Fifth Third Bancorp (FITBP) 2011 Q3 法說會逐字稿

Good morning. My name is Jamie, and I will be your conference operator today. At this time I would like to welcome everyone to the Fifth Third Bancorp third-quarter 2011 earnings conference call. (Operator Instructions).

Thank you. I would now like to turn our conference call over to Mr. Richardson, Director of Investor Relations. Sir, you may begin your conference.

Thanks, Jamie. Good morning. Today we will be talking with you about third-quarter 2011 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 the historical performance in these statements. We have identified a number of those 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 add your firm to the operator. With that, I will turn the call over to Kevin Kabat. Kevin?

Thanks, Jeff. Today Fifth Third reported third-quarter net income to common shareholders of $373 million and earnings per share of $0.40. That EPS result was up 14% sequentially and 82% from a year ago. Our return on assets rose to 1.34%, and we generated a return on tangible common equity of 15%. Additionally tangible book value per share of $11.05 increased 5% sequentially and 13% from a year ago. These are pretty strong results, especially considering the slow economic growth, low interest rate environment that we are operating in. In fact, this is the highest quarterly net income we have reported since mid-2006 with the exception of the third quarter of 2009 when we booked the processing joint-venture gain.

Total revenue grew 3% compared with the last quarter. The main driver of the growth was net interest income, which increased $33 million or 4%. Loan growth was solid increasing $1.2 billion on an end of period basis or 2%. Fee income results were the strongest we have seen in more than two years with mortgage results benefiting from a pickup in refinancing activity given the rate environment.

Otherwise, there were a few unusual items that generally offset one another. Expenses were up from unusually low levels in the second quarter, but included charges of $28 million related to the termination of debt and hedging transactions during the quarter. We expect expenses to be flat to up modestly in the fourth quarter due to higher expenses related to elevated mortgage volumes and the potential for pension curtailment expense, which is typically required in the third or fourth quarter.

We will continue to manage expenses very carefully going forward, especially while the direction of the economic environment remains uncertain.

Credit trends continued to show substantial improvement with net charge-offs falling to the lowest levels since 2007 and nonperforming assets declining by more than $140 million on a sequential basis to the lowest level since mid-2008. We continue to expect credit trends to improve going forward.

Capital levels continue to be very strong and well in excess of regulatory requirements and targeted levels. Tier 1 common is 9.3% under current capital rules, and we would estimate a fully phased in Basel III Tier 1 common ratio of approximately 9.8%, and we believe that would place us among the highest of the top 20 US banks.

As a reminder, during the quarter, we increased our dividend by 33% to an annualized rate of $0.32 per share. This is our second dividend increase in 2011, and given our strong capital positions and strong levels of profitability, we expect to be well positioned to continue to prudently increase the capital we returned to shareholders.

In terms of the broader context, the third quarter was extremely volatile. Expectations for economic growth in the US have come down, although headlines recently have been better than expected, and interest rates have declined to historically low levels. This is a very difficult rate environment for banking institutions, but, as we demonstrated this quarter, we have the ability to generate net interest income growth despite the effects of the rate environment on the margin through the generation of loan growth and the management of liability costs.

Developments in Europe have dominated headlines in the past several months. I would point out that Fifth Third has very little direct exposure to Europe, particularly the areas of greatest concern. Our total holdings of non-US sovereign debt are just $3 million. We have no sovereign exposure to the five European peripheral nations so much in the news. We have less than $200 million in total exposure to companies headquartered in those countries, the vast majority of which is to subsidiaries of those companies here in the US. Our total exposure on a gross basis to European banks is less than $300 million. All those numbers are millions with an M, not a B. And we don't have significant trading books that could be negatively affected by the potential sale of assets by European financial institutions.

Fifth Third's strengths in traditional banking have driven the solid results we have seen in the past year and should not be significantly impacted by new rules and regulations as they go into effect. Of course, debit interchange legislation will have an initial impact, but we expect over time to mitigate much of the impact through careful work with our customers, ensuring that we continue to provide them with products and services that they find valuable and letting customers choose how to pay for the products and services they use, like our new Duo Card.

We have also just seen a draft of the Volcker rule recently released, which we expect will have little impact on our financial results or business activities. We believe the businesses we focused on and are focus on doing the right thing by our customers are very consistent with new legislative and regulatory developments. As a result, we believe we are well positioned to continue to take business from competitors as operating models are reworked to conform to new rules and new capital requirements.

Before turning it over to Dan, I would like to thank our employees for their hard work and thank our customers for their continued dedication to the bank. We are committed to delivering the highest quality banking experience in the country, and I think these results reflect our success in doing that.

With that, I will ask Dan to discuss operating results and give some comments about our outlook.

Thanks, Kevin. As Kevin discussed, we had a very strong quarter and maybe the best quarter we have reported in five years. To move into the details, I will start with slide four of the presentation.

In the third quarter, we reported net income of $381 million and recorded preferred dividends of $8 million. Net income to common was $373 million, up 14% from last quarter, and diluted earnings per share were $0.40, also up 14% or $0.05 from the second quarter. Return on assets was 1.34%, and return on tangible common equity was 15%. Those are pretty strong returns, and we believe that they have room to improve further, particularly when the economy and the asset growth begins to pick up.

Turning to slide five, net interest income on a fully taxable equivalent basis increased $33 million sequentially to $902 million, which was better than we were expecting coming into the quarter. And net interest margin increased 3 basis points to 3.65%. Balance growth in C&I, residential mortgage, auto and bank card loans contributed to the increase in NII and partially offset modest yield compression across most loan captions.

On the C&I side, the portfolio average yield was down 6 basis points from the prior quarter. We continue to originate loans in the higher end space, and this has had a mix effect that has naturally put some pressure on our reported yields in addition to the effect of lower market rates. However, spreads have widened in the market, and to the extent that continues, it should reduce pressure on bank loan yields.

Additionally market volatility has limited corporate refinancing activity in the bond market, and that has benefited asset growth.

In the indirect auto portfolio, loan yields have reflected both lower reinvestment rates and additional competition as these assets are attractive from both a loss and a duration standpoint. However, compression in new origination yields has slowed, and thus, future portfolio yield trends will be primarily related to portfolio effects related to replacing older higher-yielding loans with new lower yielding loans.

NII and NIM also benefited from the continued runoff in CDs, as well as deposit mix shift into lower-priced deposit products. Although deposit flows were exceptionally strong this quarter and that contributed some pressure to the NIM. CD runoff contributed $8 million to sequential growth in NII and 3 basis points to NIM. The full quarter impact of our second-quarter TruPS redemptions contributed about $5 million to NII and 2 basis points to NIM. And hedge ineffectiveness during the quarter, which was driven by a flattening of the yield curve, as well as increased rate volatility, contributed $3 million to NII and 1 basis point to NIM. That effect was a modest negative for us in the prior quarter.

And then finally, an extra day in the quarter added about $6 million to NII but reduced NIM by 2 basis points.

In the fourth quarter, we currently expect NII to increase modestly from this quarter with growth driven by the benefit of CD runoff, as well as loan growth with those partially offset by yield compression in the securities and loan portfolios from lower reinvestment rates.

We also would not expect the recurrence of the benefit that we realized this quarter with respect to hedge ineffectiveness.

In terms of margin, we currently expect NIM to increase a couple of basis points in the fourth quarter, largely due to the benefit of CD runoff.

Looking forward from there, the low level of rates across the curve will create asset pricing pressure, and we will naturally see some compression to the net interest margin through 2012 until we see rates begin to move up. However, from an NII standpoint, we expect to be able to generally earn through this NIM compression with earning asset growth.

Turning to slide six, let's go through the balance sheet in more detail. Average earning assets increased $1.8 billion sequentially, driven by an $860 million increase in total loan balances and a $950 million increase in investment securities balances. The increase in investment security balances was driven primarily by two factors.

First, to prepare for any unusual market developments related to the debt ceiling debate, we extended maturities of FHLB advances and increased the advances to an ASR cash position. As it turned out, we did not see any unusual cash demands or customer borrowings, and in fact, we experienced a significant influx of deposits, particularly during August.

The second factor increasing securities balances was our pre-investment earlier in the quarter of expected second half of 2011 cash flows from the investment portfolio.

Average portfolio loans and leases increased $683 million sequentially, driven by positive trends within C&I, residential mortgage and auto loans, which on a combined basis were up $1.5 billion this quarter. That growth was partially offset by the continued runoff in the commercial real estate and home equity books of about $669 million in the aggregate. Additionally mortgage loans held for sale were up $217 million, driven by increased refinancing activity during the quarter.

Looking at each loan portfolio, average commercial loans held for investment were up $309 million sequentially. Within that, average C&I loans increased $868 million sequentially. That is a 3% increase from last quarter, and they were up 9% from a year ago. Our C&I production continues to be very strong. We have seen broad-based growth across a number of industries and sectors, and as I mentioned, demand is stronger in the corporate end of the market. Given our strong levels of production and pipelines, as well as the current market environment, I expect we will see similar growth in the fourth quarter.

Commercial line utilization remained at low levels this quarter at about 33%, which is consistent with last quarter and up about a percentage point from a year ago. However, that is still down from normal levels in the low to mid 40s. By line utilization has been flat, our overall commitments have increased the past couple of quarters, and that has contributed to our increased C&I balances.

We saw continued runoff in the commercial mortgage and commercial construction books. Average CRE balances were down $510 million or 4% sequentially. We continue to expect runoff in these portfolios in the near to intermediate term although at a steadily slowing pace. CRE loans for us are only about 15% of our portfolio, so while it is a drag on overall loan growth, it is not very big and it continues to get smaller. I would expect that the size of this portfolio will plateau with the stabilization or improvement in commercial real estate markets, perhaps in the next several quarters.

Average consumer loans in the portfolio increased $374 million sequentially. The growth in consumer loans was driven by the residential mortgage book, which was up $352 million sequentially, along with auto loan growth of $257 million and credit card balance growth of $30 million. This growth was partially offset by continued runoff in the home equity portfolio, which was down $159 million. The sequential growth in mortgage loans reflected the continued retention of certain shorter-term, high-quality residential mortgages originated through our branch retail systems. We retained 406 million of these mortgages during the third quarter.

Average auto loan balances increased 2% sequentially. The auto portfolio has continued to perform very well from a credit standpoint, and while yields have come down, they remain attractive as a balance sheet asset. Home equity loan balances were down 1% sequentially. We have seen continued runoff in this portfolio for some time now, and given lower equity levels among homeowners, I would expect that that trend will continue. Average credit card balances were up 2% sequentially as we continue to increase card penetration within our customer base.

As we look ahead to the fourth quarter, we expect to see growth in C&I, mortgage and auto loans, partially offset by continued attrition in CRE balances, as well as home equity loans. That should result in continued solid overall loan portfolio growth in the fourth quarter.

Moving on to deposits, average core deposits were flat compared with last quarter, while average transaction deposits, which exclude consumer CDs, were up $708 million or 1% sequentially and $7 billion or a very strong 11% from a year ago. Consumer CDs declined $730 million in the quarter, driven by maturities of higher rate CDs that we originated in late 2008 and our continued disciplined approach to CD pricing.

Growth in transaction deposits was largely driven by demand deposits, which are up 22% from a year ago. Average retail transaction deposits increased 1% sequentially and 13% year over year with growth across most categories. Our Relationship Savings product has now attracted $13 billion of balances since its inception more than two years ago. Given the current rate environment, we continue to see customers moving funds into more liquid savings products when CDs mature.

Average commercial transaction deposits increased 1% from last quarter and 7% from a year ago. The sequential and year-over-year growth reflects increased demand deposit balances. For the fourth quarter, we currently expect continued modest growth in transaction deposits and for consumer CD balances to continue to decline.

Moving on to fees, which are outlined on slide seven, second-quarter noninterest income was $665 million, an increase of $9 million from last quarter, and was driven by strong mortgage banking revenue, growth in deposit service charges, as well as net security gains. Those categories generated growth of about $50 million in the aggregate, which was partially offset by a $17 million negative valuation adjustment on the total return swap associated with the sale of our Visa shares. Additionally in the second quarter, we reported $29 million in positive valuation adjustments on puts and warrants related to Vantiv, our processing business, whereas those were just $3 million this quarter.

Looking at each line item in detail, deposit service charges increased 7% sequentially, consumer deposit fees increased 11%, and commercial deposit fees increased 4%. The increase in consumer deposit fees reflected account growth, as well as seasonally higher fees typically realized in the third quarter.

I would note that consumer deposit fees trends over time reflect the implementation of overdraft regulations and overdraft policies, and these are now fully realized into our current numbers. The increasing commercial deposit fees was attributable to an increase in the number of accounts, as well as lower earnings credit rates. For the fourth quarter, we expect deposit fees to be stable to up modestly from the levels this quarter.

Investment advisory revenue decreased 3% from last quarter but increased 2% on a year-over-year basis. The variation from prior periods was largely driven by fluctuations in the equity and bond markets. In addition, we continue to see increased productivity, as well as salesforce expansion, which are helping to offset the impact of recently lower market values.

We currently expect to see low single-digit growth in the IA revenue line during the fourth quarter.

Corporate banking revenue of $87 million declined 8% from the second quarter and increased 1% from last year. The sequential decline was largely due to a decrease in institutional sales revenue and loan syndication fees. We expect fourth-quarter corporate banking revenue to be pretty consistent with the third-quarter levels.

Card and processing revenue was $78 million, down 12% from the second quarter and up 2% from a year ago. The sequential decline was driven by increased redemptions of both debit and credit rewards as a result of the termination of certain debit rewards programs and other changes in consumer behavior. These were higher and earlier than we expected. The year-over-year increase in card processing revenue was attributable to growth in overall transaction volumes.

As you know, the Durbin Amendment was effective as of October 1. We said that we expect that ultimate outcome -- that the ultimate outcome of the amendment will effectively reduce our debit interchange revenue by about 50% on a gross basis. That is a quarterly impact of roughly $30 million at current transaction volumes before any mitigation factors on debit interchange revenue of about $60 million per quarter.

We are being very deliberate in our actions with respect to this change. We have a multipronged mitigation approach that would include such actions as reducing the costs associated with debit card offerings, changes in eliminations to rewards, selected fees, incorporation of debit usage into bundled deposit product offerings, as well as the implementation of new products, like the Duo Card we introduced during this quarter. This mitigation will take place over time and may show up in processing fees, deposit service charges, higher deposit balances and lower expenses rather than in single line item. We said that we expect to mitigate roughly 2/3 of the impact of this change by the middle of next year and ultimately most if not all of it. That continues to be our expectation.

On the mitigation side, about $5 million a quarter would come from -- in the form of reduced expenses. Those expense reductions should be realized in the fourth quarter and thereafter.

With that background, returning to our expectations for reported card and processing revenue, we expect fourth-quarter revenue to come down $10 million to $15 million as the debit interchange rules take effect and with elevated near-term rewards redemptions, partially offset by positive seasonality. Most of the initial effect of mitigation activities, as I mentioned, will be recognized elsewhere such as in expenses.

Mortgage banking revenue on a net basis of $178 million increased 10% from the second quarter and declined 23% from a year ago. The low rate environment has generated a significant amount of mortgage refinancing activity, and that drove stronger mortgage banking results. Originations were $4.5 billion this quarter, up from $3.1 billion in the second quarter. Gains on deliveries were $119 million this quarter compared with $64 million last quarter. Servicing fees of $59 million increased $1 million from the previous quarter. Net servicing asset valuation adjustments this quarter netted to zero with MSR amortization of $34 million offset by net MSR valuation adjustments -- and that includes hedges -- of a positive $34 million. In the second quarter, net servicing asset valuation adjustments were positive $40 million. Right now we expect mortgage banking revenue to decline about $15 million to $20 million or so in the fourth quarter with strong gains on deliveries with likely a lower level of net MSR valuation adjustments in the fourth quarter.

Net gains on the sale of investment securities were $26 million in the third quarter compared with net gains of $6 million in the prior quarter. And net securities gains on nonqualifying hedges related to MSRs in the third quarter totaled $6 million.

Turning next to other income within fees, other income was $64 million, a $19 million decrease from the $83 million last quarter. As I mentioned earlier, third-quarter comparisons with the second quarter were affected by changes in the valuation of the Visa total return swap and Vantiv puts and warrants. Those items together reduced other income in the third quarter by $14 million whereas they increased other income in the second quarter by $25 million. Equity method earnings on our 49% interest in Vantiv were $17 million in the third quarter compared with $6 million in the second quarter. We currently expect our equity method earnings related to Vantiv in the fourth quarter to increase about $5 million to $10 million, due in part to positive seasonality.

Credit costs recorded in other non-interest income were $25 million in the third quarter compared with $28 million last quarter. The decline was largely due to lower losses on the sale of OREO properties, which were $21 million this quarter compared with $26 million last quarter. We expect credit-related costs within fee income to be about $25 million in the fourth quarter as well.

Overall we expect fee income in the fourth quarter in the $625 million range, down about $40 million from the third quarter. That is expected to be driven by lower mortgage banking revenue and lower card and processing revenue, partially offset by growth in other core fee lines, as well as the effect on the third quarter of the Visa total return swap.

Turning to expenses on slide eight, non-interest expense of $946 million was up $45 million or 5% sequentially, largely due to the $28 million of expense associated with the termination of certain current and planned FHLB borrowings and hedging transactions. Absent those costs, expenses were $918 million and increased 2%. Compensation expense was down 1% sequentially, primarily reflecting lower benefits-related expenses. Affordable housing impairment expense, which is recognized in other expense, was down about $9 million during the quarter, largely due to the sale of affordable housing tax credit investments. And card and processing expense was up $5 million driven by an increase in redemptions and debit and credit rewards.

Credit-related costs within operating expense were $45 million compared with $36 million last quarter. To walk through the components of that, the provision for unfunded commitments was a credit of $10 million this quarter compared with a credit of $14 million last quarter. Mortgage repurchase expense was $19 million versus $14 million in the second quarter. We have worked through a large portion of our outstanding claims, and the repurchase claims inventory is down more than 30% in the quarter. We expect the inventory of claims to continue to decline assuming GSE activity remains consistent.

In terms of the fourth quarter, we currently expect total credit related costs recognized in expense to be similar to this quarter at about $45 million. Overall we expect operating expense in the fourth quarter to be flat to up modestly from this quarter's levels. While we will not have the effect of the debit and hedge of debt and hedge termination charges, we expect elevated mortgage-related compensation and fulfillment costs to offset much of that. We also expect we may see pension curtailment costs recorded in the fourth quarter, which, if recognized, would be about $8 million.

Moving on to slide nine and taking a look at PPNR, pre-provision net revenue was $617 million in the third quarter compared with $619 million in the second quarter. We expect PPNR in the $575 million range in the fourth quarter, which is lower than the third quarter, largely due to our expectation for lower mortgage banking net revenue and the initial effects of debit interchange legislation on card and processing revenue. The effective tax rate for the quarter was 28%, which was consistent with our expectations. And we currently expect a similar tax rate for the fourth quarter.

Turning to slide 10 and capital, as Kevin mentioned, our capital levels continue to be very strong. Tier 1 common ratio increased 13 basis points this quarter to 9.33%. Tier 1 capital was 12%, and the total capital ratio was 16.3%.

Tangible common equity was 8.6%, and that is calculated excluding unrealized gains, which totaled about $542 million. All-in TCE was 9.04%, up 80 basis points from the prior quarter. Our current estimate for our Basel III Tier 1 common ratio would be about 9.8% based on what has been published so far. All these ratios are well above our targets with common ratios exceeding targeted levels by more than 100 basis points.

During the third quarter, we increased our dividend 33% to $0.08 per share or $0.32 on an annual basis, and we expect to continue to work our way toward a more normalized dividend payout.

As you know, we will be submitting an annual capital plan to the Federal Reserve as a part of its CCAR process. We would currently expect that our 2012 plan that we submit to our directors for approval would include higher dividends and a share repurchase authorization. As economic uncertainty subsides, as regulatory processes become more developed, and as the industry moves towards a Basel III perspective that will further highlight Fifth Third's relative capital strength, we do believe we have an opportunity to more closely align our capital position with our strong profitability, our capital targets and our asset growth expectations.

That wraps up my remarks. So now I will turn it over to Mary to discuss credit results and trends. Mary?

Thanks, Dan. Credit quality trends remain positive across all key categories, including delinquencies, NPAs and charge-offs. Starting with charge-offs on slide 11, total net charge-offs of $262 million decreased $42 million or 14% from the second quarter. That was 132 basis points of loans and the lowest we have reported since the fourth quarter of 2007.

The biggest improvements came from Florida where charge-offs were down 24% sequentially and from Michigan down 28%. Commercial net charge-offs were $136 million in the third quarter, down $5 million sequentially. At 123 basis points of loans, that is the lowest level since the first quarter of 2008. It includes C&I charge-offs of $55 million, down $21 million from the prior quarter. Commercial mortgage charge-offs of $47 million and commercial construction charge-offs of $35 million, up $15 million sequentially due to losses on non-owner occupied properties.

Homebuilder portfolio balances are down to $578 million, less than 20% at peak levels and less than 1% of total loans. Total consumer net charge-offs were $126 million compared with $163 million last quarter. That decline was driven by the large charge-off in other consumer loans that I discussed last quarter. Trends, otherwise, were generally stable.

Residential mortgage net charge-offs of $36 million and home equity net charge-offs of $53 million were both largely consistent with last quarter. Auto net charge-offs increased modestly to $12 million or 41 basis points. And credit card net charge-offs were $18 million, down $10 million. $5 million of the sequential decline was related to recoveries from the sale of delinquent accounts.

Looking ahead to the fourth quarter, we would expect total net charge-offs to be relatively stable in both the consumer and commercial portfolios. We expect total charge-offs for the year to be around 150 basis points or about half of the 2010 ratio.

Now moving to NPAs on slide 12.

NPAs, including those held for sale, totaled $2.1 billion at quarter-end, down $123 million or 5% from the second quarter. Excluding held for sales, NPAs were $1.9 billion, down $144 million or 7%. Overall Florida and Michigan remain our most challenged geographies from an NPA standpoint and accounted for 41% of NPAs in the commercial and consumer portfolios. However, NPAs in those two states were down $50 million sequentially.

Commercial portfolio NPAs were $1.5 billion and declined $138 million sequentially. C&I NPAs decreased $51 million. Commercial mortgage NPAs decreased by about $80 million and are at their lowest levels since the first quarter of 2009. Commercial construction NPAs declined $3 million.

Across the commercial portfolios, residential builders and developer NPAs of $207 million were down $36 million sequentially and represented 14% of total commercial NPAs. Within portfolio NPAs, commercial TDRs on non-accrual status were flat at $189 million. Commercial accrual CDRs were up $83 million, although they are still fairly low at $349 million. We expect to continue to selectively restructure commercial loans where it makes economic sense for the bank.

On the consumer side, NPAs totaled $470 million at the end of the quarter or 1.34% of loans and were down $6 million from the second quarter. Credit card NPAs declined $4 million from last quarter. Home equity and residential mortgage NPAs were both consistent with the second quarter with mortgage NPAs remaining disproportionately concentrated in Florida. And auto NPAs increased $3 million.

Looking ahead to the fourth quarter, we expect NPAs to decline by $50 million to $100 million give or take. To give an update on the pool of commercial NPAs period and held for sale, at the end of the third quarter of 2011, we had $197 million of non-accrual commercial loans held for sale. That includes $58 million of newly transferred balances on which we recorded net charge-offs of $17 million during the quarter. We periodically pursue sales when we believe that a sale of the loans and/or collateral is the optimal disposition strategy and would expect to continue to do so.

Total portfolio NPAs, commercial and consumer, are being carried at about 59% of their original face value through the process of taking charge-offs, marks and specific reserves recorded through the third quarter. We have worked to be proactive in addressing problem loans and writing them down to realistic and realizable values.

The next slide, slide 13, includes a roll forward of nonperforming loans. We have presented a lot more granularity in the table, and so the numbers are a little different from the prior tables, but the trends are the same.

Commercial inflows at $217 million were down from $340 million in the second quarter. Consumer inflows for the quarter were $201 million versus $214 million last quarter. Total inflows of $418 million were down 25% sequentially, continuing a trend we have experienced pretty consistently for the past two years. And you can see from slide 14 that the level of inflows as a proportion of our loan portfolio also remains relatively low versus peers.

Moving on 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 September 30, of which only $215 million or about 12% were on non-accrual status. Of the accruing TDRs, over 80% are current. The vast majority of which are not only current, but were also restructured more than six months ago and have shown successful seasonings.

More recent modification vintages have experienced lower re-default rates than loans we restructured earlier in the cycle. As you can see from the slides, while 2008 vintages experienced higher re-default levels, more recent vintages have trended toward a 12-month default frequency in the 25% range.

Our modification activities continue to work relatively well as I think vintage trends demonstrate. Because many of these restructurings were rate concessions, which cannot be cured despite performance, the balances will remain in TDR status. However, you should think of these as a very different situation than a nonperforming loan.

As you know, FASB issued new guidance related to TDRs that was implemented with third-quarter results. We had no material impact from implementing that guidance.

Moving to slide 16, which outlines delinquency trends, loans 30 to 89 days past due totaled $474 million, up $5 million from last quarter with consumer up $5 million and commercial flat from last quarter. Loans 90 plus days past due were $274 million, down $5 million from the second quarter with the improvement coming from the commercial portfolio. Total delinquencies of $748 million were essentially flat from last quarter, but were down $236 million or 24% on a year-over-year basis and are at very satisfactory levels, consistent with where we were in 2006.

I would also note that our commercial criticized asset levels have continued to improve, dropping $228 million or 3% sequentially. This marks the sixth consecutive quarter of decline and the lowest absolute level since the fourth quarter of 2008.

On to provision and the allowance, which is outlined on slide 17. Provision expense for the quarter was $87 million and reflected a reduction to the loan loss allowance of $175 million. Our allowance coverage ratios remain very strong with coverage of nonperforming loans of 158% and nonperforming assets of 125% and with annualized net charge-off coverage of 2.35% (sic - see presentation slides). Given anticipated trends in credit, we would expect the loan loss reserve to continue to decline in coming quarters.

Before I wrap up, there has been a lot of news on the mortgage front. We are not a party to the state's attorney general discussions, but we expect that whatever standards develop with the larger banks will become standard for the rest of the industry. We expect that to be manageable for us.

In terms of mortgage put back risk, we don't have the same exposures as many of the larger banks. For example, unlike many of our peers, we have no exposure to private mortgage securitizations with only $28 million in a well performing 2003 HELOC securitization still out there. Most of our activity has been with GSEs, and as Dan mentioned, those claims have moderated and seem to be improving.

That concludes my remarks. Jamie, can you open up the line for questions?

(Operator Instructions). Erika Penala, Bank of America/Merrill Lynch.

In light of your very strong Basel III adjusted Tier 1 comments ratios, could you give us a sense of what you will be targeting post-CCAR 2012 in terms of a total payout ratio and also give us a sense of how much of a role buy-backs could potentially play?

Sure. As you mentioned, our capital ratios are pretty strong, and we would expect on a Basel III basis that those ratios would be on a relative basis even stronger.

So, as we mentioned in our prepared comments, we do anticipate the ability to begin to return more capital to shareholders. Obviously with the CCAR process, there are guidelines and limitations as to what can be done and how quickly.

So, in the short run, we are operating under guidance that would tend to limit payouts from a dividend perspective for instance to about 30%. There is evidence that repurchases could be another 20% or 30%. So those are things that we would consider as we prepare our 2012 capital plan. And then as we go forward, we would anticipate that those guidelines would allow for more flexibility in terms of institutions determining their own payout ratios, and given our capital levels, we would expect that we would take advantage of that flexibility as it develops over the next several years.

Okay. And just one more follow-up question. For 2012, on the right side of your balance sheet, could you give us a sense of how much in high-cost CDs are set to mature and at what rate are they rolling off and at what rate are they repricing to?

We have about $800 million or so of CDs maturing this quarter. They are rolling off at rates of approximately anywhere from $4.00 to $4.50. And in terms of renewals, they are coming on at an average rate of somewhere in the 70-ish basis point range.

The other thing to keep in mind is that all of the CDs that are maturing are not being replaced. So that also adds to the benefit that we get with both NIM and NII.

And do you have a disclosed number? Is this similar for 2012 yet?

No, we do not. (multiple speakers)

You should expect it to be much less. The term of the CDs that we issued in late 2008, there were a lot of three-year CDs that we don't -- you know, there are not a lot of four-year CDs.

Ken Usdin, Jefferies.

Dan, a question for you on the margin. Obviously the quarter was up a little bit. You are pointing to a little bit more of an increase in the fourth quarter. And obviously with the pressures in the environment, you are talking about a decline from next year. But can you just give us a little bit of color on magnitude and what would be the driver versus Erika's points on the deposit repricing?

Well, for the fourth quarter, as we said, we expect that NIM will be up a couple of basis points as we benefit from some of the CD repricing that we just talked about and as compression on the asset yield side is managed through both asset growth, as well as continued deposit cost management.

Longer-term we have not really sized the NIM impact. Clearly based on our comments, we would expect that this kind of a rate environment would create some pressure on the NIM, but we think that will be very manageable and that asset growth in line with the kind of asset growth that we have been seeing in the last couple of quarters would enable us to earn through that. So I think that gives you some idea of the magnitude of what we expect.

Okay. And my second question is, on the expense side, there was a pretty sizable FHLB penalty in the third quarter, but you are still talking about flat to higher expenses in the fourth. I'm just wondering what is driving the elevated level of expense. I know you guys are more of a continuous improvement company versus a come out with the official plan, but what can you do to control the growth rate of expenses outside of the obvious environmental costs, which we still see as elevated underneath?

I guess, first, with respect to the fourth quarter, you are right. We did have about $18 million in expense in the quarter relative to those terminations, which will not repeat.

On the flip side, in the fourth quarter, two main things. One is that, even though we expect mortgage banking results overall to be down a bit, most of that is because of our not anticipating continued favorable results from a mortgage hedging perspective, actual topline mortgage results will continue to improve, and with that, it will bring higher expenses as well related to compensation and related to the fulfillment costs with respect to those mortgages. So that will offset some of the decline from the termination expenses going away.

And then, as we mentioned, there is potential pension curtailment costs, and the accounting there is a little bit strange in that you take a charge, if you have to take a charge, in the quarter in which those curtailments reach a certain threshold. In the past that has happened to us, for us, in the third quarter, sometimes the fourth. I think it has -- we have not tripped that threshold yet. We anticipate that we may trip that threshold in the fourth quarter, and that is embedded in our comments with respect to fourth-quarter expectations.

Longer-term I think you hit on the key theme, which is that we typically manage our expenses pretty consistently and not manage them through huge expense reduction programs. We continue to do that. We think that is reflected in our efficiency ratios, which I think compare pretty favorably with the industry.

In terms of what levers we have available to us as we go forward, I think we consistently try to manage our expenses in relationship to our revenue expectations. So, as the environment continues to unfold to the extent that there are greater revenue challenges that lie ahead, we will manage our expenses accordingly.

Craig Siegenthaler, Credit Suisse.

Just eyeing your guidance on the loan growth versus the deposit growth and what that kind of embeds for the loan to deposit ratio, I'm wondering how does this impact your liquidity position for Basel III requirements, and is this just something you are looking at yet?

We are definitely looking at the Basel III liquidity requirements. That being said, I think there is still a fair amount of uncertainty and I think a fair amount of potential flex in the way those requirements are actually mandated, especially for the non-global banks, so banks of our size in the US.

So we are monitoring developments. We are trying to make sure that anything we do is not going to put us at a disadvantage with respect to those liquidity requirements. But, as of now, there is not a whole lot that we are necessarily doing that would change -- we are not changing a lot of what we would do with respect to meeting those requirements.

And then just a question on credit quality here. I am just looking at your flattish charge-off guidance to the fourth quarter, and I'm just thinking about, is the low-hanging fruit in terms of credit quality improvement over? I'm just wondering because it is flattish, or is that more of a negative seasonality to the second half, and should we expect more of a step-down in charge-offs in the first half also due to seasonality?

As you indicated, we did guide to the fourth quarter that we would see charge-offs relatively stable to this quarter. I think probably the most helpful way to look at it is to still put that in the context of overall favorable credit trends. So, as you see that overall improvement and that trajectory of improvement, although on a longer-term basis you see the improvement, sometimes the improvements sequentially might look a little bit more uneven, and you will not see a same degree of improvement from quarter to quarter.

I would point out, though, that you should take a look again at some of the underlying credit metrics. Our delinquencies right now are at the lowest level since 2006. Our NPAs are at the levels of the beginning part of 2008. So overall we feel very good still about the trends, and from that standpoint, we are just giving you more granular guidance to the fourth quarter.

Ken Zerbe, Morgan Stanley.

When you guys think about your ROA targets, obviously you have managed to hit them probably sooner than I think a lot of people expected. But when you look out at the 1.3% to 1.5% going forward in 2012, is it reasonable to assume that you could actually stay within that targeted range given asset growth, given NIM compression? And if so, why would that be? What else do we need to consider? Thanks.

I guess, first of all, while we have talked about a 1.3% to 1.5% ROA being achievable on a normalized basis, we have never really said that we expect that to occur in 2012.

That being said, I think our overall expectations are that we can continue to post the kind of performance that we are posting now. Clearly there are some headwinds, but we have commented already with respect to our belief that we can earn through any NIM compression that results from the low rate environment through continued asset growth. And then from a regulatory perspective, obviously there are headwinds. The impact of the Durbin Amendment in particular creates some challenges, but we believe that we will be able to mitigate the lion's share of that. We have given some guidance with respect to the magnitude of mitigation that we expect to be able to accomplish. And I think those two things, along with just continued solid growth and continued success in the marketplace, give us confidence that we can post results that are consistent with what we are seeing right now as we go through 2012.

Okay. And then just briefly on the FHLB advances, what was the duration of those that you took out in the quarter and any way you can reduce those near-term, and if so, would that have any material impact on your NIM one way or the other?

The advancements had a maturity of about five years, a remaining maturity of about five years or so. We continue to look for opportunities on the liability side. The opportunities with FHLB advances are probably somewhat limited given -- post this transaction.

I just wanted to circle back. We have given guidance for our ROA for the fourth quarter of above 120%, and obviously we will discuss 2012 guidance in January.

Todd Hagerman, Sterne, Agee.

I just want to follow up on a previous question on credit. As you alluded to, charge-offs relatively flat. We are seeing pretty consistently now among all the banks this quarter delinquency levels flat to generally up, particularly on the consumer side. How should we think about, again, the pace of reserve relief coverage ratios on the reserve side? I know they are very strong at the Company. But when you start to see these early indicators, particularly on the consumer side, going to 2012 in an uncertain environment, can you just give us your thoughts surrounding the pace of ongoing reserve relief and coverage levels in an uncertain environment in 2012?

Yes, again, starting with the overall credit trends, what we really are looking at still is a pretty favorable environment on a macro basis. So, within that context, given those anticipated trends, we do expect that we would see the reserves continue to decline in the coming quarters. I think in terms of the pace of the client we would want to look at that again in the context of the overall credit trends and make sure that we are well aligned from that perspective.

Okay. But for the time being, again, there is nothing necessarily on the horizon that would say we need to take a pause or a break in terms of reserves?

No. Again, I think you can anchor that back to the overall credit trends, and we are not seeing anything that would suggest that kind of interruption or a significant change in trend.

Okay. And if I could just ask a follow-up to Mahesh. In terms of 2012, you had talked previously about the diminishing CD repricing, if you will, coming through next year. But trust preferreds were a big part of your 2011 capital plan. Could you just remind us in terms of what you have in 2012 in terms of potential to lower your funding costs outside of the CD book?

We have a total -- we had a total of about $2.7 billion in trust preferreds. Of that, we have called about -- at a completed calling or have noticed a call of about $515 million. Our capital plan said that we -- our capital plan included calling of trust preferreds of a certain portion of those trust preferreds. That is basically what we have remaining.

Does that answer your question?

Yes, but, again, just going back to the previous question just in terms of the CCAR process for next year and the dividends buyback, again, I anticipate that there will be some discussion or thought surrounding redeeming additional trust preferreds, particularly given your liquidity levels.

This is Jeff. I think we indicated when we announced the results of the CCAR process back in March of this year that we included in our plan, and it was not objected to that we may call certain TruPS.

Mahesh just indicated there are still TruPS that there is the potential to call, but you are asking questions about things we are not in a position to either act on or discuss. I just don't think we can really provide any more information on that. The amount of TruPS we have is publicly disclosed, the interest rates, so coupons on those are publicly disclosed. It is easy to figure out what is available to us, but whether we do anything depends on a variety of factors, including that we could end up going into the next CCAR process, and then it has to be approved all over again. Unfortunately we just cannot really slice and dice that to finally for you.

Brian Foran, Nomura.

Now that mortgage is a bigger part of the business and you have picked up some nice marketshare over the past four years, can you just remind us how you account the business? It sounds like from the comments I had thought you booked revenue at funding, but it almost sounds like the comments you book revenue at rate lock and you book the expenses on the loan funds. Is that how we should think about the timing of the revenues and expenses?

I'm not going to probably articulate this properly, but I believe we book a portion of the gain that is associated with the coupon on the mortgage relative to market rates at any given time at rate lock. And then we book the majority of the kind of originator gain that you would book through rate cycles at funding.

Got it. So the spread widening we saw this quarter helped your 3Q revenue, and then your 4Q revenue will be a more normal origination fee offset by origination expense.

I think we may have indicated we do think, excluding hedging, that mortgage revenue will be stronger in the fourth quarter than in the third.

Okay. And then on the consumer businesses, consumer lending businesses, if I add up auto, card and the other consumer bucket, it is around a third of your interest income right now. Can you just walk us through what the recent trends have been in terms of yields? I mean auto, resetting down pretty consistently; are we near the trough there? Was there anything in particular that made the card yields come down so much, and then actually just what is the other consumer loans and leases bucket?

All of the probably largest portion of that bucket, as far as autos go, I think what we are seeing is relative stabilization of new loan origination yields. As far as portfolio yields go, I think we will continue to see pressure on portfolio yields because new loan origination yields are still substantially below existing portfolio yields just because of what market rates have done.

And in cards, was there anything in particular? Is there core yield pressure there because you are putting on balance transfers, or is it just lower revenue suppression or anything in particular that made the yields come down?

I said it is probably a little bit of pressure because we do have some balance transfers, but it is not substantial.

And the other bucket? I know it is only $500 million, but the yields (technical difficulty)-- understand the yields?

The other consumer loan bucket is other, so consumer leases are in there. Our easy access product that provides people access to their funds before -- I can't think of the name.

I think that is most of it.

Paul Miller, FBR.

I just want to follow-up on Brian's question on the mortgages. Did I hear you right that you said that you are guiding down on mortgage banking into the fourth quarter or guiding up on mortgage banking in the fourth quarter?

I think overall mortgage banking will be down, but excluding the effect of hedging, mortgage delivery income will be up.

Okay. And that hedging is on the MSR, right?

That is correct.

And the other issue is just the more take a step back 10,000 foot view of mortgage banking. You know, we have seen a lot of the bigger players exit this market. Bank of America talked about closing down their correspondent lending. There is a lot of room to grow capacity in this space, but yet again there is a lot of legal issues in growing capacity in this space. What is your view of the overall mortgage market and how Fifth Third is going to fit into this?

I will talk to that. For the most part, the way we have always viewed our mortgage business was in aggregate in terms of our total consumer relationships. So, for the most part, we view that along as a key product offering for our clients, and for the most part, we almost doubled the revenue in terms of our mortgage sales within footprint by selling them the rest of our consumer packaging products -- checking accounts, credit cards, etc. -- from that standpoint.

That will continue to be a very important business to us. We are mindful in terms of the way we operate that business, and we think we have done a very good job relative to how we have operated that business, particularly in terms of the national component of that. We service our own, and we don't service for others, etc. And we will continue to stay within those risk parameters and risk appetite to stay comfortable with our mortgage business.

And so we would not be jumping into some of the vacated businesses that you referred to.

Okay. And then the stuff that you put on -- I mean, you did grow, you did have some decent mortgage growth in your portfolio, and I know a lot of people have -- you know, mortgage banking has been a big -- not mortgage banking, the mortgage portfolios, that your portfolio has been a drag. Has that mainly been jumbos that you have been portfolioing? What type of yields are you putting them on your books for?

Well, some of that is jumbos. But, frankly, more of it is a streamlined refinance product that we sell through our branch system. Often those loans tend to be higher quality loans, lower loan to value ratios, and that is a nonconforming product. So the yields are a little better than a 30-year conforming product. And given that a large section of the customers to which that product appeals are customers that have been in their homes for a while, paid down their mortgage pretty significantly, oftentimes they are lower -- they have shorter terms as well.

So what we are putting on our balance sheet is 15- and 20-year mortgages primarily that fits that description that I just had, and they have slightly higher yields than you would see on conforming loan products.

Chris Mutascio, Stifel Nicolaus.

Thanks for taking my question, but it was already asked by Brian. It was on the mortgage recognition. I appreciate it.

Chris Gamaitoni, Compass Point.

A real quick question on, can you just give us an idea of the total origination rates that you are putting on for commercial lending right now and auto lending? You gave a kind of relative basis, but do you know what the actual rates are?

In average terms on C&I, our yields are somewhat north of 3.50%. As far as autos go, I say our yields are actually fairly similar there, somewhere in the 3.30% to 3.50% range.

And then just on the mortgage side, looking at the positive guidance for the fourth quarter and kind of more positive guidance for 2012, if I look at origination forecasts for the industry, they are supposed to be down 24% quarter over quarter and 18% 2012 versus 2011. Are you getting market share? How do I reconcile those industry trends with more positive core origination income?

I think your assumption is correct. We feel we are taking share. I think that shows up relative to what we are anticipating and what we have been doing, and I think that shows up in the numbers, and we think we can continue doing that.

Although obviously we are producing great results this quarter. We expect good results next quarter. I think our peers are producing good results. There is a lot of REIT activity going on, and even taking share, it would be difficult to sustain these levels of mortgage revenues in an environment like you just described in 2012.

Ladies and gentlemen, we have reached the end of our allotted time for question and answer session. Speakers, are there any closing remarks?

No thank you. Appreciate everyone being on the call.

Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.