FIFTH THIRD BANCORP The following is Management's Discussion and Analysis of Financial Condition and Results of Operations of certain significant factors that have affectedFifth 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 inCincinnati, Ohio . AtSeptember 30, 2022 , the Bancorp had$205 billion in assets and operated 1,080 full-service banking centers and 2,146 Fifth Third branded ATMs in eleven states throughout the Midwestern and Southeastern regions of theU.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 endedDecember 31, 2021 . 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 the three months endedSeptember 30, 2022 , net interest income on an FTE basis and noninterest income provided 69% and 31% of total revenue, respectively. For the nine months endedSeptember 30, 2022 , net interest income on an FTE basis and noninterest income provided 67% and 33% of total revenue, respectively. The Bancorp derives the majority of its revenues within theU.S. from customers domiciled in theU.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 endedSeptember 30, 2022 . 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 service charges on deposits, wealth and asset management revenue, commercial banking revenue, card and processing revenue, leasing business revenue, mortgage banking net revenue, other noninterest income and net securities gains or losses. Noninterest expense includes compensation and benefits, technology and communications, net occupancy expense, equipment expense, leasing business expense, marketing expense, card and processing expense and other noninterest expense. COVID-19 Global Pandemic The COVID-19 pandemic created significant economic uncertainty and financial disruptions during the years endedDecember 31, 2021 and 2020. Government and public responses to the COVID-19 pandemic caused reductions and instability in economic activity and volatility in the financial markets. This market volatility has persisted as the impacts of the pandemic have continued to evolve. Furthermore, resurgence risk remains as new strains of the virus become prevalent which may cause additional economic disruption. The Bancorp continues to closely monitor the pandemic and its effect on customers, employees, communities and markets. 3 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) During the years endedDecember 31, 2021 and 2020, low interest rates, reduced economic activity and market volatility had the most immediate negative impacts on the Bancorp's performance. The Bancorp is unable to estimate the extent of the impact that these factors have had on its operating results since the pandemic began and these factors may adversely impact its future operating results. Current Economic Conditions Robust demand, labor shortages and supply chain constraints have led to persistent inflationary pressures throughout the economy. In response to these inflationary pressures, the FRB has raised benchmark interest rates in recent months and may continue to raise interest rates in response to economic conditions, particularly a continued high rate of inflation. Amidst these uncertainties, some financial markets have continued to experience volatility. 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, including the 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 larger market, including labor and supply chain impacts.
For further discussion 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 subsection of the Risk Management section of MD&A for additional information about the Bancorp's interest rate risk management activities.
InAugust 2022 , the Inflation Reduction Act of 2022 was signed into law to address inflation, healthcare costs, climate change and renewal energy incentives, among other things. This law includes provisions for the creation of a 15% corporate alternative minimum tax rate that is effective for tax years beginningJanuary 1, 2023 , for corporations with an average annual adjusted financial statement income in excess of$1 billion . Senior Notes Offering OnJuly 28, 2022 , the Bancorp issued and sold$1 billion of fixed-rate/floating-rate senior notes which will mature onJuly 28, 2030 . The senior notes bear interest at a rate of 4.772% per annum to, but excluding,July 28, 2029 . From, and including,July 28, 2029 until, but excluding,July 28, 2030 , the senior notes will have an interest rate of compounded SOFR plus 2.127%. The Bancorp entered into interest rate swaps designated as fair value hedges to convert the fixed-rate period of the notes to a floating rate of compounded SOFR plus 2.132%. 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 60 days prior to maturity. For further information on a subsequent event related to long-term debt, refer to Note 24. Business Combination During the second quarter of 2022, the Bancorp completed the acquisition of a national point-of-sale consumer lender specializing in home improvement and solar energy installation loans originated through a network of contractors and installers. The acquisition was accounted for under the acquisition method of accounting which generally requires assets acquired and liabilities assumed to be recorded at their estimated fair values at acquisition date. These fair value estimates are considered preliminary as ofSeptember 30, 2022 and are subject to change for up to one year after the acquisition date as additional information becomes available. For more information on the acquisition, refer to Notes 10 and 11 of the Notes to Condensed Consolidated Financial Statements. LIBOR Transition InJuly 2017 , the Chief Executive of theUnited Kingdom Financial Conduct Authority (the "FCA"), which regulates LIBOR, announced that theFCA will stop persuading or compelling banks to submit rates for the calculation of LIBOR to the administrator of LIBOR after 2021. Since then, central banks around the world, including theFederal Reserve , have commissioned working groups of market participants and official sector representatives with the goal of finding suitable replacements for LIBOR. OnMarch 5, 2021 , theFCA andICE Benchmark Administration, Limited announced that the publication of the one-week and two-month USD LIBOR maturities and non-USD LIBOR maturities would cease immediately afterDecember 31, 2021 , with the remaining USD LIBOR maturities ceasing immediately afterJune 30, 2023 . Inthe United States , the Alternative Rates Reference Committee (the "ARRC"), a group of market participants convened in 2014 to help ensure a successful transition away from USD LIBOR, identified SOFR as its preferred alternative rate. SOFR is a measure of the cost of borrowing cash overnight, collateralized byU.S. Treasury securities, and is based on directly observableU.S. Treasury -backed repurchase transactions. The composition and characteristics of SOFR are not the same as those of LIBOR, and SOFR is fundamentally different from LIBOR for two key reasons: (1) SOFR is a secured rate, while LIBOR is an unsecured rate, and (2) SOFR is an overnight rate, while LIBOR is a forward-looking rate that represents interbank funding over different maturities. As a result, there can be no assurance that SOFR, however calculated, will perform the same way as LIBOR would have at any time, including, as a result of changes in interest and yield rates in the market, market volatility, or global or regional economic, financial, political, regulatory, judicial or other events.
On
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Management's Discussion and Analysis of Financial Condition and Results of Operations
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process to govern the transition from LIBOR to a replacement rate. The LIBOR Act
also establishes a safe harbor for lenders, shielding lenders from litigation as
a result of their choice of a replacement rate (such as SOFR) per Federal
Reserve Board recommendations. On July 28, 2022 , the Federal Reserve Board
published a Notice of Proposed Rulemaking in the Federal Register that detailed
a proposed regulation carrying out the terms of the LIBOR Act. As of September
30, 2022 , the comment period had closed for this proposed regulation but it had
not yet been finalized.
The Bancorp's LIBOR transition plan is organized around key work streams, including continued engagement with central banks and industry working groups and regulators, active client engagement, comprehensive review of legacy documentation, internal operational and technological readiness, and risk management, among other things, to facilitate the transition to alternative reference rates.
Although the full impact of LIBOR reforms and actions remains unclear, the Bancorp has discontinued entering into new LIBOR-based contracts in accordance with regulatory guidance, except for permissible limited use, such as part of hedging and risk management programs. During the fourth quarter of 2021, the Bancorp expanded its offering of alternative reference rate products, including SOFR. In addition, the Bancorp is continuing its transition of existing LIBOR-based exposures to an appropriate alternative reference rate on or beforeJune 30, 2023 . As ofSeptember 30, 2022 , the Bancorp had substantial exposure to LIBOR-based products throughout several of its lines of business. These exposures included derivative contracts with a total notional value of approximately$102 billion , loans outstanding of approximately$31 billion , preferred stock of approximately$1.4 billion and long-term debt of approximately$237 million . The Bancorp currently estimates that approximately 12% of the existing exposures will mature beforeJune 30, 2023 . For the contracts that will not mature prior toJune 30, 2023 , an additional portion of these contracts is subject to contractual terms specifying alternative reference rates ("fallback provisions") that would become effective upon cessation of LIBOR's publication. Existing exposures without fallback provisions are expected to either be amended prior toJune 30, 2023 to include such provisions or to transition to an alternative reference rate pursuant to the terms of the LIBOR Act and its related regulations. For a further discussion of the various risks the Bancorp faces in connection with the replacement of LIBOR on its operations, see "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 endedDecember 31, 2021 . 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
•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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TABLE 1: Earnings Summary
For the three months ended For the nine months ended
September 30, % September 30, %
($ in millions, except for per share data) 2022 2021 Change 2022 2021 Change
Income Statement Data
Net interest income (U.S. GAAP) $ 1,498 1,189 26 $ 4,032 3,574 13
Net interest income (FTE)(a)(b) 1,502 1,192 26 4,043 3,583 13
Noninterest income 672 836 (20) 2,031 2,326 (13)
Total revenue (FTE)(a)(b) 2,174 2,028 7 6,074 5,909 3
Provision for (benefit from) credit losses 158 (42) NM 383 (330) NM
Noninterest expense 1,167 1,172 - 3,501 3,541 (1)
Net income 653 704 (7) 1,709 2,107 (19)
Net income available to common shareholders 631 684 (8) 1,631 2,032 (20)
Common Share Data
Earnings per share - basic $ 0.91 0.98 (7) $ 2.37 2.87 (17)
Earnings per share - diluted 0.91 0.97 (6) 2.34 2.83 (17)
Cash dividends declared per common share 0.33 0.30 10 0.93 0.84 11
Book value per share 21.30 29.59 (28) 21.30 29.59 (28)
Market value per share 31.96 42.44 (25) 31.96 42.44 (25)
Financial Ratios
Return on average assets 1.25 % 1.36 (8) 1.10 % 1.37 (20)
Return on average common equity 14.9 13.0 15 12.3 13.1 (6)
Return on average tangible common equity(b) 21.9 16.9 30 17.3 16.8 3
Dividend payout 36.3 30.6 19 39.2 29.3 34
(a)Amounts presented on an FTE basis. The FTE adjustments were $4 and $3 for the
three months ended September 30, 2022 and 2021, respectively and $11 and $9 for
the nine months ended September 30, 2022 and 2021, 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 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 third quarter of 2021 was $684 million , or $0.97 per
diluted share, which was net of $20 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. The Bancorp's net income available
to common shareholders for the nine months ended September 30, 2021 was $2.0
billion , or $2.83 per diluted share, which was net of $75 million in preferred
stock dividends.
Net interest income on an FTE basis (non-GAAP) was $1.5 billion for the three
months ended September 30, 2022 , an increase of $310 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 commercial
loans and leases, average other short-term investments and average consumer
loans for the three months ended September 30, 2022 compared to the same period
in the prior year. Net interest income also benefited from increases in average
taxable securities and average commercial and industrial loans for the three
months ended September 30, 2022 compared to the same period in the prior year.
These positive impacts were partially offset by an increase in rates paid on
average interest checking deposits and an increase in the average balance of
FHLB advances as well as a decrease in interest income recognized from PPP loans
for the three months ended September 30, 2022 compared to the same period in the
prior year.
Net interest income on an FTE basis (non-GAAP) was $4.0 billion for the nine
months ended September 30, 2022 , an increase of $460 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 commercial
loans and leases and average other short-term investments for the nine months
ended September 30, 2022 compared to the same period in the prior year.
Additionally, net interest income benefited from increases in average taxable
securities, average commercial and industrial loans and average indirect secured
consumer loans for the nine months ended September 30, 2022 compared to the same
period in the prior year. Net interest income also benefited from a decrease in
average long-term debt for the nine months ended September 30, 2022 compared to
the same period in the prior year. These positive impacts were partially offset
by an increase in rates paid on average interest checking deposits and an
increase in the average balance of FHLB advances for the nine months ended
September 30, 2022 compared to the same period in the prior year. Additionally,
interest income recognized from PPP loans decreased for the nine months ended
September 30, 2022 compared to the same period in the prior year. Net interest
margin on an FTE basis (non-GAAP) was 3.22% and 2.91% for the three and nine
months ended September 30, 2022 , respectively, compared to 2.59% and 2.61% for
the same periods in the prior year.
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The provision for credit losses was $158 million and $383 million for the three
and nine months ended September 30, 2022 , respectively, compared to a benefit
from credit losses of $42 million and $330 million during the same periods in
the prior year. The increases in provision expense for the three and nine months
ended September 30, 2022 were primarily driven by factors that caused increases
in the ACL during those periods including higher period-end loan and lease
balances and deterioration in forecasted macroeconomic conditions. The increase
in provision expense for the nine months ended September 30, 2022 was also
driven by the initial recognition of provision expense 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 0.21% and
0.08% for the three months ended September 30, 2022 and 2021, respectively, and
0.18% and 0.17% for the nine months ended September 30, 2022 and 2021,
respectively. At September 30, 2022 and December 31, 2021 , nonperforming
portfolio assets as a percent of portfolio loans and leases and OREO were 0.46%
and 0.47%, respectively. For further discussion 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 decreased $164 million for the three months ended
September 30, 2022 compared to the same period in the prior year primarily due
to decreases in other noninterest income, commercial banking revenue, leasing
business revenue and mortgage banking net revenue.
Noninterest income decreased
Noninterest expense decreased$5 million for the three months endedSeptember 30, 2022 compared to the same period in the prior year primarily due to a decrease in compensation and benefits, partially offset by increases in technology and communications expense and marketing expense. Noninterest expense decreased$40 million for the nine months endedSeptember 30, 2022 compared to the same period in the prior year primarily due to decreases in compensation and benefits and card and processing expense, partially offset by increases in technology and communications expense, other noninterest expense and marketing expense.
For more information on net interest income, 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 ofSeptember 30, 2022 . As ofSeptember 30, 2022 , the Bancorp's capital ratios, as defined by theU.S. banking agencies, were: •CET1 capital ratio: 9.14%; •Tier 1 risk-based capital ratio: 10.40%; •Total risk-based capital ratio: 12.64%; •Leverage ratio: 8.44%. 7 -------------------------------------------------------------------------------- Table of Contents 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 primaryU.S. GAAP measures and should not be read in isolation or relied upon as a substitute for the primaryU.S. GAAP measures. The Bancorp encourages readers to consider its 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 toU.S. GAAP: TABLE 2: Non-GAAP Financial Measures - Financial Measures and Ratios on an FTE basis For the three months ended For the nine months ended September 30, September 30, ($ in millions) 2022 2021 2022 2021 Net interest income (U.S. GAAP)$ 1,498 1,189 4,032 3,574 Add: FTE adjustment 4 3 11 9 Net interest income on an FTE basis (1)$ 1,502 1,192 4,043 3,583 Net interest income on an FTE basis (annualized) (2) 5,959 4,729 5,405 4,790 Interest income (U.S. GAAP)$ 1,760 1,292 4,512 3,916 Add: FTE adjustment 4 3 11 9 Interest income on an FTE basis$ 1,764 1,295 4,523 3,925 Interest income on an FTE basis (annualized) (3) 6,998 5,138 6,047 5,248 Interest expense (annualized) (4)$ 1,039 409 642 457 Noninterest income (5) 672 836 2,031 2,326 Noninterest expense (6) 1,167 1,172 3,501 3,541 Average interest-earning assets (7) 185,378 182,801 185,883 183,479 Average interest-bearing liabilities (8) 119,773 113,548 117,344 115,383
Ratios:
Net interest margin on an FTE basis (2) / (7) 3.22 % 2.59 2.91 2.61 Net interest rate spread on an FTE basis ((3) / (7)) - ((4) / (8)) 2.91 2.45 2.70 2.46 Efficiency ratio on an FTE basis (6) / ((1) + (5)) 53.7 57.8 57.6 59.9 The Bancorp believes return on average tangible common equity is an important measure for comparative purposes with other financial institutions, but is not defined underU.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. 8 -------------------------------------------------------------------------------- Table of Contents 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
TABLE 3: Non-GAAP Financial Measures - Return on Average
Tangible Common Equity
For the three months ended For the nine months ended
September 30, September 30,
($ in millions) 2022 2021 2022 2021
Net income available to common shareholders
(U.S. GAAP) $ 631 684 1,631 2,032
Add: Intangible amortization, net of tax 10 9 27 25
Tangible net income available to common
shareholders $ 641 693 1,658 2,057
Tangible net income available to common
shareholders (annualized) (1) 2,543 2,749 2,217 2,750
Average Bancorp shareholders' equity (U.S.
GAAP) $ 18,864 22,927 19,829 22,935
Less: Average preferred stock 2,116 2,116 2,116 2,116
Average goodwill 4,926 4,430 4,729 4,317
Average intangible assets 188 149 165 135
Average tangible common equity (2) $ 11,634 16,232 12,819 16,367
Return on average tangible common equity (1) /
(2) 21.9 % 16.9 17.3 16.8
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
TABLE 4: Non-GAAP Financial Measures - Capital Ratios
September 30, December 31,
As of ($ in millions) 2022 2021
Total Bancorp Shareholders' Equity (U.S. GAAP) $ 16,736 22,210
Less: Preferred stock 2,116 2,116
Goodwill 4,925 4,514
Intangible assets 181 156
AOCI (5,306) 1,207
Tangible common equity, excluding AOCI (1) $ 14,820 14,217
Add: Preferred stock 2,116 2,116
Tangible equity (2) $ 16,936 16,333
Total Assets (U.S. GAAP) $ 205,463 211,116
Less: Goodwill 4,925 4,514
Intangible assets 181 156
AOCI, before tax (6,716) 1,528
Tangible assets, excluding AOCI (3) $ 207,073 204,918
Ratios:
Tangible equity as a percentage of tangible assets (2) / (3) 8.18 % 7.97
Tangible common equity as a percentage of tangible assets (1) / (3) 7.16 6.94
9-------------------------------------------------------------------------------- Table of Contents 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 withU.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 endedDecember 31, 2021 . There have been no material changes to the valuation techniques or models during the nine months endedSeptember 30, 2022 . 10 -------------------------------------------------------------------------------- Table of Contents 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 endedSeptember 30, 2022 and 2021, 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$1.5 billion for the three months endedSeptember 30, 2022 , an increase of$310 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 and average other short-term investments for the three months endedSeptember 30, 2022 compared to the same period in the prior year. Net interest income also benefited from increases in average taxable securities of$20.4 billion and average commercial and industrial loans of$8.9 billion for the three months endedSeptember 30, 2022 compared to the same period in the prior year. These positive impacts were partially offset by an increase in rates paid on average interest-bearing core deposits of 37 bps and an increase in the average balance of FHLB advances of$6.6 billion for the three months endedSeptember 30, 2022 compared to the same period in the prior year. Interest income recognized from PPP loans decreased to$6 million for the three months endedSeptember 30, 2022 compared to$47 million for the same period in the prior year. Net interest income on an FTE basis (non-GAAP) was$4.0 billion for the nine months endedSeptember 30, 2022 , an increase of$460 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 and average other short-term investments for the nine months endedSeptember 30, 2022 compared to the same period in the prior year. Additionally, net interest income benefited from increases in average taxable securities, average commercial and industrial loans and average indirect secured consumer loans of$14.5 billion ,$6.1 billion and$2.3 billion , respectively, for the nine months endedSeptember 30, 2022 compared to the same period in the prior year. Net interest income also benefited from a decrease in average long-term debt of$2.2 billion for the nine months endedSeptember 30, 2022 compared to the same period in the prior year. These positive impacts were partially offset by an increase in rates paid on average interest-bearing core deposits of 12 bps and an increase in the average balance of FHLB advances of$3.1 billion for the nine months endedSeptember 30, 2022 compared to the same period in the prior year. Additionally, interest income recognized from PPP loans decreased to$38 million for the nine months endedSeptember 30, 2022 compared to$153 million for the same period in the prior year. Net interest rate spread on an FTE basis (non-GAAP) was 2.91% and 2.70% during the three and nine months endedSeptember 30, 2022 , respectively, compared to 2.45% and 2.46% in the same periods in the prior year. Yields on average interest-earning assets increased 97 bps and 39 bps, partially offset by increases in rates paid on average interest-bearing liabilities of 51 bps and 15 bps for the three and nine months endedSeptember 30, 2022 , respectively, compared to the three and nine months endedSeptember 30, 2021 . Net interest margin on an FTE basis (non-GAAP) was 3.22% and 2.91% for the three and nine months endedSeptember 30, 2022 , respectively, compared to 2.59% and 2.61% for the comparable periods in the prior year. Net interest margin for the three and nine months endedSeptember 30, 2022 was positively impacted by the previously mentioned increases in the net interest rate spread. Net interest margin results are expected to continue increasing as rates rise and assets reprice more than liabilities. Interest income on an FTE basis (non-GAAP) from loans and leases increased$301 million and$300 million during the three and nine months endedSeptember 30, 2022 , respectively, compared to the three and nine months endedSeptember 30, 2021 , driven by the previously mentioned increases in market interest rates and average loan and lease balances, partially offset by lower income from PPP 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$168 million and$298 million during the three and nine months endedSeptember 30, 2022 , respectively, compared to the three and nine months endedSeptember 30, 2021 primarily due to the previously mentioned increases in average taxable securities and yields on average other short-term investments. The increase for the nine months endedSeptember 30, 2022 was partially offset by a decrease in yields on average taxable securities of 15 bps from the same period in the prior year. Interest expense on core deposits increased$90 million and$92 million for the three and nine months endedSeptember 30, 2022 , respectively, compared to the three and nine months endedSeptember 30, 2021 primarily due to increases in the cost of average interest-bearing core deposits to 41 bps and 18 bps for the three and nine months endedSeptember 30, 2022 , respectively, from 4 bps and 6 bps for 11 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) the three and nine months endedSeptember 30, 2021 , 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$69 million and$46 million for the three and nine months endedSeptember 30, 2022 , respectively, compared to the three and nine months endedSeptember 30, 2021 . The increases for the three and nine months endedSeptember 30, 2022 were primarily due to the previously mentioned increases in the average balances of FHLB advances and increases in rates paid on average long-term debt. The increase for the nine months endedSeptember 30, 2022 was partially offset by a decrease in the average balance of long-term debt of$2.2 billion from the same period in the prior year. Refer to the Borrowings subsection of the Balance Sheet Analysis section of MD&A for additional information on the Bancorp's borrowings. During the three and nine months endedSeptember 30, 2022 , average wholesale funding represented 18% and 14%, respectively, of average interest-bearing liabilities, compared to 12% and 14%, respectively, for the three and nine months endedSeptember 30, 2021 . For more information on the Bancorp's interest rate risk management, including estimated earnings sensitivity to changes in market interest rates, see the Interest Rate and Price Risk Management subsection of the Risk Management section of MD&A. 12 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) TABLE 5: Condensed Average Balance Sheets and Analysis of Net Interest Income on an FTE Basis Attribution of Change in For the three months ended September 30, 2022 September 30, 2021 Net Interest Income(a) Revenue/ Average Yield/ Revenue/ Average Yield/ ($ in millions) Average Balance Cost
Rate Average Balance Cost Rate Volume Yield/ Rate Total
Assets:
Interest-earning assets:
Loans and leases:(b)
Commercial and industrial loans $ 56,648 646 4.53 % $ 47,774 426 3.54 % $ 88 132 220
Commercial mortgage loans 10,751 111 4.10 10,339 78 3.00 3 30 33
Commercial construction loans 5,557 66 4.71 5,729 45 3.12 (1) 22 21
Commercial leases 2,793 22 3.08 3,158 23 2.84 (3) 2 (1)
Total commercial loans and leases $ 75,749 845 4.42 $ 67,000 572 3.39 $ 87 186 273
Residential mortgage loans 19,870 166 3.32 21,750 176 3.21 (16) 6 (10)
Home equity 3,956 48 4.84 4,409 40 3.59 (4) 12 8
Indirect secured consumer loans 16,750 141 3.34 15,590 128 3.27 10 3 13
Credit card 1,756 57 12.89 1,748 55 12.38 - 2 2
Other consumer loans 3,819 60 6.21 3,031 45 5.91 12 3 15
Total consumer loans $ 46,151 472 4.06 $ 46,528 444 3.79 $ 2 26 28
Total loans and leases $ 121,900 1,317 4.29 % $ 113,528 1,016 3.55 % $ 89 212 301
Securities:
Taxable 56,535 408 2.86 36,177 261 2.86 147 - 147
Exempt from income taxes(b) 1,178 8 2.77 1,031 6 2.22 1 1 2
Other short-term investments 5,765 31 2.15 32,065 12 0.15 (18) 37 19
Total interest-earning assets $ 185,378 1,764 3.78 % $ 182,801 1,295 2.81 % $ 219 250 469
Cash and due from banks 3,162 3,114
Other assets 20,163 21,566
Allowance for loan and lease losses (2,015) (2,032)
Total assets $ 206,688 $ 205,449
Liabilities and Equity:
Interest-bearing liabilities:
Interest checking deposits $ 42,574 77 0.72 % $ 45,128 6 0.05 % $ - 71 71
Savings deposits 23,814 7 0.12 20,941 1 0.02 - 6 6
Money market deposits 29,066 16 0.22 30,514 3 0.03 - 13 13
Foreign office deposits 206 - 0.78 195 - 0.03 - - -
CDs $250,000 or less 2,048 1 0.09 2,937 1 0.19 - - -
Total interest-bearing core deposits
0.41 $ 99,715 11 0.04 $ - 90 90
CDs over $250,000 2,226 11 1.90 306 1 1.10 9 1 10
Federal funds purchased 607 3 2.10 348 - 0.13 - 3 3
Securities sold under repurchase agreements 472 - 0.22 570 - 0.01 - - -
FHLB advances 6,608 38 2.30 - - - 38 - 38
Derivative collateral and other borrowed
money 356 5 4.92 552 - 0.24 - 5 5
Long-term debt 11,796 104 3.49 12,057 91 2.98 (2) 15 13
Total interest-bearing liabilities $ 119,773 262 0.87 % $ 113,548 103 0.36 % $ 45 114 159
Demand deposits 59,535 62,626
Other liabilities 8,516 6,348
Total liabilities $ 187,824 $ 182,522
Total equity $ 18,864 $ 22,927
Total liabilities and equity $ 206,688 $ 205,449
Net interest income (FTE)(c) $ 1,502 $ 1,192 $ 174 136 310
Net interest margin (FTE)(c) 3.22 % 2.59 %
Net interest rate spread (FTE)(c) 2.91 2.45
Interest-bearing liabilities to
interest-earning assets 64.61 62.12
(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 $4 and $3 for the three
months ended September 30, 2022 and 2021, respectively.
(c)Net interest income (FTE), net interest margin (FTE) and net interest rate
spread (FTE) are non-GAAP measures. For further information, refer to the
Non-GAAP Financial Measures section of MD&A.
13
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Management's Discussion and Analysis of Financial Condition and Results of Operations
(continued)
TABLE 6: Condensed Average Balance Sheets and Analysis of Net Interest Income on an FTE Basis
Attribution of Change in
For the nine months ended September 30, 2022 September 30, 2021 Net Interest Income(a)
Revenue/ Average Yield/ Revenue/ Average Yield/
($ in millions) Average Balance Cost
Rate Average Balance Cost Rate Volume Yield/ Rate Total
Assets:
Interest-earning assets:
Loans and leases:(b)
Commercial and industrial loans $ 54,907 1,569 3.82 % $ 48,761 1,308 3.59 % $ 172 89 261
Commercial mortgage loans 10,664 278 3.49 10,446 239 3.06 5 34 39
Commercial construction loans 5,429 159 3.91 5,936 139 3.14 (12) 32 20
Commercial leases 2,858 63 2.95 3,154 70 2.98 (6) (1) (7)
Total commercial loans and leases $ 73,858 2,069 3.75 $ 68,297 1,756 3.44 $ 159 154 313
Residential mortgage loans 19,981 479 3.20 21,316 524 3.28 (32) (13) (45)
Home equity 3,953 120 4.06 4,695 126 3.59 (21) 15 (6)
Indirect secured consumer loans 17,041 407 3.20 14,755 377 3.41 55 (25) 30
Credit card 1,717 161 12.50 1,798 165 12.29 (7) 3 (4)
Other consumer loans 3,234 148 6.10 3,029 136 5.99 9 3 12
Total consumer loans $ 45,926 1,315 3.83 $ 45,593 1,328 3.89 $ 4 (17) (13)
Total loans and leases $ 119,784 3,384 3.78 % $ 113,890 3,084 3.62 % $ 163 137 300
Securities:
Taxable 50,529 1,060 2.81 36,014 798 2.96 306 (44) 262
Exempt from income taxes(b) 1,084 21 2.56 797 14 2.32 5 2 7
Other short-term investments 14,486 58 0.53 32,778 29 0.12 (24) 53 29
Total interest-earning assets $ 185,883 4,523 3.25 % $ 183,479 3,925 2.86 % $ 450 148 598
Cash and due from banks 3,081 3,046
Other assets 20,211 20,922
Allowance for loan and lease losses (1,939) (2,228)
Total assets $ 207,236 $ 205,219
Liabilities and Equity:
Interest-bearing liabilities:
Interest checking deposits $ 45,172 100 0.30 % $ 45,333 20 0.06 % $ - 80 80
Savings deposits 23,435 10 0.06 20,136 3 0.02 1 6 7
Money market deposits 29,533 22 0.10 30,653 10 0.04 - 12 12
Foreign office deposits 157 - 0.39 155 - 0.04 - - -
CDs $250,000 or less 2,205 2 0.10 3,420 9 0.34 (2) (5) (7)
Total interest-bearing core deposits $ 100,502 134 0.18 $ 99,697 42 0.06 $ (1) 93 92
CDs over $250,000 1,055 13 1.64 620 6 1.36 5 2 7
Federal funds purchased 421 4 1.31 339 - 0.12 - 4 4
Securities sold under repurchase agreements 484 - 0.10 599 - 0.02 - - -
FHLB advances 3,141 48 2.04 - - - 48 - 48
Derivative collateral and other borrowed
money 365 8 2.70 543 1 0.31 - 7 7
Long-term debt 11,376 273 3.21 13,585 293 2.88 (51) 31 (20)
Total interest-bearing liabilities $ 117,344 480 0.55 % $ 115,383 342 0.40 % $ 1 137 138
Demand deposits 62,084 61,084
Other liabilities 7,979 5,817
Total liabilities $ 187,407 $ 182,284
Total equity $ 19,829 $ 22,935
Total liabilities and equity $ 207,236 $ 205,219
Net interest income (FTE)(c) $ 4,043 $ 3,583 $ 449 11 460
Net interest margin (FTE)(c) 2.91 % 2.61 %
Net interest rate spread (FTE)(c) 2.70 2.46
Interest-bearing liabilities to
interest-earning assets 63.13 62.89
(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 $11 and $9 for the nine
months ended September 30, 2022 and 2021, 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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Table of Contents
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 and the portfolio of unfunded commitments and
letters of credit that is based on factors previously discussed in the Critical
Accounting Policies section of the Bancorp's Annual Report on Form 10-K for the
year ended December 31, 2021 . 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 $158 million and $383 million for the three
and nine months ended September 30, 2022 , respectively, compared to a benefit
from credit losses of $42 million and $330 million during the same periods in
the prior year. Provision expense increased for the three and nine months ended
September 30, 2022 compared to the same periods in the prior year primarily
driven by factors which caused increases in the ACL during those periods
including higher period-end loan and lease balances and deterioration in
forecasted macroeconomic conditions. The increase in provision expense for the
nine months ended September 30, 2022 was also driven by the initial recognition
of provision expense on loans acquired as part of a business acquisition during
the second quarter of 2022. The benefit from credit losses for the three and
nine months ended September 30, 2021 was driven by decreases in the ACL in
response to improved economic forecasts and improved commercial and consumer
credit quality.
The ALLL increased $207 million from December 31, 2021 to $2.1 billion at
September 30, 2022 . At September 30, 2022 , the ALLL as a percent of portfolio
loans and leases increased to 1.75%, compared to 1.69% at December 31, 2021 . The
reserve for unfunded commitments increased $17 million from December 31, 2021 to
$199 million at September 30, 2022 . At September 30, 2022 , the ACL as a percent
of portfolio loans and leases increased to 1.91%, compared to 1.85% at
December 31, 2021 .
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 detailed 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 decreased $164 million and $295 million for the three and
nine months ended September 30, 2022 , respectively, compared to the three and
nine months ended September 30, 2021 .
The following table presents the components of noninterest income:
TABLE 7: Components of Noninterest Income
For the three months ended For the nine months ended
September 30, September 30,
($ in millions) 2022 2021 % Change 2022 2021 % Change
Service charges on deposits $ 143 152 (6) $ 449 445 1
Wealth and asset management revenue 141 147 (4) 430 436 (1)
Commercial banking revenue 134 152 (12) 406 465 (13)
Card and processing revenue 105 102 3 306 298 3
Leasing business revenue 60 78 (23) 179 226 (21)
Mortgage banking net revenue 69 86 (20) 152 235 (35)
Other noninterest income 59 120 (51) 195 211 (8)
Securities (losses) gains, net (38) (1) NM (84) 12 NM
Securities losses, net -
non-qualifying hedges on mortgage
servicing rights (1) - NM (2) (2) -
Total noninterest income $ 672 836 (20) $ 2,031 2,326 (13)
Service charges on deposits
Service charges on deposits consisted of $105 million and $331 million of
service charges on commercial deposits and $38 million and $118 million of
service charges on consumer deposits for the three and nine months ended
September 30, 2022 , respectively. Service charges on deposits consisted of $110
million and $325 million of service charges on commercial deposits and $42
million and $120 million of service charges on consumer deposits for the three
and nine months ended September 30, 2021 , respectively. Service charges on
deposits decreased $9 million and increased $4 million for the three and nine
months ended September 30, 2022 , respectively, compared to the three and nine
months ended September 30, 2021 . The decrease for the three months ended
September 30, 2022 was primarily driven by higher treasury management earnings
credits. The increase for the nine months ended September 30, 2022 was primarily
due to an increase in commercial treasury management 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 decreased $6 million for both the three and
nine months ended September 30, 2022 compared to the three and nine months ended
September 30, 2021 . The decrease for the three months ended September 30, 2022
was primarily driven by a decrease in private client service fees. The decrease
for the nine months ended September 30, 2022 was primarily driven by decreases
in securities income and private client service fees. The Bancorp's trust and
registered investment advisory businesses had approximately $494 billion and
$541 billion in total assets under care as of September 30, 2022 and 2021,
respectively, and managed $52 billion and $61 billion in assets for individuals,
corporations and not-for-profit organizations as of September 30, 2022 and 2021,
respectively.
Commercial banking revenue
Commercial banking revenue decreased $18 million and $59 million for the three
and nine months ended September 30, 2022 , respectively, compared to the three
and nine months ended September 30, 2021 primarily driven by decreases in
corporate bond fees, loan syndication fees and merger and acquisition fees,
partially offset by increases in contract revenue from commodity derivatives and
commercial customer derivatives.
Card and processing revenue
Card and processing revenue increased $3 million and $8 million for the three
and nine months ended September 30, 2022 , respectively, compared to the three
and nine months ended September 30, 2021 primarily due to an increase in credit
card interchange, partially offset by increased reward costs as well as a
decrease in other EFT income. The increases in credit card interchange and
reward costs were driven by an increase in consumer and business card spend
volumes.
Leasing business revenue
Leasing business revenue decreased $18 million and $47 million for the three and
nine months ended September 30, 2022 , respectively, compared to the three and
nine months ended September 30, 2021 . The decreases for the three and nine
months ended September 30, 2022 were primarily due to decreases in leasing
business solutions revenue, partially offset by increases in lease remarketing
fees. The decreases in leasing business solutions revenue were related to the
disposition of LaSalle Solutions during the second quarter of 2022. The decrease
for the nine months ended September 30, 2022 also included a decrease in lease
syndication fees.
Mortgage banking net revenue
Mortgage banking net revenue decreased $17 million and $83 million for the three
and nine months ended September 30, 2022 , respectively, compared to the three
and nine months ended September 30, 2021 .
The following table presents the components of mortgage banking net revenue:
TABLE 8: Components of Mortgage Banking Net Revenue
For the three months ended For the nine months ended
September 30, September 30,
($ in millions) 2022 2021 2022 2021
Origination fees and gains on loan sales $ 24 78 73 248
Net mortgage servicing revenue:
Gross mortgage servicing fees 81 63 230 181
Net valuation adjustments on MSRs and free-standing derivatives purchased to economically hedge MSRs
(36) (55) (151) (194)
Net mortgage servicing revenue 45 8 79 (13)
Total mortgage banking net revenue $ 69 86 152 235
Origination fees and gains on loan sales decreased $54 million and $175 million
for the three and nine months ended September 30, 2022 , respectively, compared
to the three and nine months ended September 30, 2021 primarily driven by
decreases in gain on sale margins and lower volume as well as the impact of
gains recognized during the three and nine months ended September 30, 2021 from
sales of forbearance loans that were repurchased from GNMA. Residential mortgage
loan originations decreased to $4.0 billion and $11.7 billion for the three and
nine months ended September 30, 2022 , respectively, from $5.0 billion and $14.7
billion for the three and nine months ended September 30, 2021 , respectively,
due to the impact of higher market interest rates on refinance activity.
Net mortgage servicing revenue increased $37 million and $92 million for the
three and nine months ended September 30, 2022 , respectively, compared to the
three and nine months ended September 30, 2021 primarily due to increases in
gross mortgage servicing fees and decreases in net negative valuation
adjustments. Refer to Table 9 for the components of net valuation adjustments on
the MSR portfolio and the impact of the Bancorp's non-qualifying hedging
strategy.
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Management's Discussion and Analysis of Financial Condition and Results of Operations
(continued)
TABLE 9: Components of Net Valuation Adjustments on MSRs
For the three months ended For the nine months ended
September 30, September 30,
($ in millions) 2022 2021 2022 2021Changes in fair value and settlement of free-standing derivatives purchased to economically hedge the MSR portfolio
$ (84) (11) (368) (99)
Changes in fair value:
Due to changes in inputs or assumptions(a) 83 20 358 123
Other changes in fair value(b) (35) (64) (141) (218)
Net valuation adjustments on MSRs and free-standing derivatives purchased to economically hedge MSRs $ (36)
(55) (151) (194)
(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 $48 million and $217 million for three and nine
months ended September 30, 2022 , respectively, and losses of $44 million and $95
million for the three and nine months ended September 30, 2021 , respectively, in
mortgage banking net revenue for valuation adjustments on the MSR portfolio. The
valuation adjustments on the MSR portfolio included increases of $83 million and
$358 million for the three and nine months ended September 30, 2022 ,
respectively, and increases of $20 million and $123 million for the three and
nine months ended September 30, 2021 , 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, 2022 , which resulted in a reduction to modeled
prepayment speeds and a widening of the spread between mortgage rates and swap
rates. There was also a decrease in the modeled OAS assumptions for the three
months ended September 30, 2022 and an increase in the modeled OAS assumptions
for the nine months ended September 30, 2022 . The fair value of the MSR
portfolio decreased $35 million and $141 million for the three and nine months
ended September 30, 2022 , respectively, and decreased $64 million and $218
million for the three and nine months ended September 30, 2021 , 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. The Bancorp recognized net losses of $1 million
and $2 million during the three and nine months ended September 30, 2022 ,
respectively, compared to net losses of an immaterial amount and $2 million
during the three and nine months ended September 30, 2021 , respectively,
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, 2022
and 2021 were $120.3 billion and $92.7 billion , respectively, with $102.7
billion and $77.9 billion , respectively, of residential mortgage loans serviced
for others.
Other noninterest income
The following table presents the components of other noninterest income:
TABLE 10: Components of Other Noninterest
Income
For the three months ended For the nine months ended
September 30, September 30,
($ in millions) 2022 2021 2022 2021
Private equity investment income $ 14 22 55 41
BOLI income 15 16 48 46
Cardholder fees 14 13 41 38
Banking center income 6 6 18 17
Equity method investment income 4 3 17 24
Consumer loan fees 5 4 15 13
Gains on contract sales 1 61 2 62
Loss on swap associated with the sale of Visa ,
Inc. Class B Shares (17) (17) (46) (67)
(Losses) gains on sale of businesses (1) - (7) 1
Other, net 18 12 52 36
Total other noninterest income $ 59 120 195 211
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Management's Discussion and Analysis of Financial Condition and Results of Operations
(continued)
Other noninterest income decreased $61 million and $16 million for the three and
nine months ended September 30, 2022 , respectively, compared to the three and
nine months ended September 30, 2021 , primarily due to a decrease in gains on
contract sales. The decrease for the nine months ended September 30, 2022 was
partially offset by a decrease in the loss on the swap associated with the sale
of Visa, Inc. Class B Shares and an increase in private equity investment
income.
Gains on contract sales for the three and nine months ended September 30, 2021
primarily included the recognition of a $60 million gain on the sale of the
Bancorp's HSA deposit portfolio, which was completed in the third quarter of
2021. The Bancorp recognized negative valuation adjustments of $46 million
related to the Visa total return swap during the nine months ended September 30,
2022 compared to negative valuation adjustments of $67 million during the nine
months ended September 30, 2021 . For additional information on the valuation of
the swap associated with the sale of Visa, Inc. Class B Shares , refer to Note 22
of the Notes to Condensed Consolidated Financial Statements. Private equity
investment income increased $14 million for the nine months ended September 30,
2022 compared to the same period in the prior year primarily driven by gains
recognized on certain private equity investments.
Noninterest Expense
Noninterest expense decreased $5 million and $40 million for the three and nine
months ended September 30, 2022 , respectively, compared to the same periods in
the prior year.
The following table presents the components of noninterest expense:
TABLE 11: Components of Noninterest Expense
For the three months ended For the nine months ended
September 30, September 30,
($ in millions) 2022 2021 % Change 2022 2021 % Change
Compensation and benefits $ 605 627 (4) $ 1,900 1,971 (4)
Technology and communications 106 98 8 306 285 7
Net occupancy expense 74 79 (6) 225 235 (4)
Equipment expense 36 34 6 108 102 6
Leasing business expense 33 33 - 95 102 (7)
Marketing expense 35 29 21 87 72 21
Card and processing expense 21 19 11 59 70 (16)
Other noninterest expense 257 253 2 721 704 2
Total noninterest expense $ 1,167 1,172 - $ 3,501 3,541 (1)
Efficiency ratio on an FTE basis(a) 53.7 % 57.8 57.6 % 59.9
(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 decreased$22 million and$71 million for the three and nine months endedSeptember 30, 2022 , respectively, compared to the same periods in the prior year primarily driven by decreases in non-qualified deferred compensation expense and performance-based compensation, partially offset by the additional personnel costs of an acquired business as well as the impact of raising the Bancorp's minimum wage in the third quarter of 2022. The decrease for the nine months endedSeptember 30, 2022 was partially offset by the impact of a special broad-based compensation bonus granted in the first quarter of 2022. Full-time equivalent employees totaled 19,187 atSeptember 30, 2022 compared to 19,171 atSeptember 30, 2021 . Technology and communications expense increased$8 million and$21 million for the three and nine months endedSeptember 30, 2022 , respectively, compared to the same periods in the prior year primarily driven by increased investment in strategic initiatives and technology. Marketing expense increased$6 million and$15 million for the three and nine months endedSeptember 30, 2022 , respectively, compared to the same periods in the prior year primarily due to an increase in account acquisition programs. The increase for the nine months endedSeptember 30, 2022 was also driven by increased advertising.
Card and processing expense decreased
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Management's Discussion and Analysis of Financial Condition and Results of Operations
(continued)
The following table presents the components of other noninterest expense:
TABLE 12: Components of Other Noninterest Expense
For the three months ended For the nine months ended
September 30, September 30,
($ in millions) 2022 2021 2022 2021
Loan and lease $ 40 54 127 158
FDIC insurance and other taxes 37 29 101 87
Losses and adjustments 26 19 62 49
Data processing 21 19 61 60
Travel 15 12 45 22
Professional service fees 16 14 42 46
Intangible amortization 12 11 34 32
Postal and courier 10 9 30 28
Other, net 80 86 219 222
Total other noninterest expense $ 257 253 721 704
Other noninterest expense increased $4 million and $17 million for the three and
nine months ended September 30, 2022 , respectively, compared to the same periods
in the prior year primarily due to increases in FDIC insurance and other taxes
and losses and adjustments, partially offset by a decrease in loan and lease
expense. The increase for the nine months ended September 30, 2022 also included
an increase in travel expense.
FDIC insurance and other taxes increased $8 million and $14 million for the
three and nine months ended September 30, 2022 , respectively, compared to the
same periods in the prior year primarily as a result of an increase in the FDIC
insurance assessment rate. Losses and adjustments increased $7 million and $13
million for the three and nine months ended September 30, 2022 , respectively,
compared to the same periods in the prior year. The increase for the three
months ended September 30, 2022 was primarily due to increases in operational
losses and legal settlements. The increase for the nine months ended
September 30, 2022 was primarily due to a reduction in the net benefit from
changes in credit valuation adjustments on customer accommodation derivatives
and an increase in operational losses, partially offset by a decrease in legal
settlements. Travel expense increased $23 million for the nine months ended
September 30, 2022 compared to the same period in the prior year due to an
increase in travel as a result of the gradual cessation of travel restrictions
related to the COVID-19 pandemic.
Loan and lease expense decreased $14 million and $31 million for the three and
nine months ended September 30, 2022 , respectively, compared to the same periods
in the prior year primarily driven by a decrease in loan servicing expenses
related to the Bancorp's sales of certain government-guaranteed residential
mortgage loans that were previously in forbearance programs and serviced by a
third party.
Applicable Income Taxes
TABLE 13: Applicable Income Taxes
For the three months ended For the nine months ended
September 30, September 30,
($ in millions) 2022 2021 2022 2021
Income before income taxes $ 845 895 2,179 2,689
Applicable income tax expense 192 191 470 582
Effective tax rate 22.7 % 21.3 21.6 21.6
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 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 increased to 22.7% for the three months ended
September 30, 2022 compared to 21.3% for the same period in the prior year
primarily related to a decrease in excess tax benefits related to share-based
compensation and an increase in the amount of nondeductible expenses. The
effective tax rate was 21.6% for both the nine months ended September 30, 2022
and 2021.
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