Fifth Third Bancorp said Tuesday it swung to a loss during the third quarter, missing Wall Street expectations, as credit costs skyrocketed and the regional bank was forced to take losses on some investments.
The net loss, after accounting for $25 million in preferred dividends, was $81 million, or 14 cents per share, compared with earnings of $325 million, or 61 cents per share, during the same quarter a year ago.
Analysts polled by Thomson Reuters, on average, forecast earnings of 18 cents per share for the quarter.
Fifth Third set aside $941 million during the third quarter to cover loan and lease losses. The Cincinnati-based bank set aside just $139 million for loss provisions during the same quarter last year.
Nearly all banks have been forced to ramp up their loan-loss reserves over the past year and a half as customers increasingly default on their loans. Fifth Third said the losses are primarily tied to residential real estate loans and commercial residential builder and developer loans. The losses are concentrated in Michigan and Florida, the bank said in a statement.
Fifth Third's net charge-off rate — the amount of loans written off as not being repaid compared with the size of the entire lending portfolio — rose to 2.17 percent in the third quarter from 0.6 percent during the same quarter last year.
The charge-offs were larger than anticipated, driven by increases in commercial mortgage and construction losses, Citi Investment Research analyst Keith Horowitz wrote in a research note. He had estimated the charge-off rate would be 1.89 percent during the quarter.
Fifth Third also incurred a $51 million pretax, or 6 cents per share after-tax, charge for its investments in Fannie Mae and Freddie Mac preferred stock. The two mortgage giants were taken over by the government during the third quarter, leading to a sharp drop in the value of their preferred shares.
The bank also recorded a $45 million pretax, or 5 cents per share after-tax, charge related to Visa Inc.'s settlement with Discover Financial Services. A third charge totaling $27 million pretax, or 4 cents per share after tax, was taken to lower the value of bank-owned life insurance policies.
Net interest income, the difference between how much it costs a bank to borrow money and how much it receives from lending money to customers, jumped 41 percent to $1.07 billion from $760 million during the year-ago period. The increase in net interest income included a $215 million benefit due to accounting adjustments tied to the acquisition of First Charter Corp. earlier in the year.
Non-interest income, money derived from fees and other charges, rose 5 percent to $717 million from $681 million during the same quarter in 2007.
Fifth Third also said it was considering applying to receive funds through the recently passed $750 billion government bailout plan. The bank said it supports the plan that calls for the government to directly invest in banks and purchase troubled assets, especially those tied to mortgages.
If the bank applies to the government program, it may effect its plans to sell noncore assets as it looks to increase its capital cushion. Earlier this year, Fifth Third laid out a capital raising plan that included a stock issuance, dividend cut and the sale of certain assets. It is still evaluating the asset sales and negotiating potential deals.
Shares of Fifth Third rose 2 cents to $12.25.
