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Edited Transcript of FITB earnings conference call or presentation 23-Apr-19 1:00pm GMT

Q1 2019 Fifth Third Bancorp Earnings Call

CINCINNATI Apr 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Fifth Third Bancorp earnings conference call or presentation Tuesday, April 23, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chris Doll

Fifth Third Bancorp - Director of IR

* Frank R. Forrest

Fifth Third Bancorp - Executive VP & Chief Risk Officer

* 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

* Tayfun Tuzun

Fifth Third Bancorp - Executive VP & CFO

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Conference Call Participants

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* Brian D. Foran

Autonomous Research LLP - Partner & US Regional Banks

* Erika Najarian

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

* 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 in Equity Research

* Robert Scott Siefers

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

* Saul Martinez

UBS Investment Bank, Research Division - MD & Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen. This is your conference operator. At this time, I would like to welcome everyone to the Fifth Third Bancorp First Quarter 2019 Earnings Call. (Operator Instructions) Thank you.

I would now like to turn the call over to Chris Doll, Director of Investor Relations. You may begin your conference.

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Chris Doll, Fifth Third Bancorp - Director of IR [2]

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Thank you, Lori. Good morning and thank you for joining us. Today, we'll be discussing our financial results for the first quarter of 2019. Please review the cautionary statements on our materials, which can be found in our earnings release and presentation. These materials contain reconciliation to non-GAAP measures along with information pertaining to the use of non-GAAP measures as well as forward-looking statements about Fifth Third's performance. We undertake no obligation to and would not expect to update any such forward-looking statements after the date of this call.

This morning, I'm joined 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, Chris, and thank all of you for joining us this morning. Earlier today, we reported first quarter 2019 net income available to common shareholders of $760 million or $1.12 per share. Our core EPS includes a positive $0.49 impact from several items shown on Page 3 of our release. Excluding these items, adjusted first quarter earnings were $0.63 per share. Tayfun will discuss unique items in greater detail in his prepared remarks.

But the most notable items impacting our reported results were merger-related items associated with the acquisition of MB Financial, and the gain from the sale of our remaining stake in Worldpay. The sale of our final Worldpay stake during the first quarter marks the end of a chapter for Fifth Third. Since the joint venture in 2009, we have realized approximately $7 billion in pretax income for our shareholders with an additional $900 million remaining in TRA cash flows. And a new chapter for us was a successful closing of the MB Financial acquisition this quarter.

On March 22, the acquisition added nearly $20 billion in assets, 86 full-service banking centers, over 185,000 new clients and 2,600 new team members to Fifth Third. We're excited to leverage the enhanced capabilities of our company to better serve our clients. In addition to broadening customer and banking capabilities, this acquisition generates significant scale in Chicago, a market we entered nearly 20 years ago and know very well. In fact, Chicago has been our largest retail market for the last 12 years in terms of total deposits prior to this transaction. With the addition of MB's balance sheet, we will rank #2 in middle-market relationships and #3 in Retail Banking in the Chicago market. We look forward to successfully converting the majority of all the systems and processes in early May.

After the May conversion, MB customers will have access to Fifth Third's expanded products and services, including our advanced digital capabilities, sophisticated commercial and wealth client solutions, and access to our expanded network of over 50,000 fee-free ATMs. After the previously announced branch consolidations, our retail customers will have access to nearly 200 branches on the largest networks in the Chicago area. We believe that Fifth Third Chicago is now in a significant position of strength that allow us to generate stronger deposit, household, and revenue growth moving forward.

As we have mentioned previously, the vast majority of the core systems are migrated to Fifth Third technology, which reduces the complexity of the conversion. We have run 3 very successful mock conversions over the past several months, involving more than 600 people from both companies. We are confident that the conversion process will continue to proceed smoothly. As previously committed, we expect to fully realize the $255 million in expense synergies by the end of the first quarter of 2020.

We'll provide quarterly updates on our progress toward achieving our expense targets. We have a tremendous opportunity to leverage the complemented products and capabilities with the 2 franchises. We will leverage MB's expertise of lower middle-market lending, asset-based lending and leasing, while offering our clients from MB more sophisticated Fifth Third digital banking, treasury management, capital markets and advisory products and services. We remain very confident in the growth prospects of the combined company. To date, we have experienced no material attrition of key leaders, relationship managers or clients. Furthermore, 7 of the 13 key leaders in our Chicago region are former MB employees, leading areas such as commercial middle-market, equipment finance and asset-based lending.

We will also continue -- we also continue to expect to generate meaningful revenue synergies from the acquisition, going to approximately $60 million to $75 million in annual pretax income net of expenses in 2022. While we have devoted a significant amount of energy on the MB acquisition to make sure we deliver for our clients, employees and shareholders, we have also remained very focused on executing on our key strategic priorities to produce strong financial results.

Our first quarter financial performance was strong. During the quarter, loan growth, fee growth and NII exceeded our previous guidance on a standalone basis. Expenses were also favorable to our prior guidance, excluding the impacts of the MB Financial transaction. We generated year-over-year core positive operating leverage every quarter in 2018, and we have continued that momentum in the first quarter of 2019, again achieving year-over-year positive operating leverage. Credit quality metrics also remained solid.

Net charge-offs were 32 basis points, including just 11 basis points in our commercial portfolio, which is at the lowest level in 20 years. And the NPL, NPA and criticized asset ratios all remain near their multiyear low levels. Economic conditions remain generally stable, but consistent with other banks, our clients continue to be cautious with respect to their growth plans. We remain steadfast in our disciplined approach to client selection. We will not chase loan growth for the sake of growing, but rather maintain our focus on balancing credit quality and profitability.

Now moving on to our strategic priorities. At Fifth Third, we are positioned to drive improved profitability, while continuing to manage our risk exposures prudently.

First, we continue to leverage technology, including our data analytics capabilities to accelerate our digital transformation while continuing to modernize our systems and infrastructure. We are committed to delivering a digital banking experience that is simple, seamless and secure. We are investing in digital technologies that will deliver innovative and convenient solutions that will enhance our customers' ability to meet their financial goals. Our new Dobot app is one example of this, which helps users set goals and save through small automated transfers. Since the launch at the beginning of the year, we have had over 37,000 downloads of the app across 48 states, with users studying saving goals of over $150 million. In addition, we are investing so that the majority of our core products can be originated digitally within the next 24 months. Leveraging our buy, partner, build approach, we will continue to deliver digital solutions that will enhance our customers' financial lives.

Second, we continue to invest in our business to drive profitable organic growth. We have made several recent investments in technology and talent to support our growth plans. These investments include key addition to our sales teams and strategic areas of the company such as middle-market lending. We have added high-quality RMs in our new geographies, including Southern California and Texas. In fact, we now generate approximately 50% of our middle-market originations outside of our 10-state retail footprint. Wealth & Asset management, which had a record year last year; corporate banking with revenues increasing 27% from the first quarter of 2018, including growth in capital markets, which was up 19% from a year ago quarter; and in our retail franchise, we continue to generate solid household and deposit growth at 2x the market average. All these provide evidence that we are delivering our commitments to diversify revenue and accelerate growth.

Our third priority is to expand our market share in key geographies with the acquisition of MB providing the necessary scale in the Chicago market. We are continuing to optimize our branch network to support our faster-growing Southeast markets, while also rationalizing our legacy footprint. Lastly, we are focused on maintaining our disciplined approach to credit expansion and capital management throughout the company. Credit discipline remains as important now as ever. We are focused on maximizing our returns through the full cycle rather than generating lower-quality loan growth. We continue to expect a generally stable environment throughout the rest of 2019 and are not wavering in our approach to managing our exposures.

We have demonstrated our ability to diligently manage our expenses, while investing in areas of strategic importance. We remain focused on generating positive operating leverage in all environments. We continue to stay disciplined on capital allocation. We believe our current capital levels are elevated relative to our risk profile. And we prioritize capital deployment strategies based on what we believe will achieve the highest long-term return for our shareholders. Our clearly defined sales 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 2 years as reflected in our ability to consistently generate positive operating leverage.

We continue to generate solid financial results in the first quarter with adjusted PPNR of 19% since the first quarter of 2018, adjusted efficiency ratio of 61% increasing over 3.5% year-over-year, and continued stability in our credit quality measures. We remain very confident in our ability to achieve our financial targets and outperform through the cycle. 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, and we're delivering the outcomes as planned.

With that, I'll turn over to Tayfun to discuss the first 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 Page 3 of the earnings presentation. As Greg mentioned, we closed the MB Financial acquisition on March 22. Under the terms of the merger agreement, MB stockholders received 1.45 shares of Fifth Third's common stock and $5.54 in cash for each share of MB common stock.

Total consideration for the transaction was $3.6 billion, including $469 million of cash and $3.16 billion of common shares. Upon completion of the merger, Fifth Third issued 122.8 million shares at a closing price of $25.48 per share on March 21. In our earnings materials, we have included additional information about the MB acquisition, including a summary balance sheet on the acquisition date. The first quarter impact of MB's business activities for the 6 business days from closing to quarter end had a negligible impact to our overall profitably metrics, but has impacted our balance sheet comparisons for the quarter.

As you can see in our disclosures, this quarter has many moving parts due to the nature of the timing of the MB closing and a number of other onetime items. We have given our best effort to clarify the impacts so you can also see the underlying trends in our business and compare them to our previous guidance. Fifth Third's adjusted stand-alone performance this quarter has exceeded our January guidance with respect to all balance sheet and income statement items. Going forward, we continue to expect the impact of MB Financial to provide a meaningful uplift in our financial performance, and our guidance incorporates those trends.

Also, before discussing our financial results, I would like to highlight, as we have indicated in our earnings materials, that we have 2 accounting policy conformity changes for the quarter. First, we reclassified the components of lending-related provision into a single measure on our income statement, including the provision for unfunded commitments, which was previously reported in non-interest expense. We believe this change will provide a better comparison relative to the vast majority of our peers. Our current quarter efficiency ratio was not affected by this change.

Second, the operating lease income and expense related to MB's leasing business will be shown on a gross basis consistent with Fifth Third's accounting policy compared to the net basis that MB utilized. This change has no impact on net income.

Now turning to the financial highlights of the quarter on Slide 3. Our first quarter results were very strong. As I mentioned, we exceeded our January guidance for loan growth, NII, expenses and fees on an adjusted basis excluding any benefit from the MB Financial acquisition at the end of the quarter. Reported results were positively impacted by the notable items on Page 4 of the presentation, including a $433 million after-tax gain on the sale of our final stake in Worldpay and a $7 million after-tax benefit from our GreenSky equity stake, partially offset by a negative $84 million after-tax impact from merger-related items and a $24 million after-tax negative mark related to the Visa total return swap. Subsequent to quarter end, we sold our remaining GreenSky shares, which should result in a material gain for the quarter. We have now exited our equity stakes in all publicly traded companies.

Excluding these items, pre-provision net revenue increased 19% year-over-year while the efficiency ratio declined more than 3.5%. All of our adjusted return metrics were strong during the first quarter. Strong revenue growth and disciplined expense management have continued to improve our efficiency ratio and resulted in positive operating leverage on a year-over-year basis. Our credit performance remains solid. Our forward-looking credit metrics remained at nearly 20-year lows as net charge-offs continued to decline during the quarter.

Moving to Slide 5. Average sequential loan growth of 3% was partially impacted by the late quarter addition of the MB portfolio. Excluding the impact of MB, total average loans grew 2% sequentially and approximately 4.5% year-over-year, led by a C&I growth of 8.5%. As we have mentioned recently, our loan performance over the last few quarters is beginning to provide a clearer picture of our longer-term growth potential.

Total average commercial loan growth was 4% sequentially, or 2% excluding MB, exceeding our previous guidance of 1% growth. Originations were up 12% from the prior year, with strength in middle-market lending as well as in corporate banking. In our commercial business, we continue to benefit from investments in our sales force and the redesign of our mid and back-office functions that has helped to increase the time allocated to sales for our existing relationship managers.

Total commercial line utilization was relatively flat sequentially on a stand-alone basis and up 2% with MB. Lower payouts from paydowns throughout the first quarter also supported net commercial loan growth. Average commercial real estate balances were up 4% compared to last quarter and were flat excluding MB. CRE balances as a percentage of total risk-based capital remains very low and in the bottom quartile relative to peers. We currently expect average total commercial loans to grow by approximately 17% on a sequential basis in the second quarter. Given MB's impact on first quarter average balances, end-of-period loan growth may give the best representation of our go-forward expectations, which we expect to be approximately 1% in the second quarter, driven by 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 20% compared to 2018, again impacted by the MB acquisition. This guidance implies that our stand-alone Fifth Third commercial loan growth outlook for the full year exceeds our previous guidance and preserves the first quarter outperformance for the full year.

Average consumer loans, excluding MB, were up about 0.5% sequentially. As we highlighted in our earnings materials, we have combined the MB indirect consumer loan portfolio with our auto loan category. Growth in auto, card and unsecured personal loans were partially offset by declines in home equity and Residential Mortgage. Similar to prior quarters, this quarter, we have elected not to retain fixed-rate conforming mortgage loans in the current rate environment. Including the impact of MB, average consumer loans increased 1% sequentially.

In the second quarter, given the impact of the acquired portfolio, we expect total average consumer loan balances to increase approximately 7% sequentially, with the same portfolio dynamics that I discussed for the first quarter. The end-of-period portfolio in the second quarter should increase 1.5% to 2% from the first quarter. For the full year, we expect average total consumer loans to increase 7% to 8% compared to 2018. Similar to commercial loans, this implies a stronger outlook on a stand-alone basis.

We currently expect full year 2019 average total loans to increase approximately 15% to 16% compared to 2018. Average core deposits were up 5% on a year-over-year basis and up 1% compared to the prior quarter. Excluding the impact of MB, average core deposits increased 3% compared to the year ago quarter and were flat sequentially in a seasonally soft quarter. Performance continued to reflect migration from demand deposits into interest-bearing accounts.

Moving on to Slide 6. Compared to the prior quarter, NII increased $1 million, including the 6-day impact from MB, which was $16 million. Our stand-alone results exceeded our January guidance, largely reflecting the stronger loan growth. As we discussed during our earnings call in January, our fourth quarter NIM included a 2 basis point benefit from seasonal items. Adjusting for this impact, the NIM of 3.28% in the current quarter was up 1 basis point from the fourth quarter. Purchase accounting accretion had a negligible impact in the first quarter. The increase in our NIM would have been higher, except for the accelerated long-term debt insurance during the quarter.

Compared to the year ago quarter, net interest income increased $87 million, or 9%, and the NIM expanded 10 basis points. Adjusting for the 6-day impact from MB, resulting in a stand-alone year-over-year NII growth was 7%.

Cost of interest-bearing deposits rose 11 basis points quarter-over-quarter, below the peer average. On a combined basis, our cumulative deposit beta is in the mid-30s, with consumer in the mid-20s and commercial in the high 50s. The December rate hike resulted in a first quarter beta of 39%. While our current outlook does not assume any future rate hikes, we expect a modest continuation in consumer and commercial deposit repricing throughout 2019, with the 39% deposit beta increasing to 53% by the end of the second quarter.

We expect the full year 2019 NII to grow 15% to 16% over 2018 without any additional rate hikes, and excluding purchase accounting accretion. Our outlook reflects the impact of MB as well as additional loan growth. We expect our second quarter NII to increase about 12% to 13% sequentially, reflecting the benefits of our larger earning asset base and day counts, partially offset by continued deposit pricing pressures.

Our second quarter NIM, excluding purchase accounting accretion, should be up about 4 basis points compared to the first quarter. We expect the NIM on a full year basis to expand about 10 basis points in 2019, excluding the purchase accounting benefit to NIM. We expect purchase accounting accretion to have about a 4 basis point impact on the NIM this quarter and 3 basis points on the full year NIM.

Excluding the impact of the listed items, noninterest income increased 3% compared to the year ago quarter and decreased 6% compared to the prior quarter, which included the impact of the Worldpay TRA. The 6-day impact of MB on noninterest income was $12 million. Adjusting for the MB impact, our stand-alone results exceeded our guidance.

Corporate banking fees were up 27% compared to the year ago quarter, which exceeded our guidance. Performance compared to the year ago quarter reflected strong capital markets revenue and increased business lending fees. We currently expect our corporate banking revenue to grow about 20% compared to last year's second quarter, reflecting both the larger client base post-MB and improved performance from the initiatives we have previously discussed. Card and processing revenue was flat compared to the year ago quarter and decreased 6% compared to the prior quarter, primarily reflecting seasonality in transaction volumes.

Wealth & Asset Management was up 3% from the prior quarter due to seasonally strong tax-related, private client service revenue. Mortgage banking revenue was up 4% sequentially in the first quarter. Origination volume of $1.6 billion was up 5% from last quarter. Gain on sale margin was 176 basis points during the quarter, up 17 basis points sequentially and down 13 basis points from the year ago quarter.

Deposit service charges decreased 4% compared to the year ago quarter and decreased 3% compared to the prior quarter. Performance from the year ago quarter reflected lower net commercial deposit fees resulting from increased earnings credits. Sequential performance was driven by seasonally lower consumer fees.

For the second quarter, we expect total noninterest income to be up 17% to 18% from the adjusted first quarter of 2019. And for the full year, we expect total noninterest income to increase approximately 16% from the adjusted 2018 noninterest income. Just as a reminder, these expectations include the grossed-up operating lease revenues, which is about $90 million in 2019.

I would like to highlight that we no longer expect to receive the Worldpay TRA payment in 2019, given the impact of the merger-related expenses from the Vantiv-Worldpay merger completed in January 2018 on the company's final taxable income. This is just a change in timing. Despite the shift in the timing of expected revenue recognition, we continue to expect to receive over $900 million in TRA cash flows, which includes increased cash flows from the final sale of our Worldpay stake.

As a reminder, Fifth Third recognizes income during the fourth quarter of the year, following the year in which Worldpay recognizes the benefit of the tax deductions. And in any tax year where Worldpay does not have sufficient taxable income to utilize the tax attributes, the deductions carry forward. Our previous estimates were based on the assumption that Worldpay would likely have sufficient taxable income in 2018 to utilize the deductions. Once we have a better understanding of the impact of the recently announced FIS-Worldpay transaction, we will update our TRA forecast for 2020 and beyond.

First quarter reported expenses included merger-related items from the MB transaction, totaling $76 million pretax. Excluding these items, expenses were up just 1% from the adjusted first quarter of 2018, including the $20 million in expenses resulting from the 6 business days of MB carry. Due to the normal seasonal increase in compensation-related expenses in the first quarter, the year-over-year comparisons are more meaningful. The implied stand-alone Fifth Third run rate expenses actually declined from the year ago quarter as diligent expense management throughout the bank and the reduction in the FDIC surcharge more than offset the impacts from continued investments in technology and higher compensation from last year's nonbank acquisition activity.

The sequential increase in expenses during the first quarter was primarily attributable to seasonally elevated employee-based expenses, which were affected by the timing of compensation awards, the company's 401(k) match, and payroll tax expenses. Furthermore, during the quarter, there were a few other expense items that we did not call out specifically that were unique onetime items, including deferred compensation mark-to-market and customer derivative valuation adjustments. Therefore, the run rate trends were even better. We will maintain the same focus on expense management throughout 2019, while continuing to invest in our company.

Our adjusted efficiency ratio for the first quarter was 61%. The current quarter efficiency ratio is impacted by the seasonal compensation and benefit items I mentioned, therefore should improve over the next 3 quarters. We have established a very clear track record for delivering positive operating leverage and intend to continue for the foreseeable future.

We currently expect second quarter expenses to increase about 10% to 12% sequentially from the adjusted first quarter of 2019, excluding the merger-related expenses and CDI amortization expense, due entirely to the impact of MB. Our NII fee and expense outlook for the second quarter should result in an efficiency ratio below 60%.

Also, we expect full year 2019 expense growth of approximately 13% from an adjusted 2018 expense base of $3.865 billion, again excluding merger-related expenses and the intangible amortization. As a reminder, due to the change in accounting, the incremental MB-related operating expense base is about $75 million higher compared to their historic levels due to the gross-up for operating leases, which has no impact on bottom line since the revenue side is also grossed up.

Our previous outlook for MB-related expense savings and timing of those savings remain intact. We expect to achieve $255 million in savings by the end of the first quarter in 2020. In addition, we expect our total after-tax merger charges, inclusive of actual merger-related charges recognized in current and past periods and projected future charges to be about $250 million after tax.

Turning to credit results on Slide 9. First quarter credit results continued to be benign. The criticized asset ratio increased sequentially to 4.35%, with Fifth Third stand-alone ratio essentially flat and remaining at multiyear lows. The increase was caused primarily by the MB portfolio, which consists of a greater percentage of [more] granular well-collateralized middle-market and Business Banking exposures. The MB portfolio has tended to carry a higher percentage of criticized assets with lower loss content, given prudent advance rates on tangible assets, which we believe will result in low net credit losses even under stress, consistent with their historical performance.

Net charge-offs were $77 million, or 32 basis points, down 3 basis points from the prior quarter. The commercial charge-off rate of 11 basis points is at the lowest level in 20 years. The consumer net charge-off ratio of 68 basis points increased slightly compared to the last quarter.

Both the NPL ratio of 41 basis points and the NPA ratio of 45 basis points continue to hover near historically low levels. The ALLL ratio declined sequentially to 1.02%, impacted by the purchase accounting impacts from the MB acquisition. Excluding these impacts, the ALLL ratio would have been unchanged compared to the prior quarter as the provision for loan losses of $89 million exceeded net charge-offs by $12 million during the quarter, driven by strong stand-alone loan growth.

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 10. Capital levels remained very strong during the first quarter. Our common equity Tier 1 ratio was estimated at 9.7%; and our tangible common equity ratio, excluding unrealized gains and losses, was 8.21%. In addition to the impact of the cash and stock components of the MB acquisition to our capital levels, we also initiated a $913 million accelerated share repurchase near the end of the quarter. As a result of the MB acquisition, issuance net of our buyback activity at the end of the first quarter, common shares outstanding increased almost 93 million shares, or 14%, compared to the prior quarter. We have provided more information on the share count progression for the first quarter in our appendix slides.

As a Category 4 bank, Fifth Third was given the option to distribute capital based on a predefined template calculation or undergo the full CCAR 2019 process. As a result of our analysis, the amount of capital that could be returned using the predefined template would likely not have a material difference compared to undergoing the full stress test.

As a result, in early April, we submitted our planned capital actions to the Federal Reserve utilizing the template approach. We continue to expect to increase our common dividend in June to $0.24, pursuant to final CCAR 2018 authorization, subject to board approval and market conditions, and we expect to provide an update to our capital distribution plans once we receive the formal response from the Fed. Additionally, we plan to buy back any amounts up to the $433 million after-tax gain generated from our final Worldpay sale.

Slide 11 provides a summary of our current outlook. We kept the 2018 references for noninterest income and expense the same as the original guidance to avoid any confusion related to MB's incremental impact for the partial year. The right-hand side of our outlook highlights our expectations for our 3 key financial metrics in the fourth quarter of 2019. Excluding the TRA and the operating lease policy impacts, this guidance is largely unchanged from the outlook we gave in March at an investor conference prior to the closing of the MB transaction. The slight increase on our full year tax rate is to the higher estate tax impact from MB. As a result, we currently expect an ROTCE of 17% or greater, an ROA of approximately 1.4% and an efficiency ratio below 56% by the fourth quarter of 2019.

In summary, I would like to reiterate a few points. We reported very strong financial results for the first quarter and remain focused on our key strategic priorities to drive the company forward and to outperform through various business cycles. We are focused on successfully executing against our strategic priorities and remain confident in our ability to achieve our financial targets.

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

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Chris Doll, Fifth Third Bancorp - Director of IR [5]

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Thanks, Tayfun. (Operator Instructions) We will do our best to answer as many questions as possible in the time we have allotted this morning. (Operator Instructions)

Lori, please open the call 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 Scott Siefers from Sandler O'Neill.

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Robert Scott Siefers, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [2]

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Tayfun, just wanted to ask a little on the fee income guidance for the second quarter and the full year, just want to make sure I'm understanding it correctly, given the moving parts of just core Fifth Third and the addition of MBFI and then the accounting change related to the MBFI leases as well. So when you look at the second quarter, I guess given that you're changing to a gross-up or to a gross methodology for the operating lease stuff from MBFI, might have expected it to be a little higher. So I guess might have expected the guide overall to be a bit higher. I guess if you could just walk through sort of what you see as the main puts and takes as we go into the second quarter, please. And then if you can flow that through to the full year as well, please.

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

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Sure. So we really, in terms of the stand-alone Fifth Third performance, whether it applies to the second quarter or the full year, we don't see a change from our previous guidance. And that's why we wanted to keep -- if you look at Page 11, we still are using our 2018 base as -- it's the same as before. So drivers obviously with respect to our Fifth Third stand-alone fee growth are largely corporate banking revenues led by capital markets fees. I think wealth is going to likely have a good quarter. And in general, once you cross the seasonality with respect to deposit fees going into a stronger quarter for mortgages, those all support a better second quarter performance as we are guiding you here, up 12%, 13%.

With respect to MB, again, the big change relative to their run rate is going to be the added operating lease revenues. They were recording, I think, maybe a little over $20 million to $25 million in net performance. And that number now toward the year is going over -- going to about $90 million. So you can probably distribute that amount evenly across the quarters. We do believe that post-closing and as well as sort of post-conversion, which we expect to be in early May, the MB fee income trends to pick up for the rest of the year as their pipelines will now, post-conversion, start building strongly.

In terms of the rest of the year for the company, we still expect an economy that is in line with sort of the current level. We expect, again, corporate revenues to be leaner in terms of moving our noninterest income numbers for the year. The big change really, when you think about it, is the removal of the $29 million of TRA payments in the fourth quarter, and it's just a change in timing. But we believe that there will be some strength in the remaining numbers between now and the fourth quarter, so we expect to make up a good amount of that lost fee income in the second and third quarters. In the fourth quarter, though, we are going to see lower total fees. Which also, I'm going to highlight this because it's important, as you know, the efficiency ratio that we're guiding to is a little bit different than the efficiency ratio we guided to previously, which was under 55%. That $29 million TRA payment and together with the impact of the grossed-up operating lease revenues and leases, they have an impact on the efficiency ratio.

So in general, our fee guidance continues to remain very close and maybe a little bit higher than what we guided back in January. Sorry about the long response, but there's so many moving parts I just wanted to clarify.

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Robert Scott Siefers, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [4]

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No. I understand and appreciate it for those specific reasons. And then if I could sneak in one more. This one is more stock mark, but again, given all the moving parts. So you've got the -- I guess there'll be a full quarter addition of the shares from MBFI, then you have the accelerated program and now you'll be repurchasing presumably the $433 million or so gain or with the gain from Worldpay. What's the -- if you're comfortable, what's a good approximation of the share count we should be using as we go into the second quarter, just given all those moving parts and the different timing of how some of those -- the nuance hits with those things?

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

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Yes. Just one comment on the ASR timing of the -- I'm sorry, timing of the Worldpay gain buyback. Because of some of the ASR technicalities and dynamics, we will probably be increasing our buybacks with the Worldpay gain more so in the sort of the third quarter rather than the second quarter of the year. Jamie, do you want to give a bit more clarity on the share count?

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James C. Leonard, Fifth Third Bank - Executive VP & Treasurer [6]

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Sure. So Scott, we included on Page 16 in the presentation what we expected this question to be, which was just how the shares would work going forward. So we end the quarter at 739 million shares outstanding. The remaining portion of the ASR will retire an incremental 5 million shares in the second quarter. And then to Tayfun's point, should the Worldpay repurchases occur in the back half of the year, that would have no impact on the second quarter. And then the diluted impact from equity awards typically ranges in the $12 million -- 12 million share range. So if you're working on the EPS calculation, I think that should give you enough to narrow in on the outstanding.

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Operator [7]

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

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John G. Pancari, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [8]

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On the loan growth side, just want to see if you can give a little bit more color around the trends you saw in the quarter. They appear to be a little bit stronger than we're looking for and wanted to get some color on where you're seeing some of the strength and then conversely where you might be seeing a little bit of pullback as you go through the year.

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Lars C. Anderson, Fifth Third Bancorp - Executive VP & COO [9]

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Yes. So John, we were really pleased with the growth that we saw in the first quarter. It exceeded our expectations. Obviously, there's a few moving parts there. Our production was at higher levels than we have seen in most first quarters, which is typically seasonally lower. That really benefited us. Also, the disruptions in the capital markets in the fourth quarter that kind of slipped into the first quarter really impacted some of the institutional loan market. So that muted some of the paydowns that we otherwise may have -- we may have realized. Our commercial real estate portfolio successfully pivoted, as I've been sharing with you over the last year or 2. We actually saw a little bit of growth in the overall commercial real estate line, but I would underscore we saw a decline in our construction loan portfolio as that gets later in the cycle, and we selectively added term mortgage opportunities that really fit into our late-cycle strategy there. So really putting all of that together with a lot of the investments we made in, frankly, talent, our processes, our redesign, our middle-market focus, all those really are coming together and frankly are producing the outcomes that we had hoped for in not just the first quarter but 2019 and beyond.

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John G. Pancari, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [10]

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Okay. That's helpful. And then separately, just want to see if you can give us your thoughts on any balance sheet actions planned post the MB integration here in terms of any de-emphasis around any of the lending areas as well as on the deposit side or the actions there in terms of refining the deposit mix.

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

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Not really. I mean there's really no discrete items. I think we had positioned for the investment portfolio ahead of the closing on our side and liquidation of most of their investment portfolio. In terms of the loan portfolios, clearly, all commercial portfolios are going to be subject to incorporation into our business, so we expect to grow their business along with ours. We are obviously entering a couple of new and direct-to-consumer businesses in RV, motorcycles and recreational. So we -- there are no immediate changes. We are going to evaluate that business over the next number of quarters. And unless we see any changes from what they have seen, our goal is to maintain those businesses as well. So no. No big changes.

On the deposit side, I do believe that the combined company will perform stronger in Chicago on the consumer. And obviously, we're bringing a lot more products and the digital access that should benefit the overall consumer base in Chicago. And on the commercial side, I think we also bring over better corporate treasury management capabilities. So we would expect for commercial and consumer deposit growth to benefit from this.

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Operator [12]

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Your next question comes from the line of Matt O'Connor from Deutsche Bank.

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Matthew D. O'Connor, Deutsche Bank AG, Research Division - MD in Equity Research [13]

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I was just wondering if you can elaborate a bit on the criticized assets from MB. I think if you back into the math, it seems like it's about 9% of the commercial book and wondering how that compared to a year ago. And then is there any impact from closing the deal that would have impacted those numbers?

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Frank R. Forrest, Fifth Third Bancorp - Executive VP & Chief Risk Officer [14]

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Matt, it's Frank. First, all banks have slightly different risk rating scales. None are exactly the same. And so what we've done through due diligence in the first month after closing is we effectively mapped over their ratings to our scale. So a lot of it is definitional. As Tayfun mentioned before though, keep in mind the bulk of their portfolio is small business and it's smaller in the middle market and those tend to have a higher or more critical risk profile. But the difference here, when you look beyond the criticized asset levels, is that if you look historically, MB over the last 4 years, with one outlier quarter in the third quarter of last year, which was really just one large leveraged loan, which is not who they are, it was just an outsized transaction that we don't anticipate going forward. Their overall loss rates are very low. They've managed the book really well and they support that with a really strong asset-based lending team and a leasing team. And so they've got really very, very good collateral expertise. The loans are well secured. They're managed appropriately.

And at the end of the day, so again, it's a small business middle-market book, their loss rates are very well in line with our expectations. We're not changing our credit loss outlook at all for the year. We're very comfortable with where we are. The mapping exercise is over. And when you look at the combined company, we're still -- our 4.5-roughly percent criticized assets are well in line with our peers, and we expect that to be stable as we go forward. So we're really pleased with MB. They've got a very impressive group of relationship managers who are dedicated to the company and their client base has been with them for a long time and they overall managed it very well. So we rightsized what we needed to do. That's not unexpected in any acquisition. And I hope that you'll see those changes as we go forward. And again, we look to the future with a lot of confidence and we're excited about our new teammates and what they bring to Fifth Third.

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Matthew D. O'Connor, Deutsche Bank AG, Research Division - MD in Equity Research [15]

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Okay. That's helpful. And then I think, in the opening comments, there was some mention about continued emphasis or expansion in the Southeast and just wonder if you could elaborate on that. Is it still a de novo strategy or are you open to some fill-in or larger deals in the Southeast?

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Gregory D. Carmichael, Fifth Third Bancorp - Chairman, President & CEO [16]

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This is Greg. Right now, what we're really focused on is just being additive to the markets that were in the Southeast already today, that we don't have the distribution level really needed to best serve that market. We're growing deposits in the Southeast market by 7%. That's 2x what we're growing in our legacy markets. So what we're really going to do is optimize and continue to optimize our legacy branches and transition about 100-plus branches into our Southeast markets, but that's going to be on a de novo basis. Right now, it's really focused on filling in where we have opportunities through a de novo strategy, not through an acquisition strategy. We're very comfortable with that plan and are off to a good start this year of identifying those opportunities, getting the land acquired and moving forward with our build plans. Those branches, as I mentioned before, will be much smaller, higher self-serve, lower staffing levels, smaller footprints, lower cost to operate, (inaudible) but a very efficient branch. But where we need geography in the Southeast and markets we're already in, it will be a de novo strategy going forward.

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Operator [17]

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

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Kenneth Michael Usdin, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [18]

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Question on credit and credit loss expectations. You really only mentioned about provisioning with growth. So just with the pro formas, your loss ratio has been in like the 30-ish, low 30s basis points range. How do we think about the loss trajectory now with MBFI on board? Should we be thinking about it on the same with pro forma? Does it go lower? How do you expect NCOs to traject, I guess, would be the base question?

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Tayfun Tuzun, Fifth Third Bancorp - Executive VP & CFO [19]

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Ken, we don't project losses. We've never done that. But in general, MB does not have an incremental add to our loss rate. So to project the sort of the trends, they obviously dilute the portfolio a little bit through the denominator. The trend should mainly reflect Fifth Third's loss rate. And as you said, the last sort of 3 quarters, we've been between 30 and 35 basis points. I mean those -- right now we have no information to believe that, that trend should be changing. So that 30 to 35 basis points, the current range is probably a good range for the rest of the year.

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Kenneth Michael Usdin, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [20]

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Right. But that's for the Fifth Third because the denominator is to your point...

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Tayfun Tuzun, Fifth Third Bancorp - Executive VP & CFO [21]

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It is for the total. Yes. I mean again it could be a little closer to the lower end of it. I don't know exactly incrementally.

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Kenneth Michael Usdin, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [22]

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Okay. Okay. Second question. I know you alluded to it, but we didn't see it in the slides, the 2020 outlook and the metrics that you provided. I know that there are some changes because of the accounting stuff. But can you just talk about your -- the tracking towards that, especially the ROE guide that you had for 2020 and it's a big gap from where you are today and where you're expecting to end the year and just the confidence that you have in terms of getting to that outlook as you look for -- to full year '20?

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Tayfun Tuzun, Fifth Third Bancorp - Executive VP & CFO [23]

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Yes. It's a little too early to give specific to 2020 guidance, but our expectations with respect to the year have not changed. Now there's just a little bit of a change here in the fourth quarter with TRA. But with respect to the contribution that we're getting from MB and stand-alone performance trends, I think everything is pretty much in place. So we're still guiding to the same trends. As the year progresses, we will be able to give you a little bit better guidance. Obviously, it's only been a couple of weeks since we closed this transaction. So I'd like to get a little bit of time under our belt in order to give you more specific guidance, but nothing has changed compared to what we thought previous to the closing of the transaction.

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Operator [24]

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

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Erika Najarian, BofA Merrill Lynch, Research Division - MD and Head of US Banks Equity Research [25]

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I just wanted to make sure we were thinking about the capital return correctly. If we filled in the numbers in the template correctly, we're getting to a templated capital return of about $2.65 billion, $2.7 billion. And I wanted to understand if that's a ballpark number relative to how you feel about the template and then wanted to confirm that the $433 million would be on top of that capacity.

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James C. Leonard, Fifth Third Bank - Executive VP & Treasurer [26]

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Yes. Erika, it's Jamie. Most folks that I've seen have calculated a template had a payback capacity for Fifth Third in the $2 billion range, excluding Worldpay. And so that's the ballpark I would think you should be in.

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Tayfun Tuzun, Fifth Third Bancorp - Executive VP & CFO [27]

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Your number appears to be a little bit on the high side, ex Worldpay.

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Erika Najarian, BofA Merrill Lynch, Research Division - MD and Head of US Banks Equity Research [28]

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Okay. Got it. And just my follow-up question on the margin. I just wanted to make sure that we were thinking about a base of 322 for 2018, then 10 points of accretion, natural accretion from that, plus 3 basis points of purchase accounting. And just underneath there, could we get a little bit more color on how you expect deposit cost to trend? Heard you loud and clear, Tayfun, on the prepared remarks. And also, Jamie, how you're managing the securities portfolio from here, given ever-changing expectations for the yield curve?

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James C. Leonard, Fifth Third Bank - Executive VP & Treasurer [29]

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Sure. I'll take a stab, but I think there are 3 or 4 questions in there. And if I miss any, let me know. In terms of deposit costs, we would expect, as Tayfun mentioned, in the first quarter, we had 11 basis point increase in interest-bearing core deposit cost during the quarter, up from 88 basis points in the fourth quarter to 99. And then the MB portfolio was priced relatively in line with ours. They were about 91 basis points on interest-bearing core deposit cost at the end of the year. So given the beta that Tayfun mentioned, the up 11, we felt good about the performance in the deposit book. And then, as we turn towards the second quarter, with a little bit of the tail on deposit rates, we would expect that interest-bearing core deposit cost to be up 3 to 4 basis points in the second quarter. And so when you look at the NIM outlook, as you mentioned, we're going from 328 to 332 exclusive of the purchase accounting benefits. And then the 332 should be fairly stable throughout the back half of the year, which gives you your full year average.

In terms of the securities portfolio, we repositioned a lot ahead of the closing of the transaction, as Tayfun mentioned. There's a little bit of Treasury bills still remaining, about $800 million or so that's being used to collateralize municipal deposits at MB that we will most likely have run off in the second quarter. So the portfolio on an average basis will be up a little bit, but not as much as you might be modeling such that our interest-earning asset forecast for the second quarter would be up 10% to 11%. So loan growth obviously ahead of that and then the securities portfolio relatively flat during the quarter. And then as the year progresses, we would look to be opportunistic either to add additional hedges or add a little bit of investment portfolio leverage if the opportunities present themselves. But if not, we're very comfortable with our 325 to 329 yield in the investment portfolio and fairly stable balances from here on out.

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Tayfun Tuzun, Fifth Third Bancorp - Executive VP & CFO [30]

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Maybe this is also a good time, since -- if the question doesn't get asked, I want to get this out. In terms of the PAA accretion versus the CDI amortization, we expect those 2 line items to neutralize each other. So out of the 2, we don't see much of an impact on the bottom line, so that you guys can also model that appropriately.

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Operator [31]

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Your next question comes from the line of Saul Martinez from UBS.

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Saul Martinez, UBS Investment Bank, Research Division - MD & Analyst [32]

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A couple of merger accounting questions because those are so much fun. I think -- I just want to get my numbers straight, Tayfun. The PAA adds about 4 bps to 2Q NIM and 3Q to the full year. By my math, that's about something like $14 million, $15 million in incremental NII per quarter and $40 million to $50 million for the full year. Is that the ballpark?

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Tayfun Tuzun, Fifth Third Bancorp - Executive VP & CFO [33]

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That's right. Yes, very close, yes.

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Saul Martinez, UBS Investment Bank, Research Division - MD & Analyst [34]

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Okay. And you guys, I couldn't find what the final credit mark was. You -- I think when you announced the deal was 1.7% and I couldn't reconcile with the tangible book roll forward in the appendix. But was that -- is that more or less what ended up being sort of the final credit mark on the MB book?

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James C. Leonard, Fifth Third Bank - Executive VP & Treasurer [35]

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Yes. Saul, it's Jamie. The goodwill impact in the roll forward that you see reflects the preliminary credit and rate marks of about $360 million and about $100 million of that is allocated to the PCI nonaccretable yield portfolio. And so then the residual is then the rate and credit mark on the accretable yield portion. And that's where, when you look at the contractual maturity of MB's loan book of 5.5 years, that's what drives your $15 million a quarter of PAA. So the one caveat, since we're in the bowels of merger accounting, is that all of these numbers are preliminary and are based on the contractual maturities. Obviously, actual portfolio cash flows and any final goodwill adjustments over the remainder of the year will move it around a little bit, but I think your using the $15 million a quarter is a good baseline for now.

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Tayfun Tuzun, Fifth Third Bancorp - Executive VP & CFO [36]

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And the CDI was about $180 million.

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Saul Martinez, UBS Investment Bank, Research Division - MD & Analyst [37]

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The CDI is about $180 million. Okay. All right. And I think you may have answered this in the prior question, but I think your initial guide for CDI was over 10 years. That's still kind of the expectation following that?

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James C. Leonard, Fifth Third Bank - Executive VP & Treasurer [38]

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So the one change that is made from our original estimates, we had assumed a 10-year [sum of year] digits. After going through the portfolio, we ended up selecting a 7.5-year life to the CDI. It's $183 million CDI over 7.5 years, which translates to about $40 million impact this year. And that's driven by their business banking and lower middle market focus has a higher turnover rate in the deposit book than what our book does, which is understandable given that our book is heavier weighted to consumer as well as the upper end of the middle market and large corporate. So that was the one change from the model last year, was going from 10 years to 7.5 years.

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Saul Martinez, UBS Investment Bank, Research Division - MD & Analyst [39]

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Got it. Okay. Appreciate it. And then just really quickly, a final question on credit. The card NCO, I know it's a small part of your book, but card NCO rate really ticked up and I think it was $33 million in absolute numbers, which is [slightly] higher, it's like 40% to 45% of your overall NCO. Is anything there that we should be thinking about or that you could just comment on what's transpiring in the card portfolio?

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James C. Leonard, Fifth Third Bank - Executive VP & Treasurer [40]

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Yes. A couple of things. Obviously, it came in a little bit higher than we expected. And when we looked at the details, there are 2 portfolios which sort of is about 15% of the total loans that resulted in 30%, about 30% of the charge-offs. The testing pool that we started out with, as you know, we've been working on the analytical platforms starting in 2017 and fine-tuning our credit. So there were a few tests that we ran back in '17. And the second portfolio that contributed a little bit heavier were the early online originations. So if you were to exclude those, I think the charge-off trends have been very much in line with the rest of the industry. Maybe in the last sort of 2 years or so, since the beginning of '17, charge-offs have come up about 40 basis points excluding those. And we expect -- as those 2 portfolios continue to amortize, we expect the charge-offs continue to come down during the rest of the year.

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Operator [41]

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

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Gerard S. Cassidy, RBC Capital Markets, LLC, Research Division - Analyst [42]

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I apologize if you guys addressed this already since I got on the call a little later. Can you give us some color on what you're seeing in the underwriting trends for credit, particularly in the commercial side? And then, Tayfun, just to follow up on your last comment regarding the online credit card portfolio having some higher charge-offs. Can that be extrapolated into other types of online lending? Or are you guys seeing any trends there as well?

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Tayfun Tuzun, Fifth Third Bancorp - Executive VP & CFO [43]

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No. I mean we don't have enough of online originations in other products for us to comment on the extrapolation, Gerard. So I don't have any details on that or more information to help you out with that one. In terms of commercial trends, Frank or Lars?

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Frank R. Forrest, Fifth Third Bancorp - Executive VP & Chief Risk Officer [44]

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Well, I mean, it's a good question and it's a challenging environment. I'm sure you've heard that on most of the calls. But as we said before and as Greg said in his opening comments, we continue to be, I think, very disciplined. We're intently focused on clients that we know very well. Client selection is the key to everything you do. And we, I think, maintain very prudent structures on our credits. We have covenants on our credits on the vast majority, unlike where some of the trends are going. So I would tell you our underwriting hadn't really changed. It shouldn't change. It's consistent. And that's how we continue to be confident that we'll be very successful through changing economic cycles. I don't know if, Lars, you have anything to add?

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Lars C. Anderson, Fifth Third Bancorp - Executive VP & COO [45]

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Yes. Gerard, I have not seen any changes, frankly, in the market. It's obviously very, very competitive. We do have obviously a broader set of industry verticals where we bring more expertise. Our asset-based lending, what MB is bringing to us is just going to strengthen our position to manage risk. But to Frank's point, we feel very comfortable with our client selection, underwriting and we haven't seen any substantial shifts.

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Gerard S. Cassidy, RBC Capital Markets, LLC, Research Division - Analyst [46]

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Very good. And then as a follow-up question, obviously there's been some talk recently by different presidents within the Federal Reserve about the possibility that they may start cutting rates this year, similar to what Greenspan did in 1994, '95 following that tightening cycle, if inflation is, let's say, 1% or 1.5%. If we were to see a Fed funds rate cut in the fourth quarter, let's say, of this year, can you guys share with us what that would do to some of your net interest revenue assumptions?

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James C. Leonard, Fifth Third Bank - Executive VP & Treasurer [47]

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Yes. Gerard, it's Jamie. We forecast the rate cut would be 2 basis points of NIM erosion. And obviously, in the fourth quarter of 2018, we took some pretty good steps to hedge our down rate risk. But as you see in our disclosures, it's still certainly a top risk that we're mindful of and obviously would have goals this year to further increase the hedging program if the opportunities present themselves. But if those opportunities aren't there and the Fed were to cut rate, we currently model a 43% beta in the down rate. Perhaps we could do a little bit better than that, but we would expect a 2 basis point hit to NIM as a result.

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Tayfun Tuzun, Fifth Third Bancorp - Executive VP & CFO [48]

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That's my point. If it happens in December, [obviously it's not going to happen].

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Gerard S. Cassidy, RBC Capital Markets, LLC, Research Division - Analyst [49]

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Great. And it sounded like the deposit betas may come down maybe more quickly in a rate-cutting environment.

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James C. Leonard, Fifth Third Bank - Executive VP & Treasurer [50]

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Yes. The last couple of moves up have been, as Tayfun said in his opening remarks, in the 50 to 60 range the past 2 cuts up. So if we were able to mimic that on the way down, we would certainly do better than what our asset sensitivity disclosures reflect, which is a linear 43% on the way down.

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Operator [51]

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And your next question comes from the line of Brian Foran from Autonomous.

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Brian D. Foran, Autonomous Research LLP - Partner & US Regional Banks [52]

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I guess one of the challenges is just kind of getting people thinking about the earnings power on a consistent basis. As you look at Slide 11 and the way you've laid this out, kind of excluding PAA, excluding merger and TRA and CDI, is this kind of how you're going to be thinking about adjusted EPS going forward? And if we're trying to think about it on a comparable basis, is this kind of a template in your mind, setting aside the actual numbers, just like the definitions of the line items?

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Tayfun Tuzun, Fifth Third Bancorp - Executive VP & CFO [53]

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Yes. I think that's right. And in terms of where we anchor these targets, we've said for the last 3 years that our goal is to perform at the higher end of the peer group distribution. When you actually set up the structure of your financial guidance and provide quantitative support for those, they are somewhat environment dependent. These are not meant to give perspective on -- during a recession, et cetera. But in all environments, in terms of relative performance, these quantitative targets should be good targets for the long term.

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Brian D. Foran, Autonomous Research LLP - Partner & US Regional Banks [54]

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And then if I just think about the ROA for 4Q '19. So the 1.4% now versus the 1.5% before, and I realize that's squiggly line, so it's kind of maybe just rounding of basis points. But we've got the 5 basis point impact from the TRA change, what else changed between the 1.5% in March and the 1.4% now?

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Tayfun Tuzun, Fifth Third Bancorp - Executive VP & CFO [55]

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The balance sheet is a little bit larger in terms of the size. That's probably the biggest impact behind that, along with the TRA payment.

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Operator [56]

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There are no further questions at this time. I'll hand it back over to Chris Doll for closing remarks.

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Chris Doll, Fifth Third Bancorp - Director of IR [57]

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Thank you, Lori, and thank you all for your interest in Fifth Third Bank. If you have any follow-up questions, please contact the IR department and we'll be happy to assist you.

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Operator [58]

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This concludes today's conference call. Thank you, everyone, for your participation. You may now disconnect.