Fifth Third Bancorp (FITBO) 2014 Q2 法說會逐字稿

Good morning. My name is Jessica and I will be your conference operator today. At this time, I would like to welcome everyone to the Fifth Third Bank second quarter 2014 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, a question and answer session.

(Operator Instructions). I would now like to turn the call over to Jim Eglseder, Director of Investor Relations. You may begin your conference.

Thanks, Jessica. Good morning. Today we will be talking to you about our second-quarter 2014 results. This discussion may contain certain forward-looking statements about Fifth Third pertaining to our financial condition, results of operations, plans, and objectives. These statements involve certain risks and uncertainties. There are a number of factors that could cause results to differ materially from historical performance and these statements.

We have identified some of these factors in our forward-looking cautionary statement at the end of our earnings release and in other materials, and we encourage you to review them. Fifth Third undertakes no obligation and would not expect to update any such forward-looking statements after the date of this call.

I am joined on the call today by several people: our CEO Kevin Kabat and CFO Tayfun Tuzun; Frank Forest, Chief Risk and Credit Officer; and Treasurer Jamie Leonard. During the question and answer period, please provide your name and that of your firm to the operator. With that, I will turn the call over to Kevin Kabat.

Thanks, Jim. Good morning, everyone. We reported second-quarter net income to common shareholders of $416 million, and earnings per diluted share of $0.49. Results included $125 million gain on the sale of Vantiv shares, a $63 million positive evaluation on the Vantiv warrant, litigation reserve charges of $61 million, and a few other items that Tayfun will cover. In total, these items benefited EPS in the quarter by approximately $0.06.

Economic data has improved throughout the quarter and the economy appears to be moving in a positive direction after a weak first quarter. While the housing activity was slower than expected, new job formation should continue to help households increase their spending, while they further improve their balance sheets.

We are also at a point in this cycle where we would expect to see capital expenditures pick up after a lengthy period where business investment has not been strong. Our overall financials are in line with and reflect the current state of the markets, regulatory environment, and economic activity.

Given this background, I am pleased with our results and believe that we will continue to grow our Company profitably as conditions continue to improve. The strategies that we have executed, including our deposit simplification project and diversified investments in corporate banking, as well as ongoing activities such as the enhancements to our retail banking approach, are together producing very good results in this environment and will be a differentiating factor for Fifth Third now and in the future.

Loan growth remains solid despite relatively cautious customer demand. Average portfolio loans grew $1 billion sequentially and $3.8 billion from last year. Growth was driven by C&I, which was up 2% sequentially and 10% compared with last year.

The sequential increase in commercial line utilization from 30% to 32% is an encouraging sign, indicative of the relative improvement in the economic environment. Commercial real estate balances continue to trend up, increasing 2% from last quarter as a result of growth in construction balances.

NII was up 1% sequentially and 2% from the prior year as asset growth continues to offset the negative effect of loan repricing. I am pleased with our ability to grow net interest income during this prolonged low interest rate environment.

We continue to generate solid core deposit growth, which was up 1% compared with last quarter, driven by 5% growth in consumer savings and money market balances. Year-over-year core deposits were up 9%, driven by 16% growth in commercial core deposit balances. Continued growth in core deposits is a sign of the strength of our retail deposit franchise and the growing scale and scope of our commercial relationships.

Operating results were highlighted by card and processing revenue, up 11% sequentially, and 12% from a year ago, driven by increased transaction volume and card utilization. Additionally, service charges on deposits were up 5% sequentially and corporate banking revenue was up 3% sequentially.

Our results this quarter benefited from the sale of a portion of our ownership stake in Vantiv as well as a positive mark on the warrant that we hold. Our combined stake in Vantiv is uniquely valuable with significant remaining capacity. As we have said before, strategically, we will continue to reduce our ownership in the best interest of our shareholders.

Quarterly expenses were flat sequentially and were down 8% from the prior year. Elevated litigation related expenses prevented a larger decline this quarter. If you exclude the litigation charges in all periods, noninterest expense was down 1% sequentially and 9% from the prior year. Going forward, we will maintain our focus on expense management as you would expect from us, while we continue to invest in our infrastructure and business lines to support long-term sustainable growth.

Credit results were stronger during the quarter, as expected, with net charge-offs of 45 basis points. These charge-off levels are in line with what we would expect at this point in the credit cycle and with our overall credit metrics. Nonperforming asset levels were down 12% sequentially and 28% from last year and our nonperforming asset ratio declined below 100 basis points for the first time since the third quarter of 2007.

Capital levels remain very strong. Our tier 1 common ratio was 9.6% on a Basel I basis, and 9.3% pro forma for US Basel III rules. And our tier 1 capital ratio increased 35 basis points to 10.8%.

During the quarter, we conducted several actions under our 2014 capital plan, including raising our quarterly common dividend by 8% and entering into an agreement to repurchase $150 million of common stock. Additionally, we issued $300 million of perpetual preferred stock during the quarter. Our tangible book value grew 9% year-over-year.

Our capital generation and our overall capital position give us the ability to support balance sheet growth while continuing to return capital to shareholders in a prudent manner.

Along with very good financial results, I want to highlight the positive impact we are having in our communities. We were recently recognized by the Gallup organization for our commitment to employee engagement, diversity, and inclusion. Gallup noted the consistent investment we have made in these areas and the benefit it has had for employees and customers.

Our innovative partnerships with NextJob and Stand Up to Cancer have been a success story recognized publicly. We were the first in the industry to partner with NextJob to offer job coaching services to our unemployed mortgage borrowers. We are now running a reemployment marketing campaign, which leverages the power of social media to help job seekers reach prospective employers.

Our partnership with Stand Up to Cancer led to the introduction of branded credit and debit cards that direct donations to the organization for every qualifying purchase made with those cards. We are the only card issuer to offer these affinity products, and we are seeing real benefits from the relationship, including better retention and higher cross-sell with these customers. In addition, we surpassed the $2 million mark for donations to Stand Up to Cancer since this partnership began last year.

Efforts like these make a real difference to our customers and the communities where we live and work, and you can expect to see more innovative approaches from us, in line with our focus on growing relationships with value-added offerings. We have a role in enhancing the lives of our employees and customers, and we take that responsibility seriously as we make our business decisions.

Overall, I am pleased with our results this quarter. We remain focused on the things we can control to differentiate results: lending and deposit generation, business execution, and disciplined expense management. With that, let me turn it over to typhoon Tayfun now to discuss operating results in more detail and give some comments about our outlook. Tayfun?

Thanks, Kevin. Good morning and thank you for joining us. The financial summary on page 4 of the presentation notes some highlights from the quarter.

We reported net income to common shareholders of $416 million or $0.49 per diluted share. Second-quarter earnings included the following items that, in total, benefited results by approximately $0.06. The $125 million pretax gain on the sale of Vantiv shares and $63 million positive valuation on the Vantiv warrant were partially offset by $61 million in litigation reserve charges, a $17 million impairment charge on bank premises, a $16 million negative valuation adjustment on the visa total return swap, and a $12 million negative impact to equity method earnings from our interest in Vantiv related to the one-time impact of their acquisition of Mercury Payment Systems during the quarter.

Earnings per share adjusted for these items were $0.43 share, consistent with a similarly adjusted $0.43 in the first quarter.

Our operating results were solid, reflecting the modest rebound in the economy following the weakness in the first quarter and some pickup in spending activity by businesses and consumers. Housing activity has been weaker than anticipated at the beginning of the year, and consumers are maintaining their conservative perspective on new leverage. The environment is challenging, but we remain committed to achieving positive operating leverage and prudently growing revenues.

I will start the detailed review with the average balance sheet and page 5 of the presentation. Average earning assets increased 2% sequentially, driven by higher investments and lower balances.

In the second quarter, average investment securities increased by $1.3 billion or 6% from the first quarter, reflecting $3.3 billion of purchases, partially offset by sales of lower yielding assets as we continue to optimize our liquidity position. Notably, since the second quarter of 2013, we have added $6.7 billion to the securities portfolio, increasing our investment portfolio as a percent of total assets from 13.5% a year ago to 17.6% at the end of the second quarter.

With respect to our securities portfolio, the absolute level of rates creates an environment that is only marginally attractive beyond the LCR-driven activity. For the remainder of 2014, we expect total interest-earning assets to grow more in line with average loan growth.

Shifting to loans, average portfolio loans increased $1 billion or 1% from the first quarter. Sequential growth was driven by a $1.1 billion increase in commercial loan balances, with 2% growth each in C&I and commercial real estate. C&I balances reflected line utilization of 32%, up from 30% in the first quarter, which was partially offset by runoff and pay down activity.

Higher average CRE balances were driven by growth in commercial construction balances for the sixth consecutive quarter, partially offset by lower commercial mortgage balances.

New commercial loan production was up 29% from the first quarter. Slightly more than half of the new production was through our large corporate, mid-corporate, and structured finance segments. Commensurate with our strong presence in Midwestern states, a little more than 20% of new production represented loans to the manufacturing industry. Average consumer loans were flat on a linked quarter basis, as runoff in home equity balances continues to offset modest growth and other consumer loan categories.

On the deposit side, average core deposits increased $1.3 billion in the second quarter, primarily driven by consumer money market account growth. Importantly, we continue to grow net new accounts and our customers are holding higher average balances.

Our current cross-sell ratio in retail is about 5.5 products per consumer checking household, which is up from before our deposit simplification changes, and we believe that we can improve this already strong household penetration level going forward.

It has been a full year since we completed the final leg of the conversion of our consumer deposit account offerings to a more simplified platform. And it is clearly having the intended results, both in terms of consumer deposit behavior as well as fee income, which I will touch on in a minute.

But, first, taking a look at NII on page 6 of the presentation. Taxable equivalent net interest income increased $7 million sequentially to $905 million, driven by interest-earning asset growth, including loan growth and a $1.3 billion increase in average investment securities balances, as well as an additional day in the second quarter. These benefits offset the negative effects of loan repricing and higher interest expense associated with debt issuances over the last two quarters.

The net interest margin was 315 basis points, down 7 basis points from the first quarter, as expected. The effects of loan repricing, debt issuances, and day count were partially offset by higher yields on investment securities.

Shifting to fees on page 7 of the presentation, second-quarter noninterest income was $736 million compared with $564 million last quarter. Vantiv again provided the most significant sequential impact, with $125 million gain on the sale of shares and a $63 million positive warrant valuation, partially offset by a $12 million negative impact to equity method of income from our interest in Vantiv that is related to certain charges they recognized as a result of the acquisition of Mercury Payment Systems in June.

Excluding the Vantiv items in both quarters, the decline in fee income was due to lower mortgage banking net revenue, a $17 million negative valuation adjustment for land upon which we no longer expect to build branches, and a $16 million negative valuation adjustment on the Visa total return swap.

We have previously described the work we are doing in the retail bank around our distribution network and the impact of changing consumer preferences. As part of our ongoing effort to optimize our retail distribution strategy, we continually evaluate the composition of our branch network and land parcels. In the second quarter, we determined that a number of properties we had originally intended for future banking centers no longer meet our targets. Based on the appraisals we have received, we booked a $17 million impairment charge in the quarter to reduce their carrying value to estimated fair value.

Moving on to line item results within fee income, starting with mortgage banking revenue. Residential mortgage originations increased to $2 billion, with 70% purchase volume as we benefited from the uptick from spring buying season, partially offset by the impact of our (technical difficulty) benefiting from a 10% increase in personal assets under management as well as higher market values. Card and processing revenue and service charges on deposits rebounded from a seasonally light first quarter, up $8 million and $6 million, respectively, but also showed growth compared with last year.

12% growth in card and processing revenue from a year ago reflected progress on our goal to increase the number of cards our customers have, and the utilization of those cards, as well as higher consumer purchase volume.

Year-over-year growth in deposit service charges of 2% was driven by a 7% increase in commercial deposit fees as we continue to drive deeper relationships on that side of the business. Our results demonstrate the progress we have made in forming new customer relationships as well as selling new products and services to existing customers. The positive results in our deposit fees show that our fee revenue growth strategies in both consumer and business segments, based on innovative, value-added products and services, are achieving the intended outcome.

Corporate banking revenue increased 3% sequentially with a pickup in syndication fees and foreign-exchange fees. Growth of 1% from a year ago was driven by higher syndication fees and institutional sales revenue, given our focus on increasing [league left] relationships to better position ourselves to earn a greater share of our customers' noncredit business.

In sum, our core fee income performance held strong despite the challenging revenue environment. We have done a good job of driving long-term profitability in our core businesses while overcoming the impact of businesses that we have exited, like the brokers mortgage business.

The other side of the equation is our commitment to expense discipline. Noninterest expense, shown on page 8 of the presentation, was $954 million this quarter compared with $950 million in the first quarter. Expense results included $61 million in litigation reserve charges, higher than we expected as regulatory and litigation costs remain a headwind, which you can see in recent announcements from other peers. We would expect these charges to decline from these levels, although it is hard to predict when that will happen.

Excluding litigation charges, adjusted expenses were well-controlled and were $893 million, which is down $6 million sequentially when normalized for the first quarter litigation charge as well. This sequential decline reflected lower benefits expense from seasonally high first-quarter levels, and was partially offset by higher long-term incentives that were paid in the quarter.

Our FTE count declined 2% from the first quarter.

We did see higher card and processing expense sequentially, in line with the higher revenue earned in that business during the quarter. All other lines look good and we remain pleased with our ability to manage our core expense levels.

PPNR, shown on page 9 of the presentation, was $682 million. When adjusted for the items noted on the slide, PPNR was $593 million, up slightly from the first quarter adjusted PPNR. --, the result of NII performance and the core expense discipline I just mentioned. The efficiency ratio adjusted on the same basis was approximately 60% for the quarter.

Turning to credit results on page 10, total net charge-offs of [$100 million] decreased $67 million sequentially, with a $57 million decline in commercial net charge-offs and a $10 million decline in consumer net charge-offs. As we expected, net charge-offs of 45 basis points of average loans and leases returned to trend. Total delinquencies remained low at $337 million.

Nonperforming assets of $832 million at quarter end were down $114 million from the first quarter, bringing the NPA ratio to 92 basis points, its lowest level in seven years. Commercial NPLs of $396 million declined 15% sequentially and reflects overall improved financial results in several large relationships, as well as a lower level of inflows.

As you know, the snick exam has been a topic of interest, given the public discussion during the quarter. Results are generally communicated to banks in the second quarter. While I cannot get further into specifics, the results we received were very much in line with our own internal assessments and we don't currently expect any material impacts next quarter related to the exam.

Wrapping up on credit, the allowance for loan and lease losses declined $25 million sequentially and reserve coverage remained solid at 1.61% of loan and leases. I'd reiterate that future changes in our reserves will increasingly reflect loan growth, more than the changing credit profile of the overall portfolio. The pace of reserve releases slowed this quarter, and I anticipate that trend to continue.

Turning to capital on slide 11, capital levels continued to be strong and well above regulatory requirements. The tier 1 common equity ratio was 9.6%, up 10 basis points from last quarter, and the tier 1 capital ratio increased 35 basis points from 10.8%.

During the quarter, we announced an 8% increase in the quarterly common dividend to $0.13 per share, as well as common stock repurchases of $150 million. The average diluted share count is down another 1% sequentially, and is the lowest we have seen since the end of 2010.

We also issued $300 million of preferred Series J, which brings the total amount of preferred stock in tier 1 capital to $1.3 billion, or 111 basis points of risk-weighted assets. Just so you have it for your models, the Series J issuance carries a semiannual dividend which would normally be about $7 million every quarter, starting in September. However, this will be about a $5 million (technical difficulty) quarter as a result of the shorter (technical difficulty).

Similarly, our Series H issuance carries a semiannual dividend, which would be about $15 million every other quarter, paid in June and December. And the Series I issuance carries a $7.5 million quarterly dividend. Therefore, our third quarter preferred dividend should be $12 million, and then it should resume its normal alternating pattern of $22.5 million in the fourth quarter, $15 million in the first quarter, and so on.

Now turning to the outlook on page 12, we have updated parts of this slide to reflect any changes to our full-year expectations. As in the past, comparisons exclude the impact of any gains on Vantiv share sales and changes in warrant a value in 2014 and 2013, as indicated in the footnote on this slide.

Our NII, NIM, and balance sheet expectations are unchanged. I will start with net interest income. We expect full year 2014 NII to increase from full year 2013 NII of $3.6 billion in the 2% growth range. The key drivers of the 2014 growth are loan growth and higher investment securities balances, partially offset by increased funding costs and some additional loan spread compression. We still expect NII to trend up throughout the year.

We anticipate a full year NIM in the 315 basis points range, plus or minus, again unchanged from prior guidance as we continue to evaluate our LCR position and see continued effects of repricing. Higher NII guidance includes the impact of the decision we made earlier this year to limit the availability of our deposit advance product to existing customers. We continue to evaluate possible banking solutions that would be appropriate for a potentially wider segment of customers. We are reviewing alternative options to offer products and services to these customers, taking into account their needs and preferences.

We would also aim for any transition plans to minimize disruption for our customers. It is critical that we get this right, utilizing the time we have to do so. We will inform you of our plans as we conclude these reviews. Although the outcome will depend on the final product design and customer usage, the revenues will be considerably lower than our existing deposit advance product. But the outcome will depend on the final product design and customer usage.

Turning to loan growth, we still expect mid-single-digit growth for the full year, primarily driven by growth in C&I and commercial real estate. These increases will be partially offset by declines in residential mortgage balances and continued runoff in the home equity portfolio. We continue to expect a mid-single-digit increase in deposits, driven by both commercial and consumer.

Moving on to overall fee income and expense expectations for 2014, as a reminder, these comparatives exclude $534 million in 2013 fee income related to gains on Vantiv sales and changes in the warrant value. Our 2014 guidance, likewise, excludes any effect from these Vantiv items.

Largely reflecting the current mortgage environment and our exit from the broker channel, we currently expect a low double-digit decline in total fee income in 2014, compared with adjusted fee income in 2013, which includes negative impact from the charges to Vantiv equity method income and bank-owned land we discussed earlier totaling $29 million. We would expect mortgage banking to remain relatively flat versus the second quarter for the remainder of the year.

Excluding mortgage, we expect fees to grow in the mid-single-digits range in aggregate versus 2013 with growth in all other major fee categories. Within this guidance, based on the timing of some categories, we expect fee income trends to accelerate in the fourth quarter, which also (technical difficulty) from the carrying payment that we expect to receive from Vantiv.

Looking at the details within fees, we would expect to see low single-digit percentage growth in deposit fees, although commercial service charges are growing at a mid-single-digit pace. We expect investment advisory revenue growth in the mid-single-digits range, with strong growth in our asset management fees and more moderate growth in brokerage income.

And we expect corporate banking revenue growth in the 10% range, with a bulk of the growth in the fourth quarter. This is slightly below our previous guidance, driven by low volatility in the market, which is having a negative impact on derivative and foreign exchange volumes. We are increasing our expectations for card and processing revenue growth to be in the high single digits range.

Turning to expenses, we expect full year noninterest expense to be down in the mid (technical difficulty) currently expect expenses in the third quarter to be up slightly from the $893 million core expenses we reported in the second quarter, excluding any unforeseen one-time items. As always, we remain committed to managing our expenses in line with revenue trends while maintaining appropriate investments in the Company to build future revenue streams and risk infrastructure in light of the changing business and regulatory environment.

Overall, we still expect to achieve positive core operating leverage in 2014, excluding Vantiv. We expect PPNR to be relatively stable for the year, compared with 2013, and we still expect the efficiency ratio to move below 60% in the second half of the year.

As for taxes, we expect the full year 2014 effective tax rate to be in the 27% to 27.5% range.

Turning to credit, our outlook for full year net charge-offs is relatively unchanged and remains around 50 basis points for the year. We still expect a significant decline in NPAs, down about 15% from last year's levels, further reducing the NPA ratio.

With respect to loan loss reserves, we continue to expect the benefit from improvement in credit results to be partially offset by new reserves related to loan growth. All in, we produced another solid quarter. This is a tough competitive environment where the focus is clearly on execution, and we'll continue to drive towards improving performance where we feel we can do better.

That wraps up my remarks. Jessica, can you open the line for questions, please?

(Operator Instructions) Ken Zerbe, Morgan Stanley.

Just in terms of the deposit advance product, looking at yields, it looks like they are down about 4 percentage points this quarter to about 35. Has anything changed in terms of your expectation for how quickly that does run off? And, just to be super clear, all that runoff is already -- or is it already included in your current guidance? Thanks.

Yes. The progress on EAX this year is included in our guidance. I would say that the behavior -- customer behavior is relatively in the range of our expectations. It is not a whole lot different from where we expected when we made the announcement earlier this year.

Understood. And you guys have not -- do you have an estimate in terms of timing of when you might come up with an alternative product?

We are working on it, Ken. Clearly, it is a pretty complex process. We know, obviously, that some agencies have provided guidance. Others are working on it. There is no full clarity.

And I think we have, obviously, a group of people working on it and we will be working on it for the remainder of the year, and we will share the updates with you as soon as we have more clarity. But I think it will take a number of months before we can clarify where we are going.

All right. And then, last question, just in terms of the litigation charges, I guess Fifth Third is not one of the banks I normally think about having high litigation expense, but can you give us any more color in terms of what is driving those expenses and whether there is any kind of resolution in sight on that? Thanks.

I am afraid I am not going to be able to give you more detail than what is in our filings. You can go to our latest 10-Q filing and look at the items that we discussed. It is environmental.

We are dealing with similar issues that other banks are dealing with and we expect these litigation charges, obviously, to end. And we don't necessarily have a clear path to the calendar time when it will end. But the issues that we are dealing with are not a lot different from the issues that other peer banks are dealing with.

Paul Miller, FBR Capital Markets.

This is Jessica Ribner for Paul. We have one question just on the mortgage banking side of the business. How are you addressing the segment as a whole, and with what is going on in the market that we are looking at probably a sub-trillion-dollar market weighted towards purchase, but the purchase market hasn't come back like we thought. How are you thinking about that going forward?

Right. And we agree with you that our expectations coming to this year, with respect to the spring and summer season, were higher than what the actuals are coming out as. The volumes are lower.

From our perspective, though, the other added element is we decided to exit the broker channel during the first quarter. That clearly is impacting our volumes.

In terms of the remainder of this season and the remainder of the year, we are not expecting significant changes to our origination volumes. Our origination volumes, when you exclude the broker channel, are up at a very healthy level.

Our pipeline, when you exclude, again, the impact of the broker channel, is actually up at a very healthy level -- 30%-plus as well. So we have lowered our expectations, given the housing activity that we have seen over the past two, three months. And our guidance for the remainder of the year reflects that sort of a more of a flat performance on the top line revenue in that business.

Okay. And then just in terms of July, have you seen any upward trends from the second quarter?

In terms of just mortgage or overall?

In terms of mortgage.

Similar trends. Once you get it late into the season, these trends don't necessarily change much month over month. So I would say that what you are seeing out with respect to housing data is probably reflective of what we are seeing.

Erica Najarian, Bank of America Merrill Lynch.

My first question is, in terms of your progress, or if you prefer, what inning you are in terms of reaping potential savings from your retail distribution resizing, where are you on your progress? And, as we think about 2015, we appreciate certainly the guidance for the efficiency ratio in the second half. But if the interest rate environment doesn't change, is there enough potential savings left in the till to continue to drive the efficiency ratio down further next year?

I believe that there is more room in our expenses. Clearly, we have been very focused in looking at the revenue trends and looking at the future of our businesses, with and without an increase in the interest rate environment. And our efforts so far have produced very good results.

Now, in terms of the retail business, there are graphic trends and the customer usage trends are changing very rapidly. So we end up adjusting our expectations continuously as every month's data comes in with respect to how heavily customers are using the digital channels. We're up over 30% now in terms of the total deposit transactions that are coming through the ATMs and the mobile app.

So -- and, also, our pilot projects with respect to the design of our branch, with respect to the type of employment that we have in those branches, are producing good results as well. So there is going to be more room as we continue to invest in technology. And as the customers are also likely to exceed our expectations as to how they interact with us.

Going back to what that means for efficiency ratio, just even sort of beyond 2015, we have always said that where we are as a Company, 55% efficiency ratio would somehow, from the interest rate environment, is very achievable. We continue to believe that. And we will do our best to time the movement and the efficiency ratio along with the revenue patterns that we see.

But, for now, I think the fact that we are guiding to a sub 60% level for the second half of the year is pretty good, given the rather subdued economic environment that we are seeing and the challenges that we are facing, for example, with respect to mortgage revenues. We are pleased. I believe that there is more room and we will do our best to continue to produce those results.

Keith Murray, ISI.

Just touching on the litigation expense, and I appreciate you can't give too much specific information, but just curious if the increase is related to new items or changes in existing items based on what you have seen in other settlements, et cetera.

Yes. I'm afraid I am not going to be able to give you more details, really, than what we have in the Q. I mean, we will be updating, obviously, our 10-Q filing here shortly. If there is any updates we are going to communicate that via Q.

Okay. And then just back on the deposit events -- products, can you just explain the revenue dynamic for 2014? So let's assume, for arguments sake, you don't have a replacement product in place by the beginning of 2015. Would there be like a cliff decline in revenue in the first quarter 2015, as you phase out at the end of 2014? How does that work?

Yes. As -- in my discussion at the beginning of this call, I mentioned that we are working both on what the product or the set of products of services is going to look like, as well as how we are going to manage the transition period as we tend to intend to avoid an abrupt disruption to the delivery to our customers. So, more to come on that as we get closer to the end of the year.

Matt O'Connor, Deutsche Bank.

This is Dan Delmar, from Matt's team. If you could just comment on the commercial pricing trends that you are seeing and your expectations for that going forward, it seems like utilization was up a little bit this quarter on the commercial side. And what do you think that means for C&I growth?

We typically -- let me answer the second part of your question. We typically don't have aggressive assumptions on utilization rates, because we don't really see an abrupt increase in economic activity. So our guidance really does not rely much on continuing tick ups in utilization rates.

In terms of pricing, it continues to be competitive. The segments that we are growing mid-corp and large corp are very attractive segments for all banks, and we expect that environment to continue. It likely is not going to change much.

The other part, from our perspective, is we are continuously booking commercial loans of better credit profile compared to previous periods. And so, from a new yield perspective, what you are seeing in our overall portfolio yield progress is impacted by that improving credit profile of new loans that are coming on the sheet.

So, in general, we have no expectations that this pricing environment is going to change much. We don't really -- we have not built in any utilization rate increases into our outlook.

Our production continues to be very strong. I looked at our production -- new production patterns going back to the beginning of 2011, and if you take out Q4 -- because Q4 is always a very high origination volume quarter -- this quarter's production beat eight of the 11 quarters.

So, production patterns continue to be well; just the refi and payoff activity is producing more subdued results from a portfolio outstanding perspective. But we are pleased with the activity levels.

All right, thank you. Lastly, could you just remind us of the pace of the contingent tax liability going forward?

In terms of dollars, dollar payments?

Dollars and timing.

The timing is -- you are talking about Vantiv, I am assuming.

Yes.

Okay. So the timing is going to be Q4. And, as we have discussed, this is a very long series of contingent cash flows, upwards of 15 years. And when you look at Vantiv's filings, based on what they disclose, the Q4 amount is about $23 million.

(inaudible).

Not to beat a dead horse on this deposit advance, but is it fair to say -- if I hear you right, it is in the 2014 outlook, but it is also kind of slowly starting to bleed down. And as we look to 2015, you have to do the review on the placement products, but you kind of referenced any replacement product, maybe fewer customers that will qualify in the ability to repay. Maybe there would be a little bit higher underwriting expense going along with it.

So is it right to think it is annualizing maybe $125 million, I think, of revenue right now? And maybe, as we look to 2015, for those of us that have to kind of put something in the model, maybe haircut it by half or something? I mean, is that -- clearly, that half is my estimate, not yours. But it is it right to think that 2015 has a step down regardless of what the outcome of the review is, and it is just a question of how much that step down is?

Look, I think that we have not provided guidance with respect to 2015 on specific percentage terms. The other thing that I want to clarify is, we believe that ultimately the solution needs to be evaluated as more of a different nature of products and services rather than just one-for-one product substitution, because the nature of the offer is going to be broader. We are looking at a package of different products and services that this segment is going to need. And we are designing our offer relative to that type of demand.

What is difficult is, ultimately, it is the new offer or bundle of products and services is going to address, most likely, a wider segment of customers than the set of customers who are using our existing EAX product. So part of the change in the revenues and profits tied to this is going to depend on that widening of the customer base. Whether the number is 50%, 60% lower, I don't have enough information. If I had, I would have given you that guidance today.

But, in terms of there is going to be at the end of 2014, we will update you guys on that progress. But, clearly, the change in the revenue line item in 2015 is going to be reflective of a more discreet change on revenues that are coming through that way.

That's very helpful. On the commercial side, I guess two numbers that I was grappling with, one on the NPL inflows. Clearly, there is kind of a walk back in most credit metrics this quarter, which is good news. The NPL inflows have been a little higher, kind of as a run rate, if I smooth out over the past couple of quarters. So I wonder if you could just talk probably about the commercial credit cycle and whether you think we are bouncing along the trough or whether you think we are starting kind of a process of normalization, fully realizing that there were some unusual credits last quarter, let's call them.

And then, secondly, I think you mentioned the commercial core deposit growth was up 16% year-over-year. I guess regardless of whether that number is right more broadly as you think about commercial deposits, any ability you have had to parse apart how much of it is core customer growth, new accounts, things like that, versus how much of it you feel like might be excess liquidity sitting around because of the low rate cycle.

This is Frank Forest. Let me take the first part of your question and I will let Tayfun answer the second part. On the NPL question, we are certainly making very good progress in continuing to move both NPAs and NPL down. We did have a slight push up in the second quarter on NPLs. Quite frankly, that came from a very thorough review of our portfolios, specifically our leverage book. So we had a few credits that we moved into the NPL category as a result of that review.

We were very pleased overall, however, with the review and the quality of the book once we went back and reconfirmed it. But the overall trend and the guidance we have given, both on NPAs and NPLs, projects that we continued to see opportunity for further declines through the end of this year into next year.

We are working that very carefully. We are very pleased with the results to date and especially with the decline in NPAs in the second quarter. So there is still room for improvement.

On the commercial deposit side, I would say that the increase that we have seen is related to core growth, our existing customers and relationships. It is difficult to judge how much of that core increase is related to the excess liquidity that they have and -- but, clearly, in this LCR environment, our focus is on LCR-friendly core commercial deposit growth. So -- but, there is clearly a segment of that increase that is related to excess liquidity. Jamie, I don't know if you have any additional comments on that.

Yes. I think the nature of your question is just getting it -- you know, how are we modeling deposit behavior for what potentially could be a rising rate environment. And one of the things we continue to do is reevaluate what occurred in 2004, which was the last time we entered a Fed tightening cycle. And, for us, three significant differences with how we model deposit behavior going forward versus what we actually experienced back then.

One is we currently assume no lag in increasing deposit rates, whereas back then you certainly had a lag in how the industry responded to rising rates in order to restore historical deposit spreads. Second, we have a higher level of absolute betas assumed today than we did actually experience back then. But, then, finally, to your point, we do assume significant runoff in our certain deposit classes and wholesale DDAs is one of them. So we do model fairly significant runoff and yet, after all of these conservative and prudent modeling, we still are asset sensitive and pretty comfortable with how we are positioned.

Ken Usdin, Jefferies.

Tayfun, to your comments earlier about expenses, understanding that you are anticipating a sub-60% efficiency ratio, is the second quarter for you guys have done really well and relatively well compared to expectations on core expenses, yet we see a reduction in the fee guidance and no further reduction in the expense guidance. So I'm just wondering, what those moving dynamics are between revenues/expenses in terms of the delta in pre/pre, and what are the drivers of incremental expense growth that you wouldn't be able to adjust against the changes you are making on the fee outlook side?

Just to reiterate the outlook, the outlook is for the entire year and is reflective of sort of the realized changes in mortgage and in corporate. And mortgages, clearly, it has been affected by a little bit higher amortization in the MSI line. -- MSR line.

So, as we look forward to the remainder of the year, we still believe that we are going to do a good job with noninterest income and different fee categories. We have very strong expectations as we updated payment processing. IA continues to be strong.

And corporate banking, I think, is going to be strong as well. It has clearly been impacted by low volatility and certain sensitive line items.

The expenses, there are some seasonal changes from Q2 to Q3. The marketing experience typically picks up in Q3. There are some -- the impact of known amortizations from previous capital investments in IT, et cetera. Remember, we are continuing to invest in the Company. We are not stopping it.

But, clearly, what I would tell you is whether we achieve it in a given quarter, if we do see significant changes to revenues, we do actually act. And we make sure that our expense line does not necessarily cross the revenue growth line. So all I can tell you is, so far, we have done a good job in adjusting our expenses based on revenue trends. And some of it, obviously, has been impacted by important decisions. Exiting the broker channel was an important event that impacted the mortgage line of revenues.

And -- but, I can guarantee you that the focus on expenses is very much high on our priority list. We believe that when you see our numbers going forward, we will continue to prove that it is a high priority item.

Okay. And my second question is, the automobile loans line has been now flatlined for several quarters. And understanding the competition and the spreads that are out there, fleshed out against the fact that SAAR industry sales are continuing to go up every quarter, can you just talk about originations versus paydowns and where you stand on desire to grow that business?

So let me give you a couple of data points with respect to production. Last year's Q2 2013 production was $1.6 billion. I think [first quarter was $1.3 billion], down from $1.4 billion in Q1. We are being very careful in putting to work our shareholders equity in that business line, and we are trying to find the best balance between getting the right profitability and the right credit profile.

The business continues to be very competitive. The payoff performance is really not much different, so with -- the impact of the outstanding volumes is really more due to changing production patterns. Our first goal is to book profitable loans. We are not going after volume. And we will not change that approach.

We have done a better job in the last six months compared to the previous six months in achieving a better spread in that business. And we kept the credit profile -- duration profile of that business fairly stable. So we are pleased. We are not complaining that origination volumes are slightly down.

But we will continue to continue to look for opportunities. And when it is time to increase production, we will do so, but it has to be done on a profitable basis. We are not going to just do it to show higher loan growth.

Mike Mayo, CLSA.

Your lower guidance for fees and pre-provision net revenue, is that solely due to the reduction in mortgage that we have seen so far year to date?

Largely, yes. I mean, there is some drop in corporate revenues that are more against sensitive item interest rate derivative volume. It was a little bit less than we expected. Our investment advisory business is doing well; a bit below, because we are moving that business from a transactional focus to a stable growth and asset management. But, in general, Mike, it is more reflective of what is happening in mortgage than anything else.

And is the forward guidance indicative of everything you have seen so far year to date whether it is the investment advisory, the mortgage broker channel, or the MSR write-down? Or is that also more subdued expectations when you look ahead?

It is more reflective of what we have seen.

Okay. So there is no real change in the forward outlook except that it starts from a little lower base.

That's about right. Yes.

Okay. But, if a lot of this is due to the mortgage broker channel, why wouldn't you have known about this guidance after first quarter earnings? I mean, what is the new information here?

I think what has happened was that the change was a bit more abrupt than what we expected. The MSR performance, clearly, when you compare -- just when you look at Q1 numbers, our hedge gains were a little bit higher in Q1. Moving production away from brokered mortgage also impacted the amortization of the asset itself, as new originations were a bit lower than we expected. So it is a combined effect between what is happening to the servicing asset as well as the origination loans.

Sure. But wouldn't you have known about that amortization change, since you knew in advance you were moving product away from the broker channel? Or was there something that was missed? Or the rates changed or something changed, right?

Just remember, going back to the earlier part of the discussion, somebody asked what we thought about the housing activity on origination levels. Even excluding the broker channel, we put on less in our servicing portfolio than we had originally anticipated due to the subdued housing activity. So we thought that the purchase activity would be higher, even just based on our retail channels.

Okay. But, as it relates to mortgage, really, the damage has been done as reflected by this quarter's results.

We believe that we will have a fairly flat performance in mortgage for the remainder of the year, yes.

Okay. Switching gears, what were second-quarter revenues from the deposit advance product?

About $30 million.

$30 million. Okay.

(multiple speakers) that is a gross number.

And what was the net?

I don't have the credit numbers in front of me, Mike. We can update (multiple speakers).

Well, even ballpark. I mean, I will take -- is it bigger than a breadbox sort of answer here. Just trying to size this.

It is just about a breadbox, probably.

You can buy a lot of breadboxes for $30 million. So I mean, what sort of loss rates do you have on this product?

Mike, I don't have those numbers. It's a very small number. It is not a very big number.

Okay. So this is a big nut to swallow here not. I mean, either you mitigate this or, per the prior question, lose $120 million in revenues per year. Is that too draconian, simply to take $120 million off the top starting day one of 2015?

I believe that is too draconian. Ultimately, the outcome will depend on the transition period and also the replacement of this revenue stream. But, as we said, in our opening lines, revenues will be considerably lower, but taking the entire amount out, I think (multiple speakers) (technical difficulty)

And what sort of efficiency ratio does that business line have?

A very low efficiency ratio.

Okay. So it is pretty low. As far as your buybacks -- shares were reduced by 1%. But you didn't redeploy the Vantiv gain, so should we assume maybe the pace of buybacks picking up here in the next quarter?

Yes. Yes. I mean, they should -- it is more of really a calendar issue, Mike. We will obviously resume our activities as we get out of our blackout period. So it is not indicative of a change in pattern. And we should see a pickup here in the activity this quarter.

When does your blackout period end?

The more important thing is the current ASR expires at the end of July.

Yes. So it is difficult to have two ASRs in the same time in the market. You can do it, but our blackout period started with our board meeting in mid-June and it now is over with this earnings release.

And just a follow up on that. At what price level does it make sense to buy back your stock? I mean, up to what price or what sort of parameters do you use for that?

So far, we have focused on share buybacks as a systemic return of capital to our shareholders. And we have refrained from necessarily acting based on day-to-day, month-to-month stock awards. We always believe that our stock is a good buy.

And so far, when we look at the IRR in the last two years of us a buying stock, the performance has been very good. We will continue that approach. We still believe that our stock is a very good investment, and at this point, we are not necessarily being guided by where the stock price is today.

Terry McEvoy, Sterne, Agee.

Just one question left on my list. Do you have the Vantiv gain in the second quarter? And I am not connecting any dots, but you also had the land valuation adjustment, so you made a decision to look at the value of the land.

I am just thinking about the in litigation reserve. Was that something that could have been taken in future quarters, much like the land valuation adjustment? Or was there something specific in terms of conversations or something that is event-driven that was behind that charge?

Terry, these are totally independent events. The litigation reserves are tied to activity that we see during the quarter and what we have in front of us. The land valuation -- that's -- we look at that every quarter. So, none of these are tied together. These are all independent decisions that we have made based on the facts that we know as of today.

This does conclude today's conference call, as we have reached our allotted time. You may now disconnect. Thank you.