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Fifth Third Bancorp (NASDAQ:FITB)

Q1 2012 Earnings Call

April 19, 2012 9:30 am ET

Executives

Jeff Richardson - Director of Investor Relations and Corporate Analysis

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

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

Bruce K. Lee - Chief Credit Officer and Executive Vice President

Tayfun Tuzun - Senior Vice President and Treasurer

Analysts

Ken A. Zerbe - Morgan Stanley, Research Division

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

Leanne Erika Penala - BofA Merrill Lynch, Research Division

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

Brian Foran - Nomura Securities Co. Ltd., Research Division

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

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

Craig Siegenthaler - Crédit Suisse AG, Research Division

Operator

Good morning. My name is Kenya 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] Mr. Richardson, you may begin your conference.

Jeff Richardson

Thanks, Kenya. Good morning. Today we'll be talking with you about our first quarter 2012 results. This call may contain certain forward-looking statements about Fifth Third pertaining to our financial condition, results of operations, plans and objectives. These statements involve certain risks and uncertainties. There are a number of factors that could cause results to differ materially from historical performance in these statements. We've identified some of these factors in our forward-looking cautionary statement at the end of our earnings release and in other materials, and we encourage you to review them. Fifth Third undertakes no obligation and would not expect to update any such forward-looking statements after the date of this call.

I'm joined on the call by several people: Kevin Kabat, our 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 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. First quarter was a very strong start to the year for Fifth Third. We reported first-quarter net income to common shareholders of $421 million and earnings per diluted common share of $0.45. Excluding net gains related to Vantiv which were itemized in the release, earnings would have been $0.36. That would be a 9% sequential increase from the $0.33 we reported in the fourth quarter of 2011. Revenue results were better than we expected back in January driven by continued strong mortgage revenue, corporate banking revenue and in investment advisory fees. Mortgage business has been a great business for us over the last couple of years. We've picked up significant market share and that provided significant cross sell value to us as well. We expect that to continue in the second quarter. Corporate banking also came in strong with an 18% sequential increase and investment advisory revenue was up 7% from the fourth quarter. We again posted very solid loan growth for the quarter, particularly in C&I loans, which were up 5% sequentially on an average basis. Credit trends also continued to improve. Net charge-offs declined for the fourth consecutive quarter to $220 million or 1.08% of loans while nonperforming assets declined $143 million down 8% on a sequential basis. Delinquencies dropped 11% and our criticized asset levels continue to decline as well. So we're seeing ongoing conversions towards historical levels across the board.

Deposit generation continues to be a strength for us with average transaction deposit growth of 2% sequentially and $7.7 billion or 10% from last year. We're adding new customers and growing balances with current customers with our value based approach to products and services. Capital levels also continue to be very strong, including under the rules proposed by Basel III. Our Tier 1 common ratio was 9.6% and we estimate our pro forma Tier 1 common ratio would be about 10% on a fully phased-in Basel III basis. We believe that would place us among the highest Basel III capital positions of the top 20 U.S. banks. As you know, we submitted our annual capital plan last quarter to the Federal Reserve, which included, among other plans, increasing our quarterly dividend in initiating common share repurchases including using any after-tax gains related to share offerings and Vantiv. And as announcement of CCAR results, the Fed's independent analysis with the 19 banks results indicated that our expected capital levels and profitability levels under stress were among the strongest of the banks tested. The Fed did not object to our continuation of the current common dividend or repurchasing shares with any Vantiv gains. They did, however, object to the planned dividend increase and other share repurchases. As you know, we're not permitted by Fed rules to comment on the reasons for their objection. The resubmission will be based on March 31, 2012 results, using new macroeconomic scenarios. We believe we'll be able to address their concerns in our resubmission, which we expect in late May or early June. Capital plans rules provide that the Federal respond no later than 75 days after a resubmission, so most likely sometime in August. We would currently expect to include similar plans for the dividend and share repurchases as originally submitted, subject to our evaluation of the scenarios and results and board consideration in approval of the plan. We have substantial capital and earnings capacity, including under stressed assumptions to distribute a significantly higher percentage of our earnings to shareholders while maintaining capital above targeted and required levels.

Now turning to the economy. The overall economic picture remains about where it's been for more than a year. We're seeing slow improvement in a number of areas but the pace of the recovery is noticeably weaker than any post recession period in memory. Companies we call on remain, to a large extent, in a wait-and-see mode; not on defense, but not yet fully committed to offense either. As the year progresses, we expect to see continued improvement in the economy and in the business environment, but the pace of the recovery is very likely to remain slower than what we would like.

Before I turn it over to Dan, I want to mention the strategic transactions that were announced in late March and early April. This is Vantiv's -- the first is Vantiv's initial public offering. This was part of a several year process that we started back in 2008. When we made the decision to sell an interest in Fifth Third processing solution, we believed that the growth of the business would be accelerated by enabling it to operate independently and that's exactly what's happened. Vantiv nearly doubled its revenue between 2008 and '11, which also included the benefit of several acquisitions. Those acquisitions would have been difficult to accomplish and had -- had the processing business remained a fully consolidated subsidiary of the bank. We continue to own a 39% interest in the company, whose stock was valued at $4.2 billion at the end of the first quarter. That represents about $1.6 billion of pretax value to Fifth Third, which is carried on our books at only $600 million. That's after recognizing about $2 billion pretax through gains to date. We feel very good about the way we've executed on our strategy and think we and Vantiv are in a good position as we move forward.

The second, we announced in early April that we were selling our money market mutual funds to Federated Investors, and our retail stock and bond funds to Touchtone. These transactions will allow us to focus on areas of strength for Fifth Third, versus mutual fund product manufacturing. The transactions aren't expected to have a material impact in the results, but they are expected to have a small positive earnings effect for us on an ongoing basis. Both of these transactions have been a priority for us for some time now and it's great to see our strategies bearing fruit. They've strengthened our company by increasing our focus and core strength in sales and service distribution and providing our customers with advice that they can trust.

So it was a good start to the year and reflected good momentum as we look forward to the second quarter and second half of the year. Pipelines are strong and we're seeing solid loan growth. The rate environment is challenging, but manageable. Credit continues to improve overall and across virtually all portfolios. We've already felt most of the negative impact from Regulatory Reform as applicable to Fifth Third, and we do expect further mitigation in coming quarters. And our capital position is very strong, well above Basel III requirements already and we have substantial capacity to increase distributions.

At this point, I'll ask Dan to discuss operating results and give some comments about our outlook. Dan?

Daniel T. Poston

Okay, thanks, Kevin. Good morning, everyone. I'll start with Slide 4 of the presentation and move into some of the details of the results for the quarter.

In the first quarter, we reported net income of $430 million and recorded preferred dividends of $9 million. Therefore, net income to common shareholders was $421 million resulting in diluted earnings per share of $0.45, which was up 36% or $0.12 from the fourth quarter level. There were a number of unusual items during the quarter, although it was probably not as noisy as it might seem. As outlined in the release, first quarter results included several income items related to Vantiv that together contributed a total of $125 million in fee income for the quarter, which is about $0.09 per share after tax. Those items were $115 million in gains related to Vantiv's IPO. An estimated $36 million in charges that were recorded through equity method earnings related to Vantiv's refinancing of its bank debt, and $46 million in gains on Vantiv warrants.

The first 2 items are clearly unusual in nature. As far as the warrant gains go, we do frequently have gains or losses there but the size of the gains this quarter was unusual and related to the sizable increase in Vantiv's valuation in connection with its initial public offering. Other than the Vantiv impact, there were several other unusual items affecting results that largely offset one another.

In fee income, we recorded $19 million in charges on the Visa total return swap and $9 million in investment securities gains. In expenses, we recorded a $23 million benefit from the resolution of certain non-income tax related assessments. And recorded expenses of $28 million related to additions to litigation reserves, debt termination and severance.

Taking a look at Slide 5. Net interest income on a fully taxable equivalent basis decreased $17 million sequentially to $903 million, and the net interest margin decreased 6 basis points to 3.61%. The decline in net interest income was primarily driven by asset yield compression in loans and securities, which was partially offset by balance growth in C&I, commercial lease, residential mortgage and auto loans. Interest expense increased $1 million as lower deposit costs were offset by a $5 million increase in hedging effectiveness. And then overall, NII was reduced by about $6 million due to day count. As for the margin, the decline was largely attributable to lower loan yields. Otherwise, lower securities yields, hedging effectiveness each reduced margin by 2 basis points, while deposit mix shift and day count each contributed about 2 basis points. To give a little more color on loan yields, on the C&I side, the portfolio average yield was down 8 basis points compared with last quarter. Yields on new originations have remained relatively stable, so the portfolio yield compression is largely the effect of portfolio repricing as well as the origination of higher quality loans, which naturally will carry a lower rate. In the indirect auto portfolio, the portfolio average yield has continued to decline, reflecting both increased competition in this space, as well as the portfolio effect of replacing older higher yielding loans with newer lower yielding loans. We will continue to closely manage pricing in loan volumes in the coming quarters to ensure that our returns remain appropriate. We currently expect NII in the second quarter to be down about $5 million to $10 million to the $895 million range, which is consistent with previous expectations. That's despite the impact of our debt issuance in March, which will cost us about $3 million for the full quarter and the impact of the Vantiv refinancing, which is about a $2 million income reduction. Otherwise, we'd expect loan growth and lower hedging effectiveness to more or less offset the impact of the rate environment on loans and security yields.

In terms of the margin, we currently expect NIM to decline about 5 or 6 basis points due to the same factors outlined above. We generally expect the margin to stabilize in the second half of the year and for continued loan growth to produce NII growth in the second half. We continue to expect growth in full-year 2012 NII compared to 2011 with the full-year margin at the lower end of our outlook.

Turning to the balance sheet in Slide 6. Average earning assets increased $971 million sequentially driven by a $1.5 billion increase in total loan balances partially offset by $508 million decrease in investment securities and other short-term investments. The securities portfolio trends reflect lower cash balances at the Fed, which are included in short-term investment balances. We expect the securities portfolio to be relatively stable over the next few quarters. Average portfolio loans and leases increased $1.6 billion sequentially, driven by positive trends in C&I, commercial lease, residential mortgage and auto loans. Those were partially offset by continued run-off in the commercial real estate and home equity books. Average loans held-for-sale were down $107 million during the quarter.

Looking at each loan portfolio. Average commercial loans held for investment increased $1.3 billion sequentially or 3%, and $2.5 billion year-over-year or 6%. Average C&I loans increased $1.5 billion sequentially, that's a 5% increase from last quarter and a 15% increase from a year ago. Our C&I production continues to be strong and has been broad-based across industries and sectors. We're seeing continued demand in the large corporate and mid corporate space. Given our strong levels of production and our current pipelines, I expect we'll continue to see solid growth in the second quarter, even in the current environment.

Commercial line utilization remained at 32% this quarter, which is consistent with last quarter. Commercial mortgage and commercial construction balances declined in the aggregate by $395 million sequentially or about 3%. We expect runoff in these portfolios to continue to slow, and I would expect that the size of this portfolio will generally plateau in the second half of the year.

Commercial lease balances were up 6% sequentially after remaining relatively stable for the past several quarters. This represents increased seasonal activity that occurred in December of last year, and I would expect these balances to remain relatively stable in the coming quarters. Average consumer loans in the portfolio increased $309 million sequentially or 1%, and $1.4 billion compared with a year ago, which is about 4%. Average residential mortgage loans in the portfolio were up 3% sequentially. The sequential growth reflected strong originations during the quarter due to the current rate environment as well as the continued retention of certain shorter-term higher-quality residential mortgages originated through our branch retail system. These mortgages increased $286 million on an end-of-period basis during the first quarter. Average auto loan balances increased 2% sequentially. We continue to see a significant amount of competitive yield pressure in this space and as a result, origination volumes came down some this quarter, as we managed our volumes with an eye on profitability.

Home equity loan balances were down 2% sequentially and average credit card balances were up 1% sequentially.

Looking ahead to the second quarter, we expect to see growth in C&I and mortgage loans, partially offset by continued declines in commercial real estate and home equity balances. Overall, that should result in continued solid overall loan portfolio growth in the second quarter.

Moving on to deposits. Deposit growth remained exceptionally strong. Average core deposits were up $1.1 billion or 1% compared with last quarter. Average transaction deposits, which exclude consumer CDs, were up $1.5 billion or 2% on a sequential basis, and up $7 billion or 10% from a year ago. Growth in transaction deposits was largely driven by interest checking balances, which were up 16% from the prior quarter and 20% from a year ago. Consumer CDs declined $409 million in the quarter driven by our continued disciplined approach to CD pricing. Average consumer transaction deposits increased 1% sequentially and 7% year-over-year, with growth across most categories. Our relationship savings products has now attracted over $14 billion of balances since its 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 3% from last quarter and 14% from a year ago. Customers continue to use balances in order to offset fees due to the lack of a better investment opportunity for their excess cash and I expect that tendency will continue given the current rate environment. For the second quarter, we currently expect transaction deposits to be relatively stable compared to first quarter and for consumer CD balances to continue to decline.

Now turning to fees, which are outlined on Slide 7. First quarter noninterest income was $769 million, an increase of $219 million from last quarter and that includes the $125 million in net benefits related to Vantiv that I discussed earlier. Excluding that, noninterest income was up $94 million driven by strong mortgage banking, corporate banking revenue and investment advisory results, as well as the effect of the Visa total return swap. As I mentioned earlier, we recorded $19 million in negative valuation adjustments related to that Visa total return swap this quarter, while in the fourth quarter, we recorded a $54 million negative valuation adjustment on the swap due to Visa's funding of their litigation reserve. So while a negative for this quarter, the positive delta there was $35 million in terms of our fee growth sequentially. As you'll recall, this swap -- with this swap we essentially sold the economics of our Visa shares to a counter party while retaining the litigation risk that Visa member banks have.

Now looking at each line item in detail. Deposit service charges declined 5% sequentially, but increased 4% from the prior year. Consumer deposit fees decreased 10% sequentially and 1% year-over-year. The sequential decline was driven by seasonally lower overdraft occurrences in the first quarter. Commercial deposit fees declined 1% from last quarter, but increased 7% year-over-year driven by new customer account growth. For the second quarter, we expect to see a solid increase in deposit fees, about $5 million or so, driven by growth in the commercial deposit fees. Investment advisory revenue increased 7% from last quarter and decreased 1% on a year-over-year basis. The sequential increase is largely due to seasonal trust tax preparation fees, increased brokerage revenue and higher market values. We currently expect to see a modest further increase in investment advisory revenue in the second quarter driven by brokerage revenue.

Corporate banking revenue of $97 million increased 18% from the fourth quarter and 13% from last year. The sequential increase was primarily due to higher syndication fee revenue as well as increased lease related fees, institutional sales and business lending fees. We expect second quarter corporate banking revenue of about $100 million up moderately from the solid results in the first quarter. Card and processing revenue was $59 million, down $1 million from the fourth quarter and $21 million from a year ago. The sequential decline was driven by seasonally strong fourth quarter volumes while a year-over-year decline represents the impact of the new debit interchange rules, which cost us about $30 million on a quarterly basis. We've mitigated a little less than half of that thus far through various revenue and expense categories.

Our current expectation for second quarter total card and processing revenue is for growth of about $10 million from the first quarter levels due to higher volumes and seasonality. Mortgage banking revenue of $204 million increased $48 million from the fourth quarter and $102 million from a year ago. Originations were $6.4 billion this quarter compared with $7.1 billion in the fourth quarter.

Gains on deliveries of $174 million increased $22 million from the previous quarter. Servicing fees were $61 million compared with $58 million last quarter, and net servicing asset valuation adjustments were negative $31 million this quarter with MSR amortization of $46 million and net MSR valuation adjustments, including hedges, of a positive $15 million. In the fourth quarter, net servicing asset valuation adjustments were a negative $54 million. Currently, we would expect mortgage banking revenue to be down about $50 million from the first quarter with volumes at similar levels, but we would expect lower MSR results and the gain on sale margin to decline from the relatively high levels we saw during the first quarter.

Net gains on the sale of investment securities were $9 million in the first quarter compared with net gains of $5 million in the prior quarter.

Turning to other income within fees. Other income was $175 million, compared with $24 million last quarter. All of the Vantiv related effects are recorded in this line item. Additionally, as I mentioned, we had a charge on the Visa total return swap of $19 million this quarter versus $54 million last quarter. Other significant items in other income include equity method earnings from our interest in Vantiv. And that included the estimated $36 million charge related to Vantiv's debt termination and refinancing charges that were disclosed in March. Now that Vantiv is a public company, we expect to have additional information to provide related to our equity method earnings results in our quarterly filings after Vantiv reports its earnings. But we won't be explicit about that contribution in our earnings releases and related calls.

Credit costs recorded in other noninterest income were $14 million in the first quarter compared with $33 million last quarter. That decline was largely due to decreased fair value charges on commercial loans held-for-sale, which were $1 million in the first quarter compared with $18 million last quarter. Otherwise, these costs were $13 million in the first quarter compared with $15 million in the fourth quarter. We expect second quarter credit cost in revenue to be in that $15 million range.

Looking at overall fee income expectations for the second quarter, we currently expect fee income of about $625 million to $630 million in the second quarter or perhaps a bit better. That's better than we were expecting in January, but down about $15 million to $20 million from fee income resulting the first quarter, which were $644 million, exclusive of the Vantiv gains we've discussed. That decline would be driven by lower mortgage banking revenue that I've discussed, and partially offset by fee income growth that we currently expect in other business lines.

Turning now to expenses there on Slide 8. Noninterest expense of $973 million was down $20 million or 2% sequentially. Current quarter expenses included the $23 million benefit from agreements reached on certain non-income tax related assessments, offset by $13 million in additions to litigation reserves, $9 million in debt extinguishment charges and $6 million in severance expense. You'll recall that the prior quarter expenses included $19 million in additions to litigation reserves. So if you exclude those items, noninterest expenses were down $6 million, and that's despite a $25 million seasonal increase in FICA and unemployment costs. That improvement was driven by lower credit related costs as well as careful management of expenses. Credit related costs within operating expense were $34 million, down $10 million from last quarter. That decline was driven by lower workout related expenses within other assets, other problem asset related expense, which was $19 million this quarter compared to $28 million last quarter. As well as a modest reduction in mortgage repurchase expense to $15 million. We saw a slight uptick in our claims inventory as we expected, but within the range of variability that we've seen historically. We haven't seen any significant increase in recognized losses associated with GSC activity.

In terms of the second quarter, we currently expect total credit related cost recognized in expense to be stable to up modestly from the first quarter levels. Overall, we currently expect operating expense in the second quarter to be down about $15 million from the $973 million reported this past quarter. Key drivers of that decrease are the net $5 million in unusual first quarter items that I mentioned earlier, a reduction of about $15 million related to FICA and unemployment expense, as well as continued expense discipline. Partially offsetting those benefits, we'll see a temporary increase in marketing expense during the second and the third quarters of about $15 million above the first quarter levels. Those are related to our new branding campaign and the related advertising. Those expenses will come back down to first quarter levels on a run-rate basis in the fourth quarter.

We continue to expect that our quarterly efficiency ratio will move back close to 60% or so by the end of the year, reflecting the trends that I just discussed.

Moving on to Slide 9, and taking a look at PPNR. Pre-provision net revenue was $694 million in the first quarter compared with $473 million in the fourth quarter. This quarter's results included the $125 million in benefits related to Vantiv. If you exclude that, PPNR in the first quarter was $569 million, driven by strong fee income results and disciplined expense management, as most of the other unusual items that I mentioned largely offset one another. We expect PPNR to be the same ballpark in the second quarter and again, that's above the previous expectations that we had.

The effective tax rate was 29% this quarter. Higher than we were initially expecting and that was due to the effect of the Vantiv IPO gains. For the second quarter, we expect the effective tax rate to be 32% or 33%, and that's due to the effect of stock options that are expiring. Those will cost us about $0.02 in the quarter, in the second quarter while in the third and fourth quarters, the effective tax rate should be at about the 28.5% range, which will result in a full-year tax rate of about 29%.

Turning to capital on Slide 10. Capital levels continue to be very strong. Tier 1 common ratio increased about 30 basis points to 9.6%, reflecting higher retained earnings. Tier 1 capital was 12.2%, up 28 basis points from last quarter, while total capital ratio was 16.1% and consistent with the fourth quarter level. Tangible common equity was 9.0%. That's calculated excluding unrealized gains, which totaled $468 million on an after-tax basis. All in, TCE was 9.4% and that was up 33 basis points from last quarter.

Our current estimate for our Basel III Tier 1 common ratio would be about 10.0%. These ratios are all significantly above our targets and the common ratios exceed targeted levels by well over 100 basis points. As Kevin mentioned, we plan to repurchase common shares in an amount equal to the after-tax gains realized from the Vantiv common shares, which were about $75 million this quarter. And we expect to enter into an accelerated share repurchase agreement shortly. Additionally, we entered into agreements in early April to sell certain mutual funds and money market funds from our asset management business. We expect these transactions to close in the third quarter, but they are not expected to have a material impact on our results. After the closing, our investment advisory fees will be reduced by about $5 million per quarter and we expect expenses will be reduced by a similar amount, but overall, it should be a net positive from a bottom-line perspective.

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

Bruce K. Lee

Thanks, Dan. Starting with charge offs on Slide 11. Total net charge-offs of $220 million in the first quarter declined 8% sequentially, and were at their lowest level since the end of 2007. Commercial net charge-offs declined to $102 million or 89 basis points. That was also the first time since the fourth quarter of 2007 that commercial net charge offs fell below the 100 basis point level. We saw improvement in C&I charge-offs down $8 million sequentially to $54 million, and in commercial mortgage charge-offs down $17 million to $30 million. Commercial construction charge-offs increased to $18 million from a very low $4 million last quarter. Total consumer net charge offs of $118 million, down $8 million sequentially. Improvement was broad-based and reflects underlying trends in the overall consumer credit environment and the impact of our portfolio management actions. As a macro comment, we're at a point where we're seeing steady improvement across the loan portfolios and looking ahead to the second quarter, we expect net charge offs to be down another $25 million or so, with pretty significant reductions on both the commercial and consumer sides.

Now moving to nonperforming assets on Slide 12. NPAs, including those held-for-sale, totaled $1.8 billion at quarter-end, down $164 million or 8% from the fourth quarter. Excluding held-for-sale, NPAs were $1.7 billion down $143 million or 8%. Commercial portfolio NPAs were $1.2 billion and declined $114 million or 9% sequentially. We saw improvement across all categories with commercial mortgage NPAs down $69 million, C&I NPAs down $35 million, commercial construction NPAs down $8 million and commercial lease NPAs down $2 million. Also, commercial OREO was down a pretty substantial $41 million to $236 million.

Across the commercial portfolios, residential builder and developer NPAs of $123 million, were down $32 million sequentially and represent less than 10% of total commercial NPAs. Within portfolio NPAs, commercial TDRs on nonaccrual status were relatively flat on a sequential basis. Commercial accruing TDRs were up $91 million, although they remain fairly low at $481 million. We expect to continue to selectively restructure commercial loans where it makes economic sense for the bank.

In the consumer portfolio, NPAs declined $29 million to $449 million or 1.26% of loans, with NPLs down about $20 million and OREO down $9 million. Non-accruing consumer TDRs were down $19 million and accruing consumer TDRs were up $12 million in the quarter. The total portfolio actually declined $7 million, which marks the first decline since we began our restructuring program in 2007. The portfolio has generally peaked as opportunities for new restructurings have become more limited due to our past proactive practices and more stable residential real estate credit conditions. Overall, our TDR portfolio is performing in line with our expectations and significantly outperforms non-accruing consumer loans.

Overall, NPA trends were solidly improved during the quarter. Looking ahead to the second quarter, we currently expect NPAs to continue to decline, primarily in the commercial portfolio, with the reduction of perhaps $75 million to $100 million being the current expectation.

The next slide, Slide 13, includes a roll forward of nonperforming loans. Commercial inflows at a $168 million were down $21 million in the first quarter. Consumer inflows for the quarter were $183 million, down $22 million. Total inflows of $352 million were down 11% sequentially, consistent with the trend we've experienced for the past 2 years.

Moving to Slide 14, which outlines delinquency trends. Loans 30 to 89 days past due totaled $365 million, down $87 million from last quarter, with consumer down $61 million and commercial down $26 million from last quarter. Loans 90-plus days past due were $216 million, up $16 million from the fourth quarter with a single credit in the commercial book accounting for more than the increase. We have no loss exposure to this credit to speak of. Total delinquencies of $581 million were down $71 million from last quarter and remain at precrisis levels. I'd also mention that our commercial criticized asset levels continue to improve in the first quarter, down about $320 million or 4% sequentially.

On to provision and the allowance, which is outlined on Slide 15. Provision expense for the quarter was $91 million and included a reduction in the loan loss allowance of $129 million. Our coverage of nonperforming assets remained strong at 127% and we'd expect to see continued declines in the reserve as we forward, although the pace is likely to continue to slow over time.

Slide 16 outlines our recent mortgage repurchase experience. The vast majority of our activity has been with the GSEs and as Dan mentioned earlier, those claims in losses associated with them have remained fairly stable in the $20 million range per quarter. Our results clearly show continued improvement in our credit metrics and reflect the hard work of a large number of employees across the company. We still have some work to do, but clearly we're on the right track.

That concludes my remarks. One housekeeping item before I turn it over to Kevin, there were some errors on Slides 12, 32 and 33 of the presentation we published early this morning in the geographic distribution of NPAs. We corrected those at about 8:30 this morning, and the corrected version will show Florida with 41% of residential NPAs, not 30% on Slide 12. So if you pulled a copy of the presentation before that, you might want to reprint those slides. Sorry about that.

I'll turn it back over to Kevin now for any closing remarks.

Kevin T. Kabat

Thanks, Bruce. As Dan and Bruce outlined, it was a strong quarter for Fifth Third, both on a headline basis including the benefits from Vantiv and on a core basis excluding those gains. PPNR results were about $40 million better than we expected back in January, excluding Vantiv. That reflects significantly stronger fee results, lower expenses and consistent NII. Our outlook for the second quarter is also stronger than we conveyed at the beginning of the year. So we're feeling good and probably a little better now than earlier in the year, with generally stronger PPNR expectations for the second quarter and second half, as well as generally better expectations for credit. All told, we believe Fifth Third is set up pretty well for the remainder of 2012. We intend and expect to address the Fed's objections in our resubmission and expect to implement a capital plan in the third quarter that delivers more value to shareholders while maintaining a very strong capital position.

That wraps up our remarks. So Kenya, can you open the line up for questions?

Question-and-Answer Session

Operator

[Operator Instructions] You have a question from the line of Ken Zerbe.

Ken A. Zerbe - Morgan Stanley, Research Division

It's Ken Zerbe of Morgan Stanley. First question I had, just on CCAR, I understand you can't say why, but can you just address that -- let's call it the delay, and when you plan to resubmit, I was under the impression it would be a 30-day resubmission process. Seems like it's taking a little bit longer now. And then just as a follow-up on that one, if you do get approved for what you're asking for in 2012, should we just expect almost an acceleration of buybacks in the second half?

Daniel T. Poston

Yes. Relative to timing, I think, while the rules provide for a 30 -- a minimum of a 30-day requirement, that's not necessarily required, and I think, as we look at our resubmission, there's a few things that are driving the timing. One is the fact that we're going to use 3, 31 data to update the capital plans. So obviously, we couldn't start on that until we have the 3, 31 data. We're also using economic scenarios that are reflective of the 3, 31 environment and throughout the expectations for the future as of 3, 31. And as we get that information, then we have to prepare or we have to execute our stress test and then use those stress testing results to kind of build our capital plan to demonstrate the impact of our proposed capital actions on our capital. So that process takes some time and as we mentioned in our prepared remarks, our current expectation is that we would submit that plan in late May or early June. From that point forward of course, the Fed has to get through its review process, which I think the rules allow for a maximum review period of 75 days. So our current expectation is that we will receive a response from them likely in the month of August. So relative to the capital actions, as we said, we expect to submit a plan that has very similar capital actions to those proposed earlier. We think there is a lot of support for us doing that from a quantitative basis. You've seen the results of the prior submission and we fared very well from a capital perspective, even with those proposed capital actions. And we've indicated that the Fed's objection was not related to quantitative matters so that the prior plan in those capital actions were acceptable on a quantitative basis. If anything, the economic environment's probably gotten a little better. So as we -- while we have prepared our stress test and prepared our capital forecasts, we would fully expect that the updated capital plan will easily support the capital actions that we proposed last time. And in that those are largely driven by capital levels and not necessarily related to time periods, I think that would result in capital actions that occur in a somewhat compressed time frame given that we would be starting a little later than we would have otherwise been starting.

Ken A. Zerbe - Morgan Stanley, Research Division

All right, that helps. Just one other question I had, in terms of the mortgage banking outlook, the lower expectations for revenues there, is that because you've already started to see lower gain on sale margins or is that just your expectation for the quarter? Just curious on trends so far this quarter.

Daniel T. Poston

I think it's a little bit of both. I think we have started to see the margins come down a little bit. I think that the guidance that we've given would reflect an expectation that they may come down a bit more from where they are now.

Operator

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

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

I was wondering if you could give us an update on consumer deposit product redesign and update us on your thoughts for mitigation and how that should show through the deposit fees?

Kevin T. Kabat

Yes, Ken. I, what I can tell you at this point is we are really comfortable in terms of the approach that we've taken. As we've talked about publicly, and as we've talked about in some of the conferences, our orientation has been to redesign toward a value-added -- and so our expectation is that, that will be well received in the marketplace and that we're really progressing well. So nothing new to report on that at this point, but certainly later in the year, we'll be able to talk more deeply about marketplace reaction and acceptance.

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

And I don't want to make this so much a follow-up on CCAR, but is there any updated thoughts as it relates to just capital usage and management around M&A and the potential for M&A, and does anything change with regards to that vis-à-vis this whole CCAR process resubmission?

Daniel T. Poston

If your question is does the qualitative objection we received to CCAR change anything with respect to our M&A expectations, I think the answer to that is no. I think if you look at the CCAR rules, any significant M&A activity would require a submitted capital plan anyway. So I don't see the CCAR process presenting anything different now than we might have expected 90 days ago.

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

And last, a real quick one, you mentioned the comments about stabilizing the margin in the back of the year after the expected step down in the second quarter. Can you just talk us through the ins and outs, what gets better, what gets worse in terms of keeping it stable in the back half?

Daniel T. Poston

Yes. I'll make a couple of comments and then Tayfun Tuzun can add any comments that he might have. I mean, in general I think we're in a rate environment now that is creating some asset yield compression. I think as those lower rates get reflected in our portfolio, to a larger degree, as those rates stabilize, which is what the expectation is from here forward, we're not expecting significant changes in rates from here out. The impact on the portfolio becomes less and less as more and more of that lower rate environment is already baked into the portfolio. So the asset yield compression will tend to decrease somewhat over time. The other thing I would point out is that relative to like this quarter's performance, we didn't see a significant change or any change really in our overall funding cost. And that's despite the fact that our average deposit costs considering kind of rate reductions as well as mix changes within our deposit portfolio actually produce a 4 or 5 basis point decline in deposit costs, but that was completely offset by increases in wholesale funding cost. And while wholesale funding is not a significant component of our -- or not as significant a component of our funding as it has been in the past, it still didn't have a pretty significant impact this quarter and that was driven largely by the hedging effectiveness that we talked about, which we wouldn't expect to continue and will ultimately reverse as well as the impact of the debt offering that we did during the quarter which, while it increases the average cost a bit, we were very, very pleased with the result of that offering and believe that represents very, very favorable long-term funding for us. So the impact of those things, we would expect to be muted as we move into the latter part of the year.

Operator

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

Leanne Erika Penala - BofA Merrill Lynch, Research Division

My first question is a follow-up to Ken Usdin's question on the margin. You mentioned that the asset yield compression will certainly start to taper off in the second half of the year. But could you specifically point to what the potential repricing opportunities could be on the right-hand side of your balance sheet in the second half?

Tayfun Tuzun

This is Tayfun. I mean we clearly, last year, you've watched us manage our deposit costs fairly aggressively and we continue to do that on an incremental basis. We -- our eyes are still on deposit growth and opportunities, both on the consumer side as well as commercial side to manage those rates down, but the opportunities obviously are not as large as they were last year. And it's going to be a function of inflows and outflows and how comfortable we feel at managing those rates down. So there are opportunities left on our balance sheet, and we will continue to utilize them as much as we can.

Daniel T. Poston

Another thing I would add to that is we've talked in the past about the potential for the calling of TRUPs securities and if that were to occur, that would also provide some benefit in terms of overall funding costs.

Leanne Erika Penala - BofA Merrill Lynch, Research Division

And could you size that opportunity in terms of what the effective rate is on your balance sheet that you're recognizing on the TRUPs?

Tayfun Tuzun

I don't think we've disclosed those numbers separately. I think our TRUPs -- the information is public, and we currently have about $2.2 billion, $2.3 billion in outstandings and some of those are priced attractively so that they wouldn't necessarily be subject to cause even if we could do them, but a large portion of them obviously have call dates this year, natural call dates and some of them are also subject to an NPI ruling that may come out this year, we've been waiting for it, but we're not quite certain as to the timing of it. So there are clearly opportunities. There are large numbers that would impact our liability costs and unfortunately at this point, timing is uncertain because we don't know when the regulators will be publishing those rulings.

Jeff Richardson

The coupon on the -- we've indicated that we would submit on our capital plan the redemption of $1.4 billion and the Fed has not objected to that.

Tayfun Tuzun

Yes.

Jeff Richardson

The coupons on those are north of 7%. We haven't disclosed the swap rates because we have traditionally never disclosed the swapped costs of our funding, but wholesale funding relative to the swap cost is lower so it would be a net benefit to our NII.

Leanne Erika Penala - BofA Merrill Lynch, Research Division

And just my last question is just taking a step back, it's clear that the loan growth momentum at this company is very much positive and you're approaching a loan-to-deposit ratio of about 100% as we go several quarters out. I'm just wondering is that going to be, since acquisitions has always been a core competency in the past, is that something that could behoove you to look at deals more aggressively in terms of looking forward deposit funding in that way? Or you'd rather wait for the right opportunities and fund incremental loan growth wholesale?

Daniel T. Poston

Well, I think there would be a number of ways to address those funding needs. And I'm not sure we would look to M&A transactions to meet those needs. I think both from -- some of that could come from incremental wholesale funding. I think we would also, when that time comes, adjust our posture with respect to deposits. As you know, there's not a lot of competition for deposits at this particular point in time. So I think the opportunity needs to grow the deposit book, to look at our CD pricing strategies and a variety of other things would probably come ahead of looking to M&A activity to provide that funding. Through M&A it provides some funding, I think that would be a byproduct of M&A rather than the objective of it.

Jeff Richardson

Yes, I mean we would always wait for the right opportunity and obviously deposit funding, the value of that funding is lower today than it probably it has been in our careers. So we would take that into account in any transaction that we looked at. Erika, I'm sorry, we, I guess we do actually disclose in our K the swapped cost of our TRUPs. It's on Page 116 of our annual report.

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 was just wondering if you could provide a little more color on the loss provision which was up sequentially in the quarter despite what would be seen as an improvement in underlying credit. How should we think about the pace at which you draw down the reserves going forward?

Daniel T. Poston

Kevin, as you point out the allowance, the decrease in the allowance was smaller than it had been in the prior quarter by $50-some million this quarter, and the allowance is a complicated area, obviously. It's largely model driven. And part of the difficulty in trying to relate the change in the allowance to earn credit trends is not just the current quarter's results, it's the change in expectations about the future and you don't necessarily know with a lot of clarity what our future expectations were last quarter versus this quarter. So as charge offs occur, I mean one of the reasons for higher levels of reserves are the expectation of future charge-offs. As those charge offs occur, it allows you to reduce the allowance. So while you might think of it as charge offs are coming down we need fewer reserves, another way to look at it may be that to the extent that your reserve was higher because of charge-off expectations, if those charge-offs have occurred and are declining, then the reserve release is associated with those charge-offs having already been provided for will decline as well. So it's a complicated analysis for the reserves. I think we have indicated previously that in general, we expect the trends to be for declining adjustments in reserve balances as we go forward. So I think that's all part of it. The other thing is that in addition to credit trends, loan growth has an impact. So the reserve may have downward leanings because of improving credit, but some of that can be offset by the growth in the portfolios and obviously, as we've been talking, our loan growth has been pretty strong over the last few quarters and that has an impact on the allowance as well. So from here, I think, while we expect that the reserve will continue to come down, we think kind of the longer-term trends will be that the amount of those adjustments will likely decline as we go forward.

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

In the past you've, Kevin, you've talked about a potentials range where the reserve-to-loan ratio might settle in. Has there been any change to your thinking on that?

Kevin T. Kabat

No, Kevin. We still feel that the 1.50% to probably 2% range is going to be the settle out range. We haven't changed our view from that perspective, 1.50% probably is the most likely, but still within that range, it feels like it's the right thing, at least in the kind of our vision at this point.

Operator

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

Brian Foran - Nomura Securities Co. Ltd., Research Division

Just on maybe Vantiv, to start, I mean, I guess one option over time, given the ability to buy back stock as you realize gains would be to sell the stake, but that wouldn't accomplish a whole lot, it feels like because you'd lose the equity method earnings. But how does like -- to understand the accounting interplay with the Fed approval right to the extent Vantiv does M&A, M&A stock-based and it's accretive, is that really the kind of good scenario for you because then, the stock it's put in place so you revalue part of your stake on the equity method earnings and to the extent the M&A's accretive, you still get the same earnings contribution or a little higher so you can do both buybacks and keep your earnings if that plays out?

Daniel T. Poston

I'm not sure I understand all the mechanics of your question. I mean, clearly, if Vantiv does accretive M&A transactions, 40% of that accretion will accrue to us under the equity benefit accounting. To the extent that share buybacks or other kinds of returns of capital are tied to the level of earnings, then those distributions will be allowed to increase.

Jeff Richardson

It sounded like you were suggesting that if Vantiv issue shares in M&A that we mark our position to market, and I don't think that's the way it works. That...

Brian Foran - Nomura Securities Co. Ltd., Research Division

And then just on the mortgage business, I mean, I guess a little bit of a disconnect with some of your, for lack of a better word, kind of mid-major peers were PNC, USB Wells, BB&T, in general volume was flat to up this quarter, given some of the market share being put in play, and in general it sounded like guidance for most of them was for better still results in 2Q, so obviously the mortgage business is doing phenomenally so it's hard to complain, but is there something obvious in terms of geography or mix that would make you different than that peer group?

Daniel T. Poston

Brian, phenomenon is a tough pedestal. And so we feel very good about how well we're positioned in terms of our mortgage space, we good feel about the activity that we're seeing. Obviously in this environment, with the interest rate environment out there and the predominance of the activity being related to refi, any movement in that arena can really change the trajectory from that perspective. And I think that what we're trying to do is present a most likely scenario for you. Obviously if it stays good, we've demonstrated in the past 1.5 years that we're going to get our fair share and we can do very well in that space. So could be an opportunity for us, but that's our best vantage and our best look at where we are in terms of the environment today, so.

Brian Foran - Nomura Securities Co. Ltd., Research Division

If I could sneak one last one in, I mean, you're starting to get some questions about the loan and deposit ratio, my guess is incremental auto originations, while profitable, are actually hurting the NIM and it seems like the capital markets are pricing auto securitizations at like 1.5 to 2-point gains. Have you, is an auto securitization program something that would be attractive, or could be a possibility? I mean, it seems like it could be a nice compromise, in your term accretive and actually help the NIM and also provide a cheap source of funding, but I don't know if there other offsets I'm not considering?

Tayfun Tuzun

Well from a loan-to-deposit perspective, we feel very comfortable with liquidity on our balance sheet. So there's really no urgency to look for transactions to inject liquidity beyond what we have today. A number of our peers have done off-balance-sheet auto securitizations. It's a product that clearly lends itself to liquidity. We have $11 billion, $12 billion of that on our balance sheet. The credit quality is very high, which makes securitizations profitable. But at this point, we are looking at it from a marginal perspective. When it makes sense to do it, to bring in additional liquidity relative to our marginal cost going forward, we will do that. I don't think the driver of that transaction will be merely just making our NIM look better. And, but we obviously, continuously review the possibility and we'll pull that trigger when we're ready to do that.

Jeff Richardson

Hey Brian, this is Jeff. Somebody here in the room with a better accounting background than I have pointed out that dilution in our ownership with Vantiv would trigger gains and losses. I think probably when you work that through, it probably wouldn't amount to a whole lot unless the transaction Vantiv did was very large. But yes, that is -- that was kind of a third order version of the future and haven't thought that through, so there's your answer.

Operator

Your next questions come from the line of Todd Hagerman with Sterne Agee.

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

Just a couple of questions related to loans. Kevin, I think you mentioned or Dan, about as respect to the loans, both the repricing effect as well as some of the yield pressure on some of the new fundings, but I'm wishing or hoping you could give a little bit more color on the repricing effect itself. You mentioned that a lot of work had been done, I think last quarter and this quarter. I'm just wondering how that might be affecting, again, kind of the second half outlook with respect to the margin and what specifically you're doing within the portfolio?

Tayfun Tuzun

This is Tayfun. Dan mentioned the fact that as we continue to reprice fixed-rate loan portfolios and our fixed rate securities portfolio, the difference between the average portfolio yield and the marginal yields that we are putting on our books continues to shrink. The more newer loans you have in the portfolio, the next dollar of loan has a lesser impact in terms of moving the spreads down. In addition to that we also obviously, both on the consumer and commercial side adding loans at very high credit quality, which is having an impact on average spreads. So as we look to the second half of the year, we see the impact that we have seen over the last 2, 3 quarters lessening as marginal pricing catches up with average pricing, we should see stability in our margin and that's what Dan talked about earlier.

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

Okay, and again, with that fixed rate product, for example, is there anything structurally you're doing different than in the past, and I'm thinking in terms of just how you may hedge that portfolio or in terms of like 4's, if you will, is any of the structure itself or how you may hedge that product changed from the past?

Tayfun Tuzun

Structurally loans are no different, I mean there are no meaningful differences in the way we structure loans and the way we look at term funding, et cetera. We look at obviously, interest rate risk management opportunities, but the environment has not been very good to overlay derivative rate activity on our books so we have not done a lot of that, but obviously that's a topic of continuous discussion and if we see opportunities, we'll do that.

Jeff Richardson

This is Jeff. I would just add in terms of our expectations for the second half. It's really being, I think you're comparing and we're comparing to what we saw in the first and what we expect in the second quarter, which are things that affected the margin that are kind of not as sustained sequential changes. So things like the hedging effectiveness this quarter, which was a sequential change of $5 million, there's no balance associated with that. So it's straight to the margin. Second quarter versus the first, we have the Vantiv refinancing which, you know, is an event that will take effect and then it won't sequentially keep taking effect. And there's one other item.

Tayfun Tuzun

Debt issuance, fixed-rate debt issuance in March will clearly be fully baked into our quarterly run rate.

Jeff Richardson

So those 2 things by themselves were about half of our sequential margin decline in the first quarter. Sorry, each -- the margin decline in each of the first and second quarters is about half explained by things that won't be sustained in terms of their sequential change.

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

Okay, and then just a related question, in terms of the loan yields themselves, we heard from a competitor that Ohio in particular, the pricing was particularly intense and they've kind of stepped back from that market. Again, as we've seen for the most part, the midwest banks showing pretty good growth overall, with Ohio itself kind of being singled out as being perhaps a little bit more competitive on the pricing side. Could you give just a little bit more color in terms of, again, just the market share that you're taking and kind of how that translates into some of that pressure on the asset yields?

Kevin T. Kabat

First of all, Todd, I want to thank you for the question, and we'd like you to repeat that consistently throughout the season from that standpoint. So welcome to the home turf. Well from our standpoint, and I think you can see it relative to our yields, and our ability to continue to grow, take share from the businesses is, while it's competitive and yes, while we've seen some compression as we've talked about, a lot of that is our continuing to go to even stronger credits who deserve better pricing from that standpoint. So from a competitive standpoint while it is that way, it always has been that way and hasn't really significantly changed for us, at least from our vantage point from that perspective. It's kind of game on and steady as she goes from that standpoint. So I really don't have a lot of other insight relative to those comments, or what others are feeling on that basis, but we feel pretty good about how well we're positioned, what we're doing and the disciplines we're applying to the business that we're putting on. So keep asking those questions, okay?

Jeff Richardson

He's come back from Ohio. It should help pricing in Ohio.

Operator

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

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

Now I don't know if you answered this question already, but I believe you made a comment that you expect your mortgage banking production to be relatively flat for the first quarter to the second quarter, but you expect the earnings to go down. Does that mean you expect or you've already seeing your gain on sale margins decline? Or is there something else in there?

Daniel T. Poston

Yes, I think there was a question earlier. We do expect the gain on sale margins to be lower the second quarter than the first. The first, the margins in the first quarter were very, very strong. So we are expecting that to decline somewhat in the first quarter, excuse me, in the second quarter and in response to an earlier question, I think we already indicated that we've begun to see some of that already in terms of activity early in the quarter.

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

Okay, you got the guys, right [ph]?

Kevin T. Kabat

The only other thing I would mention is that our expectations with respect to the overall results of mortgage servicing right valuations and hedging activity is also a component of the decline that we expect in mortgage banking revenue from first quarter to second. In the first quarter, that was a net positive of about $14 million or $15 million and we wouldn't expect that to continue.

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

Okay, and then also going to the resident, the resi portfolio that you retain, I think it was it was even, it's gone from 12% to 13% of your balance sheet, I think it's up in double-digits year-over-year. Can you talk a little bit about what type of loans that you're retaining on the balance sheet, are they jumbo loans, any 5/1s and what type of yield are you getting on them?

Tayfun Tuzun

So it's a combination, Paul. We clearly continue to originate jumbo loans. But we're talking about this small amount of activity, it may be around $50 million a month type of activity. Those are sort of a combination of 5/1 ARMs; some fixed-rates, but predominantly probably on the ARMs side. The other product that probably, which is a larger origination volume, is our branch originated mortgage product and that product we originate anywhere between $120 million and $140 million a month of depending on the rate environment. It's basically a product to very high credit borrowers, very similar to an agency mortgage but from a process perfected in order to speed up the process. It doesn't necessarily mirror all features of an agency product. And they tend to be shorter in duration, predominantly sort of 10, 15-year maturity mortgages. And some of our competitors have talked about the same product, it's a product that is a very good balance sheet mortgage product, and it's priced anywhere between sort of 50 to 75 basis points above an agency mortgage product. So it is an attractive risk return trade-off that we choose to keep on balance sheet today.

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

And going back to the mortgage-bank part of it, the stuff that you're selling, are you seeing a lot of HARP volume?

Daniel T. Poston

We have seen an increase in HARP-related volumes I think probably a couple of quarters ago, that was probably 20% of our originations that has come up a bit to perhaps 30% or so of origination volume now. And the expectation is, is that might even increase a bit further as we see another surge in refi volumes here if rates stay where they are now, we expect that to maybe inch up a little higher than that. So we have seen some impact of that, although it hasn't been dramatic.

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

And just a quick follow-up on the last question about how competitive the Ohio market at Midwest has been. Can you compare that to what's going on in the South, because we're hearing in the South it's a really nice time to be out there hiring in teams and whatnot because it's not competitive? Can you just compare to Midwest with the South, Georgia and Florida?

Kevin T. Kabat

Sure, Paul. I would not categorize anything in our business these days as not competitive. Just that clarification. But clearly, there is a differentiation from the geographies in the Southeast. We are seeing, again, very attractive business opportunities, we are seeing the opportunities and have been lifting up teams and bankers and folks that really like our operating model. There's a lot of, there's a lot more disruption earlier and longer in the Southeast still, so there's a lot of reshuffling, rethinking about what's happening from that standpoint. So we're seeing a lot of good opportunities, pipelines are strong. We're seeing attractive business on a relative basis, and we're seeing a great way to grow the business through acquiring talent as we move forward. So all that is true for us and our vantage point as well, Paul.

Operator

Your next question comes from the line of Craig Siegenthaler with Credit Suisse.

Craig Siegenthaler - Crédit Suisse AG, Research Division

Just looking at the liability side of the balance sheet, looking at the decline in the band deposits at 1Q, and then the guidance were kind of flattish transaction deposits in 2Q. What is your outlook for both, I guess longer-term deposit growth? Do you expect it to match loan growth here? Do you expect loan growth to exceed it? And then also for deposit costs, because your average interest-bearing liability yield also was kind of flattish in the fourth quarter. So I wonder if we're really near the end of this.

Tayfun Tuzun

I think the interest-bearing liability, Dan discussed it related to one of the other questions, is more related to the wholesale funding and the hedging effectiveness and the impacts of long-term debt expense. On the deposit side, quarter-over-quarter we have seen reduction in our sort of core deposit rates, and again, as I mentioned before, we continue to evaluate our pricing very frequently. In terms of growth expectations, obviously, over the past couple of years, we've seen significant growth inflows, both into our non-interest-bearing as well as interest-bearing commercial and consumer accounts. And we still continue to maintain those deposits and grow those deposits. The outlook depends on really how companies and consumers do in a sort of a slightly growing economy. We just expect stability. We don't expect to see similar growth rates that we've seen over the past year or 2, but we expect those deposits to remain stable. And we predominantly use deposit growth to fund loan growth. I mean, that's sort of from a liquidity perspective the prudent thing to do, and we will continue to do that.

Jeff Richardson

This is Jeff. I would just only add that in terms of the change in our deposit rates, I mean, as I think we've talked about the last 2 years, a significant amount of our CD funding or the cost of our CD funding was originated in the second half of '08. And so, we saw step downs in our CD rates in, at the end of '09, '10, '11. So 1, 2 and 3-year CDs. I don't think we originated many 4-year CDs in the end of '08. We did originate some 5-year CDs, and so there's a modest amount of some of the benefit coming at the end of next year, but that was a significant driver in our reduced deposit costs last year, and that's largely behind us other than a bit that we'd see next year.

Craig Siegenthaler - Crédit Suisse AG, Research Division

Then if we think about your NIM guidance of down 5 to 6 and then kind of stable in the second half, I heard the earlier kind of question, but I wasn't sure exactly if that second half kind of a flattish trend is really driven by anything on the TRUP side in terms of refinancing? Or does that exclude what you may do in terms of repaying the TRUPs?

Jeff Richardson

It's generally -- includes everything.

Craig Siegenthaler - Crédit Suisse AG, Research Division

And then just one additional, I'm sorry if you filmed this earlier [ph], but if we look at both salaries and employee benefits, and kind of the increase there, I'm just wondering if we back out severance and we also back out the seasonality, what is a good run rate in terms of those 2 items to look about as we walk forward?

Jeff Richardson

I think we've given guidance on expenses overall. I don't want to give guidance on line items within expenses.

Craig Siegenthaler - Crédit Suisse AG, Research Division

But can you just identify what the unusual impact was from those 2, those 2 items?

Jeff Richardson

The severance was $6 million, and the FICA and unemployment seasonal increase was $25 million?

Daniel T. Poston

$25 million. Yes, and that's in the employee benefits line.

Craig Siegenthaler - Crédit Suisse AG, Research Division

Okay, so $31 million between the 2 is kind of a good number to back out?

Daniel T. Poston

Yes. Those 2 items were $31 million this quarter. Now I will point out that not all of that $25 million and FICA and unemployment increase comes out in the second quarter. I think that our prepared comments I think estimated that, that was about a $15 million decline in that item in the second quarter, and more of that will come out as we go through the year and more and more people are over the maximum thresholds there.

Kevin T. Kabat

Craig, can I just circle back to one thing? You alluded to declining demand deposits and I guess if you look at it on a period end to period end basis, it's down about $1 billion, but those balances fluctuate pretty significantly on a day-to-day basis, and I think a more useful measure of what's happening with deposits is, demand deposits especially, is average balances and on an average balance basis, our demand deposits are dead-on in the first quarter where they were in the fourth.

Operator

At this time, there are no questions.

Jeff Richardson

Well, I think we're done. We appreciate your time this morning and feel free to give us a call and IR if you have any other questions. Thanks.

Operator

This concludes today's conference. You may now disconnect.

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