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Fifth Third Bancorp (NASDAQ:FITB)

Q1 2014 Results Earnings Conference Call

April 17, 2014, 09:30 AM ET

Executives

Jim Eglseder - Investor Relations

Kevin T. Kabat - Vice Chairman and CEO

Tayfun Tuzun - EVP and CFO

James C. Leonard - SVP and Treasurer

Jeff Richardson - Director of Investor Relations and Corporate Analysis

Analysts

Jessica Sara Levi-Ribner - FBR Capital Markets & Co.

Kenneth M. Usdin - Jefferies & Co. LLC

R. Scott Siefers - Sandler O'Neill + Partners L.P.

Erika Najarian - Bank of America Merrill Lynch

Kevin St. Pierre - Sanford Bernstein

Brian Foran - Autonomous Research

Keith Murray - ISI Group Inc.

Operator

Good morning, my name is Sally and I will be your conference operator today. At this time I would like to welcome everyone to the Fifth Third Bank First Quarter 2014 Earnings Conference Call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions). Thank you. Mr. Jim Eglseder, Director of Investor Relations, you may begin your conference.

Jim Eglseder

Thank you, Sally. Good morning. Today we'll be talking with you about our first quarter 2014 results.

This call may contain certain forward-looking statements about Fifth Third pertaining to our financial condition, results of operations, plans and objectives. These statements involve certain risks and uncertainties. There are a number of factors that could cause results to differ materially from historical performance in these statements. We've identified some of these factors in our forward-looking cautionary statement at the end of our earnings release and in other materials and we encourage you to review them. Fifth Third undertakes no obligation and would not expect to update any such forward-looking statements after the date of this call.

I'm joined on the call by several people; our CEO, Kevin Kabat and CFO, Tayfun Tuzun; Frank Forrest, Chief Risk Officer; Treasurer, Jamie Leonard and Jeff Richardson, Director of Capital Planning. During the question and answer period please provide your name and that of your firm to the operator. With that I'll turn the call over to Kevin Kabat. Kevin?

Kevin T. Kabat

Thanks, Jim. We reported first quarter net income to common shareholders of $309 million and earnings per diluted share of $0.36. Significant items during the quarter include a $36 million negative valuation on the Vantiv warrant, litigation reserve charges of $51 million and a few other items that Tayfun will cover. These items reduced EPS in the quarter by approximately $0.07. Additionally we recognized charge-offs of about $60 million on three relatively large credit with the higher charge-offs during the quarter expected.

Our credit outlook for the remainder of the year hasn't change absent the impact of these credits. Each of these situations had unique characteristics that led to charge-offs. We don't believe this is indicative of a change in direction of the broader portfolio. Highlights in the quarter included 3% growth in both average core and transaction deposits, year-over-year core deposits were up 8% and transaction deposits were up 9%. For the quarter, average portfolio loans grew 2% sequentially and period end portfolio loans increased $1.1 billion or 1%. Average commercial loan balances were up 3% sequentially, led by C&I growth of 4% over last quarter.

Commercial real estate average balances continued to rebound, driven primarily by construction loans with total commercial real estate balances up 1% sequentially. Excluding mortgage revenues, which continue to decline, fee income results were solid, you know they exhibited some seasonal trends.

I would add that the lower levels of consumer fee income relative to what we expected coming into the quarter exhibited more than the normal seasonal softness, whether it was debit, credit activity, ATM, account household activity in the branches, all were a bit lighter than expected in the first quarter. We still have enough of our footprint in parts of country that were significantly impacted by the severe weather in January and February and we did see activity pickup in March. I don't know that we will ever get that lost activity back, but certainly the March trends continued into April and much more in line with what we've seen historically and supported by solid household growth and other trends resulting from our consumer bank redesign.

Highlights in the quarter were corporate banking fees up 11% sequentially and 6% from a year ago. And also investor advisors had a record quarter, was up 4% sequentially led by solid production from our private banking business and higher trust tax fees. Our private banking business, which is a little under half of that total business line in aggregate showed year-over-year growth of 8% and sequential growth of 11%.

We continue to manage costs in a disciplined manner. Quarterly expenses decreased 4% sequentially, driven primarily by a reduction in total employee cost, so that includes the impact of seasonally higher benefits expense. If you exclude the litigation charges in the quarter, non-interest expenses were approximately $900 million, the lowest level on that basis in several years.

Overall, this was a strong quarter in terms of core controllable expense management. Capital levels remain very strong; our Tier 1 common ratio was 9.5% on a Basel 1 basis and 9.1% pro forma for U.S. Basel III rules. Our ability to generate capital and our strong capital position under current and future capital rules give us the ability to support the balance sheet growth while continuing to return capital to shareholders in a prudent manner.

During the quarter we announced and completed the repurchase of roughly of $100 million of common stock, which completed our 2013 CCAR plans. Also in March we announced our capital plan related to the 2014 CCAR process. That plan included a potential dividend increase during the CCAR period up to $0.13 as well as up to $669 million of share repurchases. We also will be able to utilize any after tax gains from sales of Vantiv shares for additional repurchases.

We think our plan is prudent while still returning significant amounts of capital to shareholders, we believe that our stressed results demonstrate our robust capacity withstand stressed conditions and maintain a strong capital position. While there was a bit of noise in the quarter we expect to return to previous charge-off trends although results maybe lumpy from time-to-time. Regulatory and litigation costs in this environment are challenging but we would not expect them to remain at this level and we feel good about our investment in Vantiv. Although as a mark-to-market instrument, our warrant will likely continue to add some volatility to reported results.

Core operating results were otherwise generally strong and as Tayfun will discuss, we currently expect second quarter results to return to trend. I will turn it over to him now to discuss the operating results in more detail and give some comments about our outlook. Tayfun?

Tayfun Tuzun

Thank you, Kevin and good morning and thank you for joining us. I will start with the financial summary on page four of the presentation. There were a number of moving parts through the quarter which Kevin mentioned in his remarks.

EPS was affected by elevated litigation reserve charges as well as the mark on the Vantiv warrant which have been mostly upward in the past couple of years. We have reported net income to common shareholders of $309 million or $0.36 per diluted share. The negative Vantiv warrant valuation mark of $36 million and seasonal declines in some fee items drove the non-interest income lower compared with last quarter. Expenses were well controlled despite the seasonal increase in benefits expense and reflected the impacts of further efficiencies in our mortgage and retail businesses.

Commercial loan and core deposit growth were solid and in line with our expectations. We continue to believe that our underlying trends and our focus on executing our strategic plan, position us very well for the remainder of the year.

Turning to the average balance sheet on page five of the presentation. Average earning assets increased 1% sequentially, driven by higher loan balances and investments. Total average commercial loans grew $1.7 billion or 3% with good production in middle market C&I, commercial real estate and our other specialty lending business including healthcare.

Average balances also benefitted from a 1% uptick in line utilization during the quarter to 30%. On the consumer side held-for-investment loan balances were flat on a linked-quarter basis, with growth in residential mortgage, credit card and auto loan offset by lower home equity balances. Investment securities increased by $2 billion or 11% reflecting our incremental purchases of highly liquid assets.

Turning to deposits, average core deposits increased by $2.2 billion or 3% in the first quarter, driven primarily by average balance growth. This was due to growth in checking balances as well as new money market account relationships and longer duration retail CDs.

Taking a look at NII on page six of the presentation; as expected, taxable equivalent net interest income decreased $7 million sequentially to $898 million, driven by a $12 million negative impact from two fewer days in the quarter. Otherwise the net addition of about $2.1 billion of investment securities and commercial loan growth drove a sequential increase in net interest income. These benefits offset the negative effects of loan re-pricing, higher deposit balances and debt issuances from the last two quarters. These activities were generally consistent with our plans coming into the quarter and we feel we've made very good progress toward exceeding the CR limit.

We will likely continue with similar actions over the course of the year which may affect the NIM somewhat, but they should not affect NII. As we expected in our outlook in January the net interest margin came in relatively stable at 322 basis points, up 1 basis point from the fourth quarter. The benefits of lower cash balances held at the fed, day count and the full quarter impact of the fourth quarter TruPS redemption offset by the effects of loan re-pricing and recent debt issuances.

Shifting to fees on page seven of the presentation. First quarter non-interest income was $564 million compared with $703 million last quarter. The most significant impact sequentially was the Vantiv warrant valuation, which experienced a $127 million swing from the fourth quarter primarily due to the 7% decline in Vantiv share price.

Despite this quarter's decline Vantiv's share price has increased 48% since the beginning of 2012 and we have recorded $171 million in positive valuation adjustments on our warrants during that period. Seasonally lower deposit service charges and card and processing revenue as well as lower mortgage banking revenue, each reduced fee income in the quarter.

Mortgage originations were $1.7 billion this quarter, compared with $2.6 billion in originations last quarter. The gain on sale revenue declined $19 million from the prior quarter, reflecting lower origination and gain on sale margins which declined 22 basis points sequentially to $242 basis points. MSR valuation adjustments, including hedges were at positive $28 million in the fourth quarter compared with the positive $26 million last quarter.

Other highlights of the quarter included an 11% increase in corporate banking revenue and a 4% increase in investment advisory revenues to a record $102 million driven by seasonal tax preparation fees, growth in personal assets under management and higher market values.

On a year-over-year basis all the main fee categories showed growth other than mortgage. Our operating platform is strong and we've demonstrated great versatility in managing our fee generating businesses, which is a very good indicator of our ability to successfully transition from periods of peak mortgage activity.

Non-interest expense show on page eight of the presentation was $950 million this quarter, compared with $989 million in the fourth quarter. Expense reserve included $51 million in litigation reserve charges, a seasonal $24 million increase in FICA and unemployment tax expense and 4 million in severance expense. Adjusting for these items and seasonal increases, expenses declined 5% compared with the fourth quarter. Compensation-related expense declined 7% sequentially marginally due to two key drivers.

We continue to rationalize our mortgage business line in line with lower production levels. Since the second quarter of 2013 we’ve taken out $55 million of mortgage cost including an additional $5 million in the first quarter. In addition to mortgage the changes in the retail banking environment, our investments in and the success of our digital platforms and our strategic decisions on branch design and staffing have enabled us to enhance our services while also reducing branch cost which are down $29 million on our full year run rate basis since the first quarter of 2013 primarily due to lower FTE cost.

We’ve made a lot of progress. We are in a very good competitive position relative to our peers and we believe that there is more opportunity as we continue to evolve our structure. All in PPNR shown page nine of the presentation was $507 million. When adjusted for the items noted on the slide PPNR was $590 million down about 5% from the fourth quarter adjusted PPNR. This decline was primarily driven by the seasonal increase in FICA and unemployment tax expense. Adjusted for this seasonal uptick PPNR was $640 million. The efficiency ratio adjusted on the same basis was 60% for the quarter we still expect our efficiency ratio to decline below 60% during the second half of the year.

Turning to credit results on page 10 and starting with charge-offs. Total net charge-off of $168 million increased $20 million sequentially. Consumer net charge-offs decline $7 million. As Kevin mentioned first quarter commercial charge-offs included three larger credits that added $60 million for the quarter. These credits represent three unique sets of circumstances and I’ll spend a few moments on each. They do not share geographic characteristics and they were not leveraged or syndicated credit.

Each contributed about $20 million in losses during the quarter, the remainder of our losses were more typical and range from 0 to $7 million. The first of these credits was a letter of credit that was extended to a public entity a number of years ago. Deterioration in its financial situation led to the outcome. We have no other public entities exposure of this size and nature. And there is no change in our expectations for the rest of this portfolio.

The second credit was an exposure to a company where there is currently an investigation on the way regarding potential financial irregularities. We need to wait until our analysis is complete but once again our credit team believes that the nature of the disruption is unique to this transaction.

The third credit was to the company that recently lost key contracts which had a negative impact on its financial performance and subsequently led to default on our loan. Although the higher than anticipated losses this quarter have the effect of increasing our expected charge-offs for the full year we’ve not seen a change in the broader credit trends in our portfolio. As a result our outlook for charge-offs for the remainder of the year has not changed.

In terms of our other credit trends commercial early stage delinquencies, HFI asset levels and NPA all declined relative to the fourth quarter. Total delinquencies of $337 million declined $42 million or 11% and included only $10 million of commercial loans.

Looking across the page non-performing assets of $946 million at quarter-end were down $34 million or 4% from the fourth quarter. The improvement was due to a $25 million sequential decline in commercial real estate NPA and a $22 million decline in residential mortgage NPAs partially offset by a $14 million increase in C&I loans.

Reserve coverage remains solid at 1.65% of loans and leases. The allowance for loan and lease losses declined $99 million sequentially reflecting the portfolio's overall risk profile and charges to the allowance.

Page 11 of the presentation includes a roll forward of non-performing loans. Commercial inflows in the first quarter were $163 million up $56 million from the fourth quarter largely driven by inflows from the credits I discussed earlier. Consumer inflows for the quarter were $93 million down $72 million sequentially reflecting the fourth quarter change in our home equity non-accrual policy.

Turning to capital on slide 12, capital levels continued to be well above the regulatory requirements with tier one common equity ratio of 9.5% up 12 basis point from last quarter. Changes in capital ratios reflected growth retained earnings beyond the impact of dividend and share repurchase activity.

We completed the repurchases related to our 2013 capital requirement in the first quarter. Repurchases in 2013 and the first quarter of 2014 totaled 73 million shares including those related to after tax gains on the sale of Vantiv shares. Our repurchases have driven significant decline in our fully diluted share count, down over 100 million shares or 10% from their peak while at the same time maintaining common equity capital ratios significantly above regulatory units.

The Federal Reserves 2014 CCAR review is complete and we received no objection to our capital plan. We believe our results demonstrate the relative strength of our capital position and our ability to absorb significant stress. Given our capacity for internal capital generation we would expect to continue to prudently return additional capital to shareholders under our 2014 CCAR plan.

Now turning to the outlook page on page 13, we've updated parts of the slide to reflect any changes to our full year expectations but in general our first quarter results did not have a significant impact other than on charge-offs as I already mentioned. I would note that as in the past comparisons with 2013 exclude the impact of any gains on Vantiv share sales and changes in warrant value in 2014 and 2013 as indicated in the footnote on the slide.

Our NII, NIM and balance sheet expectations are unchanged from our January guidance, so I'll start with net interest income. We expect full year 2014 NII to increase from full year 2013 NII of $3.6 billion in the 2% growth range. The key drivers of the 2014 growth are loan growth and higher investment security balances partially offset by increased funding costs and some additional loans that have come under pressure.

We still expect NII to trend up throughout the year. We anticipate a full year NIM in the 315 basis point range plus or minus and again unchanged from the January guidance as we continue to add LCR friendly portfolio investments and see loan spread compression.

Turning to loan growth, we still expect mid-single digit growth for the full year average, primarily driven by continued growth in C&I as well as growth in commercial real estate. These increases will be partially offset by declines in residential mortgage balances and continued run off in the home equity portfolio. We expect both commercial and consumer deposits to increase.

Moving on to overall fee income and expense expectations for 2014, as a reminder these comparisons exclude $534 million in 2013 fee income related to gains on Vantiv sale and changes in the warrant value. Our 2014 guidance likewise excludes any effects from Vantiv events other than our normal recurring income. Overall, we currently expect a mid to high single digit decline in total fee income in 2014 compared with adjusted fee income in 2013, primarily reflecting a forecast reduction in mortgage banking revenue of about $325 million. The forecasted reduction in mortgage revenue is about $50 million more than we expected in January, primarily reflecting continued softening in originations and the impact of our decision to exit the brokerage channel that we announced in March.

Excluding mortgage we expect fees to grow in the mid-single digits range in aggregate versus 2013 with growth in all other fee categories. Looking at the details within fees; we expect to see mid-single digit percentage growth in deposit fees. We brought our expectations a down a bit reflecting a moderation in both consumer and commercial service charges.

We continue expect investment advisory revenue growth in the 10% range, corporate banking revenue growth in the mid-teens range and card and processing revenue growth in the mid-to-high single digits range. And lastly, as I mentioned, we currently expect mortgage banking revenue to decline about $325 million from 2013. We currently expect originations and gain-on-sale revenues to be fairly consistent throughout the last three quarters of the year.

Turning to expenses, we expect full year non-interest expense to be down in the mid-single digits relative to reported 2013 expenses. I'd note that we've been managing our expenses very carefully and given the revised outlook in some of our fee categories we would also expect to revisit expenses [inaudible] on a large base so it does not change on the macro percentage guidance. We will continue to manage expenses carefully and aggressively in line with revenue results in that economic environment.

Overall we still expect to achieve positive core operating leverage in 2014 excluding Vantiv. And we expect PPNR growth mostly into this range for the year. And importantly we still expect the efficiency ratio to move below 60% in the second half of the year. As for taxes we expect the full year 2014 effective tax rate to be in 27% to 27.5% range.

Turning to credits, we've adjusted our outlook for full year net charge-offs upward by about $60 million to reflect the elevation in first quarter charge-offs. That translates to about 50 basis points for the year. There was no meaningful change otherwise to our outlook for the last three quarters of the year as we continue to see improvements in overall credit quality metrics including non-performing and criticized assets. We still expect a significant decline in NPAs down about 15% from last year levels and for the NPA ratio to move solidly below 1% during the year.

With respect to loan loss reserves we continue to expect the benefit of improvement in credit reserves to be partially offset by new reserves related to loan growth.

Finally a housekeeping note. The segment reporting that we provide on page 34 of the earnings release reflects a reorganization of our business banking unit which primarily impacted the commercial and branch banking segment this quarter. This change was also applied retrospectively to our segment reporting and is reflected in all periods presented.

In summary the strong fundamental progress in our business was obscured to some extent this quarter. However with strong momentum in our core businesses and our ability to make progress in our strategic initiative of generating core PPNR growth in what remains a challenging environment for banking institutions. We're improving efficiencies while investing in our business and we believe we remain well positioned as we progress through the year.

That wraps up my remarks. Sally can you open the line for questions please.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Paul Miller with FBR. Your line is now open.

Jessica Sara Levi-Ribner - FBR Capital Markets & Co.

Hey, good morning. This is Jessica Ribner for Paul. How are you?

Kevin T. Kabat

Good. How are you?

Jessica Sara Levi-Ribner - FBR Capital Markets & Co.

Good, thanks. Just a couple of questions. The first is how much more room do you think you guys have reserve releases in the coming quarters given that you're at a 165 basis points reserve ratio?

Tayfun Tuzun

Yeah, in general we've not provided forward-looking guidance on reserves other than saying that in 2014 our reserves are likely to be lower than in 2013 and we will probably stick to that guidance. We have a very solid ratio at 165 and we feel very comfortable with the credit profile of our balance sheet. And in that respect we would still expect that number to go down. But beyond that in this environment it is difficult to provide a more precise outlook for reserves.

Jessica Sara Levi-Ribner - FBR Capital Markets & Co.

Okay, thank you. And then just one question on the mortgage banking side, I know you mentioned during the call that you don't expect to see a pickup above last year or even to last year's level but what are you seeing in the spring buying season, is it encouraging for the rest of the year?

Kevin T. Kabat

It is too early to tell. We clearly are now entering the high season and coming out of a very cold winter in our footprint in the Midwest. It's early to tell but so far I think originations are moving along as expected.

Jessica Sara Levi-Ribner - FBR Capital Markets & Co.

Okay. Thank you very much.

Kevin T. Kabat

You're welcome.

Operator

Your next question comes from the line of Ken Usdin with Jefferies. Your line is open.

Kenneth M. Usdin - Jefferies & Co. LLC

Thanks, good morning. Tayfun I was wondering on the expense side when you guys talk about the outlook you are working on for the last year's reported. So if I look at $950 million of reported expenses with the $51 million litigation and severance and the $24 million seasonal increase I was wondering if you could you level set us on how we should think about the progression after the first quarter, do we start at $875 million and then move from there.

Tayfun Tuzun

Well obviously the first quarter excluding the one-time you just mentioned number is below $900 million, including the $24 million in employee related seasonal numbers. Going forward we probably will be up a little bit but the remainder of the year should fairly -- should be stable, so there we shouldn't see quarter-to-quarter changes relatively though compared to the adjusted number, our expenses will probably inch up.

Kenneth M. Usdin - Jefferies & Co. LLC

And could you talk -- so I just wanted ask you to explain through that, so if you got the seasonal $24 million what would the seasonal $24 million be completely replaced by if you are talking about mortgage continuing to be a little bit soft underneath?

Tayfun Tuzun

Yeah we will -- there is a little bit seasonality in our marketing expense. You will see that in the second and third quarters of the year and beyond that there are really small changes in different line items nothing big quarter-to-quarter, in mortgage just because, our production goes up in the second and third quarter you will see some uptick in base compensation expense probably just for a couple of quarters on the mortgage side towards the end of the year.

Other than that it's really is sort of across the board, there's nothing meaningful in any one line item.

Kenneth M. Usdin - Jefferies & Co. LLC

Okay, and then on the capital side you talked about just always checking to understand forwards versus the approval is that you got on this year's CCAR so how do we think about, how you are thinking about this year in terms of getting through the new approval and any change in your view about continuing to monetize Vantiv.

Kevin T. Kabat

So when you look at our 2013 CCAR plans, what we announced at the beginning of that period and what we executed was very much sub line. So we fully executed our 2013 capital plan. Our expectation is that we will fully execute our 2014 capital plans, as we disclosed in March with $669 million in buybacks and a potential increase in dividend to 13 bps -- $0.13. And those are obviously subject to Board approval and financial conditions. But in general our expectations would be the same as 2013.

With respect to Vantiv we own 25% of the company right now. The company is doing very well but we publicly stated that our long-term strategic goal is not to maintain a large ownership in a publicly traded company and we will execute on that plan. You will likely see sales this year, it's difficult to predict the timing. But what we laid out in our plan last year with respect to our thoughts in Vantiv we will continue to execute this year.

Kenneth M. Usdin - Jefferies & Co. LLC

Okay. Thanks very much.

Kevin T. Kabat

You're welcome.

Operator

Your next question comes from the line of Scott Siefers with Sandler O'Neil. Your line is open.

Kevin T. Kabat

Good morning, Scott.

R. Scott Siefers - Sandler O'Neill + Partners L.P.

Good morning, guys. Hey Tayfun I was wondering if you could just speak broadly to commercial pricing dynamics that you are seeing and just as you look at the prospects of additional pressure on the NIM how heavily is it weighted towards pricing issues versus things like continuing to liquidity build and prep of LTI, things of that nature?

Tayfun Tuzun

I will make some general comments and I will turn it over to Jamie to comment on his actions with respect to liquidity. In general the market continues to be competitive. And you've seen that from other peer banks as well. We are now maintaining a very tight discipline around pricing and around credits attached to those pricing levels. And we are likely to see more compression in commercial loans.

As you’ve seen some comments about pricing in commercial real estate where we play there is a big difference than the long term commercial mortgage product doesn’t necessarily fit our balance sheet. We are not completing in that segment where lot of the insurance companies and pension funds appear to have increased their focus. In commercial lending C&I per se we are seeing continued price compression although quarter-over-quarter comparisons in our commercial unit is a bit misleading because we had a couple of moving parts in Q4 to our benefit and couple and as you will see so Jamie you want to comment on how you see this spread compression coming from commercial versus everything else that you are doing in the balance sheet.

James C. Leonard

Sure Tayfun. Scott's it Jamie. The NIM outlook on 2Q as Tayfun mentioned in his prepared remarks we were -- continue to expect the NIM in 2014 of about 315. I think that is where the second quarter should end up and the moving parts there one to two bps of loan yield compression, a couple of bps declined due to day count, and then the remainder being the impact of the additional portfolio leverage and then the funding cost to go along with it. And again I think we’ve managed the first quarter very effectively. We are pleased with the outcome and being up a bps well continuing to add the portfolio leverage and a lot of that was due to continued discipline in pricings in commercial auto and mortgage.

R. Scott Siefers - Sandler O'Neill + Partners L.P.

Okay. That’s perfect thank you very much for the color.

Operator

Your next question comes from the line of Matt O’Connor with Deutsche Bank. Your line is open.

Kevin T. Kabat

Morning Matt.

Unidentified Analyst:

Hey yes, it's Dan for Matt. Quick question on the fees with the fee income guidance coming down this quarter in some of that businesses like investment advisory and deposits fees, is that primarily due to a weaker January and February with the weather? Are you seeing activity a bit lower than expected?

Tayfun Tuzun

No, look I mean I think you know we want to make sure that we provide you guys with an updated realistic look. And I clearly the first quarter activity, as Kevin mentioned result in his remark was lower than we expected and whether it was due to weather or something else, at this point we don’t want to speculate but we’ve seen the pick-up in March, we’ve seen very good household built up in March and in to April here which should be of little bit of a better direction in consumer related fees.

In general our IA business which is primarily focused on private wealth management and brokerage is doing very well, despite the fact that we may have lowered the outlook a little bit that’s still is a strong growth business for us.

In corporate banking it's still expected to be up double digits. So those are very strong numbers. We are not changing the tone of our outlook but we felt we had to make some adjustments for what these came in January and February this quarter so far.

Kevin T. Kabat

Said, a little bit differently Dan it's really difficult to tell you whether or not those fees catch up or they simply trend back and we are not going to make the assumption that day we get any kind of catch up from those perspective particularly as it relates to the consumer side of the house is just we don’t think that’s a reasonable expectation. And that’s why to Tayfun's point we've kind of given the guidance that we’ve given.

Unidentified Analyst:

Got it, thank you.

Operator

Your next question comes from the line of Erika Najarian from Bank of America. Your line is open.

Kevin T. Kabat

Good morning, Erika.

Erika Najarian - Bank of America Merrill Lynch

Good morning. My first question is on the efficiency guidance. It’s a bit of a two parter. And Tayfun I appreciate the color you gave on breaking the 60% efficiency ratio in the second half of the year. How much of a decline in your litigation reserve accrual play into that guidance? And additionally could you give us a little bit more color in terms of the opportunity you mentioned to evolve the structure? And what that can imply for your efficiency outlook for 2015?

Tayfun Tuzun

Yes, first of all I think adjusting for the litigation reserves and Vantiv our numbers already are pretty close to 60%. So from here on we don’t forecast

Be close to 60%. So from here on we don't forecast additional litigation reserves. So my guidance for the efficiency ratio does not include additional litigation reserves and we would not make that forecast. We would not build that into our forecast. But we're confident given the strength in our fee income, our NII increase, 2% year-over-year and the ability to manage the expenses down that we will be able to reach a below 60% efficiency ratio in the second quarter.

With those numbers obviously we have some expected efficiency gains on the retail side this year which we would expect to continue into 2015. We're seeing, as we've shared with you in December and again in February, we're tracking consumer behavior very closely. We've a very close eye on what that means for expenses in our branch system. We would expect that behavior to continue to move in our favor. We've seen that in Q1. We're seeing increased usage of ATM and digital use in transaction volumes. If that trend continues and I should say it is likely to continue to from our perspective we should see increased efficiencies in 2015 in addition to what we're seeing this year.

Erika Najarian - Bank of America Merrill Lynch

Got it.

Kevin T. Kabat

And Erika just one color on that. That's all while still continuing to invest in our top-line, the revenues and our ability to grow the company from that perspective. So we've got a balanced perspective and we're trying to make sure that we do what's best for our shareholders long-term, not just short-term given the environment that we have.

Erika Najarian - Bank of America Merrill Lynch

Got it, and a follow-up question. There has been much talk during this earning season about leverage loans and shared national credits. Could you give us a sense of let's say over the past four quarters how much leverage lending and shared national credits have contributed to your overall C&I growth and perhaps remind us how those credits performed during the last two credit cycles versus third relative to your the rest of your C&I book?

Tayfun Tuzun

Yes. Let me, thanks for asking the question. It's clearly has been discussed in different platforms. First of all I think relying on third-party information to deduct any type of origination levels for individual banks is extremely difficult because what's being published and what's been used to support some of the research is totally based on splitting book running credits without actually looking at how much credit each book runner is keeping from each transaction.

So for example in 2013 if you look at total lead table book runner credit, that's $5.3 billion and that's been associated with us but when we look at actual our total committed levels it's less than half of that amount and when you look at the outstanding it's close to only 25% of those amounts. So you can't -- it's very difficult to start with the top line relying on third-party published numbers and coming out with loans in that -- that hit our balance sheet.

And of that amount just remember the way they define notes, of that amount only a fraction of the $1.3 billion for 2013 is in leveraged loans and that's probably in the mid-teens. So as you sort of peel the onion you will get to a number that is much smaller than what the top line number would indicate. So for the first quarter of 2013 if you were to add up the credits that we were part of as a book runner the gross number would be $2.4 billion. But our committed number total in Q1 was a little less than $700 million and the loans on our books currently is less than half of that, which is $340 million. And it's a smaller amount, a much smaller amount is again in the leverage loans. So one needs to be very careful in terms of interpreting syndicated loans volumes or leverage loan volumes because what they describe as leverage is truly loans that are below investment grade.

Now how do we sort of view syndicated lending within our commercial business? Syndicated lending is an important part of our business. As you know over the last three four years, we've shifting our commercial lending up towards higher end of the corporate volume sector, our investments in healthcare, our investments in the energy sectors and our investments in the mid-corporate sector, they all have moved us up in terms of the size of the borrowers.

So when you look at the borrowers, these are companies with $250 million or higher in revenues, their borrowing needs are going to be larger and clearly no one bank can handle the entire borrowing needs of those institutions. So we end up basically participating in syndications. And the other misnomer a little bit is people look at the agents and volumes and they correlate those with leads where banks are participating heavily in either structuring or underwriting the credit, well again very long our strategy in building up and the size of the borrowers, we also have increased the capacity on the capital market side. And what we are seeing is that in half or even in some quarters close to two-thirds of these transactions we are heavily involved in structuring and syndicating these credits.

So what's happening today is very much in line with what we expected two-three years ago when we ventured into the upgrades in our commercial lending platform and the upgrade in our capital markets platform and we are seeing the results and these are expected results. Today about 39% of our total commercial loans is in syndicated credit, that's the number that we are very comfortable with.

In terms of the credit profile of our syndicated book when you look at the performance of these, what you will see is charge-offs, NPA ratios, non-accruals have got the remainder of the portfolio, the credit grades in this portfolio are better than the credit grades when you look at the broader commercial portfolio that we own. So again what we're trying to do is we're trying to differentiate what it means to be in syndicated lending, the fact that it's part of our strategy and at 39% of commercial loans we're very comfortable where this portfolio is.

Jeff Richardson

Let me just add, this is Jeff. Kind of going back to original question, our leverage portfolio is using the regulatory definitions, it's about $4.8 billion, so less than 10% of our portfolio and why we are also very comfortable.

Kevin T. Kabat

Yes, and that's actually in the slides that we…

Jeff Richardson

Yes, and that has not grown over the last 12 to 15 months. So it has not been really attributable to losses.

Kevin T. Kabat

And while we 're at it, let's clarify one more issue. Our life lending has been talked about quite a bit over the last number of quarters. Our exposure to covenant life lending is less than 1% of our portfolio. So and it's page to pay attention to the details and we're providing this disclosure to make sure that the research out there appropriately reflects our exposures.

Erika Najarian - Bank of America Merrill Lynch

That is a very complete answer. Thank you. Thanks.

Kevin T. Kabat

You're welcome.

Operator

Your next question comes from the line of Kevin St. Pierre with Sanford Bernstein. Your line is open.

Kevin St. Pierre - Sanford Bernstein

Good morning. So in the quarter we saw a significant increase in the loans transferred to non-performing, is that related to the three commercial credits?

Kevin T. Kabat

Yes.

Kevin St. Pierre - Sanford Bernstein

Okay, and then if could just follow up on capital and the CCAR, so 2014 your submission was designed to maintain capital ratios. Do you anticipate a point, be it 2015 you maybe you tell me when we might be able to start managing ratios down to some endpoint target in the eights?

Kevin T. Kabat

That's the question we ask frequently. We get to every year prior to our submission of our CCAR package, we have debates here, we have debates with our peers and everything now, it's hard to forecast that, Kevin. In this environment, the regulators are doing a much better job in terms of communicating with us. Every year this process is getting better. We are learning more about how they view capital management and learning more of the processes we would hope that going forward this process will continue to evolve in a positive direction as we've seen over the last two years.

Kevin St. Pierre - Sanford Bernstein

All right. And may be if you could remind us of your capital deployment priorities obviously this year is dividend and share repurchase but as we get into next year and perhaps ramping up capital return how you would view M&A organic growth, share repurchase, what your priorities might be?

Kevin T. Kabat

Yeah Kevin again I think the forecast for this year is correct and accurate. I am not sure when or if '15 is significant different as we get better ideas, we get later in the year. We can give you a little bit better color on what we anticipate. But I wouldn't expect a lot of significant change in terms of the immediate priority at least as far at this point.

Tayfun Tuzun

I think we've said also that we're not inclined to pilot capital in case may be there is an M&A deal of this nature. We are managing capital in a general range and like any company if an M&A transaction came along then they adjust our capital activity. So anything that we ever did this large we might -- we will probably be issuing shares and if there were small we can manage that through adjusting our share repurchases.

So our priorities are to hold capital in the general range of return and not worry about future M&A.

Kevin T. Kabat

And keep in mind too Kevin again we try to be very transparent in terms of strategy for us but we have an awful lot of what I refer to as off sheet capital as well for use in case something attractive to our shareholders came along for us to purpose.

Kevin St. Pierre - Sanford Bernstein

Great, thank you very much.

Operator

Your next question comes from the line of Brian Foran with Autonomous. Your line is open.

Kevin T. Kabat

Good morning, Brian.

Brian Foran - Autonomous Research

Good morning. I guess a few just clarifications on the guidance because we think about the asset base to apply the ROA too I'm just going to streamline my model for two lines. You have been growing faster on assets at least year-over-year on assets just faster than loans held from investment right now, is that going to continue for the whole year given the liquidity build or is the mid-single digit held for investment a roughly good guide for total assets as well.

Tayfun Tuzun

Yeah, I think the way to look at it will be mid-single digit growth on loans, high single digit growth on earning assets and then somewhere in between on total assets would be the right way to model that.

Brian Foran - Autonomous Research

And then on the positive advance product, I apologize if missed it earlier but could you just remind us what the impact is and the pace of that impact as we move through the year?

Tayfun Tuzun

Yeah as we know we are in January, we announced that we no longer are accepting new customers in that line item. We will continue to service existing customers until the end of the year and then we will be out of that product completely at the end for this year.

In terms of the earnings related to the early access product, those are in other consumer longer leases category and the vast majority of that line item belongs to that product. In terms of the outlook as to where that will go this year clearly we've taken out growth from earnings related to that product that we'll continue to earn and our teams are currently working diligently for a substitute product. It's too early to tell what that product is going to look like again how to build the earnings capacity of that product into our outlook.

Brian Foran - Autonomous Research

If I could sneak in one last you referenced the pace of global banking change on a couple of the past calls you've talked about some pilot markets where you are testing out some new branch formats, and new staffing formats, are there any kind of early learning from that, that can help us think about what the framing of the opportunity for 2015 on the branches might be

Kevin T. Kabat

Let me answer the second part of your question first, I think it's a bit early to start building expectations through 2015 but when we look at the pilots, the pilots continue to operate very successfully. And as we've discussed these tests are designed to address the customers' changing behavioral patterns. And we continue to see uptick and their activity through the ATM channel, mobile channel, we continue to see changes in the way our teller lines are being utilized.

We are very excited about how our newly created job definitions are working in addressing the combination of sales activity and the channel activity. So whether it's with respect to the quality of customer service or with respect to the efficiency that's attached to changes we are very encouraged by the signs that we are getting from the test. And we will share with you as the year goes along what our expectations would be with respect to 2015. But we’d like to take a little bit more time to read the tea leaves on this prospect.

Brian Foran - Autonomous Research

Appreciate it, thank you.

Operator

Your next question comes from the line of Keith Murray with ISI. Your line is open.

Kevin T. Kabat

Good morning.

Keith Murray - ISI Group Inc.

Good morning. Just a question on the other non-interest income line I know it’s felt over the gains sector but if you back out the impacts from Vantiv let's say core number is again $76 million this quarter. If you do it for last quarter we are sort of in the $80 plus million range. If you think about your outlook and folks in our seat trying to model it what's kind of a core or average number you think could you use for other non-interest income?

Kevin T. Kabat

That’s line item is a combination of many bits and details, that includes for example our Vantive earnings that includes our rolling income and price holding fees et cetera, it's difficult to say that precisely clear and give you a guidance outlook. But in general I would expect over the next two three quarters, the fourth quarter core numbers probably would approximate what we should expect there.

Keith Murray - ISI Group Inc.

Okay. And then just going back to the LTR on top of obviously the impact to net interest margin et cetera, if you think about it from a cost side and then having to calculate it daily potentially how big of an undertaking as that as far as potential cost and impact on just going forward?

Kevin T. Kabat

I would say it’s not as much the cost to calculate it every day as much as it is the challenge that our employee will have to dedicate and have been dedicating months of efforts in managing the data, the field and staging all of this information and then the overall IT infrastructure work that has to occur. We can do it all in house with the systems we have. So it’s not a large cost from that perspective. However it’s a lot of manpower to do the LCR calculations and obviously having the ability to forecast and factor in the volatility from the different deposits spaces and mixes that you have is really a challenging thing and why everybody is focused on having a buffer to the minimum components level. But it’s definitely a lot of work but it shouldn’t be a lot of external spend to make that happen.

Keith Murray - ISI Group Inc.

Okay thank you very much.

Operator

There are no further questions at this time. Mr. Eglseder, I will turn the call back over to you.

Jim Eglseder

Great, thanks for listening today. I did want to make one clarifying point to our response to a question earlier. I think we mentioned that efficiency ratio would go below 60% in 2Q that’s actually two half so that was not intended to be a change from our expectations, just so everyone is clear on that. But otherwise thanks for joining us on the call today, that's all.

Operator

This concludes today’s conference call. You may now disconnect.

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