Fifth Third Bancorp (FITB) — Q4 2024 Earnings Call Transcript

Good morning, everyone. Welcome to Fifth Third's fourth quarter 2024 earnings call. This morning, our Chairman, CEO and President, Tim Spence; and CFO, Bryan Preston, will provide an overview of our fourth 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 January 21, 2025, 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.

Thanks, Matt, and good morning, everyone. At Fifth Third, we believe great banks distinguish themselves not by how they perform in benign environments, but rather by how they navigate uncertain ones. They achieve this through a diversified business mix, defensive balance sheet positioning, and by obsessing over the details in day-to-day operations while investing for the long term. This morning, we reported earnings per share of $0.85 or $0.90, excluding certain items outlined on Page 2 of the release, exceeding the guidance we provided in our third quarter earnings call. We achieved an adjusted return on equity of 13.7%, the highest among all peers who have reported thus far. Revenues for the quarter grew 2% sequentially and 2% year-over-year. Core adjusted PPNR exceeded $1 billion for the first time in several quarters, and our adjusted efficiency ratio improved to 54.7%. The fourth quarter capped the year with the industry outlook for interest rates, loan growth, regulation and capital markets activity all changed significantly. Despite this, we delivered strong and predictable results. Our full year return on assets of 1.17%, return on tangible common equity, excluding AOCI, of 14%, and efficiency ratio of 57.1%, all finished among the top in our peer group. We were one of only a few banks to achieve full year guidance for NII, fees, expenses, PPNR and net charge-offs that was provided back in January. Our NIM inflected in the first quarter as we said it would. NII inflected in the second quarter as we said it would. We returned to positive operating leverage in the fourth quarter on both a sequential and year-over-year basis, as we said we would. We resumed share repurchases in the second quarter and raised our dividend in the third quarter. In total, for the year, we returned $1.6 billion of capital to our shareholders while also increasing our CET1 ratio by more than 20 basis points. Competitive barriers are exceedingly difficult to build in the banking business. The only way we know how to build them is to invest continuously in a limited number of strategies over a sustained period. Our growth strategies are well-known and have been consistent for several years now. Their impact is evidenced in our 2024 results and reflected in the third-party accolades that we received during the year. Our investments to expand our Southeast branch footprint and in our differentiated momentum banking platform continued to drive outsized growth in granular low-cost deposits. For the second consecutive year, Fifth Third was number one among all large banks in year-over-year retail deposit growth measured on a cap deposit basis. We generated year-over-year household growth of 2.3%, punctuated by 6% growth in the Southeast. And we also won JD Power's Retail Banking Satisfaction Award for the Florida region. The 31 de novo branch locations we opened in 2024 and the 60 new branches we expect to open in the Southeast in 2025 should set us up well to continue to gain market share. On lending, our investments to generate granular diversified loan originations without compromising on pricing or risk gained momentum throughout the year and contributed to a strong finish. On a sequential end-of-period basis, we grew loans 3%, or a bit more than 1% faster than the HA. Growth was balanced between consumer and commercial and across product categories, including from our through-the-cycle commitment to the auto business, strong C&I production from the middle market and key CIB verticals, and continued growth from our Provide and Dividend Fintech platforms. In the middle market, we expanded our Relationship Manager headcount by 25% in the Southeast and in our expansion markets over the course of 2024. Fourth quarter middle market loan production reached a three-year high, increasing over 50% sequentially and over 70% year-over-year, and we also saw a modest uptick in utilization. Our C&I pipelines in middle market are at record levels heading into 2025, and we expect to add another 5% to 10% to RM headcount over the course of the year. On fees, our Commercial Payments business grew fee revenues by 8% in 2024, and we processed $17 trillion in volume. Our managed services offerings and Newline led the way on growth and nearly 40% of all new Commercial Payments relationships had no credit attached. In addition, Care Sheet, Global Finance, and This Week in Fintech all recognized Newline with awards for technology innovation. The ramp from new and expanded relationships won during the year, including Stripe and Trustly, will give us a head start on a strong 2025. In Wealth and Asset Management, total assets under management grew 17% year-over-year, up roughly $10 billion to $69 billion in total AUM. Our Fifth Third Private Bank, Fifth Third Securities and Fifth Third Wealth Advisors business units all delivered strong performance, and we were recognized for the sixth consecutive year as Best Private Bank by Global Finance. Last, we continued to make good progress on modernizing our operating platform. We completed general ledger and clearing platform conversions during the year and launched term deposits on a modern cloud core. Our cross-functional lean value streams have achieved more than $150 million in annualized savings, and headcount declined 1% year-over-year. These initiatives continue to improve execution quality and provide funding for the investments in our growth strategies. Looking ahead to 2025, there are many reasons to feel optimistic about the banking sector. The underlying economy is solid and most business owners are more optimistic about 2025 than they were about 2024. The combination of front-end rates above zero and some steepness in the yield curve is a more constructive setup than we've had in quite some time. We may also be on the cusp of a shift in the direction of regulation, which could unlock new opportunities. With that said, recent history is a good reminder that things can shift very quickly. The modern economy is the most complex adaptive system the world has ever seen, and complex systems react to change in unexpected ways. Come what will, we are pleased with the positioning of our company. We remain confident in achieving record NII in 2025 and delivering full-year positive operating leverage across a range of interest rate environments. Our credit portfolio remains well diversified and proactively managed, and the risks are well understood. We will continue to focus on stability, profitability, and growth in that order, and to stay balanced in our positioning while investing with the long term in mind. Before I turn it over to Bryan, I want to say thank you to our employees for the way you support our customers and our communities, and for your commitment to getting 1% better every day. You make our company the special place it is. With that, Bryan will provide additional details on the quarter and our outlook for 2025.

Thanks, Tim, and thank you to everyone joining us today. Our fourth quarter results demonstrated the ongoing strength and momentum of our company. With a resilient balance sheet and diversified income streams, we achieved 3% sequential growth in adjusted revenue. That revenue performance, combined with our ongoing expense discipline, resulted in a 5% sequential pre-provision net revenue increase in the fourth quarter on an adjusted basis. As Tim mentioned, our strong profitability allowed us to return over $1.6 billion of capital to our shareholders in 2024, including the $300 million share repurchase executed in the fourth quarter. We delivered $3 billion of sequential growth in end-of-period loans and maintained our CET1 ratio consistent with our near-term operating target of 10.5%. In addition to the $630 million in stock we repurchased in 2024, our tangible book value per share, inclusive of the impact of AOCI, increased 6% from the previous year despite the 10-year treasury increasing nearly 70 basis points. The strategy in our investment portfolio to focus on investments with known cash flows through bullet and locked out securities will continue to benefit us as these positions pull to par. Even with the increase in rates, the securities we maintained and available for sale realized an improvement in our unrealized loss position since the end of last year. Highlighted on Page 2 of our release, our reported results were impacted by certain items. These include costs related to the Visa/MasterCard interchange litigation and a contribution to our foundation, partially offset by benefits related to an updated estimate for the FDIC special assessment and the resolution of a prior period state tax item. Net interest income for the quarter continued its positive momentum, increasing 1% sequentially to $1.4 billion with net interest margin improving 7 basis points. Proactive balance sheet management resulted in a 35 basis point reduction in the cost of interest-bearing deposits. These actions, along with the loan growth and the continued repricing benefit on fixed-rate assets, more than offset the decrease in yield on our floating rate assets. Loan growth accelerated in December, resulting in a strong period-end loan growth of 3% with average loans increasing 1% sequentially. Period-end commercial loans were up 3%, and average balances were relatively stable. We saw broad-based strength in production across our middle-market footprint, led by our Chicago, Indiana, Carolinas, and Georgia regions, as well as a rebound in our corporate banking verticals. The utilization improved a point, some of which we expect is normal year-end seasonality. Average and period-end consumer loans were up 2% from the prior quarter, reflecting increases in indirect auto and residential mortgages. Both asset classes also saw sequential increases in yield due to the continued front book, back book repricing benefits on these fixed-rate portfolios. Shifting to deposits. Average core deposits were up 1% sequentially, driven by higher interest checking balances in Commercial. This core deposit performance combined with the flexibility provided by our elevated cash position allowed us to meet our expected down rate beta targets and further reduce higher cost short-term wholesale borrowings. Interest-bearing core deposits peaked at 2.99% in August and were down to 2.49% in the month of December, representing a core deposit beta in the upper 50s. Total core deposits have increased by $1.6 billion over that same horizon. As always, our focus remains on prudently managing total funding costs while maintaining a strong liquidity position. We are very pleased with the 38 basis point sequential decrease in interest-bearing liability costs. Our balanced approach will continue to provide us with the flexibility needed to continue our NII growth trajectory to a record 2025, as we head into another uncertain rate environment. Demand deposit balances as a percent of core deposits remained at 24% during the quarter, consistent with our expectations. Balances were stable on both an end-of-period and average basis compared to the third quarter. We believe this balance level will be maintained as short-term rates are likely to be relatively stable over the near-term. We ended the quarter with full Category 1 LCR compliance at 125%, and our loan-to-core deposit ratio was 73%, up 2% from the prior quarter. Moving to fees. During the fourth quarter, we updated the non-interest income captions on our income statement to better align disclosures to our most significant business activities, which includes the addition of commercial payments and capital markets line items. The appendix of our presentation provides more detail on the caption changes. Excluding the impacts of the securities gains and losses and the Visa total return swap, adjusted non-interest income in the fourth quarter increased 5% compared to the same quarter last year. Capital Markets, Wealth and Commercial Payments all delivered strong fee results, driven by our sustained strategic growth investments in products and sales personnel. Capital markets grew 16% over the prior year with increases in loan syndications, debt capital markets, and M&A advisory revenue. We continue to see activity below prior year levels in our customer hedging and institutional brokerage fees. In Wealth, fees grew 11% over the prior year to $163 million due to AUM growth and increased transactional activity at Fifth Third Securities. The new Commercial Payments caption includes TAM fees and earnings credits that were previously included in service charges on deposits and commercial card and sponsorship revenue that was previously reported in card and processing revenue. Compared to the prior year, Commercial Payments revenue increased 7%, driven by treasury management net fee equivalent growth, which was up 11%. We continue to acquire new clients in treasury management products in our managed services and in Newline. The securities losses of $8 million were primarily from the mark-to-market impact of our non-qualified deferred compensation plan, which is offset in compensation expense. Moving to expenses. Excluding the items noted on Page 2 of our release, our adjusted non-interest expense was up 1% from the year-ago quarter and decreased 1% sequentially. The previously mentioned deferred compensation mark reduced expenses by $7 million for the quarter compared to expense increases of $10 million and $13 million in the prior and year-ago quarters, respectively. Excluding the impact of the deferred comp mark, the year-over-year expense growth was 2% and sequential expense growth was 1%. While investments in technology, branches, and sales personnel have and will continue to drive expense increases, these costs continue to be partially funded through the savings generated by our value stream efficiency programs. Shifting to credit. The net charge-off ratio was 46 basis points, in line with our expectations for the quarter and down 2 basis points sequentially. Commercial charge-offs were 32 basis points, down 8 basis points. Consumer charge-offs were up 6 basis points, which primarily reflects the normal seasonal fourth quarter uptick we see in our indirect auto and card portfolios, as well as the continued seasoning of the 2022 vintages in our Solar and RV portfolios. Consistent with broader industry data, the 2022 consumer vintage appears to be a modest underperformer relative to other origination periods. Early stage delinquencies, 30 to 89 days past due, increased only 1 basis point and remained near the lowest levels we have experienced over the last decade. Our NPA ratio increased 9 basis points sequentially to 71 basis points. Commercial NPAs contributed $122 million to the increase from the prior quarter, and consumer NPAs were up only $15 million. Within Commercial, our CRE portfolio continues to perform well with no net charge-offs during the quarter and a stable NPA ratio of 46 basis points. Additionally, total Commercial criticized assets decreased by $435 million, an 8% reduction during the quarter. Our provision expense for the quarter resulted in a $43 million build in our allowance for credit losses. This build was primarily attributable to the strong growth in period end loans and a modest deterioration in the Moody's macroeconomic scenarios. Our ACL coverage ratio was 2.08%, down 1 basis point from the third quarter. We made no changes to our scenario weightings during the quarter. Moving to capital. We ended the quarter with a CET1 ratio of 10.5%, significantly exceeding our buffered minimum of 7.7% and consistent with our near-term target. Our pro forma CET1 ratio, including the AOCI impact of the securities portfolio is 8.1%, up 32 basis points year-over-year. We anticipate continued improvement in the unrealized losses in our securities portfolio, given that approximately 60% of the fixed-rate securities in our AFS portfolio are in bullet or locked out structures, which provides a high degree of certainty to our principal cash flow expectations. Assuming the forward curve is realized, approximately 18% of the AOCI related to the securities losses will accrete back into equity by the end of 2025, increasing tangible book value per share by 5% before considering any future earnings. During the quarter, our $300 million share repurchase reduced our share count by 6.7 million shares. Moving to our current outlook. We entered 2025 with strong momentum and a resilient balance sheet and remain confident in our ability to achieve record NII and full-year positive operating leverage. We expect full-year NII to increase 5% to 6%. This outlook uses the forward curve at the start of January, which assumed 25 basis point rate cuts in March and October. We would not change our NII guidance for 2025, even if we assume that no cuts will occur. We expect full-year average total loans to be up 3% to 4% compared to 2024, with the increase primarily driven by the broad-based improvement in C&I combined with continued growth in auto loans. We are assuming that the cash position, securities portfolio, and commercial revolver utilization all remain relatively stable throughout 2025. Full-year adjusted non-interest income is expected to be up 3% to 6%, reflecting continued revenue growth in Commercial Payments, Capital Markets, and Wealth and Asset Management, partially offset by the continued run-off of the operating lease business, muted mortgage originations given the rate environment, and the year-over-year impact of the final TRA revenue occurring in 2024. We expect full-year adjusted non-interest expense to be up 3% to 4% compared to 2024. Our expense outlook assumes accelerated branch openings in high growth Southeast markets and continued sales force additions in middle market, Commercial Payments, and Wealth to increase our production capacity to support our strategic growth initiatives. In total, our guide implies full-year adjusted revenue to be up 4% to 6%, PPNR to grow in the 6% to 7% range, and positive operating leverage closer to 2%. Moving to credit. We expect 2025 net charge-offs to be between 40 and 49 basis points. Assuming no changes in macroeconomic forecasts, we expect the provision to build between $50 million and $100 million due to loan growth. Moving to our outlook for the first quarter. We expect NII to be flat with the fourth quarter of 2024 as the benefits of loan growth, fixed-rate asset repricing, and the continued reduction in the cost of interest-bearing liabilities should offset the impact of two fewer days. We expect average total loan balances to increase 2% in the first quarter due to continued momentum in C&I and auto. Excluding the impact of the TRA, we expect non-interest income to be down 6% to 7% compared to the fourth quarter, mainly due to normal seasonality in card spend, capital markets activity, and other Commercial Banking revenue. First quarter adjusted non-interest expense is expected to be up 8% compared to the fourth quarter. As is always the case, our first quarter expenses are impacted by seasonal items associated with the timing of compensation awards and payroll taxes. Excluding the seasonal items of approximately $100 million, expenses would be flat in the first quarter. We expect first quarter charge-offs to be in the 45 to 49 basis point range and expect the ACL build will be $10 million to $25 million due to loan growth. Finally, we expect to execute $225 million in share repurchases in the first quarter, with future quarter share repurchases dependent on the level of loan growth. We will continue to target our CET1 ratio around 10.5% while we await more clarity around the future of the capital rules and other regulations. In summary, with our resilient balance sheet, diversified revenue streams, and disciplined expense and credit risk management, 2025 is set to be a year of continuing long-term investments, record NII, positive operating leverage, and strong returns for our shareholders. With that, let me turn it over to Matt to open the call for Q&A.

Good morning, guys. Thanks for taking the question. Maybe Tim or Bryan, I was hoping you could just provide a little more context as to how you see loan demand developing through the year. Your commentary, I'd say recently has been much more encouraging. You discussed things like the robust commercial pipelines, etc. So just maybe some additional color on how you see things developing.

Sure, Scott. While it might be a tough point for a Miami grad, we wanted to show that it's not just Ohio State that can score early in the year. We were pleased with the fourth quarter as we had anticipated growth in our pipeline and were waiting for the election to see that come to fruition. With the recent additions to our sales force and ongoing activities, we're well-positioned. We've emphasized the importance of having varied loan origination sources since different channels can perform well at different times. In the fourth quarter, most channels were successful. On the consumer side, auto loans performed strongly for us last year. We often faced questions about our commitment to this area while some banks were stepping back. However, we believe in its cyclical nature and recognize that it can thrive at specific points in the cycle, and we are currently experiencing one of those favorable periods. We expect continued moderate growth in home equity, especially through fintech platforms. On the commercial side, our growth was widespread. Following the election, we saw a quarter’s worth of production in just six weeks as we began clearing out backlogs. Thirteen of our fifteen regions and two-thirds of our verticals showed growth during the quarter. Although we benefited slightly from seasonal changes, particularly in mortgage warehouse and trade finance, we believe the underlying trends indicate the potential for above-market growth. We are currently maintaining a record level in our middle market pipeline, largely supported by last year's sales force additions. We also saw a 1% increase in utilization, which is promising. After talking to around two dozen clients post-election, over 80% expressed more optimism for 2025 compared to 2024. Half of them indicated they would be accelerating planned investments, and about a third plan to fund these investments through increased credit usage or new facilities. There’s a growing optimism in M&A activity as well. However, we do have concerns, particularly regarding labor availability, which our middle market clients cite as their biggest worry, even more than inflation, interest rates, or supply chain issues related to tariffs. Overall, the outlook is encouraging, and as last night's game reminded us of Notre Dame's late rally, it's important not to declare victory too early.

Perfect. Thank you. And like all the analogies in there, so thanks. And then, Bryan, I think you had suggested you wouldn't change the guide based on more or fewer cuts implies you're, I guess, pretty agnostic to changes in rates. How would you characterize your rate sensitivity now versus where you'd like it to be? I'm guessing, it's pretty much where you wanted, but would just appreciate your thoughts.

Yeah. We're pretty happy right where we are. We're fairly neutral right now. And as Tim talked about, the diversification of our loan origination platforms as well as the inherent flexibility that the liquidity on our balance sheet provides gives us a lot of levers to be modestly a little bit asset sensitive or a little bit liability sensitive depending on what the environment provides. So we like that positioning in this environment right now.

Hi. I have a lengthy question but I'm seeking a brief response. You mentioned record pipelines in the middle market, a 1% increase in loan utilization, and improvements in 13 out of 15 markets and two out of three verticals. It appears your customers are feeling more optimistic. Are you predicting a shift toward commercial loan growth for Fifth Third? Is this prediction for the entire industry or both? And how confident are you in that outlook?

If you want a short answer, then my answer is maybe. But the thing that I always worry about is uncertainty, right? I think I said in my prepared remarks, the economy is a pretty complex system. It is resistant to simulation and it can change pretty unpredictably. The backdrop is more favorable than it has been. Like, if you're a customer, you have a 100 basis points benefit in rate cuts. You have more certainty over the direction of travel on regulation. I think we're going to have to watch a lot of the discussions we had on the labor market and labor availability related to the questions on immigration, deportations, and otherwise. We're going to have much more clarity there in relatively short order. And I think if those things come about and we don't see big supply chain disruptions yet, we should continue to see some expansion on the C&I portfolio. Just don't bake in 12% annualized growth, please, into your models for Fifth Third. Thank you.

Hi. Good morning. This is Thomas Leddy standing in for Gerard. You saw a good drop in deposit rates in the fourth quarter. Could you just give us a little more color on what your outlook is for deposit rates in 2025, assuming the Fed is finished cutting?

We expect to see some reduction in costs now that the Fed seems to have completed its rate cuts. In the first quarter, we will benefit from the full impact of the December cut. We also have nearly $8 billion of certificates of deposit maturing in the first quarter, currently averaging about 4.3%, which will provide us with additional flexibility. The overall situation will largely depend on loan growth. If loan growth becomes stronger, we might see some increase in deposit competition. However, we are confident in our current position. With our cash reserves, we are in a good position to potentially lower our loan-to-deposit ratio and support loan growth using our excess cash as we did this quarter, giving us the flexibility to manage costs effectively.

The increase was primarily due to five commercial borrowers with an average loan size of $32 million. There are no noticeable industry or geographic trends or concentrations among these borrowers. We are currently just a few basis points above our 10-year commercial average, indicating stability from that perspective. Each of these non-performing asset credits is evaluated individually, considering the financial risk, and these assessments are reflected in our financial results through either a specific reserve or charge-off. The largest inflow of non-performing assets this quarter is expected to be resolved in the first half of the year, either through debt reduction or full repayment. This situation exemplifies our efforts to collaborate with borrowers in distress to achieve mutually beneficial outcomes.

Okay. Great. That's helpful color. Thank you for taking my questions.

Hey, good morning.

Hey, Ebrahim.

Hey, Tim. I wanted to revisit the consistent investments in branches in the Southeast and ask about the returns from branches that opened two to four years ago. As we consider potential loan growth in the industry, should we view Fifth Third as positioned to outperform in loan and deposit growth because of these investments? Could you share what the returns have been from these investments and highlight any specific markets or areas where growth is anticipated for 2025? Thanks.

I will address the second part of your question while Bryan can elaborate on the first part.

The average age of our Southeast branches, particularly the new builds, is around three years. We plan to open another 50 branches in 2025. We're still in the early stages of ramping up from a balance standpoint, which positions us well for customer acquisition and significant deposit growth, similar to what we've achieved over the past few years. This growth will play a crucial role in our net interest income. On the asset side, our progress is linked to the new sales force we've established in new markets, along with a 20% increase in our middle market sales team over the past few years. These factors will provide strong support for our net interest income going forward.

Yeah. And I think the callback here is, what we talk about a lot is the degree to which we pride flexibility. The nice thing about having these engines online is it really does give us the ability to toggle between growing deposits when we want to do that or leveraging the fact that we have great liquidity to manage margins. So we make those decisions based on the environment, what the needs of the balance sheet are, as Bryan was saying. In terms of the markets, you can sort of think about that what we've done in a few waves here. The first wave, the new branch builds were disproportionately concentrated in Nashville, North Carolina, and Southwest Florida. The next wave here when you look at these branches coming online this year and next year. The Southeast Coast, so not Dade County, but Broward North, Central Florida and North Florida will all see material increases in branch activity along with South Carolina, and I think we get our first branch open in Birmingham this year. The other big driver in a two-year to three-year timeframe less so in 2025, is that we're going to see a nice pickup in Atlanta, and in the Atlanta area, we have several branches that will be coming online there.

That's helpful. I have a quick question about the fees. You might not have as strong a capital markets presence as some competitors. Can you give us an idea about the revenue growth shown on Slide 7 for Wealth and Payments markets? How much is that growth reliant on loan growth or balance sheet loans? Should we consider any of these as strategies for acquiring clients?

Yeah. Okay. Great question. I'll just take it by business. So Wealth, not dependent on balance sheeting loans. We have like $7 in AUM for every $1 in deposits and what $15 or something like that in AUM for every $1 in loans. It really is a wealth management sort of fiduciary focused franchise. It is not balance sheet dependent at all. Commercial Payments, it's sort of half-half, right? I gave the number there that 40% of the new relationships we added last year were Payments-led. Say that in other direction. We added almost one new Commercial Payment relationship that had no credit attached to it for every relationship that we did. But certainly, the balance sheet supports what has been high-single-digit, low double-digit growth rates. It's just not reliant on it. And the Newline platform, in particular, is an important driver there. On the Capital Markets side of the equation, much more of what we do in that space is essentially cross selling to existing commercial banking clients. We built a really strong middle market franchise. The hedging activity is great there, that would happen principally to clients who make use of the balance sheet. The M&A activity, our M&A franchise half the engagements roughly come from inside the house as opposed to being independent, which is what we want, right? It's the mechanism for monetizing the attachment point that you get out of the commercial lending business. And certainly, as it relates to the CIB strategy, the focus on capital markets growth there really does link. I just believe we have a long way to go to get to full penetration inside our existing book of business. So I'm pretty confident in our ability to continue to grow capital markets fees at a rate that exceeds the balance sheet by a healthy margin.

That's helpful. Thanks, Tim.

Hi. Good morning. On Capital, I hear you on keeping the reported CET1 at 10.5%. The question was, how are you thinking about CET1 including AOCI? I know some of your peers are operating or looking to operate in that 9% to 10% range. There is some volatility here on the long end of the curve. So I guess the question is, do you have a target for CET1, including AOCI? And how are you thinking about buybacks and capital management from here?

Yes, we do. We aim to maintain CET1, including AOCI, above 8% for now, and we expect it to gradually increase over time due to the pull to par on the investment portfolio. Currently, the AFS portfolio is at the midpoint of the yield curve, with a duration just under 4%, around 3.8%. The price sensitivity of this portfolio has improved significantly. Therefore, we are optimistic about the AOCI accretion we anticipate over the next few years, which assures us that, regardless of any capital regulations, we will have no trouble meeting those requirements over time. Regarding buybacks, our capital priorities will focus on supporting organic growth, sustaining a strong dividend, and then buybacks. Ultimately, the level of buybacks will be close to the 10.5% mark, aligning with the loan growth delivered each quarter.

Got it. So I understand that you will maintain that or you will accumulate through that CET1 including AOCI. Is there any point at which it could affect loan growth and influence RWA guidance at some point?

We don't see anything at this point that would create a situation where we would pull back meaningfully from a loan growth perspective.

Thank you. So on the Commercial Payments, first of all, thank you for breaking that out and giving us more disclosure. I know, it's an area you've invested and feel like you're kind of pulling away from the pack. When we look at it being 20% of fees, up 8% year-over-year, I think you kind of gave us a couple of times 40% of new Commercial relationships, where Payments-led. Do you have any sense, like, if we got this disclosure from all your peers, are you a little higher? Are you a lot higher? And what's the main metric you think you would stand out on?

Yeah. Great question. So I will say to begin with the reason that we changed our reporting is because it is confusing to see it. So it was confusing for us previously. It's confusing for peers. And the metrics that I like here because they are public and they're transparent as you can do a lot of comparison on your own utilizing data from sources like Nacha or the Nielsen report or I think EY does a benchmarking study and otherwise. And you can look at total volumes per dollar of Commercial deposits. And that essentially calculates a turnover ratio for you and the higher the turnover ratio, the more payment centric the business is. So we're definitely overweight this business relative to others. Look, I think we have 3.5 times roughly the market share, if you were to look at the individual product categories nationally in major Commercial Payments rails that we would have in C&I lending just as a point of triangulation. And I know we're growing faster than the industry is overall because again, we got to look at the benchmarking data on industry growth rates. And I think the other thing that's been helpful for us is because we have this business working with third-party software developers, a little bit counterintuitively, we're actually a beneficiary when traditional FIs lose market share to non-banks because Newline grows when partners like Stripe or Corpay or whatever Toast, Nuvei, etc. Trustly bracks when they outgrow the players in their individual markets. And we get good data from Greenwich Associates that suggest we have sort of top in the peer group penetration rates in terms of active treasury management relationships with our lending customers. I'm not going to give the exact number, but it's a mid-80s number for us in terms of penetration there. So like, that's the way I would short of debt reckoning, try to triangulate our position relative to others, but it would be great if everybody adopted our captions and then you'd be able to know.

It would. Maybe, if I could sneak in a follow-up on the guidance on Page 15, definitely appreciate your comments going out of your way to mention that 2024, you kind of hit the guidance on all lines and very few banks did that. So you're assumingly giving us a down the fairway plan here. You've touched on all the individual line items, but maybe just kind of wrapping it up, if there were kind of one or two upside and downside risks you were thinking about for the year, what would you highlight within everything you've given us?

Yeah. I think loan growth is certainly going to be a question and the deposit costs will be a question. So I think just with my treasury background, I'm always going to be nervous about NII, but we certainly feel good about the trajectory that we're on. And then just overall market activity from a fee perspective. We had a fairly soft first half of 2024 in capital markets. We're not expecting that to repeat in 2025, but those markets based businesses are always the one where you can see some volatility.

Good morning. Regarding capital, I understand your priorities for deployment with organic growth being the top focus, followed by dividends and buybacks. How are you approaching mergers and acquisitions, considering both non-bank transactions and the broader banking sector, especially with the changes in Washington and the evolving regulatory environment that emphasize the need for scale? I would like to hear your updated thoughts on this, Tim. Thanks.

Sure, I'm happy to discuss this. The context is important; the U.S. has the least consolidated banking system in the world, and the banking sector is also among the least consolidated parts of the U.S. economy. Eventually, we will see more consolidation in this space, and I believe that is appropriate. Treasury Secretary Bessent has clearly stated that he wants to foster more competition among larger banks. In our situation, we could have made the numbers work before this year, and I'm quite confident that we could have secured a deal then. Our approach remains the same in that regard. We value the density in the markets we compete in and have always been clear about that. We believe in diversification and maintaining a proper balance within our franchise. It's also crucial to have the human capital needed to take advantage of the ongoing technological innovations. I visited Silicon Valley a few weeks ago, and the excitement there regarding what’s ahead is palpable. Banks must be ready to compete with tech-native companies, as this administration is not only addressing some of the regulatory challenges but is also making it easier for these companies to thrive. However, I firmly believe that we will not pursue growth for its own sake. We can grow without engaging in mergers and acquisitions, which not everyone can claim. This is evident when you look at our growth rates. We intend to make the right decisions as opportunities arise. Regarding the non-bank sector, we remain interested in expanding our capabilities in managed services and Commercial Payments, where we have been active. We're not interested in making large acquisitions, so don't expect us to buy a publicly traded tech company and spend a lot of capital that way. We prefer businesses with proven products that simply lack distribution from time to time, as these represent real franchise value. This contrasts with acquiring talent-driven businesses, where one often has to continually reinvest in employees every few years.

Got it. Okay, Tim. Thank you for that. That's helpful. And then, separately, it's clear you guys have certainly been executing better than many of your peers in terms of your growth and your returns and hitting your targets as you had noted earlier in the call as well. As we look at your broader returns, I mean, you're here in the high teens, 18% to 19% return on tangible common equity here. You're in the mid-50s efficiency ratio. As you look at 2025, which is a year where we expect some underlying improvement in the macro backdrop, how do you view the return profile for the third as you're looking at ROTCE, and operating efficiency for the year, and then possibly even beyond that, where do you think the returns are heading towards?

Yeah. And I mean, here's what I would say. I take great pride in the fact that you don't have to believe like a long deductive logic chain in order to get to a place where you're confident that we can achieve returns in excess of our cost of equity. Like, we're kind of in or within reach of our return targets in terms of what we think are good places to run the company. And so, if you think about it in the context of stability, profitability, and growth, like, we like the predictability of the business. We're proud of that. I don't think there's a lot of work that needs to be done there. We're neutrally positioned from an ALM perspective and defensive in terms of credit. I mean, the fourth quarter production as an example. The PDs were actually better on a dollar weighted basis than our existing portfolio. So we feel good there. Our profitability, like, the mid to high teens and the return on tangible common equity in a mid-50s efficiency ratio feels pretty good. We'll get operating leverage this year, if the year plays out as we expect, as Bryan said, I think it's probably closer to 2% in terms of what we'll produce. But the goal for us then really isn't to try to find a way to get an 18% return to a 19% return or a 55% efficiency ratio to a 54%. It's to sustain that level and grow tangible book value per share right, that really is where the focus has got to be in terms of the next leg in the franchise, all assuming again that we have the more benign backdrop that was sort of the setup in your question.

Good morning. Although it may not directly relate to your question, you mentioned that middle market customers are still facing challenges with labor. I assume that is affecting their loan demand or the transition from pipeline to actual volumes. Are they optimistic that these issues will resolve themselves? Are they looking to use technology to help mitigate these challenges, or do they have any specific plans?

That's a great question. It largely varies by sector. For the manufacturing and logistics, wholesale distribution side of the business, there's clear optimism about maintaining gains. I've mentioned some examples of the facilities we've established to support the retooling of manufacturing sites or warehouses. A notable enhancement is that a lot more high-volume picking is being done by robots. These robots can restack racks and move SKUs around overnight based on the forward order book, allowing pickers to be more productive when they arrive in the morning. In healthcare, there's hope that graduating classes from nursing schools will eventually exceed demand, reducing reliance on traveling nursing companies. Personally, I'm less optimistic about this for our healthcare clients, but there's still hope. In many other sectors, such as services, construction, and retail, there's concern about the labor market's trajectory. The U.S. has a negative birth rate, and due to demographic shifts, more people are retiring each year than entering the workforce. This structural issue won't improve without increased productivity through technology. When speaking with clients, you'll find a mix of optimism about a cooling labor market, but the jobs report doesn't indicate that's happening. We'll have to see if there's an effective immigration program to support additional documented labor in the U.S.

That's interesting color. And then you guys are pretty balanced, I think, between large corporate and middle market. Are there kind of different themes in the large corporate, meaning they're less pressured by labor? And then as you think about just bringing it all together, as you think about your C&I growth, do you think it will be more large corporate or middle market driven this year if you had to adjust? And then I'm done. Thank you.

Yeah. I'll take the second one first. I think the goal here is balance, like, we want over time, we have gotten more granular. We made some progress on granularity, which was an important part of the strategy of Fifth Third. So the sort of small business, business banking, middle market segment, ideally, we'll grow a little bit faster than corporate banking. I don't expect corporate banking to outgrow the middle market. And meaningfully, the plan was set to have good balance and consistent focus on granularity there, including within corporate banking for that matter. Do you want the other part of it, Bryan, of the question?

We generally expect corporate banking and larger companies to manage labor pressures somewhat more effectively than the middle market, and we believe this trend will likely continue. This is largely due to their investment capacity, which allows for investment in automation and the ability to adapt to different labor markets, providing them with greater flexibility. Additionally, these companies typically have more pricing power, enabling them to pass on some costs and attract suitable labor. Therefore, in corporate banking, scale is significant, and it plays an important role in the commercial and industrial portfolio as well. I agree with that.

All right. Great. Thank you for all that.

Thanks. Good morning. Just wanted to ask about additional C&I utilization as well as any upgrade downgrade trends from the criticized and classified.

On the C&I utilization front, it increased by about a percentage point, reaching around 36% at the end of the quarter, and it has remained in that range at the start of this quarter. We do not anticipate any significant changes in utilization for the rest of the year and expect it to stay relatively stable. Now, regarding the CRIP front?

Yeah. As it relates to the CRIP, as Bryan mentioned, we were down $435 million in the fourth quarter. Our ratio was down just over 7%. 90% of the criticized portfolio, including our NPAs are current. So I feel really good about the progress we've made. We said last quarter on this call we expected to see criticized reduce a little bit. We continue to work through those troubled assets. So I feel good about the trend. I feel good about the portfolio. It continues to maintain a great balanced mix, strong concentration, limit disciplines. So I feel good about the current asset quality.

Great. We'll leave it there. Thank you both very much.

Thanks. Matt is indicating that we need to wrap up. Before we finish, I want to express my thoughts for the people in California affected by the wildfires, particularly our employees, clients, and partners in the area. Fortunately, based on feedback from our team and direct communication with clients, we have seen positive outcomes. I take great pride in the commercial banking presence we’ve established in California over the last several years, which has experienced a 50% compound annual growth rate. It has primarily been in the middle market and is nearly self-funded. The progress has been exceptional. I also have a personal connection to the region; my dad grew up in the Altadena Pasadena area, and my grandparents are buried there. Those communities hold a special significance for me. Fifth Third will do its part to support the rebuilding of these communities, as I believe they will rise again. Matt, please continue.

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