Good morning. Welcome to day three of Barclays' twenty-second Annual Global Financial Services Conference. I'm Jason Goldberg. If you haven't figured it out by now, I cover the US large cap banks. We got a host of companies in this morning's session, and then at lunch, kind of an analyst recap panel secured for all of us and we'll do some kind of ARS questions and kind of review how we all performed last year. Very pleased to have kicking off day three is Fifth Third Bancorp. From the company of Tim Spence, Chairman and CEO, and Bryan Preston, Chief Financial Officer. Tim's going to take us through some quick slides, and then we'll do some Q&A. Tim?
Great. Thank you, Jason. Good morning, everybody. We appreciate you being here with us bright and early. We published a slide presentation last night, as Jason mentioned, on our investor relations website, which I will reference in my prepared remarks, and after that, Bryan and I are happy to take your questions. At Fifth Third, we believe that great banks distinguish themselves not by how they perform in benign environments, but rather how they navigate challenging ones. I continue to be very pleased with the strong and predictable results that Fifth Third has produced in what has been a dynamic, economic, and interest rate environment. Among all peers who did not participate in an FDIC-assisted transaction, Fifth Third ranks number one in total shareholder return in the one-year, five-year, and seven-year time frames, and number three in the ten-year time frame.
Our operating priorities continue to be stability, profitability, and growth, in that order. We create stability through building a strong core deposit-funded balance sheet, maintaining credit discipline, and positioning our balance sheet to perform well in a range of interest rate environments. We generate strong profitability through a diverse range of fee income sources, a focus on unit economics, and consistent expense management. Competitive barriers are exceedingly difficult to achieve in our business. The only path to delivering sustainable long-term growth without diminishing profitability or stability is to invest consistently into a limited number of strategies.
For several years now, our focus has been adding branches and sales resources to produce a top five market share in our high-growth Southeast markets, leveraging technology to deliver clear differentiating in our core checking and commercial payments product offerings, and positioning ourselves to benefit from manufacturing and infrastructure investments associated with the federal government's industrial policy. The cumulative impact of these multi-year investments cannot be easily replicated, nor do we intend to slow down and let others catch up. This morning, I'm going to spend some time on our commercial payments business, as I believe our track record of innovation, competitive differentiation, and long-term growth potential is less well understood there than in other parts of our company. As shown on slide nine, payments innovation has long been in Fifth Third's DNA. We introduced the nation's first shared ATM network in nineteen seventy-seven.
Throughout the eighties, nineties, and early 2000s, we built what is now one of the world's largest credit and debit card processors. Following the two thousand and nine spin out of Vantiv, now known as Worldpay, we refocused on growing other payment types and on leveraging software to drive process automation into clients' broader commercial payment workflows. Currency Solutions, Expert AP, Expert AR, and Healthcare Receivables launched in subsequent years and are now known collectively today as our Managed Services platforms. We'll come back to these shortly. In twenty twenty-two, we leveraged what we had learned over more than a decade of supporting third-party payment processors to form our embedded payments business, which we branded publicly as New line last year. Today, our commercial payments business possesses significant scale and an outsized market share.
Depending on which balance sheet measure you use, Fifth Third is somewhere between the tenth and fifteenth largest bank in the U.S., but we are the sixth largest in commercial payments by revenue, with a top five market share in six individual payment categories. We will process more than $17 trillion in payments volume in twenty twenty-four and expect to generate more than $700 million in recurring fee revenue that is growing at more than 10% a year. We employ over 1,300 people exclusively in commercial payments, serving the needs of more than 10,000 payments clients. Our innovation in this business was a key differentiator for Fifth Third in receiving the twenty twenty-three Bank of the Year award from The Banker. Commercial payments as a market is massive, and the white space is still significant.
While the secular transition to electronic payments in the consumer space is largely complete, more than a third of B2B payments still occur using checks. The broader order to cash and procure to pay workflows are manual, costly, filled with friction, and susceptible to fraud. In other words, they are ripe for what Marc Andreessen referred to as software eating the world. That idea, bringing software and analytics to drive automation and least cost routing, is the genesis of our managed services strategy. It's producing breakthrough results for clients and has generated annual revenue growth of 16% over the past eight years. One illustration of how we create value in managed services comes from our cash logistics offering. Through the combination of software and EFT-enabled smart safes, we've effectively digitized the cash rooms for large retailers, quick serve restaurants, and entertainment venues.
We have real-time insight into physical cash needs at the individual store or location level by denomination, and are able to forecast replenishment requirements. That allows us to drive down unnecessary float and eliminate unnecessary courier routing. In the case of Wendy's, we were able to reduce time spent on restaurant cash management by 50% across a large number of locations. Another example of creating value comes from our healthcare receivable solution, Big Data Healthcare. We provide hosted software and machine learning capabilities that enable hospitals and large practice groups to automate the onerous manual reconciliation process attached to insurance payments, thereby eliminating costs and accelerating access to working capital. We ingest data interchange files from most clearing houses, banks, and lockbox providers, and integrate simply into the largest practice management systems used by healthcare providers.
In typical implementation, we're able to auto-post more than 90% of all transactions, allowing one recent client, as an example, to reduce their offshore reconciliation staff from over 100 FTE to fewer than 10 in less than six months of launch. We're also able to identify underpayments from insurers, enabling clients to enhance revenue realization. One final illustration of how we're able to streamline commercial payment workflows with software comes from our accounts payable automation solution, Expert AP. Expert AP automates the matching and reconciliation of purchase orders, invoices, and payments, which get handled manually and generally in paper, by accounts payable clerks in most B2B sectors. With the data captured on contractual payment terms and supplier payment acceptance, Expert AP also enables clients to automate least cost routing.
Manufacturing, logistics, and construction industries have been our strongest adopters, and revenues continue to grow in Expert AP by nearly 20% a year. Lastly, I'd like to touch quickly on Newline, our embedded payments business. Newline provides a vertically integrated API platform for third-party software developers to launch payment, card, and deposit solutions on Fifth Third's platform. We are not a newcomer to this business, having first entered in embedded payments more than a decade ago when we spun out Vantiv and had to externalize our payment capabilities, network compliance, and AML BSA protocols to support their growth. The acquisition of Rize Money a year ago added a modern technology layer and developer experience to our industrial-strength payments infrastructure and know-how. A simple illustration of how embedded payments work would be Blackbaud, a leading provider of cloud-based enterprise management software solutions for nonprofits and educational institutions.
When a donor clicks on a nonprofit's website to make a donation via their bank account, the Blackbaud digital donations platform utilizes Newline to facilitate the account-to-account payment, authorizing and clearing the donation for the nonprofit organization. A sample of the 150-plus clients served by Newline is listed on slide 13. These companies are leaders in their respective markets, and we get to benefit from their accelerated growth and innovation. Building on a strong legacy market position in commercial payments and the accelerated growth that our managed services and embedded payment strategies offer, we expect commercial payments to achieve a $1 billion annual recurring revenue within the next five years. We are excited about our company, both in terms of current performance and in opportunities that are on the horizon.
We remain confident in our ability to deliver strong outcomes, including PPNR and earnings outcomes, consistent with our original expectations for the full year in 2024 . We will stay focused on execution to deliver on our commitments, including continued NII growth and expense discipline. Our business trajectory positions us to return to positive operating leverage in the fourth quarter and into next year. With that, Bryan and I are happy to take your questions. Thank you.
Thanks, Tim. That was definitely interesting on payments. Maybe we kind of stick with that, you know, first, but maybe just, I guess, how do your tech investments in commercial payments kind of provide a differentiated solution? We've had a lot of banks at this conference mention treasury management. PNC mentioned it, Truist mentioned it, probably a few others. You know, I guess, what's different about you?
So first of all, thank you. I was expecting to start on the guidance.
We'll get there.
Don't worry.
I usually give the companies to at least half time.
There we go. I thought I was going to get a breather. Bryan would step in and cover that, but we'll get to that one. You know, I think the first thing is the sustained focus on payments. I was reminiscing with these guys on the way out. In fact, Copilot helped Matt locate the date, but the first time I appeared on stage at an investor conference was in March of 2017, and it was a Barclays conference. It was just with Darren Peller, and it was the Barclays Payments Conference. So, this is not a new topic for Fifth Third. It's not a thing that we've pivoted to as we're trying to figure out with, you know, the sort of new proposal on capital and liquidity, how we get back to an equity return profile that we perceive to be attractive.
It's been part of the DNA of the company for forty, fifty years at this stage. And this focus on non-card payments and on leveraging both the legacy electronic payment rails and then soon, you know, much more heavily, the real-time payments and FedNow system to deliver real innovation that drives hard operational cost savings for clients, is a thing we've been at, as I mentioned, for almost a decade at this stage. So there's an element as it relates to what's different, that just involves living in the business, having anchor tenants on these platforms, understanding their needs, and then building not just the sort of infrastructure to process payments, but the solutions around those payments, so that you can point to, you know. I think last year we drove $40 million in operational expenses out of our managed services, clients, businesses.
That's people they didn't need. It's couriers moving around that were no longer necessary. It's paper that was getting passed, that isn't getting passed anymore. And that stuff adds up, right? So I think that's probably the most significant piece of differentiation, is the fact that we've been at it, and that we have moved from this discussion of you know, who processes efficiently? And the answer to that is anybody who's scaled the way we are does that. And into this business of actually streamlining or automating workflows for people.
I guess you mentioned kind of the acquisition of Rize last year and kind of this, you know, Newline, I guess, embedded payment type business. You know, what, I guess, does that allow you to do that maybe other banks can't?
Yeah. So you have an interesting market right now. Like, the payments rails over the course of the last thirty, forty years, especially on the card payment side, have moved from being dominated, like the exclusive purview to banks of banks, to being heavily bank-led on the issuing side and heavily non-bank-led on the acquiring side. And because of that, a lot of the innovation that is occurring in helping people accept and process payments is happening outside the banking sector. The challenge those folks have is they need access to bank payment rails. They have to be able to develop onto a platform that supports that access in a secure fashion, in a scalable fashion, and frankly, in a fashion that allows for them to continue to innovate.
So what Rize did was to take our scaled payment infrastructure, our compliance apparatus, our BSA AML BSA know-how, and externalize that in the form of about 200 microservices, which are, architected as APIs, the way that a sort of a modern technology architecture, would be structured. That then allows third-party software developers that we approve to develop onto the platform to integrate our code base directly into their offerings. So go from, in the case of Blackbaud, as an example, a company that provides really great, human capital management, donations management. Like, essentially, they're the ERP for charities, and educational systems.
It allows them to get into the business then of providing payment options for their clients without having to develop all of the back-end infrastructure, the processing, the posting, the recon, and the rule sets that are required to operate in that space.
I guess something. You know, I think maybe a month or so ago, you guys announced a partnership with Stripe. It seems like almost like a banking-as-a-service type model. But maybe just talk to kind of what you do with them and then, you know, risk- and maybe some of the risks associated-
Yep
with operating with FinTechs in a regulatory environment and just
Yeah, great question.
They're not, you know, different. Yeah.
Yeah. Stripe accesses the banking system in two capacities. One is as a merchant acquirer, and they need a BIN sponsor to get access to the Visa, Mastercard payment rails. That is not work we do for them today. The other then is as part of their product innovation, they added a feature that they refer to as Stripe Treasury, which is essentially a fully functioning cash management account for people who want to be able to integrate cash management that third-party platforms like a Shopify or direct clients of Stripe, who want to be able to leverage cash management functionality in their own branded experience. Fifth Third is the engine behind that cash management account. That's a nascent offering for Stripe. It's one they expect to be a core focus of the way that they continue to scale their business.
But we provide the account structures, the ability to move money into and out of those accounts, the identity layer, and otherwise. I think the risks here are no different than the risks that we take in our own business. You just have to recognize that that third party is a representation of you as a bank, and therefore, you have to police their operations the same way you would police your own, right? We think of the companies and the third-party payment providers who integrate on top of the New Line platform as an extension of the bank, and you've got to govern it accordingly.
Oh, well, we could put up the first ARS question. We've been asking this at all the companies. Don't worry, I won't ask you guys to comment. But, you know, maybe we'll kind of pause on payments a bit and turn it just a bit to the financials. And you did provide us a lot of guidance in that slide, at least on the third quarter. Maybe the first place to start, we can just run through it, is, you know, loan growth is something a lot of banks have talked to being soft, and the H8 data would signal that. So like, you know, your quarter will be a little bit softer than anticipated.
Maybe just talk to kind of what you're hearing from your customers, kind of current expectations and, you know, what you think is needed to see to kind of restart loan growth.
Yeah. I think that's the question that all of us are asking, so I have had the opportunity to try to get out in the second and third quarter and visit each of our regions, and then we hold lunches where I'll get 10, 12 clients at once. And we have been going around the room and asking clients, like, "Do you have, you know, some form of expansionary activity or capital restructuring that you want to do, like, that you are thinking about? An acquisition, new capital equipment, opening up a new location or otherwise?" And we get a show of hands.
So we asked each of those folks, "Why are you waiting?" Election uncertainty certainly is one factor, but the number one factor that comes up is people don't want to be the person that essentially invests at the peak of the rate cycle. We then have been asking: What would it take? What does the Fed need to do in order for you to be willing to invest? And the answer is: I need to believe that the economy is going to hold up, and then generally, it's about 100 basis points in cuts, is what we have been hearing. Like 4.5% would reach a point where more projects pencil out, where there would be more confidence in making some of those investments.
... interesting, and I think that's what it takes.
Yeah, and the one thing that I would add, you know, when you look at the updated loan guidance from, we're expecting to be up 1% to stable. One trend that we saw that changed this quarter, we did see utilization tick down a little bit this quarter, and that was mostly in the middle market space. That had been an item for us that had been relatively rock solid in terms of stability for about a year, but we did see a little bit of pullback this quarter, and that's been a factor that's impacted the loan growth expectations.
Got it. And then maybe, we could put up the next ARS question. Can we just talk about deposits, you know, kind of what trends you're seeing and I guess the Feds, you know, unlikelihood or likelihood going to cut next week? How do you respond? I think some of your commentary suggested you're kind of think betas will be higher than maybe some of your peers.
Yeah, and part of that is, our cumulative betas are a little bit higher than some of our peers as well. So we were fairly aggressive on the way up, ensuring that we were building cash because we felt like being in a position of significant liquidity at the peak of the cycle was going to give us some optionality. And you saw that play out as we've stayed at kind of peak Fed, and we hit the trough, both on the NII and then prospectively faster than most of the peers. And the expectation is that we're in a spot where if loan growth shows up and we have liquidity that we can deploy into the loan portfolio, if it doesn't, we have the ability to be a little bit more aggressive on the funding side.
And that's been the play all along, and I think we've been fairly consistent on that, and we feel good about the positioning. We've done a lot of work to be ready for when the cuts occur. $35 billion of index deposits. We've been testing the promo balances. We've kept the CD portfolio short, so we'll have an ability to react. And so we have a lot of confidence in our ability to get the beta out necessary to maintain that modest neutral liability sensitivity to neutral positioning.
Got it. And maybe throw out the next ARS question as I go to you. But I guess, you know, marrying that together, you know, it, it seems like, you know, there was a fear that banks would kind of guide down kind of second half interest income at this conference, and it seems like most have kind of stuck with their guidance despite, you know, the, the market pricing in, greater easing. It seems like as we start to think about twenty twenty-five, there's a bit more uncertainty. You guys have, you know, I would think maybe outperform peers in terms of managing the balance sheet. But I guess just how you're thinking kind of the back half of this year into next year with respect to our loan and interest income trends.
Yeah, we continue to feel good about the trends that we're seeing. I mean, we're unchanged on our guidance for NII for the third quarter at +2%. So we feel really good about the performance that we're seeing. The nature of it looks a little different because the loan growth during asset growth is a little bit less than we expected, but we're getting a little bit better performance than we expected on the funding side. So the puts and takes puts us in that position. The fourth quarter, we continue to feel good about as well. You know, we're not changing our full year guidance from an NII perspective.
That range that we put out at the very beginning of the year, I mean, we have been the same range the entire year, despite very different rate scenarios, where we started the year expecting seven cuts, then at one point we were down to three cuts, now we're back to four cuts. So we've been fairly consistent on that and expected, honestly, between a zero and seven cut scenario to be able to deliver that range, which we are going to be able to do. 2025, it really, we're going to be able to continue to grow NII. The liability management is going to position us to do that, as well as the fixed rate asset repricing.
But you know, a true acceleration of NII beyond our current expectations would require a recovery from a loan demand perspective. You know, that certainly will be a challenge for the entire industry if loan demand doesn't pick up, but we're positioned to continue to grow NII even without that.
Yeah. I think philosophically, we don't like setting plans around factors that we don't control unless we believe we have multiple levers, right? Multiple paths to get to the outcome, and the simple rationale for that is once you set your revenue expectation, that has an impact on your expense capacity, and you spend the money first, and if the revenue doesn't materialize, then you have an issue with the core profitability, so when we set the full year NII guide, we were pretty clear that we thought the market was out in front of the Fed. I think that bore out. Equivalently, it felt like the market, you know, got behind the Fed then for a period of time then.
But we came into the year without an expectation for super robust loan growth, and we knew that if we didn't get the loan growth, we had the ability to go to work on deposit costs and the continued momentum from fixed rate asset repricing, which we would continue to see if the Fed cuts a hundred this year and essentially follows the dot plot, right? So there for us isn't just the growth in the balance sheet or to get NII to perform. It just becomes important-
That's right.
As you think about the long-term trajectory, right? Great companies have to grow.
And then, I guess turning to the fee income front, you did kind of modestly increase, kind of your guide, kind of decently increase your guidance for the fourth, third quarter. Can you talk to what, what's driving the change in expectations and just, any other trends you wanted to point out?
Yeah. The main thing it's, and it's similar to what we have talked about in prior periods, where volatility is obviously back in the market and our capital markets are overweight hedging, and trading activity relative to M&A. Those businesses had been sluggish in the first half of the year, and they're doing really well in the third quarter, as we've gotten some of that volatility back. So it really is all the line items that have been performing well this year. Commercial payments continues to grow robustly, wealth and asset management continues to do really well, and then now capital markets have shown up as those hedging businesses have come back.
I guess in the July earnings call, you kind of took down your fee income guidance for the year. Now, on the October earnings call, do you have to re-increase your fee income guidance for the full year?
We will take a look at how we're feeling at the end of the quarter when we talk about the fourth quarter. You know, as everyone knows, these markets are fickle these days. We do expect, you know, a decent fourth quarter still. But, you know, we're not going to. Yeah, we'll have to see ultimately where capital markets end up for the full year.
Yeah, the markets are fickle, we're not. We just didn't want to bet on a turn when a turn hadn't materialized, and then to the extent that the turn is materializing now, that definitely will be reflected in how we look at the fourth.
That's right. And then the other component is, with that higher fee income, the thing that we feel really good about, and this is another thing that we've talked about, because ultimately, we're managing to being able to deliver that consistent growth of PPNR over time. And we feel really good that even with that fee growth that we're seeing, we've been able to be disciplined on expenses, and we're going to come in in line with what we expected from an expense perspective. It's a nice PPNR story we feel good about.
Yeah, and I guess, thinking that, because typically when we hear higher capital markets revenues, there is kind of a cost associated with that. So, are you providing, are you kind of finding efficiencies elsewhere to kind of help mitigate that? And then I guess within that, I think I heard him talk to positive operating leverage for 2025. As you kind of approach that budgeting process, you know, how are you thinking about overall expense management?
Good.
I mean, philosophically, I think one thing that's a little bit unique about how we try to run the company is we treat strategic planning, which we are in the middle of. We leave here and go back. We have our board strategy offsite for the rest of this week, as a capital allocation exercise. So we talk both, sources and uses, and I think sometimes what happens is you run the strategy exercise as a way to solicit investment requests, and then you got to go back and figure out how to make the expense plan square later. We don't think of it that way. We think good companies, healthy companies, reallocate existing expenses, because by definition, you want to invest in things that are becoming more important. That also then means that there's something else that is becoming, on a relative basis, less important.
We are good at making sure that we get the right level of productivity out of our resources, but I think we've become especially good at working consistently on these value streams, right? So at the beginning of every year, we designate 12 different value streams. Think of, they're essentially end-to-end processes that start with the raw material and finish with the customer. And we set specific targets for cost, quality, and improvements in the client experience.
And as we make progress in the first half of the year, that tends to then produce a little bit of an expense tailwind for us in the second half of the year, and that's important because the annualization of those savings then generates some of the investment capacities, help to fund a lot of the things we want to do strategically in the coming year and gives us the opportunity to then reload and, you know, work on the next twelve areas of focus. So I think that's helping us in terms of expense management. It will be helping us in terms of generating positive operating leverage.
And as you know, again, the combination of this sort of consistent, strong fee growth and its high-margin fee business, if it's hedging and if it's capital markets, and if it's—I'm sorry, if it's treasury management, commercial payments, and wealth management, and then that ongoing discipline will continue to carry, you know, carry it forward.
Let me put the next ARS question on credit quality. But I guess one of the things in the third quarter, you know, taking up the charge-off guidance from 40 to 45 basis points to 50 basis points, let me just talk to kind of what are the drivers of that, and then I'll follow up on a reserve question after.
Yeah, absolutely. The main driver is just a little bit higher than what we expected from a commercial charge-off perspective, just as companies continue to navigate this higher interest rate environment. But what we would also highlight is 80%-85% of those charge-offs are fully reserved. So these are, these are things that it's not ultimately were surprises for us, but things where the timing was uncertain. You know, these were, these were troubled credits that we've been monitoring, and the events occurred that it was time to take the charge off. And so that is a component of when you look at then the provision guide, where because they were fully reserved, it actually doesn't have a big impact on us from a provision perspective.
The other thing that I would highlight about our provision guide this quarter is that, one component of it in our footnote is a little bit different, where we have seen deterioration in the Moody's outlooks that we utilize to build our ACL projections and our provision calculations, and we did incorporate that into this estimate so that, you know, that $10 million-$25 million build, we had previously said a $25 million build, assuming the scenarios were, static. We've had some specific reserves that'll come off as part of these charge-offs. We have not seen the loan growth that we've expected, but we've seen weakening in those scenario projections, which then has offset it. So that's why we're still humming a bit of a build, because we're taking that into account.
Got it. And I guess within the commercial charge-off this quarter, any particular industries to note?
There were a couple in the media space where just some aspects of the expectations around how the world is evolving, whether that's migration from traditional media to streaming or even some of the digital advertising categories. You know, there was a little bit in that space. It wasn't overweight, and maybe a third was in that space, and then everything else was fairly well diversified.
Got it. And then I guess anything else, away from CNI you're keeping an eye on? Auto's been a topic over the last day or two. I know you guys have-
Yeah.
Your players there from time to time.
No, our auto portfolio continues to perform very strongly. We have always been focused on prime, super prime in the auto space. We've always been very cautious about the terms that we extend out to, so the auto portfolio, there's always a little bit of seasonality. Third quarter tends to be an increase from a seasonal perspective, so, you know, don't be surprised when you look at consumer charge-offs, and there's an uptick from two Q to three Q. That's just seasonality, but the portfolio overall is performing very strongly.
Yeah, the weighted average FICO at origination is like 775, in auto, 775, 780 consistently.
... Got it. And then maybe on, and then I guess as you think about credit, I guess beyond the third quarter, I guess, how do you feel about just the overall health of your customer base and, you know, where do you see kind of charge-offs looking out?
I think in general, the economy is pretty healthy right now. Like, there's no question, we have been talking about this for a few years, that on the consumer side of the spectrum, the folks who are having the most challenges are the ones who were exposed not just to inflation in core goods and services, but also, rent inflation, right? So the homeowners who locked in thirty-year fixed rate mortgages at the 2.5%-3.5% level, essentially inoculated themselves from the inflation and the single largest expense that most American households face. So folks with incomes north of 75,000 and who own their homes have continued to do very well. We can see that in our deposit data.
I think it's evident when you look at the market, that folks who are sub $75,000 in income, folks who do not own their homes, are feeling the pinch. And I think the economic data indicates that they're actually now behind. Like, they're not only are they not seeing real wage growth, but they're actually losing ground again. I think thankfully for us, that is just not a component of our consumer lending activity. Our sub-680 FICO is like 1%, in terms of the distribution of the book, and 85% of our consumer exposure is to homeowners, whether that is through mortgages and home equity loans and lines, or through the any of the other products. It's like 75% for auto and credit card, just as an example.
On the commercial side of the equation, the challenge here, for businesses has been those who couldn't control input costs, and therefore couldn't pass, them along in the form of higher prices, or folks who, invested heavily on the expectation that they would see growth and then haven't seen it, right? So the digital media, as Bryan mentioned, I think there are some folks who believed that the spike in, streaming activity that we all saw during the pandemic would sustain itself, and maybe, maybe nobody would ever return to a movie theater. If that doesn't materialize, clearly you've made an investment that you're going to have a harder time getting the value from. But corporate profit margins are at their widest.
Like, they are very, very healthy, and because they're healthy, and I think because most large businesses still remember how hard it was to find labor two, three years ago, they're not running widescale layoffs. They're finding other ways to control expenses, and as long as that balance is maintained, and we see some relief from the Fed in sectors where leverage is a little bit higher, I think the Fed's going to stick a soft landing here, and we're not going to see a meaningful spike in unemployment. We'll probably see a sort of continued gradual normalization on that front, and you won't see an economic downturn.
Maybe shifting gears to capital. It looks like you're going to get to avoid the RWA inflation from Basel III Endgame, but still have to deal with the inclusion of AOCI. You know, you're in a good capital position.
Sure.
We started to buy back, I think, earlier than expected in the second quarter. Just, I guess, how do you think about capital management?
Yeah. Just on that point, on the re-proposal, it, it's worth saying, 'cause we've been vocal when we felt like there was a reason to complain, that, at the outset of this process, Vice Chair Barr told us, along with several other banks, that I don't remember exactly what the adjectives were, but it was like that the decision-making process would be transparent and, subject to comment, and deliberative, I think was the other word. And the decision that the Fed made, in conjunction with the OCC and FDIC to go to re-proposal here after they made pretty significant changes to the rule, is very consistent with that. So I, at a minimum, am quite appreciative of the way that the process has run, and will continue to run.
That said, I think there's a possibility under the revised rule that our RWA might have gone down, if we had been subject to it. So if we write a comment letter, it may be to ask if we have the ability to opt in to the broader capital, the capital form. We do feel good about the capital levels inside the company. The actions we took last fall, when we put ourselves on the RWA diet, and did the things we did from a liquidity perspective, were designed to put us in a position to comply with the rules as they were originally proposed.
And the byproduct of that is that, you know, that the relief that I think we will see here and the structure that we have in the securities portfolio, and therefore the predictable roll-in, of the AOCI marks, are going to allow us to run with our sort of conventional priorities as we had, or as we would have, prior to, you know, March Madness last year. So, organic growth is priority number one. We'd love to have, you know, constructive lending activity to be able to fund with all the capital and liquidity that we have been building. The strong dividend as number two, and we have a belief in the earnings power of the company and the importance of continuing to adjust the dividend to reflect that. And then share repurchases are number three.
As it became clear to us in the first half of the year that we were not only going to beat the capital targets, I should say, that beat the date we had set to achieve our capital targets, and that the loan growth wasn't going to materialize, we were able to resume share repurchase, and we expect to be able to continue to do that as the environment plays out here.
So in your list of capital priorities, I didn't hear you mention acquisitions. So could we maybe just talk to, and maybe separately, you kind of, you know, non-bank acquisitions. You mentioned about Rise, and you've done Dividend and Provide, and just maybe kind of your appetite there. But I'd also love to get your thoughts on, you know, bank acquisitions as well.
Yeah. Well, I think, I meant what I said in the script about our belief that the way that you build competitive moats is that, essentially, I think, Jamie Dimon, in a shareholder letter a long time ago, talked about the, the competitive moats in the banking business, you know, are shallow. Like, the extension of that, from my point of view, is the only way you maintain them is you got to keep digging. You pick an area of focus, and you invest into it on a sustained basis. I think we got what we needed in Rise to support embedded payments. Big Data Healthcare is an important component of what we have been trying to get done on the managed services front. We always look at those things, but we're not a high-priced buyer in that space.
We're always looking for engineering talent and good core technology, not businesses that have already inflected and hit a steep growth trajectory. Because what we bring to the table is the distribution and the payments processing. What we tend to want is the technology, and that means you're looking at companies that have kind of proven product market fit, as opposed to those that are further along. So those aren't really material from a capital management perspective. We have what we want in terms of the diversification on the fixed-rate lending platforms, so that isn't a focus. And I think on the, you know, the banks front, the nice thing we have today with the success we've had in the Southeast is we have an alternative to M&A as a mode of expanding our conventional banking business, right?
The branches down there, you know, capital earnbacks are just under four years. The IRRs are call it 18%-20%. And they're granular investments. You're making one $5 million investment at a time, as opposed to taking on the execution risk of something much more significant to that. So priority for us is going to continue to be just fund that organic expansion, build out the markets we're in, get exactly what we want in a pace that we know we can achieve. Anything that we did on the inorganic front would have to pay, there'd have to be a very healthy execution risk premium on top of what is already about a 20% IRR, much more granular and therefore predictable investment profile.
Great. On that note, we're out of time, so please join me in thanking Tim and Bryan for their time this morning.