管理層發言
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 go ahead, 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 in market share in our footprint, and first half production growth was the 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 given us 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. We also launched an initiative to provide free wills 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 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 payment 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 that 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 no 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 is to focus on bullet and locked-out securities in order to have certainty of cash flows, which continues to pay off.
The unrealized loss in our AFS portfolio improved 6% sequentially 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 non-performing 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 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 non-relationship 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 non-interest 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 non-interest 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 by $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 the 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 non-interest 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 compensation 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 non-interest 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 non-interest 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 non-interest income to be up 1% to 4%. Third quarter adjusted non-interest 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.
分析師問答
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, strategically, even if we think about bank M&A picking up. Are there characteristics, be it size or 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, the bank's capital priorities will always emphasize organic growth first. This is because organic growth is entirely within our control, and a key factor for successful acquisitions is managing our core business effectively. Our priority will always be to operate the company in a way that increases our market share organically, while also ensuring there is enough capital available for this. Additionally, we aim to provide a stable and progressively growing dividend and support capital returns to investors during times of excess capital through share repurchases. I wasn't surprised by the recent announcement regarding consolidation; I've been mentioning for some time that further consolidation is likely, as the banking sector in the U.S. remains the least consolidated industry, and in fact, the least consolidated banking sector globally. However, it's important to recognize that M&A should serve as a tool for achieving strategic outcomes rather than being an end goal itself.
Scale can be beneficial across sectors, but it needs to be the right type of scale. For instance, in a hypothetical military scenario, one wouldn't confront a larger force head-on; instead, you'd leverage terrain advantages and choose optimal strategies. This analogy reflects how we should approach the U.S. banking landscape. Our strategy is focused on establishing a dense network of branches in a concentrated region, which is far more effective than a sparse distribution across major cities. Our emphasis will be on density and the capacity to drive organic growth by spreading customer acquisition costs across various products. The value of relationships built through offering a diverse range of services is crucial for us. We will maintain continuity in our operations and culture, as many entities operate very differently than we do. Our approach remains consistent; we wouldn't change our capital deployment strategy based on a single deal announcement, but our primary goal will always be to execute our strategy in the most effective way for our shareholders.
That's good information. I have a separate question. As we consider your narrowed charge-off range, what is your assessment of the potential risks related to the tax bill affecting the residential solar panel industry, and how will this influence your business strategy going 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. What we learned as we spent time in home improvement is that the place 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 involve a prime in a series of subs. 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. 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., is the fact that solar is one of the most complex home improvement installations.
Between the need for 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, 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. In fact, today, even prior to the sort of expected reduction in solar volumes that Bryan mentioned, about 25% to 30% of new originations are home improvement nonsolar-related. 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 that 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, those credit trends are incredibly encouraging. I think they underline the comments 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, it looks 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 as a follow-up, I was hoping you might be able, in your response, to address what you see as competitive dynamics on both the loan and deposit side, rational, irrational, etc.
Yes. Thanks, Scott. Great question. I would tell you, the big thing that I think was the outperformance item outside of the NPA payoff was the DDA performance we've seen. We were expecting to be able to transition back into growth mode on DDA now that the interest rate environment has been stable for a period of time. But we saw a really strong performance this quarter. That certainly was a big driver of our success. We continue to feel really good about our ability to have gotten cost out of our deposit book while continuing to improve the composition. I think that's probably an underappreciated thing about what we've been able to do over the last year, just how much we've strengthened the deposit base, especially with growth in the consumer small business sector. From an NIM perspective, we continue to feel like we did earlier this year, which is 2 to 3 basis points of NIM improvement each quarter, driven by fixed rate asset repricing continuing as well as loan growth.
It's really just going to be kind of the core blocking and tackling and improvement of the business over time. So nothing dramatic there. And like you said, if we adjust for the 3 bps from the interest recovery, we would be more in line with the 3.09% NIM. That 3 bps a quarter puts us right where we expected to be at the end of the year in that kind of mid-teens range. So 3.15-ish feels still very achievable. We feel very good about the trajectory from here. From a competitive landscape perspective, our industry is always very competitive. I don't think I would actually really call out much that we're seeing on either the loan or the deposit side at this point. Spreads look in line with what we've been seeing over the last 6 to 12 months across almost every asset class on the lending side, and deposit competition has been very, very rational. We've seen great success in continuing to be able to find growth in the right pockets and improving the 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. 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 of sort of growth out of the consumer side of the business. 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 tariff levels, there is value for them 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 prefer to run 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, has generated real interest in replacing equipment for some pockets in our customer base. 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, like yellow metal rental businesses, 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.
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, they need to cede to buyer pricing expectations, or you have buyers who have been patient and 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 at as 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 supports 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 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 for certain.
This is Thomas Leddy standing in for Gerald. Given all the recent headlines, can you just give us your thoughts on stablecoins 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. We've been able to watch the use cases that have evolved on those platforms and get a sense for it. We also have an interesting asset that a lot of 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. I'm quite excited about that as a potential use case for our clients. I think the thing that's gotten a lot of 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. 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.
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. The stablecoin rails today don't offer either of those features. If they get added, they will 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 are absolutely an interesting application internationally; stablecoins for cross-border payment or for collateral in different exchanges are interesting use cases, but 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 Tim Spence from 2023 or 2024 if I would regret not voluntarily submitting to an additional stress test, I would have thought 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. 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 models and otherwise. I expect us to see a benefit from there. We will obviously benefit from the step away from gold plating on Basel III, from a more risk-based view of the liquidity rules that were originally proposed.
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. 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, as some of whom in a category gave 10 times in this last election cycle what all banks in total gave, and who, as a result, are influential in policymaking circles. 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.
There’s a lot of work that we continue to try to do in Washington just to make sure that there's a balanced view of what a level playing field looks like. I would love to see more de novo charters approved because that would mean that the competitors that we have to face in the field every day are playing by the same set of rules that we are. But there is going to be a balance; there's going to be 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?
No, I would actually expect to see a pretty balanced growth in the second half of the year, Erika. Certainly, the utilization trends, which we had a very strong fourth quarter and first quarter, were something that we talked about previously — there is a risk you could see a little bit of a pullback. We do think that we continue to hear that inventory build was a significant theme for the utilization pickup, and that has certainly reversed some. But we still feel good about growth from here. It's part of the reason why we actually increased our full-year average balance loan guide because of the strength that we're seeing. I mentioned in prepared remarks that pipelines in commercial were up 50%. They're now in line with where pipelines were a year ago. That led to a pretty strong end of the year last year. So even though that little bit of a pullback in utilization, as well as the couple of paydowns that we saw in commercial construction, we still feel pretty positive that we're going to be able to see some nice commercial growth in the second half to supplement what we think is going to be continued broad-based growth from a consumer perspective.
If the consumer remains strong and you're observing growth based on the pipeline, I am curious about your deposit and funding strategy for the second half of the year. Your momentum in demand deposits is evidently robust, although total deposits have slightly decreased or remained flat. As we consider the latter half of the year, how are you managing the balance between optimizing your deposit mix and increasing deposits for funding? Do you have sufficient cash? I believe you reported $13 billion at the end of the period to support that additional loan growth. Also, what are your expectations for deposit costs in the second half of the year?
Yes, we feel very good about our balance sheet positioning, and we will continue to focus on being core deposit funded. We've taken the necessary steps regarding rate cuts. Although our forecast based on future rates anticipates three cuts, we currently align with a higher-for-longer perspective. We are prioritizing balanced growth and potentially cost stabilization, with maybe a slight increase in funding costs. Ultimately, our approach will depend on the overall needs of the balance sheet. Therefore, we intend to maintain a more balanced growth strategy as long as it is constructive from a net interest income and net interest margin standpoint.
I'm going to continue with the Metaverse analogy, and this time, it's a little different. I'm uncertain about your stance. I understand your thoughts, but is commercial loan growth returning to the industry or not? I'm leaving it to you to decide. If you observe the largest banks, loan growth is returning more in capital markets. You project a 5% increase in loans for the year, which is quite optimistic. The middle market pipeline has risen by 50%, as you mentioned. However, you highlighted a decline in commercial loan growth in the second quarter. Others have suggested this might be temporary due to tariffs and that relationship banking is subdued. You noted a reduction in just-in-time borrowing with a decrease of 50 basis points in utilization. Your projections for the year don’t suggest much more growth. So, you're indicating that things are improving, but your forecasts seem to suggest limitation in loan growth. So, is loan growth back, or not? Or is it still to be determined?
I appreciate you bringing that up, Mike, because if I did convey those points in order, I can see why there’s some confusion. You raised an important point at the start, and I want to highlight that before addressing your question about whether loan growth is back. It really depends on the specific market we are looking at. We don't operate in the higher end of the market. The activities seen at money center and investment banks simply aren’t present in our area; that’s a different environment. Our focus is on Main Street banking, primarily involving privately owned businesses or those that have private sponsors. In that space, loan growth is indeed showing signs of returning, but it might not be at the levels that many anticipated when they discussed loan growth coming back. Manufacturers operating in this environment face enormous uncertainty. I haven’t spent much time visiting clients this quarter, but each time I engage with these manufacturing ecosystems, it becomes clear that the complexity is hard to grasp unless you're deeply involved.
During a recent conversation with a supplier to a significant appliance manufacturer, I learned that a typical household appliance consists of around eight to ten components, all of which have multiple parts, including the control panel, pump, and circuit board. Currently, about three-quarters of those parts are produced overseas. While there are some domestic options available, they may not have sufficient capacity. For instance, sheet steel seems to have enough capacity for external cases, but the same cannot be said for aluminum; even if we had full capacity online in the U.S., we couldn't meet half the demand, according to one of our aluminum clients. Although there are opportunities for adding capacity in the U.S., doing so requires certainty about future tariff levels. Many negotiations on these deals are still pending. In other instances, components needed for HVAC units might not meet EPA standards, forcing dependence on Chinese sources for those materials.
There are valid reasons for borrowing, and we are seeing clients taking advantage of those, but it’s within a landscape filled with uncertainties regarding supply chains, whether it's for materials or components, as well as pricing strategies. There’s a struggle among major distribution partners regarding how much of any tariff needs to be absorbed. I genuinely believe there's potential for improved loan growth, but I also foresee that the latter half of the year may bring further uncertainties. We prefer not to give guidance that we can’t sustain across varied scenarios. If the market environment improves, it becomes easier to scale up and support more activity than to retract if we are overly optimistic and that does not materialize.
I guess that goes to your point about changes to complex systems and the 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. The only thing 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 reduction in NPAs that Tim mentioned as following through on our commitments. Last quarter, we indicated we had good visibility into resolving 40% of our commercial NPAs in the upcoming quarters. This quarter, we achieved 18% of that, and I am confident in our ability to reach 40% in the next couple of quarters based on our current observations. Additionally, in response to your question, not only did we make significant progress on the existing NPAs, but our inflows of new NPAs also decreased by 77% compared to the previous quarter. This reduction reflects an overall improvement in credit performance, beyond our ongoing proactive portfolio management.
Tim, I want to revisit your stablecoin. There's a lot of interest in what it signifies for Fifth Third and its customers. Stripe is considering the possibility of introducing their own stablecoins. What implications would that have for a company like theirs if they were to implement their own stablecoin? Could you elaborate on that for us?
Yes. The fact is, I mean, the narrow answer is for a company like Stripe or a company like Fireblocks or some of the others that we have been fortunate to do business with, the propagation of these technologies is a good thing, and it probably, on balance, creates more business opportunity for Fifth Third, okay? Because in order to buy a stablecoin, you have to on-ramp currency from Fiat, and we're in that business. In order to convert a stablecoin back into a dollar post-transaction, you have to off-ramp it, and we're in that business. You have to be able to hold the value in the reserve account somewhere and manage intraday liquidity, so the minting and burning of coins throughout the day, and we're a good provider of instant payment rails that they can essentially develop directly into their existing code bases. You don't have a recon process that has to get done the way that you were using some other infrastructure.
So I think that is encouraging. What I will say, though, is if you look at the Stripes, and you look at the Robinhoods and some of the others who have been more vocal and active about what they would do with stablecoins, a lot of the focus is still on cross-border activity. Stripe gets bills and collects payments from companies all over the world and then has to pay for hosting and a variety of services in all sorts of jurisdictions around the world. That's the perfect sort of ecosystem for a stablecoin because you can move currency on-chain and then transact almost instantaneously or near instantaneously across borders in places where there isn't interoperability in the domestic payment schemes today. So I'm quite optimistic about what that means for us. The wildcard would be if you saw people move money out of banks and into stablecoins in the U.S. for domestic payments or domestic cash management; that feels highly unlikely to me.
We have digital money that provides a yield, which stablecoins don't in the form of all of these online banks and money market funds that already exist. We have low-cost, ubiquitous, and already embedded instant or near-instant payment schemes. If there's a test that you have to run on this stuff, great. I think — I was going to say I understand from Matt that that was the last of our questions. Before we close it out, I just want to give a quick shout out to our friends at Skyline Chile down the road, who were just named the best regional restaurant chain in the U.S. This lends more evidence to my belief that the best regional business is Bloom in Cincinnati. So congratulations, guys.
Thanks, Tim, and thanks Tiffany, and thanks 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.