Fifth Third Bancorp — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Fifth Third Bancorp is a Cincinnati-based diversified bank operating across 11 Midwestern and Southeastern states, with $207.7 billion in assets and 1,100 full-service banking centers at quarter-end.
Financial performance and condition
- Q3 earnings: Net income was $704 million, up 21% year over year; net income available to common shareholders was $684 million and diluted EPS was $0.97, up from $562 million and $0.78, respectively.
- Revenue and margins: FTE total revenue was $2.03 billion, up 7%. FTE net interest income was $1.19 billion, up 2%; noninterest income was $836 million, up 16%. FTE net interest margin was 2.59%, versus 2.58%, and the FTE efficiency ratio improved to 57.8% from 61.3%.
- Year-to-date earnings: For the first nine months, net income was $2.11 billion versus $823 million; diluted EPS was $2.83 versus $1.04. FTE revenue increased 5% to $5.91 billion, while FTE net interest income declined 1% to $3.58 billion and FTE net interest margin fell to 2.61% from 2.85%.
- Credit costs and quality: The company recorded a $42 million credit-loss benefit in Q3 and a $330 million benefit for the nine months, compared with benefits of $15 million and a $1.11 billion provision, respectively, in 2020. Q3 annualized net charge-offs were 0.08% of average portfolio loans, versus 0.35%. Nonperforming portfolio assets were 0.52% of portfolio loans and leases plus OREO, down from 0.79% at year-end 2020. The allowance for loan and lease losses was $1.95 billion (1.81% of portfolio loans); total credit-loss allowance was 2.00% of portfolio loans.
- Balance sheet and funding: Total assets were $207.7 billion, versus $204.7 billion at December 31, 2020. Deposits rose to $165.1 billion from $159.1 billion; portfolio loans and leases were $107.9 billion, down from $108.8 billion. Borrowings declined to $12.7 billion from $16.5 billion, principally after debt redemptions and paydowns.
- Liquidity and capital: Management reported more than $100 billion of available liquidity and stated that the parent company could meet contractual obligations and dividends for 27 months without capital-market access or upstream bank dividends. Regulatory CET1 was 9.86%, compared with 10.34% at year-end; total risk-based capital was 13.94%, versus 15.08%.
- Cash flows, nine months: Operating cash provided was $1.36 billion, investing cash used was $2.33 billion, and financing cash provided was $1.03 billion. Cash and due from banks increased $66 million to $3.21 billion.
Material changes and notable items
- Year-over-year earnings growth chiefly reflected much lower credit provisioning, higher noninterest income, and lower funding costs. The 2020 comparison included substantial pandemic-related credit reserves and $51 million of Q3 securities gains; 2021 Q3 had a $1 million net securities loss.
- Noninterest income included a $60 million gain on sale of the HSA deposit portfolio. Other income also benefited from stronger private-equity investment results. Mortgage banking revenue for the nine months fell 20% to $235 million, including MSR valuation effects.
- Commercial and industrial loans declined amid PPP forgiveness and repayments, while consumer loans increased, particularly indirect secured consumer and residential mortgage loans. PPP loans outstanding were $2.3 billion at September 30; the program was closed to new originations in Q2.
- Core deposits grew, supported in part by stimulus-related customer liquidity; management noted that elevated excess cash balances are expected to continue suppressing net interest margin. The reported nine-month FTE margin was down 24 basis points year over year.
- The Bancorp repurchased $1.08 billion of shares in the first nine months, including a $550 million accelerated repurchase in Q3. After quarter-end, it entered a further $316 million repurchase transaction and issued $500 million of senior notes.
- Accumulated other comprehensive income declined to $1.64 billion from $2.60 billion at year-end, largely reflecting unrealized losses on available-for-sale securities and cash-flow hedges.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management described an economic recovery with resilient consumer demand, but flagged Delta and other variants, supply-chain and labor constraints, inflationary pressure, and uneven recovery across industries. It noted that Federal Reserve officials had indicated bond-purchase tapering could begin to be announced in Q4 2021.
- Management expects excess liquidity to weigh on margins if short-term rates remain low or fall. The Bancorp’s modeled NII sensitivity showed benefits under rising-rate scenarios, but outcomes depend on deposit behavior, repricing assumptions, and other model inputs.
- COVID-19 remains a source of credit, operating, and economic uncertainty. At September 30, $2.31 billion of residential mortgage and consumer loans had received payment relief; $239 million remained in active relief. Certain commercial borrowers and pandemic-affected industries remain subject to added credit monitoring.
- The Bancorp is transitioning away from LIBOR and expected to stop using LIBOR for new financial contracts by the end of 2021. The timing and effect of the transition remain uncertain.
- Legal matters include the CFPB’s account-opening allegations, shareholder litigation, merchant interchange litigation, and the Klopfenstein Early Access case, in which plaintiffs’ claimed damages exceed $280 million. The Bancorp estimated reasonably possible legal and regulatory losses of up to approximately $50 million above accruals for matters where a range could be estimated; it cautioned that other losses may not be estimable. Mortgage representation-and-warranty losses could be up to approximately $11 million above the $9 million reserve.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether credit quality and reserve releases remain sustainable as stimulus effects fade and relief programs wind down.
- How deposit growth, excess liquidity, interest rates, and deposit betas affect future net interest income and margin.
- The durability of fee income, particularly the impact of the one-time HSA sale gain, private-equity valuations, and mortgage servicing valuations.
- Capital and liquidity effects of ongoing repurchases, debt issuance, and the scheduled phase-in of CECL regulatory-capital effects.
- Developments, accruals, and potential exposure in the disclosed legal proceedings and pandemic-sensitive loan portfolios.