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Fifth Third Bancorp (NASDAQ:FITB)
Q4 2020 Earnings Call
Jan 21, 2021, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Fifth Third Bancorp fourth-quarter 2020 earnings conference call. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions] Thank you. I would now like to hand the conference over to your speaker today, Chris Doll, director of investor relations.

Please go ahead.

Chris Doll -- Director of Investor Relations

Thank you, Melissa. Good morning and thank you for joining us. Today, we'll be discussing our financial results for the fourth quarter of 2020. Please review the cautionary statements and our materials, which can be found in our earnings release and presentation.

These materials contain reconciliations to the 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 and would not expect to update any such forward-looking guidance or statements after the date of this call. This morning, I'm joined by our CEO, Greg Carmichael; CFO, Jamie Leonard; President Tim Spence; 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 to his comment -- for his comments.

Greg Carmichael -- Piper Sandler -- Analyst

Thanks, Chris, and thank all you for joining us this morning. I hope you're all well and staying healthy. Earlier today we reported full-year 2020 net income of $1.4 billion or $1.83 per share. We delivered strong financial results in 2020 despite the challenging operating environment brought on by the pandemic.

We had several highlights for the year. We generated record adjusted pre-provision net revenue, we maintained our expense discipline producing an adjusted efficiency ratio below 59% which was stable compared to the prior year and remains near-decade low, and we generated a record-adjusted-fee revenue including records in both our commercial and wealth and asset management businesses. We also continued to generate peer-leading, consumer-household growth of 3% with outside success in Chicago and our key Southeast markets. While nearly doubling our reserves, we generated 11.7% adjusted return on tangible common equity excluding AOCI for the full year and generated an ROTCE of 18.4% in the fourth quarter.

Just as importantly, we have successfully navigated the COVID‑19 pandemic keeping 99% of our branches open for business while working closely with our customers to support them during these challenging times through the PPP program, hardship relief programs, and other outreach efforts that we have previously discussed. Our efforts have been noticed externally, we are recognized by an independent third-party as a top-performing bank among the 12 largest U.S. retail banks based on our pandemic response for our customers, communities, and employees. Also, we had the honor of winning the Greenwich Middle-market CX award reflecting our commitment to delivering a superior customer experience for and during the COVID‑19 crisis.

Additionally, during the year, we published our inaugural ESG report highlighting our efforts to generate sustainable value for all stakeholders. And just this week we announced that we've became the first regional bank to achieve carbon-neutrality in our operations. Turning to the fourth quarter, we reported net income of $604 million. Our reported EPS included a negative $0.10 impact from the items shown on Page 2 of our release.

Excluding these items, adjusted fourth-quarter earnings were $0.88 per share. Jamie will walk you through the quarterly financial results in more detail in just a minute. Focused execution on our key strategic priorities and our disciplined approach to clear this management, continue to drive strong financial performance. As we recently announced, we have taken decisive action to drive efficiencies and improve the long-term profitability of the bank by streamlining our operations including divesting less-profitable businesses such as property and casualty insurance, while investing in areas of growth and profitability.

For example, we recently finalized the acquisition of H2C which strengthens our healthcare investment banking and strategic advisory capabilities. We continue to assess select strategic investments and non‑bank acquisitions to improve fee growth. All reported and adjusted-return metrics were solid and improved sequentially in the fourth quarter, reflecting our strong operating results including the provision for credit loss performance. We expect a positive momentum in our operating results to continue in 2021.

Net interest income increased 1% sequentially despite loan portfolio headwinds. Underlying NIM which excludes excess cash and PPP impacts increased 8 basis points sequentially. We expect to generate differentiated NIM performance relative to peers in 2021 and beyond, reflecting the hedge in investment portfolio actions we have taken over the past several years. Our credit pull remains solid with net charge-offs of 43 basis points stable compared to the recent quarters.

Also, our gross ad assets and allowance for credit losses both declined sequentially reflecting our credit discipline and improved credit results and economic outlook. We continue to benefit from the diversification, the resilience of our fee-based businesses, and retail, commercial, and wealth and asset management. Many of our fee-based businesses are generating strong results. They're helping to cushion the impact of lower rates.

Our robust capital-fee levels further improved this quarter indicative of our balance -- of our balance sheet strength. Our regulatory capital levels have increased for three consecutive quarters as a result of our strong earnings power, balance sheet dynamics, and the Fed's temporary suspension of buybacks. With the partial relief announced by the Fed in December, we intend to execute up to $180 million in share repurchases in the first quarter. Through pro-active management, we have built a strong and stable balance sheet that significantly improved the diversification of our fee revenue.

We have done this all maintaining our culture of expense discipline and demonstrating our commitment to consistent and solid through-the-cycle performance. Our financial performance continues to give us confidence that we can safely and soundly operate the company by a significant lower capital levels. For our CET1 target remains at 9.5%, we will continue to evaluate the appropriate target -- capital target as the economy improves. We're also seeing continued strength in our commercial loan production levels in our pipelines.

Fourth quarter loan production was the highest in 2020 and was down around 20% from the year-ago quarter, but was up over 50% from the third quarter. We are encouraged by the recent trends, the sequential improvement in almost all regions and all verticals. Strong production was more than offset by elevated payoffs and another 1% decline in line utilization. Our middle-market pipeline improvement is well diversified.

We got our footprint including significant strength in our Southeast markets. In corporate banking, pipeline strengthened again this quarter with improvement in industrials, retail, healthcare, solar and financial institutions, partially offset by continued sluggishness in hospitality and energy. Based on a strong pipeline of stable utilization trends for the first three weeks of January, we currently expect C&I loan balances to improve on a period-end basis during first quarter excluding the impact of PPP loans. Commercial real estate pipelines continue to be well below pre-COVID levels.

Before I turn it over to Jamie to further discuss results and our outlook, I want to reiterate our strategic priorities which will enable us to continue generate long-term shareholder value. Our four -- our four key strategic priorities have not changed over the past several years and include leveraging technology, accelerated digital transformation, driving organic growth and profitability, expanding market share in key geographies, and maintaining a disciplined approach on expenses and client selection. We'll put the appropriate level of prioritization and focus on areas where we see the highest probability for driving strong financial returns and generating long-term value for our shareholders. Our balance sheet strength, diversified revenues, and continued focus on disciplined expense management will serve us well as we navigate this environment in 2021 and beyond.

I would like to once again thank our employees. I am very proud of the way you have continually risen to the occasion to support our customers and each other during these challenging times. Fifth Third continues to be a source of strength for customers and our communities and will remain committed to the equality, equity, and inclusion for all. To that end, we made a three-year $2.8 billion pledge to this commitment through lending, investing, and donating, including a $25 million contribution to the Fifth Third Foundation.

Our financial results continue to reflect our focused execution, discipline, and through-the-cycle principles. We remain committed to generate sustainable long-term value for our shareholders and anticipate that we will continue improving our relative performance as a top-performing regional bank. With that, I'll turn it over to Jamie to discuss our fourth-quarter results and our current outlook.

Jamie Leonard -- Chief Financial Officer

Thank you, Greg, and thank all of you for joining us today. One quick housekeeping item before discussing our financial results for the quarter. As you'll see in our earnings materials, we are no longer adjusting certain metrics for purchase-accounting accretion or intangible amortization given that they largely offset and have an immaterial impact on pre‑tax income. We hope this will help simplify our disclosures going forward to more easily assess our financial ratios.

Now, turning to our fourth-quarter performance. We ended 2020 with positive momentum and delivered strong financial results. Reported results were impacted by several notable items including a $23 million after-tax negative mark related to the Visa total return swap, a $21 million after after-tax charge related to our acquisition and disposition actions as Greg mentioned, the sale of our H -- HSA business remains in process and should close by the end of this quarter. We also recognized a $16 million after-tax charge related to our branch and non-branch real-estate-efficiency strategies.

This includes impairments associated with seven branches we will be closing in April as part of our normal rigor on reviewing our network for efficiencies. These closures are an addition to the 37 branches we announced last quarter. Furthermore, as Greg discussed, we reported in $19 million after-tax charitable contribution expense to promote racial equality. And we also reported $4 million after-tax from COVID-related expenses.

Lastly, we had a one‑time favorable item related to state taxes of $13 million. In terms of the financial highlights for the quarter, despite the nearly 160-basis-point decline and one-month LIBOR over the last 12 months, we were able to generate an adjusted PPNR above the fourth quarter of 2019 level. We generated an efficiency ratio of 58%. Our operating performance reflected a 1% increase in NII, a 16% increase in adjusted fees, and a 4% increase in adjusted expenses.

Given the strong PPNR results, combined with continued credit-related improvements, we produced strong reported and adjusted return metrics including an adjusted ROA of 1.31% and an adjusted return on tangible common equity of 18.4% excluding AOCI, despite growing our regulatory capital 20 basis points during the quarter. Drilling into the income statement performance. The sequential increase in NII of 1% reflected the strength of our balance sheet and deposit franchise. We saw a 4-basis-point improvement in our total loan yields which was supported by both the continued benefits from our long-duration, deep-in-the-money cash flow hedges, as well as $10 million on additional PPP income.

Our NII results included $11 million of incremental, favorable pre-payment penalties in the securities portfolio, reflecting one of the benefits from our strategy to invest in bullet and locked-out cash flows. Approximately 59% of the investment portfolio is still invested in both locked-out cash flows at quarter-end. And our investment portfolio yield increased 9 basis points sequentially to 3.1%. Net premium amortization in our securities portfolio was only $1 million in the fourth quarter.

On the liability side, we reduced our interest-bearing core deposit costs by another 5 basis points. For the fourth quarter, the average cost of our core deposits was only 5 basis points. CD and debt maturities also provided a 2-basis-point improvement to NIM versus the third quarter. Reported NIM was stable compared to the third quarter, reflecting the favorable securities portfolio and PPP income I mentioned, offset by the impact of higher cash levels.

Underlying NIM excluding PPP and excess cash improved 8 basis points to 3.14%. Once again, we had another strong quarter generating non-interest income to cushion the rate-driven NII pressure. The resilience in our fee-income levels continues to highlight the revenue diversification that we have achieved. Total non-interest income increased 9% relative to the third quarter.

Excluding the notable items, non-interest income increased 16%. We generated record-commercial-banking revenue which increased double digits sequentially and year over year, driven by strength across most of the business. We also recorded TRA income of $74 million as well as gains from several of our direct fintech investments and venture capital funds. These investments generated $75 million of fee income in 2020 and we expect continued gains in 2021.

Top-line mortgage banking revenue declined $46 million sequentially, driven by a $26 million headwind reflecting a decline in rate-lock volumes, a $12 million impact from our decision to retain $250 million of our retail production during the quarter, and $8 million due to margin compression. MSR decay and servicing fees were unchanged sequentially and will remain challenged in this environment. While we did not deliver the mortgage the results, we expected due to capacity pressures, we have seen meaningful improvement in December and January. Non-interest expenses also increased relative to the third quarter, albeit to a much lesser extent than fees.

Adjusted expenses were up 3% excluding the market-to-market impacts associated with non-qualified deferred compensation but is offset in security gains within non-interest income. The largest contributor of the expense growth was performance‑based compensation, driven by the strong performance in fees related to the business growth and other revenue-linked expenses. Moving to the balance sheet. Total average loans declined 3% sequentially with both commercial and consumer balances in line with our previous guidance ranges.

Commercial loan balances continue to reflect lower revolver utilization rates, which decreased another 1% in the quarter to 32%. Line utilization rates so far in January are stable relative to the fourth quarter. We currently expect utilization to remain unchanged for the first half of 2021 and are forecasting only a modest increase of approximately 1% in the second half of the year as the economy improves. Average CRE loans were flat sequentially with end-of-period balances declining 1%.

As we have discussed before, we believe that the commercial real estate sector is particularly vulnerable to the current economic environment and supports our strategy of lower exposure and our focus on high‑quality borrowers. We have provided more information related to our CRE exposures in our presentation this quarter. Average total consumer loans increased 1% sequentially, driven by continued growth in the auto portfolio, partially offset by declines in home equity and credit card. We took additional action in the consumer portfolio at the end of December to improve our NII trajectory for 2021, deploying approximately $2 billion of our excess liquidity by purchasing government-guaranteed residential mortgages currently in forbearance under the CARES Act provision.

These loans are in our held-for-sale portfolio as they are not expected to held for more than one to two years. These loans provide a more attractive risk-adjusted return than other current investment alternatives. Our securities portfolio of roughly $35 billion decreased 1% compared to the prior quarter, reflecting the impact of paydowns combined with the lack of compelling reinvestment opportunities. Our investment portfolio positioning continues to support NII in the current environment, allowing for patience in investing at the current unattractive long‑term rates.

Given the potential for strong economic growth in the second half of 2021, we do not believe long‑duration securities are providing an appropriate risk-return trade‑off. As a result, we do not expect to grow our investment portfolio in the near term. Our un -- unrealized securities and cash flow hedge gains at the end of the quarter remained at $3.5 billion. Also, our deliberate actions within the securities portfolio over the past several years focused on structuring the portfolio in anticipation of a lower-rate environment and should continue to give us a strong advantage as a very effective hedging tool to help mitigate the rate headwinds.

Average other short‑term investments which includes interest‑bearing cash increased to $35 billion, growing $5 billion from the prior quarter and $33 billion compared to the year-ago quarter. In addition to the loan growth headwind outside of PPP, a significant increase in excess cash reflects record-deposit growth over the past nine months. Core deposits increased 3% compared to the third quarter, despite a 12% reduction in consumer CD balances which help drive down interest‑bearing core deposit cost by 5 basis points. Moving on to credit.

Overall, credit quality continues to be -- to be solid, reflecting our disciplined approach to client selection and underwriting, balance sheet optimization, and the improved macro-economic environment. Charge‑offs remained well behaved at 43 basis points, non-performing assets declined $67 million or 7% with the resulting NPA ratio of 79 basis points declining 5 basis points sequentially. Also, our criticized assets declined 12% with appreciable improvements in energy, industrial, and middle market. Given the solid credit results, lower end-of-period loan balances, and improvements in the macro-economic outlook, our reserve coverage declined 8 basis points to 2.41% of portfolio loans and leases with improvement in both consumer and commercial.

The low level of net charge-offs combined with the $130 million decline in allowance resulted in a net $13 million benefit through the provision line. Our ACL decline of $131 million was attributable to several factors. Approximately one‑third of the -- the decline was the result of lower period-end loan balances with the remainder of the release due to both the improved economic outlook and the improved commercial credit risk profile, which is reflected in our lower MPA and criticized asset levels. As is required under CECL, our reserve reflects all known macroeconomic and credit quality information as of December 31.

While we are not predicting or forecasting reserve releases at this point, given both the significant uncertainty in the economy and our loan growth expectations to the extent there would be meaningful and sustained improvement in the broader economy, that's not unreasonable that reserves could come down from here even if credit losses tick up. Our base-case, macro-economic scenarios, and its GDP remains below 2019 levels until the end of 2021, an unemployment rate higher than the current 6.7%, and being 2021 at 7.2% and declining to 5.6% by the end of 2022. Importantly, our base estimate incorporates favorable impacts from fiscal stimulus generally consistent with the $900 million package as of the end of December but does not incorporate additional relief as currently proposed by the new administration. We did not change our scenario rates at 60% to the base and 20% to the upside and downside scenarios.

Applying a 100% probability rating to the base scenario would result in a $200 million release to our fourth-quarter reserve. Conversely, applying a 100% to the downside scenario result -- would result in a $900 million build. Inclusive of the impact of approximately $136 million in remaining discount associated with the MB loan portfolio, our ACL ratio is 2.53%. Additionally, excluding the $5 billion in PPP loans with virtually no associated credit reserve, the ACL would be approximately 2.65%.

Moving to capital. Our capital remains strong during the quarter. Our CET1 ratio ended the quarter at 10.3%, above our stated target of 9.5% which amounts to approximately $1.2 billion of excess capital. As a reminder, we have remaining capacity to purchase 76 million shares from our 100 million share program authorized by our board of directors in 2019, representing $2.4 billion or 11% of our current shares outstanding.

As Greg mentioned, we plan to execute approximately $180 million in share repurchases during the first quarter, and should the Federal Reserve permit banks to continue to repurchase shares in 2021 under the current net income tax framework, we would have around $1 billion of buyback capacity in total for 2021, assuming no change to our reserve coverage. Moving to our current outlook. We have provided detailed guidance for both the full year and the first quarter consistent with previous fourth-quarter earnings calls. We expect full-year 2021 total loans to be stable with 2020, on both an average and end-of-period basis reflecting the full‑year headwinds of commercial line utilization declines from the second half of 2020 and PPP forgiveness, offset by the benefit of the consumer loan added at the end of 2020, and our forecast of $2 billion of new PPP loan originations in 2021.

Average commercial balances are expected to decline in the low- to mid-single-digits range compared to 2020, while consumer balances should increase in the mid‑to‑high-single-digits range. For the first quarter, we expect average total loan balances to increase approximately 2% to 3% sequentially, reflecting relative stability in the C&I portfolio, continued strength in the auto portfolio, and growth in residential mortgage and other consumer loans, partially offset by a 1% decline in CRE. Given the loan outlook combined with our expectations for the underlying margin to be around 3% reflective of the structure rate protection from our securities and hedge portfolios, we expect NII to decline approximately 3% next year and also decline around 3% in the first quarter relative to the fourth quarter assuming no deployment of our excess liquidity We expect non-interest income to increase 2% to 3% in 2021, which includes the 1% headwind from lower TRA income in 2021. If not for the TRA impact, our fee expectations would be for 3% to 4% growth, which includes the impact of approximately $40 million in foregone annual revenue associated with our business exits as part of our expense savings program.

For the first quarter, we expect fees to increase mid‑single digits year over year, which is not -- which is a 9% to 10% decline sequentially reflecting seasonal impacts such as the lack of TRA revenue and lighter other non-interest income partially offset by the seasonal uptick in wealth revenue from tax preparation fees in the first quarter, and significantly stronger mortgage revenue. We expect top‑line mortgage revenue to improve $30 million to $35 million in the first quarter, relative to the fourth quarter, and also anticipate stronger results in our loan and lease indication businesses. We expect full-year 2021 non-interest expense to decline approximately 1% relative to the adjusted 2020 expenses, driven by the impacts of our expense reduction program, but partially offset by expenses associated with strong fee growth, servicing expenses associated with the consume -- consumer loan portfolio purchased in the fourth quarter, and continued investments to accelerate both our digital transformation and our sales force and branch expansion in our growth markets. As is always the case for us, our first-quarter expenses are impacted by seasonal items associated with the timing of compensation awards and payroll taxes.

Compared to the first quarter of 2020 reported expenses, we expect total expenses to be flat. On a sequential basis, excluding seasonal items, our total first-quarter expenses are expected to be down approximately 3% to 4% from the fourth quarter. We currently expect to generate year‑over‑year adjusted positive operating leverage in the second half of 2021, reflecting our expense actions, our continued success growing our fee‑based businesses, and our proactive balance sheet management. We expect total net charge‑offs in 2021 to be in the 45- to 55-basis-point range.

If the proposed stimulus passes, we would expect to be at the lower end of that range. In summary, our fourth quarter and full-year 2020 results were strong and continue to demonstrate the progress we have made over the past few years toward achieving our goal of outperformance through the cycle. We will continue to rely on the same principles, disciplined client selection, conservative underwriting, and a focus on a long‑term performance horizon which gives us confidence as we navigate this environment. With that, let me turn it over to Chris to open up the call for Q&A.

Chris Doll -- Director of Investor Relations

Thanks, Jamie. [Operator instructions] Melissa, please open the call for questions.

Questions & Answers:


Operator

Thank you. [Operator instructions] Your first question comes from the line of Scott Siefers from Piper Sandler. Your line is open.

Scott Siefers -- Piper Sandler -- Analyst

Good morning, guys. Thanks for taking the question.

Greg Carmichael -- Piper Sandler -- Analyst

Hey, Scott.

Scott Siefers -- Piper Sandler -- Analyst

Just wanted to ask about sort of the -- the C&I outlook. You know, near term, I -- I guess I would -- would characterize the commentary -- the commentary as constructive, but yet the outlook for just I think a 1% increase in line utilization in the second half, it seemed to me it stands in a bit of contrast from some of your peers who seem to require a more robust acceleration in C&I later in the year. I guess I'm just curious for maybe more color on how you're thinking about the potential rebound in C&I as the economy normalizes around, say, midyear or so.

Greg Carmichael -- Piper Sandler -- Analyst

Hey, Scott. This is Greg. First of all, I'd say we were encouraged by the -- by the fourth-quarter pipeline growth that we've seen up significantly over third quarter, albeit slightly down from where we were in 2019. So, we're seeing progress out there, and it's really -- it's pretty broad-based across all of our regions and across our verticals.

So, we're -- we're encouraged by the strength we're seeing there. Obviously, there's a lot of unknowns going in as we go into 2021, additional stimulus, the vaccines, and so forth, the recovery. So, it's a hard thing for us to gauge what the expectations are. But there's a lot of liquidity out there right now.

So, we're optimistic that the vaccines get distributed appropriately and we get the economy back in full swing second of the year. Those numbers might look stronger, but right now, we're just being -- at the end of day, conservative but encouraged by the pipelines that we've seen already. And Tim, if you have anything more to add.

Tim Spence -- President

No. I -- I think that's absolutely right. As you said, I think we're particularly pleased with the pickup in middle-market production that we saw in the fourth quarter and the continued strength in the industry verticals like renewable energy, technology, and healthcare where the bank has made fairly significant strategic investments over the course of the past several years.

Scott Siefers -- Piper Sandler -- Analyst

OK. Perfect. Thank you. And -- and then just within your guidance for the full year, I know that you guys conservatively don't include the -- the PPP impact.

Just curious however to the extent that they -- they do come through, how are you expecting those to ebb and -- ebb and flow? You know, will most of the forgiveness from the -- the first round expect them to be sort of a first-half event? Or how do you see that flowing through?

Jamie Leonard -- Chief Financial Officer

Yeah. Scott, it's Jamie. For PPP in total, NII, we expect about $150 million in 2021 which includes about $60 million in accelerated forgiveness fees, which compares to about 100 million of total NII in 2020, which included only $10 million in accelerated forgiveness fees. And right now, in our outlook, we expect first-quarter forgiveness fees to be in line with the fourth quarter.

Perhaps that's -- we'll -- we'll do better than that from a forgiveness perspective. We've got about $400 million or a little bit less than 10% of the 2020 originations forgiven. And so, as we model it out, we expect the majority of the fees from the 2020 originations to be forgiven in the third quarter as borrowers approach that 16-month time horizon of, you know, needing to make payments or -- or have it forgiven. So, right now, you know, we expect the back half of the year to have a little bit more accelerated fees.

And then as we mentioned in the prepared remarks, we expect the 2021 round of PPP to be about $2 billion in originations, and then that will accrue at a lower rate just -- just given the five-year term on those loans. So, we expect about 1.8% yield prior to any of the forgiveness fees.

Scott Siefers -- Piper Sandler -- Analyst

Perfect. All right. Thank you all very much.

Operator

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

Ken Usdin -- Jefferies -- Analyst

Hi. Thanks. Good morning, guys. Jamie, on the -- on the -- on the fee side, it's good to hear you reiterate that up 3% to 4% core growth excluding TRA.

I -- I heard your core -- your comments about mortgage for the first quarter. But can you just give some more color in terms of what you expect to drive that-that growth this year and -- and how mortgage fit into that equation?

Jamie Leonard -- Chief Financial Officer

Sure. I think some of the momentum coming off of 2020 will lead to a very successful 2021 in the fee businesses. You know, we did grow households 3% on the consumer side, and then the investments we made and the capital markets' offerings over the past several years, that should bear fruit in 2021. So, when you line up the fee categories for 2021, I expect high-single-digit growth in treasury management and commercial banking, which does include the capital markets business, mid-single-digits growth in consumer deposit fees, wealth and asset management, and card and processing; and then low single-digit growth in mortgage.

Ken Usdin -- Jefferies -- Analyst

Got it. So, even with the strong year, given some of that -- I guess -- I guess, it was a capacity point you made earlier about mortgage. You still think mortgage can grow this year. Is that just because you see production pulling through, or do you see less of the MSR drag over time? Just maybe little more color on the mortgage side.

Thanks.

Jamie Leonard -- Chief Financial Officer

Yeah. On -- on mortgage in the fourth quarter, there were capacity constraints and there was the headwind from our decision to portfolio $250 million of our retail production. Those loans will close in the first quarter, and then you will see that show up in the residential mortgage balances and held for investment. And from there, we do expect the capacity constraints to be behind us.

And from an MSR perspective, this environment for servicing is certainly challenging. We expect that to abate in the second half of 2021. And all-in, you know, the low -- the low-single-digit growth for 2021, I think, is a -- a-- a very achievable number for us.

Ken Usdin -- Jefferies -- Analyst

OK. Understood. Thanks -- thanks a lot, Jamie.

Operator

Your next question comes from the line of Peter Winter from Wedbush Securities. Your line is open.

Peter Winter -- Wedbush Securities -- Analyst

Good morning.

Greg Carmichael -- Piper Sandler -- Analyst

Good morning, Peter.

Peter Winter -- Wedbush Securities -- Analyst

I wanted to ask about capital. And could -- if you change -- if you could just go over the -- the capacity, what's left in the existing share buyback, how much you have left. And then secondarily, if -- if the Fed were to lift the restrictions on share buybacks, just how you're thinking about capital returns?

Jamie Leonard -- Chief Financial Officer

Yeah. Thanks for the question, Peter. In 2019, we approved a $100 million share repurchase program. We have 76 million shares left under that program.

So, call it, $2.4 billion. Right now, for 2021, if you assume the Fed continues their trailing 12-month net income test and you look at our guide on earnings, you should generate about $1 billion of capacity assuming no additional reserve releases. And if you look at our capital from a spot basis at the end of December 31, 2020, we have about $1.2 billion of excess, even with the loan performance that we've had. So, you know, I think for 2021, should the Fed open the window, $1 billion or so is a -- I think everything triangulates to that level.

Peter Winter -- Wedbush Securities -- Analyst

OK. That's -- that's helpful. And then you guys lowered the -- the net charge-off guidance from December where December I think was 55 basis points to 65 basis points. What -- what gives you the confidence that, like, there's nothing looming, especially with some of these loans coming off deferral, assuming we don't get an additional stimulus package?

Richard Stein -- Chief Credit Officer

Yeah. Hey. It's Richard. Thanks for the question.

I -- I think it really comes down to the -- the activity we have from a risk-management perspective, the confidence we have in the underwriting, and our portfolio management. We continue to see consumer loss rates lower than normal. We saw them lower than normal in -- in 2020. We expect that to continue in '21.

As the -- the impact of stimulus rolls through the portfolio, remember, our portfolio is concentrated in prime and super prime. We have a white -- weighted average FICO of close to 760. So, confidence in -- in what's happening there from a -- from an activity standpoint. We do expect commercial office to tick up a little bit from the -- into the high-40s, low-50s.

And that's just going to be a function of -- of the normal migration we see in commercial. We highlighted some -- some potential at-risk industries in -- in the -- in the deck. But we've seen -- we've seen criticized assets come down, as Jamie mentioned. We've seen positive resolutions in our workout group.

And so, just given what we see in the portfolio, where we see performance restabilization across a number of sectors, we have a lot more confidence in that range.

Peter Winter -- Wedbush Securities -- Analyst

That's great. Thanks very much.

Operator

Your next question comes from the line of Terry McEvoy from Stephens. Your line is open.

Terry McEvoy -- Stephens Inc. -- Analyst

Hi. Good morning. Maybe start with the question for -- for Jamie who I guess by now, we'll call the chief cook and bottle washer at Fifth Third. So, a question for Jamie.

You know, pretty clear on kind of the securities purchases and your thoughts there on -- on holding cash. I guess my question, are there opportunities to purchase loans, like the government-guaranteed loans that you had in the fourth quarter, as well as the decision to just hold more mortgages on the balance sheet as you -- as you think about the -- the next 12 months?

Jamie Leonard -- Chief Financial Officer

Yeah. And that's essentially what we did in the back half of 2020. In the third quarter, we repurchased our own Ginnie Mae forbearance pool. Now, it's about $750 million that came out our balance sheet.

In the fourth quarter, we purchased the servicer's pool to the, you know, to the tune of $2.1 billion, as well as taking the $250 million of retail production and putting it on the sheet. I think, for now, we've -- we've done a lot of work on the residential mortgage portfolio to improve it, and we think the returns are incredibly attractive. I think going forward, I'd like to see, you know, the -- the loan growth be in other categories, just given the convexity risk you have in residential mortgage, and that we've -- we've done enough. So, that's why we expect in the first quarter to get back to selling all of our production.

But, again, I think the trade that we were able to execute was a nice deployment of excess cash. And certainly, a far better return than just buying mortgage-backed securities. And we think the ROA, you know, is 2% or so on that transaction versus, you know, security purchases are, you know, probably 1% to sub-1% right now.

Terry McEvoy -- Stephens Inc. -- Analyst

Thank you. And then just as a follow-up, just looking at the CECL allowance, I'm curious, what was behind the increase in commercial mortgage and commercial construction? Other categories drifted lower. Those two were -- were up higher over -- quarter over quarter and I was hoping to get some insight there. Thank you.

Richard Stein -- Chief Credit Officer

Yeah. It's-it's Richard again. I -- look, in -- in commercial real estate, we've seen continued negative migration. That -- that's just a portfolio, an asset class that has a longer -- a longer tail in terms of when problems arise and a -- a longer tail when they're going to be resolved.

So, we saw criticized assets go up in that sector. And, you know, and so, we -- that, plus some qualitative adjustments, because we don't believe that the models fully reflect the -- the variables that are impacting some of these subsectors like hospitality and retail in terms of the time of recovery. And so, just given the -- the asset migration trends and some qualitative adjustments, that drove the ACL com -- commercial real estate higher in the quarter.

Terry McEvoy -- Stephens Inc. -- Analyst

Great. Thanks again.

Operator

Your next question comes from the line of Ken Zerbe from Morgan Stanley. Your line is open.

Ken Zerbe -- Morgan Stanley -- Analyst

Hi. Great. Thanks. First question.

Just in terms of the NII guidance, I just want to make sure that the -- or question whether the -- the down 3% in 2021, does that include your expectation of accelerated PPP fee income?

Jamie Leonard -- Chief Financial Officer

Yeah. Thanks for the question. So, we do include the $2 billion of additional 2021 PPP in our guide. I think the NII guide of down 3%, that trajectory could improve, I guess to the point of the first question on the call today, you know, through higher commercial line utilization because we do assume just a small uptick in the back half of the year.

And, you know, frankly, there is, you know, not much we can do about that. It's a -- a borrower/customer demand situation. A steepening yield curve benefit would also help. We anchor our guidance on the January 4 implied forward curve.

So, perhaps we'll -- we'll do a little bit better there. And should the curve steepen significantly, then we would have opportunity to deploy excess cash. Third, with regard to the PPP, we're assuming $2 billion of originations. But as we -- and perhaps that's a conservative number because as we sit here today, we've submitted over $1 billion in apps in just the first two days.

And then finally, as Greg mentioned, perhaps there'll be better commercial loan production through higher borrower demand and capex and inventory build -- buildups. And from a production expectation perspective, we're expecting 2021 commercial loan production to be up about 20% or so from 2020, but still, you know, down 7% or so from 2019 levels. So, our outlook assumes, you know, improvement -- improvement, but not returning to a 2019 type of economy.

Ken Zerbe -- Morgan Stanley -- Analyst

Got it. OK. All right. And just my second question, I -- I think Greg mentioned the 9.5% receipts you want to target currently, which I totally understand.

But you did make a comment that you would kind of reconsider that as the economy gets better. Can you just help us to mention -- like, let's assume that the economy is fully better? Like, where -- where is a good level for Fifth Third to run on CET1?

Jamie Leonard -- Chief Financial Officer

So, prior to some of the challenges that we're cropping up in the environment. We had a 9% target. So, should the economy, you know, improve, as -- as we hope it does in the back of 2021, 9% I think is a logical next step for us. When we stress-test our balance sheet, we believe our balance sheet has a risk profile that could be run in the 8.5% to 9% range.

Our stress capital buffer is currently 7%, so I guess the Fed's perspective is much lower than that. But I think for us, you know, for this year, we're targeting 9.5% and we'll evaluate that target as we see how the economic unfolds.

Ken Zerbe -- Morgan Stanley -- Analyst

All right. Thank you.

Operator

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

Bill Carcache -- Wolfe Research -- Analyst

Thank you. Good morning. We saw back book repricing headwinds to loan yields persist throughout the last SREP cycle, and not just for Fifth Third, but across the banking system. I believe about half of your loan portfolio is vary -- variable rate and indexed to the short end of the curve, but there's still some repricing yet to come through.

Would -- would you expect a similar dynamic with further pressure on loan yields to come in this SREP cycle as well? Maybe if you can just speak to that and maybe compare and contrast what -- what's different about this cycle.

Jamie Leonard -- Chief Financial Officer

Well, I think that's a -- a good observation and we are experiencing that phenomenon. And we saw it in the fourth quarter NIM and it's a factor in our first quarter guide. Right now, from C&I production levels, just given the floating nature of the portfolio, yields are roughly in line, maybe 5 bps below the current portfolio. But on the consumer side, which is more a fixed rate in nature instruments, we are seeing new production yields 25 to 35 basis points below portfolio yields.

And so, that is certainly a -- a headwind in our NII outlook.

Bill Carcache -- Wolfe Research -- Analyst

Understood. And separately -- sorry if I missed this, but I -- I wanted to ask about -- if you could give some color on new money rates in light of the curve steepening that we've seen. On the security side, it seems like some of the dynamics around QE have led agency MBS spreads over treasuries to turn negative, which would seem to temper some of the benefits of the steeper curve. But I was hoping that you guys could discuss some of the opportunities that -- that you see there.

Jamie Leonard -- Chief Financial Officer

Yeah. I think -- it's a -- it's a great question, and you're -- we're seeing a divergence in practice across the banks. Our view in terms of, you know, what the rate environment would need to progress to in order to put our excess liquidity to work is we would like to see 50-basis-points-or-more improvement in the entry points, either through the spread widening or curve steepening. A lot of banks, you know, to your point, defined in on the 25 basis points of steepening or even before that.

But credit spreads have tightened, you know, 10 basis points or more over that time so that the net entry point improvement to us is not that compelling. In fact, you know, by our math, if you bought in the third quarter, even in the first couple months of the fourth quarter, you lost $2 in value for every $1 in carry you picked up over that period of time. So, you still have more risk should the curve steepen further, and we don't want to be stuck in a bad trade chasing balances at what -- at what are still historically low levels of rates. So, the good news for us is, you know, we are very well-positioned in the investment portfolio.

We have the luxury of time. Portfolio of cash flows are about $1 billion a quarter is how we're modeling it. So, we just think being patient -- we can afford to be patient, and we'll move when we think we're getting the appropriate risk-return in the environment.

Bill Carcache -- Wolfe Research -- Analyst

That's very helpful. Thank you for taking my questions.

Operator

Your next question comes from the line of Erika Najarian from Bank of America. Your line is open.

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

Hi. Good morning. My first question is a clarification question. You know, Jamie, you mentioned $1 billion in buyback capacity for the year.

But that would imply that the Fed expands its income test beyond the first quarter. Correct?

Jamie Leonard -- Chief Financial Officer

Yes. $180 million in the first quarter and then any additional repurchases are certainly subject to the Fed allowing us to do so.

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

So, if they lift the income restriction, I guess, number one, what are your plans for DFAS participation this summer? And number two, where could that capacity grow to if you were not subject to that income restriction after first quarter?

Jamie Leonard -- Chief Financial Officer

So, the -- I'll take the second part of the question first because that's the easier one. Right now, against our target of 9.5%, we have a $1.2 billion of excess capital. So, until the economy shows, you know, significant improvement, you know, $1.2 billion would take us down to our target. So, I think that's a fair number to use.

The income test would deliver a little bit less that. In terms of the CCAR opt-in, you know, it's funny because we've discussed this as a team and, you know, we officially have until April 5 to decide. But right now, given that our binding capital constraint is our own internal target of 9.5% versus the Fed's prior stress capital buffer for us at 7% or even 7.2% in their COVID test, should they adopt those December results in the SEB. You know, frankly, you know, we feel like our team deserves a respite following the six stress tests we did during the pandemic.

And there's essentially nothing to be gained by participating. So, I think for now, if I had to decide today, I would decide not to opt in.

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

Got it. And just my second question is on the net charge-off outlook for this cycle. You know, should we think of that 45 basis points to 55 basis points as your quantification of the peak, or are you expecting, you know, despite to be delayed in 2022? I'm just trying to square that with a 2.65% reserve ex-PPP.

Jamie Leonard -- Chief Financial Officer

Yeah. Yeah. So, it's interesting when you -- when you look at the guide for us, the 45 basis points to 55 basis points, you know, for the first quarter, we actually expect charge-offs to be in the 40-basis-point to 45-basis-point range and grow during the year. And to your point, you know, as losses get pushed out, but we certainly expect, you know, the 45-basis-point to 55-basis-point range to be the peak, even though some of the additional stimulus are -- are -- are, you know, elongating the cycle.

I think ultimately, the -- the peak of the cycle keep -- keeps coming down, which is why we continue to the guide to a better and better number. So, right now, I think 45 basis points to 55 basis points will be the -- the peak for us.

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

Got it. Thank you.

Operator

Your next question comes from the line of John Pancari from Evercore ISI. Your line is open.

John Pancari -- Evercore ISI -- Analyst

Good morning.

Greg Carmichael -- Piper Sandler -- Analyst

Good morning.

John Pancari -- Evercore ISI -- Analyst

On the -- back to the capital topic, given your thoughts on capital and where you stand in terms of excess, can you just give us your updated thoughts on M&A potential in terms of both bank opportunities and what your thoughts are there, as well as on the non-bank side? Thanks.

Greg Carmichael -- Piper Sandler -- Analyst

John, this is Greg. Good question. Good enough as you might imagine. First off, we haven't changed our position.

We're really focused on non-bank M&A opportunities as evidenced by our recent acquisition of H2C that really supports our not-for-profit-health-care part of ours -- our -- our vertical. So, it's really about making sure that we are additive to both our products and our service capabilities for our fee-based business whether it be wealth and asset management, our payments capability, our capital markets capability. That's where we're spending our energies right now, and in really getting out of businesses that are more hobby such as we talked about our property and casualty business that wasn't really providing the returns we're looking for and we couldn't get the scale. So, our focus is going to continue to be on those opportunities to enhance our business value proposition and grow those fee businesses.

That's what we've been focused on the last five years mainly. From a bank M&A perspective, it's not on our -- our agenda right now. If -- as always, we would -- we would assess an attractive situation. But today, that's not our focus.

Our focus is on non-bank, you know, M&A that adds to the businesses we just discussed.

John Pancari -- Evercore ISI -- Analyst

Thanks, Greg. And then on -- on that front, on the non-bank front, I know you mentioned wealth and asset management. Just to confirm, is that -- is it both areas that you'd be interested in? I know you've expressed an interest in wealth, but you would also be interested in the institutional asset management side as well.

Greg Carmichael -- Piper Sandler -- Analyst

No. No. Not the institutional side. We're pretty much focused on --on like I said, the -- the wealth and asset management side where we made acquisitions like Franklin Street Partners in -- in North Carolina.

That's pretty much our focus right now on the wealth side of business.

John Pancari -- Evercore ISI -- Analyst

OK. Got it. That -- that's helpful. And if I can ask just one more -- one more question.

In -- in terms of the securities portfolio, just wanted to get an update on -- on how the -- the underlying credit within the securities focus is holding up? I know you have a CRE concentration there in terms of CMBS but just wanted to kind of get an updated -- an update there on what you're seeing in terms of the performance of the underlying securities, If there's any stress there evolving. Thank you.

Jamie Leonard -- Chief Financial Officer

Yeah. We're invested in about $3.5 billion of non-agency CMBS, and it's holding up well. The delinquency rates are mid- to high-single digits, but the credit enhancement right now is approaching 40%. And we only invest in the super senior AAA-rated tranches, so that we're at the top of the repayment stack.

So, you know, we're not concerned about the credit exposure in the non-agency book.

John Pancari -- Evercore ISI -- Analyst

Got it. OK. Great. Thank you.

Operator

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

Mike Mayo -- Wells Fargo Securities -- Analyst

Hi.

Greg Carmichael -- Piper Sandler -- Analyst

Hi, Mike.

Mike Mayo -- Wells Fargo Securities -- Analyst

I -- I -- I think I heard you correctly. So, you're kind of guiding for negative operating leverage in the first half of the year and positive operating leverage in the second half of the year and kind of flattish for the year as a whole. Is that kind of fair summary of what you guys said?

Jamie Leonard -- Chief Financial Officer

Yeah.

Mike Mayo -- Wells Fargo Securities -- Analyst

OK. So, the quest -- the question really is, on the spending -- and I'm sure there's a lot of opportunities to spend money. But from the strategic landscape, you know, you have a lot of large banks that are opening up branches in some of your markets. Others that are saying, you know, branch-like, digital-first.

Some are trying to use their credit cards in the markets to cross-sell. Others are moving kind of middle-market businesses into your area. So, as it relates to the kind of the competitive banking wars in your markets, you know, how do you think about that? I mean, are you seeing any impact yet? Are you worried about that over the next five years? Is it much to do about nothing, or is this a major strategic threat and you say, hey, we need to spend more money on, you know, X, Y, and Z?

Greg Carmichael -- Piper Sandler -- Analyst

And, Mike, let me start. This is Greg, and I'm going to throw it to Tim. This is a great question for him also. You think about the investments we are making, we still expect to run when the expense base is down next year as we continue to make the strategic investments.

Our strategies -- and you've heard this over and over, have not changed in the last five years for as how we're focused on the businesses which is digital transformation, feeding our business with organic opportunities to grow our businesses such as our fee-based businesses I just discussed a moment ago, and add -- and add to the acquisitions. Our fintech placed to add to our products and capabilities to deliver through our customers our -- our services. So, we're going to continue to focus on that. You know, we're very competitive.

You know, the household growth that we've seen at 3%, strong growth in our Southeast markets. You know, we're a leader in the -- in the -- in Chicago market. So, we like those investments. So, we're very comfortable in ability to compete.

We think our investment structure we have in place today allows us to continue to grow our franchise and be extremely competitive. So, we're not going to change that. We're going to continue to feed the opportunities that we think create the greatest value for our shareholders. Let me let Tim add for just a second.

Tim Spence -- President

Yeah. No. I -- I mean, Mike, new competition is always something that we watch closely. And I think I would not isolate it just to the folks who are traditional financial institutions that are building into our markets.

We pay a lot of attention to the fintech companies, particularly given that in some cases, they are arbitraging the regulatory apparatus at the moment in a way that creates imbalanced competition. I think the point that Greg made that, to me, is the most important one is we have, on a sustained basis, continued to gain share, even in our highest-density markets over the course of the past three or four years on primary banking relationships, which we view as being the best measure of market share because the decisions you make on pricing, a deposit product or you domin -- domicile headquarter deposits or otherwise have a big impact on the FDIC numbers that you -- you sometimes see people use on a period-to-period basis. So, the strong household growth we have seen across the franchise in particular and focused markets like Chicago and the Southeast, as Greg mentioned on the consumer side of the business, and the strong co-relationship growth that we continue to see out of our middle-market franchise are the things that give us confidence in our ability to continue to compete.

Mike Mayo -- Wells Fargo Securities -- Analyst

And I think -- you say 3% household growth over what time frame, and that -- that's an interesting way to think about it because what you're making for household is -- is depressed from a -- the low-rate environment. So, the 3% household growth over the past year or -- or what time frame?

Tim Spence -- President

Yeah. Yeah. It's 3% household growth over the past year. But if you were to look at our growth in prior years, it would've been in the 2% to 3% range quite steadily.

So, we actually seen some acceleration driven both by the build-out in the Southeast and the -- the growth rates for our Chicago market post-MB of a -- than among the strongest in the franchise and definitely far stronger than we had seen in Chicago when we were Fifth Third on a stand-alone basis.

Mike Mayo -- Wells Fargo Securities -- Analyst

All right. Thank you.

Operator

Your next question comes from the line of Saul Martinez from UBS. Your line is open.

Saul Martinez -- UBS -- Analyst

Hey. Good morning. Thanks for taking my question. I wanted to follow up on Erika's comments and question.

It seems to me like your reserve ratios are -- are just completely inconsistent with your -- your charge-off guidance. Your -- your NCO of -- of 50 basis points at the midpoint, your, you know, and at the peak of the cycle does seem to be suggesting that, you know, the -- the government has effectively played the role of superhero and -- and prevented credit cycle from really even emerging. And your reserves are about 5 times that. And I would guess your weighted average remaining life is not five years.

And that -- that, you know, doesn't even consider that your NCO rates are going to fall from here. So, can you just help me, you know, bridge the gap on, you know, your reserve levels relative to your charge-offs? Because the conclusion would be, you know, you've -- seem -- would seem to me to be that you're -- you're making, you know, an ample level of qualitative adjustments or your probability weighting downside scenarios pretty conservatively and that we should be thinking that it's pretty likely you are going to see pretty significant reserve releases in, you know, coming -- in the coming quarters.

Jamie Leonard -- Chief Financial Officer

Yeah. It's a very good question, and the answer really comes down to the fact that the modeling of the ACL is based on the Moody's hypothetical scenario that -- and that's frankly why we included that in the prepared remarks. Everybody will have that information. It is certainly a scenario that is one, the base scenario is more conservative than our own outlook; and two, does include a 20% allocation to a -- a downside scenario that obviously, we don't expect to happen.

So, by its very nature, delivers an ACL reserve that would be higher than our expectations for losses in this environment.

Saul Martinez -- UBS -- Analyst

So, is your model factoring in that charge-offs that are higher than what you're guiding to in '21.

Jamie Leonard -- Chief Financial Officer

Well, the reserve calculation is a three-year -- for us, a three-year reasonable and supportable period, and that it reverts back over the -- in the remaining years to your historical loss rates. Whereas our guide is our internal modeling over the next 12 months. So, you can have differences in there -- in that, given the different scenarios that are used.

Saul Martinez -- UBS -- Analyst

Right. Yeah. I don't want to belabor this, but like if you're -- if you're saying that this is the peak and your reserves are 5 times that, it just seems hard to disconnect the two to that -- to that degree. It just -- it just seems like there is a --

Jamie Leonard -- Chief Financial Officer

Yeah. I think --

Saul Martinez -- UBS -- Analyst

Things we're aware.

Jamie Leonard -- Chief Financial Officer

Yeah. I think to your question, it's -- if the outlook continues to improve, all other things being equal, the reserve will come down and should come down.

Saul Martinez -- UBS -- Analyst

Right. Right.

Jamie Leonard -- Chief Financial Officer

Our point is -- our point is, we remain conservatively positioned and prudently positioned given the uncertainty in the environment. And we'd like to get through another three to six months and see how this --

Saul Martinez -- UBS -- Analyst

Yeah.

Jamie Leonard -- Chief Financial Officer

Unfolds with vaccine efficacy and the economy turnaround.

Greg Carmichael -- Piper Sandler -- Analyst

I think that's really important.

Jamie Leonard -- Chief Financial Officer

Right. Yeah.

Greg Carmichael -- Piper Sandler -- Analyst

That's really important what Jamie has just said.

Saul Martinez -- UBS -- Analyst

It's a good problem to have. Yeah, so, you know, go ahead, sorry.

Greg Carmichael -- Piper Sandler -- Analyst

Yeah. No. This is -- this is the conversation's growing -- this is a conversation. We're obviously -- that's -- that's on the forefront of how we think about our business.

But we are taking a conservative approach. We do want to wait and see over the next couple quarters how -- how those vaccines play out, how the economic plays out. I mean, you're exactly right. You know, if you look at what we've got modeled versus what are our expectations are, we think there's significant upside for reserve releases as we go into the latter part of this year if things play out as we expect they will.

Saul Martinez -- UBS -- Analyst

OK. Just as a quick follow -- additional question on -- on expenses, just to make sure I'm -- I'm getting the glide path right here. It would seem, you know, based on your full-year and your first-quarter expenses, it would seem like at the midpoint of the range, you would -- you're factoring in about $1.1 billion a quarter of expenses from 2Q to -- to 4Q. And, you know, I guess you get there in 2Q with most of the way there with seasonal expenses going away.

But, I mean, is it fair to say -- like, how do we think about that glide path? And -- and should we be -- should we be thinking that by fourth quarter, with some of these expense initiatives filtered through, you could be even below that $1.1 billion as you -- run rate as you head into 2022?

Jamie Leonard -- Chief Financial Officer

Yeah. It's a -- a good observation. We do have a higher run rate in the first quarter and -- due to the seasonal items that we typically have and that I discussed in the prepared remarks. And, yes, when you model it out, $1.1 billion is a --a fairly good run rate to assume given the revenue projections if fee growth ends up being better than the 3% to 4%, then expenses -- obviously, revenue lines will -- will be higher.

But for our outlook, that are -- you are exactly right. And then the benefit that we might have in the fourth quarter is to the extent our lean process automation and other initiatives pay off sooner than the 2022 time horizon, then you could see some additional improvement in the fourth quarter. But for now, we're expecting $100 million to $150 million of savings to occur in 2022 and not in 2021.

Saul Martinez -- UBS -- Analyst

Got it. OK. Thank you very much.

Operator

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

Gerard Cassidy -- RBC Capital Markets -- Analyst

Good morning, Greg. Good morning, Jamie.

Greg Carmichael -- Piper Sandler -- Analyst

Morning.

Jamie Leonard -- Chief Financial Officer

Hey, Gerard.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Coming back to loan loss reserves, when you take a look at your loan loss reserve on January 1 when, you know, the CECL was put into place for you and your peers, I think your loan loss reserve was about 180 basis points.

Jamie Leonard -- Chief Financial Officer

182 basis points. Yup.

Gerard Cassidy -- RBC Capital Markets -- Analyst

There you go. Clearly, it's higher today. Do you think ultimately -- I don't know if it's '22 or '23 -- but is that a good endpoint that we should look at in terms of, you know, when this whole COVID issue is behind us? And as the second part of this whole loan loss reserving, what's your guys' view on CECL now that we've had it for a year? I know it was a very tumultuous this year, but do you think it's made it more volatile, less volatile?

Jamie Leonard -- Chief Financial Officer

I'll take the first question.

Gerard Cassidy -- RBC Capital Markets -- Analyst

You don't have to answer the two.

Jamie Leonard -- Chief Financial Officer

I'll let Greg answer the second question.

Gerard Cassidy -- RBC Capital Markets -- Analyst

OK.

Jamie Leonard -- Chief Financial Officer

The -- in -- in terms of the 182 basis points and, you know, the day one level, we've spent a lot of time looking at that as to, you know, when should we or if we ever should return back to that day one 182 basis points. And right now, our current thinking is that in order to get there, it will take -- you know, it's going to measured a lot longer than several quarters because we're going to exit this crisis with corporate debt levels -- leverage levels, significant -- significantly higher coming now than they were going in. And you would -- the way the modeling works, you would have to have an economic outlook as good as the outlook was essentially in 4Q of '19. And that might be hard to ever get back to, at least in the next couple of years.

So, I think the bias for all of our reserves across the industry is probably to take a longer period of time. And ultimately if you -- you said if, you know, take a guess as to where that plays out over the next two years. Or at the end of two years from now, would you be at your day one? I'd say we probably are over that number because of the corporate debt levels and because the economic outlook is probably not as favorable as the 4Q '19 outlook was when we adopted CECL.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Got it.

Jamie Leonard -- Chief Financial Officer

In terms of --

Greg Carmichael -- Piper Sandler -- Analyst

Yes. The volatility, absolutely yes.

Jamie Leonard -- Chief Financial Officer

OK.

Greg Carmichael -- Piper Sandler -- Analyst

I mean, obviously, given -- given the CECL methodology and -- and -- and going into a stressed environment, you saw those huge, huge swings that we -- that we're dealing with right now. Then also, it just was necessary to release the reserves. The models haven't been too --there's no one modeled in the pandemic. These are new models, so there's a lot of qualitative adjustments to these models that, you know, where -- there's burns to the uncertainty in front of us right now.

So, it does definitely make some more volatility for us.

Gerard Cassidy -- RBC Capital Markets -- Analyst

No doubt. Greg, here is a bigger-picture question for you when -- when you go down the elevator in the evening, you know, the -- the -- the outlook for the banking industry, including Fifth Third, is positioned very well, assuming as the economy recovers as we all think it will. Those bank stock prices as you know, from your own stock price since the Pfizer announcement right after the election has been fantastic. What do you see as -- and everything is hopefully going to shape up really well this year? But what are the risks that you worry about when you go down that elevator at night?

Greg Carmichael -- Piper Sandler -- Analyst

First off, good question. I think we're well-positioned to be, you know, competitive in the markets that we're in. The investments that we've made I think are in line with our -- our long-term growth expectations and success of our business. So, I feel really good about how we're competing today.

The challenge always is when -- look -- watching these fintech players come forth. I'm not seeing regulatory oversight that we're dealing with, capital expectation, and so forth. So, there's a threat there that we're kind of watching. If they get access to the banking system, [Inaudible], and so forth, that can create some stress for us that I'm very concerned about.

But as far as our investments in fintech entities themselves and investments that we're making, I'm very comfortable with. It's really those -- those fintech players out there that -- that are under the same regulatory framework that we are creating some stress for us, nipping around the edge of our profit pools, and maybe shifting some customer behavior. So, that's probably the thing that keeps me up most at the night. As far as competing those sort of banks, I think we've done all the right things to do that.

Just making sure we keep our eyes open, and we have been on what it looks like we're competing with some of these other non-traditional bank players. To that end, that's why we've made significant investments in our digital capabilities and really create a digital bank ourselves. All our lending products were online available, software products online, service capabilities. And we've made huge investments in our digital capabilities to make sure we're well-positioned to deal with those type of threats.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Great. Thank you, Greg.

Greg Carmichael -- Piper Sandler -- Analyst

Thanks.

Operator

Your last question comes from the line of Christopher Marinac from J. Montgomery Scott. Your line is open.

Christopher Marinac -- Janney Montgomery Scott-- Analyst

Thanks. Greg, just leveraging off of your last answer to Gerard. Do you see fintech acquisitions as a necessary item in the future or do you just want to be a good customer of these companies?

Greg Carmichael -- Piper Sandler -- Analyst

You know, I think, once again, we've been -- we've either a partner or acquirer of fintech opportunities. Once again, it gets back into our strategy whether -- it's buy, partner, then build. So, we really want to focus on it. The technology and the capabilities are already out there, and it fits into our strategic direction with respect to how we're going to, you know, offer or how we're going to offer it, you know? And with the opportunity, it looks like, from a growth perspective, we like to buy that capability if it's already there.

It's quicker way to get for the market. If we can't do that, you can watch us do numerous fintech partnerships to allow us to get the capabilities through that type of relationship. And if we can't do that, you'd watch us build, and build those capabilities. That's really been our mindset over the last decade with respect to how we handle fintechs or how we address those opportunities.

Christopher Marinac -- Janney Montgomery Scott-- Analyst

Great. Thanks very much and thanks for all the information this morning.

Greg Carmichael -- Piper Sandler -- Analyst

Thank you. Take care.

Operator

There are no further questions at this time. Mr. Doll, I'll turn the call back over to you.

Chris Doll -- Director of Investor Relations

Thank you, Melissa, and thank you all for your interest in Fifth Third. If you have any follow-up questions, please contact the IR department and we would be happy to assist you.

Operator

[Operator signoff]

Duration: 71 minutes

Call participants:

Chris Doll -- Director of Investor Relations

Greg Carmichael -- Piper Sandler -- Analyst

Jamie Leonard -- Chief Financial Officer

Scott Siefers -- Piper Sandler -- Analyst

Tim Spence -- President

Ken Usdin -- Jefferies -- Analyst

Peter Winter -- Wedbush Securities -- Analyst

Richard Stein -- Chief Credit Officer

Terry McEvoy -- Stephens Inc. -- Analyst

Ken Zerbe -- Morgan Stanley -- Analyst

Bill Carcache -- Wolfe Research -- Analyst

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

John Pancari -- Evercore ISI -- Analyst

Mike Mayo -- Wells Fargo Securities -- Analyst

Saul Martinez -- UBS -- Analyst

Gerard Cassidy -- RBC Capital Markets -- Analyst

Christopher Marinac -- Janney Montgomery Scott-- Analyst

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