Fifth Third Bancorp (FITBI) Earnings Call Transcript & Summary

Welcome to day 3 of Barclays 23rd Annual Financial -- Global Financial Services Conference. Thank you. We appreciate all your attendance here. We had a jam-packed morning of banks. We have a great cross-section of companies all in this room, Fifth Third Regions, Morgan Stanley, M&T, State Street and Zions. And kicking off the festivities this morning, pleased to welcome back Fifth Third. From the company, once again, CEO, Tim Spence; CFO, Bryan Preston. Tim is going to start with some prepared remarks. They put out a slide deck and 8-K last night, and then we'll take some questions.

Great. Thank you, Jason. Good morning, everybody. As Jason mentioned, we published a slide presentation last night to our Investor Relations website. In it, we reaffirmed our loan guidance, increased our PPNR guidance by 3% on stronger fee income, updated the credit loss outlook and then shared some positive developments on the growth strategies. But the appropriate place to start this morning is clearly with the credit update. So last week, we became aware of an issue at a client where we provide one of their asset-backed warehouse facilities. This is a company that's been in business for nearly 2 decades, transacts with global lenders, is backed by sophisticated equity investors, is an issuer of rated securitizations and is audited by a major accounting firm. But despite that, based on our ongoing review, it appears there's significant fraud in the collateral file that was used to support the borrowing base in all their warehouse facilities as well as the audited financial statements of the company. The current funded loan balance for Fifth Third is roughly $200 million. And while we continue to investigate the matter at the moment, we currently estimate the loss to be substantially all of it. Needless to say, we're deeply disappointed with this development and the impact that it's going to have on an otherwise strong quarter and improving underlying credit trends. But our commitment to you is that we will always be transparent and that we are going to deal with issues head on. We've been in the warehouse lending business for a very long time. And in the wake of this development, we did review the rest of the portfolio relationship-by-relationship. In fact, I personally have read the most recent field exams for similar borrowers. And based on that review, we're confident this is an isolated issue. So turning to the other topics covered in the presentation. This has been a strong quarter for new business and commercial payments. And first, I'm quite pleased to announce that the U.S. Department of Treasury selected Fifth Third as the new exclusive financial agent and issuing bank for the Direct Express program beginning in January of 2026. The Direct Express program serves 3.4 million participants who receive over $43 billion in annual federal benefits payments on their prepaid cards. The program is the equivalent of the second largest neobank in the U.S. with similar average revenue per customer, but significantly better profitability. We currently expect the process to enroll new enrollees starting in January and to begin conversions on the existing program participants in mid-2026, and we will provide more detail on the financial implications of that in the fourth quarter. Second, as we mentioned in our second quarter earnings call, with the passage of the GENIUS Act, we're quite bullish about the potential market opportunities for Fifth Third and for new lines specifically in digital assets. I'm pleased to share that Circle, the world's largest regulated stablecoin provider and Fireblocks, the largest digital asset infrastructure provider, have both chosen to partner with Newline as they expand their stablecoin payment networks. These wins are a strong market validation of our payments technology and indicative of the sorts of opportunities that we believe will continue to arise for us. Third, as we've talked about on many occasions, managed services, which is where we provide software and outsource services to large commercial clients to help them automate payment workflows, play a really important role in enabling us to grow payments revenues faster than the balance sheet. And last month, we expanded our retail receivables managed services offering with the acquisition of DTS Connex, which is a leading software platform for simplifying the management of daily cash operations by providing real-time data on transactions and inventory. DTX is a strong and diverse client base that includes Starbucks, CVS, H&R Block and others and is a great addition to our industry-leading cash logistics business, which has a #2 national market share among all banks. Moving to retail banking. Our Southeast expansion strategy continues to progress nicely. Since its inception, the de novo branch programs achieved 119% of its deposit growth targets. And as we fine-tune site selection and branch opening tactics, newer vintages of branches are actually performing better than the program overall, with branches built in 2024 and 2025, achieving 160% of their deposit growth targets. Half the consumer deposit growth for Fifth Third this quarter has come from the Southeast and our total cost of consumer deposits in the Southeast is 1.9%, which is a very attractive cost of funds. We continue to open branches in the Southeast of a strong clip, having opened 15 branches thus far in 2025, including our first location in Alabama, and we have another 35 scheduled to open in the fourth quarter alone. By the end of 2028, we expect to have nearly 600 branches in the Southeast and will have achieved our goal of top 5 locational share in these attractive high-growth markets. Together, our retail banking and commercial payment strategic investments are producing strong growth in high-quality deposit categories with commercial and consumer DDA balances up more than $1.5 billion or 4% year-over-year. This growth helped us to maintain low deposit costs while also improving the overall funding profile and should continue to do so if the Fed resumes cutting this month. As I mentioned upfront, again, I'm disappointed that the issue with one warehouse client has marred what otherwise are strong underlying business fundamentals. We expect criticized assets and NPAs to decrease again this quarter. And reflecting that improvement, we currently expect fourth quarter net charge-offs to be around 40 basis points. Our loan growth remains solid, and the midpoint of our updated guidance implies approximately 160 basis points of sequential positive operating leverage, which provides strong momentum into next year. With That, Bryan and I are happy to take your questions.

That was a very -- in under 7 minutes.

We wanted to make sure we left plenty of time for questions, Jason.

So a lot in there. Let's maybe start with the asset impairment you announced last night. I know you just talked about -- one of the things you mentioned on the podium once that this was an isolated incident. I guess, what gives you confidence to say that? Maybe just talk more broadly about your asset-based financing business.

Yes. Listen, I think philosophically at Fifth Third, when we have an issue anywhere we get back to the source data, right? You go back and you do a line-by-line review. So we learned about this incident last week, as I mentioned. Job 1 was, really figure out what collateral we did have that was unencumbered and what we can do to secure that and to position ourselves for what's likely to be a lengthy litigation exercise here given the range of parties that are involved. Step 2 then was to look at every other client that we have in the warehouse business, whether it was a consumer asset class or otherwise, and to go back and look at the audited financials and to look at the recent field exams, we conduct third-party or certainly have third parties conduct field exams on our collateral for every one of these clients. And as I mentioned in my script, I read them in addition to our Chief Credit Officer having read them, our Head of our Commercial Bank having read them and the folks that run our asset-based finance business, having gotten back into them. And I think on the basis of that review, we're confident that this is a one-off, an isolated incident in that portfolio. The third task then is to take a step back and to look at our processes and to say, is there something we could have done differently that would have allowed us either to catch this or to catch it earlier, right, to catch it, so that you didn't have a problem at all or to catch it earlier so that you could manage the size of the loss. And that's really the work that is to come here. But as it relates to the existing portfolio, we're confident that there isn't another one of these in the warehouse lending.

I guess when you look back, was this a client selection issue or a collateral management issue, I guess?

Yes, I mean, by definition, when you have a fraud, it's ultimately a client selection issue because we're not in the business of doing business with people who commit fraud. And there is going to be a fair amount of litigation on this. So there are some things that I'm just not got comfortable talking about in detail. But our understanding as it stands today is that the master loan tape was corrupted. So that is a collateral problem, right? And that in addition to that, that there are irregularities in the financial statements, despite there having been unqualified audit opinions on those financial statements, which is then a source of strength issue on top of that, right?

I guess, maybe, I guess, what steps are you taking to make sure this doesn't happen again?

Well, we're going to do the review. We're going to do a full review of the way that we manage collateral. We're going to look at the portfolio. We are -- have been in this business, as I mentioned, for a very long time. We have some treasured multi-decade clients here, who are the absolute best at what they do. And we're committed to serving those folks. The question then becomes, how much larger do you want the business to be? And is it the size that we want it to be today? Does it need to be smaller? Are there additional things we can do as it relates to the way we manage collateral to ensure that we're money good with the security because your comfort in doing business in this space is that it is supposed to be secured lending. But for the security to be worth anything, the collateral has to be good clearly.

Got it. And then I guess you put up the slide with the third quarter provision guidance, if I do some quick math, it looks like your provision ex to fraud would have been like $50 million this quarter after being like $175 million in the last 3 quarters. So that would have been a decent like reserve relief, I would suspect. I guess can you help us reconcile that?

Yes. Overall, we were having quite a nice quarter heading into this, as Tim said. We were seeing, obviously, positive trends in the fee businesses, and we are seeing positive performance from a credit perspective as well. The NPAs and criticized assets that we've continued to work through and lower over time. So that was on a good trajectory. For the first time in a while, the macro scenarios were not working against us. And so the combination of the improved credit performance of the core portfolio as well as those macro scenarios, were putting us in a spot where we're expecting to have a decent release this quarter. And that is a partial offsetting. And that is the one thing I want to make sure that everybody understands. We did revise our guidance slightly on how we present the provision. The $220 million to $250 million represents the total dollar provision, the charge-offs plus the builder release for the quarter, just given that at this point in time, we don't know how much of the $170 million to $200 million of loss on the fraud is going to be charged off versus just a specific reserve.

Got it. Got it. And then maybe just maybe shifting gears to Direct Express. It was interesting. It was going from a small bank to a very big bank, and now it's ending up as we call it, a super regional bank.

We're a pretty big payment bank, just to be clear, right second through the sixth national market share in basically every major commercial payment. So I think we're pretty big.

Fair enough, fair enough. I guess maybe face it this way. Treasury ultimately gave it to you, I guess. Why?

Well, I think we're well equipped to be able to deliver on a program the scale. We've talked a lot about the commercial payments business, the fact that we process over $17 trillion a year in payments. We are the bank behind the largest payroll card program -- private sector payroll card program in the U.S., right? We've talked in the past about the long and fruitful relationship we've had with ADP. And I think the industrial strength, the knowledge of how to manage our consumer business, given the strength of our core consumer, the third brand in consumer business and then the partners that we brought to the table. Fifth Third, Fiserv and Master Card are going to be the partners here in terms of delivery that gave the treasury, as I understand, it gave the bureau of fiscal services confidence that we'd be able to deliver both on the sort of a high-quality value proposition for participants in the Direct Express program on an ongoing basis as well as what is a significant conversion exercise. They clearly had been going a little bit more slowly just based on some of the remarks that have been made publicly in other cases than originally anticipated. But we are the exclusive agent going forward, right, recognizing there's a little bit of confusion on that front.

Yes. And I guess you mentioned issuing new cards in the beginning of next year. There's like, I guess, $3.8 billion of deposits kind of currently on that program. How does that get from the other provider to Fifth Third? How does that work?

A conversion process. Essentially, you have to issue a new card and a new account. And then my understanding is that the way it will work is the payments will cut over onto the new prepaid product and then the customer will have the choice of moving the balances off of their existing card and on to the new one or just spending the balances on the existing card down and allowing the balances to replenish on the new card. That's the way that these conversions worked historically.

Got it. I guess that process starts in mid -- you said 2026?

Yes.

How long do you think it typically take?

We expect -- and the second quarter are probably too early at the moment to give you a clear schedule on the conversion. But we will come back and provide guidance on the financial implications of this in the fourth quarter. And that is going to be predicated on our belief at that point in time on the pace that we can move and the way that we execute the conversion.

As presumably get like, call it, approaching $4 billion of noninterest-bearing deposits onto the balance sheet. I guess, how do you think about deploying that over time?

Continuing on the path that we have been in terms of just balance sheet optimization. I mean we do feel good about what we're seeing from a loan growth perspective at this point. We reaffirmed our guidance from a loan growth perspective. The trends we're seeing are good. Pipeline is good. So our expectation is the balance sheet is going to continue to grow, and it puts us in a place to continue to have strong, stable core deposits to fund that loan growth.

Yes, I'm -- because we have elected to utilize our deposit growth strength to lower funding costs and widen margins and improve the quality of deposit funding at the bank, I think folks have gotten a little bit confused because core deposits have been stable for us throughout the year. The DDA growth has been phenomenal, right? I mean 4%, 5% DDA growth on a year-over-year basis is a wonderful trajectory, and it's coming from the investments in the commercial payments business, which drives DDA and clearly, on the branch density that's being built out in the Southeast. So when you add Direct Express on top of that, we're going to be able to grow like the world -- the best thing in the world would be able to fund the larger share of the possible -- share of the balance sheet possible with the DDA, and we're going to have 3 really strong mechanisms to continue to grow DDA in mid to upper single-digit rate on an ongoing basis.

Got it. I guess, Bryan, you mentioned loan growth. I guess kind of looking at the results to the kind of lag last quarter. This quarter flat up 1%. Maybe just talk to some of the puts and takes and maybe that number feels like maybe a bit lower than some others that have spoken.

Yes. Last quarter, really was ultimately a utilization trend. We saw utilization growth in the fourth quarter of '24 and the first quarter of this year in a period where I think a lot of the peers had not seen that utilization growth. Saw a little bit of reversal in the second quarter. When we look at our data, it appears to align very closely with what you're seeing out of the broader macro data with regards to inventory builds, and that is the behavior that we saw a lot of our customers, which pre-tariff, we saw a buildup of inventory, buildup of utilization and as they started to spend down that inventory, we saw the utilization come down. So we didn't really see anything that was unusual. And since basically, we've reached the floor, which was about 36.5% early in the quarter, we've seen stable to growing utilization since then. So that is what put us on back on a more normalized trajectory for us is the distortion that was caused by that early inventory build and spend down has now out of the numbers. And we're at a 37% utilization right now back to what we think is in that range of more normalized numbers. And we're seeing really granular strong growth, in particular, out of our middle market business. And that's really across the footprint. We're seeing loan growth in the Midwest and the Southeast as well as in our expansion markets of Texas and California. So very broad-based, stable and strong growth from here and feel good about what we're seeing.

I think the right measure for us from my perspective, like you always debate is sequential loan growth or year-over-year loan growth the right way to evaluate a business. And for peers who have had shrinking balance sheets and are starting to make the turn, sequential is obviously the right point of focus. We got back to growing loans earlier than others did. My own view is that year-over-year is the right way to think about it because it starts to neutralize some of the seasonality that you see given the composition of our loan book. And if you take out the midpoint of the guidance, it's like it implies 5.5%, 6% year-over-year loan growth. That's pretty good. I think that stacks up actually quite favorably relative to most of the other regionals. So we feel good about where we are.

Fair enough. I think we jumped into it. It's the first ARS question. And then I guess just maybe on deposits. I guess you guys don't have to guide the deposits, but maybe just talk to in terms of what you're seeing in the quarter, in terms of rate mix or balance mix rate paid that presumably cut next week, you guys have typically had a decent beta. Maybe just talk to your expectations there?

Yes, more of the same from us on a deposit front in terms of cost and continuing to drive to get to a good outcome there. I'd expect broadly stability in our deposit cost this quarter as most of the impact of the cuts from late last year have really come through and we've done work to optimize. We are growing deposits, which we feel really good about. We should see about 1% sequential growth with growth on both the commercial and consumer side as well as performance. As Tim mentioned, from a DDA perspective, the DDA trends continue to be good. That is granular, kind of grinded out slow growth. This isn't a quarter of a big mix shift, but we feel good to be on that trajectory now of back-to-back quarters of DDA growth. And we expect that to continue through the rest of the year. We'll see a little bit of seasonality in the fourth quarter. We always have some commercial build in the fourth quarter as we head into year-end. So that is what we would expect to see. But from a cost perspective, exactly in line with what we expected. From this point, from a beta perspective, we still believe we can get a lot of cost out of the portfolio as the Fed cuts. We still have $30-ish billion of fully indexed deposits in our commercial portfolio. We will have opportunities in our consumer CD portfolio and our consumer money market book associated with promo offers from a cost rationalization perspective. But we're certainly focused on funding loan growth in this environment as well. So we are going to be more focused to be balanced on at this point in the cycle. You were to roll back to when the Fed began the easing cycle at the beginning. We just had a view that loan growth was probably going to be a little slower. We felt like the industry had a lot of liquidity. So we felt like cost rationalization was going to be a big theme. And that's ultimately what played out and why we thought we could deliver north of 60% beta. At this point in the cycle, we think that there's probably going to be more loan growth, a little bit more cost competition on deposits. So I'd tell you we're probably high 40s, low 50s expectations from a beta perspective, but it's going to be used to fund loan growth, which ultimately is going to be productive from an NII and a returns perspective.

Got it. And maybe put up the next ARS question. But I guess you kind of reiterated your NII guide, at least for the third quarter. Maybe just talk to just how you're thinking about NII and NIM as we kind of finish up this year and kind of maybe what are some of the puts and takes as you start to think about next year?

Yes. We feel really good about the exit rate of what we expect to see at this point. Really, the real question for 2026 is going to be about where does the Fed ultimately normalize, where do they eat in their cutting cycle and then ultimately, what the shape of the curve looks like in that scenario. If we were to see the Fed come down a bit on the front end, that should be beneficial, and we're very sensitive to the front end from a liability perspective. And from a deposit cost perspective, and a funding cost perspective, that should create some significant opportunity for us. And then from a fixed rate loan origination perspective and a repricing perspective, which has been a big theme for us in the industry, shape of the curve is going to have a pretty big impact there. We feel good about our ability to maintain and grow NIM from here as the balance sheet continues to grow. But the ultimate level where it stabilizes is going to depend on where the curve is up in 2026.

Looks like the audience was listening to your 320 comment on the earnings call.

I was smiling thinking that you need to narrow our ranges. Is this an issue of the ranges that you've set here?

I guess maybe shifting gears to fee income. You had a nice guide up for the third quarter. Maybe just kind of delve into kind of what's driving that. And then I think your full year guide was only up modestly. So I guess any thoughts on kind of how the full year is going to pan out.

Yes. We feel really good about what we're seeing from a fee perspective, and it was really broad-based. We continue to see strong strength at our wealth and asset management business. Commercial payments continues on its growth trajectory and a really nice rebound this quarter for Capital Markets. So 3 key businesses for us that are expected to continue to perform very well at this point. So we feel good about what we're seeing on that front. The performance this quarter obviously will have an impact on how we think about the full year guide from here. That will be something that we'll update as part of earnings.

But, I think to put a point on what Bryan said, the sources of strength for us are the places where we've been investing. So you can draw a straight line between the things that we talked about in our prepared remarks on commercial payments and the sources of growth on top line fee revenue there, you can see the benefits of the investments that have been made in wealth management, like we're running with more WMAs to our wealth advisers in the regions than we've had previously. We just surpassed $3 billion in assets under management in this RIA that we built on our own. And so you can see where we're getting the fee income. And then we were -- we talked about the movement to more of a conventional CIB structure in our corporate banking and investment banking area about a year ago, and you're seeing the benefits of that collaboration start to play through here on syndications and bond business, in particular. The question mark is going to be, how much of a pickup do we see in middle-market M&A? That's not a big part of the business, but it's a big part of the difference between a really strong quarter for Fifth Third and the strong quarter for Fifth Third in fees. And there are promising signs there, both for the end of this quarter as well as carrying into the end of the fourth.

Let me put up the next ARS question while we turn to expenses. But I guess other banks at this conference have kind of guided up on fee income as well, but they have also kind of guided up on expenses. You kind of guide up on fee income, but are kind of keeping the expense guide unchanged. Maybe just talk to kind of the ability to kind of manage costs nearer term? And then as you kind of think about the 2026 operating budget, how are you approaching the cost guidance?

I'm only smiling because this survey mechanism is the most clever way of eliciting 2026 guidance this early in the year. So we're not taking the bait on that one, just to be clear. Listen, we get paid to drive consistent and strong returns and then growth in tangible book value per share. And we get the growth in TBV per share by growing earnings. So the focus for us is always on still strong profitability and then growth at that level of profitability. Like I'm very proud of the fact that when you look at NIM and NII for a company that's generating the loan growth. We are the business we're doing at the margins is actually accretive to NIM, right? That's the reason that NII has been outgrowing the balance sheet at Fifth Third, which isn't always the case in our business. The margins, we have worked very hard to ensure that the margins and the unit economics are great across the spectrum of the fee income businesses. And then I'm very proud of the fact that we've been able to fund about $1 in every $2 in investment we've made over the course of the past several years through reductions in expenses associated with either mean process management disciplines or automation through the technology that's gone in us. So the focus really is on continuing to drive this continuation of the strong positive operating leverage trend that we've had over the course of several years now and to invest in what then becomes a flywheel of growth for future years.

Got it. And the lean end of terms year-over-year comparisons, I mean, you think about the midpoint of the guide that we've updated for the third quarter, that's 300, it implies 300 basis points of year-over-year positive operating leverage in the 3 quarters. We're delivering good outcomes. We're going to stay focused on expenses in terms of being rational with how we think about getting efficiencies out of our company, but we're going to continue to invest in the company as well. And we see opportunities there to deliver returns and deliver growth at a faster rate.

We get questions on occasion about are we investing or not? And I always chuckle because I think -- there's no one other than JPMorgan who has built more branches than we have in the markets we're building into the key sales forces, right? We have this focus on more granularity in the commercial business, the middle market. Sales force is up double digits year-over-year. The wealth management sales force is up, not including Fifth Third Wealth Advisors, high single digit, low double digit rate plus you add in the Fifth Third wealth advisers hires, and we're operating with more sales and client service capacity than we've ever had in the wealth management business. We've been able to successfully integrate several of these small tuck-in acquisitions and commercial payments. And those have been a big catalyst for the growth that we experienced. That's in the run rate in terms of what we're doing from an expense management perspective. And I'm really excited about some of the things we're going to be able to do with the technology that either has gone in or that will go in and the degree to which it will provide a platform for us to make use of AI to drive even more efficiency in the business. So we look at it and think we have a pretty full investment plate, but we're getting positive operating leverage, like Bryan described anyway, as opposed to having to make a decision between near-term profitability and long-term value.

Got it. And then just on the capital front, you said $300 million ARS, ASR?

Still 8:00 In the morning.

Well, this is ARS, accelerated share buyback. I guess, how do you -- how should we think about just buybacks in the future in capital management in general?

Yes. I mean our priority is always organic growth, first and foremost. And if we can see -- if we can find the right opportunities from a lending perspective, that is the first place that we're going to go from a capital deployment perspective because we think we can generate the best returns there and deliver the best book value growth for our shareholders over time by just our core banking business. We're going to maintain a strong and stable dividend. And then ultimately, share buybacks are what's left from a capital perspective to make sure that we're not sitting on underutilized capital. And so historically, we've probably been in a range of $100 million to $300 million a quarter. That would be the kind of thing that I would think we would be able to stay in given what we would expect to see from a growth and profitability perspective.

And then maybe in terms of another use of capital of the acquisitions, maybe we'll talk nonbank acquisitions first. You mentioned the DTS Comex acquisition. I guess what else do you think you need? What else is out there? Kind of what are you looking for in the nonbank space?

We have -- we're believers that if you're buying things in the nonbank space, you have to be confident that there is franchise value and that you can get real synergy on the revenue side because generally, there's just not a lot of expense opportunities in those sorts of deals, the principal cost outside of commercial payments or the people, and that's what you're getting in the transaction. So we have not been believers in growing the talent-driven businesses through M&A, it just -- you end up paying for the company and then paying to retain the talent. And quite often 5 years later when the retention agreements are outpaying, to keep them again. And therefore, the returns just aren't great to shareholders. On the other hand, we've had great success where the asset that we're acquiring is the software package and the embedded user base and then the engineering capability and where we can attach that technology to our scaled payments processing and drive faster growth, right, either more adoption of the software because we're able to introduce it to existing clients. But I think in particular, from my point of view, where we can operate with the Gillette razors and blades model, where the software is the razor and the tip of the spear offering that allows us to add a payments client to Fifth Third, who isn't a borrowing customer and then to generate the recurring revenue from the payments behind it. So that's the sort of a business that we like. The strategy there has been very focused on verticals. So where are there industry verticals that have complex payment needs that we have some existing expertise in. So we bought big data health care, that's our health care receivables. And again, automates what's otherwise a very manual and messy recon and allocation process for large practice groups or other provider networks. DTS fits squarely in the retail receivables business that we have. We have done some things where we had minority equity investments and folks that had broader B2B payables offerings in the past. In fact, I think I spoke at your payments conference like 8 or 9 years ago with a couple of the folks we were doing those sorts of things with. But those are the sorts of strategies that we like in nonbank acquisitions market. It really is about buying a capability that allows us to drive out operational expense for our clients and then a pending the payments processing behind it.

Makes sense. And then I guess maybe shifting gears to the bank M&A front. There's certainly been more transactions announced, more chat in the marketplace. You guys have done well, have a strong currency, don't put a deck out over the summer, having with some interesting math. Just maybe talk to your appetite for bank acquisitions.

Yes, I don't think it's any different than the answer we've provided on this one, which is we're not believers in M&A as a strategy onto itself in scale as an end objective onto itself. We look at M&A as a means to achieve an outcome, right? So when I talk about our key strategic priorities, we want density. We are believers that leading market shares and being big in the markets where you compete is the right way for large regional bank to operate as opposed to being in as many different markets as you can be. We're believers in the value add and in the application of software to transform the value proposition with customers. That clearly has been the focus of the managed services strategy and the things that we're doing in embedded. And we are believers in the value in having the ability to continue to invest in technology and customer acquisition. And otherwise, those are the things that are priorities for Fifth Third. The question is always then what's the opportunity cost of any choice. So we have an organic expansion strategy that's worked quite well in the Southeast, like the -- we're not talking about building branches. We have been building them in markets where we already have them, right? And they're significantly outperforming their -- the deposit targets that we set for them at the time that we did the modeling on a site-by-site basis of what would be required to generate a 15-plus percent IRR for making those sorts of investments. And those are granular investments. They are like $5 million capital allocation decisions one at a time as opposed to larger bets. So for us to make the decision to go inorganic to achieve the goals that we have, we have to believe that we could either get our cash back faster than we get them back through the organic expansion activities or that we can generate an ARR that significantly -- that is good enough to justify the increased execution risk associated with buying something and having to deal with it all once as opposed to building it one by one by one. So that's the framework. That's the way that we think about these things.

Fair enough. And then I guess, Tim, you talked about -- a little bit about stablecoin and I guess, the new announcements with Circle and Fireblocks. It's something we kind of struggle with in terms of how this all pans out. You have had nice tech background. Ultimately, I guess, what -- do you see is the kind of a use case for stablecoin? And does it disrupt the banking industry as some concern? And just love to hear your thoughts.

Yes. I think the right question ultimately be asking, I mean, having a legal framework was very important, right? There is value in digital assets and real utility and the technologies that underpin digital assets in the financial world. Like that, I view as being on ambiguous. But there had to be a legal framework that govern what good look like there. And with that framework being in place, I think we're going to see the emergence of really high-quality, well-run regulated companies like a Circle as an example, emerge and continue to grow. So that's the view. The question though isn't -- like what is -- are these things legal? And therefore, what could the disrupting risk be? The question really needs to be, why would a customer choose to either hold a store value in a stablecoin or to use stablecoin rails for transactions versus an alternative payment mechanism. My view is if you do that analysis, the risk of disruption to the domestic market for transaction accounts and domestic payments is not high, okay? And the simple basis for that is 85% to 90% of the interactions we have with our customers today are digital. So we are in the digital currency business. It's just -- it's digital fee out in your checking account as experienced by you through your mobile app and spent by you through one of a wide range of payment mechanisms, one. Two, but those payment rails are low cost to consumer. Nobody pays us to use a debit card. Nobody in momentum banking pays us for access to their checking account, right? And so there isn't a cost advantage to the consumer and the payment mechanisms that are available in our existing accounts are ubiquitous in terms of their acceptance. So there's no question of where the payment can or can't be used. I mean the argument they get made in domestic as well, but look at the cost of credit cards. But merchants aren't accepting credit cards because they want a higher cost payment mechanism. They're accepting credit cards because their customers want to pay with them. Why do they want to pay? Because they get rewards, which by the way, are funded by the interchange, right? Or they want open to buy. They want the credit line that's attached to it and the float benefit, which, of course, doesn't exist by definition with a stablecoin or an instant payment that is attached to a deposit account or otherwise. Now could a digital asset company build a rewards proposition or open to buy and float around a digital asset payment? Sure, but those things have costs. And if they have costs, it means there's going to be a higher acceptance cost on the merchant side of the equation. I think where the really interesting opportunities are is where you don't have existing payment rails that are interoperable, which is principally in cross-border payments today. There's some really far out stuff that we've seen and talked to folks about, that involve essentially the infinite divisibility of stablecoins, which will be useful in fractional payments on the Internet and otherwise. But the cross-border applications are where I think a lot of the early action is going to be here outside of folks wanting to keep fungible collateral posted on chain because they're investing in crypto, but they want to go to bed at some point and get a little bit of sleep.

Perfect. On that note, please join me in thanking Fifth Third for their time today.

Thank you.