James Leonard
Executive Vice President and Chief Financial Officer at Fifth Third Bancorp
Thank you, Tim. And thank all of you for joining us today. Our first quarter results were strong despite the market volatility during the quarter. Average and period and total deposit balances were flat compared to the prior quarter. Average core deposits declined in line with our guidance of down 1%. We grew loans modestly during the quarter while adding new quality relationships in both commercial and net new households and consumer. We achieved an adjusted efficiency ratio of 59% and a seasonally challenged quarter, which is a six point improvement compared to the year ago quarter.
Our first quarter core PPNR grew nearly 40% compared to last year, reflecting the diversification and growth of our revenue streams combined with disciplined expense management. Net interest income of approximately $1.52 billion increased 27% year over year, but declined 4% sequentially. Our sequential NII performance was impacted by our shift to a more defensive balance sheet position given the volatile environment, the impact of lower day count and seasonally strong investment portfolio income in the prior quarter. Fee income exceeded our expectations despite the market related headwinds, and we remain disciplined on expenses while continuing to invest in our businesses.
PPNR was impacted by the expenses associated with higher than expected fee income. Our NIM declined six basis points for the quarter, while interest bearing deposit costs increased 64 basis points to 176 basis points, reflecting a cycle to date interest bearing deposit beta of 36% through the first quarter, which includes the impact of CDs.
Total adjusted non-interest income increased 2% compared to the year ago quarter driven by -- commercial banking and mortgage fee income, which more than offset a decline in deposit service charges due to the elimination of consumer NSF fees last year and the impact of higher earnings credits from higher market rates this year. Growth in commercial banking fee income was primarily driven by increased loan syndication, fixed income sales and trading and M&A advisory revenue, partially offset by a decline in corporate bond fees.
The improvement in mortgage revenue was driven by increased servicing fees and lower asset decay. Adjusted non-interest expense increased 6% compared to the year ago quarter, excluding the impact of non-qualified deferred compensation expenses from both periods. Expense growth was elevated due to the dividend finance acquisition in the second quarter of 2022 and growth in the provide franchise. Excluding the FinTech growth impacts and the FDIC assessment, total expenses increased approximately 3% compared to the year ago quarter as discipline throughout the bank, combined with automation initiatives were offset by compensation associated with our minimum wage hike, higher fee income and higher technology and communications expense, reflecting our focus on platform modernization initiatives.
Moving to the balance sheet, total average portfolio loans and leases increased 1% sequentially reflecting growth in both commercial and consumer portfolios. Commercial was led by C&I where payoffs were muted and production was stable in our regional middle market banking business but down in our corporate bank. The subdued production and the corporate bank reflects our focus on optimizing returns on capital in this environment, combined with less robust demand. Compared to a year ago quarter, C&I loans, excluding PPP have increased 13%. The period and commercial revolver utilization rate remains stable compared to last quarter at 37%.
Average total consumer portfolio loans and leases increase 2% compared to the prior quarter led by dividend finance while balances from the rest of our consumer captions remained relatively stable. Average total deposits were flat compared to the prior quarter, as increases in CDs and interest checking balances were offset by a decline in demand deposits. By segment, wealth and asset management average balances increased sequentially, consumer was stable and commercial modestly declined consistent with normal first quarter seasonality.
Period and total deposits were also flat compared to the prior quarter. Notably, we have grown deposits 1% since the end of last June compared to a 4% decline for the top 25 banks as shown in the Feds AJ data. We have included additional materials in our earnings presentation to highlight some of the key attributes of our high quality deposit franchise that may be relevant in this environment.
Moving to Credit, as Tim mentioned, credit trends remain healthy and our key credit metrics remained well below normalized levels. The ratio of early stage loan delinquencies 30 to 89 days past due decreased four basis points sequentially to 26 basis points and remained below 2019 levels. The net charge-off ratio of 26 basis points increased four basis points sequentially, and was at the low end of our guidance range. The NPA ratio of 51 basis points was up two basis points compared to a year ago.
From a credit 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 have also maintained the lowest overall portfolio concentration in nonprime consumer borrowers among our peers.
In commercial, we have maintained the lowest overall portfolio concentration in CRE at 14% of total loans. Across all commercial portfolios, we continue to closely monitor exposures where your inflation and higher rates may cause stress and continue to closely watch the leveraged loan portfolio and office CRE.
Office loans of $1.6 billion represented just 1.3% of total loans, with a criticized ratio of 8.2% and only one basis point of delinquencies. While the leveraged loan portfolio has declined 65% since 2016, and is now less than $3 billion outstanding today. We have focused on positioning our balance sheet to deliver strong, stable results through the cycle.
Moving to the ACL. Our reserve change this quarter was a net increase of $37 million, or a build of $86 million excluding the onetime impact of adopting the accounting standard eliminating TDR accounting, which reduced the reserve by $49 million. Our bill primarily reflected loan growth, notably from dividend finance loans which contributed $88 million of the increase. The ACL ratio increased one basis point sequentially, or five basis points excluding the accounting change.
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% while the downside scenario underlying our allowance coverage incorporates a peak unemployment rate of 7.8%. We maintained our scenario weightings of 80% to the base and 10% to each of the upside and downside scenarios.
Moving to Capital, our CET1 ratio remained relatively stable compared to last quarter, and in the first quarter at 9.25%. Our capital position reflects our strong earnings generation offset by the impacts of returning capital in the form of dividends and repurchases, risk weighted asset growth primarily in consumer loans and a seven basis point decline from the CECL phase in.
Our tangible book value per share increased 11% sequentially, partially impacted by our AOCI position, which improves 17%. Tangible book value grew 7% excluding AOCI compared to the year ago quarter.
Moving to our current outlook, we expect full year average total loan growth between 2% and 3% which reflects our cautious outlook on the economic environment. We expect total commercial loans to increase in the low to mid-single digits area compared to 2022 which implies modest incremental growth from the first quarter through year end given our outlook for a tempered lending environment in the second half of the year. We expect line utilization rates to remain stable. We expect total consumer loan growth to also be modest as a strong increase from dividend finance will be mostly offset by a decline in auto and mortgage.
We continue to expect approximately $4.5 billion in dividend loan production for the year given the secular tailwinds and our investments in the business combined with market share gains. We expect deposits to be stable or grow from the first quarter average level as we progress throughout 2023 consistent with our strong customer acquisition trends. Within that, we expect continued migration from DDA into interest bearing products throughout the remainder of 2023 with the mix of demand deposits to total core deposits, declining from 32% today to 30% by year end.
For the second quarter of 2023, we expect average total loan balances to be stable to up 1% sequentially with growth fairly balanced between commercial and consumer portfolios. We expect average deposits to also be stable to up 1% on a sequential basis.
Shifting to the income statement, we expect full year NII will increase 7% to 10%. As other banks have noted, industry wide deposit pricing pressures intensified in the wake of the Silicon Valley and Signature Bank failures. Therefore, as shown in our presentation materials, we are providing NII guidance under a range of deposit betas given potential diverging levels of intensity with respect to deposit competition going forward. The upper end of our NII guidance assumes an approximate terminal beta of 43%, and the lower end assumes approximately a 49% terminal beta compared to our January expectation of 42%.
The midpoint of our NII outlook translates to a 47% beta with total interest bearing deposit costs increasing 45 basis points or so in the second quarter, and another 25 basis points in the second half of the year. Our outlook also considers the lag effects from previous rate hikes and continued DDA migration and assumes the Fed hikes 25 basis points in May, and then holds short term rates of 525 basis points for the remainder of the year.
Our guidance assumes that our securities portfolio balances decline a couple billion dollars between now and year end, and that we hold closer to $10 billion in excess cash for most of the year. Assuming we continue to defensively position the balance sheet for the remainder of the year by maintaining an elevated excess cash position combined with continued intense deposit competition, we are assuming NIM will be in the 320 to 325 range for the year. We expect second quarter NII to be down approximately 1% sequentially reflecting the deposit loan and cash dynamics I mentioned.
We expect adjusted non-interest income to be stable to up 1% in 2023, reflecting continued success taking market share due to our investments and talent and capabilities, resulting in stronger gross treasury management revenue, capital markets fees wealth and asset management revenue and mortgage servicing to be partially offset by higher earnings credit rates on TM, subdued lease remarketing revenue and a reduction and other fees reflecting lower TRA and private equity income this year. We expect our fourth quarter TRA revenue to decline from 46 million in 2022 to 22 million in 2023. We expect second quarter adjusted non-interest income to be up 2% to 3% compared to the first quarter. We expect to continue generating strong revenue across most fee captions and that will be partially offset by a slowdown in debt capital markets revenue.
We continue to expect full year adjusted non-interest expenses to be up 4% to 5% compared to 2022. Our expense outlook incorporates the FDIC insurance assessment rate change that went into effect on January 1. The mark-to-mark can impact on non-qualified deferred compensation plans which was a reduction in 2022 expenses, and the full year impact of investments to grow the dividend finance and provide businesses.
Excluding the dividend acquisition, FDIC assessment and NQDC impacts, we would expect our full year 2023 core expenses to be up less than 3%. Our guidance reflects continued investment in our digital transformation, which should result in technology expense growth in the low double digits for the year. We also expect marketing expenses to increase in the mid to high single digits area. Our guidance also factors the run rate benefits from the severance expense recognized in the first quarter, which reflected proactive actions taken to reduce on-going expenses given the operating environment. We expect second quarter adjusted non-interest expenses to decrease 8% to 9% compared to the first quarter.
In total, our guide implies full year adjusted revenue growth of 6% to 8%, resulting in PPNR growth in the 9% to 10% range. This would result in an efficiency ratio below 55% for the full year. We expect second quarter PPNR to increase 10% to 11% compared to the first quarter, and for second quarter efficiency ratio to be around 54%. We continue to expect second quarter and full year 2023 net charge-offs to be in the 25 to 35 basis points range.
Given our expected period and loan growth, including continued strong production from dividend finance we continue to expect a quarterly build to the ACL of approximately $100 million, assuming no changes in the underlying economic scenarios.
In summary, with our strong PPNR growth engine, discipline, 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.
