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spk04: Greetings and welcome to the Huntington Bank Shares second quarter 2023 conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Tim Sabatris, Director of Investor Relations for Huntington Bank Shares. Thank you. You may begin.
spk00: Thank you, Operator. Welcome, everyone, and good morning. Copies of the slides we will be reviewing today can be found in the Investor Relations section of our website, www.huntington.com. As a reminder, this call is being recorded, and a replay will be available starting about one hour from the close of the call. Our presenters today are Steve Steinauer, Chairman, President, and CEO, and Zach Wasserman, Chief Financial Officer. Rich Pohle, Chief Credit Officer, will join us for the Q&A. Earnings documents, which include our forward-looking statements disclaimer and non-GAAP information, are available on the Investor Relations section of our website. With that, let me now turn it over to Steve.
spk06: Thanks, Tim. Good morning, everyone, and welcome. Thank you for joining the call today. We're pleased to announce our second quarter results, which Zach will detail later. Our approach to both our colleagues and customers continues to be grounded in our purpose and served us well in the second quarter. Our colleagues again demonstrated that we make people's lives better, help businesses thrive, and strengthen the communities we serve. Now, on to slide four. These are the key messages we want to highlight today. First, Huntington has a distinguished deposit franchise, which continues to benefit from our strategy to acquire and deepen primary bank customer relationships. This has fueled continued deposit growth over the year, including this quarter. Second, We once again drove capital ratios higher with common equity tier one having increased for four quarters in a row. We remain on track to build CET1 to the high end of our range by year end. Third, credit quality, which is a hallmark of the company, is performing very well. and we continue to operate within our aggregate moderate to low risk appetite. Fourth, we are dynamically managing through the interest rate environment. We are maintaining disciplined deposit pricing while delivering deposit growth and maintaining a robust liquidity position. Finally, we remain intently focused on executing our strategy. We are investing in the business to drive long-term sustainable revenue growth, and we continue to proactively manage the expense base, to align with the revenue outlook. Operation Accelerate remains on track and we will increase our use of business process outsourcing to drive sustained efficiencies into 2024. Moving on to slide five. Over the past decade, we've transformed Huntington. This puts us in a position of strength today. This foundation includes our granular and high quality deposit base which is supported by our leading consumer, business, and commercial banking franchises. With this strong foundation in place, we can be nimble and seize on opportunities to expand our business that will arise during times like these. The hiring of the fund finance team we announced last month is a great example. This business was on our commercial banking growth roadmap, and we're pleased to be able to add great talent and welcome these colleagues to Huntington. We are building capital even as we maintain loan growth. We are optimizing the level of new loan growth and remaining judicious for the loans we carry on balance sheet in order to generate the highest return on capital. As a result, capital ratios expanded in the second quarter with our CET1 ratio increasing to 9.82%. Further, our adjusted CET1 ratio is 8.12% above the peer median. Our disciplined approach to risk management drives our strong credit quality. with low net charge-offs and the non-performing asset ratio decreasing for the eighth consecutive quarter. Our management team has a long track record of being disciplined operators with a focus on delivering value for shareholders. This execution has been awarded and recognized across the franchise, including winning the J.D. Power Mobile Award for the fifth year in a row and maintaining our strong number one SBA ranking. Regarding the macro outlook, it remains a dynamic environment Interest rates are playing out in the higher for longer scenario that we had been anticipating for some time. Economic activity in our footprint appears to be holding up relatively well, which supports sustained loan growth and solid credit performance. That said, we are diligent, watching the environment closely, and are actively managing our loan portfolio. We are well prepared to operate through a range of potential scenarios. Further, we are also closely monitoring the potential regulatory adjustments to capital and other requirements. We are evaluating the proposals, and thus far the potential new requirements appear broadly in line with what we had expected. We are well positioned to manage through these changes, address them expediently, and over time offset a meaningful portion of the potential impacts. And finally, before I hand it over to Zach, we want to share that Rich Poli, our Chief Credit Officer, has announced his upcoming retirement effective at the end of 2023. We've greatly benefited from Rich's expertise and leadership during his nearly 12 years with Huntington. He's been a great leader of our colleagues and a great partner for me and the executive team. We have a strong bench and we're pleased Brendan Lawler, Deputy Chief Credit Officer, will succeed Rich in this role at the end of the year. Brendan joined us in 2019 after 25 plus years as a senior commercial credit executive at a large regional bank and is currently responsible for all commercial credit across the bank. Zach, over to you to provide more detail on our financial performance.
spk09: Thanks, Steve, and good morning, everyone. Slide six provides highlights of our second quarter results. We reported GAAP earnings per common share of 35 cents. Return on tangible common equity, or ROTCE, came in at 19.9% for the quarter. Further adjusting for AOCI, ROTCE was 15.8%. Deposits grew during the quarter, increasing by $2.7 billion, or 1.9%, on an end-of-period basis. Loan balances continued to grow, as total loans increased by $900 million, or 0.8%, from the prior quarter. Credit quality remained strong, with net charge-offs of 16 basis points and allowance for credit losses of 1.93%. As Steve mentioned, capital increased from the prior quarter. This solid capital position, coupled with our robust credit reserves, puts our CET1 plus ACL loss-absorbing capacity in the top quartile of the peer group. Turning to slide 7, average loan balance has increased 0.8% quarter over quarter, or 3.1% annualized. driven by commercial loans, which increased by $772 million, or 1.1% from the prior quarter. Primary components of this commercial growth included distribution finance, which increased $464 million, asset finance increased by $234 million, business banking increased by $160 million, auto floor plan increased by $175 million. Offsetting this growth CRE balances were lower by $340 million. In consumer, growth continued to be led by residential mortgage, which increased by $438 million, and RV Marine, which increased by $112 million. Partially offsetting this growth were lower auto loan balances, which declined by $318 million. Turning to slide eight, as noted, we continued to deliver ending deposit growth in the second quarter. Balances were higher by $2.7 billion, primarily driven by consumer, with commercial balances up modestly. On a year-over-year basis, ending deposits increased by $2.6 billion, or 1.8%. Turning to slide 9, we saw sustained growth in deposit balances throughout the second quarter. On a monthly basis, total deposit average balances expanded sequentially for April, May, and June. with June 30th ending balances above the June monthly average, providing a strong start point as we enter Q3. Within consumer deposits, we have now seen average balances increase for seven months in a row. Within commercial, average monthly deposits were stable over the course of the second quarter. Turning to slide 10, I want to share more details on our non-interest-bearing deposits. Overall, the $33 billion of these deposits represent 23% of total balances and are well diversified across consumer, business, and commercial banking. The ongoing mix shift we have seen from non-interest bearing over the past two quarters has been in line with our expectations and consistent with what we saw in the last cycle. We expect this mix shift trend to moderate and then stabilize in 2024. This trend is reflected in our total deposit beta guidance. On to slide 11. For the quarter, net interest income decreased by $61 million or 4.3% to $1,357,000,000 driven by lower sequential net interest margin. On a year-over-year basis, NII increased $90 million or 7.1%. We continue to benefit significantly from our asset sensitivity and the expansion of margins that has occurred throughout this cycle. Reconciling the change in NIM from the prior quarter, we saw a reduction of 29 basis points on both a gap and core basis, excluding accretion. During Q2, we maintained an elevated cash balance relative to Q1, which impacted NIM even as it had a relatively minor actual cash economic cost. On a comparative basis, Normalizing for cash levels, NIM was 3.17% for the quarter, or a 21 basis point decline from the prior quarter. The biggest drivers of the lower NIM quarter over quarter were higher funding costs, partially offset by increased earning asset yields. We continue to analyze multiple potential interest rate scenarios as we forecast expected trends over the remainder of 2023 and into 2024. The two primary scenarios we incorporate include one which is represented by the forward yield curve and another which assumes rates stay higher for longer and end 2024 approximately 75 basis points higher than the forward. We think this is the most likely range for short-term rates over the next six quarters. Based on this range, we anticipate net interest margin of approximately 3% by Q4 plus or minus a few basis points. This would equate to core net interest income on a dollar basis for the fourth quarter to be down approximately 1% to 2% from Q2 levels. As we look out further into 2024, clearly the trends will depend on both those interest rate scenarios and what is happening with the broader economy and industry factors, including loan demand and deposit growth. That said, our modeling indicates NIM outlooks are stable to rising during 2024, which, coupled with earning asset growth, is expected to drive net interest income dollar expansion as we move through 2024. Turning to slide 12, cost of deposits moved higher in the quarter to 1.57%. Our cumulative beta through Q2 is 32%, up seven percentage points from the prior quarter. in line with our expectations and prior guidance. As I mentioned, we continue to expect cumulative deposit beta of approximately 40%. Turning to slide 13, on the securities portfolio, we saw another step up in reported yields quarter over quarter. We did not reinvest cash flows from securities in the second quarter as we allowed those proceeds to remain in cash given the attractive short-term rates. Cash and securities balances on average increased by $5 billion from the prior quarter, as we maintained higher cash levels in the quarter. As of June 30th, on an ending basis, cash and securities totaled $52 billion, representing a more normalized level as we go forward into Q3. Turning to slide 14, our contingent liquidity continues to be robust. Our two primary sources of liquidity, cash and borrowing capacity at the FHLB and Federal Reserve, represented $11 billion and $77 billion, respectively, at the end of Q2. At quarter end, this pool of available liquidity represented 205% of total uninsured deposits, a peer-leading coverage. Turning to slide 15, our hedging program is dynamic, continually optimized, and well diversified. Our objectives are to protect capital in up-rate scenarios and protect NIM in down-rate scenarios. During the quarter, we further expanded are pay fixed swaptions hedge position to protect capital from tail risk in substantive uprate scenarios. There is a modest upfront premium associated with these swaptions and the hedges result in a mark to market each quarter as they're deemed economic hedges. On the subsequent slide, you will see that positive impact during the second quarter on our fee revenues. We also remain focused on our objective of managing NIM to protect the downside and have maintained additional upside NIM opportunity given our asset sensitivity. The interest rate movements in the first few weeks of Q3 have provided opportunities for additional attractive hedging. We have incrementally added modest additional exposures to both our capital protection and NIM protection hedge portfolios and will remain dynamic as we go throughout the quarter if further opportunities arise. Moving on to slide 16. Non-interest income was $495 million for the second quarter. Excluding notable items, fees increased $40 million, including a $18 million benefit from the positive mark to market on the pay fix options. Excluding this benefit, underlying fee income would have been $477 million. We saw solid performance in our key areas of strategic focus, including payments and wealth management. Capital markets revenues declined by $2 million from the prior quarter, however increased by $3 million year over year. Clearly the events of March and the US debt ceiling debate caused a fairly challenging capital markets environment in Q2. However, pipelines remain solid and there are encouraging signs pointing to opportunity in the back half of the year. Moving on to slide 17, GAAP non-interest expense decreased by $36 million. Adjusted for notable items in the prior quarter, core expenses increased by $6 million, driven by a full quarter effect of annual merit increases and higher marketing spend. We entered the year with a posture of managing core expense growth to a very low level, given the economic backdrop. We developed and executed a series of proactive actions to reduce expense run rates, including the voluntary retirement program, organizational alignment, and our continued implementation of long-term efficiency programs such as Branch Optimization and Operation Accelerate. We continually calibrate the level of expense growth to revenues, and we're taking additional actions to further manage the pace of expense growth, even as we remain focused on self-funding investments in our key growth initiatives. We're actively working on the next set of medium-term efficiency opportunities, including business process outsourcing, which represents a promising lever for us to continue to deliver a low-level expense growth into 2024. Slide 18 recaps our capital position. Common equity Tier 1 increased to 9.82% and has increased sequentially for four quarters. OCI impacts to common equity Tier 1 resulted in an adjusted CET1 ratio of 8.12%. Our tangible common equity ratio, or TCE, increased three basis points to 5.80%. Q2 ending cash levels were higher than Q1 end, which impacted the TCE ratio by two basis points. Adjusting for AOCI, our TCE ratio was 7.45%. Our capital management strategy will result in expanding capital over the course of the year, while maintaining our top priority to fund high return loan growth. we intend to grow CET1 to the very high end of our target operating range of nine to 10%. Adjusting for AOCI, we expect adjusted CET1 to be in the approximately mid eights range by year end. On slide 19, credit quality continues to perform very well. As mentioned, net charge-offs were 16 basis points for the quarter. This was lower than last quarter by three basis points. On a year-over-year basis, charge-offs were up 13 basis points from the prior year's historic low level. Non-performing assets declined from the previous quarter and have reduced for eight consecutive quarters. Allowance for credit losses is higher by three basis points to 1.93% of total loans. On slide 20, we continue to be below our target range of net charge-offs through the cycle of 25 to 45 basis points. and our ACL coverage ratio is among the highest in our peer group. Let's turn to our 2023 outlook on slide 21. As I noted, we analyzed multiple potential scenarios to project financial performance and develop management action plans. Our guidance is informed by the interest rate scenarios I discussed previously and the consensus economic outlook. On loans, our outlook is 5% to 6%, consistent with our prior expectations to be near the lower end of our prior range. On deposits, we maintain our outlook of 1% to 3% growth for the full year. Core net interest income, XPAA and PPP, is expected to grow between 3% and 5%, inclusive of our expectations for deposit beta and loan growth. Non-interest income on a core full year basis is expected to be down 2% to 4%, This range reflects the results from capital markets we've already seen in Q2 and the assumption of gradual improvement in activities throughout the balance of the year. The remainder of our fee businesses are tracking very well to our prior expectations. On expenses, as noted, we are proactively managing with a posture to keep underlying core expense growth at a very low level and calibrated to revenue growth. For the full year, we expect core underlying expense growth between 1% and 2%, plus the incremental expenses from the full-year run rate of Capstone and Tarana of approximately $50 million, and the two basis point increase in 2023 FDIC insurance rates of approximately $30 million. And finally, given the strong results posted during the first half of the year, we now expect full-year net charge-offs to be between 20 to 30 basis points. With that, we will conclude our prepared remarks and move to Q&A.
spk00: Tim, over to you. Thanks, 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.
spk04: Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Madan Grasalia with Morgan Stanley. Please proceed with your question.
spk11: Hi, good morning. Mark Hahn.
spk12: Good morning.
spk11: I wanted to dig into your comments on NIM being stable to rising in 2024 under the two scenarios that you outlined for rates. Can you expand on some of the moving parts in there, especially in the higher for longer scenario? I guess, would that put more pressure on NII than the forward curve scenario with higher deposit betas, or do I have that wrong?
spk10: I'll take that one and thanks for the question. I think the outlook that we're seeing is really consistent with both of those scenarios. I think in the higher for longer scenario, the top end of that scenario range, we would benefit from asset sensitivity, asset yield would continue to rise. Likely there would be a continuation and an extending out. of the liability pricing cycle, but to know those two things, we can expect to actually be higher overall NIM given the asset sensitivity and very consistent with what we've discussed over time. At the lower end of the scenario, you see the faster blunting of the deposit pricing cycle, but also some less increase in asset pricing, and we'd likewise be able for the NIM, but albeit maybe at a few basis points lower than that. So generally, higher rates for us continue to corroborate to higher NIM. I would note as well that during the course of 2024, we will benefit from the shifting from a negative carry on our downrated hedging program to a much more neutral position by the end of the year. So that will be a support for NIM conjecture throughout the course of 2024.
spk11: Got it. And then separately, just on regulation overall, I know you noted that the new requirements seem to be broadly coming in in line with expectations. But maybe if you can dig into how you're managing ahead of that. I know you're building capital levels from here. You're holding a high level of cash instead of reinvesting in securities. So maybe can you expand on where you expect regulation to go, especially as it relates to, you know, the AOCI opt-out as well as LCR? Sure.
spk10: And as you know, we are trying to be planful, anticipatory of where we think things are going and manage ahead of it. And I think, you know, at the most macro level, we do think we'll be able to relatively expediently address these potential deregulations And frankly, over time, offset a lot of what would otherwise be potential impacts of them. But digging in specifically, it's our working assumption that the tailoring exclusion of AOCI not to be reported in CET1 will likely be removed. And hence, it's our plan to continue to manage a capital hire to move CET1 inclusive of AOCI higher than the guidance we indicated in the mid-eighths range by the end of 2023. And if we continue on with the same operating posture to 2024, we would expect that ratio to approach 9%, essentially get to 9% by the end of 2024. So back to essentially the low end of our operating range on that basis. We're also actively looking at the Basel III potential new RWA changes. As you know well, there are three big changes in there. The fundamental review of the trading book. We think that's going to be essentially the material for Huntington given our business mix. There's operational risk. requirements, which likely will be increasing RWA. They're largely keyed off of fee income. We see a slightly higher RWA from that. However, offsetting that will be credit risk RWAs, which are more nuanced, more fine-tuned, and on net are lower, we believe, for Huntington. Still early days, and we have more analysis to go, but we see offsetting factors there. Unclear whether there will be a net impact from that, but they're generally relatively offsetting. As it relates to other you know, regulatory focuses like liquidity, like potential long-term debt. Likewise, we're monitoring, and we think we can, those, in fact, will be relatively small over time. Happy to double-click on that for the questions if folks want.
spk11: Great. Thank you.
spk10: You're welcome.
spk04: Thank you. Our next question comes from the line of Matt O'Connor with Deutsche Bank. Please proceed with your question.
spk12: Good morning. One thing that we're seeing from some of your peers is a pullback in lending as they look to build capital and alleviate some of the funding pressures. On the flip side, obviously, you've got very strong capital, strong liquidity, as you highlighted. high reserves and just wondering how you're thinking about how you can play offense and maybe take advantage of pullback by some of your peers.
spk10: It's a great question, Matt, and it's something that we really actively look at because we are in a position of strength. We want to really seize the opportunities to win new clients, win great business. It's in times like this that companies, when they operate in a position of strength, really can gain meaningful and enduring market share and we're cognizant of that. We're balancing that clearly with two factors. One, the desire to not only grow loans, but to also drive capital, as I just noted in the prior question. So we're actively modulating loan growth, bringing it down from a 10% loan rate year-over-year level to 5% Q1, 3% Q2. I think it will be more like 1% probably in the back half of the year. We're also very much looking at how we can potentially optimize the balance sheet and drive higher returns out of the assets that we do have. With that being said, we are on our front foot. You saw us hire the funds and the evidence team, which would be a great new business line for us, brings liquidity, great customer quality there. And we are continuing to look, finding pockets of strong growth, even as we optimize for the highest returns for the year at the margin. So very much on the front foot, and to your point, there are, in fact, opportunities that we'll see come through this.
spk12: And then I guess just following up on the lending side, I mean, everything we can track, it seems like auto spreads are at or near highs, voided spreads at highs, commercial spreads have widened. So why isn't there a leaning into this? Or is it just that the demand's not there at this point?
spk10: I think there continues to be pockets of demand and great clients. And we've got a very strong set of clients that we're supporting as well. And to your point, the yields are strong. With that being said, clearly the deposit costs are also rising and funding costs are also rising. We're balancing those things in a way that we think is prudent. Driving higher yields, I would say, really feel encouraged by what we're seeing on the asset yield side. the long-durated asset categories like mortgage and auto really benefiting between 10 and 20 bps on the portfolio, and I would expect that to continue for some time to come, really sustaining that 2024 and beyond NIM that we were talking about in the previous question, even as, again, we optimize to also allow capital to rise. Matt, Steve, this is Steve. I think it's fair to say we're being a little cautious until we know the outcome of the regulatory suggested reforms as well. There's more opportunity, I think, that we will avail ourselves once we know what the rules are and the positions that we need to have going forward.
spk12: Yep, fair enough. Thank you.
spk10: Thank you.
spk04: Thank you. Our next question comes from the line of Stephen Alexopoulos with J.P. Morgan. Please proceed with your question.
spk07: Hey, good morning, everyone. Hi, Stephen. Good morning. So, Zach, the commentary you gave about the NIM getting down to about 3% by the fourth quarter is helpful. I'd imagine once we move beyond that, because it sounds like most of the mixed shift out of non-interest-bearing will be done, it's really going to be that incremental NIM increase. That's going to decide where do we go from there. What is the spot in today, right? Incremental loans, incremental deposits, just how does that compare to that 3% level?
spk10: It's still higher than that. I think I pointed you to the quarter adjusted for cash levels that we're kind of running at now in the third quarter. The second quarter was around 317. And so what we're seeing at the margin is it's continued modest decline in NIM here through the course of the balance of this year from that 317 normalized Q2 run right down to the 3% by the end of the year. And I agree with your point, which is as you get into the early part of next year, a lot of the major trends start to stabilize. It's really about incremental fundamentally what the underlying NIM is. Likely there will be some potential continued trends in the very early part of 2024. But I agree with your point. I would also note that for us, during 2024, the reduction in negative carriers and hedges will incrementally help throughout the course of the year.
spk07: Right. So some tailwinds there. OK. And then for Steve, so the equity market seems to be coming around to this possibility of a soft landing. I'm curious, when you talk to your customers, what are you hearing? Are they coming around to this soft landing? and maybe a little more optimistic. What are you hearing? Thank you.
spk10: See, I would say our customers generally are having a good year and expect to close out with a good year. They're working their margins through expenses, but inflation seems to be abating, supply chains in better shape, clearer line of sights to this half. And they're optimistic about 24 and beyond, generally. So this would suggest, at worst case, soft landing and potentially the ability to avoid a recession. In the Midwest, particularly our footprint, there's still a lot of economic activity, announcements of investments, targeted growth. So we're in a good position relative to some of the other regions. And we have significant activity going on. that I think we'll see, particularly here in Ohio, through the course of this year.
spk07: Okay. Thanks for all the color. You're welcome.
spk04: Thank you. Our next question comes from the line of Ibrahim Poonawalla with Bank of America. Please proceed with your question.
spk02: Hey, good morning. Good morning, everyone. I just wanted to go spend some time on the expense outlook. I think you've done a lot of work here today, the project accelerate that you talk about. And Zach, I think you said the goal is to keep expense growth low for next year. Maybe give us a sense of the size of that BPO opportunity that you talked about. And how do you think about positive operating leverage going into next year given NII growth will likely be tough?
spk10: Great question, Irene. Thanks. Framing the overall posture, it is very much to keep operating expenses at a very low level, not only this year but next year. We've been trying to be very proactive in setting up those programs so we can implement them effectively and have them build over time. On the BPO opportunity, this is something that we have leveraged over time for a while and continually looking at from a strategic perspective what functions that we really believe must be owned or which critical value for them to be owned by Huntington versus those that we could benefit from the scale and capabilities of a partner. The more we lean in to analyze that, the more we're encouraged that there are incremental opportunities relatively modest in terms of size this year, but building over time. And I think really part of a portfolio of efficiency programs that will support that low level is 24, and frankly continue to build it to 25 and beyond also. So it's encouraging. Again, part of the portfolio of programs becoming more incrementally leading in now to be able to accelerate the benefits of. On positive operating leverage, as we've said a lot, It's a core tenet of our operating plan. It's one of the three major financial targets we've set for ourselves, something we take very seriously. Of course, we're managing the company for the medium term to really generate value and want to make sure that we're not doing anything in the short term that would damage that long-term growth trajectory. Too early to say what 24 will look like. You know, I think you'll clearly have a grow over on revenue. It'll pressure revenue growth. But we're also very encouraged, as I said, with the opportunity to keep expense growth low. So I'm not going to give guidance at this moment. I still think it's within the range of reason that we're going to drive toward it. And for him, if I could add, this is Steve. The team is also working on a longer-term project called Operation Accelerate. We shared that at the investor day. It's changing procedures and digitizing substantially the front-to-back side of the bank. That is going very well. It's on track. It was multi-year, and that will help us with both efficiencies and customer staff. So Zach has got us focused and consolidated 31 branches. We did a voluntary retirement program. We've done some restructuring of segments and some some of the business units and support units during the course of the year. What he's referencing now with BPL is added into a very healthy level of focus and activity on the expense management side so far this year.
spk02: Understood. And any updated thoughts, Steve? You talked about building capital. But at the same time, you've talked about seed revenue opportunities, doing some targeted M&A like you've done in the past. Any thoughts there? Is the opportunity set attractive for you to do anything?
spk10: Well, our focus, as you know, is always to grow the core of the business. We've got a lot of opportunity to do that in front of us. And as the expectations around capital and , et cetera, get established, I think we're going to be in a very strong position to lean into that in an even more robust fashion. We're trying to get positioned for that now. Beyond that, as you saw last year, there are fee businesses that were attractive. I suspect we'll find some additional ones at some point in the future, but we believe we've got a lot of opportunity at hand. There's nothing pressing in terms of pushing or needing to push for M&A now, and so we're very, very focused on driving the core. Thank you.
spk04: Thank you. Our next question comes from the line of Scott Cifras with Piper Sandler. Please proceed with your question.
spk08: Good morning, everyone. Thanks for taking the question. Hey, Steve or Zach, just kind of conceptually, maybe when you think about the 40% CUME beta, Maybe just a thought or two on the major puts and takes when you think about that being the right number for you all. You guys are in a very competitive market, but I think it's clear within the last month or so, especially, that the deposit flows are there. So I guess I'm just curious what you're seeing in terms of competitive dynamic and what sort of makes that the right number to land on it from.
spk10: This is Zach. Scott, I'll take that one. All of the trends and forecasts that we're creating, as I noted in the prepared remarks, pretty rigorous multiple scenarios underlying that continue to corroborate that. So we feel like it's a good forecast, as always. I always note the best forecast we've got, we'll share an update, if ever that comes to pass, but our forecast has been pretty stable around that level for a while now. And the underlying monthly trends continue to corroborate it. Just double-clicking into the drivers, I would say, one, we're seeing a continued modest rise in deposit costs. but at a decelerating rate, just like you would expect it to be. We saw a beta trend by 8% in Q1, 7% in Q2. It'll be less than that if we go into Q3, clearly, and then kind of topping out into Q4. So that's why I'm just sort of seeing a declining trend, all the increasing. The other thing is the mix shift from not interest bearing into interest bearing is occurring fairly well like we would expect it to in the cycle, and that likewise is decelerating. Most of that mix shift has happened at this point, and we're already beginning to see the signs of that that, again, build up and corroborate to that 40%. You know, on the competition side, you know, it's a competitive environment. But to your point, the deposits are there. And I think what's encouraging is it's very rational. And I think that given a decelerating loan growth throughout the industry and for us, that that's the kind of escape valve pressure which is allowing us to manage, you know, pretty well here according to our plan. So overall, I still think that's the right forecast.
spk08: All right. Perfect, and that's all I have, so thank you very much. Thanks, Scott.
spk04: Thank you. Our next question comes from the line of Erica Najarian with UBS. Please proceed with your question. Hi, good morning.
spk01: Hi, Erica. My first question is after the clarification. One, your 40% cumulative data that's on total deposits, correct? That's correct. Yes, because a lot of your peers give it on interest-bearing, so I just wanted to make sure that you just thought of that when Scott was asking that question. And my real question is, I think the market really appreciates sort of the expansion of the net interest income outlook. You know, could you tell us about how you're thinking about the elasticity of deposit pricing on the way down? I think to your point earlier, Zach, there are a lot of investors that are thinking about rate cuts for next year, and they're wondering how much power do banks have to price down if rates stay at a relatively high level versus what we've seen in a while.
spk10: Yep. Terrific questions. This is also a topic that gets lots of mindshare with us, you know, just as rigorously as we've anticipated on the way up, on you just as rigorous on the way down, so very much planning and watching that. You know, I think it'll clearly be a function of what segments you're in, what segment you're looking at, you know, on the commercial side. where rates are generally higher and where there's often a very bespoke and a priori agreement between us and our clients around how we'll trend, that will likewise trend lower. I think a pretty confident we'll drive that at a very similar measure to the way it went up. I think many of the other very rational price segments like that in the middle market and business banking will likewise trend down pretty fast as rates decline. In some of the categories in which we've been drawing in consumer, there are some time dimensions to them, which we'll have to manage as those times elapse. But again, the playbook there is well-trodden. And I think we feel quite good about the ability to bring that down. The overall lack of consumer side will clearly be a function of what's going on in the economy at that point and the outlook for rates forward at that point. But all the playbooks in history would tend to do that pretty well.
spk01: Got it. And just as a follow up to that, if I may, you're holding a lot of cash. And obviously, there's not a lot of motivation to deploy that. Again, as we think about next year, in the same scenario, you're still going to be earning a lot of your cash. on your cash for 0% risk weight if the Fed cuts moderately. And I guess outside of better loan growth, you know, Zach, what would be the factors for you to, you know, normalize, start normalizing that cash, you know, to a level that's more appropriate? Or do you feel like with all the liquidity rolls down the pipe, you might as well just hold it there for now since you're getting paid for it anyway?
spk10: Yeah. I think that the level that we're running at for cash right now, sort of around eight to nine billion is the right level for the company given liquidity requirements. So I think we're generally at where we think is the right level. Always tuning at the margin for how we're incrementally funding and tuning the short-term FHLB borrowing, the cash level. But I think for the most part, that cash level is right-sized right now. You know, I think within the securities portfolio broadly, you know, we'll continue to see the trend of moderately lower duration, sequentially, as we've been doing, frankly, for the last eight quarters of a row, and just continuing to preference, you know, liquidity.
spk01: Thank you.
spk10: Thank you.
spk04: Thank you. Ladies and gentlemen, as a reminder, if you'd like to join the question queue, please press star 1 on your telephone keypad. Our next question comes from the line of Ken with Jeffrey. Please proceed with your question.
spk03: Hey, thanks. Good morning, guys. Zach, just a follow-up on your NII24 comments. And you talked about earning asset growth. I'm just wondering, you know, your balance sheet has been elevated this quarter. a good amount. And I guess, are you expecting, as you look out further, that deposit growth will continue to carry the overall balance sheet side forward? And kind of, I guess, how do you think about the wholesale funding part of the equation as a balancing act in that?
spk10: Yeah, terrific question. And broadly speaking, the answer is yes. So I believe that we will bring low growth in line with deposit growth for the most part. And I think that's what we'll see here in the back half of this year. That's my expectation for the trend into 2024 as well. I expect to see a pretty stable, if not slightly lower, loan-to-deposit ratio here over the next couple quarters. And just fundamentally match funding, making sure that we can, you know, it's one of those fundamental underlying factors that allows us to manage the deposit data and the marginal margin, you know, for the forgetting on the loans, as I noted. earlier, so it's an important dynamic. You know, the good thing, and I think we've talked about this in the past, is that we are coming to this cycle and we're now operating, let's say, three quarters of the innings in with a pretty favorable position where if we saw really attractive loan opportunities, we could in fact fund them with non-customer sources of funding and increase the loan-to-deposit ratio, but that's not the default position for now. I think for now, I think getting loans and deposits growing at a pretty similar rate is quite healthy and a good balance for us.
spk03: Okay, and a follow-up. Can you try to help us understand how the benefits from the security swaps look this quarter, and then as you go forward into next year, just your loan hedges, does that become a part of the benefit next year in terms of getting that NII starting to move the right way? Thanks.
spk10: Yeah, it does. Great question, Ken. Let me elaborate on that. Up through the early part of Q3, inclusive activities we've done in the first few weeks of this quarter, we've got around $29 billion of down rate hedge protection through received big swaps, around $21, $22 billion. some floor spreads, which pay off under down-rate scenarios, and then a portfolio of callers, which are the option to enter into receive-fix swaps in the future and likely will if rates continue to trend generally where they're expected to. So it's a pretty powerful portfolio. It's both extant now and even more than will be extant over the coming six to 12 months as we enter into those caller-based receive-fix swaps. The impact, obviously the challenge in down rate hedging right now is that with an inverted yield curve, and frankly with a fairly steep decline already forecasted, you've got to assume pretty dire down rate scenarios to convince yourself it makes sense to incrementally hedge your receipt fix right now, given the negative carry right now. What we are experiencing in the P&L at this moment is about 15 basis points of negative NIM drag from the receipt fix that we're already in. And that will go to essentially zero by the end of 2024 if you follow up the forward yield curve scenario. So that's 15 basis points of tailwind, and we should see them then between now and the end of 2024, fairly radical clawback throughout that period.
spk03: Got it. Very helpful. Thank you. You're welcome.
spk04: Thank you. Our next question comes from the line of John Armstrong with RBC Capital Markets. Please proceed with your questions.
spk05: Thanks. Good morning, guys. Good morning. A couple of credit questions. First of all, congratulations, Rich, on your retirement. Thanks, John. You've done a great job, and I've enjoyed your perspective on these calls. Commercial real estate and consumer question. So on commercial real estate, how far ahead can you guys look in terms of identifying future issues? I know it's been a focus for you guys to tighten things up. But curious what you're doing now, and it obviously looks very clean, but you have a fair amount of reserves allocated to the business, and that's kind of why I ask.
spk10: Yeah, we're looking, you know, we're focused primarily right now on the 2023 and 2024 impacts, and it's really hard to look much further beyond that. So, you know, we're doing quarterly portfolio reviews in office. We're touching the real estate book. Every month, I think we've probably gone through 90% of the loans, over $5 million in that book at this point. But the focus is on 23 and 24 and managing what we can control. And that really relates to the maturities and then particularly with respect to office, the lease rollovers that might be impacting cash flow in this year and next. So that's the primary focus. Beyond that, it's tough. You mentioned the 9% reserve we've got against office. We've got a 3.4% reserve against the overall Cree book. We feel, for what we know right now, both of those are adequate, and we'll continue to look at those on a quarter-by-quarter basis. Okay. John Rich is also with the team getting loans rebalanced. Wherever there appear to be issues, there are proactive efforts to try and get... to get those addressed, you know, pay gaps, cross-lateral relations, a host of efforts, and the primary focus is 23-24, but there's also a long view, a full view of the portfolio over the next decade, and these roles and other related issues all of which we're actively managing. We've been doing that for over a year and trying to stay well ahead of where any issues may occur at this point in books in really good shape.
spk05: Yeah, it seems that way. Okay. And then on consumer, I look at this every quarter, just your non-accruals and charge-offs, and it's just kind of nothing really. maybe it goes to the soft landing comments, but you look at RV Marine consumer categories, delinquencies really haven't budged. Are you seeing anything in consumer health that bothers you at all? Because it just, you know, these numbers are really, really good.
spk10: No, the numbers are really good. And I think it goes to the client selection and just, you know, the focus that we've got on prime and super prime. You know, if you look across the entire consumer spectrum, There's really nothing in there that would lead you to believe that we're going to have anything more than just a gradual return to what might be more normalized levels of charge-offs. Because right now, to your point, they're running extremely low. The only area that I would point out that's a little bit relatively higher stress than the rest of the book is HELOC. And that's because of the floating rate nature of that portfolio. So it's going to lead to a little higher level of delinquencies than you might see across the book. But the analysis that we've done from a vintage standpoint on that book show that we're in the 55% to 60% low in the value range. So even though we might see higher levels of delinquency, we don't think the losses will follow. The housing markets are generally tight where we are, John, and unemployment is very low. So if someone has an issue, their best resolution is to sell the property, unlike what we might have seen in 08, 09 or prior cycles. Just to give Rich a little credit here and recognition, we've been at an effort to outperform our peers for over a decade with his aggregate moderate to low risk profile. And he's been very, very disciplined about that. And we expect to outperform through the cycle. We've been sharing that all along. You know, at this point, we're looking really good in that regard and a tribute to all my colleagues, but especially Rich and his leadership.
spk05: thinking you could give them a fishing boat or an RV out of the foreclosure pool, but I don't think there's anything to give. We just don't have any other assets. Sorry, Rich.
spk10: Look at my watch.
spk05: There's some old posters. You can pull those out. All right. Just two clean-ups for you, Zach. From $60 million to $50 million on the capstone. Tarana, what drove that? I know it's small, $10 million, but what happened there?
spk10: That's reflective of the cost that we see in that previous $60 million was mainly capstone and has a factor of production and revenues that flow through into compensation expense. When capital markets revenues were a bit softer in the second quarter, our outlook was somewhat lower than was originally budgeted into the back half of the year. Still probably, but just less flows into less cost. That's basically it.
spk05: Okay. And then the $30 million FDIC, that's all in the third quarter. Is that correct? So let me clarify that.
spk10: It's a really important one. That FDIC expense that we talked about in that guidance is the two basis points higher assessment that is being assessed across the industry and that was known late last year. And it's coming through every quarter. It's not the special assessment that's still being discussed. Okay, thank you. I appreciate that.
spk04: Thank you. Ladies and gentlemen, this concludes our question and answer session. I'll turn the floor back to Mr. Steiner for any final comments.
spk10: Well, thank you very much for joining us today. We're very pleased with the second quarter results as we dynamically managed through this unique environment. As you heard, we're very well positioned for times such as these with strong credit quality, improving capital ratios, and robust liquidity. The deposit book, in particular, in its granular nature, has served us very, very well, as have our efforts to provide customer service and generate great satisfaction over the years. Now, we have a team of disciplined operators, and we are executing our strategy that we outlined last year at our Investor Day, which combines our driving value for our shareholders. And just as a reminder, the board detectives are colleagues. We're all top-ten shareholders, collectively, so that reflects a strong alignment with our shareholders, and I think you're seeing the benefits of that through our results. So thank you for your support and interest in Huntington, and have a great day.
spk04: Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.
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