Thank you for coming to the second day of the RBC Financial Institutions Conference. I'm very pleased to have with us today Fifth Third Bancorp presenting this morning. As you may know, they're about the 13th largest bank in the United States, with just over $212 billion in assets. The company has put up a return on tangible common equity recently of about 18.3%. Joining us today to my immediate right is Jamie Leonard, who's currently the Executive Vice President and Chief Operating Officer. Many of you may remember Jamie as the CFO. He took over this role back in early 2024. Jamie joined Fifth Third Bank back in 1999. To his immediate right is Bryan Preston, who is the Executive Vice President and Chief Financial Officer. Bryan took over that role when Jamie moved into the current role back in January of 2024.
Prior to that, he was the treasurer for Fifth Third Bank, and he joined Fifth Third back in 2003. So Bryan's going to have some opening comments first, and then we'll go into the fireside chat. Bryan, take it away.
Thank you, Gerard, and good morning, everyone. Last night, we published a slide presentation on our investor relations website, which I'll reference in my prepared remarks. Afterward, Jamie and I will be happy to answer any questions you may have. At Fifth Third, we believe great banks distinguish themselves not by how they perform in benign environments, but by how they navigate uncertain ones. Despite a year of changing expectations on interest rates and loan growth, we were very pleased to deliver on financial commitments to our shareholders in 2024. We achieved this success through a diversified business mix, deliberate balance sheet positioning, and a continuous effort to find capacity for long-term investment while maintaining expense discipline. As a result, Fifth Third continues to deliver top quartile profitability and strong long-term returns for shareholders.
With a reasonable P/E ratio on 2025 earnings, we aim to continue that performance for our shareholders. These results stem not from chasing competitor trends, but from our consistent investments over the years. Driven by our belief in better products and service, granular retail deposit funding, and diversified fee and loan production would generate stronger long-term outcomes. Our focus remains on stability, profitability, and growth in that order. These priorities are not mutually exclusive concepts. An often overlooked driver of stability is investment in where you choose to grow. To grow sustainably faster than the industry, we positioned our branch footprint to benefit from the Southeast's rapid population growth. This region grows two to three times faster than the rest of the United States, and six times faster than our legacy Midwest markets.
Since 2018, we have opened 138 branches in the Southeast, nearly matching the national total branch builds of all of our peers combined. We are now accelerating our investment pace to 50-60 branches per year through 2028 to achieve our desired market density. These investments will give us nearly 600 branches in the Southeast and a top five location share in nearly every focus market. We capitalize on our strengths when investing, avoiding unknown or unproven areas. Our new branches consistently outperform both our models and the peer average. We ground our retail business in analytical disciplines for location selection and marketing, product innovation like Momentum Banking, and disciplined sales execution in years of hard work and lessons learned.
When our branch expansion program is complete, over half our Southeast branch network will be less than 10 years old, and we expect substantial deposit growth from the seasoning of these investments for years to come. Our Southeast investments extend beyond branches. Since 2018, we have increased our middle market banking and commercial payment sales force by 50% in our Southeast markets. Combined with our Texas and California market investments, these high-growth markets now account for nearly half of our middle market-focused sales teams. On the wealth front, our Southeast sales headcount has doubled during the same period. Our stability is also supported by over $30 billion in commercial operating deposits driven by our commercial payments business. Nearly 95% of our total commercial balances come from relationships that utilize commercial payment services, including 82% coverage of our uninsured deposits.
Over 80% of our C&I lending clients maintain a commercial payments relationship with Fifth Third. The net interest income benefit from these deposits, combined with our commercial payments fees, generate $2 billion of annualized revenue in the current rate environment. The future of payments is software-enabled solutions that solve operational problems associated with revenue or expense cycle management. Our strategy is to innovate through focused product solutions in our managed service offerings and provide payments infrastructure to the technology innovators. This area is another known capability for Fifth Third, given our payments heritage and scale as a top five treasury management provider across most major cash management products. In 2024, we processed $17 trillion in payments for our customers, and annually, we originate ACH send credits in line with volumes for all other Category IV banks combined.
We strive to be resilient to changes in rate and credit environments to generate peer-leading results with lower volatility. We have spoken for many years about the need for a credit cycle to clear out undisciplined originators. We believe we're in the early to middle innings for a credit cycle for commercial real estate. Contractual lease payments have supported many buildings with high vacancies, but these leases will continue to mature. These cycles can have a long tail, and we expect heightened losses in the banking industry and the non-bank lending space for the next several years. On slide nine, we compare Fifth Third's net charge-off ratio for CRE to other large banks. After the 2008 financial crisis, our approach to commercial real estate lending changed. It is especially lending business that requires expertise.
To be successful through the cycle, we want bankers and credit specialists who spend every day thinking about real estate. We focus on recourse lending with strong project sponsors. Even during the low-rate environment, when there were plentiful lending opportunities, we did not consider CRE to be a growth asset class. We remain disciplined in underwriting, requiring recourse and strong loan-to-values. In return, our customers know they have a lender committed through the cycle. This discipline has led to zero net charge-offs over the last three years. For interest rate risk, we try to manage our balance sheet primarily through our business lines and diversified loan originations. Origination platforms like Indirect Auto, Provide, and Dividend give us access to granular fixed-rate loans at various interest rate term points with minimal prepayment risk.
The mix of these fixed-rate loans with varied maturities and our investment securities portfolio helps us maintain our neutrally positioned balance sheet. Given our focus on maintaining optionality, we try to position the balance sheet to deliver consistent, predictable cash flows from year to year. In addition to the certainty of cash flows for fixed-rate asset repricing, structured securities have more predictable accretion schedules for AOCI to benefit tangible book value. Our tangible book value per share increased 19% from the end of 2022 to the end of 2023 as the 10-year Treasury rate remained the same. In 2024, the 10-year Treasury rate increased by 70 basis points, and the tangible book value per share still grew by 6%. Assuming the forward curve is realized, our tangible book value per share should grow by 4% per year through 2028 due only to AOCI accretion as the securities pulls to par.
Earnings will further add to this tangible book value growth. For capital, our priorities remain a strong and stable dividend, supporting organic growth, and finally, share repurchases. We believe organic growth and investing in our company is the best way to deliver strong shareholder returns. Our strong profitability and ability to grow capital provides us with a tremendous amount of flexibility. Turning to the outlook, the last few weeks have been a good reminder of the volatile and unpredictable nature of the macroeconomic and geopolitical environments. Heading into 2024, we believe that reduced regulatory burdens and more certainty on future tax policy would be drivers of increased activity. We continue to believe these factors will boost economic growth. However, the risk of the geopolitical environment and the impact of tariffs on various aspects of the economy may offset some of these benefits.
In February, we began to see how these risks manifest in reduced capital markets activities and in economic forecasts. Non-interest income is now expected to be down 9% compared to earlier guidance of down 7%-8% due to capital markets transactions being pushed out of the first quarter given the recent volatility. We are not changing our net interest income outlook for the first quarter. We have continued to see good activity in loan production, but that has been mostly offset by tightening loan spreads and some seasonal weakness in commercial deposits. Consumer deposits continue to perform well, and we expect to see the normal seasonal strength in March associated with tax refunds. Given the continued loan production, the build in ACL attributable to loan growth and mix is now expected to be $25-$30 million. Additionally, the Moody's economic scenarios for the quarter present a significant uncertainty.
Using our loan portfolio as of December 31st, the modeled ACL output from the Moody's scenarios would indicate an additional $50 million reserve build. This result is driven by Moody's forecasted deterioration in corporate profits, credit spreads, and home prices. The ultimate provision for the quarter will be dependent on the ending March loan portfolio, the March macroeconomic scenarios, and our qualitative assessments of our loan portfolio. Lastly, for the quarter, we continue to expect net charge-offs in line with our guidance from January. For the full year, we are reaffirming our revenue, expense, and net charge-off guides from January. We continue to expect record NII, a return to loan growth, and positive operating leverage. ACL increases for the remainder of the year will be dependent on loan growth and Moody's economic outlook. With that, Jamie and I are happy to take your questions. Thank you.
Bryan, thank you very much. Maybe following up on the guide that you just gave, the Moody's comments were unique. You're the first to mention the February outlook. Can you share with us, based on history, because you guys have been doing this now since January of 2020, how much subjectivity you have in interpreting their recommended economic outlook?
Yeah, there are a couple of components of that. First and foremost, the guidance update associated with credit, there's nothing idiosyncratic from a credit perspective happening there. That is a function of the balance sheet growing. When loans grow, you should expect to see reserve builds and then the formulaic impact of the Moody's economic scenario. We always have some process associated with being able to look at the portfolio and make adjustments where necessary if the modeled outcomes don't make sense. For example, on the $50 million, about $30 million of that is associated with the commercial portfolio and $20 million with the consumer portfolio. The consumer is actually driven by HPI. The Moody's outlook is actually for a weaker HPI performance, and that's impacting residential mortgages and home equity loans through our models.
We would not expect significant impact in our residential mortgage or home equity loan portfolio in this environment, just given how much is included, how much equity there is in those loans today. But it is an impact out of the modeled outcome. So we just want to make sure that people understand that these scenarios and the volatility that we're seeing around them certainly is a risk for us in the industry. This is just a function of how the models react to some of those changes.
Very good. Maybe we'll kick off, Jamie. Obviously, you're overseeing the growth of the Southeast franchise on the consumer side. Can you share with us, when you build out the new branches, how long does it take to get the profitability or break even? And Bryan pointed out that I think the average age of branches in the system is less than 10 years. Obviously, the Southeast is a lot younger. So maybe some color there as well.
Sure. The Southeast currently, we're actually less than five-year average age. Bryan's 10-year comment was, fast forward to the end of our 200-branch build initiative, that age will still be the youngest branch network of size in the Southeast. And we're really excited about the opportunity in the Southeast, why we picked the Southeast. If you just looked at the 2024 population migration in the United States, four of the top five winners in population migration were in the Southeast: North Carolina, South Carolina, Florida, Tennessee. And if you look, the next two were Alabama and Georgia. So the Southeast is winning in terms of population, and we need to be there. At the end of this year, we'll be about 35% of our branch network will be in the Southeast. At the end of this initiative, we will be at roughly 50% of the branch network in the Southeast.
The good news for us is we've done 138, and we've locked in actually the 138 of the 200 sites. We feel really good about our location selection, what that can bring to the company, and the profitability. We model achieving break even within three years, and we've been running ahead of that. You see that in the FDIC data as well as we've garnered share in 15 of the 16 markets that we operate.
Typically, when you get to break even, what kind of deposit levels generally do you see in the branches to get to that break-even point?
It depends on what the big guy's FTP rates are, but if we just use a Fed funds model on the deposits, when we get $30 million or more, we're definitely going to be profitable. We have adopted about a 1,900 sq ft footprint and continue to be very lean on the cost of the builds, but post-break even, you tend to get a seven-year runway of accelerated growth above market growth, and then, obviously, getting to 7% or 8% location share in market gives you the density that you need in order to optimize your profits within a given geography.
Got it. And one of the other interesting parts of the growth story is how you're combining that with shrinking the Midwest footprint and identifying branches that are not needed. Tell us about that strategy, how you identify them. And has there been much customer loss once you decide to close a branch?
Over the 167 years, the world has changed. That Midwest footprint, especially where it's a little bit more mature, we do analyze and move locations, and we'll do two-for-one consolidations or we'll do closures. Our branch count is actually down 5% from our pre-COVID levels before we started this. Our approach is let's consolidate branches and use that consolidation to pay for the Southeast. That has been a very effective strategy for us. The attrition has been much better than what we model. We model a 1% attrition, and it's actually been significantly below that, in part because of the digital adoption and certainly COVID-accelerated digital adoption. Our customers were roughly 75% digitally adopted. Therefore, the biggest factor on attrition is just drive time when you want to have lending activity or get advice.
Right. Yep. Bryan, you touched on in your opening remarks about payments. What distinguishes Fifth Third from some of its peers is the growth strategy in the Southeast, of course, but also the payments business. Can you elaborate? How do you get the payments group working with the commercial lenders? And how do they kind of - this is a bad word, cross-sell - but how do they collaborate together to really drive it?
Yeah. In general, I think we have done a nice job through the years with our one-bank model to really institutionalize banking relationships and deepen those relationships. That occurs both from commercial to payments, but also in our wealth business, as well as the capital markets business that we support. As I mentioned in the prepared remarks, about 80% of our lending clients are payments customers. And we think that is best in class when we look at peer statistics on that front. And first and foremost, our one-bank regional model, where the sales teams actually all report to local leadership, does make a big difference. They do a good job of working together to really understand what our client needs are and how to then solve their problems. That has been a huge component of it. Obviously, products make a big difference.
We've done a nice job on product development that actually creates problem-solving solutions for customers in terms of operational costs. That gives us an opportunity to compete in a different way. When you can talk about how your product is going to have a hard cost save in terms of the actual activities to deliver payments, that's different than just saying, "Hey, we're going to reduce your pricing a little bit relative to what you're paying today." So those two things together, that has taken us from what is typically a 3%-4% growth market when you think about the transactional and revenue activity. That gets us to that 6% or 7%. And then the investment in Newl ine, which is the embedded payments business. This is a high-growth area where we think that there is going to continue to be really strong trends. That takes product capabilities.
It takes compliance capabilities and technology capabilities, all things that we had developed through the years from our legacy payments relationship with the FTPS business that we spun out that became Vantiv and now Worldpay. We had to learn how to externalize capabilities in a unique way, and we figured out that we could turn that into a business, and what we now bring is industrial scale to an area where it had been serviced by smaller banks, and what you're seeing are these large fintech modern payment companies saying they need a partner like Fifth Third that they can count on that's not going to put them in a problem from a compliance perspective where they can't grow.
And that's why you see names like Stripe and Trustly and Blackbaud and Toast coming to our platform, because we have the products, the technology, and they have a lot of confidence in us on the compliance front. That's going to be a very high-growth business from here. It's a 30%, 40%, 50% growth business now, albeit that's a pretty small base. But that's what gets us into that high single-digit, low double-digit growth rate. And the thing we like about that business is their sales force becomes our sales force. We make money as they grow. We make money as they take share from the banking sector. So we just think it is a good strategic position to be in.
Bryan, you also mentioned in your comments, and maybe Jamie, you could touch on this as well, about the uncertainties in the geopolitical environment. And we've seen it, obviously, manifest itself this week with the tariffs. And in talking to your clients, commercial customers, maybe even some consumers, what are they feeling? Is it more uncertainty? You mentioned the investment banking revenues seem to be delayed. But then second, if you could also tie in your auto lending business, because obviously, if this Canadian tariff stays in place, autos is one of the sectors that's likely to be impacted by it. So any color you guys would like to offer on it?
Yeah. And I'll start with the commercial front, and then I'll let Jamie talk about the auto business. In general, it's kind of a mixed area right now from what does it mean to our customers. It does create some pause for them as they think about investment and capital investment, and they're reevaluating what they actually need from here and what the risks are for them. I think what has been interesting is that the lessons that were learned from COVID were the importance of supply chain diversification, and that is being reinforced to these customers. So you have some customers looking at it and saying that maybe I need to go and be a little bit proactive on inventory build in this environment just to get in front of the tariff risk.
You also have others that are saying, "I need to continue to invest in onshoring my supply chain to help protect myself from a tariff perspective." And so what we're seeing right now are actually fairly robust pipelines still. Our middle market teams would tell you that we're still seeing record pipelines from a lending perspective. We're certainly seeing some things where people are potentially being a little bit cautious given some of the volatility in the environment. But what we are seeing are people saying that, "Yes, I have to continue to invest in my business to protect myself from a long-term perspective." So we still think even with that volatility, you're going to see investment.
It may slow some things from an acquisition transactional perspective that some of what we've seen is it really has been the bond and loan capital markets activities that started to slow in February and have been slow at the beginning of this month as well. But we continue to expect to see investments in our customers investing in their businesses.
On the consumer side, obviously, the health of the consumer has been in the media and a topic of debate over the past couple of weeks with the retailers and then FHA delinquencies. I think the key differential between those stories and what we're seeing at Fifth Third is if you look at the left-hand side of the balance sheet for us, we're prime super prime lender, and therefore, the stress that others are quoting are really in the lower income, lower FICO swaths of the U.S. consumer.
What we see on the lending side is actually an improvement in delinquencies in January and February. We finished the 2024 at a 54 basis point delinquency rate in the 30-89 bucket. That's actually down to 50 basis points at the end of February. So because our focus, and we talked about this several years ago, our focus is lending to the homeowner. The homeowner is in a continued healthy state. So on our balance sheet, we're underweight homeowners. So when Bryan talks about the ACL and the HPI impacts, you might think we'd be less impacted than others, just given our underweight on what's on our balance sheet from a homeowner perspective.
But when it comes to the other asset classes, card and auto, we are very heavily focused on lending to the homeowner such that our entire left-hand side of the consumer balance sheet is about 85% lent to the homeowner. And the homeowner continues to be in good shape. The renters continue to be squeezed, and that is the challenged group. Now, if you move to the right-hand side of the balance sheet, we analyze, and obviously, we bank everyone, and so you get a broader swath of the consumer analytics when you look at our deposit activity. We don't see anything from an overdraft perspective, a MyA dvance perspective. All of the more stressed activity is actually running fairly flat, fairly consistent.
The only data point we could find as we scrub our data was that the buy now, pay later activity that customers do away from Fifth Third, because we don't offer that product, was up mid-single digits in December and January. But I'm not sure that's a significant enough data point. From our perspective, the consumer continues to do well, and in particular, the homeowner, because the labor market is so strong. But in terms of, I guess you asked on auto, we see auto as a continued driver of that fixed asset repricing benefit this year. We finished the fourth quarter at a 5.5% yield. We expect that to get up to a 6% yield just through normal repricing at the end of 2025.
From a credit perspective, there'll be a near-term benefit on auto charge-offs if tariffs continue and used car prices fluctuate higher because those residual values, much like we saw at the beginning of COVID, will help reduce charge-offs. The bigger challenge will be in the long run, are you able to adapt your underwriting standards to ensure that your LTVs aren't getting sideways from a credit perspective?
Very good. Maybe shifting over to regulatory. When you think about the changes with the election, we're looking at maybe a softer touch with the regulatory environment. We saw just this week or yesterday, the Consumer Financial Protection Bureau dropped the Zelle lawsuit against the bigger banks. Then, of course, we had the rollback of the 2024 FDIC M&A kind of guidelines. What are you guys sensing as we go through and that new heads of the agencies come in? Is it going to be a more constructive environment, do you think, with the regulators and the banks and your bank as well?
Yeah, we do think that it is going to be a more constructive environment. Obviously, a lot of uncertainty around some of the final appointments, but the feedback that we're hearing about the people that have been named or will potentially be named has been very positive. We think that the Trump administration understands that the banking sector can be very strong in helping support economic growth. And I think they're viewing it as if we can actually lighten some of this burden that has been holding banks back from a growth perspective, that could be very powerful for helping the economy because we need the private sector to continue to grow for them to achieve their objective. And so we do think that it is going to be a better regulatory environment.
Does that mean that we're going to see a 10% or 20% reduction in expenses because of a decreased regulatory burden? No. But it definitely means that it's not going to get worse from here, that it will be at a minimum stabilized with some opportunity to not be overburdened from a supervision perspective.
Tying into the regulatory environment, it seems like there's expectations for greater bank M&A activity. The last couple of years has been somewhat subdued. If you guys have any thoughts on what you see happening possibly in the consolidation of the industry and the acceptance or the support from the regulators for this to happen?
Yeah, it's a lot of uncertainty on that front, obviously. It's the classic line, "Banks are sold, not bought." So that obviously is going to be a driver. I think most people are basically looking at the outlook and saying that the next two to four years look better than the last two to four years. So I think this is going to be a much slower environment than anyone is expecting on that front. But certainly, some consolidation would be healthy for the industry. And it appears that with the rollback on potentially the bank merger changes that might have come from the DOJ and the FDIC, it definitely appears the administration is going to be more friendly for M&A.
Yeah. Jamie, coming back to the consumer side, do you guys see any differences geographically speaking? Are consumers more risk takers in the South versus the Midwest? Or how do you guys—or can you see any differences between the consumers?
I don't see differences in the behavior of the consumers by geography. What we do see in the data is that the Southeast, our average deposit level per household is about 50% higher than the average household deposit level in the Midwest. But from an economic activity, I think both where mass affluent, affluent continue to spend, lower income segments continue to be a little more pressured and are now below the 2019 deposit levels.
Got it. And we're running out of time here. We're in the red zone. But one last question on capital. You guys are obviously well capitalized. There's the likelihood, possibility that stress capital buffers could change over the next couple of years. How are you guys approaching how you manage your CET1 levels?
Yeah, we continue to believe that the 10.5% operating target that we've been utilizing is the right place to be. All of the stress analysis that we've done through the years, including even the most severe COVID scenarios, would tell you from a credit perspective that 9% for us was the right long-term capital levels. With AOCI opt-out going away, because we do think that will happen, we would probably hold an extra 50 to 75 basis points just for AFS volatility. So ending up in the high nines, low tens on a fully phased-in basis down the road feels like a reasonable spot to be.
With that, like I said, we've run out of time. Please join me in a round of applause thanking the guys from Fifth Third.