Fifth Third Bancorp (FITB)
Q2 2011 Earnings Call
July 21, 2011 9:00 am ET
Jeff Richardson - Director of Investor Relations and Corporate Analysis
Mary Tuuk - Chief Risk Officer and Executive Vice President
Mahesh Sankaran - Senior Vice President and Treasurer
Daniel Poston - Chief Financial Officer and Executive Vice President
Kevin Kabat - Chief Executive Officer, President, Executive Director, Chairman of Finance Committee and Member of Trust Committee
Unknown Analyst -
Previous Statements by FITB
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Thanks, April. Good morning, everyone. Today, we'll be talking with you about second quarter 2011 results.
This call may contain certain forward-looking statements about Fifth Third pertaining to our financial condition, result 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 a number 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 those factors. Fifth Third undertakes no obligation and would not expect to update any such forward-looking statements after the date of this call.
I'm joined on the call by several people: Kevin Kabat, our President and CEO; Chief Financial Officer, Dan Poston; Chief Risk Officer, Mary Tuuk; Treasurer, Mahesh Sankaran; and Jim Eglseder of Investor Relations. During the question-and-answer period, please provide your name and that of your firm to the operator.
With that, I'll turn the call over to Kevin Kabat. Kevin?
Thanks, Jeff. Good morning, everyone, and thanks for joining us. Today, we reported second quarter 2011 net income to common shareholders of $328 million or $0.35 per share. That's up 120% from last year's EPS, and up 30% from last quarter, excluding the $0.17 write-off of TARP discount. Trends continue to reflect broader aspects of the economy as it recovers, with positives including strong fee income results, controlled expense performance and improved credit trends. These trends generally offset the impact of a difficult interest rate environment and a competitive landscape, which negatively affected alternatives for securities reinvestment as well as lending margins.
Loan demand continues to be lower than we'd like, as deleveraging trends and economic uncertainty continue to weigh on customer demand for new financing. However, taken as a whole, this is an environment that we've been able to take advantage of.
We continue to build our relationships, both in terms of retail households and commercial lead bank positioning, and we continue to be recognized for our customer experience. Whether from our own customer surveys or those of third parties. So we continue to have success in deepening our own customer relationships and in building market share. That will drive value in the future and gives us confidence we can build upon current results.
Dan and Mary will provide more details in their remarks, but in terms of financial results, I'll touch on a few high levels items here.
Average portfolio loans increased $300 million sequentially, with C&I loans up about $600 million or 2%. Generally, paydowns remained high and that continued to impact loan growth. CRE loans were down about $400 million although that runoff continues to slow. Consumer loans were up about $150 million with growth in the residential mortgage and auto portfolios offset by home equity runoff.
Deposit growth continues to be strong. Transaction deposits increased 2% sequentially, partially offset by CD runoff in core deposits. While deposit cost decreased during the quarter, we expect the bigger benefit in the back half of the year from maturities of late 2008 vintage CDs.
Noninterest income results were strong in the second quarter. Mortgage banking revenue improved significantly from the first quarter and totaled $162 million. Deliveries were down, but gain on sale margins improved, and we recognize net gains on the MSR and related hedges given the low rate environment at the end of the quarter. Card and processing revenue and corporate banking revenue were both up 10% or more. Expenses were down 2%, due to positive seasonality and good expense control.
And finally, overall credit trends continue to improve. Charge-offs were $304 million, the lowest level since the first quarter of 2008, with a sequential reduction of $63 million. That was better than expected, across essentially all of our loan portfolios. We expect similar improvement in the third quarter. Total nonperforming assets decreased $78 million or 3%, and total delinquencies declined $70 million or 9%, compared with last quarter.
All told, these results were the strongest we reported since 2007. And I'd like to thank our 21,000 employees for their hard work, dedication and focus on meeting our customers needs and driving business results despite the many changes the industry has faced the past several years. Thank you all.
Let me turn to some of those changes. We've had a number of regulatory developments during the quarter. Perhaps the most notable, being the release of final rules related debit interchange under the Durbin Amendment. The Fed's final proposal does not provide for full cost recovery, but the proposal at least covers most of our marginal costs and was a significant improvement from where it started.
We still believe that this legislation was unwarranted and is regrettable as a precedent for private sector price controls, but at least we have some certainty and can begin to adapt to it. Dan will talk about the effect in more detail, but we currently expect a gross negative impact of about $30 million a quarter or approximately 50% of our $60 million in quarterly debit interchange revenue. We'd expect to mitigate about 1/3 to 1/2 of that in the fourth quarter of this year, which is the first quarter of implementation. Something like 2/3 of it by the first half of next year and hopefully most of the rest as we'd fully adapt to the new rules.