Bryan Preston
Executive Vice President and Chief Financial Officer at Fifth Third Bancorp
Thanks, Tim, and thank you to everyone joining us today. Our first quarter results were a strong start to the year reflecting our balance sheet strength, disciplined expense and credit risk management and diversified fee revenue streams. We saw new household growth accelerate and new quality relationships in commercial post study gains. For over a year, we have highlighted the importance of maintaining balance sheet strength and flexibility in an uncertain economic and interest rate environment. Our first quarter results evidence the strength of our current position, which should produce strong and stable returns across a wide range of economic outcomes. This approach has served us well as rate cut expectations are pushed out.
As Tim mentioned, our profitability remains strong as we have the highest ROA and ROE and among the best efficiency ratios of our peers that have reported to date in a quarter in which we have outsized seasonal compensation expenses. On a year-over-year basis, we were the most stable for both ROA and ROE and among the most stable for NII and the efficiency ratio. Our consistent and strong earnings added 15 basis points to CET1 during the quarter inclusive of absorbing 8 basis points impact from the CECL phase in.
Turning to the income statement. Net interest income for the quarter was $1.4 billion and consistent with our expectations, Interest bearing deposit costs were well managed and increased only 1 basis point compared to the prior quarter. The balance sheet continues to be reflective of defensive positioning with optionality to navigate the changing economic and interest rate environments. Net interest margin improved 1 basis point for the quarter. Increased yields on new production of fixed rate consumer loans and day count benefits contribute to the growth and were partially offset by the deposit balance migration from demand to interest bearing accounts. This increase in NIM is the first sequential improvement since the fourth quarter of 2022.
Excluding the impacts of security gains and the Visa total return swap, adjusted noninterest income decreased 1% from a year ago quarter due to lower revenue and commercial banking, leasing and mortgage, partially offset by strong growth in treasury management and wealth and asset management fees where both saw double-digit revenue growth over the prior year. The securities gains of $10 million reflected the mark-to-market impact of our nonqualified deferred compensation plan, which is more than offset in compensation expense.
Adjusted noninterest expense decreased 1% compared to the year ago quarter due to our continued focus on expense discipline and the ongoing benefits from our process automation efforts. While expenses are down versus the prior year, we continue to invest in opening new branches and increase marketing spend to drive household growth. Adjusted noninterest expense increased 8% sequentially as expected due to seasonal items associated with the timing of compensation awards and payroll taxes in addition to $15 million of expense from the previously mentioned nonqualified deferred compensation plan.
Moving to the balance sheet. Total average portfolio loans and leases decreased 1% sequentially. Average commercial portfolio loans decreased 2% due to lower demand from corporate banking borrowers and the average balance impact of last year's RWA diet, which reduced both total commitments and loan balances during the second half of 2023. Middle market loans increased during the quarter as we drive for more granularity and our winning private bank relationships. As Tim discussed, we saw solid middle market loan growth across our footprint.
Period end commercial revolver utilization was 36%, a 1% increase from the prior quarter, also driven by middle market. Average total consumer portfolio loans and leases were flat sequentially due to the overall slowdown in residential mortgage originations given the rate environment, offset by growth from solar energy installation loans and indirect auto originations. Average core deposits decreased 1% sequentially driven primarily by normal seasonality within our business. Decreases in DDA balances and CDs were partially offset by increases in interest checking.
By segment, average consumer deposits decreased 1% sequentially, while both commercial and wealth deposits were flat. Consumer deposits rebounded towards the end of the quarter to finish slightly higher than at the start of the quarter. As Tim mentioned, we are very pleased with the results of our multiyear Southeast branch investments, which are driving both strong household growth and granular insured deposits. DDA as a percent of core deposits was 25% as of the end of the first quarter compared to 26% in the prior quarter. Migration of DDA balances continued during the first quarter and we expect that trend to carry on in 2024, but at a slower pace than in prior quarters. We ended the quarter with full category 1 LCR compliance at 135% and our loan to core deposit ratio was 71%. The strong funding profile continues to provide us with great flexibility.
Moving to credit. Asset quality trends remained well behaved and below historical averages. The net charge-off ratio was 38 basis points, which was up 6 basis points sequentially and consistent with our guidance. The ratio of early stage loan delinquencies 30 to 89 days past due decreased 2 basis points sequentially to 29 bps. The NPA ratio increased 5 basis points to 64 basis points. We have maintained our credit discipline by generating and maintaining granular high quality relationships and by managing concentration risks to any asset class, region or industry.
In consumer, our focus remains on lending the homeowners, which is a segment less impacted by inflationary pressures and have maintained our conservative underwriting policies. We continue to see the expected normalization of delinquency and credit loss trends from the historically low levels experienced over the last couple of years. From an overall credit risk management perspective, we assess forward-looking client vulnerabilities based on firm specific and industry trends and closely monitor all exposures where inflation and higher for longer interest rates may cause stress.
Moving to the ACL. Our reserve coverage ratio remained unchanged at 2.12% and included a $16 million reserve release driven by lower end of period loan balances and modest improvements in the economic scenarios. We continue to utilize Moody's macroeconomic scenarios when evaluating our allowance and made no changes to our scenario weightings.
Moving to capital. We ended the quarter with a CET1 ratio of 10.44% and we continue to believe that 10.5% is an appropriate near-term operating level. As a reminder, at the beginning of the quarter, we moved $12.6 billion of securities to held to maturity. This represented one quarter of our AFS portfolio and was done when the five and 10 year treasury rates were below 4%. The move reduced AOCI volatility to capital due to our investment portfolio by around 50% during the first quarter. Our pro forma CET1 ratio including the AOCI impact of the AFS securities portfolio is 7.8%.
We expect improvement in the unrealized securities losses in our portfolio given that 60% of the AFS portfolio is in bullet or locked out securities, which provides a high degree of certainty to our principal cash flow expectations. Approximately 26% of the AOCI related to securities losses will accrete back into equity by the end of 2025 and approximately 62% by the end of 2028 assuming the forward curve plays out.
Moving to our current outlook. We expect full year average total loans to be down 2% compared to 2023 consistent with our prior expectations. The decrease is primarily driven by the impact of the 2023 RWA diet on average balances as well as lower mortgage production due to the higher interest rate environment. While we expect full year average total loans to decrease, we expect average total loans in the fourth quarter of 2024 to be up 2% compared to the fourth quarter of 2023 with both commercial and consumer balances up low single-digits by the end of 2024. We are also assuming commercial revolver utilization remains stable. For the second quarter of 2024, we expect average total loan balances to be stable.
We expect softness in commercial due to uncertainty on the interest rate and economic outlooks to be offset by consumer loan growth, which is expected to be up due to solar and auto originations. Our retail household growth and commercial payments growth remained robust in the first quarter and those outcomes will drive deposit growth in 2024. However, we are mindful of potential economic and market headwinds for monetary policy. Therefore, we are forecasting full year average core deposit growth of only 2% to 3% compared to our 5% growth realized in 2023. While we expect DDA migration to continue given the high absolute level of interest rates, the pace of migration has declined. If rates remain at current levels, we expect to see the DDA mix dip below 25% during the middle of the year.
Shifting to the income statement. Given the stabilization in our deposit costs and the benefit we are seeing from the repricing of our fixed rate loan book, we continue to expect the full year NII to decrease 2% to 4% and as Tim mentioned, we expect the NII and NIM trough is behind us. This outlook is consistent with the forward curve as of early April, which projected three total cuts. However, our balance sheet is neutrally positioned so that even with zero cuts in 2024, we expect stability in our NII outlook. The primary risk to our NII performance would be a reacceleration of deposit competition.
Our forecast also assumes our cash and other short-term investments which ended the quarter at over $25 billion remain relatively stable throughout the remainder of 2024. We expect NII in the second quarter to be stable to up 1% sequentially reflecting the impact of slowing deposit cost pressures and the benefit of our fixed rate loan repricing. Our current outlook assumes interest bearing deposit costs which were 291 basis points in the first quarter of 2024 would increase about 6 basis points sequentially if we see no rate cuts.
We expect adjusted noninterest income to be up 1% to 2% in 2024 consistent with our prior guidance reflecting growth in treasury management, capital market fees and wealth and asset management revenue. We expect second quarter adjusted noninterest income to be up 2% to 4% compared to the first quarter largely reflecting higher commercial banking revenue. Consistent with our prior guidance, we expect full year adjusted noninterest expense to be up 1% compared to 2023. Our expense outlook assumes continued investments in technology with tech expense growth in the mid single-digits and sales force additions in middle market, treasury management and wealth.
We will also open 30 to 35 new branches in our higher growth markets and close a similar number of branches in 2024. We expect second quarter total adjusted noninterest expense to be down approximately 6% compared to the first quarter due to the seasonal compensation and benefits cost in the first quarter. In total, our guide implies full year adjusted revenue to be down 1% to 2% and PPNR to decline in the 4% to 5% range. This outcome will result in an efficiency ratio of around 57% for the full year, a modest increase relative to 2023 driven by the decrease in NII. We continue to expect positive operating leverage in the second half of 2024.
Our outlook for 2024 net charge-offs remains in the 35 to 45 basis point range as credit continues to normalize with second quarter net charge-offs also in the 35 to 45 basis point range. We expect to resume provision builds in connection with loan growth assuming no change to the economic outlook. Loan growth and mix is expected to drive a $75 million to $100 million build for the full year with the second quarter build being approximately zero to $25 million. As we mentioned last quarter, our consistent and strong earnings provides us the flexibility to resume share repurchases of $300 million to $400 million in the second half of 2024, including $100 million to $200 million in the third quarter assuming a stable economic and credit outlook and capital rules that are no worse than the current NPR.
In summary, with our well positioned balance sheet, disciplined expense and credit risk management and diversified revenue growth, we will continue to generate long-term sustainable value for our shareholders, customers, communities and employees.
With that, let me turn it over to Matt to open up the call for Q&A.
