Chief Financial Officer at Citizens Financial Group
Thanks, Bruce. Good morning, everyone. First, I'll start with our headlines for the quarter, referencing slides four and five. We reported underlying net income of $595 million and EPS of $1.14. Our underlying ROTCE for the quarter was 15.5%. Net interest income was up 31% linked quarter driven by a 29-basis point improvement in margin and strong loan growth, including the impact of the HSBC and ISBC transactions. Period-end loans were up 19% linked quarter.
Excluding loans added by the HSBC and ISCC transactions, loan growth was a strong 4% led by commercial growth of 6%. Average loans are up 19% linked quarter, excluding the acquisitions, average loans were up 3% with 5% growth in commercial. Underlying fees were up 5% linked quarter or 2% excluding HSBC and ISBC acquisition impacts, reflecting the diversity and resiliency of our fee businesses. Our client hedging business had another exceptional quarter, and we delivered record results in Wealth and Card. Mortgage fees were up slightly and capital market fees were down a bit, given continued market volatility.
We remain disciplined on expenses which were up 1% linked quarter, excluding the HSBC and ISBC transactions. Overall, we delivered underlying positive operating leverage of 11.7% linked quarter and that was 6.3%, excluding the HSBC and ISBC transactions. Our underlying efficiency ratio improved to 58%. We recorded an underlying provision for credit losses, excluding ISBC of $71 million, which reflects continued strong credit performance across the retail and commercial portfolios. The underlying credit provision for the quarter excludes $145 million for the double count of CECL provision expense tied to the ISBC transaction.
Our ACL ratio stands at 1.37% down from 1.43% at the end of the first quarter. Our tangible book value per share was down 6% linked quarter, driven primarily by the impact of rising rates on securities and hedge valuations that impact AOCI. We continue to have a very strong capital position with CET1 at 9.6%, and we have increased our common dividend by 8% to $0.42 a share. On Slide 5, we have provided the HSBC and ISBC contributions to our second quarter results as well as the notable items for the quarter.
Also, Slide 21 in the appendix provides a summary of the purchase accounting impacts associated with the ISBC transaction. Next, I'll provide some key takeaways for our second quarter results. On Slide 6, net interest income was up 31%, given higher net interest margin and 17% growth in interest-earning assets, including the impact of the HSBC and ISBC transactions. The net interest margin is 3.04%, up 29 basis points, which as you can see on the NIM walk[phonetic] in the bottom left-hand side of the slide shows the benefit of higher rates with a 24 basis point increase related to asset yields reflecting the asset sensitivity of our balance sheet and improved securities reinvestment rates.
There is an 11 basis point benefit from the HSBC and ISBC transactions, largely given the repositioning of the ISBC securities portfolio and the benefit of adding their loans. With rising rates, funding costs reduced the margin eight basis points, reflecting well-controlled deposit costs. Earning asset yields are up 38 basis points linked quarter, strongly outpacing our interest-bearing deposit costs, which are up only eight basis points. Moving to Slide 7. Given the Fed's recent rate hikes and the current market expectation for the Fed funds rate to end the year in the 350 to 375 basis points range, we are confident that we will continue to realize meaningful benefits from rising rates as the forward curve plays out.
Our asset sensitivity has driven a significant improvement in NII in the first half of this year, and those benefits will continue to accumulate in the second half of 2022 and compound into 2023. Since the path of the rate cycle is uncertain, on the top left side of this page, we've provided an estimate of our NII sensitivity to further changes in rates, either up or down from the June 24 forward curve. Our overall asset sensitivity stands at about 2.5% at the end of the second quarter. This is down from 7% for the first quarter, reflecting the incorporation of ISBC's NII base and liability-sensitive profile as well as hedging actions taken to stabilize the margin and protect against downside interest rate risks.
Our improved NII outlook as well as changes in the balance sheet also contributes to the reduction in asset sensitivity. Essentially, a 25 basis point instantaneous change in the forward curve is worth about $10 million to $15 million a quarter with that balance between the long and short parts of the curve. We began the rate cycle with a strong liquidity profile, deposit costs as low as they have ever been, and our overall funding profile greatly improved, including significant improvements to our deposit mix and capabilities. We will continue to optimize our deposit base and to invest in our capabilities to attract durable customer deposits. So far this cycle, with Fed funds increasing 150 basis points since the fourth quarter of 2021, we are quite pleased with how our deposit franchise is performing with a cumulative beta of about 6%.
On a sequential basis for the second quarter, our beta was 11%. This puts us on track for a 35% cumulative beta through the end of this rate cycle if the forward curve plays out as expected. Moving on to Slide 8. We posted solid results, demonstrating the strength and diversity of our fee businesses. Capital Markets delivered solid results despite continued market volatility impacting the bond and equity markets. We saw M&A advisory and equity underwriting fees picking up a bit, but these were more than offset by modestly lower loan syndication revenue.
We continue to see good strength in our pipelines and capital markets fees could rebound nicely in the second half of the year if markets settle down, and there is more certainty regarding the path of the economy. We once again delivered a record performance in our client hedging business, up $9 million linked quarter, driven primarily by FX as we help clients manage their currency exposures as the dollar strengthened during the quarter. Our interest rate and commodities businesses also performed very well, but were down modestly from record levels in the first quarter. Mortgage fees were up modestly linked quarter given improved servicing income as higher mortgage rates resulted in slower amortization of the MSR.
Production fees remained under pressure given lower industry origination volumes with rising rates and seasonal impacts. Strong competition continues to pressure margins. However, there are clear signs that the industry is beginning to reduce capacity, which should benefit margins as we head into the second half of the year. We delivered record wealth fees, up 8% linked quarter as rising market interest rates supported customer flows into annuity products. Card fees were also a record given seasonally higher transaction volumes. On slide nine, expenses were well controlled, up 1% linked quarter, excluding HSBC and ISBC.
Our TOP seven efficiency program is continuing to make good progress, on track to deliver $100 million of pretax run rate benefits by the end of the year. Period end loans on slide 10 were up 19% linked quarter, primarily driven by the impact of the ISBC transaction, which closed at the beginning of the quarter. Excluding the impact of the HSBC and ISBC transactions, loan growth was 4% with strong commercial loan growth again this quarter, up 6%, led by C&I as we emphasize strong relationships to optimize risk-adjusted returns. Retail loans were up 1% as we continue to be more selective in consumer lending.
Average loans were up 19% linked quarter or 3% excluding the impact of the HSBC and ISBC transactions with 5% growth in commercial led by C&I and 1% growth in retail. In commercial, we continue to see strength in corporate banking originations across every region. Line utilization continued to rebound with an increase of about 300 basis points to 39% on a spot basis, primarily driven by corporate banking with the largest quarterly increase in utilization we have seen since early in the pandemic. Our clients are continuing to use their lines to build inventories to get ahead of supply chain issues and rising input prices and some are also looking to pro rata bank financing as an alternative to the volatile bond markets.
Comparing with the ISBC acquisition, we identified certain non-strategic loan portfolio totaling $2.1 billion, which we are in the process of being marketed for sale. These loans were classified as held for sale at quarter end. This will free up capital and enable our relationship bankers to focus on more desirable commercial relationship business in New York Metro. On slide 11, our period-end deposits were up 13% linked quarter as we added $19.8 billion of deposits from the ISBC transaction.
Excluding ISBC and HSBC, period-end deposits were up slightly, while average deposits were down slightly, reflecting seasonal runoff on a decline in commercial surge deposits. Moving on to slide 12. We saw excellent credit results again this quarter across the retail and commercial portfolios. Net charge-offs were at 13 basis points, down six basis points linked quarter. Non-performing loans fell six basis points to 54 basis points of total loans linked quarter, driven by improvements in C&I, residential real estate, and home equity. Other credit metrics continued to look excellent across the retail and commercial portfolios and criticized loans as a percentage of the commercial portfolio are stable after incorporating ISBC, but down on a standalone basis.
On Slide 13, I'll walk through the drivers of the allowance this quarter. We continued to see excellent credit performance across the retail and commercial portfolios. We added to the reserve this quarter to take into account strong commercial loan growth as well as the addition of ISBC. While we aren't seeing any signs of early stress in the portfolio at this point, our allowance takes into account the expectation of a more challenging macroeconomic outlook, given the Fed's rate actions to combat inflation. Our overall coverage ratio was 1.37%, which is a modest decline from the first quarter, reflecting the strong performance of our retail portfolio and the addition of the ISBC's CRE portfolio, which includes a sizable multi-family component with lower reserve requirements than our legacy portfolios.
If you recall, when we adopted CECL at the beginning of 2020, our coverage ratio was 1.47%. To put our current coverage ratio in context, we estimate our pro forma coverage ratio would be slightly lower than the 1.37% level today if we applied our current portfolio mix, incorporating ISBC to our day one CECL approach. Importantly, our coverage of non-accrual loans strengthened 256%, up from 238% in the first quarter. We feel good about the improvements to the loan portfolio we've made over the past few years and the overall positioning of our credit risk.
Moving to Slide 14. We maintained excellent balance sheet strength. Our CET1 ratio remained strong at 9.6%. Following the release of the Fed's DFAST stress results last month, our Board increased our common share repurchase authorization to $1 billion. And today, we announced an 8% increase in our common dividend to $0.42 a share. Our fundamental priorities for deploying capital have not changed, and you can expect us to remain extremely disciplined in how we manage the company. Shifting gears a bit. On Slide 15, you'll see some examples of the progress we made against the key strategic initiatives and other work we are doing across the bank to better serve our customers and make Citizens a great place to work.
As you know, we closed the acquisition of ISBC at the beginning of April, and we are very focused on successful integration. I am proud of the work our teams have done related to the acquisition. We onboarded more than 1,600 new colleagues through our HR systems on day one, and in the second quarter, we began originating mortgages on our systems. We have a number of conversions planned over the remainder of the year, and we are on track to finish in the first quarter of 2023. We have included a high-level integration timeline in the appendix on Slide 22.
Importantly, we are on target to achieve $130 million in run rate net expense synergies by the end of 2023, of which approximately 70% will be achieved by year-end 2022. The total represents about 30% of ISBC's 2021 expense base. Also, ISBC integration costs to be incurred through 2023 are now expected to come in below the estimated level of deal that we announced. We recently released our fifth annual corporate responsibility report, which highlights our progress on ESG initiatives.
The report highlights a number of significant milestones related to our sustainability efforts, including our progress towards targets to reduce greenhouse gas emissions. We also announced that we've joined the Partnership for Carbon Accounting Financials, which will accelerate our efforts to measure and disclose finance emissions. Later this year, we'll release our first TCFD climate report, which will describe our climate strategy in more detail. The report also describes our commitment to the communities we serve, and there are a few recent examples here on the slide with some of the community partnerships we are engaged with in Boston and most recently in Chinatown and Queens, New York. On the consumer side, we are excited about continuing our expansion in Florida with the opening of our latest Wealth Center in Naples.
We recently released a mobile app version of Citizens Access, which we think will be very popular with our customers and we are very proud that our Citizens Pay point-of-sale offering was awarded Best Innovation by the Banking Tech Awards. Lastly, our relentless focus on customer service, driving results as our ATM channel moved up eight places in the J.D. Power rankings. On the commercial side, we continue to perform well in the league tables, consistently ranking in the top 10 as a middle market and sponsor book runner.
The diversification in our business model is delivering results with record revenue in our client FX hedging business. We also closed the DH Capital acquisition this quarter, strengthening our capabilities in the Internet infrastructure, software, and next-generation IT services and communications sectors. On the right side of the page, we've included some digital metrics. Mobile active users are up over 20% year-over-year. Digital deposits and Zelle transactions are up over 30%, and we are seeing great success with the customer uptake of automated client service through virtual chat sessions.
We are very excited with how our digital first approach is increasing engagement with our customers and how this is all translating into a better experience and higher satisfaction. Moving to Slide 16. I'll walk through the outlook for the third quarter. Since we closed ISBC at the beginning of the second quarter, our third quarter outlook includes all our recent acquisitions. We expect NII to be up 5.5% to 7%, driven by the benefit of higher rates and solid loan growth. We are very focused on optimizing capital deployment. In consumer, we will reduce originations in mortgage, auto, and education refi, while seeking to grow in home equity, in school education, and Citizens Pay and Card.
In commercial, we expect to see further increases in-line utilization, but we'll be mindful of balancing growth and returns given current macro uncertainty. These are expected to be broadly stable though upside exists, if capital markets stabilize. Noninterest expense is expected to be up approximately 1%. We expect to continue strong sequential positive operating leverage in the third quarter and ROTCE above our medium target range of 14% to 16%. Net charge-offs are expected to be approximately 20 basis points.
We expect our CET1 ratio to land around the midpoint of our operating range at 9.75% and our tax rate should come in a bit lower at approximately 22%. With respect to full year results, we expect PPNR to be in-line with our April guidance. From a revenue standpoint, we are seeing higher NII given net interest margin, reaching approximately 3.25% in the fourth quarter, driven by higher rates and loan growth within our 20% to 22% guidance range. This will be offset by lower key revenue largely in capital markets and mortgage. Expenses will be well-controlled, which will result in full year operating leverage of at least 400 basis points and a fourth-quarter efficiency ratio of sub-55%.
We also expect the net charge-off ratio to come in lower than we guided in April, given continued favorable trends. To sum up on Slide 17. This was a very solid quarter and we are optimistic about the outlook for the rest of 2022 and beyond. We are off to a running start in New York with the close of our two acquisitions there, and we expect significant benefits in our net interest income from the higher rate environment and strong commercial loan growth. The strength and diversity of our fee business is driving solid results and our capital markets business, in particular is well-positioned for when markets stabilize given strong pipelines.
We will continue to focus on executing against our strategic priorities and building a top-performing bank that delivers for all our stakeholders. With that, I'll hand it back over to Bruce.