Huntington Bancshares Inc
NASDAQ:HBAN
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Huntington Bancshares Inc
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Greetings, and welcome to the Huntington Bancshares Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
I'd now like to turn the conference over to your host, Tim Sedabres, Director of Investor Relations.
Thank you, operator. Welcome, everyone, and good morning. Copies of the slides we will be referencing today can be found on the Investor Relations section of our website, www.huntington.com. As a reminder, this call is being recorded and a replay will be available starting about one hour from the close of the call.
Our presenters today are Steve Steinour, Chairman, President and CEO; and Zach Wasserman, Chief Financial Officer; Rich Pohle, Chief Credit Officer, will join us for the Q&A.
As noted on Slide 2, today's discussion, including the Q&A portion, will contain forward-looking statements. Such statements are based on information and assumptions available at this time and are subject to changes, risks and uncertainties, which may cause actual results to differ materially. We assume no obligation to update such statements. For a complete discussion of risks and uncertainties, please refer to this slide and material filed with the SEC, including our most recent Forms 10-K, 10-Q and 8-K filings.
Let me now turn it over to Steve.
Thanks, Tim. Good morning, and welcome. Thank you for joining the call today. We are extremely pleased to announce our third quarter results, which reflected adjusted net income of $575 million and represented another quarter of record earnings for the company. We continue to execute on our plan for 2022 and the business is performing very well despite macroeconomic uncertainties.
We are seeing sustained demand from customers across the footprint, which is reflected in the robust pipelines and our growth trends. We are closely monitoring economic developments and continue to believe we are operating from a position of strength as we head into the fourth quarter and 2023.
Now on to Slide 4. First, the performance in the third quarter was exceptional with our third consecutive quarter of record PPNR. Loan growth continued to be broad-based and combined with the benefit from higher interest rates, net interest income again expanded at a double-digit rate from the prior quarter and fee income also expanded sequentially. As a result of these factors, adjusted PPNR increased by 14% in the quarter. This performance was driven by execution of our revenue producing initiatives and reflected our continued disciplined expense management.
Second, we delivered another quarter of sequential growth in average deposits driven by commercial. Third, we were pleased to drive double-digit annualized loan growth again this quarter. With this robust loan momentum and continued pipeline strength, we are optimizing asset growth at the margin to maximize the return profile as we enter the fourth quarter.
Fourth, we are increasing our revenue and profitability guidance to incorporate the recent rate curve outlook. Zach will provide you with more details on that later.
Finally, we are positioned very well for potential economic uncertainty with balance sheet strength, including higher capital levels and a reserve profile that is near the top of the peer group. Additionally, our profitability and return on capital outlook is expected to continue to support further building capital ratios. This places Huntington in a position of strength with an outlook that will continue to be guided by our disciplined approach to customer selection and our aggregate moderate to low risk appetite through the cycle.
On Slide 5, let me share more details on our third quarter performance. As I mentioned earlier, we reported record net income, which reflects our earnings power and ability to generate sustained top-tier returns.
We have positioned the company to benefit from higher interest rates with our asset sensitivity, and we continue to grow our fee income businesses. This level of robust revenue supports our continued investment in key strategic initiatives, which will sustain growth. Importantly, we remain committed to our disciplined expense management and guided by our commitment to positive operating leverage.
Finally, as we previously delivered on the TCF integration program and cost savings, we remain focused on driving the incremental revenue opportunities from the acquisition.
Let me provide a few updates on our progress to-date. We've added over 60 revenue-producing colleagues in Minnesota and Colorado to support wealth management, business banking, middle market and specialty banking.
The commercial teams in the Twin Cities in Denver are continuing to gain traction, adding new customers and building pipelines. In addition to the expanding middle market teams, we are seeing accelerated loan growth in some of our specialty areas such as, health care and asset-based lending, where we have recently closed a handful of sizable new relationships in Colorado as a function of our expertise and local presence.
We are also driving increased productivity from the acquired branches where we have grown primary banking relationships nearly every month since conversion. We believe this demonstrates relationship deepening and a positive reception to the Huntington product offerings.
Our business banking expansion in Minnesota and Colorado is also showing substantial momentum. We're pleased to have already achieved the top three ranking or better for SBA lending, which were start-ups in both markets.
The launch of Wealth Management in the Twin Cities continues to track better than our initial projections. The team has been fully built out, and we are pleased with the caliber of talent we were able to add in this market. While it's still early, the team is already contributing to relationship growth.
Building pipelines reflect a significant customer opportunity even against a difficult market backdrop. Based on early successes we are seeing in the Twin Cities, we've expanded the wealth management business to Denver with key hires added during the third quarter.
In our Asset Finance business, which includes equipment finance and distribution finance, which was formerly known as inventory finance, our teams continue to capitalize on the opportunities to harness the combined scale to better serve our customers. The business is significantly benefiting from that scale, driving increased momentum in client acquisition and deepening of existing relationships.
We are now the fifth largest bank-owned equipment finance platform in the US, an increase from number seven only a year ago. These initiatives are ongoing, and we expect them to be a significant contributor to our growth over the longer term.
We look forward to our Investor Day next month when we can spend more time on our overall business strategies as well as how these TCF revenue synergies factor into our consolidated outlook.
Zach, over to you to provide more detail on our financial performance.
Thanks, Steve, and good morning, everyone. Slide 7 provides highlights of our third quarter results. We reported GAAP and adjusted earnings per common share of $0.39. Return on tangible common equity or ROTCE, came in at 21.9% for the quarter. Adjusted for notable items, ROTCE was 22.2%.
As you saw on slide 4, if you were to normalize TCE for the non-cash accounting impact of other accumulated comprehensive income that arises from unrealized losses on our AFS securities portfolio, our ROTCE would have been 18.6%. We are pleased with the sustained momentum in our loan balances, with total loans increasing by $3 billion and excluding PPP, loans increasing by $3.3 billion.
Total average deposits also increased $1 billion quarter-over-quarter and $3.7 billion year-over-year. This growth reflects the focus on primary bank relationships. Pre-provision net revenue expanded sequentially by 17% from last quarter to $857 million. Credit quality remained strong with net charge-offs of 15 basis points and non-performing assets declining to 53 basis points.
Slide 8 shows our continued trajectory of PPNR expansion. We expect Q4 to be another strong quarter as we drive sustainable profitability and highlight the earnings power of the company, supported by organic growth initiatives and harnessing the benefits from the TCF acquisition. We remain committed to our long track record of managing to positive operating leverage even as we continue to invest in the business.
Turning to slide 9. Average loan balances increased 2.6% quarter-over-quarter, totaling $117 billion. Excluding PPP, total loan balances increased $3.3 billion, or 2.9% driven by both commercial and consumer loans. Within commercial, excluding PPP, average loans increased by $2 billion or 3.3% from the prior quarter. These results were supported by broad-based demand across our commercial businesses that is fueling robust new production.
Line utilization remained relatively stable during the quarter on a core C&I basis, while we saw higher balances within distribution finance. Asset Finance, which includes equipment finance and distribution finance, contributed with balances higher by $1 billion. This included $300 million from distribution finance during the quarter.
Commercial real estate balances also increased by $800 million. Commercial growth continued in our middle market, corporate and specialty banking segments, which collectively increased by $200 million during the quarter.
In Consumer, growth was led by residential mortgage, which increased by $1 billion, driven by slowing prepays and higher mix of on-balance sheet loan production. We also saw steady growth in our vehicle finance business.
Turning to slide 10. We delivered average deposit growth of $1 billion. Deposit growth was led by commercial, up $1.4 billion. This expansion reflects our initiatives to drive primary bank relationships and new customer acquisition. We remain disciplined on deposit pricing, with our total cost of deposits coming in at 25 basis points for the third quarter.
On slide 11, we reported another quarter of sequential expansion of both net interest income and NIM. Core net interest income, excluding PPP and purchase accounting accretion, increased by $148 million, or 12% to $1.392 billion. Net interest margin increased primarily driven by higher earning asset yields as a result of our asset sensitivity position.
Slide 12 highlights Huntington's deposit pricing discipline. Our low deposit rate relative to the third quarter of 2015 along with an improved funding profile gives us the flexibility to remain disciplined on deposit pricing. For the third quarter, we have started to see our average cost of deposits tick-up as expected. We are remaining dynamic in this environment. We continue to manage the portfolio at a very granular and segmented level to ensure pricing discipline and with a focus on growing the primary bank relationships that bring lower-cost deposits.
Turning to Slide 13. We have been dynamically managing the balance sheet against the volatile rate backdrop. This quarter, we continued to execute on our hedging strategy to manage possible downside rate risks over the longer-term, while positioning ourselves to benefit from higher expected rates in the short-term.
In Q3, we increased our downside protection by executing a net $6.6 billion of received fixed swaps and $2 billion of callers. We will be proactive in managing our downside risk, while closely monitoring the rate outlook. Our expectation is to continue to deploy downside hedging strategies over the coming months.
Additionally, we are actively managing the securities portfolio to both capture the benefit from higher rates over time and protect tangible capital. We maintained the proportion of securities in held to maturity, flat during the quarter and our reinvesting securities portfolio cash flows at rates above portfolio yields.
Moving to Slide 14. Non-interest income was $498 million, up $13 million from last quarter. We drove record activity within our capital markets businesses during the quarter, with revenues increasing $19 million, which includes the full quarter impact from Capstone. Capstone's deal pipeline is healthy, and we expect it to contribute to additional growth in the fourth quarter.
We remain pleased with the client engagement we are seeing in the wealth management business with positive net asset flows year-to-date. The momentum in net flows has been outweighed by market-based changes in assets under management, resulting in lower overall revenue. Deposit service charges were also lower by $12 million reflecting the expected $9 million impact from Fair Play enhancements that were implemented in July. Our outlook for the impact of these fee adjustments is unchanged from prior guidance.
Our Fair Play philosophy is at the center of our strategy and is directly aligned with our mission of looking out for people. We believe the effect of Fair Play continues to be a compelling value proposition for our customers and supports sustainable growth for the bank. Fee revenues were also impacted this quarter by a decline in mortgage banking driven by a lower return on our MSR asset and lower saleable spreads.
Moving on to Slide 15. Non-interest expense increased $35 million from the prior quarter. Aligned to our prior guidance, core expenses, excluding notable items, increased $49 million to $1.043 billion. This increase was mainly driven by the full quarter impact from Capstone and Torana. It also included additional compensation expenses related to the strong revenue and production we are seeing in 2022, and impacts from Merit and day count. The underlying expense run rate remains very well controlled.
Our efficiency ratio, which is an outcome of our revenue drivers and expense management activities came in at 54.4% on a reported basis and adjusted for notable items was 53.9% for the quarter. On an adjusted basis, this reflects a decrease of 210 basis points quarter-over-quarter.
Slide 16 recaps our capital position. Common equity Tier 1 ended the quarter at 9.3% within our targeted operating range of 9% to 10%. As we go forward, our capital priorities remain unchanged with our first priority to fund organic loan growth. With the robust return on equity, we are generating from our core assets, we are deploying our incremental capital to fund organic growth and drive CET1 toward the middle of our target operating range by year-end.
Our tangible common equity ratio, or TCE, declined to 5.3% as a result of AOCI marks on the securities portfolio. Recall, this temporarily reduces equity as value marks are taken and then accretes back over time. Importantly, this does not impact our regulatory capital ratios. Our TCE ratio, excluding the AOCI impact, increased 19 basis points to 7.2%. Finally, our dividend yield remains well above the median in our peer group at 4.5%.
On slide 17, credit quality continues to perform very well. As mentioned, net charge-offs were 15 basis points for the quarter. This was higher than last quarter by 12 basis points and down five basis points from the prior year. Our consumer and commercial portfolios continue to demonstrate stability and credit quality. Nonperforming assets declined from the previous quarter and have reduced for five consecutive quarters. Criticized loans have reduced both from the prior quarter and prior year. Allowance for credit losses was up two basis points to 1.89% of total loans, reflecting a conservative reserve posture given the heightened economic uncertainty, even as our internal portfolio metrics show stability.
Turning to slide 18. Let me update our latest forecast for Q4. Our guidance assumes the consensus economic outlook through year-end and incorporates the rate curve as of the end of September. Our loan growth guidance remains unchanged at high single-digit growth rate on a year-over-year basis. We are currently tracking toward the higher end of this range. As a result of balance sheet growth and the rate curve outlook, we are again revising guidance higher for net interest income. We now expect core net interest income on a dollar basis, excluding PPP and purchase accounting accretion to be up in the high 20s to low 30s percentage growth rate for the fourth quarter on a year-over-year basis.
In fee income, we now expect it to be down low single digits for the fourth quarter on a year-over-year basis. This guidance is reduced from a prior level. We continue to see encouraging trends in core strategic growth areas within fees, namely our capital markets, wealth and advisory and payments businesses and the prior trends we have been seeing in other major fee lines, including mortgage, are within expected levels. The change in our guidance is related to the decision to hold on sheet, the guaranteed portion of our SBA loan production.
Market sale premiums for those assets have reduced and it is now more advantageous for us to hold that production on sheet in Q4, as opposed to selling. We will forgo an acceleration of fees this quarter, but benefit from higher spread income out into 2023 and beyond. We believe this is a good economic return, but will cause fee recognition in Q4 to be lower than prior expectations.
On expenses, our expectation is for core expenses to be up low single digits in the fourth quarter compared to the prior quarter. We continue to maintain tight control of underlying core expenses, while also seeing some impacts from compensation driven by the strong performance and profitability we are seeing in our 2022 results. Given the higher earnings, we now expect our tax rate to be approximately 19%.
Finally, before we move to Q&A, I'd like to end with a few key points. As Steve mentioned earlier, our business is performing exceptionally well right now with solid momentum in the underlying drivers and expanding profitability.
We also continue to see strength in our customer trends, where they appear to be managing through the environment well and with solid credit performance. Notwithstanding these clear positives, we are mindful of the heightened uncertainty and risks in the environment.
We are closely monitoring the impacts from persistently high inflation, rising interest rates, geopolitical instability and market volatility. The cone of uncertainty around the near-term economic environment has widened and the probability of a recession is increasing.
A bedrock part of the way we manage our business is to be dynamic to ensure we have game plans ready and are positioned; to act to manage through a multitude of scenarios while sustaining top-tier performance; and as always, we are guided by our moderate to low risk appetite through the cycle.
We are operating from a position of strength, and we are confident in our ability to successfully manage a range of economic environments. We're looking forward to hosting many of you at our upcoming Investor Day on Thursday, November 10, in New York City and via webcast. We are excited to share more about our strategic growth objectives and our targets to continue to drive top performance and value creation over the years to come.
With that, we will conclude our prepared remarks and move to Q&A. Tim, over to you.
Thanks, Zack. 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: This time we will be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is from the line of Betsy Graseck with Morgan Stanley. Please proceed with your question.
Hi. Good morning. Thanks for all the time this morning. What I wanted to just dig into is how we should be thinking about momentum into 2023 from a loan growth perspective. You've got accelerating growth there, and you've got some NIM benefits that are coming from the mix shift. And I just wanted to understand the dynamic as we should be thinking about loan growth versus peak NIM given in particular the hedges that you're adding? Thanks.
Sure. Great question. Thank you. This is Zach. I'll take that. I think, in terms of loan growth, we continue to see quite a bit of momentum as we discussed in the prepared remarks, even as we're taking opportunities here in the fourth quarter to optimize where we're driving that incremental production for higher capital returns. And so expect to see continued momentum into the fourth quarter and that will continue into 2023.
Notwithstanding the economic uncertainty, we continue to see demand from our clients and pipelines that even as they're pulling through are refilling and so that indicates continued momentum out into 2023 and beyond. And I think as we drive that, we'll also benefit from higher asset yields to the point of your question, and that will support expanding NIM here into the fourth quarter in the near term.
And the hedge impact, can you just talk through how we should be thinking about that as we go -- migrate through the next four quarters to eight quarters?
Sure. As it relates to hedging, we – sort of taking a step back, we purposely took a series of actions in 2021 as we discussed to increase the asset sensitivity of the business, and to benefit from higher rates that really or through over the course of the last several quarters, just in Q2 and Q3 of this year, 55 basis points of total core NIM expansion and there's more opportunity ahead.
The strategy that we're working through is really based on history, where if you look at the long-term history around rate cycles, typically medium to long-term rates begin to fall right at the peak of the Fed hiking cycle. And so even as we're continuing to benefit from our asset sensitivity over the course of the early part of this year, we have been adding incrementally to the downside hedge protection portfolio, so as to protect against potential downside rate scenarios in 2023, 2024, 2025 and beyond.
At this point, we've completed around 60% of that total potential capacity for hedging, which based on what we've done so far, would protect around to 35% to 45% of NIM in down ramp scenarios out into those years that I mentioned.
From here, I expect to stay asset sensitive, and that will, based on our expectations, drive additional NIM expansion into Q4. Even as we're continuing likely to continue to add to that hedge portfolio here over the next over the coming months, staying dynamic, walk through of interest rates, but continuing to protect against that downside. So the net of those things should support continued loan growth, as I said, and help to protect and maintain really strong levels of NIM as we go forward.
Thank you.
Thank you. Our next question is from the line of Scott Siefers with Piper Sandler. Please proceed with your question.
Good morning, guys. Thanks for taking the question. So Zach, appreciate the comments on NII into the fourth quarter. So the guidance indeed looks like another step-up that the growth rate will moderate as one might expect. Once we are, sort of, done with the Fed's tightening cycle? And maybe, if you can just comment, or give your thoughts around the ability to sustain positive NII momentum after that's all finished. It sounds like certainly the volume side sounds pretty optimistic, but we would just be curious to hear your thoughts on the puts and takes?
Yeah. Yeah, it's a great question. And I think that, the model will be that sustained growth rate in loans, coupled with the rising in the near-term and then stable NIM out into the future to really drive sustained continued growth in NII on a dollar basis. The trajectory around NIM in 2023 is very much a function of what happens with the economy, clearly and where the rate curve is trending. So it's – I won't give you a clear guidance at this point. We'll talk more about that as we engage in future sessions, but our expectation is that 2023 will look quite good from a NIM perspective and that the volume growth will really support sustained continued growth in NII.
Okay. Perfect. Thank you. And then if I could switch gears to the expense side for a moment. The cost base maybe a little higher than I would have expected into the fourth quarter, are the compensation pressures, will those sort of – I mean, are those related to just the strong earnings performance for this year? Will those – that base that we've got in the fourth quarter continue into next year as well. In other words, there's some of the transitory versus ongoing?
Yes. It's a good question. Really, that -- the portion of expenses in the third quarter that we're calling out is compensation related or really are, in fact, related to the exceptionally strong levels of production and revenue and ultimately profitability we're seeing in 2022. And our baseline posture for expense management at this point is to be keeping the core underlying growth of expenses very well controlled and at a low level.
The model, as we've talked about, quite a bit over time is for us to self-fund investments in our strategic initiatives, execution on the TCF revenue synergies and our continued technology development program by driving efficiencies in the core operating expense base of the company through scale, process, automation, et cetera. An indication of that is we're continuing to optimize our branch network.
We just announced a week or so ago, another 31 branch closures that will be implemented in the early part of next year, and that's just sort of how we'll drive that efficiency to continue to keep expenses growing at a low level and of course, drive positive operating leverage as we go forward. So that's the run rate that we see as we get out into 2023. And of course, we'll provide more clear guidance as we get closer to the beginning of next year.
Perfect. All right. Thank you very much. I appreciate the time.
Thank you.
Thank you. The next question is from the line of Steven Alexopoulos with JPMorgan. Please proceed with your question.
Hey, good morning everyone.
Good morning, Steven.
Good morning.
I want to start on the deposit side. So in the quarter, you grew average loans by $3 billion, but deposits by $1 billion, and we saw a mix shift out of non-interest-bearing into brokered that -- what do you see as a risk of non-interest-bearing outflows, right? Talk about the funding strategy? And where do you see the mix evolving to?
Yes. It's a really good question, and it's obviously a key area of considerable focus. We really like the results we're seeing on the deposit side in Q3 and solid execution of our strategy of driving toward primary bank relationships and operating accounts, even as we're staying very dynamic and really managing interest expense and the trajectory on that exceptionally closely.
What I expect into the fourth quarter is more of the same. So I expect to see deposits grow into the fourth quarter commercial led -- and even as, of course, beta and interest expense costs are beginning now to tick up as we go into the fourth quarter, just kind of taking a step back in terms of the overall funding mix to the point of your question.
As we see it, we're starting this cycle and beginning into the early stages of it from a really solid position relative to cycles. The loan-to-deposit ratio is relatively low. Non-customer sources of funding are also relatively low. And that leaves us in a good position to leverage diversified funding sources to fund that we've got. Of course, deposits are the core and that's why we're pleased that they're growing.
But we do have the opportunity to leverage short-term and long-term other sources of funding, which we'll do in a diversified way to balance the funding sources, and to be frank, to put good tension in the system to really support our disciplined approach to pricing and deposit growth over time. And so that's the model that we'll use. And I think as we go out into the future, we'll see that balance of funding.
That's helpful. And then to follow up. So based on the ranges that you're giving for the updated fourth quarter guidance, we can get to a scenario where NIM is flat or even down a little bit in the quarter -- fourth quarter. Could you frame for us how much NIM expansion you're thinking about for 4Q? And was your answer to Scott's question that you think NIM could hold flattish next year? Is that the base case? Thanks.
Yes. So, I do expect to see NIM expansion into the fourth quarter. It won't be at the same rate that we've seen for the last couple of quarters, but I do think, we'll see that continue to expand into the fourth quarter. As we go into 2023, what happens kind of over the longer term out into the back half of '23 is really going to be a function of where we see the yield curve going and the economy as I mentioned. And so, you could see stability, you could see some downdraft. We'll see. I think it's going to be a function of those drivers. With that being said, our focus, as I said before, is really on growing net interest income on a dollar basis. And I think the loan growth we're bringing through will help to sustain and support that over time.
Okay. Thanks. Steve, that deserves some type of award for the way he has managed this balance sheet so far in this environment. Thanks for taking my questions.
Thank you. It's a team effort, but appreciate the recognition.
It's also early innings. Thank you.
The next question is from the line of Ken Usdin with Jefferies. Please proceed with your question.
Hey, thanks, good morning. Zach, if I could follow up on the securities book. I was wondering, if you could just help us understand how the paid fixed, receive variable swaps have helped the securities book, noting that your yields were up 50 basis points in that book this quarter on top of a prior 50 basis points. It seems like you're really getting that extra juice off the securities book. So, can you kind of just help us understand like what's -- how long does that help you for on that swap side? And then, what are you expecting just the overall size of the book to look like going forward? Thanks.
Great question. In terms of size, we think the securities portfolio is rightsized with respect to the size of the balance sheet at this point. It's about 24% of total assets, 26% of earning assets. And I expected to say, proportionately the same -- at the same level for the foreseeable future. It's -- we're essentially managing it for our liquidity as a corporation at this point.
In terms of yields, we did see a 50 basis point increase in portfolio yield into the third quarter, which was obviously very helpful for NIM. If I was to reconcile that for you, about 30 basis points of that 50 was from the hedge portfolio. Just under 10 basis points was from the impact of new money yields coming in during the quarter and the remainder of roughly 11 basis points was driven by a reduction in premium amortization.
I expect that we'll continue to see rising yields out of the securities portfolio, partly as a function of that just continued reduction in premium amort, the hedge portfolio should continue to benefit us as well as the rate curve has ticked up just a bit incrementally from the end of the third quarter here and new money yields are pretty attractive relative to existing portfolio yield. To give you a sense, team is currently investing somewhere between 5.15% and 5.35% yields here as we enter October. So that will continue to be accretive to yield as we go forward.
Okay. And just to follow up, I'll ask on that, just then, Zach, that 30 basis points help like. How long is that helper in that part of the portfolio, the swaps on the securities book? How long does that carry forward for?
It will continue to carry forward for a while here. The tenure of those are multiple years. And so we'll obviously have to see where the trajectory of the yield curve goes to the extent to they drive incremental benefit on a quarter-to-quarter basis, but they will protect us for some time to come to the extent that rates keep rising.
Right. Okay. Thank you, Zach. Thank you.
Thank you.
Thank you. The next question is from the line of Jon Arfstrom with RBC. Please proceed with your question.
Thanks. Good morning.
Good morning, Jon.
Steve or Rich, can you talk a little bit about how you're balancing growth with -- I think, Steve, your comment was potential economic uncertainty. Your numbers look clean, but you did have a higher provision and you took your reserves up a little bit. So talk a little bit about credit, and Rich, maybe give us some help on what you're thinking on provision and reserves.
Let me start, and I'll turn it over to Rich, John. Thanks for the question. First of all, credit was really good again this quarter, and we feel very, very good about our position. We talked about it internally being a strong position that we're playing from and you'll hear us occasionally reference it externally as well.
Balanced book, balanced portfolio, lot of discipline about aggregate moderate to low-risk appetite over many years, you've seen our credit metrics quarter-over-quarter on the consumer side, super prime. It's -- we're feeling -- obviously, we're feeling very good about it. Obviously, we're working it diligently. There's a lot of portfolio review that's very active portfolio management underway constantly, and the teams are doing a great job. So now that I've stole most of Rich's thunder, let me turn it over to Rich.
I was going to say there's not a whole lot to add there. But as Steve mentioned, I mean, the credit looks really good. We've got eight basis points of charge-offs for the year in crit-class and NPAs are both trending down for several quarters. With respect to the increase in the reserve coverage, I mean, the allowance went up by $64 million in the quarter, and most of that was coming from loan growth. So we've taken this consistently a prudent approach since -- to our ACL since COVID came in 2020. And we think that we've got a good position of strength right now heading into a possible downturn.
You know, as it relates to how we're managing the growth versus where we are in the cycle, I mean, we are fundamentally laser-focused on client selection, and we underwrite our clients at all times to how do they perform through the cycle. And clearly, with one coming up potentially, we're paying heightened attention to that. But we're always sensitizing for higher rates for stress with inflation and other variables as we underwrite our credits, and that's not changing. So we feel that we can grow the balance sheet and grow it prudently, and we'll move forward from there. So we feel good about where we are.
Just as a follow-up on client selection of your comment. Can you talk a little bit about the consumer as well? I mean, your numbers are incredibly clean, but are you expecting some deterioration there over time or just give us your overall thoughts there, Rich?
Yes. We are expecting it. And really, when you talk about deterioration, I mean, you are coming off a very low base, right? With all the stimulus money that came into the system in 2020 and into 2021. The levels of delinquencies and the level of charge-offs are really unsustainable. So what we're looking at is more of a return to normal. We're closely watching the early-stage delinquencies and they're exactly where we thought they would be.
I mean, they are up off of those historic lows. But if you go back and you look at where delinquencies would have been in 2018 and 2019, we're not at those more normal levels. And with respect to charge-offs, we've had net recoveries in many of our consumer portfolios in the first, second and even into the third quarter. And we do expect over time that those are going to return to the norm. But right now, we feel very good about where the consumer book is positioned.
Okay. Thank you.
[Operator Instructions] The next question is coming from the line of Matt O'Connor with Deutsche Bank. Please proceed with your question.
Good morning. I guess, following up on the last question first. Specifically, on indirect auto, I mean, we're seeing some pockets of, I guess, stress last normalization elsewhere. I think your mix is a lot different and just so much higher quality, you've been so consistent. Obviously, you had just like $3 million of losses. But specifically, Derek, can you talk about what you're seeing and if there's any changes that you're making either on the origination side, or I guess, we're hearing about collections being tricky as well? Thanks.
Hey, Matt, it's Rich. I'll take that. So as we've been in this business for 75 years, and we've been through all sorts of cycles and as you know, our model is one of focusing on prime and super prime customers. And one of the benefits that we've developed over time is the ability to put in highly predictive custom scorecards with response to fall expectations.
So we're underwriting to not getting the car back in the first place. And we are mindful of the fact that used car prices are coming down, and we build that into our decisioning. If you look on slide 37 of the earnings deck, you'll see that, while we're maintaining really strong FICOs and custom scorecard ratings, our LTVs have come down steadily since the third quarter of 2020. And so we've got a very disciplined and sophisticated underwriting approach, and the fact that we're, I think, prudently bringing the LTVs down over time speaks well to how that folk is going to perform. It's a core competency of the bank.
We are – expect the charge-offs to return to normal. But for right now, we're enjoying what we think is a really strong core competency that we bring to that business.
Even the normal – that is on a comparative basis to the industry is just excellent. So we underwrite for roughly 20, 25 bps of loss and obviously, we're not seeing that now.
Okay. That's helpful. And then just separately, you care to give us maybe a 30-second kind of preview of the Investor Day in terms of what you're looking to accomplish. You talked about strategic update and financial targets, but anything you want to give a full review of? Thanks
Sure. This is Zach. I'll take that one. Thanks for serving up that question. We are really excited about the opportunity to engage on November 10, Thursday in New York City and via webcast for Investor Day. We've got quite a robust agenda planned. We'll go through each of our major business lines, each of our key functions like credit and risk management, and human resources, and we'll share kind of an overview, not only of the strategy generally, but also what our updated long-term expectations are for financial performance and kind of the road map for us to get there. So it's going to be a robust discussion. And I think will serve as a great launching off point for a series of additional conversations thereafter. So really excited about it and look forward to three weeks from now.
Okay. Thanks. See you there.
See you.
Thank you. We do have a question coming from the line of Erika Najarian with UBS. Please proceed with your question.
Hi. Good morning.
Good morning, Erika.
Good morning, Erika.
My first question was for Steve. And Steve, I was laughing at your response to Steven Alexopoulos' comment is classic. Your efficiency ratio medium-term target is 56% and obviously, with the help of your -- the business strengths and rates went down to 54% in the quarter. And I'm wondering if the medium-term range still holds in that you'll look to continue to reinvest back in the business, especially as rates are helping the denominator side of that equation.
Erika, if we could defer that question to Investor Day, I would be very pleased, but I also very much appreciate the inquiry.
Got it. I tried.
I can see that. You certainly did.
Second question is a follow-up for Zach. I'm going to ask Steve's question another way. I think it was -- I saw it as an accomplishment that your period end deposits grew and you kept your cost of deposits to 25 bps, well below where I think everybody was expecting to go -- so as we think about your outlook for good loan growth and some NII growth next year, how should we think about deposit growth from here? I fully understand your message that you never got to search deposits in the first place. But how should we think about core deposit growth outside of mix shift. And additionally, how you're thinking about the terminal deposit beta from here?
Sure. It's a great question, Erika, and let me see if I can expand on some of that. So in terms of deposits, our expectation is to grow core deposits into the fourth quarter, as I mentioned earlier, commercial led commercial just continues to perform very well. I think we're really benefiting from all of the investments that we've made to expand the strength of the team and expertise and capabilities, not to mention the boost around TCF synergies, which are really contributing. And so that will be the core driver into Q4.
What's interesting on the consumer side, I do expect to see some continued downdraft in consumer core into the fourth quarter, but actually pretty encouraging underlying trends. What's happening in consumer is a bit of a tale of two cities where the underlying trend in customer acquisition, household acquisition and primary bank relationship growth and the deepening efforts that we've got both in our offline channels and increasingly now on the digital channels are really working. And we're seeing nice expanding deposit gathering from those activities.
What's offsetting that is what we -- the well documented phenomenon of the elevated level of savings and so-called surge deposits from the COVID area -- era are running down. And the net of those two things has been a modest reduction over the last several quarters. I expect that to continue into the fourth quarter before that -- the surge balance, a downdraft sort of start to wane and the underlying growth that we're seeing in that core activity within consumer start to come to the fore.
And so, we're encouraged about the longer-term trends in consumer. And as I look out over the 2023 period, I expect to see deposit growth. We'll continue to see commercial probably growing faster, but consumer contributing with net positive growth.
As it relates to beta, we'll see. I think, we're pretty sanguine on this point that we've seen low deposit beta thus far, and I think that's been shared very much across the industry and a number of the peers have seen that through the third quarter.
The market is becoming more active, as I said earlier, in the back half of Q3 and continuing now into Q4. So I expect to see beta rising in the fourth quarter. It's kind of as we expected, so not overly different than what we've been planning for all along, but that is trending.
Where it ultimately goes, in my opinion, is a bit theoretical. Everything continues to track generally to our plan thus far. But where we're focused is on our strategy, drive the primary bank and operating account relationships, stay very rigorous in terms of the detailed management and very dynamic in watching the market and ultimately ensure that we can keep supporting our customers and growing those relationships, which so far has been working, and that's what we'll keep doing.
Thanks. See you in three weeks.
Looking forward to it, Erika.
Thanks.
Thank you. At this time, I would like to turn the floor over to Mr. Steinour for closing remarks.
Well, thank you for joining us today. This was a tremendous quarter for all of us at Huntington. We're very pleased to see our second straight quarter of record net income and third straight quarter of record PPNR. We believe we're well positioned to manage through the current uncertain economic outlook.
We remain committed to and we're confident of our ability to continue to create value for our shareholders. And just as a reminder, the Board executives and our colleagues, we're a top 10 shareholder collectively, reflecting our strong alignment with shareholders. So thank you for your support and interest today, and we hope we'll see many of you in three weeks. Have a great day.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.