Fifth Third Bancorp (FITBI) Q1 2013 Earnings Report, Transcript and Summary

Good morning. My name is Bradley and I will be your conference operator today. At this time, I would like to welcome everyone to the Fifth Third Bancorp Earnings Conference Call. [Operator Instructions] Mr. Jeff Richardson, Director of Investor Relations, you may begin.

Thanks, Bradley. Good morning. Today, we'll be talking with you about our first quarter 2013 results. This call 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 in these statements. We've identified some of these factors in our forward-looking cautionary statement at the end of our earnings release and in other materials and we encourage you to review them. Fifth Third undertakes no obligation and would not expect to update any such forward-looking statements after the date of this call. I'm joined on the call by several people: Our CEO, Kevin Kabat; and CFO, Dan Poston; as well as President, Greg Carmichael; Greg Schroeck from Credit; Tayfun Tuzun from Treasury; and Jim Eglseder from Investor Relations. During the question-and-answer period, please provide your name and that of your firm to the operator. With that, I'll turn the call over to Kevin Kabat. Kevin?

Thanks, Jeff. Good morning, everyone. Fifth Third reported first quarter net income to common shareholders of $413 million and earnings per share of $0.46, was up 7% over last quarter and 2% from a year ago, which included Vantiv IPO results. Earnings this quarter included a benefit from a higher valuation on the Vantiv warrant and net securities gains partially offset by a higher tax rate from the expiration of options and a couple of other smaller items. Dan will discuss these in more detail in his remarks. Those items in total net to about $0.02, a positive impact on the quarter. Quarterly earnings a year ago included $0.09 in benefit from Vantiv's IPO. Excluding Vantiv in both quarter -- in both quarters, year-over-year earnings per share increased 22%. Return on assets was 1.41% and return on tangible common equity was 15.4%. In addition, tangible book value per share increased 2% sequentially and 8% from a year ago despite the impact of share repurchases. Average sequential loan growth was 2% with particular strength in C&I loans, which were up 6% versus last quarter. Total loan growth from a year ago was 5% despite continued modest runoff in commercial real estate and home equity. C&I and residential mortgage loans increased year-over-year by 16% and 12%, respectively. Period-end loans were reduced by a $500 million auto securitization and a $60 million jumbo mortgage sale in March. Loan growth was less robust than last quarter as expected, given normal seasonality in the impact of tax law changes that drove some of the year-end activity. Nevertheless, we still produced solid loan growth in the quarter and it should stack up pretty well. We continue to invest in our lending businesses over the past several years and to improve and leverage a core strength at Fifth Third. We feel very good about our ability to take advantage of opportunities and grow loans as we move forward. Average core deposits continue to grow and were up 4% from a year ago. Transaction deposits are up almost $4 billion or 5% over last year, including 10% in growth and demand deposits and 7% in interest checking balances. Our fee income results reflect a typical seasonality where we have good momentum in a number of key businesses, which we expect to be more evident in the second quarter. Investment advisory fees of $100 million were a record for us. And mortgage revenue came in a bit better than we had expected after the rate moves in late January in terms of both mortgage gains and the MSR. Heading into the second quarter, we feel pretty good about a continuation of solid mortgage gain results with the current market environment. Credit trends continue to show steady improvement with net charge-offs down another 10% sequentially and nonperforming assets down 7% or $86 million. Total delinquencies were at their lowest level since the first quarter of 2001. Capital levels are very strong with Tier 1 common of 9.7% and a leverage ratio of 10%. We would expect that capital levels would continue to be strong under proposed Basel III capital standards as well. During the quarter, we announced the repurchase of $125 million of common stock. That transaction completed the amount we had approved under the 2012 CCAR plan. In total, inclusive of shares repurchase with gains from Vantiv sales under the 2012 plan, we repurchased $775 million of common stock or approximately 51 million shares. This reduced our diluted share count by 5%, which I'll remind you includes shares issued for compensation. In spite of these repurchases as well as solid asset growth, our Tier 1 common ratio actually increased 6 basis points from a year ago. Our ability to generate capital and our strong capital levels under Basel I or Basel III give us the ability to retain the capital we need to support balance sheet growth while continuing to return capital to shareholders in a prudent manner. In March, we announced our capital plan relating to the 2013 CCAR process. That plan included a potential dividend increase to $0.12 as well as a number of other actions including further share repurchases. We think our plan is prudent while still returning significant amounts of capital to shareholders and believe that our estimates, as well as the Federal Reserves, demonstrate our capacity to generate capital and to protect our capital base under stress. Our continued ability to generate a relatively high level of profitability from loan growth and solid revenue results, ongoing expense discipline and credit improvement give us confidence that our strategy's working. We feel very good about how we are positioned going forward. Before turning it over to Dan, I'd like to thank our employees for their continued focus and drive and our customers for their continued business and partnership with Fifth Third. With that, I'll ask Dan to discuss operating results and give some comments about our outlook. Dan?

Thanks, Kevin. I'll start with Slide 4 of the presentation and we'll discuss balance sheet, income and credit results for the first quarter before turning to the outlook for the end of my remarks. Overall, it was a strong quarter for Fifth Third. Earnings per share were $0.46, up $0.03 from last quarter. First quarter results included a $34 million positive valuation adjustment on the Vantiv warrant, which was about $0.025 per share on an aftertax basis. There were a number of other items affecting results, including a seasonally high tax rate and investment securities gains, which essentially offset one another. Those items are outlined in our release and I'll note them where applicable in my comments. As Kevin noted in his remarks, earnings per share increased 22% from a year ago, excluding the $0.09 benefit from Vantiv in the first quarter of 2012 and the $0.02 benefit this quarter. Turning to Slide 5. Tax equivalent net interest income decreased $10 million sequentially to $893 million and the net interest margin was 3.42% versus 3.49% last quarter. Those results were a bit better than expected, largely due to higher-than-expected mortgage warehouse balances and rates on those assets. The decline in net interest income was driven by a $12 million negative impact from 2 fewer days in the quarter. Additionally, repricing in the loan and securities portfolios contributed to the decline in NII, partially offset by the benefit from net loan growth during the quarter. Lastly, the full quarter impact of the FHLB debt termination in December provided a $9 million benefit to the sequential comparison. The decrease in net interest margin was driven by lower loan and securities yields, which was partially offset by a 3 basis point benefit from the fourth quarter FHLB debt termination and a 2 basis point benefit from the effective lower day count in the quarter. On the loan side, we've seen continued compression in yields, primarily driven by loan repricing and mainly in the C&I and auto portfolios. The C&I portfolio average yield was down 11 basis points compared with last quarter. The result of repricing within the portfolio as well as the impact of lower LIBOR rates combined with a continued mix shift toward higher quality loans. In the indirect auto portfolio, the average yield also continued to decline, largely reflecting portfolio effect of replacing older higher yielding loans with new lower yielding loans. We saw similar yield compression in the securities and short-term investments portfolio, which reflected higher premium amortization than normal as well as continued repricing of cash flows at lower rates. Portfolio yield is now just below 3% and, thus, we'd expect these effects to slow in the second quarter relative to this quarter. Turning to the balance sheet in Slide 6. Average earning assets increased $2.8 billion sequentially driven by a $2 billion increase in average portfolio loans and leases and a $740 million increase in loans held-for-sale. On an end-of-period basis, total loans were flat sequentially reflecting the impact of the auto loans that were securitized and sold during the quarter. Average securities and short-term investments of $16.8 billion were relatively stable compared with last year. Looking at each loan portfolio. Average commercial loans held for investment increased $1.9 billion or 4% from the fourth quarter and increased $3.7 billion or 8% from last year. C&I loans of $36.4 billion increased $2.1 billion or 6% from last quarter and increased $5 billion or 16% from a year ago. On an end-of-period basis, C&I loans were up 2% from last quarter. C&I production remains broad based across industries with a large portion of the first quarter production in manufacturing, service, energy and health care sectors, which is reflective of the investments we've made in the capital market space. Commercial mortgage and commercial construction balances declined in aggregate by $219 million sequentially or 2% as a result of continued runoff in these portfolios. We would expect these portfolios to stabilize in the near term and may see them begin to grow toward the end of the year. Average consumer loans in the portfolio of $36 billion were relatively flat sequentially and increased $705 million or 2% from a year ago. Residential mortgage loans held for investment were up 2% from the fourth quarter reflecting continued retention of shorter term, high-quality residential mortgages, which are originated through our brand's retail systems. In the first quarter, we began selling 30-year fixed jumbo mortgages, which we have been retaining and currently would expect to continue to sell such loans going forward. We are still retaining shorter term and variable-rate jumbo mortgage production. Average auto loans were flat sequentially as originations offset the impact of the $500 million securitization in March. These loans were moved to held-for-sale in February resulting in $169 million increase to average portfolio loans for the quarter and we subsequently securitized and sold those at the end of March. The securitization represented high-quality loans with relatively thin spreads, which don't make much sense for us to continue to hold from a capital perspective. Securitization will reduce net interest income by about $1 million to $2 million per quarter largely offset by increases in other fee income and it has virtually no effect on the net interest margin. Finally, home equity loan balances were down 3% sequentially, while average credit card balances were up 2% sequentially. Moving on to deposits. Average core deposits increased $631 million or 1% from the fourth quarter. Transaction deposits, which exclude consumer CDs, increased $743 million or 1% sequentially and $3.8 billion or 5% from a year ago. The sequential increase was driven by growth in consumer account balances, which reflected seasonality and higher average balances per account and were partially offset by seasonally lower commercial balances. Consumer CDs declined 3% in the quarter due to our continued disciplined approach to CD pricing. Turning to fees, which are outlined on Slide 7. First quarter noninterest income was $743 million, compared with $880 million last quarter. Current quarter fee income results included a $34 million positive valuation adjustment on the Vantiv warrant, $17 million in securities gains, a $7 million gain on the sale of certain asset management contracts and $7 million in charges associated with the Visa total return swap. You'll recall that prior quarter fee income included $138 million in net gains on Vantiv shares and the warrant, $2 million in securities gains and $15 million in charges on the Visa total return swap. Excluding all of these items, fee income was $692 million, was down $63 million or 8% sequentially primarily reflecting declines from record levels of both mortgage banking revenue and corporate banking revenue in the fourth quarter. Looking at each line item in detail. Deposit service charges decreased 3% sequentially and increased 1% from the prior year. Sequential decrease was driven by seasonally lower consumer overdrafts. Corporate banking revenue of $99 million decreased $15 million from the record levels in the fourth quarter and increased $2 million from last year. The sequential decline was driven by seasonally lower revenues, primarily lower syndication, business lending and derivatives fee revenue. You'll recall that we saw higher than normal levels of activity last quarter ahead of year-end tax law changes, which drove some of the acceleration of revenue into the fourth quarter. Mortgage banking net revenue of $220 million decreased 15% from the fourth quarter but increased 7% from a year ago. Originations were a record $7.4 billion this quarter compared with $7 billion last quarter. Gain on sale revenue was $169 million, down $70 million from record fourth quarter levels and reflected lower gain on sale margins during the quarter as well as changes in mix. Margins were particularly weak in January although they strengthened in February and March. MSR valuation adjustments, including hedges, were a positive $42 million in the first quarter versus a positive $7 million last quarter. Investment advisory revenue of $100 million was the highest in company history, increasing 8% from last quarter and 4% from the prior year. The sequential increase was driven by higher brokerage production, seasonal trust tax-preparation fees, as well as higher market values. Card and processing revenue was $65 million, a 1% decrease from seasonally higher fourth quarter levels and an 11% increase from a year ago, reflecting higher sales and transaction volumes. Turning next to Other income within fees. Other income was $109 million this quarter versus $215 million last quarter. The change is primarily due to Vantiv-related gains, which were a positive $34 million this quarter and a positive $138 million last quarter. First quarter results also included a $7 million gain on the sale of asset management contracts and $7 million in charges associated with the Visa total return swap. Credit costs recorded in other noninterest income were $10 million in the first quarter compared with $13 million last quarter and $14 million a year ago. Turning to expenses on Slide 8. Noninterest expense of $978 million decreased $185 million sequentially, or 16%. The primary drivers of the decline were due to fourth quarter events, including $134 million charge on the FHLB debt termination, $26 million in additional expense to increase mortgage repurchase reserves and $13 million in litigation reserve charges. Expense results this quarter include a $9 million benefit from the sale of affordable housing investments and $9 million in charges to increase litigation reserves. Excluding these items from both quarters, noninterest expense of $978 million decreased $12 million or 1% from the fourth quarter. The remaining drivers of sequential expense trends were a $27 million seasonal increase in FICA and unemployment expense, which was more than offset by lower employee compensation expense and lower credit costs. Credit-related costs were $24 million this quarter versus $42 million last quarter, excluding the increase in the fourth quarter repurchase reserves that I already mentioned. Realized mortgage repurchase losses were $20 million versus $15 million in the prior quarter. Additionally, first quarter credit-related costs included an $11 million increase in reserves or unfunded commitments versus a $3 million expense last quarter. Moving on to Slide 9 in PPNR. Pre-provision net revenue was $653 million in the first quarter, an increase from $616 million in the fourth quarter. Excluding the items noted on this slide, adjusted PPNR in the first quarter was $602 million down 6% from very strong fourth quarter levels and up 3% from a year ago. The effective tax rate was 30% this quarter compared with 27% last quarter. The first quarter included $12 million of tax expense due to the expiration of employee stock options, whereas the prior quarter included a $10 million benefit from the termination of leases that were settled in the quarter. Now turning to credit results. As Kevin mentioned, we continue to see solid credit improvement and positive credit quality trends in the first quarter. Results represent the best overall level of credit performance for Fifth Third since 2007 prior to the financial crisis. Starting with charge-offs, which are on Slide 10. Total net charge offs of $133 million declined $14 million or 10% from the fourth quarter and $87 million or 39% from a year ago. The net charge-off ratio was 63 basis points this quarter. That compares with 108 basis points a year ago and is the lowest that we've reported in more than 5 years. Commercial net charge-offs of $54 million declined 4% sequentially and 47% from a year ago. At 44 basis points, this was the lowest level reported since the third quarter of 2007. The biggest improvement was in C&I charge-offs, which were down $11 million or 31% from last quarter, which was partially offset by a $9 million increase in commercial mortgage net charge-offs from an unusually low fourth quarter level. Total consumer net charge offs were $79 million or 89 basis points, down 13% sequentially and 33% from a year ago. Improvement continues to be driven by lower home equity and residential mortgage losses, particularly in Florida. Auto loan charge-offs were $4 million or just 16 basis points, but included recoveries of $2 million from a charge-off sale. Moving to nonperforming assets on Slide 11. NPAs, including held-for-sale, totaled $1.2 billion at quarter end, down $86 million or 7% from the fourth quarter. Excluding held-for-sale, NPAs were 141 basis points of loans and declined $76 million. Both commercial and consumer NPAs were down about 5% sequentially. Commercial portfolio NPAs of $828 million or 166 basis points of loans declined $55 million sequentially and are at their lowest level since the fourth quarter of 2007. All portfolio categories improved with commercial real estate NPAs down $34 million and C&I NPAs down $20 million. Commercial TDRs on nonaccrual status were $159 million, down $18 million on a sequential basis. Those are included in the portfolio NPA data that I just mentioned. Commercial accruing TDRs were up $10 million, but still remained fairly low at $441 million. From the consumer portfolio, NPAs of $382 million or 106 basis points declined $21 million driven by improvement in residential mortgage and the home equity portfolios. Non-accruing consumer TDRs included in these results were $174 million, down $13 million from last quarter. Accruing consumer TDRs were $1.7 billion, relatively consistent with last quarter. The TDR book continues to perform as expected and has stabilized as restructurings have declined with improving residential credit conditions. The next slide, Slide 12, includes a roll-forward of nonperforming loans. Commercial inflows in the first quarter were $80 million up slightly from the fourth quarter, but down 52% from a year ago. Consumer inflows for the quarter were $124 million, down 33% from last year. Total inflows of $204 million were the lowest we've seen since prior to the crisis. Moving to Slide 13, which outlines delinquency and other long-term credit trends. Loans 30 to 89 days past due totaled $306 million and were down $24 million driven by improvement in consumer delinquencies. Loans over 90 days past due were $164 million, down $31 million from the fourth quarter driven by improvement in both commercial and consumer. In total, delinquencies decreased $55 million or 11% from the fourth quarter and are the lowest in 12 years. Commercial criticized asset levels also continue to improve, down about $250 million or 5% on a sequential basis and represented the eighth consecutive quarter of decline. As shown on this slide, on all key metrics, Fifth Third's current credit profile is in line with or better than peers overall. The provision and the allowance are outlined on Slide 14. Provision expense was $62 million for the quarter was down $14 million and included a reduction on the loss, loan loss allowance of $71 million. Allowance coverage remains strong at 187% of nonperforming loans and 3.3x annualized net charge-offs. Slide 15 reflects our recent mortgage repurchase experience. Claims associated with GSEs have remained fairly stable the past several quarters, but as we have said, we expect that this may increase as Freddie Mac reviews all nonperforming loans for potential put-back. And we've also already reserved for these loans. We've provided a detailed breakout of loans sold by vintage and by remaining balance. Repurchase requests and losses have been concentrated in the 2004 to 2008 vintages, about 84% of the total. Those vintages represent just 11% of the total remaining balances on loans sold. Turning to capital on Slide 16. Capital levels continue to be very strong and included the impact of approximately $125 million in common share repurchases that was announced during the quarter. The Tier 1 common ratio was 9.7%, up 19 basis points from last quarter. The Tier 1 capital ratio increased 18 basis points and total risk-based capital increased 7 basis points relative to last quarter. Our capital position would also be strong on a Basel III basis with the current estimated Tier 1 common ratio of about 8.9% assuming no changes to the proposed rules and before any mitigation activity on our part. That reflects about 36 basis points of benefit on the numerator side, offset by the effect of higher risk-weighted assets. As you know, regulators are currently considering public comments on these proposals. Tangible asset ratios are also exceptionally strong. With a 10% leverage ratio, a 9.3% tangible common equity ratio, including unrealized aftertax gains of $333 million and 9.0% TCE ratio, if you'll exclude those gains. Turning to the updated full year 2013 outlook, which is on Slide 17. You'll recall that last quarter, we shifted to an annual outlook with the expectation that we would update it with each quarter's earnings. For our 2013 outlook, we have not included the benefit of capital actions beyond those taken in the first quarter and we've assumed no meaningful change in the forward-yield curve. I'll start with net interest income and net interest margin. We continue to expect full year 2013 NII to be consistent with 2012 NII of $3.6 billion and for the full year NIM to be in the 335 to 340 basis point range, likely toward the lower end. The key drivers of 2013 full year trends are loan growth, particularly C&I loans, which we expect to offset the effect of margin compression. We expect second quarter NII to decline $5 million to $10 million. About $4 million of the change is due to the issuance of bank debt in February, the auto securitization in March and the sale of jumbo mortgages. These actions are expected to produce benefits exceeding the detriment to NII for lower FDIC insurance costs and higher fee income levels, in addition to the beneficial impact that they have on liquidity and capital efficiency. The remainder of the decline reflects a mix of loan repricing and maturities of interest rate floors, partially offset by loan growth and a $6 million benefit from an extra day in the quarter. We currently expect NII to grow in the second half of the year as margin compression subsides and with some benefit from the 2008 CDs that mature in the third and fourth quarters of the year. We will continue to look for opportunities to mitigate the effects of interest rate environment, including liability management as we continue through the year. We continue to expect mid to high-single digit loan growth from the 2012 full year average, despite the $500 million in loans we sold or securitized this quarter. And the second quarter is off to a good start thus far in the commercial business. We expect transaction and core deposits to grow modestly over last year. Now, moving on to overall fee income and expense expectations for 2013. Just as a reminder, we've adjusted 2012 comparative results on this slide to exclude all Vantiv-related impacts as well as debt termination charges, which were the largest unusual items in the 2012 numbers. Vantiv transactions contributed a net $305 million to fee income for 2012, while debt termination charges increased expenses by a total of $169 million. The net benefit to PPNR of these items was $136 million. First quarter 2013 Vantiv gains of $34 million have also been excluded. Those adjustments are listed in the footnote. Overall, we currently expect low-single digit total fee income growth in 2013 compared with 2012 adjusted fee income. That would reflect growth across most fee categories with the exception of mortgage where we saw exceptionally strong results in 2012. Looking at the details of our overall fee expectations. We would expect to see high-single digit growth in deposit fees with most of that growth coming from commercial. This is a bit lower than earlier expectations and many consumers are maintaining higher balances due to freight fees, which we are seeing in higher-than-expected deposit levels. We expect second quarter deposit fees to increase modestly from the first quarter, about 2/3 from commercial and 1/3 from consumer. We expect mid-single digit growth in the investment advisory revenue. The second quarter revenue down seasonally from the record first quarter levels. We expect mid to high-single digit growth in corporate banking revenue, a solid growth in the second quarter, although not likely to the record levels we saw in fourth quarter. We continue to anticipate about 10% annual growth in card and processing revenue driven by continued growth in sales and transaction volumes. Turning to mortgage revenue. We continue to expect a strong year for mortgage revenue, although lower than the record 2012 levels. In terms of the second quarter, our current expectation is for strong gain on sale revenue, up $10 million to $15 million, more than offset by a likely decline from the $40 million MSR valuation benefit in the first quarter. Those results can obviously move around depending on the movement of rates during the quarter. For the remainder of 2013, we expect production to decline due to a waning of the refinance boom, although we've been seeing strengthening purchase volume. Margins will likely reflect some continuing competitive pressure. Although in the near term, they should stay at or above first quarter average levels. The remainder of the year still looks pretty strong in terms of mortgage gain revenue. And if we see higher rates, we should see some offset to lower volume in the MSR valuation. Our quarterly base expectations for other income, we continue to be in the $75 million range, plus or minus, absent any significant unusual items, which we will have from time to time. To return to our overall expectations for the second quarter for fee income, excluding the impact of first quarter Vantiv warrant gain, we expect fee income to be down about $20 million to $25 million from first quarter, primarily due to lower mortgage banking revenue. Turning to expenses. We continue to expect total noninterest expense to be relatively consistent with adjusted 2012 expenses, excluding the debt termination charges that I noted earlier. Compensation-related cost is expected to be stable to down slightly versus 2012 and other operating costs are expected to be up modestly. Second quarter noninterest expense should be down about $10 million or so, driven primarily by FICA and unemployment expense, which should decline by about $20 million. We expect expenses otherwise to be relatively stable throughout the year and we will continue to manage expenses carefully and aggressively and in line with our revenue results in the macroeconomic environment. And we expect our efficiency ratio of about -- to approach 60% at the end of the year. In terms of PPNR, as outlined in my remarks, to this point, our overall expectation is for moderate growth in PPNR in 2013 building on strong adjusted results in 2012. That's despite the rate environment that remains challenging and comparisons with a record year for mortgage revenue. We currently expect PPNR in the $600 million range in the second quarter, give or take, with the expected reduction coming in the mortgage business. Turning to the credit outlook. We continue to look for momentum to continue for the first quarter with full year net charge-offs currently expected to be down about $200 million to $225 million with full year improvement fairly evenly distributed between commercial and consumer. We expect net charge-off ratio for 2013 to be in the 55 basis point range compared with the 85 basis points we reported in 2012. We continue to anticipate lower NPAs down 20% to 25% during 2015 with continued resolution of commercial NPAs being the largest driver of that reduction. Second quarter net charge-off should be down about $10 million and NPA's down about $75 million give or take. For the loss allowance, we expect continued reductions in 2013 with the ongoing benefit of improvement in credit results, partially offset by new reserves related to loan growth. Finally, as Kevin noted, during the quarter we announced the Fed's non-objection to our capital plans for the next 4 quarters. This plan consisted of a number of elements. Those included a possible increase in the quarterly common dividend to $0.12 per share as well as potential share repurchases of up to $984 million in common shares, including shares issued as a result of a potential Series G preferred stock conversion. We will plan to issue perpetual preferred if there were a conversion. We feel very good about the plan we put forward, which maintains a strong capital position, while also returning excess capital we generate to shareholders and moving our capital structure toward new Basel III standards. In summary, despite first quarter seasonality, we reported a strong quarter and have good momentum in many of our core businesses that we expect to generate PPNR growth, ongoing improvement and credit trends and strong returns. That wraps up my remarks. Jeff has a couple of other comments before we open for questions

Thanks, Dan. I've been told that the webcast missed the first minute or 2 of our remarks. Just wanted to summarize that. During that time, Kevin summarized our overall results during the quarter, which I think Dan did a good job of addressing. I also observed that our forward-looking statements are subject to risks and uncertainties and encourage listeners to refer to our cautionary statement in the release. I understand that the replay will capture what was missed. Sorry about that. Bradley, could you open up the line for questions now?

[Operator Instructions] Your first question comes from Ryan Nash of Goldman Sachs.

To start off, in terms of the loan growth, you had a fairly strong quarter in 1Q relative to peers. Can you just give us a sense where the growth is coming from? Is it more from turning commitments into new client relationships? It seems that utilization still remains low and I guess when you think about the broader loan growth outside of C&I, can you help us just understand where you feel the most comfortable in terms of your expectations for the rest of the year?

Ryan, this is Kevin. I'll make a couple of comments in terms of where we saw it. I think we were explicit in terms of trying to tell you that the investments that we've made, particularly in energy, health care. We've seen it also in manufacturing as well as what we've continued to do in terms of some of the consumer space. All are continuing to add to our focus on loan growth, so we feel good about the investments made and seeing that. I would tell you that you're correct in that we haven't seen an increase in utilization. Our utilization rates are still relatively flat and have been for a long period of time. And so, it's coming from our taking more business as well as some additional extension within our clients. But really more in terms of the market share, we've been able to gather and gain through the investments that we've made of the focus on our strategic businesses. So that's where we see most of it. And again, we still feel good about while it was a little bit lighter than what we experienced in fourth quarter, fourth quarter was very, very strong. We still feel good about where our pipelines are and some of the activity that we see in the markets today. We started the quarter off a little bit light and we feel like it's been building a little bit from that standpoint. So we feel, still feel good about our year-long guidance. I don't know if, Dan, if there's anything you'd add to that?

No, I think the only other thing I would add is that Kevin mentioned some of the industries that showed some strength. You were asking, Ryan, kind of where we felt most comfortable, where we were seeing good results. I think it is pretty broad based, not only on an industry basis, but also on geography basis. I think virtually every one of our markets showed positive loan growth this quarter. So I think it's pretty broad based across markets and industries. The only other area I think where we have made investments and we've seen strength is in the mid-corporate area. We improved or invested in resources in that area in terms of RMs and also invested to increase our capital markets capabilities, which are important to customers in that size range. And we continue to see very strong results in the mid-corporate area, which is good for loan growth, but also good for generation of fee income.

Great. And If I could just ask one question on the mortgage business. Just wanted to get a little bit more color on the outlook. It sounds like the near-term trend should be pretty consistent and we could potentially see it tapering off later in the year. Can you just give us a sense, I know you talked about mix shift as what's driving lower margins. But can you just give us a sense of how much of your mix shift played in to the decline in your margin and when you think about gain on sale, it looks like it's roughly 2.3%. Where do you see that eventually leveling off over the next couple of quarters?

Yes, Ryan, we did see, like everyone, I think, margins contracts pretty significantly in the first quarter. Some of that was due to mix change. I think a much larger factor was the rate environment. I think, particularly early in the quarter as secondary rates increased, we saw margins contract pretty significantly. Contributing to that, we did see some mix shift. So the percentage of HARP originations, I think, dropped several basis or several percentage points this quarter. And that had a slight negative impact on margin. But I think the bigger picture from a margin perspective is just the rate environment and not so much mix. As we go forward, I think we saw or we've seen margins firm up a bit later in the quarter. So while we expect relatively stable results first quarter and the second, it probably reflects slightly better margins perhaps slightly lower volumes. Volumes were strong in the first quarter. We had about a 5% or 6% increase in volumes as we increase from about $7 billion to $7.4 billion and that mitigated some of that margin compression. So second quarter, we think, well you heard our guidance from an overall basis maybe slightly better in terms of gain on sale. The rest of the year, a lot will be determined by rates. But based on kind of the current rate expectations, we would expect that perhaps volumes would begin to tail off as we go through the second half of the year.

Your next question comes from the line of Keith Murray of Nomura.

Can I just ask you, in the mortgage business, obviously, there's a lot of competition, a lot of new entrants trying to gain share. Are you seeing anything yet that would be a concern on underwriting? Or do you feel like, overall, it's still very high quality?

Yes, I mean the environment is competitive. I think that competition, I don't think manifest itself in lessening underwriting. I think all participants in the mortgage market now are very focused on underwriting very closely to GSE standards. That's something that, obviously, has gotten a lot of focus with the magnitude of put-back exposures that everyone is dealing with. So I don't think we've seen that competitive pressure manifest itself in deteriorating underwriting in any fashion at all.

Okay. And then as we think about the eventual, hopefully, someday increase in interest rates, how do you guys assume your deposit mix would change? Or do you assume you'll get some outflow on some of the deposits?

I think if the reason -- this is Tayfun. If the reason behind higher interest rates is economic growth, clearly, we would expect to see outflows on the commercial side as those depositors will find a better way to utilize their cash. On the other hand, I think we would expect the consumer space to be more stable. And as we move into that environment, I also would expect us to utilize our branch base very efficiently and maintain a good part of those deposits and if not, grow those deposits. That's our historical experience. We would expect that to play out the same way.

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

My first question is on the expense side. We really appreciate the detailed outlook. I guess I'm wondering if the production revenues on mortgage for the balance of the year in the second half come in lighter than expected or normalize more quickly, how much flexibility do you have on the expense base to minimize the impact on the bottom line?

Erika, I think in terms of the guidance that we've given, I think our expense guidance incorporates into it the expected decline in mortgage activity that we refer to in our guidance as well. If mortgage volumes come off more than our guidance suggests, I think we do have a tremendous amount of flexibility to adjust the expense base. As we built the mortgage business, I think we have done so with the idea that someday we would have to take down some of those costs. So a lot of our capacity from a mortgage perspective to deal with the refi boom comes from things like temporary labor over time, outsourcing some functions that enables us to react pretty quickly to changes and volumes and adjust the expense base accordingly.

Got it. And my follow-up question is actually a follow on to Ryan's question about your C&I growth. Should we interpret from your response to him that the lion's share of what drove the increase in C&I this year came from middle market rather than large corporate?

Well, I think overall, we saw growth across the board. I think the concentration in growth, I think, is probably in that mid-corporate and up space. I talked a bit about the impact of the investments that we have made in the mid-corporate area. So we've seen outsized growth in the mid-corporate area in this quarter and that would be expected to be a contributor to our growth as we go forward.

This is Jeff. Mid-corporate to us is -- middle market is kind of a big space and so this is the upper end of middle market that we're talking about when we say mid-corporate.

And what's the average loan size?

Mid-corporate's probably in the several tens of millions. 10 million-ish, kind of?

Yes, 30 million to 50 million, probably.

Your next question comes from the line of Brian Foran of Autonomous.

Not to be the dead horse on this corporate loan growth issue, but just with some of the other banks being pretty vocal around abstaining from the leverage loan market, I wondered if you could just kind of outline your activity there and maybe some of the investments you've made in people and specific protocols. Just kind of how do you think about doing that business differently and how should investors think about your approach versus the peer argument that maybe banks should just steer clear of leverage loans altogether?

The thing that I would tell you, Brian, is for the most part, our leverage lending portfolio, while we participate, is really not very large in this scheme of things. We're kind of a middle-market lender in the leverage lending space. And so we're not active in large corporate leverage lending, so we don't have a significant impact. The driver of our growth and the driver of what we've been bringing to the table is really around the investments that we've made in terms of different verticals. And you've heard us talk about the success we've had both in the health care space, the energy space, which we feel very good about the team and talent that we've lifted out this past year. We think we're on the early stages of seeing the benefit of that to us, so we think there's some legs there for us to continue to run with. And then also in -- that the manufacturing space, that's more broadly we're seeing impact of that and opportunity of that and particularly, in the upper Midwest part of our geography. We think we also will see some additional opportunity in the commercial real estate. We still see, as you've seen in terms of our reporting this quarter, a run-off in the commercial real estate portfolio. We think that at some point that levels out and begins to not detract from overall loan growth for us going forward. We're doing that business in very different way. We've got it, I think, in a much more disciplined and focused perspective, in terms of the way we're approaching it going forward. And we'd expect that we don't know when and we don't have the crystal ball in terms of the timing on it, but we are seeing more and better type of transactions in that space. So we think that, again, that might be an opportunity for us later this year to be contributory to the outstandings as well. So I hope that addresses your question, Brian.

One follow-up on -- and I apologize if I missed this already, but just as we think about the ROA guidance and the base that kind of apply that to -- should we expect assets to, I guess the disconnect I'm getting at, is loans were up this quarter, assets were down marginally. So your outlook for the medium-term net assets will just kind of bounce around in this $121 billion range? Or was there just kind of a 1 quarter swap out of securities cash and into loans?

Yes, I think in terms of total assets, I think that the assumption relative to total balance sheet size should probably be that it would increase consistent with what our loan growth guidance is. I think the fact that there was a disconnect on those this quarter is probably just a quarter-to-quarter average.

Your next question comes from the line of Ken Zerbe of Morgan Stanley.

Just wanted to talk a little bit about -- more about mortgage banking. Just if I can pin you down on the numbers here. So if you were $220 million this quarter, you think gain on sale was up $10 million to $15 million, you take out the $40 million from the hedging, you serve down to like the $190-ish million range. Is -- and then should we also be applying the reduction in volumes to that same -- or is that, I guess that might be incorporated in gain on sale. I'm trying to think about that versus say, your prior guidance of, I think it was 175 by midyear, because it seems that we're almost in a better environment based on the numbers that we're seeing. Is that fair way to look at it?

Yes, I think that's fair. The math that you did, I think makes sense. I think the number that you arrive at is inclusive of our expectation on both margins and volumes. And that probably is slightly better than what we had anticipated when we gave -- we initially gave our full year guidance back in January. So application volumes, while initially weak in early in the first quarter, improved pretty significantly in March. And so we're optimistic about second quarter results. That's reflected on our guidance, still cautious about the second half of the year.

And then just one follow-up, on the loan growth, the guidance there. Did you, in your guidance from last quarter, did you anticipate sort of the strong average growth and then the flat period end? Because I guess what I'm trying to figure out is, you obviously were higher we were expecting on the average basis. But that kind of also implies slower growth from here to still reach the kind of the midpoint of your guidance? Is that also, is that consistent with what you're seeing? I guess we did have flat period end growth this quarter.

Yes, our period end growth was flat this quarter. Some of that is due to some securitization said activity that occurred in the first quarter that was not anticipated to occur in the first quarter. So we securitized $500 million worth of auto loans. We also sold $60 million worth of jumbo mortgages in the quarter, which wouldn't have been reflected in the guidance earlier. Overall, I think we did expect a fairly strong growth in average balances with not as strong of growth in the period imbalances due to the impact of the very, very strong fourth quarter results.

And seasonality in the first quarter, which we almost always see.

So I think the expectations are generally in line with what we were seeing at the beginning of the year with the exception of some of that securitization in sale activity. And we would expect, as we go forward, pipelines feel good. Activity coming in to the second quarter feels good and we expect to continue to post results from a loan-growth perspective on an average balance basis that's consistent with what we saw in the first quarter.

Your next question comes from the line of Ken Usdin of Jefferies. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: First question just also another loan question. Just wanted to gauge your appetite for continuing to grow the auto book and also to potentially give -- contemplate additional securitizations like you did this quarter.

When we look forward, we see a pretty stable activity in our auto originations. The portfolio clearly is a mature portfolio. So the impact of monthly originations is not huge, but we would see similar trends going forward that we've seen over the past 3 or 4 quarters. In terms of securitizations, this was an off-balance sheet transaction to improve our capital usage in the business. And periodically, we may execute all balance sheet securitizations, but we will basically review the profile of our originations and determine if there is an opportunity for us to do the same thing. We may do on-balance sheet transactions going forward along with off-balance sheet transactions. So we will be opportunistic in that sense. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: Okay. Great. Got it. And then my second question is just coming back to the CCAR plans. And you guys had those extra potential activities. I just wanted to see if you can flush that out a little bit more for us and talk about whether or not you do expect to do that additional preferred issuance that you -- that was included in the press release at the time?

Yes, I'm not sure -- well, from a preferred perspective, we talked about $1 billion in preferred issuance made up of 2 pieces. $500 million of which was anchored to the Series G preferred stock conversion and then the buyback of those shares. So if that conversion occurs and we buy back the shares that preferred stock is converted into, we would anticipate issuing about $500 million of preferred related to that. And then, we also anticipate issuing another $500 million in preferred just to make progress toward what we perceive as the right mix of non-common Tier 1 as we move toward Basel III. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: Well, that's a piece that I'm asking about. So you included it in the press release as a potential. And I guess, that's the question, then, is what's the decision tree on whether or not you do go forward with that, or is that just really a question of you will do it, it's just the question of when?

Yes, I think we will do that as we approach phase-in of Basel III. It is a question of when. It is included in the capital plan for this year. I think the timing of that transaction being executed will be based on our evaluation of the markets and when is the most appropriate time for us to do it from that perspective.

This is Jeff. So the Series G conversion is a contingent situation. So there are certain requirements that need to be met from a stock-price standpoint and that has a pricing period. And that pricing period is month or 2 from now. And so we can't say whether that will happen because it requires something to happen in the future. But if it does happen, then Dan talked about how we would fund that. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: My last question is just, on the funding cost side of things, you're still showing a nice continuous improvement on overall funding cost side. How much room still is there to continue to ratchet your overall funding cost lower?

There is remaining room, but clearly on the deposit side the improvement is marginal. But we also have other opportunities on the balance sheet in non-deposit items. And we will realize then as we see opportunities realize.

Your final question comes from the line of Paul Miller of FBR. Paul J. Miller - FBR Capital Markets & Co., Research Division: Can you touch base a little bit on the reps and warrants? I know there's been some on the mortgage side of the design. I know there's been some comments from FHFA they'd like to clear up by the end of this year. Have you gotten any guidance that this year would be it?

No. We've not -- we've not had any indication of that in any discussions that we've had relative to our own situation. We've, obviously, seen the same things you have in terms of press, what the press is reporting. But I think our discussions have been more along the lines of what we have talked about over the past few quarter, which has been that from a Freddie Mac perspective, Freddie Mac has been more explicit with us in terms of what the criteria are that they will use to determine whether loans should be put back. That has allowed us to make better estimates with respect to what our put-backs will be and that has led to some higher reserve balances in the third and fourth quarter. We have not yet seen fully the increase in put-backs but that information will would, but we still do continue to expect to see that, ultimately, and have the reserves available to provide for that increase in volume if it materializes. Paul J. Miller - FBR Capital Markets & Co., Research Division: And then also with respect to the mortgage banking side, can you remind us again what's your split between retail and correspondent? And is there any plans that go into the warehouse side of the business?

This is Jeff. I don't have the exact numbers here. Retail is -- retail and direct are about half of our originations, correspondent and wholesale being the other half.

It's about 50-50, Paul, when you consider correspondent and wholesale. Paul J. Miller - FBR Capital Markets & Co., Research Division: And do you do warehouse lending? I'm not -- I don't see it really broken out.

No, for all practice, intents and purposes, we really don't. Paul J. Miller - FBR Capital Markets & Co., Research Division: Any plans to do that going forward?

Not at this point, no.

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