Senior Executive Vice President, Chief Financial Officer at Huntington Bancshares
Thanks, Steve, and good morning, everyone.
Slide 8 provides highlights of our second quarter results. We reported earnings per common share of $0.35. Adjusted for notable items, earnings per common share were $0.36. Return on tangible common equity, or ROTCE, came in at 19.9% for the quarter. Adjusted for notable items, ROTCE was 20.6%. We were pleased to see sustained momentum in our loan balances, with total loans increasing by $2.8 billion. And excluding PPP, loans increased by $3.3 billion.
Total average deposits also increased, with growth in both consumer and commercial balances. Pre-provision net revenue expanded sequentially and grew 17% from last quarter. Consistent with our plan, we reduced core expenses below our target of $1 billion, driven by the realization of cost synergies. Credit quality was exceptional, with record low net charge-offs of 3 basis points, and nonperforming assets reduced to 59 basis points. Slide 9 shows our continued trajectory of PPNR expansion. We see 2022 coming together quite well, as we drive sustainable profitability and highlight the earnings power of the company, supported by our organic growth initiatives and harnessing the benefits from the TCF acquisition. We remain committed to our long track record of managing to positive operating leverage, with disciplined expense management, even as we continue to invest in the business. Turning to Slide 10. Average loan balances increased 2.5% quarter-over-quarter, totaling $113.9 billion. Excluding PPP, total loan balances increased $3.3 billion or 3%, driven by commercial and consumer loans. Within commercial, excluding PPP, average loans increased by $2 billion or 3.3% from the prior quarter. These results were supported by broad-based demand across commercial lending that is driving robust new production. Line utilization remained relatively stable during the quarter on a core C&I basis, while we saw higher balances within our inventory finance business. Commercial growth was led by middle market, corporate and specialty banking, which collectively increased by $746 million during the quarter. Asset finance contributed meaningfully with balances higher by $497 million. Inventory finance continues to rebuild toward a more normalized level, with average balances up $383 million during the quarter. Commercial real estate balances also increased by $213 million. Auto dealer floor plan balances were relatively stable, increasing by $45 million, as supply chain constraints continued to dampen inventory levels. In Consumer, growth was led by residential mortgage, which increased by $1 billion, driven by slower prepays and higher mix of on-balance sheet loan production. We also saw steady growth in RV/Marine and indirect auto. Average home equity balances declined by $41 million. However, we were pleased to see end-of-period balance growth, driven by robust new production of first-lien refinance products. Turning toSslide 11. We delivered average deposit growth of $2.1 billion. Deposit growth was led by commercial, with deposits up $2.1 billion, while consumer balances increased by $500 million from the prior quarter. This growth reflects our initiatives to drive primary bank relationships and new customer acquisition across the bank. We remain disciplined on deposit pricing, with our total cost of deposits coming in at just 7 basis points for the second quarter. On Slide 12, we reported another quarter of sequential expansion of both net interest income and NIM. Core net interest income, excluding PPP and purchase accounting accretion, increased by $125 million or 11% to $1.244 billion. Consistent with our prior guidance, net interest margin increased driven by higher earning asset yields as a result of our asset sensitivity position and lower Fed cash balances. Slide 13 highlights Huntington's deposit pricing discipline. We have a long history of managing through cycles, and we believe our deposit base today is even stronger, than it was starting the last tightening cycle. For the second quarter, we have seen little change to our average cost of deposits, given the timing of rapid Fed rate moves occurring later in the quarter. That said, we are remaining dynamic in this environment. We are managing the portfolio at a very granular and segmented level, client by client in many cases, to ensure pricing discipline and growing the primary bank relationships to bring lower-cost operational deposits. Turning to Slide 14. We are managing the balance sheet in order to position ourselves to benefit from higher expected rates in the short-term, while also being judicious on managing possible downside rate risks over the longer term. We continued to execute on our hedging strategy during the second quarter, and increased our downside protection by executing a net $3.3 billion of received fixed swaps. Our expectation is to continue to add to this hedging program during the third quarter. Additionally, we are managing the securities portfolio to both capture the benefit from higher rates over time, as well as protect capital. We increased the proportion of securities and held to maturity during the quarter and our reinvesting securities portfolio cash flows at rates well above portfolio yields. Moving to Slide 15. Non-interest income was $485 million, up $41 million year-over-year and down $14 million from last quarter. We saw record activity, within our capital markets business during the quarter, which drove revenues up $12 million from prior quarter. Additionally, we saw expansion in our cards and payments revenues and deposit service charges. Fee revenues were impacted this quarter by lower gain on sale from SBA loan sales, as we sold less balances in the second quarter compared to the prior quarter. Recall, we restarted our normal SBA loan sales earlier this year. And while loan production remains robust, this quarter's gain on sale is generally aligned to our go-forward expectations. Fees were also impacted by a decline in mortgage banking as volumes continue to normalize from the exceptionally strong levels seen last year and due to lower saleable spreads. While we are pleased with the sales and client engagement traction in our Wealth Management business, we saw lower overall revenues as market-based AUM changes outweighed continued momentum in net asset flows. Moving on to Slide 16. Non-interest expense declined $35 million from the prior quarter. Excluding notable items, core expenses, declined by $13 million to $994 million, as we completed the cost savings from the acquisition and achieved our targeted expense level. Our efficiency ratio, which is an outcome of our revenue drivers and expense management activities, came in at 57% on a reported basis, and adjusted for notable items was 56% for the quarter, in line with our medium-term target. Slide 17 recaps our capital position. Common equity Tier 1 ended the quarter at 9.1% and within our target operating range of 9% to 10%. As we go forward, our capital priorities remain unchanged, with our first priority to fund organic loan growth. Our expectation is that given the strong sustained levels of loan growth, buybacks will be de minimis, if any, for the remainder of the year. With the robust return on equity we are generating, we expect to be able to fund this organic growth and see capital ratios move higher over the balance of 2022. Our tangible common equity ratio, or TCE, declined to 5.8% as a result of AOCI marks on the securities portfolio. Recall, this is an accounting construct that temporarily reduces equity as value marks are taken and then reverses over time. And this does not impact our regulatory capital ratios. Our TCE ratio, excluding the AOCI impact, has been relatively stable near 7% level. Finally, our dividend yield remains number one in our peer group at 5%. On Slide 18, credit quality continues to perform very well. As mentioned, net charge-offs were a record low of 3 basis points, benefiting from another quarter of net recoveries in commercial portfolios and continued stability in consumer credit quality. Non-performing assets declined from the previous quarter and have reduced each of the last four quarters. We also saw lower criticized loans, which have improved both from the prior quarter and prior year. Allowance for credit losses was flat at 1.87% of total loans, reflecting a conservative reserve posture, given the heightened economic uncertainty, even as our internal portfolio metrics show stability. We are proud to report on Slide 19 that we have achieved our medium-term goals. Since sharing these targets, we have been intently focused on executing on our commitments and managing dynamically through the changing environment. We have been guiding that we were as expected reflect these goals by the second half of 2022. We have now achieved these results one quarter ahead of schedule. This performance represents the earnings power of the franchise. The TCF acquisition bolstered many of these areas and allowed us to gain incremental scale and profitability, as Steve mentioned earlier. And the incremental growth momentum is only just the beginning. As we stand today, we believe our return on capital is compelling compared to our peer set, and demonstrates the financial rigor with which we operate that is focused on creating fundamental value for shareholders. Finally, turning to Slide 20, let me update our outlook. Our guidance assumes the consensus economic outlook through 2022, and that incorporates the rate curve as of the end of June. Our loan growth outlook remains unchanged at high single-digit growth rate in Q4. As a result of our balance sheet growth and the rate curve outlook, we are again revising guidance higher for net interest income. We now expect core net interest income on a dollar basis, excluding PPP and purchase accounting accretion, to grow in the high teens to low 20s percent range. In fee income, we continue to expect growth between low and mid-single digits for the fourth quarter on a year-over-year basis. We are continuing to see encouraging trends in our payments, capital markets and wealth and advisory businesses. As we shared previously, our guidance incorporates the normalization of mortgage banking revenues and the fair play enhancements we are making over the course of the second half of the year. Note, our guidance fully captures the expected benefits of our Capstone Partners and Torana acquisitions, which closed in the second quarter. On expenses, we are pleased to have completed the cost savings program. We are balancing continued momentum in the business and strong revenue growth with the uncertainty around the near-term macro outlook and inflationary pressures that are affecting the economy. The strong revenue performance of the business will drive a degree of associated compensation expenses in addition to targeted investments to support key growth initiatives. Hence, our expectation is for core expenses, excluding Capstone Partners and Torana, to grow at a modest level for the balance of 2022. Additionally, Capstone and Torana will add incremental expenses of approximately $25 million beginning in the third quarter run rate. Finally, given our continued exceptional credit performance, we are revising our full year net charge-offs down to less than 15 basis points from approximately 20 basis points previously. That concludes our opening remarks. Tim, let's open up the call for Q&A, please.