Robert Q. Reilly
Chief Financial Officer at The PNC Financial Services Group
Thanks, Bill, and good morning, everyone. Our balance sheet is on Slide 3 and is presented on an average basis and comparing to the second quarter. Loans were down 2% and averaged $320 billion. Investment securities declined $1 billion or 1%. Cash balances at the Federal Reserve increased to $7 billion to $38 billion. Deposits of $423 billion declined $3 billion or 1%. Borrowed funds increased $2 billion, primarily due to senior debt issuances near the end of the second quarter. At quarter end, AOCI was a negative $10.3 billion compared to a negative $9.5 billion at June 30 reflecting higher interest rates. However, tangible book value increased to $78.16 per common share as retained earnings growth exceeded the negative impact of AOCI. Common dividends in the quarter totaled approximately $600 million and we remain well capitalized with an estimated CET1 ratio of 9.8% as of September 30, 2023, which increased 30 basis points linked quarter.
Slide 4 shows our loans in more detail. Third quarter loans averaged $320 billion and increased $6.5 billion or 2% compared to the same period a year ago reflecting growth in both commercial and consumer loans. Compared to the second quarter, average loan balances declined 2% as growth in consumer was more than offset by a decline in commercial. Consumer loans grew approximately $500 million reflecting higher residential mortgage and credit card balances. Commercial loans averaged $218 billion, a decline of $5.5 billion, driven by lower utilization as well as pay downs outpacing new production. Loan yields increased 18 basis points to 5.75% in the third quarter predominantly driven by the higher rate environment.
Slide 5 covers our deposits in more detail. Average deposits decreased $3 billion or 1% due to a decline in consumer deposits that was somewhat offset by growth in commercial deposits. In regard to mix, consolidated non-interest bearing deposits were 26% in the third quarter, down slightly from 27% in the second quarter and consistent with our expectations and we still expect the non-interest bearing portion of our deposits to stabilize in the mid 20% range. Commercial non-interest bearing deposits represented 42% of total commercial deposits in the third quarter compared to 45% in the second quarter and our consumer deposit noninterest bearing mix remains stable at 10%. Our rate paid on interest bearing deposits increased to 2.26% during the third quarter, up from 1.96% in the prior quarter and as of September 30, our cumulative deposit beta was 41%, which was slightly better than our July expectation.
Slide 6 details our investment, security and swap portfolios. Average investment securities of $141 billion decreased $1 billion or 1% as curtailed purchase activity was more than offset by portfolio pay downs and maturities. The securities portfolio yield increased 5 basis points to 2.57% reflecting new purchase yields of 5.5% and the run off of lower yielding securities. As of September 30, the duration of investment securities portfolio was 4.2 years. Our received fixed swaps pointing to the commercial loan book totaled $35 billion on September 30.
The weighted average received fixed rate of our swap portfolio increased 34 basis points to 2.07% and the duration of the portfolio was 2.4 years as of September 30. Accumulated and other comprehensive loss increased by approximately $800 million in the third quarter as a negative impact of higher rates more than offset pay downs and maturities during the quarter. Importantly, as lower rate securities and swaps roll off, we expect our securities yield to continue to increase resulting in a meaningful improvement to tangible book value from AOCI accretion.
Turning to the income statement on Slide 7. For the first nine months of 2023, revenue grew 5% compared to the same period a year ago reflecting higher interest rates and business growth. Non-interest expense grew 2% and was well controlled despite a higher FDIC assessment rate and inflationary pressures. As a result, we generated 3% positive operating leverage and PPNR grew 9%. For the third quarter, net income was $1.6 billion or $3.60 per share. Total revenue of $5.2 billion decreased $60 million or 1% compared to the second quarter of 2023.
Net interest income declined $92 million or 3% and our net interest margin was 2.71%, a decline of 8 basis points. Non-interest income increased $32 million or 2% as higher fee income was partially offset by lower other noninterest income. Third quarter expenses decreased $127 million or 4% linked quarter. Provision was $129 million in the third quarter and our effective tax rate was 15.5%, which included the favorable impact of certain tax matters in the third quarter. For the full year, we now expect our tax-rate to be approximately 16.5%.
Turning to Slide 8. We highlight our revenue trends. Third quarter revenue was down $60 million or 1% compared with the second quarter. Net interest income of $3.4 billion decreased $92 million or 3% as higher yields on interest earning assets were more than offset by increased funding costs. Fee income was $1.7 billion and increased $67 million or 4% linked quarter. The primary driver of the increase in fee income was residential and commercial mortgage revenue, which was up $103 million, the majority of which were $97 million was related to an increase in the valuation of net mortgage servicing rights. Partially offsetting this capital markets and advisory revenue decreased $45 million or 21%, driven by lower trading revenue.
M&A advisory activity continued to remain soft during the third quarter despite robust pipeline. Going forward, we do expect this activity to increase in the fourth quarter, which is included in our guidance that I'll cover in a few minutes. Other non-interest income of $94 million declined $35 million linked quarter, driven by lower private equity revenue and included negative Visa fair value adjustments totaling $51 million. As a reminder, at September 30, PNC owned 3.5 million Visa Class B shares with an unrecognized gain of approximately $1.3 billion.
Turning to Slide 9. Our third quarter expenses were down $127 million or 4% linked quarter, which in part reflected our increased CIP program and we generated 3% positive operating leverage on both a year-to-date and a linked quarter basis. Importantly, every expense category remained stable or declined compared to the second quarter of 2023.
Our credit metrics are presented on Slide 10. While overall credit quality remained strong across our portfolio, the pressures we anticipated within the commercial real estate office sector have begun to materialize. Nonperforming loans increased $210 million or 11% linked quarter. The increase was driven by multi-tenant office CRE, which increased $373 million, but was partially offset by a decline of $163 million in non-CRE NPLs. In regard to the CRE office portfolio, total criticized loans remained essentially flat quarter-over-quarter at 23%. The difference this quarter is the migration of certain multi-tenant office loans to NPL status, which is an expected outcome as we work to resolve the occupancy and rate challenges inherent to this portfolio. Ultimately, we expect future losses on this portfolio and we believe we have reserved against those potential losses accordingly.
As of September 30, our reserves on the office portfolio were 8.5% of total office loans and inside of that 12.5% on the multi-tenant portfolio. Naturally, we'll continue to monitor and review our assumptions, especially in the higher rate environment to ensure they reflect the real-time market conditions and a full update of the portfolio is included in the appendix slides. Total delinquencies of $1.3 billion increased $75 million or 6% linked quarter, driven by higher consumer loan delinquencies. Net loan charge-offs of $121 million declined $73 million or 38% linked quarter. Our annualized net charge-offs to average loans ratio was 15 basis points in the third quarter and our allowance for credit losses totaled $5.4 billion or 1.7% of total loans on September 30, essentially stable with June 30.
Turning to Slide 11. From a capital perspective, we're well-positioned with a CET1 ratio of 9.8% as of September 30. This slide illustrates the impact to our capital levels assuming the Basel III Endgame proposed rules were effective as of September 30. The inclusion of AOCI reduces our ratio by approximately 190 basis points and the impact of all other proposed Basel III Endgame components are estimated to have an additional negative 40 to 50 basis point impact to our CET1.
Taken together, the current Basel III Endgame proposal would increase our risk weighted assets by approximately 3% to 4% and our estimated fully phased in expanded risk based CET1 ratio would be approximately 7.4%, which is above our current requirement of 7%. In light of the fluidity of the capital proposals, our share repurchase activity remains on pause. We'll continue to evaluate the potential impact of the proposed rules and may resume share repurchases activity depending on market and economic conditions as well as other factors.
In regard to the long-term debt proposal, if the rule is effective as the end of the third quarter, our binding constraint would be the long-term debt to risk weighted assets ratio at both the holding company and the bank level. We estimate our current shortfall at the holding company and bank to be approximately $1 billion and $8 billion, respectively, and we expect to reach compliance at both the consolidated and bank level through our current funding plan as well as the restructuring of existing intercompany debt. We acknowledge and want to emphasize the proposals are still in their comment period and the final rules are subject to change. That being said, we're well positioned to comply with the proposals as drafted.
Slide 12 provides more detail on the $16 billion portfolio of capital commitment facilities we acquired from Signature Bridge Bank earlier this month. PNC has been active in the capital commitment business for many years. We believe the acquisition will enhance our broader efforts in the private equity sponsor industry. Signature's origination strategy was similar to PNC's, which is focused on building relationships with large and established fund managers. As such, we expect to retain 75% of the portfolio. This acquisition is financially attractive given the purchase price of 99% of par and the high credit quality of the portfolio. Importantly, the transaction does not have a material impact to our capital ratios or tangible book value per share.
Slide 13 details our focus on controlling expenses. As Bill mentioned, we remain diligent in our expense management efforts, particularly when considering the current revenue environment. Our continuous improvement program has been in place for over a decade and through this program, we've utilized expense savings to fund our ongoing business growth and technology investments. Over the past 10 years through CIP, we've identified and completed actions to reinvest $3.7 billion in our company. As you know, we have a 2023 CIP target of $450 million and we're on track to meet that target.
Looking to 2024, even though we've just begun our budgeting process, we do expect 2024 annual CIP goal of similar magnitude to the 2023 program. Our CIP efforts over the years have allowed us to substantially invest in our company while still delivering low single-digit annual expense growth. However, the current environment poses meaningful pressures necessitating expense control measures beyond our annual CIP program. As a result, we took a hard look at our organizational structure and identified opportunities to operate more efficiently through staff reductions, which we began implementing earlier this month. This initiative will decrease the workforce by 4% and is expected to reduce 2024 expenses by approximately $325 million.
One-time costs associated with this plan are expected to be approximately $150 million and will be incurred during the fourth quarter of 2023. We believe these actions will position PNC for stronger efficiency going forward. As a result, even though our budgeting cycle isn't complete, we have an objective to keep core expenses stable in 2024, which by definition would exclude the fourth quarter one-time charges.
In summary, PNC reported a solid third quarter 2023. In regard to our view of the overall economy, we're expecting a mild recession starting in the first half of 2024 with a contraction in real GDP of less than 1%. We expect the federal funds rate to remain unchanged in the near-term between 5.25% and 5.5% through mid 2024 when we expect the Fed to begin cutting rates.
Looking ahead, our outlook for the fourth quarter of 2023 compared to the third quarter of 2023 is as follows. We expect average loans to be up approximately 3%, including the acquisition of the Signature Bank capital commitment facilities, net interest income to be down 1% to 2%, fee income to be up approximately 1% as increased capital markets activity is expected to more than offset the impact of the elevated MSR hedge gains during the third quarter, other non-interest income to be in the range of $150 million and $200 million excluding net securities and Visa activity. We expect total core non-interest expense to be up 3$ to 4%, which excludes charges related to the workforce reduction. Additionally, this guidance does not contemplate depending FDIC special assessment, which could occur during the fourth quarter and we expect fourth quarter net charge-offs to be between $200 million and $250 million.
And with that, Bill and I are ready to take your questions.
