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Fifth Third Bank

News Release

 

Fifth Third Bancorp Reports First Quarter 2007 Earnings of $0.65 Per Diluted Share

4/19/07

Earnings Highlights

Earnings Highlights

Fifth Third Bancorp today reported first quarter 2007 earnings of $359 million, or $0.65 per diluted share, compared with $66 million, or $0.12 per diluted share, in the fourth quarter of 2006 and $363 million, or $0.65 per diluted share, for the same period in 2006.

“First quarter results reflect solid performance across the board in a tough environment for banks,” said Kevin T. Kabat, President and CEO of Fifth Third Bancorp. “The prolonged inverted yield curve coupled with some softness in certain areas of the economy makes for a challenging operating environment. We continue to be guardedly optimistic about the outlook for 2007. We continue to have significant flexibility with our capital at current levels, and our management team is focused on executing on our strategic initiatives, creating shareholder value and building a company that is well-positioned for sustainable long-term growth.”

Income Statement Highlights

Income Statement Highlights

Net Interest Income

Net Interest Income

Net interest income of $742 million on a taxable equivalent basis was down $2 million from the fourth quarter. The incremental benefit from the balance sheet actions taken in the fourth quarter of approximately $18 million was offset by a number of items. The impact of FSP FAS 13-2 related to accounting for leveraged leases reduced net interest income by $7 million and the funding cost of the $386 million deposit with the IRS related to tax years currently under audit reduced net interest income by $4 million. Fewer days in the quarter reduced net interest income by $4 million, and we incurred incremental funding costs of $2 million related to share repurchases. Otherwise, the effect of lower commercial demand deposit balances modestly offset the benefit of higher consumer core deposit levels and higher auto loan and credit card balances. The net interest margin increased 28 bps, primarily due to the previously disclosed fourth quarter 2006 balance sheet actions.

Net interest income increased $24 million, or three percent, from the first quarter of 2006, primarily the result of the fourth quarter balance sheet actions and solid loan and core deposit growth.

In March 2007, the Bancorp issued $750 million of trust preferred securities for general corporate purposes, including share repurchases. During the quarter, we repurchased 7.0 million shares at a total cost of $280 million. We have 8.8 million shares remaining on our current share repurchase authorization.

Average Loans

Average Loans

Average loan and lease balances grew one percent sequentially and six percent over first quarter last year. Average commercial loans and leases were flat sequentially and grew six percent compared with the year ago quarter. Average commercial loan growth was affected by the reclassification in the fourth quarter of approximately $450 million to commercial mortgage. Prior balances were not restated. Consumer loans and leases grew one percent sequentially and six percent compared with the year ago quarter, reflecting strong auto loan growth offset by the anticipated run-off in the consumer lease portfolio totaling $499 million. Excluding this run-off, consumer loans and leases grew eight percent versus the year ago quarter.

Average Deposits

Average Deposits

Average core deposits were flat sequentially, as solid growth in savings account deposits was offset by declines in other core deposit categories. Retail core deposit growth was strong, with growth in savings and money market balances more than offsetting modest declines in interest checking and retail CDs. Retail core deposit growth offset lower commercial core deposits, driven by seasonally higher demand deposit balances in the fourth quarter. Compared with the same quarter last year, average core deposits increased two percent on growth in savings and retail CDs, partially offset by lower commercial demand deposit balances reflecting the effect of higher earnings credit rates.

Our weighted average rates paid on interest-bearing core deposits remained relatively steady at 3.43%. This reflected a modest reduction in rates paid across certain product offerings offset by a continued but slowing mix shift toward higher rate deposit products.

Noninterest Income

Non-interest Income

Noninterest income of $648 million increased $429 million sequentially as a result of the $415 million in losses incurred in the fourth quarter on the sale of securities and termination of financing agreements associated with the previously disclosed balance sheet actions. Otherwise, noninterest income rose $14 million sequentially, or two percent, on higher mortgage banking revenue, investment advisory revenue and service charges on deposits, partially offset by seasonally lower electronic payment processing revenue. Compared with first quarter 2006, noninterest income grew five percent, primarily due to strong performance in electronic payment processing revenue, investment advisory revenue and corporate banking revenue, partially offset by lower mortgage banking revenue.

Electronic payment processing (EPP) revenue of $225 million decreased three percent from seasonally strong fourth quarter levels. EPP revenue increased 15 percent over last year on double-digit growth in merchant processing, card issuer interchange, and financial institutions revenue. The merchant business continues to perform well and large national merchant contracts expected to convert in the second half of 2007 will continue to provide strong growth. The increase in card issuer interchange reflects increased debit card usage and stronger growth in credit card accounts and usage. Financial institutions revenue growth was stronger than normal due to contract termination fees recognized as a result of bank merger-related activity.

Service charges on deposits of $126 million increased three percent sequentially and was flat versus the same quarter last year. Retail service charges increased one percent sequentially, as growth in customer accounts and better fee realization were offset by a seasonal reduction in fee occurrences. Retail deposit revenue grew two percent compared with the year ago quarter. Commercial service charges increased by five percent sequentially on new customer additions and sales of lockbox and electronic disbursement services, and declined two percent compared with last year reflecting the effect of higher earnings credit rates.

Investment advisory revenue of $96 million increased six percent sequentially, primarily due to growth in private client and brokerage revenue. Private client growth reflected seasonal tax preparation fees and continued growth while brokerage revenue growth was driven by higher broker productivity and a shift toward managed accounts. Compared with the same quarter last year, revenue increased five percent, driven by strong growth in private client revenue, modest growth in brokerage and institutional trust, partially offset by lower mutual fund revenue reflecting the ongoing effect of open architecture on proprietary fund sales.

Corporate banking revenue of $83 million increased one percent sequentially, as strong institutional deal flow and customer interest rate derivative sales were largely offset by strong fourth quarter lease syndication fees. Compared with last year, revenue increased nine percent as a result of gains in institutional sales and customer derivatives activity.

Mortgage banking net revenue totaled $40 million, compared with $30 million last quarter and $47 million in the prior year quarter. First quarter origination fees and gains on loan sales were $26 million, compared with $23 million in the fourth quarter and $21 million in first quarter 2006. Mortgage originations of $2.9 billion improved from $2.5 billion in fourth quarter 2006 and $2.2 billion in first quarter 2006. Net servicing revenue, before MSR valuation adjustments, totaled $13 million in the first quarter, compared with $12 million in the fourth quarter and $14 million a year ago. The MSR valuation and related mark-to-market adjustments on free standing derivatives netted to a modest positive adjustment in the quarter, compared with a $5 million negative adjustment in the fourth quarter and a positive $11 million adjustment in the year ago quarter. The mortgage servicing asset, net of the valuation reserve, was $566 million at quarter end on a servicing portfolio of $30.3 billion.

Other noninterest income totaled $78 million in the first quarter, compared with $58 million last quarter and $80 million in the same quarter last year. Fourth quarter results included a loss of $17 million on derivatives related to securities sold as part of our fourth quarter balance sheet actions.

Noninterest Expense

Non-interest Expense

Total noninterest expense of $793 million decreased one percent from fourth quarter 2006 and increased eight percent from first quarter 2006. First quarter expense trends included a seasonal increase of $17 million in FICA and unemployment expenses. Fourth quarter results included $39 million in charges associated with the termination of financing agreements as part of the balance sheet actions. Remaining sequential expense growth was two percent. Year-over-year expense growth largely reflected higher de-novo related expenses, investment in technology, and increased volume-related processing expense.

Credit Quality

Credit Quality

Net charge-offs as a percentage of average loans and leases were 39 bps in the first quarter, compared with 52 bps last quarter and 42 bps in the first quarter of 2006. The commercial and consumer net charge-off ratios were 27 bps and 53 bps, respectively, down from 42 bps and 64 bps in the fourth quarter. Gross charge-offs and recoveries were 54 bps and 15 bps, respectively, of loans and leases. First quarter net charge-offs included $5 million in losses related to the sale of $39 million in nonperforming commercial loans, and $10 million in recoveries related to the sale of charged-off consumer loans. Fourth quarter 2006 net charge-offs included $9 million related to two large commercial credits as well as seasonally higher indirect auto losses.

Allowance Credit Losses

Provision for loan and lease losses totaled $84 million in the first quarter compared with $107 million last quarter and $78 million in the same quarter last year. The allowance for loan and lease losses represented 1.05 percent of total loans and leases outstanding as of quarter end, compared with 1.04 percent last quarter and 1.05 percent in the same quarter last year.

Non-performing Assets and Delinquent Loans

Nonperforming assets (NPAs) at quarter end were $494 million, or 66 bps of total loans and leases and other real estate owned, up from 61 bps last quarter and 51 bps in the first quarter a year ago. The sequential increase in NPAs of $39 million, or 9 percent, occurred primarily in the commercial mortgage portfolio. Commercial NPA growth was concentrated in Florida, driven by a single large NPA, and in Michigan. During the quarter, we sold $39 million in commercial NPAs and realized a $5 million loss on the sale. In the fourth quarter of 2006, we sold $13 million in commercial NPAs at a loss of $1 million.

Capital Position

Capital Position

Capital levels remained strong in the first quarter. Tangible equity declined 14 bps sequentially due to share repurchases and the $96 million reduction of equity related to the adoption of FSP FAS 13-2. Tangible equity increased 75 bps compared to the prior year first quarter primarily due to lower tangible assets as a result of the fourth quarter 2006 balance sheet actions. Regulatory capital ratios improved sequentially as the issuance $750 million of Tier 1-qualifying trust preferred securities offset the negative effect of share repurchases. This issue contributed approximately 75 bps to each of our regulatory capital ratios.

Outlook

The following outlook represents currently expected full year growth rates compared with full year 2006 results. Our outlook is based on current expectations as of the date of this release for results within our businesses; prevailing views related to economic growth, inflation, unemployment and other economic factors; and market forward interest rate expectations. These expectations are inherently subject to risks and uncertainties. There are a number of factors that could cause results to differ materially from historical performance and these expectations. We undertake no obligation to update these expectations after the date of this release. Please refer to the cautionary statement at the end of this release for more information.

Category

Net interest income

Noninterest margin

Noninterest income*

Noninterest expense**

Loans

Core deposits

Net charge-offs

Effective tax rate [non-tax equivalent]

Tangible equity/tangible asset ratio
Growth, percentage, or bps range

Mid-to-high single digits

3.35-3.45%

High single digits

Mid single digits

Mid-to-high single digits

Mid single digits

Low 50 bps range

29-30%

2007 target >7%

*comparison with the prior year excludes $415 million of losses recorded in noninterest income related to fourth quarter 2006 balance sheet actions

**comparison with the prior year excludes $49 million of charges: $10 million in third quarter 2006 related to the early retirement of debt, and $39 million in fourth quarter 2006 related to termination of financing agreements

Conference Call

Fifth Third will host a conference call to discuss these financial results at 9:00 a.m. (Eastern Time) today. Investors, analysts and other interested parties may dial into the conference call at 877-309-0967 for domestic access and 706-679-3977 for international access (password: Fifth Third). A replay of the conference call will be available for approximately seven days by dialing 800-642-1687 for domestic access and 706-645-9291 for international access (passcode: 5023636#).

Corporate Profile

Fifth Third Bancorp is a diversified financial services company headquartered in Cincinnati, Ohio. The Company has $99.8 billion in assets, operates 18 affiliates with 1,161 full-service Banking Centers, including 109 Bank Mart® locations open seven days a week inside select grocery stores and 2,104 Jeanie® ATMs in Ohio, Kentucky, Indiana, Michigan, Illinois, Florida, Tennessee, West Virginia, Pennsylvania and Missouri. Fifth Third operates five main businesses: Commercial Banking, Branch Banking, Consumer Lending, Investment Advisors and Fifth Third Processing Solutions. Fifth Third is among the largest money managers in the Midwest and, as of March 31, 2007, has $225 billion in assets under care, of which it managed $34 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 through the NASDAQ® National Global Select Market System under the symbol “FITB.”

FORWARD-LOOKING STATEMENTS

This report may contain forward-looking statements about Fifth Third Bancorp and/or the company as combined acquired entities within the meaning of Sections 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and 21E of the Securities Exchange Act of 1934, as amended, and Rule 3b-6 promulgated thereunder, that involve inherent risks and uncertainties. This report may contain certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of Fifth Third Bancorp and/or the combined company including statements preceded by, followed by or that include the words or phrases such as “believes,” “expects,” “anticipates,” “plans,” “trend,” “objective,” “continue,” “remain” or similar expressions or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may” or similar expressions. 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, either national 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) political developments, wars or other hostilities may disrupt or increase volatility in securities markets or other economic conditions; (3) changes in the interest rate environment reduce interest margins; (4) prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions; (5) changes and trends in capital markets; (6) competitive pressures among depository institutions increase significantly; (7) effects of critical accounting policies and judgments; (8) changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies; (9) 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; (10) ability to maintain favorable ratings from rating agencies; (11) fluctuation of Fifth Third’s stock price; (12) ability to attract and retain key personnel; (13) ability to receive dividends from its subsidiaries; (14) potentially dilutive effect of future acquisitions on current shareholders' ownership of Fifth Third; (15) difficulties in combining the operations of acquired entities; (16) ability to secure confidential information through the use of computer systems and telecommunications network; and (17) the impact of reputational risk created by these developments on such matters as business generation and retention, funding and liquidity. Additional information concerning factors that could cause actual results to differ materially from those expressed or implied in the forwardlooking statements is available in the Bancorp's Annual Report on Form 10-K for the year ended December 31, 2006, filed with the United States Securities and Exchange Commission (SEC).Copies of this filing are available at no cost on the SEC's Web site at www.sec.gov or on the Fifth Third’s Web site at www.53.com. Fifth Third undertakes no obligation to release revisions to these forward-looking statements or reflect events or circumstances after the date of this report.