Fifth Third Bancorp (FITB) — Q4 2018 Earnings Call Transcript

Thank you, Chelsea. Good morning and thank you for joining us. Today, we will be discussing our financial results for the fourth quarter of 2018. Please review the cautionary statement in our materials, which can be found in our earnings release and presentation. These materials contain information related to the proposed merger with MB Financial, reconciliations to non-GAAP measures along with information pertaining to the use of non-GAAP measures and forward-looking statements about Fifth Third’s performance. We undertake no obligation to and would not expect to update any such forward-looking statement after the date of this call. This morning, I’m joined on our call by our President and CEO, Greg Carmichael; CFO, Tayfun Tuzun; Chief Operating Officer, Lars Anderson; Chief Risk Officer, Frank Forrest; and Treasurer, Jamie Leonard. Following prepared remarks by Greg and Tayfun, we will open the call up for questions. Let me turn the call over now to Greg for his comments.

Thanks, Chris, and thank all of you for joining us this morning. Earlier today, we reported full year net income available to common shareholders of $2.1 billion or $3.06 per share. Full year adjusted net income of $1.8 billion was a record for the Bank as we continue making significant progress to improve profitability and better position Fifth Third for success. In addition to the record net income, we generated our best full year adjusted ROA, ROE, ROTCE and efficiency ratio in over a decade. We returned nearly 100% of earnings to shareholders through repurchases and two dividend increases as we raised the dividend nearly 40% in 2018. Additionally, we significantly improved our key credit quality metrics throughout the year. Fourth quarter 2018 net income available to common shareholders was $432 million and earnings per share of $0.64. Included in these results are three notable items, which had a negative impact of $0.05 on reported EPS. Excluding these items, adjusted earnings were $0.69 per share in the fourth quarter. Our financial results were very strong. During the quarter, we generated record loan originations and fee revenue in our commercial business, continued to properly grow the balance sheet and diligently manage our expense while continuing to invest for future growth. Since the fourth quarter of 2017, we have significantly improved all of our key financial metrics on an adjusted basis with ROA increasing 30 basis points, ROTCE increasing 440 basis points and the efficiency ratio declining more than 300 basis points. As we approach the third and final year of our NorthStar project, the fourth quarter of 2018 results should provide a great deal of confidence in our ability to achieve our enhanced targets. Before discussing our key strategic priorities and highlights for the quarter, I’d like to share some observations on a macroeconomic environment. Year-over-year U.S. economic backdrop continues to be generally positive. While global growth pressures exist and geopolitical risks remain elevated, we expect this business cycle to expand in 2019, as underlying economic fundamentals remain solid. While we’re cognizant of the rising probability of a downturn in the next couple of years, we feel good about how we positioned our balance sheet and our sales force to take advantage of growth opportunities while prudently managing our exposures. We will continue to maintain our disciplined focus on credit quality and profitability. Moving on to our strategic priorities. At Fifth Third, we are positioned to drive improved profitability well beyond Project NorthStar horizon, which concludes at the end of this year. First, we are committed to achieving our targeted financial results by the end of 2019, as outlined in our previous discussions. The continued improvement throughout 2018 reinforces our confidence in our ability to achieve our goals. In fact, our fourth quarter adjusted ROTCE of 15.4% is the highest since before the financial crisis. Second, we’re focused on successfully integrating MB Financial. We’re well-prepared for the integration of MB’s operations into Fifth Third. We’re working diligently to deliver the financial results associated with the acquisition and to make sure we get it right for our customers. We have completed all required filings and are now simply waiting for the necessary approvals. We continue to expect to close the transaction by the end of this quarter. We’re also pleased that the regulators did not object to our resubmitted capital plan, including the pro forma impact of MB Financial. Also, we remain very confident in our ability to achieve our post-merger financial targets. It is clear that we are acquiring a high-performing franchise. As shown in their fourth quarter earnings published this morning, MB generated strong returns with solid NIM expansion and solid credit results with improvements in both NPAs and credit losses. We’re excited to combine the talent and complementary capabilities of our two organizations. Third, we continue to invest in organic growth opportunities, including the previously communicated branch network optimization. Our plans are staged over multiple years and include a rollout of the state-of-the-art branch redesign. Our next-generation branches will be 40% smaller than our legacy network and will be highly automated. In 2018, optimization efforts led to the opening of 12 branches and the closing of 45 branches. We expect to decrease our network in another 10 branches in 2019. Beginning in 2020, we expect branch builds in our growth markets to exceed our closures. In addition, we’re expanding our middle market business in select high-growth markets where we can combine strong talent with local market knowledge and our enhanced product capabilities to successfully grow the portfolio. Following the very successful launch of our California middle market team, over the next 12 months we’ll be expanding to the Denver, Dallas, and Houston markets. We already have existing teams of commercial bankers in our national corporate banking business in these markets. Our track record of hiring strong talent and successfully growing our middle market franchise gives us a high degree of confidence in executing on our current expansion plans. We also plan to continue to add to our sales force in our existing footprint. We’re particularly focused on strategic acquisitions that would generally increase fee revenue to drive additional ROE growth. In fact, we are already seeing the financial benefits of our investments in talent over the last two years, especially in our capital markets and the advisory and wealth and asset management businesses. Fourth, we remain focused on accelerating our digital transformation and delivering innovative solutions for our customers. We’ve invested heavily over the last several years, both through our in-house technology capabilities and with select fintech partnerships. These investments are focused on delivering a more personalized relationship banking experience. Our goal is to ensure interactions with our customers are simple, seamless, and of course secure. Our efforts continue to be recognized. A recent rating agency recognized us as the number one bank for overall technology strategy, highlighting our ability to deliver innovative products as well as our organization-wide technology expertise. Our clearly-defined set of strategic priorities are designed to enhance revenue growth as well as generate expense efficiencies in order to meet our financial and strategic objectives. We have achieved significant expense efficiencies over the last two years as reflected in our improved efficiency ratio. As we have discussed previously, our goal is to consistently achieve positive operating leverage. Moving on to our highlights for the quarter, I'll review some key aspects of the results, and then Tayfun will discuss the quarter in greater detail. First, we continue to benefit from our improved balance sheet resiliency. Our key forward-looking credit metrics continued to improve as criticized loans declined for the seventh quarter to the lowest level in nearly 20 years. Our non-performing assets have declined nearly 50% over the past two years and today stand at the lowest level since 2000. We maintained the same disciplined approach to client selection, underwriting standards and credit risk appetite during the quarter while growing the loan portfolio. And in fact, we generated originations, both in middle market and corporate banking, at the highest credit quality in several quarters. While we have maintained strong underwriting standards, our loan yields and net interest margin have continued to expand. We believe our strong credit profile should allow us to outperform through business cycles. We generated profitable relationship growth in both our commercial and retail businesses. We continue to focus on expanding our relationships with our clients on both sides of the balance sheet. Loan growth was fully funded by core deposits during the quarter and the year. Compared to the fourth quarter of last year, we grew commercial loans by 4%, including C&I growth of 6%. Even with very strong loan growth, our total household growth of over 3% and deposit growth of 4% resulted in the lowest loan to core deposit ratio in the past 15 years. Furthermore, we managed our expenses and outperformed relative to our guidance. Excluding merger-related items, our expenses declined 2% from the prior quarter. As a result, we were able to continue to generate positive operating leverage for the quarter and the full year. I want to reiterate our expectations for standalone adjusted expense growth of only 1% in 2019. Our results show that we remain on track to achieve our enhanced NorthStar financial targets. During the fourth quarter, we generated an adjusted return on tangible common equity of 15.4%, an adjusted return on assets of 1.34%, and an adjusted efficiency ratio of 56.8%, which is already better than our standalone fourth quarter of 2019 target. We remain very confident in our ability to achieve our long-term financial targets and outperform through this cycle. We remain committed to holding ourselves accountable for delivering strong financial results under prevailing macroeconomic, interest rate, regulatory and legislative environment. I'd like to once again thank all of our employees for their hard work, dedication, and for always keeping the customer at the center. I was pleased that we were again able to deliver strong financial results in our NorthStar initiatives or delivering the outcomes as planned. With that, I'll turn it over to Tayfun to discuss our fourth quarter results and our current outlook.

Thanks, Greg. Good morning and thank you for joining us. Let's move to the financial highlights on slide four of the presentation. Our fourth quarter results were very strong. This momentum bodes well for our 2019 performance and should help us achieve our yearend goal. As Greg mentioned, the pre-closing integration work related to MB is progressing very well on both ends. We are very optimistic that the transaction will close this quarter. And as you can see from the earnings disclosures, some of the expenses related to the integration have started to impact our financials. These expenses are part of the total merger-related expenses that we discussed with you when we announced the transaction. At this time, there is no change to the financial outlook we shared with you previously with respect to the combined company. We remain very confident that the acquisition will improve ROTCE by 2%, ROA by approximately 12 basis points, and the efficiency ratio by about 4% in year two. Since we have not disclosed the transaction yet, our current 2019 guidance will only reflect the standalone Fifth Third performance expectations. Once we close the transaction, we will update you on the combined outlook in more detail, but hopefully our guidance on the performance metrics gives you a very good perspective on the outlook for the combined company. Before discussing results for the quarter, I would like to highlight as we have noted throughout our earnings materials that our current and historical financial results presented today reflect the change in accounting policy related to investments in affordable housing. Adopting this new accounting policy allows our financials to be more comparable to peers. We have also provided a summary reconciliation of the change on page 30 of the release. This change had no meaningful impact on our fourth quarter EPS. Reported results were negatively impacted by the notable items on page two of our release, including $21 million after-tax in merger-related expenses incurred in advance of our pending acquisition of MB Financial and a $17 million after-tax charge, reflecting the mark to market on our GreenSky equity stake, partially offset by a $6 million after-tax benefit from the Visa total return swap. Excluding these items, pre-provision net revenue increased 9% sequentially and 14% year-over-year. All of our adjusted return metrics were higher while loan growth and deposit growth exceeded our guidance. Strong revenue growth and disciplined expense management have continued to lower our efficiency ratio and generated positive operating leverage on a sequential and year-over-year basis, which we expect will continue in 2019. Our credit performance was solid. We reported the strongest forward-looking credit metrics in nearly 20 years. Our provision for loan losses exceeded charge-offs as a result of the strong loan growth. In his opening comments, Greg reiterated our priorities for long-term success. Our goal is to carry the revenue momentum forward while maintaining tight expense control. We will continue to manage balance sheet risk by remaining cognizant of the environmental factors impacting our business and maintain a prudent approach to capital management with the ultimate goal of rewarding our shareholders today and in the future. Moving to slide six. Our recent loan growth strength is beginning to provide a clear picture of our longer-term growth potential. We remain very confident in our ability to achieve higher overall loan growth going forward compared to the past couple of years. This quarter, average total portfolio loans were up 2% compared to the prior quarter, mostly reflecting growth in C&I loans. We grew total loans 3% on a year-over-year basis, again reflecting strength in commercial. End-of-period commercial loan growth was 3% sequentially, which significantly exceeded previous guidance of modest growth. Our success in generating profitable growth in both national corporate and regional middle market lending reflects both the impact of our investment in our sales force, as well as the increased efficiency in our mid-office and back-office functions. Total commercial loan production was up 27% relative to last quarter and up 17% relative to last year's fourth quarter. Production levels in both regional middle market, as well as national corporate businesses were higher relative to both previous quarters. Total commercial line utilization was up a little less than 1%. Despite a very strong quarter for commercial loan growth, our leverage loan balances continue to decline in the fourth quarter. Total leverage loan exposure declined 5% sequentially. End-of-period commercial real estate balances, including construction loans, were flat compared to last quarter. CRE balances as a percentage of total risk-based capital were at a peer group low of approximately 63%, significantly below the next lowest peer. We will continue to maintain a cautious approach to commercial real estate at this point in the cycle. We currently expect average total commercial loans to grow by about a percent on a sequential basis in the first quarter, with continued strength in C&I partially offset by declines in commercial construction and large ticket non-relationship commercial lease portfolios. For the full year, we expect average total commercial loans to increase approximately 5% compared to 2018. Average and end-of-period consumer loans were flat, both sequentially and compared to the year-ago quarter, as growth in our credit card portfolio and unsecured personal loans was offset by declines in home equity lending and residential mortgages. As we discussed last quarter, our indirect auto loan balances are no longer declining as origination levels are now outpacing lower amortization in the portfolio. We are deliberately choosing not to portfolio fixed rate conforming mortgage loans in the current rate environment. In the first quarter, similar to the fourth quarter, we expect total average consumer loan balances to be relatively flat with the same portfolio dynamics that I discussed for the fourth quarter. For the full year, we expect average total consumer loans to increase approximately 1% compared to 2018. Combining the commercial and consumer portfolios, we currently expect full-year 2019 average total loans to grow 3% to 3.5% compared to 2018. Total core deposits were up 4% on a year-over-year basis and up 3% compared to the prior quarter. We are very pleased with these results. Our loan to core deposit ratio has declined to the best level in 15 years. Our ability to fund incremental loan growth with core deposits is and will continue to be a very powerful factor supporting our growing overall profitability. In the current environment, there is a fine balance between growing core deposits and managing interest expense. We believe that our model strikes the right balance as we are not exposing the balance sheet to rates paid on hot money accounts as we emphasize relationship debt when making pricing decisions, which tend to create more balance and price stability. Moving on to slide seven. Compared to the prior quarter, NII increased 4% or $38 million and the NIM expanded 6 basis points, both of which exceeded our previous guidance. About 2 basis points of the NIM expansion reflected a few items that were seasonal in nature. Average yield on our loan portfolio expanded 20 basis points, which outpaced a 14 basis-point increase in interest-bearing core deposits during the quarter. Compared to the year-ago quarter, net interest income increased $122 million or 13%. The results from the year-ago quarter included a $27 million negative impact related to the change in tax law. Adjusting for this item, NII increased $95 million or 10% with NIM expanding 19 basis points from the fourth quarter of 2017, a very strong performance relative to peers. As you know, based on our previous disclosures, while achieving these results, we continued to hedge our downside risk, taking advantage of very attractive entry points last fall. Our long-term interest rate risk philosophy is not to tilt our exposure too far in either direction. We believe this is a prudent approach at this point in the cycle. Our cumulative beta leading up to the December 2018 Fed hike was approximately 35%, with consumer in the low 20s and commercial in the high 50s. The September rate hike resulted in a beta of 58%. We expect deposit beta from the December rate hike to be consistent with the impact from the September hike over the next six months, which would result in a cumulative deposit beta below 40%. Today’s guidance does not assume any additional Fed rate increases in 2019. We expect the full-year 2019 NII to grow approximately 3% over 2018 without any rate hikes. We expect our first quarter NII to decline about 1.5% to 2% sequentially based on day counts and the impact of non-recurring fourth quarter seasonal items, partially offset by the benefit from the December rate hike and loan growth. Our estimate is about 6.5% above the first quarter of last year’s NII. We expect the NIM on a full-year basis to expand 2 to 3 basis points in 2019 despite the assumption of no additional rate increases. If the Fed were to raise rates, given our balance sheet position, we would expect the NIM to benefit 1 to 2 basis points in 2019 per rate hike. Moving on to slide eight. Excluding the impact of the listed items, non-interest income increased 2% compared to both year-ago and the prior quarter. Record corporate banking revenue was driven by the highest ever M&A advisory fees, as well as increased syndication revenues. Our corporate banking fees were up 69% compared to the year-ago quarter and were up 30% compared to the prior quarter. We currently expect our corporate banking revenue to grow about 25% compared to last year’s first quarter. Our near-term performance and our 2019 expectations demonstrate our success in implementing our NorthStar initiatives over the past three years. Card and processing revenue increased 5% compared to the year-ago quarter and increased 2% compared to the prior quarter, due to higher transaction volumes, partially offset by higher rewards. Year-over-year performance also reflected strength in wealth and asset management, although we had lower revenues in the fourth quarter due to lower asset valuations. Mortgage banking revenue was up 10% in the fourth quarter, with an origination volume of $1.6 billion, gain on sale margin was 159 basis points, the lowest seen in the business. Deposit service charges decreased 2% compared to the year-ago quarter and decreased 3% compared to the prior quarter, predominantly due to higher earnings credit rates in corporate treasury management. For the first quarter, we expect total noninterest income to be stable relative to the adjusted first quarter of 2018 and for the full year, we expect total noninterest income to increase approximately 2% from the adjusted 2018 noninterest income. Moving on to slide nine, the 1% increase in reported noninterest expenses this quarter reflected a $27 million pretax impact from merger-related expenses. Excluding the merger-item, expenses decreased $20 million, or 2% sequentially. Results reflected the benefit of the elimination of the FDIC surcharge, which was about $12 million and the actions we have taken to manage our expense base. We are very pleased with these results and will maintain the same focus on expense management in 2019 while continuing to invest in our company. Our adjusted efficiency ratio for the fourth quarter was 56.8%. We have achieved positive operating leverage this quarter, both on a quarter-over-quarter and year-over-year basis, and expect to continue to improve in the foreseeable future. First quarter expenses, excluding any MB acquisition related expenses, are expected to be up about 1.5% to 2% from the first quarter of 2018. The largest item driving the year-over-year growth is a $15 million change in our unfunded commitment provision expense, which reflects growth in commitments associated with strong loan growth. Included in this guidance is also the impact of our acquisitions in 2018 in wealth and asset management and capital market, which is about 0.5% of our total expense base. Excluding these items, year-over-year expenses in the first quarter are actually expected to be lower than last year's first quarter, including the impact of the change in FDIC deposit insurance expenses. It is also worth noting that our first quarter expenses are impacted by seasonality associated with the timing of compositional warrants and payroll taxes. We continue to expect our standalone expenses, excluding the notable items disclosed in our earnings materials to be up approximately 1% year-over-year in 2019. Turning to credit results on slide 10. Fourth quarter credit results continued to be benign in line with our expectations and reflect the impact of actions that we executed over the last three years. The criticized assets ratio continued to improve, decreasing to 3.34%, near a 20-year low, from 3.45% last quarter. Net charge-offs were $83 million or 35 basis points, up 5 basis points from the prior quarter. The commercial charge-off rate of 19 basis points continues to be the lowest since before the crisis. The consumer net charge-off ratio of 61 basis points increased slightly compared to last quarter and reflected larger than usual recoveries in the prior quarter. Non-performing loans of $348 million decreased 20% from last year and are down 14% from the previous quarter. As a result, our non-performing loans and non-performing asset ratios continue to decline to levels not seen before the crisis. The provision for loan and lease losses totaled $95 million in the current quarter compared to $67 million in the year-ago quarter and $86 million in the prior quarter. The resulting coverage ratio was 1.16% with allowance in excess of non-performing loans of nearly 320%. As we remind you every quarter, the current economic backdrop continues to support a relatively stable credit outlook with potential quarterly fluctuations, given current low absolute levels of charge-offs. Turning to slide 11. Capital levels remained very strong during the fourth quarter. Our common equity Tier 1 ratio was 10.2% and our tangible common equity ratio excluding unrealized gains and losses was 8.71%. The cumulative impact of our accounting change resulted in an 11 basis-point reduction to our current CET1 ratio, which merely reflects the timing difference from accounting related to the recognition of losses. During the quarter, we completed $400 million in share repurchases. At the end of the fourth quarter, common shares outstanding were down almost 15 million shares or 2% compared to the third quarter of 2018 and down 47 million shares or 7% compared to last year's fourth quarter. Following the Fed’s non-objection to our CCAR resubmission, we will be able to repurchase an additional $900 million in share buybacks through June 2019 and increase our dividend another $0.02 in the second quarter of 2019. This is in addition to the $0.04 increase we just declared in the fourth quarter. Our near-term and long-term capital targets remain the same as before as we continue to target CET1 ratio of between 9% and 9.5%. Slide 12 provides a summary of our current outlook on a standalone basis, as well as our financial expectations from the MB Financial acquisition. We expect our standalone full-year 2019 tax rate to be in the 21% to 22% range. The higher than previously disclosed tax rate guidance simply reflects the change in accounting policy I mentioned earlier. In summary, I would like to reiterate a few points. We reported very strong financial results for the fourth quarter and remain focused on our key strategic priorities to drive the Company forward and to outperform through various business cycles. We’re focused on successfully executing against our strategic priorities and remain confident in our ability to achieve our enhanced financial targets. We remain focused on seamlessly integrating the MB acquisition and successfully generating the financial benefits, as discussed previously. We continue to position the Company to enhance our financial returns through organic profit opportunities. And lastly, we are accelerating the digital transformation for future outperformance, all within our stated goal of generating positive operating leverage.

Thanks, Tayfun. Before we start Q&A, as a courtesy to others, we ask that you limit yourself to one question and a follow-up, and then return to the queue if you have additional questions. We will do our best to answer as many questions as possible in the time we have allotted this morning.

Good morning. Thanks for taking the question. First, just quickly to clarify. Did you say something on corporate banking fees and your expectation for the first quarter?

Yes. I think we said it’s going to be up 25% relative to last year's first quarter, Geoffrey.

Thanks. So, I guess the question would be corporate banking is up 25% relative to last year, you’ve got some benefit from the acquisitions coming in as well. What is it that kind of holds back the overall picture to keep it much closer to stable, given that strength in corporate banking?

Yes, corporate banking remains very strong. It was strong in 2018, and we expect it to be strong again in 2019. We are being cautious in the mortgage banking sector as we do not anticipate a significant improvement in the environment. If conditions do improve, we would expect to see greater contributions from mortgage banking. Although we are achieving great success in our wealth and asset management business, we are not forecasting a major change in market levels. Additionally, we announced last year that we would reduce our outstandings in the large ticket leasing business, which affects our operating lease income and contributes to some challenges. However, relative to other fee line items, including corporate banking, we are benefiting not only from acquired revenues but also from organic growth opportunities.

Hey, Tayfun, can you help us understand some of the actions that you took in the quarter? You mentioned in the appendix a bunch of the changes in the swap portfolio. First of all, I guess, could you help us understand, if there was any benefits from that in the fourth quarter? And then, also, just how does that work through and impact the NIM and NII going forward? Thanks.

In the quarter, we initiated approximately $4 billion in spot starting swaps during October and early November. Then, in mid-November, we added a one-year forward starting swap, bringing the total to $5 billion. We also implemented floors at a 225 strike that were one-year forward starting. Overall, this resulted in around a $4 million benefit, equivalent to a 1 basis point benefit to net interest margin (NIM) for the fourth quarter. Given the stable outlook for one-month LIBOR rates, we anticipate this benefit will persist. Additionally, later in the quarter, following the bond market rally, we terminated $3.1 billion of swaps that were scheduled to mature in 2019. The loss from this termination will be recognized gradually throughout 2019, having no significant impact on NIM. However, if rates increase, we will not be affected by the $3 billion in swaps.

So, I guess as a follow-up, I’m just trying to understand, you are talking about 3% standalone NII growth with really good balance sheet growth, especially towards the end of the year. So, you can maybe kind of help us understand, is it the impact of that that would hold you back only 3% or just how does the NII trajectory I guess as you look past the first quarter?

I think, Ken, we have experienced significant growth in the fourth quarter, and our guidance indicates a 1% increase in average commercial loans for the first quarter. We are adopting a cautious stance as we approach 2019 and are not raising our expectations based on our success in the last quarter. However, if our performance exceeds our careful expectations, it will positively affect our net interest income.

I just wanted a little bit color on what drove the large increase in the commercial. It looks like commercial interest checking deposits in the quarter pretty substantial leg up, and just how sustainable that would be as you look out?

Yes. Thanks for the question. What we’ve seen on the commercial front has been continued migration from a client preference standpoint from DDA to IBT. So, that certainly drives a little bit of that. But more importantly for us, we’ve had a very successful fourth quarter in both new client acquisition on the commercial side as well as getting the better share of wallet of the deposit, both from our existing customers. So, we were really pleased with the deposit growth in our commercial book. And it was very widespread across our regions as well as in several of our verticals including the retail vertical, TMT, and entertainment and lodging. So, overall, very good outcome, and we expect that to continue into 2019.

Yes. In a changing environment like the one we are going through with rising rates, one of the benefits of our model and the kind of relationships we have with our clients is, we are able to build deep relationships, bring them liquidity solutions, and some of those liquidity solutions have added to the migration from DDA to interest-bearing transaction accounts. These are still relationship based. But, we are really pleased with the execution of our strategy that we’ve put out there. And frankly, we are able to fully fund the commercial bank’s loan growth for the year. And we would expect that we would continue as we head into 2019 as we’re going to stay very close to our clients in this changing environment.

And I guess, as a follow-up on the expense side, I just want to confirm what your guidance implies in terms of full-year ‘19 total expenses, including MBFI. If you look at your guidance for standalone, it implies about $3.9 billion, assuming 1% organic growth. And then, if we add in consensus numbers for MB expenses and then adjust for 50% of the cost saves of 255, I come out to about $4.35 billion. I want to see if that's fair to assume.

Well, at this point, I really don’t want to comment on the MB acquisition. Obviously timing of the closing will play a role, but our assumptions have not changed in terms of our cost saving assumptions. By the end of year one, we assume that all 100% of cost savings will be realized such that we go into the year two with full benefit of those. In terms of ours, we’re pretty clear on what we expect from the adjusted base. So, that approximately 1% type expense that we discussed last fall still holds in terms of what we expect from the standalone.

I wanted to ask you about this middle market expansion into California and Denver and Dallas. I mean, these are all areas where there are already existing competitors and people providing these services. But, what are we adding into this process that gives us the competitive advantage as we expand our core markets into these areas?

So, Marty, first of all, I think we already have a competitive advantage within the markets in which we’re operating, and I think that we’re proving that out. A number of the NorthStar investments that we've made, the acceleration that you’ve seen in our middle-market business this year. We’ve had three linked quarters of acceleration there of over a $1 billion of middle-market growth in 2018 and we continue to complement that with additional capital markets treasury management capabilities. Those capabilities, along with our value proposition, we found that we've been very successful in California and expanding into those markets. We know those markets well already. However, one of the key parts to executing effectively here is to have very high-quality, talented, experienced leadership and bankers in those markets. We’re able to assemble a really first-class team in California, and we’re already seeing some very positive momentum there. We already have a leader for Texas that will be coming onboard here shortly. We expect to duplicate that same process and execute there. I do have a history in Texas and know that market pretty well. We will be able to leverage that. And the Denver market, we also operate in today. Again, we have insights and we will replicate that in those markets. I don’t have any reason to believe we can’t deliver our middle-market value proposition, like we have in 2018 in these expansion markets.

This is Greg. I want to add that we have also expanded into Greenville, South Carolina, which is outside of our usual area, and we have a St. Louis middle market operation. Both of these have performed exceptionally well. A significant factor is finding the right talent that understands the market, combined with our go-to-market strategy and product capabilities, which has been very effective for us. However, we are very selective about which markets to enter and assess the opportunities carefully, depending on finding the right leadership and talent in those areas before proceeding. I believe Lars and the team have done a fantastic job. We have achieved considerable success and will continue to approach these opportunities with caution. Overall, we are very pleased with the results so far.

One last thing I'd tag on, if you looked at our California middle market portfolio today, this is not about buying into participations. This is about true lead relationships where we have close relationships with management.

As a follow-up, are we attracting talent from larger money-centered banks or super-regional banks involved in this process? In light of our exit from certain markets, we need to ensure that our growth is not just due to selection bias. We want to achieve genuine growth that will withstand potential stress periods, rather than experiencing a decline later on.

So, first of all, we're not taking our eye off the ball of our core franchise. We have a lot of focus; we put a very seasoned leader into a position leading middle market for our Company, he spends a lot of time on our core franchise. I couldn't feel better about our positioning there. And we're seeing the outcomes of these successes in our core franchise. You can see it in our credit metrics, you can see it in the growth, and you can see it in the talent. As I speak to California and beyond, the talent tends to come from your larger regional banks, but as we continue to expand into Texas, I would expect that we would continue to build out that same type profile, individuals that have experience in middle-market, individuals that understand not transactional but really core relationship banking and how to leverage the capabilities that we've invested in, in NorthStar and beyond.

In your opening remarks, you mentioned that leverage loans were down 5%. Could you provide an update on the size of the leverage lending exposure and how you manage that risk?

Good morning. This is Frank. Our balances actually are down 55% over the last three years, and our commitments are down 46%. And as we’ve stated before, we took an early, I think a very appropriate look at reducing risk in that portfolio. I also will add that our criticized assets in the leverage book are down 25% over the last three years. Our credit exposure today is just over $3 billion. We control that with a number of metrics, and we feel pretty good about it. I also will caution you, when trying to compare leverage portfolios, it's very difficult to do that because there's no standard definition. So, everybody has their own definition. But, we believe ours is a conservative definition. It has a pretty small overall concentration relative to our total book. So, we’ve been very assertive over a longer period of time in producing the exposure given what we anticipated with potential rising rates and where we’re in the cycle, and we think that’ll pay off if we hit a downturn here over the next 12 to 24 months.

And I think, Peter, the change compared to last quarter as well as last year also gives you some indication going forward as we would expect our origination elsewhere will exceed originations obviously in leverage lending.

We’ve recently achieved significant success in our wealth and asset management division, as well as in identifying strategic franchise opportunities that can benefit our client base and enhance our portfolio. We will continue to assess these opportunities as they arise. It’s essential to find the right opportunity that aligns with our business model and the regions in which we operate. If we identify such a match that we believe would be advantageous for Fifth, we will consider pursuing those opportunities. However, I want to emphasize that our top priority is finalizing the MB Financial acquisition. We won’t engage in any activities that could distract us from successfully achieving that goal. We are being very careful about our current commitments and our path forward.

Yes. Peter, I think, the reference to MB is important because MB Financial clearly expands our commercial reach. We’re adding relationships significantly with MB to existing relationships. So, if there are any opportunities there with respect to certain products and services that would benefit that expanded commercial client base, we would take a look at it.

Great, thanks. Good morning. You all seem very optimistic about the commercial growth in the expansion markets. When considering the commercial growth specifically in 2019, how much of the 5% growth comes from these expansion markets and the new lenders they’re hiring, compared to the existing portfolio?

Yes. So, Ken, without giving specifics about the contributions of each of these groups, I would tell you this. First of all, we’re getting substantial growth out of our existing franchise. That’s the key driver for our Company in 2018 and will be for 2019. If you look at the Midwest, Indiana continues to be a standout but the southeastern states continue to grow at a very attractive rate. We really feel good about our ability to continue that momentum into 2019 and for the expansion initiatives for us to be additive to that strength in 2019 and beyond.

So, for the full year, we expect average total commercial loans to increase approximately 5% compared to 2018. Average and end-of-period consumer loans were flat, both sequentially and compared to the year-ago quarter as growth in our credit card portfolio and unsecured personal loans was offset by declines in home equity lending and residential mortgages.

I know you guys have been trying to grow the credit card and kind of all other consumer book. Can you just remind us the targeted customer base there and how big these portfolios get? They are obviously quite small, but they do kick off a higher yield and little bit higher charge-off. Just remind us the strategy there and any kind of concentration limit that you might put in place?

Yes. Matt, our target audience continues to be prime, super prime type of range, so there is no change with respect to the credit exposure profile. With respect to targets, concentration targets, as you said that these levels are very low, and as a matter of fact, as you know, our total consumer book has been declining and now we've been trying to achieve a better balance between consumer and commercial exposures. Credit cards have a significant room to grow. We are little over $2 billion; unsecured loans do as well. We do have as you may remember, something, $2 billion type of target with respect to the GreenSky loans but these levels do not create any concerns with respect to exposure limits in unsecured consumer lending, given especially the profile of the borrowers.

Thank you everyone for your interest in Fifth Third. If you have any follow-up questions, please feel free to contact the IR department, and we’ll be happy to assist you.