Fifth Third Bancorp (NASDAQ:FITB) Q1 2022 Earnings Conference Call April 19, 2022 10:00 AM ET

Company Participants

Chris Doll - Director, IR
Greg Carmichael - CEO
Timothy Spence - President
James Leonard - CFO
Richard Stein - Chief Credit Officer

Conference Call Participants

Scott Siefers - Piper Sandler
Erika Najarian - UBS
Mike Mayo - Wells Fargo Securities
Betsy Graseck - Morgan Stanley
Ken Usdin - Jefferies
Ebrahim Poonawala - Bank of America Securities
Matt O'Connor - Deutsche Bank
Gerard Cassidy - RBC
John Pancari - Evercore
Terry McEvoy - Stephens
Christopher Marinac - Janney Montgomery Scott

Disclaimer*: This transcript is designed to be used alongside the freely available audio recording on this page. Timestamps within the transcript are designed to help you navigate the audio should the corresponding text be unclear. The machine-assisted output provided is partly edited and is designed as a guide.

Operator

00:04 Good morning. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fifth Third Bancorp First Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]

00:35 Chris Doll, Director of Investor Relations, you may begin your conference.

Chris Doll

00:42 Thank you, operator. Good morning, everyone and thank you for joining us. Today, we'll be discussing our financial results for the first quarter of 2022.

00:48 Please review the cautionary statements on our materials, which can be found in our earnings release and presentation. These materials contain reconciliations to non-GAAP measures, along with information pertaining to the use of non-GAAP measures, as well as forward-looking statements about Fifth Third's performance. We undertake no obligation to update any such forward-looking statements after the date of this call.

01:09 This morning, I'm joined by our Chairman and CEO, Greg Carmichael; President, Tim Spence; CFO, Jamie Leonard; and Chief Credit Officer, Richard Stein. Following prepared remarks by Greg, Tim and Jamie, we will open the call up for questions.

01:23 Let me turn the call over now to Greg for his comments.

Greg Carmichael

01:27 Thanks, Chris, and thank all of you for joining us. Earlier today, we reported first quarter net income of $494 million or $0.68 per share. Our reported EPS included a negative $0.02 impact from the Visa total return swap, the mark-to-market impact over to AvidXchange Holdings.

01:43 Excluding these items, adjusted first quarter earnings were $0.70 per share. During the quarter, we generated strong loan growth, including average C&I growth of up 8%, excluding PPP. We grew core deposits once again with strength in consumer transaction deposits of 4% reflecting our success in generating quality household growth, which increased 3% on a year-over-year basis.

02:09 We also took advantage of attractive market entry points for deploying our excess cash that grew our securities portfolio by approximately $5 billion on an average basis. As a result of our interest-earning asset growth, net interest income increased 1% sequentially, excluding PPP. We had yet another quarter of benign credit quality, reflecting our disciplined approach to client selection and underwriting, which resulted in near record low charge-offs of just 12 basis points. In addition to our muted credit losses, NPA remained stable, our commercial criticized assets continued to improve.

02:48 As many of you saw last week, I announced my plans to retire as CEO and transition to Executive Chairman effective July 5th. As part of our thorough succession planning process, I'm excited and proud to announce the Board has unanimously appointed Tim Spence to succeed me as our next CEO. I believe this is the right time for a transition, given Fifth Third's tremendous financial health and performance. Shareholders who have follow Fifth Third for a while, know that when I became CEO, I made a commitment that we would generate strong financial results and performed well through the various business cycles, we improvised our plans on a project North Star, we articulated several key strategic priorities generate strong and sustainable long-term financial results, including optimizing our balance sheet, differentiating our customer experience, growing and diversifying our fee revenues, building on our legacy of digital innovation and maintaining expense discipline. I am very proud of what we achieved.

03:49 We transformed our approach to credit-risk management, centralizing credit underwriting with geographic sector and product level concentration limits. We exited commercial relationships that had a skewed risk return profile totaling $7 billion focusing on high quality relationships with a more diversified and resilient businesses. We deliberately reduced our leverage lending exposure down more than 6% since 2015.

04:16 We remain cautious with respect to our CRE portfolio, with the lowest CRE as a percentage of capital among peers. We maintained our expense discipline, taking actions when necessary, including exiting non-core businesses, which allowed us to prioritize our investments in areas of strategic importance. We invested heavily in our treasury management systems, shifting our focus to building managed service platforms. As a result, we now have the highest TM fees as a percentage of revenue and commitments, and we are the fastest growing among our peers.

04:50 We made significant investments in technology to improve our resiliency and better serve our customers. We build a consumer business that has consistently added households far in excess of our peers in the U.S. average, while also taking our customers’ satisfaction scores from below peer median in 2015 to top quartile today. We grew market share organically in the Southeast and West Coast and established a leading position in Chicago through the strategic acquisition of MB Financial.

05:20 We also invested in strategic nonbank acquisitions like Provide, Dividend, Coker Capital, H2C, Franklin Street and more, to accelerate growth and broaden our capabilities. We structure our security portfolio to generate stable, predictable cash flows that has allowed us to extend in our earnings advantage versus peers. And we focus on generating sustainable value for all stakeholders, including customers, employees and communities.

05:49 From day one, my focus was to build a franchise that would perform well through the cycle, while generating consistent and quality earnings quarter-after-quarter, year-after-year. While some of these decisions impact the near-term profitability at the time, all of these proof points highlight the actions we have taken over the past several years to improve Fifth Third and set us up for long-term outperformance through various business cycles.

06:13 Furthermore, we expect our intentionally asset-sensitive balance sheet to perform extremely well relative to peers in this rate environment. With the revenue benefits of higher rates for August, we are mindful that there are likely to be elevated risk in the overall U.S. economy, which is a fairly aggressively tightens monetary policy the curb inflation, combined with the existing supply chain constraints and labor shortages . However, because of our actions and positioning Fifth Third is a strong as ever and well positioned for long-term outperformance.

06:45 I would just like to say that being the CEO of Fifth Third has been an honor of a lifetime. I'm grateful for the support of the board and all of our employees and I'm incredibly proud of what we’ve accomplished. Fifth Third is in great shape and Tim is well prepared to lead Fifth Third into the future. Tim is an outstanding and visionary leader. He is been an integral part of Fifth Third’s leadership team since 2015, helping develop strategies and vision that we are executing with excellence through innovation and technology.

07:13 Before I hand over to Tim, so this is my 29th and final quarterly earnings call. I can also say that I have enjoyed almost all of these discussions about our financial performance and outlook with the honest investor community. I want to say thank you for your confidence that you have given me for my tenure. Also I want to thank our entire leadership team, I have been extremely fortunate to work with such a great seasoned team, which I believe is the best-in-the-industry. We have accomplished together that has been nothing short of remarkable. Thank you. I know that under Tim's leadership, you will continue do great things, inspire others and improve the lives of our customers and well-being of our communities.

07:50 With that let me turn it over to Tim.

Timothy Spence

07:52 Good morning to you all. Thank you, Greg for the kind words . I'm honored to serve as Fifth Third's next CEO and to follow-on the footsteps of an incredible leader like you. I could be more excited about Fifth Third's future. Given my role in the company over the past several years and the strength of our performance, you should expect continuity in our strategic focus areas and then how we run the bank. We will maintain our operational focus, expense discipline and culture of accountability to produce consistent financial results while investing for the future. We will continue to anticipate and respond proactively to demand shifts and new competitive threats, consistent with the actions you have seen us take over the past several years, including our deliberate multi-year reduction in punitive consumer fees before it became an industry topic, the rollout of our award-winning Momentum Banking product suite, which is unparalleled among peers, our differentiated digitally enabled treasury management services to automate accounts payable and receivable launched well before the pandemic.

08:53 Partnerships and acquisitions of FinTech platforms like Provide and Dividend Finance that create national scale and a best-in-class customer experience and our focus on financing renewable energy well before ESG became a mainstream term. More broadly, we will remain mindful of the long-term structural shifts taking place such as the evolving geopolitical environments, population aging, government debt levels and central bank tightening that will create winners and losers over the next decade. No one knows for sure what the world will look like 10 years from now, but it's prudent risk managers we are always contemplating the many potential tail risks, as well as positioning the bank to take advantage of potential business opportunities that will arise. We will also be steadfast in our belief that we are most successful when we take care of all our stakeholders.

09:44 To that end, yesterday, we announced that we are increasing our minimum wage to $20 an hour across our footprint and that concurrently we will provide a mid-year wage increase to employees in our first four job bands. We are taking these actions despite having best-in-class employee retention according to leading research because we recognize that rising costs throughout the economy have a disproportionate impact on our frontline employees who are the face of Fifth Third. In total, more than 40% of our workforce will benefit from these increases, including 95% of our retail branch and operations employees. It is simply the right thing to do.

10:21 In the short term, this will result in roughly $18 million in the incremental annualized expenses. However, as we have seen with our two previous wage increases, we fully expect to achieve stronger financial outcomes from lower turnover, improved workforce quality, lower recruiting expenses and more effective training. As Greg mentioned, our balance sheet and earnings power are extremely strong. From a capital deployment perspective, we will continue to favor organic growth, evaluating strategic nonbank opportunities such as Provide and Dividend Finance paying a strong dividend and then share repurchases. Practically speaking given our robust loan growth, we currently anticipate resuming share repurchases in the fourth quarter of 2022.

11:07 On behalf of the entire leadership team, I would like to say thank you to our employees. I'm very proud that in addition to producing solid financial results, we have also continued to take deliberate actions to improve the lives of our customers and the well-being of our communities. I also hope you all feel the same sense of pride that I do in being part of an organization that was just named one of the world's most ethical companies by Ethisphere, one of just five banks globally. Fifth Third is a great company, because we have great people who live our core values every day.

11:39 With that, I will turn it over to Jamie to discuss our financial results and our current outlook.

James Leonard

11:46 Thank you, Tim and thank all of you for joining us today. Our first quarter results were solid despite the market volatility during the quarter. We generated strong loan growth in both commercial and consumer categories, deployed excess liquidity into securities at attractive entry points and grew deposits. Expenses were once again well controlled, but fees underperformed our January expectations due to the market environment.

12:13 Improvements in credit quality resulted in an ACL ratio of 180 basis points compared to 185 basis points last quarter, while an increase in loan balances resulted in the net of $11 million increase to our credit reserves. Combined with another quarter muted net charge-offs, we had a $45 million total provision for credit losses.

12:37 Moving to the income statement. Net interest income of approximately $1.2 billion was stable sequentially. Reported results were impacted by lower day count, lower PPP income including a slowdown in forgiveness that resulted in $10 million less than expected PPP related NII, and the expected decline in residential mortgage balances from previous Ginnie Mae purchases. These detriments were offset by the benefit from the deployment of excess liquidity into securities, strong loan growth and the impact of higher market rates.

13:13 Excluding PPP, NII increased 1% sequentially and 5% year-over-year. Total reported non-interest income decreased 9% compared to the year ago quarter, or 7% on an adjusted basis. Similar to peers, our results were impacted by lower capital markets revenue, primarily due to transaction delays, as well as lower mortgage revenue in light of lower origination volumes and gain on sale margins, partially offset by improving MSR asset decay.

13:40 We generated solid year-over-year fee growth in treasury management and wealth and asset management where we produced net AUM inflows again this quarter. Consumer deposit fees were stable as our success generating household growth, offset that continued decline in punitive consumer fees as part of our Momentum Banking offering.

14:08 Non-interest expenses increased just 1% compared to the year ago quarter, reflecting continued discipline throughout the company. Compensation expenses were well controlled with the year-over-year increase reflecting the previously announced broad-based restricted equity awards, which will support the continuation of our strong employee retention. We also continue to invest in the ongoing modernization of our tech platforms. These items were partially offset by lower card and processing expense due to 2021’s contract renegotiations.

14:45 Adjusted expenses increased 2% sequentially, driven by the special equity award and the usual seasonal increase in compensation and benefits expense. Our expenses this quarter included a mark-to-market benefit associated with non-qualified deferred compensation plans of $12 million with a corresponding offset in securities losses.

15:09 Moving to the balance sheet. Total average portfolio loans and leases increased 4% sequentially. Average total consumer portfolio loans increased 2% compared to the prior quarter as strength in auto originations combined with growth in residential mortgage was partially offset by declines in home equity and other consumer loan balances, primarily from GreenSky balance runoff.

15:37 Average commercial portfolio loans and leases increased 5% compared to the prior quarter, primarily reflecting growth in C&I loans. Excluding PPP, average commercial loans increased 6% with C&I loans, up 8%. Commercial loan production remains strong and in-line with our original expectations. Production was strongest in core middle market, which was well diversified geographically, which increased over 60% year-over-year.

16:09 Our production and pipelines continued to reflect our strategic investments in talent and our successful geographic expansion, as we sustained our record pace in adding new quality relationships during the first quarter. With muted payoffs and higher revolver utilization rates reflecting the capital market slowdown, period endcommercial loans excluding PPP increased 5% sequentially, and 13% compared to the year ago quarter. Over half of the sequential period end growth was due to existing revolvers with the utilization rate increasing 2% to 35.5%.

16:50 Given the market opportunities in the first quarter, we began deploying excess cash to protect against the rising risk of an economic downturn. During the first quarter, we grew our securities portfolio approximately $13 billion. On an average basis, securities increased $5 billion, or 13% sequentially. As we have said over the past two years, our balance sheet positioning allowed us to remain patient and not grow the portfolio at historically low interest rates caused by the extraordinary Federal Reserve intervention.

17:27 The past 90 days have absolutely validated our decision to patiently wait, but our actions this quarter and beyond will ensure our strong through the cycle performance under various rate scenarios over the long term. Our investments continue to focus on adding duration and structure to the portfolio with stable and predictable cash flows. Consequently, our overall allocation to bullet and locked-out structures increased from 59% to 64% at quarter end.

17:59 Average other short-term investments, which includes our interest-bearing cash decreased $6 billion, reflecting the growth in loans and securities, partially offset by continued core deposit growth. Compared to the year ago quarter, average commercial transaction deposits increased 5% and average consumer transaction deposits increased 11%, reflecting our continued success growing consumer households. We once again added households in every market compared to last year led by our key Southeast markets.

18:34 Moving to credit. As Greg mentioned, our credit performance this quarter was once again strong with NPAs at 47 basis points and net charge-offs at 12 basis points. We continue to closely monitor areas where inflation and higher rates may cause stress. As Greg also mentioned we have deliberately reduced our highly monitored leveraged loan portfolio for this very reason, which is now below $3 billion in outstanding’s. while also significantly improving the quality of the portfolio.

19:09 Moving to the ACL. Our baseline scenario assumes the labor market remains stable with unemployment ending our three-year reasonable and supportable period at around 3.7%. We maintained our scenario weights of 60% to the base and 20% to the upside and downside scenarios. Our ACL build this quarter reflected strong loan growth and a worsening downside economic scenario, partially offset by improvements in the credit risk profile of the loan portfolio, including a reduction in borrowers and prolonged distress.

19:49 If the ACL were based 100% on the downside scenario, the ACL would be $1.1 billion higher. If the ACL were 100% weighted to the baseline scenario, the reserve would be $236 million lower. While our base case expectations point to continued economic growth, there are several key risks factored into our downside scenario, including escalating geopolitical tensions, which could exacerbate existing inflationary pressures and further strained supply chains, pressures from the Fed's quantitative tightening or additional COVID variants, which could play out given the uncertain environment. Our March 31st allowance incorporates our best estimate of the economic environment.

20:41 Moving to capital. Our CET1 ratio ended the quarter at 9.3%, above our stated target of 9%. The decline in capital was primarily due to strong RWA growth in light of the robust organic business opportunities and securities purchases combined with an 8 basis point impact from the CECL capital transition rule. We expect to close the acquisition of Dividend Finance in the second quarter, which will deploy approximately 30 basis points of capital. Our tangible book value per share excluding AOCI increased 1% during the quarter and 5% compared to the year ago quarter.

21:27 Moving to our current outlook, which includes the financial impacts from Dividend Finance. We expect full year average total loan growth between 5% and 6% compared to 2021 including the expected headwinds from PPP and the Ginnie Mae forbearance loans we added last year. Excluding these items, we expect total average loan growth of around 10% reflecting strong pipelines, sales force additions, the Dividend and Provide acquisitions and stable commercial revolver utilization rates over the remainder of the year. This should result in commercial loan growth of 9% to 10%, or 15% to 16% excluding PPP.

22:15 We now expect total average consumer loans to be stable in 2022, reflecting our first quarter decision to lower auto loan production in order to enhance our returns on capital. We now expect around $8 billion in auto and specialty production for the full year, which will still result in double-digit growth in indirect consumer secured balances in 2022. Our outlook also assumes modest growth in other consumer loans, reflecting the benefits of Dividend Finance, partially offset by a 20% decline in GreenSky loans.

22:56 On a sequential basis, we expect second quarter average total loan growth of 2% to 3% comprised of 3% to 4% commercial balance growth and stable consumer balances. We expect 5% to 6% average C&I growth in the second quarter, excluding PPP. We expect our average securities portfolio to increase approximately $10 billion in the second quarter, reflecting the full quarter impact of purchases made later in the first quarter combined with the assumption that we have $2 billion more in balances given the market opportunities we have seen through early April. We also assume $1 billion in additional securities growth in both the third and fourth quarter.

23:48 Given our outlook for earning asset growth combined with the implied forward curve as of April 1st, we now expect full year NII to increase approximately 13% to 14%. It is worth noting that our outlook incorporates the impacts from the run-off of the PPP and Ginnie Mae portfolios, which resulted in a $220 million headwind this year. Excluding those portfolios, NII growth would exceed 18%. Our current outlook assumes stable to slight growth in deposit balances in 2022 compared to 2021 with continued strong growth in consumer deposits in the mid-single digits offset by the expected run off of non-operational commercial deposits.

24:43 We expect deposit betas of around 15% on the first 125 basis points of Fed rate hikes. The 25 basis points, we saw in March combined with another 50 basis points in both May and June. While we remain confident in the quality of our deposit base, the rapid and aggressive policy response by the Fed to curb inflation, including the potential for 10 rate hikes from March 2022 to March 2023 and aggressive Fed balance sheet reductions. We expect deposit betas of approximately 25% over the first 200 basis points this cycle compared to the mid-30s last cycle. The ultimate impact to NII of incremental rate hikes will be dependent on the timing and magnitude of interest rate movements, balance sheet management strategies including securities growth and hedging transactions, and realized deposit betas.

25:46 For the second quarter, we expect NII to be up 11% to 13% sequentially, reflecting strong loan growth, the impact of securities purchases and the benefits of our asset sensitive balance sheet. We expect adjusted non-interest income to be stable to down 1% in 2022 compared to our prior expectations of up 3% to 5%. This change is primarily driven by the change in our rate outlook. The single biggest line contributing to the change as deposit service charges, which is reflective of incremental earnings credits in light of the higher interest rate environment. The rate environment has also impacted our outlook for mortgage revenue, which we now expect to be down 10% or so in 2022 compared to 2021.

26:39 We continue to expect strong but slightly lower than January expectations in commercial banking fees and private equity income in 2022 provided resolutions of the temporary delays experienced in the first quarter occur. It is worth noting that even with the decline and expected fee income primarily due to the interest rate environment, we expect total revenue to now be approximately $275 million more than our January guidance.

27:12 We expect second quarter adjusted non-interest income to be up 8% to 9% compared to the first quarter or down around 1% compared to the year ago quarter. We expect full year adjusted non-interest expense to be stable on a standalone basis, or up 1% to 2% including the impact of Dividend Finance compared to 2021, which is an improvement from our previous guidance of up to 2% to 3%. We continue to strategically invest in our franchise, which should result in low double-digit growth in both technology and marketing expenses.

27:52 Our outlook also assumes we add 25 new branches primarily in our high growth Southeast markets. Our guidance also incorporates the minimum wage increase to $20 per hour that Tim mentioned. We expect these investments in our people, platforms and franchise to be partially offset by the savings from our process automation initiatives, reduced servicing expenses associated with the Ginnie Mae portfolio, a decline in leasing expense given our disposition of LaSalle Business Solutions, which was completed in April and our continued overall expense discipline throughout the company.

28:35 We expect total adjusted expenses in the second quarter to be down around 3% to 4% compared to the first quarter, which is up 2% compared to the year ago quarter, due to the acquisitions of Provide and Dividend Finance or stable on a stand-alone basis. As a result, our full-year 2022 total adjusted revenue growth is expected to significantly exceed the growth in expenses, resulting in nearly 3.5 points of improvement in the efficiency ratio.

29:12 Our outlook for significantly delivering on our positive operating leverage commitment reflects our recent acquisitions expense discipline and strong balance sheet management. It also considers the known revenue headwinds from PPP and our Ginnie Mae portfolio. We continue to expect second quarter and full year 2022 net charge-offs to be in the 20 basis points to 25 basis points range.

29:37 In summary, we continue to take actions to further strengthen our balance sheet positioning for this environment. We are deploying excess cash prudently into both loans and securities to support continued through the cycle-out performance and have a lot of momentum in our businesses to have a very successful 2022.

29:57 With that let me turn it over to Chris to open the call up for Q&A.

Chris Doll

30:02 Thanks, Jamie. Before we start Q&A, as a courtesy to others, we ask that you limit yourself to one question and a follow-up and then return to the queue if you have additional questions. We will do our best to answer as many questions as possible in the time we have this morning.

30:17 Operator, please open the call up for questions.

Question-and-Answer Session

Operator

30:21 [Operator Instructions] Your first question today comes from the line of Scott Siefers with Piper Sandler. Your line is now open.

Scott Siefers

30:35 Good morning, guys. Thanks for taking the question. Hi, Jamie, I appreciate -- hey, [indiscernible] I guess, first of all, I hope that Greg and Tim congratulations to both of you, best wishes. Greg as you go forward and Tim in the new position.

Timothy Spence

30:50 Thank you.

Scott Siefers

30:52 Yeah. Jamie, appreciate all the thoughts on sort of liquidity deployment, I guess now that you've deployed sort of a majority of the target and roughly $10 billion or so in excess liquidity and the rest will be deployed through the remainder of the year. Is there in your mind sort of an opportunity to kind of redefine what you're excess liquidity looks like? In other words, deposits aren't really coming out of the system as large the way one might have thought earlier? Is there a point at which you say, hey, those are going to stick around and there sort of user or will they just be absorbed with loan growth et cetera. Just maybe any thoughts there?

James Leonard

31:30 So it's a good question and thanks for asking, Scott, I probably should have included it in my prepared remarks, but I have recalibrated our excess liquidity given the first quarter's activity to where we're sitting on about $15 billion of excess cash here in April. I still like the one-third, one-third, one-third approach, where perhaps a third of it runs off in the commercial deposit book is the Fed starts to move in 50 basis point increments. And then, a third in additional security purchases, so $5 billion more during the course of this year. And then, obviously, the rest in loan growth especially with Dividend coming on board, where we expect continued nice loan growth throughout the year.

Scott Siefers

32:19 Okay. Perfect. And then, you gave some thoughts on sort of the puts and takes in the expense outlook. I guess, so nice to see that you can absorb that minimum wage increases still improve the expense guidance. Are there any areas where you guys exclusively dial back things outside of compensation increase or but I guess sort of maybe just a little more thought on the puts and takes as you see them?

James Leonard

32:46 Yeah. The puts and takes this quarter relative to the January guide really is the interplay of the rate environment between fees and NII, whereas expenses, the main driver of the improved expense base on a stand-alone basis was really the fulfillment costs and related compensation related to the lower fees, but the rest of the franchise in our approach to managing expenses during the year really hasn't changed from when we started the year. We continue to focus on technology investments and supporting our marketing efforts and so the marketing spend is actually a little bit higher as we look out at the year given the strong growth, we've had in consumer household acquisitions and the Momentum Banking product. Obviously, the minimum wage adjustment was a little bit of an uptick in expenses, but again offset by some of the savings from the lower fee guide. So overall, I think the approach remains the same, which has continued to invest in the business and continue to let that strong momentum show up in the rest of the balance sheet activities.

Scott Siefers

34:02 Perfect. All right. Good. Thank you very much.

Operator

34:06 Your next question comes from the line of Erika Najarian with UBS. Your line is now open.

Erika Najarian

34:15 Hi. Good morning. My first question is that really for Greg and Tim. Greg, congratulations on your retirement. I'm wondering sort of why you decided now would be a good time to step aside. And Tim, maybe just as a follow-up to that, what are you most excited about as you look forward outside of macro in terms of the growth prospects for the bank that you're inheriting?

Greg Carmichael

34:44 Thanks for the question. First of all, I think it's really a perfect time for to me to be stepping down as CEO. The bank is in fantastic shape. I became CEO in 2015. The objectives we put in place to be good through cycle, make the changes that lead to for outperformance through the cycle. I feel really good about. So, position of the bank, our business for the future of the success we've had, it's a great time to step aside. Second thing is Tim’s readiness. Tim's worked in the bank, six plus years, it's been succession, I think well final succession plan. Tim is absolutely ready and the time is now for him step up given the forms of bank. And third thing is my personal aspiration retire at age 60, which I turned 60 in January and that's always an aspiration mine to be able to be able to do that. And there's a lot of things I want to focus on, lot as travel on the personal side, personal investments and 60 was kind of my timeline also. So that would not have been work if Tim was already in the bank was position as well as also it really came together to right time.

Timothy Spence

35:51 Yeah. Erika, as it pertains to your question for me, I’m excited about a lot. We are in as good a shape as Fifth Third has been at any point since I have been around the company, including the several years that I spent outside the bank as a consultant to the bank and Greg. And I think we have assembled to really outstanding bench of leadership talent, right. We talk a lot about experience being a team sport here. So you have deeply experienced folks from inside the company, you have folks who have joined from outside the bank who brought in fresh perspectives and it really helped us to think about how we shape the business going forward.

36:34 And if you think about the long-term objective, we set for ourselves, which is to outperform through the cycle. I think all the pieces parts are in place. We have a great culture of expense discipline. We've inculcated a credit discipline that will support through the cycle performance. We have been investing continuously. I think sometimes maybe we haven't got an enough credit for it because we have essentially been harvesting expenses in some areas and redeploying them and grow. And the byproduct of that is, we have a really excellent footprint and a nice balance between the Southeast and the Midwest. And we're seeing bloom coming for many of the investments we've made in digital capabilities. I think, in particular, with a focus on product innovation, right, whether that is Momentum Banking and the differentiation that, that is Provide and supported has provided to our household growth goals where the managed services, which as Greg mentioned in his prepared remarks that help to really drive the right balance in fees to total revenue.

37:33 And then I think last but certainly not least the benefits we're going to continue to see from the acquisitions that Provide and Dividend in terms of providing sustainable loan growth was really attractive ROAs. So, I do have lots to feel good about here.

Erika Najarian

37:48 Got it. And the second question is for Jamie. Jamie, AFS has become a bad word this quarter and I'm wondering, you've always had a very distinct investment policy. If you could explain to the generalist that are listening to this call. There have been distressed about the CET1 erosion that they've seen at the big banks for it's been relevant and then the role the AOCI in other regional banks impacted tangible book. What you bought in the quarter to $10 billion and the difference between duration risk or CMBS and RMBS? And also if you could translate into generalist language, what bullet and locked-out structures mean?

James Leonard

38:35 I think, I can take the next hour of this call and go through those but this tells you how difficult question it is. Jump in if I don’t touch on all aspects of it, but I guess, I would start with saying and maybe I'm fighting a losing battle on this one, but I do struggle with the concept of fair valuing one line item of the balance sheet, but not the rest of it or not evaluating HTM in combination with AFS because philosophically for me, as a category four bank. Our election to put a security in the AFS or HTM doesn't change the economics or the risk of the investment. And I understand, the largest banks there is value in minimizing the risk of the regulatory capital volatility, but for us, well below $700 billion in assets, we believe the benefits of maintaining the flexibility to manage the portfolio as the environment unfolds or our outlook changes create significant value.

39:42 And you've seen that over the last eight years where we've had the number one performing investment portfolio yield in the industry. So I struggle with the concept of what our company be worth more if I place the securities into the Roche Motel of HTM or if I maintained by flexibility in my optionality and put it in AFS, but I understand that's how the valuation work. Our goal is always to optimize the balance sheet to deliver long-term real economic value and not make decisions, but optimize accounting outcome over economic value. So that's why we continue to pull it all of the securities and AFS because we like the optionality. In terms of what we're buying -- the second part of your question, we do like the bullet and locked-out cash flow structure so that there is a minimal extension risk in that security relative to RMBS. Probably the best example for the generalist on that would be our duration was 4.8 years at the end of the year and it moved to 5.4 years at the end of this quarter. All of that duration extension was because of the securities that we purchased, we averaged 2.5 yield and 6.5 year duration on what we purchased. So all of our duration extension was intentional and we prefer to add duration when we want to add it as opposed to the market foreseeing that duration extension upon us and that's really the value of the bullet and the locked-out cash flow. And I'll sacrifice a little bit of yield in a base environment but I protect the volatility on up rates or down rates and that's really the philosophy of managing the investment portfolio.

Erika Najarian

41:40 Got it. Okay. Thank you.

Operator

41:44 Your next question comes from the line of Mike Mayo with Wells Fargo Securities. Your line is now open.

Mike Mayo

41:53 Hi. Just, -- I’m saying questions if that's going to clarify there. So you've deployed or what 60% of your excess capital -- excess cash, I'm sorry and now you have about 40% of the excess cash to deploy from year? How we should think about this?

James Leonard

42:14 Yeah. I looked at it Mike is, I had a $35 billion of excess cash, I bought 13 of additional leverage in the quarter. Got about 15 left, net of loan growth for second quarter purchases and additional cash deployment as the year progresses. And I think to Scott's question early on, there is an opportunity to perhaps that other $5 billion of run-off in deposits doesn’t occur as offset by growth in other areas, but for now that's how we see the year playing out.

Mike Mayo

42:46 And then to the other question for the CEO change, Greg, you gave a summary of what you've accomplished over the last seven, eight years. Anything that you say if you had more time, you'd like to have achieved? And then Tim, more like who -- who is Tim Spence, right? What is your background? Maybe Greg, why did the Board select Tim? What are the unique characteristics for Tim to be steward of Fifth Third's shareholders capital for the next several years for? Thanks.

Greg Carmichael

43:23 Absolutely, right. First of all, I think, we accomplished the objectives that I set out for as we talked about and we put project those where in place. I'd like to done more faster you're probably, but you will see an ability of the organization absorbed amount of change that we're bringing forth was important also. So I think we did it the right way it’s not a whole lot, I would have changed or done differently. I'm sort of very probably accomplished as Jamie said and Tim said, , it's a team sport and we've got a great organization. We've worked hard to put a great organization and great team around Tim.

43:56 Why Tim, right now? Absolutely, the right person. Tim has a strong technology background. He has been instrumental into other acquisitions and the investments that we've been in this space. He has great, great abilities to look ahead. Understand and assess the challenges that we're going to be faced with now one year, two years, but five years down the road. So you think about our bank needs going forward, strong technology, expertise, but also beneficiary being able to see down the road or with the challenges might be that we're faced with and also execution. Tim is fantastic on the execution side you can be the great visionary, great strategist but if you cannot execute, you are not to be successful. Tim demonstrated over the years especially as present and he can execute extremely, extremely well. Once again, if that wasn't the case, we wouldn't be making this transition at this time. But he is absolutely ready, he is the right person. The reason I just said, I couldn't be more excited. I'm a large shareholder. I’m going to be a large shareholder to have Tim at the helm forward. And I’m excited about starting the next phase of my life, which is retirements of retirement I worked hard to achieve at early age and I think it's just a great, great time for both of us.

Mike Mayo

45:06 Okay. I'll requeue. I’ve some more tech questions. Thanks.

Operator

45:11 Your next question comes from the line of Betsy Graseck with Morgan Stanley. Your line is now open.

Betsy Graseck

45:19 Hi. Good morning.

James Leonard

45:23 Good morning.

Betsy Graseck

45:25 Okay. A couple of questions, first on C&I. I noticed in the deck that ex-PPP you were up 8% QQ. And I just wanted to see if you could unpack the drivers a little bit. One of the reasons is, inventory build is going up, how much longer can that last? I've got a colleague internally who is telling me that inventories are about peaking and I'm wondering, if you agree with that or not? And maybe give some sense of what you're seeing in your customers desire for CapEx and what the runway is on that? Thanks.

Timothy Spence

46:00 Yeah. Sure. Betsy. This is Tim. Thanks for the question. So I think you have to think about our C&I business is being the corporate banking business and the middle market business. So I think, very clearly the corporate banking side of the business that rising utilization there is at least in part a byproduct of the capital markets having been influx and I do anticipate that as the markets are opened up and that folks that we bank who are issuers on a regular basis. Go back into them that you'll see more fee income and then in turn a little bit less utilization. But there is no question inventory build there. Core middle market, I think there is still room to run on inventory build but there is no question that the catalyst for us in terms of our own growth has been now that the focus on CapEx in particular, investments that are going to drive labor productivity or at a minimum, a reduction in labor requirements.

47:00 And then in addition to that we have benefited now and are continuing to benefit from what was a record pace of adding new quality relationships. Last year, which is carried over into the first quarter that Jamie and Greg and I were laughing before the call. It's really, it's the 4Cs for us at Cincinnati, Chicago, the Carolinas and California plus Tennessee and we couldn't figure out how to get to fee out of that one, but that drove the outperformance and C&I production in the first quarter.

Betsy Graseck

47:33 Okay. I guess, Tennessee, so maybe at the end of that.

Timothy Spence

47:36 Yeah. There you got Tennessee, exactly.

Betsy Graseck

47:40 And then maybe you could help me understand how you're thinking about deposits and deposit moving from here, you get the Fed QE that then you’ve got your high quality book and so, how should we be thinking about deposit growth and what the loan to deposit ratio should look like as we progress over the next year or so? Thanks.

James Leonard

48:03 Yeah. We certainly expect the loan-to-deposit ratio to what I'll say improve get higher. We finished the quarter at 69% and really the interaction between the loan-to-deposit ratio and the deposit betas is obviously, highly correlated. And as we entered the last tightening cycle at third, we were in the mid-90s. So we don't expect to get that high in this over the next couple of years, but we certainly would like to manage the company in the 80s from a loan-to-deposit ratio, but it will take a little bit time to get there. I think from a deposit activity standpoint, we expect continued strong consumer deposit growth and then we're forecasting and perhaps it's conservative, a run-off in the non-operational deposits within the commercial book is, we're just not going to chase rate sensitive non-relationship deposit balances.

49:06 But with that said, I really like the balance sheet that we've put together over the last seven years where we've really improved the primacy within the consumer book as well as the granularity through the household growth along with the improvements in the operational deposits through our strong treasury management business. I know we've talked about at different conferences over the course of the year the strength of our TM business, but that ultimately will pay off as rates start to rise and we can perhaps manage to a lower beta in the next 200 basis points than what we saw with the start of the 2015 hikes.

Betsy Graseck

49:48 And the non-operational, you size that.

James Leonard

49:54 I'm sorry, I couldn’t...

Betsy Graseck

49:56 The non-operational deposits you've sized that.

James Leonard

50:02 Yeah.

Betsy Graseck

50:03 Okay. Thanks.

Operator

50:07 Your next question comes from the line of Ken Usdin with Jefferies. Your line is now open.

Ken Usdin

50:14 Hey. Thanks. Good morning. Jamie, just a following up on the securities portfolio purchases, now that you've both move more in and also rates have moved higher. I wonder if you could just level set us relative to your comments last quarter about where you think the securities book yields go over the course of the year -- year end [indiscernible]. Can you just give us kind of an updated level set on how that trajectory, given the better front book yields that you've been able to see?

James Leonard

50:44 Yes. We expect the investment yields to be in the 2.75 area in the second quarter as well as for the full year, which is up, obviously from the guide we had in January in the 2.60 to 2.70 range.

Ken Usdin

51:00 Perfect. Great. And then second question on a deepening on the expense side. So the expense guide got a little better for the full year even with the incremental minimum wage. Could you just kind of give us some granularity on what was the rest of the delta, was it incentive comp or related to fees? Was it just incremental efficiencies that you've been able to find just a details there would be great? Thank you.

James Leonard

51:25 It's predominantly the fulfillment costs within mortgage and incentives in the other businesses that were impacted by the lower fee outlook. And then, partially offset by the higher marketing expenses and the minimum wage increase impact.

Ken Usdin

51:46 Okay. Got it. So everything else related to like brands, branch savings et cetera., technology spend is intact underneath the surface?

James Leonard

51:54 Correct. Yeah.

Ken Usdin

51:56 Okay. Great. Thanks a lot guys.

Operator

52:01 Your next question comes from the line of Ebrahim Poonawala with Bank of America. Your line is now open.

Ebrahim Poonawala

52:09 Hey. Good morning. I guess one question just around, as we think about capital deployment, future M&A. Just to talk us around how and maybe Tim, if you want to jump in, how you think about adding scale for your obviously organically growing in the Southeast, talk to us about like bank M&A, is there any appetite for that? And then how does that fit in, when you think about technology and I know, Tim has spent a lot of time on payment and strategy? So just some perspective around how you see Fifth Third position on the tech stack and what are the one or two big sort of areas that you are looking to invest as we think about the next couple of years?

Greg Carmichael

52:54 Okay. A lot of questions. Let me get started here. First off, when you think about deploying capital, we have not changed I would think about. Number one is organic growth that's extremely important is the expansion in Southeast and the West Coast, investing in our people, technology, products, services, job one is organic growth, billion quality franchise for the future that performed well. Second, we look at non-bank M&A transactions. So opportunities like Provide, Dividend Finance, H2C, Coker, Franklin will be examples of non-bank opportunities that really add to our products and service capabilities, that's extremely in our reach extremely important to us. We're always looking for those type of opportunities that make us a better bank, and that’s number two.

53:36 Number three, more obviously, want to continue to pay a strong dividend. Number four, with excess cash will be share repurchases. Lowering our part would be M&A. Now why is M&A bank M&A lower on our progress of us. Quite frankly, there's not a lot of opportunities out there. And we will believe M&A is a strategy unto itself. We think, M&A is a strategy, which will support our strategic direction. When you look at some of the transactions that we've done recently, we did not participate those type of transactions. So once again if there was an opportunity from a bank M&A perspective, they have to fit into our strategic objectives such as the larger and more relevant the Southeast and attractive markets. There is just not lot of those opportunities that exist today. That's why it’s lower in our priority list. It doesn’t mean if something did emerge that fits into our strategic direction, makes us more relevant to Southeast in a right markets that we're looking for and is a good cultural fit that we wouldn't consider it. We actually we consider it. It's just lower on our prior list because there is not a lot of opportunities out there that really fit or we should be trying to accomplish that we think are actionable. So that's why it’s lower in the list for us. But once again it's something emerge, we will obviously assess that for long-term strategic shareholder value when we consider it.

Timothy Spence

54:53 Yeah. And moving forward towards, I concur with all that, I think we said for a long time that we don't believe that scale is an and in another itself and that certainly will be consistent in terms of our point of view on how we proceed. As it pertains to your questions about technology, you can think about the investments that we have been making and basically three areas. One is, just the core infrastructure, right. We talked a lot about data centers. We've talked a lot about the cloud data strategy. We talked a lot about information security and otherwise. I think we feel very good about where we're at on that front. We are making good progress. I can't remember the cricket analogy, Simon have to go with middle innings, but we are in the platform modernization front, okay. And I think feel very good about the migration away from legacy mainframe platforms and on the platforms that allow us to spend a lot more of our money on new application development as opposed to maintenance and service.

55:54 And then I think the thing that's probably been less, there has been under emphasized in our industry in general, but which is a big point of focus for ours. We are believers that the more fundamental disruption associated with the Internet in all sectors, is the way that it informs product and product innovation. So that is the area where I think we will continue to look to differentiate. We have to be good at all of the other items. There are hygiene factors, but it's the opportunities to leverage technology to change the nature of the value proposition that we have for our customers. The way that we did with Momentum Banking when we launched a year ago. And as we continue to hone and refine and add feature functionality to that platform. The things that the folks have provide have done over time that they -- where they have actually been able to accelerate the amount of innovation that they brought to market. We launched five or six new products within the first six months that they were on board and they had gotten two or three out in the prior few years beforehand. And then the managed services, which are obviously a critical platform for us and which provide really stable and high margin fee income.

Ebrahim Poonawala

57:09 Thanks for the comprehensive response. One quick follow-up. Jamie, sorry if I missed it, did you mention what the dollar amount was for the non-operational deposits?

James Leonard

57:17 We did not, but it's baked into the $5 billion of outflow that we're assuming occurs during the course of the year. So, sorry, I didn't answer that more clearly with Betsy's question.

Ebrahim Poonawala

57:30 Understand. Greg and Tim, congratulations. Thank you.

Timothy Spence

57:33 Thank you.

Operator

57:35 Your next question comes from the line of Matt O'Connor with Deutsche Bank. Your line is now open.

Matt O'Connor

57:42 Good morning. Could you guys talk about how C&I spreads are trending? I know a few quarters ago, you were talking about pressure, but we've seen obviously widening spreads in capital markets, which is a perfect indicator, but certainly better to widen the narrow. And on the flip side, as rates go up, there's obviously more spread to potentially probably where does you think about competitive forces? So, maybe what you're seeing now and how you think will trend next few quarters? Thank you.

James Leonard

58:13 Yeah, Matt. It's Jamie. Thanks for the question. The C&I spreads or definitely stabilized during the course of the first quarter, such that the C&I yields ex-PPP were only down 4 basis points as opposed to some of the double-digit types of declines you saw in other quarters. So we feel good about stabilization of loan yields. And in fact for the balance sheet hitting an inflection point in the second quarter for pretty much every asset class, but yields and spreads should be improving as we go forward from here.

Matt O'Connor

58:55 Okay. And then as we think about, I guess specifically like on the spreads like yields will go up obviously rates are going up, but then a lot of banks are -- all banks are trying to grow kind of the core C&I which has been trying to Fifth Third for years. So how do you think some of the spreads trend the next few quarters between the puts and takes off again capital markets you've seen some spread widening but competitive forces from the banks?

James Leonard

59:19 Yeah. I think C&I spreads in the second quarter stable flat and then improvement perhaps as we get to the back end of the second quarter heading into the second half of the year, given some of the disruption in the capital markets and the spread widening from the geopolitical tensions, that's how we have a model going forward.

Matt O'Connor

59:42 Okay. That's helpful. Thank you.

Operator

59:44 Your next question comes from the line of Gerard Cassidy with RBC. Your line is now open.

Gerard Cassidy

59:50 Good morning, everyone.

Greg Carmichael

59:53 Good morning.

Gerard Cassidy

59:56 Greg and Tim congratulations on the new roles for both of you. Jamie, I always appreciate your color commentary about the balance sheet and the asset liability sensitivity as well as the expectations you have for the full year as well as the second quarter and the world has changed dramatically in this first quarter as evidenced by your assumptions on the Fed funds rate and the powerful impact that has had on net interest income. Can you share with us, if we're here a year from now, then Greg will be drinking a pina colada in the Caribbean and we know that. But for you [Multiple Speakers] What should we really focus in on a year from now that could be a starling. Is it just breathtaking how it's changed and it's not just for you folks, of course, it’s everybody. But I'm just taking the back at how strong everyone's net interest income growth is now because of the rate environment changed and I’m wondering a year from now, what could it be like that could make us stay up late at night worrying?

James Leonard

61:07 I think a year from now and really the value that we see from our actions this quarter is just how well positioned our balance sheet is to perform well through the cycle both from an NII perspective and a credit perspective. And I think perhaps there was some concern that we have waited too long and miss the opportunity. And I think the good news from today's release is that we are well positioned and well protected to the possibility of recession in 2023 or 2024, not that that's our base case, but certainly something that we're mindful of and we pride ourselves and really under Greg's leadership over the last seven years of being good risk managers and that's how we approach thanks for that show that downturn occur. We're well positioned to be a strong performer. But should we continue to see good economic growth, but this is a company that's positioned to do well with generating high returns, high PPNR growth and really do well through the cycle.

Timothy Spence

62:22 Gerard, if I were to add on adding Jamie referenced credit, we've come out of a period here where the dynamic around rates as I think really obscured the importance of funding quality. And it just given the way that reporting gets done, it's probably hard to tell from the outside looking in, how good the funding base is, and that doesn't just extend the banks, it's the non-banks as well, right. So as the Fed tightens, I think there is going to be more differentiation and maybe the market fully appreciates as it relates to the stability and the quality your funding base and the banks who have done the things that we've tried to do in terms of growing primary relationships and what the focus on core operational deposits should be much better positioned to whether an environment where liquidity maybe is, there is a premium attached to it unlike the environment that we really have come out of over the course of the past handful years.

Gerard Cassidy

63:25 Very good. Thank you for the color. And the prime relationships that you've developed with your customers and the low cost funding that comes along with that is obviously very beneficial. At what point or is there a point that you folks may look for some term funding if rates were to really go higher 12 months from now. Just like they've done in the last three or four months, does it make sense at some point to start looking at some term funding?

James Leonard

63:57 Yes. And that is included in our NII guide as well for the year.

Gerard Cassidy

64:02 Very good. Thank you, Jamie.

Operator

64:07 Your next question comes from the line of John Pancari with Evercore. Your line is now open

John Pancari

64:13 Good morning. On the deposit beta topic, I just wanted to see if you could perhaps discuss any of the risks or concerns that investors had that is for the industry could surprise higher than many of the banks are expecting, I know you guys are expecting a lower beta perhaps in the 25% range versus we experienced in previous cycle. Can you just talk about the concerns there that competition to be could be much more intense this time around given the various players in the space that could perhaps influence deposit betas to be higher than expected?

James Leonard

64:56 Yeah, John. Thanks for the question. There are a lot of competing factors on where the betas shake out. We think the overwhelming factor for the industry is the amount of liquidity is signified by the loan to deposit ratio and the industry being 20% better than they were at the end of 2015, heading into the last cycle, but you're certainly right the level of competition ultimately dictates the deposit betas, we just think the industry is so much better positioned now that the level of that competition should be less. So from an industry perspective, we think that should win out but then if we're wrong then let's talk about it on an idiosyncratic basis for Fifth Third, what we've been able to accomplish with the primacy and operational deposits and the treasury management business has translated for us what we believe should be a lower beta on the first 200 -- at the 35 last time, 25 this time. But with that said, 90 days ago, we were modeling a 20 beta on those first 200. So we have raised our own expectations a bit. Hopefully, we will do better than that, but possibility that we would not 25% beta is what we've settled in our outlook in the up 200.

66:31 When you break it down by customer segment, obviously the wealth and asset management area as a highly price sensitive portfolio whereas for us the improvement won’t be as much in that portfolio as it is in the commercial business because of the treasury management. And then in the retail book if the value exchange with the free services that you receive in Momentum Banking, we believe should result in a little bit lower beta this time around so that we're not competing on rate for the retail customer, but rather the value exchange with those other services, then including things like less punitive fees, the NSF elimination and all of the other structural changes we made to our product lineup should result in a better beta of the cycle. But if by chance, we are wrong. I think we're well positioned to be able to compete well regardless of how that plays out.

John Pancari

67:32 Got it. Okay. Thanks, Jamie. That's helpful. And then a similar question actually on the credit side. I know you're not flagging anything to concerning on the credit front and that's very similar to the message that we've gotten net of out of the banks this earnings season. And you know, but I know you saw a bit of a tick up in your [indiscernible] in a couple of the banks we have seen that as well. What areas of credit are you watching most closely? What areas do you think will move first? And are there any signs of faster than expected normalization at all within your consumer portfolio for example?

Richard Stein

68:11 Yeah. Hey. It's Richard. Let me start with the last one. From a consumer standpoint, we're actually not seeing signs of acceleration. If you think about where the excess liquidity certainly to the top 70% of that went to the top 20% of income households that liquidity has been sticking around for our customer base and again, we're prime and super-prime. And activity really haven’t -- we really haven't seen a shift in activity with respect to behavior changes in terms of that excess liquidity running off faster than we expected. In fact it's running off a little slower than we expected as people continue to strike the right balance across their lifestyles.

68:40 From a delinquency standpoint, we're at such a low level and this links to change for us was really in commercial. We're at such a low level, but it just takes one or two to slip over the quarter to change the percentage. So, we're really not seeing any trends. In terms of that would be alarming, that would -- that points us to an acceleration of the normalization across credit, whether it's consumer or commercial I think areas we're watching. Clearly, we continue to watch the leverage space, particularly enterprise value lending that's an area that we've been very disciplined on and we were happy with the portfolio. But that's a place where we continue to exercise discipline.

69:27 There is a handful of segments and CRE. Office is one that we're watching long term just given -- just given the structural changes in that space, but we focus on quality Class A properties, gateway cities. It's all very good stuff. And then, there's -- we're watching consumer products and manufacturing and senior living in a couple of more places where, look, we're watching as places where the ability to pass through cost increase, maybe a little harder. We haven't seen evidence of that at least at this point most people been able to pass cost increases through, but that's where we're watching.

John Pancari

70:05 Very helpful. Thanks for taking my questions.

Operator

70:08 Your next question comes from the line of Terry McEvoy with Stephens. Your line is now open.

Terry McEvoy

70:15 I'll take that. Good morning. Jamie, maybe a question for you. Could you just remind us what the mixes within commercial banking revenue, it was down 21%, but the better than some of your others who maybe, call it, capital markets or investment banking? And then maybe what are pipelines like today, and do you have any near-term thoughts on that business?

James Leonard

70:36 Yeah. The disruption in the first quarter definitely impacted the debt capital markets groups with the loan syndications and the corporate bond fees. For us within the commercial banking, it's a pretty good split between FRM products where we're helping customers with hedging called out a third of the business, a little bit more than that amount in investment banking revenue and then the remainder within some of the lending fee categories that an aggregate to the total. So, what we've seen is that FRM has done better that we originally expected, but that investment banking category within corporate bond and loan syndication and branch fees performed worse than expectations, so that's the mix there. The guide for the year includes some assumption that’s markets stabilize and reopen and should that not happen and we would just have more of that interplay between NII and fees. So that at the end of the day I will still feel good about the revenue generation of the company.

Terry McEvoy

71:52 And then just as a follow-up, the average commercial loan growth of 9% to 10% versus 7% to 8% in January. Is that all layering in Dividend Finance or ex that deal, you see a stronger year within commercial lending?

James Leonard

72:08 Yeah. So Dividend Finance will show up in other consumer loans, unlike Provide that did show up in C&I. So you'll see Provide’s benefit is in the C&I guide and Dividend Finance's and other consumer loans category.

Terry McEvoy

72:24 Okay. Great. Thanks for clearing that up. And then congrats to both Greg and Tim. Thank you for taking my questions.

Greg Carmichael

72:30 Thank you, Terry.

Operator

72:35 Your next question comes from the line of Christopher Marinac with Janney Montgomery Scott. Your line is now open.

Christopher Marinac

72:41 Thanks. Good morning. Jamie, I wanted to ask about the Fed balance sheet and epic contracts. Does not make a difference to your rate outlook and/or kind of how you perceive the macro picture?

James Leonard

72:53 We do expect contraction with our outlook of the Fed balance sheet as they potentially begin the sell down in June, announced that in May. I guess ultimately, the variable to our outlook would be, if they were to move significantly faster than perhaps you have a little bit more deposit outflow or higher deposit betas than what's expected, but it would have to be pretty quick and significant action on their part to implement the quantitative tightening more so than what we've got baked in. So I think ultimately it will play out, okay.

Christopher Marinac

73:38 Okay. But you're not expecting the opposite where they don't contract at all, it's not part of the interaction?

James Leonard

73:44 Correct. Yeah.

Christopher Marinac

73:45 Okay. Very well. Thanks.

Operator

73:51 Your next question again comes from the line of Mike Mayo with Wells Fargo. Your line is now open.

Mike Mayo

73:59 Hi. I was since, Greg you define Tim starting with the word tack or technology maybe just dig into a little bit more, Tim, your vision for what droves the bank in the future look like in terms of technology. Greg, you certainly have taken Fifth Third away, but there's still a lot more to go, I'm sure. So I'll give you Column A or Column B. Column A would be more one premise proprietary in-house don't rely too much on third-party and you can control your destiny, and Column A is where certain banks are where they want to protect a lot of their customer data and information, safety and security. Now Column B would be a zero ops, 100% public cloud, maybe 10, 15, 20 FinTech partners and the Lego approach where you piece those together really making use of having kind of a break down the borders around the bank. So column A or column B or maybe I'm framing this wrong and you can give another answer, but how do you 4C that the tech bank of the future?

Greg Carmichael

75:08 Tim is going to answer towards C here.

Timothy Spence

75:11 No. Look like, I think it's a mix of both the nice thing about our sector is there really is a very active technology vendor community and it gives you a lot of choices about how you want to run the business. I don't think we're ever going to be all in bucket A or bucket B. We're big believers that where there is an industry utilities that drives very limited customer differentiation and where there is a benefit to shared scale it makes sense to ride on the rails that are available and where there is an opportunity to differentiate and/or in the aspect of the business that's deeply proprietary that it's got to be managed and maintained in-house. So I think you're going to see us take a best of blend approach as it relates to those two areas. But with a heavy focus on owning the tech platforms in the products which are customer facing and probably comparatively a lighter emphasis on that as it relates to the back office where you're talking about a scaled utility that's processing credits and debits as opposed to something that's more strategic our proprietary to business.

Mike Mayo

76:26 Okay. That was clear. Any more concrete metrics that you can give us not everyone disclosed this, but the number of apps that you have and how much you'd like to reduce that or the number of vendors you have and where you'd like that to go, or percent that you're on the public cloud and where you'd like to take that or number of data centers where the end state is what you desire? So anything concrete those of us on the outside could -- you maybe ask you again in a couple of years to track your progress?

Greg Carmichael

76:55 Hey, Mike. This is Greg. I don't have concrete numbers for you. When you think about things like data centers it's two. Obviously, we want to be down to two data centers and we're approaching that pretty quickly here. Obviously, we want to make sure we have a hot sight and you get latency on how fast things could travel, it's really mindful that, but that's going to be the case. We think about our core apps around the business something less than we have today. I'm not sure how substantial of the agenda today, but something less we have today. Customer-facing apps as you think about them, when we can build off of common platforms and expand of a common platform very different than the past, there is an open source cloud-based computing that technology enabled us to do things over definitely we have less applications. So less applications for the customer facing side of house somewhat less applications on the back and as we consolidate some of our platforms and vendors, definitely less vendors. And data center we wanted to.

Timothy Spence

77:53 Mike, the metric that I think I'm really -- the metrics I'd really chiefly focused on how to deal with the resiliency of our environment. We have talked a lot about that, then they have to do with the mix of spend and the sort of continued focus on driving a heavier share of our overall spend to new application, development and products and out of legacy maintenance costs, right. Those I think are the things coupled then with what you can see publicly in terms of the way that customers evaluate our digital channels, in terms of the differentiation that you can see in the quality and the products and the services that are going to be the things that you should hold us accountable to.

Mike Mayo

78:37 Last one, so to run the bank, change the bank spend for technology where has it been, where is it today and where it might go to then?

Timothy Spence

78:46 Yeah. You include information security and otherwise, it's been, call it 35 change the bank, 65 run the bank the goal going forward is to invert that 65-35.

Mike Mayo

78:57 Great. Thank you very much.

Operator

79:02 Your next question comes from the line of Gerard Cassidy with RBC. Your line is now open.

Gerard Cassidy

79:10 Thank you. Just wanted to follow-up and apologize if you guys addressed this in your opening remarks. But Tim, you mentioned the 4Cs of your markets post Tennessee. Can you share with us where you're seeing the best commercial loan growth within the portfolio. I mean, coming from what parts of the 4Cs?

Timothy Spence

79:35 Yeah. As in which industry sectors, Gerard or where within -- where geographically within the markets?

Gerard Cassidy

79:41 More geographic that said, yeah.

Timothy Spence

79:44 Yeah, sure. So Betsy did correct me, it is the 5Cs if you count the FEE at the end of Tennessee as one, and I got an angry text message from our Head of Indiana and pointed out that they had a pretty good quarter as well. So, yeah, look I think geographically we have the benefit of having a really strong presence and mid-sized natural areas. And if you look at both demographics and economic activity that's where the majority of growth is coming from across the U.S. right now. It isn't necessarily the mega cities and it's certainly not the rural areas. It's the Charlotte's, the Raleigh's, the Cincinnati, the Indianapolis, the Columbus, the Inland Empire and California, as a point of example there as well, where you're seeing a lot of the activity and that is very consistent with what you would see inside our book of business as well.

80:41 So the Cincinnati Columbus corridor, I think has been a very strong resilient corridor that should be even better as Intel lands here and we get the downstream component suppliers and logistics companies and software engineering companies and otherwise that make their way into the space. Indianapolis and Columbus, I think are the two bright stars in terms of economic growth in the Midwest and obviously what we are getting out of the upstate. And Charlotte and Raleigh has been really outstanding along with middle Tennessee and Nashville, as opposed to other parts of the state that are growing at less robust pace.

Gerard Cassidy

81:21 And then as a follow-up to, in the commercial lending areas, how important are the treasury management products to complement the actual loan growth, obviously, we know lending standards can easily drive loan growth if you lower them. [Multiple Speakers] Can you share with us the color as well.

Timothy Spence

81:40 Yeah. I know there -- I mean they are extremely important and they have been a big catalyst for the success we've had in growing our quality relationship count, Gerard, so a third 30% to 35% of our new relationships have been led by TM in terms of the initial product sale, which certainly is anomalous to what I had experienced prior to or having had the success that we've had as it relates to managed services. And if you look at the available industry research the folks that do benchmarking on this front that Fifth Third is always in the very top of the top quartile in terms of TM penetration in the middle market into our middle-market lending relationships, which I think you can kind of evaluate just by looking at the growth of commercial deposit fees over time and commercial deposits as a percentage of Commercial total loan commitments, both of which Fifth Third is best-in-class in relative to its investor peer group. So it's important strategically in terms of how we go to market and the results are bearing out in terms of the financial performance.

Gerard Cassidy

82:50 Great. Thank you.

Operator

82:54 There are no further questions at this time. I turn the call back over to your Chris Doll.

Chris Doll

82:59 Thank you, Emma, and thank you all for your interest in Fifth Third. Please contact the IR department if you have questions

Operator

83:06 This concludes today's conference call. Thank you for attending. You may now disconnect.