Favorable Core Trends Continue, More Than Offset by Higher Credit Costs and
Leveraged Lease Charge
CINCINNATI, July 22 /PRNewswire-FirstCall/ --
-- Loss per share of $0.37 driven by $0.42 charge related to tax treatment
of leveraged leases
-- Pre-tax, pre-provision earnings were $602 million; $745 million
excluding leveraged lease and merger expense impact, up 16 percent from
a year ago
-- Noninterest income increased 8 percent from the second quarter of 2007
-- Payments processing income growth of 15 percent
-- Deposit service revenue up 12 percent
-- Corporate banking income growth of 26 percent
-- Mortgage banking revenue up 108 percent
-- Net interest income is flat versus the second quarter of 2007; up 17
percent excluding leveraged lease litigation charges
-- Average loans up 11 percent and transaction deposits up 6 percent
-- Second quarter issuance of $1.1 billion in convertible preferred
securities
-- Total capital ratio of 12.15 percent
-- Tier 1 capital ratio of 8.51 percent
-- Tangible equity ratio of 6.37 percent
Earnings Highlights
For the Three Months Ended
June March December September June
2008 2008 2007 2007 2007
Net income (in millions) ($202) $286 $16 $325 $376
Common Share Data
Earnings per share, basic (0.37) 0.54 0.03 0.61 0.69
Earnings per share, diluted (0.37) 0.54 0.03 0.61 0.69
Cash dividends per common
share 0.15 0.44 0.44 0.42 0.42
Financial Ratios
Return on average assets (0.73%) 1.03% 0.06% 1.26% 1.49%
Return on average equity (8.4) 12.3 0.7 13.8 15.7
Tier I capital 8.51 7.72 7.72 8.46 8.13
Net interest margin (a) 3.04 3.41 3.29 3.34 3.37
Efficiency (a) 58.6 42.3 72.6 59.2 54.1
Common shares outstanding
(in thousands) 577,530 532,106 532,672 532,627 535,697
Average common shares
outstanding
(in thousands):
Basic 540,030 528,498 529,120 530,123 540,264
Diluted 540,030 530,372 530,939 532,471 543,228
% Change
Seq Yr/Yr
Net income (in millions) NM NM
Common Share Data
Earnings per share, basic NM NM
Earnings per share, diluted NM NM
Cash dividends per common share (66%) (64%)
Financial Ratios
Return on average assets NM NM
Return on average equity NM NM
Tier I capital 10% 5%
Net interest margin (a) (11%) (10%)
Efficiency (a) 39% 8%
Common shares outstanding (in thousands) 9% 8%
Average common shares outstanding
(in thousands):
Basic 2% -
Diluted 2% (1%)
(a) Presented on a fully taxable equivalent basis
NM: not meaningful
Fifth Third Bancorp (Nasdaq: FITB) today reported a second quarter 2008
net loss of $202 million, or $0.37 per diluted share, compared with
earnings of $286 million, or $0.54 per diluted share, in the first quarter
of 2008 and $376 million, or $0.69 per diluted share, for the same period
in 2007.
Reported results included charges related to leveraged leases totaling
$0.42 per share. In our 8-K filed on June 18, 2008, and previous filings,
we noted that this charge was possible. Reported results included a charge
of approximately $130 million pre-tax, or $0.16 per share after-tax, to
reflect a projected change in the timing of tax benefits pursuant to FSP
FAS 13-2, and an increase to tax expense of approximately $140 million, or
$0.26 per share both pre-tax and after-tax, required for interest related
to previous tax years pursuant to FIN 48. The actual charge in total was
modestly lower than we previously estimated was possible if we determined a
charge was necessary. Based on recent court decisions related to leveraged
leases and current uncertainty regarding the outcome of our own case, we
have concluded that previously recognized benefits from the transactions
must be remeasured as required by FIN 48. We believe this charge addresses
the remaining downside risk we have related to leveraged leases should
there be a negative outcome in our case. We continue to believe that our
tax treatment was proper under the tax law as it existed at the time the
tax benefits were reported and that the facts in our case are different
than other cases decided and support our position. Accordingly, we will
continue to defend our leases in the courts. Additional discussion
regarding this issue can be found later in this release. Reported results
also included $13 million pre-tax, or $0.02 per share after-tax, in
acquisition-related expenses.
On June 18, after evaluating a variety of potential credit scenarios
through 2009, Fifth Third raised the Tier 1 capital ratio target range to 8
-- 9 percent and issued $1.1 billion of additional capital in the form of
convertible preferred securities. Additionally, given the outlook for a
continued negative credit environment, the common dividend was reduced to
conserve capital in current and future periods. The combination of those
actions raised the Tier 1 ratio to 8.51%, the middle of the revised target
range as of June 30, 2008.
"The capital actions we announced in June, combined with our expected
strong core earnings growth and the anticipated sale of non-core
businesses, significantly strengthen our capital position. We believe we
have the capacity to withstand provision expense and losses in excess of
stress scenarios we evaluated, creating a significant capital cushion to
withstand unexpected developments. These actions reflect our commitment to
protect the health and strength of the Bank, now and in the future," said
Kevin T. Kabat, Chairman and CEO of Fifth Third Bancorp.
"While we were disappointed in our overall results for the second
quarter, which included a charge related to leveraged leases, they were
largely in line with our expectations last month. Absent unexpected events,
we anticipate returning to profitability in the third quarter.
"Non-performing assets and net charge-offs continued to increase,
reflecting weakening economic conditions. Deteriorating credit trends
remain disproportionately attributable to commercial and residential real
estate loans, particularly in Florida and Michigan, and we continue to be
very active in taking steps to address these issues that we and the
industry are facing.
"Based on the decisive action we've taken, we believe we have the
capacity to absorb future losses in excess of what we've modeled and are
well-positioned relative to our peers. Throughout this economic downturn,
we've maintained our focus on our long-term goals and objectives, and we
continue to make investments in our businesses and execute on our strategic
plans. As this quarter shows, we continued to produce strong operating
results and we remain committed to posting bottom-line results that
outperform the industry once this cycle turns."
Income Statement Highlights
For the Three Months Ended
June March December September June % Change
2008 2008 2007 2007 2007 Seq Yr/Yr
Condensed Statements
of Income
($ in millions)
Net interest income
(taxable equivalent) $744 $826 $785 $760 $745 (10%) -
Provision for loan
and lease losses 719 544 284 139 121 32% 492%
Total noninterest
income 722 864 509 681 669 (16%) 8%
Total noninterest
expense 858 715 940 853 765 20% 12%
Income before income
taxes (taxable
equivalent) (111) 431 70 449 528 NM NM
Taxable equivalent
adjustment 6 6 6 6 6 - -
Applicable income
taxes 85 139 48 118 146 (39%) (42%)
Net income (loss)
available to common
shareholders (a) (202) 286 16 325 375 NM NM
Earnings per share,
diluted ($0.37) $0.54 $0.03 $0.61 $0.69 NM NM
(a) Dividends on preferred stock are $.185 million for all quarters
presented
NM: not meaningful
Net Interest Income
For the Three Months Ended
June March December September June
2008 2008 2007 2007 2007
Interest Income
($ in millions)
Total interest income
(taxable equivalent) $1,213 $1,453 $1,556 $1,535 $1,495
Total interest expense 469 627 771 775 750
Net interest income
(taxable equivalent) $744 $826 $785 $760 $745
Average Yield
Yield on interest-
earning assets 4.95% 5.99% 6.52% 6.73% 6.75%
Yield on interest-
bearing liabilities 2.23% 2.99% 3.78% 4.04% 4.08%
Net interest rate
spread (taxable
equivalent) 2.72% 3.00% 2.74% 2.69% 2.67%
Net interest margin
(taxable
equivalent) 3.04% 3.41% 3.29% 3.34% 3.37%
Average Balances
($ in millions)
Loans and leases,
including held for
sale $112,098 $111,291 $107,727 $102,131 $100,767
Total securities and
other short-term
investments 53,763 53,458 51,967 50,922 50,932
Total interest-bearing
liabilities 84,417 84,353 80,977 76,070 73,735
Shareholders' equity 9,629 9,379 9,446 9,324 9,599
% Change
Seq Yr/Yr
Interest Income ($ in millions)
Total interest income (taxable
equivalent) (17%) (19%)
Total interest expense (25%) (37%)
Net interest income (taxable equivalent) (10%) -
Average Yield
Yield on interest-earning assets (17%) (27%)
Yield on interest-bearing
liabilities (25%) (45%)
Net interest rate spread (taxable
equivalent) (9%) 2%
Net interest margin (taxable
equivalent) (11%) (10%)
Average Balances ($ in millions)
Loans and leases, including held for sale 1% 11%
Total securities and other short-
term investments 1% 6%
Total interest-bearing liabilities - 14%
Shareholders' equity 3% -
Net interest income of $744 million on a taxable equivalent basis
declined $82 million from the first quarter of 2008 largely due to the
recalculation of cash flows on certain leveraged lease transactions that
reduced net interest income by approximately $130 million. Excluding this
charge, net interest income increased by $48 million, or 6 percent, from
the previous quarter. Net interest income benefited from lower funding
costs on core deposits and wholesale borrowings, a steeper yield curve and
lower balances in higher priced consumer certificates of deposit (CD). This
more than offset the effect of lower asset yields, the issuance of
additional wholesale funding and higher loan interest reversals and
nonaccrual balances in the quarter. Net interest income included the
benefit of $31 million in accretion and amortization of fair value purchase
accounting adjustments related to First Charter Corporation (First
Charter). It is expected that net interest income will continue to benefit
from this effect in coming quarters. The reported net interest margin was
3.04 percent, down 37 bps from the first quarter of 2008. Excluding the
impact of the leveraged lease litigation, net interest margin was 3.57
percent, a 16 bp increase from the previous quarter. The accretion and
amortization of First Charter purchase accounting adjustments provided a 13
bp benefit to the net interest margin, with the additional improvement due
to lower core deposit and wholesale funding costs.
Compared with the second quarter of 2007, net interest income was flat
and net interest margin declined 33 bps from 3.37 percent due to the impact
of the charge related to our leveraged lease litigation. Excluding the
impact of the leveraged lease litigation charges, net interest income
increased by $129 million, or 17 percent, from the same period in 2007, and
net interest margin expanded 20 bps. The increase in net interest income
reflected average earning asset growth of 11 percent and 25 bps of widening
in the net interest rate spread.
Average Loans
For the Three Months Ended
June March December September June
2008 2008 2007 2007 2007
Average Portfolio Loans and
Leases ($ in millions)
Commercial:
Commercial loans $28,299 $25,367 $23,650 $22,183 $21,584
Commercial mortgage 12,590 12,016 11,497 11,041 11,008
Commercial construction 5,700 5,577 5,544 5,499 5,595
Commercial leases 3,747 3,723 3,692 3,698 3,673
Subtotal - commercial loans
and leases 50,336 46,683 44,383 42,421 41,860
Consumer:
Residential mortgage loans 9,922 10,395 9,943 8,765 8,490
Home equity 12,012 11,846 11,843 11,752 11,881
Automobile loans 8,439 9,278 9,445 10,853 10,552
Credit card 1,703 1,660 1,461 1,366 1,248
Other consumer loans and
leases 1,125 1,083 1,099 1,138 1,174
Subtotal - consumer loans
and leases 33,201 34,262 33,791 33,874 33,345
Total average loans and
leases (excluding held for
sale) $83,537 $80,945 $78,174 $76,295 $75,205
Average loans held for sale 1,676 3,967 3,998 1,950 1,843
% Change
Seq Yr/Yr
Average Portfolio Loans and
Leases ($ in millions)
Commercial:
Commercial loans 12% 31%
Commercial mortgage 5% 14%
Commercial construction 2% 2%
Commercial leases 1% 2%
Subtotal - commercial loans and leases 8% 20%
Consumer:
Residential mortgage loans (5%) 17%
Home equity 1% 1%
Automobile loans (9%) (20%)
Credit card 3% 36%
Other consumer loans and leases 4% (4%)
Subtotal - consumer loans and leases (3%) -
Total average loans and leases
(excluding held for sale) 3% 11%
Average loans held for sale (58%) (9%)
Average portfolio loan and lease balances grew 3 percent sequentially
and 11 percent from the second quarter of 2007 with approximately 1 percent
of the sequential growth and 3 percent of the year-over-year growth
attributable to acquisitions. Average commercial loans and leases grew 8
percent sequentially and 20 percent compared with the previous year. Growth
was primarily driven by commercial and industrial (C&I) lending, up 12
percent sequentially and 31 percent versus a year ago, reflecting solid
production across most of our footprint and the effect of acquisitions
while approximately $1.0 billion, or 4 percent, of sequential growth in C&I
loans was due to commercial loans held for sale reclassified to portfolio
loans during the quarter. Compared with last quarter, commercial mortgage
balances increased $574 million and commercial construction balances grew
by $123 million. The acquisition of First Charter contributed $179 million
and $114 million, respectively. Consumer loan and lease balances declined 3
percent sequentially and were flat from the second quarter of 2007.
Excluding balances from acquisitions, average consumer loans were down 4
percent sequentially and 5 percent year-over-year. Sequentially, growth in
home equity and credit card loans was more than offset by declines in auto,
primarily due to first quarter of 2008 sales and securitizations, and
residential mortgage loans. On a year-over-year basis, growth in credit
card and residential mortgage loans offset a decline in auto loans. Almost
all of the year-over-year growth in residential mortgage loan balances was
due to the fourth quarter of 2007 acquisition of R-G Crown. In the first
quarter of 2008, the Bancorp securitized and sold $2.7 billion in auto
loans. During the second quarter of 2008, the Bancorp sold approximately
$523 million of residential mortgage portfolio loans.
Average Deposits
For the Three Months Ended
June March December September June
2008 2008 2007 2007 2007
Average Deposits
($ in millions)
Demand deposits $14,023 $13,208 $13,345 $13,143 $13,370
Interest checking 14,396 14,836 14,394 14,334 15,061
Savings 16,583 16,075 15,616 15,390 14,620
Money market 6,592 6,896 6,363 6,247 6,244
Foreign office (a) 2,169 2,443 2,249 1,808 1,637
Subtotal - Transaction
deposits 53,763 53,458 51,967 50,922 50,932
Other time 9,517 10,884 11,011 10,290 10,780
Subtotal - Core deposits 63,280 64,342 62,978 61,212 61,712
Certificates - $100,000
and over 8,143 5,835 6,613 6,062 6,511
Other foreign office 2,948 3,861 2,464 1,981 732
Total deposits $74,371 $74,038 $72,055 $69,255 $68,955
% Change
Seq Yr/Yr
Average Deposits ($ in millions)
Demand deposits 6% 5%
Interest checking (3%) (4%)
Savings 3% 13%
Money market (4%) 6%
Foreign office (a) (11%) 33%
Subtotal - Transaction deposits 1% 6%
Other time (13%) (12%)
Subtotal - Core deposits (2%) 3%
Certificates - $100,000 and over 40% 25%
Other foreign office (24%) 303%
Total deposits - 8%
(a) Includes commercial customer Eurodollar sweep balances for which the
Bancorp pays rates comparable to other commercial deposit accounts.
Average core deposits were down 2 percent sequentially and up 3 percent
from the second quarter of 2007. Excluding acquisitions, core deposits
declined 3 percent for the quarter and were relatively unchanged from the
previous year. Transaction deposits (excluding consumer time deposits) grew
1 percent from the first quarter and 6 percent from a year ago. The
sequential growth and 2 percent of the year-over-year growth were
attributable to acquisitions. The decline in core deposits compared to the
first quarter of 2008 was driven by lower foreign office commercial sweep
deposits, interest checking, money market and consumer CD balances which
more than offset growth in demand deposit account (DDA) and savings
balances. On a year-over-year basis, growth in DDA, savings, money market
and foreign office deposits balances more than offset lower interest
checking and consumer CD balances. The decline in consumer CD balances in
the second quarter of 2008 reflected unusually high competitor pricing in
many of our markets and our determination that such pricing was not
reflective of the value of these deposits.
Retail core deposits decreased 1 percent sequentially and were
relatively unchanged from the second quarter of 2007. Comparisons for both
periods reflect an increase in net new accounts offset by lower average
account balances. Commercial core deposits decreased 3 percent sequentially
and increased 7 percent year-over-year.
The $2.3 billion sequential increase in jumbo CDs resulted from actions
taken early in the second quarter to extend the average duration of
wholesale borrowings to reduce exposure to high levels of market
volatility.
Noninterest Income
For the Three Months Ended
June March December September June % Change
2008 2008 2007 2007 2007 Seq Yr/Yr
Noninterest Income
($ in millions)
Electronic payment
processing revenue $235 $213 $223 $212 $205 10% 15%
Service charges on
deposits 159 147 160 151 142 8% 12%
Investment advisory
revenue 92 93 94 95 97 (1%) (5%)
Corporate banking revenue 111 107 106 91 88 3% 26%
Mortgage banking net
revenue 86 97 26 26 41 (11%) 108%
Other noninterest income 49 177 (113) 93 96 (72%) (49%)
Securities gains
(losses), net (10) 27 7 13 - NM NM
Securities gains, net -
non-qualifying hedges
on mortgage servicing
rights - 3 6 - - (100%) NM
Total noninterest income $722 $864 $509 $681 $669 (16%) 8%
Noninterest income of $722 million declined $142 million sequentially
and increased $53 million, or 8 percent, from a year ago. First quarter of
2008 results included a $273 million gain resulting from the Visa IPO,
partially offset by a $152 million pre-tax charge to reduce the cash
surrender value of one of our Bank-Owned Life Insurance (BOLI) policies.
Excluding the impact of Visa and BOLI in the first quarter and net
securities gains/losses in both the first and second quarters of 2008,
noninterest income increased $18 million, or 3 percent, from the previous
quarter. Year-over-year growth in noninterest income of 8 percent was
driven by strong growth in payments processing revenue, deposit fees,
corporate banking revenue and mortgage banking revenue.
Electronic payment processing (EPP) revenue of $235 million increased
10 percent sequentially and 15 percent from a year ago driven by continued
strong merchant processing results, up 16 percent. Card issuer interchange
revenue increased 20 percent from the previous year, driven by higher debit
and credit card usage and an increase in the average dollar amount per
debit card transaction. Financial institutions revenue grew 10 percent from
the second quarter of 2007.
Service charges on deposits of $159 million increased 8 percent
sequentially and 12 percent compared with the same quarter last year.
Retail service charges increased 12 percent from the first quarter and 7
percent from the second quarter of 2007. Both sequential and year-over-year
comparisons reflect strong growth in net new accounts and higher deposits
fees. Commercial service charges increased 4 percent sequentially and 19
percent compared with last year. This growth primarily reflects the effect
of lower market interest rates, as reduced earnings credit rates paid to
customers have resulted in higher realized net use of services fees to pay
for treasury management services.
Corporate banking revenue of $111 million increased 3 percent
sequentially and 26 percent year-over-year. Revenue growth for both periods
was driven by broad-based strength, with particularly strong growth in
foreign exchange revenue, up 10 percent sequentially and 79 percent from
the same period in 2007, institutional sales revenue, up 4 percent
sequentially and 35 percent year-over-year, and business lending fees, up 8
percent sequentially and 23 percent from the second quarter of 2007. Strong
results continue to be driven by more volatile markets and increased
penetration of the Company's middle market customer base.
Investment advisory revenue of $92 million was down 1 percent
sequentially and 5 percent from the second quarter of 2007. Institutional
trust revenue decreased 1 percent sequentially and 6 percent year-over-year
largely due to market value declines. Mutual fund fees were up 1 percent
sequentially and down 10 percent year-over-year resulting from market
volatility. Brokerage fee revenue was up 1 percent sequentially and down 12
percent from the second quarter of 2007 reflecting the continued shift in
assets from equity products to money market funds and a decline in
transaction-based revenues.
Mortgage banking net revenue totaled $86 million in the second quarter
of 2008, an $11 million decline from strong first quarter results and a $45
million increase from the second quarter of 2007. Second quarter
originations were $3.3 billion, a decline of 17 percent from the previous
quarter, due to rising interest rates and lower commensurate application
volumes and originations in the latter half of the quarter. Second quarter
originations resulted in gains on the sale of mortgages of $79 million
compared to gains of $93 million during the previous quarter and $25
million during the same period in 2007. Revenue for the second quarter
included $9 million related to gains on the sale of portfolio loans
compared with $11 million in the previous quarter and $2 million in the
second quarter of 2007. The first quarter of 2008 adoption of FAS 159 for
mortgage banking contributed $17 million of the year-over-year increase in
mortgage banking revenue and additional origination costs recorded in other
noninterest expense. Net servicing revenue, before mortgage servicing
rights (MSR) valuation adjustments, totaled $11 million in the second
quarter, compared with $8 million last quarter and $13 million a year ago.
MSR valuation adjustments, including mark-to-market related adjustments on
free-standing derivatives, represented a net loss of $4 million in the
second quarter of 2008, compared with a net loss of $3 million last quarter
and a net gain of $3 million a year ago. The mortgage-servicing asset, net
of valuation reserve, was $697 million at quarter end on a servicing
portfolio of $38.7 billion.
Net losses on investment securities were $10 million in the second
quarter of 2008 compared with net gains of $27 million last quarter.
Other noninterest income totaled $49 million in the second quarter of
2008 compared with $177 million last quarter and $96 million in the second
quarter of 2007. Second quarter 2007 results included a $16 million gain on
the sale of non-strategic credit card accounts. Last quarter's results
included a $273 million gain resulting from the Visa IPO, a charge of $152
million related to the decrease in the cash surrender value of one of the
Bancorp's BOLI policies, $26 million in hedge and other losses associated
with the sale of auto loans and $15 million in gains on sale from auto
securitization transactions. The year-over-year decline in other
noninterest income was driven by approximately $20 million in write-downs
on other real estate owned (OREO) properties in the second quarter of 2008
as well as the credit card gain a year ago.
Noninterest Expense
For the Three Months Ended
June March December September June % Change
2008 2008 2007 2007 2007 Seq Yr/Yr
Noninterest Expense
($ in millions)
Salaries, wages and
incentives $331 $347 $328 $310 $309 (5%) 7%
Employee benefits 60 85 56 67 68 (29%) (11%)
Payment processing expense 67 66 68 65 59 2% 14%
Net occupancy expense 73 72 70 66 68 2% 8%
Technology and
communications 49 47 47 41 41 3% 18%
Equipment expense 31 31 32 30 31 - -
Other noninterest expense 247 67 339 274 189 269% 31%
Total noninterest expense $858 $715 $940 $853 $765 20% 12%
Noninterest expense of $858 million increased by $143 million
sequentially and $93 million from a year ago. Second quarter results
included $13 million in acquisition-related expenses as a result of the
First Charter and First Horizon acquisitions during the quarter. First
quarter results included the reversal of $152 million in Visa litigation
reserves, $9 million in severance-related costs, $7 million in
acquisition-related expenses due to the acquisition of R-G Crown and $18
million of seasonally higher FICA and unemployment expenses. Excluding the
aforementioned items, noninterest expense increased $12 million, or 1
percent, from the first quarter of 2008. Expense growth was primarily
related to volume-related processing and technology investment expense. The
increase in noninterest expense compared with the second quarter of 2007
was driven by higher costs due to acquisitions, increased loan and lease
processing costs as a result of collections activities, increased provision
for unfunded commitments, as well as increased franchise and other taxes as
a result of the impact of the favorable settlement of certain tax audits in
the second quarter of 2007. Additionally, $8 million of the year-over-year
increase in other noninterest expense was related to increased FDIC
insurance expense which previously was offset by prior insurance premium
credits.
Credit Quality
For the Three Months Ended
June March December September June
2008 2008 2007 2007 2007
Total net losses charged off
($ in millions)
Commercial loans ($107) ($36) ($48) ($23) ($24)
Commercial mortgage loans (21) (33) (15) (8) (16)
Commercial construction loans (49) (72) (12) (5) (7)
Commercial leases - - - - -
Residential mortgage loans (63) (34) (18) (9) (9)
Home equity (54) (41) (32) (27) (20)
Automobile loans (26) (35) (30) (25) (15)
Credit card (21) (20) (15) (13) (10)
Other consumer loans and leases (3) (5) (4) (5) (1)
Total net losses charged off (344) (276) (174) (115) (102)
Total losses (365) (293) (193) (127) (124)
Total recoveries 21 17 19 12 22
Total net losses charged off ($344) ($276) ($174) ($115) ($102)
Ratios
Net losses charged off as a
percent of average loans and
leases (excluding held for sale) 1.66% 1.37% 0.89% 0.60% 0.55%
Commercial 1.41% 1.21% 0.66% 0.33% 0.44%
Consumer 2.04% 1.58% 1.18% 0.93% 0.68%
Net charge-offs as a percentage of average loans and leases were 166
bps in the second quarter, compared with 137 bps in the first quarter of
2008 and 55 bps in the second quarter of 2007. Loss experience continues to
be concentrated in Michigan and Florida and primarily related to consumer
residential real estate loans as well as commercial loans to residential
real estate builders and developers. Michigan and Florida represented
approximately 44 percent of total second quarter net charge-offs.
Residential real estate losses were 34 percent of total net charge-offs.
Losses on loans to residential real estate builders and developers
represent 10 percent of total losses.
Consumer net charge-offs of $167 million, or 204 bps, grew $32 million
from the first quarter of 2008, driven primarily by losses in the
residential real estate portfolio. Net charge-offs in Michigan and Florida
represented 48 percent of consumer losses in the second quarter, in line
with results from the first quarter of 2008. Home equity net charge-offs of
$54 million increased $13 million compared with last quarter, primarily due
to increased losses on brokered home equity loans reflecting borrower
stress and lower home price valuations. Originations of these brokered
loans was discontinued last year. Net losses on brokered home equity loans
were $28 million, or 51 percent, of second quarter home equity losses.
Brokered home equity loans represented $2.4 billion, or 20 percent, of the
total home equity portfolio of $12.4 billion. Michigan and Florida
represented 42 percent of second quarter home equity losses. Net
charge-offs within the residential mortgage portfolio were $63 million, an
increase of $29 million, primarily a result of declining property values on
loans in foreclosure, with losses in Michigan and Florida representing 72
percent of losses in the second quarter. Net charge-offs in the auto
portfolio declined by $9 million from the first quarter to $26 million. Net
charge-offs on consumer credit card loans were $21 million, up $1 million
from the first quarter. During the quarter, we adjusted our credit card
charge-off policy related to bankruptcies to conform with industry
standards and to increase the likelihood of recoveries and customer
affirmation of Fifth Third in bankruptcy proceedings. Credit card
charge-offs would have been $4 million higher absent this change.
Commercial net charge-offs of $177 million, or 141 bps, increased $36
million compared with the first quarter of 2008. Losses related to
residential real estate builders and developers represented $34 million, or
19 percent, of commercial net charge-offs. Commercial construction net
charge-offs decreased to $49 million from $72 million the previous quarter
driven by lower losses in Michigan. Michigan and Florida accounted for 61
percent of these losses in the second quarter. Commercial mortgage net
charge-offs decreased to $21 million, down $12 million from the first
quarter of 2008. Michigan and Florida accounted for 58 percent of these
losses. Net charge-offs in the C&I portfolio were $107 million, up $71
million from the first quarter of 2008. This increase was driven by a $23
million charge-off in Illinois as well as particular weakness among
businesses associated with residential construction activities.
For the Three Months Ended
June March December September June
2008 2008 2007 2007 2007
Allowance for Credit Losses
($ in millions)
Allowance for loan and lease
losses, beginning $1,205 $937 $827 $803 $784
Total net losses charged off (344) (276) (174) (115) (102)
Provision for loan and
lease losses 719 544 284 139 121
Allowance for loan and lease
losses, ending 1,580 1,205 937 827 803
Reserve for unfunded
commitments, beginning 103 95 79 77 79
Provision for
unfunded commitments 12 8 13 2 (2)
Acquisitions - - 3 - -
Reserve for unfunded
commitments, ending 115 103 95 79 77
Components of allowance for
credit losses:
Allowance for loan and
lease losses 1,580 1,205 937 827 803
Reserve for unfunded
commitments 115 103 95 79 77
Total allowance for credit losses $1,695 $1,308 $1,032 $906 $880
Ratio
Allowance for loan and lease
losses as a percent of loans
and leases 1.85% 1.49% 1.17% 1.08% 1.06%
Provision for loan and lease losses totaled $719 million in the second
quarter of 2008, exceeding net charge-offs by $375 million. The increase in
the provision for loan and lease losses and allowance for loan and lease
losses was largely driven by higher inherent losses resulting from
deterioration in residential real estate collateral values, particularly in
the residential homebuilder and developer portfolios and consumer
residential real estate portfolios, and negative trends in nonperforming
and other criticized assets.
The allowance for loan and lease losses represented 1.85 percent of
total loans and leases outstanding as of quarter end, compared with 1.49
percent last quarter and 1.06 percent in the same quarter last year.
As of
June March December September June
2008 2008 2007 2007 2007
Nonperforming Assets and
Delinquency ($ in millions)
Commercial loans $407 $300 $175 $175 $136
Commercial mortgage 524 312 243 146 113
Commercial construction 537 408 249 105 65
Commercial leases 18 11 5 5 4
Residential mortgage (a) 329 211 121 74 40
Home equity (b) 151 128 91 61 45
Automobile 7 5 3 3 3
Credit card (c) 15 13 5 - -
Other consumer loans and leases - - 1 - -
Total nonaccrual loans
and leases $1,988 $1,388 893 569 406
Repossessed personal property 22 22 21 19 17
Other real estate owned(d) 188 182 150 118 105
Total nonperforming assets $2,198 $1,592 $1,064 $706 $528
Total loans and leases 90
days past due $605 $539 $491 $360 $302
Nonperforming assets as a
percent of total loans, leases
and other assets, including other
real estate owned 2.56% 1.96% 1.32% 0.92% 0.70%
a) Nonaccrual loans include debt restructuring balances of $187 as of
06/30/08, $73 million as of 03/31/08, $29 million as of 12/31/07, $6
million as of 09/30/07 and $2 million as of 06/30/07.
b) Nonaccrual loans include debt restructuring balances of $116 as of
06/30/08, $86 million as of 03/31/08, $46 million as of 12/31/07, and
$16 million as of 09/30/07.
c) All nonaccrual credit card balances are the result of debt
restructurings.
d) Excludes government insured advances.
Nonperforming assets (NPAs) at quarter end were $2.2 billion, or 2.56
percent of total loans and leases and OREO, up from 1.96 percent last
quarter and 0.70 percent in the second quarter a year ago. Sequential
growth in NPAs was $606 million, or 38 percent, down from 50 percent growth
in the first quarter. Second quarter growth was driven by increases related
to residential real estate builders and developers in the commercial
portfolio and restructurings of mortgage and home equity loans in the
consumer portfolio.
Commercial NPAs of $1.5 billion, or 2.93 percent, grew $465 million, or
44 percent, in the second quarter of 2008. Commercial NPA growth was
primarily driven by continued deterioration in the commercial construction
and commercial mortgage portfolios, particularly in Michigan and Florida.
NPAs in the C&I portfolio of $414 million, increased $109 million, from the
previous quarter, driven by a $20 million increase in residential
homebuilder and developer NPAs and weakness among customers associated with
residential construction activities. Commercial construction NPAs were $552
million, an increase of $133 million from the first quarter of 2008.
Commercial mortgage NPAs were $540 million, a sequential increase of $216
million. Commercial real estate loans in Michigan and Florida represented
42 percent of our total commercial real estate portfolio. Increases in NPAs
in these states represented 74 percent of commercial real estate NPA growth
and these regions accounted for 68 percent of total commercial real estate
NPAs. Residential real estate builders and developers represented
approximately $547 million in commercial NPAs and increased $239 million
from the first quarter of 2008, accounting for approximately half of the
increase in total commercial NPAs.
Consumer NPAs of $674 million, or 2.00 percent, increased $141 million,
or 26 percent, in the second quarter of 2008. Of the growth, $136 million
was experienced in residential real estate portfolios. Residential mortgage
NPAs increased $115 million to $448 million. Of residential mortgage NPAs,
$12 million were in residential construction loans (of which $7 million was
OREO). Home equity NPAs increased $21 million to $183 million. OREO
represented $119 million of total residential mortgage NPAs and $32 million
in total home equity NPAs. Residential real estate loans in Michigan and
Florida represented 64 percent of the growth in residential real estate
NPAs, 59 percent of total residential real estate NPAs, and 36 percent of
total residential real estate loans. Included within consumer NPAs,
primarily in residential real estate loans, were $318 million in troubled
debt restructurings, including $146 million restructured in the second
quarter of 2008. These debt restructurings assist qualifying borrowers in
creating workable payment plans to enable them to remain in their homes.
Loans still accruing over 90 days past due were $605 million, up $67
million or 12 percent, from the first quarter of 2008. Consumer 90 days
past due balances increased 10 percent from the previous quarter and
commercial 90 days past due balances increased 15 percent. Growth in
commercial and consumer 90 days past dues was generally concentrated in
commercial real estate and residential mortgages.
Capital Position/Other
For the Three Months Ended
June March December September June
2008(a) 2008 2007 2007 2007
Capital Position
Average shareholders' equity to
average assets 8.59% 8.43% 8.77% 9.13% 9.53%
Tangible equity 6.37% 6.19% 6.14% 7.00% 7.18%
Tangible common equity 5.40% 6.19% 6.14% 6.99% 7.17%
Regulatory capital ratios:
Tier I capital 8.51% 7.72% 7.72% 8.46% 8.13%
Total risk-based capital 12.15% 11.34% 10.16% 10.87% 10.54%
Tier I leverage 9.08% 8.28% 8.50% 9.23% 8.76%
(a) Current period regulatory capital data and ratios are estimated
During the second quarter, we issued $400 million in trust-preferred
securities and $750 million of five-year senior notes. On June 18, 2008, we
announced a plan to raise our target for the Tier 1 capital ratio to 8-9%.
In conjunction with this plan, we issued $1.1 billion in convertible
preferred securities which raised our Tier 1 ratio to the middle of our
target range, We also announced a reduction in our quarterly dividend to
$0.15 per share from the prior $0.44 level, which conserves approximately
$1.2 billion of common equity by the end of 2009 relative to the previous
dividend level. Additionally, we announced our intention to sell certain
non-core businesses, which we expects to generate more than $1 billion on
an after-tax basis.
The tangible equity ratio increased 18 bps to 6.37 percent primarily
due to the issuance of the convertible preferred securities, which
contributed 96 bps to the ratio. The Tier 1 capital ratio increased 79 bps
to 8.51 and the total capital ratio increased 81 bps, primarily due to the
convertible preferred issuance which contributed 93 bps to both Tier 1 and
Total capital.
As previously disclosed, Fifth Third filed suit against the IRS seeking
a refund of taxes paid as a result of the audit of the 1997 tax year. This
suit involves a determination of the correct tax treatment of certain
leveraged leases entered into by the Company. The outcome of this
litigation will likely impact a number of leveraged leases we entered into
during 1997 through 2004. After a jury trial, the jury rendered a verdict
in the form of answers to interrogatories, some of which favored Fifth
Third and some of which favored the IRS. No judgment has been entered by
the Court in the case and the parties dispute the judgment that should be
entered in light of the jury's responses to the interrogatories. Both the
IRS and Fifth Third will be filing briefs, after which the Court will enter
a judgment. The nature and timing of the Court's decision is uncertain.
During the second quarter of 2008, two other decisions involving the tax
treatment of leveraged leases were issued where the courts ruled in favor
of the IRS. To date, the decisions issued have been dependent on the
specific facts in each case. We continue to believe that the facts and
circumstances related to our leveraged leases are different from these
other cases, that our tax treatment was proper under the tax law as it
existed at the time the tax benefits were reported, and that the facts in
our case support our position. We are required under applicable accounting
standards to assess the likeliness of a favorable outcome of this
litigation. In light of recent decisions and uncertainty related to our own
case, we have concluded that previously recognized benefits from the
transactions at issue in the litigation and certain other leveraged leases
described above must be remeasured as required by FIN 48 and have recorded
the charges described earlier. We believe these charges address the
downside risk we have related to leveraged leases should there be a
negative outcome in our case. We intend to continue pursuing a favorable
disposition of this matter.
On May 5, 2008, we completed our acquisition of nine branches from
First Horizon National Corporation, assuming their deposits. First Horizon
retained all loans held at the branches. Additionally, on June 6, 2008, we
completed our acquisition of First Charter Corporation, paying $31.00 per
First Charter share, or approximately $1.1 billion. This transaction
reduced tangible equity capital ratios by approximately 65 bps.
Outlook
The following outlook represents currently expected full year 2008
growth rates compared with full year 2007 results. Note that the current
outlook includes the effect of the second quarter acquisitions of First
Charter and branches from First Horizon, not previously included in the
outlook. Our outlook is based on current expectations as of the date of
this release for results within our businesses; prevailing views related to
economic growth, inflation, unemployment and other economic factors, and
market forward interest rate expectations. These expectations are
inherently subject to risks and uncertainties. There are a number of
factors that could cause results to differ materially from historical
performance and these expectations, including the effects of unusually high
market volatility and factors contributing to industry-wide and
company-specific credit losses. We undertake no obligation to update these
expectations after the date of this release. Please refer to the
forward-looking statement at the end of this release for important
information regarding risk factors related to current and future results.
Category Growth, percentage, or bps range
Net interest income# Mid-teens
Net interest margin 3.50-3.60%
Noninterest income* Low-to-mid teens
Noninterest expense** 10-12%
Average loans High single digits
Average core deposits Mid single digits
Net charge-offs 160-170 bps range
Allowance for loan loss reserve/loans >2 percent by year-end***
Effective tax rate [non-tax equivalent]# Approximately 27-28 percent
Tangible equity/tangible asset ratio Target 6-7%
Tier 1 capital ratio Target 8-9%
Total capital ratio Target 11.5-12.5%
# comparison with 2007 excludes second quarter 2008 charges related to
leveraged lease litigation ($130 million pre-tax in net interest
income and $140 million in pre- and after-tax charges in tax expense).
* comparison with 2007 excludes $273 million in first quarter 2008 gains
related to Visa's IPO and non-cash charges to lower the cash surrender
value of one of our BOLI policies of an estimated $152 million in the
first quarter of 2008 and $177 million in the fourth quarter of 2007.
** comparison with 2007 excludes $152 million in reversals of litigation
reserves in first quarter 2008 related to Visa's IPO, $20 million in
merger-related charges in first and second quarters 2008, $9 million
in severance expenses in the first quarter of 2008, and, in 2007, $172
million for charges in potential future Visa litigation settlements
and $8 million of acquisition-related expenses.
*** subject to loan loss allowance model.
Conference Call
Fifth Third will host a conference call to discuss these financial
results at 8:30 a.m. (Eastern Time) today. This conference call will be
webcast live by Thomson Financial and may be accessed through the Fifth
Third Investor Relations website at http://www.53.com (click on "About
Fifth Third" then "Investor Relations"). The webcast also is being
distributed over Thomson Financial's Investor Distribution Network to both
institutional and individual investors. Individual investors can listen to
the call through Thomson Financial's individual investor center at
http://www.earnings.com or by visiting any of the investor sites in Thomson
Financial's Individual Investor Network. Institutional investors can access
the call via Thomson Financial's password-protected event management site,
StreetEvents (http://www.streetevents.com).
Those unable to listen to the live webcast may access a webcast replay
or podcast through the Fifth Third Investor Relations website at the same
web address. Additionally, a telephone replay of the conference call will
be available beginning approximately two hours after the conference call
until Tuesday, August 5th by dialing 800-642-1687 for domestic access and
706-645-9291 for international access (passcode 50436837#).
Corporate Profile
Fifth Third Bancorp is a diversified financial services company
headquartered in Cincinnati, Ohio. As of June 30, 2008, the Company has
$115 billion in assets, operates 18 affiliates with 1,308 full-service
Banking Centers, including 97 Bank Mart(R) locations open seven days a week
inside select grocery stores and 2,329 ATMs in Ohio, Kentucky, Indiana,
Michigan, Illinois, Florida, Tennessee, West Virginia, Pennsylvania,
Missouri, Georgia and North Carolina. Fifth Third operates five main
businesses: Commercial Banking, Branch Banking, Consumer Lending,
Investment Advisors and Fifth Third Processing Solutions. Fifth Third is
among the largest money managers in the Midwest and, as of June 30, 2008,
has $207 billion in assets under care, of which it managed $31 billion for
individuals, corporations and not-for-profit organizations. Investor
information and press releases can be viewed at http://www.53.com . Fifth
Third's common stock is traded on the NASDAQ(R) National Global Select
Market under the symbol "FITB."
FORWARD-LOOKING STATEMENTS
This report may contain forward-looking statements about Fifth Third
Bancorp and/or the company as combined acquired entities within the meaning
of Sections 27A of the Securities Act of 1933, as amended, and Rule 175
promulgated thereunder, and 21E of the Securities Exchange Act of 1934, as
amended, and Rule 3b-6 promulgated thereunder, that involve inherent risks
and uncertainties. This report may contain certain forward-looking
statements with respect to the financial condition, results of operations,
plans, objectives, future performance and business of Fifth Third Bancorp
and/or the combined company including statements preceded by, followed by
or that include the words or phrases such as "believes," "expects,"
"anticipates," "plans," "trend," "objective," "continue," "remain" or
similar expressions or future or conditional verbs such as "will," "would,"
"should," "could," "might," "can," "may" or similar expressions. 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) general economic conditions and weakening in the economy,
specifically the real estate market, either national or in the states in
which Fifth Third, one or more acquired entities and/or the combined
company do business, are less favorable than expected; (2) deteriorating
credit quality; (3) political developments, wars or other hostilities may
disrupt or increase volatility in securities markets or other economic
conditions; (4) changes in the interest rate environment reduce interest
margins; (5) prepayment speeds, loan origination and sale volumes,
charge-offs and loan loss provisions; (6) Fifth Third's ability to maintain
required capital levels and adequate sources of funding and liquidity; (7)
changes and trends in capital markets; (8) competitive pressures among
depository institutions increase significantly; (9) effects of critical
accounting policies and judgments; (10) changes in accounting policies or
procedures as may be required by the Financial Accounting Standards Board
or other regulatory agencies; (11) legislative or regulatory changes or
actions, or significant litigation, adversely affect Fifth Third, one or
more acquired entities and/or the combined company or the businesses in
which Fifth Third, one or more acquired entities and/or the combined
company are engaged; (12) ability to maintain favorable ratings from rating
agencies; (13) fluctuation of Fifth Third's stock price; (14) ability to
attract and retain key personnel; (15) ability to receive dividends from
its subsidiaries; (16) potentially dilutive effect of future acquisitions
on current shareholders' ownership of Fifth Third; (17) effects of
accounting or financial results of one or more acquired entities; (18)
difficulties in combining the operations of acquired entities; (19)
inability to generate the gains on sale and related increase in
shareholders' equity that it anticipates from the sale of certain non-core
businesses, (20) loss of income from the sale of certain non-core
businesses could have an adverse effect on Fifth Third's earnings and
future growth (21) ability to secure confidential information through the
use of computer systems and telecommunications networks; and (22) the
impact of reputational risk created by these developments on such matters
as business generation and retention, funding and liquidity. Additional
information concerning factors that could cause actual results to differ
materially from those expressed or implied in the forward-looking
statements is available in the Bancorp's Annual Report on Form 10-K for the
year ended December 31, 2007, filed with the United States Securities and
Exchange Commission (SEC). Copies of this filing are available at no cost
on the SEC's Web site at http://www.sec.gov or on the Fifth Third's Web
site at http://www.53.com . Fifth Third undertakes no obligation to release
revisions to these forward-looking statements or reflect events or
circumstances after the date of this report.
SOURCE Fifth Third Bancorp
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Related links:
http://www.53.com
CONTACT:
Investors: Jeff Richardson, +1-513-534-0983,
or Jim Eglseder, +1-513-534-8424, Media: Debra DeCourcy, APR,
+1-513-534-4153, all of Fifth Third Bancorp
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