Bryan Preston
Chief Financial Officer at Fifth Third Bancorp
Thanks, Tim, and thank you to everyone joining us today.
Our fourth quarter results demonstrated the ongoing strength and momentum of our company with a resilient balance sheet and diversified income streams, we achieved 3% sequential growth in adjusted revenue. That revenue performance, combined with our ongoing expense discipline resulted in a 5% sequential pre-provision net revenue increase in the fourth quarter on an adjusted basis.
As Tim mentioned, our strong profitability allowed us to return over $1.6 billion of capital to our shareholders in 2024, including the $300 million share repurchase executed in the fourth quarter. We delivered $3 billion of sequential growth in end-of-period loans and maintained our CET1 ratio consistent with our near-term operating target of 10.5%. In addition to the $630 million in stock we were purchased in 2024, our tangible book-value per share, inclusive of the impact of AOCI, increased 6% from the previous year despite the 10-year treasury increasing nearly 70 basis-points.
The strategy in our investment portfolio to focus on investments with known cash flows through bullet and locked-out securities will continue to benefit us as these positions pull-to-par. Even with the increase in rates, the securities we maintained and available-for-sale realized an improvement in our unrealized loss position since the end of last year.
Highlighted on Page 2 of our release, our reported results were impacted by certain items. These include costs related to the Visa Mastercard interchange litigation and a contribution to our foundation, partially offset by benefits related to an updated estimate for the FDIC special assessment and the resolution of a prior-period state tax item. Net interest income for the quarter continued its positive momentum, increasing 1% sequentially to $1.4 billion with net interest margin improving 7 basis-points. Proactive balance sheet management resulted in a 35 basis-point reduction in the cost of interest-bearing deposits. These actions, along with the loan growth and the continued repricing benefit on fixed-rate assets, more than offset the decrease in yield on our floating-rate assets.
Loan growth accelerated in December, resulting in a strong period-end loan growth of 3% with average loans increasing 1% sequentially. Period-end commercial loans were up 3% and average balances were relatively stable. We saw broad-based strength in-production across our middle-market footprint, led by our Chicago, Indiana, Carolinas and Georgia regions, as well as a rebound in our corporate banking verticals. Utilization improved a point, some of which we expect is normal year-end seasonality. Average and period-end consumer loans were up 2% from the prior quarter, reflecting increases in indirect auto and residential mortgages. Both asset classes also saw sequential increases in yield due to the continued front book, back-book repricing benefits on these fixed-rate portfolios.
Shifting to deposits. Average core deposits were up 1% sequentially, driven by higher interest checking balances in commercial. This core deposit performance, combined with the flexibility provided by our elevated cash position allowed us to meet our expected down rate beta targets and further reduce higher-cost short-term wholesale borrowings. Interest-bearing core deposits peaked at 2.99% in August and were down to 2.49% in the month of December, representing a core deposit beta in the upper 50s. Total core deposits have increased by $1.6 billion over that same horizon. As always, our focus remains on prudently managing total funding costs while maintaining a strong liquidity position.
We are very pleased with the 38 basis-point sequential decrease in interest-bearing liability costs. Our balanced approach will continue to provide us with flexibility needed to continue our NII growth trajectory to a record 2025 as we head into another uncertain rate environment. Demand deposit balances as a percent of core deposits remained at 24% during the quarter, consistent with our expectations. Balances were stable on both an end-of-period and average basis compared to the 3rd-quarter. We believe this balance level will be maintained as short-term rates are likely to be relatively stable over the near-term. We ended the quarter with full category one LCR compliance at 125% and our loan to core deposit ratio was 73%, up 2% from the prior quarter.
Moving to fees. During the fourth-quarter, we updated the non-interest income captions on our income statement to better align disclosures to our most significant business activities, which includes the addition of commercial payments and capital markets line items. The appendix of our presentation provides more detail on the caption changes. Excluding the impacts of the securities gains and losses and the Visa total return swap, adjusted non-interest income in the fourth-quarter increased 5% compared to the same quarter last year. Capital markets, wealth and commercial payments all delivered strong fee results, driven by our sustained strategic growth investments in products and sales personnels. Capital markets grew 16% over the prior year with increases in loan syndications, debt capital markets and M&A advisory revenue. We continue to see activity below prior year levels in our customer hedging and institutional brokerage fees.
In wealth, fees grew 11% over the prior year to $163 million due to AUM growth and increased transactional activity at Fifth Third Securities. The new commercial payments caption includes TM fees and earnings credits that were previously included in-service charges on deposits and commercial card and sponsorship revenue that was previously reported in card and processing revenue. Compared to the prior year, commercial payments revenue increased 7%, driven by treasury management net fee equivalent growth, which was up 11%. We continue to acquire new clients in treasury management products in our managed services and in new line. The securities losses of $8 million were primarily from the mark-to-market impact of our non-qualified deferred compensation plan, which is offset in compensation expense.
Moving to expenses. Excluding the items noted on Page 2 of our release, our adjusted non-interest expense was up 1% from the year-ago quarter and decreased 1% sequentially. The previously mentioned deferred compensation mark reduced expenses by $7 million for the quarter compared to expense increases of $10 million and $13 million in the prior and year-ago quarters respectively. Excluding the impact of the deferred comp mark, year-over-year expense growth was 2% and sequential expense growth was 1%. While investments in technology, branches and sales personnel have and will continue to drive expense increases, these costs continue to be partially funded through the savings generated by our value stream efficiency programs. Shifting to credit. The net charge-off ratio was 46 basis-points, in-line with our expectations for the quarter and down 2 basis-points sequentially. Commercial charge-offs were 32 basis-points, down 8 basis-points. Consumer charge-offs were up 6 basis-points, which primarily reflects the normal seasonal 4th-quarter uptick we see in our indirect auto and card portfolios, as well as the continued seasoning of the 2022 vintages in our solar and RV portfolios.
Consistent with broader industry data, the 2022 consumer vintage appears to be a modest underperformer relative to other origination periods. Early-stage delinquencies, 30 to 89 days past-due increased only one basis-point and remained near the lowest levels we have experienced over the last decade. Our NPA ratio increased nine basis-points sequentially to 71 basis-points. Commercial NPAs contributed $122 million to the increase from the prior quarter and consumer NPAs were up only $15 million. Within commercial, our CRE portfolio continues to perform well with no net charge-offs during the quarter and a stable NPA ratio of 46 basis-points. Additionally, total commercial criticized assets decreased by $435 million, an 8% reduction during the quarter.
Our provision expense for the quarter resulted in a $43 million build in our allowance for credit losses. This build was primarily attributable to the strong growth in period end loans and a modest deterioration in the Moody's macroeconomic scenarios. Our ACL coverage ratio was 2.08%, down 1 basis-point from the third quarter. We made no changes to our scenario weightings during the quarter.
Moving to capital, we ended the quarter with a CET1 ratio of 10.5%, significantly exceeding our buffered minimum of 7.7% and consistent with our near-term target. Our pro-forma CET1 ratio, including the AOCI impact of the securities portfolio is 8.1%, up 32 basis-points year-over-year. We anticipate continued improvement in the unrealized losses in our securities portfolio, given that approximately 60% of the fixed-rate securities in our AFS portfolio are in bullet or locked-out structures, which provides a high degree of certainty to our principal cash-flow expectations. Assuming the forward curve is realized, approximately 18% of the AOCI related to the securities losses will accrete back into equity by the end of 2025, increasing tangible book-value per share by 5% before considering any future earnings. During the quarter, our $300 million share repurchase reduced our share count by 6.7 million shares.
Moving to our current outlook. We entered 2025 with strong momentum and a resilient balance sheet and remain confident in our ability to achieve record NII and full-year positive operating leverage. We expect full-year NII to increase 5% to 6%. This outlook uses the forward curve at the start of January, which assumed 25 basis-point rate cuts in March and October. We would not change our NII guidance for 2025, even if we assume that no cuts will occur. We expect full-year average total loans to be up 3% to 4% compared to 2024, with the increase primarily driven by the broad-based improvement in C&I combined with continued growth in auto loans. We are assuming that the cash position, securities portfolio and commercial revolver utilization all right -- all remain relatively stable throughout 2025.
Full-year adjusted non-interest income is expected to be up 3% to 6%, reflecting continued revenue growth in commercial payments, capital markets and wealth and asset management, partially offset by the continued runoff of the operating lease business, muted mortgage originations given the rate environment and the year-over-year impact of the final TRA revenue occurring in 2024. We expect full-year adjusted non-interest expense to be up 3% to 4% compared to 2024. Our expense outlook assumes accelerated branch openings in high-growth Southeast markets and continued sales force additions in middle-market, commercial payments and wealth to increase our production capacity to support our strategic growth initiatives.
In total, our guide implies full-year adjusted revenue to be up 4% to 6%, PPNR to grow in the 6% to 7% range and positive operating leverage closer to 2%. Moving to credit, we expect 2025 net charge-offs to be between 40 and 49 basis-points. Assuming no changes in macroeconomic forecasts, we expect the provision to build between $50 million and $100 million due to loan growth.
Moving to our outlook for the first quarter, we expect NII to be flat with the 4th-quarter of 2024 as the benefits of loan growth, fixed-rate asset repricing and the continued reduction in the cost of interest-bearing liabilities should offset the impact of two fewer days. We expect average total loan balances to increase 2% in the first-quarter due to continued momentum in C&I and auto. Excluding the impact of the TRA, we expect non-interest income to be down 6% to 7% compared to the 4th-quarter, mainly due to normal seasonality in card spend, capital markets activity and other commercial banking revenue. First-quarter adjusted non-interest expense is expected to be up 8% compared to the fourth quarter.
As is always the case, our first-quarter expenses are impacted by seasonal items associated with the timing of compensation awards and payroll taxes. Excluding the seasonal items of approximately $100 million, expenses would be flat in the first-quarter. We expect first-quarter charge-offs to be in the 45 basis-point to 49 basis-point range and expect the ACL build will be $10 million to $25 million due to loan growth. Finally, we expect to execute $225 million in share repurchases in the first-quarter with future quarter share repurchases dependent on the level of loan growth. We will continue to target our CET1 ratio around 10.5%, while we await more clarity around the future of the capital rules and other regulations.
In summary, with our resilient balance sheet, diversified revenue streams and disciplined expense and credit risk management, 2025 is set to be a year of continuing long-term investments, record NII, positive operating leverage and strong returns for our shareholders.
With that, let me turn it over to Matt to open the call for Q&A.
