Earnings lagged at Fifth Third Bancorp in the first quarter as the Cincinnati company shed lower-quality loans, produced less fee income and continued its long-term cost-cutting program.

Net income at the $140 billion-asset bank fell 6% year over year to $305 million. Earnings per share were 38 cents, in line with analysts’ average estimate, according to FactSet Research Systems.

Total average portfolio loans and leases dipped 1% to $92 billion, driven by declines in auto and commercial and industrial lending, Fifth Third said in a news release Tuesday.

The withdrawal from auto lending was said to be a conscious choice to reduce lower-return auto originations to improve returns on shareholders’ equity, while the decline in C&I lending was described as a deliberate exit from certain loans that failed to meet risk-adjusted profitability targets coupled with softer loan demand.

Energy exposure
Fifth Third's 27% decline in corporate banking revenue included a $31 million impairment tied to an oilfield services loan.

Still, net interest income increased 3% to $939 million as Fifth Third got a little bit of a bump from higher interest rates. The net interest margin increased 11 basis points from a year earlier to 3.02%.

Noninterest income declined 18% to $523 million. Several major categories of fee income fell, including a 33% decline in mortgage banking revenue based on accounting and other factors, and a 27% decline in corporate banking revenue that was driven by a $31 million impairment tied to an oilfield services loan, the release said.

Noninterest expenses remained essentially flat at $986 million. Expenses included $15 million in severance pay, most of which was related to the company’s voluntary early retirement program.

Fifth Third is entering the second year of a three-year profit-improvement plan called Project North Star.

“During the first quarter we continued to make progress towards our long-term performance goals under North Star,” President and CEO Greg D. Carmichael said. “Our net interest margin continued to improve as our balance-sheet positioning allowed us to benefit from increased short-term market rates.”

He described the company’s credit quality outlook as “benign … for the foreseeable future."