Zachary Wasserman
Senior Executive Vice President, Chief Financial Officer at Huntington Bancshares
Thanks, Steve, and good morning, everyone. Slide 6 provides highlights of our second quarter results. We reported earnings per common share of $0.30. The quarter included a $6 million notable item related to the updated FDIC Deposit Insurance Fund Special Assessment. This did not have an impact on EPS. Return on tangible common equity or ROTCE came in at 16.1% for the quarter. Adjusted for notable items, ROTCE was 16.2%. Average loan balances increased by $2 billion or 1.7% versus Q2 last year.
Average deposits continued to grow, increasing by $8 billion or 5.5% on a year-over-year basis. Credit quality remains strong with net charge-offs of 29 basis points. Allowance for credit losses decreased by 2 basis points and ended the quarter at 1.95%. Adjusted CET1 ended the quarter at 8.6% and increased roughly 10 basis points from last quarter. Supported by earnings, tangible book value per share has increased by nearly 8% year-over-year.
Turning to Slide 7. Consistent with our plan and prior guidance, loan growth is accelerating quarter-over-quarter. Our sequential growth in loans into Q2 of $1.5 billion was more than double the sequential dollar growth into the first quarter. This likewise drove acceleration of loan growth on a year-over-year basis from 1.2% in Q1 to 1.7% in Q2. At our current run rate of growth, 4.7% annualized, we are on track for the full year plan. We expect the pace of future year-over-year loan growth to accelerate over the course of 2024.
Loan growth in the quarter was supported by both commercial and consumer loan categories. Total commercial loans increased by $689 million. Excluding commercial real estate, commercial growth totaled $1.1 billion for the quarter. Over the past year, CRE balances have declined by $1.3 billion with the concentration of CRE as a percent of total loans declining 1.5 percentage points from 10.9% to 9.6% today. Even as we have managed CRE balances lower, all other loan balances have increased by over $4 billion or 4% from the prior year.
Drivers of commercial loan growth in the second quarter included $600 million from new geographies and specialty verticals. This included Fund Finance, Carolinas, Texas, Healthcare Asset-Based Lending and Native American Financial Services. Auto floor plan increased by $279 million. Regional and business banking increased by $233 million. In total consumer loans, average balances grew by $757 million or 1.4% for the quarter. Within consumer, average auto balances increased by $436 million. Residential mortgage increased by $199 million, benefiting from production as well as slower prepay speeds. RV and marine balances increased by $74 million.
Turning to Slide 8. As noted, we drove another quarter of solid deposit growth. Average deposits increased by $2.9 billion or 1.9% in the second quarter. Total cumulative deposit beta was 45%. Cost of deposits increased by 9 basis points in the second quarter, which matched the increase in earning asset yields. This was half the rate of change in deposit costs we saw into the first quarter, a continuation of the decelerating trends in funding costs even as deposit growth increased.
Within the quarter, there was notable further deceleration with June deposit costs only slightly higher than May. We are actively implementing our down beta action plan, which is further supported by the robust deposit growth we have delivered. This position is allowing us to selectively reduce rates and change other terms across the portfolio in advance of potential rate cuts later this year.
Turning to Slide 9. Our cumulative deposit growth since the start of the rate cycle of 7.9% is differentiated versus the preponderance of peers. We have outperformed by double-digit percentage points on deposit growth over this time. As a result, we've been able to fund loan growth with deposits, and at the same time, managed the loan-to-deposit ratio lower over the past year, which will support continued acceleration of lending.
Turning to Slide 10. Non-interest-bearing mix shift is tracking closely to our forecast. Average non-interest-bearing balances decreased by $280 million or 0.9% from the prior quarter. This represents a continued deceleration of mix shift consistent with our expectations. Within the consumer deposit base, average non-interest-bearing deposits were modestly higher quarter-over-quarter. This was offset by a modest decelerating trend of lower non-interest-bearing balances from commercial depositors.
On to Slide 11. For the quarter, net interest income increased by $25 million or 1.9% to $1,325 million. We are pleased to have delivered growth off the trough levels from last quarter and believe this inflection in revenues will continue into the third and fourth quarters. Net interest margin was 2.99% for the second quarter. Reconciling the change in NIM from Q1, we saw a decrease of 2 basis points. This was due to higher cash balances with spread net of free funds flat versus the prior quarter.
We continue to benefit from fixed rate loan repricing with loan yields expanding by 9 basis points from the prior quarter. As a reminder, we continue to analyze and develop action plans for a wide range of potential economic and interest rate scenarios for both short-term rates as well as the slope and belly of the curve. Our working assumption for the second half of the year is aligned with a forward curve, which projects two rate cuts by year end. Based on that outlook, we see net interest margin relatively stable over the next two quarters at or around the 3% level plus or minus a few basis points.
Turning to Slide 12. Our level of cash and securities increased as we benefited from higher funding balances from sustained deposit growth. We expect cash and securities as a percent of total average assets to remain approximately 28% as the balance sheet grows over time. We are reinvesting securities cash flows in short duration HQLA, consistent with our approach to manage the unhedged duration of the portfolio at approximately the current range.
Turning to Slide 13. As a reminder, our hedging program is designed with two primary objectives, to protect margin and revenue in down rate environments and to protect capital in potential up rate scenarios. As of June 30, our effective hedge position included $17.4 billion of receive fixed swaps, $5.5 billion of floor spreads and $10.7 billion of pay-fixed swaps. The pay-fixed swaps, which successfully protected capital, have a weighted average life of just over three years and will begin to mature over the course of 2025. As these instruments mature, our asset sensitivity will reduce.
Furthermore, at a measured pace over the past several quarters, we have added more forward-starting receive fixed swaps with effective dates starting generally in the first half of 2025. The impact of both the maturities of the pay-fixed swaps and the beginning effectiveness of the receive fixed swaps will reduce asset sensitivity in a down rate scenario by approximately one-third by the middle of next year. As always, we will continue to dynamically manage our hedging program to achieve our objectives of capital protection and NIM stabilization.
Moving on to Slide 14. Our fee revenue growth is driven by three substantive areas; capital markets, payments and wealth management. Collectively, these three areas represent nearly two-thirds of our total fee revenues. Within capital markets, revenues increased $17 million from the prior quarter, driven by higher advisory revenues. Commercial banking-related capital markets revenues were stable quarter-to-quarter. We expect to sustain and build upon this level over the back half of the year, supported by robust advisory pipelines in Capstone as well as expected new commercial loan production.
Payments and cash management revenue was up $8 million in the second quarter and increased 5% year-over-year. Treasury management fees within payments continue to grow strongly at 11% year-over-year as we deepen customer penetration. Our wealth and asset management revenues increased 8% from the prior year. Advisory relationships have increased by 8% year-over-year and assets under management have increased by 17% on a year-over-year basis.
Moving on to Slide 15. On an overall level, GAAP non-interest income increased by $24 million to $491 million for the second quarter, increasing from the seasonal first quarter low. Excluding the impacts of the CRT transactions, non-interest income increased by $31 million quarter-over-quarter.
Moving on to Slide 16 on expenses. GAAP non-interest expense decreased by $20 million and underlying core expenses increased by $13 million. During the quarter, we incurred $6 million of incremental expense related to the FDIC Deposit Insurance Fund Special Assessment. Excluding this item, core expenses came in better than our expectations for the quarter with approximately half of the lower than expected result driven by discrete benefits not expected to recur.
The increase in core expenses quarter-over-quarter was primarily driven by personnel expenses as we saw higher revenue-driven compensation and incentives due to production as well as the full quarter impact of merit increases effective in March. We continue to forecast 4.5% core expense growth for the full year. As we look into the third quarter, we expect core expenses to be higher at approximately $1,140 million. There may be some variability given revenue-driven compensation.
Slide 17 recaps our capital position. Common Equity Tier 1 ended the quarter at 10.4%. Our adjusted CET1 ratio, inclusive of AOCI, was 8.6% and has grown 50 basis points from a year ago. Our capital management strategy remains focused on driving capital ratios higher, while maintaining our top priority to fund high return loan growth. We intend to drive adjusted CET1, inclusive of AOCI, into our operating range of 9% to 10%.
Slide 18 highlights our results from this year's CCAR exercise. We were pleased to once again continue our trend of top-quartile performance for expected credit losses from the stress test. This year's result was second best compared to peers. Our SCB improved to the 2.5% minimum and our modeled stress CET1 ratio was the second best in our peer group. Our ACL as a percentage of CCAR modeled losses continued to be the highest level compared to our peers. These results validate the consistency of our long-standing approach to maintaining an aggregate moderate-to-low risk appetite.
On Slide 19, credit quality is coming in as we expected and continues to perform very well. Net charge-offs were 29 basis points in Q2, 1 basis point lower than the prior quarter. They remain in the lower half of our through-the-cycle target range of 25 to 45 basis points. Allowance for credit losses at 1.95% declined by 2 basis points from the prior quarter, effectively flat and reflects both modestly improved economic outlook as well as an increased loan portfolio.
On Slide 20, the criticized asset ratio declined 7% from the prior quarter, driven by broad-based improvements across commercial portfolios. Non-performing assets increased approximately 5% from the previous quarter to 63 basis points, while remaining below the prior 2021 level.
Turning to Slide 21. Our outlook for the full year remains unchanged from our prior guidance. As we discussed, we expect loan growth to accelerate and deposit growth to sustain its quarterly trend. We drove net interest income higher from its trough and expect that trend to continue sequentially in the second half. Core expenses are well-managed and tracking to our full year outlook, subject to some variability given revenue-driven compensation levels and the timing of staffing adds and expenses related to the insourcing of our merchant acquiring business. We expect to exit the year at a low-single-digit year-over-year growth rate. Credit is performing well aligned with our expectations.
With that, we'll conclude our prepared remarks and move over to Q&A. Tim, over to you.
