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Fifth Third Earnings Drop on Mortgage Putbacks

  • Third-quarter EPS of 38 cents, meeting the consensus estimate.
  • $24 million in mortgage putback charges.
  • $26 in charges related to trust preferred redemptions.
  • $16 million negative valuation adjustment on Vantiv warrant, which was written-up the previous quarter by $56 million.
  • Net interest margin holds at 3.56%.

NEW YORK ( TheStreet) -- Fifth Third Bancorp (FITB - Get Report) reported a decline in third-quarter earnings, as the bottom line was affected by several one-time items, including a $24 million in charges related to mortgage putback demands.

The Cincinnati lender reported third-quarter earnings of available to common shareholders of $354 million, or 38 cents a share, meeting the consensus estimate of analysts polled by Thomson Reuters.

Earnings declined from $376 million, or 40 cents a share, during the second quarter, and $381 million, or 40 cents a share, during the third quarter of 2011.

In addition to the mortgage putback charge, the sequential earnings decline reflected $26 million in charges related to the redemption of trust preferred shares, which was an industry trend for regional banks because the Federal Reserves proposed rules to implement the Basel III capital requirements will exclude most trust preferred shares from regulatory Tier 1 capital. This "capital treatment event" enabled banks to redeem trust preferred shares at favorable terms for a limited period.

The earnings decline from the second quarter also reflected a $16 million negative valuation adjustment on a warrant that Fifth Third holds in Vantiv (VNTV). During the second quarter, Fifth Third had seen a $56 million pre-tax gain from a positive adjustment in valuation for the warrant.

Fifth Third reported third-quarter net interest income of $907 million, increasing from $899 million the previous quarter, and $902 million, a year earlier. The company's net interest margin net interest margin (NIM) -- the difference between the average yield on loans and investments and the average cost for deposits and borrowings -- was 3.56%, which was the same level as in the second quarter, while narrowing from 3.65% a year earlier.

Most banks are facing pressure on their net interest margins, with the Federal Reserve keeping its target federal funds rate in a range of zero to 0.25% since the end of 2008, while the central bank in September significantly increased its purchases of long-term mortgage-backed securities, in an effort to keep long-term rates at historically low levels.

Third-quarter average loans were $82.9 billion, increasing slightly from the second quarter, but 5% year-over-year. Average commercial and industrial loans grew by 1% sequentially and 15% year-over-year, to $33.1 billion. Average residential mortgage loans were up 3% quarter-over-quarter, and 16% year-over-year, to $11.6 billion.

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