With $9.03 billion in deposits in Kentucky, Fifth Third Bank has the third-highest national market share at 7.6%, according to the FDIC’s mid-2022 annual deposit market share report.
PNC Bank has 10.6% of the Kentucky market and JP Morgan Chase has 9.4%, but the Commonwealth represents a smaller portion of those banks’ business. Kentucky accounts for 5.4% of Fifth Third’s deposit base, but only 2.8% of PNC’s deposits and a paltry 0.5% for Chase, the state’s largest bank.
The Lane Report recently spoke with Tim Spence, CEO of Cincinnati-based Fifth Third, and Kimberly Halbauer, Kentucky market president. [Editor’s note: The interviews occurred prior to both the Federal Reserve Open Market Committee’s Nov. 2 vote to increase benchmark interest rates by 0.75 percentage points and the release of the third-quarter gross domestic product numbers showing 2.6% growth.]
Mark Green: The Fed raised benchmark interest rates by another 0.75 percentage points to a 15-year high and more hikes are on the way. What adjustments is Fifth Third making as a result?
Tim Spence: Most of the adjustments we make are driven less by specific rate hikes and more by what the rate hikes indicate, which is an environment that has a lot of uncertainty. It is clear that there is a dynamic directly related to the increase in interest rates in terms of debt service and liquidity. But when you look at the global backdrop and the dynamics around the world — whether it’s the (September) UK currency crash or the dynamics around geopolitical instability — we’ve decided not only to look after customers, but also to make sure that we proceed cautiously and we have a fairly balanced stance.
We strongly believe in the markets we operate in and their vitality. I think of Kentucky as a gateway between the Midwest and the South that is very well positioned to take advantage of economic areas that will have good long-term growth prospects, including the resurgence of domestic manufacturing and onshore supply chains. We need to pursue those opportunities while making sure we’re doing the things we need to do to run a business that’s doing well, even if the Fed has to plunge the economy into recession to reduce inflation. control.
MG: How does Fifth Third view the Kentucky market? is it different than elsewhere?
Tim Spence: Kentucky is very important to Fifth Third. Our headquarters is literally on the border. This is a big market for the bank. This is a strategic market for us because of our focus on US manufacturing and the investments we are making to help rebuild US supply chains and transition the economy to electric vehicles and renewable energy as a complement to fossil fuels. When you look at markets that are big for you, have positive long-term growth prospects, and are home to industries that are focused for your business, that becomes an important market.
Kimberly Halbauer: Fifth Third would be missing a large part of our footprint if we didn’t have a presence in Kentucky. This market and community is important to our overall strategy. In particular, we are very excited about the expansion of our team in Kentucky. Most notable is the hiring of the only investment banker in the state of Kentucky.
We hired Matt Ward, who recently joined us from Truist. He was market president for Truist and had experience at JP Morgan in the investment banking world. We made a commitment like no other when we hired someone to focus on capital markets and corporate investment banking in the states of Kentucky and Tennessee and southern Indiana. This is a big difference for us in the market.
Having grown up in this market, he has earned the trust of business owners across the country to help guide them through transitions – growing and acquiring new business, transitioning assets to the next generation, selling to strategic partners or enabling growth through mergers and acquisitions. He understands some of the unique dynamics going on in Kentucky better than some of the other people who fly in from San Francisco, Chicago and New York.
In wealth management, we have acquired some influential talent from PNC, JP Morgan and US Bank over the past year. We include opportunities to further promote and nurture our existing talent across the organization.
MG: Do you foresee economic conditions improving, staying roughly the same, or worsening over the next few years?
Tim Spence: “Divergent” is the word I would use. In general, the US economy is a consumer economy, and consumers are actually in good health. Wage inflation has followed general inflation. A large portion of the US population has been able to lock in very low mortgage rates, which means their housing costs are in good shape. And there are about twice as many jobs as there are job seekers. Consumer health as a function of their earnings keeps pace with the cost of living.
Nevertheless, segments of the population are much more exposed. People who rent instead of own their homes and earn less than $50,000 a year are the segment that is currently under the most pressure. Rents continue to rise in most markets and they spend a higher proportion of their incomes on food, energy and gas than other segments of the population. We are a little worried about this segment.
On the commercial side of the equation, businesses have generally recovered well and have been able to pass on the increase in input costs in the form of price increases, which is partly why you’re seeing the price inflation that we’re having. But there are segments of the market – including some segments of commercial real estate – that are more exposed to interest rate increases because they have high amounts of leverage and variable rate structures. I expect little distress in this sector of the economy.
MG: Does a fifth take a position on whether you expect a recession?
Tim Spence: Business cycles and Father Time are unbeatable (at creating recessions) if you look at it over a long enough time frame. We are in a technical recession if you look at it, as measured by two consecutive quarters of GDP contraction. Our crystal ball is no better than the Fed’s, and (Fed Chairman Jerome) Powell has been pretty clear in his comments since (the Fed’s August annual symposium in) Jackson Hole that he believes it is highly unlikely that there will be painless way to tame inflation. . I’d say a recession is more likely than not in the next 24 months.
MG: Trend reports that the biggest banks—one of them is Fifth Third—are incorporating artificial intelligence to improve operations. Are you and if so how?
Tim Spence: Yes, but there are broader dynamics of the US economy over the next 10 years that have been slightly underreported. Over the next decade, more people will retire each year than graduate from high school and college combined. The byproduct is that we will be short of labor in general. When I talk to business owners, this is still the No. 1 concern. 1. This is not macroeconomics; it is actually a labor shortage. Everyone will have to find ways to invest in technology that improves productivity because we simply won’t have enough workers in the US to do all the work that needs to be done.
So we absolutely use artificial intelligence. We use digital tools. (However) we do not believe in the operation of unsupervised artificial intelligence in our environment. We use techniques such as machine learning to develop models. But don’t let these models adapt to your environment in real-time when they’re busy. Use development models and then rebuild the models.
MG: Banks are traditional and conservative, but in a position where they have to adopt the most modern technology in their operations – AI, Internet of Things, data analytics. It seems like Fifth Third is taking a cautious approach to embracing something that sounds dramatic.
Tim Spence: Three quarters of all transactions carried out by our customers are electronic today. Technology is actually the primary way we interact with our customers, but it’s still not the most important way. Even in a world where we provide great digital channels and allow people to do simple things themselves, when it comes to solving a problem or making a complex decision, it’s important to have access to someone who can work with you and help you make the right decision, solve a problem or advise.
We have embraced technology, but we start from what the customer needs to achieve and work back from there. The starting point is the things you worry about doing every day. You have to get paid, you have to pay for things, you have to manage liquidity. We’ve made very thoughtful use of software and analytics to build solutions for customers that help them do these things better.
MG: Do you anticipate a higher rate of mergers and acquisitions in Kentucky?
Kimberly Halbauer: The economic cycle dictates this, but we have seen significant activity. We continue to see M&A activity on both sides. When you look at the aging population of business owners, they are always thinking about an exit strategy. It could be a transition to the next generation, a sale to employees, a sale to a strategic partner, a sale to private equity. A business owner has many options. Our goal is: How can we become part of a team that helps evaluate the pros and cons of the opportunities that might be presented to them?
MG: What type of business loan customer does Fifth Third favor?
Kimberly Halbauer: I’d like to say that at Fifth Third, we have an opportunity to be all things to most people – not all people, but most people. We have the opportunity to serve very small businesses through our network of branches, and we do so today throughout Kentucky. We have a business banking segment focused on businesses with $10 million to $50 million in sales revenue. Then we have the mid-market segment, focused on typically privately held companies with $50 to $1 billion in sales revenue. And when you get into a billion-dollar-plus space, there’s a lot of different places you could take it.
Valvoline, for example, is a Kentucky-based company in this $1 billion-plus, publicly traded company. We have a vertical specifically related to chemicals – we will bring expertise and experience to the market to help Valvoline or Ashland in their overall journey, perhaps in the spirit of the renewable and non-renewable energy conversation.
We worked internally to focus on ideas around the bourbon industry. When you think about business lending, it gets interesting because we rarely find a fixed asset that we appreciate. The way we have to look at it is very different because most things, when you bottle them up, box them up, try to hold them, their value starts to drop. But in the spirits industry, especially with bourbon, prices. That’s why we’re looking at how we can be creative to help the bourbon industry – not just the bourbon producers, but also the suppliers, whether they’re coopers, glassmakers or others. That’s similar to what we’re going to do in the long term as we look at the opportunities around what the battery plants in Hardin County and Bowling Green County are going to produce for us.
MG: Kentucky is in the midst of a wave of manufacturing industry transformation. How does Fifth Third fit into the electric vehicle sector as vehicle manufacturers turn to electric?
Kimberly Halbauer: We look at all the components around it. We are currently working on the business plan and trying to understand everything from the impact this will have on consumer growth. You need employees and housing that will happen in these areas. How do we take advantage of this on a consumer level as it relates to the employees who will be moving to the area? Of the leaders who will move into the area? In our wealth management space? With startups and corporate relocations coming up around electric vehicle manufacturing plants?
We will look at the opportunities that exist as these partnerships form. We believe there will be many opportunities for existing companies and new companies to focus on working with tier 1 and 2 suppliers. We are well positioned to service the entire market and the opportunities that present themselves. We will continue to build a business strategy. We hope to continue to attract really positive, good talent and good clients while looking after our loyal customers.