Fifth Third Bancorp

Good morning. My name is Chelsea, and I will be your conference operator today. At this time, I would like to welcome everyone to the 5th Third Bancorp Q4 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Chris Dahl, you may begin your conference.

Thank you, Chelsea. Good morning, and thank you for joining us. Today, we'll be discussing our financial results for the fourth quarter of 2018. Please review the cautionary statements in our materials, which can be found in our earnings release and presentation. These materials contain information related to the proposed merger with MB Financial, reconciliations to non-GAAP measures, along with information pertaining to the use of non-GAAP measures, and forward-looking statements about Fifth Thirds performance. We undertake no obligation to, and would not expect to, update any such forward-looking statements after the date of this call. This morning, I'm joined by our President and CEO, Greg Carmichael, CSO Typhoon Dazun, Chief Operating Officer Lars Anderson, Chief Risk Officer Frank Forrest, and Treasurer Jamie Leonard. Following prepared remarks by Greg and Typhoon, we will open the call out for questions. And we turn the call over now to Greg for his comments.

Thanks, Chris, and thank all of you for joining us this morning. Earlier today, we reported a full year net income available to common shareholders of $2.1 billion, or $3.06 per share. Full year adjusted net income of $1.8 billion was a record for the bank as we continue making significant progress to improve profitability and better position Fifth Third for success. In addition to the record net income, we generate our best full year adjusted ROA, ROE, ROTCE and efficiency ratio in over a decade. We returned nearly 100% of earnings to shareholders through repurchases and two dividend increases as we raised the dividend nearly 40% in 2018. Additionally, we simply improved our key credit quality metrics throughout the year. Fourth quarter 2018 net income available to common shareholders was $432 million in earnings per share of 64 cents. Included in these results are three notable items which had a negative impact of 5 cents on reported EPS. Excluding these items, adjusted earnings were 69 cents per share in the fourth quarter. Our financial results were very strong. During the quarter, we generated record loan originations and fee revenue in our commercial business, continued to properly grow the balance sheet, and diligently managed our expenses while continuing to invest for future growth. Since the fourth quarter of 2017, we have significantly improved all of our key financial metrics on an adjusted basis, with ROA increasing 30 basis points, ROTCE increasing 440 basis points, and the efficiency ratio declining more than 300 basis points. As we approach the third and final year of our North Star project, the fourth quarter of 2018 results should provide a great deal of confidence in our ability to achieve our enhanced targets. Before discussing our key strategic priorities and the highlights for the quarter, I'd like to share some observations on the macroeconomic environment. The overall U.S. economic backdrop continues to be generally positive. While global growth pressures exist and geopolitical risks remain elevated, we expect this business cycle to expand in 2019 as underlying economical fundamentals remain solid. While we are cognizant of the rising probability of a downturn in the next couple of years, we feel good about how we have positioned our balance sheet and our sales force to take advantage of growth opportunities while prudently managing our exposures. we will continue to maintain our disciplined focus on credit quality and profitability. Moving on to our strategic priorities. At Fifth Third, we are positioned to drive improved profitability well beyond Project North Star Horizon, which concludes at the end of this year. First, we are committed to achieving our targeted financial results by the end of 2019, as outlined in our previous discussions. The continued improvement throughout 2018 reinforces our confidence in our ability to achieve our goals. In fact, Our fourth quarter adjusted ROTC of 15.4% is the highest since before the financial crisis. Second, we are focused on successfully integrating MV Financial. We are well prepared for the integration of MV's operations into Fifth Third. We are working diligently to deliver the financial results associated with the acquisition and to make sure we get it right for our customers. We have completed all required filings and are now simply waiting for the necessary approvals. We continue to expect to close the transaction by the end of this quarter. We're also pleased that the regulators did not object to our resubmitted capital plan, including the pro-form impact of MB Financial. Also, we remain very confident in our ability to achieve our post-merger financial targets. It is clear that we are acquiring a high-performing franchise. As shown in our foot quarter earnings published this morning, MB generated strong returns, reflected solid NIM expansion and sound credit results with improvements in both MPAs and credit losses. We are excited to combine the talent and complementary capabilities of our two organizations. Third, we continue to invest in organic growth opportunities, including the previously communicated branch network optimization. Our plans are staged over multiple years and include the rollout of a state-of-the-art branch redesign. Our next-generation branches will be 40% smaller than our legacy network and will be highly automated. In 2018, optimization efforts led to the opening of 12 branches and the closing of 45 branches. We expect to decrease our network in another 10 branches in 2019. Beginning 2020, we expect branch builds in our high-growth markets to exceed our closures. In addition, we're expanding our middle market business and select high-growth markets where we can combine strong talent with local market knowledge and our enhanced product capabilities to successfully grow the portfolio. Following the very successful launch of our California middle market team, over the next 12 months we'll be expanding to the Denver, Dallas, and Houston markets. We already have existing teams of commercial bankers in our national corporate banking business in these markets. Our track record of hiring strong talent and successfully growing our middle market franchise gives us a high degree of confidence executing on our current expansion plans. We also plan to continue adding to our sales force in our existing footprint. We are particularly focused on strategic acquisitions that would generate higher fee revenue to drive additional ROE growth. In fact, we are already seeing the financial benefits of our investments in town over the last two years, especially in our capital markets, M&A advisory, and wealth and asset management businesses. Fourth, we remain focused on exploring our digital transformation and delivering innovative solutions for our customers. We've invested heavily over the last several years, both through our in-house technology capabilities and with select FinTech partnerships. These investments are focused on delivering a more personalized relationship banking experience. Our goal is to ensure interactions with our customers are simple, seamless, and, of course, secure. Our efforts continue to be recognized. Bank Director Riesling rated us as the number one bank for overall technology strategy, highlighting our ability to deliver innovative products as well as our organization-wide technology Our clearly defined set of strategic priorities are designed to enhance revenue growth as well as generate expense efficiencies in order to meet our financial and strategic objectives. We have achieved significant expense efficiencies over the last two years as reflected in our approved efficiency ratio. As we have discussed previously, our goal is to consistently achieve positive operating leverage. Moving on to the highlights for the quarter, our views on key aspects of the results in the typhoon. We'll discuss the quarter in greater detail. First, we can see the benefit from our improved balance sheet resiliency. Our key forward-looking credit metrics continued to improve as criticized loans declined for the seventh quarter to the lowest level in nearly 20 years. Our non-performing assets have declined nearly 5% over the past two years, and today stand at the lowest level since 2000. We maintain the same disciplined approach to client selection, underwriting standards, and credit risk appetite during the quarter while growing the loan portfolio. In fact, both the middle market and corporate banking at the highest credit quality in several quarters. When we have maintained strong underwriting standards, our loan yields and net interest margin have continued to expand. We believe our strong credit profile should allow us to outperform through business cycles. We generated proper relationship growth in both our commercial and retail businesses. We continue to focus on expanding our relationships with our clients on both sides of the balance sheet. Loan growth was fully funded by core deposits during the quarter and the year. Compared to the fourth quarter of last year, we grew commercial loans by 4%, including C&I growth of 6%. Even with very strong loan growth, our total household growth of over 3% and deposit growth of 4% resulting in the lowest loan-to-core deposit ratio in the past 15 years. Furthermore, we managed our expenses and outperformed relative to our guidance. Excluding merger-related items, our expenses declined 2% from the prior quarter. As a result, we were able to continue to generate positive operating leverage for the quarter and the full year. I want to reiterate our expectations for standalone and adjusted expense growth of only 1% in 2019. Our results show that we remain on track to achieve our enhanced North Star financial targets. During the fourth quarter, we generated an adjusted return on tangible common equity of 15.4%, an adjusted return on assets of 1.34%, an adjusted FISTI ratio of 56.8%, which is already better than our standalone fourth quarter of 2019 target. We remain very confident in our ability to achieve our long-term financial targets and outperform through the cycle. remain committed to holding ourselves accountable for delivering strong financial results under prevailing macroeconomic, interest rate, regulatory, and legislative environment. I'd like to once again thank all of our employees for their hard work, dedication, and for always keeping the customer at the center. I was pleased that we were again able to deliver strong financial results in our North Star initiatives for delivering the outcomes as planned. With that, I'll turn it over to Typhoon to discuss our fourth quarter results and our current outlook.