Fifth Third Bancorp (FITB) — Q2 2025 Earnings Call Transcript

Good morning, everyone. Welcome to Fifth Third Second Quarter 2025 Earnings Call. This morning, our Chairman and CEO and President, Tim Spence; and CFO, Bryan Preston will provide an overview of our second quarter results and outlook. Our Chief Credit Officer, Greg Schroeck, has also joined for the Q&A portion of the call. Please review the cautionary statements in our materials, which can be found in our earnings release and presentation. These materials contain information regarding the use of non-GAAP measures and reconciliations to the GAAP results, as well as forward-looking statements about Fifth Third's performance. These statements speak only as of July 17, 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. In the period of tariff negotiations, cross currents in interest rates, and significant regulatory change, Fifth Third continues to deliver excellent profitability, strong credit trends, and accelerating revenue growth. This morning, we reported earnings per share of $0.88 or $0.90 excluding certain items outlined on Page 2 of the release, exceeding consensus estimates. Adjusted revenues grew by 6% year-over-year led by 7% growth in NII. Adjusted PPNR increased 10%, and we delivered 250 basis points of positive operating leverage, our third consecutive quarter of positive operating leverage. Our key profitability metrics continue to be very strong and among the best of all peers who have reported thus far. Our adjusted return on assets was 1.2%. Our adjusted return on tangible common equity was 18%, and our efficiency ratio was 55.5%. Our credit metrics were strong and improved as we said they would. At 45 basis points, net charge-offs were at the bottom of our guidance range and improved over the prior year. NPAs declined 11% sequentially, led by an 18% decline in commercial NPAs. Early-stage delinquencies declined again and are near historical lows. As a result of our strong financial performance and the positioning of our balance sheet, tangible book value per share increased by 18% over the prior year and by 5% sequentially. The strategic investments we have made over the past several years drove our results in the quarter. In a quarter where even C&I loan demand and the soft housing market made loan growth tepid for the industry, our diversified loan origination platforms produced average loan growth of 5% over the prior year. We grew loans in C&I, CRE, leasing, mortgage, home equity, auto, and both our Provide and Dividend fintech platforms. Investments we have made continue to support strong loan growth in future quarters. Commercial relationship manager headcount increased by 11% year-over-year, and Provide had record production in the first half of the year. In our home equity business, we were #2 in market share in our footprint, and first half production growth was the third best in the country. Both Provide and home equity are examples of the benefits we have achieved from digitally enabled lending channels, combined with One Bank collaboration. Our investments in the Southeast also continue to produce strong results across business lines. Our Consumer Bank grew net new households by 6% over the prior year in the Southeast. The granular deposit growth those households provide has offered flexibility to continue to manage deposit costs even as the Fed paused on rate cuts. In the second quarter, our average cost of consumer and small business deposits in the Southeast was 191 basis points, a 250 basis point plus spread to Fed funds. We have added 10 branches year-to-date in the Southeast, and we'll open another 40 before year-end, bringing us to nearly 400 branches across all our Southeast markets. In Commercial Banking, our Southeast regions have contributed more than half of total middle market loan growth over the past year, with North Carolina, South Carolina, Georgia, and Alabama producing the strongest results. New middle market relationship production has also accelerated across the Southeast, where our teams have added 50% more new quality relationships year-to-date than they did over the same period last year. In Wealth Management, our Southeast markets grew assets under management by 16% year-over-year to nearly $16 billion in total AUM. Adviser headcount is up about 15% in the same markets, which should support future growth. We also continue to see benefits from our investments in innovative tech-enabled products. In Consumer, J.D. Power recently recognized the Fifth Third mobile app as #1 in user satisfaction among regional banks. And we have also launched an initiative to provide free wills to every Fifth Third customer through an exclusive partnership with Fintech Trust & Wealth. We will begin to embed AI-enabled functionality into our mobile app in the second half of this year, which should further improve the user experience and reduce volumes and higher cost service channels. In commercial payments, our investments in our new line embedded payments platform have led to 30% revenue growth compared to last year, and an increase of more than $1 billion in commercial deposits connected to Newline services. We continue to win more business from existing clients and see transaction migration from legacy ACH to modern instant payments rails. During the quarter, rippling selected Newline to be their payments infrastructure provider, joining our existing roster of blue-chip fintech customers. In my annual letter to shareholders this year, I reminded readers that the global economy is a complex adaptive system, and these complex systems react to change in unexpected ways. These days, we are witnessing a lot of change in a short window of time. While we continue to be hopeful about the prospects for the second half of the year, we are also positioned to perform well in a broad range of environments. Our business mix is naturally resilient. Our balance sheet is defensively positioned, and we have the flexibility to react quickly as conditions change. Bryan will provide more detail on our outlook, but I want to emphasize that we do not need a change in the interest rate environment or a material change in market activity to continue to produce strong profitability and organic growth. We are raising our full year guidance on NII given the strong first half performance. We remain very confident in achieving record NII in 2025, even if there are no rate cuts for the remainder of the year. We will deliver 150 to 200 basis points of full year positive operating leverage, even if the capital markets do not recover, given the strong first half performance and the expense levers we have at our disposal. We will resume share repurchases in the third quarter. Our capital priorities continue to be funding organic growth, paying a strong dividend, and share repurchases in that order. Our operating priorities will also remain unchanged: stability, profitability, and growth in that order. Before I hand it over to Bryan, I want to say thank you to our employees for your dedication to your clients. Your commitment to getting 1% better every day is why Fifth Third was recently recognized by USA TODAY as a top workplace and by Forbes as Best Employers For New Grads, and I love being part of your team. With that, Bryan will provide more detail on the quarter and our outlook for the second half of the year.

Thanks, Tim, and thank you to everyone joining us today. Our second quarter results again reflected the strength and momentum of our company. On an adjusted basis, revenue increased 6% year-over-year and 5% on a sequential basis. Our stable and growing NII remains a strong contributor to our performance. We continue to realize the benefits of our diversified balance sheet and business mix through sustained loan growth, fixed-rate asset repricing, and the flexibility to execute proactive liability management. Our revenue performance, combined with our ongoing expense discipline, resulted in a 10% increase in pre-provision net revenue and 250 basis points of positive operating leverage on an adjusted basis compared to the second quarter of last year. Tangible book value per share, inclusive of the impact of AOCI, grew 18% from the prior year and 5% versus the first quarter. Our investment portfolio philosophy to focus on bullet and locked-out securities, in order to have certainty of cash flows, continues to pay off. The unrealized loss in our AFS portfolio improved 6% sequentially and despite the 10-year treasury rate being a few basis points higher than the prior quarter end. The AOCI burndown will continue to benefit tangible book value per share growth as these positions pull to par. Now diving further into the income statement. Net interest income grew 7% from the prior year and 4% sequentially. Net interest margin expanded 9 basis points sequentially. The broad-based loan growth, continued repricing benefits, and deposit cost improvements all contributed to this performance. NII was also favorably impacted by the payoff of the nonperforming loan, which contributed $14 million to NII and 3 basis points to NIM in the quarter. Excluding that payoff impact, NII still grew by 6% from the prior year and 3% sequentially, which is at the high end of our guided range. This interest realization is an example of our proactive credit management, working with our clients to achieve loss minimization through the workout process. As Tim highlighted, our diversified lending platforms continue to support strong balance sheet performance. Average portfolio loans grew 1% sequentially, while period-end loans were stable despite a decrease in commercial utilization. Consumer loans were up 3% on a period-end basis and 2% on an average basis from the prior quarter. On a period-end basis, we saw growth in every major consumer lending category, led by continued strength in our secured lending products, such as auto and home equity lending. Commercial loans increased 1% on an average basis and declined 1% on a period-end basis. As I highlighted in early June, line utilization peaked around the April month-end at 37.5%. Post-April, we have seen a gradual decrease to 36.5% as of June 30. Approximately 40% of the decrease in line utilization was driven by growth in commitments. In addition to the utilization trend, period-end loans were impacted by a $400 million sequential decrease in commercial construction balances as projects were refinanced into the permanent market. Economic uncertainty impacted client confidence and resulted in the lowest quarter of commercial loan production over the last year. There were some bright spots, with continued strong production in Chicago, the Carolinas, Georgia, and Alabama. While utilization has impacted balances, commitments continue to grow. Middle market pipelines have also rebounded during the quarter as our third quarter pipeline is up almost 50% from the prior quarter. Shifting to deposits. Average core deposits were stable sequentially, and as an increase in demand deposits was largely offset by a decrease in interest checking. Our strong liquidity profile continues to provide us with the flexibility to actively manage our overall funding costs while executing tactics to grow granular insured deposits. As a result of these efforts, interest-bearing deposit costs were down 3 basis points sequentially and 65 basis points over the last year while we have continued to grow consumer and small business deposits, which are up 1% versus the prior year. Compared to the first quarter, demand deposit balances were up 3% on an average and end-of-period basis. This strong core deposit performance has allowed us to pay down over $4 billion of higher cost non-relationship broker time deposits over the last 2 years. We will continue to prioritize high-quality, low-cost retail deposits, particularly in the Southeast with our de novo investments. The most recent vintages of de novos are significantly outperforming expectations. Branches built between 2022 and 2024 are averaging over $25 million in deposit balances within the first 12 months after opening, significantly outpacing our original expectations. We remain on pace to open 50 branches this year, with 10 opened in the first half. We have now secured approximately 80% of the locations for the additional 200 Southeast branches that we announced in November of last year. Our deposit success, along with investment portfolio positioning, has allowed us to maintain strong balance sheet liquidity while growing loans and managing deposit costs. We ended the quarter with full Category 1 LCR compliance at 120%, and our loan to core deposit ratio was 76%, up 1% from the prior quarter. Moving on to fees. Reported noninterest income was up 8% year-over-year. These results were impacted by security gains and the impact of certain items detailed on Page 4 of the release. Excluding the impact of the security gains and the other items, adjusted noninterest income for the quarter increased 3% compared to the same quarter last year, led by growth in wealth fees, which grew 4% over the prior year due to AUM growth of $8 billion, and consumer banking fees, which were up 6%. Commercial payment fees decreased $2 million due to lower commercial card spend activity and higher earnings credits from increased demand deposit balances offsetting the increase in gross fee equivalent. Our embedded payments business, Newline, continued its strong growth with fees up 30%. Deposits attached to Newline services increased to $3.7 billion, up $1.1 billion compared to a year ago period. Capital markets fees were down 3% from the prior year, primarily due to the continued slowdown in M&A advisory revenue. Bond underwriting and loan syndication activity were strong during June, and client appetite for transactional activity during stable market periods remains robust. The security gains of $16 million were from the mark-to-market impact of our nonqualified deferred compensation plan, which is offset in compensation expense. Moving to expenses. Adjusted noninterest expense was up 4% compared to the year-ago quarter and decreased 4% sequentially. The sequential comparison is impacted by seasonal items in the first quarter associated with the timing of compensation awards and payroll taxes. The previously mentioned deferred compensation mark-to-market increased expenses by $16 million for the quarter. Excluding the impact of the deferred comp mark-to-market in the quarter and in prior periods, expenses were down 5% sequentially and increased 3% compared to the prior year. The year-over-year increase in expense is due to continued investments in technology, branches, and sales personnel, partially being offset by the ongoing savings generated by our value stream efficiency programs. Shifting to credit. The net charge-off ratio was 45 basis points at the lower end of our expectations for the quarter and down 1 basis point sequentially. Commercial charge-offs were 38 basis points, up 3 basis points sequentially. Consumer charge-offs were 56 basis points, down 7 basis points, primarily due to seasonal improvement in credit performance in auto and credit cards. Our NPAs declined 11% sequentially, as expected, led by an 18% decrease in commercial nonperformers. The NPA ratio decreased 9 basis points sequentially to 72 basis points. Broad-based credit trends remain stable across industries and geographies despite the market and economic volatility. Our provision expense for the quarter included a $34 million build in our allowance for credit losses. This build was primarily attributable to the deterioration in the Moody's macroeconomic scenarios, which now project a 0.5% increase in their baseline unemployment rate projection, which is up to 4.7% by 2027. The scenario-driven increases were partially offset by improvement in the overall risk profile of the portfolio, as indicated by the reduction in NPA. This increase in reserve build was slightly less than we expected in early June as utilization trends and commercial construction paydowns impacted period-end loan balances. The reserve build increased our ACL coverage ratio by 2 basis points to 2.09%. We made no changes to our scenario weightings during the quarter. Moving to capital. We ended the quarter with a CET1 ratio of 10.6%, an increase of 13 basis points and consistent with our near-term target of 10.5%. Our pro forma CET1 ratio including the AOCI impact of securities is 8.6%, up 60 basis points year-over-year. We anticipate continued improvement in the unrealized losses in our securities portfolio given that approximately 63% 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. Moving to our current outlook. With the continued momentum from the second quarter, we remain confident in our ability to achieve record NII and full year positive operating leverage approaching 2%. We now expect full year NII to increase to 5.5% to 6.5%, up from our earlier guide. This outlook uses the forward curve at the start of July, which assumes 25 basis point rate cuts in September, October, and December. Due to the resiliency of our balance sheet, we expect to achieve record NII and our updated full year guide with no further loan growth and no rate cuts. Full year average total loans are expected to be up 5% compared to 2024, with the increase primarily driven by C&I and auto lending production. Our cash position, securities portfolio, and commercial line utilization should remain relatively stable throughout the remainder of 2025. Full year adjusted noninterest income is expected to be up 1% to 2% as the muted capital market trends are offset by continued growth in other fee categories. We now expect full year adjusted noninterest expense to be up 2% to 2.5% compared to 2024. We will continue to execute our growth plans with Southeast branch builds and sales force additions in middle market, commercial payments, and wealth. In total, our guide implies full year adjusted revenue to be up 4% to 4.5% and PPNR to grow around 7%. Moving to credit. We are tightening the range for full year net charge-offs to 43 to 47 basis points. The timing of charge-offs for individual credits may impact a particular quarter, but the midpoint of our full year expectations remains consistent with our beginning of the year guide. Moving to our outlook for the third quarter. We expect NII to be up 1% from the second quarter due to the benefits from fixed-rate asset repricing and day count. We expect average total loan balances to be stable or up 1% due to strengthening C&I pipelines and continued broad-based momentum in consumer loans. Excluding the impact of the security gains, we expect adjusted noninterest income to be up 1% to 4%. Third quarter adjusted noninterest expense is expected to be up 1% compared to the second quarter as we continue to invest. We expect third quarter charge-offs to again be in the 45 to 49 basis point range. Turning to capital. We will continue to target our CET1 ratio at 10.5%. Based on our current projections for balance sheet growth, we expect to repurchase $400 million to $500 million of stock during the remainder of 2025. We continue to prioritize organic loan growth over share repurchases in order to deliver the best long-term returns for our shareholders. In summary, we expect to maintain our momentum in the second half of the year and achieve record NII, positive operating leverage, and strong returns in an uncertain environment, all while continuing to invest for the long term. With that, let me turn it over to Matt to open up the call for Q&A.

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

I guess maybe, Tim, just thinking about capital allocation. So I heard Bryan talked about the buyback appetite for the back half of the year. But just talk to us around how you're thinking about deployment of capital. Clearly, we saw one of your competitors announce a bank deal earlier this week. Like any sense of like strategically, even if we think about bank M&A picking up. Are there characteristics be it size, be it markets of a bank that we should be thinking about as shareholders of what we could buy? I mean, any perspective would be helpful.

Yes. Great question. So I think from my point of view, the capital priorities of the bank are always going to be organic growth first because, a, organic growth is completely within our control, and b, the thing that makes you a good acquirer is the ability to run your core business effectively. So the priority here is always going to be to run the company to gain share on an organic basis and to make sure that there's adequate capital available to that in addition to ensuring that we provide a stable and, over time, growing dividend and that we're able to support the capital return to investors in periods where we have excess capital through share repurchases. And I wasn't surprised to see the announcement earlier this week. I think I said for a while that there was going to be more consolidation. The banking sector in the U.S. is the least consolidated industry, and our banking sector is the least consolidated banking sector in the world. So there is going to continue to be more of that. What I know to be true, though, is that M&A is a means to achieve a strategic outcome; it shouldn't be a strategy unto itself. There is an industrial logic to scale that I think holds in all sectors, but it's not just any kind of scale. Like you imagine us as being in a military conflict where we had to fight an enemy that was 10 times our size. You would never march out into an open field, single file, and try to face a larger army; you would pick your spots, you would try to use the terrain to your advantage, you would get dense, and you'd obviate the scale advantages that the competitor has. If you think about the structure of the banking system in the U.S., I think that is the way to think about how you win. We're going to be way more successful building 350 branches in a single region in the U.S. than we would be if we built 3 or 4 branches in the 100 largest cities in the U.S. So the focus for us is always going to be on density. It's going to be on the ability to drive organic growth by spreading the cost of customer acquisition across multiple product lines; the relationship value that you get from the ability to deliver a broad range of products and services to customers is really important to us. It's always going to be focused on ensuring that you have a sort of continuity in people say culture, but really in the mode of how you operate your business because there just are a lot of things out there that operate very differently than we do. So I think appetite is the same. We wouldn't have much conviction if one deal announcement changed our outlook on how to deploy capital, but the focus is going to be on delivering our strategy in the mode that is most effective for shareholders.

That's good insight. I have a separate question regarding the impact of the tax bill on the residential solar panel industry. How are you assessing any potential risks related to your exposure and your business strategy moving forward at Dividend?

Yes. Ebrahim, it's Bryan. Thanks for the question. I guess first, to just recap what's happened. The tax bill eliminated the tax credits on the residential solar lending business starting in January of 2026. Now so what does that mean for us? First, this has no impact on our existing solar portfolio. Our customers have already earned their tax credits, so no impact on that. From a credit perspective, we believe that the dividend net charge-offs have peaked in the second quarter. And as you can see from our NPA and delinquency trends in the first half of the year, the risk profile of the solar portfolio continues to improve. All the enhancements we've done to this business that we've made to our platform from the installer management program, installer dollar coverage, joint borrower, collections enhancements; it's all helped to drive this credit improvement. We expect net solar charge-offs to decrease 15% to 20% in the third quarter from the second quarter level and decrease again in 2026 by another 15% to 20%. Next, the tax will impact future originations as the tax credit associated with the residential solar leasing product was extended to the end of 2027. This will create an uneven playing field in the solar finance industry for about two years. We expect the lease panel volume to increase while solar loans will decrease significantly. As a result, we think that our 2026 solar originations are probably down 70% to 80% from 2025 levels. While we were hopeful to have a level playing field in 2026, we will at least see that occur in 2028. Now how are we responding? We've been innovating to create a home equity product that we expect to launch in the first quarter of 2026 on the Dividend platform. While this product will not have a tax credit, it will allow borrowers to own their solar panels and generate tax-deductible interest, which should matter to some homeowners. The home equity product will also improve Fifth Third's collateral position from a UCC to a second lien. This product should also be appealing for other home improvement projects. So while we believe the solar originations will be down in 2026, with the new home equity product, combined with other enhancements we've made in our Dividend home improvement lending platform, we expect continued growth of our Dividend loans in the low single digits next year.

Yes. Just to put a point on one of the things Bryan said strategically, Ebrahim. The interest we had in home improvement as a category predates the acquisition and Dividend by several years. It has always been a home equity bank, but we also did the partnership with GreenSky back in 2015 or '16; I don't remember when it was. I think what we learned as we spent time and home improvement is that the place that banks can play uniquely relative to FinCos and nonbank lenders is in the larger more complex home improvement programs, things that require multiple draws or that involve a prime in a series of subs. What the fintechs can do in those markets is finance the windows or the doors, but they can't finance the whole kitchen, right, a full renovation. What we like about Dividend, in addition to believing in the importance of distributed power generation and storage, which, by the way, we still believe is an important part of the way that we're going to solve the energy demand that we have in the U.S. The fact that solar is one of the most complex home improvement installations between the need for the reinforcement of the roofing, the installation of the panels, the high-voltage electrical and then working with the power companies to get permission to operate. So it's going to provide a really nice exoskeleton. That's always been the dream to be able to deliver home equity to a broader range of projects. And in fact, today, even prior to the sort of expected reduction in solar volumes that Bryan mentioned, like 25%, 30% of new originations are home improvement nonsolar related. So there is a good core business. What is going to happen is the origination volumes are going to fall. So I think our view is that the Dividend is probably going to grow in line with the balance sheet as opposed to growing at a faster rate on a go-forward basis, meaning, call it low to mid-single digits as a point of focus for us. But as Bryan said, that credit trends are incredibly encouraging. And I think they underline the comments that we've been making about focusing on the best quality installers and on super prime credit. So we're just not seeing the deterioration that folks who were full-spectrum lenders have had to struggle with.

Bryan, I wanted to ask about the margin improvement. Even if we adjust for the benefit of the NPA that you discussed in your prepared remarks, much better than you had articulated might be the case earlier this year. So I think we can see on Slide 5 kind of what's happening between quarters. But I guess just in your view, what's coming in better than you might have anticipated earlier this year? And what are we thinking about the pace of improvement opportunity going ahead or looking ahead? And then I guess the follow-up, I was hoping you might be able in your response, you sort of address what you see as competitive dynamics on both the loan and deposit side, rational, irrational, et cetera.

Yes. Thanks, Scott. Great question. I would tell you, the big thing that I think was the outperformance item outside of the NPA payoff was the DDA performance we've seen. We were expecting to be able to transition back into growth mode on DDA now that the interest rate environment has been stable for a period of time. But we saw a really strong performance this quarter. That certainly was a big driver of our success. We continue to feel really good about our ability to have gotten cost out of our deposit book while continuing to improve the composition. I think that's probably an underappreciated aspect of what we've been able to do over the last year, just how much we've been able to strengthen the deposit base, especially with growth in the consumer small business sector. From an NIM perspective, continue to feel like we did earlier this year, which is 2 to 3 basis points of NIM improvement each quarter, driven by fixed-rate asset repricing continuing as well as loan growth. It's really just going to be kind of the core blocking and tackling and improvement of the business over time. So nothing dramatic there. And like you said, if we adjust for the 3 bps from the interest recovery, we'd be more in line with the 3.09% NIM. And that 3 bps a quarter puts us right where we expected to be at the end of the year in that kind of mid-teens range. So 3.15-ish feels still very achievable. So we feel very good about the trajectory from here. From a competitive landscape perspective, our industry is always very competitive. I don't think I would actually really call out much that we're seeing on either the loan or the deposit side at this point. Spreads look in line with what we've been seeing over the last 6 to 12 months across almost every asset class on the lending side, and deposit competition has been very rational, and we've seen great success in continuing to be able to find growth in the right pockets and improving the deposit base.

Tim, maybe outside of the movement in utilization, we're obviously seeing signs of loan growth improving. You talked about investments to support loan growth, lenders up 11%, outlook sounds upbeat. So maybe just talk more specifically about your expectations for loan growth. And as you're out talking to corporates, do you feel they've gotten confident enough to start making big investment decisions and borrowing more? And I have a follow-up.

Yes. Great question. So let me take it by category. I think on the consumer side of the equation, the thing that gives us confidence is the diversity of the loan origination platforms we've got. We have long been believers that while residential mortgage is a really important product for us to offer to consumers, it wasn't a great balance sheet asset. The byproduct of that is between what we're able to do in home improvement, what will be continued expansion in home equity, which has been an important driver of our growth. and the fact that the risk-adjusted spreads in the auto business are great right now, we just feel very confident in our ability to continue to generate what will be broad-based market plus 1 point or 2 sort of growth out of the consumer side of the business. That provides a lot of ballast for us as you look at the uncertainty that exists in the corporates. I mean the positives, when you talk to customers on the commercial side of the equation at the moment are, one, there is a sort of general belief that as we continue to navigate uncertainty around trade and the tariff levels, there is value to them in running with a little bit of extra inventory, and that supports utilization. We're not seeing the big buys that we saw in the first quarter that drove up utilization for us, but we do hear from clients that they, at the moment, are preferring to run on balance with a little bit more inventory than they otherwise would have carried just to compensate for any short-term disruptions in supply chains. Second, the bonus depreciation, the accelerated depreciation schedule on capital equipment, generates real interest in replacing equipment in some pockets of our customer base. It felt last year in the second half of the year, in particular, like the U.S. was under-invested a little bit in capital equipment purchases. We heard from clients who had rental businesses, that there's been a big boom in rental demand as people tried to buy time to ensure that they got the benefit of the taxes. So I think that is a positive catalyst. The element that just hasn't come through, and that's reflected in middle market M&A activity everywhere is the M&A-driven demand. At some point, there should be a little bit of a capitulation where either the sellers accept that with higher interest rates being maybe a more permanent phenomenon that they need to concede to buyer pricing expectations or have buyers who have been patient conclude that this is the time to go. But that's really the third leg of the stool between the capital purchases, the inventories, and then eventually some M&A.

Got it. And given your comments from before, you talked about identifying 80% of the locations in the Southeast, 150 to 200 basis points of operating leverage. I guess given the success that you're seeing in your business plus the success in the Southeast, does it make sense to accelerate your efforts here from an organic perspective? And just how are you thinking about the pacing of your growth initiatives from here?

I think somewhere, Jamie Leonard is grinning like a Cheshire cat right now because we have been running like the years that I was at as a consumer bank many years ago, the best we were ever able to do was to open 25 to 30 branches in any individual year. And they're running at a pace of 50 to 60 a year at this stage. So we have doubled the effort there. The other thing that we've invested in; we haven't spent a lot of time talking about is a big boost in the sophistication of our direct marketing capabilities, which support that; they’re the way that we bootstrap the de novos and get a lot of early growth in terms of households and deposit balances. So we are accelerating the investments in those markets to the extent that we find a way to build 65 a year, I'd love it. It's just what we have been unwilling to do is to compromise on the quality of the locations. There then is nothing that we can do as it relates to the pacing on getting through local zoning jurisdictions and otherwise. So if we have the ability to get 60 done a year, we're going to get 60 done a year for certain.

This is Thomas Leddy standing in for Gerald. Given all the recent headlines, can you just give us your thoughts on stable coins and how broader adoption could impact both your payments business and deposit levels?

I'm excited about the potential of stablecoins, although perhaps not in the areas currently receiving a lot of attention. We have the advantage of having partnered with some of the largest infrastructure providers in the crypto and stablecoin sector for several years, which has allowed us to observe the evolving use cases on their platforms. We also possess a unique asset in the Newline platform, which is designed to support both payments and the intraday liquidity necessary for stablecoins to function as payment methods and stores of value. Our focus is on companies that have the compliance frameworks and operational capabilities to work with us, potentially involving reserve accounts or payment systems. Additionally, I see opportunities to use stablecoins in cross-border payments and cross-platform settlements. We, as U.S. domestic banks, have typically relied on correspondent banks for cross-border transactions. This presents a new opportunity for us, and even if it disrupts margins, it would still be beneficial. However, I find it unlikely that people will move their money from banks to stablecoins for domestic transactions, as we already have digital money providing yields, unlike stablecoins, and we have efficient instant payment systems in place. Before wrapping up, I want to congratulate our friends at Skyline Chile for being named the best regional restaurant chain in the U.S., reinforcing my belief that Bloom in Cincinnati is the best regional business. Congratulations to them.

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