Prepared remarks
Good morning. My name is Audra, and I will be your conference operator today. I would like to welcome everyone to the First Quarter 2026 Fifth Third Bancorp Earnings Conference Call. Today's conference is being recorded. I would like to turn the conference over to Matt Curoe, Director of Investor Relations. Please go ahead.
Good morning, everyone. Welcome to Fifth Third's First Quarter 2026 Earnings Call. This morning, our Chairman, CEO and President, Tim Spence; and CFO, Bryan Preston will provide an overview of our first quarter results and outlook. 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 April 17, 2026, 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 thanks for joining us today. At Fifth Third, we believe great banks distinguish themselves based on how they perform in uncertain environments, not in benign ones. We prioritize stability, profitability and growth in that order. We deliver them by finding ways to get 1% better every day while investing meaningfully in the future. Today, we reported earnings per share of $0.15 or $0.83 excluding certain items outlined on Page 2 of the release. Results reflect the February 1 closing of the Chimeric acquisition. Revenue was $2.9 billion, up 33% year-over-year and adjusted net income was $734 million, up 38%. Credit performance was in line with expectations with net charge-offs at 37 basis points. Both NPAs and criticized assets improved modestly. In the quarter, we closed the largest M&A transaction in Fifth Third's history. We delivered an adjusted return on assets of 1.12% and an adjusted return on tangible common equity of 13.7%.
Our tangible common equity ratio rose to 7.3% and tangible book value per share increased 1%. We are the only bank among our peers who have reported to date to increase both of these key metrics during the quarter. Fifth Third's legacy strategies are continuing to produce broad-based growth while we execute the Comerica integration on plan and on schedule. In commercial, legacy Fifth Third C&I loan balances grew 6% year-over-year. Production remained healthy with the strongest activity in manufacturing and construction supported by reshoring and infrastructure investments. The acquisition more than doubled, led by our Southeast markets, and 35% of new clients were fee led with no extension of credit. Importantly, our commercial loan growth continues to come from relationship-based lending and not from non-relationship sources. In commercial payments, Newline continues to scale with revenue up 30% and deposits up $2.7 billion year-over-year.
During the quarter, we launched a new payment product built on Newline, joining other marquee clients like Stripe and Circle and we advanced preparations for the second quarter launch of the new Direct Express platform. In Consumer, the legacy Fifth Third franchise delivered 3% household growth and 4% DDA balance growth. Southeast households grew 8%, led by Georgia and the Carolinas, and we opened 10 additional branches in the region during the quarter. Consumer and small business loans grew 7%, led by auto, home equity and our Provide fintech platform. Now turning to Comerica. Thanks to timely regulatory approvals, we closed earlier and originally expected on February 1 and have continued to make progress at an accelerated pace. Our top priority is our people, and we're working hard to become one team. Since Legal Day 1, leaders have been on the ground in Comerica's major markets nearly every week, and we visited every branch in the Comerica network.
We've also hosted product showcases to highlight the breadth of our combined capabilities. Organizational design and leadership decisions are complete, and I'm very excited about the caliber of our combined team. On technology, we remain on track to convert all systems over Labor Day weekend with our first full conversion later this month. As a result, we remain confident that we will deliver $360 million of net cost savings this year and reach an $850 million annual run rate by the fourth quarter. We're also already building a strong pipeline of revenue synergies. In commercial, we're seeing early wins by bringing capital markets, payments and specialty lending to existing relationships. In the first 60 days, our capital markets team completed fuels and metals commodity hedges and executed an accelerated share repurchase for Comerica clients. We also booked our first Comerica to Fifth Third loan win in asset-based lending while Fifth Third referrals helped to build the largest ever pipeline in Comerica's National Dealer Services business.
Commercial Payments has presented our managed services solutions to over 100 Comerica clients with 65 of them interested in moving forward. In Consumer, we launched our first Comerica branded deposit campaign in Texas in February. Response rates and average opening balances were broadly consistent with the results that we generate in our legacy Fifth Third markets, and nearly half of new savings customers also opened a checking account. We've hired more than half of the mortgage loan officers and auto dealer representatives that we plan to add this year in Comerica's footprint and pipelines in each of those businesses continue to build. We'll open our first Fifth Third branded branches in Dallas and Fresno this month, and we now have letters of intent in place or in progress for 81 of our targeted 150 de novo branches in Texas. As I wrote in our annual letter to shareholders, the global economy is a complex adaptive system and such systems react to change in unexpected ways.
We're closely evaluating the direct impact of the ongoing geopolitical tensions and other commodities as well as the implications for prices, interest rates and customer activity. In an environment where we may not see the macro tailwinds that many expected at the start of the year, the Comerica merger expands Fifth Third's organic opportunity set, and we do not need a perfect backdrop to deliver on our commitments. Before I turn it over to Bryan, I want to take a moment to say thank you to our colleagues. Earlier this month, we surpassed $300 million in total assets for the first time, an important milestone that reflects the work we do together to serve customers, support communities and show up for one another. I know many of you are putting in an extra effort to support the integration, whether it's helping customers, learning new products, meeting new teammates or navigating change.
Your commitment to getting 1% better every day and your dedication to our clients and to each other is what gives me confidence in what we're building and the opportunities ahead. With that, Bryan will provide more detail on the quarter and the outlook.
Thanks, Tim, and good morning. Our first quarter results reflect the strength of what we have built and the discipline with which we are executing. Results exceeded our March expectations, driven by stronger NII, disciplined expense management and integration execution on plan. Adjusted ROA was 1.12% and adjusted ROTCE excluding AOCI was 13.7%. The Comerica acquisition closed without tangible book value dilution and TBV per share grew 1% sequentially and 15% year-over-year. The earnings power of the combined company is intact, and the integration is on track. Given the magnitude of the acquisition, standard year-over-year and sequential comparisons obscure more than they reveal this quarter. What matters is how we exit, a larger, more granular loan portfolio, a lower cost deposit base and larger diversified fee income businesses. Each of those is a deliberate outcome and each positions us to generate stronger and more durable returns as the integration delivers.
Now diving further into the income statement, starting with NII and the balance sheet. Net interest income was $1.94 billion for the quarter, above our March expectations. Net interest margin expanded 17 basis points to 330 basis points, driven by the impacts of the Chimeric acquisition. That includes 7 basis points from securities portfolio marks and repositioning basis points from cash flow hedge termination and 2 basis points from purchase accounting accretion on the loan portfolio. A full quarter of these impacts will benefit NIM by a few additional basis points in the second quarter. End-of-period loans were $178 billion, up 2% sequentially from pro forma combined year-end balances. Average total loans were $158 billion, reflecting the February 1 close. The growth was broad-based, strong middle market production, a rebound in line utilization and continued momentum in home equity, auto and our Provide fintech platform.
In commercial, line utilization ended the quarter at 40.7%, up approximately 120 basis points from the pro forma combined year-end level and notably held steady throughout the volatility in March. Clients are cautious, but active. On a legacy Fifth Third basis, commercial loans grew 6% year-over-year. Combined with the Comerica addition, shared national credits now represent only 26% of total loans, a deliberate and ongoing reduction in concentration risk. On the consumer side, first quarter auto originations were the highest in 2 years with average indirect secured balances up 10% year-over-year. Home equity balances grew substantially, supported by both the acquisition and strong underlying production. We achieved the #1 HELOC origination market share in our legacy Fifth Third branch footprint. With an average portfolio of FICO of 773 and average loan-to-value of 64%, the production strength is real, and the credit discipline behind it is equally real.
Turning to deposits. Average core deposits were $207 million, and the end-of-period core deposits were $231 billion. Noninterest-bearing balances comprised 28% of core deposits at quarter end, up from 25% at the same point last year. That improvement reflects the combined benefit of Comerica's commercial DDA franchise and our continued organic consumer DDA growth. The household growth can strip is showing up directly in our funding costs. On a legacy third basis, consumer household growth of 3% over last year, supported 4% consumer DDA growth. Total deposit costs, including the benefit of noninterest-bearing balances were 158 basis points in the first quarter, a funding cost profile that compares favorably across the peer group. Interest-bearing deposit costs were 215 basis points, down 27 basis points year-over-year, reflecting both that organic deposit mix improvement and the benefit of the Comerica balance sheet.
Despite the larger balance sheet, our approach to balance sheet management is unchanged. We prioritize granular insured deposit funding over large wholesale holds. We maintain strong liquidity buffers, and we proactively manage the overall cost of funds. That discipline showed up again this quarter. Average wholesale funding declined 3% year-over-year, even with Comerica balances included. That favorable mix shift lowered the cost of interest-bearing liabilities by 36 basis points. We also maintained full Category 1 LCR compliance at 109% and a loan-to-core deposit ratio of 76%. Now turning to fees. Adjusted noninterest income, excluding securities losses and the other items listed on Page 4 of our release was $921 million, slightly above the midpoint of our March expectations. The most significant milestone here is that both wealth and commercial payments are now generating fee income at the run rate necessary to deliver $1 billion each in annualized noninterest income.
That outcome reflects years of consistent, disciplined investment in both businesses and the recurring nature of the revenue. Looking further at wealth, fees were $233 million and total AUM ended the quarter at $119 billion. Legacy Fifth Third AUM trends remained strong, up $10 billion or 15% over last year. Fifth Third Securities delivered strong retail brokerage results, with revenue up 15% year-over-year. These are businesses that we have been consistently investing in, and the returns are compounding. Commercial payment fees totaled $218 million for the quarter. Direct Express contributed $14 million in fees for the quarter and approximately $3.7 billion in average deposits for the month of March. New line continues to drive strong fee growth of 30% year-over-year and related deposits reached $5.5 billion, up $2.7 billion from last year. Capital markets fees were $134 million, up 11% sequentially.
Increased hedging activities and commodities and FX and strong bond underwriting fees combined with 2 months of activity were the primary drivers of this growth. Turning to expenses. Page 5 of our release details certain items that had a larger impact on the noninterest expense this quarter, primarily $635 million in merger-related expenses. Adjusted noninterest expense was $1.77 billion, consistent with our guidance. The adjusted efficiency ratio was 61.9%, which reflects the addition of Comerica and normal first quarter seasonality associated with the timing of compensation awards and payroll taxes. On the synergy front, we remain confident in our ability to achieve the $850 million of annualized run rate cost savings in the fourth quarter of this year. Integration activities are progressing as planned against our established milestones and savings are being realized. The expense benefit will build steadily over the first 3 quarters of this year with a more significant increase in the fourth quarter.
Once the system conversion and branch consolidations are completed in early September. Shifting to credit. The net charge-off ratio was 37 basis points for the quarter, in line with our expectations and the lowest level in 2 years. The NPA ratio was 57 basis points compared to 65 basis points last quarter. Commercial net charge-offs were 26 basis points, also a 2-year low with stable trends across industries and geographies. Consumer net charge-offs were 58 basis points, down 5 basis points from last year. The consumer portfolio remains healthy with nonaccrual and over 90 delinquency rates relatively stable across all loan categories. We have been deliberate about where we choose to grow. Our exposure to non-depository financial institutions represents only 7% of our total loan portfolio, well below the industry average. Our 3 largest categories are subscription lines supporting capital call facilities, corporate credit facilities to traditional institutions such as payment processors, insurance companies and brokerage firms, and secured lending to residential mortgage-related entities.
These are long-standing portfolios. We have deep underwriting expertise in each of them, strong collateral visibility and structural protections where needed, including borrowing base requirements and advance rates that provide significant loss absorption before we would recognize $1 of loss. On private credit, we have chosen not to participate meaningfully in lending to private credit vehicles and business development companies, which combined represent less than 1% of total loans. That was a deliberate decision, not a missed opportunity. The structural complexity embedded in these exposures introduces risks that are harder to assess through a cycle. We would rather grow in categories where we have more transparency to the collateral and have direct relationships with the underlying borrowers. On software and data center lending, we have maintained that same disciplined posture. We believe in the long-term demand for AI infrastructure, but we have also seen how quickly these build cycles can overshoot.
We have remained selective, and our exposure is intentionally limited. Software-related exposures are less than 1% of total loans, with the portfolio performing in line with expectations with no material migration in the quarter. ACL as a percentage of portfolio loans and leases decreased to 1.79%, primarily reflecting the Chimeric acquisition. The ACL as a percentage of nonperforming assets increased to 316%. Provision expense included $83 million for merger-related day 1 ACL build. Our baseline and downside cases assume unemployment reaching 4.5% and 8.5%, respectively, in 2027. We made no changes to our macroeconomic scenario weightings during the quarter, though a qualitative adjustment was applied to reflect the direct impacts of the elevated energy and commodity costs as well as the broader implications for economic growth, inflation and unemployment in the current geopolitical environment.
Moving to capital. CET1 ended at 10% reflecting the impact of the Comerica transaction and strong RWA growth. Under the proposed capital rule, our estimated fully phased-in pro forma CET1 ratio is 9.6%. The RWA benefit to capital ratios associated with the new rule is nearly a 100 basis point improvement, primarily due to credit risk RWA reduction. The proposed rule recognizes the granular, well-secured and relationship-based nature of our loan portfolio. The same portfolio characteristics we have been deliberately building toward over the past several years. We expect continued improvement in the unrealized losses as the portfolio matures. Moving to our current outlook. Our outlook reflects the forward curve at the end of March, which assumes no rate cuts or hikes in 2026. Given the updated rate outlook and our more asset-sensitive balance sheet, we are updating our full year NII outlook to a range between $8.7 billion and $8.8 billion.
We will continue to take actions to move the balance sheet to a more neutral rate risk position over time, which could include investment portfolio and/or other hedging actions. Our outlook for full year average total loans remains in the mid $170 billion range. Full year noninterest income is expected to be between $4.0 billion and $4.2 billion, reflecting continued revenue growth in commercial payments, capital markets and wealth and asset management. Full year noninterest expense is expected to be $7.2 billion to $7.3 billion, including the impact of $210 million of CDI amortization and $360 million of net expense synergies in 2026. This outlook excludes acquisition-related charges. In total, our guidance implies full year adjusted PPNR, including CDI amortization, up approximately 40% over 2025. We remain on track to exit 2026 at or near the profitability and efficiency levels consistent with our 2027 targets.
For credit, we expect full year net charge-offs between 30 and 40 basis points. Turning to capital. With the release of the proposed capital rule, we are updating our CET1 operating target to a range of 10% to 10.5%. We expect to resume regular quarterly share repurchases in the second half of 2026 with the amount and timing dependent on the balance sheet growth and the timing of the remaining merger-related charges. Our capital return priorities are unchanged: pay a strong dividend, support organic growth and then share repurchases. For the second quarter, we expect average loans of $178 million to $179 million, driven by growth in C&I, home equity and auto, is projected to be $2.2 billion to $2.25 billion with NIM expanding another 3 to 5 basis points. Noninterest income is expected to be $1 billion to $1.06 billion, and noninterest expense is expected to be $1.87 billion to $1.89 billion.
Finally, net charge-offs are expected to be 30 to 35 basis points. The first quarter established the foundation. NII above expectations, tangible book value per share growth intact, credit at a 2-year low, integration on track and early revenue synergies beginning to show. Those results matter, not just for what they are, but for what they signal. The core business is performing. The integration is delivering. And as we move through the year, the financial profile of Fifth Third will continue to improve in ways that are visible, measurable and consistent with everything we have committed to when we announced this combination. We have the balance sheet, the business mix and the team to get there. With that, let me turn it over to Matt to open up the call for Q&A.
Thanks, Bryan. Before we start Q&A, given the time we have this morning, we ask that you limit yourself to 1 question and 1 follow-up and then return to the queue if you have additional questions. Operator, please open the call for Q&A.
Questions and answers
We'll go to our first question from Mike Mayo at Wells Fargo.
As you highlighted, this is the biggest acquisition in your firm's history. And it sounds like it's on track from your prior guidance with the Labor Day integration, $850 million run rate savings by the end of fourth quarter. I think we kind of knew that already, but what's incremental in the last 3 months or since your last presentation that you think is maybe going better than expected? Is any of that higher NII guide due to the expansion in Texas and the promotions? And also, where are you seeing some of the snags? There's always issues with these things, what do you need to make sure you work out and doesn't kind of let down the progress?
Yes. Mike, it's Tim. I'll take an initial crack at that one, and then I'll let Bryan clean it up. So yes, I mean, we think we did a pretty good job of summarizing the past. As you know, when it comes to these large transactions, the absence of any surprises is a positive, right? So getting 1 quarter closer to a point where we're operating on a single common platform is an important milestone unto itself. In terms of just the core integration, I think things have gone really well. There really haven't been big surprises. We completed the Walk-the-Wall planning exercise that we run all the customer day when deliverables have been locked. I think there are 46 new to Fifth Third applications, which, as we mentioned from a technology perspective previously primarily support the Tech and Life Sciences business and the Dealer Services business, plus a couple of things in payments. I think the data strategy and the data conversion, that work is completed.
All the risk-based process reviews we needed to get done which are essentially the click down from the work that got done in diligence have been completed, and we know where the product gaps are that need to get filled. The org charts are done, as I mentioned in my remarks, and we've selected the key leaders. I'm pleased it's very early days. So this is not by any stretch of the imagination a declaration of success. But that sort of employee attrition is actually running a little bit below the historical levels. So we're not seeing any sort of elevation in attrition. I think the positive surprise is actually happening in Texas and then even more broadly across the Southeast is related to promotional activity. We got a lot of questions after we announced the deal about whether the playbook that's worked so well for Fifth Third and the Southeast would work in Texas and in the Southwest more broadly.
So that initial mailing that I referenced in my prepared remarks was a test, right? It was the test and learn process so that we could reground our targeting and expected balance models on empirical data in Texas. We mailed 700,000 households. Response rates were good. The fact that more than half of customers open checking even in an environment where there are still all the legacy tech limitations that Comerica had are still in place. I think is very good. But maybe the more exciting thing is that having regrounded the models, we dropped the subsequent mailing on the 10 to 11 of this month to 6 million people and the very early results there are super positive. With the sort of reground of the analytic models, we're getting 3x the response rate that we see at this stage in a campaign packet. And we actually expect that campaign alone to generate $1 billion in deposits across Texas, Arizona and California, which would be great.
Now that is all incorporated in the guide to be clear. That's not above and beyond the guide. But it just speaks to a the fact that the tactics that we are using in the Southeast are going to work in the Southwest and, B, the fact that Comerica had not run any sort of external consumer marketing in 13 years means it's a relatively unsaturated market for us. And therefore, if anything, I think my optimism about our ability to gain share there has improved. Then in terms of what's not working. We got a little bit of an internal civil war here between people who like their chili with beans, no beans or on spaghetti. So that we're going to have to solve before we can truly say we're one company.
All right. That's kind of like my weakness as I work too hard. But okay, so it's interesting that you mentioned having very old mailings from last century. It sounds like with 6 million mailings, you're attracting $1 billion in deposits, which is promising. But are these all Comerica accounts right now? After Labor Day, will they all transition to Fifth Third accounts? That transition seems risky as you move from Comerica to Fifth Third branding. How do you manage this transition?
Yes. I mean the tech conversion, as you know, is the single largest point of risk in a transaction because I think we've got a very good employee value proposition here. We've got, on a combined basis, more capability than either company had to serve clients, and those things are good for people that the Code Red event that could occur would be if you made a mistake on the tech conversion and either people couldn't access their accounts or you had service issues or processing issues or otherwise. So we're definitely always mindful of that. Assuming that we execute the conversion well, the way that we did with MD as an example, then I actually think the tech conversion is a positive. There'll be a bake-in period where people will need to learn to navigate new interfaces, whether that's the consumer mobile app or the commercial portals and otherwise. But the capabilities that are in Fifth Third's digital channels are much broader than exist inside Comerica's current channels.
The point I made about the managed services, like those are software solutions that we offer in commercial payments. The fact that we've shown those things to 100 Comerica clients, we have 2/3 of them as qualified leads in the sales pipeline sort of speaks to the tech quality. What the conversion will allow us to unlock, though, is all the digital marketing channels. The reason we're not doing digital marketing to support the Southwest markets today is because Comerica can't open consumer deposit accounts digitally. And therefore, there's no sense in using them. once we're under the Fifth Third brand and on the Fifth Third tech stack, the 50% of our direct marketing that gets done via digital today, all of a sudden then becomes viable in the Southwest and all the household growth tactics that we use in addition to the deposit growth tactics in the Southeast become viable as well.
We'll move to our next question from Scott Siefers of Piper Sandler.
Maybe Bryan hoping to start with you something you can speak to some of the underlying drivers in the core margin. I think I know you suggested the reported level should expand another few basis points in the second quarter due to the full quarter's impact of Comerica. But maybe you could sort of speak to dynamics such as overall rate positioning, which I think you touched on, but maybe competitive dynamics on the loan and pricing side, just those kinds of things that you're seeing?
Yes. Absolutely, Scott. Thanks for the question. As I mentioned in my prepared remarks, we are asset sensitive today. That is certainly a factor that we are focused on as we think about trying to move to a more neutral position over time. We feel very good about how we're positioned, and that's obviously one of the things that's gone well for us with the current volatility in interest rates, it's given us some opportunities to do some things in the investment portfolio and put a few positions on in the quarter at pretty attractive levels. So we do feel good about that. From a driver perspective, we do expect some additional improvement from fixed rate asset repricing over the remainder of the year. From a magnitude perspective, it's a little bit less impactful than it has been because 1/3 of our balance sheet was effectively repriced with the Chimeric acquisition. So we are still seeing some good trends there on the legacy Fifth Third portfolio.
But obviously, that's just a smaller percentage of the balance sheet now. That's probably 1 basis point, 1.5 basis points kind of pick up each quarter through the end of the year and feeling good about trajectory that gets us approaching to exiting the year closer to 340 from a NIM perspective. So a lot of things going well from a net trajectory perspective. The environment, obviously, it's competitive, we're in an industry that is always competitive, both on the lending side and on the deposit side. I would tell you that it is competitive but not irrational right now. Loan spreads have come in a little bit, but aren't crushing at this point. And we are just seeing normal deposit competition with the Midwest continues to be the most competitive deposit market that we're seeing from a consumer perspective, more competitive than the Southeast, and we're still trying to get a better sense of what Southwest looks like, but it does not look like it's going to be an outlier relative to other markets.
Okay. Perfect. And then maybe a higher level question here. You all talked about the fourth quarter of this year representing sort of the time when we really see the full run rate accretion, returns, efficiency. Basically, all the benefits from the Comerica transaction. Basically, all your numbers are going to be at or near best in class. As we start to look to a post-sort of post-Comerica time like into next year when those benefits have really become realized how will you sort of think about balancing additional improvement in profitability, returns, efficiency? Or will those at that point represent sort of steadier states as you do things like invest to just ensure that the levels you reach remain durable over time?
We've received questions recently about the durability of synergies and whether they require reinvestment. My response has been that if these funds need to be allocated elsewhere, it's not truly an expense synergy; it's more about how we apply our capital. We firmly believe we can maintain the expected profitability levels for the fourth quarter and further enhance them. There's always more to achieve, and we aim for a strong return on equity no matter the circumstances. The key is making informed decisions at the margins. With a 19% return and a 53% efficiency ratio, we must decide whether to leverage our strong operating performance to enhance profitability and boost the tangible book value multiple, or to concentrate on increasing tangible book value per share, or pursue a combination of both. I am confident we can do both effectively. When I joined 11 years ago, a quarter of the U.S. population was within our reach; now, more than half is.
As mentioned, 17 of the 20 fastest-growing metropolitan areas in the U.S. fall within our footprint, where we hold a top five market share in all. Our branch network is among the newest compared to other major banks. We also have a thriving payments business benefitting from market shares shifting from banks to non-banks. Additionally, we have welcomed a significant number of bankers from Comerica who are now able to operate without capital or liquidity limitations. Our commitment to technological innovation remains strong. We will continue to invest in our core business, aiming for a 19% return on tangible common equity, and if we exhaust our ideas, our focus will shift to increasing that return further while also enhancing book value per share.
Next, we'll go to Gerard Cassidy at RBC Capital Markets.
Tim, did you have a poster too with Steve's poster?
I had Steve and Dick. At my height, my lack of foot speed meant I had to go with the field athletes as well.
Got it. Good for you. When I look at your utilization trends that you provided, and you mentioned it in your prepared remarks, I noticed it increased significantly from 34.9% in the fourth quarter to 40.7%, and then you specified it excluding Comerica. Can you share some insights on two areas: first, what you're observing with legacy Fifth Third, and then also what legacy Comerica is experiencing?
Yes. From a utilization perspective, I can tell you that we are seeing fairly consistent trends across the Fifth Third Platform and the Comerica platform, particularly with middle market customers who are starting to show a bit more activity. We also observed a nice rebound from the corporate banking side. Some of this can be attributed to the activity in capital markets, as we experienced lower pay downs this quarter in that area. Overall, we think this rebound aligns with the expected effects of tax bill benefits, leading to increased spending as customers navigated the environment. Additionally, later in the quarter, there were impacts related to the situation in the Middle East.
Yes. Maybe the one thing I'd add there, that is at least based on the cursory read I did other banks that have reported thus far is one thing we didn't see that a lot of other people sized. We didn't get a lot of the loan growth from private equity or price capital. So if you look at the growth in loans, less than 10% of it, in our case, came from private equity or private capital. And my quick read through it may be as high as 80% of a lot of other places. One of the things that's comforting about the Comerica portfolio is they're a lot like Fifth Third in the sense that we bank real economy businesses. People make things or move them or warehouse them or sell them or core services like health care. And otherwise, between the two of us, we were both on the low end of the as a percentage of total commercial loans tables. And it just hasn't been a growth focus for us. I think the other thing I might flag there since I know it's come up as we have less than $100 million of funded exposure to data centers, what we definitely have been on the more skeptical end of the spectrum on that front.
We talk internally about the fact that we wouldn't underwrite an energy loan without a petroleum engineer looking at the projections. And I don't think there are a lot of us employing AI researchers the cost that they are to help underwrite data center facilities. It's just there's such a long history of overbuilding tech infrastructure anytime there's a platform shift. And the obligors are a little less clear than we personally would prefer. So that is where the growth wasn't coming from in our case.
Very good. I have a follow-up on credit quality, specifically regarding the guidance, which has been strong, and the quarterly numbers are solid. I have a question about the commercial segment of the portfolio. I realize that this figure fluctuates due to its nature, but the delinquency rates between 30 to 89 days are low. However, considering the commercial and industrial segment moving to 38 basis points and the increase in commercial real estate, is there anything we should watch out for? Or could this simply be due to the combination of the two companies, leading to some confusion about payment processes? I realize that might sound unusual, but any insights would be appreciated.
Yes. It's not quite as basic as they didn't know where to send payments, but the majority of the increase there, Gerard, was 2 credits, and the payments got made on April 1. So if we could have reported all of this as of April 2, you wouldn't have seen the jump that materialized there.
Our next question comes from Ebrahim Poonawala at Bank of America.
I have a question regarding deposits. It seems that funding is becoming a larger constraint for banks than capital as we move forward. Can you discuss your strategy in the Southeast given the intense environment? How are you converting clients gained through promotions into core checking accounts? Is that progress being made? Also, Tim, considering the branches you're planning to open in Texas 3 to 5 years from now, how confident are you that these branches will still be as effective as client acquisition tools in 5 years as they are today?
Yes, good question. So yes, I think your point is an important one. Your ability to convert relationships into essentially new clients, right, whether you attract them through rate or cash bonus or because of the new branch opening or otherwise, in the primary long-tenured relationships. That's effectively the seed corn for everything that we do because we have an acquirer once and then maximize wallet share strategy. That's the reason we keep disclosing the household growth rates in the Southeast, like those are primary households. If accounts going active, they get washed out of that number. And so you could trust that the 3% overall and in this case, the household growth in the Southeast, the sort of 7%, 8% range we've been running at as a real number. It's active accounts in one period divided by active accounts in the same period the year before, minus 1, right?
So the population growth in the Southeast is 1.5% to 2% per year in any given market. Our growth rates have been 7% to 8%. So we're generating 3% to 4% the growth on a net basis that the market is experiencing on a net basis, which I think should be the sort of best proof point you can rely on that we're making the conversion. Savings promotions don't count in that number, anything we do with loan products, home equity, et cetera, that doesn't count in the number that's primary checking customers. In the Southwest and in Texas, that we have 81 or 82 of these properties locked up. We're going to have branches opening next year, not in 3 to 5 years, just to be clear. And I think the measure of their importance, like I actually like to think about branches, if you don't think about them as stand-alone mechanisms to generate new account growth, the other way to think about them is attributes that boost response rates to direct marketing, whether that's digital or mail.
And there is a nonlinear decay function in response rates and expected value. The further you get away from a Fifth Third branch by drive time in our models today. It's one of the more powerful variables in dictating who gets a digital offer, like the IP range or the ZIP code in the case of a mailer actually drive whether or not you see Fifth Third promotions. And as long as that decay function exists, the branches are playing a role in driving our ability to grow the franchise. And I just don't expect human behavior to change that quickly. It certainly hasn't ever in the past.
Got it. And just one quick follow-up. You mentioned this a few times regarding the differences between NBFI growth and non-NBFI. Do you see any embedded risks in that lending that concern you? Can you explain why it seems attractive to many of your peers but not so much for Fifth Third?
I don’t believe private credit will disappear as a category. However, I think the private credit industry will be significantly smaller in the future than some may fear. Generally, we believe that the strategies for growth in this space, particularly through retail money, have proven to be flawed, especially when promising returns of 8% to 9%, which we see as unrealistic. Banks typically operate with leverage around 8 to 10 times to achieve a 15% return, while private credit often suggests high returns with much lower leverage, which seems improbable. There is certainly a place in the investment market for vehicles that offer returns between corporate bonds and equities, but I doubt the scale will be substantial. We don’t play a large role in this market; for instance, Comerica and Fifth Third collectively have about $1 billion in private credit or BDC activities. Consequently, I can’t comment deeply on the leverage in other firms' structures.
We tend to steer clear of these areas because we find it challenging to understand the total leverage involved in the various components, including portfolio companies and other lending forms. More importantly, my concern is that lending in this space lacks competitive barriers for banks, which means returns will likely align with the cost of capital. We strive to achieve returns that exceed our cost of capital. Relying heavily on growth from something tied closely to cost of capital can divert attention from more lucrative opportunities such as primary relationship lending, enhancing wallet share, and establishing lead positions. We aim to generate growth from areas that can deliver returns of over 19%, rather than the lower returns expected from private credit.
We'll move next to Manan Gosalia at Morgan Stanley.
I think in the prepared remarks, you mentioned that the proposed rules recognize granular, say, for well-collateralized loans. So I think you were pointing to opting into ERB. So first, I just wanted to clarify that. And then my main question, Tim, when you think about EBA given that it would allow banks to hold less capital against higher quality loans. Do you think it creates some sort of disincentive or negative credit selection for banks that don't opt in?
It's Bryan. At this point, we're still evaluating whether or not we will opt in to era. It's not necessarily the driver of creating the big benefit for us. It's probably an incremental 10 or so basis points relative to the numbers that I quoted. And then obviously, there's some complexities associated with data and models and systems in place necessary to do some of the calculations. So that's something that we're still evaluating. There is always some regulatory arbitrage out there, whether it's within the existing capital rules and use of securitization style structures from just general lines or how private credit participates in the regulatory landscape as well. So there is always that aspect of competition and ultimately, how you think about capital allocation across. I don't think it will have ultimately a really big impact ultimately on competitiveness across the industry and between the banks that opt in and those that don't.
Yes. I would like to add that it really depends on how you assess risk; not every bank has used the same criteria over the past 15 years. Each bank has a different approach to calculating returns. When considering Red Cap, we evaluate its performance in the context of the entire company. However, when analyzing individual credits, we take into account the amount of economic capital those credits should attract based on the risk assessment, factoring in both the likelihood of default and the potential loss if a default occurs. If you were to apply the same capital charge to every loan, especially in non-urban settings, you might encounter risks. Our method involves making macro-level decisions, while individual underwriting choices and return assessments occur at a company-specific level.
Got it. That's really helpful. And then now that we have the proposals for capital, I think the focus has been turning to the liquidity rules. I guess the question for you is, what would you like to see there on the liquidity side? And is there something that you want to see that would cause you to manage your liquidity differently from what you're doing?
Yes. I think the most valuable thing for the industry is some credit and the liquidity rules associated with your secured lending capacity at places where you know the liquidity is going to be there. Think about your FHLB borrowing capacity against your securities, discount window or repo facilities like those will be areas where getting some credit associated with that off-balance sheet liquidity would be very valuable for the industry. That is probably one of the more significant. We would also like a little bit more rationality on deposit outflow assumptions. That is an area where there has been significant pressure on the industry across the old horizontal liquidity exams that were occurring. And I just think we've ended up in a spot where the assumptions that are embedded in most liquidity stress tests today are just absurdly high relative to some of the core banking relationships, in particular, the operational deposits that are attached to treasury management services.
We'll go next to Chris McGratty at KBW.
Tim, I want to come back to the comment about the Midwest being more competitive in the Southeast. It seems somewhat contrary to where all the capital is being allocated from a lot of the banks. Can you unpack that a bit?
Yes. I mean Chris, this has been true. It's like one of the interesting factors that just been true for a very long time. I think you had 2 dynamics in the Midwest that are a little bit unique relative to the rest of the country. One, historically, you've had a lot more regional banks headquartered in the Midwest, right, and less in the way of trillionaire market share and less consolidated markets tend to be more competitive. That's just that's not a blinding insight on my part. That's just economics 101. The second factor is credit unions play a much more prominent role in a lot of the Midwestern markets than they do other places elsewhere in the country. And credit unions tend to be optimizing for very different factors like do not help do a profit mandate and therefore they tend to be optimizing around just absolute levels of liquidity needed or otherwise. And so the sort of combination of more fragmented markets and an actor that's optimizing around a different set of goals just produces higher levels of deposit competition.
That, I think, for us has been one of the interesting things as we moved into the Southeast as we have this double benefit of both having a small existing share and, therefore, a low cannibalization cost of any new marketing campaign that we run, right, which is a little bit like Judo you're using your opponent's weight against them. And the fact that at the margin, the marginal dollar in the Southeast is still a little bit cheaper to raise than the marginal dollar in the Midwest. It means we can be more aggressive and still have a very nice impact on the franchise overall.
Great. Yes, definitely, with Chicago being one of the more competitive markets and fragmented.
I don't know that there's another state with 3 regional banks headquartered in it either the way that Ohio has Fifth Third and a couple of others.
Yes, the expectation is that we talked about as being in that 53% range in 2027. Our fourth quarter efficiency ratio is always our lowest efficiency ratio for the year. So I would expect us to be a good point, 2 points below that 53% in the fourth quarter.
And we'll take our final question today from Christopher Marinac at Brean Capital Research.
I want to ask you and Bryan about the NBFI reserve allocation. Would that number necessarily not go up much this year because you're avoiding some of the higher-risk, lower-return pieces of lending?
Yes. We're not seeing anything in our portfolio that would cause us to have any need to build significant reserves related to what we're doing very well secured, very well performing, just not an area where we're seeing any significant risk.
Yes, absolutely. Before we conclude, I want to quickly say congratulations to Keith Horwitz on his retirement and on his 30 years in the community. I believe he will demonstrate that older individuals never truly fade away; they simply stop updating their outlook. We appreciate Keith for all his years of service and wish him the best in this next chapter of his life.
And that concludes our question-and-answer session. I will turn the conference back over to Matt for closing remarks.
Thank you, Audra, and thanks, everyone, for your interest in Fifth Third. Please contact the Investor Relations department if you have any follow-up questions. Audra, you may now disconnect the call.
Thank you. And this concludes today's conference call. We thank you for your participation. You may now disconnect.