James C. Leonard
Executive Vice President and Chief Financial Officer at Fifth Third Bancorp
Thank you, Greg, and thank all of you for joining us today. Our strong quarterly financial results reflect focused execution throughout the bank. The reported earnings included a negative $0.03 impact from the two items noted in the release. We generated solid revenue growth, which resulted in record fee income, combined with another quarter of strong credit quality. As a result, we produced an adjusted ROTCE excluding AOCI of over 18%. Improvements in credit quality resulted in an $85 million release to our credit reserves and an ACL ratio of 185 basis points compared to 200 basis points last quarter.
Combined with another quarter of historically low net charge-offs, we had a $47 million net benefit to the provision for credit losses. Moving to the income statement; net interest income of approximately $1.2 billion increased 1% sequentially, reflecting C&I loan growth, $10 million in seasonal mutual fund dividends and $18 million in prepayment penalties received in the investment portfolio, as well as a reduction in long-term debt. These items were partially offset by lower loan yields and a decline in PPP-related income, which was $36 million this quarter compared to $47 million in the prior quarter.
Excluding PPP, NII increased $19 million or 2% sequentially. On the funding side, we reduced our total interest-bearing liabilities cost 3 basis points this quarter. Compared to the prior quarter reported net interest margin decreased 4 basis points, reflecting a $2.6 billion increase in interest-bearing cash and lower loan yields, partially offset by prepayment penalties and mutual fund dividends from our investment portfolio. Excluding the impact of excess cash, NIM was flat sequentially. Total reported non-interest income increased 1% compared to the year-ago quarter.
As we discussed in early December, reported results included negative valuation marks totaling $22 million, attributable to a $5 million negative MSR valuation as well as a $17 million fintech investment unrealized loss recorded in securities losses that occurred since its October IPO. Similar to our previous holdings of public companies, we will exit our position at the appropriate time. Adjusted non-interest income results exclude the impact of security gains and losses, the Visa swap as well as prior period business disposition gains and losses.
Adjusted non-interest income increased 4% sequentially, driven by another quarter of record commercial banking revenue. We generated record M&A advisory fees notably in our healthcare vertical, reflecting successful outcomes from our Coker and H2C teams, combined with strong business lending and syndication revenue. These items were partially offset by lower corporate bond fees. We also generated solid fee revenue growth in treasury management, card and processing and wealth and asset management, where we generated record net AUM inflows in both the fourth quarter and the full year.
We were recently recognized as one of the world's best private banks for the third consecutive year by Global Finance Magazine and our results reflected. Additionally, mortgage banking revenue decreased $51 million compared to the third quarter, which included a $12 million unfavorable impact from our decision to retain $350 million of retail production during the quarter. Compared to the year-ago quarter, adjusted non-interest income increased 2% with improvement in every single fee caption reflecting both the underlying strength in our lines of business as well as the robust economic rebound over the past year.
Non-interest income represented 40% of total revenue in the fourth quarter. Reported non-interest expenses decreased 2% compared to the year ago quarter, primarily driven by lower occupancy expense as well as lower processing expense reflecting contract renegotiations. Adjusted expenses increased 2%, driven by higher performance-based compensation, reflecting strong business results from record AUM inflows and commercial loan production, elevated medical benefits due to pandemic, loan servicing expenses and continued technology investments.
Our expenses this quarter included mark-to-market impacts associated with nonqualified deferred compensation of $10 million compared to less than $1 million last quarter. For the full year, total adjusted fees increased 8% compared to just 2.5% expense growth. Commercial Banking revenue increased 21%. Card and processing revenue increased 14%. Wealth and asset management revenue increased 13% and TM revenue increased 9%, offset by a $28 million reduction from lower TRA income and a 16% decline in mortgage banking.
On the expense side, the largest contributor of the growth was elevated performance-based compensation, technology investments and loan servicing expenses. These items were partially offset by the actions we took about a year ago to streamline the organization, including process reengineering, vendor renegotiations, and divestitures of non-core businesses such as property and casualty insurance, HSA deposits and 401(k) recordkeeping. Moving to the balance sheet; total average portfolio loans and leases increased 1% sequentially, including the PPP headwind. Excluding PPP, portfolio loans and leases increased 3% on an average basis and increased 5% on a period-end basis. Average total consumer portfolio loans increased 1% compared to the prior quarter has continued to strengthen auto was partially offset by declines in home equity and other consumer loan balances.
Average commercial portfolio loans and leases increased 2% compared to the prior quarter reflecting growth in C&I loans. Excluding PPP, average commercial loans increased 4% with C&I loans up 7%. As Greg mentioned, commercial loan production was robust across the board up nearly 50% compared to the prior quarter, reflecting strong corporate and middle-market banking production, which was well diversified geographically. As a result, period-end C&I loans excluding PPP increased a 11% sequentially. Revolver utilization of 33% increased 2% compared to the prior quarter.
Average CRE loans were down 3% sequentially with lower balances and mortgage and construction driven by elevated payoffs in areas most impacted by the pandemic. As we have discussed before, we continue to have the lowest CRE concentration as a percentage of total capital compared to peers. Given the rate environment towards the end of the fourth quarter, we began investing a small portion of our excess cash with the average securities portfolio balances increasing 1% sequentially. Average other short-term investments, which includes our interest-bearing cash remained elevated, reflecting continued growth in core deposits.
Compared to the prior quarter commercial transaction deposits increased 5% and consumer transaction deposits increased 2%. Moving to credit, as Greg mentioned, our credit performance this quarter was once again strong, with fourth quarter net charge-offs remaining historically low. Non-performing assets declined 6% sequentially with the NPA ratio declining 5 basis points. Criticized assets declined 13% sequentially, reflecting a significant improvement from COVID high impact industries. Additionally, criticized assets declined in virtually every region in vertical and also improved in our leverage loan portfolio.
From a product standpoint, we continue to closely monitor CRE including office and hospitality exposures, given the ongoing effects of the pandemic. Moving to the ACL, our baseline scenario assumes the labor market remains stable with unemployment and main our three-year reasonable and supportable period at around 3.8%. We did not change our scenario weights of 60% to the base and 20% to the upside and downside scenarios given the continued uncertainty during the pandemic. Our ACL release this quarter came primarily from commercial reflecting the improved risk profile of the portfolio. If the ACL were based 100% on the downside scenario, the ACL would be $960 million higher.
If the ACL were 100% weighted to the baseline scenario, the reserve would be $213 million lower. While the economic backdrop and our base case expectations point to continued strength in the economy, there are several key risks factored into our downside scenario, which could play out given the uncertain environment. In addition to COVID, we continue to monitor the economic and lending implications of the supply chain and labor market constraints that currently exist. Our December 31 allowance incorporates our best estimate of the economic environment.
Moving to capital, our capital levels remained strong with the CET1 ratio ending the quarter at 9.5%. During the quarter, we completed $316 million in share repurchases as part of our capital plan, which reduced our share count by 7.3 million shares. Now that we have reached our 9.5% CET1 goal, we are returning to our 2019 CET1 target of 9% based on our improved credit risk profile and the economic outlook. It is worth noting that combining regulatory capital, credit reserves and unrealized gains we have one of the highest overall loss absorbency rates among peers. As Greg mentioned, last night, we announced the strategic acquisition of Dividend Finance.
Strategically, Dividend furthers our existing indirect consumer point-of-sale capabilities with a tech-forward platform. Dividend pioneered the financing model, which improves economic outcomes for customers and contractors. This helps accelerate dividend growth in the solar industry which is expected to continue growing at a double-digit CAGR over the next several years. Dividend will improve Fifth Third's loan portfolio granularity, geographic diversification and balance between consumer and commercial loans.
Furthermore, while not modeled we expect to generate synergies over time in our mortgage and home equity business as well as with our existing commercial clients. The transaction is also financially compelling. In 2021, Dividend gained market share and originated over $1 billion in loans, which increased 40% compared to 2019. We expect total origination volume of around $1 billion in 2022 post close. Dividend Finance previously utilized an originate-to-sell model. And as a result, the closing of the acquisition will not include a material transfer of loan losses. However, post close, Fifth Third will retain all loan originations.
Given the scalability of the business, we expect a life of loan ROA of 3% plus, ROTCE of 30% plus and an efficiency ratio below 20%. Our modeling conservatively assumes a market share consistent with dividend finances recent history, no extension of the federal solar investment tax credit, an annualized net charge offs around 130 basis points. The acquisition is expected to close in the second quarter and will utilize approximately 30 basis points of capital. Our long term capital priorities remain unchanged. First, deploy capital into organic growth initiatives. Then evaluate strategic non bank opportunities, continue paying a strong dividend and finally execute share repurchases with excess capital.
Given the strong loan growth and the acquisition of Dividend Finance, we currently expect to resume share repurchases sometime in the second half of the year. Moving to our current outlook, our full year guidance includes the financial impacts from Dividend Finance, which is expected to close in the second quarter. We expect full year average total loan growth between 5% and 6% compared to 2021, including the expected headwinds from PPP and the Ginnie Mae forbearance loans we added throughout last year. Excluding these items, we expect total average loan growth between 10% and 11%, reflecting robust pipelines, sales force additions the dividend and provide acquisitions and only a 1% improvement in commercial revolver utilization rates over the course of the year.
This should result in commercial loan growth of 12% to 13%, excluding PPP. Additionally, we expect total average consumer loan growth between 6% and 7%, excluding the Ginnie Mae loans. On a sequential basis, we expect first quarter average total loan growth of 3% to 4%, excluding PPP and Ginnie Mae loans. Including those impacts, we expect average total loans to increase 1% to 2% compared to the fourth quarter. Our outlook reflects continued strength in commercial given our production and pipelines. We expect 6% average C&I growth in the first quarter, excluding PPP.
We expect CRE balances to be stable sequentially in the first quarter, and as a result, expect average total commercial loan growth of 4% to 5% sequentially, excluding PPP. We expect average consumer loan balances to increase around 1% sequentially, excluding the Ginnie Mae impacts. We provide our expectations for this portfolio in our presentation appendix. Given our loan outlook, we expect full-year NII to increase 4% to 5%. It is worth noting that our outlook incorporates the impacts from the PPP and Ginnie Mae portfolios, which will result in a $220 million headwind next year or about 4.5 percentage points. Meaning, we would have expected close to double-digit growth in NII, if not for those portfolios, which have served their purpose to help bridge us to the more productive rate environment.
Given that current rate environment, our forecast assumes growth in our securities portfolio of approximately $1 billion per quarter and includes three rate hikes beginning in May. Due to the evolving economic outlook, our forecast and balance sheet management strategies are subject to change. As a reference point, we estimate that a 25 basis point incremental rate hike would increase NII by approximately $30 million to $35 million per quarter or 7 basis points of NIM when fully realized.
The ultimate impact to NII of incremental rate hikes will be dependent on the timing of short-term rate movements, balance sheet management strategies, including securities growth and hedging transactions and realized deposit betas. On the topic of deposit betas, our current outlook assumes a deposit beta around 13% over the first 100 basis points of rate hikes, including less than 10% for the first couple of hikes. We have updated our NII sensitivity disclosures in the presentation appendix, which now incorporates a dynamic beta repricing assumption rather than static beta approach previously utilized.
The information in the appendix uses modeled approaches to estimate the impacts of various rate scenarios based on decades of historical data. These model betas are 30% for the first 100 basis point scenario and 36% for the plus 200 basis point scenario. For the first quarter, we expect NII to be down 1% sequentially, impacted primarily by day count as well as lower prepayment penalty, PPP and Ginnie Mae income, partially offset by strong loan growth. Given the January 3 forward curve did not consider a March rate hike, if the Fed were to move in March with a run-up in benchmark rates, we would expect first quarter NII to be stable sequentially.
We expect adjusted non-interest income to increase 3% to 5% in 2022, reflecting continued success taking market share due to our investments in talent and capabilities resulting in stronger treasury management revenue, capital markets fees and wealth and asset management revenue. Additionally, we expect strong processing revenue, reflecting both the economic environment and continued household growth. Mortgage revenue should improve modestly in 2022, reflecting elevated servicing revenue from MSR purchases throughout 2021 and moderating asset decay partially offset by a meaningful decrease in production revenue.
We expect TRA and private equity income to be stable compared to 2021 levels. We expect first quarter adjusted non-interest income to be stable year-over-year or decline around 8% to 9% compared to the fourth quarter. Excluding the impacts of the TRA, we expect fees to be down approximately 3% sequentially, reflecting seasonal factors, a decline in private equity income and lower leasing revenue. We expect full year adjusted non-interest expense to be up around 1%, excluding the impact of dividend finance compared to 2021 or up 2% to 3%, including dividend.
We expect compensation expenses to increase around 3% or so, reflecting wage pressures and sales force additions, partially offset by lower performance-based compensation in certain areas such as mortgage given the outlook for lower origination volumes. 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 also assumes we add 20 to 25 new branches in our high-growth markets, which will result in high-single-digit growth of our Southeast branch network.
We expect these items to be partially offset by the savings from our process automation initiatives, reduced servicing expenses associated with the Ginnie Mae portfolio, a decline in leasing expense given the revenue outlook and continued overall expense discipline throughout the company. We expect total adjusted expenses in the first quarter of 2022 to be up around 3% to 4% compared to the year ago quarter or up 5% to 6% compared to the prior quarter. As is always the case for us, our first quarter expenses are also impacted by seasonal items associated with the timing of compensation awards and payroll taxes.
Excluding these seasonal items, we expect first quarter expenses to be down approximately 2% compared to the fourth quarter. Additionally, our first quarter expense outlook is impacted by a broader and larger special equity grant for eligible employees to reward the record performance in 2021 and to provide a retention incentive over the next several years in this competitive labor market. As a result, our full year 2022 total adjusted revenue growth is expected to exceed the growth in expenses, resulting in more than a 1 point improvement in the efficiency ratio.
Our outlook for positive operating leverage reflects continued success growing our fee-based businesses, recent acquisitions, expense discipline and strong balance sheet management. It also considers the known revenue headwinds from PPP and our Ginnie Mae portfolio. We would have guided to positive operating leverage on a stand-alone basis even without any rate hikes. We expect 2022 net charge-offs to be in the 20 basis point to 25 basis point range and we expect first quarter net charge-offs to be in the 15 basis point to 20 basis points range.
In summary, our fourth quarter and full year results were strong. We achieved positive operating leverage in 2021 in a challenging interest rate environment, while maintaining discipline throughout the company. We have a highly asset-sensitive balance sheet, which should perform very well in a rising rate environment, we have over $30 billion of excess cash and continue to grow and diversify our fee revenues, all of which support our through-the-cycle outperformance. We are deploying capital in order to maximize long-term profitability and are committed to generating sustainable long-term value for our shareholders.
With that, let me turn it over to Chris to open the call up for Q&A.