Matt Curoe :

Good morning everyone. Welcome to Fifth Third Second Quarter 2024 Earnings Call. This morning our chairman, CEO, and President, Tim Spence, and CFO, Bryan Preston will provide an overview of our second quarter results and outlook. Our Chief Credit Officer, Greg Schroeck, has also joined for the Q&A portion of the call. Please review the cautionary statements in our materials, which can be found in our earnings release and presentation. These materials contain information regarding the use of non-GAAP measures and reconciliations to the GAAP results, as well as forward-looking statements about Fifth Third's performance. These statements speak only as of July 19, 2024, and Fifth Third undertakes no obligation to update them. Following prepared remarks by Tim and Bryan, we will open up the call for questions. With that, let me turn it over to Tim.

Bryan Preston :

Thanks, Tim, and thank you to everyone joining us today. Our second quarter results were strong, reflecting our balance sheet strength, diversified revenue streams, and disciplined approach to expense and credit risk management. For more than a year, we have emphasized the importance of maintaining balance sheet strength and flexibility in an uncertain economic and interest rate environment. This approach has proven effective as the market's expectations on rate cuts, changed dramatically from the start of 2024. Despite this change in rate outlook, our NII has been consistent with the performance trajectory we discussed back in December, increasing sequentially during the second quarter from the first quarter bottoming, and NIM has increased for two consecutive quarters from the fourth quarter low. Additionally, our full year 2024 NII outlook remains unchanged. As Tim mentioned, our profitability remained strong and stable, which allowed us to resume share repurchases early and grow our CET1 ratio to 10.6% up 13 basis points. As noted on Page 2 of our earnings release, our reported results were impacted by certain items including the valuation of the visa total return swap, an update to the FDIC special assessment, and the impact of certain legal settlements and customer remediations. Excluding the impact of these items, adjusted net interest income for the quarter increased 1% from the prior quarter to $1.4 billion. And adjusted net interest margin improved 3 basis points compared to the prior quarter. Increased yields on new loan production contributed to this improvement and offset the impact of increased interest bearing core deposit costs, which were well-managed and increased only 4 basis points compared to the prior quarter. While total average portfolio loans and leases were flat sequentially, we continue to benefit from fixed rate asset repricing, led by our indirect auto business. Average total consumer portfolio loans and leases were flat sequentially, primarily reflecting the increase in indirect auto originations, offset by a decrease in other consumer loan balances. Average commercial portfolio loans decreased 1%, due to lower demand from corporate banking borrowers. Period end commercial revolver utilization remained at 36% consistent with the prior quarter. Middle market loan production increased 2% compared to the prior quarter, driven by strong performance in our southeast markets, primarily in the Carolinas, Georgia, and Florida, as well as continued success in Indiana, Texas, and California. The pipeline for the second half of the year is improving, and we are continuing to invest in our middle market banking teams, including our recently announced expansion in the Alabama market. However, we remain cautious on commercial loan growth expectations in the second half of the year, as customer demand for credit remains muted. Our investment in analytics continues to help us optimize deposit outcomes, demonstrated by our strong deposit growth in 2023 and prudent management of deposit costs in 2024. Our strong track record of liquidity management, combined with data-driven analytics, will aid in maintaining pricing discipline and optimizing liability costs. Average core deposits were flat sequentially, driven by higher CD and consumer savings and money market balances, offset by lower interest checking and commercial demand balances. Our current focus remains on prudently managing deposit costs with the Fed on hold and preparing for potential rate cuts later this year. By segment, average consumer deposits increased 2% sequentially while both commercial and wealth deposits decreased 2%. The Southeast branch investments are driving both strong household growth and granular insured deposits. Demand deposit balances as a percent of core deposits were 25% as of the end of the second quarter, stable with the prior quarter, as migration of DDA balances continued to slow. Consistent with our prior expectations for a higher for longer rate environment, we expect DDA mix to fall below 25% during the third quarter and stay around 24% for the remainder of the year. We ended the quarter with full Category 1 LCR compliance at 137% and our loan to core deposit ratio with 72%. We are well-positioned to continue to grow net interest income and our balance sheet provides flexibility to navigate the evolving economic and interest rate conditions. Moving on to fees. Excluding the impacts of security gains and the Visa total return swap, adjusted non-interest income decreased $32 million or 4% compared to the year ago quarter. This year-over-year decrease is attributable to a $34 million private equity gain recognized in the second quarter of 2023. Within our businesses, commercial payments and wealth and asset management fees continue to deliver strong results, both achieving double-digit revenue growth over the prior year, driven by our continued strategic growth investments in products and sales personnel. These areas are not only fast growing but are sizable contributors to fee income and profitability today given our strength and scale in these businesses. We expect these businesses to continue to deliver strong revenue growth. Our market-sensitive businesses such as mortgage and commercial customer hedging have been impacted by the higher rate environment, the reduced demand for credit, and reduced market volatility. The combined impact for these businesses was a $20 million decrease versus the prior year. Leasing business revenue was down $9 million versus the prior year due to our decision to de-emphasize operating leases, but it is offset by a $9 million decrease in leasing business expense. The securities gains of $3 million reflected the mark-to-market impact of our non-qualified deferred compensation plan, which is more than offset in compensation expense. While we have continued to invest in strategic growth initiatives and technology, we managed our adjusted non-interest expense flat to the year-ago quarter due to our focus on expense discipline and the ongoing benefits from the process automation efforts. Adjusted non-interest expense decreased 7% sequentially, primarily due to seasonal items during the first quarter related to compensation awards and payroll taxes. Moving to credit, consistent with our guidance, the net charge-off ratio was 49 basis points, up 11 basis points sequentially, driven by two commercial credits for which we had previously established specific reserves. Consumer charge-offs were 57 basis points, a reduction of 10 basis points sequentially, primarily due to improvement in our indirect consumer-secured portfolio. Other credit metrics showed strong sequential improvement with the ratio of early-stage delinquencies 30 to 89 days past due decreasing 3 basis points to 26 basis points, which is near the lowest levels we have experienced over the last decade. NPAs decreased by $100 million, or 13% during the quarter, and the NPA ratio decreased 9 basis points to [55] (ph) basis points. In commercial, our credit discipline is grounded in generating and maintaining granular, high-quality relationships and by managing concentration risks to any asset class, region, or industry. We continue to see no material signs of broad-based industry or geographic weakness and believe potential future commercial credit losses will be idiosyncratic in nature. In consumer, our focus remains on lending to homeowners, which is a segment less impacted by inflationary pressures. We have maintained our conservative underwriting policies and will continue to evaluate our positioning as economic conditions change. Our ACL coverage ratio decreased 4 basis points to 2.08% and included a $47 million reserve release, driven by the previously mentioned specific reserves. We continue to utilize Moody's macroeconomic scenarios when evaluating our allowance and made no changes to our scenario weightings. Moving to capital, we ended the quarter with a CET1 ratio of 10.6%, significantly exceeding our new buffered minimum of 7.7%, reflecting strong capital levels. As we assess our capital priorities, we believe that 10.5% is an appropriate near-term operating level. During the quarter, we completed $125 million in share repurchases, which reduced our share count by 3.5 million shares. Our pro forma CET1 ratio, including the AOCI impact of the securities portfolio, is 8.0%. We expect continued improvement in the unrealized securities losses in our portfolio, given that 61% of the AFS portfolio is in bullet or locked-out securities, which provide the high degree of certainty to our principal cash flow expectations. Assuming the forward curve is realized, approximately 26% of the AOCI related to securities losses will accrete back into equity by the end of 2025, increasing tangible book value per share by 10%, before considering any future earnings. 62% of the securities-related AOCI will accrete back to equity by the end of 2028. Moving to our current outlook. While the rate environment and customer credit demand have played out differently than we were expecting at the start of the year, we remain confident in our ability to deliver PPNR and earnings outcomes in-line with or better than our original expectations for the full year. We expect full-year NII to decrease 2% to 4% consistent with our guidance from January. This outlook assumes the forward curve as of early July, which projected two rate cuts in the second half of the year, September and December. We also believe we can deliver this NII outcome with no interest rate cuts and no loan growth in the second half of 2024. Given the year-to-date trends in customer activity, we now expect full-year average total loans to be down 3% compared to 2023. Average total loans in the fourth quarter of 2024 are expected to be stable to up 1% compared to the fourth quarter of 2023, with similar performance in both the commercial and consumer portfolios. Customer demand is the primary driver of this change, given the interest rate environment and other economic uncertainties. If there's more economic optimism in the second half of the year, we would expect to see loan growth in-line or better than market growth. We are forecasting fourth quarter average core deposit growth of 2% to 3% when compared to the fourth quarter of 2023. Our forecast also assumes commercial revolver utilization and our cash and other short-term investments remain relatively stable throughout the remainder of 2024. We expect full-year adjusted non-interest income to be stable to down 1% in 2024, reflecting the impact of weaker than previously expected credit demand and customer hedging activities. We expect strong growth in commercial payments and wealth and asset management revenue to continue. In response to this expectation of lower customer activity in the second half. We expect to manage full year adjusted non-interest expense stable to 2023 levels. Our expense outlook assumes continued investments in technology with tech expense growth in the mid-single digits and sales additions in middle market, commercial payments, and wealth. We will open 30 to 35 new branches in our higher growth markets and have already closed a similar number of branches in 2024. Our outlook still projects an efficiency ratio of around 57% for the full year. For full year 2024, the net charge-off outlook remains in the 35 to 45 basis points range. While we expect to resume provision builds in connection with loan growth and mix in the second half of 2024, we expect the second half build to be less than the first half of 2024 release. Therefore, we expect full-year provision to be a 0 to $10 million release, assuming no change to credit quality of the portfolio or projected economic conditions. Moving to our quarterly outlook, we expect NII and NIM growth to continue in both the third and fourth quarter. We expect NII in the third quarter to be up 2% sequentially, reflecting the impact of slowing deposit cost pressures and the continued benefit of our fixed rate asset repricing. Our current outlook assumes interest-bearing core deposit costs, which were 295 basis points in the second quarter of 2024, to increase just 4 basis points sequentially if we see no rate cuts. We expect average total loan balances to be stable to up 1% from the second quarter. We expect modest middle market, auto, and solar production to offset continued low credit demand from corporate banking customers. We expect third quarter adjusted non-interest income to be up 1% to 2% compared to the second quarter, largely reflecting strength in commercial payments and wealth and asset management and a modest increase in commercial banking revenue. We expect third quarter total adjusted non-interest expenses to be up 1% compared to the second quarter, due to the impact of the previously discussed investments in branches, technology, and sales personnel. Third quarter net charge-offs are projected to be in the 40 basis points to 45 basis point range. As mentioned in the [four-year] (ph) outlook, loan growth and mix are expected to drive a provision build, which should be around $25 million in the third quarter, assuming no change to the economic outlook. The trajectory of our income statement performance should deliver positive operating leverage in the fourth quarter 2024 and a net interest income exit rate for the year that positions us for record results in 2025, assuming no major economic or interest rate outlook changes. Finally, moving to capital. With our consistent and strong earnings, we expect to execute share repurchases of $200 million per quarter in the second half of 2024, assuming a stable economic and credit outlook and capital rules that are no worse than the current NPR. In summary, with our well-positioned balance sheet, disciplined expense and credit risk management, and diversified revenue streams, we are positioned to generate sustained, top quartile profitability and deliver long-term value for our shareholders, customers, communities, and employees. With that, let me turn it over to Matt to open the call up for Q&A.

Operator:

Thank you. We will now begin the question-and-answer session. [Operator Instructions] We'll take our first question from Ebrahim Poonawala at Bank of America.

Tim Spence:

Good morning.

Bryan Preston:

Thank you, Ebrahim. We certainly believe that rate cuts are positive for Fifth Third’s. If you look at slide 42, we actually give a little bit more detail on the mix of the interest-bearing deposit book. 64% of our book right now would be classified in kind of the higher beta categories. This represents our index deposits, which are up to $35 billion. The CDs that we have in place, we've done a nice job of managing the maturity of the CD bucket so that most of our CDs will mature by the end of the year. That's another $14 billion of balances and our promotional balances as well. So we have a lot of captions where within that book that we are going to be able to reprice down. Overall, that's about 64% of the deposits. We certainly have some lower rate buckets still that we think the betas are effectively zero. We have a high amount of confidence though that we're going to be able to get cost out and be able to manage. We really only need to be in a kind of mid-50s to low-60s beta to be able to be neutral to liability sensitive and we're confident we can deliver that.

Tim Spence:

Yeah. Good question. I think that's the million dollar question for the industry right there. There's no question that if we see some relief on rates, it is a positive, both for loan demand and for credit quality. Jamie Leonard, and I have been out in several of the markets this quarter doing market visits, and we've been running a straw poll on where rates need to be before activity picks up. And the wisdom of the crowds, at least inside Fifth Third at the moment is about 4.5% the Meridian, where we'll see a pickup in more activity. That said, while rates would be constructive, I think, I continue always to worry about the broader macro issues. We've got land wars and two volatile regions in the US right now. We have an election that's upcoming. We have massive fiscal deficits in the US. We have a ton of Treasury Issuance that's going to be required to reload the TGA at some point here, and they're going to have to turn that out, and that's going to put pressure on the long-end of the curve. And while I think we have some stability here, I'm uncomfortable with the level of support that the federal government is having to provide to keep GDP growth at where it is at the moment. I mean, the jobs numbers, this most recent batch, unless I'm mistaken, a third of the new jobs that were created, were created by the government. When we look at our footprint and we look at where the activity is, where there's federal stimulus, we're seeing robust activity everywhere else. We've got a client in Tennessee tell us that the current environment was quote, half speed ahead, right. So we will continue to be mindful about that. I'm a believer that in uncertain environments, you have to focus on getting growth from the businesses that you know and the strategies that are proven. You're not going to see us stretching into categories we don't know or doing things that we're uncomfortable with from a credit perspective and where we have to bet on a favorable macro to bail us out in terms of getting repaid.

Operator:

We'll go next to Scott Siefers at Piper Sandler.

Bryan Preston:

Yeah, absolutely, Scott. You know, the second to third quarter increase, we're talking about not too aggressive of a fee growth perspective. We continue to expect continued performance out of our wealth and asset management business, as well as commercial payments. Payments has been taken along at $3 million to $4 million a quarter increases, and we expect that to continue and feel really good about it. We're also going to see some seasonal impacts actually come out associated with our mortgage business. We've benefited a lot from the servicing portfolio, all the servicing ads that we did right at the end of the low rate cycle has benefited us and generated a lot of great income, but there is a seasonal headwind, 1Q to 2Q that we felt that was about $7 million. That's not going to repeat. So we're set up really well for that 2Q to 3Q growth that we've laid out. And then in the fourth quarter, we'll get some additional seasonal benefit out of the MSR. The payments and card spend will continue to pick up, especially the seasonal card spending consumer. We'll get the $10 million TRA benefit. And then we always see some pickup in both commercial banking and leasing in the fourth quarter that should both generate some additional income as well. That gets us to that little bit higher growth rate trajectory that you could see that's implied throughout in 3Q and 4Q.

Tim Spence:

Yeah, Scott, it's Tim. I'm happy to do that. And I think you hit on the most important thing here, which is the best thing for you to do is focus on the statements of fact as opposed to the press releases on this one. I think that by the Bureau's own statements of fact here, these were old issues. So one was nearly five years old, the other was nearly 10 years old respectively. There are things that we identified and reported. And in case of auto, we completely canceled the program before they ever even started their investigation. And I think while of course, we always take anything that impacts customers seriously, Fifth Third the size of the fines, which are a fraction of what you've seen in other places, probably speak for themselves in terms of the limited scope of the issues here. We elected to close these things out because given the fact that they were small in the past, it just didn't make sense to continue to spend more money litigating than it was going to spend to settle. So, you know, we put them in the rearview mirror. We have the one-time expense this quarter, and that's where it is going to stay. You shouldn't expect any incremental ongoing expense because these are issues that are so old, anything that needed to be done was already done from an ongoing [operational perspective] (ph).

Tim Spence:

Thank you.

Tim Spence:

Hi Mike.

Operator:

We'll go next to Ken Usdin at Jefferies.

Bryan Preston:

Yeah, absolutely. Thanks, Ken. Great question. You know, what we would tell you is that what it will create is, it will create some opportunity to be a little bit more aggressive on some of the rate cuts associated with the CDs and the promo portfolios that we've seen. Historically, when we've navigated through these down rate cycles, those first couple cuts on the consumer side do have a pretty decent impact on customer mentality and sentiment and your ability to create some sticky balances. We've been through this a few times now where we've seen the ability to convert those balances into a lower rate balance and cause them to stick around. And on the other side of that, the commercial balances, in particular the index balances, those are immediate impacts and will just move with the market. We have really no concern around that index strategy. It's another one that we've executed in prior cycles. I think we've done a nice job of kind of navigating and managing those balances up in those index portfolios as we've reached the grades. It gives us a lot of confidence in the ability to very quickly get those costs out.

Bryan Preston:

I would actually tell you that most of it is just the natural transition of the balance sheet in the business today. I think our NII story is actually pretty simple. Right now it's the continued fixed rate asset pricing and slowing deposit cost. And if you look at just the trends that we're laying out, you know, we're adding about $8 million a quarter right now, just on the natural repricing of the existing balance sheet. And you think with, we've talked a lot about $4 billion to fixed rate asset repricing. That's happening at about 200 basis points. That's $20 million a quarter. And then the deposit costs up 4 bps this quarter on $120 billion interest bearing book [versus 12] (ph) of incremental costs to take us down to that net 8. We get a little bit of continued slowing on deposit cost side. That can approach $10 million, $15 million, $20 million a quarter. Day count, we're going to pick up $10 million here in the third quarter. And then that sets us up for an exit rate where if you just take the 4 times the fourth quarter math, you're right around what is our record NII of [$58 million, $52 million] (ph). Throw on a little earning asset or loan growth on top of that and the path is there for us. That's what gives us confidence. The big wild card, like we always talk about, is just how competitive deposit pricing ultimately ends up being. But if we start to see rate cuts, we would expect to see some decent relief on the liability side.

Ken Usdin:

Got it. Thank you for that color.

Gerard Cassidy:

Hi, Tim. Hi, Bryan.

Gerard Cassidy:

Tim, Bryan, can you give us a little color? On slide 29, the transfers to non-accrual status of loans fell nicely this quarter and when you go back you know you give it -- give us the data back to the second quarter of 2023, and it's a meaningful drop from those levels. Any color that you can give us on what led to that drop? And then second, and I apologize if you addressed this already, on the commercial loan charge-off number that jumped in the quarter, were there any specific idiosyncratic loans that caused that to happen?

Gerard Cassidy:

Very good, thank you for the color. And then second, when you look at your Shared National Credit portfolio and you give us good details, once again on the Slide 25, the financial services slice of that portfolio, how much, if any -- is in sectors that is considered private equity or private credit? Because as we all know, it seems like the banking industry has been de-risked since the financial crisis and the private equity, private credit side of the equation might be taking on more of that risk. Do you guys have many loans to the Blackstone’s or the Carlisle’s or any of those types of companies and where there might be indirect exposure to that industry?

Gerard Cassidy:

Good, okay, good. Thank you again.

Tim Spence:

Thank you.

Bill Carache:

Thank you. Good morning. I wanted to follow-up on your credit commentary and ask for your thoughts on the longer-term trajectory of charge-offs given what you're seeing in both consumer and commercial. Crystal clear on all the sources of uncertainty that you highlighted, Tim, but if we assume that the soft landing scenario materializes and think about the loss content implicit in your loan book today, would you expect Fifth Third’s MCR rates to level off from here, drift a little bit higher, revert to 2019 levels. I know you can't give 2025 guidance, but any help on how you're thinking about that long-term trajectory would be super helpful.

Bill Carache:

Thanks, That's helpful. And then separately, you talked about some of the variables impacting the curve. Can you discuss how a Fifth Third’s position for either a flatter or a steeper yield curve environment?

Bill Carache:

Understood. Very helpful. Thank you for taking my questions.

Operator:

We'll go next to Erika Najarian at UBS.

Tim Spence:

Hi, Erika.

Bryan Preston:

Yeah, I would tell you that we are very focused internally on maintaining plenty of liquidity to deal with any uncertainty associated with potential rules, as well as the market. So that has just been a big driver of our positioning and why we've done that. But the other thing that it allows for us, yes it is a good liquidity risk management tool, but it does allow us to have a little bit more confidence on the interest rate risk management side as well, because we can be more aggressive on our liability management actions because of that cash position. So it really is the combination of that liquidity and liability management benefits that we are focused on and why we continue to keep those levels that we have. As rates come down, and as we get through that environment and see stability in the market from a liquidity perspective, we really have an ability to take that down over time. As you pointed out, it was a big increase year-over-year. The year-over-year increase was a 20 basis point impact on our NIM. So, getting back to more normalized levels would be a nice trend for us from a NIM perspective.

Tim Spence:

Sure. So, just to make sure that I'm clear, and I know you were, But I mean, dividend has nothing to do with the CFPB. So those are two separate issues. Right, right. Okay. Yeah. look, on the dividend front, we are believers that the best way to get growth is to attach yourself to long-term secular trends. So the focus on the Southeast was to get the bank linked to the demographic migration that was going to support the growth in that market. The focus on commercial payments has been about attaching ourselves to this trend of digitization in general and in particular the intermediation of these legacy workflows with software. And in the case of dividend and what we've elected to do on the project finance on the commercial solar side of the equation. The focus is on both the diversification of energy sources with a focus on renewable, and I think in particular in the case of dividend, the need that we are going to have across the country to have more distributed power generation and storage, if we're going to avoid rolling brownouts and other sorts of issues that come from the fact that we have a very old energy infrastructure. And in particular now with the explosion in data centers that are going to be required to support AI and otherwise, a lot of very power intensive commercial applications. So we view the residential solar and battery storage, as an important part of the way that our customers and people we don't do business with today are going to be able to meet their power needs in the future. And I actually think that for our products like this with an intermediate duration and a super prime credit risk profile, banks are the best source of liquidity, not the worst. The focus is just making sure that you do business with the best because you're right, the same way that in auto we're reliant on the quality of care that the dealer provides to ensure that you know our borrower has a good experience, we are reliant on the quality of the installer and you know the actions that we took shortly after acquiring dividend to refocus the business on the 150 best installers in the portfolio are going to continue to be, we think a very viable and high quality way to go to market.

Tim Spence:

Sure. There were some installer failures. As interest rates rose because the volume went down. I think as a matter of policy here, we take care of the customer. So if an installer is unable to complete a job, we complete it on behalf of the installers. We have done that in every case where we had an installer who was unable to complete a project and get it to PTO and you would expect that we – you should expect that we're going to continue to do that. That's the standard of care that we would provide for any customer inside the bank regardless of the channel that they came through regardless of the product. And so as those installer failures work their way through the system, we're going to take care of the customer.

Operator:

We'll go next to Manan Gosalia at Morgan Stanley.

Tim Spence:

No, I think the other issue that you're facing right now is you're actually not getting paid to extend your duration given the inversion of the yield curve. I mean, the 10-year rate this morning is 4.2%, but we're earning [5.5%, 5.40%, 5.5%] (ph) on the front end of the curve. And given our rate outlook, we just don't think it makes sense at this point to be adding duration, giving up earnings today when we think over the horizon that we are not sure that [4.20%] (ph) is a good entry point.

Bryan Preston:

We're looking for the spots where it makes sense to continue to evaluate where loan growth should come from. As Tim talked about, we're certainly not going to sacrifice on earning appropriate returns as part of this. But just given some of the confidence that we have in terms of that we think we are going to see a cut this year, that we are going to start to see some relief and we are starting to see a little bit of the animal spirits in the market start to build. Like our pipelines are looking better than where they were three months ago, six months ago. So we think there's going to be opportunity to continue to see some growth in those areas and feel good about positioning.

Operator:

We'll move next to Matt O'Connor at Deutsche Bank.

Matt O'Connor:

Hi, guys. There was an article earlier this week just talking about risk in the commercial bond market. And you guys have commercial real estate bond market that is. You guys have a good Slide on 43, just reminding all of us that a lot of it or most of it is agency. Can you talk to the non-agency CMBF and I guess kind of like almost like dumbed down what these [technical difficulty].

Matt O'Connor:

Just a line [technical difficulty] there thanks.

Matt O'Connor:

Okay, perfect. That's helpful. Thank you.

Christopher Marinac:

Thanks. Good morning. I wanted to ask about the commercial criticized and the fact that you had some of the charge-offs this quarter, would that improve those? And do you see any other kind of upgrade trends that could happen in future quarters?

Tim Spence:

Yeah, I think that the trend in criticized in general has actually been encouraging from my perspective. Greg, you may want to talk about this, but the only real growth we've seen in criticized are a few ABL facilities. If you look at it over the last 12 months, and we're well secured there and well within the collateral.

Christopher Marinac:

Great. Thank you both for the background. I appreciate it.

Tim Spence:

Welcome back.

Bryan Preston:

Yeah, I tell people here all the time that the first rule of whole is that you have to stop digging. So it is nice after many years of having brackets around the change in balance number for home equity to see a turn of the tide there. I would not anticipate that it's a big driver of our loan growth over the course of the next few quarters, not because we wouldn't like it to be, but if you look at the amount of spending and home improvement in general right now, just look at the big home improvement retailers, you'll see that that's a category that remains pretty depressed. That said, I do think that the right strategy here for homeowners who have these 3% fixed rate mortgages is going to be to improve where they are as opposed to moving. And home equity is a great way to do that. So we would like to see more growth in home equity. We like the credit quality there. It just -- it's going to be slow and steady here in terms of the pickup.

Tim Spence:

Absolutely.

Matt Curoe :

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

Matt Curoe:

Good morning, everyone. Welcome to Fifth Third's first quarter 2024 earnings call. This morning, our Chairman, CEO and President, Tim Spence, and CFO, Bryan Preston, will provide an overview of our first quarter results and outlook. Our Chief Credit Officer, Greg Schroeck, has also joined for the Q&A portion of the call. Please review the cautionary statements in our materials, which can be found in our earnings release and presentation. These materials contain information regarding the use of non-GAAP measures and reconciliations to the GAAP results, as well as forward-looking statements about Fifth Third's performance. These statements speak only as of April 19, 2024. And Fifth Third undertakes no obligation to update them. Following prepared remarks by Tim and Bryan, we will open up the call for questions. With that, let me turn it over to Tim.

Bryan Preston:

Thanks, Tim, and thank you to everyone joining us today. Our first quarter results were a strong start to the year, reflecting our balance sheet strength, disciplined expense and credit risk management and diversified fee revenue streams. We saw new household growth accelerate and new quality relationships in commercial post steady gains. For over a year, we have highlighted the importance of maintaining balance sheet strength and flexibility in an uncertain economic and interest rate environment. Our first quarter results evidence the strength of our current position, which should produce strong and stable returns across a wide range of economic outcomes. This approach has served us well as rate cut expectations are pushed out. As Tim mentioned, our profitability remains strong as we have the highest ROA and ROE, and among the best efficiency ratios of our peers that have reported to date in a quarter in which we have outsized seasonal compensation expenses. On a year-over-year basis, we were the most stable for both ROA and ROE, and among the most stable for NII and the efficiency ratio. Our consistent and strong earnings added 15 basis points to CET1 during the quarter inclusive of absorbing 8 basis points impact from the CECL phase in. Turning to the income statement. Net interest income for the quarter was $1.4 billion and consistent with our expectations. Interest-bearing deposit costs were well managed and increased only 1 basis point compared to the prior quarter. The balance sheet continues to be reflective of defensive positioning with optionality to navigate the changing economic and interest rate environments. Net interest margin improved 1 basis point for the quarter. Increased yields on new production of fixed rate consumer loans and day count benefits contribute to the growth and were partially offset by the deposit balance migration from demand to interest-bearing accounts. This increase in NIM is the first sequential improvement since the fourth quarter of 2022. Excluding the impacts of security gains and the Visa total return swap, adjusted non-interest income decreased 1% from a year ago quarter due to lower revenue in commercial banking, leasing and mortgage, partially offset by strong growth in treasury management and wealth and asset management fees, where both saw double-digit revenue growth over the prior year. The securities gains of $10 million reflected the mark-to-market impact of our non-qualified deferred compensation plan, which is more than offset in compensation expense. Adjusted non-interest expense decreased 1% compared to the year ago quarter due to our continued focus on expense discipline and the ongoing benefits from our process automation efforts. While expenses are down versus the prior year, we continue to invest in opening new branches and increase marketing spend to drive household growth. Adjusted non-interest expense increased 8% sequentially as expected due to seasonal items associated with the timing of compensation awards and payroll taxes in addition to $15 million of expense from the previously mentioned non-qualified deferred compensation plan. Moving to the balance sheet. Total average portfolio loans and leases decreased 1% sequentially. Average commercial portfolio loans decreased 2% due to lower demand from corporate banking borrowers and the average balance impact of last year's RWA diet, which reduced both total commitments and loan balances during the second half of 2023. Middle market loans increased during the quarter as we drive for more granularity and our winning private bank relationships. As Tim discussed, we saw solid middle market loan growth across our footprint. Period-end commercial revolver utilization was 36%, a 1% increase from the prior quarter, also driven by middle market. Average total consumer portfolio loans and leases were flat sequentially due to the overall slowdown in residential mortgage originations given the rate environment, offset by growth from solar energy installation loans and indirect auto originations. Average core deposits decreased 1% sequentially, driven primarily by normal seasonality within our business. Decreases in DDA balances and CDs were partially offset by increases in interest checking. By segment, average consumer deposits decreased 1% sequentially, while both commercial and wealth deposits were flat. Consumer deposits rebounded towards the end of the quarter to finish slightly higher than at the start of the quarter. As Tim mentioned, we are very pleased with the results of our multiyear Southeast branch investments, which are driving both strong household growth and granular insured deposits. DDA as a percent of core deposits was 25% as of the end of the first quarter compared to 26% in the prior quarter. Migration of DDA balances continued during the first quarter and we expect that trend to carry on in 2024, but at a slower pace than in prior quarters. We ended the quarter with full category 1 LCR compliance at 135% and our loan to core deposit ratio was 71%. The strong funding profile continues to provide us with great flexibility. Moving to credit. Asset quality trends remained well behaved and below historical averages. The net charge-off ratio was 38 basis points, which was up 6 basis points sequentially and consistent with our guidance. The ratio of early stage loan delinquencies 30 to 89 days past due decreased 2 basis points sequentially to 29 bps. The NPA ratio increased 5 basis points to 64 basis points. We have maintained our credit discipline by generating and maintaining granular high-quality relationships and by managing concentration risks to any asset class, region or industry. In consumer, our focus remains on lending to homeowners, which is a segment less impacted by inflationary pressures and have maintained our conservative underwriting policies. We continue to see the expected normalization of delinquency and credit loss trends from the historically low levels experienced over the last couple of years. From an overall credit risk management perspective, we assess forward-looking client vulnerabilities based on firm-specific and industry trends and closely monitor all exposures where inflation and higher for longer interest rates may cause stress. Moving to the ACL. Our reserve coverage ratio remained unchanged at 2.12% and included a $16 million reserve release, driven by lower end-of-period loan balances and modest improvements in the economic scenarios. We continue to utilize Moody's macroeconomic scenarios when evaluating our allowance and made no changes to our scenario weightings. Moving to capital. We ended the quarter with a CET1 ratio of 10.44% and we continue to believe that 10.5% is an appropriate near-term operating level. As a reminder, at the beginning of the quarter, we moved $12.6 billion of securities to held to maturity. This represented one quarter of our AFS portfolio and was done when the five- and 10-year treasury rates were below 4%. The move reduced AOCI volatility to capital due to our investment portfolio by around 50% during the first quarter. Our pro forma CET1 ratio, including the AOCI impact of the AFS securities portfolio, is 7.8%. We expect improvement in the unrealized securities losses in our portfolio given that 60% of the AFS portfolio is in bullet or locked-out securities, which provides a high degree of certainty to our principal cash flow expectations. Approximately 26% of the AOCI related to securities losses will accrete back into equity by the end of 2025 and approximately 62% by the end of 2028 assuming the forward curve plays out. Moving to our current outlook. We expect full year average total loans to be down 2% compared to 2023, consistent with our prior expectations. The decrease is primarily driven by the impact of the 2023 RWA diet on average balances as well as lower mortgage production due to the higher interest rate environment. While we expect full year average total loans to decrease, we expect average total loans in the fourth quarter of 2024 to be up 2% compared to the fourth quarter of 2023, with both commercial and consumer balances up low single-digits by the end of 2024. We are also assuming commercial revolver utilization remains stable. For the second quarter of 2024, we expect average total loan balances to be stable. We expect softness in commercial due to uncertainty on the interest rate and economic outlooks to be offset by consumer loan growth, which is expected to be up due to solar and auto originations. Our retail household growth and commercial payments growth remained robust in the first quarter, and those outcomes will drive deposit growth in 2024. However, we are mindful of potential economic and market headwinds for monetary policy. Therefore, we are forecasting full year average core deposit growth of only 2% to 3% compared to our 5% growth realized in 2023. While we expect DDA migration to continue given the high absolute level of interest rates, the pace of migration has declined. If rates remain at current levels, we expect to see the DDA mix dip below 25% during the middle of the year. Shifting to the income statement. Given the stabilization in our deposit costs and the benefit we are seeing from the repricing of our fixed rate loan book, we continue to expect the full year NII to decrease 2% to 4%, and as Tim mentioned, we expect the NII and NIM trough is behind us. This outlook is consistent with the forward curve as of early April, which projected three total cuts. However, our balance sheet is neutrally positioned so that even with zero cuts in 2024, we expect stability in our NII outlook. The primary risk to our NII performance would be a reacceleration of deposit competition. Our forecast also assumes our cash and other short-term investments, which ended the quarter at over $25 billion, remain relatively stable throughout the remainder of 2024. We expect NII in the second quarter to be stable to up 1% sequentially, reflecting the impact of slowing deposit cost pressures and the benefit of our fixed rate loan repricing. Our current outlook assumes interest-bearing deposit costs, which were 291 basis points in the first quarter of 2024, would increase about 6 basis points sequentially if we see no rate cuts. We expect adjusted non-interest income to be up 1% to 2% in 2024, consistent with our prior guidance, reflecting growth in treasury management, capital market fees and wealth and asset management revenue. We expect second quarter adjusted non-interest income to be up 2% to 4% compared to the first quarter, largely reflecting higher commercial banking revenue. Consistent with our prior guidance, we expect full year adjusted non-interest expense to be up 1% compared to 2023. Our expense outlook assumes continued investments in technology with tech expense growth in the mid-single digits and sales force additions in middle market, treasury management and wealth. We will also open 30 to 35 new branches in our higher-growth markets and close a similar number of branches in 2024. We expect second quarter total adjusted non-interest expense to be down approximately 6% compared to the first quarter due to the seasonal compensation and benefits cost in the first quarter. In total, our guide implies full year adjusted revenue to be down 1% to 2% and PPNR to decline in the 4% to 5% range. This outcome will result in an efficiency ratio of around 57% for the full year, a modest increase relative to 2023, driven by the decrease in NII. We continue to expect positive operating leverage in the second half of 2024. Our outlook for 2024 net charge-offs remains in the 35 basis point to 45 basis point range as credit continues to normalize, with second quarter net charge-offs also in the 35 basis point to 45 basis point range. We expect to resume provision builds in connection with loan growth assuming no change to the economic outlook. Loan growth and mix is expected to drive a $75 million to $100 million build for the full year with the second quarter build being approximately zero to $25 million. As we mentioned last quarter, our consistent and strong earnings provides us the flexibility to resume share repurchases of $300 million to $400 million in the second half of 2024, including $100 million to $200 million in the third quarter, assuming a stable economic and credit outlook and capital rules that are no worse than the current NPR. In summary, with our well-positioned balance sheet, disciplined expense and credit risk management and diversified revenue growth, we will continue to generate long-term sustainable value for our shareholders, customers, communities and employees. With that, let me turn it over to Matt to open up the call for Q&A.

Operator:

[Operator Instructions] Our first question comes from Mike Mayo from Wells Fargo. Your line is now open.

Tim Spence:

We can. Good morning, Mike.

Bryan Preston:

Thank, Mike. It's Bryan. Great question. I think one of the things on this front, we very early last year made the decision to grow deposits very aggressively. We viewed it as a very consistent theme with being focused on the long-term, focused on stability, and quite honestly, focused on returns. We viewed it as worst case. We're going to generate some low cost wholesale funding with no prepayment penalties. Best case, it gave us an opportunity to have 12 million interactions with prospects and customers. And we have a lot of confidence in our ability to win relationships, when we can get our team in front of our customers. And so with that, as we've moved into this more stable environment, there clearly was some costs as we brought those promo balances in, but it gives us an ability to actually manage and recycle interest expense where we're able to pulse offers through different markets, where we can basically harvest some savings and reintroduce that back into interest expense on new offers and ultimately have a lower net overall cost. We just feel like it's being very efficient with every dollar we're utilizing. As I mentioned in the guidance, there's certainly some risk that the competition can reaccelerate, but it does feel like overall deposit competition did soften at the end of last year and that continued to [indiscernible].

Tim Spence:

We definitely took advantage of the fact that we have I think at this point with the investments that have been made down there, Mike, a higher natural share than we did existing market share rights. So, we were able to use the Southeast as a mechanism to raise deposits without repricing existing relationships to the same degree that we would have if we were using those rate offers in markets where we had high existing shares. I think though, what's important is that what's driving the growth in the Southeast is the household growth. And those relationships are that vast majority momentum banking relationships, which means the core deposit product is a non-interest-bearing deposit product. So, the 7% growth in the Southeast when you break it apart, the research triangle is like 25% year-over-year. Most of the major markets in Florida were in the mid to high teens, Tampa 11% or 12%, Broward County and north in Southeast Florida 17%, 18% year-over-year household growth rates. So, we're gaining share in a way that then allows us to make decisions about whether we want to move more of the deposit wallet where obviously rate is part of it, or where then we have the opportunity to introduce the fee-based businesses on the consumer side of the equation, and in commercial third of the relationships that we added in treasury managers, we mentioned this last quarter, were payments led. So, they're not driven by deposit rates or credit as the entry point.

Tim Spence:

Yeah.

Scott Siefers:

Good morning, everyone. Thanks for taking the question. Was hoping you could spend a moment discussing on demand trends in more detail. Kind of soft for the group, though, you noted some specific states that have generated stronger middle market growth. And then maybe within the response, if you could also please discuss the outlooks for the specialty businesses such as dividend and provide?

Scott Siefers:

Okay. Perfect. Thank you very much. And then, Bryan, I was hoping you could discuss -- I know that the numbers aren't huge here, but maybe you could discuss sort of the fluctuations in kind of reserve building versus reserve releasing outlook. I know it sounded like from your comments it'll be a little reserve build in connection with loan growth, but I think you were among the fewer sort of mid quarter when you said maybe a little release. So, just curious sort of the puts and takes as you see now.

Scott Siefers:

Perfect. Okay. Wonderful. Thank you very much.

Gerard Cassidy:

Hello. Can you hear me?

Gerard Cassidy:

Good morning, Tim. Yeah, thank you. Bryan, just to pick up on your comments about Moody's and the outlook, can you share with us how it's kind of evolved over the last two or three quarters? And what is their current outlook for the US economy in '24? Are they still calling for a slowdown or a recession, or are they actually in the camp now that we're going to have positive real GDP growth for 2024?

Gerard Cassidy:

Got it. Thank you. And then, Tim, coming back to the growth, particularly in the commercial side, you gave us some very strong numbers, of course, particularly in your Southeast franchise. Can you take it a little deeper or give us a little more color? Once you bring on these clients like you mentioned about the customers that came in this quarter based on payments, how long does it take to get them to a return that you find -- passes your hurdle rate and you guys are happy with it? Is it a 12-month, 24-month period? Can you walk us through that kind of waterfall on how you get there? How many more products do they need in addition to payments or in addition to a loan to get them to your return levels?

Gerard Cassidy:

And real quick, Tim, just to follow-up on that payments, the new customers that you've referenced.

Gerard Cassidy:

Are you -- are those customers that don't have a payments product already or are you taking them from a fintech company or a competitor?

Gerard Cassidy:

Appreciate all the color. Thank you, Tim.

Operator:

Question comes from Ebrahim Poonawala from Bank of America. Your line is now open.

Tim Spence:

Good morning.

Tim Spence:

Yeah. Ebrahim, thank you. And as you know, we're big believers in accountability here. So, I actually asked Matt to go back and look through the Q&A in the scripts from prior quarters to see when we got the first question on higher for longer rates, and you were the one that asked it, so -- in the fourth quarter of '22 earnings call. What we said was we thought the market was overly optimistic on how quickly inflation would come down, and I don't remember what event it was last December. But the comment that I made then was that we thought either the bond market or the equity market were wrong. The question was just which one. And then, if we had to guess, it was bonds. So, I think for certain we know now that the bond market was the side of the trade that was wrong at the beginning of the year. The factors that have influenced our more cautious outlook are pretty much exactly the same today as they were the last time we talked about it. We just view the current fiscal and monetary policies to be at odds and that the fiscal side in particular is unsustainable and inflationary over time. And the longer it goes on, right, the more that the Fed will need to remain higher for longer, which puts pressure on the long end of the curve. And then, I think as a knock on to that, we know that longer rates stay elevated, the more likely it is that you see adverse consequences either in asset prices or in credit performance. The big question is just how long does that take, right? When does that play out? And that is an area where we have low conviction. So, what we are trying to do and what we will always try to do in low conviction environments is be liquid, be neutral and be diversified. Because historically, when you had a change, things slowly but suddenly or slowly then suddenly sort of a dynamic plays out in terms of big environmental shifts. On capital priorities, we do continue to expect to buy back between $300 million and $400 million in shares in the second half of the year. Our level of confidence in that just comes from the strength of the capital generation of the franchise. As Bryan and I both mentioned, we had the highest ROE and the most stable ROE, if you look at it on a year-over-year basis of any of our investor peers, and that is the basis of the confidence. If the environment ends up softening and we don't see the loan growth, that will then create a capital opportunity because the capital need to support organic growth won't be there. So, you do have a buffer here if we do see a turn in the environment and softening in loan growth expectations. And if not, then we have more than enough capital generation to do $300 million to $400 million in second half of the year.

Tim Spence:

Yeah, absolutely. So, we got into Texas in 2012 when we formed our energy vertical. We have deeply experienced folks there who have done a really excellent job. And then, over the course of the past several years added middle market offices in Houston and Dallas, where we were able to attract very strong talents from trillionaire banks, who understand the focus we have on whole relationships and we're able to do what I think for us is a little bit unique, which is a heavy focus on C&I and then the delivery of the value-added services, whether they're capital markets or payments as opposed to a focus on either loan-only relationships or buying participations or investor real estate or otherwise. That business now also has specialty products, so ABL equipment leasing coverage. It has coverage dedicated treasury management. It has wealth and asset management support and then a non-public branch office, which allows us to do things on the pub fund side. What it does not have today is any retail banking presence. I wouldn't rule that out, but those are very large markets that we're talking about here. They're not markets of between 0.5 million and 3 million people, which has been the expansion strategy in the Southeast. So, any effort that we elect to make with branches in those markets will be a thing that we communicate to you in advance, because we'll be talking about committing 50 to 100 branches in a single city in many cases as opposed to what we're doing in the Southeast right now, which is really building 10 to 25 at an individual market level and getting to that top five presence that we know we need to be able to support the primary banking model.

Operator:

Question comes from John Pancari from Evercore. Your line is now open.

Tim Spence:

Good morning.

Bryan Preston:

Yeah, John, thanks for the question. It's one where the main thing that I would highlight for you is that we continue to have very strong benefits from the fixed rate asset repricing at this point. And you can see this -- for us, you can see that in our actual numbers. Year-over-year our indirect secured consumer business, which is primarily our indirect auto business, that's up 100 basis points year-over-year on a $15 billion portfolio. So, $150 million of annualized benefit in a year where we were actually constraining production in auto because of the RWA diet. So, those businesses we have, those medium-term fixed rate lending assets, whether it's the auto business, RV Marine, whether it's solar provide, generate a lot of power for us in terms of earnings capacity. Over the next 12 months, we'll have enough fixed rate assets reprice that will generate $350 million, $400 million plus of annualized NII benefit. So, even in a higher rate environment and with the curve selling off some, that benefit is increasing for us. So that is a good outcome for us that helps support and offset some continued migration from a DDA perspective, as well as some continued forecasted increases in deposit costs overall. We're not making any assumptions that the deposit environment and the competition and the increasing cost is over, but it is definitely moderating. From a NIM perspective, we do expect positive NIM from here as well. We're only talking about a couple of few basis points a quarter trajectory. A big wild card on the magnitude of the NIM increases just ultimately is where the cash position ends up. If we continue to have really strong performance out of our deposit franchise above the 2% to 3% that we're guiding to, NIM will be a little bit lower, but NII will be better as a result of that. But overall, we feel really good about the absolute positioning.

Greg Schroeck:

Yeah, great. Thanks. Great question. So, of the $59 million increase that we saw in NPAs this quarter, $49 million of it was in commercial, two names, not in the industries that you had indicated. We had a retail trade name and a senior living trade name. So, we are continuing to see stress on the healthcare side, specifically in the senior living. That's not a huge portfolio for us and we think we have our hands around it, continue to review that portfolio on a consistent basis. So, not overly concerned. The thing that we have been consistently saying and we continue to see is we just -- we are not seeing trends by geography, by product, by industry. Our issues that have bubbled up have been more episodic and we've been able to deal with those episodic events on a quarter-by-quarter basis. So, I am not expecting to see a linear increase in our NPAs. To your last question, I still feel very good about the guidance. Bryan talked about earlier, 35 basis point to 45 basis point for the year based on -- again, Tim mentioned our commercial real estate portfolio continues to perform very, very well. The rest of our C&I borrowers continue to perform well. They've done a nice job with expense cutting. They've done a nice job passing along pricing. They're operating about as efficiently as we've seen them. We're taking a cautious view as well, not sure where rates are going to go. So, we're not seeing a lot of CapEx. But overall, we like the behaviors of our C&I portfolio, and I think the results of our commercial real estate portfolio speak for themselves.

Tim Spence:

Absolutely.

Ken Usdin:

Thank you. Good morning. Just want to follow-up with Bryan. Bryan, you mentioned the annualized dollar impact from those fixed rate securities and loans. I think you said previously that was $12 billion. I'm just wondering if you have an understanding of what you know will be also repricing in '25, and is that -- I would assume that would also then be incremental to that annualized benefit you referred to earlier?

Ken Usdin:

Okay. And then also you mentioned keeping the cash and securities at around the same level. Can you talk about just how you're preparing for liquidity rules and what that will mean in terms of that -- how you think about the mix of -- across portfolios and the amount of cash you want to keep?

Ken Usdin:

Okay. Thank you, Bryan.

Vivek Juneja:

Thanks. Tim and Bryan, a question for you on the Southeast. How much do you have in deposits there now? And what are you doing in terms of consumer side loans? Where do those stand relative to deposits?

Bryan Preston:

Yeah, absolutely. We've got about overall about $31 billion in deposits in the Southeast now. About -- over half of that relates to the consumer franchise. So, we're doing very strong in consumer on that front. And as Tim mentioned, we are -- it is a net provider of funding. We only have about $18 billion worth of loans in the Southeast.

Bryan Preston:

Yes.

Vivek Juneja:

Separate question. Solar, I noticed your growth has slowed as you've been indicating. Any update on what you're thinking in terms of originations, loan growth as well as credit?

Greg Schroeck:

And on the credit side, the solar dividend credit losses are performing right as we model right around 1.3%. We actually think we'll run a little bit better for the remainder of this year. Early volume within the portfolio is seasoning. So, we saw a little bit of seasonality this quarter, but we feel good about what we're seeing. And we certainly have more optimistic view for the rest of this year.

Vivek Juneja:

Thanks.

Manan Gosalia:

Hey, good morning. I wanted to touch on deposit competition. You compete with several of the money center banks in several markets. How are you thinking about deposit competition as QT continues, as RRP balances continue to decline and the focus shifts back to bank deposits? How do you think deposit competition will trend in that environment?

Manan Gosalia:

Got it. And then maybe a bigger picture question. Tim, in your annual letter, you talked about rationalizing the business model in response to the tougher regulatory environment. You used the RWA data as an example. Bigger picture, what do you think the evolution of the model for Fifth Third and other banks of your size will look like going forward? Maybe there's more partnerships with private credit or there's a pivot to more fee-based businesses. But in what ways will Fifth Third look different in five or seven years from now versus today?

Manan Gosalia:

Very helpful. Thank you.

Christopher Marinac:

Hey, thanks. Good morning. Just wanted to ask about possible changes on risk grades in criticized and classifieds. I know it might be premature to see anything upgraded, but just curious on the path of those that you saw and how that may evolve this year.

Christopher Marinac:

Great. Thank you for that. And just a quick follow-up. I mean, the loss content ultimately is reflected in the reserve. So that would have to change a lot for you to kind of change your guide on reserve overall?

Tim Spence:

Thanks for that, Chris. I think we don't have any other questions in the queue, but we'd be remiss if we didn't say congratulations to [Erica] (ph) and her family since she wasn't able to join us today before we wrap up our call.

Operator:

Thank you for everyone attending the call today. We all hope you have a wonderful day. Stay safe.

Matt Curoe:

Good morning, everyone, and welcome to the Fifth Third's Fourth Quarter 2023 Earnings Call. This morning our Chairman, President, and CEO, Tim Spence; and CFO, Bryan Preston will provide an overview of our fourth quarter results and outlook; our Chief Operating Officer, Jamie Leonard and Chief Credit Officer, Greg Schroeck have also joined for the Q&A portion of the call. Please review the cautionary statements in our materials, which can be found in our earnings release and presentation. These materials contain information regarding the use of non-GAAP measures and reconciliations to the GAAP results, as well as forward-looking statements about Fifth Third's performance. These statements speak only as of January 19, 2024, and Fifth Third undertakes no obligation to update them. Following prepared remarks by Tim and Bryan, we will open up the call for questions. With that, let me turn it over to Tim.

Bryan Preston:

Thanks, Tim, and thank you to everyone joining us today. 2023 was a very different year than what we were expecting 12 months ago. For Fifth Third, our success in outperforming this year was driven by our intentional actions to create and maintain flexibility for navigating uncertainty. As we enter 2024, we are very pleased with the results from 2023 and how we continue to be well-positioned for a wide range of economic outcomes. We have optionality in our balance sheet and diversification on our business mix that will allow us to adapt to changing environments. As Tim mentioned, achieving this positioning requires discipline and years of deliberate investments. Our full-year financial performance in 2023 benefited from this long-term investment. Fifth Third delivered industry-leading deposit growth of 5%, record revenue of $8.7 billion, and 100 basis points of capital accretion during the year, all while maintaining expense and credit discipline. We delivered another solid quarter to end the year. Adjusting for the FDIC special assessment and the other discrete items listed on page two of our release, return on assets was 1.3%, RoTCE was 17%, and our efficiency ratio was 55%. Additionally, we completed our risk-weighted asset diet in the fourth quarter, which reduced RWA by 3%, which was a little more than we previously estimated. The diet combined with our strong earnings led to a nearly 50 basis point increase in CET1 during the quarter, which ended at 10.3%. This capital accretion combined with the rally in market rates during the fourth quarter resulted in our pro forma CET1 ratio including the AOCI impact from unrealized losses on AFS securities, increasing to 7.7% at year-end, well above the 7% minimum. Net interest income for the quarter was $1.4 billion, which was consistent with our expectations. While NII continues to be impacted by the increasing cost of deposits, due to higher market interest rates. We've been able to build a robust liquidity position by generating peer-leading core deposit growth. Our core interest-bearing deposit costs increased 24 basis points sequentially, reflecting a cycle-to-date interest-bearing core deposit beta of 54% in the fourth quarter. We believe maintaining significant liquidity on balance sheet. It's a prudent decision given the uncertain economic and regulatory environments. Our short-term investments, which are primarily comprised of our cash at the Fed increased $8.6 billion in the fourth quarter on an average basis and drove all of the 13 basis points sequential decrease in NIM. Excluding the impacts of securities gains losses and the Visa total return swap, adjusted non-interest income increased 3% sequentially due to the growth in commercial banking, mortgage, wealth, and card and processing revenues. As well as the normal fourth quarter impact of the CRA. The growth in commercial banking fees was driven by strong institutional brokerage and improved corporate bond fees, partially offset by lower lease from marketing revenue. Fourth quarter non-interest income was also impacted by the decision to eliminate our extended overdraft fee, which was the driver of the decrease in service charges on deposits. Compared to the prior year, non-interest income decreased 3%, primarily due to a $25 million reduction in CRA revenue. Adjusted non-interest expense increased 2% sequentially, primarily driven by the impact of the non-qualified deferred compensation mark-to-market, which is mostly offset in securities gains losses. Excluding the impact of the NQDC mark, which was a $17 million expense in the fourth quarter compared to a $5 million benefit in the prior quarter, expenses were flat sequentially. Compared to the prior year, fourth quarter expenses were down 1%, which reflects our ongoing commitment to expense discipline, Tim mentioned earlier. Moving to the balance sheet. As expected, total average portfolio loans and leases decreased 2% sequentially. Most significantly driven by the 3% decrease in average total commercial loans. Our corporate banking business experienced the biggest reduction due to the RWA diet. With period-end, corporate banking total commitments decreasing 6% and unused commitments decreasing 4%. Period end, the commercial revolver utilization rate was 35%, a 1% decrease from the prior quarter. Average total consumer portfolio loans and leases decreased 1% sequentially due to our intentional pullback in indirect auto and the overall slowdown in the residential mortgage originations given the rate environment, partially offset by growth from dividend finance. Average core deposits increased 3% sequentially, driven by the growth in interest checking, money market and customer CD balances. DDA migration is showing signs of deceleration with fourth quarter showing the smallest dollar decline in DDA balances since the onset of the rate hiking cycle, even when adjusting for normal seasonal strength at year-end. DDA as a percent of core deposits were 26% for the quarter compared to 28% in the prior quarter. In addition to the migration impact, this measure is negatively impacted by the strong interest-bearing core deposit growth from new consumer and commercial relationships. By segment, average commercial deposits increased 5% sequentially while both consumer and wealth deposits increased 1%. As a result of our balance sheet positioning, RWA diet and success growing deposits, we achieved a loan to core deposit ratio of 72% at year-end, which continues to rank as the best compared to our regional peers. As Tim mentioned, we ended the year with full Category 1 LCR compliance at 129%. The strong funding profile provides us with great flexibility as we enter 2024. Moving to credit. Asset quality trends remained strong and below historical averages. The net charge-off ratio was 32 basis points which was down nine basis points sequentially and consistent with our guidance. 30 to 89 day delinquencies are flat compared to the end of 2022, the NPA ratio increased eight basis points to 59 basis points, but remains below our 10-year average of 65 basis points. We will maintain our credit discipline, focusing on generating and maintaining granular high-quality relationships. In consumer, we remain focused on lending to homeowners, which is a segment less impacted by inflationary pressures and have maintained our conservative underwriting policies. However, we are beginning and expect to continue to see normalization of delinquency and credit loss trends from the historically low levels experienced over the last couple of years. From an overall credit risk management perspective, we continue to assess forward-looking client vulnerabilities based on firm specific and industry trends and closely monitor all exposures where inflation and higher for longer interest rates may cause stress. Moving to the ACL, while our reserve coverage increased one basis point sequentially to 2.12%, the ACL balance decreased by $41 million due to lower period-end loans, which was the primary driver of the release. We continue to utilize Moody's macroeconomic scenarios when evaluating our allowance and made no changes to our scenario weightings. Our capital build is pacing ahead of the expectations we set at the beginning of the RWA diet. We are highly confident in our ability to build our CET1 ratio to 10.5% by June 2024. As Tim mentioned, on January 3rd, we made the decision to hold $12.6 billion of securities until maturity, resulting in the reclassification to HTM during 2024. This decision reduces the risk of potential capital volatility associated with investment security market price fluctuations under the proposed capital rules. We continue to expect improvement in the unrealized losses in our remaining AFS portfolio, resulting in approximately 32% of our current loss position accreting back into equity by the end of 2025 and approximately 66% by 2028, assuming the forward curve plays out. After the transfer to HTM, 65% of the remaining AFS portfolio is in bullet or locked out securities which provides a high degree of certainty to our principal cash flow expectations. We continue to believe that 10.5% is an appropriate near-term operating level for our capital. And as Tim mentioned, we expect to resume share repurchases during the second half of 2024, assuming the economic environment remains stable and the capital rules are finalized, consistent with the NPR. Moving to our current outlook. We expect full year average total loans to be down 2% compared to 2023, with the decrease primarily driven by the impact of the RWA diet on commercial loans and indirect consumer as well as lower mortgage production due to the higher rate environment, partially offset by the continued growth of dividend and provide. While we expect full year average total loans to decrease, we expect average total loans in the fourth quarter of 2024 to be up 2% compared to the fourth quarter of 2023. Commercial balances are expected to be up low single-digits by the end of 2024 and dividend originations are projected between $2.5 billion and $3 billion for the full year. We are also assuming commercial revolver utilization remained stable. For the first quarter of 2024, we expect average total loan balances to be down 1%, again, driven by the full quarter impact of the RWA diet. Both commercial and consumer loans should be down around 1%. Dividend finance originations are projected to be $400 million to $500 million in the first quarter. Total loan balances should be relatively stable throughout the first quarter. We expect deposit growth to continue during 2024 with full year average core deposits increasing 2% to 3%. While we expect DDA migration to continue given the high absolute level of interest rates, the pace of migration will be sensitive to the path of the Fed funds rate in 2024. If rates remain at current levels, we could see the DDA mix dip below 25% by the fourth quarter of 2024. However, we would expect to show a more stable composition if the more aggressive rate cut forecast were to be realized. Shifting to the income statement. Given the impact of the RWA diet on average loan balances, and the impact of higher deposit costs, we expect full year NII to decrease 2% to 4%. Our forecast assumes our security portfolio remains relatively stable and our cash levels began a slow, but steady decrease throughout 2024. This outlook is consistent with the forward curve as of early January, which projected six total rate cuts. Given the uncertainty regarding the rate outlook, our balance sheet is positioned such that even with fewer rate cuts, such as the three cut scenario being projected by the FOMC, we would expect to see only a modest deterioration in our NII outlook and would still fall within our full year guidance of down 2% to 4%. We expect NII in the first quarter to be down 2% to 3% sequentially, reflecting the impact of the lower average loan balances, a lower day count in the quarter and higher deposit costs. Our current outlook assumes interest-bearing core deposit costs, which were 289 basis points in the fourth quarter of 2023, increase 5 to 10 basis points in the first quarter, a deceleration from the 24 basis point increase experienced in the fourth quarter. With rate cuts forecasted to begin in late March and continue through the end of the year, we would expect deposit costs to decrease throughout the remainder of 2024. Under this outlook, the terminal beta for the rising rate cycle would be in the mid-50s for interest-bearing core deposits. We continue to believe we are at our NIM trough in the fourth quarter of 2023. However, another quarter of outperformance in deposit growth resulting in a higher-than-expected cash position, while a good outcome could impact NIM by a few more basis points. Barring a significant change in economic outlook, we would expect NII to stabilize and then begin growing sequentially during the remainder of 2024. We expect adjusted noninterest income to be up 1% to 2% in 2024, reflecting continued growth in treasury management revenue, capital market fees and wealth and asset management revenue partially offset by the full year impact of the elimination of our extended overdraft fee. We expect mortgage origination will remain muted in 2024 and net servicing revenue to decrease modestly as the servicing portfolio UPB continues to amortize lower. Adjusted other noninterest income, which excludes the impact of the Visa total return swap, is expected to decline by over 15% as TRA revenue will decrease from $22 million in 2023 to $10 million in the fourth quarter of 2024, and we are not including any large onetime private equity gains in our forecast. We expect first quarter adjusted noninterest income to be down 3% to 4% compared to the fourth quarter excluding the impacts of the TRA, largely reflecting seasonal factors. Normal seasonal items include lower capital markets activity and M&A activity partially offset by seasonal strength in wealth from tax planning. We expect full year adjusted noninterest expense to be up around 1% compared to 2023. Our expense outlook assumes continued investments in technology with tech expense growth in the mid to high single digits and sales force additions in middle market, treasury management and wealth. We will also close 29 branches in 2024 to offset costs associated with the 31 new branches opening in our high-growth Southeast markets. We expect first quarter total adjusted noninterest expense to be up around 8% compared to the fourth quarter. As is always the case for us, our first quarter expenses are impacted by seasonal items associated with the timing of compensation awards and payroll taxes. Excluding the seasonal items, expenses would be flat in the first quarter. In total, our guide implies full year adjusted revenue to be down 1% to 2% and PPNR to decline in the 4% to 5% range. This outcome will result in an efficiency ratio of around 57% for the full year, a modest increase relative to 2023, driven by the decrease in NII. As Tim mentioned, we expect positive operating leverage in the second half of 2024 compared to the second half of 2023. Moving to credit, we continue to expect 2024 net charge-offs to be in the 35 to 45 basis point range as credit continues to normalize with first quarter net charge-offs in the 35 to 40 basis point range. As we return to loan growth, we expect to resume provision builds. Assuming no change to the economic outlook, loan growth and mix is expected to drive a $100 million to $150 million of provision build for the year, with the first quarter being in the $0 to $25 million range. The provision build over the last three quarters of the year should be fairly even. In summary, 2024 is expected to be a year of transition as we begin the shift to a rate cutting cycle with our well-positioned balance sheet, disciplined credit risk management and commitment to delivering strong performance through the cycle, we will continue to generate long-term sustainable value for shareholders, customers, communities and employees. With that, let me turn it over to Matt to open the call up for Q&A.

Operator:

Thank you. [Operator Instructions] Your first question comes from the line of Scott Siefers of Piper Sandler. Your line is open.

Bryan Preston:

Thanks, Scott. Great question. We tell you that obviously similar to what we've seen from a rising rate perspective. The commercial and the wealth betas in particular, were -- have come through recently at a much higher level. We're in the range of probably low to high 80s from a beta perspective in both of those businesses. Cumulative betas have started to reach that point. So we're going to get a lot of repricing out of those portfolios as rates move lower. To give you a little bit of perspective, our indexed commercial deposits right now are up around $30 billion. So that gives us a lot of confidence in our ability to get some price out of that book. The consumer book is one that the betas -- the cumulative betas in that book is kind of in the mid-30s right now. It certainly moved up from a marginal perspective and we continue to have a lot of optionality between our promos and exceptions as well as what we've done from a CD perspective. We're going to be able to get rate cuts out of those portfolios as well. Our CD book, which is $10 billion now is fairly evenly laddered across the year with about 25% maturities across each quarter. We've been very careful as part of our pricing strategy to make sure that we could be able to reprice those down quickly as the rate environment were to change.

Timothy Spence:

Yes. Scott, it's Tim. I'll take that one. I mean, look, when we talk to customers today, I think in general, they're cautious but not pessimistic. So rates in the election uncertainty are definitely weighing on the appetite for new investments in the near term. I don't know of anybody who stopped an existing program or an existing investment, but they are being very careful about new expansion. So I don't expect that we're going to see a big pickup in loan demand. And I'm sure we'll get a question later on the economy. We're not expecting robust growth to drive the top line there. It's going to have to come from market share gains. So -- in our world, the key areas of investment there are very clearly in the middle market, where we have been very focused in driving more granularity into the C&I portfolio. Our middle market loan production this past year was nearly 50-50 split between the Midwest markets, including Chicago and then the Southeast markets and our expansion markets in California and Texas. And our sales force in those locations across the entire footprint is going to be up about 20% over a three-year period here for 2024. So we've got a good pent-up sales capacity there and high activity levels that will drive the outcome. And then I think the other area of strength has been in the health care and telecom, media and technology verticals. And then in the fintech platforms, right, the continued seasoning in of both provide and dividend portfolios. The last thing is the absence of a negative here, which is the auto business, our deliberate rundown of the outstandings in the auto business have created a little bit of a drag on loan growth. And the combination of credit unions being a little bit more funding constrained than all the banks who exited have created a much more favorable environment for auto originations. So we expect volumes there to come up. We're generating volume today with a weighted average FICO north of 780 and very attractive risk-adjusted spreads and that should stop the headwind and give us a more stable platform from which we'll get growth through the rest of the year.

Timothy Spence:

Absolutely.

Gerard Cassidy:

Hi, Tim. Hi, Bryan.

Gerard Cassidy:

Congratulations, Bryan, on a new role. And if Jamie is listening, congratulations to him as well.

Gerard Cassidy:

I hear that laugh. That's great. Here's like and you touched on it Tim about the economy -- many of the banks, you as well, are following the forward curve for rates, which is understandable. And there continuing to be signs that the US economy is proving more resilient than we all expected. And so the question is this for the upcoming year, what if we're all wrong -- and all of a sudden, we see 2% plus real GDP growth, the Fed doesn't move on rates, maybe one or two cuts like what we saw in '95. And credit remains even better. How does that affect the way you approach what you've set up for '24? I know Bryan gave us some color on the different interest rate scenarios. But wants just come into this year, at the end of this year, it proves to be much stronger than any of us are expecting and inflation stays around 3%.

Bryan Preston:

Yes, absolutely. I think the scenario that you're laying out there with fewer Fed cuts, continued strength from an economic perspective, that's not a remote scenario in our view. We feel like that is something that could very easily happen, especially in the first half of the year as we continue to see potentially some strong resiliency from the consumers. What that means for us, and it's a big part of the actions that we've taken thus far is that we think that could cause the long end of the curve to move up a little bit, that would actually be beneficial for us as we get an even greater benefit from the fixed rate asset repricing. We've talked previously that full year impact of fixed rate asset repricing should generate about $300 million of annualized run rate NII improvement. And that number would look even better if we saw that long and move up. It also is part of the rationale associated with shifting some of our securities into HTM. So a stronger economy is one that we're actually would obviously always hope for because we're very well positioned for that. To quote Jamie, you can't spell flexibility without FITB. That's something that we have been very focused on and recognizing that we can be wrong on both sides, the economy weaker or stronger, and we're well positioned for that.

Timothy Spence:

Yes. I mean I think it's a combination of things, Gerard. The first one is we've been very deliberate to select a few places and invest multiyear when we think about how we invest strategically, right? So the Southeast is obviously a key point of focus there. And I know a lot of people are investing in the Southeast, but it bears reminding that we've been in nearly every one of the markets down there for more than 15 years. And we're not running small LPOs. We have more than 200 client-facing people in those markets across commercial banking and wealth management alone. And then like another 1,700 that said in more than 300 branches. And the brand is seeded in those markets. So those investments when you make them, you make the investment in year one, but they don't actually hit the sort of peak benefit until year five or six. So you have this accumulation I guess a coiled spring for lack of a better term that supports then more sustained growth. We have the same benefit in the Midwest in Chicago, in particular. I mean, we added nearly 100 new quality relationships in Chicago in the middle market alone last year and have been gaining share pretty steadily at least if you use the FDIC deposit share measures as the guide. In Chicago because we're still seeing the benefits that we got out of the combination between Fifth Third and MB in those markets. The other area that we are winning, where we win is through the strength of the treasury management and the capital markets platform, which really is a middle market-focused offering for Fifth Third. About 1/3 of the new quality relationships we added in treasury management last year were treasury management only. So as opposed to being a follow-on product that you deliver into a customer that you lend money to, they're actually contributing to the relationship acquisition. And that's an engine that just wouldn't have existed here in the past, and I think still doesn't exist inside most of our peers.

Operator:

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

Mike Mayo:

Hey, I'll ask a question about the quarter, then requeue for bigger picture question. But what you don't hear too many regionals talking about buybacks like you are right now. So -- but you have a lot of numbers you're tossing out there. You have a 7% CET1 minimum, 7.7%, 10.5% by mid-year. It might be better on the buyback of $300 million to $400 million depending on the rules. So I guess, I just want to be a little more concrete. So -- are you sure that you want to be talking about buybacks as much as you are now? And what gives you confidence in doing so? And then the other side of that is you say if the rules get eased, then you might be able to buy back more than the $300 million to $400 million. So just give us the kind of the whole range of options, if you could.

Timothy Spence:

Yes. And Mike, I think the one thing I would add to what Bryan said we've tried to be very clear and transparent that our belief is it's always better if you have to make a change to adapt to new regulation, it's better to get there first. We did that as it related to consumer deposit fees, right, and very deliberate about being early there because we just viewed those profit pools as being unsustainable. I think we were clear this past summer and through the fall and winter that our intention on putting ourselves on the RWA diet and focusing as much as we did on building liquidity was that we wanted to get to the rules there first because of the flexibility that it provided. So we ended the year at roughly 10.3 in terms of the CET1. We said we wanted to get to 10.5. We'll get there just based on the current run rate in the middle of the second quarter, you had to pick a particular spot. And that gives us then the ability to return to share repurchases subject to the environment not changing, maybe a little bit earlier than others.

Timothy Spence:

Yes.

Mike Mayo:

Okay. Thank you.

Ebrahim Poonawala:

Good morning.

Ebrahim Poonawala:

I guess two questions. One, first on trying to make sense of the loan-to-deposit ratio at 70% relative to Fifth-Third's history prior to the pandemic. And even relative to some of your peers -- is a 70% loan-to-deposit ratio, the new normal for the bank or trying to understand if there's anything idiosyncratic about the deposit base that requires you to hold and operate with a lower loan-to-deposit ratio.

Ebrahim Poonawala:

Got it. And I guess a separate question maybe for Tim. I think you tried to sort of draw some distance between you and some of your peers around the Southeast technology investments. If we take those statements and account for how do you think this should reflect into should fiscal become a higher growth bank relative to these banks, a more efficient bank? Like what should we be measuring you against and do we start seeing that this year and next year? Or is this more of a longer-term process?

James Leonard:

Yes, Ebrahim, on maybe to tie your two questions together, on the loan-to-deposit ratio, part of the improvement has been the strong deposit growth we've been able to get both from the RWA diet, which I talked about a couple of quarters ago, just how customer reaction resulted in more deposits and a better share of wallet. And that continued in the fourth quarter and commercial deposits, you see in the numbers are up nicely. And then on the Southeast, we actually grew deposits in the Southeast, 5% just in the fourth quarter. And so you do get that growth in the numbers, but the Midwest still grew in total about 1%. So we've got a very nice balance here of Midwest and Southeast. And I was down in South Carolina on Wednesday, we opened our 10th branch in South Carolina this week and have plans to do 25 more over the next five years. So I think you'll continue to see the benefits of the investments over the last three years as we continue to really expand that Southeast presence.

Operator:

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

Bryan Preston:

Yes, absolutely. We're turning to a normal curve where we would have, I'd say, a 3% front end and maybe 100 to 200 basis points of spread between the front end and the 10-year rate is a very ideal environment for us because, one, we are going to get the benefit of deposit repricing lower, and at the same time, still being able to pick up a lot of benefit associated with that fixed rate asset repricing. So being able to achieve a 3.20% plus NIM in that kind of scenario, a year or two forward would be something that would be easily -- that should be very easily achievable, and we feel good about that environment.

Vivek Juneja:

Hi. Congrats, Bryan and Jamie. A couple of quick questions for you guys. One is in your NII outlook that you've given for the year, what are you assuming for deposit betas on the way down. Sorry if I missed that, trying to keep an eye on bunch of different releases this morning.

Vivek Juneja:

Great. Another little one. Other consumer loans, the NPLs moved up quite a bit linked quarter to a little over 1%. Any color is that coming from dividend finance? Or is that something else?

Vivek Juneja:

So not much loss content you'd expect from that, Jamie then, since it seems like you're deferring rather than that.

Vivek Juneja:

Okay. Thank you.

Matt O'Connor:

Good morning. I was wondering if you guys can elaborate a bit on the commercial real estate exposure. Obviously, it's a bit less than peers. And as you noted, no charge-offs last year, but your nonperformers are also into this event and even the office criticized is a relatively low 6% compared to others. So how is it so good? And I guess, are you confident that the marks and estimates are up to date. Thank you.

Matt O'Connor:

And then just more broadly speaking, obviously, the overall charge-off outlook for this year is fairly benign 35 to 45 basis points. Any more color in terms of drivers of call it, the midpoint of that range versus 2023 levels?

Matt O'Connor:

Okay. That's helpful. Thank you.

Christopher Marinac:

Hey, thanks. Good morning. Can you remind us how the commercial C&I DDAs behave on a down rate environment? And is there any reason to believe that they wouldn't kind of behave positively in your favor this time?

Christopher Marinac:

Got it. That makes sense. Thank you, Bryan, and then just a quick follow-up on reserve build -- would you still build reserves kind of within the current level we have today? I'm just trying to compare the guide of 35 to 40 basis points in the average life of the portfolio is less than four. There's really strong coverage. So just curious if you would build that same level.

Christopher Marinac:

Great. Thank you for taking my questions.

Operator:

There are no further questions at this time. I will now turn the call back to Matt Curoe for some closing remarks.

Operator:

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

Chris Doll:

Good morning, everyone. Welcome to the Fifth Third's third quarter 2023 earnings call. This morning, our President and CEO, Tim Spence; and CFO, Jamie Leonard, will provide an overview of our third quarter results and outlook. Our Treasurer, Bryan Preston; and Chief Credit Officer, Greg Schroeck, have also joined us for the Q&A portion of the call. Please review the cautionary statements on our materials, which can be found in our earnings release and presentation. These materials contain information regarding the use of non-GAAP measures and reconciliations to the GAAP results as well as forward-looking statements about Fifth Third's performance. These statements speak only as of October 19, 2023, and Fifth Third undertakes no obligation to update them. Following prepared remarks by Tim and Jamie, we will open the call up for questions. With that, let me turn it over to Tim.

James Leonard:

Thank you, Tim, and thanks all of you for joining us today. Our third quarter results were once again strong despite the market headwinds. We continue to strengthen our capital and liquidity levels ahead of pending regulations while also managing our business very efficiently. We achieved an adjusted efficiency ratio below 55%, reflecting ongoing expense discipline throughout the bank and the continued diversification and resilience of our fee revenue streams. Net interest income of approximately $1.45 billion decreased 1% sequentially. Our NII and NIM results reflect our proactive and continued defensive positioning given the uncertain economic and regulatory environments. Our short-term investments, which primarily represent our cash held at the Fed, increased $5 billion on an average basis and increased $8 billion on an end-of-period basis to $19 billion. This increased level of cash was the primary driver of our 12 basis point NIM decline. Adjusted noninterest income increased 1% compared to the year ago quarter, driven by growth in capital markets and deposit service charge revenue, partially offset by a decrease in mortgage revenue driven primarily by lower origination volumes. Our ability to produce strong capital markets revenue in a volatile market has become a key distinction for Fifth Third compared to many peers. Adjusted noninterest expense increased just 2% compared to the year ago quarter, reflecting growth in compensation and benefits, occupancy and technology expenses partially offset by continued expense discipline across the company. Moving to the balance sheet. Total average portfolio loans and leases decreased 1% sequentially and due to softening customer demand and our RWA optimization efforts. Average C&I balances decreased 2% sequentially. As Tim mentioned, clients remain cautious with respect to their growth plans. Consequently, production was muted in corporate banking. Also, average CRE balances decreased 1% compared to the prior quarter. The period-end commercial revolver utilization rate of 36% increased 1% compared to last quarter, partially due to our exit of certain lower returning unused commercial commitments. On a sequential basis, total corporate banking commitments and unused commitments decreased 3% and 4%, respectively, while total middle market commitments and unused commitments increased 5% and 7%, respectively. This trend highlights our capital optimization efforts while we continue to grow share in the middle market. Average total consumer portfolio loan and lease balances decreased 1% sequentially due to our intentional decline in indirect auto and the overall slowdown in residential mortgage originations, given the rate environment, partially offset by growth from dividend finance. Our card balances increased just 1% this quarter, reflecting our conservative risk culture and focus on transactors. Balances have increased 3% relative to the year ago quarter compared to 11% for the industry. Average total deposits increased 3% sequentially as increases in CDs and interest checking balances were partially offset by a decline in demand deposits given the mix shift we have seen for several quarters. DDAs as a percent of core deposits were 28% for the quarter compared to 30% in the prior quarter. The 2-point decline was primarily due to the strong deposit growth in the denominator that Tim highlighted from our net new relationship growth in both consumer and commercial, which are obviously skewed to interest-bearing products in this environment. As a result, we added more than $4 billion in core deposits during the quarter, the most since the fourth quarter of 2021. Additionally, the DDA migration continued to show signs of deceleration this quarter and marked the smallest dollar decline in DDA balances since the onset of the rate hiking cycle. By segment, average consumer deposits increased 2% sequentially, and commercial deposits increased 4%, while wealth and asset management deposits declined 2% and reflecting clients' alternative investment options. As a result of our balance sheet positioning and success adding new deposits, we achieved a loan to core deposit ratio of 74% and at quarter end, which should be one of the best, if not the best, compared to our regional peers. We also achieved full Category 1 LCR compliance at 118% at quarter end. Moving to credit. As Tim mentioned, credit has remained resilient. The net charge-off ratio of 41 basis points increased 12 basis points compared to the prior quarter as we expected, reflecting two credits, which had been fully reserved. Early stage delinquencies decreased 7% compared to the prior quarter, while loans 90 days past due, of just 2 basis points or a record low for Fifth Third. Non-performing loans decreased 9%. This quarter marked the lowest inflows of commercial NPLs since the second quarter of 2022. From an overall credit management perspective, we have continually improved the granularity and diversification of our loan portfolios through a focus on generating and maintaining high-quality relationships. As many of you know, we tightened underwriting standards during COVID, which limited our growth but improved the stability of our balance sheet. In consumer, we have focused on lending to homeowners, which is a segment less impacted by inflationary pressures and have maintained conservative underwriting policies. In commercial, we have maintained the lowest overall CRE concentration as a percent of total loans relative to peers for many years. Our criticized non-performing and delinquent CRE loans have all improved sequentially and remain very well behaved. And within that, the same is true for our office exposures. For instance, criticized office loans represented just 5.4% of total office CRE, which improved 180 basis points sequentially. Additionally, we have zero delinquencies and zero charge-offs. We also decreased loan balances by 8% in the office book without any loan sales. These credit quality metrics are significantly better than peers who have reported their office exposure so far this quarter. While credit quality in the office portfolio has remained very strong, and we continue to believe the overall impact on Fifth Third will be limited. We nevertheless continue to watch it closely given the environment. Our shared national credit portfolio also remains very strong from a credit quality perspective, with criticized assets, non-performing loans and net charge-offs consistently lower than the overall commercial portfolio across a multiyear period. Our credit resilience highlights our proactive risk culture. We continue to closely monitor all exposures where inflation and higher rates may cause stress throughout the entire portfolio as well as the fallout from the ongoing labor strike in the auto manufacturing sector, where we think our exposures are very manageable. Moving to the ACL. Our reserves decreased $5 million, but the coverage ratio increased 3 basis points sequentially to 2.11% as the impact of lower period end loans was offset by a slightly worse overall base case economic outlook. As you know, we incorporate Moody's macroeconomic scenarios when evaluating our allowance. Both the Moody's base scenario and the downside scenario used for the third quarter ACL assume a slightly worse average unemployment rate compared to the prior quarter. We maintained our scenario weightings of 80% to the base and 10% to each the upside and downside scenarios. Moving to capital. Our CET1 ratio increased 31 basis points sequentially ending the quarter at 9.8%. Our capital position reflects our ability to build capital quickly through our strong earnings generation, combined with the impact of our RWA diet. Our tangible book value per share, excluding AOCI, increased 10% compared to the year ago quarter. We continue to expect improvement in our unrealized securities losses resulting in approximately 35% of our current loss position accreting back into equity by the end of 2025 and approximately 2/3 by 2028, assuming the forward curve plays out. Looking forward, we expect to build capital at an accelerated pace given our RWA optimization initiative and our continued deferment of share buybacks. We anticipate accreting capital such that our CET1 ratio ends this year above 10%. Moving to our current outlook. We expect fourth quarter average total loan balances to decline 2% to 3% sequentially with consumer loans down 2% and commercial loans down 3%. The reflects our overall cautious economic outlook combined with one more quarter of our RWA diet as we are responding quickly to higher risk-adjusted return thresholds throughout the bank considering the economic and regulatory environments. We expect average deposits to be up slightly on a sequential basis. Within that, we expect core deposits to increase 1% due to our multiyear investments in the franchise to add households and primary commercial relationships, along with the benefit from seasonality. While we continue to expect modest migration from DDA into interest-bearing products in a higher for longer interest rate environment, specifically for the fourth quarter, we expect the mix of DDA to core deposits to remain relatively stable given those seasonal benefits. Shifting to the income statement. We expect fourth quarter NII to be down approximately 1% to 2% sequentially due to the continued impacts of the balance sheet dynamics I mentioned. Our NII guidance assumes no additional rate hikes and a cumulative beta, which includes CDs and excludes DDAs of 55% by the fourth quarter. Excluding brokered deposits that we have been using as a replacement for other wholesale funding, given the pricing considerations, our cumulative beta expectation continues to be 53%. This outlook translates to total interest-bearing deposit costs increasing 15 basis points to 20 basis points in the fourth quarter. Our guidance assumes that our securities portfolio balances remain relatively stable through year-end. As a byproduct of our strong deposit growth, combined with our loan outlook and stable securities balances, we expect to hold closer to $20 billion in cash and cash equivalents by year-end. Given these balance trends, we expect our loan to core deposit ratio to continue to move lower through the end of the year, which will keep Fifth Third in a strong liquidity position in anticipation of more stringent regulatory requirements, including remaining compliant with the full Category 1 LCR. We expect fourth quarter adjusted noninterest income to increase 1% to 2% compared to the third quarter. We expect revenues to remain resilient across most captions driven by our multiyear focus on growing a diverse portfolio of fee businesses that should perform well in different economic environments. We expect fourth quarter TRA revenue of $22 million compared to $46 million in the fourth quarter of 2022. We expect fourth quarter adjusted noninterest expenses to be stable to up 1% compared to the third quarter. Our guidance excludes the pending FDIC special assessment, which we currently estimate at $208 million for Fifth Third. With respect to credit quality, we expect fourth quarter net charge-offs to be 30 basis points to 35 basis points. We do expect to gradually normalize from here. We continue to believe that are through the cycle, annual charge-offs will be in the 35 basis point to 45 basis point range given the credit risk profile of the bank. Given our reduced loan outlook, we expect the change in the ACL for the fourth quarter to be stable to up $25 million, assuming no significant changes in the underlying Moody's economic scenarios. This considers production from dividend finance of around $700 million in the fourth quarter, which as you know, carries a higher reserve level of around 9%. In summary, with our proactive balance sheet management, disciplined credit risk management and commitment to delivering strong performance through the cycle, we believe we are well positioned to meet the proposed regulatory requirements while continuing to generate long-term value for our shareholders. With that, let me turn it over to Chris to open the call up for Q&A.

Operator:

[Operator Instructions] And your first question comes from the line of Scott Siefers from Piper Sandler.

JamesLeonard:

Thanks, Scott, for the question. We were certainly bringing the Victory bell on deposits this quarter. Really, when you take a look back, coming out of March Madness, one of the biggest drivers of our deposit success in the second quarter and the third quarter was really transitioning our customer recommendation engine from household growth to deposit growth. And while that sacrificed a little bit on the household growth numbers instead of our typical up 3% or up 4%, we were up 2% on households, but that translated to very strong consumer deposit growth. And so within the deposit growth we did have during the quarter of almost $4.8 billion, about 60% was commercial, 40% was consumer. And within consumer, 70% of that growth was in the Southeast markets, while 30% of that growth was in the Midwest. So again, the retail franchise at Fifth Third is just performing at an extremely high level. And on the commercial side, the growth was surprisingly high given the corporate banking book growth within the commercial deposit growth. About 80% of the growth was in corporate banking. So at the time, we were targeting, let's get LCR, full LCR north of 100%. We actually came in at 118%. So definitely did better than we initially expected. But when we were dissecting the quarter end results, it really makes sense that the corporate banking book did better. And as one of sort of hidden benefits of the RWA diet is that we are getting better share of wallet within that corporate banking book, and that also helped drive the deposit growth. So overall, a very strong quarter. Again, for us on the deposit side, we expect continued growth in the fourth quarter, albeit at a little bit lower growth rate but still up a bit in the fourth quarter.

JamesLeonard:

If you break it down between real world and regulatory world, that's really how we are looking at this in the real world with really the economic risk. Whenever you have a fixed rate asset, whether that's in AFS, HTM or in the loan portfolio, you have that economic risk to higher rates. We have elected to hold our securities in AFS, and we'll continue to do so, given that it gives us better flexibility and opportunity to reposition as the environment changes. But when you are in the real world managing the balance sheet, how we approach balance sheet management is in totality. And you can look at our strong NII results, our interest-bearing liability results, any of the measures relative to peers, the total balance sheet is performing very well. We're going to grow NII this year, 3% to 5%. Others are shrinking. So our philosophy is paying off in the real world. The challenge simply comes from the fair value of a single line item and putting that into capital. We're not insensitive to how that looks on the face of the balance sheet and the tangible book value per share. But we still believe it is prudent to have that flexibility because flexibility has value. In terms of the regulatory risk, perhaps one of the details that we continue to evaluate as something we've not really communicated to all of you externally, is that given the burn down that you have in the presentation and the significant, whether it's static rate, forward rate, you're looking at 60%, 65% of the ASC burn down during the transition into the new capital regimes, assuming the rules play out as currently written, and that burn down is going to happen on our portfolio because our portfolio has structured. We have defined maturities unlike those portfolios that are in residential mortgage-backed, instruments with convexity and extension risk, we know our portfolio is going to pay down. And we know that this is going to be very manageable from a regulatory capital perspective. When we model the capital impact at a fully phased-in level on AOCI, the impact on CET1 is about 125 basis points when you reach the third quarter of 2028 and that's why we continue to accrete CET1 is to be able to have sufficient regulatory capital for that world. And in fact, should rates get north of 8%. We would still be maintaining a CET1 well above regulatory minimums would be over 8% CET1 in that environment. So we feel good about how we're positioned, how we will roll down the curve and ultimately, the regulatory capital. It's just one of the challenges in this environment with everything in AFS is that you have that mark on the tangible book value per share, that erosion. But at the same time, should rates fall. I think all of you would be very pleased with how much tangible book value accretion, we would report in that environment.

ScottSiefers:

Yes, I agree. All right. That's perfect. So Tim and Jamie, thank you both.

ErikaNajarian:

Jamie, this first one is for you. Not to belabor the earlier point, but all the PPNR metrics and balance sheet metrics look great and also did the forward look? And I guess, if you could just explain what happened in the quarter, I think given that your portfolio -- your securities portfolio is 61% CMBS. I think investors that know you well, expected not as much negative convexity -- was there something unique that happened in this quarter in the portfolio that -- where the AOCI was that much wider?

ErikaNajarian:

And my follow-up question was for you, Tim. I think it was a very powerful statement you said in the beginning of the call in terms of confidence that you could return to loan growth next year. I think several of your peers that have similar CET1 ratios and similar AOCI marks are still talking about dieting. Could you give us a sense of, first of all, if you could confirm what the AOCI was in basis points, Jamie? And second, Tim, how are you balancing on one hand, the market wants you to continue to build capital as we approach that transitional date on CET1? And on the other, we're still hearing low demand from corporates for financing.

JamesLeonard:

And then, Erika, on your other components of the question, CET1 for us finished the quarter at 9.8%. Excluding the investment portfolio, AOCI, that number would be 6.3%. And then the RWA bloat from the pending rules would be about 2% to 3% of RWA, which is about 20 basis points. So we would look to be at a 6.1 level. But as we talked about then, the earnings power of the company is very strong. We continue to defer the buybacks. We'll continue to accrete capital and with the passage of time, given the structure in the investment portfolio. The burn down of that AOCI will be 65% or so by the time we reach the fully phased-in level. So we feel that this is a very manageable timeline for the company. In fact, have a lot of cushion should rates even go higher.

GerardCassidy:

Tim, coming back to your opening comments about your corporate and commercial customers being cautious and you yourself seeing some of the economic cross wins or cross currents being cautious. I noticed yesterday that the real GDP number that the Atlanta Fed puts out for the third quarter, is calling for a 5.4% real GDP growth in the third quarter. It's probably too high. But the point is there are a lot of cross currents. Can you share with us when you talk to your customers, what do you think is going to take them to become more optimistic and most cautious? Is it a Fed halting and increasing short-term interest rates? Is it better inflation numbers? What do you think they're waiting for before they really start committing to borrowing more money and growing their businesses?

GerardCassidy:

Thank you, Tim. Very insightful. And then on credit, tying into maybe the economic comments that you just made, and I don't know if this is sort of Greg and Jamie. But can you share with us -- Jamie, you showed some very strong credit numbers prepared remarks. And can you tell us, is it better underwriting, if you look back to the financial crisis, through the cycle, net charge-off ratio, I guess it's quite a bit higher than what you're thinking today? And then second, is it also your customers, because of the pandemic and what they went through, are they just better managed today from a balance sheet perspective than was the case pre-financial crisis?

Operator:

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

TimothySpence:

So good morning Ebrahim, it's good to chat. I think a couple of comments. So narrowly to your point, I think we have fairly good visibility into what the first half of the year is going to look like. And we're not seeing anything at the moment that would suggest that we're headed toward credit deterioration in the first half, right? We talked about it in the script delinquency formation that delinquency rates are actually down on the early-stage basis. NPAs are down sequentially, and we have a roll forward for you in the appendix. The slides, which would indicate that, that trend is likely to continue through the fourth quarter. And on the consumer side, just as an example, the nice thing about the way that we manage delinquencies is it's like an assembly line. So you can see in the zero to 29 and then the 30-plus buckets what you're going to be dealing with or early next year, and there just isn't anything in there to be worried about. With that said, the base case we're using as we think about the management of the company, strategic investments, how we manage expenses and otherwise, continues to assume that maybe the market is a little bit too bullish on the idea of a soft landing here. I mean again, you just look at the payroll numbers, so -- and apply a human lens to it. So jobs are up, but job participation is flat. Labor force participation is flat. And average hours worked are down and unemployment stable. What that means is you have more people working two jobs because they're not getting enough hours or earning enough money at the job that they were working, the base job that they were working to be able to cover their expenses. So when you then look at declining real incomes, the only thing that really would be standing between somebody who is having to work two jobs and is still suffering from a declining real income and credit delinquency is the fact that there was the stimulus buffer that built up because people had forbearance on loan portfolios and stimulus dollars. Well, the student loans are back now. Housing inflation is still very high at 7.2%, I think, in the most recent prints. And those are just early indicators that there are people across the country that are struggling a lot more than the headline numbers would suggest. So I feel good because the two areas I would say the market is most worried about right now are subprime consumers and renters where we have very little in the way of exposure on virtually no subprime, I think the lowest level there of any of our peers who provide information on that front and 85% of the consumer exposure is to homeowners. And then in commercial real estate, where, again, our exposure relative to total capital is lower than anybody else's. And because we weren't trying to grow that portfolio materially, we're able to be much more selective, which is reflected in superior credit metrics right now when you look at our commercial real estate book relative to others. So it's both smaller and better performing.

EbrahimPoonawala:

That's helpful. And just as a separate question. In terms of deposit pricing, as we look through next year and if rates don't get cut in higher for longer, are you observing any differences within your geographies, Midwest versus Southeast? Clearly, you're opening a lot of branches in the Southeast. So you have a different strategy there. I assume relative to the home market. Just give us a sense of pricing competition, any differences? And in your view, is deposit pricing now essentially national in nature? Or is it still localized where certain markets could meaningfully outperform or lag in -- on the pricing side?

BryanPreston:

Yes, absolutely. Thanks, Jamie. In general, I think what we're seeing is that it's a combination of -- it is local and a national impact right now. And what you're seeing is that you may have periods of time where the dominant players or the bigger players in specific markets may just have a lower liquidity need. And so that gives you a little bit of an opportunity to be a little bit more aggressive and do well from a share perspective. But what we've seen since March is that tends to rotate around a little bit. And ultimately, as people start to realize as deposit competition is moving in the market, you're just seeing people then start to react. Your most rate-sensitive customers are absolutely focused on the national markets. They tend to be the ones that are most willing to use a non-traditional provider, and so you definitely see some of that. But in general, it tends to -- you still tend to have some opportunity to take advantage of some geographic differences, but those geographic differences can rotate over time.

KennethUsdin:

I think you guys said in the conference season that the fourth quarter would likely be the bottom for NIM and the first quarter of next year will be the bottom for NII dollars. Just wondering, given the guide you gave today, if that still foots to that and anything we should be thinking about in terms of getting to that NII bottoming?

KennethUsdin:

And then as you think forward, how do we understand the benefit that you'll get once rates get to a peak about fixed rate loan repricing. I think it's clear to understand how the securities book moves. But on the loan side, can you walk us through just how much benefit you might be able to see as we get into next year from that side being able to offset any lagging deposit pricing?

KennethUsdin:

If I could just ask one last one. The swap slide you have just talks about the '25 -- 2025 versus '23 update. Is there anything different or any thought process different about some other banks have been adding securities based swaps to protect capital and add a little variable rate juice? Have you done anything like that incrementally? Or is that slide looks pretty intact in terms of how you're approaching swap portfolios of both loans and securities?

Operator:

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

JamesLeonard:

I think it will be environment dependent, which I'm sure is not the answer we want. But I think you hit on all the right points, Mike, which is the RWA diet makes positive operating leverage difficult in 2024. With that said, we will do everything in our power to deliver as good a results as we can, but I think it will be a challenge in 2024.

MichaelMayo:

And just clarification on the credit side. Did I hear you correctly, you have zero office delinquencies, zero office charge-offs. Commercial, you have the lowest inflows to NPA since 2Q '22. You reiterated 35 basis points to 45 basis points through the cycle. Is that correct? And I know it's been asked already, but you're saying the economy is grinding lower doesn't look good. So you just say you're credit is economically insensitive at this point? I mean that's like -- do you think you could maybe be wrong if things don't go so well.

JamesLeonard:

All of those facts are correct, and we feel very good about all of the work we've done on the credit portfolio over the last 15 years. In terms of it being economically insensitive, no, but within any industry, there are going to be winners and losers, and that's where it comes down to that client selection that Greg referenced. We just believe we are very well positioned, and we've been very diligent and part of the benefit that we're getting right now is the fact that we were not stretching for loan growth over the past several years and we probably had the lowest loan growth guides over the past several years running. And so back to our priorities of stability and profitability ahead of growth.

JohnPancari:

Just on the credit side. I know you mentioned that the new NPA inflows were the lowest since the second quarter of '22, excluding the large charged-off items, I guess, could you maybe talk about the sustainability of that? What are you seeing in terms of risk migration and some of your internal risk ratings and everything? Do you think the inflows are likely to remain that low at this point? And what's the driver of the pressure? Is it the areas everybody suspects in terms of CRE or is it more on the C&I side?

JohnPancari:

And then secondly, kind of a two-parter. Do you have -- I know you mentioned the criticized loans are down in total this quarter versus last. You have the magnitude of that decline? And then on the Shared National Credit side, the portfolio of 29% of loans, I think over the past year that maybe is down a touch. I mean, do you expect that you're going to reduce the size of the Shared National Credit book? And also what is the criticized ratio for that portfolio?

JamesLeonard:

John, it's Jamie. The crit office loans were what I referenced that declined 180 basis points. Crits overall, were up just a little bit.

MananGosalia:

I wanted to follow up on the RWA diet and the trajectory of rates. I guess does it move into the annual impact how you manage that. So from here, we get the annual moving up 1% or down 1%. Does that impact how you will manage loans? And as we look into next year, what would cause you to maybe lean into low growth? And what would cause you to peel back? Is it just the outlook on credit, what you're seeing there? Or could the rate outlook impact that as well?

MananGosalia:

And then just from a cash perspective, it seems like the build was a little bit more than you guided to before? I think you had said about $15 billion or so in cash is what you were targeting before. I think you're target has now moved to $20 billion. What's driving the change? Is it the volatility in rates? Is it just preparation for LCR? Or is it also just that you can get 5.5% of cash and makes more sense to hold cash over securities?

MananGosalia:

So it sounds like at some point, you'd be able to bring that $20 billion down. It might not be in the next 6 months or so. But as rate volatility improves, you might be able to bring that down?

MananGosalia:

So just as a clarification then, does that make you more asset sensitive, all things equal now versus, say, last year?

Operator:

And your last question comes from the line of Christopher Marinac from Janney Montgomery Scott.

JamesLeonard:

I would say steady based on what we're seeing now from the delinquency and NPA, all the above and our ongoing portfolio, in the last 12 months, we have rerated 95-plus percent of the portfolio. So based on all of that underwriting or reunderwriting, if you will, I'm expecting steady.

JamesLeonard:

Sure. Yes.

Operator:

And we have reached the end of our question-and-answer session. I will now turn the call back over to Chris Doll for some final closing remarks.

Operator:

This concludes today's conference call. Thank you for your participation. You may now disconnect.

Chris Doll:

Good morning, everyone. Welcome to the Fifth Third Second Quarter 2023 Earnings Call. This morning, our President and CEO, Tim Spence; and CFO, Jamie Leonard, will provide an overview of our second quarter results and outlook. Our Treasurer, Bryan Preston and Chief Credit Officer, Greg Schroeck, have also joined the Q&A portion of the call. Please review the cautionary statements on our materials, which can be found in our earnings release and presentation. These materials contain information regarding the use of non-GAAP measures, reconciliations to the GAAP results and forward-looking statements about Fifth Third's performance. These statements speak only as of July 20, 2023, and Fifth Third undertakes no obligation to update them. Following prepared remarks by Tim and Jamie, we will open the call for questions. With that, let me turn it over to Tim.

James Leonard:

Thank you, Tim, and thank all of you for joining us today. Our second quarter results were once again strong despite the market headwinds. We achieved an adjusted efficiency ratio of just below 55%, which is a 4-point improvement compared to the prior quarter. Our second quarter adjusted PPNR grew more than 8% compared to both the prior quarter and year ago quarter, driven by the continued diversification and growth of our fee revenue streams combined with disciplined expense management throughout the bank. . Net interest income primate $1.46 billion increased 9% year-over-year, did decline 4% sequentially. Our sequential NII performance was the result of our deliberate actions to grow on balance sheet liquidity to support a defensive balance sheet position, given the uncertain macroeconomic outlook and tightening liquidity conditions. Interest-bearing deposit costs increased 54 basis points to 2.3%, which represents a cycle-to-date beta of 45% on interest-bearing deposits, which includes the impact of CDs. Adjusted noninterest income increased 2% compared to the year ago quarter, with increases in mortgage fee income and commercial banking revenue partially offset by a decline in deposit service charges due to the impact of earnings credits from higher market rates and the elimination of our consumer NSF fees in July of last year. Adjusted noninterest expense increased 10% compared to the year ago quarter as elevated compensation and benefits expense was driven by nonqualified deferred compensation costs, the minimum wage increase that went into effect in July of 2022 and continued investment in dividend finance. Additionally, expenses increased from higher technology and communications expense and the impact of the increased FDIC assessment that began in January. Excluding the impacts of nonqualified deferred compensation, which are offset by a gross up in securities gains, the FDIC assessment increase and incremental expense growth from dividend finance, Total underlying expenses increased approximately 4% compared to the year ago quarter. Moving to the balance sheet. Total average portfolio loans and leases were stable sequentially in both commercial and consumer portfolios due to our continued discipline with respect to client selection and optimizing returns and also reflecting softening demand. The period-end commercial revolver utilization rate of 35% decreased 2% compared to last quarter. C&I balances were flat compared to the prior quarter as strong middle market loan production and muted payoffs were offset by the lower revolver utilization. Corporate banking production was also tempered due to our focus on optimizing returns on capital in this environment and lower customer demand. Average total consumer portfolio loan and lease balances reflected growth from dividend finance, offset by declines in indirect auto and residential mortgage. Average total deposits were flat compared to the prior quarter as increases in CDs and interest checking balances were offset by a decline in demand deposits. By segment, consumer deposits increased 1% and commercial deposits decreased 1%, while wealth and asset management deposits declined 12%, reflecting the impact of tax payments as well as clients' alternative investment options. June activity reflected continued momentum such that period-end total deposits were up 1% compared to the prior quarter. Notably, we have grown deposits 2% since the end of last June compared to a 5% decline for the top 25 banks as shown in the Fed's H8 data. Moving to credit. As Tim mentioned, credit trends were stable with our key credit metrics remaining below normalized levels. The net charge-off ratio of 29 basis points increased three basis points compared to the prior quarter. The NPA ratio of 54 basis points was up three basis points compared to the prior quarter. In consumer, we have focused on lending to homeowners, which represents 85% of our consumer portfolio. We have also maintained one of the lowest overall portfolio concentrations in nonprime consumer borrowers among our peers. In commercial, we have maintained the lowest overall CRE concentration as a percent of total loans relative to peers for many years. Within CRE, we have limited office exposure with a low and improving criticized asset ratio and almost no delinquencies. We continue to watch office closely and believe the overall impact on Fifth Third will be limited. We had deemphasized office even before the pandemic, and we are not currently pursuing new office CRE originations. From an overall credit management perspective, we have continually improved the granularity and diversification of our loan portfolios through a focus on generating and maintaining high-quality relationships. As many of you know, we have been and remain cautious in our economic outlook. We tightened underwriting standards during COVID, including stressing credits to an up 200-basis-point scenario off the forward curve, which limited our growth but improved the stability of our balance sheet. Since we began tightening underwriting standards, roughly 90% of our commercial portfolio has been re-underwritten. Our criticized assets have been stable over the past several quarters. Across all loan categories, we continue to closely monitor exposures where inflation and higher rates may cause stress. Moving to the ACL. Our reserves increased $87 million, reflecting the impacts of dividend finance and Moody's macroeconomic forecast, which eroded slightly. The ACL ratio increased nine basis points sequentially. As you know, we incorporate Moody's macroeconomic scenarios when evaluating our allowance. The base economic scenario from Moody's assumes the unemployment rate reaches 4.3%, while the downside scenario incorporates a peak unemployment rate of 7.8%. We maintained our scenario weightings of 80% to the base and 10% to each of the upside and downside scenarios. Moving to capital. Our CET1 ratio increased 25 basis points sequentially, ending the quarter at over 9.5%. Our capital position reflects our ability to build capital quickly through our strong earnings generation. Our tangible book value per share, excluding AOCI, increased 11% compared to the year ago quarter. We continue to expect a meaningful improvement in our unrealized loss position, assuming the forward curve plays out, resulting in approximately 36% of our current loss position accreting back into equity by the end of 2024 and approximately 50% by the end of 2025. Looking forward, we expect to build capital at an accelerated pace given our RWA optimization initiatives and by extending our share buyback pause. As Tim mentioned, we will postpone repurchases until we have more clarity on the regulatory environment in order to determine the new level of required capital dollars. Assuming we do not buy back shares through year-end, we would anticipate accreting capital such that our CET1 ratio ends this year at or above 10%. Moving to our current outlook; we expect full year average total loan growth between 1% and 2%, which reflects our cautious outlook on the economic environment and our decision to proactively adapt our balance sheet to the new regulatory regime. We expect total commercial loans to increase in the low single digits area compared to 2022, which implies a decline in the second half of the year relative to the first half. This outlook assumes the revolver utilization rate of 35% in the second quarter remained stable throughout the remainder of 2023. Our commercial loan outlook also assumes that we meaningfully reduced originations in certain areas of the commercial franchise, predominantly in the corporate bank to meet our higher risk-adjusted return thresholds, while continuing to increase the generation in our core middle market business, we expect total consumer loans to be stable to down slightly from reduced originations of the lower-yielding out-of-footprint auto and specialty lending channels, combined with portfolio residential mortgages, partially offset by growth from dividend finance. We currently expect to need approximately $4 billion in dividend loans for this year, which is a modest decrease from our previous expectations. We continue to expect to grow deposits in the back half of 2023, assuming stable or even slightly tighter market liquidity conditions Consistent with our track record over the past year of taking market share and maintaining high levels of core operating relationships in both consumer and commercial. Within that, we continue to expect migration from DDA into interest-bearing products throughout the remainder of 2023 with the mix of demand deposits to total core deposits declining from 30% in the second quarter to 27% by year-end as we discussed last month. For the third quarter of 2023, we expect average total loan balances to decline 1% to 2% sequentially with commercial down in the low single digits area and consumer stable to slightly down. We expect average deposits to be up 1% on a sequential basis, impacted by our strong finish to the second quarter, some seasonal uplift and the benefits of our multiyear investments in the franchise that Tim discussed earlier. Shifting to the income statement; we estimate full year NII will increase 3% to 5%, consistent with comments from the mid-June investor conference. Our AI guidance assumes a cumulative beta of 53% by the fourth quarter, assuming an additional 25 basis point rate hike in July and no further rate movements in 2023. Our outlook translates to total interest-bearing deposit costs increasing around 40 basis points in the third quarter and another 15 basis points or so in the fourth quarter. Our guidance assumes that our securities portfolio balances remained relatively stable between now and year-end. As a byproduct of strong deposit growth, combined with lower loan growth and stable securities balances, we expect to hold closer to $15 billion in cash and cash equivalents by year-end. We expect our loan-to-core deposit ratio to end the year in the mid-70s area. It will keep Fifth Third in a strong liquidity position in anticipation of more stringent regulatory environments. We expect third quarter NII to be down approximately 2% to 3% sequentially due to the continued impacts of the balance sheet dynamics I mentioned. We expect adjusted noninterest income to be stable in 2023, resulting from continued success, increasing market share due to our investments in talent and capabilities. with stronger gross treasury management, capital markets, wealth and asset management and mortgage servicing revenue to be offset by higher earnings credit rates on treasury management, subdued leasing remarketing revenue and a reduction in other fees due to lower TRA and private equity income this year. We expect our fourth quarter TRA revenue to decline from $46 million in 2022 to $22 million in 2023. We expect third quarter adjusted noninterest income to be down 3% to 4% compared to the second quarter. We expect to continue generating strong revenue across most fee captions, which we conservatively assume will be more than offset by a slight erosion in debt capital markets and mortgage revenue. reflecting the environmental headwinds as well as lower other noninterest income. We continue to expect full year adjusted noninterest expenses to be up 4% to 5% compared to 2022. If capital markets fees improve relative to our current expectations, we will likely land at the upper end of the range. Our expense outlook incorporates the FDIC insurance assessment rate change that went into effect on January 1, the mark-to-market impact on nonqualified deferred compensation plans which was a reductant in 2022 expenses but an increase in 2023 and full year impact of investments to grow the dividend finance and provide businesses. Excluding the FDIC assessment and NQDC impacts, we would expect our full year 2023 core expenses to be up 3%. Our guidance reflects continued investment in our digital transformation, which should result in technology expense growth in the low double digits for the year. We also expect marketing expenses to increase in the mid- to high single digits area. Our guidance also factors in the run rate benefits from the severance expense recognized in the first half of the year, which reflected proactive actions taken to reduce ongoing expenses given the operating environment. We expect third quarter adjusted noninterest expenses to decrease 1% to 2% compared to the second quarter. In total, our guide implies full year adjusted revenue growth of 3% to 4%. This would result in an efficiency ratio of around 56% for the full year. We expect full year total net charge-offs to continue to be in our previously stated 25 basis point to 35 basis point range. However, as you would expect, with normalizing credit costs in this environment from record low levels, there may be a little lumpiness in C&I in the second half such that total Bancorp's third quarter losses are expected to be 35 to 45 basis points and then fourth quarter losses improving relative to the third quarter. Given our reduced loan growth outlook, we expect a lower quarterly build to the ACL in the $25 million to $75 million range, assuming no significant changes in the underlying Moody's economic scenarios. This considers strong production from dividend finance of around $750 million in the third quarter, which, as you know, carries a higher reserve level. In summary, with our proactive balance sheet management, disciplined credit risk management and commitment to delivering strong performance through the cycle, we believe we are well positioned to continue generating long-term sustainable value for our customers, communities, employees and shareholders. With that, let me turn it over to Chris to open the call up for Q&A.

Operator:

[Operator Instructions] And your first question comes from the line of Scott Siefers from Piper Sandler.

James Leonard:

Yes, Scott, thanks for the question. It really comes down to the rate environment with the Fed in our forecast, the assumption being that the Fed reaches 5.5%, and holds. And therefore, by the end of the fourth quarter, we've gotten through all of the repricing lag that would occur. So that right now, the third quarter guide is down 2% to 3% and then the full year guide implies a little bit of a step down from third quarter into fourth quarter, and then we'll see what 2024 holds when we get there. Implicit in the guide is an increase in our deposit costs so that the terminal beta is 53%. And I guess, coming out of listening to some of the other earned calls, the one comment we would have is that our June, like everyone else's was quite strong and could -- and I think to the point in your head could result in better NII outcomes than what it reflects. But from our standpoint, spotting one robin doesn't make it spring. And therefore, we're going to continue to be cautious in the outlook and play defense in this environment. We've got a long way to go from the liquidity conditions tightening with at $80 billion a month, $1.5 trillion or more of trade issuance, the student loan repayments kicking back in, and then the competitive dynamics that we're seeing across the footprint. So we're going to play a good defense, and we think defense wins championships in this environment.

James Leonard:

Correct in that the dividend reserve coverage ratio, we're assuming, remains in that 9% area. The reduction in the guide for the ACL build is driven by all of the loan production changes that we are forecasting with the RWA diet and reducing the balance sheet for the new capital regimes that will be forthcoming.

Erika Najarian:

My first question is for Jamie. According to your first quarter Q, we're down 100 basis points parallel, I believe, your NII would be up 44 basis points over a full year. A lot of investors are now thinking about the potential for a Fed rate cut in 1Q '24. So I'm wondering, as we think about that 4Q '23 exit rate in all else equal, do you expect relative stability in NII if in the scenario as the Fed cuts? And how does that play out in terms of deposit costs? In other words, is just -- is there an absolute level where deposit costs don't move that much. Do deposit costs continue to increase even in the first few cuts? You are the most trusted CFOs out there. So it would be interesting to hear your perspective on all of that.

Erika Najarian:

Understood. And my second question maybe is for Tim. It took a lot of years of hard work, but Fifth Third has put itself in a position where you're pretty down the middle in terms of the results you're not talking about taking expenses down next year. You're not talking about RWA mitigation. And while I'm sure there's something on LCR and long-term debt as those requirements come in that you're working on, the business seemed to be something that would change strategy. The question really here is as you think is Fifth Third is positioned, and there seems to be now appreciable differences on how peers are positioned for this sort of new world order. How are you going to take advantage of it from a market share perspective? .

Operator:

And your next question comes from the line of John Panc from Evercore.

James Leonard:

Yes. And let me clarify one thing from what you said that just to make sure we're on the same page. Our guide for the ACL is for the total Bancorp balance sheet. However, the primary driver of that ACL build is dividend. Dividend, we expect to do $750 million a quarter of production, that reserve rate ballpark it in the 9% range. But the rest of the balance sheet, as we discussed in the guide is actually going -- from a loan standpoint is actually going to be down a bit. And so the net of those growing dividend, shrinking other parts of the balance sheet, inclusive of auto where we exited the states west of the Mississippi, but for Texas, combined with our efforts in shrinking the corporate banking book will result in a lower ACL build than what we've been running at this year because those other businesses will essentially be reducing the ACL coverage due to lower volumes, whereas dividend call it, in that same area, but the net effect is, let's call it, a build of $25 million to $75 million a quarter going forward.

James Leonard:

Yes. Let me start, and then I'll turn it over to Greg Schroeck to add a little bit more color. But in terms of -- as we discussed in the outlook, we continue to have a total Bancorp charge-off guide in the 25 to 35 basis point range. Within commercial over the past couple of years, it's obviously bounced around from 36 bps in 2020 down to 10 bps in '21 and 13 bps last year. And this year on commercial, we continue to be in that 20 to 30 basis point range. And then within total commercial, C&I is expected to be at the high end of that range given some of the lumpiness that we're seeing with a few credits that resulted in a little bit of that uptick in the NPA ratio at the end of the quarter. But with that, I'll turn it over to Greg for thoughts on C&I underwriting and other views.

Operator:

Your next question comes from the line of Ken Usdin from Jefferies.

James Leonard:

Yes, Ken, great question. And embedded in all of our comments and outlook today, we should have outlined the strategy that our approach here for our company is that we fully expect TLAC to get pushed down. We expect the more draconian capital rules on ops risk to get pushed down, but not any of the benefits from the credit rating risk weighting, and we expect to have to be compliant with the full LCR. So that is the underpinning of all of our strategies for managing the balance sheet, and we want to do that expeditiously. And therefore, we are going to be holding higher levels of cash. We will be rotating more into Level 1 securities. But we love the bullet locked-out structure because that provides the shock absorber to potential low rate environment. And so the flip side to all of this will be the AOCI impacts with the capital rules. And so we'll wait to see what those final rules look like, but it sounds like, obviously, AFS inclusion, HTM exclusion. And so we may have to pivot a bit on the HTM classifications given that we've not done anything to date. But that might be an outcome from the brave new world that will have to adapt to.

James Leonard:

Yes. What we did in the second quarter was we let the portfolio cash flows of $600 million roll off and not get reinvested. So essentially, to your point, bolster cash. For the rest of the year, we're assuming stable, give or take, $1 billion. We may let it run down, we may rotate into treasuries just depending on the day and the opportunities. But what you should expect from us is continued rotation into Level 1, whether cash or treasuries.

James Leonard:

Yes. It's just that there is a several factors impacting that. So in terms of consumer on the household side, we do have a very strong and consistent growth of 3%, but offsetting that tailwind is the headwind from consumer spending and the declines in the average deposit balance. So when you look at the consumer, the average deposit is still 20% higher than pre-COVID levels, but it is down 10% from the COVID average balance peaks. And so we're modeling that, that erosion does continue and therefore, it creates a little bit of a headwind. So for us, the majority of the growth is obviously coming from the Southeast de novo market and they're growing at a 7% rate. But the Midwest, whether it's same-store sales or the total Midwest networks growing households at 2%. So we like what we've been able to do, and I would say it's more about core new customer acquisition than anything else.

Ebrahim Poonawala:

I guess just first question around reserves and less to do with the mechanical finance and what you -- the ACL. But when we think about the 80% base case, Jamie, that you mentioned, I think if I heard you correctly, you said that had an unemployment rate of 4.3%. I guess, philosophically, I guess, Tim, like in the past, you've talked about 2024 could be worse in terms of debt maybe we do get a delayed recession. So just give us a mark-to-market around your operating outlook over the next, I guess, 12 to 24 months. Are you expecting a recession? And if that's the case, shouldn't you be weighted a lot more to the downside than just the 80-10-10 split that you have? .

James Leonard:

And in terms of scenario weightings, we anchored to the 80-10-10 distribution because that is the probability assignment by Moody's for each of those scenarios occurring. So that as you saw in this quarter, the scenarios eroded, unemployment ticked up about 30 basis points or so on a peak basis in their baseline scenario. And as Tim mentioned, it's certainly possible that we have a full employment soft recession. But we believe that obviously, the reserve is adequate and at 208 basis points of coverage, we feel good how we're positioned.

Timothy Spence:

Yes. We are seeing some softening in demand. There's no question about that. I think in general, part of its conservatism on the part of the clients. I think and the lack of visibility that they have into what the economy is going to look like 18 months from now. I think the other dynamic that we hear from clients is they are saying they're a little bit nervous about credit availability. So there's an interaction effect here that you have to take into account. But I was on the phone with two large clients, one in the medical field, one in the real estate field, in the past 1.5 weeks. And in both cases, they had gone out and surveyed their bank groups, and there were a lot of, hey, we've allocated all the capital we have available to invest in the second half of the year sort of responses that they were hearing back and/or real constraints on the way that they have to spread ancillaries. So I think there is a dynamic that will materialize here where demand will be lower for credit because the cost of credit will be higher. And that's the interaction effect that I think as we roll forward here, we're going to continue to see in addition to just general caution.

Michael Mayo:

I'm not sure if Jamie was quoting Aristotle earlier. One Robin does not make a spring. But we'll stick to the Aristotle quotes. So excellence is never an accident. So in terms of operating leverage or positive operating leverage, I mean, you did guide revenues lower by 350 basis points, taking the midpoint, and you didn't change expenses, and that's consistent with the industry. It looks like you could still have a shot at positive leverage, but doesn't look that way a whole lot or -- and for next year, and there's only so much you can do about higher rates and inverted curve. But do you think you have a shot for this year? How do you think about next year? Do you double up on your expense plans or do you preserve the infrastructure for potential additional growth?

Michael Mayo:

And I'm sorry, the start of the 3-year period now is -- was when?

Michael Mayo:

Got it. And then let's just go back to that quote One Robin does not make a spring. You said June was better, but you're not extrapolating that. Your guidance may be conservative, may not be, but Jamie, what is it that you saw in June and why.

Michael Mayo:

And then last follow-up. Just how comfortable are you that your NII guide kind of captures it? And is that the kind of entry point for thinking about 2024?

Operator:

And your final question comes from the line of Gerard Cassidy from RBC.

Greg Schroeck:

Yes. I think it's the ongoing review of the portfolio. As an example, in the second quarter, our team completed a complete review of our office portfolio, right? And so as we continue to stress that portfolio increasing rates using the forward curve to try to get out ahead of where those cash flows end up if rates continue to increase, but also looking at the softening rental rates in that portfolio in the real estate portfolio. That's how we stay ahead of it. We're not waiting for a covenant to forge, we're not waiting for borrowers to come to us. We're active, proactive in again, stressing the portfolio across the board, not just in commercial real estate. So we see what's coming. I think it's one of the lessons learned and a lot of us have the battles cars from the last crisis of being much more proactive state out ahead of it and then bringing forward solutions to our clients that, again, that are more proactive as opposed to, again, waiting for the covenant defaults, waiting for something to drop off the table. So that's what I'm really referring to in terms of the merchant risk.

Greg Schroeck:

Real-time liquidity metrics was kind of what Jamie is referring to.

Greg Schroeck:

So second question, yes, on a select basis, we are still making shared national credit decisions. One of the credits that I was referring to that could impact is a shared national credit. The second one is not.

Chris Doll:

Thank you, Rob, and thanks, everyone, for your interest in Fifth Third. Please contact the IR department if you have any follow-up questions. Rob, you may now disconnect the call.

Timothy Spence:

Thanks, Chris. And good morning, everyone. Thank you for joining us today. The past six weeks have seen a great deal of volatility in the banking sector. Markets have been trading on narratives over fundamentals and the term regional bank has been used to describe such a broad cross section of business models that it has lost any real descriptive value. While we at Fifth Third take any instability in our sector very seriously, there was no crisis inside our four walls. We’ve been running the company with the expectation for a higher, for a longer rate environment for many quarters now. We’ve consistently communicated in these calls and at investor conferences. As our first quarter results demonstrate our balance sheet remains well fortified, and our capacity to generate strong profitability through the cycle is strong. Excluding items noted in the release, we reported earnings per share of $0.83, a 20% increase compared to the year ago quarter. We generated nine points of year-over-year positive operating leverage driven by an 18% increase in revenue. During the quarter we held average and period end deposits flat sequentially despite the industry wide impact of quantitative tightening and normal seasonal pressures. Our key credit metrics remain near historical lows with net charge-offs of 26 basis points coming in at the low end of our guidance range. NPAs NPLs and early stage delinquency ratios remained below normalized levels, and criticized assets decrease modestly during the quarter. Moreover, we accomplished all this while also being recognized by Ethisphere as one of only two U.S. banks on their world's most ethical companies list. We were named by Fortune as one of America’s most innovative companies. And we saw our FinTech platform provide named by Fast Company as one of the world's most innovative businesses. The strong outcomes achieved this quarter and in particular in the month of March highlight the strength, granularity and well balanced nature of our deposit franchise. In the weekend, following the failure of Silicon Valley Bank alone, we open more new commercial deposit accounts than we would in a typical month. Similarly, our consumer household growth accelerated after the March turmoil. Our commercial deposit franchises led by our peer leading treasury management business where we rank in the top 10 nationally and most major commercial payment types, 88% of our commercial deposit balances are attached to relationships that utilize TM services today, and the average age of our commercial deposit relationships is 24 years. These characteristics contribute strongly to stability regardless of balance size. Our consumer deposit base is granular with nearly 90% of total consumer deposits, FDIC insured and is anchored by our flagship mass market momentum banking offering and strong branch presence in the markets we serve. Annual consumer household growth finished the quarter above 3% led by our southeast markets above 7%. During the quarter, we opened five branches in our southeast markets on top of the 70 add ins in the past three years, and we expect to open an additional 30 branches by the end of 2023. All said, end of period total deposit balances ended the quarter above the level on March 8. Looking forward while we face the same headwinds that all banks do from increased deposit competition, economic uncertainty and the potential for regulatory change, I am confident in Fifth Third’s ability to achieve top quartile returns through the cycle with a focus on stability, profitability and growth. Our long-term discipline managing interest rate and liquidity risks positions us well to generate differentiated outcomes in a range of economic environment. From a credit risk perspective, our low CRE concentration and commercial and in particular in office CRE, along with our focus on homeowners in consumer should prove to be significant advantages. Jamie will provide more information on our forward guidance, but the implied profitability and return metrics for our full year 2023 expectations are well ahead of our core 2019 results. Considering the uncertain and environment, we have elected to deposit [Ph] share repurchases for the second quarter and we’ll evaluate resuming them in the second half of the year. Last, but certainly not least, I want to thank our 20,000 employees for their hard work and dedication and supporting our customers, communities and shareholders. Your commitment to living our purpose and making sure we do the right thing every day is evidence. With that, I’ll now hand it over to Jamie to provide more details on our financial results and outlook.

Chris Doll:

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

Scott Siefers:

Good Morning, guys. Thank you for taking the question. Let’s see, Tim, you talked about the much higher than typical commercial account openings in during all the turmoil. Can you talk about sort of early reads on what has happened with those and sort of generally speaking how you’d expect commercial customers to behave going forward, whether they’ll keep the same amount with their primary institution or diversify sort of permanently? How would that all work in your mind?

James Leonard:

Yes, and Scott, what we also saw in the first quarter was that clients were focused on getting money to the best vehicle possible. So for us during the quarter, we moved almost a billion dollars more into the money market portal that we manage for them. And even with that incremental movement, we were only down about a billion dollars in commercial and a seasonally challenged quarter when last year, we were down 2 billion in the quarter, seasonally and the year before that we were down 3 billion. So to Tim’s point, the money has been moving to the optimal investment vehicles. But the good news for us is we were able to overcome that headwind and actually posted a very solid commercial deposit quarter.

James Leonard:

Yes, the last tightening cycle, we moved down five points. This time we’re forecasting to go down eight to finish the year at a 30% DDA to core deposit level. Given that our rate outlook now has the 525 and a lot longer hold with no cut. We think we’ll see continued migration and higher earnings credit rates that will result in more DDA migration. And then the challenge over time is, can you sell enough treasury management services to rebuild that DDA balance and given our strong treasury management business, we feel confident in our ability to do it. So hopefully, we do bottom out at 30. But for every 1% more than that, it translates to 40 to 50 million of NII erosion. So, it’s, while not tremendous impact, we would still want to ensure that we get that 30% higher as we head into 2024 and things like that.

James Leonard:

Thanks.

Gerard Cassidy:

Hi, Tim. Hi, Jamie.

Gerard Cassidy:

Jamie, you’ve touched on the credit and how strong it is particularly in the commercial real estate office. I think when you guys look at the scene I portfolio is there anything on the horizon whether it’s I know your leverage loan balances, as you pointed out, are down dramatically from 2016. What are you guys seeing or sensing on the scene in the C&I portfolio not CRE?

Timothy Spence:

And if I if I just add one thing on that drawing, scale is going to matter in terms of the clients that you bank, in C&I, because if you think about the dynamics that are creating headwinds for the economy, they’re related to your ability to manage input costs, or production. And ultimately, right the higher costs of carrying inventory to offset concerns around supply chain resiliency on an on-going basis. So when you the sense you get I do when I’m out talking with clients is the manufacturing businesses and the businesses attached to the resurgence of manufacturing in the U.S. are doing really, really well. The businesses that are attached to more discretionary spending. The larger clients have been able to pass input cost increases higher cost of labor through the smaller ones are having a more difficult time. And I think that arm wrestling we're seeing going on right now as an example between the not for profit hospitals and the health. The health care insurance companies is a really good example of where the larger not for profits are having a easier go of extracting concessions to cover increases in nursing costs and otherwise, and the smaller ones, it’s – it’s been more of a standoff.

James Leonard:

Yes, I would say that. On the positive side of net interest income, if the industry and the competitive dynamics settled down over the next couple of months, couple of quarters, then we would expect that we would operate in that low to mid 40s beta and that would deliver the higher end of our NII guide. We’re a little cautious though, in what we’re seeing from a competitive standpoint, as banks are clearly focused on driving, more insured retail deposit growth, and therefore the retail beta is the wildcard in our guide, and why we show the range of deposit betas that could play out and therefore the range of the NII guide is a little wider than what we normally would do just given the uncertainty with how competition will react. So in the near term, that is the wildcard that perhaps retail deposit betas which had been very well behaved actually double by the end of the year. And that would take us to the low end of the guide. I think longer-term when it comes to rates progressing beyond five and a quarter. It really comes down to what are the credit implications as the Fed reaches an even higher level. We think the magnitude of the rate increases have certainly created some shock across the country. And you saw that obviously, in what we’re calling the March Madness. But I think from an NII perspective, those higher rates could continue to be productive as long as the deposit beta dynamics stay in the 40% range. But if competition heats up, and we get into a 60% plus beta environment, that would be unproductive to NII.

Operator:

Our next question comes from the line of Ken Usdin from Jefferies. Please proceed.

James Leonard:

Yes, we feel very good about how the balance sheet is positioned, especially for a downgrade environment. Obviously, the swaps we’re very pleased with the entry points there. We’ve talked at length about in 2025, there’ll be a nice increased NII as the new swaps kick in. In terms of the investment portfolio positioning, we’ll have a bit of a decline in the second quarter as we don’t reinvest cash flows, but from there should be relatively stable. We may continue to reposition non-HQLA and the level ones but ultimately that’ll be regulatory dependent, but overall feel good about the bullet locked out nature, the structure that we have. So I think for us, it’s going to be more of operating in a high 70s loan to deposit ratio and continuing to maintain that while being very disciplined on credit which is why the loan growth guide was trimmed a bit to that up, up 2% to 3% level.

James Leonard:

Yes, I mean, in general, it’s going to be, it’s a balance of that nature of when the cuts actually occur. If you’re in a foreign liquidity environment where things still are relatively tight, the Fed has gotten inflation under control, but there’s not a big credit event obviously, the measured cuts would be one where you’re going to have a little bit more challenging time, reversing all the beta, you’re still going to get some of the beta out. But in this scenario, where the Fed is having to loosen liquidity conditions pretty rapidly, you’re going to have an opportunity to get a little bit more aggressive on your rate cuts from there and get some more of that beta out. So it really is going to be a little bit of a balance of how things play out. We’ve spent a lot of time positioning the commercial book in particular, to make sure that we stay with the appropriate amount of price sensitivity there so that we can reprice down as necessary. We’re up to about $20 billion of index deposits. So we’re taking a lot of actions to make sure that we’re well positioned, whether they stay high, or if they cut that we’ve got the flexibility to navigate through those different environments.

Operator:

Our next question comes from the line of Erika Najarian from UBS. Please proceed.

James Leonard:

Morning, Erica.

Timothy Spence:

Sure. I’m going to let Jamie start on that one, Erica, and then I’ll follow.

Timothy Spence:

And I think just to add two thoughts. Our capital stress testing indicates you could run the bank at below 9%, which is the reason that hasn’t been the binding constraint for us. We just elect to do it at the level we do because we like stability, right? And I think we were clear with everybody when we reset the capital target last year, we did it because we were concerned about uncertainty in the Outlook, and we felt that it was prudent to start building capital early as opposed to having to do it later. So I am pleased in our positioning, I think more broadly one caution I would give everybody is I think some will take the discussion about change in regulation on capital liquidity and just bake it into models. Without assuming that there’s any sort of evolution in the business model. The FDIC has been publishing quarterly data on the sector, I think since 1934. At least the dataset goes back that far. And there’s been more than one regulatory regime change during that period. And if you adjust for tax, the tax policy at a given point in time, the return levels in the sector have been remarkably consistent. So to the extent that more banks are required to hold more capital, or more liquidity, or to change the structure of funding, I think it’s reasonable to expect that the business model is going to evolve, as well.

Timothy Spence:

I mean, I think the answer is you the way that you manage that proactively as you would have started doing something on each of those topics last year, right. So we were in the market, after every earnings call last year, four times. And as a result, have the lowest incremental need in the event that TLAC had no phase in period, right. As an example, you were deliberate about the way that you manage the ACL to reflect uncertainty in the forward outlook, and therefore you’re carrying good coverage today, right, which we certainly feel we are. And you would have allowed yourself to a CRE capital during a period when the market was certainly more robust for regional banks, which I think, of course we did as well. I think lastly, what we’re going to see here coming out of this, even if there is no change in regulation, as we all will flow, the empirical data from March Madness, through our models, and it’s going to dictate a very different value for non-operational money and operational money, right. And the by-product of that is the banks that have good core retail deposit franchises, and who have good commercial operational commercial franchises. So linked to payment activity, treasury management services, and otherwise, that that is going to be the place that you want to be because while we think the Fed obviously at some point, rates are going to stay higher than zero on an absolute basis, and our ability to make money on both sides of the balance sheet is going to be a big driver who does well if there is more capital requirements or liquidity requirements are higher. Thank you.

Operator:

Our next question comes from the line of Mike Mayo from Wells Fargo Securities. Please proceed.

Timothy Spence:

Yes. So I mean us, Mike, we like to try to toe the line. We’re an and company more than we are and more companies. There’s no question that I think we all feel more cautious about the prospect for loan growth. Part of that is the Feds been abundantly clear, they’re going to tamp down demand, right, no matter what it takes that but I note that the 1% decline for us comes on top of what I think was already the lowest full year loan growth guidance. So we have been pretty cautious as it related to loan growth. And in terms of expenses, I think you noted the actions we took during the quarter; we continue to be surgical about pruning the branch network, which creates the capacity to invest in the southeast. We had little more than 12 million bucks and severance that rolled through attached to expense actions that were designed to take capacity out of businesses that we just don’t believe are going to need it, given the outlook. And I think the discipline that we have had, which is we believe in self-funding investments, because it drives good discipline around capital allocation, and effort is going to be the same here. So we do not intend to pause, the strategic investments we’re making in the southeast or the investments we’re making in the technology platform, those are going to be too valuable for the franchise in the long-term. But we are not going to be spending money on a discretionary basis that we don’t think, is going to generate a near term return, outside of our strategic investments.

James Leonard:

Yes, just to clarify on the AFS, my comment was about the AOCI, should it be a capital requirement that we would have significant improvement based on the implied forward curve through the end of 2024 about 45% of that would roll down the curve, given the bullet structure of the portfolio, not necessarily selling at all. So we do like the portfolio. But in terms of the TLAC challenge. At the end of the year, our gap to the 6%, RWA bank level would be about $4 billion. So for a bank our size that is certainly manageable, and then the question then becomes, what would the regulations change with what you would do with the proceeds. So right now, we’re sitting on $10 billion of excess cash, which is, frankly, the biggest driver of the NIM erosion as we look forward on a full year basis, because that 10 billion of excess cash costs about 16 basis points of NIM. And so if we were to issue 4 billion more in debt, obviously, we would prefer to lend it to customers. But if the liquidity rules tighten, and we have to hold a higher Reg YY liquidity buffer, then we will be forced than any of their just holding an in cash or buying more level ones. And so it starts to become a challenge with the distribution of the proceeds. When you say what, what it sets you apart, and what your earnings profile improve, I think it would just be a gross up on the balance sheet and, and really not productive. And so that’s why we haven’t done it.

James Leonard:

We haven't issued any this year, but total long term debt is $13 billion right now.

Michael Mayo:

Right. All right. Thank you.

John Pancari:

Good morning.

John Pancari:

Just a question on the securities book, I appreciate the detail you gave on 525 on the commercial mortgage backed securities, I know there are 52% of your securities book. Can you maybe give us an update there? Are you seeing any stress there in terms of the performance of those securities amid the commercial real estate stress? And then, what type of stress and would be needed to pose risks to valuations or other than temporary impairment in that portfolio? Thanks.

John Pancari:

Got it? Thank you, it’s very helpful. And then separately. I was just wondering if you can update us on the status of your core systems conversion, the March Madness at all impact the progression of the conversion of the timing of the expected conversion? And then lastly, can you maybe help us with the sizing up of the cost of the conversion and how much is expected to be capitalized?

John Pancari:

Got it. Thank you, Jamie very helpful.

Manan Gosalia:

Hey, good morning. I was wondering if you could give us some more color on why you expect deposits to grow as we get into the remainder of the year, what are you seeing in your underlying account openings and conversations with clients that gives you the confidence in that outcome? I guess my question is, why shouldn’t some of these new deposits just go back to the banks, where they have longer relationships? So once the volatility in the in the system settles down.

Manan Gosalia:

Got it, very helpful. And then maybe as a follow up, and maybe the response to this is the same. But as I look at the deposit beta assumptions on slide 11, they look pretty conservative relative to the rest of the street. But if I look at the slope of their line, it is flattening as we look into the forecast period. So why shouldn’t we expect the same rate of change that we’ve seen there more recently?

Manan Gosalia:

Got it. Thank you.

Ebrahim Poonawala:

Good morning.

Ebrahim Poonawala:

Just two quick follow ups, one on credit. I think, Jamie, you mentioned about 80% base case, unemployment 4%. Give us a sense of just sensitivity if that 4% were to be 5%, what does that mean for your allowance or the consumer allowance?

Ebrahim Poonawala:

Okay, helpful. And other quick follow up on going back to Tim, your comments around capital. And Matt, given just the uncertainty around regulations, Mac, macro economy, the nine and a quarter CT1 like, do you? Should we anticipate that drifts higher at least for the next few quarters until there’s more visibility? Or do you expect to be more proactive and return back to sort of buybacks in the back half of the year?

Ebrahim Poonawala:

And just on the environment. I think last quarter, we talked about things worsening maybe back half of this year into 24. Do you have any better visibility in terms of just the shape of the credit cycle, how deep it could be? And just when we begin to actually see the first sort of deterioration, show up in the numbers on credit metrics.

Ebrahim Poonawala:

That’s great color. Thanks.

Christopher Marinec:

Thanks for taking my question. Tim, just want to ask about dividend finance kind of skewing the loan growth this year maybe in a positive way to where the loan growth ex dividend is very conservative. Is that a fair way of thinking it through?

Christopher Marinec:

Got it. And the rest is rolling off and not…

Christopher Marinec:

Got it? Very well. Thank you, Tim. I appreciate it.

Chris Doll:

Thanks, Molly. And thanks everyone for your interest in Fifth Third. Please contact the IR department if you have any follow up questions. Molly, you can now disconnect the call.

Chris Doll:

Good morning, everyone. Welcome to Fifth Third’s fourth quarter 2022 earnings call. This morning, our President and CEO, Tim Spence; and CFO, Jamie Leonard will provide an overview of our fourth quarter results and outlook. Our Chief Credit Officer, Richard Stein; and Treasurer, Bryan Preston have also joined the Q&A portion of the call. Please review the cautionary statements on our materials, which can be found in our earnings release and presentation. These materials contain information regarding the use of non-GAAP measures and reconciliations to the GAAP results, as well as forward-looking statements about Fifth Third's performance. These statements speak only as of January 19, 2023 and Fifth Third undertakes no obligation to update them. Following prepared remarks by Tim and Jamie, we will open the call up for questions. With that, let me turn it over to Tim.

James Leonard:

Thank you, Tim and thank all of you for joining us today. Our quarterly and full year financial performance reflect focused execution and resiliency throughout the bank. We generated strong loan growth in both commercial and consumer categories and generated record revenue. NII was positively impacted by higher market rates as deposit repricing has lagged the repricing of our earning assets, combined with the benefits of fixed rate asset generation at higher rates. Fee income has remained resilient despite the market related headwinds and expenses were well controlled while we continue to reinvest in our businesses. We achieved a full year adjusted efficiency ratio of 56%, which improved throughout the year with the fourth quarter adjusted efficiency ratio below 52%. Our fourth quarter PPNR grew 12% compared to last quarter and 40% compared to last year. Net interest income of approximately $1.6 billion was a record for the bank and increase 5% sequentially and 32% year-over-year. Our NIM expanded 13 basis points for the quarter. While interest-bearing core deposit costs increased 64 basis points to 105 basis points, reflecting a cycle to date interest-bearing core deposit beta of 24% in the fourth quarter. Total non-interest income increased 9% sequentially driven by our TRA revenue and commercial banking fees. That growth in commercial banking fee income was primarily driven by higher M&A advisory revenue and client financial risk management revenue, and it was partially offset by softer results in mortgage banking origination fees. Non-interest expense increased just 1% compared to the year ago quarter. This expense growth was driven by our acquisition of Dividend Finance during the year combined with continued investments in Provide compensation associated with our minimum wage hike, as well as higher technology and communications expense, reflecting our focus on platform modernization initiatives. Excluding the impacts of Dividend and Provide, total expenses would've been down 1% year-over-year. Moving to the balance sheet. Total average portfolio loans and leases increase 1% sequentially. Average total commercial portfolio loans and leases increased 1% compared to the prior quarter, reflecting an increase in C&I balances. Growth was led by our corporate bank and robust in almost all of our industry verticals. Among our verticals, production was strongest in energy, including renewables, which increased over 50% year-over-year. Healthcare growth was led by Provide with Provide balances up 150% year-over-year. The period end commercial revolver utilization rate remains stable compared to last quarter at 37%. Average total consumer portfolio loans and leases increase 1% compared to the prior quarter, led by Dividend Finance as well as growth in home equity. This was partially offset by a decline in indirect secured consumer loans. Average total deposits increased 1% compared to the prior quarter as an increase in commercial deposits was partially offset by a decline in consumer deposits. Period end deposits increase 1% compared to the prior quarter. After the deliberate runoff of surge deposits in the middle of the year, we have achieved solid deposit outcomes throughout the second-half of 2022 reflecting our strong core deposit franchise. Moving to credit. As Tim mentioned, credit trends remain healthy and our key credit metrics remained well below normalized levels. The MPA ratio of 44 basis points was down two basis points sequentially, and our commercial MPA ratio has now declined for nine consecutive quarters. The net charge-off ratio increased just one basis point sequentially to 22 basis points within our guidance range. The ratio of early stage loan delinquencies 30 to 89 days past due also increased only two basis points sequentially and remains below 2019 levels. From a balance sheet management perspective, we have continually improved the granularity and diversification of our loan portfolios through a focus on high quality relationships. In consumer, we have focused on lending to homeowners, which are 85% of our consumer portfolio. We also have maintained the lowest overall portfolio concentration in non-prime consumer borrowers among our peers. In commercial, we have maintained the lowest overall portfolio concentration in CRE. Across all commercial portfolios, we continue to closely monitor exposures where inflation and higher rates may cause stress and continue to closely watch the leverage loan portfolio and office CRE. We have focused on positioning our balance sheet to deliver strong stable NII through the cycle. Our strong deposit franchise, our investment portfolio positioning, and our cash flow hedge portfolios will provide protection against lower rates well beyond just the next few years, as well as the addition of the fixed rate lending capabilities from both Dividend and Provide should continue to support our strong through the cycle outcomes. Moving to the ACL. Our ACL built this quarter was $112 million, primarily reflecting loan growth. Dividend Finance loans contributed $96 million to the ACL build. As you know, we incorporate Moody's macroeconomic scenarios when evaluating our allowance. The base economic scenario from Moody's assumes the unemployment rate reaches 4.2%, while the downside scenario underlying our allowance coverage incorporates a peak unemployment rate of 7.8%. Given our expected period end loan growth, including continued strong production from Dividend Finance, we currently expect a first quarter build to the ACL of approximately $100 million, assuming no changes in the underlying economic scenarios. Moving to capital. Our CET1 grew from 9.1% to 9.3% during the quarter. The increase in capital reflects our strong earnings generation, which was partially offset by the impact of a $100 million share repurchase completed in December. Moving to our current outlook. We expect full-year average total loan growth between 3% and 4% compared to 2022. We expect most of the growth to come from the commercial loan portfolio, which is expected to increase in the mid-single-digits in 2023. We expect line utilization to be stable in the first-half of 2023, but then decline slightly to 36% as capital markets conditions improve a bit in the second-half of the year. We expect total consumer loans to increase modestly as an expected increase from Dividend Finance and modest growth from home equity and card will be mostly offset by a decline in auto and mortgage reflecting the environment. For the first quarter of 2023, we expect average total loan balances to be stable sequentially. We expect commercial loans to increase 1% reflecting strong pipelines in middle market and corporate banking, and assuming commercial revolver utilization rates remain generally stable. We expect consumer balances to be stable to down 1%, reflecting lower auto and residential mortgage balances, partially offset by dividend loan originations of $1 billion or so in the first quarter. From a funding perspective, we expect average core deposits to be stable to down a 1% sequentially, reflecting seasonal factors before resuming modest growth in the subsequent quarters of 2023. We expect continued migration from DDA into interest-bearing products throughout 2023 with the mix of demand deposits to total core deposits ending the year in the low 30s. Shifting to the income statement. Given our loan outlook and the benefits of our balance sheet management, we expect full year NII to increase 13% to 14%. Our forecast assumes our securities portfolio remains relatively stable from the second-half of 2022 levels and reflects the forward curve as of early January with Fed funds increasing to 5% in the first quarter and the first 25 basis point rate cut occurring in the fourth quarter of 2023. Our current outlook assumes total interest-bearing deposit costs, which were 112 basis points in the fourth quarter of 2022 to increase in the first-half of 2023 before settling in around 2% or so in the second-half of 2023. Our outlook contemplates an environment of continued deposit competition, which would result in a cumulative deposit beta by the end of 2023 of around 42%, given the two additional rate hikes in our forecast over our October guidance. The future impacts of deposit repricing lag combined with the dynamics of our loan portfolio should result in our full year 2023 net interest margin, increasing five basis points or so relative to the fourth quarter of 2022 NIM. We expect NII in the first quarter to be down 1% to 2% sequentially reflecting the impact of a lower day count in the quarter combined with stable loan balances. We expect adjusted non-interest income to be relatively stable in 2023, reflecting continued success taking market share due to our investments and talent and capabilities resulting in stronger gross treasury management revenue, capital markets fees, wealth and asset management revenue and mortgage servicing to be offset by the market headwinds impacting top line mortgage revenue and higher earnings credit rates on treasury management, as well as subdued leasing remarketing revenue. If capital markets conditions do not improve, we would expect to generate improved NII and lowered expenses in the second-half of 2023. We expect our fourth quarter TRA revenue to decline from $46 million in 2022 to $22 million in 2023. Our guidance also assumes a minimal amount of private equity income in 2023 compared to around $70 million in the prior year. We expect first quarter adjusted non-interest income to be down 6% to 7% compared to the fourth quarter, excluding the impacts of the TRA, largely reflecting seasonal factors. Additionally, we expect to continue generating strong financial risk management revenue, which we expect will be offset by slowdown in M&A advisory revenue and the impacts of higher earnings credits and software top line mortgage banking revenue given the rate environment. We expect full year adjusted non-interest expense to be up 4% to 5% compared to 2022. Our expense outlook includes a one point headwind each from the FDIC insurance assessment rate change that went into effect on January 1st, the mark-to-market impact on non-qualified deferred compensation plans, which was a reduction in 2022 expenses and the full year expense impact of Dividend Finance. We also continue to invest in our digital transformation, which should result in technology expense growth of around 10% consistent with the past several years. We also expect marketing expenses to increase in the mid-single-digits area. Our outlook assumes we close 25 branches in the first-half of 2023 that will deliver in year expense savings and also add 30 to 35 new branches in our high growth markets, which will result in high-single-digits growth of our Southeast branch network. We expect first quarter total adjusted non-interest expenses to be up 6% to 7% compared to the fourth quarter. As is always the case for us, our first quarter expenses are impacted by seasonal expenses associated with the timing of compensation awards and payroll taxes. Excluding these seasonal items, expenses will be down approximately 2% in the first quarter. In total, our guide implies full year adjusted revenue growth of 9% to 10%, resulting in PPNR growth in the 15% to 17% range. This would result in a sub 53% efficiency ratio for the full year, a three point improvement from 2022. We expect 2023 net charge-offs to be in the 25 to 35 basis point range with first quarter net charge-offs in the 25 to 30 basis point range. In summary, with our strong PPNR growth engine, discipline credit risk management and commitment to delivering strong performance through the cycle, we believe we are well-positioned to continue to generate long-term sustainable value for customers, communities, employees, and shareholders. With that, let me turn it over to Chris to open the call up for Q&A.

Operator:

[Operator Instructions] Your first question comes from a line of Gerard Cassidy from RBC. Your line is open.

Timothy Spence:

Morning Gerard.

Timothy Spence:

Yes. Sure, Gerard and thanks for the question. I don't think we're going to fall off a cliff in the second-half of the year. That's certainly not consistent with what I hear. I was out and went and looked at the calendar the other day. I got to get into eight of our 15 markets in the fourth quarter of this past year. And I think I probably saw 40 or 50 clients while I was out there. I mean, here's what I hear. Like if you look at the manufacturing clients as an example, they're all feeling much more optimistic about moderation as it relates to raw materials. And I think by and large, they solved the supply chain issues that they were facing either through inventory builds or through restructuring the supply chain or because the overseas suppliers that they were relying on to come back online or there isn't an issue in the ports or otherwise. I think the issues they're running into are twofold. One, labor continues to be a challenge and it's labor cost, but it's also just labor availability. Two, because they solved their supply chain challenges through building inventory. When you think about lower inventory turns, you add in rising interest rates, now debt service costs to revenue or higher proportion. And so, while they got the costs associated with raw materials through this last year in price increases, they're all looking to the next 18 to 24 months to try to figure out how they pass on just this sort of continued slow grind on labor, and debt service costs. The services clients are having no problem pushing through costs, which I think is like evident in the inflation data and personally to anybody that took a vacation over the holidays this year. And they continue to be optimistic because demand has remained strong. I think what I hear more than anything else is that we're going to have a little bit of a slow grind down here in terms of growth, and that if anything, the thing I'm more worried about is not do we end up with plus 5%, 0.5% GDP or minus 0.5% GDP, but rather that the market may be overly optimistic about how quickly the Fed is going to be able to bring rates down. And that the byproduct of that is from an operating standpoint, you have to be thinking a lot more about how you position the balance sheet for the next three to five years and for more tepid growth and higher rates than worrying about the next, call it, 12 months in terms of the outlook.

James Leonard:

Yes. Thanks Gerard. And yes, I knew when we put you in the queue, I was going to get an AOCI question, so, thanks for living up to that. In terms of the AOCI, if you look at year-end levels with the 10-year at roughly 387, the AOCI, earns back with our duration at 5.4. It earns back pretty evenly across that time period. So, a billion or so of TCE earn back per year. Obviously, no capital impact given that we're category four. If you fast forward to today and where the 10-year is, certainly we've had a significant improvement in the AOCI just in the first 19 days of January. So that would be helpful to the TCE as well. In terms of the securities yields, obviously, we're very pleased with how the portfolio is positioned at a 3% yield. I would expect that what's going to happen with the investment portfolio is that it will continue to grind higher each quarter and finish the year at a 310 level. So, the average for the year is probably in the 305 range, because as we're reinvesting cash flows or seeing opportunities on new investments, we're looking at entry points in that 475 area right now.

Operator:

And your next question comes from a line of Mike Mayo from Wells Fargo. Your line is open.

James Leonard:

Yes. Mike, it's Jamie. Yes, I did reference the ROTCE motel few quarters back. And I guess today's theme, it's -- the held to maturity is more like a hide the maturity. And it certainly helps having that flexibility to reposition as environments change. But really there's no one thing that's driving the strong NII outlook and NIM expansion for us. It really is the result of years of hard work of deliberately positioning the balance sheet for really what is a range of outcomes that still could play out given all of the uncertainty. And it really is a total company effort. And that comes from the household growth, new commercial relationships, product innovation, the FinTech acquisitions, and ultimately sales execution both on loan pricing and deposit generations. So that's really what is giving us the ability to grow NII during the course of 2023, as well as expanding NIM at the same time. And I think it's one of those capabilities of Fifth Third that we've proven over the past decade that's perhaps underappreciated by the market. And like you said, the securities are certainly going to be a higher level of gross income over the course of 2023, in part because we were patient in deploying the excess cash that we had and not buying securities when the 10-year was below 2% or even below 1% like some of the other banks. I think one of the bigger differentiators for us will be the fixed rate loan businesses that we have in our ability to emphasize or deemphasize those businesses. And right now, we have a little bit of an emphasis on auto being able to generate roughly $6 billion this year. And then dividend where the gross income on dividend will exceed over $200 million of growth in 2023 relative to 2022. And so really when you package it all together with an investment portfolio that's in a net discount position of about $1 billion, a dividend portfolio that by the end of 2023 will have unamortized fees, that will roll through NII of about $1 billion. We've got a lot of downside protection and a core franchise that with its ability to grow loans and deposits really is helpful. And within all of this guide, we do not assume spread widening. So to the extent that were to happen is, Tim mentioned, that would only be upside to our guide.

Timothy Spence:

Yes. I'll let Jamie fill the question on the specific assumptions on reserves, Mike. But I probably lost my crystal ball when I moved offices earlier this past year. So, I have to rely on what I hear from clients or what we get from our friends at Moody's and otherwise. If you asked me today, I would tell you we're going to have a shallow recession, I think. But I don't know that there's a big difference between a half a percent of growth and a half a percent of GDP decline in particular, given the amount of derisking that's been done inside the banking sector and certainly inside Fifth Third over the course of the past decade. I think the more interesting dynamic really is going to be this question about the duration of a recession if we see it, and what happens if we don't get a typical recovery, right? If you have several years of below trend growth and inflation that sits above the historic, certainly above the historic 2% target. But Jamie, you want to fill the question on the inputs on the reserves?

Michael Mayo:

So that's 20% for the 8% unemployment, and 80% for the 4.2% unemployment.

Michael Mayo:

Got it. All right. Thank you.

Operator:

Your next question comes from the line of Scott Siefers from Piper Sandler. Your line is open.

James Leonard:

Yes. We feel very good about the ability to have a floor on the NIM at that 330 level and a 200 down scenario should that play out, given all the work we've done on the investment portfolio with the bullet locked out cash flows along with being in a fairly sizable net discount position and the duration that we have combined with the fixed rate loan origination platforms with auto, Dividend and Provide, those should all provide yields. And then as we've talked in the past, we've layered in $15 billion of received fixed swaps that will also provide additional protection from 2025 through 2032. And that may be one other differentiator for us relative to peers is that we've been focused more on protecting that downside over a longer period of time and therefore, the duration of our swap book as well as our investment portfolio maybe a little better positioned should that downturn occur at the end of the decade.

James Leonard:

Sure. Thanks. When it comes to the fee income, we did say relatively stable over the course of the year and probably is helpful to look at it from two components. The first would be a category I'll call the factors in our control that do deliver nice growth, both from a strong customer acquisition perspective as well as overall fee generation from a combination of the branch network, our wealth business, the commercial business. That will drive both credit card income as well as wealth and asset management fees in the mid-single-digit area and top line fee equivalent growth in the treasury management area in the high-single-digit area given our strong product lineup. From there, transitioning to mortgage, that's actually going to be the largest growth item for us in 2023. And it really goes back to all the work that we put into growing the servicing business in 2020 and 2021 when levels were more depressed. It was a good buying opportunity. And so, given our strong mortgage servicing platform, we'll increase those fees from $125 million in 2022 to the $160 million area. So that's a growth of almost 30%, whereas top line mortgage should be relatively stable off very low levels. So, we feel good about those items. Capital markets, certainly the wildcard in our guide, given that we do expect mid to high-single-digits growth in the first-half of the year relative to the first-half of 2022. And then we assume a little bit of additional growth in the back half of the year under the assumption that the capital markets disruption should abate once the Fed reaches its terminal Fed fund level. And again, as I said in the prepared remarks, if that were to not happen, then we would expect a little bit better loan growth, a little bit better NII and lower expenses. So, in terms of PPNR on a relative basis, I feel confident in that should the capital markets improvement not occur. And then the other category when it comes to fees, it would be the headwinds facing us. So, they're really environmental given the increase in interest rates, and that's on the earnings credit. We're managing earnings credits to about a 20 beta, which is a little bit better than what we thought as we entered the cycle. But even with that, service charges ultimately will be down mid-single-digits for the year, which more than offset that strong top line fee equivalent growth. On the consumer overdraft and NSF side, we probably do a little bit better relative to peers, just given that we move sooner on some of those fee and structural changes. But overall, the first-half of the year will be a little bit softer as we lap those changes that occurred mid year 2022. And then as we said in the prepared remarks, the TRA will decline in 2023 as well our expectations on lower private equity income so that other fees will be down 20%, 25% or so.

Scott Siefers:

Excellent. That’s terrific color. Thank you guys very much.

Manan Gosalia:

Hey, good morning.

Manan Gosalia:

I was wondering, can you just walk through the puts and takes around deposit growth in 2023? I mean, it seems like the expansion in the Southeast is definitely a tailwind here. So, how are you thinking about deposit growth, especially given the more challenging macro backdrop?

Timothy Spence:

Yes. And just to put a number on the -- narrowly on the Southeast, like we grew consumer deposits by over 6% in the Southeast this past year to Bryan's point. That is anti has been a tailwind for us.

Bryan Preston:

Yes. We're very comfortable with where we are from a wholesale funding perspective. We continue to have very significant contingent liquidity sources that help us manage through uncertainty in the environment. If we see decent deposit growth, we could see those wholesale funding balances come down over time. But we have a lot of flexibility across our funding base to help us manage through both liquidity needs as well as net interest income.

Operator:

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

Timothy Spence:

Yes. Let me give you the quick answer, and then I'll let Richard comment. Absolutely. I think that is our view is that it's more of a slow growing dynamic here than a cliff, right, as Gerard mentioned earlier. And that the longer that we go with rates at elevated levels, the more pressure that it places on business -- commercial borrowers, in particular. I think our consumer borrower is a little bit different because such a significant share of our consumer lending is done to homeowners that they've had the ability to inoculate themselves a little bit from inflation because they locked in these historically low fixed rate cost of housing. Richard, do you want to talk a little bit about where specifically you think that grind may take a toll?

Ebrahim Poonawala:

That was helpful. And I guess, just one quick follow-up, Jamie, on Dividend Finance. About $100 million of provisioning. Anything else around Dividend Finance in terms of growth outlook this year versus last year that we should be aware of? Are things picking up or slowing down as we think about just the underlying growth in the business?

Ebrahim Poonawala:

Noted. Thank you.

John Pancari:

Morning.

John Pancari:

On the credit front, I know you gave us really good detail on delinquencies and non-accruals. Do you have what criticized assets did in the quarter? And what areas of criticized they have migrated negatively?

John Pancari:

Okay. Thank you. That's helpful. And then sticking to credit, just my follow-up is around both commercial real estate and home equity. In commercial real estate, it looks like you did see pretty noteworthy move up in delinquencies as well as the non-accruals. And so, can you guys talk a little bit about property types within commercial real estate where you're seeing the distress and where your loan to value ratios are? And then in home equity, it looks like you also saw a pretty noteworthy increase in delinquencies there. Just want to get color around that portfolio. Thanks.

Timothy Spence:

John, I just was going to say on the equity side, all you're seeing, I think, in the consumer for us at the moment is just seasonality. Like a sequential comp from the third quarter to the fourth quarter are the wrong comparisons. Just given the natural seasonality in those businesses, I think it's better just to look at year-over-year. And we expect consumer credit to normalize over time. That's reflected in the guide that we gave. But the delinquency dynamics there are really no different than what you would have seen pre-pandemic, other than the fact that they're still muted relative to what we would have had in the past. So, I -- personally, home equity is not the area that's been an area of focus for me. That's for certain.

Timothy Spence:

Well, actually, the dynamic there is that for the first time in as long as I've been at the bank, we actually had quarter-over-quarter home equity growth. What's driving that outcome, but not a change in perspective for us on the quality of the credit or the likely outcomes there.

Operator:

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

James Leonard:

Yes. Actually, spreads have done well and are actually off to a very solid start in 2023. We finished the year in 2022 with 7.1 billion of production, if you take auto as well as the RV, marine and specialty business combined. So that fixed rate consumer secured loan category. Our expectation for 2023 for that asset class is to be down to about 6 billion or so. So, loan balances in that caption, we would expect to be down. However, yields, we expect to improve 100 basis points from the fourth quarter 2022 levels to fourth quarter 2023 levels. So, it is a nice accelerator to the earlier question around how are you able to deliver both NII growth and NIM expansion. That certainly is a helpful driver.

James Leonard:

Yes. Great question, Matt. Thanks for asking. I would say that as this environment unfolds, it really is, to your point, going to create differentiation in both performance execution and overall balance sheet positioning. We've, I think, for a number of quarters and years now been discussing how cautious our outlook is. And that has really informed what we're willing to do from a credit risk appetite perspective. So, the capital levels ultimately are a factor of the credit profile of what's on the sheet as well as the reserve levels that we have. So, the CET1 level at 925 and an ACL level of 198 creates a very sufficient loss absorption capacity. And given our SCB level is the at the minimum, I think external factors or forces would say that we're very well-positioned from a credit profile perspective as well as from a loss absorption capacity. So, we feel good about that.

Operator:

Your next question comes from the line of Ken Usdin from Jefferies. Your line is open.

James Leonard:

Yes. Great question. The PPNR levels for Dividend will be positive in the back half of -- or in 2023. The net income of Dividend post ACL will be positive or accretive in 2024. Certainly, if prepayments accelerate faster than what we have modeled, then that large amount of unamortized platform fees will come through the P&L, would it improve or accelerate the return profile. But for now, that's how we have it playing out. And we model roughly an eight-year life on the dividend asset and that we would expect to have loss rates in the 125 basis point area on a blended basis for the portfolio per year over those eight years.

Operator:

And there are no further questions at this time. Mr. Chris Doll, I turn the call back over to you for some closing remarks.

Chris Doll:

Thank you operator, and thanks everyone for your interest in Fifth Third. Please contact the investor relations department if you have any follow-up questions. Operator, you can now disconnect the call.

Chris Doll:

Good morning, everyone. Welcome to Fifth Third’s Third Quarter 2022 Earnings Call. This morning, our President and CEO, Tim Spence; and CFO, Jamie Leonard will provide an overview of our third quarter results and outlook. Our Chief Credit Officer, Richard Stein; and Treasurer, Bryan Preston have also joined us for the Q&A portion of the call. Please review the cautionary statements on our materials, which can be found in our earnings release and presentation. These materials contain information regarding the use of non-GAAP measures and reconciliations to the GAAP results, as well as forward-looking statements about Fifth Third's performance. These statements speak only as of October 20, 2022 and Fifth Third undertakes no obligation to update them. Following prepared remarks by Tim and Jamie, we will open the call up for questions. With that, let me turn it over to Tim.

Jamie Leonard:

Thank you, Tim, and thank all of you for joining us today. We are pleased with our third quarter results. We generated strong loan growth in both commercial and consumer categories and generated record adjusted revenue. NII was positively impacted by higher market rates. The income was resilient despite the market-related headwinds and expenses were well controlled while we continue to reinvest in our businesses. Consequently, we achieved a 53% adjusted efficiency ratio. Also excluding net securities losses related to two legacy venture capital investments, we generated core PPNR growth of 13% compared to last quarter and 27% compared to last year. Net interest income was approximately $1.5 billion, a record quarter and increased 12% sequentially and 26% year-over-year, primarily attributable to the benefit of higher market rates, growth and commercial loan balances, and the full quarter benefit of securities purchased in the second quarter. Our NIM expanded 30 basis points during the quarter, while interest bearing core deposit costs increased 32 basis points to 41 basis points in total, this quarter. This equates to a cycle to date deposit beta of 16% thus far on the first 225 basis points of rate hikes. Total reported non-interest income decreased just 1% sequentially. We generated improved mortgage banking and leasing business fee income, which was offset by software results in market sensitive businesses, including capital markets, and the impact of higher earnings credit rates in treasury management. Non-interest expense increased 5% compared to the prior quarter, driven by an increase in compensation and benefits expense, including the impact of the July minimum wage increase to $20 per hour, higher technology and communications expense reflecting our focus on technology modernization initiatives, and the full quarter impact of the dividend finance acquisition. Expenses in the quarter included a $7 million benefit related to the mark-to-market impact of non-qualified deferred compensation with a corresponding offset in securities losses. This compares to a $27 million benefit in the prior quarter. Excluding the NQDC impacts from both periods, total non-interest expense increased $35 million or 3%. Non-interest expense was flat compared to the year ago quarter despite the impacts of our fintech lending acquisitions of both Dividend and Provide. Moving to the balance sheet. Total average portfolio loans and leases increased 2% sequentially, including held for sale loans, total average loans increased 1% compared to the prior quarter. Average total commercial portfolio loans and leases increased 2% compared to the prior quarter, with muted pay-off and a stable revolver utilization rate of 37% period and commercial loans increased 1% sequentially and 14% compared to the year ago quarter. Average total consumer portfolio loans and leases increased 1% compared to the prior quarter driven by dividend finance, which as a reminder is recorded in other consumer loans as well as growth in residential mortgage. This growth was partially offset by a decline in indirect secured consumer loans. At quarter end, dividend loan balances were approximately $1.4 billion. Average core deposits decreased 3% compared to both the year ago quarter and the prior quarter impacted by the intentional runoff of excess and higher cross commercial deposits in the second quarter, and lower consumer interest checking balances in the third quarter. Compared to the year ago quarter, average commercial transaction deposits decreased 10% while average consumer transaction deposits increased 5% reflecting our continued success growing consumer households. We grew our securities portfolio approximately $1 billion during the third quarter, compared to $6 billion in the prior quarter. We currently expect security portfolio balances to remain generally stable through the rest of the year. We have continued to focus on maintaining structure and the investment portfolio to provide stable and predictable cash flows. Our overall allocation to bullet and locked-out structures a quarter and remain at 67% in our duration declined to 5.5 in the current quarter compared to 5.8 in the prior quarter. Moving to credit. As Tim mentioned, credit trends remain healthy. And our key credit metrics remain well below normalized levels. The NPA ratio of 46 basis points was down one basis point sequentially. Our commercial NPA ratio has now declined for eight consecutive quarters. The net charge-off rate ratio was flat sequentially at 21 basis points. The ratio of early stage loan delinquencies 30 to 89 days past due remained relatively stable sequentially than the amount of loans 90 days past due was approximately two thirds of what it was a year ago. We continue to closely monitor central business district hotels, non-profit health care, including senior living and office CRE we are also monitoring exposures where inflation and higher rates may cause stress, including the impact of changing consumer discretionary spending patterns, as well as the on-going monitoring of the leverage loan portfolio. From a balance sheet management perspective, we have continually improved the granularity and diversification of our loan portfolio with a focus on high quality commercial relationships. And on homeowners which are 85% of our consumer portfolio. We maintain the lowest overall portfolio concentrations in both commercial real estate and in non-prime borrowers among our peers. Through the Dividend and Provide acquisitions, we added granular fixed rate loan origination platforms. We have also focused on positioning our balance sheet to deliver strong, stable NII through the cycle. Our strong deposit franchise, our securities and cash flow hedge portfolios, as well as the additions of Dividend and Provide lending capabilities should continue to position us to drive strong outcomes. In the cash flow hedge portfolio, we have added an incremental $5 billion since the end of the second quarter, bringing the total cash flow hedges added this year to $15 billion. The combined securities and cash flow hedge positions will support NII through the end of the decade. Moving to the ACL, our ACL build this quarter was $96 million, primarily reflecting loan growth, as well as a slightly worsening economic outlook relative to June. Dividend finance loan growth contributed $63 million to this ACL build. Relative to the second quarter, the Moody's GDP growth forecasts are slightly stronger, while the unemployment and home price forecasts have weakened in both the baseline and downside scenarios. Given our expected period and loan growth, including stronger production from dividend finance, we currently expect a fourth quarter bill to the ACL of approximately $100 million assuming no changes in the underlying economic scenarios. The impact of the expected dividend loan originations to the ACL should be in the $80 million to $90 million range due to our improved loan growth expectations. Our economic scenarios incorporate several key risks that could exacerbate existing inflationary pressures and further strained supply chains including continued aggressive rate hikes, and quantitative tightening and labor supply constraints becoming more binding than originally anticipated. Our September 30 allowance incorporates our best estimate of the economic environment. Future baseline unemployment estimates may begin to be increasingly impacted by the Feds aggressive monetary policies. Moving to capital, our CET1 ratio ended the quarter at 9.1% compared to 9% in the quarter. The increase in capital was primarily due to our strong earnings capacity, partially offset by RWA growth reflecting robust organic business opportunities. Moving to our current outlook, for the fourth quarter of 2022 we expect average total loan balances to be stable to up 1% sequentially. We expect commercial loans to grow 1%, reflecting strong pipelines and middle market and corporate banking, and assuming commercial revolver utilization rates remain stable at 37%. We expect consumer balances to be stable down 1% reflecting our decision to lower auto loan production to enhance our returns on capital and lower residential mortgage balances partially offset by dividend loan originations of around $1 billion in the fourth quarter. From a funding perspective, we expect average core deposits to increase 1% to 2% sequentially, however we do expect some continued migration from DDA into interest bearing products. Wholesale funding balances should be stable given expected core deposit growth relative to our earning asset base. Shifting to the income statement. We expect fourth quarter adjusted revenue growth of 6% compared to the third quarter, excluding the third quarter security losses associated with legacy venture equity investments. We expect NII to be up approximately 5% sequentially, assuming a 75 basis point hike in November and another 50 basis points in December. We expect a cumulative deposit beta of around 30% by year-end. This should result in interest-bearing core deposit costs rising from 41 basis points in the third quarter to the mid-to-high 90 basis point area for the fourth quarter. We expect fourth quarter adjusted non-interest income to be up 6% to 7% compared to the third quarter or stable, excluding the impacts of the TRA. We have a strong M&A advisory pipeline and expect to continue generating strong financial risk management revenue, which we expect will be offset by earnings credits and softer top line mortgage banking revenue, given the rate environment. We expect total adjusted non-interest expenses to be up 3% to 4% compared to the third quarter, reflecting continued investments in talent, technology and our Southeast branch expansion. Our guidance assumes we open 17 new branches, 16 of which will be in our high-growth Southeast markets. Our fourth quarter guide implies stable expenses for 2022 on a full year basis compared to 2021 and 8% adjusted revenue growth, excluding securities losses, resulting in PPNR growth in the high teens. This will result in a mid-50s efficiency ratio for the full year, a 4-point improvement from 2021 and a fourth quarter efficiency ratio in the 51% to 52% range. We expect fourth quarter net charge-offs to be in the 20 to 25 basis point range, which will result in full year net charge-offs of approximately 20 basis points. In summary, with our PPNR growth engine, disciplined credit risk management and commitment to delivering strong performance through the cycle, we believe we are well positioned to continue to generate long-term sustainable value for customers, communities, employees and shareholders. With that, let me turn it over to Chris to open the call up for Q&A.

Operator:

[Operator Instructions] And your first question is from the line of Scott Siefers with Piper Sandler. Please go ahead.

Jamie Leonard:

Good morning, Scott.

Jamie Leonard:

Yes. Thanks for the question, Scott. It's a good one and timely because the dividend expectations on loan growth have continued to go up and up, their performance continues to be very strong from a loan origination standpoint. When we bought them, they were fifth in market share. And our best estimate is that they're top 3 in market share now today, and it's certainly a booming business given the rising energy costs. So with that, we had originally modeled a 5-year earn-back on the acquisition that they'd be profitable in 2023 ex the ACL and in 2024 with the ACL and they're certainly tracking ahead of those expectations. Obviously, the challenge during this quarter and as we look ahead, given their strong loan growth is the ACL build, the ACL build and the credit performance is in line with how we modeled the portfolio with the annual loss rates peaking at a 125 charge-off rate, give or take. But given the long-dated nature of the asset, it results in a much higher ACL build than some of our other loan categories. And so we're going to be providing at a pretty healthy rate in dollars given their strong loan production, and that could be $80 million to $90 million next quarter and perhaps every quarter in 2023 given that we expect $1 billion or more per quarter from them. So I guess that's a long answer to say, it's a good problem to have in the long-term because it's a high-returning asset, both from an NII perspective but also a return on the capital. It's just the unfortunate cost of providing life of loan losses at origination.

Jamie Leonard:

Well, thanks for the question because as you know, I do have some opinions on this topic and bear with me a moment while I walk through it because we run the company looking at metrics that both include and exclude AOCI, and we've been showing you both sets of metrics for better or for worse consistently over the past decade, whether that's ROTCE or tangible book value per share and TCE. And when you look at the tangible book value per share, excluding AOCI, we actually grew it in the quarter and for the year, even with the Dividend finance acquisition. So really, when it comes down to the lower TCE ratio and the tangible book value per share, including the AOCI, it really does come down to how the AOCI is moving. And so when Brian and I talk about this and have been thinking through it, we think we're really mixing two issues into that one question. The first question when you parse it out is really based on how do I feel about our investment portfolio's positioning and performance. And I would answer that as I feel very good about how we are positioned and especially how we're positioned relative to peers. It would have been great to time the market perfectly and hit the very best entry points of course. But our two years of patience definitely paid off for us. On a relative basis, we continue to have one of the highest-yielding portfolios and among the lowest unrealized losses as a percent of total securities in the industry. So the potential TCE and AOCI issue from this perspective ultimately comes down to whether you have a low-quality or poorly structured investment portfolio that will incur losses in the future, we do not. We will accrete 45 to 50 basis points or about $1 billion of TCE per year going forward and do not expect to incur any losses in the portfolio. And as we've always said, given the high composition of floating rate loans on our balance sheet, the investment portfolio should act as a shock absorber in a falling rate environment, and we believe the nice duration and structure that we have in the portfolio will do just that. So then the second question that gets mixed into this is then should we be putting securities in HTM instead of AFS? And as we said before, as a Category 4 bank, the election to put the security into AFS or HTM really doesn't impact regulatory capital other than a small deferred tax asset impact, more does it change the economics or the risk of an investment. For the largest banks, clearly, there's value to minimizing the risk of regulatory capital volatility by using the held-to-maturity bucket. For banks like us, we believe the benefits of maintaining some flexibility to manage the portfolio through a volatile environment really does create value for us through the cycle. And given that there's no change in the actual value of the security, simply based on the accounting classification of which the portfolio that we put the securities in, so it really does come down to do we think the company from a TCE or value perspective is worth less by simply fair valuing one line item in the balance sheet, or is it worth less because we placed the security and AFS? And the answer to that, we believe, is clearly no. So our goal is always optimize the balance sheet to deliver long-term real economic value and not make decisions that optimize accounting outcomes over economic value. So with that, I apologize for what may have just been the longest answer in the history of earnings calls. But as you might imagine, we feel strongly about the topic.

Robert Siefers:

Perfect. I appreciate that color. It's an interesting issue to say the least and is having kind of wide-ranging ramifications. I really appreciate that.

John Pancari:

Good morning.

John Pancari:

Wonder if you can give us a little more color on your thoughts on deposit growth. I know that you indicated that you do expect growth in the fourth quarter, maybe you can help size up that level of growth. And then how do you think about growth into 2023, particularly given that you've completed the delivery deposit balance exits that you had talked about. So how you thinking about 2023, maybe also in the perspective of the non-interest bearing mix as a percentage of the total, how you expect that shifting as well? Thanks.

Bryan Preston:

Yes. I mean our goal is always to grow deposits and take share every year. We've obviously got a strong consumer household growth or investments in our southeast markets, our leading TM business. We have confidence that we can take share. We obviously have some full year headwinds on average balances due to the excess commercial balances. We intentionally let run off in 2Q. But we do expect to grow from these 3Q levels from into 4Q, probably up 1% to 2% kind of range. You obviously have normal seasonality that we should expect to benefit from a commercial perspective as we also continue to grow households and grow our commercial relationships.

Jamie Leonard:

And then, John, on your DDA mix question, when we look back the last tightening cycle, our total DDA to total core deposits dropped 5 points from 35% to 30%. This cycle, we started at 38%, and we model a similar 5% decline, or I should say, we're forecasting a 5% decline. And then we actually model in the rate risk disclosures in the presentation, additional migration even beyond that. So we're assuming a similar mix shift as last tightening cycle. But as Tim mentioned, our product lineup is certainly different and better in the treasury management, market share certainly has improved since the last cycle. But either way, we feel good about how we're forecasting it and think it will be manageable.

Richard Stein:

Yes. It's Richard. I'll start with the delinquency comment, and I'll let Jamie talk about the ACL changes. Look, the starting from a small base, we have a couple of deals roll into delinquency you have a couple of rollout. There's really no trend. There's no pattern with respect to industry or borrower type. I think it's just a little bit of seasonality in terms of -- or a little bit of -- just a small change in terms of borrower impact as we get through the end of the quarter.

John Pancari:

Okay, great. Thank you Jamie.

Michael Mayo:

Hi, can we start off the call talking about virtualizing 90% of your workload? Or I missed some of what you had to say. But what does that mean for your efficiency ratio of 53.3%. Where do you think terminal efficiency ratio is? How much do you have in stranded costs? And on the other hand, the inflation rate costs that are your expenses. So I guess I'm looking for longer-term expense and efficiency guidance and the implications of some of these tech moves.

Michael Mayo:

Okay. So how many data centers do you have left? And is it your goal to eventually have no data centers as -- indicated?

Michael Mayo:

Okay. And so with the moves that just happened, can you size those cost savings or those savings are simply going to help fund your new tech investments?

Michael Mayo:

Okay. Alright, thank you.

Betsy Graseck:

Hi good morning.

Betsy Graseck:

I just wanted to ask a couple of questions. One, I heard the commentary around deposits earlier and the outlook for deposit growth from effectively benefiting from the new branches, etcetera, that you've been putting in. Could you just give us a sense of that branch trajectory from here and what you're anticipating over the course of the next year or two? And then also give us a sense as to what your deposit pricing strategies are as well for the next several quarters?

Bryan Preston:

Yes. Yes, absolutely. Thanks, Tim. We continue to feel good about what we've been able to do on the deposit front. The pricing is obviously starting to get more competitive, especially in the commercial portfolios. But we feel good about the 30% cumulative beta that we have talked about for that first 300 basis points in hikes. Certainly, as rates move higher here, we're going to continue to see some increase in betas. And we've previously talked about maybe that next 100, 125 basis points of hikes, those betas will get over 50%. But we think we're going to be able to manage to the below 40% cumulative beta from here, certainly a little bit higher on commercial than on the consumer side. But we recognize as rates move higher, you are going to start to see more consumer beta flow through as well.

TimSpence:

Yes. So Betty, from my standpoint on loan growth, I think the guide in the fourth quarter is stable to 1% on a quarter-over-quarter basis. That feels like a pretty good benchmark, right? If you were to start on something for where we see loan growth go in. We have really strong production coming out of dividends, as we mentioned, and are very pleased with the performance there and also strong production on Provide. On C&I, more broadly, I think we have been deliberate about moderating production over the course of this past year, you can see that in the numbers. But the production itself is still really good. It's more granular than it had been in the past, which is an important strategic priority for us. What I think I don't see a catalyst for is a material move from here on utilization rates, right? And against the strength in the fintech platforms and good core middle market production in C&I, you're going to have the drag from the slowdown in the auto production and mortgages that I think we started on perhaps earlier than others and therefore, will make its way into the numbers faster than you may see it in other places. Against that, the goal is always to grow deposits. We like to be able to grow deposits faster than loans that we as tannin [ph] of the way that we try to grow the company that doesn't always happen in any one quarter. But we do expect fourth quarter, 1% to 2% deposit growth. And while we're still in the early stages of the planning process, we intend to grow deposits next year.

Betsy Graseck:

Right. No, I noticed your liquidity sources. It's a very fulsome slide, so I really appreciate that. Thanks guys.

Kenneth Usdin:

Hi, thanks. Good morning. Just a couple of questions on the fee side. Understanding your guidance flat to the 727, I just wanted to understand, Tim, in your intro you mentioned that mortgage servicing will continue to be a benefit. So is the mortgage business hang in from here going forward? And then the second question is just can you flesh out a little bit for us just the impact of earnings credit rates on service charges and what type of impact that could have going forward as well? Thank you.

Kenneth Usdin:

Okay. And sorry, on the service charges with regards to the ECR impact there? And does that continue to -- how does that trend going forward?

Kenneth Usdin:

Okay. If I could just ask one more, just on your Slide 24, you added 5 billion more swaps since the end of the second quarter, and we can see how you've laddered that all out. Can you help us just understand, as you start to look past 4Q in terms of NII, can you continue to show positive NII growth given the positive beta comments you made earlier and just the trajectory of the protection that you've put on to the balance sheet. Thanks, Jamie.

Kenneth Usdin:

Great. Thanks a lot, Bryan.

Kenneth Usdin:

Thanks for the color, Tim.

Tim Spence:

Hey Erika.

Operator:

Your next question is from the line of Matt O'Connor with Deutsche Bank. Please go ahead.

Matthew O'Connor:

Good morning. Any impact to the Dividend Finance business from recent legislation. I guess, it's called the Inflation Reduction Act, but there's a lot of climate initiatives in there that I know help from broader areas, but any impact to that business in terms of volumes and reducing the credit versus what you thought it would have been before?

Matthew O'Connor:

Okay. And then as you think about how big this portfolio can get or you're willing to let it that, obviously, there's a lot of room to run. But if you're originating over $4 billion a year, and it's pretty long duration, the balances could build pretty quickly. Any thoughts on kind of how big? I know I've asked you before, but how big it can get and you're willing to let it at go.

Matthew O'Connor:

Okay. And then actually, just following on my first question, I'm a [indiscernible] that was always a long week. But the benefit of this credit, does this increase the volume? Reduce the kind of long-term expected credit cost? Or what's -- or a little bit about.

Matthew O'Connor:

That makes sense. And obviously, higher energy prices could also increase demand.

Matthew O'Connor:

Would there be an opportunity to securitize or like figure out a way to increase the ability to originate even more without keeping it on balance sheet over time, maybe it's more 3, 5 years out?

Matthew O'Connor:

Okay, thanks so much.

Gerard Cassidy:

Hi Tim, hi Jamie.

Gerard Cassidy:

Tim you talked about Fifth Third is one of the most active branched openers in the Southeast, along with JPMorgan Chase. Can you give us some color on the cost of opening, I know each branch is just different, but a typical cost of opening a branch one type of deposit level you need to reach to make it breakeven? And how long does it take you to get to that deposit level, if you use deposits as the measure for breakeven?

Gerard Cassidy:

And Jamie, when you get to that breakeven point, how many -- how much long does it take to get to a return on investment or return on equity, however you measure it to have it at the level that you're very satisfied with?

Gerard Cassidy:

Very good. And then as a follow-up. Yes, go ahead, Tim.

Gerard Cassidy:

Yes, very true. Thank you. As a follow-up on credit, obviously, your credit quality is very strong, similar to your peers. Maybe just remind us why are the customers, I mean you look at all the economic outlook, you mentioned, Jamie, about Moody's. It was a little worse than what you had in the prior quarter in terms of building up the reserves. How is it that credit just remains so strong in view of these crosscurrents, particularly in the housing market starting to weakening. And then and as part of this, can you just share with us also about the used car prices, obviously, they're finally starting to come down. You guys are in that market? And how does that impact maybe future charge-offs or delinquencies if prices continue to fall down?

Richard Stein:

Yes. I think the 1 thing to add on commercial, Gerard, is remember, there's a loss emergence period, so it takes a little while for the stress to ultimately roll through loss. And I think what we see and Tim articulated a lot of it is our customers are adapting, and they've had to adapt, honestly, for about 3 years now. Let's -- if you go back to 2019, the tariffs were a challenge for a lot of supply chains and manufacturing. They had to adapt. They've learned that. In COVID, you've had inflation. And so we see resilient business owners do what they do, and that's adapt to the challenges and run their business as well. And I think that's part of the conversation, and that's what we get from our relationship and our relationship managers talking to customers really get good insight to what's happening on the ground. And I think, as Tim said, there's more strength there from a fundamental perspective than perhaps people would otherwise believe. Now to your question on auto, I think the answer is auto is going to be a really classic example of a normalization. And again, you've got a shorter -- generally shorter duration in terms of the asset and the loss emergence period, and you have 2 things that are happening at the same time. One, clearly, you can see it with Manheim, used car prices are down 12% and trending down normalizing. At the same time, we're going to be rolling into originations where we bought it -- where customers bought at higher car prices. So -- we don't really see anything abnormal except for an acceleration of this intersection between car values and the originated loan to value, getting back to something that looks more normal. Again, it's a super prime book for the most part. We're disciplined on the underwriting, the resilience when you look at things like delinquencies continue to be very, very good. In fact, they're- continue to be at seasonal lows. So I think it's just this intersection of prices coming down and origination prices coming up.

Richard Stein:

It's certainly not a factor today. In fact, Gerard, if anything, think about where auto prices have gone. You're seeing -- we're seeing customers, and we see this across the spectrum that we don't lend into. I don't want to have to go turn the car and buy a new one. It's too expensive. So they're doing a lot of things to keep their car and to stay current or work through with the lenders. We don't see a lot of that because we don't really have that situation given the the quality of our consumer. But right now, I think people -- if they have a job, they want to keep their car, they don't want to go buy new.

Operator:

Today's final question will come from the line of Bill Carcache with Wolfe Research. Please go ahead.

Bill Carcache:

Hi good morning. Thanks, hey good morning. Tim and Jamie, I really appreciate hearing your thought process on the earlier question about TCE. Would your response to that question change at all, if we had a credit cycle and the Fed wasn't able to lower rates due to inflation? So the securities portfolio wasn't able to add as much of a shock absorber as you described earlier? And then to bring that back to the broader question, is there a point where decreases in TCE would become a concern for you in that scenario in particular?

Bill Carcache:

That's helpful. Thank you. And then separately, on the funding side, can you speak to your ability to bring off-balance sheet client funds back on balance sheet and the potential amount that is available in theory?

Bill Carcache:

Very helpful. Thank you for taking my questions.

Operator:

At this time, I would like to turn the call back over to Chris Doll for any closing remarks.

Operator:

Thank you Ladies and gentlemen. This does conclude the Fifth Third Bancorp Third Quarter 2022 Earnings Conference Call. Thank you for your participation. You may now disconnect.

Chris Doll:

Good morning, everyone. Welcome to Fifth Third second quarter 2022 earnings call. This morning, our President and CEO, Tim Spence; and CFO, Jamie Leonard will provide an overview of our second quarter results and outlook. Our Chief Credit Officer, Richard Stein; and Treasurer, Bryan Preston have also joined for the Q&A portion of the call. Please review the cautionary statements on our materials, which can be found in our earnings release and presentation. These materials contain information regarding to the use of non-GAAP measures and reconciliations to the GAAP results, as well as forward-looking statements about Fifth Third's performance. These statements speak only as of July 21, 2022 and Fifth Third undertakes no obligation to update them. Following prepared remarks by Tim and Jamie we will open the call up for questions. With that let me turn it over to Tim.

Jamie Leonard:

Thank you, Tim. And thank all of you for joining us today. Our second quarter results were solid. We generated strong loan growth in both commercial and consumer categories, deployed excess liquidity in the securities at attractive entry points and remain disciplined in managing our deposit costs. Expenses were once again, well controlled, even though we continue to reinvest in our businesses. Fees did underperform our April expectations due to the market volatility, but even with that softness, we generated core PPNR growth of 11% on a year-over-year basis. As a result, we achieved a sub 55% efficiency ratio and generated seven points of positive operating leverage from the second quarter of 2021. The ACL ratio increased five basis points sequentially to 1.85%, which includes a four basis point impact from the Dividend Finance acquisition, combined with $62 million in net charge-offs, we recorded a $179 million total provision for credit losses. Moving to the income statement. Net interest income of approximately $1.3 billion increased 12% sequentially and 11% year-over-year. As Tim mentioned, the underlying NII growth was around 15% compared to last quarter of which approximately half of the growth was attributable to higher market rates, and half from the combination of investment portfolio growth and loan growth, primarily in C&I. Our interest bearing core deposit costs were well controlled at just nine basis points of this quarter up just five basis points sequentially and help drive the 33 basis points of NIM expansion during the quarter. Total reported non-interest income decreased 1% sequentially and increased 3% on an adjusted basis. Compared to the prior quarter, we generated improved financial risk management card and processing, gross treasury management fees and private equity income, which was partially offset by weaker performance from our market sensitive businesses, including commercial capital markets and mortgage, and the impact of higher treasury management earnings credit rates. Non-interest expense decreased 9% compared to the prior quarter, driven by a decline in compensation and benefits expense from the seasonal peak in the first quarter, lower incentive-based comp in the current quarter due to market dynamics that impacted fees and overall continued expense discipline throughout the company. Expenses in the quarter included a $27 million benefit related to the mark-to-market impact of non-qualified deferred compensation, which has a corresponding offset in security losses. This compares to a $12 million benefit in the prior quarter. Excluding the non-qualified deferred compensation impacts from both periods, total noninterest expense, decreased $95 million or 8%. Noninterest expense decreased 4% compared to the year ago quarter. Moving to the balance sheet. Total average portfolio loans and leases increase 4% sequentially including health for sale loans, total average loans increased 3% compared to the prior quarter. Average total commercial portfolio loans and leases increased 4% compared to the prior quarter, primarily reflecting growth in C&I loans. Commercial loan production remained robust throughout the franchise outperforming our original expectations. Our production and pipelines are the result of our strategic investments and talent, as we continue to see strength and new quality relationship generation during the second quarter. With muted payoffs and a 1% increase in the revolver utilization rate to 37% period and commercial loans increased 3% sequentially, and 12% compared to the year ago quarter. Average total consumer portfolio loans and leases increased 3% compared to the prior quarter driven by residential mortgage and the dividend acquisition, which are recorded in other consumer loans. This growth was partially offset by a decline in home equity. At quarter end, total dividend loan balances were $650 million reflecting our decision to hold some loans the dividend would have otherwise sold combined with their post-close production volume. Average core deposits were stable compared to the year ago quarter, and decreased 4% compared to the prior quarter, including the impact of the intentional runoff of excess and higher cost commercial deposits. This runoff was in line with our expectations and reflects our pricing discipline from our strong overall liquidity position. Compared to the year ago quarter, average commercial transaction deposits decreased 8% and average consumer transaction deposits increased 1% reflecting our continued success growing consumer households. Given the improved entry points during the first and second quarters we deployed cash into the securities portfolio, which resulted in second quarter average securities balance growth of approximately $12 billion. We completed net purchases of $6 billion in securities during the second quarter compared to $13 billion in the prior quarter. The higher than previously expected security purchases in the second quarter were the result of accelerating planned second half of 2022 purchases given the attractive entry points in late May and June. We currently expect security portfolio balances to remain generally stable through the rest of the year. We have continued to focus on adding duration and structure to the investment portfolio to provide stable and predictable cash flows. Consequently, our overall allocation to bullet and locked out structures increase from 64% to 67% at quarter end, and our duration increase from 5.4 to 5.7. Moving to credit; as Tim mentioned, credit remained healthy and in line with our previous expectations. The NPA ratio of 47 basis points improved 2 basis points sequentially with net charge offs of just 21 basis points. The ratio of early stage delinquencies, 30 to 89 days past due relative to loans was stable in the second quarter and the amount of loans 90 days past due is less than half of what it was a year ago. We continue to closely monitor the same areas we have previously discussed such as central business district hotels, senior living and office CRE. We are also monitoring exposures where inflation and higher rates may cost stress, including the impact of changing consumer discretionary spending patterns as well as the ongoing monitoring of the leverage loan portfolio. Our ACL build this quarter was $117 million of which approximately 75% was from strong loan growth, including the $53 million ACL impact from the dividend acquisition and the remaining 25% was attributable to worsening economic projections relative to March, net of reductions in certain pandemic related qualitative adjustments. Given the incremental clarity on the economy's ability to withstand geopolitical tensions and the pandemic fallout with vaccine efficacy and other measures, we elected to return to our standard approach for scenario weights of 80% to the baseline and 10% to the downside and upside scenarios. We believe our models are better suited to appropriately evaluate economic scenarios and outcomes from monetary tightening on our loan portfolio than on humanitarian crises such as pandemics and wars. Despite the scenario weight change we increased our reserves in specific portfolios such as CRE, where we continue to believe there elevated risks. Our baseline scenario assumes the labor market remains relatively stable with unemployment ending our three-year reasonable and supportable period at around 3.8%, which is slightly weaker than our previous estimate. Additionally, GDP growth and home price forecast have weakened relative to our March forecast in both our baseline and downside scenarios. Our expectations incorporate several key risks that could exacerbate existing inflationary pressures and further strain supply chains including aggressive rate hikes and quantitative tightening and labor supply constraints becoming more binding than originally anticipated. Our June 30 allowance incorporates our best estimate of the economic environment. Moving to capital, our CET1 ratio ended the quarter at 9% compared to 9.3% in the prior quarter. The decline in capital was primarily due to strong RWA growth reflecting robust organic business opportunities and the impact of the dividend finance acquisition. We expect to accrete capital to the 9.25% area by year-end given our strong earnings capacity and we will evaluate resuming buybacks after that time. Moving to our current outlook, for the full year 2022 we continue to expect average total loan growth between 5% and 6% compared to 2021 or around 10% excluding PPP and Ginnie Mae impacts, reflecting strong pipelines and stable commercial revolver utilization rates over the remainder of the year. Dividend finance is generating strong origination volumes. We expect loan originations of around $1.3 billion in the second half of 2022 which is 30% more than our original estimates. Similarly provide loan production remain strong as we expect over $1 billion in total production in 2022. Dividend and provide together are expected to contribute a little more than 1% of the total average loan growth for the year. We expect average commercial loan growth of 9% to 10% or 14% to 15% excluding PPP. We expect total average consumer loans to be stable in 2022, reflecting our decision to lower auto loan production to enhance our returns on capital. We expect around $7 billion in auto and specialty production for the full year, which will still result in double-digit growth and average indirect consumer secured balances in 2022. Our outlook also assumes growth of approximately 15% in other consumer loans reflecting the benefits of dividend finance. Shifting to the income statement we continue to expect full year adjusted revenue growth of 7% to 8%, which will be a record year of revenue for Fifth Third. Given our outlook for earning asset growth combined with the implied forward curve as of July 1st, which assumes a fed funds rate of 3.25% by year end. We expect full year NII to increase 17% to 18%. Our outlook incorporates the impacts from runoff of the PPP and Ginnie Mae portfolios. Excluding those portfolios, NII growth would be around 20%. Our current outlook assumes average deposit balances decline a $2 billion in the third quarter, reflecting the full quarter impact of the second quarter runoff of excess and higher cost commercial deposits and seasonality, and then return to growth in the fourth quarter. Since the onset of the rate hikes, our deposit betas have been muted at low single-digits for the cycle to date. We expect increases to our interest-bearing core deposit costs to accelerate over the next two quarters due to the timing impact of deposit reprising lags from earlier hikes and continued aggressive rate hikes from the fed. We continue to expect a 25% deposit beta on the first 225 basis points of rate hikes and a marginal beta of around 45% to 50% on the next 75 basis points of rate hikes. The ultimate impact NII of incremental rate hikes will be dependent on the timing and magnitude of interest rate movements, balance sheet management strategies, including securities growth and hedging transactions and realized deposit betas. We expect full year adjusted noninterest income to be down 7% to 8% in 2022, reflecting softer second quarter performance combined with the high probability of continued market volatility, reflecting a more aggressive rate outlook, including lower wealth and asset management mortgage and capital markets revenue, as well as higher earnings credit rates offsetting strong gross treasury management fee growth. Despite the expected decline in capital markets revenue, we expect full year capital markets revenue to be up nearly 50% from the pre-pandemic 2019 levels, which highlights the success we’ve had over the past few years in growing a diversified capital markets business. We expect full year adjusted noninterest expense, including the impacts of dividend finance to be stable to down 1% compared to 2021. An improvement from our previous guide of up 1% to 2%. We continue to strategically invest in our franchise, which should result in low double-digit growth in both technology and marketing expenses. Our outlook also assumes we had 20 to 25 new branches, primarily in our high growth Southeast markets in 2022. Our guidance also incorporates the minimum wage increase to $20 per hour that went into effect on July 4th. We expect these investments in our people platforms and franchise to be offset by the savings from our process automation initiatives reduced servicing expenses associated with the Ginnie Mae portfolio, a decline in leasing expense, given our LaSalle Solutions sale and our continued overall expense discipline throughout the company. As a result our full year 2022 total adjusted revenue growth combined with our expense outlook should generate four points of improvement in the efficiency ratio and positive operating leverage of around 8%. Full year adjusted PPNR growth is expected to be 17% to 19%, which is an improvement to the range compared to our April estimate, reflecting the strong NII and expense outcomes, partially offset by the market related fee headwinds. Our outlook for significantly delivering on our positive operating leverage commitment reflects the benefits of our ability to grow our customer base combined with our strong balance sheet management and expense discipline. For the third quarter of 2022, we expect average total loan balances to increase 1% sequentially reflecting 1% to 2% growth in commercial and stable consumer balances. We expect our average securities portfolio to increase $2 billion to $3 billion reflecting the full quarter impact of purchases made during the second quarter. Shifting to the income statement, we expect third quarter adjusted revenue growth of 8% to 9% compared to the second quarter. We expect NII to be up 11% to 12% sequentially, reflecting strong loan growth, the impact of securities purchases and the benefits of our balance sheet positioning. We expect adjusted noninterest income to be down 3% to 4% compared to the second quarter. We expect total adjusted noninterest expenses to be up 4% to 5% compared to the second quarter or up 2% compared to the year ago quarter due to the acquisitions of provide and dividend finance. Excluding the second quarter NQDC benefits on expenses, we expect noninterest expenses to increase around 2% sequentially. We continue to expect third quarter and full year 2022 net charge-offs to be in the 20 to 25 basis point range. In summary with our balance sheet positioning, PPNR growth engine and disciplined credit risk management, we believe we are well positioned to continue to deliver strong performance in this type of environment. With that, let me turn it over to Chris to open the call up for Q&A.