Fifth Third Bancorp (FITBI) Q4 2013 Earnings Report, Transcript and Summary

Good morning. My name is Tanisha, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Fifth Third Bank Fourth Quarter 2013 Earnings Conference Call. [Operator Instructions] Thank you. Mr. Jeff Richardson, you may begin your conference.

Thanks, Tanisha. Good morning. Today, we'll be talking with you about our full year and fourth 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, Tayfun Tuzun; Frank Forrest, Chief Risk Officer and Credit Officer; Treasurer, Jamie Leonard; and Jim Eglseder from Investor Relations. [Operator Instructions] . With that, I'll turn the call over to Kevin Kabat. Kevin?

Thanks, Jeff, and good morning, everyone. Before touching on the fourth quarter highlights, I want to make a few comments about 2013 as a whole. Net income to common shareholders of $1.8 billion was the highest in the company's 155-year history. Net income to common shareholders increased 17% over last year. Earnings per diluted share of $2.02 were up 22% from a year ago. Our return on assets was 1.5% and return on average tangible common equity was 16%. Those ratios were 1.3% and 14%, excluding the benefit of Vantiv and other unusual items outlined on Slide 10 of our presentation. These are strong returns, particularly in this low interest rate environment. Net interest income was down 1% in 2013 despite a 23-basis-point decline in the margin. On a reported basis, fee income was up 8%, expenses were down 3% and PPNR was up 12%. Excluding the items I just referred to, PPNR was stable despite the significant decline in mortgage revenue with fee income down just 2% and expenses down 1%. The efficiency ratio declined 3.5% on a reported basis to 58% and was 60% on an adjusted basis. Full year average transaction deposits increased 6%, and loans grew 5%. Credit quality metrics showed significant continued improvement with charge-offs for the year down 29% and nonperforming assets down 25%. Fifth Third continues to accrete significant amounts of capital through earnings. We repurchased $1.7 billion and net of the equity issued in the Series G conversion, returned $1.3 billion to shareholders. Of that, about $200 million was related to the repurchases equal to 100% of gains from sales of Vantiv stock. The remaining $1.1 billion repurchases and dividends represented a 70% payout ratio of earnings excluding Vantiv gains. The same time, we retained the capital needed to support asset growth. As a result, our Tier 1 common equity ratio of 9.4% was more or less flat to 2012 levels, which was exactly what we aimed to do in our 2013 capital plan. Meanwhile, we reduced our fully diluted share count by about 50 million shares, or 5%. While capital ratios remained above our target levels, our expectation is that we will continue to manage our capital position in 2014 at roughly current levels limiting the growth in capital through share repurchases and continuing to target dividends consistent with the Federal Reserve's 30% payout ratio guidance. Vantiv continues to be a success story for us and has contributed to be -- contributed to our ability to manage our capital through our ongoing disciplined monetization of our stake in Vantiv and the repurchase of our own shares with gains. In 2009 we entered a joint venture that enabled Fifth Third Processing Solutions, now renamed, to more effectively expand its operation as an independent entity, which has included meaningful M&A. The same time, we've maintained our long-term partnership, which was [ph] best-in-class payments processor. Today, we're reaping the benefits of our actions several years ago. Vantiv is now a $6-plus billion market cap company. Fifth Third remains its largest shareholder and our 25% stake represents a market value of $1.6 billion, which we're carrying on our books at about $400 million as of the third quarter. Additionally, we also hold long-term warrants in Vantiv valued on our books at nearly $400 million. In the meantime, since mid-2009, we've generated pretax gains of nearly $3 billion from the monetization of our Vantiv position. This has been a terrific business and investment for us and while we expect to sell our remaining stake over time, we'll continue to very much value our ongoing business partnership with Vantiv. Now moving on to a few highlights of the fourth quarter. We reported fourth quarter net income to common shareholders of $383 million and earnings per diluted share of $0.43. Significant items during the quarter included a $91 million positive valuation on the Vantiv warrant, expenses to bill litigation reserves of $69 million, a negative valuation on the Visa total return swap of $18 million and several other smaller items that Tayfun will discuss in more detail. In total, these items contributed approximately $0.01 to quarterly EPS. Returns on assets and equity remained strong and tangible book value per share increased 5% from a year ago, despite the impact of share repurchase activity. Average core deposits were up 6% from a year ago with transaction deposits up $5.5 billion including DDA growth of $1.5 billion. For the quarter, average portfolio loans grew 1% sequentially and period-end portfolio loans increased $1.4 billion, or 2%, which sets us up well for first quarter of 2014 growth. Fee income results were solid. Consumer deposit fees are up 6% from a year ago. Credit card balances are up 9% year-over-year and we continue to see the benefit of our investments in the mid-corporate space and in the energy and healthcare industries. We continue to manage costs in a disciplined manner. Quarterly expenses increased 3% sequentially, driven primarily by higher litigation cost, partially offset by lower credit-related costs and mortgage banking expenses. Excluding the items I referred to earlier, expenses were $922 million. Overall, this was a strong quarter in terms of core expense management, although there was obviously a lot of noise in the expense results. Capital levels remained very strong. Our Tier 1 common ratio is 9.4% on a Basel I basis and 9% pro forma on the new U.S. Basel III rules. Our leverage ratio is 9.6%, near the top of our peer group. Our ability to generate capital and our strong capital position under current and future capital rules gives us the ability to support balance sheet growth while continuing to return capital to shareholders in a prudent manner. Looking forward to 2014, it is early in the year but most sectors of the economy appear to be on pretty solid footing that seems committed to pursuing a tapering path that keeps the economy moving forward. Sources of customer uncertainty related to the economy, budget battles, et cetera, have diminished and that makes us hopeful that 2014 will provide a stronger backdrop to economic activity and borrowing than 2013. We continue to produce strong profitable -- profitability results due to Fifth Third's business model, revenue generation capabilities and disciplined expense management. These give us confidence that we're well positioned to win going forward, and have successfully built the foundation of that success over the last several years. I want 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 Tayfun to discuss operating results and give some comments about our outlook. Tayfun?

Thank you, Kevin, and good morning, everyone. As Kevin discussed, 2013 was a very good year for Fifth Third as we reported record net income. In a year with continued pressure on margins, our interest -- net interest income remained stable. Strong and consistent growth in card and processing revenue, investment advisory and deposit fees proves our ability to protect and grow our earnings as we transition from the mortgage refi blues [ph] . Full year expenses were down 3% despite a 4% increase in technology and communications expense as we continue to invest in our businesses. All said, these are results we are proud of, despite a challenging interest rate environment. Moving to Slide 5 of the presentation. Fourth quarter earnings per diluted share were $0.43. Recall that current [ph] quarter results included $19 million or $0.02 per diluted share preferred stock dividends, which we did not have in the third quarter. There were also several items that affected earnings in this quarter which contributed about $0.01 overall to fourth quarter EPS. Those are outlined on page 2 of our release, and I'll note their impact to various line items throughout my comments. Turning to Slide 6. Tax equivalent net interest income increased $7 million sequentially to $905 million. Despite ongoing margin pressure, we have grown net interest income the past 2 quarters. Net interest margin was 321 basis points versus 331 basis points last quarter. The 10 basis points margin contraction was attributable to higher cash balances, which reduced the margin by 8 basis points. Stronger-than-expected deposit growth and the debt issuances drove the cash position for the quarter. In terms of balance sheet composition, you'll recall that last quarter we took advantage of higher interest rates to add to our securities portfolio and to change its composition. We continued to take advantage of higher rate opportunities throughout the fourth quarter and added about $550 million in [indiscernible] securities. The higher earnings from these securities, as well as higher loan balances contributed to the increase in net interest income. We also benefited from approximately $300 million in runoff of 2008 vintage CD maturities. These benefits were partially offset by the negative effect of loan repricing, lower mortgage held-for-sale balances and higher interest expense resulting from debt issuances during the quarter. As I mentioned, deposit growth was better than we expected. In addition, we issued $1.75 billion in bank debt and $750 million in holding company debt during the fourth quarter, which benefits liquidity as we continue to improve our liquidity-to-coverage ratio. Market demand and pricing for these issuances was quite strong. Loan and lease yields were generally lower although the 4-basis-point decline was less than we've seen in previous quarters. Reported C&I portfolio yields declined 3 basis points, driven by repricing within the portfolio, combined with a continued mix shift toward higher-quality loans. In the indirect auto portfolio, the average yield declined 6 basis points in the quarter. Competition for high-quality auto loans remains strong. Maintaining price discipline and achieving our profitability targets is important to us, and that resulted in lower production numbers during the second half of 2013. In the taxable securities portfolio, yields increased 12 basis points, reflecting the benefit from higher securities yields. Combined with higher balances, the yield improvement generated an additional $17 million in interest income over last quarter. Our patience here has certainly paid off and you should expect us to exercise the same discipline across the board in our loan and investment portfolio decisions. Turning to the balance sheet and Slide 7. Average earning assets increased $4.2 billion sequentially, driven by a $1.8 billion increase in investment securities and a $2.7 billion increase in short-term investment balances. The increase in average investment securities was driven by the combination of the net $2 billion of securities we added during the third quarter and about $550 million of net additions in the fourth quarter, primarily Ginnie Mae's in both quarters. The increase in short-term investment balances resulted from higher cash balances held at the Fed, as I already noted. Average held-for-investment portfolio loans and leases were up $623 million, but were offset by a $912 million decline in average loans held-for-sale. Looking at each loan portfolio, average commercial loans increased $641 million or 1% from the third quarter and increased $3.7 billion or 8% from last year. Period and commercial loans increased 2.5% sequentially or 10% on an annualized basis. C&I loans of $38.8 billion increased $702 million or 2% from last quarter and increased $4.5 billion or 13% from a year ago. C&I production remains strong this quarter and continues to be broad-based across industries with particular strength in manufacturing, as well as mid-corporate and large corporate lending. Commercial line utilization declined to 29% from 30% in the third quarter as clients continue to exercise a higher degree of caution and minimize line usage. Commercial mortgage balances declined $226 million sequentially or 3%, while commercial construction balances increased $159 million. On an end of period basis, total CRE balances grew for the first time in over 5 years. This has been a headwind for loan growth, but it feels like we've seen the bottom in terms of the size of this portfolio and we expect it to grow in coming quarters. Average consumer portfolio loans of $36.5 billion were flat from the prior quarter and increased $229 million or 1% from a year ago. Residential mortgage loans held for investments were up 1% from the third quarter. Average auto loans decreased 1% sequentially and increased 1% from the prior year. Average home equity loan balances were down 1% sequentially and 8% from the prior year reflecting continued runoff in the portfolio. And average credit card balances were up 3% sequentially and 9% from a year ago, driven by account growth and higher balance utilization. Moving on to deposits. The fourth quarter was another very strong quarter for deposits with average core deposits up $2.3 billion or 3% from the third quarter. Transaction deposits increased $2.5 billion or 3% sequentially and $5.5 billion or 7% from a year ago. End of period DDAs were up 8% sequentially and 9% year-over-year. The deposit simplification initiative that we completed in early 2013 continues to increase average consumer deposit account balances as we deepen relationships. We have seen particular strength in commercial deposits, which were up 6% sequentially. Expanded commercial relationships and the scale of our treasury management business continues to support commercial deposit growth. Average consumer CDs declined 4% sequentially as a result of the high-priced CDs that rolled off during the quarter. Turning to fees, which are outlined on Slide 8. Fourth quarter noninterest income was $703 million compared with $721 million last quarter. Current quarter fee income results included a $91 million positive valuation adjustment on the Vantiv warrant, whereas last quarter's results included similar benefits from an $85 million gain on the sale of Vantiv shares and a $6 million positive valuation adjustment on the Vantiv warrant. In the fourth quarter, we also received the first payment under our tax receivable agreement with Vantiv, which was $9 million. Going forward, Fifth Third will receive an annual payment corresponding with tax benefits incurring to Fifth Third associated with this agreement. Fourth quarter fee results also included $18 million of charges associated with the Visa total return swap. These were $2 million in the third quarter. Excluding these items, fee income of $621 million declined $11 million, primarily due to lower corporate banking revenue and other noninterest income. Looking at each line item in detail. Corporate banking revenue of $94 million decreased $8 million from the third quarter and $20 million from record results a year ago. Current quarter results included a $9 million charge to write down the equipment value on an operating lease, which resulted in lower lease remarketing fees. Our expanded product offering may result in relatively modest quarterly fluctuations in this line item, but overall, we feel very good about the contributions from our expanded capacity and platform. Deposit service charges increased 1% sequentially and 6% from the prior year. The year-over-year increase reflected a 6% growth in both consumer deposit fees and commercial deposit fees. The growth in deposit fees has been consistently positive in 2013. As we have discussed previously, our new retail deposit platform, the continued increase in new customer accounts and higher treasury management fees should provide us very good support for growth in this line item. Mortgage banking net revenue of $126 million increased 4% from the third quarter and decreased 51% from a year ago. Originations were $2.6 billion this quarter compared with $4.8 billion last quarter and $7 billion in the fourth quarter of 2012. Gain on sale revenue was $60 million versus $74 million in the prior quarter and $239 million in the fourth quarter of 2012. The sequential decline reflected lower originations, partially offset by higher gain on sale margins during the quarter while the year-over-year decline reflected both lower production and lower margins. MSR valuation adjustments, including hedges, were a positive $26 million in the fourth quarter compared with positive $23 million last quarter and positive $7 million in the fourth quarter of 2012. Contrary to the gain on sale revenue, the current rate environment will provide a strong boost to servicing income this year as servicing asset amortization has declined to $23 million from $39 million last quarter and $52 million in the year ago quarter. Purchase volume for the quarter was $1.3 billion and 51% origination versus $2 billion and 43% of originations in the third quarter. Investment advisory revenue of $98 million increased 2% from the third quarter and 6% from the prior year. The sequential and year-over-year increase was driven by higher brokerage fees and private client services revenue, reflecting strong production and market performance. Card and processing revenue was $71 million, an increase of 3% from the third quarter, 8% from a year ago, reflecting higher transaction volumes and an increase in the number of purchase active accounts. The decline in mortgage revenue continues to impact our quarter-over-quarter comparisons, but our overall core business activity and noninterest income results display the underlying strength of our platform to transition through this and grow even in the absence of the very strong mortgage results that our shareholders benefited from over the last few years. Turning next to other income within fees. Other income was $170 million this quarter versus $185 million last quarter, and included the Vantiv-related income and Visa charges that I discussed earlier. Excluding these items in both quarters, other noninterest income of $88 million in the fourth quarter declined $8 million sequentially. Credit costs recorded in noninterest income were $5 million in the fourth quarter compared with $5 million last quarter and $13 million a year ago. Turning to expenses on Slide 9. Noninterest expense was $989 million this quarter compared with $959 million in the third quarter. Expense results this quarter included $69 million in charges to increase litigation reserves compared with $30 million last quarter. Current quarter expenses also included $8 million in debt extinguishment costs associated with the TruPS redemption, $8 million in severance expense and $8 million contribution to the Fifth Third Foundation. Expenses included a benefit to mortgage repurchase provision of $26 million, primarily associated with our Freddie Mac settlements in the fourth quarter. That compared with a $4 million benefit in the third quarter. Prior quarter results also included $5 million severance expense and the annual large bank supervisory assessment fee of $5 million. Excluding these items from both quarters, noninterest expense of $922 million was generally consistent with the third quarter. Current quarter results included a decline in mortgage production related expenses of approximately $19 million, mostly in compensation expenses. We will continue to manage expenses in our mortgage business efficiently in 2014. Credit-related costs were a benefit of $12 million compared with expense of $16 million last quarter. This decline was primarily driven by a $26 million benefit to mortgage repurchase provision as a result of the settlement with Freddie Mac and the corresponding expectation for lower future repurchase requests and file claims. Realized mortgage repurchase losses were $33 million, reflecting the $25 million settlement payments to Freddie Mac versus $13 million in the prior quarter. Expenses overall were $119 million lower in 2013 than in 2012, a decline of 3%. We achieved core operating leverage despite a difficult year for mortgage with growth in PPNR and a reduced efficiency ratio. These results were indicative of our ability to manage expenses in a disciplined way while continuing to invest in strategic business growth initiatives. We expect more of that to come in 2014. Moving on to Slide 10 and PPNR. Pre-provision net revenue was $614 million in the fourth quarter compared with $655 million in the third quarter. Excluding the items noted on this Slide, adjusted PPNR in the fourth quarter was $623 million, up 3% from the prior quarter reflecting growth in NII and improvement in other core fee lines, down 3% from a year ago primarily due to lower mortgage revenue. Now turning to credit results. As Kevin mentioned, fundamental credit trends remained favorable in the fourth quarter. Starting with charge-offs on Slide 11. Total net charge-offs of $148 million increased $39 million or 36% from the third quarter and were flat from a year ago. The net charge-off ratio was 67 basis points this quarter. During the fourth quarter, we restructured a large loan resulting in a charge-off of $43 million or 19 basis points of loans, which was absorbed by existing reserves for this credit, so there was no overall P&L impact. Excluding this credit, net charge-offs were $105 million or 48 basis points of loans. Additionally, we changed our policy regarding the timing of when home equity loans are placed on nonaccrual and the treatment of second lien mortgages behind nonperforming first liens. This resulted in additional home equity net charge-offs of $6 million or 3 basis points of loans. Commercial net charge-offs of $78 million increased $34 million sequentially and $22 million from a year ago, driven by the restructured loan that I just mentioned. Excluding this impact, commercial net charge-offs were down $9 million from the prior quarter and C&I net charge-offs were down $21 million. Commercial real estate net charge-offs were $12 million versus $0 in the previous quarter, and were down $9 million from a year ago. Total consumer net charge-offs was $70 million, up $5 million sequentially and down $21 million from a year ago. Home equity net charge-offs were $26 million, an increase of $7 million from the third quarter primarily due to the change in non-accrual accounting policy that I mentioned. Given our underwriting standards today, combined with the credit profile of our loan portfolios, we expect our credit performance will remain strong and continue to improve in 2014. NPAs of $980 million at quarter-end were down $34 million or 3% from the third quarter with commercial NPAs down 11% and consumer NPAs up 12%. The change in our home equity nonaccrual policy increased consumer NPAs by $46 million. Excluding the impact of this policy change, consumer NPAs were down 2% sequentially. The overall NPA ratio was 1.1%, down 6 basis points from the third quarter and 39 basis points from a year ago. Commercial portfolio NPAs were $607 million and declined $73 million or 11% sequentially. The decrease was driven by a $47 million decline in commercial real estate NPAs and a $31 million decline in C&I NPAs. Commercial TDRs on nonaccrual status included in NPAs were $228 million, down $13 million on a sequential basis. Commercial accrual in TDRs were $869 million, up $370 million which includes the impact of the restructured credit that I mentioned earlier. In the consumer portfolio, NPAs of $373 million increased $39 million as a result of the change in home equity nonaccrual policy. Excluding this change in policy, consumer NPAs were down $7 million from the prior quarter. Non-accruing consumer TDRs included in these results were $136 million, relatively consistent with last quarter. Accruing consumer TDRs were $1.7 billion consistent with last quarter. As you know, performing TDRs which include an interest rate modification below market rates cannot be reclassified out of TDR until they are refinanced on market terms. $1.3 billion of these loans are current and $1.1 billion of them are current and have seasoned for more than a year. We would expect this portfolio to slowly attrite over time as the opportunity and need for new restructurings has declined with improving residential real estate conditions. Total delinquencies of $379 million were down $35 million or 8% from the third quarter. Loans 30 to 89 days past due were up $18 million from the previous quarter, and loans over 90 days past due were down $53 million from the third quarter primarily due to the change in placing home equity loans over 90 days past due on nonaccrual status. Commercial criticized asset levels continued to improve, down $390 million or 9% sequentially, and represented the 11th consecutive quarter of decline. Provision expense of $53 million for the quarter was up $2 million from the third quarter and included a reduction in the loan loss allowance of $95 million. Allowance coverage remains strong at 211% of nonperforming loans and 161% of nonperforming assets. Slide 12 includes a roll-forward of nonperforming loans. Commercial inflows in the fourth quarter were $107 million, up $36 million from the third quarter, due to $43 million in inflows from the restructured credit that I've mentioned. The inflow of this portion of the credit was charged off, as I mentioned, and therefore, there was no impact to our ending NPL balance. Consumer inflows for the quarter were $165 million, up $70 million from last quarter primarily due to $46 million in inflows resulting from the change in the home equity nonaccrual policy. Slide 13 outlines our recent mortgage repurchase experience. We saw a sequential decrease in GSC claims, which are down 30% from a year ago as well. As previously announced, during the quarter we entered into a settlement for $25 million with Freddie Mac to resolve repurchase claims associated with mortgage loans originated and sold prior to January 1, 2009. As a result, we expect a decline in future claims and repurchase requests. Turning to capital on Slide 14. Capital levels continue to be very strong. The Tier 1 common equity ratio was 9.4%, down 50 basis points from last quarter. As you may recall, we had somewhat elevated levels of capital at the end of the third quarter due to the timing difference between issuances related to our Series G conversion and subsequent buybacks that occurred during the fourth quarter. The Tier 1 capital ratio was 10.4% and total risk-based capital was 14.1%. Changes in capital ratios included the impact of the redemption of TruPS during the quarter, as well as the issuance of preferred stock, payment of preferred dividends and share repurchase activity. Tangible equity ratios also continued to be strong with an 8.7% TCE ratio, including unrealized after-tax gains of $82 million, an 8.6% TCE ratio excluding those gains. Our current pro forma estimate for the Tier 1 common equity ratio under the final Basel III capital rules is 9%. That calculation assumes an exclusion of certain AOCI components from capital, which is subject to an election on our part in early 2015. That pro forma estimate would be about 9.1% including AOCI. As a result, our capital position is well in excess of the minimum required ratios including capital conservation buffers. Just a reminder, our May preferred stock issuance carries a semiannual dividend, which would normally be about $15 million every other quarter. This dividend was $19 million in the fourth quarter as a result of the payment for this top [ph] period. Our December preferred stock issuance will pay a quarterly dividend, which will be $9 million in the first quarter of 2014 and $7.5 million for each subsequent quarter. So the pattern would be $9 million first quarter, $23 million second quarter, $7.5 million third quarter, and so on. These are after-tax amounts and so they can move EPS a bit from quarter-to-quarter. We will aim to smooth this out with any future preferred stock issuances. Capital management has been a highlight for us in 2013. We are maintaining very strong levels of capital to support our balance sheet in all environments and returning significant amounts of capital to our shareholders. Our fully diluted share count this year declined by about 50 million shares or 5%, and we will continue to be very disciplined in the way we manage our shareholders' capital. Turning to the full year 2014 outlook on Slide 15. Consistent with last year, we will provide an update to our annual outlook with each quarter's earnings announcements. As in the past, comparisons with 2013 exclude the impact of Vantiv-related items in 2014 and 2013 as noted in the footnote to this Slide, but otherwise, these are based on reported numbers for simplicity. I'll start with net interest income. We currently expect full year 2014 NII to increase modestly from full year 2013 NII of $3.6 billion, maybe 2% to 3%. 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 expect NII in the first quarter to decline due to the $12 million negative impact from lower day count, but should be up otherwise and trend up in subsequent quarters throughout 2014. We anticipate a full year NIM in the 315-basis-point range, plus or minus compared with a 3.21% we reported this past quarter, and that would be due to the effect of lower margin, LCR-friendly portfolio investments and loan spread compression. Our LCR compliance actions should be neutral to positive to NII, but will dilute the NIM. The first quarter NIM should be relatively stable with the benefits of our TruPS redemption and lower day count offset by full quarter impact of debt issuances last quarter, loan spread compression and higher securities balances. Turning to loan growth, we expect mid-single-digit growth from the 2013 full year average, primarily driven by continued growth in C&I, as well as growth in commercial real estate. These increases will be partially offset by declines in residential mortgage balances and continued runoff in the home equity portfolio. We expect both commercial and consumer deposits to increase. Now moving onto overall fee income and expense expectations for 2014. As I noted, these comparisons exclude $534 million in 2013 fee income related to Vantiv gains, and our 2014 guidance, likewise, excludes effect from Vantiv events other than our normal equity method income. Overall, we currently expect a mid-single-digit decline in total fee income in 2014 compared with adjusted fee income in 2013, reflecting a forecast reduction in mortgage banking revenue of about $275 million. Excluding mortgage, we expect fees to grow in the mid-single-digits in aggregate versus 2013 with growth in all fee categories other than mortgage. Looking at the details of our overall fee expectations. We'd expect to see mid-to-high single-digit percentage growth in deposit fees with the majority of that coming from commercial. This expectation reflects a continuation of recent momentum in treasury management as we continue to focus on product penetration and building new accounts. Deposit fees will likely be slightly lower in the first quarter due to seasonality, but continue to trend up throughout the year. We expect low double-digit growth in investment advisory revenue driven primarily by ongoing momentum in both private banking and brokerage. We expect mid-teens growth in corporate banking revenue driven by higher institutional sales revenue, business lending fees and FX fees. We expect mid-to-high single-digit growth in card and processing revenue, driven by continued growth in sales and transaction volumes, although this line item would likely decline in the first quarter due to seasonality. Turning to mortgage. As I mentioned, we currently expect mortgage banking revenue to decline about $275 million from 2013 based on year-over-year decline in production. We currently expect originations and mortgage revenue to be fairly consistent quarter-to-quarter during 2014, slightly a bit lower during the first quarter of 2014 due to seasonality. Turning to expenses. We currently expect 2014 expenses to decline in the mid-single-digits relative to reported 2013 expenses. The expected decline is primarily due to lower legal costs and lower personnel cost, primarily mortgage-related. Expenses to billed litigation reserves in 2013 were $159 million in 2013 and while the legal and regulatory environment remains challenging, we certainly hope these costs will be lower in 2014. These expected reductions in expense will be partially offset by increased technology, communications and equipment expense as we continue to invest in our businesses. In terms of the first quarter of 2014, expenses will include a seasonal increase of about $27 million for FICA and unemployment, but otherwise, we expect expenses to be largely consistent with the $922 million level I discussed earlier, after the investment [ph] this quarter. We will continue to manage expenses carefully and aggressively, in line with revenue results and the economic environment. Overall, we expect to achieve positive core operating leverage in 2014, excluding Vantiv. We currently expect PPNR growth in the mid-single-digits or a little better in 2014, compared with strong adjusted results in 2013. That's despite comparisons to a strong year for mortgage revenue. We currently expect the efficiency ratio to move below 60% in the second half of 2014. We expect the full year 2014 effective tax rate to be about 28% range, consistent with the 2013 adjusted rate. Turning to credit. We look for continued improvement in credit trends with full year net charge-offs currently expect -- expected to be down another $100 million or so, and the improvement fairly evenly distributed between commercial and consumer. We expect the full year net charge-off ratio to be in the 40 to 45 basis point range compared with the 58 basis points we reported this year. NPAs should decline another 20% or so in 2014, which would push the NPA ratio solidly below 1% during the year. For the loan loss allowance, we expect continued reductions in 2014. The ongoing benefit of improvement in credit results is expected to be partially offset by new reserves related to loan growth. Finally, we recently submitted our 2014 capital plan. As Kevin remarked, our expectation is that we would aim to continue to hold common equity capital ratios at approximately current levels. In 2013, net of the share issuances associated with the Series G conversion, that goal required the repurchase of about 40% to 45% of earnings. Something similar will hold true for this year as well given our asset growth expectations. Consistent with prior plans, we would generally intend to repurchase any equity created through Vantiv-related gains. In terms of dividends, we would expect to continue to target a dividend payout ratio consistent with the Federal Reserve's 30% payout ratio guidance. Obviously any of these plans would be contingent on both a non-objection to our plan from the Federal Reserve and on our board's future decisions. In summary, 2013 was a strong year for us. We posted solid results and executed on our capital plans. Although the environment remains challenging, we have strong momentum in a number of our core businesses that should support our ability to generate core PPNR growth and improved efficiency while continuing to invest in our business. Overall, we believe we are well-positioned for future success as we head into 2014. That wraps up my remarks. Tanisha, can you open up the line for questions?

[Operator Instructions] And your first question comes from the line of Matt O'Connor with Deutsche Bank.

Just following up on the NIM outlook of 315 plus or minus for the year. I guess if it's relatively stable in 1Q, should we think about have a steady progression down throughout the year?

Matt, this is Dan. I do believe you're right. You have a few moving parts in the first quarter that drive stability. You have -- all the liability actions we had in the fourth quarter, really paying dividends in the first quarter and holding NIM up, and then what you have in second, third quarter is this loan repricing effect that's pretty consistently been 3, 4 basis points a quarter. And then we see that dissipating just as new production yields reach their inflection point in total portfolio yields. And then the other moving piece to the NIM outlook is just the additional portfolio leverage that will be coming on the sheet as we into a more LCR-friendly balance sheet.

As we just think about like what part of the interest rate curve you're most sensitive to, short end, mid-part, long end, what should we be focused on in terms of the rate environment, and what needs to happen to stabilize the NIM?

Well, clearly the very short end of the curve is very important. The LIBOR indices are very important to C&I yields as we have predominantly LIBOR-based floating loans there. In terms of the consumer loans, the auto yield typically get priced around the 2 to 3 year range and their portfolio is probably more in the 4 plus -- 4, 5, year range, and the 10 year is obviously is very important from a mortgage MBS pricing perspective. So we don't really have anything longer than that and that would impact us.

Okay. And then just lastly, in terms of how asset-sensitive you are, if short rates do rise?

I mean, short rates clearly are extremely helpful for NII growth, but our guidance for this year does not assume any increases in the underlying LIBOR indices as we expected that to be on hold. But we are very positive we leverage to the short end of the curve.

And your next question comes from the line of Eric Wasserstrom with SunTrust Robinson.

Just to follow up on the tail end of Matt's question, has your move to become more LCR-friendly, has that reduced your asset sensitivity at all?

No, we've been able to manage the asset sensitivity fairly consistently and slightly asset-sensitive. We wrapped up the year in a up 100 ramp at about positive 1%, and up 200 ramp at about 2% in year 1, and I think we've consistently been in that space all year.

What we have to keep in mind is that we have to look at both the asset and the liability sides and look at the duration on both ends and clearly, long-term debt issuances on the liability side tend to increase the duration of the liabilities as some of the investment portfolio numbers may lengthen the investment portfolios ratios a little bit. There is somewhat of a balance on the liability side to that.

And just on the asset growth, I have a few questions. It looks like your GAAP assets went up about 4% sequentially, but the Basel I risk-weighted went up only about 2% and the Basel III actually went up even less than that at about 1.7%. So I'm just wondering what would explain that progression?

You do have a little bit of the benefit in the RWA calculation as we migrated the investment portfolio out of less LCR-friendly instruments into U.S. Government backed, which carries 0 risk-weighting. So we finished the year a little bit north of $4 billion in Ginnie, which carry a 0 risk-weighted whereas couple of quarters ago, that allocation would have been near 0. So frees up a little bit of capital in the process.

And one other [ph] thing really in particular that would distinguish Basel I from Basel III, I mean, other than just the denominator is different.

And was there any growth in your off balance sheet loan commitments in the period?

Yes. I mean, there is continued growth there. That's probably, this quarter would have been commensurate with our interest total loan growth, I would assume.

Okay. And -- but the Basel III sounds like it did not reflect to any kind of operating risk charge related to your growth in litigation reserves.

No.

No.

And your next question comes from the line of Matt Burnell with Wells Fargo Securities.

You've given us some complete guidance in terms of the mortgage side of things. I guess, I'm just curious, in terms of the cost reductions within the mortgage business. I believe you said last quarter you took out about $25 million in cost from that business. I'm curious what the cost -- the incremental cost reduction was in the fourth quarter, and how you're thinking about cost reductions, specifically within the mortgage business over the course of 2014.

I think the cost reductions this quarter was about $19 million in the high teens relative to the $25 million. We will continue, obviously, to manage expenses in the mortgage business throughout the year in 2014. We are still making moves there even this quarter as we expect production numbers to come down. And we clearly are expecting some uptick in Q2 and Q3 related to purchase volumes and that business will remain strong and will maintain enough capacity to address any borrowing needs. But outside that, you will see that -- and we reflected, obviously, the impact of our 2014 plans on our guidance. But if production numbers change in actual, we will be very quick to respond either way.

A question on capital and specifically, you're thinking about including -- or excluding the AOCI from capital numbers. You noted in the release that they would benefit today from the inclusion of AOCI. How are you thinking about that going forward, given the rising rate environment would be likely to create some additional volatility in that number that might be less welcome?

Yes. I mean absolutely. I mean, we clearly are very focused on the impact of higher rates and on mark-to-markets and that will be a very big factor in our decision as we approach year-end. We would expect to opt out at this point.

I mean, we would expect opt out even if we were in a gain position.

Right. It doesn't -- really it will not necessarily reflect where we are at the end of this year, whether we are in a gain position or in a loss position. I just don't think that it pays to take that volatility in our capital ratios.

And then just finally, a quick administrative question. You noted at the end of the third quarter, your [ph] reasonable possible losses -- litigation losses would be about $177 million. Does that number come down by the amount that you provided for this quarter?

We will disclose that in the K, but I don't think there's any reason to expect any big move in that.

And your next question comes from the line of Ken Usdin with Jefferies.

Just a question on mortgage related to -- when you talk about a decline of 275 off of the 700 this year, was that decline -- would the '14 outlook for mortgage include any MSR gains in your outlook?

We don't typically include MSR gains in our outlook, Ken, I mean because that's clearly a very volatile number.

Right. So that would be gravy to that number. Okay, and then secondly, do you have any incremental plans to do additional preferred issuances and/or debt financing? That clearly -- that were big benefits to the size of the balance sheet. I'm just wondering what you're funding plans are you look ahead?

Yes. We are about 2/3 in our preferred bucket today, so we do have another $500 million or so left, and we do continue to believe that the way to manage the capital account efficiently would require us to fulfill that bucket. So we may include that in our 2014 fund. In addition, on an ongoing basis, we do have additional debt issuance plans in 2014.

And that -- is that -- okay, that's fine. So in terms of earning asset growth, can you talk about the mid-single digit loan growth, and I understand the basis of earning asset growth more than offsetting the NIM growth. But how would you compare your view of mid-single-digit loan growth, to what -- how big you expect the overall earning asset base to go next year?

I think our earning assets will likely to be north of that, and I would say, there's going to be probably 5%-plus. But as we have always said, there is an LCR component to our investment portfolio balance strategy, but there is also a risk/return component. And during the year we will make that determination as we see the market developing. So it's hard to tell exactly how much over 5% we may get to, but that's our current plan.

And then last quarter question, just on the deposit growth of Kevin, you mentioned how strong it was and especially in commercial. Was any of that kind of fleeting that came in the fourth and was gone by the end of the quarter from a yearend perspective or do you believe that this kind of pace of deposit growth is core and sustainable?

Ken, we did not see it fleet and so it's sticky and we expect that to continue obviously as we've talked and try to bake into the guidance that we gave you for '14, our anticipation is that we're continuing to have a platform with which to be able to grow, attract and keep our clients from that standpoint. We would expect some utilization of those deposit before they come to us for loans which we haven't seen yet, but no, those were sticky and safe.

Yes, the other thing I would add to that is, maybe 2 or 3 years ago, obviously, we were -- sort of [ph] passive receiver of large amounts of liquidity, but today, we're very active and the deposit growth numbers reflect true business strategies, both on the commercial side, as well as the consumer side. So that's part of the reason why these fluctuations are likely to stick because again, we're not passively receiving these funds.

And your next question comes from the line of Paul Miller with FBR. Paul J. Miller - FBR Capital Markets & Co., Research Division: You talked about how your line usage, it went down, but you're also, at the same time, talking about -- and other banks have said this, that you feel that loan growth is -- that it's going to be very solid or not solid relative to where we used to be but pretty good 3% or 5% range. Can you just talk about, is this conversations that you're having out there, I mean, what are you seeing out there to give you self confidence that even though usage is down loan growth is going to pick up?

Yes, Paul, this is Kevin. I would tell you that, that is accurate in terms of kind of what we're seeing as a barometer. Our conversations directly with clients and prospects. The tonality I would tell you, has changed. So there's a little bit more positiveness in it. There is a bit more outlook and upbeat in terms of their view. How fast that comes, how fast the change comes, we're not sure, but we've seen fairly good production. Continued strong pipelines from that standpoint which will be consistent with some of that outlook and some of that optimism that we're really beginning to feel or see with our clients. And that definitely is a total change in the last 90, 120 days.

And we saw -- we had solid loan growth in 2013 while we saw line usage go down as well. So it's... Paul J. Miller - FBR Capital Markets & Co., Research Division: And what areas, I mean what are some of the areas that you really -- I guess where you're excited about, like some of the loan growth areas?

We continue to see good strength in manufacturing. We continue to see it in our mid corporate and large corporate. We continue to see it in our verticals, both in our healthcare and in our energy verticals. So pretty broad-based, Paul, from that standpoint. And as Tayfun mentioned in detailing some of the specifics for the quarter, we're beginning to see now some good demand showing up in the commercial real estate side. Our construction average balances were up, as you can see, substantially for us. Building, we think in terms of some momentum for commercial real estate. That will be positive for us and we're seeing some good projects to be able to continue that growth. So that's where we see it, so a broader focus from our standpoint still feels right [ph] from our standpoint.

And your next question will be from Ken Zerbe with Morgan Stanley.

Just wanted to go back to the comment that you're not passively receiving your deposits. Obviously, really strong deposit growth this quarter. How much of that was actually not related to your strategy so much, but because you chose to aggressively pull in deposits this quarter, whether through it's better pricing versus your strategy. I mean, if that make sense, because what I'm trying to figure out is, are you bolstering liquidity intentionally by bringing in deposits to bear pricing?

Actually that's a very good question. We have not done any significant pricing changes in either commercial or retail deposit space. I think what we are seeing is on the consumer side, the deposit simplification project that we finished earlier this year truly had a fairly significant impact on average balances. As depositors with higher average balances pay less fees, we've seen that impact fairly clearly during the year. On the commercial side, it truly is a function of our turnkey management activities. Overall, we talked about this, I think, in other earnings conference calls. The relationship-based approach, away from single credit relationships and commercial tends to have very good impact on deposits. Clearly, we like it. It's, from an LCR perspective, a large majority of deposits are LCR-friendly. So we are encouraging our sales force to focus on deposit growth, but we have not done anything from a pricing perspective. Now, looking into 2014 and beyond, obviously, we will -- reactive -- the competitive environment changes significantly from where we see today.

And your next question comes from the line of Keith Murray with ISI.

Could you just touch on deposit events, changes and you talked about service charges, revenue increasing. Is that baked into your guidance for '14?

Yes, and you've seen our announcement, it's a phase-out plan and it is baked into our forecast for the upcoming year.

Okay. And then you talked about growth assumptions for '14. What you assume risk weighted assets, either Basel I or Basel III will grow by in 2014?

It's probably going to below our true earnings asset growth as a portion of that earning asset growth is going to not put much pressure on that. We would expect that to be probably under 5% at this point.

Okay. And then finally on expenses, you mentioned potential in the mortgage business. Are there opportunities outside of mortgage that could be meaningful, and what kind of pension expense savings do you have baked in for '14?

There is nothing on the pension expense side. Yes, I mean, there clearly, we've talked in December in one of the conferences about the changes that are occurring on the retail side of the business. As we reconfigure our retail delivery channel, you will see some savings there. In addition to that, you need to look at this guidance in its entirety. Clearly, if the expense side goes together with the revenue side and if we see changes on the revenue side, we will react and there is going to be more expense savings. Across the board, we do truly -- many people talk about their ongoing focus on expenses, but I think we've proven to you guys that, that truly happens here and mortgage will not be the only business where we will see expense savings this year.

I just want to jump in and clarify on the last question. I think RWI growth is likely to be closer to the mid-single digits range that [ph] the about mid-single digits that earning assets growth will have -- I don't know may be little bit low but I'm not sure with respect to the growth opportunity [ph] .

And your next question comes from the line of Owen Lau with Janney Capital Market.

Actually this is Sameer Gokhale from Janney Capital. A couple of questions I wanted to ask. Firstly, in terms of the credit metrics, if you adjust for some of the charges that were taken this quarter in your commercial loan portfolio and then also the change in accounting policy for home equity loans and you back those out, it looks like there's some improvement in the credit metrics, but they seem more or less relatively stable, at least sequentially. And I was trying to look at those metrics and kind of reconcile those with your forward guidance for charge-offs to be down $100 million. I mean, it seems like certainly we're in a very good or benign charge-off environment. But what gives you increased confidence or confidence that the magnitude of the improvement in charge-offs should maybe accelerate a little bit just based again on the sequential trends between Q3 and Q4? It seems like that the metrics is somewhat stable. So could you talk about that a little bit?

This is a Frank Forrest, good question. The guidance we gave a year around charge-offs was $200 million down and our guidance this year is $100 million down, and when you look across our portfolio, it was rather granular, we're making substantial progress, we have intense focus on continuing to see improvement and both on the charge-off metrics, consumer and commercial, and also on the nonperforming portfolio, which our guidance is down 20% for 2014. We're confident that we'll continue to see progress. So we don't think we're at the inflection point yet at Fifth Third. We see substantial additional opportunity for progress. Might have slowed a little bit in the fourth quarter, but it's not necessarily reflective of our outlook for the entire year of 2014. Good question, though.

That's helpful. And then just in terms of your reserve ratio, your allowance to loan and leases, the guidance says that you expect it to be lower compared to the end of the year number of 1.79%. And clearly, where that allowance ratio goes, the reserve ratio goes, is going to be the only kind of missing piece from the guidance that will help us get to the provision number. So have you talked about where you expect that reserve ratio to go by the end of 2014? Should we anticipate going down as far as 1.5%? Does that seem aggressive? Could you help us size that?

This is Jeff. We have talked in the past about obviously, there are a lot of moving parts to where the allowance ratio ends up, including new rules. And we've indicated that it felt like maybe 1.5% would be the sort of place that the ratio may go. It obviously could end up being higher than that or lower. We can't really predict that and we do understand that, that may be the missing piece for our guidance. Our guidance is pretty clear, but we cannot predict with certainty what our allowance ratio will be at the end of the year and we're not going to provide guidance as if we can. That allowance is set at the end of the each quarter based on our models. So I don't know if [ph] you want to add anything there? Obviously, we expect it to go down, but we can't really sort of give you a good prediction as to where it will end.

Okay, that's helpful. And just on an unrelated note related to the deposit advances which you said you'll stop offering. Are you planning to replace that with any sort of other secured product as some of your competitors have indicated they might do? Or are you just completely stopping that and not replacing that with [ph] anything else?

No. Clearly, I think as we announced last week, our expectation, we see, with our consumers and our customers a high demand in this area, simply changing this doesn't change the demand perspective. We have been dealing [ph] and working with all of our stakeholders and trying to come up with solutions that we think would benefit everyone, from that standpoint. So we're committed to that. We got a lot of work to do. We'll continue that work and so I don't have anything that I would say to you today that is at hand for us in terms of replacing that. Our expectation is we'll continue to look to see if we can find a good solution, keep our clients in a regulated banking system, which we think is best for all.

Ladies and gentlemen, we have reached the end of the allotted time for the Q&A portion for today's call. Thank you for your participation. You may now disconnect.