Fifth Third Bancorp — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010; filed November 8, 2010. Fifth Third is a diversified bank headquartered in Cincinnati, serving Midwestern and Southeastern markets through four reported business segments. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless noted.
Financial performance and key metrics
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net interest income, FTE | $916 | $874 | $2.703 billion | $2.491 billion |
| Noninterest income | $827 | $851 | $2.074 billion | $4.130 billion |
| Total revenue, FTE | $1.743 billion | $1.725 billion | $4.777 billion | $6.621 billion |
| Provision for loan and lease losses | $457 | $952 | $1.372 billion | $2.766 billion |
| Noninterest expense | $979 | $876 | $2.869 billion | $2.859 billion |
| Net income attributable to Bancorp | $238 | $(97) | $420 | $835 |
| Net income available to common shareholders; diluted EPS | $175; $0.22 | $(159); $(0.20) | $233; $0.29 | $670; $0.91 |
Net interest margin was 3.70% for Q3 and 3.63% for the first nine months, up 27 and 38 basis points, respectively, from the comparable 2009 periods. The efficiency ratio was 56.2% for Q3 and 60.1% for the nine-month period; the comparable 2009 nine-month ratio was 43.2%, or 59.0% excluding the $1.8 billion processing-business sale gain.
For the nine months, operating cash flow was $2.291 billion, investing cash flow was $1.561 billion, and financing cash flow was $(3.955) billion. Cash and due from banks ended the period at $2.215 billion, down $103 million from year-end 2009. These cash-flow figures reflect bank balance-sheet and loan-sale activity and should be interpreted in that context.
At September 30, total assets were $112.322 billion; portfolio loans and leases were $76.009 billion, deposits $81.362 billion, total borrowings $13.096 billion, and Bancorp shareholders’ equity $13.884 billion. Regulatory capital ratios were 13.85% Tier I, 18.28% total risk-based, 12.54% Tier I leverage, and 7.34% Tier I common equity. The filing states these capital ratios exceeded applicable “well-capitalized” guidelines.
Material changes versus prior periods
- Q3 net income returned to profit from a prior-year loss, principally as the loan-loss provision fell by 52%. Common earnings also benefited from a $152 million BOLI litigation settlement, partly offset by $25 million in related legal expenses.
- Q3 noninterest income fell 3% year over year, but increased 11% excluding the BOLI settlement and the prior-year $244 million Visa share-sale gain. Nine-month noninterest income fell 50%, largely reflecting the absence of the 2009 $1.8 billion processing-business sale gain and Visa gain; excluding the cited unusual items, it declined 10%.
- Q3 net charge-offs rose 26% to $956 million, and the annualized charge-off ratio increased to 4.95% from 3.75%. The quarter included $123 million of charge-offs on residential mortgage loans sold and $387 million related to commercial loans transferred to held for sale.
- Nonperforming assets, including loans held for sale, declined to $2.781 billion from $3.508 billion a year earlier. The reported nonperforming-asset ratio was 3.51% including nonaccrual loans held for sale, or 2.72% excluding them. OREO and repossessed property increased to $498 million from $273 million a year earlier.
- Average loans and leases fell 5% in Q3 year over year, while average deposits grew; average core deposits rose 8%. Wholesale funding declined 26% on an average basis for the quarter.
- For the first nine months, net income attributable to the Bancorp declined 50% and common net income declined 65% from 2009, when results included the large processing-sale gain.
Outlook, management commentary, risks and unusual items
The filing provides no quantified earnings guidance. Management described credit trends as moderating in 2010 and cited improved net interest income from lower-cost deposit mix and funding costs, partly offset by weaker loan demand. Management also noted continued stress in real estate, particularly in Michigan and Florida, and in commercial real estate and residential mortgage portfolios.
- Credit and loan sales: The allowance for loan and lease losses was $3.194 billion, or 4.20% of portfolio loans and leases, versus 4.69% a year earlier. The filing cautions that reserve models may lag deterioration or improvement. Commercial and consumer credit quality remains sensitive to economic conditions, collateral values and unemployment.
- Mortgage representations and warranties: The reserve rose to $86 million from $28 million a year earlier. New repurchase-demand requests were $132 million in Q3; outstanding demand inventory was $184 million at quarter-end. The filing says higher demand volume drove increased expense.
- Regulation and capital: The Dodd-Frank Act was enacted in July 2010; management said its ultimate impact was not yet known and could be substantial. Potential effects include capital and liquidity requirements, deposit insurance costs, debit interchange limits and consumer-protection rules. Certain trust preferred securities, $2.8 billion at quarter-end, are scheduled to phase out of Tier I capital beginning in 2013.
- Liquidity and funding: The Bancorp reported approximately $24.5 billion of secured borrowing capacity and $19.0 billion available under its bank note program, as well as $8.8 billion of shelf-registration capacity, subject to market access. It opted out of the FDIC Transaction Account Guarantee program effective July 1, 2010.
- Legal and regulatory matters: Pending matters include Visa-related antitrust litigation, a securities class action and a shareholder derivative action; the filing says the impact of certain cases cannot yet be assessed. The SEC made information requests understood to relate to accounting and reporting for certain commercial loans. Management reported no material deficiencies from its Q3 foreclosure-process reviews, which were ongoing.
- Other unusual items: New accounting guidance effective January 1, 2010 required consolidation of certain VIEs, initially increasing assets by $1.3 billion and reducing retained earnings by $77 million; management said regulatory capital ratios were not materially affected. The common dividend remained $0.01 per share in Q3, and no shares were repurchased under the announced program.
Most important facts for investors to verify
- Whether the improvement in nonperforming assets and provision expense is sustained, and how charge-offs evolve after the quarter’s large loan sales and transfers.
- The adequacy of the $3.194 billion loan-loss allowance and $86 million representation-and-warranty reserve, including future repurchase demands and realized losses.
- Whether core-deposit growth and lower funding costs can offset weak loan demand, regulatory fee changes and pressure on service-charge income.
- The effects of Dodd-Frank implementation and the planned phase-out of trust preferred securities on earnings, liquidity and capital ratios.
- Developments in mortgage foreclosure reviews, SEC inquiries, and material litigation, including Visa-related exposures.
- Comparability of reported earnings: the BOLI settlement, mortgage servicing valuation and hedges, loan-sale charge-offs, and prior-year processing and Visa gains materially affect period-to-period results.