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Executives

Jeff Richardson - Director of Investor Relations and Corporate Analysis

Kevin T. Kabat - Vice Chairman, Chief Executive Officer, Member of Finance Committee and Member of Trust Committee

Daniel T. Poston - Chief Financial officer and Executive Vice President

Analysts

Ian Foley - Jefferies & Company, Inc., Research Division

Brian Foran

Ken A. Zerbe - Morgan Stanley, Research Division

Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division

Jessica Ribner - FBR Capital Markets & Co., Research Division

Kevin J. St. Pierre - Sanford C. Bernstein & Co., LLC., Research Division

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

Stephen Scinicariello - UBS Investment Bank, Research Division

Ebrahim H. Poonawala - BofA Merrill Lynch, Research Division

Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division

Fifth Third Bancorp (FITB) Q4 2012 Earnings Call January 17, 2013 9:30 AM ET

Operator

Good morning. My name is Pamela, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fifth Third Bank Earnings Conference Call. [Operator Instructions] I will now turn the call over to Jeff Richardson, Director of Investor Relations. You may begin.

Jeff Richardson

Thanks, Pamela. Good morning. Today, we'll be talking with you about our full year and fourth 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 statement after the date of this call.

I'm joined on the call by several people: Our CEO, Kevin Kabat; and CFO, Dan Poston; as well as Greg Schroeck from Credit; Tayfun Tuzun from Treasury; and Jim Eglseder from Investor Relations. During the question-and-answer period, please provide your name and that of your firm to the operator.

With that, I'll turn the call over to Kevin Kabat. Kevin?

Kevin T. Kabat

Thanks, Jeff. Good morning, everyone. We know it's a busy morning for you.

Before we go through the quarter, I want to make some comments about 2012 as a whole. While the interest rate and regulatory environment certainly were not favorable, Fifth Third results demonstrated the many core strengths of our company. We worked hard to position ourselves to take advantage of opportunities when they returned and had the infrastructure in place to execute. We focused on the long term when it was difficult to do so. Those results show up in some areas very clearly, such as mortgage banking, where revenue was up 41%, and corporate banking revenue, up 18% this year. Less obvious is the important work we've done in areas where year-over-year revenue is down, but where quarterly results are trending up, such as deposit service charges and card processing revenue.

Overall, net income of $1.6 billion, the second highest in the company's history, and net income to common shareholders increased 41% over last year. Earnings per diluted share were $1.66, also up 41% from a year ago. For the year, we posted a return on assets of 1.34% and a return on average top -- tangible common equity of 14.3%, up from 11.4% in 2011. I'm pleased with our ability to produce these results in the midst of a relatively weak economic recovery and significant regulatory changes.

We remain committed to our markets, which is demonstrated through our strong deposit and loan growth results. For the full year, average

transaction deposits increased 8% and loans grew 6%, including a very strong fourth quarter. Credit quality metrics showed continued and significant improvement, with charge-offs for the year down 40% and nonperforming assets down nearly 30%. And we returned nearly $1 billion in capital to shareholders while maintaining, and actually growing, already very strong equity capital levels. We've posted a very good year on nearly all fronts, considering the environment, and we believe that provides the solid foundation to build on as we enter a new year.

Let me talk a little bit about then some highlights of the fourth quarter. Fifth Third reported fourth quarter net income to common shareholders of $390 million and earnings per diluted common share of $0.43, which is up 30% over last year. Earnings results included the impacts of the charges related to the FHLB prepayment and the gain on the Vantiv share sale and a couple of other items, which Dan will discuss in more detail. Those items net to about a $0.02 negative impact on the quarter. Return on assets was 1.33%, and return on tangible common equity was 14.1%. In addition, tangible book value per share was $12.33, increased 2% sequentially and 10% from a year ago, despite the impact of repurchases and capital returned to shareholders.

Loan growth continue to be solid, with particular strength in C&I loans, up 4% sequentially. Total loan growth from a year ago was 5% despite modest runoff in the commercial real estate and home equity portfolios. C&I and residential mortgage loans increased year-over-year by 15% and 13%, respectively. We feel that our success in growing loans organically is due in large part to the investments we've made in those businesses over the past several years and is a core strength of Fifth Third.

Every caption in fee come -- fee income increased sequentially. Corporate banking revenue of $114 million was up 38% over the fourth quarter last year, this was the strongest quarterly result in our history for that group and is reflective of their efforts and our investments over the past few years. Mortgage banking revenue continued to be very strong at $258 million, also a record of 65% over last year and 29% sequentially.

Credit trends continue to improve, with net charge-offs down another 6% sequentially and nonperforming assets down $174 million or 12% sequentially. Total delinquencies were at their lowest level since the second quarter of 2004. Capital levels are very strong and well in excess of target levels and regulatory requirements. Tier 1 common was 9.5% under current capital rules, and under the proposed Basel III capital standards, we would estimate a fully phased-in Tier 1 common ratio of 8.8%.

During the quarter, we initiated 2 share repurchase transactions for a total of approximately $225 million of common stock. Most of the impact of those transactions is in the fourth -- is in our fourth quarter capital ratios, while just 1/3 of the impact is reflected in our average share count. Our period-end share count was reduced by 38 million shares or 4% during the year. Our capital plan also included the possibility of an additional $125 million in common share repurchases through the end of March 2013. Our ability to generate capital and our strong capital level 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.

As you know, we recently submitted our capital plan under the CCAR or Comprehensive Capital Analysis and Review process. That plan includes potential dividend increases consistent with the Federal Reserve's 30% payout ratio guidance, as well as potential common share repurchases, that would maintain capital levels similar to current levels and support asset growth. This would be consistent with our recent levels of repurchase activity. Similar to 2012, we would also aim to distribute any future after-tax gains on the sale of Vantiv stock, if realized. Dan will discuss this more in his remarks.

The environment remains challenging from a growth perspective, but we continue to demonstrate our ability to generate strong loan growth and a relatively high level of profitability from solid revenue results, continued expense discipline and continued credit improvement. Now before I turn it over to Dan, I'd just like to thank our employees for their continued focus and drive and our customers for their continued business and partnership with Fifth Third.

With that, let me ask Dan to discuss operating results and give some comments about our outlook. Dan?

Daniel T. Poston

Thanks, Kevin. I'll start with Slide 4 of the presentation. For the quarter, we reported net income of $399 million. Net income to common shareholders was $390 million and diluted earnings per share of $0.43 increased 13% from last quarter's $0.38. Fourth quarter results included $157 million gain on the sale of Vantiv shares and $134 million charge on the termination of FHLB debt. Quarterly results also included $19 million in unrealized losses on Vantiv warrants, $15 million in charges associated with the Visa total return swap and an additional $29 million of pretax charges related to the increase in our mortgage repurchase reserve. Finally, we recognized a $10 million benefit in the tax line during the quarter related to the termination of leases. I'll touch on each of these later in my remarks, but in total, the items I just outlined reduced after-tax earnings by $16 million or about $0.02 per share after tax. All in all, it was a strong quarter for Fifth Third and that gives us a solid foundation as we enter 2013. I'll discuss our outlook toward the end of my remarks.

Turning to Slide 5. Tax equivalent net interest income decreased $4 million sequentially to $903 million, and the net interest margin was 3.49% versus 3.56% last quarter. You'll recall that in the fourth quarter, net interest income benefited from several nonrecurring items that, in total, contributed $10 million to NII and 4 basis points to the margin. Excluding the impact of these items on the sequential comparisons, net interest income increased $6 million and the net interest margin declined 3 basis points. Net interest income benefited from lower interest expense due to the full quarter effect of the redemption of trust preferred securities that occurred in the third quarter and also from the termination of the FHLB debt in the fourth quarter. These provided a benefit of $7 million from a sequential comparison standpoint.

The additional benefit of loan growth and lower deposit costs was offset by the effects of repricing on loans and investment securities. As I just mentioned, the net interest margin declined 3 basis points, excluding the 4 basis point impact of third quarter items. This reflected 3 basis points of benefit from the full quarter effect of the TruPs redemption in the third quarter and the termination of FHLB debt in the fourth quarter. The remaining decline of about 6 basis points was primarily due to lower loan and securities yields.

On the loan side, we've seen continued compression in yields, primarily driven by loan repricing, mainly in the C&I and auto portfolios. On the C&I side, the portfolio average yield was down 7 basis points compared with last quarter as a result of repricing and mix shift toward higher quality loans. In the indirect auto portfolio, the average yield also continued to decline, largely reflecting the portfolio effect of replacing older higher-yielding loans with new lower-yielding loans.

Turning to the balance sheet on Slide 6. Average earning assets increased $1.5 billion sequentially, driven by growth in average portfolio loans and leases up $1.1 billion or 1% sequentially. End-of-period loans increased $2.7 billion or 3% sequentially.

Looking at each of the portfolios, average commercial loans held for investment increased $788 million or 2% from the third quarter and increased $3.1 billion or 7% year-over-year. C&I loans of $34 billion grew $1.2 billion or 4% from last quarter and increased $4.4 billion or 15% from a year ago. Notably, C&I loans on an end-of-period basis were up $2.7 billion or 8% from last quarter, with strong growth in December reflecting success in our corporate banking business and tax planning actions by businesses in advance of year end. C&I production remains broad based across industries and sectors, with particular strength in the manufacturing and healthcare industries.

We continue to see the benefit of our investments over the past several years. For example, we recently added a number of experienced bankers in the energy group, and that group contributed about 10% of our new C&I production this quarter. Commercial mortgage and commercial construction balances declined in the aggregate by $430 million sequentially or 4%. While our originations continue to increase modestly in this area, we've also seen increased payoffs driven by market activity.

Average consumer loans in the portfolio increased $267 million or 1% sequentially and $976 million or 3% from a year ago. Residential mortgage loans held for investment were up 2% sequentially, reflecting strong originations and continued retention of jumbo loans, as well as shorter-term, high-quality residential mortgages originated through our retail branch system. Average auto loan balances increased 1% compared with the third quarter. We remain focused on managing volume and pricing in this business given the competitive environment. Home-equity loan balances were down 2% sequentially, and average credit card balances were up 3% sequentially, benefiting from seasonal purchase volume.

Moving on to deposits. Average core deposits increased $2.6 billion or 3% from the third quarter. Transaction deposits, which exclude consumer CDs, increased $2.7 billion or 3% sequentially and $4.6 billion or 6% from a year ago, with growth driven by demand deposits. Consumer CDs declined $130 million in the quarter due to our continued disciplined approach to CD pricing.

Turning to fees, which are outlined on Slide 7. Fourth quarter noninterest income was $880 million, an increase of $209 million from last quarter. Current quarter fee results included $157 million gain on the sale of Vantiv shares that we announced in December, also a $19 million loss on Vantiv warrants and $15 million in charges on the Visa total return swap. Excluding these items and similar items last quarter, fee income of $757 million was up $82 million or 12% sequentially, which was driven by strong mortgage banking and corporate banking revenue results.

Looking at each line item in detail. Deposit service charges increased 5% sequentially and declined 1% from the prior year. The sequential increase was driven by consumer deposit fees, which were up 10% due to seasonality, as well as the initial benefit of transitioning to our new simplified deposit product offerings. Commercial deposit fees increased 2% sequentially and 6% over the prior year, due to account growth and increased treasury management sales revenue.

Corporate banking revenue of $114 million was the highest in company history, as Kevin noted, which increased $13 million from a strong third quarter level and $32 million from last year. The growth was primarily driven by higher syndication and business lending fees. As I mentioned, year-end tax law changes drove a number of corporate transactions or accelerated their timing. More significantly, investments in our capital markets and treasury management capabilities are creating more lead opportunities and increased production, and we led or co-led over half of our syndicated transactions during the fourth quarter.

Mortgage banking net revenue of $258 million increased 29% from the third quarter and 65% from a year ago. Originations were $7 billion this quarter, matching our highest quarter ever and compared with $5.8 billion last quarter. Gain on sale revenue was a record $239 million, up $13 million from strong third quarter levels on higher volumes, partially offset by lower gain on sale margins. MSR valuation adjustments, including hedges, were a positive $7 million in the fourth quarter compared with a negative $40 million last quarter.

Investment advisory revenue increased 1% from last quarter and 3% from the prior year, largely due to higher private client services revenue and institutional trust fees. This was partially offset by lower mutual fund fee revenue, which resulted from the sale of certain mutual funds which closed in the third quarter. Card and processing revenue was $66 million, up 2% from the third quarter and 10% from a year ago, reflecting higher sales and transaction volumes.

Turning next to other income within fees. Other income was $215 million this quarter versus $78 million last quarter. Excluding unusual items I outlined a moment ago, other income was $92 million and was consistent with the prior quarter's levels. Credit costs recorded in other noninterest income were $13 million in the fourth quarter compared with $14 million last quarter and $33 million a year ago.

Now turning to expenses, which are on Slide 8. Noninterest expense of $1.2 billion increased $157 million sequentially or 16%. There was a lot of noise in expenses both this quarter and last. In the fourth quarter, expenses included $134 million charge on FHLB debt termination, $26 million in additional expense resulting from the increase in mortgage repurchase reserves and $13 million from increases to litigation reserves. Prior quarter results included $26 million of costs associated with the TruPs redemption and $22 million from an increase in mortgage repurchase reserves. Excluding these items from both quarters, noninterest expense was $990 million and increased $32 million or 3% from the third quarter. That increase was driven by higher compensation-related expenses, primarily due to very strong mortgage and commercial loan production during the quarter. Additionally, we reported $6 million in annual pension curtailment expense during the fourth quarter.

Credit-related costs and operating expense were $68 million, up $9 million from last quarter, due to higher mortgage repurchase expense. Mortgage repurchase expense was $44 million this quarter compared with $36 million last quarter. Realized losses were $15 million this quarter, which was consistent with last quarter.

As we previously announced, 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. In December, we received additional information from Freddie Mac regarding changes they've made to their selection criteria, as well as the timeframe for requesting files, which now includes the years 2004 through 2006. Previously, they were using a 2007 and forward timeframe. As a result, we further increased our reserves to incorporate estimates of probable losses on repurchases from the 2004 through 2006 timeframe. We do not have the same type of information from Fannie Mae, which represented approximately 23% of our servicing portfolio and roughly 20% of the loans sold to GSEs over the past 10 years.

Moving on to Slide 9 and PPNR. Pre-provision net revenue was $616 million in the fourth quarter compared with $568 million in the third quarter. Excluding the items noted on this slide, PPNR in the fourth quarter was $638 million, up 7% from the results in the third quarter similarly adjusted and among the strongest results we've ever reported. Adjusted PPNR to risk-weighted assets was 2.3% versus 2.0% in the third quarter. The effective tax rate was 26.8% this quarter compared with 27.7% last quarter. The fourth quarter included a $10 million benefit from the termination of leases that we settled during the quarter.

Now turning to credit results. Credit results showed substantial and continued improvement during the fourth quarter, and absolute levels of virtually every credit metric were the best we've reported since 2007 prior to the crisis.

Starting with charge-offs on Slide 10. Total net charge-offs of $147 million declined $9 million or 6% from the third quarter and $92 million or 38% from a year ago. The net charge-off ratio was 70 basis points this quarter. That compares with 119 basis points a year ago and is the lowest we reported in more than 5 years. Commercial net charge-offs of $56 million declined 10% sequentially and 50% from a year ago. At 46 basis points, this was the lowest level reported since the third quarter of 2007. The biggest improvement was in commercial mortgage charge-offs, which were down $11 million or 39% from last quarter, partially offset by a $7 million increase in C&I losses. Total consumer net charge-offs were $91 million, down 3% sequentially and down 28% from a year ago. The improvement continues to be driven by lower residential mortgage and home equity losses.

Moving on to nonperforming assets on Slide 11. NPAs, including held-for-sale, totaled $1.3 billion at quarter end, down $174 million or 12% from the third quarter. Excluding held-for-sale, NPAs were $1.3 billion or 1.49% of loans and were down $160 million from the third quarter, driven by improvement in commercial NPAs.

Commercial portfolio NPAs of $883 million, or 1.78% of loans, declined $134 million sequentially and are at their lowest level since the fourth quarter of 2007. Most portfolio categories improved, with commercial real estate NPAs down $77 million and C&I NPAs down $55 million. Commercial TDRs on nonaccrual status, which are included in portfolio NPAs, were down $177 million -- or were $177 million, up $24 million on a sequential basis. Commercial accruing TDRs were down $11 million and also remained fairly low at $431 million.

In the consumer portfolio, NPAs declined $26 million to $403 million or 110 basis points, with NPLs down $15 million, driven by improvement in residential mortgage. Non-accruing consumer TDRs were $187 million, down $5 million from last quarter. Accruing consumer TDRs were $1.66 billion, consistent with last quarter. The TDR book continues to perform as expected and has stabilized as opportunities for new restructuring become more limited with stabilizing residential real estate credit conditions.

The next slide, Slide 12, includes a roll-forward of nonperforming loans. Commercial inflows in the fourth quarter were $68 million, down 44% from the third quarter. Consumer inflows for the quarter were $145 million, down 10%. These were the lowest inflows we've seen for both commercial and consumer NPLs since prior to the crisis.

Moving to Slide 13, which outlines delinquency trends. Loans 30 to 89 days past due totaled $330 million, down $15 million, and loans over 90 days past due were $195 million, down $6 million from the third quarter. Total delinquencies of $525 million decreased $21 million or 4% from the third quarter and remain at precrisis levels. Commercial-criticized asset levels also continued to improve in the fourth quarter, with the seventh consecutive quarter of decline, down $800 million or 14% sequentially.

The provision and allowance are outlined on Slide 14. Provision expense of $76 million for the quarter was up $11 million and included a reduction in the loan loss allowance of $71 million. Allowance coverage remained strong at 180% of nonperforming loans and 3.2x annualized net charge-offs.

Slide 15 outlines our recent mortgage repurchase experience. Claims and losses associated with GSEs have remained fairly stable over the past several quarters. But we expect this will likely increase as Freddie Mac reviews all nonperforming loans for potential put-back and will now do so back to 2004. We've provided a detailed breakout of loans sold by vintage and remaining balance. Repurchase requests and losses have been concentrated in the 2005 to 2008 vintages, about 78% of the total. Those loans represent just 11% of the remaining balances.

One last topic on credit. As you're aware, last quarter, the OCC issued guidance related to consumer loans to borrowers that have been through Chapter 7 bankruptcy and have not reaffirmed their loan. 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 Federal Reserve and FDIC have not issued similar guidance. We currently estimate that we have approximately $175 million of loans that would fall into this category, about 1/3 of which have already been through the TDR process and 87% of which are current. From a charge-off perspective, our exposure to a change in the guidance, similar to the OCC guidance, would be a requirement to write these loans down to appraised value despite the fact that they continue to make contractual payments. If that guidance were adopted by our regulators, we estimate that this would result in charge-offs of about $70 million, which would be offset by currently existing reserves of about $10 million. Clearly, this would be manageable for us and we continue to monitor those developments closely, but we have no basis for taking these charges at this time until and unless there is a change in regulatory guidance on this topic.

Turning to capital, which is on Slide 16. Capital levels continue to be very strong and included the repurchase of approximately $225 million in common shares this quarter. Tier 1 common ratio at the end of the quarter was 9.5% compared with 9.7% last quarter, due to the impact of share repurchases in the quarter. Other regulatory capital ratios showed similar trends. The tangible common equity ratio was 9.1%, including unrealized gains of $375 million after tax and 8.8% excluding those.

Our capital position would also be strong from a Basel III perspective with a current estimated Tier 1 common ratio of about 8.8%, assuming no changes to the proposed rules and before any mitigation activity on our part. That reflects about 40 basis points of benefit on the numerator side, offset by the detriment from an increase in risk-weighted assets. As you know, regulators are currently considering public comments on these proposals.

During the quarter, we entered into 2 share repurchase transactions. The first, in November, was part of our normal capital management and involved the repurchase of approximately $125 million in common shares. The second, in December, followed an after-tax gain on the sale of Vantiv shares and resulted in a repurchase of approximately $100 million of common shares. These share repurchase transactions were conducted through counterparty arrangements, and they're expected to settle in the first quarter.

As Kevin noted, we reduced our period-end share count by 38 million shares or 4% in 2012, while our common equity capital ratios actually grew modestly. Our 2012 capital plan also included an additional $125 million of possible repurchases through the first quarter of 2013, which we will likely consider shortly.

Turning to the full year 2013 outlook in comparison to 2012, which is on Slide 17. You'll notice this quarter that we have shifted to an annual outlook as we head into 2013. This is consistent with our practice prior to the crisis. The effects of that period and the numerous uncertainties that followed made it difficult to confidently provide longer-term expectations. We believe that while the environment continues to be challenging, those uncertainties have lessened and we believe it is a better practice to provide a longer-term view of where we think the company is headed, hence the change. Our plan would be to provide an update to our annual outlook with each quarter's earnings announcement. We also expect our outlook commentary to continue to include additional quarterly information, where there are expected departures from the overall trends, particularly sequential impacts, such as the effects of seasonality, and I'll start with a few such comments before turning to full year results.

The strength of our fourth quarter 2012 results and momentum provide us with a good foundation for 2013. Ending loan balances were significantly higher than fourth quarter average balances, which will benefit NII. Mortgage pipelines and corporate banking pipelines are strong. We have carefully managed headcount throughout the year. It was down 3% from year-end 2011 levels, and we will continue to do so. As a result, we're expecting a solid first quarter, given the strength of the quarter that we just reported, although, as usual, we will experience negative first quarter seasonal effects. These include: seasonally higher FICA and unemployment expense, about $28 million higher than fourth quarter levels; the impact of 2 fewer days in the quarter, which will reduce NII by $12 million; and the impact of stock option expirations in the first quarter, which will raise the effective tax rate from its normal 28% rate to about 30% and reduce net income by about $10 million. I'll include additional comments about the first quarter as I discuss each line item.

Turning to our 2013 overall outlook, I would note that we have not assumed the benefit of any capital actions beyond the first quarter. We've assumed no meaningful improvement in the forward yield curve, and we have not incorporated any unusual items, such as any potential Vantiv gains or the Chapter 7 bankruptcy guidance issue that I just outlined.

I'll start with net interest income and net interest margin. We currently expect full year 2013 NII to be consistent with full year 2012 NII of $3.6 billion. We anticipate the full year NIM to fall to the 335 to 340 basis point range. The key drivers of 2013 full year trends are loan growth, particularly C&I loans, which we expect to offset the effect of margin compression. We expect margin compression will be higher in the first 2 quarters of 2013 as the portfolio reprices to prevailing rates and then for it to begin to stabilize in the second half as those effects wear off. For the first quarter, we expect NII to be in the $885 million range, reflecting $12 million of seasonal impact to day count, as well as repricing of securities and loans, partially offset by loan growth and a full quarter benefit of the fourth quarter FHLB debt termination. We currently expect NII to grow during the year after the first quarter, strengthening in the second half as margin compression subsides, with some benefit of 2008 CDs maturing in the third and fourth quarters. We will continue to look for opportunities to mitigate the effects of the interest rate environment, including liability management, as we move through the year.

Turning to loan growth. We expect mid to high single-digit growth from the full -- from the 2012 full year average, driven by continued growth in C&I, residential mortgage and auto lending, stabilization in commercial real estate and continued runoff in the home equity portfolio. We assume we will continue to retain only jumbo and branch-originated mortgage product. We expect deposits to remain relatively stable or to grow modestly with growth in transaction deposit balances and continued runoff in consumer CD balance.

Now moving on to overall fee income and expense expectations for 2013. First, in order to provide clearer perspective on core trends, we've adjusted 2012 comparative results on this slide to exclude Vantiv-related impacts, as well as debt termination charges, which were the largest unusual items in 2012. Vantiv transactions contributed net $305 million to fee income for 2012, while debt termination charges increased expenses by a total of $169 million. The net benefit to PPNR of these items was $136 million. Those adjustments are listed in the footnote. Overall, we currently expect low single-digit total fee income growth in 2013 compared with adjusted fee income in 2012. That would reflect growth across most fee categories, with the exception of mortgage, where we look for strong results during 2013, particularly in the first quarter, but not as strong as 2012.

Looking at the details of our overall fee expectations. We expect to see low double-digit percentage growth in deposit fees, with about 2/3 of that coming from commercial and 1/3 from consumer. This expectation reflects a continuation of recent momentum and treasury management and the full rollout of our simplified consumer deposit set. First quarter deposit fees will likely be consistent with the fourth quarter levels due to seasonality. We expect mid-single-digit growth in investment advisory revenue with solid growth in the first quarter as well.

We're looking for high single-digit growth in corporate banking revenue, driven by higher FX fees, institutional sales revenue and business lending fees. Corporate banking should be strong again in the first quarter of 2013, but perhaps $5 million below the fourth quarter's record levels. We anticipate about 10% annual growth in card and processing revenue, driven by continued growth in sales and transaction volumes. This line item will likely be flat in the first quarter due to seasonality.

Turning to mortgage. 2012 mortgage banking revenue was $845 million, reflecting record volumes, the impact of the HARP program and unusually high margins. In 2013, we expect production in margins to decline due to lower HARP refinance volume, some competitive pressure on margins and a waning in the refinance boom. That said, first quarter looks to be quite strong, and we're looking for mortgage revenue in the $230 million range, down about $15 million to $20 million. It's obviously more difficult to forecast further out, but our current expectation for the full year assumes that mortgage revenue declines to the $175 million a quarter range in the middle of the year and then drifts down slowly thereafter.

Our quarterly base expectation for the other income caption would be in the $75 million range, plus or minus, absent significant unusual items, which we will have from time to time. We would expect lower credit costs in this line item to be a contributor here.

To return to our overall expectations for fee income, while we expect a declining contribution from our mortgage banking revenue, we expect growth in other fee income categories to generally pick up the slack from a trend perspective. In terms of the first quarter, we look for fees to be in the $700 million range or perhaps a little better.

Turning to expenses. We currently expect total noninterest expenses to be relatively consistent with 2012 expenses, excluding the $169 million in debt termination charges on the FHLB debt and TruPs I noted earlier. Personnel costs are expected to be stable to down slightly versus 2012, with lower mortgage repurchase expense and very modest growth in other operating expenses. The other expense caption should average about $300 million a quarter, with lower credit costs, absent any significant unusual transactions we may experience.

First quarter expenses are currently expected to be in the $995 million range, consistent with fourth quarter core expenses. As I noted earlier, that will include a seasonal increase of about $28 million for FICA and unemployment. Those same expenses should go back down by about $20 million in the second quarter. We expect expenses otherwise to be relatively stable through the year, and our current expectation is for an efficiency ratio of about 60% in the second half of the year. We'll continue to manage expenses carefully and aggressively and in line with revenue results and the economic environment.

In terms of PPNR, we've adjusted the 2012 column on the slide for the $136 million net benefit of the impact of Vantiv and debt termination. As I outlined in my remarks to this point, our overall expectation is for moderate growth in PPNR in 2013 compared with the strong results in 2012. That's despite a rate environment that is not conducive to normalized NII results and comparisons to a record year for mortgage revenue. As I noted earlier, first quarter PPNR results will include the seasonal negative impact of $40 million in NII and expense lines.

We expect full year 2013 effective tax rate to be in the 28% to 28.5% range, which is consistent with 2012. We anticipate a higher effective tax rate in the first quarter, about 30%, as a result of the tax effect of stock options expirations. That represents about $10 million in the tax line in the first quarter. As a reminder, last year, this impact occurred in the second quarter.

Turning to credit. We look for continued improvement in credit trends, with full year net charge-offs currently expected to be down about $200 million or so and the improvement fairly evenly distributed between commercial and consumer. We expect the full year net charge-off ratio to be in the 55 to 60 basis point range, compared with the 85 basis points we reported this year. We currently expect NPAs to decline about 20% to 25% during 2013, with continued resolution of commercial NPAs being the largest driver of the reduction. First quarter charge-offs should be down about $5 million to $10 million, and NPAs should be down about $50 million to $75 million. For the loan loss allowance, we expect continued reductions during 2013, with the ongoing benefit of improvement in credit results being partially offset by new reserves related to loan growth.

Finally, as I noted in my earlier discussion, our 2013 capital plan submission included potential share repurchases. Our 2012 capital plan included $600 million of repurchases over a 5-quarter period. The 2013 CCAR process covers 4 quarters, but otherwise, our plan is generally consistent from the perspective of the pace of proposed repurchase activity. Obviously, those plans would be contingent on both a non-objection to our plan from the Federal Reserve and on our board's future decisions regarding the actual implementation of share repurchases. Overall, our capital plan submission would remain -- maintain common equity capital ratios in the same general ballpark as current levels. As a result, our plan is probably somewhat more conservative than our capital and earnings would support, but we think that is the right place to be with respect to CCAR process at this stage.

In summary, we are very pleased to close out 2012 on a strong note and that gives us confidence as we move into 2013. The environment is challenging, but we've had momentum in a number of core businesses that should support our ability to generate core PPNR growth and we expect ongoing improvement in credit trends. These trends would drive continued strong return measures. Added to those strengths is our capacity for continued prudent capital actions that would further contribute to earnings per share.

That wraps up my remarks. Pamela, can you open up the line for questions?

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Ken Usdin with Jefferies.

Ian Foley - Jefferies & Company, Inc., Research Division

It's actually Ian Foley for Ken. First question on the commercial loan growth, obviously, huge growth towards the end of the quarter. Was wondering if you could provide any details on just timing and how that could impact 1Q growth rates.

Kevin T. Kabat

Let me just start and then Dan can finish in terms of talking about forward perspective. It was strong in the end of -- and you noticed in terms of our end of period loans. We got -- it was very broad, came from a wide swathe across our geographies. It was strong, particularly in terms of healthcare, energy, manufacturing. We feel very good about that. Pipeline was good, and we were able to really work hard through year end to accommodate our clients and our client needs. That, as Dan mentioned, really does give us a good foundation and a good jump-off point relative to starting the quarter. So that feels pretty good. I don't know if there's anything else, Dan, you'd like to say in terms of that point.

Daniel T. Poston

No, not a lot more. As Kevin said, fourth quarter was very strong, some of that may have been some acceleration of some transactions. But overall, we expect that we will continue to post quarterly loan growth that's consistent with what we've seen over the past several quarters. And you can see our annual expectations for loan growth are for mid to high single-digit growth for the year, and I'm not sure we're necessarily expecting there to be significant variations during the year. So I think we would expect continued consistent solid loan growth throughout 2013.

Kevin T. Kabat

And the only other thing I would just conclude with in terms of that point, look, we've made a lot of investment in this space. Our folks are doing a very good job. We've brought in some real talent to supplement the strategic focuses that we've had. We've talked about the energy vertical, for example. Healthcare continues to be a very, very strong and very good line of business for us and vertical for us as well, and we feel good about the manufacturing business going on around us. So again, I think that we're well positioned to take advantage of where we're seeing some strength in this modest but continuing slow recovery. So I think we're well positioned to take advantage of that.

Ian Foley - Jefferies & Company, Inc., Research Division

All right. And my second question is a follow-up to the loan growth guidance. Just wondering if you could put that in context of overall earning assets and how you expect loans to earning assets to shift over the next year?

Unknown Executive

We continue to favor loan growth over growth in the investment portfolio. We don't believe that the current environment provides good risk return trades-offs for our shareholders to grow the investment portfolio. So earning asset growth almost exclusively will reflect loan growth looking forward.

Ian Foley - Jefferies & Company, Inc., Research Division

But do you think you would actually pull down the securities portfolio as a result of the loan growth, given that deposit growth is stable to up modestly?

Unknown Executive

No, I expect the investment portfolio size to remain stable.

Operator

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

Brian Foran

I think the fee growth guidance is clearly better than most people have baked in, and you give good color and helpful detail on -- by line item. I guess, maybe if you could just -- if I could ask as a follow-up where the main points of uncertainty are? Mortgage, you feel pretty confident about the first quarter. And I guess a sub-question would be if you could just remind us how you book revenue and if it's mostly at funding or rate lock that's feeding into that confidence. And then just more broadly, I mean, with all the moving parts in fees, what are the 1 or 2 things we should watch for deltas as we move through the year?

Daniel T. Poston

Yes. Clearly, there's probably more uncertainty with respect to mortgage results than any of the other line items, and we've booked the majority of revenue at rate lock, but there is some revenue that is booked upon the sale of those loans. I think in the other fee categories, we are expecting growth uniformly through all of our line items. And I think as Kevin mentioned, that growth is primarily driven by investments and actions that we've taken over the past several years. So we continue to see very solid results in corporate banking. We changed our focus or increased our focus on mid-corporate lending, and we've had concerted efforts to be in a position to be in the lead position on transactions. That has resulted in a greater fee income contribution and more opportunities for corporate banking revenues. You're seeing that in our results, and I think our expectation is you will continue to see that into 2013. On the consumer side, obviously, the fees over the last several years have been impacted by a number of regulatory headwinds. I think we've turned the corner there. We talked about that in the third quarter, that we thought consumer deposit fees have bottomed out. I think that's been proven out by our fourth quarter results, where deposit fees were up 5%. We're expecting continued growth there. We've got our -- the full implementation of our new set of deposit products is coming online in 2013. Obviously, there's some uncertainty with respect to that program. But we've been piloting that for some 6 months now, and we have a high degree of confidence in our ability to produce the kind of results that are embedded in our guidance, given the results of those pilots. So overall, we're feeling pretty good.

Brian Foran

As a follow-up, I was wondering if I could ask about auto lending. And I know you focus on prime industry statistics we look at, I mean, to suggest underwriting standards are easing quite a bit across that market, but it's harder to get a broad perspective, I guess, or 10 kind of years of perspective of whether the market just kind of rebased to a more normal level or whether people are getting over their skis a little bit. So I guess just what are you seeing on the ground from a competitive standpoint? Is the market just normalizing, or is it getting a little bit looser than you'd like in auto?

Unknown Executive

I think credit conditions in auto, in the market, are easing up a little bit because the competition at the very high-end level of FICO spectrum is very, very strong. So the risk return trade-off's of, in the sort of 775, 780-plus type FICO scores is driving margins down. And the other thing to keep in mind is that this product behaved very well from a credit perspective through the credit crisis. I think originators have some confidence as to the expected credit behavior. On our side, we have not changed our underwriting standards much. I mean, we continue -- we have a platform that is probably capable to originate more loans, but we've kept the discipline in the business to make sure that we don't compromise credit standards and we book loans that provide a good risk return trade-off. So the overall profile of our originations has not changed. We are aware of some of the market trends that you are pointing to, but I'm confident that going, moving forward in 2013, we'll keep the same type of discipline in the business.

Brian Foran

If I could sneak in a very quick last one, the NIM doing worse in the first half of the year than the second, is that just the timing of CD repricing and deposit repricing more broadly? Or is there some kind of expected inflection in asset yields as well?

Unknown Executive

So if you look, historically, you will see that first quarter -- Q4 to Q1 change is most likely going to be similar this year compared to last year. There is some support in the second half from CD -- consumer CD repricing in Q3 and Q4. In general, Q1 tends to be a bit weaker from a fee perspective, that goes into the margin line, and we would expect that to stabilize in the second half, based -- and we're not currently assuming any meaningful -- as Dan stated, any meaningful improvement in the rate environment. So with ongoing current conditions, we don't see anything unusual than what we typically see in Q1 this year.

Daniel T. Poston

The only thing I would add to that is we saw the impact on the rate environment from QE3 in the third quarter of 2012. That has had an impact on margins over the latter part of 2012, and that's not fully baked into our portfolios at this point, but that will become more and more baked into the portfolios as we move through the first half of 2013. And absent any other kind of event that has a large impact on rates, we would expect that the impact of that would begin to subside as we move into the latter part of the year.

Operator

Your next question comes from the line of Ken Zerbe with Morgan Stanley.

Ken A. Zerbe - Morgan Stanley, Research Division

Just a question on the rep and warranty expense that you took this quarter on the earlier vintages. How well do you feel that you're able to capture the potential charges associated with that? Meaning, are we -- do you feel that we are basically done with those earlier vintage charges at this point, or is this just the first step among several, potentially?

Daniel T. Poston

Well, the -- I think it's important to recognize that our reserving methodology is not to attempt to estimate the total losses from repurchase activity over the entire life of the portfolio. Our reserving methodology is to reserve for those losses that we can estimate based on the current conditions. So we've moved to a point over the last couple of quarters where we have far more insight into what Freddie Mac is going to do with respect to requesting files [indiscernible] postulate whether to put a loan back to us and what decisions they will be making in that regard. So we've increased our reserves to the extent that we can now estimate put-back activity into the future, which we were unable to do before. But that doesn't mean that we have made those estimates for the entire life of the portfolio. We're making those estimates based upon which loans we think have currently exhibited behavior and are currently nonperforming in Freddie Mac's eyes and that they will ultimately put back to us. So it's a look into the next several quarters or years in terms of what they might do with loans that have nonperforming characteristics today, but it's not trying to project how that portfolio will perform years into the future. So hopefully, that's answers your question.

Ken A. Zerbe - Morgan Stanley, Research Division

Yes, no, it does, actually. It helps a lot. Just as a follow-up question, maybe a little more broad. It seems that you were fairly optimistic when it comes to C&I growth in 2013. Obviously, auto is just as competitive. When you think about the potential categories where we could see growth, is C&I the best in terms of, sort of the, I'd say I guess, risk reward or in terms of the yield versus the risk that you're taking on that, where you see more opportunity to grow versus other categories?

Kevin T. Kabat

Yes. Ken, this is Kevin. I would tell you that, that statement or that assumption is true. We do feel very good about the risk reward and the value that we're seeing, particularly as you see, and as we were able to report this quarter, some of the commercial fee revenue that we had. That should give you comfort and an indication of our confidence of driving the right business and the right value for the risks that we're taking. It certainly does for me, so...

Daniel T. Poston

The only other thing I would point out from a risk reward perspective is that I think that what Kevin just said is probably all the more true when you consider the fee income opportunities. So a lot of our C&I growth is a result of our mid-corporate strategy, and I think you have the dynamic that I alluded to earlier with respect to the fee income opportunities on that business being far greater than they are in many other categories of our loan portfolios.

Operator

Your next question comes from the line of Jefferson Harralson with KBW.

Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division

My question is a follow-up to the last one and maybe it's too similar, so feel free to pass it by if it's too similar. But in just listening to all the conference calls this quarter on loan growth, it feels like we've had a lot of small and midsized businesses sell to, either family members or whatever, and get a lot of -- and we had a lot of leveraged financed volume that's driving a nice kind of a late quarter C&I growth. Is that kind of what you're seeing here? And is -- and I just want to make -- as you guys are guiding to a much higher nice loan growth, I just want to know what the drivers are to that loan growth in your guidance, because it seems like a big piece of this quarter might be fairly temporary, or am I thinking about that incorrectly?

Kevin T. Kabat

Yes. Certainly, we did see some activity that was M&A transactions and the like that may have had some tax motivation in terms of tax changes. But I would say that while that was a contributor to our growth, I think it was not the key driver to our growth. So I wouldn't anticipate that the absence of those kinds of transactions going forward would have any risk of impacting our guidance. So if you look at our guidance, certainly, our guidance is not that we will replicate the fourth quarter every quarter going forward. Fourth quarter was strong. That was one of the reasons it was strong. But the absence of those kinds of transactions is fully baked into our guidance as we go forward.

Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. And then for the '13 guidance, I guess, what has to go right for that to -- for the guidance to come true?

Kevin T. Kabat

From our standpoint, the assumptions that we've made relative to our guidance, I think, we articulated, which is really kind of the continued modest recovery that we're having. That has to go through. From our standpoint, we have to execute well. We've made the right investments. I think we're well positioned. We're scoring in the areas where we've specifically put investment against. To be able to do that, we've got to continue that momentum and that execution, and I think that's entirely within our strength and control. So it feels really good, and we've got to also continue to be very disciplined relative to credit quality. We know there will be continued competitive pressure from that standpoint, and I think we're very mindful of all the factors of success in being able to do that. We wouldn't have given the guidance if we didn't feel confident at this stage that these are the things that we're dealing with in this environment and have been able to demonstrate in the past year as well.

Operator

Your next question comes from the line of Paul Miller with FBR Capital Markets.

Jessica Ribner - FBR Capital Markets & Co., Research Division

This is Jessica Ribner for Paul. Just taking a look at your gain-on-sale margins, it looks like it fell about 50 basis points quarter-over-quarter. That was just a rough back of the envelope calculation. We were wondering what that was a result of?

Daniel T. Poston

You are right. I think it probably did decline somewhere in that range. I think the dynamic there is that third quarter margins were at record highs. Some of those margins were driven by the level of HARP refinance activity and the margins on that business. I think margins were also driven in the third quarter by the fact that you had a pretty significant rate impact as a result of some of the QE3 announcements during the third quarter. So as those became -- as that rate environment became more baked into all of the market rates and the rate offerings, I think those margins lowered a bit. So I think that's the dynamic there.

Jessica Ribner - FBR Capital Markets & Co., Research Division

And do you foresee another drop like that between fourth quarter and the first quarter, or do you think it's going to level off a little bit?

Daniel T. Poston

I think it's going to level off a little bit. I think, in general, our guidance for mortgage for 2013 reflects both the fact that volumes and gain-on-sale margins will come in a little bit.

Operator

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

Kevin J. St. Pierre - Sanford C. Bernstein & Co., LLC., Research Division

I appreciate the color on the capital plan submission. I was just wondering if you could help us understand the conservatism with Tier 1 common, Basel I, 9.5%, Basel III 8.8% presumably well above where you need to be in 2019. Is your conservatism rooted in your experience from 2012, or is it keeping some dry powder on hand in case strategic opportunities arise? What's driving the conservatism?

Daniel T. Poston

Well, I don't think it's related to our experience in 2012. That was more of a qualitative issue, as we've discussed, and I think we're talking about conservative -- conservatism here in terms of kind of quantitative measures. And I think the largest driver of that conservatism are things that others have talked about as well, and that's just simply the way the process is constructed. There is a considerable amount of uncertainty as banks submit their plans with respect to what the models that the regulators will be using look like and what kind of results they will produce. I think it's safe to say that everyone in 2012 experienced the situation, or nearly everyone, the situation where the capital plan that they submitted and the capital ratios that, that produced were adjusted downward by the regulators once the regulators ran their models. So we don't know what those models look like. We don't know how big those adjustments may be, and therefore, we're required to bake a fair amount of conservatism into what we submit in order to allow for the potential for those kinds of adjustments as we go forward. We would anticipate that over time, that either those adjustments will get smaller or that we will be better able to predict them, or both. But as we sit here today, there's a significant amount of uncertainty, and therefore, we can't take the risk that what we submit kind of is inconsistent with the result that they're going to have.

Kevin J. St. Pierre - Sanford C. Bernstein & Co., LLC., Research Division

All right, that's helpful. And then just quickly on the reserves. You pointed out you're 3.2x annualized charge-offs, peer median closer to 2x. Should we expect you to main that kind of -- maintain that kind of coverage over annualized charge-offs, or do you find -- do you think you'll drift closer to where the peers are?

Daniel T. Poston

I suspect we may drift closer to where peers are. Our reserve methodology is not driven off of achieving a multiple -- a certain multiple of charge-offs. It's more a result of the models that we run in order to establish our reserves. So that ratio is largely determined by kind of the different pace, perhaps, of improvements in levels of charge-off versus levels of nonperforming loans. So we may still have allowances that are elevated by the fact that we have higher levels of nonperforming loans that we still need to resolve, yet charge-off performance has improved more quickly, and therefore, that ratio changes a bit over time. So I suspect, over time, it may be closer to peers than it is right now.

Operator

Your next question comes from the line of Jennifer Demba with SunTrust Robinson.

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

It sounds like you've had a fair amount of success off the bat with the energy team. I'm wondering if you're contemplating hiring any other specialty lending teams. And then my second question revolves around M&A. I'm wondering, Kevin, what you're seeing out there in the landscape right now and if you think there maybe could be some opportunities for Fifth Third to participate in that market in 2013.

Kevin T. Kabat

Yes. Jennifer, a couple of quick items. One is, right now, we're very pleased with the investments made and focused on making sure we drive the full benefit of those investments. And so there isn't anything imminent relative to an expansion of our verticals and the concentrations that we've done in those specialties. So we feel good about that, so nothing that I'm here to announce or talk about today. On the M&A front, what I would tell you is, look, it's -- it is a challenging time. I think those that can demonstrate that they can return and make a good return in this challenging environment should see some opportunities begin to emerge. I don't know how soon that happens. Our expectation, what we've talked about, is that we think that's more likely to be an end of the year, maybe even into next year kind of orientation, as people really kind of evaluate what levers they have to pull and what strengths they get to play within this environment. So we're going to be mindful. We're going to be disciplined. We're going to be watchful relative to that, but we're not certainly anticipating something imminently on that front either.

Operator

Your next question comes from the line of Steve Scinicariello with UBS.

Stephen Scinicariello - UBS Investment Bank, Research Division

Just curious, from a big-picture perspective, as you look at 2013 and all of the many opportunities that Fifth Third has, I was just kind of curious how you would potentially rank order some of them in terms of whether it's just continuing to take market share on the C&I side or the enhancements that you've made on the retail side to drive further fee income and -- or continue to play capital. I mean, as you kind of look at the opportunity set for 2013, how would you rank order those kind of benefits that could flow to you over the course of this year?

Kevin T. Kabat

Yes, this is Kevin. What I would tell you is, look, our orientation is to make sure that we continue to look at those opportunities and leverage them appropriately. I'd -- I would tell you that we feel good about a number of them that you just mentioned. And that certainly, as we look at the business itself and our operating model, investments, the changes and the opportunities before us, we still feel good about in that perspective. Clearly, you're seeing the results of some of those investments begin to materialize, strong C&I, strong commercial growth, strong commercial fee income. In terms of that, we think that's going to be a continued opportunity for us. Mortgage, we will ride and continue to do well in for as long as the refi opportunity continues. But we also like the purchase component of what we drive in that business. It's a good contributor and we double that relative to -- in footprint deposit products and cross-sell that we do from that standpoint. We feel good strategically about how we've positioned our deposit simplification program and the benefits there. Dan talked a little bit about that, and I think that's something further out that we should continue to benefit. And we have a good solid platform design for the environment that we're in today that we can grow and move forward with. And we still think that the repositioning that we've done relative to the other businesses are opportunities for us, as well as our geographies and what our affiliates are doing and our operating model from that perspective. So there are a lot of strengths that we focused on, that we've continued to hone from that standpoint, but I don't feel the luxury of necessarily segregating some out. We're pulling the levers on all of them, and I think it really comes down to our ability to continue to execute, which we feel good about it and plays to a strength of this organization. So that's how I would sum it up for you.

Operator

Your next question comes from the line of Erika Penala with Bank of America Merrill Lynch.

Ebrahim H. Poonawala - BofA Merrill Lynch, Research Division

This is Ebrahim Poonawala on behalf of Erika. Quick question, just going back to your Vantiv stake. If you can -- I guess, Dan, just talk through the thought process in terms of retaining that stake. Obviously, Vantiv's trading at a much higher PE and relative to the PE assigned to the Fifth Third stock. If you can talk through, in terms of rationale of holding onto that stake versus monetizing that and buying back the stock at current levels, where it's still relatively cheaper in tangible book value basis versus waiting it out much longer.

Daniel T. Poston

Yes. I think we've talked about this a number of times before. Looking at our Vantiv stake from a big-picture perspective over time, we would -- we believe and continue to believe that holding a significant minority stake in another public company is probably not the strategy that we would like to follow longer term. I think the need for us to monetize that or the desire for us to monetize that quickly is moderated or mitigated pretty significantly by the fact that we know that company very, very well. So we have a lot of ties with that company. They were a part of Fifth Third for a long time. We created the company. And therefore, our comfort level that we really know and understand that company and understand its current operations and its current prospects, is very high, and therefore, it gives us the flexibility to accomplish our longer-term objective over time and in a very considered, kind of over a longer timeframe. So we would expect that we would continue to monetize that investment over time as we deem appropriate, but it's not something that we would expect to accomplish quickly or to do in an undisciplined, unthoughtful kind of way.

Ebrahim H. Poonawala - BofA Merrill Lynch, Research Division

Understood. And I guess just one question, following up on your net charge-off guidance of 55 to 60 basis points. I guess just looking forward, where do you think net charge-offs bottom out, given obviously, the marks you've taken over the last few years. Are we close to a bottom in 2013, or can you see charge-offs grind lower into '14, below 50 basis points?

Daniel T. Poston

Yes. I think from an -- there's really 2 different questions, one of which is the question that you ask is the kind of where they bottom out, the other question is where do they normalize, and I think those are 2 different numbers. From a normalization perspective, based on historical results and based on our knowledge of the portfolio and how our underwriting has changed over the last several years, we would expect that kind of normalized charge-offs are probably in the 40-basis-point range, plus or minus. In terms of where charge-off rates bottom out, they're likely to go below that normalized level at some point and then kind of come back up to a normalized level ultimately. So we think on a longer-term basis, 40 basis points, plus or minus, may be a normalized level, we may well hit levels that are somewhat below that ultimately, and I wouldn't -- obviously, we don't expect that this year. We're talking 55 to 60 basis points for this year. So I would expect charge-off rates to continue to come down into '14 or perhaps even '15.

Operator

Your next question comes from the line of Jon Arfstrom with RBC Capital Markets.

Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division

Sorry to belabor this, but just one clarification, Dan, for you, on the word conservatism or conservative on the CCAR request. Just want to understand what that means. Does that mean not -- does conservative mean not trying to touch some of your excess capital, or does conservative mean not reaching for the high end of that targeted payout range that you've held pretty consistently?

Daniel T. Poston

Yes. I think conservative means that if you look at where our capital ratios are, you look at where regulatory minimums are, look at where our internal targets are, we're not trying to get from point A to point B in all 1 year. So we recognize we have excess capital. There are many uses for that excess capital as we go forward. One of which would be to return that to our shareholders. But we've said that our expectation is that the capital plan that we put together will result in our capital ratios remaining fairly stable. So in that respect, we're not drawing down that excess capital by virtue of this capital plan in any kind of significant way, rather, we are seeking to prevent the continued buildup of excess capital at this point in time. And part of that is because we may well have uses for excess capital in the future, but frankly, probably the more immediate reason is we don't believe that the process and the regulatory environment now is conducive to us kind of draining that capital out of the balance sheet at this point in time.

Operator

At this time, we have reached out the allotted time for questions. Do you have any closing remarks?

Kevin T. Kabat

We do not. Thank you.

Operator

And this concludes today's conference call. You may now disconnect.

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