Fifth Third Bancorp (FITBI) 2010 Q4 法說會逐字稿

Good evening, my name is Danyetta, and I will be your conference operator for today. At this time, I'd like to welcome everyone to the Fifth Third Bancorp fourth quarter 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session.

(Operator Instructions).

At this time, I would now like to turn the call over to Mr. Jeff Richardson, Director of Investor Relations. Sir, you may begin your conference.

Thanks. Hello, and thanks for joining us this evening. Today, we will be talking with you about our full-year and fourth-quarter 2010 results. This call may contain certain forward-looking statements about Fifth Third pertaining to our financial condition, results of operations, plans, and objectives. These statements involve certain risks and uncertainties. There are a number of factors that could cause results to differ materially from historical performance in these statements. We've identified a number of these factors in our forward-looking cautionary statement at the end of our earnings release, and in other materials, and we encourage you to review those factors. Fifth Third undertakes no obligation and would not expect to update any such forward-looking statements after the date of this call.

I'm joined on the call by several people. Kevin Kabat, our President and CEO; Chief Financial Officer, Dan Poston, Chief Risk Officer, Mary Tuuk, Treasurer, Mahesh Sankaran, and Jim Eglseder of Investor Relations. During the question-and-answer period, please provide your name and that of your firm to the operator. With that, I'll turn the call over to Kevin Kabat. Kevin?

Thanks, Jeff. Good evening, and thanks for joining us. We appreciate your time and expect to you've seen both that we announced earnings after the market closed today and also that we've announced an offering to issue $1.7 billion in common stock, with the intention of using the proceeds of that offering, a planned senior debt offering, and other available funds to fully repay our TARP preferred stock of $3.4 billion, subject to notification and approval of the US Treasury.

This action would eliminate the annual $170 million reduction to net income to shareholders from the preferred dividend, plus another approximately $11 million in discount accretion that runs through the preferred dividend line every quarter. I'd note that the warrants associated with the TARP investment will remain outstanding after TARP is repaid, but we plan to engage the US Treasury in discussions about their repurchase. If we can't reach an agreement on our value, we will evaluate participating in the auction.

I'll make a few remarks about our plans before we continue our discussion of earnings and our outlook, although those remarks will be limited, because we've launched a securities offering. We have discussed with you, for the past year or so, our thoughts about TARP repayment. We believed it was important that we generate the kind of results that we have been generating and have just reported, that we allow time for the demonstration that economic trends were well-established, and that we await more clarity related to capital standards and industry capital levels, clarity that was important for ourselves, and also for regulators. We have had ongoing dialogue with regulators on this topic, including these plans.

We believe that the conditions we were waiting for now exist. And, that now is the right time for us to repay TARP. We have carefully considered the size of the capital raise, in light of an assessment of our capital needs, industry capital levels, regulatory expectation, the BASEL III proposals, and the desire for future flexibility in capital management policy, and for the opportunities that we expect to be available to us as we emerge from the cycle. These actions are expected to produce a capital position that is in excess of our internal targets, and the BASEL III fully phased-in minimums.

Our Tier 1 common equity ratio, pro forma for the offering and TARP repayment, would be 9%, versus our internal target in the 8% range. We believe this will position us for maximum flexibility in managing capital and pursuing growth opportunities. We have provided more information about our plans and their pro forma effects in the appendix to the earnings presentation that we will walk through today. There are many questions you may want to ask us on this call, that we won't be able to answer. Either because we've launched a securities offering, or we can't answer for other reasons relating to regulatory confidentiality. We try to be pretty open and transparent about our own company, but legal and regulatory considerations limit what I can say about these topics, at this time.

Now, with that behind us, I'll make some opening comments about fourth quarter and 2010 earnings, and then hand the call over to Dan and Mary for a more detailed discussion for our financial and credit performance and outlook. As I noted, we've posted a presentation on our website to facilitate our discussion. So, let's get started on page three. Today, we reported full-year net income to common shareholders of $503 million or $0.63 per common share. Compared with full-year 2009 earnings of $511 million which included a $1.1 billion after-tax gain from the sale of our interests in our processing business.

For the fourth quarter, we continued our strong momentum, and posted a $0.33 per share profit and ROA approaching 1.2%. Net income was $333 million, up 40% and ROE was 10%. Those are very strong results and show the core earnings power of our company. A significant highlight of the year was our return to profitability, and maintaining high levels of pre-tax, pre-provision earnings. We also continued our positive momentum on the credit front. Net charge-offs fell below 2%, as expected, on an annualized basis for the first time since the second quarter of 2008. Non-performing assets, including loans held-for-sale, declined 11%, and NPA inflows were much lower than levels experienced earlier in 2010.

We also posted significantly lower delinquencies, which were down 7% on a sequential quarter basis, and were at the lowest level since the first quarter of 2007. The results of our efforts on this front are encouraging, and we look forward to continued improvements. In terms of our outlook for 2011, the overall environment for business has improved somewhat, and we're seeing some growth as corporate earnings continue to be strong. There's positive momentum in ISM manufacturing surveys, which have been trending up for nearly a year and a half, as well as GDP growth. Those improvements are beginning to show up in companies' bottom lines, and are reflected in our C&I loan growth this quarter.

We're seeing good momentum in middle-market commercial lending, as well as our auto originations. In the second half of 2010, we saw record levels of originations and broad-based growth within C&I loans, which is a good sign, and we believe that growth will continue into 2011. Commercial real estate loans continue to decline, but the runoff is slowing, and we're seeing some selective but attractive opportunities here and there.

Of course, unemployment remains high, and consumers generally continue to deleverage, but consumer spending has been reasonably good the past several months, and I think people are generally feeling more optimistic about their own circumstances and the environment than they have in a long time. The Midwest, where we're strongest, is doing okay. It's not robust, but there's a noticeable change in tone, and that is supportive of continued moderate growth as we turn the corner into 2011. The industry faces some headwinds from the Dodd-Frank Act, including debit card interchange caps, but we know our business, and we'll adapt accordingly. Dan will talk more about that in his comments.

We are in touch with the needs of our customers, and we know our markets. Our traditional banking focus is very much in line with the direction of financial reform. We continue to support consumer protection. We're proactively evaluating and addressing areas where we will be most significantly impacted, such as debit interchange fees, to ensure we will be able to mitigate a substantial amount of these impacts and costs.

Let me give you some additional highlights of the quarter. We had very strong loan and deposit growth during the quarter. C&I loans grew $889 million, on an end of period basis, despite the $842 million negative impact of the [aft PPS] loan refinancing. Our growth within C&I is broad-based across many industries, where we have invested resources. Average auto loans grew about $300 million, and this continues to be a strong performing asset class with net charge-offs below 70 basis points. Average transaction deposits grew $3 billion on a sequential basis, or 5%, which was driven by across-the-board growth in all products, including 9% sequential growth in DDA balances.

NII increased $3 million sequentially, while NIM was up five basis points to 3.75%. We saw balance sheet growth and that allowed us to deploy some of our excess liquidity, helping drive those results. Corporate banking revenue grew 21% on a sequential basis, that's closely tied to loan activity. Investment advisory revenue grew 4%, and card and processing revenue was up 5%. Lastly, net charge-offs of $356 million were down 63% sequentially, and down 20%, excluding charges related to the third-quarter credit actions that we took, and we have moved the majority of the commercial loan balances transferred to held-for-sale last quarter.

Before I turn it over to Dan, I just want to say that I am excited to begin a new year here in 2011, which I think is going to have a much different feel for us, for Fifth Third . We've continued to invest in high opportunity and growth businesses, and I expect that the results of all of the things we have done in our Company that have been overshadowed by credit will start showing up more clearly. With that, I'll ask Dan to discuss operating results and give some comments about our

Okay. Thanks, Kevin. As Kevin mentioned, we had a very strong quarter, and we've got many positive operating trends to discuss. If you turn to slide four of the presentation, in the fourth quarter, we reported net income of $333 million and paid preferred dividends of $63 million. This resulted in $270 million of net income available to common shareholders, or $0.33 per diluted share. Compared with the third quarter, this was a 40% increase in net income, and a 50% increase in diluted earnings per share.

You'll notice that our average diluted share count was up this quarter by almost 40 million shares. That simply represents the effect of the if-converted method of computing diluted EPS as the shares underlying our series-G convertible preferred stock and our warrants were now included in our fully-diluted share count. This resulted from increased profitability, but reduced EPS by about $0.005 for the quarter. These strong results were driven by $583 million of PPNR, which reflected solid fee and net interest income results, and by significantly reduced net charge-offs and provision expense, as our credit profile continue to improve.

Before I turn to detailed results, let me stop here for just a moment. In my comments, I will provide information relating to our outlook for the first-quarter results and for trends going forward. The offering we've announced, and the TARP repayment may affect some of those expectations. In the interest of clarity, I am providing outlook excluding the effects of those actions rather than incorporating them into our guidance. We've provided several slides that outline our plans, and provide pro forma effects of those plans. Those slides are in the appendix to the presentation that are part of our earnings materials, and those effects are pretty simple to calculate.

So, turning now to slide five, and NII. Net interest income on a fully taxable equivalent basis increased $3 million sequentially to $919 million, while net interest margin increased 5 basis points to 3.75%. There were a number of puts and takes in the quarter that led to the sequential improvement. NII and NIM both benefited from ongoing CD repricing and deposit mix shift away from CDs, as well as continued deposit pricing discipline.

Also, we experienced higher average total loan balances, despite the refinancing of a portion of our loan to FTPS, which we outlined in the release, and I'll talk a little bit more about in a minute. The net result of that muted what would have otherwise been a more substantial contribution to the growth in loans and the trends there. On the other hand, we experienced higher premium amortization expense, due to higher securities pre-payments during the quarter. And, finally, and this is more of NIM factor, we had strong C&I loan originations, to highly rated credits, and the yield on those loans reflected that high quality.

With that context, and turning to slide six, let's go through the balance sheet in a bit more detail. Average earning assets were down about $1 billion sequentially, or 1%, which was primarily driven by lower investment securities balances, partially offset by growth in average total loan balances. Average short-term investments declined $1 billion, driven by lower cash balances held at the Fed. We reduced excess liquidity through the run-off of CDs, which kept overall deposits flat, and we prepaid $1 billion in Federal Home Loan Bank funding. Average taxable investments securities balances declined about $210 million, which was primarily the result of the sale of agency securities during the quarter, which generated gains of about $18 million.

Additionally, we continued to invest a portion of portfolio cash flows in high-quality mortgage originations, generally with maturities of 20 years or less, in order to maintain the duration of our earning assets portfolio. We continue to be very careful about managing the interest rate risk profile of our balance sheet, and we continue to target a neutral to modestly asset-sensitive position.

Average wholesale funding declined about $2 billion, compared with the third quarter. As I noted, during the quarter, we terminated $1 billion in Federal Home Loan Bank funding, based on our excess liquidity position, and our reduced funding needs, so we saw a partial impact of that during this quarter. We incurred about $17 million in charges on the early extinguishment of these borrowings, and the associated cash flow hedge, which was also terminated. That charge is recorded in other non-interest expense. The remaining decline in wholesale funding was attributable to the decline in jumbo CDs.

Average total loan balances were up about $300 million compared to the prior quarter, even after the impact of refinancing our loan to FTPS during the quarter. In connection with their acquisition of National Processing Company, FTPS increased the size of its loan facilities, which were then syndicated through a group of banks. We are part of that syndicate, but our share of that loan is now about one-third of the original $1.25 billion. Excluding the impact of that refinancing, average total loan balances would have been up about $845 million over the prior quarter. Period-end total loans increased $965 million, and would have increased $1.8 billion, absent the FTPS refinancing.

We're very pleased with our core loan production. We're seeing some growth within several areas. We saw positive low balance trends within C&I, residential mortgage, and auto loans. Looking at each portfolio, average commercial loans in the portfolio were down 2% from last quarter, which was driven by the $961 million of loans that we transferred to held-for-sale in connection with the credit actions taken at the very end of the third quarter, as well as the impact of the FTPS loan refinancing.

On an end-of-period basis, commercial loans were up $522 million, driven by growth in C&I loans and partially offset by the runoff in the commercial real estate portfolio. Period-end C&I loans increased 3% sequentially, and, excluding the impact of the FTPS loan refinancing, period-end C&I loans increased 7% sequentially. We've seen broad-based growth across many industries and sectors, with continued particularly strong production within manufacturing and healthcare industries.

Commercial line utilization was stable again this quarter, although it remains at low levels still, at 32.7%, compared with 32.4% last quarter and 32.7% a year ago. As you know, that's down from normal levels that are in the low- to mid-40s. We saw continued runoff in the commercial mortgage and commercial construction portfolios, but the rate of decline has slowed. In aggregate, on a period-end basis, those portfolios were down 3% sequentially. We'd expect these balances to continue to trend down over the near term, but as I noted, that headwind is diminishing.

Average consumer loans in the portfolio increased 2% sequentially, and increased 3% on a period-end basis. Average residential mortgage balances were up 7% sequentially, including the $228 million of non-performing loans that were sold at the end of the third quarter. Mortgage originations were $7.4 billion in the fourth quarter, a 33% increase over last quarter. The increased origination volume was due to increased refinance activity and record low mortgage rates. As we mentioned last quarter, we began retaining simplified re-fi mortgages originated through our retail branch system, which is a product that has lower LTVs, shorter durations, and higher average rates than most of the conforming loans that we sell to agencies. Mortgage retention added about $710 million to our average balances during this quarter.

Average auto loan balances increased 3% sequentially and 21% from last year, due to strong originations throughout the year. The loans we brought back on the balance sheet in the first quarter contributed pretty significantly to the year-over-year increase. Our auto portfolio has continued to perform very well, and spreads have remained attractive, although we've begun to see some pressure on spreads recently due to increased competition. Average credit card balances were flat sequentially, and down 7% from a year ago. And, average home equity loan balances were down 2% from the third quarter, and 5% on a year-over-year basis.

Looking ahead to the first quarter of 2011, we'd expect to see continued loan growth in the first quarter, with solid C&I growth, despite the full quarter effect of the FTPS loan refinancing on that quarter. For reference, while our period-end balances already fully the reflect that, our average balances will be impacted by about another $300 million or so in the first quarter.

Moving on to deposits. Average core deposits increased 2% on a sequential basis, and 6% year-over-year. Consumer CDs, which are included in core deposits, declined 17% sequentially and 35% year-over-year. That reflects a continuation of the repricing of the CD portfolio, including higher rate CDs that were originated in the second half of 2008. We still have about $2.5 billion of those CDs, which have rates in excess of 4%, and we expect about $1.5 billion to mature, primarily during the second half of 2011. Excluding consumer CDs, average transaction deposits were up 5% sequentially, and 16% from a year ago. The main driver of the sequential increase was seasonally high DDAs, which were up 9% sequentially and 16% from a year ago.

Average retail transaction deposits increased 4% sequentially, and 14% year-over-year, with growth across all categories. We've had great success with our relationship savings product, which has now attracted over $9 billion of balances since its inception. These balances have more than tripled from a year ago, and, more importantly, they've deepened relationships with our core transaction customers. Average commercial transaction deposits increased 5% from last quarter, and 18% from a year ago.

Average public fund balances were down 1% sequentially and 18% year-over-year, as we've adjusted our pricing due to our excess liquidity position. If you exclude public funds balances, average commercial transaction deposits increased 6% sequentially and 33% from a year ago. That reflects continued strong liquidity among our commercial customers, as well as seasonally high DDA balances. They were up 10% sequentially and 19% from a year ago.

We'd expect a modest decline in core deposits in the first quarter as consumer CDs continue to run off, although we have continued to be pleasantly surprised each quarter by the strength of trends in the core transaction deposit area. With that background, let me circle back to our overall outlook for NII and NIM. Due to the short month in February, we experienced significant seasonality in the first quarter, due to day counts. That affects NII and NIM comparisons between the fourth quarter and the first quarter, and also between the first quarter and the second quarter.

Day count alone will reduce NII by about $12 million, and increase NIM by about 3 basis points in the first quarter. As a result, we expect NII to be down about $5 million to $10 million in the first quarter, and for NIM to be up about 5 to 10 basis points. Both NII and NIM should also benefit from CD runoff and from expected loan growth, both of which will help absorb some of our excess liquidity. This seasonality will reverse itself in the second quarter and we currently expect NII and NIM to return to levels similar to the fourth quarter, or perhaps a little better.

Moving on to fees, as outlined on slide seven. Third-quarter non-interest income was $656 million, a decrease of $171 million from last quarter, but you'll remember that fee income in the third quarter included $152 million gain from the settlement of BOLI litigation. If you exclude this gain, fee income declined 3%, largely due to exceptionally strong third-quarter mortgage results. Deposit service charges decreased 3% sequentially, with commercial deposit fees up 3% and consumer deposit fees down 10%. As you know, Reg E went into effect for all accounts in July and August. We saw about $17 million in the full run rate impact of this, in the fourth quarter, which is right in line with our expectations of $15 million to $20 million impact per quarter. We'd expect first quarter deposit fees to be down about $5 million from seasonally strong fourth quarter levels.

Investment advisory revenue increased 4% from last quarter, and 8% on a year-over-year basis. Both the sequential and year-over-year increases were driven by an overall lift in equity and bond markets, as well as improved production, particularly in the private client services, institutional, and brokerage areas. Securities and brokerage fee revenue increased 2% sequentially and 13% from a year ago, reflecting the benefit of investments in our sales forces -- sales force, and sales management. We expect investment advisory revenue to grow another $5 million in the first quarter.

Corporate banking revenue of $103 million increased 21% from the third quarter to the fourth, and 16% from last year. The sequential improvement was partially the result of higher loan syndication fees, given the favorable market conditions. Additionally, sequential results benefited from higher business lending fees, lease re-marketing results, and seasonally high foreign exchange revenue. The year-over-year increase was also largely driven by those same factors. We'd expect first-quarter corporate banking revenue to be down about $10 million from the very strong fourth quarter levels.

Mortgage banking revenue of about $149 million decreased $83 million from very strong third-quarter results, primarily driven by the swing of MSR impairment net of hedging results, that was a $20 million loss this quarter, compared with a gain of $46 million in the third quarter. Current quarter results were up $17 million from a year ago. If you look at gains on deliveries, they were $158 million this quarter, compared with $173 million last quarter, as we continued to have strong origination volume from refinancing activities, but margins declined, due to rising mortgage rates.

Servicing fees of $59 million were up modestly, and MSR amortization was $47 million in the fourth quarter, compared with $43 million last quarter. Additionally, Fed securities gains on non-qualifying hedges on MSRs in the fourth quarter totaled $14 million, which we currently wouldn't expect to repeat in the first quarter. On an overall basis, we expect total mortgage banking-related revenue to decrease in the first quarter by about $40 million, primarily driven by lower gains on deliveries due to the impact of the higher rate environment and lower refinancing activity.

Payment processing revenue was $81 million, which was a 5% increase from last quarter, and a 7% increase from a year ago, driven by seasonally strong consumer spending in the fourth quarter. We expect first-quarter processing revenue to be up a similar amount.

Before I move on, Kevin touched on the Durbin amendment. It's premature to estimate the actual impact of this legislation, as the proposals that are out there right now are currently out for comment, but it's certainly much less than just calculating the proposed interchange caps based on volume, because that would not incorporate any mitigation, which we believe will be substantial, both for us and for the industry. We had about $204 million in debit interchange revenue for the year of 2010, driven by volume of 433 million transactions.

The proposed caps were $0.12 or $0.07 per transaction, and until we have final rules, we're not really prepared to directly comment on the gross financial impact of this legislation, but you can kind of do the math in terms of the range of potential results that that produces. However, I just want to mention again that we expect to substantially mitigate the effect of the new rules, and so we would not expect to ever experience anything like that kind of drop in revenue, even if these kinds of proposals are ultimately adopted.

This is a valuable service to our customers and to merchants, and it costs us a lot more than $0.12 per transaction to make this service available. We have no intention of offering a loss-leader product that is core to the fundamental nature of deposit and payments offerings. We've been studying this for many months, and we've got a number of alternatives available to us. Which of those we ultimately pursue will depend a lot on a number of factors, including the final proposal, the competitors' actions, and our own internal work and planning over the next five or six months, until it is scheduled to take effect.

Because we haven't decided what to do, for all the reasons that I just mentioned, including that the final rules aren't in place, I can't tell you what the mitigating effect will be. We're going to be very careful in what we do and how we implement it. And we would ultimately expect to recapture most, if not all, of the value that we have delivered through this channel.

Net gains on investment securities were $21 million in the fourth quarter, compared with net gains of $4 million in the previous quarter. And, then, turning to other income, within the fee income area, other income declined $140 million sequentially, due primarily to the $152 million BOLI gain that we had last quarter, as well as lower credit-related costs realized in revenue this quarter. Credit costs recorded in fee income were $34 million in the fourth quarter compared with $42 million last quarter.

Net gains on held-for-sale loans that were sold or settled during the quarter were $21 million, which were offset by $35 million in fair value charges on commercial loans held-for-sale, for a net of $14 million. Last quarter, losses of that nature were about $10 million. Additionally, losses on OREO properties were $19 million this quarter, versus $29 million last quarter. We expect credit-related costs within fee income on an overall basis to drop about $15 million in the first quarter.

Overall, we currently expect first-quarter fee income of about $600 million, plus or minus. With the decline primarily driven by lower mortgage banking revenue, as I discussed, and lower securities gains, as well as seasonality. That seasonality and continued organic growth should produce favorable sequential comparisons in the second quarter, in virtually every fee category.

Turning to expenses on slide eight. Non-interest expense of $987 million was up $8 million or 1% sequentially, which was driven by higher revenue-based incentives, resulting from increased production and full-year revenue results, as well as continued investment in our sales force expansion. As I previously mentioned, during the quarter, we also incurred a $17 million charge in other non-interest expense, in conjunction with the early extinguishment of $1 billion in FHLB funding, along with an associated interest rate cash flow hedge.

As you would expect in this environment, we continue to see elevated credit-related costs. Third-quarter credit-related costs, included within operating expense, were $53 million versus $67 million last quarter. The decline from the prior quarter was driven by decreased expenses related to mortgage repurchases. $20 million this quarter, compared with $45 million last quarter. You'll remember that we increased the repurchase reserve by about $15 million last quarter, and we believe that we are adequately reserved, given our current exposure and our expectations.

File requests and repurchase demands have been volatile and difficult to predict, although repurchase demands did come down this quarter. We currently expect demands for repurchases and loss severities to remain elevated, and our current expectation for first quarter 2011 is for repurchase expense to be about $20 million, similar to this quarter. Reserves related to unfunded commitments declined $4 million in the fourth quarter, compared with a $23 million reduction in the third quarter. We currently expect the total credit-related costs included in expense in the first quarter to be consistent with these fourth-quarter levels.

In total, we expect first-quarter expenses to be down $35 million to the $950 million range. That decline would be driven primarily by lower mortgage-related compensation and lower loan closing costs, as well as the effect of the $17 million charge on debt extinguishment that we incurred in the fourth quarter. Those reductions will be partially offset by the traditional seasonal spike in FICA and unemployment costs within the employee benefits expense line of about $21 million. The great majority of those incremental costs will not recur in the second quarter, as you may recall from prior years.

Moving on to slide nine, taking a look at PPNR. Pre-provision net revenue was $583 million in the quarter, in line with our expectations. If you exclude the gain we had from the BOLI settlement in the third quarter, PPNR declined about $50 million, as we expected, due to lower mortgage banking results. We currently expect first quarter PPNR in the $550 million to $560 million range. Coupled with mortgage banking, the drivers there are largely seasonal. $33 million, due to day count and employee benefits alone.

We will recapture about $30 million of that seasonality in the second quarter, and we currently expect second quarter PPNR to be more similar to the fourth quarter level of $580 million, or perhaps a little better. You'll see in the release that the effective tax rate for the fourth quarter was about 20%, which was consistent with last quarter, and in line with our expectations. We expect that in 2011, our effective tax rate will return to more normalized levels of closer to 30%, as the tax rate resets for the year at a higher level of expected earnings for 2011. The first quarter effective tax rate should be in that range, or perhaps a little bit higher.

Turning to capital on slide 10. Capital levels remain very strong. Tangible common equity was 7%, a 34 basis point improvement from the end of the third quarter. That ratio, as we calculate it, excludes unrealized securities gains, which totaled $314 million. All in, TCE was 7.3%. Tier 1 common increased 16 basis points to 7.5%, and the Tier 1 ratio was up 9 basis points to 13.9%. And, the total capital ratio was down 14 basis points to 18.1%.

That's a strong capital position, and our proposed capital plan that we announced today will make it even stronger. We also have solid trends and earnings and capital generation, and, thus, we would expect to exceed our target levels in the near-term, but that will also provide us with a significant amount of flexibility over time to support attractive opportunities for balance sheet growth, appropriate distributions to shareholders, and opportunistic but disciplined evaluation of M&A opportunities.

Fifth Third has a strong earnings position. We reported 108 -- excuse me, 118 basis points of ROA this quarter. While we'll have some seasonality in the first quarter, and we'll be back to a more normalized tax rate, we think we'll produce something close to that 118 basis points in the second quarter. Longer-term, we continue believe that a more normalized ROA for us is in the 130 to 150 basis point range. I think the 130 basis points is imminently doable, without any long-delay to get there. Our provision expense is still over 80 basis points, and that is well above what we would expect on a normalized basis. We also had $87 million in credit costs, reported in both fees and expenses, and that's still probably $50 million above where those amounts were before the crisis. There are headwinds like Durbin, but I believe we will adapt to that, as I discussed earlier.

Finally, and significantly, our business is significantly under-leveraged, relative to what it's capable of. We've made every effort to protect the revenue-generating resources of the Company during the crisis, because we wanted to maintain our capacity to act on opportunities when they returned, which we believe they are now doing, but our assets base and our fee revenue currently reflects an economic environment that is not yet firing on all cylinders. Put another way, as we begin to grow, we don't expect that we'll have to grow expenses and headcount at the same rate.

You all know that Fifth Third's philosophy is to be pretty lean, but we're currently at an efficiency ratio of a little north of 60%, and that's a function of the under-leveraging of our franchising capabilities. I'd expect that to move back into the 50's on a normalized basis, and we will work to ensure that we're as efficient as possible, while we continue to invest for the revenue growth we're confident that we can generate. You've seen that the revenue generation capability is there, even during a crisis in our operating results.

So, we feel very good about our competitive position, our strategic position, and we look forward to 2011 as a year where we have the opportunity to demonstrate those strengths clearly. That wraps up my remarks. I'll now turn over to Mary to discuss credit results and trends. Mary?

Thanks, Dan. We continued to see progress in most of our loan portfolios during the quarter. Non-performing inflows continue to remain more moderate, charge-offs were down significantly on both the reported and core basis, and, as expected, dropped below 2% in the fourth quarter. We sold the majority of the loans we moved to held-for-sale last quarter at prices consistent with our marks. And, delinquencies continued to improve and our outlook for all key credit metrics continues to be for improving trends going forward.

Let's get into the details, starting with charge-offs on slide 11. Total net charge-offs of $356 million dropped $600 million from the third quarter, which included $510 million in charge-offs related to our credit actions. Those included the sale of residential mortgage loans on non-accrual status, and the transfer of commercial NPAs to held-for-sale. On a core basis, net charge-offs were $446 million last quarter, and, thus, the sequential core improvement was $90 million, or a 20% reduction. That was better than we were expecting, coming into the quarter.

I'm going to exclude the impact of these third-quarter credit actions in my remaining discussion of net charge-offs trends by portfolio, in order to provide a better feel for trends in the ongoing portfolio. Total commercial net charge-offs were $173 million, compared with portfolio commercial net charge-offs of $240 million in the third quarter, a 28% decline. C&I portfolio net charge-offs were $85 million, down 34% from the third quarter. Commercial mortgage portfolio charge-offs were $80 million for the quarter, compared with $66 million in the third quarter. Approximately 58% of the losses came from Michigan and Florida.

Commercial construction portfolio charge-offs were $11 million, down 75% on a sequential quarter basis. I'd note that commercial construction balances are down to $2 billion on an end-of-period basis, compared with $3.8 billion a year ago. Homebuilder losses continued to decline in the quarter, totaling just $19 million, compared with $32 million of portfolio losses last quarter. You will recall that we suspended home builder originations three years ago, have already recorded significant charge-offs against that portfolio, and have made nice progress in reducing our exposure.

Portfolio balances are down to $699 million, significantly below the peak of $3.3 billion back in mid-2008. We currently anticipate that first quarter commercial net charge-offs will be relatively stable, although the longer-term trend is still favorable. Total consumer net charge-offs were $183 million compared with the core result of $206 million last quarter. Residential mortgage net charge-offs were $62 million, down 23% from the third quarter, largely due to the benefit of the third-quarter credit actions, although they were still better than we expected.

Home equity losses decreased slightly to $65 million, about 38% of the fourth quarter losses were from the brokered home equity portfolio, which, at $1.7 billion, is down from a peak of about $2.7 billion in 2007. Auto net charge-offs remained low at $19 million, or 68 basis points. Credit card net charge-offs declined to $33 million, or a relatively low 712 basis points. We currently expect first-quarter consumer net charge-offs to be fairly stable, but, like commercial, with continued improving trends.

Now, moving to NPAs on slide 12. NPAs, including held-for-sale, totaled $2.5 billion at quarter-end, down $313 million or 11% from the third quarter. NPAs, excluding held-for-sale, were $2.2 billion or 2.79% of loans, up modestly from 2.72% of loans in the third quarter. That growth reflects the effect of our third-quarter credit actions. Inflows were relatively stable, but outflows, in the form of charge-offs, obviously declined.

My remaining comments on NPAs will focus on the held-for-investment portfolio, unless otherwise noted. Overall, Florida and Michigan remain our most challenged geographies from an NPA standpoint, and accounted for 42% of NPAs in the commercial and consumer portfolios. However, NPAs in those two states were down $13 million sequentially, a continuation of trends we've seen for some time now. Commercial portfolio NPAs were $1.7 billion or 3.79% of loans, compared with 3.71% of loans in the third quarter. Commercial construction NPAs declined $32 million, while commercial mortgage NPAs were consistent with the prior quarter.

C&I NPAs increased $102 million, primarily driven by a $78 million credit placed on non-accruals this quarter. This was sort of an unusual situation, and we do expect C&I NPAs to decline again in the first quarter. Across the commercial portfolios, residential builder and developer NPAs of $259 million were down $21 million or 7% sequentially, and represented about 16% of total commercial NPAs. Within NPAs, commercial TDRs on non-accrual status increased to $141 million this quarter, from $31 million last quarter. We expect to continue to selectively restructure commercial loans where it makes economic sense for the bank. Looking ahead to the first quarter, we expect commercial portfolio NPAs to be down, versus current levels. On the consumer side, portfolio NPAs totaled $513 million at the end of the quarter, or 1.5% of loans, an increase from the 1.44% reported in the third quarter, and in line with our expectations.

Residential mortgage NPAs increased $40 million during the quarter to $368 million. Home equity NPAs totaled $72 million at the end of the third quarter, a $1 million drop from third-quarter levels. Auto NPAs were down $1 million, and credit card NPAs were down $2 million. We expect first-quarter consumer portfolio NPAs to be up modestly, compared with the fourth quarter, with stable inflows.

To give an update on the pool of commercial NPAs that are in held-for-sale, of the $574 million of balances transferred in the third quarter, $223 million remain, of which about $44 million is under contract. Our marks still feel appropriate, and we had a realized net gain on loans sold from this pool, which was offset by a similar amount of valuation adjustments on the remaining loans. We've been proactive in addressing problem loans, and writing them down to realistic and realizable values.

Total portfolio NPAs, commercial and consumer, are being carried at about approximately 63% of their original face value, through the process of taking charge-offs, marks, and specific reserves recorded through the fourth quarter. That overall haircut is lower than earlier in the year, and it reflects our having cleared out or dealt with much of our most stressed credits. This metric may well continue to trend upwards due to a lower level of loss content on our NPAs, which we're seeing in our charge-off trends.

The next slide, slide 13, includes a roll-forward of nonperforming loans. As I mentioned earlier, our commercial nonperforming loan inflows were up slightly, at $308 million, resulting in a relatively stable commercial nonperforming loan total for the quarter. Consumer inflows were essentially flat, at $159 million. As you can see on slide 14, our level of inflows remains relatively low, versus peers on a proportional basis. A couple of years ago, we had higher proportional inflows, and I think that's a reflection of our geographies, which were impacted earlier than others, and the fact that we aggressively identified and dealt with issues as they occurred.

Turning to slide 15, we provide some data on our consumer troubled debt restructurings. We have $1.8 billion of consumer TDRs on the books as of December 31, of which $1.6 billion were accruing loans and $206 million were non-accrual. Out of that $1.6 billion of accruing TDRs, approximately $1.3 billion were current. And, of current loans, about $1.1 billion were current and were restructured six months ago or more. Based on that experience and our redefault rates overall, we expect the vast majority of that $1 billion pool to stay current. Over time, we've learned more about what works and doesn't work in modifying loans.

As a result, more recent modification vintages has shown lower redefault rates than loans we restructured earlier in the cycle. Those recent vintages also constitute a larger proportion of the aggregate TDR pool. As you can see from the slide, while 2008 vintages experiences higher redefault levels, more recent vintages have trended toward a 12-month default frequency, in the 25% range. Overall, we continue to be pleased with the results of our loss mitigation efforts, and I think the vintage trends indicate that they're working.

Moving to slide 16, which outlines delinquency trends, loans 30 to 89 days past due totaled $636 million, down $31 million from last quarter, with consumer up $14 million, due to seasonal factors and commercial down $45 million. Loans 90 days past due were $274 million, down $43 million from the third quarter with consumer down $9 million and commercial down $34 million to just $30 million. The commercial delinquency levels are the lowest that we've seen since year-end 2004. Total delinquencies of $910 million this quarter were down 7% from last quarter, the lowest level since the first quarter of 2007. We believe we're seeing signs of stabilization, and don't currently expect a lot of movement next quarter, although delinquencies can move around a bit, given seasonality and timing issues.

Now, for a couple of comments on provision and the allowance, which is outlined on slide 17. Provision expense for the quarter was $166 million, and reflected a reduction to the loan loss allowance of $190 million. Our allowance coverage ratios remain very strong, with coverage of nonperforming loans of 179%, nonperforming assets of 138%, and coverage of annualized net charge-offs of over two times.

Slide 18 contains the credit loss results of our most recent stress test, as well as performance against the SCAP scenarios. Starting with actual results, as you can see, 2010 losses were $2.3 billion, below 2009 losses of $2.6 billion, and significantly below SCAP assumptions, including our baseline submission. This is despite our recognition of $510 million of charge-offs in the third quarter, through marks on loans transferred to held-for-sale. The vast majority of which would otherwise not likely have been incurred until 2011, absent our disposition plan.

Turning to 2011, we provide the results of our internal stress scenarios. These scenarios are based on MoodysEconomy.com macroeconomic scenarios, and are outlined on page 34 in the appendix. We disclosed these same scenarios last month, so I won't discuss in detail. The Moody's scenarios are their base case scenario, their recession case scenarios, to which they assign a 25% probability, and the depression case or complete collapse scenario, which is assigned a 4% probability.

I think our expectations for 2011, under the conditions included in any of the scenarios, speak for themselves. Under base and recession conditions in 2011, we'd expect charge-offs to be below 2010. Under depression case conditions, we'd expect charge-offs to be consistent with 2010. I think the inset box explains why we would expect charge-offs not to go up under depression scenarios. The influence of the $500 million in marks we took in 2010, on both 2010 losses and those we would have otherwise expected in 2011.

As we noted last month, these scenarios do not include that based on the Fed's specified supervisory stress macroeconomic scenario. That scenario was provided under the CCPR, and we can't share it, however, we believe our internal scenarios cover an appropriate range of either likely or unlikely but possible macro environments and the results that we would expect from them. We obviously share these scenarios with our regulators. Kevin, I'll turn it back to you for any closing comments before we get to the Q&A.

Thanks, Mary. Just wanted to finish by saying 2010 was a year of great progress for Fifth Third, including a return to solid profitability, significant improvement in credit results and trends, market share gains and higher customer sat scores. In fact, in the most recent survey of Fifth Third customers by the University of Michigan, our overall customer satisfaction score broke our previous record and our score exceeded that of any large bank in the industry, published under Michigan's broad industry survey. We're focused on deepening customer relations, growing our customer base through the strength of the Fifth Third brand. We continue to focus on the strategic initiatives that are helping us drive revenue growth. I want to thank all the hard work of our employees, and, at this point, I want to open it up then for any questions.

(Operator Instructions).Your first question comes from the line of Bob Patten with Morgan Keegan.

Holy smokes, I'm never first. Hey guys. (laughter). Never. I just want to ask a quick modeling question, this is the easy one, FDIC transfers wasn't broken out, is it the same as the third quarter?

This is Jeff. I don't think FDIC expense is big enough to be a reportable category.

Okay, so I'll get over that. Kevin, can you review hypothetically, assuming your plans get done and executed as you want, what your productization or capital use is going to be over the next 6 to 12 months?

Let me turn it over to Dan to address for you Bob.

Yes, Bob, andsome of this is included in the earnings PowerPoint deck, specifically on page 25. We have outlined some elements of how we would seek to manage capital on a going-forward basis. First and foremost, I think we have some pretty significant organic growth opportunities. We are starting to see some growth in the loan portfolios, particularly in the C&I area. We are very encouraged in the most recent quarter of the demand there.

We think there is organic growth opportunities. We also think there is strategic opportunities that are on the horizon,whether that be via acquisition or whether that be through de novo expansions, we believe that the opportunities for growth, particularly in a recovering economy, are pretty significant.

Relative to capital management policy going forward, we believe that our current earnings position as well as our capital position both now and even more so in the future, based on the plans that we have, would support a return to a more normalized dividend policy. And as we look forward, that certainly is something that would be included in our plans. Share repurchases and our minds will probably be at the bottom of the list. To the extent that these other deployments of capital that I just mentioned, if those left us still with excess capital as we went on the road, share repurchases would be something we would evaluate, but we would expect that would be something that would be longer term in nature.

Just a quick technical question, Dan. You guys have done two dividend reductions. Under the way that the rules work, if you repay TARP, can you increase it back to $0.15 a quarter, without permission?

I think there's two levels of restrictions right now. There's one restriction that's embedded into the actual TARP documents itself. I believe that restriction says that we can't increase it to any level above the level at which it was, when we entered into TARP. And beyond that, based on the Fed's recent announcement relative to capital management policies and the CCPR process, those types of changes would be subject to approval through that process as well. So I think the CCPR process effectively trumps whatever the restrictions in the TARP documents themselves are and all dividend increases would need to go through that process.

Okay, thanks guys.

Your next question comes from the line of Brian Foran with Nomura.

Hi, how are you? I know you spent a lot of time up front addressing the why now question on TARP, but I've gotten the same question form several people, so I will ask it the way they asked it, which is, you needed $1.7 billion you made $270 million this quarter, why not wait a few quarters and raise half as much? And then, I have a follow-up after that.

Brian, as you said, we did address that somewhat. We've talked in the past about being patient, and I think we have been patient. That wasn't just to be patient because there were certain things that we thought were important in order for us to have the right environment for TARP repayment to make sense. Those were improvements in our earnings, improvements in our credit, a more solid economy and a more well-established recovery, and perhaps most significantly, increased capital or increased clarity on future regulatory requirements. I think all of those things, particularly in the fourth quarter, started to come into fruition and come into existence with a fair amount of clarity.

So in the fourth quarter, I think we really started to believe that the time for us to repay TARP was right, the time for us to consider that issue more significantly with our regulators was right, so we have been involved in discussions with our regulators since that time. We think that those things created the right time for us to make this decision, and with our discussions with the regulators, with our observations of what regulators have apparently asked others to do, we thought that the amount of capital that we have decided to raise and the resulting capital levels of 9.0% were the right levels for us at this particular point in time.

All of that I think was also impacted by the new CCPR process, the fact that the reinstatement of dividends was something that was becoming more important for the industry, as well as the sense that opportunities were becoming closer and closer on the horizon. Those are opportunities related to continuing economic recovery, or opportunities related to strategic opportunities that might become available as M&A activity took place. So those were all things I think that contributed to our evaluation of this being an appropriate time or us to make this move.

I appreciate that. And then as you think about normalized earnings power, I had always said a 60 BP provision rate in for you guys, based on 50 BPs for everyone but cards and then 500 BPs for cards. I guess where you are now and still heading lower suggest maybe that's a little high. Can you give us any thoughts on what you think of as a normal provisioning run rate for the Company overall as being?

Hey Brian, this is Jeff. I think in the situation we are in right now, with the announcement that we made, we haven't commented on, in any direct way, about what we think our normalized provision would be. We've talked about ranges of reasonable assumptions for dividends, just for purposes of explaining where we thought we could get to, but I don't feel like we ought to -- I feel like we can't answer that question right now. I apologize. I understand the thinking behind the way you came up with your result, and I'm sorry.

That's fair. I appreciate it. Thank you.

We have reached the allotted time for questions. This concludes today's teleconference. You may now disconnect at this time.