Bryan Preston
Executive Vice President and Chief Financial Officer at Fifth Third Bancorp
Thanks, Tim, and thank you to everyone joining us today. We're pleased that our third quarter results once again demonstrate the strength of our company. Our well-positioned balance sheet and diversified fee income streams drove 3% sequential adjusted revenue growth. That revenue performance combined with our ongoing expense discipline resulted in 5% sequential pre-provision net revenue growth in the third quarter on an adjusted basis.
As Tim mentioned, our profitability remained strong, which allowed us to continue to accrue capital, while we're purchasing shares and raising the quarterly common dividend 6%. Our CET1 ratio grew to 10.8% at the end of the quarter, and our tangible book value per share, inclusive of AOCI, increased 14% compared to June 30th and 47% from a year-ago.
Highlighted on Page 2 of our release, our reported results were impacted by certain items, including costs related to the Visa-Mastercard interchange litigation and some severance recognized during the quarter as we continue to work to drive efficiencies in automation. Net interest income for the quarter was over $1.4 billion and increased 2% sequentially, and net interest margin improved 2 basis points. Increased yields on new loan production were the primary driver of this improvement and more than offset the impact of increased interest-bearing core deposit costs, which were well-managed and up only 2 basis-points compared to the prior quarter.
With the Fed funds rate cut at the end of the quarter, in September, we experienced our first month-over-month decrease in interest-bearing core deposit costs during this rate cycle. While total average portfolio loans and leases were flat sequentially, we are seeing some signs of life. Loan production rebounded for both Middle Market and Corporate Banking with strong contributions from the Georgia and Chicago regions, as well as the energy and TMT verticals.
For the commercial portfolio, average loans decreased 1%, primarily due to increased paydowns and softness in revolver utilization, which declined 1% during the quarter to 35%. Average total consumer portfolio loans and leases were up 1% from the prior quarter, primarily reflecting an increase in indirect auto originations, which continued to be a significant contributor to our fixed rate asset repricing. During the quarter, we saw a 200 basis points of pickup on the front book, back book repricing in this portfolio.
Diving further into deposits. Average core deposits were up 1% sequentially, driven by higher money market balances, offset by a decrease in savings and CDs. This core deposit balance performance, combined with our well-timed long-term debt issuance during the quarter, has allowed us to pay down higher cost short-term wholesale borrowings. As a result, our rates paid on total interest-bearing liabilities decreased 1 basis point sequentially.
Our current focus remains on prudently managing deposit costs as we have officially entered the rate cutting cycle. Since mid-2023, we have been increasing our testing of price sensitivity in our deposit book to be well prepared for this phase of the cycle. We remain confident in our ability to manage liability costs to drive net interest income performance in the fourth quarter and beyond. Demand deposit balances as a percent of core deposits were 24% during the third quarter, down 1% from the prior quarter. This level is consistent with our expectations from July, and we expect DDA mix to stay around 24% for the remainder of the year.
By segment, average consumer and wealth deposits were stable sequentially, while commercial deposits increased 3%. We ended the quarter with full Category 1 LCR compliance at 132% and our loan to core deposit ratio was 71%, down 1% from the prior quarter.
Moving on to fees. Excluding the impacts of the security gains and the Visa total return swap, adjusted non-interest income increased 2% compared to the year-ago quarter. As Tim mentioned, our Commercial Payments and Wealth businesses delivered strong fee results with both achieving double-digit revenue growth over the prior year, driven by our sustained strategic organic growth investments in products and sales personnel.
In Commercial Payments, revenue increased 10% as we continue to acquire new clients in traditional treasury management products, our managed service offerings and in Newline. In Wealth, our AUM increased to $69 billion, up 21% over the prior year, driven by strong inflows from Fifth Third Wealth Advisors and market performance. Fees of $163 million this quarter were a record high, led by strong transactional activity at Fifth Third Securities and the fee benefit from the AUM growth.
Our Capital Markets business rebounded this quarter as bond issuance and trading, as well as rate hedging activities picked up. Fees grew 9% over the prior year, also led by our debt capital markets business. The security gains of $10 million were from the mark-to-market impact of our non-qualified deferred compensation plan, which is more than offset in compensation expense.
Moving to expenses. Excluding these items noted on Page 2 of our release, our adjusted non-interest expense was up 3% from the year-ago quarter and increased 2% sequentially, primarily due to increases in performance-based compensation due to the strong fee generation, the impact of the previously mentioned non-qualified deferred compensation mark-to-market and continued investments in technology, branches and sales personnel.
Shifting to credit. The net charge-off ratio was 48 basis points, slightly better than our expectations from early September and down 1 basis point sequentially. Commercial charge-offs were 40 basis points, down 5 basis points sequentially and consumer charge-offs were 62 basis points, up 5 basis points from a seasonally low second quarter.
Early stage delinquencies, 30 to 89 days past due decreased 2 basis points to 24 basis points, which remained near the lowest levels we have experienced over the last decade. NPAs increased $82 million during the quarter, and the NPA ratio increased 7 basis points to 62 basis points, in line with our 10-year average and remains below the peer median level. Commercial NPAs increased $60 million from the prior quarter. Within our C&I portfolio, NPAs increased $20 million due to increased inflow activity, which, given the nature of the commercial business, will be uneven from quarter-to-quarter. On a year-over-year basis, C&I NPAs are down $7 million.
Our CRE portfolio continues to perform well with no net charge-offs during the quarter and an NPA ratio of only 46 basis points. The increase in our commercial mortgage NPAs is related to a single senior living credit in our owner-occupied portfolio. Consumer NPAs increased $20 million from the prior quarter. Approximately half of this increase was driven by a recent change in policy related to our consumer non-accrual processes to better align our policies across asset classes and primarily impacted our return to accrual timing for loans that are paying in full and current. Overall, we are not seeing any broad credit weakening across industries or geographies.
From a credit perspective, we do not expect Hurricane Helene to have a material impact on losses, and we are continuing to assess the impact of Hurricane Milton. Our ACL coverage ratio increased 1 basis point to 2.09% and included an $18 million reserve bill. We continue to utilize Moody's macroeconomic scenarios when evaluating our allowance and made no changes to our scenario weightings.
Moving to capital. We ended the quarter with a CET1 ratio of 10.8%, significantly exceeding our buffered minimum of 7.7%, reflecting strong capital levels. Our pro forma CET1 ratio, including the AOCI impact of the securities portfolio, is 8.7%. We expect continued improvement in the unrealized losses in our securities portfolio, given that 59% of the AFS portfolio is in bullet or locked-out securities, which provides a high degree of certainty to our principal cash flow expectations.
Assuming the forward curve is realized, approximately 24% of the AOCI related to securities losses will accrete back into equity by the end of 2025, increasing tangible book value per share by 6% before considering any future earnings. 61% of the securities-related AOCI should accrete back to equity by the end of 2028. During the quarter, we completed $200 million in share repurchases, which reduced our share count by 4.9 million shares. As we assess our capital priorities, we continue to believe that 10.5% is an appropriate near-term operating level.
Moving to our current outlook. We anticipate continued growth in NII and NIM during the fourth quarter with NII up 1% sequentially, reflecting the impact of lower deposit rates and the continued benefit of fixed rate asset repricing, partially offset by the decrease in yield from our floating rate loan portfolio. This outlook assumes a 25 basis point cut in November and a 50 basis point cut in December. We would not expect any change to this outlook if fewer rate cuts were to occur.
We expect average total loan balances to be stable to up 1% from the third quarter with middle market and auto production offsetting mixed demand in other asset classes. Fourth quarter adjusted non-interest income is anticipated to rise 3% to 4% compared to the strong third quarter, largely due to a continued rebound in capital markets revenue and continued growth in commercial payments. Additionally, we expect fourth quarter TRA revenue to be $10 million, down from $22 million in the fourth quarter of 2023.
Fourth quarter total adjusted non-interest expenses are expected to be stable compared to the third quarter as the increases in revenue-based compensation and the investments in branches and technology are largely offset by efficiencies achieved in other areas. Fourth quarter net charge-offs are projected to be similar or slightly down from the third quarter. Given the expected increase in loans during the fourth quarter, we anticipate an ACL build of $20 million to $40 million, assuming no major change to the economic outlook.
We expect to deliver positive operating leverage in the fourth quarter on both a sequential and a year-over-year basis and our PPNR guidance for the full year remains in-line with our guidance from back in January. Our net interest income trajectory exiting the year continues to position us for record results in 2025, assuming no major economic or interest rate outlook changes.
Finally, moving to capital. With our consistent and strong earnings, we now expect to increase our share repurchases in the fourth quarter to $300 million with potential further repurchases depending on the level of loan growth throughout the quarter. In summary, with our well-positioned balance sheet, growing revenue streams and disciplined expense and credit risk management, we are set to generate strong and stable capital accretion, top-quartile profitability and long-term value for shareholders, customers, communities and employees.
With that, let me turn it over to Matt to open the call up for Q&A.
