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 . AtMarch 31, 2021 , the Bancorp had$207 billion in assets and operated 1,098 full-service banking centers and 2,383 Fifth Third branded ATMs in eleven states throughout the Midwestern and Southeastern regions of theU.S. The Bancorp reports on four business segments: Commercial Banking, Branch Banking, Consumer Lending 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, 2020 . 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 endedMarch 31, 2021 , net interest income on an FTE basis and noninterest income provided 61% and 39% 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 months endedMarch 31, 2021 . 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 commercial banking revenue, service charges on deposits, wealth and asset management 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, leasing business expense, equipment expense, card and processing expense, marketing expense and other noninterest expense. COVID-19 Global Pandemic The COVID-19 pandemic created significant economic uncertainty and financial disruptions during the year endedDecember 31, 2020 , which has continued into 2021. Government and public responses to the COVID-19 pandemic, including temporary closures of businesses and the implementation of social distancing protocols, have caused and continue to cause, reductions and instability in economic activity that have resulted in increased unemployment levels in certain industries and volatility in the financial markets. During the year endedDecember 31, 2020 and the three months endedMarch 31, 2021 , low interest rates, reduced economic activity and market volatility have 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 it is likely that these factors will continue to adversely impact its future operating results. The increased availability of COVID-19 vaccinations has begun to mitigate the public health effects of the pandemic but the recovery 3 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) from the related economic crisis continues to disproportionately affect certain industries, geographies and demographics more than others. This uneven recovery, combined with the unprecedented nature of the government response to the pandemic, make it difficult to predict the extent to which the pandemic will continue to adversely impact the Bancorp and its customers. The Bancorp has provided a variety of relief options for both commercial and consumer customers that were affected by the COVID-19 pandemic, including loan covenant relief, loan maturity extensions, payment deferrals, forbearances and fee waivers. For further information about these programs, refer to the Credit Risk Management subsection of the Risk Management section of MD&A included herein, and also Note 1 of the Notes to Consolidated Financial Statements included in the Bancorp's Annual Report on Form 10-K for the year endedDecember 31, 2020 . Government Response to theCOVID-19 Pandemic Congress , the FRB and the otherU.S. state and federal financial regulatory agencies have taken actions to mitigate disruptions to economic activity and financial stability resulting from the COVID-19 pandemic. The descriptions below summarize certain significant government actions taken in response to the COVID-19 pandemic. The descriptions are qualified in their entirety by reference to the particular statutory or regulatory provisions or government programs summarized. The CARES Act The Coronavirus Aid, Relief and Economic Security ("CARES") Act was signed into law onMarch 27, 2020 and has subsequently been amended several times, including by the Consolidated Appropriations Act, 2021. Among other provisions, the CARES Act included funding for the SBA to expand lending, relief from certainU.S. GAAP requirements to allow COVID-19-related loan modifications to not be categorized as TDRs, direct stimulus payments and a range of incentives to encourage deferment, forbearance or modification of consumer credit and mortgage contracts. One of the key CARES Act programs is the Paycheck Protection Program, discussed further below, which has temporarily expanded the SBA's business loan guarantee program. The CARES Act contains additional protections for homeowners and renters of properties with federally backed mortgages, including a 60-day moratorium on the initiation of foreclosure proceedings beginning onMarch 18, 2020 and a 120-day moratorium on initiating eviction proceedings effectiveMarch 27, 2020 . Borrowers of federally backed mortgages have the right under the CARES Act to request up to 360 days of forbearance on their mortgage payments if they experience financial hardship directly or indirectly due to the COVID-19 public health emergency. TheFederal Housing Administration , Fannie Mae and Freddie Mac have independently extended their moratorium on foreclosures and evictions for single-family federally backed mortgages until at leastJune 30, 2021 . Also pursuant to the CARES Act, theU.S. Treasury has the authority to provide loans, guarantees and other investments in support of eligible businesses, states and municipalities affected by the economic effects of COVID-19. Some of these funds have been used to support several FRB programs and facilities described below or additional programs or facilities that are established by its authority under Section 13(3) of the Federal Reserve Act which meet certain criteria. FRB Actions The FRB has taken a range of actions to support the flow of credit to households and businesses, offset forced liquidations and restore liquidity in the financial markets. For example, onMarch 15, 2020 , the FRB reduced the target range for the federal funds rate to 0 to 0.25% and announced that it would increase its holdings ofU.S. Treasury securities and agency mortgage-backed securities and begin purchasing agency commercial mortgage-backed securities. The FRB has also encouraged depository institutions to borrow from the discount window and has lowered the primary credit rate for such borrowing by 150 basis points while extending the term of such loans up to 90 days. Reserve requirements have been reduced to zero as ofMarch 26, 2020 . In addition, the FRB established a range of facilities and programs to support theU.S. economy andU.S. marketplace participants in response to economic disruptions associated with COVID-19. Through these facilities and programs, the FRB, relying on its authority under Section 13(3) of the Federal Reserve Act, has taken steps to directly or indirectly purchase assets from, or make loans to,U.S. companies, financial institutions, municipalities and other market participants. Paycheck Protection Program The Bancorp is a participating lender in PPP, which is a program administered by the SBA to provide forgivable, guaranteed loans to eligible borrowers that have been affected by the COVID-19 pandemic. As ofMarch 31, 2021 , the Bancorp held PPP loans with a carrying amount of$5.4 billion under the program. PPP loans are available to a broader range of entities than ordinary SBA loans, require deferral of principal and interest repayment, and may be forgiven if the borrower demonstrates that the loan proceeds were used for qualified payroll costs and certain other expenses. The PPP has been expanded to permit second and third rounds of funding, including for certain borrowers who have already received a PPP loan, subject to certain conditions. American Rescue Plan Act The American Rescue Plan Act of 2021, which was signed into law onMarch 21, 2021 , provides additional relief for businesses, states, municipalities and individuals by, among other things, allocating additional funds for the PPP and by providing a third round of economic 4 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) impact payments to individuals. The American Rescue Plan is expected to positively impact theU.S. economy. However, the impacts of the stimulus on the Bancorp's business, results of operations and financial condition are highly uncertain and will depend on future developments, including the scope and duration of the pandemic and its impact on the economy in general. Accelerated Share Repurchase Transaction During the three months endedMarch 31, 2021 , the Bancorp entered into and settled an accelerated share repurchase transaction. As part of the transaction, the Bancorp entered into a forward contract in which the final number of shares delivered at settlement was based generally on a discount to the average daily volume weighted-average price of the Bancorp's common stock during the term of the repurchase agreement. Refer to Note 15 and Note 23 of the Notes to Condensed Consolidated Financial Statements for additional information on share repurchase activity. The following table presents a summary of the Bancorp's accelerated share repurchase transaction that was entered into and settled during the three months endedMarch 31, 2021 : TABLE 1: Summary of Accelerated Share Repurchase Transaction Shares Received from Amount Shares Repurchased on Forward Contract Repurchase Date ($ in millions) Repurchase Date Settlement Total Shares Repurchased Settlement Date January 26, 2021 $ 180 4,951,456 366,939 5,318,395 March 31, 2021 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. The Bancorp has substantial exposure to LIBOR-based products within its commercial lending, commercial deposits, business banking, consumer lending and capital markets lines of business as well as corporate treasury function. OnNovember 30, 2020 , theFederal Reserve , OCC, andFDIC issued a public statement that the administrator of LIBOR announced it will consult on an extension of publication of certainU.S. Dollar ("USD") LIBOR tenors untilJune 30, 2023 , which would allow additional legacy USD LIBOR contracts to mature before the succession of LIBOR. The administrator then announced onMarch 5, 2021 , that it will cease publication of 1-week and 2-month USD LIBOR onDecember 31, 2021 , and that overnight and 1-, 3-, 6-, and 12-month USD LIBOR will cease to be published onJune 30, 2023 . Although the full impact of LIBOR reforms and actions remains unclear, the Bancorp continues to prepare to transition from LIBOR to alternative reference rates, and it is expected that a broad transition away from the use of LIBOR to alternative reference rates for new financial contracts will occur by the end of 2021. Inthe United States , it is likely that LIBOR-priced transactions and products will transfer to the Secured Overnight Financing Rate ("SOFR"). There are risks inherent with the transition to any alternative rate such as SOFR as the rates may behave differently than LIBOR in reaction to monetary, market and economic events. 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. The Bancorp is currently in the process of developing new products and transaction agreements which are based on reference rates other than LIBOR. The Bancorp is also in the process of developing a transition plan for existing LIBOR-based financial contracts that are not expected to mature or settle prior to the cessation of LIBOR publication. For a further discussion of the various risks the Bancorp faces in connection with the expected 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, 2020 . 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
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Management's Discussion and Analysis of Financial Condition and Results of Operations
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•Return on Average Tangible Common Equity (non-GAAP): Tangible net income
available to common shareholders (annualized) divided by average tangible common
equity
•Net Interest Margin (non-GAAP): Net interest income on an FTE basis
(annualized) 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 (annualized) divided by average
portfolio loans and leases
•Return on Average Assets: Net income (annualized) divided by quarterly average
assets
•Loan-to-Deposit Ratio: Total loans divided by total deposits
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.
TABLE 2: Earnings Summary
For the three months ended
March 31, %
($ in millions, except for per share data) 2021 2020 Change
Income Statement Data
Net interest income (U.S. GAAP) $ 1,176 1,229 (4)
Net interest income (FTE)(a)(b) 1,179 1,233 (4)
Noninterest income 749 671 12
Total revenue (FTE)(a)(b) 1,928 1,904 1
(Benefit from) provision for credit losses(c) (173) 640 NM
Noninterest expense 1,215 1,200 1
Net income 694 46 NM
Net income available to common shareholders 674 29 NM
Common Share Data
Earnings per share - basic $ 0.94 0.04 NM
Earnings per share - diluted 0.93 0.04 NM
Cash dividends declared per common share 0.27 0.27 -
Book value per share 28.78 28.26 2
Market value per share 37.45 14.85 152
Financial Ratios
Return on average assets 1.38 % 0.11 NM
Return on average common equity 13.1 0.6 NM
Return on average tangible common equity(b) 16.8 1.0 NM
Dividend payout 28.7 675.0 (96)
Average total Bancorp shareholders' equity as a percent of average assets
11.26 12.63 (11)
(a)Amounts presented on an FTE basis. The FTE adjustments were $3 and $4 for the
three months ended March 31, 2021 and 2020, respectively.
(b)These are non-GAAP measures. For further information, refer to the Non-GAAP
Financial Measures section of MD&A.
(c)The provision for credit losses is the sum of the provision for loan and
lease losses and the provision for the reserve for unfunded commitments.
Earnings Summary
The Bancorp's net income available to common shareholders for the first quarter
of 2021 was $674 million , or $0.93 per diluted share, which was net of $20
million in preferred stock dividends. The Bancorp's net income available to
common shareholders for the first quarter of 2020 was $29 million , or $0.04 per
diluted share, which was net of $17 million in preferred stock dividends.
Net interest income on an FTE basis (non-GAAP) was $1.2 billion for the three
months ended March 31, 2021 , a decrease of $54 million compared to the same
period in the prior year primarily due to the impact of lower market rates.
Compared to the prior year, market rates in the first quarter of 2021 were
adversely impacted by 2020 monetary policy actions in response to the COVID-19
pandemic to lower the target range of the federal funds rate and the Federal
Reserve's bond purchase programs. The Bancorp has significant portfolios of
floating interest rate loans, which are primarily LIBOR- or Prime-based, which
decreased the yield on total average loans and leases by 76 bps for the three
months ended March 31, 2021 compared to the same period in the prior year.
Yields on average commercial and industrial loans, average commercial mortgage
loans and average commercial construction loans decreased 65 bps, 138 bps and
162 bps, respectively, for the three months ended March 31, 2021 compared to the
same period in the prior year. The Bancorp's portfolios of fixed interest rate
loans also decreased in yield as a result of increased refinance activity and
lower reinvestment yields due to lower overall market rates. In addition to
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market rate impacts on earning assets, net interest income was also negatively
impacted by a decrease in average commercial and industrial loans of $2.0
billion from the three months ended March 31, 2020 . Interest income recognized
from PPP loans partially offset these negative impacts. The Bancorp was able to
partially offset the decrease in earning asset yields by decreasing rates paid
on average interest-bearing liabilities by 65 bps. The decrease in rates paid on
average interest-bearing liabilities was primarily driven by decreases in rates
paid on average interest checking deposits and average money market deposits of
68 bps and 67 bps, respectively, from the three months ended March 31, 2020 . Net
interest margin on an FTE basis (non-GAAP) was 2.62% for the three months ended
March 31, 2021 compared to 3.28% for the comparable period in the prior year.
The benefit from credit losses was $173 million for the three months ended
March 31, 2021 compared to provision for credit losses of $640 million during
the same period in the prior year. The decrease in provision expense for the
three months ended March 31, 2021 compared to the same period in the prior year
was primarily driven by factors which caused a decrease in the ACL from
December 31, 2020 , including improved economic forecasts, improved consumer
credit quality and decreases in nonperforming loans and commercial criticized
assets. Net losses charged off as a percent of average portfolio loans and
leases were 0.27% and 0.44% for the three months ended March 31, 2021 and 2020,
respectively. At March 31, 2021 , nonperforming portfolio assets as a percent of
portfolio loans and leases and OREO decreased to 0.72% compared to 0.79% at
December 31, 2020 . 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 increased $78 million for the three months ended March 31,
2021 compared to the same period in the prior year primarily due to increases in
other noninterest income, commercial banking revenue and leasing business
revenue, partially offset by a decrease in mortgage banking net revenue. Other
noninterest income increased $35 million for the three months ended March 31,
2021 compared to the three months ended March 31, 2020 primarily due to a
decrease in private equity investment losses as well as a decrease in the loss
on the swap associated with the sale of Visa, Inc. Class B Shares . Commercial
banking revenue increased $29 million for the three months ended March 31, 2021
compared to the three months ended March 31, 2020 primarily due to increases in
institutional sales and loan syndication fees, partially offset by a decrease in
contract revenue from commercial customer derivatives. Leasing business revenue
increased $14 million for the three months ended March 31, 2021 compared to the
same period in the prior year primarily driven by an increase in lease
syndication fees, partially offset by a decrease in lease remarketing fees.
Mortgage banking net revenue decreased $35 million for the three months ended
March 31, 2021 compared to the same period in the prior year primarily due to a
decrease in net mortgage servicing revenue, partially offset by an increase in
origination fees and gains on loan sales.
Noninterest expense increased $15 million for the three months ended March 31,
2021 compared to the same period in the prior year primarily due to an increase
in compensation and benefits expense, partially offset by decreases in other
noninterest expense and marketing expense. Compensation and benefits expense
increased $59 million for the three months ended March 31, 2021 compared to the
same period in the prior year primarily due to increases in non-qualified
deferred compensation expense and higher performance-related expenses. Other
noninterest expense decreased $34 million for the three months ended March 31,
2021 compared to the same period in the prior year primarily due to decreases in
losses and adjustments and travel expense, partially offset by an increase in
loan and lease expense. Marketing expense decreased $8 million for the three
months ended March 31, 2021 compared to the same period in the prior year
primarily due to the impact of the COVID-19 pandemic, which resulted in a pause
or slowdown in numerous marketing campaigns, including running less advertising,
as well as the suspension of cash bonuses and other account acquisition
programs.
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 ofMarch 31, 2021 . As ofMarch 31, 2021 , the Bancorp's capital ratios, as defined by theU.S. banking agencies, were: •CET1 capital ratio: 10.46%; •Tier I risk-based capital ratio: 11.94%; •Total risk-based capital ratio: 14.80%; and •Tier I leverage ratio: 8.61%. 7 --------------------------------------------------------------------------------
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