管理層發言
Hello, everyone. Thank you for joining us, and welcome to Fifth Third's Second Quarter Earnings Call. After today's prepared remarks, we will host a question-and-answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Matt Curoe, Director of Investor Relations. Please go ahead.
Good morning, everyone. Welcome to Fifth Third's second quarter 2026 earnings call. This morning, our Chairman, CEO, and President, Tim Spence, and CFO, Bryan Preston, will provide an overview of our second 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 July 17th, 2026, and Fifth Third undertakes no obligations 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.
Morning, everyone. Thank you for joining us. At Fifth Third, we believe great banks distinguish themselves not by how they perform in benign environments, but how they navigate uncertain ones. In a strong macro environment like this one, our job is to stay disciplined and to build durable franchise earnings, not simply to enjoy the cyclical boosts. As we always say, it's stability, profitability and growth in that order. Today, we reported earnings per share of $0.83 or $1.02 excluding certain items outlined on page two of the release. When we announced our merger with Comerica nine months ago, we made three commitments, to produce no tangible book value per share dilution, to become an even more profitable company, and to create an even better platform for long-term growth. While we are still in the middle of integration and not every metric is yet where it will be, our trajectory and long-term potential are visible in this quarter's results. Tangible book value per share increased 10% year-over-year, 1% sequentially, and 7% since the announcement of the transaction. Our adjusted return on tangible common equity improved to 19%. Our adjusted return on assets improved to 1.3%, and our adjusted efficiency ratio improved to 57%, even with most of the expense synergies still yet to be captured. As importantly, our organic growth strategies continue to deliver on the broader footprint and opportunity set that Fifth Third and Comerica together possess. End of period consumer and small business deposits increased 4% sequentially, driven by strong new customer acquisition. In the Southeast, consumer checking households grew by 7% year-over-year, approximately 4x the rate of underlying market growth. We opened more than one branch per week during the quarter and remain on schedule to open 55 new branches in the Southeast for the full year. Encouragingly, Comerica's Texas, Arizona, and California markets grew checking households by 4%, the first net new household growth in several years, and added $2.5 billion in deposits, more than double the $1 billion expectation that we shared in our last earnings call. We also opened our first Fifth Third-branded branches in Texas and California during the quarter. Following conversion, we expect Southwest household growth to accelerate further as Comerica's existing branches see the full benefit of Fifth Third's products, digital channels, and analytically driven direct marketing. We will also see the pace of new branch openings accelerate in Texas, having now secured 101 of the 150 additional locations we targeted to build by the end of 2029. Turning to commercial lending, end of period C&I loans grew 2% sequentially. Comerica's legacy markets and specialty verticals grew C&I loans with Texas, California, Michigan, environmental services, dealer services, and tech and life sciences all showing growth. Our largest fee businesses hit important milestones during the quarter with commercial payments and wealth and asset management each achieving a $1 billion-plus annualized fee run rate and capital markets fees reaching a $600 million annualized pace. Newline continued to drive growth in commercial payments, with fee revenue increasing 35% year-over-year, and the technology behind it earned 2026 top financial innovation awards from both the American Banker and Global Finance. We also shipped the first Direct Express cards on our new platform during the quarter, with 66,000 new beneficiaries and all participating federal agencies now live. Behind the scenes, our product and technology teams had a strong quarter, both in terms of integration and innovation. On the integration front, we executed our second mock conversion in June with good outcomes. We remain on track to execute systems conversion on Labor Day weekend, the last step to unlock the $850 million of annualized run rate synergies we committed to deliver in the fourth quarter. On the innovation front, Newline extended its Model Context Protocol server capabilities with Skills, standardizing how AI models can use our tools and workflows. Our consumer team shipped a new AI-powered interface within our mobile app designed to streamline navigation and task completion for our customers. We also launched Fifth Third for Business during the quarter, a banking experience designed to help small businesses manage working capital and get paid faster. This solution includes several differentiated tech-enabled elements, including crediting eligible payments such as merchant receivables and government payments up to two days early for free, enabling business customers to accept payments via Zelle and tap-to-pay directly on their smartphones, and providing access to working capital through the same award-winning digital interface that powers Provide. Internally, Fifth Third colleagues continued to make significant use of AI tools to boost quality and productivity, executing more than 1 million prompts in the month of June alone. In technology, the prompt accepted rate for new code was 45% during the quarter, and over 87% of unit testing was automated by AI. While it's early days and we have much yet to learn about how best to harness the power of these tools, I'm looking forward to what we will be able to do after our technical conversion is complete. Before I hand it over to Bryan, I would like to take a moment to thank our team members. The work you do is detailed, demanding, and important, especially now as we serve existing customers and communities, along with executing the largest merger in our history. We are building a Fifth Third that is not just bigger, but better, more differentiated, and more resilient. That's why earlier this morning, Euromoney recognized you as the best U.S. bank in 2026. Congratulations. With that, I'll turn it over to Bryan.
Thanks, Tim, and good morning. Our second quarter results reflect a core franchise that kept compounding and the earnings power of the combined company beginning to show through in the margin, the fee lines, and the expense discipline. The comparisons to the prior quarters remain distorted by the acquisition. Let me review the key themes in two parts. First, our organic engine kept executing, and second, Comerica broadened the runway ahead of us. Starting with our organic performance, net interest income and margin show the benefits of the continued disciplined execution in addition to the acquisition benefits. Net interest income was $2.22 billion, and net interest margin expanded 6 basis points sequentially to 3.36%. The margin move breaks down cleanly. The additional month of Comerica contributed 3 basis points, and the remaining expansion came from the continued benefit of fixed-rate asset repricing, loan growth, and deposit performance. Loan growth was broad-based and granular. Period-end portfolio loans of $179 billion grew 1% sequentially, with commercial loans up $2 billion or 2% on production across middle market and corporate banking. Line utilization was stable at 40.8%, flat with the first quarter. Clients remained active despite continued market volatility. Shared national credits remain a modest 26% of total loans, consistent with our focus on granularity. In addition, our Provide fintech platform grew loans approximately 4% sequentially. We are realizing the benefits from expanding Provide's leading digital experience in practice finance into a broader small business lending platform, where we have moved from number 31 in SBA lending nationally a year ago to number 15 today. Period-end consumer loans grew steadily, with the mix continuing to shift. Home equity balances increased 3% sequentially, and we were the number one originator of home equity lines across our legacy footprint. This growth maintains the same credit discipline, with an average FICO of 774 and a loan-to-value ratio of 63%. Given the rate outlook, we expect continued momentum in this product where we have been building share. Our funding discipline shows in the deposit book where we saw granular deposit growth and well-controlled deposit costs. Average core deposits were $229 billion in the quarter, and period-end core deposits were $231 billion. We remain focused on improving the composition of our deposit base towards our long-term goal of retail deposits contributing 60% of our core deposits. During the second quarter, consumer deposits grew nearly $5 billion and offset the intentional reduction of higher cost non-relationship deposits and normal seasonality in commercial. The $2.5 billion of consumer deposit growth in the Southwest that Tim described was a meaningful driver of that growth and reflects early traction in our newer markets. Average non-interest-bearing balances were 28% of core deposits, up from 25% a year ago, reflecting Comerica's commercial DDA franchise and our own consumer DDA growth. On a legacy Fifth Third basis, households grew 3% over the past year and, as Tim highlighted, even faster in the Southeast markets, translating into 5% consumer DDA growth, reflecting relationship-based, not rate-driven growth. Total deposit costs fell 4 basis points sequentially to 1.54%, a favorable outcome relative to industry trends. Interest-bearing deposit costs also improved, down 2 basis points sequentially. Our balance sheet management posture is unchanged. We prioritize granular insured deposit funding, and we continue to hold meaningful liquidity buffers. We maintained a Category 1 LCR ratio of 107% and a loan-to-core deposit ratio of 77%. We have and will continue to actively manage our overall funding costs through pricing and mix, a discipline that has allowed us to expand NIM this quarter while continuing to fund growth. The fee business performance carried the same breadth with not one line, but three delivering solid outcomes. The same three that we have invested in for years, and the returns are compounding. Adjusted non-interest income, excluding security gains and other items listed on page four of the release, was $1.04 billion. Wealth and Asset Management revenue was $256 million on higher personal asset management fees and favorable market performance. Total assets under management were $128 billion. On a legacy Fifth Third basis, AUM was $85 billion, up 16% from the prior year. Within Wealth, Fifth Third Securities continued its momentum with retail brokerage revenue up 18% from the prior year. Commercial payments revenue was $254 million, led by strength in Newline and core treasury services. As Tim noted, Newline fee revenue was up 35% compared to the prior year, and related deposits were $5.3 billion, an increase of $2.1 billion from the prior year. Direct Express contributed $22 million in fee income with average deposits of $3.7 billion in the quarter. Capital markets fees were $154 million on client financial risk management and loan syndication activity, an annualized pace in line with the $600 million run rate Tim described. Now to expenses, where the benefits from Comerica and the integration progress are already being realized. Total adjusted non-interest expense of $1.86 billion was better than our expectations as we continue to realize synergy benefits ahead of schedule. Page five of our release details the certain items that had the largest impact on non-interest expense this quarter. Primarily, $203 million in merger-related charges. The full $850 million of annualized run rate expense synergies is on track for the fourth quarter with systems conversion over Labor Day weekend the next major step. Given that conversion timing, we expect to realize the majority of the remaining synergy benefits in the fourth quarter. The adjusted efficiency ratio was 57.1%, a strong improvement from the first quarter, and we remain confident in achieving a run rate efficiency target of 53%. On credit, trends were benign and improving. The net charge-off ratio improved 7 basis points sequentially to 30 basis points at the bottom of our range and the lowest level since the second quarter of 2023. Commercial net charge-offs were 21 basis points, down 5 basis points sequentially, with stable trends across industries and geographies despite the continued market volatility. Consumer net charge-offs were 53 basis points, down 5 basis points sequentially. Consumer delinquency trends remained stable. Non-performing assets were relatively stable, up 3 basis points from the first quarter. Commercial criticized assets decreased during the quarter. Where we grow is a choice and so is where we don't. Our exposure to non-depository financial institutions is approximately 7% of total loans, well below the industry average. Concentrated in subscription and capital call facilities, corporate facilities to traditional financial institutions, and secured lending to mortgage-related entities. In each of these areas, we have deep underwriting history and structural protections that provide significant loss absorption before we would recognize a dollar of loss. On private credit, our loan growth does not rely on lending to private credit vehicles and business development companies, which together are less than 1% of total loans. A deliberate decision given the structural complexity that is harder to assess through a cycle. On software and data center lending, we believe in the long-term demand for AI infrastructure but have stayed selective. At less than 1% of total loans, that exposure is intentionally limited and performing in line with expectations. The ACL ratio ended at 1.76% of portfolio loans, down 3 basis points sequentially, reflecting continued strength in the risk profile of our book, particularly in C&I lending. Provision of $129 million was down $98 million from the prior quarter, which included an $83 million day one CECL bill for Comerica-acquired non-PCD and non-PSL loans. Our baseline and downside economic cases assume unemployment reaching 4.6% and 8.5%, respectively, in 2027, consistent with the prior quarter scenarios. We made no changes to our macroeconomic scenario weightings during the quarter. Moving to capital, CET1 ended the quarter at 9.93%, an increase of 4 basis points sequentially, despite strong period and loan growth and absorbing $175 million of after-tax charges related to the merger and other items. Our CET1 ratio, including the AOCI impact of our securities portfolio, was 8.7%. Tangible common equity, including AOCI, improved to 7.3%. We expect continued improvement in the unrealized losses in our securities portfolio, given the bullet locked-out structure, as approximately 55% of the fixed-rate securities in our AFS portfolio have a defined principal repayment schedule. A portfolio construction choice that gives us a high degree of certainty around the timing of the AOCI accretion back into capital. There was no share repurchase activity in the first half of the year. Moving to our current outlook. Our outlook reflects the forward curve at the end of June, which assumes a 25 basis point rate hike in September. Given the updated rate outlook and actions we took during the quarter, we are increasing our full year NII guidance to a range of $8.74 billion to $8.8 billion. Those actions, repositioning $4.5 billion of securities and adding $3 billion of forward starting received fixed swaps as a cash flow hedge on our commercial loan portfolio added to the NII outlook while beginning to reduce our asset sensitivity. We are refining our average loan guidance range to $174 billion to $176 billion. As a reminder, the average balance for the year will only include 11 months of Comerica. We are raising and narrowing our full year non-interest income guidance to a range of $4.06 billion to $4.16 billion, reflecting continued growth in commercial payments, capital markets, and wealth and asset management. We are also lowering and narrowing our full year non-interest expense guidance to a range of $7.22 billion to $7.26 billion. This outlook excludes acquisition-related charges. Taken together, our guidance implies full year adjusted PPNR growth of more than 40% versus 2025, including the impact of CDI amortization. We remain on track to exit 2026 at profitability and efficiency levels consistent with our 2027 targets. For credit, we expect second half net charge-offs of 30 to 35 basis points, which would place our full year performance in the bottom half of our 30 to 40 basis points range. Turning to capital, our CET1 operating target is 10% to 10.5%, and we are effectively there, with capital continuing to build through our earnings power. Our capital priorities remain unchanged. Maintain a strong dividend, support organic growth where we see the highest returns on deployed capital, then return excess capital through share repurchases. Consistent with that approach, we expect to resume regular quarterly repurchase activity in the second half of this year. For the third quarter, we expect NII to grow 2% to 2.5% from the second quarter, driven by the continued benefit of fixed rate asset repricing and day count. Average loans are expected to be up approximately 1%, led by growth in C&I, home equity, and auto. Adjusted non-interest income is expected to increase 1% to 3%, while adjusted non-interest expense is expected to decrease 1% to 2% as expense synergies continue to be realized. The second quarter turned the integration thesis into results. The earnings power of the combined company isn't a forecast anymore. You can see it in the margin, the fee lines, and the expense discipline. The core grew on its own. Comerica widened the runway, with the Labor Day conversion just weeks away, the earnings power is landing on the schedule we set. With that, let me turn it over to Matt to open 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 one question and one follow-up, then return to the queue if you have additional questions. Operator, please open the call for Q&A.
分析師問答
We will now begin the question-and-answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question is from the line of Ebrahim Poonawala with Bank of America. Your line is now open. Please go ahead.
Good morning. Maybe talking about the upcoming systems conversion at Comerica. Just talk to us as we move forward. Obviously, the expense synergies are playing out in line, if not better than expected. As we think about what's next tied to the deal and the opportunities it has created for the bank, maybe lay out if there's more to do on the efficiency front as we think about expenses making that franchise more productive. Does it create idiosyncratic revenue growth runway for Fifth Third, even as early as 2027? Thanks.
Sure. Thank you. Good question. A lot there. We feel very good going into the Labor Day systems conversion. I think we've talked before about the fact that the mantra here on any sort of a big program, whether it's something like this or the organic expansion, is think slow, act fast. We elected to do three mocks as opposed to two, which I think is generally where people are. We got through the second mock in June, and that went very well. We've actually built some pretty cool tech tools for this conversion—an intelligence layer that sits on top of the Microsoft project plan that is able to monitor the conversion in real time, and then helps the teams coordinate, including having AI essentially listening into Teams or Slack feeds and monitoring for any sign that there may be a delay, and then helping us to think through contingencies. We feel very good about being able to get the conversion done on Labor Day, which then, to your point, even unlocks the last large wave of synergies, both as it relates to real estate and to people, and then obviously to the elimination of the systems. We are, if you just look at it mathematically, running a good bit ahead of the $850 million in synergies. Our plan, assuming that the environment holds the way that it has been, is to redeploy anything above the $850 million into supporting revenue growth, unless we don't have opportunities to do that. At least as it stands today, the intent would not be to allow the additional synergies to fall directly to the bottom line in the form of incremental efficiency. It would be investing. The deposit campaigns in the Southwest went extraordinarily well. When we talked to you in January, we said we were hoping post-close to be able to get $500 million to $750 million out of the Southwest markets. When we did the earnings call and the programs were tracking ahead of plan, we said we hope to get $1 billion to $2.5 billion of incremental deposits into those Southwest branches. We're eager post-conversion to be able to turn on the checking household acquisition marketing. We expect to do very well. The unannualized sequential checking household growth in the Southwest was 4%, as I mentioned in my prepared remarks. I won't make an effort to calculate the compound rate. It's 16% annualized growth in robust markets, and that's without the checking products that Fifth Third will bring and the incremental household marketing. I think the other area is we intend to turn on the jets and the product specialists in the relationship manager sales force. We're ahead of the game on mortgage. We were able to move earlier there because Comerica really didn't have a large mortgage platform. We did the same amount in production in the Comerica footprint in two months that Comerica did in 12 months last year. That is evidence of where I think we'll be able to see pickup. We had some sizable commodities hedging relationships in metals and recycling come online, aligned to Comerica's verticals in the second quarter. About 10% of the Comerica payments sales force production was Fifth Third products that Comerica didn't previously offer. I think that could be a lot more. That could be 50% by the time that we're done. The ABL product in particular, in addition to equipment leasing, continues to be quite successful. We had Comerica bankers win new quality relationships. Not just servicing existing relationships, but winning new relationships with those products. Given that those things are materializing today, pre-conversion, when it's still a little bit cumbersome to manage client relationships across two technology stacks, when we get through to the other side of this, we should be able to show a pickup in both loan production and fee production on the commercial side next year. There's no reason not to take the household growth rates and to multiply it by four for the Southwest, because we will invest in an environment where deposits continue to be important and demand continues to be ample. Anything incremental we generate above and beyond the $850 million in the bottom line will drive up tangible book value per share growth.
Got it. Thank you. Maybe Bryan, one quick one for you. As we think about, I'm assuming you still expect the normalized net margin to move into the 340s sometime next year. Just talk to us on the deposit side, given the campaigns you're running, in terms of what you are observing both from a competitive standpoint, maybe by market, and from a customer behavior standpoint. Is the Fed not doing anything, leading to deposit pricing discussions ebbing, or are customers still mixing towards higher rate products? Thanks.
Thanks, Ebrahim. The environment certainly is competitive. That's not unexpected in what has now shifted into a loan growth environment. Loan growth obviously creates deposit growth for the industry as well, but there's a lot of sorting that has to occur. We are seeing an uptick in competitiveness across the footprint. The consumer deposit franchise is probably the most competitive area right now across the Midwest, Southeast, and Southwest. We've tested many different rate offers over the last six months in the first half of the year, and it certainly is getting more expensive to grow deposits. What we feel really good about is our ability to manage overall deposit costs, which you see in our results this quarter. We've remained disciplined on our ability to recycle interest expense into new opportunities. One thing that's hard to see in the numbers is that we're still maintaining about $100 billion of what we refer to as high-beta balances that we have the opportunity to recycle, which has been a real focus and helped us deliver strong deposit growth and deposit cost discipline this quarter. We see that trend continuing. We're excited about the opportunities in the Southwest markets in particular because we have such low share in those markets; we have the ability to grow with limited cannibalization. That helps us manage the overall marginal cost of those deposits. We think it's going to remain competitive. On the commercial front, I wouldn't say it's as competitive as consumer. People are positioning to take advantage of the rate environment. One way we manage that is making sure our index portfolio is structured correctly, which we feel good about right now. I don't think people are overly focused on potential hikes at this point; it's a coin toss, and it's something we're keeping a close eye on.
If I add one thing: environments like this favor people who have differentiated strategies. If you're in commodity markets for deposits, competition dictates your margins. When you have differentiated platforms, particularly operational ones that are harder to build quickly, you have optionality others don't. You saw in this past quarter that Newline delivered two yards, consumer three, and Direct Express four in deposit growth examples. Those are things not everybody can play. Direct Express is unique, Newline is differentiated with a lockout, and our branch building in the Southeast gives us an advantage. Combined, these assets create opportunities to generate growth above pure price competition.
Thank you both.
Your next question is from the line of Manan Gosalia with Morgan Stanley. Your line is now open. Please go ahead.
Good morning. Tim, when you think about reinvesting those incremental expense synergies from Comerica, you're also talking about several benefits on the top line that can come in relatively quick order next year. As you think about the benefit on the revenue side as well, and the investments you're making on the AI side, how should we think about the medium-term efficiency ratio, bearing in mind that you also want to keep reinvesting in the business?
We feel very good about where we're going to end the year. Bryan reinforced that whatever the glide path we are on for ROTCE, we made a huge step from first quarter to second quarter toward the target efficiency ratio. Seasonally, the fourth quarter tends to be our most efficient quarter, so we should do better than the 19% ROTCE and 53% efficiency ratio that we had set for 2027 in that quarter. Our belief is that at the level of profitability we're running at today, maintaining that level of profitability while showing enough operating leverage to continue supporting 19%+ ROTCE—compensating for the roll-in of AOCI into tangible common equity and driving tangible book value per share growth—is the best way to generate long-term value. We intend to accelerate investments in AI. I'm proud of our tech and product teams for what they've shipped because their principal focus has been delivering a flawless conversion. There is a lot more we'll do once we move out of a code-freeze environment and can drive more efficiency into the business. We have proven strategies to generate low-cost deposit growth and fee growth that are a better path for us, given our position, than focusing on small incremental improvements in core profitability.
Got it. Maybe separately on Direct Express. You spoke about issuing new cards and adding 66,000 new beneficiaries. How quickly can that product scale relative to the $3.7 billion in deposits you mentioned, and how are you thinking about the opportunity to expand that program in the years ahead?
There are two stages: front book and back book. The front book applies to all new beneficiaries in the federal government who elect not to have their benefits routed to a checking account; they go on the new platform. The back book conversion will commence this year and will scale the new platform by moving deposits off the old Comerica-operated platform onto the new Fifth Third and Fiserv solution. We are seeing good underlying growth in deposits in this portfolio, and demographics make retirees a favorable segment. I think we'll see secular growth tailwinds there.
If you look back on a multi-year view: in 2024, this program averaged closer to $3 billion in balances. It's sitting at $3.7 billion today, and we would expect that kind of growth to continue. The makeup of this program—retirees and segments of the economy that are effectively unbanked or don't have traditional bank accounts—supports continued DDA growth and strong demographic trends.
Great. Thank you.
Your next question is from the line of Ryan Nash with Goldman Sachs. Your line is now open. Please go ahead.
Morning. Tim, you talked about the deposit growth engine moving full speed ahead with your first down reference. Bryan also talked about runoff of some higher balances. Given all the initiatives you have going on, can you put a finer point on what is assumed for deposit growth and how you're thinking about deposit growth over the medium term as well as the key drivers of it? Thank you. I have a follow-up.
When we look at the numbers, it's hard to see all the moving parts since we're now comparing a full quarter impact of Comerica to two-thirds of a quarter and layering on normal commercial seasonality. If you look at June average balances versus March average balances for the month, we saw 1% sequential growth, including recovery of DDA balances from typical seasonality. From a mid-single digit growth rate perspective, we think that's the trajectory the company can be on for some time, and we can accelerate faster depending on the speed at which we deploy marketing dollars. A mid-single digit growth rate supports the mid-single digit loan growth we talk about. We think we have a long runway. We have discussed the four $10 billion deposit opportunities in front of us: the maturing Southeast network, the Southwest network, building out our small business product, and tech and life sciences growth. That's a $40 billion opportunity over the next five to seven years as the network matures. The deposit franchise tailwinds are there. We have a diversified franchise to grow across geography and business lines. The consumer franchise is profitable—$116 billion of deposits at a total cost of deposits that supports strong profitability. We can attract new customers, and over time we can price them down while maintaining those relationships.
Got it. Tim, you put a finer point on loan growth expectations. You saw solid C&I growth in the quarter. Maybe expand on what you're seeing in the market: any signs of irrationality or areas you're leaning into versus pulling back? Do you think we could sustain these types of loan growth rates going forward? Thank you.
I feel pretty good about our ability to sustain the loan growth pace, barring a material macro change. Commercial clients' confidence is up broadly—demand is stable and in some cases improving. Sectors linked to infrastructure, data center investment, and reshoring activity like automotive have strong demand. Those focused on value-oriented consumers show more hesitancy. Legacy Fifth Third C&I was up more than 2%; new quality relationships are running about 20% ahead of the prior year, supported by more middle market bankers on the street. Comerica business lines and markets grew C&I loans about 1% sequentially after being flat for several years. Vertical specialties grew 6%—energy, talent, and the bankers there are exciting. Post-conversion, there's no reason both teams won't converge around the same growth rate. The blended outlook for the bank is a pretty nice sustained loan growth outlook.
Thanks for the color.
Your next question is from the line of Erika Najarian with UBS. Your line is now open. Please go ahead.
Hi. Good morning. Just to make sure we're taking away the right thing from those responses: Bryan, should we assume a mid-single digit annualized growth rate for deposits in the second half of the year? Also, can you put a finer point on deposit costs as you progressed through the year? Assuming no Fed hike, what should we expect for deposit costs, and if there is a Fed hike, what kind of beta would we see?
A mid-single digit growth rate is a fair long-term growth rate for us, aligned with the loan growth perspective and keeping the balance sheet core deposit funded. From the second half perspective, there's normal seasonality with a ramp in the end of the fourth quarter due to commercial balances building heading into year-end. From a cost perspective, more of the balance growth will come in interest-bearing products; we expect deposit costs to be stable to slightly up even in a flat Fed funds scenario. We can manage this through continued asset growth and fixed-rate asset repricing. If there is a hike, deposit costs would increase, but repricing of the asset side would outweigh that and be a net benefit for NII.
Thank you. My second question: some peers have provided more detail on deregulatory impacts. Any updated thoughts on Basel III endgame and electing either the enhanced risk-based or revised standardized approaches? Also, you mentioned Category 1 LCR compliance at 107%—how bulked up is your balance sheet for LCR compliance, and what could it mean for natural margin if LCR reform allows drawing from the discount window as liquidity?
We are where we need to be from a balance sheet and LCR perspective. Any LCR relief would create margin value long-term by allowing a smaller security portfolio, particularly a smaller Level 1 allocation, which would be NIM accretive. It's tough to quantify until you see the floors and what a minimum security portfolio size might be. We keep collateral pledged at the discount window well above our security portfolio; we don't believe we could take our security portfolio to near zero. From a capital perspective, we feel very good about where we are on Basel III endgame. On a fully phased-in basis, we're above 9.5% CET1. Including phase-in AOCI, we'd be north of 10.5%. Capital is in good shape. We also have the option to adopt the expanded risk-based approaches, which is about a 10 basis point difference relative to the standardized approach; that's a choice we'll evaluate.
Great. Thank you.
Your next question is from the line of Gerard Cassidy with RBC Capital Markets. Your line is now open. Please go ahead.
Hi, Tim. Question for you: you pointed out that synergies are coming in ahead of the $850 million. When can you tell us about what your commercial leader is doing to grow revenues? You laid out expenses at deal announcement and they're coming through. Do you think a year from now you'll be able to quantify that you've grown revenues by X because of the combination? You touched on mortgages and production—when do you think you could quantify revenue synergies?
Great question. I think going into next year. We're tracking these things in a detailed way today—down to the deal level. For example, about 8% of Comerica payments sales force production was Fifth Third products Comerica didn't previously offer. We're measuring that. The focus will shift post-conversion from job one—protecting existing value and getting expense synergies—to job two—energizing the combined team to drive growth. On retention, 99.4% of Comerica commercial customers who were on the books at the beginning of this year are still clients today. We're running ahead of normalized client attrition. Teams have done an incredible job explaining why customers are better off with the combined company. We'll give you a view in the fourth quarter and into next year of what we think is coming from legacy Fifth Third strategies versus what's coming from applying those strategies to new markets or leveraging Comerica capabilities across the broader platform. We'll be transparent.
Very good. Appreciate that color. As a follow-up, on AI growth's impact to the U.S. economy: have you been able to assess second-order effects on commercial customers benefiting from AI growth? And are there risks of overbuilding, similar to the dot-com era fiber build-out? How do you get your arms around those risks?
We think about that. Given how I spend time in technology, the guaranteed rule is we'll misestimate capacity needs because a nascent market attracts many competitors. That implies some overbuilding, though it may be absorbed over a longer timeframe than anticipated, which makes construction financing risky. Given the composition of our client portfolios—real-economy businesses—we have many relationships with companies constructing data centers. For example, I met an HVAC contractor with a five-year backlog tied to hyperscaler demand. We bank businesses engaged in the supply chain of data center construction, like aggregate and lime. It's hard to do a portfolio-level second-derivative exposure analysis; we do that assessment when underwriting individual clients, looking at concentration in revenue composition and stress scenarios. The benefit of banking suppliers and participants in the ecosystem rather than making speculative construction loans is that many have stable underlying businesses.
Great. Thank you. Appreciate it.
Your next question is from the line of Mike Mayo with Wells Fargo Securities. Your line is now open. Please go ahead.
Hey. Quick clarification: you've not changed your $850 million expense saving number, correct?
No, $850 million or more will drop to the bottom line. The 'or more' will depend on whether we can drive better shareholder value by reinvesting into revenue growth or by running a more efficient company.
Okay. You said you have 99.4% retention of Comerica's commercial customers. Do you have a similar figure for consumer customers?
The consumer franchise is net up about 102% of what it was at the beginning of the year. It's essentially flat in Michigan and up 4% in the Southwest markets.
Okay. As far as commercial loan growth—it's okay, not great. Any thoughts about relative growth? Should we expect it to accelerate more for you after Labor Day?
Loan growth accelerated this quarter and, barring macro changes, there's no reason to believe it will decelerate. Legacy Fifth Third C&I up more than 2% compares favorably. Comerica went from flat to up 1% sequentially during a period when our focus was protecting customers through migration—this was all production. We didn't get a lift in utilization quarter-to-quarter, but production trends are positive. Commercial real estate was softer, up 0.5%, and we remain conservative there. We haven't provided back leverage to many private credit funds; there's been deterioration in structure and pricing in some places. In C&I, things remained more consistent. On the consumer side, home equity has been strong and indirect auto a source of growth. When conversion is complete and all teams are on the same platforms and products, you'll see an acceleration of the blended C&I growth rate.
If I can slip in one more: you mentioned customer retention on the consumer side is 102%. Do you have gross and net details for that?
The gross and net is roughly 94% to 95% retention of customers that were on the books at the beginning of the year, plus 5% to 6% above that due to new production, which gets you to the 102% overall. It's normalized attrition on the legacy book combined with a pickup in production.
Great. Thank you.
Your next question is from the line of John Pancari with Evercore. Your line is now open. Please go ahead.
Thanks. Quick capital question: you expect to resume buybacks in the second half. Can you help with cadence—how should we think about the pace of buybacks in 3Q and 4Q? Separately, remind us of the branch approach to other markets—Michigan and California. Any change in approach given the announcements? Thanks.
On branches: in Michigan, given the size of both banks' networks, Comerica was heavier in eastern Michigan and Fifth Third in western and northern Michigan. There are just over 70 consolidations that will happen in Michigan, all announced; no others are contemplated. Many locations share the same parking lot in the same strip center, so we are not moving people far. The intent is to execute consolidations, settle customers, and then evaluate growth pockets over time. Comerica customers will have about 60% more branches and Fifth Third customers 40% more branches—that's the plan. In California, we have a couple of de novos to add in the Central Valley and places where we have commercial operations; beyond that, there's no plan to add or subtract at this time. We have 150 branches to build in Texas and are finishing off the Southeast. We'll reevaluate strategy in 2027–2029 based on how things mature.
On capital and repurchases: the third quarter will be a smaller quarter than the fourth quarter for buybacks, partly due to more significant deal charges in the third quarter associated with system conversion and branch closures—probably in the $50 million to $100 million range, though dependent on loan growth. In the fourth quarter, we expect to return to more normalized pacing, which we view as roughly $200 million to $300 million per quarter.
Great. Thanks, Bryan.
Your next question is from the line of Brian Foran with Truist. Your line is now open. Please go ahead.
Good morning. A modeling question: given first half actuals, the 3Q guide, and implied 4Q based on full year, some see 3Q slightly below consensus and 4Q higher. Is the message that 3Q is a bit light and 4Q better, or is it within a narrow range and the bigger picture is things are coming in line?
I think the simpler explanation is cadence of expense synergies in a deal that closes mid-quarter and converts in the last month of the third quarter. The conversion occurs on Labor Day weekend, but you don't get immediate full benefit the next day; we need to ensure stability and won't decommission legacy platforms until things are stable. That timing changes the trajectory. Also, revenue focus is protecting clients during conversion this quarter; in the fourth quarter you'll see more regular production across the company. We are data-driven and working on complex pre-conversion concierge processes for the most complex commercial payments clients. It's hard to model a deal closing mid-quarter and converting in the first week of the last month of the third quarter, so the cadence explains the appearance of a lighter 3Q and stronger 4Q.
Boil it down to this: full year PPNR—we're increasing our outlook. This is the first time we've given you the split from 3Q to 4Q to help you see that cadence.
That's helpful. One more on credit: credit outperforming out of the gates—do you view that as momentary because the environment is benign, or could it be more sustained given the combined book profile and new production opportunities?
My view is it will carry forward and is mix-driven. Comerica's portfolio was more weighted to commercial and C&I than Fifth Third's, and loss rates on consumer assets are structurally higher. We lowered the range for the second half reflecting continuation in the immediate term. Barring a mix change, expect that to carry forward. There's no outsized recoveries or purchase accounting impacts driving outlook; that's why you see continuation.
Thank you.
Your next question is from the line of Ben Gerlinger with Citigroup. Your line is now open. Please go ahead.
Hi. In terms of the branches, aside from market share within the MSAs you build them in, what should shareholders look for to see the success of those branches given the many moving parts—what proxies should we watch?
We look at branch-to-branch performance as the best proxy. The goal is to build a capital-light annuity—average deposits per branch is a key metric. In the Southeast, since 2018 when we started expansion, branch count rose about 60% and deposits more than doubled—average deposits per branch increased. Profitability per branch has improved; profitability in the Southeast today is about half of the Midwest branches, driven by higher average deposits per branch and continued growth. Comerica's Southwest network looks similar to where Fifth Third's Southeast looked in 2018: about 200 branches and roughly $6.1 billion in deposits at the time of close. We learned lessons and intend to replicate progress faster. We'll continue to report de novo performance and average deposits per branch, which are the single best proxies for breakeven and long-term franchise profitability.
Got you. Thank you.
Your next question is from the line of Ken Usdin with Autonomous Research. Your line is now open. Please go ahead.
Thanks. Bryan, you've talked about incremental asset sensitivity given the transaction. Now that you've seen a full quarter and have a better feel for the balance sheet and rates environment, where does that sit relative to your ideal position? Will you continue to remix the swap and securities portfolio?
We're more asset sensitive than historically, visible in our disclosures. We took actions to reduce that, repositioning about $4.5 billion in the securities portfolio during the quarter—moving duration from about one year to four years—and putting on $3 billion of swaps. That reduced our year-two asset sensitivity by just under 10%. Over time we'd like to get into the mid-single-digit range from an asset sensitivity perspective. We'll do it in a measured way given market volatility and the importance of choosing good entry points for duration investments. Good progress, but still somewhat more asset sensitive than we'd typically target; we'll work it down over time.
All right. Great. Thanks, guys.
Your next question is from the line of Chris McGratty with KBW. Your line is now open. Please go ahead.
Good morning. On capital markets outlook—any comments? Tim, on reinvesting additional savings into the business, is capital markets one of the areas where you might put more dollars to work? If so, where are you versus potential?
Most investment is focused on consumer deposits: branch expansion, direct marketing, digital, and adding sales force. We've also invested in specialists to support M&A advisory and capital markets, and in technology, particularly AI. We're pleased with the $2 billion fee income platforms and capital markets exceeding a $600 million run rate. Investment on the capital markets side will focus on real estate capital markets next, reflecting our acquisition of a HomeStreet mechanics DUS lender and converting that into a multi-agency platform to generate real estate capital markets fees. There will be investment there as well.
All right, great. Thank you.
There are no further questions at this time. I will now turn the call back to Matt Curoe for closing remarks.
Thank you, Alexandra, and thanks everyone for your interest in Fifth Third. Please contact the investor relations department if you have any questions. Operator, you may now disconnect the call.