Teleconferência de Resultados do 3T26 da Fifth Third (FITB): PPNR Sobe 8%, Perspectiva de Crescimento para o 4T se Fortalece

Principais Destaques

• O Fifth Third (FITB) relatou um LPA no 3T26 de US$ 0,90, ou US$ 1,13 excluindo itens especificados. A receita líquida pré-provisão (PPNR) ajustada subiu 8% na comparação trimestral, atingindo US$ 1,5 bilhão.
• A receita ajustada cresceu 2% em relação ao 2T, enquanto as despesas ajustadas recuaram 2%. O retorno sobre o patrimônio líquido tangível ajustado (ROTCE) atingiu 20,6%, o retorno sobre ativos (ROA) foi de 1,41% e o índice de eficiência melhorou para 54,6%.
• Os depósitos essenciais médios subiram 3% na comparação trimestral, atingindo US$ 236 bilhões, financiando um crescimento médio de 1% na carteira de empréstimos. A relação empréstimo/depósito essencial recuou um ponto percentual, para 76%.
• A conversão dos sistemas da Comerica foi concluída no feriado de Labor Day. A administração afirmou que as sinergias de despesas restantes devem ser incorporadas à taxa de execução (run rate) no 4T, oferecendo a primeira visão de um trimestre completo da lucratividade da empresa combinada.
• A administração espera que a PPNR ajustada do 4T cresça entre 9% e 10% na comparação trimestral, impulsionada por um crescimento de 2,5% a 3,5% na receita líquida de juros, alta de 2% a 4% nas receitas de tarifas e uma redução de 2% a 3% nas despesas ajustadas.
• O crédito permaneceu estável: as perdas líquidas definitivas (net charge-offs) foram de 31 pontos-base, enquanto o índice CET1 aumentou nove pontos-base, para 10%, dentro da faixa operacional de 10% a 10,5% estipulada pela administração.

Principais Dados Financeiros

Desempenho Operacional e dos Negócios

O crédito comercial impulsionou o crescimento dos empréstimos, com o saldo médio comercial aumentando aproximadamente US$ 1,5 bilhão, concentrado em C&I (comercial e industrial) e construção. A produção total de empréstimos comerciais dobrou em relação ao mesmo trimestre do ano anterior, enquanto os pipelines brutos de produção entraram no 4T em níveis recordes. A administração destacou a atividade no Centro-Oeste, Sudeste e em várias verticais de setores, incluindo saúde, energia e renováveis, instituições financeiras e financiamento a concessionárias.

A média dos empréstimos a consumidores ficou estável. Os saldos de crédito com garantia imobiliária (home equity) cresceram 3% e os saldos de financiamento imobiliário aumentaram 1%, compensando a redução nos empréstimos para energia solar e saldos ligeiramente menores em financiamento de veículos.

O crescimento dos depósitos essenciais incluiu US$ 3 bilhões decorrentes da transferência de produtos de sweep de investimento legados da Comerica para o balanço. Os depósitos de consumidores aumentaram 5% na comparação trimestral no Sudeste e 23% no Sudoeste. Os depósitos sem rendimentos (noninterest-bearing) subiram ligeiramente e representaram 27% dos depósitos essenciais.

Os custos totais de depósitos subiram nove pontos-base, para 1,64%, refletindo preços promocionais e a migração do sweep de investimento. Excluindo o impacto do sweep, os custos aumentaram sete pontos-base. O crescimento dos depósitos permitiu ao Fifth Third reduzir o financiamento no atacado médio em 10%, incluindo uma redução de US$ 1,3 bilhão em dívida de longo prazo e um declínio de US$ 1,1 bilhão nos adiantamentos do Federal Home Loan Bank.

A receita de tarifas manteve-se diversificada. A receita de gestão de patrimônio e ativos subiu 1% na comparação trimestral, para US$ 259 milhões, a receita de pagamentos comerciais aumentou 1%, para US$ 256 milhões, e a receita de originação imobiliária (mortgage banking) subiu US$ 8 milhões, atingindo US$ 47 milhões. As tarifas do mercado de capitais caíram 5%, para US$ 147 milhões, já que a menor atividade de assessoria em M&A e sindicação de empréstimos superou as tarifas mais altas de debêntures e bônus corporativos.

A empresa adicionou US$ 2,5 bilhões à sua carteira de títulos mantidos até o vencimento a um rendimento médio de 4,9% e contratou US$ 7 bilhões em hedges de fluxo de caixa com recebimento de taxa fixa. Essas ações reduziram a sensibilidade dos ativos, embora a administração tenha afirmado que o balanço continua posicionado para se beneficiar de eventuais aumentos adicionais nas taxas de juros.

O Fifth Third também lançou o Fifth Third Innovation Banking, combinando a franquia de tecnologia e ciências da vida da Comerica com as capacidades digitais, de pagamentos, banco de investimento e gestão de patrimônio do Fifth Third. A administração vê o negócio como uma oportunidade potencial de US$ 10 bilhões em depósitos até 2030.

Orientação da Administração (Guidance)

Para o 4T26, a administração forneceu as seguintes projeções na comparação trimestral:

As projeções utilizam a curva futura do início de outubro, que assumia um aumento de 25 pontos-base nas taxas de juros em dezembro. A administração espera que rendimentos mais elevados em empréstimos de taxa flutuante, a alocação de títulos e a repactuação de preço de ativos de taxa fixa sustentem a receita líquida de juros, parcialmente compensados por custos de depósitos mais elevados.

A administração também espera que a lucratividade na taxa de saída do 4T alcance ou supere as metas de 19% para o ROTCE e de 53% para o índice de eficiência, estabelecidas quando a transação com a Comerica foi anunciada. As projeções para o ano inteiro de 2027 estão agendadas para a teleconferência de resultados do 4T em janeiro.

Riscos e Pontos de Atenção

• Um aumento acentuado nas taxas de longo prazo reduziu outros resultados abrangentes acumulados em US$ 1,6 bilhão durante o 3T e levou o Fifth Third a adiar uma recompra de ações planejada para setembro.
• A maior competição por depósitos e os preços promocionais podem continuar elevando os custos de captação. A administração assume atualmente um beta de depósito na faixa média de 50% para um aumento de juros no curto prazo, com potencial para um beta maior caso as altas de juros persistam.
• A volatilidade das taxas no final do trimestre atrasou algumas atividades do mercado de capitais e pressionou as tarifas imobiliárias, embora a administração espere uma receita de mercado de capitais sazonalmente mais forte no 4T.
• A administração está monitorando de perto tomadores de empréstimos de consumo discricionário, tomadores sensíveis a taxas de juros, risco de refinanciamento, imobiliário comercial (CRE) e empréstimos alavancados.
• O Fifth Third permanece cauteloso em relação a classes de ativos de alto crescimento e menos comprovadas. A exposição a crédito privado ficou em menos de 1% do total de empréstimos, enquanto os empréstimos alavancados representaram aproximadamente 2% do balanço.
• O índice de capital Basileia III da empresa foi estimado em 9,2% no conceito totalmente implementado (fully phased-in). As regras finais de capital e liquidez podem afetar a composição futura dos títulos disponíveis para venda e mantidos até o vencimento.

Destaques da Sessão de Perguntas e Respostas dos Analistas

Eficiência e reinvestimento: A administração afirmou que a meta de US$ 850 milhões em sinergias da fusão foi atingida, com economias brutas na faixa inferior dos US$ 900 milhões antes dos reinvestimentos. Os gastos foram redirecionados para aquisição de clientes, marketing, contratação para vendas, agências, pagamentos, gestão de patrimônio e desenvolvimento de produtos. Um crescimento mais rápido da receita impulsionado pelas taxas de juros pode permitir que a eficiência de curto prazo supere a meta de 53%.

Crescimento de depósitos: Aproximadamente 45% do crescimento trimestral de depósitos veio da transferência dos depósitos de sweep da Comerica para o balanço. A longo prazo, a administração identificou mais de US$ 10 bilhões em crescimento potencial de depósitos tanto no Sudeste quanto no Sudoeste, além de uma oportunidade de US$ 10 bilhões no Innovation Banking até 2030.

Expansão no Texas: Os depósitos pro forma de varejo e pequenas empresas cresceram mais de 20% na comparação anual nos mercados de referência no Texas, enquanto as famílias atendidas no Sudoeste aumentaram 8%. O Fifth Third adicionou aproximadamente 80 a 85 relacionamentos no segmento de médio porte (middle-market) no Texas desde 1º de fevereiro e planeja abrir 150 novas agências no Texas ao longo de três anos, a partir do 3T27.

Alocação de capital: A administração estimou que os lucros geram mais de US$ 1 bilhão em capital por trimestre antes de dividendos e necessidades de crescimento. Em uma estrutura de crescimento normal, a empresa vê capacidade potencial para US$ 300 milhões a US$ 500 milhões em recompras trimestrais, embora a atividade real vá depender do crescimento dos empréstimos e dos níveis de capital do setor.

Condições de crédito: A administração afirmou que os clientes continuam investindo apesar das taxas mais elevadas e que não observou estresse emergente generalizado. O Fifth Third atribuiu a resiliência do crédito em parte a sistemas aprimorados de alerta precoce, dados comportamentais na subscrição de riscos, exposição conservadora a categorias não comprovadas e à migração de parte dos empréstimos de maior risco para fora do sistema bancário.

IA e dinâmica econômica bancária: A administração espera que a IA exija investimentos no curto prazo em infraestrutura e implementação, enquanto potencialmente melhora a eficiência operacional ao longo do tempo. Argumentou que os depósitos operacionais e baseados em relacionamento devem estar menos expostos à otimização de caixa impulsionada por IA do que os depósitos dependentes principalmente de preços.

Transcrição Completa da Teleconferência de Resultados

Transcrição completa da teleconferência de resultados

Comentários da administração

Operator

Hello, everyone. Thank you for joining us, and welcome to the Fifth Third's Third Quarter Earnings Conference Call. [Operator Instructions]

I will now hand the conference over to Matt Curoe, Director of Investor Relations. Please go ahead.

Matt Curoe

Good morning, everyone. Welcome to Fifth Third's Third Quarter 2026 Earnings Call. This morning, our Chairman, CEO and President, Tim Spence; and CFO, Bryan Preston, will provide an overview of our third 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 October 19, 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.

Timothy Spence

Hello, everyone, and thank you for joining us. It's my custom to start these calls with a comment on great banks and navigating uncertainty.

But today, I want to start with something else that distinguishes great banks, their people. This quarter was a defining moment in the history of our company. I am humbled by and exceptionally grateful for the commitment our people showed to our clients, our shareholders and to one another. We announced the acquisition of Comerica 1 year and 13 days ago. And throughout that time, all our people hustled and collaborated to complete the largest and most complicated conversion in our 168-year history.

Following Legal Day One, you welcomed new colleagues on to your teams and introduced Fifth Third to new communities. You made the tough decisions necessary to achieve our expense commitments and work together to identify and pursue revenue opportunities. You invested more than 4 million hours in preparation for conversion and you gave new meaning to the word Labor in Labor Day weekend when you onboarded approximately 600,000 accounts and 293 banking centers while decommissioning 82 others.

Since then, you have continued to work tirelessly to welcome new customers to the bank to get their accounts configured the way they want them and to ensure customers experience the benefits of banking with our combined company. Your advice is what improves our clients' personalized in their businesses. Your creativity is what wins awards for innovation, and your commitment to excellence is what produces peer-leading financial results. Thank you for keeping our customers at the center of everything you do.

This morning, we reported earnings per share of $0.90 or $1.13, excluding certain items outlined on Page 2 of the release. Adjusted PPNR grew 8% over the second quarter as adjusted revenue grew 2%, while adjusted expenses fell 2%. In an increasingly competitive environment, core deposits grew 3% sequentially and loans grew 1%. Net charge-offs remained stable at 31 basis points. Despite the conversion occurring a full 10 weeks into the quarter, we've already exceeded 2 of the 3 2027 profitability targets spelled out in our deal announcement. Our adjusted return on tangible common equity was 20.6%. Our adjusted return on assets was 1.41% and our adjusted efficiency ratio was 54.6%. Even with the largest acquisition in our company's history and the 10-year treasury increasing 114 basis points in the past year, our tangible book value per share grew 2% year-over-year, and our TCE ratio was flat.

With technical conversion and the work on expense synergies now behind us, our primary task going forward is to leverage the power of our combined company to drive organic growth and market share. The FDIC summary of deposit data set is one mechanism we use to measure progress and the 2026 release became available in September. Using a cap branch deposit methodology to focus on retail deposits, I am pleased that Fifth Third ranked #1 in our retail footprint and #3 nationally in year-over-year retail deposit growth.

In Texas, we came straight out of the chute in February. Retail deposits in Dallas and Houston grew more than 20% over the prior year, and we gained more than 40 basis points of market share. We now rank #7 and #8 in Dallas and Houston, respectively, and that is prior to opening any of our 150 de novo branches in Texas over the next 3 years, starting with the first one in the third quarter next year.

In our Southeast footprint, we again ranked #6 in retail market share. Retail deposits continue to grow at a rate more than 5x the rate of the Southeast overall, and they have grown at an 11% compound annual rate over the past 5 years. Our Southeast de novo program continued to be a big part of the growth story, but it is not all of it. We ranked #2 in total new branches built and #2 in average deposits per branch after 3 years, but we are also #2 in same branch deposit growth for legacy branches over the same period. Our total cost of Southeast consumer deposits remains 207 basis points below Fed funds. We've already opened 35 additional branches in the Southeast in 2026 and remain on track to open the [ full $55 ] that we committed for the full year.

One other strategic item I would like to note from the quarter was the formal launch of Fifth Third Innovation Banking, a business focused on startup and growth stage companies, their founders and the investors who back them. Innovation Banking pairs Comerica's 34-year-old tech and life sciences vertical with Fifth Third's payments, digital, investment banking and wealth management capabilities. It will be built around hub cities where venture capital flows are concentrated in the industry verticals where we can bring unique expertise, starting with our recently launched fintech vertical. We will spend more time dimensioning this business for you in the coming months, but we see it as a $10 billion deposit opportunity by 2030 in addition to other avenues for revenue growth.

Now let me close where I usually begin. At Fifth Third, we believe great banks distinguish themselves not by how they perform in benign environments, but by how they navigate on certain ones. While our clients tell us the underlying economy remains strong, this is a fluid operating environment as evidenced by the recent sharp spike in interest rates. When things change to factors that dictate success change along with them, discipline and optionality become very important. In this environment, our priorities are to be strongly differentiated in core deposit growth, broadly diversified in loans and other earning assets with limited exposure to unproven high-growth categories and the interest rate sensitive borrowers balanced across recurring fee businesses and less exposed to market-sensitive revenue streams and to have the profitability to sustain the long-term investments in growth and AI without compromising return targets.

While we will always have opportunities to get 1% better, I feel great about how Fifth Third is positioned and in our ability to deliver an even better 2027. After all, you can't spell flexibility without F, I, T and B. With that, I'll hand it over to Bryan to provide more detail on the quarter and on our outlook for the remainder of the year.

Bryan Preston

Thanks, Tim, and good morning. Our third quarter results show the profitability of the combined company, even with the expense synergies not yet fully in the run rate. The conversion over Labor Day weekend was the last major step of the technical integration and the remaining expense synergies will follow. Additionally, the rate environment tested the balance sheet. Rates moved sharply higher in the quarter that weighed on capital markets fees and on AOCI, but it will drive NII growth and provide attractive entry points to reduce the increased asset sensitivity we've carried since closing the acquisition.

Through the conversion of the rate volatility, the business has kept growing in both the Fifth Third and Comerica footprints and credit performance remained stable. As Tim mentioned, adjusted PPNR grew 8% to $1.5 billion. Of the $113 million sequential increase, over half came from revenue with net interest income up 3% and fees up 1%. The realization of expense synergies was the primary driver of the $45 million decrease in adjusted expenses.

Page 2 of our release details the certain items excluded from these adjusted figures. The PPNR growth drove the approximately 160 basis point improvement in our adjusted ROTCE and the 250 basis point improvement in our adjusted efficiency ratio. The step-up in profitability is sustainable. In the fourth quarter, the expense base comes down further as the remaining expense synergies are realized and revenue continues to grow organically. With the systems conversion complete and the expense base where it will be, the fourth quarter gives you the first full view of the combined company's profitability and the baseline from which we will grow.

Net interest income was $2.28 billion, up $56 million from the second quarter. The increase was driven by organic loan growth, investment portfolio activity and continued fixed rate asset repricing, partially offset by higher deposit costs and tighter spreads in C&I and auto. Net interest margin was 3.34%, down 2 basis points. In order to simplify certain conversion-related activities, we intentionally migrated Comerica off-balance sheet investment suite products onto the balance sheet into deposit products, which resulted in elevated cash. As a result, average short-term investments rose $3.1 billion and reduced net interest margin by approximately 4 basis points but had no material impact on NII. Excluding this cash build, the margin would have expanded about 2 basis points over the prior quarter.

The higher market rates during the quarter provided attractive entry points to begin reducing our asset sensitivity. We added $2.5 billion to the held-to-maturity portfolio at an average yield of 4.9%, and we added $7 billion of received fixed cash flow hedges. The third quarter taxable securities yield increased 13 basis points to 3.68%. As a result of the investment portfolio actions, period end short-term investments declined $2.8 billion. Even with these actions, we remain asset sensitive and expect to benefit from further potential rate hikes. Loan growth in the quarter were commercial led with production diversified across the combined footprint and verticals. Total commercial loan production in the third quarter was double the production generated in the year ago quarter.

Among regions, Chicago, Indiana and Michigan continue to generate meaningful activity in the Midwest. While the Carolinas and Florida were the standout regions in the Southeast. While vertical production was also very lot based, consumer retail, health care, energy and renewables, media and entertainment, FIG and Dealer Finance all delivered strong production growth, both sequentially and year-over-year.

Our gross production pipelines remain at record levels as we enter the fourth quarter. Average portfolio loans increased 1% sequentially to $179 billion, and period-end loans were also up 1% to $180 million. Average commercial loan growth of approximately $1.5 billion was concentrated in C&I and construction. Commercial line utilization was 38%, down 50 basis points from the prior quarter, partially offsetting the production. Average consumer loans were stable as home equity grew 3% and [ Req Q ] Mortgage grew 1%, offsetting runoff in solar and modestly lower auto balances. The mix remains consistent with our strategy: relationship-based commercial growth and consumer categories where we have long underwriting experience and attractive risk-adjusted returns. Core deposits funded the quarter's loan growth and continued to replace wholesale borrowings.

Average core deposits increased 3% sequentially to $236 billion, led by retail deposit campaigns and payments linked operational deposit growth. The previously mentioned migration of Comerica investment suites onto the balance sheet added $3 billion in deposits. Additionally, we simplified some of Comerica's legacy deposit products into more modern interest checking product structures, resulting in a shift from commercial savings and money market into interest checking, which grew 6%. Money markets still grew 5%, thanks to the success of our retail deposit campaigns, while savings in retail CDs each declined 2%.

Consumer deposit growth was 5% sequentially in the Southeast and 23% in the Southwest. At the end of the first quarter, the Southwest represented 7.6% of our consumer deposits. At September 30, that increased to 10.4% of our consumer deposits. When we announced the merger last year, we believe our consumer deposit growth strategies would be replicable in new markets. Our early campaign performance continues to support our belief in this $10 billion plus growth opportunity in the Southwest. Average noninterest-bearing deposits were up slightly sequentially and represent 27% of core deposits. Total deposit costs rose 9 basis points sequentially to 1.64%, reflecting promotional pricing from the successful retail campaigns and the impact of the Comerica Investment Suite migration to the balance sheet. Excluding the investment sweep impact, deposit costs rose 7 basis points. The deposit growth allowed us to reduce average wholesale funding 10%, including a $1.3 billion reduction in long-term debt and a $1.1 billion reduction in FHLB advances. With that mix shift, the rate on total interest-bearing liabilities rose 6 basis points and only 4 basis points, excluding the American investment sweeps impact.

Our loan to core deposit ratio was 76%, down 1% from the prior quarter. Our approach has not changed. Granular deposit funding, meaningful liquidity buffers and active management of overall funding costs. Shifting to fees. Adjusted noninterest income, excluding the items listed on Page 4 of the release, was $1.05 billion, up 1% sequentially and 33% from the prior year. Sequential growth in wealth, commercial banking and mortgage more than offset a $7 million decline in capital markets fees. The late quarter rate move pushed out some expected capital markets activity as well as having a negative impact on mortgage fees. Wealth and asset management revenue was $259 million, up 1% sequentially, reflecting higher institutional trust and personal asset management revenue.

Total assets under management were $125 billion at quarter end. Retail brokerage revenue was $60 million in the quarter, up 7% from a year ago. Commercial Payments revenue was $256 million, up 1% sequentially with growth in deposit fees partially offset by higher earnings credits. Capital markets fees were $147 million, down 5% as lower M&A advisory and loan syndication activity more than offset higher corporate bond fees. Commercial banking revenue rose 2% to $128 million on higher lease remarketing and syndication revenue and mortgage banking revenue was $47 million, up $8 million as the prior quarter loss on net servicing valuation did not repeat in the third quarter. Consumer Banking revenue was $158 million, down 2%. With 5 key categories each generating more than $500 million in annual run rate revenue and each representing at least 10% of our total fees, our diversified fee engines kept total fees growing despite the 5% decrease in capital markets.

Now to expenses, where the integration progress shows most clearly. Adjusted noninterest expense was $1.82 billion, down 2% sequentially, driven by lower compensation and benefits expense as synergies were realized. Adjusted expenses exclude certain items listed on Page 2 of our release and the nonqualified deferred compensation mark-to-market. The adjusted efficiency ratio improved 250 basis points and we generated approximately 450 basis points of sequential positive operating leverage. Remaining synergies will be realized from the system decommissioning, staffing changes and branch consolidations that followed conversion weekend, including the 82 banking centers consolidated and will take effect in the fourth quarter.

Merger-related charges recognized on interest expense were $215 million in the quarter, primarily associated with the systems conversion and total approximately $1.1 billion year-to-date, consistent with our integration time line. We continue to expect total merger-related charges of approximately $1.3 billion, with substantially all remaining charges anticipated in the fourth quarter.

On credit, performance remained in line with our expectations. Net charge-offs were $139 million or 31 basis points, up 1 basis point sequentially and at the low end of our 30 to 35 basis point range we guided to in July. Commercial net charge-offs were 22 basis points, up 1 basis point, while consumer net charge-offs improved 1 basis point to 52 basis points. The NPL ratio increased 1 basis point to 59 basis points. The NPA ratio increased 4 basis points to 64 basis points, reflecting the impact of a $58 million increase in branch and other corporate real estate that were consolidated as part of the integration. Excluding this merger-related real estate impact, the NPA ratio was up 1 basis point. Early stage delinquencies improved with the 30- to 89-day balances down $21 million sequentially to 30 basis points driven by improvement in the commercial loan portfolio. The allowance for credit losses was $3.1 billion or 1.74% of portfolio loans, down 2 basis points sequentially reflecting stable loss performance and improvement in the commercial portfolio risk profile. The allowance covered nonperforming loans 294% and nonperforming assets 271%.

Provision expense was $122 million compared with $129 million in the second quarter. We made no changes to our macroeconomic scenario weightings during the quarter. Our baseline and downside cases assume unemployment reaching 4.7% and 8.3%, respectively, in 2027. The credit results are consistent with the disciplined and diversified portfolio construction Tim described. We are focused on limiting exposures most sensitive to higher rates and continue to grow in categories where we have long underwriting histories, and structural protections. Our exposure to nondepository financial institutions was 8% of total loans at quarter end, concentrated in subscription and capital call facilities corporate facilities to traditional financial institutions and secured lending to mortgage-related entities with private credit exposures representing less than 1% of total loans.

Moving to capital. CET1 ended the quarter at 10%, up 9 basis points as earnings more than offset risk-weighted asset growth of 1% and the impact of $211 million of after-tax charges related to the integration and other items. That places us within our 10% to 10.5% operating range. The increase in longer-term interest rates impacted AOCI by $1.6 billion during the quarter. Given the bullet locked-out structure in the investment portfolio, which represents approximately 57% of fixed rate securities and available for sale, we have a high degree of certainty into the timing of the AOCI accretion back into capital given the scheduled nature of the principal cash flows. Using the forward curve at the start of October, we project AOCI accretion to generate 27 basis points of marked CET1 and 4% growth in tangible book value per share by year-end 2027 before considering any future earnings contributions to capital. We estimate our fully phased-in Basel III capital ratio to 9.2%.

Given the speed and magnitude of rate increases during the quarter, we deferred restarting our share repurchase program, which delayed a small repurchase planned for September. Future share repurchase activity will be based on capital needed to support organic loan growth and overall industry capital levels. In September, we raised the quarterly common dividend 5% to $0.42 per share. Our capital return priorities are unchanged. They had a strong dividend, support organic growth to deliver the best long-term returns for our shareholders and then share repurchases.

Moving to our outlook. Tim highlighted, we grew across the combined footprint and delivered returns ahead of the targets we set for 2027 in the third quarter. Those trends should continue in the fourth. We expect average loan growth of 1% to 2% sequentially, led by continued commercial loan growth, primarily in C&I and CRE, we expect net interest income to be up 2.5% to 3.5% sequentially driven by higher yields on floating rate loans, a full quarter impact of the securities deployment and continued fixed rate asset repricing, partially offset by higher deposit costs. This outlook reflects the forward curve at the start of October, which assumes a 25 basis point rate hike in December. With the current rate outlook, we see fourth quarter net interest margin at or above the 3.40% level.

Adjusted noninterest income is expected to be up 2% to 4%, reflecting seasonally strong capital markets activity and continued growth in wealth and commercial payments. We expect the remaining synergy realization to take adjusted noninterest expense down 2% to 3%, partially offset by compensation associated with seasonal fee strength and occupancy expense growth associated with [indiscernible] order branch openings. In total, our guide implies adjusted PPNR to grow 9% to 10% from the third quarter. It also places net interest income and the implied PPNR for the full year to be at the high end of the range we provided back in January for the combined company.

The fourth quarter is typically our best quarter for ROTCE and the efficiency ratio. Even after adjusting for normal seasonal strength, our guide delivers the 2026 exit rate profitability at or better than the 19% ROTCE and 53% efficiency ratio we set at the deal announcement and on the time line we committed to in January. As is our custom, we will provide our full 2027 outlook in January on the fourth quarter earnings call. For credit, we expect net charge-offs of 30 to 35 basis points in the fourth quarter. On capital, we expect CET1 to remain within our 10% to 10.5% operating range, and we expect to repurchase $200 million to $300 million of stock in the fourth quarter, depending on the strength of our organic loan growth. The third quarter showed the profitability of the combined company with the synergies not yet fully realized. The fourth quarter brings the rest of the synergies into a business that is already growing. We exit 2026 as one bank, with the value of the Comerica accommodation no longer a projection, but a run rate and with the organic growth momentum that carries it from here.

With that, let me turn the call over to Matt to open it up for Q&A.

Matt Curoe

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 and then return to the queue if you have additional questions.

Operator, please open the call for Q&A.

Operator

[Operator Instructions] Your first question comes from the line of Ryan Nash with Goldman Sachs.

Perguntas e respostas

Ryan Nash

Maybe just to kick off where Bryan had left off regarding the 2027 expectations of 53% efficiency in 19% ROTCE. Obviously, a lot of things have moved around. I know that we'll get an update in January. But maybe just broad strokes on how you're thinking about some of the key drivers? What's really changed since the initial guide came out? And also just how you think about reinvestment in the business versus letting maybe some of the upside hit the bottom line?

Timothy Spence

Yes. I mean, I think the adage in my household, Ryan, is good things come to those who wait. So we're asking to talk about 2027 guidance today. But Bryan -- I'll walk through a few of the moving parts in the script, and I'm going to let him talk a little bit about just the framework we're using to think through as we see revenue growth based on sources and otherwise, what it means for efficiency and reinvestment.

Bryan Preston

Yes. Thanks, Tim. The main thing I would tell you that has changed since the deal model is just the rate environment. Obviously, we've had carried an asset-sensitive balance sheet that's benefiting quite a bit from the changing rate outlook. No one was anticipating 100-plus basis points of hikes over the 24-month horizon post the deal when we closed the deal. So certainly, that has been a big difference that's created a lot of earnings power for us as a company, which we're feel very good about from a positioning perspective.

We've been able to deliver on the $850 million synergy target. We've actually outperformed that a bit from a gross perspective. That number is really low 900s from a gross perspective, but we've used some reinvest back in the business, whether it's marketing expense to grow households or even just continuing to accelerate sales force hiring in the newly expanded markets. Those are the main areas that we're looking at from a reinvestment perspective.

From a longer-term perspective, 53% efficiency is where we want to run the company. We think that is a good prudent place and it's going to allow us to deliver those 19% ROTCE that we've been talking about. But we also recognize that we do want to continue to invest in growth, and we're going to do that in a very, very prudent way. But when you see the kind of rate environment changes we've seen, there's never -- we're not going to have the ability to invest as quickly as you may like with those changing rate environment changes. So there is an opportunity for us to outperform that 53% in the near term.

Ryan Nash

Got you. And then -- Tim...

Timothy Spence

No, I just was saying agreed on everything Bryan said.

Ryan Nash

Got you. You guys had really successful deposit growth this quarter. Maybe just unpack some of the growth, how much is due to the campaigns you've been running across the Southwest markets. And now that the conversion is behind you, how do you think this changes the curve in terms of deposit gathering?

Timothy Spence

Yes. Good one. It's fun right now to spend time thinking about the deposit franchise. The old adage here at Fifth Third was loans are for show, deposits are for no, right? We went through a period where both in terms of the date of the curve and absolute levels of interest rates. Loans were show [indiscernible]. But we're back to a place where I think the ability to grow high-quality, low-cost deposits is going to be like the determinant of your ability to generate really strong returns in an environment where if the economy continues to clip along at 6%, 7% nominal GDP, we should have pretty good loan growth across the board.

The composition of deposits at Fifth Third, it's so radically different today than what it was previously. Like if you look at the breakdown now, deposit balances are like 50% Midwest, 25% coming from the high-growth Southeast and Southwest markets and then 25% national, whether that's corporate banking or deposits we're able to source via our fintech platforms provide and otherwise. As Bryan referenced in his remarks, about 45% of the deposit growth in the quarter was the decision we made to move Comerica sweep deposits back on balance sheet. I do expect that some of those deposits may go back into other forms of liquidity now that we're through the conversion and things are stable. But we also had some more modern hybrid account structures that I think will be appealing to some of those clients.

The unique thing now is going to be where the growth comes from going forward, right? I think we had seen in the last couple of quarters, folks have varying degrees of success in driving deposit growth. And our view is if you're going to get low-cost deposits, it has to come from some structural investment that accumulates over time. And whether that is the continued power of the build-out of the Southeast, which we've talked about is in excess of a $10 billion incremental opportunity or the $10 billion opportunity we think exists in Texas to anything. I think we're probably more [indiscernible] on given the early success that we've had here or the success that we continue to have driving operating accounts in small business and from commercial payments. And then now the innovation banking platform, which is at a minimum a $10 billion opportunity in the next handful of years. Those are going to be the places that we go to find the incremental growth.

Operator

Your next question comes from the line of [ Scott Seifers ] with TD Cowen Securities.

Unknown Analyst

So I guess now that the cost savings look increasingly like the locks as the market's focus sort of begins to shift more visibly to the revenue side. You've had, I guess, the benefit of even more time since the closing and conversion. Maybe if you could speak sort of broadly about how you're feeling about the revenue synergies you guys articulated in the past. And as you sort of think about timing and magnitude, which of these at this point, feel like sort of the easiest pickings, which could take more time to marinate or require more investment, et cetera?

Timothy Spence

Yes. Bryan and I think we're commenting this morning, Scott, that one of the fun things about this acquisition is pretty much everywhere where we thought there was opportunity we're finding opportunities. So what I think we have said from the outset was the revenue synergies that we could get at with structural levers. We're going to be the ones that would materialize the fastest. The stuff that involved either teaching people, new products and services or building new connectivity inside the company would be the sort of the remediate and then the stuff that required at the investment in physical plant, like the branches would be what took us the longest. That's more or less how it's playing out.

Like obviously, the success we had with the deposit campaigns in the second quarter and carrying over to the beginning of the third quarter. It is evidence of the ability for us to deploy the tactics that we've utilized to drive consumer deposit growth. through Comerica's Southwestern markets. And I only anticipate that will get better as we get now checking account and marketing online with the technology conversion behind us. So quite excited about our ability to even grow faster than the 8% household growth that we generated in the Southeast in the third quarter -- I'm sorry, Southeast and the Southwest in the third quarter.

A second structural level was just balance sheet capacity, as we talked about for commercial lending. So when we announced the acquisition, the big question we got was would we be able to maintain Fifth Third's prior pace of growth? I think C&I growth last year annualized out something on the order -- in the third quarter last year, like 4%, 4.5% for Fifth Third, it was 4.7% in the third quarter this year. So I asked an answer in terms of our ability to get Comerica's specialty verticals and markets running at the pace of growth that Fifth Third legacy was doing. And I think there should be more upside from there as we add bankers. We actually have more bankers in Texas today than we did in February 1 when the deal closed just as an example. And that's just now -- we're just now scratching the surface on our ability to utilize the ABL products, the leasing products. Some of the other things, Fifth Third had in the specialty lending categories through Comerica's markets.

Lastly, then, I think Wealth, really nice early progress there. We expected Wealth to materialize a little more slowly because we have to repay for all of those clients. And typically, you've got to get through a conversion before you can do a lot of deepening. But we have already seen about $100 million in new AUM added from Comerica private banking clients and $100 million in mandates for our institutional business from commercial clients, removing retirement plans and pensions over onto these new platform. So very excited about the energy that now that we're through conversion and that we can focus on new business and not just taking care of existing client relationships about what we're going to be able to do.

Unknown Analyst

Perfect. And then Bryan, I appreciate the fourth quarter repurchase commentary. And I know how you think about capital management sort of thematically from your remarks. But as I think about things, there's just going to be so much capital creation over -- especially the coming year, even if you -- or as you reinvest, there should still be a lot of excess developed over time. Any thoughts to maybe help kind of narrow the cone of potential magnitude as we look out a few quarters?

Bryan Preston

Thanks, Scott. I think you're right. The profitability of the company is driving a lot of capital creation every quarter. I mean, rough math, it's north of $1 billion a quarter, just from earnings contribution to the company, about 45 basis points on average. Think about 1/3 of that goes into the dividend. So that's still 30 basis points of capital every quarter then to support growth or for share repurchases.

And you think a normal growth rate, we talk a lot about high single-digit normal GDP plus 1 point or 2 from a growth perspective. That's only $250 million, $400 million, $500 million capital from a retention perspective, which leaves $300 million to $500 million a quarter available for share repurchases if we were wanting to execute that. So there is a lot of optionality on that. And even with the higher rates, yes, the higher rates has an impact on AOCI, but it also helps us generate more income and more profitability over that same horizon. So we've got a lot of capital flexibility from here as we continue to navigate this environment.

Operator

Your next question comes from the line of Manan Gosalia from Morgan Stanley.

Manan Gosalia

Tim, a lot of conversation and debate through the quarter on the potential risk to deposit from AI-driven cash optimization tools. I was wondering if you can give your perspective on what that could mean for the banking industry and how Fifth Third might choose to respond over time?

Timothy Spence

Yes, sure. Let me maybe make a broad comment, and just -- I'll give you some data on what we see because I think there's more sorting that goes on in the banking sector today than people maybe broadly -- I appreciate. My own view on this one is that this is the right question to ask. Like every time you have a new technology platform that either reduces friction or increases transparency. You should be asking the question about what that means for margins.

I just think that you're asking about the wrong companies. Like what history has shown us over and over again is that the groups that are most exposed to this sort of change are the ones that have nothing but pricing defining their value propositions, which again, I think in our world, in the case of deposits would mean the online-only banks who have to lead with rate or who don't have any distribution and therefore, have to buy liquidity through aggregators or the wealth platforms that are pricing sweep deposits at inferior yields to market rates where there are equivalents and not the folks who have either distribution or product advantages or relationship advantages, as I certainly believe that we do because those are the things that justify incremental margins. It's just -- it's the sweep deposits of the world, the online-only deposits are going to go from being low-margin products to even lower margin products.

And I think for the rest of us, there's enough interplay here, whether it's proprietary distribution, like we have been building across the Southeast and the Southwest through the direct marketing capabilities we have. And then the unique value that's embedded in the products themselves or in broader relationship pricing on both the consumer and the commercial side of the equation. So our estimate is that something on the order of $2.5 billion of deposits on our platform are sorted every month, okay, meaning they either move from a paycheck that comes into a deposit account or out of the equities markets into cash or come off of promotional pricing or in an [ MMDA ] or move out of a CD product and then move somewhere else, okay? In our case, we have been successful in retaining about 80% of those deposits. 90% of that tends to go back into a deposit. About 10% of it hits a liquidity portal either on the consumer or the commercial side of the equation or goes into an investment account.

So the mechanisms that need to be in place to ensure that money that's there for investment and at rest versus money that is in motion, like basically money that's on a layover in a checking account because it came in through a paycheck and then it's going to move out in the next 2 to 4 weeks in the form of some sort of expenses. That settles in the accounts where it should settle. The advantage banks like us who have these branch networks and the checking led proposition on the consumer side of the equation, and then a heavily operational commercial deposit base led by all the stuff that we do in commercial payments is that the money is operational. It needs to be here. The median checking account at Fifth Third is like $3,100, right? So there's just not a lot of value there.

I think the last point, I just want to make sure that I make is like every time you have a new platform like this, the battle for a market comes down to weather incumbents get the innovation faster than the insurgents get distribution. I think that's an old and recent hors line. It's definitely the mine. But we're going to take every valuable service that you can get done on use, whether that's looking at subscriptions and finding opportunities to generate savings or budgeting or otherwise. And we're all going to build them into our apps and the benefit you'll get then is investment-grade or bank-grade information security as a perimeter. And no blending between the information that exists in your financial graph with the information that exists in your social graph, which today is monetized by basically selling you to third parties for ad purposes and otherwise. And I just think the incumbents have a lot of leverage here provided that we respond.

Manan Gosalia

That's great color. I really appreciate your response. Bryan, maybe to switch over to the other side. I think you noted that loan pipelines are at record levels right now. Are you seeing any impact from higher rates at all? Is that part of the conversation? Are there any projects that clients are pulling back on in the high rate environment? Or on the flip side, are you reducing your appetite to lend in any specific industries or for any projects?

Bryan Preston

Yes. I mean clients are still very, very productive in their conversations right now. Certainly, as people talk about high rates, it influences how they think about the world. But I think in general, the feedback that we're hearing overwhelmingly is that it is still a growing economy. And high rates are not a meaningful driver of decision-making from here. It's like they need investment because they're worried about continued inflation and input costs and things where they know they need to make this investment. They want to go ahead and get it done.

Another 50 to 100 basis points on rates do not impact their view. They do worry about demand from here if there were a broader slowdown because of rates. But in general, most of our clients are saying that they are going to continue to move forward with investment. The things that we are focused on right now, clearly, consumer discretionary is a category that we're paying a lot of attention to between the combination of the rate environment and continued inflation. And anything that we think is interest rate sensitive. We are paying particular attention to. We've continued to be very disciplined on leverage lending, our leverage portfolio continues to be a very small portion of our balance sheet at about 2%. That's not an area that we've been looking to grow. And we just think that there's areas where the unproven asset classes, we're continuing to be very cautious around.

So in general, most of the core middle market banking that we've been doing and the industry specialties where we have real expertise, we're seeing a lot of opportunity in, and that's the spot where we're going to continue to lean into.

Operator

Your next question comes from the line of Ebrahim Poonawala with Bank of America.

Ebrahim Poonawala

So maybe first question, Bryan, just wanted to circle back. I think you mentioned the efficiency ratio long term, still 53%, seems like number you like with the balance between investments and efficiency is kind of what management is targeting could be lower in the near term. But one, I just wanted to make sure I heard that right. But maybe bigger picture, just about areas of investment spend. And when we think about AI, you're adding scale and density should we expect the bank to be incrementally more efficiently than you look at it unit cost economics or medium-term efficiency ratio, would that be headed towards the 50%? Or is that just unreasonable given the investment spend that you have ahead?

Bryan Preston

Yes. I think certainly, there is going to be opportunity to leverage AI to get the company more efficient over time. That is something that I think is a little bit longer term out. And obviously, that is the big question is we're sitting here talking about news and the impact on deposit cost. If AI is so effective that it actually gives you the ability from a cost-effective perspective to optimize low balance deposit accounts, it's going to create a lot of opportunity for us to get efficiency in how we operate as a company.

So those are all the trade-offs we're thinking about from a longer-term perspective and as cost structures change and those opportunities come manage on it, but it does take near-term investment to get there, near-term investment and fuel capacity and infrastructure associated with deployment of AI. I would tell you that from a near-term perspective, when we talk about investing, it is a continuation of the strategies that you have heard us talk about for a long time. It's investment in retail distribution and marketing to grow households, it's investment in middle market bankers and product partners and capital markets and treasury management and wealth and its investment in product and product from a consumer banking perspective, continuing to advance our Momentum Banking consumer product as well as continuing to invest in our payments business. That's such an incredible portion driver of future growth for us, both from the deposit and operational deposit perspective as well as fees.

And so -- those are the near-term places that we're looking at that keep us in that kind of 53% range. But certainly, as technology and other structural investments change, it does give us an opportunity to continue to evolve our expense base.

Timothy Spence

Yes. If I can just put a point on a couple of things there. You touched on it and admittedly, I haven't done this analysis in a while. But historically, average deposits per branch were basically the 1 metric that positively correlated with the efficiency ratio. I agree it was never scale, again, controlling at least to some extent for some of the audits that are out there in terms of business mix.

So as we get more dense, you should expect the existing business to continue to improve its efficiency. The question is just always where you get the leverage on the marginal dollar. Like are we better off where we're positioned at this level of profitability, trying to grind out a little bit more in the way of return are we better offering the compound tangible book value per share. And we have done that now recently, and we just are of the belief that sustaining peer-leading returns and driving up TVB per share growth is a more powerful lever for long-term investors than trying to go from peer-leading returns to even more peer-leading position.

Ebrahim Poonawala

Got it. And maybe just sticking with sort of density deposits per branch. So Comerica seems to have gone relatively smoothly. You have a playbook on bank M&A. Like as we think about the next 6, 12 months, like how do you think about potential opportunities that could accelerate some of what you plan to achieve through de novo branch openings via an acquisition?

Timothy Spence

Yes. I thought we might get that one. So I spent some time steering at the data that comes out of my or ring this morning. And it says I'm still operating with a moderately high sleep deficit.

So I think from Fifth Third's perspective, we got to get back into balance on sleep deficit and otherwise, before we would look at anything else. We have a lot of opportunity in front of us organically. I think the playbook has worked well, but part of the reason that the playbooks worked well is because we had discipline in terms of what we elected to do. And then we committed ourselves to getting it done entirely before we got distracted with the next thing. And that ethos is just an ethos here, whether it's organic investment or inorganic investment.

Ebrahim Poonawala

That accuracy of the ordering is suspect you might be sleeping better than you think.

Timothy Spence

Well, I still want to see a crown before I get too excited about anything.

Operator

Your next question comes from the line of Gerard Cassidy with RBC Capital Markets.

Gerard Cassidy

Tim, question for you both. On the investment portfolio, you folks have about 70% in available for sale and 30% in held to maturity. And when we think about Basel III end game, when it's finalized, we all know about the AOCI being included in CET1. Can you guys give us some thoughts on how you might change that mix over the next couple of years to manage the AOCI volatility?

Bryan Preston

Yes. Gerard, thanks. Great question. There is no doubt as the capital rules are finalized, we will be using more HTM as part of our investment portfolio. The thing that we have been cautious around is, has honestly been waiting for the final liquidity rules because we wanted to make sure that we weren't making this decision without understanding if there were going to be some limits on the amount of HTM securities that [indiscernible] liquidity.

But I think it's fair to say that as long as there's nothing meaningfully unexpected in those rules that we're probably going to be operating at a closer to 50-50 split between AFS and HTM going forward. So we do think as we continue to invest cash flows over the next couple of years, you're going to see that mix continue to head into the HTM direction. And what -- from a broader balance sheet perspective than what will happen is the AFS portfolio will manage with a slightly lower duration than the HTM portfolio. And that in general, our balance sheet has needed a security portfolio with a 4- to 5-year duration. And so we'll try to blend that with a little bit longer duration stuff in HTM to help manage that capital volatility risk.

Gerard Cassidy

Very good. Tim, I might regret asking this question, first, for somebody like me. Credit quality for you folks and your peers is very good. It's been very resilient, maybe surprisingly so for all of us to see. And here's maybe the regrettable question. Has the credit picture for the industry and you guys specifically changed in the sense that either your better underwriters or more conservative underwriters. We know what's happened post financial crisis with the derisking of the industry? Or is it just the economic environment is much better than we all thought and don't get over your skis to think that the banking industry is smarter now on credit?

Timothy Spence

I think that's the first time I've ever gotten the question where the asker expressed regret twice. We got to the end of it. Listen, I think there are a few things that are going on here. There's no question that coming out of the financial crisis, there was a huge investment made inside the banking sector. to get smarter on credit. And in particular, I think to get smarter on early warning signals. Certainly, that's the case here Fifth Third. There's an apparatus around early warning that supports the continuous monitoring that we do in commercial. There's a lot more behavioral data utilized in the underwriting process in consumer and then in small business and otherwise, which has proven to be very useful as a complement to conventional scored underwriting.

So I think we've gotten better. Clearly, the -- some of the risk has migrated out of the banking system just given the growth in the NBFI world. Now that obviously has come back in through back leverage and otherwise. But with enhancement that didn't exist previously. So I do think that the higher leverage points, the more rate-sensitive borrowers and otherwise are more prominently supported by nonbanks today than certainly they were in the past. So those things are good. That said, like I mean you know this better than I do. The history is that big credit cycles are not driven by that sort of normal economic cycle in mature industries. They're driven by relatively not well understood, high-growth asset classes or new channels that turn out to drive negative select or otherwise.

So while I think we're better at the stuff we've always known, as you know, we tend to be a little bit more reticent to dip our toe into areas of the credit markets that are not proven or where it's hard for us to see that they're being accurately priced. Like that is the reason that we have essentially set out the data center construction lending to the data center sponsors. It is the reason that I think we have the lowest exposure combined with our combined balance sheet to private credit relative to the others. It may well be that we were wrong there to be worried about credit and right to be worried about just being priced appropriately. But in my mind, those are 2 sides at the same point. So yes, I think we're better and new risks will continue to materialize as long as human beings are continuing to find new ways to take risk.

Operator

Your next question comes from the line of Chris McGratty with KBW.

Christopher McGratty

Tim, in the past, you've talked about the Midwest being one of the more competitive markets, whereas I think some of your peers have talked about the Southeast. You gave an interesting stat in your prepared remarks. I think it was -- the Southeast was, I think, a little over 200 basis points, the pricing was a little bit below the Fed funds. Do you have those same stats by market? Like I guess what I'm after is deposit -- incremental deposit costs by your 3 big markets.

Bryan Preston

Yes. Chris, it's Bryan. What I would tell you on that front is, you have to be careful when you look at those numbers because the seasoning of the book matters as well. And so what you're going to see is that the Midwest market is our highest margin market because it has the oldest book. And part of that is the legacy checking accounts, in particular, are just higher balance on average. The Southeast has a higher percentage of promotional offers then as a percentage of the deposit book. And even with that, you still have 200 basis points of spread relative to the Fed funds rate and then the Southwest book will have the absolute highest rate of promotional offers as a percentage of their book. So it will have the lowest margins right now relative to Fed funds.

In general, I don't have the exact numbers in front of me for the Midwest and the Southeast. But I would expect that the Midwest at this point is probably about 50 basis points better than the Southeast. And the Southwest is going to be probably 50 to 100 basis points worse. But it is just a function of the percentage of promo offers as a percent of the aggregate deposit base.

Timothy Spence

Yes. And then the measure of competition in my mind is not sort of what is the price on the seasoned portfolio. It's what is it cost to grow the marginal deposit in each of those markets. So when we talk about the Midwest being more competitive, it's at the margin, if you wanted to grow another dollar of deposits, it is tougher to do it. Just when you look at the promotional offers that are in the market in the Midwest than it is in the Southeast today. I think the other dynamic that's worth mentioning is the more consolidated market structures tend to be less competitive in terms of the bleeding edge offer, the less consolidated market structures.

And the Southeast and the Southwest have both historically been more consolidated market structures than you see in the Midwest, which is part of the other reason that we're, I think, quite optimistic about our ability to continue to gain share in both of those places. And that frankly, that the tactics that have worked so well over the past several years in the Southeast are portable to the Southwest in just one simple statistic, 4 out of the 5 largest banks by market share in Dallas, as an example, do not offer a totally free checking product, right? And that is, I think, 4 out of 5 the 5 largest bank by market share in literally every Midwest market would have a totally free checking product.

Gerard Cassidy

Okay. That's interesting. And then maybe a comment or an update on Direct Express post conversion?

Timothy Spence

Yes. Thank you. Good progress there. As you'll remember, we launched our new platform in -- at the beginning of the second quarter. Every one of the participating agencies inside the federal government is issuing cards on that platform, and we got through the period of hyper care that we always run when we launch a new product, and we're very pleased with the outcomes. You can see it just in the -- whether it's the digital channel usage or Direct Express customers, taking advantage of some of the functionality that's built into the mobile app to support things like paying rent. And otherwise, we also have made some changes to policies, whether it was ATM or in the branches to enable Direct Express customers to do things more easily than they were able to do at Comerica and then that is a huge benefit associated with having a broader branch network in terms of the way that we service those folks.

We anticipate initiating the full conversion of the legacy program this winter moving into next spring. So there's lots of work underway to ensure that, that is a seamless transition. This is just by definition, a population that tends to need a little bit more handholding and therefore, we have been very concerned about executing the conversion in a way that produces the least disruption for our clients. But the fit goal inside the U.S. Treasury has been a wonderful partner here. We're very excited about the platform that Fifth Third and [indiscernible] offer to be able to turn this program really from a funds disbursement model for the federal government into a tool for financial health for the population that it serves. So business continues to plug away. We continue to see it as a nice growth engine for the company.

Operator

Your next question comes from the line of Mike Mayo with Wells Fargo Securities.

Michael Mayo

My general question is simply for more granularity on what's taking place in Texas. You said you've added bankers, but deposit costs are 50 to 100 basis points more. So it seems like some cross currents there. So my long shock question is, it seems like your return on assets, firm-wide it's 1.4%. It's probably a lot less of the Southwest. What is it in the Southwest or Texas what sort of gap is there? And I'm not expecting an answer, but I thought I'd try since you're a line of business company. So an easier question, if you can't answer that, what time frame were you referring to? So Southwest deposits are up 23%. Households are up 8%. Dallas Houston, Austin deposits are up over 20%. Is that year-over-year? And if you can just give some of those types of metrics for loans, businesses and anything else?

Timothy Spence

Yes, sure. Let me start on that, Mike, and I'll try to answer both of your questions, and then we'll transition. So the ROAs in the business are best in markets where we have a really strong middle market commercial banking franchise that is potentially self-funded or even a liquidity -- net liquidity provider back to the bank with low-cost sort of checking anchored consumer deposits. So we have a very nice middle market business in Texas through the combination of the sort of legacy Comerica, which was a very strong sort of top 5 market position in core middle market in its Texas markets and then the expansion market that Fifth Third has built there.

What we don't have yet is the retail deposit funding base that we will have as we build out the branch network. So the branches in Texas, with the average branch deposits for consumer small business are, I think, a little bit less than half what we would have in our Midwest markets just as a point of comparison and about in line with what we have in the Southeast despite all the branches in Texas being seasoned already and very few of the branches in the Southeast as a percentage of the total being seasoned and still seasoning on their own. So we expect the ROAs in Texas to go up from here, not to go down as we're doing the construction and as we continue to add talent in the market.

So as it pertains to the statistics that I provided on retail small business, it's year-over-year pro forma. So we added Fifth Third and Comerica together, which in retail in Texas was Comerica something Fifth Third, nothing a year ago and then the combined company today. And then we capped the individual branches at $250 million to get the headquarter and wholesale deposits out and the 20% -- the greater than 20% growth rates across the 4 MSAs that you mentioned are year-over-year. They would also be greater than 20%, if you cap the branches at $500 million. So there's no game playing there. It's just you have to draw the line somewhere. So we did. The 8% household growth is year-over-year households.

So it's Comerica households a year ago. It's Comerica plus the new households we've been able to generate across the Southwest this year. And I anticipate that the growth rate there should be double digits because that is what we have demonstrated repeatedly we're able to do in markets where we're adding to the branch footprint where we're adding direct marketing support we got 8% with no checking marketing across the Southwest in terms of where we're going.

No, I think the one other stat that you didn't reference but that I will give you is we've added, I think, something on the order of 80 or 85 middle-market relationships in Texas this year from Feb 1 forward. That's a pretty good clip for us down there, and it is a faster clip. It's about 2x the pace per middle market banker that Comerica was adding them the in the last few years. So you can see the acceleration there from both the impact of the combined teams and the additional balance sheet capacity and the new solutions that we're bringing to the market.

Michael Mayo

And that 80 to 85 middle market is off to what sort of base is that kind of small? Or is that meaningful?

Timothy Spence

It's meaningful growth. I don't have the total number off the top of my head here, but we'll be happy to share that.

Michael Mayo

And then just when you say they're 2x faster per banker in that footprint. I mean how does that happen? I mean because you have more balance sheet because you told them to work harder because you have more accountability. I mean it's hard to just flip the switch and make that happen. So what are you doing differently that's helping them?

Timothy Spence

Yes. I mean what you hear when you talk to the bankers is they have more attachment points. So when you are in the markets and you talk to Comerica like very seasoned Comerica bankers as we were actually across the Southwest over the course of the last couple of months. The anchor products Comerica had to lead with where C&I lending or maybe a personal loan through the private bank to the owner of the business historically. The average that C&I loan tenure at most banks is like 18 or 19 years, just when you look at the average length of the relationships, you have to wait a long time if that's the only attachment point you have.

Whereas at Fifth Third, as we have talked about in the past, C&I remains the primary attachment point in the middle market. But our folks lead with lease lines through the equipment leasing platform, they lead with hedges like commodity hedges or currencies through our capital markets platform. And then they have the commercial payments business which as I think we have shared repeatedly adds almost one new relationship that's payment led for every relationship that it adds that's attached to a new C&I facility on an annual basis. So what you hear from the bankers is they just have more arrows in the quiver. And if they can't move the working capital line, that there's a lot of other things that they can do to initiate new relationships with clients. So that's part of it.

I think the other big part of it, as we've talked about it in the past, is Comerica was going out of its way to ensure that the liquidity and the capital that we're available to support lending principally supported the growth of existing relationships, which is absolutely the right thing to do, if that's a constraint. In our pace, we have a larger balance sheet that we, as evidenced by the sequential growth during the quarter even when you strip out the incremental deposits that came from moving Comerica suite product on balance sheet. We have ample liquidity to support more lending activity. And therefore, it's allowed them to be more front-footed in terms of what they can add to grow.

Operator

Your next question comes from the line of Erika Najarian with UBS.

L. Erika Penala

Just wanted to clarify, Bryan, your response to Ryan's question like an hour ago, did you say when the rate environment changed a lot since the deal. So you don't have the ability to invest this quickly. Did you say it gives you a better chance to outperform the 53% efficiency or it's tougher to outperform to 53%? I just wanted to make sure I read on that right.

Bryan Preston

Yes, yes, it gives you a better chance to outperform because the idea is that with the asset sensitivity, it generates profitability at a clip when rate changes happen at a pace faster than we typically plan and deploy investments. You think about the sales hiring and the branch builds, like those are multiyear strategies that we're executing. So from a near-term perspective, it's going to give us an opportunity to outperform the deal targets.

L. Erika Penala

Got it. Glad I clarified that. And just to follow up, obviously, especially after Comerica, your balance sheet is more short rate sensitive, but there's also movements in the portfolio. You talked about taking down flu you also brought on a bunch of off-balance sheet deposits that may come back off. As we think about the forward curve and you think about maybe the 10-year not going hopefully not testing 53 anymore. How should we think about the net interest margin trajectory from that plus exit rate in 4Q, assuming the forward curve?

Bryan Preston

Yes. I mean it's a -- obviously, we're positioned to be benefiting from continued rate increases, but there's a lot of big questions further out just in terms of what the loan environment and the deposit environment looks like in '27. We'll give you more clarity on that at the beginning of next year when we give full guidance.

L. Erika Penala

But statically, it sounds like it should be a net positive, assuming no changes in mix and modest growth?

Bryan Preston

Yes. I mean, all else being equal, the rate environment is beneficial. We've obviously continued to generate fixed rate asset repricing. The opportunity on that $4 billion to $5 billion a quarter of repricing that occurs has actually gotten better again, closer to 100 basis points. We are sensitive to the front end. So the higher rate outlook is beneficial to us. The wildcard on all these things is just where is deposit competition over time, but certainly a very productive environment with what we're seeing right now.

Operator

Our next question is from the line of Ben Gerlinger who has disconnected. Please hold.

We will now take the question. Our next question from John Pancari with Evercore.

John Pancari

I'll try to be quick. Just on the -- related to the last question, maybe just another way to go at it with the deposit side. I mean, can you just help us with the trajectory of your expected trend in deposit costs here into fourth quarter and into 2027. And what beta are you assuming in the uprate environment could that differ on the downgrade data or previous up rate betas that you're seeing now that you've got the compare balance sheet on board?

Bryan Preston

Yes. The beta assumption right now from a near-term perspective is a mid-50s beta for just a hike to. Certainly, that if you were to see more persistent hikes, that could start to drift up a little bit. And you see this in -- as Tim was referencing earlier, the overall deposit cost, new money costs in the consumer business. That used to be a Fed funds plus from a promo perspective, that as of the last couple of quarters, shifted up closer to Fed funds plus 50. Now part of that is just the outlook from a rate expectation perspective.

And when we talk about the relative competitiveness of the market, it's that Fed fund plus 50 number that we're focused on when we say the Midwest is more competitive. But you're typically in a plus or minus 10 or 15 basis point range across markets on that new market, new money pricing. If we were to see a lower expectation of hikes we're only to get 1 or 2 more. I think you're going to see that start to rationalize again because certainly, people are acting in front of rates.

With that, if new money continues to come on, on that rate, I think you would see a continued deposit cost migration that looks similar to our migration that you saw from 2Q to 3Q, excluding the impact of the off-balance sheet sweeps that we brought on balance sheet because we do intend to continue to keep growing deposits, but we'll also be able to do some things to some of the prior vintages of promos to offset some of that cost. It's that same strategy that we've used continuously on reinvesting interest expense, recycling it in different areas will allow us to continue to grow. Even with where we price things down, we're still keeping in the range of 80% of balances somehow within the framework of our company, either between deposit book or in some of our off-balance sheet investment products. So we do retain a fair amount of dollars even after we reprice those balances down.

John Pancari

Got it. Okay. And then lastly, on the credit side, I know you said that certain areas that you're watching more closely consumer discretionary average lending. Are there any areas that you are seeing stress start to evolve? We got a couple of the banks this quarter [indiscernible] have a couple of bumps. And so are you seeing anything on that front? And then the ACL ratio declined a bit this quarter, a couple of bps. How should we think about the reserve level?

Timothy Spence

Yes. Not really. In terms of any areas. As you mentioned that -- the areas of the economy where there've been transitioned, consumer discretionary is one. And you just -- you see the value position brands and the luxury brands doing better than the sort of the middle market brands in consumer discretionary at the moment in terms of what's going on. We were watching commodity price exposed categories really closely. But the margin compression this last quarter was like 1.4% in terms of their operating margins in our portfolios as we got new financials in.

So they've done a very nice job of positioning themselves either to be less sensitive to the movement in commodities prices or to be able to push price along to their own customers, rate-sensitive borrowers and particularly the ones that are reaching or refinance wall or all these places that we look that tends to be real estate and leverage lending. There's just not a lot in our leveraged loan book, so there's not a lot to watch in that particular case, although we always watch it closely.

And then on the real estate front, I mean, you could see it in our performance this quarter and you get the stratification there. I think we feel pretty good about what's going on that front. But those are going to continue to be the areas that we watch like is there a factor that could drive a shift in demand. Is there volatility in input costs, or do you have a scenario where debt service costs become challenging for clients. Those are the things that anticipate credit stress in the portfolio. There's just not a lot of that going on, really anywhere in the industry as you referenced.

Operator

There are no further questions at this time. I will now turn the call back to Matt Curoe for closing remarks.

Matt Curoe

Thank you, Alexandra, and thanks, everyone, for your interest in Fifth Third. Please contact the Investor Relations department if you have any follow-up questions. Alexandra, you may now disconnect the call.

Operator

This concludes today's call. Thank you for attending. You may now disconnect.