FITB Fifth Third Bancorp

Fifth Third Bancorp (Nasdaq: FITB) today reported third quarter 2011 net income of $381 million, compared with net income of $337 million in the second quarter of 2011 and net income of $238 million in the third quarter of 2010. After preferred dividends, third quarter 2011 net income available to common shareholders was $373 million or $0.40 per diluted share, compared with second quarter net income of $328 million or $0.35 per diluted share, and net income of $175 million or $0.22 per diluted share in the third quarter of 2010.

Third quarter 2011 results included a $17 million reduction in other noninterest income related to the valuation of a total return swap entered into as part of the 2009 sale of Visa, Inc. Class B shares. There were similar reductions of $4 million in the second quarter of 2011 and $5 million in the third quarter of 2010. Third quarter 2011 results included $3 million in positive valuation adjustments on Vantiv LLC puts and warrants, compared with positive $29 million in the second quarter of 2011 and negative $5 million in the third quarter of 2010. Third quarter 2011 results included investment securities gains of $26 million, compared with $6 million in the second quarter and $4 million in the year ago quarter. Third quarter 2011 results also included $28 million of expense related to the termination of certain FHLB borrowings and hedging transactions. Third quarter 2010 net income included a pre-tax benefit, net of associated expenses, of $127 million from the settlement of litigation related to a bank-owned life insurance (BOLI) policy.

Earnings Highlights

  For the Three Months Ended   % Change September   June   March   December   September     2011   2011   2011   2010   2010   Seq   Yr/Yr Earnings ($ in millions) Net income attributable to Bancorp $381 $337 $265 $333 $238 13 % 60 % Net income available to common shareholders $373 $328 $88 $270 $175 14 % 112 %   Common Share Data Earnings per share, basic 0.41 0.36 0.10 0.34 0.22 14 % 86 % Earnings per share, diluted 0.40 0.35 0.10 0.33 0.22 14 % 82 % Cash dividends per common share 0.08 0.06 0.06 0.01 0.01 33 % 700 %   Financial Ratios Return on average assets 1.34 % 1.22 % 0.97 % 1.18 % 0.84 % 10 % 60 % Return on average common equity 11.9 11.0 3.1 10.4 6.8 8 % 75 % Return on average tangible common equity 14.9 14.0 4.2 13.9 9.4 6 % 59 % Tier I capital 11.96 11.93 12.20 13.89 13.85 - (14 %) Tier I common equity 9.33 9.20 8.99 7.48 7.34 1 % 27 % Net interest margin (a) 3.65 3.62 3.71 3.75 3.70 1 % (1 %) Efficiency (a) 60.4 59.1 62.5 62.6 56.2 2 % 7 %   Common shares outstanding (in thousands) 919,779 919,818 918,728 796,273 796,283 - 16 % Average common shares outstanding (in thousands): Basic 914,947 914,601 880,830 791,072 791,017 - 16 % Diluted 955,490 955,478 894,841 836,225 797,492 - 20 %   (a) Presented on a fully taxable equivalent basis  

“Fifth Third’s third quarter results showed continued strength as we generated a profit of $373 million, up 14 percent from last quarter and more than doubling from last year,” said Kevin T. Kabat, president and CEO of Fifth Third Bancorp. “Return on assets was 1.34 percent and we generated a return on average tangible common equity of nearly 15 percent. Tangible book value per share grew a strong 5 percent sequentially.

“Revenue increased 3 percent sequentially. The primary driver of growth during the quarter was a 4 percent increase in net interest income. Average loan balances excluding loans held-for-sale were up 1 percent over last quarter and up 2 percent on a period end basis. C&I continues to be a strength for us, with average balances up 3 percent from last quarter and up 9 percent compared with the third quarter of 2010. Noninterest income increased 1 percent driven by growth in mortgage banking net revenue, deposit service charges, and gains on securities sales, which more than offset the negative sequential effect of valuation adjustments related to our Visa total return swap and Vantiv puts and warrants. Expense trends reflected costs related to the termination of certain FHLB borrowings and hedging transactions.

“Credit trends continued to improve as net charge-offs declined 14 percent from last quarter to $262 million or 1.32 percent of loans and leases. Nonperforming asset (excluding held-for-sale) levels declined $144 million or 7 percent sequentially to 2.44 percent of loans, leases and OREO, and delinquency trends remain consistent with pre-crisis levels.

“While the current environment is characterized by a significant level of uncertainty, particularly related to Europe, Fifth Third is delivering solid results and expects to continue to do so in the future. We do not have significant direct exposure to Europe, particularly the peripheral nations of most concern; our capital and liquidity levels are very strong; and thus far we continue to see business activity in our markets that, while not robust, has been more than sufficient to support solid loan growth and strong earnings results.”

Income Statement Highlights

    For the Three Months Ended   % Change September   June   March   December   September     2011   2011   2011   2010   2010   Seq   Yr/Yr Condensed Statements of Income ($ in millions) Net interest income (taxable equivalent) $902 $869 $884 $919 $916 4 % (2 %) Provision for loan and lease losses 87 113 168 166 457 (23 %) (81 %) Total noninterest income 665 656 584 656 827 1 % (20 %) Total noninterest expense   946   901   918   987   979   5 %   (3 %) Income before income taxes (taxable equivalent)   534   511   382   422   307   5 %   74 %   Taxable equivalent adjustment 4 5 5 5 4 (20 %) - Applicable income taxes   149   169   112   83   65   (12 %)   129 % Net income 381 337 265 334 238 13 % 60 % Less: Net income attributable to noncontrolling interest   -   -   -   1   -   -     -   Net income attributable to Bancorp 381 337 265 333 238 13 % 60 % Dividends on preferred stock   8   9   177   63   63   (11 %)   (87 %) Net income available to common shareholders   373   328   88   270   175   14 %   112 % Earnings per share, diluted $0.40 $0.35 $0.10 $0.33 $0.22 14 % 82 %  

Net Interest Income

  For the Three Months Ended   % Change September   June   March   December   September     2011   2011   2011   2010   2010   Seq   Yr/Yr Interest Income ($ in millions) Total interest income (taxable equivalent) $1,059 $1,050 $1,065 $1,109 $1,130 1 % (6 %) Total interest expense   157     181     181     190     214     (13 %)   (27 %) Net interest income (taxable equivalent)   $902     $869     $884     $919     $916     4 %   (2 %)   Average Yield Yield on interest-earning assets (taxable equivalent) 4.28 % 4.37 % 4.47 % 4.52 % 4.57 % (2 %) (6 %) Yield on interest-bearing liabilities   0.86 %   1.00 %   1.02 %   1.04 %   1.13 %   (14 %)   (24 %) Net interest rate spread (taxable equivalent)   3.42 %   3.37 %   3.45 %   3.48 %   3.44 %   1 %   (1 %) Net interest margin (taxable equivalent) 3.65 % 3.62 % 3.71 % 3.75 % 3.70 % 1 % (1 %)   Average Balances ($ in millions) Loans and leases, including held for sale $80,013 $79,153 $79,379 $79,148 $78,854 1 % 1 % Total securities and other short-term investments 18,142 17,192 17,290 18,066 19,309 6 % (6 %) Total interest-earning assets 98,155 96,345 96,669 97,214 98,163 2 % - Total interest-bearing liabilities 72,473 72,503 72,372 72,657 75,076 - (3 %) Bancorp shareholders' equity   12,841     12,365     13,052     14,007     13,852     4 %   (7 %)  

Net interest income of $902 million on a fully taxable equivalent basis increased $33 million from the second quarter of 2011. Interest income increased $9 million and interest expense declined $24 million. Higher interest income results reflected growth in C&I, residential mortgage, auto, and bankcard loan balances, as well as in investment securities, which more than offset lower yields on loans and securities given the current interest rate environment. Interest expense improvements were driven by lower deposit costs, including the run-off of high-rate CDs and their replacement at lower yields, as well as lower long-term debt expense. The latter reflected the full-quarter impact of our redemption of Trust Preferred Securities (TruPS) in the second quarter of 2011 and hedge ineffectiveness in the second and third quarters of 2011 due to changes in the interest rate environment. An extra day in the quarter added $6 million sequentially to net interest income.

The net interest margin was 3.65 percent, an increase of 3 bps from 3.62 percent in the previous quarter. The increase reflected the net effect of the factors mentioned in the net interest income discussion, while day count reduced the margin by 2 bps.

Compared with the third quarter of 2010, net interest income decreased $14 million and the net interest margin decreased 5 bps. The decrease in net interest income and net interest margin was largely the result of lower loan and investment securities yields, partially offset by higher average loan balances, run-off in higher-priced CDs, and mix shift to lower cost deposit products.

Securities

Average securities and other short-term investments were $18.1 billion in the third quarter of 2011 compared with $17.2 billion in the previous quarter and $19.3 billion in the third quarter of 2010. Sequential growth was due to the investment of cash borrowed from the FHLB in advance of the U.S. debt ceiling deadline as well as the pre-investment of a portion of expected second half of 2011 portfolio cash flows during the quarter.

Loans

    For the Three Months Ended   % Change September   June   March   December   September     2011   2011   2011   2010   2010   Seq   Yr/Yr Average Portfolio Loans and Leases ($ in millions) Commercial: Commercial and industrial loans $28,777 $27,909 $27,331 $26,338 $26,344 3 % 9 % Commercial mortgage 10,050 10,394 10,685 10,985 11,375 (3 %) (12 %) Commercial construction 1,752 1,918 2,030 2,171 2,885 (9 %) (39 %) Commercial leases   3,300   3,349   3,364   3,314   3,257   (1 %)   1 % Subtotal - commercial loans and leases   43,879   43,570   43,410   42,808   43,861   1 %   -   Consumer: Residential mortgage loans 10,006 9,654 9,282 8,382 7,837 4 % 28 % Home equity 10,985 11,144 11,376 11,655 11,897 (1 %) (8 %) Automobile loans 11,445 11,188 11,070 10,825 10,517 2 % 9 % Credit card 1,864 1,834 1,852 1,844 1,838 2 % 1 % Other consumer loans and leases   441   547   646   722   667   (19 %)   (34 %) Subtotal - consumer loans and leases   34,741   34,367   34,226   33,428   32,756   1 %   6 % Total average loans and leases (excluding held for sale) $78,620 $77,937 $77,636 $76,236 $76,617 1 % 3 %     Average loans held for sale   1,393   1,216   1,743   2,912   2,237   15 %   (38 %)  

Average loan and lease balances (excluding loans held-for-sale) were up $683 million sequentially, or 1 percent, and increased $2.0 billion, or 3 percent, from the third quarter of 2010. Period end loan and lease balances (excluding loans held-for-sale) grew $1.2 billion, or 2 percent, from the second quarter and $3.2 billion, or 4 percent, from a year ago.

Average commercial portfolio loan and lease balances were up $309 million sequentially, or 1 percent, and increased $18 million from the third quarter of 2010. C&I average loans increased 3 percent sequentially and 9 percent compared with the third quarter of 2010. Average commercial mortgage and commercial construction loan balances declined by a combined 4 percent sequentially and 17 percent from the same period the previous year, reflecting continued low customer demand and tighter underwriting standards. Commercial line usage, on an end of period basis, was consistent at 33 percent of committed lines in the third quarter versus 33 percent in the second quarter of 2011 and 32 percent in the third quarter of 2010.

Average consumer portfolio loan and lease balances were up $374 million sequentially, or 1 percent, and increased $2 billion, or 6 percent, from the third quarter of 2010. Average residential mortgage loans increased 4 percent sequentially, reflecting stronger originations during the quarter as rates decreased to historical lows as well as the continued retention of certain branch originated shorter-term fixed-rate residential mortgages, which totaled $406 million in the third quarter. Compared with the third quarter of 2010, average residential mortgage loans increased 28 percent and reflected the previously mentioned retention of mortgages. Average auto loans increased 2 percent sequentially and 9 percent year-over-year as continued strong loan origination volumes more than offset pay-downs. The growth outlined above was partially offset by lower home equity loan balances, which declined 1 percent sequentially and 8 percent year-over-year due to lower demand and production.

Average loans held-for-sale of $1.4 billion increased $177 million from second quarter levels primarily due to the high level of refinancing activity during the quarter. Compared with the third quarter of 2010, average loans held-for-sale decreased $844 million due to the effect of elevated mortgage refinancing activity in 2010 on the mortgage loan warehouse.

Deposits

  For the Three Months Ended   % Change September   June   March   December   September     2011   2011   2011   2010   2010   Seq   Yr/Yr Average Deposits ($ in millions) Demand deposits $23,677 $22,174 $21,582 $21,066 $19,362 7 % 22 % Interest checking 18,322 18,701 18,539 17,578 17,142 (2 %) 7 % Savings 21,747 21,817 21,324 20,602 19,905 - 9 % Money market 5,213 5,009 5,136 4,985 4,940 4 % 6 % Foreign office (a)   3,255   3,805   3,580   3,733   3,592   (14 %)   (9 %) Subtotal - Transaction deposits 72,210 71,506 70,161 67,964 64,941 1 % 11 % Other time   6,008   6,738   7,363   8,490   10,261   (11 %)   (41 %) Subtotal - Core deposits 78,218 78,244 77,524 76,454 75,202 - 4 % Certificates - $100,000 and over 3,376 3,955 4,226 4,858 6,096 (15 %) (45 %) Other   7   2   1   9   4   192 %   65 % Total deposits   $81,601   $82,201   $81,751   $81,321   $81,302   (1 %)   -   (a) Includes commercial customer Eurodollar sweep balances for which the Bancorp pays rates comparable to other commercial deposit accounts.  

Average core deposits were flat sequentially and increased 4 percent from the third quarter of 2010, as transaction deposit growth was partially offset by continued runoff of consumer time deposits (CDs). Average transaction deposits, excluding consumer time deposits, increased 1 percent from the second quarter of 2011 primarily driven by higher demand deposit account (DDA) balances. Year-over-year growth of 11 percent was driven by higher DDA, savings, interest checking, and money market account balances.

Retail average transaction deposits increased 1 percent sequentially and reflected higher DDA, money market, and interest checking account balances. Growth of 13 percent from the third quarter of 2010 reflected higher balances across all transaction deposit account categories. Consumer CDs included in core deposits declined 11 percent sequentially and 42 percent year-over-year, driven by maturities of higher-rate CDs and customer reluctance to purchase longer CD maturities given the current low rate environment.

Commercial average transaction deposits increased 1 percent sequentially and 7 percent from the previous year. Sequential growth reflected higher inflows to DDAs during the quarter, with levels particularly elevated during the debt ceiling debate and aftermath, partially offset by lower foreign office deposits and lower public funds balances in interest checking. Year-over-year growth also reflected higher inflows to DDAs, partially offset by lower foreign office deposits. Average public funds balances were $5.4 billion compared with $5.7 billion in the second quarter of 2011 and $5.2 billion in the third quarter of 2010.

Noninterest Income

  For the Three Months Ended   % Change September   June   March December   September     2011   2011   2011   2010   2010   Seq   Yr/Yr Noninterest Income ($ in millions) Service charges on deposits $134 $126 $124 $140 $143 7 % (6 %) Corporate banking revenue 87 95 86 103 86 (8 %) 1 % Mortgage banking net revenue 178 162 102 149 232 10 % (23 %) Investment advisory revenue 92 95 98 93 90 (3 %) 2 % Card and processing revenue 78 89 80 81 77 (12 %) 2 % Other noninterest income 64 83 81 55 195 (23 %) (67 %) Securities gains, net 26 6 8 21 4 333 % 550 %

 

Securities gains, net - non-qualifying hedges on mortgage servicing rights

  6   -   5   14   -   NM     NM   Total noninterest income $665 $656 $584 $656 $827 1 % (20 %)   NM: Not Meaningful                

Noninterest income of $665 million increased $9 million sequentially, or 1 percent, and declined $162 million or 20 percent compared with year ago results. The sequential growth was driven by securities gains, higher mortgage banking net revenue and service charges on deposits, partially offset by the effect of valuation adjustments on the Visa total return swap and Vantiv puts and warrants described below. The year-over-year decline was driven by the $152 million benefit in the third quarter of 2010 from the settlement of litigation associated with one of the Bancorp’s BOLI policies as well as by lower mortgage banking net revenue and service charges on deposits.

Third quarter 2011 results included a $17 million reduction in income due to the increase in fair value of the liability related to the total return swap entered into as part of the 2009 sale of Visa, Inc. Class B shares. This total return swap reduced noninterest income by $4 million in the second quarter of 2011 and by $5 million in the third quarter of 2010. Third quarter 2011 results included a $3 million positive valuation adjustment on warrants and puts related to the 2009 sale of an interest in our processing business, compared with $29 million in positive valuation adjustments on these instruments in the second quarter of 2011 and $5 million in negative valuation adjustments in the third quarter of 2010. Third quarter 2010 results included the previously mentioned $152 million benefit from the settlement of litigation associated with one of the Bancorp’s BOLI policies. Excluding these items, as well as investment securities gains in all periods, noninterest income increased $28 million, or 4 percent, from the previous quarter driven by higher mortgage banking net revenue, and service charges on deposits. On a year-over-year basis, noninterest income, excluding the items mentioned above, decreased $28 million, or 4 percent, due to lower mortgage banking net revenue and service charges on deposits.

Service charges on deposits of $134 million increased 7 percent from the second quarter and decreased 6 percent compared with the same quarter last year. Retail service charges increased 11 percent sequentially due to higher consumer overdrafts driven by account growth and one additional day in the quarter. Compared with the third quarter of 2010, retail service charges declined 16 percent largely due to the implementation of new overdraft regulations and overdraft policies. Commercial service charges increased 4 percent sequentially and 2 percent compared with the same quarter last year due to reductions in earnings credit rates and account growth.

Corporate banking revenue of $87 million decreased 8 percent from the second quarter of 2011 and increased 1 percent from the same period last year. Sequential results were driven by lower syndication fees and institutional sales revenue. Higher revenue from business lending fees primarily drove the year-over-year increase.

Mortgage banking net revenue was $178 million in the third quarter of 2011, a 10 percent increase from the second quarter of 2011 and a 23 percent decrease from the third quarter of 2010. Third quarter 2011 originations were $4.5 billion, compared with $3.1 billion in the previous quarter and $5.6 billion in the third quarter of 2010. Third quarter 2011 originations resulted in gains of $119 million on mortgages sold compared with gains of $64 million during the previous quarter and $173 million during the third quarter of 2010. Additionally gain on sale margins increased from second quarter levels although they were lower than third quarter 2010 levels. Mortgage servicing fees this quarter were $59 million, compared with $58 million in the second quarter of 2011 and $56 million in the third quarter of 2010. Mortgage banking net revenue is also affected by net servicing asset value adjustments, which include mortgage servicing rights (MSR) amortization and MSR valuation adjustments (including mark-to-market adjustments on free-standing derivatives used to economically hedge the MSR portfolio). These net servicing asset valuation adjustments were net zero in the third quarter of 2011 (reflecting MSR amortization of $34 million and MSR valuation adjustments of positive $34 million); positive $40 million in the second quarter of 2011 (MSR amortization of $25 million and MSR valuation adjustments of positive $65 million); and positive $3 million in the third quarter of 2010 (MSR amortization of $43 million and MSR valuation adjustments of positive $46 million). The mortgage-servicing asset, net of the valuation reserve, was $662 million at quarter end on a servicing portfolio of $56 billion.

Net gains on securities held as non-qualifying hedges for the MSR were $6 million in the third quarter of 2011, compared with none in the second quarter of 2011 and none in the third quarter of 2010.

Investment advisory revenue of $92 million decreased 3 percent sequentially and increased 2 percent from the third quarter of 2010. Private and Institutional asset-based fees, including investment management, are down sequentially and up year-over-year based on equity and bond market levels. Sequential and year-over-year growth rates were both negatively impacted by lower mutual fund advisory fees.

Card and processing revenue was $78 million in the third quarter of 2011, a decrease of 12 percent sequentially and an increase of 2 percent from the third quarter of 2010. The sequential decline was driven by increased redemptions on both debit and credit rewards programs. The year-over-year comparison reflected higher transaction volumes partially offset by elevated levels of both debit and credit rewards redemptions.

Other noninterest income totaled $64 million in the third quarter of 2011, compared with $83 million in the previous quarter and $195 million in the third quarter of 2010. Other noninterest income included revenue from our equity interest in the processing business, effects of the valuation of warrants and puts related to the processing business sale, and changes in income related to the valuation of the total return swap entered into as part of the 2009 sale of Visa, Inc. Class B shares. For periods ending September 30, 2011, June 30, 2011, and September 30, 2010, revenue from our processing business equity interest was $17 million, $6 million, and $7 million, respectively; warrant/put valuation adjustments were positive $3 million, positive $29 million, and negative $5 million, respectively; and reductions in income related to the Visa, Inc. total return swap were $17 million, $4 million, and $5 million, respectively. Third quarter 2010 results also included the $152 million gain from the settlement of litigation related to a BOLI policy. Excluding these items, other noninterest income increased $9 million from the previous quarter and $15 million from the third quarter of 2010.

Net credit-related costs recognized in other noninterest income were $25 million in the third quarter of 2011 versus $28 million last quarter and $44 million in the third quarter of 2010. Third quarter 2011 results included $3 million of net gains on sales of commercial loans held-for-sale and $6 million of fair value charges on commercial loans held-for-sale, as well as $21 million of losses on other real estate owned (OREO). Second quarter 2011 results included $8 million of net gains on sales of commercial loans held-for-sale and $9 million of fair value charges on commercial loans held-for-sale, as well as $26 million of losses on OREO. Third quarter 2010 results included net losses of $1 million on the sale of loans held-for-sale, $9 million of fair value charges on commercial loans held-for-sale, and $29 million of losses on OREO.

Net gains on investment securities were $26 million in the third quarter of 2011, compared with investment securities gains of $6 million in the previous quarter and $4 million in the third quarter of 2010.

Noninterest Expense

    For the Three Months Ended   % Change September   June   March   December   September     2011   2011   2011   2010   2010   Seq   Yr/Yr Noninterest Expense ($ in millions) Salaries, wages and incentives $369 $365 $351 $385 $360 1 % 3 % Employee benefits 70 79 97 73 82 (12 %) (15 %) Net occupancy expense 75 75 77 76 72 - 3 % Technology and communications 48 48 45 52 48 - - Equipment expense 28 28 29 32 30 1 % (6 %) Card and processing expense 34 29 29 26 26 18 % 33 % Other noninterest expense     322   277   290   343   361   16 %   (11 %) Total noninterest expense     $946   $901   $918   $987   $979   5 %   (3 %)  

Noninterest expense of $946 million increased 5 percent from the second quarter of 2011 and decreased 3 percent from the third quarter of 2010. Third quarter 2011 expenses included $28 million of costs related to the termination of certain FHLB borrowings and hedging transactions. Excluding these items, noninterest expense increased $17 million, or 2 percent, from the second quarter of 2011 driven by increased credit-related costs and increased card and processing expense partially offset by lower affordable housing investments impairment expense. Excluding the items relating to debt and hedge terminations mentioned above, as well as $25 million in legal expenses associated with the previously described BOLI settlement in the third quarter of 2010, noninterest expense declined $36 million, or 4 percent, compared with the third quarter of 2010 driven by decreased credit-related costs.

Credit costs related to problem assets recorded as noninterest expense totaled $45 million in the third quarter of 2011, compared with $36 million in the second quarter of 2011 and $67 million in the third quarter of 2010. Third quarter credit-related expenses included provision expense for mortgage repurchases of $19 million, compared with $14 million in the second quarter and $45 million a year ago. (Realized mortgage repurchase losses were $31 million in the third quarter of 2011, compared with $22 million last quarter and $30 million in the third quarter of 2010, with the increase due to higher claims resolution.) Provision for unfunded commitments was a benefit of $10 million in the current quarter, compared with a benefit of $14 million last quarter and a benefit of $23 million a year ago. Derivative valuation adjustments related to customer credit risk were $4 million in expense this quarter versus $1 million in expense last quarter and $8 million in expense a year ago. OREO expense was $7 million this quarter, compared with $6 million last quarter and $9 million a year ago. Other problem asset-related expenses were $25 million in the third quarter, compared with $30 million the previous quarter and $28 million in the same period last year.

Credit Quality

        For the Three Months Ended September   June   March   December   September 2011   2011   2011   2010   2010 Total net losses charged off ($ in millions) Commercial and industrial loans ($55 ) ($76 ) ($83 ) ($85 ) ($237 ) Commercial mortgage loans (47 ) (47 ) (54 ) (80 ) (268 ) Commercial construction loans (35 ) (20 ) (26 ) (11 ) (121 ) Commercial leases 1 2 (1 ) 3 (1 ) Residential mortgage loans (36 ) (36 ) (65 ) (62 ) (204 ) Home equity (53 ) (54 ) (63 ) (65 ) (66 ) Automobile loans (12 ) (8 ) (20 ) (19 ) (17 ) Credit card (18 ) (28 ) (31 ) (33 ) (36 ) Other consumer loans and leases       (7 )   (37 )   (24 )   (4 )   (6 ) Total net losses charged off (262 ) (304 ) (367 ) (356 ) (956 )   Total losses (294 ) (343 ) (397 ) (399 ) (992 ) Total recoveries       32     39     30     43     36   Total net losses charged off ($262 ) ($304 ) ($367 ) ($356 ) ($956 ) Ratios (annualized) Net losses charged off as a percent of average loans and leases (excluding held for sale) 1.32 % 1.56 % 1.92 % 1.86 % 4.95 % Commercial 1.23 % 1.30 % 1.52 % 1.59 % 5.66 %   Consumer       1.32 %   1.89 %   2.43 %   2.20 %   4.00 %  

Net charge-offs were $262 million in the third quarter of 2011, or 132 bps of average loans on an annualized basis. Net charge-offs were 14 percent lower than second quarter 2011 net charge-offs of $304 million, and 73 percent lower than third quarter 2010 net charge-offs of $956 million. Third quarter 2010 also included net losses of $510 million recorded on the sale or transfer of loans to held-for-sale.

Commercial net charge-offs were $136 million, or 123 bps, down $5 million versus $141 million, or 130 bps, in the second quarter. C&I net losses were $55 million compared with net losses of $76 million in the previous quarter. Commercial mortgage net losses totaled $47 million, unchanged from the second quarter. Commercial construction net losses were $35 million, compared with net losses of $20 million in the prior quarter. Net losses on residential builder and developer portfolio loans across the C&I and commercial real estate categories totaled $18 million. Originations of homebuilder / developer loans were suspended in 2007 and the remaining portfolio balance is $578 million, down from a peak of $3.3 billion in the second quarter of 2008.

Consumer net charge-offs were $126 million, or 132 bps, down $37 million versus $163 million, or 189 bps, in the second quarter. The decline was primarily driven by the effect of charge-offs in the second quarter recorded in the other consumer loan and lease category that resulted from a single credit relationship, as well as lower credit card charge-offs. Net charge-offs on residential mortgage loans in the portfolio were $36 million, unchanged from the previous quarter. Home equity net charge-offs were $53 million, versus $54 million in the second quarter. Net losses on brokered home equity loans represented 33 percent of third quarter home equity losses; such loans are 14 percent of the total home equity portfolio. The home equity portfolio included $1.5 billion of brokered loans, down from a peak of $2.6 billion in 2007; originations of these loans were discontinued in 2007. Net charge-offs in the auto portfolio of $12 million increased $4 million seasonally from the prior quarter. Net losses on consumer credit card loans were $18 million, down $10 million from the previous quarter. Net charge-offs in other consumer loans were $7 million, down $30 million from the previous quarter.

      For the Three Months Ended September   June   March   December   September 2011   2011   2011   2010   2010 Allowance for Credit Losses ($ in millions) Allowance for loan and lease losses, beginning $2,614 $2,805 $3,004 $3,194 $3,693 Total net losses charged off (262 ) (304 ) (367 ) (356 ) (956 ) Provision for loan and lease losses       87     113     168     166     457   Allowance for loan and lease losses, ending 2,439 2,614 2,805 3,004 3,194   Reserve for unfunded commitments, beginning 197 211 227 231 254 Provision for unfunded commitments       (10 )   (14 )   (16 )   (4 )   (23 ) Reserve for unfunded commitments, ending 187 197 211 227 231   Components of allowance for credit losses: Allowance for loan and lease losses 2,439 2,614 2,805 3,004 3,194 Reserve for unfunded commitments       187     197     211     227     231   Total allowance for credit losses $2,626 $2,811 $3,016 $3,231 $3,425 Allowance for loan and lease losses ratio As a percent of loans and leases 3.08 % 3.35 % 3.62 % 3.88 % 4.20 % As a percent of nonperforming loans and leases (a) 158 % 160 % 170 % 179 % 202 % As a percent of nonperforming assets (a) 125 % 125 % 132 % 138 % 153 %   (a) Excludes non accrual loans and leases in loans held for sale  

Provision for loan and lease losses totaled $87 million in the third quarter of 2011, down $26 million from the second quarter of 2011 and down $370 million from the third quarter of 2010. The allowance for loan and lease losses represented 3.08 percent of total loans and leases outstanding as of quarter end, compared with 3.35 percent last quarter, and represented 158 percent of nonperforming loans and leases, 125 percent of nonperforming assets, and 235 percent of third quarter annualized net charge-offs.

  As of September   June   March   December   September Nonperforming Assets and Delinquent Loans ($ in millions) 2011   2011   2011   2010   2010 Nonaccrual portfolio loans and leases: Commercial and industrial loans (a) $449 $485 $477 $473 $525 Commercial mortgage loans 353 417 415 407 464 Commercial construction loans 151 147 159 182 211 Commercial leases 13 16 11 11 30 Residential mortgage loans 142 145 140 152 124 Home equity 25 26 24 23 23 Automobile loans - 1 1 1 1 Other consumer loans and leases (a)   1     3     60     84     -   Total nonaccrual loans and leases $1,134 $1,240 $1,287 $1,333 $1,378 Restructured loans and leases - commercial (nonaccrual) 189 188 149 141 31 Restructured loans and leases - consumer (nonaccrual)   215     211     209     206     175   Total nonperforming loans and leases $1,538 $1,639 $1,645 $1,680 $1,584 Repossessed personal property 17 15 20 27 29 Other real estate owned (b)   389     434     461     467     469   Total nonperforming assets (c) $1,944 $2,088 $2,126 $2,174 $2,082 Nonaccrual loans held for sale 171 147 184 247 680 Restructured loans - commercial (nonaccrual) held for sale   26     29     32     47     19   Total nonperforming assets including loans held for sale   $2,141     $2,264     $2,342     $2,468     $2,781     Restructured Consumer loans and leases (accrual) $1,601 $1,593 $1,573 $1,560 $1,588 Restructured Commercial loans and leases (accrual) $349 $266 $243 $228 $146   Total loans and leases 90 days past due $274 $279 $266 $274 $317 Nonperforming loans and leases as a percent of portfolio loans, leases and other assets, including other real estate owned (c) 1.93 % 2.09 % 2.11 % 2.15 % 2.07 % Nonperforming assets as a percent of portfolio loans, leases and other assets, including other real estate owned (c) 2.44 % 2.66 % 2.73 % 2.79 % 2.72 %   (a) Nonaccrual loans and leases at December 31, 2010 reflect a reclassification of $84 million in nonperforming loans from commercial and industrial loans to other consumer loans and leases which occurred after the Bancorp's Form 8-K was filed on January 19, 2011. This reclassification was primarily a result of the determination that consumer loans obtained in the foreclosure of a commercial loan were more appropriately categorized as other consumer loans and leases in accordance with regulatory guidelines.   (b) Excludes government insured advances.   (c) Does not include nonaccrual loans held-for-sale.  

Total nonperforming assets, including loans held-for-sale, were $2.1 billion, a decline of $123 million, or 5 percent, from the previous quarter. Nonperforming assets held-for-investment (NPAs) at quarter end were $1.9 billion or 2.44 percent of total loans, leases and OREO, and decreased $144 million, or 7 percent, from the previous quarter. Nonperforming loans held-for-investment (NPLs) at quarter end were $1.5 billion or 1.93 percent of total loans, leases and OREO, and decreased $101 million or 6 percent from the second quarter.

Commercial portfolio NPAs at quarter-end were $1.5 billion, or 3.31 percent of commercial loans, leases and OREO, and decreased $138 million, or 9 percent, from the second quarter. Commercial portfolio NPLs were $1.2 billion, or 2.60 percent of commercial loans and leases, and decreased $97 million from last quarter. Commercial construction portfolio NPAs were $237 million, a decline of $3 million from the previous quarter. Commercial mortgage portfolio NPAs were $631 million, down $80 million from the prior quarter. Commercial real estate loans in Michigan and Florida represented 47 percent of commercial real estate NPAs and 37 percent of our total commercial real estate portfolio. C&I portfolio NPAs of $588 million decreased $51 million from the previous quarter. Within the overall commercial loan portfolio, residential real estate builder and developer portfolio NPAs of $207 million declined $35 million from the second quarter, of which $48 million were commercial construction assets, $144 million were commercial mortgage assets and $15 million were C&I assets. Commercial portfolio NPAs included $189 million of nonaccrual troubled debt restructurings (TDRs), compared with $188 million last quarter.

Consumer portfolio NPAs of $470 million, or 1.34 percent of consumer loans, leases and OREO, decreased $6 million from the second quarter. Consumer portfolio NPLs were $383 million, or 1.09 percent of consumer loans and leases, and decreased $3 million from last quarter. Of consumer NPAs, $407 million were in residential real estate portfolios. Residential mortgage NPAs were $337 million, consistent with the previous quarter, with Florida representing 46 percent of residential mortgage NPAs and 17 percent of total residential mortgage loans. Home equity NPAs were down $1 million compared with last quarter at $70 million. Credit card NPAs declined $4 million from the previous quarter to $46 million. Other consumer NPAs declined $2 million to $1 million this quarter. Consumer nonaccrual TDRs were $215 million in the third quarter of 2011, compared with $211 million in the second quarter.

Second quarter OREO balances included in portfolio NPA balances described above were $389 million, down $45 million from $434 million in the second quarter, and included $316 million in commercial OREO and $73 million in consumer OREO. Repossessed personal property of $17 million consisted largely of autos.

Loans still accruing over 90 days past due were $274 million, down $5 million, or 2 percent, from the second quarter of 2011. Commercial balances 90 days past due of $63 million decreased $5 million sequentially. Consumer balances 90 days past due of $211 million were flat from the previous quarter. Loans 30-89 days past due of $474 million increased $5 million, or 1 percent, from the previous quarter. Commercial balances 30-89 days past due of $135 million were flat sequentially and consumer balances 30-89 days past due of $339 million increased $5 million from the second quarter.

At quarter-end, we held $197 million of commercial nonaccrual loans for sale, compared with $176 million at the end of the second quarter. During the quarter we sold approximately $17 million of held for sale loans; we transferred approximately $57 million of commercial loans from the portfolio to loans held-for-sale, and we transferred approximately $3 million of loans from loans held-for-sale to OREO. We recorded charge-offs of $17 million on the loans transferred to held for sale; we recorded negative valuation adjustments of $6 million on held-for-sale loans and we recorded net gains of $3 million on loans that were sold or settled during the quarter.

Capital Position

      For the Three Months Ended September   June   March   December   September 2011   2011   2011   2010   2010 Capital Position Average shareholders' equity to average assets 11.33% 11.12% 11.77% 12.52% 12.38% Tangible equity (a) 8.98% 9.01% 8.76% 10.42% 10.04% Tangible common equity (excluding unrealized gains/losses) (a) 8.63% 8.64% 8.39% 7.04% 6.70% Tangible common equity (including unrealized gains/losses) (a) 9.04% 8.96% 8.60% 7.30% 7.06% Tangible common equity as a percent of risk-weighted assets (excluding unrealized gains/losses) (a) (b) 9.39% 9.28% 9.09% 7.56% 7.40%

Regulatory capital ratios: (c)

Tier I capital 11.96% 11.93% 12.20% 13.89% 13.85% Total risk-based capital 16.25% 16.03% 16.27% 18.08% 18.28% Tier I leverage 11.08% 11.03% 11.21% 12.79% 12.54% Tier I common equity (a) 9.33% 9.20% 8.99% 7.48% 7.34% Book value per share 13.73 13.23 12.80 13.06 12.86 Tangible book value per share (a) 11.05 10.55 10.11 9.94 9.74   (a) The tangible equity, tangible common equity, tier I common equity and tangible book value per share ratios, while not required by accounting principles generally accepted in the United States of America (U.S. GAAP), are considered to be critical metrics with which to analyze banks. The ratios have been included herein to facilitate a greater understanding of the Bancorp's capital structure and financial condition. See the Regulation G Non-GAAP Reconciliation table for a reconciliation of these ratios to U.S. GAAP.   (b) Under the banking agencies risk-based capital guidelines, assets and credit equivalent amounts of derivatives and off-balance sheet exposures are assigned to broad risk categories. The aggregate dollar amount in each risk category is multiplied by the associated risk weight of the category. The resulting weighted values are added together resulting in the Bancorp's total risk weighted assets.   (c) Current period regulatory capital data ratios are estimated.  

Capital ratios remained strong during the quarter. Compared with the prior quarter, the Tier 1 common equity ratio increased 13 bps to 9.33 percent. The tangible common equity to tangible assets ratio of 8.63 percent (excluding unrealized gains/losses) and 9.04 percent (including unrealized gains/losses) reflected growth in both retained earnings and assets. The Tier 1 capital ratio increased 3 bps to 11.96 percent reflecting retained earnings growth offset by the redemption of TruPS during the quarter; the Total capital ratio increased 22 bps to 16.25 percent; and the Leverage ratio increased 5 bps to 11.08 percent.

Book value per share at September 30, 2011 was $13.73 and tangible book value per share was $11.05, compared with June 30, 2011 book value per share of $13.23 and tangible book value per share of $10.55.

The Bank for International Settlements (BIS) has proposed new capital rules for Internationally Active banks, known as “Basel III.” Fifth Third is subject to U.S. bank regulations for capital, which have not yet been issued in response to the Basel proposals. Fifth Third’s capital levels exceed current U.S. “well-capitalized” standards and proposed Basel III standards, and we expect Fifth Third’s capital levels to continue to exceed U.S. “well-capitalized” standards including the adoption of U.S. rules that incorporate changes contemplated under Basel III and/or the Dodd-Frank Act.

Fifth Third’s Tier 1 and Total capital levels at September 30, 2011 included $2.3 billion of TruPS, or 2.2 percent of risk weighted assets. During the quarter, the Bancorp redeemed at par $40 million of its TruPS. Under the Dodd-Frank financial reform legislation, these TruPS are intended to be phased out of Tier 1 capital over three years beginning in 2013. The BIS also issued proposals that would include a phase-out of these securities, although over a longer period. We will continue to evaluate the role of these types of securities in our capital structure, based on regulatory developments. To the extent these types of securities remain outstanding during and after the phase-in period, they would be expected to continue to be included in Total capital, subject to prevailing U.S. capital standards. The BIS has also proposed adjustments to definitions of capital, including what is to be included in the definition of Tier 1 common, and to risk weightings applied to certain types of assets. We do not currently expect these proposed adjustments to negatively affect Fifth Third’s Tier 1 common capital levels and for any potentially positive effect to be modest.

We expect to manage our capital structure over time – including the components represented by common equity and non-common equity –to adapt to and reflect the effect of legislation, changes in U.S. bank capital regulations that reflect international capital rules developments, regulatory expectations, and our goals for capital levels and capital composition as appropriate given any changes in rules.

Other

Fifth Third Bank owns a 49 percent interest in Vantiv, LLC, formerly Fifth Third Processing Solutions, LLC. (Advent International owns the remaining 51 percent interest.) The 49 percent interest is recorded on Fifth Third’s balance sheet as an equity method investment with a book value of $551 million. Additionally, Fifth Third has a warrant to purchase additional shares in Vantiv which is carried as a derivative asset at a fair market value of $101 million, and Advent has a contingent put option to sell shares in Vantiv to Fifth Third which is carried as a derivative liability at a fair market value of $1 million.

Conference Call

Fifth Third will host a conference call to discuss these financial results at 9:00 a.m. (Eastern Time) today. This conference call will be webcast live by Thomson Financial and may be accessed through the Fifth Third Investor Relations website at www.53.com (click on “About Fifth Third” then “Investor Relations”). The webcast also is being distributed over Thomson Financial’s Investor Distribution Network to both institutional and individual investors. Individual investors can listen to the call through Thomson Financial’s individual investor center at www.earnings.com or by visiting any of the investor sites in Thomson Financial’s Individual Investor Network. Institutional investors can access the call via Thomson Financial’s password-protected event management site, StreetEvents (www.streetevents.com).

Those unable to listen to the live webcast may access a webcast replay or podcast through the Fifth Third Investor Relations website at the same web address. Additionally, a telephone replay of the conference call will be available beginning approximately two hours after the conference call until Thursday, November 3rd by dialing 800-585-8367 for domestic access and 404-537-3406 for international access (passcode 11414384#).

Corporate Profile

Fifth Third Bancorp is a diversified financial services company headquartered in Cincinnati, Ohio. As of September 30, 2011, the Company had $115 billion in assets and operated 15 affiliates with 1,314 full-service Banking Centers, including 103 Bank Mart® locations open seven days a week inside select grocery stores and 2,437 ATMs in Ohio, Kentucky, Indiana, Michigan, Illinois, Florida, Tennessee, West Virginia, Pennsylvania, Missouri, Georgia and North Carolina. Fifth Third operates four main businesses: Commercial Banking, Branch Banking, Consumer Lending, and Investment Advisors. Fifth Third also has a 49% interest in Vantiv, LLC, formerly Fifth Third Processing Solutions, LLC. Fifth Third is among the largest money managers in the Midwest and, as of September 30, 2011, had $273 billion in assets under care, of which it managed $23 billion for individuals, corporations and not-for-profit organizations. Investor information and press releases can be viewed at www.53.com. Fifth Third’s common stock is traded on the NASDAQ® National Global Select Market under the symbol “FITB.”

Forward-Looking Statements

This news release contains statements that we believe are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended, and Rule 3b-6 promulgated thereunder. These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. They usually can be identified by the use of forward-looking language such as “will likely result,” “may,” “are expected to,” “is anticipated,” “estimate,” “forecast,” “projected,” “intends to,” or may include other similar words or phrases such as “believes,” “plans,” “trend,” “objective,” “continue,” “remain,” or similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” or similar verbs. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including but not limited to the risk factors set forth in our most recent Annual Report on Form 10-K. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements we may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to us.

There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) general economic conditions and weakening in the economy, specifically the real estate market, either nationally or in the states in which Fifth Third, one or more acquired entities and/or the combined company do business, are less favorable than expected; (2) deteriorating credit quality; (3) political developments, wars or other hostilities may disrupt or increase volatility in securities markets or other economic conditions; (4) changes in the interest rate environment reduce interest margins; (5) prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions; (6) Fifth Third’s ability to maintain required capital levels and adequate sources of funding and liquidity; (7) maintaining capital requirements may limit Fifth Third’s operations and potential growth; (8) changes and trends in capital markets; (9) problems encountered by larger or similar financial institutions may adversely affect the banking industry and/or Fifth Third; (10) competitive pressures among depository institutions increase significantly; (11) effects of critical accounting policies and judgments; (12) changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board (FASB) or other regulatory agencies; (13) legislative or regulatory changes or actions, or significant litigation, adversely affect Fifth Third, one or more acquired entities and/or the combined company or the businesses in which Fifth Third, one or more acquired entities and/or the combined company are engaged, including the Dodd-Frank Wall Street Reform and Consumer Protection Act; (14) ability to maintain favorable ratings from rating agencies; (15) fluctuation of Fifth Third’s stock price; (16) ability to attract and retain key personnel; (17) ability to receive dividends from its subsidiaries; (18) potentially dilutive effect of future acquisitions on current shareholders’ ownership of Fifth Third; (19) effects of accounting or financial results of one or more acquired entities; (20) difficulties in separating Vantiv, LLC, formerly Fifth Third Processing Solutions from Fifth Third; (21) loss of income from any sale or potential sale of businesses that could have an adverse effect on Fifth Third’s earnings and future growth; (22) ability to secure confidential information through the use of computer systems and telecommunications networks; and (23) the impact of reputational risk created by these developments on such matters as business generation and retention, funding and liquidity.

You should refer to our periodic and current reports filed with the Securities and Exchange Commission, or “SEC,” for further information on other factors, which could cause actual results to be significantly different from those expressed or implied by these forward-looking statements.