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Operator
Operator
Hello and welcome to the Q4 2023 5th 3rd Bancorp Earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star 1 on your telephone keypad. If you would like to withdraw your question, again, press the star 1. I'll now turn the conference over to Matt Kuro, Director of Investor Relations. Please go ahead.
Matt Kuro
Director of Investor Relations
Good morning, everyone, and welcome to the Fifth Third's Fourth Quarter 2023 Earnings Call. This morning, our Chairman, President, and CEO, Tim Spence, and CFO, Brian Preston, will provide an overview of our fourth quarter results and outlook. Our Chief Operating Officer, Jamie Leonard, and Chief Credit Officer, Greg Schreck, have 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 presentations. 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 January 19, 2024, and Fifth Third undertakes no obligation to update them. Following prepared remarks by Tim and Brian, we will open up the call for questions. With that, let me turn it over to Tim.
Tim Spence
Chairman, President and CEO
Thanks, Matt, and good morning, everyone. At Fifth Third, we believe that great banks distinguish themselves based on how they navigate challenging and uncertain operating environments. 2023 was certainly a challenging year for the industry, but I am very pleased with how we measured up. Our defensive balance sheet positioning, strong execution, and multi-year strategic investments produced top quartile profitability, the best core deposit growth, and the best total shareholder return among all regional peers who did not participate in an FDIC-assisted transaction. We generated an all-time record full-year revenue of $8.7 billion. Deposits grew 5% compared to an industry-wide decline of 3%. Credit performance was strong with net charge-offs remaining below historical averages and, although it would be foolish to expect it to repeat forever, in commercial real estate we experienced zero net charge-offs in 2023 and only two basis points of delinquent loans as of early January. These strong outcomes, combined with our multi-year expense discipline, produced a full-year adjusted return on assets of 1.25%, an adjusted return on tangible common equity, XAOCI, of 15.9%, and an adjusted efficiency ratio of 55.9%, all among the best of our peers. We also continued to take market share organically by growing our customer base and deepening relationships. We grew consumer households by 3% overall, punctuated by 6% growth in the southeast. In commercial, we added a record number of new quality middle market relationships, up 11% over the prior year. As a result, we grew or maintained our deposit market share position in all 40 of our largest MSAs. As we turn the page to 2024, we remain focused on differentiating Fifth Third based on the strength and consistency of our financial performance, by prioritizing stability, profitability, and growth in that order. Brian will take you through the detail on the fourth quarter and our outlook for the year shortly. But before that, I would like to touch on a few points. The first of these is the strength of our balance sheet. Our defensive positioning and decision to move quickly to adapt to proposed regulatory changes have put us in a position to play offense in 2024. Having achieved full Category 1 LCR compliance on August 31st and maintained it since, our liquidity position is very strong. We completed our RWA diet in the fourth quarter and accreted nearly 50 basis points of CET1, putting us on pace to reach a 10.5% CET1 ratio by mid-year 2024. Given our strong earnings profile and the significant rally in interest rates in December, our tangible book value per share grew nearly 30% during the fourth quarter. At the beginning of January, we moved $12.6 billion of securities to held in maturity, representing roughly one-quarter of our AFF portfolio. We expect this move will de-risk potential AOCI volatility to capital by about 30% in the event that market rates rise again. If the economic outlook remains stable and the capital rules are finalized no worse than the current NPR, these actions put us in a position to resume share repurchases of up to $300 to $400 million in the second half of 2024, including $100 to $200 million as early as the beginning of the third quarter. Should the final rules prove less stringent than the initial proposals, we'll have additional flexibility in deploying excess capital and liquidity to further improve profitability and position Fifth Third for growth. The second point I'd like to highlight is profitability. Expense discipline, strong returns, and positive operating leverage remain core areas of focus for Fifth Third. Supported by our technology modernization investments and a focus on leaning out key value streams, we reduced full-time equivalent employee headcount by 4% from our peak in 2023 to the end of the year, without the need for a company-wide expense program. The run rate benefits of these efforts put us in a position to sustain the peer-leading annualized expense growth that we have averaged the past several years, even as we continue to invest for growth. While the carryover effect of the RWA diet makes it unfeasible for the full year, we do anticipate returning to positive operating leverage in the second half of 2024. The third point I'd like to highlight is about growth. Our strategies have been consistent, building out our southeast markets, producing a strong feed to total revenue mix, and leveraging software that differentiates our product offerings and improves productivity. These are multi-year investments that cannot be replicated easily by competitors through one to two years of hiring a few new branches or small token acquisitions. In 2023, we opened 37 new branches concentrated in the southeast, bringing us to 107 opened over the past five years. We plan to open another 31 branches in the southeast in 2024. As a portfolio, these branches have continued to outperform our expectations on both household acquisition and deposit growth, and should provide a tailwind for several years forward. We also continue to invest in treasury management, wealth and asset management, and capital markets. All three of these businesses grew for us in 2023, and we expect mid to high single digit growth in each in 2024. In treasury management, our acquisitions of Rise and Big Data Healthcare and the launch of New Line, our embedded payments business, should continue to support peer leading performance. In wealth and asset management, Global Finance recently named our private bank as best U.S. regional private bank for the fifth consecutive year and best private bank for entrepreneurs globally for the first time. In our capital markets business, we have seen more robust activity levels to start the year, including an M&A pipeline that is one and a half times the full-year revenue target embedded in our guidance. Overall, we expect 2024 to be a solid year of improving revenue trends and continued expense discipline. Given what we believe to be a less certain outlook than the markets would imply, we are positioned to perform well under a range of economic and interest rate scenarios. Before I hand it over to Brian, I want to say thank you to our employees for hustling to deliver great results in 2023 and for the job you do every day to take care of our customers and communities. You make our company the special place it is. That, I'm going to turn it over to Brian to provide additional details on our fourth quarter results and our current outlook for 2024.
Brian Preston
Chief Financial Officer
Thanks, Tim, and thank you to everyone joining us today. 2023 was a very different year than what we were expecting 12 months ago. For Fifth Third, our success in outperforming this year was driven by our intentional actions to create and maintain flexibility for navigating uncertainty. As we enter 2024, we are very pleased with the results from 2023 and how we continue to be well positioned for a wide range of economic outcomes. We have optionality in our balance sheet and diversification in our business mix that will allow us to adapt to changing environments. As Tim mentioned, achieving this positioning requires discipline and years of deliberate investments. Our full year financial performance in 2023 benefited from this long-term investment. Fifth Third delivered industry-leading deposit growth of 5%, record revenue of $8.7 billion, and 100 basis points of capital accretion during the year, all while maintaining expense and credit discipline. We delivered another solid quarter to end the year. Adjusting for the FDIC special assessment and the other discrete items listed on page two of our release, return on assets was 1.3%, ROTCE was 17%, and our efficiency ratio was 55%. Additionally, We completed our risk-weighted asset diet in the fourth quarter, which reduced RWA by 3%, which was a little more than we previously estimated. The diet, combined with our strong earnings, led to a nearly 50 basis point increase in CET1 during the quarter, which ended at 10.3%. This capital accretion, combined with the rally in market rates during the fourth quarter, resulted in our pro forma CET1 ratio, including the AOCI impact from unrealized losses on AFS securities increasing to 7.7 percent at year end, well above the 7 percent minimum. Net interest income for the quarter was $1.4 billion, which was consistent with our expectations. While NII continues to be impacted by the increasing cost of deposits due to higher market interest rates, we have been able to build a robust liquidity position by generating peer-leading core deposit growth. Our core interest-bearing deposit costs increased 24 basis points sequentially, reflecting a cycle-to-date interest-bearing core deposit beta of 54% in the fourth quarter. We believe maintaining significant liquidity on balance sheet is a prudent decision given the uncertain economic and regulatory environments. Our short-term investments, which are primarily comprised of our cash at the Fed, increased $8.6 billion in the fourth quarter on an average basis and drove all of the 13 basis points sequential decrease in them. Excluding the impacts of securities gains losses and the Visa total return swap, adjusted non-interest income increased 3% sequentially due to the growth in commercial banking, mortgage, wealth, and card and processing revenues, as well as the normal fourth quarter impact of the CRA. The growth in commercial banking fees was driven by strong institutional brokerage and improved corporate bond fees, partly offset by lower lease remarketing revenue. Fourth quarter non-interest income was also impacted by the decision to eliminate our extended overdraft fee, which was the driver of the decrease in service charges on deposits. Compared to the prior year, non-interest income decreased 3%, primarily due to a $25 million reduction in TRA revenue. Adjusted non-interest expense increased 2% sequentially, primarily driven by the impact of the non-qualified deferred compensation mark to market, which is mostly offset in securities gains losses. Excluding the impact of the NQDC mark, which was a $17 million expense in the fourth quarter, compared to a $5 million benefit in the prior quarter, expenses were flat sequentially. Compared to the prior year, fourth quarter expenses were down 1%, which reflects our ongoing commitment to expense discipline Tim mentioned earlier. Moving to the balance sheet. As expected, total average portfolio loans and leases decreased 2 percent sequentially, most significantly driven by the 3 percent decrease in average total commercial loans. Our corporate banking business experienced the biggest reduction due to the RWA diet, with period-end corporate banking total commitments decreasing 6 percent and unused commitments decreasing 4 percent. Period-end commercial revolver utilization rate was 35 percent, a 1 percent decrease from the prior quarter. Average total consumer portfolio loans and leases decreased 1% sequentially due to our intentional pullback in indirect auto and the overall slowdown in residential mortgage originations given the rate environment, partially offset by growth from dividend finance. Average core deposits increased 3% sequentially, driven by the growth in interest checking, money market, and customer CD balances. GDO migration is showing signs of deceleration, with fourth quarter showing the smallest dollar decline in DDA balances since the onset of the rate hiking cycle, even when adjusting for normal seasonal strength at year end. DDAs as a percent of core deposits were 26% for the quarter compared to 28% in the prior quarter. In addition to the migration impact, this measure is negatively impacted by the strong interest-bearing core deposit growth from new consumer and commercial relationships. By segment, Average commercial deposits increased 5% sequentially, while both consumer and wealth deposits increased 1%. As a result of our balance sheet positioning, RWA diet, and success growing deposits, we achieved a loan-to-core deposit ratio of 72% at year end, which continues to rank as the best compared to our regional peers. As Tim mentioned, we ended the year with full Category 1 LCR compliance at 129%, The strong funding profile provides us with great flexibility as we enter 2024. Moving to credit, asset quality trends remain strong and below historical averages. The net charge-off ratio was 32 basis points, which was down 9 basis points sequentially and consistent with our guidance. 30 to 89-day delinquencies are flat compared to the end of 2022. The NPA ratio increased 8 basis points to 59 basis points, but remains below our 10-year average of 65 basis points. We will maintain our credit discipline, focusing on generating and maintaining granular, high-quality relationships. In consumer, we remain focused on lending to homeowners, which is a segment less impacted by inflationary pressures, and have maintained our conservative underwriting policies. However, we are beginning and expect to continue to see normalization of delinquency and credit loss trends from the historically low levels experienced over the last couple years. From an overall credit risk management perspective, we continue to assess forward-looking client vulnerabilities based on firm-specific and industry trends and closely monitor all exposures where inflation and higher for longer interest rates may cause stress. Moving to the ACL, while our reserve coverage increased one basis point sequentially to 2.12%, The ACL balance decreased by $41 million due to lower period end loans, which was the primary driver of the release. We continue to utilize Moody's macroeconomic scenarios when evaluating our allowance and made no changes to our scenario weightings. Our capital build is pacing ahead of the expectations we set at the beginning of the RWA diet. We are highly confident in our ability to build our CET1 ratio to 10.5% by June 2024. As Tim mentioned, on January 3rd, We made the decision to hold $12.6 billion of securities until maturity, resulting in the reclassification to HTM during 2024. This decision reduces the risk of potential capital volatility associated with investment security market price fluctuations under the proposed capital rules. We continue to expect improvement in the unrealized losses in our remaining AFS portfolio resulting in approximately 32% of our current loss position accreting back into equity by the end of 2025 and approximately 66% by 2028, assuming the forward curve plays out. After the transfer to HTM, 65% of the remaining AFS portfolio is in bullet or locked out securities, which provides a high degree of certainty to our principal cash flow expectations. We continue to believe that 10.5% is an appropriate near-term operating level for our capital. And as Tim mentioned, we expect to resume share repurchases during the second half of 2024, assuming the economic environment remains stable and the capital rules are finalized, consistent with the NPR. Moving to our current outlook, we expect full-year average total loans to be down 2% compared to 2023. with the decrease primarily driven by the impact of the RWA diet on commercial loans and indirect consumer, as well as lower mortgage production due to the higher rate environment, partially offset by the continued growth of dividend and provide. While we expect full year average total loans to decrease, we expect average total loans in the fourth quarter of 2024 to be up 2% compared to the fourth quarter of 2023. Commercial balances are expected to be up low single digits by the end of 2024, and dividend originations are projected between $2.5 and $3 billion for the full year. We are also assuming commercial revolver utilization remains stable. For the first quarter of 2024, we expect average total loan balances to be down 1%, again, driven by the full quarter impact of the RWA diet. Both commercial and consumer loans should be down around 1%. Dividend finance originations are projected to be $400 million to $500 million in the first quarter. Total loan balances should be relatively stable throughout the first quarter. We expect deposit growth to continue during 2024, with full-year average core deposits increasing 2% to 3%. While we expect DDA migration to continue given the high absolute level of interest rates, the pace of migration will be sensitive to the path of the Fed funds rate in 2024. If rates remain at current levels, we could see the DDA mix dip below 25% by the fourth quarter of 2024. However, we would expect to show a more stable composition if the more aggressive rate cut forecasts were to be realized. Shifting to the income statement, given the impact of the RWA diet on average loan balances and the impact of higher deposit costs, we expect full-year NII to decrease 2% to 4%. Our forecast assumes our security portfolio remains relatively stable and our cash levels begin a slow but steady decrease throughout 2024. This outlook is consistent with the forward curve as of early January, which projected six total rate cuts. Given the uncertainty regarding the rate outlook, our balance sheet is positioned such that even with fewer rate cuts, such as the three-cut scenario being projected by the FOMC, We would expect to see only a modest deterioration in our NII outlook and would still fall within a full-year guidance of down 2 to 4 percent. We expect NII in the first quarter to be down 2 to 3 percent sequentially, reflecting the impact of the lower average loan balances, a lower day count in the quarter, and higher deposit costs. Our current outlook assumes interest-bearing core deposit costs, which were 289 basis points in the fourth quarter of 2023, increase 5 to 10 basis points in the first quarter, a deceleration from the 24 basis point increase experienced in the fourth quarter. With rate cuts forecasted to begin in late March and continue through the end of the year, we would expect deposit costs to decrease throughout the remainder of 2024. Under this outlook, the terminal beta for the rising rate cycle would be in the mid-50s for interest-bearing core deposits. We continue to believe we are at our NIM trough in the fourth quarter of 2023. However, another quarter of outperformance in deposit growth resulting in a higher than expected cash position, while a good outcome, could impact NIM by a few more basis points. Barring a significant change in economic outlook, we would expect NII to stabilize and then begin growing sequentially during the remainder of 2024. We expect adjusted non-interest income to be up 1% to 2% in 2024, reflecting continued growth in treasury management revenue, capital market fees, and wealth and asset management revenue, partially offset by the full-year impact of the elimination of our extended overdraft fee. We expect mortgage origination will remain muted in 2024 and net servicing revenue to decrease modestly as the servicing portfolio UPB continues to amortize lower. Adjusted other non-interest income, which excludes the impact of the Visa total return swap, is expected to decline by over 15%, as TRA revenue will decrease from $22 million in 2023 to $10 million in the fourth quarter of 2024, and we are not including any large one-time private equity gains in our forecast. We expect first quarter adjusted non-interest income to be down 3% to 4% compared to the fourth quarter, excluding the impacts of the PRA, largely reflecting seasonal factors. Normal seasonal items include lower capital markets activity and M&A activity, partially offset by seasonal strength and wealth from tax planning. We expect full-year adjusted non-interest expense to be up around 1% compared to 2023. Our expense outlook assumes continued investments in technology, with tech expense growth in the mid to high single digits, and Salesforce additions in middle market, treasury management, and wealth. We will also close 29 branches in 2024 to offset costs associated with the 31 new branches opening in our high-growth southeast markets. We expect first quarter total adjusted non-interest expense to be up around 8% compared to the fourth quarter, as is always the case for us. Our first quarter expenses are impacted by seasonal items associated with the timing of compensation awards and payroll taxes. Excluding the seasonal items, expenses would be flat in the first quarter. In total, our guide implies full year adjusted revenue to be down 1% to 2% and PPNR to decline in the 4% to 5% range. This outcome will result in an efficiency ratio of around 57% for the full year. a modest increase relative to 2023, driven by the decrease in NII. As Tim mentioned, we expect positive operating leverage in the second half of 2024 compared to the second half of 2023. Moving to credit, we continue to expect 2024 net charge-offs to be in the 35 to 45 basis point range as credit continues to normalize, with first quarter net charge-offs in the 35 to 40 basis point range. As we return to loan growth, we expect to resume provision builds. Assuming no change to the economic outlook, loan growth and mix is expected to drive a $100 to $150 million of provision build for the year, with the first quarter being in the $0 to $25 million range. The provision build over the last three quarters of the year should be fairly even. In summary, 2024 is expected to be a year of transition as we begin the shift to a rate-cutting cycle. With our well-positioned balance sheet, disciplined credit risk management, and commitment to delivering strong performance through the cycle, we will continue to generate long-term sustainable value for shareholders, customers, communities, and employees. With that, let me turn it over to Matt to open the call up for Q&A.
Matt Kuro
Director of Investor Relations
Thanks, Brian. Before we start Q&A, given the time we have this morning, we ask that you limit yourself to one question and a follow-up, and then return to the queue if you have additional questions. Operator, please open the call for Q&A.
Operator
Operator
Thank you. And again, if you have a question, please press star 1 on your telephone keypad. And if you wish to remove yourself from the queue, simply press star 1 again. One moment, please, for your first question. Your first question comes from the line of Scott Seifers of Piper Sandler. Your line is open.
Scott Seifers
Analyst at Piper Sandler
Good morning, everybody. Thank you for taking the question. A lot of good color on the NII expectations, so I appreciate that. I guess just within there, I think, Brian, you noted your comment about deposit costs decreasing through the course of this year. Maybe a thought or two on how those trajectories will differ in your view between the commercial and the consumer portfolios?
Brian Preston
Chief Financial Officer
Thanks, Scott. Great question. We'd tell you that obviously similar to what we've seen from a rising rate perspective, the commercial and the wealth betas in particular have come through recently at a much higher level. We're in the range of probably low to high 80s from a beta perspective in both of those businesses. Cumulative betas have started to reach that point. So we're going to get a lot of repricing out of those portfolios as rates move lower. To give you a little bit of perspective, our indexed commercial deposits right now are up around $30 billion, so that gives us a lot of confidence in our ability to get some price out of that book. The consumer book is one that the cumulative betas in that book is kind of in the mid-30s right now. It's certainly moved up from a marginal perspective, and we continue to have a lot of optionality between our promos and exceptions, as well as what we've done from a CD perspective. where we're going to be able to get rate cuts out of those portfolios as well. Our CD book, which is $10 billion now, is fairly evenly laddered across the year with about 25% maturities across each quarter. We've been very careful as part of our pricing strategy to make sure that we could be able to reprice those down quickly if the rate environment were to change.
Scott Seifers
Analyst at Piper Sandler
Okay, perfect. Thank you. And then separately, so given that you're done with the RWA mitigation process, effort. Sounds like you've got the option to be on your front foot to the extent that you choose to be going into the year. You're just sort of curious what your expectation is in terms of loan demand as the year plays out.
Tim Spence
Chairman, President and CEO
Yeah. Hey, Scott, it's Tim. I'll take that one. I mean, look, when we talk to customers today, I think in general, they're cautious but not pessimistic. So rates and the election uncertainty are definitely weighing on the appetite for new investments in the near term. I don't know of anybody who's stopped an existing program or an existing investment, but they are being very careful about new expansion. So I don't expect that we're going to see a big pickup in loan demand. And I'm sure we'll get a question later on the economy. We're not expecting robust growth to drive the top line there. It's going to have to come from market share gains. So in our world, The key areas of investment there are very clearly in the middle market, where we have been very focused in driving more granularity into the CNI portfolio. Our middle market loan production this past year was nearly 50-50 split between the Midwest markets, including Chicago, and then the Southeast markets and our expansion markets in California and Texas. And our sales force in those locations across the entire footprint is going to be up about 20% over a three-year period here for 2024. So we've got a good pent-up sales capacity there and high activity levels that'll drive the outcome. And then I think the other area of strength has been in the healthcare and telecom media and technology verticals. And then in the fintech platforms, right? The continued seasoning in of both provide and dividend portfolios The last thing is the absence of a negative here, which is the auto business, our deliberate rundown of the outstandings in the auto business have created a little bit of a drag on loan growth. And the combination of credit unions being a little bit more funding constrained and all the banks who exited have created a much more favorable environment for auto origination. So we expect volumes there to come up. We're generating a volume today with a weighted average FICO north of 780. and very attractive risk-adjusted spreads, and that should stop the headwind and give us a more stable platform from which we'll get growth through the rest of the year.
Scott Seifers
Analyst at Piper Sandler
Perfect. Okay, great call. Thank you very much.
Operator
Operator
Absolutely. Your next question comes from the line of Gerard Cassidy of RBC. Your line is open.
Brian Preston
Chief Financial Officer
Hi, Tim. I'm Brian.
Operator
Operator
Morning.
Brian Preston
Chief Financial Officer
Congratulations, Brian, on your new role, and if Jamie is listening, congratulations to him as well.
Tim Spence
Chairman, President and CEO
At worst than that, Gerard, Jamie's here.
Brian Preston
Chief Financial Officer
I hear that laugh. That's great. And you touched on it, Tim, about the economy. Many of the banks, you as well, are following the forward curve for rates, which is understandable. And there continue to be signs that the U.S. economy is proving more resilient than we all expected. And so the question is this, for the upcoming year, what if we're all wrong and all of a sudden we see two plus percent real GDP growth, the Fed doesn't move on rates, maybe one or two cuts like what we saw in 95, and credit remains even better. How does that affect the way you approach what you've set up for 24? I know Brian gave us some color on the different interest rate scenarios, but what if we just come into this year, at the end of this year, it proves to be much stronger than any of us are expecting, and inflation stays around 3%.
Tim Spence
Chairman, President and CEO
I'll leave it to Brian to provide more detail, Gerard, but I'm glad you asked that question. Because if there is one frustration I have, in particular on the way that the media is reporting on economic activity, is they're treating the world like it's deterministic, and it's not, right? It's stochastic in terms of the outcomes here. And while you can see the slowdown in inflation, you can see some slowdown in the economy in particular in specific sectors. It's just hard to be certain, given the impact of deficit spending and the way that has continued to provide a buffer against any consumer slowdown. And I think the possibility that maybe we return to a world where recessions in the U.S. are regional as opposed to being national phenomenon, which I think people have forgotten about because the last two were driven by a global health pandemic and a global financial crisis. So we're trying to run the company in a way that provides an outlook on the expected outcomes in the middle of the distribution, but that manages to a much more stable return profile in the event we get into either of the tails, right? More robust economic growth, stickier inflation on one side of the equation, and therefore the Fed not being able to come off of its restrictive policies assessed and the other alternative where I think you have to say you have some sort of a geopolitical event that creates a price shock in energy, another supply chain issue or otherwise, which could trigger an unexpected slowdown. So, Brian, maybe a little color on the upside.
Brian Preston
Chief Financial Officer
Yeah, absolutely. I think the scenario that you're laying out there with fewer Fed cuts, continued strength from an economic perspective, That's not a remote scenario in our view. We feel like that is something that could very easily happen, especially in the first half of the year as we continue to see potentially some strong resiliency from the consumers. What that means for us, and it's a big part of the actions that we've taken thus far, is that we think that could cause the long end of the curve to move up a little bit. That would actually be beneficial for us as we get an even greater benefit from the fixed rate asset repricing. We talked previously that a full-year impact of fixed-rate asset repricing should generate about $300 million of annualized run rate NII improvement, and that number would look even better if we saw that long end move up. It also is part of the rationale associated with shifting some of our securities into HTM. So a stronger economy is one that we actually would obviously always hope for because we're very well positioned for that. To quote Jamie, you can't spell flexibility without FITB. That's something that we have been very focused on and recognizing that we can be wrong on both sides, the economy weaker or stronger, and we're well positioned for that.
Brian Preston
Chief Financial Officer
Very good. Thank you. And then another bigger picture question, Tim, I think you touched on your middle market business. Customers grew 11% year over year. And then later in the comments, I think you said that you've got to take these customers or clients from maybe other banks. How are you guys doing that? And then if you could tie it into that loan-to-deposit ratio, I think you guys said you're at 72%. What's the ideal level that you'd eventually like to get to? Thank you.
Tim Spence
Chairman, President and CEO
Yeah. I mean, I think it's a combination of things, Gerard. The first one is we've been very deliberate about to select a few places and invest multi-year when we think about how we invest strategically, right? So the Southeast is obviously a key point of focus there. And I know a lot of people are investing in the Southeast, but it bears reminding that we've been in nearly every one of the markets down there for more than 15 years. And we're not running small LPs. We have more than 200 client facing people in those markets across commercial banking and wealth management alone. And then like another 1700 that said in more than 300 branches and the brand is seated in those markets. So those investments, when you make them, you make the investment in year one, but they don't actually hit the sort of peak benefit until year five or six. So you have this accumulation. I guess a coiled spring, for lack of a better term, that supports then more sustained growth. We have the same benefit in the Midwest, in Chicago in particular. I mean, we added nearly 100 new quality relationships in Chicago in the middle market alone last year and have been gaining share pretty steadily, at least if you use the FDIC deposit share measures as the guide. in Chicago because we're still seeing the benefits that we got out of the combination between Fifth Third and MB in those markets. The other area that we are winning, where we win is through the strength of the treasury management and the capital markets platform, which really is a middle market focused offering for Fifth Third. About a third of the new quality relationships we added in treasury management last year were treasury management only. as opposed to being a follow-on product that you deliver into a customer that you've lent money to, they're actually contributing to the relationship acquisition. And that's an engine that just wouldn't have existed here in the past and I think still doesn't exist inside most of our peers. Thank you. Yeah.
Operator
Operator
Your next question comes from the line of Mike Mayo of Wells Fargo Securities. Your line is open.
Mike Mayo
Analyst at Wells Fargo Securities
Hey, Mike. Hi, Al. Hey, I'll ask a question about the quarter, then reach you for bigger picture questions. But you don't hear too many regionals talking about buybacks like you are right now. So, but you have a lot of numbers you're tossing out there. You have a 7% CE21 minimum, 7.7%, 10.5% by mid-year. You know, it might be better on the buybacks of $300 to $400 million, depending on the rules. So, I guess I just want to be a little more concrete. So, Are you sure that you want to be talking about buybacks as much as you are now and what gives you confidence in doing so? And then the other side of that is you say if the rules get eased, then you might be able to buy back more than the 300, 400 million. So just give us the kind of the whole range of options if you could.
Brian Preston
Chief Financial Officer
Yeah, Mike, and what we would tell you on the buybacks and in particular on the rule, the There appears to be momentum associated with some relief on both the ops risk side and the credit risk RWA. As we've continued to refine our estimate from an RWA perspective, the rule as proposed is a low single digits impact from an RWA perspective. And almost seven points of RWA is created by the ops risk rule. So if that is pared back, we could actually see our RWA go down under the new rule. which obviously creates a lot of incremental capacity for us as we think about how much capital we need to help run the company from a long-term perspective. Additionally, we have a lot of confidence in the stability of the capital ratios going forward and the pace at which we're creating capital. That, in combined with the actions that we've taken from a security portfolio perspective to de-risk the portfolio with the HTM election, as well as just the continued benefit that we're going to get from Roland on the remaining AFS portfolio, It just puts us in a position where we are going to have a lot of capital generation and a lot of ability to have flexibility to return capital if the organic growth opportunities aren't there.
Tim Spence
Chairman, President and CEO
Yeah, and Mike, I think the one thing I would add to what Brian said is is we've tried to be very clear and transparent that our belief is it's always better if you have to make a change to adapt to new regulation, it's better to get there first. We did that as it related to consumer deposit fees, right, and very deliberate about being early there because we just viewed those profit pools as being unsustainable. I think we were clear this past summer and through the fall and winter that our intention on putting ourselves on the RWA diet and focusing as much as we did on building liquidity was that we wanted to get to the rules there first because of the flexibility that it provided. So, you know, we ended the year at roughly 10.3 in terms of the CET1. We said we wanted to get to 10.5. You know, we'll get there just based on the current run rate in the middle of the second quarter if you had to pick a particular spot. And that gives us then the ability to return to share repurchases subject to the environment not changing, maybe a little bit earlier than others.
Mike Mayo
Analyst at Wells Fargo Securities
And a short follow-up. So if the Basel III gets gutted, I guess not a high probability, but some have mentioned that recently, then your RWAs obviously would be flat. So you might be better off if they change the opt rule and it passes. Did I get that right? Yeah. Yeah.
Jamie Leonard
Chief Operating Officer
Other than if it truly gets gutted and the AOCI impact, that would be a better option than even if the off-risk rule got gutted. Okay, thank you.
Operator
Operator
Your next question comes from the line of Abraham Poonawalla of Bank of America. Your line is open.
Tad Piper
Analyst at Bank of America
Hey, good morning. Good morning. I guess two questions. One first on AOCI. Trying to make sense of the loan-to-deposit ratio at 70% relative to fifth-third history prior to the pandemic and even relative to some of your peers. Is a 70% loan-to-deposit ratio the new normal for the bank or trying to understand if there's anything idiosyncratic about the deposit base that requires you to hold and operate with a lower loan-to-deposit ratio?
Brian Preston
Chief Financial Officer
Tad Piper- Great question, I would tell you that 72% is not our long term target, but I would say that our loan our loan to deposit ratio has come down relative to pre pre pandemic levels and a big. Tad Piper- A big portion of that is just heightened expectations regarding liquidity, so I would expect us to operate in the mid 70s more than likely from a long term perspective with loan to deposit. We were probably mid-80s pre-pandemic. So that is something that we would expect to continue. But we do think that we can move up from the current levels.
Tad Piper
Analyst at Bank of America
Got it. And I guess a separate question maybe for Tim. I think you tried to sort of draw some distance between you and some of your peers around the Southeast technology investments. If we take those statements and account for How do you think this should reflect into should Frisco become a higher growth bank relative to these banks, a more efficient bank? Like what should we be measuring you against and do we start seeing that this year and next year or is this more of a longer term process?
Tim Spence
Chairman, President and CEO
Yeah, great question. And I think maybe a nuance. I'm less trying to draw a distinction between us and others than I am to say that you can't get what we think we have in terms of the advantages. overnight, right? They're not advantages that can be built in one to two years. They require steady and consistent investment, which of course has been the philosophy here, along with the belief that you have to find ways to self-fund it through efficiency and better productivity along the way. I'm hesitant to say fifth third is going to be a growth bank because I think four or five of the people who are described as growth banks failed this past year. Our belief though, is that great companies should be able to take market share on an organic basis. So if you assume that, uh, that base market growth is somewhere around 2%, or at least the financial services, uh, sector should be able to track GDP. There's a headwind with the emergence of all of these non-bank competitors. Therefore, the more realistic goal from my perspective is to try to beat GDP by a couple of percentage points on an annualized basis, which probably means you need to have 3% to 4% outsized growth relative to your market. These granular investments we're making across the Southeast are definitely part of the way that matriculates into performance. I think the other place then that you should expect to see it, given where we're investing, This continued support for a better fees to total revenue mix, which is going to be really critically important in the event that the rules as they are proposed do pass because of the impact that higher capital and liquidity requirements. are going to have. And you're seeing that today. The core fifth-third consumer franchise, if you just look at household acquisition as a measure, is outgrowing Midwest population growth by about 1.5% per year. It's outgrowing the Southeast markets by about 4 percentage points per year. So you can see the impact of the incremental investment if you just disaggregate our business and look at it on a market-by-market basis. Jamie, maybe you want to add something here.
Jamie Leonard
Chief Operating Officer
Yeah, Ibrahim, maybe to tie your two questions together, on the loan-to-deposit ratio, part of the improvement has been the strong deposit growth we've been able to get both from the RWA diet, which I talked about a couple quarters ago, just how customer reaction resulted in more deposits and a better share of wallet. And that continued in the fourth quarter. Commercial deposits, you see in the numbers, are up up nicely. And then on the Southeast, we actually grew deposits in the Southeast 5% just in the fourth quarter. And so you do get that growth in the numbers, but the Midwest still grew in total about 1%. So we've got a very nice balance here of Midwest and Southeast. And I was down in South Carolina on Wednesday. We opened our 10th branch in South Carolina last this week and have plans to do 25 more over the next five years. So, I think you'll continue to see the benefits of the investments over the last three years as we continue to really expand that southeast presence.
Tad Piper
Analyst at Bank of America
Thank you.
Operator
Operator
Your next question comes from the line of Erica Nigerian of UBS. Your line is open.
Nick Holocco
Analyst on behalf of Erica Nigerian at UBS
Good morning. This is Nick Holocco on for Erica. I think in the past you've talked about a curve where the front end is in the low 3% range as an ideal rate environment for the bank. Is that still the right way to think about it? And if we get to that range, do you think we could see NIM migrate back to the 320 to 330% range that you were producing back in the 2018-2019 period? Thank you.
Brian Preston
Chief Financial Officer
Tad Piper- yeah absolutely returning to a normal curve, where we would have a you know I say 3% front end and maybe 100 200 basis points of spread between. Tad Piper- The front end and the 10 year rate is a very ideal environment for us because one. Tad Piper- We are going to get the benefit of deposit repricing lower and, at the same time, still being able to pick up a lot of benefit associated with that fixed rate asset repricing so. Being able to achieve a 320-plus NIM in that kind of scenario a year or two forward would be something that should be very easily achievable, and we feel good about that environment.
Operator
Operator
Your next question comes from the line of Vivek Junija of J.P. Morgan. Your line is open.
Jamie Leonard
Chief Operating Officer
Hi. Congrats, Brian and Jamie. A couple of quick questions for you guys. One is, In your NII outlook that you've given for the year, what are you assuming for deposit betas on the way down? Sorry if I missed that, trying to keep an eye on a bunch of different releases this morning.
Brian Preston
Chief Financial Officer
Glad you asked the question. It's the first time it's come up, actually, and it wasn't in our scripted remarks. We are expecting betas on the way down to look very similar to what we saw on the last couple hikes, which is in a 60% to 70% range. We don't expect a significant difference in betas between the first cut and the third cut. You're still at such a high level that that beta should be relatively high from a marginal perspective. Our rate risk disclosures, we talk about, say, a 60% to 65% beta on the way down. We tend to be a little bit conservative on those disclosures, so we think we're going to be able to deliver that, if not a little bit better.
Jamie Leonard
Chief Operating Officer
Great. Another little one. Other consumer loans, the NPLs moved up quite a bit, linked quarter to a little over 1%. Any color, is that coming from dividend finance or is that something else?
Jamie Leonard
Chief Operating Officer
Yeah, it's Jamie Levesque. Yeah, it is actually from dividend finance. And the driver of that, there's some element that just normalization as you go through growing a new company, but that's a smaller part of it. The larger part of it, of the increase, is actually from our decision to deliver a good customer experience for the borrowers that have had instances where there are delays in getting the solar panel installations to receive permission to operate from the utilities. That could also be delayed due to installer performance issues or supply chain shortages. So what we've elected to do is different forms of deferment or modification in order to assist the borrowers. And then I would expect this to improve over time as we continue to improve the installer network as well.
Jamie Leonard
Chief Operating Officer
So not much loss content you'd expect from that, Jamie, then, since it's
Jamie Leonard
Chief Operating Officer
Seems like you're deferring rather than... There will be lost content in there. It is appropriately reserved, so not an income impact. But from a solar perspective, we continue to run solar losses around 1% or so. And as we talked about, our deal model was 130 basis points on solar. The challenge we've had... from a loss content perspective, has been on the home improvement side where dividend had a subprime component to their portfolio that has higher losses. And we stopped originating that product back over a year ago. So there'll be some loss content, but I don't think you would see it impacting income.
Jamie Leonard
Chief Operating Officer
Thank you.
Operator
Operator
Your next question comes from the line of Matt O'Connor of Deutsche Bank. Your line is open.
Greg Schreck
Chief Credit Officer
Good morning. I was wondering if you guys could elaborate a bit on the commercial real estate exposure. Obviously, it's a bit less than peers, and as you noted, you know, no charge-offs last year, but your non-performers are also, you know, insignificant, and even the office criticized as a relatively low 6%, you know, compared to others. So, How is it so good? And I guess, are you confident that the marks and estimates are up to date? Thank you.
Greg Schreck
Chief Credit Officer
Yeah, that's great. Great question. So, yes, very confident in our marks and where we currently are. Also, very, very comfortable with the overall asset quality. We've been, for the last several years, very disciplined in terms of our client selection. We're underwriting commercial real estate, specifically office, at something below 60% loan to value. We've got 90% recourse on that portfolio. And so our borrowers are continuing to exhibit the right behaviors. They're supporting their projects. They're writing checks to reduce the debt as necessary. We're out ahead of that portfolio. The maturities are evenly split over the next four to five years. We don't have that so-called wall of maturities. that we've heard from some other banks and you've heard in the marketplace. So I do feel very good about the overall portfolio, our office included.
Greg Schreck
Chief Credit Officer
And then just more broadly speaking, obviously the overall charge off outlook for this year is fairly benign, you know, 35 to 45 basis points. Any more color in terms of drivers of, you know, call it the mid point of that range versus 2023 levels?
Greg Schreck
Chief Credit Officer
I think we're going to continue to see a lot of what we saw in 2024, what we saw in 2023, right? We don't have any significant trends geographically or by product. And so, you know, what we saw in 2023 was a little bit more episodic. And based on what we're seeing on the CNI side right now, I mean, our borrowers have done a nice job both on the executing on the revenue expense management side. There's obviously margin compression, but overall, as Tim said earlier, they're looking for the same things we're looking for, which is what is the Fed going to do and when. We hear a lot about labor costs, so they're keeping their eye on that. So I think we're going to have a lot of the same old, same old, certainly as we get into the first and second quarters in terms of what we're seeing, both from the lost content in commercial real estate, minimal, and C&I. We will have a name pop up every once in a while. We'll deal with it. But again, we're not seeing trends that would lead me to believe that our criticized assets, our overall asset quality is going to move much from where it is right now. Again, as we sit here today, heading into the first quarter.
Greg Schreck
Chief Credit Officer
Okay, that's helpful. Thank you.
Operator
Operator
Your next question comes from the line of Christopher Marinak of Jenny Montgomery Scott. Your line is open.
Christopher Marinak
Analyst at Jenny Montgomery Scott
Hey, thanks. Good morning. Can you remind us how the commercial CNI DDAs behave on a downright environment, and is there any reason to believe that they wouldn't kind of behave positively in your favor this time?
Brian Preston
Chief Financial Officer
Yeah, absolutely. We would expect DDAs to, especially the migration, to stop migrating into interest bearing and begin growing as rates cuts begin to occur. We talked about that a little bit in the scripted remarks, that if we were to see more aggressive cuts, we'd see some opportunity there. We've typically modeled somewhere between $500 and $1 billion of DDA migration per 100 basis points of rate hikes or rate cuts. We'd expect that to be a fairly similar migration level on up or down, just positive or negative. We would tell you that probably the beginning cut or two, maybe it's a little bit slower, but if you were to see a much more aggressive path and if the Fed funds rate got down into the threes, we would expect a decent reversal.
Christopher Marinak
Analyst at Jenny Montgomery Scott
Got it, and that makes sense. Thank you, Brian. And just a quick follow-up on reserve build. Would you still build reserves kind of within the current level we have today? I'm just trying to compare the guide of 35 to 40 basis points in the average life for the portfolio with less than four. There's really strong coverage. I'm just curious if you would build to that same level.
Brian Preston
Chief Financial Officer
Yeah, as long as the economic scenario is similar and the mix of the portfolio obviously is very important in terms of what drives drives a build, certainly dividend, some of the things that we're talking about from an auto perspective where it can carry a little bit more reserve but has an impact from a build perspective, that drives more of the dollar build than anything else at this point.
Christopher Marinak
Analyst at Jenny Montgomery Scott
Great. Thank you for taking my questions. Thank you.
Operator
Operator
There are no further questions at this time. I will now turn the call back to Matt Kiro for some closing remarks.
Matt Kuro
Director of Investor Relations
Thank you, JL. And thanks, everyone, for your interest in Fifth Third. Please contact the Investor Relations Department if you have any follow-up questions. JL, you can now disconnect the call.
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