Fifth Third Bancorp — 2009 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2009; fourth-quarter results are also summarized. Fifth Third is a diversified bank headquartered in Cincinnati, serving Midwestern and Southeastern markets through four reported segments: Commercial Banking, Branch Banking, Consumer Lending and Investment Advisors.
Financial performance and condition
| Metric | 2009 | 2008 |
|---|---|---|
| Total revenue (FTE) | $8.155 billion | $6.482 billion |
| Net interest income (FTE) | $3.373 billion | $3.536 billion |
| Net interest margin | 3.32% | 3.54% |
| Provision for loan and lease losses | $3.543 billion | $4.560 billion |
| Noninterest expense | $3.826 billion | $4.564 billion |
| Net income (loss) | $737 million | $(2.113) billion |
| Net income (loss) available to common shareholders | $511 million | $(2.180) billion |
| Diluted earnings per share | $0.67 | $(3.91) |
| Efficiency ratio | 46.9% | 70.4% |
- Profitability and unusual items: 2009 included a $1.758 billion pretax gain on the sale of a majority interest in the processing business, a $244 million Visa share-sale gain, and other Visa-related benefits. The 2008 comparison included a $965 million goodwill impairment. Thus, reported earnings and revenue comparisons include significant transaction and accounting items.
- Credit quality: Net charge-offs were $2.581 billion, or 3.20% of average loans and leases, versus $2.710 billion and 3.23% in 2008. The allowance for loan and lease losses rose to $3.749 billion, or 4.88% of portfolio loans, from $2.787 billion, or 3.31%. Nonperforming assets excluding nonaccrual loans held for sale increased to 4.22% of loans, leases and other assets from 2.38%.
- Balance sheet: Assets were $113.380 billion at year-end, down from $119.764 billion. Portfolio loans and leases were $76.779 billion, down from $84.143 billion; deposits were $84.305 billion, up from $78.613 billion. Shareholders’ equity was $13.497 billion, versus $12.077 billion.
- Debt and liquidity: Total borrowings declined to $12.104 billion from $23.831 billion, including $10.507 billion of long-term debt and $1.597 billion of short-term borrowings. Core deposits increased to $76.595 billion. Management cited $25.8 billion of secured borrowing capacity and $8.8 billion of remaining securities issuance capacity under its shelf registration, subject to market access. Cash and due from banks ended the year at $2.318 billion.
- Capital: Year-end regulatory ratios were 13.31% Tier 1 capital, 17.48% total risk-based capital, 12.43% Tier 1 leverage and 7.00% Tier 1 common equity. The Bancorp reported exceeding well-capitalized guidelines. Tangible common equity to tangible assets, a non-GAAP measure, was 6.45%, up from 4.23%.
- Cash flows: Operating activities provided $3.794 billion, investing activities provided $1.076 billion and financing activities used $5.291 billion. Cash and due from banks declined $421 million during the year.
Material changes and fourth-quarter review
- Noninterest income rose 62%, primarily because of the processing-business sale gain and stronger mortgage banking revenue. Mortgage originations increased 89% to $21.7 billion. Card and processing revenue fell 33% following the sale of most of that business.
- FTE net interest income decreased 5% and net interest margin declined 22 basis points. Management attributed pressure to assets repricing faster than liabilities in a low-rate environment and lower accretion from acquired-loan purchase-accounting adjustments.
- Noninterest expense fell 16% year over year, but excluding the prior-year goodwill impairment and other specified items, expenses increased; higher FDIC assessments, loan-related costs and problem-asset management expenses were among the drivers.
- Fourth-quarter 2009 net loss available to common shareholders was $160 million, or $0.20 per diluted share, compared with a $159 million loss in Q3 2009 and a $2.184 billion loss in Q4 2008. Q4 2009 provision was $776 million, down from $952 million in Q3. Net charge-offs were $708 million, versus $756 million in Q3.
- Q4 results included a $20 million pretax warrant valuation benefit and a $22 million litigation reserve charge. Management reported signs of credit stabilization late in the year, while nonperforming assets continued to rise.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management described a challenging credit environment and said credit trends showed signs of stabilization in Q4; results remain exposed to economic conditions, credit costs and market rates.
- Key risks include deterioration in real estate and borrower credit quality, particularly in Michigan, Florida and other regional markets; higher charge-offs or allowance needs; interest-rate and mortgage-servicing-rights volatility; and the ability to maintain funding, liquidity, capital and favorable ratings.
- During 2009, Moody’s, S&P and DBRS downgraded Bancorp or bank ratings. Further downgrades could increase funding costs or constrain market access. The company also cited increased FDIC costs and potential regulatory changes, including capital, liquidity, consumer-protection and compensation requirements.
- The $3.4 billion Treasury CPP investment carries preferred dividends and restrictions on common dividends and certain repurchases. Common dividends were $0.04 per share for 2009, down from $0.75 in 2008; the quarterly dividend was $0.01 in Q4.
- Pending matters include Visa interchange-fee antitrust litigation, a patent case and consolidated securities and ERISA class actions. Management said outcomes could not be assessed for certain cases. The filing also describes mortgage recourse and representation-and-warranty exposures, credit support for an unconsolidated commercial-loan vehicle, and other commitments.
- Beginning January 1, 2010, new accounting guidance was expected to require consolidation of certain previously unconsolidated entities, increasing assets by approximately $1.3 billion and reducing retained earnings by $76 million; management expected no material regulatory-capital impact.
Important facts for investors to verify
- How much of 2009 earnings depended on the processing-business and Visa transactions, and what recurring earnings remain after the sale?
- Whether credit quality improves: track nonperforming assets, restructured-loan performance, charge-offs, allowance coverage and concentrations in commercial real estate, Michigan and Florida.
- Whether core-deposit growth and reduced wholesale funding remain sustainable, and whether disclosed borrowing capacity is available under changing market conditions.
- The terms and continuing cost of Treasury preferred stock, dividend restrictions, debt maturities and the effect of potential regulatory or rating changes.
- The 2010 consolidation of previously off-balance-sheet entities, outstanding litigation and recourse obligations, and the effects of mortgage-servicing valuations and other significant estimates.