Download pdf - Fifth Third Bancorp (FITB) Earnings Report: Q4 2014 ...s.t.st/media/xtranscript/2015/Q1/13018113.pdf · Fifth Third Bancorp (FITB) Earnings Report: Q4 2014 Conference Call Transcript

CompanyName:Fif thThirdBancorpCompanyTicker:FITBSector:Financial

Industry:BankingEventDescription:Q4 2014 EarningsCall

©2014TheStreet,Inc.AllRightsReserved Page1of 24

FifthThirdBancorp(FITB)EarningsReport:Q42014ConferenceCallTranscriptThefollowingFifthThirdBancorpconferencecalltookplaceonJanuary21,2015,09:00AMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

JimEglseder;FifthThirdBancorp;Director-IRKevinKabat;FifthThirdBancorp;CEOTayfunTuzun;FifthThirdBancorp;EVP,CFOFrankForrest;FifthThirdBancorp;ChiefRisk,CreditOfficerJamieLeonard;FifthThirdBancorp;SVP,Treasurer

OtherPart icipants

ErikaNajarian;BofAMerrillLynch;AnalystMattBurnell;WellsFargoSecurities;AnalystMattO'Connor;DeutscheBank;AnalystKenZerbe;MorganStanley;AnalystRyanNash;GoldmanSachs;AnalystKenUsdin;JefferiesandCompany;AnalystScottSiefers;SandlerO'NeillandPartners;AnalystThomasLeTrent;FBR;AnalystMikeMayo;CLSALimited;AnalystJeffreyElliott;RobertW.BairdandCo.;AnalystVivekJuneja;JPMorgan;AnalystMartyMosby;ViningSparks;AnalystSameerGokhale;JanneyCapitalMarkets;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator:

Goodmorning.MynameisJake,andIwillbeyourconferenceoperatortoday.

AtthistimeIwouldliketowelcomeeveryonetotheFifthThirdBankQ42014earningsconferencecall.Alllineshavebeenplacedonmutetopreventanybackgroundnoise.Afterthespeakers'remarks,therewillbeaquestion-and-answersession.(OperatorInstructions).Thankyou.

Mr.JimEglseder,DirectorofInvestorRelations,youmaybeginyourconference.

JimEglseder(Director-IR):

Thanks,Jake,andgoodmorning.Todaywewillbetalkingwithyouaboutourfull-yearandfourth-quarter2014results.

Thisdiscussionmaycontaincertainforward-lookingstatementsaboutFifthThirdpertainingtoourfinancialcondition,resultsofoperations,plansandobjectives.Thesestatementsinvolvecertainrisksanduncertainties.Thereareanumberoffactorsthatcouldcauseresultstodiffermateriallyfromhistorical




performanceandthesestatements.Wehaveidentifiedsomeofthesefactorsinourforward-lookingcautionarystatementattheendofourearningsreleaseandinothermaterials,andweencourageyoutoreviewthem.

FifthThirdundertakesnoobligationandwouldnotexpecttoupdateanysuchforward-lookingstatementsafterthedateofthiscall.

Iamjoinedonthecalltodaybyseveralpeople,ourCEO,KevinKabat,andCFO,TayfunTuzun;FrankForrest,ChiefRiskOfficer,andTreasurer,JamieLeonard.Duringthequestion-and-answerperiod,pleaseprovideyournameandthatofyourfirmtotheoperator.

Withthat,IwillturnthecallovertoKevinKabat.Kevin?

KevinKabat (CEO):

Thanks,Jim.Goodmorning,everyone.In2014,wecontinuedtoexecuteonourstrategicplans.Wepostedsolidresultsinspiteofthechallengingenvironment.Returnonassetswas1.1%andreturnontangiblecommonequitywas12.2%.Netinterestincomeincreased1%andwegeneratedstrongfeeincomeinourcorebusinesseswith8%growthincardandprocessingrevenue,7%growthincorporatebankingfeerevenue,and4%growthininvestmentadvisoryfees.

Additionally,wemaintainedourexpensedisciplinewithexpensesdown6%whilemakingcontinuedinvestmentsinourbusiness.

Wegrewaverageloans2%comparedwith2013including9%growthinC&Iand7%growthinbankcard.Wemadesignificantprogressrebuildingourcommercialconstructionbookandnearlydoubledouroutstandingbalancesoveryear-end2013.

Inaddition,wegrewaveragecoredeposits8%including10%growthinsavingsandmoneymarketbalancesand6%growthindemanddepositbalances.Wehaveplacedastrongemphasisonbuildingfullandprofitablecustomerrelationshipsandwearefocusedonaligningvalueprovidedandvaluereceivedgivenchangesintheprofitabilityofretailproducts.

Webelievethestrengthofourdepositfranchisewillbeverysignificantinthecomingratecycleandtheinvestmentsthatwearemakinginourretailbusinessareincreasinglybuildingacompetitiveadvantageforus.

Ourstrongearningscontributedtothesolidreturnsweprovidedourshareholdersasweexecutedonourcapitalplans.Werepurchasedoutstandingsharesworth$654millionwhichdecreasedoursharecountby4%andweincreasedourcommondividend9%allwhilemaintainingstronglevelsofcapital.Intotal,wereturnedmorethan$1billionincapitaltoshareholderswhilegrowingourtangiblebookvalueby11%andourTier1commonratioby20basispoints.

OverallIbelievethat2014wasasuccessfulyearforusandIbelievewearepositionedwellforthecurrentenvironment.

Nowturningtotheresultsofthequarter.Todaywereportedfourth-quarternetincometocommonshareholdersof$362millionandearningsperdilutedshareof$0.43.Resultsincludedtheimpactofa$56millionpositivevaluationontheVantivwarrant,$25millioninchargesassociatedwiththetransferofcertainloanstoheldforsale,anda$19millionchargerelatedtothevaluationofourVisatotalreturnswapwhichintotalessentiallywashed.

Wehavediscussedoureffortstoreduceourriskexposuresandduringthequarterwemoved$720millionofTDRstoheldforsaleaswelooktotakeadvantageofmarketconditionsforthesetypesofassets.Ultimately




weexpectthistransactiontoimproveouroverallcreditprofile,reducingservicingcostsandenableustousemoreofourcapitalefficiently.

Fourth-quarterfeeincomeresultswerehighlightedby20%sequentialgrowthincorporatebankingfeerevenuedrivenbyhighersyndicationvolumesandbusinesslendingfeesduetoincreasedvolatilityinthefourthquarter.Resultswerealsosupportedbystrongcardandprocessingfeesandinvestmentadvisoryrevenue.

Wemaintainedabalancedapproachtoexpensedisciplinethatischaracterizedbyanintensefocusonmanagingexpenseswhilecontinuingtoinvestinourinfrastructureandourrevenue-generatingcapabilities.Expensesyear-over-yearweredown7%andasexpectedincreased3%sequentiallyfromrelativelylowlevelsinthethirdquarter.

Aswediscussedlastquarter,ourfinancialsreflectsomeofthedeliberateactionswehavetakenthatwebelievearetherightdecisionstomakeforthelong-termandwillpositionuswellastheeconomyandinterestrateenvironmentchange.Partofthisistakingaprudentapproachtolendingstandardsandmaintainingariskreturnprofile.

Thishadanimpactonloangrowthinthequarter.Wecontinuetoseeaggressivepricingandstructurefrombothbanksandnon-banksandhavechosentonotchasedealsthatdonotoffertheappropriatereturnfortheriskwearetaking.WearemanagingtheCompanyforthelong-termandwearecommittedtomaintainingourdisciplineeveninthischallengingenvironment.

Averageportfolioloanswereup4%comparedwithfourth-quarterof2013withmodestsequentialgrowth.Growthfrom2013wasdrivenby6%growthinC&Iand6%growthinbankcardloans.Wecontinuedtogeneratesolidcoredepositgrowth,up8%comparedwithlastyearandhighlightedby13%growthinconsumersavingsandmoneymarketbalances.Commercialdepositsincreased10%comparedwithlastyearwithcheckingaccountbalancesup13%anddemanddepositbalancesup10%.

Wecontinuetomakegoodprogressincredit.Excludingnetcharge-offstakeninconjunctionwiththetransferofTDRloans,ournetcharge-offratiowas45basispointsofloans.Non-performingassetlevelscontinuetotrenddownandournon-performingassetratioendedtheyearat82basispoints.

OverallI'mpleasedwiththeprogresswehavemadeoverthepastseveralyearscontinuingoureffortstorepositiontheCompanyinthiscurrentlychallengingenvironment.Wearewellalongthepathbecauseoftheworkwehavedonetoaddresschangingcapitalandliquidityrequirementsandheightenedregulatoryexpectationsandtoadapttothelowinterestlowrateenvironment.

Wedorecognizethat2015istopofmindandthatwearefacingsomenear-termheadwinds.Likeothersintheindustry,wewillcontinuetomanagethroughthelowinterestrateenvironmentanditsimpactonloanyieldsandtheinvestmentportfolioaswellasincreasingcostsrelatedtocomplianceandriskmanagement.

Wewillalsobeimpactedbythechangesweannouncedtoourdepositadvanceproduct.WewillworkthroughallofthatthisyearwhilecontinuingtorepositiontheCompanyinordertoachieveourlonger-termobjectives.Weremainfocusedonthethingswecancontrol.Wearemakingstrategicdecisionstoachievetherightbusinessmix,onewhichproduceslessvolatileandmoresustainableearningsgrowthandwecontinuetopursueopportunitiesthatadduniquevalueforourcustomerswhileprovidingasolidreturnforourinvestors.

Thebenefitsofourstrategieswillprovemoreenduringthroughthecontinuedenhancementswearemakingtoourriskcultureandourfocusonappropriatelybalancingriskandreward.

Webelievethesestrategieswillenableustoachieveourlong-termtargetsinanormalizedenvironmentwhichwouldincludehigherrates.Tothatendwehavenotchangedourobjectivesandwecontinuetowork




towardareturnonaverageassetsinthe1.3%to1.5%rangeandanefficiencyratiointhemid50s.Wethinkthosearereasonabletargets.Wehaveprudentstrategiesinplacewithatalentedworkforceallalignedtowardsthoseobjectives.

OurdedicatedemployeessetFifthThirdapartastheyworkwithourcustomerstoprovidesolutionstotheirfinancialneedsandIthankthemfortheirmanycontributions.Whilewehavealotofworkaheadofus,wehaveasolidfoundationfromwhichtogrow.Wewillcontinueourtransitionin2015andwewillprovideupdatesthroughouttheyearaboutourprogress.

Withthat,IwillturnitovertoTayfunanddiscussourfourth-quarteroperatingresultsandouroutlook.Tayfun?

TayfunTuzun(EVP,CFO):

Thanks,Kevin.

Goodmorningandthankyouforjoiningus.

In2014,despitethemanyenvironmentalchallengesthatKevinmentioned,wecontinuedtoexecuteonourstrategicprioritiesandtookdeliberateactionstopositionourCompanywelltomeetthosespecificchallenges.Inayearwithcontinuedpressureonmargins,wegrewnetinterestincome1%andfurtherstrengthenedthebalancesheetwithrespecttoourliquidity,interest-rateandcreditriskexposures.

Growthinfeeincomeincludingcorporatebanking,cardandprocessing,investmentadvisoryanddepositfeesprovedthebenefitofourdiversebusinessmodelaswecontinuetotransitionfromthemortgagerefinanceboom.Full-yearexpensesweredown6%evenaftera4%increaseintechnologyrelatedexpensesaswecontinuetoinvestinourbusiness.

Ourstrongresultssupportedourcapitalreturnsaswedistributed$1.1billiontocommonshareholdersthroughdividendsandsharerepurchasesin2014resultinginatotalpayoutratioof76%.

Lookingindetailatthefourthquarter,Iwillstartwithafinancialsummaryonpage3ofthepresentation.

Wereportednetincometocommonshareholdersof$362millionor$0.43perdilutedshare.TherewereseveralitemsthataffectedearningsinthequarterandIwillnotetheirimpacttovariouslineitemsthroughoutmycomments.

Inthefourthquarter,wetransferredapproximately$720millionofprimarilyaccruingfirstlienresidentialmortgagesthatwereclassifiedastroubleddebtrestructuringtoheldforsale.Thevastmajority,about97%oftheseloans,wereoriginatedin2008orpriorandapproximately50%ofthebalancewaslocatedinMichiganandFlorida.Weexpecttoexecuteasaleoftheseloansearlythisyear.

Inconnectionwiththeloantransfer,werecognizedincrementalnetcharge-offsofabout$87millionor38basispointsandotherrelatedexpenses.However,thiswaspartiallyoffsetbya$64millionreductionintheallowanceforloanlosses.Asaresult,thepretaxnetincomeimpactofthetransactionincludingexpensesof$2milliontotaled$25millionor$0.02pershare.Thistransactionrepresentsanotherstepinourstrategicdirectiontoreducepotentialsourcesofearningsvolatilityinourbusiness.

Withthat,let'smoveontotheaveragebalancesheetandpage4ofthepresentation.Inthefourthquarter,averageinvestmentsecuritiesdecreasedby$216millionor1%sequentiallyreflectingourlowappetitetodeployadditionalcashintoinvestmentsecuritiesgiventhecurrentrateenvironment.Consequently,wedidnotreinvestallofourcashflowsintheinvestmentportfoliothisquarter.Asaresultwhencombinedwithourstrongdepositgrowth,ourcashbalancesattheFedreachedover$7billionattheendofthequarter.




Shiftingtoloans,wecontinuetobeprudentonpricingandterms.Asaresult,wesawrelativelystableaverageportfolioloanbalancesup$242millionfromthethirdquarterdrivenbygrowthincommercialconstructionandresidentialmortgagebalances.Otherwise,payoffsandpaydownsoffsetsolidfourth-quarterC&Iproduction.Competitioncontinuestobefierceandaswehavestatedbefore,pricingdoesnotleavemuchroomforerror.

Wehaveandwillcontinuetomakedeliberatedecisionsnottoaddorrenewloansattermsorpricingthatwouldproducesub-optimalriskreturnprofilesaswedeployourcapital.

Wehaveseenverystrongdepositgrowththroughouttheyearendandasweexpectedthatcontinuedinthefourthquarter.Averagecoredepositsincreased$3.2billionfromthethirdquarterdrivenbygrowthinmoneymarketanddemanddepositaccounts.

OurLCRratioatyear-endexceeded110%,averysignificantachievementaccomplishedin2014.

MovingtoNIIonpage5ofthepresentation.Taxableequivalentnetinterestincomedecreased$20millionsequentiallyto$888millioninlinewiththeexpectationswesharedwithyouinDecember.A$6millionreductionduetocreditspreadcompression,$9millionduetothefollowingimpactoffixed-ratedebtissuance,and$4millionrelatedtothedelayinthedeploymentofourportfolioinvestmentsdrovethedecline.

Thenetinterestmarginwas296basispoints,down14basispointsfromthethirdquarterwith8basispointsofcompressionrelatedtoourelevatedcashbalances.Debtissuancesandloanrepricingwereresponsibleforthebalanceofthedecline.Thequarterlydeclineinourloanyieldswerethesmallestoftheyear.

Shiftingtofeesonpage6ofthepresentation,fourth-quarternoninterestincomewas$653millioncomparedwith$520millioninthethirdquarter.Resultsincludeda$56millionpositivevaluationadjustmentontheVantivwarrantanda$19millionchargerelatedtothevaluationoftheVisatotalreturnswap.Theseimpactswerenegative$53millionandnegative$3millionrespectivelyinthethirdquarter.Excludingtheseitemsinbothquarters,feeincomeof$616millionincreased$40millionor7%sequentiallydrivenbysolidcorporatebankingresultsandthepaymentunderourtaxreceivableagreementwithVantiv.

Corporatebankingfeesincreased$20millionor20%sequentiallyonhighersyndicationandbusinesslendingfees.Onafull-yearbasis,corporatebankingfeesincreased7%aswecontinuetogrowthecontributionsfromourcapitalmarketsolutionsandothernoncreditproductsandservices.

Cardandprocessingrevenueincreased2%fromthethirdquarterandwasup7%fromthefourthquarterof2013aswecontinuedtobenefitfromgreatercardutilizationandhigherconsumerpurchasevolumes.Forthefullyear,cardandprocessingrevenuewas$295million,up8%from2013andthehighestlevelwereportedsince2011whentheDurbinAmendmentwasimplemented.

MortgagebankingnetrevenuewasflatsequentiallywhichwasconsistentwithourOctoberexpectations.Originationsdeclinedseasonallyandwere$1.7billioncomparedwith$1.9billioninthethirdquarter.Increasesingainonsalerevenueweremostlyoffsetbydeclinesinservicingfees.Gainonsalemarginswereup60basispointsto284basispoints.

Depositservicechargesdeclined2%fromthethirdquarterandwereflatrelativetothefourthquarterof2013.Commercialdepositservicechargesandretaildepositservicechargeseachdeclined2%sequentially.

Ontheconsumerside,wesawadecreaseinoverdraftoccurrencesduringthequarter.Totalinvestmentadvisoryrevenuedeclined2%sequentiallybutforthefull-yearrevenueof$407millionwasarecord.Thedeclinewasinmorevolatilerevenueitems.

Wehavebeensuccessfulingrowingassetsundermanagementwhichareup8%from2013andwecontinuetofocusonshiftingfeestructurestoanassetbaserecurringmodelawayfromtransactionalpricing.




Excludingmortgage,theyear-over-yearincreaseinourtotaladjustednoninterestincomewas3.3%in2014whichisaverygoodaccomplishmentinthisenvironment.

Weshownoninterestexpenseonpage7ofthepresentation.Expensescameinat$918millionthisquartercomparedwith$888millioninthethirdquartermatchingourexpectations.Noninterestexpenseincludedhighercompensationrelatedexpenseincluding$4millionhighermedicalclaimsaswellas$6millioninseveranceexpense.

PPNRonpage8ofthepresentationwas$618million.Whenadjustedfortheitemsnotedontheslide,PPNRwas$580million,down$13millionfromthird-quarteradjustedPPNRprimarilyduetohigherexpensespartiallyoffsetbytheVantivTRApayment.Theefficiencyratioadjustedonthesamebasiswas61%forthequarter.

Turningtocreditresultsonpage9,totalnetcharge-offsof$190millionincreased$75millionsequentially.Fourth-quarternetcharge-offsincluded$87millionrelatedtothetransferoftheresidentialmortgageloansclassifiedasTDRstoheldforsale.Excludingthisimpact,netcharge-offswere$104million,asequentialdeclineof$11millionor10%andwere45basispointsofaverageloans.

Non-performingassetsexcludingloansheldforsalewere$748millionatquarterendanddown$48millionfromthethirdquarterbringingtheNPLratioto64andtheNPAratioto83basispoints,itslowestlevelinsevenyears.CommercialNPAsandconsumerNPAsdecreased$26millionand$22millionrespectivelyfromthethirdquarter.ResidentialmortgageNPAsdecreased$40millionprimarilyreflectingthetransferofTDRstoheldforsale.

Asanupdateinlightofthedeclineinthepriceofcrudeoilintheenergyportfolio,ourbalancesarefairlymodestatjustover$2billion.Wehaverelationshipswithabout170customersfocusedonthemiddlemarketandlargecorporateborrowers.Only2%arecriticizedwithnodelinquencies.

Inourreservebaselendingportfolio,weonlylendagainstprovenreserves.Thevastmajorityofourproducerclientsthatareleveragedtooilhavereasonablelevelsofhedginginplacethrough2015andmanyarehedgedthrough2016andincertaincasesinto2017.

Overall,thequalityofthefirmswehaverelationshipswithisverygood.Wecurrentlyhavenoexposuretoshaleactivityinouroutstandings.Wecontinuetomonitordevelopmentsbutwedofeelgoodaboutourpositions.

Wrappinguponcredit,theallowanceforloanleaselossesdeclined$92millionsequentiallyincludinga$64millionreleaserelatedtotheTDRtransfer.OurreservereleaseexcludingtheTDRrelatedimpactwas$28millionrelativeto$44millionlastquarterandsoourprovisionexcludingtheTDRsalewas$76millioncomparedto$71millionlastquarter.

Reservecoverageremainedsolidat1.47%ofloansandleasesand227%ofNPLs.Wearepleasedwiththelevelofcreditmetricsaswestart2015.

Lookingatcapitalonslide10,capitallevelscontinuetobestrongandwellaboveregulatoryrequirements.Tier1commonequityratioonaBaselIbasiswas9.6%,up1basispointfromlastquarter.ProformaforBaselIIIrules,ourcommonequityTier1ratiowas9.4%andincreased1basispointfromlastquarter.

Attheendofthefourthquarter,theaveragedilutedsharecountwasdownanother1%sequentiallyandisthelowestwehaveseensincethethirdquarterof2010.Duringthequarter,weannouncedcommonstockrepurchasesof$180million.ThatASRwas[sold]earlierthismonthandthetotalfortheentiretransactionwasapproximately9.1millionshares.

RelativetoCCAR,wesubmittedourcapitalplaninearlyJanuaryandwewillprovideyoumoredetailsonour




planinMarch.

Nowturningtoouroutlookfortheyear.Beforewediscussthebroadguidelinesofourfinancialperformanceexpectationsfor2015,wewouldliketoprovideyouwithourunderlyingassumptionsonthemostrelevanteconomicdriversinourbusiness.Thisyeartheabilitytoconfidentlyforecastthelevelofeconomicgrowthandthepathoftherateenvironmentaremorechallengingasthepastthreeweekshaveclearlyshown.Nevertheless,weneedtouseabaseforecastwhichweknowwillbesubjecttofrequentchanges.

Ourbaseeconomicoutlookisbasedonmostrecentconsensusmarketingexpectationsfordomesticeconomicactivity.CurrentconsensusexpectationsindicatethattheUSeconomywillachieveyear-over-yeargrowthof2.5%to3%in2015withlowerinflation.Onaverage,weshouldexpectourindustrytoachieveoverallloangrowthapproximatingGDPgrowth.

Incommerciallending,weexpectourgrowthtoexceed3%supportedpartiallybyourrecentstrategicinvestments.Wealsoexpectcontinuingdeclinesinconsumerloans,HELOCsandautosastheresultsofbothcontinuedweaknessinloandemandandcompetitivepricingpressuresthatwilllikelymaintainourcautiousapproach.

WiththeLCRrelatedinvestmentslargelybehindus,ourportfolioinvestmentswillbeopportunisticinthisenvironment.Weexpecttoincreasethesizeoftheportfoliobutthetimingwillbedependentonratesandotherbalancesheetdynamics.Wedon'thaveanysignificantderivativecontractsthatareexpiringthisyear.

Undertheexpectationofarelativelyhealthyeconomy,weassumetheFedwillstartraisingtheFedfundsrateduringthesecondhalfoftheyear.Ourrateoutlookforthefirsthalfoftheyearisflat.Reflectingourdetailedpublicdiscussionsanddisclosuresonourassetsensitivityandbaseduponthecombinationofourloangrowthoutlookandinterestrateassumptionsandincludingthe$100millionreductionrelatedtoourdepositadvanceproductthatwecommunicatedbefore,weexpecta1%to2%declineinNIIonayear-over-yearbasisbutagrowingrunrateafterthemidyearpoint.

OnJanuary1ofthisyear,therepricingofourdepositadvanceproducttookeffectandtheNIIimpactwasimmediate.Althoughouryear-over-yearcomparisonswillhavetheimpactofthisreduction,theunderlyingtrendofourcoreNIIprogressshouldbepositivethroughouttheyear.Excludingthisimpact,wewouldexpectourNIItogrowthisyear.

WithrespecttoNIM,includingtheimpactofthe$100milliondeclineinourdepositadvancerelatedinterestincomewhichisonanannualbasisequivalenttoabout8basispoints,weexpectcontinuedcontractionduringthefirsthalfoftheyearbutbasedontherateassumptionsourNIMshouldrecoverbyyearendtoQ42014levels.Ifratesstayflat,wewouldexpectcontinuedcontractionduringthesecondhalfoftheyearandend2015roughly5to7basispointsbelowQ42014levelsexcludingtheimpactofthedepositadvanceproducts.

Forthefirstquarter,weexpecttheimpactofthedepositadvanceproducttobe$20millionto$25million.Inaddition,daycounthas$12millionnegativeimpact.Otherwisewegenerallyexpectthebenefitfromloangrowthtobeoffsetbycontinuedrepricingintheportfolio.WeexpectNIMtobelowerduringthequarterduetoelevatedcashbalancesandongoingpricingpressures.

WeexpectourcreditperformancetocontinuetoimprovebutwewouldliketoremindyouthatweexpectALLLreleasesin2015tobesignificantlybelowthe2014levelsandloangrowthwillresultinhigherlevelsofprovisioning.Weareveryencouragedbytheoverallgoodqualityofnewloansthatweareputtingonourbalancesheetsoourfundamentalcreditperformanceshouldimprove.

WeexpectournoninterestincomeexcludingVantivrelatedgainsof$155millionin2014tocontinuetogrowatahealthyrate.Wecurrentlyexpectanincreaseinthemid-singledigitspercentrangewiththemaindrivers



©2014TheStreet,Inc.AllRightsReserved Page8 of 24

beingfeeincomerelatedtocommercialbankingandinvestmentadvisory.

Mortgagerevenuewillbeafunctionoftherateenvironmentwhichatthistimeisdifficulttoforecastforthefullyear.TogetherwithourNIIexpectations,wewouldexpectourfull-yeartotalrevenuestoexceedour2014corerevenues.

Forthefirstquarterfeeincome,mostfeerevenuelinesincludingdepositfees,cardandprocessingrevenueandcorporatefeestendtobeseasonallylowandweexpectcorporatebankingfeestobeadditionallyimpactedbythecurrentmarketenvironment.Additionally,wewillnothavethebenefitoftheVantivTRApaymentinthefirstquarter.

Ontheexpenseside,asalways,wewillmaintainourfocusonmanagingourCompanyefficiently.Wewillhowevercontinuetoinvestinourbusinessestogrowthrevenuesandbuildandmaintainaninfrastructurethatwillbeacompetitiveadvantageforus.

Asyouhaveheardfromotherbanks,riskandcomplianceinfrastructuresarebeingreevaluatedandredesignedandwearedoingthesame.Ourheadcountintheseareaswillincrease.Wewillcontinuetodriveefficiencieslikewhatyousawin2014wherewereducedourheadcountbyalmost1100butasaresultofthesehires,weexpecttoaddtoourtotalheadcountin2015.

Customerdemandisdrivingtechnologyinvestmentsbothtocreatenewefficienciesaswellastoadapttothechangingenvironment.Someofthesearepermanentchangestoourexpensebase,someofthemaretemporary.

For2015fullyearundertherevenueassumptionsthatIoutlined,weexpecttoachieveafull-yearefficiencyratiointhelow60s.Theyear-over-yearincreaseincompliancerelatedexpensesisexpectedtobeinthe$25millionrange,predominantlyheadcountrelated.Inaddition,weexpectroughly$15millioninexpensesduringthesecondhalfoftheyearrelatedtotheEMVtechnologyinourcreditcardbusiness.

TheimpactofthereductioninrevenuerelatedtothedepositadvanceproductandthecomplianceinEMVrelatedexpensesareequivalenttoroughly2%intermsofourefficiencyratio.Therewillbequarterlyfluctuationsduetotheseasonalnatureofsomeitemsasalwaysandintheneartermwemayexperiencehigherexpenses.

Forthefirstquarter,wewillseehigherexpensesprimarilyduetoseasonallyhigherFICAandunemploymentexpensemuchlikewhatwesawlastyearandcontinuedinvestmentsinriskmanagementcompliance.Inaddition,marketingexpenseswillhaveaseasonalpickup.

WearestillofthefirmopinionthatwecanoperatethisCompanyinthemid-50sefficiencyratiowhenrevenuesnormalize.

Forthefullyear,weareassuminganeffectivetaxrateinthe26%range.Wealsowouldjustliketoremindyouthattherevenueexpectationsthatwesharedwithyoutodaydonotincludepotentialbutcurrentlyun-forecasteditemssuchasVantivwarrantmarksorgainsorlossesonsharesales.

Insummary,weareenteringthenewyearwithastrategicfocustomanageourCompanyefficientlyandwithalong-termfocusongrowthandachievingoptimalreturnsforourshareholders.Webelievethatourstrategieswilldrivelessvolatile,moresustainablelong-termearningsgrowthandreturnsandwelookforwardtoprovidingupdatesaswegoalongthisyear.

Withthat,let'sopenthelinefordiscussions.Jake?

QUESTIONS&ANSWERS




Operator:

(OperatorInstructions).

ErikaNajarian,BankofAmerica.

ErikaNajarian(Analyst-BofAMerrillLynch):

Yes,goodmorning.Myfirstquestionisonthecommercialloangrowthoutlook.Youmentionedthatyouexpectedtoexceedthe3%GDPgrowththatisbeingforecastedcurrently.IfIlookattheaverageC&Igrowththisquarter,itwasup6%yearoveryear.Imeanobviouslyexceeds3%couldmeanalotofthingsbutarewesupposedtotakeawayfromthisthatC&Iloangrowthcouldbeflatordecelerating?Andifso,inanimprovingGDPbackdropwhyisthatthecaseforFifthThird?


Idon'tthinkwearebackingawayfromgrowthincommerciallending.Wetotallyexpectcommerciallendingtogrowthisyeartothe3%pluslevel.In2014,weclearlyhadsomeheadwindswithrespecttopayoffsrelatedtocompetitiveoffersfromeithercapitalmarketsorothercompetitors.Ourexpectationfullyisthatwewouldgettosimilarlevelsofgrowthandourproductionnumberswouldindicatethatweshouldbeabletoachievethat.

Andalsogivensortofthevolatilitythatweareseeingincapitalmarkets,wewilljusthavetowaitandseewhatthepayoffandpaydownexperienceisandastheeconomyimprovesIsuspectthatourclientswillbeutilizingmoreoftheirborrowingcapacity.

SoatthispointweareoptimisticaboutC&Igrowth.Wearenotbackingawayfromitandwewillachievesortofthe3%pluswhetherthatisat4%,5%or6%willclearlydependalittlebitoneconomicactivity.


Gotit.Myfollow-upquestion,youweretrackinga61%efficiencyratioonanadjustedbasisthisquarterandyouareguidingtowardslow60%witha50basispointincreaseinthefront-endforthesecondhalfoftheyear.AndIguessisthemainmessagethatFifthThirdisunlikelytomovetowardthemid-50suntilwearemorematureintotheratecycleoristheresomethingfurthertodowiththeexpensebaseafteryouhaveinvestedinthecomplianceandtechnologyrelatedmattersthatyoumentioned?


Soclearlyonayear-over-yearbasis,theimpactofthe$100millionreductioninNIIrelatedtoourdepositadvanceproducthasabigimpact.(multiplespeakers)onrevenues.Andthenwehavetheadditional$40millionofexpensesthatImentioned.

WhatishappeningtodayisIdon'tthinkthatournewguidancechangesourperspectivesonwherewethinkourlong-termefficiencyratiowillbe.Ithinkourindustryisgoingthroughachangeinthewaywemanageriskandcompliance.

Thisisanewprototypethatbankslargeandsmallareadopting.Whereasinthepastriskandcompliancemanagementhadmoreofacentralizedstructure,thatstructuretodayisbeingredesignedtoincorporatethosefunctionsintothefrontlinesandaswellatthesametimeboostthecentralizedriskandcompliancemanagementunits.Sobydefinition,thatdeploymentrequiresheadcount.

Newprocessesarebeingdesignedtoaccommodatethestructureandthereisalwaysacostinvolvedwhensuchanundertakingistakingplace.Thisdevelopmentappliesnotjusttousbuttoallbanksinourpeergroupandeventuallywethinktherewillbetechnologyapplicationstotheseprocessesbutwearenotthereyet.




Sothereforewhatishappeningtodayisthattheseefforts,headcounteffortsareheavyandhaveanegativeimpactonourefficiencyratiowithoutnecessarilycreatingnewrevenuestreams.Butwedobelievethatultimatelytheseeffortswillhaveotherpositiveexternalitiesthatwillimpactourefficiencyoncetheyareinplace.Ourcustomerswillforexampleexperiencebetterservicewhichshouldimpactcustomerretentionandweshouldexperienceloweroperatinglosses.

Sothatwillmovethroughourefficiencyratiointime.Butrightnowweareintheinvestmentphasewithoutnecessarilyrealizingthesebenefitsandontopofthatwearealsooperatinginadifficultrevenueenvironment.Soastheprocessmatures,wewillgettheefficienciesbackandasweapplymoretechnology,thosewillbeevenmorepronounced.

SoIguessthequestioniswhycan'tyoudothisallbytakingexpensesoutelsewheretopayfortheseinvestmentsandweare.Thefinalnetcostoftheseinvestmentsactuallyislowerthanwhatthegrowthexpensesarebecausewearepartiallypayingforthemwithsavingselsewhere.Butwecan'tstopalltheinvestmentsandwestillneedtolookforrevenuegrowthopportunitiesinourbusinesses.

Sotheotherpiecesforexample,theinvestmentinEMVthisyearwillhaveultimatelyverybeneficialimpactonfraudlosseswhichwillonceagainworkthroughtheefficiencyratio.Butthosebenefitsaregoingtoberealizedafterthetechnologyisinplace.Sothereforein2015fromacalendaryearperspective,wehavethisphenomenonoftheblipinourefficiencyratio.Butbynomeansouroperatingleveragepicturein2015revisesourperspectiveonhowwecanrunthisCompany.Itisjustacombinationofthenatureoftheseinvestmentsandtheoperatingenvironmentthatwearein.

ItisalonganswerbutweclearlyareveryfocusedintermsofmanagingourCompanyefficiently.


Gotit.Thanksfortakingmyquestions.

Operator:

MattBurnell,WellsFargoSecurities.

Matt Burnell(Analyst-WellsFargoSecurities):

Goodmorning.Thanksfortakingmyquestion.IguessIwantedtobroadenthequestiononcommercialloangrowthoutsideofC&Isinceyouhavealreadyansweredthatquestion.ButIguess--andIknowitisasmallnumberrelativetototalloansbutcommercialconstructionwasupfairlyvisibly,hasbeenupfairlyvisiblyoverthelastcoupleofquarters.

Canyougiveusalittlemorecolorastowhatyourexpectationsareforgrowthinthatportfolioandaretherespecificlocationsorprojectsthataredrivingthatandarethereancillaryprofitopportunitiesoutsideoflendingrevenuethatyouaregeneratingfromthoseloans?


Sure.Soweaboutdoubledourcommercialconstructionin2014andwhenwelookattheunderlyingproductiontrends,about75%to80%ofthatproductionisinourfootprintandabout75%or80%oftheunderlyingtypeofprojectiseitherindustrialormultifamilyandthereissomeofficebuildingsattachedtothataswell.

Clearlyduetotheshortnatureofthatlending,thenaturalgrowthinthatportfoliowillultimatelyslowdownfromwhatweareexperiencingtodaybecausethechurnitselfwilllimitthenetgrowth.

Atthispointduetothatnature,wearenotnecessarilyseeingasignificantfeepickupbutwearebroadening




ourcustomerbaseandwouldpotentiallyobviouslyseektogrownoncreditrevenues.Butatthisstage,itisnotaverymeaningfulnumber.

AportionoftheconstructionloanswethinkwecancapturebutIhavetotellyouthatcompetitionfrominsurancecompaniesandotherverylong-termorientedinvestorsisverytoughandwearenotnecessarilycompetingastheyturnfromconstructiontoperm.


Thankyou.Justasafollow-upbackoncommerciallending,itisclearthatyouarenotseeingthereturnsonthosetypesoflendingexposuresthatyouwouldliketosee.Whereareyouseeingthemostaggressivecompetitioncomingfrom?Isitsmallerregionalbanksorisitbiggerbanks?Andgivenyourcommentsabouttryingtodiversifyyourrevenuesource,givenyourstrongcapitalratios,arethereopportunitiesthatyouhaveseenoutinthemarketplacetopotentiallyaddcommercialfeerevenueviainorganicgrowth?

KevinKabat (CEO):

Matt,thisisKevin.Iwouldjusttellyouthatcompetitivelywehaveastheyearhasprogressedseenitcontinuetoratchetupnotonlyintermsofpricingbutinstructure.AndIwouldsayhardtocategorizeoutofonesegmentalthoughwewouldtellyouthatweseeitequallyintermsofthelargestinstitutionsthatarebeingveryaggressiveintermsofsomeoftheparticularlystructureofthedeals.Soithasjustcontinued.

Itisnotsurprisingtousfromthatstandpoint.Iguessthebiggestsurpriseisthespeedatwhichithasacceleratedandthatisreallykindofthedisciplinethatweputagainstourorientationfromthatperspective.Sowesawokayproduction,wesawalotmoreaggressivepaydownaswegotprogressivelyintotheyear.AndIthinkthatwillcontinueandthatisreallykindofwhatwearelookingat.

Relativetootherfeeincome,IthinkTayfunhastalkedaboutourexpansionintermsofcapitalmarketsandsomeoftheofferingsthatwenowhavethecapabilitiesofproducing.Wethinkthereisstillopportunitiesthere.Idon'tknowifthereareothers,Tayfun,thatcomeinto(multiplespeakers)


Theoneparticularnew--onenewverticalthatwelaunchedinthesecondhalfoftheyearisretailverticalandwedidthatdeliberatelybecausewehaveverystrongtreasurymanagementproductstocompeteinthatarea.Andthatwas,weexpectthefeeincomecomponentincorporatelendingviatheseverticalplaystoactuallycontinuetoincrease.

BecauseIdon'tthinkatleastintheneartermourexpectationisthatthepriceandstructurecompetitionwillprobablystillbewithussoweareverykeenonmakingsurethatwesupplementrelationshipprofitabilityvianoncreditproducts.


Thankyouverymuch.

Operator:

MattO'Connor,DeutscheBank.

Matt O'Connor(Analyst-DeutscheBank):

Goodmorning.WasjusttryingtodosomeroughcalculationsonalltheguidancetobackintowhattheabsoluteexpenseoutlookisandfiguredIwouldjustaskinsteadoftryingtopullthemovingpiecestogether.Butjustaswethinkabouttotalcostfor2015,obviouslyXthingslikelitigationthatmightpopup,whatisthe




outlookontheexpenses?


Well,theoutlookontheexpensesIthinkourguidance,theformatofourguidanceisasIwentthroughearlier.Whatweexpectisweexpecthigherheadcountsandthereforeinadditiontosortofnormalmeritincreaseswedoexpectouremploymentrelatedexpenseitemstoincrease.

WedoexpecthigherITexpensesbecausewecontinuetoinvestinourretailbusinessandourcommercialbusiness.Wehavetomaintainthelevelofinvestmentstogrowearnings.Weareinvestingquiteabitofmoneyinourdigitalrevenuegenerationcapabilitiesinretail.Wearecontinuingtoinvestinthecapitalmarketsbusinesssothoseitemswillcontinuetogoup.

Marketingislikelytobehigherandwearecomingoffofaloweryearin2014forthat.Soingeneral,Matt,Ithinkourexpenseguidanceyouwillneedtoworkthatthroughtherevenueguidanceandtheefficiencyratio,thelow60sefficiencyratiothatweprovidedyouwith.Andonarunratebasis,ournewhireincreaseswillprobablybehigherinthesecondhalfoftheyearcomparedtothefirstbutingeneralwewillseehigheremploymentrelatedexpenses.


Okay.AnditseemslikeexsomeoftheITinfrastructurespend,thereismoreexpensecreepthanwehaveseen.Isitthatyouhaverunoutofareasthatyoucancuttooffsetsomeoftheinflationorisitthatwearecloseenoughtoratesincreasingandrevenuepickingupthatyoudon'twanttocutmoreintothecoreorintothecore?


Iwouldn'tcharacterizeitaswehaverunoutofareastosave.Iwouldcharacterizeitaswearenotnecessarilyreducingourinvestmentsinourbusinessesthisyearasweareverykeenonreachingtherevenuegrowthtargets.Ithinkourrevenuesaregrowingyear-over-yearwhichisimportanttonoteandwearekeenonmakingsurethatweputsomeofoursavingsforexampleinretail,backtoretailbecausewecontinuetoviewthatlineofbusinessasveryimportantnotonlyin2015butbeyond2015.

KevinKabat (CEO):

AndtheotherthingIwouldadd,Matt,asyouknowandhavefollowedusforawhile,youknowthatwearemindfulofmakingsurethatourrevenuecapabilitiescontinuetotrackrelativetotheenvironmentandtheanticipationoftheenvironment.SoasTayfunjustmentioned,wearedevelopinganewverticalinourcommercialspacethatwearehiring.Wearealsoinvestinginourinvestmentadvisoryspacethathasgottenusagoodreturnandsowewillcontinuetodothataswellaswegoforward.


Andthenjustquicklyonthesecuritiesbook,youtalkedaboutitlikelygrowingfromheredependentonrates.Butaswethinkaboutthat$22billionofsecurities,howbigshouldthatbeifrateswere--youcanpickthelevel,2.25or2.5onthe10year--howdepressedisthatlevelrightnowjustgivenwhathashappenedtoratesinthelastthree,fourmonths?

JamieLeonard(SVP,Treasurer):

Matt,itisJamie.IthinkthewaytolookatthesecuritybookisreallyinthecontextoftheLCR.Wewereat92%lastquarter;weareat112%thisquarter.SothesizeofthesecuritybookwhatIwouldliketoseeisexitingtheyear100%ormoresohavinganacceptablebufferthere.




Sittingon$7billionofcashattheendoftheyear,thereweren'talotofopportunitiesandwestilldon'tseealotofopportunitiesinthisrateenvironmentbutwewillcontinuetobeopportunistic.ButIthinkyoucanexpecttoseesomeofthatcashdeployedoverthecourseof2015intoLCRfriendlyHQLA.


Andnothingonthemagnitude,thecashhasgoneupbycallit$5billionandchangethelasttwoquarters.Isthatacorebuildoristhatjustbecauseratesaresolow?


Ithinkthebuild-upincashisinsomepartdrivenbyseasonalitybutinalargepartdrivenbyalotofthestrongdepositgrowthTayfunreferencedwithregardtoourretailbankingfranchise.


Ithinkthebroadermessageonthebalancesheet,Matt,isthatwetrulyareonadaytodaybasis,wearemonitoringthis.Wearemonitoringtheassetsideofthebusiness,theliabilitysideofthebusiness.Clearlydepositgrowthhasexceededourexpectationsin2014,whichwasgreat,butweareverykeenonmakingsurethatfromamarginperspectiveknowingthatwewillcontinuetoexperiencecreditspreadcontractionthatwemanagetheliabilitysideofthecostsasefficientlyaswecan.

Soyouwillseeusspendingquiteabitoftimeandfocusontheliabilitysidethisyear.


Okay,thankyou.

Operator:

KenZerbe,MorganStanley.

KenZerbe (Analyst-MorganStanley):

Goodmorning.Firstquestion,justintermsofthetransactiondeposits,canyouaddresswhatdrovethebigincreasethere?Isthereaphilosophyshiftthatisactuallydrivingyourdesiretogrowdepositsmuchmoreaggressively?


Well,we'vealways--Ithinklastyearinmanyinstances,we'vediscussedourperspectiveonthevalueofdeposits,andwecontinuetomaintainthatperspective.Welikedeposits;webelievethatourdepositfranchisewillbetheanchortoourprofitabilityinourbalancesheet.

Andinthefourthquarterwehaveexperiencedabitofahighergrowthincommercialdeposits,andeverylineinourcommercialdepositbookhasgrown.AndIthinkthatismorereflectiveofsortofthecorporatecashpositionswithrespecttoourclientsmorethanjustadeliberateactionthatwetookinourcommercialdeposits.Butingeneral,wehavenotchangedourviewofdeposits.


Buthaveyouincreasedyourpricingofthosecommercialdepositstohelpdrawmoredepositsinatall?


No,therewerenoincreasesinourcommercialdepositpricing.





Gotyou.Understood.Andthensecondquestion,intermsofthegainonsalemarginsobviouslymuchhigherthisquarter.Wasthatjustablipgivenwhathappenedwithinterestratesorshouldweexpectthosetocomebackdownagainnextquarter?


Wewillsee.Thereasonwhywedidnotwanttogivemortgageguidanceisbecauseofthevolatilityofthecurrentenvironment.Clearlyweareexperiencingapickupearlythisquarterin[AD]volumesandratelocks.Wewouldexpecttoseethatthisquarterandwewillseehowthatimpactsgainonsaleofmargins.Itisalittleearlytobeabletogiveyoucoloronthatyet.


Okay,great.Thankyou.

Operator:

RyanNash,GoldmanSachs.

RyanNash(Analyst-GoldmanSachs):

Goodmorning,guys.JustwantedtoaskoneclarificationontheNIMoutlook.Istheflatyear-over-yearguidancewithhigherrates,isthatinclusiveorexclusiveofthedepositadvanceproduct?


Ryan,itisJamie.WhatTayfunhadmentionedwasforthefirstquarterwewouldexpectNIMtobedowndrivenbytheearlyadvancedproductandthatisabout8basispointsandthendaycountbenefitof3basispointsbringingyouintothatoutlookforthefirstquarterofdown5basispointsorsooffoffourthquarterlevels.Andthenfromthereitwouldbedependentupontherateenvironmenttogo--togrowfromthere.


OuroutlookintermsofthepicturethatIgaveyouwascomparingQ4of2014toQ4of2015.


Andisthatinclusiveofdepositadvance--ofearlyaccess?


Yes.


Okay,gotit.Justshiftinggearstocredit,youtalkedaboutafewputsandtakesthatyouareexpectingcreditwillimprovebutloangrowthwilldrivehigherprovisions.Doyouthinkin2015wewillseetheinflectionpointwherecharge-offswillactuallystarttomeetprovisionsordoyouthinkyouwillactuallyhavetostarttobuildsomereservesin2015?


Wewouldexpectthedollarcharge-offstocontinuetodeclineandultimatelywebelievethatduringtheyeartheremaycomeapointwherewemayhitthatinflectionpoint.Itisabitearlytotellthatyet.




Weobviouslyhavetherightlevelofreservestodayat1.47%coverage.Newloansthatarecomingonthesheetareofgoodqualitywhichshouldimprovetheprofileandthenwewillseehowloangrowthproceeds.Theremaycomeapointin2015wherethatcrossovertakesplacebutatthispointIcan'ttellyouwhenandIcan'ttellyoubyhowmuch.


Gotit.Thanksfortakingmyquestions.

Operator:

KenUsdin,Jefferies.

KenUsdin(Analyst-JefferiesandCompany):

Thanks.Goodmorning,guys.Aquestiononcapital.YourTier1commonratiohaskindofhunginhereatagood9.4level,otherpeershavetendedtogrowalittlebitmore.

SoyouarenowinlineifnotalittlebitbelowwheresomeothersareandI'mjustwonderingifthereisanychangeinyourphilosophyaroundthetypeofmagnitudeofaskwhenyouthinkaboutCCARgoingforward?Iknowyouarenotgoingtobeabletotellustheamountyouaskfor.Butjustphilosophicallydoyoustillfeelasgoodaboutthetypeofaskyouguyshavegenericallydoneinthepastaboutreturningoverallmajorityofyourannualearnings?


So,Ken,IthinkthelasttwoyearswehaveworkedonCCARwiththesamegoaltomaintainourcapitalratiogoingintotheperiodandcomingoutoftheperiod.Thatactuallyenabledustoachievemoreaggressivecapitalreturndollarscomparedtoourpeers.

Ourphilosophytherehasnotchanged.WestillmaintainourviewthatastablecapitalratiogoingintotheCCARperiodandcomingoutoftheCCARperiodisthebestoutcomegiventheabsolutelevel,giventherelativelevelofcapitaltoourpeers.ThathasnotchangedandhopefullywewillgettosharetheresultswithyouinMarch.


Okay,gotit.Andthenjustonemoreclarificationontheoutlookintermsofjustyouroutlookforthefeesideandunderstandingwhatyousaidbeforeonnotbeingquiteclearonhowmortgagecancomethrough.Whenyouaretalkingaboutyourexpectedfull-yearoutlookforfeegrowth,canyoujustmakesureweareallbasedontherightstartingpointforit?Andthenisitbasicallythengoingtobethoseothercoreareasyouthinkyoucangrowwiththeswingfactorbeingmortgage?


SoasImentionedearlierinthecall,excludingmortgagein2014theyear-over-yearincreaseinourtotaladjustedforVantivnoninterestincomewas3.3%.Webelievethatagainexcludingmortgage,wecanachievethatnumberandevenbetterduringtheyearandthatiswhatouroutlookisbasedon.


Okay,gotit.Thanksalot.

Operator:

ScottSiefers,SandlerO'Neill.




Scot t Siefers (Analyst-SandlerO'NeillandPartners):

Goodmorning,guys.EitherTayfunormaybeJamie,justonthemarginIjustwanttomakesureIamunderstandingthedynamicscorrectly.Soitsoundslikequalitativelythebigpressurepointfortheimmediatetermisjustthedepositadvanceproductbutotherwisebasedonthetrajectoryyouhavegot,itsoundslikethecoremarginafterthefirstquarterwouldkindofhavetobeflattogetyoubacktothefourthquarter2014levelbytheendof2015.

Sowhatasyouseeitaresortofonacorebasisarethemaindynamicsthatwouldallowthecoremargintojustkindofstabilizeratherthankindofremainunderpressureinlightoftherateenvironment?


ThisisJamieandasTayfunhadmentioned,wearesensitiveontheshortendofthecurvesoclearlyFedtighteninginthebackhalfoftheyearwouldbebeneficial.Secondarilycommercialloangrowthnorthofthe3%GDPlevelscertainlywillhelp.

ButinthemeantimewethinkwecanruntheCompanyandourbalancesheetispositionedtodeliverstableNIMinthefirsthalfof2015butfortheimpactoftheearlyadvancedproduct.Sowehavesomeopportunityontheliabilitysidejustgivenhowstrongourdepositgrowthhasbeen.

Wecanmaybeearnanotherbasispointortwotherebutforthemostpart,theloanyieldcompressionyousawduring2014continuedtobelessandlessandsowehavegotalittlebit,maybeabasispointortwoofheadwindtherebutthatiscertainlymanageable.


ClearlyNIMguidancethisyearisverychallenging.Whatwehaveseenheresofaraloneinthelastthreeweeksis30+basispointdropinthe10year,notthatnecessarilythe10-yeardrivesourNIM.

ButwerecognizethechallengesassociatedwithNIMguidancebecauseitalsodependsasImentionedonthetimingofourabilitytodeploymoreleverageintoourinvestmentportfolio,wewillbepatientduringtheyear.NoquestionaboutitwhichmayfluctuateourNIMfromtimetotimebutwewillmaintainthatcautiousapproachthatwehavemaintainedthroughout2014.

Whenwedoseeopportunitieswewillgoafterthem.Alsoitisdifficulttonecessarilygiveyougoodguidanceforcreditspreads.Asyouknow,creditspreadscontractionhasactuallyoverwhelmedsomeofthebaseratechangesthroughout2014andwefeltthatinourcommercialbook.

Whatencouragesusalittlebitisthatourfixed-rateportfoliosaretrulyshowingsignsofstabilityasweexpectedandwewouldhopetoachievethatin2015butagainasmuchguidanceaswearegivingyoutodayonNIM,werecognizetheimportanceofthe$100millionreductionininterestincomerelatedtodepositproductsandwearecognizantofthevolatilityofthisenvironment.


Okay,Iperceivethatcolor.Thatishelpful.Andthenjustasasecondquestion,soasIamsortofweighingalltheguidancetogetherbutasyoulookatthingsandmaybethereisalittlepressureonexpensesthisyearbutallin,wouldyouexpecttogrowtherevenuebasemorethantheexpensebase?

Inotherwords,areyouexpectingpositiveoperatingleveragethisyearoristhisgoingtobekindofmorekindofayearthatreflectssomeinvestmentsandthentherevenuesidecomesnextyearwiththebenefitofhighrates?Howareyouthinkingaboutthatdynamic?





Wewillnothavepositiveoperatingleveragethisyear.Wewillgrowrevenuesbutourexpenseswillexceedthat.Itisextremelydifficulttoovercometheyear-over-yeardeclineinourrevenuesof$100millionassociatedwiththedepositadvanceproduct.


Okay,allright.Thankyouguysverymuch.

Operator:

PaulMiller,FBR.

ThomasLeTrent (Analyst-FBR):

Goodmorning,guys.ThisisactuallyThomasLeTrentonbehalfofPaul.MostofthequestionshavealreadybeenaskedandansweredbutIjustwanttoclarifyonthe1Q2015guidanceonexpenses,Icertainlyappreciatetheguidancethatseasonalitywilldrivethemhigher.

ButI'mtryingtofigureoutwhatbasetostartfrom.Youhad$33millionofcreditcostinOpExinthequarter.Obviouslythatishigherthanlet'scallit$10millionthelastfewquarters.IfIthinkaboutitlikethat,doesthatmeanthatexpensescouldberelativelyflatquarteroverquarterorhowshouldIgoaboutthat?


Notnecessarily.ClearlythebigmoverisgoingtobeintheseasonalpickupinFICAandsomeoftheunemploymentworkerscomplinesandthentherewillbeapickupinmarketing.SoIwouldn'tnecessarilykeepthelineitemsflat.TherewillbedecreasesinsomebutoverallclearlyseasonallywedoexperiencequiteabitofpickupinexpensesinQ1.


Okay.Andthenjustonefollow-upquestiononcredit.Ithinkyou'vegot$900millionleftintheconsumerportfolioIthinkinTDRandanother$800millionincommercial.Arethereanysortofnear-termplanstomovethosetoheldforsalelikeyoudidwiththeportfoliothisquarterorcanyoutalkaboutthatalittlebit?


No,atthistimewedon'thaveanyplans.TheremainingmortgageTDRsincludeagoodamountofgovernmentguaranteedmortgagesandthenwehaveabout$400millioninhomeequityloansandabout$100millionandautosandcreditcards.Atthistimewehavenoplans.


Okay,thatisall.Thankyouverymuch.

Operator:

MikeMayo,CLSA.

MikeMayo (Analyst-CLSALimited):

Justaclarification.Sowouldyouhavepositiveoperatingleveragein2015excludingthe$100milliondecline?




©2014TheStreet,Inc.AllRightsReserved Page18 of 24

Yes,Ithinkwewouldbemuchclosertothat.Igaveyoutheimpactofthe$100millionplusthe$25millionrelatedtoinfrastructureplusthe$15millionrelatedtoEMVwhichaddsuptoabout2%,Mike.Sothosearethemoversoftheoperatingleverage.Butagain,Icannotemphasizeitenough,thosenumbersdoinclude$100millionreductionandthatisthedifficultythatwearefacingthisyear.


Butonacorebasisyoustillexpectefficiencytoimproveexcludingthenoise?


[Yes,]wearelookingforallopportunitiestoimproveefficiencyonacorebasis.


Okay.Separate.Somymainquestionreallygetstothelackofloangrowththisquarter.Soisthatgoodnewsorbadnews?Iguessthebadnewsiscomparedtopeer,youhavelessloangrowthbutthegoodnewscouldbewesawrisk,wearepullingback.Doyougetcreditwiththatpullbackwithregulators?AndyoumentionedinsurancecompaniesandIthinkotherlong-terminvestors,sowhoaretheseotherparticipantsbankingornon-banking,thataredisruptingcompetitionforyou?


Sointermsofloangrowth,thisgameislongerthanoneortwoquartersandIthinkweareobviouslypreservingsomecapacityinordertoparticipatebetter.Ourproductionnumbersareactuallyprettydecent.Itisjustthepayoffshavelimitednetloangrowth.

Pensionfundsisanotherparticipantandcommercialmortgage.Mycommentrelatedtoinsurancecompanieswasmoreinthecommercialmortgagespace.Onthecommercialsidethroughout2014,wehaveseencompetitionfromnon-banks.Wehaveseencompetitionfrombanks.Clearlysomebanksareshowingbetterloangrowththanwedoandonepotentiallycouldsaythattheywerehappierwiththeriskreturnoffersthanwewereandtheytookawaysomebusinessfromus.

Butagain,weviewthisasmorelong-term.Theregulatorsreallyarenotnecessarilycommentingonloangrowthonewayoranotherbecauseourdialoguewiththeregulatorsthroughouttheyearactuallyhasbeenpositive.Frank,Idon'tknowifyouwanttoaddtothatcolor?

FrankForrest (ChiefRisk,CreditOfficer):

TheonlythingIwouldadd,Mike,isthatallregulatorslookatnewdealsthathavebeenputoninthelast12monthssotheyarealllooking,thatiswheretheyarefocused.Whatisthequalityofthenewdealsthathavebeenonthebooksinthelast12months?

AllIcantellyouisweareverycomfortablewithwhatweputonthebooksthelast12monthsandwearecomfortablewithinourownshoesandwearegoingtomanageourbooksaccordinglybasedonourcomfortlevel.Wearenotgoingtobedrivenbythemarket.Banksthathavedonethatbeforeendupfollowingthemselvesinaspiraldownward.Wehaveallseenitbefore.Wehaveallbeenthroughitandwearenotgoingtogothroughitagainhere.


Youhaveseenalotofcyclesonthatlastpoint,justmylastfollow-up.Whenhaveyouseenapullbacklikethisinthepast?Alotoftimestheindustrykeepsmakingtheloansuntilyouactuallyseealothigherlosses.Soyou'renotreallyseeingalothigherlossesrightnowyetyouarepullingback.Whatpriorperiodwouldyou




saythisiscomparableto?


I'mnotsureIcan.Imeanifyougobackfivetosixyearsthroughthedownturn,mosteverybodyfollowedeachotherinthewrongdirection.IwouldsaythatwherewearebetterandIwouldthinkthatalotofbanksarebetterandhavelearnedisreallyinbeingmuchmoreproactiveinmanagingriskmuchmoreanticipatory,usingmanymoretoolstoassesstheportfoliostoday.

Westresstesttodayeverywhichwayyoucanpossiblyimaginefromaborrowertotheportfoliosanddifferentsegmentsoftheportfolio.MaybethatispartofthatcameoutofCCARthreeorfouryearsagobutIwouldsaytheportfolioanalyticsthatwedotodayarefardifferentthantheywerebefore.

Sowearemuchmorecomfortablewithourforwardview.


Frank,onelasttime,youhavebeendoingthisforwhatliketwo,threedecades,canyoureachbackfurtherintimetofindacomparableperiodwhenyouliterallybackedawayfromloansasmuchasyouaredoingwhenyouhaven'tseenmuchhigherloanlosses?


Comeon,Mike.I'mnotthatold.I'mnotsureIcantobehonest.Youcanthinkthroughthedifferentcycles.Wehavegonethroughsomelonggoodcyclesontherealestatesidebutfundamentallyyouknowifyougoback15or20or25yearsmaybebeyondyourlifespan,bankshavehistoricallygottenintroublewithcommercialrealestate,thatisoneplace.Bankshavegottenintroublewithleveragedlending.Thestorytendstochangebuttheoutcomeattheendofthedaydoesn't.

SoIamnotsureIcantakeyoudownmemorylaneandtellyouagoodexampleofwheresomebodyhasdonesomethingdifferently.AllIcansayisthatIthinktheworldchangedfourtofive,sixyearsagowithwhatoccurredandIcan'tspeakforotherinstitutionsallIcanspeakforatFifthThirdisthatweareverycomfortablewithourperspectiveoncredittodayandwedonotwanttoputtheCompanyinapositiontoreturntopastpractices.


Mike,wealsohavetokeepinmindthatthesedecisionsarenotmadepurelyonacreditbasisbecausewhenyougobackthosedecades,youwillseedifferentcreditspreadenvironmentsanddifferentlevelsofcapitalthatbankshavebeenholdingatthetime.Sowhenyoulookatthereturns,thatcalculationincludesmorethanjustcredit.

Sowhenwesaythatwearebackingawayfromcredit,wearenotnecessarilysayingthatweareseeingsignificantlynegativecredittrends,it'sjustacombinationofspreads,ofcreditandwhereourcapitallevelsrequireadifferentperspectiveonwhatweareputtingonourbookstoday.


Gotit,thankyou.

Operator:

JeffreyElliott,AutonomousResearch.

Jef f reyEllio t t (Analyst-RobertW.BairdandCo.):




I'vegotaquestiononthelitigationside.Youhavehadquiteafewquartersoverthelasttwoyearswhereyoutookfairlychunkylitigationchargesandthisquarteryouhavegotarecovery.Soareyoustartingtoseelightattheendofthetunneltherethatsomeoftheissuesthatyouhadtobuildreservesforarefinallygettingclosertoconclusion?


Thelitigationtunnelisalongone.ThisquarterthenumberwasarecoverybutasmallnumberandIdon'tthinknecessarilythattheseprocessesarefast-movingprocessessoIwouldn'tcharacterizeitasweareseeingthelightattheendofthetunnel.Ithinkitwilltakeawhileforustoworkthroughalloftheseitems.


Andthenjustanotherquickexpenseone.The$33millioncreditrelatedexpensewithinnoninterestexpenses,canyougiveanycoloronwhatthatrelatedto?Itseemsprettylargecomparedwithwhatyounormallyseethere?


Itisnotnecessarilyoneortwoitems.Itisacombination.Forexample,derivativemarksgothere.Iwouldn'tnecessarilycharacterizethemasatotalthatreflectsoneortwotrends.ThatnumberwillbevolatilequarteroverquartersoIwouldn'tinterpretthe$33millionnumberasarunratenumber.


Great,thankyou.

Operator:

VivekJuneja,JPMorgan.

VivekJuneja (Analyst-JPMorgan):

Acoupleofquestions.Firstly,energyloangrowth,youroilandgasloansthatyoutalkedaboutwhichisjustover$2billion,howmuchdidtheygrowin2014and2013andhowmuchofthatissharednationalcredits?


ThisisFrank.Thatbookgrewabout$450millionin2014.OurportfolioisreallyamixtureofthemiddlemarketandlargecorporatesoIdon'thaveaspecificpercentagebutmostofourcompanieswouldbeanywhereinthatsector.


Okay.Sowhatyouaresayingisyoudon'thaveabreakoutofhowmuchissharednationalcredits?


Again,ourcompaniesarepredominantly--theyareintheUS,theyarepredominantlyintheSouthwest,theyareacombinationofmiddlemarket,midcapandlargecorporates.


Tayfun,aquestionforyou.JusttoclarifytheNIMguidanceshort-termrate,youtalkedaboutthefactthatNIMwouldbedown5to7basispointsbyfourthquarter2015ifratesstayedflat.Justwanttoclarify,areyoureferringtoshort-termratesstayingflatmeaningnoFedhikesorareyoureferringtolong-termratesstaying




wheretheyarecurrentlywhichisaround180both?I'mjusttrytogetasenseof...


Both.Vivek,itisboth.


Okay.SoiftheFeddidraiseratesbutthelongendstillstayeddown,whatwouldNIMlooklikethen?


Thatwouldimpactmainlyourinvestmentportfolioyieldsandthetimingofourdeploymentsintotheinvestmentportfolio.Westillobviouslywouldbenefit.Wehaveapositiveexposuretotheshortendandthebenefitwouldbelessthanacompleteyieldcurve.


Okay,allright.Thankyou.

Operator:

MartyMosby,ViningSparks.

MartyMosby(Analyst-ViningSparks):

Goodmorning.Nowthatwearetryingtoshifttowardinvesting,whatIwantedtoatleasthaveachancekindoftounderstandbetter,whataretheopportunitiesthatyouareinvestinginandhowdoesthatfitwithyourcompetitiveadvantagesorhowyouarelookingatbeingabletocompeteinthemarketplace?


Yes,soletmetalkaboutacoupleofspecificitems.Inretail,asIhavementionedoverthelastfewmonths,wehaveredesignedouremploymentinourbranchsystembaseduponthedemographictrendsandtransactiontrendsthatweareseeingfromretailcustomers.Customersarereachingusthroughdigitalchannels.Weneedtoreachthemthroughdigitalchannelstobeabletogrowrevenuesasweareseeinglessandlessofthemwalkingthroughthedoors.

Weareinvestinginourabilitytoreachourcustomersthroughdigitalchannels.Thatisoneareaandthatiswhatwebelieveneedstohappenaswecontinuetostrengthenourretailfranchise.

Theotherareathatwehavebeentalkingaboutclearlyisonthecorporatesideaswearefocusingontotalrelationshipprofitability,weneedtomakesurethatwecaptureanduseallthedifferentpiecesofrelationshiprevenuesandcostsappropriatelyinordertomaintainacompetitiveadvantageinthewaywepriceourproductsandservices.Thatisanotherarea.

Thethirdareathatweareinvestingisinourpaymentsbusiness.Wehaveasyouknowcombinedtheretailandcommercialpiecesofthepaymentspectrumunderoneumbrella.Wearemakinginvestmentstherebecausewedobelievethatgoingforwardwehaveadvantagesgivenourhistoryinthatbusiness.

Andthenininvestmentadvisory,whichisanotherimportantbusinessforus,weareaddingtalenttoensureacontinuedprogressonrevenuesothosearetheareasthatweareinvestingasidefromthecomplianceandriskrelatedinfrastructureinvestmentsthatwehaveinplace.





AndthenthesecondquestionIhadwasasyoulookattheadvanceddepositsituationandthatrollingoff,wehadtalkedabouttryingtocomeupwithsomealternatives.Kindoftheaddresswhatyouarestilldoingthereornotdoingthereandalsowhatarethosecustomersgoingtoturntonowthattheyhavebeencutofffromtheproductthatyouwereprovidingthemattheendoftheyear?


SoonJanuary1,wereducedourpriceontheproductby70%andwealsomadesomechangestothedesignoftheproductthatwillimpactusageandthefrequencyofusageoftheproduct.Thatiswhatsortofwhenwegivetheguidanceofa$100millionreductioninrevenuesassociatedwiththeproduct,thosechangeswouldreflectthat.

Whatwedon'tknowtodayiswhentheregulatorswillprovidetheirguidanceproposalsandultimatelywillissuetheirguidance.Wedon'tknowthetimingofthatandthewayweformulatedthatfortheyearisdependingonthetimeofwhenthatguidancecomesout,therearethreeoutcomes.

Eitherwearetotallyoutofthebusinessbecausetheguidancedoesnotenableustoofferanyproduct.Ourcurrentproductfitstheguidance.Inthatcase,wewillcontinuetooffertheproductandpotentiallyofferittonewclients.Orwithintheguidance,weneededtomakeadjustmentstoourproductdesign.

Whatwedon'tknowtodayiswhetherthatisgoingtohappeninMarch,June,Septemberorin2015atall.Westillseektoaddresstheneedsofthosecustomersbecausewedobelievethatwiththeappropriateproductdesignedappropriately,itisbettertokeepthoseclientsinourfold.Butagain,theregulatorswilldecideonhowtheyseethisindustryworkingandwewillreactaccordingly.


Andgiventhedrasticreductioninpricing,isthereanychanceyoumightgetincrementalbusinessfromothercustomerswantingtotakeadvantageofit?


Tooearlytotellbutjustrememberthatwearenotofferingtheproducttopeoplewhowerenotsignedontotheproductatthebeginningof2014.Wehavenotexpandedthepopulation.


Gotyou.Thanks.

Operator:

SameerGokhale,JanneyCapitalMarkets.

SameerGokhale (Analyst-JanneyCapitalMarkets):

Great,thankyou.Justafewquestions.Firstly,Iwantedtotouchonyourautoloanportfoliowhichhasn'tgrownverymuch.IknowyouhadtalkedabouttryingtomaintainyourunderwritingstandardsandIthinktheexpectationfor2015isforthatportfoliotomaybeshrinkby3%orso.AndIwascuriousabouthowyouthinkaboutrunningthatbusinessbecauseitseemslikeitismoreofaflowbusinessanddealersclearlywanttoworkwithbanksandotherlendersthathaveloansmorereadilyavailablefortheircustomersatthepointofsale.

Soasyouthinkaboutmaintainingyourunderwritingstandardsandmaybethatloanportfolioshrinkingalittlebit,howdoyoubalancethatwiththefactthatyoustillneedtomaintainapresenceinthatbusinessandmaintainthoserelationshipswiththedealers.Ifyoucantalkaboutthat,thatwouldbealittlehelpful.





Wehavebeeninthatbusinessforalongtime.Itgoesback30,40years.Wehaveverygooddeeprelationshipswithdealersandwehavemaintainedthoserelationshipsthroughcycles.Thereisgoodbusinesscomingfromthedealersthatwearebookingonourbalancesheetandwewillcontinuetodoso.Theyexpectwhattypeofbusinessthatwewillputonandtheyknowwhattypeofbusinessthatwewillnotputon.Thathasn'thurtus.

Itismoreorlessacommoditybusinesssupportedbymaintainingthosestrongrelationships.Soaslongaswearesatisfiedwiththeamountofloansthatwegetunderthecurrentprofitabilityguidelines,weshouldbeabletogetthatflow.

Giventhelong-termrelationships,ifyoudowanttogetmorecompetitive,youcangetmorepaperoutofthembecauseagaintheyknowthatwearenotintoday,outtomorrow.TheyknowthatthereisalongercyclesoIdon'tthinkwearenecessarilyeitherdamagingthoserelationshipsorimpactingflowsinadiscerniblemanner.


Juststickingwiththeautoloansfornow,ifyouweretolookatvintagesandifyoulookattheautoloansoriginatedoverthelast12monthsorso,thishasbeenmoreofanissueIthinkorconcernforsubprimeauto,whichyourportfolioseemstobeprime.

ButtotheextentthatyoucantalkaboutLTVsfor,say,thelast12monthsandloantermsbecausewearehearingabouttermsaslongas84months.Hasthatneedlemovedatallinyourportfoliowithyourvintageforlastyearrelativetoprioryearsorhaveyoumaintainedthatataprettyconsistentlevel?


Intermsoftermontheautobookoverthelastseveralyearswehaverun68months,68months,thispastyear69months,sonoappreciablemovementthere.IntermsofLTV,wehavebeenrunningandcontinuetoruninthe91%,92%level.AndintermsofFICA,weare751in2014,andthatisaveryconsistenttrendandtoyourpoint,reflectiveuponourfocusonprime,superprimecustomersandoverallstrongcreditprofilewithintheautobook.


Okay.JustswitchinggearsifyoucouldjusttouchonagaintheLCR,Ithinkyousaidyouwereat112%andwhatIwasjusttryingtograpplewithalittlebitwaswhereyouarerelativetowhattherequirementsarethroughthebeginningof2016.Youseemtobewellaheadofthat.

AndIthinkyouhadreferredtomaintainingsamesortofcushionbutasIthinkaboutyourLCRandthensomeofthecommentaryaroundmaybethesecuritiesportfoliogrowing,itseemslikeitdoesn'tneedtogrowalotbecauseyoualreadyhavemorethanmettheLCRrequirement.

Soinlightofthat,shouldweexpectanynegativeimpactontheNIMgoingforwardfromtheadditionofmaybemorehigh-qualityliquidassets?IfyoucouldjusthelpclarifythatalittlebitbecauseIthinkIjustgotalittleconfusedwithsomeofthatdiscussions.


Sure.Thegoodnewsisthegrowthindepositsandtheelevatedcashpositionreallystrengthensthebalancesheetandgivesusflexibility.Soour112%LCRincludesthebenefitof$7billionofcashheldattheFedatyearend.Soifweweretodeploy$7billionofcashtakeittoanextremeandputitallinC&Iloangrowth,




thenyourLCRwoulddroprightbackdowntothat92%levelwherewewereatattheendofSeptember.

Somypointinansweringthequestiononsecuritiesdeploymentissomeofthatcashwillbeputtoworkinthecourseof2015asamodifiedapproachbank.WhenwereachJanuaryof2016,wewillneedtoexceeda90%LCR,andwewouldliketohaveabufferobviouslybeyondthe90%.

Thereissomebalancebetweenholding$7billionincashandhaving112%LCRanddeployingthatcashtobothloangrowthandfurthersupportHQLAadditionswherewewillmanagetheLCRbetween95and105overthecourseofthenextyearorso.


Butjusttothinkaboutit.

Operator:

Iamsorry,wehavereachedtheendofourallottedtime.I'msorryfortheinterruption.Youmaygoaheadwithclosingremarks.


Thankyouforjoiningus.

Sameer,ifyouhaveanyquestions,I'msorrywecutyouoffthere.Butifyouhaveanyquestions,pleasecallus,andwewillclarifyyourquestions.

Again,thankyouforjoiningus,andwelookforwardtosharingwithyouourprogressthroughouttheyear.

Operator:

Thisconcludestoday'sconferencecall.Youmaynowdisconnect.

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