Fifth Third Bancorp (NASDAQ: FITB) Q4 2019 Earnings Call Transcript

Fifth Third Bancorp (FITB) Q4 2019 earnings call dated Jan. 22, 2020

Corporate Participants:

Chris Doll — Director of Investor Relations

Greg D. Carmichael — Chairman of the Board, President and Chief Executive Officer

Tayfun Tuzun — Executive Vice President and Chief Financial Officer

Frank R. Forrest — Executive Vice President and Chief Risk Officer

James C. Leonard — Executive Vice President and Treasurer

Lars C. Anderson — Executive Vice President and Chief Operating Officer

Analysts:

Scott Siefers — Piper Sandler — Analyst

Ken Usdin — Jefferies — Analyst

John Pancari — Evercore ISI — Analyst

Ken Zerbe — Morgan Stanley — Analyst

Erika Najarian — Bank of America — Analyst

Matt O’Connor — Deutsche Bank. — Analyst

Saul Martinez — UBS — Analyst

Christopher Marinac — Janney Montgomery Scott — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Fifth Third Bank’s Fourth Quarter 2019 Earnings Call. [Operator Instructions]

I will now hand today’s conference over to Mr. Doll. Please go ahead.

Chris Doll — Director of Investor Relations

Thank you, Dkitria [Phonetic]. Good morning and 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 our materials, which can be found in our earnings release and presentation. These materials contain reconciliations to non-GAAP measures, along with information pertaining to the use of non-GAAP measures, as well as forward-looking statements about Fifth Third’s performance. We undertake no obligation to and would not expect to update any such forward-looking statements after the date of this call.

This morning, I’m joined by our President and CEO, Greg Carmichael; CFO, Tayfun Tuzun; Chief Operating Officer, Lars Anderson; Chief Risk Officer, Frank Forrest; Treasurer, Jamie Leonard. Following prepared remarks by Greg and Tayfun, we will open the call for questions.

Let me turn over the call now to Greg for his comments.

Greg D. Carmichael — Chairman of the Board, President and Chief Executive Officer

Thanks, Chris, and thank all of you for joining us this morning. Earlier today, we reported record full year 2019 net income of $2.5 billion or $3.33 per share. Full year adjusted net income of $2.1 billion was also a record for the Bank.

As I reflect on the past year, I’m very pleased with the significant progress we made positioning Fifth Third for long-term success. In addition to the record net income, we generated our best full year core return on tangible common equity excluding AOCI in over a decade, up 120 basis points from last year. We produced our lowest efficiency ratio in over a decade, which decreased 160 basis points from last year. We generated peer-leading household and deposit growth, all while reducing deposit cost during the year.

Also during the year, we successfully integrated MB Financial. We added significant scale in the Chicago market and expect to generate even 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 5 basis points after expanding 18 basis points in 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 in wealth and asset management, while generating positive inflows every quarter during the year.

Net charge-offs and other key credit metrics remained at or near historically low levels throughout the year. We generated nearly $0.5 billion of excess capital through Worldpay transactions in 2019, which is yet to be deployed. And we returned over 110% of adjusted earnings to shareholders in 2019 through a 27% increase in our dividend and through share repurchases.

In summary, we are extremely pleased with the progress we have made and expect to build on our strong performance in 2020 and beyond.

For the fourth quarter, net income available to common shareholders was $701 million or $0.96 per share. Reported results included a positive $0.28, primarily from the successful Worldpay tax receivable agreement transactions completed during the quarter. Since the spin-off of our processing business 10 years ago, we have generated over $7 billion in pretax value for our shareholders, with another $195 million remaining in TRA income, which will be fully realized over the next five years. Tayfun will discuss the fourth quarter TRA transaction in more detail.

Our fourth quarter financial results were very strong, reflecting our prior North Star investments to further diversify our revenue streams, prudent balance sheet management, continued expense discipline and our success in achieving the targeted 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 reflect our ability to successfully manage the balance sheet despite the lower rate environment, which led to strong NIM 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 in 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 during the quarter was consistent with our previous guidance, reflecting the generally subdued macroeconomic environment. Total commercial loans were stable and consumer loans were up 1% sequentially. Following our trend, we successfully generated strong core deposit growth while proactively reducing deposit cost more than our previous guidance. Our average loan to core deposit ratio of 90% is the lowest in over 15 years.

Credit results during the quarter were partially impacted by our conversion to a national charter. Excluding this impact, net charge-offs were up just 1 basis point sequentially, with consumer flat and commercial up 2 basis points. Provision was primarily impacted by growth in specific reserves related to a couple of commercial loans.

Before I turn over to Tayfun to discuss our results and outlook, I’d like to once again emphasize our strategic priorities to outperform through the cycle and generate long-term shareholder value. As I mentioned, we have been very successful in executing our priorities throughout 2019 and have delivered on our targeted outcomes as expected. We will continue to focus on these priorities going forward, including: leveraging technology to accelerate our digital transformation; investing in talent, capabilities and process improvements to generate relationship growth and improve profitability; continue to expand our presence in select geographies, focusing on high-growth markets. We are investing in the Southeast footprint with better deposit growth trends, higher expected population growth and greater market vitality. And lastly, we are focused on maintaining our disciplined approach throughout the Company.

To that end, our capital allocation priorities are: organic balance sheet growth, fee-generating non-bank acquisitions, paying a strong dividend, and share repurchases. Bank acquisitions are not a priority. Our medium term CET1 capital target remains at approximately 9.5%. We plan to increase our dividend another $0.03 this quarter. Subject to Board approval, we expect to execute our remaining buybacks from CCAR 2019.

Our clearly-defined strategic growth priorities, our proactive balance sheet management, and 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, while continuing to invest for long-term performance. I’m pleased to report that we were again able to deliver strong financial results. Our strong performance this quarter was a direct result of our employees’ hard work and dedication to keeping the customer at the center of everything we do.

With that, I’ll turn it over to Tayfun to discuss our fourth quarter results and our current outlook.

Tayfun Tuzun — Executive Vice President and Chief Financial Officer

Thank you, Greg. Good morning, and thank you for joining us today. Let’s move to the financial highlights on Slide 4 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, non-interest income and non-interest expenses, all performed in line or better than our October guidance. Reported results for this quarter were positively impacted by $0.28 per share from several notable items. The most significant was a $265 million after-tax gain from the Worldpay TRA transaction, which added approximately 20 basis points to our CET1 ratio. Similar to all of the strategic decisions related to our legacy processing business over the past 10 years, the TRA transaction creates significant value for our shareholders by monetizing gross cash flows that previously expected to occur primarily from 2025 until 2035. Consequently, we are also no longer exposed to FIS’ 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 TRA transaction, reported results were also affected by a $34 million after-tax negative mark related to the Visa total return swap, a $15 million after-tax contribution to the Fifth Third Foundation and a $7 million after-tax impact from MB merger-related charges. Additionally, our quarterly results were negatively impacted by a $7 million 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 are affected by this conversion. Adjusting for those items and the purchase accounting impact 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 also increased 30 basis points from the prior year to 14.8%, while 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 5, 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 our 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 payoffs. We have experienced higher-than-usual payoffs this quarter in our leveraged lending and structured finance portfolios, as well as in our construction portfolio.

New loan production in regional middle market banking has increased every quarter since the first quarter of 2019. Our new loan originations, particularly in Cincinnati, Chicago and Florida, were 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 decline 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 CRE 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 in 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 to remain 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 6, reported net interest income declined 1% compared to the prior quarter. The purchase accounting adjustments benefited our fourth quarter NII by $18 million and our net interest margin by 5 basis points compared to $28 million and 7 basis points in the third quarter. Adjusting for purchase accounting accretion, NII 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 3 basis points from the third quarter adjusted NIM, which was better than our October guidance of down 4 basis points to 5 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 basis points to 18 basis points. We expect interest-bearing core deposit costs in the first quarter to decline approximately another 8 basis points 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 in 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 1 basis points to 2 basis points from the fourth quarter core NIM of 3.22%, reflecting the increasing benefit from the forward-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%, consistent with our October guidance and down just 2 basis points from our core 2019 NIM, 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 on to Slide 7, we had a stronger quarter in fee income than we guided to in October. Adjusted non-interest 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 are very pleased with the second half revenue strength in capital markets, especially the growth from our regional banking client 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 have made in our North Star project in talent and in advanced capabilities to better serve our clients. As we anticipated, the return 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. Origination 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 in new AUM 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 a stronger year in 2020 in our consumer and commercial deposit service charges, based on the trend that we are seeing.

Our 2019 non-interest 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 non-interest income growth of approximately 8% relative to the adjusted 2019 level of $2.711 billion, including the expected Worldpay TRA 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 NII growth and strong increase in fees, we expect to achieve a very strong 4% total revenue growth in 2020.

Moving on to Slide 8, fourth quarter reported pretax 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 and prior-period items shown in our materials, non-interest expense was flat sequentially. We remain on track to deliver on the previously-provided outlook for MB-related expense savings. We continue to expect to achieve $255 million in savings by the end of the first quarter of 2020. 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 of the $3 raise 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 a 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 OCC charter 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 a 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 2% and 3% compared to adjusted 2019 non-interest 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 under potentially less favorable economic conditions. We recognize that as we navigate through the environment, investments in projects with lower returns may be de-emphasized or delayed in order to focus our capital investments in the highest areas of importance within the four strategic corporate priorities.

Turning to credit results on Slide 9, due to our national charter conversion, fourth quarter credit results were impacted by accounting policy changes to conform to OCC guidance regarding certain assets, which resulted in an increase in TDR and OREO balances. These changes increased consumer NPLs by $83 million and NPAs by $113 million, which added 7 basis points to the NPL ratio and 10 basis points to the NPA ratio. The same change resulted in a one-time $10 million increase in charge-offs, all within our consumer portfolio. Excluding the one-time OCC impact, net charge-offs remained at historically low levels during the quarter. The consumer net charge-off ratio was flat and commercial was up 2 basis points sequentially. The adjusted NPA and NPL ratios continue to be benign and in line with the levels that we have seen all year.

The ALLL 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 two 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 the 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 CECL adoption, which is in effect as of January 1, the day-one adjustments will result in an increase of approximately 48% to 50% or between $645 million and $675 million to our allowance for credit losses, which includes reserves for unfunded commitments, 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 CECL treatment of reserves, which adds more than 10% to the increase that I mentioned. As discussed previously, excluding the impact of MB, we expect reserves for commercial loans to decrease and consumer and mortgage loans to increase relative to the incurred loss methodology. We plan to include a full description and transition details in our upcoming 10-K disclosure.

Consistent with peer banks who have recently commented on the impact of CECL, given the number and potential volatility associated with the underlying variables supporting the CECL methodology, we expect more volatility in our quarterly provision expense. Our calculations for the allowance for credit losses rely on various models and estimation techniques, utilizing historical losses, borrower characteristics, economic conditions, and a reasonable and supportable forecast, as well as other relevant factors. For expected losses in our reasonable and supportable forecast period of three years, we will use three macroeconomic scenario. 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 CECL, we will be providing forecast for 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 basis point to 40 basis point range, which is up just a few basis points compared to the 36 basis point 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 in 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 1 ratio was 9.7% and our tangible common equity ratio, excluding AOCI, was 8.4%. Our tangible book value per share was $21.13 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 1.5% 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 CCAR cycle. Between the Worldpay sale gains in the first quarter of 2019 and the impact of the recent TRA transaction, we have nearly $0.5 billion of additional capital above our initial expectations as we proceed into the 2020 CCAR 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 million 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 the progress we’ve made over the past few years toward achieving our goal of outperformance through 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 for Q&A.

Chris Doll — Director of Investor Relations

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] And your first question comes from the line of Scott Siefers with Piper Sandler.

Scott Siefers — Piper Sandler — Analyst

Good morning, guys. Thanks for taking my question. Hey, Tayfun, I just wanted to ask about the fourth quarter provision and give some detail on the items impacting it, in addition to just the move to the national charter. But you had, it sounds like, a couple of commercial credits and then the impact from the credit card portfolio as well. Just as you think about things sort of on a go-forward basis, how much of that proves transitory and how much, if any, is sort of a new run rate? In other words, if it was higher than expected this quarter due to some of those kind of revert back down, or what’s the best way to think about it?

Tayfun Tuzun — Executive Vice President and Chief Financial Officer

Sure. Scott, I will make a few comments and I’ll turn it over to Frank for the credit piece. We believe that clearly these couple of credits that just happened in one quarter impacted the provision numbers, which we believe to be transitionary. If you look at our guidance for next year, we are clearly expecting continued stability in benign credit performance away from sort of the accounting-related changes in our credit metrics. This truly was just one of these quarters where a few credit loans came up. But, Frank, do you want to comment on that?

Frank R. Forrest — Executive Vice President and Chief Risk Officer

Tayfun, I will. And Scott, we’ve talked about before, the commercial business — and we’ve [Phonetic] done this a long time — is lumpy. It’s the nature of the business, lumpy. One quarter, that makes a trend in either direction in the commercial business, and it’s something that you manage over an extended period of time. These two credits are non-related to each other. They’re both kind of core middle market companies. The company has actually banked for a long period of time. One is a retailer. One is in the hospitality sector. They’re just — they’re going through a workout and they happen to hit at the same time. But if you revert back to the year and if you look at our overall, again, results for the year, we’re actually very pleased with the asset quality for the year. As we said before, our criticized assets came within our expectations for the year. Our outlook for 2020 has really not changed other than maybe a 2 [Phonetics] basis points, 3 [Phonetics] basis points increase, just given the economy. And overall, our nonperforming assets for the quarter were centered on these two items, the $50 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. So we’re highly confident — I’m highly confident we’ve done that. These are middle market credits. The increases we’ve actually seen for the year in our problem credits have been tied to kind of the lower-end middle market. A lot of that’s reflective of repositioning the rating system from MB. Some of it’s in our systems as well. Those credits tend to be very well secured and historically have a loan loss rate, and it’s a very granular portfolio, which is what we like to see.

When you think about the portfolios, at least in my experience, where we — you should be concerned, as you think about the economy, when an economy slips [Phonetic], it’s commercial real estate, it would be your large corporate book and it would be leveraged. And when you think about our commercial real estate book, we have the lowest concentration of commercial real estate loans than [Phonetic] any of our peers. And that portfolio has performed exceptionally well. And we position it with companies today that are basically national and large regional developers that are essentially investment grade or near investment grade, lot of liquidity. Our large corporate books performed exceptionally well, our shared national credit book; very low level of criticized assets, and it’s very diverse. We manage the risk exposures there, I think, very prudently.

And when you think about leverage, leverage in our case, we’ve been focused on reducing that for now for four years. We’ve reduced over $5 billion in leveraged loans in the last four years, which is a 48% decrease. But we feel very good about the remaining leverage that we have today. We have specialized groups that lend to that sector according [Phonetic] to the line of business, and they’re tied together with specialists that we have in risk. And we manage it prudently, we monitor it prudently. So our overall thesis, I suppose, is that when you think about the portfolio and what Fifth Third has done over the last four years, we’ve completely repositioned this portfolio for success, and we’re highly confident that that work will project itself as we move forward in 2020 and beyond under any economic scenario.

Scott Siefers — Piper Sandler — Analyst

Okay. That’s helpful. I appreciate that. And then separately, Tayfun, I was curious on the gain that you got from the change in the TRA agreement, do you guys have the same flexibility to repurchase shares with that gain as you do under kind of a more traditional — if you were to just sell shares and get an after-tax gain in that way?

Tayfun Tuzun — Executive Vice President and Chief Financial Officer

Not with the gain that we book. We typically go to the Fed with a specific request. But clearly, the first quarter 2019 gain on share sales, we are able to buy back shares with that. But 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 CCAR exercise.

Scott Siefers — Piper Sandler — Analyst

Yeah. Okay, perfect. Thank you.

Chris Doll — Director of Investor Relations

Dkitria, are you there?

Operator

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

Ken Usdin — Jefferies — Analyst

Thanks, good morning guys. Can I ask a 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.

Tayfun Tuzun — Executive Vice President and Chief Financial Officer

I suspect that I’ll 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 our stable growth in consumer accompanied by good growth in household will continue. We do expect a stronger year in commercial deposit growth as well because we have a good amount of focus on the partnership in our treasury management group and our commercial deposit. Jamie, anything you want add?

James C. Leonard — Executive Vice President and Treasurer

Ken, this is Jamie. One of our goals this year is that 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%. Tayfun mentioned our focus is really improving the share of wallet that we get on the commercial side of the aisle because historically, retail, as you know, has been a very strong provider of deposits and funding for the Company over the years. So our focus is getting commercial 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 are intentionally running down our CD portfolio and repricing a lot of those higher-cost CDs around 2% or so, right now, repricing them down in the 1.25% 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 to what we expect in the first in the second quarter of the year.

Ken Usdin — Jefferies — Analyst

Got it, okay. And maybe as a follow-up, on the first quarter outlook, you talk about down 2% but you — NII. But you did indicate that you expect the 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 — it seems like that there wouldn’t be so much of a drag on fourth to first.

James C. Leonard — Executive Vice President and Treasurer

Yeah. From an NII dollars perspective, the fourth to the first is really driven by day count of $10 million, then higher wholesale funding costs and the impact of seasonal runoff in DDAs. That’s about $5 million. And then the investment portfolio, we expect to be down about $10 million from the elevated fourth quarter levels. The fourth quarter levels include a lot of the year-end one-time mutual fund dividend amounts, and that was $6 million. And so, the other portion of the investment portfolio reduction is that we did not reinvest cash flows in the fourth quarter. And as Tayfun 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 — will probably be in that 21% to 22% range over the course of the year.

Tayfun Tuzun — Executive Vice President and Chief Financial Officer

Yeah. And maybe this is a good point for us also to add that for the year, our NII guidance for the year basically assumes a fairly flat, even 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. But 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 will have an impact on the actual performance when we get to the end of the year.

Ken Usdin — Jefferies — Analyst

Okay. Thanks guys.

Operator

Your next question comes from John Pancari with Evercore ISI.

John Pancari — Evercore ISI — Analyst

Hey, good morning. On the CECL front, 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 into 2020 or how we could think about it on a full year basis on how it’s impacted by the adoption? Thanks.

Tayfun Tuzun — Executive Vice President and Chief Financial Officer

Sure. Yeah, I think the progress in our reserves and the impact on the provision number is probably very similar to others, except for when you look at what’s driving the higher reserve rates, it really is the longer dated loans and some of the consumer credit outstandings. We, as you know, 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 CECL, but just because in the current interest rate environment, I don’t think that we’re getting paid to grow that. And home equities have been declining. That’s another portfolio that has a relatively large increase in — under CECL compared to the incurred methodology. So those two portfolios should not contribute much in terms of increases in reserve coverage.

The one portfolio that we continue to grow is auto. Now, auto CECL is also higher than auto incurred loss. So that should have a slight sort of increase. But if we continue to grow our commercial book, as we have done so in the past, that’s our biggest book, and we will continue to grow that. I suspect that our coverage ratio ultimately will not change much from 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 a quarter under our belt, it is very difficult to establish good, reliable trends, given the impact of these various macroeconomic scenarios that we will be applying.

John Pancari — Evercore ISI — Analyst

Got it. Okay. Thanks Tayfun. 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 everything you had indicated that you’re retaining a majority of your targeted employees as part of the deal. You mentioned that last quarter. Just want to get an update on that front and where — how that’s been progressing.

Greg D. Carmichael — Chairman of the Board, President and Chief Executive Officer

Hey, John. Thanks for the question. This is Greg. First of all, we feel really good about the talent that we have in the Chicago market, as evidenced by the strong production numbers that we’re seeing 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 the form of individuals to late [Phonetic] expenses and so forth that did not have jobs offered to them. So a lot of 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 hit our expense targets that we modeled in this attrition is exactly where we’d expect it to be. So we’re — there’s no surprises here.

We’ve also taken a best-of-breed approach. So when you think about leadership in that market, all right, and as [Indecipherable] as CEO, we’ve retained the best of breed we thought to run that company. There’s redundancy. There’s optimization that’s going to occur. You would expect certain individuals to look for other opportunities as we modeled in. So it’s very much in line with what we expected. There was no surprises here. And we’ll achieve the objectives we’ve mentioned. But more importantly, the outcomes in Chicago, when you look at our retail franchise, our wealth business and our strong, strong core middle market production, we’re really excited about what we’re seeing there, and also the revenue synergies as they start to come together as we integrate that business into the rest of our business, whether it be asset-based lending, leasing, capital markets, into the old MB book, we feel really good about what we’re seeing there. And we’re very bullish on the ability to accomplish our objectives that we set forth in that market, but there is no surprises here.

John Pancari — Evercore ISI — Analyst

Got it. Thanks Greg. I appreciate it.

Operator

Your next question comes from the line of Ken Zerbe with Morgan Stanley.

Ken Zerbe — Morgan Stanley — Analyst

Great, thanks. And just in terms of corporate banking, obviously, you’ve had really good success over the last couple of years with that business. And I know 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? Is that — like how far forward can we continue to expect sort of those double-digit gains? I’m just trying to understand what’s sort of transitory versus more of a sustainable growth rate.

Greg D. Carmichael — Chairman of the Board, President and Chief Executive Officer

Ken, I’ll add to this and then I’ll turn it over to Lars for a little more color on this. First off, when you go back and think about our North Star commitments, a lot of those investments were in corporate banking, capital markets area. And those investments we said will start to materialize from a revenue perspective in 2019, you’re seeing that. Strength in 2018, continued strength in 2019. We continue to invest in that area because once again, it provides the products and services we need to better support our clients. And we have a great team assembled and we continue to make great progress in that area. So we would expect that performance to continue as we look into 2020 and beyond. So Lars, let me give you that.

Lars C. Anderson — Executive Vice President and Chief Operating Officer

Yeah, Ken, we’re really pleased with how the North Star investments foundational [Phonetic] have really played out. We shared with you in particular the re-platforming of our FRM business. We’re already seeing the benefits of that. You can actually see that in our foreign exchange performance this quarter. FRM business is really coming back. It’s strong. But in addition to that, a real focus on our advisory model, our relationship banking model and aligning our businesses to both our middle market focus as a company as well as our industry verticals to be an adviser, a consultant, which that meant that we really needed to go after the investment banking piece of capital markets. And that is paying big, 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 health care industry. Most recently, you saw the fact that we recruited 12 investment bankers in San Francisco. It aligns with our renewables and solar business. So that’s the theme here is to continue to build out a broad platform to serve the industries, geographies and segments that we plan to win in. 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 in our corporate banking success. I’m really proud of the talent that we have.

Ken Zerbe — Morgan Stanley — Analyst

All right. That’s great. And then, just maybe one follow-up question for Tayfun. You mentioned that you have higher regulatory expenses related to the charter change in 2020 as part of that 1% extra expense growth next year. Is there any seasonality related to that? I’m trying to figure out what’s — again, what sort of unusual first half kind of driven expenses versus this just permanently increases your expense base. Thanks.

Tayfun Tuzun — Executive Vice President and Chief Financial Officer

Yeah, there is no — Ken, there is about $11 million, $12 million just the direct fee that we pay to the OCC. It’s just — that’s that marginal increase in indirect costs. But there is no seasonality.

Ken Zerbe — Morgan Stanley — Analyst

And it’s just an ongoing expense going forward?

Tayfun Tuzun — Executive Vice President and Chief Financial Officer

That’s correct. The change is a unique change year-over-year, but it will be in our expense base going forward.

Ken Zerbe — Morgan Stanley — Analyst

Perfect. All right, thank you.

Operator

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

Erika Najarian — Bank of America — Analyst

Hi, good morning. I just wanted to reiterate maybe the point that you made earlier. If the NII or the non-interest income revenue outlook fell short, there is room to pull the expense lever and potentially we do better than the 2% to 3% range to achieve positive operating leverage for 2020?

Tayfun Tuzun — Executive Vice President and Chief Financial Officer

Yeah, so we clearly — we have always intended to — in the past number of years to achieve it. We achieved it every year. And we continue to keep the same target. And when you look at the contents of the remaining expenses beyond that 1% sort of unique change, Erika, clearly our largest expense is in compensation. And there is an underlying inflation built into that, and that consumes over 0.5 point of that expense increase. And in addition, there is also another 0.5 point or so in 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 then, we’re going to have to make some choices as to where to invest and where not to invest to wait out a slower revenue growth environment.

Erika Najarian — Bank of America — Analyst

Great, thank you.

Operator

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

Matt O’Connor — Deutsche Bank. — Analyst

Good morning. I was wondering if you could talk a bit about just commercial borrower sentiment. You did mention that the payoffs were quite high in 4Q and had a somewhat muted outlook for commercial lending. I think it was the first quarter. But it seems like maybe commercial and corporate sentiment is improving. Maybe it’s just literally [Phonetic] the last few weeks here, but that’s one of the themes that we’ve been hearing from some other banks and maybe some of the things in the credit markets point to that as well. So, are you seeing some early signs of that? Or is it a little bit of a different customer base for you guys than maybe we’re seeing elsewhere?

Lars C. Anderson — Executive Vice President and Chief Operating Officer

Yeah, Matt. So first of all, just to address the first quarter, there’s seasonality issues in that. So I would really be looking to Tayfun’s guidance for the year. That’s what we’re focused on is executing in 2020. There has been a heightened sense of caution as we have moved through the second half of 2019 with some of the global tensions, tariffs, those kinds of things. But some of the resolution of that, we’re beginning to hear 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 a potential pickup in activity levels there. So frankly, 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 in middle market banking, in industry verticals. But in summary, there is still a sense of 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 some of the trade tariff activities recently completed.

Matt O’Connor — Deutsche Bank. — Analyst

Okay, that’s helpful. And then, just separately, you reiterated sort 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 pull 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.

Tayfun Tuzun — Executive Vice President and Chief Financial Officer

Yeah. The capital decisions are independent from that, Matt, because they — the timing of these availabilities are random. We have in the past — we’re very clear. Lars mentioned the confidence that we have in our advisory businesses, in commercial. We clearly — if we can — if we come across opportunities to even grow our advisory M&A services etc., 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 the capital that we have is somewhat independent of the opportunities. If we see the opportunities, we will execute them regardless of whether we’re sitting on $0.5 billion of capital or not.

Matt O’Connor — Deutsche Bank. — Analyst

Got it. Thank you.

Operator

Your next question comes from the line of Saul Martinez with UBS.

Saul Martinez — UBS — Analyst

Hey, good morning, guys. First, I wanted to clarify a couple of points on credit. First, you obviously — on the commercial side, you obviously mentioned the specific allowances for two commercial credits. You also had a big increase in NPL formation in commercial, I think $165 million, on Page 21. I think, Frank, you mentioned that was also related to the — those two specific credits. I just wanted to confirm that was the case. And also on CECL, Tayfun, just again a clarification. And I have to sharpen my pencil on this, but I think your allowance takes your ACL ratio to like 160 bps, 170 bps. I guess what you’re saying is that obviously, there is volatility, there’s more things driving quarterly provision, but your best guess at this point would be that it sort of stays in that range and we should be modeling provisions with charge-offs and growth. Is that sort of the right way to think about it? So a couple of questions with more a clarification question on…

Tayfun Tuzun — Executive Vice President and Chief Financial Officer

I’ll take the CECL one and then I’ll turn it over to Frank. I think your numbers are right in the ballpark, Saul. And yes, sitting here looking at the balance sheet progress, without necessarily having a clear-cut 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 side?

Frank R. Forrest — Executive Vice President and Chief Risk Officer

Yes, on the $165 million, your question was is it inclusive of the $50 million. And the answer is, yes, it was. And just as a reminder, in the workout business, things are lumpy. It’s — you don’t package things up in any package and you have even inflows and outflows. We want to — we analyze inflows every quarter in detail and look to see if there’s any particular trends that are bothersome to us. So we didn’t see anything there in particular that’s spread out. I will say the flip side of that is, we had a really strong quarter on collections. So our net at the end of the day was $50 million, which I think about as sort of those two credits that were there before. So that’s the story there. And again, it doesn’t — I don’t think portend anything different in our outlook for 2020. We feel very good about 2020 based on where we sit today.

Saul Martinez — UBS — Analyst

Great. That’s really helpful. Thanks a lot guys.

Operator

And your next question comes from the line of Christopher Marinac with Janney Montgomery.

Christopher Marinac — Janney Montgomery Scott — Analyst

Hey, good morning. I just wanted to follow up on Tayfun’s comment early in the call about the accelerated paydowns of leveraged loans in other commercial. Is that attrition going to continue do you think? Or would you look to replace those loans this year?

Tayfun Tuzun — Executive Vice President and Chief Financial Officer

Yeah. Our intent is not necessarily to grow the leveraged portfolio to make up for the faster payoffs. We will make loan decisions independent of the payouts. But Lars, any comments on that?

Lars C. Anderson — Executive Vice President and Chief Operating Officer

Yeah. No, so actually going back to a previous question, just so that you understand, the build that you see, and we have seen both in middle market and corporate banking, increasing volumes of loan production throughout the year, and that is really encouraging, 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, a softness in the industry that we’re seeing has been in paydowns, elevated paydowns. However, the complexion of that changed in the fourth quarter. In the fourth quarter, rather than just deleveraging of some of our portfolio, what we saw with the two biggest drivers was number one, higher risk assets in the leveraged lending portfolio where we actually saw a decline there. And that’s a positive thing. It’s strengthening our balance sheet. And it’s not that we will not extend credit into the leveraged lending market, but we’re being very disciplined and selective in that market. The second piece of it goes back to what Frank said earlier. We saw pretty significant paydowns in our construction lending line of business, which I’ve shared previously in prior calls that we expected that 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 leveraged lending will be a growth area for us for a period of time this late in the cycle.

Christopher Marinac — Janney Montgomery Scott — Analyst

Great Lars. That’s really helpful background. Thank you both for the comments.

Operator

Thank you. Your final question comes from the line of Scott Siefers with Piper Sandler.

Scott Siefers — Piper Sandler — Analyst

Hey, guys, Thanks for taking the follow-up. I just wanted to ask on your GreenSky relationship. I know you guys had renewed that relationship. Just at a top level, any changes to how you’re thinking about appetites for those types of credits? And then, I guess more specifically, were there any changes in the terms as a result of that renewal?

Tayfun Tuzun — Executive Vice President and Chief Financial Officer

I can’t necessary — yes, we renewed the relationship, and we renewed the relationship having had the experience with GreenSky 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 way it was done, the way it was structured from a credit support perspective, as well as pricing perspective. That’s all I’m going to comment, given the fact that they’re the counterparty to the agreement. But we feel pretty good as to where we ended during the renewal discussion.

Scott Siefers — Piper Sandler — Analyst

All right. That sounds great. Thank you.

Tayfun Tuzun — Executive Vice President and Chief Financial Officer

Okay.

Chris Doll — Director of Investor Relations

Well, there is no further questions. Thank you all for your interest in Fifth Third Bank. If you have any follow-up questions, please contact the IR Department and we’ll be happy to assist you.

Operator

[Operator Closing Remarks]