10-QPeriod: Q2 FY2008

FIFTH THIRD BANCORP Quarterly Report for Q2 Ended Jun 30, 2008

Filed August 7, 2008For Securities:FITBFITBOFITBPFITB-PIFITB-PMFITB-PAFITBIFITB-PK

Summary

Fifth Third Bancorp (FITB) reported a net loss of $202 million for the second quarter of 2008, a significant decline from a net income of $376 million in the same period of 2007. This downturn was largely attributed to a $229 million after-tax charge related to leveraged leases, necessitated by recent court decisions and ongoing litigation concerning these leases. Additionally, the bank experienced a substantial increase in its provision for loan and lease losses, reaching $719 million compared to $121 million in Q2 2007, reflecting the ongoing deterioration in credit quality and collateral values, particularly in Michigan and Florida. Despite the net loss, the bank saw an 8% increase in noninterest income, driven by growth in electronic payment processing, deposit service charges, corporate banking, and mortgage banking revenues. Noninterest expenses rose by 12%, impacted by acquisition-related costs for two recent branch acquisitions and investments in technology and expansion. The Bancorp's capital ratios remained robust, exceeding regulatory well-capitalized guidelines, and were strengthened by a convertible preferred stock issuance. However, the significant increase in provision for credit losses and the leveraged lease charge created considerable headwinds for the quarter.

Financial Highlights

34 data points
Beta

Net Income

-$202.00M

EPS (Diluted)

$-0.37

Total Assets

$114.97B

Free Cash Flow

$3.12B

Financial Statements
Beta
Interest Expense$469.00M
Net Income-$202.00M
EPS (Basic)$-0.37
EPS (Diluted)$-0.37

Key Highlights

  • 1Reported a net loss of $202 million for Q2 2008, a stark contrast to a net income of $376 million in Q2 2007.
  • 2A significant $229 million after-tax charge related to leveraged leases negatively impacted earnings due to litigation and court decisions.
  • 3Provision for loan and lease losses surged to $719 million from $121 million year-over-year, indicating worsening credit quality.
  • 4Net charge-offs as a percentage of average loans increased significantly to 1.66% from 0.55% in the prior year's quarter.
  • 5Noninterest income grew 8% year-over-year, driven by strong performance in electronic payment processing, corporate banking, and mortgage banking.
  • 6Noninterest expenses increased by 12%, partly due to acquisition costs ($13 million) and increased mortgage origination costs.
  • 7Capital ratios remained strong, exceeding regulatory requirements, bolstered by a $1.1 billion convertible preferred stock issuance.
  • 8Acquisition of First Charter Corporation for approximately $1.1 billion completed in June 2008.

Frequently Asked Questions

The primary driver for the net loss of $202 million in Q2 2008 was a substantial after-tax charge of $229 million related to leveraged leases. This charge was deemed necessary due to recent court decisions and uncertainty surrounding ongoing litigation concerning these lease agreements. Additionally, a significant increase in the provision for loan and lease losses, from $121 million in Q2 2007 to $719 million in Q2 2008, also contributed to the negative result, reflecting deteriorating credit quality and collateral values.

Credit quality has deteriorated significantly compared to the prior year. Net charge-offs as a percentage of average loans and leases rose to 1.66% in Q2 2008 from 0.55% in Q2 2007. Nonperforming assets as a percentage of total assets, including other real estate owned, increased to 2.56% from 0.70% in the prior year. The allowance for loan and lease losses as a percentage of total loans also increased substantially to 1.85% from 1.06% in the prior year, indicating management's response to rising credit risks.

Fifth Third Bancorp completed the acquisition of First Charter Corporation on June 6, 2008, for approximately $1.1 billion. This acquisition expanded its footprint into North Carolina and strengthened its presence in Georgia. The acquisition contributed positively to loan growth and added to noninterest income streams, but also incurred $13 million in acquisition-related expenses during the quarter. The integration of First Charter will be a key focus going forward.

Fifth Third Bancorp's capital levels remain strong, exceeding regulatory well-capitalized guidelines. The Tier 1 capital ratio was 8.51% at June 30, 2008. The bank further strengthened its capital position by issuing approximately $1.1 billion in convertible preferred stock during the quarter and reducing its quarterly common stock dividend. Core deposits continue to be a significant funding source, representing 57% of the Bancorp's asset funding base at the end of the quarter, though wholesale funding has increased due to asset growth.