Huntington Bancshares Inc

NASDAQ:HBAN

Earnings Call Analysis

Huntington Bancshares Delivers Strong Q3 Performance with Promising Growth Outlook

Huntington Bancshares reported impressive third-quarter results, showcasing a 3% year-over-year increase in average loan balances and $8.3 billion in deposit growth. The bank's net interest income rose by 2.9% to $1.364 billion, with expectations for flat to 1% growth in Q4. Looking ahead, a cumulative down beta is forecasted at mid-30s by late 2025, with record net interest income anticipated next year. The bank's credit quality remains robust, with stable charge-offs. Effective expense management continues, supporting long-term organic growth despite a shift towards more competitive commercial deposits.

Strong Loan and Deposit Growth

In the third quarter of 2024, Huntington Bancshares demonstrated impressive financial stability and growth, highlighted by a 3.1% year-over-year average loan growth, aggregating to $3.7 billion. The end-of-period loans surged by 6.3% on an annualized basis, illustrating the bank's commitment to consistent lending practices. Average deposits also saw robust growth, rising by $8.3 billion or 5.6% year-over-year, significantly outpacing industry averages. This solid foundation positions Huntington both for continued success and the ability to navigate the evolving economic landscape.

Effective Management of Interest Rates

Huntington is proactively managing its interest rate environment, executing a 'down beta' strategy in anticipation of a declining Federal Reserve rate cycle. As of now, the bank expects two additional 25 basis-point rate reductions by the end of 2024 and further cuts in 2025. With these adjustments, Huntington forecasts a cumulative down beta in the mid-to-high 30s by the end of 2025 and mid-40s by the end of 2026, allowing for optimized deposit rates and increased lending potential.

Net Interest Income with Growth Resumption

In the quarter, net interest income rose by $39 million, or 2.9%, to $1.364 billion, benefiting from sustained deposit growth and effective loan yield management. The net interest margin (NIM) was reported at 2.98%, with expectations for it to be flat or increase by up to 1% year-over-year in Q4. Looking ahead to 2025, Huntington foresees record net interest income supported by steady loan growth and a shifting interest rate landscape, anticipating a NIM expansion to above 3% in the second half of 2025.

Resilient Fee Revenue Streams

Huntington's fee revenue strategies are proving effective, with a 12% year-over-year increase in core fee revenues. Notably, fees in key areas such as payments, wealth management, and capital markets are contributing significantly. The bank's in-sourcing of merchant acquiring operations is expected to add roughly 1% to overall fee revenue growth in 2025, showcasing the bank's ability to capitalize on new revenue streams.

Sound Credit Quality Maintained

Credit quality remains a cornerstone of Huntington’s performance with net charge-offs stable at 30 basis points. The allowance for credit losses has improved, ending the quarter at 1.93%. Importantly, the bank's focus on prime and super-prime consumer portfolios has contributed to low delinquency rates, supporting the overall healthy credit environment within its operational strategy.

Outlook for Future Growth Trends

As Huntington enters the final quarter of 2024, strong momentum from loan production and deposit gathering indicates a favorable outlook for growth into 2025. The fourth quarter production levels in September were notably high, with a 68% increase in late-stage commercial pipelines year-over-year. This trend suggests a steady trajectory for loan volume, bolstered by the bank's expansion into new markets, particularly in the Carolinas.

Investments and Efficiency Focus

Alongside organic growth strategies, Huntington has invested in enhancing operational efficiencies. While core expenses increased by approximately 4.5% year-over-year, these investments are expected to yield favorable outcomes supporting revenue-generating initiatives in 2025. The bank also targets to maintain disciplined expense growth while focusing on sustainably driving profits.

Earnings Call Transcript 2024-Q3

[Operator]

Greetings, and welcome to the Huntington Bancshares 2024 Third Quarter Earnings Review. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Tim Sedabres, Director of Investor Relations. Please go ahead.

[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 are very pleased to report outstanding results for the third quarter, which Zach will detail later. 2024 continues to be a dynamic year, and our year-to-date results demonstrate Huntington's strength and consistent performance. These strong results reflect the dedication of our nearly 20,000 colleagues across the bank who live our purpose every day as we make people's lives better, help businesses thrive and strengthen the communities we serve.

Now on to Slide 4. There are 5 key messages we want to share with you today. First, we are driving accelerated loan growth along with sustained deposit growth. These results are supported by our core businesses, as well as the successful execution of new initiatives, including expanded geographies and commercial banking verticals. Second, we are actively executing our down beta playbook as the market enters a declining Fed rate cycle. We are dynamically managing the balance sheet, and coupled with our growth outlook, we expect to deliver record net interest income in 2025.

Third, we continue to drive fee revenues higher with sustained momentum across our 3 major focus areas: payments, wealth management and capital markets. Fourth, our credit performance remained strong during the quarter with stable net charge-offs as well as lower nonperforming and criticized assets. This is a direct result of our consistent, disciplined credit management and our aggregate moderate to low risk appetite. Finally, our performance during the quarter set the foundation for continued organic growth and increased profitability into 2025 and beyond.

I will move us on to Slide 5 to recap our performance. We delivered accelerated loan growth in the quarter with average balances growing by 3% from a year ago. End-of-period loans increased at a 6.3% annualized rate. Average deposit growth continued at a robust pace, increasing by $8.3 billion or 5.6% over the past year. We drove capital ratios higher again with adjusted common equity Tier 1 of 8.9%. This benefited both from capital accretion from earnings as well as reduced AOCI. Our fee revenue strategies are delivering, with GAAP fee income increasing by 3% year-over-year. On an adjusted basis, core fee revenues demonstrated robust growth, increasing by 12% from a year ago, driven by payments, wealth management and capital markets. We are sustaining momentum in the growth of primary bank customer relationships.

As we continue to acquire new customers across the footprint, consumer PBRs have increased by 2%, and business banking PBRs have increased by 4% year-over-year. We have delivered PBR growth consistently with year-over-year increases for over a dozen consecutive quarters. We have continued to invest across the company to drive sustained organic growth.

Last month, we were pleased to announce our full franchise and branch expansion into the Carolinas. This builds upon the success of our earlier investments in the commercial and regional banking teams over the past year. These markets represent some of the most attractive geographies nationally, given their size and growth characteristics. We've hired well-established colleagues with local expertise in these markets, and the results today are tracking much better than our initial business case.

We've also invested substantially in our payments businesses, particularly in treasury management, including bringing in-house our merchant acquiring capabilities. The merchant acquiring business completed its final testing phase in September and implemented its full commercial launch in early October. The opportunity within merchant is substantial. And when at scale, we expect it will add 1 percentage point to overall fee revenue growth.

Credit trends overall are holding up very well, supported by our long track record of disciplined client selection. Our consumer portfolios are constructed around prime and super prime exposures. Within these portfolios, consumer delinquency rates remain stable. We are continuing to see sound fundamentals from our commercial customers. They have managed this rate cycle and inflationary change as well with stable revenue and profitability trends.

Overall, our customers continue to show strength and resiliency, which supports the constructive outlook for sustained organic growth. We exited the third quarter with robust production levels in September and with momentum that is carried into the fourth quarter. As an example, our regional banking group posted record loan production ex-PPP in the third quarter. Heading into the fourth quarter, late-stage commercial pipelines at quarter-end are up 68% from a year ago.

Our teams are actively implementing our down beta action plans. Fee revenue growth was robust in the third quarter, and we have confidence in our many initiatives, including merchant acquiring, as well as the outlook for capital markets and advisory revenues given strong pipelines as we enter the fourth quarter. We are maintaining disciplined expense management while continuing to invest. The additional efficiency actions we took in the third quarter will support our ability to sustain investment into revenue-producing initiatives into 2025.

Credit remains a hallmark of Huntington, with stable charge-offs and improved nonperforming and criticized assets. In closing, we have confidence in our ability to sustain our organic growth outlook as we finish the year and move into 2025. 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 third quarter results. We reported earnings per common share of $0.33. The quarter included $6 million of notable items on a net basis and did not have an impact to earnings per share. Return on tangible common equity, or ROTCE, came in at 16.2% for the quarter. Adjusted for notable items, ROTCE was 16.3%. Pre-provision net revenue, or PPNR, increased by 8.3% from the prior quarter. This was driven by net interest income, which expanded by 2.9%, and fee revenues, which increased by 6.5% from the prior quarter. Average loan balances increased by $3.7 billion or 3.1% versus last year. Average deposits continued to grow, increasing by $8.3 billion or 5.6% on a year-over-year basis.

Credit quality remains strong, with net charge-offs of 30 basis points. Allowance for credit losses decreased by 2 basis points and ended the quarter at 1.93%. Adjusted CET1 ended the quarter at 8.9% and increased roughly 30 basis points from last quarter. Supported by earnings as well as the recapture of AOCI from lower rates, tangible book value per share has increased by 21.5% year-over-year.

Turning to Slide 7. Consistent with our plan and prior guidance, year-over-year average loan growth is accelerating. Q3 loan growth was 3.1% year-over-year, rising from last quarter's 1.7% growth and the 1.3% we posted in Q1. Average loan balances increased sequentially by $1.1 billion. Excluding runoff from commercial real estate, loans increased by $1.6 billion or 1.3%. As Steve mentioned, end of period loans increased by 1.6% and represented a 6.3% annualized growth rate.

Loan growth in the quarter was supported by strong contributions from core businesses and from new initiatives. Our new initiatives collectively represented $700 million of growth in the quarter and included Carolinas, Texas, fund finance, health care asset-based lending and Native American Financial Services. Note, this pace of growth was above the second quarter level as teams continued to ramp up. and we expect growth in the fourth quarter to be further above these levels. Other drivers of loan growth in the third quarter included $595 million from consumer auto, $268 million from regional banking, $165 million from residential mortgage, $137 million from auto floorplan, $80 million from RV/Marine, $131 million from all other consumer categories on a net basis and $109 million from all other commercial categories on a net basis. This growth was partially offset by a seasonal decline in distribution finance, which was lower by $747 million.

Generally, we see the third quarter as the seasonal low point in the year for this business given inventory levels across our mix of programs. We expect inventories to build into the fourth quarter and resulting balances to be higher in the fourth quarter on average compared to the third quarter.

Turning to Slide 8. As noted, we drove another quarter of solid deposit growth. Average deposits increased by $2.9 billion or 1.9% in the third quarter. On a full quarter basis, total cost of deposits increased by 2 basis points in the third quarter. And interest-bearing deposit costs were flat for the quarter. Within the quarter, there were notable declines in deposit costs. We saw total cost of deposits decline sequentially in both August and September, with September costs lower by 7 basis points. This is a direct result of our proactive and disciplined execution of our down beta action plans in advance of the Fed's 50 basis point rate cut in September and continuing into Q4. These actions reflect our active balancing of deposit volumes and rate.

Given our robust deposit growth over the past year, we're in a strong position to optimize rates from here. We will remain very dynamic in managing the business and our action plan as this interest rate environment evolves. Our forecast is aligned with a forward curve, which projects 2 additional 25 basis point rate cuts by year-end and a further 525 basis point rate cut in 2025. As we noted in the past several quarters related to guidance on up beta, the performance and trajectory of down beta will be a function of the actual and projected path of rates, and importantly, customer expectations for that path. Based on the current rate outlook, we continue to project a cumulative down beta in the mid- to high-30s by the fourth quarter of 2025 and in the mid-40s range by the fourth quarter of 2026.

Turning to Slide 9. Our cumulative deposit growth since early 2023 totaled 7.1%. This level continues to well outpace the peer group. As a result, we've been able to decisively implement the down beta strategy, fund loan growth with deposits, and at the same time, manage the loan-to-deposit ratio lower over the past year, which will support the continued acceleration of lending.

On to Slide 10. For the quarter, net interest income increased by $39 million or 2.9% to $1.364 billion. We delivered sustained growth off of the trough levels from the first quarter of this year, consistent with our guidance. Net interest margin was 2.98% for the third quarter. Reconciling the change in NIM from Q2, we saw a decrease of 1 basis point. This was due to spread, net of free funds, lower by 2 basis points, higher cash balances driving margin lower by 2 basis points, partially offset by lower drag from the hedging program, which improved by 3 basis points. We continue to project full year net interest income to be within our prior guidance range.

The fourth quarter level is expected to be flat to up 1% on a year-over-year basis and then resume growth over the first half of 2025 and accelerate in the second half. This is expected to result in record net interest income for 2025 based on current rate curve expectations. We continue to benefit from fixed rate loan repricing, with loan yields expanding by 4 basis points from the prior quarter. This occurred even as SOFR moved lower during the quarter. As a reminder, we continue to analyze and develop action plans for a wide range of potential economic and interest rate scenarios for both short-term rates as well as the slope and belly of the curve. As I noted earlier, our working assumption includes 2 additional rate cuts by year-end and a further 5 cuts in 2025 and underlies this net interest income outlook.

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

Turning to Slide 12. Over the course of the rate cycle, we've positioned the company to benefit from asset sensitivity as the rate environment moved higher, and are now reducing our level of asset sensitivity as market expectations are increasingly weighted toward a down rate path. That strategy has worked well to maximize the benefit from the rate cycle and protect capital while managing NIM within a tight corridor. On the bottom of the slide, there is an illustration of the asset sensitivity path over the next several quarters. In Q3, we lowered our asset sensitivity by more than 1/3 from the second quarter. Looking forward, we expect the total cumulative reduction in asset sensitivity from Q2 to be greater than 50% by year-end 2024 and moving to above 60% by mid-2025. As always, we will continue to dynamically manage our hedging program to achieve our objectives of capital protection and NIM stabilization.

Moving on to Slide 13. On an overall level, noninterest income increased by $32 million to $523 million for the third quarter. Adjusting for the impacts of CRT transactions and the [ Pay Fix swaptions ] mark-to-market from the prior year, fee revenues increased by $55 million or 12% on a core underlying basis.

Moving on to Slide 14. Our strategy to increase the penetration and usage of value-added fee services is building on momentum we've created over the last several years. Adjusted fee revenues as a percentage of total revenues have increased from 25% a year ago to 28% in Q3. This reflects the focused effort on key initiatives across payments, wealth management and capital markets. Within payments, revenues have increased by $4 million in the third quarter and have increased by $6 million year-over-year. Commercial payments revenues, including treasury management fees, have grown strongly, increasing by 8% from the prior year.

Debit card revenue grew by 3% year-over-year, reflecting performance higher than industry averages, yet clearly impacted by the relatively slower levels of consumer spending growth we are seeing economy-wide. Other card-based revenues continued to grow year-over-year, supported by consumer credit card spending trends. The addition of merchant acquiring in-house capabilities will further support our overall payments revenue growth as we enter the fourth quarter and carry into 2025.

As Steve noted earlier, we see this initiative adding approximately 1 percentage point to overall fee revenue growth next year. Within Wealth Management, revenue growth was outstanding, increasing 18% from the prior year. Advisory relationships have increased by 7% year-over-year. And assets under management have increased 22% on a year-over-year basis. These results benefited from sustained positive net asset flows.

Within Capital Markets, we saw exceptionally strong revenue growth, increasing by $26 million or 50% from the prior year to $78 million. These results were driven by commercial banking-related capital markets revenues, which are accelerating as we have previously guided as a result of higher commercial loan production. As we look out into Q4, we expect to post another quarter of sequential growth in Capital Markets, driven by continued underlying core banking-related services and a robust advisory pipeline. We expect this positive momentum to carry into 2025.

Moving on to Slide 15 on expenses. GAAP noninterest expense increased by $13 million, and underlying core expenses also increased by $13 million. During the quarter, we incurred $13 million of expenses related to efficiency programs, which will benefit our 2025 expense outlook and allow us to reinvest savings into key revenue-producing initiatives. Additionally, this was partially offset by a $7 million benefit from the FDIC special assessment. Net, notable items for the quarter totaled $6 million.

Excluding these items, core expenses came in slightly better than our expectations for the quarter at $1.124 billion. The increase in core expenses quarter-over-quarter was primarily driven by personnel expenses due to higher salaries and benefit costs. We also saw $3 million of higher expenses related to merchant acquiring as we brought that business in-house and launched our services in October. We continue to forecast approximately 4.5% core expense growth for the full year.

Slide 16 recaps our capital position. Common equity Tier 1 ended the quarter at 10.4%. Our adjusted CET1 ratio, inclusive of AOCI, was 8.9% and has grown 90 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%.

On Slide 17, credit quality is coming in as we expected and continues to perform very well. Net charge-offs were 30 basis points in Q3, relatively stable over the past 4 quarters. Allowance for credit losses at 1.93% declined by 2 basis points from the prior quarter and reflects both modestly improved economic outlook as well as an increased loan portfolio.

On Slide 18, the criticized asset ratio decreased by 9% from the prior quarter to 4.09%. The nonperforming asset ratio declined by 1 basis point to 62 basis points. Turning to Slide 19. Our outlook for the full year remains unchanged from our prior guidance. Our expectations for the fourth quarter include accelerating loan growth at approximately 4% to 5% on a year-over-year basis. Deposit growth is expected to increase between 4% and 5% on a year-over-year basis. We see full year net interest income unchanged from our prior guidance range. The fourth quarter level is expected to be flat to up 1% on a year-over-year basis and then resume growth in the first half of 2025 and accelerating in the second half.

Core fee revenues adjusted for the swaptions and CRT items are expected to grow at approximately 8% to 9% year-over-year in the fourth quarter. Core expenses are well managed and tracking to our full year outlook. For the fourth quarter, we expect growth of approximately 3% year-over-year, subject to some variability given revenue-driven compensation levels, as well as expenses related to the in-sourcing of our merchant acquiring business, which brings with it direct offsetting fee revenues. This is consistent with our previous commentary to exit the year at a low single-digit year-over-year expense growth rate.

Credit is performing well, aligned with our expectations, and net charge-offs are projected to be relatively similar to Q3. Our tax rate for the fourth quarter is likely to be between 18% and 19%. 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 1 question and 1 related follow-up. And then if that person has additional questions, he or she can add themselves back into the queue. Thank you.

[Operator]

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

[Manan Gosalia, analyst]

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

[Zachary Wasserman, executive]

Thanks, Manan. This is Zach. I'll take that one. And the short answer is yes. Just a short timing difference between the really powerful and very effective actions you've seen on reducing deposit costs, which you saw some of the trends we illustrated in the third quarter, those will continue into the fourth quarter, just not fully offsetting on a short-term basis, the reductions in variable yields. I think we'll exit Q4 having a positive run rate benefit from deposit costs relative to asset yields, but the early part of the quarter, assuming, again, 2 more rate cuts, which is our forecast here, we'll likely be a little lower quarter-to-quarter.

[Manan Gosalia, analyst]

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

[Zachary Wasserman, executive]

Yes. It's a terrific question, Manan. That is effectively the plan. We really pleased to see how much deposit growth we've seen throughout the course of this year. Obviously, very significantly faster than the industry average overall. And that really puts us in a pretty strong position now with having brought down loan-to-deposit ratio. And just given how strong that deposit gathering has been to now turn and drive down beta and to begin to decelerate deposit growth even as loan growth is accelerating.

So if you look at the guidance we've given for deposits into the fourth quarter, I would expect the balances to be relatively flat actually quarter-to-quarter even as they still grow year-on-year. And that's really an indication that we're doing, exactly what you just said, leveraging that position to really drive our funding cost lower.

[Operator]

Our next question is from the line of Ebrahim Poonawala with Bank of America.

[Ebrahim Poonawala, analyst]

Two things. One, I guess, Zach, I just wanted to follow up. I think you mentioned NII. I guess you have the guidance for fourth quarter. And then did you mean to say that the growth accelerates from the 4Q versus 3Q level as we think about first half '25 and then get even faster through the course of '25? If you could just clarify that. And with that, what's the sensitivity to rate cuts, right? Like, we had [ very some ] retail sales to the markets actively recalibrating what the Fed may or may not do. Just talk to us whether getting 3 to 4 cuts versus not getting those cuts means much in terms of your NII outlook?

[Zachary Wasserman, executive]

Great question. Appreciate the chance to unpack it and clarify that. So our general expectations for NIM are to be a few basis points lower into the fourth quarter, really driven by what I was talking about from Manan's question earlier, just a short timing impact before which -- before accelerating betas start to fully offset and more than offset the variable impact on variable loans. I will note as well that 1 of the major benefits we'll have to NIM here is our hedging program. And just for the facts, we had around 12 basis points of hedge dragging in the second quarter -- sorry, in the third quarter. That's going to reduce -- if you look at the forward yield curve down to 7 basis points in Q4 and flip over the course of 2025 to a 5 basis point benefit by the end of 2025.

So beta accelerating and the hedge drag continually reducing and then beginning to be a hedge benefit as you go throughout the course of next year really are the drivers of why we expect to see sustained NIM expansion from the Q4 level in Q1, into Q2 and Q3 and then continuing on from there. So expect to see a nice upward drift in NIM from a Q4 level throughout the course of 2025. And when you couple that with the really robust loan growth we're driving, that will be what drives NII high will be the course of '25. We expect, as I noted in my prepared remarks, record NII dollars in 2025 really driven by those 2 factors.

[Ebrahim Poonawala, analyst]

Understood.

[Zachary Wasserman, executive]

I'll expand on your question on sensitivities. So I think your point is very well noted, it's a pretty dynamic environment here for sure. And while our underlying forecast assumes a couple of rate cuts this quarter and then 5 into next year, we could very well not see those, as you noted. I think in the short term for us, if you saw less rate cuts, you see an even better NIM performance and an even better NII dollar performance. Of course, as you know well, what would also matter a lot is the reason why you're not seeing those rate reductions and what that would imply about customer and market beliefs about where rates are going. And so we offer them that would on certain impact. But in the short term, it will be universally positive for us to have less rate cuts.

If there's more, I think you got to kind of matters why. I do think, for example, EB, earlier this year when we saw market expectations for rate reductions really accelerated a lot. That was very helpful to drive the actions around down beta. And so if you did see more rate reductions, while it might produce a little bit of short-term headwinds over the longer term might actually be even better for down rate deposit pricing. And so again, sort of a little uncertain over the short -- over the long term there if rates are even faster down.

[Ebrahim Poonawala, analyst]

That's helpful. And I guess just 1 thing you talked earlier about traction in Carolinas, just how loan growth was evolving. Talk to us in terms of deposit growth, you did hire a sort of a big team on the mortgage side. We see mortgage rates pulled back. But either that team or just the overall deposit gathering strategy beyond promotional rates, where do you see deposit growth coming from?

[Zachary Wasserman, executive]

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

So it's -- commercial is now beginning to accelerate. And I think as we have an outlook for '25, I would expect -- we're generally expecting continued deposit growth with the mix being slightly more commercial than consumer as we go into next year.

[Operator]

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

[Jon Arfstrom, analyst]

A couple -- 1 clarification. I think maybe a simple question, but you're saying fourth quarter NII around $1 billion, [ 330, 340 ], something like that. Am I reading that right?

[Zachary Wasserman, executive]

We're expecting between $15 million to $25 million lower sequentially, Jon. They will be around flat to up 1% on a year-over-year basis. Again, assuming not only 50 cut we just had, but another [ 225 ] here in the last few months of this year.

[Jon Arfstrom, analyst]

Okay. Okay. That's helpful. And then kind of a simple question, funny question. But on Slide 10, I kind of want to joke about the scaling of that, but the fourth quarter '25 bar chart implies higher NII. Is there -- odd question, is there any scale into that, Zach? Or what kind of an acceleration do you expect in NII growth throughout the year?

[Zachary Wasserman, executive]

I'm expecting pretty steady NII dollar growth from Q1 to Q2, Q2 to Q3 and continuing on. Jon, I think the kind of the path of NIM also starting now to get into a bit of overly precision at this point given [ alacrities ]. But generally speaking, I'm expecting to see nice sustained NIM expansion in Q1, Q2, Q3 and a bit topping out into Q4, but we'll see where the rate environment is at that point. And the dollars really be pretty steady growth throughout the year as lending sustains at a fairly solid level. It's probably the best way I can answer your question.

[Jon Arfstrom, analyst]

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

[Zachary Wasserman, executive]

Yes, a little bit off. We make roughly $25 million on a run rate annual basis for merchant acquiring in the old outsourced model that we have. As we in-source that business, we're thinking next year can be -- fill the $50 million in terms of overall revenue, which is -- that's an extra $25 million, sort of about 1% of the overall fee revenue base as you go into next year.

[Operator]

Our next question is from the line of Erika Najarian with UBS.

[Zachary Wasserman, executive]

Good morning, Erika.

[Operator]

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

[L. Erika Penala, analyst]

Can you hear me? Apologies. Sorry about that. So Zach, as you can imagine, everybody is asking about the blank box on 4Q '25 for Slide 10. So maybe I'll ask it this way. So consensus wants to fill that box. That would imply 8% year-over-year growth from your implied fourth quarter 2024. So I'm assuming that has loan growth and also the NIM inflection. So with that -- with consensus filling that box in at up 8% quarter-over-quarter, are they in the right ballpark as we think about your loan growth momentum and the dynamics of your balance sheet?

[Zachary Wasserman, executive]

Well, I'm not going to give that level of guidance precision at this point of the year, Erika. As you know, we will give guidance as we get into the early part of next year. But I don't think that's directionally wrong, frankly. I think we're expecting to see NIMs rise throughout the course of 2025. I mentioned earlier, I see NIM above 3% in the second half of next year. If you compare that to where we'll be this year, that will be a nice NIM expansion off of our forecast for Q4. So that will drive some year-over-year growth.

And then our current run rate on loan growth is around 6% on an annualized pace right now. And there's nothing that indicates we will not be able to sustain that pace in the next year. In fact, the fourth quarter looks outstanding in terms of loan growth and the momentum we've got across the business. And so those are relatively good underlying drivers to get to the number you're talking about without being really declared on guidance at this point.

[L. Erika Penala, analyst]

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

[Zachary Wasserman, executive]

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

The plan for 2025 is the same as we've had before, drive for positive operating leverage. I do expect to live it to the point of your last question to have a pretty solid revenue growth trajectory. And so I don't intend to -- we collectively don't intend to be in harvest mode. We want to keep driving for growth, but certainly to drive very solid improvement in positive operating leverage and efficiency ratio and then just to sustain that as we go forward.

[L. Erika Penala, analyst]

Got it. Thank you so much.

[Operator]

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

[Matthew O'Connor, analyst]

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

[Zachary Wasserman, executive]

Yes. Great question, Matt. It was primarily capital markets that you noted on the basis of your question. So we were expecting to see a pretty solid Q3 for capital markets, but it beat our expectations, even beat. Overall, really, really pleased with the execution, the sustained level of performance we're seeing in the 3 key areas of focus. 12% year-over-year growth in fees is pretty outstanding from our perspective.

The outlook for Q4 is likewise, pretty solid, particularly in capital markets. I think we'll see another really, really good quarter, sequential growth in cap markets, wealth continue to drive a good underlying household acquisition and net flows. And then payments really chugging along here, particularly with the addition of merchant acquiring, it should be a nice lift on tailwind to grow.

[Matthew O'Connor, analyst]

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

[Zachary Wasserman, executive]

Yes. Great question. On the plan to grow capital, we feel really good about how that's going. And as we've noted a number of times, the primary and most significant driver of our plans to continue to drive capital higher is just core organic earnings and strong return on capital. We look at these CRT transactions as really tactical as opportunistic. They're kind of an interesting innovation in the marketplace for sure that offer great low return on capital for certain asset classes. Just look back to the transaction we did in the second quarter, we unlocked 17 basis points of capital for less than 3% cost of capital, just $7 million plus transaction costs. So very, very efficient. So it's possible we'll be opportunistic in the future around these, but they're really -- we see them in that light, opportunistic. And the core is really the underlying return on capital and organic earnings.

[Operator]

[Operator Instructions] Our next question is from the line of [ Sean Serhan ] with Evercore ISI.

[Unknown Analyst]

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

[Zachary Wasserman, executive]

Yes. [ Sean ], thanks for the question. This is Zach. I'll take the first part, and then Brendan will tack off with the second part follows. So we're really, really pleased actually with what we're seeing in the auto lower production area. Auto for us is a terrific asset to lean into at times like this. One of the general expectation for rates is to be reducing a nice fixed asset class, got about a 2-year duration. Remember, this is prime, and super prime credit quality is a very, very solid underlying returns. And also an incredibly efficient business for us. It's a 10% efficiency ratio business for us that it is very, very optimizable. We can put in pricing in the market on Friday, see the impacts of it over the weekend, dial it back in again the next Tuesday as we go into the next week. And so really, really optimizable and precision return calibration for us here.

So we like this one. I think the production levels for the fourth quarter looks to be around the same as the third quarter year. So I think we have hit a nice run rate at this point. And then we'll see where it goes out into the course of next year. But right now, nice fixed assets that we're getting very significant fixed asset repricing benefits coming through into the mill. Brendan, over you on credit.

[Brendan Lawlor, executive]

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

[Stephen Steinour, executive]

[ Sean ], we've been -- this is Steve. We've been very disciplined. We've got 15 years of quarterly track record here. It's an area of continuing focus and discipline as well as we refine the model in a number of times during the course of that period of time. So we like what we're seeing. We're very confident. And obviously, with the disciplines we have, super prime product, we're not going to see what you alluded to from another institution.

[Unknown Analyst]

Got it. Very helpful. And then Zach, shifting over to the hedge program slide. It's always helpful. I noted you received fixed balance in the back half of '25 came down a bit this quarter versus last. Can you update us on any adjustments made there in the quarter? And then maybe highlight any future adjustments you're thinking about?

[Zachary Wasserman, executive]

Thanks for bringing that question, [ Sean ]. So what we tried to illustrate on that slide is really the continued dynamic management of asset sensitivity really bringing down asset sensitivity a lot. Both a 1/3 reduction in sensitivity just in the third quarter alone, get to 50% reduction from Q2 by the end of this year and then the 60% by the middle of next year. And 1 of the things that we try to highlight all the time is we're very dynamic. So we're continually looking at the most efficient way to really do those 2 objectives of protecting capital and maximizing and stabilizing NIM. So we'll always make adjustments here as we deem it most efficient.

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

[Operator]

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

[Stephen Steinour, executive]

Thank you for joining us today. In closing, we delivered exceptional results for the third quarter, highlighted by the successful execution of organic growth initiatives. Net interest income expanded, fee revenues grew strongly. Expenses were well managed, and credit remains stable. Our strategy is working well, and our investments in the franchise are delivering returns. We remain in an attractive competitive position, and we continue to seize opportunities to add talented bankers across our businesses.

Collectively, the Board, executives and our colleagues are a top 10 shareholder. So we have strong alignment to deliver sustained value creation for our shareholders. As a reminder, we have an Investor Day scheduled in the new year on February 6, and you are invited to that. And finally, thank you to all our Huntington colleagues for driving these outstanding results. Thank you very much for joining us today. Have a great day.

[Operator]

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