Fifth Third Bancorp FITB
Q2 2013 Earnings Call Transcript
Transcript Call Date 07/18/2013

Operator: Good morning. My name is Alicia, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fifth Third Bank Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

Thank you. I would now turn today's call over to Mr. Richardson, Director of Investor Relations. Sir, you may begin.

Jeff Richardson - Director, IR: Thanks Alicia. Good morning. Today, we'll be talking with you about our second 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 Greg Schroeck from Credit; Tayfun Tuzun from Treasury; and Jim Eglseder of 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?

Kevin T. Kabat - President and CEO: Thanks Jeff. Fifth Third reported second quarter net income to common shareholders of $594 million and earnings per diluted share of $0.66. Earnings this quarter included a benefit from gains on the sale of a portion of our Vantiv stake and higher valuation on the Vantiv warrant which together contributed about $0.22 of benefit.

There are a few smaller items during the quarter that were modestly detrimental on a net basis which Dan will discuss in more detail. Year-over-year, earnings per share increased 22%, excluding the impact of Vantiv in both quarters. Return on assets and equity were strong with and without the Vantiv benefit and tangible book value per share increased 1% sequentially and 7% from a year ago despite the fairly significant impact of share repurchases.

Now turning to the business activity, average sequential portfolio loan growth was 1% with C&I loans up $1.2 billion. Average portfolio loan growth from a year ago is 5% with average C&I and residential mortgage portfolio loans up 15% and 9% respectively.

Period end loans increased 2% sequentially and 6% from last year. These comparisons include the impact of $500 million auto loan securitization during the first quarter.

Average core deposits continued to grow and were up 4% from a year ago. Transaction deposits increased $4 billion or 5% including a very strong 13% growth in demand deposits, primarily in consumer, but with good growth in commercial as well.

Fee income results reflected solid growth from seasonal softness in the first quarter and we produced strong performance in nearly every line item. Corporate banking revenue, mortgage banking net revenue, deposit service charges and card and processing revenue were up mid-single digits. Certainly, things have changed in the mortgage business, but the second quarter for mortgage was still quite strong, and our other fee businesses continued to perform strongly. Dan will cover our expectations of the second half of the year in his remarks.

Although there was noise during the quarter, expenses remained well controlled. We expect second half expenses to decline, including the impact of lower mortgage origination costs. Credit trends continue to show a steady improvement with net charge-offs down another 16% sequentially and nonperforming assets down 5% to 132 basis points of loans. The charge-off ratio was 51 basis points for the quarter, the lowest since mid-2007. Total delinquencies continued to be at historically low levels, particularly on the commercial side with 30 to 89 day delinquencies of only $7 million and 90 days past due less than $1 million. Hard to improve on those numbers.

Capital levels remain very strong with Tier 1 common of 9.4% and a leverage ratio of 10.4%. The update pro forma estimate for Basel III Tier 1 common equity is 9.1%. Our ability to generate capital and our strong capital levels under Basel I and Basel III perspectives gives us the ability to retain the capital we need to support our balance sheet growth while continuing to return capital to shareholders in a prudent manner.

During the quarter, we announced an increase in our quarterly dividend to $0.12 and the repurchase of $539 million of common stock. We have approximately $600 million in remaining capacity left under our 2013 CCAR plan.

Our continued ability to generate a relatively higher level of profitability from loan growth and solid revenue results, ongoing expense discipline and credit improvement give us confidence that our strategies are 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?

Daniel T. Poston - EVP and CFO: Thanks, Kevin. I'll start with Slide 4 of the presentation and I'll discuss results for the second quarter before turning to the outlook before the end of my remarks. Overall, we posted strong results this quarter. Earnings per share were $0.66, up $0.20 from last quarter.

There were a number of items affecting the second quarter results including a $242 million gain on the sale of Vantiv shares and the $76 million positive valuation adjustment on the Vantiv warrant, which in aggregate benefited earnings per share was $0.022 in the second quarter.

Vantiv warrant gains were $0.02 benefit in the first quarter. There were several other smaller items that affected earnings in the quarter which are all outlined in my release, and I'll not those throughout my comments.

Turning to Slide 5; tax equivalent net interest income decreased $8 million sequentially to $885 million in line with our expectations and the net interest margin was 333 basis points versus 342 basis points last quarter. The decline in net interest income included a $12 million negative impact from maturities of interest rate floors and $6 million benefit from higher quarterly day count.

Otherwise the remaining $2 million decline was driven by loan repricing partially offset by the benefit of net loan growth higher yields on investment securities and lower long-term debt expense. The 9 basis points decline in the net interest margin included a 5 basis points reduction due to the maturity of interest rate floors and 1 basis points from the day count affect.

On the loan side yields declined primarily in the C&I and auto portfolios. Reported C&I portfolio yields were sequentially lower although 13 basis points of the decline was the result of the maturity of interest rate floors previously discussed. Remaining decline was driven by reprising within the portfolio, combined with the continued mix shift towards higher quality loans.

In indirect auto portfolio, the average yield declined 13 basis points in the quarter, largely reflecting the portfolio effect replacing older higher yielding loans with new lower yielding loans. In the taxable securities portfolio, yields increased 11 basis points, reflecting lower premium amortization given the rising rates, as well as the benefit from reinvestment in higher yielding securities.

Turning to the balance sheet on Slide 6, average earning assets increased $709 million sequentially, driven by an $804 million increase in average portfolio loans and leases, and $116 million increase in securities and short-term investment balances. These increases were partially offset by a $211 million decline in average loans held-for-sale, largely reflecting the impact on sequential averages in the auto loans that were in held-for-sale before their securitization and sale at the end of March.

Looking at each loan portfolio, average commercial loans held-for-investment increased $902 million or 2% from the first quarter and increased $3.6 billion or 8% from last year. C&I loans of $37.6 billion increased $1.2 billion or 3% from last quarter, and increased $4.9 billion or 15% from a year ago. C&I production remains broad-based across industries, with strong production in the large and mid-corporate space.

We continue to see contributions from our investments in healthcare and energy verticals, as well as in the manufacturing industry. Commercial mortgage balances declined $347 million sequentially or 4%. Commercial construction balances increased modestly, the first increase in five years. As a result, these portfolios are beginning to stabilize and we may begin to see net commercial real estate loan growth by the end of this year.

Average consumer portfolio loans of $36.2 billion were relatively flat sequentially, but increased $494 million or 1% from a year ago. The average comparisons include the impact of the $500 million securitization of auto loans that took place in the first quarter. The full quarter impact of this securitization reduced this quarter's average portfolio loans by $338 million, compared with the first quarter.

Residential mortgage loans held for investment were up 1% from the first quarter, reflecting continued retention of shorter-term high quality residential mortgages originated through our retail branch system.

Average auto loans were down 1% sequentially, reflecting the impact of the auto securitization in March, but were up 1% from the prior year.

Average home equity loan balances were down 3% sequentially, and average credit card balances were flat sequentially.

Moving onto deposits, we continue to see solid deposit trends with average core deposits up $617 million, or 1%, from the first quarter. Transaction deposits, which exclude consumer CDs increased $740 million or 1% sequentially and $4.1 billion or 5% from a year ago. As Kevin mentioned, we've seen strength particularly in demand deposits, up 4% sequentially and 13% from a year ago. Both commercial and consumer deposits have grown nicely with particular strength on the consumer side. Consumer CDs declined 3% in the quarter.

Turning to fees, which are outlined on Slide 7. Second quarter noninterest income was $1.1 billion, compared with $743 million last quarter. As I mentioned earlier, current quarter fee income results included a $242 million gain on the sale of Vantiv shares and a $76 million positive valuation adjustment on the Vantiv warrant. In addition, second quarter results included a $10 million benefit from the settlement of one of our BOLI policies that we previously surrendered, and a $5 million charge related to the valuation of the Visa total return swap.

You'll recall that first quarter fee income included about $50 million of noteworthy items, with the Vantiv warrant and investment securities gains being the largest, all of which are detailed in the release.

Excluding all of these items, fee income of $737 million increased $45 million or 7% sequentially, reflecting higher mortgage banking revenue, corporate banking revenue and deposit service charges.

Looking at each line item in detail. Deposit service charges increased 4% sequentially and 4% from the prior year. The sequential increase was primarily driven by increased retail service charges, which were up 10% sequentially and 4% from the prior year. As a result of the completion of our conversion to the new deposit product offerings. This transition has gone well and we believe that it provides a solid foundation for our retail business going forward.

Corporate banking revenue of $106 million increased 7% from the first quarter and 4% from a year ago. The sequential increase was driven by higher syndication, derivatives and foreign exchange fees, partially offset by lower institutional sales revenue.

Mortgage banking net revenue of $233 million increased 6% from the first quarter and 28% from a year ago. Originations were a record $7.5 billion this quarter compared with $7.4 billion last quarter. Purchase volume was $1.8 billion, up significantly from the $1.0 billion in the first quarter. Gain on sale revenue was $150 million, down $19 million from the prior quarter, reflecting lower gain on sale margins during the quarter, partially offset by stronger HARP volumes with higher margins. MSR valuation adjustments, including hedges, were a positive $72 million in the second quarter compared with a positive $43 million last quarter.

Investment advisory revenue of $98 million was down 2% from record first quarter levels and increased 6% from the prior year. The sequential decline was primarily due to seasonal tax-related fees that were recognized in the first quarter. The year-over-year increase reflects strong wealth management and record brokerage revenue as well as the benefit of higher market values.

Card and processing revenue was $67 million, a 4% increase from the first quarter and a 6% increase from a year ago, reflecting higher sale and transaction volumes. This business continues to produce strong, steady growth. The net investment portfolio securities gains were zero this quarter, compared with $17 million in the first quarter and $3 million a year ago. We also realized $6 million in net securities gains that were related to nonqualified MSR hedges. Those were $2 million last quarter and zero in the second quarter of 2012.

Turning next to other income within fees, other income was $414 million this quarter versus $109 million last quarter and included the Vantiv-related gains that I discussed earlier. Excluding Vantiv gains in both quarters, other noninterest income of $96 million in the second quarter increased $21 million sequentially. Credit costs recorded in other noninterest income were $6 million in the second quarter compared with $10 million last quarter and $17 million a year ago.

Turning to expenses, which are on Slide 8, noninterest expense was $1.0 billion compared with $978 million last quarter. Expense results this quarter included $33 million in charges to increased litigation reserves and a $2 million benefit from the sale of affordable housing investments. You'll recall that prior quarter results included 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 $986 million increased $8 million or 1% from the first quarter.

Current quarter results reflected a seasonal decline in FICA and unemployment benefits expense, partially offset by increased compensation related expenses. Credit-related costs were $35 million this quarter versus $24 million last quarter. Included within credit-related costs were a net $6 million increase to the mortgage representation and warranty reserve. That was driven by a $9 million increase to the reserve, resulting from additional information obtained from Freddie Mac regarding changes to its selection criteria for future mortgages repurchases and file requests.

Realized mortgage repurchase losses were $14 million versus $20 million in the prior quarter. Additionally second quarter credit-related costs included a $2 million release from reserves for unfunded commitments versus $11 million release last quarter.

Moving on to Slide 9 and PPNR; pre-provision net revenue was $923 million in the second quarter, compared with $653 million in the first quarter. Excluding the items noted on this slide, adjusted PPNR in the second quarter was $631 million, up 5% from the prior quarter and up 6% from the year ago.

Now turning to credit results; as Kevin mentioned our credit trends continue to perform very well, as we saw solid credit improvement across every category in the second quarter. Starting with charge-offs, which are on Slide 10.

Total net charge-offs of $112 million, declined $21 million or 16% from the first quarter and $69 million or 38% from the year ago. The net charge-off ratio was 51 basis points this quarter and is the lowest we reported in more than five years.

Commercial net charge-offs of $45 million, declined 17% sequentially and 42% from the year ago. At 36 basis points this was the lowest level reported since the third quarter of 2007. The decrease was driven by commercial mortgage net charge-offs which were down $16 million from last quarter, partially offset by an $8 million increase in C&I net charge-offs.

Total consumer net charge-offs were $67 million or 73 basis points down 15% sequentially and 35% from a year ago. This was the lowest net charge-off ratio for consumer since the second quarter of 2007. Improvement continued to be driven by lower home-equity and residential mortgage losses with improvements across most geographies. Auto loan net charge-offs were $5 million or just 16 basis points of loans.

Moving to nonperforming assets on Slide 11, NPAs of $1.2 billion at quarter end were down $60 million or 5% from the first quarter with commercial NPAs down 4%, and consumer NPAs down 7%. Commercial portfolio NPAs were $794 million and declined $34 million sequentially. The decrease was driven by a $63 million decline in commercial real estate NPAs, partially offset by a $29 million increase in C&I NPAs.

Commercial TDRs on nonaccrual status included in NPAs were $140 million, down $19 million on a sequential basis. Commercial accruing TDRs were up $34 million, but remained fairly low at $475 million. In the consumer portfolio, NPAs of $356 million declined $26 million, driven by improvement in the residential mortgage portfolio. Non-accruing consumer TDRs included in these results were $162 million, down $12 million from last quarter.

Accruing consumer TDRs were $1.7 billion relatively consistent with last quarter. To-date, a third has worked with over 10,000 borrowers to modify their loans to help them stay in their homes. Aggregate 12 months re-default rates are just over 25% and improved considerably and the modification program evolved following its inception in 2008. As you know, performing TDRs that included an interest rate modification cannot be reclassified out of TDRs status unless they are refinanced on market terms. $1.4 billion of these loans are current and $1 billion of them are current and have seasoned for more than a year. We would expect that this portfolio will slowly decline over time as the opportunity and need to introduce new restructurings has declined with improving residential real estate credit conditions.

Before moving on, I did want to touch on our delinquency levels. Total delinquencies of $410 million were down $60 million or 13% from the first quarter. Loans 30 to 89 days past due were down $48 million, driven by $30 million decline in commercial delinquencies and an $18 million decline in consumer delinquencies. Loans over 90 days past due were down $12 million from the first quarter, driven by improvement in consumer, and as Kevin noted, commercial 90 date plus balances were less than $1 million.

Commercial criticized asset levels also continued to improve, down about $200 million or 4% sequentially and represented the ninth consecutive quarter of decline.

The next slide, Slide 12, includes the roll forward of nonperforming loans. Commercial inflows in the second quarter were $151 million, a bit higher than the first quarter, but down $52 million or 26% from a year ago. Consumer inflows for the quarter were $116 million, down 36% from last year. Total inflows of $267 million remained at relatively low levels. We generally expect continued improvement in both the commercial and consumer portfolios.

The provision in the allowance are outlined on Slide 13. Provision expense was $64 million in the quarter. It was up $2 million from the first quarter and included a reduction in the loan loss allowance of $48 million. Allowance coverage remained strong at 191% of nonperforming loans and 3.9 times annualized net charge-offs.

Slide 14 outlines our recent mortgage repurchase experience. As expected, we saw a slight uptick in claims associated with GSEs as Freddie Mac is now reviewing all nonperforming loans for potential put back. However, claims are still 45% below levels, we were experiencing a year ago. As I mentioned earlier, we increased the reserve for these loans during the quarter based on additional Freddie Mac guidance received.

We've provided a detailed breakout of loans sold by vintage and remaining balance. Repurchase requests and losses have been concentrated in the 2004, 2008 vintages, about 84% of the total. Those vintages represent just 9% of the total remaining balances on sold loans.

Turning to capital on Slide 15, capital levels continue to be very strong and included the impact of the $600 million preferred stock issuance and approximately $539 million in common share repurchases that were announced during the quarter. The Tier 1 common equity ratio was 9.4%, down 26 basis points from last quarter. Tier 1 capital ratio increased 24 basis points and total risk-based capital was consistent with last quarter.

Tangible equity ratios also continued to be strong with the 9.0% TCE ratio, including unrealized after-tax gains of $149 million and an 8.8% TCE ratio if you exclude those gains. You are aware of the U.S. banking regulators have approved final Basel III capital rules. Our current pro forma estimate for the Tier 1 common equity ratio is 9.1%. That calculation assumes an exclusion of AOCI components from capital, which is subject to an election on our part in early 2015.

That pro forma estimate would be about 9.2%, if we included AOCI. As a result, our capital position is well in excess of the minimum required ratios, including capital conservation buffers and the additional clarity on the rules will hopefully make the CCAR process a bit more transparent going forward.

A couple of reminders, we have about ($600 million) of repurchase capacity remaining under our 2013 CCAR plan that runs through March 31 of 2014. Also you'll need to take note of the timing of preferred dividends going forward. First, the Series G convertible preferred stock has been redeemed, so that dividend has been eliminated and we will have no scheduled preferred dividends in the third quarter of 2013.

Our May preferred stock issuance carries a semi-annual dividend, which will not be payable until the fourth quarter. That dividend would normally be about $15 million every other quarter. The fourth quarter dividend will actually be a bit larger about $19 million because it will include the stub period for May and June.

Turning to updated full year 2013 outlook which is summarized on Slide 16. We made a number of modest adjustments to our full year outlook with the primary changes in the mortgage banking revenue as you might expect. I'll start with net interest income and net interest margin. We continue to expect full year 2013 NII to be relatively consistent with 2012 NII of $3.6 billion and we expect four year NIM to be in the 335 basis point range.

We expect third quarter NII to increase by about $5 million to $10 million. That reflects the benefit to the higher rate environment on the securities portfolio and securities yields, as well as loan growth and higher day count, offset by loan repricing and the full quarter effect of the interest rate floors that matured during the second quarter. Day count adds about $6 million, and the floor maturities will cost us about $5 million.

As we've previously discussed, we expect NIM compression to subside in the second half of the year and to begin stabilizing. We currently expect third quarter net interest margin to decline a few basis points, with 1 basis point of detriment from day count and 2 basis points from the full effect of the matured floors, and we'd expect fourth quarter NII and margin to improve, and that will include the benefit of $800 million in maturing CDs from 2008 that mature over the second half of the year.

We expect full year loan growth versus 2012 full year averages in the mid-single-digits or a little better, which reflects the $500 million in loans we securitized last quarter and the ongoing sale of 30-year jumbo mortgages. We expect transaction deposits and core deposits to grow in the mid-single-digits range compared with 2012 averages.

Now, moving on to overall fee income and expense expectations for 2013. Just as a reminder, we've adjusted 2012 comparative results on this left side to exclude all Vantiv related impacts, as well as debt termination charges which were the largest unusual items last year. In the first half of 2013 Vantiv transactions contributed $352 million to fee income which are also exclude. Those adjustments are listed in the footnote on this slide.

Overall, we currently expect fee income to be relatively consistent with 2012 adjusted fee income. That would reflect mid or high-single digit growth across all major fee categories other than mortgage which of course is being compared to record 2012 levels. So, looking at the details of our overall fee expectations; we expect to see mid-single-digit growth in deposit fees, that's a bit lower than we previously expected as many consumers continue to maintain higher deposit balances that defray fees.

We're obviously seeing that benefit in our deposit trends where in the third quarter we're looking for mid-single digit sequential deposit fee growth. We expect mid to high-single digit annual growth in the investment advisory revenue, corporate banking revenue and card and processing revenues. Corporate banking results in the third quarter should be quite strong.

Turning to mortgage banking revenue, obviously, the change in the rate environment this quarter has resulted in changes to our expectations for mortgage revenue and it's makeup. As I discussed earlier, second quarter mortgage banking revenue was $233 million or $161 million excluding the MSR gains of $72 million. Relative to that $161 million base level, for the third quarter, we currently expect mortgage banking revenue to decline about 20% to 25% sequentially, reflecting lower volumes and some margin compression, which will be partially offset by lower servicing asset amortization. That outlook does not include any MSR valuation adjustments, which will depend on a rate environment at the end of the quarter.

For the full year, our current forecast with total mortgage banking revenue is in the $700 million range, which would be down about 18% from record levels in 2012. Our quarterly base expectation for other income caption would continue to be in the $75 million range, plus or minus, absent significant unusual items, which will occur from time-to-time.

If we turn to our overall expectations for the third quarter fee income, we currently expect fee income in the $630 million to $640 million range with the sequential reduction reflecting second quarter Vantiv gains, the $72 million in MSR gains this quarter and lower mortgage production revenues, with increases across most other fee lines otherwise.

Turning to expenses, we currently expect third quarter noninterest expense of $940 million plus or minus, reflecting lower mortgage-related expenses and the impact of elevated litigation-related costs in the second quarter. We expect an efficiency ratio in the 61% to 62% range, a bit higher than we were previously forecasting due to the change in the expected mortgage environment. We continue expect full year noninterest expense to be relatively consistent with adjusted 2012 expenses. We will continue to manage our expenses carefully and aggressively in line with the revenue results and the economic environment.

In terms of PPNR, as reflected in my remarks to this point, our overall expectation for the year is consistent with 2012 levels, and that's despite a rate environment that remains challenging and comparisons with a record year for mortgage revenue.

Turning to the credit outlook, we expect overall credit trends to remain favorable in the second half, with full year net charge-offs currently expected to be down about $200 million to $225 million. We currently expect the net charge-off ratio for 2013 to be in the 55 basis point range, compared with 85 basis points that we reported in 2012. We're continuing to anticipate lower NPAs, down about 20% during 2013 with continued resolution of commercial NPAs being the largest driver of the reduction. For the loan loss allowance, we expect continued reductions in 2013, but the ongoing benefit of improvement in credit results, partially offset by new reserves related to loan growth.

In summary, we have good momentum in many of our core businesses that we expect to help us generate continued solid results. That wraps up our remarks.

Operator, could you open up the line for questions, please?

Transcript Call Date 07/18/2013

Operator: Matt Burnell, Wells Fargo.

Matthew Burnell - Wells Fargo Securities, LLC: I guess, I'm just curious, first of all in terms of what you're seeing in terms of demand for commercial loans, obviously C&I loans were growing a little bit faster than the rest of the portfolio. I guess, as you look across your geographic footprint, are there any particular markets that are seeing stronger growth or have you seen any effect from some of the currency fluctuations that might have dampened demand across your footprint over the quarter?

Kevin T. Kabat - President and CEO: Let me kind of address that. Dan, you've got any additional comments you can make them, but what I would tell you is that we've seen demand pretty broad-based. I wouldn't tell you that it was specific in terms of any geography. We are also seeing it broad across industry types. So, we're relatively pleased given the environment. We did see a little bit of increase in pay downs in the first – or in the second quarter. I think in reaction to kind of the Fed's announcements. I think CFOs were really looking at their debt and trying to lock-in or pay down some of the low-cost that they had, but for the most part, pipelines continue to be robust and again broad-based across both geography and industry type from our standpoint. So, I don't know if there is anything else Dan that you'd add to that commentary.

Daniel T. Poston - EVP and CFO: No, I guess these are only comment. I agree the growth has been pretty broad-based. But I think we have seen particular success in the southern regions where we continue to capture market share. So, I think we've probably got a little bit of bias to growth to some of the markets in the south, but in general, making good progress and seeing growth across our geography.

Kevin T. Kabat - President and CEO: The only other thing I'd add to, Matt, is the investments that we made and have continued to make in our verticals continues to pay dividend for us, whether it's the energy vertical, the healthcare vertical. Those continue to be good opportunities for us and we still are winning fairly well in that space. So, we feel good about those investments and our outlook there.

Daniel T. Poston - EVP and CFO: Just to follow-up on that. In the areas where we've made investments specifically in mid-corporate capabilities, the healthcare vertical, the energy vertical, we are seeing growth rates in those areas significantly in excess of the overall growth rates in C&I. So, those investments continue to pay pretty good dividends for us.

Kevin T. Kabat - President and CEO: Then the last comment I would make is as we mentioned in our scripting upfront, we saw, although it's much smaller portfolio than it has been historically for us. We saw growth in our construction space that obviously will mature into to our commercial mortgage, we spent quite deliberate in our focus around that space and our expectation is that that will no longer by the end of the year or first part of next year that will no longer drain assets from the balance sheet, but we think that we can – are finding attractive enough projects and beginning to invest in that and that we can either be the end of its decline and hopefully again be an opportunity for us to increase a little bit of our exposure as we look out.

Matthew Burnell - Wells Fargo Securities, LLC: If I can just shift gears a little bit to the mortgage side of things. I appreciate the detail you provided in your outlook relative to mortgage banking revenues. But I guess, I'm just curious, if you could provide a little more color in terms how you are thinking about taking the cost out of that business as the refi boom comes – slows back down, is it – are you thinking more in terms of sort of one to two quarter lag or is it potentially little bit longer than that?

Daniel T. Poston - EVP and CFO: Well, we've talked a bit about this in the past and there is a fair amount of expense within the mortgage business that is variable with respect to, in particular, the compensation related pieces that vary with originations and with revenue. Beyond that, there are some fulfillment expenses that are variable, but that do require actions on the part of management to actively manage those expenses and do involve or require sometime in order to make those adjustments. So, as mortgage revenues and expectations for mortgage revenues have declined, we have begun actively managing those expenses. We have plans to take out temporary labor, contract labor, reduce our FTE through reductions of those kind of third-party headcount as well as reductions in overtime and we will be working over the quarter to bring down overall expense levels in the mortgage environment to be consistent with the revenue expectations. As we sit here right now, if you look at our revenue guidance, we've talked about a 20% to 25% decline from the $162 million in non-MSR related mortgage revenue in the second quarter, that's about $40 million in real numbers. Our expense revenue or our expense expectations for the third quarter would be that we can take expenses down equal to about two-thirds of that revenue, which is pretty much in line with the overall kind of efficiency levels in that business. So, that's about $25 million in the third quarter and we will continue to evaluate other opportunities to make further changes in the mortgage business that are consistent with our kind of intermediate and longer term expectations for what that business contributes.

Kevin T. Kabat - President and CEO: Matt, I'd kind of put a finer point in terms of your question. I think, Dan, has given you kind of a good overview. I'd just make a couple of comments. One is, this isn't a surprise to us, shouldn't be to you either in terms of the mortgage refi business changing. So, obviously, we've been anticipating the turn and when that was going to happen. We will be aggressive in managing our business and we expect to get, as Dan kind of highlighted to you, most of that expense out quickly, and no more than two quarters in terms of addressing that business dependent upon the sustained level of demand, because that's where we'll size of business do from that perspective. So, you'll see us all over that.

Jeff Richardson - Director, IR: This is Jeff. Just one thing I would add I think we've discussed this kind of a 60 day lag between taking expenses out revenue. The 60 days is kind of happened because this started in early May and so we are acting in the third quarter just as you would expect given that that's happening.

Matthew Burnell - Wells Fargo Securities, LLC: I guess one final question. We started to see a little bit of M&A occur in smaller size banks within the Midwest and within the couple of specific markets within the Midwest where you have some operations. I guess I'm just curious given your relatively strong capital position, if there is increased interest at this point heading into 2014 with the capital rules now sort of relatively well understood to increase your footprint penetration within the Western part of the Midwest?

Kevin T. Kabat - President and CEO: Yeah. I would tell you, Matt, clarity is helpful and so getting our arms around that is helpful as we look at it. As we've indicated and as we've talked about in the past, we grew up as an acquirer, we know that there'll be a time for consolidation that we'll be at the table for. We look at these things, obviously, in terms of use of capital and all of the other metrics we've outlined for you in the past relative to where we'd have to pass our hurdle rates, and obviously, if it's within footprint, we're both aware of it, understanding what's going on and look at that as opportunity to have greater density within our footprint. We think that strategically makes the most sense to us as we look out. So, again, I think that all of that fits within our purview, all of that fits within our strategic orientation and we'll continue to monitor what that looks like. If there's something that we think really is interesting and fits within those parameters, yeah, we we'd take a real hard look at it.

Jeff Richardson - Director, IR: The one thing, you started this with our high capital levels, and I think we would not look at our high capital levels as increasing our desire to do M&A. I think we would look at M&A as something that we would do when the deals are right in the right time, but we can also buy back our own stock with that capital, and we'd have to look at the value of that trade versus buying somebody else's stock. So we don't view that capital as something that we've got to get rid of.

Operator: Matt O'Connor, Deutsche.

Matthew O'Connor - Deutsche Bank North America: I've got a few just nuance questions here. So, I apologize in advance, but first on the share count, what share counts should we be using, whether it's 3Q or 4Q, you've got some forward settlements that there's a full impact that needs to come from that. I don't know if that includes the Vantiv gain. There's just a few moving pieces in the buy back. So, maybe you could give us some insight in terms of what's already been announced or already planned for as we think about the share count on a dilutive basis?

Daniel T. Poston - EVP and CFO: Well, so that's a tough one to answer because the third quarter share count is going to include things that we do in the third quarter and we haven't given guidance on that and we haven't acted on it. I think I would hesitate to give you a share count for the third quarter.

Matthew O'Connor - Deutsche Bank North America: Maybe putting some moving pieces out there?

Daniel T. Poston - EVP and CFO: You can take our CCAR plan and then kind of assume what you're going to assume for the timing of the remaining $600 million of repurchases and then we'll come up with the share count that hopefully will be in the ballpark.

Matthew O'Connor - Deutsche Bank North America: Right. So, there's a $600 million remaining. There's still a $15 million benefit I think from what still needs to be settled, that's in the period end, but not the average or something?

Daniel T. Poston - EVP and CFO: Yeah, there's a small settlement amount that – $15 million, is that right?

Kevin T. Kabat - President and CEO: Yeah. You always have some amounts at the end of the completion period that would create that I mean that's sort of related to how we execute our -- (exercise) our share buybacks.

Matthew O'Connor - Deutsche Bank North America: Then the Vantiv gain that you realized this quarter, the $150 and change you would be allowed to buy back stock with that in addition to the $600 million and the forward settlement that's still out there, right?

Daniel T. Poston - EVP and CFO: The $600 million incorporates the fact that we already have approval for Vantiv. So, the share repurchase that we did in May plus the $600 million equals the total for CCAR plus Vantiv.

Matthew O'Connor - Deutsche Bank North America: And then just separately, I know that tax rate has been coming in a little bit higher the first couple of quarters this year, but you're still sticking to the outlook of I think 28.5% for the full year which obviously implies a (decent) decline in the rest of the year. I mean, I'm just trying to figure out kind of what's going on with the tax rate over all and then as we think out longer-term, is that 28.5% kind of a good run rate to use?

Daniel T. Poston - EVP and CFO: The tax rate is – we kind of reset it this year. It's been fairly stable in that 28.5% range. I think we were – because we have seasonality in the first quarter, that tax rate is a little high. So, second half of the year, 28.5%, 29% somewhere in there seems about right.

Matthew O'Connor - Deutsche Bank North America: And then just separately – actually one other small thing. So, the preferred dividends, $15 million every other quarter, (which we just pencil), so that's the only piece that's out there once just other one is converted, so we just pencil $30 million per year starting next year?

Daniel T. Poston - EVP and CFO: Yes, but it will be $15 million every other quarter, not $7.5 million per quarter.

Matthew O'Connor - Deutsche Bank North America: And then separately if I may, just kind of (bigger footer) question. You've talked about how you have one of the smaller securities books out there. I mean, you've got a lot of capacity to add to it over time if rates rose and you chose so. I did notice that period end securities were about $1 billion higher than last quarter and the average. Just thoughts on where rates are right now, both your capacity and interest in adding more securities to your period end levels?

Daniel T. Poston - EVP and CFO: We don't view the current rate environment as the endgame environment. The reason why balances have increased this quarter is really more due to our decision to free investment of the expected cash flows that are coming back to us from the portfolio. Our anticipation is that rates will continue to inch up as we get closer to the end of QE, as well as the eventual whether it's end of '14 or '15 starting increasing short-term rates. So we have not fundamentally changed our investment strategy. This is probably somewhat of a temporary increase in investment balances, but clearly we evaluate our opportunities and options and we will make the right decisions. But this particular quarter's increase in balances is not a permanent change in our investment day approach.

Kevin T. Kabat - President and CEO: Yeah, said another way, Matt, the $1 billion increase in the end of period balances that you see is an acceleration of assumed investments in the NIM and NII guidance that we gave reflects that is an acceleration of investment cash flows and not as a permanent increase in the level of portfolio at this point.

Operator: Ken Zerbe, Morgan Stanley.

Ken Zerbe - Morgan Stanley: First question just on capital. With I guess the positive changes that we've seen to Basel III capital ratios, we look ahead to 2014 and your Basel III number is higher the way you previously thought it was going to be. Do you think that gives you anymore flexibility under this 2014 CCAR process, to ask for more capital return than you may have otherwise under different Basel III rules?

Daniel T. Poston - EVP and CFO: Well, we are certainly hopeful that having some final rules create some clarity that allows the CCAR process to be a little more transparent and for both us and the regulators to have add a little more certainty with respect to what capital levels need to be going forward and how we should manage those. So, I think net-net, it's a positive in terms of removing an additional uncertainty, which might allow us to do things in our CCAR plan and otherwise we might have been a little hesitant to do because of that uncertainty. So, I think on the margin, the impact that you are talking about maybe there, yes.

Ken Zerbe - Morgan Stanley: Then just one final question. On Page 5 you had a chart showing C&I loan yields, I guess this time there are 32 basis points, this quarter to 358. When we think about where you're putting on new loans, including any fees that might be in there as well, what's the right or what's the current level of C&I yield, just to have a base of where that might bottom out?

Daniel T. Poston - EVP and CFO: Yeah. I think as we stated, Ken, this quarter, we had the impact of expiring floor maturities on our C&I portfolio yield. So, that was a large impact on yields as we think about yields and spreads going forward in that business segment, there are several factors that impact that line item. One is just the fact that incoming loans clearly are of different credit nature, better credit nature compared to outgoing world, so that is fairly clear from the activity that we see. The other one is the impact of the overall credit spreads both in capital markets as well as bank loan markets, credit spreads continue to tighten during the first half of the year, and that activity impacts our bank loan spreads, it impacts the prepayment behavior in that portfolio. The other one that we have to keep in mind is that as a company, we have and we continue to approach that business from a relationship perspective. So, the credit spreads are just a portion of the relative returns in that business and we are clearly seeing increased de-activity and our internal return targets and profitability ratios take into account non-credit segments in that business. Now, having said all that I think when you go through a change in the rate environment that we've experienced over the last sort of six to eight weeks that tends to sort of hopefully create some changes in spread trends and we may see some of that going forward. In general, we expect credit spreads to stabilize, but we are cautious because that necessarily is a little bit dependent upon what happens in capital markets, what happens with competition how they price loans. So, in our guidance with respect to NIM or NII, we tend to be cautious in how we think about commercial yields. But clearly this quarter's particular drop in yield has been outsized and largely impacted by the expression, of course. So, I wouldn't extrapolate what happened this quarter into future quarters.

Operator: Paul Miller, FBR.

Paul Miller - FBR: Coming back to the mortgage side. Correct me if I'm wrong, which you mostly a refi shop. What type of things are you doing to try to increase your purchase market or are you just comfortable with the mix shift you got right now?

Daniel T. Poston - EVP and CFO: In the second quarter, about a quarter of our volume is related to purchase mortgages. So, I think, we do have a fairly sizable portion of our business that's purchase business. That increased significantly during the quarter purchased volume was $1.8 billion of the $7 billion plus in originations in the quarter that was up 80% from $1 billion in the first quarter. So, I think, we are seeing increased purchase volume that resolve of a number of things; one is we've given more attention and focus obviously to purchase volume as the environment has started to shift. We get the seasonal benefit of the selling season that starts in the second quarter and continues into the third. Continued stabilization and improvement in real estate valuations in the real estate market is helping there as well. So, we have sizable portion of our business in the second quarter it was from purchase volume that will be a greater percentage, obviously, as we go forward, and the refi portion of the business (indiscernible). But we are confident in our ability to capture our share repurchase volume and think we are doing the right things to increase purchase volumes since we go forward.

Paul Miller - FBR: I believe correct me if I'm wrong. I don't believe that you guys have a lot of eligible loans in your portfolio because your portfolio is relatively clean. Am I correct, or are you doing HARP?

Daniel T. Poston - EVP and CFO: Depends on who you compare us to, but in general we would say that our portfolio is much cleaner relative to a large number of our peers.

Paul Miller - FBR: But are you doing HARP? Is there HARP originations in that $7 billion number?

Jeff Richardson - Director, IR: Yeah.

Kevin T. Kabat - President and CEO: Absolutely.

Daniel T. Poston - EVP and CFO: Yeah, we had about $1.4 billion. That was about 22% of our second quarter volume.

Paul Miller - FBR: With that, is the HARP – with higher rates, is the HARP gain on sale margins relative to the overall gain on sale margins, are they coming in or are they still holding pretty strong?

Kevin T. Kabat - President and CEO: They've come in significantly. In the second quarter, they were still probably 100 basis points or so, wider than non-HARP. We're expecting that, that differential will continue to shrink as we go forward.

Operator: Ken Usdin, Jefferies.

Ken Usdin - Jefferies: First question, I just wanted to ask you to update us on your strategy around hedging the MSR. You guys have had really nice MSR gains over the last couple of quarters, and I know you did say that they would be down from here, but can you just talk to the extent that you are hedging the MSR or are you more just apt to kind of let it ride with rates at this point?

Kevin T. Kabat - President and CEO: We absolutely hedge our MSR. Our risk management approach and sort of the underlying policy limits require us to manage MSR volatility within a fairly prudent guidelines. Now, having said that, the same risk management approach in general applies to the overall mortgage banking revenues, and as you know, up until the end of the second quarter, we've operated under very unprecedented rate and margin environment and during the second half of 2012, and most of first half of 2013 primary third year mortgage rates have fluctuated between 3.5% and 3.875%. And gain on sale margins at that time approached 4 or 5 points. Now, operating net environment for three or four quarters in a row creates significant risk exposures to the underlying revenue streams and we are cognizant of that. At that point, a 25 basis point move up or down in rates has created changes. We spend a lot of time studying our MSR assets and its complexity and we use a lot of third-party opinions along those lines. We're also very cognizant on how MSR assets are valued. As you know, largely valuations depend on what happens at the end of the quarter. So, it's very difficult for us not to hedge the position. And the hedge position is not a position that you put on at the beginning of the quarter and go away because it's a very dynamic position. Having said all of that, we are now in a different rate environment. We moved away from that 3.5% to 3.75% zone into more of a 4.5% mortgage rate zone. And in this environment, clearly, our approach to hedging MSR values is going to be different than the strategies that we have used over the past sort of three or four quarters. So, we've never given any guidance in terms of our MSR, because truly as a hedge management philosophy we don't anticipate gains and losses and our goal is to neutralize the volatility in that asset. But having moved from that (cuspy) nature of mortgage rates, we're clearly much more focused on making sure that we preserve the stability in the value of our MSR. So, to basically cut it short, yes, we do hedge our MSR value. We will continue to hedge the MSR value. Our tactics may change from one quarter to another, but in general, we do not take market risk when it comes to the mortgage revenue streams in our business.

Ken Usdin - Jefferies: Then my second question is regarding just preferred issuance. When you did the press release back in the spring about the conversion, now that convergence has happened, that press release also mentioned the possibility of issuing another 500 million of preferred. So I wanted to ask you, A, are you planning on doing that and then B, you are still very low as a percentage of Basel III in terms of total preferred bucket. So, I just wanted to gasping through your thoughts on just, do you intend to continue to fill up that bucket and where would you expect to take that to over time?

Daniel T. Poston - EVP and CFO: We plan to follow our CCAR plan and issuing another $450 million in preferred securities is in that plan, so we plan to execute that strategy. Going forward, I think we believe that we achieve better capital efficiency by utilizing preferred securities in our capital account and over time we would like to utilize the room that we have in that line item.

Ken Usdin - Jefferies: Then just last quick thing, so that $450 million is going to – we don't know exact timing, but that's something that we need to contemplate as far as the preferred expense run rate – the preferred dividend run rate as well?

Daniel T. Poston - EVP and CFO: Correct.

Operator: Stephen Scinicariello, UBS.

Stephen Scinicariello - UBS: I just want to talk about life after mortgage for a second here. Just given some of the strong underlying trends and some of your other fee income areas like deposit charges, cards, corporate investment management and whatnot, I'm just kind of wondering if you could talk a little bit about some of the opportunities you have to kind of ramp those up as kind of the economy continues to get better and the ability of that to maybe offset some of the kind of net effect from kind of the mortgage tailing off?

Kevin T. Kabat - President and CEO: Yeah, Steve, Couple of things I'd say. One is if you look at it, I think we're little bit ahead of the game, because you can see the progress being made even today, and today's results in our other fee areas. So whether you are talking about commercial fees, whether you are talking about deposit fees, whether you are talking about card fees, whether you are talking about record brokerage fees contributing to the IAA – our IAA business, we feel really good about the momentum that we've built and investments we've made in those businesses that will continue. And I think that is true in terms of the guidance that we've given you and the progress that we've made from that standpoint. And even in terms of life after mortgage as you say, there will be a mortgage business that will continue to refer a consumer product through or deposit products with cross-sells will continue to be a strength of ours. Our sales culture continues to be the strength, so those are opportunities. And we are also really, just know beginning to see, I think, some better health in our business banking space. So that end of the spectrum I think is beginning and that has, I think, of a better outlook over the next few quarters and into next year as well as. So, again, we feel like we are really well positioned and our businesses are operating and working well. We think we are ahead of the game in terms of some of the product offerings that we've put out. We've talked about our deposit simplification, that's complete now and we have a platform that we can build on. And as I mentioned earlier on one of the questions, we are also beginning to see a lessening of drag on our assets and balances in the CRE space. So, again, we think that we'll show you and we'll be able to demonstrate the transition to the core bank strength if they are, I think, chosen the numbers today that you look for us in the future. I don't know, Dan, if there is anything you to add.

Daniel T. Poston - EVP and CFO: No, that says pretty well.

Operator: Jack Micenko, SIG.

John Micenko - Susquehanna Financial Group: On the mortgage side, you've grown your mortgage portfolio nicely over the past several years. At the same time, historically, when rates have gone up, you've seen the migration on the purchase side from third year fixed into maybe some (7/1s, 10/1s). I think that's generally the kind of product you've been looking to put on balance sheet. So, I guess, the question is in the mortgage business on the purchase side, have you seen that transition yet in terms of a migration to lower – shorter duration purchase mortgage and would that potentially be a driver of additional mortgage growth in the future on balance sheet as the structure is more sort of consistent with the duration you are looking for in the mortgage book?

Daniel T. Poston - EVP and CFO: I don't have the statistics as to what percentage of our arm originations are purchased versus refi, but in general, our preference as you stated is for shorter duration mortgage assets. We do not currently and for a number of quarters now have not been retaining longer-term mortgages, whether it's conforming jumbos or a retail mortgage product. If we do see an uptick in shorter duration mortgage originations, yes, that would benefit our overall mortgage portfolio growth, because I suspect that we will not make any changes in terms of duration, preferences in our retained loans portfolios. Yes, if we do see that uptick, we may be able to retain with more of those shorter duration mortgages.

John Micenko - Susquehanna Financial Group: Then on the commercial real estate side, the run-off has been I don't know net maybe call it $300 million a quarter. Can you give us some granularity around what some of the growth looks like and trying to do the math and net out what – when we see the trough I think you had said maybe by the end of the year and then what kind of sort of net new growth we can potentially forecast going forward?

Kevin T. Kabat - President and CEO: I think the color that we've given you is really kind of pertaining to this year and our expectation is that, we could begin to see some growth in the CRE assets, so that gives you the number there. We really haven't given guidance in terms of next year we will when we get closer to the end of year. But obviously, when we hit that inflection point that could become, as you can see as a percentage of our total assets and book we're probably one of the lowest, if not the lowest in all of the regionals with that asset classifications. So, there is a good opportunity out there. We've got good focus and strong infrastructure against that to take a look at it, but we will give you more clearly as we get further out in the year on that.

Operator: There are no further questions at this time. This concludes today's conference call. You may now disconnect.