Fifth Third Bancorp (FITBO) 2005 Q2 法說會逐字稿

At this time I would like to welcome everyone to the second quarter 2005 earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the call over to Mr. Bradley Adams, Investor Relations Officer of Fifth Third Bancorp. You may begin your conference, sir.

Good morning. I'd like to thank everyone for joining us this morning. I'd also like to remind everyone that this call can contain certain forward-looking statements about Fifth Third Bancorp. Pertaining to recently completed acquisitions, the financial condition, results of operations, plans, and objectives of the Bancorp. These statements involve certain risks and uncertainties. There are a number of factors that could cause results to differ materially from historical performance and these statements. Fifth Third undertakes no obligation to update these statements after the date of this call. At this time I'd like to turn the call over to George Schaefer, President and CEO of FIfth Third.

Thanks Brad. Good morning and thanks for taking the time to listen in. I'll have a few comments and then Mark will review some of the income statement and balance sheet trends before we open it up for your questions. Regarding the trends for this quarter, loan growth trends continue to remain very good and we expect low double-digit growth rates to continue in the near term. Both consumer and commercial produced very good results this quarter. Commercial loans increased 10% annualized from last quarter; consumer loans increased by 16% on an annualized basis, highlighted by 16% growth in home equity loans. Secondly, service income trends improved almost across the broad spectrum with 19% annualized growth in noninterest income. Our processing businesses continue to perform well with revenue up 21% over last year and 28% on an annualized basis. The processing company is doing very well.

Deposit revenues improved sequentially on our rebound and overdraft related revenues and mortgage banking posted solid results despite impairment charges on the carrying value of the servicing assets. Our investment advisor's business continues to be affected by a difficult market and declines in brokerage related revenues although it was up quarter over quarter. Other noninterest income also increased nicely primarily due to strong growth from commercial banking,, fixed income trading and sales, customer interest rate derivative sales, consumer loan fees, and our international banking. We will continue to work to build momentum across all of our key business lines, but we feel very good about these trends that we have seen from the first quarter to the second quarter.

Credit quality trends were excellent with net charge-offs at $55 million or 34 basis points of loans and leases. The provision for loan and lease losses totaled $60 million with an additional $4 million included in noninterest expense added to the reserve for unfunded commitments. 34 basis points of net charge-offs is the lowest level we have seen since December of the year 2000. We continue to be very pleased with the credit performance overall and expect losses to remain below historical averages for the remainder of the year. That being said we are hopeful that this type of credit performance -- I mean we are aware that this type of credit performance can't continue, but we are pretty optimistic about our credit quality. Net interest income was essentially unchanged from last quarter despite good loan growth due to a 9 basis point contraction in the net interest margin. I'll let Mark talk about the specific moving parts and the things we're working on to improve performance here.

Expense growth was a little above our initial expectations at about 10% over last year and 17% on an annualized basis. Employee related expenses increased by about $15 million from last quarter with continued investment in the sales force. As you all know we continue to hire quality sales people and we think that's a key for our long-term growth. Our expense focus will remain diligent given our overall revenue trends with growth moderating in all captions except for investment in sales people and information technology. Mark will give you some more details on the expenses in a minute.

Deposit growth is at best characterized as mixed with very good results and demand deposits and consumer CDs mitigated by a more modest result in interest bearing transaction accounts. On a comparable basis transaction deposits increased by 6% over last year with core deposits up 9%. Compared to first quarter transaction deposit growth was essentially unchanged due to continued high balance account attrition and core deposits increased by 4% on an annualized basis. I will say that the second quarter customer additions in net account growth were very good and we continue to work very hard on growing the corresponding balances. On general we have seen a more competitive deposit market than some of our affiliates. I'm confident of our ability to grow core deposits given our continued focus and diligence at both the affiliate and the banking center level.

A couple of additional comments before I turn things over to Mark. First, net interest income trends continue to be below our expectations and we're working very hard to improve those results. Some of the challenges are certainly related to a difficult rate environment, but we believe that we are moving closer to a level of revenue and earnings performance that we expect to achieve. Higher interest rates combined with loan and deposit growth equates to strong revenue growth. Loan growth continues to be very good and we are confident that deposit trends will improve as well. Retail banking is a competitive business and we believe that daily sales execution is at a premium in a tough rate environment. Our team here at Fifth Third is certainly ready to meet that challenge.

Second, I'd like to say that we are enthused with the trajectories we have seen from significant de novo investments we have been making over the last year and a half plus. We have added 105 banking centers, excluding acquisitions and relocations in that time and hired over 2400 sales people. With total head count additions coming in at about 10 to 1 sales people to support people. We have invested in technology to drive back office efficiencies and put better tools in the hands of our sales force that will drive growth now and in the future. This level of investment has certainly been expensive in its initial stages, but we are determined to build a high quality franchise in each of our markets that will deliver excellent returns over the long term.

Third our balance sheet remains in good shape. Our capital levels are strong, we like the businesses we're in. The sales culture is stronger than its ever been here and we are looking forward to the rest of the year and into 2006. With that I'll turn things over to Mark to discuss some of the details.

Thanks George. I'll start off with the balance sheet and net interest income. On the asset side consumer loan growth was very good this quarter and commercial loan growth continues to produce at low double digit percentage growth rates. We continue to be pleased with the level of loan growth we're seeing and expect these trends to continue in the near term. Total earning asset growth was somewhat muted due to further reductions in the securities portfolio totaling approximately $500 million. The portfolio itself has decreased more than 20% since its peak last year excluding the impact of acquisitions. Earning asset growth was also impacted by a $320 million reduction in the residential mortgage and construction portfolio. Net interest income was essentially unchanged from last quarter do to a 9 basis point margin contraction from seasonally high first quarter levels. Margin contraction resulted from significant curve flattening in the quarter, deposit growth lagging earning asset growth and mix shifts within the deposit base.

The margin compression and impact of rates can be traced to the significant compression in the net interest rate spread from 301 to 286. Though free funding demand deposits in equity increased by 16% on an annualized basis this impact was more than offset by the decreased implied value of these funds. The key variable in the second half of the year remains attracting low cost deposits. Strong growth in this area will translate into solid net interest income growth. When our margin stabilizes, as it did in the second half of the quarter, we're in a position where balance sheet growth will translate into bottom line growth.

Tangible capital ratio increased from 646 to 689 in the second quarter with earnings an approximate $189 million improvement in the after tax mark to market on the available for sale for securities portfolio. We are very comfortable with these levels and expect that capital will remain relatively constant over the remainder of the year exclusive of mark to market adjustments.

On the expense side employees expenses increased about $15 million linked quarter with increases in sales head count as George noted and about 8 million in one time severance related expenses. Headcount is up by over 2600 people over last year and by more than 300 from last quarter end. The overwhelming majority of these additions have been revenue producers located in our largest opportunity markets. Most notably Florida, Chicago, Indianapolis, Nashville, Cleveland, Detroit, and Columbus.

Within the business lines our commercial business had a great quarter. As George mentioned average loan growth was excellent at 11% over last year on a core basis. Deposit revenues increased modestly on customer additions offset by the negative impact from compensating balances and earnings credit rates. Other commercial banking revenues increased by 38% annualized and 21% over last year. Customer interest rate derivative sales nearly doubled and delivered over $5 million in growth from the last quarter.

On the retail side we had excellent results in direct lending, with 16% average annualized growth in home equity loans. Deposit service revenues also bounced back from first quarter lows, increasing by 14% unannualized as overdraft revenues rebounded nicely. Good performance on the demand deposit side was mitigated by some mix shift to higher cost funds during the quarter. Retail deposits continue to be impacted by high balance account attrition with growth continuing to be dominated by new banking centers.

Within Fifth Third processing solutions we had a great quarter with revenue up 21% over last year and 28% annualized. We had good contributions from both the merchant business as well as the financial institution side. On the merchant processing side the second quarter was also marked by a long-term contract extension with Kroger, our largest customer. Mortgage banking increased by 44% on an annualized basis from last quarter on very strong originations of $2.6 billion. Strong refinance and purchase activity somewhat mitigated by 37 million in impairment and amortization offset by only $18 million in hedging gains. Investment advisory revenues were up from last quarter, but down over last year on slower retail brokerage, primarily fixed annuities and market sensitive revenues. That concludes by comments and at this point we would like to open up to any questions which you may have.

[OPERATOR INSTRUCTIONS] Your first question comes from Mike Mayo with Prudential Equity Group.

Hi.

Morning Mike.

If you could elaborate a little bit more on the outlook for the margin, what you expect and how sensitive those expectations are to the shape to the yield curve.

At this point in time we would expect we will have some very modest compression in the margin in the third quarter and then stabilize. It is not particularly sensitive to continuing shape of the curve at this point in time unless we would get an inversion of prolonged magnitude.

And what spread do you look at, like if you look at the three month to five year, that's around 80 basis points, if that were to go back to say 140 basis points would you expect the margin to increase a lot or how much?

That would be meaningfully accretive to the margin

And just how sensitive would that be? Like do you have a relationship there?

Yes, if you look at that, that would probably be accretive to margin by low double digit basis points

Going back to that 140 bit?

Yes

Okay. And separately on the deposit front you guys have been talking about ramping up deposit growth for the past year now and it hasn't quite happened. Is this kind of a Midwest phenomena, is it a Fifth Third phenomena, what's going on there?

Well, I would say what we have seen, Mike, is some very strong deposit growth, the mix just hasn't been what we'd like to see it be. We're continuing to see attrition from high balance transaction accounts. We're getting real good growth in what I would call the core average balance type transaction accounts. We're seeing very strong growth in our CDs. So essentially what's happening is you're seeing a mix shift in the deposit side from those transaction accounts into those CDs on some of those balances.

Mike there has also been -- this is George -- there's also been some pretty strong deposit pricing that's going on here in the Midwest. As everybody's fighting for deposits in each of our markets, and its different almost in each market, there have been some pretty wild rates paid on deposits out here, people trying to prevent deposit runoff out here. So we have seen more of that as the interest rates move up we have seen people paying higher prices on deposits. So there is a competitive impact out there. But if you look at what we're really focused on is opening new accounts, I think we have done an excellent job and our net new account growth has really gone very well. If you look for example in Chicago, for example, last month we opened 9000 new transaction checking accounts. In May that number for Chicago alone was 7300 out there. Those are really super numbers and we're seeing that kind of growth in the majority of our markets and ultimately once you get the account the balances follow there. So we're pretty pleased on that side.

Mike, please don't over-read this comment we are clearly not unconcerned with margin by any stretch of the imagination, but George hit on a key thing and that is we are managing for growth. Clearly we could improve the margin by slowing -- earning asset generation or by engaging in much heavier securitization activity, anything along those lines, but we are still managing this company for long-term growth and think that that long term deposit customer acquisition is critical and the long-term asset generation is also equally critical.

And one last follow up, you opened 105 banking centers, 2600 new sales people. When does all that kick in for better growth? Are you there now or do you have a certain timeframe when you say this is when we really should be seeing the benefits.

I think we're seeing the positive impact there. We have got some of our banking centers are now profitable within the first six months out there, it does take a while with the sales people that we have hired to get them up to our typical $100,000 a year after tax profit, are all those people at that level yet, no they're not, but we are working hard to get them there and that's certainly the target there. The same down in Florida, we have added a lot of new sales people down there, whether it's on the small business banking side, whether it's in the commercial side, whether it's mortgage originators, whether it's on the retail side we are adding tremendous new sales force down into Florida and that right now, we just did the conversion in January. So that's really beginning to ramp up. We are seeing some positive signs there.

All right, thank you.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Chris Mutascio with CSFB.

Good morning. Hey, Mark, can you just clarify one thing, it's kind of going back to Mike's question. If you have very modest margin compression in third quarter coupled with the thought that you all are saying that you will continue to see low double digit loan growth should I infer then that net interest income dollar should start to improve in third quarter, or are we going to fund the loan growth through the investment securities runoff?

No, I think you should start to assume that net interest income dollars will begin to improve.

The follow up to that, on the operating expense line, it looks like and George mentioned that it was higher than anticipated. It it looks like it was even higher than anticipated from the mid quarter update. Did something happen late in the quarter to see that ramp up in the expense base?

No, I think it's pretty consistent with what our expectation was. At the end of the day I would say George hit on it earlier Chris that you can start to see some of the revenue pull through from the commercial adds in that service income line. The retail adds are expenses that take longer to ramp up because most of them are associated with that de novo branching activity. So the expense associated with them has a lag to profit ability as George alluded to earlier. So we expect to see that start pulling through here in future quarters as well. One of the critical things we are looking at and managing every day is that rookie ramp up process, making sure that all these sales heads that we've added to the organization, all these de novo branches we have put in are coming up the curve the way we would like to see them.

Thank you.

Your next question comes from the line of John McDonald with Bank of America Securities.

Hi. I was wondering, could you remind us why the margin is seasonally high in the first quarter and how much did seasonality contribute to the client from first to second quarter.

I would say that's probably a relatively modest issue. The first quarter is seasonally high due to day down count impact. The answer to the second part of your question is probably 3 to 4 basis points, something like that.

Okay. Mark, can you talk about the high balance account attrition, are you seeing attrition to CDs or to other bank deposit accounts? I just want to clarify that.

We are seeing attrition primarily to CDs at this point in time.

Okay. Final question was just on buy backs, the share count was down this quarter, could you remind us on what the Company's position is on buy backs and is there still an impact from the agreement that you disclosed to us in January, is that still impacting share count?

That is not still impacting share count at this point in time. We do have an authorization, we had approved some time ago that gives us some dry powder on that front. I would say my earlier comments about being real comfortable with capital levels about where they are right now and not letting them rebuild meaningfully nor leveraging the balance sheet significantly should probably give you some guidance on that one.

Okay, thanks.

Your next question comes from the line of Lori Appelbaum with Goldman Sachs.

My question relates to commercial loan balances and deposits. On the commercial side can you comment why commercial loan balances are down on average and if the First National acquisition had anything to do with it potentially or if there's been any attrition on commercial bankers in Detroit or other markets that are impacting the numbers.

I think the -- Lori the primary impact of the numbers is the fact that we had an exceptionally strong first quarter that sort of shall we say diluted somewhat the pipeline of closings for the early part of the second quarter. But if you look at the ramp up the month of June was exceptionally strong, and on an EOP basin, I think we are up about 500 million bucks there.

There was also Lori, this is George, there was also -- we did get some paydowns from some nonperforming administrative loans down there, there was some problem credits that we moved out during the period that affected that a little bit on average.

How much was that George?

That was in the 50, $100 million range.

Okay. Was it sector related at all or--?

No, I think that was pretty broad.

It was fairly broad, okay. Well, Fifth has always been a company that's been very price competitive in its markets helping growth over time, if the Company is increasingly focused on making the customer base more sticky and enhancing customer service through, for example one of the initiatives is tying Branch Manager incentives to customer service, if you could comment on those initiatives whether they're having traction improving attrition rates and the general experience in making the customer more sticky.

There's a lot of things we're doing to improve customer SAT and customer retention. We have hired some national firms to sample that. We have got a totally different on-boarding process. Our data processing system we're installing the new Siebel system here that's going to help quite a bit on that. But we have already seen pretty significant improvement in account retention. And we know for example that using on-line banking, our E53 account and that by the way is our fastest growing account, the stickiness there with bill payment has been very helpful. But also now, Lori, we are calling our customers when they open an account after 15 days and 30 days, 60 days, 90 days, we are really baby-sitting the accounts out there if you will. And with the help of this national organization we're making a lot of calls and spending a lot of time on improving retention, because just a little bit improvement in retention really does improve your net overall. We have already started to see the impact from a lot of that. We're also working on our service component from all of our banking center employees, trying to get them much more engaged I think is the word out there, because that is extremely important in maintaining and retaining accounts.

George, if you could quantify the impact of all the initiatives on losing the attrition rate. What would you say it's moved a hundred basis points, or what's the general movement?

I would like to come back. I don't have the exact data, if I did it would be just a guess out there Lori right now. But we talk about this pretty regularly and I don't have the current June 30, number for you right now, although I know it's been a good -- our net new account openings are up significantly from a year ago. And the net means we're not closing as many as we were, as big a part of that as the other side.

All right, thanks.

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

Good morning guys.

Morning.

I just have a couple of questions on mortgage banking line. You gave the detail about the 18 million in derivatives gains and then the 37 million in valuation adjustments and amortization, can you quantify what specifically the dollar amount of the MSR impairment was? Then additionally did you securitize or sell any first mortgages and book a gain in the mortgage banking line item and if you could quantify the dollar amount there as well if so?

Scott this is Brad. Impairment was in the neighborhood of maybe just a little bit north of the $20 million range. I would tell you to look at the size of the servicing portfolio which is in the release compared to the carrying value on the balance sheet which is also on the release, we saw movement there from about 158 to 150. In terms of the sales of mortgage loans, that's pretty much what we're in the business of Scott. Anything that's conforming is sold immediately into the secondary market, nonconforming is defined as either jumbo or variable rate product is generally pooled and sold. You can see what the balances on the balance sheet did. I would say that certainly our loan sales were up significantly as it relates to origination being up significantly as well. We originated about 2.6 billion which is up roughly 700,000 from last quarter. 700 million, excuse me.

Okay, thank you. Then just one follow up, just kind of a question of semantics on the outlook for expenses. In the press release you say that growth in noninterest expenses should stabilize around the current level, does that mean that we should expect total noninterest expenses to grow about 3% a quarter or will they be stabilizing here at this roughly $728 million run rate.

I think you could probably expect some very modest growth in them going forward, probably somewhere along that -- a little less than that number that you supposed a second ago. I would say looking forward we will continue to invest both in IT as well as in revenue producers and branches in our newer growth markets. That said we probably also recognize that it's pretty challenging external environment right now and expenses are going to be very tightly controlled elsewhere around the Company. So going forward I would expect very modest growth in the order of a couple percent.

Okay, thank you very much.

Your next question comes from the line of Jason Goldberg with Lehman Brothers.

Thank you, good morning.

Morning Jason.

The tax rate has been trending down I think each of the last four quarters or so, give me -- give some color in terms of what's driving that, is it sustainable, or maybe what's the more normalized tax rate we should be thinking about.

Yes, I would say -- where I would guide you on that one, Jason, is we had some very favorable tax examination results this quarter and we do expect the tax rate will increase slightly in the third quarter. But if you take a look back at the tax rate for the full year of 2004 we would expect our tax rate for the full year of '05 would be well below that '04 number.

And Jason in terms of some of the trends affecting that, in the fourth quarter we certainly saw a different tax rate related to balance sheet restructuring. We also have an increase or higher bowling impact than we had in the same quarters last year.

Okay. And then separately George, there's a headline on Winters or somewhere saying on CNBC this morning you aim to double the size of the bank. I guess just some more color around that is that kind of newer markets, older markets, existing markets, just more color there.

Yes, I think that's all of the above. We continue to expand in the big markets we're already in markets like Chicago where we only have a 3% share, and markets like Detroit where we only have about a 4% share, same in Cleveland where we only have about a 5% share. As you know we are just going into the St. Louis and Pittsburgh markets, we have about 40 people now over in St. Louis, and we are profitable over there and that appears to be going very well. Pittsburgh we have got three offices there and have some more locations and that business is looking very well. We want to continue to expand in Tennessee. And in the Florida markets for us, we're building a lot of de novo offices down there. We have got a lot of sites selected down there, there's some excellent deposit site opportunities for us to grow there.

In the other lines of business that's the retail side. In the other lines of business, the way we have been growing is by adding these sales people. If we're going to grow at 15, 20% a year we need to add 15, 20% a year good quality sales people out there. And the leverage from getting the sale -- we have already got the infrastructure, we have already got the buildings and the occupancy expense and we've already got the systems in place at the margin the next sale is extremely profitable out there. So that's what we're doing is adding the people, adding the -- and adding the locations. And with 15 or 20% growth over five or six years that gets you to a double without any acquisitions. At some point in time I think the pricing on the acquisition side will get a little bit more rational out there, that might allow us to do something opportunistic.

Super. Thank you.

Your next question comes from the line of Mike Holton with T. Rowe Price.

Good morning. Wonder if we could look again Mark at your comment about expenses versus expectations from the 8-K. And just a little flavor on how expenses ended up being up over $20 million when about a month ago the expressed thought on the Company's part was that expenses were going to be flat.

I think there's a couple different issues there Mike. One piece of the puzzle is clearly the severance item that we detailed out in the release. Obviously you can't say much more about that, it's HR related other than the fact we don't expect it to be recurring. I would say in addition to that it's the result of some very strong performance in the commercial line of business and some incentive payments that are related to that strong performance to some of the sales force. As well as just some continued success in bringing on and hiring new sales force talent to join the organization, particularly in the Florida market. But as George noted across the franchise.

And as you think about the expense growth moderating a bit, which would seem to be what you indicated earlier on, does that mean just you front loaded hiring into the first half of the year and so hiring generally will slow or there will be other categories where you can pull expenses out?

I think absolutely that's accurate. The bulk of the hiring was done in the latter part of the first quarter. So as you see, that begins to get the full quarter impact of that in the second quarter so you see some of that pulling through. You also see continued hiring throughout the second quarter. Moving forward we have some additional sales hiring to do, but we can pretty much self fund all that via initiatives we have elsewhere. As well as a lot of the de novo branch expansion.

Okay, thanks.

Your next question comes from the line of David George with A.G. Edwards.

Good morning, thanks for taking the question. A question in regards to your investment advisory business, that line item hasn't really moved for six quarters. Obviously the equity market has been at least okay as has the fixed income market. It seems -- I know you guys have added a lot of sales people in that business, so can you give us an update as to what's going on and what's behind the lackluster showing in that line item? Thanks.

Most of the weakness, David, results primarily from fixed annuity sales. We roll that up into brokerage related revenues. That's been our primary challenge. Certainly haven't seen a big pickup in the market to offset that but it's largely eating into any successes that we have had on the institutional asset management side

How much, then Brad, is annuity sales of the total revenue line with respect to IA?

When those things were hot and rates were low we probably saw a number that approached 20%. We're nowhere near that now.

Okay, that's helpful, thanks.

I do think that if you look at the fourth quarter last year, the revenue as 82 million, first quarter it was 90, second quarter it's 91 there. We have got a little trend to the positive going there. And we are starting to see some impact from some of the sales people here.

And a year ago it was 97, at least I think, at least per the release.

Thanks for the color.

Yes.

Your next question comes from the line of Kevin St. Pierre with Sanford Bernstein.

Good morning guys.

Morning.

I was just wondering if you could comment again something else related to the mid quarter update. You had mentioned that net interest income would probably be up modestly I think was the word you used. Over the last month was it greater margin compression or slower asset growth that led to the flattish results?

I would say a piece of that is clearly related to that reduction in the securities portfolio that you see there being somewhat opportunistic as the rates came back down again, clearly drove a piece of that. I would say in addition to that probably a little bit of organic compression taking place as well Kevin

And separately, on deposit fees, I know we're up seasonally from the first quarter, but over the past few quarters you have alluded to maybe some changes in NSF policies. Can you tell us if you made any specific changes across the network either versus last year or versus last quarter

Yes, we actually did make some changes in there. We used to charge a daily fee that was charged on day one, we have moved that a little bit to give the customer a break on that side and that has seemed to have some positive impact there. We have given our managers a lot more leeway in looking at how we handle the overdraft charges out there. And we have done a lot better job of explaining our account structure to our customers on the initial setup out here letting them know exactly where we are and what's expected out there. So we have had a lot better customer relations going on as it relates to NSF charges and that's been very, very helpful.

Were those changes in effect for the full quarter so that we have seen the increase in deposit fees despite--?

We put them in effect the first of June is when we made those changes out there and they were very well received by the customer.

And Kevin, what we are still looking for here is just the right balance between attrition and fee realization here.

If you sit back and look at it Kevin, in addition to the high balance count the other area I think we have mentioned on previous calls or at conferences that the other area we had attrition was in our totally free checking base. It wasn't net attrition but there was a high level of turnover in that account base. The theory basically behind what we're doing there is let's keep those customers, keep the churn from occurring if you will, maybe collect a little less per occurrence, but keep the customer and over time, collect a lot more absolute dollars.

Thank you.

Your next question comes from the line of Ed Najarian with Merrill Lynch.

Good morning. It's Ed Najarian. Most of my questions have been answered, but just two quick ones. First on the transaction processing business, obviously good year-over-year growth, but the growth rate does seem to be decelerating a bit, albeit still strong, but decelerating any comments there? Then secondarily I'm a little confused coming back to some of the comments on the margin. I think I just heard a statement to Kevin's question that there was some organic margin compression towards the end of the quarter. But earlier in the call I thought I heard you say that the margin stabilized in the month of June which is what gave you some confidence of less pressure in the third quarter. So if you could just maybe give some clarity on what sort of happened at the end of the quarter to the margin. Thanks.

With respect to FTPS I would say Ed we remain comfortable with our long-term 20% growth rate, kind of forecast on FTPS there. The absolute size makes growth rates similar to what you might have seen in the past a little bit more challenging, but we feel very comfortable that long-term 20% growth rate is sustainable. With respect to margin, your comments well taken, I probably did get a little confusing in my statements there. I would say the margin did stabilize towards the end of the quarter, that is indeed the case and the bulk of what we saw toward the end of the quarter would have been the result of the security sales.

Okay thank you.

Your next question comes from the line of Vivek Juneja with JP Morgan.

Just following on Mike Holton's question firstly, the severance you did, which areas were those in?

We can't really comment there.

That's an HR related issue Vivek, we obviously can't say much more other than we don't expect them to recur.

Are you downsizing certain businesses or what's going on and I'm just surprised that you didn't know about it on June 10, and did that just happen out of the blue in the last two weeks?

Again, it's an HR related issue and I can answer your question by saying no, we are not downsizing certain areas. I can tell you that much, beyond that I'm really pretty limited in what I can share and I'm sure you understand.

In terms of your margin outlook, what is your expectation for deposit growth.

We would see deposit growth in our current forecast running at about the level we saw it in the month of June, in the month of July, and then ramping up in the month of August and September modestly.

And similar to what you are seeing which is more in things like CDs.

I would say we probably have a little bit more coming into transaction growth as a result of trends we saw in the last part of the quarter. Overall core deposit growth probably somewhere on the order of generally 8 to 10% is what's built in and we're forecast at this point in time Vivek. Overall earning asset growth similar to what you saw this quarter.

And on the commercial loan growth side, you obviously have some reduction, what are you seeing in terms of pricing there and what are you factoring into your margin for that?

Vivek, this is George. I think on the commercial loan side, the pricing, it's been competitive, but not excessively so. Actually on the loan side the pricing has been, I think our spreads there have actually improved a little bit in the quarter. The deposit pricing has been much more fierce than the commercial loan pricing. Obviously the indirect loan pricing, indirect car loans and leases that's pretty fierce on that side, but generally the commercial pricing has been reasonably stable.

Thanks.

Your next question comes from the line of Gary Townsend with Friedman, Billings, Ramsey.

Good morning gentlemen, how are you?

Thanks Gary.

Most questions have been asked. I was wondering if -- I didn't see particulars or data with respect to attrition rates or retention rates as you might call them. Have you disclosed that data or do you plan to?

Are you talking account or--?

Well, for example other companies do -- I'm sure you track your attrition or retention rates and progress over time, I was wondering if you have plans to publish some historical data on that to just show the progress.

We have not historically disclosed that data, Gary.

Let me just -- that might be helpful to us just to kind of see how you're thinking about it and how you do progress. And I think the last time we spoke on conference call I inquired whether you had plans to do any comp store data releases and I haven't seen those, perhaps you have.

We have not done any comp store releases at this point in time.

And again, do you have plans to do that any time soon?

No, I think we will take that into consideration, let's take a look at that.

That would be super. I appreciate it. Thank you.

Your next question comes from the line of Carol Barger with CREF Investments.

My question was answered already, thanks guys.

Thanks Carol.

Your next question comes from the line of John Balkind with Fox-Pitt.

Morning guys, I'm all set, thanks.

Thanks John.

[OPERATOR INSTRUCTIONS] Your next question comes from Chris McGrady with Keefe, Bruyette and Woods.

It's Denis LaPlante, good morning. Just a clarification, that severance expense, that's not part of the restructuring and integration of the Florida deal, is that correct

That's correct.

That's over and above that, okay. The second point is I missed about a minute of the call and this is probably where you were talking about some of this, but as I talk to companies in the Midwest, other banks, oftentimes Fifth Third gets pointed to in terms of one of the companies, one of the banks that is particularly aggressive on the deposit side. So you cite an aggressive deposit environment, pricing investment in the Midwest, but you may be part of that whole process in terms of what's creating that environment. You're not the only one I understand. So can you maybe elaborate a little bit given some of the margin compression, and indeed how are you kind of offsetting the rate volume questions here in terms of margin versus NII growth.

Denis, over the long haul we believe very firmly the key to profitability in this business comes off the right side of the balance sheet. So we are probably not prone to slow deposit growth any time soon. We believe that when you're in an interest rate environment like we're sitting in right now the value of those free deposits or those relatively lower cost deposits is somewhat muted because of the absolute low level of wholesale funding rates today relatively speaking. But as we return to a more normalized environment our core business still is about taking care of our customers, it still is about generating earning assets and funding those earning assets with those good core deposits. So right now I'm probably pretty sanguine on continuing to make sure we are driving deposit growth.

If I can tie in those comments related to the tangible equity outlook that you suggested that you would have relatively flattish tangible numbers here on in, if you take a look at that you are expecting then an earning asset growth to maybe accelerate a little bit and all of that incremental to come from the shrinkage or at least the capital being stable, you are expecting that to really come -- get a reduction from the buyback then.

Yes, I would say buy backs are clearly one tool we have available to manage that level, no question.

Great, thank you.

Your next question comes from the line of Mike Holton.

Hey again. This HR related issue, is that severance payment for one individual?

No.

No, it is not one individual.

Can you give us a sense for how many?

We would rather not Mike. Mike, we are really rather limited in the things we can say there. I apologize, we're not trying to be evasive or anything like that.

All right.

I think that concludes today's questions. One more question, operator.

Yes, sir, we do have time for one more question. We have John McDonald with Bank of America Securities.

Hi, guys. Quick follow-up on this service charge on deposits, what kind of growth outlook do you have there? You had a nice rebound this quarter, you talked about that a little bit, what kind of expectations do you have going forward on that line?

I think on the full year, John, we are still looking for modest growth from that, somewhere between 0 and 5% over last year.

Okay, thanks.

There are no further questions, sir.

Thank you all very much for listening in this morning, we appreciate your time and we look forward to talking to you next quarter. Thanks.

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