Fifth Third Bancorp - Earnings Call - Q4 2024
January 21, 2025
Executive Summary
- Reported diluted EPS was $0.85; adjusted EPS was $0.90 as interchange litigation and a foundation contribution were partly offset by an FDIC special assessment update and a tax benefit. NII rose 1% QoQ and NIM expanded 7 bps to 2.97% on deposit cost reductions and fixed‑rate asset repricing.
- Fee momentum: adjusted noninterest income rose 6% QoQ and 5% YoY; capital markets +11% QoQ/+16% YoY, commercial payments +1% QoQ/+7% YoY, wealth & asset management +3% QoQ/+11% YoY.
- Credit metrics were stable-to-improving: NCO ratio fell 2 bps QoQ to 0.46%, NPL ratio increased to 0.69% with commercial inflows; ACL/loans was ~2.08% and CET1 ended at 10.51% after $300M buyback.
- 2025 outlook: management guided to record NII, full‑year positive operating leverage, loans +3–4%, adjusted fees +3–6%, and adjusted expenses +3–4%; Q1’25 NII flat QoQ with seasonal expense step‑up (~$100MM).
- Near‑term catalysts: reiterated “record 2025 NII” and positive operating leverage; continued capital return ($300M Q4 repurchase; planned $225M buyback in Q1’25); prime rate cut to 7.50% in Dec supports deposit cost trajectory and floating loan yields reset context.
What Went Well and What Went Wrong
- What Went Well
- “We remain confident in achieving record NII in 2025 and delivering full year positive operating leverage across a range of interest rate environments.” – CFO Bryan Preston. NIM rose 7 bps QoQ to 2.97% on a 38 bps decline in interest‑bearing liability costs.
- Fee growth from strategic investments: adjusted noninterest income +6% QoQ/+5% YoY; capital markets syndication/M&A strength and wealth AUM growth to $69B drove double‑digit YoY fee increases.
- Expense discipline: adjusted efficiency ratio improved to 54.7%; adjusted expenses fell 1% QoQ.
- What Went Wrong
- NPL/NPA increased: NPLs rose to $823MM (0.69% of loans) and NPAs to $853MM (0.71%) on commercial inflows; management expects a large NPA inflow to pay down in H1’25, but it pressured coverage ratios sequentially.
- Reported EPS impacted by litigation/foundation items (−$0.05); interchange litigation reduced noninterest income by $51MM and increased expense $4MM.
- CET1 dipped 24 bps QoQ to 10.51% on loan growth/RWA expansion despite buybacks; pro forma CET1 incl. AOCI remains a watchpoint amid long‑end rate volatility.
Transcript
Operator (participant)
and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the 5th Third Bancorp Fourth Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
We kindly ask callers to limit themselves to one question and one follow-up. I would now like to turn the conference over to Matt Kiro, Senior Director of Investor Relations. Please go ahead.
Matt Curoe (Senior Director of Investor Relations)
Good morning, everyone. Welcome to 5th Third's Q4 2024 earnings call. This morning, our Chairman, CEO and President, Tim Spence and CFO, Brian Preston, will provide an overview of our Q4 results and outlook. Our Chief Credit Officer, Greg Schreck, has also joined for the Q and 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 5th Third's performance. These statements speak only as of January 21, 2025, and 5th Third undertakes no obligation to update them. Following prepared remarks by Tim and Brian, we will open up the call for questions. With that, let me turn it over to Tim.
Tim Spence (CEO & President)
Thanks, Matt, and good morning, everyone. At 5th Third, we believe great banks distinguish themselves not by how they perform in benign environments, but rather by how they navigate uncertain ones. They achieve this through a diversified business mix, defensive balance sheet positioning and by obsessing over the details in day to day operations while investing for the long term. This morning, we reported earnings per share of $0.85 or $0.90 excluding certain items outlined on Page 2 of the release, exceeding the guidance we provided in our Q3 earnings call. We achieved an adjusted return on equity of 13.7%, the highest among all peers who have reported thus far.
Revenues for the quarter grew 2% sequentially and 2% year over year. Core adjusted PPNR exceeded $1,000,000,000 for the first time in several quarters and our adjusted efficiency ratio improved to 54.7%. The 4th quarter capped the year where the industry outlook for interest rates, loan growth, regulation and capital markets activity all changed significantly. Despite this, we delivered strong and predictable results. Our full year return on assets of 1.17%, return on tangible common equity excluding AOCI of 14%, and efficiency ratio of 57.1%, all finished among the top in our peer group.
We were one of only a few banks to achieve full year guidance for NII, fees, expenses, PPNR and net charge offs that was provided back in January. Our NIM inflected in the Q1 as we said it would, NII inflected in the 2nd quarter as we said it would. We returned to positive operating leverage in the 4th quarter on both a sequential and a year over year basis as we said we would. We resumed share repurchases in the 2nd quarter and raised our dividend in the 3rd quarter. In total for the year, we returned $1,600,000,000 of capital to our shareholders, while also increasing our CET1 ratio by more than 20 basis points.
Competitive barriers are exceedingly difficult to build in the banking business. The only way we know how to build them is to invest continuously in a limited number of strategies over a sustained period of time. Our growth strategies are well known and have been consistent for several years now. Their impact is evident in our 2024 results and reflected in the 3rd party accolades that we received during the year. Our investments to expand our Southeast branch footprint and in our differentiated momentum banking platform continue to drive outsized growth in granular low cost deposits.
For the 2nd consecutive year, 5th Third was number 1 among all large banks in year over year retail deposit growth measured on a cap deposit basis. We generated year over year household growth of 2.3%, punctuated by 6% growth in the Southeast. And we also won J. D. Power's Retail Banking Satisfaction Award for the Florida region.
The 31 de novo branch locations we opened in 2024 and the 60 new branches we expect to open in the Southeast in 2025 should set us up well to continue to gain market share. On lending, our investments to generate granular diversified loan originations without compromising on pricing or risk gained momentum throughout the year and contributed to a strong finish. On a sequential end of period basis, we grew loans 3% or a bit more than 1% faster than the H8. Growth was balanced between consumer and commercial and across product categories, including from our through the cycle commitment to the auto business, strong C and I production from the middle market and key CIB verticals and continued growth from our provide and dividends in tech platforms. In the middle market, we expanded our relationship manager head count by 25% in the Southeast and in our expansion markets over the course of 2024. 4th quarter middle market loan production reached a 3 year high, increasing over 50% sequentially and over 70% year over year, and we also saw a modest uptick in utilization. Our C and I pipelines in middle market are at record levels heading into 2025, and we expect to add another 5% to 10% to RM headcount over the course of the year.
On fees, our commercial payments business grew fee revenues by 8% in 2024 and we processed $17,000,000,000,000 in volume. Our managed services offerings and NewLine led the way on growth and nearly 40% of all new commercial payments relationships have no credit attached. In addition, CareShield, Global Finance and This Week in FinTech all recognized NewLine with awards for technology innovation. The ramp from new and expanded relationships won during the year, including Stripe and Trustly will give us a head start on the strong 2025. In Wealth and Asset Management, total assets under management grew 17% year over year, up roughly $10,000,000,000 to $69,000,000,000 in total AUM.
Our 5th Third Private Bank, 5th Third Securities and 5th Third Wealth Advisors business units all delivered strong performance and we were recognized for the 6th consecutive year as best private bank by Global Finance. Last, we continued to make good progress on modernizing our operating platform. We completed general ledger and clearing platform conversions during the year and launched term deposits on a modern cloud core. Our cross functional lean value streams have achieved more than $150,000,000 in annualized savings and headcount declined 1% year over year. These initiatives continue to improve execution quality and provide funding for the investments in our growth strategies.
Looking ahead to 2025, there are many reasons to feel optimistic about the banking sector. The underlying economy is solid and most business owners are more optimistic about 2025 than they were about 2024. The combination of front end rates above 0 and some steepness in the yield curve is a more constructive setup than we have had in quite some time. We may also be on the cusp of a shift in the direction of regulation, which could unlock new opportunities. With that said, recent history is a good reminder that things can shift very quickly.
The modern economy is the most complex adaptive system the world has ever seen and complex systems react to change in unexpected ways. Come what will, we are pleased with the positioning of our company. We remain confident in achieving record NII in 2025 and delivering full year positive operating leverage across a range of interest rate environments. Our credit portfolio remains well diversified and proactively managed and the risks are well understood. We will continue to focus on stability, profitability and growth in that order and to stay balanced in our positioning while investing with the long term in mind.
Before I turn it over to Brian, I want to say thank you to our employees for the way you support our customers and our communities and for your commitment to getting 1% better every day. You make our company the special place it is. With that, Brian will provide additional details on the quarter and our outlook for 2025.
Bryan Preston (Executive VP & CFO)
Thanks, Tim, and thank you to everyone joining us today. Our 4th quarter results demonstrated the ongoing strength and momentum of our company. With a resilient balance sheet and diversified income streams, we achieved 3% sequential growth in adjusted revenue. That revenue performance combined with our ongoing expense discipline resulted in a 5% sequential pre provision net revenue increase in the 4th quarter on an adjusted basis. As Tim mentioned, our strong profitability allowed us to return over $1,600,000,000 of capital to our shareholders in 2024, including the $300,000,000 share repurchase executed in the Q4.
We delivered $3,000,000,000 of sequential growth in end of period loans and maintained our CET1 ratio consistent with our near term operating target of 10.5%. In addition to the $630,000,000 in stock we repurchased in 2024, our tangible book value per share inclusive of the impact of AOCI increased 6% from the previous year despite the 10 year treasury increasing nearly 70 basis points. The strategy in our investment portfolio to focus on investments with known cash flows through the bullet and locked out securities will continue to benefit us as these positions pull to par. Even with the increase in rates, the securities we maintained and available for sale realized an improvement in their unrealized loss position since the end of last year. Highlighted on Page 2 of our release, our reported results were impacted by certain items.
These include costs related to the Visa, Mastercard interchange litigation and a contribution to our foundation, partially offset by benefits related to an updated estimate for the FDIC special assessment and the resolution of a prior period state tax item. Net interest income for the quarter continued its positive momentum, increasing 1% sequentially to $1,400,000,000 with net interest margin improving 7 basis points. Proactive balance sheet management resulted in a 35 basis point reduction in the cost of interest bearing deposits. These actions along with the loan growth and the continued repricing benefit on fixed rate assets more than offset the decrease in yield on our floating rate assets. Loan growth accelerated in December, resulting in a strong period end loan growth of 3% with average loans increasing 1% sequentially.
Period end commercial loans were up 3% and average balances were relatively stable. We saw broad based strength in production across our middle market footprint led by our Chicago, Indiana, Carolinas and Georgia regions, as well as a rebound in our corporate banking verticals. Utilization improved the point, some of which we expect is normal year end seasonality. Average and period end consumer loans were up 2% from the prior quarter, reflecting increases in indirect auto and residential mortgages. Both asset classes also saw sequential increases in yield due to the continued front book, back book repricing benefits on these fixed rate portfolios.
Shifting to deposits. Average core deposits were up 1% sequentially, driven by higher interest checking balances in commercial. This core deposit performance combined with the flexibility provided by our elevated cash position allowed us to meet our expected down rate beta targets and further reduce higher cost short term wholesale borrowings. Interest bearing core deposits peaked at 2.99% in August and were down to 2.49% in the month of December, representing a core deposit beta in the upper 50s. Total core deposits have increased by $1,600,000,000 over that same horizon.
As always, our focus remains on prudently managing total funding costs while maintaining a strong liquidity position. We are very pleased with the 38 basis point sequential decrease in interest bearing liability costs. Our balanced approach will continue to provide us with flexibility needed to continue our NII growth trajectory to a record 2025 as we head into another uncertain rate environment. Demand deposit balances as a percent of core deposits remained at 24% during the quarter, consistent with our expectations. Balances were stable on both an end of period and average basis compared to the Q3.
We believe this balance level will be maintained as short term rates are likely to be relatively stable over the near term. We ended the quarter with full Category 1 LCR compliance at 125% and our loan to core deposit ratio was 73%, up 2% from the prior quarter. Moving to fees. During the Q4, we updated the non interest income captions on our income statement to better align disclosures to our most significant business activities, which includes the addition of commercial payments and capital markets line items. The appendix of our presentation provides more detail on the caption changes.
Excluding the impacts of the securities gains and losses and the Visa total return swap, Adjusted non interest income in the Q4 increased 5% compared to the same quarter last year. Capital markets, wealth and commercial payments all delivered strong fee results, driven by our sustained strategic growth investments in products and sales personnels. Capital markets grew 16% over the prior year with increases in loan syndications, debt capital markets and M and A advisory revenue. We continue to see activity below prior year levels in our customer hedging and institutional brokerage fees. In wealth, fees grew 11% over the prior year to $163,000,000 due to AUM growth and increased transactional activity at 5th Third Securities.
The new commercial payments caption includes TN fees and earnings credits that were previously included in service charges on deposits and commercial card and sponsorship revenue that was previously reported in card and processing revenue. Compared to the prior year, commercial payments revenue increased 7%, driven by treasury management net fee equivalent growth, which was up 11%. We continue to acquire new clients in treasury management products in our managed services and in new line. The securities losses of $8,000,000 were primarily from the mark to market impact of our non qualified deferred compensation plan, which is offset in compensation expense. Moving to expenses.
Excluding the items noted on Page 2 of our release, our adjusted non interest expense was up 1% from the year ago quarter and decreased 1% sequentially. The previously mentioned deferred compensation mark reduced expenses by $7,000,000 for the quarter compared to expense increases of $10,000,000 $13,000,000 in the prior and year ago quarters, respectively. Excluding the impact of the deferred comp mark, year over year expense growth was 2% and sequential expense growth was 1%. While investments in technology, branches and sales personnel have and will continue to drive expense increases, these costs continue to be partially funded through the savings generated by our value stream efficiency programs. Shifting to credit, the net charge off ratio was 46 basis points, in line with our expectations for the quarter and down 2 basis points sequentially.
Commercial charge offs were 32 basis points, down 8 basis points. Consumer charge offs were up 6 basis points, which primarily reflects the normal seasonal 4th quarter uptick we see in our indirect auto and card portfolios, as well as the continued seasoning of the 2022 vintages in our solar and RV portfolios. Consistent with broader industry data, the 2022 consumer vintage appears to be a modest underperformer relative to other origination periods. Early stage delinquencies 30 to 89 days past due increased only one basis point and remained near the lowest levels we have experienced over the last decade. Our NPA ratio increased 9 basis points sequentially to 71 basis points.
Commercial NPAs contributed $122,000,000 to the increase from the prior quarter and consumer NPAs were up only $15,000,000 Within commercial, our CRE portfolio continues to perform well with no net charge offs during the quarter and a stable NPA ratio of 46 basis points. Additionally, total commercial criticized assets decreased by $435,000,000 an 8% reduction during the quarter. Our provision expense for the quarter resulted in a $43,000,000 build in our allowance for credit losses. This build was primarily attributable to the strong growth in period end loans and a modest deterioration in the Moody's macroeconomic scenarios. Our ACL coverage ratio was 2.08 percent, down 1 basis point from the 3rd quarter.
We made no changes to our scenario weightings during the quarter. Moving to capital, we ended the quarter with a CET1 ratio of 10.5%, significantly exceeding our buffered minimum of 7.7% and consistent with our near term target. Our pro form a CET1 ratio, including the AOCI impact of the securities portfolio, is 8.1%, up 32 basis points year over year. We anticipate continued improvement in the unrealized losses in our securities portfolio, given that approximately 60% 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 expectations. Assuming the forward curve is realized, approximately 18% of the AOCI related to the securities losses will accrete back into equity by the end of 2025, increasing tangible book value per share by 5% before considering any future earnings.
During the quarter, our $300,000,000 share repurchase reduced our share count by 6,700,000 shares. Moving to our current outlook. We entered 2025 with strong momentum and a resilient balance sheet and remain confident in our ability to achieve record NII and full year positive operating leverage. We expect full year NII to increase 5% to 6%. This outlook uses the forward curve at the start of January, which assumed 25 basis point rate cuts in March October.
We would not change our NII guidance for 2025 even if we assume that no cuts will occur. We expect full year average total loans to be up 3% to 4% compared to 2024, with the increase primarily driven by the broad based improvement in C and I combined with continued growth in auto loans. We are assuming that the cash position, securities portfolio and commercial revolver utilization all remain relatively stable throughout 2025. Full year adjusted non interest income is expected to be up 3% to 6%, reflecting continued revenue growth in Commercial Payments, Capital Markets and Wealth and Asset Management, partially offset by the continued runoff of the operating lease business, muted mortgage originations given the rate environment and the year over year impact of the final TRA revenue occurring in 2024. We expect full year adjusted non interest expense to be up 3% to 4% compared to 2024.
Our expense outlook assumes accelerated branch openings in high growth Southeast markets and continued sales force additions in middle market, commercial payments and wealth to increase our production capacity to support our strategic growth initiatives. In total, our guide implies full year adjusted revenue to be up 4% to 6%, PPNR to grow in the 6% to 7% range and positive operating leverage closer to 2%. Moving to credit, we expect 2025 net charge offs to be between 40 and 49 basis points. Assuming no changes in macroeconomic forecasts, we expect the provision to build between $50,000,000 $100,000,000 due to loan growth. Moving to our outlook for the Q1.
We expect NII to be flat with the Q4 of 2024 as the benefits of loan growth, fixed rate asset repricing and the continued reduction in the cost of interest bearing liabilities should offset the impact of 2 fewer days. We expect average total loan balances to increase 2% in the Q1 due to continued momentum in C and I and auto. Excluding the impact of the TRA, we expect non interest income to be down 6% to 7% compared to the 4th quarter, mainly due to normal seasonality in card spend, capital markets activity and other commercial banking revenue. 1st quarter adjusted non interest expense is expected to be up 8% compared to the 4th quarter. As is always the case, our first quarter expenses are impacted by seasonal items associated with the timing of compensation awards and payroll taxes.
Excluding the seasonal items of approximately $100,000,000 expenses would be flat in the Q1. We expect Q1 charge offs to be in the 45 basis point to 49 basis point range and expect the ACL build will be $10,000,000 to $25,000,000 due to loan growth. Finally, we expect to execute $225,000,000 in share repurchases in the Q1, with future quarter share repurchases dependent on the level of loan growth. We will continue to target our CET1 ratio around 10.5% while we await more clarity around the future of the capital rules and other regulations. In summary, with our resilient balance sheet, diversified revenue streams and disciplined expense and credit risk management, 2025 is set to be a year of continuing long term investments, record NII, positive operating leverage and strong returns for our shareholders.
With that, let me turn it over to Matt to open the call for Q and A.
Matt Curoe (Senior Director of Investor Relations)
Thanks, Brian. Before we start Q and 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 and A.
Operator (participant)
Our first question will come from the line of Scott Siefers with Piper Sandler. Please go ahead.
Scott Siefers (Managing Director)
Good morning, guys. Thanks for taking the question. Maybe Tim or Brian, I was hoping you could just provide a little more context as to how you see loan demand developing through the year. Your commentary, I'd say recently has been much more encouraging. You discussed things like the robust commercial line, commercial pipelines, etcetera.
So just maybe some additional color on how you see things developing?
Tim Spence (CEO & President)
Yes. No problem. Scott, I know this will a little bit like salt in the wound for a Miami grad, but we just needed to demonstrate that it isn't only Ohio State that can put points up on the Board early in the year. I mean, look, we were happy with the 4th quarter, obviously, largely because we could see a building in the pipeline for a while. We just needed to get through the election to start to see some of it pull through.
And I think it, along with the sort of as sales force additions, continued activity are going to set us up nicely. Like we've talked a lot about the importance of having diversified loan origination sources because sometimes some channels would work when others didn't. I think in the Q4, most of the channels did. On the consumer side of the equation, auto was strong for us all year last year. I think we were asked a lot when there were several other banks getting out of the business, why we were committed to it and we talked about the fact that it's cyclical, but it can be great at certain points in the cycle and we're at one of those points where it's quite beneficial.
So we think we'll have good things there. Home equity, both the FinTech platforms had a strong finish to the year and I think we'll continue to grow moderately coming into this year. On the commercial side of the equation, the growth that we saw was really broad based. We got about quarters worth of production in the 6 weeks following the election as the backlog and the pipeline started to clear. On a sequential basis, 13 of the 15 regions in a 2 out of 3 verticals roughly showed growth during the quarter.
And while we did get a little bit of a benefit from seasonality, in particular in areas like mortgage warehouse and trade finance, I think the underlying characteristics would support above market growth. We're still sitting on a record pipeline level in the middle market. That is definitely supported by the sales force additions that we made last year. You can see that in the numbers. And we got a 1% pickup in utilization, which I just think is encouraging.
And we asked clients, we got to talk to about 2 dozen clients following the election just about how they feel about the year. More than 80% of them indicated they were more optimistic for 2025 than they were 2024. About half of them indicated they were accelerating planned investments, about a third of those said they were going to support those investments through increased credit utilization or new facilities. There's definitely a lot more optimism on the M and A front. The flies in the ointment here since that's what I always worry about.
Labor availability is the single biggest concern that we hear from middle market clients more so than inflation or interest rates at this point or even supply chain issues tied to tariffs. So overall, I think it's an encouraging outlook. Just as the game last night reminded us with Notre Dame's late rally, you don't want to declare victory at the end of Q1 either.
Scott Siefers (Managing Director)
Perfect. Thank you. And like all the analogies in there, so thanks. And then, Brian, I think you had suggested you wouldn't change the guide based on more or fewer cuts implies you're, I guess, pretty agnostic to changes in rates. How would you characterize your rate sensitivity now versus where you'd like it to be?
I'm guessing it's pretty much where you want it, but would just appreciate any thoughts.
Bryan Preston (Executive VP & CFO)
Yes. We're pretty happy right where we are. We're fairly neutral right now. And as Tim talked about, the diversification of our loan origination platforms as well as the inherent flexibility that the liquidity on our balance sheet provides, it gives us a lot of levers to be modest a little bit asset sensitive or a little bit liability sensitive depending on what the environment provides. So we like that positioning in this environment right now.
Scott Siefers (Managing Director)
Perfect. All right. Thank you, guys.
Tim Spence (CEO & President)
Thank you.
Operator (participant)
Our next question comes from the line of Mike Mayo with Wells Fargo. Please go ahead.
Mike Mayo (Managing Director)
Hi. I'm going to ask a long question, just looking for a really short answer.
Tim Spence (CEO & President)
That's not fair.
Mike Mayo (Managing Director)
And that is look, you're talking about record pipelines in middle market, 1% higher loan utilization, 13 to 15 markets have picked up, 2 or 3 verticals have picked up. It seems like your customers are more positive. Are you calling the turn for commercial loan growth for 5th Third? Are you calling it for the industry? Are you calling it for both? And what's your confidence level around that?
Tim Spence (CEO & President)
If you want a short answer, then my answer is maybe. Mike, it's the thing that I always worry about is uncertainty, right? I think I said in my prepared remarks, the economy is a pretty complex system. It's a simulation and it can change pretty unpredictably. The backdrop is more favorable than it has been.
Like if you're a customer, you have 100 basis points benefit in rate cuts. You have more certainty over the direction of travel on regulation. I think we're going to have to watch that a lot of the discussions we had on the labor market and labor availability related to questions on immigration, deportations and otherwise. We're going to have much more clarity there in relatively short order. And I think if those things come about and we don't see big supply chain disruption, chain disruption, yes, we should continue to see some expansion on the C and I portfolio.
Just don't bake in 12% annualized growth, please, into your models for 5th 3rd.
Mike Mayo (Managing Director)
Sounds good. All right. Thank you.
Tim Spence (CEO & President)
Thank you.
Operator (participant)
Our next question comes from the line of Gerard Cassidy with RBC. Please go ahead.
Thomas Leddy (Assistant VP)
Hi, good morning. This is Thomas Leddy standing in for Gerard. You saw a good drop in deposit rates in the Q4. Could you just give us a little more color on what your outlook is for deposit rates in 2025 assuming the Fed is finished cutting?
Bryan Preston (Executive VP & CFO)
Yes. We'll continue to get a little bit of cost out if the Fed is done at this point. We have a little bit of 1st quarter tailwind benefiting in this space as we'll get some full quarter impact of the December cut. Additionally, we have almost $8,000,000,000 of CDs maturing in the Q1. That's at a weighted average rate of about 4.3% right now.
That's going to give us some flexibility as well. Beyond that, it's really going to be dependent on loan growth. If it becomes a more robust loan growth year potentially, we do think deposit competition could tick up a little bit. But in general, we feel good about our positioning. With the cash position, we're in a spot where if we needed to, we could actually take down our loan to improve our loan to deposit ratio a little bit and fund some of that loan growth with that excess cash like we did this quarter.
But we have a lot of flexibility to navigate those costs.
Thomas Leddy (Assistant VP)
Okay. Thank you. That's helpful. And then just quickly, can you give us any color on the uptick we saw in C and I non accruals this quarter?
Greg Schroeck (EVP & Chief Credit Officer)
Yes, it's Greg. So, increase was really driven by 5 commercial borrowers, about an average loan size of $32,000,000 no discernible industry or geographic trends, no concentrations among these borrowers. We remain within a few basis points above our 10 year commercial average. So relatively flat from a 10 year average perspective. And as you know, each of these credits, NPA credits get individually evaluated.
We assess those based on the financial risk and those results are captured in our financial results, either through a specific reserve or a charge off. The largest of the MPA inflows this quarter is expected to pay off or pay down within the first half of the year, either through debt reduction or I guess that the full payoff. And it's a great example of how we're working with borrowers experiencing stress to reach outcomes that are mutually beneficial.
Thomas Leddy (Assistant VP)
Okay, great. That's helpful color. Thank you for taking my questions.
Operator (participant)
Our next question comes from the line of Ebrahim Poonawala with Bank of America. Please go ahead.
Ebrahim Poonawala (Managing Director - Head of North American Banks Research)
Hey, good morning.
Tim Spence (CEO & President)
Hey, Ebrahim.
Ebrahim Poonawala (Managing Director - Head of North American Banks Research)
Hey, Tim. I guess maybe just going back to the very start in terms of consistent investments in branches, Southeast, just remind us around the payoff that you had from branches open 2, 3, 4 years ago. As we think about means, again, if loan growth picks up for the industry, that's great. Should we think of 5th Third as someone that outperforms on loan and deposit growth given these investments? So give us a sense of what the payoff has been as you measure these investments?
And maybe even talk about like any specific markets areas where the new the growth for 2025 is planned? Thanks.
Tim Spence (CEO & President)
Yes. I'll take the second half of that. I'll let Brian talk to the payoff the first half of this.
Bryan Preston (Executive VP & CFO)
Yes. The weighted average age of our Southeast branches now, especially the new builds are still in the early innings, right? It's nearly 3 years on average is where we are right now and we're going to build another 50 in 2025. And so we're still in the early ramp periods from an average balance perspective. So it puts us in a position from a customer acquisition perspective where we can drive and continue to drive significant deposit growth similar to what you've seen from us over the last couple of years.
And that will be a big driver then of the NII performance. On the asset side of the sheet, it's more related to the sales force additions that we've been making, the teams that we've hired in new markets as well as just the 20% increase in middle market headcount that we've middle market sales headcount that we've increased over the last couple of years. So those will be all will be strong tailwinds for us from an NII perspective.
Tim Spence (CEO & President)
Yes. And I think the call back here is what we talk about a lot is the degree to which we price flexibility. The nice thing about having these engines online is it really does give us the ability to toggle between growing deposits when we want to do that or leveraging the fact that we have great liquidity to manage margins. So we make those decisions based on the environment, what the needs of the balance sheet are, as Brian was saying. In terms of the markets, you can sort of think about that what we've done in a few waves here.
The first wave, the new branch builds were disproportionately concentrated in Nashville, North Carolina and Southwest Florida. The next wave here when you look at this branch is coming online this year and next year. The Southeast Coast, so not Dade County, but Broward North, Central Florida and North Florida will all see material increase in branch activity along with South Carolina, and I think we get our 1st branch open in Birmingham this year. The other big driver in a 2 to 3 year timeframe less so in 2025 is that we're going to see a nice pickup in Atlanta. And in the Atlanta area, we have several branches that will be coming online there.
Ebrahim Poonawala (Managing Director - Head of North American Banks Research)
Got it. That's helpful. And I guess maybe just one quick one on the fees. Maybe you don't have kind of as deep of a capital markets franchise as some of your peers, but just give us a sense of when we look at Slide 7, wealth payments markets, how dependent is that revenue growth on actually balance sheeting loan growth or loans? And are those should we view any of those as tools for client acquisition?
Tim Spence (CEO & President)
Yes. Okay. Great question. I'll just take it by business. So wealth not dependent on balance sheeting loans.
We have like $7 in AUM for every $1 in deposits and it's what $15 or something like that in AUM for every $1 in loans. It really is a wealth management sort of fiduciary focused franchise. It is not balance sheet dependent at all. Commercial payments, it's sort of half half, right? I gave the number there that 40% of the new relationships we added last year were payments led.
Say that in other direction, we added almost one new commercial payment relationship that had no credit attached to it for every relationship that we did. But certainly, the balance sheet supports what has been high single digit, low double digit growth rates. It's just not reliant on it. And the NewLine platform, in particular, is an important driver there. On the capital market side of the equation, much more of what we do in that space is essentially cross selling to existing commercial banking clients.
We built a really strong middle market franchise. The hedging activity is great there. That would happen principally to clients who make use of the balance sheet. The M and A activity, our M and A franchise, half the engagements roughly come from inside the house as opposed to being independent, which is what we want, right? That's the mechanism for monetizing the attachment point that you get out of the commercial lending business.
And certainly, as it relates to the CIB strategy, the focus on capital markets growth there really does link. I just believe we have a long way to go to get to full penetration inside our existing book of business. So I'm pretty confident in our ability to continue to grow capital markets fees at a rate that exceeds the balance sheet by a healthy margin.
Ebrahim Poonawala (Managing Director - Head of North American Banks Research)
That's helpful. Thanks, Tim.
Operator (participant)
Your next question comes from the line of Manan Gosalia with Morgan Stanley. Please go ahead.
Tim Spence (CEO & President)
Hey, Manan.
Manan Gosalia (Equity Analyst)
Hi, good morning. On capital, I hear you on keeping the reported CET1 at 10 0.5%. The question was how are we thinking about CET1 including AOCI? I know some of your peers are operating or looking to operate in that 9% to 10% range. There is some volatility here on the long end of the curve.
So I guess the question is, do you have a target for CET1 including AOCI? And how are you thinking about buybacks and capital management from here?
Bryan Preston (Executive VP & CFO)
Yes. We do the expectation would be to keep CET1 inclusive of AOCI north of 8% right now, but we would expect that to continue to increase over time with the pull to par on the investment portfolio. The AFS portfolio is actually right now on the belly of the curve. The duration of that portfolio is below 4. It's about 3.8 right now.
And if you look at the price sensitivity of the portfolio, it has moved in significantly. So we feel really good about the AOCI accretion that we should be seeing over the next couple of years, which gives us confidence that depending on whatever the capital rules may be, we're going to have no issues with meeting that over time. From a buyback perspective from here, our capital priorities are going to continue to be supporting organic growth, maintaining a strong dividend and then buybacks. And so the ultimate level of buybacks will be around that 10.5 percent level and where that triangulates with the end of period loan growth we deliver each quarter.
Manan Gosalia (Equity Analyst)
Got it. So on the I hear you that you'll keep that you'll accrete through that CD1, including AOCI. Is there any level at which it will it could impact loan growth and drive RWA diets at some stage?
Bryan Preston (Executive VP & CFO)
We don't see anything at this point that would create a situation where we would pull back meaningfully from a loan growth perspective.
Manan Gosalia (Equity Analyst)
Perfect. Thank you.
Operator (participant)
Your next question comes from the line of Brian Foran with Truist Securities. Please go ahead.
Tim Spence (CEO & President)
Welcome back, Brian.
Brian Foran (Managing Director)
Thank you. Thank you. So on the commercial payments, first of all, thank you for breaking that out and giving us more disclosure. I know it's an area you've invested and feel like you're kind of pulling away from the pack. When we look at it being 20% of fees, up 8% year over year, I think you kind of gave us couple of times 40% of new commercial relationships where payments led.
Do you have any sense like if we got this disclosure from all your peers, are you a little higher? Are you a lot higher? And what's the main metric you think you would stand out on?
Tim Spence (CEO & President)
Yes. Great question. So I will say to begin with the reason that we changed our reporting is because it is confusing to see it. So it was confusing for us previously. It's confusing for peers.
The metrics that I like here because they are public and they're transparent is you can do a lot of comparison on your own utilizing data from sources like NACHA or the Nielsen report or I think does a benchmarking study and otherwise. And you can look at total volumes per dollar of commercial deposits. And that essentially calculates a turnover ratio for you. And the higher the turnover ratio, the more payment centric the business is. So, we're definitely overweight this business relative to others.
Like I think we have 3.5x roughly the market share if you were to look at the individual product categories nationally nationally in major commercial payments rails that we would have in C and I lending just as a point of triangulation. And I know we're growing faster than the or than the industry is overall because again, we got to look at the benchmarking data on industry growth rates. I think the other thing that's been helpful for us is because we have this business working with 3rd party software developers, a little bit counterintuitively, we're actually a beneficiary when traditional FIs lose market share to non banks because NewLine grows when partners like Stripe or Corpay or whatever Toast, Nuve, etcetera. Trust Lebrex when they outgrow the players in their individual markets. And we get good data from Greenwich and Associates that suggests we have sort of top in the peer group penetration rates in terms of active treasury management relationships with our lending customers.
I'm not going to get the exact number, but it's a mid-80s number for us in terms of penetration there. So like that's the way I would, short of dead reckoning, try to triangulate our position relative to others. But it would be great if everybody adopted our captions and then you'd be able to know.
Brian Foran (Managing Director)
It would. Maybe if I could sneak in a follow-up on the guidance on Page 15. Definitely appreciate your comments going out of your way to mention that 2024, you kind of hit the guidance on all lines and very few banks did that. So you're assumingly giving us a down the fairway plan here. You've touched on all the individual line items, but maybe just kind of wrapping it up, if there was kind of 1 or 2 upside and downside risks you were thinking about for the year, what would you highlight within everything you've given us?
Bryan Preston (Executive VP & CFO)
Yes. I think loan growth is certainly going to be a question and then deposit costs will be a question. So I think just with my treasury background, I'm always going to be nervous about NII, but we certainly feel good about the trajectory that we're on. And then just overall market activity from a fee perspective. We had a fairly soft first half of twenty twenty four in Capital Markets.
We're not expecting that to repeat in 2025, but those markets based businesses are always the one where you could see some volatility.
Brian Foran (Managing Director)
Awesome. Thank you so much.
Operator (participant)
Your next question comes from the line of John Pancari with Evercore. Please go ahead.
Tim Spence (CEO & President)
Hey, John.
John Pancari (Senior Managing Director & Senior Research Analyst)
Good morning.
Just on the back to capital, on the M and A front, I hear you on your deployment priorities organic is still top priority than dividend and buybacks. How are you thinking about M and A here, both from a non bank M and A perspective, but also for in the whole bank perspective, given the regime change in Washington and the regulatory posture changing and need for scale? Just want to get your updated thoughts there, Tim. Thanks.
Tim Spence (CEO & President)
Sure.
No, happy to do it. I mean, the context here matters, right? Like the U. S. Has the least consolidated banking system in the world.
And I believe the banking system is also the least consolidated sector in the U. S. Economy. So it's a little bit like holding back floodwaters. Eventually, there's going to be more consolidation in the space and I think it's appropriate.
Our Treasury Secretary, Besson, was pretty clear in his testimony that he wants more competition for the larger banks. I think in our case, we could have made the math work prior to this year, and I'm pretty confident we could have gotten a deal approved prior to this year. So I don't know that our posture is any different in that regard. We value the density in the markets where we compete. We've been clear about that.
We're believers in the value of diversification and having an appropriate balance inside the franchise. And we're believers in having the capacity to not just the absolute investment levels, I think people get over focused on that, but to be able to have the human capital to take advantage of a lot of the tech innovation that's going on. I mean, I was out in the Valley 3, 4 weeks ago now and the energy is all the way back there in terms of what's coming down the pike and banks need to be prepared to compete with people who are tech native because I think this administration, in addition to lowering some of the regulatory issues that we've had, is going to make it easier for those guys to persist as well. What I don't believe in and what we're never going to do is to just pursue scale at any cost. Like we have the ability to grow without doing M and A.
I don't think everybody can say that, but you can see it when you look at the growth rates in the franchise. And so we want to make the right decisions there as the opportunities materialize. On the non bank front, we continue to be interested in adding to the capacity that we have in the managed services and the commercial payments. So that is an area where we've been active. We're not big buyers of big properties, so don't be looking for us to buy a publicly traded tech company and to blow off a bunch of capital that way.
But you do find businesses where the core product is proven product market fit, but they're lacking distribution on occasion. And those are things that we like because there's real franchise value when you're getting tech and a proven product that doesn't exist in the same ways when you're acquiring people and then you have to essentially buy them again every 3 to 5 years in some of the more talent driven businesses.
John Pancari (Senior Managing Director & Senior Research Analyst)
Got it. Okay, Tim. Thank you for that. That's helpful. And then separately, it's clear you guys have certainly been executing better than many of your peers in terms of your growth and your returns and hitting your targets as you had noted earlier in the call as well.
As we look at your broader returns, I mean, you're here in the high teens, 18% to 19% return on tangible common equity here. You're in the mid-50s efficiency ratio. As you look at 2025, which is a year where we expect some underlying improvement in the macro backdrop, how do you view the return profile for 5th Third as you're looking at ROTCE and operating efficiency for the year and then possibly even beyond that? Where do you think the returns are heading towards?
Tim Spence (CEO & President)
Yes. I mean, here's what I would say. I take great pride in the fact that you don't have to believe like a long deductive logic chain in order to get to a place where you're confident that we can achieve returns in excess of our cost of equity. Like we're kind of in or within reach of our return targets in terms of what we think are good places to run the company. So if you think about it in the context of stability, profitability and growth, like we like the predictability of the business.
We're proud of that. I don't think there's a lot of work that needs to be done there. We're neutrally positioned from an ALM perspective and defensive in terms of credit. I mean the Q4 production is an example. The PDs were actually better on a dollar weighted basis than our existing portfolio.
So we feel good there. Our profitability, like the mid to high teens and the return on tangible common equity in the mid-50s efficiency ratio feels pretty good. We'll get operating leverage this year if the year plays out as we expect. As Brian said, I think it's probably closer to 2% in terms of what we'll produce. But the goal for us then really isn't to try to find a way to get an 18% return to a 19% return or a 55% efficiency ratio to a 54%.
It's sustained that level and grow tangible book value per share, right? That really is where the focus has got to be in terms of that sort of the next leg in the franchise, all assuming again that we have that more benign backdrop that was sort of the setup in your question.
John Pancari (Senior Managing Director & Senior Research Analyst)
Thanks, Tim. Very helpful.
Operator (participant)
Your next question comes from the line of Matt O'Connor with Deutsche Bank. Please go ahead.
Tim Spence (CEO & President)
Hey, Matt.
Matthew O'Connor (Managing Director)
Good morning.
A little bit of a kind of non fit sort of question, but since you mentioned that you said middle market customers, the biggest thing that they're highlighting is still some challenges in labor. And maybe that's I would assume that's impacting some of that loan demand or pipelines turning into actual volumes. But are they hopeful that some of that dislocation will finally solve itself? Are they kind of trying to offset these challenges with tech that should kind of help at some point or I guess what's the plan if they have any?
Tim Spence (CEO & President)
Yes. No, that's a great question. I mean, it sort of depends by sector, right? So let me say that in advance. On the manufacturing and logistics wholesale distribution side of the business, there's no question that they're hopeful that they can get gains intact.
Like I've shared some examples of the facilities that we put in place to support the retooling of manufacturing facilities or warehouses so that the you're getting a lot more of your picking and high volume items, as an example, done by robots, including robots that based on the forward order book, will actually restack racks and move SKUs around overnight so that the pickers when they come in, in the morning are more productive. So there is some of that. I think in sectors like healthcare, there is a hope that at some point here that the graduating classes from nursing schools and otherwise overtakes the demand and that they can rely a little less on the traveling nursing companies. I'm less personally optimistic there for our health care clients, but they're hoping for that. In a lot of the other sectors like services, construction and retail and otherwise, I think there is a concern around the direction of travel on labor because the reality is we have a negative birth rate in the U.
S. And we have because of the just the demographic pyramid and the size of the baby boomer generation versus the exes and the millennials, We have more people retiring every year right now than we have entering the workforce. And that's a structural problem that I don't think gets better unless you can boost productivity with technology. So you hear a mix of all those things when you talk to clients, some optimism that maybe the labor market will cool, but the jobs report is not suggesting that's happening. And we just have to wait and see on whether or not there is a functioning immigration program that would support additional documented labor in the U. S.
Matthew O'Connor (Managing Director)
That's interesting color. And then you guys are pretty balanced, I think, between large corporate and middle market. Are there kind of different themes in the large corporate, meaning there are less pressure by labor? And then as you think about just bringing it all together, as you think about your C and I growth, you think it will be more large corporate or middle market driven this year, if you had a guess? And then I'm done. Thank you.
Tim Spence (CEO & President)
Yes. I'll take the second one first. I think the goal here is balance. Like we want over time, we have gotten more granular. We made some progress on granularity, which was an important part of the strategy of 5th Third.
So that sort of small business, business banking, middle market segment ideally will grow a little bit faster than corporate banking. I don't expect Corporate Banking to outgrow the middle market meaningfully. The plan was set to have good balance and consistent focus on granularity there, including within Corporate Banking for that matter. You want the other part of it, Brian?
Bryan Preston (Executive VP & CFO)
It's a good question. Yes. I mean, I think in general, we do expect corporate banking to and the larger companies in general have navigated the labor pressures a little bit better than the middle market. We think that's a theme that is likely to continue. A lot of that just has to do with their investment capacity, their ability to invest in automation, their ability to shift to different labor markets just tends to provide more flexibility and they also tend to be the businesses that have had a little bit more pricing power to be able to pass through some costs so that they could attract the right labor.
So we think the corporate banking, I mean, we talk about it in banking, scale matters and it matters in the C and I portfolio as well.
Matthew O'Connor (Managing Director)
All right, great. Thank you for all that.
Operator (participant)
Your next question comes from the line of Erika Najarian with UBS. Please go ahead.
Bryan Preston (Executive VP & CFO)
Hey, Erika.
Operator (participant)
Good morning.
Erika Najarian (Managing Director & Equity Research Analyst)
Just two quick follow-up questions. Brian, as we think about the net interest income outlook, could you share with us how you expect net interest margin to traject from that $2.97 And do you have a view if we have a 4% neutral rate, what the normalized margin would be for 5th 3rd under that scenario?
Bryan Preston (Executive VP & CFO)
Yes. We expect margin to continue to improve a few basis points each quarter throughout the year. Certainly, there's a big wildcard associated with cash position in any individual quarter. The 7 basis point increase this quarter, obviously, was partly attributable to that cash position coming down some due to that loan growth that we saw as well as liability management actions. We've been talking for a while now that getting back into the 320s in this kind of rate environment is achievable for us.
Certainly though, the shape of the curve and the mix of the balance sheet is going to be a big driver in that. But we feel good about the trajectory that we're on in both NII and NIM will continue to improve each quarter throughout the year.
Erika Najarian (Managing Director & Equity Research Analyst)
Got it. And maybe the next follow-up question is for Tim. I believe the stress capital buffer that Kystard received was 3.2% last year. I'm wondering as you think about the embedded risk in the balance sheet, if you think it's worth it to participate off cycle to revisit that stress capital buffer?
Tim Spence (CEO & President)
Yes, great question. No, it doesn't make sense for us to do it just because it's not a binding constraint for us today, Erica. I am optimistic that we're going to get more transparency out of the stress tests given the Fed's announcement and subsequently the litigation filing from the BPI. And that will be quite helpful. But today, whether that stress capital buffer was 2.5 or 3.2 or 3.5 or even it doesn't matter.
Erika Najarian (Managing Director & Equity Research Analyst)
Got it. Thank you.
Operator (participant)
Our final question will come from the line of Christopher Marinac with Janney Montgomery Scott. Please go ahead.
Christopher Marinac (Director of Research)
Thanks. Good morning. Just wanted to ask about additional C and I utilization as well as any upgrade downgrade trends from the criticized and classified.
Bryan Preston (Executive VP & CFO)
Yes. On the C and I utilization front, it moved up to about a point to it's in the 36% range at quarter end and it stayed in that range at the beginning of this quarter.
We're not forecasting any significant change in utilization throughout the rest of the of the year and expect it to be relatively stable. And then on the
Greg Schroeck (EVP & Chief Credit Officer)
CRIT front? Yes. As it relates to the CRIT, as Brian mentioned, we were down $435,000,000 in the 4th quarter. Our ratio was down just over 7%. 90% of the criticized portfolio including our NPAs are current.
So I feel really good about the progress we've made. We said last quarter on this call, we expect to see criticized reduce a little bit. We continue to work through those troubled assets. So I feel good about the trend. I feel good about the portfolio.
It continues to maintain great balance mix, strong concentration, limited disciplines. So I feel good about the current asset quality.
Christopher Marinac (Director of Research)
Great. We'll leave it there. Thank you both very much.
Tim Spence (CEO & President)
Thanks. Manav is signaling to me that we're on the way out. So before we go, I just wanted to say quickly that my thoughts continue to be with the people in California who've been impacted by the wildfires and especially our employees, clients and partners who live and work there. We've been fortunate based on what I heard from our folks and directly from clients. I'm really proud of the commercial banking presence we've built in California over the past several years.
It's been like a 50% compound annual growth rate. It's all middle market, nearly self funded. It's really it's been outstanding. But I have a personal connection out there too. My dad grew up in the Altadena Pasadena corridor and my grandparents relate to rest there.
And those communities are really special to me. And 5th Third will do its part as part of this equation to help those communities rebuild as I know they will. That, Manav?
Matt Curoe (Senior Director of Investor Relations)
Thanks, Tim. And thanks everyone for your interest in 5th Third. Please contact the Investor Relations department if you have any follow-up questions. Regina, you may now disconnect the call.
Operator (participant)
That will conclude today's call. Thank you all for joining. You may now disconnect.