Huntington Bancshares - Q3 2024

Executive Summary

• HBAN delivered a solid Q3 2024: diluted EPS of $0.33, up $0.03 QoQ and down $0.02 YoY; total FTE revenue of $1.887B, up 4% QoQ and flat YoY as net interest income and fee revenues both expanded.
• Net interest income rose 2.9% QoQ to $1.364B, with NIM at 2.98% (-1bp QoQ) and CFO reaffirmed full-year NII within prior guidance range, while guiding Q4 NII to be flat to up 1% YoY and sequentially $15–$25M lower vs Q3 due to timing of down beta vs falling variable yields.
• Fee momentum was broad-based: capital markets & advisory +50% YoY to $78M, wealth +18% YoY to $93M, payments +4% YoY to $158M; CFO said capital markets beat internal expectations and expects sequential growth in Q4.
• Credit remained strong and stable: NCOs 0.30%, NPA ratio 0.62%, ACL 1.93% of loans; CET1 at 10.4%, adjusted CET1 8.9%, TBV/share up 10% QoQ to $8.65; management reiterated confidence in record NII in 2025 with accelerating down beta and hedge drag flipping to a benefit.
• Strategic catalysts: merchant acquiring launched in October (in-sourced) with ~$50M revenue run-rate in 2025 (+~$25M incremental, ~1pp to fee revenue growth), accelerating loan growth from new initiatives (Carolinas, Texas, fund finance, etc.), and rapid asset sensitivity reduction (>50% by YE24; >60% by mid-2025).

What Went Well and What Went Wrong

What Went Well

• Accelerating loan and sustained deposit growth with pipelines robust: end-of-period loans +$2.0B (+6% annualized QoQ); average deposits +$2.9B QoQ and +$8.3B YoY; management highlighted record regional banking loan production and late-stage commercial pipelines +68% YoY.
• Broad-based fee revenue momentum: capital markets & advisory +50% YoY ($78M), wealth +18% YoY ($93M), payments +4% YoY ($158M); CFO: “12% year-over-year growth in fees is pretty outstanding” and expects sequential growth in Q4.
• Disciplined deposit cost management ahead of rate cuts: total cost of deposits declined intra-quarter, with September down 7bps as down beta actions were executed; CFO expects cumulative down beta in mid- to high-30s by Q4’25.

What Went Wrong

• Sequential NII trajectory for Q4: management guided Q4 NII to be $15–$25M lower sequentially (flat to up 1% YoY), reflecting timing lag as variable asset yields fall faster than deposit costs initially.
• NIM edged down: net interest margin slipped to 2.98% (-22bps YoY), and CFO guided “a few basis points lower” into Q4 before rising in 2025 as down beta accelerates and hedge drag fades.
• Nonaccruals and NPAs modestly higher vs prior year: NALs 0.58% (vs 0.49% YoY) and NPA ratio 0.62% (vs 0.52% YoY), with increases in C&I and CRE NALs; management continues to actively manage CRE, especially office exposure.

Transcript

Operator (participant)

Greetings, and welcome to the Huntington Bancshares' 2024 third quarter earnings review. At this time, all participants will be in a listen-only mode. The 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. I would now like to turn the conference over to your host, Tim Sedabres, Director of Investor Relations. Please go ahead.

Tim Sedabres (EVP, Head of Corporate and Strategic Finance)

Thank you, operator. Welcome, everyone, and good morning. Copies of the slides we will be reviewing today can be found on 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 Lawlor, 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 are very pleased to report outstanding results for the third quarter, which Zach will detail later. Twenty twenty-four continues to be a dynamic year, and our year-to-date results demonstrate Huntington's strength and consistent performance. These strong results reflect the dedication of our nearly 20,000 colleagues across the bank 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 driving accelerated loan growth along with sustained deposit growth. These results are supported by our core businesses, as well as the successful execution of new initiatives, including expanded geographies and commercial banking verticals.

Second, we are actively executing our down beta playbook as the market enters a declining Fed rate cycle. We are dynamically managing the balance sheet, and coupled with our growth outlook, we expect to deliver record net interest income in twenty twenty-five. Third, we continue to drive fee revenues higher with sustained momentum across our three major focus areas: payments, wealth management, and capital markets. Fourth, our credit performance remained strong during the quarter, with stable net charge-offs, as well as lower non-performing and criticized assets. This is a direct result of our consistent, disciplined credit management and our aggregate moderate to low risk appetite. Finally, our performance during the quarter set the foundation for continued organic growth and increased profitability into twenty twenty-five and beyond. I will move us on to slide five to recap our performance.

We delivered accelerated loan growth in the quarter, with average balances growing by 3% from a year ago. End of period loans increased at a 6.3% annualized rate. Average deposit growth continued at a robust pace, increasing by $8.3 billion, or 5.6% over the past year. We drove capital ratios higher again, with adjusted common equity Tier 1 of 8.9%. This benefited both from capital accretion from earnings as well as reduced AOCI. Our fee revenue strategies are delivering, with GAAP fee income increasing by 3% year over year. On an adjusted basis, core fee revenues demonstrated robust growth, increasing by 12% from a year ago, driven by payments, wealth management, and capital markets. We are sustaining momentum in the growth of primary bank customer relationships.

As we continue to acquire new customers across the footprint, consumer PBRs have increased by 2%, and business banking PBRs have increased by 4% year over year. We have delivered PBR growth consistently with year-over-year increases for over a dozen consecutive quarters. We have continued to invest across the company to drive sustained organic growth. Last month, we were pleased to announce our full franchise and branch expansion into the Carolinas. This builds upon the success of our earlier investments in the commercial and regional banking teams over the past year. These markets represent some of the most attractive geographies nationally, given their size and growth characteristics. We've hired well-established colleagues with local expertise in these markets, and the results today are tracking much better than our initial business case.

We've also invested substantially in our payments businesses, particularly in treasury management, including bringing in-house our merchant acquiring capabilities. The merchant acquiring business completed its final testing phase in September and implemented its full commercial launch in early October. The opportunity within merchant is substantial, and when at scale, we expect it will add one percentage point to overall fee revenue growth. Credit trends overall are holding up very well, supported by our long track record of disciplined client selection. Our consumer portfolios are constructed around prime and super prime exposures. Within these portfolios, consumer delinquency rates remain stable. We are continuing to see sound fundamentals from our commercial customers. They've managed this rate cycle and inflationary change as well, with stable revenue and profitability trends. Overall, our customers continue to show strength and resiliency, which supports a constructive outlook for sustained organic growth.

We exited the third quarter with robust production levels in September and with momentum that is carried into the fourth quarter. As an example, our regional banking group posted record loan production ex-PPP in the third quarter. Heading into the fourth quarter, late-stage commercial pipelines at quarter end are up 68% from a year ago. Our teams are actively implementing our down beta action plans. Fee revenue growth was robust in the third quarter, and we have confidence in our many initiatives, including merchant acquiring, as well as the outlook for capital markets and advisory revenues, given strong pipelines as we enter the fourth quarter. We are maintaining disciplined expense management while continuing to invest. The additional efficiency actions we took in the third quarter will support our ability to sustain investment into revenue-producing initiatives into 2025.

Credit remains a hallmark of Huntington, with stable charge-offs and improved non-performing and criticized assets. In closing, we have confidence in our ability to sustain our organic growth outlook as we finish the year and move into twenty twenty-five. 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 third quarter results. We reported earnings per common share of $0.33. The quarter included $6 million of notable items on a net basis and did not have an impact to earnings per share. Return on tangible common equity, or ROTCE, came in at 16.2% for the quarter. Adjusted for notable items, ROTCE was 16.3%. Pre-provision net revenue, or PPNR, increased by 8.3% from the prior quarter. This was driven by net interest income, which expanded by 2.9%, and fee revenues, which increased by 6.5% from the prior quarter. Average loan balances increased by $3.7 billion, or 3.1%, versus last year.

Average deposits continued to grow, increasing by $8.3 billion or 5.6% on a year-over-year basis. Credit quality remains strong, with net charge-offs of 30 basis points. Allowance for credit losses decreased by 2 basis points and ended the quarter at 1.93%. Adjusted CET1 ended the quarter at 8.9% and increased roughly 30 basis points from last quarter. Supported by earnings, as well as the recapture of AOCI from lower rates, tangible book value per share has increased by 21.5% year over year. Turning to slide seven. Consistent with our plan and prior guidance, year-over-year average loan growth is accelerating. Q3 loan growth was 3.1% year over year, rising from last quarter's 1.7% growth and the 1.3% we posted in Q1.

Average loan balances increased sequentially by $1.1 billion. Excluding runoff from commercial real estate, loans increased by $1.6 billion, or 1.3%. As Steve mentioned, end-of-period loans increased by 1.6% and represented a 6.3% annualized growth rate. Loan growth in the quarter was supported by strong contributions from core businesses and from new initiatives. Our new initiatives collectively represented $700 million of growth in the quarter and included The Carolinas, Texas, Fund Finance, Healthcare Asset-Based Lending, and Native American Financial Services. Note, this pace of growth was above the second quarter level as teams continue to ramp up, and we expect growth in the fourth quarter to be further above these levels.

Other drivers of loan growth in the third quarter included $595 million from consumer auto, $268 million from Regional Banking, $165 million from residential mortgage, $137 million from Auto Floorplan, $80 million from RV and Marine, $131 million from all other consumer categories on a net basis, and $109 million from all other commercial categories on a net basis. This growth was partially offset by a seasonal decline in Distribution Finance, which was lower by $747 million. Generally, we see the third quarter as the seasonal low point in the year for this business, given inventory levels across our mix of programs.

We expect inventories to build into the fourth quarter and resulting balances to be higher in the fourth quarter on average, compared to the third quarter. 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 third quarter. On a full quarter basis, total cost of deposits increased by two basis points in the third quarter, and interest-bearing deposit costs were flat for the quarter. Within the quarter, there were notable declines in deposit costs. We saw total cost of deposits decline sequentially in both August and September, with September costs lower by seven basis points. This is a direct result of our proactive and disciplined execution of our down beta action plans in advance of the Fed's fifty basis point rate cut in September and continuing into Q4.

These actions reflect our active balancing of deposit volumes and rate. Given our robust deposit growth over the past year, we're in a strong position to optimize rates from here. We will remain very dynamic in managing the business and our action plan as this interest rate environment evolves. Our forecast is aligned with a forward curve, which projects two additional twenty-five basis points rate cuts by year-end and a further five twenty-five basis points rate cuts in twenty twenty-five.

As we noted in the past several quarters related to guidance on up beta, the performance and trajectory of down beta will be a function of the actual and projected path of rates and, importantly, customer expectations for that path. Based on the current rate outlook, we continue to project a cumulative down beta in the mid- to high-thirties by the fourth quarter of 2025, and in the mid-forties range by the fourth quarter of 2026. Turning to slide nine. Our cumulative deposit growth since early 2023 totaled 7.1%. This level continues to well outpace the peer group. As a result, we've been able to decisively implement the down beta strategy, fund loan growth with deposits, and at the same time, manage the loan-to-deposit ratio lower over the past year, which will support the continued acceleration of lending. On to slide ten.

For the quarter, net interest income increased by $39 million, or 2.9%, to $1.364 billion. We delivered sustained growth off of the trough levels from the first quarter of this year, consistent with our guidance. Net interest margin was 2.98% for the third quarter. Reconciling the change in NIM from Q2, we saw a decrease of one basis point. This was due to spread net of free funds, lower by two basis points, higher cash balances, driving margin lower by two basis points, partially offset by lower drag from the hedging program, which improved by three basis points. We continue to project full year net interest income to be within our prior guidance range.

The fourth quarter level is expected to be flat to up 1% on a year-over-year basis, and then resume growth over the first half of twenty twenty-five and accelerate in the second half. This is expected to result in record net interest income for twenty twenty-five based on current rate curve expectations. We continue to benefit from fixed rate loan repricing, with loan yields expanding by four basis points from the prior quarter. This occurred even as SOFR moved lower during the 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. As I noted earlier, our working assumption includes two additional rate cuts by year-end and a further five cuts in twenty twenty-five and underlies this net interest income outlook.

Turning to slide 11. 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 percentage of total average assets, to remain at approximately 28% as the balance sheet grows over time. We are reinvesting securities cash flows in treasuries and expect to manage the unhedged duration of the portfolio at approximately the current range. We have increased the average duration of new securities purchases from very short half-year duration to slightly longer, 2- to 3-year durations, which is a component of our strategy to systematically reduce asset sensitivity over the next several quarters. Turning to slide 12.

Over the course of the rate cycle, we've positioned the company to benefit from asset sensitivity as the rate environment moved higher and are now reducing our level of asset sensitivity as market expectations are increasingly weighted toward a down rate path. That strategy has worked well to maximize the benefit from the rate cycle and protect capital while managing NIM within a tight corridor. On the bottom of the slide, there is an illustration of the asset sensitivity path over the next several quarters. In Q3, we lowered our asset sensitivity by more than one-third from the second quarter. Looking forward, we expect a total cumulative reduction in asset sensitivity from Q2 to be greater than 50% by year-end 2024, and moving to above 60% by mid-2025.

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 13. On an overall level, GAAP non-interest income increased by $32 million to $523 million for the third quarter. Adjusting for the impacts of CRT transactions and the Pay-Fixed Swaptions mark-to-market from the prior year, fee revenues increased by $55 million or 12% on a core underlying basis. Moving on to slide 14. Our strategy to increase the penetration and usage of value-added fee services is building on momentum we've created over the last several years. Adjusted fee revenues as a percentage of total revenues have increased from 25% a year ago to 28% in Q3. This reflects the focused effort on key initiatives across payments, wealth management, and capital markets.

Within payments, revenues have increased by $4 million in the third quarter and have increased by $6 million year over year. Commercial payments revenues, including treasury management fees, have grown strongly, increasing by 8% from the prior year. Debit card revenue grew by 3% year over year, reflecting performance higher than industry averages, yet clearly impacted by the relatively slower levels of consumer spending growth we are seeing economy-wide. Other card-based revenues continued to grow year over year, supported by consumer credit card spending trends. The addition of merchant acquiring in-house capabilities will further support our overall payments revenue growth as we enter the fourth quarter and carry into 2025. As Steve noted earlier, we see this initiative adding approximately 1 percentage point to overall fee revenue growth next year. Within wealth management, revenue growth was outstanding, increasing 18% from the prior year.

Advisory relationships have increased by 7% year over year, and assets under management have increased 22% on a year-over-year basis. These results benefited from sustained positive net asset flows. Within capital markets, we saw exceptionally strong revenue growth, increasing by $26 million or 50% from the prior year to $78 million. These results were driven by commercial banking-related capital markets revenues, which are accelerating, as we have previously guided, as a result of higher commercial loan production. As we look out into Q4, we expect to post another quarter of sequential growth in capital markets, driven by continued underlying core banking-related services and a robust advisory pipeline. We expect this positive momentum to carry into 2025. Moving on to slide 15 on expenses. GAAP non-interest expense increased by $13 million, and underlying core expenses also increased by $13 million.

During the quarter, we incurred $13 million of expenses related to efficiency programs, which will benefit our 2025 expense outlook and allow us to reinvest savings into key revenue-producing initiatives. Additionally, this was partially offset by a $7 million benefit from the FDIC special assessment. Net notable items for the quarter totaled $6 million. Excluding these items, core expenses came in slightly better than our expectations for the quarter at $1.124 billion. The increase in core expenses quarter over quarter was primarily driven by personnel expenses due to higher salaries and benefit costs. We also saw $3 million of higher expenses related to merchant acquiring as we brought that business in-house and launched our services in October. We continue to forecast approximately 4.5% core expense growth for the full year. Slide 16 recaps our capital position.

Common Equity Tier 1 ended the quarter at 10.4%. Our adjusted CET1 ratio, inclusive of AOCI, was 8.9% and has grown ninety 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%. On slide 17, credit quality is coming in as we expected and continues to perform very well. Net charge-offs were thirty basis points in Q3, relatively stable over the past four quarters. Allowance for credit losses at 1.93%, declined by two basis points from the prior quarter and reflects both modestly improved economic outlook as well as an increased loan portfolio.

On slide eighteen, the criticized asset ratio decreased by 9% from the prior quarter to 4.09%. The non-performing asset ratio declined by one basis point to 62 basis points. Turning to slide nineteen. Our outlook for the full year remains unchanged from our prior guidance. Our expectations for the fourth quarter include accelerating loan growth at approximately 4%-5% on a year-over-year basis. Deposit growth is expected to increase between 4% and 5% on a year-over-year basis. We see full year net interest income unchanged from our prior guidance range. The fourth quarter level is expected to be flat to up 1% on a year-over-year basis, and then resume growth in the first half of 2025 and accelerating in the second half.

Core fee revenues, adjusted for the swaptions and CRT items, are expected to grow at approximately 8%-9% year over year in the fourth quarter. Core expenses are well managed and tracking to our full year outlook. For the fourth quarter, we expect growth of approximately 3% year over year, subject to some variability given revenue-driven compensation levels, as well as expenses related to the insourcing of our merchant acquiring business, which brings with it direct offsetting fee revenues. This is consistent with our previous commentary to exit the year at a low single digit year-over-year expense growth rate. Credit is performing well, aligned with our expectations, and net charge-offs are projected to be relatively similar to Q3. Our tax rate for the fourth quarter is likely to be between 18%-19%. With that, we'll conclude our prepared remarks and move over to Q&A.

Tim, over to you.

Tim Sedabres (EVP, Head of Corporate and Strategic Finance)

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. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please 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. And our first question is from the line of Manan Gosalia with Morgan Stanley. Please proceed with your questions.

Manan Gosalia (Stock Analyst)

Hey, good morning.

Zach Wasserman (CFO)

Good morning.

Manan Gosalia (Stock Analyst)

Good morning. You know, the guidance for 4Q NII, I think, implies that NII should be flat to slightly down versus 3Q. Can you talk about what's driving that? You know, is that just a timing difference between those floating rate asset yields coming down and deposit costs coming down?

Zach Wasserman (CFO)

... Thanks, Manan. This is Zach. I'll take that one. And the short answer to your question is yes. Just a short timing difference between the really powerful and very effective actions we've seen on reducing deposit costs, which you saw some of the trends we illustrated in the third quarter. Those will continue into the fourth quarter, just not fully offsetting on a short-term basis, the reductions in variable yields. I think we'll exit Q4 having a positive run rate benefit from deposit costs relative to asset yields. But the early part of the quarter, assuming again, two more rate cuts, which is our forecast here, will likely be a little lower, quarter to quarter.

Manan Gosalia (Stock Analyst)

Got it. And, can you, share more color on, on the deposit growth there? You know, it looks like you continue to grow deposits faster than loans this quarter. You know, is that mostly coming from new account growth? And, you know, I guess the question there is why not pay down some of the higher cost CDs to help NII, and have deposits grow a little bit slower than loans, given that you pre-funded a lot of the loan growth in the first half of the year?

Zach Wasserman (CFO)

Yeah. Terrific question, Manan. That is effectively the plan. You know, we really pleased to see how much deposit growth we've seen throughout the course of this year. Obviously, you know, very significantly faster than the industry average overall. And that really puts us in a pretty strong position now with having brought down loan to deposit ratio and just given how strong that deposit gathering has been, to now turn and drive down beta and begin to decelerate deposit growth, even as loan growth is accelerating. So if you look at the guidance we've given for deposits into the fourth quarter, I would expect the balances to be relatively flat, actually, quarter to quarter, even as they still grow year on year.

And that's really an indication that we're doing exactly what you just said, leveraging that position to really drive our funding costs lower.

Manan Gosalia (Stock Analyst)

Got it. Thank you.

Operator (participant)

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

Ebrahim Poonawala (Managing Director)

Good morning.

Zach Wasserman (CFO)

Good morning, Ebrahim.

Ebrahim Poonawala (Managing Director)

Two things. One, I guess, Zach, just wanted to follow up. I think you mentioned NII. I guess you have the guidance for fourth quarter, and then did you mean to say that the growth accelerate from the four Q versus three Q level as we think about first half 2025, and then get even faster through the course of 2025? If you could just clarify that. And with that, what's the sensitivity to rate cuts, right? Like, we had very strong retail sales, so the market's actively recalibrating what the Fed may or may not do. Just talk to us whether getting three to four cuts versus not getting those cuts means much in terms of your NII outlook.

Zach Wasserman (CFO)

Yeah. Yeah, great, great question, EV. Appreciate the chance to unpack it and clarify a bit. So, you know, our general expectations for NIM are to be a few basis points lower into the fourth quarter, really driven by what I was talking about from Manan's question earlier. Just a short timing impact before accelerating beta starts to fully offset and more than offset the variable, you know, impacts on variable loans. I will note as well, that one of the major benefits we'll have to NIM here is our hedging program. And just for the facts, we had around 12 basis points of hedge dragging in the third quarter.

That's gonna reduce if you look at the forward yields curve, down to seven basis points in Q4, and flip over the course of twenty twenty-five to a five basis point benefit by the end of twenty twenty-five. Beta accelerating and the hedge drag continually reducing and then beginning to be a hedge benefit as you go throughout the course of next year really are the drivers of why we expect to see sustained NIM expansion from the Q4 level into Q1, into Q2 and Q3, and then, you know, continuing on from there. Expect to see a nice upward drift in NIM from the Q4 level throughout the course of twenty twenty-five. When you couple that with the really robust loan growth we're driving, that'll be what drives NII high over the course of twenty-five.

We expect, as I noted, you know, like a pair of marquee records, record NII and record deposits in 2025, really driven by those two factors.

Ebrahim Poonawala (Managing Director)

Understood.

Zach Wasserman (CFO)

Then just maybe I'll expand on your question on sensitivities. I think your point is very well noted. It's, you know, it's a pretty dynamic environment here, for sure. You know, while our underlying forecast assumes a couple more rate cuts this quarter and then five into next year, we could very well not see those, as you noted. I think in the short term for us, if you saw less rate cuts, you'd see a even better NIM performance and an even better NII dollar performance. Of course, as you know well, you know, what would also matter a lot is the reason why you're not seeing those rate reductions and what that would imply about customer and market beliefs about where rates are going.

And so, you know, in the longer term, that would be uncertain impacts, but in the short term, it'd be universally positive for us to have less rate cuts. If there's more, you know, I think, again, it kind of matters why. I do think, you know, for example, EV, earlier this year when we saw market expectations for rate reductions really accelerate a lot, that was very helpful to drive the actions around down beta. And so if you did see more rate reductions, while it might produce a little bit of short-term headwinds, over the longer term, it might actually be even better for down rate deposit pricing. And so again, sort of a little uncertain over the short, but over the long term there, if rates even faster down.

Ebrahim Poonawala (Managing Director)

That's helpful. And I guess just one thing you talked earlier about-

... traction in Carolinas, just how loan growth was evolving. Talk to us in terms of deposit growth. You did hire a sort of a big team on the mortgage side. We've seen mortgage rates pull back, but either that team or just the overall deposit gathering strategy, beyond promotional rates, where do you see deposit growth coming from?

Zach Wasserman (CFO)

Yeah, I mean, what we've seen with deposit performance throughout the year is its consumer has been really, really strong. But over the course of the last several quarters, commercial now starting to really catch up. And I think that's driven, you know, both by our core commercial business, but also by some of the new verticals and new markets. The mortgage service vertical in particular has been doing really well, driving a couple billion dollars of incremental deposits in the third quarter. And as I noted before, that could well continue to grow over the longer term here, as well.

It's commercial is now beginning to accelerate, and I think as we have an outlook for 2025, I would expect we're generally expecting continued deposit growth, with the mix being slightly more commercial than consumer as we go into next year.

Ebrahim Poonawala (Managing Director)

Noted. Thank you.

Operator (participant)

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

Jon Arfstrom (Managing Director)

Hey, thanks. Good morning, guys.

Zach Wasserman (CFO)

Morning, Jon.

Jon Arfstrom (Managing Director)

One clarification. I think, maybe a simple question, but you're saying fourth quarter NII around $1.33-$1.34 billion, something like that. Am I reading that right?

Zach Wasserman (CFO)

We're expecting between $15 million to $25 million lower sequentially, John. That'll be, you know, around flat to up 1% on a year-over-year basis. Again, assuming not only 50 coverage you have, but another two 25s here in the last few months of this year.

Jon Arfstrom (Managing Director)

Okay. Okay, that's helpful. Thank you for that. And then, kind of a simple question, funny question, but on slide 10, I kind of want to joke about the scaling of that, but the fourth quarter 2025 bar chart implies higher NII. Is there... Odd question, is there any scaling to that, Zach, or what kind of an acceleration do you expect in NII growth throughout the year?

Zach Wasserman (CFO)

I'm expecting pretty steady NII dollar growth from Q1 to Q2, from Q2 to Q3, and continuing on. John, I think, you know, the kind of the path of NIM, obviously, we're starting now to get into a bit of overly level of precision at this point, given all the uncertainties. But generally speaking, I'm expecting to see nice, sustained NIM expansion in Q1, Q2, Q3, and a bit topping out into Q4, but we'll see where the rate environment is at that point. And the dollar's really been pretty steady growth throughout the year, as lending sustains at a fairly solid level. So that's the way I can answer your question.

Jon Arfstrom (Managing Director)

Yeah. Okay, good. If I can squeeze one more, and I apologize for doing this, but the merchant acquirer, you're saying 1% growth to overall fee revenues. Are you saying that could be a $200 million business? Is that-

Zach Wasserman (CFO)

Currently-

Jon Arfstrom (Managing Director)

Too much or...?

Zach Wasserman (CFO)

Currently, yeah, a little bit off. We make roughly $25 million on a run rate annual basis from merchant acquiring in the old outsourced model that we had. As we insource that business, we're thinking next year could be, you know, build up $50 million in terms of overall revenue, which is, you know, that's an extra $25 million, sort of about 1% of the overall fee revenue base as you go into next year.

Jon Arfstrom (Managing Director)

Yep. Okay. All right. Thank you for clarifying that.

Zach Wasserman (CFO)

Yep. Good questions.

Operator (participant)

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

Zach Wasserman (CFO)

Morning, Erika.

Operator (participant)

Erika, perhaps your line may be muted. You're live for questions.

Erika Najarian (Managing Director and Equity Research Analyst)

Can you hear me?

Zach Wasserman (CFO)

Yes, we can hear you now. Go ahead. Yeah, we can hear you, Erika.

Erika Najarian (Managing Director and Equity Research Analyst)

Apologies. Sorry about that. So Zach, as you can imagine, everybody is asking about the blank box on 4Q25 for slide 10. So maybe I'll ask it this way: So consensus wants to fill that box that would imply, you know, 8% year-over-year growth from your implied fourth quarter 2024. So I'm assuming that has loan growth and also the NIM inflection. So, you know, with that, with consensus filling that box in at up 8% quarter over quarter, are they in the right ballpark as we think about, you know, your loan growth momentum and the dynamics of your balance sheet?

Zach Wasserman (CFO)

I'm not going to give, you know, that level of guidance precision at this point in the year. Erika, as you know, we'll give guidance as we get into the first part of next year. But I don't think that's directionally wrong, frankly. I think we're expecting to see NIMs rise throughout the course of twenty twenty-five. I mentioned earlier, I see NIM above 3% in the second half of next year. If you compare that to where we'll be this year, that'll be a nice NIM expansion off of our forecast for Q4. So that'll drive some year-over-year growth. And then, you know, our current run rate on loan growth is around 6% on an annualized pace right now.

And there's nothing that indicates we will not be able to sustain that pace into next year. In fact, the fourth quarter looks outstanding in terms of loan growth and the momentum we've got across the business. And so, you know, those are relatively good underlying drivers to get to the number you're talking about without, you know, being overly declarative on guidance at this point.

Erika Najarian (Managing Director and Equity Research Analyst)

... No, that, that's helpful. Thank you. And on the expense run rate, I think, Zach, what you and Steve have been talking about in terms of investments, you know, really showed through with regards to your 3% year-over-year, quarter over quarter - I'm sorry, year-over-year fourth quarter guide for fourth quarter relative to, you know, the run rate for this year, and we're seeing it in the loan growth. You know, as we think about next year, with the caveat that Huntington, under this management team and board, is constantly investing, should we expect more of a harvest year, so to speak, in that perhaps that fourth quarter run rate year-over-year is more sustainable rather than the 5, 5.5%?

Zach Wasserman (CFO)

Yeah, great, great question. You know, in the area of expenses, it's something we're incredibly rigorously focused on, and this year is playing out pretty much exactly like we expected, hitting the roughly 4.5% year-over-year growth, decelerating throughout the year, as you noted, and really, Erika, staying focused on the model we've got. Driving efficiencies and baseline expenses. You saw us take another series of actions in the third quarter, and those are, you know, continuing on. It's a fairly continual process of driving reengineering to enable us to really drive the offensive expense categories that are investment related, technology development, marketing, additions of people to go and drive some of these new great revenue producing initiatives. You know, the plan for 2025 is the same as we've had before, drive for positive operating leverage.

I do expect, you know, to limit to the point of your last question, to have a pretty solid revenue growth trajectory, and so I don't intend to. We collectively don't intend to be in harvest mode. We want to keep driving for growth, but certainly to drive very solid improvement in positive operating leverage and efficiency ratio, and then just to, you know, to sustain that as we go forward.

Erika Najarian (Managing Director and Equity Research Analyst)

Got it. Thank you so much.

Zach Wasserman (CFO)

Thanks, Erika.

Operator (participant)

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

Matt O'Connon (Managing Director)

Good morning. Question on fee revenues came in, a decent amount better than you expected with the interquarter guide. I assume a lot of that swing is the capital markets, and maybe the loan sale. But just anything else that surprised you, that you'd want to call out? I mean, all the categories actually did pretty well. So I guess I'm just wondering-

Zach Wasserman (CFO)

Yeah.

Matt O'Connon (Managing Director)

What was kind of better than what you thought a month ago? Thanks.

Zach Wasserman (CFO)

Yeah, great question, Matt, and it was primarily capital markets that you noted in the basis of your question. So, you know, we were expecting to see a pretty solid Q3 for capital markets, but it beat our expectations even better than that. You know, overall, really pleased with the execution, the sustained level of performance we're seeing in the three key areas of focus. 12% year-over-year growth in fees is pretty outstanding from our perspective. The outlook for Q4 is likewise pretty solid, particularly in capital markets. I think we'll see another really good quarter sequential growth in the cap markets.

Wealth continuing to drive a good underlying household acquisition and net flows, and then payments, you know, really chugging along here, particularly with the addition of merchant acquiring, should be a nice lift, tailwind to growth.

Matt O'Connon (Managing Director)

Okay. And then, on the credit risk transfer or the CRTs, as you call it, you know, now that you've got, you're approaching your targeted capital level, you know, even including AOCI, and you've got all the funding and all those positives, is that something that you're looking to do less of going forward or unwind them?

Zach Wasserman (CFO)

Yeah, great, great question. You know, on the plan to grow capital, feel really good about how that's going, and you know, as we've noted a number of times, you know, the primary and most significant driver of our plans to continue to drive capital higher is just core organic earnings and strong return on capital. You know, we look at these CRT transactions as really tactical, as opportunistic. They're kind of an interesting innovation in the marketplace for sure, that offer great low return on capital for certain asset classes. You know, just look back to the transaction we did in the second quarter. We unlocked 17 basis points of capital for less than 3% cost of capital, just $7 million plus transaction costs.

Very, very efficient. It's possible we'll be opportunistic in the future around these, but they're really, we see them in that light, opportunistic, you know, and the core is really the underlying return on capital and organic earnings.

Matt O'Connon (Managing Director)

Got it. Okay, thank you.

Zach Wasserman (CFO)

Thank you.

Operator (participant)

As a reminder, to ask a question today, you may press star one from your telephone keypad at this time. Our next questions are from the line of John Pancari with Evercore ISI. Please proceed with your questions.

John Pancari (Senior Managing Director and Senior Research Analyst)

Good morning. I was hoping you could address-

Zach Wasserman (CFO)

Good morning.

John Pancari (Senior Managing Director and Senior Research Analyst)

The trends and strategy in the auto business. Production stepped up again late quarter in 3Q. Can you talk about the growth outlook there a little bit? And then maybe shifting to credit. There was a big update mid-quarter from an auto peer, and you saw a little bit of a step up in DQs this quarter. Can you address expected credit trends, giving shifting auto values? Thanks.

Zach Wasserman (CFO)

Yeah. John, thanks for the question. This is Zach. I'll take the first part, and then Brendan will tack on for the second part around Black Book falls. So, so really, really pleased actually with what we're seeing in the auto loan production area. You know, auto for us is a terrific asset to lean into at times like this, when the general expectation for rates is to be reducing. A nice fixed asset class, got about a two-year duration. Remember, this is prime and super prime credit quality, so very solid underlying returns, and also incredibly efficient business for us. This is a 10% efficiency ratio business for us that it is very, very optimizable.

We can put in pricing in the market on a Friday, see the impacts of it over the weekend, dial it back in again the next Tuesday as we go into the next week. So really, really optimizable and precision return calibration for us here. So we like this one. I think the production levels for the fourth quarter look to be around the same as the third quarter year. So I think we've had to hit a nice run rate at this point, and then, you know, we'll see where it goes out into the course of next year. But for right now, nice, nice fixed asset that we're getting, you know, very significant fixed asset repricing benefits coming through into the NIM. Brendan, over to you on credit.

Brendan Lawlor (Chief Credit Officer)

Sure. John, this is Brendan, and, you know, given our history in this industry, we have the ability to utilize our custom scorecard to really drive the customer selection that Zach was referencing. And that continues to be a strength for us. You know, we've seen late stage delinquency and charge-offs that remain right within our historical levels, so we're not seeing broad deterioration at all here. And frankly, with our deep industry expertise and we're traditionally lower than the peer set when it comes to charge-offs or delinquencies, and that trend continues this quarter. So we feel real confident in this book.

Steve Steinour (Chairman, President and CEO)

John, we've been—this is Steve. We've been very disciplined. We've got fifteen years of quarterly track record here. It's an area of continuing focus and discipline as well as we refined the model a number of times during the course of that period of time. So we like what we're seeing. We're very confident in it, and obviously with the disciplines we have, super prime, prime, we're not going to see what you alluded to from another institution.

John Pancari (Senior Managing Director and Senior Research Analyst)

Got it. Very helpful. Thank you. And then, Zach, shifting over to the hedge program slide, it's always helpful. I noticed the receive-fixed balance in the back half of twenty-five came down a bit this quarter versus last. Can you update us on any adjustments made there in the quarter, and then maybe highlight any future adjustments you're thinking about? Thanks.

Zach Wasserman (CFO)

Yeah. Thanks for, thanks for bringing that question up, John. So what, what we tried to illustrate on that slide is really the, the, the continued dynamic management of asset sensitivity, really bringing down asset sensitivity a lot. Both, you know, a third reduction in sensitivity just in the third quarter alone, you know, get to 50% reduction from Q2 by the end of this year, and then, you know, to 60% by the middle of next year. And, you know, one of the things we try to highlight all the time in this is we're very dynamic, so we're continually looking at the most efficient way to really do those two objectives of protecting capital and maximizing and stabilizing NIM. So we'll always make adjustments here as we deem it most efficient.

You know, an example of that, we just did another $1 billion in forward starting receivers just in the early part of this quarter, that are really starting out into the second half of 2025. That'll just continue to drive asset sensitivity lower, you know, at the time we really want it. So we're always doing this. Really, primarily at this point, the game plan vis-à-vis asset sensitivity is gradually allow the pay-fixed options to reduce and to expire, put on more forward-starting receivers when we see nice opportunities in the market to do that, gradually lengthen the duration in our U.S. Treasury securities portfolio, and really optimize the kind of funding mix for lower structurally fixed funding, more structurally variable funding, and optimize lower levels of Fed cash.

And so those are really the components that drive the overall reduction asset sensitivity.

John Pancari (Senior Managing Director and Senior Research Analyst)

Perfect. Thank you.

Operator (participant)

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would now like to turn the call back to Mr. Steinour for closing remarks.

Steve Steinour (Chairman, President and CEO)

Thank you for joining us today. In closing, we delivered exceptional results for the third quarter, highlighted by the successful execution of organic growth initiatives. Net interest income expanded, the revenues grew strongly, expenses were well managed, and credit remained stable. Our strategy is working well, and our investments in the franchise are delivering returns. We remain in an attractive, competitive position, and we continue to seize opportunities to add talented bankers across our businesses. Collectively, the board executives and our colleagues are a top ten shareholder, so we have strong, strong alignment to deliver sustained value creation for our shareholders. As a reminder, we have an Investor Day scheduled in the new year on February sixth, and you're invited to that. And finally, thank you to all our Huntington colleagues for driving these outstanding results. Thank you very much for joining us today. Have a great day.

Operator (participant)

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.