Net Income of $882 million, Exceeds Tier 1 Common Commitment by 60%
CINCINNATI, July 23 /PRNewswire-FirstCall/ --
- Generated over $1.4 billion in tangible common equity through the combination of an "at the market" common equity offering and exchange of cash and common stock for convertible preferred stock
- Subsequent to the close of the second quarter, Fifth Third sold its Visa, Inc. class B common stock for an after-tax benefit of approximately $206 million
- These actions result in Tier 1 common equity credit under the SCAP assessment of $1.75 billion, exceeding Fifth Third's $1.1 billion SCAP commitment by 60%
- Completed sale of an approximate 51% interest in Fifth Third's processing business, resulting in a gain of $1.8 billion pre-tax, or $1.1 billion after-tax
- Tier 1 common ratio of 7.0%, Tier 1 ratio of 12.9% as of June 30, 2009
- Visa transaction improves pro forma capital ratios by approximately 19 bps; pro forma Tier 1 common equity ratio of 7.2%
- Average core deposits increased 9% from the previous year; wholesale funding reduced by nearly $7 billion reflecting strong liquidity position
- Net interest margin of 3.26%, up 20 bps sequentially
- Noninterest income increased 11% on strong mortgage banking and payments processing revenue, excluding gain from processing joint venture and investment securities gains/losses
- Allowance to loan ratio increased to 4.28%, allowance to nonperforming loans ratio of 135%, allowance to annualized net charge-off ratio of 1.4 times
- Extended over $21 billion of new and renewed credit in the second quarter
Earnings Highlights
For the Three Months Ended
--------------------------
June March December September June
2009 2009 2008 2008 2008
---- ---- ---- ---- ----
Earnings ($ in millions)
Net income (loss) $882 $50 ($2,142) ($56) ($202)
Net income (loss)
available to common
shareholders $856 ($26) ($2,184) ($81) ($202)
Common Share Data
Earnings per share,
basic 1.35 (0.04) (3.78) (0.14) (0.37)
Earnings per share,
diluted 1.15 (0.04) (3.78) (0.14) (0.37)
Cash dividends per
Common share 0.01 0.01 0.01 0.15 0.15
Financial Ratios
Return on average
assets 3.05% 0.17% (7.16%) (.19%) (.72%)
Return on average
common equity 41.2 (1.4) (94.6) (3.3) (8.5)
Tier I capital 12.90 10.93 10.59 8.57 8.51
Tier I common equity 7.00 4.50 4.37 5.18 5.18
Net interest
margin (a) 3.26 3.06 3.46 4.24 3.04
Efficiency (a) 29.9 65.1 131.3 54.2 58.6
Common shares
outstanding
(in thousands) 795,313 576,936 577,387 577,487 577,530
Average common
Shares outstanding
(in thousands):
Basic 629,789 571,810 571,809 571,705 540,030
Diluted 718,245 571,810 571,809 571,705 540,030
% Change
--------
Seq Yr/Yr
--- -----
Earnings ($ in millions)
Net income (loss) 1666% NM
Net income (loss) available to
common shareholders NM NM
Common Share Data
Earnings per share, basic NM NM
Earnings per share, diluted NM NM
Cash dividends per common share 0% (93%)
Financial Ratios
Return on average assets 1694% NM
Return on average common equity NM NM
Tier I capital 18% 52%
Tier I common equity 12% 40%
Net interest margin (a) 7% 7%
Efficiency (a) (54%) (49%)
Common shares outstanding (in
thousands) 38% 38%
Average common shares outstanding
(in thousands):
Basic 10% 17%
Diluted 26% 33%
(a) Presented on a fully taxable equivalent basis
NM: not meaningful
------------------
Fifth Third Bancorp (Nasdaq: FITB) today reported second quarter 2009 net income of $882 million, compared with net income of $50 million in the first quarter of 2009 and a net loss of $202 million in the second quarter of 2008. After preferred dividends, second quarter 2009 net income available to common shareholders was $856 million, compared with a net loss of $26 million in the first quarter of 2009 and a net loss of $202 million in the second quarter of 2008. In the quarter, we reported EPS of $1.15 per diluted share, compared with a net loss of $0.04 per diluted share in the first quarter and a net loss of $0.37 per diluted share in the same quarter of 2008.
Second quarter of 2009 net income included a gain of $1,764 million pre-tax, or $1,055 million after-tax, from the completion of the previously announced processing business transaction with Advent International. Results also included a special FDIC deposit insurance fund assessment, which decreased net income by $55 million pre-tax, or $36 million after-tax. Net income available to common shareholders also included a $35 million benefit, recorded as a reduction to preferred dividend expense, reflecting the excess of the carrying value of preferred shares over the fair value of the common shares and cash exchanged through our tender offer for Series G preferred stock. The benefit of this reduction in preferred dividend expense is not included in earnings per diluted share under the "if converted" method (discussed further below) utilized for determining diluted earnings per share in the second quarter.
First quarter 2009 net income benefited by $101 million after-tax, or $0.18 per share, due to the net impact of several significant items. These items included a tax benefit related to the decision to surrender of one of our bank-owned life insurance (BOLI) policies, charges related to this BOLI policy, a reduction in income tax expense and a related charge due to our agreement with the IRS to settle all of Fifth Third's disputed leveraged leases for all open years, securities losses, and severance expense. Second quarter 2008 results included net charges of approximately $233 million after-tax, or $0.44 per share, related to significant items. These included $130 million pre-tax charge to reflect a projected change in the timing of tax benefits pursuant to FSP FAS 13-2, an increase to tax expense of approximately $140 million required for interest related to previous tax years pursuant to FIN 48, and $13 million pre-tax in acquisition-related expenses.
During the second quarter of 2009, the reported common shares outstanding increased reflecting the effect of shares issued during the quarter through our "at-the-market" common share offering as well as the common shares issued in connection with the exchange of a portion of our Series G preferred stock. Average diluted common shares of 718 million increased 146 million shares from the first quarter of 2009. The increase reflected an average impact of 47 million shares from the issuance of 158 million shares in our common share offering, and 9 million common shares from the exchange. The increase also reflected the inclusion of the 96 million shares underlying our Series G preferred stock, due to the utilization of the "if-converted" method. Period-end common shares of 795 million increased 218 million shares from the first quarter of 2009 due to the issuance of 158 million in the common share offering and 60 million converted through the preferred stock exchange. We would expect our average basic and diluted shares going forward to approximate the period end share count of 795 million, with the remaining 36 million common shares underlying unexchanged Series G preferred shares being included in periods when the impact of their inclusion is dilutive to the diluted EPS calculation. The impact of second quarter activities on reported share counts is more fully discussed later in this release.
During the quarter, we completed the sale of a 51 percent interest in our processing business through a joint venture with Advent International. This transaction produced an after-tax gain of $1.1 billion and enhanced our tangible common equity ratios by approximately 100 basis points. Additionally, we successfully issued $1.0 billion of common stock and exchanged 63 percent of our convertible preferred shares into common stock through a cash and stock tender. These two common stock transactions resulted in a further increase in tangible common equity ratio of approximately 130 basis points. Finally, subsequent to the end of the second quarter, we sold our Visa, Inc. class B common shares for an after-tax benefit of approximately $206 million. The combined effect of these transactions has enhanced our tangible common equity by $2.7 billion, or approximately 240 bps, while at the same time increasing tangible book value per share by approximately $1.00 per share to $9.75 on a pro forma basis.
Also during the quarter, the 19 largest U.S. banks completed the results of the Supervisory Capital Assessment Program (SCAP) "stress test." The purpose of this stress test was to evaluate results, loan losses, and capital levels under a "more adverse scenario" that was viewed as a possible although unlikely development. Under this assessment, Fifth Third committed to increase its Tier 1 common equity by $1.1 billion, a commitment, which has been exceeded by approximately $650 million through the common stock transactions, and Visa sale outlined above. The SCAP required participating banks to take actions to ensure that their Tier 1 common equity ratio would exceed 4 percent of risk-weighted assets under the more adverse scenario. Including the effect of the Visa transaction, our pro forma Tier 1 common equity ratio as of the second quarter of 2009 was 7.2 percent.
"This was an eventful quarter for Fifth Third and for the industry," said Kevin T. Kabat, Chairman, CEO and President of Fifth Third Bancorp. "We completed our processing joint venture transaction at a gain of $1.1 billion, raised $1.0 billion in new common equity, and brought about the early conversion of 63 percent of our existing convertible preferred stock, further increasing common equity by $441 million. We exceeded the SCAP Tier 1 common equity commitment by 60 percent. Our operating results and credit loss experience through the second quarter have been superior to the results submitted under the SCAP more adverse scenario, and we expect that to remain the case in coming quarters.
Results for the second quarter were in line with our expectations and continue to reflect strong core results coupled with high credit costs. As expected, we saw significant improvement in the net interest margin, up 20 basis points from the prior quarter, driven by improved liability pricing and wider loan spreads, which drove a 7 percent sequential increase in net interest income. We expect expansion in the net interest margin to continue in the second half of the year. Fee growth remained strong, up 11 percent on a core basis from the first quarter of 2009. Expense management remains a key focus, and core expenses were relatively flat from the first quarter despite the strong revenue performance.
Credit trends remain difficult and signals regarding future trends are somewhat mixed at this point. We continue to work aggressively to manage the risk in our loan portfolio. As expected, net charge-offs increased from the first quarter to $626 million. We expect loan losses to increase moderately in the third quarter, with higher commercial real estate charge-offs partially offset by lower consumer charge-offs. Second quarter nonperforming asset growth of 7 percent represented deceleration from prior quarters, and significantly lower levels of inflows. We currently expect higher NPA growth in the third quarter although below the levels of growth experienced in prior quarters.
The provision for loan losses exceeded net charge-offs by $415 million, increasing the reserve to loan ratio to 4.28 percent. Our reserve position relative to loans, nonperforming loans, and levels of charge-offs are very strong and we currently do not expect significant additional growth in loan loss reserves to be necessary, absent further deterioration in credit conditions. The level of our reserves coupled with our strong levels of underlying earnings and capital place us in a very strong position to deal with the expected challenges in the remainder of this credit cycle."
Income Statement Highlights
For the Three Months Ended
--------------------------
June March December September June
2009 2009 2008 2008 2008
---- ---- ---- ---- ----
Condensed Statements of
Income ($ in millions)
Net interest income
(taxable equivalent) $836 $781 $897 $1,068 $744
Provision for loan
and lease losses 1,041 773 2,356 941 719
Total noninterest
income 2,583 697 642 717 722
Total noninterest
expense 1,021 962 2,022 967 858
--------- ----- --- ----- --- ---
Income (loss) before
income taxes
(taxable equivalent) 1,357 (257) (2,839) (123) (111)
-------------------- ----- ---- ------ ---- ----
Taxable equivalent
adjustment 5 5 5 5 6
Applicable income taxes 470 (312) (702) (72) 85
----------------------- --- ---- ---- --- --
Net income (loss) 882 50 (2,142) (56) (202)
Dividends on preferred
stock 26 76 42 25 -
---------------------- -- -- -- -- -
Net income (loss)
available to
common shareholders 856 (26) (2,184) (81) (202)
-------------------- --- --- ------ --- ----
Earnings per share,
diluted $1.15 ($0.04) ($3.78) ($0.14) ($0.37)
------------------- ----- ------ ------ ------ ------
% Change
--------
Seq Yr/Yr
--- -----
Condensed Statements of Income ($
in millions)
Net interest income (taxable
equivalent) 7% 12%
Provision for loan and lease losses 35% 45%
Total noninterest income 271% 258%
Total noninterest expense 6% 19%
------------------------- - --
Income (loss) before income taxes
(taxable equivalent) NM NM
--------------------------------- -- --
Taxable equivalent adjustment 0% (17%)
Applicable income taxes NM 453%
----------------------- -- ---
Net income (loss) 1666% NM
Dividends on preferred stock (66%) NM
---------------------------- --- --
Net income (loss) available to common
shareholders NM NM
------------------------------------- -- --
Earnings per share, diluted NM NM
--------------------------- -- --
NM: not meaningful
------------------
Net Interest Income
For the Three Months Ended
--------------------------
June March December September June
2009 2009 2008 2008 2008
---- ---- ---- ---- ----
Interest Income ($ in
millions)
Total interest income
(taxable equivalent) $1,184 $1,183 $1,411 $1,553 $1,213
Total interest expense 348 402 514 485 469
---------------------- --- --- --- --- ---
Net interest income
(taxable equivalent) $836 $781 $897 $1,068 $744
--------------------- ---- ---- ---- ------ ----
Average Yield
Yield on interest-earning
assets 4.62% 4.63% 5.44% 6.16% 4.95%
Yield on interest-bearing
liabilities 1.67% 1.89% 2.28% 2.25% 2.23%
---------------------------- ---- ---- ---- ----
Net interest rate
spread (taxable
equivalent) 2.95% 2.74% 3.16% 3.91% 2.72%
-------------------- ---- ---- ---- ---- ----
Net interest margin
(taxable
equivalent) 3.26% 3.06% 3.46% 4.24% 3.04%
Average Balances ($ in millions)
Loans and leases,
including
held for sale $84,996 $85,829 $87,426 $85,772 $85,212
Total securities and
other short-term
investments 17,762 17,835 15,683 14,515 13,363
Total interest-bearing
liabilities 83,407 86,218 89,440 85,990 84,417
Shareholders' equity 12,490 12,084 10,291 10,843 9,629
-------------------- ------ ------ ------ ------ -----
% Change
--------
Seq Yr/Yr
--- -----
Interest Income ($ in millions)
Total interest income (taxable
equivalent) 0% (2%)
Total interest expense (13%) (26%)
---------------------- --- ---
Net interest income (taxable equivalent) 7% 12%
---------------------------------------- - --
Average Yield
Yield on interest-earning assets 0% (7%)
Yield on interest-bearing liabilities (12%) (25%)
------------------------------------- --- ---
Net interest rate spread (taxable
equivalent) 8% 8%
------------------------------------ - -
Net interest margin (taxable equivalent) 7% 7%
Average Balances ($ in millions)
Loans and leases, including held for
sale (1%) 0%
Total securities and other short-term
investments 0% 33%
Total interest-bearing liabilities (3%) (1%)
Shareholders' equity 3% 30%
-------------------- - --
Net interest income of $836 million on a taxable equivalent basis increased $55 million, or 7 percent, from the first quarter of 2009. The sequential increase was driven by improved spreads on loan originations, and a deposit mix shift to lower cost core deposits as higher priced term deposits issued in the third and fourth quarters of 2008 matured, partially offset by higher non-accrual loan balances.
The reported net interest margin was 3.26 percent, up 20 bps from 3.06 percent in the first quarter of 2009. The sequential increase in net interest margin was largely driven by the factors outlined above.
Compared with the second quarter of 2008, net interest income increased $92 million and the net interest margin increased 22 bps from 3.04 percent. Second quarter 2008 results included the effect of the changes in estimated cash flows on certain leveraged lease transactions that reduced net interest income by approximately $130 million. Excluding the leveraged lease litigation charge recorded in the second quarter of 2008, net interest income declined by $38 million from the same period in 2008 and the net interest margin declined 30 bps. The declines in net interest income and net interest margin were largely driven by shift in deposit mix toward higher priced certificates of deposit (CDs) in the latter part of 2008 and higher interest reversals, partially offset by improved pricing spreads on loan originations.
