Huntington Bancshares Inc (HBAN) — Q2 2024 Earnings Call Transcript

Thanks, Tim. Good morning, everyone, and welcome. Thank you for joining the call today. We're pleased to announce our second quarter results, which Zach will detail later. These results are supported by our colleagues, who live our purpose every day as we make people's lives better, help businesses thrive, and strengthen the communities we serve. Now, on to slide four. There are five key messages we want to share with you today. First, we are intensely focused on executing our organic growth strategies and leveraging our position of strength. Our robust liquidity and capital base put us in a position to drive growth, and we are investing in new geographies and businesses in addition to existing businesses. Second, we expanded net interest income, and we expect to continue to grow sequentially from the first quarter trough. This outlook is supported by accelerating loan growth and sustained deposit growth to power future revenue expansion. Third, we drove fee revenues higher in the quarter with support from our three major focus areas: capital markets, payments, and wealth management. Fourth, we are achieving strong credit performance with stable net charge-offs, which are tracking as expected for the year. This is a direct result of our sustained and disciplined approach to credit over many years and our aggregate moderate to low-risk appetite. Finally, we believe the net result of these actions will deliver expanded profitability from here and into 2025 and beyond. I will move us on to slide five to recap our performance. We delivered accelerated loan growth with average balances growing by $2 billion from a year ago. Annualized loan growth in the quarter was 4.7%. Average deposit balances also increased, growing $8 billion or 5.5% over the past year. Capital further strengthened with reported common equity Tier 1 of 10.4% and adjusted common equity Tier 1 of 8.6%, inclusive of AOCI. Liquidity remains top tier with coverage of uninsured deposits of 204%, a peer-leading level. Credit quality was stable as net charge-offs improved by 1 basis point from the first quarter to 29 basis points. We are sustaining momentum in the growth of our primary bank relationships, with consumer and business increasing by 2% and 4%, respectively year-over-year. Again, this past quarter, we seized the opportunity to add talented bankers. We're pleased to add new deposit-focused capabilities in the mortgage servicing and homeowners association, title, and escrow areas. These new teams build upon the prior investments we've made in the Carolinas, Texas, and three new specialty commercial verticals. As we shared last month, we are bringing in-house our merchant acquiring business within our payments organization to further accelerate revenues and capabilities. As I mentioned, our disciplined positioning of robust capital and liquidity enables our ability to sustain a growth posture. Capital continues to increase, with adjusted CET1 up approximately 50 basis points from a year ago. Liquidity continues to be robust, supported by sustained deposit gathering. We were pleased to once again deliver top quartile results in this year's CCAR stress test exercise with Huntington’s modeled credit losses being second best in the peer group. Our stress capital buffer was reduced and came in at the minimum level of 2.5%. Across our markets, we see the broader economy continuing to hold up. Our new initiatives, teams, and geographies provide growth opportunities, even as the broader environment for customer loan demand remains somewhat muted. Zach, over to you to provide more detail on our financial performance.

Thanks, Steve, and good morning, everyone. Slide six provides highlights of our second quarter results. We reported earnings per common share of $0.30. The quarter included a $6 million notable item related to the updated FDIC Deposit Insurance Fund Special Assessment. This did not have an impact on EPS. Return on tangible common equity, or ROTCE, came in at 16.1% for the quarter. Adjusted for notable items, ROTCE was 16.2%. Average loan balances increased by $2 billion or 1.7%, versus Q2 last year. Average deposits continued to grow, increasing by $8 billion, or 5.5%, on a year-over-year basis. Credit quality remains strong, with net charge-offs of 29 basis points. Allowance for credit losses decreased by 2 basis points and ended the quarter at 1.95%. Adjusted CET1 ended the quarter at 8.6% and increased roughly 10 basis points from last quarter. Supported by earnings, tangible book value per share has increased by nearly 8% year-over-year. Turning to slide seven, consistent with our plan and prior guidance, loan growth is accelerating quarter-over-quarter. Our sequential growth in loans into Q2 of $1.5 billion was more than double the sequential dollar growth into the first quarter. This likewise drove acceleration of loan growth on a year-over-year basis from 1.2% in Q1 to 1.7% in Q2. At our current run rate of growth of 4.7% annualized, we are on track for the full-year plan. We expect the pace of future year-over-year loan growth to accelerate over the course of 2024. Loan growth in the quarter was supported by both commercial and consumer loan categories. Total commercial loans increased by $689 million. Excluding commercial real estate, commercial growth totaled $1.1 billion for the quarter. Over the past year, CRE balances have declined by $1.3 billion, with the concentration of CRE as a percent of total loans declining by 1.5 percentage points from 10.9% to 9.6% today. Even as we have managed CRE balances lower, all other loan balances have increased by over $4 billion or 4% from the prior year. Drivers of commercial loan growth in the second quarter included $600 million from new geographies and specialty verticals. This included fund finance, Carolinas, Texas, healthcare asset-based lending, and Native American financial services. Auto floor plan increased by $279 million. Regional and business banking increased by $233 million. In total, consumer loans' average balances grew by $757 million or 1.4% for the quarter. Within consumer, average auto balances increased by $436 million. Residential mortgage increased by $199 million, benefiting from production, as well as slower prepay speeds. RV and marine balances increased by $74 million. Turning to slide eight. As noted, we drove another quarter of solid deposit growth. Average deposits increased by $2.9 billion or 1.9% in the second quarter. Total cumulative deposit beta was 45%. Cost of deposits increased by 9 basis points in the second quarter, which matched the increase in earning asset yields. This was half the rate of change in deposit costs we saw into the first quarter, a continuation of the decelerating trends in funding costs even as deposit growth increased. Within the quarter, there was notable further deceleration with June deposit costs only slightly higher than May. We are actively implementing our down beta action plan, which is further supported by the robust deposit growth we have delivered. This position is allowing us to selectively reduce rates and change other terms across the portfolio in advance of potential rate cuts later this year. Turning to slide nine. Our cumulative deposit growth since the start of the rate cycle of 7.9% is differentiated versus the preponderance of peers. We have outperformed by double-digit percentage points on deposit growth over this time. As a result, we've been able to fund loan growth with deposits, and at the same time, manage the loan to deposit ratio lower over the past year, which will support continued acceleration of lending. Turning to slide 10. Non-interest bearing mix shift is tracking closely to our forecast. Average non-interest-bearing balances decreased by $280 million or 0.9% from the prior quarter. This represents a continued deceleration of mix shift, consistent with our expectations. Within the consumer deposit base, average non-interest-bearing deposits were modestly higher quarter-over-quarter. This was offset by a modest decelerating trend of lower non-interest-bearing balances from commercial depositors. On to slide 11. For the quarter, net interest income increased by $25 million or 1.9% to $1,325 million. We are pleased to have delivered growth off the trough levels from last quarter and believe this inflection in revenues will continue into the third and fourth quarters. Net interest margin was 2.99% for the second quarter. Reconciling the change in NIM from Q1, we saw a decrease of 2 basis points. This was due to higher cash balances, with spread net of free funds flat versus the prior quarter. We continue to benefit from fixed-rate loan repricing with loan yields expanding by 9 basis points from the prior quarter. As a reminder, we continue to analyze and develop action plans for a wide range of potential economic and interest rate scenarios for both short-term rates as well as the slope and belly of the curve. Our working assumption for the second half of the year is aligned with a forward curve, which projects two rate cuts by year-end. Based on that outlook, we see net interest margin relatively stable over the next two quarters at or around the 3% level, plus or minus a few basis points. Turning to slide 12. Our level of cash and securities increased, as we benefited from higher funding balances from sustained deposit growth. We expect cash and securities as a percent of total average assets to remain approximately 28% as the balance sheet grows over time. We are reinvesting securities cash flows in short duration HQLA, consistent with our approach to manage the unhedged duration of the portfolio at approximately the current range. Turning to slide 13. As a reminder, our hedging program is designed with two primary objectives: to protect margin and revenue in down rate environments, and to protect capital in potential up rate scenarios. As of June 30, our effective hedge position included $17.4 billion of received fixed swaps, $5.5 billion of floor spreads, and $10.7 billion of pay fixed swaps. The pay fixed swaps, which successfully protected capital, have a weighted average life of just over three years and will begin to mature over the course of 2025. As these instruments mature, our asset sensitivity will reduce. Furthermore, at a measured pace over the past several quarters, we have added more forward-starting receive fixed swaps, with effective dates starting generally in the first half of 2025. The impact of both the maturities of the pay fix swaps and the beginning effectiveness of the receive fix swaps will reduce asset sensitivity in a down rate scenario by approximately one-third by the middle of next year. As always, we will continue to dynamically manage our hedging program to achieve our objectives of capital protection and NIM stabilization. Moving on to slide 14, our fee revenue growth is driven by three substantive areas: capital markets, payments, and wealth management. Collectively, these three areas represent nearly two-thirds of our total fee revenues. Within capital markets, revenues increased $17 million from the prior quarter, driven by higher advisory revenues. Commercial banking-related capital markets revenues were stable quarter-to-quarter. We expect to sustain and build upon this level over the back half of the year, supported by robust advisory pipelines in Capstone, as well as expected new commercial loan production. Payments and cash management revenue was up $8 million in the second quarter and increased 5% year-over-year. Treasury management fees within payments continue to grow strongly at 11% year-over-year as we deepen customer penetration. Our wealth and asset management revenues increased 8% from the prior year. Advisory relationships have increased by 8% year-over-year, and assets under management have increased by 17% on a year-over-year basis. Moving on to slide 15. On an overall level, GAAP non-interest income increased by $24 million to $491 million for the second quarter, increasing from the seasonal first quarter low. Excluding the impacts of the CRT transactions, non-interest income increased by $31 million, quarter-over-quarter. Moving on to slide 16 on expenses. GAAP non-interest expense decreased by $20 million, and underlying core expenses increased by $13 million. During the quarter, we incurred $6 million of incremental expense related to the FDIC Deposit Insurance Fund Special Assessment. Excluding this item, core expenses came in better than our expectations for the quarter, with approximately half of the lower-than-expected result driven by discrete benefits not expected to occur. The increase in core expenses quarter-over-quarter was primarily driven by personnel expenses, as we saw higher revenue-driven compensation and incentives due to production, as well as the full quarter impact of merit increases effective in March. We continue to forecast 4.5% core expense growth for the full-year. As we look into the third quarter, we expect core expenses to be higher at approximately $1.140 billion. There may be some variability given revenue-driven compensation. Slide 17 recaps our capital position. Common equity Tier 1 ended the quarter at 10.4%. Our adjusted CET1 ratio, inclusive of AOCI, was 8.6% and has grown 50 basis points from a year ago. Our capital management strategy remains focused on driving capital ratios higher, while maintaining our top priority to fund high return loan growth. We intend to drive adjusted CET1, inclusive of AOCI, into our operating range of 9% to 10%. Slide 18 highlights our results from this year's CCAR exercise. We were pleased to once again continue our trend of top quartile performance for expected credit losses from the stress test. This year's result was second best, compared to peers. Our SCB improved to the 2.5% minimum, and our modeled stress CET1 ratio was the second-best in our peer group. Our ACL, as a percentage of CCAR modeled losses, continued to be the highest level, compared to our peers. These results validate the consistency of our long-standing approach to maintaining an aggregate moderate to low-risk appetite. On slide 19, credit quality is coming in as we expected and continues to perform very well. Net charge-offs were 29 basis points in Q2, 1 basis point lower than the prior quarter. They remain in the lower half of our through-the-cycle target range of 25 to 45 basis points. Allowance for credit losses at 1.95% declined by 2 basis points from the prior quarter, effectively flat and reflects both a modestly improved economic outlook and an increased loan portfolio. On slide 20, the criticized asset ratio declined by 7% from the prior quarter, driven by broad-based improvements across commercial portfolios. Non-performing assets increased approximately 5% from the previous quarter to 63 basis points, while remaining below the prior 2021 level. Turning to Slide 21. Our outlook for the full-year remains unchanged from our prior guidance. As we discussed, we expect loan growth to accelerate and deposit growth to sustain its quarterly trend. We drove net interest income higher from its trough and expect that trend to continue sequentially in the second-half. Core expenses are well-managed and tracking to our full-year outlook, subject to some variability, given revenue-driven compensation levels and the timing of staffing adds and expenses related to the insourcing of our merchant acquiring business. We expect to exit the year at a low single-digit year-over-year growth rate. Credit is performing well, aligned with our expectations. With that, we'll conclude our prepared remarks and move over to Q&A. Tim, over to you.

Hey, good morning.

Morning, Manan.

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

Yes. Thanks, Manan. Good morning. A great question. Appreciate the chance to elaborate on this one. Well, as I noted in the prepared remarks, we're already beginning the early stages of the down beta playbook. I think reducing acquisition rates, shifting the acquisition mix from time deposits toward more money market, which is easier and faster to manage on a down beta trajectory, shortening the duration of CDs and making targeted rate reductions in certain client segments. So already beginning these actions and they've benefited us in the second quarter. As we look forward, clearly, the performance and trajectory of our beta will be a function of what not only the core yield curve projects, but importantly what clients in the markets generally believe to be the rate environment. With that being said, what we're seeing setup now is very conducive to continuing this action, being ready to actually implement the full down beta playbook when we presumably see a rate reduction later this year. So there's good confidence in where things are going in terms of that. It's a little early to give precise guidance here because clearly the trajectory on beta over the course of the first year. So it will be a function of those market expectations. But it's our general working assumption that we'll be in the mid to high-20s percent down beta range over a kind of first year period and then continuing from there. And as I said, sort of shaping up pretty well here in the early days a bit.

Got it. Can you discuss how loan spreads are tracking? Several banks have mentioned weaker demand for loan growth, but they are all seeking loan growth. Are you noticing increased competition, and how is that affecting loan spreads overall?

No. Look, it is certainly a competitive environment. And we're driving growth, as we said, into the second quarter. On a dollar basis, we saw double the growth into the second quarter than we saw in the first quarter. So the acceleration that we have been calling for some time we're seeing. And so we feel pretty pleased about that. Part of the question on loan spreads for us overall on a net basis is where are we growing, what segments, what categories are we growing in. And where we're focused is driving growth in a lot of the new areas we've been investing in, which typically come on with pretty attractive spreads relative to the average. I would characterize the spread environment generally as pretty flat on a product and category level. And for us, we're really focused on trying to drive capital optimization, obviously, in the areas with the highest return that often have good spreads, but it could also come with fee business performance as well.

Great. Thank you.

Hi, good morning.

Morning, Erika.

Can you discuss the expected trends in deposits for the remainder of the quarter? You've clearly outperformed many of your peers in terms of deposit growth over the cycle. It seems like some of this deposit growth may be pre-funding stronger loan growth expected for the second half of the year. I noticed your securities portfolio and the rate you mentioned appears to be a favorable move relative to the curve. My question is, do you have enough deposits to support the acceleration we've been anticipating, or do you expect to continue growing at this pace, similar to the competitive dynamics you experienced in June? In other words, will the growth be as cost-effective as the nine basis points for the quarter?

Thank you for the question, Erika. This is Zach. I heard your inquiry regarding our expectations for loan and deposit growth, as well as how we plan to fund future loans and the anticipated rate trajectory. To address that, we're very pleased with our progress in gathering deposits. Looking at the bigger picture, we've outperformed our peers by 15% during the rate cycle, with a beta that compares favorably to both historical trends and our peers. This performance allows us to prefund our future loan growth. Over the past year, our loan-to-deposit ratio has decreased from 84% to 81%, which positions us well to fund our loans using core deposits amidst a slowdown in expected loan growth. I’d also like to emphasize, as mentioned in a previous question, that this situation gives us great flexibility to manage beta effectively and be selective with our funding sources. We're actually exceeding our initial deposit growth budget, which is part of the reason we've raised our deposit growth forecast to the higher end of our initial guidance range. We experienced remarkable growth in the second quarter, nearly $3 billion, although I don’t expect to see that same level of growth moving forward. However, I do anticipate continued growth, particularly into the fourth quarter, allowing us to stay within our overall guidance of 3% to 4% for the year. This will enable us to manage the increased lending volumes we're projecting effectively. Regarding our pricing strategy, we are being careful as we remain in acquisition mode, but we're aware of our strong position, which gives us the opportunity to begin reducing beta. We're noticing a decline in acquisition pricing in the marketplace, and we are taking advantage of that. If we see rate reductions in September, which seems likely given current market expectations, we’ll be able to carry that momentum forward.

Thank you. As a follow-up question, I am trying to piece together everything you shared about deposit pricing trends, ongoing fixed-rate asset repricing, and the maturing swaps. While you started the year with a predominantly asset-sensitive position, based on how your balance sheet is expected to develop next year, it appears that both in pricing strategy and through financial mechanics, you are poised to potentially benefit from the rate curve or lower short-term rates.

That's a great question. Let me address our strategy regarding net interest margin trajectory and asset sensitivity. Our goal over the past year and a half has been to leverage our natural asset sensitivity to fully capitalize on the current rising rate environment, which has been effective. Now, as we anticipate rates peaking and potentially starting to decrease, we are strategically lowering our asset sensitivity. In my earlier comments, I mentioned that by increasing forward-starting received fixed swaps and the expiration of pay fixed swaps, we expect to reduce asset sensitivity by about a third by mid-next year. We will remain flexible in our management approach, but this is a deliberate reduction in asset sensitivity in response to projected lower rates. Regarding net interest margin, we expect it to remain stable over the next few quarters, with two main positive factors contributing. Fixed asset repricing will positively impact net interest margin, and we experienced about 16 basis points of net hedge drag in the second quarter, which should decrease to nearly neutral by mid-next year under an implied forward scenario. This should provide steady benefits over the upcoming quarters. Additionally, two factors that depend on interest rate paths are variable yields and interest-bearing liability costs. We anticipate an accelerating effective down beta that will help offset variable yield declines, resulting in a relatively flat net interest margin. However, in the long run, we do see opportunities to increase net interest margin in a rising yield curve environment, which is what the market seems to expect. Overall, we are optimistic about the future trajectory of net interest margin once we move past the initial phases of the current rate changes.

Thank you.

Thank you.

Hey, good morning, everyone.

Morning, Steven.

I want to start by asking Zach about the potential for two rate cuts this year, perhaps in September and December. Zach, what is your view on the outlook for net interest income, considering it could go down by 1 to 4? Which part of that range do you think we are likely to lean towards?

Yes, that's a great question. Our approach in setting these ranges is to try to capture where we believe our basic trend is heading. Overall, we are trending positively within that range, despite a couple of cuts. A significant factor in managing a stable net interest margin will be our ongoing efforts to lower the trajectory of interest rate cuts and eventually reduce them further. The extent to which we can do this is influenced by the competitive landscape and customer perceptions of the rate future. Thus, our rates will depend on the market and economic confidence broadly. However, the data continues to provide a solid level of confidence regarding the yield curve. We feel optimistic about our ability to navigate this. Another important aspect is loan growth, which shows promising signs. Our pipelines appear strong, and we expect solid performance in the second quarter to continue growing and accelerating year-over-year in the latter half of the year. We could potentially see even quicker loan growth if some of our new initiatives perform better than anticipated in our plans. The pipelines there look very promising, enhancing our pull-through. Based on our projections, we perceive a slight upward trend in loan growth. Additionally, we experienced more commercial real estate runoff in the second quarter than initially budgeted. If that decreases moving forward, we could see higher loan volumes, which might elevate revenues above our expectations. Conversely, if any of these factors worsen, it could push us to the lower end of our projections. However, I feel confident that we are currently trending right in the middle of that range.

So middle of the range, is that what you said?

That's the baseline.

That's your baseline. Okay, that's helpful. And then it's funny when you look at slide seven, you're calling out the $600 million, that was the increase in average loans from new initiatives, right? I don't know, call it, $2.5 billion a year. And I'm curious, because you could look at that and say, well, that's sort of a catch-up, you have new bankers and new verticals bring over their books, but then you're saying momentum is building. So when we look out from here, we think about that $2.5 billion run rate or so, do you see upside to that? As the quarters roll forward, should we see more contribution from new initiatives in a dollar perspective?

I think I'm expecting to see very strong performance in these new initiatives. We're really pleased with how they're doing. Every one of them has booked customers, is booking loans. We're seeing good performance on the full relationship in terms of deposits and fees starting to come through. So really pleased with it. And I also wouldn't characterize it necessarily as them bringing their books over. These were talented bankers with deep experience in their industries and those geographies we've launched in and we're just sort of driving through new client acquisition on a pretty core basis. The trajectory of growth that you highlighted, I expect to see a pretty steady build from here. I don't know that I'd see acceleration per se, but the trajectory we're on is already very accretive to loan growth.

Got it. Okay. Thanks for taking my questions.

Thank you.

Good morning, everyone. I appreciate you taking my question. My inquiry relates to customer demand for loans, which has largely been addressed. However, I would like to focus specifically on the auto sector. I have observed that production levels are the highest they have been in recent years. Is this being utilized as a strategic move, especially considering the overall growth has been softer than expected earlier this year? It seems that other categories may experience stronger growth later on. I'm simply interested in your perspective on the auto sector. Additionally, could you provide insights into the quality of the auto loan portfolio, particularly in light of the fluctuations in used car values and the current economic conditions?

Scott, this is Steve. I'll answer your question. Our auto business has performed excellently this year and we anticipate it will continue strong in the second quarter. We're not viewing it as a buffer; instead, we see it as a fantastic opportunity. While some other banks have scaled back on auto lending recently, this has opened up opportunities for us, and we expect to keep generating significant volume and growth. As mentioned at the CLM, and similar to our past practices with auto securitization, we will manage our overall exposure, but we have a considerable amount of work ahead. Regarding the quality of our portfolio, it is of super prime quality with very low defaults, which we have emphasized over the years. We focus on default frequency. Although changes in used car pricing can slightly affect incremental losses, it won't be a significant factor for us either way. Historically, this portfolio has performed exceptionally well, and we expect that to continue.

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

We are on track for that. I feel confident about how we are managing expenses this year. There has been some timing variance from our initial expectations, but the full year looks to be in line with our initial thoughts and guidance. As we've mentioned in previous calls, this will lead to a gradual slowdown in year-over-year growth throughout the year. Last quarter, expense growth was about 5% year-over-year, and I believe it was around 6% in Q2. We expect this to trend down to low single digits by the fourth quarter on a year-over-year basis, and we anticipate continuing this trend into 2025.

Perfect. Okay, good. Thank you for taking the questions.

Thank you.

Hey, good morning.

Good morning, Ebrahim.

I guess, Zach, I'm not sure if I've missed it. Just talk to us around the loan to deposit ratio, 80%. Do you expect that to stay as is? The guidance kind of implies that. But as we think about all this loan growth coming up, should we expect the loan to deposit ratio to stay flat, like that's where the Bank is going to be managed? And talk to us also about the mix of these deposits that are coming in, if you can talk about like blended rates or what the NIB mix of these deposits is, that would be helpful. Thanks.

Yes, that's a great question. We are quite satisfied with our deposit gathering efforts and the pre-funding of loan growth, which we anticipate will continue to increase over time. I expect that over a longer period, the loan to deposit ratio will gradually rise again, though it will remain within a relatively tight range. Our goal is to grow deposits at a rate similar to loans on average over time, with any difference being temporary as we observe short-term trends that may diverge. In the latter half of this year, I anticipate a slightly quicker sequential loan growth compared to deposit growth, but not to an extent that would significantly alter the ratio. Fundamentally, our deposit growth continues to reflect the same dynamics we've seen for the past few quarters. The acquisition of new relationships is quite positive. We noted a 2% increase in primary bank household growth in the consumer segment and 4% in the business banking sector, with commercial banking also seeing many new names and customers, especially due to our new growth initiatives. Additionally, we've added new verticals focused on deposit gathering, which is very beneficial. The composition is shifting from more time deposits to more money market accounts, which should help us reduce costs at a faster pace going forward. This will contribute to a slow progression of stabilizing deposit costs and subsequently decreasing them gradually. Regarding non-interest bearing deposits, while I haven't been asked about this yet, you can see in the materials the trend we’re observing. We are experiencing a significant reduction in the mix shifting out of non-interest bearing deposits. From the fourth quarter, there was a $1.3 billion decline, while in the second quarter, we reported only $300 million in reductions. In fact, the consumer segment has seen an increase. Therefore, we believe we are nearing the end of this shift out of non-interest bearing deposits, and this trend is expected to continue in the near term.

I have a quick follow-up. You mentioned that expenses will grow low-single digits by the end of the year. Should we interpret that as an indication of whether expense growth in '25 will be higher, lower, or the same as '24?

Great question again. We've been discussing expense growth, which is targeted at 4.5% this year. This rate was intentionally set higher to allow for investments in new growth initiatives and to enhance our data and automation capabilities across the company. However, we plan to reduce this growth rate as we enter 2025, expecting to see lower expense growth in 2025 compared to 2024. The trend supports this expectation, as we anticipate ending this year with a significantly lower year-over-year growth rate. Our goal is to maintain that lower growth rate going into 2025.

Ebrahim, Zach has shared in the past, efforts to lower growth rates in core expense levels of the Bank in order to continue to invest in different opportunities, revenue-producing opportunities primarily. You should expect to see that from us in '25 and beyond as well.

Got it. Thanks, Stephen and Zach.

Thank you, Ebrahim.

Good morning. I was hoping…

Good morning, Matt.

I was hoping you guys could talk about the risk transfers that you guys have executed on. Just there's been some coverage about it, what you've done and some others in the media. And, I guess, I'm just trying to figure out the logic. I mean, you've got strong capital, you're building capital. I realize you've got kind of the strong loan growth outlook. But the rate that was kind of put out there in the media seems pretty high for what's a very high-quality auto book as you show in the slides here. So just trying to understand kind of the logic about it and the cost to the media is like 7.5%. So anything around the logic and financial impact? Thanks.

Yes, that's a great question. This is Zach, and I'll address it. If you take a moment to consider our capital plans and place these transactions within the broader context of that plan, you'll see that it has two main objectives. First, we aim to increase our adjusted CET1 ratio, which was 8.6% in the second quarter. Our goal is to raise this to our target range of 9% to 10%, and we believe we are just a few quarters away from reaching that with our current trajectory. The second key objective is to support high-return loan growth, which we are successfully achieving and expect to accelerate year-over-year. The main source of capital to support these goals is our organic earnings and the core earning potential of the company, which remains our primary focus. Regarding your question on CRT and CLNs, these transactions can help with optimizing our risk-weighted assets and balance sheet. We were pleased to execute a CDS transaction in the fourth quarter of last year and a successful credit-linked-note transaction in the second quarter. To give you an idea of the economics, the second quarter yield was outstanding, with a cost of capital of under 3%. This involved a $4 billion notional transaction against high-quality indirect auto loans, resulting in a 74% reduction in risk-weighted assets, or a $3 billion drop in RWA. Additionally, we gained almost $500 million of funding from this transaction, with a minimal cost of $7 million in spread for the first year, plus some modest upfront transaction expenses. This approach is very efficient, unlocking 17 basis points of CET1 and supporting our primary objectives. We view it as tactical; it isn't the core driver, but rather an opportunistic strategy, and we are very satisfied with the favorable economics.

Okay, that's super helpful. Thank you.

Thank you.

Hey, thanks. Good morning, guys.

Good morning, Jon.

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

Our pipelines extend a couple of quarters ahead, providing us with partial visibility through the fourth quarter, though not complete. We don’t have much clarity into 2025 yet. However, certain businesses have established relationships, especially in our distribution finance sector, which allows us some insight into their production plans. Overall, we lack significant visibility for multiple quarters. That said, our customers are performing well this year, and there’s an expectation that as rates decrease, they will be able to conduct even more business next year, which is a sentiment they commonly express.

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

Credit continues to perform very well, and we are pleased with our performance year-to-date. The outlook is promising. We've invested significant time in portfolio reviews and management, and the results are favorable. There may be some volatility in commercial real estate for us and others in the industry over the next couple of years, but overall we are in a strong position. Our concentration in commercial real estate continues to decrease, and we have seen over $250 million in office payouts in the last six quarters. The construction unused commitments have been fully absorbed, so our commercial real estate portfolio is in good shape.

Okay. Thank you.

Thank you.

Hi. Good morning.

Good morning, Peter.

You had a good morning. There was a nice rebound in fee income, and with merchant acquiring coming back in-house in the third quarter, that should add about $6 million to fees. Do you think you can maintain this momentum and possibly reach the upper end of the 5% to 7% range for fee income?

Thanks for the question. This is Zach. I'll address that. The fee income performance was very strong, and we were pleased with the results. The second quarter saw a 6% increase from the first quarter, continuing a year-over-year growth rate of around 5%, similar to the first quarter. We expect to stay within our 5% to 7% full-year range. As we move into the second half of the year, the growth compared to last year will make things easier. I believe we will see ongoing sequential growth, particularly in our three main areas of focus: capital markets, payments, and wealth management. We are executing well, and current trends support our outlook. Payments increased by 5% year-over-year in Q2, and treasury management is showing double-digit growth driven by client engagement. Wealth management remains strong, with performance advisory households up 8% and revenue rising by 8% due to asset under management and net flows. Capital markets have been somewhat uneven, but we were pleased to see strong growth in Q2, especially in our advisory business. The middle-market mergers and acquisitions space, which faced challenges with rising interest rates last year, is now picking up, and I believe this momentum will continue. I expect sequential growth in all these areas, and while our exact position within the range will depend on our performance, I am confident we will achieve it.

Okay. For my last question about credit, I wanted to ask your thoughts on the good credit trends. The ACL ratio shows you're at the top end of your peers. How are you planning to approach reserving in the future? Are you aiming to keep the ACL ratio steady to support loan growth? What would need to happen for you to consider lowering the ACL ratio?

Hey, Peter, it's Brendan. I'll take that one. As you mentioned, we maintained the reserve flat this quarter at 1.95 compared to 1.97 last quarter as the models adjust the dollar amount of the reserve. We continue to monitor the market volatility, especially regarding rates and the effects of prolonged higher rates on our commercial real estate portfolio. As we witness stronger economic performance reflected in our modeling, along with the consistent solid performance of the credit portfolio, that’s when we would consider reducing the reserve more significantly. This will unfold over a longer period. Currently, we believe we are adequately reserved.

Got it. Thanks for taking the questions.

Well, thank you for joining us today. In closing, we're pleased with our second quarter results, having delivered sequential growth in both spread and fee revenues. We're expecting our organic growth strategies and our investments are bearing fruit with momentum building across the Bank. Our competitive position remains strong with robust capital liquidity. We continue to seize the opportunities to add talented bankers across our businesses. We remain focused on our long-term strategic objectives. And collectively, the Board, executives and our colleagues are a top 10 shareholder. We have a strong alignment of delivering meaningful value for our shareholders. Finally, special thank you to our nearly 20,000 colleagues here at the Bank who support our customers every day and are the backbone of these results. Thank you for your support and interest in Huntington. Have a great day.