Fifth Third Bancorp (FITB) — Q1 2022 Earnings Call Transcript

Thank you, operator. Good morning, everyone and thank you for joining us. Today, we'll be discussing our financial results for the first quarter of 2022. Please review the cautionary statements on our materials, which can be found in our earnings release and presentation. These materials contain reconciliations to non-GAAP measures, along with information pertaining to the use of non-GAAP measures, as well as forward-looking statements about Fifth Third's performance. We undertake no obligation to update any such forward-looking statements after the date of this call. This morning, I'm joined by our Chairman and CEO, Greg Carmichael; President, Tim Spence; CFO, Jamie Leonard; and Chief Credit Officer, Richard Stein. Following prepared remarks by Greg, Tim and Jamie, we will open the call up for questions.

Thanks, Chris, and thank all of you for joining us. Earlier today, we reported first quarter net income of $494 million or $0.68 per share. Our reported EPS included a negative $0.02 impact from the Visa total return swap, the mark-to-market impact over to AvidXchange Holdings. Excluding these items, adjusted first quarter earnings were $0.70 per share. During the quarter, we generated strong loan growth, including average C&I growth of up 8%, excluding PPP. We grew core deposits once again with strength in consumer transaction deposits of 4% reflecting our success in generating quality household growth, which increased 3% on a year-over-year basis. We also took advantage of attractive market entry points for deploying our excess cash that grew our securities portfolio by approximately $5 billion on an average basis. As a result of our interest-earning asset growth, net interest income increased 1% sequentially, excluding PPP. We had yet another quarter of benign credit quality, reflecting our disciplined approach to client selection and underwriting, which resulted in near record low charge-offs of just 12 basis points. In addition to our muted credit losses, NPA remained stable, our commercial criticized assets continued to improve. As many of you saw last week, I announced my plans to retire as CEO and transition to Executive Chairman effective July 5th. As part of our thorough succession planning process, I'm excited and proud to announce the Board has unanimously appointed Tim Spence to succeed me as our next CEO. I believe this is the right time for a transition, given Fifth Third's tremendous financial health and performance. Shareholders who have followed Fifth Third for a while know that when I became CEO, I made a commitment that we would generate strong financial results and perform well through the various business cycles, we improvised our plans on a project North Star, we articulated several key strategic priorities generate strong and sustainable long-term financial results, including optimizing our balance sheet, differentiating our customer experience, growing and diversifying our fee revenues, building on our legacy of digital innovation and maintaining expense discipline. I am very proud of what we achieved. We transformed our approach to credit-risk management, centralizing credit underwriting with geographic sector and product level concentration limits. We exited commercial relationships that had a skewed risk return profile totaling $7 billion focusing on high-quality relationships with more diversified and resilient businesses. We deliberately reduced our leverage lending exposure down more than 6% since 2015. We remain cautious with respect to our CRE portfolio, with the lowest CRE as a percentage of capital among peers. We maintained our expense discipline, taking actions when necessary, including exiting non-core businesses, which allowed us to prioritize our investments in areas of strategic importance. We invested heavily in our treasury management systems, shifting our focus to building managed service platforms. As a result, we now have the highest TM fees as a percentage of revenue and commitments, and we are the fastest growing among our peers. We made significant investments in technology to improve our resiliency and better serve our customers. We built a consumer business that has consistently added households far in excess of our peers in the U.S. average, while also taking our customers’ satisfaction scores from below peer median in 2015 to top quartile today. We grew market share organically in the Southeast and West Coast and established a leading position in Chicago through the strategic acquisition of MB Financial. We also invested in strategic nonbank acquisitions like Provide, Dividend, Coker Capital, H2C, Franklin Street and more to accelerate growth and broaden our capabilities. We structured our security portfolio to generate stable, predictable cash flows that have allowed us to extend our earnings advantage versus peers. And we focus on generating sustainable value for all stakeholders, including customers, employees and communities. From day one, my focus was to build a franchise that would perform well through the cycle while generating consistent and quality earnings quarter-after-quarter, year-after-year. While some of these decisions impact short-term profitability at the time, all of these proof points highlight the actions we have taken over the past several years to improve Fifth Third and set us up for long-term outperformance through various business cycles. Furthermore, we expect our intentionally asset-sensitive balance sheet to perform extremely well relative to peers in this rate environment. With the revenue benefits of higher rates for August, we are mindful that there are likely to be elevated risks in the overall U.S. economy, which is undergoing fairly aggressive monetary policy tightening to curb inflation, combined with the existing supply chain constraints and labor shortages. However, because of our actions and positioning, Fifth Third is as strong as ever and well positioned for long-term outperformance. I would just like to say that being the CEO of Fifth Third has been an honor of a lifetime. I'm grateful for the support of the board and all of our employees and I'm incredibly proud of what we’ve accomplished. Fifth Third is in great shape and Tim is well prepared to lead Fifth Third into the future. Tim is an outstanding and visionary leader. He has been an integral part of Fifth Third’s leadership team since 2015, helping develop strategies and vision that we are executing with excellence through innovation and technology. Before I hand over to Tim, this is my 29th and final quarterly earnings call. I can also say that I have enjoyed almost all of these discussions about our financial performance and outlook with the honest investor community. I want to say thank you for the confidence that you have given me throughout my tenure. Also, I want to thank our entire leadership team; I have been extremely fortunate to work with such a great seasoned team, which I believe is the best in the industry. We have accomplished together that has been nothing short of remarkable. Thank you. I know that under Tim's leadership, you will continue to do great things, inspire others and improve the lives of our customers and the well-being of our communities. With that, let me turn it over to Tim.

Good morning to you all. Thank you, Greg, for the kind words. I'm honored to serve as Fifth Third's next CEO and to follow in the footsteps of an incredible leader like you. I couldn't be more excited about Fifth Third's future. Given my role in the company over the past several years and the strength of our performance, you should expect continuity in our strategic focus areas and in how we run the bank. We will maintain our operational focus, expense discipline and culture of accountability to produce consistent financial results while investing for the future. We will continue to anticipate and respond proactively to demand shifts and new competitive threats, consistent with the actions you have seen us take over the past several years, including our deliberate multi-year reduction in punitive consumer fees before it became an industry topic, the rollout of our award-winning Momentum Banking product suite, which is unparalleled among peers, our differentiated digitally enabled treasury management services to automate accounts payable and receivable launched well before the pandemic. Partnerships and acquisitions of FinTech platforms like Provide and Dividend Finance that create national scale and a best-in-class customer experience and our focus on financing renewable energy well before ESG became a mainstream term. More broadly, we will remain mindful of the long-term structural shifts taking place such as the evolving geopolitical environments, population aging, government debt levels and central bank tightening that will create winners and losers over the next decade. No one knows for sure what the world will look like 10 years from now, but as prudent risk managers we are always contemplating the many potential tail risks, as well as positioning the bank to take advantage of potential business opportunities that will arise. We will also be steadfast in our belief that we are most successful when we take care of all our stakeholders. To that end, yesterday we announced that we are increasing our minimum wage to $20 an hour across our footprint and that concurrently we will provide a mid-year wage increase to employees in our first four job bands. We are taking these actions despite having the best-in-class employee retention according to leading research because we recognize that rising costs throughout the economy have a disproportionate impact on our frontline employees who are the face of Fifth Third. In total, more than 40% of our workforce will benefit from these increases, including 95% of our retail branch and operations employees. It is simply the right thing to do. In the short term, this will result in roughly $18 million in incremental annualized expenses. However, as we have seen with our two previous wage increases, we fully expect to achieve stronger financial outcomes from lower turnover, improved workforce quality, lower recruiting expenses and more effective training. As Greg mentioned, our balance sheet and earnings power are extremely strong. From a capital deployment perspective, we will continue to favor organic growth, evaluating strategic non-bank opportunities such as Provide and Dividend Finance, paying a strong dividend and then share repurchases. Practically speaking, given our robust loan growth, we currently anticipate resuming share repurchases in the fourth quarter of 2022. On behalf of the entire leadership team, I would like to say thank you to our employees. I'm very proud that in addition to producing solid financial results, we have also continued to take deliberate actions to improve the lives of our customers and the well-being of our communities. I also hope you all feel the same sense of pride that I do in being part of an organization that was just named one of the world's most ethical companies by Ethisphere, one of just five banks globally. Fifth Third is a great company because we have great people who live our core values every day. With that, I will turn it over to Jamie to discuss our financial results and our current outlook.

Thank you, Tim and thank all of you for joining us today. Our first quarter results were solid despite the market volatility during the quarter. We generated strong loan growth in both commercial and consumer categories, deployed excess liquidity into securities at attractive entry points and grew deposits. Expenses were once again well controlled, but fees underperformed our January expectations due to the market environment. Improvements in credit quality resulted in an ACL ratio of 180 basis points compared to 185 basis points last quarter, while an increase in loan balances resulted in the net of $11 million increase in our credit reserves. Combined with another quarter of muted net charge-offs, we had a $45 million total provision for credit losses. Moving to the income statement, net interest income of approximately $1.2 billion was stable sequentially. Reported results were impacted by lower day count, lower PPP income including a slowdown in forgiveness that resulted in $10 million less than expected PPP related NII, and the expected decline in residential mortgage balances from previous Ginnie Mae purchases. These detriments were offset by the benefits from the deployment of excess liquidity into securities, strong loan growth and the impact of higher market rates. Excluding PPP, NII increased 1% sequentially and 5% year-over-year. Total reported non-interest income decreased 9% compared to the year ago quarter, or 7% on an adjusted basis. Similar to peers, our results were impacted by lower capital markets revenue, primarily due to transaction delays, as well as lower mortgage revenue in light of lower origination volumes and gain on sale margins, partially offset by improving MSR asset decay. We generated solid year-over-year fee growth in treasury management and wealth and asset management where we produced net AUM inflows again this quarter. Consumer deposit fees were stable as our success generating household growth offset that continued decline in punitive consumer fees as part of our Momentum Banking offering. Non-interest expenses increased just 1% compared to the year ago quarter, reflecting continued discipline throughout the company. Compensation expenses were well controlled with the year-over-year increase reflecting the previously announced broad-based restricted equity awards, which will support the continuation of our strong employee retention. We also continue to invest in the ongoing modernization of our tech platforms. These items were partially offset by lower card and processing expenses due to 2021’s contract renegotiations. Adjusted expenses increased 2% sequentially, driven by the special equity award and the usual seasonal increase in compensation and benefits expense. Our expenses this quarter included a mark-to-market benefit associated with non-qualified deferred compensation plans of $12 million with a corresponding offset in securities losses. Moving to the balance sheet. Total average portfolio loans and leases increased 4% sequentially. Average total consumer portfolio loans increased 2% compared to the prior quarter as strength in auto originations combined with growth in residential mortgage was partially offset by declines in home equity and other consumer loan balances, primarily from GreenSky balance runoff. Average commercial portfolio loans and leases increased 5% compared to the prior quarter, primarily reflecting growth in C&I loans. Excluding PPP, average commercial loans increased 6% with C&I loans, up 8%. Commercial loan production remains strong and in-line with our original expectations. Production was strongest in core middle market, which was well diversified geographically, increasing over 60% year-over-year. Our production and pipelines continued to reflect our strategic investments in talent and our successful geographic expansion, as we sustained our record pace in adding new quality relationships during the first quarter. With muted payoffs and higher revolver utilization rates reflecting the capital market slowdown, period end commercial loans excluding PPP increased 5% sequentially and 13% compared to the year ago quarter. Over half of the sequential period end growth was due to existing revolvers with the utilization rate increasing 2% to 35.5%. Given the market opportunities in the first quarter, we began deploying excess cash to protect against the rising risk of an economic downturn. During the first quarter, we grew our securities portfolio approximately $13 billion. On an average basis, securities increased $5 billion, or 13% sequentially. As we have said over the past two years, our balance sheet positioning allowed us to remain patient and not grow the portfolio at historically low interest rates caused by the extraordinary Federal Reserve intervention. The past 90 days have validated our decision to patiently wait, but our actions this quarter and beyond will ensure our strong through-the-cycle performance under various rate scenarios over the long term. Our investments continue to focus on adding duration and structure to the portfolio with stable and predictable cash flows. Consequently, our overall allocation to bullet and locked-out structures increased from 59% to 64% at quarter end. Average other short-term investments, which include our interest-bearing cash, decreased $6 billion, reflecting the growth in loans and securities, partially offset by continued core deposit growth. Compared to the year ago quarter, average commercial transaction deposits increased 5% and average consumer transaction deposits increased 11%, reflecting our continued success growing consumer households. We once again added households in every market compared to last year led by our key Southeast markets. Moving to credit. As Greg mentioned, our credit performance this quarter was once again strong with NPAs at 47 basis points and net charge-offs at 12 basis points. We continue to closely monitor areas where inflation and higher rates may cause stress. As Greg also mentioned, we have deliberately reduced our highly monitored leveraged loan portfolio for this very reason, which is now below $3 billion in outstanding loans while also significantly improving the quality of the portfolio. Moving to the ACL. Our baseline scenario assumes the labor market remains stable with unemployment ending our three-year reasonable and supportable period at around 3.7%. We maintained our scenario weights of 60% to the base and 20% to the upside and downside scenarios. Our ACL build this quarter reflected strong loan growth and a worsening downside economic scenario, partially offset by improvements in the credit risk profile of the loan portfolio, including a reduction in borrowers in prolonged distress. If the ACL were based 100% on the downside scenario, the ACL would be $1.1 billion higher. If the ACL were 100% weighted to the baseline scenario, the reserve would be $236 million lower. While our base case expectations point to continued economic growth, several key risks are factored into our downside scenario, including escalating geopolitical tensions, which could exacerbate existing inflationary pressures and further strain supply chains, pressures from the Fed's quantitative tightening or additional COVID variants, which could play out given the uncertain environment. Our March 31st allowance incorporates our best estimate of the economic environment. Moving to capital. Our CET1 ratio ended the quarter at 9.3%, above our stated target of 9%. The decline in capital was primarily due to strong RWA growth in light of the robust organic business opportunities and securities purchases combined with an 8 basis point impact from the CECL capital transition rule. We expect to close the acquisition of Dividend Finance in the second quarter, which will deploy approximately 30 basis points of capital. Our tangible book value per share excluding AOCI increased 1% during the quarter and 5% compared to the year ago quarter. Moving to our current outlook, which includes the financial impacts from Dividend Finance. We expect full year average total loan growth between 5% and 6% compared to 2021, including the expected headwinds from PPP and the Ginnie Mae forbearance loans we added last year. Excluding these items, we expect total average loan growth of around 10%, reflecting strong pipelines, sales force additions, the Dividend and Provide acquisitions and stable commercial revolver utilization rates over the remainder of the year. This should result in commercial loan growth of 9% to 10%, or 15% to 16% excluding PPP. We now expect total average consumer loans to be stable in 2022, reflecting our first quarter decision to lower auto loan production in order to enhance our returns on capital. We now expect around $8 billion in auto and specialty production for the full year, which will still result in double-digit growth in indirect consumer secured balances in 2022. Our outlook also assumes modest growth in other consumer loans, reflecting the benefits of Dividend Finance, partially offset by a 20% decline in GreenSky loans. On a sequential basis, we expect second quarter average total loan growth of 2% to 3% comprised of 3% to 4% commercial balance growth and stable consumer balances. We expect 5% to 6% average C&I growth in the second quarter, excluding PPP. We expect our average securities portfolio to increase approximately $10 billion in the second quarter, reflecting the full quarter impact of purchases made later in the first quarter combined with the assumption that we have $2 billion more in balances given the market opportunities we have seen through early April. We also assume $1 billion in additional securities growth in both the third and fourth quarters. Given our outlook for earning asset growth combined with the implied forward curve, as of April 1st, we now expect full year NII to increase approximately 13% to 14%. It is worth noting that our outlook incorporates the impacts from the run-off of the PPP and Ginnie Mae portfolios, which resulted in a $220 million headwind this year. Excluding those portfolios, NII growth would exceed 18%. Our current outlook assumes stable to slight growth in deposit balances in 2022 compared to 2021 with continued strong growth in consumer deposits in the mid-single digits offset by the expected runoff of non-operational commercial deposits. We expect deposit betas of around 15% on the first 125 basis points of Fed rate hikes. The 25 basis points rate hike we saw in March combined with another 50 basis points in both May and June. While we remain confident in the quality of our deposit base, the rapid and aggressive policy response by the Fed to curb inflation, including the potential for 10 rate hikes from March 2022 to March 2023 and aggressive Fed balance sheet reductions, means we expect deposit betas of approximately 25% over the first 200 basis points of this cycle compared to the mid-30s last cycle. The ultimate impact on NII from incremental rate hikes will depend on the timing and magnitude of interest rate movements, balance sheet management strategies including securities growth and hedging transactions, and realized deposit betas. For the second quarter, we expect NII to be up 11% to 13% sequentially, reflecting strong loan growth, the impact of securities purchases and the benefits of our asset sensitive balance sheet. We expect adjusted non-interest income to be stable to down 1% in 2022 compared to our prior expectations of up 3% to 5%. This change is primarily driven by the change in our rate outlook. The single biggest line contributing to the change is deposit service charges, which is reflective of incremental earnings credits in light of the higher interest rate environment. The rate environment has also impacted our outlook for mortgage revenue, which we now expect to be down 10% or so in 2022 compared to 2021. We continue to expect strong but slightly lower than January expectations in commercial banking fees and private equity income in 2022, provided resolutions of the temporary delays experienced in the first quarter occur. It is worth noting that even with the decline in expected fee income primarily due to the interest rate environment, we expect total revenue to now be approximately $275 million more than our January guidance. We expect second quarter adjusted non-interest income to be up 8% to 9% compared to the first quarter or down around 1% compared to the year ago quarter. We expect full year adjusted non-interest expense to be stable on a standalone basis, or up 1% to 2% including the impact of Dividend Finance compared to 2021, which is an improvement from our previous guidance of up to 2% to 3%. 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 add 25 new branches primarily in our high growth Southeast markets. Our guidance also incorporates the minimum wage increase to $20 per hour that Tim mentioned. We expect these investments in our people, platforms and franchise to be partially 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 disposition of LaSalle Business Solutions, which was completed in April, and our continued overall expense discipline throughout the company. We expect total adjusted expenses in the second quarter to be down around 3% to 4% compared to the first quarter, which is up 2% compared to the year ago quarter, due to the acquisitions of Provide and Dividend Finance or stable on a stand-alone basis. As a result, our full-year 2022 total adjusted revenue growth is expected to significantly exceed the growth in expenses, resulting in nearly 3.5 points of improvement in the efficiency ratio. Our outlook for significantly delivering on our positive operating leverage commitment reflects our recent acquisitions, expense discipline and strong balance sheet management. It also considers the known revenue headwinds from the PPP and our Ginnie Mae portfolio. We continue to expect second quarter and full year 2022 net charge-offs to be in the 20 basis points to 25 basis points range. In summary, we continue to take actions to further strengthen our balance sheet positioning for this environment. We are deploying excess cash prudently into both loans and securities to support continued through-the-cycle outperformance and have a lot of momentum in our businesses to have a very successful 2022.

Thanks, Jamie. Before we start Q&A, as a courtesy to others, we ask that you limit yourself to one question and a follow-up and then return to the queue if you have additional questions. We will do our best to answer as many questions as possible in the time we have this morning. Operator, please open the call up for questions.

Good morning, everyone. I appreciate the opportunity to ask a question. Congratulations to both Jamie and Greg as you move forward, and best wishes to Tim in his new role. Jamie, thank you for sharing your insights on liquidity deployment. Since you have already deployed the majority of the target and have about $10 billion in excess liquidity remaining to be utilized throughout the year, do you see a chance to redefine what excess liquidity means for you? In particular, it seems that deposits aren't leaving the system as significantly as previously anticipated. Is there a point where you believe those deposits will remain stable, or will they eventually be absorbed through loan growth and other factors? I would appreciate any thoughts on this matter.

So it's a good question and thanks for asking, Scott, I probably should have included it in my prepared remarks, but I have recalibrated our excess liquidity given the first quarter's activity to where we're sitting on about $15 billion of excess cash here in April. I still like the one-third, one-third, one-third approach, where perhaps a third of it runs off in the commercial deposit book as the Fed starts to move in 50 basis point increments. And then, a third in additional security purchases, so $5 billion more during the course of this year. And then, obviously, the rest in loan growth especially with Dividend coming on board, where we expect continued nice loan growth throughout the year.

Okay. Perfect. And then, you gave some thoughts on sort of the puts and takes in the expense outlook. I guess, so nice to see that you can absorb that minimum wage increases still improve the expense guidance. Are there any areas where you guys exclusively dial back things outside of compensation increase, or I guess sort of maybe just a little more thought on the puts and takes as you see them?

Yeah. The puts and takes this quarter relative to the January guide really is the interplay of the rate environment between fees and NII, whereas expenses, the main driver of the improved expense base on a stand-alone basis was really the fulfillment costs and related compensation related to the lower fees, but the rest of the franchise in our approach to managing expenses during the year really hasn't changed from when we started the year. We continue to focus on technology investments and supporting our marketing efforts so the marketing spend is actually a little bit higher as we look out at the year given the strong growth we've had in consumer household acquisitions and the Momentum Banking product. Obviously, the minimum wage adjustment was a little bit of an uptick in expenses, but again offset by some of the savings from the lower fee guide. So overall, I think the approach remains the same, which has continued to invest in the business and continue to let that strong momentum show up in the rest of the balance sheet activities.

Perfect. All right. Good. Thank you very much.

Hi. Good morning. My first question is that really for Greg and Tim. Greg, congratulations on your retirement. I'm wondering sort of why you decided now would be a good time to step aside? And Tim, maybe just as a follow-up to that, what are you most excited about as you look forward outside of macro in terms of the growth prospects for the bank that you're inheriting?

Thanks for the question. First of all, I think it's really a perfect time for me to be stepping down as CEO. The bank is in fantastic shape. I became CEO in 2015. The objectives we put in place to be good through the cycle, make the changes that lead to our outperformance through the cycle. I feel really good about the position of the bank, our business for the future and the success we've had. It's a great time to step aside. The second thing is Tim’s readiness. Tim's worked in the bank for six plus years; it's been succession, I think, a well-thought-out succession plan. Tim is absolutely ready and the time is now for him to step up given the forms of the bank. The third thing is my personal aspiration to retire at age 60, which I turned 60 in January and that's always been an aspiration of mine to be able to do that. There are a lot of things I want to focus on, a lot of travel on the personal side, personal investments and 60 was kind of my timeline also. So that would not have worked if Tim was not already in the bank and in position as well as also it really came together at the right time.

Yeah. Erika, as it pertains to your question for me, I’m excited about a lot. We are in as good a shape as Fifth Third has been at any point since I have been around the company, including the several years that I spent outside the bank as a consultant to the bank and Greg. I think we have assembled an outstanding bench of leadership talent, right. We talk a lot about experience being a team sport here. So you have deeply experienced folks from inside the company, you have folks who have joined from outside the bank who have brought in fresh perspectives and really helped us think about how we shape the business going forward. If you think about the long-term objective we set for ourselves, which is to outperform through the cycle, I think all the pieces parts are in place. We have a great culture of expense discipline. We've inculcated a credit discipline that will support through-cycle performance. We have been investing continuously. I think sometimes maybe we haven't gotten enough credit for it because we have essentially been harvesting expenses in some areas and redeploying them into growth. The byproduct of that is we have a really excellent footprint and a nice balance between the Southeast and the Midwest. We are seeing bloom coming from many of the investments we've made in digital capabilities. I think in particular, with a focus on product innovation, right, whether that is Momentum Banking and the differentiation that, that has provided to our household growth goals where the managed services, which as Greg mentioned in his prepared remarks, help drive the right balance in fees to total revenue. Last but certainly not least are the benefits we're going to continue to see from the acquisitions that Provide and Dividend in terms of providing sustainable loan growth with really attractive ROAs. So I do have lots to feel good about here.

Got it. And the second question is for Jamie. Jamie, AFS has become a bad word this quarter and I'm wondering, you've always had a very distinct investment policy. If you could explain to the generalists that are listening to this call. There have been distressed about the CET1 erosion that they've seen at the big banks for it’s been relevant and then the role the AOCI in other regional banks impacted tangible book. What you bought in the quarter to $10 billion and the difference between duration risk or CMBS and RMBS? And also if you could translate into generalist language, what bullet and locked-out structures mean?

I can spend the next hour discussing this topic, which shows how challenging it is. Please feel free to jump in if I miss any points. I'll start by saying that I find it difficult to value just one line item on the balance sheet without considering the others, or to evaluate held-to-maturity securities in relation to available-for-sale securities. For us, as a smaller bank, the choice to classify a security as AFS or HTM does not affect its economic impact or risk. I understand that larger banks may want to minimize regulatory capital volatility, but given that we have less than $700 billion in assets, we believe that having the flexibility to manage our portfolio as conditions change provides significant value. Over the past eight years, our investment portfolio has had the highest performance yield in the industry. I question whether our company would have a higher valuation if we classified securities as HTM instead of maintaining our flexibility with AFS, but I recognize the valuation methodology. Our focus is on optimizing the balance sheet for long-term economic value rather than prioritizing accounting outcomes. That’s why we continue to designate all our securities as AFS, as we prefer the flexibility. Regarding your second question, we favor bullet and locked-out cash flow structures to minimize extension risk in comparison to residential mortgage-backed securities. A clear example of this is that our duration was 4.8 years at the end of last year and increased to 5.4 years by the end of this quarter. This duration extension was entirely due to the securities we purchased, which had an average yield of 2.5% and a duration of 6.5 years. All duration extension was a conscious decision on our part, and we prefer to add duration strategically rather than having the market force it upon us. This is the underlying value of bullet and locked-out cash flow structures. I may accept a slightly lower yield in a stable environment, but I safeguard against the volatility of interest rate changes, which reflects our investment portfolio management philosophy.

Got it. Okay. Thank you.

Hi, I have a question that might help clarify things. You've utilized approximately 60% of your excess cash, and now there remains about 40% of excess cash available for deployment this year. How should we consider this?

Yeah. I looked at it Mike, is I had a $35 billion of excess cash, I bought 13 of additional leverage in the quarter. Got about 15 left, net of loan growth for second quarter purchases and additional cash deployment as the year progresses. I think to Scott's question early on, there is an opportunity to perhaps that other $5 billion in run-off in deposits doesn’t occur as offset by growth in other areas, but for now that's how we see the year playing out.

In response to the question about the CEO change, Greg provided a summary of his accomplishments over the past seven to eight years. Is there anything else he would have liked to achieve with more time? Additionally, who is Tim Spence? What is his background? Greg, why did the Board choose Tim? What unique qualities does Tim possess that make him suitable to manage Fifth Third's shareholders' capital over the coming years? Thank you.

Absolutely, right. First of all, I think we accomplished the objectives that I set out for, as we talked about and we put project North Star where in place. I'd like to have done more faster probably, but you will see an ability of the organization to absorb the amount of change that we're bringing forth was important also. So I think we did it the right way; there’s not a whole lot I would have changed or done differently. I'm sort of very proud of what we accomplished, as Jamie said and Tim said, it's a team sport and we've got a great organization. We've worked hard to put a great organization and great team around Tim. Why Tim, right now? Absolutely, the right person. Tim has a strong technology background. He has been instrumental in other acquisitions and the investments that we've made in this space. He has great abilities to look ahead, understand and assess the challenges that we're going to be faced with now one year, two years, but five years down the road. If you think about our bank needs going forward, strong technology expertise, but also the ability to see down the road or what the challenges might be that we're faced with and also execution. Tim is fantastic on the execution side; you can be the great visionary, great strategist, but if you cannot execute, you are not to be successful. Tim has demonstrated over the years especially as president and he can execute extremely, extremely well. Once again, if that wasn't the case, we wouldn't be making this transition at this time. But he is absolutely ready, he is the right person. The reason I just said, I couldn't be more excited; I'm a large shareholder. I’m going to be a large shareholder to have Tim at the helm forward. And I’m excited about starting the next phase of my life, which is retirement of retirement I worked hard to achieve at an early age and I think it's just a great, great time for both of us.

Okay. I'll requeue. I’ve got some more questions. Thanks.

I'll take that. Good morning. Jamie, maybe a question for you. Could you just remind us what the mixes within commercial banking revenue, it was down 21%, but the better than some of your others who maybe, call it, capital markets or investment banking? And then maybe what are pipelines like today, and do you have any near-term thoughts on that business?

Yeah. The disruption in the first quarter definitely impacted the debt capital markets groups with the loan syndications and the corporate bond fees. For us within commercial banking, it's a pretty good split between FRM products where we're helping customers with hedging, call that a third of the business, a little bit more than that amount in investment banking revenue and then the remainder within some of the lending fee categories that aggregate to the total. So, what we've seen is that FRM has done better than we originally expected, but that investment banking category within corporate bond and loan syndication and branch fees performed worse than expectations, so that's the mix there. The guide for the year includes some assumptions that markets stabilize and reopen; should that not happen, and we would just have more of that interplay between NII and fees. At the end of the day, I will still feel good about the revenue generation of the company.

And then just as a follow-up, the average commercial loan growth of 9% to 10% versus 7% to 8% in January. Is that all layering in Dividend Finance or ex that deal, do you see a stronger year within commercial lending?

Yeah. So Dividend Finance will show up in other consumer loans, unlike Provide that did show up in C&I. So you'll see Provide’s benefit is in the C&I guide and Dividend Finance's and other consumer loans category.

Thanks. Good morning. Jamie, I wanted to ask about the Fed balance sheet and epic contracts. Does not make a difference to your rate outlook and/or kind of how you perceive the macro picture?

We do expect contraction with our outlook of the Fed balance sheet as they potentially begin the sell-down in June, announced that in May. I guess ultimately, the variable to our outlook would be, if they were to move significantly faster than perhaps you have a little bit more deposit outflow or higher deposit betas than what's expected, but it would have to be pretty quick and significant action on their part to implement the quantitative tightening more so than what we've got baked in. So I think ultimately it will play out, okay.

Okay. But you're not expecting the opposite where they don't contract at all. It's not part of the interaction?

Correct.

I was since, Greg you define Tim starting with the word tack or technology; maybe just dig into a little bit more, Tim, your vision for what drives the bank in the future look like in terms of technology. Greg, you certainly have taken Fifth Third away, but there's still a lot more to go, I'm sure. So I'll give you Column A or Column B. Column A would be more one premise proprietary in-house, don't rely too much on third-party and you can control your destiny, and Column A is where certain banks are where they want to protect a lot of their customer data and information, safety and security. Now Column B would be a zero ops, 100% public cloud, maybe 10, 15, 20 FinTech partners and the Lego approach where you piece those together really making use of having kind of a break down the borders around the bank. So column A or column B or maybe I'm framing this wrong and you can give another answer, but how do you foresee the tech bank of the future?

No. Look, I think it's a mix of both. The nice thing about our sector is there really is a very active technology vendor community and it gives you a lot of choices about how you want to run the business. I don't think we're ever going to be all in bucket A or bucket B. We're big believers that where there are industry utilities that drive very limited customer differentiation and where there is a benefit to shared scale, it makes sense to ride on the rails that are available and where there is an opportunity to differentiate and/or in the aspect of the business that's deeply proprietary that it's got to be managed and maintained in-house. So I think you're going to see us take a best of blend approach as it relates to those two areas. But with a heavy focus on owning the tech platforms in the products which are customer-facing and probably comparatively a lighter emphasis on that as it relates to the back office where you're talking about a scaled utility that's processing credits and debits as opposed to something that's more strategic or proprietary to the business.

Hey, Mike. This is Greg. I don't have concrete numbers for you. When you think about things like data centers, it's two. Obviously, we want to be down to two data centers and we're approaching that pretty quickly here. Obviously, we want to make sure we have a hot site and you get latency on how fast things could travel; it's really mindful of that, but that's going to be the case. We think about our core apps around the business something less than we have today. I'm not sure how substantial the agenda today, but something less than we have today. Customer-facing apps as you think about them, when we can build off of common platforms and expand off of a common platform very different than the past, there is an open source cloud-based computing that technology enabled us to do things over definitely we have less applications. So less applications for the customer-facing side of house, somewhat less applications on the back and as we consolidate some of our platforms and vendors, definitely less vendors. And data center we wanted to.

The metrics I am primarily focused on relate to the resilience of our environment. We have discussed this extensively, and it involves the balance of spending and our continued emphasis on shifting a larger portion of our overall expenditures toward new application development and products, moving away from legacy maintenance costs. These factors, combined with how customers assess our digital channels and the differentiation evident in the quality of our products and services, are what we should be held accountable for.

Last one, so to run the bank, change the bank spend for technology where has it been, where is it today and where it might go to then?

Yeah. You include information security and otherwise, it's been, call it 35 change the bank, 65 run the bank. the goal going forward is to invert that 65-35.

Good morning, everyone. Greg and Tim congratulations on the new roles for both of you. Jamie, I always appreciate your color commentary about the balance sheet and the asset liability sensitivity as well as the expectations you have for the full year as well as the second quarter. The world has changed dramatically in this first quarter as evidenced by your assumptions on the Fed funds rate and the powerful impact that has had on net interest income. Can you share with us, if we're here a year from now, then Greg will be drinking a pina colada in the Caribbean and we know that. But for you, what should we really focus in on a year from now that could be startling? Is it just breathtaking how it's changed and it's not just for you folks, of course, it’s everybody. But I'm just taking back at how strong everyone's net interest income growth is now because of the rate environment change and I'm wondering a year from now, what could it be like that could make us stay up late at night worrying?

I think a year from now and really the value that we see from our actions this quarter is just how well positioned our balance sheet is to perform well through the cycle, both from an NII perspective and a credit perspective. I think perhaps there was some concern that we have waited too long and missed the opportunity. The good news from today's release is that we are well positioned and well protected for the possibility of recession in 2023 or 2024. Not that that's our base case, but certainly something that we're mindful of and we pride ourselves on being good risk managers, and that's how we approach the downturn should it occur. We're well positioned to be a strong performer. But should we continue to see good economic growth, this is a company that's positioned to do well with generating high returns and high PPNR growth.

Gerard, if I were to add on adding Jamie referenced credit, we've come out of a period here where the dynamic around rates has I think really obscured the importance of funding quality. And given the way that reporting gets done, it's probably hard to tell from the outside looking in, how good the funding base is, and that doesn't just extend to the banks, it's the non-banks as well. As the Fed tightens, I think there is going to be more differentiation, and maybe the market fully appreciates as it relates to the stability and the quality of your funding base and the banks who have done the things that we've tried to do in terms of growing primary relationships and what the focus on core operational deposits should be much better positioned to weather an environment where liquidity may have a premium attached to it unlike the environment that we really have come out of over the course of the past handful of years.

Very good. Thank you for the color. And the prime relationships that you've developed with your customers and the low-cost funding that comes along with that is obviously very beneficial. At what point or is there a point that you folks may look for some term funding if rates were to really go higher 12 months from now? Just like they've done in the last three or four months, does it make sense at some point to start looking at some term funding?

Yes. And that is included in our NII guide as well for the year.

Good morning. On the deposit beta topic, I just wanted to see if you could perhaps discuss any of the risks or concerns that investors had that is for the industry could surprise higher than many of the banks are expecting. I know you guys are expecting a lower beta perhaps in the 25% range versus we've experienced in previous cycles. Can you just talk about the concerns there that competition to be could be much more intense this time around given the various players in the space that could perhaps influence deposit betas to be higher than expected?

Thank you for the question, John. There are several factors that impact how the betas will turn out. We believe the primary factor for the industry is the level of liquidity, as indicated by the loan-to-deposit ratio, which is significantly better now compared to the end of 2015 as we enter this cycle. However, you are correct that the level of competition ultimately affects the deposit betas. We feel the industry is better positioned today, which should lead to reduced competition. From an industry viewpoint, we expect this to play in our favor. If we find ourselves mistaken, we can discuss Fifth Third's specific achievements, particularly in primacy and operational deposits within the treasury management business, which we think will contribute to a lower beta—earlier we projected a 20 beta for the first 200, but expectations have been adjusted upward since then. Ideally, we will exceed this, but we are prepared for a 25% beta as a reasonable outlook for the up 200. When analyzing by customer segment, the wealth and asset management area is highly price sensitive, suggesting less improvement there compared to the commercial business due to treasury management. Additionally, within the retail segment, we believe the value provided through free services in our Momentum Banking program will help produce a slightly lower beta this time, focusing on value rather than competing on rates. We've made structural enhancements, like eliminating punitive fees and adjusting our product offerings, which should yield a better beta this cycle. However, if our assumptions prove incorrect, we are confident in our ability to compete effectively regardless of the outcome.

Got it. Okay. Thanks, Jamie. That's helpful. And then a similar question actually on the credit side. I know you're not flagging anything too concerning on the credit front and that's very similar to the message that we've gotten net out of the banks this earnings season. And you know, but I know you saw a bit of a tick up in your credit quality in a couple of the banks; we have seen that as well. What areas of credit are you watching most closely? What areas do you think will move first? And are there any signs of faster than expected normalization at all within your consumer portfolio, for example?

It's Richard. Let me address the last point. From a consumer perspective, we are not observing signs of acceleration. The excess liquidity that primarily benefited the top 20% of income households has remained with our customer base, which consists mainly of prime and super-prime segments. We have not noticed any significant changes in activity related to the pace at which this liquidity is being depleted; in fact, it's depleting slightly slower than anticipated as individuals find a balance in their lifestyles. In terms of delinquencies, we are at an extremely low level, and while there can be fluctuations from a few cases impacting the overall percentage, we aren't detecting any concerning trends that would indicate an accelerated normalization in credit, whether for consumers or commercial sectors, which we are monitoring. We remain cautious with leveraged lending, particularly in enterprise value lending, where we are pleased with our portfolio discipline. Additionally, there are several segments in commercial real estate that we are keeping an eye on, such as office spaces, due to long-term structural shifts. We are focused on quality Class A properties in gateway cities. Furthermore, we are observing consumer products, manufacturing, and senior living sectors closely, particularly regarding their ability to manage cost increases. So far, most have successfully passed on these costs, but we are vigilant about this situation.

I'll take that. Good morning. Jamie, maybe a question for you. Could you just remind us what the mixes within commercial banking revenue were down 21%, but better than some of your others who maybe, call it, capital markets or investment banking?

The disruption in the first quarter definitely impacted the debt capital markets groups with the loan syndications and corporate bond fees. For us within commercial banking, it's a pretty good split between FRM products where we're helping customers with hedging; call that a third of the business; a little bit more than that amount in investment banking revenue and then the remainder within some of the lending fee categories that aggregate to the total. So what we've seen is that FRM has done better than we originally expected, but that investment banking category within corporate bond and loan syndication and branch fees performed worse than expectations, so that's the mix there. The guide for the year includes some assumption that markets stabilize and reopen.