Zachary Wasserman
Senior Executive Vice President, Chief Financial Officer at Huntington Bancshares
Thanks, Steve, and good morning everyone. Slide 7 provides highlights of our third quarter results. We reported GAAP and adjusted earnings per common share of $0.39. Return on tangible common equity or ROTCE came in at 21.9% for the quarter. Adjusted for notable items, ROTCE was 22.2%. As you saw on Slide 4, if you were to normalize TCE for the non-cash accounting impact of other accumulated comprehensive income that arises from unrealized losses on our AFS securities portfolio, our ROTCE would have been 18.6%. We are pleased with the sustained momentum in our loan balances, with total loans increasing by $3 billion and excluding PPP, loans increasing by $3.3 billion. Total average deposits also increased $1 billion quarter-over-quarter and $3.7 billion year-over-year. This growth reflects the focus on primary bank relationships. Pre-provision net revenue expanded sequentially by 17% from last quarter to $857 million. Credit quality remained strong, with net charge-offs of 15 basis points and non-performing assets declining to 53 basis points.
Slide 8 shows our continued trajectory of PPNR expansion. We expect Q4 to be another strong quarter as we drive sustainable profitability and highlight the earnings power of the Company, supported by our organic growth initiatives and harnessing the benefits from the TCF acquisition. We remain committed to our long track-record of managing to positive operating leverage, even as we continue to invest in the business.
Turning to Slide 9. Average loan balances increased 2.6% quarter-over-quarter, totaling $117 billion. Excluding PPP, total loan balances increased $3.3 billion or 2.9%, driven by both commercial and consumer loans. Within commercial, excluding PPP, average loans increased by $2 billion, or 3.3% from the prior quarter. These results were supported by broad-based demand across our commercial businesses that is fueling robust new production. Line utilization remained relatively stable during the quarter on a core C&I basis, while we saw higher balances within distribution finance. Asset finance, which includes equipment finance and distribution finance, contributed with balances higher by $1 billion. This included $300 million from distribution finance during the quarter. Commercial real estate balances also increased by $800 million. Commercial growth continued in our middle-market corporate and specialty banking segments, which collectively increased by $200 million during the quarter. In Consumer, growth was led by residential mortgage, which increased by $1 billion, driven by slowing prepays and higher mix of on-balance sheet loan production. We also saw a steady growth in our vehicle finance business.
Turning to Slide 10. We delivered average deposit growth of $1 billion. Deposit growth was led by commercial, up $1.4 billion. This expansion reflects our initiatives to drive primary bank relationships and new customer acquisition. We remain disciplined on deposit pricing, with our total cost of deposits coming in at 25 basis points for the third quarter.
On Slide 11, we reported another quarter of sequential expansion of both net interest income and NIM. Core net interest income, excluding PPP and purchase accounting accretion, increased by $148 million or 12% to $1.392 billion. Net interest margin increased, primarily driven by higher earning asset yields as a result of our asset sensitivity position.
Slide 12 highlights Huntington's deposit pricing discipline. Our low deposit rate relative to the third quarter of 2015, along with an improved funding profile, gives us the flexibility to remain disciplined on deposit pricing. For the third quarter, we've started to see our average cost of deposits tick up as expected. We are remaining dynamic in this environment. We continue to manage the portfolio at a very granular and segmented level to ensure pricing discipline and with a focus on growing the primary bank relationships that bring lower cost deposits.
Turning to Slide 13. We've been dynamically managing the balance sheet against the volatile rate backdrop. This quarter, we continued to execute on our hedging strategy to manage possible downside rate risks over the longer term, while positioning ourselves to benefit from higher expected rates in the short term. In Q3, we increased our downside protection by executing a net $6.6 billion of receive-fixed swaps and $2 billion of callers. We'll be proactive in managing our downside risk, while closely monitoring the rate outlook. Our expectation is to continue to deploy downside hedging strategies over the coming months.
Additionally, we are actively managing the securities portfolio to both capture the benefit from higher rates over time and to protect tangible capital. We maintained the proportion of securities in held-to-maturity flat during the quarter and are reinvesting securities portfolio cash flows at rates above portfolio yields.
Moving to Slide 14. Non-interest income was $498 million, up $13 million from last quarter. We drove record activity within our capital markets businesses during the quarter, with revenues increasing $19 million, which includes the full quarter impact from Capstone. Capstone's deal pipeline is healthy and we expect it to contribute to additional growth in the fourth quarter. We remain pleased with the client engagement we are seeing in the wealth management business, with positive net asset flows year-to-date. The momentum in net flows has been outweighed by market-based changes in assets under management, resulting in lower overall revenue. Deposit service charges were also lower by $12 million, reflecting the expected $9 million impact from Fair Play enhancements that were implemented in July. Our outlook for the impact of these fee adjustments is unchanged from prior guidance. Our Fair Play philosophy is at the center of our strategy and is directly aligned with our mission of looking out for people. We believe the effect of Fair Play continues to be a compelling value proposition for our customers and supports sustainable growth for the Bank. Fee revenues were also impacted this quarter by a decline in mortgage banking, driven by a lower return on our MSR asset and lower saleable spreads.
Moving on to Slide 15. Non-interest expense increased $35 million from the prior quarter. Aligned to our prior guidance, core expenses, excluding notable items, increased $49 million to $1.043 billion. This increase was mainly driven by the full quarter impact from Capstone and Torana. It also included additional compensation expenses related to the strong revenue and production we are seeing in 2022 and impacts from merit and day count. The underlying expense run rate remains very well-controlled. Our efficiency ratio, which is an outcome of our revenue drivers and expense management activities, came in at 54.4% on a reported basis, and adjusted for notable items, was 53.9% for the quarter. On an adjusted basis, this reflects a decrease of 210 basis points quarter-over-quarter.
Slide 16 recaps our capital position. Common equity tier 1 ended the quarter at 9.3%, within our targeted operating range of 9% to 10%. As we go forward, our capital priorities remain unchanged, with our first priority to fund organic loan growth. With the robust return on equity we are generating from our core assets, we are deploying our incremental capital to fund organic growth and drive CET1 toward the middle of our target operating range by year-end. Our tangible common equity ratio or TCE declined to 5.3% as a result of AOCI marks on the securities portfolio. Recall, this temporarily reduces equity as value marks are taken and then accretes back over time. Importantly, this does not impact our regulatory capital ratios. Our TCE ratio, excluding the AOCI impact, increased 19 basis points to 7.2%. Finally, our dividend yield remains well-above the median in our peer group at 4.5%.
On Slide 17, credit quality continues to perform very well. As mentioned, net charge-offs were 15 basis points for the quarter. This was higher than last quarter by 12 basis points and down 5 basis points from the prior year. Our consumer and commercial portfolios continue to demonstrate stability and credit quality. Non-performing assets declined from the previous quarter and have reduced for five consecutive quarters. Criticized loans have reduced both from the prior quarter and prior year. Allowance for credit losses was up 2 basis points to 1.89% of total loans, reflecting a conservative reserve posture, given the heightened economic uncertainty, even as our internal portfolio metrics show stability.
Turning to Slide 18. Let me update our latest forecast for Q4. Our guidance assumes the consensus economic outlook through year-end and incorporates the rate curve as of the end of September. Our loan growth guidance remains unchanged at high-single-digit growth rate on a year-over-year basis. We are currently tracking towards the higher-end of this range. As a result of balance sheet growth and the rate curve outlook, we are again revising guidance higher for net interest income. We now expect core net interest income on a dollar basis, excluding PPP and purchase accounting accretion, to be up in the high-20s to low-30s percentage growth rate for the fourth quarter on a year-over-year basis. In fee income, we now expect it to be down low-single digits for the fourth quarter on a year-over-year basis. This guidance has reduced from our prior level.
We continue to see encouraging trends in core strategic growth areas within fees, namely our capital markets, wealth and advisory and payments businesses. And the prior trends we've been seeing in other major fee lines, including mortgage, are within expected levels. The change in our guidance is related to the decision to hold on sheet the guaranteed portion of our SBA loan production. Market sale premiums for those assets have reduced and it is now more advantageous for us to hold that production on sheet in Q4 as opposed to selling. We will forego an acceleration of fees this quarter, but benefit from higher spread income out into 2023 and beyond. We believe this is a good economic return, but will cause fee recognition in Q4 to be lower than prior expectations.
On expenses, our expectation is for core expenses to be up low-single digits in the fourth quarter compared to the prior quarter. We continue to maintain tight control of underlying core expenses, while also seeing some impacts from compensation, driven by the strong performance and profitability we are seeing in our 2022 results. Given the higher earnings, we now expect our tax rate to be approximately 19%.
Finally, before we move to Q&A, I'd like to end with a few key points. As Steve mentioned earlier, our business is performing exceptionally well right now, with solid momentum in the underlying drivers and expanding profitability. We also continue to see strength in our customer trends, where they appear to be managing through the environment well and with solid credit performance. Notwithstanding these clear positives, we are mindful of the heightened uncertainty and risks in the environment. We are closely monitoring the impacts from persistently high inflation, rising interest rates, geopolitical instability and market volatility. The cone of uncertainty around the near term economic environment has widened and the probability of a recession is increasing. A bedrock part of the way we manage our business is to be dynamic to ensure we have game plans ready and are positioned to act to manage through a multitude of scenarios, while sustaining top-tier performance. And as always, we are guided by our moderate to low risk appetite through the cycle. We are operating from a position of strength. And we are confident in our ability to successfully manage a range of economic environments.
We're looking-forward to hosting many of you at our upcoming Investor Day on Thursday, November 10th in New York City and via webcast. We are excited to share more about our strategic growth objectives and our targets to continue to drive top performance and value-creation over the years to come.
With that, we'll conclude our prepared remarks and move to Q&A. Tim, over to you.
