Huntington Bancshares - Q2 2024

Executive Summary

• Q2 delivered sequential revenue and EPS growth: Total revenue (FTE) rose to $1.816B from $1.767B and diluted EPS increased to $0.30 from $0.26; year-over-year comparisons remain below 2023 levels given funding costs and mix shifts.
• Operating metrics improved: efficiency ratio fell to 60.8% (from 63.7%), while NIM was essentially stable at 2.99% (down 2 bps q/q); average loans and deposits both increased q/q, supporting NII expansion off the Q1 trough.
• Credit remained solid within normalized ranges (NCOs 29 bps; ACL 1.95%), CET1 strengthened to 10.4%; liquidity remained robust with $95B of cash/borrowing capacity covering 204% of estimated uninsured deposits.
• Outlook/guidance unchanged: management reiterated FY24 guides (loan growth 3–5%, deposit growth 2–4%, NII -2% to +2%, fee growth 5–7%, core expenses +4.5%, NCOs 25–35 bps) and expects NIM around ~3% with sequential NII growth in 2H24; deposit down-beta mid-to-high 20s over the first year when cuts begin.

What Went Well and What Went Wrong

• What Went Well

  • Revenue and EPS inflected higher sequentially on both NII and fees; CEO highlighted organic growth investments and robust capital/liquidity as enablers of accelerating loan growth and higher 2H revenue momentum: “expected to drive higher revenues over the second half of the year”.
  • Fee engines performed: payments (+5% y/y), wealth (+8% y/y), and capital markets (+30% q/q) supported noninterest income growth to $491M (from $467M).
  • Credit quality stable: NCOs improved to 29 bps (from 30 bps), ACL coverage remained strong at 1.95%; CCAR losses were “second best” among peers and SCB at the 2.5% minimum.

• What Went Wrong

  • NIM edged down 2 bps to 2.99% as higher cash balances/funding costs offset loan yield gains; NIM remains below year-ago levels given elevated deposit costs (interest-bearing deposit cost +88 bps y/y).
  • Efficiency still elevated vs prior year (60.8% vs 55.9% y/y) on higher personnel and tech/data spend; core expenses up y/y despite sequential decline in GAAP costs.
  • Nonperformers drifted up (NPA ratio 0.63% vs 0.46% y/y) with increases in CRE/C&I NALs; management flagged continued industry “sloppiness” in CRE office albeit manageable given granularity and reserve posture.

Transcript

Operator (participant)

Greetings and welcome to the Huntington Bancshares Second Quarter 2024 earnings conference call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. As a reminder, this conference is being recorded. At this time, I'll now turn the conference over to your host, Tim Sedabres, Director of Investor Relations. Please go ahead, sir.

Tim Sedabres (Director of Investor Relations)

Thank you, Operator. Welcome, everyone, and good morning. Copies of the slides we will be reviewing today can be found in the Investor Relations section of our website, www.huntington.com. As a reminder, this call is being recorded, and a replay will be available starting about one hour from the close of the call. Our presenters today are Steve Steinour, Chairman, President, and CEO, and Zach Wasserman, Chief Financial Officer. Brendan Lawler, Chief Credit Officer, will join us for the Q&A. Earnings documents, which include our forward-looking statements disclaimer and non-GAAP information, are available on the Investor Relations section of our website. With that, let me now turn it over to Steve.

Steve Steinour (Chairman, President, and CEO)

Thanks, Tim. Good morning, everyone, and welcome. Thank you for joining the call today. We're pleased to announce our second quarter results, which Zach will detail later. These results are supported by our colleagues who live our purpose every day as we make people's lives better, help businesses thrive, and strengthen the communities we serve. Now, on to slide four. There are five key messages we want to share with you today. First, we are intensely focused on executing our organic growth strategies and leveraging our position of strength. Our robust liquidity and capital base put us in a position to drive growth, and we are investing in new geographies and businesses in addition to existing businesses. Second, we expanded net interest income, and we expect it to continue to grow sequentially from the first quarter trough.

This outlook is supported by accelerating loan growth and sustained deposit growth to power future revenue expansion. Third, we drove fee revenues higher in the quarter with support from our three major focus areas: Capital Markets, Payments, and Wealth Management. Fourth, we are achieving strong credit performance with stable net charge-offs, which are tracking as expected for the year. This is a direct result of our sustained and disciplined approach to credit over many years and our aggregate moderate to low-risk appetite. Finally, we believe the net result of these actions will deliver expanded profitability from here and into 2025 and beyond. I will move us on to slide five to recap our performance. We delivered accelerated loan growth with average balances growing by $2 billion from a year ago. Annualized loan growth in the quarter was 4.7%.

Average deposit balances also increased, growing $8 billion, or 5.5%, over the past year. Capital further strengthened with reported Common Equity Tier 1 of 10.4% and adjusted Common Equity Tier 1 of 8.6%, inclusive of AOCI. Liquidity remains top tier with coverage of uninsured deposits of 204%, a peer-leading level. Credit quality was stable as net charge-offs improved by 1 basis point from the first quarter to 29 basis points. We are sustaining momentum in the growth of our primary bank relationships, with consumer and business increasing by 2% and 4%, respectively, year-over-year. Again, this past quarter, we seized the opportunity to add talented bankers. We're pleased to add new deposit-focused capabilities in the mortgage servicing and homeowners association, title, and escrow areas. These new teams build upon the prior investments we've made in the Carolinas, Texas, and three new specialty commercial verticals.

As we shared last month, we are bringing in-house our merchant acquiring business within our payments organization to further accelerate revenues and capabilities. As I mentioned, our disciplined positioning of robust capital and liquidity enables our ability to sustain a growth posture. Capital continues to increase, with adjusted CET1 up approximately 50 basis points from a year ago. Liquidity continues to be robust, supported by sustained deposit gathering. We were pleased to once again deliver top quartile results in this year's CCAR stress test exercise, with Huntington's modeled credit losses second best in the peer group. Our stress capital buffer was reduced and came in at the minimum level of 2.5%. Across our markets, we see the broader economy continuing to hold up. Our new initiatives, teams, and geographies provide growth opportunities even as the broader environment for customer loan demand remains somewhat muted.

Zach, over to you to provide more detail on our financial performance.

Zach Wasserman (CFO)

Thanks, Steve, and good morning, everyone. Slide six 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 seven, 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 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 Floorplan 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 eight, 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 nine, 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, manage 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 received 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 received fixed swaps will reduce asset sensitivity in a down rate scenario by approximately 1/3 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 2/3 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-over-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%-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, one basis point lower than the prior quarter. They remain in the lower half of our through-the-cycle target range of 25 basis points - 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.

Tim Sedabres (Director of Investor Relations)

Thank you, Zach. Operator, we will now take questions.

We ask that as a courtesy to your peers, each person ask only one question and one related follow-up, and then if that person has additional questions, he or she can add themselves back into the queue. Thank you.

Operator (participant)

Thank you. We'll now be conducting the question-and-answer sessions. If you'd like to ask a question at this time, you may press star one from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to withdraw your question from the queue. For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Thank you. Our first question is from the line of Manan Gosalia with Morgan Stanley. Please proceed with your questions.

Manan Gosalia (Research Analyst)

Hey, good morning.

Zach Wasserman (CFO)

Morning, Manan.

Manan Gosalia (Research Analyst)

Zach, can you expand on your comments on how you're managing downside deposit beta if we get a couple of rate cuts by year-end? I think in the past you've spoken about a downside beta of 20% or so on total deposits. Can that be a little bit better given that you've been more competitive on deposits in the first half of the year?

Zach Wasserman (CFO)

Yeah, thanks, Manan. Good morning. Great question. Appreciate the chance to elaborate on this one. As I noted in the prepared remarks, we're already beginning the early stages of the down beta playbook. I think reducing acquisition rates, shifting the acquisition mix from time deposits toward more money market, which is easier and faster to manage on a down beta trajectory, shortening the duration of CDs, and making targeted rate reductions in certain client segments.

Already beginning these actions, and they benefited us in the second quarter. As we look forward, clearly the performance and trajectory around beta will be a function of what the forward yield curve projects, but importantly what clients and the markets generally believe to be the rate environment. With that being said, what we're seeing set up now is very conducive to continuing this action and being ready to actually implement the full down beta playbook when we presumably see a rate reduction later this year. There's good confidence in where things are going in terms of that.

It's a little early to give precise guidance here because clearly the trajectory around beta over the course of the first year or so will be a function of those market expectations, but it's our general working assumption that we'll be in the mid to high 20% down beta range over a kind of first-year period and then continuing from there. And as I said, sort of shaping up pretty well here in the early days of it.

Manan Gosalia (Research Analyst)

Got it. And then maybe on the loan side, can you talk about how spreads are tracking? We've had several banks highlighting weaker demand on loan growth, but they're all looking for loan growth. So are you seeing things getting more competitive? And how is that impacting loan spreads overall?

Zach Wasserman (CFO)

Yeah. Look, it is certainly a competitive environment, and we're driving growth, as we said, into the second quarter.

On a dollar basis, we saw double the growth into the second quarter than we saw in the first quarter. So the acceleration that we have been calling for for some time we're seeing, and so feel pretty pleased about that. Part of the question on loan spreads for us overall on a net basis is where are we growing? What segments, what categories are we growing in? And where we're focused is driving growth in a lot of the new areas that we've been investing in, which typically come on with pretty attractive spreads relative to the average. I would characterize the spread environment generally as pretty flat on a product and category level, and for us, we're really focused on trying to drive capital optimization, obviously, into the areas with the highest return that often have good spreads, but also come with fee business performance as well.

Manan Gosalia (Research Analyst)

Great. Thank you.

Operator (participant)

Our next question is from the line of Erika Najarian with UBS. Please proceed with your questions.

Erika Najarian (Managing Director)

Hi. Good morning.

Zach Wasserman (CFO)

Morning, Erika.

Erika Najarian (Managing Director)

I wanted to talk through expected deposit trends for the rest of the quarter. Clearly, you have outpaced, as you mentioned, back to propelling the retail group here into the first cycle in terms of deposit growth. I guess I got the impression that perhaps some of this deposit growth is pre-funding even better loan growth for the second half of the year. I did notice that you skipped through your securities portfolio and that that rate that you mentioned is a good move relative to the curve.

But I'm just wondering, I guess the question here is, can you continue to do you have enough deposits to fund the acceleration of the second half that we've been waiting for, or are you expecting it to continue to grow at this pace but closer to the rate and competitive dynamics that you observed in June? In other words, it won't be as expensive at the +9 basis points for the quarter.

Zach Wasserman (CFO)

Thanks, Erika, for the question. This is Zach. I'll take it. Your line was clipping a little bit as I went, but I think what I heard was, what is our expectation for loan growth and kind of deposit sorry, deposit growth, I'm sorry, and deposit pricing here in the back half of the year, and will we have enough to fund loans going forward and what the kind of rate trajectory is around that?

So let me see if I can address that, and if I haven't covered it, you can follow up. Look, I think we're really pleased with how things are going on deposit gathering, for sure. If you take a big step back, 15% outperformance versus the peer median over the course of the rate cycle with a beta that compares pretty favorably to both history and peers. So really doing well. I think what that's allowing us to do is, to your question, pre-fund to some degree of future loan growth. And we've seen the loan-to-deposit ratio just in the last year go from 84% this time last year to 81% now in the quarter that just closed. So sort of sets up that ability to fund with core deposits, the accelerating loan growth that we expect.

But also, I would note, and it sort of goes back to Manon's question a second ago, it gives us a lot of flexibility to really manage down beta and to be selective and disciplined in terms of where that next unit of funding will come from. And so that is sort of the intention, and we've been performing really well. I mean, to some degree, I will share that we're actually outperforming our initial budget on deposit growth. It's one of the reasons why we elevated the deposit growth forecast up to the high end of our initial guidance range. I think we saw an extraordinary level of growth into the second quarter, almost $3 billion.

I don't expect that same level of sequential growth into the second quarter, but I do expect it to grow, and I would see some nice sequential growth into the fourth quarter too and to be within that overall guidance range of 3-4 for the whole year. So I think that'll allow us to kind of absorb the increased lending volumes that we're projecting and core fund them and set up the ability to manage down beta. In terms of pricing strategy, I'm going to sort of go back a little bit to the answer I gave to Manan, which is we're being judicious. We're still in acquisition mode, but we're very much cognizant that we are in a position of strength, and that can allow us to execute the early stages of down beta. So we're seeing it in the marketplace, reduction in go-to-market acquisition pricing.

We're likewise doing that and taking that opportunity. And I believe that if we do get rate reductions here in September, which seems to be a certainty based on the market expectations, we'll be able to continue that and to drive it forward even further.

Erika Najarian (Managing Director)

Thank you. And just as a follow-up question, Zach, as I try to put together everything that you've told us about deposit pricing trends, continued fixed-rate asset repricing, and the swaps that are maturing, while you started the year having a generally asset-sensitive position, the way your balance sheet will evolve into next year, it sounds like in terms of both strategically and pricing and mechanically in terms of some of the financial engineering rolling off, you will be set up to potentially benefit from that rate curve or lower short rates.

Zach Wasserman (CFO)

Yeah. Great question.

So let me sort of address some of the thinking around NIM trajectory, asset sensitivity plans. The objective we've had vis-à-vis asset sensitivity management over the last year, year and a half even, has been to allow our natural asset sensitivity to really maximize the value of the up-rate environment, which worked pretty well. Clearly, now as we think about rates topping out and then presumably the beginning of fall, we are strategically reducing asset sensitivity. And the prepared remarks I highlighted that the combination of increasing forward starting receive fixed swaps and expiration of pay fixed swaps will reduce asset sensitivity by about a third between now and the end of, sorry, the middle of next year. And we'll continue to be dynamic in managing that, but that's a very intentional reduction in asset sensitivity to manage it in the presence of reduced rates.

I think on NIM, generally seeing pretty stable trends here over the next several quarters. There are two substantive positive factors we've discussed over time. Fixed asset repricing will continue to benefit the NIM. Second factor, hedge drag. We had about 16 basis points of net hedge drag in the second quarter that we just closed. That'll go down to almost a neutral position by the middle of next year in an implied forward scenario. We'll get some benefits from that pretty steadily here over the next several quarters. The other two factors that are very rate path dependent clearly are what happens with variable yields, what happens with interest-bearing liability costs. In our expectation, you'll see an accelerating and effective down beta that'll help to mitigate variable yield reductions. The net of those things will be a pretty flat NIM here.

I think over the longer term, we do see certainly the opportunity to drive NIM higher in a more upward sloping yield curve environment. And so that is, I think, what the market is expecting. And so we're pretty positive about where NIM will go over the longer term after we get through this sort of initial stages of down rating.

Erika Najarian (Managing Director)

Thank you.

Zach Wasserman (CFO)

Thank you.

Operator (participant)

Our next question is from the line of Steven Alexopoulos with JPMorgan. Please proceed with your question.

Steven Alexopoulos (Equity Analyst)

Hey. Good morning, everyone.

Zach Wasserman (CFO)

Morning, Steven.

Steven Alexopoulos (Equity Analyst)

I want to start maybe, Zach, for you. So if we do get two cuts this year, say September, December, Zach, what's your bias as it relates to the NII outlook, the down one to down four? Where in the range do you think we lean?

Zach Wasserman (CFO)

Yeah. Great question.

Our practice in terms of setting these rates is to try to box where we think our basic trend is going. So we're generally trending pretty well in the middle of that range, and that's including the couple cuts there. I do think that a lot of one of the key factors in managing a flat NIM will be that continued execution on reducing the trajectory of interest-bearing costs rising and then begin to driving them lower. And of course, the real ability to do that is a function of what the competitive environment is and what customers believe the rate path is. And so it'll be dependent on the conviction of the market and the economy broadly where our rates are going. But with that being said, the data does continue to set up pretty good confidence around where the forward yield curve will go.

So I feel pretty good about our ability to do that. The other element of it clearly is loan growth. We're seeing really encouraging signs there. Pipelines look strong. Solid performance in Q2. Expect to continue to grow and accelerate on a year-over-year basis here in the back half of the year. I think we could see even faster loan growth if some of our new growth initiatives perform even better than they're forecasted to do in our base plan. Pipelines there look really good. If pull-through is even better than our base plan, then we could see some upward bias on loan growth. Likewise, what we haven't addressed yet in the Q&A section here is we did see more CRE runoff in the second quarter than we had expected in our kind of initial budgeting to the extent that that is lower going forward.

You can see some higher loan volumes, and that could lift revenues above the base plan. Conversely, if any of those factors were worse, that could take us to the lower end. But feel pretty good about trending right in the middle of that range at this point, Steven.

Steven Alexopoulos (Equity Analyst)

The middle of the range, is that what you're saying?

Zach Wasserman (CFO)

That's the baseline.

Steven Alexopoulos (Equity Analyst)

That's your baseline. Okay. That's helpful. And then it's funny. When we look at slide seven, you're calling out the $600 million. That was the increase in average loans from new initiatives, right? I don't know. Call that $2.5 billion a year. And I'm curious because you could look at that and say, "Well, that's sort of a catch-up. You have new bankers and new verticals bring over their books." But then you're saying momentum is building.

So when we look out from here, we think about that $2.5 billion run rate or so. Do you see upside to that as the quarters roll forward? Should we see more contribution from new initiatives in a dollar perspective?

Zach Wasserman (CFO)

No, I think I'm expecting to see very strong performance in these new initiatives. We're really pleased with how they're doing. Every one of them has booked customers, is booking loans. We're seeing good performance on the full relationship in terms of deposits and fees starting to come through. So we're really pleased with it. And I also wouldn't characterize it necessarily as them bringing their books over. These were talented bankers with deep experience in their industries and in those geographies we've launched in. And we're just grinding through new client acquisition on a pretty core basis.

The trajectory of growth that you highlighted, I expect to see a pretty steady build from here. I don't know that I'd see acceleration per se, but the trajectory right is already very accretive to loan growth.

Steven Alexopoulos (Equity Analyst)

Got it. Okay. Thanks for taking my questions.

Zach Wasserman (CFO)

Thank you.

Operator (participant)

Our next questions are from the line of Scott Siefers with Piper Sandler. Please proceed with your question.

Scott Siefers (Managing Director)

Morning, everybody. Thank you for taking the question. So I think my questions on overall customer demand on loans have sort of been answered. But I was hoping you could maybe address auto in particular. I noticed production is as high as it's been in the last several years.

Is that sort of maybe being used as a flex given sort of the softer overall growth than you had anticipated maybe earlier this year, and albeit within the context that it sounds like things outside of that category are going to advance more robustly later on? So just curious how you're thinking about auto. And then as the follow-up, maybe just sort of quality of that portfolio given the kind of fluctuations we've seen in used car values, slower economy, etc.

Steve Steinour (Chairman, President, and CEO)

Scott, this is Steve. I'll take the question. And our auto business has performed very well this year, and in the second quarter, we expect it will continue. We're not using it as a buffer. I think that was essentially what you were asking. We just see it as a terrific opportunity. Some of the other banks in the last year or so pulled back on auto.

It's created a bit of an opportunity for us, and we'd expect to continue generating significant volume and growth. As you saw with the CLN, and as we've done in the past with auto securitization, we'll manage aggregate exposure with the book, but we've got quite a bit of room at this point. In terms of quality of the book, it's a super prime book, and so very low default. And we've talked about this for years. We focus on default frequency. On the margin, the used car pricing can have a slight impact on incremental loss or avoided loss on each repossession. But it's not going to be a big number for us either way. We've shown that this book performs very well over the years, and we expect it will continue to do so.

Scott Siefers (Managing Director)

Okay. Perfect. Thank you. And then, Zach, maybe one for you just on cost.

Appreciate sort of the third quarter rise, but then it sounds like we're still all on track for the full year. In the past, and I don't want to get too detailed on next year, but you've sort of talked about that normalization of overall cost growth into next year. Any change sort of broadly to how you're thinking about that, or are we still sort of on track for that as well?

Zach Wasserman (CFO)

On track for that is the headline answer there. I feel really good about how we're managing expenses for the year. There's clearly been a little bit of timing delta from where we would have initially expected where we are now, but the full year looks quite in line with where we would have thought initially and in line with our guidance.

What that'll set up is, as we've discussed on previous calls, a steady deceleration in the rate of year-over-year growth as we go throughout the course of this year. I think expense growth last quarter was about 5% year-over-year. This is around 6%, I think, effectively in Q2. It will just close. That'll trend toward low single digits by the time we get to the fourth quarter on a year-over-year basis. And our expectation will continue to kind of run that trend down into 2025.

Scott Siefers (Managing Director)

Perfect. Okay. Good. Thank you for taking the questions.

Zach Wasserman (CFO)

Thank you.

Scott Siefers (Managing Director)

Our next questions are from the line of Ebrahim Poonawala with Bank of America. Please proceed with your questions.

Ebrahim Poonawala (Managing Director)

Hey. Good morning. I guess.

Zach Wasserman (CFO)

Hi there.

Ebrahim Poonawala (Managing Director)

Zach, I'm not sure if I missed it. Just talk to us around the loan-to-deposit ratio, 80%. Do you expect that to stay as is?

The guidance kind of implies that. But as we think about all this loan growth coming up, should we expect the loan-to-deposit ratio to stay flat? That's where the bank's going to be managed. And talk to us also about the mix of these deposits that are coming in. If you can talk about blended rates or what the NIM mix of these deposits is, that would be helpful. Thanks.

Zach Wasserman (CFO)

Yeah. Yeah. Great question. I think that we're really pleased with how we're doing on deposit gathering. And to some degree, it is pre-funding loan growth that we're expecting to continue to drive higher here over time. And so I expect over the course of a longer time period, likely see the loan-to-deposit ratio drift back higher again, but stay within a pretty tight range.

The objective we've got on average over time is to grow our deposits at a very similar rate to loans. The delta would only be kind of temporary as we see trends on a relatively short time basis might maybe diverge. In the back half of this year, I'm expecting to see maybe slightly faster sequential loan growth than deposit growth, but not so meaningful as to probably shift that ratio very much. Fundamentally, what we're seeing in terms of deposit growth is the same function we've been seeing for the last several quarters. Underlying acquisition of new relationships is quite good. We talked about 2% primary bank household growth and consumer, 4% business bank, commercial also growing a lot of new names and new customers, particularly given our new growth initiatives.

And also importantly, a couple of the new verticals we've added very much focused on deposit gathering, which is very much helpful. The mix of it, as I noted in one of the earlier questions, is sort of actively shifting out of more time into more money market. That's going to follow the driver from here, which will help us set up the ability to move beta down at a faster rate going forward. And all that's going to contribute to just that sort of slow progression of topping out deposit costs and then bringing them back down in that decelerating way on the up and then accelerating on the way down as we've discussed. That's sort of what we're seeing at this point.

In terms of non-interest bearing, I don't think I've gotten the question on it yet, but I think in the materials, you can see the chart of where that's going. We're seeing a meaningful deceleration of that mix shift out of non-interest bearing into the first quarter to give you a sense from the fourth quarter, $1.3 billion reduction in non-interest bearing into the second quarter, which is closed, only $300 million of reduction in non-interest bearing. And in fact, consumer went up. So we think we're almost done here in terms of a mix shift out of non-interest bearing, and this will add some tail here in the near term.

Ebrahim Poonawala (Managing Director)

Got it. And I guess just one quick follow-up. You mentioned expenses will do low single digits, if I heard you correctly, by the end of the year.

Should we be leading into that in terms of 2025 expense growth being higher, lower, or same as 2024?

Zach Wasserman (CFO)

So the thing with the great question is the point we've been discussing, I think, for a while in terms of expense growth. This year, 4.5% was intentionally higher than what we would have otherwise been running at so that we could invest in some of these new growth initiatives and also, importantly, invest a lot of data and automation capabilities throughout the company. But that pace of growth would reduce as we went into 2025. And that is our plan. I expect to see a lower growth rate of expenses in 2025 than we're seeing in 2024.

The sort of the trend is very much supportive of that because by the time we'll exit this year, we'll already be exiting at a kind of run rate of year-over-year growth that's quite low. So trying to maintain that lower growth rate as we go into 2025.

Steve Steinour (Chairman, President, and CEO)

Ebrahim, Zach has shared in the past efforts to lower growth rates in core expense levels of the bank in order to continue to invest in different opportunities, revenue-producing opportunities primarily. You should expect to see that from us in 2025 and beyond as well.

Ebrahim Poonawala (Managing Director)

Noted. Thanks, Steve and Zach.

Zach Wasserman (CFO)

Thank you, Ebrahim.

Operator (participant)

Our next questions are from the line of Matt O'Connor with Deutsche Bank. Please proceed with your questions.

Matt O'Connor (Managing Director)

Good morning. I was hoping you guys could talk about the risk transfers that you guys have executed on.

There's been some coverage about it, what you've done and some others in the media. I guess I'm just trying to figure out the logic. I mean, you've got strong capital, you're building capital. I realize you've got kind of the strong loan growth outlook. But the rate that was kind of put out there in the media seems pretty high for, let's say, very high-quality auto books, as you show in the slides here. So just trying to understand kind of the logic of that and the cost. The media said like 7.5%. So anything around the logic and financial impact, I think.

Zach Wasserman (CFO)

Yeah. Great questions,its Zach. I'll take that one. If you take it back in terms of our capital plan, put these transactions in the context of the overall capital plan, the plan is really twofold: drive adjusted CET1 higher.

We were 8.6% adjusted CET1 in the second quarter. We intend to drive that up into our operating range of 9%-10%. I think we're just a handful of quarters away from achieving that on our current trajectory. Then the second key objective is fund high return loan growth. We're doing that. I think, as we said, that'll continue and accelerate on a year-over-year basis. The prime driver of creating the capital to support both of those objectives is organic earnings and the core earnings power of the company. That really is the core focus, the prime focus. With that being said, and just shifting now to your question on CRT and CLNs, at the margin, these transactions can be very helpful for just further RWA and balance sheet optimization.

We're pleased to do a CLN transaction in the fourth quarter of last year and then a very successful credit-linked note transaction in the second quarter. To give you a sense of the economics, the second quarter deal was exceptionally good. Less than a 3% cost of capital. So what do I mean by that? $4 billion notional transaction against high-quality indirect auto loans, 74% reduction in risk-weighted assets through the transaction, so $3 billion reduction in RWA. We also get almost $500 million in funding from the transaction. And the cost of that is only $7 million into spread on a year one basis, plus some modest upfront transaction costs. So it's incredibly efficient at the margin to unlock 17 basis points of CET1 and just continue to support those prime objectives. So we look at it as very much tactical.

It's not the core underlying driver, but it's just these opportunistic things that come through. And I'm really pleased with how it went. Ultimately, the economics are incredibly favorable.

Matt O'Connor (Managing Director)

Okay. That's super helpful. Thank you.

Zach Wasserman (CFO)

Thank you.

Operator (participant)

Our next questions are from the line of Jon Arfstrom with RBC Capital Markets. Please proceed with your questions.

Jon Arfstrom (Managing Director)

Hey. Thanks. Morning, guys.

Zach Wasserman (CFO)

Morning, Jon.

Jon Arfstrom (Managing Director)

Maybe a question for you, Steve. How far out do you have visibility on loan growth? I'm thinking a little bit more about the exit rate for NII in 2024 and just curious how you're thinking beyond the next quarter or two.

Steve Steinour (Chairman, President, and CEO)

Well, I plan to go out a couple of quarters. And so we have visibility through not full visibility, but partial visibility through the fourth quarter. We don't yet have significant visibility into 2025.

Certain businesses, though, because of the nature of their relationships, our Distribution Finance, we tie back into the supply base. And we get some insight from them as to what they intend to produce. But on the whole, we don't have significant multi-quarter visibility, Jon. We do see from our customer base, however, they're performing well this year. I think there's an expectation as rates come down that they'll be doing even more business next year. And that's a general sentiment to sort of share with you.

Jon Arfstrom (Managing Director)

Yep. Okay. That's helpful. And I guess this hasn't been touched on, but anything to note on credit? Anything you're seeing that's bothering you? Anything that's surprising you positively? Thank you.

Steve Steinour (Chairman, President, and CEO)

Credit continues to perform very well. We're very pleased with performance year to date. The outlook looks good. As you know, we spent a lot of time on portfolio reviews and management.

It's looking good. There'll be some lumpiness in commercial real estate over the next couple of years for us and others in the industry. But outside of that, looking good. On the whole, for us, it's not going to be an issue. As you know, our CRE concentration continues to reduce. I think we had a little over $250 million of office payoffs over the last six quarters. The half of construction unused commitments have been absorbed. So the CRE book's in good shape.

Jon Arfstrom (Managing Director)

Okay. Thank you.

Steve Steinour (Chairman, President, and CEO)

Thank you.

Operator (participant)

Thank you. Our final question is from the line of Peter Winter with D.A. Davidson. Please proceed with your question.

Peter Winter (Managing Director and Senior Research Analyst)

Good morning. You guys had a nice rebound in fee income. And then you've got the merchant acquiring coming back in-house starting in the third quarter, which I think adds about $6 million to fees.

Just, do you think fee income that you can continue with this momentum and kind of maybe come in at the upper end of that 5%-7% range?

Zach Wasserman (CFO)

Thanks for the question, Peter. This is Zach. I'll take that one. So I would share the underlying premise of your question, which is fee income performance was very strong. We were really pleased with what we saw. Second quarter was up 6% sequentially from the first, continued to run at a 5% year-over-year growth rate, similar to the first quarter year-over-year. Our expectation is to land within our 5%-7% full-year range. As we get into the back half of the year, I would note that some of the growovers versus last year get a little easier. With that being said, I think we'll continue to power sequential growth here.

It really is the three primary areas of focus: Capital Markets, Payments, Wealth Management. Execution quality is very strong. The trends we're seeing continue to be very much conducive to that. Payments up 5% year-over-year in Q2. Treasury Management within that double-digit growth driven by client penetration. Wealth Management continues to run at very strong levels of performance. Advisory households up 8%. AUM and net flows look really good. That's driving revenue of 8%. The Capital Markets, which clearly has been a little bit choppy in the back half of last year, we were pleased to see what we would expect, which was strong growth in the second quarter, particularly in our advisory business. We know that the middle market M&A has been in a challenging environment as yields were as the interest rate environment was rising last year.

That activity is now picking up and I think will sustain. So I'm expecting sequential growth in each of those areas. And I think where we land within the range will be clearly a function of how well we perform in it. But strong confidence we're going to get there.

Peter Winter (Managing Director and Senior Research Analyst)

Okay. And then just last question, just on credit. I mean, as you talked about, credit trends are really good. If I look at the ACL ratio, you're at the top end of peers. Just how are you thinking about reserving going forward? Is it kind of keep the ACL ratio fairly steady at current levels and just support loan growth? And I guess, what do you need to see to start lowering the ACL ratio?

Steve Steinour (Chairman, President, and CEO)

Peter, its Steve. Excuse me. I'll take that one.

As you sort of noted, we basically had the reserve flat this quarter of 1.95% versus 1.97% last quarter. It's a modest add to the dollar amount of the reserve. We've just continued to watch the volatility in just the overall market, but particularly with respect to rates, as well as the impact of the higher for longer rates on our commercial real estate portfolio. So excuse me. As we see stronger economic performance come through in our modeling, combined with the continued solid performance of the credit portfolio, that's when we would really look to start to move the reserve down more materially. But that'll play out over a longer period of time. And so we're continuing to watch and manage this to the right level. But right now, we feel like we're adequately reserved.

Peter Winter (Managing Director and Senior Research Analyst)

Got it. Thanks for taking the question.

Steve Steinour (Chairman, President, and CEO)

Sure.

Operator (participant)

Thank you. At this time, we've reached the end of our question and answer session. I would like to turn the call back over to Mr. Steinour for closing remarks.

Steve Steinour (Chairman, President, and CEO)

Well, thank you for joining us today. In closing, we're pleased with our second quarter results, having delivered sequential growth in both spread and fee revenues. We're expecting our organic growth strategies and our investments are bearing fruit with momentum building across the bank. Our competitive position remains strong with robust capital liquidity. We continue to seize the opportunities to add talented bankers across our businesses. We remain focused on our long-term strategic objectives. Collectively, the board, executives, and our colleagues are a top-tier shareholder with strong alignment, delivering meaningful value for our shareholders.

Finally, a special thank you to our nearly 20,000 colleagues here at the bank who support our customers every day and are in the backbone of these results. Thank you for your support and interest. In Huntington, have a great day.

Operator (participant)

Thank you. This will conclude today's conference. We disconnect your lines at this time. Thank you for your participation. Have a wonderful day.