Robert Q. Reilly
Chief Financial Officer at The PNC Financial Services Group
Thanks, Bill, and good morning, everyone. As Bill just mentioned and notable during the third quarter, we converted the BBVA USA franchise to the PNC platform in less than 11 months following the announcement of the deal. PNC's increased scale from this acquisition underscores the opportunity we have with the BBVA USA franchise. We have a proven track record of acquiring attractive strategic opportunities, identifying and reducing inherent risks and successfully growing franchises to deliver enhanced shareholder value. And as Bill just mentioned, we're well on our way to accomplishing this with BBVA USA.
Due to the June 1 closing of the acquisition, our average balance sheet growth for the third quarter reflected the full quarter impact of the acquisition as loans grew $36 billion, securities increased $12 billion and deposits grew $53 billion. For comparative purposes to the second quarter, which you'll recall included just one month of BBVA USA results, our balance sheet on Slide 3 is presented on a spot basis. Total spot loans declined $4.5 billion or 2% linked-quarter. Excluding the impact of PPP forgiveness, loans grew, and I'll cover the drivers in more detail over the next few slides.
Investment securities declined approximately $900 million or 1% as we slowed purchase activity throughout much of the quarter during the relatively unattractive rate environment. Our cash balances at the Federal Reserve continued to grow and ended the third quarter at $75 billion. On the liability side, deposit balances were $449 billion at September 30 and declined $4 billion, reflecting the repositioning of certain BBVA USA portfolios.
We ended the quarter with a tangible book value of $94.82 per share and an estimated CET1 ratio of 10.2%, both substantially above the pro forma levels we anticipated at the time of the deal announcement. During the quarter, we returned capital to shareholders with common dividends of $537 million and share repurchases of $393 million. Given our strong capital ratios, we continue to be well positioned with significant capital flexibility going forward.
Slide 4 shows our loans in more detail. Average loans increased $36 billion linked-quarter to $291 billion, reflecting the full quarter impact of the acquisition. Taking a closer look at the linked-quarter change in our spot balances, total loans declined $4.5 billion. The PNC legacy portfolio excluding PPP loans grew by $4.7 billion or 2% with growth in both commercial and consumer loans. PNC legacy commercial loans grew $3.7 billion driven by growth within corporate banking and asset-based lending. This growth in balances has been aided by a slight uptick in spot utilization. And whilst still near historic lows, utilization did reach its highest level since December 2020. Growth in PNC's legacy consumer loans linked-quarter was driven by higher residential real estate balances.
Within the BBVA USA portfolio, loans declined $4.4 billion, primarily due to intentional run-off relating to the overlapping exposures and non-strategic loans. Looking ahead, we have approximately $5 billion of additional BBVA USA loans that we intend to let roll off over the next few years, which is in line with our acquisition assumptions. Finally PPP loans declined $4.8 billion due to forgiveness activity. And as of September 30, $6.8 billion of PPP loans remain on our balance sheet.
Moving to Slide 5. Average deposits of $454 billion increased $53 billion compared to the second quarter, driven by the acquisition. On the right, you can see total period end deposits were $449 billion at September 30, a decline of $4 billion or 1% linked-quarter. Inside of this, PNC legacy deposits increased $5.4 billion as deposits continue to grow reflecting the strong liquidity position of our customers. BBVA USA deposits declined approximately $9.4 billion during the third quarter, which was anticipated as we rationalized the rate paid on certain acquired commercial deposit portfolios and exited several non-core deposit-related businesses. Overall, our rate paid on interest-bearing deposits is now 4 basis points, a 1 basis point decline linked-quarter.
Slide 6 details the change in our period end securities and Federal Reserve balances. And as most of you know, we have been disciplined in deploying our excess liquidity with rates at historically low levels. Back at the beginning of the year, as the yield curve steepened, we accelerated our rate of purchasing activity. However, towards the end of the second quarter, we deliberately slowed our purchases as yields declined.
With the increase in rates at the end of the third quarter, we've resumed our increased levels of purchasing, including $5.4 billion of forward settling securities, which will be reflected in the fourth quarter. Average security balances now represent approximately 24% of interest-earning assets, and we still expect to be in the range of approximately 25% to 30% by year end.
As you can see on Slide 7, our third quarter income statement includes the full quarter impact of the acquisition. Reported EPS was $3.30, which included pre-tax integration costs of $243 million. Excluding integration costs, adjusted EPS was $3.75. Third quarter revenue was up 11% compared with the second quarter, reflecting the acquisition as well as strong organic fee growth. Expenses increased $537 million or 18% linked-quarter, including $235 million of integration expenses and two additional months of BBVA USA operating expenses. Legacy PNC expenses increased $76 million or 2.7%, virtually all of which was driven by higher fee business activity.
Pre-tax pre-provision earnings excluding integration costs were $1.9 billion, an increase of $25 million or 7%. The provision recapture of $203 million was primarily driven by improved credit quality and changes in portfolio composition, and our effective tax rate was 17.8%. For the full year, we expect our effective tax rate to be approximately 17%. As a result, total net income was $1.5 billion in the third quarter.
Now let's discuss the key drivers of this performance in more detail. Turning to Slide 8. These charts illustrate our diversified business mix. In total, revenue of $5.2 billion increased $530 million linked-quarter. Net interest income of $2.9 billion was up $275 million or 11%, reflecting the full quarter benefit of the earning asset balances acquired from BBVA USA. Inside of that, interest income on loans increased $277 million or 13%, while investment securities income declined $9 million, driven by elevated premium amortization on the acquired BBVA USA portfolio.
Net interest margin of 2.27% was down 2 basis points, driven primarily by lower security yields. Importantly, in the fourth quarter, we expect premium amortization to decline meaningfully and the yield on securities -- the yield on the securities portfolio to increase. Third quarter fee income of $1.9 billion increased $274 million or 17% linked-quarter. BBVA USA contributed fee income of $184 million, an increase of $122 million linked-quarter, driven by two additional months of operating results.
Legacy PNC fees grew by $152 million linked-quarter or 10%, driven by higher corporate service fees related to record M&A advisory activity as well as growth in residential mortgage revenue. Other non-interest income of $449 million decreased $19 million linked-quarter as higher private equity revenue was more than offset by the impact of $169 million negative Visa derivative adjustment. This adjustment relates to the extension of the expected timing of litigation resolution.
Turning to Slide 9. Our third quarter expenses were up by $537 million or 18% linked-quarter. The increase was primarily driven by the impact of higher BBVA USA's expenses of $327 million and higher integration expenses of $134 million. PNC legacy expenses increased $76 million or 2.7% due to higher incentive compensation commensurate with the strong performance in our fee businesses, including a record quarter in M&A advisory fees. Our efficiency ratio adjusted for integration cost was 64%.
Obviously, with the acquisition, our expense base is now higher, but nevertheless, we remain disciplined around our expense management. And as we stated previously, we have a goal to reduce PNC's standalone expenses by $300 million in 2021 through our continuous improvement program, and we're on track to achieve our full year target. Additionally, we're confident we'll realize the full $900 million in net expense savings off of our forecast of BBVA USA's 2022 expense base and expect virtually all of the actions that drive the $900 million of savings to be completed by the end of 2021. We still expect to incur integration costs of approximately $980 million related to the acquisition. Since the announcement of the acquisition, we've incurred approximately half of these integration costs. And as Bill mentioned, we appreciate all the hard work our teammates have done to keep us on track and to achieve these goals.
Our credit metrics are presented on Slide 10 and reflect strong credit performance. Non-performing loans of $2.5 billion decreased $251 million or 9% compared to June 30 and continue to represent less than 1% of total loans. Total delinquencies of $1.4 billion at September 30 increased $106 million or 8%. However, this increase includes approximately $75 million of operational delays in early stage delinquencies, primarily related to BBVA USA acquired loans. Subsequent to quarter end, all of these operational delinquencies have been or are in the process of being resolved. Excluding these, total delinquencies would have increased $31 million or 2%.
Net charge-offs for loans and leases were $81 million, a decline of $225 million linked-quarter. The second quarter included $248 million of charge-offs related to BBVA USA loans, mostly the result of required purchase accounting treatment for the acquisition. Our annualized net charge-off to average loans in the third quarter was 11 basis points. And during the third quarter, our allowance for credit losses declined $374 million, primarily driven by improvement in credit quality as well as changes in portfolio composition. At quarter end, our reserves were $6 billion, representing 2.07% of loans.
In summary, PNC reported a strong third quarter, and notably, earlier this week, converted the BBVA USA franchise. With this step completed, we expect to add significant value to our shareholders as we continue to realize the potential of the combined company. In regard to our view of the overall economy, after somewhat slower growth during the third quarter of 2021, due in part to the delta variant and supply chain problems, we expect GDP to accelerate to about 6% annualized in the fourth quarter. We also expect the Fed funds rate to remain near zero for the remainder of the year.
Looking at the fourth quarter of 2021 compared to the recent third quarter results, we expect average loan balances excluding PPP to be up modestly. We expect NII to be up modestly. On a percentage basis, we expect fee income to be down between 3% and 5%, mostly reflecting the elevated third quarter M&A activity. We expect other non-interest income to be between $375 and $425 million, excluding net securities and Visa activity. On a percentage basis, we expect total non-interest expense to be down between 3% and 5% excluding integration expense, which we approximate to be $450 million during the fourth quarter. And we expect fourth quarter net charge-offs to be between $100 million and $150 million.
And with that, Bill and I are ready to take your questions.
