30, 2023, respectively, compared to the three and nine months ended September 30, 2022 primarily due to the previously mentioned increases in the cost of average interest-bearing core deposits to 265 bps and 219 bps for the three and nine months ended September 30, 2023, respectively, from 41 bps and 18 bps for the three and nine months ended September 30, 2022, respectively, as a result of increasing short-term interest rates. Refer to the Deposits subsection of the Balance Sheet Analysis section of MD&A for additional information on the Bancorp’s deposits.
Interest expense on average wholesale funding increased $159 million and $558 million for the three and nine months ended September 30, 2023, respectively, compared to the three and nine months ended September 30, 2022 primarily due to the previously mentioned increases in rates paid on average long-term debt and FHLB advances as well as increases in the average balances of CDs over $250,000 and long-term debt. Refer to the Borrowings subsection of the Balance Sheet Analysis section of MD&A for additional information on the Bancorp’s borrowings. Average wholesale funding represented 17% and 18% of average interest-bearing liabilities for the three and nine months ended September 30, 2023, respectively, compared to 18% and 14% for the three and nine months ended September 30, 2022, respectively. For more information on the Bancorp’s interest rate risk management, including estimated earnings sensitivity to changes in market interest rates, refer to the Interest Rate and Price Risk Management subsection of the Risk Management section of MD&A.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
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TABLE 5: Condensed Consolidated Average Balance Sheets and Analysis of Net Interest Income on an FTE Basis |
For the three months ended | September 30, 2023 | September 30, 2022 | Attribution of Change in Net Interest Income(a) |
($ in millions) | Average Balance | Interest Earned/Paid | Average Yield/ Rate | Average Balance | Interest Earned/Paid | Average Yield/ Rate | Volume | Yield/ Rate | Total |
Assets: | | | | | | | | | |
Interest-earning assets: | | | | | | | | | |
Loans and leases:(b) | | | | | | | | | |
Commercial and industrial loans | $ | 57,015 | | 1,006 | | 7.00 | % | $ | 56,648 | | 646 | | 4.53 | % | $ | 4 | | 356 | | 360 | |
Commercial mortgage loans | 11,216 | | 173 | | 6.12 | | 10,751 | | 111 | | 4.10 | | 5 | | 57 | | 62 | |
Commercial construction loans | 5,540 | | 97 | | 6.93 | | 5,557 | | 66 | | 4.71 | | — | | 31 | | 31 | |
Commercial leases | 2,618 | | 24 | | 3.75 | | 2,793 | | 22 | | 3.08 | | (2) | | 4 | | 2 | |
Total commercial loans and leases | $ | 76,389 | | 1,300 | | 6.75 | | $ | 75,749 | | 845 | | 4.42 | | $ | 7 | | 448 | | 455 | |
Residential mortgage loans | 18,019 | | 160 | | 3.52 | | 19,870 | | 166 | | 3.32 | | (16) | | 10 | | (6) | |
Home equity | 3,897 | | 80 | | 8.17 | | 3,956 | | 48 | | 4.84 | | (1) | | 33 | | 32 | |
Indirect secured consumer loans | 15,787 | | 176 | | 4.43 | | 16,750 | | 141 | | 3.34 | | (9) | | 44 | | 35 | |
Credit card | 1,808 | | 64 | | 14.09 | | 1,756 | | 57 | | 12.89 | | 2 | | 5 | | 7 | |
Other consumer loans | 6,366 | | 123 | | 7.65 | | 3,819 | | 60 | | 6.21 | | 47 | | 16 | | 63 | |
Total consumer loans | $ | 45,877 | | 603 | | 5.22 | | $ | 46,151 | | 472 | | 4.06 | | $ | 23 | | 108 | | 131 | |
Total loans and leases | $ | 122,266 | | 1,903 | | 6.18 | % | $ | 121,900 | | 1,317 | | 4.29 | % | $ | 30 | | 556 | | 586 | |
Securities: | | | | | | | | | |
Taxable | 55,519 | | 435 | | 3.10 | | 56,535 | | 408 | | 2.86 | | (7) | | 34 | | 27 | |
Exempt from income taxes(b) | 1,475 | | 12 | | 3.21 | | 1,178 | | 8 | | 2.77 | | 2 | | 2 | | 4 | |
Other short-term investments | 12,956 | | 186 | | 5.69 | | 5,765 | | 31 | | 2.15 | | 67 | | 88 | | 155 | |
Total interest-earning assets | $ | 192,216 | | 2,536 | | 5.23 | % | $ | 185,378 | | 1,764 | | 3.78 | % | $ | 92 | | 680 | | 772 | |
Cash and due from banks | 2,576 | | | | 3,162 | | | | | | |
Other assets | 15,920 | | | | 20,163 | | | | | | |
Allowance for loan and lease losses | (2,327) | | | | (2,015) | | | | | | |
Total assets | $ | 208,385 | | | | $ | 206,688 | | | | | | |
Liabilities and Equity: | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | |
Interest checking deposits | $ | 53,109 | | 426 | | 3.18 | % | $ | 42,574 | | 77 | | 0.72 | % | $ | 23 | | 326 | | 349 | |
Savings deposits | 20,511 | | 46 | | 0.89 | | 23,814 | | 7 | | 0.12 | | (1) | | 40 | | 39 | |
Money market deposits | 32,072 | | 202 | | 2.50 | | 29,066 | | 16 | | 0.22 | | 2 | | 184 | | 186 | |
Foreign office deposits | 168 | | 1 | | 1.72 | | 206 | | — | | 0.78 | | — | | 1 | | 1 | |
CDs $250,000 or less | 9,630 | | 96 | | 3.97 | | 2,048 | | 1 | | 0.09 | | 7 | | 88 | | 95 | |
Total interest-bearing core deposits | $ | 115,490 | | 771 | | 2.65 | | $ | 97,708 | | 101 | | 0.41 | | $ | 31 | | 639 | | 670 | |
CDs over $250,000 | 5,926 | | 73 | | 4.91 | | 2,226 | | 11 | | 1.90 | | 32 | | 30 | | 62 | |
| | | | | | | | | |
Federal funds purchased | 181 | | 2 | | 5.31 | | 607 | | 3 | | 2.10 | | (3) | | 2 | | (1) | |
Securities sold under repurchase agreements | 352 | | 1 | | 1.46 | | 472 | | — | | 0.22 | | — | | 1 | | 1 | |
FHLB advances | 3,726 | | 50 | | 5.26 | | 6,608 | | 38 | | 2.30 | | (21) | | 33 | | 12 | |
Derivative collateral and other borrowed money | 48 | | 1 | | 7.82 | | 356 | | 5 | | 4.92 | | (5) | | 1 | | (4) | |
Long-term debt | 14,056 | | 193 | | 5.46 | | 11,796 | | 104 | | 3.49 | | 23 | | 66 | | 89 | |
Total interest-bearing liabilities | $ | 139,779 | | 1,091 | | 3.10 | % | $ | 119,773 | | 262 | | 0.87 | % | $ | 57 | | 772 | | 829 | |
Demand deposits | 44,228 | | | | 59,535 | | | | | | |
Other liabilities | 7,073 | | | | 8,516 | | | | | | |
Total liabilities | $ | 191,080 | | | | $ | 187,824 | | | | | | |
Total equity | $ | 17,305 | | | | $ | 18,864 | | | | | | |
Total liabilities and equity | $ | 208,385 | | | | $ | 206,688 | | | | | | |
Net interest income (FTE)(c) | | $ | 1,445 | | | | $ | 1,502 | | | $ | 35 | | (92) | | (57) | |
Net interest margin (FTE)(c) | | | 2.98 | % | | | 3.22 | % | | | |
Net interest rate spread (FTE)(c) | | | 2.13 | | | | 2.91 | | | | |
Interest-bearing liabilities to interest-earning assets | | | 72.72 | | | | 64.61 | | | | |
(a)Changes in interest not solely due to volume or yield/rate are allocated in proportion to the absolute dollar amount of change in volume and yield/rate.
(b)The FTE adjustments included in the above table were $7 and $4 for the three months ended September 30, 2023 and 2022, respectively.
(c)Net interest income (FTE), net interest margin (FTE) and net interest rate spread (FTE) are non-GAAP measures. For further information, refer to the Non-GAAP Financial Measures section of MD&A.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
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TABLE 6: Condensed Consolidated Average Balance Sheets and Analysis of Net Interest Income on an FTE Basis |
For the nine months ended | September 30, 2023 | September 30, 2022 | Attribution of Change in Net Interest Income(a) |
($ in millions) | Average Balance | Interest Earned/Paid | Average Yield/ Rate | Average Balance | Interest Earned/Paid | Average Yield/ Rate | Volume | Yield/ Rate | Total |
Assets: | | | | | | | | | |
Interest-earning assets: | | | | | | | | | |
Loans and leases:(b) | | | | | | | | | |
Commercial and industrial loans | $ | 57,786 | | 2,908 | | 6.73 | % | $ | 54,907 | | 1,569 | | 3.82 | % | $ | 86 | | 1,253 | | 1,339 | |
Commercial mortgage loans | 11,237 | | 493 | | 5.87 | | 10,664 | | 278 | | 3.49 | | 16 | | 199 | | 215 | |
Commercial construction loans | 5,527 | | 279 | | 6.74 | | 5,429 | | 159 | | 3.91 | | 3 | | 117 | | 120 | |
Commercial leases | 2,661 | | 71 | | 3.59 | | 2,858 | | 63 | | 2.95 | | (5) | | 13 | | 8 | |
Total commercial loans and leases | $ | 77,211 | | 3,751 | | 6.50 | | $ | 73,858 | | 2,069 | | 3.75 | | $ | 100 | | 1,582 | | 1,682 | |
Residential mortgage loans | 18,168 | | 467 | | 3.43 | | 19,981 | | 479 | | 3.20 | | (45) | | 33 | | (12) | |
Home equity | 3,946 | | 217 | | 7.34 | | 3,953 | | 120 | | 4.06 | | — | | 97 | | 97 | |
Indirect secured consumer loans | 16,219 | | 508 | | 4.19 | | 17,041 | | 407 | | 3.20 | | (20) | | 121 | | 101 | |
Credit card | 1,790 | | 188 | | 14.06 | | 1,717 | | 161 | | 12.50 | | 7 | | 20 | | 27 | |
Other consumer loans | 5,950 | | 325 | | 7.29 | | 3,234 | | 148 | | 6.10 | | 144 | | 33 | | 177 | |
Total consumer loans | $ | 46,073 | | 1,705 | | 4.95 | | $ | 45,926 | | 1,315 | | 3.83 | | $ | 86 | | 304 | | 390 | |
Total loans and leases | $ | 123,284 | | 5,456 | | 5.92 | % | $ | 119,784 | | 3,384 | | 3.78 | % | $ | 186 | | 1,886 | | 2,072 | |
Securities: | | | | | | | | | |
Taxable | 56,127 | | 1,292 | | 3.08 | | 50,529 | | 1,060 | | 2.81 | | 124 | | 108 | | 232 | |
Exempt from income taxes(b) | 1,459 | | 35 | | 3.17 | | 1,084 | | 21 | | 2.56 | | 8 | | 6 | | 14 | |
Other short-term investments | 8,708 | | 348 | | 5.34 | | 14,486 | | 58 | | 0.53 | | (32) | | 322 | | 290 | |
Total interest-earning assets | $ | 189,578 | | 7,131 | | 5.03 | % | $ | 185,883 | | 4,523 | | 3.25 | % | $ | 286 | | 2,322 | | 2,608 | |
Cash and due from banks | 2,776 | | | | 3,081 | | | | | | |
Other assets | 16,405 | | | | 20,211 | | | | | | |
Allowance for loan and lease losses | (2,231) | | | | (1,939) | | | | | | |
Total assets | $ | 206,528 | | | | $ | 207,236 | | | | | | |
Liabilities and Equity: | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | |
Interest checking deposits | $ | 50,782 | | 1,061 | | 2.79 | % | $ | 45,172 | | 100 | | 0.30 | % | $ | 14 | | 947 | | 961 | |
Savings deposits | 21,755 | | 118 | | 0.73 | | 23,435 | | 10 | | 0.06 | | (1) | | 109 | | 108 | |
Money market deposits | 29,815 | | 419 | | 1.88 | | 29,533 | | 22 | | 0.10 | | — | | 397 | | 397 | |
Foreign office deposits | 151 | | 2 | | 1.63 | | 157 | | — | | 0.39 | | — | | 2 | | 2 | |
CDs $250,000 or less | 7,537 | | 198 | | 3.51 | | 2,205 | | 2 | | 0.10 | | 13 | | 183 | | 196 | |
Total interest-bearing core deposits | $ | 110,040 | | 1,798 | | 2.19 | | $ | 100,502 | | 134 | | 0.18 | | $ | 26 | | 1,638 | | 1,664 | |
CDs over $250,000 | 5,222 | | 179 | | 4.57 | | 1,055 | | 13 | | 1.64 | | 114 | | 52 | | 166 | |
| | | | | | | | | |
Federal funds purchased | 347 | | 13 | | 4.89 | | 421 | | 4 | | 1.31 | | (1) | | 10 | | 9 | |
Securities sold under repurchase agreements | 347 | | 3 | | 1.13 | | 484 | | — | | 0.10 | | — | | 3 | | 3 | |
FHLB advances | 5,035 | | 188 | | 4.99 | | 3,141 | | 48 | | 2.04 | | 41 | | 99 | | 140 | |
Derivative collateral and other borrowed money | 123 | | 7 | | 8.10 | | 365 | | 8 | | 2.70 | | (8) | | 7 | | (1) | |
Long-term debt | 13,474 | | 514 | | 5.09 | | 11,376 | | 273 | | 3.21 | | 58 | | 183 | | 241 | |
Total interest-bearing liabilities | $ | 134,588 | | 2,702 | | 2.68 | % | $ | 117,344 | | 480 | | 0.55 | % | $ | 230 | | 1,992 | | 2,222 | |
Demand deposits | 47,138 | | | | 62,084 | | | | | | |
Other liabilities | 6,929 | | | | 7,979 | | | | | | |
Total liabilities | $ | 188,655 | | | | $ | 187,407 | | | | | | |
Total equity | $ | 17,873 | | | | $ | 19,829 | | | | | | |
Total liabilities and equity | $ | 206,528 | | | | $ | 207,236 | | | | | | |
Net interest income (FTE)(c) | | $ | 4,429 | | | | $ | 4,043 | | | $ | 56 | | 330 | | 386 | |
Net interest margin (FTE)(c) | | | 3.12 | % | | | 2.91 | % | | | |
Net interest rate spread (FTE)(c) | | | 2.35 | | | | 2.70 | | | | |
Interest-bearing liabilities to interest-earning assets | | | 70.99 | | | | 63.13 | | | | |
(a)Changes in interest not solely due to volume or yield/rate are allocated in proportion to the absolute dollar amount of change in volume and yield/rate.
(b)The FTE adjustments included in the above table were $18 and $11 for the nine months ended September 30, 2023 and 2022, respectively.
(c)Net interest income (FTE), net interest margin (FTE) and net interest rate spread (FTE) are non-GAAP measures. For further information, refer to the Non-GAAP Financial Measures section of MD&A.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Provision for Credit Losses
The Bancorp provides, as an expense, an amount for expected credit losses within the loan and lease portfolio that is based on factors previously discussed in the Critical Accounting Policies section of MD&A. For a discussion of the factors used to determine the amount provided, as an expense, for expected credit losses within the portfolio of unfunded commitments, refer to the Critical Accounting Policies section of the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2022. The provision is recorded to bring the ALLL and reserve for unfunded commitments to a level deemed appropriate by the Bancorp to cover losses expected in the portfolios. Actual credit losses on loans and leases are charged against the ALLL. The amount of loans and leases actually removed from the Condensed Consolidated Balance Sheets are referred to as charge-offs. Net charge-offs include current period charge-offs less recoveries on previously charged-off loans and leases.
The provision for credit losses was $119 million and $460 million for the three and nine months ended September 30, 2023, respectively, compared to $158 million and $383 million during the same periods in the prior year. The provision for credit losses for the three months ended September 30, 2023 included the impacts of decreases to specific reserves on individually evaluated commercial loans and decreases in period-end loan and lease balances, which were partially offset by the impact of slight deterioration in the economic forecast. The provision for credit losses for the nine months ended September 30, 2023 included the impacts of increases in period-end loan and lease balances, increases in specific reserves on individually evaluated commercial loans and deterioration in the economic forecast. The provision for credit losses for the three and nine months ended September 30, 2022 included the impacts of increases in period-end loan and lease balances and deterioration in forecasted macroeconomic conditions. The provision for credit losses for the nine months ended September 30, 2022 also included the initial recognition of provision for credit losses on loans acquired as part of a business acquisition completed in the second quarter of 2022.
The ALLL increased $146 million from December 31, 2022 to $2.3 billion at September 30, 2023 inclusive of a $49 million reduction from the impact of the adoption of ASU 2022-02 on January 1, 2023, as further discussed in Note 3 of the Notes to Condensed Consolidated Financial Statements. At September 30, 2023, the ALLL as a percent of portfolio loans and leases increased to 1.95%, compared to 1.81% at December 31, 2022. The reserve for unfunded commitments decreased $27 million from December 31, 2022 to $189 million at September 30, 2023. At September 30, 2023, the ACL as a percent of portfolio loans and leases increased to 2.11%, compared to 1.98% at December 31, 2022.
Refer to the Credit Risk Management subsection of the Risk Management section of MD&A as well as Note 6 of the Notes to Condensed Consolidated Financial Statements for more information on the provision for credit losses, including an analysis of loan and lease portfolio composition, nonperforming assets, net charge-offs and other factors considered by the Bancorp in assessing the credit quality of the loan and lease portfolio and determining the level of the ACL.
Noninterest Income
Noninterest income increased $43 million and $106 million for the three and nine months ended September 30, 2023, respectively, compared to the three and nine months ended September 30, 2022.
The following table presents the components of noninterest income:
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TABLE 7: Components of Noninterest Income | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, | | | | |
($ in millions) | 2023 | 2022 | % Change | 2023 | 2022 | % Change | | | | |
Commercial banking revenue | $ | 154 | | 134 | | 15 | | $ | 461 | | 406 | | 14 | | | | | |
Wealth and asset management revenue | 145 | | 141 | | 3 | | 434 | | 430 | | 1 | | | | | |
Service charges on deposits | 149 | | 143 | | 4 | | 431 | | 449 | | (4) | | | | | |
Card and processing revenue | 104 | | 105 | | (1) | | 310 | | 306 | | 1 | | | | | |
Mortgage banking net revenue | 57 | | 69 | | (17) | | 184 | | 152 | | 21 | | | | | |
Leasing business revenue | 58 | | 60 | | (3) | | 162 | | 179 | | (9) | | | | | |
Other noninterest income | 55 | | 59 | | (7) | | 152 | | 195 | | (22) | | | | | |
Securities gains (losses), net | (7) | | (38) | | (82) | | 3 | | (84) | | NM | | | | |
Securities losses, net – non-qualifying hedges on mortgage servicing rights | — | | (1) | | (100) | | — | | (2) | | (100) | | | | | |
Total noninterest income | $ | 715 | | 672 | | 6 | | $ | 2,137 | | 2,031 | | 5 | | | | | |
Commercial banking revenue
Commercial banking revenue increased $20 million and $55 million for the three and nine months ended September 30, 2023, respectively, compared to the three and nine months ended September 30, 2022 primarily driven by increases in loan syndication fees, foreign exchange fees and institutional brokerage revenue, partially offset by decreases in contract revenue from commercial customer derivatives. The increase for the three months ended September 30, 2023 was also driven by an increase in corporate bond fees.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Wealth and asset management revenue
Wealth and asset management revenue increased $4 million for both the three and nine months ended September 30, 2023 compared to the same periods in the prior year primarily driven by increases in private client service fees. The Bancorp’s trust and registered investment advisory businesses had approximately $547 billion and $494 billion in total assets under care as of September 30, 2023 and 2022, respectively, and managed $57 billion and $52 billion in assets for individuals, corporations and not-for-profit organizations as of September 30, 2023 and 2022, respectively.
Service charges on deposits
Service charges on deposits increased $6 million and decreased $18 million for the three and nine months ended September 30, 2023, respectively, compared to the three and nine months ended September 30, 2022. Service charges on commercial deposits were $109 million and $315 million for the three and nine months ended September 30, 2023, respectively, an increase of $4 million and a decrease of $16 million from the same periods in the prior year. The increase for the three months ended September 30, 2023 was primarily due to an increase in commercial treasury management fees. The decrease for the nine months ended September 30, 2023 was primarily due to higher treasury management earnings credits driven by market interest rates, partially offset by an increase in commercial treasury management fees. Service charges on consumer deposits were $40 million and $116 million for the three and nine months ended September 30, 2023, respectively, an increase of $2 million and a decrease of $2 million from the same periods in the prior year. The increase for the three months ended September 30, 2023 was primarily due to an increase in overdraft fees. The decrease for the nine months ended September 30, 2023 was primarily driven by the elimination of non-sufficient funds fees during the third quarter of 2022.
Card and processing revenue
Card and processing revenue decreased $1 million and increased $4 million for the three and nine months ended September 30, 2023, respectively, compared to the three and nine months ended September 30, 2022. The decrease for the three months ended September 30, 2023 was primarily due to increased reward costs, partially offset by an increase in debit card interchange. The increase for the nine months ended September 30, 2023 was primarily due to increases in debit and credit card interchange, partially offset by increased reward costs.
Mortgage banking net revenue
Mortgage banking net revenue decreased $12 million and increased $32 million for the three and nine months ended September 30, 2023, respectively, compared to the three and nine months ended September 30, 2022.
The following table presents the components of mortgage banking net revenue:
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TABLE 8: Components of Mortgage Banking Net Revenue |
| For the three months ended September 30, | For the nine months ended September 30, |
($ in millions) | 2023 | 2022 | 2023 | 2022 |
Origination fees and gains on loan sales | $ | 19 | | 24 | | 59 | | 73 | |
Net mortgage servicing revenue: | | | | |
Gross mortgage servicing fees | 79 | | 81 | | 241 | | 230 | |
Net valuation adjustments on MSRs and free-standing derivatives purchased to economically hedge MSRs | (41) | | (36) | | (116) | | (151) | |
Net mortgage servicing revenue | 38 | | 45 | | 125 | | 79 | |
Total mortgage banking net revenue | $ | 57 | | 69 | | 184 | | 152 | |
Origination fees and gains on loan sales decreased $5 million and $14 million for the three and nine months ended September 30, 2023, respectively, compared to the three and nine months ended September 30, 2022, primarily driven by lower volumes of residential mortgage loan originations. Residential mortgage loan originations decreased to $1.5 billion and $4.6 billion for the three and nine months ended September 30, 2023, respectively, from $4.0 billion and $11.7 billion for the three and nine months ended September 30, 2022, respectively, primarily due to the impact of higher market interest rates on refinance activity.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
The following table presents the components of net valuation adjustments on the MSR portfolio and the impact of the Bancorp’s non-qualifying hedging strategy:
| | | | | | | | | | | | | | |
TABLE 9: Components of Net Valuation Adjustments on MSRs |
| For the three months ended September 30, | For the nine months ended September 30, |
($ in millions) | 2023 | 2022 | 2023 | 2022 |
Changes in fair value and settlement of free-standing derivatives purchased to economically hedge the MSR portfolio | $ | (75) | | (84) | | (110) | | (368) | |
Changes in fair value: | | | | |
Due to changes in inputs or assumptions(a) | 73 | | 83 | | 107 | | 358 | |
Other changes in fair value(b) | (39) | | (35) | | (113) | | (141) | |
Net valuation adjustments on MSRs and free-standing derivatives purchased to economically hedge MSRs | $ | (41) | | (36) | | (116) | | (151) | |
(a)Primarily reflects changes in prepayment speed and OAS assumptions which are updated based on market interest rates.
(b)Primarily reflects changes due to realized cash flows and the passage of time.
The Bancorp recognized income of $34 million and losses of $6 million for the three and nine months ended September 30, 2023, respectively, and income of $48 million and $217 million for the three and nine months ended September 30, 2022, respectively, in mortgage banking net revenue for valuation adjustments on the MSR portfolio. The valuation adjustments on the MSR portfolio included increases of $73 million and $107 million for the three and nine months ended September 30, 2023, respectively, and increases of $83 million and $358 million for the three and nine months ended September 30, 2022, respectively, due to changes in market rates and other inputs in the valuation model, including future prepayment speeds and OAS assumptions. Mortgage rates increased during the three and nine months ended September 30, 2023, which caused a decrease in modeled prepayment speeds. The fair value of the MSR portfolio decreased $39 million and $113 million for the three and nine months ended September 30, 2023, respectively, and decreased $35 million and $141 million for the three and nine months ended September 30, 2022, respectively, as a result of contractual principal payments and actual prepayment activity.
Further detail on the valuation of MSRs can be found in Note 13 of the Notes to Condensed Consolidated Financial Statements. The Bancorp maintains a non-qualifying hedging strategy to manage a portion of the risk associated with changes in the valuation of the MSR portfolio. Refer to Note 14 of the Notes to Condensed Consolidated Financial Statements for more information on the free-standing derivatives used to economically hedge the MSR portfolio.
In addition to the derivative positions used to economically hedge the MSR portfolio, the Bancorp acquires various securities as a component of its non-qualifying hedging strategy. Gains and losses on these securities are recorded in securities losses, net – non-qualifying hedges on mortgage servicing rights in the Bancorp’s Condensed Consolidated Statements of Income.
The Bancorp’s total residential mortgage loans serviced as of September 30, 2023 and 2022 were $118.5 billion and $120.3 billion, respectively, with $101.9 billion and $102.7 billion, respectively, of residential mortgage loans serviced for others.
Leasing business revenue
Leasing business revenue decreased $2 million and $17 million for the three and nine months ended September 30, 2023, respectively, compared to the three and nine months ended September 30, 2022. The decrease for the three months ended September 30, 2023 was primarily driven by a decrease in operating lease income. The decrease for the nine months ended September 30, 2023 was primarily driven by a decrease in leasing business solutions revenue related to the disposition of LaSalle Solutions during the second quarter of 2022 as well as a decrease in lease remarketing fees.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Other noninterest income
The following table presents the components of other noninterest income:
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TABLE 10: Components of Other Noninterest Income | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, |
($ in millions) | 2023 | 2022 | | 2023 | 2022 |
Equity method investment income | $ | 3 | | 4 | | | 48 | | 17 | |
BOLI income | 15 | | 15 | | | 45 | | 48 | |
Cardholder fees | 15 | | 14 | | | 43 | | 41 | |
Private equity investment income | 13 | | 14 | | | 39 | | 55 | |
Banking center income | 7 | | 6 | | | 19 | | 18 | |
Consumer loan fees | 5 | | 5 | | | 15 | | 15 | |
Loss on swap associated with the sale of Visa, Inc. Class B Shares | (10) | | (17) | | | (72) | | (46) | |
Other, net | 7 | | 18 | | | 15 | | 47 | |
Total other noninterest income | $ | 55 | | 59 | | | 152 | | 195 | |
Other noninterest income decreased $43 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 primarily due to an increase in the loss on swap associated with the sale of Visa, Inc. Class B Shares as well as a decrease in private equity investment income, partially offset by an increase in equity method investment income.
The Bancorp recognized a negative valuation adjustment of $72 million related to the Visa total return swap during the nine months ended September 30, 2023 compared to a negative valuation adjustment of $46 million during the same period in the prior year. For additional information on the valuation of the swap associated with the sale of Visa, Inc. Class B Shares, refer to Note 23 of the Notes to Condensed Consolidated Financial Statements. Private equity investment income decreased $16 million for the nine months ended September 30, 2023 compared to the same period in the prior year primarily driven by valuation adjustments recognized on certain private equity investments. Equity method investment income increased $31 million for the nine months ended September 30, 2023 compared to the same period in the prior year primarily due to a gain on the partial disposition of an equity method investment during the second quarter of 2023.
Securities gains (losses), net
Net securities losses were $7 million and net securities gains were $3 million for the three and nine months ended September 30, 2023, respectively, compared with losses of $38 million and $84 million for the three and nine months ended September 30, 2022, respectively. For more information, refer to Note 4 of the Notes to Condensed Consolidated Financial Statements.
Noninterest Expense
Noninterest expense increased $21 million and $249 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year.
The following table presents the components of noninterest expense:
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TABLE 11: Components of Noninterest Expense | | | | |
| For the three months ended September 30, | | | For the nine months ended September 30, | |
($ in millions) | 2023 | 2022 | % Change | | 2023 | 2022 | % Change |
Compensation and benefits | $ | 629 | | 605 | | 4 | | $ | 2,036 | | 1,900 | | 7 |
Technology and communications | 115 | | 106 | | 8 | | 347 | | 306 | | 13 |
Net occupancy expense | 84 | | 74 | | 14 | | 248 | | 225 | | 10 |
Equipment expense | 37 | | 36 | | 3 | | 110 | | 108 | | 2 |
Marketing expense | 35 | | 35 | | — | | 96 | | 87 | | 10 |
Leasing business expense | 29 | | 33 | | (12) | | 94 | | 95 | | (1) |
Card and processing expense | 21 | | 21 | | — | | 63 | | 59 | | 7 |
Other noninterest expense | 238 | | 257 | | (7) | | 756 | | 721 | | 5 |
Total noninterest expense | $ | 1,188 | | 1,167 | | 2 | | $ | 3,750 | | 3,501 | | 7 |
Efficiency ratio on an FTE basis(a) | 55.0 | % | 53.7 | | | | 57.1 | % | 57.6 | | |
(a)This is a non-GAAP measure. For further information, refer to the Non-GAAP Financial Measures section of MD&A.
Compensation and benefits expense increased $24 million and $136 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year. The increase for the three months ended September 30, 2023 was primarily driven by an increase in base compensation. The increase for the nine months ended September 30, 2023 was primarily driven by the
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
additional personnel costs of an acquired business, the impact of raising the Bancorp’s minimum wage in the third quarter of 2022, an increase in non-qualified deferred compensation expense and an increase in severance expense, partially offset by decreases in performance-based compensation. Full-time equivalent employees totaled 18,804 at September 30, 2023 compared to 19,187 at September 30, 2022.
Technology and communications expense increased $9 million and $41 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year primarily driven by increased investments in strategic initiatives and technology modernization.
Net occupancy expense increased $10 million and $23 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year primarily driven by higher expenses associated with the maintenance and renovation of banking centers as well as the impacts of exiting mortgage warehouse lending.
Marketing expense increased $9 million for the nine months ended September 30, 2023 compared to the same period in the prior year primarily due to an increase in deposit campaigns.
The following table presents the components of other noninterest expense:
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TABLE 12: Components of Other Noninterest Expense | | | |
| For the three months ended September 30, | | For the nine months ended September 30, |
($ in millions) | 2023 | 2022 | | 2023 | 2022 |
FDIC insurance and other taxes | $ | 39 | | 37 | | | 122 | | 101 | |
Loan and lease | 34 | | 40 | | | 99 | | 127 | |
Losses and adjustments | 21 | | 26 | | | 70 | | 62 | |
Data processing | 22 | | 21 | | | 66 | | 61 | |
Dues and subscriptions | 15 | | 15 | | | 46 | | 43 | |
Travel | 11 | | 15 | | | 45 | | 45 | |
Professional service fees | 12 | | 16 | | | 41 | | 42 | |
Securities recordkeeping | 13 | | 11 | | | 38 | | 36 | |
Cash and coin processing | 12 | | 11 | | | 37 | | 33 | |
Intangible amortization | 10 | | 12 | | | 32 | | 34 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Other, net | 49 | | 53 | | | 160 | | 137 | |
Total other noninterest expense | $ | 238 | | 257 | | | 756 | | 721 | |
Other noninterest expense decreased $19 million and increased $35 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year. The decrease for the three months ended September 30, 2023 was primarily due to decreases in loan and lease expense and losses and adjustments. The increase for the nine months ended September 30, 2023 was primarily due to increases in FDIC insurance and other taxes and losses and adjustments, partially offset by a decrease in loan and lease expense.
FDIC insurance and other taxes increased $21 million for the nine months ended September 30, 2023 compared to the same period in the prior year primarily as a result of an increase in the FDIC insurance assessment rate.
Losses and adjustments decreased $5 million and increased $8 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year primarily due to the impacts of legal and regulatory proceedings.
Loan and lease expense decreased $6 million and $28 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year primarily driven by a decrease in loan servicing expenses related to the Bancorp’s sales of certain government-guaranteed residential mortgage loans that were previously in forbearance programs and serviced by a third party.
Applicable Income Taxes
The Bancorp’s income before income taxes, applicable income tax expense and effective tax rate are as follows:
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TABLE 13: Applicable Income Taxes | | | | | | | | |
| | | | For the three months ended September 30, | | For the nine months ended September 30, |
($ in millions) | | | | 2023 | 2022 | | 2023 | 2022 |
Income before income taxes | | | | $ | 846 | | 845 | | | 2,338 | | 2,179 | |
Applicable income tax expense | | | | 186 | | 192 | | | 519 | | 470 | |
Effective tax rate | | | | 22.0 | % | 22.7 | | | 22.2 | | 21.6 | |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Applicable income tax expense for all periods presented includes the benefit from tax-exempt income, tax-advantaged investments, and tax credits (and other related tax benefits), partially offset by the effect of proportional amortization of qualifying LIHTC investments and certain nondeductible expenses. The tax credits are primarily associated with the Research Credit under Section 41 of the IRC, the Low-Income Housing Tax Credit program established under Section 42 of the IRC, the New Markets Tax Credit program established under Section 45D of the IRC, the Rehabilitation Investment Tax Credit program established under Section 47 of the IRC and the Qualified Zone Academy Bond program established under Section 1397E of the IRC.
The effective tax rate decreased to 22.0% for the three months ended September 30, 2023 compared to 22.7% for the same period in the prior year primarily related to an increase in tax credits. The effective tax rate increased to 22.2% for the nine months ended September 30, 2023 compared to 21.6% for the same period in the prior year primarily related to a decrease in excess tax benefits related to share-based compensation, partially offset by an increase in tax credits.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
BALANCE SHEET ANALYSIS
Loans and Leases
The Bancorp classifies its commercial loans and leases based upon primary purpose and consumer loans based upon product or collateral. Table 14 summarizes end of period loans and leases, including loans and leases held for sale, and Table 15 summarizes average total loans and leases, including average loans and leases held for sale.
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TABLE 14: Components of Total Loans and Leases (including loans and leases held for sale) |
| September 30, 2023 | | December 31, 2022 |
As of ($ in millions) | Carrying Value | % of Total | | Carrying Value | % of Total |
Commercial loans and leases: | | | | | |
Commercial and industrial loans | $ | 55,819 | | 46 | % | | $ | 57,305 | | 47 | % |
Commercial mortgage loans | 11,122 | | 9 | | | 11,020 | | 9 | |
Commercial construction loans | 5,634 | | 5 | | | 5,433 | | 4 | |
Commercial leases | 2,624 | | 2 | | | 2,704 | | 2 | |
Total commercial loans and leases | $ | 75,199 | | 62 | % | | $ | 76,462 | | 62 | % |
Consumer loans: | | | | | |
Residential mortgage loans | 17,826 | | 15 | | | 18,562 | | 15 | |
Home equity | 3,898 | | 3 | | | 4,039 | | 3 | |
Indirect secured consumer loans | 15,434 | | 13 | | | 16,552 | | 14 | |
Credit card | 1,817 | | 2 | | | 1,874 | | 2 | |
Other consumer loans | 6,528 | | 5 | | | 4,998 | | 4 | |
Total consumer loans | $ | 45,503 | | 38 | % | | $ | 46,025 | | 38 | % |
Total loans and leases | $ | 120,702 | | 100 | % | | $ | 122,487 | | 100 | % |
Total portfolio loans and leases (excluding loans and leases held for sale) | $ | 120,088 | | | | $ | 121,480 | | |
Total loans and leases, including loans and leases held for sale, decreased $1.8 billion, or 1%, from December 31, 2022 driven by decreases in both commercial loans and leases and consumer loans.
Commercial loans and leases decreased $1.3 billion, or 2%, from December 31, 2022 due to decreases in commercial and industrial loans and commercial leases, partially offset by increases in commercial construction loans and commercial mortgage loans. Commercial and industrial loans decreased $1.5 billion, or 3%, from December 31, 2022 primarily as a result of payoffs and decreased revolving line of credit utilization. Commercial leases decreased $80 million, or 3%, primarily as a result of a planned reduction in indirect non-relationship-based lease originations. Commercial construction loans increased $201 million, or 4%, from December 31, 2022 as draws on existing commitments and loan originations exceeded payoffs. Commercial mortgage loans increased $102 million, or 1%, from December 31, 2022 as loan originations exceeded payoffs.
Consumer loans decreased $522 million, or 1%, from December 31, 2022 primarily due to decreases in indirect secured consumer loans, residential mortgage loans and home equity, partially offset by an increase in other consumer loans. Indirect secured consumer loans decreased $1.1 billion, or 7%, from December 31, 2022 primarily driven by paydowns exceeding loan originations. Residential mortgage loans decreased $736 million, or 4%, from December 31, 2022 primarily due to decreases in residential mortgage loans held for sale as the Bancorp sold government-guaranteed loans that were previously in forbearance programs and also had lower origination volumes. Home equity decreased $141 million, or 3%, from December 31, 2022 as payoffs exceeded loan originations and new advances. Other consumer loans increased $1.5 billion, or 31%, from December 31, 2022 primarily driven by originations of point-of-sale solar energy installation loans.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
| | | | | | | | | | | | | | | | | |
TABLE 15: Components of Average Loans and Leases (including average loans and leases held for sale) |
| September 30, 2023 | | September 30, 2022 |
For the three months ended ($ in millions) | Carrying Value | % of Total | | Carrying Value | % of Total |
Commercial loans and leases: | | | | | |
Commercial and industrial loans | $ | 57,015 | | 47 | % | | $ | 56,648 | | 46 | % |
Commercial mortgage loans | 11,216 | | 9 | | | 10,751 | | 9 | |
Commercial construction loans | 5,540 | | 5 | | | 5,557 | | 5 | |
Commercial leases | 2,618 | | 2 | | | 2,793 | | 2 | |
Total commercial loans and leases | $ | 76,389 | | 63 | % | | $ | 75,749 | | 62 | % |
Consumer loans: | | | | | |
Residential mortgage loans | 18,019 | | 15 | | | 19,870 | | 16 | |
Home equity | 3,897 | | 3 | | | 3,956 | | 3 | |
Indirect secured consumer loans | 15,787 | | 13 | | | 16,750 | | 14 | |
Credit card | 1,808 | | 1 | | | 1,756 | | 2 | |
Other consumer loans | 6,366 | | 5 | | | 3,819 | | 3 | |
Total consumer loans | $ | 45,877 | | 37 | % | | $ | 46,151 | | 38 | % |
Total average loans and leases | $ | 122,266 | | 100 | % | | $ | 121,900 | | 100 | % |
Total average portfolio loans and leases (excluding loans and leases held for sale) | $ | 121,630 | | | | $ | 119,644 | | |
Average loans and leases, including average loans and leases held for sale, increased $366 million for the three months ended September 30, 2023 compared to the same period in the prior year driven by an increase in average commercial loans and leases, partially offset by a decrease in average consumer loans.
Average commercial loans and leases increased $640 million, or 1%, for the three months ended September 30, 2023 compared to the same period in the prior year primarily due to increases in average commercial mortgage loans and average commercial and industrial loans, partially offset by a decrease in average commercial leases. Average commercial mortgage loans increased $465 million, or 4%, for the three months ended September 30, 2023 compared to the same period in the prior year as loan originations exceeded payoffs. Average commercial and industrial loans increased $367 million, or 1%, for the three months ended September 30, 2023 compared to the same period in the prior year primarily as a result of loan originations exceeding payoffs, partially offset by decreased revolving line of credit utilization. Average commercial leases decreased $175 million, or 6%, for the three months ended September 30, 2023 compared to the same period in the prior year primarily as a result of a planned reduction in indirect non-relationship-based lease originations.
Average consumer loans decreased $274 million, or 1%, for the three months ended September 30, 2023 compared to the same period in the prior year primarily due to decreases in average residential mortgage loans and average indirect secured consumer loans, partially offset by an increase in average other consumer loans. Average residential mortgage loans decreased $1.9 billion, or 9%, for the three months ended September 30, 2023 compared to the same period in the prior year primarily due to decreases in residential mortgage loans held for sale as the Bancorp sold government-guaranteed loans that were previously in forbearance programs and also had lower origination volumes. Average indirect secured consumer loans decreased $963 million, or 6%, for the three months ended September 30, 2023 compared to the same period in the prior year primarily driven by paydowns and lower originations. Average other consumer loans increased $2.5 billion, or 67%, for the three months ended September 30, 2023 compared to the same period in the prior year primarily driven by originations of point-of-sale solar energy installation loans.
Investment Securities
The Bancorp uses investment securities as a means of managing interest rate risk, providing collateral for pledging purposes and for liquidity risk management. Total investment securities were $49.4 billion and $52.2 billion at September 30, 2023 and December 31, 2022, respectively. The taxable available-for-sale debt and other investment securities portfolio had an effective duration of 4.9 at September 30, 2023 compared to 5.4 at December 31, 2022.
Debt securities are classified as available-for-sale when, in management’s judgment, they may be sold in response to, or in anticipation of, changes in market conditions. Securities that management has the intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost. Debt securities are classified as trading typically when bought and held principally for the purpose of selling them in the near term. At September 30, 2023, the Bancorp’s investment portfolio consisted primarily of AAA-rated available-for-sale debt and other securities. The Bancorp held an immaterial amount of below-investment grade available-for-sale debt and other securities at both September 30, 2023 and December 31, 2022.
During the three and nine months ended September 30, 2023, the Bancorp recognized $1 million and $5 million, respectively, of impairment losses on its available-for-sale debt and other securities, included in securities gains (losses), net, in the Condensed Consolidated Statements of Income. These losses related to certain securities in unrealized loss positions where the Bancorp has determined that it no longer intends to
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
hold the securities until the recovery of their amortized cost bases. The Bancorp did not recognize impairment losses on its available-for-sale debt and other securities for both the three and nine months ended September 30, 2022.
At both September 30, 2023 and December 31, 2022, the Bancorp completed its evaluation of the available-for-sale debt and other securities in an unrealized loss position and did not recognize an allowance for credit losses. The Bancorp did not recognize provision expense related to available-for-sale debt and other securities in an unrealized loss position during both the three and nine months ended September 30, 2023 and 2022.
The following table summarizes the end of period components of investment securities:
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TABLE 16: Components of Investment Securities |
As of ($ in millions) | September 30, 2023 | December 31, 2022 |
Available-for-sale debt and other securities (amortized cost basis): | | |
U.S. Treasury and federal agencies securities | $ | 3,680 | | 2,683 | |
Obligations of states and political subdivisions securities | 2 | | 18 | |
Mortgage-backed securities: | | |
Agency residential mortgage-backed securities | 11,743 | | 12,604 | |
Agency commercial mortgage-backed securities | 29,055 | | 29,824 | |
Non-agency commercial mortgage-backed securities | 4,922 | | 5,235 | |
Asset-backed securities and other debt securities | 5,378 | | 6,292 | |
Other securities(a) | 777 | | 874 | |
Total available-for-sale debt and other securities | $ | 55,557 | | 57,530 | |
Held-to-maturity securities (amortized cost basis): | | |
Obligations of states and political subdivisions securities | $ | — | | 3 | |
Asset-backed securities and other debt securities | 2 | | 2 | |
Total held-to-maturity securities | $ | 2 | | 5 | |
Trading debt securities (fair value): | | |
U.S. Treasury and federal agencies securities | $ | 641 | | 45 | |
Obligations of states and political subdivisions securities | 43 | | 14 | |
Agency residential mortgage-backed securities | 7 | | 8 | |
Asset-backed securities and other debt securities | 531 | | 347 | |
Total trading debt securities | $ | 1,222 | | 414 | |
Total equity securities (fair value) | $ | 250 | | 317 | |
(a)Other securities consist of FHLB, FRB and DTCC restricted stock holdings that are carried at cost.
On an amortized cost basis, available-for-sale debt and other securities decreased $2.0 billion from December 31, 2022 primarily due to decreases in asset-backed securities and other debt securities, agency residential mortgage-backed securities and agency commercial mortgage-backed securities, partially offset by increases in U.S. Treasury and federal agencies securities. Trading debt securities increased $808 million from December 31, 2022 primarily due to purchases of U.S. Treasury securities during the nine months ended September 30, 2023 related to the Bancorp’s management of collateral posted for derivative exposures.
On an amortized cost basis, available-for-sale debt and other securities were 28% and 30% of total interest-earning assets at September 30, 2023 and December 31, 2022, respectively. The estimated weighted-average life of the debt securities in the available-for-sale debt and other securities portfolio was 6.5 years and 6.8 years at September 30, 2023 and December 31, 2022, respectively. In addition, the debt securities in the available-for-sale debt and other securities portfolio had a weighted-average yield of 3.04% and 2.97% at September 30, 2023 and December 31, 2022, respectively.
Information presented in Table 17 is on a weighted-average life basis, anticipating future prepayments. Yield information is presented on an FTE basis and is computed using amortized cost balances and reflects the impact of prepayments. Maturity and yield calculations for the total available-for-sale debt and other securities portfolio exclude other securities that have no stated yield or maturity. Total net unrealized losses on the available-for-sale debt and other securities portfolio were $7.7 billion and $6.0 billion at September 30, 2023 and December 31, 2022, respectively. The fair values of investment securities are impacted by interest rates, credit spreads, market volatility and liquidity conditions. The fair value of the Bancorp’s investment securities portfolio generally decreases when interest rates increase or when credit spreads widen.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
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TABLE 17: Characteristics of Available-for-Sale Debt and Other Securities |
As of September 30, 2023 ($ in millions) | Amortized Cost | Fair Value | Weighted-Average Life (in years) | Weighted-Average Yield |
U.S. Treasury and federal agencies securities: | | | | |
Average life after one year through five years | $ | 2,777 | | 2,651 | | 2.8 | 3.73 | % |
Average life after five years through ten years | 903 | | 811 | | 5.2 | 2.42 | |
Total | $ | 3,680 | | 3,462 | | 3.4 | 3.40 | % |
Obligations of states and political subdivisions securities: | | | | |
Average life within one year | 2 | | 2 | | 0.9 | — | |
| | | | |
| | | | |
Total | $ | 2 | | 2 | | 0.9 | — | % |
Agency residential mortgage-backed securities: | | | | |
Average life within one year | 5 | | 5 | | 0.3 | 1.01 | |
Average life after one year through five years | 787 | | 711 | | 3.5 | 2.73 | |
Average life after five years through ten years | 9,832 | | 8,327 | | 8.3 | 3.05 | |
Average life after ten years | 1,119 | | 833 | | 11.5 | 2.96 | |
Total | $ | 11,743 | | 9,876 | | 8.3 | 3.02 | % |
Agency commercial mortgage-backed securities:(a) | | | | |
Average life within one year | 43 | | 41 | | 0.9 | 2.99 | |
Average life after one year through five years | 8,772 | | 7,915 | | 3.6 | 2.75 | |
Average life after five years through ten years | 15,272 | | 12,702 | | 7.3 | 2.86 | |
Average life after ten years | 4,968 | | 3,803 | | 12.1 | 2.90 | |
Total | $ | 29,055 | | 24,461 | | 7.0 | 2.83 | % |
Non-agency commercial mortgage-backed securities: | | | | |
Average life within one year | 121 | | 118 | | 0.7 | 3.58 | |
Average life after one year through five years | 2,711 | | 2,529 | | 2.3 | 3.24 | |
Average life after five years through ten years | 2,090 | | 1,678 | | 7.7 | 2.81 | |
| | | | |
Total | $ | 4,922 | | 4,325 | | 4.6 | 3.07 | % |
Asset-backed securities and other debt securities: | | | | |
Average life within one year | 432 | | 423 | | 0.7 | 4.62 | |
Average life after one year through five years | 3,532 | | 3,266 | | 2.9 | 3.67 | |
Average life after five years through ten years | 1,325 | | 1,213 | | 5.8 | 4.13 | |
Average life after ten years | 89 | | 88 | | 12.9 | 6.27 | |
Total | $ | 5,378 | | 4,990 | | 3.6 | 3.91 | % |
Other securities | 777 | | 777 | | | |
Total available-for-sale debt and other securities | $ | 55,557 | | 47,893 | | 6.5 | 3.04 | % |
(a)Taxable-equivalent yield adjustments included in the above table are 0.18% and 0.03% for securities with an average life greater than 10 years and in total, respectively.
Other Short-Term Investments
Other short-term investments primarily include overnight interest-earning investments, including reserves held at the FRB and federal funds sold. The Bancorp uses other short-term investments as part of its liquidity risk management tools. Other short-term investments were $18.9 billion at September 30, 2023, an increase of $10.6 billion from December 31, 2022. This increase was primarily attributable to the Bancorp’s decision to increase its liquidity position in response to conditions in the operating environment as of September 30, 2023.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Deposits
The Bancorp’s deposit balances represent an important source of funding and revenue growth opportunity. The Bancorp continues to focus on core deposit growth in its retail and commercial franchises by improving customer satisfaction, building full relationships and offering competitive rates. Average core deposits represented 77% and 76% of average total assets for the three months ended September 30, 2023 and 2022, respectively.
The following table presents the end of period components of deposits:
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TABLE 18: Components of Deposits |
| September 30, 2023 | | December 31, 2022 |
As of ($ in millions) | Balance | % of Total | | Balance | % of Total |
Demand | $ | 43,844 | | 26 | % | | $ | 53,125 | | 33 | % |
Interest checking | 53,421 | | 32 | | | 51,653 | | 32 | |
Savings | 20,195 | | 12 | | | 23,469 | | 14 | |
Money market | 33,492 | | 20 | | | 28,220 | | 17 | |
Foreign office | 168 | | — | | | 182 | | — | |
Total transaction deposits | $ | 151,120 | | 90 | | | $ | 156,649 | | 96 | |
CDs $250,000 or less | 10,306 | | 6 | | | 3,809 | | 2 | |
Total core deposits | $ | 161,426 | | 96 | | | $ | 160,458 | | 98 | |
CDs over $250,000(a) | 6,246 | | 4 | | | 3,232 | | 2 | |
Total deposits | $ | 167,672 | | 100 | % | | $ | 163,690 | | 100 | % |
(a)Includes $5.4 billion and $3.1 billion of retail brokered certificates of deposit which are fully covered by FDIC insurance as of September 30, 2023 and December 31, 2022, respectively.
Core deposits increased $968 million, or 1%, from December 31, 2022 primarily due to an increase in CDs $250,000 or less, partially offset by a decrease in transaction deposits as a result of the higher interest rate environment. CDs $250,000 or less increased $6.5 billion from December 31, 2022 primarily due to higher offering rates. Transaction deposits decreased $5.5 billion, or 4%, from December 31, 2022 as decreases in demand deposits and savings deposits were partially offset by increases in money market deposits and interest checking deposits. In response to the higher interest rate environment, deposit balances have migrated, and are expected to continue to migrate, from noninterest-bearing products such as demand deposits into higher interest-bearing products such as money market accounts and CDs. Demand deposits decreased $9.3 billion, or 17%, from December 31, 2022 primarily as a result of balance migration into interest checking deposits and lower balances per customer account. Savings deposits decreased $3.3 billion, or 14%, from December 31, 2022 primarily as a result of lower balances per consumer customer account due to increased consumer spending, partially offset by higher balances per commercial customer account as a result of higher interest rates. Money market deposits increased $5.3 billion, or 19%, from December 31, 2022 primarily as a result of higher balances per consumer customer account due to higher offering rates. Interest checking deposits increased $1.8 billion, or 3%, from December 31, 2022 primarily as a result of commercial balance growth and balance migration from demand deposits, partially offset by lower balances per consumer customer account.
CDs over $250,000 increased $3.0 billion, or 93%, from December 31, 2022 primarily due to an increase in retail brokered CDs issued, which are utilized as a short-term funding source.
The following table presents the components of average deposits for the three months ended:
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TABLE 19: Components of Average Deposits |
| September 30, 2023 | | September 30, 2022 |
($ in millions) | Balance | % of Total | | Balance | % of Total |
Demand | $ | 44,228 | | 27 | % | | $ | 59,535 | | 37 | % |
Interest checking | 53,109 | | 32 | | | 42,574 | | 27 | |
Savings | 20,511 | | 12 | | | 23,814 | | 15 | |
Money market | 32,072 | | 19 | | | 29,066 | | 18 | |
Foreign office | 168 | | — | | | 206 | | — | |
Total transaction deposits | $ | 150,088 | | 90 | | | $ | 155,195 | | 97 | |
CDs $250,000 or less | 9,630 | | 6 | | | 2,048 | | 1 | |
Total core deposits | $ | 159,718 | | 96 | | | $ | 157,243 | | 98 | |
CDs over $250,000(a) | 5,926 | | 4 | | | 2,226 | | 2 | |
Total average deposits | $ | 165,644 | | 100 | % | | $ | 159,469 | | 100 | % |
(a)Includes $5.2 billion and $2.1 billion of retail brokered certificates of deposit which are fully covered by FDIC insurance for the three months ended September 30, 2023 and 2022, respectively.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
On an average basis, core deposits increased $2.5 billion, or 2%, for the three months ended September 30, 2023 compared to the same period in the prior year due to an increase in average CDs $250,000 or less, partially offset by a decrease in average transaction deposits. Average CDs $250,000 or less increased $7.6 billion for the three months ended September 30, 2023 compared to the same period in the prior year primarily due to higher offering rates. Average transaction deposits decreased $5.1 billion, or 3%, for the three months ended September 30, 2023 compared to the same period in the prior year primarily driven by decreases in average demand deposits and average savings deposits, partially offset by increases in average interest checking deposits and average money market deposits. In response to the higher interest rate environment, average deposit balances have migrated, and are expected to continue to migrate, from noninterest-bearing products such as demand deposits into higher interest-bearing products such as money market accounts and CDs. Average demand deposits decreased $15.3 billion, or 26%, for the three months ended September 30, 2023 compared to the same period in the prior year primarily as a result of balance migration into interest checking deposits and lower average balances per customer account. Average savings deposits decreased $3.3 billion, or 14%, for the three months ended September 30, 2023 compared to the same period in the prior year primarily due to lower average balances per consumer customer account due to increased consumer spending, partially offset by an increase in average balances per commercial customer account. Average interest checking deposits increased $10.5 billion, or 25%, for the three months ended September 30, 2023 compared to the same period in the prior year primarily as a result of average commercial balance growth and balance migration from demand deposits and money market deposits, partially offset by lower average balances per consumer customer account. Average money market deposits increased $3.0 billion, or 10%, for the three months ended September 30, 2023 compared to the same period in the prior year primarily as a result of higher average balances per consumer customer account, partially offset by balance migration into interest checking deposits.
Average CDs over $250,000 increased $3.7 billion for the three months ended September 30, 2023 compared to the same period in the prior year primarily due to an increase in retail brokered CDs issued.
Contractual maturities
The contractual maturities of CDs as of September 30, 2023 are summarized in the following table:
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TABLE 20: Contractual Maturities of CDs(a) |
($ in millions) | |
Next 12 months | $ | 16,300 | |
13-24 months | 167 | |
25-36 months | 62 | |
37-48 months | 11 | |
49-60 months | 7 | |
After 60 months | 5 | |
Total CDs | $ | 16,552 | |
(a)Includes CDs $250,000 or less and CDs over $250,000.
Deposit insurance
The FDIC generally provides a standard amount of insurance of $250,000 per depositor, per insured bank, for each account ownership category defined by the FDIC. Depositors may qualify for coverage of accounts over $250,000 if they have funds in different ownership categories and all FDIC requirements are met. All deposits that an account owner has in the same ownership category at the same bank are added together and insured up to the standard insurance amount. As of September 30, 2023 and December 31, 2022, approximately $99.5 billion, or 59%, and $94.1 billion, or 58%, respectively, of the Bancorp’s domestic deposits were estimated to be insured. As of September 30, 2023 and December 31, 2022, approximately $68.0 billion and $69.4 billion, respectively, of the Bancorp’s domestic deposits were estimated to be uninsured. At September 30, 2023 and December 31, 2022, approximately $3.5 billion and $727 million, respectively, of the Bancorp’s time deposits were estimated to be not fully insured. The estimated uninsured portions of those time deposits were $1.9 billion and $306 million at September 30, 2023 and December 31, 2022, respectively. Where information is not readily available to determine the amount of insured deposits, the amount of uninsured deposits is estimated, consistent with the methodologies and assumptions utilized in providing information to the Bank’s regulators.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Borrowings
The Bancorp accesses a variety of short-term and long-term funding sources. Borrowings with original maturities of one year or less are classified as short-term and include federal funds purchased and other short-term borrowings. Total average borrowings as a percent of average interest-bearing liabilities were 13% and 17% for the three months ended September 30, 2023 and 2022, respectively.
The following table summarizes the end of period components of borrowings:
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TABLE 21: Components of Borrowings |
As of ($ in millions) | September 30, 2023 | December 31, 2022 |
Federal funds purchased | $ | 205 | | 180 | |
Other short-term borrowings | 4,594 | | 4,838 | |
Long-term debt | 16,310 | | 13,714 | |
Total borrowings | $ | 21,109 | | 18,732 | |
Total borrowings increased $2.4 billion, or 13%, from December 31, 2022 primarily due to an increase in long-term debt partially offset by a decrease in other short-term borrowings. Long-term debt increased $2.6 billion from December 31, 2022 primarily driven by the issuance of senior fixed-rate/floating-rate notes in July of 2023 totaling $1.25 billion and the issuance of asset-backed securities in August of 2023 totaling $1.5 billion related to an automobile loan securitization. Additionally, in September of 2023 the Bancorp obtained $1.5 billion in new FHLB advances that will mature in 2024, utilizing its existing borrowing capacity. These increases were partially offset by the redemptions or maturities of $1.3 billion of notes, $134 million of paydowns associated with loan securitizations and $188 million of fair value adjustments associated with hedged long-term debt during the nine months ended September 30, 2023. Other short-term borrowings decreased $244 million from December 31, 2022. The level of other short-term borrowings can fluctuate significantly from period to period depending on funding needs and the sources that are used to satisfy those needs. For further information on the components of other short-term borrowings, refer to Note 15 of the Notes to Condensed Consolidated Financial Statements.
The following table summarizes components of average borrowings for the three months ended:
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TABLE 22: Components of Average Borrowings |
($ in millions) | September 30, 2023 | September 30, 2022 |
Federal funds purchased | $ | 181 | | 607 | |
Other short-term borrowings | 4,126 | | 7,436 | |
Long-term debt | 14,056 | | 11,796 | |
Total average borrowings | $ | 18,363 | | 19,839 | |
Total average borrowings decreased $1.5 billion, or 7%, for the three months ended September 30, 2023 compared to the same period in the prior year primarily due to decreases in average other short-term borrowings and average federal funds purchased, partially offset by an increase in average long-term debt. Average other short-term borrowings and average federal funds purchased decreased $3.3 billion and $426 million, respectively, for the three months ended September 30, 2023 compared to the same period in the prior year primarily due to core deposit growth and increased long-term debt which reduced the need for short-term funding during the period. Average long-term debt increased $2.3 billion for the three months ended September 30, 2023 compared to the same period in the prior year primarily driven by issuances of senior fixed-rate/floating-rate notes in the second half of 2022 totaling $2.0 billion and the aforementioned issuances in 2023 totaling $2.75 billion. These increases were partially offset by redemptions or maturities of $1.3 billion of notes, $155 million of fair value adjustments associated with hedged long-term debt and $171 million of paydowns associated with loan securitizations since September 30, 2022. Information on the average rates paid on borrowings is discussed in the Net Interest Income subsection of the Statements of Income Analysis section of MD&A. In addition, refer to the Liquidity Risk Management subsection of the Risk Management section of MD&A for a discussion on the role of borrowings in the Bancorp’s liquidity management.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
BUSINESS SEGMENT REVIEW
The Bancorp reports on three business segments: Commercial Banking, Consumer and Small Business Banking and Wealth and Asset Management. Additional information on each business segment is included in Note 24 of the Notes to Condensed Consolidated Financial Statements. Results of the Bancorp’s business segments are presented based on its management structure and management accounting practices. The structure and accounting practices are specific to the Bancorp; therefore, the financial results of the Bancorp’s business segments are not necessarily comparable with similar information for other financial institutions. The Bancorp refines its methodologies from time to time as management’s accounting practices and businesses change.
The Bancorp manages interest rate risk centrally at the corporate level. By employing an FTP methodology, the business segments are insulated from most benchmark interest rate volatility, enabling them to focus on serving customers through the origination of loans and acceptance of deposits. The FTP methodology assigns charge and credit rates to classes of assets and liabilities, respectively, based on the estimated amount and timing of cash flows for each transaction. Assigning the FTP rate based on matching the duration of cash flows allocates interest income and interest expense to each business segment so its resulting net interest income is insulated from future changes in benchmark interest rates. The Bancorp’s FTP methodology also allocates the contribution to net interest income of the asset-generating and deposit-providing businesses on a duration-adjusted basis to better attribute the driver of the performance. As the asset and liability durations are not perfectly matched, the residual impact of the FTP methodology is captured in General Corporate and Other. The charge and credit rates are determined using the FTP rate curve, which is based on an estimate of Fifth Third’s marginal borrowing cost in the wholesale funding markets. The FTP curve is constructed using the U.S. swap curve, brokered CD pricing and unsecured debt pricing.
The Bancorp adjusts the FTP charge and credit rates as dictated by changes in interest rates for various interest-earning assets and interest-bearing liabilities and by the review of behavioral assumptions, such as prepayment rates on interest-earning assets and the estimated durations for indeterminate-lived deposits. Key assumptions, including the credit rates provided for deposit accounts, are reviewed annually. Credit rates for deposit products and charge rates for loan products may be reset more frequently in response to changes in market conditions. In general, the charge rates on assets increased since December 31, 2022 as they were affected by the prevailing level of interest rates and by the duration and repricing characteristics of the portfolio. The credit rates for deposit products also increased since December 31, 2022 due to higher interest rates and modified assumptions. Thus, net interest income for asset-generating business segments was negatively impacted by the rates charged on assets while deposit-providing business segments were positively impacted during the nine months ended September 30, 2023.
The Bancorp’s methodology for allocating provision for credit losses to the business segments includes charges or benefits associated with changes in criticized commercial loan levels in addition to actual net charge-offs experienced by the loans and leases owned by each business segment. Provision for credit losses attributable to loan and lease growth and changes in ALLL factors is captured in General Corporate and Other. The financial results of the business segments include allocations for shared services and headquarters expenses. Additionally, the business segments form synergies by taking advantage of relationship depth opportunities and funding operations by accessing the capital markets as a collective unit.
The following table summarizes net income (loss) by business segment:
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TABLE 23: Net Income (Loss) by Business Segment | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, | |
($ in millions) | 2023 | 2022 | | 2023 | 2022 | | |
Commercial Banking | $ | 718 | | 369 | | | 2,009 | | 1,026 | | | |
Consumer and Small Business Banking | 739 | | 377 | | | 2,145 | | 699 | | | |
Wealth and Asset Management | 79 | | 56 | | | 226 | | 125 | | | |
General Corporate and Other | (876) | | (149) | | | (2,561) | | (141) | | | |
Net income | $ | 660 | | 653 | | | 1,819 | | 1,709 | | | |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Commercial Banking
Commercial Banking offers credit intermediation, cash management and financial services to large and middle-market businesses and government and professional customers. In addition to the traditional lending and depository offerings, Commercial Banking products and services include global cash management, foreign exchange and international trade finance, derivatives and capital markets services, asset-based lending, real estate finance, public finance, commercial leasing and syndicated finance.
The following table contains selected financial data for the Commercial Banking segment:
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TABLE 24: Commercial Banking | | |
| For the three months ended September 30, | For the nine months ended September 30, |
($ in millions) | 2023 | 2022 | 2023 | 2022 |
Income Statement Data | | | | |
Net interest income (FTE)(a) | $ | 1,012 | | 596 | | 3,017 | | 1,676 | |
Provision for (benefit from) credit losses | — | | (2) | | 37 | | 44 | |
Noninterest income: | | | | |
Commercial banking revenue | 154 | | 133 | | 459 | | 405 | |
Service charges on deposits | 95 | | 90 | | 275 | | 285 | |
Leasing business revenue | 58 | | 60 | | 162 | | 179 | |
Other noninterest income | 46 | | 15 | | 130 | | 123 | |
Noninterest expense: | | | | |
Compensation and benefits | 156 | | 147 | | 499 | | 483 | |
Leasing business expense | 29 | | 33 | | 94 | | 95 | |
Other noninterest expense | 293 | | 260 | | 923 | | 783 | |
Income before income taxes (FTE) | 887 | | 456 | | 2,490 | | 1,263 | |
Applicable income tax expense(a)(b) | 169 | | 87 | | 481 | | 237 | |
Net income | $ | 718 | | 369 | | 2,009 | | 1,026 | |
Average Balance Sheet Data | | | | |
Commercial loans and leases, including held for sale | $ | 72,028 | | 72,086 | | 73,142 | | 70,123 | |
Demand deposits | 21,581 | | 34,503 | | 23,862 | | 36,930 | |
Interest checking deposits | 34,313 | | 18,495 | | 30,629 | | 20,086 | |
Savings and money market deposits | 5,265 | | 5,615 | | 5,094 | | 6,212 | |
Certificates of deposit | 83 | | 106 | | 55 | | 116 | |
Foreign office deposits | 168 | | 206 | | 151 | | 157 | |
(a)Includes FTE adjustments of $5 and $2 for the three months ended September 30, 2023 and 2022, respectively, and $11 and $7 for the nine months ended September 30, 2023 and 2022, respectively.
(b)Applicable income tax expense for all periods includes the tax benefit from tax-exempt income, tax-advantaged investments and tax credits partially offset by the effect of certain nondeductible expenses. Refer to the Applicable Income Taxes subsection of the Statements of Income Analysis slection of MD&A for additional information.
Net income was $718 million and $2.0 billion for the three and nine months ended September 30, 2023, respectively, compared to $369 million and $1.0 billion for the same periods in the prior year. The increases for the three and nine months ended September 30, 2023 were primarily driven by increases in net interest income on an FTE basis and noninterest income, partially offset by increases in noninterest expense.
Net interest income on an FTE basis increased $416 million and $1.3 billion for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year primarily driven by increases in yields on commercial loans and leases as well as increases in FTP credit rates on deposits. These positive impacts were partially offset by increases in FTP charge rates on commercial loans and leases as well as increases in rates paid on and average balances of interest checking deposits and increases in rates paid on average savings and money market deposits.
The provision for credit losses was immaterial and $37 million for the three and nine months ended September 30, 2023, respectively, compared to the benefit from credit losses of $2 million and the provision for credit losses of $44 million for the three and nine months ended September 30, 2022, respectively. The provision for credit losses was immaterial for the three months ended September 30, 2023 as an allocated benefit from credit losses related to commercial criticized assets was offset by net charge-offs. The decrease in provision for credit losses for the nine months ended September 30, 2023 compared to the same period in the prior year was primarily driven by an increase in allocated benefit from credit losses related to commercial criticized assets, partially offset by an increase in net charge-offs. Annualized net charge-offs as a percent of average portfolio loans and leases were 12 bps and 13 bps for the three and nine months ended September 30, 2023, respectively, compared to 16 bps and 13 bps for the same periods in the prior year.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Noninterest income increased $55 million and $34 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year. The increase for the three months ended September 30, 2023 was primarily driven by increases in other noninterest income and commercial banking revenue. The increase for the nine months ended September 30, 2023 was primarily driven by increases in commercial banking revenue and other noninterest income, partially offset by decreases in leasing business revenue. Commercial banking revenue increased $21 million and $54 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year primarily driven by increases in loan syndication fees, foreign exchange fees and institutional brokerage revenue, partially offset by decreases in contract revenue from commercial customer derivatives. The increase for the three months ended September 30, 2023 was also driven by an increase in corporate bond fees. Other noninterest income increased $31 million and $7 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year primarily driven by decreases in net securities losses. The increase for the nine months ended September 30, 2023 was partially offset by a decrease in private equity investment income. Leasing business revenue decreased $17 million for the nine months ended September 30, 2023 compared to the same period in the prior year primarily driven by a decrease in leasing business solutions revenue related to the disposition of LaSalle Solutions during the second quarter of 2022 as well as a decrease in lease remarketing fees.
Noninterest expense increased $38 million and $155 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year primarily driven by increases in other noninterest expense and compensation and benefits. Other noninterest expense increased $33 million and $140 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year primarily driven by increases in allocated expenses and FDIC insurance and other taxes. The increases in allocated expenses were primarily related to cash management services and information technology support services. Compensation and benefits increased $9 million and $16 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year primarily driven by increases in base compensation.
Average commercial loans and leases decreased $58 million and increased $3.0 billion for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year. The decrease for the three months ended September 30, 2023 was primarily due to decreases in average commercial and industrial loans and average commercial leases, partially offset by an increase in average commercial mortgage loans. The increase for the nine months ended September 30, 2023 was primarily due to increases in average commercial and industrial loans, average commercial mortgage loans and average commercial construction loans, partially offset by a decrease in average commercial leases. Average commercial and industrial loans decreased for the three months ended September 30, 2023 compared to the same period in the prior year primarily due to payoffs and decreased revolving line of credit utilization. Average commercial and industrial loans increased for the nine months ended September 30, 2023 compared to the same period in the prior year primarily as a result of loan originations exceeding payoffs. Average commercial mortgage loans increased for the three and nine months ended September 30, 2023 compared to the same periods in the prior year as loan originations exceeded payoffs. Average commercial construction loans increased for the nine months ended September 30, 2023 compared to the same period in the prior year as loan originations exceeded payoffs. Average commercial leases decreased for the three and nine months ended September 30, 2023 compared to the same periods in the prior year primarily as a result of a planned reduction in indirect non-relationship-based lease originations.
Average deposits increased $2.5 billion and decreased $3.7 billion for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year. The increase for the three months ended September 30, 2023 was primarily due to an increase in average interest checking deposits, partially offset by a decrease in average demand deposits. The decrease for the nine months ended September 30, 2023 was primarily due to decreases in average demand deposits and average savings and money market deposits, partially offset by an increase in average interest checking deposits. Average demand deposits decreased $12.9 billion and $13.1 billion for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year primarily as a result of balance migration into interest checking deposits and lower average balances per customer account. Average interest checking deposits increased $15.8 billion and $10.5 billion for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year primarily as a result of higher average balances per customer and balance migration from demand deposits and money market deposits. Average savings and money market deposits decreased $1.1 billion for the nine months ended September 30, 2023 compared to the same period in the prior year primarily due to balance migration into interest checking deposits and lower average balances per customer account. Lower average commercial customer account balances in demand deposits and savings and money market deposits for the nine months ended September 30, 2023 included the impact of deliberate runoff during the second quarter of 2022 of certain higher cost commercial deposits.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Consumer and Small Business Banking
Consumer and Small Business Banking provides a full range of deposit and loan products to individuals and small businesses through a network of full-service banking centers and relationships with indirect and correspondent loan originators in addition to providing products designed to meet the specific needs of small businesses, including cash management services. Consumer and Small Business Banking includes the Bancorp’s residential mortgage, home equity loans and lines of credit, credit cards, automobile and other indirect lending and other consumer lending activities. Residential mortgage activities include the origination, retention and servicing of residential mortgage loans, sales and securitizations of those loans and all associated hedging activities. Indirect lending activities include extending loans to consumers through automobile dealers, motorcycle dealers, powersport dealers, recreational vehicle dealers and marine dealers. Other consumer lending activities include home improvement and solar energy installation loans originated through a network of contractors and installers.
The following table contains selected financial data for the Consumer and Small Business Banking segment:
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TABLE 25: Consumer and Small Business Banking | | |
| For the three months ended September 30, | For the nine months ended September 30, |
($ in millions) | 2023 | 2022 | 2023 | 2022 |
Income Statement Data | | | | |
Net interest income | $ | 1,390 | | 833 | | 4,016 | | 1,981 | |
Provision for credit losses | 105 | | 34 | | 221 | | 93 | |
Noninterest income: | | | | |
Card and processing revenue | 78 | | 79 | | 231 | | 231 | |
Mortgage banking net revenue | 57 | | 69 | | 184 | | 151 | |
Wealth and asset management revenue | 53 | | 52 | | 159 | | 154 | |
Service charges on deposits | 55 | | 53 | | 159 | | 164 | |
Other noninterest income | 31 | | 33 | | 86 | | 86 | |
Noninterest expense: | | | | |
Compensation and benefits | 217 | | 207 | | 663 | | 630 | |
Net occupancy and equipment expense | 63 | | 58 | | 188 | | 175 | |
Card and processing expense | 19 | | 19 | | 57 | | 54 | |
Other noninterest expense | 325 | | 324 | | 992 | | 930 | |
Income before income taxes | $ | 935 | | 477 | | 2,714 | | 885 | |
Applicable income tax expense | 196 | | 100 | | 569 | | 186 | |
Net income | $ | 739 | | 377 | | 2,145 | | 699 | |
Average Balance Sheet Data | | | | |
Consumer loans, including held for sale | $ | 43,017 | | 43,187 | | 43,176 | | 43,066 | |
Commercial loans | 2,987 | | 1,868 | | 2,742 | | 1,603 | |
Demand deposits | 21,620 | | 23,606 | | 22,163 | | 23,705 | |
Interest checking deposits | 11,750 | | 15,111 | | 12,647 | | 15,418 | |
Savings and money market deposits | 42,697 | | 43,521 | | 41,857 | | 43,220 | |
Certificates of deposit | 10,240 | | 2,235 | | 7,980 | | 2,417 | |
Net income was $739 million and $2.1 billion for the three and nine months ended September 30, 2023, respectively, compared to $377 million and $699 million for the same periods in the prior year. The increase for the three months ended September 30, 2023 was primarily driven by an increase in net interest income, partially offset by increases in provision for credit losses and noninterest expense as well as a decrease in noninterest income. The increase for the nine months ended September 30, 2023 was primarily driven by increases in net interest income and noninterest income, partially offset by increases in provision for credit losses and noninterest expense.
Net interest income increased $557 million and $2.0 billion for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year primarily due to increases in FTP credit rates on deposits as well as increases in yields on and average balances of loans. These positive impacts were partially offset by increases in FTP charge rates on loans as well as increases in rates paid on deposits.
Provision for credit losses increased $71 million and $128 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year primarily due to increases in net charge-offs on commercial and industrial loans, other consumer loans, indirect secured consumer loans and credit card. Annualized net charge-offs as a percent of average portfolio loans and leases increased to 90 bps and 65 bps for the three and nine months ended September 30, 2023, respectively, compared to 32 bps and 30 bps for the same periods in the prior year.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Noninterest income decreased $12 million and increased $33 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year. The decrease for the three months ended September 30, 2023 was primarily driven by a decrease in mortgage banking net revenue. The increase for the nine months ended September 30, 2023 was primarily driven by an increase in mortgage banking net revenue. Refer to the Noninterest Income subsection of the Statements of Income Analysis section of MD&A for additional information on the fluctuations in mortgage banking net revenue.
Noninterest expense increased $16 million and $111 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year. The increases for the three and nine months ended September 30, 2023 were primarily driven by increases in compensation and benefits and net occupancy and equipment expense. The increase for the nine months ended September 30, 2023 also included an increase in other noninterest expense. Compensation and benefits expense increased $10 million and $33 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year. The increase for the three months ended September 30, 2023 was primarily driven by an increase in base compensation. The increase for the nine months ended September 30, 2023 was primarily driven by the incremental impact of acquired businesses and the impact of raising the Bancorp’s minimum wage in the third quarter of 2022, partially offset by a decrease in incentive compensation. Net occupancy and equipment expense increased $5 million and $13 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year primarily due to increases in allocated occupancy costs. Other noninterest expense increased $62 million for the nine months ended September 30, 2023 compared to the same period in the prior year primarily due to increases in allocated expenses, FDIC insurance and other taxes and marketing expense. The increase in allocated expenses was primarily related to information technology support services. These increases were partially offset by decreases in loan servicing expenses related to the Bancorp’s sales of certain government-guaranteed residential mortgage loans that were previously in forbearance programs and serviced by a third party.
Average consumer loans decreased $170 million and increased $110 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year. The decrease for the three months ended September 30, 2023 was primarily due to decreases in average residential mortgage loans and average indirect secured consumer loans, partially offset by an increase in average other consumer loans. The increase for the nine months ended September 30, 2023 was primarily due to an increase in average other consumer loans, partially offset by decreases in average residential mortgage loans and average indirect secured consumer loans. Average other consumer loans increased for the three and nine months ended September 30, 2023 compared to the same periods in the prior year primarily driven by originations of point-of-sale energy installation loans. Average residential mortgage loans decreased for the three and nine months ended September 30, 2023 compared to the same periods in the prior year primarily due to decreases in residential mortgage loans held for sale as the Bancorp sold government-guaranteed loans that were previously in forbearance programs and also had lower origination volumes. Average indirect secured consumer loans decreased for the three and nine months ended September 30, 2023 compared to the same periods in the prior year primarily driven by paydowns and lower originations. Average commercial loans increased $1.1 billion for both the three and nine months ended September 30, 2023 compared to the same periods in the prior year primarily driven by increases in average commercial and industrial loans and average commercial mortgage loans as loan originations exceeded payoffs.
Average deposits increased $1.8 billion and decreased $113 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year. The increase for the three months ended September 30, 2023 was primarily driven by an increase in average certificates of deposit, partially offset by decreases in average interest checking deposits, average demand deposits and average savings and money market deposits. The decrease for the nine months ended September 30, 2023 was primarily driven by decreases in average interest checking deposits, average demand deposits and average savings and money market deposits, partially offset by an increase in average certificates of deposit. Average interest checking deposits decreased $3.4 billion and $2.8 billion, average demand deposits decreased $2.0 billion and $1.5 billion and average savings and money market deposits decreased $824 million and $1.4 billion for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year primarily as a result of lower average balances per customer account due to increased consumer spending and balance migration into certificates of deposit. Average certificates of deposit increased $8.0 billion and $5.6 billion for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year primarily due to higher offering rates. In response to the higher interest rate environment, deposit balances have migrated, and are expected to continue to migrate, from noninterest-bearing products to higher interest-bearing products.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Wealth and Asset Management
Wealth and Asset Management provides a full range of wealth management services for individuals, companies and not-for-profit organizations. Wealth and Asset Management is made up of three main businesses: FTS, an indirect wholly-owned subsidiary of the Bancorp; Fifth Third Private Bank; and Fifth Third Institutional Services. FTS offers full service retail brokerage services to individual clients and broker-dealer services to the institutional marketplace. Fifth Third Private Bank offers wealth management strategies to high net worth and ultra-high net worth clients through wealth planning, investment management, banking, insurance, trust and estate services. Fifth Third Institutional Services provides advisory services for institutional clients including middle market businesses, non-profits, states and municipalities.
The following table contains selected financial data for the Wealth and Asset Management segment:
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TABLE 26: Wealth and Asset Management | | |
| For the three months ended September 30, | For the nine months ended September 30, |
($ in millions) | 2023 | 2022 | 2023 | 2022 |
Income Statement Data | | | | |
Net interest income | $ | 98 | | 79 | | 294 | | 167 | |
Provision for credit losses | 1 | | — | | 1 | | — | |
Noninterest income: | | | | |
Wealth and asset management revenue | 137 | | 132 | | 410 | | 407 | |
Other noninterest income | 2 | | 2 | | 5 | | 5 | |
Noninterest expense: | | | | |
Compensation and benefits | 53 | | 54 | | 169 | | 166 | |
Other noninterest expense | 82 | | 88 | | 254 | | 255 | |
Income before income taxes | $ | 101 | | 71 | | 285 | | 158 | |
Applicable income tax expense | 22 | | 15 | | 59 | | 33 | |
Net income | $ | 79 | | 56 | | 226 | | 125 | |
Average Balance Sheet Data | | | | |
Loans and leases, including held for sale | $ | 4,388 | | 4,512 | | 4,427 | | 4,383 | |
Deposits | 10,634 | | 12,258 | | 11,253 | | 13,020 | |
Net income was $79 million and $226 million for the three and nine months ended September 30, 2023, respectively, compared to $56 million and $125 million for the same periods in the prior year. The increases for the three and nine months ended September 30, 2023 were primarily driven by increases in net interest income and noninterest income. The increase for the three months ended September 30, 2023 was also impacted by a decrease in noninterest expense.
Net interest income increased $19 million and $127 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year primarily driven by increases in FTP credit rates on deposits as well as increases in yields on average loans and leases. These positive impacts were partially offset by increases in rates paid on average deposits and increases in FTP charge rates on loans and leases for the three and nine months ended September 30, 2023 compared to the same periods in the prior year.
Noninterest income increased $5 million and $3 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year due to increases in wealth and asset management revenue, primarily driven by increases in private client service fees.
Noninterest expense decreased $7 million for the three months ended September 30, 2023 compared to the same period in the prior year primarily driven by a decrease in other noninterest expense which was primarily the result of a decrease in allocated expenses related to operational support and settlement services.
Average loans and leases decreased $124 million and increased $44 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year. The decrease for the three months ended September 30, 2023 was primarily driven by decreases in average other consumer loans and average commercial and industrial loans as payoffs exceeded loan production, partially offset by an increase in average commercial mortgage loans as a result of higher loan production. The increase for the nine months ended September 30, 2023 was primarily driven by increases in average commercial mortgage loans and average residential mortgage loans as a result of higher loan production.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Average deposits decreased $1.6 billion and $1.8 billion for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year primarily driven by decreases in average interest checking deposits and average demand deposits as a result of lower average balances per customer account, partially offset by an increase in average savings and money market deposits.
General Corporate and Other
General Corporate and Other includes the unallocated portion of the investment securities portfolio, securities gains and losses, certain non-core deposit funding, unassigned equity, unallocated provision for credit losses expense or a benefit from the reduction of the ACL, the payment of preferred stock dividends and certain support activities and other items not attributed to the business segments.
Net interest income on an FTE basis decreased $1.0 billion and $3.1 billion for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year primarily driven by increases in FTP credits on deposits allocated to the business segments, increases in interest expense on long-term debt and deposits and decreases in interest income on loans and leases. These negative impacts were partially offset by increases in FTP charges to the business segments on loans and leases as well as increases in interest income on investment securities and other short-term investments. The increases in both FTP credits and FTP charges allocated to the business segments were driven by increases in market interest rates. Under the Bancorp’s internal reporting methodology, the Bancorp insulates the business segments from interest rate risk associated with fixed-rate lending by transferring this risk to General Corporate and Other through the FTP methodology. As a result, the amount of FTP credits on deposits earned by the business segments has increased at a faster pace than the amount of allocated FTP charges on loans and leases. If market interest rates remain at current levels, the FTP charges to the business segments for loans and leases will increase over time as fixed-rate loans mature and are replaced with new originations.
The provision for credit losses decreased $113 million and $45 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year primarily driven by the impact of allocations to the business segments.
Noninterest income increased $40 million for the nine months ended September 30, 2023 primarily driven by the recognition of net securities gains compared to net securities losses during the same period in the prior year, partially offset by an increase in the loss on the swap associated with the sale of Visa, Inc. Class B shares.
Noninterest expense decreased $25 million and $15 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year primarily driven by the impact of increases in corporate overhead allocations from General Corporate and Other to the other business segments, partially offset by an increase in compensation and benefits. Compensation and benefits increased for the three months ended September 30, 2023 primarily driven by an increase in base compensation and increased for the nine months ended September 30, 2023 primarily driven by higher non-qualified deferred compensation expense and severance expense.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
RISK MANAGEMENT - OVERVIEW
The Risk Management Overview section included in Item 7 of the Bancorp’s Annual Report on Form 10-K describes the Bancorp’s Enterprise Risk Management Framework and Three Lines of Defense structure as well as key areas of risk, which include credit risk, liquidity risk, interest rate risk, price risk, legal and regulatory compliance risk, operational risk, reputation risk and strategic risk. Item 7 of the Bancorp’s Annual Report on Form 10-K also includes additional detailed information about the Bancorp’s processes related to operational risk management as well as legal and regulatory compliance risk management. The following information should be read in conjunction with the Bancorp’s Annual Report on Form 10-K.
CREDIT RISK MANAGEMENT
Credit risk management utilizes a framework that encompasses consistent processes for identifying, assessing, managing, monitoring and reporting credit risk. These processes are supported by a credit risk governance structure that includes Board oversight, policies, risk limits and risk committees.
The objective of the Bancorp’s credit risk management strategy is to quantify and manage credit risk on an aggregate portfolio basis, as well as to limit the risk of loss resulting from the failure of a borrower or counterparty to honor its financial or contractual obligations to the Bancorp. The Bancorp’s credit risk management strategy is based on three core principles: conservatism, diversification and monitoring. The Bancorp believes that effective credit risk management begins with conservative lending practices which are described below. These practices include the use of intentional risk-based limits for single name exposures and counterparty selection criteria designed to reduce or eliminate exposure to borrowers who have higher than average default risk and defined weaknesses in financial performance. The Bancorp carefully designs and monitors underwriting, documentation and collection standards. The Bancorp’s credit risk management strategy also emphasizes diversification on a geographic, industry, product and customer level as well as ongoing portfolio monitoring and timely management reviews of large credit exposures and credits experiencing deterioration of credit quality. Credit officers with the authority to extend credit are delegated specific authority based on risk and exposure amount, the use of which is closely monitored. Underwriting activities are centrally managed, and Credit Risk Management manages the policy and the authority delegation process directly. The Credit Risk Review function provides independent and objective assessments of the quality of underwriting and documentation, the accuracy of risk ratings and the charge-off, nonaccrual and reserve analysis process. The Bancorp’s credit review process and overall assessment of the adequacy of the ACL is based on quarterly assessments of the estimated losses expected in the loan and lease portfolio. The Bancorp uses these assessments to maintain an adequate ACL and record any necessary charge-offs. Certain loans and leases with probable or observed credit weaknesses receive enhanced monitoring and undergo a periodic review. Refer to Note 6 of the Notes to Condensed Consolidated Financial Statements for further information on the Bancorp’s credit rating categories, which are derived from standard regulatory rating definitions. In addition, stress testing is performed on various commercial and consumer portfolios utilizing various models. For certain portfolios, such as real estate and leveraged lending, stress testing is performed at the individual loan level during credit underwriting.
In addition to the individual review of larger commercial loans that exhibit probable or observed credit weaknesses, the commercial credit review process includes the use of two risk rating systems. The first of these risk rating systems is based on regulatory guidance for credit risk rating systems. These ratings are used by the Bancorp to monitor and manage its credit risk. The Bancorp also separately maintains a dual risk rating system for credit approval and pricing, portfolio monitoring and capital allocation that includes a “through-the-cycle” rating philosophy for assessing a borrower’s creditworthiness. This “through-the-cycle” rating philosophy uses a grading scale that assigns ratings based on average default rates through an entire business cycle for borrowers with similar financial performance. The dual risk rating system includes thirteen categories for estimating probabilities of default and an additional eleven categories for estimating losses given an event of default. The probability of default and loss given default evaluations are not separated in the regulatory risk rating system.
The Bancorp utilizes internally developed models to estimate expected credit losses for portfolio loans and leases. For loans and leases that are collectively evaluated, the Bancorp utilizes these models to forecast expected credit losses over a reasonable and supportable forecast period based on the probability of a loan or lease defaulting, the expected balance at the estimated date of default and the expected loss percentage given a default. Refer to Note 3 of the Notes to Condensed Consolidated Financial Statements for additional information about the Bancorp’s processes for developing these models, for estimating credit losses for periods beyond the reasonable and supportable forecast period and for estimating credit losses for individually evaluated loans.
For the commercial portfolio segment, the estimated probabilities of default are primarily based on the probability of default ratings assigned under the through-the-cycle dual risk rating system and historical observations of how those ratings migrate to a default over time in the context of macroeconomic conditions. For loans with available credit, the estimate of the expected balance at the time of default considers expected utilization rates, which are primarily based on macroeconomic conditions and the utilization history of similar borrowers under those economic conditions. The estimates for loss severity are primarily based on collateral type and coverage levels and the susceptibility of those characteristics to changes in macroeconomic conditions.
For collectively evaluated loans in the consumer and residential mortgage portfolio segments, the Bancorp’s expected credit loss models primarily utilize the borrower’s FICO score and delinquency history in combination with macroeconomic conditions when estimating the probability of default. The estimates for loss severity are primarily based on collateral type and coverage levels and the susceptibility of those characteristics to changes in macroeconomic conditions. The expected balance at the estimated date of default is also especially impactful in
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
the expected credit loss models for portfolio classes which generally have longer terms (such as residential mortgage loans and home equity) and portfolio classes containing a high concentration of loans with revolving privileges (such as home equity). The estimate of the expected balance at the time of default considers expected prepayment and utilization rates where applicable, which are primarily based on macroeconomic conditions and the utilization history of similar borrowers under those economic conditions. The Bancorp also utilizes various scoring systems, analytical tools and portfolio performance monitoring processes to assess the credit risk of the consumer and residential mortgage portfolios.
Overview
Longer-term interest rates increased throughout the third quarter of 2023 as economic growth accelerated and the U.S. Treasury indicated that it would begin the process of issuing a higher proportion of debt with longer-term maturities in 2024. At the September 2023 FOMC meeting, FRB officials said a “soft landing” is the goal but is secondary to restoring price stability. Resilient consumer demand has supported the soft landing narrative in financial markets and has led the market to reflect the expected higher-for-longer monetary policy into market interest rates. With monetary policy at a restrictive level, the FOMC has transitioned to a data-dependent approach where future monetary policy decisions will be based on the strength of the economic data.
The downside risks to the economic outlook continue to increase as persistent inflation above the FRB’s 2% target may force the FOMC to keep interest rates higher for longer. The rise in longer-term rates during the third quarter of 2023 has the potential to adversely impact asset prices and economic activity. Heightened geopolitical tensions may also lead to increased economic uncertainty and volatility as well as higher commodity prices, reversing some of the easing seen recently in headline inflation. Against this backdrop, tighter liquidity in the banking sector is limiting the supply of credit in the economy. Over time, these factors may adversely impact business investment, job growth and consumer spending which could lead to a recession.
Loan Modifications to Borrowers Experiencing Financial Difficulty
On January 1, 2023, the Bancorp adopted ASU 2022-02, which eliminated the accounting guidance on TDRs for creditors for all loan modifications to borrowers experiencing financial difficulty occurring on or after January 1, 2023. For further information on the Bancorp’s adoption of ASU 2022-02, refer to Note 3 and Note 6 of the Notes to Condensed Consolidated Financial Statements.
Commercial Portfolio
The Bancorp’s credit risk management strategy seeks to minimize concentrations of risk through diversification. The Bancorp has commercial loan concentration limits based on industry, lines of business within the commercial segment, geography and credit product type. The risk within the commercial loan and lease portfolio is managed and monitored through an underwriting process utilizing detailed origination policies, continuous loan level reviews, monitoring of industry concentration and product type limits and continuous portfolio risk management reporting.
The Bancorp is closely monitoring various economic factors and their impacts on commercial borrowers, including, but not limited to, the level of inflation, higher-for-longer interest rates, labor and supply chain issues, volatility and changes in consumer discretionary spending patterns, including debt and default levels. The Bancorp maintains focus on disciplined client selection, adherence to underwriting policy and attention to concentrations.
The Bancorp provides loans to a variety of customers ranging from large multinational firms to middle market businesses, sole proprietors and high net worth individuals. The origination policies for commercial and industrial loans outline the risks and underwriting requirements for loans to businesses in various industries. Included in the policies are maturity and amortization terms, collateral and leverage requirements, cash flow coverage measures and hold limits. The Bancorp aligns credit and sales teams with specific industry and regional expertise to better monitor and manage different industry and geographic segments of the portfolio.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
The following table provides detail on commercial loans and leases by industry classification (as defined by the North American Industry Classification System), by loan size and by state, illustrating the diversity and granularity of the Bancorp’s commercial loans and leases as of:
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TABLE 27: Commercial Loan and Lease Portfolio (excluding loans and leases held for sale) |
| September 30, 2023 | December 31, 2022 |
($ in millions) | Outstanding | Exposure | Nonaccrual | Outstanding | Exposure | Nonaccrual |
By Industry: | | | | | | |
Real estate | $ | 12,205 | | 19,802 | | 4 | | 11,275 | | 17,938 | | 25 | |
Financial services and insurance | 10,138 | | 21,638 | | — | | 9,927 | | 20,674 | | — | |
Manufacturing | 10,044 | | 20,383 | | 58 | | 11,024 | | 21,174 | | 88 | |
Business services | 6,290 | | 10,871 | | 58 | | 5,971 | | 10,240 | | 4 | |
Healthcare | 5,784 | | 8,173 | | 8 | | 5,576 | | 7,838 | | 28 | |
Wholesale trade | 5,307 | | 10,367 | | 7 | | 5,538 | | 10,620 | | 4 | |
Accommodation and food | 4,319 | | 7,113 | | 24 | | 4,340 | | 7,028 | | 10 | |
Retail trade | 4,106 | | 10,156 | | 88 | | 4,495 | | 10,570 | | 9 | |
Communication and information | 3,154 | | 6,498 | | — | | 3,428 | | 6,944 | | — | |
Mining | 3,125 | | 6,212 | | — | | 3,634 | | 6,811 | | — | |
Construction | 2,757 | | 6,496 | | 11 | | 2,945 | | 6,265 | | 15 | |
Transportation and warehousing | 2,460 | | 4,519 | | 4 | | 2,621 | | 4,664 | | 2 | |
Utilities | 2,035 | | 3,955 | | — | | 1,862 | | 4,172 | | — | |
Entertainment and recreation | 1,646 | | 3,070 | | 8 | | 1,729 | | 3,053 | | 67 | |
Other services | 1,138 | | 1,619 | | 6 | | 1,088 | | 1,484 | | 9 | |
Agribusiness | 370 | | 578 | | — | | 456 | | 651 | | — | |
Public administration | 212 | | 328 | | 4 | | 343 | | 451 | | 1 | |
Individuals | 28 | | 77 | | 1 | | 76 | | 117 | | — | |
Other | — | | — | | — | | 61 | | 62 | | 1 | |
Total | $ | 75,118 | | 141,855 | | 281 | | 76,389 | | 140,756 | | 263 | |
By Loan Size: | | | | | | |
Less than $1 million | 4 | % | 3 | | 20 | | 4 | | 3 | | 17 | |
$1 million to $5 million | 7 | | 7 | | 10 | | 7 | | 6 | | 12 | |
$5 million to $10 million | 5 | | 4 | | 4 | | 5 | | 4 | | 17 | |
$10 million to $25 million | 13 | | 11 | | 36 | | 14 | | 12 | | 28 | |
$25 million to $50 million | 25 | | 23 | | — | | 23 | | 22 | | 26 | |
Greater than $50 million | 46 | | 52 | | 30 | | 47 | | 53 | | — | |
Total | 100 | % | 100 | | 100 | | 100 | | 100 | | 100 | |
By State: | | | | | | |
California | 10 | % | 9 | | 6 | | 9 | | 8 | | 3 | |
Texas | 9 | | 9 | | 4 | | 9 | | 9 | | 9 | |
Illinois | 9 | | 8 | | 8 | | 9 | | 9 | | 30 | |
Ohio | 8 | | 11 | | 5 | | 9 | | 11 | | 8 | |
Florida | 7 | | 7 | | 44 | | 7 | | 7 | | 6 | |
New York | 6 | | 6 | | — | | 6 | | 6 | | — | |
Michigan | 5 | | 5 | | 4 | | 5 | | 5 | | 5 | |
Georgia | 4 | | 4 | | 1 | | 4 | | 4 | | 1 | |
Indiana | 3 | | 3 | | 1 | | 3 | | 3 | | — | |
Tennessee | 3 | | 3 | | 1 | | 3 | | 3 | | 2 | |
North Carolina | 3 | | 2 | | 1 | | 3 | | 2 | | 2 | |
South Carolina | 3 | | 2 | | 1 | | 2 | | 2 | | — | |
Other | 30 | | 31 | | 24 | | 31 | | 31 | | 34 | |
Total | 100 | % | 100 | | 100 | | 100 | | 100 | | 100 | |
The origination policies for commercial real estate outline the risks and underwriting requirements for owner and nonowner-occupied and construction lending. Included in the policies are maturity and amortization terms, maximum LTVs, minimum debt service coverage ratios, construction loan monitoring procedures, appraisal requirements, pre-leasing requirements (as applicable), pro forma analysis requirements and interest rate sensitivity. The Bancorp requires a valuation of real estate collateral, which may include third-party appraisals, be performed at the time of origination and renewal in accordance with regulatory requirements and on an as-needed basis when market conditions justify. The Bancorp maintains an appraisal review department to order and review third-party appraisals in accordance with regulatory requirements.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Nonaccrual assets with relationships exceeding $1 million are reviewed quarterly to assess the appropriateness of the value ascribed in the assessment of charge-offs and specific reserves. Additionally, collateral values are also reviewed at least annually for all criticized assets.
The Bancorp assesses all real estate and non-real estate collateral securing a loan and considers all cross-collateralized loans in the calculation of the LTV ratio. The following tables provide detail on the most recent LTV ratios for commercial mortgage loans greater than $1 million, excluding commercial mortgage loans that are individually evaluated for an ACL. The Bancorp does not typically aggregate the LTV ratios for commercial mortgage loans less than $1 million.
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TABLE 28: Commercial Mortgage Loans Outstanding by LTV, Loans Greater Than $1 Million |
As of September 30, 2023 ($ in millions) | LTV > 100% | LTV 80-100% | LTV < 80% |
Commercial mortgage owner-occupied loans | $ | 52 | | 344 | | 3,867 | |
Commercial mortgage nonowner-occupied loans | — | | 16 | | 4,465 | |
Total | $ | 52 | | 360 | | 8,332 | |
| | | |
TABLE 29: Commercial Mortgage Loans Outstanding by LTV, Loans Greater Than $1 Million |
As of December 31, 2022 ($ in millions) | LTV > 100% | LTV 80-100% | LTV < 80% |
Commercial mortgage owner-occupied loans | $ | 63 | | 533 | 3,566 |
Commercial mortgage nonowner-occupied loans | 4 | | 65 | 4,510 |
Total | $ | 67 | | 598 | 8,076 |
The Bancorp views nonowner-occupied commercial real estate as a higher credit risk product compared to some other commercial loan portfolios due to the higher volatility of the industry.
The following tables provide an analysis of nonowner-occupied commercial real estate loans by state (excluding loans held for sale):
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TABLE 30: Nonowner-Occupied Commercial Real Estate (excluding loans held for sale)(a) | | | |
As of September 30, 2023 ($ in millions) | | | For the three months ended September 30, 2023 | | | For the nine months ended September 30, 2023 |
| Outstanding | Exposure | 90 Days Past Due | Nonaccrual | Net Charge-offs | | | Net Charge-offs |
By State: | | | | | | | | |
Illinois | $ | 1,337 | | 1,635 | | — | | 2 | | — | | | | — | |
Florida | 1,200 | | 2,073 | | — | | — | | — | | | | — | |
Ohio | 1,147 | | 1,580 | | — | | — | | — | | | | — | |
South Carolina | 954 | | 1,165 | | — | | — | | — | | | | — | |
Michigan | 777 | | 1,137 | | — | | — | | — | | | | — | |
Texas | 698 | | 1,360 | | — | | — | | — | | | | — | |
California | 682 | | 1,169 | | — | | — | | — | | | | — | |
Georgia | 449 | | 851 | | — | | — | | — | | | | — | |
All other states | 3,176 | | 5,295 | | — | | — | | — | | | | — | |
Total | $ | 10,420 | | 16,265 | | — | | 2 | | — | | | | — | |
(a)Included in commercial mortgage loans and commercial construction loans in the Loans and Leases subsection of the Balance Sheet Analysis section of MD&A.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
| | | | | | | | | | | | | | | | | | | | | | |
TABLE 31: Nonowner-Occupied Commercial Real Estate (excluding loans held for sale)(a) | | | |
As of September 30, 2022 ($ in millions) | | | | For the three months ended September 30, 2022 | | | For the nine months ended September 30, 2022 |
| Outstanding | Exposure | 90 Days Past Due | Nonaccrual | Net Charge-offs | | | Net Charge-offs |
By State: | | | | | | | | |
Illinois | $ | 1,510 | | 1,709 | | — | | 24 | | — | | | | — | |
Florida | 1,168 | | 1,902 | | — | | — | | — | | | | — | |
Ohio | 1,076 | | 1,465 | | — | | — | | — | | | | — | |
South Carolina | 770 | | 960 | | — | | — | | — | | | | — | |
Michigan | 868 | | 1,146 | | — | | — | | — | | | | — | |
Texas | 822 | | 1,357 | | — | | — | | — | | | | — | |
California | 581 | | 923 | | — | | — | | — | | | | — | |
Georgia | 405 | | 889 | | — | | — | | — | | | | — | |
All other states | 3,395 | | 5,137 | | — | | 1 | | — | | | | 3 | |
Total | $ | 10,595 | | 15,488 | | — | | 25 | | — | | | | 3 | |
(a)Included in commercial mortgage loans and commercial construction loans in the Loans and Leases subsection of the Balance Sheet Analysis section of MD&A.
Consumer Portfolio
The Bancorp’s consumer portfolio is materially comprised of five categories of loans: residential mortgage loans, home equity, indirect secured consumer loans, credit card and other consumer loans. The Bancorp has identified certain credit characteristics within these five categories of loans which it believes represent a higher level of risk compared to the rest of the consumer loan portfolio. The Bancorp does not update LTVs for the consumer portfolio subsequent to origination except as part of the charge-off process for real estate secured loans. The Bancorp actively manages the consumer portfolio through concentration limits, which mitigate credit risk through limiting the exposure to lower FICO scores, higher LTVs, specific geographic concentration risks and additional risk elements.
The Bancorp continues to ensure that underwriting standards and guidelines adequately account for the broader economic conditions that the consumer portfolio faces in a rising-rate environment. Guidelines are designed to ensure that the various consumer products fall within the Bancorp’s risk appetite. These guidelines will be monitored and adjusted as deemed appropriate in response to the prevailing economic conditions while remaining within the Bancorp’s risk tolerance limits.
The payment structures for certain variable rate products (such as residential mortgage loans, home equity and credit card) are susceptible to changes in benchmark interest rates. With increases in interest rates, minimum payments on these products also increase, raising the potential for the environment to be disruptive to some borrowers. The Bancorp actively monitors the portion of its consumer portfolio that is susceptible to increases in minimum payments and continues to assess the impact on the overall risk appetite and soundness of the portfolio.
Residential mortgage portfolio
The Bancorp manages credit risk in the residential mortgage portfolio through underwriting guidelines that limit exposure to loan characteristics determined to influence credit risk. Additionally, the portfolio is governed by concentration limits that ensure geographic, product and channel diversification. The Bancorp may also package and sell loans in the portfolio.
The Bancorp does not originate residential mortgage loans that permit customers to defer principal payments or make payments that are less than the accruing interest. The Bancorp originates both fixed-rate and ARM loans. Within the ARM portfolio, approximately $523 million of ARM loans will have rate resets during the next twelve months. Of these resets, substantially all are expected to experience an increase in rate, with an average increase of approximately 1.81%. Underlying characteristics of these borrowers are relatively strong with a weighted average origination DTI of 35% and weighted average origination LTV of 72%.
Certain residential mortgage products have characteristics that may increase the Bancorp’s credit loss rates in the event of a decline in housing values. These types of mortgage products offered by the Bancorp include loans with high LTVs, multiple loans secured by the same collateral that when combined result in an LTV greater than 80% and interest-only loans. The Bancorp has deemed residential mortgage loans with greater than 80% LTVs and no mortgage insurance as loans that represent a higher level of risk.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
The following table provides an analysis of the residential mortgage portfolio loans outstanding by LTV at origination as of:
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TABLE 32: Residential Mortgage Portfolio Loans by LTV at Origination |
| September 30, 2023 | | December 31, 2022 |
($ in millions) | Outstanding | Weighted- Average LTV | | Outstanding | Weighted- Average LTV |
LTV ≤ 80% | $ | 11,923 | | 62.6 | % | | $ | 12,395 | | 61.9 | % |
LTV > 80%, with mortgage insurance(a) | 3,002 | | 95.1 | | | 3,092 | | 94.7 | |
LTV > 80%, no mortgage insurance | 2,368 | | 91.2 | | | 2,141 | | 90.5 | |
Total | $ | 17,293 | | 72.2 | % | | $ | 17,628 | | 71.3 | % |
(a)Includes loans with either borrower or lender paid mortgage insurance.
The following tables provide an analysis of the residential mortgage portfolio loans outstanding by state with a greater than 80% LTV at origination and no mortgage insurance:
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TABLE 33: Residential Mortgage Portfolio Loans, LTV Greater Than 80% at Origination, No Mortgage Insurance |
As of September 30, 2023 ($ in millions) | | For the three months ended September 30, 2023 | | For the nine months ended September 30, 2023 |
| Outstanding | 90 Days Past Due and Accruing | Nonaccrual | Net Charge-offs | | Net (Recoveries) Charge-offs |
By State: | | | | | | |
Ohio | $ | 521 | | — | | 8 | | — | | | — | |
Illinois | 472 | | 1 | | 4 | | — | | | — | |
Florida | 425 | | — | | 2 | | — | | | (1) | |
Indiana | 174 | | — | | 2 | | — | | | — | |
Michigan | 167 | | — | | 2 | | — | | | — | |
North Carolina | 163 | | — | | 1 | | — | | | — | |
Kentucky | 127 | | — | | 1 | | — | | | — | |
All other states | 319 | | — | | 5 | | — | | | — | |
Total | $ | 2,368 | | 1 | | 25 | | — | | | (1) | |
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TABLE 34: Residential Mortgage Portfolio Loans, LTV Greater Than 80% at Origination, No Mortgage Insurance |
As of September 30, 2022 ($ in millions) | | | For the three months ended September 30, 2022 | | For the nine months ended September 30, 2022 |
| Outstanding | 90 Days Past Due and Accruing | Nonaccrual | Net Charge-offs | | Net (Recoveries) Charge-offs |
By State: | | | | | | |
Ohio | $ | 532 | | — | | 10 | | — | | | — | |
Illinois | 477 | | 1 | | 5 | | — | | | — | |
Florida | 392 | | — | | 3 | | — | | | (1) | |
Indiana | 167 | | — | | 2 | | — | | | — | |
Michigan | 173 | | — | | 1 | | — | | | — | |
North Carolina | 166 | | — | | — | | — | | | — | |
Kentucky | 128 | | — | | 1 | | — | | | — | |
All other states | 323 | | — | | 6 | | — | | | — | |
Total | $ | 2,358 | | 1 | | 28 | | — | | | (1) | |
Home equity portfolio
The Bancorp’s home equity portfolio is primarily comprised of home equity lines of credit. Beginning in the first quarter of 2013, the Bancorp’s newly originated home equity lines of credit have a 10-year interest-only draw period followed by a 20-year amortization period. The home equity line of credit previously offered by the Bancorp was a revolving facility with a 20-year term, minimum payments of interest-only and a balloon payment of principal at maturity. Approximately 30% of the outstanding balances of the Bancorp’s portfolio of home equity lines of credit have a balloon structure at maturity. Peak maturity years for the balloon home equity lines of credit are 2025 to 2028 and approximately 9% of the balances mature before 2025.
The ALLL provides coverage for expected losses in the home equity portfolio. The allowance attributable to the portion of the home equity portfolio that is collectively evaluated is determined on a pooled basis using a probability of default, loss given default and exposure at default model framework to generate expected losses. The expected losses for the home equity portfolio are dependent upon loan
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
delinquency, FICO scores, LTV, loan age and their historical correlation with macroeconomic variables including unemployment and the home price index. The expected losses generated from models are adjusted by certain qualitative adjustment factors to reflect risks associated with current conditions and trends. The qualitative factors include adjustments for changes in policies or procedures in underwriting, monitoring or collections, economic conditions, portfolio mix, lending and risk management personnel, results of internal audit and quality control reviews, collateral values and geographic concentrations.
The home equity portfolio is managed in two primary groups: loans outstanding with a combined LTV greater than 80% and those loans with an LTV of 80% or less based upon appraisals at origination. For additional information on these loans, refer to Table 36 and Table 37. Of the total $3.9 billion of outstanding home equity loans:
•76% reside within the Bancorp’s Midwest footprint of Ohio, Michigan, Illinois, Indiana and Kentucky as of September 30, 2023;
•35% are in senior lien positions and 65% are in junior lien positions at September 30, 2023;
•76% of non-delinquent borrowers made at least one payment greater than the minimum payment during the three months ended September 30, 2023; and
•The portfolio had a weighted average refreshed FICO score of 750 at September 30, 2023.
The Bancorp actively manages lines of credit and makes adjustments in lending limits when it believes it is necessary based on FICO score deterioration and property devaluation. The Bancorp does not routinely obtain appraisals on performing loans to update LTVs after origination. However, the Bancorp monitors the local housing markets by reviewing various home price indices and incorporates the impact of the changing market conditions in its ongoing credit monitoring processes. For junior lien home equity loans which become 60 days or more past due, the Bancorp tracks the performance of the senior lien loans in which the Bancorp is the servicer and utilizes consumer credit bureau attributes to monitor the status of the senior lien loans that the Bancorp does not service. If the senior lien loan is found to be 120 days or more past due, the junior lien home equity loan is placed on nonaccrual status unless both loans are well-secured and in the process of collection. Additionally, if the junior lien home equity loan becomes 120 days or more past due and the senior lien loan is also 120 days or more past due, the junior lien home equity loan is assessed for charge-off. Refer to the Analysis of Nonperforming Assets subsection of the Risk Management section of MD&A, Note 1 of the Notes to Consolidated Financial Statements included in the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2022 and Note 3 of the Notes to Condensed Consolidated Financial Statements for more information.
The following table provides an analysis of home equity portfolio loans outstanding disaggregated based upon refreshed FICO score as of:
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TABLE 35: Home Equity Portfolio Loans Outstanding by Refreshed FICO Score |
| September 30, 2023 | | December 31, 2022 |
($ in millions) | Outstanding | % of Total | | Outstanding | % of Total |
Senior Liens: | |
FICO ≤ 659 | $ | 110 | | 3 | % | | $ | 122 | | 3 | % |
FICO 660-719 | 186 | | 4 | | | 205 | | 5 | |
FICO ≥ 720 | 1,088 | | 28 | | | 1,262 | | 31 | |
Total senior liens | $ | 1,384 | | 35 | % | | $ | 1,589 | | 39 | % |
Junior Liens: | | | | | |
FICO ≤ 659 | 209 | | 5 | | | 211 | | 5 | |
FICO 660-719 | 445 | | 12 | | | 433 | | 11 | |
FICO ≥ 720 | 1,860 | | 48 | | | 1,806 | | 45 | |
Total junior liens | $ | 2,514 | | 65 | % | | $ | 2,450 | | 61 | % |
Total | $ | 3,898 | | 100 | % | | $ | 4,039 | | 100 | % |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
The Bancorp believes that home equity portfolio loans with a greater than 80% LTV (including senior liens, if applicable) present a higher level of risk. The following table provides an analysis of the home equity portfolio loans outstanding in a senior and junior lien position by LTV at origination as of:
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TABLE 36: Home Equity Portfolio Loans Outstanding by LTV at Origination |
| September 30, 2023 | | December 31, 2022 |
($ in millions) | Outstanding | Weighted- Average LTV | | Outstanding | Weighted- Average LTV |
Senior Liens: | | | | | |
LTV ≤ 80% | $ | 1,222 | | 51.0 | % | | $ | 1,395 | | 52.1 | % |
LTV > 80% | 162 | | 88.9 | | | 194 | | 88.8 | |
Total senior liens | $ | 1,384 | | 55.7 | % | | $ | 1,589 | | 56.8 | % |
Junior Liens: | | | | | |
LTV ≤ 80% | 1,716 | | 65.1 | | | 1,628 | | 65.6 | |
LTV > 80% | 798 | | 88.8 | | | 822 | | 89.2 | |
Total junior liens | $ | 2,514 | | 73.1 | % | | $ | 2,450 | | 74.1 | % |
Total | $ | 3,898 | | 66.8 | % | | $ | 4,039 | | 67.2 | % |
The following tables provide an analysis of home equity portfolio loans outstanding by state with a LTV greater than 80% (including senior liens, if applicable) at origination:
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TABLE 37: Home Equity Portfolio Loans Outstanding with an LTV Greater than 80% at Origination |
As of September 30, 2023 ($ in millions) | | | For the three months ended September 30, 2023 | | For the nine months ended September 30, 2023 |
| Outstanding | Exposure | 90 Days Past Due and Accruing | Nonaccrual | Net Charge-offs | | Net (Recoveries) Charge-offs |
By State: | | | | | | | |
Ohio | $ | 294 | | 818 | | — | | 6 | | — | | | — | |
Illinois | 147 | | 349 | | — | | 3 | | — | | | (1) | |
Michigan | 143 | | 402 | | — | | 2 | | — | | | — | |
Indiana | 95 | | 252 | | — | | 2 | | — | | | — | |
Florida | 84 | | 205 | | — | | 2 | | — | | | — | |
Kentucky | 81 | | 214 | | — | | 1 | | — | | | — | |
All other states | 116 | | 302 | | — | | 3 | | — | | | — | |
Total | $ | 960 | | 2,542 | | — | | 19 | | — | | | (1) | |
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TABLE 38: Home Equity Portfolio Loans Outstanding with an LTV Greater than 80% at Origination |
As of September 30, 2022 ($ in millions) | | | For the three months ended September 30, 2022 | | For the nine months ended September 30, 2022 |
| Outstanding | Exposure | 90 Days Past Due and Accruing | Nonaccrual | Net (Recoveries) Charge-offs | | Net (Recoveries) Charge-offs |
By State: | | | | | | | |
Ohio | $ | 318 | | 865 | | — | | 8 | | — | | | (1) | |
Illinois | 168 | | 370 | | 1 | | 4 | | — | | | (1) | |
Michigan | 163 | | 441 | | — | | 3 | | (1) | | | (1) | |
Indiana | 98 | | 259 | | — | | 2 | | — | | | — | |
Florida | 75 | | 185 | | — | | 2 | | — | | | — | |
Kentucky | 84 | | 220 | | — | | 1 | | — | | | — | |
All other states | 112 | | 293 | | — | | 3 | | — | | | — | |
Total | $ | 1,018 | | 2,633 | | 1 | | 23 | | (1) | | | (3) | |
Indirect secured consumer portfolio
The indirect secured consumer portfolio is comprised of $12.3 billion of automobile loans and $3.1 billion of indirect motorcycle, powersport, recreational vehicle and marine loans as of September 30, 2023. All concentration and guideline changes are monitored monthly to ensure alignment with original credit performance and return projections.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
The following table provides an analysis of indirect secured consumer portfolio loans outstanding disaggregated based upon FICO score at origination as of:
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TABLE 39: Indirect Secured Consumer Portfolio Loans Outstanding by FICO Score at Origination |
| September 30, 2023 | | December 31, 2022 |
($ in millions) | Outstanding | % of Total | | Outstanding | % of Total |
FICO ≤ 659 | $ | 204 | | 1 | % | | $ | 248 | | 1 | % |
FICO 660-719 | 3,209 | | 21 | | | 3,564 | | 22 | |
FICO ≥ 720 | 12,021 | | 78 | | | 12,740 | | 77 | |
Total | $ | 15,434 | | 100 | % | | $ | 16,552 | | 100 | % |
It is a common industry practice to advance on these types of loans an amount in excess of the collateral value due to the inclusion of negative equity trade-in, maintenance/warranty products, taxes, title and other fees paid at closing. The Bancorp monitors its exposure to these higher risk loans.
The following table provides an analysis of indirect secured consumer portfolio loans outstanding by LTV at origination as of:
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TABLE 40: Indirect Secured Consumer Portfolio Loans Outstanding by LTV at Origination |
| September 30, 2023 | | December 31, 2022 |
($ in millions) | Outstanding | Weighted- Average LTV | | Outstanding | Weighted- Average LTV |
LTV ≤ 100% | $ | 11,321 | | 79.6 | % | | $ | 12,087 | | 79.6 | % |
LTV > 100% | 4,113 | | 110.3 | | | 4,465 | | 110.5 | |
Total | $ | 15,434 | | 87.7 | % | | $ | 16,552 | | 87.9 | % |
The following table provides an analysis of the Bancorp’s indirect secured consumer portfolio loans outstanding with an LTV greater than 100% at origination:
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TABLE 41: Indirect Secured Consumer Portfolio Loans Outstanding with an LTV Greater than 100% at Origination |
As of ($ in millions) | Outstanding | 90 Days Past Due and Accruing | Nonaccrual | Net Charge-offs for the Three Months Ended | | Net Charge-offs for the Nine Months Ended |
September 30, 2023 | $ | 4,113 | | — | | 15 | | 9 | | | 27 | |
September 30, 2022 | 4,460 | | 7 | | 9 | | 6 | | | 14 | |
Credit card portfolio
The credit card portfolio consists of predominantly prime accounts with 98% of balances existing within the Bancorp’s footprint at both September 30, 2023 and December 31, 2022. At September 30, 2023 and December 31, 2022, 71% and 72%, respectively, of the outstanding balances were originated through branch-based relationships with the remainder coming from direct mail campaigns and online acquisitions.
Given the variable nature of the credit card portfolio, interest rate increases impact this product and it is regularly monitored to ensure the portfolio remains within the Bancorp’s risk tolerance.
The following table provides an analysis of the Bancorp’s outstanding credit card portfolio disaggregated based upon FICO score at origination as of:
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TABLE 42: Credit Card Portfolio Loans Outstanding by FICO Score at Origination |
| September 30, 2023 | | December 31, 2022 |
($ in millions) | Outstanding | % of Total | | Outstanding | % of Total |
FICO ≤ 659 | $ | 73 | | 4 | % | | $ | 80 | | 4 | % |
FICO 660-719 | 509 | | 28 | | | 528 | | 28 | |
FICO ≥ 720 | 1,235 | | 68 | | | 1,266 | | 68 | |
Total | $ | 1,817 | | 100 | % | | $ | 1,874 | | 100 | % |
Other consumer portfolio loans
Other consumer portfolio loans are comprised of secured and unsecured loans originated through the Bancorp’s branch network, point-of-sale solar energy installation and home improvement loans originated through a network of contractors and installers, and other point-of-sale loans originated or purchased in connection with third-party companies. Loans originated in connection with one third-party point-of-sale company are impacted by certain credit loss protection coverage provided by that company. The Bancorp discontinued origination of new loans with this third-party company in September 2022.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
The following table provides an analysis of other consumer portfolio loans outstanding by product type as of:
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TABLE 43: Other Consumer Portfolio Loans Outstanding by Product Type |
| September 30, 2023 | | December 31, 2022 |
($ in millions) | Outstanding | % of Total | | Outstanding | % of Total |
Point-of-sale, primarily solar energy installation | $ | 4,191 | | 64 | % | | $ | 2,297 | | 46 | % |
Third-party point-of-sale | 942 | | 14 | | | 1,262 | | 25 | |
Other secured | 884 | | 14 | | | 909 | | 18 | |
Unsecured | 511 | | 8 | | | 530 | | 11 | |
Total | $ | 6,528 | | 100 | % | | $ | 4,998 | | 100 | % |
Analysis of Nonperforming Assets
Nonperforming assets include nonaccrual loans and leases for which ultimate collectability of the full amount of the principal and/or interest is uncertain and certain other assets, including OREO and other repossessed property. A summary of nonperforming assets is included in Table 44. For further information on the Bancorp’s policies related to accounting for delinquent and nonperforming loans and leases, refer to Note 1 of the Notes to Consolidated Financial Statements included in the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2022 and the Nonaccrual Loans and Leases section of Note 3 of the Notes to Condensed Consolidated Financial Statements.
Nonperforming assets were $618 million at September 30, 2023 compared to $539 million at December 31, 2022. Nonperforming portfolio assets as a percent of portfolio loans and leases and OREO were 0.51% and 0.44% at September 30, 2023 and December 31, 2022, respectively. Nonaccrual loans and leases secured by real estate were 36% of nonaccrual loans and leases as of September 30, 2023 compared to 42% as of December 31, 2022.
Portfolio commercial nonaccrual loans and leases were $281 million at September 30, 2023, an increase of $18 million from December 31, 2022. Portfolio consumer nonaccrual loans were $289 million at September 30, 2023, an increase of $37 million from December 31, 2022. Refer to Table 45 for a rollforward of portfolio nonaccrual loans and leases.
OREO and other repossessed property was $42 million and $24 million at September 30, 2023 and December 31, 2022, respectively. The Bancorp recognized losses of $7 million and $8 million on the transfer, sale or write-down of OREO properties for the three and nine months ended September 30, 2023, respectively. The Bancorp recognized an immaterial amount of losses on the transfer, sale or write-down of OREO properties for both the three and nine months ended September 30, 2022.
For the three and nine months ended September 30, 2023, approximately $13 million and $35 million, respectively, of interest income would have been recognized if the nonaccrual portfolio loans and leases had been current in accordance with their contractual terms compared to $9 million and $24 million for the same periods in the prior year. Although these values help demonstrate the costs of carrying nonaccrual credits, the Bancorp does not expect to recover the full amount of interest as nonaccrual loans and leases are generally carried below their principal balance.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
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TABLE 44: Summary of Nonperforming Assets and Delinquent Loans and Leases | |
As of ($ in millions) | September 30, 2023 | December 31, 2022 |
Nonaccrual portfolio loans and leases: | | |
Commercial and industrial loans | $ | 262 | | 215 | |
Commercial mortgage loans | 18 | | 40 | |
Commercial construction loans | — | | 8 | |
Commercial leases | 1 | | — | |
Residential mortgage loans | 127 | | 124 | |
Home equity | 58 | | 67 | |
Indirect secured consumer loans | 31 | | 29 | |
Credit card | 32 | | 27 | |
Other consumer loans | 41 | | 5 | |
Total nonaccrual portfolio loans and leases(a) | $ | 570 | | 515 | |
OREO and other repossessed property(c) | 42 | | 24 | |
Total nonperforming portfolio loans and leases and OREO | $ | 612 | | 539 | |
Nonaccrual loans held for sale | 6 | | — | |
Total nonperforming assets | $ | 618 | | 539 | |
Total portfolio loans and leases 90 days past due and still accruing: | | |
Commercial and industrial loans | $ | 3 | | 11 | |
| | |
| | |
Commercial leases | — | | 2 | |
Residential mortgage loans(b) | 6 | | 7 | |
Home equity | — | | 1 | |
| | |
Credit card | 20 | | 18 | |
Other consumer loans | — | | 1 | |
Total portfolio loans and leases 90 days past due and still accruing | $ | 29 | | 40 | |
Nonperforming portfolio assets as a percent of portfolio loans and leases and OREO | 0.51 | % | 0.44 | |
Nonperforming portfolio loans and leases as a percent of portfolio loans and leases | 0.47 | | 0.42 | |
ACL as a percent of nonperforming portfolio loans and leases | 443 | | 468 | |
ACL as a percent of nonperforming portfolio assets | 413 | | 447 | |
(a)Includes $17 and $15 of nonaccrual government insured commercial loans whose repayments are insured by the SBA as of September 30, 2023 and December 31, 2022, respectively.
(b)Information for all periods presented excludes advances made pursuant to servicing agreements for GNMA mortgage pools whose repayments are insured by the FHA or guaranteed by the VA. These advances were $143 as of September 30, 2023 and $212 as of December 31, 2022. The Bancorp recognized losses of $1 and an immaterial amount for the three months ended September 30, 2023 and 2022, respectively, and $2 for both the nine months ended September 30, 2023 and 2022, due to claim denials and curtailments associated with these insured or guaranteed loans.
(c)Includes $21 and $10 of branch-related real estate no longer intended to be used for banking purposes as of September 30, 2023 and December 31, 2022, respectively.
The following tables provide a rollforward of portfolio nonaccrual loans and leases, by portfolio segment:
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TABLE 45: Rollforward of Portfolio Nonaccrual Loans and Leases |
For the nine months ended September 30, 2023 ($ in millions) | Commercial | Residential Mortgage | Consumer | Total |
Balance, beginning of period | $ | 263 | | 124 | | 128 | | 515 | |
Transfers to nonaccrual status | 359 | | 52 | | 276 | | 687 | |
Transfers to accrual status | (59) | | (21) | | (69) | | (149) | |
Transfers to held for sale | (10) | | — | | — | | (10) | |
Loan paydowns/payoffs | (138) | | (25) | | (48) | | (211) | |
Transfers to OREO | — | | (6) | | (8) | | (14) | |
Charge-offs | (140) | | — | | (117) | | (257) | |
Draws/other extensions of credit | 6 | | 3 | | — | | 9 | |
Balance, end of period | $ | 281 | | 127 | | 162 | | 570 | |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
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TABLE 46: Rollforward of Portfolio Nonaccrual Loans and Leases |
For the nine months ended September 30, 2022 ($ in millions) | Commercial | Residential Mortgage | Consumer | Total |
Balance, beginning of period | $ | 337 | | 33 | | 128 | | 498 | |
Transfers to nonaccrual status | 194 | | 120 | | 97 | | 411 | |
Transfers to accrual status | (2) | | (22) | | (52) | | (76) | |
Transfers to held for sale | (23) | | — | | — | | (23) | |
Loan paydowns/payoffs | (117) | | (15) | | (41) | | (173) | |
Transfers to OREO | — | | (3) | | — | | (3) | |
Charge-offs | (95) | | — | | (23) | | (118) | |
Draws/other extensions of credit | 4 | | 2 | | — | | 6 | |
Balance, end of period | $ | 298 | | 115 | | 109 | | 522 | |
Analysis of Net Loan Charge-offs
Net charge-offs were 41 bps and 21 bps of average portfolio loans and leases for the three months ended September 30, 2023 and 2022, respectively, and were 32 bps and 18 bps of average portfolio loans and leases for the nine months ended September 30, 2023 and 2022, respectively. Table 47 provides a summary of credit loss experience and net charge-offs as a percentage of average portfolio loans and leases outstanding by loan category.
The ratio of commercial loan and lease net charge-offs as a percent of average portfolio commercial loans and leases increased to 34 bps and 22 bps during the three and nine months ended September 30, 2023, respectively, compared to 17 bps and 14 bps during the same periods in the prior year primarily due to increases in net charge-offs on commercial and industrial loans of $31 million and $51 million for the three and nine months ended September 30, 2023, respectively.
The ratio of consumer loan net charge-offs as a percent of average portfolio consumer loans increased to 53 bps and 48 bps during the three and nine months ended September 30, 2023, respectively, compared to 28 bps and 26 bps during the same periods in the prior year primarily due to increases in net charge-offs on other consumer loans of $16 million and $45 million for the three and nine months ended September 30, 2023, respectively, and increases in net charge-offs on indirect secured consumer loans of $9 million and $25 million for the three and nine months ended September 30, 2023, respectively.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
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TABLE 47: Summary of Credit Loss Experience |
| For the three months ended September 30, | | For the nine months ended September 30, |
($ in millions) | 2023 | 2022 | | 2023 | 2022 |
Losses charged-off: | | | | | |
Commercial and industrial loans | $ | (70) | | (46) | | | (138) | | (91) | |
Commercial mortgage loans | — | | — | | | (1) | | — | |
Commercial construction loans | — | | — | | | (1) | | (3) | |
Commercial leases | — | | (1) | | | — | | (1) | |
Residential mortgage loans | (1) | | (1) | | | (3) | | (2) | |
Home equity | (2) | | (2) | | | (6) | | (7) | |
Indirect secured consumer loans | (27) | | (18) | | | (75) | | (48) | |
Credit card | (19) | | (15) | | | (59) | | (51) | |
Other consumer loans(a) | (39) | | (21) | | | (106) | | (56) | |
Total losses charged-off | $ | (158) | | (104) | | | (389) | | (259) | |
Recoveries of losses previously charged-off: | | | | | |
Commercial and industrial loans | $ | 5 | | 12 | | | 11 | | 15 | |
Commercial mortgage loans | — | | — | | | 1 | | 1 | |
Commercial construction loans | — | | 1 | | | — | | 1 | |
Commercial leases | 1 | | 2 | | | 1 | | 2 | |
Residential mortgage loans | 1 | | 2 | | | 3 | | 4 | |
Home equity | 2 | | 3 | | | 5 | | 9 | |
Indirect secured consumer loans | 8 | | 8 | | | 27 | | 25 | |
Credit card | 4 | | 3 | | | 13 | | 12 | |
Other consumer loans(a) | 13 | | 11 | | | 36 | | 31 | |
Total recoveries of losses previously charged-off | $ | 34 | | 42 | | | 97 | | 100 | |
Net losses charged-off: | | | | | |
Commercial and industrial loans | $ | (65) | | (34) | | | (127) | | (76) | |
Commercial mortgage loans | — | | — | | | — | | 1 | |
Commercial construction loans | — | | 1 | | | (1) | | (2) | |
Commercial leases | 1 | | 1 | | | 1 | | 1 | |
Residential mortgage loans | — | | 1 | | | — | | 2 | |
Home equity | — | | 1 | | | (1) | | 2 | |
Indirect secured consumer loans | (19) | | (10) | | | (48) | | (23) | |
Credit card | (15) | | (12) | | | (46) | | (39) | |
Other consumer loans | (26) | | (10) | | | (70) | | (25) | |
Total net losses charged-off | $ | (124) | | (62) | | | (292) | | (159) | |
Net losses charged-off as a percent of average portfolio loans and leases: | | | | | |
Commercial and industrial loans | 0.45 | % | 0.24 | | | 0.29 | | 0.18 | |
Commercial mortgage loans | — | | (0.01) | | | 0.01 | | (0.01) | |
Commercial construction loans | — | | (0.08) | | | 0.03 | | 0.05 | |
Commercial leases | (0.08) | | (0.12) | | | (0.05) | | (0.05) | |
Total commercial loans and leases | 0.34 | % | 0.17 | | | 0.22 | | 0.14 | |
Residential mortgage loans | — | | (0.02) | | | — | | (0.02) | |
Home equity | 0.03 | | (0.08) | | | 0.02 | | (0.07) | |
Indirect secured consumer loans | 0.47 | | 0.24 | | | 0.39 | | 0.18 | |
Credit card | 3.25 | | 2.69 | | | 3.43 | | 3.02 | |
Other consumer loans | 1.67 | | 1.10 | | | 1.58 | | 1.07 | |
Total consumer loans | 0.53 | % | 0.28 | | | 0.48 | | 0.26 | |
Total net losses charged-off as a percent of average portfolio loans and leases | 0.41 | % | 0.21 | | | 0.32 | | 0.18 | |
(a)The Bancorp recorded $8 and $26 in both losses charged off and recoveries of losses previously charged off related to customer defaults on point-of-sale consumer loans for which the Bancorp obtained recoveries under third-party credit enhancements for the three and nine months ended September 30, 2023, respectively, compared to $8 and $23 for the three and nine months ended September 30, 2022, respectively.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Allowance for Credit Losses
The allowance for credit losses is comprised of the ALLL and the reserve for unfunded commitments. As described in Note 3 of the Notes to Condensed Consolidated Financial Statements, the Bancorp maintains the ALLL to absorb the amount of credit losses that are expected to be incurred over the remaining contractual terms of the related loans and leases (as adjusted for prepayments). The Bancorp’s methodology for determining the ALLL includes an estimate of expected credit losses on a collective basis for groups of loans and leases with similar risk characteristics and specific allowances for loans and leases which are individually evaluated. For collectively evaluated loans and leases, the Bancorp uses quantitative models to forecast expected credit losses based on the probability of a loan or lease defaulting, the expected balance at the estimated date of default and the expected loss percentage given a default. The Bancorp’s expected credit loss models consider historical credit loss experience, current market and economic conditions, and forecasted changes in market and economic conditions if such forecasts are considered reasonable and supportable.
The Bancorp also considers qualitative factors in determining the ALLL. Qualitative adjustments are used to capture characteristics in the portfolio that impact expected credit losses which are not fully captured within the Bancorp’s expected credit loss models. These factors include adjustments for changes in policies or procedures in underwriting, monitoring or collections, lending and risk management personnel and results of internal audit and quality control reviews. In addition, the qualitative adjustment framework can be utilized to address specific idiosyncratic risks such as geopolitical events, natural disasters or changes in current economic conditions that are not reflected in the quantitative credit loss models, and their effects on regional borrowers and changes in product structures. Qualitative factors may also be used to address the impacts of unforeseen events on key inputs and assumptions within the Bancorp’s expected credit loss models, such as the reasonable and supportable forecast period, changes to historical loss information or changes to the reversion period or methodology.
In addition to the ALLL, the Bancorp maintains a reserve for unfunded commitments recorded in other liabilities in the Condensed Consolidated Balance Sheets. The methodology used to determine the adequacy of this reserve is similar to the Bancorp’s methodology for determining the ALLL. The provision for unfunded commitments is included in the provision for credit losses in the Condensed Consolidated Statements of Income.
For the commercial portfolio segment, the estimates for probability of default are primarily based on internal ratings assigned to each commercial borrower on a 13-point scale and historical observations of how those ratings migrate to a default over time in the context of macroeconomic conditions. For loans with available credit, the estimate of the expected balance at the time of default considers expected utilization rates, which are primarily based on macroeconomic conditions and the utilization history of similar borrowers under those economic conditions. The estimates for loss severity are primarily based on collateral type and coverage levels and the susceptibility of those characteristics to changes in macroeconomic conditions.
For collectively evaluated loans in the consumer and residential mortgage portfolio segments, the Bancorp’s expected credit loss models primarily utilize the borrower’s FICO score and delinquency history in combination with macroeconomic conditions when estimating the probability of default. The estimates for loss severity are primarily based on collateral type and coverage levels and the susceptibility of those characteristics to changes in macroeconomic conditions. The expected balance at the estimated date of default is also especially impactful in the expected credit loss models for portfolio classes which generally have longer terms (such as residential mortgage loans and home equity) and portfolio classes containing a high concentration of loans with revolving privileges (such as home equity). The estimate of the expected balance at the time of default considers expected prepayment and utilization rates where applicable, which are primarily based on macroeconomic conditions and the utilization history of similar borrowers under those economic conditions.
At both September 30, 2023 and December 31, 2022, the Bancorp used three forward-looking economic scenarios during the reasonable and supportable forecast period in its expected credit loss models to address the inherent imprecision in macroeconomic forecasting. Each of the three scenarios was developed by a third party that is subject to the Bancorp’s Third-Party Risk Management program including oversight by the Bancorp’s independent model risk management group. The scenarios included a most likely outcome (Baseline) and two less probable scenarios with one being more favorable than the Baseline and the other being less favorable. The more favorable alternative scenario (Upside) depicted a stronger near-term growth outlook while the less favorable outlook (Downside) depicted a moderate recession.
The Baseline scenario was developed such that the expectation is that the economy will perform better than the projection 50% of the time and worse than the projection 50% of the time. The Upside scenario was developed such that there is a 10% probability that the economy will perform better than the projection and a 90% probability that it will perform worse. The Downside scenario was developed such that there is a 90% probability that the economy will perform better than the projection and a 10% probability that it will perform worse.
September 30, 2023 ACL
The ACL as of September 30, 2023 was impacted by several factors, including decreases in specific reserves on individually evaluated commercial and industrial loans and lower period-end loan and lease balances, partially offset by deterioration in the economic forecast. As of September 30, 2023, the Bancorp’s economic scenarios included estimates of the expected impacts of the changes in economic conditions caused by inflationary and high interest rate pressures and the ongoing Russia-Ukraine conflict. At September 30, 2023, the Bancorp assigned an 80% probability weighting to the Baseline scenario and 10% to each of the Upside and Downside scenarios.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
The Baseline scenario assumed average annualized real GDP growth for 2023 at 2.0% with the forecast decreasing to 1.3% in 2024 and rebounding to 2.3% in 2025. The Baseline scenario also assumed an average unemployment rate of 3.6% for the remainder of 2023, increasing to an average of 4.0% for 2024 and an average of 4.2% in 2025. Relative to the target federal funds rate, the Baseline scenario assumed no further increases in 2023, with the target rate peaking at 5.3% in the third quarter of 2023. The Baseline scenario assumed an average federal funds rate of 5.1% in 2024, decreasing to 4.2% in 2025. Lastly, the Baseline scenario included a moderately cautious outlook for corporate profits, at an average percentage change from a year ago of (3.5%) for 2023, recovering to an average of 1.7% and 2.3% in 2024 and 2025, respectively. The Upside scenario assumed that, on an average annual basis, the change in real GDP would be 2.2% in 2023, increasing to 3.2% in 2024 and decreasing to an average of 2.5% in 2025. The Upside scenario also assumed an unemployment rate at an annual average of 3.5% and 3.1% in 2023 and 2024, respectively, slightly increasing back to 3.5% in 2025. In the Upside scenario, the forecast for the federal funds rate was generally consistent with the Baseline scenario. The Upside scenario also assumed a contraction in corporate profits to an average percentage change from a year ago of (3.2%) in 2023, recovering to an average of 4.1% in 2024, and continuing to increase to an average of 5.1% in 2025. The Downside scenario assumed that the U.S. economy falls into a recession in the fourth quarter of 2023. The Downside scenario assumed average annualized real GDP growth for 2023 at 1.8%, declining to an average of (1.7%) in 2024 and recovering to an average of 1.4% in 2025. The Downside scenario unemployment rate peaks at an average of 7.7% in the fourth quarter of 2024 and decreases to an average of 7.2% in 2025. In the Downside scenario, the forecast for the federal funds rate included a similar assumption as the Baseline scenario for 2023, followed by a decrease to an average target rate of 3.8% in 2024 and 1.4% in 2025. Lastly, the Downside scenario assumed a significant decrease in corporate profits at an average percentage change from a year ago of (7.0%) for 2023, further contracting at a rate of (20.0%) in 2024 and recovering to an average of 7.1% in 2025.
The Bancorp’s quantitative credit loss models are sensitive to changes in economic forecast assumptions over the reasonable and supportable forecast period. Applying a 100% probability weighting to the Downside scenario rather than using the probability-weighted three scenario approach would result in an increase in the quantitative ACL of approximately $2.4 billion. This sensitivity calculation only reflects the impact of changing the probability weighting of the scenarios in the quantitative credit loss models and excludes any additional considerations associated with the qualitative component of the ACL that might be warranted if probability weights were adjusted.
The following table provides a rollforward of the Bancorp’s ACL:
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TABLE 48: Changes in Allowance for Credit Losses | | | | | | | | |
| | | | For the three months ended September 30, | | For the nine months ended September 30, |
($ in millions) | | | | 2023 | 2022 | | 2023 | 2022 |
ALLL: | | | | | | | | |
Balance, beginning of period | | | | $ | 2,327 | | 2,014 | | | 2,194 | | 1,892 | |
Impact of adoption of ASU 2022-02(b) | | | | — | | — | | | (49) | | — | |
Losses charged-off(a) | | | | (158) | | (104) | | | (389) | | (259) | |
Recoveries of losses previously charged-off(a) | | | | 34 | | 42 | | | 97 | | 100 | |
Provision for loan and lease losses | | | | 137 | | 147 | | | 487 | | 366 | |
Balance, end of period | | | | $ | 2,340 | | 2,099 | | | 2,340 | | 2,099 | |
Reserve for unfunded commitments: | | | | | | | | |
Balance, beginning of period | | | | $ | 207 | | 188 | | | 216 | | 182 | |
(Benefit from) provision for the reserve for unfunded commitments | | | | (18) | | 11 | | | (27) | | 17 | |
Balance, end of period | | | | $ | 189 | | 199 | | | 189 | | 199 | |
(a)The Bancorp recorded $8 and $26 in both losses charged off and recoveries of losses previously charged off related to customer defaults on point-of-sale consumer loans for which the Bancorp obtained recoveries under third-party credit enhancements for the three and nine months ended September 30, 2023, respectively, compared to $8 and $23 for the three and nine months ended September 30, 2022, respectively.
(b)Refer to Note 3 of the Notes to Condensed Consolidated Financial Statements for further information.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
The following table provides an attribution of the Bancorp’s ALLL to portfolio loans and leases:
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TABLE 49: Attribution of Allowance for Loan and Lease Losses to Portfolio Loans and Leases |
As of ($ in millions) | September 30, 2023 | December 31, 2022 |
Attributed ALLL: | | |
Commercial and industrial loans | $ | 828 | | 776 | |
Commercial mortgage loans | 276 | | 246 | |
Commercial construction loans | 67 | | 90 | |
Commercial leases | 16 | | 15 | |
Residential mortgage loans | 155 | | 245 | |
Home equity | 109 | | 133 | |
Indirect secured consumer loans | 241 | | 187 | |
Credit card | 229 | | 254 | |
Other consumer loans | 419 | | 248 | |
Total ALLL | $ | 2,340 | | 2,194 | |
Portfolio loans and leases: | | |
Commercial and industrial loans | $ | 55,790 | | 57,232 | |
Commercial mortgage loans | 11,122 | | 11,020 | |
Commercial construction loans | 5,582 | | 5,433 | |
Commercial leases | 2,624 | | 2,704 | |
Residential mortgage loans(a) | 17,293 | | 17,628 | |
Home equity | 3,898 | | 4,039 | |
Indirect secured consumer loans | 15,434 | | 16,552 | |
Credit card | 1,817 | | 1,874 | |
Other consumer loans | 6,528 | | 4,998 | |
Total portfolio loans and leases | $ | 120,088 | | 121,480 | |
Attributed ALLL as a percent of respective portfolio loans and leases: | | |
Commercial and industrial loans | 1.48 | % | 1.36 | |
Commercial mortgage loans | 2.48 | | 2.23 | |
Commercial construction loans | 1.20 | | 1.66 | |
Commercial leases | 0.61 | | 0.55 | |
Residential mortgage loans | 0.90 | | 1.39 | |
Home equity | 2.80 | | 3.29 | |
Indirect secured consumer loans | 1.56 | | 1.13 | |
Credit card | 12.60 | | 13.55 | |
Other consumer loans | 6.42 | | 4.96 | |
Total ALLL as a percent of portfolio loans and leases | 1.95 | % | 1.81 | |
Total ACL as a percent of portfolio loans and leases | 2.11 | | 1.98 | |
(a)Includes residential mortgage loans measured at fair value of $113 at September 30, 2023 and $123 at December 31, 2022.
The Bancorp’s ALLL may vary significantly from period to period based on changes in economic conditions, economic forecasts and the composition and credit quality of the Bancorp’s loan and lease portfolio. For additional information on the Bancorp’s methodology for measuring the ALLL, refer to Note 3 of the Notes to Condensed Consolidated Financial Statements. For additional information on the Bancorp’s methodology for measuring the reserve for unfunded commitments, refer to Note 1 of the Notes to Consolidated Financial Statements included in the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2022.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
INTEREST RATE AND PRICE RISK MANAGEMENT
Interest rate risk is the risk to earnings or capital arising from movement of interest rates. This risk primarily impacts the Bancorp’s income categories through changes in interest income on earning assets and the cost of interest-bearing liabilities, and through fee items that are related to interest-sensitive activities such as mortgage origination and servicing income and through earnings credits earned on commercial deposits that offset commercial deposit fees. Price risk is the risk to earnings or capital arising from changes in the value of financial instruments and portfolios due to movements in interest rates, volatilities, foreign exchange rates, equity prices and commodity prices. Management considers interest rate risk a prominent market risk in terms of its potential impact on earnings. Interest rate risk may occur for any one or more of the following reasons:
•Assets and liabilities mature or reprice at different times;
•Short-term and long-term market interest rates change by different amounts; or
•The expected maturities of various assets or liabilities shorten or lengthen as interest rates change.
In addition to the direct impact of interest rate changes on NII and interest-sensitive fees, interest rates can impact earnings through their effect on loan and deposit demand, credit losses, mortgage origination volumes, the value of servicing rights and other sources of the Bancorp’s earnings. Changes in interest rates and other market factors can impact earnings through changes in the value of portfolios, if not appropriately hedged. Stability of the Bancorp’s net income is largely dependent upon the effective management of interest rate risk and to a lesser extent price risk. Management continually reviews the Bancorp’s on- and off-balance sheet composition, earnings flows, and hedging strategies and models interest rate risk and price risk exposures, and possible actions to manage these risks, given numerous possible future interest rate and market factor scenarios. A series of policy limits and key risk indicators are employed to ensure that risks are managed within the Bancorp’s risk tolerance for interest rate risk and price risk.
The Commercial Banking and Wealth and Asset Management lines of business manage price risk for capital markets sales and trading activities related to their respective businesses. The Consumer and Small Business Banking line of business manages price risk for the origination and sale of conforming residential mortgage loans to government agencies and government-sponsored enterprises. The Bancorp’s Treasury department manages interest rate risk and price risk for all other activities. Independent oversight is provided by ERM, and key risk indicators and Board-approved policy limits are used to ensure risks are managed within the Bancorp’s risk tolerance.
The Bancorp’s Market Risk Management Committee, which includes senior management representatives and reports to the Corporate Credit Committee (accountable to the ERMC), provides oversight and monitors price risk for the capital markets sales and trading activities. The Bancorp’s ALCO, which includes senior management representatives and is accountable to the ERMC, provides oversight and monitors interest rate and price risks for Mortgage and Treasury activities.
Net Interest Income Sensitivity
The Bancorp employs a variety of measurement techniques to identify and manage its interest rate risk, including the use of an NII simulation model to analyze the sensitivity of NII to changes in interest rates. The model is based on contractual and estimated cash flows and repricing characteristics for all of the Bancorp’s assets, liabilities and off-balance sheet exposures and incorporates market-based assumptions regarding the effect of changing interest rates on the prepayment rates of certain assets and attrition rates of certain liabilities. The model also includes senior management’s projections of the future volume and pricing of each of the product lines offered by the Bancorp as well as other pertinent assumptions. The NII simulation model does not represent a forecast of the Bancorp’s net interest income but is a tool utilized to assess the risk of the impact of changing market interest rates across a range of market interest rate environments. As a result, actual results will differ from simulated results for multiple reasons, which may include actual balance sheet composition differences, timing, magnitude and frequency of interest rate changes, deviations from projected customer behavioral assumptions as well as from changes in market conditions and management strategies.
As of September 30, 2023, the Bancorp’s interest rate risk exposure is governed by a risk framework that utilizes the change in NII over 12-month and 24-month horizons under parallel ramped increases and decreases in interest rates. Policy limits are utilized for scenarios assuming a 200 bps increase and a 200 bps decrease in interest rates over twelve months. The Bancorp routinely analyzes various potential and extreme scenarios, including parallel ramps and shocks as well as steepening and other non-parallel shifts in rates, to assess where risks to net interest income persist or develop as changes in the balance sheet and market rates evolve. Additionally, the Bancorp routinely evaluates its exposures to changes in the bases between interest rates.
In order to recognize the risk of noninterest-bearing demand deposit balance migration or attrition in a rising interest rate environment, the Bancorp’s NII sensitivity modeling assumes additional attrition of approximately $600 million of demand deposit balances over a period of 24 months for each 100 bps increase in short-term market interest rates. Similarly, the Bancorp’s NII sensitivity modeling incorporates approximately $600 million of incremental growth in noninterest-bearing deposit balances over 24 months for each 100 bps decrease in short-term market interest rates. The incremental balance attrition and growth are modeled to flow into and out of funding products that reprice in conjunction with short-term market rate changes.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Another important deposit modeling assumption is the amount by which interest-bearing deposit rates will increase or decrease when market interest rates increase or decrease. This deposit repricing sensitivity is known as the beta, and it represents the expected amount by which the Bancorp’s interest-bearing deposit rates will change for a given change in short-term market rates. The Bancorp utilizes dynamic deposit beta models to adjust assumed repricing sensitivity depending on market rate levels. The dynamic beta models were developed utilizing the Bancorp’s performance during prior interest rate cycles. Since the beginning of the current tightening cycle, the Bancorp’s actual cumulative interest-bearing deposit beta through September 30, 2023 was approximately 50% as repricing has been similar to what was experienced in prior interest rate cycles. Using the dynamic beta models, the Bancorp’s NII sensitivity modeling assumes weighted-average rising-rate interest-bearing deposit betas at the end of the ramped parallel scenarios of 78% for both a 100 bps and 200 bps increase in rates. In the event of rate cuts, this approach assumes a weighted-average falling-rate interest-bearing deposit beta at the end of the ramped parallel scenarios of 68% and 67% for a 100 bps and 200 bps decrease in rates, respectively. In falling rate scenarios, deposit rate floors are utilized to ensure modeled deposit rates will not become negative. NII simulation modeling assumes no lag between the timing of changes in market rates and the timing of deposit repricing despite such timing lags having occurred in prior rate cycles. In addition, modeled and forecasted deposit migration from low-beta deposit products to more rate-sensitive deposit products in the rising rate scenarios contribute additional beta of 10%-20%, resulting in an effective beta of 90+% in the Bancorp’s baseline NII sensitivity profile. Future actual performance will be dependent on market conditions, the level of competition for deposits and the magnitude of continued interest rate increases. The Bancorp provides sensitivity analysis in Tables 51 and 52 for key assumptions related to its deposit modeling, including beta and DDA balance performance.
The Bancorp continually evaluates the sensitivity of its interest rate risk measures to these important deposit modeling assumptions. The Bancorp also regularly monitors the sensitivity of other important modeling assumptions, such as loan and security prepayments and early withdrawals on fixed-rate customer liabilities.
The following table shows the Bancorp’s estimated NII sensitivity profile and ALCO policy limits as of:
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TABLE 50: Estimated NII Sensitivity Profile and ALCO Policy Limits |
| September 30, 2023 | | September 30, 2022 |
| % Change in NII (FTE) | | ALCO Policy Limit | | % Change in NII (FTE) | | ALCO Policy Limit |
Change in Interest Rates (bps) | 12 Months | 13-24 Months | | 12 Months | 13-24 Months | | 12 Months | 13-24 Months | | 12 Months | 13-24 Months |
+200 Ramp over 12 months | (3.27) | % | (4.73) | | | (4.00) | | (6.00) | | | (2.36) | | (2.13) | | | (4.00) | | (6.00) | |
+100 Ramp over 12 months | (1.62) | | (2.25) | | | N/A | N/A | | (1.66) | | (1.20) | | | N/A | N/A |
-100 Ramp over 12 months | 0.61 | | 0.27 | | | N/A | N/A | | N/A | N/A | | N/A | N/A |
-200 Ramp over 12 months | 0.91 | | (0.18) | | | (8.00) | | (12.00) | | | (3.53) | | (9.79) | | | (8.00) | | (12.00) | |
Table 50 presents the change in estimated net interest income for 12 month and 13-24 month horizons for alternative interest rate scenarios relative to the net interest income projection for a static rate scenario for those same time horizons. As previously mentioned, these numbers do not represent a forecast, but are instead risk measures that are monitored to evaluate the consolidated interest rate risk position of the Bancorp. At September 30, 2023, the Bancorp’s NII sensitivity in the rising-rate scenarios is negative in years one and two as interest expense is expected to increase more than interest income due to deposit repricing and balance migration estimates given the high interest rate environment. The Bancorp’s NII simulation projects an increase in NII in year one and a decrease in NII in year two under the parallel 200 bps ramp decrease in interest rates. The NII increase in year one is driven by deposits repricing faster than earning assets. However, in year two, some deposits have reached their floors but assets continue to reprice down generating less NII. The changes in the estimated NII sensitivity profile compared to September 30, 2022 were primarily attributable to higher market interest rates driving higher expected betas combined with deposit mix to higher beta products.
Tables 51 and 52 provide the sensitivity of the Bancorp’s estimated NII profile at September 30, 2023 to changes to certain deposit balance and deposit repricing sensitivity (beta) assumptions.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
The following table includes the Bancorp’s estimated NII sensitivity profile with an immediate $1 billion decrease and an immediate $1 billion increase in demand deposit balances as of September 30, 2023:
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TABLE 51: Estimated NII Sensitivity Profile at September 30, 2023 with a $1 Billion Change in Demand Deposit Assumption |
| % Change in NII (FTE) |
| Immediate $1 Billion Balance Decrease | | Immediate $1 Billion Balance Increase |
Change in Interest Rates (bps) | 12 Months | 13-24 Months | | 12 Months | 13-24 Months |
+200 Ramp over 12 months | (4.38) | % | (5.86) | | | (2.16) | | (3.61) | |
+100 Ramp over 12 months | (2.64) | | (3.22) | | | (0.60) | | (1.28) | |
-100 Ramp over 12 months | (0.22) | | (0.40) | | | 1.45 | | 0.94 | |
-200 Ramp over 12 months | 0.17 | | (0.70) | | | 1.65 | | 0.34 | |
The following table includes the Bancorp’s estimated NII sensitivity profile with a 10% increase and a 10% decrease to the corresponding deposit beta assumptions as of September 30, 2023:
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TABLE 52: Estimated NII Sensitivity Profile at September 30, 2023 with Deposit Beta Assumptions Changes |
| % Change in NII (FTE) |
| Betas 10% Higher(a) | | Betas 10% Lower(a) |
Change in Interest Rates (bps) | 12 Months | 13-24 Months | | 12 Months | 13-24 Months |
+200 Ramp over 12 months | (4.33) | % | (6.70) | | | (1.74) | | (1.95) | |
+100 Ramp over 12 months | (2.15) | | (3.22) | | | (0.85) | | (0.87) | |
-100 Ramp over 12 months | 1.10 | | 1.15 | | | (0.04) | | (0.90) | |
-200 Ramp over 12 months | 1.88 | | 1.55 | | | (0.38) | | (2.47) | |
(a)Applies a +/- 10% multiple on assumed betas.
Economic Value of Equity Sensitivity
The Bancorp also uses EVE as a measurement tool to govern and manage its interest rate risk exposure. Policy limits are utilized for scenarios assuming an instantaneous 200 bps increase and a 200 bps decrease in interest rates. Whereas the NII sensitivity analysis highlights the impact on forecasted NII on an FTE basis (non-GAAP) over one- and two-year time horizons, EVE is a point-in-time analysis of the economic sensitivity of current balance sheet and off-balance sheet positions that incorporates all cash flows over their estimated remaining lives. The EVE of the balance sheet is defined as the discounted present value of all asset and net derivative cash flows less the discounted value of all liability cash flows. Due to this longer horizon, the sensitivity of EVE to changes in the level of interest rates is a measure of longer-term interest rate risk. EVE values only the current balance sheet and does not incorporate any assumptions related to continued production or renewal activities used in the NII sensitivity analysis. As with the NII simulation model, assumptions about the timing and variability of existing balance sheet cash flows are critical in the EVE analysis. Particularly important are assumptions driving loan and security prepayments and the expected balance attrition and pricing of indeterminate-lived deposits.
The following table shows the Bancorp’s estimated EVE sensitivity profile as of:
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TABLE 53: Estimated EVE Sensitivity Profile |
| September 30, 2023 | September 30, 2022 |
Change in Interest Rates (bps) | % Change in EVE | ALCO Policy Limit | % Change in EVE | ALCO Policy Limit |
+200 Shock | (5.92) | % | | (12.00) | | (7.97) | | (12.00) | |
+100 Shock | (2.39) | | | N/A | (3.75) | | N/A |
-100 Shock | 1.88 | | | N/A | N/A | N/A |
-200 Shock | 2.21 | | | (12.00) | | 0.58 | | (12.00) | |
The EVE sensitivity is negative in a +200 bps rising-rate scenario and positive in a -200 bps falling-rate scenario at September 30, 2023. The changes in the estimated EVE sensitivity profile from September 30, 2022 were primarily related to higher dynamic betas due to the increase in market interest rates which was largely offset by the shortening of the investment portfolio duration and increased levels of cash and other short-term investments.
While an instantaneous shift in spot interest rates is used in this analysis to provide an estimate of exposure, the Bancorp believes that a gradual shift in interest rates would have a more modest impact. Since EVE measures the discounted present value of cash flows over the estimated lives of instruments, the change in EVE does not directly correlate to the degree that earnings would be impacted over a shorter
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
time horizon (e.g., the current fiscal year). Further, EVE does not account for factors such as future balance sheet growth, changes in product mix, changes in yield curve relationships and changing product spreads that could mitigate or exacerbate the impact of changes in interest rates. The NII simulations and EVE analyses do not necessarily include certain actions that management may undertake to manage risk in response to actual changes in interest rates.
The Bancorp regularly evaluates its exposures to a static balance sheet forecast, basis risks relative to the Prime Rate and various SOFR terms, yield curve twist risks and embedded options risks. In addition, the impacts on NII on an FTE basis and EVE of extreme changes in interest rates are modeled, wherein the Bancorp employs the use of yield curve shocks and environment-specific scenarios.
Use of Derivatives to Manage Interest Rate Risk
An integral component of the Bancorp’s interest rate risk management strategy is its use of derivative instruments to minimize significant fluctuations in earnings caused by changes in market interest rates. Examples of derivative instruments that the Bancorp may use as part of its interest rate risk management strategy include interest rate swaps, interest rate floors, interest rate caps, forward contracts, forward starting interest rate swaps, options, swaptions and TBA securities.
Tables 54 and 55 show all swap and floor positions that are utilized for purposes of managing the Bancorp’s exposures to the variability of interest rates. These positions are used to convert the contractual interest rate index of agreed-upon amounts of assets and liabilities (i.e., notional amounts) to another interest rate index, to hedge the exposure to changes in fair value of a recognized asset attributable to changes in the benchmark interest rate or to hedge forecasted transactions for the variability in cash flows attributable to the contractually specified interest rate. The volume, maturity and mix of portfolio swaps change frequently as the Bancorp adjusts its broader interest rate risk management objectives and the balance sheet positions to be hedged. For further information, refer to Note 14 of the Notes to Condensed Consolidated Financial Statements.
The following tables present additional information about the interest rate swaps and floors used in Fifth Third’s asset and liability management activities:
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TABLE 54: Weighted-Average Maturity, Receive Rate and Pay Rate on Qualifying Hedging Instruments |
As of September 30, 2023 ($ in millions) | Notional Amount | Fair Value | Remaining (years) | Fixed Rate | Index |
Interest rate swaps related to C&I loans – cash flow – receive-fixed | $ | 8,000 | | (5) | | 1.2 | | 3.06 | % | SOFR |
Interest rate swaps related to C&I loans – cash flow – receive-fixed – forward starting(a) | 10,000 | | (2) | | 7.7 | | 3.06 | | SOFR |
Interest rate swaps related to commercial mortgage and commercial construction loans – cash flow – receive-fixed | 4,000 | | 2 | | 1.3 | | 0.99 | | SOFR |
Interest rate swaps related to commercial mortgage and commercial construction loans – cash flow – receive-fixed – forward starting(a) | 4,000 | | (2) | | 8.3 | | 2.25 | | SOFR |
Interest rate swaps related to long-term debt – fair value – receive-fixed | 5,955 | | (63) | | 5.1 | | 5.18 | | SOFR |
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Total interest rate swaps | $ | 31,955 | | (70) | | | | |
Interest rate floors related to C&I loans – cash flow – receive-fixed | $ | 3,000 | | — | | 1.2 | | 2.25 | | SOFR |
(a)Forward starting swaps will become effective on various dates between October 2023 and February 2025.
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TABLE 55: Weighted-Average Maturity, Receive Rate and Pay Rate on Qualifying Hedging Instruments |
As of December 31, 2022 ($ in millions) | Notional Amount | Fair Value | Remaining (years) | Fixed Rate | Index |
Interest rate swaps related to C&I loans – cash flow – receive-fixed | $ | 8,000 | | (76) | | 1.0 | | 3.02 | % | 1 ML |
Interest rate swaps related to C&I loans – cash flow – receive-fixed – forward starting(a) | 11,000 | | 22 | | 8.3 | | 3.05 | | 1 ML |
Interest rate swaps related to commercial mortgage and commercial construction loans – cash flow – receive-fixed | 4,000 | | (25) | | 2.1 | | 0.99 | | 1 ML |
Interest rate swaps related to commercial mortgage and commercial construction loans – cash flow – receive-fixed – forward starting(a) | 4,000 | | 5 | | 9.1 | 3.50 | | 1 ML |
Interest rate swaps related to long-term debt – fair value – receive-fixed | 5,955 | | (69) | | 5.9 | 5.18 | | 1 ML / 3 ML / SOFR |
Total interest rate swaps | $ | 32,955 | | (143) | | | | |
Interest rate floors related to C&I loans – cash flow – receive-fixed | $ | 3,000 | | 4 | | 2.0 | | 2.25 | | 1 ML |
(a)Forward starting swaps will become effective on various dates between February 2023 and February 2025.
Additionally, as part of its overall risk management strategy relative to its residential mortgage banking activities, the Bancorp enters into forward contracts accounted for as free-standing derivatives to economically hedge IRLCs that are also considered free-standing derivatives.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
The Bancorp economically hedges its exposure to residential mortgage loans held for sale through the use of forward contracts and mortgage options as well. Refer to the Residential Mortgage Servicing Rights and Price Risk section for the discussion of the use of derivatives to economically hedge this exposure.
The Bancorp also enters into derivative contracts with major financial institutions to economically hedge market risks assumed in interest rate derivative contracts with commercial customers. Generally, these contracts have similar terms in order to protect the Bancorp from market volatility. Credit risk arises from the possible inability of the counterparties to meet the terms of their contracts, which the Bancorp minimizes through collateral arrangements, approvals, limits and monitoring procedures. The Bancorp has risk limits and internal controls in place to help ensure excessive risk is not being taken in providing this service to customers. These controls include an independent determination of interest rate volatility and potential future exposure on these contracts and counterparty credit approvals performed by independent risk management. For further information, including the notional amount and fair values of these derivatives, refer to Note 14 of the Notes to Condensed Consolidated Financial Statements.
Residential Mortgage Servicing Rights and Price Risk
The fair value of the residential MSR portfolio was $1.8 billion and $1.7 billion at September 30, 2023 and December 31, 2022, respectively. The value of servicing rights can fluctuate sharply depending on changes in interest rates and other factors. Generally, as interest rates decline and loans are prepaid to take advantage of refinancing, the total value of existing servicing rights declines because no further servicing fees are collected on repaid loans. For further information on the significant drivers and components of the valuation adjustments on MSRs, refer to the Noninterest Income subsection of the Statements of Income Analysis section of MD&A. The Bancorp maintains a non-qualifying hedging strategy relative to its mortgage banking activity in order to manage a portion of the risk associated with changes in the value of its MSR portfolio as a result of changing interest rates. The Bancorp may adjust its hedging strategy to reflect its assessment of the composition of its MSR portfolio, the cost of hedging and the anticipated effectiveness of the hedges given the economic environment. Refer to Note 13 of the Notes to Condensed Consolidated Financial Statements for more information on servicing rights and the instruments used to hedge price risk on MSRs.
Foreign Currency Risk
The Bancorp may enter into foreign exchange derivative contracts to economically hedge certain foreign denominated loans. The derivatives are classified as free-standing instruments with the revaluation gain or loss being recorded in other noninterest income in the Condensed Consolidated Statements of Income. The balance of the Bancorp’s foreign denominated loans at September 30, 2023 and December 31, 2022 was $1.2 billion and $1.0 billion, respectively. The Bancorp also enters into foreign exchange contracts for the benefit of commercial customers to hedge their exposure to foreign currency fluctuations. Similar to the hedging of price risk from interest rate derivative contracts entered into with commercial customers, the Bancorp also enters into foreign exchange contracts with major financial institutions to economically hedge a substantial portion of the exposure from client driven foreign exchange activity. The Bancorp has risk limits and internal controls in place to help ensure excessive risk is not being taken in providing this service to customers. These controls include an independent determination of currency volatility and potential future exposure on these contracts, counterparty credit approvals and country limits performed by independent risk management.
Commodity Risk
The Bancorp also enters into commodity contracts for the benefit of commercial customers to hedge their exposure to commodity price fluctuations. Similar to the hedging of foreign exchange and price risk from interest rate derivative contracts, the Bancorp also enters into commodity contracts with major financial institutions to economically hedge a substantial portion of the exposure from client driven commodity activity. The Bancorp may also offset this risk with exchange-traded commodity contracts. The Bancorp has risk limits and internal controls in place to help ensure excessive risk is not taken in providing this service to customers. These controls include an independent determination of commodity volatility and potential future exposure on these contracts and counterparty credit approvals performed by independent risk management.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
LIQUIDITY RISK MANAGEMENT
The goal of liquidity management is to provide adequate funds to meet changes in loan and lease demand, unexpected levels of deposit withdrawals and other contractual obligations. Mitigating liquidity risk is accomplished by maintaining liquid assets in the form of cash and investment securities, maintaining sufficient unused borrowing capacity in the debt markets and delivering consistent growth in core deposits. A summary of certain obligations and commitments to make future payments under contracts is included in Note 18 of the Notes to Condensed Consolidated Financial Statements.
The Bancorp’s Treasury department manages funding and liquidity based on point-in-time metrics as well as forward-looking projections, which incorporate different sources and uses of funds under base and stress scenarios. Liquidity risk is monitored and managed by the Treasury department with independent oversight provided by ERM, and a series of Policy Limits and Key Risk Indicators are established to ensure risks are managed within the Bancorp’s risk tolerance. The Bancorp maintains a contingency funding plan that provides for liquidity stress testing, which assesses the liquidity needs under varying market conditions, time horizons, asset growth rates and other events. The contingency plan provides for ongoing monitoring of unused borrowing capacity and available sources of contingent liquidity to prepare for unexpected liquidity needs and to cover unanticipated events that could affect liquidity. The contingency plan also outlines the Bancorp’s response to various levels of liquidity stress and actions that should be taken during various scenarios.
Liquidity risk is monitored and managed for both Fifth Third Bancorp and its subsidiaries. The Bancorp (parent company) receives substantially all of its liquidity from dividends from its subsidiaries, primarily Fifth Third Bank, National Association. Subsidiary dividends are supplemented with term debt to enable the Bancorp to maintain sufficient liquidity to meet its cash obligations, including debt service and scheduled maturities, common and preferred dividends, unfunded commitments to subsidiaries and other planned capital actions in the form of share repurchases. Liquidity resources are more limited at the Bancorp, making its liquidity position more susceptible to market disruptions. Bancorp liquidity is assessed using a cash coverage horizon, ensuring the entity maintains sufficient liquidity to withstand a period of sustained market disruption while meeting its anticipated obligations over an extended stressed horizon.
The Bancorp’s ALCO, which includes senior management representatives and is accountable to the ERMC, monitors and manages liquidity and funding risk within Board-approved policy limits. In addition to the risk management activities of ALCO, the Bancorp has a liquidity risk management function as part of ERM that provides independent oversight of liquidity risk management.
Sources of Funds
The Bancorp’s primary sources of funds include revenue from noninterest income as well as cash flows from loan and lease repayments, payments from securities related to sales and maturities, the sale or securitization of loans and leases and funds generated by core deposits, in addition to the use of public and private debt offerings.
Of the $47.9 billion of securities in the Bancorp’s available-for-sale debt and other securities portfolio at September 30, 2023, $4.2 billion in principal and interest is expected to be received in the next 12 months and an additional $7.4 billion is expected to be received in the next 13 to 24 months. For further information on the Bancorp’s securities portfolio, refer to the Investment Securities subsection of the Balance Sheet Analysis section of MD&A.
Asset-driven liquidity is provided by the Bancorp’s ability to pledge, sell or securitize loans and leases. In order to reduce the exposure to interest rate fluctuations and to manage liquidity, the Bancorp has developed securitization and sale procedures for several types of interest-sensitive assets. A majority of the long-term, fixed-rate single-family residential mortgage loans underwritten according to FHLMC or FNMA guidelines are sold for cash upon origination. Additional assets such as certain other residential mortgage loans, certain commercial loans and leases, home equity loans, automobile loans and other consumer loans (including point-of-sale solar energy installation loans) are also capable of being securitized or sold. For the three and nine months ended September 30, 2023, the Bancorp sold or securitized loans and leases totaling $3.3 billion and $5.9 billion, respectively, compared to $4.0 billion and $10.6 billion during the three and nine months ended September 30, 2022, respectively. For further information, refer to Note 13 of the Notes to Condensed Consolidated Financial Statements.
Core deposits have historically provided the Bancorp with a sizeable source of relatively stable and low-cost funds. The Bancorp’s average core deposits and average shareholders’ equity funded 85% of its average total assets for both the three and nine months ended September 30, 2023 compared to 85% and 88% for the three and nine months ended September 30, 2022, respectively. In addition to core deposit funding, the Bancorp also accesses a variety of other short-term and long-term funding sources, which include the use of the FHLB system. Management does not rely on any one source of liquidity and manages availability in response to changing balance sheet needs.
In June of 2023, the Board of Directors authorized $10.0 billion of debt or other securities for issuance, of which $8.75 billion of debt or other securities were available for issuance as of September 30, 2023. The Bancorp is authorized to file any necessary registration statements with the SEC to permit ready access to the public securities markets; however, access to these markets may depend on market conditions. The Bancorp issued and sold fixed-rate/floating-rate senior notes of $1.25 billion in July of 2023 as further discussed in Note 16 of the Notes to Condensed Consolidated Financial Statements.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
As of September 30, 2023, the Bank’s global bank note program had a borrowing capacity of $25.0 billion, of which $20.9 billion was available for issuance. Additionally, at September 30, 2023, the Bank had approximately $59.6 billion of borrowing capacity available through secured borrowing sources, including the FRB (through the Bank Term Funding Program and the Discount Window) and the FHLB.
In a securitization transaction that occurred in August of 2023, the Bancorp transferred $1.74 billion in aggregate automobile loans to a bankruptcy remote trust which subsequently issued approximately $1.58 billion of asset-backed notes, of which approximately $79 million were retained by the Bancorp, resulting in approximately $1.5 billion of outstanding notes included in long-term debt in the Condensed Consolidated Balance Sheets as of September 30, 2023. The third-party holders of the asset-backed notes do not have recourse to the general assets of the Bancorp. Refer to Note 12 and Note 16 of the Notes to Condensed Consolidated Financial Statements for additional information.
Current Liquidity Position
The Bancorp maintains a strong liquidity profile driven by strong core deposit funding and over $100 billion in current available liquidity. Refer to the Deposits subsection of the Balance Sheet Analysis section of MD&A for more information regarding the Bancorp’s deposit portfolio characteristics. The Bancorp is managing liquidity prudently in the current environment and maintains a liquidity profile focused on core deposit and stable long-term funding sources, while supplementing with a variety of secured and unsecured wholesale funding sources across the maturity spectrum, which allows for the effective management of concentration and rollover risk. The Bancorp’s investment portfolio remains highly concentrated in liquid and readily marketable instruments and is a significant source of secured borrowing capacity. As part of its liquidity management activities, the Bancorp maintains collateral at its secured funding providers to ensure immediate availability of funding. Additionally, the Bancorp executes periodic test trades to assess the operational processes associated with its secured funding sources, including the Discount Window and the Bank Term Funding Program.
As of September 30, 2023, the Bancorp (parent company) has sufficient liquidity to meet contractual obligations and all preferred and common dividends without accessing the capital markets or receiving upstream dividends from the Bank subsidiary for 29 months.
Credit Ratings
The cost and availability of financing to the Bancorp and Bank are impacted by its credit ratings. A downgrade to the Bancorp’s or Bank’s credit ratings could affect its ability to access the credit markets and increase its borrowing costs, thereby adversely impacting the Bancorp’s or Bank’s financial condition and liquidity. Key factors in maintaining high credit ratings include a stable and diverse earnings stream, strong credit quality, strong capital ratios and diverse funding sources, in addition to disciplined liquidity monitoring procedures.
The Bancorp’s and Bank’s credit ratings are summarized in Table 56. The ratings reflect the ratings agency’s view on the Bancorp’s and Bank’s capacity to meet financial commitments.*
*As an investor, you should be aware that a security rating is not a recommendation to buy, sell or hold securities, that it may be subject to revision or withdrawal at any time by the assigning rating organization and that each rating should be evaluated independently of any other rating. Additional information on the credit rating ranking within the overall classification system is located on the website of each credit rating agency.
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TABLE 56: Agency Ratings |
As of November 7, 2023 | Moody’s | Standard and Poor’s | Fitch | DBRS Morningstar |
Fifth Third Bancorp: | | | | |
Short-term borrowings | No rating | A-2 | F1 | R-1L |
Senior debt | Baa1 | BBB+ | A- | A |
Subordinated debt | Baa1 | BBB | BBB+ | AL |
Fifth Third Bank, National Association: | | | | |
Short-term borrowings | P-2 | A-2 | F1 | R-1M |
Short-term deposit | P-1 | No rating | F1 | No rating |
Long-term deposit | A1 | No rating | A | AH |
Senior debt | A3 | A- | A- | AH |
Subordinated debt | A3 | BBB+ | BBB+ | A |
Rating Agency Outlook for Fifth Third Bancorp and Fifth Third Bank, National Association | Negative | Stable | Stable | Stable |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
CAPITAL MANAGEMENT
Management regularly reviews the Bancorp’s capital levels to help ensure it is appropriately positioned under various operating environments. The Bancorp has established a Capital Committee which is responsible for making capital plan recommendations to management. These recommendations are reviewed by the ERMC and the annual capital plan is approved by the Board of Directors. The Capital Committee is responsible for execution and oversight of the capital actions of the capital plan.
Regulatory Capital Ratios
The Basel III Final Rule sets minimum regulatory capital ratios as well as defines the measure of “well-capitalized” for insured depository institutions.
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TABLE 57: Prescribed Capital Ratios |
| Minimum | Well-Capitalized |
CET1 capital: | | |
Fifth Third Bancorp | 4.50 | % | N/A |
Fifth Third Bank, National Association | 4.50 | | 6.50 | |
Tier 1 risk-based capital: | | |
Fifth Third Bancorp | 6.00 | | 6.00 | |
Fifth Third Bank, National Association | 6.00 | | 8.00 | |
Total risk-based capital: | | |
Fifth Third Bancorp | 8.00 | | 10.00 | |
Fifth Third Bank, National Association | 8.00 | | 10.00 | |
Leverage: | | |
Fifth Third Bancorp | 4.00 | | N/A |
Fifth Third Bank, National Association | 4.00 | | 5.00 | |
The Bancorp is subject to the stress capital buffer requirement and must maintain capital ratios above its buffered minimum (regulatory minimum plus stress capital buffer) in order to avoid certain limitations on capital distributions and discretionary bonuses to executive officers. The FRB uses the supervisory stress test to determine the Bancorp’s stress capital buffer, subject to a floor of 2.5%. The Bancorp’s stress capital buffer requirement has been 2.5% since the introduction of this framework and was most recently affirmed as part of Fifth Third’s 2023 Capital Plan submission with an effective date of October 1, 2023. The Bancorp’s capital ratios have exceeded the stress capital buffer requirement for all periods presented.
The Bancorp adopted ASU 2016-13 on January 1, 2020 and elected the five-year transition phase-in option for the impact of CECL on regulatory capital with its regulatory filings as of March 31, 2020. The Bancorp’s modified CECL transition amount became subject to the phase-out provisions of the final rule on January 1, 2022, and will be fully phased-out by January 1, 2025. The impact of the modified CECL transition amount on the Bancorp’s regulatory capital at September 30, 2023 was an increase in capital of approximately $249 million. On a fully phased-in basis, the Bancorp’s CET1 capital ratio would be reduced by 13 bps as of September 30, 2023.
On July 27, 2023, the U.S. banking agencies released a notice of proposed rulemaking to revise the Basel III Capital Rules, which would replace its existing risk-based capital framework for large banks with a new framework that implements international capital standards. The proposed rulemaking would increase capital requirements applicable to banking organizations with total assets of $100 billion or more, including Fifth Third, and would align the calculation of regulatory capital and the calculation of risk-weighted assets across large banking organizations. As proposed, the rules would be effective for the Bancorp on July 1, 2025 and phased in over a three-year transition period. The Bancorp is in the process of evaluating this proposed rulemaking and assessing its potential impact.
On August 29, 2023, the U.S. banking agencies issued a notice of proposed rulemaking to require that certain banking organizations with $100 billion or more in consolidated assets, including Fifth Third, comply with certain long-term debt requirements at the holding company and insured depository institution levels. These proposed requirements are intended to absorb losses in the event of the failure of a banking organization. As proposed, the rules would be phased in over a three-year period after their effective date. The Bancorp is in the process of evaluating this proposed rulemaking and assessing its potential impact.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
The following table summarizes the Bancorp’s capital ratios as of:
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TABLE 58: Capital Ratios |
($ in millions) | September 30, 2023 | December 31, 2022 |
Quarterly average total Bancorp shareholders’ equity as a percent of average assets | 8.30 | % | 8.18 | |
Tangible equity as a percent of tangible assets(a)(b) | 8.46 | | 8.31 | |
Tangible common equity as a percent of tangible assets(a)(b) | 7.49 | | 7.30 | |
Regulatory capital:(c) | | |
CET1 capital | $ | 16,510 | | 15,670 | |
Tier 1 capital | 18,626 | | 17,786 | |
Total regulatory capital | 22,111 | | 21,606 | |
Risk-weighted assets | 168,433 | | 168,909 | |
Regulatory capital ratios:(c) | | |
CET1 capital | 9.80 | % | 9.28 | |
Tier 1 risk-based capital | 11.06 | | 10.53 | |
Total risk-based capital | 13.13 | | 12.79 | |
Leverage | 8.85 | | 8.56 | |
(a)These are non-GAAP measures. For further information, refer to the Non-GAAP Financial Measures section of MD&A.
(b)Excludes AOCI.
(c)Regulatory capital ratios as of both September 30, 2023 and December 31, 2022 are calculated pursuant to the five-year transition provision option to phase in the effects of CECL on regulatory capital.
Capital Planning
In 2011, the FRB adopted the capital plan rule, which requires BHCs with consolidated assets of $50 billion or more to submit annual capital plans to the FRB for review. Under the rule, these capital plans must include detailed descriptions of the following: the BHC’s internal processes for assessing capital adequacy; the policies governing capital actions such as common stock issuances, dividends and share repurchases; and all planned capital actions over a nine-quarter planning horizon. Furthermore, each BHC must report to the FRB the results of stress tests conducted by the BHC under a number of scenarios that assess the sources and uses of capital under baseline and stressed economic conditions.
Under the Enhanced Prudential Standards tailoring rules, the Bancorp is subject to Category IV standards, under which the Bancorp is no longer required to file semi-annual, company-run stress tests with the FRB and publicly disclose the results. However, the Bancorp is required to develop and maintain a capital plan approved by the Board of Directors on an annual basis. As an institution subject to Category IV standards, the Bancorp is subject to the FRB’s supervisory stress tests every two years, the Board capital plan rule and certain FR Y-14 reporting requirements. The supervisory stress tests are forward-looking quantitative evaluations of the impact of stressful economic and financial market conditions on the Bancorp’s capital. The Bancorp became subject to Category IV standards on December 31, 2019, and the requirements outlined above apply to the stress test cycle that started on January 1, 2020. The Bancorp was not subject to the 2023 supervisory stress test conducted by the FRB, but submitted the Board-approved capital plan and information contained in Schedule C - Regulatory Capital Instruments as required by the April 5, 2023 deadline.
The Bancorp maintains a comprehensive process for managing capital that considers the current and forward-looking macroeconomic and regulatory environments and makes capital distributions that are consistent with the requirements in the FRB’s capital plan rule, inclusive of the Bancorp’s stress capital buffer requirement.
Dividend Policy and Stock Repurchase Program
The Bancorp’s common stock dividend policy and stock repurchase program reflect its earnings outlook, desired payout ratios, the need to maintain adequate capital levels, the ability of its subsidiaries to pay dividends and the need to comply with safe and sound banking practices as well as meet regulatory requirements and expectations. The Bancorp declared dividends per common share of $0.35 and $0.33 for the three months ended September 30, 2023 and 2022, respectively, and $1.01 and $0.93 for the nine months ended September 30, 2023 and 2022, respectively. Pursuant to the Bancorp’s Board-approved capital plan, during the first quarter of 2023, the Bancorp entered into and settled an accelerated share repurchase transaction in the amount of $200 million. Refer to Note 17 of the Notes to Condensed Consolidated Financial Statements for additional information on share repurchase activity. The Bancorp did not enter into an ASR transaction during the third quarter of 2023. The Bancorp does not currently expect to repurchase any common stock, except pursuant to employee compensation plans, during the fourth quarter of 2023.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
The following table summarizes the monthly share repurchase activity for the three months ended September 30, 2023:
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TABLE 59: Share Repurchases | | | | | |
Period | Total Number of Shares Purchased(a) | Average Price Paid per Share | | Total Number of Shares Purchased as a Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased under the Plans or Programs(b) |
July 1 - July 31, 2023 | 17,204 | $ | 26.71 | | | — | 32,115,811 |
August 1 - August 31, 2023 | 55,538 | 28.03 | | | — | 32,115,811 |
September 1 - September 30, 2023 | 1,401 | 26.88 | | | — | 32,115,811 |
Total | 74,143 | $ | 27.70 | | | — | 32,115,811 |
(a) Shares repurchased during the periods presented were in connection with various employee compensation plans. These purchases do not count against the maximum number of shares that may yet be purchased under the Board of Directors’ authorization.
(b) On June 18, 2019, the Bancorp announced that its Board of Directors had authorized management to purchase 100 million shares of the Bancorp’s common stock through the open market or in any private party transactions. This authorization did not include specific targets or an expiration date.
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Quantitative and Qualitative Disclosures about Market Risk (Item 3) |
Information presented in the Interest Rate and Price Risk Management section of Management’s Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference. This information contains certain statements that the Bancorp believes are forward-looking statements. Refer to page 1 for cautionary information regarding forward-looking statements.
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Controls and Procedures (Item 4) |
The Bancorp conducted an evaluation, under the supervision and with the participation of the Bancorp’s management, including the Bancorp’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Bancorp’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on the foregoing, as of the end of the period covered by this report, the Bancorp’s Chief Executive Officer and Chief Financial Officer concluded that the Bancorp’s disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports the Bancorp files and submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported as and when required and information is accumulated and communicated to the Bancorp’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
The Bancorp’s management also conducted an evaluation of internal control over financial reporting to determine whether any changes occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Bancorp’s internal control over financial reporting. Based on this evaluation there has been no such change during the period covered by this report.
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Fifth Third Bancorp and Subsidiaries Condensed Consolidated Financial Statements and Notes (Item 1) |
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) | | |
| As of |
| September 30, | December 31, |
($ in millions, except share data) | 2023 | 2022 |
Assets | | |
Cash and due from banks | $ | 2,837 | | 3,466 | |
Other short-term investments(a) | 18,923 | | 8,351 | |
Available-for-sale debt and other securities(b) | 47,893 | | 51,503 | |
Held-to-maturity securities(c) | 2 | | 5 | |
Trading debt securities | 1,222 | | 414 | |
Equity securities | 250 | | 317 | |
Loans and leases held for sale(d) | 614 | | 1,007 | |
Portfolio loans and leases(a)(e) | 120,088 | | 121,480 | |
Allowance for loan and lease losses(a) | (2,340) | | (2,194) | |
Portfolio loans and leases, net | 117,748 | | 119,286 | |
Bank premises and equipment(f) | 2,303 | | 2,187 | |
Operating lease equipment | 480 | | 627 | |
Goodwill | 4,919 | | 4,915 | |
Intangible assets | 136 | | 169 | |
Servicing rights | 1,822 | | 1,746 | |
Other assets(a) | 13,818 | | 13,459 | |
Total Assets | $ | 212,967 | | 207,452 | |
Liabilities | | |
Deposits: | | |
Noninterest-bearing deposits | $ | 43,844 | | 53,125 | |
Interest-bearing deposits | 123,828 | | 110,565 | |
Total deposits | 167,672 | | 163,690 | |
Federal funds purchased | 205 | | 180 | |
Other short-term borrowings | 4,594 | | 4,838 | |
Accrued taxes, interest and expenses | 1,834 | | 1,822 | |
Other liabilities(a) | 5,808 | | 5,881 | |
Long-term debt(a) | 16,310 | | 13,714 | |
Total Liabilities | $ | 196,423 | | 190,125 | |
Equity | | |
Common stock(g) | $ | 2,051 | | 2,051 | |
Preferred stock(h) | 2,116 | | 2,116 | |
Capital surplus | 3,733 | | 3,684 | |
Retained earnings | 22,747 | | 21,689 | |
Accumulated other comprehensive loss | (6,839) | | (5,110) | |
Treasury stock(g) | (7,264) | | (7,103) | |
Total Equity | $ | 16,544 | | 17,327 | |
Total Liabilities and Equity | $ | 212,967 | | 207,452 | |
(a)Includes $59 and $17 of other short-term investments, $1,728 and $185 of portfolio loans and leases, $(27) and $(2) of ALLL, $11 and $2 of other assets, $15 and $9 of other liabilities, and $1,553 and $118 of long-term debt from consolidated VIEs that are included in their respective captions above at September 30, 2023 and December 31, 2022, respectively. For further information, refer to Note 12.
(b)Amortized cost of $55,557 and $57,530 at September 30, 2023 and December 31, 2022, respectively.
(c)Fair value of $2 and $5 at September 30, 2023 and December 31, 2022, respectively.
(d)Includes $497 and $600 of residential mortgage loans held for sale measured at fair value at September 30, 2023 and December 31, 2022, respectively.
(e)Includes $113 and $123 of residential mortgage loans measured at fair value at September 30, 2023 and December 31, 2022, respectively.
(f)Includes $22 and $24 of bank premises and equipment held for sale at September 30, 2023 and December 31, 2022, respectively.
(g)Common shares: Stated value $2.22 per share; authorized 2,000,000,000; outstanding at September 30, 2023 – 680,989,701 (excludes 242,902,880 treasury shares), December 31, 2022 – 683,385,880 (excludes 240,506,701 treasury shares).
(h)500,000 shares of no par value preferred stock were authorized at both September 30, 2023 and December 31, 2022. There were 422,000 unissued shares of undesignated no par value preferred stock at both September 30, 2023 and December 31, 2022. Each issued share of no par value preferred stock has a liquidation preference of $25,000. 500,000 shares of no par value Class B preferred stock were authorized at both September 30, 2023 and December 31, 2022. There were 300,000 unissued shares of undesignated no par value Class B preferred stock at both September 30, 2023 and December 31, 2022. Each issued share of no par value Class B preferred stock has a liquidation preference of $1,000.
Refer to the Notes to Condensed Consolidated Financial Statements.
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Fifth Third Bancorp and Subsidiaries Condensed Consolidated Financial Statements and Notes (continued) | | |
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited) | | |
| For the three months ended September 30, | For the nine months ended September 30, |
($ in millions, except share data) | 2023 | 2022 | 2023 | 2022 |
Interest Income | | | | |
Interest and fees on loans and leases | $ | 1,899 | | 1,315 | | 5,445 | | 3,377 | |
Interest on securities | 444 | | 414 | | 1,320 | | 1,077 | |
Interest on other short-term investments | 186 | | 31 | | 348 | | 58 | |
Total interest income | 2,529 | | 1,760 | | 7,113 | | 4,512 | |
Interest Expense | | | | |
Interest on deposits | 844 | | 112 | | 1,977 | | 147 | |
Interest on federal funds purchased | 2 | | 3 | | 13 | | 4 | |
Interest on other short-term borrowings | 52 | | 43 | | 198 | | 56 | |
Interest on long-term debt | 193 | | 104 | | 514 | | 273 | |
Total interest expense | 1,091 | | 262 | | 2,702 | | 480 | |
Net Interest Income | 1,438 | | 1,498 | | 4,411 | | 4,032 | |
Provision for credit losses | 119 | | 158 | | 460 | | 383 | |
Net Interest Income After Provision for Credit Losses | 1,319 | | 1,340 | | 3,951 | | 3,649 | |
Noninterest Income | | | | |
Commercial banking revenue | 154 | | 134 | | 461 | | 406 | |
Wealth and asset management revenue | 145 | | 141 | | 434 | | 430 | |
Service charges on deposits | 149 | | 143 | | 431 | | 449 | |
Card and processing revenue | 104 | | 105 | | 310 | | 306 | |
Mortgage banking net revenue | 57 | | 69 | | 184 | | 152 | |
Leasing business revenue | 58 | | 60 | | 162 | | 179 | |
Other noninterest income | 55 | | 59 | | 152 | | 195 | |
Securities gains (losses), net | (7) | | (38) | | 3 | | (84) | |
Securities losses, net – non-qualifying hedges on mortgage servicing rights | — | | (1) | | — | | (2) | |
Total noninterest income | 715 | | 672 | | 2,137 | | 2,031 | |
Noninterest Expense | | | | |
Compensation and benefits | 629 | | 605 | | 2,036 | | 1,900 | |
Technology and communications | 115 | | 106 | | 347 | | 306 | |
Net occupancy expense | 84 | | 74 | | 248 | | 225 | |
Equipment expense | 37 | | 36 | | 110 | | 108 | |
Marketing expense | 35 | | 35 | | 96 | | 87 | |
Leasing business expense | 29 | | 33 | | 94 | | 95 | |
Card and processing expense | 21 | | 21 | | 63 | | 59 | |
Other noninterest expense | 238 | | 257 | | 756 | | 721 | |
Total noninterest expense | 1,188 | | 1,167 | | 3,750 | | 3,501 | |
Income Before Income Taxes | 846 | | 845 | | 2,338 | | 2,179 | |
Applicable income tax expense | 186 | | 192 | | 519 | | 470 | |
Net Income | 660 | | 653 | | 1,819 | | 1,709 | |
Dividends on preferred stock | 37 | | 22 | | 100 | | 78 | |
Net Income Available to Common Shareholders | $ | 623 | | 631 | | 1,719 | | 1,631 | |
Earnings per share - basic | $ | 0.91 | | 0.91 | | 2.51 | | 2.37 | |
Earnings per share - diluted | $ | 0.91 | | 0.91 | | 2.50 | | 2.34 | |
Average common shares outstanding - basic | 684,224,277 | | 689,278,078 | | 684,090,872 | | 688,617,910 | |
Average common shares outstanding - diluted | 687,059,147 | | 694,592,855 | | 687,661,319 | | 695,207,279 | |
Refer to the Notes to Condensed Consolidated Financial Statements.
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Fifth Third Bancorp and Subsidiaries Condensed Consolidated Financial Statements and Notes (continued) | | |
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited) | | |
| For the three months ended September 30, | For the nine months ended September 30, |
($ in millions) | 2023 | 2022 | 2023 | 2022 |
Net Income | $ | 660 | | 653 | | 1,819 | | 1,709 | |
Other Comprehensive (Loss) Income, Net of Tax: | | | | |
Net unrealized losses on available-for-sale debt securities: | | | | |
Unrealized holding losses arising during period | (1,218) | | (2,129) | | (1,252) | | (5,564) | |
Reclassification adjustment for net losses (gains) included in net income | — | | — | | 1 | | (2) | |
Net unrealized losses on cash flow hedge derivatives: | | | | |
Unrealized holding losses arising during period | (527) | | (530) | | (664) | | (840) | |
Reclassification adjustment for net losses (gains) included in net income | 72 | | (3) | | 185 | | (109) | |
Defined benefit pension plans, net: | | | | |
Net actuarial loss arising during the year | — | | (1) | | — | | (2) | |
Reclassification of amounts to net periodic benefit costs | — | | 1 | | 1 | | 4 | |
Other comprehensive loss, net of tax | (1,673) | | (2,662) | | (1,729) | | (6,513) | |
Comprehensive Income (Loss) | $ | (1,013) | | (2,009) | | 90 | | (4,804) | |
Refer to the Notes to Condensed Consolidated Financial Statements.
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Fifth Third Bancorp and Subsidiaries Condensed Consolidated Financial Statements and Notes (continued) |
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (unaudited) |
($ in millions, except per share data) | Common Stock | Preferred Stock | Capital Surplus | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total Equity |
Balance at June 30, 2022 | $ | 2,051 | | 2,116 | | 3,636 | | 20,818 | | (2,644) | | (7,007) | | 18,970 | |
Net income | | | | 653 | | | | 653 | |
Other comprehensive loss, net of tax | | | | | (2,662) | | | (2,662) | |
Cash dividends declared: | | | | | | | |
Common stock ($0.33 per share) | | | | (230) | | | | (230) | |
Preferred stock: | | | | | | | |
| | | | | | | |
Series I ($414.06 per share) | | | | (8) | | | | (8) | |
Series J ($343.62 per share) | | | | (4) | | | | (4) | |
Series K ($309.38 per share) | | | | (3) | | | | (3) | |
Series L ($281.25 per share) | | | | (4) | | | | (4) | |
Class B, Series A ($15.00 per share) | | | | (3) | | | | (3) | |
| | | | | | | |
Impact of stock transactions under stock compensation plans, net | | | 24 | | | | 3 | | 27 | |
| | | | | | | |
Balance at September 30, 2022 | $ | 2,051 | | 2,116 | | 3,660 | | 21,219 | | (5,306) | | (7,004) | | 16,736 | |
| | | | | | |
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Balance at June 30, 2023 | $ | 2,051 | | 2,116 | | 3,708 | | 22,366 | | (5,166) | | (7,266) | | 17,809 | |
| | | | | | | |
| | | | | | | |
Net income | | | | 660 | | | | 660 | |
Other comprehensive loss, net of tax | | | | | (1,673) | | | (1,673) | |
Cash dividends declared: | | | | | | | |
Common stock ($0.35 per share) | | | | (242) | | | | (242) | |
Preferred stock: | | | | | | | |
Series H ($547.63 per share) | | | | (13) | | | | (13) | |
Series I ($414.06 per share) | | | | (7) | | | | (7) | |
Series J ($553.61 per share) | | | | (7) | | | | (7) | |
Series K ($309.38 per share) | | | | (3) | | | | (3) | |
Series L ($281.25 per share) | | | | (4) | | | | (4) | |
Class B, Series A ($15.00 per share) | | | | (3) | | | | (3) | |
| | | | | | | |
Impact of stock transactions under stock compensation plans, net | | | 25 | | | | 2 | | 27 | |
| | | | | | | |
Balance at September 30, 2023 | $ | 2,051 | | 2,116 | | 3,733 | | 22,747 | | (6,839) | | (7,264) | | 16,544 | |
Refer to the Notes to Condensed Consolidated Financial Statements.
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Fifth Third Bancorp and Subsidiaries Condensed Consolidated Financial Statements and Notes (continued) |
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (unaudited) |
($ in millions, except per share data) | Common Stock | Preferred Stock | Capital Surplus | Retained Earnings | Accumulated Other Comprehensive (Loss) Income | Treasury Stock | Total Equity |
Balance at December 31, 2021 | $ | 2,051 | | 2,116 | | 3,624 | | 20,236 | | 1,207 | | (7,024) | | 22,210 | |
Net income | | | | 1,709 | | | | 1,709 | |
Other comprehensive loss, net of tax | | | | | (6,513) | | | (6,513) | |
Cash dividends declared: | | | | | | | |
Common stock ($0.93 per share) | | | | (648) | | | | (648) | |
Preferred stock: | | | | | | | |
Series H ($637.50 per share) | | | | (15) | | | | (15) | |
Series I ($1,242.18 per share) | | | | (23) | | | | (23) | |
Series J ($814.49 per share) | | | | (10) | | | | (10) | |
Series K ($928.13 per share) | | | | (9) | | | | (9) | |
Series L ($843.75 per share) | | | | (12) | | | | (12) | |
Class B, Series A ($45.00 per share) | | | | (9) | | | | (9) | |
| | | | | | | |
Impact of stock transactions under stock compensation plans, net | | | 36 | | | | 20 | | 56 | |
| | | | | | | |
Balance at September 30, 2022 | $ | 2,051 | | 2,116 | | 3,660 | | 21,219 | | (5,306) | | (7,004) | | 16,736 | |
| | | | | | |
|
Balance at December 31, 2022 | $ | 2,051 | | 2,116 | | 3,684 | | 21,689 | | (5,110) | | (7,103) | | 17,327 | |
Impact of cumulative effect of change in accounting principle(a) | | | | 37 | | | | 37 | |
Balance at January 1, 2023 | $ | 2,051 | | 2,116 | | 3,684 | | 21,726 | | (5,110) | | (7,103) | | 17,364 | |
Net income | | | | 1,819 | | | | 1,819 | |
Other comprehensive loss, net of tax | | | | | (1,729) | | | (1,729) | |
Cash dividends declared: | | | | | | | |
Common stock ($1.01 per share) | | | | (698) | | | | (698) | |
Preferred stock: | | | | | | | |
Series H ($1,185.13 per share) | | | | (29) | | | | (29) | |
Series I ($1,242.18 per share) | | | | (22) | | | | (22) | |
Series J ($1,570.07 per share) | | | | (19) | | | | (19) | |
Series K ($928.13 per share) | | | | (9) | | | | (9) | |
Series L ($843.75 per share) | | | | (12) | | | | (12) | |
Class B, Series A ($45.00 per share) | | | | (9) | | | | (9) | |
Shares acquired for treasury | | | | | | (201) | | (201) | |
Impact of stock transactions under stock compensation plans, net | | | 49 | | | | 40 | | 89 | |
| | | | | | | |
Balance at September 30, 2023 | $ | 2,051 | | 2,116 | | 3,733 | | 22,747 | | (6,839) | | (7,264) | | 16,544 | |
(a)Related to the adoption of ASU 2022-02 as of January 1, 2023. Refer to Note 3 for additional information.
Refer to the Notes to Condensed Consolidated Financial Statements.
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Fifth Third Bancorp and Subsidiaries Condensed Consolidated Financial Statements and Notes (continued) |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) |
| For the nine months ended September 30, |
($ in millions) | 2023 | 2022 |
Operating Activities | | |
Net income | $ | 1,819 | | 1,709 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | |
Provision for credit losses | 460 | | 383 | |
Depreciation, amortization and accretion | 347 | | 324 | |
Stock-based compensation expense | 141 | | 137 | |
Benefit from deferred income taxes | (117) | | (19) | |
Securities (gains) losses, net | (6) | | 90 | |
MSR fair value adjustment | 6 | | (217) | |
Net gains on sales of loans and fair value adjustments on loans held for sale | (20) | | (77) | |
Net gains on disposition and impairment of bank premises and equipment and operating lease equipment | (4) | | (6) | |
Proceeds from sales of loans held for sale | 3,934 | | 10,328 | |
Loans originated or purchased for sale, net of repayments | (3,464) | | (8,380) | |
Dividends representing return on equity investments | 35 | | 32 | |
Net change in: | | |
Equity and trading debt securities | (129) | | 66 | |
Other assets | (577) | | 507 | |
Accrued taxes, interest and expenses and other liabilities | 12 | | (522) | |
Net Cash Provided by Operating Activities | 2,437 | | 4,355 | |
Investing Activities | | |
Proceeds from sales: | | |
AFS securities and other investments | 2,718 | | 4,242 | |
Loans and leases | 197 | | 155 | |
Bank premises and equipment | 3 | | 1 | |
Proceeds from repayments / maturities of AFS and HTM securities and other investments | 3,214 | | 3,770 | |
Purchases: | | |
AFS securities and other investments | (4,795) | | (28,521) | |
Bank premises and equipment | (365) | | (240) | |
MSRs | (25) | | (208) | |
Proceeds from settlement of BOLI | 12 | | 37 | |
Proceeds from sales and dividends representing return of equity investments | 64 | | 61 | |
Net cash received for divestitures | — | | 46 | |
Net cash paid on acquisitions | — | | (917) | |
Net change in: | | |
Other short-term investments | (10,572) | | 27,981 | |
Portfolio loans and leases | 829 | | (7,425) | |
Operating lease equipment | 65 | | (79) | |
Net Cash Used in Investing Activities | (8,655) | | (1,097) | |
Financing Activities | | |
Net change in deposits | 3,982 | | (8,033) | |
Net change in other short-term borrowings and federal funds purchased | (133) | | 5,329 | |
Dividends paid on common and preferred stock | (784) | | (700) | |
Proceeds from long-term debt issuances/advances | 4,283 | | 2,003 | |
Repayment of long-term debt | (1,507) | | (1,702) | |
Repurchases of treasury stock and related forward contract | (200) | | — | |
| | |
Other | (52) | | (81) | |
Net Cash Provided by (Used in) Financing Activities | 5,589 | | (3,184) | |
(Decrease) Increase in Cash and Due from Banks | (629) | | 74 | |
Cash and Due from Banks at Beginning of Period | 3,466 | | 2,994 | |
Cash and Due from Banks at End of Period | $ | 2,837 | | 3,068 | |
Refer to the Notes to Condensed Consolidated Financial Statements. Note 2 contains cash payments related to interest and income taxes in addition to non-cash investing and financing activities.
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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited) |
1. Basis of Presentation
The Condensed Consolidated Financial Statements include the accounts of the Bancorp and its majority-owned subsidiaries and VIEs in which the Bancorp has been determined to be the primary beneficiary. Other entities, including certain joint ventures in which the Bancorp has the ability to exercise significant influence over operating and financial policies of the investee, but upon which the Bancorp does not possess control, are accounted for by the equity method and not consolidated. The investments in those entities in which the Bancorp does not have the ability to exercise significant influence are generally carried at fair value unless the investment does not have a readily determinable fair value. The Bancorp accounts for equity investments without a readily determinable fair value using the measurement alternative to fair value, representing the cost of the investment minus any impairment recorded and plus or minus changes resulting from observable price changes in orderly transactions for an identical or a similar investment of the same issuer. Intercompany transactions and balances among consolidated entities have been eliminated.
In the opinion of management, the unaudited Condensed Consolidated Financial Statements include all adjustments, which consist of normal recurring accruals, necessary to present fairly the results for the periods presented. In accordance with U.S. GAAP and the rules and regulations of the SEC for interim financial information, these statements do not include certain information and footnote disclosures required for complete annual financial statements and it is suggested that these Condensed Consolidated Financial Statements be read in conjunction with the Bancorp’s Annual Report on Form 10-K. The results of operations, comprehensive income and changes in equity for the three and nine months ended September 30, 2023 and 2022 and the cash flows for the nine months ended September 30, 2023 and 2022 are not necessarily indicative of the results to be expected for the full year. Financial information as of December 31, 2022 has been derived from the Bancorp’s Annual Report on Form 10-K.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
2. Supplemental Cash Flow Information
Cash payments related to interest and income taxes in addition to non-cash investing and financing activities are presented in the following table for the nine months ended September 30:
| | | | | | | | |
($ in millions) | 2023 | 2022 |
Cash Payments: | | |
Interest | $ | 2,554 | | 487 | |
Income taxes | 496 | | 124 | |
| | |
Transfers: | | |
Portfolio loans and leases to loans and leases held for sale | $ | 281 | | 105 | |
Loans and leases held for sale to portfolio loans and leases | 5 | | 406 | |
Portfolio loans and leases to OREO | 9 | | 5 | |
| | |
Bank premises and equipment to OREO | 29 | | 22 | |
| | |
Supplemental Disclosures: | | |
Net additions to lease liabilities under operating leases | $ | 56 | | 102 | |
Net (reductions) additions to lease liabilities under finance leases | (6) | | 29 | |
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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited) |
3. Accounting and Reporting Developments
Standards Adopted in 2023
The Bancorp adopted the following new accounting standards during the nine months ended September 30, 2023:
ASU 2021-08 – Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers
In October 2021, the FASB issued ASU 2021-08, which provides guidance on the accounting for revenue contracts with customers which are acquired in a business combination. The amendments generally state that an acquirer accounts for an acquired revenue contract with a customer as if it had originated the contract. The amendments also provide certain practical expedients for acquirers when recognizing and measuring acquired contract assets and liabilities. The Bancorp adopted the amended guidance on January 1, 2023 on a prospective basis and will apply the amendments for business combinations occurring on or after the adoption date. The adoption of the amended guidance did not have a material impact on the Bancorp’s Condensed Consolidated Financial Statements.
ASU 2022-01 – Derivatives and Hedging (Topic 815): Fair Value Hedging-Portfolio Layer Method
In March 2022, the FASB issued ASU 2022-01, which clarifies the guidance in ASC 815 on fair value hedge accounting of interest rate risk for portfolios of financial assets and renames the last-of-layer method the portfolio layer method. Under previous guidance, the last-of-layer method enabled an entity to apply fair value hedging to a stated amount of a closed portfolio of prepayable financial assets without having to consider prepayment risk or credit risk when measuring those assets. ASU 2022-01 expands the scope of this guidance to allow entities to apply the portfolio layer method to portfolios of all financial assets, including both prepayable and nonprepayable financial assets. It allows entities to designate multiple layers within a single closed portfolio as individual hedged items. Further, ASU 2022-01 clarifies that the fair value basis adjustments should be adjusted at the portfolio level and should not be allocated to individual assets within the portfolio. The Bancorp adopted the amended guidance on January 1, 2023 on a prospective basis, except for the amendments related to fair value basis adjustments that, if applicable, were required to be applied on a modified retrospective basis. The adoption of the amended guidance did not have a material impact on the Bancorp’s Condensed Consolidated Financial Statements.
ASU 2022-02 – Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures
In March 2022, the FASB issued ASU 2022-02, which eliminates the accounting guidance on troubled debt restructurings for creditors in ASC 310-40, amends the guidance on calculating the allowance for credit losses for restructured financing receivables and requires entities to evaluate all receivable modifications under ASC 310-20 to determine whether a modification made to a borrower results in a new loan or the continuation of an existing loan. The amended guidance adds enhanced disclosures for creditors with respect to loan refinancings and restructurings for borrowers experiencing financial difficulty. The amended guidance also requires disclosure of current period gross charge-offs by year of origination within the vintage disclosures required by ASC 326. The Bancorp adopted the amended guidance on January 1, 2023 on a prospective basis, except for the amendments impacting the measurement of the ACL for TDRs and reasonably expected TDRs, which were adopted on a modified retrospective basis. Upon adoption, the Bancorp recorded a decrease to the ACL of $49 million and a cumulative-effect adjustment to retained earnings of $37 million, net of tax. This adjustment was primarily attributable to the removal of the requirement to use a discounted cash flow approach to measure the impact of certain concessions granted as part of a TDR and the removal of the requirement to consider the impacts of reasonably expected TDRs when estimating expected credit losses. The required disclosures are included in Note 6.
ASU 2022-04 – Liabilities-Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations
In September 2022, the FASB issued ASU 2022-04, which provides guidance on the disclosure requirements for supplier finance programs. The amendments require that a buyer in a supplier finance program disclose sufficient qualitative and quantitative information about the program to allow a user of financial statements to understand the program’s nature, activity during the period, changes from period to period, and potential magnitude. The Bancorp adopted the amended guidance on January 1, 2023 on a retrospective basis, except for the amendments related to disclosure of rollforward information, which are required to be adopted on January 1, 2024 on a prospective basis. The adoption of the amended guidance did not have a material impact on the Bancorp’s Condensed Consolidated Financial Statements.
Significant Accounting Standards Issued but Not Yet Adopted
The following significant accounting standards were issued but not yet adopted by the Bancorp as of September 30, 2023:
ASU 2022-03 – Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions
In June 2022, the FASB issued ASU 2022-03, which clarifies the guidance in ASC 820 on the fair value measurement of an equity security that is subject to contractual sale restrictions, stating that such restrictions are not considered part of the unit of account of the security and therefore are not considered in measuring fair value. The amended guidance also requires disclosure of the fair value of equity securities subject to contractual sale restrictions and certain additional information about those restrictions. The amended guidance is effective for the Bancorp on January 1, 2024, with early adoption permitted, and is to be applied prospectively.
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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited) |
ASU 2023-02 – Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method
In March 2023, the FASB issued ASU 2023-02, which expands the permitted usage of the proportional amortization method to include additional tax credit investment programs beyond qualifying LIHTC structures if certain conditions are met. The amended guidance permits entities to make elections to apply the proportional amortization method on a program-by-program basis for qualifying programs and also makes certain amendments to measurement and disclosure guidance. The amended disclosure guidance applies to all investments within programs where the proportional amortization method has been elected, including investments within those programs which do not meet the criteria to permit application of the proportional amortization method. The amended guidance is effective for the Bancorp on January 1, 2024, with early adoption permitted, and is to be applied on a modified retrospective or retrospective basis, except for certain provisions affecting the measurement of existing LIHTC investments which may be applied prospectively. The Bancorp plans to adopt the amended guidance on January 1, 2024 on a modified retrospective basis and does not expect the adoption of the proportional amortization method to have a material impact on its Condensed Consolidated Financial Statements.
Reference Rate Reform and LIBOR Transition
In March 2020, the FASB issued ASU 2020-04, which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments in the ASU apply only to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. In January 2021, the FASB issued ASU 2021-01, which clarified that the optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting also apply to derivatives that are affected by the discounting transition. The expedients and exceptions provided by the amendments did not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022 for which an entity had elected certain optional expedients. Subsequently, in December 2022, the FASB issued ASU 2022-06 which deferred the sunset date of Topic 848 from December 31, 2022 to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The amendments in ASU 2020-04 (as amended) are effective for the Bancorp as of March 12, 2020 and may be applied through December 31, 2024. The Bancorp has utilized the optional expedients and exceptions in accounting for certain eligible contract modifications, existing hedging relationships and new hedging relationships as part of its LIBOR transition activities.
In March 2022, the Adjustable Interest Rate (LIBOR) Act (the “LIBOR Act”) was signed into law. The LIBOR Act offers a federal solution for transitioning legacy instruments that lack sufficient provisions addressing LIBOR’s cessation by outlining a uniform process to govern the transition from LIBOR to a replacement rate. The FRB issued final regulations to carry out the terms of the LIBOR Act, which became effective on February 27, 2023. Under the LIBOR Act and the related regulations, three-month CME Term SOFR plus a tenor spread adjustment of 0.26161% was designated as the replacement reference rate for instruments that previously referenced three-month U.S. dollar LIBOR. As of September 30, 2023, substantially all contracts have transitioned to alternative reference rates, either under existing contract terms or under the provisions of the LIBOR Act. Additionally, all remaining LIBOR-based exposures, including derivative contracts, loans, preferred stock and long-term debt, will transition to appropriate alternative reference rates at the time of the next repricing event. Refer to Note 16 and Note 17 for additional information about certain exposures which were transitioned to an alternative reference rate.
Updates to Significant Accounting and Reporting Policies
In conjunction with the adoption of ASU 2022-02 on January 1, 2023, the Bancorp has updated its accounting and reporting policies for nonaccrual loans and leases, loan modifications and the ALLL as described below. Refer to Note 1 of the Notes to Consolidated Financial Statements in the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2022 for discussion of these accounting and reporting policies for periods prior to January 1, 2023.
Portfolio loans and leases - nonaccrual loans and leases
The Bancorp places loans and leases on nonaccrual status when full repayment of principal and interest is not expected, unless the loan or lease is well-secured and in the process of collection. When a loan is placed on nonaccrual status, the accrual of interest, amortization of loan premium, accretion of loan discount and amortization/accretion of deferred net direct loan origination fees or costs are discontinued and all previously accrued and unpaid interest is reversed against income. The Bancorp utilizes the following policies to determine when full repayment of principal and interest on a loan or lease is not expected:
•Commercial loans are placed on nonaccrual status when there is a clear indication that the borrower’s cash flows may not be sufficient to meet payments as they become due. Commercial loans where the principal or interest has been in default for a period of 90 days or more are generally maintained on nonaccrual status unless the loan is fully or partially guaranteed by a government agency or otherwise considered to be well-secured and in the process of collection.
•Residential mortgage loans are placed on nonaccrual status when principal and interest payments become past due 150 days or more, unless repayment of the loan is fully or partially guaranteed by a government agency. Residential mortgage loans may stay on nonaccrual status for an extended time as the foreclosure process typically lasts longer than 180 days. The Bancorp maintains a reserve for the portion of accrued interest receivable that it estimates will be uncollectible, at the portfolio level, for residential mortgage loans which are past due 90 days or more and on accrual status. This reserve is recorded as a component of other assets on the Bancorp’s Condensed Consolidated Balance Sheets, consistent with the classification of the related accrued interest receivable.
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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited) |
•Home equity loans and lines of credit are placed on nonaccrual status if principal or interest has been in default for 90 days or more. Home equity loans and lines of credit that have been in default for 60 days or more are also placed on nonaccrual status if the senior lien has been in default 120 days or more.
•Credit card loans that have been modified for a borrower experiencing financial difficulty are placed on nonaccrual status at the time of the modification. Subsequent to the modification, accounts are placed on nonaccrual status when required payments become past due 90 days or more in accordance with the modified terms.
•Indirect secured consumer loans and other consumer loans are generally placed on nonaccrual status when principal or interest becomes past due 90 days or more.
•Loans discharged in a Chapter 7 bankruptcy and not reaffirmed by the borrower are placed on nonaccrual status and considered collateral-dependent loans at the time of discharge, regardless of the borrower’s payment history or capacity to repay in the future.
Well-secured loans are collateralized by perfected security interests in real and/or personal property for which the Bancorp estimates proceeds from the sale would be sufficient to recover the outstanding principal and accrued interest balance of the loan and pay all costs to sell the collateral. The Bancorp considers a loan in the process of collection if collection efforts or legal action is proceeding and the Bancorp expects to collect funds sufficient to bring the loan current or recover the entire outstanding principal and accrued interest balance in the near future.
Nonaccrual loans and leases may be returned to accrual status when all delinquent principal and interest payments become current in accordance with the loan agreement and the remaining principal and interest payments are reasonably assured of repayment in accordance with the contractual terms of the loan agreement, or when the loan is both well-secured and in the process of collection. Nonaccrual loans that have been modified for a borrower experiencing financial difficulty may not be returned to accrual status unless such loans have sustained repayment performance of six months or more and are reasonably assured of repayment in accordance with the modified terms. Loans discharged in a Chapter 7 bankruptcy and not reaffirmed by the borrower may be returned to accrual status twelve months or more after discharge provided there is a sustained payment history after bankruptcy and collectability is reasonably assured for all remaining contractual payments.
Except for loans discharged in a Chapter 7 bankruptcy that are not reaffirmed by the borrower, accruing residential mortgage loans, home equity loans and lines of credit, indirect secured consumer loans and other consumer loans modified for borrowers experiencing financial difficulty are maintained on accrual status, provided there is reasonable assurance of repayment and of performance according to the modified terms based upon a current, well-documented credit evaluation. Accruing commercial loans modified for borrowers experiencing financial difficulty are maintained on accrual status provided there is a sustained payment history of six months or more prior to the modification and collectability is reasonably assured for all remaining contractual payments under the modified terms. Modifications of commercial loans and credit card loans for borrowers experiencing financial difficulty that do not have a sustained payment history of six months or more in accordance with their modified terms remain on nonaccrual status until a six-month payment history is sustained.
Nonaccrual loans and leases are generally accounted for on the cost recovery method due to the existence of doubt as to the collectability of the remaining amortized cost basis of nonaccrual assets. Under the cost recovery method, any payments received are applied to reduce principal. Once the entire amortized cost basis is collected, additional payments received are treated as recoveries of amounts previously charged-off until recovered in full, and any subsequent payments are treated as interest income. In certain circumstances when the remaining amortized cost basis of a nonaccrual loan or lease is deemed to be fully collectible, the Bancorp may utilize the cash basis method to account for interest payments received on a nonaccrual loan or lease. Under the cash basis method, interest income is recognized when cash is received, to the extent such income would have been accrued on the loan’s remaining balance at the contractual rate.
The Bancorp records a charge-off to the ALLL when all or a portion of a loan or lease is deemed to be uncollectible, after considering the net realizable value of any underlying collateral. Commercial loans and leases on nonaccrual status and criticized commercial loans with aggregate borrower relationships exceeding $1 million are subject to an individual review to identify charge-offs. The Bancorp does not have an established delinquency threshold for partially or fully charging off commercial loans and leases. The Bancorp records charge-offs on consumer loans in accordance with applicable regulatory guidelines, which are primarily based on a loan’s delinquency status.
Portfolio loans and leases - loan modifications
In circumstances where an existing loan is modified (including a restructuring, refinancing, or other changes in terms which affect the loan’s contractual cash flows), the Bancorp evaluates whether the modification results in a continuation of the existing loan or the origination of a new loan. The Bancorp accounts for a modification as a new loan if the terms of the modified loan are at least as favorable to the Bancorp as the terms for comparable loans to other borrowers with similar collection risks who are obtaining new loans, or if the modification of terms is considered more than minor. If neither of these conditions are met, then the Bancorp will account for the loan as a continuation of the existing loan. When a modification is accounted for as a new loan, any unamortized net deferred fees or costs from the original loan are recognized in interest income when the new loan is originated. When a modification is accounted for as a continuation of the existing loan, the unamortized net deferred fees or costs from the original loan and any additional incremental direct fees and costs are carried forward and deferred as part of the amortized cost basis of the modified loan.
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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited) |
ALLL
The Bancorp disaggregates its portfolio loans and leases into portfolio segments for purposes of determining the ALLL. The Bancorp’s portfolio segments include commercial, residential mortgage and consumer. The Bancorp further disaggregates its portfolio segments into classes for purposes of monitoring and assessing credit quality based on certain risk characteristics. Classes within the commercial portfolio segment include commercial and industrial, commercial mortgage owner-occupied, commercial mortgage nonowner-occupied, commercial construction and commercial leasing. The residential mortgage portfolio segment is also considered a class. Classes within the consumer portfolio segment include home equity, indirect secured consumer, credit card and other consumer loans.
The Bancorp maintains the ALLL to absorb the amount of credit losses that are expected to be incurred over the remaining contractual terms of the related loans and leases. Contractual terms are adjusted for expected prepayments but are not extended for expected extensions, renewals or modifications except in circumstances where extension or renewal options are embedded in the original contract and not unconditionally cancellable by the Bancorp. Accrued interest receivable on loans is presented in the Condensed Consolidated Financial Statements as a component of other assets. When accrued interest is deemed to be uncollectible (typically when a loan is placed on nonaccrual status), interest income is reversed. The Bancorp follows established policies for placing loans on nonaccrual status, so uncollectible accrued interest receivable is reversed in a timely manner. As a result, the Bancorp has elected not to measure a reserve for accrued interest receivable as part of its ALLL. However, the Bancorp does record a reserve for the portion of accrued interest receivable that it expects to be uncollectible.
Credit losses are charged and recoveries are credited to the ALLL. The ALLL is maintained at a level the Bancorp considers to be adequate and is based on ongoing quarterly assessments and evaluations of the collectability of loans and leases, including historical credit loss experience, current and forecasted market and economic conditions and consideration of various qualitative factors that, in management’s judgment, deserve consideration in estimating expected credit losses. Provisions for credit losses are recorded for the amounts necessary to adjust the ALLL to the Bancorp’s current estimate of expected credit losses on portfolio loans and leases.
The Bancorp’s methodology for determining the ALLL includes an estimate of expected credit losses on a collective basis for groups of loans and leases with similar risk characteristics and specific allowances for loans and leases which are individually evaluated.
Larger commercial loans and leases included within aggregate borrower relationship balances exceeding $1 million on nonaccrual status are individually evaluated for an ALLL. The Bancorp considers the current value of collateral, credit quality of any guarantees, the guarantor’s liquidity and willingness to cooperate, the loan or lease structure (including modifications, if any) and other factors when determining the amount of the ALLL. Other factors may include the borrower’s susceptibility to risks presented by the forecasted macroeconomic environment, the industry and geographic region of the borrower, size and financial condition of the borrower, cash flow and leverage of the borrower and the Bancorp’s evaluation of the borrower’s management. When loans and leases are individually evaluated, allowances are determined based on management’s estimate of the borrower’s ability to repay the loan or lease given the availability of collateral and other sources of cash flow, as well as an evaluation of legal options available to the Bancorp. Allowances for individually evaluated loans and leases that are collateral-dependent are measured based on the fair value of the underlying collateral, less expected costs to sell where applicable. Individually evaluated loans and leases that are not collateral-dependent are measured based on the observable market value of the loan or lease or the present value of expected cash flows, discounted at the loan’s effective interest rate. Specific allowances on individually evaluated commercial loans and leases are reviewed quarterly and adjusted as necessary based on changing borrower and/or collateral conditions and actual collection and charge-off experience.
The Bancorp considers loans to be collateral-dependent when it becomes probable that repayment of the loan will be provided through the sale or operation of the collateral instead of from payments made by the borrower. The expected credit losses for these loans are typically estimated based on the fair value of the underlying collateral, less expected costs to sell where applicable. Specific allowances on individually evaluated consumer and residential mortgage loans are reviewed quarterly and adjusted as necessary based on changing borrower and/or collateral conditions and actual collection and charge-off experience.
Expected credit losses are estimated on a collective basis for loans and leases that are not individually evaluated. For collectively evaluated loans and leases, the Bancorp uses models to forecast expected credit losses based on the probability of a loan or lease defaulting, the expected balance at the estimated date of default and the expected loss percentage given a default. The estimate of the expected balance at the time of default considers prepayments and, for loans with available credit, expected utilization rates. The Bancorp’s expected credit loss models were developed based on historical credit loss experience and observations of migration patterns for various credit risk characteristics (such as internal credit risk ratings, external credit ratings or scores, delinquency status, loan-to-value trends, etc.) over time, with those observations evaluated in the context of concurrent macroeconomic conditions. The Bancorp developed its models from historical observations capturing a full economic cycle when possible.
The Bancorp’s expected credit loss models consider historical credit loss experience, current market and economic conditions, and forecasted changes in market and economic conditions if such forecasts are considered reasonable and supportable. Generally, the Bancorp considers its forecasts to be reasonable and supportable for a period of up to three years from the estimation date. For periods beyond the reasonable and supportable forecast period, expected credit losses are estimated by reverting to historical loss information without adjustment for changes in
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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited) |
economic conditions. This reversion is phased in over a two-year period. The Bancorp evaluates the length of its reasonable and supportable forecast period, its reversion period and reversion methodology at least annually, or more often if warranted by economic conditions or other circumstances.
The Bancorp also considers qualitative factors in determining the ALLL. Qualitative factors are used to capture characteristics in the portfolio that impact expected credit losses but are not fully captured within the Bancorp’s expected credit loss models. These include adjustments for changes in policies or procedures in underwriting, monitoring or collections, lending and risk management personnel and results of internal audit and quality control reviews. These may also include adjustments, when deemed necessary, for specific idiosyncratic risks such as geopolitical events, natural disasters and their effects on regional borrowers, and changes in product structures. Qualitative factors may also be used to address the impacts of unforeseen events on key inputs and assumptions within the Bancorp’s expected credit loss models, such as the reasonable and supportable forecast period, changes to historical loss information or changes to the reversion period or methodology. When evaluating the adequacy of allowances, consideration is also given to regional geographic concentrations and the closely associated effect that changing economic conditions may have on the Bancorp’s customers.
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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited) |
4. Investment Securities
The following tables provide the amortized cost, unrealized gains and losses and fair value for the major categories of the available-for-sale debt and other securities and held-to-maturity securities portfolios as of:
| | | | | | | | | | | | | | |
September 30, 2023 ($ in millions) | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value |
Available-for-sale debt and other securities: | | | | |
U.S. Treasury and federal agencies securities | $ | 3,680 | | 1 | | (219) | | 3,462 | |
Obligations of states and political subdivisions securities | 2 | | — | | — | | 2 | |
Mortgage-backed securities: | | | | |
Agency residential mortgage-backed securities | 11,743 | | — | | (1,867) | | 9,876 | |
Agency commercial mortgage-backed securities | 29,055 | | — | | (4,594) | | 24,461 | |
Non-agency commercial mortgage-backed securities | 4,922 | | — | | (597) | | 4,325 | |
Asset-backed securities and other debt securities | 5,378 | | 3 | | (391) | | 4,990 | |
Other securities(a) | 777 | | — | | — | | 777 | |
Total available-for-sale debt and other securities | $ | 55,557 | | 4 | | (7,668) | | 47,893 | |
Held-to-maturity securities: | | | | |
Asset-backed securities and other debt securities | $ | 2 | | — | | — | | 2 | |
Total held-to-maturity securities | $ | 2 | | — | | — | | 2 | |
(a)Other securities consist of FHLB, FRB and DTCC restricted stock holdings of $281, $494 and $2, respectively, at September 30, 2023, that are carried at cost.
| | | | | | | | | | | | | | |
December 31, 2022 ($ in millions) | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value |
Available-for-sale debt and other securities: | | | | |
U.S. Treasury and federal agencies securities | $ | 2,683 | | — | | (188) | | 2,495 | |
Obligations of states and political subdivisions securities | 18 | | — | | — | | 18 | |
Mortgage-backed securities: | | | | |
Agency residential mortgage-backed securities | 12,604 | | 5 | | (1,372) | | 11,237 | |
Agency commercial mortgage-backed securities | 29,824 | | 11 | | (3,513) | | 26,322 | |
Non-agency commercial mortgage-backed securities | 5,235 | | — | | (520) | | 4,715 | |
Asset-backed securities and other debt securities | 6,292 | | 3 | | (453) | | 5,842 | |
Other securities(a) | 874 | | — | | — | | 874 | |
Total available-for-sale debt and other securities | $ | 57,530 | | 19 | | (6,046) | | 51,503 | |
Held-to-maturity securities: | | | | |
Obligations of states and political subdivisions securities | $ | 3 | | — | | — | | 3 | |
Asset-backed securities and other debt securities | 2 | | — | | — | | 2 | |
Total held-to-maturity securities | $ | 5 | | — | | — | | 5 | |
(a)Other securities consist of FHLB, FRB and DTCC restricted stock holdings of $381, $491 and $2, respectively, at December 31, 2022, that are carried at cost.
The following table provides the fair value of trading debt securities and equity securities as of:
| | | | | | | | |
($ in millions) | September 30, 2023 | December 31, 2022 |
Trading debt securities | $ | 1,222 | | 414 | |
Equity securities | 250 | | 317 | |
The amounts reported in the preceding tables exclude accrued interest receivable on investment securities of $150 million and $131 million at September 30, 2023 and December 31, 2022, respectively, which is presented as a component of other assets in the Condensed Consolidated Balance Sheets.
The Bancorp uses investment securities as a means of managing interest rate risk, providing collateral for pledging purposes and for liquidity risk management. As part of managing interest rate risk, the Bancorp acquires securities as a component of its MSR non-qualifying hedging strategy, with net gains or losses recorded in securities losses, net – non-qualifying hedges on mortgage servicing rights in the Condensed Consolidated Statements of Income.
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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited) |
The following table presents the components of net securities gains and losses recognized in the Condensed Consolidated Statements of Income, including those recognized related to the Bancorp’s non-qualifying hedging strategy for MSRs:
| | | | | | | | | | | | | | |
| For the three months ended September 30, | For the nine months ended September 30, |
($ in millions) | 2023 | 2022 | 2023 | 2022 |
Available-for-sale debt and other securities: | | | | |
Realized gains | $ | 1 | | 3 | | 34 | | 15 | |
Realized losses | — | | (3) | | (30) | | (12) | |
Impairment losses | (1) | | — | | (5) | | — | |
Net realized (losses) gains on available-for-sale debt and other securities | $ | — | | — | | (1) | | 3 | |
Trading debt securities: | | | | |
Net realized losses | — | | (1) | | — | | (2) | |
Net unrealized gains | — | | — | | 2 | | 11 | |
Net trading debt securities gains (losses) | $ | — | | (1) | | 2 | | 9 | |
Equity securities: | | | | |
Net realized gains | 2 | | 1 | | 3 | | 1 | |
Net unrealized losses | (9) | | (39) | | (1) | | (99) | |
Net equity securities gains (losses) | $ | (7) | | (38) | | 2 | | (98) | |
Total gains (losses) recognized in income from available-for-sale debt and other securities, trading debt securities and equity securities(a) | $ | (7) | | (39) | | 3 | | (86) | |
(a)Excludes $2 and $3 of net securities gains for the three and nine months ended September 30, 2023, respectively, and $1 and $4 of net securities losses for the three and nine months ended September 30, 2022, respectively, related to securities held by FTS to facilitate the timely execution of customer transactions. These gains and losses are included in commercial banking revenue and wealth and asset management revenue in the Condensed Consolidated Statements of Income.
The Bancorp recognized impairment losses on available-for-sale debt and other securities of $1 million and $5 million during the three and nine months ended September 30, 2023, respectively. These losses were included in securities gains (losses), net, in the Condensed Consolidated Statements of Income. These losses related to certain securities in unrealized loss positions where the Bancorp has determined that it no longer intends to hold the securities until the recovery of their amortized cost bases. The Bancorp did not recognize impairment losses on its available-for-sale debt and other securities for both the three and nine months ended September 30, 2022.
At both September 30, 2023 and December 31, 2022, the Bancorp completed its evaluation of the available-for-sale debt and other securities in an unrealized loss position and did not recognize an allowance for credit losses. The Bancorp did not recognize provision expense related to available-for-sale debt and other securities in an unrealized loss position during both the three and nine months ended September 30, 2023 and 2022.
At September 30, 2023 and December 31, 2022, investment securities with a fair value of $23.8 billion and $11.0 billion, respectively, were pledged to secure borrowing capacity, public deposits, trust funds, derivative contracts and for other purposes as required or permitted by law.
The expected maturity distribution of the Bancorp’s mortgage-backed securities and the contractual maturity distribution of the remainder of the Bancorp’s available-for-sale debt and other securities and held-to-maturity securities as of September 30, 2023 are shown in the following table:
| | | | | | | | | | | | | | |
($ in millions) | Available-for-Sale Debt and Other | Held-to-Maturity |
Amortized Cost | Fair Value | Amortized Cost | Fair Value |
Debt securities:(a) | | | | |
Due in 1 year or less | $ | 170 | | 166 | | — | | — | |
Due after 1 year through 5 years | 15,597 | | 14,333 | | — | | — | |
Due after 5 years through 10 years | 28,864 | | 24,235 | | — | | — | |
Due after 10 years | 10,149 | | 8,382 | | 2 | | 2 | |
Other securities | 777 | | 777 | | — | | — | |
Total | $ | 55,557 | | 47,893 | | 2 | | 2 | |
(a)Actual maturities may differ from contractual maturities when a right to call or prepay obligations exists with or without call or prepayment penalties.
| | |
Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited) |
The following table provides the fair value and gross unrealized losses on available-for-sale debt and other securities in an unrealized loss position, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position as of:
| | | | | | | | | | | | | | | | | | | | |
| Less than 12 months | 12 months or more | Total |
($ in millions) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses |
September 30, 2023 | | | | | | |
U.S. Treasury and federal agencies securities | $ | 735 | | (7) | | 2,077 | | (212) | | 2,812 | | (219) | |
| | | | | | |
Agency residential mortgage-backed securities | 154 | | (15) | | 9,721 | | (1,852) | | 9,875 | | (1,867) | |
Agency commercial mortgage-backed securities | 5,392 | | (787) | | 19,069 | | (3,807) | | 24,461 | | (4,594) | |
Non-agency commercial mortgage-backed securities | 134 | | (9) | | 4,134 | | (588) | | 4,268 | | (597) | |
Asset-backed securities and other debt securities | 367 | | (23) | | 4,219 | | (368) | | 4,586 | | (391) | |
Total | $ | 6,782 | | (841) | | 39,220 | | (6,827) | | 46,002 | | (7,668) | |
December 31, 2022 | | | | | | |
U.S. Treasury and federal agencies securities | $ | 2,400 | | (188) | | — | | — | | 2,400 | | (188) | |
Obligations of states and political subdivisions securities | — | | — | | 1 | | — | | 1 | | — | |
Agency residential mortgage-backed securities | 10,078 | | (1,170) | | 938 | | (202) | | 11,016 | | (1,372) | |
Agency commercial mortgage-backed securities | 22,083 | | (2,487) | | 3,697 | | (1,026) | | 25,780 | | (3,513) | |
Non-agency commercial mortgage-backed securities | 3,621 | | (272) | | 1,059 | | (248) | | 4,680 | | (520) | |
Asset-backed securities and other debt securities | 3,164 | | (178) | | 2,495 | | (275) | | 5,659 | | (453) | |
Total | $ | 41,346 | | (4,295) | | 8,190 | | (1,751) | | 49,536 | | (6,046) | |
At September 30, 2023 and December 31, 2022, $46 million and $42 million, respectively, of unrealized losses in the available-for-sale debt and other securities portfolio were related to non-rated securities.
| | |
Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited) |
5. Loans and Leases
The Bancorp diversifies its loan and lease portfolio by offering a variety of loan and lease products with various payment terms and rate structures. The Bancorp’s commercial loan and lease portfolio consists of lending to various industry types. Management periodically reviews the performance of its loan and lease products to evaluate whether they are performing within acceptable interest rate and credit risk levels and changes are made to underwriting policies and procedures as needed. The Bancorp maintains an allowance to absorb loan and lease losses that are expected to be incurred over the remaining contractual terms of the related loans and leases. For further information on credit quality and the ALLL, refer to Note 6.
The following table provides a summary of commercial loans and leases classified by primary purpose and consumer loans classified based upon product or collateral as of:
| | | | | | | | |
($ in millions) | September 30, 2023 | December 31, 2022 |
Loans and leases held for sale: | | |
Commercial and industrial loans | $ | 29 | | 73 | |
| | |
Commercial construction loans | 52 | | — | |
| | |
Residential mortgage loans | 533 | | 934 | |
Total loans and leases held for sale | $ | 614 | | 1,007 | |
Portfolio loans and leases: | | |
Commercial and industrial loans | $ | 55,790 | | 57,232 | |
Commercial mortgage loans | 11,122 | | 11,020 | |
Commercial construction loans | 5,582 | | 5,433 | |
Commercial leases | 2,624 | | 2,704 | |
Total commercial loans and leases | $ | 75,118 | | 76,389 | |
Residential mortgage loans | $ | 17,293 | | 17,628 | |
Home equity | 3,898 | | 4,039 | |
Indirect secured consumer loans | 15,434 | | 16,552 | |
Credit card | 1,817 | | 1,874 | |
Other consumer loans | 6,528 | | 4,998 | |
Total consumer loans | $ | 44,970 | | 45,091 | |
Total portfolio loans and leases | $ | 120,088 | | 121,480 | |
Portfolio loans and leases are recorded net of unearned income, which totaled $276 million and $238 million as of September 30, 2023 and December 31, 2022, respectively. Additionally, portfolio loans and leases are recorded net of unamortized premiums and discounts, deferred direct loan origination fees and costs and fair value adjustments (associated with acquired loans or loans designated as fair value upon origination) which totaled a net discount of $339 million and net premium of $146 million as of September 30, 2023 and December 31, 2022, respectively. The amortized cost basis of loans and leases excludes accrued interest receivable of $584 million and $518 million at September 30, 2023 and December 31, 2022, respectively, which is presented as a component of other assets in the Condensed Consolidated Balance Sheets.
The Bancorp’s FHLB and FRB borrowings are primarily secured by loans. The Bancorp had loans of $14.8 billion and $15.9 billion as of September 30, 2023 and December 31, 2022, respectively, pledged to the FHLB, and loans of $51.5 billion and $57.1 billion at September 30, 2023 and December 31, 2022, respectively, pledged to the FRB.
| | |
Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited) |
The following table presents a summary of the total loans and leases owned by the Bancorp as of:
| | | | | | | | | | | | | | |
| Carrying Value | 90 Days Past Due and Still Accruing(a) |
($ in millions) | September 30, 2023 | December 31, 2022 | September 30, 2023 | December 31, 2022 |
Commercial and industrial loans | $ | 55,819 | | 57,305 | | 3 | | 11 | |
Commercial mortgage loans | 11,122 | | 11,020 | | — | | — | |
Commercial construction loans | 5,634 | | 5,433 | | — | | — | |
Commercial leases | 2,624 | | 2,704 | | — | | 2 | |
Residential mortgage loans | 17,826 | | 18,562 | | 6 | | 7 | |
Home equity | 3,898 | | 4,039 | | — | | 1 | |
Indirect secured consumer loans | 15,434 | | 16,552 | | — | | — | |
Credit card | 1,817 | | 1,874 | | 20 | | 18 | |
Other consumer loans | 6,528 | | 4,998 | | — | | 1 | |
Total loans and leases | $ | 120,702 | | 122,487 | | 29 | | 40 | |
Less: Loans and leases held for sale | 614 | | 1,007 | | | |
Total portfolio loans and leases | $ | 120,088 | | 121,480 | | | |
(a)Excludes government guaranteed residential mortgage loans.
The following table presents a summary of net charge-offs (recoveries):
| | | | | | | | | | | | | | |
| For the three months ended September 30, | For the nine months ended September 30, |
($ in millions) | 2023 | 2022 | 2023 | 2022 |
Commercial and industrial loans | $ | 65 | | 34 | | 127 | | 76 | |
Commercial mortgage loans | — | | — | | — | | (1) | |
Commercial construction loans | — | | (1) | | 1 | | 2 | |
Commercial leases | (1) | | (1) | | (1) | | (1) | |
Residential mortgage loans | — | | (1) | | — | | (2) | |
Home equity | — | | (1) | | 1 | | (2) | |
Indirect secured consumer loans | 19 | | 10 | | 48 | | 23 | |
Credit card | 15 | | 12 | | 46 | | 39 | |
Other consumer loans | 26 | | 10 | | 70 | | 25 | |
Total net charge-offs | $ | 124 | | 62 | | 292 | | 159 | |
The following table presents the components of the net investment in portfolio leases as of:
| | | | | | | | |
($ in millions)(a) | September 30, 2023 | December 31, 2022 |
Net investment in direct financing leases: | | |
Lease payment receivable (present value) | $ | 591 | | 570 | |
Unguaranteed residual assets (present value) | 99 | | 107 | |
| | |
Net investment in sales-type leases: | | |
Lease payment receivable (present value) | 1,605 | | 1,704 | |
Unguaranteed residual assets (present value) | 81 | | 76 | |
(a)Excludes $248 and $247 of leveraged leases at September 30, 2023 and December 31, 2022, respectively.
Interest income recognized in the Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2023 was $7 million and $20 million, respectively, for direct financing leases and $16 million and $47 million, respectively, for sales-type leases. For the three and nine months ended September 30, 2022, interest income recognized was $7 million and $22 million, respectively, for direct financing leases and $13 million and $36 million, respectively, for sales-type leases.
| | |
Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited) |
The following table presents undiscounted cash flows for both direct financing and sales-type leases for the remainder of 2023 through 2028 and thereafter as well as a reconciliation of the undiscounted cash flows to the total lease receivables as follows:
| | | | | | | | |
As of September 30, 2023 ($ in millions) | Direct Financing Leases | Sales-Type Leases |
Remainder of 2023 | $ | 65 | | 130 | |
2024 | 170 | | 501 | |
2025 | 137 | | 438 | |
2026 | 116 | | 261 | |
2027 | 73 | | 199 | |
2028 | 32 | | 126 | |
Thereafter | 48 | | 96 | |
Total undiscounted cash flows | $ | 641 | | 1,751 | |
Less: Difference between undiscounted cash flows and discounted cash flows | 50 | | 146 | |
Present value of lease payments (recognized as lease receivables) | $ | 591 | | 1,605 | |
The lease residual value represents the present value of the estimated fair value of the leased equipment at the end of the lease. The Bancorp performs quarterly reviews of residual values associated with its leasing portfolio considering factors such as the subject equipment, structure of the transaction, industry, prior experience with the lessee and other factors that impact the residual value to assess for impairment. The Bancorp maintained an allowance of $16 million and $15 million at September 30, 2023 and December 31, 2022, respectively, to cover the losses that are expected to be incurred over the remaining contractual terms of the related leases, including the potential losses related to the lease residual value. Refer to Note 6 for additional information on credit quality and the ALLL.
| | |
Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited) |
6. Credit Quality and the Allowance for Loan and Lease Losses
The Bancorp disaggregates ALLL balances and transactions in the ALLL by portfolio segment. Credit quality related disclosures for loans and leases are further disaggregated by class.
Allowance for Loan and Lease Losses
The following tables summarize transactions in the ALLL by portfolio segment:
| | | | | | | | | | | | | | |
For the three months ended September 30, 2023 ($ in millions) | Commercial | Residential Mortgage | Consumer | Total |
Balance, beginning of period | $ | 1,199 | | 173 | | 955 | | 2,327 | |
| | | | |
Losses charged off(a) | (70) | | (1) | | (87) | | (158) | |
Recoveries of losses previously charged off(a) | 6 | | 1 | | 27 | | 34 | |
Provision for (benefit from) loan and lease losses | 52 | | (18) | | 103 | | 137 | |
Balance, end of period | $ | 1,187 | | 155 | | 998 | | 2,340 | |
(a)The Bancorp recorded $8 in both losses charged off and recoveries of losses previously charged off related to customer defaults on point-of-sale consumer loans for which the Bancorp obtained recoveries under third-party credit enhancements.
| | | | | | | | | | | | | | |
For the three months ended September 30, 2022 ($ in millions) |
Commercial | Residential Mortgage |
Consumer |
Total |
Balance, beginning of period | $ | 1,165 | | 248 | | 601 | | 2,014 | |
Losses charged off(a) | (47) | | (1) | | (56) | | (104) | |
Recoveries of losses previously charged off(a) | 15 | | 2 | | 25 | | 42 | |
Provision for loan and lease losses | 25 | | 5 | | 117 | | 147 | |
Balance, end of period | $ | 1,158 | | 254 | | 687 | | 2,099 | |
(a)The Bancorp recorded $8 in both losses charged off and recoveries of losses previously charged off related to customer defaults on point-of-sale consumer loans for which the Bancorp obtained recoveries under third-party credit enhancements.
| | | | | | | | | | | | | | |
For the nine months ended September 30, 2023 ($ in millions) | Commercial | Residential Mortgage | Consumer | Total |
Balance, beginning of period | $ | 1,127 | | 245 | | 822 | | 2,194 | |
Impact of adoption of ASU 2022-02 | 4 | | (36) | | (17) | | (49) | |
Losses charged off(a) | (140) | | (3) | | (246) | | (389) | |
Recoveries of losses previously charged off(a) | 13 | | 3 | | 81 | | 97 | |
Provision for (benefit from) loan and lease losses | 183 | | (54) | | 358 | | 487 | |
Balance, end of period | $ | 1,187 | | 155 | | 998 | | 2,340 | |
(a)The Bancorp recorded $26 in both losses charged off and recoveries of losses previously charged off related to customer defaults on point-of-sale consumer loans for which the Bancorp obtained recoveries under third-party credit enhancements.
| | | | | | | | | | | | | | |
For the nine months ended September 30, 2022 ($ in millions) | Commercial | Residential Mortgage | Consumer | Total |
Balance, beginning of period | $ | 1,102 | | 235 | | 555 | | 1,892 | |
Losses charged off(a) | (95) | | (2) | | (162) | | (259) | |
Recoveries of losses previously charged off(a) | 19 | | 4 | | 77 | | 100 | |
Provision for loan and lease losses | 132 | | 17 | | 217 | | 366 | |
Balance, end of period | $ | 1,158 | | 254 | | 687 | | 2,099 | |
(a)The Bancorp recorded $23 in both losses charged off and recoveries of losses previously charged off related to customer defaults on point-of-sale consumer loans for which the Bancorp obtained recoveries under third-party credit enhancements.
| | |
Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited) |
The following tables provide a summary of the ALLL and related loans and leases classified by portfolio segment:
| | | | | | | | | | | | | | |
As of September 30, 2023 ($ in millions) | Commercial | Residential Mortgage | Consumer | Total |
ALLL:(a) | | | | |
Individually evaluated | $ | 70 | | 1 | | 6 | | 77 | |
Collectively evaluated | 1,117 | | 154 | | 992 | | 2,263 | |
Total ALLL | $ | 1,187 | | 155 | | 998 | | 2,340 | |
Portfolio loans and leases:(b) | | | | |
Individually evaluated | $ | 247 | | 125 | | 69 | | 441 | |
Collectively evaluated | 74,871 | | 17,055 | | 27,608 | | 119,534 | |
Total portfolio loans and leases | $ | 75,118 | | 17,180 | | 27,677 | | 119,975 | |
(a)Includes $2 related to commercial leveraged leases at September 30, 2023.
(b)Excludes $113 of residential mortgage loans measured at fair value and includes $248 of commercial leveraged leases, net of unearned income, at September 30, 2023.
| | | | | | | | | | | | | | |
As of December 31, 2022 ($ in millions) |
Commercial | Residential Mortgage |
Consumer |
Total |
ALLL:(a) | | | | |
Individually evaluated | $ | 30 | | 47 | | 45 | | 122 | |
Collectively evaluated | 1,097 | | 198 | | 777 | | 2,072 | |
Total ALLL | $ | 1,127 | | 245 | | 822 | | 2,194 | |
Portfolio loans and leases:(b) | | | | |
Individually evaluated | $ | 531 | | 560 | | 297 | | 1,388 | |
Collectively evaluated | 75,858 | | 16,945 | | 27,166 | | 119,969 | |
| | | | |
Total portfolio loans and leases | $ | 76,389 | | 17,505 | | 27,463 | | 121,357 | |
(a)Includes $2 related to commercial leveraged leases at December 31, 2022.
(b)Excludes $123 of residential mortgage loans measured at fair value and includes $247 of commercial leveraged leases, net of unearned income, at December 31, 2022.
CREDIT RISK PROFILE
Commercial Portfolio Segment
For purposes of monitoring the credit quality and risk characteristics of its commercial portfolio segment, the Bancorp disaggregates the segment into the following classes: commercial and industrial, commercial mortgage owner-occupied, commercial mortgage nonowner-occupied, commercial construction and commercial leases.
To facilitate the monitoring of credit quality within the commercial portfolio segment, the Bancorp utilizes the following categories of credit ratings: pass, special mention, substandard, doubtful and loss. The five categories, which are derived from standard regulatory rating definitions, are assigned upon initial approval of credit to borrowers and updated periodically thereafter.
Pass ratings, which are assigned to those borrowers that do not have identified potential or well-defined weaknesses and for which there is a high likelihood of orderly repayment, are updated at least annually based on the size and credit characteristics of the borrower. All other categories are updated on a quarterly basis during the month preceding the end of the calendar quarter.
The Bancorp assigns a special mention rating to loans and leases that have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may, at some future date, result in the deterioration of the repayment prospects for the loan or lease or the Bancorp’s credit position.
The Bancorp assigns a substandard rating to loans and leases that are inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged. Substandard loans and leases have well-defined weaknesses or weaknesses that could jeopardize the orderly repayment of the debt. Loans and leases with this rating also are characterized by the distinct possibility that the Bancorp will sustain some loss if the deficiencies noted are not addressed and corrected.
The Bancorp assigns a doubtful rating to loans and leases that have all the attributes of a substandard rating with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors that may work to the advantage of and strengthen the credit quality of the loan or lease, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include a proposed merger or acquisition, liquidation proceeding, capital injection, perfecting liens on additional collateral or refinancing plans.
| | |
Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited) |
Loans and leases classified as loss are considered uncollectible and are charged off in the period in which they are determined to be uncollectible. Because loans and leases in this category are fully charged off, they are not included in the following tables.
For loans and leases that are collectively evaluated for an ACL, the Bancorp utilizes models to forecast expected credit losses over a reasonable and supportable forecast period based on the probability of a loan or lease defaulting, the expected balance at the estimated date of default and the expected loss percentage given a default. For the commercial portfolio segment, the estimates for probability of default are primarily based on internal ratings assigned to each commercial borrower on a 13-point scale and historical observations of how those ratings migrate to a default over time in the context of macroeconomic conditions. For loans with available credit, the estimate of the expected balance at the time of default considers expected utilization rates, which are primarily based on macroeconomic conditions and the utilization history of similar borrowers under those economic conditions. The estimates for loss severity are primarily based on collateral type and coverage levels and the susceptibility of those characteristics to changes in macroeconomic conditions. For more information about the Bancorp’s processes for developing these models, estimating credit losses for periods beyond the reasonable and supportable forecast period and for estimating credit losses for individually evaluated loans, refer to Note 3.
| | |
Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited) |
The following tables present the amortized cost basis of the Bancorp’s commercial portfolio segment, by class and vintage, disaggregated by credit risk rating:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As of September 30, 2023 ($ in millions) | Term Loans and Leases by Origination Year | Revolving Loans | Revolving Loans Converted to Term Loans | |
2023 | 2022 | 2021 | 2020 | 2019 | Prior | Total |
Commercial and industrial loans: | | | | | | | | | |
Pass | $ | 1,881 | | 3,875 | | 2,050 | | 705 | | 315 | | 412 | | 42,533 | | — | | 51,771 | |
Special mention | 14 | | 90 | | 40 | | 14 | | 16 | | 107 | | 1,465 | | — | | 1,746 | |
Substandard | 123 | | 101 | | 47 | | 184 | | 50 | | 95 | | 1,673 | | — | | 2,273 | |
Doubtful | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Total commercial and industrial loans | $ | 2,018 | | 4,066 | | 2,137 | | 903 | | 381 | | 614 | | 45,671 | | — | | 55,790 | |
Commercial mortgage owner-occupied loans: | | | | | | | | |
|
Pass | $ | 695 | | 1,004 | | 685 | | 390 | | 205 | | 265 | | 1,693 | | — | | 4,937 | |
Special mention | 29 | | 10 | | 24 | | — | | — | | 1 | | 74 | | — | | 138 | |
Substandard | 39 | | 22 | | 12 | | 17 | | 51 | | 12 | | 123 | | — | | 276 | |
Doubtful | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Total commercial mortgage owner- occupied loans | $ | 763 | | 1,036 | | 721 | | 407 | | 256 | | 278 | | 1,890 | | — | | 5,351 | |
Commercial mortgage nonowner-occupied loans: | | | | | | | | |
|
Pass | $ | 602 | | 908 | | 323 | | 404 | | 312 | | 314 | | 2,617 | | — | | 5,480 | |
Special mention | 103 | | 15 | | 24 | | — | | — | | 7 | | 27 | | — | | 176 | |
Substandard | 23 | | 22 | | 8 | | 5 | | — | | 3 | | 54 | | — | | 115 | |
Doubtful | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Total commercial mortgage nonowner-occupied loans | $ | 728 | | 945 | | 355 | | 409 | | 312 | | 324 | | 2,698 | | — | | 5,771 | |
Commercial construction loans: | | | | | | | | |
|
Pass | $ | 150 | | 30 | | 35 | | 42 | | 71 | | 6 | | 4,800 | | — | | 5,134 | |
Special mention | — | | — | | — | | — | | — | | — | | 190 | | — | | 190 | |
Substandard | 63 | | — | | 33 | | — | | — | | — | | 162 | | — | | 258 | |
Doubtful | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Total commercial construction loans | $ | 213 | | 30 | | 68 | | 42 | | 71 | | 6 | | 5,152 | | — | | 5,582 | |
Commercial leases: | | | | | | | | |
|
Pass | $ | 435 | | 427 | | 525 | | 230 | | 161 | | 754 | | — | | — | | 2,532 | |
Special mention | — | | 5 | | 6 | | 3 | | 3 | | 8 | | — | | — | | 25 | |
Substandard | 11 | | 7 | | 12 | | 3 | | 4 | | 30 | | — | | — | | 67 | |
Doubtful | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Total commercial leases | $ | 446 | | 439 | | 543 | | 236 | | 168 | | 792 | | — | | — | | 2,624 | |
Total commercial loans and leases: | | | | | | | | | |
Pass | $ | 3,763 | | 6,244 | | 3,618 | | 1,771 | | 1,064 | | 1,751 | | 51,643 | | — | | 69,854 | |
Special mention | 146 | | 120 | | 94 | | 17 | | 19 | | 123 | | 1,756 | | — | | 2,275 | |
Substandard | 259 | | 152 | | 112 | | 209 | | 105 | | 140 | | 2,012 | | — | | 2,989 | |
Doubtful | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Total commercial loans and leases | $ | 4,168 | | 6,516 | | 3,824 | | 1,997 | | 1,188 | | 2,014 | | 55,411 | | — | | 75,118 | |
| | |
Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2022 ($ in millions) | Term Loans and Leases by Origination Year | Revolving Loans | Revolving Loans Converted to Term Loans | |
2022 | 2021 | 2020 | 2019 | 2018 | Prior | Total |
Commercial and industrial loans: | | | | | | | | | |
Pass | $ | 3,825 | | 3,098 | | 994 | | 445 | | 269 | | 488 | | 44,521 | | — | | 53,640 | |
Special mention | 65 | | 24 | | 15 | | 36 | | 10 | | 24 | | 1,221 | | — | | 1,395 | |
Substandard | 150 | | 77 | | 233 | | 26 | | 7 | | 107 | | 1,597 | | — | | 2,197 | |
Doubtful | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Total commercial and industrial loans | $ | 4,040 | | 3,199 | | 1,242 | | 507 | | 286 | | 619 | | 47,339 | | — | | 57,232 | |
Commercial mortgage owner-occupied loans: | | | | | | | | | |
Pass | $ | 1,177 | | 826 | | 522 | | 257 | | 160 | | 264 | | 1,624 | | — | | 4,830 | |
Special mention | 17 | | 15 | | 13 | | 12 | | 13 | | 2 | | 56 | | — | | 128 | |
Substandard | 51 | | 14 | | 20 | | 73 | | 11 | | 25 | | 106 | | — | | 300 | |
Doubtful | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Total commercial mortgage owner-occupied loans | $ | 1,245 | | 855 | | 555 | | 342 | | 184 | | 291 | | 1,786 | | — | | 5,258 | |
Commercial mortgage nonowner-occupied loans: | | | | | | | | | |
Pass | $ | 1,127 | | 462 | | 490 | | 397 | | 220 | | 170 | | 2,453 | | — | | 5,319 | |
Special mention | 1 | | 84 | | 26 | | — | | — | | 23 | | 88 | | — | | 222 | |
Substandard | 65 | | 19 | | 18 | | 1 | | 1 | | 17 | | 100 | | — | | 221 | |
Doubtful | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Total commercial mortgage nonowner-occupied loans | $ | 1,193 | | 565 | | 534 | | 398 | | 221 | | 210 | | 2,641 | | — | | 5,762 | |
Commercial construction loans: | | | | | | | | | |
Pass | $ | 82 | | 31 | | 93 | | 8 | | 35 | | 7 | | 4,684 | | — | | 4,940 | |
Special mention | — | | — | | — | | — | | — | | — | | 293 | | — | | 293 | |
Substandard | 53 | | — | | — | | — | | — | | 2 | | 145 | | — | | 200 | |
Doubtful | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Total commercial construction loans | $ | 135 | | 31 | | 93 | | 8 | | 35 | | 9 | | 5,122 | | — | | 5,433 | |
Commercial leases: | | | | | | | | | |
Pass | $ | 584 | | 664 | | 306 | | 192 | | 146 | | 696 | | — | | — | | 2,588 | |
Special mention | — | | 4 | | 2 | | 4 | | 7 | | 19 | | — | | — | | 36 | |
Substandard | 1 | | 20 | | 2 | | 4 | | 21 | | 32 | | — | | — | | 80 | |
Doubtful | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Total commercial leases | $ | 585 | | 688 | | 310 | | 200 | | 174 | | 747 | | — | | — | | 2,704 | |
Total commercial loans and leases: | | | | | | | | | |
Pass | $ | 6,795 | | 5,081 | | 2,405 | | 1,299 | | 830 | | 1,625 | | 53,282 | | — | | 71,317 | |
Special mention | 83 | | 127 | | 56 | | 52 | | 30 | | 68 | | 1,658 | | — | | 2,074 | |
Substandard | 320 | | 130 | | 273 | | 104 | | 40 | | 183 | | 1,948 | | — | | 2,998 | |
Doubtful | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Total commercial loans and leases | $ | 7,198 | | 5,338 | | 2,734 | | 1,455 | | 900 | | 1,876 | | 56,888 | | — | | 76,389 | |
The following table summarizes the Bancorp’s gross charge-offs within the commercial portfolio segment, by class and vintage:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
For the nine months ended September 30, 2023 ($ in millions) | Term Loans and Leases by Origination Year | Revolving Loans | Revolving Loans Converted to Term Loans | |
2023 | 2022 | 2021 | 2020 | 2019 | Prior | Total |
Commercial loans and leases: | | | | | | | | | |
Commercial and industrial loans | $ | 24 | | 6 | | 12 | | 1 | | — | | 5 | | 90 | | — | | 138 | |
Commercial mortgage owner-occupied loans | — | | — | | — | | — | | — | | — | | 1 | | — | | 1 | |
| | | | | | | | | |
Commercial construction loans | — | | — | | — | | — | | — | | — | | 1 | | — | | 1 | |
| | | | | | | | | |
Total commercial loans and leases | $ | 24 | | 6 | | 12 | | 1 | | — | | 5 | | 92 | | — | | 140 | |
| | |
Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited) |
Age Analysis of Past Due Commercial Loans and Leases
The following tables summarize the Bancorp’s amortized cost basis in portfolio commercial loans and leases, by age and class:
| | | | | | | | | | | | | | | | | | | | |
| Current Loans and Leases(a) | Past Due | Total Loans and Leases | 90 Days Past Due and Still Accruing |
As of September 30, 2023 ($ in millions) | 30-89 Days(a) | 90 Days or More(a) | Total Past Due |
Commercial loans and leases: | | | | | | |
Commercial and industrial loans | $ | 55,697 | | 48 | | 45 | | 93 | | 55,790 | | 3 | |
Commercial mortgage owner-occupied loans | 5,346 | | 2 | | 3 | | 5 | | 5,351 | | — | |
Commercial mortgage nonowner-occupied loans | 5,771 | | — | | — | | — | | 5,771 | | — | |
Commercial construction loans | 5,576 | | 6 | | — | | 6 | | 5,582 | | — | |
Commercial leases | 2,601 | | 23 | | — | | 23 | | 2,624 | | — | |
Total portfolio commercial loans and leases | $ | 74,991 | | 79 | | 48 | | 127 | | 75,118 | | 3 | |
(a)Includes accrual and nonaccrual loans and leases.
| | | | | | | | | | | | | | | | | | | | |
| Current Loans and Leases(a) | Past Due | Total Loans and Leases | 90 Days Past Due and Still Accruing |
As of December 31, 2022 ($ in millions) | 30-89 Days(a) | 90 Days or More(a) | Total Past Due |
Commercial loans and leases: | | | | | | |
Commercial and industrial loans | $ | 57,092 | | 98 | | 42 | | 140 | | 57,232 | | 11 | |
Commercial mortgage owner-occupied loans | 5,241 | | 14 | | 3 | | 17 | | 5,258 | | — | |
Commercial mortgage nonowner-occupied loans | 5,756 | | 6 | | — | | 6 | | 5,762 | | — | |
Commercial construction loans | 5,424 | | 7 | | 2 | | 9 | | 5,433 | | — | |
Commercial leases | 2,698 | | 4 | | 2 | | 6 | | 2,704 | | 2 | |
Total portfolio commercial loans and leases | $ | 76,211 | | 129 | | 49 | | 178 | | 76,389 | | 13 | |
(a)Includes accrual and nonaccrual loans and leases.
Residential Mortgage and Consumer Portfolio Segments
For purposes of monitoring the credit quality and risk characteristics of its consumer portfolio segment, the Bancorp disaggregates the segment into the following classes: home equity, indirect secured consumer loans, credit card and other consumer loans. The Bancorp’s residential mortgage portfolio segment is also a separate class.
The Bancorp considers repayment performance as the best indicator of credit quality for residential mortgage and consumer loans, which includes both the delinquency status and performing versus nonperforming status of the loans. The delinquency status of all residential mortgage and consumer loans and the performing versus nonperforming status are presented in the following tables.
For collectively evaluated loans in the consumer and residential mortgage portfolio segments, the Bancorp’s expected credit loss models primarily utilize the borrower’s FICO score and delinquency history in combination with macroeconomic conditions when estimating the probability of default. The estimates for loss severity are primarily based on collateral type and coverage levels and the susceptibility of those characteristics to changes in macroeconomic conditions. The expected balance at the estimated date of default is also especially impactful in the expected credit loss models for portfolio classes which generally have longer terms (such as residential mortgage loans and home equity) and portfolio classes containing a high concentration of loans with revolving privileges (such as home equity). The estimate of the expected balance at the time of default considers expected prepayment and utilization rates where applicable, which are primarily based on macroeconomic conditions and the utilization history of similar borrowers under those economic conditions. Refer to Note 3 for additional information about the Bancorp’s process for developing these models and its process for estimating credit losses for periods beyond the reasonable and supportable forecast period.
| | |
Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited) |
The following tables present the amortized cost basis of the Bancorp’s residential mortgage and consumer portfolio segments, by class and vintage, disaggregated by both age and performing versus nonperforming status:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As of September 30, 2023 ($ in millions) | Term Loans by Origination Year | Revolving Loans | Revolving Loans Converted to Term Loans | |
2023 | 2022 | 2021 | 2020 | 2019 | Prior | Total |
Residential mortgage loans: | | | | | | | | | |
Performing: | | | | | | | | | |
Current(a) | $ | 889 | | 3,171 | | 5,103 | | 2,768 | | 968 | | 4,129 | | — | | — | | 17,028 | |
30-89 days past due | — | | 1 | | 5 | | 1 | | 1 | | 13 | | — | | — | | 21 | |
90 days or more past due | — | | 2 | | 1 | | — | | — | | 3 | | — | | — | | 6 | |
Total performing | 889 | | 3,174 | | 5,109 | | 2,769 | | 969 | | 4,145 | | — | | — | | 17,055 | |
Nonperforming | — | | 5 | | 5 | | 5 | | 4 | | 106 | | — | | — | | 125 | |
Total residential mortgage loans(b) | $ | 889 | | 3,179 | | 5,114 | | 2,774 | | 973 | | 4,251 | | — | | — | | 17,180 | |
Home equity: | | | | | | | | |
|
Performing: | | | | | | | | |
|
Current | $ | 58 | | 43 | | 3 | | 6 | | 12 | | 97 | | 3,561 | | 32 | | 3,812 | |
30-89 days past due | — | | — | | — | | — | | — | | 2 | | 23 | | 3 | | 28 | |
90 days or more past due | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Total performing | 58 | | 43 | | 3 | | 6 | | 12 | | 99 | | 3,584 | | 35 | | 3,840 | |
Nonperforming | — | | — | | — | | — | | — | | 6 | | 51 | | 1 | | 58 | |
Total home equity | $ | 58 | | 43 | | 3 | | 6 | | 12 | | 105 | | 3,635 | | 36 | | 3,898 | |
Indirect secured consumer loans: | | | | | | | | |
|
Performing: |
|
|
|
|
|
|
|
|
|
Current | $ | 3,392 | | 4,685 | | 4,363 | | 1,761 | | 727 | | 337 | | — | | — | | 15,265 | |
30-89 days past due | 16 | | 44 | | 38 | | 19 | | 12 | | 9 | | — | | — | | 138 | |
90 days or more past due | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Total performing | 3,408 | | 4,729 | | 4,401 | | 1,780 | | 739 | | 346 | | — | | — | | 15,403 | |
Nonperforming | 2 | | 9 | | 8 | | 6 | | 3 | | 3 | | — | | — | | 31 | |
Total indirect secured consumer loans | $ | 3,410 | | 4,738 | | 4,409 | | 1,786 | | 742 | | 349 | | — | | — | | 15,434 | |
Credit card: | | | | | | | | |
|
Performing: | | | | | | | | | |
Current | $ | — | | — | | — | | — | | — | | — | | 1,744 | | — | | 1,744 | |
30-89 days past due | — | | — | | — | | — | | — | | — | | 21 | | — | | 21 | |
90 days or more past due | — | | — | | — | | — | | — | | — | | 20 | | — | | 20 | |
Total performing | — | | — | | — | | — | | — | | — | | 1,785 | | — | | 1,785 | |
Nonperforming | — | | — | | — | | — | | — | | — | | 32 | | — | | 32 | |
Total credit card | $ | — | | — | | — | | — | | — | | — | | 1,817 | | — | | 1,817 | |
Other consumer loans: | | | | | | | | |
|
Performing: | | | | | | | | |
|
Current | $ | 2,071 | | 2,773 | | 340 | | 173 | | 92 | | 117 | | 847 | | 40 | | 6,453 | |
30-89 days past due | 5 | | 16 | | 4 | | 2 | | 2 | | 1 | | 3 | | 1 | | 34 | |
90 days or more past due | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Total performing | 2,076 | | 2,789 | | 344 | | 175 | | 94 | | 118 | | 850 | | 41 | | 6,487 | |
Nonperforming | 4 | | 30 | | 4 | | 1 | | 1 | | 1 | | — | | — | | 41 | |
Total other consumer loans | $ | 2,080 | | 2,819 | | 348 | | 176 | | 95 | | 119 | | 850 | | 41 | | 6,528 | |
Total residential mortgage and consumer loans: | | | | | | | | | |
Performing: | | | | | | | | | |
Current | $ | 6,410 | | 10,672 | | 9,809 | | 4,708 | | 1,799 | | 4,680 | | 6,152 | | 72 | | 44,302 | |
30-89 days past due | 21 | | 61 | | 47 | | 22 | | 15 | | 25 | | 47 | | 4 | | 242 | |
90 days or more past due | — | | 2 | | 1 | | — | | — | | 3 | | 20 | | — | | 26 | |
Total performing | 6,431 | | 10,735 | | 9,857 | | 4,730 | | 1,814 | | 4,708 | | 6,219 | | 76 | | 44,570 | |
Nonperforming | 6 | | 44 | | 17 | | 12 | | 8 | | 116 | | 83 | | 1 | | 287 | |
Total residential mortgage and consumer loans(b) | $ | 6,437 | | 10,779 | | 9,874 | | 4,742 | | 1,822 | | 4,824 | | 6,302 | | 77 | | 44,857 | |
(a)Information includes advances made pursuant to servicing agreements for GNMA mortgage pools whose repayments are insured by the FHA or guaranteed by the VA. As of September 30, 2023, $84 of these loans were 30-89 days past due and $143 were 90 days or more past due. The Bancorp recognized $1 and $2 of losses during the three and nine months ended September 30, 2023, respectively, due to claim denials and curtailments associated with these insured or guaranteed loans.
(b)Excludes $113 of residential mortgage loans measured at fair value at September 30, 2023, including $2 of nonperforming loans.
| | |
Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2022 ($ in millions) | Term Loans by Origination Year | Revolving Loans | Revolving Loans Converted to Term Loans | |
2022 | 2021 | 2020 | 2019 | 2018 | Prior | Total |
Residential mortgage loans: | | | | | | | | | |
Performing: | | | | | | | | | |
Current(a) | $ | 3,195 | | 5,440 | | 2,981 | | 1,051 | | 344 | | 4,336 | | — | | — | | 17,347 | |
30-89 days past due | 4 | | 4 | | 3 | | 1 | | 2 | | 15 | | — | | — | | 29 | |
90 days or more past due | — | | — | | 1 | | — | | 1 | | 5 | | — | | — | | 7 | |
Total performing | 3,199 | | 5,444 | | 2,985 | | 1,052 | | 347 | | 4,356 | | — | | — | | 17,383 | |
Nonperforming | — | | 3 | | 4 | | 4 | | 7 | | 104 | | — | | — | | 122 | |
Total residential mortgage loans(b) | $ | 3,199 | | 5,447 | | 2,989 | | 1,056 | | 354 | | 4,460 | | — | | — | | 17,505 | |
Home equity: | | | | | | | | | |
Performing: | | | | | | | | | |
Current | $ | 46 | | 3 | | 7 | | 15 | | 17 | | 94 | | 3,741 | | 18 | | 3,941 | |
30-89 days past due | — | | — | | — | | — | | — | | 2 | | 28 | | — | | 30 | |
90 days or more past due | — | | — | | — | | — | | — | | 1 | | — | | — | | 1 | |
Total performing | 46 | | 3 | | 7 | | 15 | | 17 | | 97 | | 3,769 | | 18 | | 3,972 | |
Nonperforming | — | | — | | — | | — | | — | | 8 | | 58 | | 1 | | 67 | |
Total home equity | $ | 46 | | 3 | | 7 | | 15 | | 17 | | 105 | | 3,827 | | 19 | | 4,039 | |
Indirect secured consumer loans: | | | | | | | | | |
Performing: | | | | | | | | | |
Current | $ | 6,034 | | 5,875 | | 2,600 | | 1,217 | | 416 | | 239 | | — | | — | | 16,381 | |
30-89 days past due | 34 | | 42 | | 28 | | 22 | | 11 | | 5 | | — | | — | | 142 | |
90 days or more past due | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Total performing | 6,068 | | 5,917 | | 2,628 | | 1,239 | | 427 | | 244 | | — | | — | | 16,523 | |
Nonperforming | 4 | | 6 | | 7 | | 6 | | 4 | | 2 | | — | | — | | 29 | |
Total indirect secured consumer loans | $ | 6,072 | | 5,923 | | 2,635 | | 1,245 | | 431 | | 246 | | — | | — | | 16,552 | |
Credit card: | | | | | | | | | |
Performing: | | | | | | | | | |
Current | $ | — | | — | | — | | — | | — | | — | | 1,808 | | — | | 1,808 | |
30-89 days past due | — | | — | | — | | — | | — | | — | | 21 | | — | | 21 | |
90 days or more past due | — | | — | | — | | — | | — | | — | | 18 | | — | | 18 | |
Total performing | — | | — | | — | | — | | — | | — | | 1,847 | | — | | 1,847 | |
Nonperforming | — | | — | | — | | — | | — | | — | | 27 | | — | | 27 | |
Total credit card | $ | — | | — | | — | | — | | — | | — | | 1,874 | | — | | 1,874 | |
Other consumer loans: | | | | | | | | | |
Performing: | | | | | | | | | |
Current | $ | 2,704 | | 540 | | 355 | | 169 | | 112 | | 146 | | 908 | | 26 | | 4,960 | |
30-89 days past due | 14 | | 6 | | 3 | | 2 | | 2 | | 2 | | 3 | | — | | 32 | |
90 days or more past due | — | | — | | — | | — | | — | | — | | 1 | | — | | 1 | |
Total performing | 2,718 | | 546 | | 358 | | 171 | | 114 | | 148 | | 912 | | 26 | | 4,993 | |
Nonperforming | 2 | | 1 | | — | | — | | — | | 1 | | 1 | | — | | 5 | |
Total other consumer loans | $ | 2,720 | | 547 | | 358 | | 171 | | 114 | | 149 | | 913 | | 26 | | 4,998 | |
Total residential mortgage and consumer loans: | | | | | | | | | |
Performing: | | | | | | | | | |
Current | $ | 11,979 | | 11,858 | | 5,943 | | 2,452 | | 889 | | 4,815 | | 6,457 | | 44 | | 44,437 | |
30-89 days past due | 52 | | 52 | | 34 | | 25 | | 15 | | 24 | | 52 | | — | | 254 | |
90 days or more past due | — | | — | | 1 | | — | | 1 | | 6 | | 19 | | — | | 27 | |
Total performing | 12,031 | | 11,910 | | 5,978 | | 2,477 | | 905 | | 4,845 | | 6,528 | | 44 | | 44,718 | |
Nonperforming | 6 | | 10 | | 11 | | 10 | | 11 | | 115 | | 86 | | 1 | | 250 | |
Total residential mortgage and consumer loans(b) | $ | 12,037 | | 11,920 | | 5,989 | | 2,487 | | 916 | | 4,960 | | 6,614 | | 45 | | 44,968 | |
(a)Information includes advances made pursuant to servicing agreements for GNMA mortgage pools whose repayments are insured by the FHA or guaranteed by the VA. As of December 31, 2022, $81 of these loans were 30-89 days past due and $147 were 90 days or more past due. The Bancorp recognized an immaterial amount and $2 of losses during the three and nine months ended September 30, 2022, respectively, due to claim denials and curtailments associated with these insured or guaranteed loans.
(b)Excludes $123 of residential mortgage loans measured at fair value at December 31, 2022, including $1 of 30-89 days past due loans and $2 of nonperforming loans.
| | |
Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited) |
The following table summarizes the Bancorp’s gross charge-offs within the residential mortgage and consumer portfolio segments, by class and vintage:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
For the nine months ended September 30, 2023 ($ in millions) | Term Loans by Origination Year | Revolving Loans | Revolving Loans Converted to Term Loans | |
2023 | 2022 | 2021 | 2020 | 2019 | Prior | Total |
Residential mortgage loans | $ | — | | — | | — | | — | | — | | 3 | | — | | — | | 3 | |
Consumer loans: | | | | | | | | | |
Home equity | — | | — | | — | | — | | — | | 1 | | 5 | | — | | 6 | |
Indirect secured consumer loans | 4 | | 28 | | 20 | | 10 | | 7 | | 6 | | — | | — | | 75 | |
Credit cards | — | | — | | — | | — | | — | | — | | 59 | | — | | 59 | |
Other consumer loans | 6 | | 39 | | 12 | | 9 | | 6 | | 8 | | 25 | | 1 | | 106 | |
Total residential mortgage and consumer loans | $ | 10 | | 67 | | 32 | | 19 | | 13 | | 18 | | 89 | | 1 | | 249 | |
Collateral-Dependent Loans and Leases
The Bancorp considers a loan or lease to be collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. When a loan or lease is collateral-dependent, its fair value is generally based on the fair value less cost to sell of the underlying collateral.
The following table presents the amortized cost basis of the Bancorp’s collateral-dependent loans and leases, by portfolio class, as of:
| | | | | | | | |
($ in millions) | September 30, 2023 | December 31, 2022 |
Commercial loans and leases: | | |
Commercial and industrial loans | $ | 228 | | 433 | |
Commercial mortgage owner-occupied loans | 6 | | 14 | |
Commercial mortgage nonowner-occupied loans | 3 | | 27 | |
Commercial construction loans | — | | 56 | |
Commercial leases | — | | 1 | |
Total commercial loans and leases | $ | 237 | | 531 | |
Residential mortgage loans | 125 | | 57 | |
Consumer loans: | | |
Home equity | 55 | | 46 | |
Indirect secured consumer loans | 14 | | 6 | |
| | |
Total consumer loans | $ | 69 | | 52 | |
Total portfolio loans and leases | $ | 431 | | 640 | |
| | |
Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited) |
Nonperforming Assets
Nonperforming assets include nonaccrual loans and leases for which ultimate collectability of the full amount of the principal and/or interest is uncertain and certain other assets, including OREO and other repossessed property.
The following table presents the amortized cost basis of the Bancorp’s nonaccrual loans and leases, by class, and OREO and other repossessed property as of:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
($ in millions) | With an ALLL | No Related ALLL | Total | | With an ALLL | No Related ALLL | Total |
Commercial loans and leases: | | | | | | | |
Commercial and industrial loans | $ | 225 | | 37 | | 262 | | | 114 | | 101 | | 215 | |
Commercial mortgage owner-occupied loans | 10 | | 6 | | 16 | | | 9 | | 7 | | 16 | |
Commercial mortgage nonowner-occupied loans | — | | 2 | | 2 | | | 20 | | 4 | | 24 | |
Commercial construction loans | — | | — | | — | | | 6 | | 2 | | 8 | |
Commercial leases | — | | 1 | | 1 | | | — | | — | | — | |
Total nonaccrual portfolio commercial loans and leases | $ | 235 | | 46 | | 281 | | | 149 | | 114 | | 263 | |
Residential mortgage loans | 39 | | 88 | | 127 | | | 81 | | 43 | | 124 | |
Consumer loans: | | | | | | | |
Home equity | 23 | | 35 | | 58 | | | 45 | | 22 | | 67 | |
Indirect secured consumer loans | 28 | | 3 | | 31 | | | 26 | | 3 | | 29 | |
Credit card | 32 | | — | | 32 | | | 27 | | — | | 27 | |
Other consumer loans | 41 | | — | | 41 | | | 5 | | — | | 5 | |
Total nonaccrual portfolio consumer loans | $ | 124 | | 38 | | 162 | | | 103 | | 25 | | 128 | |
Total nonaccrual portfolio loans and leases(a)(b) | $ | 398 | | 172 | | 570 | | | 333 | | 182 | | 515 | |
OREO and other repossessed property | — | | 42 | | 42 | | | — | | 24 | | 24 | |
Total nonperforming portfolio assets(a)(b) | $ | 398 | | 214 | | 612 | | | 333 | | 206 | | 539 | |
(a)Excludes $6 and an immaterial amount of nonaccrual loans held for sale as of September 30, 2023 and December 31, 2022, respectively.
(b)Includes $17 and $15 of nonaccrual government insured commercial loans whose repayments are insured by the SBA as of September 30, 2023 and December 31, 2022, respectively.
The Bancorp recognized an immaterial amount of interest income on nonaccrual loans and leases for both the three and nine months ended September 30, 2023 and 2022.
The Bancorp’s amortized cost basis of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process according to local requirements of the applicable jurisdiction was $125 million and $154 million as of September 30, 2023 and December 31, 2022, respectively.
Modifications to Borrowers Experiencing Financial Difficulty
On January 1, 2023, the Bancorp adopted ASU 2022-02, which eliminated the recognition and measurement guidance for TDRs. The amended accounting and disclosure requirements are applicable to loan modifications to borrowers experiencing financial difficulty which are completed on or after the adoption date. For further information on the adoption of ASU 2022-02, refer to Note 3.
In the course of servicing its loans, the Bancorp works with borrowers who are experiencing financial difficulty to identify solutions that are mutually beneficial to both parties with the objective of mitigating the risk of losses on the loan. These efforts often result in modifications to the payment terms of the loan. The types of modifications offered to borrowers vary by type of loan and may include term extensions, interest rate reductions, payment delays (other than those that are insignificant) or combinations thereof. The Bancorp typically does not provide principal forgiveness except in circumstances where the loan has already been fully or partially charged off.
The Bancorp applies its expected credit loss models consistently to both modified and non-modified loans when estimating the ALLL. For loans which are modified for borrowers experiencing financial difficulty, there is generally not a significant change to the ALLL upon modification because the Bancorp’s ALLL estimation methodologies already consider those borrowers’ financial difficulties and the resulting effects of potential modifications when estimating expected credit losses.
As of September 30, 2023, portfolio loans with an amortized cost basis of $171 million and $484 million were modified during the three and nine months ended September 30, 2023, respectively, for borrowers experiencing financial difficulty, as further discussed in the following sections. These modifications for the three and nine months ended September 30, 2023 represented 0.14% and 0.40%, respectively, of total portfolio loans and leases as of September 30, 2023. These amounts excluded $6 million and $24 million for the three and nine months ended September 30, 2023, respectively, of consumer and residential mortgage loans which have been granted a concession under provisions of the Federal Bankruptcy Act and are monitored separately from loans modified under the Bancorp’s loan modification programs. As of
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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited) |
September 30, 2023, the Bancorp had commitments of $156 million to lend additional funds to borrowers experiencing financial difficulty whose terms have been modified during the nine months ended September 30, 2023.
Commercial portfolio segment
Commercial loan modifications are individually negotiated and may vary depending on the borrower’s financial situation, but the Bancorp most commonly utilizes term extensions for periods of 3 to 12 months. In less common situations and when specifically warranted by the borrower’s situation, the Bancorp may also consider offering commercial borrowers interest rate reductions or payment deferrals, which may be combined with a term extension.
The following tables present the amortized cost basis of the Bancorp’s commercial portfolio loans that were modified for borrowers experiencing financial difficulty, by portfolio class and type of modification:
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For the three months ended September 30, 2023 ($ in millions) | Term Extension | Term Extension and Interest Rate Reduction | Term Extension and Payment Deferral | | Total | % of Total Class |
Commercial and industrial loans | $ | 92 | | 1 | | 8 | | | 101 | | 0.18 | % |
Commercial mortgage owner-occupied loans | 3 | | — | | — | | | 3 | | 0.06 | |
Commercial mortgage nonowner-occupied loans | 1 | | — | | — | | | 1 | | 0.02 | |
Commercial construction loans | 19 | | — | | — | | | 19 | | 0.34 | |
Total commercial portfolio loans | $ | 115 | | 1 | | 8 | | | 124 | | 0.17 | % |
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For the nine months ended September 30, 2023 ($ in millions) | Term Extension | Interest Rate Reduction | Term Extension and Interest Rate Reduction | Term Extension and Payment Deferral | Payment Deferral | Total | % of Total Class |
Commercial and industrial loans | $ | 176 | | 1 | | 1 | | 8 | | 5 | | 191 | | 0.34 | % |
Commercial mortgage owner-occupied loans | 24 | | — | | — | | — | | — | | 24 | | 0.45 | |
Commercial mortgage nonowner-occupied loans | 21 | | — | | 3 | | — | | — | | 24 | | 0.42 | |
Commercial construction loans | 116 | | — | | — | | — | | — | | 116 | | 2.08 | |
Total commercial portfolio loans | $ | 337 | | 1 | | 4 | | 8 | | 5 | | 355 | | 0.47 | % |
Residential mortgage portfolio segment
The Bancorp has established residential mortgage loan modification programs which define the type of modifications available as well as the eligibility criteria for borrowers. The designs of the Bancorp’s modification programs for residential mortgage loans are similar to those utilized by the various GSEs. The most common modification program utilized for residential mortgage loans is a term extension for up to 480 months from the modification date, combined with a change in interest rate to a fixed rate (which may be an increase or decrease from the rate in the original loan). As part of these modifications, the Bancorp may capitalize delinquent amounts due at the time of the modification into the principal balance of the loan when determining its modified payment structure. For loans where the modification results in a new monthly payment amount, borrowers may be required to complete a trial period of three to four months before the loan is permanently modified. The Bancorp also offers payment delay modifications to qualified borrowers which allow either the deferral of repayment for delinquent amounts due until maturity or capitalization of delinquent amounts due into the principal balance of the loan. The number of monthly payments delayed varies by borrower but is most commonly within a range of 6 to 12 months.
The following tables present the amortized cost basis of the Bancorp’s residential mortgage loans that were modified for borrowers experiencing financial difficulty, by type of modification:
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For the three months ended September 30, 2023 ($ in millions) | Total | % of Total Class |
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Payment delay | $ | 3 | | 0.02 | % |
Term extension and payment delay | 27 | | 0.15 | |
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Term extension, interest rate reduction and payment delay | 1 | | 0.01 | |
Total residential mortgage portfolio loans | $ | 31 | | 0.18 | % |
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For the nine months ended September 30, 2023 ($ in millions) | Total | % of Total Class |
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Payment delay | $ | 16 | | 0.09 | % |
Term extension and payment delay | 69 | | 0.40 | |
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Term extension, interest rate reduction and payment delay | 4 | | 0.02 | |
Total residential mortgage portfolio loans | $ | 89 | | 0.51 | % |
The Bancorp had $7 million of in-process modifications to residential mortgage loans outstanding as of September 30, 2023 which are excluded from the completed modification activity in the tables above. These in-process modifications will be reported as completed
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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited) |
modifications once the borrower satisfies the applicable contingencies in the modification agreement and the loan is contractually modified to make the modified terms permanent.
Consumer portfolio segment
The Bancorp’s modification programs for consumer loans vary based on type of loan. The most common modification program for home equity is a term extension for up to 360 months combined with a deferral of delinquent amounts due until maturity, which may also be combined with an interest rate reduction. Modification programs for credit card typically involve an interest rate reduction and an increase to the minimum monthly payment in order to repay a larger portion of outstanding balances. Modifications for indirect secured consumer loans and other consumer loans are less commonly utilized as part of the Bancorp’s loss mitigation activities and programs vary by specific product type.
The following tables present the amortized cost basis of the Bancorp’s consumer portfolio loans that were modified for borrowers experiencing financial difficulty, by portfolio class and type of modification:
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For the three months ended September 30, 2023 ($ in millions) | Interest Rate Reduction | Payment Deferral | Term Extension and Payment Deferral | Term Extension, Interest Rate Reduction and Payment Deferral | Total | % of Total Class |
Home equity | $ | 2 | | — | | 1 | | 2 | | 5 | | 0.13 | % |
Credit card | 9 | | — | | — | | — | | 9 | | 0.50 | |
Other consumer loans | — | | 2 | | — | | — | | 2 | | 0.03 | |
Total consumer portfolio loans | $ | 11 | | 2 | | 1 | | 2 | | 16 | | 0.06 | % |