Fifth Third Bancorp — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010; comparison is primarily with Q1 2009. Fifth Third is a diversified regional financial services company headquartered in Cincinnati, Ohio, reporting across Commercial Banking, Branch Banking, Consumer Lending, and Investment Advisors.
Financial performance and condition
| Metric | Q1 2010 | Q1 2009 / comparison |
|---|---|---|
| Total revenue, FTE | $1.528 billion | $1.478 billion; up 3% |
| Net interest income, FTE | $901 million | $781 million; up 15% |
| Net interest margin | 3.63% | 3.06%; up 57 basis points |
| Noninterest income | $627 million | $697 million; down 10% |
| Provision for loan and lease losses | $590 million | $773 million; down 24% |
| Noninterest expense | $956 million | $962 million; down 1% |
| Net income (loss) | $(10) million | $50 million |
| Net loss available to common shareholders; diluted EPS | $(72) million; $(0.09) | $(26) million; $(0.04) |
| Net charge-offs; as a percentage of average loans | $582 million; 3.01% | $490 million; 2.37% |
| Nonperforming assets ratio, excluding nonaccrual loans held for sale | 4.02% | 3.19% at March 31, 2009; 4.22% at December 31, 2009 |
Net interest income benefited from lower deposit and borrowing costs, a shift toward lower-cost core deposits, and improved commercial loan pricing. Average loans and leases fell 7% year over year to $80.1 billion. Noninterest income was pressured by the 2009 sale of most of the processing business and lower corporate banking revenue; gains in mortgage banking and investment advisory revenue provided partial offsets. Mortgage servicing rights (MSR) hedging contributed a $51 million net gain to mortgage banking revenue.
Balance sheet and capital at March 31, 2010: Total assets were $112.7 billion, versus $119.3 billion a year earlier. Deposits were $83.6 billion, up from $79.8 billion; total borrowings were $12.6 billion, down from $23.6 billion. Shareholders’ equity was $13.4 billion. Regulatory capital ratios were 13.40% Tier 1, 17.55% total risk-based, 12.00% Tier 1 leverage, and 6.97% Tier 1 common equity; management said ratios exceeded “well-capitalized” guidelines.
Cash flows: Operating activities provided $910 million and investing activities provided $740 million; financing activities used $1.835 billion. Cash and due from banks declined $185 million to $2.133 billion. These figures reflect the quarter’s banking-related flows and should not be interpreted as a standalone measure of available liquidity.
Liquidity: Core deposits were 68% of the asset funding base. The Bancorp reported $23.5 billion in secured borrowing capacity, $19.0 billion available under its bank note program, and $8.8 billion of securities available for issuance under its shelf registration, subject to market access. The company elected to leave the FDIC Transaction Account Guarantee program effective July 1, 2010.
Material changes versus comparable periods
- Common-shareholder loss widened to $72 million from $26 million, despite a $120 million increase in FTE net interest income and a lower loan-loss provision. Preferred dividends were $62 million, compared with $76 million.
- Credit costs remained a central pressure: net charge-offs rose 19% to $582 million and the charge-off ratio increased to 3.01%. Nonperforming assets improved from year-end 2009 but remained above the prior-year level.
- Core deposits increased 13% from March 2009, while wholesale funding fell 42% on an average-balance basis. Total borrowings declined 47% year over year.
- Card and processing revenue fell 67% following the June 2009 sale of a majority interest in those businesses. The first-quarter 2010 results included $13 million of transition-services revenue and $13 million of related operating expense.
- Mortgage banking revenue rose to $152 million from $134 million, including stronger MSR hedge results, while mortgage originations declined 31% to $3.5 billion.
Outlook, commentary, risks, and unusual items
- Management cited signs of stabilization in credit trends in late 2009 and Q1 2010, which contributed to a lower provision. It did not provide specific earnings or financial guidance in the supplied filing text.
- Credit exposure remained concentrated in stressed real estate markets, particularly Michigan and Florida. Construction and real-estate-related commercial lending, residential mortgages, and certain home-equity exposures were areas of concern. Unemployment, property values, delinquencies, and charge-offs could affect results.
- Mortgage representation-and-warranty expense was $39 million for the quarter, reflecting more repurchase demands and higher recognized losses on repurchased loans. The related reserve rose to $66 million from $37 million at year-end 2009.
- On January 1, 2010, new accounting rules led the Bancorp to consolidate certain securitization vehicles and other VIEs. The adoption increased assets by about $1.3 billion and reduced retained earnings by $77 million; management said regulatory capital ratios were not materially affected.
- Tax results included a $24 million benefit from settlement of uncertain tax positions with the IRS and a $14 million noncash charge for stock-based compensation tax benefits that would not be realized. The quarter’s reported tax benefit was $12 million.
- The filing identifies risks from economic and real-estate weakness, credit deterioration, interest-rate changes, funding and capital needs, regulatory changes, litigation, and market disruption. It also notes proposed 2010 financial legislation whose ultimate terms and impact were uncertain.
- Pending matters include payment-card interchange antitrust litigation, patent litigation, securities class actions, and ERISA claims. Management stated that the effects of certain proceedings could not be assessed; see the filing’s legal proceedings discussion for details.
Most important facts for investors to verify
- Whether credit stabilization continues: track net charge-offs, nonperforming assets, delinquencies, foreclosures, and allowance coverage, especially in Michigan and Florida.
- Whether the reduction in provision expense is sustainable given rising year-over-year charge-offs and continued real-estate exposure.
- How much earnings depend on deposit-cost benefits, MSR hedge gains, tax items, and other nonrecurring or timing-sensitive effects.
- Progress and potential losses on mortgage repurchase demands, recourse exposures, and private mortgage reinsurance.
- Liquidity and capital resilience, including the effect of opting out of the FDIC Transaction Account Guarantee program and any changes in credit ratings or market access.
- The impact of VIE consolidation and other new accounting requirements on reported assets, liabilities, earnings, and comparability.