Fifth Third Bancorp (FITB) Earnings Call Transcript & Summary

Good morning. Welcome to Day 3 of Barclays 22nd Annual Global Financial Services Conference. I'm Jason Goldberg if you haven't figured that out by now, I cover the U.S. large cap banks. We got a host of companies in this morning session and then at lunch kind of an analyst recap panel here for all of us, want to do some kind of ARS questions and kind of review how we all performed last year. Very pleased to have kicking off day 3 is Fifth Third Financial. From the company, I have Tim Spence, Chairman and CEO; and Bryan Preston, Chief Financial Officer. Tim is going to take us through some quick slides, and then we'll do some Q&A. Tim?

Yes. Thank you, Jason. Good morning, everybody. We appreciate you being here with us bright and early. We published a slide presentation last night, as Jason mentioned on our Investor Relations website which I will reference in my prepared remarks. And after that, Bryan and I are happy to take your questions. At Fifth Third, we believe that great banks distinguish themselves not by how they perform in benign environments but rather how they navigate challenging ones. I continue to be very pleased with the strong and predictable results that Fifth Third has produced in what has been a dynamic economic and interest rate environment. Among all peers who did not participate in an FDIC-assisted transaction, Fifth Third ranks #1 in total shareholder return in the 1-year, 5-year and 7-year time frames and #3 in the 10-year time frame. Our operating priorities continue to be stability, profitability and growth in that order. We create stability through building a strong core deposit funded balance sheet, maintaining credit discipline and positioning our balance sheet to perform well in a range of interest rate environment. We generate strong profitability through a diverse range of fee income sources, a focus on unit economics and consistent expense management. Competitive barriers are exceedingly difficult to achieve in our business. The only path to delivering sustainable long-term growth without diminishing profitability or stability is to invest consistently into a limited number of strategies. For several years now, our focus has been adding branches and sales resources to produce a top 5 market share in our high-growth Southeast markets, leveraging technology to deliver clear differentiating in our core checking and commercial payments product offerings and positioning ourselves to benefit from manufacturing and infrastructure investments associated with the federal government's industrial policy. The cumulative impact of these multiyear investments cannot be easily replicated nor do we intend to slow down and let others catch up. This morning, I'm going to spend some time on our commercial payments business as I believe our track record of innovation, competitive differentiation and long-term growth potential is less well understood there than in other parts of our company. As shown on Slide 9, payments innovation has long been in Fifth Third's DNA. We introduced the nation's first shared ATM network in 1977. Throughout the '80s, '90s and early 2000s, we built what is now one of the world's largest credit and debit card processors. Following the 2009 spin out of Vantiv, now known as Worldpay, we refocused on growing other payment types and on leveraging software to drive process automation into clients' broader commercial payment workflows. Currency Solutions, Expert AP, Expert AR and Healthcare Receivables launched in subsequent years and are now known collectively today as our managed services platforms. We'll come back to these shortly. In 2022, we leveraged what we had learned over more than a decade of supporting third-party payment processors to form our embedded payments business, which we branded publicly as Newline last year. Today, our Commercial Payments business possesses significant scale and an outsized market share. Depending on which balance sheet measure you use, the Fifth Third is somewhere between the 10th and 15th largest bank in the U.S. but we are the sixth largest in commercial payments by revenue, with the top 5 market share in 6 individual payment categories. We will process more than $17 trillion in payments volume in 2024 and expect to generate more than $700 million in recurring fee revenue that is growing at more than 10% a year. We employ over 1,300 people exclusively in Commercial Payments, serving the needs of more than 10,000 payments clients. Our innovation in this business was a key differentiator for Fifth Third in receiving the 2023 Bank of the Year award from The Banker. Commercial Payments as a market is massive, and the white space is still significant. While the secular transition to electronic payments in the consumer space is largely complete, more than 1/3 of B2B payments still occur using checks. The broader order to cash and procure-to-pay workflows are manual, costly, filled with friction and susceptible to fraud. In other words, they are ripe for what Marc Andreessen referred to as software eating the world. That idea, bringing software and analytics to drive automation and lease cost routing is the genesis of our managed services strategy. It's producing breakthrough results for clients and has generated annual revenue growth of 16% over the past 8 years. One illustration of how we create value and manage services comes from our cash logistics offering. Through the combination of software and EFT-enabled smart safes, we've effectively digitized the cash rooms for large retailers, quick-serve restaurants and entertainment venues. We have real-time insight into physical cash needs at the individual store or location level by denomination and are able to forecast replenishment requirements. That allows us to drive down unnecessary float and eliminate unnecessary courier routing. In the case of Wendy's, we were able to reduce time spent on restaurant cash management by 50% across a large number of locations. Another example of creating value comes from our Healthcare Receivable Solution, Big Data Healthcare. We provide hosted software and machine learning capabilities that enable hospitals and large practice groups to automate the onerous manual reconciliation process attached to insurance payments, thereby eliminating costs and accelerating access to working capital. We ingest data interchange files from most clearinghouses, banks and lockbox providers and integrate simply into the largest practice management systems used by healthcare providers. In typical implementation, we're able to auto post more than 90% of all transactions, allowing one recent client as an example, to reduce their offshore reconciliation staff from over 100 FTE to fewer than 10 in less than 6 months of launch. We're also able to identify underpayments from insurers, enabling clients to enhance revenue realization. One final illustration of how we're able to streamline commercial payment workflows with software comes from our accounts payable automation solution, Expert AP. Expert AP automates the matching and reconciliation of purchase orders, invoices and payments, which get handled manually and generally in paper by accounts payable clerks in most B2B sectors. With the data captured on contractual payment terms and supplier payment acceptance, Expert AP also enables clients to automate lease cost routing. Manufacturing, logistics and construction industries have been our strongest adopters and revenues continue to grow in Expert AP by nearly 20% a year. Lastly, I'd like to touch quickly on Newline, our embedded payments business. Newline provides a vertically integrated API platform for third-party software developers to launch payments, card and deposit solutions on Fifth Third's platform. We are not a newcomer to this business, having first entered in embedded payments more than a decade ago when we spun out Vantiv and had to externalize our payment capabilities, network compliance and AML/BSA protocols to support their growth. The acquisition of Rize Money a year ago added a modern technology layer and developer experience to our industrial payments infrastructure and know-how. A simple illustration of how embedded payments work would be Blackbaud, a leading provider of cloud-based enterprise management software solutions for nonprofits and educational institutions. When a donor clicks on a nonprofit's website to make a donation via their bank account, the Blackbaud digital donations platform utilizes Newline to facilitate the account-to-account payment authorizing and clearing the donation for the nonprofit organization. A sample of the 150-plus clients served by Newline is listed on Slide 13. These companies are leaders in their respective markets, but we get to benefit from their accelerated growth and innovation. Building on a strong legacy market position in Commercial Payments and the accelerated growth that our managed services and embedded payment strategies offer, we expect Commercial Payments to achieve a $1 billion annual recurring revenue within the next 5 years. We are excited about our company, both in terms of current performance and in opportunities that are on the horizon. We remain confident in our ability to deliver strong outcomes, including PPNR and earnings outcomes consistent with our original expectations for the full year in 2024. We will stay focused on execution to deliver on our commitments including continued NII growth and expense discipline. Our business trajectory positions us to return to positive operating leverage in the fourth quarter and into next year. With that, Bryan and I are happy to take your questions.

Thanks, Tim. That was definitely interesting on payments. Maybe to kind of stick with that first. But maybe just, I guess, how do your tech investments in Commercial Payments kind of provide a differentiated solution? We've had a lot of banks at this conference mention treasury management, P&C mentioned it, Truist mentioned it, probably a few others. I guess what's different about you?

So first of all, thank you. I was expecting to start on the guidance.

I usually give the companies to get at least half time.

There I go. I was going to get a breather, Bryan would step in and set it up, we'll get to that one. I think the first thing is the sustained focus on payments. I was reminiscing with these guys on the way out. In fact, copilot helping out locate the date. But the first time I appeared on stage at an investor conference was in March of 2017, and it was a Barclays Conference. It was just with Darrin Peller and it was the Barclays Payments Conference. So this is not a new topic for Fifth Third. It's not a thing that we've pivoted to as we're trying to figure out with the sort of new proposal on capital and liquidity, how we get back to an equity return profile that we perceive to be attractive. It's been part of the DNA of the company for 40, 50 years at this stage and this focus on noncard payments and on leveraging both the legacy electronic payment rails and then soon much more heavily the real-time payments and Fed now system to deliver real innovation that drives hard operational cost savings for clients is the thing we've been at, as I mentioned, for almost a decade at this stage. So there's an element as it relates to what's different. It just involves living in the business, having anchor tenants on these platforms, understanding their needs and then building not just the sort of infrastructure to process payments, but the solutions around those payments so that you can point to -- I think last year, we drew out $40 million in operational expenses out of our Managed Services clients business. That's people they didn't need, it's couriers moving around that were no longer necessary, it's paper that was getting passed -- that isn't getting passed any more, and that stuff adds up, right? So I think that's probably the most significant piece of differentiation is the fact that we've been at it and that we have moved from this discussion of who processes efficiently. And the answer to that is anybody who scaled the way we are does that. And into this business of actually streamlining or automating workflows for people.

I guess you mentioned kind of the acquisition of Rize last year and kind of this Newline, I guess, embedded payment type business. What I guess, does that allow you to do that maybe other banks can't?

Yes. So you have an interesting market right now, like the payments rails over the course of the last 30, 40 years, especially on the card payment side have moved from being dominated, like the exclusive [purview] of banks being heavily bank led on the issuing side and heavily nonbank led on the acquiring side. And because of that, a lot of the innovation that is occurring in helping people accept and process payments is happening outside the banking sector. The challenge those folks have is they need access to bank payment rails. They have to be able to develop onto a platform that supports that access in a secure fashion, in a scalable fashion, and frankly, in a fashion that allows for them to continue to innovate. So what Rize did was to take our scale payment infrastructure, our compliance apparatus, our AML/BSA know-how and externalize that in the form of about 200 micro services which was architected as APIs, the way that sort of a modern technology architecture would be structured, then allows third-party software developers that we approve to develop onto the platform to integrate our code base directly into their offerings. The go-from in the case of Blackbaud, as an example, a company that provides really great human capital management, donations management, like essentially, they're the ERP for charities and educational systems, it allows them to get into the business then of providing payment options for their clients without having to develop all of the back-end infrastructure, the processing, the posting, the recon and the rule set that are required to operate in that space.

And I guess something -- in maybe a month or so ago guys announced that partnership with Stripe. It seems almost like a banking-as-a-service type model. Could you maybe just talk to kind of what you do with them and then maybe some of the risks associated with operating with fintechs in a regulatory environment and just...

Stripe access is the banking system in 2 capacities. One is as a merchant acquirer, and they need a BIN sponsor to get access to the Visa, MasterCard payment rails. That is not work we do for them today. The other then is, as part of their product innovation, they added a feature that they refer to as Stripe Treasury, which is essentially a fully functioning cash management account for people who want to be able to integrate cash management, that third-party platforms like a Shopify or direct clients of Stripe who want to be able to leverage cash management functionality in their own branded experience. Fifth Third is the engine behind that cash management account. That's a nascent offering for Stripe. It's one they expect to be a core focus of the way that they continue to scale their business. But we provide the account structures, the ability to move money into and out of those accounts, the identity layer and otherwise. I think the risks here are no different than the risks that we take in our own business. You just have to recognize that, that third party is a representation of you as a bank. And therefore, you have to police their operations the same way you would police your own, right? We think of the companies and the third-party payment providers who integrate on top of the Newline platform as an extension as the bank, and you got to govern it accordingly.

Helpful. If we could put up the first ARS question. We've been asking this to other companies, don't worry, I want to ask you guys to comment. But maybe we'll kind of maybe pause on payments a bit and turn just a bit to the financials and you did provide us a lot of guidance in that slide, at least in the third quarter. Maybe the first place to start and run through it is loan growth is something, a lot of banks have talked being soft and the [indiscernible] data would signal that. It sounds like your quarter will be a little bit softer than anticipated. Maybe just talk to kind of what you're hearing from your customers kind of current expectations and what you think is needed to see to kind of restart loan growth?

Yes. I think that's the question that all of us are asking. So I have had the opportunity try to get out in the second and third quarter and visit each of our regions, and then we hold lunches where I'll get 10, 12 clients at once. And we have been going around the room and asking clients, like do you have some form of expansionary activity or capital restructuring that you want to do, like that you are thinking about an acquisition, new capital equipment, opening up a new location or otherwise and you've got to show hands. So we asked each of those folks why are you waiting? Election uncertainty certainly is one factor, but the #1 factor that comes up is people don't want to be the person that essentially invest at the peak of the rate cycle. We then have been asking, what would it take? What does the Fed need to do in order for you to be willing to invest. And the answer is, I need to believe that the economy is going to hold up and then generally, it's about 100 basis points in cuts is what we have been hearing, like 4.5% would reach a point where more projects pencil out, where there would be more confidence in making some of those investments. I think that's what it takes.

And the one thing that I would add, when you look at the updated loan guidance, we're expecting to be up 1% to stable. One trend that we saw that changed this quarter, we did see utilization tick down a little bit this quarter, and that was mostly in the middle market space. That has been an item for us that has been relatively rock solid in terms of it for about a year, but we did see a little bit of pullback this quarter, and that's been a factor that's impacted the loan growth expectations.

Got it. And then maybe we could put up the next ARS question. Maybe just talk about deposits, kind of what trends you're seeing in, I guess, the Fed's. Likely they're going to cut next week, how do you respond? I think some of your commentary suggested you kind of think betas to be higher than maybe some of your peers?

Yes. And part of that is our cumulative betas are a little bit higher than some of our peers as well. So we were fairly aggressive on the way up, ensuring that we're building cash because we felt like being in a position of significant liquidity at the peak of the cycle is going to give us some optionality. And you saw that play out as we've stayed at kind of peak Fed. We hit the trough, both on an NII and NIM perspective faster than most of the peers. And the expectation is that we're in a spot where if loan growth shows up, then we have liquidity that we can deploy into the loan portfolio. If it doesn't, we have the ability to be a little bit more aggressive on the funding side. And that's been the play all along, and I think we've been fairly consistent on that. And we feel good about the positioning. We've done a lot of work to be ready for when the cuts occur, $35 billion of index deposits. We've been testing the promo balances. We've kept the CD portfolio short. So we'll have an ability to react. And so we have a lot of confidence in our ability to the beta out necessary to maintain that modest neutral liability sensitivity to neutral positioning.

Got it. And maybe throw out the next ARS question as I go to you. But I guess marrying that together, it seems like, there was a fear that banks would kind of guide down kind of second [indiscernible] interest in some of this conference. And it seems like most are kind of stuck with their guidance despite the market pricing in greater easing. It seems like as we start to think about 2025, there's a bit more uncertainty -- you guys -- I would think, maybe outperform peers in terms of managing the balance sheet. But I guess this is how you're thinking kind of the back half of this year into next year with respect to overall net interest income trends?

Yes, we continue to feel good about the trends that we're seeing. I mean, we're unchanged on our guidance for NII for the third quarter at plus 2% so we feel really good about the performance that we're seeing. The nature of it looks a little different because the loan growth, the earning asset growth is a little bit less than we expected. But we're getting a little bit better performance than we expected on the funding side. So the puts and takes puts us in that position. In the fourth quarter, we continue to feel good about it as well. We're not changing our full year guidance from an NII perspective, that range that we put out at the very beginning of the year. I mean, we have been the same range the entire year despite very different rate scenarios where we started the year expecting 7 cuts, then at one point, we were down to 3 cuts. Now we're back to 4 cuts. So we've been fairly consistent on that and expected, honestly, between a 0 and 7 cut scenario to be able to deliver that range, which we are going to be able to do. 2025, it really -- we're going to be able to continue to grow NII. The liability management is going to position us to do that as well as the fixed rate asset repricing. But a true acceleration of NII beyond our current expectations would require a recovery from a loan demand perspective. That certainly will be a challenge for the entire industry if loan demand doesn't pick up, but we're positioned to continue to grow NII even without that.

Yes. I think philosophically, we don't like setting plans around factors that we don't control, unless we believe we have multiple levers, right, multiple paths to get to the outcome. And the simple rationale for that is once you set your revenue expectation, that has an impact on your expense capacity. And you spend the money first and if the revenue doesn't materialize, then you have an issue with the core profitability. So when we set the full year NII guide, we were pretty clear that we thought the market was out in front of the Fed. I think that were out equivalently, it felt like the market got behind the Fed then for a period of time. But we came into the year without an expectation for super robust loan growth. And we knew that if we didn't get the loan growth, we had the ability to go to work on deposit costs and the continued momentum from fixed rate asset repricing, which we would continue to see if the Fed cuts 100 this year and essentially follows to stop, right? So that for us isn't just the grow- -the-sheet door to get NII to perform. It just becomes important and this is not for long-term trajectory, right? Great companies have to grow.

And then, I guess, turning to the fee income front, you did kind of modestly increase kind of your -- decently increased your guidance for the fourth -- third quarter, maybe talk to what's driving the change in expectations and just any other trends you want to point out?

Yes. The main thing is -- and it's similar to what we have talked about in prior periods where volatility is obviously back in the market. And our capital markets are overweight hedging and trading activity relative to M&A. Those businesses have been sluggish in the first half of the year, and they're doing really well in the third quarter as we've gotten some of that volatility back. So it really is -- all the line items that have been performing well this year, Commercial Payments continues to grow robustly, Wealth and Asset Management continues to do really well and then now capital markets have shown up as those hedging businesses have come back.

I guess on the July earnings call, you kind of took down your fee income guidance for the year. Now on the October earnings call, if you have to increase your fee income guidance for the full year?

We will take a look at how we're feeling at the end of the quarter when we talk about the fourth quarter. As everyone knows, these markets are fickle these days. We do expect a decent fourth quarter still. But we're not going to -- we'll have to see ultimately were capital markets end up for the full year.

Yes. The markets are fickle, we're not. We just didn't want to bet on a turn when a turn hadn't materialized and then to the extent that the turn is materializing now, that definitely will be reflected in how we look at the...

That's right. And then -- and the other component is with that higher fee income, the thing that we feel really good about. And this is another thing that we've talked about because ultimately, we're managing to being able to deliver that consistent growth of PPNR over time. And we feel really good that even with that degrowth that we're seeing, we've been able to be disciplined on expenses, and we're going to come in line with what we expected from an expense perspective. So it's a nice PPNR story we feel a bit about.

Yes. And I guess thinking that typically, when we hear higher capital markets revenues, there is kind of a cost associated with that. So are you providing -- are you kind of finding efficiencies elsewhere to kind of help mitigate that? And then, I guess, within that, I think I heard Tim talk to operating leverage for 2025 as you kind of approach that [indiscernible] process, how are you thinking about overall expense management?

I mean, philosophically, I think one thing that's a little bit unique about how we try to run the company is we treat strategic planning which we are in the middle of. We leave here and go back. We have our Board strategy offsite the rest of this week as a capital allocation exercise. So we talk both sources and uses. And I think sometimes what happens is you run the strategy exercise as a way to solicit investment request and then you got to go back and figure out how to make the expense plan square later. . We don't think of it that way. We think good companies, healthy companies reallocate existing expenses because by definition, you want to invest in things that are becoming more important. That also then means that there's something else that is becoming on a relative basis less important. We are good at making sure that we get the right level of productivity out of our resources. But I think we've become especially good working consistently on these value streams, right? So at the beginning of every year, we designate 12 different value streams. Think of -- they're essentially end-to-end processes that start with the raw material and finish with the customer. And we set specific targets for cost, quality and improvements in the client experience. And as we make progress in the first half of the year, that tends to then produce a little bit of an expense tailwind for us in the second half of the year. And that's important because the annualization of those savings then generates some of the investment capacity, it has helped to fund a lot of the things we want to do strategically in the coming year and gives us the opportunity to reload and work on the next 12 areas of focus. So I think that's helping us in terms of expense management. It will be helping us in terms of generating positive operating leverage and again, the combination of this sort of consistent strong fee growth and its high margin fee business, if it's hedging and if it's Capital Markets and if it's -- I'm sorry, if it's Treasury Management, Commercial Payments and Wealth Management, and then that ongoing discipline will continue to carry forward.

Maybe put the next ARS question on credit quality. But I guess, one of the things in the third quarter, taking up the charge-off guidance from 40 to 45 bps to 50 bps. I mean, just talk to kind of what are the drivers of that? And then I'll follow up on the reserve question after.

Yes, absolutely. The main driver is just a little bit higher than what we expected from a commercial charge-off perspective just as we continue -- as companies continue to navigate this higher interest rate environment. But what we would also highlight is 85% of those charge-offs are fully reserved. So these are things that, it's not ultimately were surprises for us, but things where the timing was uncertain. These were troubled credits that we've been monitoring and the events occurred that it was time to take the charge-off. And so that is a component of when you look at then the provision guide where because they were fully reserved, it actually doesn't have a big impact on us from a provision perspective. The other thing that I would highlight about our provision guide this quarter is that one component of it and our footnote is a little bit different where we have seen deterioration in the Moody's outlooks that we utilized to build our ACL projections and our provision calculations. And we did incorporate that into this estimate so that $10 million to $25 million bill. We had previously said a $25 million bill, assuming the scenarios were static. We've had some specific reserves that will come off as part of these charge-offs. We have not seen the loan growth that we've expected, but we've seen weakening in those scenario projections, which then has offset it. So that's why we're still having a bit of a bill because we're taking that into account.

Got it. And I guess within the commercial charges this quarter, any particular industry to note?

There were a couple in the media space. where just some aspects of the expectations around how the world is evolving, whether that's migration from traditional media to streaming or even some of the digital advertising categories, there was a little bit in that space. It wasn't overweight and maybe 1/3 was in that space, and then everything else was fairly well diversified.

Got it. And then I guess anything else away from seeing how you're keeping an eye on auto, it has been a topic over the last day or 2. I know you guys have your players there from time to time?

No. Our auto portfolio continues to perform very strongly. We have always been focused on prime, super prime in the auto space. We've always been very cautious about the terms that we extend out to. So the other portfolio -- there's always a little bit of seasonality. Third quarter tends to be an increase from a seasonal perspective. So don't be surprised when you look at consumer charge-offs and they should uptick from 2Q to 3Q, that's just seasonality. But the portfolio overall is performing very strongly.

Yes. The weighted average FICO at origination is like 775 and auto 775, 780 consistently.

Got it. And then maybe on -- and then I guess as you think about credit, I guess, beyond the third quarter, I guess, how do you feel about just the overall healthy customer base and where do you see kind of charge-offs looking out?

I think in general, the economy is pretty healthy right now. Like there's no question, we have been talking about this for a few years that on the consumer side of the spectrum, the folks who are having the most challenges are the ones who were exposed, not just inflation in core goods and services, but also rent inflation, right? So the homeowners who walked in 30-year fixed rate mortgages at the 2.5% to 3.5% level, essentially inoculated themselves from the inflation in the single largest expense that most American households face. So folks with income north of 75,000 and who own their homes have continued to do very well. We can see that in our deposit data. I think it's evident when you look at the market that folks who are sub 75,000 in income, folks who do not own their homes are feeling the pinch. And I think the economic data indicates that they're actually now behind, like they're -- not only are they not seeing real wage growth, but they're actually losing ground. Again, I think thankfully for us, that is just not a component of our consumer lending activity. Our sub 680 FICO is like 1% in terms of the distribution of the book and 85% of our consumer exposure is to homeowners, whether that is through mortgages and home equity loans and lines are through the -- any of the other products. It's like 75% for auto and credit card, just as an example. On the commercial side of the equation, the challenge here for businesses have been those who couldn't control input costs and, therefore, couldn't pass them along in the form of higher prices or folks who invested heavily on the expectation that they would see growth and then haven't seen it, right? So the digital media as Bryan mentioned, I think there are some folks who believe that the spike in streaming activity that we all saw during the pandemic would sustain itself and maybe nobody would ever return to a movie theater. If that doesn't materialize, clearly, you've made an investment that you're going to have a harder time getting the value from. But corporate profit margins are at their wides, like they are very, very healthy. And because they're healthy, and I think because most large businesses still remember how hard it was to find labor 2, 3 years ago, they're not running wide-scale layoff. They're finding other ways to control expenses. And as long as that balance is maintained and we see some relief from the Fed in sectors where leverage is a little bit higher, I think the Fed is going to stick a [indiscernible] here, and we're not going to see a meaningful spike in unemployment. We'll probably see a sort of continued gradual normalization on that front, and you won't see an economic downturn.

Got it. And maybe shifting gears to capital. It looks like you're going to get to avoid the RWA inflation from [indiscernible], but still have to deal with the inclusion of AOCI. You're in a good capital position, we started to buyback, I think, earlier than expected in the second quarter. Just I guess how do you think about capital management?

Yes. Just on that point on the re-proposal, it's worth saying because we've been vocal when we felt like there was a reason to complain that. At the outset of this process, Vice Chair told us along with several other banks that I don't remember exactly what the adjectives were, but it was like that the decision-making process would be transparent and subject to comment and deliberative, I think, was the other word. And the decision that the Fed made in conjunction with the OCC and FDIC to go to reproposal here after they made pretty significant changes to the rule is very consistent with that. So at a minimum, I'm quite appreciative of the way that the process has run and will continue to run. That said, I think there's a possibility under the revised rule that our RWA might have gone down if we had been subject to it. So if we write a comment letter, it may be to ask if we have the ability to opt in the broader capital, the capital reform. We do feel good about the capital levels inside the company. The actions we took last fall when we put ourselves on the RWA diet and did the things we did from a liquidity perspective were designed to put us in a position to comply with the rules as they were originally proposed. And the byproduct of that is that the relief that I think we will see here and the structure that we have in the securities portfolio and therefore, the predictable roll-in of the AOCI marks are going to allow us to run with our sort of conventional priorities as we had or as we would have prior to March Madness last year. So organic growth is priority #1. We'd love to have constructive lending activity to be able to fund with all the capital and liquidity that we have been building. The strong dividend is #2 and we have a belief in the earnings power of the company and the importance of continuing to adjust the dividend to reflect that. And then share repurchases are #3. And as it became clear to us in the first half of the year that we were not only going to beat the capital targets, but would led -- I shouldn't say that, beat the date we have set to achieve our capital targets and that the loan growth wasn't going to materialize, we were able to resume share repurchase, and we expect to be able to continue to do that as the environment plays out here.

So in your list of capital priorities, I didn't hear you mention acquisitions. So could we maybe just talk to maybe separately, kind of nonbank acquisitions, you've mentioned about Rize, it's on dividend and provide, and just maybe some of your appetite there. But I also like to get your thoughts on bank acquisitions as well?

Yes. Well, I think -- I meant what I said in the script about our belief that the way that you build competitive moats is that, essentially, I think Jamie Dimon and the shareholder letter long time ago talked about the competitive moats in the banking business are shallow. The extension of that from my point of view is the only way you maintain them is you got to keep digging. You pick an area of focus and you invest into it on a sustained basis. I think we got what we needed in Rize to support embedded payments. Big Data Healthcare is an important component of what we have been trying to get done on the managed services front. We always look at those things, but we're not a high-priced buyer in that space. We're always looking for engineering talent and good core technology, not businesses that have already inflected and hit a steep growth trajectory because what we bring to the table is the distribution and the payments processing, what we tend to want is the technology and that means you're looking at companies that have kind of proven product market fit as opposed to those that are further along. So those aren't really material from a capital management perspective. We have what we want in terms of the diversification on the fixed rate lending platforms. So that isn't a focus. And I think on the bank's front, the nice thing we have today with the success we've had in the Southeast, is we have an alternative to M&A as a mode of expanding our conventional banking business, right? The branches down there, the capital earn backs are just under 4 years. The IRRs are, call it, 18%, 19%, 20%. And they're granular investments. You're making $1 million, $5 million investment at a time as opposed to taking on the execution risk of something much more significant to that. So priority for us is going to continue to be just fund that organic expansion, build out the markets we're in, get exactly what we want in a pace that we know we can achieve. Anything that we did on the inorganic front would have to pay -- there have to be a very healthy execution risk premium on top of what is already about a 20% IRR and much more granular and therefore predictable investment profile.

Great. On that note, we're out of time. So please join me in thanking Tim and Bryan for their time this morning.