Fifth Third’s expansion in Southeast paying early dividends

Recessions aren’t often a great time for expansion, but Fifth Third Bancorp says its push into the Southeast has provided a sorely needed source of growth.

Cincinnati-based Fifth Third has opened 32 of around 120 new branches it has planned for markets such as Charlotte, N.C., Nashville, Tenn., and Tampa, Fla. Those branches accounted for about 12% of the households added to its customer base between November and February, and executives are counting on those new markets to deliver again in coming quarters. Altogether, Fifth Third banked about 2.2 million households as of March.

“We couldn’t be more pleased to date with the progress we’ve seen … especially if you look at household growth, new customer acquisition, strength of our commercial businesses in the Southeast markets,” Chairman and CEO Greg Carmichael told analysts on a conference call Tuesday.

“Right now, we think the Southeast is still a good place for us to continue to invest until we get to the scale and take advantage of the opportunities that are out there,” he said.

In mid-2018, Fifth Third revived a Southeastern expansion plan that it had shelved after the 2008 financial crisis. It had added at least a dozen of the branches when the coronavirus pandemic began. Carmichael said last year that Fifth Third wouldn’t pause its plan due to the pandemic but suggested the original plan could be tweaked somewhat.

New branches in the Southeast accounted for 12% of customers that Fifth Third Bancorp added in recent months. “Right now, we think the Southeast is still a good place for us to continue to invest until we get to the scale and take advantage of the opportunities that are out there,” CEO Greg Carmichael says.

Ultimately, the plan is for Fifth Third to achieve a top five deposit market share in larger metro markets across the Southeast, President Tim Spence said. The company plans to open another 30 or so branches this year and 35 more branches next year.

The $207 billion-asset Fifth Third reported net income of $694 million in the first quarter, compared with $46 million in the same quarter last year when the pandemic was declared. Earnings per share of 93 cents came in 25 cents higher than the mean estimate of analysts polled by FactSet Research Systems.

Fifth Third’s earnings beat primarily stemmed from a $173 million release of reserves for credit losses. The company made a $640 million provision in the first quarter last year as the economy weakened. The company later faced some pushback from analysts when it began releasing loan-loss reserves in the third quarter, but executives said the decision was in line with strengthening credit metrics.

Credit quality continued to improve in the first quarter. Net charge-offs fell to $71 million, or 0.27% of all loans, compared with $118 million and 0.43% in the prior quarter. Nonperforming loans declined to $741 million, or 0.68% of all loans, from $834 million and 0.77%.

Net interest income declined 4% year over year to $1.2 billion, and the net interest margin narrowed 66 basis points to 2.62%.

Noninterest income grew 12% from the same quarter last year to $749 million. Service charges on deposits ticked down 3% to $144 million. Commercial banking revenue rose 23% to $153 million, driven by debt capital markets, loan syndication and M&A advisory fees. Wealth and asset management revenue rose 7% to $143 million, and card and processing revenue grew 9% to $94 million on higher consumer spending.

Average deposits in the quarter totaled $158.9 billion, or 25% higher than they were in the first quarter last year.

Average loans shrank 2% year over year to $109 billion due to lower commercial lending, residential mortgage and home equity lending.

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