Vice Chair and Chief Financial Officer at U.S. Bancorp
Thanks, Andy. If you turn to Slide 8, I'll start with a balance sheet review followed by a discussion of third quarter earnings trends. Average loans increased 3.9% compared with the second quarter driven by 6.5% growth in commercial loans, 4.7% growth in mortgage loans and 6.0% growth in credit card balances.
Commercial loan growth reflected increased business activity and higher utilization rates across both large corporate and middle market portfolios. Underlying demand remains healthy as we continue to focus on appropriate return opportunities to prudently deploy our capital.
In the retail portfolio, we saw solid linked quarter growth and year-over-year growth in credit card balances, reflecting strong spending activity and lower payment rates. Purchase mortgage market share gains and lower prepayment activity continued to support residential mortgage balance growth.
Turning to Slide 9, total average deposits increased slightly compared to the second quarter. Growth in total interest bearing deposits more than offset the impact of lower total noninterest bearing deposit balances as customers respond to the rising interest rate environment. Total average deposits increased by 5.9% compared to a year ago.
Slide 10 shows credit quality trends, which continued to be strong across our loan portfolio. The ratio of nonperforming assets to loans and other real estate was 0.20% at September 30, compared with 0.23% at June 30 and 0.32% a year ago. Our third quarter charge-off ratio of 0.19% improved slightly versus the second quarter of 2022 and third quarter of 2021 levels. The allowance for credit losses as of September 30 totaled $6.5 billion, or 1.88% of period end loans. The $200 million increase in our reserve this quarter was primarily reflective of loan growth and to a lesser extent uncertainties in the economic outlook.
Slide 11 provides an earnings summary. In the third quarter, we reported $1.18 per share, excluding $0.02 per share of merger and integration charges related to the planned acquisition of MUFG Union Bank.
Turning to Slide 12, net interest income on a fully taxable equivalent basis totaled $3.9 billion, representing an 11.3% increase compared with the second quarter and a 20.6% increase from a year ago. Linked quarter growth was driven by strong earning asset growth and a 24 basis point increase in the net interest margin, which benefited from rising interest rates, partially offset by deposit pricing and short-term borrowing costs.
Slide 13 highlights trends in noninterest income. Noninterest income decreased 3.1% on a linked quarter basis as declines in mortgage banking and treasury management revenues were partially offset by stronger corporate payments revenue and an increase in other noninterest revenue. Compared with a year ago, noninterest income declined 8.3% primarily due to lower mortgage banking revenue, reduced deposit service charges reflecting changes in our policies, and lower treasury management fees due to rising rates partially offset by higher payments revenue and trust and investment management fees. The decline in mortgage revenue primarily reflected lower refinancing activity in the market which continued to pressure total application volumes and the related gain on sale margins given excess industry capacity. In the third quarter, total payments revenue increased by 4.9% compared with a year earlier.
Slide 14 provides linked quarter and year-over-year revenue growth trends for our three payments businesses. Because of the cyclical nature of our payments businesses, we believe year-over-year trends are a better indicator of underlying business performance in a normal environment.
Credit and debit card fee revenue increased -- or decreased 0.5% on a year-over-year basis, as the impact of higher credit card and debit card volume was more than offset by continued lower prepaid card activity. Excluding prepaid card activity, which was elevated last year in connection with supporting unemployment programs, credit and debit card fee revenue would have increased 3.0% compared with the third quarter of 2021.
The bottom half of the slide illustrates the year-over-year growth rates in both merchant processing and corporate payments fee revenue over the last several quarters. Third quarter merchant processing revenue increased 3.6% year-over-year. Growth was negatively impacted by unfavorable foreign currency exchange rates, given market volatility in Europe and specifically in the U.K. Excluding the FX impact, year-over-year growth in merchant fee revenue was approximately 9.4%.
Slide 15 provides some additional information on our payment services business. On the right side of the slide, you will see the continued strong momentum we are seeing in our tech-led revenue in partnerships within our merchant acquiring business. The key to that trajectory is the strong growth we have seen in new tech-led partnerships. Through the third quarter, new tech-led partnerships year-to-date were 2.5 times the number of new partnerships we had acquired in the entire year of 2019. And these partnerships are continuing to grow.
Turning to Slide 16, noninterest expense increased 1.9% on a linked quarter basis, excluding merger and integration costs associated with the pending acquisition of Union Bank. The change in expense was driven by higher compensation, professional services and marketing and business development expenses.
Slide 17 highlights our capital position. Our common equity Tier 1 common -- our common equity Tier 1 capital ratio at September 30 was 9.7%. On Slide 18, I'll provide some forward-looking guidance for U.S. Bank on a standalone basis. Again, this guidance does not include any potential impact of Union Bank.
Let me start with full year 2022 guidance which is consistent with our previous expectations. We continue to expect total net revenue to increase 5% to 6% in 2022 compared to 2021. We expect mid-teen growth in taxable equivalent net interest income, which is slightly improved from our previous outlook of low to mid-teens growth. We continue to expect a decline in fee revenue for the full year, primarily due to the impact of higher interest rates on mortgage revenue due to lower refinancings in the market. Lower deposit service charges due to pricing changes and a decline in other noninterest income. We continue to expect positive operating leverage of at least 200 basis points in 2022, excluding the impact of merger and integration related costs associated with the Union Bank acquisition. For the full year of 2022, we expect our taxable equivalent tax rate to be approximately 22%.
I will now provide guidance for the fourth quarter. We expect both total revenue and total core expenses excluding merger and integration costs to increase by approximately 2% on a linked quarter basis. Net interest income will continue to be supported by earning asset growth and higher rates. However, our fee revenue will be lower reflecting typical seasonality in some of our fee-based businesses.
Credit quality remains strong. Over the next few quarters, we expect the net charge-off ratio to remain lower than historical levels, but to normalize over time. Changes in the allowance for credit losses near term will primarily reflect loan growth and changes in the economic outlook.
If you turn to Slide 19, I'll provide an update on our previously announced pending acquisition of Union Bank. In September of 2021, we announced that we had entered into a definitive agreement to acquire the core regional banking franchise of MUFG Union Bank. We continue to make significant progress and planning for the closing of the deal in the fourth quarter of 2022, while we await regulatory approval. As you know, regulatory approvals are not within the company's control and may impact the timing of the closing of the deal. As a reminder, we expect to close on the deal approximately 45 days after being granted U.S. regulatory approval. As previously discussed, we are targeting the conversion date in the first half of 2023. The financial merits of the deal remain intact. Our EPS accretion estimates are unchanged, and we continue to estimate the acquisition will generate an internal rate of return of approximately 20%, which is well above our cost of capital.
The company's target CET1 capital ratio is 8.5%. Based on interest rates as of October 13, our CET1 capital ratio at close would approximately -- would approximate 8.3%. We expect the CET ratio to increase towards 9% as the purchase accounting valuation adjustments accrete into capital through earnings.
I'll hand it back to Andy for closing remarks.