Participants

Matt Curoe; Senior Director- Investor Relations; Fifth Third Bancorp

Timothy Spence; Chairman of the Board, President, Chief Executive Officer; Fifth Third Bancorp

Bryan Preston; Chief Financial Officer, Executive Vice President; Fifth Third Bancorp

Greg Carmichael; Chairman of the Board, President, Chief Executive Officer; Fifth Third Bank National Association Representative Office UK (London Branch)

Scott Siefers; Analyst; Piper Sandler

Gerard Cassidy; Analyst; RBC Capital Markets

Mike Mayo; Analyst; Wells Fargo Securities

Ebrahim Poonawala; Amalyst; Bank of America

Erika Najarian; Analyst; UBS Equities

Manan Gosalia; Analyst; Morgan Stanley

Matt O-Connor; Analyst; Deutsche Bank

Christopher Marinac; Analyst; Janney Montgomery Stock

Presentation

Operator

Thank you for standing by. My name is (inaudible) and I will be your conference operator today. At this time. I would like to welcome everyone to the Fifth Third Bancorp, third quarter, 2024 earnings conference call. (Operator instructions)
I would now like to turn the conference over to Matt Curoe, Senior Director of Investor Relations. You may begin.

Matt Curoe

Good morning, everyone. Welcome to Fifth Third, 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 Carmichael 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.

Timothy Spence

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 second quarter 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 should 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 FDICs 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 and year-over-year retail deposit growth measured on a cap 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 JP Morgan. In our Southeast markets, we maintained our number six overall position and significantly closed the GAAP to our top five goal.
We grew retail deposits nearly 16% year-over-year and gained meaningful market share in 14 of our 15 focus MFAs 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 or 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 head count 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. New line in 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 discipline 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 of purchases.
Even with these actions, our CET1 ratio increased to 10.8%. This will allow us to increase share of purchases 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 cross currents including reversals and interest rate rallies, volatility and jobs reports, stickiness and inflation and geopolitical uncertainty could produce a wide range of potential economic outcomes.
We will continue to manage the 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 [month].
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, you'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 (inaudible) 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.

Bryan Preston

Thanks Tim and thank you to everyone joining us today. We're pleased with 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. That 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 accrue capital while we're purchasing shares and raising the quarterly common dividend 6%. Our CET1 ratio grew to 10.8% at the end of the quarter and our tangible book value per share inclusive of AOC I 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 Mastercard Interchange litigation and some severance recognized during the quarter as we continue to work to drive efficiencies and automation. That 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 with 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 points of pick up 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 [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 impact 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 and traditional treasury management products, our managed service offerings and a new line. And wealth, our AUM increased to $69 billion up 21% over the prior year driven by strong inflows from Fifth Third wealth advisers and market performance.
Fees of $163 million 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 and 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 pure 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 NTAs 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 non accrual 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 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 bill. We continue to utilize Moody's macroeconomic scenarios when evaluating our allowance and made no changes to our scenario waitings.
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 AOC I 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 AOC I 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 fourth quarter, 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 your 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 mixed demand in other asset classes.
Fourth quarter, adjusted non interest income is anticipated to rise 3% to 4% compared to the strong third quarter, 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 PP and our 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.

Matt Curoe

Thanks Bryan. (Operator instructions)

Question and Answer Session

Operator

(Operator instructions)
Scott Siefers, Piper Sandler.

Scott Siefers

Morning, everyone. Thanks for taking the call. Hey, I was hoping you might be able to discuss sort of just 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 data and sort of how that evolves over time, given that you've had, you've been very transparent about it and have an optimistic outlook there as well.

Bryan Preston

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 pure 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 after seeing play out.
And then also then to start to see when that has been fully realized that movement and the data 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 beta 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 maturity about 75% of our CD portfolio (inaudible) between now and the end of the 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 and 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'll be a big driver of the increase NII from here.

Scott Siefers

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, maybe a bit more optimistic on what lending demand might look like given some of the signs of life you referred to in your (inaudible).

Bryan Preston

Yeah, we are seeing some more activity there. We don't need need heroic loan growth to deliver record NII The, how the NI I is delivered is obviously going to be very environment dependent. So shape of the curve is going to matter. We do expect to start to see some tailwinds on the loan growth side, given what we've seen.
The decreases from a commercial perspective, we think for the most part are behind us and we're seeing nice tailwinds in the consumer businesses that will be a big driver of how we transition into a long growth from here. So, we would like to see a little bit of loan growth that certainly would be helpful in terms of delivering that record NII. But we feel good about the trajectory from here.

Scott Siefers

Got you. Perfect All. Thank you very much, Bryan.

Operator

Gerard Cassidy, RBC Capital Markets.

Gerard Cassidy

Hi, Tim, Hi, Bryan.

Bryan Preston

Morning.

Gerard Cassidy

Can you guys, I posed this question to one of your peers yesterday when I framed it out, part of the response was it was a rosy outlook. So I'll give that as a caveat to you. But can you share with us, I'm curious and, I'm not asking for specific '25 guidance, but if the Fed continues with dropping rates the way they appear to be in terms of the forward curve and their own outlook.
And we actually go from an inverted yield curve that we've lived with for over two years now to a positively sloping curve with the front end drops to [3, 3.5], the long end stays around [4 to 4.5]. Can you share with us, what kind of impact that may have on your net interest income growth for '25?

Bryan Preston

Yeah, obviously, Gerard, we'll give more detail in 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 will be, we do continue to have confidence that we will get cost out. And the thing that's not reflected in the 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 shape curve, there would be even more benefit than from the fixed rate asset we're pricing. And we would also have a little bit of opportunity to get some, a little bit more economics out of duration and 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 (inaudible)

Timothy Spence

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 Feds actions and the data would tell us that is realistic. It probably feels rosy because we just haven't seen in an environment like that over a very long time.
It was a very long time period, 20 years or something like that, right? Either we had absolute rates at zero on the front end and a little bit of slow, but we 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, that front end comes down, I think our view that 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, 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 of 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.

Gerard Cassidy

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 the securities portfolio for the end of '25.
Can you remind us in an environment where you know what the (inaudible) end game 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?

Bryan Preston

Yeah, our target right now in normalized environments, we like being in say, a 35% to 45% range from a dividend payout ratio perspective. The share buyback ultimately is driven by how much capacity we have relative to organic growth. Because we do our preference would be to continue to invest on the organic front when we see good risk adjusted returns.
And then with what's left, we manage capital via the share buybacks. Continue to feel good with the capital generation that we've been seeing that $200million or $300 million of share buybacks feel about the right level.
This quarter, we saw a little bit of benefit in our WA, which allows us to potentially have a little bit more share buyback, but with some loan growth coming in next year, hopefully we'll be talking about a little bit lower buyback over time just because we've got a lot more organic opportunities to invest in.

Gerard Cassidy

Very good. Thank you, guys.

Timothy Spence

Thank you.

Operator

Mike Mayo, Wells Fargo Securities.

Mike Mayo

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 pay downs? And why are you seeing more of this? That it sounds like you said there's signs of life, but you know, is it bigger than a bread box sort of what you think might come ahead? Thanks.

Bryan Preston

Oh yes, thanks Mike. The paydowns for the quarter were around say, $900 million 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 moved down. That 1% decreases, another say $800 million.
So the combination of those two were decent driver ultimately from a overall average loan growth and then the period long 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 a very robust capital markets activity in the second quarter, 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.

Mike Mayo

And as far as, if you had to (inaudible) kind of expectations of, for the next several quarters over the next year, are you willing to give us any number yet? You think it'll be more than 1% or 2% or I mean, I'm sure you're going to--

Bryan Preston

We get average loan growth guide, 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 level. 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.

Timothy Spence

Yeah, I, I think, Mike, it's, it's Tim, The one thing I maybe I'd add here, I am of the view that the factors that would lead to a more favorable environment for loan growth inside the banking system are potentially in front of us, subject to one who wins the election and probably more importantly what of the things that both candidates are campaigning on actually make their way into policy and how they elect to govern.
What we hear from clients when I'm out in the field is that, it's one, the elevated level of rates have been challenging because there's a capital investments that don't make sense, just don't pencil out in an environment where rates are higher.
Two, because they are uncertain about what we're going to see in the election. They have been using cash flow from the businesses to pay down debt in lieu of investing it in another place.
And three, you have this big build up in the inventory in the '21, '22, '23 timeframe associated with people moving. I think we refer to it as the shift from just in time to just in case in inventories. As rates came up, we have seen, I think the term for that one of our distribution clients, our wholesale distribution clients used (inaudible) last week with destocking.
So less inventory, less bill material across supply chains which in turn, and a focus on more inventory terms just getting the balance sheet to work harder, which reduces the revolving credit borrowing needs. That can't go to zero. So you're not going to have a headwind there. If interest rates come down and more M&A and capital investment starts to make sense that hasn't worked, you should see a pick up on that front.
And then if we continue to see, more certainty as it relates to the trajectory of the economy and have the uncertainty attached to the election out of the equation, I think we could see a better environment across the banking system and that coupled with the sales head counts that we continue to make, we referenced that in the prepared remarks should support the, at to above the market growth rate on the lending side of the equation that Bryan referenced earlier.

Mike Mayo

Great. Thank you.

Operator

Ebrahim Poonawala, Bank of America.

Ebrahim Poonawala

Good morning. I guess just a couple of follow ups. One maybe starting with loan growth. Tim, you mentioned two things, one from Fifth Third standpoint. Are we still lapping de risking or running off the shared national credit book? I think it's down 11% year over year. Just give us your 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 would, that looks different today than it would have 345 years ago?

Timothy Spence

Yeah, sure, good question. So we should be at the inflection point on the sort of impact of the RW a diet by the end of the year. We, 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 spill over 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 you know, that I need less de risking than 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 the corporate cash that comes along with some of those larger relationships and as it relates to private credit, but we do see it at the margins principally in the 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 you know, the things that some of the private lenders are willing to do or not in line with the way that we want to run our pro 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 a quarter and a third 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 you know, a large percentage of your company operating at distress levels. It's just odd to see that amount of pick lending going on. So I, you know, 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.

Bryan Preston

And Ebrahim, it's Bryan, the we put a little bit of detail on the SNC portfolio on slide 24 of our slide and you know, $31 billion portfolio, it's down 11% year over year, but we are still facing lapping some of that headline,

Ebrahim Poonawala

But what was the point that we are at a point where the $31.2 billion is close to where this book should bottom out.

Bryan Preston

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

Timothy Spence

The CIB pipeline, the middle market pipeline, which I think we referenced in response to Mike's question is at 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 a year.
So that you're seeing the turn there which should support the decline and run off increase in production and an inflection point loan balances.

Ebrahim Poonawala

And just the other question on capital allocation means your stock's 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.

Bryan Preston

Yeah, I mean, we feel really good for one 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. You know, 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, you know, 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 degenerate 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.

Ebrahim Poonawala

Noted. Thank you.

Operator

Erika Najarian, UBS.

Erika Najarian

Hi, good morning. My first question is for you, Bryan. So you indicated your deposit beta so far on the recent cuts are in the mid-40s. You know, 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 data given how quickly corporate can reprice and you know, retail has sort of been awoken, so to speak in terms of higher rates.
So if you could speak to that and maybe speak a little bit too, if 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 of if we get a neutral rate of, you know, two and three quarters or 3% what do you think your natural spread is or natural deposit rate in that environment?

Bryan Preston

Yeah, I mean, that is a obviously a very interesting question. The shape of the curve is going to matter a lot in that scenario as well. You know, when we think about the, when we think about the pacing of how the beta will come through, like you said, it is the commercial deposits will come through very quickly.
The retail takes a little bit longer, the two primary drivers for us on that, it's the guarantee periods on the promotional offerings which tend to be between say 45 and 90 days. And then it's the maturities of your CRE portfolio.
And as I mentioned there earlier, 75% of our CRE will mature between now and the end of the first quarter. So to get the rest of the beta and get to that kind of cumulative data that we have been targeting where, you know, high 50s kind of be for us, it'll take about two quarters because the CD with pricing is going to be a component of that.
Now that that's $13 billion book from a natural level perspective, I think that is, that is really tough to estimate. I mean, we're sitting here at peak rates, we were at a 299-ish was our peak interest bearing core deposit cost versus a 550 FED funds level.
You know, we would expect to see a little bit of compression potentially in that spread, but being able to maintain you know, 150 basis points to 200 basis points of deposit spread. Seems like a potentially achievable scenario. One big question on that Erica, another one that would obviously be a big question is just where, where does the, how does the magnitude of long growth change over time.
And you've got a decent curve shape back to Gerard's question and you've got opportunities for long growth, you're going to have some opportunities to be a little bit more competitive to raise more deposits and ultimately drive better NII. And at the end of the day, we're not managing the deposit data, we're managing the NII and profitability trajectory and those are the decisions in the trade-offs we make.

Erika Najarian

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, it feels like given record and NII, and you know, your, 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 it feels more appropriate. You know, obviously assuming that revenues grow above that, you know, as we think about 2025 is it right for us to you know, until we get guide 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 re tackle and revisit that you may have pulled back on in '24 because the NII dollars were coming down.

Timothy Spence

Yes, I am. So, thank you -- that I think there was a compliment and a question in there and I appreciate both. And I, you've heard me reference, I think the old saying that Cincinnati invented hustle in the past that dates back to, Pete Rose's nickname and the fact that he sprinted to first base on a walk, I think that ethos is, I think a part of the way that we try to run the company, right is to sprint to first on a walk.
So we try to work on next year's problems in the year after that this year as opposed to waiting for that environment to materialize. And that part of why I think we made the NIM turn right, our NIM trough and then grew in the first quarter before most of our peers, the NII inflected positive in the second quarter over the first quarter, which was before most of the peers.
We got to real sequential positive operating leverage this quarter versus the last quarter. And we're saying we'll get there year over year next year. Like none of that involved us holding back on investments we thought were important to the company or would make sense, right? We have, we're going to have built 30-plus branches this year in an environment where we were trying to manage expenses.
We continued forward on the platform, modernization, the acquisitions we made and fin on the commercial payment side of fintech companies last year, we've continued to feed this year. And the hiring as I mentioned on the sales force and both in wealth management and in the middle market have been pretty significant.
So you should expect us to do the same sorts of things next year and to expect the company through other efficiency initiatives to help self-fund you know, the investments along the way. And we don't view strategic planning as an investment request process.
It's principally a resource allocation process. So I don't know that I helped you with a specific number for 2025. You have to wait till January to get that. But the annualized expense run rate of the bank over a period of time has been call it 3% if you look at it.
So that's certainly if you were going to use the past an average through more benign periods and more challenging periods would be where you'd start.

Erika Najarian

Got it. Thanks so much.

Operator

Manan Gosalia, Morgan Stanley.

Manan Gosalia

Hey, good morning. 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?

Bryan Preston

But you'll see some people that try to do some negotiations on deposit cost, that's 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 depositor 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 have something that we've had a 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 in the manager being a headwind from a beta perspective.

Manan Gosalia

Got it. And then, you know, maybe just separately on credit. On slide 28 you're showing NCOS and NPAS reaching normalized levels. And I know you noted that you're not seeing any signs of credit weakening. Can you give us some more color there? You know, 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 road rates. Maybe, you know what helps us this to stabilize from here.

Greg Carmichael

Yeah, it's Greg, I'll take that one. A couple things you look at our delinquencies or delinquencies continue to be at all time. Low levels. Our criticized assets actually went down by $8 million quarter over quarter. We had, we had the, the increase in NPAS.
On the commercial side, those were driven by five names and five different industries. We've been very consistent 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 '22, '23 origination villages, they're underperforming across many of the consumer asset classes. We see the same thing in the portfolio specifically in dividend and, 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 basis points, 60 basis points. And so I would expect a dividend to be a little bit elevated for the next quarter or two.
But, but then I'm highly confident that we'll work through those vintages and it comes back down to more normalized level and that, that 125 level. So we're just not seeing any anything within the portfolios commercial or consumer that's that causing additional concern. It's been pretty stable.
Our borrowers have had continued to behave. You see the commercial real estate portfolio. We've got virtually no delinquencies, very, very minimal non-performing assets in that commercial real estate portfolio. So across the board that diversification, that strategic play of building out and through the cycle portfolio has played well for us and I would expect that to continue in the future.

Manan Gosalia

Great. Thank you.

Operator

Matt O-Connor, Deutsche Bank.

Matt O-Connor

Good morning. On slide 10, you've got some pie charts show you showed before just showing the mid 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 re-shift 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 bi-component of that as well?

Timothy Spence

Yeah, there's no by 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 built man, they're performing very well. We 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 [DeNovo] right now is going to be like call it 2 years, 2.5 years at the 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.

Matt O-Connor

Okay. So that's super helpful. So a lot of maturing of what you've already done, we will move the needle quite a bit. And then just and then just you can see it--

Timothy Spence

In the year over year deposit growth that I cited from the FDIC summary deposits. It's visible there.

Matt O-Connor

Right here and then just separately, I know there's been a lot of discussion on the 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 like normalized NIM? Looking at a few years that you get the fixed rate, asset re price and whatever rates do break the flow curve and any concept of normalizing them.

Bryan Preston

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, the, the cash position that we're holding today, we're, you know, we're at the $20 billion of cash, we're up almost $9 billion year over year. Every billion dollars of excess cash that we're holding is a basis point to have on them.
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 basis points to 20 basis points to our name alone. We're going to see them grow 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 of a more normalized curve, get front and down, I mean, it's not, it's not unreasonable to think we could be talking about, you know, getting back to what was a 315 to 325 then into a reasonable time horizon?

Matt O-Connor

Okay. That's helpful. Thank you very much.

Operator

Christopher Marinac, Janney Montgomery Stock.

Christopher Marinac

Thanks. Good morning. 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?

Timothy Spence

Hi, I mean, I think any time there's 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. They're 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.

Christopher Marinac

Great Tim, thank you for that and just a quick follow up on. So I said returns over time. Does lower interest rates help you get your returns or does it make it more challenging,

Bryan Preston

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

Christopher Marinac

Great. Thank you, Bryan. Appreciate it everybody.

Operator

Mike Mayo, Wells Fargo Securities.

Mike Mayo

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 think I'm thinking about the Southeast branches or wealth or commercial payments. And it kind of goes back to our earlier question, maybe you shouldn't buy back so much stock if you have so many opportunities for growth or you know, high class problem if you get there.

Timothy Spence

Yeah, I mean the we look at all of these things, the easiest comparable across the different investment types is probably just IRR mic, right? And time to break even. So the IRR of the branches in the Southeast has been running in the 18% to 20% range and the time to break even has been a couple of years, right? If you were to look at the small acquisitions we've made to support commercial payments, we were targeting IRRs in the 20s in those cases, in part because you had a more nascent business and less predictable after then, you know, when you built 100 branches and you know what you're going to get out of the next location that you build.
So I think in general, we feel really good about anything that we can get done in that sort of 15% to 25% range subject to the execution risk that's attached the more uncertain, the more nascent the strategy, the higher the return you would expect to get out of it. And the more proven strategies, you know, obviously the lower the execution risk premium that you would need to place on them.
I don't think we are constraining the investment rate. Like if you just look at the Southeast, JP Morgan has built the most branches down there over the course of the past five years, they're at 180 or something like that. I think fifth third is number two and I believe [Bofa] is number three. And then there's a pretty wide GAAP between that and everybody else. And I know, I don't have to tell you that we're a little bit smaller than [B of A] and JP Morgan.
So we -- I -- we think being appropriately aggressive in terms of the investment rate down there. And at least at the moment, I don't know that if we said, hey, we're not going to buy back stock. We don't have an alternative use for that capital on an organic basis that we would be thinking you know that we would deploy it toward

Bryan Preston

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

Mike Mayo

And just to push back on that last point, I mean, it's I hear you if you get those sorts of IRRs and you're accelerating your branch build, but it comes at a time when I think some of the Southeast competitors have, you know, woken up, recovered, like you less unlike securities losses going from defense to offense, you have that change for the last few years.
And you also have the likes of some of those big banks that you mentioned with spending so much more in technology and digital. So don't you think it might be tougher in the next few years and it's been in the past few years?

Timothy Spence

Well, I don't know, I don't think that the Southeast was uncompetitive the last five years. Right. I think that what you're just you're constantly looking at is are we making the right set of investments given the competitors that we have and our value proposition relative to others? I completely agree. The amount of money that is getting deployed into technology investment on the part of the large banks is eye popping.
But if you look at the value proposition, like go pull up the consumer lead consumer checking account offering for any of those large banks and for Fifth Third or some other regional and tell me how that materialized into some substantially better value proposition.
I actually think in many cases, what you would see is the opposite is it's been the regionals who led on consumer friendly product innovation. It's definitely been through Fifth Third, but it's not just be Fifth Third, in terms of the offerings there so that we are not running the bank to be able to take share in uncompetitive environments, we run the bank to be able to take share in very competitive environments.
And you know, I expect the level of competition is going to stay high. Not that it's going to get better or for that matter and get worse.

Mike Mayo

All right. Thank you.

Timothy Spence

Thank you.

Operator

That concludes our Q&A session and then I'll turn the conference back over to Matt for closing remarks.

Matt Curoe

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. Operating room, now disconnect the call. Thank you.

Operator

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