Goodwill Impairments Drive Fifth Third’s $2.2 Billion Loss

Fifth Third Bancorp (FITB) reported Thursday a net loss of $2.2 billion — or $3.94 per share — for all of 2008. These losses reflected a quarterly loss of $2.2 billion — or $3.82 per share — for the fourth quarter, a leap from the $81 million loss reported for the third quarter. These losses were “driven primarily by goodwill impairment, credit actions, higher credit costs and market valuation adjustments,” according to the earnings statement published by the bank. The more than $3.4 billion invested Dec. 31 in Fifth Third by the Treasury Department through the capital purchase program vehicle within the Troubled Asset Relief program helped the bank to increase its tangible equity ratio to 7.86 percent, raise its tier 1 capital ratio to 10.59 percent, and boost its total capital ratio to 14.79 percent, according to the statement. The investment was offset, however, by a significant increase in Fifth Third’s loan loss reserve to a total $2.8 billion, resulting in an allowance-to-loan-and-lease ratio of 3.3 percent, up from the 2.4 percent reported in the third quarter. The reserve also made for an allowance-to-nonperforming-loan ratio of 123 percent, up from the 79 percent achieved in the third quarter, the bank reported. “Economic conditions have deteriorated across our footprint and have placed both our consumer and commercial loan portfolios under significant stress, as evident in our bottom line results for the year,” said chairman, president and CEO Kevin Kabat. “The resultant decline in our stock price during the quarter, and the evaluation of goodwill, led to our recording of goodwill impairment of $940 million after-tax during the quarter.” He went on to remind investors that the goodwill impairment is a non-cash charge and doesn’t affect the bank’s capital ratios. Fifth Third reported an “aggressive” approach to counter problematic consumer loans — modification on a massive scale. The bank reported that, of the total $547 million in “restructured” loans occupying the books for all of 2008, fourth-quarter modifications accounted for $218 million in loans. “Modifying these loans is beneficial not only to our shareholders but is also consistent with the needs of our customers, and result in a greater likelihood of payment and more value ultimately received by Fifth Third,” officials said in the earnings statement. “We understand that these actions significantly impacted our bottom line results, but we believe the actions taken in 2008 to mitigates risks and fortify the balance sheet will benefit our shareholders and customers in 2009 as this credit cycle progresses.” A look into Fifth Third’s mortgage business Fifth Third reported $9.3 billion average residential mortgage loan portfolio for the quarter, a continued slight easing off on the business through all of 2008. The first-quarter 2008 mortgage portfolio totaled nearly $10.4 billion — a figure that has declined every quarter since. Non-performing assets accounted for $259 million of the residential mortgage portfolio. The decreased mortgage business also showed in Fifth Third’s mortgage banking business net revenue, which swung into at a $29 million loss for the quarter. Mortgage loan charge-offs eased slightly from the previous quarter from $77 million to $68 million, while home equity charge-offs also dropped slightly to $54 million, possibly reflecting the decline in overall mortgage business. Losses in Michigan and Florida represented 80 percent of losses related to these charge-offs, according to the report. Read the report. Write to Diana Golobay at Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

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