Jamie Leonard
Chief Financial Officer at Fifth Third Bancorp
Thank you, Tim, and thank all of you for joining us today. Our quarterly and full-year financial performance reflect focused execution and resiliency throughout the bank. We generated strong loan growth in both commercial and consumer categories and generated record revenue.
NII was positively impacted by higher market rates as deposit repricing has lagged the repricing of our earning assets combined with the benefits of fixed rate asset generation at higher rates. Fee income has remained resilient despite the market-related headwinds and expenses were well controlled while we continue to reinvest in our businesses. We achieved a full-year adjusted efficiency ratio of 56%, which improved throughout the year with the fourth quarter adjusted efficiency ratio below 52%. Our fourth quarter PPNR grew 12% compared to last quarter and 40% compared to last year.
Net interest income of approximately $1.6 billion was a record for the bank and increased 5% sequentially and 32% year-over-year. Our NIM expanded 13 basis points for the quarter, while interest-bearing core deposit costs increased 64 basis points to 105 basis points, reflecting a cycle-to-date interest-bearing core deposit beta of 24% in the fourth quarter.
Total non-interest income increased 9% sequentially driven by our TRA revenue and commercial banking fees. That growth in commercial banking fee income was primarily driven by higher M&A advisory revenue and client financial risk management revenue and it was partially offset by softer results in mortgage banking origination fees.
Non-interest expense increased just 1% compared to the year-ago quarter. This expense growth was driven by our acquisition of Dividend Finance during the year combined with continued investments in Provide, compensation associated with our minimum wage hike as well as higher technology and communications expense, reflecting our focus on platform modernization initiatives. Excluding the impacts of Dividend and Provide, total expenses would have been down 1% year-over-year.
Moving to the balance sheet. Total average portfolio loans and leases increased 1% sequentially. Average total commercial portfolio loans and leases increased 1% compared to the prior quarter, reflecting an increase in C&I balances. Growth was led by our corporate bank and robust in almost all of our industry verticals. Among our verticals, production was strongest in energy, including renewables, which increased over 50% year-over-year. Healthcare growth was led by Provide with Provide balances up 150% year-over-year. The period-end commercial revolver utilization rate remained stable compared to last quarter at 37%.
Average total consumer portfolio loans and leases increased 1% compared to the prior quarter led by Dividend Finance as well as growth in home equity. This was partially offset by a decline in indirect secured consumer loans. Average total deposits increased 1% compared to the prior quarter as an increase in commercial deposits was partially offset by a decline in consumer deposits. Period-end deposits increased 1% compared to the prior quarter. After the deliberate runoff of surge deposits in the middle of the year, we have achieved solid deposit outcomes throughout the second half of 2022, reflecting our strong core deposit franchise.
Moving to credit. As Tim mentioned, credit trends remain healthy and our key credit metrics remained well below normalized levels. The NPA ratio of 44 basis points was down 2 basis points sequentially and our commercial NPA ratio has now declined for nine consecutive quarters. The net charge-off ratio increased just 1 basis point sequentially to 22 basis points within our guidance range. The ratio of early-stage loan delinquencies 30 days to 89 days past due also increased only 2 basis points sequentially and remains below 2019 levels.
From a balance sheet management perspective, we have continually improved the granularity and diversification of our loan portfolios through a focus on high-quality relationships. In consumer, we have focused on lending to homeowners, which are 85% of our consumer portfolio. We also have maintained the lowest overall portfolio concentration in non-prime consumer borrowers among our peers.
In commercial, we have maintained the lowest overall portfolio concentration in CRE. Across all commercial portfolios, we continue to closely monitor exposures where inflation and higher rates may cause stress and continue to closely watch the leveraged loan portfolio and office CRE. We have focused on positioning our balance sheet to deliver strong, stable NII through the cycle. Our strong deposit franchise, our investment portfolio positioning and our cash flow hedge portfolios will provide protection against lower rates well beyond just the next few years as well as the addition of the fixed rate lending capabilities from both Dividend and Provide should continue to support our strong through-the-cycle outcomes.
Moving to the ACL. Our ACL build this quarter was $112 million, primarily reflecting loan growth. Dividend Finance loans contributed $96 million to the ACL build. As you know, we incorporate Moody's macroeconomic scenarios when evaluating our allowance. The base economic scenario from Moody's assumes the unemployment rate reaches 4.2% while the downside scenario underlying our allowance coverage incorporates a peak unemployment rate of 7.8%.
Given our expected period-end loan growth, including continued strong production from Dividend Finance, we currently expect a first quarter build to the ACL of approximately $100 million, assuming no changes in the underlying economic scenarios.
Moving to capital. Our CET1 grew from 9.1% to 9.3% during the quarter. The increase in capital reflects our strong earnings generation, which was partially offset by the impact of a $100 million share repurchase completed in December.
Moving to our current outlook. We expect full-year average total loan growth between 3% and 4% compared to 2022. We expect most of the growth to come from the commercial loan portfolio, which is expected to increase in the mid-single digits in 2023. We expect line utilization to be stable in the first half of 2023 but then decline slightly to 36% as capital markets conditions improve a bit in the second half of the year. We expect total consumer loans to increase modestly as an expected increase from Dividend Finance and modest growth from home equity and card will be mostly offset by decline in auto and mortgage, reflecting the environment.
For the first quarter of 2023, we expect average total loan balances to be stable sequentially. We expect commercial loans to increase 1%, reflecting strong pipelines in middle market and corporate banking and assuming commercial revolver utilization rates remain generally stable. We expect consumer balances to be stable to down 1%, reflecting lower auto and residential mortgage balances, partially offset by dividend loan originations of $1 billion or so in the first quarter.
From a funding perspective, we expect average core deposits to be stable to down 8% sequentially, reflecting seasonal factors before resuming modest growth in the subsequent quarters of 2023. We expect continued migration from DDA into interest-bearing products throughout 2023 with the mix of demand deposits to total core deposits ending the year in the low-30s.
Shifting to the income statement. Given our loan outlook and the benefits of our balance sheet management, we expect full-year NII to increase 13% to 14%. Our forecast assumes our securities portfolio remains relatively stable from the second half of 2022 levels and reflects the forward curve as of early January with Fed funds increasing to 5% in the first quarter and the first 25 basis point rate cut occurring in the fourth quarter of 2023.
Our current outlook assumes total interest-bearing deposit costs, which were 112 basis points in the fourth quarter of 2022, to increase in the first half of 2023 before settling in around 2% or so in the second half of 2023. Our outlook contemplates an environment of continued deposit competition which would result in a cumulative deposit beta by the end of 2023 of around 42%, given the two additional rate hikes in our forecast over our October guidance.
The future impacts of deposit repricing lags combined with the dynamics of our loan portfolio should result in our full-year 2023 net interest margin increasing 5 basis points or so relative to the fourth quarter of 2022 NIM. We expect NII in the first quarter to be down 1% to 2% sequentially, reflecting the impact of a lower day count in the quarter combined with stable loan balances.
We expect adjusted non-interest income to be relatively stable in 2023, reflecting continued success taking market share due to our investments in talent and capabilities, resulting in stronger gross treasury management revenue, capital markets fees, wealth and asset management revenue and mortgage servicing to be offset by the market headwinds impacting top-line mortgage revenue and higher earnings credit rates on treasury management as well as subdued leasing remarketing revenue.
If capital markets conditions do not improve, we would expect to generate improved NII and lowered expenses in the second half of 2023. We expect our fourth quarter TRA revenue to decline from $46 million in 2022 to $22 million in 2023. Our guidance also assumes a minimal amount of private equity income in 2023 compared to around $70 million in the prior year. We expect first quarter adjusted non-interest income to be down 6% to 7% compared to the fourth quarter excluding the impacts of the TRA, largely reflecting seasonal factors.
Additionally, we expect to continue generating strong financial risk management revenue, which we expect will be offset by a slowdown in M&A advisory revenue and the impacts of higher earnings credits and softer top-line mortgage banking revenue, given the rate environment. We expect full-year adjusted noninterest expense to be up 4% to 5% compared to 2022. Our expense outlook includes a 1 point headwind each from the FDIC insurance assessment rate change that went into effect on January 1, the mark-to-market impact on non-qualified deferred compensation plans, which was a reduction in 2022 expenses, and the full year expense impact of Dividend Finance.
We also continue to invest in our digital transformation, which should result in technology expense growth of around 10%, consistent with the past several years. We also expect marketing expenses to increase in the mid-single digits area. Our outlook assumes we close 25 branches in the first half of 2023 that will deliver in-year expense savings and also add 30 to 35 new branches in our high-growth markets, which will result in high-single digits growth of our Southeast branch network.
We expect first quarter total adjusted non-interest expenses to be up 6% to 7% compared to the fourth quarter. As is always the case for us, our first quarter expenses are impacted by seasonal expenses associated with the timing of compensation awards and payroll taxes. Excluding these seasonal items, expenses will be down approximately 2% in the first quarter. In total, our guide implies full-year adjusted revenue growth of 9% to 10%, resulting in PPNR growth in the 15% to 17% range. This would result in a sub-53% efficiency ratio for the full year, a 3-point improvement from 2022. We expect 2023 net charge-offs to be in the 25 basis point to 35 basis point range with first quarter net charge-offs in the 25 basis point to 30 basis point range.
In summary, with our strong PPNR growth engine, disciplined credit risk management and commitment to delivering strong performance through the cycle, we believe we are well positioned to continue to generate long-term sustainable value for customers, communities, employees and shareholders.
With that, let me turn it over to Chris to open the call up for Q&A.
