Prepared remarks
Hello, and thank you for joining us. My name is Tiffany, and I will be your conference operator today. I would like to welcome everyone to the Fifth Third Second Quarter 2025 Earnings Conference Call. I will now turn the call over to Matt Curoe, Senior Director of Investor Relations. Please proceed, Mr. Curoe.
Good morning, everyone. Welcome to Fifth Third Second Quarter 2025 Earnings Call. This morning, our Chairman and CEO and President, Tim Spence; and CFO, Bryan Preston will provide an overview of our second quarter results and outlook. Our Chief Credit Officer, Greg Schroeck, has also joined for the Q&A portion of the call. Please review the cautionary statements in our materials, which can be found in our earnings release and presentation. These materials contain information regarding the use of non-GAAP measures and reconciliations to the GAAP results. As well as forward-looking statements about Fifth Third's performance. These statements speak only as of July 17, 2025, and Fifth Third undertakes no obligation to update them. Following prepared remarks by Tim and Bryan, we will open up the call for questions. With that, let me turn it over to Tim.
Thanks, Matt, and good morning, everyone. At Fifth Third, we believe great banks distinguish themselves, not by how they perform in benign environments, but rather by how they navigate uncertain ones. In the period of tariff negotiations, cross currents and interest rates and significant regulatory change, Fifth Third continues to deliver excellent profitability, strong credit trends and accelerating revenue growth. This morning, we reported earnings per share of $0.88 or $0.90 excluding certain items outlined on Page 2 of the release, exceeding consensus estimates. Adjusted revenues grew by 6% year-over-year led by 7% growth in NII. Adjusted PPNR increased 10%, and we delivered 250 basis points of positive operating leverage, our third consecutive quarter of positive operating leverage. Our key profitability metrics continue to be very strong and among the best of all peers who have reported thus far. Our adjusted return on assets was 1.2%. Our adjusted return on tangible common equity was 18% and our efficiency ratio was 55.5%. Our credit metrics were strong and improved as we said they would. At 45 basis points, Net charge-offs were at the bottom of our guidance range and improved over the prior year. NPAs declined 11% sequentially, led by an 18% decline in commercial NPAs. Early-stage delinquencies declined again and are near historical lows. As a result of our strong financial performance and the positioning of our balance sheet, tangible book value per share increased by 18% over the prior year and by 5% sequentially. The strategic investments we have made over the past several years drove our results in the quarter. In a quarter where even C&I loan demand and the soft housing market made loan growth tepid for the industry, our diversified loan origination platforms produced average loan growth of 5% over the prior year. We grew loans in C&I, CRE, leasing, mortgage, home equity, auto and both our Provide and Dividend fintech platforms. Investments we have made continue to support strong loan growth in future quarters. Commercial relationship manager headcount increased by 11% year-over-year, and Provide had record production in the first half of the year. In our home equity business, we were #2 market share in our footprint and first half production growth was third best in the country. Both Provide and home equity are examples of the benefits we have achieved from digitally enabled lending channels, combined with One Bank collaboration. Our investments in the Southeast also continue to produce strong results across business lines. Our Consumer Bank grew net new households by 6% over the prior year in the Southeast. The granular deposit growth those households provide has provided flexibility to continue to manage deposit costs even as the Fed paused on rate cuts. In the second quarter, our average cost of consumer and small business deposits in the Southeast was 191 basis points. A 250 basis points plus spread to Fed funds. We have added 10 branches year-to-date in the Southeast, and we'll open another 40 before year-end, bringing us to nearly 400 branches across all our Southeast markets. In Commercial Banking, our Southeast regions have contributed more than half of total middle market loan growth over the past year, with North Carolina, South Carolina, Georgia and Alabama producing the strongest results. New middle market relationship production has also accelerated across the Southeast, where our teams have added 50% more new quality relationships year-to-date than they did over the same period last year. In Wealth Management, our Southeast markets grew assets under management by 16% year-over-year to nearly $16 billion in total AUM. Adviser headcount is up about 15% in the same markets, which should support future growth. We also continue to see benefits from our investments in innovative tech-enabled products. In Consumer, J.D. Power recently recognized the Fifth Third mobile app as #1 in user satisfaction among regional banks. And we also launched an initiative to provide free will to every Fifth Third customer through an exclusive partnership with Fintech Trust & Wealth. We will begin to embed AI-enabled functionality into our mobile app in the second half of this year, which should further improve the user experience and reduce volumes and higher cost service channels. In commercial payments, our investments in our new line embedded payments platform led to 30% revenue growth compared to last year and an increase of more than $1 billion in commercial deposits connected to Newline services. We continue to win more business from existing clients and to see transaction migration from legacy ACH to modern instant payments rails. During the quarter, Rippling selected Newline to be their payments infrastructure provider, joining our existing roster of blue-chip fintech customers. In my annual letter to shareholders this year, I reminded readers that the global economy is a complex adaptive system and the complex systems react to change in unexpected ways. These days, we are witnessing a lot of change in a short window of time. While we continue to be hopeful about the prospects for the second half of the year, we are also positioned to perform well in a broad range of environments. Our business mix is naturally resilient. Our balance sheet is defensively positioned and we have the flexibility to react quickly as conditions change. Bryan will provide more detail on our outlook, but I want to emphasize that we do not need a change in the interest rate environment or a material change in market activity to continue to produce strong profitability and organic growth. We are raising our full year guidance on NII given the strong first half performance. We remain very confident in achieving record NII in 2025, even if there are zero rate cuts for the remainder of the year. We will deliver 150 to 200 basis points of full year positive operating leverage even if the capital markets do not recover, given the strong first half performance and the expense levers we have at our disposal. We will resume share repurchases in the third quarter. Our capital priorities continue to be funding organic growth paying a strong dividend and share repurchases in that order. Our operating priorities will also remain unchanged: stability, profitability and growth in that order. Before I hand it over to Bryan, I want to say thank you to our employees for your dedication to your clients. Your commitment to getting 1% better every day is why Fifth Third was recently recognized by USA TODAY as a top workplace and by Forbes as Best Employers For New Grads, and I love being part of your team. With that, Bryan will provide more detail on the quarter and our outlook for the second half of the year.
Thanks, Tim, and thank you to everyone joining us today. Our second quarter results again reflected the strength and momentum of our company. On an adjusted basis, revenue increased 6% year-over-year and 5% on a sequential basis. Our stable and growing NII remains a strong contributor to our performance. We continue to realize the benefits of our diversified balance sheet and business mix through sustained loan growth, fixed rate asset repricing and the flexibility to execute proactive liability management. Our revenue performance, combined with our ongoing expense discipline, resulted in a 10% increase in pre-provision net revenue and 250 basis points of positive operating leverage on an adjusted basis compared to the second quarter of last year. Tangible book value per share, inclusive of the impact of AOCI, grew 18% from the prior year and 5% versus the first quarter. Our investment portfolio philosophy to focus on bullet and locked out securities in order to have certainty of cash flows continues to pay off. The unrealized loss in our AFS portfolio improved 6% sequentially and despite the 10-year treasury rate being a few basis points higher than the prior quarter end. The AOCI burndown will continue to benefit tangible book value per share growth as these positions pull to par. Now diving further into the income statement. Net interest income grew 7% from the prior year and 4% sequentially. Net interest margin expanded 9 basis points sequentially. The broad-based loan growth, continued repricing benefits and deposit cost improvements all contributed to this performance. NII was also favorably impacted by the payoff of the nonperforming loan which contributed $14 million to NII and 3 basis points to NIM in the quarter. Excluding that payoff impact, NII still grew by 6% from the prior year and 3% sequentially. Which is at the high end of our guided range. This interest realization is an example of our proactive credit management, working with our clients to achieve loss minimization through the workout process. As Tim highlighted, our diversified lending platforms continue to support strong balance sheet performance. Average portfolio loans grew 1% sequentially, while period-end loans were stable despite a decrease in commercial utilization. Consumer loans were up 3% on a period-end basis and 2% on an average basis from the prior quarter. On a period-end basis, we saw growth in every major consumer lending category led by continued strength in our secured lending products, such as auto and home equity lending. Commercial loans increased 1% on an average basis and declined 1% on a period-end basis. As I highlighted in early June, line utilization peaked around April month end at 37.5%. Post-April, we have seen a gradual decrease to 36.5% as of June 30. Approximately 40% of the decrease in line utilization was driven by growth and commitments. In addition to the utilization trend, period-end loans were impacted by a $400 million sequential decrease in commercial construction balances as projects were refinanced into the permanent market. Economic uncertainty impacted client confidence and resulted in the lowest quarter of commercial loan production over the last year. There were some bright spots with continued strong production in Chicago, the Carolinas, Georgia and Alabama. While utilization has impacted balances, commitments continue to grow. Middle market pipelines have also rebounded during the quarter as our third quarter pipeline is up almost 50% from the prior quarter. Shifting to deposits. Average core deposits were stable sequentially and as an increase in demand deposits was largely offset by a decrease in interest checking. Our strong liquidity profile continues to provide us with the flexibility to actively manage our overall funding costs while executing tactics to grow granular insured deposits. As a result of these efforts, interest-bearing deposit costs were down 3 basis points sequentially and 65 basis points over the last year while we have continued to grow consumer and small business deposits, which are up 1% versus the prior year. Compared to the first quarter, demand deposit balances were up 3% on an average and end-of-period basis, this strong core deposit performance has allowed us to pay down over $4 billion of higher cost nonrelationship broker time deposits over the last 2 years. We will continue to prioritize high-quality, low-cost retail deposits, particularly in the Southeast with our de novo investments. The most recent vintages of de novos are significantly outperforming expectations. Branches built between 2022 and 2024 are averaging over $25 million in deposit balances within the first 12 months after opening, significantly outpacing our original expectations. We remain on pace to open 50 branches this year with 10 opened in the first half. We have now secured approximately 80% of the locations for the additional 200 Southeast branches that we announced in November of last year. Our deposit success, along with investment portfolio positioning has allowed us to maintain strong balance sheet liquidity while growing loans and managing deposit costs. We ended the quarter with full Category 1 LCR compliance at 120% and our loan to core deposit ratio was 76%, up 1% from the prior quarter. Moving on to fees. Reported noninterest income was up 8% year-over-year. These results were impacted by security gains and the impact of certain items detailed on Page 4 of the release. Excluding the impact of the security gains and the other items, adjusted noninterest income for the quarter increased 3% compared to the same quarter last year, led by growth in wealth fees, which grew 4% over the prior year due to AUM growth of $8 billion and consumer banking fees, which were up 6%. Commercial payment fees decreased $2 million due to lower commercial card spend activity and higher earnings credits from increased demand deposit balances offsetting the increase in gross fee equivalent. Our embedded payments business, Newline continued its strong growth with fees up 30%. Deposits attached to Newline services increased to $3.7 billion, up $1.1 billion compared to a year ago period. Capital markets fees were down 3% from the prior year, primarily due to the continued slowdown in M&A advisory revenue. Bond underwriting and loan syndication activity was strong during June, and client appetite for transactional activity during stable market periods remains robust. The security gains of $16 million were from the mark-to-market impact of our nonqualified deferred compensation plan, which is offset in compensation expense. Moving to expenses. Adjusted noninterest expense was up 4% compared to the year ago quarter and decreased 4% sequentially. The sequential comparison is impacted by seasonal items in the first quarter associated with the timing of compensation awards and payroll taxes. The previously mentioned deferred compensation mark-to-market increased expenses by $16 million for the quarter. Excluding the impact of the deferred comp mark-to-market in the quarter and in prior periods, expenses were down 5% sequentially and increased 3% compared to the prior year. The year-over-year increase in expense is due to continued investments in technology, branches and sales personnel partially being offset by the ongoing savings generated by our value stream efficiency programs. Shifting to credit. The net charge-off ratio was 45 basis points at the lower end of our expectations for the quarter and down 1 basis point sequentially. Commercial charge-offs were 38 basis points, up 3 basis points sequentially. Consumer charge-offs were 56 basis points, down 7 basis points, primarily due to seasonal improvement in credit performance in auto and credit card. Our NPAs declined 11% sequentially, as expected, led by an 18% decrease in commercial nonperformers. The NPA ratio decreased 9 basis points sequentially to 72 basis points. Broad-based credit trends remain stable across industries and geographies despite the market and economic volatility. Our provision expense for the quarter included a $34 million build in our allowance for credit losses. This build was primarily attributable to the deterioration in the Moody's macroeconomic scenarios, which now project a 0.5% increase in their baseline unemployment rate projection, which is up to 4.7% by 2027. The scenario-driven increases were partially offset by improvement in the overall risk profile of the portfolio, as indicated by the reduction in NPA. This increase in reserve build was slightly less than we expected in early June as utilization trends and commercial construction paydowns impacted period-end loan balances. The reserve build increased our ACL coverage ratio by 2 basis points to 2.09%. We made no changes to our scenario weightings during the quarter. Moving to capital. We ended the quarter with a CET1 ratio of 10.6%, an increase of 13 basis points and consistent with our near-term target of 10.5%. Our pro forma CET1 ratio including the AOCI impact of securities is 8.6%, up 60 basis points year-over-year. We anticipate continued improvement in the unrealized losses in our securities portfolio given that approximately 63% of the fixed rate securities in our AFS portfolio are in bullet or locked out structures, which provides a high degree of certainty to our principal cash flow expectations. Moving to our current outlook. With the continued momentum from the second quarter, we remain confident in our ability to achieve record NII and full year positive operating leverage approaching 2%. We now expect full year NII to increase to 5.5% to 6.5%, up from our earlier guide. This outlook uses the forward curve at the start of July, which assumes 25 basis point rate cuts in September, October and December. Due to the resiliency of our balance sheet, we expect to achieve record NII and our updated full year guide with no further loan growth and no rate cuts. Full year average total loans are expected to be up 5% compared to 2024, with the increase primarily driven by C&I and auto lending production. Our cash position, securities portfolio and commercial line utilization should remain relatively stable throughout the remainder of 2025. Full year adjusted noninterest income is expected to be up 1% to 2% as the muted capital market trends are offset by continued growth in other fee categories. We now expect full year adjusted noninterest expense to be up 2% to 2.5% compared to 2024. We will continue to execute our growth plans with Southeast branch builds and sales force additions in middle market, commercial payments and wealth. In total, our guide implies full year adjusted revenue to be up 4% to 4.5% and PPNR to grow around 7%. Moving to credit. We are tightening the range for full year net charge-offs to 43 to 47 basis points. The timing of charge-offs for individual credits may impact a particular quarter, but the midpoint of our full year expectations remains consistent with our beginning of the year guide. Moving to our outlook for the third quarter. We expect NII to be up 1% from the second quarter due to the benefits from fixed rate asset repricing and day count. We expect average total loan balances to be stable to up 1% due to strengthening C&I pipelines and continued broad-based momentum in consumer loans. Excluding the impact of the security gains, we expect adjusted noninterest income to be up 1% to 4%. Third quarter adjusted noninterest expense is expected to be up 1% compared to the second quarter as we continue to invest. We expect third quarter charge-offs to again be in the 45 to 49 basis point range. Turning to capital. We will continue to target our CET1 ratio at 10.5%. Based on our current projections for balance sheet growth, we expect to repurchase $400 million to $500 million of stock during the remainder of 2025. We continue to prioritize organic loan growth over share repurchases in order to deliver the best long-term returns for our shareholders. In summary, we expect to maintain our momentum in the second half of the year and achieve record NII, positive operating leverage and strong returns in an uncertain environment, all while continuing to invest for the long term. With that, let me turn it over to Matt to open up the call for Q&A.
Thanks, Bryan. Before we start Q&A, given the time we have this morning, we ask that you limit yourself to one question and one follow-up. And then return to the queue if you have additional questions. Operator, please open the call for Q&A.
Questions and answers
Your first question comes from Ebrahim Poonawala with Bank of America.
I guess maybe, Tim, just thinking about capital allocation. So I heard Bryan talked about the buyback appetite for the back half of the year. But just talk to us around how you're thinking about deployment of capital. Clearly, we saw one of your competitors announce a bank deal earlier this week. Like any sense of like strategically, even if we think about bank M&A picking up. Are there characteristics be it size, be it markets of a bank that we should be thinking about as shareholders of what we could buy. I mean, any perspective would be helpful.
Yes, that's a great question. From my perspective, our bank's capital priorities will always center on organic growth first. This is because organic growth is fully within our control, and being an effective acquirer depends on our ability to manage our core business well. Therefore, our main focus will always be to operate the company in a way that increases our market share organically while ensuring there is sufficient capital to support that growth. Additionally, we aim to provide a stable and steadily growing dividend and support capital returns to investors during times of excess capital through share repurchases. I wasn’t surprised by the recent announcement, as I have anticipated further consolidation in the U.S. banking sector, which is among the least consolidated industries globally. While mergers and acquisitions can help achieve strategic goals, they shouldn't be an end in themselves. There is a rationale for achieving scale across all sectors, but it must be the right kind of scale. For instance, in a scenario where we are competing against a significantly larger opponent, it wouldn't make sense to confront them directly. Instead, you'd utilize your strengths and the environment to offset their advantages. In the banking sector, our success lies in establishing substantial branch density in specific regions rather than spreading ourselves thin across the largest cities. Our strategy is to focus on density and drive organic growth by sharing customer acquisition costs across various product lines. The value in building strong relationships through offering a wide range of products and services is crucial. We must also prioritize continuity in our people and operations, as many in the industry operate very differently than we do. Our appetite for mergers and acquisitions remains steady, and one deal will not shift our outlook on capital deployment. Our ongoing focus is on effectively executing our strategy to benefit our shareholders.
That's insightful. I have another question. Considering that your charge-off range has become narrower, could you share your thoughts on the impact of the tax bill on the residential solar panel industry? How are you assessing the potential risks associated with your exposure and your business strategy moving forward at Dividend?
Yes. Ebrahim, it's Bryan. Thanks for the question. I guess, first, to just recap what's happened. The tax bill eliminated the tax credits on the residential solar lending business starting in January of 2026. Now so what does that mean for us? First, this has no impact on our existing solar portfolio. Our customers have already earned their tax credits, so no impact on that. From a credit perspective, we believe that the Dividend net charge-offs have peaked in the second quarter. And as you can see from our NPA and delinquency trends in the first half of the year, the risk profile of the solar portfolio continues to improve. All the enhancements we've done to this business that we've made to our platform from the installer management program, installer dollar coverage, joint borrower, collections enhancements, it's all helped to drive this credit improvement. We expect net solar charge-offs to decrease 15% to 20% in the third quarter from the second quarter level and decrease again in 2026 by another 15% to 20%. Next, the tax will impact future originations as the tax credit associated with the residential solar leasing product was extended to the end of 2027. This will create an uneven playing field in the solar finance industry for about 2 years. We expect the lease panel volume to increase while solar loans will decrease significantly. As a result, we think that our 2026 solar originations are probably down 70% to 80% from 2025 levels. While we were hopeful to have a level playing field in 2026, where both products were treated equally, we'll at least see that occur in 2028. Now how are we responding? We've been innovating to create a home equity product that we expect to launch in the first quarter of 2026 on the Dividend platform. While this product will not have a tax credit, it will allow borrowers to own their solar panels and generate tax-deductible interest, which should matter to some homeowners. The home equity product will also improve Fifth Third's collateral position from a UCC to a second lien. This product should also be appealing for other home improvement projects. So while we believe the solar originations will be down in 2026, with the new home equity product, combined with other enhancements we've made in our Dividend home improvement lending platform, we expect continued growth of our Dividend loans in the low single digits next year.
Yes. Just to put a point on one of the things Bryan said strategically, Ebrahim. The interest we had in home improvement as a category predates the acquisition of Dividend by several years. It has always been a home equity bank, but we also did the partnership with GreenSky back in 2015 or '16. I don't remember when it was. And I think what we learned as we spent time in home improvement is that the place that banks can play uniquely relative to FinCos and nonbank lenders is in the larger more complex home improvement programs, things that require multiple draws or that involve a prime in a series of subs. And what the fintechs can do in those markets is to finance the windows or the doors but they can't finance the whole kitchen, right, a full renovation. And so what we like about Dividend in addition to believing in the importance of distributed power generation and storage, which, by the way, we still believe is an important part of the way that we're going to solve the energy demand that we have in the U.S. The fact that solar is one of the most complex home improvement installations between the need for the reinforcement of the roofing, the installation of the panels, the high-voltage electrical and then working with the power companies to get permission to operate. So it's going to provide a really nice exoskeleton. That's always been the dream to be able to deliver home equity to a broader range of projects. And in fact today, even prior to the sort of expected reduction in solar volumes that Bryan mentioned, like 25% to 30% of new originations are home improvement non-solar related. So there is a good core business. What is going to happen is the origination volumes are going to fall. So I think our view is the Dividend is probably going to grow in line with the balance sheet as opposed to growing at a faster rate on a go-forward basis, meaning, call it, low to mid-single digits as a point of focus for us. But as Bryan said, that credit trends are incredibly encouraging. And I think they underline the comments that we've been making about focusing on the best quality installers and on super prime credit. So we're just not seeing the deterioration that folks who were full-spectrum lenders have had to struggle with.
Bryan, I wanted to ask on the margin improvement. Even if we adjust for the benefit of the NPA that you discussed in your prepared remarks, much better than you had articulated might be the case earlier this year. So I think we can see on Slide 5 kind of what's happening between quarters. But I guess just in your view, what's coming in better than you might have anticipated earlier this year? And what are we thinking about the pace of improvement opportunity going ahead or looking ahead? And then I guess the follow-up, I was hoping you might be able in your response, you sort of address what you see as competitive dynamics on both the loan and deposit side, rational, irrational, et cetera.
Yes. Thanks, Scott. Great question. The main factor contributing to our strong performance, aside from the NPA payoff, has been the growth in our DDA. We anticipated a return to growth in DDA now that interest rates have stabilized, and we experienced impressive results this quarter. This was certainly a key factor in our success. We remain optimistic about our ability to reduce costs in our deposit book while enhancing its composition. This is something we believe has been somewhat undervalued in our achievements over the past year, particularly the strengthening of our deposit base, especially in the consumer small business segment. Regarding our net interest margin, we continue to expect a 2 to 3 basis points improvement each quarter, driven by the repricing of fixed-rate assets and loan growth. It's essentially about consistent improvements in our operations over time, without any significant changes. If we adjust for the 3 basis points from the interest recovery, our NIM would align closer to 3.09%, and that 3 basis points each quarter puts us on track to achieve a mid-teens range by year-end. So, reaching approximately 3.15% still seems quite feasible. We feel good about our trajectory moving forward. In terms of competition, our industry remains highly competitive. However, I wouldn't highlight any major shifts happening on either the loan or deposit fronts at this time. Spreads are consistent with what we've seen over the past 6 to 12 months across almost all lending asset classes, and deposit competition has remained very reasonable. We have been successful in finding growth in the right areas while improving our deposit base.
Tim, maybe outside of the movement in utilization, we're obviously seeing signs of loan growth improving. You talked about investments to support loan growth, lenders up 11%, outlook sounds upbeat. So maybe just talk more specifically about your expectations for loan growth. And as you're out talking to corporates, do you feel they've gotten confident enough to start making big investment decisions and borrowing more? And I have a follow-up.
Yes. Great question. So let me take it by category. I think on the consumer side of the equation, the thing that gives us confidence is the diversity of the loan origination platforms we've got. We have long been believers that while residential mortgage is a really important product for us to offer to consumers, it wasn't a great balance sheet asset. And the byproduct of that is between what we're able to do in home improvement, what will be continued expansion in home equity, which has been an important driver of our growth. and the fact that the risk-adjusted spreads in the auto business are great right now, we just feel very confident in our ability to continue to generate what will be broad-based market plus 1 point or 2 sort of growth out of the consumer side of the business. And that provides a lot of ballast for us as you look at the uncertainty that exists in the corporates. I mean the positives, when you talk to customers on the commercial side of the equation at the moment are, one, there is a sort of general belief that as we continue to navigate uncertainty around trade and the tariff levels, but there's a value to them in running with a little bit of extra inventory, and that supports utilization. We're not seeing the big buys that we saw in the first quarter that drove up utilization for us, but we do hear from clients that they at the moment are preferring to run on balance with a little bit more inventory than they otherwise would have carried just to compensate for any short-term disruptions in supply chains. Second, the bonus depreciation, the accelerated depreciation schedule on capital equipment, it is that in some pockets in our customer base, generating real interest and replacing equipment. It felt last year in the second half of the year, in particular, like the U.S. was underinvested a little bit in capital equipment purchases. We heard from clients who had rental businesses, a yellow metal rental businesses and otherwise, that there's been a big boom in rental demand as people tried to buy time to ensure that they got the benefit of the taxes. So I think that is a positive catalyst. The element that just hasn't come through, and that's reflected in middle market M&A activity everywhere as the M&A-driven demand. And at some point, there should be a little bit of a capitulation where either the sellers accept that with higher interest rates being maybe a more permanent phenomenon that they need to seed to buyer pricing expectations or you have buyers who have been patient to conclude that this is the time to go. But that's really the third leg of the stool between the capital purchases, the inventories and then eventually some M&A.
Got it. And given your comments from before, you talked about identifying 80% of the locations in the Southeast, 150 to 200 basis points of operating leverage. I guess given the success that you're seeing in your business plus the success in the Southeast, does it make sense to accelerate your efforts here from an organic perspective? And just how are you thinking about the pacing of your growth initiatives from here?
I think somewhere, Jamie Leonard is grinning like a Cheshire cat right now because we have been running like the years that I was a consumer bank many years ago, the best we were ever able to do was to open 25 to 30 branches in any individual year. And they're running at a pace of 50 to 60 a year at this stage. So we have doubled the effort there. The other thing that we've invested in, we haven't spent a lot of time talking about is a big boost in the sophistication of our direct marketing capabilities, which then support that they're the way that we bootstrap the de novos and get a lot of early growth in terms of households and deposit balances. So we are accelerating the investments in those markets to the extent that we find a way to build 65 a year, I would love it. It's just what we have been unwilling to do is to compromise on the quality of the locations. And there then is nothing that we can do as it relates to the pacing on getting through local zoning jurisdictions and otherwise. So if we have the ability to get 60 done a year, we're going to get 60 done a year for certain.
This is Thomas Leddy standing in for Gerald. Given all the recent headlines, can you just give us your thoughts on stable coins and how broader adoption could impact both your payments business and deposit levels?
Yes. Happy to do that. I happen to be pretty excited about the prospects for stablecoins, but maybe not in the same places that are getting a lot of the headlines these days. We have a little bit of an advantage here in that we've banked a couple of the largest infrastructure providers to the crypto and in particular, the stablecoin sector for a few years now. And we've been able to watch the use cases that have evolved on those platforms and get a sense for it. And we also have a kind of an interesting asset that a lot of the other banks don't have in the Newline platform, which is really well architected to be able to support both the sort of payments and the intraday liquidity activity that's required to make stablecoins work as both stores of value and payment rails. Our interests are one, where there are companies that have the compliance infrastructure and the operational robustness to bank them and there are things that we will do there, whether it relates to reserve accounts or payment rails. And otherwise, but then secondarily as a user of stablecoins, I think in particular in some of the cross-border payments and the cross-platform settlement applications that are out there. Banks like us who are U.S. domestic banks have been outsourcing that sort of cross-border payment activity to correspondent banks. So that's a greenfield and anything that we can do even if it's disruptive in terms of the margins is a net positive for us. So I'm quite excited about that as a potential use case for our clients. I think the thing that's gotten a lot of the attention that I just don't believe in is the risk that stablecoins pose or don't pose to point-of-sale payments and to domestic payments in general. But I think the reason that the media has been wrong on this one is that there's been such a focus on the cost of credit card acceptance when cash checks, ACH and debit are all already price competitive and all already basically universally accepted. So the reason that people accept credit cards is because consumers want to use credit cards and the reason consumers want to use credit cards is because they either need the liquidity that the credit line provides or because they want the rewards. And the stablecoin rails today don't offer either of those features. And if they get added, they're going to have to increase the cost of acceptance. In order to offset the cost of providing the liquidity or the cashback rewards or otherwise. So stablecoins in markets with unstable central banks or not a broad-based banking system, absolutely an interesting application internationally, stablecoins for cross-border payment or for collateral and different exchanges, interesting use case, domestic payments. I think there's probably more smoke than fire on that one right now.
Okay. That's helpful color. And then just lastly, it appears expected regulatory relief for the industry will potentially have a pretty big impact on at least the money center banks, evidenced by the recent stress test results and their resulting stress capital buffers. Can you just share your thoughts on the potential benefits specifically for Fifth Third from the expected regulatory relief we might see over the next year or so?
Yes. Absolutely. I think if you asked the Tim Spence from 2023 or 2024, if I would regret not voluntarily submitting to an additional stress test, I would have thought that you were crazy. But at the moment, I wish that all banks had undergone the stress test this last time around because it probably would have helped you all to understand the benefits that will accrete to regional banks in addition to the big money center guys, the stress testing relief is going to be beneficial for everybody. The opacity of that process and the models that were used are just not helpful. And we're believers that transparency is a good thing and I think you saw the potential upside that regional banks will get in the form of capital relief from more rational scenarios and better to models and otherwise. And I expect us to see a benefit from there. We obviously will benefit from the step away from gold plating on Basel III, from sort of a more risk-based view of the liquidity rules that were originally proposed. And I have been quite encouraged by Governor Bowman's speeches, as it relates to the evolutions of the supervisory approach across the bank regulators. And then lastly, Ebrahim mentioned it earlier, but that was an encouraging sign that one of our peers announced an M&A transaction and expected a 6-month approval and close like that's evidence of a well-oiled regulatory review process. All that said, I just want everybody to remember that there's another side to this, which is not just the banks that are seeing regulatory relief. There are a lot of nonbank competitors who also have a lot of influence in Washington, some of whom is a category gave 10 times in this last election cycle, what all banks in total gave and who, as a result, are influential and policymaking circles. And they want to do a lot of the things that either banks have traditionally done or to have access to things that banks have traditionally only had access to without being banks. So there's a lot of work that we are continuing to try to do in Washington, just to make sure that there's a balanced view on what a level playing field looks like. I would love to see more de novo charters approved because that would mean with the competitors that we have to face in the field every day are playing by the same set of rules that we are but that there is going to be a balance. There's going to be a relief for us and increased competition.
I had a few questions just on balance sheet mix from here, and I'm looking at sort of the period-end data, the period-end data looked a little bit soft for commercial and very strong for consumer given Tim, in your comments about commercial clients and activity levels for the second half of the year, should we expect that mix of growth to change? Or is there a dynamic where you can continue to see strong consumer growth in the back half of the year in addition to a pickup in C&I growth?
I would expect to see balanced growth in the second half of the year. The utilization trends showed strong performance in the fourth quarter and first quarter, but there was a risk of a slight pullback. We believe that the increase in inventory was a major factor for the rise in utilization, and while that has reversed somewhat, we remain optimistic about growth moving forward. This optimism is reflected in our increased full year average balance loan guidance due to the strength we are experiencing. I also noted that commercial pipelines are up 50% and are now consistent with last year's levels, which contributed to a strong finish last year. Despite a minor pullback in utilization and some paydowns in commercial construction, we remain confident in seeing significant commercial growth in the second half, alongside ongoing broad-based growth from consumers. Yes, at this point we feel very good about our balance sheet positioning and we will focus on continuing to be core deposit funded. We have done what was necessary from a rate cut perspective. While our forecast based on forward rates assumes three cuts, we currently believe in a longer period of higher rates. Our focus is on balanced growth and potentially stabilizing costs, possibly seeing a small increase in funding costs as we grow, but this will depend on overall balance sheet needs. We plan to be in a more balanced growth mode as long as it supports net interest income and net interest margin.
I'm going to use the Metaverse analogy again, but this time it's a bit different. I'm not quite sure what your stance is. I hear your points, but can you clarify if commercial loan growth has returned to the industry? Consider the major banks, which indicate 5% loan growth for the year, a strong figure. You mentioned that the middle market pipeline is up 50%. However, on the flip side, you've noted decreased commercial loan growth in the second quarter. Others have mentioned this downturn might be temporary due to tariffs, with muted relationship banking and a reduction in just-in-time borrowing, as you pointed out, along with a drop in utilization by about 50 basis points. Your expectations for growth and commitment, along with your guidance for the year, suggest limited growth remains. So, are we seeing loan growth returning, or not, or is it still to be determined?
I appreciate your perspective, Mike, because if I did lay out all those points in a row, I can see how it would be confusing. You made a very important point at the outset that I want to highlight, and then I’ll address your question about loan growth, which really depends on the specific market segment we’re discussing. We don’t operate in the high-end markets like money center banks or investment banks, which experience activity that we don't. Our focus is on Main Street banking, primarily involving privately owned businesses or those now owned by sponsors. In that domain, loan growth is indeed returning, although it may not be at the level that many people expected when they discussed the return of loan growth. The uncertainty faced by manufacturers and material providers today is significant. I haven't interacted extensively with clients this quarter, but after visiting a few manufacturing environments, I've realized it's challenging to grasp their complexity without firsthand experience. I spoke with a supplier for a major appliance manufacturer and learned that each household appliance consists of multiple components, each made up of several parts, and a substantial portion of these parts are produced overseas. While there are some domestic alternatives available, such as steel for appliance casings, we still face limitations. For instance, despite having full aluminum production capacity in the U.S., one client mentioned we couldn’t meet even half of their demand. There are opportunities to increase capacity domestically, but companies need to be confident about future tariff levels before making those investments. Many deals are still unresolved. Similarly, for critical components like refrigerants used in HVAC units, the refining processes often don’t comply with EPA standards, necessitating reliance on imports from China. While we do observe valid reasons for borrowing, it occurs amid considerable uncertainty regarding supply chains and pricing strategies. There’s a complex negotiation happening with major distribution partners about how tariffs will influence costs throughout the supply chains. As a result, businesses are making decisions cautiously, rather than with a sense of reckless optimism. I believe there’s a chance for improvement in loan growth, but the second half of the year could bring its own uncertainties. We avoid providing guidance based on market externalities that we cannot control. Instead, we focus on setting realistic guidance and plans that we can achieve across a variety of scenarios. If the market conditions improve, we can scale up our support for increased activity, which is much easier than adjusting downward if we were overly optimistic and things don't materialize.
I guess that goes to your point about changes to complex systems and difficulty in predicting those.
Tim, maybe following up on the loan growth. I mean any comments on credit spreads? You've seen a lot of peers talk a little bit more optimistically about growth in the quarter. What have you seen, if anything, on credit spreads?
Chris, it's Bryan. Credit spreads have actually been pretty stable. In general, we're seeing spreads in line with what we've been seeing, honestly, for the last handful of quarters. So nothing that we would call out on that front. I mean the only thing that we're seeing from time to time is that some folks are getting a little bit of rationale on protecting house accounts every now and then, and it's more about defending business versus seeing unreasonable credit spreads as people are trying to grow.
Yes, it's Greg. I would categorize the NPA reduction that Tim mentioned as aligning with our commitments. Last quarter, we indicated we had good visibility on resolving 40% of our commercial NPAs in the upcoming quarters. We achieved 18% of that this quarter, and I feel confident in our ability to reach 40% over the next few quarters based on current observations. Additionally, not only have we made significant progress on existing NPAs, but our inflows of NPAs have decreased by 77% from last quarter. We are not experiencing the same inflows as we did previously, which reflects improved overall credit performance alongside our proactive portfolio management efforts.
Tim, I want to return to your stablecoin. Many people are asking what this means for Fifth Third and your customers. Stripe is considering adopting their own stablecoins, so how does that impact business for a company like them if they have their own stablecoin? Could you explain that for us?
Yes. The short answer is that for companies like Stripe or Fireblocks, the growth of these technologies is beneficial and likely creates more business opportunities for Fifth Third. To buy a stablecoin, you need to convert fiat currency, and we are involved in that process. Additionally, converting a stablecoin back into dollars after a transaction also involves us, as we provide conversion services. We also manage the holding of value in reserve accounts and intraday liquidity, which includes the minting and burning of coins. We offer instant payment solutions that integrate easily with existing systems, eliminating the cumbersome reconciliation process required by other infrastructures. However, it's important to note that many companies that are vocal about adopting stablecoins, like Stripe and Robinhood, focus heavily on cross-border transactions. For instance, Stripe processes payments globally and needs to manage various costs in multiple jurisdictions, making stablecoins ideal for facilitating those transactions quickly across borders where local payment systems lack interoperability. I am optimistic about the potential benefits of this for us. On the other hand, the possibility of people moving money from banks to stablecoins for domestic payments or cash management seems unlikely. We have digital money options that provide yields, unlike stablecoins, through online banks and money market funds. Additionally, we already have widespread, low-cost instant payment solutions in place. Therefore, I believe stablecoins face significant challenges when it comes to domestic use.
Okay. That's helpful color. And then just lastly, it appears expected regulatory relief for the industry will potentially have a pretty big impact on at least the money center banks, evidenced by the recent stress test results and their resulting stress capital buffers. Can you just share your thoughts on the potential benefits specifically for Fifth Third from the expected regulatory relief we might see over the next year or so?
Yes. Absolutely. I think if you asked the Tim Spence from 2023 or 2024, if I would regret not voluntarily submitting to an additional stress test, I would have thought that you were crazy. But at the moment, I wish that all banks had undergone the stress test this last time around because it probably would have helped you all to understand the benefits that will accrete to regional banks in addition to the big money center guys; the stress testing relief is going to be beneficial for everybody. The opacity of that process and the models that were used are just not helpful. And we're believers that transparency is a good thing, and I think you saw the potential upside that regional banks will get in the form of capital relief from more rational scenarios and better to models and otherwise. And I expect us to see a benefit from there. We obviously will benefit from the step away from gold plating on Basel III, from sort of a more risk-based view of the liquidity rules that were originally proposed. And I have been quite encouraged by Governor Bowman's speeches, as it relates to the evolutions of the supervisory approach across the bank regulators. And then lastly, Ebrahim mentioned it earlier, but that was an encouraging sign that one of our peers announced an M&A transaction and expected a 6-month approval and close like that's evidence of a well-oiled regulatory review process. All that said, I just want everybody to remember that there's another side to this, which is not just the banks that are seeing regulatory relief. There are a lot of nonbank competitors who also have a lot of influence in Washington, some of whom is a category gave 10 times in this last election cycle, what all banks in total gave and who, as a result, are influential and policymaking circles. And they want to do a lot of the things that either banks have traditionally done or to have access to things that banks have traditionally only had access to without being banks. So there's a lot of work that we are continuing to try to do in Washington just to make sure that there's a balanced view on what a level playing field looks like. I would love to see more de novo charters approved because that would mean with the competitors that we have to face in the field every day are playing by the same set of rules that we are but that there is going to be a balance. There's going to be a relief for us and increased competition.
Thanks, Bryan. And thanks to everyone for your interest in Fifth Third. Please contact the Investor Relations department if you have any follow-up questions. Tiffany, you may now disconnect the call.
Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.