Huntington Bancshares Inc (HBAN) — Q2 2023 Earnings Call Transcript

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 1 hour from the close of the call. Our presenters today are Steve Steinour, Chairman, President and CEO; and Zach Wasserman, Chief Financial Officer. Rich Pohle, 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.

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. Our approach to both our colleagues and customers continues to be grounded in our purpose and served us well in the second quarter. Our colleagues again demonstrated that we make people's lives better, help businesses thrive and strengthen the communities we serve. Now on to Slide 4; these are the key messages we want to highlight today. First, Huntington has a distinguished deposit franchise which continues to benefit from our strategy to acquire and deepen primary bank customer relationships. This has fueled continued deposit growth over the year, including this quarter. Second, we once again drove capital ratios higher with common equity Tier 1 having increased for four quarters in a row. We remain on track to build CET1 to the high end of our range by year-end. Third, credit quality, which is a hallmark of the company, is performing very well and we continue to operate within our aggregate moderate to low risk appetite. Fourth, we are dynamically managing through the interest rate environment. We are maintaining disciplined deposit pricing while delivering deposit growth and maintaining a robust liquidity position. Finally, we remain intently focused on executing our strategy. We are investing in the business to drive long-term sustainable revenue growth and we continue to proactively manage the expense base to align with the revenue outlook. Operation Accelerate remains on track and we will increase our use of business process outsourcing to drive sustained efficiencies into 2024. Moving on to Slide 5; over the past decade, we've transformed Huntington. This puts us in a position of strength today. This foundation includes our granular and high-quality deposit base which is supported by our leading consumer, business, and commercial banking franchises. With this strong foundation in place, we can be nimble and seasonal opportunities to expand our business that will arise during times like these. The hiring of the fund finance team we announced last month is a great example. This business was on our Commercial Banking growth roadmap and we're pleased to be able to add great talent and welcome these colleagues to Huntington. We are building capital even as we maintain loan growth. We are optimizing the level of new loan growth and remaining judicious for the loans we carry on balance sheet in order to generate the highest return on capital. As a result, capital ratios expanded in the second quarter with our CET1 ratio increasing to 9.82%. Further, our adjusted CET1 ratio is 8.12%, above the peer median. Our disciplined approach to risk management drives our strong credit quality with low net charge-offs and the nonperforming asset ratio decreasing for the eighth consecutive quarter. Our management team has a long track record of being disciplined operators with a focus on delivering value for shareholders. This execution has been awarded and recognized across the franchise, including winning the J.D. Power Mobile Award for the fifth year in a row and maintaining our strong number one SBA ranking. Regarding the macro outlook, it remains a dynamic environment; interest rates are playing out in the higher-for-longer scenario that we had been anticipating for some time. Economic activity in our footprint appears to be holding up relatively well, which supports sustained loan growth and solid credit performance. That said, we are diligently watching the environment closely and are actively managing our loan portfolio. We are well prepared to operate through a range of potential scenarios. Further, we are also closely monitoring the potential regulatory adjustments to capital and other requirements. We are evaluating the proposals and thus far, the potential new requirements appear broadly in line with what we had expected. We are well positioned to manage through these changes, address them expediently and over time, offset a meaningful portion of the potential impacts. And finally, before I hand it over to Zach, we want to share that Rich Pohle, our Chief Credit Officer, has announced his upcoming retirement effective at the end of 2023. We've greatly benefited from Rich's expertise and leadership during his nearly 12 years with Huntington. He's been a great leader of our colleagues and a great partner for me and the executive team. We have a strong bench and we're pleased Brendan Lawlor, Deputy Chief Credit Officer, will succeed Rich in this role at the end of the year. Zach, over to you to provide more detail on our financial performance.

Thanks, Steve and good morning, everyone. Slide 6 provides highlights of our second quarter results. We reported GAAP earnings per common share of $0.35. Return on tangible common equity, or ROTCE, came in at 19.9% for the quarter. Further adjusting for AOCI, ROTCE was 15.8%. Deposits grew during the quarter, increasing by $2.7 billion or 1.9% on an end-of-period basis. Loan balances continue to grow as total loans increased by $900 million or 0.8% from the prior quarter. Credit quality remains strong with net charge-offs of 16 basis points and allowance for credit losses of 1.93%. As Steve mentioned, capital increased from the prior quarter. This solid capital position, coupled with our robust credit reserves, puts our CET1 plus ACL loss-absorbing capacity in the top quartile of the peer group. Turning to Slide 7; average loan balances increased 0.8% quarter-over-quarter or 3.1% annualized, driven by commercial loans which increased by $772 million or 1.1% from the prior quarter. Primary components of this commercial growth included distribution finance which increased $464 million; asset finance increased by $234 million; Business Banking increased by $160 million; Auto floorplan increased by $175 million. Offsetting this growth, CRE balances were lower by $340 million. In Consumer, growth continued to be led by residential mortgage which increased by $438 million; and RV Marine which increased by $112 million. Partially offsetting this growth were lower auto loan balances which declined by $318 million. Turning to Slide 8; as noted, we continued to deliver ending deposit growth in the second quarter. Balances were higher by $2.7 billion, primarily driven by consumer with commercial balances up modestly. On a year-over-year basis, ending deposits increased by $2.6 billion or 1.8%. Turning to Slide 9; we saw sustained growth in deposit balances throughout the second quarter. On a monthly basis, total deposit average balances expanded sequentially for April, May and June, with June 30 ending balances above the June monthly average, providing a strong start as we enter Q3. Within consumer deposits, we have now seen average balances increase for seven months in a row. Within Commercial, average monthly deposits were stable over the course of the second quarter. Turning to Slide 10; I want to share more details on our noninterest-bearing deposits. Overall, the $33 billion of these deposits represent 23% of total balances and are well diversified across Consumer, Business, and Commercial Banking. The ongoing mix shift we have seen from noninterest-bearing over the past two quarters has been in line with our expectations and consistent with what we saw in the last cycle. We expect this mix shift trend to moderate and then stabilize in 2024. This trend is reflected in our total deposit beta guidance. On to Slide 11; for the quarter, net interest income decreased by $61 million or 4.3% to $1,357 billion, driven by lower sequential net interest margin. On a year-over-year basis, NII increased $90 million or 7.1%. We continue to benefit significantly from our asset sensitivity and the expansion of margins that has occurred throughout the cycle. Reconciling the change in NIM from the prior quarter, we saw a reduction of 29 basis points on both a GAAP and core basis excluding accretion. During Q2, we maintained an elevated cash balance relative to Q1, which impacted NIM even as it had a relatively minor actual cash economic cost. On a comparative basis, normalizing for cash levels, NIM was 3.17% for the quarter or a 21 basis point decline from the prior quarter. The biggest drivers of the lower NIM quarter-over-quarter were higher funding costs partially offset by increased earning asset yields. We continue to analyze multiple potential interest rate scenarios as we forecast expected trends over the remainder of 2023 and into 2024. The two primary scenarios we incorporate include: one which is represented by the forward yield curve and another which assumes rates stay higher for longer and end 2024, approximately 75 basis points higher than the forward. We think this is the most likely range for short-term rates over the next six quarters. Based on this range, we anticipate net interest margin of approximately 3% by Q4, plus or minus a few basis points. This would equate to core net interest income on a dollar basis for the fourth quarter to be down approximately 1% to 2% from Q2 levels. As we look out further into 2024, clearly, the trends will depend on both those interest rate scenarios and what is happening with the broader economy and industry factors, including loan demand and deposit growth. That said, our modeling indicates NIM outlooks are stable to rising during 2024 which, coupled with earning asset growth, is expected to drive net interest income dollar expansion as we move through 2024. Turning to Slide 12; cost of deposits moved higher in the quarter to 1.57%. Our cumulative beta through Q2 is 32%, up 7 percentage points from the prior quarter, in line with our expectations and prior guidance. As I mentioned, we continue to expect cumulative deposit beta of approximately 40%. Turning to Slide 13; on the securities portfolio, we saw another step-up in reported yields quarter-over-quarter. We did not reinvest cash flows from securities in the second quarter as we allowed those proceeds to remain in cash given the attractive short-term rates. Cash and securities balances on average increased by $5 billion from the prior quarter as we maintained higher cash levels in the quarter. As of June 30, on an ending basis, cash and securities totaled $52 billion, representing a more normalized level as we go forward into Q3. Turning to Slide 14; our contingent liquidity continues to be robust. Our two primary sources of liquidity, cash and borrowing capacity at the FHLB and Federal Reserve represented $11 billion and $77 billion, respectively, at the end of Q2. At quarter end, this pool of available liquidity represented 205% of total uninsured deposits—a peer-leading coverage. Turning to Slide 15; our hedging program is dynamic, continually optimized and well diversified. Our objectives are to protect capital in uprate scenarios and protect NIM in downrate scenarios. During the quarter, we further expanded our Pay Fix swaptions hedge position to protect capital from tail risk in substantive upgrade scenarios. There is a modest upfront premium associated with these swaptions and the hedges result in a mark-to-market each quarter as they're deemed economic hedges. On the subsequent slide, you will see that positive impact during the second quarter on our fee revenues. We also remain focused on our objective of managing NIM to protect the downside and have maintained additional upside NIM opportunity given our asset sensitivity. The interest rate movements in the first few weeks of Q3 have provided opportunities for additional attractive hedging. We have incrementally added modest additional exposures to both our capital protection and NIM protection hedge portfolios and will remain dynamic as we go throughout the quarter if further opportunities arise. Moving on to Slide 16; non-interest income was $495 million for the second quarter. Excluding notable items, fees increased $40 million, including an $18 million benefit from the positive mark-to-market on the pay-fix swaptions. Excluding this benefit, underlying fee income would have been $477 million. We saw solid performance in our key areas of strategic focus, including payments and wealth management. Capital markets revenues declined by $2 million from the prior quarter, however, increased by $3 million year-over-year. Clearly, the events of March and the U.S. debt ceiling debate caused a fairly challenging capital markets environment in Q2. However, pipelines remain solid and there are encouraging signs pointing to opportunities in the back half of the year. Moving on to Slide 17; GAAP noninterest expense decreased by $36 million. Adjusted for notable items in the prior quarter, core expenses increased by $6 million, driven by a full quarter effect of annual merit increases and higher marketing spend. We entered the year with a posture of managing core expense growth to a very low level given the economic backdrop. We developed and executed a series of proactive actions to reduce expense run rates, including the voluntary retirement program, organizational alignment and our continued implementation of long-term efficiency programs such as branch optimization and operation accelerate. We continually calibrate the level of expense growth to revenues and we're taking additional actions to further manage the pace of expense growth, even as we remain focused on self-funding investments in our key growth initiatives. We are actively working on the next set of medium-term efficiency opportunities, including business process outsourcing which represents a promising lever for us to continue to deliver a low level of expense growth into 2024. Slide 18 recaps our capital position. Common Equity Tier 1 increased to 9.82% and has increased sequentially for four quarters. OCI impacts to common equity Tier 1 resulted in an adjusted CET1 ratio of 8.12%. Our tangible common equity ratio, or TCE, increased 3 basis points to 5.80%. Q2 ending cash levels were higher than Q1 end which impacted the TCE ratio by 2 basis points. Adjusting for AOCI, our TCE ratio was 7.45%. Our capital management strategy will result in expanding capital over the course of the year while maintaining our top priority to fund high-return loan growth. We intend to grow CET1 to the very high end of our target operating range of 9% to 10%. Adjusting for AOCI, we expect adjusted CET1 to be in the approximately mid-8s range by year-end. On Slide 19, credit quality continues to perform very well. As mentioned, net charge-offs were 16 basis points for the quarter. This was lower than last quarter by 3 basis points. On a year-over-year basis, charge-offs were up 13 basis points from the prior year's historic low level. Nonperforming assets declined from the previous quarter and have reduced for eight consecutive quarters. Allowance for credit losses is higher by 3 basis points to 1.93% of total loans. On Slide 20, we continue to be below our target range of net charge-offs through the cycle of 25 to 45 basis points and our ACL coverage ratio is among the highest in our peer group. Let's turn to our 2023 outlook on Slide 21. As I noted, we analyzed multiple potential scenarios to project financial performance and develop management action plans. Our guidance is informed by the interest rate scenarios I discussed previously and the consensus economic outlook. On loans, our outlook is 5% to 6%, consistent with our prior expectations to be near the lower end of our prior range. On deposits, we maintain our outlook of 1% to 3% growth for the full year. Core net interest income ex PAA and PPP is expected to grow between 3% and 5%, inclusive of our expectations for deposit beta and loan growth. Non-interest income on a core full year basis is expected to be down 2% to 4%. This range reflects the results from capital markets we've already seen in Q2 and the assumption of gradual improvement in activities throughout the balance of the year. The remainder of our fee businesses are tracking very well to our prior expectations. On expenses, as noted, we are proactively managing with a posture to keep underlying core expense growth at a very low level and calibrated to revenue growth. For the full year, we expect core underlying expense growth between 1% and 2%, plus the incremental expenses from the full year run rate of Capstone and Torana of approximately $50 million and the 2 basis point increase in 2023 FDIC insurance rates of approximately $30 million. And finally, given the strong results posted during the first half of the year, we now expect full year net charge-offs to be between 20 to 30 basis points. With that, we will conclude our prepared remarks and move to Q&A.

I wanted to dig into your comments on NIM being stable to rising in 2024 under the two scenarios that you outlined for it. Can you expand on some of the moving parts in there, especially in the higher for longer scenario? I guess, would that put more pressure on NII than the forward curve scenario with higher deposit betas? Or do I have that wrong?

Manan, this is Zach. I'll take that one and thanks for the question. The outlook we're seeing aligns well with both scenarios. In the higher for longer scenario, which represents the upper end of the range, we would benefit from asset sensitivity as asset yields would likely continue to rise, and we could see an ongoing period of extended liability pricing. However, we do not expect this scenario to lead to a significantly higher overall net interest margin due to the asset sensitivity we've consistently discussed. In the lower scenario, we would experience a quicker adjustment in deposit pricing but with a lesser increase in asset pricing, which might result in a slight decrease in net interest margin, potentially just a few basis points lower. Overall, higher rates continue to support a rise in net interest margin for us. Additionally, throughout 2024, we will transition from a negative carry on our downrate hedging program to a more neutral position by year-end, which will further support the net interest margin trajectory during 2024.

Got it. And then separately, just on regulation overall, I know you noted that the new requirements seem to broadly come in line with expectations. But maybe if you can dig into how you're managing ahead of that. I know you're building capital levels from here. You're holding a high level of cash instead of reinvesting in securities. So maybe can you expand on where you expect regulation to go, especially as it relates to the AOCI opt-out as well as LCR.

Sure. As you know, we are trying to be planful and anticipatory of where we think things are going and manage it ahead. And I think at the most macro level, we do think we'll be able to relatively expediently address these potential new regulations. And frankly, over time, offset a lot of what otherwise would be the potential impact on them. But digging in specifically, it's our working assumption that the tailoring exclusion of AOCI, not including it will likely be removed. And hence, it's our plan to manage capital higher to CET1 inclusive of AOCI higher in the guidance we indicated in the mid-8s range by the end of 2023. And if we continue on with the same operating posture to 2024, we would expect that ratio to approach 9% essentially to get to 9% by the end of 2024; so back to essentially the low end of our operating range on that basis. We're also actively looking at the Basel III potential new RWA changes. As you know well, there are three big changes in there. The fundamental review of the trading book, we think that's going to be essentially material for Huntington given our business mix. There's operational risk requirements which likely will be increasing RWA, they're largely based on fee income. We see a slightly higher impact from that. However, offsetting that will be credit risk RWAs which are more nuanced, more fine-tuned and on-net are lower for Huntington. Still early days and we have more analysis to do. We see offsetting factors there and it's unclear whether there will be a net impact from that but generally, relatively offsetting. As it relates to other regulatory focuses like liquidity, like potential long-term debt, likewise, we're monitoring and we think we can manage those impacts will be relatively small over time. Happy to double-click on that and any further questions for folks want.

We're seeing from some of your peers is a pullback in lending as they look to build capital and alleviate some funding pressure. On the flip side, obviously, you've got very strong capital, strong liquidity as you highlighted, and high reserves. I'm just wondering how you're thinking about how you can play offset and maybe to even pull back by some of your peers?

It's a great question, Matt and it's something that we really have to look at because we are in a position of strength. We want to really seize the opportunities to win new clients in a great business. It's in times like this that companies when they operate prudently can gain meaningful market share, and we're cognizant of that. We're balancing that clearly with two factors: One, the desire to not only grow loans but to also drive capital, as I just noted in the prior question. So we're actively modulating loan growth, bringing it down from a 10% run rate year-over-year level to 5% in Q1, 3% in Q2. I think it will be more like 1% probably in the back half of the year. We're also very much looking at how we can potentially optimize the balance sheet and drive higher returns out of the assets that we do have. With that being said, we are on our front foot. You saw us hire the fund for the EMS team which will be a great new business line for us and brings liquidity, great customer quality there. And we are continuing to look for pockets of strong growth, even as we optimize for the highest returns for the year at the margin. So very much on the front foot. And to your point, there are back opportunities that we'll see some changes.

And then, I guess just following up on the lending side. I mean everything we can track, it seems like auto spreads are at or near highs, and commercial spreads have widened. So why isn't there a leaning into this? Or is it just that the demand is not there at this point?

Look, I think there continues to be pockets of demand and great clients. And we've got a very strong set of workforce supporting as well. And to your point, the yields are strong. With that being said, clearly, the deposit costs are also rising and funding costs are also rising. So we're balancing those things in the way we think is prudent. Driving higher yields, I would say, really feel encouraged by what we're seeing on the asset yield side. The long-durated asset categories like mortgage and auto are benefiting by between 10 basis points and 20 basis points on the portfolio. And I expect that to continue for some time to come, really sustaining that 2024 non-interest margin that we were talking about in the previous question, even as again, we optimize to also allow capital to us.

Matt, this is Steve. I think it's fair to say we're being a little cautious until we know the outcome of the regulatory suggested reforms as well. There's more opportunity. I think that we will avail ourselves once we know what the rules are and the positions that we need to have going forward.

I found your commentary regarding the NIM reaching around 3% by the fourth quarter helpful. I anticipate that once we move past that point, as it seems the mix shift away from noninterest-bearing accounts will be mostly complete, the incremental NIM will play a crucial role in determining our trajectory. What is the current spot NIM for incremental loans and deposits, and how does that compare to the 3% level?

It's still higher than that. I think, again, I'd point you to for the quarter adjusted for cash levels that we're kind of running at now in the third quarter, the second quarter was around 3.17%. And so what we're seeing at the margin is a continued modest decline in NIM here through the course of the balance of this year from that 3.17% normalized Q2 run rate down to the 3% by the end of the year. And I agree with your point which is as you get into the early part of next year, a lot of the kind of major trends will start stabilizing and it's really going to be fundamental what the underlying is. Likely, there will be some potential continued trends in the very early part of '24 but I agree with your point. I would also note that for us during the quarter, the reduction in the negative carrier from hedges will incrementally help obviously through the course of the year again.

Right for some tailwinds there, okay. And then for Steve, so the equity market seems to be coming around to this possibility of the soft landing. I'm curious, when you talk to your customers, what are you hearing? Are they coming around to the soft landing and maybe a little more optimistic? What are you hearing?

Steve, I would say our customers generally are having a good year and expect to close out with a good year. They're working their margins through expenses but inflation seems to be a big challenge and the supply chain is in better shape. Clearer lines of sight to this half and they're optimistic about '24 and beyond generally. So this would suggest at worst-case a soft landing and potentially the ability to avoid a recession. In the Midwest, particularly in our footprint, we still have a lot of economic activity, announcements of investments, targeted growth. So we're in a good position relative to some of the other regions and we have significant activity going on that I think we'll see particularly here in Ohio through the course of this year.

I wanted to discuss the expense outlook. You've made significant progress this year regarding the project actual rate. I believe your goal is to keep expense growth low for the coming year. Could you provide some insight into the size of the BPO opportunity you mentioned? Also, how do you foresee positive operating leverage for next year considering that NII growth will probably decrease? What are the specifics around that?

Yes. Great question, Ebrahim. Thanks. So maybe framing the overall planning is very much to keep operating expenses at a very low level, not only this year but next year. We've been trying to be very proactive and setting up those programs and can implement them effectively and have to build over time. On the BPO opportunity, this is something that we have leveraged over time for a while and continually looking at from a strategic perspective, what functions we believe must be owned or are critical value for us versus those that we can benefit from the scale capabilities of partnering with others. The more we need to analyze that, the more we're encouraged there are incremental opportunities. Relatively modest in terms of size this year but building over time. And I think really part of the portfolio of efficiency programs that will support that low level of '24 and frankly, to continue to build into '25 and beyond also. So it's encouraging to get part of the portfolio of programs with something that we're incrementally leading in now to be able to accelerate the benefits of. On positive operating leverage, as we've said a lot, it's a core tenet of our operating plans, one of the three major financial targets we set for ourselves, and it's something we take very seriously. Of course, we're managing the company for the medium term to really generate value and want to make sure that we're not doing anything in the short term that we've damaged that long-term growth trajectory. It's too early to say what '24 will look like. I think you'll clearly have a grow over on revenue that will pressure revenue growth but we're also very encouraged with the opportunity to keep expense growth low. So not going to give guidance at this moment. I still think it's within the major reason that we're going to drive results.

Ebrahim, if I could add, this is Steve. The team is also working on a longer-term project Operation Accelerate. We shared that at the Investor Day. It's changing procedures and digitizing substantially the front to back side of the bank, that is going very well. It's on track. It was multiyear and that will help us with both efficiencies and customer satisfaction. So Zach has got us focused on consolidating three branches. We did a voluntary retirement program. We've done some restructuring and segments and some of the business units and support units during the course of the year. What he's referencing now with BPO is additive to a very healthy level of focus and activity on the expense management side so far this year.

Understood. And any updated thoughts? Steve, you talked about building capital but at the same time, you've talked about fee revenue opportunities, doing some targeted M&A like you've done in the past. Any thoughts there? Is the opportunity set attractive for you to do anything?

Well, our focus, as you know, is always to grow the core of the business. We've got a lot of opportunity to do that in front of us. And as the regulatory expectations around capital and liquidity, et cetera, get established, I think we're going to be in a very strong position to capitalize on that in an even more robust fashion. We're trying to get positioned for that now. As you saw last year, there were a few businesses that were attractive. I suspect we'll find some additional ones at some point in the future. But we believe we've got a lot of opportunity at hand. There's nothing pressing in terms of pushing or needing to push for M&A now. And so we're very, very focused on driving the core.

Steve or Zach, kind of conceptually, maybe when you think about the 40% cumulative beta, maybe just a thought or two on the major puts and takes when you think about that being the right number for you all. You guys are in a very competitive market but I think it's clear within the last month or so, especially that the deposit flows are there. So, I guess I'm just curious what you're seeing in terms of competitive dynamics? What sort of makes that the right number to land on it?

This is Zach, I'll address that. We have developed several trends and forecasts, and as I mentioned in the prepared remarks, we have solid scenarios supporting our expectations. Therefore, we believe it's a reliable forecast. As always, we will provide an update if our best forecast changes. Our focus has remained stable at this level for some time, and the underlying monthly trends are still favorable. Looking at the factors driving this, we are noticing a continued modest increase in deposit costs, but at a slowing rate, as anticipated. We experienced an 8% beta trend in Q1 and a 7% in Q2, which is expected to decrease further in Q3 and peak in Q4. This explains the declining trend amid rising costs. Additionally, the shift from noninterest-bearing to interest-bearing deposits is progressing as expected for this cycle, and that trend is also slowing down. Most of the shift has already occurred, and we are beginning to see signs supporting the 40%. In terms of competition, while it's a competitive landscape, deposits are still available, and it's reassuring to see rational behavior in the market. Given the slowing loan growth in the industry, we have a buffer that helps us manage our situation effectively according to our plan. Overall, we still stand by our forecast.

My first question is actually a clarification one, your 40% cumulative beta, correct?

That's correct.

Yes. Because a lot of your peers provided it on interest-bearing. So I just wanted to make sure that just noted that one, Scott was asking that question. And my real question is, I think the market really close to sort of the expansion of the net interest income outlook. Could you tell us about how you're thinking about the elasticity of deposit licenses on the way down? I think to your point earlier, Zach, there are a lot of investors that are thinking about where you cut for next year. And they're wondering how much power do banks have to price down if rates stay at a relatively high level versus what we've seen in a while?

Thank you for the great questions. Regarding softer topics, we are seeing significant attention, just as we expected during our growth phase and now as we experience a decline. We are actively planning and monitoring this closely. The impact will certainly depend on the specific segments in question. In the commercial sector, where betas are generally higher, we have established agreements with our clients on how trends will behave, which we anticipate will also decline. We are quite confident that we can manage this similarly to how we experienced growth. Additionally, other rational price segments in the middle market and business banking are likely to decrease quickly as rates fall. In some consumer categories where we have been growing, there are timing aspects that we will need to manage as they evolve. However, we have a well-established approach for this and feel positive about our capability to navigate it. The overall changes on the consumer side will depend on the state of the economy and future forecasts, but our historical playbooks suggest we will handle this effectively.

Got it. And just as a follow-up to that, if I may. You're holding a lot of cash. And obviously, there's not a lot of motivation to deploy that. Again, as we think about next year in the same scenario, you're still going to be earning a lot of your cash on your cash flow at 0% risk weight if the Fed moderately. And I guess outside of better loan growth, Zach, what would be the factors for you to normalize, start normalizing that cash to a level that's more appropriate? Or do you feel like with all the liquidity rolls down the pipe, you might as well just hold it there for now since you're getting paid for it anyway?

Yes. I think that the level that we're running at for cash right now is sort of around $8 billion to $9 billion is the right level for the company given the liquidity requirements. So I think we're generally at where we think is the right level. Always tuning at the margin for how we're incrementally funding and kind of tuning the short-term FHLB borrowings at the cash level. But I think for the most part, that cash level is right-sized right now. I think within the securities portfolio broadly, we'll continue to see the trend of moderately lower duration sequentially as we've been doing, frankly, over the last three quarters in a row; and just continuing to preference liquidity.

Is that just a follow-up on your NII '24 comments? And if you talked about earning asset growth. I'm just wondering if your balance sheet has been elevated this quarter a good amount. And I guess are you expecting as you look out further that deposit growth will continue to carry the overall balance sheet side forward? And I guess, how do you think about the wholesale funding part of the equation as a balancing act on that?

Yes, terrific question. Broadly speaking, the answer is yes. So I believe that we will see loan growth in line with deposit growth for the most parts. And I think that's what we'll see here in the back half of this year. That's my expectation for what the trend is to 2024 as well. I tend to see a pretty stable but slightly lower loan-to-deposit ratio here over the next couple of quarters. And just fundamentally match funding making sure we can one of those fundamental underlying factors that allows us to manage the deposit beta and the marginal margin that we're getting up on the loan, as I noted earlier. So it's an important dynamic. The good thing, and I think we've talked about this in the past, is that we are coming to this cycle and we're now operating, let's say, in three quarters of the innings in a pretty favorable position where we saw really attractive loan opportunities, we could, in fact, fund them with non-customer sources of funding and increase loan-to-deposit ratio but that's not the default position for now. I think we're now, I think, getting loans and deposits growing at a pretty similar rate. It's quite healthy and a good balance for us.

Okay. And a follow-up, can you try to help us understand how the benefits from the security swaps look this quarter? And then as you go forward into next year, just your loan hedges, does that become a part of the benefit next year in terms of getting that NII starting to move the right way?

Yes, it does. Great question, Ken. Let me elaborate on that. So up through the only part of Q3, inclusive of activities we've done in the first few weeks of this quarter, we've got around $29 billion of downgrade hedge protection through received fixed swaps. It's around $21 billion, $22 billion. We've got some floor spreads which pay off under downgrade scenarios and then a portfolio of collars which will give us the option to enter into received fixed swaps in the future. And likely will, if rates continue to trend generally what they're expected to. So it's a pretty powerful portfolio that both extent now and even more than will be extent over the coming six to twelve months as we enter into those color-based received fixed loss hedges. The impact, obviously, I mean, the challenge in hedging right now is that with an inverted yield curve and by me, with a fairly steep decline already forecasted, you've got some pretty dire downgrade scenarios to convince yourself that it makes sense to incrementally enter things right now, given that they carry right now. What we are experiencing in the P&L at this moment is about 15 basis points of negative NIM drag from the receipt fix that we're already in. And that will go into essentially zero by the end of 2024, if you follow out the forward yield curve scenarios. So that's 15 basis points of tailwind which we should see between now and the end of '24, fairly ratable clawback throughout that period.

I have a couple of questions about credit. First, I want to congratulate Rich on his retirement. He has done a fantastic job, and I've appreciated his insights during these calls. Regarding commercial real estate and consumer concerns, how far ahead can you foresee future issues in commercial real estate? I know you are focused on tightening things up, but I'm curious about your current actions. It appears to be in good shape, but you have allocated a significant amount of reserves to this area, which prompts my question.

Yes. We are currently focused on the impacts for 2023 and 2024, and it's challenging to project much beyond that. We are conducting quarterly portfolio reviews in our office and reviewing the real estate book each month. At this stage, we've likely assessed about 90% of the loans over $5 million in that book. Our main focus is on 2023 and 2024, specifically managing what we can control, which largely pertains to maturities. Additionally, we are paying particular attention to the lease rollovers in the office sector that may affect cash flow this year and next. That's our primary focus. As for the 9% reserve, we have a 3.4% reserve against overall prebook for potential softness, and we believe that both reserves are adequate based on our current understanding. We will continue to evaluate them on a quarterly basis.

Jon, Rich is also with the team getting long rebalanced wherever there appear to be issues that are proactive efforts to try to get those addressed. The primary focus is '23 and '24. But there's also a long view full view of the portfolio over the next decade and other-related issues, all of which we are actively managing. We've been doing that for over a year and trying to stay well ahead of any issues that may occur at this point to put in really good shape.

It seems that way. Okay. And then on consumer, I review this every quarter, and when I look at your nonaccruals and charge-offs, it’s really nothing significant. This might relate to the soft landing comments, but when examining the RV and marine consumer categories, delinquencies have not changed much. Are you noticing anything concerning in consumer health, because these numbers are very strong?

No, the numbers are really good. And I think it goes to the client selection and just the focus that we've got on prime and super prime. If you look across the entire consumer spectrum. There's really nothing in there that would lead you to believe that we're going to have anything more than just a gradual return to what might be more normalized levels of charge-offs. Because right now, to your point, they're running extremely low. The only area that I would point out that's a little bit relatively higher stress than the rest of the book is and that's because of the floating rate nature of that portfolio. So it's going to lead to a little higher level of delinquencies than you might see across the book but the analysis that we've done from a vintage standpoint, on that book show that we're in the 55% to 60% loan-to-value range. So even though we might see higher levels of delinquency, we don't think the losses will follow.

Housing markets are generally tight in our areas, Jon, and unemployment is very low. If someone encounters an issue, the most effective solution is to sell a property, which is different from what we witnessed in 2008, 2009, or earlier years. I want to acknowledge Rich here, as we have been working to outperform our peers for over a decade with this moderate to low risk profile, and he has been very disciplined in this approach. We anticipate continued outperformance throughout the cycle, and we have consistently communicated this. Overall, the situation is looking very good, and I appreciate all my colleagues, especially Rich and his leadership.

Yes, I agree. Steve, I was thinking you could give them a fishing boat or an RV out of the foreclosure pool. There's anything to give.

We just don't have any other assets. On my lunch at some at posters. We pull those out.

Just to clean up for you, Zach. The $60 million to $50 million on the Capstone, Torana. What drove that? I know it's small $10 million but what happened there?

Yes, Julie, the previous $60 million primarily came from Capstone and included aspects related to production and the revenues that contribute to compensation expenses. As capital markets revenues were somewhat lower in the second quarter, our forecast was adjusted downward compared to the initial budget for the latter half of the year, leading to reduced costs. That's essentially the situation.

Okay. And then the $30 million FDIC, that's all in the third quarter. Is that correct?

So let me clarify that it's really important one. That FDIC expense that we talked about in that guidance is the two basis points higher assessment that is being assessed across the industry and that was known late last year and it's coming through every quarter. It's not the special assessment that's still being discussed.

Well, thank you very much for joining us today. We're very pleased with the second quarter results as we dynamically manage through this unique environment. As you heard, we're very well positioned for times such as these with strong credit quality, improving capital ratios and robust liquidity. The deposit growth, in particular in strangle nature has served us very, very well as head of our efforts to provide customer service and generate great satisfaction over the years. And we have a team of disciplined operators and we are executing our strategy that we outlined last year at our Investor Day which provides us with driving value for our shareholders. And just as a reminder, the Board of Executives and our colleagues were all top 10 shareholders collectively. So that reflects a strong alignment with our shareholders and I think you're seeing the benefits of that through our results. So thank you for your support and interest in Huntington and have a great day.