July 22 (Bloomberg) -- Fifth Third Bancorp, Ohio's second- largest bank, posted its first loss in at least nine years as the lender set aside more money to cover bad debts in distressed housing markets including Florida and Michigan.

The net loss was $202 million, or 37 cents a share, compared with a profit of $376 million, or 69 cents, in the same period a year earlier, the Cincinnati-based company said today in a statement. The bank had a profit of 5 cents a share excluding a tax charge related to leveraged leases. Last month the bank forecast earnings of 1 to 5 cents.

Chief Executive Officer Kevin Kabat braced Fifth Third for further losses last month by slashing the dividend 66 percent and announcing plans to raise $2 billion selling shares and subsidiaries. The bank tripled its charge-offs for loans it expects won't be paid back, and boosted its provisions against future bad loans sixfold to $719 million.

``Credit quality deteriorated during the quarter,'' David Konrad, an analyst with KBW Inc. in New York, said in a research note. Still, second-quarter results were ``modestly better'' than the company's forecast on higher-than-expected loan growth, Konrad said.

Average loans were $83.5 billion in the three months ended June 30, up 3.2 percent from the first quarter and 11 percent from the same period a year ago, according to the bank.

Fifth Third advanced $1.56, or 12 percent, to $14.95 at 4 p.m. in Nasdaq Stock Market trading. National City Corp., Ohio's biggest bank, declined 0.7 percent, while No. 3 KeyCorp rose 4.3 percent after Deutsche Bank AG analyst Mike Mayo said he's less ``negative'' on bank earnings.

Bad Debt

Fifth Third said debt it doesn't expect to be paid back surged to $344 million in the second quarter from $102 million. Commercial loans accounted for almost a third of that total, or $107 million, while bad residential mortgages were $63 million, according to the statement. The net interest margin, which measures lending profitability, narrowed to 3.04 percent from 3.41 percent in the first quarter.

Market trends in the past month ``have been generally negative,'' prompting Fifth Third to raise its expectations for bad loans this year, Interim Chief Financial Officer Daniel Poston said on a conference call. The company now expects 2008 net charge-offs of 1.6 percent to 1.7 percent of loans, up from the 1.6 percent to 1.65 percent forecast in June.

National City

The lender followed National City and KeyCorp in raising cash. U.S. lenders may need an additional $65 billion as losses and writedowns extend into 2009's first quarter, Goldman Sachs Group Inc. analysts said June 17. KeyCorp reported its first unprofitable quarter since 2001 today.

``We were disappointed in our overall results for the second quarter,'' Kabat said in the statement. ``We have the capacity to absorb future losses in excess'' of the company's forecast, he said.

The Tier 1 capital ratio, a measure of the bank's ability to withstand bad loans, rose to 8.51 percent at the end of June from 7.72 percent at the end of March.

Fifth Third said on June 18 it expected ``continued growth'' in loan loss reserves amid the worst housing slump in at least a quarter century. Kabat's plan to sell $1 billion in preferred convertible shares came about a month after he told investors on a conference call that he didn't ``foresee the need'' to raise significant common equity.

Bad loans to homebuilders are expected to accumulate at a faster rate in the second half, Chief Risk Officer Mary Tuuk said on the conference call. The charge-offs to developers will be ``substantial'' in the remainder of the year, Tuuk said.

Profit Projection

Fifth Third will probably return to profitability in the third quarter, Kabat said in the statement. The bank reiterated plans to sell $1 billion in ``non-core'' businesses.

The company added 57 branches in one of the strongest housing markets in the U.S. with its $1.1 billion purchase of Charlotte, North Carolina-based First Charter Corp. last month. In May, it bought 9 branches in the Atlanta area from First Horizon National Corp.

Results included a second-quarter charge of $13 million, or 2 cents a share, on acquisition-related expenses.

To contact the reporter on this story: Andrew Frye in New York at afrye@bloomberg.net.

Last Updated: July 22, 2008 16:15 EDT