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) 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.

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."

Usdin said that the company's fourth-quarter guidance "calls for: 1) $890mm of net interest income (worse than expected), 2) NIM compression, 3) $710mm in fees (better than expected), 4) $970mm-$975mm in expenses (worse than expected), and 5) $150mm in charge-offs (better than expected)." In sum, the guidance calls for fourth-quarter pre-provision earnings of about $617 million, which is ahead of Usdin's estimate of $594 million.

Fifth Third Bancorp's shares returned 21% year-to-date, through Wednesday's close at $15.13.

The shares trade for 1.3 times their reported Sept. 30 tangible book value of $12.12, and for 10.5 times the consensus 2013 EPS estimate of $1.59. Based on a quarterly payout of f10 cents, the shares have a dividend yield of 2.64%.

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Interested in more on Fifth Third Bancorp? See TheStreet Ratings' report card for this stock.


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

>Contact by Email.

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 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.

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