Prepared remarks
Thank you for standing by. And welcome to the Fifth Third Bancorp Third Quarter 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. I'd now like to turn the call over to Matt Curoe, Senior Director of Investor Relations. You may begin.
Good morning, everyone. Welcome to Fifth Third's third quarter 2025 earnings call. This morning, our Chairman, CEO, and President, Timothy N. Spence, and CFO, Bryan D. Preston, will provide an overview of our third quarter results and outlook. Our Chief Credit Officer, Greg Schroeck, has also joined for the Q&A portion of the call. Please review the cautionary statements in our materials, which can be found in our earnings release and presentation. These materials contain information regarding the use of non-GAAP measures and reconciliations to the GAAP results as well as forward-looking statements about Fifth Third's performance. These statements speak only as of October 17, 2025, and Fifth Third undertakes no obligation to update them. Following prepared remarks by Tim and Bryan, we will open up the call for questions. With that, let me turn it over to Tim.
Good morning, everyone, and thank you for joining us today. At Fifth Third, we believe that great banks distinguish themselves not by how they perform in benign environments, but rather by how they navigate uncertain ones. Our operating priorities are stability, profitability, and growth in that order. We seek to achieve them by obsessing over the detail on our day-to-day operations while simultaneously investing for the long term. As you are aware, last week we announced the merger of Fifth Third and Comerica. Our M&A framework has been consistent. First, that M&A is not a strategy unto itself, but rather a means to achieve stated strategic objectives. Second, that the cash earn-back, IRR, and NPV of synergies must be superior to organic alternatives to justify higher execution risk, and third, that the outcome must be a company that is better and not just bigger. We believe this is one of those rare combinations that satisfies all three criteria. The Third standalone momentum in the revenue and expense synergies from Comerica should produce a well-diversified, even more profitable company with even better long-term growth.
Shifting to third-quarter earnings. This morning we reported earnings per share of $0.91 or $0.93 excluding certain items outlined on Page two of the release. Reported and core results include the impact of nearly $200 million of provision expense associated with the fraud at Tricolor, which marked an otherwise excellent quarter of operating results across NII fees, expenses, and strategic growth. Average loans increased 6% year over year marking the fourth consecutive quarter where year-over-year loan growth accelerated. Average demand deposits were up 3% year over year, led by 6% consumer DDA growth. Adjusted revenues also rose 6% underpinned by 7% improvement in net interest income and 5% growth in fees.
Even with the impact of the large fraud, our profitability remains strong. On an adjusted basis, our ROA was 1.25%, our ROTCE was 17.7%, and our efficiency ratio was 54.1%. In credit, commercial nonperforming assets declined 14% and criticized assets decreased 4%. To the lowest level in over three years.
Lastly, tangible book value per share grew 7% year over year, and 3% sequentially in a quarter in which we repurchased $300 million of stock.
And raised our common dividend by 8%. Turning to our growth strategy, our investments in the Southeast, and expanding our middle market sales force and in building high growth recurring fee business continue to demonstrate strong results. We added 13 branches in the Southeast during the third quarter, including our first in Alabama. And we expect to open 27 more before the end of the year.
Consumer households across Southeast increased by 7% year over year, more than four times the rate of underlying market growth. Our deposit pricing remained with the total cost of retail deposits in the Southeast averaging 193 basis points in the quarter.
We'll leverage the same proven de novo playbook marketing tactics, and differentiated digital offerings to drive retail deposit growth as we add 150 branches to Comerica's Texas footprint. Together, we'll have a presence in 17 of the fastest-growing large US metro areas. In our regions, our focus on middle market and wealth is delivering new quality relationships, granular loan growth, and recurring fees.
In the third quarter, middle market RM headcount increased 8% year over year. New client acquisition increased 40%, and average middle market loans increased 6%. In wealth and asset management, adviser headcount rose 10% year over year, while fees climbed 11%. And assets under management reached $77 billion in the quarter. Post close, we will rely on the same recruiting discipline investment capacity, and one bank sales approach to help Comerica accelerate the growth of their crown jewel middle market franchise.
In our CIB vertical, franchise finance had another standout quarter. Over the past year, we have served as the lead arranger on 24 transactions totaling $3.9 billion, including eight in the third quarter alone. Over the past two years, the Franchise Finance team has generated more than $40 million in annual commercial payments fees and $34 million in capital markets fees.
We are excited to add America's strong verticals to our existing expertise including in national dealer services, environmental services, and tech and life sciences, among others.
In commercial payments, fee growth reaccelerated to 3% sequentially in the third quarter. Newline increased revenue by 31% year over year and grew deposits by more than a billion dollars.
We expect New Line to sustain its growth as transactional activity ramps from the rollout of Stripe treasury and many other category-defined payments customers who build on Newline's API. We're also seeing strong early activity from our acquisition of DTS Connect. Since the announcement, we have launched pilots with the most profitable quick-service restaurant in the industry and a 1,200 location chain of convenience stores. And also executed the first preordered branch change order at a major bank.
With over 2,000 branches. On Direct Express, our merger with Comerica should simplify the transition for its 3.4 million program participants. We also anticipate additional growth opportunities stemming from the president's executive order mandating the transition to electronic payments for all federal disbursals. Lastly, we continue to deploy technology and lean manufacturing principles to produce savings and boost scalability.
From our peak staffing level in early 2019, the total headcount of Fifth Third is down 8% while adjusted revenues are up 20%. The investments we've made will help us efficiently scale the business and achieve our synergy target as we integrate Comerica. Before Bryan provides further detail on our outlook, I'd like to revisit the commitments we made beginning in the year to deliver record NII regardless of the rate environment and to produce 150 to 200 basis points positive operating leverage for the full year. We will deliver both.
Looking to 2026 and beyond, there is so much to be excited about at Fifth Third. Among these, the tailwind from our investments in the Southeast along with 60 additional branches to be opened next year, the sustained excellence of our J. D. Power award-winning digital experience and differentiated payments products, and the incredible new colleagues, geographies, and capabilities Comerica becoming part of our company. I'm grateful to all the people whose hard work has put us in a position to take these steps. To the colleagues of both Fifth Third and Comerica who will work so hard in the coming months to make our partnership a success. And in particular to our clients who entrust us with their well-being.
With that, Bryan will provide more detail on the quarter and our outlook for the fourth quarter.
Thanks, Tim. And thank you to everyone joining us today. Third-quarter results reflect disciplined execution of our strategic priorities. Expanding in the Southeast, scaling payments in New Line, and maintaining operational efficiency while delivering strong performance in a rapidly changing environment. Adjusted revenue was $2.3 billion, our highest since 2022. NII grew 7% year over year, and 2% sequentially and net interest margin expanded for the seventh consecutive quarter. Our balance sheet continued to benefit from our balanced business mix through diversified loan origination platforms, fixed rate asset repricing tailwinds, and broad funding sources supporting proactive liability management. Our fee businesses, led by wealth, commercial payments, and capital markets, delivered adjusted growth of 5% year over year and 7% sequentially. This revenue performance along with ongoing expense discipline led to an 11% increase in pre-provision net revenue and 330 basis points positive operating leverage.
On an adjusted basis compared to the third quarter of last year. As Tim mentioned, tangible book value per share including the impact of AOCI, grew to 3% from the second quarter. Despite only an eight basis point decrease in the ten-year treasury rate unrealized losses on our portfolio improved 9% sequentially, underscoring the benefit of our bullet locked out securities. These positions provide certainty of cash flow and should continue to support tangible book value growth as they pull to par. Now diving further into the income statement and balance sheet performance, net interest margin expanded 23 basis points over last year and one basis point sequentially. Year over year, average loans are up 6% and excluding CRE categories, average balances are up 7%. Repricing benefits on fixed rate assets and disciplined management of liability costs continue to contribute to the strong NII. As Tim noted, relationship manager headcount is up 8%, and average middle market loans grew 6% over the last year.
Third-quarter middle market production rebounded sharply, up around 50% on both the year over year and sequential basis. Production levels are stable to improving in 11 of 14 regions, with the strongest performance in Central Ohio, Georgia, Texas, and the Carolinas. Provide our fintech lending platform for practice finance continues to drive growth. With balances up nearly $1 billion over the last year. This growth in middle market C and I helps offset paydowns in our CIB and CRE portfolio where average loan balances declined modestly as clients accessed bond and permanent financing markets during the quarter. This capital markets activity was a contributor to our strong fee performance during the quarter. Production in our corporate banking verticals also rebounded this quarter, up 24% over two quarters. Pipelines for middle market and corporate banking remained strong heading into year-end.
Commercial line utilization helps steady throughout the quarter and ended in the mid-36% area. In total, end of period commercial loans are up 5% over last year. Consumer loans grew 2% on an average basis, and 1% on a period-end basis from the prior quarter. We once again saw growth in nearly every major consumer lending category, led by continued strength in auto and home equity lending. Shifting to deposits, average core deposits increased 1% sequentially driven by DDA and money market growth. Average noninterest bearing deposits grew 1% sequentially and 3% over the prior year, led by consumer DDA growth of 6% as we continue to drive strong household growth. Through our de novo investment. 3% over the last year, led by the 7% growth in the Southeast. Proactive balance sheet management has allowed us to maintain our strong liquidity position while reducing our overall funding cost. We remain focused on granular insured deposits growing average consumer and small business deposits by 1% sequentially.
Consumer and payments linked deposit growth has given us the flexibility to manage down wholesale funding which declined 3% sequentially. This favorable mix shift lowered the cost of interest-bearing liabilities by one point. Our Southeast De Novo investments continue to deliver high quality low-cost retail deposits. Locations opened in 2022 and 2024 are significantly outperforming expectations, with deposits per branch at month 12 averaging over $25 million, outpacing our model target. And as Tim mentioned, our total cost of deposits in the Southeast is only 1.93%, generating 200 plus basis points of spread relative to Fed funds. We remain on track to open 50 branches this year with 23 opened year to date. We have secured approximately 85% of the locations for the additional 200 Southeast branches that we announced last November. We ended the quarter full category one LCR compliance at a 126% and our loan to core deposit ratio was 75%, down 1% from the prior quarter.
Moving on to fees. Adjusted noninterest income excluding security gains and Visa swap impacts grew 7% sequentially and 5% over the last year. Wealth fees rose by 11% over the year on $8 billion of AUM growth and strong retail brokerage activity. Capital markets fees rebounded up 28% sequentially and 4% over the last year, driven by higher activity in loan syndications and M&A advisory. Commercial payment fees increased $5 million or 3% sequentially including a $2 million negative impact from higher earnings credits on demand deposit growth. This fee performance was driven by core treasury management and Newline related gross fees. Newline related deposits hit $3.9 billion, up $1 billion from a year ago. The securities gains of $10 million were from the mark-to-market impact of our nonqualified deferred compensation plan, which is offset in compensation expense. Moving to expenses. Adjusted noninterest expense increased 3% compared to the year-ago quarter and 2% sequentially, reflecting continued strategic investments in technology, branches, and sales personnel.
Even with the headcount additions associated with these investments, overall headcount is down 1% versus last year as our value stream programs continue to drive savings through automation and process. By year-end, we anticipate $200 million run rate annualized savings associated with our value stream. Shifting to credit. The net charge-off ratio was 109 basis points for the quarter, which includes a $178 million in net charge-offs from Tricolor. NPAs declined 10% sequentially, as expected, and the NPA ratio decreased 65 basis. Broad-based credit trends remain stable across industries and geographies. Excluding Tricolor, commercial charge-offs were 51 basis points compared to 38 basis points in the prior quarter. This increase is due to the resolution of certain non-performing loans for which specific reserves had been previously established. Commercial non-performing loans decreased 14% sequentially and 30% since the first quarter.
Consumer charge-offs were 52 basis down four basis points, which is the lowest level over the last two years. The sequential decrease is primarily due to improvement in solar lending charge-offs, which were down 39 basis points sequentially. The broad consumer portfolio remains safe with non-accrual and over 90-day delinquency rates stable and improving across loan categories. Provision expense included a $142 million reduction in our allowance for credit losses, reflecting improvement in Moody's macroeconomic scenarios and a reduction in specific reserves. Even with the scenario improvement, our baseline and downside cases assume unemployment reaching 4.8% and 8.4% in 2026, respectively. We made no changes to our scenario weightings during the quarter. ATL as a percentage of our portfolio loans and leases decreased 13 basis points to 1.96%. The ACL as a percentage of nonperforming assets increased to 302% due to the decrease in NPA.
Moving to capital. CET1 ended at 10.54%, consistent with our near-term target of 10.5%. The pro forma CET1 ratio including the AOCI impact of the securities portfolio is 8.8%. We expect continued improvement in the unrealized losses at 62% of fixed-rate securities in our AFS portfolio. Our current outlook expects NII to be stable to up 1% from the third quarter due to loan and core deposit growth. This outlook assumes two 25 basis point rate cuts during the fourth quarter. We expect average total loan balances to be up 1% due to normal seasonal growth, a strong C and I pipeline, and continued broad-based momentum in consumer lending. We expect adjusted noninterest income to be up 2% to 3% due to seasonal strength in capital markets, and continued commercial payments growth. Fourth-quarter adjusted noninterest expense is expected to be up 2% due to the opening of 27 financial centers in the Southeast and incentive compensation related to the growth in capital markets fees.
In total, our guide implies full-year adjusted revenue to be up nearly 5% and PPNR to grow 7% to 8%. Moving to credit, fourth-quarter net charge-offs are expected to be around 40 basis points. Finally, turning to capital, we will be pausing share repurchases until the close of the Comerica acquisition, which is currently expected around the end of 2026. In summary, we expect to maintain our momentum as we end the year and achieve record NII, positive operating leverage, and strong returns in an uncertain environment, all while continuing to invest for the long term.
With that, let me turn it over to Matt to open up the call for Q&A.
Questions and answers
We will now begin the question and answer session. If you would like to ask a question, please press 1 and your telephone keypad. If you would like to withdraw your question, simply press 1 again. Your first question today comes from the line of Gerard Cassidy from RBC Capital Markets. Your line is open.
Good morning, Tim. Good morning, Bryan.
Good morning, Gerard.
Tim, can you give us some further updates or color on the Comerica transaction in terms of how it's been received internally at Comerica and maybe by their customers? They're going to be obviously part of Fifth Third in a short while. And then second, as part of that, how is the process going with the regulators? We're seeing an incredibly expedited timeline on deals that have been announced before your deal being approved in less than six months.
Yeah. Happy to do that, Gerard. And I think in general, it's just been very positive all the way across the board. So, just to start with regulators, first, I think we're making good progress on the regulatory filings. We expect to have them completed by the end of the month. And then for you, the S4 should be filed shortly after we get the Q out. I think the Controller of the Currency's public commentary actually was attached to a new charter approval recently, about accelerating the review of both new charter applications and merger applications is clearly a very positive development and consistent with what we're seeing in other deals. And all the early engagement that we have done with the regulators has been constructive.
So I feel very good about the timeline that we laid out and that Bryan just reiterated. I think the feedback from employees and communities has been really positive on both sides of Fifth Third and Comerica. I think the number one question that we're getting is what the name of the Detroit Tigers Stadium is gonna be at the end of all this, that's a pretty good sign about what we're dealing with. So, and I think what has rung through to folks is this idea that we're gonna be able to accomplish things together that neither company was gonna be able to do on their own.
You know, there was a one of the other CEOs on another call talked a little bit about their philosophy on M&A and what they were interested in or not. I actually think what he said, if I were to abstract a little bit, is really true. Like, if you're gonna do a deal and you want it to be successful, it either has to be strength pairing strength or strength pairing opportunity. You can't have places where both companies are weak be credited as a deal outcome. And the beauty of what we're doing with Comerica is the things you need to believe are either strength strength or strength opportunity. We're great at retail deposit gathering and are already primarily retail deposit funded, so we're gonna be able to do a lot there.
They have a fabulous granular middle market loan franchise. We provide more granularity in our commercial business, so there's gonna be a really nice complement there. We're both strong in different ways in the payments business and in wealth management, so there's a strength strength match. I just think there's a lot positive there.
And I think, you know, what we are going to try to do either late in this quarter or as we turn to the beginning of the year is just to provide a little bit more insight to investors on the synergies. I think we are feeling very good about our ability to get the outcomes. When you look at the synergies, as a percentage of Fifth Third and Comerica combined, which is really the right way to look about it, that's the way that we'll be approaching this exercise. They're quite manageable and I think well defined.
But I just, in general, the reception has been, like, it's, I, we the teams on both sides were small because of the focus diligence.
Great. I appreciate that. And then as a follow-up, as you said in your opening comments, the great banks distinguish themselves on how they navigate uncertain environments. And this week has certainly been very uncertain for many of the regional banks, including your own because of the concerns about this NDFI lending and the contagion risk. And I frame that with you, if you go back to the nineteen eighties and look at what happened to the price of oil in Texas, dropping below $10 a barrel, it led to the contagion risk of commercial real estate blowing up. In the NDF portfolio you have it. I know you have the Tricolor issue, but is there a contagion risk in there? And can you just share maybe your thoughts on what's going on with that portfolio and how the market's reacting to it?
Yeah. I appreciate you being the one to give the history lesson this round. Normally, I feel like it has to be me on this. So thanks for that. And you’d be happy to know I assigned the book Belly Up as reading to a new executive at Fifth Third. There's a lot of familiarity with the oil patch bus in Texas and Oklahoma. And I think one of the challenges we have on the NDFI fund is while the Fed's reporting was designed to be helpful here, the categorization is a little bit confusing. So Schroeck is prepared to talk a little bit about maybe an easier way to understand what's in NDFI across the industry and in our portfolio in particular.
Yeah. It's a great question, Gerard. Thank you. I'll start by saying it's a portfolio that we have maintained low levels. We're the lowest in the FI concentrations of large banks. We're at about 8% of the total portfolio. As Tim said, the call report categories can be pretty generic. So I'll provide a breakdown. Contained in that portfolio. I'll start with REITs. So REITs and other mortgage-related facilities make up 33% of our NDFI balances and represent the largest portion of the portfolio. We have processes, procedures, and structures that have been tested through the cycle, and including robust monitoring of leases. We've not had any losses in this portfolio over the last ten years, so really solid portion of the portfolio that makes up our largest component. Next, about 24% of the NDFI balance are payment processors. Insurance companies, brokerage firms, SBIC firms. Balances in this category are primarily related to large players, well recognized names, and not at all related to the conversations going on in the market right now.
Next would be our subscription facilities at 18%. NDFI funds represent exposure to high net worth individuals and other private capital investors who have capital commitments to these funds. Third, percent of the balances are loans to private capital warehouse facilities. This category has been an area of rapid growth in the industry. However, we've been really intentional in limiting our growth in these vehicles. We have one lender where we have a deep relationship. This is a portfolio where we have deep relationships with the lenders, typically lending into one of their portfolio companies. The smallest share of NDFI balances are loans to non-real estate and non-private credit related warehouses. Of our balances. It's about 9%. That category includes our exposure to consumer asset classes. Gerard, you mentioned Tricolor. It's in that broad issue. It's in that portfolio and has received significant scrutiny as part of our comprehensive review of the portfolio.
Given that comprehensive review, if you'll feel very confident in the quality of the remaining clients, it's in that category. We've been overall and we've been very deliberate in our strategy to keep NDFI portfolio balances diversified. Our disciplined underwriting framework is designed to safeguard portfolio quality by avoiding aggressive advance rates, which we see in the market sometimes. Overly concentrated collateral pools, inexperienced management teams, and structures that do not meet our overall risk appetite. I'll also add as part of the Comerica review, we also reviewed Comerica's NDFI portfolio. 70% of Comerica's NDFI portfolio is concentrated in low-risk subscription facilities, which complements our disciplined approach to client selection and portfolio diversification. Post-close, our combined NDFI portfolio balances will be 7%, so down from our Fifth Third overall 8%. So we feel really good about the ongoing diversification.
Thank you for the thorough answer. Appreciate it.
Your next question comes from the line of Ebrahim Poonawala from Bank of America. Your line is open. Good morning.
I guess maybe just sticking with credit and outside of the NDFI issue, just if you from a mark to market standpoint, are your customers feeling the pain on the commercial side from tariffs and slowing activity? Or are we on the other side actually where things are picking up in terms of folks wanting to make investment decisions which could drive loan growth? I'm just wondering what seems more likely as it cuts through all this noise at the moment.
I think unfortunately, the answer to that is yes. On both points. I was out in several of our markets. I got to visit about three dozen of our commercial clients. And the quarter to quarter went to the client who referred to his outlook as, quote, nauseously optimistic. I think the tariff uncertainty absolutely continues to weigh on any clients that are exposed. That said, I would tell you, in general, people are more optimistic than they were in the second quarter. In part because when you add up all of the different tariffs there is some uniformity across most of the countries that provide, you know, our significant sources of the supply chain for folks in materials and manufacturing and, you know, the construction and the other sectors that are, you know, big in our footprint.
The question mark really has been who would bear the brunt of the tariff? And I would say now on balance, it's a sort of a shared pain approach here where the supplier, the intermediary, and the customer each absorbing about a third of the increased cost. But the supplier and the intermediaries have also been clear whenever we talk to them that their intent is ultimately to get back to prior margins, which would mean over time, you would see continued price increases as a mechanism to move the costs through.
The bright spot here is really one that's just the Fed resuming rate cuts. I think people have been more optimistic about they're more front end focused than I think I would have said I believe them to be. They're more optimistic about what the value of you know, a total of 50 to 100 basis points of cuts will have on client demand and also penciling out their own investments.
There's also another reality here. A lot of our clients when the tariff announcement hit, deferred capital expenditures and have been renting, either renting excess space or renting equipment. And we are getting requests now for financing that are reflected in the pipeline in the middle market business in particular to support the sort of shift from rent to own. So I think that's quite positive. The other thing that I like seeing is I like our logistics clients. They're a good bellwether on the sort of, you know, wheels of the economy turning. And we're hearing from logistics clients that there hasn't exactly been a huge rebound, but that their activity has stabilized and is moving on the upswing. I think the folks that are having the most robust demand, obviously, are the people who are either attached to the big government infrastructure investments, things like bridges and roads that are moving forward or folks that are attached to AI. And there's so much demand there because with one of our clients in the concrete business, they not only have a strong order book, but the suppliers are driving the pricing as opposed to the buyers driving the pricing in these cases, meaning the margins are really great. And the other end of the spectrum, I think residential construction and auto is still slower.
Okay. Cool. Thanks for that. And I guess just a separate question. Think back to Comerica, I think if you don't mind spending some time around, and you talked about this when you announced the deal, just the optionality that Comerica provides. So you've talked about opening the branches in Texas. But Comerica also had a big technology life science practice, and Cisco to Newline's been leaning in there. Just either it's that or either it's double-clicking on the existing footprint and deepening relationships which may have kind of sidelined a bit over the last decade. What's that potential to unlock and accelerate growth for the combined entity as we look out a year from now?
Yeah. Thanks for asking on that one. I think one of my fundamental beliefs is if you don't want to grow by sacrificing pricing or risk discipline, you have to attach yourself to segments of the economy that have a secular tailwind. And the innovation economy is the most pronounced, you know, profound secular tailwind on the business side of our business in the US. So I am quite excited about the potential on tech and life sciences. Historically, the OCC looked at that business a little bit differently than other people did, but I think the early signals coming out of the OCC are that they want national banks to be able to compete in all markets. And I am optimistic that we're going to be able to do some interesting things there. I think Michigan is about creating a fortress position in the Midwest. Texas for us is gonna be about investment. I think we can continue to add a lot more middle market bankers and clearly the branches are there.
California really will be a more business focused strategy. And between New Line, which is a unique asset, and the fact that a lot of the early folks at SVB actually were from a predecessor to Comerica in 1991, you know, we have credibility having been in that market. Like, there's a really interesting things to be done there because post-SVB, you have, you know, First Citizens still active, you have JPMorgan active, you have a couple of investment banks active that really are leading on the M&A advisory and capital raising front. And then you have foreign banks, and a fragmented market like that will be good hunting for people like us. The thing that's probably important to remember with Comerica is I think they're running a four to one deposit to loan ratio in that market. So one of the things we may do very early on is just focus on the ways in which we can leverage Newline to drive even more deposits on platform as well.
Well, thank you so much. Your next question comes from the line of Scott Siefers from Piper Sandler. Your line is open.
Good morning, guys. Thank you for taking the question.
Hi.
Hey, Tim. So, I mean, based on all you've said, I don't get the impression that there's any change or impact to your de novo expansion plans while you go through the Comerica transaction. But I was just hoping you could spend a moment discussing sort of how you balance the planned organic expansion with the large integration just to make sure nothing sort of slips through the cracks.
Yeah. No. That's great. So I think you probably have to think about it in two ways. One is just what resources did the two sorts of separate growth areas of focus draw. So the de novos are in the Southeast footprint. There is gonna be, well, there are some really wonderful Comerica bankers in the Southeast, but they don't have a branch presence. So we're not gonna have disruption in those markets. So the regional leaders who have to be on top of driving the daily, weekly, monthly activity in the Southeast are not gonna be disrupted. That's the first thing. Secondarily, the people inside the bank who find the location who build the locations and who run the locations are three different groups. So 85%, as Bryan said, of the locations have been found, meaning that that group has the capacity to be looking for locations in Texas. And if you just do the math on the 40, we will have built in the second half of this year, the 60 we just said we're gonna build next year.
By the time we're at a point where we've got sites and permits pulled, the people who build the locations are gonna be freed up from the Southeast to be able to shift their focus onto the acceleration of the openings in Texas. And lastly, because of the scale we have in the Southeast, the draw on human capital and the need to drive recruiting and otherwise to be able to new branches is substantially lower because the majority of the folks we put into the de novos are people who have trained up and come through our other retail financial centers. And therefore, the Southeast is sort of on the flywheel of being able to feed itself. So, there really is not an overlap in terms of the critical resources to be able to do those two things. The second thing that's really important is we've talked a lot about the focus on modularity in the way that we drive the retail expansion. That has been the point I'm trying to make whenever I say we haven't built 100 branches.
We built one branch 100 times. It's a consistent site selection model, and it's a consistent retail format, meaning there's no need for additional engineering resources or otherwise If we have experience at this point with essentially almost every zoning jurisdiction and set up that you would want to experience in the zoning rules in general in Texas. It’s much easier than they are in the Southeast and certainly than in the Midwest. So it's not like we're gonna have to learn on the fly here. We just have to find the locations, and we have the people to do that. And we gotta build the same thing we've been building and we know how to do that, obviously. And then the focus really is gonna be on making sure that as we do the conversion in Texas, the initial experience that Comerica's existing retail clients have is really, really strong.
Mhmm. Perfect. Thank you for that. And then with regard to Direct Express, you noted the merger should simplify the transition for their customers. I imagine it really eases things for you all as well. I know there was already, you know, a sense of urgency to get the balances moved before the merger was announced but was hoping you could just sort of spend a moment at least at a top level on how I presume it's all still going to switch to Fifth Third's rails.
Yep.
So the transition schedule that we talked about when we announced the Direct Express win that you know, commencing Fifth Third as the administrative agent for new program enrollees in the beginning of the first quarter and then starting the conversion process at the end of the second quarter is, you know, still progressing as planned. And I feel good about all that. The dynamic here that's most important is that we were gonna have to issue out of our own bins or buy Comerica's bins in order to be able to make the card numbers work. Right? And that when the deal closes, again, provided that it closes as we expected to and in advance of when we were planning the back-end conversion, the factor that would have driven new card issuance would have been the need to use a bid range. So, Kurt and I had actually talked about this or buying the bins from Comerica prior to commencing the discussion on the merger itself. We were looking at the possibility of being able to simplify that aspect. For the program participants. And clearly, if we get the deal closed, the bins are ours, and we'll be able to continue to issue out of them and maintain existing cards.
Yeah. Perfect.
Your next question comes from the line of Manan Gosalia from Morgan Stanley. Your line is open.
Good morning. You touched on Direct Express right now. I was wondering if you could talk about the opportunities there on the income statement and the contract there. And I think on the CMA deck, you adjust about a hundred and ten million in NII. But can you touch on what the full opportunity is there? How do you expect that to grow? The fee contribution that you expect.
Yeah. Happy to talk, Manan. You know, the big question when we announced the program was really about the timing of when we would see the balance transitions over. And that was one of the reasons why we said we would provide more information in the fourth quarter. Obviously, the Comerica transaction provides a lot more certainty around how the balances will hit the third balance sheet. It's on average about $3.5 billion of DDA that will obviously provide a lot of funding benefits associated with our balance sheet. From a fee perspective, the way to think about it is there's probably a, you know, 15 to 20% type margin on the fees relative to the expense load. And you're probably looking at something that is in the range of a hundred to a hundred and ten million type expense level. That's primarily related to the processing cost and the fees. There’s a gross up on the fees associated with the interchange that comes through.
We do have some revenue share with our processing partners. That's why there will be a fairly direct link on that. And then the growth for us is primarily gonna be related to transaction activity in the future as well as growth in the programs. And we are excited about the potential for incremental growth in the program due to the executive order trying to limit more to limit the amount of paper checks that are issued. And this is the government's program for electronic disbursement. So we do believe there's even more upside in the program over time.
Maybe if I can pivot over to credit. Excluding the credit that you called out, I think, as you know, we're about 52 basis points this quarter. And you're guiding for about 40 basis points in the fourth quarter. I know you talked about some of the sentiment and what you're hearing, but can you to what gives you the confidence that NCOs will step down from here? And how we should think about that? Going into 2026?
Yeah. Great question. So I look at it a couple different ways. One of them, even indicators, right, criticized assets. As Bryan mentioned, our criticized assets are down again, 4% this quarter. I also looked at predictability. We've been, we've talked over the last couple of quarters about NPAs coming down in that 40% range. They were 14% this quarter, 30% over the last two quarters, and we have good visibility tracking to that 40%. We're not seeing NPA surprises. The losses we're taking are reserved. Think we’ll continue to get out ahead of some of these problems and deal with them timely. So I feel good about that. The consumer portfolio continues to perform very, very well. Delinquencies are just six basis points below even pre-COVID levels. Consumer loss rates stable at 52 basis points. That's consistent with our ten-year average. The portfolio is playing out. And I still feel really good. I mean, excluding the Tricolor fraud-related issue range I still expect full-year charge-offs to land midpoint of our original guidance. And assuming no significant changes in the environment, based on what I know today, continue to be very confident that commercial loss rates return to that mid.
And Manan, I'll just add since there's some names that have been in the news. We have no relationship with Tricolor. We did have a relationship historically with First Brands, but we exited it a handful of years ago because of some issues that were identified during the collateral reviews we were doing. And that only residual exposure there is $51,000 of operating leases. $51,000. That's secured, Greg tells me, by a forklift and a printer. I asked if the printer had wheels, he said no. So if necessary, we're gonna use the forklift to get the printer out of there. But they're just the—that's the other thing here in terms of confidence is there's no exposure to the names that are out in the market.
Your next question comes from the line of Ken Usdin from Autonomous Research. Your line is open.
Hey, Ken.
Hey, guys. Good morning.
Good morning.
I was wondering if we could talk a little bit about the NII trajectory and the helpers that you have. Can you just give us an update about the fixed rate repricing that you have and what you're seeing now given the change in the curve in terms of the benefits and how long out you have line of sight onto that?
Yeah. Thanks, Ken. Great question. You know, we continue to feel good about fixed rate asset repricing. That's something that was a contributor this quarter as well as for most of the year. We have seen, you know, a decent compression in the yield curve this quarter. In particular, the two to three-year point of the curve has come down about 40 basis points. We talked with you as part of July earnings. And that obviously has a decent impact on the indirect auto business, which has been a big driver of our fixed rate asset repricing. We're still seeing $4 billion to $5 billion a quarter of fixed rate assets that are repricing. And we're picking up now around 100 basis points. And we expect that 100 basis points to persist through the end of this year and mid to late next year. So we do feel good about the trajectory that we're seeing there, even with some of the compression that we've seen from a curve perspective.
And then, honestly, for 2026, when you think about NII trajectory, the Comerica transaction has such a meaningful impact on overall balance sheet positioning and as we've talked as part of that announcement, there's a fairly decent pickup from a profit standpoint.
Perspective and then NII is going to be a good component of that as we work ahead on bringing our diverse funding capabilities to that platform as well as positioning the balance sheet for and using our fixed rate loan origination platforms to position the balance sheet for better long-term performance. And so we feel very good about the trajectory that we are heading into.
Yep.
Great. And that was actually dovetails to my follow-up, which was just, you know, it's been great to see the noninterest bearing growth over the last couple of quarters. And still a little increase in the IBD cost. So to that point you just made, and given that we're on the next leg down of the rate cycle, what does that put us into context in terms of what you're expecting to see in terms of deposit betas on the IBD side?
Yeah. For the next, I would tell you for the next couple quarters, the fourth quarter and into the first quarter, we're gonna be a little less aggressive than we have been. We delivered a low sixties beta on the first 100 basis points cuts. Prior to the Comerica transaction, you know, I had high confidence that we were gonna be able to deliver kind of mid-forties to low fifties beta, which would've kept us in a good position. But given the point of trying to stay balanced from a retail perspective because we want to work ahead and be in a position to deal with some high-cost funding that's on their balance sheet. That'll be a very accretive transaction for us in 2026 when we utilize the optionality that our funding position will give us. Next year to deal with some issues on the combined balance sheet. We are gonna run a little lower on our betas. Here. So I would expect that for the fourth quarter and the first quarter, for our betas to be in the more like 30% range. And so that's a little bit of the rationale when we talk about a kind of a stable to up 1% NII forecast for the.
Yep.
That makes sense. Okay. Thanks for that, Bryan.
Your next question comes from the line of Christopher Edward McGratty from KBW. Your line is open.
Hey, Chris.
Hey. Good morning. Sean Culhane actually on for Chris McGratty. Quick question just on the expense growth expectations. You touched on near-term expense growth elevating as you continue to invest in the branch expansion. But just longer term, how should we think about operating leverage from here? And maybe more specifically, how you think about organic expense growth in terms of balancing places that require continued investment such as payments, as well as the branch expansion obviously in Texas as well as Southeast but versus kind of like the synergies and the offsets from both the merger as well as prior AI expense. A lot of good questions embedded in there. So a couple of things. One, the branch expense is seasonal for us. So, I think we said we were gonna get about 50 branches opened this year, so 40 of the 50 happened in the second half of the year. That's part of the reason that you see the ramp in the fourth quarter is half of the branches in total get opened in the fourth quarter alone.
And that's actually an improvement for us. It used to be 80 or 90% of the branches got opened in the fourth quarter. So I wouldn't read too much into the fourth quarter as a point of extrapolation into the future. We do believe we have the ability to continue to drive operating leverage out of the company. It's been convenient that others have offered 2027 as a medium-term guidance range because that corresponds with the numbers that we provided for the combination of Fifth Third and Comerica. And, you know, the outlook there was 19% ROTCE or better and, you know, getting down to the low to mid-fifties—mid call—53% in terms of the efficiency ratio, and we've printed from 54 this quarter. The guide implies 54 next quarter. So there is continued operating leverage in order to get there. And that's inclusive of the sorts of investments we're making in the business. I mean, we bought a payment software company in this past quarter that feathered into the run rate.
I think what's worked for us here has been this belief that we need to fund something on the order of half of everything that we want to invest back into the business through finding other savings opportunities. Now that's principally been automation, leveraging technology to drive people costs down and to improve scalability. And those investments are gonna be super helpful as I mentioned in my prepared remarks as we integrate Comerica. It’s allowed us to just look at it over five years. I mean, I think we bought now five fintech companies during that period in time. We've built more branches than anybody other than JPMorgan during that period of time. We've been growing the Salesforce by five to 10% across the regional footprint during that period of time, making big investments in tech platforms and otherwise. And despite all that, we've had I think something that's on the order of the lowest cumulative expense growth across our peer group.
So we are gonna continue to invest in the company. I'm super excited, as I've said, about the opportunities to invest into places like Texas and scaling the verticals like National Dealer Services and pairing that with the auto business and life sciences like you bring that earlier.
But we also expect ourselves to have to pay as we go in addition to asking investors to back it, and that's why you get the operating leverage at the end of the day.
That's great color. Thank you.
I appreciate it.
Your next question comes from the line of Michael Lawrence Mayo from Wells Fargo Securities. Your line is open.
Hey, Mike.
Hey.
I have kind of one negative question, one positive question. So the negative question, if you could just double click on the Tricolor category. I think it was 9% of your total NDFI. Just elaborate more on what contained that category. And the deposit question is, you talked about the team that will be in charge of the integration of Comerica. You have Jamie. We also don't heard you talk about Darren King either. I almost forget that he's there. You're keeping him like, locked in a closet somewhere, but you have a lot of talent at the top of the house. I like to hear how they're they'll be deployed for the integration, but first, more elaboration on the Tricolor category.
Yeah, I was gonna say we'll start there because now I'm gonna go get Darren out of his office and demonstrate that he's free to move around the building. Go ahead, Greg. So it's primarily consumer asset classes. So consumer auto, consumer finance companies, and there's a reason why it's our lowest category from a concentration standpoint, and we're watching that consumer very, very closely. Clearly impacted with higher interest rates, unemployment, inflation, etcetera, but that's primarily what makes up that category.
Yeah. And it's not, I think, dominated by relationships with the largest players. The long tenure in their having been through all these names myself, as I mentioned at Barclays, I find confidence that Tricolor is unfortunately, it is unique there in terms of, yeah.
I think we have an excellent team. And I think Comerica is bringing really excellent executives to the table in terms of what we're doing here. So the integration advisory council is jointly staffed. Jamie is on point since the third. Megan Burkart from Comerica, their chief administrative officer from Comerica, folks like Darren and Pete Sefzik from Comerica, the IT leaders, folks from operations and otherwise all involved here. Darren's worked very closely with Peter in thinking through how we integrate the middle market bankers. Darren's responsibility here is regional banking, so Darren's had wealth management, middle market, and business banking. Peter will take on wealth management. Darren's taking on the expanded middle market business banking side of the equation. So they have been working through a few roles, taking opportunities where we're allowed to do so to meet people.
So it sounds like some ex-frenemies will become colleagues. They had worked together before.
There we go.
Alright.