Q4 2019 Earnings Call
Fourth quarter 2000, <unk> earnings call at this time, all participants are in listen only mode. After the speakers presentation. There will be a question and answer session to ask the question you. When you press star one on your telephone keypad. If you require any further assistance. Please press star Zero I would know him in today's conference over to Mr. doll.
Please go ahead.
Thank you to keep trio good morning, Thank you all for joining us today.
Today, we'll be discussing our financial results for the fourth quarter of 2019.
Please review the cautionary statements on 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 the thirds performance, we undertake no obligation to but 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 <unk>, Chief operating Officer Lars Anderson.
The first officer, Frank Forest, and Treasurer JV liner.
We prepared remarks by Greg talk soon we will open the call for questions. Let me turn the call now to Grad for his comments. Thanks, Chris that that goal you for joining us this morning.
Earlier today, we reported record full year 2019, net income of $2.5 billion.
$3.33 per share.
Full year adjusted net income of $2.1 billion was also a record for the bank.
As a reflecting the past year.
Very pleased with the significant progress we've made to position fifth third for long term success.
In addition to the record net income.
Would generate or best for your core return on tangible common equity, excluding AOCI, arguing over a decade.
About 20 basis points from last year.
We produced our lowest efficiency ratio and over a decade, which decreased 160 basis points.
Last year.
We generated a peer leading householder deposit growth, while reducing deposit cost during the year.
Also during the year, we successfully integrate MB financial.
We got us if you scaled the Chicago market and expect to generate even a stronger deposit household and revenue growth going forward.
We successfully navigated the evolving interest rate environment as our full year 2019 core net interest margin expanded five basis points after expanding 18 basis points the year before which is at the higher end of our peer group.
We generated record fee income, including corporate banking as our capital markets business generated double digit revenue growth for the second consecutive year.
We also generated record revenue wealth and asset management will generate positive inflows every quarter during the year.
Net charge off another key credit metrics remain at or near historically low levels throughout the year.
We generated nearly half a billion dollars of excess capital.
The won't pay transactions in 2019, which is yet to be deployed.
And we returned over 110% of adjusted earnings to shareholders and 2019 through a 27% increase our dividend through share repurchases.
In summary, we were extremely pleased with the progress we have made expect to build our strong performance in 2020 and beyond.
For the fourth quarter net income available to common shareholders was $701 million or 96 cents per share reported results included a pause in 28 cents.
Primarily from the successful Worldpay tax receivable grima transaction completed during the quarter.
Since the spin off of a processing business 10 years ago, we have generated over $7 billion in pre tax value for shareholders.
With another $195 million remaining into your a income which we fully realize over the next five years.
But they will discuss the fourth quarter Cherry transaction in more detail.
Our fourth quarter financial results were very strong, reflecting our prior norstar investments to further diversify our revenue streams.
Our balance sheet management continued expense discipline and our success in achieving the target of financial outcomes from the MB financial acquisition.
We generated very strong fee revenue, including a new record in capital markets. Our net interest income results. Once again reflects our ability to successfully manage the balance sheet. Despite the low rate environment, which led to strong performance in the quarter.
We continue to manage our expenses diligently. This reflects our continued focus on generating efficiencies throughout the bank, while still investing in high priority areas to support revenue growth.
We remain on track to achieve the $255 million an annual savings from the MB acquisition by the end of the first quarter of 2020 and are excited about the revenue synergies that are emerging.
Loan growth for the quarter was consistent with our previous guidance, reflecting the generally subdued macroeconomic environment.
Commercial loans were stable consumer loans were up 1% sequentially.
Following our trend we successfully generally strong core deposit growth will proactively reducing deposit cost more than our previous guidance or average loan to core deposit ratio 90%.
Is the lowest in over 15 years.
Great results for the quarter were partially impacted by our conversion to a national charter.
Excluding this impact net charge offs were up just one basis points sequentially with consumer flat and commercial up two basis points.
Vision was primarily impacted by growth in specific reserves related to a couple of commercial loans.
Before I turn over time to discuss our results and outlook I'd like to once again emphasize our strategic parties to outperform through the cycle and generate long term shareholder value.
As I mentioned.
We have been very successfully executing our properties throughout 2018 have delivered on our targeted outcomes as expected. We will continue to focus on these parties going forward, including leveraging technology to accelerate our digital transformation.
Investing in talent capabilities and process improvements to generate relationship growth and improved profitability.
Continue to expand our presence in select geographies focusing on high growth markets. We're investing in the southeast footprint with better deposit growth trends are expected population growth and greater market volatility.
And lastly, we are focused on maintaining our disciplined approach throughout the company.
To that Ed our capital allocation priorities, our organic balance sheet growth.
We generated non bank acquisitions.
Paying a strong dividend and share repurchases.
Bank acquisitions are not a priority our medium term CE T. One capital target remains at approximately 9.5%.
We plan to increase our dividend another three cents this quarter subject to board approval, we expect to execute our remaining buybacks from seek or 29.
Our clearly defined strategic growth priorities.
Back to balance sheet management.
Our ongoing discipline throughout the bank position us well for the future.
We continue to focus on striking the appropriate balance in order to generate positive operating leverage this year, we'll continue to invest for long term performance.
I'm pleased report we were good able to deliver strong financial results are strong performance. This quarter was a direct result of our employees hard work dedication to keeping the customer at the center of everything we do.
With that I'll turn it over time to discuss our fourth 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.
We are pleased with our overall financial performance and strong finish to a strong year.
Similar to the trends all year during the fourth quarter, our net interest income net interest margin noninterest income and noninterest expenses.
All performed in line for better than our October guidance.
Reported results for this quarter were positively impacted by 28 cents per share from several notable items.
The most significant was a 265 million dollar after tax gain from the Worldpay TRT transaction, which added approximately 20 basis points, our cetone ratio.
Similar to all of this strategic decisions related to our legacy processing business over the past 10 years the.
The Trs transaction creates significant value for our shareholders by monetizing gross cash flows.
Obviously expected to occur primarily from 2025 until 2035.
Consequently, we are also no longer exposed to if I ask this taxable income capacity in the future related to those cash flows and we still have multiple years of annual benefits impacting our fee income in the future.
We provide more information on the transaction in our presentation appendix.
In addition to the carry transaction reported results were also affected by a $34 million after tax negative mark related to the visa total return swap.
15 million dollar after tax contribution to the fifth third foundation.
And a $7 million after tax impacts from MB merger related charges.
Additionally, our quarterly results were negatively impacted by 7 million dollar after tax impact to provision for credit losses, resulting from our conversion to a national charter.
Our earnings materials provide more information on the various credit metrics that affected by this conversion.
Adjusting for those items and the purchase accounting impacts shown in our earnings materials fourth quarter pre provision net revenue increased 14% from the prior year.
Our core return on tangible common equity excluding AOCI I also increased 30 basis points from the prior year to 14.8% well our tangible book value per share increased 10% from last year.
Our goal is to carry the revenue momentum forward, while maintaining tight expense control.
We will continue to manage balance sheet risk by remaining cognizant of the environmental factors and maintain a prudent approach to capital management with the ultimate goal of rewarding our shareholders today and in the future.
Moving to slide five.
Total average loans were flat sequentially as consumer grew 1% and commercial was stable from the prior quarter.
Our focus continues to be on generating higher quality loan growth to maximize returns through the full cycle.
In our commercial business similar to last quarter strong production levels in both regional middle market and corporate banking were offset by elevated pay ups.
We have experienced higher than usual payoffs this quarter in our leverage lending and structured finance portfolios as well as in our construction portfolio.
New loan production and regional Middle market banking has increased every quarter since the first quarter of 2019.
Our new loan originations, particularly in Cincinnati, Chicago, and Florida, we're strong in the fourth quarter.
Total commercial line utilization was stable.
In commercial leasing our balances continued to decline due to our 2018 decision to hold new originations in our large ticket indirect segment and focus on driving relationship oriented growth.
We expect to see lease balances declined by approximately $300 million by the end of 2020 as a result.
Beyond 2020, this impact should be lower.
Average commercial real estate loans were up 1% from last quarter, primarily reflecting draws on prior period commitments.
Our CRT balances as a percentage of total risk based capital remained very low at less than 80%.
Commercial loan growth will likely remain relatively muted in the near term, reflecting the subdued environment for corporate capital investments.
We will continue to maintain our focus on client selection and prudent underwriting and the best long term interest of our shareholders.
Average total consumer loans grew 1% from last quarter predominantly driven by strong auto loan production of $1.7 billion within the same risk return profile that we have targeted for the past number of years.
The decline in home equity balances continues to reflect high levels of payoffs and Paydowns.
Our credit card growth continues to track in line with the industry.
The residential mortgage portfolio was flat sequentially.
We expect this portfolio to remain flat for the foreseeable future barring any significant changes in the interest rate environment.
In the first quarter, we expect total average loan balances remained relatively stable sequentially.
For the full year 2020, we expect average loans to increase approximately 4% relative to last year with growth in both commercial and consumer portfolios.
Moving on to slide six.
Reported net interest income declined 1% compared to the prior quarter.
The purchase accounting adjustments benefited our fourth quarter Eni by $18 million and our net interest margin by five basis points compared to $28 million and seven basis points in the third quarter.
Adjusting for purchase accounting accretion and I was relatively flat with just a $4 million decrease sequentially.
Interest income benefited a couple of million dollars from seasonal dividends.
The adjusted fourth quarter NIM of 3.22% decreased three basis points from the third quarter, adjusted NIM, which was better than our October guidance of down four to five basis points.
Our relative NIM performance throughout this cycle.
This rate cycle has been outstanding.
Our focus on reducing our overall interest bearing liability costs to offset the impact of lower market rates remains very high.
Interest bearing core deposit rates were down 19 basis points during the quarter better than our previous guidance range of 15 to 18 basis points.
We expect interest bearing core deposit costs into first quarter to decline approximately another eight to 10 basis points from the fourth quarter, assuming the fed remains on hold.
Combining our first quarter forecast with the results of the past three quarters, we will achieve a cumulative 30 basis point decline and interest bearing core deposit costs since the fed started lowering interest rates last year, resulting in a 40% beta.
On a core basis, we expect first quarter NIM to expand one to two basis points from the fourth quarter core NIM of 3.22%.
Reflecting the increasing benefit from the board starting hedge positions that became effective over the past few months.
For the full year 2020, we continue to expect core NIM to be 3.25%.
Assistant with our October guidance and down just two basis points from our core 2019 them.
Assuming no fed rate cuts this year.
For the full year. We currently expect net interest income excluding purchase accounting adjustments to increase approximately 2%.
We expect our first quarter net interest income excluding purchase accounting adjustments to decline approximately 2% sequentially impacted by day count and the relatively stable loan growth outlook.
Our first quarter outlook also assumes partial reinvestment of the investment portfolio cash flows, which may change depending on the environment.
Moving onto slide seven.
We had a stronger quarter in fee income than we guided to in October .
Adjusted noninterest income decreased only 2% sequentially as deposit fees and corporate banking fees performed better than expected offsetting a portion of the seasonal decline in mortgage revenues.
Continuing its recent trends corporate banking fees exceeded our guidance.
Our capital market teams generated record revenues this quarter up 10% from the third quarter.
For the full year, our capital markets fees were up 12% following 15% year over year growth in 2018.
We're very pleased with the second half revenue strength in capital markets, especially to growth from our regional banking clients activities.
Our focus on client selection and deepening those relationships is working well to diversify our revenue streams.
The power of our one bank model, which engages all business lines in meeting our clients' needs is very visible in our financial results.
We generated very strong 30% growth in corporate banking revenue in 2019 relative to 2018, reflecting the investments we've made in our North Star project in talent.
And in advanced capabilities to better serve our clients.
As we anticipated the returns to those investments will continue to reward our shareholders.
Mortgage banking revenue decreased 23% to $73 million sequentially and increased 35% relative to the fourth quarter of 2018.
Originated in volume of $3.8 billion was up 13% from the prior quarter.
Our gain on sale margin was 156 basis points in the quarter impacted by seasonally lower application volumes in the quarter and tightening primary secondary spreads.
Wealth and asset management revenue increased 4% from the prior quarter due to higher personal asset management fees.
We finished the year very strong and UN flows and expect this trend to continue in 2020.
Deposit service charges were up this quarter with higher fees in consumer as well as commercial.
We expect this stronger year end 2020 at our consumer and commercial deposit service charges based on the trends that we are seeing.
Our 2019 noninterest income results demonstrate the increasing benefit of having a platform with a wide scope of product and service capabilities.
For the full year 2020, we expect core noninterest income growth of approximately 8% relative to the adjusted 2019 level of $2.711 billion, including the expected Morro Bay DRD benefit in the fourth quarter.
We expect first quarter non interest income to decline approximately 3%, reflecting seasonally lower mortgage and interchange revenue.
Our first quarter forecast also does not include any investment gains.
In total.
As a result of anti growth and strong increase in fees, we expect to achieve a very strong 4% total revenue growth in 2020.
Moving on to slide eight.
Fourth quarter reported pre tax expenses included merger related items totaling $9 million intangible amortization expense of $14 million and a contribution to the fifth third foundation of $20 million.
Adjusted for these items in prior period items shown in our materials noninterest expense was flat sequentially.
We remain on track to deliver on the previously provided outlook for EMV related expense savings.
We continue to expect to achieve $255 million in savings by the end of the first quarter of 2020.
Additionally, we 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 $245 million after tax which is $5 million lower than our deal estimate.
As is always the case for us our first quarter expenses are impacted by seasonal items associated with the timing of compensation awards and payroll taxes.
Excluding these seasonal items, we would expect our total expenses in the first quarter to be down approximately 1% sequentially.
Total first quarter expenses, including the seasonal items are expected to be up approximately 5% from the adjusted fourth quarter, which also includes the full impact over the $3 raised in our minimum wage to $18 an hour.
Although in the short term the increase in minimum wage is dilutive in the long run we expect to achieve is stronger financial outcome through lower turnover improved workforce quality lower recruiting expenses and more effective training.
For the full year, there are a number of discrete one time changes, including the impact of the minimum wage increase.
And the increase in direct regulatory fees related to the FCC chartered conversion.
In addition, we are planning to continue to rationalize and modernize our technology infrastructure, which will result in additional in year expense growth relative to our recent trends.
These three unique items are expected to increase our total expenses by approximately 1%.
We are anticipating and minimal increase in discretionary expenses outside of these items.
Excluding these unique items affecting 2020.
Total expenses should increase less than 2%.
In total, including these items, we expect total adjusted expenses to increase between two and 3% compared to adjusted 2019 noninterest expenses of $4.372 billion, which reflects growth in expense items tied to strong revenue performance that I mentioned.
Regardless of our 12 month outlook, which calls for positive operating leverage resulting from strong revenue and disciplined expense growth in this uncertain macroeconomic environment, we intend to maintain flexibility to achieve positive operating leverage on the potentially less favorable economic conditions.
We recognize that as we navigate through the environment investments in projects with lower returns, maybe deemphasized or delayed in order to focus our capital investments in the highest areas of importance with into four strategic corporate priorities.
Turning to credit results on slide nine.
Due to our national charter conversion fourth quarter credit results were impacted by accounting policy changes to conform to RCC guidance regarding certain assets, which resulted in an increase in TDR in Oreo balances.
These changes increased consumer npls by $83 million and Npis by $113 million, which added seven basis points to the NPL ratio and 10 basis points for the NPL ratio.
The same change resulted in a onetime $10 million increase in charge offs, all within our consumer portfolio.
Excluding the onetime ULCC impact net charge offs remain at historically low levels during the quarter.
The consumer net charge off ratio was flat and commercial was up two basis points sequentially.
The adjusted NPPA and NPL ratios continued to be benign and in line with the levels that we have seen all year.
The age of oil ratio increased slightly to 1.1% of portfolio loans and leases driven largely by two factors.
The larger portion of the increase was due to higher specific reserves for to middle market commercial loans in two different industries.
We expect these loans to go through our resolution process in the first or second quarter.
We also increased the allowance in our credit card portfolio as they incurred loss methodology captured the uptick in historical loss rates.
As we discussed before the higher credit card loss rates are related to growth in certain promotional test portfolios, which are expected to run off and result in more normalized charge offs towards the end of the quarter end of the year.
Card charge offs were actually down 20 basis points this quarter compared to third quarter.
With respect to the seasonal adoption, which is in effect as of January 1st the day. One adjustments will result in an increase of approximately 48% to 50% or between $645 million and $675 million, sorry allowance for credit losses, which includes reserves for unfunded commitment.
And is below the upper end of the range that we provided in October .
As a reminder, this increase includes the impact of the MB acquisition accounting methodology pertaining to our non PCI loan portfolio and the Cecil treatment of reserves, which adds more than 10% to the increase that I mentioned.
As discussed previously excluding the impact of MB, we expect to reserves for commercial loans to decrease and consumer in mortgage loans to increase relative to the incurred loss methodology.
We plan to include a full description and transition details in our upcoming and pay disclosure.
Consistent with peer banks, who have recently commented on the impact of C. So.
Given the number and potential volatility associated with the underlying variable supporting the seasonal methodology, we expect more volatility in the in our quarterly provision expense.
Our calculations for the allowance for credit losses rely on various models and estimation take needs.
Using historical losses borrower characteristics economic conditions, and a reasonable insupportable forecast as well as other relevant factors.
Than expected losses in our reasonable and the portable forecast period of three years, we will use three macro economic scenarios.
From there, we assume losses revert to historical levels over a period of two years on a straight line basis.
Given the multiple variables impacting provision expense under C.. So we will be providing forecasted net charge offs for the foreseeable future.
Overall, we expect our full year 2020 charge offs to remain near historically low levels and be in the 35 to 40 basis point range, which is up just a few basis points compared to 36 to 37 basis point charge off rates that we have seen in the last couple of quarters.
Again, I would like to remind you that the current economic backdrop continues to support a relatively stable credit outlook with potential fluctuations and losses on a quarter to quarter basis, given the current low absolute levels of charge offs.
Turning to slide 10.
Capital levels ended the year very strong.
Our common equity tier one ratio was 9.7% and our tangible common equity ratio excluding AOCI.
Was 8.4%.
Hi.
We will book value per share was $21 in 13 cents this quarter up 10% year over year.
During the quarter, we completed $300 million in buybacks, which reduced our share count by approximately 10 million shares or about one of the half percent of our common shares outstanding.
Compared to the third quarter.
We expect to execute the remaining approximately $600 million of repurchases over the remaining two quarters in this see CCAR cycle.
Between the world pay sale gains in the first quarter of 2019 and the impact of the recent DRA transaction, we have nearly half a billion dollars of additional capital above our initial expectations. As we proceed into the 2020 CSR exercise.
As we discussed last quarter, the pacing of our preferred dividends has recently changed in light of our September issuance and the conversion of existing preferred stock to floating rates with quarterly payments.
We expect our preferred expense to alternate between 17.
And $33 million every quarter going forward, assuming no issuances or change in LIBOR.
Slide 11 provides a summary of our current outlook.
In summary, I would like to reiterate a few items our fourth quarter results were strong and continue to demonstrate to progress we've made over the past few years toward achieving our goal of outperformance to the cycle.
Our execution on the MB acquisition is on track to meet our targets on both expense and revenue synergies.
As always we remain intensely 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 procurement.
Next Dyson before we start una as a courtesy to others. We ask you to limit yourself to one question and a follow up and then returned to the Q. If you have additional questions. We will do our best answer as many questions as possible in the time, we have this morning.
During the question and answer period. Please provide your name and that of your from to the operator. The Catriona. Please open the call for questions.
Thank you at this time I'll like to remind everyone. In what is asking question. Please press star one on your telephone keypad.
And your first question comes from the line of Scott Siefers with Piper Sandler.
Good morning, guys. Thanks for taking.
Good morning.
Hey, Stephane just wanted to ask about the fourth quarter provision you gave some some detail on the items impacting in addition to just have moved to the national charter, but you had sounds like the couple of commercial credits and then the impact from the credit card portfolio as well as you think about things sort of on a go forward basis, how much of that proves transitory and how.
How much is.
If any sort of a new run rate in other words, if it was higher than expected this quarter or do some of those kind of refer back down or what's the best way to think about it sure Scott I will make a few comments and I'll turn it over to Greg.
For for the credit because we believe that clearly these couple of credits.
That just happened in one quarter impacted to provision numbers, which we believe to be Transitionary. If you look at our guidance for next year, we are clearly.
Expecting continued stability and benign credit performance away from so be accounting related to changes in our credit metrics. This truly was just one of these quarters where few.
Credit loans came up but the Frank do you want to comment on that.
I will.
That's what we talked about before the commercial business.
Done this along time as lumpy, it's the nature of the business as lumpy.
One quarter doesn't make a trend in either direction and the commercial business and.
Something that you made a difference penetrated on these two credits are not related to each other.
They are both kind of core middle market companies companies actually bank for long period of time once a retailer once of the hospitality sector Theyre just going through a workout the happened to hit at the same time, but if you revert back to the year. If you look at our overall again results for the year, we're actually very pleased with asset quality for the year.
As we said before our criticized assets within our expectations for the year our outlook for 2020 is really not changed.
Good.
Basis points increase just given the economy and overall our nonperforming assets.
For the quarter were centered on these two items.
30 million net flow at the end of the day.
When we think back to the work we've done in the company intentionally over the last four years. We've repositioned this company to be strong through operating cycles, and we're highly confident I'm highly confident we've done that.
These are middle market credit increases, we've actually seen for the year.
Our problem credits have been tied to kind of the lower in middle market. One of that is reflective of repositioning the rating system from MB some of its in our.
Systems as well, but those credits tend to be very well secured.
And historically have a low loss rate and it's a very granular portfolio, which is what we'd like to see.
When you think about the portfolios at least in my experience.
Where we should be concerned as you think about the economy when the economy slips.
Its commercial real estate it would be your large corporate book and would be leverage and when you think about our commercial real estate book, we have the lowest concentration of commercial real estate ones with any of our peers and that portfolios performed exceptionally well and.
And we position with companies today, they're basically national and large.
Regional developers essentially investment return investment grade model liquidity.
Our large corporate looks performed exceptionally well our shared national credit look very low level of criticized assets and it's very diverse we managed the risk exposures that are I think very prudently.
When you think about leverage leveraged our phase we've been focused on reducing that for now for 40 years, we've reduced over $5 billion and leverage loans and the last four years, which is a 48% decrease that we feel very good about the remaining levers, but we have today, we have specialized groups that led to that sector. Both in the line of business.
They are tied together with specialists that we have in risk and we manage it prudently we monitored prudently. So overall thesis I suppose is that when you think about the portfolio of whats system. It has done over the last four years, we've completely repositioned this portfolio for success and we're highly confident that that worth of will project itself as we move forward in 2000.
20, and beyond under any economic scenario.
Okay. That's helpful. I appreciate that and then separately if I was curious on the gain that you got from the change in the Trs agreement do you guys have the same flexibility to repurchase shares that game.
As you do under kind of a more traditional if you're just.
Sell shares and get an after tax gain that way not with a gain that we book I mean, you typically.
We typically go to the fed with specific requests, but clearly the first quarter 2019 gain on share sales.
We are able to buy back shares with.
Yes.
Obviously this gain that we booked in the fourth quarter goes into our overall capital ratios, which gives us a better starting point for the 2020 seek our exercise yes, okay perfect. Thank you.
Thank you.
Yes.
The Keytruda you there.
Yes that question comes from the line of Kayne Anderson with Jefferies.
Thanks, Good morning, guys.
Ask question on the right side of the balance sheet, you talked about loans growing 4%. This year I'm wondering if you could put the deposits into context in terms of.
The mix of deposits and what type of growth you're expecting on the deposit side overall thanks.
I suspect that ill turn it over to.
Jamie with details as well, we obviously have had a very good year.
Both in consumer as well as commercial deposits in 2019, we expect that are stable growth in consumer.
Accompanied by good growth in households, but we'll continue we do expect the stronger yen commercial deposit growth as well because we have.
So good amount of focus.
On the partnership between our Treasury management group and.
Social deposits, Jamie anything you want in chemistry may one of our goals. This year is the.
We do match loan growth with deposit growth and so for US we would expect core deposits to be growing similarly to the loan side at 4% pattern mention our focus is really improving.
The share of wallet that we get on the commercial side of the I'll because historically retail as you know has been very strong.
Provider of deposits and funding for the company over the years. So our focus is getting commercial of up to those levels. So.
We would expect commercial to outperform those numbers and then on the retail side to be a little bit less than.
That 4% number in part because we're intentionally running down our CD portfolio.
Repricing and a lot of those.
Higher cost Cds around 2% or so right now reprice in them down in the one on a quarter range. So we are driving.
Those deposits out the door, which results in a little bit lower retail deposit growth number. However, you see that benefit show up in our deposit costs, both in the fourth quarter as well as a big support for what we expect in the first in the second quarter leader.
Got it okay, and maybe as a follow up on the first quarter outlook, you talk about down 2%, but you Doug and I, but you did indicate that you expect to core NIM to be up and loan stable. So can you help us flush out what the other deltas would be in terms of you mentioned the seasonality of securities and some of the deposits like what else what it seems like that there wouldn't be so much of a.
Drag on fourth to first.
Yes from and then I dollars perspective.
The fourth to the first is really driven by day count of $10 million than higher wholesale funding costs and the impact of seasonal run off and da's, but about $5 million and then the investment portfolio, we expect to be down about $10 million from the elevator fourth quarter.
Levels. The fourth quarter levels include a lot of the year end onetime mutual fund dividend amounts and that was 6 million.
And so.
The other portion of the investment portfolio of reduction is that we did not reinvest cash flows in the fourth quarter and as type and mentioned.
Given where rates are right now we don't expect to reinvest all of our portfolio cash flows in the first quarter. So we'll be opportunistic if.
Things change, we certainly have the capacity.
To reinvest but right now we're running the portfolio at about 21% of total assets and that's what we'll probably be in that 21% to 22% range over the course of the year. Yes. Maybe this is a good point for US also to add that for the year, our eni guidance for the year.
Basically assumes it fairly flat even in maybe a slightly down average portfolio balance so.
For those of you who are modeling investment portfolio numbers for 2020, our decisions on the investment portfolio tend to be very opportunistic bye for now as we sit here at the beginning of the year, we're not anticipating an increase to investment portfolio balances. If we do see opportunities if the environment changes that clearly we'll have it.
Impact on the actual.
Performance, when we get to the end of year.
Okay. Thanks, guys.
Your next question comes from John Pancari with Evercore ISI.
Hey, good morning.
On the Cecil front.
The.
If you could help us think about how.
Provision on a day two basis could shape up in terms of either on a quarterly basis as we go in to 2020 or how we could think about it on the full year basis on how it's impacted by the adoption. Thanks sure, Yes, I mean I think.
The progress in our reserves and.
The impact on the provision numbers is probably.
Very similar to others.
Except for when you look at what's driving the higher reserve grades.
It really is the longer dated loans and some of the consumer credits Outstandings.
We as you know.
I have been very clear on our expectations with respect to the residential mortgage portfolio, we do not intend to grow that portfolio not necessarily because of seasonal but just because the current interest rate environment I don't think that we're getting paid to grow that.
And home equities have been declining thats another portfolio that has.
A liberal through large increase in under seasonal compared to the incurred methodology. So.
So those two portfolios should not contribute much in terms of increases in reserve coverage.
The portfolio that we continue to grow is auto.
Now also Cecil is also higher than auto incurred loss.
So that should have a slide sort of increase but.
If we continue to grow commercial book.
As we have down so.
In the past.
That's our biggest look and we will continue to grow that I suspect that our coverage ratio ultimately will not change much.
So where we are standing, but we're all going to have to wait and see how this plays out it is without having not even at quarter under our belt. It is very difficult to establish.
Good reliable trend given the impact of these various macro economic scenarios that we will be applied.
Got it okay. Thanks to tune and then.
And then separately on the MB side.
Just wanted to see if you can give us an update on banker retention I know there was some concerns about that a few months back on some headlines that or anything that you had indicated that you were retaining.
We already have your targeted.
Employees are part of the deal you mentioned that last quarter, just wanted to get an update on that front on where how that's been progressing. Thanks. John Thanks for the question. This is Greg first while we feel really good about the talent we have in the Chicago market is as evidenced by the strong production numbers that we're seeing from from Chicago.
As you would expect we have a target of $255 million of expense reduction. So a lot of that reduction shows up in a form of individuals.
Two late expensive so forth that did not have jobs.
Offer to them so low that attrition you would expect to see that I would tell you in general 80, plus percent individuals we offer positions to.
Or with the company remain we feel really good about that.
And our ability to our expense targets that we modeled in this attrition is exactly where we expected to be so were there is no surprises here. We've also taken a best of breed approach. So you think about leadership in that market Alright, Mitch bloggers are CEO , we retained the best of breed, we thought the run that company Theres redundancy there is optimal.
Nation is going occur you would expect certain individuals to look for other opportunities as we modeled in so words very much in line with we expected to there was no surprises here.
And we'll achieve the objectives, we mentioned, but more importantly, the outcomes in Chicago, we look at our retail franchise or will business in our strong strong core middle market production. We're really excited about we're seeing there and also to revenue synergies as they start to come together as we integrate that business in the reservoir business, whether it be asset based lending leasing.
Capital markets into the into the old and be book, we feel really good about what we're seeing there and we're very bullish on 1 billion accomplish our objectives that we set forth in that market, but there's no surprises here.
Got it thanks, Greg appreciate it.
Your next question comes from the line of cancer with Morgan Stanley .
Great. Thanks.
And just in terms of corporate banking, obviously, you've had really good success over the last couple of years for that business.
And I know for your fee growth is obviously higher for 2020 in general but can you just talk specifically about corporate banking in terms of what you're expecting from that line I missed that like how how far forward can we continue to expect so those double digit.
Gains I'm, just trying to understand what sort of transitory versus more of a sustainable growth rate.
Can you all of this and then I'll turn it over to two floors for a little more coal and as first off when you go back and think about our norstar commitments a lot of those investments RIN.
Corporate banking capital markets area, and those investments, we still will start to materialize from a revenue perspective in 2019 and you're seeing that.
Strength in 2018 continued strength in 2019, we continue to invest in that area because once again and provides the products and services, we need to better support our clients.
And we've had a great team assembled and we continue to make great progress in that area. So we would expect depth performance to continue on as we look into 2020 and beyond the larger than they give you the.
Hi, Ken.
We're really pleased with how the Norstar investments Foundation all have really played out we shared with you in particular, the replatforming of our FRM business. We're already seeing the benefits of that you can actually see that in our foreign exchange performance this quarter.
You know FRM business is really coming back at strong.
But in addition to that a real focused on our advisory model, our relationship banking model and aligning our businesses to both our middle markets focus as a company.
As well as our industry verticals to be a advisor a consultant, which that meant that we really needed to go after the investment banking.
Piece of capital markets and that is paying big dividends for us today. So an example of that would be coker capital that we acquired.
And that perfectly aligns with our advisory approach to the healthcare industry. Most recently you saw the fact that we recruited 12 investment bankers.
In San Francisco, and aligns with our renewables and solar business. So thats. The theme here is to continue to build out a role would platform to serve the industries geographies and segments.
We plan to win now look we may not be able to control the ultimate loan growth quarter to quarter or year to year, because there are macroeconomic impacts on that but one thing. We can do is bring them advice solutions and those are often tied towards our fee products and services.
And you're seeing that come through and our corporate banking success I'm really proud of the talent that we have.
All right Thats, Great and then just maybe one follow up questions for Tyson you mentioned that you're gonna have higher regulatory expenses related to the charter change.
In 2020 is part of that 1% extra expense growth next year is there any seasonality related to that I'm trying to figure out like whats again sort of what sort of unusual or first half kind of driven expenses versus this is permanently increases your expense base. Thanks, Yes. There is not Ken there is about 11 $12 million just the direct feed.
We paid to the Onecc it just.
Thats the marginal increase indirect cost, but there is no seasonality to that.
And it's just an ongoing expense going forward Thats correct right why.
The changes a unique change year over year, but it will be in our expense base going forward.
Perfect Alright, thank you.
Your next question comes from the line of Erika Najarian with Bank of America.
Hi, good morning.
Right.
I just wanted to.
You reiterate maybe the point that you made earlier.
If the Eni or the noninterest income revenue outlook fell short there's room to pull the expense lever and potentially do better than the 2% to 3% range too.
She positive operating leverage for 2020.
Yes, so we clearly we have always intended to.
In the past number of years to achieve it we achieved that every year and we continue to keep the same targets and when you look at the content. So the remaining expenses.
Beyond the at 1% sort of unique change Erica clearly our largest expense is in compensation and there is an underlying inflation built into that and that consumes.
Over a half a point of that expense increase and in addition, there is also another half a point or so and expense increase related directly to revenue growth. So if the revenues sort of tend to come in slower than we expect we believe that.
It will be reflected on expense growth as well and.
And we've got to have to make some choices as to where to invest and we're not to invest to wait out a slower revenue growth and bar.
Great. Thank you.
Your next question comes from the line of Matt O'connor with Deutsche Bank.
Good morning.
I was wondering if you could talk a bit about just commercial borrower sentiment.
Mentioned that the payoffs were quite high in Fourq and had a somewhat muted outlook for commercial lending.
I think it was a first quarter, but it seems like maybe commercial corporate sentiment is improving.
Maybe it's just literally the last few weeks here.
That's one of the themes that we've been hearing from some other banks and.
Maybe some of that things in the credit markets pointed out as well. So how are you seeing from early signs of that or is it a little bit of a different customer base.
For you guys and the Mediware sitting elsewhere.
Yes, Matt So first of all just to address the first quarter, there's seasonality issues in that so I would really be looking to typhoons.
No guidance for the year, that's what we're focused on is executing and 2020.
You know that there has been a heightened sense of caution as we have moved through the second half of 2019.
Some of the global tensions tariffs those kinds of things, but some of the resolution of that we're beginning to hear us some positive things we're seeing some activity levels that are reflected in the pipelines.
Not just from a lending but also from a fee solutions perspective that is giving me a little bit more confidence as we look at 2020.
And our potential pick up.
In activity levels there so.
Frankly, I'm not I'm not looking at 2020 with a lot of concern.
I feel like that we can go out there and execute given where we have positioned our resources in the southeast and middle market banking industry verticals, but.
But in summary.
There is still a sensor caution, but I would describe it as.
Positively migrating as you see a number of things start to play out in the global marketplace and.
With with some of the trade tariffs on activities recently completed.
Okay. That's helpful. And then just separately you reiterated.
Kind of your interest in additional fee deals you've talked about this in the past just remind us kind of which areas.
You must be looking to complement and are they sizable enough that you kind of pulled back a little bit of your capital versus your target or they're just not going to be meaningful enough to really impact the kind of capital and buyback story. Thank you, yes. The capital decisions are independent from that Matt I mean, because they see the timing of.
These availabilities are a random.
We have in the past that were very clear large mentioned.
The confidence that we have our advisory businesses in commercial be clearly if we can if we come across opportunities to even grow our advisory M&A services et cetera, we will be looking for those.
Long time ago, we started talking about potentially adding more.
Capital markets capabilities in commercial real estate as they may become available we will be focusing on those.
We have invested.
In our asset management business.
There are opportunities that are.
Financially feasible and rewarding we will be looking at those.
So it is going to be more business commercial oriented fee oriented opportunities.
But at this point.
What we do with a capital that we have is somewhat independent of the opportunities. If we see opportunities we will execute them, regardless of whether we're sitting on half a billion dollars of capital or not.
Got it thank you.
Your next question comes from the line of Saul Martinez with the yes.
Hey, good morning, guys.
First I wanted to clarify a couple of points on on credit first.
You obviously on the commercial side, you, obviously mentioned the specific allowances for for two commercial credit you also had a big increase in NPL formation in commercial 665 million on page 21, I think Frank you mentioned that was also related to the to the those two.
Could specific credits, but just wanted to confirm that was the case and also on Cecil Typhoon just again, a clarification NAV to sharpen my pencil on this but I think you're allowed to take share.
Ratio to like 100, 6000 70 Bips.
I guess, what you're saying is that.
We see there's volatility there is there more things driving quarterly provision, but your best guess at this point would be that it's sort of stays in that range and we should be modeling provision twist charge offs in growth is that sort of the right way to think about it took a couple of questions. More clarification question I wanted to see so on and then I'll turn it over to Frac.
Your numbers are right in the ballpark saw and and yes, I mean sitting here looking at our balance sheet progress without necessarily having a perfect knowledge of macro scenarios I can only assume that it's probably going to stay around those levels, but obviously.
After a couple of quarters under our belt, we will be able to give you a more precise answer on this one Frank on the credit so yes on the one the 165. Your question was included inclusive of the 50 and the answer is yes. It was okay and just as a reminder, in the workout business.
Things are lumpy I mean, it's you you don't package things up.
Package and you have even inflows and outflows we look we analyze inflows every quarter in detailed look to see if there's any particular trends that are bothersome to us. So we didn't see anything there in particular, it's spread out I will say the flip side of that as we had a really strong quarter on collections during that at the end of the day was 50 million, which I think.
About a sort of those two credits that were there before so.
That's that's the story there and again it doesn't I don't think pretend anything different.
In our outlook for 2020, we feel very good about 2020 based on where we sit today.
Great. That's really helpful. Thanks, a lot guys.
Your next question comes from a line of Christopher Marinac with Janney Montgomery.
Hey, good morning, I, just wanted to follow up on Tysons common early in the call about the accelerated pay downs of leverage loans and other commercial.
Is that attrition going to continue do you think or would you look to replace those loans this year.
Yes, our intent is not necessarily to grow the leverage portfolio to make up for the faster.
Payoffs we will.
We will make loan decisions independent of the payoffs, but lars any comments on that yes, no. So.
Actually going back a previous question just so that you understand the build that you see add we have seen both in middle market and corporate banking increasing volumes of loan production throughout the year and that is really encouraging which which I had mentioned about 2020 some of my optimism.
On the flip side and part of the muted impact in the ultimate balance sheet on.
Softness in the industry that we're seeing has been paydowns elevated paydowns. However, the complexity of that changed in the fourth quarter and the fourth quarter.
Rather than just de leveraging some of our portfolio.
What we saw were the two biggest drivers was number one higher risk assets in the leverage lending portfolio.
Where we actually saw a decline there and that's a positive thing is strengthening our balance sheet.
And it's not that we will not extend credit to enter the leverage lending market, but we're being very disciplined and selective in that market. The second piece. If it goes back to what Frank said earlier, we saw pretty significant paydowns in our construction lending line of business, which I shared.
Previously in prior calls that we expected that would begin to occur. This is a sign of a healthy commercial real estate portfolio late in the cycle. So maybe a little bit more than you asked but to kind of frame it.
We do not see that leverage lending will be a growth area for us for a period of time. This late in the cycle.
Great. That's really helpful background. Thank you both for the comments.
Thank you. Your final question comes from the line, Scott Siefers with Piper somewhere.
Hey, guys. Thanks for taking that the follow up.
Just wanted to ask on your Green Sky relationship I know you guys had.
Renewed.
Thanks, and chip just at a top level any any changes to how you're thinking about appetites for those type of types of credits or and then I guess more specifically with any changes and.
The terms.
As a result of of that renewal.
I can't necessarily but yes, we renewed the relationship and we renewed the loan relationship.
Having had the experience with Greens guy over the past couple of years and having seen a fairly stable credit performance, having said that we believe that the renewal actually.
Benefits us the weight was done the weight was structured from a credit support perspective, as well as pricing perspective, that's all I'm going to comment given the fact that.
That that.
The counterparty to the agreement, but we feel pretty good as to where we ended.
During the renewal discussions.
Okay, all right that's sounds great. Thank you okay.
Well, there's no further questions. Thank you off interest in fifth third bank to give any follow up questions. Please contact the IR department and we'll be happy to assist deal.
Thank you for your participation. This concludes today's conference call you may now disconnect.