Fifth Third Bancorp

Ladies and gentlemen, thank you for standing by, and welcome to the Fifth Third Bancorp Third Quarter 2019 Earnings Call. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's call is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your first speaker today. Crystal, please go ahead, sir.

Thank you, Prince. Good morning, and thank you for joining us today. We'll be discussing our financial results for the third quarter of 2019. Please review the cautionary statements on our materials, which can be found in our earnings release and presentation. These materials contain reconciliations to non-GAAP measures, along with information pertaining to the use of non-GAAP measures. as well as forward-looking statements about Fifth Third's 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, CFO Typhoon Tuzun, 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 for questions. Let me turn the call over now to Greg for his comments.

Thanks, Chris. Thank all of you for joining us this morning. Earlier today, we reported third quarter 2019 net income available to common shareholders of $530 million, or $0.71 per share. Our reported EPS included a negative $0.04 impact from the items shown on page two of our release, mostly from merger-related expenses associated with MB Financial. Excluding these items, adjusted third quarter earnings were $0.75 per share. Our financial results were very strong and reflect our ongoing discipline throughout the bank, as well as the strength of our diversified revenue streams. We generated strong fee revenue, including a record in capital markets, while tightly managing our expenses. Our revenue and expense results exceeded our July expectations. During the quarter, we also returned 96% of our earnings to shareholders in the form of common dividends and share repurchases. Adjusted pre-provision net revenue increased 28% from a year ago to quarter, The strong performance reflects our ability to generate strong core revenue growth as we manage our expenses and deliver on our financial commitments from the MD financial acquisition. We also generate strong core deposit growth compared to the prior quarter while proactively lowering interest-bearing deposit costs. All of our key return and profitability metrics improved significantly in the third quarter as we achieved our year-end financial targets by generating an ROTCE excluding AOCI of 16.5%, an ROA of 1.35%, and an efficiency ratio below 57% on adjusted basis. Our ROTCE has increased 280 basis points, our ROA has increased seven basis points, and our efficiency ratio has decreased 260 basis points from the year-ago quarter. And the period loans were flat sequentially, Our commercial loan production continued to be strong during the quarter, but was muted by elevated payoffs. Consistent with our prior guidance, we generated average consumer loan growth of 2% sequentially. We remain focused on maximizing our returns through the full cycle rather than generating lower quality loan growth. Credit quality once again remained relatively benign during the quarter. Non-performing assets and the NPA ratio both declined from the prior quarter, and many of our credit metrics remain at or near historical low levels. Before I turn it over to Typhoon to discuss our financial results and fourth quarter outlook, I'll review our four key strategic priorities to improve our long-term performance. First, we continue to leverage technology, such as our data analytics capabilities, to accelerate our digital transformations. Our investments are focused in areas that reduce the friction inherent in traditional banking channels while also investing in areas that drive operational efficiencies. We have made considerable investments over the past several years to modernize, simplify, and rationalize our infrastructure. In addition, we are investing in advanced fraud and cybersecurity technologies to detect and respond to threats quickly. In total, our annual technology spend exceeds $650 million. While we will continue to invest in technology next year and beyond, we expect our investments will lead to improved efficiencies throughout the bank. Second, we continue to invest to drive future organic growth in several areas of the bank. The ultimate goal of our investments is to improve both the employee and customer experience in order to support sustainable profitable growth. We believe it is critical to provide our employees with the right tools to maximize productivity, particularly those who directly interact with our clients. To that end, we recently announced an increase in the minimum wage for our employees to $18 an hour effective at the end of this month, which will primarily impact those located in branches in our operations center. We fully expect that this increase will lead to lower employee turnover, a better customer experience, and as a result, improved revenue growth. We have also added talent and capabilities to our Texas and California geographies. We remain pleased with our ability to successfully generate strong relationship growth while maintaining a credit standard consistent with our in-footprint middle market banking business. In addition, we've already seen positive financial outcomes from our renewable energy M&A advisory team, which complements our investment banking capabilities to deliver strategic client solutions throughout our national commercial franchise. Third, we continue to expand our presence in select key geographies, including Chicago. As I have mentioned previously, our strategy is to generate a higher market share in large and high-growth markets. Our employees remain energized about the combined potential of Chicago. Our overall employee attrition continues to track our original deal expectations. Most importantly, we have not experienced any material client attrition. We remain very pleased with the middle market loan production in our Chicago region, which was by far the strongest region during the quarter. Although we are not finished working to ensure sustainable success, we remain pleased with the progress we have made so far. We are confident in our ability to deliver the financial synergies from the MB financial acquisition as previously communicated. We continue to expect to realize the $255 million in annual expense synergies by the end of the first quarter of 2020 and have already completed many of the key expense actions. We also continue to expect revenue to generate approximately $60 to $75 million in annual pre-tax income by 2022. Our commercial teams have done a great job in laying a foundation to leverage our capabilities and strengths across our entire franchise. We already see success generating incremental revenue opportunities. For instance, we have successfully leveraged our enhanced leasing capabilities to provide value-added client solutions to all our middle market and corporate banking clients. We continue to believe that Fifth Third Chicago is in a position of strength that will allow us to generate stronger deposit, household, and revenue growth moving forward. With the MB acquisition significantly improving our position in the Chicago MSA, we are continuing to invest in our southeast markets with better deposit growth trends, higher expected population growth, and greater market vitality. Lastly, we are focused on maintaining our disciplined approach throughout the company. While we continue to expect generally stable credit quality, we are cognizant of the evolving economic and interest rate environment. From a balance sheet perspective, we have successfully generated strong deposit growth while maintaining pricing discipline. We expect to continue our strong deposit growth momentum going forward. Our average loan-to-core deposit ratio of 91% is the lowest in over 15 years, reflecting our ability to generate strong core deposit growth and an unwillingness to stretch for loan growth. We expect that this ratio will remain in the low 90s for the foreseeable future. Our balance sheet management philosophy of focusing on improved performance through the full economic cycle positions us well for the future. Given our capital management priorities are focused on returning capital through dividends and repurchases, in addition to organic growth strategies I mentioned, bank acquisitions are not a priority. We have continued to demonstrate our discipline in managing our expenses diligently while investing in areas of strategic importance. though expenses declined $3 million sequentially excluding merger-related items. We generated year-over-year positive operating leverage on an adjusted basis for this quarter, but I think we share more about our expense expectations for the fourth quarter. Our clearly defined strategic priorities and our proactive balance sheet management and our continued discipline throughout the bank positions us well into next year and beyond. We remain cognizant of the dynamic economic interest rate environment and continue to focus on through-the-cycle outperformance to create long-term shareholder value. And please report that we were again able to deliver strong financial results. 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 of everything we do. With that, I'll turn it over to Typhoon to discuss our third quarter results and our current outlook.

Thank you, Greg. Good morning, and thank you for joining us today. Let's move to the financial highlights on slide four of the earnings presentation. During the quarter, we achieved strong revenue growth with flat expenses and continued benign credit results. With a 3% quarter-over-quarter increase in adjusted total revenue and a slight decline in expenses, our annualized core PPNR as a percent of earning assets of 2.3% in the third quarter of 2019 reached the highest level since 2013. Reported results for this quarter were negatively impacted by two notable items, a $22 million after-tax impact from NB merger-related charges and an $8 million after-tax negative mark related to the Visa total return swap. Adjusting for those items, pre-provisioned net revenue increased 7% from the prior quarter, and our efficiency ratio improved 180 basis points to 56.7% as strong, firm-wide fee growth more than offset lower net interest income during the quarter. As Greg mentioned in his opening remarks, our adjusted return metrics were also very strong in the third quarter. We achieved an adjusted ROA of 1.35% and an adjusted return on tangible common equity of 16.5%, excluding AOCI, despite the market dynamics and stable capital levels during the quarter. Our adjusted ROTCE is now over 280 basis points higher compared to a year ago, and our adjusted ROA is up seven basis points for the same period as most of our peers have experienced declines in those metrics. At our original CET1 target, which was closer to 9%, our ROTCE, excluding AOCI, would have been approximately 17.5% in the third quarter. Our performance this quarter also helped us achieve our previously stated year-end return targets one quarter sooner than we anticipated. Clearly, environmental factors, especially interest rates, will have an impact on these returns going forward. Our third quarter credit performance continued to reflect the generally benign macroeconomic environment with both the NPL and NPA ratios declining quarter over quarter. Moving to slide five. Total average loans declined less than 1% sequentially. Our focus continues to be on generating high-quality loan growth to maximize our returns through the full cycle. In our commercial business, strong origination volumes in CNI were more than offset by elevated payoffs and paydowns. Total commercial line utilization decreased over 1% sequentially, reflecting the broad market uncertainties. I would also like to point out that the third quarter average loan growth metrics were impacted by higher payoffs and paydowns at the end of June. We also continue to see declining balances in large ticket indirect leasing where we halted new originations in early 2018. Average commercial real estate loans were flat from last quarter. Our CRE balances as a percentage of total risk-based capital remain very low at less than 80% which keeps our exposure relative to capital near the bottom of our peer group. We expect that near-term loan growth will continue to reflect the softer environment for corporate capital investments. With our expanded capabilities, our new originations continue to remain strong. However, payoffs and paydowns have resulted in muted net loan growth so far this year. Assuming a similar environment in the fourth quarter, we expect average commercial loans to be relatively stable compared to the third quarter. As always, our focus is on client selection and prudent underwriting as we plan to grow our balance sheet in the best long-term interest of our shareholders. Average total consumer loans grew 2% from last quarter. Overall, consumer loan demand remains at healthy levels within our risk appetite. This quarter, growth was driven by strong auto loan production of $1.8 billion during the quarter. Auto production spreads were the highest in nearly a decade, again, with the same strong risk profile that we have targeted for the past number of years. Home equity production was 5% higher this quarter compared to last quarter, but due to paydowns and payoffs, our balances declined. Our credit card growth was in line with the industry. The residential mortgage portfolio was flat and in line with our balance sheet management preferences in the current rate environment. In the fourth quarter, we expect total average consumer loan balances to increase 1% to 2% sequentially. Moving on to slide six, reported net interest income was stable compared to the prior quarter. Adjusting for purchase accounting accretion, NII decreased $14 million sequentially, or 1%. The purchase accounting adjustments benefited our third quarter NII by $28 million and our net interest margin by seven basis points. The adjusted third quarter NIM of 3.25% decreased seven basis points from the second quarter. Third quarter margin compression was slightly elevated relative to our July expectations due to a larger decline in LIBOR and the shift in the yield curve, as well as elevated cash balances resulting from strong deposit growth. Our overall interest-bearing liability costs continue to be very well maintained, down six basis points during the quarter. Interest-bearing core deposit costs decrease two basis points sequentially, as we expected. We expect interest-bearing core deposit costs in the fourth quarter to decline approximately another 15 to 18 basis points from the third quarter, assuming an October Fed rate cut. During the quarter, the yield on the loan portfolio declined nine basis points, and as we expected, our investment portfolio yield maintained a relatively stable level with a decline of only four basis points. Total premium amortization was less than $3 million. On a core basis, we expect fourth quarter NIM to decline four to five basis points from the core third quarter NIM of 3.25 percent. Our guidance incorporates a 25 basis point Fed rate cut in October and results in a core NIM for the full year 2019 of approximately 3.26 percent, a four basis point increase compared to 2018. We currently expect our fourth quarter net interest income, excluding PAA, to be down approximately 1% sequentially, reflecting the NIM impact and the relatively stable loan growth outlook. As we look ahead to next year, the hedge positions will start contributing meaningfully and at an increasing level to the overall NII based on our current rate outlook. we expect our core NIM in the first quarter of 2020 to expand a couple of basis points from the fourth quarter of 2019, given the benefit of $4 billion of previously executed forward starting hedges that will begin in December and January. At this time, we expect full year 2020 core NIM to be in the range of approximately 3.2 to 3.25%, depending on the size and timing of Federal Reserve actions. We would expect to be at the upper end of the range, assuming no Fed rate cuts in 2020, and expect to be at the lower end of the range, assuming two additional 25 basis point rate cuts in March and September of 2020. We assume that deposit betas will be in the 40s. In summary, we expect our NIM to widen a few basis points for the full year 2020 relative to the expected Q4 level, if there are no rate cuts and remain fairly stable if there are two more rate cuts. Moving on to slide seven. We had a stronger quarter in fee income than we guided to in July. Adjusted non-interest income increased 11% sequentially, led by strong performances in both corporate banking and mortgage banking. As you recall, in July, we guided to a strong second half fee performance, and we realized a larger portion of our anticipated growth in the third quarter. During the last two years, we deliberately channeled our investments in a number of diverse fee-generating businesses to maintain our ability to grow total revenues in different environments, and our year-to-date non-interest income results demonstrate the increasing benefit of having a platform with a wider scope of product and service capabilities. Corporate banking fees were up 23% from the prior quarter, significantly exceeding our prior guidance, driven by strong growth in debt capital markets, M&A advisory, and lease-related revenue, all reflecting our diversified and enhanced capabilities to better serve our clients. Our capital markets teams generated record revenues this quarter, partially impacted by clients accessing the debt markets for financing. Additionally, The renewable energy M&A team that we hired two months ago already closed two transactions during the quarter. For the fourth quarter, we currently expect corporate banking revenues of approximately $150 million, or up 15% from the year-ago quarter, but down from this record third quarter. Mortgage banking revenue of $95 million increased 51% sequentially. Origination volume of $3.4 billion increased was up 17% from the prior quarter. Our gain on sale margin of 232 basis points was up 66 basis points sequentially and 69 basis points from the same quarter last year, driven by expanding primary-secondary spreads, which we anticipate will remain elevated in the fourth quarter given industry-wide capacity constraints. Our mortgage platform is stronger today than three years ago based on our investment in our loan origination system. The cyclical nature of this business is providing good revenue support in this environment. Wealth and asset management revenue increased 2% from the prior quarter due to higher personal asset management revenue. Deposit service charges were flat compared to the prior quarter as higher consumer deposit fees were offset by lower commercial deposit fees. Our strong performance this quarter elevated our second-half total fee outlook, raising our full-year 2019 fee income growth to 17 to 18 percent from our July guidance of 15 to 16 percent, once again highlighting the diversification benefits and strength in fee income generation. Because of the record high numbers in the third quarter, we expect our fourth quarter total non-interest income to decrease approximately 4% from the adjusted third quarter of 2019. This outlook is reflective of seasonality in mortgage banking. We also expect higher wealth management revenues during the quarter. Moving on to slide eight. Third quarter reported expenses included merger-related items of $28 million as well as intangible amortization expense of $14 million. Adjusted for these items and prior period items shown in our materials, non-interest expense decreased $3 million from the prior quarter. We remain on track to deliver on the previously provided outlook for MB-related expense savings. we continue to expect to achieve $255 million in savings by the end of the first quarter of 2020, and to capture approximately 80% of the savings on a run rate basis by year end. Additionally, we continue to expect our total after tax merger charges, inclusive of the merger related charges recognized in current and past periods, as well as projected future charges to be approximately $250 million after tax. We expect fourth quarter expenses to continue to drift slightly lower from the adjusted third quarter level, including the impact of the $3 raise in our minimum wage from $15 to $18 effective at the end of this month. As we look ahead to 2020, we are mindful of the challenging outlook for revenue growth related to slower loan growth and lower interest rates, and plan to manage the trends in our core expenses appropriately. While we maintain our focus on investing in our businesses for long-term growth, we will not disregard the near-term realities associated with the market environment and the impact on operating leverage. We will share our 2020 expectations with you in January. Turning to credit results on slide nine. Third quarter credit results continue to reflect the generally benign economic environment. Our key credit metrics remain at or near historical lows. The third quarter NPA ratio of 47 basis points declined four basis points sequentially, while the NPL ratio decreased sequentially to 44 basis points from 48 basis points. Compared to last quarter, commercial net charge-offs increased five basis points, and consumer net charge-offs were up nine basis points, reflecting seasonal factors. The A-triple-L ratio increased slightly sequentially to 1.04% of portfolio loans and leases. We currently expect fourth quarter charge-offs to generally track the third quarter's performance. Again, I would like to remind you that the current economic backdrop continues to support a relatively stable credit outlook with potential quarterly fluctuations given the current low absolute levels of charge-offs. With respect to the upcoming CECL adoption, our expected ranges appear to be in line with other banks that have already disclosed their information. In our legacy portfolio, we expect the impact of CECL to result in a 30 to 40% increase in reserves. Due to differences between the accounting treatment of MBs loans under the acquisition accounting methodology and the treatment under CECL, the increase in CECL reserves for our combined loan portfolio will be in the range of 40 to 55 percent. This incremental impact is predominantly due to the fact that under the CECL methodology, there is no mechanism that converts the non-PCI discount that we established at the time of acquisition to loan reserves. Turning to slide 10, capital levels remain very strong during the third quarter. Our common equity tier one ratio was 9.6%, and our tangible common equity ratio excluding AOCI was 8.21%. Our medium term CET1 target remains at 9.5%. Our tangible book value per share was $21.06 this quarter, up 17% year over year, and up 5% from the second quarter. During the quarter, we completed $350 million in buybacks, which reduced our share count by approximately 13.4 million shares, or about 2% of our common shares outstanding compared to the second quarter. We expect to execute the remaining approximately $900 million of repurchases over the remaining three quarters in the CCAR cycle, in addition to raising our dividend by 3 cents, which is subject to Board approval. Slide 11 provides a summary of our current outlook. We plan to provide more information regarding our 2020 outlook in January, consistent with our normal timing. In summary, I would like to reiterate a few items. Our third quarter results were strong and continue to demonstrate the progress that we've made over the past few years towards achieving our goal of outperformance through the cycle. Our execution on the MV acquisition is on track to meet our targets on both expense and revenue synergies. As always, we remain intently focused on successfully executing against our strategic priorities and remain confident in our ability to outperform through various economic cycles. With that, let me turn it over to Chris to open the call up for Q&A.

Thanks, Tyson. Before we start Q&A, as a courtesy to others, we ask that you limit yourself to one question and a follow-up, and then return to the queue if you have additional questions. We will do our best to answer as many questions as possible in the time we have allotted this morning. During the question and answer period, please provide your name and that of your firm to the operator. Prince, please open the call for questions.

Sure. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Our first question comes from Matt O'Connor from Deutsche Bank. Your line is now open.

Good morning.

Good morning.

Thanks for all the clarity on the guidance for the fourth quarter, and I appreciate you don't want to give anything explicit on 2020 related to cost, but you did say you're mindful of kind of the tougher revenue environment and was hoping you could just talk about some of the puts and takes as we think about 2020, and I'll put a couple out there to get the easy ones out of the way. Like you've obviously got the full year benefit of the MB cost saves, little drag for minimum wage, but remind us kind of where you are in some of the investment cycle, whether it's related to technology or some of your expansion efforts, you know, how those might compare next year versus this year.

Yeah. Thanks, Matt, for the question. Just the MB comparison also needs to take into account the fact that you know, we will have four quarters with MB expense base versus, you know, three quarters in 2019. So I just want to point that out. And obviously, the MB picture is intact, and we will deliver those cost savings. In terms of the drivers of the expense base that we are now looking at as we are building our 2020 plan, the tech investments clearly are underway. I think we've done you know, quite a bit to improve our infrastructure and focused on customer-facing tools this year. That will continue into next year. Our expansion plans, whether it's related to retail expansion in the southeast, which is mostly financed by closing branches in the north, as well as prudent geographic expansion in commercial, we are still keen on moving on because those are long-term growth drivers, and we've had good success in the efforts over the past two years. Having said that, I think those decisions, the incremental investment decisions, will be made with the environment in the background. And we also look to improve the productivity of the existing expense base. When you think about it, we have about a $4.4 billion total expense base on an annual basis. About $2.3 billion of that is in headcount-related expenses, that's salaries, benefits, and other headcount expenses. So we need to make sure that we get the productivity out of that expense base appropriately, and that should continue to provide some ability to fund those incremental expansions from savings on the expense. Half a billion dollars of that $4.4 billion total expense base is in equipment and occupancy, and we continue to focus on efficiencies there. And about $400 million of that is in pure IT costs, away from headcount-related IT costs. So these areas still will give us the opportunity to look for efficiencies as we continue to prudently and selectively invest in the company But the revenue growth is strong, and we believe that despite the fact that we will have challenges associated with the rate environment, the fee base and the diversified product and service offerings will continue to support that revenue growth into 2020. So that's the color that I can give you today. But again, you know, we've been very focused on positive operating leverage over the past two, three years. And that's still in our minds as we are building the 2020 plan.

Okay, that's helpful. Very detailed. Thank you.

Next question is from John Pencary from Evercore. Your line is now open.

Morning. Morning, John. Just on the acquisition on MB, I know there's been some press about departures, banker departures going to competing banks. And I just wanted to see if you could talk a little bit about what you have seen on the banker front, because I know some of the reports were including, you know, other departures that were unrelated. And have those departures been consistent with your expectations, or have they exceeded? Thanks.

Hey, John, as I mentioned, this is Greg. As I mentioned in my prepared remarks, the execution against the expense synergies is going as planned. A large part of that expense synergy obviously was personnel. So you absolutely expect some of that personnel to move to other banks. We fully expected that. I would say right now 90% of all the high performers that we targeted retaining from a banker perspective are still with the bank today. So we have not lost those. And it's very much in line with our expectations of what we modeled in. And there's probably a little more to come as we continue to work towards our expense synergy numbers. But you would expect that both in the back office and some of our sales forces. We bring the two companies together, look at our gearing ratios and what we need in that market. A lot of those bankers basically didn't have opportunities with their third and they end up at another bank. So you're going to have banks wanting to tout that a little bit, but that's to be expected and within our modeling for this transaction.

Okay, great. Thanks. That's helpful. And then just separately, I appreciate all the guidance you gave on the loan side and everything. So really, I just wanted to ask about demand, what you're seeing in your markets right now. If you are seeing any erosion in confidence on the commercial borrower side, I mean, we have seen some macro data that would support the view that there could be some moderation, whether it's ISM or CapEx or whatnot. So if you can give us a little bit more color on what you're seeing, that'd be helpful.

Yeah, so this is Lars. Frankly, I've been in the market a lot recently, and I am not seeing any improvement, I don't believe, in terms of the perspective of our clients relative to the economic environment. I'd say that we continue to see a very heightened level of concerns and uncertainty with tariffs, global slowing. You know, a lot of growing uncertainty now in Washington around public policy, and these are all weighing heavily on our clients' minds. And certainly, we're taking that into consideration as we, you know, look at the market environment, which we would be operating in in the fourth quarter in 2020. With that said, you know, we're very pleased with the investments that we've made. You know, we had a very, very strong, in fact, the strongest quarter of commercial loan growth in the third quarter. You know, we did have offsetting that, you know, utilization rates back off about 140 basis points. That's about a billion-dollar swing in terms of our outstandings. A good portion of that. However, we were positioned very well. As you know, we've invested in our capital markets platform, in particular in FRM, our bond underwriting and distributing. And frankly, we were well positioned to capture a lot of that. That is a portion of the record level of capital markets fees that we recognized in the third quarter. So it's not always just about the balance sheet and the outstanding loans. It's about helping your clients, depending upon the current economic environment and with our broadened capabilities. We've well positioned ourselves to do that. So, frankly, I feel very confident about, you know, the future for our company, given the investments that we've made, and look forward to continuing to execute against our opportunities.

Thanks, Floris. Appreciate it.

Next question is from Ken from Jeffries. Your line is now open.

Thanks. Good morning. I was just wondering, thanks for giving the caller on where the NIM could settle out. How is it going to work with the purchase accounting from here, just given your current schedule and then how CECL might change the expected contribution for that as you think about next year? Thanks.

Hey, Ken. It's Jay. Thanks. That was actually a very complicated question. The first part is very easy. Purchase accounting, we were $15 million in the second quarter. It increased to $28 million in the third quarter, just given the higher CPRs. We're forecasting, again, assuming zero prepayments, that number would be about $15 million fourth quarter and first quarter. There's roughly $150 million of PAA left to go. So that part is fairly straightforward. The more complicated part in terms of how to seasonal impact all of this, the PAA really shouldn't be impacted. However, the impact on income recognition from PCI loans is still being evaluated. The big core accounting firms are still having discussions with the FASB in terms of whether that should continue to be recognized on an effective yield basis or recognized more on a

cash flow for those that would need to go to non-accrual so quite complicated with no official answer yet so we'll provide more guidance once we hear back okay got it and then just follow up just on the deposit side i believe you guys talked about 15 to 18 basis points interest bearing cost decline in the fourth um it's a healthy uh beta on the way down can you talk about what's happening on the deposit front in terms of product pricing and um your confidence in getting that type of response across the deposit base. Thanks.

Yes, we think and are confident in our ability to deliver a 40% beta on the three moves, July, September, and October. That full beta will actually be realized through the end of the first quarter. And what we've done from a rate perspective is midway through the third quarter, we reduced our go-to-market rates on the retail side from a 1.5% offer. We pulled it down to 1% because, as we've said before, we really aren't interested in competing with online banks or attracting hot money. And so not all of our peers moved their promo rates during the quarter, and that's why we were able to deliver the reduction that you see in the third quarter of two basis points but are confident that will continue into the fourth quarter. And then from the CD side, we talked about this last quarter. We've got about $1.9 billion of CDs that mature at a 2% rate in the fourth quarter, and our go-to-market rate right now is roughly 1.2%. And there's another $2 billion in the first quarter. So from a retail perspective, we feel very good about the steps we've taken and that those numbers will improve. and then on the commercial side, a large portion of that deposit book is indexed, so as those rate cuts occur, we'll realize that. So, again, we think our strong market share in the majority of our markets allows us the opportunity to move a little bit earlier than perhaps some of our peers and deliver those deposit reductions.

Great. Thank you, Jamie.

Jared Cassidy from RBC. Your line is now open.

Good morning. Hey, Gerard. Typhoon, can you share with us one of the things I think investors and the analysts are trying to get their arms around is next year's CECL so-called day two number, the day one number, which you gave us, you know, the amount of capital or the amount of the reserve that it will go up when you guys change the CECL. And you pointed out on the legacy portfolio, 30% to 40% increase. Is that a – rough idea of what we can think of provisioning going forward in day two, that provisions under CECL could be as high as 30 to 40 percent higher than what they would have been if CECL was not implemented? Or is that just way off base?

Well, Gerard, it's a difficult question to answer because clearly there is going to be dependence upon what the economic scenarios are. and how each portfolio is growing. Because as many banks have said, and we're seeing the same thing, clearly the pressure on the commercial side is much less compared to the mortgage side and the consumer side. And also there are different, as you consider the full life of that product, there are different phases that are governed by the economic scenario outlook for the first, you know, a few years, and then there is a regression back to normal and then back to normal historic rates. So it is difficult to answer. We are still working on finalizing the models and I'll be, I'll be able to give obviously a lot more clarity as we move into the first quarter. But I think, you know, there is a decent chance that provisions will go up based upon where that growth is coming from relative to today.

Okay, thank you. Greg, you pointed out in your opening comments that acquisitions are not a priority right now. And you look at the big merger we saw this year between BB&T and SunTrust and You look at the stock performance of those companies the day prior to the announcement to today, and they've outperformed the bank index. Would you guys consider a merger equals, or what would make you think about something like that in the future?

First off, Gerard, from a responsibility perspective, we have an obligation to our shareholders and our board to assess any opportunity that makes good business sense for our shareholders. So if an opportunity of that nature emerged, we would discuss it, we would look at it, and we'd make the right decision for long-term benefit of our shareholders. At this point right now, we have a lot on our plate, completing MD Financial, organic growth strategy we have. We're very pleased with the performance of the franchise. We don't think we need to do anything but continue to invest in our business and grow our business and deliver on the results that we were talking about today. But once again, if something did emerge of that nature, we would consider it as we would be required to. But at this point right now, we are not interested In acquisitions, we're focused on driving the outcomes we're looking for through an organic perspective of our business.

Great. Thank you for the color.

Next, Peter Witter from Wedbush Securities. Your line is now open.

Good morning. Hey, Peter. Can you give an update on credit? Obviously, nice decline in non-performing assets, but I was just looking at the Increase in net charge-offs quarter to quarter, which should be fairly stable in the fourth quarter, and then the reserve bills, and then finally just what's happening with criticized loans.

Yeah, let me make just a short comment, and I'll turn it over to Frank for more color. I mean, we've always said that at these very low levels of charge-offs, there's going to be small variations, but we're still in the teens in terms of commercial charge-offs. and very much in line on the consumer side. The other thing that I want to point out is the consumer charge-offs, if you're looking at like year-over-year comparisons, we had a charge-off portfolio sale last year, so that lowered the absolute rate last year. In terms of the provision bill, really, I mean, for any given portfolio, when you think about it, if you sort of compare the economic environment at the end of June to the economic environment at the end of September, the background is different. And so the two basis point increase in reserves, reserve coverage is really more reflective of that. And I'll turn it over to Frank for any color on the actual sort of portfolio trends here.

Yep. Hey, Peter. Good question. Just some perspective. When you think about reserve builds, one thing to keep in mind, in this quarter, as you look at it, we had a $35 million build Of the 35, 28 was on the funded portfolio. Seven is on increases in reserve for unfunded commercial commitments. When you go back and you think about 2018, for example, we had reserve releases of $122 million. We said at that time, and we've said over subsequent quarters, that we were at an inflection point. Typhoon has mentioned that several times this morning. We have been at an inflection point. Our numbers have been historically low across the board. We're really sort of still at an inflection point. Our non-performing assets are below 50 basis points. That number, if you compare it to the median reported peer numbers, is better than the peer. We expect that to stay stable. That's an important number. Our charge-offs are well within our risk appetite. We expect that to remain there. We haven't changed our guidance at all. When you think about criticized assets, we're watching criticized assets closely. included the results of the Shared National Credit exams for banks. We included that in our numbers. We did have a blip up in criticized assets. One particular large corporate credit was involved in that. We don't see any loss in that credit. It's being restructured. Where we saw an increase in criticized assets has really been in sort of quarter-middle market. And so when you look at core general markets, those loans tend to be secured loans and backed by guarantors. And so we don't see any particular trends or patterns related to geography or risk type that's overly concerning to us. If you think of our large corporate book and you think about commercial real estate, those are books that typically have a lot of volatility in a market. Our criticized assets are below 3%. Both those portfolios are very well underwritten, very stable portfolios. Our leverage book is performing well. We've reduced it by 50% in the last three years. So all the work that we've done to change the mix of this portfolio is still reflected in our results today. And so, yes, we did have a build in the third quarter. We did that because we wanted to take a very conservative view of where we are. The market has changed a bit in the third quarter and we do live in a world as Lars was talking about where our borrowers are more on edge now than they have been before. Tariffs are taking an impact on weakened customers. They're not really having an impact on strong customers. So as I step back and think about it, 2018, we had a significant release. In 2019, for the most part, it's been stable. We took a look in the third quarter and we bumped it up a bit. We think it was the right thing to do. We manage this book conservatively, and I think it's been reflected clearly in our results over the past two to three years. Our outlook has not changed. So I'm still very comfortable with where we are, and I'm very comfortable with the positions we've taken to change the outlook of this company going forward relative to repositioning the portfolio in a much different manner than we did in the past.

That's great. Very helpful. Really helpful. Typhoon, on expenses, I know you're not ready to give 2020 guidance. I'm just wondering with the full quarter, I guess fully realizing the expenses by the first quarter next year, could you say expenses in the first quarter you would expect to be down from 4Q?

It's very early to be able to give you that perspective, Peter. The difference between the run rate just with respect to the MB portfolio from the fourth quarter to the first quarter is about $20 million. So on a run rate basis, because on a run rate, about $2.55 divided by four gives you you know, about a $65 to $70 million type of number, and then we're going from 80% realization to, you know, a 100% realization. And then our first quarter is always the high quarter because we have, you know, the VC numbers and the FICA numbers, all that stuff. So let us wait a little longer to give you that color. But as I said, you know, we are very focused on making sure that we deliver the right expense numbers for next year, given the background on the revenue side.

Thanks, Typhon. Yep.

Next question is from Brian Foren from Autonomous. Your line is now open.

Hi. Good morning, everyone. Good morning, Brian. So one follow-up on CECL. I'm almost reluctant to ask because my understanding is tenuous at best. But my understanding was there was like a double count benefit where CECL had lifetime reserves and then the old PCI accounting had you know, marks on these acquired loans and then, you know, so you're effectively reserved twice and then that reverses through the P&L as the loans mature. So is your comment that it's unclear how that double account benefit will work or is the comment that that double account benefit might not actually be there?

Well, we will have to wait for more clarity throughout the quarter. And, you know, I'm hesitant to give you more guidance at this time. But, you know, what I pointed out too was that From a pure CECL impact perspective, the current methodology does not provide a mechanism to convert a non-PCI discount into the CECL reserve number. That really is more of the impact on a day one basis. But let's wait until the first quarter so that we can give you a bit more clarity on that.

Fair enough. One small follow-up. I still get a fair amount of questions on GreenSky from investors. I mean, it's such a small piece of your book. I sometimes wonder if they're Fifth Third investors or GreenSky investors who are asking it. But could you maybe give us an update? Where does the loan book stand now and any thoughts on the growth trajectory going forward?

So the loan book stands at about $1.4 billion. Clearly, Incremental growth this year came in lower than we expected because the prepayments in the portfolio are overwhelming a preset level of originations. If you remember going two years ago when we first announced the partnership, we thought by now we would be at $2 billion, which was the back-end goal. And so in terms of the portfolio metrics, credit is behaving as we expected and the margins are behaving as we expected. And, you know, the company clearly announced a period of time during which they will be evaluating different strategies, and we are waiting for that. And depending upon, you know, in what direction they choose to go, we will make our own decisions based on how we see those loans benefiting our balance sheet. So I think there's still probably some questions that need to be answered before we can give you a clearer direction on green sky loans. Thank you for that.

Next question is from Erica Najarian from Bank of America. Your line is now open.

Hi, good morning.

Good morning.

So, you know, despite a solid quarter of the stock gap down at the open, and I'm wondering if, you know, some of that is the hope the market had that you'd provide a little bit more directional, if not specific clarity and expenses. So I guess I'm going to try one more time. You know, if I take out the impact of a March 22nd close, and I just look at consensus numbers, or expectations for revenue starting in the second quarter of 20, it seems like consensus is expecting flat year-over-year revenue growth from the second quarter of 2020 onward. And I'm wondering that given your message for positive operating leverage, if after the seasonal increase in the first quarter, the message really here is that if that is really the revenue outlook that will transpire in 2020, that the expense base would technically would have to go down from that $1.117 billion in the fourth quarter.

Yeah. So, you know, I think the trajectory of the revenue outlook, we gave you some perspective on our margin expectations in 2020, you know, a five basis point difference, depending upon, you know, when and how much the Fed decides to cut. if they decide to cut. But we still expect a decent level of fee income growth. We've seen good income growth this year in fees, and the investments should continue to provide support for better fee income growth going forward than the last couple of years. And I'm very hesitant to give you more clarity than that in terms of the revenue side, and we will manage the expenses accordingly. And I think we are very focused on making sure that the expense base does not move away from us as we look at that revenue trend. And our teams are very focused, and we have about six to eight weeks in front of us here to finalize our plan. And we are optimistic that we will be able to provide good guidance to you guys in January. In terms of, you know, what the market was expecting, what we guided in July is playing out for the second half of the year, you know, very much in line with our guidance. The NIMIC came down a little bit more than we expected based on the rate movements, but in terms of the revenues, you know, we had a great third quarter, obviously, and that is capturing pretty much what we expected from the second And with the mortgage seasonality upon us, moving from third quarter to fourth quarter, it is difficult to build upon this very strong third quarter in fee income and project even higher fee income in the fourth quarter. So we're mindful of that. And a couple of, you know, transactions on the capital market side and advisory side came in in the third quarter. But in general, our outlook was strong for the second half of the year, and we are now actually showing a very strong second half performance.

Okay, so the follow up question is, thank you for giving a clarity in terms of your net interest margin expectations for next year. And Jamie, I'm wondering, wanted to clarify that range of 3.2 to 3.25, that includes two rate cuts from here. And if that's the case, then the contribution from the 4 billion in hedges should be a positive 40 million annualized with LIBOR at 150?

So the guide we have is the cut in October plus two more in 2020, March and September. And in order to help, let's just look at all of the hedges that we have in place from a cash flow perspective. So our cash flow hedges in the first three quarters of 2019 made about $2 million. Over the next five quarters, if those rate cuts play out, Those $11 billion of hedges are going to make $155 million. So that's $15 million in the fourth quarter, and then the rest spread out across 2020. So that's really the backdrop for our confidence in the NIM overall not compressing. going forward the way you saw it in the third quarter. We just, you know, unfortunately did one year forward starting swaps, and we probably should have done seven-month forward starting swaps to protect the third quarter. But when you look at first quarter of 2019 versus first quarter of 20, our guide is that NIM would be down five or six BIPs with those July, September, and October cuts, and I got to believe that's going to be best-in-class performance over that period of time.

When you look at the cumulative change in NIM this year, we are ahead of our peers. I mean, it's been a very, actually, very good performance for the first three quarters of this year when you look at it on a cumulative basis. Also, when you look at it as people are guiding now for the fourth quarter and the way we are guiding for the fourth quarter, the 2019 NIM performance is very strong.

Understood. I think that, you know, the market may be thinking that industry is generally top-ticking on fees. I don't think the skepticism is over actually your net interest income. I think it's a combination of just the industry top-ticking on fees and then sort of what the expense management fallout will be from there. But I very much appreciate all the detail on NII. Thank you. Sure. Yep.

Next question is from Saul Martinez. Your line is now open.

Hi, guys. I'll ask another question on CECL, which is a pretty popular topic on this call. Your reserve ratio is about, I think it was 104 basis points this quarter. With the CECL reserves, you know, 40 to 55%, that'll take you more or less, I think, to about 150 basis points, a triple L ratio. Do you expect your growth going forward, your growth in loan balances to, on average, under the CECL methodology, come from products that have higher or lower than 150 basis points lifetime losses?

Yeah, good question. So when you think about the portfolios that are driving a higher percentage of CECL reserves, residential mortgaged, we have at this time and probably in the near to medium term have no plans to grow the residential mortgage book home equity loans have been in decline now for a number of years that's another portfolio that is carrying a you know high percentage and then you know sort of other consumer loans inclusive of green sky loans also carries a higher percentage so those are All those three portfolios will probably display a relatively lower growth rate compared to other loans on our books. And commercial clearly being our largest portfolio, getting back to a more normalized level of commercial loan growth would indicate that perhaps that day one percentage would be overstating the incremental impact on reserves.

Yeah, got it. So, I mean, under the CECL methodology, your commercial, especially your CNI, I would think would be, you know, I don't know if materially, but it should be much lower than one and a half percent. And if it normalizes, your H-triple-L ratio should gravitate down at that

Everything else being equal, including the economic scenarios that are being applied, that is a reasonable assumption.

Okay, got it. Thank you. And I guess I want to go back to NII and specifically on deposit betas and deposit prices. It seems like you have good visibility in terms of the betas on the rate cuts for July, September, October. But If I look into next year, if we do get a March and a September cut, I mean, how confident are you with those 40% betas on future cuts? And I'm asked because if your guidance comes to fruition, I calculate that your deposit costs, interest-bearing deposit costs, are going to be probably in the 80 basis point range, probably lower, obviously lower all in. It just doesn't seem like there's a lot of room for deposit costs to come down from these levels given the low jump-off point. And, you know, deposit costs are already low relative to short-term rates from a historical standpoint. So I guess the question is, you know, if rates do continue, short rates do continue to come in, maybe even more than what you're expecting, how does the deposit beta outlook change?

Yeah, this is Jamie Saul. You're right in that, you know, our fourth quarter forecast for interest-bearing core deposits is in the – we call it mid-80s basis points of cost, and then that number coming off of the other rate actions we would take plus a March cut, we'd be into the 70s at that point in time. We still think there's opportunity to operate at a 40 beta on the next couple of cuts, but certainly once you're beyond those cuts and if you had more in 2021, you would start to bump up against some of your deposit floors and some of your products. We model all of that in our interest rate risk sensitivity tables, and that's where you see that, you know, when the Fed starts cutting 100 or 150 basis points, that, you know, the outcomes aren't as productive as on the first couple. But I think for the foreseeable future, the next three or four cuts, 40 beta is a good number for us.

And are those cuts coming – are those betas coming – are they pretty balanced between retail and commercial, or are they –

No, it's very barbelled, where retail right now, we think from July, September, October, will be in the 25 to 30 range, and commercial will be in our wealth and asset management group would be in the 60% range. And that's similar to what we saw on the way up, the 225 basis points of Fed Heights.

Right. Okay. Got it. Thank you very much.

Next question is from Mike Mayo from Wells Fargo Security. Your line is now open.

Hi, can you hear me?

Hi, so three things which we can observe. Your expenses are controlled. The MB financial closings took place and tech is a priority. So we can see that. So can you just give us some more understanding what's happening under the hood as it relates to technology like you closed three of the four MB Financial data centers. So, you know, how many data centers did you have at the peak? You know, how many do you have now and where do you think that can go? And then maybe, you know, how many apps did you have at the peak and what happened, you know, pre and post merger with MB Financial and anything else on technology such as the cloud and what percent of the apps, you know, you might want to move to a public cloud.

Michael, I'll try and answer that question in the order in which you asked it. First off, from a technology perspective, obviously we've invested in technology as other banks have done that, but we really like the returns we've got from those investments. If you go back in 2007, just look at our central operations, and you look at 2007 to 2019, we grew that expense base 1% over that 12-year period of time. We're $30 billion bigger in assets and more in transactions. We focus a lot of our technology investments in operational efficiencies, back office capabilities, artificial intelligence capabilities to better serve our clients. We're getting paid well for those type of investments. We'll continue to do that, as well as our customer-facing opportunities. We're going to continue to leverage technology to improve the way we serve our customers and reach our customers and the effectiveness from a cost perspective of how we talk to those customers. In addition to that, we're investing in cybersecurity, as you would imagine, or fraud. If you look at our fraud losses, we're down year over year. I would tell you very few of our peers, I think, are down year over year because of the investments we made in technology. We get paid well for that. So we'll continue to do that at the right pace in how we think about it. As far as data centers go, we run with two data centers. We'll run in the future with two data centers. Those data centers have to be about 200 miles apart as a requirement from a continuity perspective. And right now with MB Financial, there's two additional data centers that will close down and consolidate into our operations. Most of their applications were consolidated onto our applications, so most of their applications were eliminated, except for those applications that were supporting their asset-based lending platforms and their leasing platforms. Everything else, for the most part, is consolidated into Fifth Third, and the majority of that's complete. So we've got work to do on the cleanup of the data centers, as you would expect, but that's all part of the plan and part of the numbers we explained to you, and we'll absolutely execute well on getting that done. With respect to the cloud, listen, we don't just move applications from our legacy to the cloud in current state. If we have the opportunity to re-engineer an application and it's suited for the public or private cloud, we'll then move it to the public-private cloud. We do use a public cloud. We do use private clouds. But at the end of the day, it's really based on the application. We're very mindful of the risk. So we're very mindful with the applications. Do we allow to be in that cloud environment? So we're really diligent about how we think about our infrastructure. A lot of our investments also around remodeling of our technology infrastructure, our legacy platforms to make them more agile so we can move more quickly in this digital age. So we'll continue to do that. And the cloud's part of how we do that. But we're less concerned about how many apps we have in certain areas. But if you just move a current application up into the cloud, it's probably going to cost you more money to operate.

Okay? Yeah, I guess just that last comment was interesting. And as far as data centers, though, where were you at the peak? And just to be clear, you have two data centers. You have two more with MB Financial, so you have four?

We have four data centers, Mike, and we'll go back down to two.

Okay, so you will have four total data centers when you're done. And how does that compare?

Mike, we'll have two data centers when we're done. We had two going into the merger. MB had two. We'll consolidate their two onto our two. So we'll have two at the end of the day.

Okay, great. So two data centers.

Right.

And how does that compare? Look, you have the tech background. You know this stuff. I mean, how does two data centers for a bank your size compare to peer? Or how many total data centers does the industry have? And why do so many banks not give this information when we ask? So I appreciate you giving this to us.

Yeah. I mean, first off, too, has always been in any business, whether it was Prior days in the manufacturing sector, two data centers is the more optimal way of running it. You have to have the space to properly throw off different grids and so forth from a telecom perspective. But two is the optimal way for us to run our business. And that's where we've operated it. That's where we're most efficient. We get the best leverage of our talent and our resources and our reuse of our capabilities. So more than that would not make sense for, you know, fifth, third or most companies, I believe. But that's how we see things, and we'll consolidate once again the 2MB onto our current two legacy fifth-third data centers.

All right, thank you.

Next question is from Marty Mosby from Vining Sparks. Your line is now open.

Thanks. Hey, good morning. I have three quick questions, and then I want to kind of dive into a little deeper subject. Okay. If you get into first of three, your capital and your buybacks, you bought about $350 million this quarter. You're kind of foreshadowing $300 million per quarter. I thought there was kind of an overhang of past gains that you could have a catch-up this quarter, so I was curious why it wasn't a little bit higher in the share repurchase in this particular quarter.

Yeah, good question, Marty. The $300 million per quarter is probably a good directional guidance. What we did was, as you remember, at the beginning of this year, we were thinking that we would probably be going towards a 9% type capital number, but we chose to actually be at the upper end of our target at more like 9.5%. So we had the world pay gains that still remain that we executed in the first quarter. We decided not to execute the buybacks related to that. That's about $200 million or so in gains that we've kept on balance sheet. That's the difference that you're seeing.

Okay. And that's keeping that going forward. You want to keep that higher capital ratio, so that's there. Yeah.

For now, in the near term, that's probably a good target.

Okay. And then you showed a schedule on preferred dividends kind of oscillating between 33% and 17%. is that going to be the pattern going up and down each quarter given the semi-annual payments on Series H?

Yes, more or less that's what's going to happen, and then it would change as any of the preferreds reach their fixed period and move to floating, but those are a few years off. So for the foreseeable future, that's the good pattern.

Okay. And then I just wanted to bring up a point on purchase accounting because you had the uptick this quarter from 15 to 28, and then you had the reserve build of 50. So when you look at those two things, the reserve build more than offset this uptick in purchase accounting accretion. And those are kind of tied because as you're taking those loans out as they're prepaying and then coming back in as a normal loan, you're having to kind of rebuild reserves on loans that were in purchase accounting accretion. So there's a an actual not a real benefit this quarter from this transaction or this kind of process. There's actually a negative weighing on the quarter that kind of releases as you go into next quarter.

Marty, I don't think those two are necessarily connected to each other. Clearly, the higher prepayments have resulted in a higher purchase accounting accretion number for the quarter, but the build is not necessarily on MB loans. So, It is a broader environmental factor that takes into account many other variables in our A-triple-L methodology. So I would not connect those two together.

Even if they're not connected, there's some offsetting going between the reserve bill that's negative and the positive in the purchase accounting accretion. I would still say that they're not connected to each other. Right, got it. Now, going into East Cecil again, one, I wanted to answer Gerard's question. I think we're missing a little bit of math, so let me kind of give you what my thought is and get your response. The thought that you increase your allowance by 30% or 40% and that your day two provisioning costs are going to be 30% to 40% higher doesn't work out that way for this reason. If you looked at your allowance over the last five quarters, You've had provisioning of $475 million. You had net charge-offs of $409 million, which represented 85% of your loan loss provisioning. So that doesn't change day two. You're still going to have to cover your losses. What you're going to have increase is the 15% of what you paid over the last year in loan growth goes up by 30%. So you could go from 15% to 20% of your allowance that's related to loan growth, which would be at that higher ratio because you're going to have the higher reserve level that you're going to have to maintain. So it's only the incremental part on loan growth that goes up by 30%, 40%. It's not your total amount of loan loss provision that you have every quarter because that's really mainly related to the losses, not the the allowance ratio. Does that make sense?

Yes, it does. And I think there is a second question. I think it was Peter or somebody else asked the question in terms of what that incremental number is based on the growth dynamics that we would see in our portfolios. So what you're saying is correct. And on top of it, which portfolio grows also has an impact on that provision that is purely related on incremental loan growth.

Yeah. So if you had the exact same mix of loans you would keep the 150 ratio. So instead of providing at 105, you're going to be providing at 150. So just on the incremental loan growth, does it go up 30%? Your whole loan loss provision doesn't go up 30% because losses are the majority reason for loan loss provision. So the net charge off ratio still will be the main driver for your loan loss provisioning.

That is correct. I interpreted Gerard's question the same way you did in terms of just applying it to incremental loan growth. So,

Yes, but generalists kind of get lost in that in the sense they kind of think, well, no, that means our loan loss provisioning has to go up by that amount. It really doesn't have to. And the only thing I was going to leave as a guidance and just for everybody in the industry to kind of think about is because of day two, don't think of day one as a real good chance to round up our allowances because we never get this back. This isn't an allowance like we had in the past. where you kind of can build it, given your economic belief of what's going to happen, and then eventually kind of recapture that. This is a through the life, through the cycle kind of provisioning. So, you know, rounding up on this CECL is just going to create more volatility and higher provisioning that really never gets realized until you actually liquidate your bank. So, you know, actually being a conservative, you know, in a sense of rounding up, in our mentality, we've been trained to do that for so long, is not a good answer given the way the accounting is going to be different day two as we move forward. So I would just encourage everybody to not just think of this as, I've heard so many people say, this is our chance to round up allowance to prepare for the recession. This ain't going to give you any benefit as you go into that recession. So It's not a reserve you're getting benefit from. So anyway, I'll get off the mic.

No, thanks for that background. I think that's fairly helpful, Marty.

Thank you, Marty.

Thank you. All right. Next question is from Vivek Juneja from J.P. Morgan. Your line is now open. Hey, Vivek.

Hi. Sorry, I'm going to get a little more prosaic. Just a corporate banking line item. You mentioned lease remarketing. Can you tell us what the gains on that were this quarter?

Yeah, that lease item, Vivek, includes more than just remarketing because, remember, we now have two new leasing businesses under our hood, LaSalle Leasing and Celtic Leasing, so it's a broader number. There were just some leveraged leases that paid off during the quarter, and I think that number was, I don't know, in the sort of single-digit, upper single-digit number, something like that.

Okay. Okay, great. And that number, given that you're doing more in leases, was likely to be more volatile going forward as a result, Typhoon?

There is some volatility associated with the underlying business, especially on the technology side, which is dependent upon the timing of the technology contracts that are coming due. But in general, I think the trends will be positive. I think we expect that line item, as we are also now investing more in that business to continue to grow. We may see some seasonality going forward, but in general, I think the trends will be up.

Yeah, and I would just add, as we continue to build out our equipment finance kind of preeminence, frankly, in the regional banking market with MB joining us, Our strength in syndicating these transactions has grown significantly. We've got some great talent there, and we would expect that that will continue to grow in the future.

Okay, great. Second question, just want to clarify the numbers that I think Frank may have put out. Criticized assets. Frank, was it 3% criticized assets to loans, or did I get that not correct? Or was it up 3%? and what was the change linked quarter?

Let me talk in terms of classified assets, which is probably better than criticized assets. Classified assets are loans that are rated substandard. Criticized assets include loans that have potential problems, but they're not well-defined weaknesses at this point in time. Our classified assets were up 5% of the quarter, and again, as I said before, they fluctuate from quarter to quarter up and down. still well within our risk appetite, within our tolerance.

Okay.

And does that increase, as you said, mostly from the shared national credit exam results?

No, it actually was more in the core. On the classified, it was actually just more in our core middle market. That's a granular portfolio, and as I said before, it's a portfolio that tends to be well secured. So while the level of problem loans goes up, it doesn't change your outlook relative to not performing or to loss in a material way.

Yeah, I think the SNCC portfolio levels, and I don't have the actual numbers in front of me, but they're almost like 50% in terms of these credit metrics, whether it's classified or criticized. They are well below the broader portfolio credit metrics.

Yeah, I mean, that's right. And what I did mention before, and maybe what you've reflected on, are... large corporate book, which is the shared national credit portfolio for the most part, the level of criticized assets in that entire book is under 3%. That may be what you were referencing. That's a very, very big number. And the same goes for our commercial real estate portfolio. It's under 3%, which is where the banks have had the preponderance of their problems over the past decade or so. So those are books we manage very carefully. We feel very, very comfortable with the overall asset quality. I think that was in response to your question.

Okay.

Thank you. Thank you.

Next question is from Christopher Maranek from Janie Montgomery Scott. Your line is now open.

Hey, thanks. Just wanted to ask about the talent pool in Chicago and the turnover that has happened with MB. Is most of that behind you, and are you confident with kind of what's happened on backfill with your staff?

First off, as I said earlier, the turnover that we've seen so far is exactly what we modeled in. 90% of all the high performers that we intended to keep, we offered positions to, are still with the bank. This is normal with respect to an acquisition in a market by a larger bank. There's individuals that we didn't offer positions to that are going to show up at other banks. A lot of that's what you're seeing right now. We're getting close to the end of that tail, and we feel very comfortable about The talent that we have to serve that market, the talent that we retain, as I mentioned in my prepared remarks, we've had very little client attrition associated with this transition. And Chicago is one of our strongest production markets and core middle market across all of our regions this quarter. So we feel really good about the talent that we have. But once again, to get $255 million of expense surges out, a lot of that is people-related expenses. So you would expect those individuals to show up at other banks. And I know other banks like to tout that as having success recruiting an entity. But that's just part of this process of consolidating two financial institutions. You're going to get some of that attrition, which is to be expected and planned for.

Great, Greg. That's very helpful. Thanks very much.

There are no further questions. I'm turning the call over to Chris Dahl.

Thank you, Prince, and thank you all for your interest in Fifth Third. If you have any follow-up questions, please contact the I.O. department, and we will be happy to assist you.

This concludes today's conference call. Thank you for your participation. You may now disconnect.