Fifth Third Bancorp Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
April 19, 2022

There are 13 speakers on the call.

Operator

Good morning. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the 5th Third Bancorp First Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Speaker 1

Q3.

Operator

Thank you. Chris Toll, Director of Investor Relations, you may begin your conference.

Speaker 2

Thank you, operator. Good morning, everyone, and thank you for joining us. Today, we'll be discussing our financial results for the Q1 of 2022. Please review the cautionary statements in 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 5th Third's performance.

Speaker 2

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. Let me turn the call over now to Greg for his comments.

Speaker 3

Thanks, Chris, and thank all of you for joining us. Earlier today, we reported 1st quarter net income $494,000,000 or $0.68 per share. Our reported EPS included negative 0.02 dollars impact The Visa Total return swap and the mark to market impact of our NABIT Exchange holdings. Between these items, adjusted Q1 earnings were $0.70 per share. During the quarter, we generated strong loan growth, including average C and I growth of 8%, excluding PPP.

Speaker 3

We grew core deposits once again with strength in consumer transaction deposits of 4%, reflecting our success 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 We grew our securities portfolio by approximately $5,000,000,000 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 decline selection and underwriting. This resulted in near record low charge offs of just 12 basis points.

Speaker 3

In addition to our muted credit losses, NPAs remain stable and our commercial criticized assets continue to improve. As many of you saw last week, I announced my plan 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 see me as our next CEO. I believe this is the right time for a transition given 5th Third's tremendous financial health and performance. Sharers who have followed 5th 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.

Speaker 1

When we

Speaker 3

formalize our plans under Project Northstar, we articulated several key strategic priorities to 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 3rd. I am very proud of what we achieved. We transformed our approach Credit Risk Management, centralizing credit underwriting with geographic sector product level concentration limits. We exited commercial relationships That is skewed risk return profile totaling $7,000,000,000 focusing on high quality relationships with more diversified and resilient businesses. We deliberately reduced our leverage lending exposure down more than 6% since 2015.

Speaker 3

Remain cautious with respect to our CRE portfolio with the lowest CRE as a percentage of capital among peers. We maintain our expense discipline, Taking actions when necessary, including exiting non core businesses, which allow 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. Quarter. As a result, we now have the highest TN fees as a percentage of revenue and commitments and we are the fastest growing among our peers.

Speaker 3

We 3rd. We made significant investments in technology to improve our resiliency and better serve our customers. 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 medium in 2015 to top quartile today.

Speaker 3

We grew market share organically in the Southeast and West Coast and establish a leading position in Chicago through the strategic acquisition of MB Financial. We also invested in strategic non bank acquisitions like Provide, dividend, Coker Capital, H2C, Franklin Street and more to accelerate growth and broaden our capabilities. We structured our securities portfolio to generate stable, predictable cash flows that has 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 1, my focus was to build a franchise 3rd.

Speaker 3

We'll generate consistent and quality earnings quarter after quarter, year after year. Well, some of these decisions impact the near term profitability at the time. All these proof points highlight the actions we have taken over the past 7 years to improve 5th Third This set us up for long term outperformance through various business cycles. Furthermore, we expect our intensely asset Balance sheets perform extremely well relative to peers in this rate environment. For the revenue benefits of higher rates are August, we are mindful There are likely to be elevated risk in the overall U.

Speaker 3

S. Economy if the Fed aggressively tightens monetary policy to curb inflation, combined with the existing supply chain constraint from labor shortages. However, because of our actions and positioning, 5th Third is as strong as ever and well positioned for long term outperformance. I would just like to say that being the CEO of 5th Third has been an honor of a lifetime. I'm grateful for the support of the board and all of our employees I'm incredibly proud of what we've accomplished.

Speaker 3

5th Third is in great shape and Tim is well prepared to lead 5th Third into the future. Tim is an outstanding and visionary leader. He's has been a integral part of 5th Third's leadership team since 2015, helping develop strategies and vision that we are executing 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 quarter.

Speaker 3

I want to say thank you for your confidence that you have given me toward my tenure. Also 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 3rd. What we have accomplished together has been nothing short of remarkable. Thank you.

Speaker 3

I know that under Tim's leadership, you will continue to do great things, inspire others and improve the lives of our customers and well-being of our communities. With that, let me turn it over to Tim.

Speaker 4

Good morning to you all. Thank you, Greg, for the kind words. I'm honored to serve as 5th Third's next CEO and to follow in the footsteps of an incredible leader 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 payment industry topic.

Speaker 4

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 3rd. More broadly, we will remain mindful of the long term structural shifts taking place, such as well as positioning the bank to take advantage of potential business opportunities that will arise. We will also be steadfast in our belief We are most successful when we take care of all our stakeholders.

Speaker 4

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 Despite having best in class employee retention according to leading research, because we recognize that rising costs throughout the economy have a disproportionate impact 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 $18,000,000 in incremental annualized expenses. However, As we have seen with our 2 previous wage increases, we fully expect to achieve stronger financial outcomes from lower turnover, improved workforce quality, lower recruiting 3rd.

Speaker 4

As Greg mentioned, our balance sheet and earnings power are extremely strong. From a capital perspective, we will continue to favor organic growth, evaluating strategic non bank opportunities

Speaker 3

such as

Speaker 4

provide and dividend finance, paying a strong dividend and quarter. 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 one of the world's most ethical companies by atmosphere, one of just 5 banks globally. 5th Third is a great company quarter. We have great people who live our core values every day.

Speaker 4

With that, I will turn it over to Jamie to discuss our financial results and our current outlook.

Speaker 5

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 In 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 quarter, while an increase in loan balances resulted in the net $11,000,000 increase to our credit reserves.

Speaker 5

Combined with another quarter muted net charge offs, we had a $45,000,000 total provision for credit losses. Moving to the income statement. Net interest income of approximately $1,200,000,000 was stable sequentially. Reported results were 3rd impacted by lower day count, lower PPP income, including a slowdown in forgiveness that resulted in $10,000,000 less and expected PPP related NII and the expected decline in residential mortgage balances from previous Ginnie Mae purchases. These detriments were offset by the benefit from the deployment of excess liquidity in the securities, strong loan growth and the impact of higher market rates.

Speaker 5

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 the continued decline in punitive consumer fees as part of our momentum banking offering.

Speaker 5

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 expense due to 20 21's contract renegotiations. Adjusted expenses increased 2% sequentially, driven by the special equity award and the usual seasonal increase in compensation and benefits expense.

Speaker 5

Our expenses this quarter included a mark to market benefit associated with non qualified deferred compensation plans of $12,000,000 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, a strength in auto originations combined with growth in residential mortgage was partially offset by declines in home equity 3rd. Commercial portfolio loans and leases increased 5% compared to the prior quarter, primarily reflecting growth in C and I loans.

Speaker 5

Excluding PPP, average commercial loans increased 6% with C and I loans up 8%. Commercial loan production remained strong and in line with our original expectations. Production was strongest in core middle market, Which was well diversified geographically, which increased over 60% year over year. Our production and pipelines continue to reflect Our strategic investments in Talend and our successful geographic expansion as we sustained our record pace in adding new quality relationships during The Q1. 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.

Speaker 1

3rd

Speaker 5

quarter. We began deploying 3rd. To protect against the rising risk of an economic downturn. During the Q1, we grew our securities portfolio 3rd. On an average basis, securities increased $5,000,000,000 or 13% sequentially.

Speaker 5

As we have said over the past 2 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 absolutely validated our decision to patiently wait Our investments continue to focus on adding duration and structure to the portfolio with stable and predictable cash flows. Consequently, our overall allocation to Bulleit and LockDown Structures increased from 59% to 64% at quarter end. Average other short term investments, which includes our interest bearing cash, decreased 6,000,000,000 dollars 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.

Speaker 5

We once again added households in every market 3rd quarter. 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 $3,000,000,000 in outstandings, while also significantly improving the quality of the portfolio.

Speaker 5

Moving to the ACL. Our baseline scenario assumes the labor market remains stable with unemployment ending our 3 year reasonable and supportable period at around 3.7%. We maintained our scenario weights 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 3rd portfolio, including a reduction in borrowers and prolonged distress. If the ACL were based 100% on the downside scenario, The ACL would be $1,100,000,000 higher.

Speaker 5

If the ACL were 100% weighted to the baseline scenario, The reserve would be $236,000,000 lower. While our base case expectations point to 3rd There are several key risks 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 quarter. Additional COVID variance, which could play out given the uncertain environment. Our March 31st allowance incorporates our best estimate quarter at 9.3%, above our stated target of 9%. The decline in capital was Combined with an 8 basis point impact from the CECL capital transition rule.

Speaker 5

We expect to close the acquisition of Dividend Finance quarter, which will deploy approximately 30 basis points of capital. Our tangible book value per share excluding 3rd. 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 3rd 5% and 6% compared to 2021, including the expected headwinds from PPP and the Ginnie Mae forbearance loans we added last year.

Speaker 5

Excluding these items, we expect total verage 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 Q1 decision to lower auto loan production in order to enhance our returns on capital. We now expect Around $8,000,000,000 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.

Speaker 5

On a sequential basis, we expect 2nd 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 and I growth in the second quarter, excluding PPP. We expect our average 3rd quarter. Reflecting the full quarter impact of purchases made later in the Q1, combined with the assumption that we add $2,000,000,000 more in balances given the market opportunities we have seen through early April. We also assume $1,000,000,000 in additional securities growth in both the 3rd and 4th quarter.

Speaker 5

Given our outlook For earning asset growth combined with the implied forward curve as of April 1, we now expect full year NII to 3rd quarter. The impact from the runoff of the PPP and Ginnie Mae portfolios, which result in a $220,000,000 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, We expect deposit betas of around 15% on the first 125 basis points of Fed rate hikes, The 25 basis points we saw in March combined with another 50 basis points in both May 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, We expect deposit betas of approximately 25% over the first two hundred basis points this cycle compared to the mid-30s last cycle.

Speaker 5

The ultimate impact to NII of incremental rate hikes will be dependent on the timing and magnitude of interest rate movements, balance sheet management strategies, including securities growth and hedging transactions and realized deposit betas. For the Q2, we expect NII to be up 11% to 13% sequentially, reflecting strong loan growth, the impact of 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.

Speaker 5

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 Q1 occur. It is worth noting that even with the decline in 3rd expected fee income primarily due to the interest rate environment. We expect total revenue to now be approximately $275,000,000 more quarter. Our January guidance. We expect 2nd quarter adjusted non interest income to be up 8% to 9% compared to the quarter or down around 1% compared to the year ago quarter.

Speaker 5

We expect full year adjusted non interest expense to 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 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.

Speaker 5

We Total adjusted expenses in the second quarter to be down around 3% to 4% compared to the 1st quarter, which is up 2% compared to the year ago quarter due to the acquisitions of Provide and Dividend Finance were stable on a standalone 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 PPP and our Ginnie Mae portfolio. We continue to expect 2nd quarter and full year 2022 net charge offs to be in the 20 to 25 basis points range.

Speaker 5

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. With that, let me turn it over to Chris to open the call up

Speaker 2

for Q and A. Thanks, Jamie. Before we start Q and 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.

Operator

Keypad. Your first question today comes from the line of Scott Siefers with Piper Sandler. Your line is now open.

Speaker 6

Good morning, guys. Thanks for taking the question. Good morning, Joe. Hey, Jamie. I appreciate you.

Speaker 6

Hey, I guess, first of all, Greg and Tim, congratulations to both of you and best wishes. Greg, as you go forward and Tim in the new position. Yes. Jamie, appreciate all the thoughts on sort of liquidity deployment. I guess now that you've deployed Sort of a majority of the target, roughly $10,000,000,000 or so in excess liquidity and the rest will be deployed through the remainder of the year.

Speaker 6

Is there in your mind sort of an opportunity to kind of redefine what your excess liquidity looks like? In other words, deposits aren't really Coming out of the system at large the way one might have thought earlier, is there a point at which you

Speaker 3

say, hey, those are going

Speaker 6

to stick around in their sort of or will they just be absorbed with loan growth, etcetera? Just maybe any thoughts there.

Speaker 5

It's a good question, and thanks For asking, Scott. I probably should have included it in my prepared remarks that I've recalibrated our excess liquidity given the Q1's activity To where we're sitting on about $15,000,000,000 of excess cash here in April. I Still like the 1 third, 1 third, 1 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 $5,000,000,000 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.

Speaker 6

Okay, perfect. And then You gave some thoughts on sort of the puts and takes in the expense outlook. I guess it was nice to see that you can absorb that minimum wage increase and Still improve the expense guidance. Are there any areas where you guys explicitly dialed back things side of compensation increase or I guess sort of maybe just a little more thought on the puts and takes as you see them.

Speaker 5

Yes. The puts and takes this quarter relative to the January guide really is the interplay of the rate environment between fees and NII, whereas 3rd The main driver of the improved expense base on a standalone basis is really the fulfillment costs and related 3rd related to the lower fees, but the rest of the franchise and our approach to managing expenses during the year really hasn't change from when we started the year. We continue to focus on technology investments and Supporting our marketing efforts. And so the marketing spend is actually a little bit higher as we look out at the year given the strong 3rd. We've had in consumer household acquisitions and the Momentum Banking product.

Speaker 5

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 is continue to invest in the business and continue to let that Strong momentum show up in the rest of the balance sheet activities.

Speaker 6

Terrific. All right, good. Thank you very much.

Operator

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

Speaker 7

Hi, good morning. My first question is really for Greg and Tim. Congratulations on your retirement. I'm wondering sort of why you decided now would be a good time to step aside. And side of macro in terms of the growth prospects for the bank that you're inheriting.

Speaker 3

Harry, this is Greg. Thanks for the question. First off, 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.

Speaker 3

The objections we put in place to be good through the cycle, make the changes that we need to for our performance through the cycle, I feel really good about. So Position of the bank, our position for the future, the success we've had, it's a great time to step aside. Second thing is Tim's readiness. Tim has been with the bank 6 plus years. It's been succession, I think, well thought out succession plan.

Speaker 3

Tim is absolutely ready. 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 it's always been an aspiration of mine to be able to be able to do that. And there's a lot of things I want to focus on.

Speaker 3

A lot of that's travel on the personal side, personal investments and 60 was kind of my timeline also. So that would not have

Speaker 5

been work if Tim wasn't ready and

Speaker 3

the bank wasn't positioned as well as it was. So It really came together at the right time.

Speaker 4

And Erica, as it pertains to Your question for me, I mean, I'm excited about a lot. I think we are in as good a shape as 5th Third has 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 to Greg. And I think we have assembled a really 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.

Speaker 4

You have folks who have joined from outside the bank who brought in fresh perspectives and have really helped to think about how we shape the business going forward. And 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 the cycle performance. We have been investing continuously.

Speaker 4

I think sometimes maybe we haven't gotten enough credit for it because we have essentially Harvesting expenses in some areas and redeploying them in growth. And the byproduct of that is we have a really excellent footprint and a nice balance between the Southeast and the Midwest. And we're seeing the bloom coming from many of the investments we've made in 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 and support it has provided to our household growth goals or the managed services, which as Greg mentioned in his prepared remarks, that help to really drive The right balance in fees to total revenue. And then I think last, but certainly not least, The benefits we're going to continue to see from the acquisitions of Provine and Dividend in terms of providing sustainable loan growth with really attractive ROAs. So there's a lot to feel good about here.

Speaker 7

Got it. And the second question is for Jamie. Jamie, AFS has become a bad word this quarter. And I'm wondering, you have you've always had a very distinct investment policy. If you could explain to the generalists that are listening to this call that have been distressed about the CET1 erosion that they've seen at the big banks where it's and relevant and then the AOCI in other regional banks and if it impacted tangible book, what you bought in the quarter to $10,000,000,000 and the difference between duration risks for CMBS and RMBS.

Speaker 7

And also if you could translate into generalist language what bullet and locked out structures mean.

Speaker 5

I think I can take the next hour of this call and go through those. But just tells you how Good question it is. Jump in if I don't touch on all aspects of it. But I guess I would start with saying, and maybe I'm Fighting the losing battle on this one, but I do struggle with the concept of fair valuing one line item of the balance sheet, but not the rest of it or Not evaluating HTM in combination with AFS because philosophically for me, as a Category 4 bank, our election To put a security into AFS or HTM doesn't change the economics or the risk of the investment. And I understand for the largest banks, There is value in minimizing the risk of the regulatory capital volatility.

Speaker 5

But for us, well below $700,000,000,000 in assets, We believe the benefits of maintaining the flexibility to manage the portfolio as the environment unfolds or Our outlook changes create significant value. And you've seen that over the last 8 years where we've had the number one performing investment portfolio yield in the industry. So I struggle with the concept of Would our company be worth more if I place the securities into the Roche Motel of HTM or if I Maintain my flexibility and my optionality and put it in AFS, but I understand that's how the valuations work. Our goal is always to optimize the balance sheet to deliver long term real economic value and not make decisions That optimize an accounting outcome over economic value. So that's why we continue to put all of the securities in AFS because we like the optionality.

Speaker 5

In terms of what we're buying, the second part of your question, we do like the bullet and locked out cash flow structure so that there's a minimal extension risk in that security relative to RMBS. Probably the best example for the generalist on that would be our duration was 4.8 years At the end of the year and it moved to 5.4 years at the end of this quarter, all of that duration extension was because of the securities that we purchased. We averaged 2.5 yield 6.5 year duration on what we purchased. So all of our duration extension was intentional, and we prefer to add duration when we want to add it as opposed to the market, forcing that duration extension upon us. And that's really the value of the bullet in the locked out cash flow.

Speaker 5

I'll sacrifice a little bit of yield in a base environment, but I protect the volatility on up rates or down rates and that's really the philosophy of

Operator

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

Speaker 1

Hi. Just I'm taking questions, just I just want to clarify there. So you've deployed What, 60% of your excess capital excess cash, I'm sorry. And now you have about 40% of the excess cash to deploy from here.

Speaker 5

Yes. How we should think about this? Yes. I looked at it, Mike, as I had $30,000,000,000 to $35,000,000,000 of excess cash. I bought 13 of additional leverage in the quarter.

Speaker 5

Got about 15 left, net of loan growth for 2nd quarter 3rd quarter. And I think to Scott's question early There's an opportunity that perhaps that other $5,000,000,000 of runoff in deposits doesn't occur or is offset by growth in other areas. But for now, That's how we see the year playing out.

Speaker 1

And then to the other question, with CEO change. Greg, you gave a summary of what you've accomplished over the last 7, 8 years. Anything that you say if you had more time you'd like to have achieved? And then Tim, more like Who is Tim Spetsch, right? What is your background?

Speaker 1

Maybe Greg, why did the Board select Tim? What are the unique characteristics For Tim to be the steward of 5th Third's shareholders' capital for the next several years forward. Thanks.

Speaker 3

Absolutely right. First off, I think we accomplished the objectives that I set out for that we talked about and we put Project North Star in place. What I'd like to done more faster, yes, probably. But once again, our ability of the organization to absorb the amount of change that we're bringing forth What's important also, so I think we did it the right way. It's not a whole lot.

Speaker 3

I would have changed or done differently. So I'm 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 a great team around Tim.

Speaker 3

Why Tim right now? Absolutely the right person. Tim has a strong technology background. He's been instrumental in a lot of Acquisitions and the investments that we've made in this space. He has great, great abilities to look ahead, understand and assess the strong technology expertise, but also being a visionary and being able to see down the road or what the challenges might be that we're faced with.

Speaker 3

And also execution, Tim is fantastic on the execution side. He could be the great visionary, great strategist, but if he can't execute, you're not going to be successful. Tim has demonstrated over the years, especially as President, he 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.

Speaker 3

He's the right person The reasons I just said, I couldn't be more excited. I'm a large shareholder, I'm going to be a large shareholder. They have a pivot to hell going forward. And I'm excited about starting the next phase of my life, which is Retirement is something I work hard to achieve at an early age. And I think it's just a great, great time for both of us.

Speaker 1

Okay. I'll requeue. I have some more tech questions.

Speaker 3

Thanks.

Operator

Your next question comes from the line of Betsy Graseck with Morgan Stanley. Your line is now open.

Speaker 8

Hi, good morning.

Speaker 4

Good morning.

Speaker 8

Good morning. Okay. A couple of questions. First on the C and I, I noticed in the deck that ex PPP, you were up 8% QQ. And I just wanted to see if you could unpack the drivers a little bit.

Speaker 8

One of the reasons is Inventory builds going up, how much longer can that last? I've got a colleague internally who is telling me that inventories are about peaking and I'm wondering if you agree with that or not. And maybe give some sense of what you're seeing in your customers' desire for CapEx and what the runway is on that?

Speaker 4

Thanks. Yes. Sure, Betsy. This is Tim. Thanks for the question.

Speaker 4

So look, I think you have to think about our C and I business as being the corporate banking business and the middle market business. I mean, very clearly, the corporate banking side of the The rising utilization there is at least in part a byproduct of the capital markets having been influx. And I do anticipate that As the markets open up and the folks that we bank, who are issuers, on a regular basis Go back into them that you'll see more fee income and then internal little bit less utilization. But there is no question inventory build there. In the core middle market, I think there is still room to run on inventory build, but there is no question that the catalyst for us In terms of our own growth has been now that the focus on CapEx, in particular investments that are going to that are going to drive labor productivity or at a minimum, a reduction in labor requirements.

Speaker 4

And then in addition to that, we have Benefited now and are continuing to benefit from what was a record pace of adding new quality relationships last year, which has carried over into the Q1. Jamie and Greg and I were laughing before the call. It's really it's the 4 Cs for us. It's Cincinnati, Chicago, the Carolinas in California plus Tennessee and we couldn't figure out how to get a C out of that one. But that drove The outperformance in C and I production in the Q1.

Speaker 8

Okay. I guess, tenancy, So maybe at the end of that, you could Yes,

Speaker 4

there you go. Dennis, exactly. There it is.

Speaker 8

And then maybe you could Help me understand how you're thinking about deposits and deposit movement from here. You Fed QE, but then you've got your high quality book. And so how should we be thinking about deposit growth and what the loan to deposit ratio should look like as we Over the next year or so. Thanks.

Speaker 5

Yes. We certainly expect the loan to deposit ratio to, What I'll say improve, get higher. We finished the quarter at 69%. And really, The interaction between the loan to deposit ratio and the deposit betas is obviously highly correlated. And As we entered the last tightening cycle at 5th, 3rd, we were in the mid-90s.

Speaker 5

So we don't expect to get that high in this over the next couple of years, but we 3rd Certainly would like to manage the company in the 80s from a loan to deposit ratio, but it will take a little bit time to get there. I think from a deposit activity standpoint. We expect continued strong consumer deposit growth. And then we're forecasting and perhaps it's conservative A runoff in the non operational deposits within the commercial book is we're just not going to chase rate sensitive non relationship deposit balances. But with that said, I really like the balance sheet that we've put together over the last 7 years where we've really improved the primacy within the consumer book as well as the granularity through the household growth, Along with the improvements in the operational deposits through our strong treasury management business, I know we've talked about at different conferences over the course of the year, the strength of our TM business, but that ultimately will pay off As rates start to rise and we can perhaps manage to a lower beta in the next 200 basis points than what we saw With the start of the 2015 hikes.

Speaker 8

And the non operational, you sized that?

Speaker 5

I'm sorry, I couldn't Oh,

Speaker 8

the non operational deposits, you've sized that?

Speaker 5

Yes. Yes. Okay. Thanks.

Operator

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

Speaker 1

Hey, thanks. Good morning. Jamie, just Following up on the securities portfolio purchases, now that you've both moved more in and also rates have moved higher, I wonder if you could just level set us Relative to your comments last quarter about where do you think the securities book yields go over the course of the year? You're in it looks like you're in $280 ish type of now. Can you just give us kind of an updated level set on how that trajects given the better front book yields that you've been able to see?

Speaker 5

Yes. We expect the investment yields to be in the 2.75% area in the second quarter as well as for the full year, Which is up obviously from the guide we had in January in the 260 to 270 range.

Speaker 1

Perfect, great. And then second just question on deepening on the expense side. So the expense guide got a little better For the full year, even with the incremental minimum wage, could

Speaker 3

you just kind of give

Speaker 1

us some granularity on what was the rest The delta, was it incentive comp related to fees? Was it just incremental efficiencies that you've been able to find? Just details there would be great. Thank you.

Speaker 5

It's predominantly the fulfillment costs within mortgage and incentives in the other

Speaker 1

Okay, got it. So everything else related to like Branch savings, etcetera, technology spend is intact underneath the surface?

Speaker 5

Correct, yes.

Speaker 1

Okay, great. Thanks a lot guys.

Operator

Your next question comes from the line of Braheem Poonawala with Bank of America. Your line is now open.

Speaker 9

Hey, good morning. I guess one question just around as you think about Capital deployment, future M and A. Just talk to us around how and maybe Timna, if you want to jump in, around on how do you think about Adding scale, so you're obviously organically growing in the Southeast. Talk to us about like bank M and A, is there any appetite for that? And then how does that fit in when you think about technology?

Speaker 9

And I know Tim will spend a lot of time on payments, tech strategy. So Some perspective on how you see 5th, 3rd position on the tech stack and what are the 1 or 2 big sort of areas that you're looking to invest as we think about the next couple of years.

Speaker 3

Okay. A lot of questions. And this is great. Let me get started here. First off, When you think about deploying capital, we have not changed how we think about it.

Speaker 3

Number 1 is organic growth. That's Extremely important as well as the expansion in the Southeast on the West Coast, investing in our people, technology, products, services. Job 1 is organic growth building a quality franchise for the future and outperform well. 2nd, we look at non bank M and A transactions. So Opportunities like Provide, Dividend Finance, H2C, Coker, Franco would be examples of non bank opportunities that really add to our That's extremely in our reach, extremely important to us.

Speaker 3

We're always looking for those type of opportunities that make us a better bank. And that's number 2. Number 3, we want to obviously want to continue to pay a strong dividend. Number 4, with excess cash, will be share repurchases. Lower on our part of this would be M and A.

Speaker 3

Now why is M and A Bank M and A lower on our part of this for us? Quite frankly, there's not a lot of opportunities quarter. And we don't believe M and A is a strategy unto itself. We think M and A is a strategy in which will support our strategic direction. When you look at some of the transactions that have been done recently, we would not participate did not participate in those type of transactions.

Speaker 3

So once again, If there was an opportunity from a Bank M and A perspective, it had to fit into our strategic objectives such as being larger and more relevant in the Southeast and attractive markets. There's just not a lot of those opportunities that exist today. That's why it's lower in our priority list. It doesn't mean that something didn't emerge that fits into our strategic direction, Makes us more relevant to Southeast in the right market that we're looking for is a good cultural fit that we wouldn't consider. We absolutely It's just lower on our priority list because there's not a lot of those opportunities out there that really fit on what we're strategically trying to accomplish that we think are actionable.

Speaker 3

So that's why it's lower But once again, if something emerges, we would always assess that. For long term shareholder value, we would consider it.

Speaker 4

Yes. And for what it's worth, I concur with all that. I think we said for a long time that we don't believe that scale is an end in and of itself and that Certainly, we'll be consistent in terms of our point of view on how we proceed. As it pertains to your questions about technology, you can think about the investments that we have been making in basically 3 areas. One is just the core infrastructure, right?

Speaker 4

We've talked a lot about data centers. We've talked a lot about the cloud Data strategy, we talked a lot about information security and otherwise. I think we feel very good about where we're at on that front. We are making good progress. I can't remember the cricket analogy, so I'm going to have to go with middle innings, but we're in the platform modernization front.

Speaker 4

And I to spend a lot more of our money on new application development as opposed to maintenance and service. And then I think the thing that's probably been Less that has been underemphasized in our industry in general, but which is a big point of focus for ours Because we are believers that the more fundamental disruption associated with the Internet in all sectors is the way that it informs product and product innovation. So That is the area where I think we will continue to look to differentiate. We have to be good at all of the other items, their hygiene But it's the opportunities to leverage technology to change the nature of the value proposition that we have for our the way that we did with Momentum Banking when we launched it a year ago. And as we continue to hone and refine and add feature functionality to that platform.

Speaker 4

The things that the folks that provide have done over time that they where they have actually been able to accelerate the amount of innovation That they brought to market. We launched 5 or 6 new products within the 1st 6 months that they were on board and they had gotten 2 or 3 out in the prior few years beforehand and then the managed services, which are obviously a critical platform for us and which provide really stable and high margin fee income.

Speaker 9

Thanks for that comprehensive response. One quick follow-up, Jamie. Sorry if I missed it. Did you mention what the dollar amount was for the non operational deposits?

Speaker 5

We did not, but it's baked into the $5,000,000,000 Of outflow that we're assuming occurs during the course of the year. So sorry, I didn't answer that more clearly with Betsy's question.

Speaker 9

Understood. And congratulations. Thank you.

Speaker 4

Thank you.

Operator

Your next question comes from the line of Matt Connor with Deutsche Bank. Your line is now open.

Speaker 1

Good morning. Can you guys talk about how C and I spreads I know a few quarters ago, you were talking about pressure, but we've seen obviously widening spreads in capital markets, which isn't Perfect indicator, but certainly better to widen than narrow. And on the flip side, as rates go up, there's obviously more spread to Probably where you think about competitive forces. So maybe what you're seeing now and how you think they'll trend in the next few quarters? Thank you.

Speaker 5

Yes, Matt, it's Jamie, thanks for the question. The C and I spreads are definitely stabilized during the course of the Q1, Such that C and I yields ex PPP were only down 4 basis points as opposed to some of the double digit types of declines You saw another quarter's. So we feel good about stabilization of loan yields. And in fact, For the balance sheet, hitting an inflection point in the second quarter for pretty much every asset class that yields and spreads Should be improving as we go forward from here.

Speaker 1

Okay. And then as we think about, I guess, Specifically like on the spreads, like yields will go up obviously because rates are going up. But then a lot of banks are or all Thanks for trying to grow kind of the core C and I, which has been strength of the 3rd for years. So how do you think some of the spreads trend the next quarters between the puts and takes of, again, capital markets. You've seen some spread widening, but competitive forces from

Speaker 5

Yes. I think C and I spreads in the second quarter, stable, flat and then improvement perhaps as we get to the back and the second quarter heading into the second half of the year given some of the disruption in the capital markets and the spread widening from the geopolitical That's how we have a model going forward.

Speaker 1

Okay. It's helpful. Thank you.

Operator

Your next question comes from the line of Jared Cassidy with RBC. Your line is now open.

Speaker 10

Good morning, everyone.

Speaker 5

Good morning.

Speaker 10

Greg and Ken, 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 Q2. And the world has changed dramatically in this Q1 as evidenced by your assumptions on the Fed funds rate and the powerful impact that it's had on net interest income. Can you share with us, if we're here a year from now, now granted Greg will be drinking a Pina Colada in the Caribbean and we know that, but For you and I, why don't we what should we really focus in on a year from now That could be as startling as it's just breathtaking how it's changed. And it's not just for you folks, of course, it's everybody.

Speaker 10

But I'm just taking the 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?

Speaker 5

Yes, 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. And I think Perhaps there was some concern, would we have waited too long and missed the opportunity. And I think the good news from today's release is that We are well positioned and well protected to the possibility of a recession in 2023 or 2024, not that that's our base case, but certainly something that we're mindful of and we Pride ourselves and really under Greg's leadership over the last 7 years of being good risk managers and that's how we approach things. So that Should a downturn occur, we're well positioned to be a strong performer. But should we continue to see good economic growth

Speaker 3

That this

Speaker 5

is a company that's positioned to do well with generating high returns, High PPNR growth and really do well through the cycle. Yes.

Speaker 4

George, if I were to add One thing I think 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 Just 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 banks, it's to non banks as well, right? So, as the Fed tightens, I think there's going to be more differentiation than maybe the market fully appreciates as it relates to the stability and 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 with the focus on core operational Deposits should be much better positioned to weather in an environment where liquidity maybe is there's a premium attached to it, Unlike the environment that we really have come out of over the course of the past handful of years.

Speaker 10

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 these last 3 or 4 months, does it make sense at some point to start looking at some term funding?

Speaker 5

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

Speaker 10

Very good. Thank you, Jamie.

Operator

Your next question comes from the line of John Pancari with Evercore. Your line is now open.

Speaker 11

Good morning. On the deposit beta topic,

Speaker 1

I just want to see if

Speaker 11

you could perhaps discuss any of the risks or Concerns that investors have that betas for the industry could surprise higher than And many of the banks are expecting, I know you guys are expecting a lower beta perhaps in the 25% range versus you experienced in the previous cycle. Can you just talk about the concerns there that competition could be much more intense this time around given the various players in the space Like the Bratz and Plumes deposit betas to be higher than expected.

Speaker 5

Yes. John, thanks for the question. There are a lot of competing on where the betas shake out. We think the overwhelming factor for the industry is the amount of liquidity is Signified by the loan to deposit ratio and the industry being 20% better than they were at the end of 2015 Heading into the last cycle, but you're certainly right, the level of competition ultimately dictates The deposit betas, we just think the industry is so much better positioned now that The level of that competition should be less. So from an industry perspective, we think that should win out.

Speaker 5

But then if we're wrong, then let's talk about it on an idiosyncratic basis for 5th Third. What we've been able to accomplish with the primacy and operational deposits in the treasury management business Has translated for us what we believe should be a lower beta on the first 200, at the 35 last time, 25 this time. But with that said, 90 days ago, we were modeling a 20 beta on those first 200. So we have raised our own expectations a bit. Hopefully, we will do better than that.

Speaker 5

But on the Possibility that we would not 25% beta is what we've settled in our outlook in the up 200. When you break it down by customer segment, obviously, the wealth and asset management area is a highly price sensitive portfolio, whereas for us, the improvement won't be as much in that portfolio as it is In the commercial business because of the treasury management. And then in the retail book, the value exchange with The free services that you receive in Momentum Banking, we believe should result in a little bit lower beta this time around so that we're not competing on rate for the retail customer, but rather the value exchange with those other services, Including things like less punitive fees, the NSF elimination and all of the other structural changes we made To our product lineup should result in a better beta of the cycle. But if by chance we're wrong, I think we're well positioned to Be able to compete well regardless of how that plays out.

Speaker 11

Got it. Okay. Thanks, Jamie. That's helpful. And then a Similar question actually on the credit side.

Speaker 11

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 out of the banks this earnings season. And you know, but I know you saw a bit of a tick up in your 30 to 89 past dues A couple of other banks have seen it 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?

Speaker 12

Yes. Hey, it's Richard. Let me start with the last one. From a consumer standpoint, we're actually not seeing signs of acceleration. If you Think about where the excess liquidity went, certainly to the top 70% of that went to the top 20% of income households.

Speaker 12

That liquidity has been sticking around for our customer base. And again, we're prime and super prime. And activity really hasn't we really haven't seen a shift in activity with Back to behavior changes in terms of that excess liquidity running off faster than we expected. In fact, it's running off slower than we expected as people continue to strike the right balance across their lifestyles. From a delinquency standpoint, we're at such a low level.

Speaker 12

And the blinks to change for us was really in commercial. We're at such a low level that it just takes 1 or 2 to slip over the quarter to 3rd So we're really not seeing any trends in terms of that would be alarming that would point us to an acceleration of the normalization cross credit, whether it's consumer or commercial. I think areas we're watching, clearly, we continue to watch the leverage space, particularly enterprise value lending. That's an area that we've been very disciplined on and we're happy with the portfolio, but that's a place where we continue to exercise discipline. There's a handful of segments in CRE.

Speaker 12

Office is one that we're watching long term just given the structural changes in that space. But we focus on quality, Class A properties, gateway cities, it's all very good stuff. And then there's then we're watching consumer products and Manufacturing and Senior Living and a couple more places where what we're watching is places where the ability to pass through cost increase may be a little harder. We haven't seen evidence of that. At least at this point, most people have been able to pass cost increases through, but that's where we're watching.

Speaker 11

Very helpful. Thanks for taking my

Operator

questions. Your next question comes from the line of Trevor McEvoy with Stephens. Your line is now open.

Speaker 2

I'll take that. Good morning. Jamie, maybe a question for you. Could you just remind us what the mix is within Commercial Banking revenue. It was down 21%, but better than some

Speaker 5

of your others who maybe call

Speaker 2

it Capital Markets or Investment Banking. And then David, what are pipelines like today? And do you have any near term thoughts on that business?

Speaker 5

Yes. The disruption in the Q1 definitely impacted the debt capital markets groups with the loan syndications and the corporate bond fees. For us, Within the 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 then 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.

Speaker 5

The guide for the year It includes some assumption that markets stabilize and reopen. And should that not happen, then We would just have more of that interplay between NII and fees, so that at the end of the day, I would still feel good about the revenue generation of the company.

Speaker 9

And then just as

Speaker 2

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, you see

Speaker 5

a stronger year within commercial lending? Yes. So dividend finance will show up in other consumer loans, unlike Provide that did show up in C and I. So you'll see provides benefit is in the C and I guide and dividend finances and the other consumer loans quarter.

Speaker 2

Okay, great. Thanks for clearing that up. And then congrats to both Greg and Tim. Thank you for taking my questions.

Speaker 4

Thank you, Terry.

Operator

Your next question comes from the line of Christopher Marinac with Jamie Montgomery Scott. Your line is now open.

Speaker 1

Thanks. Good morning. Jamie, I wanted to ask about the Fed balance sheet and if it contracts, does that make a difference to your rate outlook and or kind of how you

Speaker 5

We do expect contraction with Our outlook of the Fed balance sheet is they potentially begin to sell down in June, announce it in May. I guess Ultimately, the variable to our outlook would be if they were to move significantly faster 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.

Speaker 1

Okay. But you're not expecting the opposite where they don't contract at all.

Speaker 5

That's not part of

Speaker 3

the year.

Speaker 1

Correct. Yes. Okay. Very well. Thanks.

Operator

Your next question again comes from the line of Mike Mayo with Wells Fargo. Your line is now open.

Speaker 1

Hi. Well, since Greg you defined Tim, starting with the word tech or technology, Maybe just dig into a little bit more, Tim, your vision for what does the back of the future look like in terms of technology. Greg, you certainly have taken 5th 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 on premise, proprietary, in house, don't rely too much on third parties And you can control your destiny.

Speaker 1

And that column A is where certain banks are, where they want to protect a lot of their customer data and information, Safety and Security. Column B would be 0 ops, 100 percent public cloud, Maybe 10, 15, 20 FinTech partners in a type of Lego approach where you piece those together, really making use of having Kind of 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, How do you foresee the tech bank of the future?

Speaker 3

Tim's going to answer Dorsey here.

Speaker 4

No, I look, Mike, 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 going to be all in bucket A or bucket B. We're big believers that where there is an industry utility that drives very limited customer differentiation and where there's a benefit to shared scale, it makes sense to ride on The rails that are available and where there's an opportunity to differentiate and or an 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 and 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.

Speaker 1

Okay. That was clear. But any more concrete metrics that you can give us? Not everyone discloses this, but The number of apps that you have and how much you'd like to reduce that or the number of vendors you have and where you'd like that to go or the percent that you're on the public cloud and where you'd like To take that or number of data centers where the end state is what you desire. Just anything concrete those of us on the outside could and maybe ask you again in a couple of years to track your progress.

Speaker 3

Hey, Mike, this is Gray. I don't have concrete numbers for you. When you think about things like data centers, it's 2, obviously. We want to be down to 2 data centers, and we're approaching that pretty quickly here. Obviously, we want to make sure we have a hot site and you get You got latency on how fast things could travel, so I think we're going to be mindful of that.

Speaker 3

But that's going to be the case. When you think about our core apps that run the business, Something less than we have today. I'm not sure how substantial it will be at the end of the day, but something less than we have today. Customer facing apps, as you think about that, when we can build off the 3rd. And expand off a common platform very different than the past using open source cloud based computing.

Speaker 3

That technology enables us 3rd. We have less applications. So less applications on the customer facing side of the house, somewhat less applications on the back end as we consolidate

Speaker 1

some of our platforms and

Speaker 3

vendors, and definitely less vendors. Vendors, and definitely less vendors, and the data centers we're going to 2.

Speaker 4

Yes. Mike, the metric that I think I'm really The metrics were I'm really chiefly focused on have to do with resiliency of our environment. We have talked a lot about that. And then they have to do with the mix of spend and that sort of continued focus on driving a heavier share of our overall spend to new application development and products and out of Legacy maintenance costs, right. Those I think are the things coupled then with what you can see publicly In terms of the way that customers evaluate our digital channels, in terms of the differentiation that you can see in the quality and the products

Speaker 1

3rd. Last one. So the run the bank, change the bank spend for technology. Where has it been? Where is it today?

Speaker 1

And where might that go to then?

Speaker 4

Yes. 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 end for that 65, 35.

Speaker 1

Great. Thank you very much.

Operator

Your next question comes from the line of Gerard Cassidy with RBC. Your line is now open.

Speaker 10

Thank you. I just had a follow-up and I apologize if you guys addressed this in your opening remarks. But Tim, you mentioned the 4 Cs Your markets, plus Tennessee. Can you share with us where you're seeing the best commercial loan growth within the portfolio. Are they coming from what parts of the 4 Cs?

Speaker 4

Yes. As in which industry sectors, Gerard, or where Within the where geographically within the markets?

Speaker 10

More geographic than 10%. Yes.

Speaker 4

Sure. So Betsy, you did correct me. It is the 5 Cs if you count the SCE at the end of Tennessee as one. And I got an angry text message from our Head Indiana pointed out that they had a pretty good quarter as well. So, yes, look, I think geographically, we have the benefit of Having a really strong presence in midsized metro areas.

Speaker 4

And if you look at both demographics and economic activity, That's where the majority of growth is coming from across the U. S. Right now. It isn't necessarily the mega cities and it's certainly not the rural areas. It's the Charlotte's, the Raleigh's, the Cincinnati's, the Indianapolis's, the Columbus's, the Inland Empire in California is a point of example there as well, where you're seeing a lot of the activity and that is very consistent with what you would see inside our book of business as well.

Speaker 4

So the Cincinnati Columbus corridor, I think, has been a very strong and resilient corridor that should be even better as Intel Lance here and we got the downstream component suppliers and logistics companies and software engineering companies and otherwise that make their way into the space. Indianapolis and Columbus, I think are the 2 bright stars in terms of economic growth In the Midwest and obviously what we are getting out of the upstate and Charlotte and Raleigh has been really outstanding along with Middle Tennessee and Nashville As opposed to other parts of the state that are growing at a less robust pace.

Speaker 10

And then as a follow-up, Tim, in the commercial lending areas, How important is are the treasury management products to complement the actual loan growth? Obviously, When you know lending standards can easily drive loan growth as you lower them. Can you share with us that color as well?

Speaker 4

Yes, I know, they're I mean, they're extremely important and they have been a big catalyst for the success we've had in growing our quality relationship count, Gerard. So a third, 30% to 35% of our new relationships have been led by TM In terms of the initial product sale, which certainly is anomalous to what I had experienced prior to our having had the success we've had as it relates to managed services. And if you look at the available industry research, the folks that do benchmarking on this front, 5th Third is always in the very top of the top quartile in terms of TM penetration in the middle market and to our middle market lending relationships, Which I think you can kind of evaluate just by looking at the growth of commercial deposit fees over time and commercial deposits percentage of commercial total loan commitments, both of which 5th Third is best in class in relative to its investor So it's important strategically in terms of how we go to market, and the results are bearing out in terms of the financial performance.

Speaker 10

Great. Thank you.

Operator

There are no further questions at this time. I turn the call back over to you, Crystal.

Speaker 5

Thank you, Emma, and thank

Speaker 2

you all for your interest in 5th Third. Please contact the IR department if you have any questions.

Operator

Conference call. Thank you for attending. You may now disconnect.

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Earnings Conference Call
Fifth Third Bancorp Q1 2022
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