Fifth Third Bancorp - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 delivered stable growth with diluted EPS of $0.88 and adjusted EPS of $0.90; net interest income (NII) rose 4% sequentially and 8% year-over-year as NIM expanded 9 bps to 3.12%.
• Against consensus, EPS modestly beat while revenue missed on S&P Global’s definition; consensus Primary EPS was $0.87 vs actual $0.90*, and revenue consensus was $2.22B vs actual $2.07B* (see Estimates Context) (Values retrieved from S&P Global).
• Management raised FY 2025 NII growth guidance to 5.5–6.5% (from 5–6%), tightened FY NCO guidance to 43–47 bps, and guided Q3 2025 NII up ~1% with average loans stable to up 1%.
• Credit quality improved: NPAs fell 11% QoQ (commercial NPAs down 18%), NCO ratio decreased to 0.45%, and CET1 increased to 10.56% (+13 bps QoQ).
• Potential near-term stock catalysts: raised NII guide, resumed buyback plan ($400–$500M expected in H2 2025), and ongoing Southeast branch expansion; watch solar lending origination shift post tax changes and capital markets softness.

What Went Well and What Went Wrong

• What Went Well

  • “Adjusted revenues and adjusted PPNR increased year-over-year by 6% and 10%, respectively,” with the highest adjusted PPNR growth rate in two years.
  • Deposit mix improved and DDA growth supported lower funding costs; interest-bearing liabilities costs fell 2–3 bps QoQ and 61–65 bps YoY.
  • Credit metrics strengthened: NPAs down 11% sequentially, commercial NPAs down 18%; early-stage delinquencies near historical lows.
  • CEO: “We expect to continue to generate strong, stable returns… during volatile environments… operating principles of stability, profitability, and growth – in that order.”.

• What Went Wrong

  • Reported revenue under S&P’s definition missed consensus despite bank-reported total revenue growth; capital markets fees remained muted YoY.
  • Commercial period-end loans dipped 1% QoQ on lower construction balances and reduced line utilization post April peak.
  • Solar lending: net charge-offs peaked in Q2 and future originations likely down 70–80% in 2026 due to tax credit changes (offset by planned home equity product pivot).

Transcript

Operator (participant)

Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fifth Third second quarter 2025 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during that time, simply press star, then the number one on your telephone keypad. I would now like to turn the call over to Matt Curoe, Senior Director of Investor Relations. Mr. Curoe, please go ahead.

Matt Curoe (Senior Director of Investor Relations)

Good morning, everyone. Welcome to Fifth Third second quarter 2025 earnings call. This morning, our Chairman, CEO, and President, Tim Spence, and CFO, Bryan Preston, will provide an overview of our second quarter results and outlook. Our Chief Credit Officer, Greg Schroeck, has also joined for the Q&A portion of the call. Please review the cautionary statements in our materials, which can be found in our earnings release and presentation. These materials contain information regarding the use of non-GAAP measures and reconciliations to the GAAP results, as well as forward-looking statements about Fifth Third's performance. These statements speak only as of July 17th, 2025, and Fifth Third undertakes no obligation to update them. Following prepared remarks by Tim and Bryan, we will open up the call for question

s. With that, let me turn it over to Tim.

Tim Spence (Chairman, CEO, and President)

Thanks, Matt, and good morning, everyone. At Fifth Third, we believe great banks distinguish themselves not by how they perform in benign environments, but rather by how they navigate uncertain ones. In a period of tariff negotiations, cross-currents in interest rates, and significant regulatory change, Fifth Third continues to deliver excellent profitability, strong credit trends, and accelerating revenue growth. This morning, we reported earnings per share of $0.88, or $0.90 excluding certain items outlined on page two of the release, exceeding consensus estimates. Adjusted revenues grew by 6% year-over-year, led by 7% growth in NII. Adjusted PPNR increased 10%, and we delivered 250 basis points of positive operating leverage, our third consecutive quarter of positive operating leverage. Our key profitability metrics continue to be very strong and among the best of all peers who have reported thus far. Our adjusted return on assets was 1.2%.

Our adjusted return on tangible common equity was 18%, and our efficiency ratio was 55.5%. Our credit metrics were strong and improved as we said they would. At 45 basis points, net charge-offs were at the bottom of our guidance range and improved over the prior year. NPAs declined 11% sequentially, led by an 18% decline in commercial NPAs. Early-stage delinquencies declined again and are near historical lows. As a result of our strong financial performance and the positioning of our balance sheet, tangible book value per share increased by 18% over the prior year and by 5% sequentially. The strategic investments we have made over the past several years drove our results in the quarter.

In a quarter where uneven C&I loan demand and a soft housing market made loan growth tepid for the industry, our diversified loan origination platforms produced average loan growth of 5% over the prior year. We grew loans in C&I, CRE, leasing, mortgage, home equity, auto, and both our Provide and Dividend fintech platforms. Investments we have made should continue to support strong loan growth in future quarters. Commercial relationship manager headcount increased by 11% year-over-year, and Provide had record production in the first half of the year. In our home equity business, we were number two market share in our footprint, and first half production growth was third best in the country. Both Provide and Home Equity are examples of the benefits we have achieved from digitally enabled lending channels combined with One Bank collaboration. Our investments in the Southeast also continue to produce strong results across business lines.

Our consumer bank grew net new households by 6% over the prior year in the Southeast. The granular deposit growth those households provide has provided flexibility to continue to manage deposit costs even as the Fed paused on rate cuts. In the second quarter, our average cost of consumer and small business deposits in the Southeast was 191 basis points, a 250 basis points plus spread to Fed funds. We have added 10 branches year to date in the Southeast and will open another 40 before year-end, bringing us to nearly 400 branches across all our Southeast markets. In commercial banking, our Southeast regions have contributed more than half of total middle market loan growth over the past year, with North Carolina, South Carolina, Georgia, and Alabama producing the strongest results.

New middle market relationship production has also accelerated across the Southeast, where our teams have added 50% more new quality relationships year to date than they did over the same period last year. In wealth management, our Southeast markets grew assets under management by 16% year-over-year to nearly $16 billion in total AUM. Advisor headcount is up about 15% in the same markets, which should support future growth. We also continue to see benefits from our investments in innovative tech-enabled products. In consumer, J.D. Power recently recognized the Fifth Third mobile app as number one in user satisfaction among regional banks, and we also launched an initiative to provide free wills to every Fifth Third customer through an exclusive partnership with Trust & Will.

We will begin to embed AI-enabled functionality into our mobile app in the second half of this year, which should further improve the user experience and reduce volumes in higher-cost service channels. In commercial payments, our investments in our Newline embedded payments platform led to 30% revenue growth compared to last year and an increase of more than $1 billion in commercial deposits connected to Newline services. We continue to win more business from existing clients and to see transaction migration from legacy ACH to modern instant payments rails. During the quarter, Rippling selected Newline to be their payments infrastructure provider, joining our existing roster of blue-chip fintech customers. In my annual letter to shareholders this year, I reminded readers that the global economy is a complex, adaptive system and that complex systems react to change in unexpected ways.

These days, we are witnessing a lot of change in a short window of time. While we continue to be hopeful about the prospects for the second half of the year, we are also positioned to perform well in a broad range of environments. Our business mix is naturally resilient, our balance sheet is defensively positioned, and we have the flexibility to react quickly as conditions change. Bryan will provide more detail on our outlook, but I want to emphasize that we do not need a change in the interest rate environment or a material change in market activity to continue to produce strong profitability and organic growth. We are raising our full-year guidance on NII given the strong first half performance. We remain very confident in achieving record NII in 2025, even if there are zero rate cuts for the remainder of the year.

We will deliver 150 basis points-200 basis points of full-year positive operating leverage, even if the capital markets do not recover, given the strong first half performance and the expense levers we have at our disposal. We will resume share repurchases in the third quarter. Our capital priorities continue to be funding organic growth, paying a strong dividend, and share repurchases in that order. Our operating priorities will also remain unchanged: stability, profitability, and growth in that order. Before I hand it over to Bryan, I want to say thank you to our employees for your dedication to your clients. Your commitment to getting 1% better every day is why Fifth Third was recently recognized by USA Today as a top workplace and by Forbes as best employers for new grads. And I love being part of your team.

With that, Bryan will provide more detail on the quarter and our outlook for the second half of the year.

Bryan Preston (CFO)

Thanks, Tim, and thank you to everyone joining us today. Our second quarter results again reflected the strength and momentum of our company. On an adjusted basis, revenue increased 6% year-over-year and 5% on a sequential basis. Our stable and growing NII remains a strong contributor to our performance. We continue to realize the benefits of our diversified balance sheet and business mix through sustained loan growth, fixed-rate asset repricing, and the flexibility to execute proactive liability management. Our revenue performance, combined with our ongoing expense discipline, resulted in a 10% increase in pre-provision net revenue and 250 basis points of positive operating leverage on an adjusted basis compared to the second quarter of last year. Tangible book value per share, inclusive of the impact of AOCI, grew 18% from the prior year and 5% versus the first quarter.

Our investment portfolio philosophy to focus on bullet and locked-out securities in order to have certainty of cash flows continues to pay off. The unrealized loss in our AFS portfolio improved 6% sequentially, despite the 10-year Treasury rate being a few basis points higher than the prior quarter end. The AOCI burndown will continue to benefit tangible book value per share growth as these positions pull to par. Now, diving further into the income statement. Net interest income grew 7% from the prior year and 4% sequentially. Net interest margin expanded nine basis points sequentially. Broad-based loan growth, continued repricing benefits, and deposit cost improvements all contributed to this performance. NII was also favorably impacted by the payoff of a non-performing loan, which contributed $14 million to NII and three basis points to NIM in the quarter.

Excluding that payoff impact, NII still grew by 6% from the prior year and 3% sequentially, which is at the high end of our guided range. This interest realization is an example of our proactive credit management, working with our clients to achieve loss minimization through the workout process. As Tim highlighted, our diversified lending platforms continue to support strong balance sheet performance. Average portfolio loans grew 1% sequentially while period-end loans were stable despite a decrease in commercial utilization. Consumer loans were up 3% on a period-end basis and 2% on an average basis from the prior quarter. On a period-end basis, we saw growth in every major consumer lending category, led by continued strength in our secured lending products such as auto and home equity lending. Commercial loans increased 1% on an average basis and declined 1% on a period-end basis.

As I highlighted in early June, line utilization peaked around April month-end at 37.5%. Post-April, we have seen a gradual decrease to 36.5% as of June 30th. Approximately 40% of the decrease in line utilization was driven by growth and commitments. In addition to the utilization trend, period-end loans were impacted by a $400 million sequential decrease in commercial construction balances as projects were refinanced into the permanent market. Economic uncertainty impacted client confidence and resulted in the lowest quarter of commercial loan production over the last year. There were some bright spots with continued strong production in Chicago, the Carolinas, Georgia, and Alabama. While utilization has impacted balances, commitments continue to grow. Middle market pipelines have also rebounded during the quarter, as our third quarter pipeline is up almost 50% from the prior quarter.

Shifting to deposits, average core deposits were stable sequentially as an increase in demand deposits was largely offset by a decrease in interest checking. Our strong liquidity profile continues to provide us with the flexibility to actively manage our overall funding costs while executing tactics to grow granular insured deposits. As a result of these efforts, interest-bearing deposit costs were down three basis points sequentially and 65 basis points over the last year, while we have continued to grow consumer and small business deposits, which are up 1% versus the prior year. Compared to the first quarter, demand deposit balances were up 3% on an average and end-of-period basis. This strong core deposit performance has allowed us to pay down over $4 billion of higher-cost non-relationship brokered time deposits over the last two years.

We will continue to prioritize high-quality, low-cost retail deposits, particularly in the Southeast with our de novo investments. The most recent vintages of de novos are significantly outperforming expectations. Branches built between 2022 and 2024 are averaging over $25 million in deposit balances within the first 12 months after opening, significantly outpacing our original expectations. We remain on pace to open 50 branches this year, with 10 opened in the first half. We have now secured approximately 80% of the locations for the additional 200 Southeast branches that we announced in November of last year. Our deposit success, along with investment portfolio positioning, has allowed us to maintain strong balance sheet liquidity while growing loans and managing deposit costs. We ended the quarter with full Category I LCR compliance at 120%, and our loan-to-core deposit ratio was 76%, up 1% from the prior quarter.

Moving on to fees, reported non-interest income was up 8% year-over-year. These results were impacted by security gains and the impact of certain items detailed on page four of the release. Excluding the impacts of the security gains and the other items, adjusted non-interest income for the quarter increased 3% compared to the same quarter last year, led by growth in wealth fees, which grew 4% over the prior year due to AUM growth of $8 billion. And consumer banking fees, which were up 6%. Commercial payments fees decreased $2 million due to lower commercial card spend activity and higher earnings credits from increased demand deposit balances, offsetting the increase in gross fee equivalent. Our embedded payments business, Newline, continued its strong growth, with fees up 30%. Deposits attached to Newline services increased to $3.7 billion, up $1.1 billion compared to a year ago period.

Capital markets fees were down 3% from the prior year, primarily due to the continued slowdown in M&A advisory revenue. Bond underwriting and loan syndication activity was strong during June, and client appetite for transactional activity during stable market periods remains robust. The security gains of $16 million were from the mark-to-market impact of our non-qualified preferred compensation plan, which is offset in compensation expense. Moving to expenses, adjusted non-interest expense was up 4% compared to the year-ago quarter and decreased 4% sequentially. The sequential comparison is impacted by seasonal items in the first quarter associated with the timing of compensation awards and payroll taxes. The previously mentioned deferred compensation mark-to-market increased expenses by $16 million for the quarter. Excluding the impact of the deferred comp mark-to-market in the quarter and in prior periods, expenses were down 5% sequentially and increased 3% compared to the prior year.

The year-over-year increase in expense is due to continued investments in technology, branches, and sales personnel, partially being offset by the ongoing savings generated by our value stream efficiency programs. Shifting to credit, the net charge-off ratio was 45 basis points at the lower end of our expectations for the quarter and down one basis point sequentially. Commercial charge-offs were 38 basis points, up three basis points sequentially. Consumer charge-offs were 56 basis points, down seven basis points, primarily due to seasonal improvement in credit performance in auto and credit card. Our NPAs declined 11% sequentially, as expected, led by an 18% decrease in commercial non-performers. The NPA ratio decreased nine basis points sequentially to 72 basis points. Broad-based credit trends remained stable across industries and geographies despite the market and economic volatility. Our provision expense for the quarter included a $34 million build in our allowance for credit losses.

This build was primarily attributable to the deterioration in the Moody's macroeconomic scenarios, which now project a 0.5% increase in their baseline unemployment rate projection, which is up to 4.7% by 2027. The scenario-driven increases were partially offset by improvement in the overall risk profile of the portfolio, as indicated by the reduction in NPAs. This increase in reserve build was slightly less than we expected in early June, as utilization trends and commercial construction paydowns impacted period-end loan balances. The reserve build increased our ACL coverage ratio by two basis points to 2.09%. We made no changes to our scenario weightings during the quarter. Moving to capital, we ended the quarter with a CET1 ratio of 10.6%, an increase of 13 basis points and consistent with our near-term target of 10.5%. Our pro forma CET1 ratio, including the AOCI impact of securities, is 8.6%, up 60 basis points year-over-year.

We anticipate continued improvement in the unrealized losses in our securities portfolio, given that approximately 63% of the fixed-rate securities in our AFS portfolio are in bullet or locked-out structures, which provides a high degree of certainty to our principal cash flow expectation. Moving to our current outlook, with the continued momentum from the second quarter, we remain confident in our ability to achieve record NII and full-year positive operating leverage approaching 2%. We now expect full-year NII to increase to 5.5%-6.5%. Up from our earlier guide. This outlook uses the forward curve at the start of July, which assumed 25 basis point rate cuts in September, October, and December. Due to the resiliency of our balance sheet, we expect to achieve record NII and our updated full-year guide with no further loan growth and no rate cuts.

Full-year average total loans are expected to be up 5% compared to 2024, with the increase primarily driven by C&I and auto lending production. Our cash position, securities portfolio, and commercial line utilization should remain relatively stable throughout the remainder of 2025. Full-year adjusted non-interest income is expected to be up 1%-2%, as the muted capital market trends are offset by continued growth in other fee categories. We now expect full-year adjusted non-interest expense to be up 2%-2.5% compared to 2024. We will continue to execute our growth plans with Southeast branch builds and sales force additions in middle market, commercial payments, and wealth. In total, our guide implies full-year adjusted revenue to be up 4%-4.5% and PPNR to grow around 7%. Moving to credit, we are tightening the range for full-year net charge-offs to 43 basis poitns-47 basis points.

The timing of charge-offs for individual credits may impact a particular quarter, but the midpoint of our full-year expectations remains consistent with our beginning-of-the-year guide. Moving to our outlook for the third quarter, we expect NII to be up 1% from the second quarter due to the benefits from fixed-rate asset repricing and day count. We expect average total loan balances to be stable to up 1% due to strengthening C&I pipelines and continued broad-based momentum in consumer loans. Excluding the impact of the security gains, we expect adjusted non-interest income to be up 1%-4%. Third quarter adjusted non-interest expense is expected to be up 1% compared to the second quarter as we continue to invest. We expect third quarter charge-offs to again be in the 45 basis points-49 basis point range. Turning to capital, we will continue to target our CET1 ratio at 10.5%.

Based on our current projections for balance sheet growth, we expect to repurchase $400 million-$500 million of stock during the remainder of 2025. We continue to prioritize organic loan growth over share repurchases in order to deliver the best long-term returns for our shareholders. In summary, we expect to maintain our momentum in the second half of the year and achieve record NII, positive operating leverage, and strong returns in an uncertain environment. All while continuing to invest for the long term. With that, let me turn it over to Matt to open up the call for Q&A.

Matt Curoe (Senior Director of Investor Relations)

Thanks, Bryan. Before we start Q&A, given the time we have this morning, we ask that you limit yourself to one question and one follow-up, and then return to the queue if you have additional questions. Operator, please open the call for Q&A.

Operator (participant)

At this time, if you would like to ask a question, press star, then the number one on your telephone keypad. To withdraw your question, simply press star one again. We will pause for just a moment to compile the Q&A roster. Your first question comes from Ebrahim Poonawala with Bank of America. Please go ahead.

Ebrahim Poonawala (Managing Director and Head of North American Banks Research of U.S. & Canadian Banks)

Good morning.

Tim Spence (Chairman, CEO, and President)

Morning.

Ebrahim Poonawala (Managing Director and Head of North American Banks Research of U.S. & Canadian Banks)

I guess maybe. Tim, just thinking about capital allocation. So I heard. Bryan talk about the buyback appetite for the back half of the year, but just talk to us around how you're thinking about deployment of capital. Clearly, we saw one of your competitors announce a bank deal earlier this week. Any sense of, strategically, even if we think about a bank M&A picking up.

Are there characteristics, be it size, be it markets of a bank, that we should be thinking about as shareholders of what Fifth Third could buy? I mean, any perspective would be helpful. Thank you.

Tim Spence (Chairman, CEO, and President)

Yeah. Great question. So. I think from my point of view, the capital priorities of the bank are always going to be organic growth first because, A, organic growth is completely within our control, and B, the thing that makes you a good acquirer is the ability to run your core business effectively. So the priority here is always going to be to run the company to gain share on an organic basis and to make sure that there's adequate capital available to that in addition to ensuring that we provide a stable and over time growing dividend and that we're able to support the capital return to investors in periods where we have excess capital through share repurchases. I wasn't surprised to see the announcement earlier this week. I think I've said for a while that there was going to be more consolidation. I think the banking sector in the U.S. is the least consolidated industry, and our banking sector is the least consolidated banking sector in the world. So there is going to continue to be more of that. What I know to be true, though, is that M&A is a means to achieve a strategic outcome. It shouldn't be a strategy unto itself. There is an industrial logic to scale that I think holds in all sectors, but it's not just any kind of scale.

If you imagine us being in a military conflict where we had to fight an enemy that was 10x our size, you would never march out into an open field single file and try to face a larger army. You would pick your spots. You would try to use the terrain to your advantage. You'd get dense. And you'd obviate the scale advantages that the competitor has. And if you think about the structure of the banking system in the U.S., I think that is the way to think about how you win. We're going to be way more successful building 350 branches in a single region in the U.S. than we would be if we built three or four branches in the 100 largest cities in the U.S. So the focus for us is always going to be on density.

It's going to be on the ability to drive organic growth by spreading the cost of customer acquisition across multiple product lines. So the relationship value that you get from the ability to deliver a broad range of products and services to customers is really important to us. And it's always going to be focused on ensuring that you have a sort of continuity in, people say culture, but really in the mode of how you operate your business because there just are a lot of things out there that operate very differently than we do. So I think appetite's the same. We wouldn't have much conviction if one deal announcement changed our outlook on how to deploy capital. But the focus is going to be on delivering our strategy in the mode that is most effective for shareholders.

Ebrahim Poonawala (Managing Director and Head of North American Banks Research of U.S. & Canadian Banks)

That's good color. Thank you.

And I guess maybe just a separate question. As we think about, I mean, obviously your charge-off range narrowed, but as we think about the impact of the tax bill on the residential solar panel industry, just give us how you are handicapping any potential risk tied to your exposure and the business strategy from here going forward at Dividend. Thank you.

Bryan Preston (CFO)

Yeah. Ebrahim, it's Bryan. Thanks for the question. I guess first to just recap what's happened. The tax bill eliminated the tax credits on the residential solar lending business starting in January of 2026. Now, so what does that mean for us? First, this has no impact on our existing solar portfolio. Our customers have already earned their tax credits, so no impact on them. From a credit perspective, we believe that the Dividend net charge-offs have peaked in the second quarter.

And as you can see from our NPA and delinquency trends in the first half of the year, the risk profile of the solar portfolio continues to improve. All the enhancements we've done to this business that we've made to our platform from the installer management program, installer bill of coverage, joint borrower, collections enhancements, it's all helped to drive this credit improvement. We expect net solar charge-offs to decrease 15%-20% in the third quarter from the second quarter level and decrease again in 2026 by another 15%-20%. Next, the tax bill will impact future originations as the tax credit associated with the residential solar leasing product was extended to the end of 2027. This will create an uneven playing field in the solar finance industry for about two years. We expect the leased panel volume to increase while solar loans will decrease significantly.

As a result, we think that our 2026 solar originations are probably down 70%-80% from 2025 levels. While we were hopeful to have an even level playing field in 2026 where both products were treated equally, we will at least see that occur in 2028. Now, how are we responding? We have been innovating to create a home equity product that we expect to launch in the first quarter of 2026 on the Dividend platform. While this product will not have a tax credit, it will allow borrowers to own their solar panels and generate tax-deductible interest, which should matter to some homeowners. The home equity product will also improve Fifth Third's collateral position from a UCC to a second lien. This product should also be appealing for other home improvement projects.

So while we believe the solar originations will be down in 2026, with the new home equity product combined with other enhancements we have made in our Dividend Home Improvement Lending Platform, we expect continued growth of our Dividend loans in the low single-digits next year.

Tim Spence (Chairman, CEO, and President)

Yeah. Just to put a point on one of the things Bryan said strategically, Ebrahim, the interest we had in home improvement as a category predates the acquisition of Dividend by several years. Fifth Third has always been a home equity bank, but we also did the partnership with GreenSky back in 2015 or 2016. I do not remember when it was.

And I think what we learned as we have spent time in home improvement is that the place that banks can play uniquely relative to fincos and non-bank lenders is in the larger, more complex home improvement programs, things that require multiple draws or that involve a prime and a series of subs. And what the fintechs can do in those markets is to finance the windows or the doors, but they cannot finance the whole kitchen, right? A full renovation.

So what we liked about Dividend, in addition to believing in the importance of distributed power generation and storage, which, by the way, we still believe is an important part of the way that we are going to solve the energy demand that we have in the U.S., is the fact that solar is one of the most complex home improvement installations between the need for the reinforcement of the roofing, the installation of the panels, the high-voltage electrical, and then working with the power companies to get permission to operate. So it is going to provide a really nice exoskeleton. That has always been the dream to be able to deliver home equity to a broader range of projects. And in fact, today, even prior to the sort of expected reduction in solar volumes that Bryan mentioned, I think 25%-30% of new originations are home improvement non-solar related.

So there is a good core business. What is going to happen is the origination volumes are going to fall. And so I think our view is the dividend's probably going to grow in line with the balance sheet as opposed to growing at a faster rate on a go-forward basis, meaning call it low to mid-single-digits as a point of focus for us. But as Bryan said. The credit trends are incredibly encouraging. And I think they underline the comments that we've been making about focusing on the best quality installers and on super prime credit. So we're just not seeing the deterioration that. Folks who were full-spectrum lenders have had to struggle with.

Ebrahim Poonawala (Managing Director and Head of North American Banks Research of U.S. & Canadian Banks)

Very comprehensive. Thank you both.

Operator (participant)

Your next question comes from Scott Siefers with Piper Sandler. Please go ahead.

Scott Siefers (Managing Director)

Morning, guys. Thanks for taking the question.

Bryan, wanted to ask on the margin improvement, even if we adjust for the benefit of the NPA that you discussed in your prepared remarks, much better than you had articulated might be the case earlier this year. So I think we can see on slide five kind of what's happening between quarters. But I guess just in your view, what's coming in better than you might have anticipated earlier this year? And what are we thinking about the pace of improvement opportunity going ahead or looking ahead? And then I guess the follow-up, I was hoping you might be able, in your response, to sort of address what you see as competitive dynamics on both the loan and deposit sides, rational, irrational, etc.

Bryan Preston (CFO)

Yeah. Thanks, Scott. Great question. I would tell you the big thing that I think was.

The outperformance item outside of the NPA payoff was the DDA performance we've seen. We were expecting to be able to transition back into growth mode on DDA now that the interest rate environment has been stable for a period of time. But we saw really strong performance this quarter. That certainly was a big driver of our success. We continue to feel really good about our ability to have gotten costs out of our deposit book while continuing to improve the composition. I think that's probably an underappreciated thing about what we've been able to do over the last year, just how much we've been able to strengthen the deposit base, especially with growth in the consumer small business sector.

From a NIM perspective, continue to feel like we did earlier this year, which is 2 basis points-3 basis points of NIM improvement each quarter driven by fixed-rate asset repricing continuing as well as loan growth. It's really just going to be kind of the core blocking and tackling and improvement of the business over time. So nothing. Dramatic there. And like you said, if we adjust for the three basis points from the interest recovery, we'd be more in line with a 3.09% NIM. And that three basis points a quarter puts us right where we expect it to be at the end of the year in that kind of mid-teens range. So 3.15%-ish feels still very achievable. So feel very good about the trajectory from here. From a competitive landscape perspective, our industry is always very competitive.

I don't think I would actually really call out much that we're seeing on either the loan or the deposit side at this point. Spreads look in line with what we've been seeing over the last 6 months-12 months across almost every asset class on the lending side. And deposit competition has been very, very rational. And we've seen great success in continuing to be able to find growth in the right pockets and improving the deposit base.

Scott Siefers (Managing Director)

Perfect. All right. Good. Thank you very much, Bryan.

Operator (participant)

Your next question comes from Ryan Nash with Goldman Sachs. Please go ahead.

Ryan Nash (Managing Director of Regional Banks and Consumer Finance)

Hey, good morning, everyone.

Tim Spence (Chairman, CEO, and President)

Hey, longtime listener, first-time caller.

Ryan Nash (Managing Director of Regional Banks and Consumer Finance)

Is this sports radio talk?

Tim Spence (Chairman, CEO, and President)

I wish.

Ryan Nash (Managing Director of Regional Banks and Consumer Finance)

Tim. Maybe outside of the movement in utilization, we're obviously seeing signs of loan growth improving. You talked about investments to support loan growth. Lenders up 11%. Outlook sounds upbeat.

So maybe just talk more specifically about your expectations for loan growth. And as you're out talking to corporates, do you feel they've gotten confident enough to start making big investment decisions and borrowing more? Thank you. I have a follow-up.

Tim Spence (Chairman, CEO, and President)

Yes. Yeah. Great question. So let me take it by category. I think on the consumer side of the equation, the thing that gives us confidence is the diversity of the loan origination platforms we've got. We have long been believers that while residential mortgage is a really important product for us to offer to consumers, it wasn't a great balance sheet asset.

And the byproduct of that is between what we're able to do in home improvement, what will be continued expansion in home equity, which has been an important driver of our growth, and the fact that the risk-adjusted spreads in the auto business are great right now. We just feel very confident in our ability to continue to generate what will be broad-based market plus a point or two sort of growth out of the consumer side of the business. And that provides a lot of ballast for us as you look at the uncertainty that exists in the corporates.

I mean, the positives, when you talk to customers on the commercial side of the equation at the moment, are one, there is a sort of general belief that as we continue to navigate uncertainty around trade and the tariff levels, that there's a value to them in running with a little bit of extra inventory, and that supports utilization. We're not seeing the big buys that we saw in the first quarter that drove up utilization for us, but we do hear from clients that they, at the moment, are preferring to run on balance with a little bit more inventory than they otherwise would have carried just to compensate for any short-term disruptions in supply chains. Second, the bonus depreciation, the accelerated depreciation schedule on capital equipment. It's in some pockets in our customer base generating real interest in replacing equipment.

It felt last year in the second half of the year in particular like the U.S. was underinvested a little bit in capital equipment purchases. We heard from clients who had rental businesses, yellow metal rental businesses and otherwise, that there had been a big boom in rental demand as people tried to buy time to ensure that they got the benefit of the taxes. So I think that is a positive catalyst. The element that just hasn't come through, and that's reflected in middle market M&A activity everywhere, is the M&A-driven demand. And at some point, there should be a little bit of a capitulation where either the sellers accept that with higher interest rates being maybe a more permanent phenomenon that they need to cede to buyer pricing expectations, or where you have buyers who have been patient who conclude that this is the time to go.

But that's really the third leg of the stool between the capital purchases, the inventories, and then eventually some M&A.

Ryan Nash (Managing Director of Regional Banks and Consumer Finance)

Got it. And given your comments from before, you talked about identifying 80% of the locations in the Southeast, 150 basis points-200 basis points of operating leverage. I guess, given the success that you're seeing in your business plus the success in the Southeast, does it make sense to accelerate your efforts here from an organic perspective? And just how are you thinking about the pacing of your growth initiatives from here? Thank you.

Tim Spence (Chairman, CEO, and President)

Yeah. I think somewhere Jamie Leonard is grinning like a Cheshire cat right now because we have been running. The years that I was the head of the consumer bank many years ago, the best we were ever able to do was to open 25 or 30 branches in any individual year.

And they're running at a pace of 50 branches-60 branches a year at this stage. So we have doubled the effort there. The other thing that we've invested in, we haven't spent a lot of time talking about, is a big boost in the sophistication of our direct marketing capabilities, which then support that they're the way that we bootstrap the de novos and get a lot of early growth in terms of households and deposit balances. So we are accelerating the investments in those markets to the extent that we find a way to build 65 branches a year, I would love it. It's just what we have been unwilling to do is to compromise on the quality of the locations. And there then is nothing that we can do as it relates to the pacing on getting through local zoning jurisdictions and otherwise.

So if we have the ability to get 60 branches done a year, we're going to get 60 branches done a year for certain.

Ryan Nash (Managing Director of Regional Banks and Consumer Finance)

Got it. Thanks for taking the question.

Tim Spence (Chairman, CEO, and President)

Thank you.

Operator (participant)

Your next question comes from the line of Gerard Cassidy. Please go ahead.

Thomas Leddy (Assistant VP of Equity Research)

Hi. Good morning. This is Thomas Leddy standing in for Gerard.

Tim Spence (Chairman, CEO, and President)

Hey.

Thomas Leddy (Assistant VP of Equity Research)

Given all the recent headlines, can you just give us your thoughts on stablecoins and how broader adoption could impact both your payments business and deposit levels?

Tim Spence (Chairman, CEO, and President)

Yep. Yep. Happy to do that. I happen to be pretty excited about the prospects for stablecoins, but maybe not in the same places that are getting a lot of the headlines these days.

We have a little bit of an advantage here in that we've banked a couple of the largest infrastructure providers to the crypto and particularly the stablecoin sector for a few years now. And we've been able to watch the use cases that have evolved on those platforms and get a sense for it. And we also have kind of an interesting asset that a lot of the other banks don't have in the Newline platform, which is really well architected to be able to support both the sort of payments and the intraday liquidity activity that's required to make stablecoins work as both stores of value and payment rails. Our interests are one where there are companies that have the compliance infrastructure and the operational robustness to bank them. And there are things that we will do there, whether it relates to reserve accounts or payment rails and otherwise.

But then secondarily, as a user of stablecoins, I think in particular in some of the cross-border payments and then cross-platform settlement applications that are out there. Banks like us who are U.S. domestic banks have been outsourcing that sort of cross-border payment activity to correspondent banks. So that's a greenfield. And anything that we can do even if it's disruptive in terms of the margins is a net positive for us. So I'm quite excited about that as a potential use case for our clients. I think the thing that's gotten a lot of the attention that I just don't believe in is the risk that stablecoins pose or don't pose to point-of-sale payments and to domestic payments in general.

And I think the reason that the media has been wrong on this one is that there's been such a focus on the cost of credit card acceptance when cash, checks, ACH, and debit are all already price competitive and all already basically universally accepted. So the reason that people accept credit cards is because consumers want to use credit cards. And the reason consumers want to use credit cards is because they either need the liquidity that the credit line provides or because they want the rewards. And the stablecoin rails today don't offer either of those features. And if they get added, they're going to have to increase the cost of acceptance in order to offset the cost of providing the liquidity or the cashback rewards or otherwise. So stablecoins in markets with unstable central banks or not a broad-based banking system absolutely an interesting application internationally.

Stablecoins for cross-border payment or for collateral on different exchanges, interesting use case. Domestic payments. I think there's probably more smoke than fire on that one right now.

Thomas Leddy (Assistant VP of Equity Research)

Okay. Thank you. That's helpful color. And then just lastly, it appears expected regulatory relief for the industry will potentially have a pretty big impact on at least the money center banks, evidenced by the recent stress test results and their resulting stress capital buffers. Can you just share your thoughts on the potential benefits specifically for Fifth Third from the expected regulatory relief we might see over the next year or so?

Tim Spence (Chairman, CEO, and President)

Yeah. Absolutely. I think if you asked the consensus from 2023 or 2024. If I would regret not voluntarily submitting to an additional stress test, I would have thought that you were crazy. But.

At the moment, I wish that all banks had undergone the stress test this last time around because it probably would have helped you all to understand the benefits that will accrete to regional banks in addition to the big money center guys. The stress testing relief is going to be beneficial for everybody. The opacity of that process and the models that were used are just not helpful. And we're believers that transparency is a good thing. And I think you saw the potential upside that the regional banks will get in the form of capital relief. More rational scenarios and better-tuned models and otherwise. And I expect us to see a benefit from that. We obviously will benefit from the step away from gold plating on Basel III, from a sort of a more risk-based view of the liquidity rules that were originally proposed.

And I have been quite encouraged by Governor Bowman's speeches as it relates to the evolutions of the supervisory approach across the bank regulators. And then lastly, I mentioned it earlier, but that was an encouraging sign that one of our peers announced an M&A transaction and expected a six-month approval and close. That's evidence of a well-oiled regulatory review process. All that said, I just want everybody to remember that there's another side to this. It's not just the banks that are seeing regulatory relief. There are a lot of non-bank competitors who also have a lot of influence in Washington, some of whom as a category gave 10x in this last election cycle what all banks in total gave and who, as a result, are influential in policymaking circles.

And they want to do a lot of the things that either banks have traditionally done or to have access to things that banks have traditionally only had access to without being banks. So there's a lot of work that we are continuing to try to do in Washington. Just to make sure that there's a balanced view on what a level playing field looks like. I would love to see more de novo charters approved because that would mean that the competitors that we have to face in the field every day are playing by the same set of rules that we are. But there is going to be a balance. There's going to be relief for us and increased competition.

Thomas Leddy (Assistant VP of Equity Research)

Okay. Great. Thank you for the color, and thank you for taking my questions.

Tim Spence (Chairman, CEO, and President)

Yep.

Operator (participant)

Your next question comes from Erika Najarian with UBS. Please go ahead.

Erika Najarian (Managing Director and Equity Research Analyst of Large-Cap Banks and Consumer Finance)

Hi. Good morning. Good morning. Bryan, I had a few questions just on balance sheet mix from here. And I'm looking at sort of the period-end data. The period-end data looked a little bit soft for commercial and very strong for consumer. Given Tim and your comments about commercial clients and activity levels for the second half of the year, should we expect that mix of growth to change, or is there a dynamic where you can continue to see strong consumer growth in the back half of the year in addition to a pickup in C&I growth?

Bryan Preston (CFO)

No, I would actually expect to see a pretty balanced growth in the second half of the year, Erika.

Certainly, the utilization trends, which we had a very strong fourth quarter and first quarter, and it was one of the things that I think we had talked about previously, which was "Hey, there is a risk that you could see a little bit of a pullback." We do think that we continue to hear that inventory builds was a significant theme for the utilization pickup, and that has certainly reversed some. But we still feel good about growth from here. It's part of the reason why we actually increased our full-year average balance loan guide because of the strength that we're seeing. I mentioned in prepared remarks that pipelines in commercial were up 50%. Actually, pipelines are now in line with where pipelines were a year ago. And that led to a pretty strong end of the year last year.

So even though that little bit of a pullback in utilization, as well as the couple of paydowns that we saw in commercial construction, we still feel pretty positive that we're going to be able to see some nice commercial growth in the second half to supplement what we think is going to be continued broad-based growth from a consumer perspective.

Erika Najarian (Managing Director and Equity Research Analyst of Large-Cap Banks and Consumer Finance)

And to that end, if the consumer is still solid and you're seeing that acceleration based on the pipeline, I'm wondering about your deposit strategy, funding strategy in the second half of the year. I mean, clearly, your demand deposit momentum is strong. Total deposits were down a smidge or flat.

I guess as we think about the second half of the year, how are you balancing optimizing your mix versus gathering more deposits for funding, or do you have enough cash, I think, at $13 billion at period-end that could help fund that incremental loan growth? And sorry for the compound question. And what are the expectations for deposit costs in the second half of the year?

Bryan Preston (CFO)

Yeah. At this point, we feel very good about our balance sheet positioning, and we are going to be focused on continuing to be core deposit funded. We've done what we've needed to do from a rate cut perspective. We do think that while our forecast based off of forward rates assumes three cuts, we are somewhat in a higher-for-longer camp right now.

And we are definitely more focused on balanced growth and probably cost stabilization, if not maybe a basis point or two higher as we grow from a funding cost perspective. But it's always going to be dependent on overall what the balance sheet needs. So we do plan to be in a more balanced growth mode at this point, as long as it's constructive from an NII perspective.

Erika Najarian (Managing Director and Equity Research Analyst of Large-Cap Banks and Consumer Finance)

Got it. Thank you.

Operator (participant)

Your next question comes from Mike Mayo with Wells Fargo. Please go ahead.

Mike Mayo (Managing Director and Head of U.S. Large-Cap Bank Research)

Hey, I'm going to stick with the metaverse analogy here. And this time, it's a little bit different. But I'm not really sure which camp you're in. I hear what you're saying, but is commercial loan growth back to the industry, or is it not back? And I'll let you choose column A or column B here. It's back.

If you look at the biggest banks, it's back. That's more capital markets. You guide 5% loan growth to the year. That's pretty high. The middle market pipeline's up 50%, as you said. And then the not-back column. You talked about the less commercial loan growth in the second quarter. Others talked about it being temporary due to tariffs, that relationship banking is muted, just-in-time borrowing. You mentioned the utilization down, I guess, 50 basis points core, extra growth in commitment. And your guide to the year does not imply much growth left. So. You're talking like, "Hey, things are back," but then your guide, you're kind of already close to that guide to the year if loans don't grow much more. So. Is loan growth back, or is it not, or is it still TBD? Thanks.

Tim Spence (Chairman, CEO, and President)

Yeah.

I appreciate you holding up the mirror, Mike, because if I did say all those things in sequence, I can understand why you're confused. I think that you hit on a really important point at the beginning there that I just want to emphasize, and then I'm going to answer your is it back or is it not back question, which is it depends a little bit on the universe that you're in, right? We don't play in the upper end of the markets businesses, right? You see activity at the money center banks, at the investment banks. That just doesn't exist in ours, that's a different universe. Our universe is Main Street banking. It's principally privately-owned businesses or businesses that were privately owned and are now owned by sponsors. And I think in that universe, loan growth is back.

It just may not be back at the level that, when people said loan growth was going to be back, that everybody thought about. The amount of uncertainty you have to navigate if you are a manufacturer or a materials provider is massive in this environment. Having spent a lot of time out with clients this quarter, it's just every time I walk away from one of these manufacturing ecosystems, I think to myself, there's just no way to understand the complexity unless you're involved in it. I got some time with a supplier to the major appliance manufacturers. And it's like there's eight or 10 components in any sort of household appliance. There's an assembly. And there's a casing. Every one of those components is 5 parts-25 parts, whether it's the control panel or the pump or the circuit board or whatever.

And something like 3/4 of those parts in most appliances are made overseas today. So there's some domestic alternatives in some cases. And where there are domestic alternatives, some have enough capacity. The sheet of steel, as I understand, as an example, there's enough capacity to build the external casings of all the appliances that could come back. But if you were consuming aluminum, if we had 100% of the capacity online for aluminum in the U.S., we couldn't even meet half the demand. One of our aluminum clients told me the other day. So then there are places where you could add. But if you're going to add capacity to the U.S., you've got to have real confidence in what the tariff levels are going to be over time. And most of these deals have not been settled out yet.

And then in other cases, if you need refrigerant for an HVAC unit or something like that, the refining processes are dirty enough that they don't comply with EPA standards. And therefore, you've got to rely on China for stuff like that. So there are good reasons to borrow. And we are seeing people exercise good reasons to borrow. But it's in the context of a big cloud with a question mark on how to think about your supply chain, whether it's materials or component manufacturers. And on what you can push through in terms of prices because there's a tug of war going on behind the scenes with most of the major distribution partners right now on what percentage of any sort of a tariff needs to be absorbed where in the supply chains.

And the result is you're seeing people make decisions, but it's not like a wild, animal spirits, risk-on sort of an environment. So do I think that there's a possibility we could do better on the loan growth front? Absolutely. But I also think there's a possibility where the second half of the year could be engulfed in all sorts of uncertainty. And we're not believers in providing guidance that we're not able to that requires some market externality to achieve. We are believers in putting guidance out and putting plans together. That we believe we can deliver under a broad range of scenarios. And if the market backdrop's better, then it's always easier to scale up to support more activity than it is to do an unwind if you were overly optimistic and it doesn't come through.

Mike Mayo (Managing Director and Head of U.S. Large-Cap Bank Research)

I guess that goes to your point about changes to complex systems and difficulty in predicting those.

Tim Spence (Chairman, CEO, and President)

I thought our world was complex. And then you sit in some of these supply chain discussions, and it's way more difficult to sort of take apart than an ALCO meeting at Fifth Third.

Mike Mayo (Managing Director and Head of U.S. Large-Cap Bank Research)

Got it. All right. Thank you so much.

Tim Spence (Chairman, CEO, and President)

Thank you.

Operator (participant)

Your next question comes from Chris McGratty with KBW. Please go ahead.

Chris McGratty (Managing Director and Head of U.S. Bank Research)

Oh, great. Good morning, everybody.

Tim Spence (Chairman, CEO, and President)

Hey, Chris.

Chris McGratty (Managing Director and Head of U.S. Bank Research)

Tim, maybe following up on the loan growth. I mean, any comments on credit spreads? You've seen a lot of peers talk a little bit more optimistically about growth in the quarter. What have you seen, if anything, on credit spreads?

Bryan Preston (CFO)

Hey, Chris. It's Bryan. Credit spreads have actually been pretty stable.

In general, we're seeing spreads that are in line with what we've seen, honestly, for the last handful of quarters. So nothing that we would call out on that front. I mean, the only thing that we're seeing from time to time is that some folks are getting a little bit irrational on protecting house accounts every now and then. And it's more about defending business versus seeing unreasonable credit spreads as people are trying to grow.

Chris McGratty (Managing Director and Head of U.S. Bank Research)

Okay. Perfect. And then my follow-up would be on credit, the improvement in classifieds and non-accruals this quarter and tightened up the charge-off guide. The back half of the year, I mean, maybe a little bit more detail on what you're seeing in the resolution process. That gives you confidence. Borrower conversations, inflow activity, stuff like that would be great.

Greg Schroeck (Chief Credit Officer)

Yeah. Thanks. It's Greg.

So, I would put the NPA reduction that Tim talked about kind of in the category of doing what we said. We said last quarter, we had good visibility into the resolution of 40% of our commercial NPAs over the next few quarters. We hit 18% of that this quarter. And I feel good about our ability to hit the 40% over the next couple of quarters based on what we're seeing. I think to your question too, not only did we make great progress on the existing NPAs, our inflows in NPAs dropped 77% from last quarter. So we're not seeing the inflows that we had the prior quarter. So it's a good reflection of improved overall credit performance and just our ongoing proactive portfolio management.

Chris McGratty (Managing Director and Head of U.S. Bank Research)

Very helpful. Thanks a lot.

Operator (participant)

Your next question comes from Steve Alexopoulos with TD Cowen. Please go ahead.

Steven Alexopoulos (U.S. Large-Cap Bank Analyst)

Hi, everybody.

Tim Spence (Chairman, CEO, and President)

Hey.

Steven Alexopoulos (U.S. Large-Cap Bank Analyst)

Tim, I want to go back to your comments on the stablecoin. You've got to ask quite a bit here. What does it mean for Fifth Third and your customers, right, Stripe, who's talking about adopting their own stablecoin potentially? What does it mean for business, right, as relevant to a company like that if they have their own stablecoin? Could you unpack that for us?

Tim Spence (Chairman, CEO, and President)

Yeah. I mean. The narrow answer is for a company like Stripe, right, or a company like Fireblocks or some of these others that we have been fortunate to do business with, the propagation of these technologies is a good thing. And it probably on balance creates more business opportunity for Fifth Third, okay, because. In order to buy a stablecoin, you have to on-ramp currency from fiat, and we're in that business.

And in order to convert a stablecoin back into a dollar post-transaction, you have to off-ramp it, and we're in that business. And you got to be able to hold the value in the reserve account somewhere and manage intraday liquidity, so the minting and burning of coins throughout the day. And we're a good provider of instant payment rails. That they essentially can develop directly into their existing code bases. You don't have a recon process that has to get done the way that you would. If you were using some other infrastructure. So I think that is encouraging. What I will say, though, is if you look at the Stripe and you look at the Robinhood and some of the others who have been more vocal and active about what they would do with stablecoins, a lot of the focus is still on cross-border activity, right?

Stripe gets bills and collects payments from companies all over the world. And then has to pay for hosting and a variety of services in all sorts of jurisdictions around the world. That's the perfect sort of an ecosystem for a stablecoin because you can move currency on-chain and then transact in it instantaneously or near instantaneously across borders in places where there isn't interoperability in the domestic payment schemes today. So I think I'm quite optimistic about what that means for us. The wild card would be if you saw people move money out of banks and into stablecoins in the U.S. for domestic payments or domestic cash management. That feels highly unlikely to me. We have digital money that provides it a yield, which stablecoins don't, in the form of all of these online banks and money market funds that already exist. And we have low-cost, ubiquitous, and already embedded instant or near-instant payment schemes that if there's a sort of a good enough test that you have to run on this stuff.

Steven Alexopoulos (U.S. Large-Cap Bank Analyst)

Got it. Okay. That was my question. Thank you.

Tim Spence (Chairman, CEO, and President)

Great. I think I'm. Go ahead. I was going to say I understand from Matt that that was the last of our questions, and before we want to close it out, I just want to give a quick shout-out to our friends at Skyline Chili down the road who were just named the best regional restaurant chain in the U.S. Just lends more evidence to my belief that the best regional businesses bloom in Cincinnati, so congratulations, guys.

Matt Curoe (Senior Director of Investor Relations)

Thanks, Tim, and thanks, Tiffany, and thanks, everyone, for your interest in Fifth Third. Please contact the investor relations department if you have any follow-up questions. Tiffany, you may now disconnect the call.

Operator (participant)

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.