Fifth Third Bancorp - Q3 2024

Executive Summary

• Q3 2024 delivered resilient profitability despite macro volatility: diluted EPS was $0.78 with adjusted EPS $0.85 after $0.07 of notable items; NIM rose 2 bps to 2.90% and CET1 increased 13 bps to 10.75%.
• Fee growth was broad-based (commercial banking +13% QoQ; wealth & asset management +3% QoQ) and disciplined expenses improved the adjusted efficiency ratio to 56.1% (-70 bps QoQ).
• Management raised the quarterly common dividend 6% to $0.37 and executed $200M of share repurchases; CET1 still rose, underscoring capital strength.
• Outlook: management guides 4Q NII +1% QoQ, noninterest income +3–4%, loans stable to +1%, with $20–$40MM ACL build; they plan ~$300M of repurchases in 4Q, and expect record NII in 2025 absent major macro shocks.

What Went Well and What Went Wrong

What Went Well

• “We produced a return on equity of 12.8%… Our adjusted efficiency ratio improved to 56.1%… and we are in a position to achieve positive operating leverage on both a sequential and year-over-year basis in the fourth quarter.” – CEO Tim Spence.
• Fee momentum: commercial banking revenue +13% QoQ (bond fees, brokerage), wealth & asset management revenue +3% QoQ, service charges +3% QoQ, with adjusted noninterest income +4% QoQ.
• Capital and liquidity: CET1 10.75% (+13 bps QoQ) alongside $200M buybacks (+4.9M shares reduced); LCR Category 1 compliance maintained; loan-to-core deposit ratio 71%.

What Went Wrong

• Credit metrics normalized: NPL ratio rose to 0.59% (+7 bps QoQ), NPA ratio to 0.62% (+7 bps), NCO ratio 0.48% (down 1 bp QoQ but +7 bps YoY); provision increased to $160MM.
• Noninterest expense rose 2% QoQ (performance-based comp; tech & communications), and reported EPS was pressured by $47MM pre-tax Visa TRS mark, $10MM Mastercard litigation, and $9MM severance.
• Year-over-year margin headwinds persisted: NIM 2.90% vs 2.98% in 3Q23 due to higher funding costs and elevated liquidity (cash and short-term investments ≈$25B at quarter-end).

Transcript

Operator (participant)

Thank you for standing by. My name is Joelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fifth Third Bancorp third quarter twenty twenty-four 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 this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. I would now like to turn the conference over to Matt Curoe, Senior Director of Investor Relations. You may begin.

Matt Curoe (Senior Director of Investor Relations)

Good morning, everyone. Welcome to Fifth Third's third quarter twenty twenty-four earnings call. This morning, our Chairman, CEO, and President, Tim Spence, and CFO, Bryan Preston, will provide an overview of our third 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 October eighteenth, twenty twenty-four, and Fifth Third undertakes no obligation to update them. Following prepared remarks by Tim and Bryan, we will open up the call for questions. 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. Our focus on stability, profitability, and growth in that order has served us well in this dynamic operating environment and continues to produce strong and predictable results. This morning, we reported earnings per share of $0.78 or $0.85, excluding certain items outlined on page two of the release, exceeding the guidance we provided in our second quarter earnings call. We produced a return on equity of 12.8%, the best among peers who have reported thus far and the most stable on a trailing twelve-month basis. Our adjusted efficiency ratio improved to 56.1% in the third quarter. Headcount declined 1% year over year, despite continued investments in our growth strategies.

We achieved sequential positive operating leverage for the second consecutive quarter without the need to expend shareholder capital on an investment portfolio restructuring charge and are in a position to achieve positive operating leverage on both a sequential and a year-over-year basis in the fourth quarter. Despite changes throughout the year on interest rates, economic activity, and market demand, as we come into the home stretch for twenty twenty-four, I am pleased to say that Fifth Third should deliver NII, fees, expenses, and credit costs within the full-year guidance ranges we provided back in our January earnings call.

Before I hand the call over to Bryan to provide additional detail on our financial results and outlook, I would like to take a minute to highlight the ways in which our strategic growth investments, which have been consistent over several years, are providing long-term organic growth that is not macro environment dependent. In our consumer bank, consumer households grew 2.7% over the prior year, punctuated by 6% household growth in the Southeast. The release of the FDIC's annual Summary of Deposits during the quarter provided an additional means to benchmark our performance. For the second year in a row, Fifth Third was number one among all large banks in year-over-year retail deposit growth, measured on a capped branch deposit basis. We maintained or improved our market position in every market where we compete.

In our Midwest markets, we maintained our number 2 overall position behind JPMorgan. In our Southeast markets, we maintained our number 6 overall position and significantly closed the gap to our top five goal. We grew retail deposits nearly 16% year over year and gained meaningful market share in 14 of our 15 focus MSAs in the Southeast. We will open up 19 de novo branch locations in the fourth quarter and plan to accelerate the pace of openings through 2028, at which time we will have nearly half our network or more than 500 branches in total in the Southeast. In our commercial bank, we continue to expand our middle market presence and to invest in commercial payments.

Over the past twelve months, we have increased relationship manager headcount by over 20% in our Southeast and expansion markets, including opening commercial banking offices in Birmingham, Kansas City, and in the Central Valley. Third quarter middle market loan production was the highest in five quarters, led by the Southeast markets, which were up 20% sequentially and over 30% over the prior year. Our commercial payments business grew net fee equivalent revenues by 10% year over year in the quarter, and we processed $4.3 trillion in dollar volume. Newline and our managed service offerings continue to lead the way in terms of growth that is delinked from our balance sheet. Over 40% of all new commercial payments relationships added this year have been payments-led with no credit attached.

In our wealth and asset management business, we achieved record quarterly revenues growing by 12% year over year. Total assets under management have grown $12 billion in the past year, or up 21% to $69 billion. Our Fifth Third Private Bank, Fifth Third Securities, and Fifth Third Wealth Advisors business units all continue to generate strong performance. Turning to capital, our strong profitability and disciplined balance sheet management are providing growth capacity and the opportunity to increase capital return to shareholders. This quarter, we increased our common dividend by 6% to $0.37 per share and executed $200 million in share repurchases. Even with these actions, our CET1 ratio increased to 10.8%.

This will allow us to increase share repurchases in the fourth quarter to $300 million, with the potential to increase further, depending on the level of loan growth realized during the quarter. Looking ahead to the remainder of the year and the beginning of next, while we feel more optimistic today about the near-term outlook for the economy, we also recognize that crosscurrents, including reversals in interest rate rallies, volatility in jobs reports, stickiness in inflation, and geopolitical uncertainty could produce a wide range of potential economic outcomes. We will continue to manage Fifth Third with a focus on stability, profitability, and growth in that order, and to stay liquid and conservatively positioned while investing with the long term in mind. Lastly, I'd like to take a moment to express our sympathies to all those who have been impacted by Hurricane Helene and Hurricane Milton.

We recognize the hardships that arise from such devastating events, and I would like to also thank all our employees who have answered the call to support our customers and communities at this time. In the days since the hurricanes, you've worked tirelessly to reopen branches and check in on customers. You staffed the Fifth Third Financial Empowerment Bus to enable those who lost power and internet access to apply for FEMA disaster relief. Your dedication to serve in the face of these natural disasters is inspiring. Thank you for living our core values. With that, I will turn it over to Bryan to provide more detail on the quarter and our outlook.

Bryan Preston (CFO)

Thanks, Tim, and thank you to everyone joining us today. We're pleased that our third quarter results once again demonstrate the strength of our company. Our well-positioned balance sheet and diversified fee income streams drove 3% sequential adjusted revenue growth. That revenue performance, combined with our ongoing expense discipline, resulted in 5% sequential pre-provision net revenue growth in the third quarter on an adjusted basis. As Tim mentioned, our profitability remains strong, which allowed us to continue to accrue capital while we're purchasing shares and raising the quarterly common dividend 6%. Our CET1 ratio grew to 10.8% at the end of the quarter, and our tangible book value per share, inclusive of AOCI, increased 14% compared to June thirtieth and 47% from a year ago.

Highlighted on page two of our release, our reported results were impacted by certain items, including costs related to the Visa, Mastercard interchange litigation and some severance recognized during the quarter as we continue to work to drive efficiencies and automation. Net interest income for the quarter was over $1.4 billion and increased 2% sequentially, and net interest margin improved two basis points. Increased yields on new loan production were the primary driver of this improvement and more than offset the impact of increased interest-bearing core deposit costs, which were well managed and up only two basis points compared to the prior quarter. With the Fed funds rate cut at the end of the quarter, in September, we experienced our first month-over-month decrease in interest-bearing core deposit costs during this rate cycle.

While total average portfolio loans and leases were flat sequentially, we are seeing some signs of life. Loan production rebounded for both middle market and corporate banking, with strong contributions from the Georgia and Chicago regions, as well as the energy and TMT verticals. For the commercial portfolio, average loans decreased 1%, primarily due to increased paydowns and softness in revolver utilization, which declined 1% during the quarter to 35%. Average total consumer portfolio loans and leases were up 1% from the prior quarter, primarily reflecting an increase in indirect auto originations, which continued to be a significant contributor to our fixed rate asset repricing. During the quarter, we saw a 200 basis points of pickup on the front book, back book repricing in this portfolio. Diving further into deposits.

Average core deposits were up 1% sequentially, driven by higher money market balances, offset by a decrease in savings and CDs. This core deposit balance performance, combined with our well-timed long-term debt issuance during the quarter, has allowed us to pay down higher cost, short-term wholesale borrowings. As a result, our rates paid on total interest-bearing liabilities decreased one basis point sequentially. Our current focus remains on prudently managing deposit costs as we have officially entered the rate cutting cycle. Since mid-2023, we have been increasing our testing of price sensitivity in our deposit book to be well prepared for this phase of the cycle. We remain confident in our ability to manage liability costs to drive net interest income performance in the fourth quarter and beyond.

Demand deposit balances as a percent of core deposits were 24% during the third quarter, down 1% from the prior quarter. This level is consistent with our expectations from July, and we expect DDA mix to stay around 24% for the remainder of the year. By segment, average consumer and wealth deposits were stable sequentially, while commercial deposits increased 3%. We ended the quarter with full Category I LCR compliance at 132%, and our loan to core deposit ratio was 71%, down 1% from the prior quarter. Moving on to fees. Excluding the impacts of the security gains and the Visa total return swap, adjusted non-interest income increased 2% compared to the year ago quarter.

As Tim mentioned, our commercial payments and wealth businesses delivered strong fee results, with both achieving double-digit revenue growth over the prior year, driven by our sustained strategic organic growth investments in products and sales personnel. In commercial payments, revenue increased 10% as we continue to acquire new clients in traditional treasury management products, our managed service offerings, and in Newline. In wealth, our AUM increased to $69 billion, up 21% over the prior year, driven by strong inflows from Fifth Third Wealth Advisors and market performance. Fees of $163 million this quarter were a record high, led by strong transactional activity at Fifth Third Securities and the fee benefit from the AUM growth. Our capital markets business rebounded this quarter as bond issuance and trading, as well as rate hedging activities picked up.

Fees grew 9% over the prior year, also led by our debt capital markets business. The security gains of $10 million were from the mark-to-market impact of our non-qualified deferred compensation plan, which is more than offset in compensation expense. Moving to expenses. Excluding these items noted on page 2 of our release, our adjusted non-interest expense was up 3% from the year ago quarter and increased 2% sequentially, primarily due to increases in performance-based compensation due to the strong fee generation, the impact of the previously mentioned non-qualified deferred compensation mark-to-market, and continued investments in technology, branches, and sales personnel. Shifting to credit, the net charge-off ratio was 48 basis points, slightly better than our expectations from early September and down 1 basis point sequentially.

Commercial charge-offs were 40 basis points, down five basis points sequentially, and consumer charge-offs were 62 basis points, up five basis points from a seasonally low second quarter. Early stage delinquencies, 30-89 days past due, decreased two basis points to 24 basis points, which remain near the lowest levels we have experienced over the last decade. NPAs increased $82 million during the quarter, and the NPA ratio increased seven basis points to 62 basis points, in line with our 10-year average and remains below the peer median level. Commercial NPAs increased $60 million from the prior quarter. Within our C&I portfolio, NPAs increased $20 million due to increased inflow activity, which, given the nature of the commercial business, will be uneven from quarter to quarter. On a year-over-year basis, C&I NPAs are down $7 million.

Our CRE portfolio continues to perform well, with no net charge-offs during the quarter and an NPA ratio of only 46 basis points. The increase in our commercial mortgage NPAs is related to a single senior living credit in our owner-occupied portfolio. Consumer NPAs increased to $20 million from the prior quarter. Approximately half of this increase was driven by a recent change in policy related to our consumer non-accrual processes to better align our policies across asset classes and primarily impacted our return to accrual timing for loans that are paying in full and current. Overall, we are not seeing any broad credit weakening across industries or geographies. From a credit perspective, we do not expect Hurricane Helene to have a material impact on losses, and we are continuing to assess the impact of Hurricane Milton.

Our ACL coverage ratio increased one basis point to 2.09% and included an $18 million reserve build. We continue to utilize Moody's macroeconomic scenarios when evaluating our allowance and made no changes to our scenario weightings. Moving to capital, we ended the quarter with a CET1 ratio of 10.8%, significantly exceeding our buffered minimum of 7.7%, reflecting strong capital levels. Our pro forma CET1 ratio, including the AOCI impact of the securities portfolio, is 8.7%. We expect continued improvement in the unrealized losses in our securities portfolio, given that 59% of the AFS portfolio is in bullet or locked out securities, which provides a high degree of certainty to our principal cash flow expectations.

Assuming the forward curve is realized, approximately 24% of the AOCI related to securities losses will accrete back into equity by the end of 2025, increasing tangible book value per share by 6% before considering any future earnings. Sixty-one percent of the securities-related AOCI should accrete back to equity by the end of 2028. During the quarter, we completed $200 million in share repurchases, which reduced our share count by 4.9 million shares. As we assess our capital priorities, we continue to believe that 10.5% is an appropriate near-term operating level.

Moving to our current outlook, we anticipate continued growth in NII and NIM during the fourth quarter, with NII up 1% sequentially, reflecting the impact of lower deposit rates and the continued benefit of fixed-rate asset repricing, partially offset by the decrease in yield from our floating-rate loan portfolio. This outlook assumes a twenty-five basis points cut in November and a fifty basis points cut in December. We would not expect any change to this outlook if fewer rate cuts were to occur. We expect average total loan balances to be stable to up 1% from the third quarter, with middle market and auto production offsetting mixed demand in other asset classes. Fourth quarter adjusted non-interest income is anticipated to rise 3%-4% compared to the strong third quarter, largely due to a continued rebound in capital markets revenue and continued growth in commercial payments.

Additionally, we expect fourth quarter TRA revenue to be $10 million, down from $22 million in the fourth quarter of 2023. Fourth quarter total adjusted non-interest expenses are expected to be stable compared to the third quarter, as the increases in revenue-based compensation and the investments in branches and technology are largely offset by efficiencies achieved in other areas. Fourth quarter net charge-offs are projected to be similar or slightly down from the third quarter. Given the expected increase in loans during the fourth quarter, we anticipate an ACL build of $20 million-$40 million, assuming no major change to the economic outlook. We expect to deliver positive operating leverage in the fourth quarter on both a sequential and a year-over-year basis, and our PPNR guidance for the full year remains in line with our guidance from back in January.

Our net interest income trajectory exiting the year continues to position us for record results in 2025, assuming no major economic or interest rate outlook changes. Finally, moving to capital. With our consistent and strong earnings, we now expect to increase our share repurchases in the fourth quarter to $300 million, with potential further repurchases depending on the level of loan growth throughout the quarter. In summary, with our well-positioned balance sheet, growing revenue streams, and disciplined expense and credit risk management, we are set to generate strong and stable capital accretion, top-quartile profitability, and long-term value for shareholders, customers, communities, and employees. With that, let me turn it over to Matt to open the call up 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)

Thank you. The floor is now open for questions. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask a question and are listening via loudspeaker on your device, please pick up your handset to ensure that your phone is not on mute when asking a question. Again, we ask that you limit yourself to one question and one follow-up, and rejoin the queue for any follow-up questions. Thank you. Your first question comes from the line of Scott Siefers of Piper Sandler. Your line is open.

Scott Siefers (Managing Director)

Morning, everyone. Thanks for taking the call.

Bryan Preston (CFO)

Morning.

Scott Siefers (Managing Director)

Bryan, I was hoping you might be able to discuss sort of just the main puts and takes you see in the fourth quarter NII guide. In particular, curious about how you're thinking about the further trajectory of deposit betas, and sort of how that evolves over time, given that you've been very transparent about it and have an optimistic outlook there as well.

Bryan Preston (CFO)

Yeah, absolutely. We continue to feel really good about the trajectory of the NII, as well as the performance on the deposit front. And as you know, we've spent a lot of time being prepared for this point in the cycle, and things are playing out basically as we expected. You know, when we look at both our results and peer results, you know, the natural transition that you would expect is broker deposits, wholesale funding borrowings to start to come down. That's what we're seeing play out. And then also then to start to see when that has been fully realized, that movement in the beta. And that's exactly what we're seeing from us and the competition.

For us, you know, $35 billion of the index deposits, we were able to get the beta out of those as expected. To date, we're about in the mid-40s in terms of the betas that we've achieved since the 50 basis point rate cut. And we still have $13-$14 billion of CDs that will be approaching maturities. About 75% of our CD portfolio matures between now and the end of the first quarter, as well as some additional promos that we'll see maturities on. And we'll continue to grind through the deposit costs in other areas of the book. So continue to feel really good about that as the trajectory plays out.

And then the fixed-rate asset repricing, and that benefit continues to be a sequential tailwind for us, and that's going to continue into the fourth quarter of next year. And that'll be a big driver of the increase in NII from here.

Scott Siefers (Managing Director)

Okay, perfect. Thank you. Maybe looking out a little further, I know you've discussed generating record NII in twenty twenty-five. Would love to hear any updated thoughts there, I guess including what kind of lending rebound might be required to achieve that. It sounded like, you know, maybe a bit more optimistic on what lending demand might look like, given some of the signs of life you referred to in your opening remarks.

Bryan Preston (CFO)

Yeah. We are seeing some more activity there. We don't need heroic loan growth to deliver record NII. How the NII is delivered is obviously gonna be very environment dependent, so shape of the curve is gonna matter. We do expect to start to see some tailwinds on the loan growth side, given what we've seen. You know, the decreases from a commercial perspective, we think, for the most part, are behind us, and we're seeing nice tailwinds in the consumer businesses. That will be a big driver of how we transition into loan growth from here. So, you know, we would like to see a little bit of loan growth.

That certainly would be helpful in terms of delivering that record NII, but we feel good about the trajectory from here.

Scott Siefers (Managing Director)

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

Operator (participant)

Your next question comes from the line of Gerard Cassidy of RBC Capital Markets. Your line is open.

Gerard Cassidy (Managing Director)

Hi, Tim. Hi, Bryan.

Bryan Preston (CFO)

Morning.

Gerard Cassidy (Managing Director)

Can you guys... I posed this question to one of your peers yesterday, and when I framed it out, part of the response was it was a rosy outlook, so I'll give that as a caveat to you. But can you share with us-- I'm curious, and we're not-- I'm not asking for specific 2025 guidance, but if the Fed continues with-

... dropping rates the way they appear to be in terms of the forward curve and their own outlook. And we actually go from an inverted yield curve that we've lived with for over two years now, to a positively sloping curve, where the front end drops to 3-3.5, the long end stays around 4-4.5. Can you share with us what kind of impact that may have on your net interest income growth for 2025?

Bryan Preston (CFO)

Yeah, obviously, Gerard, we'll give more detail in next year on 2025. But if we can actually get a little bit more steepness in the curve, get the inversion out of the curve, that is very powerful for us from an NII perspective from here. 'Cause we would expect to see some relief on the liability side of the balance sheet. We do continue to have confidence that we will get costs out. And the thing that's not reflected in our forward guidance right now is an assumption that we're gonna be able to maintain the fixed rate asset spreads. We do assume that there is compression as rates come down, and if we were to get to a normal shape curve, there would be even more benefit then from the fixed rate asset repricing.

and we would also have a little bit of opportunity to get some, a little bit more economics out of duration in the security portfolio and then the swap portfolio over time. So that'd be a really productive environment for us, and we would see it, over time, you would see a significant expansion if you did.

Tim Spence (Chairman, CEO and President)

Yeah, yeah. And at least for what it's worth, Gerard, I don't know that I see your outlook as being overly rosy in that regard. I just think it's probably a reflection of what both the Fed's actions and the data would tell us is realistic. It probably feels rosy because we just haven't seen an environment like that over a very long time, a very long time period, probably twenty years or something like that, right? Either we had absolute rates at zero on the front end and a little bit of slope, but we've had this situation now where the front end was elevated, and you had a historic level of inversion without a recession.

If the Fed manages to land the plane here, the front end comes down. I think our view has been that the ten-year was probably going to be stickier. It just you're talking about on an intermediate-term basis, you know, inherently more inflationary dynamics, including the domestic manufacturing, industrial policy, the green energy transition, the historic level of fiscal deficits that we're running. Like, those are all things that should work against the long end of the curve moving meaningfully lower. And potentially even you could see, you know, if the Fed settles out at the you know, three or three and a half, the long end of the curve move up a little bit, so you get more of a normal term premium.

That sort of an environment, if it doesn't come along with, you know, some other issue, would be a really wonderful one for the balance sheet portion of our, you know, of our revenue.

Gerard Cassidy (Managing Director)

Very good. And then can you guys remind us, you talked about lifting up the buyback a bit in the fourth quarter. Bryan, you talked about how the tangible book value accretion, how it's going to come through just the burn off of that, the securities portfolio through the end of 2025. Can you remind us in an environment where you know what the Basel III Endgame requirements are, which hopefully we will, obviously, by this time next year, what should we expect in terms of how much of the capital that you guys are comfortable giving back to shareholders as a percentage of earnings, for example, in dividends and buybacks?

Bryan Preston (CFO)

Yeah. Our target right now, in normalized environments, we like being in, say, a 35%-45% range from a dividend payout ratio perspective. The share buyback ultimately is, driven by how much capacity we have relative to organic growth, because we do our preference would be to continue to invest on the organic front, when we see good risk adjusted returns. And then with what's left, we manage capital via the share buybacks. Continue to feel good with the capital generation that we've been seeing, that, $200 million-$300 million in share buybacks feel about the right level. This quarter, we saw a little bit of benefit in RWA, which allows us to potentially have a little bit more share buyback.

But with some loan growth coming in next year, hopefully we'll be talking about a little bit lower buyback over time, just because we've got a lot more organic opportunities to invest in.

Gerard Cassidy (Managing Director)

Very good. Thank you, guys.

Tim Spence (Chairman, CEO and President)

Thank you.

Operator (participant)

Your next question comes from the line of Mike Mayo of Wells Fargo Securities. Your line is open.

Mike Mayo (Analyst)

Hey, just to follow up on the... You said the loan production is the highest in five quarters, and then quarter over quarter loan growth is flat, right? So if you could just give a little bit more detail, like how much would loans have grown without pay downs, and why aren't you seeing more of this? That it sounds like you said there's signs of life, but, you know, is it bigger than a breadbox, sort of what you think might come ahead? Thanks.

Bryan Preston (CFO)

Yeah. Thanks, Mike. The paydowns for the quarter were around, say, $900 million. You know, a bit elevated from what we would typically see in some of the portfolios, as well as we had a utilization headwind of about 1% because we did see the revolver utilization move down. That one percent decrease is another, say, $800 million. So the combination of those two were a decent driver, ultimately, from a overall average loan growth and then the period loan growth perspective. We're not expecting continued pressures at this point. You know, we've seen utilization stabilize in the second half of the quarter and in the beginning of this quarter, so that doesn't feel like a headwind for us right now.

The capital markets activity, obviously, it was a very robust capital markets activity in the second quarter. Third quarter, we do think that fed into some of the paydown behaviors that we're seeing. But from here, we're expecting to get back to a little bit more normalized level, and we think that helps then with loan growth from here.

Tim Spence (Chairman, CEO and President)

As far as the penciled-in kind of expectations, you know, for the next several quarters over the next year, are you willing to give us any number yet? Do you think it'll be more than 1% or 2%? Or, I mean, I'm sure you're going to-

Bryan Preston (CFO)

Yeah, I mean, we gave average loan growth guide, obviously of up 1% sequentially. We'll get into 2025 in more detail next year. But in general, our objective would be to grow with the market plus a point or two. Historically, the banking industry grows in line with, you know, GDP, nominal GDP type levels. And if we get back to that kind of environment and the industry gets back to overall aggregate growth, we would expect to be in line, if not outperforming the industry.

Tim Spence (Chairman, CEO and President)

Yeah, I think-

Bryan Preston (CFO)

Yeah.

Tim Spence (Chairman, CEO and President)

Mike, it's Tim. The one thing I maybe I'd add here, I am of the view that the factors that would lead to a more favorable environment for loan growth inside the banking system are potentially in front of us. Subject to, one, who wins the election, and probably more importantly, what of the things that both candidates are campaigning on actually make their way into policy and how they elect to govern. What we hear from clients when I'm out in the field is that it's one, the elevated level of rates have been challenging because there's capital investments that don't make sense, that just don't pencil out in an environment where rates are higher.

Two, because they are uncertain about what we're going to see in the election, they have been using cash flow from the businesses to pay down debt in lieu of investing it in other places. And three, you have this big buildup in inventory in the 2021, 2022, 2023 time frame associated with people moving. I think we refer to it as the shift from just in time to just in case in inventories. As rates came up, we have seen the. I think the term for it that one of our distribution clients, our wholesale distribution clients use when I was out with them last week, was destocking.

So less inventory, less bill of material across supply chains, which in turn and a focus on more inventory turns, just getting the balance sheet to work harder, which reduces the revolving credit borrowing needs. Like, that can't go to zero, so you're not going to have a headwind there. If interest rates come down and more M&A and capital investment starts to make sense, that hasn't worked, you should see a pickup on that front. And then if we continue to see, you know, more certainty as it relates to the trajectory of the economy and have the uncertainty attached to the election out of the equation, I think we could see a better environment across the banking system.

That, coupled with the sales headcounts that we've continued to make, we referenced that in the prepared remarks, should support the, you know, at to above, market growth rate, on the lending side of the equation that Bryan referenced earlier.

Mike Mayo (Analyst)

Great. Thank you.

Operator (participant)

Your next question comes from the line of Ebrahim Poonawala of Bank of America. Your line is open.

Ebrahim Poonawala (Managing Director)

Good morning.

Tim Spence (Chairman, CEO and President)

Morning.

Ebrahim Poonawala (Managing Director)

I guess just a couple of follow-ups. One, maybe starting with loan growth. Tim, you mentioned, two things. One, from a Fifth Third standpoint, are we still lapping, de-risking or, running off the Shared National Credit book? I think it's down 11% year over year. Just give us your sense of, is that book going to continue to decline as you kind of, reduce your exposure there? And secondly, in your business, are you seeing any competition from non-bank direct lenders, private credit, that looks different today than it would have three, four, five years ago?

Tim Spence (Chairman, CEO and President)

Yeah, sure. Good, good question. So we should be at the inflection point on the sort of impact of the RWA diet by the end of the year. We, I think we talked last year about the fact that we were trying to get everything done in the fourth quarter. There would be a little bit of a spill over into the first, as you just got through normal timing. But we should be reaching the inflection point on that front, where you don't have the, you know, the. I mean, less de-risking, Ebrahim, than a focus on what would the profitability, the unit economics of those relationships look like in a world where you had, a different perspective on capital levels, and the value of the corporate cash that comes along with some of those larger relationships.

As it relates to private credit, like, we do see it at the margins, principally in the leveraged lending space. What I would tell you has happened is their focus on, less structure, faster execution, then has a little bit of a bleed over in other areas. And there is no question that, you know, the things that, some of the private lenders are willing to do are not in line with the way that we want to run our portfolio. I think it was the Financial Times or the Journal, but there was a piece about a week ago in the paper that talked about Payment in kind, or where I come from, negative amortization lending, was between a quarter and a third of the portfolios at most of the major private credit shops.

That is definitely not something you would ever see at Fifth Third, in an environment where the economic backdrop is benign, and where you don't have you know, a large percentage of your companies operating at distress levels. It's just odd to see that amount of PIK lending going on. So, I you know, if they're willing to do those things and we're not, by definition, they're gonna scrape the most indebted companies out of the banking sector.

Bryan Preston (CFO)

Ebrahim and Bryan, we put a little bit of detail on the SNC portfolio on slide twenty-four of our slides.

Ebrahim Poonawala (Managing Director)

Yep.

Bryan Preston (CFO)

You know, it's a $31 billion portfolio. It's down 11% year over year, so we are still facing lapping some of that headwind.

Ebrahim Poonawala (Managing Director)

But was the point that we are at a point where that 31.2 is close to where this book should bottom out?

Bryan Preston (CFO)

I think you're gonna continue to see some runoff, but we do think you're getting back to the point where you'll start to see some production coming in and offsetting it. It may not be exactly at the floor, but the decreases should definitely be moderating.

Tim Spence (Chairman, CEO and President)

The CIB pipeline, the middle market pipeline, which I think we referenced in response to Mike's question, is at an all-time record level. And the CIB pipeline, which would be where the majority of the shared national credits would originate, is at the highest level it has been in a year. So that you're seeing the turn there, which should support the decline in runoff, increase in production, and an inflection point in loan balances.

Ebrahim Poonawala (Managing Director)

Just the other question on capital allocation means your stock's done well. I'm not saying it's expensive, but it's stayed well on tangible book when you look at it. Why not hold excess capital as opposed to picking up the pace of buybacks, given that we might be in an improving economy? If that happens, more capital, good for growth. If it's worse, it adds defensibility. Just talk through in terms of how you go through capital allocation and the whole discussion or analysis around holding on and building some more excess dry powder as opposed to accelerating buybacks from here.

Bryan Preston (CFO)

Yeah, I mean, we, we feel really good full on about the earnings trajectory of the company. And we think, given that, we feel like our stock is continues to be a good bargain, for us, and we think it's a good investment for us from a corporate perspective. You know, we look at a couple things on that front. We're generating a lot of capital every quarter, and so that actually gives us the ability to be very dynamic with our capital allocation decisions. We have a lot of confidence that we're gonna be able to generate the capital necessary for organic growth. And then if we wanted to, slow down capital distribution via share buybacks, because we see more opportunity or we need to get more defensive, we would be able to do that.

Another component is just, you know, when you think about our industry and the 10% cost of equity, sitting on excess capital is a high cost for our shareholders. So being in a position as we are right now, and being able to go ahead and make some decisions and deploy at a time where we continue to feel really positive about the trajectory as a company, and knowing that we have the flexibility with the income profile and the stability that we have going forward, to regenerate the capital when we would need to, and if we think different opportunities would present themselves. That's really the thought process on how we're thinking about capital allocation from here.

Ebrahim Poonawala (Managing Director)

Noted. Thank you.

Operator (participant)

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

Erika Najarian (Managing Director)

Hi, good morning.

Bryan Preston (CFO)

Morning.

Erika Najarian (Managing Director)

My first question is for you, Bryan, so you indicated that your deposit beta so far on the recent cuts are in the mid-forties. You know, as we think about the speed of index deposit repricing and then retail, could you give us a sense of what you think the cadence could be as we go through the next five quarters, so a few of your peers have noted that it might not be a straight line, you know, path to the terminal beta, given how quickly corporate can reprice and, you know, retail has sort of been awoken, so to speak, in terms of higher rates, so if you could speak to that and maybe speak a little bit to, as you think about your mixed deposits, you know, we haven't seen a neutral rate that's not zero for so long.

So maybe help us get a sense of if we get a neutral rate of, you know, 2.75% or 3%, what do you think your natural spread is or natural deposit rate is in that environment?

Bryan Preston (CFO)

Yeah, I mean, that is obviously a very interesting question. The shape of the curve is going to matter a lot in that scenario as well. You know, when we think about the pacing of how the beta will come through, like you said, it is the commercial deposits will come through very quickly. The retail takes a little bit longer. The two primary drivers for us on that, it's the guarantee periods on the promotional offerings, which tend to be between, say, 45 and 90 days, and then it's the maturities of your CD portfolio. And as I mentioned earlier, 75% of our CDs will mature between now and the end of the first quarter.

So to get the rest of the beta and get to that kind of cumulative beta that we have been targeting, where, you know, high fifties kind of beta for us, it'll take about two quarters because the CD repricing is going to be a component of that, now that that's $13 billion in book. From a natural level perspective, you know, I think that is really tough to estimate. I mean, we're sitting here at peak rates, we were at a 2.99-ish was our peak interest bearing core deposit cost versus a five, you know, 5.50 Fed funds level. You know, we would expect to see a little bit of compression potentially in that spread.

But being able to maintain, you know, 150-200 basis points of deposit spread seems like a potentially achievable scenario. One big question on that, Erika, another one that would obviously be a big question is just where does the how does the magnitude of loan growth change over time? And if you've got a decent curve shape, back to Gerard's question, and you've got opportunities for loan growth, you're gonna have some opportunities to be a little bit more competitive to raise more deposits and ultimately drive better NII. And at the end of the day, we're not managing the deposit betas, we're managing the NII and profitability trajectory, and those are the decisions and the trade-offs we'll make.

Erika Najarian (Managing Director)

Got it. And my second question is for Tim. You know, Tim, the feedback from investors has always been quite positive in terms of the forward-looking way of how you look at the world. And as we think about two thousand and twenty-five, I guess it, it feels like given record NII and, you know, your, your fee income should benefit if activity levels come back in general, in an even bigger way next year. It feels like the expense run rate that you posted year over year this quarter to 3% sounds, it feels more appropriate. You know, obviously, assuming that revenues grow above that. You know, as we think about two thousand and twenty-five, is it right for us to, you know, until we get guide from you, put growth in expenses as a placeholder?

As we think about 2025, what are the big projects that you feel like you're ready to retackle and revisit that you may have pulled back on in 2024 because the NII dollars were coming down?

Tim Spence (Chairman, CEO and President)

Yes. So thank you. That. I think there was a compliment and a question in there, and I appreciate both. It. You've heard me reference, I think, the old saying that Cincinnati invented hustle in the past. That dates back to, Pete Rose's nickname and the fact that he sprinted, to first base on a walk. I think that, that ethos is, I think a part of the way that we try to run the company, right? Is to sprint to first on a walk. So we try to work on next year's problems and the year after that this year, as opposed to waiting for that environment to materialize. And that's part of why I think we made the NIM turn, right, our NIM trough, and then grew in the first quarter before most of our peers.

The NII inflected positive in the second quarter over the first quarter, which was before most of the peers. We got to real sequential positive operating leverage this quarter versus the last quarter, and we're saying we'll get there year over year next year. But none of that involved us holding back on investments we thought were important to the company or would make sense, right? We have we're gonna have built thirty-plus branches this year in an environment where we were trying to manage expenses. We continued forward on the platform modernization. The acquisitions we made in fintech on the commercial payment side of fintech companies last year, we've continued to feed this year. And the hiring, as I mentioned, on the sales force and both in wealth management and in the middle market, have been pretty significant.

So you should expect us to do the same sorts of things next year, and to expect the company through other efficiency initiatives to help self-fund, you know, the investments along the way. And we don't view strategic planning as an investment request process, it's principally a resource allocation process. So I don't know that I helped you with a specific number for twenty twenty-five. You have to wait till January to get that. But the annualized expense run rate of the bank over a period of time, as has been call it, 3%, if you look at it. So that certainly, if you were going to use the past, averaged through more benign periods and more challenging periods, would be where you'd start.

Erika Najarian (Managing Director)

Got it. Thanks so much.

Tim Spence (Chairman, CEO and President)

Absolutely.

Operator (participant)

Your next question comes from the line of Manan Gosalia of Morgan Stanley. Your line is open.

Manan Gosalia (Executive Director)

Hey, good morning. I wanted to ask about index deposits. Can you talk about how they've behaved over time? So I guess the question is that as rates fall and the rates on those index deposits fall, is there a chance that some of those move into other deposit products with exception pricing? Or, does that not really happen based on historical experience?

Bryan Preston (CFO)

You'll see some people that try to do some negotiations on deposit costs. That's. Those are things that always occur, but those are things that we are typically able to manage fairly well. The reality is, you get paid a better spread as a depositor on an index deposit, because you're taking the risk ultimately on market movements. Whereas on a managed account, it's typically a wider spread because we have more ability to manage it. So it's something that we've had good experience with it behaving, controlling it through our pricing and through our discipline around that process. We're not overly concerned about reverse migration from index back into managed rate being a headwind from a beta perspective.

Manan Gosalia (Executive Director)

Got it. And then, you know, maybe just separately on credit. On slide 28, you're showing NCOs and NPAs reaching normalized levels. I mean, I know you noted that you are not seeing any signs of credit weakening. Can you give us some more color there? You know, what gives you some confidence that things are just normalizing here? Is it that rates are going down, so that helps you on the credit side? Is it just what you're seeing on the roll rates? Maybe, you know, what helps us to stabilize from here?

Greg Schroeck (Chief Credit Officer)

Yeah, it's Greg. I'll take that one. A couple things. You look at our delinquencies; they continue to be at all-time low levels. Our criticized assets actually went down by $8 million quarter over quarter. We had the increase in NPAs. On the commercial side, those were driven by five names in five different industries. We've been very consistent in talking about a very diverse portfolio, and it continues to be very diverse. On the consumer side, we're seeing a little bit of softness on Dividend. We're seeing a little bit of softness in the RV portfolio. When you look at the 2022, 2023 origination vintages, they're underperforming across many of the consumer asset classes. We see the same thing in the portfolio, specifically in Dividend and RV.

But the securitization data from other originators will tell you the same thing. We're actually outperforming those indexes, that securitization data by almost 50-60 basis points. And so I would expect delinquency to be a little bit elevated for the next quarter or two, but I'm highly confident that we'll work through those vintages when it comes back down to more normalized level in that 125 level. So we're just not seeing anything within the portfolios, commercial or consumer, that's causing additional concern. It's been pretty stable. Our borrowers have continued to behave. We see the commercial real estate portfolio. We've got virtually no delinquencies, very, very minimal non-performing assets in that commercial real estate portfolio.

So across the board, that diversification, that strategic play of building out a through the cycle portfolio has played well for us, and I would expect that to continue in the future.

Manan Gosalia (Executive Director)

Great. Thank you.

Operator (participant)

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

Matthew O'Connor (Managing Director)

Good morning. On slide 10, you've got some pie charts here you showed before, just showing the mix shift from the Midwest to being more balanced. I guess the question is, as we look out the next few years, you show the split getting to 50/50, which is still a pretty meaningful reshift from here. So how do you get there? Is it simply harvesting what you've done, a combination of harvesting and building? Is there a buy component of that as well?

Greg Schroeck (Chief Credit Officer)

Yeah, there's no buy component in there. That's the old-fashioned way, which is one new branch at a time and the right marketing and product strategies to support the increase in distribution. So if you look at the branches we've built, Matt, they're performing very well. We've talked in the past about the fact that the performance at this stage, and having built more than 100 of them, is pretty predictable. And they reach a point where they sort of saturate their catchment area in about seven years, right? They break even within two, and then they make this pivot to continuing growth. So the average age of the de novo right now is going to be like, call it two years, two and a half years at the most.

So there is a five-year tailwind we'll get from the 100 that are already in the ground, and operational. Plus, we have been building about 30-35 a year. That number should move up, into the sort of 40-50 range on an annualized basis, just based on what we have in the pipeline. And as those branches come online, you will see that mix shift play out first in the allocation of the physical distribution, and then behind that, over time, as they mature, the mix of the deposit base on the retail side overall.

Matthew O'Connor (Managing Director)

Okay, so that's super helpful, so a lot of maturing of what you've already done will move the needle quite a bit.

Greg Schroeck (Chief Credit Officer)

It will.

Matthew O'Connor (Managing Director)

And then separately, I just

Greg Schroeck (Chief Credit Officer)

Yes. Sure, for your retail deposit growth that I cited from the FDIC summary deposits. It's visible there.

Matthew O'Connor (Managing Director)

Thank you. And then, just separately, I know there's been a lot of discussion on the interest income and kind of drivers of the NIM. And I'm sorry if I missed it, but have you guys talked about this concept of, like, normalized NIM, looking out a few years as you get the fixed rate out, repricing and whatever rates do, break the forward curve? Any concept of normalizing NIM?

Bryan Preston (CFO)

Yeah, I mean, it's another tough one because what does the environment look like? What does the shape of the curve look like out in the future? If you just take the cash position that we're holding today, we're at, you know, we're north of $20 billion of cash. We're up almost $9 billion year over year. Every $1 billion of excess cash that we're holding is 1.5 basis points on NIM. So just getting $10 billion out over the next year and hopefully having some opportunities to deploy that into the loan portfolio, that could add 15-20 basis points to our NIM alone. We're going to see NIM growth from here, just with the continued repricing of the portfolio.

From a fixed rate asset perspective, that just takes a little bit more time to play out. But if you get a little bit of relief on the front end, a more normalized curve, get the front end down. I mean, it's not unreasonable to think we could be talking about, you know, getting back to what was a 3.15 to 3.25 NIM in a reasonable time horizon.

Matthew O'Connor (Managing Director)

Okay, that's helpful. Thank you very much.

Operator (participant)

... Your next question comes from the line of Christopher Marinac of Janney Montgomery Scott. Your line is open.

Christopher Marinac (Director of Research)

Thanks. Good morning. I wanted to ask about some of the large banks who have been placed under regulatory orders this year. Does that create new business opportunities for you beyond your already organic pipeline?

Tim Spence (Chairman, CEO and President)

I mean, I think any time there's a limit on someone else's ability to grow, it means that the rest of the industry has to have the capacity to be able to absorb the growth in the market. So I guess in that sense, yes, just tactically. I think more strategically, the more disciplined you are about the way you run your business, the better you do in moments when there's any sort of disruption somewhere else, right? So I wouldn't wish significant regulatory problems on anybody. They're no fun to work through, but they do tend to create opportunities at the margins for other banks that are in a strong position and have the ability to grow in an environment where others may not.

Christopher Marinac (Director of Research)

Great, Tim. Thank you for that. And just a quick follow-up on sort of returns over time. Does lower interest rates help you get your returns, or does it make it more challenging?

Bryan Preston (CFO)

Lower interest rates, as long as that comes along with a normalization of the yield curve, would certainly be very helpful to returns over time. A low flat curve is a challenging environment for the banking system.

Christopher Marinac (Director of Research)

Great. Thank you, Bryan. Appreciate it, everybody.

Bryan Preston (CFO)

Mm-hmm.

Operator (participant)

We have a follow-up question from the line of Mike Mayo of Wells Fargo Securities. Your line is open.

Mike Mayo (Analyst)

Hey, I was just wondering. This is a big picture question. You guys give the sense that you're investing more for growth than others. Do you have any metric on how much you make in your organic investments and what sort of returns you get on those? I think, I'm thinking about the Southeast branches or wealth or commercial payments, and it kind of goes back to that earlier question. Maybe you shouldn't buy back so much stock if you have so many opportunities for growth or, you know, high-class problem if you get there.

Tim Spence (Chairman, CEO and President)

Yeah, I mean, the we look at all of these things. The easiest comparable across the different investment types is probably just IRR, Mike, right? And time to break even. So the IRR of the branches in the Southeast has been running in the 18%-20% range, and the time to break even has been a couple of years, right? If you were to look at the small acquisitions we've made to support commercial payments, we were targeting IRRs in the 20s in those cases, and partly because you had a more nascent business and less predictable outcome than, you know, when you built 100 branches and you know what you're going to get out of the next location that you build.

So, in general, we feel really good about anything that we can get done in that sort of 15%-25% range, subject to the execution risk that's attached. The more uncertain, the more nascent the strategy, the higher the return you would expect to get out of it. And the more proven strategies, you know, obviously, the lower the execution risk premium that you would need to place on them. I don't think we are constraining the investment rate. Like, if you just look at the Southeast, JPMorgan has built the most branches down there over the course of the past five years. They're at 180 or something like that.

I think Fifth Third is number two, and I believe B of A is number three, and then there's a pretty wide gap between that and everybody else. And I know I don't have to tell you that we're a little bit smaller than B of A and JPMorgan. So we are, we think being appropriately aggressive in terms of the investment rate down there. And at least at the moment, I don't know that if we said, "Hey, we're not going to buy back stock," we don't have an alternative use for that capital on an organic basis that we would be thinking, you know, that we would deploy it toward.

Bryan Preston (CFO)

And Mike, we are accelerating the investment, as Tim mentioned, on the proven strategies. It's part of why we're going from what was twenty to thirty branch builds a year to fifty plus branch builds a year. So we have more confidence that gives us a point of view of an area we want to invest in. And then the other limiter for us is always gonna be on the analysts that are worried about positive operating leverage, because that's the trade-off we care about as well.

Mike Mayo (Analyst)

Just to push back on that last point, I mean, it's I hear you. If you get those sorts of IRRs, and you're accelerating your branch build, but it comes at a time when I think some of the Southeast competitors have, you know, woken up, recovered, like you, less unrealized securities losses, going from defense to offense. You have that change versus the last few years, and you also have the, the likes of some of those, those big banks that you mentioned with spending so much more in technology and, and digital. So don't you think it might be tougher in the next few years than it's been in the past few years?

Tim Spence (Chairman, CEO and President)

Oh, I don't know. I don't think that the Southeast was uncompetitive the last five years, right? I think that what you're constantly looking at is, are we making the right set of investments, given the competitors that we have and our value proposition relative to others? I completely agree the amount of money that is getting deployed into technology investment on the part of the large banks is eye-popping. But if you look at the value proposition, like, go pull up the consumer-led consumer checking account offering for any of those large banks and for Fifth Third or some other regional, and tell me how that materialized into some substantially better value proposition. I actually think in many cases, what you would see is the opposite, is it's been the regionals who led on consumer-friendly product innovation.

It's definitely been true of Fifth Third, but it's not just been Fifth Third, in terms of the offerings there. So, we are not running the bank to be able to take share in uncompetitive environments. We run the bank to be able to take share in very competitive environments. And, you know, I expect the level of competition is going to stay high, not that it's going to get better or, for that matter, get worse.

Mike Mayo (Analyst)

All right. Thank you.

Tim Spence (Chairman, CEO and President)

Yep, thank you.

Operator (participant)

That concludes our Q&A session. I'm going to turn the conference back over to Matt for closing remarks.

Matt Curoe (Senior Director of Investor Relations)

Thank you, and thanks, everyone, for your interest in Fifth Third. Please contact the Investor Relations Department if you have any follow-up calls or questions. Operator, you may now disconnect the call. Thank you.

Operator (participant)

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