Fifth Third Bancorp (NASDAQ:FITB) Q4 2021 Earnings Conference Call January 20, 2022 9:00 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

John Pancari - Evercore
Erika Najarian - UBS
Ken Usdin - Jefferies
Gerard Cassidy - RBC
Bill Carcache - Wolfe Research
Mike Mayo - Wells Fargo
Matt O'Connor - Deutsche Bank

Operator

Good day. Thank you for standing by, and welcome to the Fifth Third Bancorp Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Thank you.

I would now like to hand the conference over to your speaker today, Mr. Chris Doll, Director of Investor Relations. Sir, please go ahead.

Chris Doll

Thank you, operator. Good morning and thank you for joining us. Today we’ll be discussing our financial results for the fourth quarter of 2021. Please review the cautionary statements in our materials which can be found in our earnings release and presentation. These materials contain reconciliations to non-GAAP measures along with information pertaining to the use of non-GAAP measures, as well as forward-looking statements about Fifth Third’s performance. We undertake no obligation to update any such forward-looking statements after the date of this call.

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

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

Greg Carmichael

Thanks, Chris, and thank all you for joining us this morning.

Earlier today, we reported full year net income of $2.8 billion or $3.73 per share. We delivered strong financial results throughout the year, while fully supporting our customers, our communities and our employees. We generated full-year adjusted ROTCE, excluding AOCI, of 19%. Additionally, excluding the provision benefit in excess of charge-offs, our ROTCE exceeded 16% and improved more than 130 basis points from last year, driven by record financial results throughout the franchise.

We generated record revenue of nearly $8 billion in 2021, which increased 4% compared to 2020, highlighted by strength in commercial, retail and wealth and asset management. Our performance was led by record adjusted fee revenue, which increased 8%. Net interest income was stable compared to last year despite the continued environmental headwinds as we have been disciplined deploying excess cash.

Full-year adjusted expenses increased just 2.5% compared to last year, reflecting disciplined expense management throughout the company. As a result of our strong financial performance, we achieved positive operating leverage, excluding security gains and losses and generated an adjusted efficiency ratio below 60%.

Credit quality remained strong with historically low full-year net charge-offs of just 16 basis points. Additionally, non-performing loans and criticized assets continue to improve throughout the year, including the fourth quarter. Our credit results demonstrate our disciplined client selection, conservative underwriting and continued benefits from fiscal and monetary government stimulus programs.

For the fourth quarter, we reported net income of $662 million or $0.90 per share. Our reported EPS included a negative $0.03 impact from the items shown on Page 2 of our release. Excluding these items, adjusted fourth quarter earnings were $0.93 per share. Our quarterly financial results reflected strong momentum in most of our businesses. We saw that improved revenues compared to the third quarter.

We generated record commercial banking revenue, record treasury management revenue and record wealth and asset management revenue in the quarter. We expect the positive momentum in our business to carry forward into 2022 and beyond.

In our commercial business, record loan production of $8.2 billion increased approximately 50% sequentially with record performances in both corporate banking and middle market. Despite the ongoing challenges we are hearing from our customers, including supply chain constraints and labor shortages, production was broad-based across our regions and verticals.

From a regional middle market perspective, we generated strong production this year in several markets, including Chicago, the Carolinas, Indiana, Georgia and our expansion markets. From an industry vertical perspective, health care, renewables, retail, technology and financial institutions all continued to outperform.\

As result of our record production and record new quality relationships, we generated C&I loan growth, excluding PPP of 7% on an average basis or 11% on a period-end basis compared to last quarter.

The acceleration of commercial loan growth at the end of 2021, our strong pipeline, new commitment growth, production anticipated from Provide and continued investments in capabilities and talent will also support accelerated loan growth in 2022.

In our retail business, we once again generated consistent peer-leading consumer household growth in excess of 3% year-over-year, highlighted by our Chicago and Southeast markets. We continue to add households in every region, reflecting the ongoing success of momentum banking as well as our branch expansion and digital initiatives. Our success throughout our retail business comes down to three factors.

First, we are generating smart scale in our local markets. This quarter, we opened 18 banking centers in our key Southeast MSAs, while consolidating four locations throughout our footprint. We have also closed an additional 40 locations in the month of January, primarily in legacy markets.

We will continue to leverage our geospatial analytics to optimize our overall branch network, while taking into account evolving customer preferences. We continue to target a branch network allocation of approximately 35% in the Southeast by 2025.

Second, we offer differentiated products and services like Momentum Banking, which includes features that enable customers to avoid overdraft fees and get access to short-term liquidity when needed. I'd like to point out with respect to unit fees we have been the lowest among peers with significant consumer banking operations for several quarters.

And third, we are delivering an outstanding customer experience as shown by leading third-party surveys. We have improved in the bottom quartile five years ago to top quartile today. We are recognized as the number one bank out of the top 25 banks taking care of our customers during the pandemic.

Our balance sheet earnings power remained very strong. Last night to support continued acceleration of our growth and profitability, we announced the acquisition of Dividend Finance, a leading fintech point-of-sale, consumer lender, providing solutions for a highly attractive and growing renewable energy industry.

They have strong relationships with a robust contract network, offer sales and project management solutions through a state-of-the-art technology platform, and have a customer footprint focused on prime and super-prime borrowers. They have a coast-to-coast footprint with targeted growth initiatives in the Southeast.

By financing consumer renewable energy solutions, combined with our existing leadership in providing renewable solutions to commercial clients since 2012, we are supporting the country's transition to a more sustainable economy and furthering our ESG leadership position among peers.

As the only bank among peers that are earning a leadership score from CDP for three consecutive years, we are intensely focused on leading the transition to a sustainable future. Our focus has been recognized by several prominent ESG providers, including MSCI, which recently gave us a three-notch rating upgrade.

Whereas our sustained peer-leading household growth, top quartile key metrics, balance sheet management or strong diversified fee revenues, we have established a track record of doing what we say we're going to do. Our execution ultimately produces superior, consistent and sustainable financial performance.

Across all of our businesses, our strategic priorities are unchanged. We remain focused on leveraging technology to accelerate our digital transformation, investing to drive growth and profitability, expanding market share in key geographies and maintaining discipline throughout the company.

Before turning it over to Jamie to discuss our financial results and our current outlook, I'd like to once again thank our employees. I very much appreciate the way you have continued to raise to the occasion to support our customers, communities and each other. This is because of our frontline employees that we were able to keep within 99% of our branches opened since the onset of the pandemic.

We gave a special bonus to these employees in the quarter in recognition of their extraordinary and ongoing efforts to provide essential banking services for our customers. This marks the second time during the pandemic that we have recognized the work of our frontline employees through a special bonus.

In summary, we believe our strong and highly asset-sensitive balance sheet, diversified revenues and continued focus on disciplined management throughout the company will serve us well this year and beyond. We expect to generate positive operating leverage again for the full year in 2022 without adjusting for PPP or other known headwinds.

We remain focused on growing strong relationships and managing the balance sheet with a through-the-cycle perspective to generate sustainable long-term value for our stakeholders and maintaining our position as a top-performing regional bank.

With that, I'll turn over to Jamie to discuss our financial results and our current outlook.

James Leonard

Thank you, Greg, and thank all of you for joining us today.

Our strong quarterly financial results reflect focused execution throughout the bank. The reported earnings included a negative $0.03 impact from the two items noted in the release. We generated solid revenue growth, which resulted in record fee income, combined with another quarter of strong credit quality. As a result, we produced an adjusted ROTCE excluding AOCI of over 18%.

Improvements in credit quality resulted in an $85 million release to our credit reserves and an ACL ratio of 185 basis points compared to 200 basis points last quarter. Combined with another quarter of historically low net charge-offs, we had a $47 million net benefit to the provision for credit losses.

Moving to the income statement. Net interest income of approximately $1.2 billion increased 1% sequentially, reflecting C&I loan growth, $10 million in seasonal mutual fund dividends and $18 million in prepayment penalties received in the investment portfolio, as well as a reduction in long-term debt. These items were partially offset by lower loan yields and a decline in PPP-related income, which was $36 million this quarter compared to $47 million in the prior quarter. Excluding PPP, NII increased $19 million or 2% sequentially.

On the funding side, we reduced our total interest-bearing liabilities cost three basis points this quarter. Compared to the prior quarter, reported net interest margin decreased four basis points, reflecting a $2.6 billion increase in interest-bearing cash and lower loan yields, partially offset by prepayment penalties and mutual fund dividends from our investment portfolio. Excluding the impact of excess cash, NIM was flat sequentially.

Total reported noninterest income increased 1% compared to the year ago quarter. As we discussed in early December, reported results included negative valuation marks totaling $22 million, attributable to a $5 million negative MSR valuation as well as a $17 million fintech investment unrealized loss recorded in securities losses that occurred since its October IPO. Similar to our previous holdings of public companies, we will exit our position at the appropriate time.

Adjusted noninterest income results exclude the impact of security gains and losses, the Visa swap as well as prior period business disposition gains and losses. Adjusted noninterest income increased 4% sequentially, driven by another quarter of record commercial banking revenue.

We generated record M&A advisory fees notably in our healthcare vertical, reflecting successful outcomes from our Coker and H2C teams, combined with strong business lending and syndication revenue. These items were partially offset by lower corporate bond fees.

We also generated solid fee revenue growth in treasury management, card and processing and wealth and asset management, where we generated record net AUM inflows in both the fourth quarter and the full year. We were recently recognized as one of the world's best private banks for the third consecutive year by Global Finance Magazine and our results reflected.

Additionally, Mortgage banking revenue decreased $51 million compared to the third quarter, which included a $12 million unfavorable impact from our decision to retain $350 million of retail production during the quarter.

Compared to the year ago quarter, adjusted noninterest income increased 2% with improvement in every single fee caption reflecting both the underlying strength in our lines of business as well as the robust economic rebound over the past year. Noninterest income represented 40% of total revenue in the fourth quarter.

Reported noninterest expenses decreased 2% compared to the year ago quarter, primarily driven by lower occupancy expense as well as lower processing expense reflecting contract renegotiations.

Adjusted expenses increased 2%, driven by higher performance-based compensation, reflecting strong business results from record AUM inflows and commercial loan production, elevated medical benefits due to pandemic, loan servicing expenses and continued technology investments.

Our expenses this quarter included mark-to-market impacts associated with nonqualified deferred compensation of $10 million compared to less than $1 million last quarter. For the full year, total adjusted fees increased 8% compared to just 2.5% expense growth.

Commercial Banking revenue increased 21%. Card and processing revenue increased 14%. Wealth and asset management revenue increased 13% and TM revenue increased 9%, offset by a $28 million reduction from lower TRA income and a 16% decline in mortgage banking.

On the expense side, the largest contributor of the growth was elevated performance-based compensation, technology investments and loan servicing expenses. These items were partially offset by the actions we took about a year ago to streamline the organization, including process reengineering, vendor renegotiations, and divestitures of noncore businesses such as property and casualty insurance, HSA deposits and 401(k) recordkeeping.

Moving to the balance sheet. Total average portfolio loans and leases increased 1% sequentially, including the PPP headwind. Excluding PPP, portfolio loans and leases increased 3% on an average basis and increased 5% on a period end basis. Average total consumer portfolio loans increased 1% compared to the prior quarter has continued to strengthen auto was partially offset by declines in home equity and other consumer loan balances.

Average commercial portfolio loans and leases increased 2% compared to the prior quarter reflecting growth in C&I loans. Excluding PPP, average commercial loans increased 4% with C&I loans up 7%. As Greg mentioned, commercial loan production was robust across the board up nearly 50% compared to the prior quarter, reflecting strong corporate and middle market banking production, which was well diversified geographically. As a result, period-end C&I loans excluding PPP increased a 11% sequentially.

Revolver utilization of 33% increased 2% compared to the prior quarter. Average CRE loans were down 3% sequentially with lower balances and mortgage and construction driven by elevated payoffs in areas most impacted by the pandemic. As we have discussed before, we continue to have the lowest CRE concentration as a percentage of total capital compared to peers.

Given the rate environment towards the end of the fourth quarter, we began investing a small portion of our excess cash with the average securities portfolio balances increasing 1% sequentially.

Average other short-term investments, which includes our interest bearing cash remained elevated, reflecting continued growth in core deposits. Compared to the prior quarter commercial transaction deposits increased 5% and consumer transaction deposits increased 2%

Moving to credit, as Greg mentioned, our credit performance this quarter was once again strong, with fourth quarter net charge-offs remaining historically low. Non-performing assets declined 6% sequentially with the NPA ratio declining 5 basis points. Criticized assets declined 13% sequentially, reflecting a significant improvement from COVID high impact industries.

Additionally, criticized assets declined in virtually every region in vertical and also improved in our leverage loan portfolio. From a product standpoint, we continue to closely monitor CRE including office and hospitality exposures, given the ongoing effects of the pandemic.

Moving to the ACL, our baseline scenario assumes the labor market remains stable with unemployment and main our three year reasonable and supportable period at around 3.8%. We did not change our scenario weights of 60% to the base and 20% to the upside and downside scenarios given the continued uncertainty during the pandemic.

Our ACL release this quarter came primarily from commercial reflecting the improved risk profile of the portfolio. If the ACL were based 100% on the downside scenario, the ACL would be $960 million higher. If the ACL were 100% weighted to the baseline scenario, the reserve would be $213 million lower.

While the economic backdrop and our base case expectations point to continued strength in the economy, there are several key risks factored into our downside scenario, which could play out given the uncertain environment. In addition to COVID, we continue to monitor the economic and lending implications of the supply chain and labor market constraints that currently exist. Our December 31 allowance incorporates our best estimate of the economic environment.

Moving to capital, our capital levels remained strong with the CET1 ratio ending the quarter at 9.5%. During the quarter, we completed $316 million in share repurchases as part of our capital plan, which reduced our share count by 7.3 million shares.

Now that we have reached our 9.5% CET1 goal, we are returning to our 2019 CET1 target of 9% based on our improved credit risk profile and the economic outlook. It is worth noting that combining regulatory capital, credit reserves and unrealized gains we have one of the highest overall loss absorbency rates among peers.

As Greg mentioned, last night, we announced the strategic acquisition of Dividend Finance. Strategically, Dividend furthers our existing indirect consumer point-of-sale capabilities with a tech-forward platform.

Dividend pioneered the financing model, which improves economic outcomes for customers and contractors. This helps accelerate dividend growth in the solar industry which is expected to continue growing at a double-digit CAGR over the next several years.

Dividend will improve Fifth Third's loan portfolio granularity, geographic diversification and balance between consumer and commercial loans. Furthermore, while not modelled we expect to generate synergies over time in our mortgage and home equity business as well as with our existing commercial clients.

The transaction is also financially compelling. In 2021, Dividend gained market share and originated over $1 billion in loans, which increased 40% compared to 2019. We expect total origination volume of around $1 billion in 2022 post close.

Dividend Finance previously utilized an originate-to-sell model. And as a result, the closing of the acquisition will not include a material transfer of loan losses. However, post close, Fifth Third will retain all loan originations.

Given the scalability of the business, we expect a life of loan ROA of 3% plus, ROTCE of 30% plus and an efficiency ratio below 20%. Our modelling conservatively assumes a market share consistent with dividend finances recent history, no extension of the federal solar investment tax credit, an annualized net charge offs around 130 basis points.

The acquisition is expected to close in the second quarter and will utilize approximately 30 basis points of capital. Our long term capital priorities remain unchanged. First, deploy capital into organic growth initiatives.

Then evaluate strategic non-bank opportunities, continue paying a strong dividend and finally execute share repurchases with excess capital. Given the strong loan growth and the acquisition of Dividend Finance, we currently expect to resume share repurchases sometime in the second half of the year.

Moving to our current outlook, our full year guidance includes the financial impacts from Dividend Finance, which is expected to close in the second quarter. 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 throughout last year.

Excluding these items, we expect total average loan growth between 10% and 11%, reflecting robust pipelines, sales force additions the dividend and provide acquisitions and only a 1% improvement in commercial revolver utilization rates over the course of the year. This should result in commercial loan growth of 12% to 13%, excluding PPP. Additionally, we expect total average consumer loan growth between 6% and 7%, excluding the Ginnie Mae loans.

On a sequential basis, we expect first quarter average total loan growth of 3% to 4%, excluding PPP and Ginnie Mae loans. Including those impacts, we expect average total loans to increase 1% to 2% compared to the fourth quarter. Our outlook reflects continued strength in commercial given our production and pipelines. We expect 6% average C&I growth in the first quarter, excluding PPP.

We expect CRE balances to be stable sequentially in the first quarter, and as a result, expect average total commercial loan growth of 4% to 5% sequentially, excluding PPP. We expect average consumer loan balances to increase around 1% sequentially, excluding the Ginnie Mae impacts. We provide our expectations for this portfolio in our presentation appendix.

Given our loan outlook, we expect full year NII to increase 4% to 5%. It is worth noting that our outlook incorporates the impacts from the PPP and Ginnie Mae portfolios, which will result in a $220 million headwind next year or about 4.5 percentage points. Meaning, we would have expected close to double-digit growth in NII, if not for those portfolios, which have served their purpose to help bridge us to the more productive rate environment.

Given that current rate environment, our forecast assumes growth in our securities portfolio of approximately $1 billion per quarter and includes three rate hikes beginning in May. Due to the evolving economic outlook, our forecast and balance sheet management strategies are subject to change. As a reference point, we estimate that a 25 basis point incremental rate hike would increase NII by approximately $30 million to $35 million per quarter or seven basis points of NIM when fully realized.

The ultimate impact to NII of incremental rate hikes will be dependent on the timing of short-term rate movements, balance sheet management strategies, including securities growth and hedging transactions and realized deposit betas.

On the topic of deposit betas, our current outlook assumes a deposit beta around 13% over the first 100 basis points of rate hikes, including less than 10% for the first couple of hikes. We have updated our NII sensitivity disclosures in the presentation appendix, which now incorporates a dynamic beta repricing assumption rather than static beta approach previously utilized.

The information in the appendix uses modeled approaches to estimate the impacts of various rate scenarios based on decades of historical data. These model betas are 30% for the first 100 basis point scenario and 36% for the plus 200 basis point scenario. For the first quarter, we expect NII to be down 1% sequentially, impacted primarily by day count as well as lower prepayment penalty, PPP and Ginnie Mae income, partially offset by strong loan growth.

Given the January 3 forward curve did not consider a March rate hike, if the Fed were to move in March with a run-up in benchmark rates, we would expect first quarter NII to be stable sequentially. We expect adjusted noninterest income to increase 3% to 5% in 2022, reflecting continued success taking market share due to our investments in talent and capabilities resulting in stronger treasury management revenue, capital markets fees and wealth and asset management revenue.

Additionally, we expect strong processing revenue, reflecting both the economic environment and continued household growth.

Mortgage revenue should improve modestly in 2022, reflecting elevated servicing revenue from MSR purchases throughout 2021 and moderating asset decay partially offset by a meaningful decrease in production revenue. We expect TRA and private equity income to be stable compared to 2021 levels.

We expect first quarter adjusted noninterest income to be stable year-over-year or decline around 8% to 9% compared to the fourth quarter. Excluding the impacts of the TRA, we expect fees to be down approximately 3% sequentially, reflecting seasonal factors, a decline in private equity income and lower leasing revenue.

We expect full year adjusted noninterest expense to be up around 1%, excluding the impact of dividend finance compared to 2021 or up 2% to 3%, including dividend. We expect compensation expenses to increase around 3% or so, reflecting wage pressures and sales force additions, partially offset by lower performance-based compensation in certain areas such as mortgage given the outlook for lower origination volumes.

We also continue to invest in our digital transformation, which should result in technology expense growth of around 10%, consistent with the past several years. We also expect marketing expenses to increase in the mid-single-digits area. Our outlook also assumes we add 20 to 25 new branches in our high-growth markets, which will result in high-single-digit growth of our Southeast branch network.

We expect these items 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 the revenue outlook and continued overall expense discipline throughout the company.

We expect total adjusted expenses in the first quarter of 2022 to be up around 3% to 4% compared to the year ago quarter or up 5% to 6% compared to the prior quarter. As is always the case for us, our first quarter expenses are also impacted by seasonal items associated with the timing of compensation awards and payroll taxes. Excluding these seasonal items, we expect first quarter expenses to be down approximately 2% compared to the fourth quarter.

Additionally, our first quarter expense outlook is impacted by a broader and larger special equity grant for eligible employees to reward the record performance in 2021 and to provide a retention incentive over the next several years in this competitive labor market. As a result, our full year 2022 total adjusted revenue growth is expected to exceed the growth in expenses, resulting in more than a 1 point improvement in the efficiency ratio.

Our outlook for positive operating leverage reflects continued success growing our fee-based businesses, recent acquisitions, expense discipline and strong balance sheet management. It also considers the known revenue headwinds from PPP and our Ginnie Mae portfolio.

We would have guided to positive operating leverage on a stand-alone basis even without any rate hikes. We expect 2022 net charge-offs to be in the 20 to 25 basis point range and we expect first quarter net charge-offs to be in the 15 to 20 basis points range.

In summary, our fourth quarter and full year results were strong. We achieved positive operating leverage in 2021 in a challenging interest rate environment, while maintaining discipline throughout the company. We have a highly asset-sensitive balance sheet, which should perform very well in a rising rate environment, we have over $30 billion of excess cash and continue to grow and diversify our fee revenues, all of which support our through-the-cycle outperformance. We are deploying capital in order to maximize long-term profitability and are committed to generating sustainable long-term value for our shareholders.

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

Chris Doll

Thanks, Jamie.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of John Pancari from Evercore. Your line is open.

John Pancari

On the loan growth front, clearly, on the commercial side on C&I, very robust on the end-of-period growth, 11% ex the PPP impacts. Can you give us a little more detail on the drivers in terms of the businesses? I know you mentioned corporate and middle market. And then also, do you see any impact from borrowers pulling forward demand for borrowing into the fourth quarter given the change from LIBOR to SOFR? Thanks.

Greg Carmichael

John, this is Greg. I’ll start off and with those activities prepared with a lot of color to your question we were expecting of course. First off, we've made significant investments over the last five years in our strategic markets in the Southeast, west Coast, Texas on verticals and talent and so forth. So we would expect to see this type of outcome as we go into last year into this year. So we're very pleased with the performance. We're very pleased with the momentum we have going into it.

Once again, I think it's a byproduct of the investments we made in talent, our expansion of these geographies and just the way we've approached this business over the last five years. You're starting to see the outcomes. But Tim will give you more as the markets itself and where we're seeing the outcomes.

TimothySpence

Yes, sure. Happy to do it. So let me anchor it to the numbers. So ex PPP, as you mentioned, C&I loan growth was about 11% or on a dollar basis, it was about $4.9 billion point-to-point in the quarter. So of that, about one-third of it came from an increase in utilization on existing revolver and then a full two-third of the growth were a byproduct either of the record production we had.

We had a record quarter in addition to it being a record year in both corporate banking and in the middle market or it was new clients funding up commitments that were extended in earlier quarters this year, consistent with the data we have been sharing on commitment growth.

So on the utilization front, the lower end of our book tends to move in terms of utilization faster than the corporate banking side. And we did see that middle market and business banking had the best pickup in utilization rates, which is probably at least in part a byproduct to the manufacturing and logistics centric nature of the Midwest markets. But the drivers there when you talk to clients were really inventory levels. There were some tax distributions or business expansion related, people investing in CapEx or acquisitions.

On the corporate banking side, it was really the big vertical, but the draws there were most concentrated in the mortgage servicer segment. On the two-thirds of the growth that came from production. I think, as Greg mentioned, they're literally basically entirely driven by the strategic investments. So on, Corporate Banking, it was industry verticals.

In the middle market, it was really the sales force expansion in the Southeast through the additions of California and Texas. And then it was strong performance from Provide as they got into the run rate. In total, it really is new relationships, more than it forwards a transition to SOFR. So we added 551 new relationships in commercial in 2021, so about 30% more than our prior high mark at any one point.

And I think what we feel very good about is these really aren't just loan-only relationships. They are the driver of what you saw in the strong growth we had on both treasury management and capital markets. I think if you look forward, I was looking at the bottoms-up pipelines earlier this week, and they are about 75% larger than where they were at the same time last year and almost 90% larger than the first quarter of 2019. So we feel very good about our ability to sustain the robust loan growth.

And the drivers there, again, are the strategic investments. Chicago is the biggest year-over-year improver as we continue to see strength and the benefits of the synergies from the MB merger. And then its markets like Tennessee, North Florida, California and Texas in the regions.

And then on the vertical side, it's the stalwart verticals for us, health care and TMT along with continued really good growth in renewables. And then as we talked about in the past, the mortgage warehouse segment that we launched recently.

I think haven't been out in the market. The energy is really good there. I think there's a strong sense for us that between the investments we've made and the fact that we've really been able to focus on execution and collaboration, having had our people back in the office for longer than most and not having the distractions of merger integration or otherwise, it really has been -- it's been nice to see the pickup.

John Pancari

Thanks, Tim. And then quickly Greg just on M&A, I wanted to get your updated thoughts on deals. I know you indicated that non-bank acquisitions would be more of a priority. And if so, what additional businesses outside of what you just did on the Dividend Finance side? What are the businesses in terms of bolt-ons? And then maybe a quick comment just on whole bank fields. Thanks.

Greg Carmichael

First, thanks for the questions. Our strategy hasn't changed. It's really, as you said, it's the bolt-ons opportunities non-bank transactions, just like we did with Dividend, which we couldn't be more pleased about that acquisition and how it fits into our portfolio of opportunities strategically.

But more of those type of opportunities we're going to continue to look for. So point of sale on the consumer side, in addition to that, we're going to continue to focus on wealth and asset management opportunities that might emerge.

Obviously, on the cap market side, on the advisory side of the house there's other verticals that we're looking for partners in that space from an advisory perspective. So we'll continue to focus on those opportunities, the fintech plays and the advisory that fits to some of the additional verticals, wealth and asset management will be the areas of opportunity we continue to stay focused on.

And when you think about a bank acquisition right now, especially given all the challenges and complexity of what we're seeing in on the regulatory front in Washington with some of the movements that are underway right now and the challenge to get a large transaction done or a bank transaction for banks over $100 billion that's out there.

So it's on your mind as you think about the timing to get a transaction done. But once again, at this point right now, our focus is to be relevant in the strategic markets that we're already banking in. There's not many of these opportunities that exist right now. So once again, it's not a primary focus of ours today, and I don't see that in the near future also as we think about the rest of this year.

Operator

And our next question comes from the line of Erika Najarian from UBS. Your line is open.

Erika Najarian

My first question is for Jamie. Jamie, you have been vocal in the past in terms of guiding or giving us a sense of what kind of deposit attrition we could expect in a rising rate backdrop. One of your biggest competitors mentioned that we don't expect negative deposit growth at all. In fact, they expect positive deposit growth through this rate cycle. And I'm wondering, especially in light of your commentary that you're deploying about $1 billion of cash per quarter, if you have changed your tune as to the duration of the excess deposits that you gathered during the pandemic?

James Leonard

Thanks, Erika, and welcome back to the coverage of Fifth Third. So I appreciate the question. Let me take it in two parts. So first, when it comes to the macro view and for the industry, you go back over the last 100 years, I think there's only been two years where deposits didn't grow in the industry. So I do believe that there can be deposit growth as the Fed tightens and history proves that.

So when it comes to Fifth Third, the more idiosyncratic view that we have is that, we would be comfortable having up to one-third of our excess cash migrate away from Fifth Third deposit products and into more productive vehicles for those customers. So with that said, when we look at our deposit betas, our deposit pricing outlook for the rate hikes on the horizon, we're going to be very disciplined on those deposit rates. And therefore, if deposits leave, it's a very manageable outcome for us.

However, I will tell you, given our strong commercial client acquisition, our strong treasury management growth and our strong household growth as we sit here today, even with balance and disciplined deposit betas, we still expect deposit growth this year at Fifth Third and that's even with continuing to run down our CD portfolio. As much as I would be comfortable with a little bit of deposit outflow, I think given our sales success, we will have deposit growth this year.

Erika Najarian

And my second question is for Greg. I thought it was very striking and telling that Jamie said during his prepared remarks that you would have generated positive operating leverage without rates. And the earnings season has really put CEOs in two camps. One, the CEOs that are spending the rate hikes and second, those that are more allowing it to fall to the bottom line. As we think about Fifth Third and Fifth Third in the middle of a normalizing rate cycle, what is your view of reinvesting later years, right, after the PPP headwinds dissipate versus taking that rate generated additional income and reinvesting it.

Greg Carmichael

First of all, we're always going to continue, Erika, invest in the future of this company. We're in it for the long haul. We never do anything focused on the quarter or even for a full year. So we'll continue to invest. Look at our technology investments. It's been running around 10%. You can expect we're going to continue to do that. We're also going to continue to invest in our ability to expand this franchise both geography, product sets through our verticals, capabilities, in our talent capabilities. So we'll continue to invest in those areas.

Obviously, wages are another area we're going to have to continue to step up on and be aggressive on which we have been as a leader in the minimum wage going from 12% to 15% to 15% to 18%, we took that pain before most of our peers did. We saw the need to do that. So, as you think about our investment, we're going to continue to invest. But we also believe a lot of the

guidance we're giving right now this year, when you think about the first 3, 4 ,5 increases on the rate side of the house, most of that will fall to the bottom line as we already got our investment structure put in place for 2022.

Beyond that, we'll continue to think about our investments necessary. You can expect some of that then will start to continue to turn into future investments. But I think as you look at this year, the guidance we provided most of that would fall to the bottom line.

Operator

And our next question comes from the line of Ken Usdin from Jefferies. Your line is open.

Ken Usdin

Hi, Jamie, you've been steadfast in your view of holding back on the liquidity deployment, and we see that again this quarter. Just wanted -- as we've seen quite a change in what the potential outlook for rates looks like, any different views here about how you expect to use excess liquidity and look at the securities book going forward?

Jamie Leonard

So in the prepared remarks, we talked about deploying $1 billion per quarter into the investment portfolio, a little more detail around our thinking there is that we've been patient. We were fortunate to be able to be patient. We have a very well positioned portfolio heading into the pandemic. And so it's afforded us this opportunity to wait. We've always said we wanted to get to the 2% entry points. And we got that visibility at the back half of December. And so we put some money to work in December, and then we've continued to do that here in January and expect to do it as the year progresses.

Should rates continue, the curve continues to steepened, we perhaps could choose to move a little bit faster. And if they dip back down, we may choose to step off the gas a little bit in terms of the investment. But what we're investing in, we're really focused on structure right now. We finished the year with the bullet and locked-out cash flows at 59%. I would expect that number to get a little bit higher as we deploy a portion of the excess cash. So let's call it 40% to 50% of the allotment that we have for the security portfolio currently of $10 billion. So we'll reinvest cash flows. We'll add a little bit of leverage during the course of the year and look for us to do that in more structured product.

Ken Usdin

Great. And my follow-up is just 275 exit on your securities portfolio yields. And following on that point you just made about the locked-out cash flows. Can you help us understand how you see that 275 trajecting inside your overall NII outlook in the moment? Thanks.

Jamie Leonard

Thanks. Very good question. We expect yields for the portfolio to be in the 260 to 270 range this year, and that's with reinvesting and adding the additional leverage. The one component to the portfolio yield that is a little bit lumpy is the prepayment penalties. It's one of the advantages you get from the bullet structure that we have, and we were the beneficiaries of it in the fourth quarter.

We've had a little bit thus far in January, and we would expect some of that as the year progresses. But that's the one item that makes it a little more challenging. But I would expect call it, 5 to 8 basis points of erosion as the year progresses, but then some prepayment penalties bolstering the yield so that we end up in that 260 to 270 range for the year.

Operator

And your next question comes from the line of Gerard Cassidy from RBC. Your line is open.

Gerard Cassidy

Jamie, can you elaborate. You gave some interesting numbers on the Dividend acquisition. When you talk about the life of loans in terms of the ROAs and profitability, can you give us some more information or just elaborate on how you're going to grow that business and why the profitability appears to be so high in that business.

James Leonard

I'll start, and then I'll turn it over to Tim to add a little more color, but thanks for the question, Gerard. In terms of the loans and why they scream so profitably. Right now, it's offered as a 20 to 25-year term, the coupon, the customer is paying is in the 3% range. But the tax incentives are significant and allows a merchant discount to be paid and that merchant discount could add as much as 5 percentage points to the yield given that the loans end up being about a five year life.

So you end up in the 22%, 23% type of federal benefit as part of the energy tax credit program. So there are some moving parts here. The yield will ebb and flow as a result of how that merchant discount plays out in the ultimate weighted average life, but that is why on the surface. It is a very profitable business more so than some of the other consumer origination channels that we have. And this is an area that we even talked about at several of the conferences in 2021 as a key challenge for Fifth Third is really improving the technology and the distribution around home equity lending and other consumer point-of-sale origination channel.

Timothy Spence

Yes. I think to Jamie's point, I mean, point one, Gerard, as it relates to the way that you grow it is it's easier to grow when you have a strong tailwind, and there's no question when you look at the level of investment that's going to go into home improvement over the course of the next five to 10 years focused on sustainability. There is a really significant opportunity.

I mean the Dividend's business today has been primarily on the solar panel side of the business. But in addition to that, there's storage, which is a fast-growing sector. There's energy efficiency-related investments, whether that's HVAC or Windows or green landscaping or otherwise. And then I think as we continue to see this push towards electric vehicles, there's a dynamic as it relates to high voltage currency into different parts of the homes than you needed previously.

So all those categories are going to be big drivers of secular growth in the broader home improvement sector. And with dividends positioning, and the investments that have been made in this end-to-end technology platform, I think we believe they're pretty uniquely positioned to benefit and to continue to gain share there.

I mean this is to call it a point-of-sale platform is almost to understate what it is. It's a fully integrated end-to-end solution that allows contractors to drive quoting to specify the sort of technical details around the installation itself.

They're third-party data checks on the appropriateness of what is being installed, given the weather environment and the power generation potential and the local utility rates, which are obviously very customer-friendly, but also a good guardrail for the contractors themselves.

They have APIs directly into the largest contractors CRM system. So in many cases, there isn't a third-party point of sale at all. It's just generated out of the iPad application that the contractor is using to begin with. And then all manner of downstream capabilities, including not funding loans until there's actually power coming off of the panels today that provide a really excellent customer experience. So as they come into Fifth Third, they obviously have the benefit of our balance sheet.

That's one less thing that these fintech credit mono-lines otherwise would need to do in terms of recruiting bank funding partners. So we should be able to improve the product innovation velocity the way that we have with Provide bluntly. Provide's launched more products in the last six months than they had in the three years prior, okay, on the financing side.

I think the other obvious benefit is while we are not believers in the way that some are and the opportunities associated with indirect lending to checking account cross-sell, they are very obvious loan-to-loan opportunities here, whether it's the Fifth Third mortgage servicing portfolio and providing an extension of credit there.

We're leveraging our ability to underwrite and manage home equity and to connect that with a replenishable open to buy against what's an instalment alone or otherwise. So I think that is how we -- the first point of growth here is going to be make sure we get the talent.

And we'll continue to make investments in the technology platform benefit from the secular growth. And then we're going to add capabilities that a bank can have in this case.

Gerard Cassidy

Very good, and then as a follow-up, Jamie, when looking at your balance sheet, obviously, quite low, as for the industry because of the deposit growth you touched on what you think deposits could do.

What do you think is an optimal loan-to-deposit ratio for Fifth Third? And how long would it take to reach that level considering the puts and takes of what's going on in the marketplace today?

James Leonard

Yes. As you pointed out, it's certainly a low loan-to-deposit ratio in the mid-60s right now. It's certainly far better than I think our -- at least in my career, our highest number was back in 2005. It looks like 120%. So I think the optimal ratio is probably somewhere in between.

I'd like to operate the balance sheet in the 85% or so range, which is why we would be willing to have some of the more rate-sensitive deposits run off during the tightening cycle, but also and more importantly is that we do expect significant loan growth as we talked about $10-plus billion could be $13 billion to $14 billion next year. And so that's going to help give a nice notch up in the loan-to-deposit ratio, but it probably takes us a couple of years to get back to the number that we would, I think, like to operate and that would be indicative of a very productive balance sheet.

Operator

And your next question comes from the line of Bill Carcache from Wolfe Research. Your line is open.

Bill Carcache

Thank you. Good morning everyone. Jamie, can you speak to whether there's a risk that some of the upward pressure you're seeing on expenses maybe out of your control. If you could just frame your confidence level and being able to manage [technical difficulty] environment such that you continue to achieve positive operating leverage even under different inflation scenarios?

James Leonard

Yes. We feel very confident in our ability to manage expenses. It's one of the things that's been a hallmark of the company under Greg's leadership is the expectation that every year, every area has to get more efficient. It's just a base expectation when we go through our planning and you see it in the results. So heading into this year, there's $125 million of savings that I'm highly confident we will achieve through the lean process, automation, through the branch consolidations and the vendor savings.

But then as Greg pointed out, we do want to invest in our employees and in our franchise to really drive that revenue growth. So I think we've got a good approach here where we're balancing the revenue growth and sales expansion of the company while leaning out the support functions.

And then to your main point of the question when it comes to inflation, wages, we have a stronger merit pool this year, and we have the special equity grant that we mentioned earlier to help improve retention, but that comes at a cost, and that is baked into our guide. And our guide was to be up 1% on a stand-alone basis. The Dividend acquisition adds 1.5 or so to the expense number, which is how we ended up in the 2% to 3% range.

But as Greg said, we're really focused on the long-term performance doing the right thing in the long run. And I think our expense discipline helps drive that and it may appear to an outsider when you look at the numbers, that there's not a lot of activity there because things are fairly stable. The reality is we are driving a lot of savings, but we're choosing to reinvest those savings to improve the company for the long run.

Bill Carcache

That's helpful. Thank you. As a follow-up for Greg, I wanted to ask a strategic question. When you look at the success you've had with some of the bolt-on deals you've done, do you see a time where you'll want to continue to expand into new markets beyond those you're already in through digital channels without the need for traditional M&A and all the disruption that they can bring? Or are the -- I guess, the focus of -- focusing on your digital investments on serving customers in your existing markets?

Gregory Carmichael

First off, every CEO says a relationship bank, but we really live and breathe being a relationship bank as evidenced by our commitment to have our employees back in the office, focus on taking care of the customer. So we think our digital channels. It's really about how we reach our customers and how we service our customers and doing that best-in-class. So right now, we're pleased with the expansion markets that we're focused on right now.

As we look at those, there's probably a couple of other markets that we're interested in. If we buy the right talent, we will go into those markets, but it's all based on the talent. I don't see us necessarily leading with a digital play at this point on the consumer side in markets that we're not in today from a brick-and-mortar perspective. I don't see that happening in the near term. I don't think we need to do that. I don't think it's a good business for us.

As we mentioned before, we're flushed liquidity. We got strong household growth. The profitability of our retail franchise has never been stronger. So we think the model we have right now which provide the brick-and-mortar services, call center services, both our digital capabilities is the best model for us today. Now obviously, we're not going to be naive and are a barrier ahead to seen as what the future might hold. But if that opportunity presents all that makes sense, we have our capabilities to do those expansions with our technology and they're designed for that. But we'll take advantage of that opportunity if it makes sense at some point in the future if it materializes.

Operator

Our next question comes from the line of Mike Mayo from Wells Fargo. Your line is open.

Mike Mayo

Set off the starting gun for loan growth. So what you grew, that 44% annualized commercial loans were up $9 billion. And what you described, I guess, what, one-third drawdown and roughly split on middle market, large corporate. You talked about inventory build and capital expenditures. So I think you gave a nice summary of all that. But what had happened to the supply chain disruptions and the delay in loan growth later when the supply chain disruption go away. Really, the question is why now?

Timothy Spence

Yes. I mean, Mike, it's Tim Spence. Hello. No, I think the supply chain issues are still real. We have many clients who say they'd like to be running at inventory levels that are above where they're at. I just think we took share this year. I mean that's the reason I anchor back to this point about our having record new relationship growth, new quality relationship growth into the commercial bank. Anecdotally, when you get into the ground, there wasn't a geographic market that didn't add double-digit new relationships this year, then you go out and you talk to those clients.

And then literally, they were house relationships at other places who either associated with the disruption or who felt like they were not getting what they needed in terms of the breadth of capabilities or who follow the banker that we managed to attract into our franchise over time, who chose to move from another financial institution to Fifth Third.

So, I think that is the reason that we managed to grow at the rate that we did despite the fact that there are still natural constraints to inventory building. And then we haven't yet seen the pop quite at the level that we expect to see, although we did get some benefit of that associated with the M&A activity.

I think the one other thing I would tell you is there was an inflection point this year in our pipelines, when we got people back into the office and we started seeing clients in person, in April of this past year. And the level of activity that we generate through our One Bank model, which is the relationship management model that's been in place here for more than a decade, is really core to the way that we grow business. And I think we saw the outcomes of that over the course of the year in terms of the acceleration of loan growth and production in particular.

Mike Mayo

So, not to put words in your mouth, I'm looking for validation. As it relates to loan growth, the pandemic is over.

Greg Carmichael

[indiscernible].

Timothy Spence

We're all looking at each other trying to figure out what who is going to take that one.

Greg Carmichael

But I do think the supply chain constraints. I think the labor shortages and so forth are here to stay for a while. I don't see that add at all as we go into the year. But I think people are adjusting. I think corporations are adjusting, I think they're figuring out ways to do things more efficiently. As Tim said, there's not a customer we talk to where labor is not an issue. There's not a customer we talked to where they would like to build more inventory faster.

But I think we've just done a good job of banking these customers and taking those relationships. But it will still be a challenging environment as we move forward. But we're very optimistic in investments we've made in the geographies and people and capabilities. And we just feel like we've got -- we get the right formula right now.

James Leonard

Yes, Mike, I would say that while the pandemic is not over, we're navigating it quite well with all of the strategies that Tim and Greg have laid out and that we're very bullish on that loan growth for 2022 in addition to the Provide acquisition now adding Dividend Finance to the Fifth Third family.

Mike Mayo

And then just one clarification. So clearly, you're pursuing build not buy, but part of that decision not to pursue bank deals, you said it's because of the communication of Washington to see about the regulatory scrutiny or mergers over $100 billion. That typically is holding you back some even if you wanted to.

Greg Carmichael

Yes, we tell you if we wanted to and if we thought there was a right opportunity, another if that's out there that makes sense that's actionable, I would be very concerned as a CEO to try to introduce an opportunity right now into the regulatory environment with some of the constraints that are out there. I think on how they're thinking about mergers until I get some of those items addressed, dealt with, figured out. I just think it's going to be problematic for a period of time.

Operator

And our next question comes from the line of Matt O'Connor from Deutsche Bank. Your line is open.

Matt O'Connor

You talked about how overdraft or NSF fee is lower for you guys than peers. I think it was last month and rolled out some changes. Just remind us what the impact to revenues might be this year and kind of longer term? And then is there any kind of additional changes you're thinking of making given some announcements from bigger banks as well? Thanks.

Timothy Spence

Yes. Matt, it's Tim. Thanks. So just to recap, I mean, we talked a lot about the fact that we've been among the least reliant banks on punitive fees for a while now and about the fact that, that really was a part of about a three to four year journey that we have been on to improve the checking value proposition and then really to get out of the business of charging customers when something went wrong as opposed to charging them because we've added value and giving them the tools to manage liquidity more effectively. And it was because of all the forces you see people reacting to today.

So yes, I think we've been very clear about what's in the Momentum banking proposition. The fact that it offers the broadest suite of tools to avoid an overdraft that we talked a little bit about in the fourth quarter, the fact that we made changes in October including things like changing posting orders, increasing the de minimis negative balance threshold, lowering the limit on the number of daily occurrences.

I think essentially the same things you're hearing from others today. Lastly, the -- one other item that has been on the road map that we are moving forward with is eliminating NSF fees, and we do intend to do that at the end of the second quarter, all those changes are incorporated into the 2022 fee outlook. So you should not expect an incremental negative from Fifth Third associated with the evolution of the way that we think about helping customers manage short-term liquidity.

Matt O'Connor

And then separately, a bit of a random question. But you're a very big auto lending bank to consumers. And as we think about car prices being up so much, especially used cars. Have you thought about kind of underwriting a bit different?

You've got really good disclosures in your appendix, the LTVs have come down a little bit, might go up a little bit. When I read about used car prices up 40%, 45%, I just think for myself, underwriting to that may not be a great idea. I don't know how you're thinking about that but just being a big player on that.

Richard Stein

Yes. Thanks for the question. It's Richard. From an underwriting standpoint, we do think about how values have changed. But I think it's important to understand, we look at supply-demand dynamics for autos. I don't -- we don't think that's going to change in the near-term, certainly.

And I think the dynamics around how the OEMs actually produce and sell cars are going to create a continued tightness, if you will, in terms of supply. I don't -- I think the days of the OEMs filling the factory and flooding the market with cars are done they're are going to be more discipline, that' kind of give us -- that' kind of give us more certainty around used car prices overtime.

The other thing I'll add is we are a prime and super prime underwriter from an auto perspective. And so while the collateral value is important, it's the quality of the borrower that really stands to all for us, and that hasn't changed for us at all.

And we continue to see the tailwinds around the consumer from a quality perspective to be strong. So, no real changes in terms of the underwriting criteria. We were mindful of supply demand dynamics and do consider what car prices will do in the future.

Matt O'Connor

Okay. And remind me the mix of new versus used car lending that you did.

Greg Carmichael

It's 58-42 used in 2021.

Timothy Spence

And I don't think it's ever been outside of the 60-40 one way or the other.

Matt O'Connor

Yes.

Timothy Spence

We live in the sort of roughly evenly balanced range.

Operator

Now we have reached the end of our Q&A session, I would like to hand the conference back to Mr. Chris Doll for the closing remarks.

Chris Doll

Thank you, Ludy. And thank you all for your interest in Fifth Third. Please contact the IR department if you have any further questions.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.