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Fifth Third Bank

News Release

 

Fifth Third Bancorp Reports Second Quarter 2007 Earnings of $0.69 Per Diluted Share

7/19/07

Earnings Highlights

Earnings Highlights

Fifth Third Bancorp today reported second quarter 2007 earnings of $376 million, or $0.69 per diluted share, compared with $359 million, or $0.65 per diluted share, in the first quarter of 2007 and $382 million, or $0.69 per diluted share, for the same period in 2006.

Second quarter 2007 results included a $16 million pre-tax gain ($0.02 per share) on the sale of certain non-strategic credit card accounts, partially offset by $7 million in pre-tax costs ($0.01 per share) associated with the implementation of expense reduction initiatives, including severance. Second quarter 2006 results included a pre-tax gain of $24 million from the redemption of a portion of the common shares of MasterCard Incorporated held by Fifth Third, which was partially offset by $10 million of losses on certain securities sold during that quarter. These items benefited earnings per share in the second quarter of 2006 by net $0.02 per share.

“Second quarter results were strong across most areas of the Company,” said Kevin T. Kabat, President and CEO of Fifth Third Bancorp. “Revenue growth of six percent was gratifying in a fairly tough environment. Net interest income was up despite a continued challenging interest rate environment and share repurchases, and we saw fee growth of eight percent, generally reflecting across the board increases. Expenses were also well managed during the quarter. On the other hand, credit is a challenge at this point in the cycle, and we are actively managing our risks in this kind of environment. We do expect continued deterioration in credit trends for the near future, but they remain within our expectations. All told, we were pleased with our results, and remain very focused on executing on our strategic plans and building shareholder value.”

Income Statement Highlights

Income Statement Highlights

Net Interest Income

Net Interest Income

Net interest income of $745 million on a taxable equivalent basis was up $3 million from the first quarter. Growth was driven by consumer deposit production and modest reductions in consumer deposit rates, loan growth, and day count. These contributions were offset by the impact of the first quarter issuance of $750 million trust preferred securities and share repurchase activity during the first and second quarters. The net interest margin was 3.37 percent, down 7 bps, with the reduction driven by the effect of debt issuance, share repurchases and day count, partially offset by deposit growth and pricing.

Compared with the second quarter 2006, net interest income increased $29 million, or four percent, and the net interest margin expanded 36 bps, primarily the result of the fourth quarter 2006 balance sheet actions.

During the quarter, we repurchased 16.7 million shares at a total cost of $693 million. As of June 30, 2007, there were 22.1 million shares remaining under our current share repurchase authorization.

Average Loans

Average Loans

Average loan and lease balances grew two percent sequentially and five percent over the second quarter last year. Average commercial loans and leases grew two percent sequentially and five percent compared with the year ago quarter. Average C&I loan growth was three percent sequentially, whereas commercial mortgage and construction loans were flat, with commercial mortgage growth driven by the conversion of construction loans to permanent financing. Consumer loans and leases grew one percent sequentially and six percent compared with the year ago quarter, reflecting strong auto loan and credit card growth offset by anticipated run-off in the consumer lease portfolio totaling $442 million versus second quarter 2006. Excluding this run-off, consumer loans and leases grew eight percent versus the quarter a year ago.

Average Deposits

Average Deposits

Average core deposits were relatively flat sequentially (up two percent annualized) and grew one percent over second quarter 2006. Strong growth in savings products and modest growth in demand deposits were largely offset by declines in interest checking and CDs. Retail core deposits remained solid, up two percent or six percent annualized, driven primarily by growth in savings and demand deposit balances. Commercial core deposits exhibited modest declines in all categories.

Weighted average rates paid on interest-bearing core deposits remained relatively steady at 3.39 percent compared with 3.43 percent in the first quarter. 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, primarily savings accounts.

Noninterest Income

Non-interest Income

Noninterest income rose $59 million sequentially, or nine percent, on higher revenues in all fee categories. Compared with second quarter 2006, noninterest income grew eight percent, with growth across all categories, but particularly strong in electronic payment processing revenue, deposit service charges and corporate banking revenue. Second quarter 2007 results included a gain of $16 million on the sale of $89 million in non-strategic credit card accounts. Second quarter 2006 results included a $24 million gain from the redemption of a portion of the common shares of MasterCard Incorporated held by Fifth Third, partially offset by $10 million of losses on certain securities sold in the same quarter. Excluding the above-mentioned items, sequential noninterest income growth was seven percent and year-over-year growth was eight percent.

Electronic payment processing revenue of $243 million increased eight percent sequentially and fifteen percent over last year on strong growth in merchant processing, card issuer interchange, and financial institutions revenue. We expect large national contracts signed with the U.S. Treasury and, more recently, Walgreens, to continue to support merchant revenue growth going forward. Card issuer interchange was driven by higher card usage and an increase in credit card accounts stemming from success in our initiative to increase our customer penetration. Higher card usage volumes drove the financial institutions revenue growth.

Service charges on deposits of $142 million increased thirteen percent sequentially and six percent versus the same quarter last year. Retail service charges increased twenty-three percent from seasonally weak first quarter numbers, driven by more normal levels of customer activity. Retail deposit revenue grew eleven percent compared with the year ago quarter. Commercial service charges increased by two percent sequentially, and declined one percent compared with last year reflecting the effect of higher earnings credit rates.

Investment advisory revenue of $97 million was up two percent sequentially and one percent over second quarter last year. Private Bank revenue declined modestly due to the earlier completion and filing of seasonal tax returns in the first quarter of 2007, affecting sequential and year-over-year comparisons. Brokerage fee revenue grew eleven percent sequentially and six percent year-over-year largely, reflecting additions of quality brokers and higher broker productivity.

Corporate banking revenue of $88 million increased six percent sequentially led by strong growth in customer interest rate derivatives income, syndications and asset backed securities fees, and foreign exchange and letter of credit fees. Compared with last year, revenue increased eight percent as a result of solid growth in interest rate derivatives income, institutional sales, and syndication fees.

Mortgage banking net revenue totaled $41 million, compared with $40 million last quarter and $41 million in the prior year quarter. Mortgage originations of $3.3 billion improved from $2.9 billion in first quarter 2007 and $2.6 billion in second quarter 2006. Gain-on-sale margins narrowed modestly, resulting in second quarter origination fees and gains on loan sales of $25 million, compared with $26 million in the first quarter and $27 million in second quarter 2006. Net servicing revenue, before MSR valuation adjustments, totaled $13 million in the second quarter, compared with $14 million in the first quarter and $14 million a year ago. The MSR valuation and related mark-to-market adjustments on free-standing derivatives netted to a positive $3 million adjustment in the second quarter compared with less than $1 million in the first and year ago quarters. The mortgage-servicing asset, net of the valuation reserve, was $602 million at quarter end on a servicing portfolio of $31.5 billion.

Other noninterest income totaled $96 million in the second quarter, compared with $78 million last quarter and $76 million in the same quarter last year. The increase resulted primarily from the $16 million gain on sale of $89 million in certain non-strategic credit card accounts.

Noninterest Expense

Non-interest Expense

Noninterest expense of $803 million increased one percent from first quarter 2007 and increased six percent from second quarter 2006. Second quarter expenses included $7 million in one-time costs associated with expense reduction initiatives, primarily related to severance. Expenses were otherwise flat sequentially and up five percent versus a year ago. Salaries, wages and incentives were up six percent sequentially, reflecting severance of $5 million, relatively flat salary and wages and higher revenue based incentives. Seasonally higher FICA and unemployment expenses in the first quarter primarily drove the sequential decline in employee benefit expense. Compared with the second quarter of 2006, compensation expense trends reflected a relatively stable employee base. Payment processing expense growth of 21 percent was driven by similar growth in transaction volumes. Year-over-year expense growth in other categories largely reflected higher de novo related expenses and technology investments.

Credit Quality

Credit Quality

Net charge-offs as a percentage of average loans and leases were 55 bps in the second quarter, in line with expectations, compared with 39 bps last quarter and 37 bps in the second quarter of 2006. Gross charge-offs and recoveries were 66 bps and 11 bps, respectively, of loans and leases, compared with 54 bps and 15 bps in the first quarter of 2007. Commercial net charge-off growth of $18 million was driven by higher losses on commercial mortgages and a $6 million loss related to the liquidation of a commercial borrower. Consumer net charge-off growth of $13 million reflected first quarter recoveries on the proceeds of $10 million in charged-off consumer loans and higher losses on consumer real estate. Second quarter net charge-offs included $3 million in losses related to the sale of $27 million in nonperforming commercial loans. First quarter net charge-offs included $5 million in losses related to the sale of $39 million in nonperforming commercial loans, as well as the $10 million in recoveries on the charge-off sale of charged-off consumer loans. The commercial and consumer net charge-off ratios were 44 bps and 68 bps, respectively, up from 27 bps and 53 bps in the first quarter.

Allowance Credit Losses

Provision for loan and lease losses totaled $121 million in the second quarter compared with $84 million last quarter and $71 million in the same quarter last year. The allowance for loan and lease losses represented 1.06 percent of total loans and leases outstanding as of quarter end, compared with 1.05 percent last quarter and 1.04 percent in the same quarter last year.

Non-performing Assets and Delinquent Loans

Nonperforming assets (NPAs) at quarter end were $528 million, or 70 bps of total loans and leases and other real estate owned, up from 66 bps last quarter and 49 bps in the first quarter a year ago. Sequential growth in NPAs was $34 million, or 7 percent. Consumer NPA growth of $22 million was driven by higher foreclosed real estate and higher repossessed autos reflecting an acceleration in our auto repossession policy late last year. Commercial NPA growth of $12 million was driven by growth in commercial mortgage and construction NPAs, particularly in Eastern Michigan. We sold $27 million in commercial NPAs, in the quarter compared with $39 million in commercial NPAs sold in the first quarter. Delinquent loans were $302 million, up $59 million from the first quarter, with approximately two thirds of the growth in commercial. Commercial delinquency growth was concentrated in real estate lending, particularly in Michigan and South Florida. Consumer growth was driven by residential delinquencies in South Florida, Northeastern Ohio, and Eastern Michigan.

Capital Position

Capital Position

Capital levels were lower during the quarter although they remained very strong. The tangible equity and regulatory capital ratios declined sequentially due to 16.7 million share repurchases at a total cost of $693 million. The tangible equity ratio was flat compared with the prior year second quarter primarily due to lower tangible assets as a result of the fourth quarter 2006 balance sheet actions.

On May 21, 2007, Fifth Third Bancorp and R&G Financial Corporation (“RGF”) signed a definitive agreement under which Fifth Third will acquire RGF‘s Florida-based subsidiary, R–G Crown Bank, which operates 30 branches in Florida and three in Augusta, Georgia. The transaction is expected to close in the fourth quarter of 2007. This transaction is expected to reduce capital ratios by approximately 40 bps.

Outlook

The following outlook represents currently expected full year growth rates compared with full year 2006 results. The outlook does not include the effect of our pending acquisition of R-G Crown Bank. 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.