Fifth Third Bancorp (FITB) 2005 Q3 法說會逐字稿

Good Morning, I will be your conference operator. At this time I would like to welcome everyone to the third quarter 2005 earnings conference call. [OPERATOR INSTRUCTIONS] I will now turn to the call over to Brad Adams, Investor Relations Officer of Fifth Third Bancorp. Sir, you may begin.

Good morning. With me here today are; George Schaefer as well as Neal Arnold and Kevin Kabat. I'd like to remind everyone before we get started, that this call contains certain forward-looking statements about Fifth Third Bancorp, pertaining to recently completed acquisitions, the financial condition results of operations, plans and objectives of the Bancorp. These statements involve certain risks and uncertainties. There are a number of factors that could cause results to differ materially from historical performance and these statements. Fifth Third undertakes no obligation to updates these statements after the date of the this call. At this time, I'd like to turn the call over to George Schaefer, President and CEO of Fifth Third.

Thanks Brad. Good morning, everyone, and thanks for taking the time to listen in. I'll have a few comments and then Neal Arnold and Kevin Kabat will review some of the other trends before we open it up for your questions. Regarding trends this quarter. First of all, loan growth trends continued to remain very strong and we expect low double-digit growth rates to continue in the near turn. Both the consumer and the commercial groups produced very good loan results this quarter. Commercial loans increased 11% annualized from last quarter. C&I loans are now up a very strong 21% over the same quarter last year. Consumer loans increased by 12% on an annualized basis from last quarter.

Next, deposit growth is best characterized as disappointing with very good growth in some captions, offset by more modest results in others. Compared to last year average transaction deposits increased by 8%, with core deposits up 12%. Compared to the second quarter, transaction deposit growth was essentially unchanged due to continued high balance account attrition. Core deposits increased by just 3% on an annualized basis. We have taken steps, however, to improve these results. Three net interest income declined by $13 million on a sequential basis due to a 13 basis point contraction in the net interest margin. The decline in margin was primarily associated with increases in deposit pricing affected during the quarter in order to drive growth in the future.

Our primary challenge remains funding loan growth with core deposit growth. We remain committed to avoiding incremental leverage. I'll let Neal talk about the specific moving parts and the things we're working on to improve performance here.

Next, service income trends were mixed with continued strength in our processing business and commercial banking subcategories. Deposit revenues improved sequentially on a rebound and overdraft related revenues and mortgage banking posted solid results. Our investment advisor business continues to be affected by poor performance in brokerage related revenues. Within other noninterest categories, trends were fairly similar to what we saw last quarter. With decreases in consumer loan and lease fees and institutional bond sales representing the majority of the $11 million decrease.

Expense growth was better than we originally anticipated at $4 million more more than the second quarter. Our expense focus will remain diligent given our own all revenue trends with growth moderating in most captions. You can see the movement in the major captions in the release. The $12 million increase in other noninterest expense was primarily due to the increased marketing expense in support of our most recent deposit campaign, our bank card volume-related expenses and finally IT expenses.

Next, credit quality trends remain very strong with net charge-offs at $64 million or 38 basis points of loans and leases. The provision for loans and leases totaled $69 million. We'll continue to be - - we are continuing to be very pleased with credit performance overall. But we are mindful that this type of credit performance can't continue indefinitely.

A couple of additional comments before I turn things over. First, net interest income and deposit trends are below our expectations, and we're working very hard to improve the results. Deposit growth continues to be a very high priority. Some of the challenges are certainly related to a difficult rate environment, but we believe our actions this quarter will ensure that our rates and product offerings are extremely competitive in all of our markets. Maintaining the current level of loan growth and driving a better funding solution continues to be our primary objective. Retail banking is a competitive business and we believe that our motto remains superior to our competition. Our team is ready to meet that challenge.

While deposit growth remains below targeted levels, we have continued to use strong loan growth to improve the earning asset mix. Available for-sale securities declined by over $900 million on average for the quarter and 2.1 billion on a period-end basis in the third quarter. This reduction funded the shortfall in deposits and left the tangible capital ratio essentially unchanged at 6.84%. Despite an incremental negative $182 million mark-to-market change in other comprehensive income.

Overall, I'd like to say that we're enthused with some of the trajectories we're seeing from the significant investments that we've been making over the last year and a half. New banking centers continue to produce solid results and the new salespeople are making progress towards achieving Fifth Third levels of production. This year certainly has not been easy and the environment remains difficult but I remain confident that we will produce better results in 2006. With that, I'd like to turn things over to Neal to discuss some of the details. Neal.

Thank you, George. I'm going to spend a moment and talk about the balance sheet and some of the noninterest income trends and then expenses and then more broadly on the fee income categories. On the balance sheet, first of all on the asset side, as George said, consumer loan growth was very good this quarter. Commercial loan growth continues to produce at low double digit kind of percentage growth rates. We're pleased with the level of loan growth that we're seeing and we expect those to continue in the near term.

As George mentioned, the coupons on the loan growth I would tell you are the best we've seen in three years. And spreads continue to be stable. And given the upward trend in interest rates, it's continued to see good longer term trends here. On the earning asset growth somewhat more muted due to the reductions in the securities portfolio that George mentioned of 2.1 billion on an end-of-period basis. The portfolio itself has decreased by almost $9 billion from the third quarter of last year despite the acquisition of First National in Florida. So, we continue to try to be opportunistic to reduce the size of that. Total growth of 11%, annualized. Earning asset growth at 4% annualized. And core deposit growth of 3% annualized. So I think in general, a better mix on the balance sheet.

Net interest income declined by 13 million last quarter, due to 13 basis points of margin contraction, as George said. Really driven by some of the deposit pricing initiatives that we took in the quarter as well as continuing to work on the mix. We certainly saw mix shifts going modestly against us and Kevin will talk about that. The impact of the deposit pricing increases can be seen in the compression in our net interest rate spread. And as I said, Kevin will chat about that. Our key variable in the fourth quarter in the first half of 2006 remains attracting low cost deposits given the shape of the curve and given our overall loan growth on the balance sheet.

Based on what we see going on at this point, we think into the first quarter we expect the margin to remain reasonably stable with no more than four to five basis points of continuing contraction. Or potentially stable in the best case scenario. As George mentioned, the securities portfolio has meaningfully downsized both from sales and from cash flows during the quarter. Again, we'll continue to watch that closely on the basis of our deposit growth and our loan growth trends and we'll continue to move that lower.

On the expense side, noninterest expense increased by only $4 million in the linked quarter. We saw better expense control in a number of categories but at the same time we're continuing to invest in our banking centers and people in our newer markets. And continue to see a number of productivity improvement initiatives to help offset some of those investments. We have said that to folks that we expect to deliver positive operating leverage going into 2006.

Now, let me turn for a moment on some of the business lines and some of the activity within those business lines predominantly around the noninterest income areas. First of all, commercial had a very solid quarter. Loan growth was up 11% on an annualized basis. 13% annualized for straight C&I growth. Deposit revenues were essentially unchanged despite rising earnings credit rates. And commercial banking income was up 16% over last year. So, I think we're seeing some of the benefit of an expanded sales force across all of our affiliate markets. Fifth Third processing solutions continued to have very strong revenues. We've seen there with revenue up 23% up over last year and all business segments within FTPS showing very strong growth, both EFT, merchant and the card side.

On the mortgage banking side, as George mentioned, stable versus the prior quarter. But if you look at mortgage banking originations, we had about $3 billion in originations, which is up about 71% versus a year ago. And given the overall slower industrial origination trends, we're pleased with the activity here. We did have a number of movements in valuation reserves both amortization in the quarter. And Brad will be happy to go through any of those that you might want. On the investment advisor side, I'd say this continues to be an area that we don't see the growth rates that we'd like to see.

As George said, it's predominantly driven by retail brokerage activity. But I would tell you we continue to look to improve our retail brokerage performance as well as the institution and money management revenues. So in total, fee revenues showed modestly better trends of up 8% versus the same quarter last year. And the heartening thing is we're seeing a little more broad based strength in deposit and commercial and other categories than just FTPS. So feel better with the fee income trends. With that, I'll turn it over to Kevin to talk about deposits in retail bank.

Thank you, Neal. Let me talk about and give you a little bit more information about what we've done in terms of deposits. Deposits continues to be our key focus. And in the third quarter, as mentioned, we have increased deposit pricing dramatically. What we've done is we feel we've positioned ourselves very well in each of our markets. And we intend to continue to be aggressive with our increase with increased Fed rates. While our promotional rates are not the highest, they are competitive with our competition and our everyday great rates are extremely competitive. We believe they are better value for our long-term relationships.

We're also keenly aware that pricing alone is not the answer. So, we've been focused also on our production retention. Our production in number of accounts continues to accelerate and we're doing a better job on the retention side. Through the first nine months of the year, our consumer transaction account openings are up 10% over last year and our net new account production is up 28%.

We are doing this in a number of different ways. I'm going to mention a couple specific examples. First and foremost, we are selling now more multiple or bundled accounts, savings and a DDA. All of our promotional rates are tied to have having a DDA. Secondly, we are enhancing our product offering and services. For example, last week we announced our free comprehensive identity theft solution for all multiple product product checking account customers. And we believe customers recognize the risks associated with identity theft and will value this level of protection and our offer. And we think this will be one of the best offers in the market today.

Thirdly, we continue to selectively expand our distribution system. Incorporating our learnings from past results in order to accelerate our returns. Our de novo strategy and our banking centers in general are performing very well with good loan and deposit trends as they get up and running. We have and continue to set aggressive targets for return and recognize it takes time for our banking centers to mature.

However, on average, we believe $1 million in annual net income on a 1.5 million investment is a good long-term value for our shareholders. We do know that faster is better though. In general, I believe there remains a great deal of untapped leverage from these investments, but we're happy with their production thus far. Again, while we're not satisfied with the results, we are encouraged and believe at this point we're focused on the things that will continue to accelerate our deposit growth.

Let me make a couple of additional comments then in terms of retail banking in general. And some of the highlights in the quarter. Our loan generation continues to be strong. Home equity has increased by 13% annualized. Total consumer growth, excluding residential mortgage, increased 20% annually. And year-over-year, excluding acquisitions, consumer loans increased 12%. Retail deposit revenues continue to show progress and have increased 28% annualized from last quarter. That reflects directly on the DDA production effort that I just discussed.

Business banking continues to be an area focus and opportunity for us as well. Small business loans increased 18% and small business demand deposits have increased 23% year-to-date. In our affiliate world, I would tell you that our affiliate model is alive and well. We've made significant improvements in our management and feel good about our teams in the field. Our newer and bigger markets have shown good progress. And while this doesn't happen over night, we're seeing some encouraging signs. For example, nine affiliates had at least double digit loan growth. And our best performers have been Florida at 27% growth, Chicago at 18%, Cleveland at 18% and Nashville, also at 18%. And as we've talked about, we do have struggles on the deposit side. The good news, however, is that all of our affiliates are positive growers. With our best performers being at Lexington at 30%, Detroit at 22%, Indianapolis at 14% and Nashville at 13%.

We often get questions about our progress in Florida specifically and I wanted to make a couple comments there. Through September, Florida has grown as I mentioned, loans of 27%, demand deposits are up 37%, total core deposits are up 6%, fee income is up 33%, and account openings were up by 16% from second quarter levels in Florida. Overall, we still have a lot of work to do on the deposit side, both in affiliates and retail specifically, but I'm enthusiastic about some of the trends that we're seeing today compared to where we were earlier this year. And with that, I would like to open it up for questions.

[OPERATOR INSTRUCTIONS] Your first question is from the line of Gary Townsend with Friedman Billings Ramsey.

Gentlemen, how are you?

Very good, good morning, Gary.

Question on deposits. As I understood your comments, you've been losing large balances or large customer balances, but you seem to be doing relatively well with regard to accumulation of other new customers with smaller balances. I'd just like to have more color on that dynamic if you could provide it.

Sure, Gary. What I would would say is broadly with the industry as well as with us, we've seen depositors really migrating back to time deposits as short rates have risen over the last 12 months. We're also seeing some migration from our interest checking product to our savings products. And that's primarily because of our strategy of putting people in the right product and getting our pricing between products done well and right. But we're also seeing balances in general migrate down in accounts over $100,000. And it's not related, as you mentioned, necessarily to account closures but rather purchases and other investments. So ultimately, we think the best way to offset these trends is to open more accounts, close less. And we're working on doing both of those as I mentioned. And we feel like our account production is the best attack against that.

And with respect to corporate customers and trends on that side of the business?

We have not seen, again with the ECR rates, we really are seeing good DDA production on our side. That's what we're focused on. Similarly in terms of the consumer side.

And in Florida, it sounds as though you have about 6% growth. Do you have some comp store numbers? Or perhaps it's too early for that. But can you talk about just some of the dynamics in that market? It seems as though you've found it very competitive, shall we say?

We like the Florida market, I would say, Gary. I would tell you that we have seen a much better mix in the core deposits, which we really like from that standpoint. And again, the focus has really been on demand and it's growth from that perspective. We think the Florida market and the southeast right now are better priced for us than what we see in the midwest. And we think that that's a real opportunity for us.

Thank you.

You bet.

Your next question comes from the line of Vivek Juneja with J.P. Morgan.

Hi, Neal. A question for you. The tax rate was lower than you've been running at. Can you talk a little bit about what's causing that and what's the normalized tax rate?

The last two quarters I would tell you the tax rate's been a little lower. That's been a result of some resolution of tax issues in prior years as well as statue of limitation expiration on a couple items. We expect that to more normalize in the 31% area I think in the future quarters. But we don't mind getting some of our money back.

Right, right, absolutely. And 90 day past due loans, Kevin, saw a little bit of a pickup this quarter. Can you give us some color on which categories?

Hi, Vivek, This is Brad. That's a reclassification on - - that's strictly in the residential mortgage sector. It's just a reclass between 90 days past due and nonaccrual loans conforming with the more industry standard practice for that item.

Okay. So, at what point are they going to MPL for residential mortgage?

90 days.

Did you move something out of MPL into 90 days or did you - -?

It lasts between 90 days and MPL.

Okay. So, just so that I understand, MPL's and residential mortgage loans, those - - you're no longer - - you're putting them first into the 90 days past due and then they go into MPL afterwards?

Vivek I'm - - We'll look at those numbers and come back to you in a couple minutes here. We will answer that question. It looks like - - the standard practice for us is at 90 days past due they go on nonaccruals.

Okay. Thanks.

Your next question comes from the line of Ed Najarian with Merrill Lynch.

Good morning, guys.

Good morning, Ed.

A couple of quick questions here. First a real quick one for Neal. When you talk about the potential for four to five basis points of margin pressure, was that in each of the next two quarters or was that sort of in total over the next two quarters? That's the first question. And second if you could talk a little about your de novo expansion plan going forward? Just sort of the pace of de novo that we can expect for the next couple quarters or maybe for the '06 full year. And along with that, maybe a little more color as to why you think you'll be able to get positive operating leverage in '06. Just - - is there more broad-based efficiency enhancement initiatives being launched, are there headcount reductions, anything of that nature?

That was how many questions now?

Well, I guess two but broadly defined.

I'm rusty. I don't know if I can remember that many. Let me take a shot at it. On the margin side we said our expectation is no more than four to five basis points in total over the next two quarters of continued compression and that's with the Fed increases in. As Kevin highlighted, 100% of our ability to accomplish that is based on how well we do on core deposit gathering. We think the fourth and first quarter are naturally better deposit gathering quarters than the third quarter was in general. Plus we took a lot of pricing action to try to improve those trends given our overall loan growth.

Okay. So, that's a cumulative four to five over two quarters?

Correct. The next was around the de novo strategy, I recall.

Correct.

And I would say - - I will certainly let Kevin comment. But I I would say in general, we've had a pretty big platform of branches in the queue. We do a fair amount of study by market. And then it's really a function of individual affiliate presidents picking how many they want to do as they look at their budgets. And I think we've had anywhere from 70 to a 100 in the queue. Obviously some of them we've done over the last 18 months are now past break even and they're starting to contribute positively. So, we'll see some better in-total trends. But I'll let Kevin if you want to - -.

I would say just to be specific, in the fourth quarter we've got queued up between 10 and 15 more de novo branches. And then our expectation to Neal's point earlier is, we'll continue with the de novo expansion in '06 about on a comparable basis.

Yes.

And then I'd say your last question was around positive operating leverage. I guess a couple things, Ed. If you stop the margin from going down and we have the kind of loan and deposit momentum that you see there, the fact that it's not going south; helps your revenue line. I would tell you more breadth in our revenue growth in other fee categories than FTPS and commercial, and we're seeing that on the deposits fee revenue. We certainly are optimistic on mortgage and I'd say on the IA side. So, I think that's where our confidence comes from. On the expense side, I think we've looked at a lot of the categories, and we're trying to be very careful but also balance investment with cost control.

I think we're also, this is George. I think we're also looking for a lot better performance out of our newer areas. Tennessee, their performance should improve pretty significantly, as is Florida. The production numbers in Florida, as Kevin mentioned, continue to move up. And if you look in the supplement, you'll see that right now we do have a 101 more offices than we had a year ago. Now, 70 or 71of those are the result of Florida. The other 30 are de novo offices. But we've also been consolidating upgrading, putting two into one in a lot of areas where the demographics have changed. So, we've made pretty significant upgrades there in terms of movements. And at the same time, where we have lower performing areas we've addressed some of those also.

But I would say, we're absolutely focused on doing a better job on the expense side in total. We recognize its challenging operating environment, and we're trying to be careful about those categories.

Okay, thank you.

Your next question comes from the line of Dave George with AG Edwards.

Good morning, guys. Thanks for taking my question. Neal, as it relates to the balance sheet, I know your margin commentary is helpful. It looks like the securities portfolio ran down to the tune about 800 million.

On average.

Yes, on Q3 and period end is a little bit more. So, can you talk about how much more shrinkage we should expect to see there over the next couple of quarters?

I would tell you that's a somewhat a moving target. It's a function of the loan growth and the deposit growth trends that we're seeing from the other areas. So if deposit growth is better, we obviously probably won't see as much. But I would tell you cash flow coming out of the portfolio averages somewhere between 1 billion to 1.5 billion. So, to the extent that we'd do anything more dramatic than that, I would say the general trend is for the portfolio to continue to go down given overall low margin that we have. That's the best thing that we can do is move those assets off the balance sheet.

Okay, thanks, a lot. Appreciate it.

Your next question comes from the line of Kevin St. Pierre with Bernstein

I joined the call a little bit late so I apologize if you've covered this. I was wondering if you could talk a little bit about the process and prospects for identifying a new CFO?

We have begun the search, we've engaged Russell Reynolds, folks that we know very well. And so we're actively in the marketplace right now. And that's really the extent of the update I could give you right now. Are you looking for a job?

I'm quite happy right now.

Okay Kevin.

Just separately in terms of M&A appetite. Maybe you could update us on that? Just comments on, some have - - with the decline in the stock price and the valuation at Fifth Third, some have said what would have been unthinkable several years ago, in that Fifth Third could potentially be a target. Maybe you can comment on both sides of the M&A story?

This is George. On the acquisition side, as you know acquisitions are something that we really never plan for because they're so unpredictable. Right now we're focused on organic expansion. We like the potential returns from these organic expansion efforts and expect to continue, like we said, along these lines with de novo expansion. There are few deals that we would be interested in at this point but these things are always difficult to predict. If an opportunity came along that offered a very strong return on investment and added a presence in a new metropolitan market, certainly we would be interested there. So, that's what we're looking at on the acquisition front. In terms of the other side of the equation, as you know we never really comment on some of the rumors that are out there in the market. But we would always take a realistic view of what's going on.

Thanks very much.

Your next question comes from the line of Michael Holton with T. Rowe Price.

I want to take another shot at the expense question I think Ed asked earlier. It sounded like you guys were responding to his question talking more about revenues. And revenues may be strengthening as opposed to actions you're taking on the expense front just in case the environment remains tougher. So, could you talk maybe about what you're doing different on the expense control front this quarter and what your plans are for next quarter going into '06 than what you do normally?

I think we're pretty clear. If you look at the individual captions on the expense side, Michael, you'll see that we are certainly very cost conscious. Some of those investments we started multiple quarters ago, whether that's on the IT side or whether that's on the branch build side. So those - - you don't turn that one on a dime. But I would say across-the-board we're being more cautious around the expense side. I think that's true in all corporate America. But I would say we don't have any broad-based headcount initiatives. What we're really focusing on is making sure we're careful in each of the businesses and that we're improving it. Longer term, the best way to improve operating leverage us from the revenue side and not the expense side. And we certainly recognize that as do our investors I think.

And the other part.

Specifically, maybe if I can just hop in. Some of the things that we're working hard on on the expense side are things like imaging. We've put a lot of effort into the image process where we convert paper into electronics. We are doing a lot of automation in our 1100 banking centers. We've improved our loan processing and on-boarding and new accounts process is out there. We have a lot of lean Six Sigma going on in the Company right now. And we're looking at significant call center enhancements that we think will help us out significantly on that side. So, there's a lot of operation and IT work going on to improve our processes internally. Now they're going to help both on the expense side plus on the account retention side and on the customer satisfaction side.

And the second part of that is; you put in the release that you expect growth and noninterest expense into the future quarters to stabilize around current levels. What does had a mean? Does that mean that you don't expect expenses to go up from a Q3 levels? You think the year-over-year growth rates will be similar, what exactly does that mean?

I think we're saying reasonable flat expenses. I wouldn't hold that to individual captions because there are captions that have still gone up, but I think in general what we've said that is those expense levels are the kind of expense levels you should expect over the next couple quarters.

Okay. So, starting in Q4?

Yes.

Okay.

Your next question comes from the line of Carol [Burger] with Crest Investment.

Trying to understand your margin guidance a little bit more. Could you tell us when the repricing happened in the quarter? And also, tell us a little bit about what your assumptions are for the shape of the yield curve, rates, et cetera, embedded in that four or five basis points?

Carol, I'll take a shot at it. Some of you don't trust our credibility on margin guidance. A couple of things I would say is that we, given what's gone on in wholesale funding rates and driven by the Fed increases, our priority was to get better at funding our core balance sheet growth. And if you look at it, our balance sheet has grown anywhere between $1 billion and $2 billion a quarter given our loan growth. And so I would tell you that the pricing that we did on the deposit side was aimed at driving volume to fund core loan growth with core deposits. And that's really been our focus. The repricing happened about mid to early July, so we had probably half of it in the quarter. And I would say, certainly customers will continue to pick higher interest rate options. That's what they're doing.

But what we've tried to do and, I think Kevin highlight it had on the retail side, we are trying to drive our account opening breadth of effort across all of our branches. I'll tell we're doing the same thing on the commercial side. We're measuring every commercial officer to make sure that we're opening more accounts per person on that side. We know we're in a headwind on that. But I would say our guidance as it relates to margin and we've run lot of testing around it. Sometimes it's hard to know whether or not you miss because of forecast error, execution, but I'd tell we're keenly focused on both of those.

Thank you.

Your next question comes from the line of Jed Gore with Sunova Capital.

Thank you, for taking my questions. Actually Carol just asked my question and Neal you just answered it, thank you.

Okay, you do have follow question from the line of Vivek Juneja with J.P. Morgan.

You changed your name.

Neal, just a follow-up on the margin question. When up talk about the four to five basis point cumulative, I understand the securities portfolio is a moving target. But when you talk about that guidance, what are you assuming in that? Your securities deals are coming down; so obviously you're factoring something in your base case when you think about it.

As it relates to the securities portfolio?

Yes.

We're modeling as it relates to the cash flows coming out. But I would tell you that we continue to look at all options. And it's a 100% focused on if our deposit growth does not cover our loan growth, we'll continue to move the securities portfolio down. And we've run all those scenarios in there.

Hi Vivek, this is Brad again. In reference to your earlier question about the increase in over 90, that was probably broad-based across captions there. There wasn't a real outlier. The only significant relates to a regulatory change as it relates to classification of Jennie Mae loans. I think that's an industry issue. It probably made up about a third of the increase that we saw this quarter.

This is probably question for Kevin. On the commercial loan side, can you give us some color as to any markets or industries or subsectors that you are seeing faster growth in or where you're seeing since you're growing very well strongly both paradigm as well as average?

The comment I would make to you is; we are seeing very good loan growth across all of our markets. And I wouldn't say that it's specific in any given geography but broadly based across all geographies. And we're also seeing good growth in terms of a number of industry segments as well. So it's very, very broadly based.

The other issue is our line utilization is up too. I believe it's 46%, which is probably much higher than we've seen in the last couple of years. And that's across the board. So the line utilization is up a bit higher also, which is driving a lot of that.

And Kevin, on the commercial side, Delta, did you take any - - is there any reclassifications of nonaccrual for that? Have you taken any write-offs on that? What is your exposure on that on?

Yes, let me do that. This is George. We've experienced some exposure in the regional jets that we're currently evaluating. And expect that the facts relative to our position there will become clearer in the months ahead. In general, if a large number of regional jets are taken out of service, it will obviously affect the value of our planes. But at this point it's too early for us to predict the actual loss on our exposure. But the total current exposure to the Delta Comair bankruptcy is less than 25 million and it's all on the Comair side.

Thanks, George.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Betsy Graseck with Morgan Stanley.

Thanks very much. Just a question on the deposit growth. The numbers that you were giving earlier in the call, they related to accounts and they were Q on Q, is that correct?

That's correct.

Could you give us a sense of the account growth since you started repricing? And if you could also speak to balances as well? How you've been seeing the market react to the pricing that you did?

I would tell you a couple of things. Our account production focuses - - we really have been working on that all year and those were year-over-year numbers so you can see the net effect of that. That isn't all accumulated in a month or two. You can't move the numbers that quickly. I would also tell you that, we are seeing with good production smaller account average balance and the same trends that we've talked about in terms of the high balance IBT trends. So, the good news from our standpoint too is the high balance attrition number is lessening. And so we are seeing improvement there. Again, we're not satisfied with it, but we're seeing improvement.

I think in some of the categories, clearly we're seeing better growth in straight consumer DDA and in savings products. It's really the interest-bearing transaction account where we're seeing pressure on the high balance. And whether that was part money by our customers, driven by rate or singularly by them making decisions now to invest that money we don't always know.

And that's why we get back to the same focus relative to the account production. and that net new number of 28% is a number we focus on a lot around hire.

Okay. So, will you be raising say the advertising and the marketing budget to get the word out into your regions?

Has been.

Yes. That's part of what you saw on the expense.

Okay. Thanks.

Absolutely.

Your next question comes from the line of Richard Manuel with River Source Investments.

Hi, guys. I would ask you to discuss the incremental spreads on new loans. Neal, you commented that you like those spreads more than the ones you've seen I think over the last three years.

Yes.

Could you drill down on that please?

Yes. When we're looking at the portfolio I guess a couple fairly obvious comments. As rates have come up from where they were over the last couple years, the absolute coupons are pretty dramatically higher. That's obviously good news for us. The spreads, and I think we characterized them as stable on the across the board. But I would tell you retail and commercial spreads have been well-behaved in the quarter. I would tell you on the consumer side, we're seeing spreads actually improve a little. Those spreads have always been the tightest of any of the products. If anything else they could stand a little improvement. So I think we'd kind of characterized the spread environment out there as being. When you get the kind of loan growth that we've had, we've tried to be very good at raising rates as quickly as possible and I think we have seen that.

We also are putting a lot more emphasis on our small business banking where the spreads are much bigger in that category. So we've got almost 400 people, loan officers out there working in that segment where we're seeing some pretty good growth and some pretty good spreads. And as we expand our credit card portfolio, that should help our spreads also.

Another question.

Yes.

You mentioned the cash flow on the portfolio.

Yes.

Was that an annual number or was that - -?

No that's a quarter.

That was a quarterly number.

A quarterly number and it - - obviously with mortgage-related products you don't have a maturity specific. But the cash flow has been quite stable in 1 billion to 1.5 billion a quarter.

Great, thank you.

Yes.

Your next question comes from the line of Denis Laplante with KBW.

Thank you, good morning. The interest checking numbers that you've talked about where the high balance accounts have been problematic, can you define specifically what you mean by high balance? Are we talking $50,000 in account balances, are we talking a 100? And then after you define that for us, how much is left of those balances?

We're talking over a 100,000, Dennis. That's really what we look at. How much is left, if we look at and we've stratified that, we've got approximately $5 billion of the $7 to $9 billion portfolio left in IBT that we have today. And again we've been busy talking with and having conversation with all of our customers from that perspective. That's part of the strategy as well that I didn't talk about, but we are calling and talking to our customers proactively.

So 5 billion, now you mentioned of 7 to 9. There's - - on the balance sheet you show interest checking of almost a little over 18 billion.

In that category, I said, from the 5 billion to the over a 100. And there's another, I believe there's another 7, total of 7 in terms of over 50. Those are the numbers.

Of over 50.

Yes.

And what's the difference between the rates on average being paid on those accounts versus the go-to rate?

We've really tried to - -

It varies by market. Yes, it varies by market, Denis so I can't give you a specific in terms of - - but we really condensed those rates. I would tell you in general, those rates exceeded probably a 100 and 125 basis points two quarters, three quarters ago. Today we've condensed those to no greater than I'd say between 40 and 60?

Okay.

Differential in basis points, Denis.

Yes.

Thank you very much.

Sure.

Your next question comes from the line of Joe Steven with Steven Capital.

I think most of my questions have been answered but I wanted to ask one more. Your de novo expansion seems to be going real well for you guys. Can you lay out a little bit of the strategy as far as how many you plan to open over the next two years and then the geography of the next knew openings? Thanks, guys.

Yes. The de novo strategy is is going very well. We continue to look at our growth in de novo from a very aggressive perspective in terms of ROI and our production. Our expectation is that we will continue to invest in those but we're also being smarter in terms of where. And I would tell that you Florida is very exciting for us from a market standpoint. Chicago continues to be a great opportunity for us and is showing the best results from a de novo strategy basis as well. So, those would be the highlights and colors. Nashville and Tennessee is a very attractive market for us as well. So, those are the markets that when we like, and we'll continue to invest in from a de novo standpoint.

We also are continuing to put a few offices over in Pittsburgh. We have got regular expansion there. And then that great midwestern city, St. Louis, we're also starting to open some offices.

Thanks, guys.

your next question comes from the line of Michael Holton with T. Rowe Price.

On the CFO search front, do you have an update as to when you might think you'd have somebody in place, realizing you're going through it now? And also and is Mark still functioning as the CFO or has his duties kind of been parsed out amongst numerous individuals in the financial department?

Our CFO search, we continue very aggressively. Our expectation is that we'll fill it when we have world class talent to fill that with. And we'll do that as soon as we possibly can. I can't give you a specific on that. Those searches are ongoing right now. And I would tell you that while Mark is here, we have divied those responsibilities up and have good team under Mark, really watching over the numbers. As well as the oversite that we continue to give directly in terms of that area, so- -.

All right.

your last question comes from the line of Fred Cummings with Keybanc Capital Markets.

Yes, good morning. Just a couple quick questions. Neal and George, have you guys ruled out another balance sheet restructuring or will that decision be made once you hire new CFO?

Gosh, I don't know if they come with those in a box. I guess I'd say in general, we have tended to look at the cash flow that we're seeing on the loan and the deposit side. We're going to continue to be very diligent around maintaining our balance sheet quality. We want to make sure that the deposit side funds everything. But I'd say if there are opportunities to continue to roll the securities portfolio down, we will do that responsibly.

Okay. Then a second question, Neal. You've gotten a lot of questions about how you plan on managing expenses next year. Can you just kind of quantify how you'd like to manage the spread between revenue and expense growth? Are we talking about a 100 basis point differential, 200? I know more is better. But realistically what should we be looking for?

Well, we're more intent on rebuilding our momentum there. Do we have a specific target? I guess I'd say, Fred, we're mindful that in today's environment we taking revenue for granted. So we've been very cautious, are trying to be very careful on a number of expense categories. And then what we're trying to do is; we think some of the momentum, whether it's in the sales force on the mortgage side, whether it's in the activity we've seen on the deposit fee revenue. And I'd say if margin just stops going down, you're going to have better revenue coming off the balance sheet. So, do I think we're going to be back into double digit revenue growth in the next couple quarters? No, I think we have to build this a step at a time. And I think as the consequence we're very sober on the expense side.

And then one final question for George. George I guess I've read your comments saying that you'd like to double the size of the bank within the next five years. And one, down still believe that Fifth Third can do that? And then two, more importantly, would you think that your profitability levels would be maintained at around - - actually should improve given where the margin is. But that would imply something in the neighborhood of 14% type earnings growth. Is that realistic, George?

I think we've always sort of set those kind of targets and set the bar high in what we'd like to expect. And if you go back and look at that, we've historically been able to do that. Now, as we get larger, there's absolute numbers out there. But I think in terms of a target, those are the kind of aspirations that we're focusing on as to continue those kind of growth rates in our businesses. And as we go forward, we evaluate those opportunities as we go forward.

I would tell you, we're real sober about making sure we improve our operating performance. And we're not dreaming about size. It's about building revenue and net income momentum and that's job one today at Fifth Third.

Okay. Thank you.

This concludes the Fifth Third Bancorp's third quarter 2005 conference call. Thank you very much for your attention.

Thank you for participating in today's conference. You may now disconnect.