Q3 2021 Fifth Third Bancorp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the fifth third Bancorp third quarter 2021 earnings conference call.
At this time all participants are in listen only mode. After the speaker's presentation, there will be a question and answer session.
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I'd now like to turn the conference over to your Speaker today, Chris Doll Director of Investor Relations. Please go ahead Sir.
Thank you operator, good morning, and thank you for joining US today, we'll be discussing our financial results for the third quarter of 2021. Please.
Please review the cautionary statements in our materials, which can be found in our earnings release and presentation.
These materials contain reconciliations to non-GAAP measures along with information pertaining to the use of non-GAAP measures as well as forward looking statements about fifth third's performance, we undertake no obligation 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 We will open the call up for questions let.
Let me turn the call over now to Greg for his comments, thanks, Chris and thank all of you for joining US. This morning earlier today, we reported third quarter net income was $704 million or 97 per share a core basis, we earned <unk> 94 per share.
Once again, we delivered strong financial results, while fully supporting our customers communities and employees.
During the quarter, we generated adjusted bar, Oh, TCE of nearly 19%, which represents the fifth straight quarter exceeding 80%.
We generate period end C&I loan growth of 4% compared to the prior quarter, excluding the impact of the PPP.
Commercial loan production increased 5% from last quarter, representing the strongest quarter since the fourth quarter of 2019.
We generate strong consumer household growth of 3% compared to last year with growth in every region in our footprint, reflecting the continued success of our branch and digital initiatives.
And.
As expected, we generated positive operating leverage on a year over year basis.
Our performance this quarter reflected strong business outcomes.
Across our franchise, resulting in improved and diversified revenues.
This was combined with disciplined balance sheet management expense management, yet another quarter of benign credit results.
We closed the provide acquisition and the sale of Hs any deposits during the quarter to improve long term growth and profitability provide.
Provide a leading fintech companies, serving health care practices will further accelerate profitable relationship growth.
Silver HSA deposits as part of our multiyear strategy to simplify the organization and prioritize investments in order to generate differentiated outcomes for our customers and shareholders.
Despite continued pressure.
Low interest rates.
Adjusted P. P N O R increased 4% compared to the year ago quarter, highlighting the strong results from our fee based businesses and retail mortgage commercial and wealth and asset management.
Excluding the impact of the P. P. P average total loans increased 1% compared to last quarter, reflecting.
Commercial loan production as well as strengthen our indirect auto residential mortgage portfolios commercial loan production increased 5% sequentially with record quarters, and corporate banking and middle market.
Despite some of the challenges we have been hearing from our customers, including supply chain constraints and labor shortages. The strong production was led by our healthcare renewable energy and retail vehicles and was well diversified geographically.
Our commercial lending production trends pipelines and retention of the client relationship all support continued loan growth.
As it relates to provide we're very pleased with the progress we've seen so far we're even more excited about the opportunities for continued growth as we have previously mentioned, we expect strong origination volumes in 2022, reflecting a robust pipeline added product capabilities and key talent hires provide supports a relationship approach.
With approximately two thirds of customers, having either a deposit account or a payments relationship with her.
During the quarter, we recorded a net benefit to credit losses, as well as historically low net charge offs of a basis points, reflecting continued improvement in both our commercial and consumer portfolios.
In addition to historical low credit losses, we experienced another quarter of improvement in Chris eyes assets and Mpa's.
Or criticize asset declined nearly 20% are MTA ratio declined nine basis points sequentially.
Our MPA NPL ratios this quarter Ah reverted back to Prepandemic levels.
A strong performance reflect disciplined client selection conservative underwriting and continue support from fiscal and monetary government's stimulus programs.
Our balance sheet earnings power remained very strong.
As we've said before we remain focused on deploying capital into organic growth opportunities evaluate strategic non-bank opportunities paying a strong dividend and share repurchases.
Bank acquisitions remain a lower priority.
I would like once again, thank our employees I very much appreciate the way you have continually residency occasions for our customers communities and each other.
I am very proud that in addition to producing strong pronounce results we.
We have also acceded to take delivered actions to improve the lives of our customers and the well being of our communities for our customers. We are excited to rollout Jeannie, our new AI driven digital assistant in the fourth quarter. This would drive targeted marketing capabilities digital engagement and improved customer retention.
Poor communities, we made a 50 million dollar contribution to our foundation this quarter as.
As part of our 2.8 billion dollar commitment to accelerate racial equity equality and inclusion in our communities.
In total we have contributed to $40 million in philanthropic support since the end of last year.
We continue to make targeted investments to accelerate economic revitalization as you may have seen in last week's announcement, a fifth thirds neighborhood investment program. This.
This innovative initiative further demonstrates our commitment to be in ESG leader. In addition to other recent proof points, including.
Sharing it over $6 billion toward our $8 billion renewable energy goal to be achieved by 2025 and.
Announcing a new position at a climate risks to focus on identifying measuring and managing the physical and transition risk of our clients and a robust transparent and pure leading ESG disclosures.
This summer we believe our balance sheet strength diversify revenues and continued focus on disciplined management throughout the company will service well into 2022 and beyond we expected Jerry positive operating leverage on a year over year basis in the fourth quarter and also for the full year in 2021, we remain committed to generate sustainable long term value and can.
Assistant producing through the cycle top quartile results with that I'll turn over James discuss our third quarter results and our current outlook.
Thank you Greg and thank all of you for joining US today, we're very pleased with our financial results this quarter, reflecting focused execution throughout the bank or quarterly results included solid revenue growth and continued discipline on both expensive and credit.
The reported earnings included a $21 million after tax benefit or three per share from the three items noted on page two of the release.
Our strong business performance throughout the bank is reflected in our return metrics, we produced and adjusted rows of 132% and and adjusted Rotc's, excluding OCI of 18.7%.
Improvements in our loan portfolio credit quality resulted in a 63 million dollar release store credit reserves and an ACL ratio of 200 basis points compared to two O six last quarter.
Combined with our historically low net charge offs, we had a $42 million net benefit to the provision for credit losses.
Moving to the income statement net interest income of approximately $1.2 billion increased 2% compared to the year ago quarter, reflecting the benefits of our balance sheet positioning continuing benefits from PPP income and income from our journey may forbearance loan purchases.
Our NII results relative to the second quarter included a $6 million reduction in PPP income a 4 million dollar decline in prepayment penalties on our investment portfolio and the impact of lower earning asset yields partially offset by a higher date count and a reduction in long term debt.
Our allocation to bullet and locked out structure is currently 60% of the total investment portfolio, which is expected to continue to provide ongoing NII protection in this low rate environment.
On the liability side, we've reduced our interest bearing core deposit cost another basis point this quarter to four basis points with.
With a highly asset sensitive balance sheet in over $30 billion of excess liquidity, we continue to be well positioned to benefit when interest rates rise. While also remaining well hedged if rates remain low given our securities portfolio and derivatives.
Total reported noninterest income increased 13% sequentially impacted by a $60 million gain associated with the disposition of HSA deposits as previously communicated.
Adjusted noninterest income increased 3% driven by strong mortgage banking Treasury management leasing and wealth and asset management revenues.
Commercial banking revenue, which achieved record results. The past two quarters remained solid strength and M&A advisory fees, particularly in our healthcare vertical was more than offset by lower corporate bond fees comp.
Compared to the year ago quarter, adjusted noninterest income increased 13% with improvement in every single caption, reflecting both the underlying strength in our lines of business as well as the robust economic rebound over the past year.
Our total noninterest revenue was 41% of total revenue in the third quarter.
Reported non interest expense increased 2% compared to the second quarter, primarily due to the $15 million Foundation contribution.
Adjusted expenses were flat sequentially as an increase in marketing expense associated with momentum banking and increased T&D expense were offset by a decrease in compensation and benefits expense <unk>.
Compared to the year ago quarter adjust that non interest expense increased 2%, primarily driven by an increase in performance based compensation, reflecting strong business results servicing expenses associated with Jenny may loan purchases and the impact of the provide acquisition.
These items were partially offset by lower card and processing expense due to contract renegotiation and lower net occupancy expense.
On a year over year basis total adjusted fees have increased 13% compared to just 2% expense growth.
Moving to the balance sheet total average portfolio loans and leases decline half of a percent sequentially, including the headwind from PPP loans, excluding PPP average loans and leases increased 1% with period and loans up 1.5% pointing to positive momentum as we head into.
The fourth quarter.
Average total consumer portfolio loans increased 2% as continued strength in the auto portfolio and growth and residential mortgage balances or partially offset by declines in home equity and credit card balances.
While we did not retain incremental conforming mortgage originations in the third quarter, we have elected to retain approximately $400 million of our retail mortgage production for the balance sheet in the fourth quarter and will continue to evaluate the economic tradeoffs, given our balance sheet capacity in this environment.
Average commercial loans declined 2% compared to the prior quarter due entirely to PPP forgiveness, excluding PPP average commercial loans increased around half of a percent with C&I loans up 2%.
Production with robust across the board up 5% compared to the prior quarter with both corporate and middle market banking generating record production, which was well diversified geographically.
As a result.
Period end C&I loans, excluding PPP increased 4%.
Revolver utilization of 31% was stable compared to the prior quarter.
However, it is worth noting that total commitments have increased approximately $5 billion. Since the end of last year, driven by new client acquisition and an increase in demand from existing clients in anticipation of future business growth.
Average CRE loans were down 3% sequentially with lower balances and mortgage and construction driven by elevated pay offs in areas most impacted by the pandemic, reflecting are cautious approach to those sectors.
Our securities portfolio with stable sequentially, we continue to reinvest portfolio cash flows, but will remain patient on deploying the excess liquidity.
Assuming no meaningful changes to our economic outlook, we would expect to begin our excess cash deployment when investment yields move north of the 200 basis points level.
We remain optimistic that continued GDP growth and the feds eventual tapering a bond purchases will present more attractive risk return opportunities in the future.
Average other short term investments, which includes interest bearing cash remain elevated reflecting growth and core deposits since the onset of the pandemic, which are up 6% year over year.
Moving to credit.
Are strong credit performance this quarter once again reflects our discipline client selection conservative underwriting prudent balance sheet management and the continued benefit of fiscal and monetary stimulus programs and improvement in the broader economy.
As Greg mentioned, the third quarter net charge off ratio of eight basis points was historically low and improved eight basis points sequentially.
Nonperforming assets declined 15% with the NPA ratio declining nine basis points sequentially to 52 basis points.
The decline in criticized assets reflected significant improvements in retail non essential and leisure consistent with the reopening of the economy and higher activity in those sectors as well as improvements in our energy and leverage loan portfolios.
We continue to focus on segments of non owner occupied commercial real estate, particularly central business District hotels as activity has not yet returned to prepandemic levels.
Moving to the ACL our base case macroeconomics scenario is relatively similar to last quarter, which assumes the labor market continues to improve and job growth continues to strengthen with unemployment, reaching 4% in the first quarter of 2022 and ending our three year reasonable and supportable.
Period at around 3.5%.
We did not change our scenario eighths of 60% to the base and 20% to the upside and downside scenarios. However are ACL release was lower this quarter is the improvement in the underlying economic forecast decelerated from the second quarter.
Additionally, the ACL requirement and the downside scenario worsened compared to the second quarter due to a forecasted slower pace of recovery and a larger increase in unemployment.
If the ACL were based 100% on the downside scenario, the ACL would be $788 million higher.
If the ACL were 100% waited to the baseline scenario the reserve would be $176 million lower.
While the favorable economic backdrop in our base case expectations point to further improvement in the economy. There are several key risks factored into our downside scenario, which could play out given the uncertain environment.
In addition, the Covid, we continue to monitor the economic in London implications of the supply chain and labor market constraints that currently exist.
September 30th allowance incorporates our best estimate of the economic environment with lower unemployment and continued improvement in credit quality.
Moving the capital R capital levels remains strong in the third quarter are CET, one ratio ended the quarter at nine 8%.
During the quarter, we completed $550 million in share repurchases, which reduced our share count by 14.5 million shares compared to the second quarter.
We also raised our common dividend three or 11% to 30 per share.
Our capital plan support approximately $300 million of share repurchases in the fourth quarter of 2021, and we continue to target a 9.5% CET one by June 2022.
Moving to our fourth quarter outlook.
We expect average total loan balances to increased 2% sequentially, excluding the PPP headwind.
Including the PPP impact, we expect average total loans to increase approximately 1%.
Our outlook reflects half a point of improvement from commercial revolving line utilization continued strength in commercial production given our record pipelines.
<unk> continued stabilization and Paydowns based on activity that we're seeing so far in October.
We expect average CNI growth of 4% to 5% excluding PPP in the fourth quarter.
And CRE balances to decline around 1% or so primarily due to construction constraints.
As a result, we anticipate total average commercial loan growth of around 3% sequentially excluding PPP.
We expect average total consumer loan balances to increase around 1% sequentially, including the impacts of Ginnie Mae forbearance pool purchases and are held for sale portfolio.
We purchased $300 million during the third quarter, an additional $700 million in early October.
Given our loan outlook, we expect NII to be down 1% sequentially in the fourth quarter, assuming stable securities balances and a 17 million dollar reduction in PPP income.
Excluding PPP, we expect fourthquarter NII to be up slightly relative to the third quarter.
Our guidance indicates full year 2021, NII declines less than 1% compared to full year 2020, despite no meaningful growth and investment securities balances throughout the year and an average decline in one month LIBOR of approximately 40 basis points.
We expect in into declined three to four basis points in the fourth quarter, primarily due to loan yield compression.
We expect to fourth quarter fees to increase around 6% compared to the third quarter and to be up around 8% on a year over year basis, excluding the impacts of the TRA.
This results in full year 2021 feet growth, excluding the impacts of the TRA of approximately 10% compared to 2020.
Our outlook assumes a continued healthy economy, resulting in a record full year commercial banking revenue led by 20% growth in capital market space record wealth and asset management revenue up double digits and double digit growth in card and processing revenue.
We expect private equity income to be in the $40 million area in the fourth quarter, our outlook assumes a sequential decline in topline mortgage revenue of approximately 40% with roughly half of that decline due to seasonally lower fourthquarter volumes and declining spreads and half to our decision to retain $400 million.
And retail production that I mentioned earlier.
We expect fourthquarter expenses to be stable to up 1% compared to the third quarter, reflecting continued growth in technology investments servicing expenses associated with the Ginnie Mae loan purchases and continued marketing support related to our rollout of momentum offset by disciplined expense management throughout the comp.
Penny an initial savings beginning from our process automation program.
As a result, our full year 2021 total core revenue growth is expected to exceed the growth and core expenses, despite the right environment.
We will have achieved positive operating leverage in a year in which the vast majority of the industry will likely experienced an erosion inefficiency.
We expect total net charge offs in the fourth quarter to be in the 10 to 15 basis points range, which would result in full year 2021 charge offs are 15 basis points or so.
In summary, our third quarter results were strong and continued to demonstrate the progress we have made over the past few years toward achieving our goal of outperformance through the cycle.
We will continue to rely on the same principles of disciplined clients election, conservative underwriting and a focus on a long term performance horizon, which has served us well during this environment.
With that let me turn it over to Chris to open the call up for Q&A.
Thanks, Jamie before we start Q&A as a courtesy to others. We ask that you limit yourself to one question and one 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 a lot of this morning.
Greater please open the call for questions.
If you would like to ask an audio question. Please press star one on your telephone keypad again star one to ask an audio question.
Your first question comes from the line at Scott Seafirst with Hypersthene layer.
One of the guys. Thanks. This morning to go that morning.
Just wanted to ask you a couple of questions on loans loan growth, which looks like it's coming back nicely Uhm first it was hoping you could talk about any differences you're seeing in demand between your larger and smaller customers. You May think you had mentioned that production sounded pretty strong in both corporate and middle markets any any additional color. There and then the second was just wondering if you could speak to the dynamic.
You are seeing in terms of both pricing and structure just in other words changes to the competitive environment.
This is Greg let me start off and then I'll flip it over to Tim and maybe Jamie first of all we're very encouraged you'll receive from a production perspective.
We've got a commercial production of the third quarter.
We want with strong a 5.4 billion that was up from 5.1 billion in the second quarter and five 2 billion in the third quarter 2019, we expect up reduction to continue to be stable going into the fourth quarter sets encouraging we expect average loads of 1% with Pvp, 2% up without Ppb's does some strength there.
We're also see online use they should pick up a little bit more and our core middle market, which is nice to see them for change. So when you think about our geographies, what we're seeing right now.
From a geography perspective, North Carolina, Texas, Cincinnati, Columbus, where are tough for markets from commercial loan growth in Q3, which is encouraging.
If you look at six regions and hold time highs, which we're very encouraged with the Chicago Grand Rapids, Columbus, Kentucky, North Carolina and Texas.
Felt really good and we're starting to see once against good momentum out there.
Net new relationships. So we watch very carefully brought in 419, new commercial relationships year to date, most ellison core middle market.
And some of them.
Large court.
The net net we're seeing good progress out there good performance.
Encouraged overseeing to date as we go into the fourth quarter and then into 2022.
Yeah.
Just added a few points to what Greg mentioned so.
I had the chance to be out in aid of our 14 regions. This past quarter I think you get really excellent color. When you have an opportunity to sit with clients and with bankers and they are all feeling the shortages as it relates to labor and supply chain.
We have a hotel operators, who are now only cleaning rooms, when Pete believe as an example, I visited in electronics client out west and asked to see their demo room, and there was nothing but holes in the walls of severe whereas the equipment and they had sold all the inventory.
Because they are struggling to get the parts in to be able to fill orders. So all those issues are still real I. Thank the good news is we are seeing M&A as a catalyst we're seeing capex now as a catalyst in particular for businesses that are able to substitute equipment and automation for.
Manual processes.
And then bluntly as Greg mentioned, I think we feel pretty confident that a lot of the improvement. We're seeing is just coming from taken sure I mean, they relationship count Greg mentioned would be higher than.
Where we were at prior to the pandemic. So we'll have taken more new relationships on board. This year through nine months, then we had in all of 2018 or 2019.
Just as an example, so they're good good just general pick up there it would be great to continue to see a little bit more activity as it relates to utilization as folks try to build inventories and otherwise it just that's going to be the wildcard for us and.
June.
Scott also if you look at our verticals, which I Should've mentioned this our largest production years, we're seeing the larger strengthened right now is technology media telecom or retailers' financial institutions rolled doing well. So we're seeing some good momentum in those spaces and then Scott to answer the second part of your question in terms of the segments I think Greg.
And then a nice summary, there what we're seeing from a line utilization perspective is that the middle market line Utilizations up almost 1%, whereas corporate banking continues to trend down so quarter over quarter that utilization with stable and if we want to go into the decimals. It was 31 three at the end of June and it's 31 one is.
<unk> sat here on September 30th, but we are starting to see more borrowing demand and pick up in the middle market space.
As opposed to the corporate banking and then in terms of pricing while Nimbed came in as expected in line with our July guide, we do have the headwind in.
In the CNI yield portfolio, because it is very competitive out there.
I think for the most part banks are competing on price and non banks are competing on structure. So for us the price headwind.
It comes in just a little bit tighter spreads, but also some of the reduction in the LIBOR floor. So you lose some of that excess earnings in this environment, but you can <unk>.
Perhaps recapture the yield benefit is the fed's starts to move on the on the front end of the curve hopefully in the next year to 18 months, so as expected, but certainly a headwind when it comes to pricing.
Okay. Good. Thank you very much for all the color.
Your next question comes from the line of Peter Winter with.
Securities.
Good morning.
You guys you guys have done.
Job on the securities yields with the right box on the cash flows and the bullets.
I'm wondering.
Is this type of securities yield sustainable into next year.
With with the remarks continuing.
Yeah, I would say Peter it's we're inoculated from the right environment that we're not immune to it so it's.
As you saw in the numbers this quarter and as we look out even next quarter. It is.
A steady grind down as we reinvest the cash flows so that's her.
Hurts the yield a bit 10, 15 basis points or so.
If you look out on the bullets themselves they're at a.
$2 65 yield.
With <unk>.
Cash flows I think we're projecting about $7 billion cash flows in that portfolio over the next five years. So there will be a step down should rates stay where they are today reinvestment yields right. Now I think are in the 170 to 180 range. So.
Barring a curve steepened or it'll be.
A slow flights definitely downward trend on the portfolio yield the good news for US is we're very well positioned and it is.
Pretty insulated from the environment relative to help appears a physician their portfolio.
Okay.
And if I could just follow up on <unk>.
Expenses.
You've had the benefit of those expense initiatives this year, which clearly benefited.
When looking at the fee income growth relative to the expense growth can you just talk about some of the expense seems opportunities going forward we.
Go into the next year or has a lot of the low hanging fruit didn't realize and if you could also talk about any inflation pressures.
Looking to next year.
Sure. Thanks for the question. The one update we have an expense savings in our program for 2022 is that.
We are targeting $125 million in savings for 2022, and that's a combination of the lien process automation intelligent operations. The branch closures. We have 42 branches closing in the first quarter of 2022, and then some smaller vendors savings bundled together so we've tightened the range on that.
Bundle.
Savings from $100 million to $150 million to 125, and then obviously, we're not getting into expense guide for 2022, because we will continue to evaluate how much of those savings will be reinvested into the.
Salesforce expansion on commercial as well as the wealth and asset management, but we feel good about the progress we're making.
On the LPGA program in fact, if you.
You look in the press release buried I think at the bottom of page 14, as an FTE count and we're down a couple of hundred FTE, even with adding about 100 from the provide acquisition and that's starting to show the benefit of that LPGA savings. So we've we've made progress we've had some success there is.
$6 million of savings and our fourth quarter forecast tied into that program, but then the $125 million for next year.
And the head count there doesn't even reflect the benefit from the offshore right automation savings on offshore processes that were completed by JV partners, what word painting north of 20% at this point of the processes that where offshore now fully automated.
And from the other part of your question on inflation in terms of.
Wage inflation and other things we've been able to.
Manage through the environment from an employee and cost structure and still deliver.
Fairly stable expenses this quarter, we continue to <unk>.
<unk> opportunity to to do the same while there is the wage inflation and other pressure. We do have those other opportunities ahead of us and so perhaps some of the $125 million would be absorbed by some inflationary pressure, but ultimately.
A moderate amount of inflation would ultimately be very positive for the bank in terms of PNR and.
Interest income capabilities.
That's great. Thanks, Jamie.
Your next question comes from the line of Gerard Cassidy with RBC.
Good morning, everyone will draw in the morning.
Greg when you look at your C E T one ratio.
Target and to bring it down to 95%.
Next year.
It looks like if I recall correctly, you're required number is 7% by the feds.
What would it take for you guys to bring it down from 95% to something lower or is it no the 95% and set in stone and you're just not going to budge off of that so there's nothing says Gerard but it did it did we think just approved place to be.
Multifacet, we think about that level.
Obviously, we believe it through the bank at a much lower level.
But also watch with the market storm environment, we're operating in where our peers are doing we just suggest approve target point to shoot for at this point.
Very good and then maybe Richard.
Talk about credit quality, obviously your numbers similar to some of your peers are quite strong, particularly in the net charge offs area.
And I suspect that this is unusually good and it's not sustainable just due to normal.
Seasoning and portfolios how long do you think you guys could see net charge offs stand is extremely low level and when do you think do they start creeping up too.
More normal level I know normal is hard to define but when did they start to creep up yeah.
Yeah Gerard thanks for the question.
Clearly, we're pleased with the eight basis points this quarter and like you said, we don't think that's going to repeat.
But given the the economic outlook, we do expect charge offs to be better than our through the cycle average and probably.
Certainly into 22 and into twenty-three for a couple of reasons, one it's going to be simply the amount of liquidity that's out there to inflation collateral values continue to be strong and when we run our mid cycle stress tests, we're seeing 25 to 35 basis points.
As a charge off range for the bank through 22 and 23.
Now that as I said, it's a little bit lower than what we think the long term average is if you recall, we think through the cycle average is somewhere between 35 and 45 basis points.
But given our approach given the way we manage the balance sheet that way, we think about client selection of underwriting we think it's a it's a it's a grind through 22 and 23 pack to something that feels a little bit more normal.
[noise] great appreciate it thank you.
Your next question comes from the line of can Houston with Jeffrey.
Alright. Thanks, Good morning, Hey, Jamie I was wondering if you can elaborate a little bit more on on the portfolio structure. So when you talk about the 7 billion, that's kind of we're going to run off over the next several years ha-ha.
Hire the on that part of the book and when you're reinvesting the cash flows to keep the book flat are you also buying back some new type of bullet structures or are you just more investing in kind of plain vanilla today.
So we've been buying a little bit of everything.
When we're reinvest in the portfolio cash flows I've been running about 1 billion five a quarter.
Second quarter third quarter.
So depending on on the day, we've added some level ones, we've added some level twos.
But in total the mix hasn't really changed a whole lot and then in terms of the bullets over the next couple of years.
It's a very small number in terms of total cash flow, maybe a couple of hundred million.
And then over years 345, then you start to have cash flow portfolio in.
But right now the total book bullets as well as the cash flowing securities where in a 275 yield give or take and then for the fourth quarter yields should be a little bit better than that with.
Little bit of seasonal.
Mutual fund dividends in the end QVC, plus a little bit of prepayment penalties that have occurred thus far in October.
Okay got it. Thank you and just to follow up with you guys have been really taking down the long term debt footprint, which is still even add size. The majority of your interest bearing liability costs is one of the worst the level of button that you need to keep it at and what's the tradeoffs versus.
The deposit base the mix of deposits and how much more could you potentially returned to reduce that footprint. Thanks.
Probably at the.
The low point in terms of the long term debt outstanding we had a maturity in September 850 million that will.
Well, perhaps look to replenish in the next quarter or two but I think we're at a good spot more wall position, we've been able to utilise, the excess liquidity and take advantage of the environment to deliver some savings.
From a cost standpoint, both from long term debt as well as running off some of the CD book that.
Certainly behaved more like wholesale funding than the core deposit books. So.
I think we are in a good spot probably reached the the end of the line on the long term debt probably have a little bit more.
More room on the CD book to run it down a little bit more.
Okay got it thank you.
Your next question comes from the line at John Kerry with Evercore.
Good morning.
Uhm, Greg you mentioned some key talent hires that should help drive nonproduction into 2022, you know provide a little bit of color on the areas, where you're where you are hiring particularly within the the lending areas I missed that hiring is continuing.
Absolutely. Thanks for the question, obviously, the southeast markets and we've been adding to our mission manager bankers in that market with a lot of success theirs were real pleased with the production. We're seeing that market will continue to add in that market on those great opportunities. We run a good franchise down there and that's obviously a focal point for our expansion. In addition to that I would say, Texas.
The West Coast, California, the talent, we've been able to acquire in those markets. The bankers that we brought on significant increases in bankers in those markets over the last two or three years and were seized great.
Great progress from a production perspective alpha.
Outstanding perspective, so like those are the strategies, we watch it very carefully and we invest what we see opportunities in those areas continue to be great opportunities for us.
And when it comes will be distorted with Tim the Cvs any Kelly wants to add to that yeah.
I think a couple other Greg hit that the geographic points. We also are in the process of building out a mortgage warehouse vertical that's a good business for us it's a business, we abandon historically, but it hasn't been a point of focus and we saw an opportunity there with some talent to go out and take some market share. So I think that that's an area we can.
Continue to add to the renewables team and are focused on how we.
Be able to land has some really important talent into provide post the provide acquisition in and I'll have now formally launched the VAT vertical there for veterinarians. So I think it's going to be a really good source of growth to complement the strength, we already had medical dental and that business line.
Got it alright. Thank you and then secondly, just update us where you stand on.
On your core system upgrade can you maybe remind us of the timing of the project and the cost of that you see tied to it and then separately do you see any risks to the cost that you had budgeted for the upgrade given the wage inflation dynamics. Thanks.
First of all for our Tech budgets. This may take that versus is about $700 million now it's been growing about 10% per year for the last five years.
You think about our court platforms, we talked about the modernization effort that's been going on for a couple of years you saw it with a mortgage loan origination system. The resiliency platforms, we put in place.
The data architecture strategy and we rolled out.
Next coming up is obviously Fas core deposits and we're gonna Miss right now turning on and snow, that's going extremely well and something we're very pleased with so this is an ongoing effort. If you asked me if it was a baseball analogy would probably in mid eddings here, but it's alone game and we will continue to invest prudently. In addition to that you think about our tech <unk>.
<unk> <unk> focused on being able to take hostile so lead process auto nation has been of great focus.
Our business in.
In an area, where we've made a lot of progress and so we'll continue to invest for those opportunities will continue to stay focused on where platform replacement.
Partnership with Fas effective where their largest processing customer if.
If you think about how we think about that business and integration when we're done with the corps platforms will be able to manage costs vary officially.
And effectively through that exercise. So we're very comfortable with what we think the new operating environment will look like from cost perspective, but if you think about our our our check spent how we think about our business, it's really 50% keeping the business running so to speak 35% advance into business and 15% protecting business.
John John It's Timmy, one just small point to add to that and it came up earlier there was a question about inflation in wages.
Jamie said earlier, we were immune but not inoculated on a different point I'm, sorry, inoculated, but not immune on a different point and here again, we raised our minimum wage to 18 Bucks an hour in 2019 I think we were the first to the regional banks certainly of our peer group to have made that move in the byproduct of that is we are watching.
As I am sure you are the announcements coming out of many of our peers that they're raising their minimum wage, but they're getting to $18 an hour in nearly all cases, which is where fifth third is already at in the byproduct of that is.
A lot of that in near term impact is kind of in our run rate.
Got it alright, thanks for taking my questions.
Your next question comes from the line of B L Kashi with Wolf research.
Oh, good morning, I wanted to follow up on your net charge offering commentary as you think about the normalization of drinks jewelry. It's off these low levels to the 25 35 basis points in 22 23 that you mentioned is.
Is the level of your reserve rate currently high enough.
Such at the trajectory is also likely to be flat to down even as as once you reach normalize higher.
Any color that you can give on that dynamic we'd be helpful. Yes.
Yeah, I think it's a little tough.
To take a life of loan expected loss rate of the ACL and compare it to.
Short term forecast because.
The lone maturity certainly.
R. A swing factor in that so obviously, we're comfortable with our ACL at 200 basis points, it's 204 basis points excluding PPP.
So yeah.
Yes.
Comfortable that the ACL is adequate to cover the <unk>.
Expected losses over the life of the loans and then when Richard's talking about those periodic.
Charge off levels for a a point in time and with.
A fairly shorter duration portfolio throwing off some of those losses in the consumer side, a card and auto.
I think we're at a good spot.
Mmm very helpful. Thank you and then following up on the utilization commentary.
To the extent that supply chain.
Adams were to extend.
Further into next year, how much do you think that that weighs on just giving them the make up of your client base. How much is it would that sort of when the the.
The normalization of utilization rates versus the potential for for those utilization rates to continue to improve even if those supply chain problems, where where to spend a bit longer.
Yeah, I think we're seeing stable line utilization because of those supply chain constraints. So.
Hopefully the worst case scenario would be stable as we talked about in our guide we expect a little bit of an uptick both from a seasonal one year and positioning with our customers of about half a percent. So we've reduced.
Our outlook on utilization because of the supply chain and labor constraints.
From a next year perspective, hopefully they get resolved and we'll start to see inventory built and that should provide a little bit of a tailwind to our loan growth expectations.
Thank you for taking my questions.
Your next question comes on the line of Man, Oh, Connor with Deutsche Bank.
Good morning.
Good morning.
I was wondering if you could dig a little bit more into some of the lone yield pressure.
Talking about earlier on and if you kind of a hold.
Rates constant when does that eventually flattened out.
Yeah, Matt.
For our quarter, if you look in the tables and you look at the gross yield decline.
<unk>, it's really driven by three factors, one <unk> had elevated prepayment.
Loan fees that get recorded in the NII. So <unk> was high so that was a portion.
You have <unk>.
Regular repricing front book back book phenomenon and that's weird.
I would characterize it as three basis points or so of NIM from that and I expect that should continue into the fourth quarter and then the other phenomenon on the LIBOR floor is more a consequence of getting through renewal season, and some of the other things happening out of the second quarter, so that should dissipate, but that was.
Call. It a third half of that yields compression you see in the in the tables and the earnings release. So as we look ahead I would expect a couple a bit.
Two to three <unk> headwind from C&I loan yield compression for all of those factors into the fourth quarter and that's why we're guiding.
Reported them down as well for the fourth quarter similar to what we saw in the third quarter.
And then I guess beyond four two I mean is there still a fair amount of repricing between the backbone from Boston and all that.
And are you getting close too.
Sorry go ahead.
Thanks for the question.
I think from a proper backfoot perspective, it's.
The tailwind as the curve Steepening, we've seen in the third quarter and showed that continue we'll hit that intersection.
But and so we give a little more left you do have the repricing effect.
Continuing where new loans are coming on it lower yields than the runoff and paydowns in the back book.
I think on top of that we have done a nice job managing.
NII in the balance sheet through this environment and we certainly have.
Dry powder, whether it's through the asset sensitivity or the $33 billion of excess cash that we could choose to deploy to mitigate those effects.
If need be but for now we still think patients.
That's still the way to go and therefore, if there's a little bit of Nimbed compression along the way that's fine our focus is more on the long term and delivering the best performance. We can over the next five years.
Okay. Thank you.
Your next question comes from the line of Mike Mayo with Wells Fargo.
Hi.
You might be mentioned positive operating leverage in 2021, even while we spend 10% more on Tac and nightmare in the fourth or fifth inning of your cat transformation. So I guess the question is do you intend to continue to spend around 10% more on tech each year and how is that changing it.
Especially as you move off premise as much as you are is they're going to be a period, where you have to run somewhat parallel systems and then you'll get the benefit in a few years out and more generally how do you think about the the number of tech partner that you have and if you can quantify the number I'll take that too.
Yeah, and Mike. This is Greg this headache, 10%, probably the right number for us that's not cast in stone.
As you mentioned operating leverage plasma operating leverage that's something we're very focused on we deliberate will delivered in 2021 as we go into our planning process for 2022 or focuses on positive operating leverage so as I mentioned earlier some of that tech spending has gone right to.
Process efficiencies, we were able to take out the 200, plus additional people and so forth branch closures. Some things that we're working on right now on the expense side of the house the support step positive operating leverage and we continue to grow fees that are really robust rate.
Close to 10% CAGR of last couple of years, So net net plausible operating leverage.
Something we're very focused on believe it can continue deliver on this is that the text then we'll roughly run around 10 plus percent. When you think about the core platform modernization, we talked about the fourth or fifth inning, I think of it more as a crew.
Test matches, it's been going on it's going to continue to go on for quite some time, we're going to have to deal with that.
But at the end of the day I think as we put these new platforms in we're able to do the very systematic way with respect to how we turn these platforms on so it's not the big Bang approach really turned on by geography by product line. So we're we're very insulated for having to do a big Bang an impact with that said you have you have some dual system platform.
That are going to run simultaneously till we get old markets all products converted over.
In the case of some of our major implementations coming up with our core deposit platform. So that's going to take a little bit of time, but it did that we should be a lot more efficient we should be able to bring more enhancements that are different cage forward to our business, we should be able to continue to take out costs through our lead process automation and our investments in AI technology. So net net.
Check is going to be a sources of Ah spend for us in that range as I mentioned before as we go forward, but then I think we're getting paid very well for our objective is to go head to head with the Fintech players the large.
Bank competitors that we have to deal with.
And be very successful and we've been able to do that and demonstrate that when you think about the fintech players that are out there. We got the same capabilities he's going to approach like momentum, but we also got 53000 free Atm's 1100 banking centers and 10000 service personnel. If they don't have and we got the core relationships. So no net will continue to stay focused but that's.
Kind of a range of organ operated.
That's helping us one more follow up just one simple thought I mean, there's a debate of how much banks should keep on premise versus off premise clearly you're going more in the off premise direction and it seems like you are accelerating at what was the tipping point I've always the biggest factor.
What.
I want to have more of the open architecture of be off premise, even though to some other banks are saying, we want to keep a lot of.
Patterns.
Think.
We intend to transition basically you said, 90% on premise.
Do you think about that for the next five years.
As we as we look at this is what's going to shift.
As you mentioned before so 9% on premise is going to shift the roughly 90% off premise and 70% of that will be hosted in a private cloud. When you think about platforms like <unk> as soon as we're going to be private clouds, and the public cloud AWS about 20%. So you think about the ship 90% will be.
An off premise model and roughly 70% private 20% public.
Alright, thank you.
[noise]. Your next question comes from the line of David Conrad with K B W.
Yeah.
Hey, I was hoping you could help us out with if there's any constraint limitations on the balance sheet, meaning.
We look at our earnings models over the next couple of years and redeploy a lot of the excess liquidity just wondering some of your peers as mentioned, maybe 30% of earning assets would be the the limit of securities regardless of race. So just wondering if you've thought about a constraint on the Security's book and then also embedded in the scared.
These books the C M. B S portfolios kind of crept up now, it's just under 60% or the the available for sale didn't know if there. It's all agency are predominantly agency, but didn't know if there is a concentration limit that you would have on that portfolio as well. Thank you.
Thanks for the question David the short answer is that when we look at the excess liquidity call at 30 billion, we expect a third of it.
Go into the securities portfolio, a third of it in the loans a third of it we think while.
Deposits in the banking system may not decline, we do expect those deposits to find it more productive home, perhaps money market funds or other investment vehicles so for us.
Running at 18% or so in the Securities book as a percent of total assets. So if we.
Take call at $10 billion of the excess liquidity and put it in the book, where it 23, 24%, that's that's where I'd like to operate a somewhere 23% to 25% of total assets, but it's not a capacity constraint.
It's more I think given the environment, that's a more productive place to be in terms of the sea mbas.
I think the heart of your question is asked what is the non agency MBS.
Portion of the portfolio.
That's 3.8 billion or so and again that for us.
Super Senior tranches, we feel very good about the credit enhancement 30 plus percent there so.
Not a not a large credit risk position to have whereas the rest of the C. O B S book would be agency guarantee.
Great. Thank you.
At this time there are no further questions I would like to turn the floor back to management for any additional or closing remarks.
Thank you Angie and thank you all for your interest in fifth third please contact Investor Relations Department. If you have any further questions.
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