Zach Wasserman
Chief Financial Officer & Senior Executive Vice President at Huntington Bancshares
Thanks, Steve, and good morning, everyone. Slide seven provides the highlights for the second quarter, which included closing the TCF transaction, delivering strong new loan production and maintaining solid credit quality as well as robust liquidity and capital positions. On a fully reported basis, including all impact of the acquisition, we reported a net loss per common share of $0.05 for the second quarter. Earnings were impacted by acquisition expenses of $269 million and the so-called CECL double count provision expense of $294 million. Earnings per common share adjusted for these notable items were positive $0.35 per share.
As Steve mentioned, we closed the TCF acquisition in June, and we remain on track for the realization of the deal economics. Even as we brought on TCF, our teams did not lose focus on driving organic growth across the bank. We saw underlying loan growth ex TCF in many of our consumer loan portfolios, namely mortgage, auto and RV/Marine. We also saw encouraging new commercial loan production and building pipelines. Fee income was also a bright spot in the quarter as we saw increases in our underlying Huntington business, including treasury managements, card and payments, capital markets and our wealth and investment businesses. With respect to credit, net charge-offs were 28 basis points.
The allowance for credit losses ended the quarter at 2.08% and was driven by provisioning of $294 million from the acquired TCF loan book, offset against $145 million of reserve release from the legacy Huntington book. Detailed loan and credit marks related to TCF are included on Slide 25 of the appendix. Liquidity remained elevated as we continue to see growth in deposit balances. This gives us ample opportunity to deploy into incremental lending opportunities and securities to support net interest income growth in the coming quarters. Additionally, we fully exited the capital protection hedging position that utilize interest rate caps, closing out a very useful hedge and replacing them with alternative capital protection tools which have less earnings volatility as they qualify for hedge accounting. Finally, common equity Tier one ended the quarter at 9.97%.
Turning to Slide 8. FTE net interest income increased, primarily driven by the addition of TCF in the quarter. On a linked-quarter basis, net interest margin decreased 82 basis points to 2.66%, primarily driven from the net change in the interest rate caps from the prior quarter. Looking for a moment at the underlying NIM dynamics. The impact in the second quarter from the mark-to-market on the caps was negative 17 basis points, while we saw three basis points benefit from purchase accounting accretion.
Therefore, the underlying NIM, excluding the caps in PAA, was approximately 2.8% for the second quarter. This compares to 2.98% on the same basis in the prior quarter. As we have noted in previous calls, we had expected a reduction in NIM into Q2, driven in part by a nine basis point step-down in the benefit of our existing interest rate hedging positions as well as forecasted PPP dynamics and yield curve impacts on spread. At the Morgan Stanley conference in June, we guided to a second quarter NIM in the low 2.80s. The underlying second quarter NIM of 2.80% was a few basis points below expectations due to the additional impact of excess liquidity as deposits yet again increased in the quarter and elevated Fed caps represented an 18 basis point drag on the NIM in the quarter.
Looking ahead, we continue to expect Q2 to be the low point for NIM for the year, driving a positive trend will be the addition of TCF assets that will benefit margin as we get a full quarter impact of those acquired assets in the third quarter. Also the continued execution of our balance sheet optimization program will provide benefits from our ongoing focus on funding cost optimization, asset mix and customer level pricing. And over time, we expect the elevated liquidity levels that I mentioned to normalize, reducing that 18 basis point drag back down to 0 as it does.
These positive factors will offset some continued spread pressure from competition for high-quality assets and the absolute level of interest rates as well as impacts from the roll-off of hedges, as illustrated on the next slide. All told, these changes are expected to bring us to a net interest margin in the 2.90s next quarter. Our outlook continues to point to NIM stability at approximately those levels for the foreseeable future going forward. Turning to Slide 9. In the second quarter, the interest rate caps resulted in a $55 million negative mark-to-market driven by lower rates at quarter end. However, cumulatively, over the life of these caps, the strategy was highly effective and resulted in a $94 million pretax gain, $75 million net of tax, but as we intended, offset approximately 46% of the negative impact on capital from rising rates.
As the securities portfolio gradually grew during the last two quarters and prepayment speeds on that portfolio have reduced, we now have the opportunity to utilize a more traditional hedging structure to accomplish the same capital protection objective. Hence, we fully exited the caps during the second quarter and replaced them with $4 billion of forward starting swaps, which qualify for hedge accounting and reduce earnings volatility while achieving a similar level of capital protection. Additionally, we moved $4.5 billion of securities available for sale into held for maturity during the quarter in order to further minimize volatility in OCI as a result of the changes in interest rates.
Turning to Slide 10. Average loan balances increased by 9% year-over-year driven by the added TCF balances and continued growth in our consumer loan portfolios. Period-end loan balances ended the second quarter at $112 billion. We continue to have near record origination levels in our consumer portfolios in the second quarter with RV/Marine, automobile and residential mortgage all continuing to post sequential quarter growth. Despite the inventory constraints in auto and RV/Marine, consumer demand remains very high, driving continued strength in originations. The same can be said for home lending, where origination activity is quite robust despite ongoing home inventory constraints. The calling activity and origination volumes in the commercial portfolios also continued to be robust.
However, overall commercial growth is constrained by pressure on utilization rates. Auto dealer floor plan balances remained a headwind in the quarter, driven by inventory supply constraints. But we're optimistic that we're nearing the floor for these balances. The outlook is expected to slowly recover from these levels as OEMs deliver increased inventory to dealers. The inventory finance business from TCF has been facing a similar headwind as inventory levels have been depressed and outstandings have been near multiyear lows.
Commercial utilization rates for our middle market and corporate portfolios remained relatively stable in the second quarter. Cumulatively, these three areas of commercial lending combined represent $5 billion to $6 billion of incremental loan growth opportunity as utilization rates recover. With respect to investment securities, we completed a repositioning of the acquired TCF portfolio to improve both yields and to reduce duration. We also deployed an incremental $4 billion of excess liquidity into additional securities. Inclusive of these actions, the securities portfolio ended the quarter at $35 billion. Given the level of excess liquidity we had at quarter end, we would expect to grow the securities portfolio incrementally by approximately $4 billion over the remainder of 2021.
Slide 11 provides an update on PPP. In total, we originated $11.4 billion of PPP loans, inclusive of TCF's activity. We continue to expect approximately 85% of balances from the programs to ultimately be forgiven. PPP loans totaled $4.2 billion at quarter end, with a significant acceleration in the pace of forgiveness during June. We anticipate forgiveness of the majority of balances to be completed in the second half of the year, with a portion trailing into early 2022. Turning to Slide 12.
Average total deposits increased 13% sequentially due to the acquisition of TCF and increased customer liquidity levels at Huntington. We continue to leverage excess liquidity to manage wholesale funding balances and costs lower. Slide 13 illustrates the strength of our capital and liquidity ratios. As I mentioned, common equity Tier one ended the quarter at 9.97% and is near the top of our 9% to 10% operating guideline. These strong capital levels, coupled with the ongoing economic recovery and our merger integration proceeding as planned, gave us confidence to relaunch our share buyback program earlier than previously expected.
The Board has authorized $800 million of common stock repurchases over the next four quarters that will likely be overweighted towards the earlier part of that time. Our capital plan entails managing our CET1 ratio towards the lower half of our 9% to 10% operating range over the medium term. This plan is supported by our finalization of the marks on the acquired portfolio and our confidence in the pro forma earnings power and return on capital profile of the company. Slide 14 provides a view of our allowance for credit losses. The second quarter ending ACL represents 2.08% of total loans, down from 2.17% at prior quarter end. The allowance includes the previously mentioned TCF credit mark, which was partially offset by an 8% reserve release on the legacy Huntington portfolio.
Slide 15 provides a snapshot of key credit quality metrics for the quarter. Our overall credit performance remained strong. Net charge-offs represented an annualized 28 basis points of average loans and leases below our 35 to 55 basis point through-the-cycle average target range. Consumer charge-offs were quite low this quarter at just two basis points as auto and home equity portfolios both reported net recoveries. Year-to-date, consumer net charge-offs have been nine basis points. Our criticized assets and NPA ratios were both modestly higher as a result of the TCF acquired portfolios. These portfolios came over as expected consistent with our detailed due diligence work, and we remain comfortable with the acquired book. The ACL coverage on NPAs is strong at 229%.
Finally, turning to our outlook on Slide 16. We've provided a set of medium-term financial targets, including a 17% return on tangible common equity, a 56% efficiency ratio while remaining committed to investing in our people-first digitally powered strategy. These metrics, in addition to sustainable top line revenue growth, slightly above nominal GDP will drive earnings per share growth over time. Our efficiency ratio will benefit from expense synergies from the TCF acquisition and incorporates our commitment to continued investment in technology and digital capabilities. Annual positive operating leverage remains a core principle of our strategy.
We believe these metrics, revenue growth, return on capital and annual positive operating leverage, are a compelling set of financial performance indicators and closely aligns with value creation for our shareholders. Now let me turn it back over to Mark, and we'll get to your questions.