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Executives

Jeff Richardson - Director of Investor Relations and Corporate Analysis

Bruce K. Lee - Chief Credit Officer

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

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

Analysts

Craig Siegenthaler - Crédit Suisse AG, Research Division

David J. Long - Raymond James & Associates, Inc., Research Division

Ken A. Zerbe - Morgan Stanley, Research Division

Stephen Scinicariello - UBS Investment Bank, Research Division

Leanne Erika Penala - BofA Merrill Lynch, Research Division

Andrew Marquardt - Evercore Partners Inc., Research Division

Matthew H. Burnell - Wells Fargo Securities, LLC, Research Division

Paul J. Miller - FBR Capital Markets & Co., Research Division

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

Michael Mayo - CLSA Asia-Pacific Markets, Research Division

Fifth Third Bancorp (FITB) Q4 2011 Earnings Call January 20, 2012 9:00 AM ET

Operator

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

Jeff Richardson

Thanks, Jamal. Good morning. Today, we'll be talking with you about our full year and fourth 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 historical performance in these statements. We've identified some of these factors in our forward-looking cautionary statement at the end of our earnings release and in other materials, and we encourage you to review them. Fifth Third undertakes no obligation and would not expect to update any such forward-looking statements after the date of this call.

We're joined on the call by several people: Kevin Kabat, our President and CEO; Chief Financial Officer, Dan Poston; Chief Credit Officer, Bruce Lee; Treasurer, Tayfun Tuzun; and Jim Eglseder of Investor Relations.

During the question-and-answer period, please provide the name -- 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. Before going through the quarter, I want to make some comments regarding 2011. Although it was a fairly tough year environmentally, I believe our results demonstrate the many core strengths of Fifth Third, as well as the many steps we've taken to make it a better company. Net income to common shareholders of $1.1 billion is the highest since 2006 and more than doubled from last year. Pre-provision net revenue exceeded $2 billion for the third consecutive year, as we've managed the regulatory headwinds and a slow growth environment. We've posted a return on assets of about 1% for 5 consecutive quarters with the full year ROA of 1.2%, up about 50 basis points from our 2010 full year ROA. I'm pleased with our ability to produce these returns in the midst of a relatively weak economic recovery and significant regulatory changes.

We remain committed to serving our markets, which is being demonstrated through our strong deposit and loan growth results. For the year, average transaction deposits increased 10%, and we grew portfolio loans 5%, with average balances increasing each quarter throughout the year. Credit quality metrics showed continued and significant improvement, with charge-offs approximately half of 2010's levels, and we continue to build equity capital despite our already strong capital position. Those trends are encouraging and provide a solid foundation to build on as we enter a new year.

Now moving onto some highlights for the fourth quarter. Fifth Third reported fourth quarter net income to common shareholders of $305 million and earnings per diluted common share of $0.33. Earnings results included the impact of charges related to the Visa total return swap and our bankcard association membership, which Dan will discuss in more detail. Those charges were $68 million pretax or about $0.045 per share. Returns remain solid despite the impact of these charges and the initial impact of new debit interchange rules.

Return on assets for the quarter was 1.1%, and return on tangible common equity was 12%. Additionally, tangible book value per share of $11.25 increased 2% sequentially and 13% from a year ago. We posted very strong loan growth for the quarter, with end-of-period portfolio loans and leases up 2% sequentially and up 9% on an annualized basis. We're seeing continued growth in our C&I, mortgage and auto portfolios. Additionally, the rate of attrition in other portfolios continues to slow as the economy slowly improves and more stability begins to return to real estate markets and values. Looking to next quarter, we expect these trends to continue.

Credit trends continue to show improvement, with net charge-offs falling to the lowest level since 2007 and nonperforming assets declining $128 million on a sequential basis to the lowest level since early 2008. Total NPAs, including held for sale, were down $187 million or 9%. Delinquencies continue to decline as well, falling $95 million sequentially to the lowest levels in recent memory. Capital levels continue to be very strong and well in excess of targeted levels and regulatory requirements, including those proposed under Basel III. 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 9.7%. We believe that will place us among the highest Basel III capital positions of the top 20 U.S. banks.

As you know, we recently submitted our capital plan under the Comprehensive Capital Analysis and Review or CCAR process. We believe that our strong capital levels and earnings make it possible and appropriate for us to increase our distributions to shareholders in coming quarters, including through share repurchases, while at the same time the plan will retain some of our common equity generation to support asset growth. Dan will discuss this more in his remarks.

Looking at the broader economic picture, we continue to see slow improvement with recent trends favorable. While recent unemployment figures are encouraging, it's important to note that labor force participation rates remain 2% to 3% below levels seen in precrisis years. Put another way, while seeing the economy adds jobs can very positive -- is very positive, right now, we've got $3 million to $4 million less people out there looking for them. So the declines we've seen in the unemployment rate are likely to slow as more people attempt to re-enter the labor force. However, this is still a positive development.

GDP continues to expand as does consumer sentiment, but overall improvement remains somewhat sluggish. Customers continue to view the macroeconomic and political environment as uncertain in making their investment decisions, and that may not improve a lot in an election year. That being said, the U.S. economy is resilient, and we think slow and steady growth throughout 2012 is the most likely scenario. That kind of growth is now likely to lead to higher rates where a steeper yield curve, which we'd like to see and which is critical to allow us to a more fully -- to more fully generate the higher returns we expect for Fifth Third.

Before turning it over to Dan and Bruce, I'd like to thank our employees for their continued focus and drive and our customers for their continued dedication to the bank. Improving the customer experience is an ongoing focus for us. Our customers' success is our success, and we look forward to helping them and many new clients exceed in 2012, and we believe we're very well positioned to do just that. I also want to welcome to the call Bruce Lee, who will be discussing credit results. As you know, a couple of months ago, Bruce was named Chief Credit Officer succeeding Mary Tuuk in that role. Mary is now Market President of our third largest affiliate in Western Michigan. Bruce brings a wealth of experience to his position, including most recently heading up our Special Assets Group, which he continues to lead.

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

Daniel T. Poston

Thanks, Kevin. I will start on Slide 4 of the presentation and move into details of the quarter. In the fourth quarter, we reported net income of $314 million and recorded preferred dividends of $9 million. Net income to common was $5 million and diluted earnings per share were $0.33, down 18% or $0.07 from the third quarter. As we previously announced, this included $68 million of pretax charges or about $0.045 per share on an after-tax basis that we incurred in the fourth quarter associated with the Visa total return swap and increased bankcard association litigation reserves.

As you may recall, in mid-2009, we sold our Visa B shares to a counterparty. Now that transaction was designed to insulate the purchaser from the effects of Visa's litigation costs on the conversion rate of those B shares into A shares, and that was done through a total return swap. Visa made a $1.6 billion deposit to its litigation escrow account in December, and so $54 million of the charges that we recorded were in other noninterest income, and those were designed to adjust the value of the associated swap liability. In light of this development, we also increased other reserves related to bankcard membership by $14 million.

Turning to Slide 5. Net interest income on a fully taxable equivalent basis increased $18 million sequentially to $920 million, which was better than we expected, and net interest margin increased 2 basis points to 3.67%. Growth in C&I, residential mortgage, auto and credit card loans contributed to the increasing NII and NIM. This was partially offset by yield compression across most loan captions, which cost us 5 basis points in margin, as well as lower reinvestment rates on securities given the current interest rate environment. All in, net loan growth contributed 2 basis points to NIM. NII and NIM also benefited from lower deposit costs, including the $16 million sequential impact of continued runoff of high rate CDs, which contributed 7 basis points to margin. Deposit flows were exceptionally strong this quarter, which contributed some pressure to NIM. We also had a fairly sizable nonaccrual recovery in the fourth quarter, and that provided a $3 million benefit to NII.

The full quarter benefit of terminating FHLB debt and swaps in the third quarter was offset by higher interest expense related to hedge ineffectiveness, which in the third quarter was a modest positive.

To give a little more color on loan yields, on the C&I side, portfolio average yield was consistent with last quarter. We've seen pretty solid demand in both the middle market and large corporate arenas. However, we continue to originate higher-quality loans, which is being reflected in yields. In the indirect auto portfolio, the portfolio average yield has continued to decline, reflecting both increased competition in this space as these assets are attractive from both the loss and duration standpoint, as well as the portfolio effect related to replacing older higher-yielding loans with new lower-yielding loans. We currently expect NII in the first quarter to be down $15 million to $20 million, reflecting the effect of the current rate environment on loans and securities, as well as a $6 million reduction due to day count.

In terms of the margin, we currently expect NIM to decline about 5 basis points due to the factors outlined above. Looking forward beyond the first quarter, the low level of rates across the curve will continue asset pricing re-pressure, unless we'd expect to see some additional modest compression to the net interest margin through 2012 until we see the industry rates move up. However, from an NII standpoint, we expect earning asset growth to more than offset NIM compression. So for the full year, based on the current forward curve, we'd expect NII to show a modest growth from full year 2011, with full year margin in the $3.55 to $3.60 range.

Turning to the balance sheet on Slide 6. Average earning assets increased $1.4 billion sequentially, driven by a $2.3 billion increase in total loan balances partially offset by an $899 million decrease in investment securities. Securities portfolio trends reflect lower reinvestment of portfolio of cash flows and lower short-term investment balances. We'd expect that the securities portfolio would be relatively stable over the next few quarters. Average portfolio loans and leases increased $1.3 billion sequentially, driven by positive trends within C&I, residential mortgage and auto loans, which were up a combined $1.8 billion this quarter. That growth was partially offset by continued runoff in the commercial real estate and home equity books of $583 million in the aggregate. Additionally, mortgage loans held for sale were up $956 million driven by increased refinancing activity during the quarter.

Looking at each loan portfolio, average commercial loans held for investment were up $757 million sequentially or 2%. Average C&I loans increased $1.1 billion sequentially. That's a 4% increase from last quarter and a 13% increase from a year ago. Our C&I production continues to be very strong and has been broad based across industries and sectors. As I mentioned, we continue to generate high-quality loans in this space. Given our strong levels of production and pipelines and the current market environment, I expect we'll continue to see solid growth in the first quarter. Commercial line utilization remained at low levels this quarter at 32%, which was down slightly from 33% last quarter. That largely reflects higher levels of commitments as usage was pretty stable. Commercial mortgage and commercial construction balances declined in the aggregate by $408 million sequentially or 3%. We continue to expect runoff in these portfolios in the near to intermediate term, although at a steadily slowing pace. I would expect the size of this portfolio would plateau with stabilization or improvement in commercial real estate markets, perhaps, over the next several quarters. Average consumer loans in the portfolio increased $537 million sequentially or 2%. The growth in consumer loans was driven by the residential mortgage portfolio, up $458 million sequentially, auto loan growth of $251 million and credit card growth of $42 million. This growth was partially offset by continued runoff in the home equity portfolio, which was down $175 million.

The sequential growth in mortgage loans reflected strong originations during the quarter due to the rate environment, as well as the continued retention of certain shorter-term, high-quality residential mortgages originated through our branch retail system. We added $476 million of these mortgages on an end-of-period basis during the quarter. Average auto loan balances increased 2% sequentially, as volumes more than offset pay downs. Loan demand has been strong due to improving auto sales volumes, but pricing has become more competitive, and we will be closely managing pricing and loan volumes in the coming quarters to ensure that returns remain appropriate.

Home equity loan balances were down 2% sequentially. I expect this portfolio will continue to decline for some time given the demand and the equity availability for potential borrowers. Average credit card balances were up 2% sequentially, largely due to increased seasonal spending.

As we look ahead to the first quarter, we expect to see growth in C&I, mortgage and auto loans, partially offset by continued declines in commercial real estate and home equity balances. That should result in continued solid overall loan portfolio growth in the first quarter.

Moving on to deposits. Deposit growth remains exceptionally strong. Average core deposits were up $2.4 billion or 3% compared with last quarter. Average transaction deposits, which exclude consumer CDs, were up $3.4 billion or 5% sequentially and up $7.7 billion or 11% from a year ago. Growth in transaction deposits was largely driven by demand deposits, which were up 10% from the prior quarter and 24% from a year ago. Consumer CDs declined $1 billion in the quarter, driven by maturities of higher rate CDs that we originated in late 2008 and our continued disciplined approach to CD pricing. Average retail transaction deposits increased 3% sequentially and 12% year-over-year with growth across most categories. Our Relationship Savings product has now attracted nearly $14 billion of balances since inception nearly 3 years ago. Given the current rate environment, we expect to continue to see customers moving funds into liquid savings products when CDs mature. Average commercial transaction deposits increased 9% from last quarter and 11% from a year ago. The sequential and year-over-year growth reflected higher demand deposit and interest checking balances with the sequential increase primarily due to seasonality. Customers continue to use balances in order to offset fees due to a lack of better investment opportunity for their excess cash. And that tendency will probably continue given the current rate environment. For the first quarter, we expect transaction deposits to be relatively stable compared to the fourth and for consumer CD balances to continue to decline.

Moving on to fees, which are outlined on Slide 7. Fourth quarter noninterest income was $550 million, a decrease of $115 million from last quarter. There were a number of significant drivers there. First was the $54 million charge related to the Visa total return swap. That compared with a $17 million negative valuation adjustment of the swap in the prior quarter. The change in debit rules reduced debit interchange fees by about $30 million, and that's reported in card and processing revenue. Net MSR valuation adjustments were $54 million this quarter versus a net of 0 last quarter. And investment securities gains were just $5 million this quarter compared with $26 million in the third quarter. And the effect of the items I just mentioned was $142 million or more than all of the decline. Growth of 27 -- excuse me, $27 million otherwise was primarily due to gains on mortgage deliveries, which were up $32 million in the quarter.

Looking at each line item in detail. Deposit service charges increased 1% sequentially and declined 3% from the prior year. Consumer deposit fees were flat sequentially and commercial deposit fees increased 2% from last quarter. The sequential increase in commercial deposit fees was attributable to new customer accounts. The year-over-year comparisons reflect the previous implementation of new overdraft regulations and overdraft policies. For the first quarter, we expect a modest decline in deposit fees due to seasonality in the consumer fees.

Investment advisory revenue decreased 2% from last quarter and 3% on a year-over-year basis. The variation from prior periods was largely driven by fluctuations in the equity and bond markets, partially offset by increased production in the private client services group. We currently expect to see mid- to high-single-digit growth in investment advisory revenue during the first quarter, largely driven by brokerage revenue and seasonal tax preparation fees in the trust group.

Corporate banking revenue of $82 million declined 5% from the third quarter and 20% from last year. The sequential decline was largely due to a decrease in the interest rate derivative and lease-related fees, as well as lower foreign exchange revenue as we've seen our clients take shorter more conservative positions. The year-over-year comparison was also impacted by strong syndication fees in the fourth quarter of 2010. We would expect first quarter corporate banking revenue to be up $10 million to $15 million from the lower fourth quarter levels.

Card and processing revenue was $60 million, down $18 million from the third quarter and $21 million from a year ago. As you know, this represented the first full quarter of impact of the implementation of the new debit interchange rate rules, which cost us about $30 million in the quarter, as we expected. This was partially offset by increased transaction volumes, as well as an initial mitigation activity recognized in this line item, primarily lower rewards. As we previously mentioned, 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 cost associated with debit card offerings, changes and eliminations to rewards, selected fees, incorporation of debit usage into bundle deposit product offerings and the implementation of new products. We are consulting with our customers about their preferences for our services and how they pay for those services. The effects of mitigation will show up in a variety of areas rather than in a single-line item and would be expected to include processing fees, deposit service charges, higher deposit balances and lower expenses. We expect to mitigate roughly 2/3 of the impact of this change by the third quarter and most, if not all of it, over time. Our current expectation for total card and processing revenue for the first quarter is that it would be stable to up modestly from fourth quarter levels. Mortgage banking net revenue of $156 million decreased $22 million from the third quarter and increased $7 million from a year ago. The low rate environment has generated significant refinance activity. Originations were $7.1 billion this quarter, up from $4.5 billion in the third quarter. Gains on deliveries of $152 million increased $33 million from the previous quarter. Servicing fees were $58 million in the quarter compared with $59 million last quarter. Net servicing asset valuation adjustments were negative $54 million this quarter, with MSR amortization of $47 million and net MSR valuation adjustments, including hedges of a negative $7 million. In the third quarter, net servicing asset valuation adjustments netted to 0. Currently, we would expect mortgage banking revenue in the first quarter to be in the same ballpark as the fourth quarter. Net gains on the sale of investment securities were $5 million in the fourth quarter compared with net gains of $26 million in the prior quarter. And net securities gains on non-qualifying hedges on MSRs were negative $3 million in the fourth quarter compared with a positive $6 million in the third quarter.

Turning next to other income within fees. Other income was $24 million, a $40 million decrease from the $64 million last quarter. As I mentioned earlier, fourth quarter comparisons with the third quarter were affected by changes in the valuation of the Visa total return swap, which represented a negative $54 million in the fourth quarter compared with a negative $17 million last quarter. Other significant items and other income included $10 million in positive valuation adjustments on puts and warrants related to Vantiv compared with $3 million last quarter. And equity method earnings from our 49% interest in Vantiv were seasonally higher at $25 million this quarter compared with $17 million in the third quarter.

Credit costs recorded in other noninterest income were $33 million in the fourth quarter compared with $25 million last quarter. The increase was largely due to fair value charges on commercial loans, which were $18 million in the fourth quarter compared with $6 million last quarter, partially offset by net gains on sales of commercial loans held for sale, which were $9 million this quarter compared with $3 million last quarter. We wouldn't expect fair value charges of the same level in the first quarter, and thus credit-related costs within fee income in the first quarter should be down. Overall, we expect fee income in the first quarter to be up $50 million to $60 million from the fourth quarter, due primarily to the effect of the Visa charge this quarter.

Turning to expenses on Slide 8. Noninterest expense of $993 million was up $47 million or 5% sequentially. Current quarter expenses included a $14 million addition to litigation reserves related to bankcard association membership, and you'll recall that the prior quarter expenses included $28 million of costs related to the termination of certain FHLB borrowings and hedging transactions. Absent those items, the increase in expenses was largely due to $5 million in other litigation reserve additions; $6 million of annual pension settlement expense reflected in the benefits line; the effect of a higher stock price on long-term equity awards expense, which was a sequential increase of about $10 million; and elevated compensation expense driven by higher mortgage-related incentive pay and increased loan volume fulfillment costs. Credit-related costs within operating expense were $44 million compared with $45 million last quarter. Most of these costs were relatively consistent with the third quarter, including mortgage repurchase expense, which was $18 million this quarter and $19 million last quarter. We've worked through a large portion of our outstanding claims, and our repurchase claims inventory continues to trend down. We have seen an uptick in the level of file reviews by the GSEs. These reviews are not repurchase demands, and the increase is largely related to performing loans, so we don't currently expect to see any significant increase in recognized losses associated with those. In terms of the first quarter, we currently expect total credit-related costs recognized in expense to be in line with our fourth quarter levels. Overall, we currently expect operating expense in the first quarter to be down about $15 million or so from this quarter's levels.

We expect a seasonal increase in FICA and unemployment costs totaling about $25 million to be offset by lower compensation expense, as well as lower litigation expense. Expenses in the second and third quarters should decline further with that seasonality behind us.

Moving on to Slide 9 and taking a look at PPNR. Pre-provision net revenue was $473 million in the fourth quarter compared with $617 million in the third quarter. This included the $68 million of charges related to interchange litigation. Excluding these charges, PPNR in the fourth quarter was $541 million. We expect PPNR in the $530 million range in the first quarter, driven primarily by lower net interest income, partially offset by lower expenses. That should increase a bit in the second quarter, as expenses seasonally improve and then further in the second half with higher net interest income and better fee results.

The effective tax rate for the quarter was 25%, a bit lower than we are initially expecting, primarily due to the affect of the Visa charge on full year earnings. We currently expect the quarterly effective tax rate for 2012 to be in the 27% to 28% range, although the second quarter rate will be about 5% higher than that due to the effect of options expiring during the quarter.

Turning to capital on Slide 10. Capital levels continue to be very strong. The Tier 1 common ratio increased 1 basis point to 9.34%, reflecting higher retained earnings as well as asset growth. Tier 1 capital was 11.9% and total capital ratio was 16.1%. Tangible common equity was 8.7%, and that's calculated excluding unrealized gains, which totaled $470 million. All in, TCE was 9% consistent with last quarter. Our current estimate for our Basel III Tier 1 common ratio would be about 9.7%. These ratios are all well above our targets with the common ratios exceeding targeted levels by more than 100 basis points. We have submitted our annual capital plan to the Federal Reserve as part of its CCAR process. That included an evaluation of our capital plan in the context of earnings and capital expectations, including under stress scenarios from the perspective of both current U.S. capital rules, as well as the Basel III framework. We believe that we have a strong ability to withstand stressful conditions, including those similar to the Fed's adverse scenario due to our strong pre-provision net revenue profitability, our current high capital levels, our strong reserves and the reduction of loss content in our loan portfolio that resulted from our previous actions and higher-quality loan originations.

We intend to continue the process of normalizing our dividend by moving it to levels more consistent with the Fed's near-term payout ratio guidance of 30%. We also included common share repurchases in our submitted plan, as we've previously communicated was our intention. In establishing our repurchase plans, an important consideration was that retained earnings have been adding to capital ratios that are already above both our targets and required levels. Our purpose, at least for the 2012 CCAR process, was to minimize the increase of excess capital while retaining some of the common equity we generate to accommodate asset growth. I would note that our capital levels already exceed fully phased-in Basel III standards, which the Fed has indicated is an important consideration in the CCAR process. Of course, in addition to requiring a non-objection from the Federal Reserve, actual dividend and share repurchases will be subject to prevailing economic conditions, our results and the authorization of our board and other factors at the time those actions would be considered. We expect that the Federal Reserve will issue its response on or before March 15.

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

Bruce K. Lee

Thanks, Dan. I'm glad to be here and look forward to reconnecting with many of you in my new role. Our overall credit results are encouraging with credit quality trends positive across all categories, including delinquencies, NPAs and charge-offs.

Starting with charge-offs on Slide 11. Total net charge-offs of $239 million decreased $23 million or 9% from the third quarter. That was 119 basis points of loans and the lowest we've reported since the fourth quarter of 2007. The biggest improvement came from Florida, where charge-offs were down 37% sequentially. Commercial net charge-offs were $113 million in the fourth quarter and were down $23 million sequentially. At 1% of loans, that's the lowest levels since the first quarter of 2008.

C&I charge-offs were $62 million, up $7 million sequentially. Commercial mortgage charge-offs were $47 million, consistent with the third quarter. And commercial construction charge-offs were $4 million, down $31 million or 88% sequentially. At 137 basis points, that is the lowest charge-off rate on the construction portfolio since prior to the crisis. I'd also note that our homebuilder portfolio balances are down to $512 million, less than 20% of peak levels and less than 1% of total loans.

Total consumer net charge-offs were $126 million, consistent with last quarter. Trends were generally stable. Residential mortgage net charge-offs of $36 million were flat sequentially, and home equity net charge-offs of $50 million were down $3 million. Auto net charge-offs were $13 million versus $12 million last quarter and remained low at 44 basis points. And credit card net charge-offs were $21 million, a $3 million sequential increase and also relatively low at 4.29%.

Looking ahead to the first quarter, we'd expect net charge-offs to be down another $10 million to $15 million or so, driven by lower commercial charge-offs. We also currently expect net charge-offs to move below 100 basis points in the second half of the year.

Now moving to nonperforming assets on Slide 12. NPAs, including those held for sale, totaled $2 billion at quarter end, down $187 million or 9% from the third quarter. Excluding held for sale, NPAs were $1.8 billion, down $128 million or 7%. Overall, Florida remains our most challenged geography from an NPA standpoint and accounted for about 25% of NPAs in the commercial and consumer portfolios. However, NPAs in Florida were down $36 million sequentially, so we are making progress there.

Commercial portfolio NPAs were $1.3 billion and declined $136 million or 9% sequentially. Commercial OREO was down $39 million, and commercial NPLs were down $97 million. By portfolio, C&I NPAs decreased $79 million, commercial construction NPAs declined $58 million, and commercial mortgage NPAs increased by $7 million. Across the commercial portfolios, residential builder and developers NPAs of $155 million were down $52 million sequentially and represented less than 12% of total commercial NPAs.

Within portfolio NPAs, commercial TDRs on nonaccrual status were down $29 million to $160 million. Commercial accrual TDRs were up $41 million, although they remain fairly low at $390 million. We expect to continue to selectively restructure commercial loans, where it makes economic sense for the bank.

In the consumer portfolio, NPAs totaled $478 million at the end of the quarter or 1.34% of loans and were up $8 million from the third quarter. Consumer OREO increased $14 million, reflecting higher foreclosure activity. The inventory of repossessed autos declined $3 million, and consumer NPLs also declined $3 million.

Looked at by portfolio, residential mortgage NPAs increased $13 million sequentially, primarily OREO, while home equity NPAs declined $4 million. Auto NPAs were down $2 million sequentially and credit card NPAs increased $2 million.

Looking ahead to the first quarter, we expect NPAs to continue to decline. Our current expectations is that they will be down about $100 million primarily in the commercial portfolio. Turning briefly to the pool of commercial NPAs carried in held for sale at the end of the fourth quarter, we had $138 million of nonaccrual commercial loans held for sale compared with $197 million last quarter. Fourth quarter balances included $28 million of newly transferred balances, on which we recorded no net charge-offs during the quarter. We periodically pursue sales when we believe that a sale of the loan 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 90 -- at about 59% of their original face value through the process of taking charge-offs, marks and specific reserves recorded through the fourth quarter. We continue to be proactive in addressing problem loans in attempting to ensure we've written them down to realistic and realizable values.

The next slide, Slide 13, includes a roll-forward of nonperforming loans. Commercial inflows at $190 million were down $27 million from $217 million in the third quarter. Consumer inflows for the quarter were $206 million, similar to those in the third quarter at $201 million. Total inflows of $396 million were down 5% sequentially, continuing a trend we've experienced pretty consistently for the past 2 years.

Moving on to Slide 14. We provided some data on our consumer troubled debt restructurings. We have $1.8 billion of consumer TDRs on the books as of December 31, of which only $220 million or about 12% were on nonaccrual status. Of the accruing TDRs, over 80% are current. The vast majority of which are not only current but were also restructured more than 6 months ago and have shown successful seasoning. More recent modification vintages have experienced lower re-default rates than loans we restructured earlier in the cycle. As you can see from the slide, 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 the vintage trends demonstrate. Because many of these restructurings were rate concessions, which cannot be cured despite performance, the balances will remain in TDR status.

Moving to Slide 15, which outlines delinquency trends. Loans 30 to 89 days past due totaled $452 million, down $22 million from last quarter, with consumer up $15 million and commercial down $37 million from last quarter. Loans 90-plus days past due were $200 million, down $74 million from the third quarter with $55 million of the improvement coming from the commercial portfolio. Commercial over 90s were only $8 million, which I'm not sure we can improve on. Total delinquencies of $652 million were down $95 million from last quarter and are back to precrisis levels. While not on this slide, I'd also mention that our commercial criticized asset levels continued to improve in the fourth quarter, down about $300 million or 4% sequentially.

On to the provision in allowance, which is outlined on Slide 16. Provision expense for the quarter was $55 million and included a reduction in the loan loss allowance of $184 million. Our allowance coverages remained very strong, with coverage of nonperforming loans of 157% and nonperforming assets of 124%, as well as 208 -- 238% coverage of annualized net charge-offs. Given anticipated trends in credit, we'd expect the loan loss reserve to continue to decline in coming quarters, although the pace of decline may begin to slow as you would expect. I'll wrap up with a couple of comments on current industry concerns.

Slide 17 outlines our recent mortgage repurchase experience. The vast majority of our activity has been with the GSEs, and as Dan mentioned earlier, those claims and losses associated with them remain fairly stable in the $20 million to $30 million range per quarter.

Slide 18 is a new addition and outlines our European exposure. Our international exposures are primarily related to trade finance and financing activities of our customers here in the U.S. who have a foreign parent or activities of U.S. companies overseas. A couple of key elements: We have no European sovereign exposure. Our total exposure to companies in the 5 GIIPS countries is less than $200 million. Our total exposure to European financial institutions is also less than $200 million, and our total exposure to eurozone countries is less than $1.5 billion, including trade finance and exposure to U.S. companies with eurozone parents. Less than $900 million of that exposure is funded. Those are very small numbers in the context of our balance sheet.

Finally, Slide 19 summarizes our business model, which is focused on traditional banking activities. We are not heavily interconnected with other financial institutions. We have very little in the way of trading activities. We did not originate CDOs or securitized mortgages to any grade extent and thus, don't have the exposure to those issues that many larger peers do. We are focused on serving our customers in the Midwest and Southeast in ways that we believe are consistent with the direction of financial reform, and that will remain our focus going forward.

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

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from Erika Penala.

Leanne Erika Penala - BofA Merrill Lynch, Research Division

Erika Penala from BofA Merrill Lynch. My first question was on capital allocation. We appreciate the comments in terms of the CCAR request and putting it in context of minimizing capital build going forward. But as you find yourself still being restricted in terms of what you'd like to pay out to shareholders, could you give us the sense of what your priorities are in terms of other strategic initiatives like M&A? And if so, where would you be looking? And what's the bid ask spread currently that you're seeing?

Daniel T. Poston

Yes, Erika, as you alluded to, while we are being given a bit more flexibility in terms of managing our own capital levels, we still don't have complete freedom to manage our capital the way that we would optimally like to. And that leaves us with a situation where we will probably continue to have capital levels in excess of what we might ideally want to have. I think relative to how we deploy that capital, our -- we've talked a lot in the past about priorities. Our first priority is organic growth. We continue to believe that we have good prospects for continuing to grow our loan portfolios. Relative to M&A, I think M&A remains an alternative that we monitor closely. It's not something that we are going to push before its time. I think we will be very disciplined. I expect that there may be some M&A opportunities in 2012, but frankly, based on the current bid ask spread that as you referred to, I don't expect that to happen in the near term. So in all likelihood, it would be later in 2012 rather than earlier, so -- and relative to kind of where we would see M&A activity occurring, I think there are a variety of geographies and a variety of sizes of organizations that may make sense at different points in time and perhaps for different reasons. I think one of our primary objectives would be to continue to increase the density in the markets that we're in. I think we would probably have a bias toward acquisitions that are not geography expanding but rather are fill-ins and help us achieve our increased density goals. But that shouldn't be taken to assume that there may not be opportunities that present themselves outside of that, but we would look at it and evaluate at the time.

Leanne Erika Penala - BofA Merrill Lynch, Research Division

And just my second question and I'll step off. Your guidance for the full year margin of 355 to 360, does that include a plan to redeem any of your TRUPs? And if so, how much and at which rate?

Daniel T. Poston

We've talked about TRUPs. We've talked about the possibility that we would redeem additional TRUPs. I think the TRUPs that we have, have contractual call provisions that will allow us to call some of them at least, to call them later in 2012 or early 2013. There's the possibility that something could happen that would present us with an opportunity under our regulatory call provision to do that earlier. Those are things that we consider, and I think our overall guidance includes a number of things that we anticipate during the year and attach certain probabilities to and certainly the potential for TRUPs redemptions would be part of that.

Jeff Richardson

I think it'd be fair to say -- this is Jeff -- that guidance would accommodate several outcomes.

Operator

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

Ken A. Zerbe - Morgan Stanley, Research Division

In terms of -- I guess, I was just thinking about like the dynamics between loan growth and deposit growth, because obviously you're looking for growth in loans next year but also in deposits. But I guess normally, when we think about a modest economic recovery, we would assume some core deposit contraction on the part of borrowers. Can you just talk about are you seeing any of that so far or expect that going forward?

Daniel T. Poston

We are not seeing it thus far. And we've talked about fourth quarter results, and we continue to see expansion in deposits. We do expect that as the economic recovery continues and hopefully strengthens, we do expect that, that will result in some deposit outflow. We've not seen that yet. We're not expecting large amounts of that in the near term, but certainly, it is something that we would expect with an expansion and something that's built into our modeling and the way we manage the balance sheet.

Ken A. Zerbe - Morgan Stanley, Research Division

Okay, great. And just very quickly, the increase that you had in the held-for-sale loans, does that meaningfully impact your margin in the quarter?

Daniel T. Poston

I don't think it had a tremendous impact on margin though. I mean, most of that increase, as you might expect, is a result of the residential mortgage pipeline, and it didn't have a dramatic impact on margin.

Operator

And your next question comes from the line of Ken Usdin with Jefferies.

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

Two quick questions. First of all, credit, obviously continuing to be much improved and the reserve release also was still pretty sizable this quarter. I was just wondering if you'd give us some type of directional outlook for the magnitude of release you continue to expect based on what you've already seen in terms of the ongoing improvement in credit.

Daniel T. Poston

Yes. The reserve release is obviously governed by accounting rules. It's governed by methodologies and models that we have adopted and we'll continue to follow in the future. And it's difficult to predict at any particular point in time how or what the reserve release will look like. That being said, I think 2 things come to mind in terms of impacts on kind of the continued pace of reserve release. One is that we are starting to see stronger loan growth, and with loan growth comes the need to provide reserves for those additional loans. And those reserves on those additional loans will mitigate or offset any reserve release associated with credit improvement that's taking place. And then secondly, while credit continues to improve very nicely, we were very encouraged by our credit results this quarter. As the recovery wears on, one would only expect that the pace of those credit improvements would slow. So I think those 2 things will tend to probably act as mitigating factors in terms of the level of our expected reserve releases as we go forward over time. I don't -- I'm not sure that any of those things have any dramatic immediate impact, but certainly over time, I think those are things that would tend to make that reserve release lower rather than higher.

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

Right, okay. Second question is on expenses. I know you talked about the fact that expenses should come down in the second and third after the first. But just wondering -- I think the expense feedback you're getting is at the -- obviously, the expenses for this quarter were higher than expected and even look to be higher than expected for the first quarter. So I know Fifth Third continues to be a continuous improvement type of place, but can you talk about perhaps the magnitude of expense declines that we could see after the first? And then what else can you do behind the scenes to mitigate some of the extra expense growth that still seems to be coming through?

Daniel T. Poston

Yes, as you mentioned, I think we did see expense growth in the fourth quarter, a lot of that. And I think we touched on most of those in our prepared remarks. We're associated with unusual or unique items that aren't necessarily kind of run rate items. So I think the key, and you touched on it, is that while the expense declines in the first quarter are mitigated by or offset by some seasonality in our FICA expenses -- and we have that every year. It's relates to the fact that the -- that you kick into a new calendar year, and we also have payouts of incentive compensation and so forth from the prior year. So the first quarter is always elevated. That's about $25 million. It's not an insignificant sum. So if you look at a $15 million decrease in the first quarter that we've guided to on -- that is despite a $25 million kind of seasonal bump in the first quarter related to FICA, you can see that fourth quarter to first, absent the FICA increase, we're looking at $40 million or so decrease in expenses. And we would expect that $25 million to go away as we go forward. So in terms of the magnitude of expense improvements from first quarter forward, one of the items certainly would be the $25 million that we talked about. We would also expect that expenses in the first quarter would continue to be impacted by strong levels of mortgage servicing or excuse me, of mortgage origination activity, which brings with it increased incentive compensation and increased expenses related to mortgage fulfillment. And I think some of those things would be expected to moderate expenses as we go forward. On the revenue side, I think the mortgage revenue, as we move on through the year, we would expect to be replaced by actions that we're taking relative to mitigation activities on Durbin that would have a fairly sizable impact in the second half of the year.

Operator

And your next question comes from Craig Siegenthaler with Crédit Suisse.

Craig Siegenthaler - Crédit Suisse AG, Research Division

Maybe just to go back a little deeper on that last question on expenses. So guidance was for a $50 million decline in the first quarter, but that includes a $25 million seasonal bump, so it looks like we have a step-down in the second quarter. As we think longer term, I realize your credit-related expenses will probably continue to decline in NIE [ph], but how should we think about kind of core operating expenses trending kind of on the other side of the second quarter?

Daniel T. Poston

Yes, I mean, I think from an expense trend perspective, you should expect that we will continue to manage expenses very closely the way we always have. We talked about first quarter and the impacts seasonally. But as we go forward, we would expect to make steady progress in terms of our efficiency ratio. We've talked in the past, in the recent past about having a targeted efficiency ratio in the mid-50s. We're not going to get there this year, but we do believe we will make a very steady progress in -- toward our efficiency goals during 2012 and that we would approach a 60% or so efficiency ratio by the time we get to the end of the year. So on longer-term basis, I think meeting our efficiency targets will involve -- will need to involve increases on a revenue side. And clearly, the interest rate environment in particular is something that will allow us to make progress on that front, as well as the balance sheet growth that we expect we will accomplish during 2012 and into the future as the recovery gets a bit stronger. So we would anticipate that a stronger revenue environment, as well as kind of continued cost efficiency, will allow us to meet our goals on that front.

Craig Siegenthaler - Crédit Suisse AG, Research Division

And just to get to that mid-50s ratio, is that roughly 100% driven by revenues? And from your comments, it sounds like to get there, you need higher rates, that it's almost -- it will be very difficult to achieve that mid-50s in the absence of a Fed rate hike. Is that true?

Daniel T. Poston

Yes, I think that's fair.

Operator

And your next question comes from Paul Miller with FBR Capital Markets.

Paul J. Miller - FBR Capital Markets & Co., Research Division

On -- we saw over the last couple of days that USB, PNC and this morning, SunTrust talked about being invited into the AG settlement. That's supposed to be settled very shortly. Have you been at any talks with regulators about -- in joining the settlement? And what are your thoughts on it because my guess is whatever it is, you might have -- you probably have to live by whatever they settle.

Daniel T. Poston

Yes, well first of all, we're not a party to any of the discussion with the state attorneys general, and therefore, we don't really have any insight into those discussions relative to that [ph]. We're not a large servicer particularly relative to the big 5 firms that were initially involved in those discussions, and perhaps, that's been expanded now. But that has not included us, so I think we're something like the 15th, 16th largest servicer in the country. So we don't really have a lot of information that allows us to evaluate that. Certainly, relative to those discussions and how those discussions bear out, we do expect that whatever standards, new standards may develop with respect to those discussions or out of those discussions would apply to the rest of the industry as well. But the settlement discussions that occur, those relate to specific states. They relate to specific activities that specific firms may have engaged in, and they discuss specific revenues given all that. And the applicability of those things to us, I think, depends on a lot of things that we don't really have a whole lot of knowledge about. So we don't know what those are or how they might apply to us, so we will obviously continue to monitor the situation. But we don't really have any comment on that now and certainly, don't have anything that would lead us to believe that we need to put a reserve on the books or do some of the other things that you're seeing in other organizations. Relative to other regulators, regulatory contact, we typically don't discuss kind of banking regulatory discussions, so we can't really comment any further relative to discussions beyond the fact that we haven't been involved in any discussions relative to the settlement with the various states.

Paul J. Miller - FBR Capital Markets & Co., Research Division

And then on the loan growth, and we're seeing a lot of decent loan growth, not only by you but throughout the industry. Is it coming from -- are you seeing real economic growth even though it might be small? Or is it market share transfers from small institutions to the larger institutions like yourself?

Kevin T. Kabat

Paul, this is Kevin. What I'd tell you is we are seeing loan growth, and we're seeing it really mostly in terms of our C&I buckets and larger, better credits. And so I certainly don't feel like it's coming from the smaller end of our business or our industry, but I do think we're seeing it in terms of the larger competitors that we've historically gone against from that standpoint because of the nature of the credits that we're seeing. So I would tend to see and steer you more toward the higher end than the lower end.

Operator

Your next question comes from Matt Burnell with Wells Fargo Securities.

Matthew H. Burnell - Wells Fargo Securities, LLC, Research Division

Just following up on that question, if -- how much of the loan growth expectation in the first quarter is driven by continuing growth in the larger, better credits that, Kevin, you just mentioned? And if we end up getting in an environment that is a bit less volatile in the capital markets with a bit less overall fear, does that concern you in terms of many of those companies potentially moving away from banks for their lending and maybe potentially going into the capital markets? Just how sensitive are -- is your loan growth to that scenario?

Kevin T. Kabat

I think, Matt, that for the most part, again, given kind of the base that we're talking about, strong, large international and national clients who really have weathered the storm very, very well and continue to weather the storm very well continue to look for opportunities to lower their costs, debt costs, lending costs, as well as continue to look for kind of strengthening the participations more broadly across their bank groups as well. I -- We don't see a lot of volatility or sensitivity relative to those issues because they're already baked into expectations, and it's still pulling through in terms of pipeline. So on a near-term basis, we don't see a great magnitude change, potential risk from that standpoint. Now obviously, Matt, dial your worst-case scenario up and we certainly think that would be something more concerning. But based on what we see today as most likely scenarios going forward in at least in the short term, we don't see that impacting us in that fashion.

Jeff Richardson

Matt, I think one other thing is that I think we've seen more breadth in the last few months than maybe we were seeing earlier in the year.

Matthew H. Burnell - Wells Fargo Securities, LLC, Research Division

True. Yes.

Kevin T. Kabat

Yes, it is -- that's a really good point, Jeff. We are seeing it really even begin to come down in terms of smaller companies now surfacing a little bit, again, just being smart relative to how they position their balance sheets and P&Ls going forward as well. So we feel pretty confident, pretty good about where we stand right now.

Matthew H. Burnell - Wells Fargo Securities, LLC, Research Division

Okay. And then if I could, a question on the putback request to Bruce. You mentioned that you're getting -- it appears you're getting some more requests for files on performing loans. I guess, I'm curious as to your guess as to why you're getting those requests if the -- because most other companies have mentioned that usually what drives putback requests are delinquencies. If these loans are performing, I guess, I'm a little curious as to why you're getting requests for documentation on performing loans.

Bruce K. Lee

Yes. I think that we're just seeing a different behavior from the GSEs, and as they have increased the number of their requests, it's increasing their statistical sample of our portfolio, and because of the percentage that is performing, that piece is an increasing percentage of the sampling that they're currently doing with us.

Daniel T. Poston

Yes, I think part of the difficulty in monitoring the levels of activity and interpreting the levels of activity is we have 2 different things going on from the GSEs that really have different purposes. One is related to kind of their managing their losses through kind of putbacks of loans that they're going to occur losses on. The other is just monitoring the ongoing quality of activity and the ongoing documentation, compliance with documentation standards. And requests that we get related to those 2 different activities that the GSEs engage in are difficult to pull apart sometimes.

Bruce K. Lee

The other thing that even though the sampling has increased, the requests were flat quarterly [ph].

Operator

And your next question comes from Steve Scinicariello with UBS Securities.

Stephen Scinicariello - UBS Investment Bank, Research Division

Just a couple quick ones for you, just in terms of kind of the whole CCAR and capital planning process, I mean, when we put you through our stress test, you guys performed extremely well. And I'm just kind of curious about the comments where you say in terms of minimizing the excess capital build. I mean, to mean, is it fair if I kind of translate that into equating to about a $1.4 billion type of amount of excess that you're kind of going to earn through the course of the year? Is that kind of a fair way read some of those comments?

Jeff Richardson

I think before Dan answers, I will say we can't really respond to a question about how much we're going to earn for the year and how much we're going to distribute for the year. I'm going to turn it back to Dan just to kind of respond to his comments and what we're trying to do. I think conceptually, you can -- you're understanding what we're trying to do.

Daniel T. Poston

Yes, so within the -- in terms of the construction of our plan, we're obviously trying to balance a number of objectives. One of them being to manage our capital levels to our capital targets as closely as we can to return as much capital to our shareholders as possible but to stay within the lines, so to speak, with respect to the regulatory mandates, as well as regulatory guidance that might go above and beyond the things that are in writing in terms of the actual CCAR rules and regulations. So we think that the plan that we've put together is a good one and is a balanced plan in terms of making progress toward all of those objectives.

Stephen Scinicariello - UBS Investment Bank, Research Division

Great. Now that's very helpful. Just it definitely seems just the amount of excess capital is pretty significant there. And then just the only other follow-up I had, just sort of point of clarification, just going back to the salary and compensation expense line, I know we have the uptick this quarter for a lot of the areas that you mentioned, about $24 million. And I was just curious. How much of that increase is related to kind of the incentive compensation? If I take the $24 million increase back out onto the $6 million in FICA is -- how much of that $18 million incremental jump would be to like mortgage banking incentive comp?

Daniel T. Poston

I'm not sure if we have that number here. While perhaps some of the folks here see if we have that detail with us, I would just point out that we mentioned several other items that impact salary and benefits expense during the quarter. There was $6 million or $8 million related to pension settlements that hit during the quarter because we triggered the accounting threshold that requires those charges to be taken. There was $10 million related to revaluing long-term equity grants as a result of the performance of our stock during the quarter, which was up $2.60, I think, from end of third quarter, the end of the fourth. So there's -- that's about $16 million, $18 million there. Of the rest of the increase in salary and benefits, I would expect that a fair amount of it relates to the mortgage activity either from incentives paid to mortgage originators or expense related to personnel to process the higher level of loan activity.

Jeff Richardson

I think our mortgage expenses in total for the quarter were up about $13 million, $15 million. And about $8 million, $10 million of that was due to incentives being paid on production.

Operator

Your next question comes from Mike Mayo with CLSA.

Michael Mayo - CLSA Asia-Pacific Markets, Research Division

I'm just referring to Slide 9, where you look at PPNR. On one hand, you're showing growth in commercial loans, growth in deposits, growth in spread revenues, growth in service charges. On the other hand, PPNR is down quite a bit, and you said expect around $530 million or so in the first quarter and maybe a little higher after that. But you're still only recapturing about half of the decline from the prior couple quarters. And just looking to see what you think is the root cause for decline in PPNR. Or is it simply factors out of your control or things that you can control?

Jeff Richardson

Mike, it's Jeff. I mean, I think if you're looking at the current quarter versus the last several, mortgage banking and the effect of the Durbin Amendment are going your 2 big drivers, and then the sort of unusually higher level of our expenses this quarter would be the out [ph].

Michael Mayo - CLSA Asia-Pacific Markets, Research Division

And in terms of getting back to a more normalized rate -- because you said later this year it should trend back higher. Have you given any guidance where you think it settles out at?

Daniel T. Poston

No, I don't think or we have not given guidance, PPNR guidance. I think if you look at the components of that, we have given a bit of guidance relative to the future NII. I think we gave some guidance with respect to NIM and NII going forward for 2011 that talked about stronger levels in the latter half of the year due to continued asset growth, as well as day count benefit in the second half of the year. Expenses, we gave guidance with respect to the $25 million seasonality impact on the first quarter going away, as well as other continued expense improvements as we go forward in the year. And relative to fees, while we haven't given a lot of specifics relative to fees for the whole year, clearly, one of the things we've talked about is the fact that right now we are being impacted by the implementation of the Durbin Amendment in the fourth quarter. And we've talked about the fact that while we were optimistic relative to our ability to mitigate most, if not all of that, that, that was going to take time. And I think we will see the continuing impact of our mitigation initiatives with respect to Durbin become more and more prevalent in our earnings as we move through 2012.

Michael Mayo - CLSA Asia-Pacific Markets, Research Division

Okay. And then just separately, it seems like you're going back toward more normal levels in terms of credit, you said, by the end of this year. But on the other hand, 60% efficiency ratio by year end is a far cry from where the company was many years ago. And what's the key -- if you don't get the revenue growth coming back, what's the key to getting that efficiency ratio lower?

Jeff Richardson

This is Jeff. A couple things. I think we indicated we expected charge-offs to about go below 100 basis points in the second half of the year, but that is not something considered to be normal. Obviously, that's not part of the efficiency ratio, but we do expect further improvement in credit than that. More broadly speaking, our efficiency ratio in the low-60s is not where we expect to be, not where we intend to be. But we are in an environment where interest rates are very, very low, and we are earning next to nothing on our deposits, which is the large source of value for a bank, a banking company. And that is a very important part of the long-term revenue capability of the company, and we are going to invest in the company in order to realize that benefit, which we will realize. It's just probably not going to be this year.

Michael Mayo - CLSA Asia-Pacific Markets, Research Division

And last follow-up, it's a hard question. I mean, what if rates stay low for longer? At what point do you say, "We're going to pull back on a number branches"? You had some banks building a lot of branches. Some of them are closing. At what point do you say, "You know what, this rate environment's going to stay around for longer than many expect. Maybe we should pull back"?

Kevin T. Kabat

Mike, I think -- this is Kevin. What I would have to believe is that it was a more permanent adjustment in the environment as opposed to our being able to realize the value of that longer term. So we will manage that. We'll continue to move and make progress from that perspective. But we're managing this for long-term total return for our shareholders, and I'd have to believe that there were some permanent structure and change to valuation or the ability to create value out of our franchise in order to really kind of, in my mind, cut bone. We've always been good at making sure that we were lean and we run hard and run fast from that perspective. That culture hasn't changed. But we're going to make sure that as long as we're focused on creating long-term value, those are the things that we'll balance against types of decisions you talked about.

Operator

[Operator Instructions] And your next question comes from David Long with Raymond James.

David J. Long - Raymond James & Associates, Inc., Research Division

Back to the expenses, speaking about the guidance that you gave in October after your third quarter call, how much, if any, of what we're looking now as your guidance is a result of additional investment in the business due to maybe your outlook on the economy improving?

Kevin T. Kabat

Well, the only thing that I would tell you is part of the investment that we're making does continue in terms of us picking up some teams out -- lifting out some folks that we believe that will help contribute even in a difficult environment like today. We've been successful in hiring some commercial teams in different parts of our markets. We'll continue to look for those opportunities. And where we see the opportunities to find folks that contribute to our folks -- to our bottom line in this type of environment, that makes sense for us to continue to look at as contributing to expenses. I don't know if there's anything else, Dan, that you'd add to that. But that'd be our orientation, Dave.

David J. Long - Raymond James & Associates, Inc., Research Division

Okay. And then secondly, thinking about your loan growth, your guidance seems to be that your pipeline's still pretty good. We should still expect to see decent loan growth here in the first quarter in the commercial side. And is there any seasonality or maybe some of your customers taking advantage of accelerated depreciation opportunities here on that we need to consider when thinking about loan growth, commercial loan growth specifically for the first quarter?

Bruce K. Lee

Yes, this is Bruce. I would say that there's been very little seasonality and people taking advantage of that right now, and so we don't -- the only difference is if we do see an uptick in utilization, which has been at really almost historical low levels and we even saw another downtick of 1% in the last quarter.

Jeff Richardson

This is Jeff. I mean, there is some seasonality that does exist. It is more in the consumer side than the commercial side. Fourth quarter growth was very strong. We've given guidance for the first quarter, which I think with continued solid growth or something along those lines. So we feel very good about where we are heading into the year, and we expect good, solid loan growth.

Operator

And your next question comes from Andrew Marquardt with Evercore Partners.

Andrew Marquardt - Evercore Partners Inc., Research Division

Just back on PPNR, off of the -- so it seems like off the first quarter $530 million range, we should think about incrementally improving, but it seems like it's largely expense driven and then maybe even more so in the back half of the year. I guess the question is can you get -- magnitude-wise, can you get up to the kind of the higher 5s, if you will, maybe even without a better rate environment just driven by expenses and maybe some loan growth driving NII? Or is that really going to be a challenge?

Daniel T. Poston

Well, we haven't given specific PPNR guidance for the second half of the year. But I think we do expect that we will see contribution to higher PPNR levels on all fronts, not just from expenses. Clearly, expenses will be a significant factor in terms of improving on that $530 million. But we also expect NII in the second half to be stronger than the first because of the continued asset growth, as well as day count benefit that kick in, in the second half of the year. And as I mentioned earlier, I think we would expect the PPNR contribution from Durbin mitigation activities to be stronger in the second half of the year than first. So while without commenting on specific levels of PPNR, I think we would expect contributions from all of those things to allow us to move north of that $530 million.

Jeff Richardson

And just core improvement and our results, bearing fruit. Corporate banking has good, solid momentum behind it, the brokerage business. So I think there -- as Dan said, on all fronts, we expect improvement from the first quarter, and I think our guidance suggests that.

Andrew Marquardt - Evercore Partners Inc., Research Division

Okay. And then just back on capital deployment, an earlier question, can you just remind us what your internal capital targets are? I believe you've said in the past maybe 8%, 8.5%. And I think you said you're at 9.7%. Is that 8%, 8.5%, you think, still valid given everything that's been going on in terms of how the regulators view things?

Daniel T. Poston

Yes, I think what we said in the past is in the 8% range for Tier 1 common. That was a level or that is a targeted level that is without the benefit of finalization of the U.S. rules around Basel III and so forth. So to the extent that there are some things in there that we don't anticipate, that number might be adjusted slightly. But in general, we think that's an appropriate target and will continue to be an appropriate target as we move forward. So I think your question commented on our current Basel III level of 9.7%. I think that's kind of where we would expect it to be based on what we know about the rules now. So that would represent a fairly sizable amount of excess capital that, over time, we would seek to deploy and/or return to shareholders.

Jeff Richardson

I would just add that, that does include an assumption which we don't know, that the current Basel proposals would include unrealized gains in Tier 1 common. And we do have a fairly sizable amount. It's 300, 400 -- 30 or 40 basis points in our capital ratios, and we don't know whether that will ultimately be included. So as we look at our excess capital versus our target, we don't know whether that's excess capital or not. We certainly wouldn't treat it as excess capital because it can go away with changes in the interest rates.

Andrew Marquardt - Evercore Partners Inc., Research Division

Yes. That's helpful And then just a couple ticky tack questions. On page -- Slide 19 rather, you had mentioned in terms of mortgage putback litigation section, quarterly repurchase costs $20 million to $25 million, I believe. Is that what we should think about as a current or as an ongoing cost?

Jeff Richardson

I think we indicated in our remarks that we expected credit-related expenses in the first quarter to be similar to the fourth. And I think that has been the range of experience over the last 5, 6, 7 quarters. So absent a change in GSE behavior, that's where we're running.

Andrew Marquardt - Evercore Partners Inc., Research Division

Okay, got it. And then the last ticky tack is just -- or do you guys have any update on the prior kind of outstanding SEC investigation around legacy accounting reporting issues? Any update on that? Where does that stand?

Daniel T. Poston

No, we don't really have anything new to report on that front.

Operator

And there are no further questions at this time. I would like to thank everyone for participating in today's call. You may now disconnect.

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