Q1 2021 Fifth Third Bancorp Earnings Call

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all off the phone keypad, if you require any further assistance to hand the conference over to your speaker today director of investor relations.

Thank you. Good morning, and thank you everyone for joining us today. We'll be discussing Fifth Third Financial results for the first quarter of 2021. Please review the cautionary statements in our materials, which can be found in our earnings release and presentation with these materials contained reconciliation to non-gaap measures along with information pertaining to the use of non-gaap measures as well as forward-looking statements about Fifth Third performance. We undertake no obligation to do not expect to update any such forward-looking statements after the date of this call this morning. I'm joined by our CEO Greg Carmichael CFO Jamie Leonard president, Tim Spence and chief credit officer. Richard Stein following prepared remarks by Greg and Jamie will open the call for question.

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

Thanks, Chris and thank you for joining us this morning. Hope you are all well and staying healthy or today reported first-quarter. Net income the $690 billion dollars from 93 cents per Chef. We can cheat are positive momentum in the past several quarters. And once again delivers strong financial results in the first quarter these strong results reflect record commercial and see Revenue continued success generating consumer household growth and a strong underlying net interest margin.

Our performance reflects focused execution our key strategic priorities we continue to benefit from the diversification resilience of our feed based businesses and Retail mortgage commercial and wealth and asset management, which are generated strong results in helping to cushion the impact of lower short-term rates. We have maintained our discipline client selection and conservative understanding which are evident in our credit metrics or the quarter. We recorded a benefit in our provision for credit losses reflecting a stronger economic Outlook as well as historically low net charge-offs which included improvements in both our commercial and consumer loan portfolios.

Addition to music read losses are criticized assets.

Npl is also improved sequentially non-performing loans decreased 11% for the prior quarter with npl influence at the lowest level since the third quarter of 2019 off our balance sheet earnings power remained very strong as a result a robust cet1 ratio further improved the 10.5% this quarter r61 Target remains at 9.5% as we have stated many times before we are focused on deploying capital for organic growth opportunities evaluating non-bank opportunities where it fits our strategy game and share repurchases based on our current dividend trailing four quarters of net income. We have the capacity to repurchase shares up to three hundred forty-seven million dollars in the second quarter. After that. We have more flexibility in terms of how and when we return Capital to shareholders under the framework.

Jamie will provide more details on our Capital plan.

Improve macroeconomic data in Outlook or line with our strongest overall commercial Loan Production since before the pandemic furthermore. We have seen our pipeline strength and considerably over the past 90 days with significant strength and Manufacturing Renewables Healthcare and Technology partially offset by Mew demand and Leisure and hospitality and cream Dakshin was offset by elevated payoffs and pay Downs combined with another 1% decline in line utilization. We are retained a customer in their Court banking relationship as virtually none of our commercial payoffs. When the quarter where the result of client attrition additionally pay Downs in our corporate bank largely reflected clients tapping the capital markets where we benefit package from additional Capital Market fees.

Given the strong production Trends firming Pipeline and retention of the client relationship. We remain well positioned to take advantage of a more favorable economic backdrop declined to execute their growth plans in a second half of 2021. We will continue to assess the implications of client supply chain constraints as we progress through the year consumer employment savings is being trans also remains oil given the fiscal stimulus tempt a man and a gradual reopening of the economy rather footprint.

Despite the overall economic recovery over the past several quarters. I recognize that not everyone in our society has benefited equally this is why I'm very proud that in addition to producing strong financial results. We have also continued to take deliberate actions to improve the lives of our customers and well-being of our communities. I am particularly pleased that we exceeded our five year thirty thousand billion dollar commitment to invest in low and moderate-income communities by more than nine billion dollars. We also recently announced a 2.8 billion dollar commitment and support a racial equality focused on lending investing and financial accessibility.

We also now.

Cole momentum banking which competes with the fintech and is now our Flagship mass-market banking offering momentum banking provides customers with a query Solutions off our newly enhanced mobile app to help them avoid unnecessary fees including immediate access to funds from digital posits short-term on-demand borrowing options on a simple gold base savings targets free customer access to their paycheck the two days earlier with a qualifying direct deposit starting in June and no monthly service fees. In addition. We were honored to once again be named one of the world's most ethical companies by ethisphere. Also reflecting are strong corporate culture compliance program in the actions. We were both just five banks globally to receive this Accolade this year.

we believe our balance sheet strength Diversified revenues and can achieve focus on discipline expense management will serve us well in 2021 and Beyond

we remain committed to generate sustainable long-term value for shareholders anticipate that we will continue improving our relative performance as a top Regional Bank.

I would like to once again thank our employees. I am very proud of the way you have continually risen to the occasion to support our customers in each other over the past year. You have enabled Fifth Third to continue to be a source of strength for a customers in our communities.

Without sort of a Jamie discuss our first quarter results in our current Outlook. Thank you Greg and thank all of you for joining us today. We generated strong returns. This quarter reflecting are solid operating performance and continued Improvement in credit quality. We produce an adjusted Roa of 1.4% and and rotce excluding AOC I of 96.8% ppnr results were also strong driven by strength and both nii and fees consequently expenses were elevated relative to our previous guidance. Due to Performance and market-linked compensation expenses.

We recorded a $244 million-dollar release to our credit Reserve this quarter which lowered our ACL ratio from 2.41% to 2.19% or historical charge-offs which came in better-than-expected combined with an improving economic Outlook versus previous expectations resulted in a $173 million-dollar net benefit to the provision for credit losses.

Continuing with the income statement performance net interest income declined just 1% sequentially due to the lower day count and a reduction in prepayment penalties received in the Securities portfolios compared to the fourth quarter. This was partially offset by the impact of two point 1 billion dollars and government-guaranteed Residential Mortgage forbearance loans purchased from a third-party servicer in December and another six hundred million in March. We have continued to take action to prudently deploy excess liquidity in order to improve our nii trajectory for twenty Twenty-One. And these loans provided a more attractive risk-adjusted return relative to other alternatives.

our first quarter nii result

Also included approximately twelve million dollars in incremental PPP fees reflecting loan forgiveness compared to the fourth quarter additionally as we discussed previously our price nii results included prepayment penalty income for our Investment Portfolio, which declined $10 sequentially from a liability management perspective. We reduced our choice bearing core deposit cost another two basis points of this quarter resulting in a cost of only six basis points.

Reported Nim increased four basis points sequentially reflecting they declined and excess cash incremental forgiveness fees and Day Count partially offset by the aforementioned Securities prepayment penalty income declined underlying them excluding and excess cash decreased just four basis points to 310 basis points with the top quartile margin relative to peers an asset sensitive balance sheet and over thirty billion dollars in excess liquidity. We believe that we remain well-positioned for a higher rate environment while also benefit from structural protection against lower rates, given our Securities and hedge portfolios.

Additionally, we have updated our interest rate risk disclosures to reflect a 38% deposit beta to better align with our future expectations based on the last rate hike psycho experience and a plus one hundred basis points scenario where we invest about one-third of our excess liquidity over 12 months. We would expect annual nii to be about 15 per month higher compared to a static rate environment.

Total reported not interest income decreased 5% adjusted non-interest income excluding the tra impact increased 3% compared to the prior quarter off her feet performance reflected strength throughout our lines of business including record Commercial Banking fees led by robust debt Capital markets Revenue Mortgage Banking Revenue driven by Smith's production and strong leasing business Revenue.

Topline Mortgage Banking Revenue increase $42 sequentially reflecting improved execution and strong production in both retail and correspondent, which was partially offset wage incremental margin pressure. Also as we discussed in January, our fourth-quarter results included a $12 headwind from our decision to retain a portion of our retail production.

Mortgage servicing fees of $59 and MSR net valuation gains of $18 were more than offset by asset decay of 81 million dollars primary mortgage rates were to move higher. We would expect to see some servicing Revenue Improvement, which would likely be more than offset by production and margin pressures in that environment as a result. We currently offer a full year mortgage Revenue to decline low to mid single-digits given our rate Outlook.

reported not

Trust expenses decreased 2% relative to the fourth quarter adjusted expenses were up 3% driven by seasonal items in the first quarter in addition to elevated compensation related offences linked to strong feed performance as well as the mark-to-market impact on nonqualified deferred comp plans.

Current quarter expenses included $10 in servicing expenses from our purchase loan portfolios for the full year. We expect to incur 50 to 55 million dollars in servicing expenses for purchase loans, including the impact of an additional 1 billion dollars in forbearance pool purchases. And April moving to the balance sheet total average loans and leases were Flags actually cni results continued to reflect stronger production levels offset by pay Downs additionally revolver, utilization rates decreased another 1% This quarter record low, 31% due to the extraordinary levels of Market liquidity and robust Capital markets the sequential Decline and utilization came primarily from COVID-19 packed Industries in our energy vertical.

Also our leverage loan outstandings decline more than 10% sequentially.

It's Greg mention. We are encouraged by the fact that we are retaining customer relationships throughout this environment and are benefiting from the opportunities average cre loans were flat sequentially with end of. Balances up 2% reflecting draw Downs on prior commitments, which were paused during the pandemic.

Average total Consumer loans were flat sequentially is continued strength in the auto portfolio was offset by declines and home equity credit card and Residential Mortgage balances Auto production the quarter with strong and 2.2 billion dollars with an average FICO score around 780 with lower Advanced rates higher internal credit scores in better spreads compared to last year.

Our Securities portfolio increased approximately 1% This quarter is we opportunistically pre invest it expected second quarter cash flows of approximately 1 billion dollars during March off with respect to broader Securities portfolio positioning we remain patient, but we will continue to be opportunistic as the environment evolves assuming no meaningful changes to our economic Outlook. We would expect to increase our cash deployment when investment yields move north of the 200 basis-point range.

We are optimistic that strong economic growth in the second half of 2021 will present more attractive risk-return opportunities.

We continue to feel very good about our Investment Portfolio positioning with 57% of the Investment Portfolio invested in bullet and locked out cash flows 1/4 in our Securities portfolio had two million dollars of net discount accretion first quarter in our unrealized Securities and cash flow hedge gains at the end of the quarter remained strong at two point four billion dollars refax.

average

Short-term Investments which includes interest-bearing cash decrease two billion dollar sequentially and increase Thirty billion dollars compared to the year ago quarter.

The unprecedented excess cash levels are the results of record deposit growth over the past year for deposits were flat compared to the fourth quarter as growth in consumer transaction deposits packed up by the fiscal stimulus was offset by seasonal declines in commercial transaction deposits and a reduction in consumer CD balances. We are experiencing strong deposit growth spurt in April and expect low single-digit growth in the second quarter from both consumer and Commercial customers.

moving to credit

originally a criticality continues to reflect our disciplined approach to clients election and underwriting prudent management of our balance sheet exposures and the continued Improvement of the macroeconomic environment.

first quarter net charge-off ratio of 27 basis points improved 16 basis points, sequentially non-performing assets declined $81 billion or 9% off resulting in a ratio of 72 basis points declining 7 basis points sequentially also are criticized assets declined 8% with considerable improvements in casinos restaurants and Leisure Travel as well as in our energy and leverage loan portfolios partially offset by continued pressure and Commercial Real Estate, particularly Central business district hotels.

Our base-case macroeconomic scenario assumes the labor market continues to improve with unemployment reaching 5% by the middle of next year and ending our three-year Thursday. In the low 4% range.

As a result this scenario assumes most of the labor market disruption created by the pandemic and resulting government programs is resolved by Twenty twenty four years, but still leaves a persistent employment gap of a few million jobs compared to pre COVID-19 expectations.

Additionally our base estimate incorporates favorable impacts from the administration's recent fiscal stimulus and assumes an infrastructure package over a trillion dollars is passed this year.

We did not change our scenario weights of 60% to the base and 20% to the upside and downside scenarios applying a 100% probability waiting to the base scenario would result in a $169 million-dollar release to our Reserve conversely applying one hundred percent to the downside scenario would result in a 788 million dollar bill inclusive of the impact of approximately 109 million dollars in remaining discount associated with the loan portfolio or ACL ratio was 2.29% additionally excluding the 5 billion dollars in PPP loans with virtually. No Associated Credit Reserve ratio would be approximately 2.4%

with the recent

Economic recovery in our base-case expectations point to further Improvement. There are several key risks factored into our downside scenario, which could play out given the uncertain environment. Like all of you we continue to closely watch COVID-19 case and vaccinations Trends which could impact the timing of reopening of local economies in reverse the strengthening consumer confidence strength our March 31st, allowance incorporates our best estimate of the impact of improving economic growth lower unemployment and improving credit quality, including the expected benefits of government programs.

Moving to Capital or Capital remains strong during the quarter r c e t 1 ratio grew during the quarter ending at 10.5% above our stated Target of 9.5% which a.m. To approximately 1.4 billion dollars of excess Capital are tangible book value per share excluding is up 8% since the year ago quarter off during the quarter. We completed one hundred and eighty million dollars and buy backs which reduced our share count by approximately 5 million shares compared to the Border as Greg mentioned. We have the capacity to repurchase up to three hundred forty-seven million dollars in the second quarter based on our current dividend and the federal reserve's average trailing four quarters of net income framework.

As a category for Bank, we expect to have additional flexibility with respect to Capital distributions starting in the third quarter as prudent stewards of capital. We expect to get closer to our c e On Target by mid 2022 while we did not participate in sikar 20-21. We are required to submit our board approved Capital plan to the FED those plans support potential to raise our dividend in the third quarter and repurchase over eight hundred million dollars in the second half of 2021.

Moving to our current outlook for the full year, we expect average total loan balances to be stable to up a bit compared to last year reflecting relative stability and Commercial combined a low single-digit growth in consumer, which includes the additional 1 billion in Ginnie Mae forbearance on purchases in April. We continue to expect cre to remain stable in this environment. Our loan Outlook assumes commercial revolver utilization rates migrate closer to 33% by year-end. It also includes the impact of two billion dollars in loan balances. We expect to a page from the latest round of PPP including the one point seven billion. We've generated to date which will continue to be offset by forgiveness throughout the year.

We expect our underlying them to be in the 305 area for the full year combined with our loan Outlook. We expect to decline just 1% this year, assuming stable Securities bounces on a sequential basis. We expect nii to be stable to up 1% within our nii guidance. We assume we generate approximately $150 million in PPP relax interest income and 2021 of which $53 million was realized in the first quarter compared to one hundred million in the full year of 2020.

we

SEC. Increase 45% compared to twenty twenty or five to 6% excluding the impact of the tra.

Improvement from our previous guide reflects a more robust economic rebound as well as our continued success taking market share as a result of our investments and talent and capabilities resulting and stronger prospecting Revenue Capital markets fees and wealth and asset management Revenue, which will be partially offset by mortgage.

We expect second quarter fees to decline three to five percent reflecting lower mortgage and leasing revenues partially offset by low single-digit growth and card and processing and treasury management Revenue long. We expect relatively stable Commercial Banking revenues sequentially.

Given both are stronger fee and and I Outlook combined with the servicing costs from the loan portfolio purchases. We expect full-year expenses to be up 1% driven by volume of compensation and other expenses on a sequential basis. We expect expenses to decline 5 to 7%

We expect to generate positive operating leverage in the second half of 2021 reflecting our expense actions. Our continued success growing our fee-based businesses and our proactive balance sheet management long. We expect total net charge-offs and twenty Twenty-One to be in the 30 to 40 basis point range given the strong first-quarter performance and assuming our base-case scenario continues to play out second-quarter losses are likely to be in the twenty-five to thirty five basis points range in summary. Our first quarter results were strong and continue to demonstrate the progress. We made over the past few months toward achieving our goal of outperformance through the cycle. We will continue to rely on the same principles of discipline client selection conservative underwriting and a focus on a long-term performed with Verizon, which is served us very well during this environment with that. Let me turn it over to Chris to open the call up for Q&A page.

Before we start Q&A as a courtesy to others. We ask that you limit yourself to one question and a follow-up and then return to the queue. If you have additional questions, we will do our best to answer as many questions as possible in the time we have off this morning operator. Please open the call for questions.

Thank you. As a reminder to ask a question. You will need to press star one on your telephone to withdraw your question. Press the pound key. Please stand by while we compiled the cure a roster month.

Your first response is from bill carcache with wolf research, please go ahead. Thank you. Good morning. I wanted to ask about your Investments specifically in the Southeast Georgia. Um, you're obviously managing expenses for the revenue environment, but can you talk about the priorities with the investment dollars of warranty into the southeast, where are those Investments being made and and have we took it to see the returns the most of us come to already involved growth nii and see trends that we saw this quarter just a little bit more color on the return timeline would be helpful Fantastico. Just Greg. Of course. Thanks for the question. I asked us if we continue to be bullish on our investments in our in our strength and our Southeast markets the remind you these are markets were already in but we have a presence. It's really about being a better provider of products and services into a job Market's it really taken advantage of the opportunity to Marcus create for us. We couldn't be more pleased to date with the progress we've seen in that market, especially if you look at household growth new customer acquisition strength of our commercial.

Businesses in in those in the Southeast markets. So the progress we make the date we're going to continue to invest in those markets as it makes sense from a other investment perspective. Obviously, we bounce off for the greatest return for our shareholders. But right now we think the southeast is still good place for us to continue to invest until we get to the scale and and take advantage of the offer.

These are out there and I'll give me want to add a few things on the progress. Yeah bill so good question just to add to what Greg said we when we announced the build out of the de novo strategy in the markets in the Southeast. We announced that we were going to build about a hundred and twenty branches only about 30 of those have come online but those 30 branches collectively are contributing almost 10% of our new household production this year. So we're seeing some benefit there but a lot still to come as we add another 30-plus branches in the Southeast this year and another $35 next year on The Commercial Banking and wealth management side of the equation. I think we talked in the past about the additions we have made in the Southeast on the income side of the business both Coker Capital Bank to see your headquarter down there and have strong Southeast presences, but we also talked about adding Thirty additional middle-market Bankers to the southeast and only about seven of those positions were filled.

In the first quarter with another 10 offers outstanding so very clearly those benefits are not yet in the run-rate, but we've been very pleased with the quality of talent that we are able to attract and we expect that to continue to further accelerate the shift in the business mix between the Midwest and the southeast Marcos.

That's very helpful. Thank you and follow up. Can you speak to your your asset sensitivity and any plans to alter it from here and then maybe just discuss how you're thinking about the the potential for layering getting any swaps from where we are currently. Yeah, it's Jamie. Thanks for the question. We did as I said in our prepared remarks update on a sensitivity disclosures to I think be a little more transparent and give you our views of how we see the next rate hike cycle plane out so I could change our deposit bettas from 70 down to 38% So with that in mind, obviously that reflects a a very asset-sensitive balance sheet, you can see in the disclosures how we look at it right now is that given our view on the economy? We believe there's still a momentum in a bias for higher rates.

As 20-21 plays and even twenty twenty-two. So for us, you know, we can afford to be patient and fortunately, you know, our Investment Portfolio is running off at a pretty slow pace in the hedges aren't running off at all. We still have two and a half more years before we have that headwind. So we're really not forced into trades today that would sacrifice future nii levels just to make income now. So I think we'll continue to be patient will be opportunistic but we would certainly like to see entry points a little bit better at our Focus would be more on Earth, you know, just extension of protection as opposed to laying on, you know, net new notional amounts to where we are today.

Got it. Thanks, Jamie. Thank you all for taking my questions.

Thank you. Your next response is from Gerard Cassidy of RBC, please go ahead. Thank you. Good morning. How are you guys?

Jamie can you share with us and maybe Greg to we all have seen in the banking industry and you guys certainly are showing it as well this incredible deposit growth year-over-year in Clearlake quantitative-easing from the FED is a major contributor to the industry's deposit growth as well as the deficit spending by the US government. Obviously, you're not a wholesale Bank like some of our money center banks that might be gathering some of these deposits from this quantitative easing. Can you show me this? Where is the or kind of give us a a timeline or a trail of dead air? Is this deposit growth coming from in terms of your customer base? And what's going to eventually bring it down so that your you know, your short-term investments will eventually be utilized your customers basically drawing down those deposits.

Thanks Gerard the great question in a difficult answer but I'll start with the easy Parts in terms of where our deposit growth has come from, you know from you know, 27% year-over-year, you know, thirty plus billion dollars, you know, 70% of that has come from our commercial customer base and 30% is come out of the consumer book in terms of the consumer book. The growth is really driven as we've talked about the 3% household growth, but also just the Consumers Bank deleveraging and when you you know, slice the consumer deposit book just March over March averaged Eda and Ivy tease her account or up about 30% savings are up to 15% So we're seen that consumer Behavior being a little more conservative plus the additional stimulus and all the other liquidity programs available are just dead.

Adding a significant balances to these consumer accounts. I think that will come down is consumer spending picks up and we should expect that excess liquidity of about $2,000 per accounts start to wane in the back half of this year. But for the second quarter, we do expect consumer deposit growth to continue Thursday. We seen that with the stimulus payments with tax refunds. And so, you know, we see a portion of that excess liquidity being, you know, applied to paying down unsecured loans, but the most part sticking from a commercial perspective I think clients are just being more conservative and I expect the commercial deposit balance in life. Perhaps stick down a little bit slower and over a period of years is is folks while you know, we see strong pipelines and encourage

Loan growth I think.

Corporations will can hold a little bit extra and liquidity given what we've just been through and so I think you might see the ability to grow loans without really took a lot of runoff in the commercial deposits, but I think consumer spending will drive a decline in the consumer book perhaps sooner than commercial.

Very good. I know you gave us some good Color Jamey on the loan loss reserves relative to loans and credit quality for you and your peers has been waged ordinarily good through a cycle. That was pretty dramatic as we all know. What do you think and I know it's a moving Target with Cecil, but what do you think about getting the reserves down to that day one Cecil level in January of 2020? Why would it take and how long will it take for do you think for you guys to bring it down to that level off? So our day one reserved was 182 basis points in on an apples-to-apples basis today if you exclude PPP, let's call it a 2:30 level. So when you look at our process at the end of each quarter, we have a robust process that estimates the allowance based on the credit risk in

The portfolio and that's driven by the economic forecasts over the three-year reasonable and supportable Horizon that we use. So while we feel very positive about credit performance to date through the pandemic, they're still segments of the economy and our loan book that if not returned to those pre pandemic levels of health. So we do think full normalization will take time and will not occur over a period of just a few quarters and I guess the answer the heart of your question to get back to those adoption level Reserve rates. We would need to see a sustained strength and the credit characteristics of those borrowers that are most at risk for the longer-term negative impacts from the pandemic in concert with improving economic forecasts and most importantly those forecasts. No need to improve above our current expectations. So I think it will take some time.

Very good. Thank you for the answer.

Your next response is from Mike Mayo with Wells Fargo Securities, please go ahead.

Hi, can you size the level of your Investments, you know, you expect positive operating leverage in the second half the Year. This must be taking some sort of a toll and I guess we've heard a lot of Investments. You have the southeast expansion where you're opening 70 branches. That's one category a second category would be other extension markets like Texas and California and the third category would be the loan process automation. So when you when you add it all up, you know, what sort of impact does this happen? When do these Investments Peak? If you think of a J curve as investing and hurting your your profits then improving later. When do you get to that inflection point home? Yeah. It might gets Jamie. Thanks for the question. Really when you look at our expense outlook for the year. Yes. As you mentioned. We do expect the operator positive operating leverage. They can have the birth.

The second quarter of 2021 is probably going to be the highest.

Growth rate on expenses and the IT investments will be you know, year-over-year up double-digits. We expect marketing to accelerate in the second quarter and then we have the investments from the loan servicing costs for some of the loan pool purchases. So really when we look out at the expense guide, each quarter should be better and better in terms of expensive whereas nii grows, you know, we're at the trough now and I should grow every quarter and then as we talked about before, you know fees from the second quarter trough should be throughout the rest of the year. So that's how we see the year playing out. Obviously, we've got some flexibility to change that expense progression. Should it not play out and deliver that extra Revenue, but that's really odd how we see the airplane else.

And just two separate question for the southeast expansion strategy. What is the the end game in terms of where do you want to be in terms of market share where you are today or other metrics that you're you're monitoring and like this is Greg. I mean listen, so we sent many times before we like the southeast Marcus for all the reasons you would expect it's also dinner is performing be strong for me, except of our business both on the retail side and on the commercial side and on the west side, so it's really been a strong performance for a soldier and game. We want to be just call it top five banks end up in the market from a deposit perspective will be an objective of ours. That's pretty much what we search for. We think that makes us relevant allows serve the community the best so top five retail deposits that were thinking about it and then from a banker perspective on a commercial sites. Just making sure we have the talent in the market to take advantage of the opportunities down there that are presented to us dead.

So that's kind of what we're focused on anything you want to add to that? No, I think that's that's right. We're a little bit unique if you look at the southeast footprint and most of the growth in the Southeast is happening on the Atlantic coast in the Mid-Atlantic and then on both sides in Florida, and we really have a Metro Market strategy down there. So the focus is on places like Charlotte Raleigh Durham Chapel Hill a Nashville Maples Tampa the high-growth mid-size markets, and that's Greg said top five in those markets would get you to call it eight to 10% market share in those stated Metro areas as opposed to including the micropolitan markets elsewhere in the state. All right. Thank you.

And nice responses from Jefferies, please. Go ahead.

Thanks. Good morning. Follow up on the Ginnie Mae and the Mortgage Banking businesses. Do you still see room to find and and repurchase more of those Ginnie Mae buyouts and you month on the mortgage side that you're retaining a little bit more of your production. Can you give us an understanding of how much of that production you're you're now planning to retain a net how much that's changed over time. Thanks. Thanks Ken. I'm in terms of the Ginnie Mae pool. They're becoming more and more difficult to locate. I think is everybody's been executed on that play for their own portfolio. And as we talked about we bought back our seven hundred fifty million in the third quarter of 2020. So that combined with the fact that you know, we're over three billion of product now, I think that's a ahead an appropriate allocation for a balance sheet. So I'm not looking to add add more there in terms of the mortgage retention. We did retain in the fourth quarter 1/4.

billion or so of our retail production

This quarter we did not elect to retain anything that was saleable. So we're currently selling everything them all and then retaining, you know jumbo non-conforming another item. So I think that's in that you know for now would be Our intention for the rest of this year.

Okay, and Jamie one follow up on mortgage. You guys have been taking a long a little bit longer to get kind of the pipeline through and we saw the origination up. Can you just give us a an update their birth on just your outlook for origination volumes and have you kind of gotten that that to the right spot in terms of being able to get the production through and and in terms of that opportunity set thanks choice for as disappointing is the fourth quarter was and mortgaged. The first quarter was just as exciting. So we feel very good about how the team performed. The first quarter was very strong and I got you know, the trains running on time and everything is in in a good spot as you can tell from the first quarter results. So in terms of the outlook for the year, we expect the mortgage origination wage to be up a bit, you know call it mid single-digits second quarter volumes mid single-digits, but the headwind is going to be you know, margin compression. Yep.

So why we you know transition to more of a purchase environment here over the summer months volumes should be strong margins will compress and then as those, you know our payments refi slowdown, we expect to see a little bit of a left in the servicing portfolio. So it's you know less of a headwind and perhaps even a positive at the back half of the year, but net I think on a year-over-year basis we're looking at a slight decline in both top-line and bottom-line mortgage fees. Okay. Jamie.

Your next response is from Kim Zerbe of Morgan Stanley, please go ahead.

Can you line is open? I apologize. I was on mute in terms of getting to the nine and half percent seat here. One target. How much did that comes from off the very high-end of your allowable stock BuyBacks like the eight hundred million in the back half of the Year versus balance sheet growth later in the year the balance sheet growth of you know,

Fairly stable in terms. I guess of the year-over-year we do have I guess the dynamic of cni growth but PPP pay downs, but I don't see the balance sheet at least in in 2021 being that big of a driver. I guess. There's a 9 basis points of erosion with the Cecil transition that kicks in in the first quarter of 2022, but overall, you know, I our income levels are are more than sufficient to cover the balance sheet growth. So, you know, the real benefit for us is just you know, buying back the 347 million in the second quarter and then eight hundred or more in the back half of the year to try to bring that down to 95% by mid-year 20-22. That's our that's our goal. And then also have a dividend increase here in the third quarter.

God okay. Perfect.

And then just as a follow-up in terms of your net charge-off guidance think you're a 27 basis points this quarter your guys for next quarter's sort of call it maybe Thirty basis points at the midpoint, but your full year Guidance just the 30 to 40 basis points. Are you implying that second half should see noticeably higher charge of us or is that just being more conservative? Yep, I think it's an element of conservative ISM given the uncertainty in the environment. We certainly could experience charge-offs off the very low end of that range. But, you know at this point in time feel like it's prudent the guide to a 30 to 40 basis point range.

Got it. Okay. Thank you.

Your next response is from Matt O'Connor, please go ahead good morning.

So just to ask him a quick question a little bit different. You actually had a a more modest increase in in both deposits and the cash this quarter than what we're seeing the overall industry and and just wondering you know how you'd reconcile that that difference. Yeah. It's really driven by or commercial clients and in particular our focus on retailers where you typically have seasonal run off in the first quarter of every year from elevated fourth-quarter balances, I think on a year-over-year basis, you know, our growth is dead certainly at the high end and I think we've done a very nice job of you know, capturing more than our fair share of the excess liquidity in the commercial book and then obviously the household growth on the consumer side is connected. So, you know, I feel good about how how we're positioned from a deposit Gathering perspective it it's just more about you know, when is the right time to start putting the money to work?

Okay, and then the separately the incremental costs related to the mortgage servicing for the loans that your purchase is obviously a lot more Revenue that you're getting than the dead fifty million of of additional costs. But I I guess I was a little surprised that there's that much incremental costs that is just not more scalable or is it a whole bit of a more intensive product to service given the nature of the Ginnie Maes very good question. The the answer is actually far simpler, which is we don't offer service the loans and therefore we pay a servicing fee and that servicing fee is certainly on the high side given the yield on the Securities. And so it ends up being almost a 2% servicing fee paid to the service sir. But the flip side is you get more than that benefit, but it does show up in nii. So when you look at our

Expense guide is diligent as we are and as focused as we are on expenses at the end of the day, we did raise the expense guide to two points half of that is from the volume weighted compensation expense and feed growth and then half is from these additional Loan Servicing costs that are more than offset by the Improvement in nii.

and what's the

Wheel pick up and revenue that you get for those loans or the yield if you open a present. Yeah. Hi. Hi 3% yield.

Okay, and then there's additional fee income that comes as the loans are resold. So all in it's a Roa of roughly 2% which is very attractive in this environment and certainly better than just buying and the portfolio.

Yep. Thank you.

Who makes responses from Scott siefers of Piper Santa please go ahead morning guys. Thanks for taking the question. I guess when we talk about the line utilization improve actually from 31 up to 33% by the end of the year, maybe just a reminder of what you would consider sort of a typical number for you guys. And then just as the the follow-up I'm not sure anyone has found a great answer for it. But maybe just best guesses are your thoughts on why utilization isn't already improving kind of broadly for the industry given that we all have, you know, what seems like pretty good back into the likely trajectory the economy vaccination rates Etc just would be curious to hear your thoughts. They're just got a good question is Greg. I'll start it. Maybe throw it back over to Tim for some more color and first off normalize line utilization for us going into the pandemic would have been thirty-six thirty-seven percent on average. So I would leave it with a pandemic you sold a spiked up the 40-plus percent, but think about normalized range 30

We're running about 31% right now. So hopefully the second half of the year is a little stronger as we anticipated look at our bottoms up for cast, you know, we can pick up another 2% lift. That's just you know stretch out there. But we think that's doable given we're seeing our pipelines just back up to 33% which is still not the normalized level you think about each one percent's about $750,000 of the standings for us. So in back of the 2% uplift by year-end is less than 1% on total loan growth for twenty Twenty-One given the ramp up throughout the year. So it's it's possible. But once again, I think you know, there's a lot of variables out that we're watching but we are encouraged by the pipeline strength that we're seeing right now our production levels and commercial in the first quarter where I predict demek. So we're encouraged by that. If you look at the pipeline's going forward, you know, and the forecast right now will be about 30% up in production over twenty twenty but slightly below print that make sure

And we're seeing good strength in manufacturing Healthcare TNT and Renewables right now if you look at our market, so we're seeing some good progress, Indiana, Michigan, California in the Carolinas with job as a source of strength from an asset perspective. So production strong pipelines look good. You know, we're hopeful we'll see them, you know back half of this year and Improvement in line utilization wage. Once again, it's a lot of liquidity out there. So it's something we're watching. I think just to act to add to what Greg said. I mean Scott we're asking the same question to ourselves right in terms of what the visibility we have into the economy and some of the signals were seeing about a pick-up of inflation and input costs. You know, I I have that chance since the beginning to be out in 12 of our fifteen different regions and to spend time with clients there. So we've been asking that question and what we're hearing from them primarily are either Saddam.

I train disruptions at some of that obviously is the the some of the global dynamics that we have talked about.

Heather was stuck in the canal or shortages in semiconductors, but it also is just access to materials and then on the other side of the equation labor shortages in particular as it relates to the skilled trades and the byproduct of that is we're not seeing the inventory building that you might otherwise expect to see yet. So we're watching the inventory levels closely. We're watching the page index closely as leading indicators to when we may see a pick-up in utilization. I think one positive note, which is reflected in the results in the first quarter is we are seeing an increased Demand on the equipment side of the business and that is encouraging because that obviously would be the other precondition to an expansion. Yep.

All right, that's perfect. Thank you guys very much for the thoughts.

Thank you. And your last question is from Erika. Najarian of Bank of America, please go ahead. Good morning. First question is Jamie Jamie? Thank you so much for slides V. I love it, you know most investors have started to talk about normalized ROTC. She's you know, as I think about valuing banks with a month or two to three or four word look, you know, and even though you deploy some excess liquidity, you know, what stunning is how significant it still is relative to 419 and as long investors contemplate with normalize returns are for Fifth Third where do short-term Investments normalize to

so

your question are you?

From a total return perspective ROTC or are you just asking on you know, what do we how much excess cash do we end up holding? Yes. Do you ever go back to the three billion or we redefined what excess liquidity is for you guys? Cuz we've obviously we debate daily. Why not the right time to put the money out of work and how do we see the environment playing out I right now, I think the the easiest way to consider the excess liquidity would be a third truck runs off a third of it. We'd love to invest in organic loan growth and a third of It ultimately gets invested in the Investment Portfolio. And so in terms of you know what the return profile looks like with regard to the Investment Portfolio.

Yeah, we want to wait for the right time to put the money to work. But when we do put it to work, you know, we're at 18% right now is Securities is a percent of total assets, you know, we're comfortable running that number at 23% or so. So that means about ten billion or so of that additional liquidity. We would deploy into the Investment Portfolio over.

And just one last question on momentum banking. How should we think about how momentum banking can you know potential rate impact, you know long term consumer deposit growth versus, you know, whether or not that re normalizes service charges on deposits lower.

Sure, Erica, it's Tim a good question. So I think we we are very focused our strategy as I think we've discussed quite frequently as a primary relationship strategy. It's a birthday is on primary Banking and so focused on being the place where you get paid on where you pay your bills and how you build up with what it in the byproduct of that obviously is Jamie mentioned earlier is we did seem a positive Trends on the consumer side of the business because the liquidity that consumers have built top really is in the transaction accounts as opposed to somewhere else. So our deposit growth and the consumer side has been underpinned. May I call it to to 3% household growth over a period of several years now, we would like to continue to bump that number up. Uh, and we think that the momentum banking products coupled with the expansion of the southeast gives us a path to doing that in terms of the overall household growth rates that we experience which will support non interest-bearing deposit growth. I think on the other side of the equation

Yes, when somebody elects to use a short-term liquidity product a car Early Access product the deposit Advance product that we've had in the market for several years. Now that is a lower-cost way to cover a cash flow shortfall than an overdraft fee. But it's also a very sustainable way and owing to the fact that we have had those products in our products at five years now. Our overdraft charges is a percentage of total consumer deposits or lower than all but one of the large US Banks already. So I think from our perspective we're giving the consumer the widest possible range of options to avoid fees. We're getting the benefit of that in the form of household growth and of Primacy, which is the entry point for us to Asia products range of products and services that we offer and because of our position on the overdraft side of the equation and the low Reliance on that feeling we have left to give up there and they're going to be able to outgrow birth.

Any sort of an impact on the fees per household measure.

Got it. That was clear. Thank you.

Thank you. There are no further responses at this time. I turn the call back over to Crystal. If you have any questions, please contact our department and we will be happy to assist you with.

This concludes today's conference call. Thank you for participating you may now disconnect.

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