Zachary Wasserman
Senior Executive Vice President and Chief Financial Officer at Huntington Bancshares
Thanks, Steve, and good morning, everyone.
Slide 6 provides highlights of our second quarter results. We reported GAAP earnings per common share of $0.35. Return on tangible common equity, or ROTCE, came in at 19.9% for the quarter. Further adjusting for AOCI, ROTCE was 15.8%. Deposits grew during the quarter, increasing by $2.7 billion or 1.9% on an end-of-period basis. Loan balances continue to grow as total loans increased by $900 million or 0.8% from the prior quarter. Credit quality remains strong, with net charge-offs of 16 basis points and allowance for credit losses of 1.93%. As Steve mentioned, capital increased from the prior quarter. This solid capital position, coupled with our robust credit reserves, puts our CET1 plus ACL loss-absorbing capacity in the top quartile of the peer group.
Turning to Slide 7. Average loan balances increased 0.8% quarter-over-quarter or 3.1% annualized, driven by commercial loans, which increased by $772 million or 1.1% from the prior quarter. Primary components of this commercial growth included distribution finance, which increased $464 million; asset finance increased by $234 million; business banking increased by $160 million; auto floor plan increased by $175 million. Offsetting this growth, CRE balances were lower by $340 million. In consumer, growth continued to be led by residential mortgage, which increased by $438 million; and RV/Marine, which increased by $112 million. Partially offsetting this growth were lower auto loan balances, which declined by $318 million.
Turning to Slide 8. As noted, we continued to deliver ending deposit growth in the second quarter. Balances were higher by $2.7 billion, primarily driven by consumer, with commercial balances up modestly. On a year-over-year basis, ending deposits increased by $2.6 billion or 1.8%.
Turning to Slide 9. We saw sustained growth in deposit balances throughout the second quarter. On a monthly basis, total deposit average balances expanded sequentially for April, May and June, with June 30 ending balances above the June monthly average, providing a strong start point as we enter Q3. Within consumer deposits, we have now seen average balances increase for seven months in a row. Within commercial, average monthly deposits were stable over the course of the second quarter.
Turning to Slide 10. I want to share more details on our non-interest-bearing deposits. Overall, the $33 billion of these deposits represent 23% of total balances and are well diversified across Consumer, Business and Commercial Banking. The ongoing mix shift we have seen from non-interest-bearing over the past two quarters has been in line with our expectations and consistent with what we saw in the last cycle. We expect this mix shift trend to moderate and then stabilize in 2024. This trend is reflected in our total deposit beta guidance.
On to Slide 11. For the quarter, net interest income decreased by $61 million or 4.3% to $1.357 billion, driven by lower sequential net interest margin. On a year-over-year basis, NII increased $90 million or 7.1%. We continue to benefit significantly from our asset sensitivity and the expansion of margins that has occurred throughout the cycle.
Reconciling the change in NIM from the prior quarter, we saw a reduction of 29 basis points on both a GAAP and core basis, excluding accretion. During Q2, we maintained an elevated cash balance relative to Q1, which impacted NIM even as it had a relatively minor actual cash economic cost. On a comparative basis, normalizing for cash levels, NIM was 3.17% for the quarter or a 21 basis point decline from the prior quarter. The biggest drivers of the lower NIM quarter-over-quarter were higher funding costs, partially offset by increased earning asset yields.
We continue to analyze multiple potential interest rate scenarios as we forecast expected trends over the remainder of 2023 and into 2024. The two primary scenarios we incorporate, include one, which is represented by the forward yield curve; and another, which assumes rates stay higher for longer, and end 2024 approximately 75 basis points higher than the forward. We think this is the most likely range for short-term rates over the next six quarters. Based on this range, we anticipate net interest margin of approximately 3% by Q4, plus or minus a few basis points. This would equate to core net interest income on a dollar basis for the fourth quarter to be down approximately 1% to 2% from Q2 levels.
As we look out further into 2024, clearly, the trends will depend on both those interest rate scenarios and what is happening with the broader economy and industry factors, including loan demand and deposit growth. That said, our modeling indicates NIM outlooks are stable to rising during 2024, which, coupled with earning asset growth, is expected to drive net interest income dollar expansion as we move through 2024.
Turning to Slide 12. Cost of deposits moved higher in the quarter to 1.57%. Our cumulative beta through Q2 is 32%, up 7 percentage points from the prior quarter, in line with our expectations and prior guidance. As I mentioned, we continue to expect cumulative deposit beta of approximately 40%.
Turning to Slide 13. On the securities portfolio, we saw another step-up in reported yields quarter-over-quarter. We did not reinvest cash flows from securities in the second quarter as we allowed those proceeds to remain in cash given the attractive short-term rates. Cash and securities balances on average increased by $5 billion from the prior quarter as we maintained higher cash levels in the quarter. As of June 30, on an ending basis, cash and securities totaled $52 billion, representing a more normalized level as we go forward into Q3.
Turning to Slide 14. Our contingent liquidity continues to be robust. Our two primary sources of liquidity, cash and borrowing capacity at the FHLB and Federal Reserve represented $11 billion and $77 billion, respectively, at the end of Q2. At quarter end, this pool of available liquidity represented 205% of total uninsured deposits, a peer-leading coverage.
Turning to Slide 15. Our hedging program is dynamic, continually optimized and well diversified. Our objectives are to protect capital in upgrade scenarios and protect NIM in down rate scenarios. During the quarter, we further expanded our pay fix swaptions hedge position to protect capital from tail risk in substantive upgrade scenarios. There is a modest upfront premium associated with these swaptions, and the hedges result in a mark-to-market each quarter as they're deemed economic hedges. On the subsequent slide, you will see that positive impact during the second quarter on our fee revenues.
We also remain focused on our objective of managing NIM to protect the downside and have maintained additional upside NIM opportunity given our asset sensitivity. The interest rate movements in the first few weeks of Q3 have provided opportunities for additional attractive hedging. We have incrementally added modest additional exposures to both our capital protection and NIM protection hedge portfolios, and we will remain dynamic as we go throughout the quarter if further opportunities arise.
Moving on to Slide 16. Non-interest income was $495 million for the second quarter. Excluding notable items, fees increased $40 million, including a $18 million benefit from the positive mark-to-market on the pay fix swaptions. Excluding this benefit, underlying fee income would have been $477 million. We saw solid performance in our key areas of strategic focus, including payments and wealth management. Capital markets revenues declined by $2 million from the prior quarter, however, increased by $3 million year-over-year. Clearly, the events of March and the U.S. debt ceiling debate caused a fairly challenging capital markets environment in Q2. However, pipelines remain solid, and there are encouraging signs pointing to opportunity in the back half of the year.
Moving on to Slide 17. GAAP non-interest expense decreased by $36 million. Adjusted for notable items in the prior quarter, core expenses increased by $6 million, driven by a full quarter effect of annual merit increases and higher marketing spend. We entered the year with a posture of managing core expense growth to a very low level, given the economic backdrop. We developed and executed a series of proactive actions to reduce expense run rates, including the voluntary retirement program, organizational alignment and our continued implementation of long-term efficiency programs, such as branch optimization and operation accelerate. We continually calibrate the level of expense growth to revenues, and we're taking additional actions to further manage the pace of expense growth, even as we remain focused on self-funding investments in our key growth initiatives. We're actively working on the next set of medium-term efficiency opportunities, including business process outsourcing, which represents a promising lever for us to continue to deliver a low level expense growth into 2024.
Slide 18 recaps our capital position. Common equity Tier 1 increased to 9.82% and has increased sequentially for four quarters. OCI impacts to Common Equity Tier 1 resulted in an adjusted CET1 ratio of 8.12%. Our tangible common equity ratio, or TCE, increased 3 basis points to 5.80%. Q2 ending cash levels were higher than Q1 end, which impacted the TCE ratio by 2 basis points. Adjusting for AOCI, our TCE ratio was 7.45%. Our capital management strategy 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 very high-end of our target operating range of 9% to 10%. Adjusting for AOCI, we expect adjusted CET1 to be in the approximately mid-8s range by year-end.
On Slide 19, credit quality continues to perform very well. As mentioned, net charge-offs were 16 basis points for the quarter. This was lower than last quarter by 3 basis points. On a year-over-year basis, charge-offs were up 13 basis points from the prior year's historic low level. Non-performing assets declined from the previous quarter and have reduced for eight consecutive quarters. Allowance for credit losses is higher by 3 basis points to 1.93% of total loans.
On Slide 20, we continue to be below our target range of net charge-offs through the cycle of 25 to 45 basis points, and our ACL coverage ratio is among the highest in our peer group.
Let's turn to our 2023 outlook on Slide 21. As I noted, we analyze multiple potential scenarios to project financial performance and develop management action plans. Our guidance is informed by the interest rate scenarios I discussed previously, and the consensus economic outlook.
On loans, our outlook is 5% to 6%, consistent with our prior expectations to be near the lower end of our prior range. On deposits, we maintain our outlook of 1% to 3% growth for the full year. Core net interest income, ex PAA and PPP, is expected to grow between 3% and 5%, inclusive of our expectations for deposit beta and loan growth. Non-interest income on a core full year basis is expected to be down 2% to 4%. This range reflects the results from capital markets we've already seen in Q2 and the assumption of gradual improvement in activities throughout the balance of the year. The remainder of our fee businesses are tracking very well to our prior expectations.
On expenses, as noted, we are proactively managing with a posture to keep underlying core expense growth at a very low level and calibrated to revenue growth. For the full year, we expect core underlying expense growth between 1% and 2%, plus the incremental expenses from the full year run rate of Capstone and Torana of approximately $50 million, and the 2 basis point increase in 2023 FDIC insurance rates of approximately $30 million.
And finally, given the strong results posted during the first half of the year, we now expect full year net charge-offs to be between 20 to 30 basis points.
With that, we will conclude our prepared remarks and move to Q&A. Tim, over to you.
