Good day. My name is Ellie, and I will be your conference operator for today. At this time, I'd like to welcome everyone to the Fifth Third Bancorp First Quarter 2024 Earnings Conference Call. All lines will be placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I would now like to hand over the call to Matt Curoe. You may now begin the conference.

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

Thanks, Matt, and good morning, everyone. At Fifth Third, we believe that great banks distinguish themselves not by how they perform in benign environments, but rather by how they navigate challenging ones. In that sense, the uncertainty we face in the current environment provides us with an opportunity to demonstrate that our focus on stability, profitability and growth in that order will produce consistently strong, some might even say boring, financial results. This morning, we reported earnings per share of $0.70, or $0.76 excluding the Visa and Mastercard settlement litigation charges and the additional FDIC special assessment. All major income statement captions were in line with or better than the guidance that we provided in our January earnings call. Our adjusted return on equity and return on assets are the highest of all peers who have reported thus far and the most stable when compared to results from the first quarter of 2023. We grew period-end deposits compared to the prior quarter and generated annualized consumer household growth of 3%, punctuated by 7% growth in our Southeast markets. Since 2018, we have built more than 100 de novo branches in the Southeast. As a portfolio, they are exceeding our expectations, having achieved 112% of their household growth goals and 132% of the deposit goals built into the business cases. Florida is our top performing de novo market, with deposit dollars at 195% in gold. J.D. Power also recently named Fifth Third number one for retail banking customer satisfaction in the Florida market. Importantly, net interest margins improved in the quarter, driven by stabilizing deposit costs with interest-bearing deposit costs increasing only 1 basis point sequentially. Consistent with our guidance last year, the fourth quarter of 2023 marked the low point for NIM, and we believe the first quarter of 2024 will mark the low point for NII. While end-of-period loan balances were down 1% compared to the prior quarter, we saw solid middle market loan growth across our footprint with Tennessee, the Carolinas, Kentucky, Indiana, and Texas achieving the strongest results. Our footprint continues to benefit in an outsized way from federal incentives to bolster investments in domestic manufacturing and energy infrastructure. The Midwest and Southeast have received more investment per capita than other US regions in industries as diverse as multimodal logistics, semiconductors, batteries, and pet food. Treasury management and wealth and asset management were the strongest contributors to fee income, driven by the strategic investments we have been making in both areas. Treasury management revenue grew 11% year-over-year, driven by our software-enabled managed services payments offerings, and Newline, our embedded payments business. Over one-third of the new treasury management relationships added in the quarter were payments-led and had no credit extended. Wealth and asset management fee revenues grew 10% year-over-year, highlighted by strong growth in Fifth Third Wealth Advisors. The RIA platform we launched in 2022 recently crossed $1 billion in assets under management. Our credit performance remained stable, highlighted by continued strength in our commercial real estate portfolio. We posted another quarter of zero net charge-offs in CRE and have less than $3 million of NPAs in our non-owner-occupied portfolio. While we expect that broader credit trends will continue to normalize, our emphasis on client selection and credit discipline helps to ensure that we have a well-diversified portfolio, not overly concentrated in any asset class, industry, or geography. Expenses are well controlled. Adjusted for discrete items highlighted in the release, expenses declined 1% year-over-year, driven by savings realized through process automation and our focus on value streams. Expense discipline is what has allowed us to make the long-term investments in our business necessary to generate superior returns and operating leverage through the cycle. Looking forward to the rest of the year, we remain cautious given the wide range of potential economic and geopolitical scenarios that could materialize. Depending on how you read the most recent data, inflation is either sticky at 3%, slowly moving down to 2%, or moving back up past 4%. Geopolitical tensions remain elevated, and deficit spending, green energy investments, and the domestication of supply chains are all inherently inflationary in the medium term. We believe the best way to manage in uncertain times is to stay liquid, stay neutrally positioned and stay broadly diversified while investing with the long-term in mind. That is what we intend to do. I want to thank our employees. Your hustle, heart, and dedication are why we've been recognized thus far in 2024 as one of the World's Most Admired Companies by Fortune, one of the Best Brands for Customer Service by Forbes, and one of the World's Most Ethical Companies by Ethisphere. Thank you for keeping our shareholders, customers, and communities at the center of everything we do. With that, I'll now turn it over to Bryan to provide additional details on our first quarter results and our current outlook for 2024.

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

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.

Our first question comes from Mike Mayo from Wells Fargo. Your line is now open.

Hi. Can you hear me?

We can. Good morning, Mike.

Hey. I'm just trying to figure out how you get away with interest-bearing deposit cost going up only 1 basis point quarter-over-quarter when the group is like around up 10 basis points? And I mean, is this sustainable? Is it due to your tech? Is it because of your Southeast expansion? What's your secret here, or maybe it's just ways to bite you in future quarters? Thanks.

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

And just to follow up, I mean, you are expanding share in the Southeast. You said you went from, what, 8% to 6% year-over-year. I mean, don't you need to price competitively and offer higher rates to gain that share?

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

Our next question comes from Scott Siefers from Piper Sandler. Your line is now open.

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

Sure, I'm happy to start. Overall, the feedback we've received from clients remains consistent. They're not feeling overly negative at the moment, but they're not aggressively pursuing capital investments, M&A opportunities, or increasing inventories either. The current situation with higher interest rates will likely impact their plans. Therefore, I believe that any growth we can achieve will primarily come from gaining market share. Growth in the latter half of the year is expected in areas where we've made strategic investments. For instance, our middle market C&I performed well in the first quarter, particularly in the Midwest and Southeast, where we benefit from federal stimulus programs related to manufacturing, energy transition, and infrastructure, as our regions have received a significant share of those funds. Additionally, we have expanded our sales force in the Southeast considerably over the past three years, which should help us continue to gain market share as those team members become fully effective. Texas has also been a rewarding market for us, with our presence there for over a decade and around 175 employees, complementing our strong commercial banking team in California. We anticipate continued growth in that market. Lastly, in terms of industry verticals, we are seeing improvement in our pipelines in aerospace, defense, transportation, and TMT sectors.

Thank you very much. Bryan, could you discuss the fluctuations between reserve building and reserve releasing? I understand the numbers are not significant, but it seemed from your comments that there will be some reserve build due to loan growth, although you mentioned a potential small release mid-quarter. I'm interested in your perspective on the current factors affecting these changes.

Yeah. Thanks, Scott. I think the main thing there is two items. For the guidance for the rest of the year, that is under the assumption that there is no change to the economic outlooks as provided by Moody's. A big driver of the release this quarter was the economic outlook from Moody's did get better. So that was a factor. We also had end-to-period decrease in loans sequentially. So that was an item that drove the release as well. Next quarter, we did guide to stability on loans. So that's what we're saying kind of zero to $25 million. Mix could cause a little bit of build, but we do expect end-of-period loan growth in the second half of the year and that's where you get the larger numbers.

Hello. Can you hear me?

We can. Good morning, Gerard. We couldn't for a minute there.

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

Their baseline scenario has shown some stability. I don’t believe there’s a significant slowdown predicted for 2024. They continue to enhance their baseline expectations and have also made improvements to their downside scenario, which has had a greater impact on our reserve calculation. Overall, they are now optimistic about the economy's continued progress and do not anticipate a significant slowdown at this time in 2024.

Thank you. Tim, regarding growth, especially on the commercial side, you shared some impressive figures, particularly in your Southeast franchise. Could you elaborate further? After onboarding clients as you mentioned this quarter, how long does it typically take for them to yield a return that meets your expectations? Is it within 12 months, 24 months? Can you explain the process and what additional products they might need beyond payments or loans to achieve your desired return levels?

Certainly. I will start with payments and then move on to loans, as payments is more straightforward. Our payments clients generally meet their return thresholds right from the start, as there is no credit involved. This means the capital we hold is operational risk capital. Boarding a client can take anywhere from 30 to 45 days, but due to some beneficial investments we made before last spring’s deposit crisis, we can now onboard clients in about six days on average, provided they are prepared. This quick onboarding supports the current pace of approximately 11% year-over-year growth in commercial payments fees. Our goal has been to achieve a high single-digit growth rate, which relies on our ability to ramp up quickly with each new client. On the credit side, the advantage of our focus on granularity is evident when we shift a middle market relationship, which typically involves a single bank relationship, allowing credit to come on quickly. It may take one to two months to transition payables and receivables and get payments flowing, but generally, we reach the return threshold well within a year in middle market scenarios. However, when we operate at the upper middle market or in corporate banking, the return profile may take longer to develop, as we often focus on capital markets revenues rather than payments. When we lead, we see quick returns, while in participant roles, we believe in nurturing the relationship for future growth. We also conduct an annual operating review across all regions and corporate verticals, where we identify the 25 lowest returning relationships in their portfolios. For these, we either develop a relationship improvement plan or exit.

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

Good morning.

Good morning.

I have one question for you, Tim. You've been quite cautious about the macroeconomic outlook over the past 12 to 18 months. Has your perspective changed today? I'm asking because I'm trying to align that with your messaging regarding buybacks, which seems quite proactive for the second half and third quarter. Could you provide some insight into whether you feel more optimistic about the economic outlook in your markets today compared to six or twelve months ago? Additionally, how are you approaching capital allocation, and should we anticipate that the current level of buybacks will continue in the second half unless growth picks up next year? Thank you.

Thank you, Ebrahim. We strongly believe in accountability here. I asked Matt to review the Q&A from previous quarters to find when we first received inquiries about prolonged higher rates, and you were the one who raised it during the fourth quarter of 2022 earnings call. At that time, we mentioned that we thought the market was too optimistic about how quickly inflation would decrease, and I can't recall the specific event from last December. However, my comment then was that either the bond market or the equity market was mistaken, and we suspected it would be the bonds. Now, it is clear that the bond market was indeed incorrect at the start of the year. The same factors that led to our cautious outlook then continue to influence us today. We believe that current fiscal and monetary policies are conflicting, with the fiscal policies being particularly unsustainable and inflationary in the long run. The longer this persists, the more the Federal Reserve will need to keep rates elevated, which affects long-term rates. Furthermore, if longer rates remain high, it increases the likelihood of negative impacts on asset prices or credit performance. The key question is how long this will take to materialize, and we have low conviction on that. Therefore, in uncertain environments, our strategy will always focus on maintaining liquidity, neutrality, and diversification. Historically, significant changes occur gradually before suddenly accelerating. Regarding capital priorities, we expect to repurchase between $300 million and $400 million in shares in the second half of the year. Our confidence in this comes from the strong capital generation of our franchise. As Bryan and I mentioned, we achieved the highest and most stable return on equity compared to our investor peers, which underpins our confidence. If the economic environment softens and we don't experience loan growth, it could create an opportunity for capital since we won't need as much capital for organic growth. This gives us a safety net if there’s a downturn in the economic environment and lower expectations for loan growth. If conditions remain stable, we have sufficient capital generation to support the planned share buybacks in the second half of the year. Absolutely.

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

Good morning.

Good morning.

Regarding the net interest income outlook of a decline between 2% and 4%, I remember that last quarter your forecast was based on the forward curve, and you had anticipated five or six rate cuts in that assumption. Now, it seems you are adhering more closely to the forward curve, which suggests fewer cuts, possibly around three. Nonetheless, your net interest income guidance has remained the same despite these changes. Could you elaborate on how you plan to maintain that outlook without any adjustments? Additionally, how does this impact your margin forecast? I understand you suggested that margins have hit their low point, similar to net interest income, but looking ahead through the year, what kind of trend do you anticipate for margins? Thank you.

Thank you for the question, John. The key point I want to emphasize is that we are still reaping significant benefits from the repricing of our fixed-rate assets. You can observe this in our actual numbers. Year-over-year, our indirect secured consumer business, mainly consisting of our indirect auto business, has increased by 100 basis points on a $15 billion portfolio, translating to a $150 million annual benefit, even while we were limiting auto production due to the RWA constraints. Our medium-term fixed-rate lending assets, including auto, RV, marine, and solar, are generating considerable earnings capacity for us. In the next 12 months, we expect enough fixed-rate assets to reprice, producing an annualized net interest income benefit of between $350 million and $400 million. Despite a higher rate environment and some pullback in the curve, this benefit is growing for us, which is a positive outcome that supports us and mitigates the ongoing shifts we're seeing in demand deposit accounts, as well as projected rises in overall deposit costs. We are not making any predictions that the deposit climate, competition, and increasing costs have plateaued, but we are noticing signs of moderation. We anticipate positive net interest margin from this point forward, though it's only a few basis points per quarter trajectory. The key uncertainty regarding the extent of NIM increases ultimately lies in where our cash position settles. If our deposit franchise continues to perform strongly above the 2% to 3% we are guiding to, NIM might be slightly lower, but net interest income will improve as a consequence. Overall, we are quite optimistic about our positioning.

Thank you for the great question. Regarding the $59 million increase in non-performing assets this quarter, $49 million of that was in commercial, specifically related to two names outside the industries you mentioned. We identified a retail trade name and a senior living trade name. We are still observing stress on the healthcare side, particularly in senior living, but it’s not a major portfolio for us, and we believe we have it under control, regularly reviewing it. Therefore, we are not overly worried. We have consistently noted that we aren’t seeing trends tied to geography, product, or industry. The issues we've faced have been more episodic, and we've managed these events on a quarter-by-quarter basis. Thus, I do not anticipate a steady rise in our non-performing assets. As for your final question, I remain confident about our guidance. Bryan mentioned earlier that we are projecting between 35 and 45 basis points for the year, supported by Tim’s comments on our commercial real estate portfolio, which is performing exceptionally well. Our other commercial and industrial borrowers are also doing well; they have managed to cut expenses effectively and have been successful in passing along pricing, operating efficiently. We are taking a cautious stance as we are uncertain about future rate movements, which is leading to limited capital expenditures. Overall, we are pleased with the behavior of our commercial and industrial portfolio, and the performance of our commercial real estate portfolio speaks volumes.

Great. Thank you for taking my questions.

Absolutely.

Our next question comes from Ken Usdin from Jefferies. Your line is now open.

Thank you. Good morning. I wanted to follow up with Bryan. You mentioned the annualized dollar impact from fixed rate securities and loans, which I think you said was $12 billion. I'm curious if you have any insights on what will also be repricing in '25, and I assume that would be an additional benefit to the annualized figure you mentioned earlier?

That's right. We do have a similar amount that will happen in '25. And actually, we've been in the range of $4 billion to $5 billion a quarter repricing overall on the portfolio between loans and investment portfolio. The investment portfolio has actually been, say, $600 million to $800 million a quarter range. That number is actually going to start accelerating later this year as we start to get some maturities on the bullet/locked-out structures. We're expecting over $1 billion in the fourth quarter and a pace similar to that in 2025. So, this benefit and the repricing is going to continue and actually pick up a little bit, and that's where the higher for longer environment, as long as the frontend stays relatively stable, because that will help keep deposit costs stable, the higher long end will actually help and contribute to higher income over time.

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

Sure. Let me start on the consumer loan side and then Bryan will fill in on the detail on deposits. So, the balance sheet in the Southeast on the consumer side for the core banking relationships is a net funding provider for us. Vivek, the sort of general development of a customer relationship is acquire the primary DDA via direct marketing and the work that we do around the new branches as we build them. The payments products are an important part of primacy. So, credit card would come after that. And then, from there, you have the episodic opportunities whether that's home equity, because there is some improvement going on, or mortgage, although there obviously hasn't been a lot of that in the environment over the course of the past few years. The auto business, the dividend solar finance business in particular do have strong production in Florida, just because of the size of the population relative to the other states where we do business. But they're really unconnected to deposits. Bryan, you want to talk about the individual markets and deposit balances?

We have approximately $31 billion in deposits in the Southeast, with more than half of that coming from the consumer segment. Our performance in consumer banking is very strong. Additionally, as Tim highlighted, we are a net provider of funding, holding around $18 billion in loans in the Southeast.

Yeah, absolutely.

And I would imagine most of those are on the commercial side, as Tim said, at this point?

Yes.

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

I'll start and then Greg can provide insights on credit. We remain the second largest financer in the residential solar market. Our growth potential is closely linked to the market size at this time. Currently, with high rates and net metering reductions in certain areas, there's an affordability issue since buying energy from the grid is less expensive than financing solar installations. Additionally, as rates increase, we observe a shift towards leased installations, similar to trends in the auto industry, meaning that financing for solar will decline. Industry estimates suggest a reduction of about 13% to 14% in total installations this year, which will likely lead to a more significant drop in financing volumes. We have structured our plan anticipating a 30% year-over-year decline. In a prolonged high-rate environment, that estimate seems appropriate. If the decline is less severe, it will simply reflect the ongoing challenge of weighing lease options against financing, as well as the feasibility of offsetting energy costs with the equipment installation expenses.

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

And then just on the volume front for originations for solar, I know this question came up earlier as well. We're probably talking closer to $1.7 billion to $2 billion of originations this year, just given the dynamics that Tim mentioned earlier.

Next question comes from Manan Gosalia from Morgan Stanley. Your line is now open.

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

We think that is certainly a big question for us and for the industry, and it's one of the items why we highlighted that our NII guidance at this point is less rate environment dependent and more dependent on just the overall level of deposit competition. As you mentioned, we do compete against the money center banks as well as a lot of regionals across our different markets. In the Midwest, we compete against JPMorgan primarily. They're the number one bank in most of our markets. We're the number two bank in those markets. So, we see them and face off against them. And obviously, in the Southeast, we deal with Bank of America, Wells, and Truist, so very significant competition. In general, it does feel like the broader liquidity environment has stabilized versus what we saw midyear last year. So, even with a little bit of weakness from an overall industry deposit perspective at this point unless something really breaks in the liquidity system, we're not expecting the significant food fight for cash that happened last year as people were just scrambling to show that they had a stable balance sheet. But it does mean that over time that you're likely to see just a potential increase in competition. The big counter for this is really going to be whether or not loan growth shows up or not. If there's no loan growth for the industry, there's not going to be a need for significant competition for deposits. And so, broadly speaking, we think competition probably stays lighter than what we saw last year, especially in a stable environment, also at a time where we think the whole industry is going to be focused on maintaining profitability. So, we do think that will moderate some of the pressures, but the bottoming of the RRP and potential decreases in bank reserves as QT continues, certainly could create some pressure in the medium term.

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

We need to find a way to boost growth in labor productivity. This is true across the economy, and it's evident in the banking sector as well. Despite significant investments in technology over the last decade and a half, there haven't been many substantial improvements in productivity beyond branch adjustments. Whether it's through the cloud platforms we're implementing to enhance processing efficiency or leveraging AI, we must reduce overhead costs. This will be a key focus for us as we navigate our value streams and continue tech modernization. Moreover, there will be areas where regional and community banks won't be able to compete in the future unless there's a reallocation of the non-credit wallet. For instance, larger public companies tend to dominate this space. Last year, we stepped back from certain businesses where we were significant lenders but weren't receiving a fair share of ancillary revenues, which were primarily going to bigger banks. This situation either needs money center banks to commit more individually to justify their ancillary offerings or for corporate treasurers to distribute the budget more evenly. In my view, we will see a shift in this area at least initially. I'm also interested in how private credit evolves. Historically, it’s rare for firms to grow as quickly as private credit while avoiding significant errors. I'm uncertain about the sustainable competitive advantage for this approach, especially if the model is successful. Given that we are effective at gathering deposits, I would prefer our institution to hold these potentially profitable assets on our balance sheet, though this hasn't been a current focus. Lastly, there’s the consideration of bank consolidation; it’s hard to envision a future with 4,000 banks. We will likely see some banks retreating to markets where they can maintain a competitive edge and focusing on areas where they can match the scale benefits enjoyed by larger banks, rather than trying to compete broadly across the country in a less defensible strategy.

Next question comes from Christopher Marinac from Janney. Your line is now open.

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

Yeah, it's a great question. So again, probably not going to be linear, it's going to be lumpy. It has been for us in the past given current previous comments I made about episodic, more episodic events and the fact that we're just not seeing trending by industry, by geography. And so, I would expect it to continue to be lumpy. But as I said earlier, we're still liking the way our C&I portfolio is behaving. We like our commercial real estate track record an awful lot. But with higher for longer, maybe higher forever interest rates, we're going to continue to see stress and we're going to continue to proactively manage the portfolio as we have. We're not doing deep dives because on an ongoing basis, we are stressing the C&I portfolio by 200 basis points. We're getting out ahead of any potential issues, but that could lead to some criticized assets, a special mention. We're doing the same thing, do something on the commercial real estate side, exit stress testing. So, we're taking a look at maturities and we're stressing by 100 basis points a forward curve on what that loan looks like at maturity. And so, if we see weakness there, we could see an elevation in criticized assets, but 99% of our accruing criticized assets are current, right? And if you include our non-accrual, we're still 93%, 94% current within that portfolio. So, we'll see episodic kind of lumpiness for the remainder of the year.

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

Exactly.

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

Thank you, Tim. Thank you, Ellie, and thank you everyone for joining and for your interest in Fifth Third. Please reach out to the Investor Relations department if you have any additional follow-up questions. Ellie, you can now disconnect the call.

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