Fifth Third Bancorp (FITB) — Q1 2026 Earnings Call Transcript

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. Our 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, our Newline continued 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 than 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 reached 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 situation on the energy 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 extra effort to support the integration, whether it adds 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, with 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 Fifth 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 in 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 nondepository 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 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. The new rule should expand the ability of the banking industry to support the economy through increased lending capacity. Additionally, our tangible common equity ratio, including the impact of AOCI and the Comerica acquisition increased to 7.3%. Over the last 12 months, the impact of unrealized losses included in the regulatory capital under the proposed rule has decreased by 16%, a 25 basis point improvement to the pro forma capital ratios despite an 11 basis point increase in the 10-year treasury rate. That is the direct result of our strategy to concentrate our AFS portfolio and securities that return principal on a known schedule, which represents approximately 55% of the fixed rate holdings within our AFS portfolio. We expect continued improvement in the unrealized losses as the securities mature. 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 guide 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.

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 the 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 start with that question and then let Bryan add more. We believe we've done a good job summarizing our progress. When dealing with large transactions, not having surprises is a good sign. Moving closer to operating on a single common platform is a significant milestone. The core integration has gone smoothly without major surprises. We completed the necessary planning exercises, and there are 46 new applications that primarily support our Tech and Life Sciences and Dealer Services sectors, along with some payment initiatives. Our data strategy and conversion tasks are complete, and all required risk-based reviews have been done. We understand the product gaps that need addressing, and the organizational charts are finalized with key leaders selected. While it's still very early, I'm happy to note that employee attrition is a bit lower than our historical averages, so we aren't experiencing any spikes in turnover. A positive development is happening in Texas and the Southeast connected to our promotional efforts. We received numerous questions after announcing the deal about whether our approaches in the Southeast would translate well to Texas and the Southwest. The initial mailing I mentioned was a test to realign our targeting and balance models based on actual data from Texas. We reached out to 700,000 households, and the response rates were strong. It's encouraging that over half of customers are opening checking accounts, even with the legacy technology challenges from Comerica still in place. More exciting is that after refining our models, we mailed to 6 million people on the 10th and 11th of this month, and early results are very positive, with response rates tripling compared to prior campaigns. We expect this campaign to bring in $1 billion in deposits across Texas, Arizona, and California, which is great. This expectation is included in our guidance, not additional to it, but it shows that our strategies used in the Southeast can effectively translate to the Southwest. Additionally, Comerica has not carried out any consumer marketing in 13 years, making it a relatively untapped market for us. Thus, I have increased optimism about our market share potential in that area. As for challenges, we have some internal disagreements about preferences for chili, whether with beans, without beans, or served on spaghetti. We'll need to resolve that before we can truly unite as one company.

That's a bit of a weakness for me since I work too hard. It's interesting that you mentioned the extensive mailings from last century, but with 6 million mailings, it appears you're securing $1 billion in deposits, which should pay off. However, this is all from Comerica accounts, correct? After Labor Day, these will transition to Fifth Third accounts. It seems there is some risk in that transition from Comerica to Fifth Third branding. How do you handle that change?

Yes. I mean the tech conversion, as you know, right, 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 integrated into Fifth Third 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. Like 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.

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 has given us some opportunity 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 on 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 the trajectory that gets us approaching to exiting the year closer to 340 from a NIM perspective. 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?

Yes, that's a good question. We've been receiving similar inquiries over the past 90 days regarding whether the synergies are sustainable or if they need to be reinvested. I have been explaining that if the funds need to be allocated elsewhere, that’s not considered an expense synergy; it’s a matter of capital application. We firmly believe we can maintain the profitability level that we anticipate achieving in the fourth quarter and continue to enhance it. I grew up surrounded by distance runners and Nike posters were on my walls as a child. The perspective here is that there’s no finish line. We have so much ahead of us. Our goal is to generate a strong return on equity regardless of circumstances, and we need to make decisions based on marginal gains. If we are at 19% with a 53% efficiency ratio, the marginal decision should be whether to leverage our strong operating performance to drive higher profitability and increase tangible book value or to focus on growing tangible book value per share or perhaps a combination of both. I am confident we can achieve both. When I joined 11 years ago, less than a quarter of the U.S. population lived in our footprint. Today, more than half do, and as Bryan noted, 17 of the 20 fastest growing large metro areas in the U.S. are within our footprint, where we hold a top 5 market share. Our branch network is among the newest compared to any of the top banks. We also have a payments business benefitting from non-banks gaining market share, which is positive. Additionally, we’ve welcomed a significant number of bankers from Comerica who are now free from capital or liquidity constraints. I'm proud of our track record in technology innovation. We will continue to invest in our core business with the expectation that achieving a 19% ROTCE is commendable. If we exhaust our ideas, we will then aim to increase it to 20, 21, or 22; otherwise, our focus will be on growing book value per share.

Tim, did you have a poster too with Steve's poster?

I had Steve and Dick on my wall as a kid at my height my lack of foot speed, you had to go with the field athletes as well.

Got it. Good for you. When I look at your utilization trends that you provided, which you also mentioned in your prepared remarks, I noticed it increased significantly from 34.9% in the fourth quarter to 40.7%, excluding Comerica. Can you provide some insights on two areas: first, what you're observing with legacy Fifth Third, and then what are the trends with legacy Comerica?

Yes. From a utilization perspective, it's fairly consistent across the Fifth Third Platform and the Comerica platform. In the middle-market segment, we're beginning to observe increased activity. Additionally, we noted a positive rebound from the corporate banking side. Part of this can be attributed to the activity in capital markets, as we experienced less pay down this quarter in that area. It seems to be the rebound we anticipated due to some tax bill benefits, leading to more active spending as customers navigate the current environment. Later in the quarter, there were also 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 saw. We didn't get a lot of the loan growth from private equity or private 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, right, primarily privately 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 is 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 one follow-up regarding the credit quality you mentioned. The guidance for net charge-offs looks strong, and the numbers for the quarter are promising. I'm curious about the commercial side of the portfolio. I understand this number can fluctuate, but the delinquency rates from 30 to 89 days, although low, show an increase in commercial and industrial to 38 basis points, with commercial real estate also rising. Should we be concerned about anything there, or is it likely just due to the merger of the two companies and some confusion about payment routing? I know that might sound unusual, but any insight 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.

I have a question regarding deposits. It seems that funding is becoming a greater constraint for banks moving forward compared to capital. Could you discuss your Southeast strategy in this intense environment? How are you converting clients who were gained through promotions into core checking accounts? Is that process underway? Also, regarding one of the earlier questions, Tim, what is your level of confidence that branches will continue to be as relevant in 3 to 5 years as a tool for client acquisition 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 is the primary long-tenured relationship. 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 in 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 1 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 times 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, which boost response rates to direct marketing, whether that's digital or male. 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 1 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. Just a quick follow-up. You mentioned the difference between NBFI growth and non-NBFI several times. I'm curious if you see any embedded risks in the lending that concerns you. Can you explain why it's appealing to many of your peers but not as much when you evaluate it for Fifth Third?

I'm not making a judgment on private credit and its future. I don't think it will disappear as a category. Generally, we believe the private credit market will be significantly smaller in the future than some have feared. There were two growth strategies discussed: retail funding, which has proven to be a misguided approach, especially promising returns of 8% to 9%, which we view as unrealistic. Banks typically operate with leverage of 8 to 10 times to achieve a 15% return, whereas private credit expects to deliver similar returns with only 2 to 3 times leverage, which has always seemed unrealistic to us. There is definitely space in the investment landscape for options that yield returns between corporate bonds and equities, but it doesn’t appear to be sustainable at a large scale. We aren’t major players in this sector; for instance, Comerica and Fifth Third together have around $1 billion in private credit or BDC activities, so my insights on leverage in the rest of the market are limited. We steered clear of private credit because we couldn't grasp the overall leverage within various structures involving portfolio companies, back leverage, NAV lending, and other complexities. We tend to avoid things we don't fully understand. However, the main reason for our avoidance is that lending in this area lacks competitive barriers for banks. This suggests that the expected returns will eventually align with the cost of capital, and we aim to produce returns that exceed this cost. If our business becomes overly reliant on growth strategies that are constrained by costs of capital, it could shift focus away from areas that could yield excess returns, like primary relationship lending and enhancing wallet share. Our goal is to target growth opportunities that can provide returns of over 19% in the long run rather than settling for lower returns around 11% to 14%.

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 the EBA. So first, I just wanted to clarify that. And then my main question, Tim, when you think about the 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 the EBA. 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. The only thing I would add is that it largely depends on how you underwrite. Not every bank has historically adhered to the same binding constraints. Different banks have different approaches to calculating returns. The key factor we consider is Red Cap and its returns concerning the overall performance of the company. When analyzing individual credits, we assess the economic capital those credits should attract based on how we rate the risks associated with them, including default probability and loss given default. If you were simply applying the same capital charge to every loan, like in a non-urban setting, you might face certain risks. However, our approach ensures that macro-level decisions guide the opt-in or opt-out process, while individual underwriting and return calculations are performed at the company level.

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.

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, Chris, this has been consistently true for a long time. The Midwest has two unique dynamics compared to the rest of the country. First, there are historically more regional banks based in the Midwest, leading to less market share for larger banks and more competitive markets. This isn’t a groundbreaking observation; it’s just basic economics. The second point is that credit unions have a more significant presence in many Midwestern markets than they do in other regions. Credit unions typically focus on different factors, such as liquidity needs rather than profit mandates, which creates a distinct set of competitive pressures. This combination of fragmented markets and different operational goals results in higher levels of deposit competition. As we enter the Southeast, we benefit from having a smaller existing market share and thus lower cannibalization costs for any new marketing efforts. It's somewhat akin to using an opponent's weight against them. Additionally, raising funds in the Southeast is relatively cheaper than in the Midwest, allowing us to be more aggressive with our strategies while positively impacting our overall franchise.

Yes, we expect to be in the 53% range by 2027. Our fourth quarter efficiency ratio is typically the lowest for the year, so I anticipate it will be about 2 points below that 53% in the fourth quarter.

I was wondering when you first announced the Comerica acquisition, you were targeting a 27% EPS of $4.89. But now that you have spent more time with the company and are seeing some early successes on the revenue synergy side, do you foresee an increase in that number since it did not factor in any revenue synergies?

Yes. I mean, obviously, that's something that's part of the deal that we would not contemplate any revenue synergies. So anything that we are seeing would be upside. So we do feel good about kind of the progress there. I think we will be striving to outperform what is there? Obviously, 2027 is a long time away, and the environment, the rate environment and a lot of other things can change. But we certainly are more positive today about the opportunity in front of us, even though we were incredibly positive at the time of the acquisition. So a lot of things are going well, and we feel good about the trajectory of the company. The higher for longer rate environment and our outlook and like we are very cautious around what could happen out the curve. So we are trying to make sure that we're balancing capital risk as well with a downrate risk. And all the things that's happened even over the last month or so when you think about what it's going to do to inflation and what is honestly still a fairly reasonably strong economic activity that we're seeing. We just see that there is more bias right now for the higher for longer outlook. So with that, we're probably moving a little bit slower. But as that outlook changes, we would have an ability to accelerate. There's probably in the neighborhood of $30 billion to $40 billion of kind of notional exposure that we could move out the curve as our rate environment changes. That gives us a lot of flexibility as we navigate this environment. And we think even if you were to start to see some more significant cuts again that what you're likely to see is some amount of steepening that gives you some opportunity for us to deploy and maintain and even grow NII even in a falling rate environment.

Just one question because I know we're pushing the limits of length of time. But Bryan, given that there's no cuts in the curve, could Fifth Third maintain deposit costs even if there are no cuts?

Yes, we believe we can sustain deposit costs even if the Fed does not implement cuts. The key factor will depend on what the balance sheet requires for growth. If we experience aggressive loan growth, that could increase pressure on deposit costs. However, in a more stable and normalized growth environment, we feel confident that we have the flexibility to keep deposit costs steady.

This is an analyst on for John. Just one on the fee side. Solid results in the quarter, healthy guide despite the volatility in headlines if this subsided at all, you see this driving much upside from the billion quarterly run rate. I think our wealth and capital markets, like you mentioned, I think about how much conservative might be baked in the guidance now again versus potential upside?

Yes. I mean there's always a little bit of conservatism we put in place relative to capital markets. which we've been talking about hoping for a kind of more stable productive environment now in the hedging environment for a couple of years. So we do think there's opportunity for that as a more stabilized environment to come out. Obviously, that will be helpful from an M&A perspective as well. The rest of the businesses have been doing fairly well without or even with the uncertainty that we've been facing. So we feel like the tailwinds there and the investments we've been making from a sales force and a production perspective position those businesses to continue to grow as well as the investments from a payments perspective and just the categories that we're attached to. So certainly, we think that there is opportunity from a fee perspective to continue to see good outcomes.

Just one question, just given that it's a partial close quarter. I just wanted to understand the moving parts a little bit. Can you help us understand the dollars of purchase accounting accretion that we're in what you're expecting for 2Q and just how that cascades in terms of the schedule?

Yes. In our slide deck and NIM walk, we outlined that there was about $12 million of purchase accounting accretion linked to the loan portfolio in the first quarter. The simplest way to think about it is that it reflects just two months of activity, and it will gradually decrease over the next few years. Most of this is tied to the commercial portfolio, which has a shorter duration compared to residential mortgage exposures. This outlines the primary aspect of the purchase accounting accretion. Regarding securities, what we have done is align those securities with current market rates, so any assumptions should be based on your expectations for market yields as they relate to the securities.

Okay. So basically, if that's one line you mentioned in your prepared remarks, it will increase a little bit more in the second quarter. So it's really just that 12% run rate. Is that the only part? I just want to understand the magnitude of how much that will help going forward.

Yes. Well, basically the 12 becoming probably closer to mid-teens when you think about adding a note for next quarter. In a normalized environment, we would typically discuss buybacks in the range of $200 million to $300 million, reflecting our historical run rate. However, this will depend significantly on our need to support organic growth, as prioritizing lending is crucial for us. We prefer to deploy capital in ways that yield higher returns. We believe our ability to attract customers and achieve high-teens returns represents the best outcome for our shareholders. For this year, we anticipate buybacks will be lower than that, especially in the second half, but we still see some opportunities to restart buybacks.

Question on dividend finance. It looks like the deceleration you anticipated is starting to come through in the related uptick in NCOs there is beginning to occur as well. How high should we expect this NCO rate to trend so that we're not surprised given the slowdown is fully anticipated?

Yes, it's a good question. We believe the current range is a reasonable expectation for some time. The industry is experiencing significant disruption due to the tax bill, which has created a scenario where leasing products are more economically favorable compared to lending products. This was not the environment we anticipated during the original acquisition. We are working through these changes, and it's clear that this is no longer a growth asset for us. However, the charge-off ratio we are currently experiencing is likely where we will remain for a while. Yes, the HELOC growth is off to a very strong start in the first quarter, and more than offsetting that headwind on dividend finance. What's driving the strong growth in HELOC? Is it Fifth Third's pricing? Or is it grassroots loan demand from customers? And what is the outlook for this business? The first quarter benefited somewhat from the acquisition, particularly in the consumer lending categories, with HELOC being a notable contributor to the loan balance. This likely accounts for about half of the growth in the first quarter. Beyond that, we are observing strong grassroots activities. Over the past couple of years, we have made significant improvements to the business and the customer experience, which has positioned us well. Our branch activities are performing well, and enhancements in technology and underwriting have made the product easier for bankers to sell. We are experiencing a lot of positive activity and have been able to engage more in marketing and customer acquisition strategies. Given the current dynamics of the home equity market and the low housing turnover, we believe that we will continue to see substantial growth in this area for some time. We are now over two years into observing consistent growth in home equity.

Yes. The 1 thing I'd just add there is, I think, as Bryan said in his remarks, #1 in market share in our footprint in home equity originations and in the bottom half in terms of pricing. And there's very good pricing data available through aggregators. So we are not competing on price. It's great originations volume effectively at better spreads than others.

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 activity?

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 dramatic growth.

Yes, absolutely. Before we conclude, I want to quickly congratulate Keith Horwitz on his retirement and his 30 years in the community. I believe he will demonstrate that old hats never die; they just stop updating their outlook. We appreciate Keith for all his years of contributions here and wish him the best in this next phase.

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.