John F. Woods
Vice Chairman and Chief Financial Officer at Citizens Financial Group
Thanks, Bruce, and good morning, everyone. First, I'll start with our headlines for the quarter, referencing Slide 5. We reported underlying net income of $669 million and EPS of $1.30. Our underlying ROTCE for the quarter was 17.9%. Net interest income was up 11% linked quarter, driven by a 21 basis point improvement in margin to 3.25% and 2% growth in average interest-earning assets. Average loans are up 2% linked quarter, with 3% growth in commercial. Fees were fairly stable, down 2% linked quarter as our client hedging business returned to more historical levels following an exceptional first half of the year and mortgage results softened a bit.
Capital markets fees and service charges were stable. We remain highly disciplined on expenses, which are up 1% linked quarter. Overall, we delivered underlying positive operating leverage of 6% linked quarter, and our underlying efficiency ratio improved to 54.9%. We recorded a provision for credit losses of $123 million and a reserve build of $49 million this quarter, which reflects an increased risk of recession, partly offset by improvement in portfolio mix.
Our ACL ratio stands at 1.41%, up from 1.37% at the end of the second quarter and compares with a pro forma day 1 CECL reserve of approximately 1.3%. Our tangible book value per share is down 8.6% linked quarter, driven by the impact of higher long-term rates on AOCI. We continue to have a very strong capital position with our CET1 ratio at 9.8%, just above the midpoint of our target range.
Next, I'll provide further details related to third quarter results. On Slide 6, net interest income was up 11%, given higher net interest margin and 2% growth in interest earning assets. The net interest margin was 3.25%, up 21 basis points. As you can see on the new block in the bottom left-hand side of the slide, the healthy increase in asset yields outpaced funding costs, reflecting the asset sensitivity of our balance sheet.
Moving to Slide 7. With the current expectation for the Fed to raise rates further, we are confident that we will continue to realize meaningful benefits from rising rates as the forward curve plays out. Our asset sensitivity has driven a significant improvement in NII year-to-date and those benefits will continue to accumulate into the fourth quarter and compound into 2023.
Our overall asset sensitivity increased to approximately 3.3% at the end of the third quarter, up from 2.6% for the second quarter, primarily driven by the impact of variable rate loan originations. Our asset sensitivity will allow us to have further upside as the forward curve continues to move up. We expect cumulative loan betas to exceed deposit betas through the rate cycle. Our interest-bearing deposit beta is tracking well within our expectations, and the ultimate outcome will depend upon the pace and level of Fed rate hikes from here.
So far in this cycle, with Fed funds increasing 225 basis points since 4Q 2021, our cumulative interest-bearing deposit beta is well controlled at 18% through the end of the third quarter. On a sequential basis, our deposit beta was 26%. We began the rate cycle with a strong liquidity and funding profile including significant improvements through our deposit mix and capabilities. We will continue to optimize our deposit base and to invest in our capabilities to attract durable customer deposits.
We continue to execute our hedging strategy to managing a more predictable and stable outlook for NII as we benefit from the higher rate environment. You'll find a summary of our hedge position in the appendix on Slide 23. In the third quarter, we did an additional $10 billion of hedges with a focus on extending our protection out through 2024 and beyond, primarily through forward starting swaps. We expect our NIM to rise to 3.5% or better by the end of 2023 and for our overall hedge position to provide a NIM floor of about 3.25% through the fourth quarter of 2024 if we see rates come down by 200 basis points across the forward curve before it could move higher with further hedge actions.
Moving on to Slide 8, we posted good fee results despite headwinds from continued market volatility and higher rates. These were fairly stable, down 2% linked quarter as our client hedging business returned to more historical levels following an exceptional first half of the year. Card fees were strong again this quarter while capital markets and service charges were stable. Focusing on capital markets, market volatility continued to impact the bond and equity markets. M&A advisory fees picked up nicely, but this was offset by lower loan syndication revenue amid increased economic uncertainty and market volatility.
We continue to see good strength in our M&A pipeline to continue to build with strong pinch activity and a growing backlog. While current market volatility may constrain the ability for deals to close, capital markets fees should see some seasonal improvement in the fourth quarter, particularly in M&A advisory and even more broadly if markets settle down. Mortgage fees were softer as the higher rate environment weighed on production volumes, which more than offset the fact that production margins improved modestly this quarter, but still remain below historical levels.
We are seeing signs of the industry reducing capacity, which should benefit margins over time and servicing operating fees were stable. Wealth fees are $5 million lower linked quarter given the impact of lower market levels on AUM. And in other income, we saw a seasonal benefit from our tax advantaged investments and an increase in leasing revenue.
On Slide 9, expenses were well controlled, up 1% linked quarter. Our TOP7 efficiency program is continuing to make good progress and is on track to deliver over $115 million of pretax run rate benefits by the end of the year.
Average loans on Slide 10 were up 2% linked quarter driven by 3% growth in commercial with growth in C&I and CRE, given modestly higher loan utilization and slower paydowns. Retail loans increased 1% with growth in mortgage and home equity, offsetting planned runoff in auto. Period-end loans were broadly stable linked quarter given higher-than-usual end-of-quarter C&I line paydown, which were generally redrawn after quarter end.
On Slide 11, average deposits were up $1.3 billion or 1% linked quarter, with growth coming from retail term deposits and Citizens Access savings and commercial banking deposits were broadly stable. Deposit costs remain well controlled. Our interest-bearing deposit costs were up 38 basis points, which translates to an 18% cumulative beta. We feel good about how we are optimizing deposit costs in this rate environment, and our performance to date is reflective of the investments need to strengthen our deposit franchise since the IPO. Overall, liquidity improved as we reduced our FHLB advances by $2.3 billion and increased our cash position at quarter end.
Moving on to Slide 12. We saw good credit results again this quarter across the retail and commercial portfolios. Net charge-offs were 19 basis points, up 6 basis points linked quarter but still very low relative to historical levels. Nonperforming loans were broadly stable at 55 basis points of total loans. Given the higher risk of recession, we are watching our loan portfolio very carefully for early signs of stress, in particular, pre office, leveraged loans and selected nonprofit sectors.
At this point, we aren't seeing significant issues emerge. Also, the leading indicators for consumer continue to be stable and favorable to pre-pandemic levels. Personal disposable income has declined from stimulus-driven highs but remains above the pre-pandemic 2019 average. Spending for travel and restaurants remain steady and above pre-pandemic levels, while credit card and home equity line utilization are still well below pre-pandemic levels and retail delinquencies continue to remain favorable to historical levels.
Turning to Slide 13. I'll walk through the drivers of the allowance this quarter. We continue to see very good credit performance across the retail and commercial portfolios. While we aren't seeing stress in the portfolio at this point, we increased our allowance by $49 million to take into account an increased risk of recession, partly offset by improvement in portfolio mix. Our overall coverage ratio stands at 1.41%, which is a modest increase from the second quarter.
If you recall, when we adopted CECL at the beginning of 2020, our coverage ratio was 1.47%. However, given the Investors acquisition and some shifts in the portfolio mix, we estimate our pro forma day 1 CECL allowance to be approximately 1.3%. The current reserve level contemplates a shallow recession and incorporates the risk of added stress on certain portfolios including those subject to higher risk from inflation, supply chain issues and return to office trends.
Moving to Slide 14. We maintained excellent balance sheet strength. Our CET1 ratio increased to 9.8%, which is slightly above the midpoint of our target range. This, combined with our strong earnings outlook, puts us in a position to resume share repurchases in the fourth quarter. Tangible book value per share and the tangible common equity ratios were both reduced by the impact of higher long-term rates on AOCI. We have increased our held to maturity portfolio for about 30% of total loans at quarter end, which has helped to mitigate the impact of rising rates. Our fundamental priorities for deploying capital have not changed, and you can expect us to remain extremely disciplined in how we manage capital allocation.
Shifting gears a bit. On Slides 15 and 16, you'll see some examples of the progress we made against the key strategic initiatives and what's on tap for our businesses in the near term. Since we closed the Investors acquisition in April, we've been executing against a phased approach to the integration. In the second quarter, we began originating mortgages on our systems. And since then, we have completed the conversion of mortgage servicing. We also successfully completed the conversion of more than 10,000 Investors' wealth clients, representing about $1.6 billion in assets to our platform. We have a lot more to do, but I'm pleased to say that we are on track to complete the deposit and branch conversions in mid-first quarter 2023.
We have included a high-level integration timeline in the appendix on Slide 22. Importantly, we remain on target to achieve our planned $130 million of run rate net expense synergies by the end of 2023, of which approximately 70% will be achieved by the end of 2022. We also continue to expect that the integration costs will come in below our initial estimates.
In the last two years, we have launched a collection of new banking products and features that make it easier to bank with us. Last week, we announced the next step in that evolution with CitizensPlus, which provides financial rewards, banking features and tailored advice that grows with customers from everyday banking to personalized wealth management. This includes Citizens Private Client, our new expanded wealth management offering, which will launch by the end of the year.
We are fully committed to driving momentum in our wealth business. And as part of the launch, we are hiring more than 200 new financial advisors and relationship managers. We continue to make meaningful strides forward with our national digital strategy and tech modernization. Earlier this year, we migrated Citizens Access to a fully cloud-enabled platform, and we launched a national storefront adding mortgage and education refis to the portal. Over the next year or so, we plan to expand our national storefront, adding card and checking first and then Wealth and Citizens Pay. As we add products to the platform, we have an exciting opportunity to build relationships across a growing national customer base.
Our vision is to migrate our core branch deposits to this modern platform over time, which will be a key change in efficiency and flexibility in terms of implementing upgrades and enhancements. We are also growing our innovative Citizens Pay offering, which is currently at about 160 merchant partners and expanding across targeted verticals. Over the next year, we are working to launch a new mobile app and a unique customer direct experience.
Moving to the commercial business on Slide 16. Over the past eight years, we've invested heavily in talent and product capabilities in M&A, corporate finance, bond and equity underwriting, FX and commodities and so on. Despite the challenging environment, we remain near the top of the league tables, consistently ranking in the top 10 as a middle market and sponsor book runner and helping corporates and private equity sponsors access capital through the public markets.
We have also integrated our cash management and global market solutions as well with our coverage. We are excited about the potential synergies from our recent acquisitions as we target growth in key verticals. The JMP acquisition gets us much deeper into the growing healthcare, technology and financial services sectors, expands our equity underwriting and adds research capabilities, and DH Capital expands our capabilities in the Internet infrastructure, communication sectors, software and next-generation IT services. These businesses are exceptionally well positioned for when markets reopen.
Moving to Slide 17, I'll walk through the outlook for the fourth quarter. We expect NII to be up roughly 3%, driven by the benefit of higher rates with a margin rising to the 3.3% to 3.35% range. Average loans are expected to be stable to up modestly as commercial growth is partially offset by order rundown. These are expected to be stable to up modestly. Noninterest expense is expected to be stable. Net charge-offs are expected to be approximately 20 basis points to 22 basis points. We expect our CET1 ratio to land near the upper end of our target range of 9.5% to 10% and our tax rate should come in at approximately 22%.
With respect to the full year, we continue to track well and expect to beat our full year 2022 guidance across key P&L categories and performance measures. We expect to deliver positive operating leverage for full year 2022 in excess of 5%, with fourth quarter sequential positive operating leverage of about 3%. We also expect to deliver a full year efficiency ratio of about 57% with the fourth quarter coming in under 54%. And we expect to deliver a full year ROTCE in excess of 16% with the fourth quarter well above both Q3 and our medium-term target range of 14% to 16%.
To sum up, on Slide 18, we delivered a strong quarter amid a dynamic environment and we are optimistic about the outlook for the fourth quarter and into 2023. We expect to continue to see significant benefits in our net interest income from the higher rate environment. Our diverse fee business is driving solid results and our capital markets business, in particular, is well positioned for when markets stabilize, and our commitment to operating efficiency remains a hallmark. We are well prepared for a slowdown in the environment with a strong capital, liquidity and funding position and we are being prudent with respect to our credit risk appetite and loan growth. At the same time, we are playing some offense, executing well on strategic initiatives in each of our businesses that will deliver medium-term growth and outperformance.
With that, I'll hand it back over to Bruce.