Fifth Third Announces Fourth Quarter 2020 Results

Fifth Third Bancorp (FITB):

Key Highlights

• CET1 approx. 84 bps above target; positioned to initiate repurchases up to $180 million in 1Q21

• Solid credit quality, with stable NCOs and declines in NPAs; reserve coverage reflects improved macroeconomic environment and credit results

• Completed divestitures of property & casualty insurance and 401(k) recordkeeping businesses as well as facility exits to help deliver $200 million of annual expense savings

• Closed acquisition of Hammond Hanlon Camp LLC, expanding our healthcare advisory expertise

• Made $2.8 billion commitment to accelerate racial equity, equality and inclusion, including 4Q20 donation of $25 million

4Q20 compared to 3Q20

• NII up 1%; Reported NIM stable, with ~8 bps expansion to underlying NIM excl. excess cash and all PPP impacts(f)

• Noninterest income up 9%, and up 16% excl. certain items(a) reflecting record commercial banking revenue

• Noninterest expense up 6% (up 3% excl. certain items and after impact of non-qualified deferred compensation(a)) reflecting strong business performance

CEO Commentary

"Fifth Third delivered strong financial performance in 2020 despite the challenging operating environment brought on by the pandemic. We also delivered strong fourth quarter results, improving return metrics, and solid credit quality compared to the prior quarter. Our robust capital and liquidity levels further improved this quarter, indicative of our balance sheet strength which will serve us well this year and beyond.

Focused execution on our key strategic priorities and our disciplined approach to credit risk management continue to drive strong financial results while also generating improved outcomes for customers. As we recently announced, we have taken actions to drive efficiencies and improve the long-term profitability of the bank as we navigate the interest rate environment by streamlining our operations, including divesting less profitable businesses, while still investing in areas of growth and profitability.

We remain committed to generating sustainable long-term value for shareholders and anticipate that we will continue improving our relative performance as a top performing regional bank.

I am very proud of the way our employees have continually risen to the occasion in support of our customers and each other during these challenging times in our society. Fifth Third continues to be a source of strength for our customers and our communities, and we remain committed to equality, equity, and inclusion for all.”

-Greg D. Carmichael, Chairman and CEO

Fifth Third Bancorp (NASDAQ®: FITB) today reported fourth quarter 2020 net income of $604 million compared to net income of $581 million in the prior quarter and $734 million in the year-ago quarter. Net income available to common shareholders in the current quarter was $569 million, or $0.78 per diluted share, compared to $562 million, or $0.78 per diluted share, in the prior quarter and $701 million, or $0.96 per diluted share, in the year-ago quarter.

Reported full year 2020 net income was $1.4 billion compared to full year 2019 net income of $2.5 billion. Full year 2020 net income available to common shareholders was $1.3 billion, or $1.83 per diluted share, compared to 2019 full year net income available to common shareholders of $2.4 billion, or $3.33 per diluted share. Full year 2019 results were impacted by approximately $900 million related to pre-tax revenue associated with Worldpay/FIS.

Compared to the prior quarter, NII increased $12 million, or 1%, reflecting lower core deposit and wholesale borrowing costs, approximately $10 million in accelerated PPP fees recognized upon loan forgiveness, and elevated investment portfolio prepayment penalty proceeds, partially offset by the impact of lower commercial loan balances and a decline in mortgage rates. Compared to the prior quarter, NIM was stable. Lower core deposit costs, accelerated PPP fees recognized upon loan forgiveness, elevated investment portfolio prepayment penalty proceeds, and lower CD balances were offset by the unfavorable impact of increased cash balances. Fourth quarter 2020 NIM was negatively impacted by approximately 56 bps due to the impact of PPP and excess liquidity compared to historical balances, compared to 48 bps in the prior quarter.

Compared to the year-ago quarter, NII decreased $47 million, or 4%, primarily reflecting lower market rates and lower commercial loan balances, partially offset by lower deposit costs, the favorable impact of previously executed cash flow hedges, and growth from PPP loans. Compared to the year-ago quarter, NIM decreased 69 bps, primarily reflecting the impact of elevated cash balances and lower market rates, partially offset by benefits from lower core deposit and wholesale borrowing costs, as well as the favorable impact of previously executed cash flow hedges.

Reported noninterest income increased $65 million, or 9%, from the prior quarter, and decreased $248 million, or 24%, from the year-ago quarter. The reported results reflect the impact of certain items in the table below. Reported results in the current quarter include securities gains, including approximately $13 million attributable to mark-to-market impacts related to non-qualified deferred compensation assets (more than offset by $19 million in noninterest expense).

Compared to the prior quarter, noninterest income excluding certain items increased $111 million, or 16%. Compared to the year-ago quarter, noninterest income excluding certain items increased $90 million, or 12%.

Compared to the prior quarter, service charges on deposits increased $2 million, or 1%, reflecting an increase in consumer deposit fees. Commercial banking revenue increased $16 million, or 13%, primarily driven by increases in M&A advisory fees and loan syndication revenue, partially offset by lower corporate bond fees. Mortgage banking net revenue decreased $51 million, or 67%, primarily driven by lower origination fees and gains on loan sales resulting from a decrease in origination volumes, margin compression, the decision to retain certain mortgages originated during the quarter, and an unfavorable MSR net valuation adjustment. Current quarter mortgage originations of $3.9 billion decreased 13% compared to the prior quarter. Wealth and asset management revenue increased $1 million, or 1%, primarily driven by higher personal asset management revenue and brokerage fees, partially offset by lower institutional trust fees. Card and processing revenue was flat, as an increase in credit transaction volume was offset by higher rewards. Leasing business revenue decreased $8 million, or 10%, primarily driven by a seasonal decrease in business solutions revenue. Other noninterest income results were driven by the recognition of tax receivable agreement revenue of $74 million as well as private equity income.

Compared to the year-ago quarter, service charges on deposits decreased $3 million, or 2%, as a decline in consumer deposit fees was partially offset by an increase in commercial deposit fees. Commercial banking revenue increased $14 million, or 11%, reflecting an increase in M&A advisory fees and corporate bond fees, partially offset by lower loan syndication revenue. Mortgage banking net revenue decreased $48 million, or 66%, primarily driven by an unfavorable MSR net valuation adjustment and an increase in MSR decay resulting from higher prepayment speeds. Wealth and asset management revenue increased $4 million, or 3%, primarily driven by higher personal asset management revenue and brokerage fees. Card and processing revenue decreased by $3 million, or 3%, primarily reflecting lower commercial and consumer card spend volumes, partially offset by lower rewards. Leasing business revenue decreased $2 million, or 3%, primarily reflecting lower operating lease revenue. Other noninterest income results were driven by the recognition of tax receivable agreement revenue as well as private equity income.

Reported noninterest expense increased $75 million, or 6%, from the prior quarter, and increased $76 million, or 7%, from the year-ago quarter. The reported results reflect the impact of certain items in the table below.

Compared to the prior quarter, noninterest expense excluding certain items increased $41 million, or 4%, primarily due to an increase in compensation and benefits expense reflecting strong business performance and the mark-to-market impacts of approximately $19 million in non-qualified deferred compensation expense in the current quarter compared to a $7 million expense in the prior quarter, partially offset by lower other noninterest expense. Compared to the year-ago quarter, noninterest expense excluding certain items increased $38 million, or 3%, primarily reflecting an increase in compensation and benefits expense, partially offset by lower marketing expense and other noninterest expense.

Compared to the prior quarter, total average portfolio loans and leases decreased 4%, primarily driven by a decline in C&I and residential mortgage balances, partially offset by an increase in indirect secured consumer loans (predominantly indirect automobile). Average commercial portfolio loans and leases decreased 5%, reflecting lower C&I revolving line of credit utilization and term loan balances, as well as a decline in commercial mortgage loans, partially offset by growth in commercial construction balances. Average consumer portfolio loans decreased 1%, as lower residential mortgage and home equity balances were partially offset by higher indirect secured consumer loans.

Compared to the year-ago quarter, total average portfolio loans and leases were flat as growth in both indirect secured consumer loans and commercial construction loans were offset by declines in home equity and residential mortgage balances, as well as lower C&I balances impacted by lower revolving line of credit utilization. Average commercial portfolio loans and leases decreased 1%, due to a decline in C&I loan balances reflecting lower revolving line of credit utilization, and the expected decline in commercial leases, partially offset by PPP loans and growth in commercial construction loans. Average consumer portfolio loans were flat, as higher indirect secured consumer loans were offset by lower home equity, residential mortgage balances, and credit card balances.

Total period-end commercial portfolio loans and leases of $69 billion decreased $2 billion, or 3%, from the prior quarter, and decreased $1 billion, or 1%, from the year-ago quarter. The sequential decline reflected lower C&I revolving line of credit utilization and term loan balances in the current quarter. Period-end commercial revolving line utilization was 32%, compared to 33% in the prior quarter and 36% in the year-ago quarter. Period-end consumer portfolio loans were relatively stable compared to the third quarter, as continued growth in indirect secured consumer loans was partially offset by declines in residential mortgage and home equity balances. Period-end loans and leases held for sale increased $2.2 billion sequentially, primarily attributable to the purchase of $2.1 billion in government guaranteed loans related to GNMA early buyouts associated with CARES Act forbearance plans.

Average available-for-sale debt and other securities of $35.0 billion decreased 1% compared to the prior quarter and 1% compared to the year-ago quarter. Average other short-term investments (which includes interest-bearing cash) of $35.0 billion increased $5.2 billion compared to the prior quarter and increased $33.0 billion compared to the year-ago quarter.

Compared to the prior quarter, average core deposits increased 3%, driven by growth in demand and savings deposits, partially offset by declines in interest checking and other time deposits. Average demand deposits represented 36% of total core deposits in the current quarter compared to 33% in the prior quarter. Average commercial transaction deposits increased 3% and average consumer transaction deposits increased 2%.

Compared to the year-ago quarter, average core deposits increased 28%, reflecting double-digit growth in all deposit captions except other time and foreign office deposits. Average commercial transaction deposits increased 49% and average consumer transaction deposits increased 16%.

The period end loan-to-core deposit ratio was 69% in the current quarter, compared to 72% in the prior quarter and 89% in the year-ago quarter. Excluding PPP loans of $4.8 billion in the current quarter and $5.2 billion in the prior quarter, the period end loan-to-core deposit ratio was 66% in the current quarter, compared to 69% in the prior quarter.

Compared to the prior quarter, average wholesale funding decreased 14%, driven by lower jumbo CD balances, as well as the full-quarter impact of debt redemption that occurred at the end of the third quarter. Compared to the year-ago quarter, average wholesale funding decreased 13%, reflecting decreases in jumbo CD balances and federal funds borrowings.

Nonperforming portfolio loans and leases were $834 million in the current quarter, with the resulting NPL ratio of 0.77%. Compared to the prior quarter, NPLs decreased $57 million with the NPL ratio decreasing 3 bps. Compared to the year-ago quarter, NPLs increased $216 million with the NPL ratio increasing 21 bps.

Nonperforming portfolio assets were $864 million in the current quarter, with the resulting NPA ratio of 0.79%. Compared to the prior quarter, NPAs decreased $67 million with the NPA ratio decreasing 5 bps. Compared to the year-ago quarter, NPAs increased $184 million with the NPA ratio increasing 17 bps.

The benefit from credit losses totaled $13 million in the current quarter. The allowance for credit loss ratio represented 2.41% of total portfolio loans and leases in the current quarter, compared with 2.49% in the prior quarter and 1.23% in the year-ago quarter (under the incurred loss methodology). In the current quarter, the allowance for credit losses represented 315% of nonperforming portfolio loans and leases and 304% of nonperforming portfolio assets. The allowance for loan and lease losses ratio represented 2.25% of total portfolio loans and leases in the current quarter.

Net charge-offs were $118 million in the current quarter, with the resulting NCO ratio of 0.43%. Compared to the prior quarter, net charge-offs increased $17 million and the NCO ratio increased 8 bps. Compared to the year-ago quarter, net charge-offs increased $5 million and the NCO ratio increased 2 bps.

Capital ratios remained strong this quarter. The CET1 capital ratio was 10.34%, the tangible common equity to tangible assets ratio was 7.11% excluding AOCI, and 8.29% including AOCI. The Tier I risk-based capital ratio was 11.83%, the Total risk-based capital ratio was 15.08%, and the Tier I leverage ratio was 8.49%. Certain capital ratios, including the Tier I leverage ratio, continued to be impacted by the increase in assets since the onset of the pandemic, predominantly from growth in 0% risk-weighted assets resulting from an increase in interest-bearing cash as well as PPP loans.

On December 18, 2020, the Federal Reserve announced results of the second round of stress tests under the 2020 Comprehensive Capital Analysis and Review (CCAR) process, and stated that it is extending the time period for notifying banks whether Stress Capital Buffer requirements will be recalculated through March 31, 2021. Additionally, the Federal Reserve announced it is authorizing CCAR banks to initiate share repurchases in the first quarter of 2021, subject to payout limits such that capital distributions consisting of common dividends and share repurchases cannot exceed average net income over the prior four quarters. Based on the four quarters of net income and common dividends ended the fourth quarter of 2020, Fifth Third has the capacity to execute up to approximately $180 million in share repurchases in the first quarter of 2021 (which includes approximately $20 million in repurchases to offset employee compensation issuances), which may be completed through an accelerated share repurchase agreement or open market repurchases.

Tax Rate

The effective tax rate was 19.1% compared with 22.1% in the prior quarter and 22.0% in the year-ago quarter. The tax rate in the current quarter reflected favorable one-time state tax adjustments of $13 million.

Conference Call

Fifth Third will host a conference call to discuss these financial results at 9:00 a.m. (Eastern Time) today. This conference call will be webcast live and may be accessed through the Fifth Third Investor Relations website at www.53.com (click on “About Us” then “Investor Relations”). Those unable to listen to the live webcast may access a webcast replay through the Fifth Third Investor Relations website at the same web address, which will be available for 30 days.

Corporate Profile

Fifth Third Bancorp is a diversified financial services company headquartered in Cincinnati, Ohio, and the indirect parent company of Fifth Third Bank, National Association, a federally chartered institution. As of December 31, 2020, the Company had $205 billion in assets and operates 1,134 full-service Banking Centers, and 2,397 Fifth Third branded ATMs in Ohio, Kentucky, Indiana, Michigan, Illinois, Florida, Tennessee, West Virginia, Georgia, North Carolina and South Carolina. In total, Fifth Third provides its customers with access to approximately 52,000 fee-free ATMs across the United States. Fifth Third operates four main businesses: Commercial Banking, Branch Banking, Consumer Lending, and Wealth & Asset Management. Fifth Third is among the largest money managers in the Midwest and, as of December 31, 2020, had $434 billion in assets under care, of which it managed $54 billion for individuals, corporations and not-for-profit organizations through its Trust and Registered Investment Advisory businesses. Investor information and press releases can be viewed at www.53.com. Fifth Third’s common stock is traded on the NASDAQ® Global Select Market under the symbol “FITB.”

Earnings Release End Notes

1. Non-GAAP measure; see discussion of non-GAAP reconciliation beginning on page 26 of the earnings release.
2. Net losses charged-off as a percent of average portfolio loans and leases presented on an annualized basis.
3. Nonperforming portfolio assets as a percent of portfolio loans and leases and OREO.
4. Regulatory capital ratios are calculated pursuant to the five-year transition provision option to phase in the effects of CECL on regulatory capital after its adoption on January 1, 2020.
5. Current period regulatory capital ratios are estimated.
6. Fourth quarter 2020 underlying NIM calculated by reducing average interest-earning assets approximately $32.5 billion resulting from excess cash compared to normalized levels (average other short term investments less a $2.5 billion normalized level) and approximately $5.1 billion from average PPP balances (with a corresponding reduction to net interest income of approximately $41 million), resulting in an underlying NIM of approximately 3.14%; Third quarter 2020 underlying NIM calculated by reducing average interest-earning assets approximately $27.3 billion resulting from excess cash compared to normalized levels (average other short term investments less a $2.5 billion normalized level) and approximately $5.2 billion from average PPP balances (with a corresponding reduction to net interest income of approximately $33 million), resulting in an underlying NIM of approximately 3.06%.
7. Assumes a 23% tax rate.
8. COVID-19 related expenses include incremental costs incurred for enhanced cleaning measures, personal protective equipment, and other supplies in response to the COVID-19 pandemic.
9. Includes commercial customer Eurodollar sweep balances for which the Bank pays rates comparable to other commercial deposit accounts.
10. Nonperforming portfolio loans and leases as a percent of portfolio loans and leases and OREO.

FORWARD-LOOKING STATEMENTS

This release contains statements that we believe are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended, and Rule 3b-6 promulgated thereunder. These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. They usually can be identified by the use of forward-looking language such as “will likely result,” “may,” “are expected to,” “is anticipated,” “potential,” “estimate,” “forecast,” “projected,” “intends to,” or may include other similar words or phrases such as “believes,” “plans,” “trend,” “objective,” “continue,” “remain,” or similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” or similar verbs. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including but not limited to the risk factors set forth in our most recent Annual Report on Form 10-K as updated by our filings with the U.S. Securities and Exchange Commission (“SEC”). When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements we may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to us. We undertake no obligation to release revisions to these forward-looking statements or reflect events or circumstances after the date of this document.

There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) effects of the global COVID-19 pandemic; (2) deteriorating credit quality; (3) loan concentration by location or industry of borrowers or collateral; (4) problems encountered by other financial institutions; (5) inadequate sources of funding or liquidity; (6) unfavorable actions of rating agencies; (7) inability to maintain or grow deposits; (8) limitations on the ability to receive dividends from subsidiaries; (9) cyber-security risks; (10) Fifth Third’s ability to secure confidential information and deliver products and services through the use of computer systems and telecommunications networks; (11) failures by third-party service providers; (12) inability to manage strategic initiatives and/or organizational changes; (13) inability to implement technology system enhancements; (14) failure of internal controls and other risk management systems; (15) losses related to fraud, theft, misappropriation or violence; (16) inability to attract and retain skilled personnel; (17) adverse impacts of government regulation; (18) governmental or regulatory changes or other actions; (19) failures to meet applicable capital requirements; (20) regulatory objections to Fifth Third’s capital plan; (21) regulation of Fifth Third’s derivatives activities; (22) deposit insurance premiums; (23) assessments for the orderly liquidation fund; (24) replacement of LIBOR; (25) weakness in the national or local economies; (26) global political and economic uncertainty or negative actions; (27) changes in interest rates; (28) changes and trends in capital markets; (29) fluctuation of Fifth Third’s stock price; (30) volatility in mortgage banking revenue; (31) litigation, investigations, and enforcement proceedings by governmental authorities; (32) breaches of contractual covenants, representations and warranties; (33) competition and changes in the financial services industry; (34) changing retail distribution strategies, customer preferences and behavior; (35) difficulties in identifying, acquiring or integrating suitable strategic partnerships, investments or acquisitions; (36) potential dilution from future acquisitions; (37) loss of income and/or difficulties encountered in the sale and separation of businesses, investments or other assets; (38) results of investments or acquired entities; (39) changes in accounting standards or interpretation or declines in the value of Fifth Third’s goodwill or other intangible assets; (40) inaccuracies or other failures from the use of models; (41) effects of critical accounting policies and judgments or the use of inaccurate estimates; (42) weather-related events, other natural disasters, or health emergencies; and (43) the impact of reputational risk created by these or other developments on such matters as business generation and retention, funding and liquidity.

You should refer to our periodic and current reports filed with the Securities and Exchange Commission, or “SEC,” for further information on other factors, which could cause actual results to be significantly different from those expressed or implied by these forward-looking statements.

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