01—Abstract
Summary
Summary of the 10-K filed March 2, 2009. Cited figures are marked; the original filing is the authoritative source.
Fifth Third Bancorp (FITB) reported a 2008 net loss of $2.2 billiona, or $3.94 per diluted share, versus net income of $1.1 billion ($1.99 per diluted share) in 2007.
The swing was driven primarily by a sharp rise in credit costs: the provision for loan and lease losses rose to $4.6 billionb from $628 million, and net charge-offs reached 3.23% of average loans versus 0.61% a year earlier. Results were also hit by a $965 million goodwill impairment charge (Commercial Banking $750 million, Consumer Lending $215 million), a $229 million after-tax leveraged lease charge, $215 million of BOLI cash surrender value losses, and $104 million of OTTI charges. Partly offsetting these were a $273 million gain on the partial redemption of Visa ownership interests, $339 million of purchase accounting accretion from the First Charter acquisition, and a 19% rise in noninterest income.
Net interest margin improved to 3.54% from 3.36%. The balance sheet and capital position changed materially. Nonperforming assets rose to $3.0 billionc (2.96% of loans and other assets, excluding loans held for sale) from $1.1 billion, and the allowance for loan and lease losses more than doubled to $2.8 billion (3.31% of loans).
Credit stress was concentrated in Michigan and Florida, with homebuilder and developer loans representing a large share of losses. Management sold or transferred $1.3 billiond of commercial loans to held-for-sale in Q4 2008, recording $800 million of charge-offs. Total assets grew to $119.8 billion, largely through acquisitions.
Tier 1 capital ratio rose to 10.59% from 7.72%, supported by roughly $1 billion of convertible preferred stock issued in Q2 2008 and $3.4 billion of Series F preferred stock and warrants sold to the U.S. Treasury under the Capital Purchase Program on December 31, 2008. For investors, the key issues are the sustainability of credit quality, the dividend, and the outlook for 2009. The common dividend was cut to $0.01 per quarter for Q4 2008, and CPP terms restrict common dividend increases and repurchases until 2011 or until the Treasury exits.
Management expects FDIC assessments to roughly double in Q1 2009 and expects continued elevated provisions. Tangible common equity fell to 4.23% of tangible assets, down from 6.14%, which is a key metric to monitor.
02—Key points
Key Highlights
- Net loss of $2.2 billion ($3.94 per diluted share) in 2008, compared with net income of $1.1 billion ($1.99 per share) in 2007, driven by a $4.6 billion provision for loan losses and a $965 million goodwill impairment charge.
- Net charge-offs rose to 3.23% of average loans from 0.61%, with the Michigan and Florida real estate and homebuilder portfolios accounting for most of the losses; $800 million of charge-offs came from $1.3 billion of loans transferred to held-for-sale in Q4.
- Nonperforming assets reached $3.0 billion (2.96% ratio, up from 1.32%), and the allowance for loan and lease losses more than doubled to $2.8 billion, or 3.31% of loans.
- Capital ratios improved significantly: Tier 1 capital ratio of 10.59% (from 7.72%) and total risk-based capital ratio of 14.78%, helped by $3.4 billion of U.S. Treasury CPP preferred stock and roughly $1.0 billion of convertible preferred issued in 2008. Tangible common equity fell to 4.23% from 6.14%.
- Net interest margin expanded to 3.54% from 3.36%, aided by $339 million of purchase accounting accretion from the First Charter acquisition, which closed in June 2008 for about $1.1 billion.
- Noninterest income rose 19% to $2.9 billion, including a $273 million gain from the partial redemption of Visa ownership interests, offset by $104 million of OTTI charges and $215 million of BOLI losses.
- The common dividend was reduced to $0.01 per share in Q4 2008 ($0.75 for the full year, versus $1.70 in 2007), and CPP restrictions limit common dividend increases and share repurchases until 2011 or until the Treasury exits.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2008filed March 2, 2009Financial Statements
FY2008 against FY2007
| Line item | FY2008FY2007 | Change |
|---|---|---|
| Interest Expense | $2.09B$3.02B | −30.6% |
| Net Income | -$2.11B$1.08B | −296.4% |
| EPS (Basic) | $-3.91$1.99 | −296.5% |
| EPS (Diluted) | $-3.91$1.98 | −297.5% |
| Shares Outstanding (Basic) | 553.00M— | — |
| Shares Outstanding (Diluted) | 553.00M— | — |
05—Questions
Frequently Asked Questions
Why did Fifth Third swing from a $1.1 billion profit in 2007 to a $2.2 billion loss in 2008?
The primary driver was credit losses. The provision for loan and lease losses increased to $4.6 billion from $628 million, as net charge-offs rose to 3.23% of average loans from 0.61%. Commercial and real estate loans in Michigan and Florida, particularly to homebuilders and developers, drove most of the deterioration. In addition, a $965 million goodwill impairment charge, a $229 million after-tax leveraged lease charge, and $215 million of BOLI losses reduced earnings, partly offset by a $273 million Visa-related gain.
Is the dividend at risk, and what constraints apply?
Management cut the quarterly common dividend to $0.01 per share in Q4 2008, and the full-year 2008 dividend was $0.75 versus $1.70 in 2007. Under the terms of the $3.4 billion CPP investment, the Treasury's consent is required for any increase in common dividends above the prior quarterly rate of $0.15 until December 31, 2011, or until the preferred stock is redeemed or transferred. Common dividends cannot be paid unless accrued preferred dividends have been paid. The company also noted that an 8.7% expected dividend yield assumption was used in its stock option valuations, reflecting the lower share price.
How strong is the balance sheet and capital position after the 2008 losses?
Regulatory capital ratios improved substantially. The Tier 1 capital ratio rose to 10.59% from 7.72%, the Tier 1 leverage ratio to 10.27%, and the total risk-based capital ratio to 14.78%, all above well-capitalized thresholds. However, tangible common equity fell to 4.23% of tangible assets from 6.14%, because much of the new capital was preferred stock. Book value per share declined to $13.57 from $17.18. Management's target is a Tier 1 ratio of 8% to 9%.
What are the key credit risks investors should watch in 2009?
Key risks include continued deterioration of the Michigan and Florida real estate markets, which accounted for about 66% of Q4 2008 net charge-offs while representing less than 30% of loans. Nonperforming assets are elevated at $3.0 billion, including $473 million of nonaccrual loans held for sale. Commercial real estate, homebuilder and developer exposure ($4.0 billion total homebuilder exposure, with $2.7 billion outstanding), and brokered home equity loans (50% of home equity charge-offs in 2008) are also concerns. Management expects provisions to remain elevated, and the allowance reflects continued stress.
What does the company expect for 2009 costs and funding?
Management expects FDIC insurance costs to increase substantially in 2009. The assessment rate increase effective January 1, 2009 is expected to roughly double the first-quarter assessment, a 20 basis point special assessment is planned for June 30, 2009, and the Temporary Liquidity Guarantee Program fees are also expected to weigh on results. Funding costs may rise if deposit growth is insufficient, since wholesale funding was 42% of interest-bearing liabilities in 2008. Management also cited a $2.8 billion long-term debt maturity in 2009, including $1.3 billion of unsecured debt.
06—Continue