Updated from 9:12 a.m. EDT.

Fifth Third

(FITB) - Get Report

posted a hefty second-quarter loss due to higher credit costs and a leveraged lease charge, though management expects a profitable third quarter.

The Cincinnati-based bank lost $202 million, or 37 cents per share, last quarter, compared with earnings of $376 million, or 69 cents per share a year earlier. Excluding a one-time charge of 42 cents per share due to a court ruling that affected how its leveraged-lease holdings are taxed, Fifth Third would have posted a profit of 5 cents per share.

On average, the Street had expected the company to break even, according to Thomson Reuters, though those estimates typically exclude special items.

Fifth Third shares were trading up 5.9%, at $14.18 in recent trading.

Fifth Third also posted higher non-performing assets and charge-offs due to "deteriorating credit trends" affecting the industry, Chairman and CEO Kevin Kabat said. Charge-offs more than tripled to $344 million, with accelerations across the board -- from commercial loans and mortgages to automobile and credit-card loans.

Though management is "disappointed" in the overall results, Kabat characterized them as "largely in line with our expectations" that the company outlined in an 8-K filing last month. "Absent unexpected events, we anticipate returning to profitability in the third quarter," he added.

As the real-estate market continues to decline, Fifth Third and its peers have scrambled to boost capital levels. The company issued $1.1 billion in preferred stock, $400 million in trust-preferred securities and $750 million in senior notes last quarter. It also reduced its quarterly dividend to 15 cents per share from 44 cents to save $1.2 billion and plans to sell more than $1 billion worth of non-core businesses.

As a result, Fifth Third posted a Tier-1 capital ratio of 8.51%, within its target of 8% to 9%. Its overall capital ratio was 12.15% and its tangible-equity ratio was 6.37%.

Celent senior analyst Bart Narder called the loss "much less troubling" than

Wachovia's

(WB) - Get Report

, the Charlotte, N.C., bank which earlier in the day reported a major loss of nearly $9 billion, or $4.20 per share. Narder said Fifth Third's loss was more of a "finished situation driven by tax law and is unrelated to the fundamental assets of the bank."

Still, the analyst noted that Fifth Third's credit quality is also declining, particularly in Michigan and Florida.

"It is unclear when this trend will stop," says Narder. He adds that the geographic concentration of bad consumer loans "may be a consolation to the loan work-out specialists, but it is no consolation for shareholders."

While bad loans created a challenging environment for Fifth Third, the company said noninterest income rose 8%, with increases from payment processing, deposits, corporate banking and mortgage banking. Net interest income was flat due to the leveraged-lease charges, though average loans were up 11% and transaction deposits climbed 6%.

While bad loans created a challenging environment for Fifth Third, the company said noninterest income rose 8%, with increases from payment processing, deposits, corporate banking and mortgage banking. Net interest income was flat due to the leveraged-lease charges, though average loans were up 11% and transaction deposits climbed 6%.