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Fifth Third Earnings Drop on Mortgage Putbacks

Fifth Third's noninterest income totaled $671 million in the third quarter, declining from $678 million the previous quarter, but increasing from $665 million, a year earlier. The third quarter number included the Vantiv warrant write-down and also "$13 million in gains recognized from sale of certain Fifth Third funds."

Mortgage banking revenue grew to $200 million during the third quarter, from $183 million in the second quarter, and $178 million in the third quarter of last year.

The third-quarter bottom line was boosted by a $19 million release of loan loss reserves, "reflecting continued improvement in credit trends." The company's loan loss reserves covered 2.32% of total loans as of Sept. 30, which was a strong level of coverage, when compared to an annualized net charge-off rate of 0.75%.

Fifth Third CEO Kevin Kabat said that the company's "third quarter earnings were highlighted by solid net interest income results and continued strong mortgage banking revenue, contributing to an ROA of 1.23 percent and a return on average common equity of 10.4 percent," and that the bank "had success across our commercial bank and consumer lending businesses, with double-digit growth in corporate banking revenue, up 16 percent year-over-year, and mortgage banking revenue, up 13 percent year-over-year."

Kabat went on to say that the company "entered into a share repurchase agreement for $350 million of common stock," and that "our current capital levels and ability to generate capital are strong, and we expect to continue to return capital to shareholders in a prudent manner, absent any significant changes in the operating environment."

Fifth Third said that the share repurchase agreement "reduced Fifth Third's share count by 21.5 million shares" during the third quarter, "which had an 8 million impact on average share count." The company "expects the settlement of this transaction to occur on or before November 26, 2012."

The company's estimated Basel III Tier 1 common equity ratio was 9.0% as of Sept. 30.

Jefferies analyst Ken Usdin rates Fifth Third a "Buy," with a $16 price target, and said on Thursday after the earnings release that "forward pre-provision [for loan losses] guidance looks good, but sustainability could be in question since positive deltas are in fees (presumably mortgage) and net interest income guidance was disappointing."
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