Strong core operating results offset by higher credit costs, market
valuation adjustments
CINCINNATI, Oct. 21 /PRNewswire-FirstCall/ --
-- Net loss of $56 million ($0.14 per diluted common share) driven
primarily by higher credit costs, market valuation adjustments
-- FNM/FRE impairment of $0.06 per share, Visa/Discover settlement
charge of $0.05 per share, BOLI charge of $0.04 per share. Results
also included net $0.05 benefit from litigation settlement.
-- Pre-tax, pre-provision earnings of $813 million, up 40 percent from the
third quarter of 2007; up 12 percent excluding third quarter 2008 loan
discount accretion, litigation-related items, and asset sale/market
valuation gains and losses
-- Reported net interest income up 41 percent versus the third quarter of
2007; up 12 percent excluding First Charter loan discount accretion
-- Average loans up 11 percent and average core deposits up 3 percent
-- Noninterest income increased 5 percent from the third quarter of 2007,
or 11 percent excluding items mentioned above
-- Payments processing revenue growth of 14 percent
-- Deposit service revenue up 13 percent
-- Corporate banking revenue growth of 15 percent
-- Mortgage banking revenue up 74 percent
-- Tier 1 capital ratio of 8.53 percent (target range 8-9 percent)
-- Total capital ratio of 12.25 percent (target range 11.5-12.5 percent)
-- Tangible equity ratio of 6.19 percent (target range 6-7 percent)
-- Allowance to loan ratio increased to 2.41 percent
Earnings Highlights
For the Three Months Ended
Sept- Sept-
ember June March December ember
2008 2008 2008 2007 2007
Net income (loss) (in
millions) ($56) ($202) $286 $16 $325
Net income (loss) available
to common shareholders ($81) ($202) $286 $16 $325
Common Share Data
Earnings per share, basic (0.14) (0.37) 0.54 0.03 0.61
Earnings per share, diluted (0.14) (0.37) 0.54 0.03 0.61
Cash dividends per common
share 0.15 0.15 0.44 0.44 0.42
Financial Ratios
Return on average assets (.28%) (.73%) 1.03% 0.06% 1.26%
Return on average equity (3.0) (8.4) 12.3 0.7 13.8
Tier I capital 8.53 8.51 7.72 7.72 8.46
Net interest margin (a) 4.24 3.04 3.41 3.29 3.34
Efficiency (a) 54.2 58.6 42.3 72.6 59.2
Common shares outstanding
(in thousands) 577,487 577,530 532,106 532,672 532,627
Average common shares
outstanding
(in thousands):
Basic 571,705 540,030 528,498 529,120 530,123
Diluted 571,705 540,030 530,372 530,939 532,471
% Change
Seq Yr/Yr
Net income (loss) (in millions) (72%) NM
Net income (loss) available to
common shareholders (60%) NM
Common Share Data
Earnings per share, basic (62%) NM
Earnings per share, diluted (62%) NM
Cash dividends per common share - (64%)
Financial Ratios
Return on average assets (62%) NM
Return on average equity (64%) NM
Tier I capital - 1%
Net interest margin (a) 39% 27%
Efficiency (a) (8%) (8%)
Common shares outstanding (in
thousands) - 8%
Average common shares outstanding
(in thousands):
Basic 6% 8%
Diluted 6% 7%
(a) Presented on a fully taxable equivalent basis
NM: not meaningful
Fifth Third Bancorp (Nasdaq: FITB) today reported a third quarter 2008
net loss of $56 million. This represented a net loss to common shareholders
of $81 million, or $0.14 per diluted share, compared with a net loss of
$202 million, or $0.37 per diluted share, in the second quarter of 2008 and
net income of $325 million, or $0.61 per diluted share, in the third
quarter of 2007. The third quarter 2008 net loss to common shareholders
includes $25 million in preferred stock dividends. Reported results
included: a $51 million pre-tax, or $0.06 per share after-tax, charge due
to the impairment of preferred stock held in Fannie Mae and Freddie Mac; an
estimated non-cash charge of $45 million pre-tax, or $0.05 per share
after-tax, related to Visa's settlement with Discover; and an estimated
non-cash charge of $27 million pre-tax, or $0.04 per share after-tax, to
lower the current cash surrender value of one of our Bank-Owned Life
Insurance ("BOLI") policies. Results also included a net benefit of $40
million pre-tax, or $0.05 per share after-tax, related to the satisfactory
resolution of a court case stemming from goodwill created in a prior
acquisition.
"The banking industry has experienced unprecedented developments in
recent weeks," said Kevin T. Kabat, Chairman, President and CEO of Fifth
Third Bancorp. "These events have a variety of causes. The headline issues
- subprime lending, option ARMs, credit default swaps, CDOs - involve
products that Fifth Third has not engaged in. Nor do we have significant
exposures to troubled financial counterparties who have been in the news.
As our results indicate, we are not immune to disruptions in the capital
markets and weakening economic conditions. Higher credit costs once again
drove bottom line results that no one here is satisfied with.
Non-performing assets and net charge-offs continued to increase and remain
disproportionately attributable to commercial and residential real estate
loans, particularly in Florida and Eastern Michigan.
Despite the difficult economic backdrop, the core earnings power of the
Bank remains positive. Our businesses continue to produce revenue growth
and our disciplined approach to expense control allows us to efficiently
operate our businesses.
We announced a capital plan in June that anticipated significant
uncertainty in the economic outlook and was devised to provide us with the
ability to withstand additional negative developments. This plan involved,
first, an increase in our targeted capital ratios, including a Tier 1
capital ratio target of 8-9 percent, a range we expect continually to meet
or exceed and which is significantly in excess of regulatory
"well-capitalized" levels. Second, the issuance of $1.1 billion in Tier 1
securities, which placed Fifth Third solidly within its target capital
ranges. Third, the reduction of our common dividend, which preserves over
$1.2 billion in equity through the end of 2009 relative to our prior
dividend level.
The remaining element of our capital plan involved adding $1 billion or
more to capital through the sale of non-core assets to provide for the
possibility of a difficult 2009, a view that continues to seem likely to
us. During the past quarter, we have made significant progress in
evaluating attractive structures, gauging significant interest on the part
of potential investors, and negotiating potential transactions.
Last week, however, the U.S. Treasury outlined a plan that would
involve the purchase of Tier 1 securities from eligible financial
institutions. We support this plan, which we believe represents an
effective method to achieve the goals of increasing credit availability
while at the same time providing a firmer capital foundation for U.S.
banks. Nine institutions have participated initially and we expect many
additional competitors to also avail themselves of this program.
We are in the process of evaluating this opportunity and considering an
application. The terms of this capital, and our desire to ensure that we
maintain strong capital levels, not only in absolute terms but also
relative to competitors, will be factors in our decision. We would also
expect to reevaluate our plans and activities with respect to pursuing a
current sale of non-core assets as part of our capital plan. We believe
that either alternative would provide capital well in excess of our capital
targets.
Regardless of our course of action, we will continue to evaluate our
businesses from a strategic planning perspective and will make decisions in
the context of what's best for our investors and customers. We retain
significant flexibility as we evaluate our businesses and opportunities
that may present themselves in a significantly changing financial services
landscape."
Income Statement Highlights
For the Three Months Ended % Change
Sept- Sept-
ember June March December ember
2008 2008 2008 2007 2007 Seq Yr/Yr
Condensed Statements
of Income ($ in millions)
Net interest income
(taxable equivalent) $1,068 $744 $826 $785 $760 44% 41%
Provision for loan and
lease losses 941 719 544 284 139 31% 578%
Total noninterest income 717 722 864 509 681 (1%) 5%
Total noninterest
expense 967 858 715 940 853 13% 13%
Income before income
taxes (taxable
equivalent) (123) (111) 431 70 449 11% NM
Taxable equivalent
adjustment 5 6 6 6 6 (17%) (17%)
Applicable income taxes (72) 85 139 48 118 NM NM
Net income (loss) (56) (202) 286 16 325 (72%) NM
Dividends on preferred
stock 25 - - - - NM NM
Net income (loss)
available to common
shareholders (81) (202) 286 16 325 (60%) NM
Earnings per share,
diluted ($0.14) ($0.37) $0.54 $0.03 $0.61 (62%) NM
NM: not meaningful
Net Interest Income
For the Three Months Ended
Sept- Sept-
ember June March December ember
2008 2008 2008 2007 2007
Interest Income ($ in
millions)
Total interest income
(taxable equivalent) $1,553 $1,213 $1,453 $1,556 $1,535
Total interest expense 485 469 627 771 775
Net interest income (taxable
equivalent) $1,068 $744 $826 $785 $760
Average Yield
Yield on interest-earning
assets 6.16% 4.95% 5.99% 6.52% 6.73%
Yield on interest-bearing
liabilities 2.25% 2.23% 2.99% 3.78% 4.04%
Net interest rate spread
(taxable equivalent) 3.91% 2.72% 3.00% 2.74% 2.69%
Net interest margin
(taxable equivalent) 4.24% 3.04% 3.41% 3.29% 3.34%
Average Balances ($ in
millions)
Loans and leases, including
held for sale $85,772 $85,212 $84,912 $82,172 $78,243
Total securities and other
short-term investments 14,515 13,363 12,597 12,506 12,169
Total interest-bearing
liabilities 85,990 84,417 84,353 80,977 76,070
Shareholders' equity 10,843 9,629 9,379 9,446 9,324
% Change
Seq Yr/Yr
Interest Income ($ in millions)
Total interest income (taxable
equivalent) 28% 1%
Total interest expense 3% (37%)
Net interest income (taxable
equivalent) 44% 41%
Average Yield
Yield on interest-earning assets 24% (8%)
Yield on interest-bearing
liabilities 1% (44%)
Net interest rate spread (taxable
equivalent) 44% 45%
Net interest margin (taxable
equivalent) 39% 27%
Average Balances ($ in millions)
Loans and leases, including held for sale 1% 10%
Total securities and other short-
term investments 9% 19%
Total interest-bearing liabilities 2% 13%
Shareholders' equity 13% 16%
Net interest income of $1.1 billion on a taxable equivalent basis was
up $324 million from the second quarter of 2008. Third quarter net interest
income included the benefit of $215 million from fair value purchase
accounting adjustments for loan discount accretion related to the second
quarter 2008 acquisition of First Charter Corporation ("First Charter").
The impact of loan discount accretion in the second quarter 2008 was $31
million. As previously disclosed, cash flow recalculations on certain
leveraged lease transactions reduced second quarter 2008 net interest
income by approximately $130 million. Excluding the leveraged lease charge
in the second quarter and the effects of the loan discount accretion in
both quarters, net interest income increased $11 million from the second
quarter 2008. Net interest income benefited from a lower effective federal
funds rate, an increase in LIBOR rates and higher securities balances,
which more than offset higher costs associated with a shift toward higher
cost deposits and unusually wide spreads on wholesale funding sources, an
increase in loan interest reversals, and higher nonaccrual balances.
Reported net interest margin was 4.24 percent, up 120 bps from 3.04
percent in the second quarter of 2008. The increase was primarily due to
the impact of purchase accounting adjustments, which contributed 85 bps to
the third quarter margin versus 13 bps to the second quarter margin, and
the negative impact of 53 bps to the second quarter margin of the leveraged
lease charge. Excluding the impact of these items, net interest margin was
3.39 percent and declined 5 bps from the previous quarter. The decline was
driven by a shift to higher cost deposits and a transition to longer term
institutional and commercial CDs, as the Bank continues to manage its
exposure to overnight funding sources.
Compared with the third quarter of 2007, net interest income was up
$308 million and net interest margin increased 90 bps from 3.34 percent
primarily due to the impact of loan discount accretion from the First
Charter acquisition. Excluding this item, net interest income increased by
$94 million, or 12 percent, from the same period in 2007, and net interest
margin expanded 5 bps. The increase in net interest income reflected
average earning asset growth of 11 percent.
Average Loans
For the Three Months Ended
Sept- Sept-
ember June March December ember
2008 2008 2008 2007 2007
Average Portfolio Loans
and Leases ($ in millions)
Commercial:
Commercial loans $28,284 $28,299 $25,367 $23,650 $22,183
Commercial mortgage 13,257 12,590 12,016 11,497 11,041
Commercial construction 6,110 5,700 5,577 5,544 5,499
Commercial leases 3,641 3,747 3,723 3,692 3,698
Subtotal - commercial loans
and leases 51,292 50,336 46,683 44,383 42,421
Consumer:
Residential mortgage
loans 9,681 9,922 10,395 9,943 8,765
Home equity 12,534 12,012 11,846 11,843 11,752
Automobile loans 8,303 8,439 9,278 9,445 10,853
Credit card 1,720 1,703 1,660 1,461 1,366
Other consumer loans and
leases 1,165 1,125 1,083 1,099 1,138
Subtotal - consumer loans
and leases 33,403 33,201 34,262 33,791 33,874
Total average loans and
leases (excluding held for
sale) $84,695 $83,537 $80,945 $78,174 $76,295
Average loans held for sale 1,077 1,676 3,967 3,998 1,950
% Change
Seq Yr/Yr
Average Portfolio Loans and Leases ($ in millions)
Commercial:
Commercial loans - 28%
Commercial mortgage 5% 20%
Commercial construction 7% 11%
Commercial leases (3%) (2%)
Subtotal - commercial loans and leases 2% 21%
Consumer:
Residential mortgage loans (2%) 10%
Home equity 4% 7%
Automobile loans (2%) (23%)
Credit card 1% 26%
Other consumer loans and leases 4% 2%
Subtotal - consumer loans and leases 1% (1%)
Total average loans and leases
(excluding held for sale) 1% 11%
Average loans held for sale (36%) (45%)
Average portfolio loan and lease balances grew 1 percent sequentially
and 11 percent from the third quarter of 2007. Excluding acquisitions,
portfolio loan and lease balances declined 1 percent sequentially and
increased 6 percent from the previous year. Average commercial loans and
leases grew 2 percent sequentially and 21 percent compared with the
previous year. Sequential growth was driven almost entirely by the full
quarter impact on average balances from the First Charter acquisition,
which contributed $688 million to average commercial mortgage balances and
$548 million to average commercial construction balances in the third
quarter. Excluding all acquisitions, commercial loan growth was flat
sequentially and increased 17 percent from the previous year.
Year-over-year growth excluding acquisitions was primarily driven by
commercial and industrial (C&I) lending, up 26 percent versus a year ago,
primarily the result of strong production during the first and second
quarters of 2008. Period end loans included $1.4 billion of commercial
loans primarily due to the use of contingent liquidity facilities related
to certain off-balance sheet programs.
Consumer loan and lease balances increased 1 percent sequentially and
declined 1 percent from the third quarter of 2007. Excluding the impact of
acquisitions, average consumer loans decreased 2 percent sequentially and 8
percent year-over-year. Sequentially, growth in high FICO, low
loan-to-value (LTV) home equity loans and credit card loans was more than
offset by declines in auto and residential mortgage loans. On a
year-over-year basis, growth in home equity, credit card and residential
mortgage loans was offset by a reduction in auto loan balances due to the
securitization of $2.7 billion in the first quarter of 2008. All of the
year-over-year growth in residential mortgage loan balances was due to the
fourth quarter 2007 acquisition of R-G Crown and the second quarter 2008
acquisition of First Charter.
Average Deposits
For the Three Months Ended
Sept- Sept-
ember June March December ember
2008 2008 2008 2007 2007
Average Deposits ($ in
millions)
Demand deposits $14,225 $14,023 $13,208 $13,345 $13,143
Interest checking 13,843 14,396 14,836 14,394 14,334
Savings 16,154 16,583 16,075 15,616 15,390
Money market 6,051 6,592 6,896 6,363 6,247
Foreign office (a) 2,126 2,169 2,443 2,249 1,808
Subtotal - Transaction
deposits 52,399 53,763 53,458 51,967 50,922
Other time 10,780 9,517 10,884 11,011 10,290
Subtotal - Core deposits 63,179 63,280 64,342 62,978 61,212
Certificates - $100,000
and over 11,623 8,143 5,835 6,613 6,062
Other foreign office 395 2,948 3,861 2,464 1,981
Total deposits $75,197 $74,371 $74,038 $72,055 $69,255
% Change
Seq Yr/Yr
Average Deposits ($ in millions)
Demand deposits 1% 8%
Interest checking (4%) (3%)
Savings (3%) 5%
Money market (8%) (3%)
Foreign office (a) (2%) 18%
Subtotal - Transaction deposits (3%) 3%
Other time 13% 5%
Subtotal - Core deposits - 3%
Certificates - $100,000 and over 43% 92%
Other foreign office (87%) (80%)
Total deposits 1% 9%
(a) Includes commercial customer Eurodollar sweep balances for which the
Bancorp pays rates comparable to other commercial deposit accounts.
Average core deposits were flat sequentially and up 3 percent from the
third quarter of 2007. Excluding acquisitions, average core deposits
declined 2 percent both from the previous quarter and the previous year.
Average transaction deposits (excluding consumer time deposits) were down 3
percent from the second quarter and grew 3 percent from a year ago.
Sequential growth in average demand deposit accounts (DDA) and consumer CD
balances was offset by lower interest checking, savings and money market
deposits, and foreign office commercial sweep deposits. On a year-over-year
basis, growth in DDA, savings, consumer CD and foreign office commercial
sweep deposits more than offset lower interest checking and money market
balances.
Retail average core deposits increased 1 percent sequentially and were
up 3 percent from the third quarter of 2007. Sequential growth in DDA and
consumer CD balances was partially offset by lower interest checking,
savings, and money market balances. The sequential decline in
interest-bearing transaction accounts reflects lower average account
balances as economic conditions have weakened. Commercial core deposits
decreased 1 percent sequentially and increased 5 percent year-over-year.
Sequential growth in DDA and interest checking account balances was more
than offset by lower savings and money market account balances.
The $3.5 billion sequential increase in CDs $100,000 and over reflects
actions we have undertaken beginning in the second quarter of 2008 to
extend the average duration of wholesale borrowings to reduce exposure to
high levels of market volatility in overnight markets.
Noninterest Income
For the Three Months Ended % Change
Sept- Dec- Sept-
ember June March ember ember
2008 2008 2008 2007 2007 Seq Yr/Yr
Noninterest Income ($ in
millions)
Electronic payment processing
revenue $235 $235 $213 $223 $212 - 11%
Service charges on deposits 172 159 147 160 151 8% 13%
Investment advisory revenue 90 92 93 94 95 (2%) (5%)
Corporate banking revenue 104 111 107 106 91 (6%) 15%
Mortgage banking net revenue 45 86 97 26 26 (47%) 74%
Other noninterest income 112 49 177 (113) 93 129% 21%
Securities gains (losses), net (63) (10) 27 7 13 530% NM
Securities gains, net -
non-qualifying hedges
on mortgage servicing rights 22 - 3 6 - NM NM
Total noninterest income $717 $722 $864 $509 $681 (1%) 5%
Noninterest income of $717 million decreased $5 million sequentially
and increased $36 million from a year ago. Third quarter results included a
$76 million gain related to a satisfactory resolution of a court case
related to goodwill stemming from a previous acquisition. (Legal expenses
of $36 million associated with this case are recorded in noninterest
expense.) Results also included a $51 million other-than-temporary
impairment charge on Fannie Mae and Freddie Mac preferred stock and a
non-cash estimated charge of $27 million to lower the current cash
surrender value of one of our BOLI policies. Excluding these items,
noninterest income declined $3 million from a strong second quarter, driven
primarily by lower mortgage banking revenue partially offset by higher
deposit service charges and a $22 million gain on non- qualifying hedges on
mortgage servicing rights. Third quarter 2007 results included a gain of
$15 million on the sale of FDIC deposit insurance credits and a $16 million
gain on the sale of certain non-strategic credit card accounts. Excluding
these items in the third quarter of 2007, investment securities gains and
losses, and the gain from the litigation settlement and the BOLI charge in
the third quarter of 2008, noninterest income increased by $92 million, or
14 percent from the previous year. Year-over-year growth in noninterest
income was driven by growth in payments processing revenue, deposit fees,
corporate banking revenue and mortgage banking revenue.
Electronic payment processing (EPP) revenue of $235 million was
unchanged sequentially and increased 11 percent from a year ago. Merchant
processing revenue was up 9 percent from the previous year, reflecting
continued solid account acquisition offset by lower volumes due to a
reduction in retailer same-store sales. Card issuer interchange revenue
increased 19 percent from the previous year, driven by an increased number
of debit and credit card transactions and an increase in the average dollar
amount per debit card transaction. Financial institutions revenue grew 6
percent from the third quarter of 2007 driven by higher transaction
volumes.
Service charges on deposits of $172 million increased 8 percent
sequentially and 13 percent compared with the same quarter last year.
Retail service charges increased 11 percent from the second quarter and 8
percent from the third quarter of 2007, due to lower average balances and
increased deposit fees. Commercial service charges increased 3 percent
sequentially and 21 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
services fees used to pay for treasury management services.
Corporate banking revenue of $104 million decreased 6 percent
sequentially from strong second quarter results and was up 15 percent from
the previous year. Solid sequential growth in foreign exchange fees and
institutional sales, each up 5 percent, was more than offset by declines in
interest rate derivative revenue, down 38 percent, and business lending
fees, down 15 percent. Corporate banking revenue growth on a year-over-year
basis was primarily driven by strong growth in foreign exchange revenue, up
77 percent, institutional sales revenue, up 21 percent, and business
lending fees, up 11 percent. Results continue to be driven by market
volatility and increased product penetration into our middle market
customer base.
Investment advisory revenue of $90 million was down 2 percent
sequentially and 5 percent from the third quarter of 2007. Institutional
trust revenue decreased 1 percent from the same period the previous year
largely driven by lower market values. Mutual fund fees were down 6 percent
year-over-year, as market volatility drove declines from the previous year.
Brokerage fee revenue was down 16 percent from the third quarter of 2007
reflecting the continued shift in assets from equity products to money
market funds due to extreme market volatility, as well as a decline in
transaction-based revenues.
Mortgage banking net revenue totaled $45 million in the third quarter
of 2008, a $41 million decline from strong second quarter results and a $19
million increase from the third quarter of 2007. Third quarter originations
were $2.0 billion, down from $3.3 billion the previous quarter, due to
lower application volumes as a result of market disruptions and interest
rates that were generally higher during the quarter. Third quarter
originations resulted in fees and gains on the sale of mortgages of $43
million compared with gains of $79 million during the previous quarter and
$9 million during the same period in 2007. Revenue for the third quarter
included $8 million related to gains on the sale of portfolio loans
compared with $9 million in the previous quarter and $2 million in the
third quarter of 2007. The first quarter of 2008 adoption of FAS 159 for
mortgage banking contributed $11 million of the year- over-year increase in
mortgage banking revenue, with corresponding origination costs recorded in
noninterest expense. Net servicing revenue, before mortgage servicing
rights (MSR) valuation adjustments, totaled $17 million in the third
quarter, compared with $11 million last quarter and $14 million a year ago.
MSR valuation adjustments, including mark-to-market related adjustments on
free-standing derivatives, represented a net loss of $15 million in the
third quarter of 2008, compared with a net loss of $4 million last quarter
and a net gain of $3 million a year ago. The mortgage-servicing asset, net
of the valuation reserve, was $683 million at quarter end on a servicing
portfolio of $39.8 billion.
Net securities gains of $22 million were recorded in the third quarter
on non-qualifying hedges on mortgage servicing rights which offset MSR
valuation adjustments, compared with no gains in the previous quarter or in
the same period the previous year.
Net losses on investment securities were $63 million in the third
quarter of 2008 compared with a net loss of $10 million last quarter. We
recorded an other-than-temporary-impairment charge on the Fannie Mae and
Freddie Mac preferred stock ownership, which accounted for $51 million of
these losses compared with $13 million in charges last quarter. These
assets are now
carried at $4 million on a combined basis on an original par value of
$69 million.
Other noninterest income totaled $112 million in the third quarter of
2008 compared with $49 million last quarter and $93 million in the third
quarter of 2007. Third quarter 2008 results included the $76 million gain
related to the litigation settlement stemming from a prior acquisition and
the $27 million charge that lowered the current cash surrender value of one
of our BOLI policies. Excluding these items, other noninterest income
increased by $14 million from the previous quarter driven by lower
write-downs on other real estate owned (OREO) properties. Excluding the
gain from the court case and the BOLI charge in the third quarter of 2008
and the gain on the sale of FDIC deposit insurance credits and certain
non-strategic credit card accounts in the third quarter of 2007, other
non-interest income was relatively unchanged from the previous year.
Noninterest Expense
For the Three Months Ended % Change
Sept- Dec- Sept-
ember June March ember ember
2008 2008 2008 2007 2007 Seq Yr/Yr
Noninterest Expense ($ in
millions)
Salaries, wages and incentives $321 $331 $347 $328 $310 (3%) 4%
Employee benefits 72 60 85 56 67 19% 8%
Payment processing expense 70 67 66 68 65 4% 8%
Net occupancy expense 77 73 72 70 66 5% 16%
Technology and communications 47 49 47 47 41 (4%) 14%
Equipment expense 34 31 31 32 30 10% 12%
Other noninterest expense 346 247 67 339 274 40% 26%
Total noninterest expense $967 $858 $715 $940 $853 13% 13%
Noninterest expense of $967 million increased $109 million sequentially
and $114 million from a year ago. Third quarter results included an
estimated $45 million charge due to Visa's pending settlement with
Discover, $36 million related to legal expenses associated with the
litigation settlement from a prior acquisition, and $7 million in
additional pension settlement expense, the same amount that was recorded in
the third quarter of the previous year. Second quarter 2008 results
included $13 million in expenses related to the acquisition of First
Charter and branches from First Horizon and $12 million in sequentially
additional operating expenses from acquisitions. Third quarter 2007 results
included a $78 million charge due to Visa's settlement with American
Express. On a year-over-year comparison basis, acquisitions have added
approximately $31 million of additional operating expense compared with the
prior year and the impact of the adoption of FAS 159 on the classification
of mortgage origination costs has added approximately $11 million.
Excluding these items, noninterest expense increased $15 million, or 2
percent, from the second quarter of 2008 and increased $69 million, or 9
percent, from the third quarter of 2007. Expense growth on a sequential
basis was primarily attributable to volume-related processing and
technology investment expense. The increase in noninterest expense compared
with the third quarter of 2007 was driven by increased loan and lease
processing costs as a result of increased collections activities, increased
provision for unfunded commitments, and higher volume-related payments
processing expense.
Credit Quality
For the Three Months Ended
Sept- Dec- Sept-
ember June March ember ember
2008 2008 2008 2007 2007
Total net losses charged off
($ in millions)
Commercial loans ($85) ($107) ($36) ($48) ($23)
Commercial mortgage loans (94) (21) (33) (15) (8)
Commercial construction loans (88) (49) (72) (12) (5)
Commercial leases - - - - -
Residential mortgage loans (77) (63) (34) (18) (9)
Home equity (55) (54) (41) (32) (27)
Automobile loans (32) (26) (35) (30) (25)
Credit card (24) (21) (20) (15) (13)
Other consumer loans and leases (8) (3) (5) (4) (5)
Total net losses charged off (463) (344) (276) (174) (115)
Total losses (481) (365) (293) (193) (127)
Total recoveries 18 21 17 19 12
Total net losses charged off ($463) ($344) ($276) ($174) ($115)
Ratios
Net losses charged off as a percent of
average loans and leases (excluding
held for sale) 2.17% 1.66% 1.37% 0.89% 0.60%
Commercial 2.07% 1.41% 1.21% 0.66% 0.33%
Consumer 2.33% 2.04% 1.58% 1.18% 0.93%
Net charge-offs as a percentage of average loans and leases were 217
bps in the third quarter, compared with 166 bps in the second quarter of
2008 and 60 bps in the third quarter of 2007. Loss experience continues to
be primarily associated with consumer residential real estate loans and
commercial residential builder and developer loans, and to be
disproportionately concentrated in Michigan and Florida. These states
represented approximately 65 percent of total third quarter net
charge-offs. Of total net charge-offs, 35 percent related to residential
builders and developers and 29 percent related to residential real estate.
Excluding losses on loans to homebuilders and developers of $163 million in
the third quarter and $34 million the previous quarter, net charge-offs
decreased by $10 million.
Commercial net charge-offs of $267 million, or 207 bps, increased $90
million compared with the second quarter of 2008. Losses related to
residential builders and developers were $163 million and increased $129
million from the second quarter and represented 61 percent of commercial
net charge-offs. Of total residential real estate builder and developer net
charge-offs, $9 million were C&I losses, $75 million were commercial
construction losses, and $79 million were commercial mortgage losses.
Commercial construction net charge-offs increased to $88 million from $49
in the second quarter. Michigan and Florida accounted for approximately 86
percent of these losses in the third quarter and more than all of the
sequential increase. Commercial mortgage net charge-offs increased to $94
million, up $73 million from the second quarter of 2008. Michigan and
Florida accounted for approximately 87 percent of these losses and
approximately 95 percent of the sequential growth. Net charge-offs in the
C&I portfolio were $85 million, down $22 million from the second quarter of
2008. Excluding the previously disclosed $25 million loss related to fraud
in the second quarter of 2008, C&I losses were relatively flat.
Consumer net charge-offs of $196 million, or 233 bps, grew $29 million
from the second quarter of 2008, driven primarily by losses in the
residential real estate portfolio. Net charge-offs in Michigan and Florida
represented 52 percent of consumer losses in the third quarter, up from 48
percent in the second quarter of 2008. Home equity net charge-offs of $55
million increased $1 million and continued to be driven by brokered home
equity loans reflecting borrower stress and lower home price valuations.
Originations of these brokered loans were discontinued last year. Net
losses on brokered home equity loans were $30 million or 54 percent of
third quarter home equity losses. Brokered home equity loans represented
$2.4 billion, or 19 percent, of the total home equity portfolio of $12.6
billion. Michigan and Florida represented 40 percent of third quarter home
equity losses. Net charge-offs within the residential mortgage portfolio
were $77 million, an increase of $14 million from the previous quarter,
primarily a result of declining property values on loans in foreclosure,
with losses in Michigan and Florida representing 85 percent of losses in
the third quarter. Net charge-offs in the auto portfolio increased by $6
million from the second quarter to $32 million, driven by seasonality and
lower values received on larger vehicles at auction. Net charge-offs on
consumer credit card loans were $24 million, up $3 million from the second
quarter, as the portfolio continues to mature.
For the Three Months Ended
Sept- Dec- Sept-
ember June March ember ember
2008 2008 2008 2007 2007
Allowance for Credit Losses
($ in millions)
Allowance for loan and lease
losses, beginning $1,580 $1,205 $937 $827 $803
Total net losses charged off (463) (344) (276) (174) (115)
Provision for loan and lease
losses 941 719 544 284 139
Allowance for loan and lease
losses, ending 2,058 1,580 1,205 937 827
Reserve for unfunded commitments,
beginning 115 103 95 79 77
Provision for unfunded
commitments 17 10 8 13 2
Acquisitions - 2 - 3 -
Reserve for unfunded commitments,
ending 132 115 103 95 79
Components of allowance for
credit losses:
Allowance for loan and lease
losses 2,058 1,580 1,205 937 827
Reserve for unfunded
commitments 132 115 103 95 79
Total allowance for credit losses $2,190 $1,695 $1,308 $1,032 $906
Ratio
Allowance for loan and lease
losses as a percent of
loans and leases 2.41% 1.85% 1.49% 1.17% 1.08%
Provision for loan and lease losses totaled $941 million in the third
quarter of 2008, exceeding net charge-offs by $478 million. The increase in
the provision for loan and lease losses as well as the corresponding
increase in the allowance for loan and lease losses was largely driven by
higher estimates of inherent losses resulting from deterioration in
residential real estate collateral values, particularly in the residential
homebuilder and developer and consumer residential real estate portfolios,
and negative trends in nonperforming and other criticized assets.
The allowance for loan and lease losses represented 2.41 percent of
total loans and leases outstanding as of quarter end, compared with 1.85
percent last quarter, and represented 79 percent of nonperforming loans,
the same percentage as the previous quarter.
As of
Sept- Dec- Sept-
ember June March ember ember
2008 2008 2008 2007 2007
Nonperforming Assets and
Delinquency ($ in millions)
Commercial loans $550 $407 $300 $175 $175
Commercial mortgage 724 524 312 243 146
Commercial construction 636 537 408 249 105
Commercial leases 23 18 11 5 5
Residential mortgage (a) 474 329 211 121 74
Home equity (b) 169 151 128 91 61
Automobile 10 7 5 3 3
Credit card (c) 20 15 13 5 -
Other consumer loans and
leases - - - 1 -
Total nonaccrual loans and
leases $2,606 $1,988 $1,388 $893 $569
Repossessed personal property 24 22 22 21 19
Other real estate owned (d) 198 190 182 150 118
Total nonperforming assets $2,828 $2,200 $1,592 $1,064 $706
Total loans and leases 90
days past due $671 $608 $539 $491 $360
Nonperforming assets as a
percent of total loans,
leases and other assets,
including other real estate
owned 3.30% 2.57% 1.96% 1.32% 0.92%
a) Nonaccrual loans include debt restructuring balances of $258
million as of 09/30/08, $156 million as of 06/30/08, $73 million as
of 03/31/08, $29 million as of 12/31/07, and $6 million as of
09/30/07.
b) Nonaccrual loans include debt restructuring balances of $168
million as of 09/30/08, $139 million 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 $2.8 billion, or 3.30
percent of total loans and leases and OREO, up from 2.57 percent last
quarter and 0.92 percent in the third quarter a year ago. Sequential growth
in NPAs was $628 million, or 29 percent, down from 38 percent growth in the
second quarter. Third 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 $2.0 billion, or 3.79 percent, grew $464 million, or
30 percent, from the second quarter of 2008. Commercial NPA growth was
primarily driven by continued deterioration in the commercial construction
and commercial mortgage portfolios, particularly in the residential builder
and developer portfolio and particularly in Michigan and Florida.
Residential real estate builder and developer NPAs were $702 million in the
third quarter, up $154 million from the previous quarter. Of the total
residential real estate builder and developer NPAs, $42 million were C&I
NPAs, $343 million were commercial construction NPAs, and $316 million were
commercial mortgage NPAs. These also represented 12 percent, 52 percent,
and 39 percent of the quarterly increases in C&I, commercial construction,
and commercial mortgage NPAs, respectively. NPAs in the C&I portfolio of
$557 million increased $143 million, or 35 percent, from the previous
quarter. Commercial construction NPAs were $659 million, an increase of
$107 million, or 19 percent, from the second quarter of 2008. Commercial
mortgage NPAs were $749 million, a sequential increase of $209 million, or
39 percent. Commercial real estate loans in Michigan and Florida
represented 42 percent of our total commercial real estate portfolio while
increases in NPAs in these states represented 66 percent of commercial real
estate NPA growth and accounted for 68 percent of total commercial real
estate NPAs.
Consumer NPAs of $841 million, or 2.54 percent, increased $164 million,
or 24 percent, in the third quarter of 2008. Of the growth, $154 million
was experienced in residential real estate portfolios. Included within
consumer NPAs, primarily in residential real estate loans, were $427
million in debt restructurings, including a net $104 million that were
restructured in the third quarter of 2008. These debt restructurings assist
qualifying borrowers in creating workable payment plans to enable them to
remain in their homes. Residential mortgage NPAs increased $143 million to
$593 million and home equity NPAs increased $11 million to $194 million.
OREO represented $118 million of total residential mortgage NPAs and $25
million in total home equity NPAs. Residential real estate loans in
Michigan and Florida represented 52 percent of the growth in residential
real estate NPAs, 58 percent of total residential real estate NPAs, and 35
percent of total residential real estate loans.
Loans still accruing over 90 days past due were $671 million, up $63
million or 10 percent, from the second quarter of 2008. Consumer 90 days
past due balances decreased 9 percent from the previous quarter and
commercial 90 days past due balances increased 37 percent.
Capital Position
For the Three Months Ended
Sept- Dec- Sept-
ember June March ember ember
2008 (a) 2008 2008 2007 2007
Capital Position
Average shareholders' equity to
average assets 9.45% 8.59% 8.43% 8.77% 9.13%
Tangible equity 6.19% 6.37% 6.19% 6.14% 7.00%
Tangible common equity 5.23% 5.40% 6.19% 6.14% 6.99%
Regulatory capital ratios:
Tier I capital 8.53% 8.51% 7.72% 7.72% 8.46%
Total risk-based capital 12.25% 12.15% 11.34% 10.16% 10.87%
Tier I leverage 8.77% 9.08% 8.28% 8.50% 9.23%
(a) Current period regulatory capital data and ratios are estimated
The tangible equity ratio decreased 18 bps to 6.19 percent. The Tier 1
capital ratio increased 2 bps to 8.53 and the total capital ratio increased
10 bps to 12.25. The Tier 1 and total capital ratios were higher in the
third quarter as the reported net loss to common shareholders of $81
million was more than offset by a decrease in risk weighted assets due to
lower off balance sheet exposures and the increase in the reserve for loan
and lease losses. Our tangible equity to tangible assets ratio target is 6
to 7 percent; the tier 1 capital ratio target is 8 to 9 percent; and our
total capital ratio target is 11.5 to 12.5 percent.
Conference Call
Fifth Third will host a conference call to discuss these financial
results at 8:00a.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, November 4th by dialing 800-642-1687 for domestic access and
706-645-9291 for international access (passcode 63867680#).
Corporate Profile
Fifth Third Bancorp is a diversified financial services company
headquartered in Cincinnati, Ohio. As of September 30, 2008, the Company
has $116 billion in assets, operates 18 affiliates with 1,298 full-service
Banking Centers, including 93 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 September 30,
2008, has $196 billion in assets under care, of which it managed $30
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 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 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, does 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, or the businesses in which Fifth Third, one is 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; or Media, Debra DeCourcy, APR,
+1-513-534-4153, all of Fifth Third Bancorp
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