01—Abstract
Summary
Summary of the 10-K filed February 26, 2010. Cited figures are marked; the original filing is the authoritative source.
Fifth Third Bancorp's 2009 results reflect a sharp turn in earnings driven by a one-time gain rather than core banking strength.
Net income available to common shareholders was $511 milliona, or $0.67 per diluted share, versus a $2.2 billion loss ($3.91 per share) in 2008. The swing was heavily influenced by the $1.8 billion pre-tax gain from selling a ~51% stake in its merchant processing business (Fifth Third Processing Solutions) to Advent International, plus a $244 million gain on Visa Class B share sales. Excluding these and other one-time items, underlying profitability remained under pressure from elevated credit costs.
Credit quality remained the central concern. The provision for loan and lease losses fell to $3.5 billionb from $4.6 billion, and net charge-offs held at 3.20% of average loans. However, nonperforming assets rose to 4.22% of loans, leases and other assets (excluding held-for-sale nonaccruals) from 2.38%, and the allowance for loan and lease losses reached 4.88% of loans.
Losses were concentrated in Michigan and Florida, with commercial real estate, homebuilder/developer and residential mortgage exposures the main drivers. Management indicated that credit trends began stabilizing in the fourth quarter of 2009. From a balance sheet and capital perspective, the company strengthened its position through a $1 billionc at-the-market common offering, an exchange of Series G preferred shares, and the processing sale, which together allowed it to exceed the SCAP Tier 1 common equity requirement.
Tier 1 capital ratio was 13.31% and Tier 1 common equity was 7.00%. Investors should note that net interest margin compressed to 3.32% from 3.54%, the dividend was cut to $0.04d per share, ratings were downgraded by Moody's, S&P and DBRS during 2009, and the CPP preferred stock restricts common dividend increases and repurchases.
02—Key points
Key Highlights
- Net income available to common shareholders of $511 million ($0.67 diluted EPS) vs. a $2.2 billion loss in 2008, largely due to a $1.8 billion pre-tax gain on the Processing Business Sale.
- Provision for loan and lease losses declined to $3.5 billion from $4.6 billion, while net charge-offs were steady at 3.20% of average loans.
- Nonperforming assets rose to 4.22% of loans, leases and other assets from 2.38%; the allowance for loan and lease losses grew to 4.88% of loans from 3.31%.
- Net interest margin fell to 3.32% from 3.54%, and net interest income declined 5% as the net interest rate spread compressed 21 bp.
- Noninterest income rose 62% to $4.8 billion, but excluding the processing gain, card and processing revenue fell 33% after the sale.
- Capital strengthened: Tier 1 capital ratio of 13.31%, Tier 1 common equity of 7.00%, and a $1 billion common stock offering in June 2009.
- Credit ratings were downgraded by Moody's (issuer to Baa1), S&P (to BBB) and DBRS during 2009, and the common dividend was cut to $0.04 per share from $0.75.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2009filed February 26, 2010Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Interest Expense | $1.31B$2.09B | −37.2% |
| Net Income | $737.00M-$2.11B | +134.9% |
| EPS (Basic) | $0.73$-3.91 | +118.7% |
| EPS (Diluted) | $0.67$-3.91 | +117.1% |
| Shares Outstanding (Basic) | 696553.00M | −100.0% |
| Shares Outstanding (Diluted) | 726553.00M | −100.0% |
05—Questions
Frequently Asked Questions
How much of the 2009 earnings recovery came from one-time items?
A large share. The $1.8 billion pre-tax gain from the Processing Business Sale and the $244 million gain on Visa Class B shares, along with a $106 million BOLI-related tax benefit and a $55 million IRS leveraged lease settlement benefit, drove much of the improvement. Net income of $737 million excluding these items would have been substantially lower, and the company still absorbed a $55 million FDIC special assessment.
Is credit quality improving?
Management says trends began stabilizing in Q4 2009, and the provision fell year over year and quarterly provisions declined from Q3 to Q4. However, nonperforming assets rose to $3.5 billion (4.38% including held-for-sale nonaccruals), and net charge-offs remained high at 3.20%. Michigan and Florida account for a disproportionate share of losses, and the company reported a 26% redefault rate on consumer restructured loans.
Is the dividend at risk, and what restricts shareholder returns?
The common dividend was cut to $0.04 per share in 2009 (quarterly rate of $0.01 in Q4). Under the Treasury's CPP, the company agreed to limit common dividends to $0.15 per quarter and needs Treasury consent for increases or most repurchases until the earlier of December 31, 2011 or redemption of the $3.4 billion Series F preferred. Bank subsidiary dividend limits and ratings pressure also constrain payouts.
What happened to the company's funding and liquidity position?
Liquidity improved. Core deposits rose $9.8 billion (15%) to represent 68% of the funding base, total borrowings fell $11.7 billion to $12.1 billion, and short-term borrowings dropped to $1.6 billion from $10.2 billion. The company also has $8.8 billion available under its shelf registration and $18.2 billion under its bank note program. Long-term debt of $800 million matures in 2010.
What are the upcoming accounting changes that could affect the balance sheet?
Effective January 1, 2010, new FASB guidance on transfers of financial assets and VIE consolidation requires the company to consolidate its formerly off-balance-sheet qualifying special-purpose entities (commercial loan conduit and automobile/home equity securitizations). This is expected to increase total assets by about $1.3 billion and reduce retained earnings by $76 million, with minimal effect on regulatory capital ratios.
06—Continue