Zachary Wasserman
Senior Executive Vice President, Chief Financial Officer at Huntington Bancshares
Thanks, Steve, and good morning, everyone. Slide 6 provides highlights of our first quarter results. We reported GAAP earnings per common share of $0.39 and adjusted EPS of $0.38. Return on tangible common equity, or ROTCE, came in at 23.1% for the quarter. Adjusted for notable items, ROTCE was 22.7%. And -- further adjusting for AOCI, ROTCE was 17.8%. Pre-provision net revenue expanded 41% year-over-year to $844 million.
Loan balances continue to grow as total loans increased by $1.5 billion from the prior quarter. Liquidity coverage remains robust, with over $60 billion of available liquidity, representing a peer-leading coverage of uninsured deposits of 136%. Credit quality remains strong, with net charge-offs of 19 basis points and allowance for credit losses of 1.9%.
Turning to Slide 7. Average loan balances increased 1.3% quarter-over-quarter, driven by commercial loans, which increased by $1.5 billion or 2.2% from the prior quarter. Primary components of this commercial growth included distribution finance, which increased $800 million tied to continued normalization of dealer inventory levels as well as seasonality with shipments of spring equipment arriving to dealers.
Corporate and Specialty Banking increased $242 million, primarily driven by growth in mid-corp, health care and tech and telecom. Other asset finance businesses contributed growth of $216 million. Auto floor plan continued normalization, with balances higher by $214 million. Business banking also increased $92 million.
In Consumer, growth continued to be led by residential mortgage, which increased by $316 million. Partially offsetting this growth were home equity balances, which declined by $159 million. All other categories, including RV/Marine and auto declined by a collective $123 million.
Turning to Slide 8. We continued to deliver average deposit growth in the first quarter. Balances were higher by $472 million, primarily driven by consumer, which more than offset lower commercial balances. On a year-over-year basis, average deposits increased by $3.2 billion or 2.3%.
Turning to Slide 9. I want to share more details behind Huntington's deposit franchise. Our deposit base represents a leading percentage of insured deposits at 69% as of Q1. Our deposit base is highly diversified with consumer deposits representing over half of our total deposits and the average consumer balance being $11,000.
Turning to Slide 10. Complementing our diversified deposit base is the stability and growth of our deposits over time. During last year, we consistently delivered deposit growth well above peer levels despite the backdrop of rising rates and quantitative tightening. Through year end 2022, cumulative deposit growth was 2.4%, nearly 6 percentage points better than the peer median.
Over the course of Q1, monthly average deposit balances were stable at approximately $146 billion. Within consumer deposits, balances have increased for four months in a row. Total commercial balances were modestly lower, consistent with expected seasonality. During March, in addition to seasonality, commercial customers also incrementally utilized our off-balance sheet liquidity solutions.
Turning to Slide 11. We have a sophisticated approach to customer liquidity management that comprises both on-balance sheet deposit products as well as off-balance sheet alternatives. Over the past four years, we have invested substantially to build out these solutions to ensure we're managing our customers' overall liquidity needs. The enhanced liquidity solutions allow us to manage the full customer relationship with primary bank and operating deposits on balance sheet and utilizing our off-balance sheet solutions for investment or non-operational funds.
Over the course of 2020 and 2021, we intentionally leveraged these off-balance sheet solutions in order to support our customers' excess liquidity. This resulted in fewer surge deposits coming on sheet as well as less commercial deposit runoff during 2022 compared to the industry. On a year-over-year basis, our Commercial Banking segment on-balance sheet deposits increased 11% and our off-balance sheet liquidity balances increased 54%. During March, this approach yet again showed its value for both Huntington and our customers. We saw customers moving a modest amount of deposit balances into treasuries and other products, while we were able to maintain those primary operating accounts on our balance sheet.
Of the total change in Commercial segment deposit balances between March 6 and the end of Q1, we estimate that approximately half the delta was attributable to normal seasonality, and the remainder was mainly the result of shifts into our off-balance sheet solutions. The bottom table highlights these movements as well as trends in the first two weeks of April. On-balance sheet deposits have returned to the March 6 level and off-balance sheet continues to grow.
Turning to Slide 12. Our liquidity capacity is robust. Our two primary sources of liquidity, cash and borrowing capacity at the FHLB and Federal Reserve represented $10 billion and $51 billion, respectively, at the end of Q1. As part of our ongoing liquidity management, we continually seek to maximize contingent borrowing capacity. And as of April 14, our total cash and available borrowing capacity increased to $65 billion. At quarter end, this pool of available liquidity represented 136% of total uninsured deposits, a peer-leading coverage.
On to Slide 13. For the quarter, net interest income decreased by $53 million or 4% to $1.418 billion driven by lower day count and lower net interest margin. Year-over-year, NII increased $264 million or 23%. Net interest margin decreased 12 basis points on a GAAP basis from the prior quarter and decreased 11 basis points on a core basis, excluding accretion. The reduction in GAAP NIM included 5 basis points from lower spreads, net of free funds, due to funding mix and marginally accelerated interest costs. It also included 5 basis points from the first substantive negative carry impact from our long-term downrate NIM hedging program and 3 basis points from higher cash levels.
Slide 14 highlights our ongoing disciplined management of deposit costs and funding. For the current cycle to date, our beta on total cost of deposits was 25%. As we've noted, we expect deposit rates to continue to trend higher from here over the course of the rate cycle. Given the recent market environment, at the margin, we do expect a steeper near-term trajectory.
Turning to Slide 15. Our hedging program is dynamic, continually optimized and well diversified. Our objectives are to protect capital in up-rate scenarios and to protect NIM in down-rate scenarios. During the first quarter, we added to the hedge portfolio with both of these objectives in mind. On the capital protection front, we added $1.6 billion in additional pay fixed swaps and $1.5 billion in forward starting pay fixed swaptions. Throughout the quarter, we were deliberate in managing the balance sheet to benefit from asset sensitivity.
We also incrementally added to our hedge position to manage possible downside rate risks over the longer-term as well as took actions to optimize the near-term cost of the program. During the quarter, we executed a net $400 million of received fixed swaps, terminated $4.9 billion of swaps and entered into $5 billion of floor spreads. As we've noted before, our intention is to manage NIM in as tight a corridor as possible as we protect the downside and maintain upside potential if rates stay higher for longer.
Turning to Slide 16. On the securities portfolio, we saw another step-up in reported yields quarter-over-quarter. We benefited from higher reinvestment yields as well as our hedges to protect capital. From a portfolio strategy perspective, we expect to continue to add to the allocation of shorter duration exposures to benefit from the inverted yield curve and further enhance the liquidity profile of the portfolio. You will note that fair value marks at the end of March were lower than year end, both in the AFS and HTM portfolios, as market interest rates moved lower sequentially. Importantly, we have also shown the $700 million total positive fair value mark from our pay fixed hedges, which are intended to protect capital.
Moving on to Slide 17. Non-interest income was $512 million, up $13 million from last quarter. These results include the $57 million gain on the sale of our retirement plan services business during the quarter. Excluding that gain, adjusted non-interest income was $455 million. This result was somewhat lower than the guidance we provided in early March, driven by lower capital markets revenues given the disruptions at the end of Q1. The first quarter is generally a seasonal low for fee revenues. As we've noted previously, we see Q1, excluding the RPS sale, being the low point and for fees to grow over the course of the year, driven by solid underlying performance in our key areas of strategic focus, capital markets, payments and wealth management.
Moving on to Slide 18. GAAP non-interest expense increased by $9 million. Adjusted for notable items, core expenses decreased by $18 million, driven by lower personnel expense, primarily as a result of reduced incentives and revenue-driven compensation. We're proactively managing expenses and have taken actions over the last several quarters to orient to a low level of expense growth in order to deliver positive operating leverage and self-fund strategic investments.
Slide 19 recaps our capital position. Common equity Tier 1 increased to 9.55% and has increased sequentially for three quarters. OCI impacts to common equity Tier 1 resulted in an adjusted CET1 ratio of 7.6% As a reminder, the reported regulatory capital framework does not include OCI impacts in the capital calculation. Our tangible common equity ratio, or TCE, increased 22 basis points to 5.7%. Note that we were holding higher cash balances at the end of Q1, which reduced the TCE ratio by 13 basis points. Adjusting for AOCI, our TCE ratio was 7.27%.
Tangible book value per share increased by 7% from the prior quarter to $7.32. Adjusting for AOCI, tangible book value increased to $9.23, and has increased for the past four quarters. Our capital management [Technical Issues] strategy for the balance of 2023 will result in expanding capital over the course of the year, while maintaining our top priority to fund high-return loan growth. We intend to grow CET1 to the top end of our 9% to 10% operating range by the end of the year. We believe this is a prudent approach given the dynamic environment. Based on our expectation for continued loan growth, we do not expect to utilize the share repurchase program during 2023.
Turning to Slide 20. Our capital plus reserves is top quartile in the peer group and gives us substantial total loss absorption capacity. On Slide 21, credit quality continues to perform very well. As mentioned, net charge-offs were 19 basis points for the quarter. This was higher than last quarter by 2 basis points and up 12 basis points from the prior year as charge-offs continue to normalize. Non-performing assets declined from the previous quarter and have reduced for seven consecutive quarters. Allowance for credit losses was flat at 1.9% of total loans.
Turning to Slide 22. We have provided incremental disclosures on our commercial real estate balances. This portfolio is well diversified and at 14% of total loans is in line with the peer group with no outsized exposures. The majority of the property types are multifamily and industrial. Over the last two years, we have grown our CRE book at a slower pace relative to the industry and peers. We remain conservative in our credit approach to CRE with rigorous client selection. Total office CRE comprises less than 2% of total loans, and the majority are suburban and multi-tenant properties.
Reserve coverage on our total CRE portfolio is 3% and the office portfolio is 8%. Let's turn to our 2023 outlook on Slide 23. As we have discussed, we analyze multiple potential economic scenarios to project financial performance and develop management action plans. We also remain dynamic in the current environment as we execute on our strategies.
Our guidance is anchored on a baseline scenario that is informed by the consensus economic outlook. We have also based our guidance on a range of interest rate scenarios, bounded on the low end using the forward curve as of the end of March to one at the higher end, where rates are higher for longer with Fed funds remaining at approximately today's level over the rest of the year. On loans, our outlook range continues to be growth between 5% and 7% on an average basis. And as before, we expect this growth to be led by commercial with more modest growth in consumer.
As we entered the year, we were trending to the middle to higher portion of that growth range. Given the market disruption and our incremental focus on optimizing loan growth for the highest returns on capital, we now expect to be in the lower half to midpoint of this range. On deposits, we are guided by our core strategy of acquiring and deepening primary bank relationships. We're narrowing our outlook with a slightly lower top end of the range and still expect to grow average deposits between 1% and 3%. However, the composition of deposit growth from here, we now expect to be primarily consumer-led with relatively less commercial growth.
Net interest income is now expected to increase between 6% and 9%. This is driven by slightly lower loan growth and marginally higher funding costs. Non-interest income on a core full year basis is expected to be flat to down 2%. The updated guidance reflects modestly lower expected growth in capital markets fees and includes the go-forward impact of the RPS business sale. As noted, we expect Q1 to be the low point for fees, growing over the course of the year, led by capital markets, payments and Wealth Management.
On expenses, we are proactively managing with a posture to keep underlying core expense growth at a very low level. We're benefiting from our ongoing efficiency initiatives, such as Operation Accelerate, branch optimization, the voluntary retirement program and the organizational realignment, providing the capacity to self-fund sustained investment in our key growth initiatives.
Given a somewhat lower revenue outlook, we are taking actions to incrementally reduce the expense growth in 2023. For the full year, we now expect core expense growth between 1% and 3%, plus the incremental expenses from the full year run rate of Capstone and Torana and the increased FDIC insurance expense. Overall, our low expense growth, coupled with expanded revenues, is expected to support another year of positive operating leverage. We continue to expect net charge-offs will be on the low end of our long-term through-the-cycle range of 25 basis points to 45 basis points.
Finally, turning to Slide 24. As you heard from Steve, the foundation we have built at Huntington over the last decade has created an institution that is well prepared for this environment. We will leverage the strength of our deposit base. We're focused on growing capital and maintaining robust liquidity. We remain disciplined in our credit posture, and we're executing our core strategy. The work we have done to build the franchise positions Huntington to outperform and be ready to opportunistically seize on pockets of growth. We will remain disciplined and dynamic in our management approach as we continue to generate long-term value for our shareholders.
With that, we will conclude our prepared remarks and move to Q&A. Tim, over to you.
