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Edited Transcript of FITB earnings conference call or presentation 19-Jul-18 1:00pm GMT

Q2 2018 Fifth Third Bancorp Earnings Call

CINCINNATI Jul 26, 2018 (Thomson StreetEvents) -- Edited Transcript of Fifth Third Bancorp earnings conference call or presentation Thursday, July 19, 2018 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gregory D. Carmichael

Fifth Third Bancorp - Chairman, President & CEO

* James C. Leonard

Fifth Third Bank - Executive VP & Treasurer

* Lars C. Anderson

Fifth Third Bancorp - Executive VP & COO

* Sameer Shripad Gokhale

Fifth Third Bancorp - Senior Director of Investor Relation

* Tayfun Tuzun

Fifth Third Bancorp - Executive VP & CFO

* Frank Forrest

Fifth Third Bancorp - Executive VP & CRO

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Conference Call Participants

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* Christopher William Marinac

FIG Partners, LLC, Research Division - Director of Research

* Erika Najarian

BofA Merrill Lynch, Research Division - MD and Head of US Banks Equity Research

* Geoffrey Elliott

Autonomous Research LLP - Partner, Regional and Trust Banks

* Gerard S. Cassidy

RBC Capital Markets, LLC, Research Division - Analyst

* John G. Pancari

Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst

* Kenneth Michael Usdin

Jefferies LLC, Research Division - MD and Senior Equity Research Analyst

* Matthew D. O'Connor

Deutsche Bank AG, Research Division - MD

* Michael Lawrence Mayo

Wells Fargo Securities, LLC, Research Division - MD, Head of U.S. Large-Cap Bank Research & Senior Analyst

* Robert Scott Siefers

Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research

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Presentation

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Operator [1]

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Good morning. My name Caitlyn, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fifth Third Bancorp Second Quarter 2018 Earnings Call. (Operator Instructions).

Sameer Gokhale, Head of Investor Relations, you may begin your conference.

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Sameer Shripad Gokhale, Fifth Third Bancorp - Senior Director of Investor Relation [2]

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Okay. Thank you, Caitlyn. Good morning, and thank you all for joining us. Today, we'll be discussing our financial results for the second quarter of 2018. This discussion may contain certain forward-looking statements about Fifth Third pertaining to our financial condition, results of operations, plans and objectives. These statements involve risks and uncertainties that could cause results to differ materially from historical performance and 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 to and would not expect to update any such forward-looking statements after the date of this call.

Additionally, we will also be discussing the proposed merger of MB Financial, Inc. and Fifth Third Bancorp. This discussion may contain certain forward-looking statements about Fifth Third, MB Financial or the combined entity pertaining to our financial condition, results of operations, plans and objectives. These statements also involve risks and uncertainties that could cause results to differ materially from historical performance and these statements. We've identified some of these factors in our forward-looking cautionary statements at the end of the earnings release and in other materials, and we encourage you to review them. We undertake no obligation to and would not expect to update any such forward-looking statements after the date of this call.

The subject matter discussed today is addressed in the proxy statement and prospectus filed with the SEC. We urge you to read it because it will contain important information. Information regarding the persons who may, under the rules of the SEC, be considered participants in the solicitation of shareholders of MB Financial, Inc., in connection with the proposed transaction, is set forth in the proxy statement and prospectus filed with the SEC.

Reconciliations of non-GAAP financial measures we reference during today's conference call are included in our earnings release, along with other information regarding the use of non-GAAP financial measures. A copy of our most recent quarterly earnings release can be accessed by the public in the Investor Relations section of our corporate website, www.53.com.

This morning, I'm joined on the 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.

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Gregory D. Carmichael, Fifth Third Bancorp - Chairman, President & CEO [3]

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Thanks, Sameer, and thank all of you for joining us this morning. Earlier today, we reported second quarter 2018 net income available to common shareholders of $563 million and earnings of $0.80 per share. Included in these results are several items noted on Slide 4 of the investor presentation. On a net basis, these items had a positive impact of $0.17 on reported earnings per share. Excluding these items, our core EPS was up approximately 11% on a sequential basis and up 37% year-over-year.

Our financial results for the quarter were strong and reflected our continued focus on driving profitable revenue growth, managing expenses prudently and disciplined underwriting. I am also pleased that we are realizing the benefits of several initiatives we implemented under project NorthStar. Before discussing the highlights of the quarter, I would like to make a few observations about the macroeconomic environment. Recent economic data has shown acceleration in GDP growth. Labor markets are strong and the unemployment rate is still very low, but the resulting skilled labor shortage may constrain GDP growth. Recent discussions about tariffs have also created uncertainty. As many of you know the U.S. economy is now in the second longest period of economic expansion on record. It is unclear how long the positive momentum will continue. So in the current economic environment, we believe that it is prudent to remain cautious and to maintain our disciplined focus on credit quality and profitability.

Moving on to our quarterly results, our financial performance for the second quarter was strong and continued to reflect the benefits of actions we undertook under project NorthStar. Commercial loan originations were strong, even though we remained focused on disciplined underwriting and client selection during the quarter. Commercial middle-market originations were up over 25% year-over-year, to the highest levels in years, while corporate banking originations increased by 28% year-over-year, to a record high during the quarter. This strong growth partly reflects the benefit of our Commercial Client Experience Initiative, or CCEI, which we implemented earlier this year. You may recall that CCEI was an end-to-end process redesign initiative. Recent results show that we have reduced cycle times in middle-market lending by 30% to 35% exceeding our original expectations. The reduced cycle times have allowed our commercial relationship managers to become more productive helping drive very strong high-quality growth in loan originations.

Average credit card balances were up a very healthy 7% year-over-year, while card purchase volume was up 10% year-over-year. One of our initiatives under project NorthStar was to deploy advanced analytics in the credit card business in order to improve activation and usage rates. We have already started seeing the benefits, as growth in our credit card purchase volume is significantly outpacing competitors in our footprint. This is a meaningful shift from a year ago when we lagged our peers.

Fee income reflected very strong growth in corporate banking revenue and a strong deal pipeline as we entered the second quarter. Total corporate banking revenue grew 36% sequentially to $120 million. During the quarter, we have begun to see the benefits of the implementation of Vision 2020, which was also part of NorthStar. Vision 2020 is the digital redesign of our financial risk management interface, which allows our commercial clients to interact in a real-time environment and make better decisions using market data. I believe that our continued focus on offering the right products, executing well and delivering on strong customer experience is helping to drive these results. A great example is Coker Capital, the health care M&A advisory firm, which we acquired in February. I am very pleased with our corporate banking results, and we expect to build on this momentum going forward.

We recently completed the implementation of our new mortgage loan origination system across all of our channels. The new mortgage loan system significantly improves our capacity to originate mortgages and enhances the efficiencies of our processes. Although the mortgage business is currently under pressure, due to very tight gain on sale margins and low inventories, we expect to see the benefits of our new loan origination system over time.

During the quarter, we expanded our wealth and asset management tools with the launch of OptiFi, an automated investment advisory platform. OptiFi will enable Fifth Third to build upon our established advisor-led approach and offer an integrated digital experience.

One of the areas we talked about at our Investor Day was the use of enhanced analytics across our bank, including the deployment of geoscience capabilities to help optimize our branch network. In the second quarter, we leveraged these newly developed analytical capabilities to evaluate our physical branch network. This evaluation supported a 3-year plan, which will result in the closure of approximately 100 to 125 branches, mostly in legacy slow-growth areas, while opening roughly the same number in higher-growth locations with more attractive demographics. We believe this plan is a right long-term strategy to increase households and further support revenue and deposit growth. We continue to enhance our digital capabilities, but believe the physical branch is still relevant and plays an important role in giving customers an integrated banking experience. As we strategically close branches, we will continue to invest in our digital capabilities. We're already seeing positive results from our digital investments.

On the consumer front, new checking account production volumes through digital channels are up approximately 50% year-over-year. Additionally, 54% of our total consumer deposits are made through our mobile and digital ATM channels and nearly 2/3 of all customer transactions are now completed digitally. We're also seeing substantial benefits on the commercial side of the house. We recently launched a managed payables solution and an advanced electronic FX platform. In addition, we continue to see strong enrollment growth in our commercial portal. Although we have primarily focused on our digital capabilities in footprint, our architecture is structured to give us the flexibility to expand outside our current footprint. Our digital transformation efforts have received a significant amount of industry recognition. I was pleased that Tim Spence, who heads our Payments, Strategy and Digital Solutions teams, was recently named Digital Banker of the Year by the American Bankers Association. This award was well-deserved for Tim's efforts in leading Fifth Third's digital transformation.

As I touched on earlier, our focus on managing expenses continues, while we invest for future growth. During the second quarter, we completed another phase of workforce reductions. These reductions were primarily concentrated in back office and support functions, and we incurred a $19 million charge related to severance expense. We expect the reduced headcount to generate an additional $80 million in expense savings over the next 12 months. Although these reductions involved difficult decisions, we believe they were the right decisions for our bank, as they not only reduced expenses but also resulted in more streamlined processes across our businesses.

Turning to credit quality, our results continue to reflect the benefit of actions we took to reduce volatility of credit losses and to improve the resiliency of our balance sheet. In 2016 and 2017, we exited $5 billion of loans that did not meet our risk or return requirements. We announced this in 2016 as part of our balance sheet optimization goal within NorthStar. As we have exited these loans and remained focused on disciplined client selection, we have continued to see an improvement in key forward indicators of credit quality. Our criticized asset ratio decreased significantly to 3.87% from 4.83% in the first quarter and 5.5% in the second quarter of 2017. We believe that our criticized ratio has moved from one of the highest in our peer group to one of the lowest over the last 2 years. This improvement should bode well for us, especially when the economic cycle turns.

As you can see from these highlights, our NorthStar initiatives are progressing very well and we are seeing the benefits in our results, we expect most of the remaining initiatives to be executed by the end of this year. This time line is well-aligned with our plan to integrate MB Financial as the transaction closes.

During the second quarter, we received the results of our CCAR submission, and we're very pleased with the outcome. As expected, we received a non-objection to our capital plan, allowing us to increase our dividend by 33% and increase capital deployment for share repurchases by 42% compared to last year's CCAR submission. We view the non-objection as very positive, and we are pleased that we are allowed to continue to return capital to our shareholders without waiting for response to our upcoming resubmission pro forma for MB Financial. We continue to make good progress towards the close of MB and have assembled a talented and experienced team from both companies that move forward with our integration plan. Tayfun will provide additional details on our progress.

One of the key areas of focus is on employee and customer retention. As I mentioned when we announced the transaction, Mitch Feiger, the CEO of MB Financial, will continue as Chairman and CEO of the combined franchise in Chicago. Several members of Mitch's current leadership team will lead the business going forward, complemented by members of the Fifth Third team in Chicago. We have identified specific roles for these individuals and the majority of them will report directly to Mitch. We believe that retaining talented leaders from both organizations will serve to help both employee as well as customer retention. We are maintaining regular communications with employees from both companies and are also conducting customer listening sessions on an ongoing basis. The listening sessions are meant to address any questions or concerns that customers may have. I am pleased that we have seen minimal employee or customer disruption since we announced the acquisition. With the organization structure in place and the right team members to lead the integration efforts, we are confident that we'll be able to realize the cost savings we announced in May.

At the time of the announcement, we intentionally excluded revenue synergies when discussing the financial impact of the acquisition. Based on our current analysis, which is still ongoing, we expect to achieve between $60 million and $75 million in pretax income from revenue synergies by year 3. We intend to update you with additional details on these benefits between now and closing. A larger part of these revenue synergies is in our combined Commercial Banking business. We intend to realize these synergies by leveraging MB's capabilities in core middle-market ABL and leasing across our footprint. We also plan to expand business relations with current MB commercial customers in Chicago, by offering our more comprehensive set of capital markets and treasury management products and services. With the addition of revenue synergies, we expect the IRR from the transaction to increase an additional 150 to 200 basis points and a tangible book value earn back decrease from 6.8 years to 5.9 years. We continue to believe that the economics of this transaction are very compelling and look forward to sharing our progress with you over the course of the year. I'd like to once again thank our employees for their hard work, dedication and for always keeping the customer at the center, which is evident in our financial results. We're pleased to have recently received the validation of our efforts from 2 separate independent third parties. First, Kiplinger's just named Fifth Third the best regional bank and runner-up for the best private bank across the entire U.S. based on the strength of our offerings. We're the only bank mentioned in both categories. And our decision scientist team won the 2018 special achievement in geosciences award, which recognizes organizations across the globe for making significant advancements in the scientific field of geosciences. We received this award for the innovative work related to our branch network analytics. I was pleased we were again able to deliver strong results and we remain on track to achieve our NorthStar targets.

With that, I'll turn it over to Tayfun to discuss our second quarter results and our current outlook.

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Tayfun Tuzun, Fifth Third Bancorp - Executive VP & CFO [4]

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Thanks, Greg. Good morning, and thank you for joining us. Let's move to the financial summary on Slide 4 of the presentation. As Greg mentioned, during the quarter, NIM expansion, strong commercial loan originations, diligent expense management and significant improvement in key credit quality indicators reflected the progress we have made to enhance our financial performance while maintaining the resiliency of our balance sheet. Reported results were positively impacted by the items noted on Page 1 of our release. The most significant item was the $205 million pretax gain from the sale of the Worldpay shares. We believe the timing of this sale and the expected return of capital via buybacks in the coming quarters will be rewarding for our shareholders, given the recent trading range of our stock. The remaining unrealized gain in our Worldpay stake is approximately $400 million based on their current stock price. Our ownership percentage is about 3.3%, and at this level, we continue to use the equity method of accounting. The sale also generated $120 million in incremental pretax TRA benefits to be recognized over 15-plus years. The gain, along with an $11 million positive pretax benefit from GreenSky's IPO, was partially offset by a $30 million branch network optimization charge, $19 million in pretax compensation expense primarily related to our workforce reduction, a $10 million pretax charge related to the Visa total return swap and a $10 million pretax contribution to the Fifth Third Foundation. Excluding these items, our underlying core ROA and ROTCE metrics continue to substantially improve. Core ROA of 1.33% improved 10 basis points sequentially with core ROTCE of 14.6% improving 1.3% from our adjusted first quarter results.

Moving to Slide 5. During the second quarter, average total portfolio loans were flat compared to the first quarter of 2018. Growth in C&I and personal loans was offset by decreases in home equity loans and commercial leases. Commercial loan growth of 1% was driven by strong origination activity in both middle-market and large corporate loans. As Greg mentioned previously, our corporate banking originations this quarter were the highest ever and commercial middle-market originations were the highest in years. However, payoffs near the end of the quarter were elevated, which resulted in slightly slower-than-anticipated loan growth for the quarter. Much of the paydown activity was the result of clients tapping the capital markets, and we were able to capture capital markets fees associated with those paydowns. Assuming the rhetoric around trade war subsides, we expect to achieve our previously discussed loan growth targets for the year.

On the topic of tariffs, it is still too early to tell whether they will have much of an impact on our clients' businesses. Our discussions with them indicate that they intend to pass the higher costs on to their customers, but it is unclear whether they will be able to achieve a complete offset, which may affect their profitability and growth plans. We will continue to monitor the situation closely.

Average C&I balances were up 1% or approximately $510 million compared to the first quarter of 2018 and were up 2% or approximately $690 million year-over-year. The sequential increase in average C&I balances was partially offset by a 3% decline in commercial leases. We expect commercial leases to continue to decline another $150 million through the end of the year. This reflects our goal to decrease our exposure to non-relationship-based leases that have historically experienced significant fluctuations in asset values.

Similar to prior quarters, price competition in commercial lending remains aggressive. We are continuing to focus on striking an appropriate balance among growth, risk management and profitability. Average commercial real estate loan balances were flat sequentially in the second quarter with mortgage down 1% and construction up 2%. We will continue to maintain a cautious approach in commercial real estate lending, particularly in certain segments of multifamily, given where we are in the cycle. We currently expect our end-of-period total commercial portfolio to grow by about 3% sequentially in the third quarter. For the full year, we expect the portfolio to grow by 4%, including the impact of the planned runoff of our national leasing business.

In Consumer, average loans were down 1% sequentially and flat year-over-year, but were up 2% year-over-year, excluding autos. Auto loans were down 5% year-over-year, reflecting the ongoing impact of our decision to curtail originations and redeploy capital elsewhere. The rate of decline in the auto portfolio should continue to slow as we expect originations to increase to about $4 billion in 2018 from $3.7 billion in 2017. Higher origination levels reflect the more attractive returns we've been seeing so far this year.

Average Residential Mortgage loans were flat sequentially and up 1% year-over-year with continued balance sheet retention of jumbo mortgages and ARMs. Separately, we acquired a $2 billion servicing portfolio to be on-boarded in the third quarter, bringing the total acquired servicing portfolio to $14 billion since the beginning of last year.

Our average credit card portfolio was flat sequentially, but balances grew by 7% year-over-year, as we are starting to see the benefits of NorthStar. We expect card balance growth in the mid- to high single digits for 2018.

Personal and other consumer loans increased 8% sequentially to $1.7 billion. This quarter, we also launched a new digital lending enhancement that allows our customers to apply for a loan on our mobile app and receive funds almost instantly. We believe that we are one of the only banks to offer this.

In the third quarter, we expect total end-of-period consumer loan balances to be relatively flat compared to the second quarter. For 2018, we expect end-of-period loan growth of approximately 1%, reflecting continued mortgage origination weakness. Excluding indirect auto loans, we expect consumer loan growth of about 2%.

Our average investment portfolio increased 1% in the second quarter as market dynamics led to a few opportunistic purchases. We expect to maintain our portfolio balance at roughly the same level in the third quarter.

We had solid deposit performance and household growth in the second quarter. Average core deposits were up 1% sequentially. An increase in interest-bearing commercial and consumer account balances was partially offset by lower commercial demand account balances. As is typical in a rising-rate environment, we continue to experience deposit migration from demand deposits to interest-bearing accounts. Overall, deposit markets have been very competitive, particularly for operational commercial deposits. Despite the environmental pressures, we believe we have an opportunity to steadily grow the consumer book, leveraging our recent success in analytical-driven direct marketing. In addition, over the long term, our decision to open new branches in high-growth markets will enable our retail franchise to support a higher deposit growth rate. From a profitability perspective, these new branches will be more efficient as they will be highly automated, smaller in size and require lower staffing levels than the branches we are planning to close.

Taxable equivalent net interest income of $1.024 billion was up $25 million or 3% from the first quarter, reflecting higher short-term market rates, a higher day count and growth in middle-market C&I loans. The NIM increased 3 basis points from the first quarter to 3.21% and has expanded 20 basis points on a year-over-year basis. The sequential improvement was primarily driven by higher short-term market rates and growth in higher-yielding commercial loans, partially offset by a higher day count and incremental commercial deposit pricing pressure, as I mentioned earlier.

Our cumulative beta, leading up to the June 2018 Fed hike, was 29% with consumer in the low 20s and commercial in the high 40s. The March rate hike resulted in a beta of approximately 45%, and we expect the June rate increase to result in a beta of approximately 50%. We expect incremental increases in deposit betas with additional future rate hikes. The NIM in the third quarter of 2018 should be flat from the second quarter, despite a 2 basis point negative impact of day count. We expect full year 2018 NIM to be between 3.2% and 3.22%, including the impact of a September rate hike. This slight change in our outlook from last quarter reflects the expectation of increased deposit betas. Embedded in our forecast is about a 10 basis point increase in interest-bearing deposit rates in each of the next 2 quarters. We expect our third quarter net interest income to be up approximately between 1% and 2% sequentially to $1.04 billion, which is largely a function of expected commercial loan growth and day count. For the full year of 2018, we currently expect NII to grow by 7% from the adjusted 2017 NII to approximately $4.12 billion. Excluding the impact of the noncore items, noninterest income in the second quarter increased 3% sequentially. The improvement was driven by a record quarter in Corporate Banking revenue and solid growth in card and processing revenue, partially offset by a seasonal decrease in wealth and asset management revenues. Mortgage banking net revenue of $53 million was down $3 million sequentially. Originations of $2.1 billion were 35% higher than the first quarter, but the second quarter gain on sale margin at 166 basis points was tighter than we expected and 23 basis points lower compared to the first quarter. We expect margins to continue to be tight during the remainder of the year. During the quarter, approximately 75% of our origination mix consisted of purchase volume with 2/3 of our originations sourced from the retail and direct channels and the remainder through the correspondent channel.

Sequential growth in corporate banking revenue of $32 million, or 36%, exceeded our previous guidance of a 20% to 25% increase. The improvement was primarily driven by strong, broad-based capital markets revenue growth, led by corporate bond fees and loan syndication revenue. With the rollout of the North Star initiatives, we believe we have the right long-term strategies in place to generate sustainably higher growth in corporate banking revenue in the future. Our solid pipeline of deals as well as the impact of the strategic investments and acquisitions should help us generate corporate banking fees between $110 million and $120 million in the third quarter even as it tends to be a slower quarter in the capital markets and, of course, subject to market conditions.

Deposit service charges remained unchanged from the first quarter. Card and processing revenue was up 6% sequentially, reflecting seasonally higher credit and debit transaction volume, partly offset by higher rewards expense. Results in our credit card business reflect the benefit of continued investments in card analytics driving faster growth compared to the industry. Total Wealth and Asset Management revenue of $108 million was down 4% sequentially, primarily driven by seasonally strong tax-related private client service revenue in the previous quarter. Year-over-year growth in Wealth Management was 5%. For the third quarter of 2018, we expect fees to be about $600 million or up approximately 6% from adjusted noninterest income in the second quarter. For the full year of 2018, we continue to expect fees to be approximately $2.35 billion.

We remain focused on disciplined expense management while continuing to invest for revenue growth. Reported noninterest expenses decreased 1% sequentially. Excluding the one-time items recognized in both quarters, expenses were down 3% and lower than our guidance for a 2% decline. Third quarter expenses are expected to be down another 1% from the reported second quarter level, even though we expect to invest more in marketing to support household growth. Our direct marketing efforts have been very successful and have driven year-over-year household growth of 4%, generating IRRs significantly higher than even our most optimistic assumptions. Leveraging this success, particularly in our high-growth southeastern markets, we will continue to invest in additional marketing efforts. Close to 1% of our expense growth in 2018 is expected to come from the increase in our marketing budget. In addition to higher marketing expense, we also expect to have higher incentive compensation expense directly tied to performance and elevated business activity. This increase in marketing expense should be partly offset by reduced compensation expenses related to the headcount reduction. This dynamic reflects our desire to achieve expense saves to invest in revenue growth opportunities in all business lines. The reduction in compensation expenses will start impacting our run rate in the third quarter with a greater impact in the fourth quarter and beyond. At this time, our expense guidance range for 2018 remains the same as last quarter adjusting for the noncore items disclosed in our earnings release.

Our adjusted efficiency ratio for the second quarter was 63%. Excluding the low-income housing amortization expense, which all peers reflect in their tax line, our efficiency ratio was 60%. We expect our efficiency ratio to continue to decline in the second half of this year. For the full year of 2018, we expect it to be slightly above 60%, excluding the impact of low-income housing amortization expense. Of course, in 2020 and beyond, the combination of the NorthStar outlook and the MB Financial acquisition significantly changes the direction of our efficiency ratio. Wrapping up the expense and revenue discussions, I want to reiterate that we expect to achieve positive operating leverage for the year as well as for the last 2 quarters of the year.

Second quarter credit results continued to follow a positive trend reflecting the impact of deliberate actions that we executed to reduce high-risk exposures during the past 2 years and an ongoing emphasis on disciplined client selection as a credit risk management tool. The criticized assets ratio, a key leading indicator of credit quality, continued to improve. At the end of the second quarter, criticized assets declined $562 million sequentially with the criticized asset ratio decreasing to 3.87% from 4.83% last quarter, its lowest level in almost 20 years. Net charge-offs were $94 million or 41 basis points, up 5 basis points from the first quarter of 2018 and up 13 basis points from last year. Commercial charge-offs were 34 basis points, up 13 basis points from the first quarter and up 17 basis points year-over-year. Consumer net charge-offs of 52 basis points were down 8 basis points sequentially and were up 6 basis points year-over-year.

Total portfolio nonperforming loans and leases were $437 million, down 28% from last year and down 3% from the previous quarter. The sequential decrease was primarily due to a 35% decline in C&I NPLs. As a result of the historically low criticized assets and low level of NPLs, the reserve ratio declined 7 basis points to 1.17%.

As we remind you every quarter, the current economic backdrop continues to support a relatively stable credit outlook. We nevertheless caution you that we could potentially experience some upward pressure in the future as we are generally in a very benign credit environment. Having said that, for the second half of the year, we expect both our charge-off ratios and dollar charge-offs to be below the first half numbers.

Capital levels remained very strong during the second quarter. Our Common Equity Tier 1 ratio was 10.9%, up 9 basis points sequentially, reflecting the partial sale of our remaining Worldpay stake. Our tangible common equity ratio, excluding unrealized gains and losses, increased 19 basis points from last quarter to 9.33%. During the quarter, we initiated and settled a $235 million share repurchase, which concluded our 2017 CCAR plan. We also raised our common dividend by $0.02 during the quarter to $0.18 per share. As Greg mentioned, we are very pleased with the CCAR 2018 results including our ability to continue to return capital to shareholders under our original CCAR submission, while we resubmit our capital plan to include MB's results. At this time, we are waiting to hear from the Fed regarding the details associated with the resubmission process. Our near-term and long-term capital targets remain the same as before.

At the end of the second quarter, common shares outstanding were down almost 7 million shares or 1% compared to the first quarter and down 61 million shares or 8% compared to last year's second quarter. Book value and tangible book value were up 8% and 7% from last year, respectively.

With respect to taxes, our second quarter rate of 15.5% was impacted by the Worldpay gain and other items disclosed in our release. Excluding these items, our tax rate was approximately 13.3%. We expect our tax rates for the full year to be in the 16% to 16.5% range. Excluding the items that are specific to 2018, we would expect our long-term tax rate to be in the 15.5% to 16% range.

Slide 13 provides an update on the primary NorthStar focus areas we discussed at Investor Day, our progress in implementing those initiatives and the remaining work we have left to do between now and the end of 2018. As Greg discussed previously, we expect to be substantially complete with the work prior to the acquisition closing and conversion. In fact, as you heard from him earlier, we have already begun to see substantial benefits from implementing several of these initiatives across middle-market loans, capital markets, credit card analytics and credit quality improvement. Recall that last quarter, we revised our fourth quarter of 2019 ROA and ROTCE targets to reflect our confidence in retaining the vast majority of the benefits from the 2018 tax legislation. During our announcement of the MB acquisition, we further raised our fourth quarter of 2019 targets to reflect the expected impact of the additional cost reduction initiatives we announced on our last earnings call. The completion of the remaining NorthStar implementation work this year aligns well with the timing of the MB Financial integration. One of our key strengths as an organization is the ability to execute against our goals as we have demonstrated over the last 2.5 years. Given the number of items in our line of sight that are expected to positively impact our results over the next 2 years, including the MB acquisition, we simplified our financial targets to provide guidance for the full year of 2020. We believe this will provide the most appropriate and informative view of our expected outcomes from all activities. Based on our current forecast and given the assumption that MB merger closes in the early part of 2019, we expect to achieve an ROTCE of 18-plus percent and ROA between 1.55% and 1.65% and an efficiency ratio in the low 50s range, excluding the LIH expense for the full year of 2020.

Slide 14 provides more detail on the expected financial benefits of additional actions I touched on briefly. As Greg mentioned in his remarks, we are implementing a comprehensive plan to redesign our retail branch network by reallocating our resources to higher-growth markets. Utilizing the results of our proprietary technology to assess the health of our branch network across thousands of dimensions, we plan to open 100 to 125 branches predominantly in the Southeast and close 100 to 125 branches within our Midwest footprint, excluding MB, over the next 36 months. We expect that these actions will enable us to preserve the profitability of our retail franchise in the North and invest in the Southeast for higher household revenue and deposit growth.

During the quarter, we reduced headcount primarily in the back office and staff areas. We expect these actions to result in approximately $80 million pretax reduction in annualized compensation expenses. We are also evaluating additional expense saves in the procurement area and are using a third-party consulting firm to help during this process. We hope to share the results with you later this quarter. Combining the reduction in compensation and the work in procurement as well as other ongoing efforts, we expect to achieve expense efficiencies of between $100 million to $125 million on an annualized basis, when fully implemented. As I mentioned earlier, we intend to reinvest a portion of these savings in marketing to boost our household and revenue growth opportunities. We expect our forward-looking guidance on revenues to reflect these benefits. The impacts of these actions are all incorporated into our 2019 and 2020 performance targets. As expected, the composition of expense savings and new investments change with the market conditions and new capabilities as we develop them, but we intend to keep all of our targets at the levels we previously forecasted or better going forward.

Now that we've discussed our update on NorthStar, I want to spend a few minutes reviewing our recently announced acquisition of MB Financial with a focus on updates since the call in May. As Greg mentioned, this transaction adds significant value to our shareholders. We remain very confident in our ability to reduce expenses by $255 million reflecting the in-market nature of the acquisition. When we announced the transaction, we discussed several expected financial metrics without assuming any revenue synergies. With revenue synergies included, the economics of the transaction become even more compelling. We estimate that by the third year of the acquisition we can drive incremental annual pretax income of $60 million to $75 million based on these synergies. We plan to leverage MB's expertise in national asset-based lending and leasing for our footprint with a focus on middle-market companies. We believe we can also generate additional benefits from utilizing our larger balance sheet and leveraging our capital markets capabilities across MB's customer base. The impact of these additional opportunities on deal economics is substantial, as Greg mentioned previously.

Post announcement, we have continued to make steady progress towards completing the transaction. We have focused on finalizing the structure of the management team and organization post close, developing integration teams and retaining employees and customers. We believe we have very complementary capabilities and plan to adopt a blended approach with best practices from both organizations.

So in summary, I would like to reiterate a few points. We reported strong financial results for the quarter and the benefits of NorthStar are becoming more apparent in our performance. We shared our progress on NorthStar and remain on track to substantially complete the initiatives by the end of this year. This time line aligns well with the start of the MB integration work after the transaction closes. The economics of the MB acquisition are compelling even without revenue synergies, but we shared expectations for revenue synergies with you today to provide a more complete picture of the economic benefits of the deal. In addition, we took additional measures to reduce costs and generate significant annual savings. Today, we also announced another step towards optimizing our branch network. Over the last 2.5 years, we have communicated what we intended to achieve, set a time line for implementation and executed very effectively on those plans. We expect to continue to do so and are confident in achieving our financial and strategic objectives.

With that, let me turn it over to Sameer to open the call up for Q&A.

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Sameer Shripad Gokhale, Fifth Third Bancorp - Senior Director of Investor Relation [5]

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Thanks, Tayfun. (Operator Instructions) During the question-and-answer session, please provide your name and that of your firm to the operator. Caitlyn, please open the call up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Geoffrey Elliott with Autonomous Research.

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Geoffrey Elliott, Autonomous Research LLP - Partner, Regional and Trust Banks [2]

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It, kind of, feels as if there are a couple of changes on the outlook we referenced to expenses being at the low end of the 4.0% to 4.1% is gone then the net interest income outlook is a bit lower. I know, you touched on some of that in the prepared remarks, but can you just summarize in a nutshell what's behind those changes? What's changed since the last time you spoke on this?

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Tayfun Tuzun, Fifth Third Bancorp - Executive VP & CFO [3]

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Sure. Let me start with the expenses, Geoffrey. As we have disclosed, we've taken a couple of actions this quarter on headcount reduction, I think, you will probably see the full impact of that in the fourth quarter and obviously, we said it has an $80 million impact on our full year run-rate basis and we will see that, obviously, in 2019. But at the same time, we have increased our investments in marketing, we are seeing very good results in our retail business, we are also allocating a little bit more money into credit cards and marketing. These are direct-marketing actions that we've been developing internally with heavy analytical content, and it's impacting our household growth relative to the industry fairly significantly. So we decided to push that button a little bit harder for future revenue growth. And the procurement savings, our -- the study is going on. That probably is also going to have a broader impact in 2019. And then, relative to our performance, the activity levels, as you've heard from us in loan production and capital market, is quite high and the compensation expense for this year is a little bit higher than before. So that all resulted in us keeping the same range. But you know we are very focused on expense management and will continue to make sure that the progress there is in line with revenue growth elsewhere. In terms of NII, obviously, we've changed our outlook slightly and most of that is due to the competition in deposit markets, a little bit higher rates -- the commercial deposit markets, the migration from DDA to the interest-bearing accounts as well as just in terms of the rates paid is a little stronger, so we've reflected that in our outlook and that impacted NII. Mortgage continues to be a tough one -- the portfolio growth numbers there, so that impacted the numbers as well. Is there anything else, Jamie, that you want to add?

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James C. Leonard, Fifth Third Bank - Executive VP & Treasurer [4]

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Maybe the only other factor, Geoffrey, is that the forecast does include some of the funding activity for the MB acquisition now post announcement, which was May 21. So there are some also funding costs in there.

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Tayfun Tuzun, Fifth Third Bancorp - Executive VP & CFO [5]

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And also, I mean, related to MB, they're not much but there's some trickling costs associated with the MB transaction, whether it's the legal, et cetera. So that's also impacting the expenses a little bit this year.

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Geoffrey Elliott, Autonomous Research LLP - Partner, Regional and Trust Banks [6]

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Just following up on the NII side, you've got 3% commercial loan growth baked in for 3Q '18, that feels like quite a big pickup in pace. What, kind of, gives you confidence that you're able to deliver there and not, kind of, struggle on the NII side? Because you're not getting the commercial loan growth you were hoping for.

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Tayfun Tuzun, Fifth Third Bancorp - Executive VP & CFO [7]

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Yes, so one technical comment and then I'll turn it over to Lars to -- for him to comment on activity. Our loan growth towards the end of the quarter was a bit weaker because we had payouts that really happened at the end of the quarter. So obviously, the growth in Q3 will be on that weaker ending balance for Q2. But besides that, obviously, we're seeing good activity. Lars, you want to comment on the state of business there?

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Lars C. Anderson, Fifth Third Bancorp - Executive VP & COO [8]

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Yes, to your point, the end of period was substantially impacted by 2 things: one, we had very active and constructive capital markets that allowed us to leverage the investments we've made in our platform and investment banking and, frankly, monetize that. And that's part of what helped us lead to really exceptional capital markets record quarter. But let me remind you, we had a record quarter of production in corporate banking, we had a record quarter of growth in middle-market outstandings, one of the highest production quarters that we've had in years in middle-market banking. Our pipelines continue to be very strong. I think, a lot of the economic environment, the tax reform and other geopolitical issues are very positive and have positioned us very well. As I look at the third quarter as well as the second half of the year, I think that we're very well positioned. We selected industries, geographies, we've recruited talent and, frankly, have positioned ourselves, I think, to accelerate our growth into the third quarter and, frankly, beyond. So I have a high level of confidence that we will be able to deliver, albeit the macroeconomic environment will need to cooperate.

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Operator [9]

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Your next question comes from the line of Gerard Cassidy with RBC.

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Gerard S. Cassidy, RBC Capital Markets, LLC, Research Division - Analyst [10]

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Tayfun, can you share with us -- you look at your demand deposits, and this is similar to your peers, it's not just you folks seeing lower demand deposits on a year-over-year basis. And today, they represent about 31.6% of total deposits. Where do you think -- if we get to a normalized rate environment, say, by the end of '19, fed funds is 3%, where do demand deposits go as a percentage of total deposits? Where do they bottom out?

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Tayfun Tuzun, Fifth Third Bancorp - Executive VP & CFO [11]

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Hard to tell, Gerard, because a lot of that also depends on your activity on the treasury management side and your ability to take market share and treasury management, which some of our newly introduced products will help us to achieve. There will probably be still continued migration from -- on the commercial side, more so obviously, from demand to interest checking. Jamie, any comments there?

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James C. Leonard, Fifth Third Bank - Executive VP & Treasurer [12]

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Yes, Gerard, I would say that the DDA migration we experienced in the second quarter was perhaps more elevated than what we'll see the rest of this year, in part, because we did increase our earnings credit rates during the quarter, so the beta on the ECR was about 45%. And so that allowed and created excess liquidity for our customers that permitted them to pursue alternative investment options to help generate better income for those companies. That was predominantly in the large corporate and mid corporate space. And with that adjustment in our managed rates during the quarter, we feel really good about where our ECs are positioned competitively. And so, I would expect the migration to slow a bit as the Fed continues to raise rates. But to Tayfun's point, if the Fed continues to raise rates and we get to a 3% terminal Fed funds rate, then certainly, the DDA as a percent of the total will continue to go down, but I don't think you'll see that type of compression that we've experienced in the past year.

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Gerard S. Cassidy, RBC Capital Markets, LLC, Research Division - Analyst [13]

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Very good. And then, in the expansion into the new markets with 100 to 125 branches over the next 36 months, can you guys talk to us on the proprietary technology you mentioned, what is it? What gives you the advantage over -- obviously, you're going into markets that are going to be very competitive with other banks. What edge do you think you'll have to be able to maybe garner some market share at the expense of others?

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Gregory D. Carmichael, Fifth Third Bancorp - Chairman, President & CEO [14]

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Gerard, this is Greg. First off, on the geoscience front, some of the advancements that we've made in that area that we were recognized for, they do -- really, they do a great job of really assessing the market opportunities where best to locate that branch based on business opportunities, consumer growth, directional trends, competition and so forth. It's a very advanced model. So that gives us a high level of comfortability, when we go into these markets, where to put those physical branches. The other thing I'll mention about the branches we're putting in are very different than the branches we're closing, much more efficient branches, smaller real estate footprints, smaller square footage of the branch itself, lower staffing levels and very highly automated when we go into these markets. But if you think about what we've accomplished, we saw the Chicago, Tennessee issue with the MB Financial acquisition, we think a smart way to expand in the Southeast is to build on the franchise that we currently have there through a de novo process to repositioning 100 to 125 branches from a higher-density legacy markets where we can continue to serve our customers with less best branches and reposition them into the Southeast. We're very confident we can continue to grow households. Tayfun mentioned the marketing spend -- increasing marketing spend, we've seen some great results of our investments in marketing. When we look at household growth over the last 6 quarters, we've added net new 118,000 new households. Consumer deposits over the next 6 quarters have that grew up close to $3 billion. So we've been very successful. Our preferred banking platform is growing significantly. So we're encouraged by what we're able to accomplish. It's really about repositioning and giving our Southeast markets more opportunity to better serve their communities.

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Operator [15]

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Your next question comes from the line of Erika Najarian with Bank of America.

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Erika Najarian, BofA Merrill Lynch, Research Division - MD and Head of US Banks Equity Research [16]

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I also wanted to get some clarity in terms of your guidance relative to the deal when I compare the slides from the deal presentation and the updated slides today. So when I look back at the MBFI deal presentation, you noted 4Q '19 NorthStar targets of 16% ROTCE and ROA of 125 basis points to 135 basis points. And you mentioned that you thought that the deal would be 200 basis points enhancing to ROTCE and 12 basis points enhancing to ROA. So a little bit confused on a couple of fronts. One, you're telling us that NorthStar will be substantially complete by this year and that implies consensus with an ROTCE of 13.8% to -- and ROA of 1.25%. But you did retain your ROTCE target for the combined company and you even increased ROA range. So I guess, I'm wondering what the moving pieces are there? Is the deal going to be really the substantive catalyst to get to this range? And, sort of, what happened to those 2019 enhanced NorthStar targets?

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Tayfun Tuzun, Fifth Third Bancorp - Executive VP & CFO [17]

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Yes. So there is absolutely no change in the way we describe the deal -- the impact of the deal on our NorthStar targets. When we made the comment about the NorthStar initiatives coming to a conclusion here at the end of 2018, that comment was really related to the internal work that is going on to be able to introduce the products and services and also, the expense initiatives. But we will see the impact of that effort throughout 2019 basically leading into our end of 2019 North Star target. And assuming that the transaction closes in the early part of 2019, then the full year of 2020 clearly has all the expense benefits associated with the transaction itself. So that's it. We're not changing the impact of the North Star initiatives in terms of their timing. All we're saying is that the effort to finish the work internally, whether it's IT, whether it's organizational design or whatever, are coming to a conclusion. That was the comment. It was not meant to be a comment on financial metrics.

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Erika Najarian, BofA Merrill Lynch, Research Division - MD and Head of US Banks Equity Research [18]

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Got it. And as a follow-up question to that, your 2020 targets look better than what we saw during the deal presentation, but the stock is down 5% at the moment. And I'm wondering, the -- going back to Geoffrey's question on the NII guide, it does look like a modest step-down in terms of the NII guide, but I think some of the investors observed that you added a September rate hike. So is the market reading it correctly that you did add a rate hike in there but did downgrade the NII outlook and therefore, the step-down, on an apples-to-apples basis, is a little bit more severe? And if that's the case, is that really because of all the deposits -- the pricing dynamics that you mentioned during the prepared remarks?

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James C. Leonard, Fifth Third Bank - Executive VP & Treasurer [19]

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Yes, Erika, it's Jamie. We did pull forward, in line with market expectations, the rate hike that was previously expected in December to September in our current guide, and we did reduce the NII outlook, predominantly driven by the commercial deposit migration and costs, but also inclusive of some wholesale funding activities related to the MB acquisition. But yes, you're reading that correctly. The one item I would clarify on our forecast, however, is that we do assume in -- that the third quarter 1-month LIBOR to fed funds or OIS spread compresses from the 16-or-so basis points we experienced in the second quarter down to 8 basis points or so in the third quarter. And that's a significant assumption that we would, obviously, do significantly better, given the asset sensitivity and the C&I composition of the portfolio being heavily tied to 1-month LIBOR. But each basis point of spread there is about $1 million per quarter. So that is a significant assumption that is also in the outlook.

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Erika Najarian, BofA Merrill Lynch, Research Division - MD and Head of US Banks Equity Research [20]

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Got it. If I could just slip one more in, Jamie, you keep mentioning the wholesale funding impact. Could you give us a sense of what the full year wholesale funding impact would be as we think about the moving parts of the guidance?

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James C. Leonard, Fifth Third Bank - Executive VP & Treasurer [21]

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I would say, of the $30 million or so change in our outlook on NII, I would call it $25 million related to commercial deposits and $5 million related to wholesale funding activities.

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Operator [22]

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

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Kenneth Michael Usdin, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [23]

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A couple of just near-term questions for you. First of all, Tayfun, you talked about the third quarter on the fees, $600 million despite continued weakness in mortgage. And I think you said earlier that, that's with an expectation that corporate banking would hang in this $110 million to $120 million zone. So off of a $567 million, can you just help us understand what the nice lift will be to get you from the second to the third and that $600 million number?

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Tayfun Tuzun, Fifth Third Bancorp - Executive VP & CFO [24]

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Yes, there is a couple of other, sort of, line items in corporate. We are forecasting potentially a little bit in private equity gains here in a couple of transactions that we have. And obviously, the improvements in -- the current success in capital markets will continue. So that sort of -- there's a few other items, nothing big significant we're expecting. Pretty decent growth relative to the seasonal changes. So there's nothing more than that.

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Kenneth Michael Usdin, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [25]

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Okay. So a couple -- okay, got it. Okay. And then on the expense side also, you mentioned that for the third quarter, just from a starting point perspective, that you're expecting down 1% from the reported $1,037 million, are you expecting there to be continued also restructuring costs in there and even MBFI-related costs? I would've thought that the core expense number would be coming down more than just 1% off of a GAAP number that you just reported at $1,037 million.

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Tayfun Tuzun, Fifth Third Bancorp - Executive VP & CFO [26]

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Yes, I think, the MB Financial-related expenses are just trickling down. That is going to probably continue through the remainder of the year. There's a little bit of an increase in technology expenses into the second half of the year as -- similar to our guidance before. And then, we're also expecting continued good business activity driving these strong capital markets and strong origination levels typically result in higher performance comp-related expenses. So that's what's driving it. We're expecting -- since this headcount reduction is going to drive a more run rate number for the fourth quarter, we're expecting that to be a little bit more stronger in the fourth quarter relative to third quarter. And then, as I mentioned before, the marketing expenses, clearly, are going to drive the quarter-over-quarter change. We will be seeing a fairly sizable increase in our third quarter marketing expense relative to the second quarter marketing expense.

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Kenneth Michael Usdin, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [27]

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Okay, got it. And then one last one, just on the -- those -- the incremental $100 million or so of savings. You mentioned spending part of it on all these initiatives that you continue to have. Can you help us understand, is that like just continuous improvement type of thing, where you save another $100 million, you spend another $100 million? Or how are you expecting the Fifth Third legacy expense base to traject pass 2018, I guess?

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Tayfun Tuzun, Fifth Third Bancorp - Executive VP & CFO [28]

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We clearly are attending to achieve efficiencies through those cost savings. We're not going to use those entire savings in order to -- and invest in the business. Our guidance of an efficiency ratio in the lower 50s in 2020 clearly show that we intend to maintain a good chunk of those expense saves in our bottom line. Even excluding the MB transaction, we are expecting a pretty decent move in our efficiency ratio, which leads to the conclusion that we intend to keep a good amount of these savings. And the other thing that, I think, needs to be realized is these investments in marketing are going to have an impact on revenue growth going forward, which, obviously, also positively impacts our efficiency ratio.

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Operator [29]

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And your next question comes from the line of Matt O'Connor with Deutsche Bank.

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Matthew D. O'Connor, Deutsche Bank AG, Research Division - MD [30]

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I just want to follow-up on just the last line of conversation, as we think about expense growth in 2019 and 2020 for Fifth Third standalone. I realize, we won't see the numbers because of the deal but obviously, there is some upfronting of the investment this year, there is some cost saves coming in. You are coming off of what will be a pretty high expense growth this year. So I was hoping maybe you can shed some light on what you think the standalone trajectory of expense growth will be of Fifth Third for the next year or 2.

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Tayfun Tuzun, Fifth Third Bancorp - Executive VP & CFO [31]

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Look, I mean, I think you are right that when you look at the expenses this year with all the investment back into the company, we have seen a little bit higher expenses. We anticipate that our 2019 expense growth will be definitely below the levels that you're seeing in 2018, and we would hope that it will be meaningfully so. So the year-over-year change in total compensation expense of $80 million is close to a 2% number on our total expense base off of this year. So those types of actions are intended to slow down expense growth moving into 2019 and 2020, even before you take into account the expense saves associated with MB Financial. So it is a little bit too early to provide guidance for expenses in 2019. But as a management team, we are extremely focused in achieving a significantly lower expense growth in 2019.

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Matthew D. O'Connor, Deutsche Bank AG, Research Division - MD [32]

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Okay. Because if you take the 4% to 5% expense growth you're looking for this year layering the synergies or cost saves that you've talked about, kind of, would get you into maybe that 2% or 3% of fail over the bottom line, which I think would be both more reasonable and well received. So any further color on that down the road would be helpful. And then just separately, you read out some revenue synergies related to leveraging the MBI -- or MBFI franchise. What about potential loan run-off being quite large and commercial real estate, have some multifamily, have some indirect consumer that you guys haven't really done in the past. And I guess, you could argue either that could be synergies to introduce you guys or there might be some rightsizing of that acquired book to align to your underwriting and strategy?

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James C. Leonard, Fifth Third Bank - Executive VP & Treasurer [33]

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Yes, Matt, it's Jamie. I think, a good way to think of the revenue synergies is that it's inclusive of customer attrition, just normal branch closure type of activity. When it comes to the actual loan book coming over through due diligence and through the last 2 months of efforts, since the deal has been announced, we're comfortable with the indirect portfolio that they have coming over and maintaining, but our revenue synergies don't assume any significant changes to that book of business. The revenue synergies that are outlined on Slide 15, the first 2 categories really highlight what MB brings to the table in terms of our ability to link and leverage their products and experience predominantly in the Business Banking and ABL and leasing, whereas the next 3 categories are more of what Fifth Third brings to the table. So we just wanted to frame up where we see the opportunities on the combined business, and we're confident in our ability to drive those synergies.

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Operator [34]

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Your next question comes from the line of John Pancari with Evercore.

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John G. Pancari, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [35]

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Regarding the MBFI deal, I know you indicated so far minimal disruption in the deal. Regarding the banker lockups, I know what was asked about on the deal call and Mitch Feiger was unclear if -- Mitch was indicating that there were definite lockups or not. Were key bankers locked up? And can you give us a little bit of detail around that?

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Gregory D. Carmichael, Fifth Third Bancorp - Chairman, President & CEO [36]

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First off, it's Greg. I'm really pleased. As we get further into this transaction and discussions with MB Financial, we're extremely pleased with the talent that they have and our ability to bring together the best-in-class in our Chicago market. So part of the retention of these bankers starts with the leadership and our model in the Chicago market and how we're going to run that business starting with Mitch as the CEO of that business going forward, the senior commercial middle-market banker from MB Financial, will lead that market for us. So it starts from the retention perspective to define the leadership team which we've done and communicated out, how we're going to operate in that market, and also the combined opportunities we bring to these 2 franchises together that can be leveraged across the market and the advanced capabilities we have in capital markets and so forth with their customer base, the capabilities to leverage their ABL and equipment financing in our core middle-market on a national level. Those things, when you put together, are extremely attractive, I believe, to the MB Financial team and to the Fifth Third team. So the environment that we're creating is best-in-class to better serve our customers there and give our sales people and our teams more resources to offer into the marketplace. So that's going very well. In addition to that, and in key situations, we have provided lockdowns for those individuals through the transition and beyond to make sure that we have the right talent in place to lead the organization. But once again, I'm going to stress that key thing is our business model and combining the best of the talent in that marketplace, as I mentioned, a specific portion of the current MB Financial team will be in place from the combined perspective when we close this deal from a leadership role. So I think, net-net, we feel real comfortable. We haven't really seen any concerns in that area yet. We've worked hard to get that right. We've worked hard to communicate effectively to all the MB Financial employees as well as our own Chicago employees, which is extremely important, and we've done a nice job of thinking -- and Mitch and his team have done a fantastic job of really putting their arms around the customer base.

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John G. Pancari, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [37]

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Okay, got it. And then, on the large corporate side, you mentioned the record corporate banking activity and originations that you're seeing. What are the yields that you're seeing -- new money yields on your corporate paper that you're bringing on to the balance sheet? And then separately, what's the total size of your shared national credit balance as of June 30?

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Lars C. Anderson, Fifth Third Bancorp - Executive VP & COO [38]

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Yes, a couple of things there. First of all, what we're seeing in the corporate banking space is extremely aggressive, there's no question about it. So we're needing to be very selective. We've shared with you our industry verticals -- the new industry verticals, which we have introduced, where we tend to get outsized returns. We're not just looking at it from a credit perspective. We look at it from a total relationship perspective. That's our strategy. But I would tell you that largely, the commercial originations that we're seeing today, while they are under some pressure, largely reflect our overall portfolio that we have in our company. What we are being able to execute on again getting back to relationship is, we told you we were going to make NorthStar investments in capital markets and other capabilities, we're leveraging those successfully into that corporate banking space specifically. That's helping us to drive record level, not just corporate lending activities but also capital markets activities for our company.

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Tayfun Tuzun, Fifth Third Bancorp - Executive VP & CFO [39]

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And in terms of the coupon, John, they're, sort of, between 4% and 4.5% in terms of production. They are fairly close to what the portfolio yields are.

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Frank Forrest, Fifth Third Bancorp - Executive VP & CRO [40]

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Correct. John, the other question you had was the shared national credit balance. Our balance was actually down a couple of billion over the last several quarters, it's roughly $26 billion today. As Lars said, the vast preponderance of those credits are tied to deep relationships and not credit only. We feel very good about it. And from an asset quality perspective, the shared national credit portfolio has less than 3% criticized assets and continues to perform exceptionally well and diversifies our portfolio across the enterprise.

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Lars C. Anderson, Fifth Third Bancorp - Executive VP & COO [41]

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Yes, one thing I would just add to that is the single largest driver of our commercial loan growth this quarter was core middle-market, it was not corporate banking growth.

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John G. Pancari, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [42]

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Got it. Okay. And that SNC balance is that -- based on the newer definition, correct?

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Frank Forrest, Fifth Third Bancorp - Executive VP & CRO [43]

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Correct.

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Operator [44]

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Your next question comes from the line of Scott Siefers with Sandler O'Neill.

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Robert Scott Siefers, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [45]

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One quick question on just the profitability program you guys detailed this morning, Tayfun. I think, you guys have said total $100 million to $125 million in cost savings, although Greg you had mentioned some of the procurement stuff you guys would detail through the quarter. That latter procurement stuff, that's already included in the $100 million to $125 million?

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Tayfun Tuzun, Fifth Third Bancorp - Executive VP & CFO [46]

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Yes, that's correct.

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Gregory D. Carmichael, Fifth Third Bancorp - Chairman, President & CEO [47]

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Yes, correct.

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Robert Scott Siefers, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [48]

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So there's no new dollar amount coming out in the next 90 days or anything?

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Tayfun Tuzun, Fifth Third Bancorp - Executive VP & CFO [49]

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That's correct.

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Robert Scott Siefers, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [50]

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Okay, perfect. And then if I can -- just want to get back to the new 2020 targets for a second. I just want to make sure I'm clear. I think I still don't understand exactly what has changed from the enhanced targets back when you announced the MBFI transaction. And I guess, as I look at it, so the standalone outlook is a bit weaker, but we have the additional profitability program you guy detailed this morning. And then you guys had also detailed the revenue enhancements from MBFI. Are those the 3 changes that have taken place since?

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Tayfun Tuzun, Fifth Third Bancorp - Executive VP & CFO [51]

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Yes, with respect to the current year numbers, Scott, some of these are obviously a little bit elevated on an annual basis for 2018. Some of the incentive comp numbers, et cetera, are a little bit elevated beyond what the normal run rates would be. So these are not all negatives as we look into 2019 and 2020 and it's important to consider that. And also, in terms of year-over-year expense growth, when I was answering a previous question, the expense growth expectations into 2019 are clearly going to be below what we have here in 2018. And then, revenue growth associated with both North Star initiatives and other investments, those are all baking into our production targets -- our performance targets for the end of next year and into 2020. So all of these are -- I think, we've been consistently raising these targets as we see our performance moving up, whether it's due to some environmental factors such as tax rates or higher expectations on other efforts and then now plus MB, we are moving on to that 18-plus percent range in return on tangible capital and then we're raising our ROA guidance along with those expectations.

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Operator [52]

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Your next question comes from the line of Mike Mayo with Wells Fargo Securities.

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Michael Lawrence Mayo, Wells Fargo Securities, LLC, Research Division - MD, Head of U.S. Large-Cap Bank Research & Senior Analyst [53]

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Could you elaborate more on the increase in marketing? I think, you said it related to credit cards, but why now and which markets? And does that tie into your expansion strategy in the Southeast? And can you just confirm your expansion strategy in the Southeast is more commercial than consumer or maybe it's consumer too? Just shed more light on that, if you could.

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Tayfun Tuzun, Fifth Third Bancorp - Executive VP & CFO [54]

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One comment on the marketing. A large majority of the marketing spend, Mike, is related to the retail deposit household growth. There is a portion that goes into credit cards, but a significant amount of those dollars actually are intended to generate retail consumer deposits and household growth.

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Gregory D. Carmichael, Fifth Third Bancorp - Chairman, President & CEO [55]

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And only I would add to that outside this comment there is, we've been very successful, Mike, as we alluded to growing household. And it's really crossed not just our legacy footprint but also in our high-growth markets in the Southeast, we've been very successful. We measure everything here, as you know, and when you look at the advanced analytics put in place and where -- and how to best market our opportunities, where we get the best returns, we've tested that over the last year plus. It's worked extremely well, and there's a bigger ask there because there's a bigger outcome there, an opportunity for us. So we've decided to invest some resources -- additional resources than planned and to continue the marketing at a higher level, given the success rate that we've already had. You're seeing that in our consumer deposit growth we've had over the last 6 quarters, I mentioned earlier, and our household growth and especially, our preferred banking platform in the customer acceptance, of that platform, and what we're seeing there from a growth perspective. So that's positive. When we talk about repositioning in the Southeast, obviously, we're going to continue to invest in our commercial business, especially core middle-market extremely important to us. We're seeing -- as Tayfun mentioned and then Lars reiterated, we're seeing record performance in loan originations across our footprint but especially in those markets also. But the investments we're going to make to reposition our branch network is just thoughtful thinking about how best to serve our customers and grow our business. As you know, coming out of the crisis, we haven't invested heavily in those higher-growth Southeast markets coming off of some acquisitions, we think the smart way of doing that is being additive to those markets using some of the advanced analytics that we have to place those branches, a much smaller footprint of branch, a higher automated branch, a lower cost branch in those markets to better serve the consumer base customers there and the Business Banking customers.

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Michael Lawrence Mayo, Wells Fargo Securities, LLC, Research Division - MD, Head of U.S. Large-Cap Bank Research & Senior Analyst [56]

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And when you say those markets in the Southeast, which specific markets?

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Gregory D. Carmichael, Fifth Third Bancorp - Chairman, President & CEO [57]

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You know, obviously, the Carolinas, the Georgia- Atlanta area on Northern wedge. You've got -- you look at Tennessee and Nashville in particular, parts of Florida are where the opportunities sit for us.

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Michael Lawrence Mayo, Wells Fargo Securities, LLC, Research Division - MD, Head of U.S. Large-Cap Bank Research & Senior Analyst [58]

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So this is de novo branch expansion in states where you don't have currently branches except for Florida?

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Gregory D. Carmichael, Fifth Third Bancorp - Chairman, President & CEO [59]

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No, we have branches in all those areas I've mentioned before. We're just, once again, not level of density that we need, I think, to better serve that market and create more leverage of our products and services and marketing spend in those markets. So it just goes back to markets like Nashville, there's additional branches necessary in Nashville. If you look at Atlanta, once again, Northern wedge of Atlanta, we've got 38, 40 branches there. There's more needed to support those communities. So it's just being thoughtful how best to grow in those markets from a retail perspective and a Business Banking perspective -- is what we're looking at.

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Michael Lawrence Mayo, Wells Fargo Securities, LLC, Research Division - MD, Head of U.S. Large-Cap Bank Research & Senior Analyst [60]

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And last question on that. Just longer-term, over like 3 to 5 years, how much larger would you like consumer to in the Southeast?

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Gregory D. Carmichael, Fifth Third Bancorp - Chairman, President & CEO [61]

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I'd tell you, from a growth perspective, how are you measuring that growth, Mike, when you say how much larger, from a deposit perspective?

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Michael Lawrence Mayo, Wells Fargo Securities, LLC, Research Division - MD, Head of U.S. Large-Cap Bank Research & Senior Analyst [62]

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Consumer revenues, consumer deposits? I mean, are we thinking about doubling the share there and reallocating capital?

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Gregory D. Carmichael, Fifth Third Bancorp - Chairman, President & CEO [63]

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We would like to grow significantly. I think, we can grow significantly in those markets and take market share in the Southeast markets based on the teams we have in place, our capabilities and what we've seen with some of the advancements that we've made and our marketing capabilities and the products and services that we offer. So we think, we could take share, we can grow deposit base at a disproportionate level than our legacy markets. And we think, we're well positioned to do that. We just got to be smart about how we add to it. But it's really going to be a balanced mix.

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James C. Leonard, Fifth Third Bank - Executive VP & Treasurer [64]

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Maybe, Mike, one data point to help frame up the size of the opportunity in the Southeast, is we have roughly 300 financial centers in the Southeast today that average about $35 million per branch in consumer deposits. The rest of our franchise -- or if you look at the Midwest - we have almost 900 branches, and they average about $53 million in average deposits per branch. So it highlights the weakness of the network -- the overall network in the Southeast, and what that opportunity might look like when you're finished building up the network and what that consumer deposit book could grow to.

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Tayfun Tuzun, Fifth Third Bancorp - Executive VP & CFO [65]

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And in terms of the, sort of, if you look at it from a branch growth perspective, you're looking at growing the branches in the key South markets by approximately 35% to 40%. So that's the next 2-, 3-years' worth of expansion.

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Operator [66]

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And your final question comes from the line of Christopher Marinac with FIG Partners.

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Christopher William Marinac, FIG Partners, LLC, Research Division - Director of Research [67]

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As you expand in the Southeast with the new branches, to what extent does that influence the deposit beta? Do you have rate specials embedded as you execute these?

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Tayfun Tuzun, Fifth Third Bancorp - Executive VP & CFO [68]

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Chris, you have to realize that we're talking about a 2- to 3-year expansion. So there is -- at this point, I think, the expansion itself is not going to have an impact in this rate environment. We will update that for you as this continues because, obviously, unlike branch closings, branch openings take a little bit longer. So let us wait and how that process goes before we show you an impact on deposit.

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Christopher William Marinac, FIG Partners, LLC, Research Division - Director of Research [69]

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Sounds good, Tayfun. And can you expect any change on LCR as these next couple quarters unfold?

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James C. Leonard, Fifth Third Bank - Executive VP & Treasurer [70]

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The one -- are you asking from a regulatory standpoint or from Fifth Third specifically?

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Christopher William Marinac, FIG Partners, LLC, Research Division - Director of Research [71]

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Well really both, but I guess regulatory first would be great.

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Tayfun Tuzun, Fifth Third Bancorp - Executive VP & CFO [72]

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Well Randy Quarles' comments yesterday, obviously, have received some attention. We're just going to have to wait and see whether there are any changes associated with LCR. Within his comments, he appeared to refer to liquidity measures. We're just going to have to wait and see.

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James C. Leonard, Fifth Third Bank - Executive VP & Treasurer [73]

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And for Fifth Third specifically, the one item that you saw in the quarter is the LCR did increase as we begin to position the portfolio into greater allocation to Level 1s as we prepare for MB's balance sheet to come over, which at deal announcement we said there would be some LCR dilution from the composition of their investment securities portfolio. So we will continue to migrate ours a little bit higher in advance of a first quarter close.

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Sameer Shripad Gokhale, Fifth Third Bancorp - Senior Director of Investor Relation [74]

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Okay, well, thank you all for your interest in Fifth Third Bank. If you have any follow-up questions, please contact the Investor Relations department, and we would be happy to assist you. Thank you.

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Operator [75]

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