Fifth Third Continues Strong Commercial Loan Growth (Update 1)

  • First-quarter net income to common shareholders of $413 million, or 46 cents a share.
  • Earnings beat the consensus EPS estimate of 39 cents.
  • Excluding special items, first-quarter EPS drops slightly to 44 cents.
  • Average commercial and industrial loans grow 6% sequentially.
  • Mortgage banking revenue drops 15% from Q4.
  • Expenses drop 16% from Q4, when the company paid $87 million, or 9 cents a share after tax, to repay FHLB debt.
  • Net interest margin down to 3.42% in Q1, from 3.49% the previous quarter and 3.56% a year earlier.

Updated from 7:41 a.m. ET with afternoon market action and comment from Jefferies analyst Ken Usdin.

NEW YORK ( TheStreet) -- Fifth Third Bancorp ( FITB) on Thursday reported continued strong growth of coveted commercial and industrial loans, with average balances in the first quarter increasing 6% sequentially and 16% year over year.

The Cincinnati-based regional lender reported first-quarter net income attributable to common shareholders of $413 million, or 46 cents a share, compared to $390 million, or 43 cents a share, in the fourth quarter, and $421 million, or 45 cents a share, in the first quarter of 2012.

The first-quarter results included a benefit of roughly $22 million, or 2 cents a share after taxes, on the valuation of the company's warrant holds in Vantiv ( VNTV), Fifth Third's former payment processing subsidiary, which was spun off in 2009.

The results for the first quarter of 2012 had been boosted by positive adjustments of roughly $90 million, or 10 cents a share after taxes, on Vantiv shares and warrants.

Excluding the special items, Fifth Third said its first-quarter earnings came to 44 cents a share, increasing 22% from a year earlier.

First-quarter tax-adjusted net interest income was $893 million, declining from $903 million in the fourth quarter and $907 million in the first quarter of 2012. Fifth Third said the sequential decline in net interest income mainly reflected the lower number of days in the first quarter. The year-over-year decline came from a lower net interest margin, which is the spread between the average yield on loans and investments and the average cost for deposits and borrowings.

The first-quarter net interest margin was 3.42%, narrowing from 3.49% the previous quarter and 3.56% a year earlier.

First-quarter noninterest income totaled $743 million, declining from $880 million in the fourth quarter, and from $769 million in the first quarter of 2012. The declines mainly reflected a $157 gain on the sale of Vantiv shares in the fourth quarter, and $115 million in gains from Vantiv's initial public offering in the first quarter of 2012.

Mortgage banking net revenue totaled $220 million in the first quarter, declining from $258 million in the fourth quarter, but increasing from $204 million in the first quarter of 2012. Mortgage loan originations in the first quarter were a record $7.4 billion, increasing from $7 billion the previous quarter and $6.4 billion a year earlier. Mortgage income declined because of a decline in gains on the sale of newly originated loans in the secondary market.

First-quarter gains on the sale of mortgage loans totaled $169 million, declining from $239 million in the fourth quarter, and $174 million in the first quarter of 2012.

Noninterest expense totaled $978 million in the first quarter, declining from $1.163 billion in the fourth quarter, but increasing slightly from $973 million in the first quarter of 2013. The fourth-quarter figure included $134 million in pretax expenses from the prepayment of $1.0 billion in FHLB loans, along with $26 million in mortgage repurchase expenses.

Excluding these and other special items, Fifth Third said that it noninterest expenses declined 1% from the fourth quarter.

The major first-quarter highlight for Fifth Third was its strong loan growth. Average total portfolio loans grew by 2% during the quarter and 4% year over year, to $85.9 billion. Average non-real estate commercial and industrial loans grew 6% quarter-over-quarter and 16% year-over-year, to $36.4 billion. Commercial mortgage and construction loan balances continued to decline, as planned.

Fifth Third's first-quarter return on average assets was 1.41%, increasing from 1.33% in the fourth quarter, but declining slightly from 1.49% in the first quarter of 2012. The first-quarter return on average tangible common equity was 12.5%, increasing from 11.5% the previous quarter, but declining from 13.1% a year earlier.

Jefferies analyst Ken Usdin said in a note to clients after the earnings announcement that "overall, we believe the quarter looks good as FITB is one of the only banks in our universe that actually beat our net interest income forecast."

Usdin was also pleased to see Fifth Third adjust its 2013 guidance for a slightly better improvement in credit quality, with net loan charge-offs expected to decline between $200 million and $225 million. Fifth Third's original 2013 outlook called for full-year neat charge-offs to decline by $200 million.

When discussing the mortgage results, Usdin said "fees were better-than-expected as mortgage banking came in about $20mm higher than our forecast. Most of the positive surprise is a result of better hedging this quarter."

The analyst rates Fifth Third a "buy," with a $19 price target.

Investors were pleased, sending Fifth Third's shares up 1.4% in afternoon trading, to $16.01.

Fifth Third's stock closed at $15.80 Wednesday, returning 5% this year, following a 23% return during 2012. The shares trade for 1.3 times their reported March 31 tangible book value of $12.62, and for 9.4 times the consensus 2014 EPS estimate of $1.69. The consensus 2013 EPS estimate is $1.64.

Following the completion of the Federal Reserve's annual stress tests, Fifth Third in March raised its quarterly dividend to 11 cents a share from 10 cents, for a yield of 2.78%, based on Thursday's closing share price.

Fifth Third's board of directors in March authorized a new 100 million share repurchase program.

FITB Chart FITB data by YCharts

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.

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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.

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