Bryan Preston
Executive Vice President and Chief Financial Officer at Fifth Third Bancorp
Thanks, Tim, and thank you to everyone joining us today. Our second quarter results were strong, reflecting our balance sheet strength, diversified revenue streams and disciplined approach to expense and credit risk management. For more than a year, we have emphasized the importance of maintaining balance sheet strength and flexibility in an uncertain economic and interest rate environment. This approach has proven effective as the market's expectations on rate cuts changed dramatically from the start of 2024. Despite this change in rate outlook, our NII has been consistent with the performance trajectory we discussed back in December, increasing sequentially during the second quarter from the first quarter bottoming, and NIM has increased for two consecutive quarters from the fourth quarter low. Additionally, our full year 2024 NII outlook remains unchanged.
As Tim mentioned, our profitability remains strong and stable, which allowed us to resume share repurchases early and grow our CET1 ratio to 10.6%, up 13 basis points. As noted on Page 2 of our earnings release, our reported results were impacted by certain items, including the valuation of the Visa total return swap, an update to the FDIC special assessment and the impact of certain legal settlements and customer remediations.
Excluding the impact of these items, adjusted net interest income for the quarter increased 1% from the prior quarter to $1.4 billion, and adjusted net interest margin improved three basis points compared to the prior quarter. Increased yields on new loan production contributed to this improvement and offset the impact of increased interest-bearing core deposit costs, which were well managed and increased only four basis points compared to the prior quarter.
While total average portfolio loans and leases were flat sequentially, we continue to benefit from fixed rate asset repricing, led by our indirect auto business. Average total consumer portfolio loans and leases were flat sequentially, primarily reflecting the increase in indirect auto originations, offset by a decrease in other consumer loan balances. Average commercial portfolio loans decreased 1% due to lower demand from corporate banking borrowers. Period end commercial revolver utilization remained at 36%, consistent with the prior quarter.
Middle market loan production increased 2% compared to the prior quarter, driven by strong performance in our Southeast markets, primarily in the Carolinas, Georgia and Florida, as well as continued success in Indiana, Texas and California. The pipeline for the second half of the year is improving and we are continuing to invest in our middle market banking teams, including our recently announced expansion in the Alabama market. However, we remain cautious on commercial loan growth expectations in the second half of the year as customer demand for credit remains muted.
Our investment in analytics continues to help us optimize deposit outcomes, demonstrated by our strong deposit growth in 2023 and prudent management of deposit costs in 2024. Our strong track record of liquidity management, combined with data-driven analytics will aid in maintaining pricing discipline and optimizing liability costs. Average core deposits were flat sequentially, driven by higher CDs and consumer savings and money market balances, offset by lower interest checking and commercial demand balances. Our current focus remains on prudently managing deposit costs with the Fed on hold, and preparing for potential rate cuts later this year.
By segment, average consumer deposits increased 2% sequentially, while both commercial and wealth deposits decreased 2%. The Southeast branch investments are driving both strong household growth and granular insured deposits. Demand deposit balances as a percent of core deposits were 25% as of the end of the second quarter, stable with the prior quarter, as migration of DDA balances continues to slow. Consistent with our prior expectations for a higher for longer rate environment, we expect DDA mix to fall below 25% during the third quarter and stay around 24% for the remainder of the year. We ended the quarter with full category one LCR compliance at 137%, and our loan to core deposit ratio was 72%. We are well-positioned to continue to grow net interest income and our balance sheet provides flexibility to navigate the evolving economic and interest rate conditions.
Moving on to fees. Excluding the impacts of security gains and the Visa total return swap, adjusted noninterest income decreased $32 million or 4% compared to the year-ago quarter. This year-over-year decrease is attributable to a $34 million private equity gain recognized in the second quarter of 2023. Within our businesses, commercial payments and wealth and asset management fees continued to deliver strong results, both achieving double-digit revenue growth over the prior year, driven by our continued strategic growth investments in products and sales personnel. These areas are not only fast growing, but are sizable contributors to fee income and profitability today, given our strength and scale in these businesses. We expect these businesses to continue to deliver strong revenue growth.
Our market-sensitive businesses such as mortgage and commercial customer hedging have been impacted by the higher rate environment through reduced demand for credit and reduced market volatility. The combined impact for these businesses was a $20 million decrease versus the prior year.
Leasing business revenue was down $9 million versus the prior year due to our decision to deemphasize operating leases, but it is offset by a $9 million decrease in leasing business expense. The securities gains of $3 million reflected the mark-to-market impact of our non-qualified deferred compensation plan, which is more than offset in compensation expense.
While we have continued to invest in strategic growth initiatives and technology, we've managed our adjusted noninterest expense flat to the year-ago quarter due to our focus on expense discipline and the ongoing benefits from the process automation efforts. Adjusted noninterest expense decreased 7% sequentially, primarily due to seasonal items during the first quarter related to compensation awards and payroll taxes.
Moving to credit. Consistent with our guidance, the net charge-off ratio was 49 basis points, up 11 basis points sequentially, driven by two commercial credits for which we had previously established specific reserves. Consumer charge-offs were 57 basis points, a reduction of 10 basis points sequentially, primarily due to improvement in our indirect consumer secured portfolio. Other credit metrics showed strong sequential improvement with the ratio of early stage delinquencies 30 days to 89 days past due decreasing three basis points to 26 basis points, which is near the lowest levels we have experienced over the last decade. NPAs decreased by $100 million or 13% during the quarter, and the NPA ratio decreased nine basis points to 55 basis points.
In commercial, our credit discipline is grounded in generating and maintaining granular high quality relationships and by managing concentration risks to any asset class, region or industry. We continue to see no material signs of broad-based industry or geographic weakness and believe potential future commercial credit losses will be idiosyncratic in nature.
In Consumer, our focus remains on lending to homeowners, which is a segment less impacted by inflationary pressures. We have maintained our conservative underwriting policies and will continue to evaluate our positioning as economic conditions change. Our ACL coverage ratio decreased four basis points to 2.08%, and included a $47 million reserve release, driven by the previously mentioned specific reserves. 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 10.6%, significantly exceeding our new buffered minimum of 7.7%, reflecting strong capital levels. As we assess our capital priorities, we believe that 10.5% is an appropriate near-term operating level. During the quarter, we completed $125 million in share repurchases, which reduced our share count by 3.5 million shares.
Our pro-forma ratio, including the AOCI impact of the securities portfolio is 8.0%. We expect continued improvement in the unrealized securities losses in our portfolio given that 61% of the AFS portfolio is in bullet or locked-out securities, which provides a high degree of certainty to our principal cash flow expectations. Assuming the forward curve is realized, approximately 26% of the AOCI related to securities losses will accrete back into equity by the end of 2025, increasing tangible book value per share by 10% before considering any future earnings. 62% of the securities-related AOCI will accrete back to equity by the end of 2028.
Moving to our current outlook. While the rate environment and customer credit demand have played out differently than we were expecting at the start of the year, we remain confident in our ability to deliver PPNR and earnings outcomes in-line with or better than our original expectations for the full year. We expect full year NII to decrease 2% to 4%, consistent with our guidance from January. This outlook assumes the forward curve as of early July, which projected two rate cuts in the second half of the year, September and December. We also believe we can deliver this NII outcome with no interest rate cuts and no loan growth in the second half of 2024.
Given the year-to-date trends in customer activity, we now expect full year average total loans to be down 3% compared to 2023. Average total loans in the fourth quarter of 2024 are expected to be stable to up 1% compared to the fourth quarter of 2023, with similar performance in both the commercial and consumer portfolios. Customer demand is the primary driver of this change given the interest rate environment and other economic uncertainties. If there's more economic optimism in the second half of the year, we would expect to see loan growth in-line or better than market growth. We are forecasting fourth quarter average core deposit growth of 2% to 3% when compared to the fourth quarter of 2023. Our forecast also assumes commercial revolver utilization and our cash and other short-term investments remain relatively stable throughout the remainder of 2024.
We expect full year adjusted non-interest income to be stable to down 1% in 2024, reflecting the impact of weaker than previously expected credit demand and customer hedging activities. We expect strong growth in commercial payments and wealth and asset management revenue to continue. In response to this expectation of lower customer activity in the second half, we expect to manage full year adjusted noninterest expense stable to 2023 levels. Our expense outlook assumes continued investments in technology with tech expense growth in the mid-single digits and sales additions in middle market, commercial payments and wealth. We will open 30 to 35 new branches in our higher growth markets and have already closed a similar number of branches in 2024. Our outlook still projects an efficiency ratio of around 57% for the full year.
For full year 2024, the net charge-offs outlook remains in the 35 to 45 basis points range. While we expect to resume provision builds in connection with loan growth and mix in the second half of 2024, we expect the second half build to be less than the first half of 2024 release. Therefore, we expect full year provision to be a $0 million [Phonetic] to $10 million release, assuming no change to credit quality of the portfolio or projected economic conditions.
Moving to our quarterly outlook. We expect NII and NIM growth to continue in both the third and fourth quarter. We expect NII in the third quarter to be up 2% sequentially, reflecting the impact of slowing deposit cost pressures and the continued benefit of our fixed rate asset repricing. Our current outlook assumes interest-bearing core deposit costs, which were 295 basis points in the second quarter of 2024, to increase just four basis points sequentially if we see no rate cuts. We expect average total loan balances to be stable to up 1% from the second quarter. We expect modest middle market, auto and solar production to offset continued low credit demand from corporate banking customers.
We expect third quarter adjusted noninterest income to be up 1% to 2% compared to the second quarter, largely reflecting strength in commercial payments and wealth and asset management, and a modest increase in commercial banking revenue. We expect third quarter total adjusted noninterest expenses to be up 1% compared to the second quarter due to the impact of the previously discussed investments in branches, technology and sales personnel.
Third quarter net charge-offs are projected to be in the 40 basis point to 45 basis point range. And as mentioned in the full year outlook, loan growth and mix are expected to drive a provision build, which should be around $25 million in the third quarter, assuming no change to the economic outlook. The trajectory of our income statement performance should deliver positive operating leverage in the fourth quarter 2024, and a net interest income exit rate for the year that positions us for record results in 2025, assuming no major economic or interest rate outlook changes.
Finally, moving to capital. With our consistent and strong earnings, we expect to execute share repurchases of $200 million per quarter in the second half of 2024, 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 streams, we are positioned to generate sustained top quartile profitability and deliver long-term value for our shareholders, customers, communities and employees.
With that, let me turn it over to Matt to open the call up for Q&A.
