Huntington Bancshares Inc

NASDAQ:HBAN

Earnings Call Analysis

Strong Loan and Deposit Growth Drives Increased Profitability

In the second quarter, the company reported accelerating loan growth, with average balances rising by $2 billion and an annualized growth rate of 4.7%. Deposit balances also saw substantial growth, increasing by $8 billion or 5.5% year-over-year. The company maintained strong credit quality, with net charge-offs improving slightly. Earnings per share stood at $0.30, reflecting a robust return on tangible common equity of 16.1%. Looking ahead, the continued expansion in net interest income and a projected stable net interest margin around 3% are expected to support sustained profitability into 2025.

Introduction to Second Quarter Performance

Huntington Bancshares presented a solid performance in its second quarter results, demonstrating strategic growth and robust financial health. The company's focused execution of organic growth strategies and a disciplined approach to credit management have fortified their position, enabling expansion in new geographies and businesses.

Improvement in Key Financial Metrics

The financial results showed notable improvements in several key metrics. Huntington reported earnings per common share of $0.30. The Return on Tangible Common Equity (ROTCE) was reported at 16.1%, and adjusted ROTCE was 16.2%. Average loan balances increased by $2 billion or 1.7% compared to the previous year, while average deposits also demonstrated substantial growth, rising by $8 billion or 5.5% year-over-year.

Focus on Credit Quality

A significant highlight was Huntington's continued strong credit quality. Net charge-offs were maintained at 29 basis points, and the allowance for credit losses ended the quarter at 1.95%. These figures reflect the company’s prudent and disciplined approach to credit risk management.

Accelerated Loan and Deposit Growth

The company has reported accelerated loan growth, consistent with its plans and prior guidance. Loans grew by $1.5 billion sequentially in the second quarter, surpassing the growth rate of the first quarter. On an annualized basis, loan growth hit 4.7%, with the pace expected to continue accelerating through 2024. Commercial loan growth was notably strong, with an increase of $1.1 billion excluding commercial real estate. Consumer loans also saw an increase, driven by auto loans and residential mortgages.

Net Interest Income and Margin Management

Net interest income increased by $25 million to $1.325 billion, reflecting a 1.9% growth from the prior quarter. While the net interest margin (NIM) was slightly down by 2 basis points to 2.99%, it is projected to remain stable around 3% in the upcoming quarters. The company is also effectively managing interest-bearing deposit costs, expecting further reductions over the year.

Growth in Fee Revenues

Huntington achieved a 6% sequential increase in fee revenues, showcasing growth in its three major focus areas: capital markets, payments, and wealth management. These areas collectively represent nearly two-thirds of the company’s total fee revenues. Capital markets and payments both reported strong performances, with payments revenues up 5% year-over-year and treasury management fees growing by 11%.

Capital Strength and Liquidity

The company's capital position remains robust. Adjusted Common Equity Tier 1 (CET1) capital ratio increased by 50 basis points from the previous year to 8.6%, driven by strong earnings. The liquidity scenario also remains favorable, supported by sustained deposit gathering and strategic asset management.

Cost Management and Expense Outlook

The company reported a $24 million increase in GAAP noninterest income, rising to $491 million for the second quarter. Core expenses were well-managed, and despite a $6 million FDIC special assessment, core expenses came in better than expected for the quarter. The company is on track with its expense forecast, targeting a 4.5% core expense growth for the full year.

Future Outlook

Huntington Bancshares is optimistic about future profitability, projecting stable and accelerating loan and deposit growth. The company anticipates continued growth in net interest income, strong credit performance, and robust fee revenue contributions from its core focus areas. With disciplined capital and liquidity management, Huntington is well-positioned for sustained growth into 2025 and beyond.

Earnings Call Transcript 2024-Q2

[Operator]

Greetings, and welcome to the Huntington Bancshares Second Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

At this time, I'll now turn the conference over to your host, Tim Sedabres, Director of Investor Relations. Please go ahead, sir.

[Timothy Sedabres, executive]

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 1 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.

[Stephen Steinour, executive]

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 4. There are 5 key messages we want to share with you today. First, we are intensely focused on executing our organic growth strategies and leveraging our position of strength. Our robust liquidity and capital base put us in a position to drive growth, and we are investing in new geographies and businesses in addition to existing businesses. Second, we expanded net interest income, and we expect it to continue to grow sequentially from the first quarter trough. This outlook is supported by accelerating loan growth and sustained deposit growth to power future revenue expansion. Third, we drove fee revenues higher in the quarter with support from our 3 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 5 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 built upon the prior investments we've made in the Carolinas, Texas and 3 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 model credit losses second best in the peer group. Our stress capital buffer was reduced and came in at the minimum level of 2.5%. Across our markets, we see the broader economy continuing to hold up. Our new initiatives, teams and geographies provide growth opportunities, even as the broader environment for customer loan demand remains somewhat muted. Zach, over to you to provide more detail on our financial performance.

[Zachary Wasserman, executive]

Thanks, Steve, and good morning, everyone. Slide 6 provides highlights of our second quarter results. We reported earnings per common share of $0.30. The quarter included a $6 million notable item related to the updated FDIC deposit insurance fund Special Assessment. This did not have an impact on EPS. Return on tangible common equity, or ROTCE, came in at 16.1% for the quarter. Adjusted for notable items, ROTCE was 16.2%. Average loan balances increased by $2 billion or 1.7% versus Q2 last year. Average deposits continued to grow, increasing by $8 billion or 5.5% on a year-over-year basis.

Credit quality remains strong, with net charge-offs of 29 basis points. Allowance for credit losses decreased by 2 basis points and ended the quarter at 1.95%. Adjusted CET1 ended the quarter at 8.6%, and increased roughly 10 basis points from last quarter. Supported by earnings, tangible book value per share has increased by nearly 8% year-over-year.

Turning to Slide 7. Consistent with our plan and prior guidance, loan growth is accelerating quarter-over-quarter. Our sequential growth in loans into Q2 of $1.5 billion was more than double the sequential dollar growth into the first quarter. This likewise drove acceleration of loan growth on a year-over-year basis from 1.2% in Q1 to 1.7% in Q2. At our current run rate of growth, 4.7% annualized, we are on track for the full year plan. We expect the pace of future year-over-year loan growth to accelerate over the course of 2024. Loan growth in the quarter was supported by both commercial and consumer loan categories. Total commercial loans increased by $689 million. Excluding commercial real estate, commercial growth totaled $1.1 billion for the quarter. Over the past year, CRE balances have declined by $1.3 billion, with the concentration of CRE as percent of total loans, declining 1.5 percentage points from 10.9% to 9.6% today. Even as we have managed CRE balances lower, all other loan balances have increased by over $4 billion or 4% from the prior year. Drivers of commercial loan growth in the second quarter included $600 million from new geographies and specialty verticals. This included fund finance, Carolinas, Texas, health care asset-based lending and Native American Financial Services. Auto floorplan increased by $279 million. Regional and business banking increased by $233 million.

In total consumer loans, average balances grew by $757 million or 1.4% for the quarter. Within Consumer, average auto balances increased by $436 million. Residential mortgage increased by $199 million, benefiting from production as well as slower prepay speeds. RV and marine balances increased by $74 million.

Turning to Slide 8. As noted, we drove another quarter of solid deposit growth. Average deposits increased by $2.9 billion or 1.9% in the second quarter. Total cumulative deposit beta was 45%. Cost of deposits increased by 9 basis points in the second quarter, which matched the increase in earning asset yields. This was half the rate of change in deposit costs we saw into the first quarter, a continuation of the decelerating trends in funding costs even as deposit growth increased. Within the quarter, there was notable further deceleration, with June deposit costs only slightly higher than May. We are actively implementing our down beta action plan, which is further supported by the robust deposit growth we have delivered. This position is allowing us to selectively reduce rates and change other terms across the portfolio in advance of potential rate cuts later this year. Turning to Slide 9. Our cumulative deposit growth since the start of the rate cycle of 7.9% is differentiated versus the preponderance of peers. We have outperformed by double-digit percentage points on deposit growth over this time. As a result, we've been able to fund loan growth with deposits and at the same time, manage the loan-to-deposit ratio lower over the past year, which will support continued acceleration of lending. Turning to Slide 10. Noninterest-bearing mix shift is tracking closely to our forecast. Average noninterest-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 noninterest-bearing deposits were modestly higher quarter-over-quarter. This was offset by a modest decelerating trend of lower noninterest-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 billion. 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 2 rate cuts by year-end. Based on that outlook, we see net interest margin relatively stable over the next 2 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 2 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 fix swaps, which successfully protected capital, have a weighted average life of just over 3 years, and will begin to mature over the course of 2025. As these instruments mature, our asset sensitivity will reduce. Furthermore, at a measured pace over the past several quarters, we have added more forward-starting receive fixed swaps, with effective dates starting generally in the first half of 2025. The impact of both the maturities of the pay fixed swaps and the beginning effectiveness of the received fixed swaps will reduce asset sensitivity in a down rate scenario by approximately 1/3 by the middle of next year. As always, we will continue to dynamically manage our hedging program to achieve our objectives of capital protection and NIM stabilization.

Moving on to Slide 14. Our fee revenue growth is driven by 3 substantive areas: capital markets, payments and wealth management. Collectively, these 3 areas represent nearly 2/3 of our total fee revenues. Within capital markets, revenues increased $17 million from the prior quarter, driven by higher advisory revenues. Commercial banking related capital markets revenues were stable quarter-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 noninterest 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, noninterest income increased by $31 million quarter-over-quarter.

Moving on to Slide 16 on expenses. GAAP noninterest expense decreased by $20 million and underlying core expenses increased by $13 million. During the quarter, we incurred $6 million of incremental expense related to the FDIC deposit insurance fund special assessment. Excluding this item, core expenses came in better than our expectations for the quarter, with approximately half of the lower-than-expected result driven by discrete benefits not expected to recur.

The increase in core expenses quarter-over-quarter was primarily driven by personnel expenses as we saw higher revenue-driven compensation and incentives due to production, as well as the full quarter impact of merit increases effective in March. We continue to forecast 4.5% core expense growth for the full year. As we look into the third quarter, we expect core expenses to be higher, at approximately $1.140 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 modestly improved economic outlook as well as an increased loan portfolio.

On Slide 20, the criticized asset ratio declined 7% from the prior quarter, driven by broad-based improvements across commercial portfolios. Nonperforming 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 in-sourcing 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.

[Timothy Sedabres, executive]

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]

[Operator Instructions] And our first question is from the line of Manan Gosalia with Morgan Stanley.

[Manan Gosalia, analyst]

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

[Zachary Wasserman, executive]

Thanks. A great question. Appreciate just to elaborate on this one. As I noted in the prepared remarks, we're already beginning the early stages of the down beta playbook, thinking, reducing acquisition rates, shifting the acquisition mix from time deposits towards more money market, which is easier and faster to manage [indiscernible] in a trajectory, shortening the duration of CDs and making targeted rate reductions in certain client segments. So already beginning these actions, and they benefited us in the second quarter.

As we look forward, clearly, the performance and trajectory around beta will be a function of what the [indiscernible] forward yield curve projects clearly what clients in the markets generally believe to be the rate environment. With that being said, what we're seeing set up now is very conducive to continuing this action, being ready to actually invest the full down data playbook when we presume CRE rate reduction later in 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 or so will be a function of those market expectations. But it's our general working assumption will be in the mid- to high 20s percent down beta range over first year period and then continuing from there. And as I said, sort of shaping up pretty well here [indiscernible].

[Manan Gosalia, analyst]

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

[Zachary Wasserman, executive]

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 feel pretty pleased about that.

Part of the question on loan spreads for us overall on a net basis is where are we growing, what segments, what categories are we growing in? And where we're focused is driving growth in a lot of the new areas that we've been investing in, which particularly come along with pretty attractive spreads relative to the average. I would characterize the spread environment generally spread is pretty flat on a product and category level. And for us, we're really focused on trying to drive capital optimization, obviously, if there is with the highest return that offset to spreads, but would also come with fee business performance as well.

[Operator]

Next question is from the line of Erika Najarian with UBS.

[L. Erika Penala, analyst]

[indiscernible] through expected deposit trends for the rest of the quarter. Clearly, you have out [indiscernible] as you went back to preponderance of your peers -- rate cycle in terms of deposit growth. I guess, I got the impression that perhaps some of the deposit growth is prefunding even better loan growth for the second half of the year. And I did notice that you could get through your [ securities ] portfolio and at that rate that you mentioned like a good move relative to the curve.

But I'm just wondering, I guess, the question [indiscernible], can you continue to do -- do you have enough deposits to fund the acceleration in [indiscernible]? Or are you expecting to continue to grow at this pace but closer to the rate and competitive dynamics that you observed in June. In other words, it won't be as expensive as plus 9 basis points for the quarter.

[Zachary Wasserman, executive]

Thanks, Erika for the question. This is Zach. I'll take it. Your line was flipping a little bit as I went up. But I think what I heard was what is our expectation for loan growth and kind of deposit price -- sorry, deposit growth, I'm sorry, and deposit pricing here in the back half of the year, and will we have enough to fund what levels going forward and what the kind of rate trajectory is around that. So let me see if I can address that if I have covered it, and you can follow up.

We're really pleased with how things are going on deposit [indiscernible] for sure. You take a big step back, 15% outperformance versus the peer median over the course of the rate cycle, with a beta that compares pretty favorably to both history and peers. So really doing well. I think what that's allowed us to do is, to your question, prefund to some degree, a future loan growth. And we've seen there's a loan to deposit ratio just in the last year from 84%. This time last year, 81% now the quarterly disclosed. So it sets up that ability to fund with core deposits, the accelerating loan growth that we expect.

But also I would note, and it sort of goes back to Manan's question a second ago, it gives us a lot of flexibility to really manage down beta and to be selective and disciplined in terms of where that next unit of funding will come from it. So that is sort of the intention, and we've been performing really well. I mean, just [indiscernible] share that we're actually outperforming our initial budget on deposit growth is one of the reasons why we elevated deposit growth forecast up to the high end of our initial guidance range.

I think we saw an extraordinary level of growth in the second quarter of almost $3 billion. I don't expect that same level of sequential growth into the second quarter, but I do expect it to grow, and I would see some nice sequential growth into the fourth quarter too, and to be within that overall guidance range of [ 3 to 4 ] for the full year. So I think that will allow us to absorb the increased lending volumes that we're projecting and core fund them [indiscernible] the ability to manage down beta.

In terms of pricing strategy, we sort of go back a little bit to the [indiscernible] I gave to Manan, which is we're being judicious. We're still in acquisition mode, but we're very much cognizant that we are in a position of strength, and that can allow us to execute the early stages of the down beta. So we're seeing it in the marketplace, reductions in go-to-market acquisition pricing. We're likewise doing that and taking that opportunity. And I believe that if we do get rate reductions here in September, which is -- seems to be uncertainty based on the market expectations, we'll be able to continue that and to drive it forward even further.

[L. Erika Penala, analyst]

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

[Zachary Wasserman, executive]

Yes. Great question. So we want to address some of the thinking around new trajectory asset sensitivity plans. But the objective we've had vis-a-vis asset sensitivity management over the last year, 1.5 years even, has been to allow our natural asset sensitivity to really maximize the value of the operating environment, which works pretty well.

Clearly, now as we think about rates topping out and then presumably beginning to fall, we are strategically reducing asset sensitivity. And in the prepared remarks, I highlighted that the combination of increasing [indiscernible] swaps and expiration of pay fixed swaps will reduce that [ sensitivity ] by about 1/3 between now and the end of -- or the middle of next year. And we'll continue to be dynamic in managing that, but that's a very intentional reduction in asset sensitivity to manage in the presence of reduced rates. I think by NIM, generally seeing pretty stable trends here over the next several quarters. And there are 2 [ substantial ] positive factors we've discussed over time, fixed asset repricing will continue to benefit the NIM. We -- second factor hedge drag. We have about 16 basis points of net hedge drag in the second quarter that we just closed. That will go down to almost a neutral position by the middle of next year and in the [indiscernible] forward scenario. So we'll get some benefit from that for pretty [indiscernible] here over the next several quarters.

The other 2 factors that are very great path depending clearly are what happens with variable yields, what happens with interest-bearing liability costs. But in our expectations, you'll see an accelerating and an effective down beta that will help to mitigate variable yield reductions. And in the middle of things will be a pretty flat NIM here.

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

[Operator]

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

[Steven Alexopoulos, analyst]

I want to start, maybe, Zach, for you. So if we do get 2 cuts this year, say, September, December, Zach, what's your bias as it relates to the NII outlook to [ down 1 to down 4 ]. Where in the range do you think we lead?

[Zachary Wasserman, executive]

Yes. Great question. So we -- our practice in terms of [indiscernible] of these rates is try to box what we think our basic trend is going. So we're generally trending pretty well in the middle of that range, and that's including the couple of cuts there.

I do think that a lot of -- one of the key factors in managing a flat NIM will be that continued execution on reducing the trajectory of interest-bearing costs, rising and then begin to driving them lower. And of course, the real ability to do that is a function of what the competitive environment is and what customers believe the rate path is. And so it will be depending on the conviction of the market and in the economy broadly where rates are going. But that being said, the data does continue to set up pretty good confidence around where the full year curve will go. And so we feel pretty good about our ability to do that.

So the other element of it clearly is loan growth. And we're seeing really encouraging signs there. Pipelines look strong. Solid performance in Q2. We expect to continue to grow and accelerate on a year-over-year basis here in the back half of the year. I think we could see even faster loan growth in some of our new growth initiatives perform even well -- even better than their -- than they're forecasted to do in our base plan. Pipeline there looks really good. And so if pull-through is even better. Our base plan that we see some upward bias on loan growth.

Likewise, what we haven't addressed in the Q&A section here is we did see more CRE runoff in the second quarter than we have had expected the kind of initial budgeting. To the extent that, that is lower going forward, you can see some higher loan volumes and that could lift revenues about the base plan, converse if either those if any of those factors were worse, that could take us to the lower end, but we feel pretty good about trying to [indiscernible] that range at this point even.

[Steven Alexopoulos, analyst]

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

[Zachary Wasserman, executive]

That's the baseline.

[Steven Alexopoulos, analyst]

That's your baseline, Okay. That's helpful. And then -- it's funny when you look at Slide 7, you're calling up to $600 million. That was the increase in average loans from new initiatives, right? I don't know, call it [ $2.5 ] billion a year.

Ed, 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 would 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?

[Zachary Wasserman, executive]

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 -- both customers is booking loans. We're seeing good performance on full relationship in terms of deposits and fees starting to come through. So really pleased with it.

I also wouldn't characterize it necessarily to them bringing their books over. These were talented bankers with deep experience in their industries in those geographies we've launched in. And we're just grinding through new client acquisition on a pretty core basis. The trajectory of growth that you highlighted, I expect to see a pretty steady build from here. I don't know I'd see acceleration per se, but the trajectory rod is already very accretive to loan growth.

[Operator]

Our next question came from the line of Scott Siefers with Piper Sandler.

[Robert Siefers, analyst]

So I think my question is on overall customer demand on loans that have sort of been answered. But I was hoping you could maybe address auto in particular. I noticed production is as high as it's been in the last several years. Is that maybe being used as a flex, given the softer overall growth than you had anticipated maybe earlier this year, and albeit within the context of -- it sounds like things outside of that category going to advance more robustly later on. So just curious how you're thinking about auto.

And then as the follow-up, maybe just sort of quality of that portfolio, given what the fluctuations we've seen in used car values, slower economy, et cetera?

[Stephen Steinour, executive]

Scott, this is Steve. I'll take the question. And our auto business has performed very well this year. And in the second quarter, we expect it will continue. We don't -- we're not using it as a buffer. I think that was essentially what you were asking. We just see this as a terrific opportunity. Some of the other banks in the last year or so pulled back on auto, it's created a bit of an opportunity for us, and we'd expect to continue generating significant volume and growth. As you saw at the CLM and as we've done in the past with all the securitization, we'll manage aggregate exposure with the book, but we've got quite a bit of room at this point.

In terms of quality of the book, it's a super prime book, and so very low default, and we've talked about this for years. We focus on default frequency. On the margin, the used car pricing can have a slight impact on incremental loss or avoided loss, but on each repossession, but it's not going to be a big number for us either way. We've shown that this book performs very well over the years, and we expect we'll continue to do so.

[Robert Siefers, analyst]

Okay. Perfect. 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 broadly to how you're thinking about that? Or are we still sort of on track for that as well?

[Zachary Wasserman, executive]

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

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

[Operator]

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

[Ebrahim Poonawala, analyst]

I guess, Zach, I'm not sure if I missed it. Just talk to us around the loan-to-deposit ratio, 80%. Do you expect that to stay as is? The guidance kind of implies that. But as we think about all this loan growth coming up, should we expect the loan-to-deposit ratio to stay flat? Like that's where the banks 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.

[Zachary Wasserman, executive]

Yes, great question. I think that -- really pleased with how we're doing on deposit gathering and to some degree, it's prefunding loan growth that we're expecting to continue to drive higher over time. And so I expect over the course of a longer time period, like we see the loan-to-deposit ratio drift back higher again, but stay within a pretty set range. The objective we've got a lot of average over time is to grow our deposits at very similarly to loans, and the delta would be kind of temporary as we see trends on a relatively short time basis might be diverged. So in the back half of this year, I'm expecting to see maybe slightly faster sequential loan growth than deposit growth, but not so meaningful. It's probably shift that ratio very much.

Fundamentally, what we're seeing in terms of deposit growth is the same function we've been seeing for the last several quarters. Underlying acquisition of new relationships is quite good, and we talked 2% primary bank household growth in consumer, 4% in business bank, commercial also growing a lot of new names and new customers, particularly given our new growth initiatives. And also importantly, a couple of the new verticals we've got very much focused on deposit gathering, which is very much helpful.

The mix of it, as I noted on one of the earlier questions, this actively shifting out of more time into more money market as a sort of volume driver up here, which will help us up really to move beta down at a faster rate going forward. And all that's going to contribute to just that slow production of topping out deposit costs and then bringing them back down in that decelerating way up, and then accelerating on the way down as we've discussed.

Let's sort of -- what we're seeing at this point in terms of noninterest-bearing, I don't think I've got any question on it yet. But I think in the materials, you can see the chart where that's going. We're seeing a meaningful deceleration of that mix shift out of noninterest-bearing into the first quarter, to give you a sense from the fourth quarter, $1.3 billion reduction noninterest-bearing into the second quarter, we disclosed only $300 million of reduction noninterest-bearing. And in fact, consumer went up. So we think we're almost done here in terms of a mix shift out of noninterest-bearing and this allows some to here in the near term.

[Ebrahim Poonawala, analyst]

Got it. And just one quick follow-up. You mentioned expenses will be low single digits, if I heard you correctly, by the end of the year. Does that -- should we be reading into that in terms of '25 expense growth being higher, lower or same as '24?

[Zachary Wasserman, executive]

So the thing was -- a great question. The point we've been discussing, I think, for a while in terms of expense growth this year, 4.5% was intentionally higher than what we have otherwise we're kind of running at so that we can invest in some of these new growth initiatives and also importantly, invest a lot of data and automation capabilities throughout the company. But that pace of growth would reduce as we went into 2025. And that is our plan. I expect to see lower growth rate of expenses in 2025 that I saw -- that we're seeing in 2024, and the trend is very much supportive of that. Because by the time we'll exit this year, we'll already be exiting at a run rate of year-over-year growth, that's quite low. So trying to maintain that lower growth rates to go into '25.

[Stephen Steinour, executive]

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.

[Operator]

Our next question is from the line of Matt O'Connor with Deutsche Bank.

[Matthew O'Connor, analyst]

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

[Zachary Wasserman, executive]

Yes. Great question. I'll take that one. If you take back several of our capital plans, put these transactions in the context of the overall capital plan, the plan is really twofold, drive adjusted CET1 higher. We were 8.6% of CET1 in the second quarter. We intend to drive that up into our operating range of 9% to 10%. We're just a handful of quarters away from achieving that correct trajectory. And then the second key objective is fund higher return loan, and we're doing that. And I think as we said, that will continue to accelerate on a year-over-year basis. So -- and the prime driver of creating the capital to support both of those objectives is organic earnings and the core earnings power of the company. And that really is the core focus, the prime focus.

With that being said, and just shifting up to your question on CRT and [indiscernible], at the margin, these transactions can be very helpful for just further RWA and balance sheet optimization. And so we're pleased to do a CDs transaction in the fourth quarter of last year and a very successful [indiscernible] transaction in the second quarter.

To give you a sense of the economics, the second quarter deal was exceptionally good. Less than 3% cost of capital. So what I mean by that, $4 billion notional transaction against high-quality indirect auto loans. 74% reduction in risk related assets through the transactions of $3 billion reduction in RWA. We also got almost $500 million of funding from the transaction. And the cost of that is only $7 million into spread on a year 1 basis, plus some modest upfront transaction costs. So it's incredibly efficient at the margin unlock 17 bps of CET1 and just continue to support those prime objectives. So we look at it as very much tactical. It's not the core underlying driver, but just the opportunistic things to come through. And we're really pleased with how that went although the economics are incredibly favorable.

[Operator]

Our next question is from the line of Jon Arfstrom with RBC Capital Markets.

[Jon Arfstrom, analyst]

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

[Stephen Steinour, executive]

Well, our pipelines go out a couple of quarters. And so we have visibility through -- in a not full visible, but part of it is going through the fourth quarter. We don't get a significant visibility into '25. Certain businesses though, because of the nature of the relationships, our distribution finance, we tie back in to the supply base. And we get some insight from that as to what they intend to produce. But on the whole, we don't have significant multi-quarter visibility, Jon. You do see from our customers, however, they're performing well this year. I think there's an expectation as rates come down, that they'll be doing more -- even more business next year, and that's a general sentiment to share with you.

[Jon Arfstrom, analyst]

Yes. 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?

[Stephen Steinour, executive]

Credit continues to perform very well. We're very pleased with the performance year-to-date. The outlook looks good. As you know, we spent a lot of time on portfolio reviews in management, and we're looking good. So there will be some sloppiness in commercial real estate over the next couple of years for us and others in the industry. But outside of that, looking good. And on the whole for us, it's not going to be an issue. As you know, our pre-concentration continues to reduce. So I think we had a little over $250 million of office payouts over the last 6 quarters. The half the construction unused commitments have been absorbed. So books -- the books in good shape.

[Operator]

Our final question is from the line of Peter Winter with D.A. Davidson.

[Peter Winter, analyst]

You guys had a nice rebound in fee income and then you've got the merchant acquiring coming on back in-house starting in the third quarter, which I think adds about $6 million fees. Just do you think fee income that you can continue this momentum and kind of maybe come in at the upper end of that 5% to 7% range?

[Zachary Wasserman, executive]

This is Zach. I'll take that one. So what I would share your -- the underlying premise of your question was fee income performance was very strong. We were really pleased with what we saw. Second quarter was up 6% sequentially from the first, continue to run at 5% year-over-year growth rates in similar to the first quarter year-over-year. And our expectation is to land within our 5% to 7% full year range.

As we get into the back half of the year, we noted that some of the grow over versus last year, a little easier. That being said, I think we'll continue to power our sequential growth here. And it really is the 3 priority areas of focus: capital markets, payments wealth management, execution quality is very strong, and the trends we're seeing continue to be very much conducive to that. The payments up 5% year-over-year in Q2. Treasury management within that double-digit growth driven by client penetration. Wealth management continues to run at very strong levels of performance advisory, household of [ agents ], AUM and net flows looks really good, and that's driving revenue of 8%.

And capital markets, which been a little bit choppy in the back half of last year. We were pleased to see what we would expect, which was strong growth in the second quarter, particularly in our advisory business. We know that the middle market M&A has been in a challenging environment as the yields were core and interest rate environment is rise in last year. That activity is now picking up, and I think we'll sustain. So I'm expecting sequential growth in each of those areas. I think where we landed in the range and which is clearly a function of how well we perform in it, but strong confidence we get there.

[Peter Winter, analyst]

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

[Brendan Lawlor, executive]

Peter, it's Brendan. I'll take that one. As you sort of noted, we basically had the reserve flat this quarter at [ 195 ] versus [ 197 ] last quarter. So modest add to the dollar amount of the reserve. We just continue to watch the volatility in just the overall market, but particularly with respect to rates as well as the impact of the higher the longer rates on our core real estate portfolio.

So as we see stronger economic performance come through in our modeling, combined with the continued solid performance of the credit portfolio, that's when we would really look to start to move the reserve down more materially, that will be play out over a longer period of time. And so we're just -- we're continuing to watch and manage this to the right level. But right now, we feel like we're adequately reserved.

[Operator]

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

[Stephen Steinour, executive]

Well, thank you for joining us today. In closing, we're pleased with our second quarter results, having delivered sequential growth in both strategy revenues. We're expecting our organic growth strategies and our investments are bearing fruitful momentum building across the day. Our competitive position remains strong with robust capital liquidity. We continue to seize the opportunities to add talented bankers across such businesses. We remain focused on our long-term strategic objectives. And collectively, the Board executives and our colleagues and top 10 shareholder. We have a strong alignment, delivered 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.

[Operator]

Thank you. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.