Fifth Third Bancorp — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Fifth Third is a diversified U.S. bank headquartered in Cincinnati, Ohio, with $185.4 billion in assets and operations across ten states. Comparisons below are against Q1 2019 unless noted.
Financial results and condition
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Net interest income, GAAP | $1.229 billion | $1.082 billion; up 14% |
| Total revenue, FTE | $1.904 billion | $2.187 billion; down 13% |
| Provision for credit losses | $640 million | $90 million |
| Noninterest expense | $1.200 billion | $1.097 billion; up 9% |
| Net income / common net income | $46 million / $29 million | $775 million / $760 million |
| Diluted earnings per share | $0.04 | $1.12 |
| Net interest margin, FTE | 3.28% | 3.28% |
| Efficiency ratio, FTE | 63.0% | 50.2% |
| Net charge-offs / average portfolio loans | 0.44% | 0.32% |
- Noninterest income was $671 million, down $430 million. The main comparison effect was a $562 million Worldpay share-sale gain recorded in Q1 2019; Q1 2020 also included $24 million of net securities losses. Mortgage banking revenue rose to $120 million from $56 million, helped by lower rates and higher originations.
- Cash from operating activities was $433 million; investing activities used $14.181 billion and financing activities provided $13.752 billion. Cash and due from banks ended at $3.282 billion.
- At March 31, assets were $185.391 billion, portfolio loans and leases were $118.037 billion, deposits were $135.061 billion and borrowings were $22.449 billion. Deposits rose $8.0 billion and borrowings rose $6.2 billion from year-end 2019. Short-term investments increased to $6.319 billion, including liquidity funded in part with FHLB advances.
- The allowance for loan and lease losses was $2.348 billion; the reserve for unfunded commitments was $169 million. Combined allowance coverage was 2.13% of portfolio loans and leases. Nonperforming assets were $710 million, or 0.60% of portfolio loans and leases plus OREO.
- Regulatory capital ratios were 9.37% CET1, 10.56% Tier 1 risk-based, 13.59% total risk-based and 9.37% Tier 1 leverage. The company said these exceeded well-capitalized guidelines; ratios include the elected CECL transition.
Material changes and unusual items
- Net income available to common shareholders fell 96% year over year, reflecting the absence of the prior-year Worldpay gain and a substantial increase in credit-loss provision.
- Fifth Third adopted CECL on January 1, 2020. Adoption increased the allowance by approximately $653 million and reduced retained earnings by $472 million. Q1 provision also reflected the COVID-19 economic outlook, lower energy prices and higher commercial credit-line utilization.
- Average loans and leases increased 14% year over year, partly reflecting the MB Financial acquisition and commercial credit-line utilization. Average core deposits rose 17%.
- Available-for-sale securities recorded $2.2 billion of net unrealized gains at quarter-end, compared with $1.1 billion at year-end 2019; much of the change was reflected in accumulated other comprehensive income.
- The mortgage servicing rights fair value declined to $685 million from $993 million at year-end, as lower mortgage rates increased expected prepayments. Hedging gains partly offset this valuation decline.
Outlook, risks and contingencies
- The filing provides no formal earnings or full-year financial guidance. Management expected Q2 net interest margin to be pressured by excess cash, PPP lending and LIBOR/Federal Funds spread dynamics. It also anticipated adverse effects on wealth revenue from equity-market conditions and on mortgage banking revenue from COVID-19.
- COVID-19, recession risk, unemployment, deteriorating borrower credit, energy-price pressure and potentially concentrated exposure to affected industries are key uncertainties. The filing identifies approximately $20.0 billion of exposure across selected heavily impacted commercial industries and a $3.4 billion energy loan portfolio.
- At April 30, Fifth Third reported approximately 11,000 originated PPP loans totaling $3.5 billion and preliminary SBA approval for about 20,000 additional applications totaling approximately $2.1 billion. Management said it offered consumer and commercial deferrals, forbearances, fee waivers and other relief.
- Management reported more than $60 billion of contingent funding sources and stated that, at March 31, liquidity was sufficient for 24 months of contractual obligations and common and preferred dividends without capital-market access or upstream bank dividends. This is management’s assessment, not a guarantee.
- Share repurchases under the capital plan were temporarily suspended on March 16. The common dividend declared was $0.27 per share, versus $0.22 a year earlier.
- Fitch revised its outlook to negative in April 2020; the filing said ratings remained under review. The company also disclosed a CFPB lawsuit concerning alleged unauthorized accounts, a related securities class action, and other litigation. For matters where an estimate was possible, reasonably possible legal and regulatory losses were up to approximately $56 million above accruals; some matters could not be estimated.
- Other risks include the uncertain LIBOR transition, potential goodwill impairment if conditions worsen, cyber and operational disruption, and the sensitivity of credit-loss estimates to economic forecasts. A downside-scenario weighting would increase modeled quantitative ACL by approximately $600 million, before any additional qualitative adjustments.
Important facts for investors to verify
- How subsequent credit performance, borrower relief expirations, criticized loans, charge-offs and delinquencies compare with the large CECL allowance and its economic assumptions.
- Whether the $8.0 billion deposit increase and liquidity position persist, and how PPP lending, line utilization and FHLB funding affect funding costs and net interest margin.
- Whether recurring revenue and expenses support earnings after excluding the prior-year Worldpay gain, and whether the weaker efficiency ratio improves.
- How mortgage servicing rights, securities-related AOCI and related hedges respond to market movements, and whether any goodwill impairment emerges.
- Updates to capital ratios, the Fitch review, the suspended repurchase plan, legal proceedings and COVID-19-related relief and PPP exposures.