Comerica Deal Is Rare Opportunity, Fifth Third CEO Says

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00:00One of the biggest U.S. bank deals this year, if not the biggest, Fifth Third is buying Comerica

00:05in an all-stock deal valued at $10.9 billion. The combined company will be the ninth largest bank

00:11in America. I'm pleased to say that joining the program now is Tim Spence, chairman, president,

00:16and CEO of Fifth Third Bank. Tim, great to have you on. Congratulations on this. Why this deal?

00:22Why now? Yeah. Good morning, Danny. Thank you. And based on your last segment on Tesla,

00:27I think the next time we have a deal, we're going to announce it by tweeting a photo of a spinning

00:31hubcap. Great idea. Yeah. Listen, we're big believers. We've been patient and quite deliberate

00:40as it relates to M&A because M&A is disruptive and it's higher execution risk than the way that you

00:48would grow organically. So in order for us to ever be interested, we have to believe that it advances

00:55our strategic priorities that there's enough of a return premium that we can compensate for

01:00additional execution risk and that at the end of the integration process, we're not just going to

01:06be bigger, we're also going to be better. And I think this is one of those rare opportunities that

01:11meets all those requirements. The return premium on the deal here is a 22% IRR and about 9% earnings

01:19per share accretion to fifth third shareholders. It's neutral to tangible book value per share

01:24at close, meaning no earn back. And those measures are all better than we can achieve

01:30purely on an organic basis. And strategically, I'm really excited because the retail franchise is the

01:36thing that has really distinguished fifth third over the course of the past four or five years.

01:41We've been the fastest growing large bank in the southeast, the large regional bank in the

01:46southeast during that period of time. And we now get access to Texas as part of our expansion plan.

01:51And in Comerica's case, the crown jewel of their company is this is incredibly strong,

01:57disciplined, middle market and commercial banking franchise. And I just think the opportunities are

02:04so significant to unlock that franchise across the broader combined footprint here. So a great

02:12opportunity to do it. And I think the window seemed right. Deals of this size also, Tim,

02:19$10.9 billion, they would easily take over a year to close just because of an elongated regulatory

02:25review process. What have you heard from regulators this time around regarding this deal? Is it a much

02:31easier environment? Yeah, I think it just empirically, if you look at the speed to approval of the deals

02:39that others have announced, including one that we saw on Friday, not long beyond 90 days, I believe,

02:46from the time of announcement. There's a strong indication here that the M&A approval process is

02:53fact-based and it's going to be quick. And that matters because the second that you make an announcement

02:59like this, you're essentially fighting a battle with time and getting the deal closed quickly so that

03:06you can retain your clients, retain your bankers, and get the combined platform integrated and back to

03:12offense. So certainly the indications that there are accelerated merger approvals are an important

03:20consideration here. With that said, Fifth Third was approved to bid on the failed banks in 2023. I'm pretty

03:26confident we could have gotten a deal approved, you know, in the prior administration as well. It's just nice to know that

03:33the process here will be fact-based, you know, but expedient if recent outcomes are in a guide.

03:40Well, Comerica seems like a ripe target, Tim. There have been lots of conversations, lots of swirling

03:45conversations, I should say, around Comerica, whether they would sail because they had a lot of activists

03:49and investors pushing them because of some of the concerns that they mismanaged some of their interest

03:54rate exposure. Is there some right sizing that you're looking at to be done once this acquisition is

03:59finalized? You know, I think the CEO of Comerica, Kurt Farmer, if he were here, would tell you that

04:08the process that the board, the journey the board was on as it related to their strategic options

04:14was deliberative and it predates the involvement of the activists, narrowly as it relates to interest

04:20rate risk. The things that make Comerica's business model great, the abundance of operational

04:26commercial deposits and all the floating rate commercial loans are what makes it hard to

04:32manage interest rate risk. So, you know, they put a hedging program in place and rates moved

04:38more quickly than I think probably any of us anticipated. And the byproduct of that is the

04:44hedge positions have created a drag. I think we said on our announcement call it was about 85 million

04:50bucks in lost income in the second quarter. So purchase accounting will allow us to deal with

04:56that and the broader fifth third balance sheet. And in particular, this diversified range of fixed

05:02rate loan origination engines that we operate are going to allow us to manage interest rate risk

05:07in a way that, you know, will be more neutral than Comerica had to just given the nature of

05:14its business composition. Well, with this deal, you also go above that $250 billion threshold where

05:21the next level of regulatory burdens, let's call it, kick in. Just how challenging and expensive does

05:28it get where you now need to do things like upgrade tech, legal and accounting expertise?

05:33Yeah, that's a great question. So we were one of the bidders on First Republic and we had to

05:39contemplate three years ago, crossing that line with a bullet. And when we came out of the process

05:46there, we elected just to start to pursue the build out of what we called category three readiness

05:53or two X in the bank inside the company. So the expenses associated with full category three compliance

05:59are mostly in the run rate at third today. And I consider them to be the incremental work that needs

06:06to be done here to be immaterial and will be done well within the allowed timeframe. So I'm confident

06:12in our ability to get that done. I realize that you're still working through this. So I hate to

06:16jump, jump the gun, Tim, but would you be interested in more M&A after this? You've already increased the

06:21threshold. Why not just go bigger? We've bought one bank in the last 10 years and we did it because

06:29we were not in a survivable strategic position in Chicago, which is a critical Midwest market for us.

06:35And the combination of fifth third and MB resulted in us actually gaining market share. And I think

06:41we're one of only a few large banks that actually has a higher market share five years after closing

06:47a deal than it did at the time of the combination on a pro forma basis. And that is to say we're

06:55disciplined. We don't do things unless we believe that we can operate as a combined company and be

07:00better. And that really is going to be the focus for us now is move through the shock of the

07:08communication that's inevitable for both companies, get focused on the actions we need to take to

07:12ensure that we deliver the financial outcomes and start the investment because the opportunities for

07:18Comerica's unique capabilities and for ours across this combined platform are things that we could live

07:26on for years.

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