• Second-quarter net income to common shareholders of $594 million, or 66 cents a share
  • Earnings beat the consensus EPS estimate of 42 cents
  • Excluding Vantiv gain, second-quarter EPS was 49 cents
  • Mortgage revenue up sequentially and year-over-year
  • Average commercial and industrial loans grow 3% sequentially, 15% year-over-year

Uptated with midday market action, Fifth Third's lower pre-provision earnings outlook and comment from Jefferies analyst Ken Usdin.



) --

Fifth Third Bancorp

(FITB) - Get Report

on Thursday bucked the industry trend and reported sequential and year-over-year growth in mortgage banking net revenue.

The Cincinnati-based regional lender reported second-quarter net income attributable to common shareholders of $594 million, or 66 cents a share, increasing from $413 million, or 46 cents a share in the first quarter, and $376 million, or 40 cents a share, during the second quarter of 2012.

The second-quarter results included an after-tax benefit of roughly $157 million, or 17 cents a share, on the valuation of the company's warrant holds in



, Fifth Third's former payment processing subsidiary, which was spun off in 2009. After-tax gains on the Vantiv holdings were $22 million or 2 cents a share in the first quarter, and $36 million, or 4 cents a share, during the second quarter of 2012.

Excluding the Vantiv gain, Fifth Third's second-quarter operating earnings of 49 cents soundly beat the consensus estimate of 42 cents, among analysts polled by

Thomson Reuters


But Fifth Third's shares were down 1.4% in midday trading on an other wise strong day for bank stocks, possibly reflecting investor disappointment with a reduced pre-provision net revenue outlook for 2013.

The provision for credit losses is the amount added to loan loss reserves each quarter. Since this item directly affects pre-tax earnings, banks and analysts often focus on pre-provision net revenue as a better indicator of operating performance, especially when credit quality is improving and provisions are declining.

In its outlook for all of 2013, Fifth Third said it expected pre-provision net revenue to be "consistent with 2012," when the company had previously said pre-provision net revenue would show "moderate growth."

Fifth Third reported second-quarter mortgage banking net revenue of $233 million, increasing from $220 million the previous quarter and $183 million a year earlier, which is an impressive result, considering the overall slowdown in U.S. mortgage lending activity and the lower gains on the sale of new loans, as long-term interest rates rise. The company said its second-quarter mortgage loan originations hit a record $7.5 billion and that it gained $150 million on mortgage sales during the quarter.

Second-quarter tax-adjusted net interest income was $885 million, declining from $893 million in the first quarter and $899 million in the second quarter of 2012. Fifth Third said the net interest income decline reflected "loan repricing and maturities of interest rate floors, partially offset by net loan growth and the benefit of higher yields on investment securities."

The second-quarter net interest margin narrowed to 3.33% from 3.42% the previous quarter and 3.56% a year earlier.

Average loans held in the bank's portfolio were up 1% sequentially and 5% year-over-year to $86.7 billion. Fifth Third continued its strong commercial and industrial loan growth, with loans of this category averaging $37.6 billion in the second quarter, rising 3% from the previous quarter and 15% from a year earlier.

Second-quarter noninterest income totaled $1.060 billion, increasing from $743 million in the first quarter and $678 million during the second quarter of 2012. In addition to gains on the Vantiv holdings of $242 million before tax, and the increase in mortgage revenue, Fifth Third reported a 4% increase (from the first quarter and year-over-year) in deposit account service charges to $136 million, while corporate banking revenue was up 7% from the first quarter and 4% year-over-year to $106 million.

"Nearly all fee income categories increased quarter-over-quarter," Fifth Third CEO Kevin Kabat said in the bank's earnings press release, adding "All major fee categories showed mid-single digit growth year-over-year."

Noninterest expense totaled $1.017 during the second quarter, increasing from $978 million in the first quarter and $937 million during the second quarter of 2012, "largely driven by

an increase in litigation reserves," according to the company. Excluding $33 million in charges to increase litigation reserves and other smaller items, the company said "noninterest expense of $986 million increased $8 million, or 1 percent, compared with the first quarter of 2013 and increased $32 million, or 3 percent, compared with the second quarter of 2012."

Fifth Third's second-quarter return on average assets -- excluding the Vantiv gain -- was 1.30% and its return on average tangible common equity was 14.1%.

Jefferies analyst Ken Usdin rates Fifth Third a "buy," with a $21 price target, and in a note to clients on Thursday wrote "Lower fees look to be the primary

factor in the reduced outlook, as the company is now guiding for 'consistent fees' vs. 'low single-digit growth' previously. "

Usdin added that "Core expenses looked fine, with salaries, occupancy, and technology all pretty tight."

Fifth Third's stock closed at $18.99 Wednesday, returning 27% this year, following a 23% return during 2012. The shares trade for 1.3 times their reported June 30 tangible book value of $12.71, and for 10.9 times the consensus 2014 EPS estimate of $1.74. The consensus 2013 EPS estimate is $1.71.

Based on a quarterly payout of 12 cents, the shares have a dividend yield of 2.53%.

Fifth Third repurchased $539 million in common shares during the second quarter, lowering its average share count to roughly 851.5 million during the second quarter. The average share count was down 3% during the quarter and 7% year-over-year.

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-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.