Fifth Third Bancorp (FITBO) 2012 Q3 法說會逐字稿

Good morning. My name is Polly and I will be your conference operator today. At this time I would like to welcome everyone to the Fifth Third 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). Thank you.

Mr. Richardson, sir, you may begin your conference.

Good morning. Today we will be talking with you about our third-quarter 2012 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 some 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 them. 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 CEO; Chief Financial Officer, Dan Poston; Chief Credit Officer, Bruce Lee; Treasurer, Tayfun Tuzun; 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 will turn the call over to Kevin. Kevin?

Thanks, Jeff. Good morning, everyone. This morning Fifth Third reported net income to common shareholders of $354 million and earnings per diluted share of $0.38. Results included charges related to the redemption of trust preferred securities as expected, which reduced EPS by $0.02.

Results also included a negative valuation adjustment on our Vantiv warrant and a gain on sale of mutual funds, which generally offset one another. Third-quarter return on assets was 1.23% and return on tangible common equity was 13%.

Core trends in our operations remained favorable as evidenced by continued loan growth in most categories and revenue strength particularly in commercial banking, which was up 16% over last year and mortgage banking, which was up 13% over a very strong quarter a year ago. These businesses continue to produce and have been important contributors during a difficult operating environment.

Overall fee results were very good in the quarter and the fourth quarter looks to be better. Average portfolio loans were up 5% from a year ago, driven by a 16% increase in residential mortgage loans and a 15% increase in CNI loans. Sequential loan growth was a bit lighter than the last several quarters, which reflected higher pay downs as borrowers became more cautious and the ability to refinance in the capital markets remained strong. Based on our pipelines and seasonably strong production in the fourth quarter, we expect loan growth to be a bit stronger in the fourth quarter as we close in on year-end and the election moves behind us.

Net interest income was up $8 million from last quarter excluding the benefit of several items that Dan will discuss in a moment. NII was consistent with last quarter.

Obviously the interest rate environment is extremely challenging, made more so by the impact of QE3 last month. The lower rate environment will negatively impact NIM trends going forward at least until rates move back up, which is obviously the opposite of the rate environment a bank wants to see, although the impact on NII and NIM should be manageable for us.

We continue to exercise discipline on the expense front; reported expenses were elevated this quarter and included the impact of the TruPS redemption charges and the increase to mortgage repurchase reserves. Expenses in the mortgage business are higher than normal. That's largely due to exceptional levels of production, so we will take that.

Overall, PPNR was $568 million or $617 million when adjusted for items described on the second page of our release. We are looking for similar PPNR results to that adjusted level or perhaps a little better in the fourth quarter as well.

Credit trends improved again with quarterly charge-offs of $156 million. That was down 14% sequentially and 40% from a year ago. The charge-off ratio was 75 basis points, down 13 basis points from last quarter and the lowest we've reported since 2007. Capital levels also continue to be very strong with a Tier 1 common ratio of 9.7% and a tangible common equity ratio of 9.5%.

In August after approval of our capital plan, we initiated share buybacks with a repurchase agreement for $350 million of common stock. Most of the impact of that transaction is in our third-quarter capital ratios while a third of the impact is reflected in our average share count.

Our capital plan included the possibility of an additional $250 million in common repurchases through the end of March 2013. We also increased the common dividend to $0.10 per share in September. Fifth Third's ability to generate capital and our strong capital levels under Basel I or Basel III give us the ability to retain the capital we need to support balance sheet growth while continuing to return capital to shareholders in a prudent manner.

Dan will discuss our outlook in more detail, but we expect to be able to produce similarly strong results in the fourth quarter. The environment remains challenging from a growth perspective, but we continue to demonstrate the ability to generate a relatively high level of profitability from solid revenue results, continued expense discipline, and continued credit improvement.

At this point, let me turn it over to Dan.

Thanks, Kevin. I will start with slide 4 of the presentation. For the quarter, we reported net income of $363 million and recorded preferred dividends of $9 million. Net income to common was $354 million and diluted earnings per share were $0.38.

Third-quarter results were reduced by $26 million of costs that are associated with our TruPS redemption or about $0.02 per share after tax and $16 million in losses on Vantiv warrants or $0.01 per share after tax. Those detriments totaled $42 million or $0.03 per share and were partially offset by $11 million of net benefit from the sale of certain Fifth Third mutual funds or $0.01 per share after tax.

Quarterly results also included an additional $24 million of pretax charges related to the increase in our mortgage repurchase reserve. I will touch on each of these items later in my discussion.

Taking a look at the details of the quarter and turning to slide 5, tax equivalent net interest income increased $8 million sequentially to $907 million and the net interest margin remained stable at 3.56%. Net interest income benefited from several items including hedging effectiveness from the redeemed TruPS and income related to an auto securitization cleanup call. These items in total contributed $10 million to NII during the quarter and 4 basis points to the net interest margin.

Otherwise, net interest income declined about $3 million versus the second-quarter results and the margin declined 4 basis points, both about what we expected for the quarter. As expected, net interest income benefited by $6 million due to an additional day in the quarter as well as from lower interest expense due to the redemption of $1.4 billion of trust preferred securities that occurred in August.

The TruPS redemption increased third-quarter NII by about $4 million. These benefits coupled with loan growth and lower deposit costs were offset by yield compression in the loan and securities portfolios as well as lower purchase accounting accretion.

The 4 basis point core decline in margin reflected 2 basis points in benefit from the August TruPS redemption offset by lower loan securities yields, lower purchase accounting accretion, and the negative effect of day count.

From a balance sheet perspective, investment securities yields declined 7 basis points due to portfolio repricing of higher yielding investments. The impact of QE3 increased prepayment speeds and we will see a full quarter effect of that in the fourth quarter.

On the loan side, we continued to have slow compression in yields primarily driven by loan repricing particularly in CNI and auto portfolios.

On the CNI side, portfolio average yield was down 5 basis points compared with last quarter, which is due to repricing and mix shift toward higher-quality loans as well as some pressure on new origination yields.

In the indirect auto portfolio, average yield also continued to decline, largely reflecting the portfolio effect of replacing older higher-yielding loans with new lower yielding ones.

Looking forward, we expect NII in the fourth quarter to be in the $890 million range. Those results will reflect an additional $4 million of benefit from the full quarter effect of the TruPS redemption. Otherwise we expect NII to be reduced by about $10 million due to the higher prepayment speeds reflecting the full quarter effect of QE3 as well as lower LIBOR rates and portfolio repricing, partially offset by loan growth.

In terms of the margin, we currently expect NIM to decline about 10 basis points in the fourth quarter. This reflects 6 basis points of core NIM contraction given the fact that we had 4 basis points of benefit that I described earlier in the third quarter. We also have a full quarter effect of QE3 prepayment rates and the repricing in the securities and loans portfolios. We'll also continue to look for opportunities to mitigate the effects of this, including liability management.

Turning to the balance sheet on slide 6, average earning assets declined $259 million sequentially, driven by a $580 million decrease in securities balances, partially offset by an increase in the average portfolio loans. The decline in securities reflected our pre-investment in the second quarter of anticipated third-quarter portfolio cash flows. Looking forward, we would expect average securities to remain fairly stable in light of the current rate environment.

Average portfolio loans and leases increased $302 million sequentially, driven by higher C&I and residential mortgage balances and partially offset by declines in commercial real estate and home equity balances.

Looking at each portfolio, average commercial loans held for investment were flat compared to the prior quarter and increased $3 billion or 7% on a year-over-year basis. C&I loans increased to $33.1 billion, up 1% from last quarter and 15% from a year ago. C&I production has been broad-based across industries and sectors with particular strength in the manufacturing and healthcare sectors. We've seen large corporate borrowers continue to refinance into the capital markets, which has impacted growth in that portfolio.

Growth moderated somewhat in the third quarter but we expect solid C&I growth in the fourth quarter given our current pipelines. Commercial line utilization remained at 32% this quarter.

Commercial mortgage and commercial construction balances declined in the aggregate by $374 million sequentially or 4%. While our originations continued to increase modestly in this area, we are also seeing increased payoffs driven by market activity. We expect to see similar levels of runoff in the fourth quarter.

Average consumer loans in the portfolio increased $287 million sequentially and $1.2 billion compared with a year ago. Residential mortgage loans held for investment were up 3% sequentially. This sequential growth reflected strong originations during the quarter due to the rate environment and continued retention of jumbo loans and shorter-term higher-quality residential mortgages that we originate through our retail branch system.

Average auto loan balances were flat compared to the second quarter. While we still like the business and this asset class, we continue to see competition in this space and we are very focused on managing volume and pricing. We currently expect modest auto loan growth in the fourth quarter.

Home equity loan balances were down 1% sequentially and average credit card balances were up 3% sequentially.

As we look ahead to the fourth quarter, we expect loan growth to be driven by solid growth in C&I, auto loan growth as well as the mortgage portfolio with that growth somewhat mitigated by the impact of the runoff in the commercial real estate and the home equity portfolios.

Moving onto deposits, we continue to manage our deposit book by focusing on higher value transaction deposits while managing non-relationship deposit accounts down. In total, average core deposits decreased $258 million from the second quarter. Average transaction deposits, which exclude consumer CDs, decreased $123 million sequentially but were up 7% or $5.3 billion from a year ago. The sequential decrease in transaction deposits was driven by declines in consumer savings and commercial interest checking balances as a result of lower public funds balances.

Demand deposits increased $776 million or 3% sequentially. Consumer CDs declined $135 million in the quarter, driven by our continued disciplined approach to CD pricing. For the fourth quarter, we currently expect transaction deposits to be up modestly compared to the third quarter and for consumer CD balances to continue to decline.

Now let's turn to fees, which are outlined on slide 7. Third-quarter noninterest income was $671 million, a decrease of $7 million from last quarter and there were a few unusual items that impacted each quarter. Third-quarter results included $16 million in negative valuation adjustments on the Vantiv warrant and $13 million in gains on the sale of mutual funds which closed in September. You will recall that the prior quarter results included $56 million in positive valuation adjustments on the Vantiv warrant which was partially offset by $17 million in negative valuation adjustments on property held for sale and $11 million in charges related to the Visa total return swap.

If we exclude those items from both quarters, fee income of $674 million was up $24 million from the second quarter, driven primarily by strong mortgage banking results.

Looking at each line item in detail, deposit service charges decreased 2% sequentially and 5% from the prior year. The decline was driven by consumer deposit fees, which were down 9% sequentially and 19% year-over-year and included the full quarter effect of our elimination of daily overdraft fees on continuing customer overdraft positions.

Commercial deposit fees increased 3% sequentially and 6% over the prior year due to account growth and increased treasury management sales. For the fourth quarter, we expect to see mid single-digit increases in deposit fees, driven by higher account fees and positive seasonality. We think that the third quarter represented the low point and we will be able to grow deposit fees from there.

Investment advisory revenue decreased 2% from last quarter and was flat compared to the prior year largely due to lower mutual fund fee revenue resulting from the sale of the mutual funds that close in September. Otherwise revenues reflected overall market valuation trends and improvement in the equity and bond markets. We currently expect IA revenue to increase modestly in the fourth quarter.

Corporate banking revenue of $101 million decreased slightly from very strong second-quarter levels and increased 16% from last year. The sequential decline was driven by seasonality and lower foreign exchange. The year-over-year increase was largely due to higher syndication fees, higher lease remarketing fees, and higher institutional sales revenue. We expect fourth-quarter corporate banking revenue to be relatively consistent with the strong third-quarter levels or perhaps up modestly.

Card and processing revenue was $65 million, up $1 million from the second quarter but down $13 million from a year ago. That year-over-year decline was driven by the impact of debit interchange legislation but was partially offset by increased transaction volumes as well as mitigation activity in that line item.

The sequential increase reflects higher transaction volumes and levels of consumer spending. We currently expect transaction volumes to drive mid single-digit growth in the card and processing revenue line for the fourth quarter.

Mortgage banking net revenue of $200 million increased 9% from strong second quarter levels and increased 13% from a year ago. Originations were $5.8 billion this quarter versus $5.9 billion in the second quarter.

Gain on sale margins were wider in the third quarter reflecting wider secondary market spreads and a higher proportion of retail channel and HARP originations. As a result, gains on deliveries were a record $226 million, up $43 million from the prior quarter. MSR valuation adjustments including the impact of hedges were negative $40 million this quarter versus a negative $22 million in the second quarter.

Currently we expect mortgage banking revenue to be up $30 million to $35 million in the fourth quarter due to lower MSR valuation adjustments, higher volumes, and relatively stable margins.

Turning next to other income within fees, other income was $78 million this quarter versus $103 million last quarter. Third-quarter results included the $16 million Vantiv warrant loss and the $13 million in gains on the sale of mutual funds. Second-quarter results included $56 million in Vantiv warrant gains, the $17 million negative valuation adjustment on bank premises held for sale, and the $11 million negative valuation adjustment on the Visa total return swap. If you exclude those items, other income was $81 million, which was up about $6 million from the second quarter.

Credit costs recorded in other noninterest income was $14 million in the third quarter compared with $17 million last quarter and $25 million a year ago. We expect fourth-quarter credit costs in revenue to be in a similar range to the past couple quarters.

Looking at overall fee income expectations for the fourth quarter, we expect growth across most fee categories with fee income up about $40 million from the $671 million we reported this quarter. That assumes no change in the value of the Vantiv warrant.

Turning to expenses now on slide 8, noninterest expense $1.0 billion increased $69 million sequentially or 7%. Current quarter expenses included $26 million in costs associated with the TruPS redemption in August, $22 million in additional expense, resulting from the increase in mortgage repurchase reserves, and $2 million of costs related to the sale of mutual funds and $5 million benefit from the sale of affordable housing investments. In total, these increased third-quarter expenses by $45 million.

Expenses in the prior quarter included a $9 million reduction in FDIC insurance expense and an $8 million benefit from the sale of affordable housing investments. Excluding these items from both quarters, noninterest expense of $961 million was up about $7 million from the prior quarter. You will recall that expenses over the past two quarters also reflect elevated levels of marketing costs associated with our new branding campaign, which should return to more normalized levels in the fourth quarter.

Credit-related costs within operating expense were $59 million, up $19 million from last quarter and driven by the increase in mortgage repurchase reserves. Mortgage repurchase expense was $36 million this quarter compared with $18 million last quarter and included $22 million related to the increase in the reserve.

Realized losses were $15 million this quarter versus $16 million last quarter and $31 million last year. As we indicated last quarter, Freddie Mac informed us that they were planning to request files beginning in the fourth quarter and on an ongoing basis for any loan that was nonperforming. During this quarter, we received more detailed information from Freddie Mac as well as the FHFA regarding the selection criteria and the timeframes covered and as a result, we are now in a position to better estimate the probable losses on loans to Freddie Mac.

We don't currently have the same type of information from Fannie Mae, however. Fannie Mae represents approximately 20% of our servicing portfolio and about 30% of the loans sold to GSEs over the past six years.

In terms of the fourth quarter, we currently expect mortgage repurchase expense of $10 million to $15 million and total credit-related costs recognized in expense to be about $40 million.

Overall for the fourth quarter, we currently expect total noninterest expenses to be down about $30 million from this quarter's elevated level. We expect that to be driven by a decline in mortgage repurchase expense in the absence of TruPS redemption charges that we had this quarter.

In the fourth quarter, we expect to recognize about $7 million in seasonal pension curtailment expenses which previously we had expected to occur in the third quarter as well as an offset to that lower remarketing costs of about the same amount. Otherwise we expect modest growth in expenses primarily driven by higher mortgage fulfillment costs.

The efficiency ratio was 64% in the third quarter and would have been 61% excluding the items noted on the next slide compared with 62% on the same basis in the second quarter. We expect fourth quarter to be similar to that 61% level that we report here from the third.

Moving onto slide 9 and PPNR, pre-provision net revenue was $568 million in the third quarter compared with $636 million in the second quarter. Excluding the items noted on this slide, PPNR in the third quarter was $617 million, up about 5% from the results in the second quarter when you adjust those similarly. We expect fourth-quarter PPNR to be consistent with that core third-quarter result or perhaps a little better.

The effective tax rate for the quarter was 27.7% compared with 31.8% last quarter. You will recall that the prior quarter tax rate was elevated due to tax expense associated with the expiration of employee stock options. We currently expect the fourth-quarter effective tax rate to be about 28.5%.

Turning to capital, which is reflected on slide 10, capital levels continued to be very strong including the initiation of common share repurchases and the redemption of TruPS this quarter. The Tier 1 common ratio was 9.7%, a decrease of about 10 basis points from last quarter. Tier 1 capital was 10.9% compared with 12.3% last quarter and the total capital ratio was 14.8% compared with 16.2% in the prior quarter. Tangible common equity was 9.5% including unrealized gains of 460 -- $468 million after tax and 9.1% if you exclude those.

Our capital position would also be strong from a Basel III perspective with Tier 1 common equity of about 9% based on our current estimates and assuming no changes to the proposed rules and before any mitigation activity on our part. That reflects about 45 basis points of benefit on the numerator side and about 115 basis points detriment from an increase in risk weighted assets. As you know, these proposals are currently in the comment period.

As Kevin previously mentioned, we entered into a share repurchase transaction in August to repurchase approximately $350 million of common shares. Our capital plan included an additional $250 million of possible repurchases through the first quarter of 2013, depending on market conditions.

That wraps up my remarks so now I'll turn it over to Bruce to discuss credit results and trends. Bruce?

Thanks, Dan. We continued to see credit improvement across all categories in the third quarter. Credit results were the best we have reported since prior to the crisis in 2007.

Starting with charge-offs on slide 11, total net charge-offs of $156 million declined $25 million or 14% from the second quarter and $106 million or 40% from a year ago. The net charge-off ratio was 75 basis points for the quarter, the lowest in five years, not as low as it should be, but it's getting there.

Commercial net charge-offs of $62 million declined 21% sequentially and 54% from last year. At 53 basis points, this was the lowest level reported since the third quarter of 2007. The biggest improvements were in C&I net charge-offs, down $17 million sequentially, and commercial lease net charge-offs, down $6 million from abnormally high second-quarter levels.

Commercial real estate net charge-offs were up a combined $7 million from last quarter but continue to moderate in general. Total consumer net charge-offs were $94 million, down 9% sequentially and 25% from a year ago. Most of this improvement was in residential mortgage charge-offs, which dropped 28% from last quarter, driven by improvements in Florida, which was down 34% sequentially. This significant reduction was a result of improved early delinquencies throughout the year and we believe this represents a level that we can continue to improve upon.

Overall, it was another solid quarter for us from a credit perspective and we continue to see improvement across the portfolio. Looking ahead to the fourth quarter, we currently expect net charge-offs to be down another $5 million to the $150 million range.

Now moving to nonperforming assets on slide 12, NPAs including held for sale, totaled $1.5 billion at quarter end down $190 million or 11% from the second quarter. Excluding held for sale, NPAs were $1.4 billion, down $173 million or 11% from the second quarter, driven by improvement in commercial NPAs.

Commercial portfolio NPAs declined $165 million sequentially to $1 billion, their lowest level since the first quarter of 2008. Most portfolio categories improved with commercial real estate NPLs down $106 million or 20% and C&I NPLs down $76 million or 17%. This was partially offset by commercial OREO balances, which were up $12 million from the past quarter.

Within portfolio NPAs, commercial TDRs on nonaccrual status were $153 million, up $6 million on a sequential basis. Commercial accruing TDRs were down $13 million and also remained fairly low at $442 million.

In the consumer portfolio, NPAs declined $8 million to $429 million or 118 basis points, with NPLs down $12 million, driven by broad-based improvement across all categories. Non-accruing consumer TDRs were $192 million, down $1 million from last quarter. Accruing consumer TDRs were $1.6 billion, consistent with the last quarter.

The TDR book continues to perform as expected, and has stabilized as opportunities for new restructurings have become more limited due to our historically proactive practices and more stable residential real estate credit conditions. Looking ahead to the fourth quarter, we currently expect NPAs to continue to decline, with the majority of the improvement in the commercial portfolio which should be down $75 million to $100 million.

The next slide, slide 13, includes a roll forward of nonperforming loans. Commercial inflows at $121 million were down $82 million in the third quarter. Additionally, paydowns on nonperforming loans were up $37 million compared with the prior quarter. Commercial inflows for the quarter were $161 million, down $21 million. These were the lowest inflows we have seen for both commercial and consumer NPLs in several years.

Moving to slide 14, which outlines delinquency trends, loans 30 to 89 days past due totaled $346 million, down $25 million from last quarter, with consumer up $13 million primarily in credit card and auto, and commercial down $37 million primarily in commercial real estate. Loans 90 plus days past due were $201 million, down $2 million from the second quarter and down $73 million or 27% from a year ago.

Total delinquencies of $547 million decreased $27 million or 5% from the second quarter and remain at pre-crisis levels. Commercial criticized asset levels also continued to improve in the third quarter, with the sixth consecutive quarter of decline down $670 million or 10% sequentially.

The provision and allowance are outlined on slide 15. Provision expense of $65 million for the quarter was down $6 million and included a reduction in the loan-loss allowance of $91 million. Allowance coverage remains strong at 167% nonperforming loans and 3.1 times annualized charge-offs. We expect to see continued declines in the reserve based on continued credit improvement.

Slide 16 outlines our recent mortgage repurchase experience as a majority of our activity has been with the GSEs. The claims and losses associated with the GSEs have remained fairly stable the past several quarters but we expect this will likely increase some with the increased file request from Freddie Mac, as Dan mentioned.

We provided a detailed breakout of loans sold by vintage and remaining balance. Repurchase requests and losses have been concentrated about 80% in the 2005 to 2008 vintages, which represent 13% of the remaining balance.

Overall results for the quarter continued to show significant improvement in our credit metrics. The trends remain headed in the right direction and we expect this to continue in the upcoming quarters.

One last thing to touch on, you are aware the OCC has issued guidance related to consumer loans to borrowers that have been through Chapter 7 bankruptcy and not reaffirmed by the borrower. This guidance included classifying such loans as TDRs, writing them down to their collateral value, and classifying them as nonperforming.

We are not an OCC bank and the Fed and FDIC have not issued similar guidance. As a result, we haven't taken any action in response to this although we continue to monitor developments and are in the process of analyzing the nature and amount of such loans in our portfolios.

We currently estimate that we have approximately $150 million of loans that would fall into this category, about one-third of which has already been through the TDR process and approximately 80% of which are current.

From a charge-offs perspective, the exposure would require a write-down of these loans to appraised value despite the fact they continue to pay as agreed. We are not in a position to estimate what that $150 million would need to be charged down to if this change were adopted. The bottom line is that this would be manageable for us but we're not in a position to provide further information at this time.

That wraps up my remarks. I will turn it back over to Kevin now for closing comments. Kevin?

Thanks, Bruce. As Dan and Bruce outlined, our core businesses continue to perform well despite economic and regulatory headwinds. Our 21,000 employees remain focused on building strong relationships and offering our customers products and services that they genuinely find to be value-added. We're finding and capitalizing on opportunities to make sure that we take share in our markets and we expect that to continue to drive our results going forward.

That wraps up our formal remarks. Operator, can you open up the line for questions?

(Operator Instructions). Ken Zerbe, Morgan Stanley.

Just a question on the outlook for C&I. I know you said it's going to pick up in fourth quarter because you have a stronger pipeline. Can you just comment about how I guess accurate looking at pipeline is in terms of actual translating into actual C&I growth? And maybe just for -- to help us understand the magnitude I guess, what was the pipeline last quarter and were you surprised going into the third quarter by the slowdown of C&I if that makes sense?

Ken, I will give you a perspective. Bruce may chime in but from our standpoint, the pipeline continues to be a good measure for us in looking at what future production anticipation is. These are deals obviously that we've got and understand explicitly where they are in development. And so while they can move a little bit for the most part we track them along from a progress standpoint.

So production continues to be clear to us. The biggest challenge for us has been really kind of what happened with the capital markets and some of the pay downs, which is a little bit more difficult to forecast and to keep ahead of in terms of understanding impact from that standpoint. Obviously we are in touch with our clients closely but they're taking advantage of the marketplace and quite frankly in some cases, we are counseling them to.

So that's really the challenge on a look forward basis. That's I think will continue to be the challenge. I think we've been pretty transparent and open relative to what we see from a pipeline standpoint in production and it has really then been the challenge of the pay downs that have continued to be kind of the variable. I don't know, Bruce, if you'd add anything.

Yes, we feel very good about the fourth-quarter pipeline. We know exactly where it's coming from. We have been involved in those credits and the approvals, so we feel good about the fourth quarter. As Kevin did mention, there's been much more capital markets activities and refinancing in the bond market than maybe we had initially anticipated but that's really what's going on.

The production side is good and we feel very confident in the accuracy of that.

The only other thing I would add, Ken, is compared to where we were relative to last quarter and guidance given and what we see today in the pipeline, that is why we have given the guidance that we have given in terms of the fourth quarter. We feel good about that.

All right, that helps. Then just one quick one on resi, can you just talk about your appetite for resi mortgage growth? Because I'm trying to reconcile that with your comments about security balances being relatively flat meaning are you intentionally running off or at least keeping -- you're growing resi at the expense so to speak of a flat securities portfolio, given where MBS yields are?

The Vantiv portfolio clearly continues to be impacted by faster prepayment speeds, but at the same time, we do have our own branch mortgage product originations and jumbo originations that are cushioning that impact. So I would expect our resi portfolio to continue to grow not heroically, but I think we should see stable growth rates in the portfolio.

So you're finding resi to be a more attractive product than MBS at this point?

It is. Not to the extent that -- where we have decided to portfolio-conforming mortgage loans. We've done that in the past a couple of years ago and we continue to evaluate that on a quarterly basis to replace prepaying mortgage-backed security balances with mortgage loans. But at this point given the valuation of conforming loans, we don't see that as an attractive risk return trade-off and we are also trying to manage our durations within reasonable limits and keeping 30-year mortgages today does not seem like a good strategy to us.

Todd Hagerman, Sterne Agee.

Good morning, everybody. Kevin, just kind of a follow-up on the loan growth commercial question. You referenced the election in your prepared remarks and production being very strong going in the quarter. If you could just help me better understand just as you referenced the challenges with the payoffs in capital markets, could you be more specific in terms of where the production really -- the strength is relative to that kind of headwind if you will. And the reference to the election, is this something that's kind of more backend loaded or just trying to get a little bit more clarity in terms of the outlook?

Todd, generally what I would say, a couple of things to your question. One is where we are seeing some of the activity is really fairly broad-based and we talked about this specifically in the manufacturing and healthcare space. That's true but it is fairly widespread and broad-based. We are hearing, seeing that uncertainty does impact and has been impacting reflections on managements, what they do and where they are, so we hope that as we get more clarity and the election being significant in this time period, that brings more clarity and decisiveness in terms of the actions posed or considering or being considered by our clients and by the marketplace in general. So that's kind of the impact we are seeing and hearing from this, from our standpoint.

So again with regard to them taking advantage of the marketplace, again some of it is through our counseling. Some of it is their own desire to strengthen and manage their balance sheets and we continue to work with them from that standpoint. I think as we get more clarity, there potentially is some pent-up demand. We see that continually. You've heard it in terms of the industry broadly relative to deposit bases and deposits on -- in banks where they are not really looking to put that capital to work.

So we are hopeful that as we get more clarity and it may not be simply a next item, but as we get into later next year that clarity becomes a matter of confidence that they begin to move forward with.

So that's all we are hearing. That's all we are seeing. We saw some of that play through our production and through our pay downs and I think that is going to continue to be a trend as we move through this time period, so --

That's helpful, and just on that point in terms of the pay downs, could you just give us a sense of kind of where that's been trending if I look at to Q2 relative to Q3, what the trend there has been in terms of the payoffs?

Yes, in the C&I space, it has clearly escalated in the third quarter again as the capital markets open up and as interest rates -- as QE3s talk more about long-term interest rates, people are going to the bond market. We are suggesting they go there. It helps their capital stack and it will reduce their costs long-term and provide them with some fixed-rate funding. So that's what we are seeing.

We saw it escalate in the third quarter and we think that we have a much better idea what will be in the fourth quarter and it's been built into our guidance.

Okay, but relative to some of the other categories, if I think about the commercial real estate, that sort of thing, is that significantly different than what you are seeing within a large corporate or no?

It's very different. Some of that real estate that's being -- that we are seeing the reduction here, is there some refinancing going on? But there's also some assets being sold by our borrowers, so we expect that pay down to be consistent in the fourth quarter with the third quarter.

Terrific. That's very helpful. Thank you.

Paul Miller, FBR.

This is actually [Tom Fletcher] on behalf of Paul. I had a quick question I guess sort on the loan growth front. But one of your competitors the other day was talking positively about Michigan and the trends they are seeing there and given your size there, I just wanted to get your thoughts on sort of what you are seeing in that market?

Tom, what I would tell you again -- I don't -- as we look at kind of the geography we feel good about the broad diversification that we have. Obviously when we talk about manufacturing, Michigan falls into that category, as does a good portion of our upper Midwest profile. So we are seeing good activity. We are seeing kind of a good area of recovery from that standpoint. I don't know -- I wouldn't say it's outsized relative to the rest of our footprint and the rest of what we are seeing as you overly kind of the manufacturing profile across our geographies. So that would be kind of our commentary relative to Michigan and what we see from that standpoint.

Okay, a quick clarification point because I sort of caught it but I didn't catch all of it. The repurchase reserves in this quarter, that was related to sort of Freddie and FHA read through and not related to Fannie, correct?

That is correct.

Okay, perfect. Thanks, guys.

Craig Siegenthaler, Credit Suisse.

Nick Karzon standing in for Craig this morning. I guess just first, kind of following up on the mortgage rep and warranty and the reserve there, can you give us a little bit more color on the expectations on that going forward? A lot of your peers have taken kind of full -- or kind of built their reserve to the extent that they don't expect to take further reserves for that 2005 to 2008 vintage. Are there plans to meet with Fannie to potentially sit down and have a similar discussion to get to that level of confidence?

Craig, this is Dan. Certainly we continue to have discussions with both Fannie and Freddie and incorporate into our reserving methodology all the current information that we have based on those discussions. So I don't want to give the impression that we haven't had any discussions with Fannie Mae. We have those discussions all the time and attempt to get the best information we can with respect to what their intentions are, what we should expect going forward.

I think what occurred with Freddie Mac this quarter, which really -- frankly started last quarter you'll recall, last order we talked about the fact that Freddie Mac had been signaling that we should expect an increase in file requests on a going forward basis. At that point in time, we didn't have the clarity that we do now with respect to when those requests would increase, how much they would increase, and more importantly what methodology or selection criteria they were using or they would -- they expected to be using to arrive at those higher levels of file requests.

So we now understand better what criteria they are using and we can use that criteria to -- as a component of our reserving methodology. So now we have reserves on the books not only for file requests that we have received but also file requests that we expect to receive based on those revised criteria. So that's the kind of clarity we got this quarter that allowed us to incorporate that information into our reserving methodology with respect to Freddie Mac.

We continue to have discussions with Fannie Mae and like Freddie Mac, our reserves for put backs from Fannie Mae reflect all of the information that we have received up to this point from Fannie Mae. We just thought it was important to emphasize that with respect to the incremental reserves that we have recorded this quarter and the change in methodology that was something that was applicable to Freddie Mac but not Fannie Mae.

Thanks, I guess just a second question.

The future? The second part of that question was what should we expect in the future? I think our methodology is based upon those loans that we expect to get file requests for based on the criteria that Freddie has laid out for us. That criteria will continue to apply into the future and to the extent that more loans in the future meet that criteria, we would expect to receive incremental file requests over and above those that are reserved for today.

So we haven't -- we don't believe that we've booked reserves for everything that will happen in the future but clearly to the extent that there are a population of loans out there that already meet this criteria and that there is somewhat of a backlog that Freddie will be working through over the next three to six months, we have accounted for those loans at this point in time. So I think we have reserved for a chunk of our remaining exposure, but I don't think it's something that we believe we have reserved for all losses for the life of the portfolio and don't think that that is the appropriate accounting policy.

Got it, thanks. I guess a second question is how much room do you see on the deposit cost side and are there any large upcoming CD maturities that we should be aware of?

I think clearly with rates were they are, there's probably less room on deposit pricing than there has been in the past but that being said, I think we continue to see some room there as we monitor those rates, monitor what competitors are doing. So that's something that we look at all the time and we will continue to look at.

I think with respect to any large amounts of repricing, we've talked in the past about CD repricing, primarily CDs that were put on the books in 2008 at the end of 2008 during the liquidity crisis that had some higher rates. Most of that is behind us. However, there were or there was a slug of those put on at the end of 2008 that had five-year maturities and therefore toward the latter half, third, fourth quarter of 2013, we will see a little bit of activity in terms of some high rate CDs that mature in that timeframe. But that's a few quarters off yet.

Thanks for taking my questions.

Vivek Juneja, JPMorgan.

With everything going on this morning I think I missed part of the comment about the OCC-related guidance. Did I hear you say $150 million of loans are impacted but you said you aren't able to estimate the charge-offs. Do you have a sense of when you might be able to do so and what's holding that back?

This is Dan. You did hear that right. We believe that there's about $150 million of loans that we will need to analyze. This is recently issued guidance and as I think you probably know, the guidance is that there should be charge downs of those loans to the appraised values. We don't have current appraised values on our entire portfolio, so as we analyze what the potential impact of this item is, one of the things that we need to do is to go get current appraisal information for those loans. So that's the reason that we are unable to estimate that at this time is just simply the fact that it's very recent guidance and we haven't received that information yet.

Our understanding is that our regulators, the Fed and FDIC, are considering that guidance and we will have a clearer view as to what the expectations of us are as we go into the fourth quarter and certainly we would anticipate having that information in the fourth quarter to enable us to respond to whatever that guidance is that we receive.

All right, thank you.

Kevin Barker, Compass Point.

(inaudible) declines in savings and checking accounts, if there is a change in strategy to allow maybe some deposits to come down in order to manage your net interest income or is there something going on there where you would allow some funds to run off? Is there something there?

Kevin, I think we missed the first part of your question. Can you please repeat that?

Could you discuss some of the declines in the checking and savings account balances?

Okay, I don't think that there is any sort of trends that we are seeing. It's sort of normal fluctuations. We are not necessarily strategically guiding them down or up. We obviously are very interested in deposit growth, continue to be interested in deposit growth and the DDAs were up quite a bit this quarter.

Obviously our clients, both our corporate side as well as consumer side, continue to hold quite a bit of liquidity and I think we're taking our market share. We are also trying to be smart about those deposits that are interest-bearing and make sure that we're managing interest costs efficiently. So I don't think that the balances indicate any trends or strategic direction at this point.

Right, then on auto lending, what rates are you seeing out there for new auto loans and what kind of ranges are you seeing for new auto loans right now?

Rates have continued to inch down from the second quarter to the third quarter. Clearly the third quarter from just a base swap rate perspective has been very volatile. Typically sort of a five-year auto loan to high FICO scores, 760 plus type FICO score borrowers is probably around 3% today.

What about the lower FICO scores? Are you --?

We don't do lower FICO scores so it is difficult for me to give you guidance on that.

Okay, are you seeing much more competition out there for auto loans? Is there something that's really going to be pushing rates if they are going to continue to go lower?

There is competition. I think Fed's commitment to keep these low rates lower for a longer period of time continues to fuel that competition. We are doing the business smartly and we have been in that business for a long time so we are managing the risk profiles within our normal traditional guidelines and we have good established relationships with dealers which is enabling us to keep rates stable at this point, but competition clearly is picking up.

And then finally, most of the originations on the mortgage banking side, was that -- what was the breakout between retail and wholesale originations this quarter?

Hang on just a minute. Let me see if we have that here.

What I'm trying to get at -- where was most of the growth in originations.

Most of the growth has been in retail. In terms of our originations --

About 60% of our originations were retail this quarter.

Okay, thank you very much.

And that was a little higher than last quarter.

Jon Arfstrom.

Good morning, guys. Just two quick questions. What's the plan for the rest of the buyback that's not part of the accelerated program?

John, this is Dan. As you know, we had a $350 million accelerated share repurchase program that was initiated in August. We have approval for about $250 million in additional repurchases over the balance of our CCAR period, which as you know goes through the end of the first quarter. So fourth quarter of 2012, first quarter of 2013 there's about $250 million in additional capacity and we would expect that barring unforeseen market conditions that those repurchases would take place ratably over that period would probably be the most likely result at this point in time.

Just to clarify, the high end of your targeted combined payout range is still 80% in terms of dividend plus buybacks?

Yes, I think that's probably a good estimate of the high end of the range, yes.

Okay, good. Then just one unrelated question but I believe you had a leadership change in Chicago and I'm just curious as to how you feel you are doing in that market and if there's any change in approach in terms of how you go about your business in Chicago?

John, for the most part, our leadership team in Chicago has been fairly stable. I'm not sure if there is a specific individual or a specific person you are referencing, but we feel really good about that marketplace. We feel really good about what Bob Sullivan has been doing in that marketplace. I think we have really had great results and continued momentum in that marketplace and Bob is doing a fantastic job for us up there. So I guess that's what I would say unless there's something specifically you'd want.

We can take it off-line. That's fine.

Bob has been in Chicago two years -- headed up Chicago two years obviously had senior positions in the Company for many years.

Yes, great.

Ken Usdin, Jefferies.

Thanks, guys. Good morning. Two follow-ups. One on just the NII and NIM outlook. I know that all banks are going to be pressured but we do see a lot of earning asset growth this quarter also. So I just wanted to see if you can help us understand as you look out into next year -- you mentioned that you think that NIM and NII challenges are manageable but can you guys grow NII next year? Do you anticipate that the pace of loan growth and earning asset growth will be able to stem the tide of the obvious NIM challenges for the industry?

As you remembered actually, I understand why these NIM and NII questions are a hot topic at this time around but we started talking about this early this year and we said that NIM takes a second seat to NII growth. And I think the whole year we focused on growing earning assets and we are giving you guidance for Q4. I wouldn't read too much into that. We are not giving you guidance for 2013, but that's because our typical update happens this quarter and there are a couple of obviously unknowns with respect to the elections and the fiscal cliff.

But we will be updating that. We're still confident that our earning asset growth will cushion NIM contraction although when you look at our numbers, our Q4 guidance is probably on the low side of what other banks are guiding their NIM.

We've been able to manage both sides quite successfully this year. You're going to end up this year with most likely a higher NII than we did last year in a very difficult market environment and we've focused on this all year and I think we are pretty confident that going forward that same focus will benefit our numbers.

Okay. And then my second question just relating as you think -- as you guys go into the next stress test obviously just wanted to get some perspective on -- your takeaways from how this year's process went, you obviously did resubmit and were allowed to proceed or not objected to. I know we haven't seen -- you guys haven't seen the data yet but just any different thought process as you go into next year's stress test in terms of even that 80% [topline] that John asked about before in terms of -- is there any -- do you anticipate there being any pushback or change given what you guys had to experience this year?

Ken, this is Dan. I think as we go into this year's process, as you pointed out, we are still waiting for the scenarios and final guidance and so forth, so we will have to react to that and incorporate that into our expectations.

But as we sit here today, I don't believe there is any significant change in our thought process relative to what is an appropriate capital return plan and what might be reflected in that. I don't think there's a strong bias that the level of our returns of capital would go up or down from the prior year based on where we sit today because I think we continue to have very strong capital levels, we continue to have strong capital accretion from strong earnings.

So on an overall basis, I think our expectations would be that it would look pretty similar to last year unless there are changes in the process that we have yet to see.

Okay, my last one is just related to -- on another capital question, any update with regards to Vantiv? I know we saw just a negative warrant account this quarter but can you just give us a quick thought on core performance of Vantiv and again just how you guys are thinking about the stake versus opportunities versus what Vantiv's own strategy is with regard to liquidity and the holding, etc.?

Yes, I think overall we're very pleased with the progress that Vantiv is making -- please with their results. I think they have good growth plans in place, which has included some level of acquisitions. I think they are in an industry that has opportunities to grow from that perspective and we believe that they have taken advantage of those opportunities very well thus far and are likely to continue to do so. So we think that that is an attractive holding for us.

Relative to plans going forward, we don't have any definitive plans at this particular point in time, so that's something that we think is an attractive holding and we think we have a lot of flexibility now that it is a public company as to how we approach that going forward and we will continue to evaluate it going forward.

So we did have a bit of a negative mark this quarter. As you know that follows some fairly large positive marks over the preceding quarter so there's a little bit of volatility now that it's a publicly traded company and the stock price moves around a little bit, but overall their stock has performed very well and we are very comfortable with our position.

Just as a -- the warrant is a warrant to purchase Vantiv stock. It is for 15 years, so the way we look at that warrant is as a 15-year instruments. The accounting for it is that it changes in value every quarter but it doesn't change in value every quarter from our perspective. But it is -- it can be volatile and as Vantiv stock moves, you can see that clearly in the market because they are publicly traded and that's going to have an impact positive or negative as their stock moves each order on our earnings and we will be clear about what the impact was, but you have the ability really to estimate that every quarter.

Okay. Thanks, guys.

We have now reached our allotted time for questions. Are there any closing remarks?

No, thanks. I appreciate it. Thanks, everyone.

Thank you for your participation. This concludes today's conference. You may now disconnect.