FITB

Fifth Third Bancorp (FITB)

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Fifth Third Bancorp (FITB)

Q4 2008 Earnings Call

January 22, 2009 8:30 am ET

Executives

Jeff Richardson – Senior VP, Investor Relations

Kevin Kabat – Chief Executive Officer

Mary Tuuk – Controller

Ross Kari – Chief Financial Officer

Analysts

Matthew O'Connor – UBS

Betsy Graseck – Morgan Stanley

Michael Mayo – Deutsche Bank

Presentation

Operator

I would like to welcome everyone to the Fifth Third Bancorp fourth quarter 2008 earnings call. (Operator Instructions) Mr. Jeff Richardson, you may begin your conference.

Jeff Richardson

Hello, and thanks for joining us this morning. We'll be talking with you today about our fourth quarter 2008 and full year results as well as recent developments. This call may contain certain forward-looking statements about Fifth Third Bancorp pertaining to our financial condition, results of operations, plans and objectives. These statements involve certain risks and uncertainties. There are a number of factors that could cause results to differ materially from historical performance in these statements.

We've identified a number of these factors in our forward-looking cautionary statement at the end of our earnings release and other materials and we encourage you to review those factors. Fifth Third undertakes no obligation and does not expect to update any such forward-looking statements after the date of this call.

I'm joined here in the room by several people. Kevin Kabat, our CEO, Chief Financial Officer Ross Kari, Chief Risk Officer Mary Tuuk, our Controller, Dan Poston and Jim Eglseder of Investor Relations.

During the question and answer period please provide your name and that of your firm to the operator. With that, I'll turn the call over to Kevin Kabat.

Kevin Kabat

Good morning everyone and thanks for joining us. We know it's a very busy morning for you this morning. I'll make a few comments about the environment, the industry and Fifth Third before talking about high level quarterly results. Then I'll turn things over to Mary and Ross who will review in detail our financial performance during the quarter, our credit trends and some of our expectations going forward.

Obviously the environment is extraordinarily difficult right now. Like last earnings season, the broader financial industry situation is again in turmoil. The U.S. government and financial authorities have taken significant steps over the past several months. They've created more stability in money markets.

Equity markets are less settled and there seems to be less differentiation among institutions in the past couple of weeks. We experienced credit challenges earlier than others given our geography and I believe the actions we've taken will better position us for the remainder of this cycle.

The economy is very weak right now, not just in credit but where consumer spending is important such as deposit service charges and transaction processing. Trends in the economy are uncertain which reduces visibility beyond the immediate future. We're intently focused on those things we control; expenses, getting in front of customers, modifying loans where appropriate, making difficult decisions and evaluating our businesses. This company retained its underlying strengths and we will continue to manage through these issues and move the company forward.

Now in terms of our results, some high level comments. We continue to produce strong operating metrics across many areas of the bank. That gives us confidence and evidence of our underlying strengths in an environment that's been difficult for the industry. That said, the industry environment is unusually challenging given the low rates and that's put some pressure on the net interest margin which we expect to persist into the first quarter.

We took significant actions this quarter in selling and moving to held-for-sale on our most problematic commercial real estate loans in Florida and Michigan. These sales and transfers resulted in losses being accelerated as these losses were marked to liquidation values or to currently very depressed bid levels.

These sales will allow us to focus our resources away from situations that we've determined have little upside potential and redeploy them toward those which have greater recovery potential. We believe we've eliminated any significant potential loss content on these loans going forward. In the process, we have significantly improved our credit metrics and coverage ratios.

Our capital position was strengthened considerably at the end of the quarter with the Treasuries investment of $3.4 billion in preferred stock. Our regulatory capital ratios are well above our target levels and we expect that to remain the case for the foreseeable future. We continue to have significant flexibility that serves Fifth Third well as we move through this tough environment.

We spent a few minutes on the credit actions that we took. As we indicated, we intended to be very aggressive in dealing with problem credits during the fourth quarter, and we were. We undertook an extensive review of our loan portfolio with a special focus on commercial real estate loans in Michigan and Florida, particularly home builder and non owner occupied commercial real estate loans.

As you know, we suspended originations of these loans beginning more than a year ago. Our goal was to identify those situations where we believe we had long and unfruitful work out processes in front of us where we believed our potential recovery was not significant relative to current market values, and where we believed the sale within the next several quarters was feasible.

On %0.6 billion in contractual balance loans were sold or were moved to held-for-sale. Approximately 90% of these loans were commercial real estate secured loans in Florida and Michigan. These loans had a carrying value at September 30, 2008 net of prior charge-offs of $1.3 billion.

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