Thank you for joining us. My name is Jael, and I will be your conference operator today. I want to welcome everyone to the Fifth Third Bancorp Third Quarter 2024 Earnings Conference Call. All lines have been muted to minimize background noise. After the speakers finish their remarks, there will be a question-and-answer session. I will now hand the conference over to Matt Curoe, Senior Director of Investor Relations. You may begin.

Good morning, everyone. Welcome to Fifth Third's third quarter 2024 earnings call. This morning, our Chairman, CEO and President, Tim Spence, and CFO, Bryan Preston, will provide an overview of our third 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 October 18, 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 great banks distinguish themselves not by how they perform in benign environments, but rather by how they navigate uncertain ones. Our focus on stability, profitability, and growth in that order has served us well in this dynamic operating environment and continues to produce strong and predictable results. This morning, we reported earnings per share of $0.78 or $0.85 excluding certain items outlined on Page 2 of the release, exceeding the guidance we provided in our Q2 earnings call. We produced a return on equity of 12.8%, the best among peers who have reported thus far and the most stable on a trailing 12-month basis. Our adjusted efficiency ratio improved to 56.1% in the third quarter. Headcount declined 1% year-over-year despite continued investments in our growth strategies. We achieved sequential positive operating leverage for the second consecutive quarter without the need to expend shareholder capital on an investment portfolio restructuring charge and are in a position to achieve positive operating leverage on both a sequential and a year-over-year basis in the fourth quarter. Despite changes throughout the year on interest rates, economic activity, and market demand, as we come into the home stretch for 2024, I am pleased to say that Fifth Third should deliver NII, fees, expenses, and credit costs within the full-year guidance ranges we provided back in our January earnings call. Before I hand the call over to Bryan to provide additional detail on our financial results and outlook, I would like to take a minute to highlight the ways in which our strategic growth investments, which have been consistent over several years, are providing long-term organic growth that is not macro environment dependent. In our consumer bank, consumer households grew 2.7% over the prior year, punctuated by 6% household growth in the Southeast. The release of the FDIC's annual summary of deposits during the quarter provided an additional means to benchmark our performance. For the second year in a row, Fifth Third was number one among all large banks in year-over-year retail deposit growth measured on a capped branch deposit basis. We maintained or improved our market position in every market where we compete. In our Midwest markets, we maintained our number two overall position behind JPMorgan. In our Southeast markets, we maintained our number six overall position and significantly closed the gap to our top five goal. We grew retail deposits nearly 16% year-over-year and gained meaningful market share in 14 of our 15 focused MSAs in the Southeast. We will open up 19 de novo branch locations in the fourth quarter and plan to accelerate the pace of openings through 2028, at which time we will have nearly half our network from more than 500 branches in total in the Southeast. In our Commercial Bank, we continue to expand our middle market presence and to invest in commercial payments. Over the past 12 months, we have increased relationship manager headcount by over 20% in our Southeast and expansion markets, including opening commercial banking offices in Birmingham, Kansas City, and in the Central Valley. Third-quarter middle market loan production was the highest in five quarters, led by the Southeast markets, which were up 20% sequentially and over 30% over the prior year. Our Commercial Payments business grew net fee equivalent revenues by 10% year-over-year in the quarter, and we processed $4.3 trillion in dollar volume. Newline and our managed service offerings continue to lead the way in terms of growth that is delinked from our balance sheet. Over 40% of all new commercial payments relationships added this year have been payments-led with no credit attached. In our Wealth and Asset Management business, we achieved record quarterly revenues growing by 12% year-over-year. Total assets under management have grown $12 billion in the past year or up 21% to $69 billion. Our Fifth Third Private Bank, Fifth Third Securities, and Fifth Third Wealth Advisors business units all continue to generate strong performance. Turning to capital, our strong profitability and disciplined balance sheet management are providing growth capacity and the opportunity to increase capital return to shareholders. This quarter, we increased our common dividend by 6% to $0.37 per share and executed $200 million in share repurchases. Even with these actions, our CET1 ratio increased to 10.8%. This will allow us to increase share repurchases in the fourth quarter to $300 million with the potential to increase further depending on the level of loan growth realized during the quarter. Looking ahead to the remainder of the year and the beginning of next, while we feel more optimistic today about the near-term outlook for the economy, we also recognize that crosscurrents, including reversals in interest rate rallies, volatility in jobs reports, stickiness in inflation, and geopolitical uncertainty could produce a wide range of potential economic outcomes. We will continue to manage Fifth Third with a focus on stability, profitability, and growth in that order and to stay liquid and conservatively positioned while investing with the long-term in mind. Lastly, I'd like to take a moment to express our sympathies to all those who have been impacted by Hurricane Helene and Hurricane Milton. We recognize the hardships that arise from such devastating events, and I would like to also thank all our employees who have answered the call to support our customers and communities at this time. In the day since the hurricanes, we've worked tirelessly to reopen branches and check in on customers. We staffed the Fifth Third Financial Empowerment Bus to enable those who lost power and Internet access to apply for FEMA disaster relief. Your dedication to serve in the face of these natural disasters is inspiring. Thank you for living our core values. With that, I will turn it over to Bryan to provide more detail on the quarter and our outlook.

Thanks, Tim, and thank you to everyone joining us today. We're pleased that our third-quarter results once again demonstrate the strength of our company. Our well-positioned balance sheet and diversified fee income streams drove 3% sequential adjusted revenue growth. Net revenue performance combined with our ongoing expense discipline resulted in 5% sequential pre-provision net revenue growth in the third quarter on an adjusted basis. As Tim mentioned, our profitability remains strong, which allowed us to continue to accrete capital while we are purchasing shares and raising the quarterly common dividend by 6%. Our CET1 ratio grew to 10.8% at the end of the quarter, and our tangible book value per share, inclusive of AOCI, increased 14% compared to June 30, and 47% from a year ago. Highlighted on Page 2 of our release, our reported results were impacted by certain items, including costs related to the Visa and Mastercard interchange litigation and some severance recognized during the quarter as we continue to work to drive efficiencies and automation. Net interest income for the quarter was over $1.4 billion and increased 2% sequentially, and net interest margin improved 2 basis points. Increased yields on new loan production were the primary driver of this improvement and more than offset the impact of increased interest-bearing core deposit costs, which were well managed and up only 2 basis points compared to the prior quarter. With the Fed Funds rate cut at the end of the quarter in September, we experienced our first month-over-month decrease in interest-bearing core deposit costs during this rate cycle. While total average portfolio loans and leases were flat sequentially, we are seeing some signs of life. Loan production rebounded for both middle market and corporate banking with strong contributions from the Georgia and Chicago regions as well as the energy and TMT verticals. For the commercial portfolio, average loans decreased 1% primarily due to increased paydowns and softness in revolver utilization, which declined 1% during the quarter to 35%. Average total consumer portfolio loans and leases were up 1% from the prior quarter, primarily reflecting an increase in indirect auto originations, which continued to be a significant contributor to our fixed-rate asset repricing. During the quarter, we saw a 200 basis point pickup on the front book, back book repricing in this portfolio. Diving further into deposits. Average core deposits were up 1% sequentially, driven by higher money market balances, offset by a decrease in savings and CDs. This core deposit balance performance combined with our well-timed long-term debt issuance during the quarter has allowed us to pay down higher-cost short-term wholesale borrowings. As a result, our rates paid on total interest-bearing liabilities decreased 1 basis point sequentially. Our current focus remains on prudently managing deposit costs as we have officially entered the rate-cutting cycle. Since mid-2023, we have been increasing our testing of price sensitivity in our deposit book to be well prepared for this phase of the cycle. We remain confident in our ability to manage liability costs to drive net interest income performance in the fourth quarter and beyond. Demand deposit balances as a percent of core deposits were 24% during the third quarter, down 1% from the prior quarter. This level is consistent with our expectations from July, and we expect the DDA mix to stay around 24% for the remainder of the year. By segment, average consumer and wealth deposits were stable sequentially, while commercial deposits increased 3%. We ended the quarter with full Category 1 LCR compliance at 132%, and our loan to core deposit ratio was 71%, down 1% from the prior quarter. Moving on to fees. Excluding the impacts of the security gains and the Visa total return swap, adjusted non-interest income increased 2% compared to the year-ago quarter. As Tim mentioned, our commercial payments and wealth businesses delivered strong fee results with both achieving double-digit revenue growth over the prior year, driven by our sustained strategic organic growth investments in products and sales personnel. In commercial payments, revenue increased 10% as we continue to acquire new clients in traditional treasury management products, our managed service offerings, and in Newline. In wealth, our AUM increased to $69 billion, up 21% over the prior year, driven by strong inflows from Fifth Third Wealth Advisors and market performance. Fees were $163 million this quarter were a record high led by strong transactional activity at Fifth Third Securities and the fee benefit from the AUM growth. Our capital markets business rebounded this quarter as bond issuance and trading, as well as rate hedging activities picked up. Fees grew 9% over the prior year, also led by our debt capital markets business. The security gains of $10 million were from the mark-to-market impact of our non-qualified deferred compensation plan, which is more than offset in compensation expense. Moving to expenses, excluding these items noted on Page 2 of our release, our adjusted non-interest expense was up 3% from the year-ago quarter and increased 2% sequentially, primarily due to increases in performance-based compensation due to the strong fee generation, the impact of the previously mentioned non-qualified deferred compensation mark-to-market, and continued investments in technology, branches, and sales personnel. Shifting to credit, the net charge-off ratio was 48 basis points, slightly better than our expectations from early September and down 1 basis point sequentially. Commercial charge-offs were 40 basis points, down 5 basis points sequentially, and consumer charge-offs were 62 basis points, up 5 basis points from a seasonally low second quarter. Early-stage delinquencies 30 to 89 days past due decreased 2 basis points to 24 basis points, which remain near the lowest levels we have experienced over the last decade. NPAs increased $82 million during the quarter, and the NPA ratio increased 7 basis points to 62 basis points, in line with our 10-year average and remains below the peer median level. Commercial NPAs increased $60 million from the prior quarter. Within our C&I portfolio, NPAs increased $20 million due to increased inflow activity, which given the nature of the commercial business will be uneven from quarter to quarter. On a year-over-year basis, C&I NPAs are down $7 million. Our CRE portfolio continues to perform well with no net charge-offs during the quarter and an NPA ratio of only 46 basis points; the increase in our commercial mortgage NPAs is related to a single senior living credit in our owner-occupied portfolio. Consumer NPAs increased to $20 million from the prior quarter. Approximately half of this increase was driven by a recent change in policy related to our consumer nonaccrual processes to better align our policies across asset classes and primarily impacted our return to accrual timing for loans that are paying in full and are current. Overall, we are not seeing any broad credit weakening across industries or geographies. From a credit perspective, we do not expect Hurricane Helene to have a material impact on losses, and we are continuing to assess the impact of Hurricane Milton. Our ACL coverage ratio increased 1 basis point to 2.09% and included an $18 million reserve build. 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 10.8%, significantly exceeding our buffered minimum of 7.7%, reflecting strong capital levels. Our pro-forma CET1 ratio, including the AOCI impact of the securities portfolio, is 8.7%. We expect continued improvement in the unrealized losses in our securities portfolio, given that 59% of the AFS portfolio is in bullet or locked-out securities, which provides a high degree of certainty to our principal cash flow expectations. Assuming the forward curve is realized, approximately 24% of the AOCI related to securities losses will accrete back into equity by the end of 2025, increasing tangible book value per share by 6% before considering any future earnings. 61% of the securities related AOCI should accrete back to equity by the end of 2028. During the quarter, we completed $200 million in share repurchases, which reduced our share count by 4.9 million shares. As we assess our capital priorities, we continue to believe that 10.5% is an appropriate near-term operating level. Moving to our current outlook, we anticipate continued growth in NII and NIM during the Q4, with NII up 1% sequentially, reflecting the impact of lower deposit rates and the continued benefit of fixed-rate asset repricing, partially offset by the decrease in yield from our floating-rate loan portfolio. This outlook assumes a 25 basis point cut in November and a 50 basis point cut in December. We would not expect any change to this outlook if fewer rate cuts were to occur. We expect average total loan balances to be stable to up 1% from the third quarter, with middle market and auto production offsetting mix demand in other asset classes. Fourth-quarter adjusted non-interest income is anticipated to rise 3% to 4% compared to the strong Q3, largely due to a continued rebound in capital markets revenue and continued growth in commercial payments. Additionally, we expect fourth-quarter TRA revenue to be $10 million down from $22 million in the fourth quarter of 2023. Fourth-quarter total adjusted non-interest expenses are expected to be stable compared to the third quarter, as the increases in revenue-based compensation and the investments in branches and technology are largely offset by efficiencies achieved in other areas. Fourth-quarter net charge-offs are projected to be similar or slightly down from the third quarter. Given the expected increase in loans during the fourth quarter, we anticipate an ACL build of $20 million to $40 million assuming no major change to the economic outlook. We expect to deliver positive operating leverage in the fourth quarter on both a sequential and a year-over-year basis, and our PPNR guidance for the full year remains in line with our guidance from back in January. Our net interest income trajectory exiting the year continues to position us for record results in 2025, assuming no major economic or interest rate outlook changes. Finally, moving to capital. With our consistent and strong earnings, we now expect to increase our share repurchases in the fourth quarter to $300 million with potential further repurchases depending on the level of loan growth throughout the quarter. In summary, with our well-positioned balance sheet, growing revenue streams and disciplined expense and credit risk management, we are set to generate strong and stable capital accretion, top quartile profitability, and long-term value for shareholders, customers, communities, and employees. With that, let me turn it over to Matt to open the call up for Q&A.

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

Your first question comes from the line of Scott Siefers of Piper Sandler.

Good morning, everyone. Thanks for taking the call. Bryan, I was hoping you might be able to discuss the main puts and takes you see in the fourth-quarter NII guide in particular. Curious about how you're thinking about the further trajectory of deposit betas, and sort of how that evolves over time given that you've been very transparent about it and have an optimistic outlook there as well.

Yeah. Absolutely. We continue to feel really good about the trajectory of the NII as well as the performance on the deposit front. As you know, we've spent a lot of time being prepared for this point in the cycle and things are playing out basically as we expected. When we look at both our results and peer results, the natural transition that you would expect is broker deposits, wholesale funding borrowings to start to come down. That's what we're seeing at the same play out. And then also then to start to see when that has been fully realized that movement in the beta. And that's exactly what we're seeing from us and the competition. For us, $35 billion of the index deposits, we were able to get the beta out of those as expected. To date, we're about in the mid-40s in terms of the betas that we've achieved since the 50 basis point rate cut. And we still have $13 billion, $14 billion of CDs that will be approaching maturities, about 75% of our CD portfolio matures between now and end of first quarter, as well as some additional promos that we'll see maturities on, and we'll continue to grind through the deposit costs in other areas of the book. So continue to feel really good about that as the trajectory plays out. And then the fixed-rate asset repricing, that benefit continues to be a sequential tailwind for us, and that's going to continue into the fourth quarter of next year. And that will be a big driver of the increase in NII from here.

Okay, perfect. Thank you. Maybe looking at a little further, I know you've discussed generating record NII in 2025. Would love to hear any updated thoughts there, I guess, including what kind of lending rebound might be required to achieve that. It sounded like you know, maybe a bit more optimistic on what lending demand might look like given some of the signs of life you referred to in your opening remarks.

We are noticing increased activity in lending. We don't require extraordinary loan growth to achieve record net interest income. The way net interest income is generated will depend significantly on the economic environment, so the shape of the interest rate curve will be important. We anticipate some positive momentum in loan growth based on recent observations. We believe that the declines in commercial lending are largely behind us, and we are experiencing favorable trends in consumer lending, which will play a crucial role in our transition to loan growth moving forward. While we would welcome some loan growth, which would certainly assist in achieving record net interest income, we remain optimistic about our path ahead.

Your next question comes from the line of Gerard Cassidy of RBC Capital Markets.

Can you share with us your thoughts on the potential impact of a shift from an inverted yield curve to a positively sloping curve, where short-term rates drop to 3% to 3.5% and long-term rates remain around 4% to 4.5%? I'm not asking for specific guidance for 2025, but given the Fed's current trajectory, how might this influence your net interest income growth for that year?

Yes. Obviously, Gerard, we'll give more detail next year on 2025. But if we can actually get a little bit more steepness in the curve, get the inversion out of the curve, that is very powerful for us from an NII perspective from here because we would expect to see some relief on the liability side of the balance sheet. We do continue to have confidence that we will get costs out. And the thing that's not reflected in our forward guidance right now is an assumption that we're going to be able to maintain the fixed-rate asset spreads. We do assume that there is compression as rates come down. And if we were to get to a normal shaped curve, there would be even more benefit then from the fixed-rate asset we’re pricing. And we would also have a little bit of opportunity to get some more economics out of duration in the security portfolio and then the swap portfolio over time. So that'd be a really productive environment for us. And we would see it over time, you would see a significant expansion of your net.

Yes. And at least for what it's worth, Gerard, I don't know that I see your outlook as being overly rosy in that regard. I just think it's probably a reflection of what both the Fed's actions and the data would tell us is realistic. It probably feels rosy because we just haven't seen it in an environment like that over a very long time, right? Either we had absolute rates of zero on the front end and a little bit of slope, but we've had this situation now where the front end was elevated and you had a historic level of inversion without a recession. If the Fed manages to land the plane here, the front end comes down. I think our view has been that the 10-year was probably going to be stickier. It just you're talking about on an intermediate-term basis, inherently more inflationary dynamics, including the domestic manufacturing industrial policy, the green energy transition, and the historic level of fiscal deficits that we're running; like those are all things that should work against the long end of the curve moving meaningfully lower. And potentially even you could see if the Fed settles out at the 3% or 3.5%, the long end of the curve move up a little bit. So you get more of a normal term premium. That sort of an environment, if it doesn't come along with some other issue, would be a really wonderful one for the balance sheet portion of our revenue.

Very good. And then can you guys remind us, you talked about lifting up the buyback a bit in the fourth quarter. Bryan, you talked about how the tangible book value accretion, how it's going to come through just the burn-off of that securities portfolio through the end of ‘25. Can you remind us in an environment where you know what the Basel III endgame requirements are, which hopefully we will obviously by this time next year, what should we expect in terms of how much of the capital that you guys are comfortable giving back to shareholders as a percentage of earnings, for example, in dividends and buybacks?

Our current target in normalized environments is a dividend payout ratio between 35% and 45%. The decision on share buybacks primarily depends on our capacity for organic growth, as we prefer to invest in organic opportunities that present good risk-adjusted returns first. Any remaining capital is then allocated to share buybacks. We remain positive about our capital generation, and we believe that $200 million to $300 million in share buybacks is an appropriate level. This quarter, we experienced some benefits in Risk-Weighted Assets, which could allow for slightly increased share buybacks. However, with anticipated loan growth next year, we expect to discuss lowering buybacks over time, as we will have more organic investment opportunities.

Your next question comes from the line of Mike Mayo of Wells Fargo Securities.

Hey. Just to follow-up on the, you said the loan production is the highest in five quarters, and then quarter-over-quarter loan growth is flat, right? So if you could just give a little bit more detail like how much would loans have grown without paydowns? And why aren't you seeing more of this? It sounds like you said there's signs of life, but is it bigger than a bread box sort of what you think might come ahead?

Yeah. Thanks, Mike. The paydowns for the quarter were around, say, $900 million, a bit elevated from what we would typically see in some of the portfolios, as well as we had a utilization headwind of about 1%, because we did see the revolver utilization move down. That 1% decrease is another say $800 million. So the combination of those two were a decent driver ultimately from an overall average loan growth and in the period loan growth perspective. We're not expecting continued pressures at this point, and we've seen utilization stabilize in the second half of the quarter and in the beginning of this quarter. So that doesn't feel like a headwind for us right now. The capital markets activity, obviously, it was very robust capital markets activity in the second quarter compared to the third quarter, we do think that fed into some of the pay down behaviors that we're seeing. But from here, we're expecting to get back to a little bit more normalized level, and we think that helps then with loan growth from here.

As for the expectations following the Penta win for the next several quarters over the coming year, are you able to provide any specific numbers? Do you anticipate it will exceed 1% or 2%?

Yes, I mean, we gave average loan growth guidance, obviously of up 1% sequentially. We'll get into 2025 in more detail next year. But in general, our objective would be to grow with the market plus a point or two. Historically, the banking industry grows in line with GDP, nominal GDP type levels. And if we get back to that kind of environment and the industry gets back to overall aggregate growth, we would expect to be in line, if not outperforming the industry.

Yes, I think Mike, it's Tim. I believe the factors for a more favorable environment for loan growth in the banking system may be emerging. This is contingent upon who wins the election and, perhaps more importantly, how the candidates' campaign promises translate into policy and governance. From what I gather during my client interactions, elevated interest rates have posed challenges, making some capital investments unfeasible in a high-rate environment. Additionally, due to uncertainties surrounding the election, businesses have opted to use cash flow to pay down debt rather than invest elsewhere. Furthermore, there has been a significant accumulation of inventory during 2021, 2022, and 2023 linked to changes in inventory management strategies. As interest rates rose, we noticed a trend described as destocking by one of our wholesale distribution clients. This resulted in less inventory and reduced materials across supply chains, leading to a focus on increasing inventory turnover and optimizing balance sheets, which in turn diminishes the need for revolving credit. While this can't drop to zero, it indicates ongoing constraints. Should interest rates decrease, and mergers and acquisitions along with capital investments become more viable, we could see an uptick in that area. Moreover, if we achieve greater certainty regarding the economy's trajectory and alleviate election-related anxieties, we might experience a better environment within the banking sector. Combined with our ongoing expansion of sales headcounts, this should support lending growth rates that are at or above market levels.

Your next question comes from the line of Ebrahim Poonawala of Bank of America.

I guess just a couple of follow-ups. One, maybe starting with loan growth. Tim, you mentioned 2 things. 1, from a Fifth Third standpoint, are we still lapping derisking or running off the Shared National Credit book? I think it's down 11% year-over-year. Just give us a sense of is that book going to continue to decline as you kind of reduce your exposure there? And secondly, in your business, are you seeing any competition from non-bank, direct lenders, private credit that looks different today than it would have three, four, five years ago?

Yeah, sure. Good question. So we should be at the inflection point on the sort of impact of the RWA guide by the end of the year. I think we talked last year about the fact that we were trying to get everything done in the fourth quarter. There would be a little bit of a spillover into the first as you just got through normal timing. But we should be reaching the inflection point on that front where you don't have the less derisking, you bring in a focus on what would the profitability, the unit economics of those relationships look like in a world where you had a different perspective on capital levels and the value of corporate cash that comes along with some of those larger relationships. As it relates to private credit, we do see it at the margins, principally in leveraged lending space. What I would tell you has happened is their focus on less structure, faster execution then has a little bit of a bleed over in other areas. And there is no question that the things that some of the private lenders are willing to do are not in line with the way that we want to run our portfolio. I think it was the Financial Times, the journal, but there was a piece about a week ago in the paper that talked about payment-in-kind or where I come from negative amortization lending was between 1/4 and 1/3 of the portfolios at most of the major private credit shops. That is definitely not something you would ever see at Fifth Third in an environment where the economic backdrop is benign and where you don't have a large percentage of your companies operating at distressed levels. It's just odd to see that amount of PIC lending going on. So they're willing to do those things and we're not. By definition, they're going to scrape the most indebted companies out of the banking sector.

And Ebrahim, it's Bryan. We put a little bit of detail on the PIC portfolio on Slide 24 of our slide. Yeah, $31 billion portfolio, it's down 11% year-over-year. So we are still facing lapping some of that headwind.

But was the point that we are at a point where the 31.2 is close to where this book should bottom out?

I think you're going to continue to see some runoff, but we do think you're getting back to the point where you'll start to see some production coming in and offsetting it. It may not be exactly at the floor, but the decreases should definitely be moderating.

The CIB pipeline, the middle market pipeline, which I think we referenced in response to Mike's question is that an all-time record level and the CIB pipeline, which would be where the majority of the Shared National credits would originate is at the highest level it has been in the year. So you're seeing the turn there, which should support the decline in runoff and increase in production and then inflection point in loan balances.

And just the other question on capital allocation means your stock has done well. I'm not saying it's expensive, but it stayed well on tangible book when you look at it. Why not hold excess capital as opposed to picking up the pace of buybacks given that we might be in an improving economy, if that happens more capital good for growth. If it's worse it adds defensibility. Just talk through in terms of how you go through capital allocation and the whole discussion or analysis around holding on and building some more excess dry powder as opposed to accelerating buybacks from here?

Yes. I mean, we feel really good about the earnings trajectory of the company. And we think given that, we feel like our stock is continues to be a good bargain for us, and we think it's a good investment for us from a corporate perspective. We look at a couple of things on that front. We're generating a lot of capital every quarter. And so that actually gives us the ability to be very dynamic with our capital allocation decisions. We have a lot of confidence that we're going to be able to generate the capital necessary for organic growth. And then if we wanted to slow down capital distribution via share buybacks because we see more opportunity or we need to get more defensive, we would be able to do that. Another component is just when you think about our industry and the 10% cost of equity, sitting on excess capital is a high cost for our shareholders. And so being in a position as we are right now and being able to go ahead and make some decisions and deploy at a time where we continue to feel really positive about our trajectory as a company and knowing that we have the flexibility with the income profile and the stability that we have going forward to generate the capital when we would need to and if we think different opportunities would present themselves. That's really the thought process on how we're thinking about capital allocation from here.

Your next question comes from the line of Erika Najarian of UBS.

My first question is for you, Bryan. So you indicated that your deposit beta so far on the recent cuts are in the mid-40s. As we think about the speed of index deposit repricing and then retail, could you give us a sense of what you think the cadence could be as we go through the next five quarters? So a few of your peers have noted that it might not be a straight-line, you know, path to the terminal beta given how quickly corporate can reprice and, you know, retail has sort of been awakened, so to speak, in terms of higher rates. So if you could speak to that and maybe speak a little bit to as you think about your deposits, you know, we haven't seen a neutral rate that's not zero for so long. So maybe help us get a sense that if we get a neutral rate of, you know, 2.75% or 3%, what do you think your natural spread is or natural deposit rate is in that environment?

That's definitely an interesting question. The shape of the curve will play a significant role in this scenario. When considering how quickly the beta will come through, commercial deposits will arrive rapidly, while retail deposits will take a bit more time. The two main factors influencing this are the guarantee periods on promotional offers, which typically last between 45 and 90 days, and the maturities of our CD portfolio. As I mentioned earlier, 75% of our CDs will mature by the end of the first quarter. To achieve the cumulative beta we've been targeting, around the high 50s, it will take us approximately two quarters, as CD repricing will be a factor given that we have $13 billion on the books. It's quite challenging to estimate from a natural level perspective. Currently, we're at peak rates, around a 2.99 level, with our peak interest-bearing core deposit cost compared to a 5.50 Fed funds level. We anticipate some compression in that spread, but maintaining a deposit spread of 150 to 200 basis points seems realistic. A key question is how demand for loan growth evolves over time. If we have a favorable curve shape and opportunities for loan growth, it could enable us to be more competitive in attracting deposits, thereby enhancing our net interest income. Ultimately, our focus is on managing net interest income and profitability, and those are the trade-offs we will consider.

Got it. And my second question is for Tim. Tim, the feedback from investors has always been quite positive in terms of the forward-looking way of how you look at the world. And as we think about 2025, I guess, it doesn't feel like given record NII and your fee income should benefit if activity levels come back in general in an even bigger way next year. It feels like the expense run rate that you posted year-over-year this quarter to 3% sounds and feels more appropriate. Obviously, assuming that revenues grow above that. As we think about 2025, is it right for us to until we get guides from you, put growth in expenses as a placeholder? And as we think about 2025, what are the big projects that you feel like you're ready to retackle and revisit that you may have pulled back on in ‘24 because the NII dollars were coming down?

Thank you for your comments and question. I value both. I've mentioned before that Cincinnati has a reputation for hustle, a trait embodied by Pete Rose who always sprinted to first base on a walk. We aim to incorporate that mindset in our operations, addressing future challenges now rather than waiting for the right conditions. This proactive approach contributed to our recent improvements in net interest margin before most competitors. We observed a positive change in net interest income in the second quarter as well, similarly ahead of peers. We achieved real sequential operating leverage this quarter compared to last and anticipate continuing this trend next year. Importantly, we did not hold back on vital investments. We are on track to open over 30 branches this year while managing expenses, continued our platform modernization efforts, and supported our commercial payment acquisitions from last year. Our investments in hiring have been significant, especially in sales for both wealth management and middle market sectors. We expect to maintain similar initiatives next year and use efficiency measures to help fund these investments. We see strategic planning as a process of allocating resources rather than merely requesting investments. While I can't provide a specific figure for 2025, you can expect an annualized expense growth rate around 3% over time, which would serve as the starting point if you consider both favorable and challenging periods in the past.

Your next question comes from the line of Manan Gosalia of Morgan Stanley.

I wanted to ask about index deposits. Can you talk about how they've behaved over time? So I guess the question is that as rates fall and the rates on those index deposits fall, is there a chance that some of those move into other deposit products with exception pricing? Or does that not really happen based on historical experience?

You'll see some people that try to do some negotiations on deposit costs. Those are things that always occur, but those are things that we are typically able to manage fairly well. The reality is you get paid a better spread as a depository on an index deposit because you're taking the risk ultimately on market movements. Whereas on a managed account, it's typically a wider spread because we have more ability to manage it. So we it's something that we've had good experience with behaving, controlling it through our pricing and through our discipline around that process. We're not overly concerned about reverse migration from index back into managed rates being a headwind from a beta perspective.

Got it. And then maybe just separately on credit, on Slide 28, you're showing NCOs and NPAs reaching normalized levels. I know you noted that you're not seeing any signs of credit weakening. Can you give us some more color there? What gives you some confidence that things are just normalizing here? Is it that rates are going down, so that helps you on the credit side? Is it just what you're seeing on the roll rates? Maybe what helps this to stabilize from here?

Yes, it's Greg. I'll take that one. A couple of things, you look at our delinquency, the delinquencies continue to be at all-time low levels. Our criticized assets actually went down by $8 million quarter-over-quarter. We had the increase in NPAs. On the commercial side, those were driven by five names and five different industries. We've been very consistent in talking about a very diverse portfolio, and it continues to be very diverse. On the consumer side, we're seeing a little bit of softness on dividend, see a little bit of softness in the RV portfolio. When you look at the 2022, 2023 origination vintages, they're underperforming across many of the consumer asset classes. We see the same thing in the portfolio, specifically in dividend and RV. But the securitization data from other originators will tell you the same thing. We're actually outperforming those indexes, that securitization data by almost 50, 60 basis points. And so I would expect dividend to be a little bit elevated for the next quarter or two, but I'm highly confident that we will work through those vintages, and it comes back down to more normalized level in that 125 level. So we're just not seeing anything within the portfolio, it's commercial or consumer that's causing additional concerns, it's been pretty stable. Our borrowers have continued to behave. We see the commercial real estate portfolio. We've got virtually no delinquencies, very minimal non-performing assets in that commercial real estate portfolio. So across the board, that diversification, that strategic play of building out a through-the-cycle portfolio has played well for us, and I would expect that to continue in the future.

Your next question comes from the line of Matt O'Connor of Deutsche Bank.

Good morning. On Slide 10, you've got some pie charts here you showed before just showing the mix shift from the Midwest to being more balanced. And I guess the question is, as we look out the next few years, you show the split getting to 50-50, which is still a pretty meaningful reshift from here. So how do you get there? Is it simply harvesting what you've done, a combination of harvesting and building? Is there a buy component of that as well?

Yeah, there's no buy component in there. That's the old fashioned way, which is one new branch at a time and the right marketing and product strategies to support the increase in distribution. So if you look at the branches we've built, Matt, they're performing very well. We've talked in the past about the fact that the performance at this stage and having built more than 100 of them is pretty predictable. And they reach a point where they sort of saturate their catchment area in about seven years, right? They break even within two and then they make this pivot to continuing growth. So the average age of the de novo right now is going to be like call it two years, two and a half years at most. So there is a five-year tailwind we'll get from the 100 that are already in the ground and operational. Plus we have been building about 30 to 35 a year; that number should move up into the sort of 40 to 50 range on an annualized basis, just based on what we have in the pipeline. And as those branches come online, you will see that mix shift play out first in the allocation of the physical distribution and then behind that over time as they mature, the mix of the deposit base on the retail side overall.

That's very helpful. A lot of the progress you've already made will significantly impact the results.

It will. I don't see it short over your retail deposit growth that I cited from the FDIC summary deposits. It's visible there.

Thank you. And then, just separately, I know there's been a lot of discussion on net interest income and kind of drivers of the NIM. And I'm sorry if I missed it, but have you guys talked about this concept of normalized NIM, looking at a few years as you get the fixed-rate asset repricing and whatever rates do break the forward curve, any concept of normalized NIM?

Yeah. I mean, that's, again, it's another tough one. Because what does the environment look like? What does the shape of the curve look like out in the future? If you just take the cash position that we're holding today, we're at we're north of $20 billion of cash. We're up almost $9 billion year-over-year. Every $1 billion of excess cash that we're holding is a basis point to have on NIM. So just getting $10 billion out over the next year and hopefully having some opportunities to deploy that into the loan portfolio that could add 15 to 20 basis points to our NIM alone. We're going to see NIM growth from here just with the continued repricing of the portfolio. From a fixed-rate asset perspective, that will continue to take that just takes a little bit more time to play out. But if you get a little bit of relief on the front end, a more normalized curve, it's front and down, I mean, it's not unreasonable to think we could be talking about getting back to what was 315 to 325 NIM in a reasonable time horizon.

Your next question comes from the line of Christopher Marinac of Janney Montgomery Scott.

I wanted to ask about some of the large banks who have been placed under regulatory orders this year. Does that create new business opportunities for you beyond your already organic pipeline?

I mean, I think any time there is a limit on someone else's ability to grow, it means that the rest of the industry has to have the capacity to be able to absorb the growth in the market. So I guess in that sense, yes, just tactically. I think more strategically, the more disciplined you are about the way you run your business, the better you do in moments when there's any sort of disruption somewhere else, right? So I wouldn't wish significant regulatory problems on anybody. There’s no fun to work through, but they do tend to create opportunities at the margins for other banks that are in a strong position and have the ability to grow in an environment where others may not.

Great, Tim. Thank you for that. And just a quick follow-up on, sort of adjusted returns over time. Does lower interest rates help you get your returns or does it make it more challenging?

Lower interest rates, as long as that comes along with a normalization of the yield curve, that would certainly be very helpful to returns over time. A low flat curve is a challenging environment for the banking system.

We have a follow-up question from the line of Mike Mayo of Wells Fargo Securities.

Hey. I was just wondering, this is a big picture question. You guys give the sense that you're investing more for growth than others. Do you have any metric on how much you make in your organic investments and what sort of returns you get on those? I'm thinking about the Southeast branches or wealth or commercial payments and it kind of goes back to that earlier question, maybe you shouldn't buy back so much stock if you have so many opportunities for growth or high-class problem if you get there?

Yes, we consider various factors in our investment strategy. A key comparable across different investment types is the internal rate of return and the time to breakeven. For our branches in the Southeast, the internal rate of return has been between 18% and 20%, and these branches typically reach breakeven in a couple of years. In the case of our smaller acquisitions to enhance commercial payments, we aimed for internal rates of return in the 20s due to the nascent nature of those businesses, which makes them less predictable compared to established branches where we have a clearer outlook on future performance. Overall, we feel positive about achieving returns in the 15% to 25% range, although this is subject to the risks associated with execution. The more uncertain or new a strategy is, the higher the expected return. Conversely, established strategies generally carry lower execution risk. I don't believe we are limiting our investment rate. For instance, in the Southeast, JPMorgan has opened more branches than anyone else in the last five years, with around 180, followed by Fifth Third and then Bank of America, leaving a significant gap to other competitors. It’s worth noting that we are smaller than JPMorgan and Bank of America. We think we are being suitably aggressive with our investment rate in that region. At this point, I don't see a scenario where we would decide against buying back stock without a clear alternative use for that capital in our organic growth strategy.

And Mike, we are accelerating the investments, as Tim mentioned, on improving strategies. It's part of why we're going from almost 20 to 30 branch builds a year to 50 plus branch builds a year. So we have more confidence that gives us point of view of an area we want to invest in. And then the other limiter for us is always going to be the analysts that are worried about positive operating leverage because that's the trade-off we care about as well.

That concludes our Q&A session. I will now turn the conference back over to Matt for closing remarks.

Thank you, and thanks everyone for your interest in Fifth Third. Please contact the Investor Relations department if you have any follow-up calls or questions. Operator, we may now disconnect the call. Thank you.

This concludes today's conference call. You may now disconnect.