FIFTH THIRD BANCORP
For the period ended Sep 30, 2024. Filed Nov 5, 2024.
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A company's report for each of its first three quarters. The financial statements are not audited. It shows how the business has moved since the last annual report, and what management says changed.
Sep 30, 2024 · Filed Nov 5, 2024
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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 (including CDs over $250,000, federal funds purchased, other short-term borrowings and long-term debt). 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, 2024 and 2023, 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 and $4.2 billion for the three and nine months ended September 30, 2024, respectively, decreasing $18 million and $219 million compared to the same periods in the prior year. For both the three and nine months ended September 30, 2024, 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 as well as decreases in the average balances of commercial and industrial loans. These negative impacts were partially offset by increases in the average balances of other short-term investments and increases in yields on average interest-earning assets.
Net interest rate spread on an FTE basis (non-GAAP) was 2.05% for both the three and nine months ended September 30, 2024, compared to 2.13% and 2.35% for the three and nine months ended September 30, 2023, respectively. Rates paid on average interest-bearing liabilities increased 28 bps and 69 bps, partially offset by increases in yields on average interest-earning assets of 20 bps and 39 bps for the three and nine months ended September 30, 2024, respectively, compared to the three and nine months ended September 30, 2023.
Net interest margin on an FTE basis (non-GAAP) was 2.90% and 2.88% for the three and nine months ended September 30, 2024, respectively, compared to 2.98% and 3.12% for the comparable periods in the prior year. Net interest margin for the three and nine months ended September 30, 2024 was primarily impacted by the previously mentioned impacts of higher market interest rates, migration of average balances of deposits from demand deposits to interest-bearing deposits and decreases in average balances of loans and leases. Net interest margin results are expected to modestly increase over the next several quarters driven by fixed-rate asset repricing and moderating deposit costs. However, net interest margin may be negatively impacted by increased deposit competition or higher levels of cash and other short-term investments.
Interest income on an FTE basis (non-GAAP) from loans and leases increased $11 million and$195 million during the three and nine months ended September 30, 2024, respectively, compared to the three and nine months ended September 30, 2023 primarily driven by increases in yields on loans and leases, partially offset by decreases in average balances of 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$128 million and $589 million during the three and nine months ended September 30, 2024, respectively, compared to the three and nine months ended September 30, 2023 primarily due to increases in the average balances of other short-term investments. The increase for the nine months ended September 30, 2024 was also driven by an increase in yields on average taxable securities.
Interest expense on average core deposits increased $153 million and $905 million for the three and nine months ended September 30, 2024, respectively, compared to the three and nine months ended September 30, 2023 primarily due to increases in the cost of average interest-bearing core deposits to 297 bps and 295 bps for the three and nine months ended September 30, 2024, respectively, from 265 bps and 219
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
bps for the three and nine months ended September 30, 2023, respectively, as a result of higher short-term interest rates and greater competition for deposits. The increases for the three and nine months ended September 30, 2024 were also driven by increases in the average balances of interest-bearing core deposits. 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$4 million and $98 million for the three and nine months ended September 30, 2024, respectively, compared to the three and nine months ended September 30, 2023 primarily due to increases in the average balances of long-term debt. The increase for the three months ended September 30, 2024 was partially offset by a decrease in the average balances of CDs over $250,000. The increase for the nine months ended September 30, 2024 was also driven by an increase in the rates paid on average long-term debt, partially offset by a decrease in the average balances of FHLB advances. Refer to the Borrowings subsection of the Balance Sheet Analysis section of MD&A for additional information on the Bancorp’s borrowings. Average wholesale funding represented 16% of average interest-bearing liabilities for both the three and nine months ended September 30, 2024, compared to 17% and 18% for the three and nine months ended September 30, 2023, respectively. For more information on the Bancorp’s interest rate risk management, including estimated earnings sensitivity to changes in market interest rates, refer to the Interest Rate and Price Risk Management subsection of the Risk Management section of MD&A.
Table of Contents
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
| TABLE 5: Condensed Consolidated Average Balance Sheets and Analysis of Net Interest Income on an FTE Basis | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| For the three months ended · September 30, 2024 · September 30, 2023 · Attribution of Change in Net Interest Income(a) | |||||||||||
| ($ 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 | $51,630 | 929 | 7.15% | $57,015 | 1,006 | 7.00% | $(96) | 19 | (77) | ||
| Commercial mortgage loans | 11,488 | 181 | 6.26 | 11,216 | 173 | 6.12 | 4 | 4 | 8 | ||
| Commercial construction loans | 5,982 | 107 | 7.14 | 5,540 | 97 | 6.93 | 8 | 2 | 10 | ||
| Commercial leases | 2,686 | 31 | 4.53 | 2,618 | 24 | 3.75 | 1 | 6 | 7 | ||
| Total commercial loans and leases | $71,786 | 1,248 | 6.91 | $76,389 | 1,300 | 6.75 | $(83) | 31 | (52) | ||
| Residential mortgage loans | 17,604 | 164 | 3.71 | 18,019 | 160 | 3.52 | (4) | 8 | 4 | ||
| Home equity | 4,018 | 85 | 8.40 | 3,897 | 80 | 8.17 | 3 | 2 | 5 | ||
| Indirect secured consumer loans | 15,680 | 214 | 5.42 | 15,787 | 176 | 4.43 | (1) | 39 | 38 | ||
| Credit card | 1,708 | 60 | 14.00 | 1,808 | 64 | 14.09 | (4) | — | (4) | ||
| Solar energy installation loans | 3,990 | 81 | 8.12 | 3,245 | 53 | 6.42 | 13 | 15 | 28 | ||
| Other consumer loans | 2,629 | 62 | 9.37 | 3,121 | 70 | 8.93 | (11) | 3 | (8) | ||
| Total consumer loans | $45,629 | 666 | 5.81 | $45,877 | 603 | 5.22 | $(4) | 67 | 63 | ||
| Total loans and leases | $117,415 | 1,914 | 6.48% | $122,266 | 1,903 | 6.18% | $(87) | 98 | 11 | ||
| Securities: | |||||||||||
| Taxable | 55,329 | 452 | 3.25 | 55,519 | 435 | 3.10 | (2) | 19 | 17 | ||
| Exempt from income taxes(b) | 1,378 | 11 | 3.30 | 1,475 | 12 | 3.21 | (1) | — | (1) | ||
| Other short-term investments | 21,714 | 298 | 5.47 | 12,956 | 186 | 5.69 | 120 | (8) | 112 | ||
| Total interest-earning assets | $195,836 | 2,675 | 5.43% | $192,216 | 2,536 | 5.23% | $30 | 109 | 139 | ||
| Cash and due from banks | 2,664 | 2,576 | |||||||||
| Other assets | 17,626 | 15,920 | |||||||||
| Allowance for loan and lease losses | (2,288) | (2,327) | |||||||||
| Total assets | $213,838 | $208,385 | |||||||||
| Liabilities and Equity: | |||||||||||
| Interest-bearing liabilities: | |||||||||||
| Interest checking deposits | $58,441 | 497 | 3.38% | $53,109 | 426 | 3.18% | $44 | 27 | 71 | ||
| Savings deposits | 17,272 | 31 | 0.71 | 20,511 | 46 | 0.89 | (7) | (8) | (15) | ||
| Money market deposits | 37,257 | 287 | 3.06 | 32,072 | 202 | 2.50 | 36 | 49 | 85 | ||
| Foreign office deposits | 164 | 1 | 1.97 | 168 | 1 | 1.72 | — | — | — | ||
| CDs $250,000 or less | 10,543 | 108 | 4.07 | 9,630 | 96 | 3.97 | 9 | 3 | 12 | ||
| Total interest-bearing core deposits | $123,677 | 924 | 2.97 | $115,490 | 771 | 2.65 | $82 | 71 | 153 | ||
| CDs over $250,000 | 3,499 | 44 | 5.08 | 5,926 | 73 | 4.91 | (31) | 2 | (29) | ||
| Federal funds purchased | 176 | 2 | 5.34 | 181 | 2 | 5.31 | — | — | — | ||
| Securities sold under repurchase agreements | 396 | 2 | 2.36 | 352 | 1 | 1.46 | — | 1 | 1 | ||
| FHLB advances | 2,576 | 36 | 5.59 | 3,726 | 50 | 5.26 | (16) | 2 | (14) | ||
| Derivative collateral and other borrowed money | 52 | 2 | 14.76 | 48 | 1 | 7.82 | — | 1 | 1 | ||
| Long-term debt | 16,716 | 238 | 5.65 | 14,056 | 193 | 5.46 | 38 | 7 | 45 | ||
| Total interest-bearing liabilities | $147,092 | 1,248 | 3.38% | $139,779 | 1,091 | 3.10% | $73 | 84 | 157 | ||
| Demand deposits | 40,020 | 44,228 | |||||||||
| Other liabilities | 6,475 | 7,073 | |||||||||
| Total liabilities | $193,587 | $191,080 | |||||||||
| Total equity | $20,251 | $17,305 | |||||||||
| Total liabilities and equity | $213,838 | $208,385 | |||||||||
| Net interest income (FTE)(c) | $1,427 | $1,445 | $(43) | 25 | (18) | ||||||
| Net interest margin (FTE)(c) | 2.90% | 2.98% | |||||||||
| Net interest rate spread (FTE)(c) | 2.05 | 2.13 | |||||||||
| Interest-bearing liabilities to interest-earning assets | 75.11 | 72.72 | |||||||||
(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 $6 and $7 for the three months ended September 30, 2024 and 2023, respectively.
(c)Net interest income (FTE), net interest margin (FTE) and net interest rate spread (FTE) are non-GAAP measures. For further information, refer to the Non-GAAP Financial Measures section of MD&A.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
| TABLE 6: Condensed Consolidated Average Balance Sheets and Analysis of Net Interest Income on an FTE Basis | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| For the nine months ended · September 30, 2024 · September 30, 2023 · Attribution of Change in Net Interest Income(a) | |||||||||||
| ($ 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 | $52,423 | 2,795 | 7.12% | $57,786 | 2,908 | 6.73% | $(280) | 167 | (113) | ||
| Commercial mortgage loans | 11,394 | 535 | 6.27 | 11,237 | 493 | 5.87 | 7 | 35 | 42 | ||
| Commercial construction loans | 5,877 | 315 | 7.16 | 5,527 | 279 | 6.74 | 18 | 18 | 36 | ||
| Commercial leases | 2,602 | 85 | 4.37 | 2,661 | 71 | 3.59 | (1) | 15 | 14 | ||
| Total commercial loans and leases | $72,296 | 3,730 | 6.89 | $77,211 | 3,751 | 6.50 | $(256) | 235 | (21) | ||
| Residential mortgage loans | 17,412 | 474 | 3.64 | 18,168 | 467 | 3.43 | (20) | 27 | 7 | ||
| Home equity | 3,960 | 248 | 8.35 | 3,946 | 217 | 7.34 | 1 | 30 | 31 | ||
| Indirect secured consumer loans | 15,410 | 598 | 5.18 | 16,219 | 508 | 4.19 | (26) | 116 | 90 | ||
| Credit card | 1,736 | 176 | 13.53 | 1,790 | 188 | 14.06 | (5) | (7) | (12) | ||
| Solar energy installation loans | 3,900 | 236 | 8.08 | 2,734 | 116 | 5.68 | 60 | 60 | 120 | ||
| Other consumer loans | 2,752 | 189 | 9.16 | 3,216 | 209 | 8.67 | (31) | 11 | (20) | ||
| Total consumer loans | $45,170 | 1,921 | 5.68 | $46,073 | 1,705 | 4.95 | $(21) | 237 | 216 | ||
| Total loans and leases | $117,466 | 5,651 | 6.43% | $123,284 | 5,456 | 5.92% | $(277) | 472 | 195 | ||
| Securities: | |||||||||||
| Taxable | 55,196 | 1,347 | 3.26 | 56,127 | 1,292 | 3.08 | (22) | 77 | 55 | ||
| Exempt from income taxes(b) | 1,395 | 34 | 3.28 | 1,459 | 35 | 3.17 | (2) | 1 | (1) | ||
| Other short-term investments | 21,174 | 883 | 5.57 | 8,708 | 348 | 5.34 | 519 | 16 | 535 | ||
| Total interest-earning assets | $195,231 | 7,915 | 5.42% | $189,578 | 7,131 | 5.03% | $218 | 566 | 784 | ||
| Cash and due from banks | 2,681 | 2,776 | |||||||||
| Other assets | 17,571 | 16,405 | |||||||||
| Allowance for loan and lease losses | (2,309) | (2,231) | |||||||||
| Total assets | $213,174 | $206,528 | |||||||||
| Liabilities and Equity: | |||||||||||
| Interest-bearing liabilities: | |||||||||||
| Interest checking deposits | $58,372 | 1,480 | 3.39% | $50,782 | 1,061 | 2.79% | $173 | 246 | 419 | ||
| Savings deposits | 17,707 | 91 | 0.69 | 21,755 | 118 | 0.73 | (21) | (6) | (27) | ||
| Money market deposits | 35,791 | 802 | 2.99 | 29,815 | 419 | 1.88 | 97 | 286 | 383 | ||
| Foreign office deposits | 156 | 3 | 2.16 | 151 | 2 | 1.63 | — | 1 | 1 | ||
| CDs $250,000 or less | 10,518 | 327 | 4.15 | 7,537 | 198 | 3.51 | 88 | 41 | 129 | ||
| Total interest-bearing core deposits | $122,544 | 2,703 | 2.95 | $110,040 | 1,798 | 2.19 | $337 | 568 | 905 | ||
| CDs over $250,000 | 4,585 | 177 | 5.16 | 5,222 | 179 | 4.57 | (24) | 22 | (2) | ||
| Federal funds purchased | 202 | 8 | 5.39 | 347 | 13 | 4.89 | (6) | 1 | (5) | ||
| Securities sold under repurchase agreements | 378 | 6 | 2.06 | 347 | 3 | 1.13 | — | 3 | 3 | ||
| FHLB advances | 2,949 | 125 | 5.68 | 5,035 | 188 | 4.99 | (86) | 23 | (63) | ||
| Derivative collateral and other borrowed money | 55 | 4 | 9.50 | 123 | 7 | 8.10 | (4) | 1 | (3) | ||
| Long-term debt | 15,951 | 682 | 5.71 | 13,474 | 514 | 5.09 | 101 | 67 | 168 | ||
| Total interest-bearing liabilities | $146,664 | 3,705 | 3.37% | $134,588 | 2,702 | 2.68% | $318 | 685 | 1,003 | ||
| Demand deposits | 40,374 | 47,138 | |||||||||
| Other liabilities | 6,904 | 6,929 | |||||||||
| Total liabilities | $193,942 | $188,655 | |||||||||
| Total equity | $19,232 | $17,873 | |||||||||
| Total liabilities and equity | $213,174 | $206,528 | |||||||||
| Net interest income (FTE)(c) | $4,210 | $4,429 | $(100) | (119) | (219) | ||||||
| Net interest margin (FTE)(c) | 2.88% | 3.12% | |||||||||
| Net interest rate spread (FTE)(c) | 2.05 | 2.35 | |||||||||
| Interest-bearing liabilities to interest-earning assets | 75.12 | 70.99 | |||||||||
(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 for both the nine months ended September 30, 2024 and 2023.
(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 and the portfolio of unfunded commitments that is based on factors discussed in the Critical Accounting Policies section of the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2023. 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 $160 million and $351 million for the three and nine months ended September 30, 2024, respectively, compared to $119 million and $460 million during the same periods in the prior year. Provision expense for the three months ended September 30, 2024 was affected by factors that caused an increase in the ACL from June 30, 2024, primarily including the recognition of specific reserves on individually evaluated commercial and industrial loans, slight deterioration in the economic forecast and changes in loan mix. The provision for credit losses for the nine months ended September 30, 2024 was affected by factors that caused a decrease in the ACL from December 31, 2023, including improvement in the economic forecast used to calculate the ACL and lower period-end loan and lease balances.
The ALLL decreased $17 million from December 31, 2023 to $2.3 billion at September 30, 2024. The ALLL as a percent of portfolio loans and leases was 1.98% at both September 30, 2024 and December 31, 2023. The reserve for unfunded commitments decreased $28 million from December 31, 2023 to $138 million at September 30, 2024. At September 30, 2024, the ACL as a percent of portfolio loans and leases decreased to 2.09%, compared to 2.12% at December 31, 2023.
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 decreased $4 million and $20 million for the three and nine months ended September 30, 2024, respectively, compared to the three and nine months ended September 30, 2023.
The following table presents the components of noninterest income:
| TABLE 7: Components of Noninterest Income | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| For the three months endedSeptember 30, · For the nine months endedSeptember 30, | |||||||||
| ($ in millions) · 2024 · 2023 · % Change · 2024 · 2023 · % Change | |||||||||
| Wealth and asset management revenue | $163 | 145 | 12 | $483 | 434 | 11 | |||
| Service charges on deposits | 161 | 149 | 8 | 467 | 431 | 8 | |||
| Commercial banking revenue | 163 | 154 | 6 | 451 | 461 | (2) | |||
| Card and processing revenue | 106 | 104 | 2 | 316 | 310 | 2 | |||
| Mortgage banking net revenue | 50 | 57 | (12) | 154 | 184 | (16) | |||
| Leasing business revenue | 43 | 58 | (26) | 120 | 162 | (26) | |||
| Other noninterest income | 15 | 55 | (73) | 103 | 152 | (32) | |||
| Securities gains (losses), net | 10 | (7) | NM | 23 | 3 | 667 | |||
| Total noninterest income | $711 | 715 | (1) | $2,117 | 2,137 | (1) | |||
Wealth and asset management revenue
Wealth and asset management revenue increased $18 million and $49 million for the three and nine months ended September 30, 2024, respectively, compared to the three and nine months ended September 30, 2023 primarily driven by increases in personal asset management revenue and brokerage income. The Bancorp’s trust and registered investment advisory businesses had approximately $635 billion and $547 billion in total assets under care as of September 30, 2024 and 2023, respectively, and managed $69 billion and $57 billion in assets for individuals, corporations and not-for-profit organizations as of September 30, 2024 and 2023, respectively.
Service charges on deposits
Service charges on deposits increased $12 million and $36 million for the three and nine months ended September 30, 2024, respectively, compared to the three and nine months ended September 30, 2023 primarily due to increases in service charges on commercial deposits. Service charges on commercial deposits were $120 million and $350 million for the three and nine months ended September 30, 2024, respectively, increasing $11 million and $35 million from the same periods in the prior year, primarily due to increases in revenue from commercial payments activities, which include traditional treasury management and embedded payments. Service charges on consumer
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
deposits were $41 million and $117 million for the three and nine months ended September 30, 2024, respectively, compared to $40 million and $116 million for the same periods in the prior year.
Commercial banking revenue
Commercial banking revenue increased $9 million and decreased $10 million for the three and nine months ended September 30, 2024, respectively, compared to the three and nine months ended September 30, 2023. The increase for the three months ended September 30, 2024 compared to the three months ended September 30, 2023 was primarily driven by an increase in corporate bond fees, partially offset by a decrease in foreign exchange fees. The decrease for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 was primarily driven by decreases in revenue from commercial customer derivatives, foreign exchange fees and loan syndication revenue, partially offset by an increase in corporate bond fees.
Card and processing revenue
Card and processing revenue increased $2 million and $6 million for the three and nine months ended September 30, 2024, respectively, compared to the three and nine months ended September 30, 2023 primarily due to increases in electronic funds transfer income. The increase for the nine months ended September 30, 2024 also included an increase in credit and debit card interchange, partially offset by increased reward costs.
Mortgage banking net revenue
Mortgage banking net revenue decreased $7 million and $30 million for the three and nine months ended September 30, 2024, respectively, compared to the three and nine months ended September 30, 2023.
The following table presents the components of mortgage banking net revenue:
| TABLE 8: Components of Mortgage Banking Net Revenue | ||||
|---|---|---|---|---|
| For the three months endedSeptember 30, | For the nine months endedSeptember 30, | |||
| ($ in millions) | 2024 | 2023 | 2024 | 2023 |
| Origination fees and gains on loan sales | $18 | 19 | 50 | 59 |
| Net mortgage servicing revenue: | ||||
| Gross mortgage servicing fees | 77 | 79 | 233 | 241 |
| Net valuation adjustments on MSRs and free-standing derivatives purchased to economically hedge MSRs | (45) | (41) | (129) | (116) |
| Net mortgage servicing revenue | 32 | 38 | 104 | 125 |
| Total mortgage banking net revenue | $50 | 57 | 154 | 184 |
Origination fees and gains on loan sales decreased $1 million and $9 million for the three and nine months ended September 30, 2024, respectively, compared to the three and nine months ended September 30, 2023 primarily driven by the impact of gains recognized during the three and nine months ended September 30, 2023 from sales of forbearance loans that were repurchased from GNMA, partially offset by the impacts of mark-to-market adjustments recognized on held for investment loans measured at fair value. Residential mortgage loan originations increased to $1.9 billion from $1.5 billion for the three months ended September 30, 2024 compared to the three months ended September 30, 2023 primarily due to the impact of lower market interest rates on originations. Residential mortgage loan originations were $4.6 billion for both the nine months ended September 30, 2024 and 2023.
The following table presents the components of net valuation adjustments on the MSR portfolio and the impact of the Bancorp’s non-qualifying hedging strategy:
| TABLE 9: Components of Net Valuation Adjustments on MSRs | ||||
|---|---|---|---|---|
| For the three months endedSeptember 30, | For the nine months endedSeptember 30, | |||
| ($ in millions) | 2024 | 2023 | 2024 | 2023 |
| Changes in fair value and settlement of free-standing derivatives purchased to economically hedge the MSR portfolio | $45 | (75) | (17) | (110) |
| Changes in fair value: | ||||
| Due to changes in inputs or assumptions(a) | (49) | 73 | 1 | 107 |
| Other changes in fair value(b) | (41) | (39) | (113) | (113) |
| Net valuation adjustments on MSRs and free-standing derivatives purchased to economically hedge MSRs | $(45) | (41) | (129) | (116) |
(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.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
The Bancorp recognized losses of $90 million and $112 million for the three and nine months ended September 30, 2024, respectively, in mortgage banking net revenue for valuation adjustments on the MSR portfolio, compared to gains of $34 million and losses of $6 million for the same periods in the prior year. The valuation adjustments on the MSR portfolio included a decrease of $49 million and an increase of $1 million for the three and nine months ended September 30, 2024, respectively, and increases of $73 million and $107 million for the three and nine months ended September 30, 2023, respectively, due to changes in market rates and other inputs in the valuation model, including future prepayment speeds and OAS assumptions. Mortgage rates decreased during the three and nine months ended September 30, 2024, which caused an increase in prepayment speeds. The fair value of the MSR portfolio decreased $41 million and $113 million for the three and nine months ended September 30, 2024, respectively, and decreased $39 million and $113 million for the three and nine months ended September 30, 2023, 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. Net gains and losses on these securities were immaterial for both the three and nine months ended September 30, 2024 and 2023.
The Bancorp’s total residential mortgage loans serviced as of September 30, 2024 and 2023 were $112.4 billion and $118.5 billion, respectively, with $95.8 billion and $101.9 billion, respectively, of residential mortgage loans serviced for others.
Leasing business revenue
Leasing business revenue decreased $15 million and $42 million for the three and nine months ended September 30, 2024, respectively, compared to the three and nine months ended September 30, 2023 primarily driven by decreases in operating lease income, lease remarketing fees and lease syndication revenue.
Other noninterest income
The following table presents the components of other noninterest income:
| TABLE 10: Components of Other Noninterest Income | ||||
|---|---|---|---|---|
| For the three months endedSeptember 30, | For the nine months endedSeptember 30, | |||
| ($ in millions) | 2024 | 2023 | 2024 | 2023 |
| BOLI income | $16 | 15 | 49 | 45 |
| Cardholder fees | 14 | 15 | 41 | 43 |
| Private equity investment income | 12 | 13 | 33 | 39 |
| Banking center income | 7 | 7 | 20 | 19 |
| Consumer loan fees | 6 | 5 | 16 | 15 |
| Equity method investment income | 5 | 3 | 13 | 48 |
| Gains on sale of businesses | 1 | 2 | 7 | — |
| Loss on swap associated with the sale of Visa, Inc. Class B Shares | (47) | (10) | (87) | (72) |
| Other, net | 1 | 5 | 11 | 15 |
| Total other noninterest income | $15 | 55 | 103 | 152 |
Other noninterest income decreased $40 million and $49 million for the three and nine months ended September 30, 2024, respectively, compared to the three and nine months ended September 30, 2023 primarily due to increases in the loss on the swap associated with the sale of Visa, Inc. Class B Shares. The decrease for the nine months ended September 30, 2024 also included a decrease in equity method investment income.
The Bancorp recognized negative valuation adjustments of $47 million and $87 million related to the Visa total return swap during the three and nine months ended September 30, 2024, respectively, compared to negative valuation adjustments of $10 million and $72 million during the three and nine months ended September 30, 2023, respectively. 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. Equity method investment income decreased $35 million for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 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 gains were $10 million and $23 million for the three and nine months ended September 30, 2024, respectively, compared to losses of $7 million and gains of $3 million for the three and nine months ended September 30, 2023, respectively. For more information, refer to Note 4 of the Notes to Condensed Consolidated Financial Statements.
Table of Contents
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Noninterest Expense
Noninterest expense increased $56 million and $57 million for the three and nine months ended September 30, 2024, respectively, compared to the same periods in the prior year.
The following table presents the components of noninterest expense:
| TABLE 11: Components of Noninterest Expense | ||||||
|---|---|---|---|---|---|---|
| For the three months endedSeptember 30, | For the nine months endedSeptember 30, | |||||
| ($ in millions) | 2024 | 2023 | % Change | 2024 | 2023 | % Change |
| Compensation and benefits | $690 | 629 | 10 | $2,099 | 2,036 | 3 |
| Technology and communications | 121 | 115 | 5 | 351 | 347 | 1 |
| Net occupancy expense | 81 | 84 | (4) | 251 | 248 | 1 |
| Equipment expense | 38 | 37 | 3 | 114 | 110 | 4 |
| Marketing expense | 26 | 35 | (26) | 92 | 96 | (4) |
| Leasing business expense | 21 | 29 | (28) | 69 | 94 | (27) |
| Card and processing expense | 22 | 21 | 5 | 63 | 63 | — |
| Other noninterest expense | 245 | 238 | 3 | 768 | 756 | 2 |
| Total noninterest expense | $1,244 | 1,188 | 5 | $3,807 | 3,750 | 2 |
| Efficiency ratio on an FTE basis(a) | 58.2% | 55.0 | 60.2% | 57.1 | ||
(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 $61 million and $63 million for the three and nine months ended September 30, 2024, respectively, compared to the same periods in the prior year primarily driven by increases in performance-based compensation and employee benefits expense. Full-time equivalent employees totaled 18,579 at September 30, 2024 compared to 18,804 at September 30, 2023.
Technology and communications expense increased $6 million and $4 million for the three and nine months ended September 30, 2024, respectively, compared to the same periods in the prior year primarily driven by increased investments in strategic initiatives and technology modernization.
Marketing expense decreased $9 million and $4 million for the three and nine months ended September 30, 2024, respectively, compared to the same periods in the prior year primarily due to decreases in advertising costs.
Leasing business expense decreased $8 million and $25 million for the three and nine months ended September 30, 2024, respectively, compared to the same periods in the prior year primarily driven by decreases in depreciation expense associated with operating lease equipment.
Table of Contents
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
The following table presents the components of other noninterest expense:
| TABLE 12: Components of Other Noninterest Expense | ||||
|---|---|---|---|---|
| For the three months endedSeptember 30, | For the nine months endedSeptember 30, | |||
| ($ in millions) | 2024 | 2023 | 2024 | 2023 |
| FDIC insurance and other taxes | $35 | 39 | 155 | 122 |
| Loan and lease | 34 | 34 | 96 | 99 |
| Losses and adjustments | 20 | 21 | 69 | 70 |
| Data processing | 21 | 22 | 61 | 66 |
| Dues and subscriptions | 15 | 15 | 46 | 46 |
| Travel | 15 | 11 | 44 | 45 |
| Securities recordkeeping | 14 | 13 | 41 | 38 |
| Postal and courier | 12 | 12 | 36 | 35 |
| Cash and coin processing | 12 | 12 | 36 | 37 |
| Professional service fees | 12 | 12 | 35 | 41 |
| Intangible amortization | 8 | 10 | 27 | 32 |
| Other, net | 47 | 37 | 122 | 125 |
| Total other noninterest expense | $245 | 238 | 768 | 756 |
Other noninterest expense increased $7 million and $12 million for the three and nine months ended September 30, 2024, respectively, compared to the same periods in the prior year.
Other noninterest expense included the impacts of FDIC insurance and other taxes, which increased $33 million for the nine months ended September 30, 2024 compared to the same period in the prior year primarily due to the incremental expenses associated with the Bancorp’s updated estimate of its allocated share of the FDIC’s special assessment, as further discussed in the Overview section of MD&A.
Applicable Income Taxes
The Bancorp’s income before income taxes, applicable income tax expense and effective tax rate are as follows:
| TABLE 13: Applicable Income Taxes | ||||
|---|---|---|---|---|
| For the three months endedSeptember 30, | For the nine months endedSeptember 30, | |||
| ($ in millions) | 2024 | 2023 | 2024 | 2023 |
| Income before income taxes | $728 | 846 | 2,151 | 2,338 |
| Applicable income tax expense | 155 | 186 | 457 | 519 |
| Effective tax rate | 21.3% | 22.0 | 21.3 | 22.2 |
Applicable income tax expense for all periods presented includes the benefits 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 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 21.3% for the three months ended September 30, 2024 compared to 22.0% for the same period in the prior year primarily related to an increase in tax credits and an increase in excess tax benefits related to share-based compensation. The effective tax rate decreased to 21.3% for the nine months ended September 30, 2024 compared to 22.2% for the same period in the prior year primarily related to the remeasurement of deferred tax assets for changes in certain state tax laws which were enacted during the second quarter of 2024 as well as a decrease in state tax expense associated with the recognition of certain previously unrecognized tax benefits.
The text of this filing, as the company filed it with the SEC, without its images or exhibits. This is not investment advice.