Steve Steinour:

Thanks, Tim. Good morning, everyone, and welcome. Thank you for joining the call today. We're pleased to announce our second quarter results, which Zach will detail later. These results are supported by our colleagues, who live our purpose every day as we make people's lives better, help businesses thrive, and strengthen the communities we serve. Now, on to slide four. There are five key messages we want to share with you today. First, we are intensely focused on executing our organic growth strategies and leveraging our position of strength. Our robust liquidity and capital base put us in a position to drive growth, and we are investing in new geographies and businesses in addition to existing businesses. Second, we expanded net interest income, and we expected to continue to grow sequentially from the first quarter trough. This outlook is supported by accelerating loan growth and sustained deposit growth to power future revenue expansion. Third, we drove fee revenues higher in the quarter with support from our three major focus areas

Tim Sedabres:

Thank you, Zach. Operator, we will now take questions. We ask that as a courtesy to your peers, each person asks 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.

Manan Gosalia:

Hey, good morning.

Manan Gosalia:

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

Manan Gosalia:

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

Manan Gosalia:

Great. Thank you.

Erika Najarian:

Hi, good morning.

Erika Najarian:

[Technical Difficulty] talk through expected deposit trends for the rest of the quarter. Clearly, you have outpaced, as you mentioned, back to preponderance of your peers at the through-the- cycle in terms of deposit growth. I guess I got the impression that perhaps some of this deposit growth is prefunding even better loan growth for the second half of the year. And I did notice that you could get through your securities portfolio and at that rate that you mentioned that like a good move relative to the curve? But I'm just wondering, I guess the question here is, can you continue to -- do you have enough deposits to fund the acceleration [Technical Difficulty] that we've been waiting for or are you expecting to continue to grow at this pace, but closer to the rate and competitive dynamics that you observed in June? In other words, it won't be as expensive plus 9 basis points for the quarter.

Erika Najarian:

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

Erika Najarian:

Thank you.

Operator:

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

Steve Steinour:

Morning, Steven.

Zach Wasserman:

Yes. Great question. So we -- our practice in terms of setting these ranges is try to box where we think our basic trend is going. So we're generally trending pretty well, though, in that range, and that's including a couple of cuts there. I do think that a lot of -- one of the key factors in managing a flat NIM will be that continued execution on reducing the trajectory of interest rate cuts rising and then begin to driving them lower. And of course, the real ability to do that is a function of what the competitive environment is and what customers believe the rate path is. And so it will be dependent on the conviction of the market and the economy broadly where our rates are going. But with that being said, the data does continue to set up pretty good confidence around where the yield curve will go. And so feel pretty good about our ability to do that. So the other element of it clearly is loan growth. And we're seeing really encouraging signs there. Pipelines look strong, solid performance in Q2, expects to continue to grow and accelerate on a year-over-year basis here in the back half of the year. I think we could see even faster loan growth if some of our new growth initiatives perform even well -- even better than they're forecasted to do in our base plan. The pipelines there look really good. And so, the pull through is even better. Based on our base plan, we see some upward bias on loan growth. Likewise, what we haven't addressed in the Q&A section here is we did see more CRE run-off in the second quarter than we had expected at the kind of initial budgeting. To the extent that that is lower going forward, you can see some higher loan volumes and that could lift revenues above the base plan. Conversely, if any of those factors were worse, that could take it to the lower end. But feel pretty good about trending right in the middle of that range at this point, Steven.

Zach Wasserman:

That's the baseline.

Steve Steinour:

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

Steve Steinour:

Thank you.

Scott Siefers:

Good morning, everybody. Thank you for taking the question. So I think my question is on customer -- overall customer demand on loans have sort of been answered. But I was hoping you could maybe address auto in particular. I noticed production is as high as it's been in the last several years. Is that sort of maybe being used as a flex, given sort of the softer overall growth than you had anticipated maybe earlier this year and -- albeit within the context of -- it sounds like things outside of that category are going to advance more robustly later on. So just curious how you're thinking about auto. And then as the follow-up, maybe just sort of quality of that portfolio given what the kind of fluctuations we've seen in used car values, lower economy, et cetera.

Scott Siefers:

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

Scott Siefers:

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

Operator:

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

Steve Steinour:

Good morning, Ebrahim.

Zach Wasserman:

Yes, great question. I think that we're really pleased with how we're doing on deposit gathering and to some degree just prefunding loan growth that we're expecting to continue to drive higher here over time. And so, I'd expect over the course of a longer time period, likely see the loan to deposit ratio drift back higher again, but stay within a pretty tight range. The objective we've got on average over time is to grow our deposits at a very similar rate to loans, and the delta would only be kind of temporary as we see trends on a relatively short-term basis might be to diverge. So over the back half of this year, I'm expecting to see maybe slightly faster sequential loan growth than deposit growth, but not so meaningful as to probably shift that ratio very much. Fundamentally, what we're seeing in terms of deposit growth is the same function we've been seeing for the last several quarters. Underlying acquisition of new relationships is quite good. We talked about 2% primary bank household growth in consumer, 4% in business bank, commercial also growing a lot of new names and new customers, particularly given our new growth initiatives. And also importantly, a couple of the new verticals we've added, very much focused on deposit gathering, which is very much helpful. The mix of it, as I noted in one of the earlier questions, is actively shifting out of more time into more money market, that sort of value driver from here, which will help us set up the ability to move beta down at a faster rate going forward. And all that's going to contribute to just that sort of slow progression of topping out deposit costs and then bringing them back down in that decelerating way on the up and then accelerating on the way down as we've discussed. That's sort of what we're seeing at this point. In terms of non-interest bearing, I don't think I've gotten the question as yet, but I think in the materials, you can see the chart where that's going. We're seeing a meaningful deceleration of that mix shift out of non-interest bearing into the first quarter, that will give you a sense from the fourth quarter, $1.3 billion reduction in non-interest bearing into the -- second quarter, we disclosed only $300 million of reduction in non-interest bearing. And in fact, consumer went up. So we think we're almost done here in terms of mix shift out of non-interest bearing and this will last until -- here in the near-term.

Zach Wasserman:

So the thing with -- great question again. The point we've been discussing, I think for a while in terms of expense growth, this year 4.5%, was intentionally higher than what we otherwise were kind of running at, so that we could invest in some of these new growth initiatives and also importantly, invest a lot of data and automation capabilities throughout the company. But that pace of growth would reduce as we went into 2025. And that is our plan. I expect to see lower growth rate of expenses in 2025 than I saw in 20 -- than we're seeing in 2024. And the sort of the trend is very much supportive of that, because by the time we'll exit this year, we'll already be exiting at a kind of run rate of year-over-year growth that's quite low. So try to maintain that lower growth rate as we go into '25.

Ebrahim Poonawala:

Got it. Thanks, Stephen and Zach.

Operator:

Our next questions are from the line of Matt O'Connor with Deutsche Bank. Please proceed with your question.

Steve Steinour:

Good morning, Matt.

Zach Wasserman:

Yes, great question. This is Zach. I'll take that one. If you take a step back and look at our capital plans, and put these transactions in the context of the overall capital plan, the plan is really twofold. Drive adjusted CET1 higher. We were 8.6% adjusted CET1 in the second quarter. We intend to drive that up into our operating range of 9% to 10%. I think we're just a handful of quarters away from achieving that, our current trajectory. And then the second key objective is fund high-return loan growth, and we're doing that. And I think as we said that will continue and accelerate on a year-over-year basis. And the prime driver of creating the capital to support those objectives is organic earnings and the core earnings power of the company. And that really is the core focus, the prime focus. With that being said, and just shifting now to your question on CRT and CLNs, at the margin, these transactions can be very helpful for just further RWA and balance sheet optimization. And so, we're pleased to do a [CDS] (ph) transaction in the fourth quarter of last year and then a very successful credit-linked-note transaction in the second quarter. To give you a sense of the economics, the second quarter yield was exceptionally good. Less than a 3% cost of capital. So what do I mean by that? $4 billion notional transaction against high-quality indirect auto loans, 74% reduction in risk-weighted assets through the transaction, so $3 billion reduction in RWA. We also get almost $500 million of funding from the transaction. And the cost of that is only $7 million into spread on a year-one basis, plus some modest upfront transaction costs. So it's incredibly efficient at the margins, unlocked 17 bps of CET1, and just continue to support those prime objectives. So we look at it as very much tactical. It's not the core underlying driver, but just these opportunistic things that come through, and really pleased with how well [Technical Difficulty] economics are incredibly favorable.

Steve Steinour:

Thank you.

Jon Arfstrom:

Hey, thanks. Good morning, guys.

Jon Arfstrom:

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

Jon Arfstrom:

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

Jon Arfstrom:

Okay. Thank you.

Operator:

Thank you. Our final question is from the line of Peter Winter with D.A. Davidson. Please proceed with your question.

Steve Steinour:

Good morning, Peter.

Zach Wasserman:

Thanks for the question. This is Zach. I'll take that one. So would share your -- the other line of [Technical Difficulty] your question was fee income performance was very strong. We were really pleased with what we saw. Second quarter was up 6% sequentially from the first. Continue to run at a 5% year-over-year growth rate, similar to the first quarter year-over-year. And our expectation is to land within our 5% to 7% full-year range. And as we get into the back half of the year, and we've got some of the grow-overs versus last year, get a little easier. With that being said, I think we'll continue to power sequential growth here and it really is the three priority areas of focus; capital markets, payments, and wealth management. Execution quality is very strong and the trends we're seeing continue to be very much conducive to that. The payments up 5% year-over-year in Q2. Treasury management is within that double-digit growth, driven by client penetration. Wealth management continues to run at very strong levels. Our performance advisory, households up 8. AUM and net flows look really good and that's driving revenue up 8%. And capital markets, which clearly has been a little bit choppy in the back half of last year, we were pleased to see what we would expect, which was strong growth in the second quarter, particularly in our advisory business, where we know that the middle-market M&A has been in a challenging environment as yields were -- as interest rate environment was rising last year, that activity is now picking up and I think will sustain. So I'm expecting sequential growth in each of those areas. I think where we land in the range will be clearly a function of how well we perform in it, but strong confidence we'll get there.

Brendan Lawlor:

Hey, Peter, it's Brendan. Excuse me, I'll take that one. As you sort of noted, we basically had the reserve flat this quarter at 1.95 versus 1.97 last quarter as the models add to the dollar amount of the reserve. We just continue to watch the volatility in just the overall market, but particularly with respect to rates, as well as the impact of higher prolonger rates on our commercial real estate portfolio. So, excuse me, as we see stronger economic performance come through in our modeling, and combined with the continued solid performance of the credit portfolio, that's when we would really look to start to move the reserve down more materially. That will be -- play out over a longer period of time. And so we're just -- we're continuing to watch and manage this to the right level, but right now we feel like we're adequately reserved.

Operator:

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

Operator:

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

Tim Sedabres :

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 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 turn it over to Steve.

Zach Wasserman :

Thanks, Steve, and good morning, everyone. Slide 6 provides highlights of our fourth quarter results. We reported GAAP earnings per common share of $0.26 and adjusted EPS of $0.28. The quarter included $39 million of notable items, primarily related to the updated FDIC deposit insurance fund special assessment of $32 million, which was driven by higher losses from last year's bank failures. Additionally, we incurred $7 million of costs related to incremental business process offshoring, efficiency plans that were finalized during the quarter. These items collectively impacted EPS by $0.02 per common share. Return on Tangible Common Equity, or ROTCE, came in at 14.2% for the quarter. Adjusted for notable items, ROTCE was 15.3%. Average deposits continued to grow during the quarter, increasing by $1.1 billion or 0.7%. Cumulative deposit beta totaled 43% through quarter end. Average loan balances increased by $701 million or 0.6% for the quarter. Credit quality remains strong with net charge-offs of 30 basis points. Allowance for credit losses was stable and ended the quarter at 1.97%. Turning to Slide 7, as I noted, average loan balances increased quarter-over-quarter and were higher by 1.3% year-over-year. For the quarter, loans increased at a 2.3% annualized pace. We expect the pace of future loan growth to accelerate over the course of 2024. Loan growth was commercial-led for the quarter with total commercial loans increasing by $691 million. Commercial balance growth included distribution finance, which increased by $352 million, benefiting from normal seasonality. Auto floor plan increased by $313 million. CRE balances declined by $31 million. All other commercial portfolios were relatively unchanged on a net basis. Within other commercial, we saw notable strength in regional and business banking balances, as a result of sustained production levels and the continued retention of all SBA loan production on balance sheet. In total consumer loans, average balances were flat overall for the quarter. Within consumer, residential mortgage increased by $137 million, benefiting from production as well as slower prepay speeds. Average auto balances declined by $59 million, however increased by $180 million on an end of period basis. RV/Marine average balances declined by $42 million and home equity was lower by $35 million. Turning to Slide 8, as noted, we drove another quarter of solid deposit growth. Average deposits increased by $1.1 billion in the first quarter. On a year-over-year basis, deposits have increased by $4.6 billion, or 3.1%. Total cumulative deposit beta continued to decelerate quarter-over-quarter and ended at 43%, consistent with our expectations for this point in the rate cycle. Our current outlook for deposit beta remains unchanged, trending a few percentage points higher so long as there is a pause from the Fed and then beginning to revert and fall when we see rate cuts. Market expectations for rate cuts have clearly been pushed out compared to our January earnings call. We continue to believe that there will be rate cuts over time, and the impact of beta will be a function of the duration in this pause from the Fed. Turning to Slide 9, non-interest-bearing mix shift is tracking closely to our forecast. Average non-interest-bearing balances decreased by $1.3 billion, or 4% from the prior quarter. We continue to expect this mixed shift to moderate and stabilize during 2024. On to Slide 10. For the quarter, net interest income decreased by $27 million or 2% to $1,300 million. Net interest margin declined sequentially to 3.01%. Cumulatively, over the cycle, we have benefited from our asset sensitivity and earning asset growth, with net interest revenues growing at a 6% CAGR over the past two years. Reconciling the change in NIM from Q4, we saw a decrease of 6 basis points. This was primarily due to lower spread, net of free funds, which accounted for 9 basis points, along with a 1 basis point benefit from lower average Fed cash and 2 basis points positive impact from other items, including lower hedge drag impact. We continue to benefit from fixed rate loan repricing. We have seen notable increases in fixed asset portfolio yields thus far in the rate cycle. And many of our fixed rate loan portfolios retain substantial upside repricing opportunity through 2024 and into 2025. 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 level of the curve. The basis of our planning and guidance continues to be a central set of those scenarios that are bounded on the low end by a scenario that includes 3 Fed Fund cuts in 2024, which tracks closely to the current Fed dot plot. This scenario is also aligned to the forward curve from the end of March for longer-durated time points. It's important to note that the level of the curve in the two-year to five-year term points is an important driver of our asset repricing and spreads. The higher scenario assume rates stay higher for longer with no Fed fund rate reductions this year. This scenario also assumes the longer-durated time points remain at or above the levels at quarter end. In both of these scenarios, as we project further out into 2025, we continue to believe it is most likely that there will eventually be rate cuts at some point as we get into next year. Comparing our latest outlook for those scenarios to the range of outlook we shared in our January guidance, there have certainly been changes given the volatility of rates over the past quarter. Both scenarios now expect Fed funds to stay elevated for longer, which will drive some incremental deposit beta, while the belly of the curve has improved, which will also support asset yields and repricing benefit. It's difficult to predict exactly how the rate environment will play out over the course of the year. As we look at the impact of this rate outlook on our business, the fundamental elements of our prior guidance remain unchanged. There's much of the year left to play out, and as a result, we're maintaining our range for full year spread revenue growth. At the margin, we're seeing somewhat higher funding costs as the expected timing of rate cuts has been pushed out. If this plays out for the full year, our view is that the overall NIM outcome could be a few basis points lower than our previous guidance in both scenarios. Importantly, we're also seeing strong continued deposit growth that is more likely to be at the top end of our deposit growth guidance range, which provides good core funding for our accelerating loan growth. We continue to see Q1 as the trough for net interest income on a dollar basis. We expect sequential growth in spread revenues from this level during the remaining quarters of the year. We also continue to project that a higher rate scenario will produce a higher overall NIM. In this scenario, we would see a more extended trend of higher deposit beta, and hence overall funding costs would be higher, we would also see an incrementally higher fixed asset repricing benefit. Importantly, our core focus is on driving revenue growth and as I noted we continue to forecast that the combination of this margin outlook, coupled with accelerating loan growth, will drive solid revenue expansion from here. This will support accelerating earnings growth rates as we move throughout this year and continue on into 2025. Turning to Slide 11. Our level of cash and securities increased as we benefited from higher funding balances from sustained deposit growth, as well as our senior note offering and ABS transactions in the first quarter. We expect cash and securities as a percentage of total average assets to remain at approximately 27% to 28% as the balance sheet grows over time. We are reinvesting securities cash flows in short duration HQLA, consistent with our approach to continue to manage the unhedged duration of the portfolio lower over time. We have reduced the overall hedged duration of the portfolio from 4.1 years to 3.5 years over the past seven quarters. Turning to slide 12, you can see an updated outlook for AOCI. Based on the rate environment at quarter end, AOCI moved incrementally higher. AOCI at quarter end was 21% lower than the levels we saw in the third quarter. Our outlook continues to forecast a substantial portion of AOCI recapture over the next couple years. Turning to Slide 13, we have updated the presentation of our balance sheet hedging program in order to more directly illustrate the intent of the hedging program. This view shows the effective swap profile in the future, including the effect of forward starting swaps, so you can see more directly the hedging exposures as they will play out over the next two years. Slide 43 in the appendix provides the total notional swap exposure similar to our prior reporting. As of March 31, we had $16.8 billion of effective received fixed swaps and $10.7 billion of effective pay fixed swaps. Our hedging program is designed with two primary objectives to protect margin and revenue and down rate environment and to protect capital and potential up rate scenarios. The pay fixed swaps, which have been effective in protecting capital during this rate cycle, have a weighted average life of just over three years and will begin to mature beginning in the second quarter of 2025. As these instruments mature, our asset sensitivity will reduce. Over time, we intend to gradually add to our down rate protection program at a measured pace. As the rate outlook moved over the course of the first quarter and the yield curve became less negatively inverted, we incrementally added to our down rate protection hedges. We added $3.5 billion of notional forward starting received fixed swaps in the first quarter. Additionally, through the first two weeks of April, we added another $2 billion of forward starting received fixed swaps. The forward starting structure minimizes near-term negative carry while protecting moderate-term net interest margin in 2025 and 2026. These instruments will also reduce the overall asset sensitivity of the business. We will remain dynamic to manage the hedging and interest rate positioning of the balance sheet, and we may make further changes over time. Our current approach is designed to gradually reduce asset sensitivity throughout the next year and a half, while allowing us to maximize the benefit from the current rate environment. Moving on to Slide 14, our fee revenue growth is driven by three substantive areas, capital markets, payments, and wealth management. In capital markets, total revenues declined from the prior quarter, driven by lower advisory revenues. Commercial banking related capital markets revenues increased sequentially since troughing in the third quarter. As commercial loan production continues to accelerate, this will support growth in areas such as interest rate derivatives, FX, and syndications. Debt capital markets is also expected to notably benefit over the course of the year. Within advisory, pipelines and backlog continue to remain robust, and we expect advisory to contribute to growth in capital markets revenues over the remainder of the year. Payments in cash management revenue was seasonally lower in the first quarter and increased 7% year-over-year. Debit card revenue continues to outperform industry benchmarks. Treasury management fees have increased 10% year-over-year as we have deepened customer penetration. We have substantive opportunities across the board in payments to grow revenues over the coming years. Our wealth and asset management strategy is delivering results, with revenues up 10% from the prior year. We are seeing great execution and the benefits of our investments in this area. Advisory relationships have increased 8% year-over-year, and assets under management have increased 12% year-over-year. Turning to Slide 15. On an overall level, GAAP non-interest income increased by $62 million to $467 million for the first quarter, excluding the impacts of the mark-to-market on the pay-fixed swaptions in the prior quarter and the CRT, fees declined seasonally by $12 million quarter-over-quarter. Our first quarter fee revenue is generally the low point for the year, and we expect non-interest income to grow sequentially from this quarter's level. Moving on to Slide 16 on expenses. GAAP non-interest expense decreased by $211 million and underlying core expenses decreased by $24 million. During the quarter, we incurred $32 million of incremental expense related to the FDIC Deposit Insurance Fund Special Assessment, as well as $7 million related to our ongoing business process offshoring program to drive efficiencies. Excluding these items, core expenses were marginally lower in the first quarter than we expected, largely due to timing of certain spend on tech and data initiatives, as well as lower incentive compensation. We continue to forecast 4.5% core expense growth for the full year. From a timing standpoint, we expect core expenses to be higher in the second quarter at approximately $1,130 million. This level should be relatively stable for the third and fourth quarter. There may be some variability given revenue-driven compensation, as well as the pace of expected new hiring activities. This level of expense supports our investments into organic growth strategies as well as data and technology initiatives. Slide 17 recaps our capital position. Common equity tier 1 ended the quarter at 10.2%. Our adjusted CET1 ratio, inclusive of AOCI, was 8.5% and has grown 60 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 18, credit quality is coming in as we expected and continues to perform very well. Net charge-offs were 30 basis points in Q1, 1 basis point lower than the prior quarter. They remain in the lower half of our through the cycle range of 25 basis points to 45 basis points. Allowance for credit losses was stable at 1.97%. Non-performing assets increased approximately 4% from the previous quarter to 60 basis points, while remaining below the prior 2021 level. The criticized asset ratio also increased approximately 3% quarter-over-quarter, with sequential increases slowing quarter-over-quarter. The overall health of the portfolio is strong and tracking to our expectations. Let's turn to our outlook for 2024. Overall, our guidance ranges are unchanged. On loans, we expect to drive accelerated growth from the first quarter, totaling between 3% and 5% on a full year basis. This will be driven by solid performance in our core, as well as meaningful contribution from the new teams and market expansions. On deposits, we're keeping the overall range the same at between 2% and 4%. We do see it more likely to end up at the higher portion of that range based on our momentum and the traction we're seeing with deposit gathering. Net interest income is expected to be within a range of down 2% and up 2% on a full year basis. As I noted, we see NIM likely a few basis points lower than our earlier guidance. We project spread revenue to expand on a dollar basis from the Q1 level into the second quarter and throughout 2024. Fee growth strategies remain on track, and we continue to see core non-interest income growth of 5% to 7% for the full year. Expense outlook is unchanged, expecting 4.5% core expense growth for the full year. Credit quality, as I mentioned, is tracking closely to our expectations, and we continue to expect full-year net charge-offs between 25 basis points and 35 basis points. With that, we'll conclude our prepared remarks and move to Q&A. Tim, over to you.

Operator:

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Our first question is coming from Manan Gosalia from Morgan Stanley. Your line is now live.

Zach Wasserman:

Sure, Manan. Thanks for the question. This is Zach. I'll take that. Broadly speaking, we're seeing the NIM outcome, but very similar to the view we had before, just as I mentioned, the sort of moderate tuning lower, you know, clearly the biggest change in the environment over the last three months, since we gave guidance in January, was the expectation for a much longer pause in this Fed posture or any rate reductions. And so at the margin, really we're seeing slightly higher deposit funding costs and overall interest-bearing liability costs. The other thing that's important, and I'm trying to note this in the prepared remarks as well, is that the deposit volumes are coming in very strong and slightly at the higher end of our prior expectation as well. And so that's contributing somewhat, although really good core funding clearly for the accelerating loan growth over time. So that's really the driver. You know, as we entered the quarter, we [just provide one last piece of color] (ph) on that. As we entered the quarter, the market forward was for the first rate reduction to be in March. We always knew that -- that was, we took the view -- that was likely not to be the case, but clearly that was the forecast of the market broadly. And we were beginning to execute the early stages of down beta actions. We've discussed shortening CD term duration, changing other elements of our pricing. You know, as we went throughout the quarter, clearly that reset. And so we've had to continue to be dynamic, as we would always be in managing deposit pricing, and likely now those more substantive downgrade actions will be pushed further out. So that's really the biggest driver of it, sort of the timing of when we'll begin to see more significant downgrade actions. Over time, we would expect to be just as effective going forward as we've been in the past on that -- and it's really just, you know, when will that occur? And hence, a few bps of additional funding costs here in 2024.

Zach Wasserman :

You know, it's a good question Manan, but the posture, we're in this custody moment here, clearly, of when will rate cuts reduce, and also not only when will the first one happen, but what will be the expected trajectory by the market, and by customers really thereafter. For us, we're very dynamic and granular in how we manage this to really optimize the next best unit of funding here. So continually thinking about when is that rate cut going to happen and obviously attempting to play in front of it. With that being said, we're talking about marginal tuning here and I wouldn't overplay it.

Operator:

Thank you. Our next question is coming from John Pancari from Evercore ISI. Your line is now live.

Stephen Steinour:

Good morning, John.

Zach Wasserman :

That is the primary driver. So yes is the answer to that. Seeing a little lower, few basis points lower NIM, but incrementally somewhat stronger loan growth, those things are largely offsetting, and continue to see the ultimate results in that guidance range. And importantly, the keeping for us is that trajectory, growing net interest income on a dollar basis out of the first quarter into the second quarter, and continuing on to the third and fourth quarter, and the outcome of that's going to be solidly expanding revenue growth and solidly expanding profit growth as well. So yes to the fundamentals of your question and the overall outlook, generally unchanged.

Stephen Steinour :

Thanks, John. We see the commercial pipeline for the second quarter, particularly the high probability of close level to be very, very good, very strong relative to the last five quarters. So as I said, each month has improved in the first quarter. Second quarter strength is obvious now at this stage. We're also seeing good business banking, loan growth, and we have the benefit of these new initiatives, none of which have [books] (ph) that they're carrying. So the three new initiatives, especially banking last year, and the Carolinas off to a really good start. Texas was there a couple of weeks ago. Got a great team there as well. All of those investments will bolster our activities throughout the year. And then, as you know, we've got one of the largest [split-up] (ph) finance companies in the country. That tends to be somewhat seasonal fourth quarter. So those would be the combination of factors that give us a lot of confidence that we'll be at or near that upper end of our guide for the full year.

Scott Siefers:

Good morning, guys. Thanks for taking the question. I kind of wanted to revisit the margin as well. So on the deposit pricing, is it possible to make sort of a broad comment about is this sort of something that you're seeing and reflecting kind of market pricing pressures or would you say you're more on sort of the leading? Because it sounds like we're trying to support the loan growth, which is obviously a very positive differentiated factor. But are you all kind of leading with pricing on the deposit side to fund that growth or what does the competitive dynamic look like as well?

Scott Siefers:

Okay. All right. Perfect. And I think you actually touched on sort of my loan-growth questions in prior responses. So that does -- I appreciate the color.

Operator:

Thank you. Next question is coming from Steven Alexopoulos from JPMorgan Chasing Company. Your line is now live.

Zach Wasserman :

Good morning, Stephen.

Zach Wasserman :

Yeah, good question. I appreciate it. And I think what I’ll just bring back to is the two key things here. Overall, the NIM outlook for us in both scenarios is a few basis points lower, mainly as a function of the timing of when rate reductions will begin and when we'll see substantive downgrade action. It's somewhat higher funding cost environment than we expected. And that's with the main driver. Second thing I would say is the four key factors for us that are driving the NIM this year remains the same. The biggest positive factor is fixed asset repricing, which I’ve just shared in the prepared remarks, we expect to see about $4 billion quarterly repricing of fixed assets. We should drive substantive benefit on the order between 10 basis points and even 12 basis points or 13 basis points, depending on how the value of the curve maintains here over the course of this year. The second positive factor is a gradual reduction to the amount of hedge drag we've got in the NIM. In Q1, we had 16 basis points of hedge drag. And I expect to see something between 5 basis points to up to 8 basis points, to maybe even 10 basis points, again, depending on how the curve moves here over the course of the rest of this year until Q4. Those are the two biggest positive factors. The other two factors are what's going on with variable yields, and what's going on with funding costs. Those are largely offsetting each other in both of those moving off of a direct cost direction, to be clear, in either a higher rate path or a lower rate path scenario. And those are modestly net negative for the full year. It would offset those positives and keep these overall NIM in a generally flat to rising position from here. So none of that has really changed. The last thing I'll say, a third point, is that all of the modeling we're doing continues to indicate that a higher rate scenario overall, all things equal, drives a higher NIM for us. Clearly the -- how this plays out over such a short period of time, three quarters, will really depend on the shape and trajectory and timing and everything. But that's the best we can do. And I think the guidance we're trying to give here with this range of scenarios is designed to allow us to give you stability in terms of the revenue guidance, which ultimately is the most important thing.

Zach Wasserman :

I expect to see NIM bouncing around these levels, or rising over the course of the rest of the year, depending on how the scenario plays out. And for that, kind of flat to rising NIM, coupled with accelerating loan growth, to drive accelerating net interest income on a dollar basis out of the first quarter into the second quarter of growth and then continuing to grow into the third and the fourth quarter.

Zach Wasserman:

Balances were modestly declining through the quarter. As we look at that -- we see a few things. One is the trajectory of dollars of non-interest bearing actually decelerating in terms of their mix shift. Secondly, for the most part, all of the mix shift that we think will happen within consumer has happened. And where there is continued drift in Q1 is really in the business and commercial side. Another point would be we expect the non-interest-bearing mix shift, mix of the percentage to continue to stabilize in the high teens over the course of this year, which is 19.4% as of Q1. You know, and lastly I'll say, as you think about that percentage, it's very notable to measure that percentage if overall deposits are shrinking versus if they're growing. For us, overall deposits are growing strongly as we've said. So the mix is one thing, but the dollars are really the most important thing. In fact, we see stabilizing here over the course of the next couple of quarters.

Operator:

Thank you. Next question is coming from Ebrahim Poonawala from Bank of America. Your line is now live.

Stephen Steinour :

Good morning, Ebrahim.

Stephen Steinour:

Thank you, Ebrahim. The economy, we all see the aggregate metrics that are released. There's an underlying strength. We're seeing that, particularly because we've been proactive with our lending activities through last year, the core is performing well. We're getting growth in our [auto book] [ph], our distribution finance in particular, our business bank, so very localized levels, principally here in the Midwest. We're also getting growth in a number of our other areas. And these new verticals that have been added, they've all closed the loans. They've all generated lending activity and other activity. And the Carolina expansion and Texas expansion are delivering results and look very promising to us. So we've positioned the bank both with the core activities and these incremental investments, I think, to outperform peers in loan growth and perhaps in a number of other respects as well, certainly through this year and potentially beyond. The pipeline activity I referenced earlier is very promising. And again, the strength of the first quarter with every month improving gives us a lot of confidence. Our investment banking activity, Capstone related, their pipeline is bigger than they've ever had, as an example. So we've got a lot of opportunity in front of us, so now we have to deliver it.

Zach Wasserman :

It will really be a [technical difficulty] take there. So I think the outcome will be somewhere between that range of EV. When we give these ranges, we try to generally box our plan and land in the middle of it. But of course, there's a bit of variance and just normal variability that's hard to forecast with such decision. So that's the expectation. I think we'll see, as I noted, just to clarify, a flat to rising NIM, a slightly higher NIM in the higher rate scenario, albeit with different drivers, and really coupling that with accelerating loan growth will drive dollars out of the level we've seen in Q1, up into Q2 and beyond, and to land for a full year somewhere in the middle of that range.

Zach Wasserman :

Certainly it's possible. We'll have to see how the rate environment plays out here. I think really at this point, we're probably parsing the precision more than is reasonable. It's still a pretty moving target in terms of where the yield curve is now, but I think we'll land somewhere in that range is our best estimate.

Operator:

Thank you. [Operator Instructions] Our next question is coming from Ken Usdin from Jefferies. Your line is now live.

Zach Wasserman:

Yeah, it's a terrific question. Just maybe I'll say a few things on that. One is the fixed asset repricing benefit that we saw, and as mentioned earlier, somewhere between 10, 11, 12, 13 basis points outside this year from that $4 billion turning quarterly. Our modeling indicates that we’ll continue on into 2025 at kind of a similar pace. It's really a very long-term phenomenon, and [indiscernible] significant support to the NIM as we get into 2025. On the hedge drag factor within NIM, that’s 16 bps in Q1, reducing down by something like 5 basis points to 8 basis points, as much as 10, depending on the rate scenario, lower by the end of Q4. That should also continue on into the early part of 2025 as well. You probably get to about neutral position if there are some rate reductions. And if you just look at the rate curve, the forward rate curve, there is an expectation in the forward curve at this point that there will be, in fact, reductions either in the back half of this year, certainly into the early part of next year. And so if that comes to pass, then we'll see that 16 basis points sort of fully resolved by the middle of 2025. If there are great reductions, then you see less of that hedge drag coming back. But obviously, then – because there are different environment overall, regardless. The other thing I'll just say, you didn't ask it, but I'll share it is, if you look at the sum total of all of our hedging activities, which, as you know, are always designed to protect capital against up-rate scenarios, protect NIM in down-rate scenarios. That chart that I illustrated in the prepared remarks has a gradual shifting of that exposure as you get into and throughout 2025. The net result of that should be that by the end of 2025, asset sensitivity should be about one-third less. And so that's sort of the intent of that program, more broadly from an interest rate risk and asset sensitivity management perspective.

Zach Wasserman :

So, as I noted a bit ago, I think it's about the same benefit as we go out into 2025, and that's fairly similar churn of quarterly volumes, and continue to see the belly of the curve that's largely on those assets are priced, significantly higher than the historical rate of those assets. Over time, of course, you'll begin to see that benefit reduce on a sequential basis. At some point, it starts to [indiscernible] but likely not until the latter part of 2025, at the earliest at this point, based on how the curve is shaping up.

Zach Wasserman :

No worries. Appreciate your question.

Jon Arfstrom:

Hey, thanks. Good morning. Can you touch a little bit on the fee income outlook and what you expect there? It seems like you're implying a bit of a step up in that based on what you saw in the first quarter, but talk a little bit about what you're seeing there. And then confidence in hitting that midpoint of the guide.

Jon Arfstrom:

Okay, good, helpful. I won't go back to net interest income, but I do want to ask about credit. Your numbers obviously look good, but anything you want to flag internally that you're seeing, and I'm curious also what you're seeing externally from a credit point of view. Thank you.

Stephen Steinour :

Just to add to that, thanks Brendan. We've reduced the office portfolio by about $500 million over the course of the last four quarters. And our largest loan is $40 million. The average is $7 million-ish. So it's very granular, and it gets a lot of attention. And we expect it will continue to reduce throughout this year.

Zach Wasserman :

Great question Jon. I'll take that one. [indiscernible] two statements I would make. First is, I feel really good about the overall performance of the business. For us, it's about executing long-term growth, long-term value creation. And Q1 set that up really well. We've seen confidence in loan growth accelerating, great core funding, and therefore the confidence in being within that range is very strong. At the margin, my revenue outlook is a touch lower than was the case before. But I think we're in the range of tuning at this point, Jon, and hence, not overly parse this -- somewhere in that range, typically try to land in the middle of the ranges that we're giving.

Operator:

Thank you. Next question is coming from Peter Winter from D.A. Davidson. Your line is now live.

Brendan Lawlor:

Peter, it's Brendan. I'll take a chunk of that. You're noting the stability quarter-over-quarter, and that's accurate. I think, as we look forward, it's really fact specific as to how the ACL coverage will move quarter-over-quarter, as we take into account the modeling of our economic scenarios, the view of credit at that time, as well as the loan growth, as you referenced in your question. We put all of that into the mix to sort of drive out of our modeling what we believe the right level of coverage is. And so -- it's harder for us to, you know, for anybody frankly to -- in this environment, to really give any strong guidance, as to which way the ACL will move, as it's really a quarterly specific metric these days, and the way it's run. So it's hard for me to come out and say, well -- we think it'll do this, and we think it'll do that.

Peter Winter:

Okay. Thanks, Steve. Just one quick follow-up. Just that comment that you're feeling better about loan growth. How much of the loan growth acceleration is new markets versus just core strength? And is part of that positive outlook, given the early success that you're seeing on the new initiatives?

Peter Winter :

And just one last final. Does the core loan growth assume a pickup in-line utilization?

Stephen Steinour:

And each of those businesses Zach referenced, we expect net increase in customers. So they'll have a core organic growth as primary driver.

Operator:

Thank you. Next question today is coming from Matt O'Connor from Deutsche Bank. Your line is now live.

Zach Wasserman:

Yeah, good question Matt. Thanks. So the answer is no, broadly. No substantive update in terms of where that may be going. For us, we've got a really strong debit card franchise, it's one of the best in the country in terms of relative penetration and utilization within our consumer and small business base. So that's a real benefit to us. If you were to just run the numbers on the proposal as it was proposed, think it's around a $90 million annualized impact for us. With that being said, if history is a guide, often those proposals are changed substantively between the time they were initially put forth and when enacted, either to not come forth at all or to be substantively altered. So we'll see -- for us in our payment strategy, there's so much growth opportunity and so many opportunities to engage our customers that there will be, over time, ways to mitigate some of that and to certainly offset with other payments related to growth. As best we can tell at this point, to be fair, there is a proposal that would be at some point mid to latter part of ‘25 that will take effect. And so not in the guidance for ‘24 as you just noted.

Stephen Steinour :

So, in closing, we're pleased with our first quarter results. We're seeing momentum build across the bank, which will drive improved performance over the course of the year and beyond. We clearly expect our investments in our businesses to deliver growth this year and the future. The balance sheet is well positioned, ample capital and robust opportunities to support our growth initiatives. Our focus remains centered on driving core revenue growth, carefully managing expenses and growing loans consistent with our aggregate moderate to low risk appetite. Just as a reminder, the Board Executives, our colleagues, our top 10 shareholder collectively reflecting our strong line to build shareholder value. Finally, we would not be able to take care of our customers without the efforts of our nearly 20,000 exceptional colleagues engaged every day across the bank. Thank you for your support. Thank you for your questions and your interest in Huntington. And have a great day.

Tim Sedabres:

Thank you, operator. Welcome, everyone, and good morning. Copies of the slides we'll be reviewing today can be found on Investor Relations section of our website, www.huntington.com. As a reminder, this call is being recorded and a replay will be available starting about one-hour from the close of the call. Our presenters today are Steve Steinour, Chairman, President and CEO; and Zach Wasserman, Chief Financial Officer. 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.

Zach Wasserman:

Thanks, Steve, and good morning, everyone. Slide 7 provides highlights of our fourth quarter results. We reported GAAP earnings per common share of $0.15 and adjusted EPS of $0.27. The quarter included $226 million of notable items, primarily related to the FDIC special assessment, which impacted EPS by $0.12 per common share. Additionally, the termination of the pay-fixed swaptions hedging program impacted pre-tax income by $74 million or $0.04 per share. Return on tangible common equity or ROTCE came in at 8.4% for the quarter. Adjusted for notable items, ROTCE was 15.1%. Average deposits continued their trend of growth into the fourth quarter, increasing by $1.5 billion or 1%. Cumulative deposit beta totaled 41% through year end. Loan balances increased by $445 million, as we continue to optimize the pace of loan growth to drive the highest return on capital. Credit quality remained strong. The trend is normalizing, consistent with our expectations and net charge-offs totaled 31 basis points. Allowance for credit losses ended the quarter at 1.97%. Turning to Slide 8. As I noted, average loan balances increased quarter-over-quarter and were higher by 2% year-over-year. We expect the pace of future loan growth to accelerate over the course of 2024. Total commercial loans increased by $125 million for the quarter and included distribution finance, which increased by $225 million, benefited by normal seasonality as manufacturer shipments increased due to inventory build of winter products. Auto Floorplan increased by $359 million and CRE balances, which declined by $361 million, including the impact of payoffs and normal amortization. And all other commercial categories net decreased as we continued to drive optimization toward the highest returns. In Consumer, growth was led by residential mortgage, which increased by $295 million and RV/Marine, which increased by $121 million, while auto loan balances declined for the quarter . Turning to Slide 9. As noted, we continued to gather deposits consistently in the fourth quarter. Average deposits increased by $1.5 billion or 1% from the prior quarter. Turning to Slide 10. Growth was maintained each month throughout the fourth quarter, continuing the recent trend. Total cumulative deposit beta ended the year at 41%, in-line with our expectations and reflecting the decelerating rate of change we would expect at this point in the rate cycle. As we've noted in the past, where beta ultimately tops out, will be a function of the end game for the rate cycle in terms of the level and timing of the peak and the duration of any extended pause before a decrease. Given market expectations for rate cuts to start sometime in 2024, our current outlook for deposit beta remains unchanged, trending a few percentage points higher and then beginning to revert and fall if and when we see rate cuts from the Fed. When interest rate cuts commence, we expect to manage betas on the way down with the same discipline as we have during the increasing rate cycle. Turning to Slide 11. Non-interest bearing mix-shift continues to track closely to our forecast with deceleration of sequential changes. The non-interest bearing percentage decreased by 80 basis points from the third quarter, and we continue to expect this mix-shift to moderate and stabilized during 2024. On to Slide 12. For the quarter, net interest income decreased by $52 million or 3.8% to $1.327 billion. Net interest margin declined sequentially to 3.07%, in-line with our forecast. Cumulatively over the cycle, we have benefited from our asset sensitivity and the expansion of margins with net interest revenues growing at an 8% CAGR over the past two years. Reconciling the change in NIM from Q3, we saw a decrease of 13 basis points. This was primarily due to lower spread, net of refunds, which accounted for 9 basis points, along with a 2 basis point negative impact from lower FHLB stock dividends and a 2 basis point reduction from hedging. Turning to Slide 13, let me share a few added thoughts around the fixed-rate loan repricing opportunity that will benefit us over the moderate term. The construct of our balance sheet is approximately half fully variable rate, 10% in indirect auto, which is a shorter approximately two-year average life, and 10% in ARMs with a four-year average life. The remainder of approximately 30% is longer average life fixed-rate. We have seen notable increases in fixed asset portfolio yields thus far in the rate cycle. Even as the forward curve forecast lower short-term rates, many of our fixed-rate loan portfolios retained substantial upside repricing opportunity for some time to come. We forecast approximately $13 billion to $15 billion of fixed-rate loan repricing opportunity in 2024, with an estimated yield benefit of approximately 350 basis points. Slide 14 provides the drivers of our spread revenue growth. As a reminder, we continue to analyze and develop action plans for a wide range of potential economic and interest rate scenarios. The basis of our planning and guidance continues to be a central set of those scenarios that is bounded on the lower end by a scenario which includes five rate cuts in 2024. The higher scenario assumes rates stay higher for longer and tracks closely with the Fed's dot plot from year end. This scenario assumes three cuts in 2024. We continue to be focused on managing net interest margin in a tighter corridor. Should the lower rate scenario play out and we see rate cuts as early as March, that will likely result in a margin over the course of the year within a range near the level we saw in the fourth quarter. This would equate to a net interest margin between 3% and 3.1% for each quarter of 2024. If the higher for longer scenario comes to pass, we expect the margin to expand and at a level that is up to 10 basis points above that. As we saw in December, the outlook for longer-term interest rates also moved lower significantly. There were a number of benefits from this lower market rate outlook. First, it resulted in higher capital levels given AOCI accretion, which supports our accelerated loan growth outlook now. Second, it provides for easing deposit competition over time. Third, it provides credit support for borrowers with the potential for locking in lower long-term rates. However, the rate outlook is incrementally more challenging for full-year spread revenue than the levels we had seen underlying our guidance in December. Net of these items, including the forecasted pace of loan growth, we now expect net interest income on a dollar basis to trough in the first quarter before expanding sequentially from that level over the course of the year. Turning to Slide 15, our contingent and available liquidity continues to be robust at $93 billion and has grown quarter-over-quarter. At quarter end, we continue to benefit from a diverse and highly granular deposit base with 70% insured deposits. Our pool of available liquidity represented 206% of total uninsured deposits, a peer-leading coverage. Turning to Slide 16, our level of cash and securities at year end increased as we've begun to reinvest portfolio cash flows during the fourth quarter. This investment strategy is consistent with our approach to continue to manage the unhedged duration of the portfolio lower over-time. We have reduced overall hedge duration of the portfolio from 4.1 years to 3.7 years over the past 18 months. Turning to Slide 17, we've updated our forecast for the recapture of AOCI. As of year-end, we've recaptured 26% of total AOCI from the peak level at September 30th. Using market rates at year end, we would recapture an estimated incremental 44% of AOCI over the next three years. Turning to Slide 18, we continue to be dynamic in positioning our hedging program. As the rate outlooks changed over the course of the fourth quarter, we focused our objective incrementally on the protection of NIM in down rate scenarios and actively reduced instruments that were intended to protect capital in up rate scenarios. As we announced in late December, we terminated the pay-fixed swaptions program as our assessment of the probability for substantial upgrade moves decreased. Over the course of Q2 through Q4, this program worked as intended, providing significant protection against possible tail risk up-rate moves with a modest overall cost for that insurance. Additionally, during the quarter, we added to our down rate NIM protection strategies, adding $2.1 billion of forward-starting received fixed swaps and adding $1 billion of floor spreads. We exited $2 billion of Collars, which were near expiration. Our objective with respect to our down rate hedging activities remains unchanged, to support the management of net interest margin and as tighter range as possible. Moving on to Slide 19, our fee growth strategies remain centered on three key areas

Operator:

Thank you. [Operator Instructions] Our first question today is coming from the line of Manan Gosalia with Morgan Stanley. Please proceed with your questions.

Stephen Steinour:

Good morning, Manan.

Zach Wasserman:

Great question, Manan. This is Zach. I'll take that. The guidance that we've given back in October and in December was really primarily designed to be an early view for you so you can get and insights to some of the key decisions we're making for us to really be able to discuss that in detail, that was approximately 4% as we discussed before. The finalization of our budget reflects the additional loan growth added to the plan and associated fee revenues as well [indiscernible] represent the differences, up to 4.5% [indiscernible] it’s about $5 million a quarter, so relatively small. I think you are -- and the underlying drivers of that are unchanged from what we have discussed before. We'll continue to drive significant efficiencies and core [indiscernible] expenses with a number of programs. We'll continue to invest in our strategic growth initiatives. We'll execute on the incremental build of capabilities in automation and data, get ahead of the coming regulations and we'll execute on the really attractive commercial growth opportunities we discussed before. All of that's included in that number and no change to our expectation as well about reducing that growth rate as we go into 2024 -- 2025, excuse me, back to more normalized levels. As it relates to your question in terms of marginal sensitivity of it. Certainly, there will be just some degree of that. I think the expense that we guide is generally calibrated interest sort of the middle of the ranges we've guided in terms of revenues and so we saw potential upside of expenses. All of the revenues hit the high-end, likewise some potential opportunity if the revenues went lower.

Zach Wasserman:

Yes. This is Zach. I'll take that one again. What we've been seeing in the marketplace broadly with respect to deposit costs and deposit beta, both across both consumer and commercial is the -- as we are looking stack, a deceleration of the sequential changes and very much for us trending highly aligned to our expectations. As well I will tell you that we are beginning to see in the marketplace a fairly constructive initial signs of firms prepared for what will likely be soon a down grader environment with a shortening, for example, time deposit terms with a change of promotional terms on money market and select testing of different price points for these segments in each geography, all of which is what you'd expect to pre stage what will ultimately be a series of down grader moves. With respect to your specific question on consumer [indiscernible] will that trend. I think the answer is yes. What we have been saying all along is that, deposit costs and beta will continue to trend at a decelerating rate through the pause period until such time if there is a rate reduction. And so, that's our expectation as well. I won’t say the go-to-market pricing is generally here, pretty consistent if not, again testing somewhat lower price points, but there is of course of sort of embedded momentum of somewhat upward bias in terms of pricing for at least another quarter here and then we'll see. We got rates cuts in March, some aggressive in our view is possible which creates downgrade [indiscernible] rate environment holds out of deposits until September, which is will be kind of a longer period of [indiscernible]

Zach Wasserman:

[indiscernible]

Erika Najarian:

Hi, good morning. And by the way, whoever wrote that script, the guidance could not be any clearer, so that was great. That being said, a few follow-up questions. The loan growth guidance from your peers would imply that the macro outlook which seems pretty consensus is indicative of software opportunities, and perhaps this is a good chance. Clearly, you've been telling us for the past few years that you've set yourself up differently and you've [indiscernible] differently to outperform. And maybe go back through those opportunities that they think that the average loan growth number is certainly notable versus peers and perhaps remind us of why Huntington is a particularly unique set of growth opportunity for this year?

Erika Najarian:

For sure, and you had the capital, so it all makes sense. And just a follow-up question, again, so many moving pieces in terms of the rate outlook, but Zach, if maybe update us on your rate sensitivity as of 12/31, how does some of the [Technical Difficulty] in terms of your balance sheet management? And also, if you could give us a little bit more detail about what you mean in terms of managing the betas on the way down in a similar discipline? And I wonder if you could give us maybe your expectations on deposit beta for the first hundred basis points of rate cut.

Erika Najarian:

So clear. Thanks so much.

Operator:

Our next question is from the line of John Pancari with Evercore ISI. Please proceed with your question.

Stephen Steinour:

Good morning, John. On the capital front, I know your CET1 increased nicely, about 15 basis points to 10.25 basis points in the fourth quarter. Just as you look at their trajectory here and your outlook for earnings and capital, organic capital generation, how are you thinking about potentially ramping up buybacks and capital return overall? Thank you.

Stephen Steinour:

And John, as Zach shared with you in the third quarter call, we are advancing as if the pending capital requirements are in place. So we're building capital now that will meet those requirements should they be adopted.

Stephen Steinour:

Well, that's a series of questions, John. I'll try to answer them, but I may miss on one aspect. Let's just back up for a moment. We had three idiosyncratic banks fail. And you've seen the rest of the industry sort of adjust and adapt and respond very quickly. And the core strength of the industry, I don't think, is in question now. For us, we believe in having a very focused, disciplined, and broadly diversified set of businesses. And we've been able to build those and achieve that posture, and it has served us very, very well as we've seen in the second half of last year and continuing to this year. So we're very bullish on our ability to organically grow and expect -- and that's our focus. We'll continue to do that. You may see further announcements from us this year in terms of organic growth moves. And I expect that we will continue to be maybe a bit contrarian, but agile as we continue to advance. We think we have tremendous opportunities already in the business lines that we have. So in terms of scale, I think the regulatory response is in reaction to those three failures, is raising questions about how much [indiscernible] will the industry or banks will benefit from in the industry over time. The expectations have clearly increased, as they should. And we are investing in our risk management platform. I think I shared on the third quarter call, for example, we will have much better intraday visibility of [indiscernible] in the near term as a consequence. There are a series of things like this that we're addressing. Now, I don't know the -- we've been investing in risk management since I arrived in 2009. So I don't know how we compare -- really compare to other banks. We've always viewed the stress test results where we've been top quartile or even leading in terms of the portfolio stresses by the regulators as a barometer. And it looks like that was a very good measure, at least at this point. So we're not anticipating a change in posture at this stage. We don't feel compelled. We have to do something. And yet, at the same time, should there be opportunities somewhere in the future, we take a look. But it has to be in a risk-adjusted context that makes sense to us. And I don't see that activity in 2014. I think we've got a tremendous amount of core growth to deliver and we're excited by that.

Stephen Steinour:

Thanks, John.

Steven Alexopoulos:

Hey, good morning everybody.

Steven Alexopoulos:

So I want to start -- for you, Zach, big picture. So historically, a steep yield curve has been a positive catalyst for bank margins and earnings. But given how you position the balance you write with the use of hedges, have you in essence created a way much of that potential benefit in order to have a more stable NIM today?

Steven Alexopoulos:

Okay, that's helpful. Zach, I asked the question because earlier you said if the rates stay higher for longer, your NIM would be about 10 basis points higher in 2024 versus the Fed cutting. But as we move beyond 2025, 2026 there's a clear benefit to the NIM. Are you able to quantify for us like on a longer term basis assuming the forward curve played out, given what's on and what's rolling off. Where the NIM could be long term for Huntington?

Steven Alexopoulos:

Okay, Thanks for taking my question.

Operator:

Our next question is from the line of Jon Arfstrom with RBC Capital Markets. Please proceed with your questions.

Stephen Steinour:

Good morning, Jon.

Zach Wasserman:

Good question. Q1, by the way, is typically seasonally lower, just with day count and just other mixed items. And so, I think we'll probably see a level that is lower than Q4 by around the same amount that Q4 was lower than Q3, and then begin to grow from there. And so, it's really the trajectory from there that's really the major difference in the guidance range, given that, if you just pull back loan growth, I would expect, in Q1 we will be about the same year on year as we saw Q4 and year around 2%. And then steadily accelerating from there and ending the year growing at or even potentially above the high end of the loan growth range. The average should be 3% to 5% that I discussed. There's a trajectory for sure during the year. And likewise, in terms of NIM, I think it's likely that the NIM will likely meet its lowest point in the year in the first quarter and then kind of rising pretty heavily depending on the scenario you look at. But that's a general trajectory I'm expecting.

Zach Wasserman:

That's an excellent point, I really appreciate the chance to clarify that. Broadly speaking, the answer is yes. The dollar amount of expenses overall we saw in core basis in Q4, the forecast we've got in our budget represents pretty similar dollar amounts overall for each of the quarters during 2024, coincidentally. In my [indiscernible] illustrate this picture for you, there's a variety of factors that are offsetting each other and driving within that. I would say there's still a little bit of additional ramp-up of run rate, some of the incremental capability investments that we're doing. Likewise, a little bit of additional ramp up on some of these new initiatives like in the commercial business. We're also actively tuning our overall strategic investments to modestly offset that. And then lastly, you've got these efficiency programs, which are cumulating in their impact over time. The business process re-engineering initiative we've been driving for quite some time. We internally call it Operation Accelerate. The business process offshoring initiative, which by the way is also growing, accumulating. So there's sort of a series of factors that are netting together, but the result of it is basically dollars that are pretty consistent with [indiscernible] to Q4.

Zach Wasserman:

Thank you.

Unidentified Analyst:

Hey, good morning. This is [Nate Stein] (ph) on behalf of Matt. I just wanted to ask about commercial credit. Commercial real estate net charge-offs increased versus 3Q levels. Can you talk about what drove that and just touch on the outlook for commercial real estate credit quality this year? And then on the C&I side, these also continue to normalize. Can you talk about what you're seeing in this book? Thank you.

Stephen Steinour:

So, Nate, it’s Steve. The charge-offs -- gross charge-offs in Q3 and Q4 were $2 million apart. It was very, very similar. The difference was in all of their coverings. The pre-portfolio is performing very well. The office portfolio has had minimal losses, 23 bips for the year. Q1 charge-offs is outstanding. We're very pleased with how the performance has occurred, and we're confident going forward. Thanks for the question.

Brendan Lawlor:

This is Brendan again, Nate, as Zach said in the prepared remarks, it really came out of our commercial real estate portfolio. The impact of higher short-term rates has persisted, and that's what's reflected in those results. Again, we have been signaling through the second half of last year that we expect the criticize to move up, and that's exactly how it played out. Again, we have good confidence in our client selection in that portfolio and solid reserve against it overall. So I guess I would classify that as just more credit normalization across the portfolio.

Operator:

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

Stephen Steinour:

Good morning, Ebrahim.

Stephen Steinour:

Well, we've had growth last year of 2%. If anything, I think the signal from the Fed pivot will foster further loan growth for the industry. We are in an advanced position. And so, we'll capture a share from that, but we also have these specialty banking initiatives in the Carolinas, and they begin with no portfolio, so there's no prepayment, repayment risk, obviously, and that's all net long-run, but those groups are off to terrific starts. We're very, very pleased with the quality of the colleagues who've been able to attract to Huntington, and I'm quite confident in our teams, both the core teams that they'll deliver in our footprint, the speciality banking teams. And frankly, our consumer lending teams are outstanding as well. So as we come into the year, we've got momentum and we're going to continue to invest in these businesses and that cumulatively should help us achieve or even exceed the goals.

Stephen Steinour:

The markets have -- broadly speaking, we're talking about 11, 12 states that were in with our network. But here in Columbus, which is what you're referring with the [Intel] (ph) plant. That plant is well under construction, and the supply chain commitments will largely be made, we think, this year as they move towards opening in the following year. So we have some unusual factors that are strengthening the outlook here in greater Columbus. And we have very, very significant market share here and lead by a lot in most categories. But it will also benefit the broader region. And that's one of just many sectors that have chosen the Midwest. Think about batteries from East Michigan, Ann Arbor, through Columbus, and some of the announcements last year, including the Honda joint venture here in greater Columbus on the battery front. There's a lot of investment that's being made in the core footprint, all of which will generate economic benefit for the industry, and certainly for us with our leadership position in many of these areas. Thanks for the question.

Stephen Steinour:

So I think we're hitting the top of the hour. I'm just going to wrap. I want to thank you very much for joining us today. In closing, we're pleased with the fourth quarter results as we dynamically manage through this environment. We believe we're well positioned. Investments we made in 2023 will further drive revenue growth in 2024 and beyond. Our focus is on driving core revenue growth, carefully managing expenses to support investments in the business, and growing loans consistent with our aggregate moderate to low risk appetite. The management team is focused on executing our strategies that we previously shared. And as a reminder, the board executives, our colleagues, we're not just shareholders. And that creates strong long-term alignment with our shareholders generally. And finally, we're grateful to our nearly 20,000 exceptional colleagues who delivered these outstanding results and our perennial award winners for customer service. Thank you all very much. Appreciate your interest and have a great day.

Tim Sedabres:

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. Rich Pohle, Chief Credit Officer, and Brendan Lawlor, Deputy 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.

Zach Wasserman:

Thanks Steve, and good morning, everyone. Slide 6 provides highlights of our third quarter results. We reported GAAP earnings per common share of $0.35 and adjusted EPS of $0.36. The quarter included $15 million of notable items, which impacted EPS by $0.01 per common share. Return on Tangible Common Equity, or ROTCE, came in at 19.5% for the quarter. Adjusted for notable items, ROTCE was 20%. Further adjusting for AOCI, underlying ROTCE was 15.3%. Average deposits grew during the quarter, increasing by $2.6 billion or 1.8%. Loan balances decreased by $561 million or one-half of 1% from Q2, driven both by seasonality and our continued optimization. Net interest income on a dollar basis expanded quarter-over-quarter, driven by a rising net interest margin. We continue to proactively manage expenses and have begun a new set of incremental actions in the third quarter, including branch consolidation, staffing efficiencies, and corporate real estate consolidations. These actions, coupled with our ongoing long-term efficiency programs, as well as the measures we implemented in Q1 of this year, will help us drive rigorous baseline expense efficiency, while sustaining capacity for investments in the franchise. Credit quality remains strong, with net charge-offs of 24 basis points and allowance for credit losses of 1.96%. Return on capital was robust, driving capital accretion with reported CET1 now above 10%. Turning to Slide 7. As I noted, average loan balances decreased one-half of 1% from Q2, driven primarily by lower commercial loan balances, which decreased by $1.2 billion, or 1.7% from the prior quarter. On a year-over-year basis, average loans increased 3.3%, reflective of our intentional optimization efforts. Primary components of the commercial loan change included CRE balances, which declined by $387 million, driven by paydowns. Distribution finance decreased $434 million due to normal seasonality with lower dealer inventory levels in the third quarter before the expected inventory build in the fourth quarter. Asset finance decreased by $271 million. Auto floorplan increased by $122 million, all other commercial categories net decreased as we continued to drive optimization towards the highest returns. In consumer, growth was led by residential mortgage and RV marine, while auto loan balances declined for the quarter. Turning to Slide 8. As noted, we continued to deliver consistent deposit growth in the quarter. Average deposits increased by $2.6 billion or 1.8% from the prior quarter. Turning to Slide 9, we saw sustained growth in deposit balances in the third quarter, including sequential increases during July, August, and September, continuing the trend we have seen previously. Importantly, core deposits represented the entirety of the deposit growth for the quarter, with broker deposits declining quarter-over-quarter. Turning to Slide 10. Non-interest-bearing mix shift continues to track closely to our forecast with the deceleration of sequential changes that we would expect at this point in the rate cycle. The non-interest-bearing percentage decreased by 120 basis points from the second quarter, and we continue to expect this mix shift to moderate and stabilize during 2024. On to Slide 11. For the quarter, net interest income increased by $22 million, or 1.6% to $1.379 billion, driven by expanded net interest margin. We continued to benefit from our asset sensitivity and the expansion of margins that has occurred throughout this cycle, with net interest income growing at 9% CAGR over the past two years. Reconciling the change in NIM from Q2, we saw an increase of 9 basis points on a GAAP basis and an increase of 10 basis points on a core basis, excluding accretion. The drivers of the higher NIM quarter-over-quarter were higher spread, net of free funds, lower Fed cash balances versus the prior quarter, and higher FHLB stock dividends in the quarter. Interest rates rose during the quarter, particularly at the longer end, and as we expected, that drove a net benefit to NIM. In addition, our optimization efforts across both loan growth and funding mix continue to perform very well. These factors resulted in the margin coming in better than we had expected when we shared our outlook in July. We continue to analyze multiple potential interest rate scenarios. The basis of our planning and guidance continues to be a central set of those scenarios that is bounded on the low end by the forward yield curve and at the high end by a scenario that projects rates stay higher for longer. The higher for longer scenario today assumes one additional rate increase in 2023, flat Fed funds through October of 2024, and ends 2024 approximately 75 basis points higher than the forward curve. With the move and rates higher, we now anticipate net interest margin for the fourth quarter to be around 305 basis points to 310 basis points. This is 5 basis points to 10 basis points higher than the level we shared previously. Looking further out, our modeling continues to indicate 2024 NIM trending flat to higher from the Q4 2023 endpoint. Turning to Slide 12. Our cumulative deposit beta through Q3 was 37%, up 5 percentage points from the prior quarter, tracking closely to our expectations. Sequential increases in beta are slowing quarter-over-quarter as we have forecasted as the interest rate cycle nears or hits its peak. As we have noted in the past, where beta ultimately tops out will be a function of the endgame for the rate cycle, in terms of the level and timing of the peak, the duration of any extended pause before a decrease. Given the outlooks for possibly a higher peak and very likely a more extended pause than was the case three months ago, our current outlook for deposit beta is to trend a few percentage points higher than our prior guidance of 40%. We will have to see how the rate environment plays out to 2024 to know with certainty. What is critical in our view is to ensure we continue to manage both deposit and loan pricing exceptionally rigorously; drive asset yields higher; deliver solid incremental returns; and deliver a better overall NIM from the higher for longer rate environment as a result. Turning to Slide 13 and expanding on my point on loan yields. The construct of our balance sheet is approximately half fully variable rate, 10% indirect auto, which is a shorter, approximately two-year duration fixed product, 10% in arms with a five-year duration, and the remainder of approximately 30% is longer-durated fixed. This mix contributes to the asset sensitivity of our overall balance sheet and has helped us to benefit significantly from the current rate cycle. We are seeing solid increases in fixed asset portfolio yields. Given the higher for longer rate environment, we expect to continue to benefit from this fixed asset repricing going forward, supporting the higher NIM outlook. Turning to Slide 14, our level of cash and securities was down slightly from the prior quarter as we lowered some of the elevated cash we've been holding in Q2. During Q3, we did not reinvest securities cash flows, and the securities balance moved modestly lower as proceeds were held in cash given the attractive short-term rates. We're managing the duration of the portfolio lower, continuing our management approach since 2021. Turning to Slide 15, our contingent and available liquidity continues to be robust at $91 billion and has grown quarter-over-quarter. At quarter end, this pool of available liquidity represented 204% of total uninsured deposits appear leading coverage. Turning to Slide 16, we continued to be dynamic in adding to our hedging program during the quarter. Our objectives remain twofold, to protect capital in up-rate scenarios and to protect NIM in down-rate scenarios. The most substantive increase was in addition to our forward-starting pay-fix swaption strategy, which increased by $5.9 billion during the quarter to $15.5 billion total. This program is intended to protect capital from tail risk in substantive up-rate scenarios and once again benefited us as rates moved higher in the quarter. We also added $2 billion in [callers] (ph) to support our NIM against longer term down-rate scenarios. Moving on to Slide 17. GAAP non-interest income increased by $14 million, or 2.8%, to $509 million for the third quarter. Excluding the mark to market on the pay-fix swaptions, fees were relatively stable quarter-over-quarter. On an underlying basis compared to the second quarter, we saw increases in deposit service charges, including higher payment-related treasury management fees. This growth was largely offset by lower capital markets fees. Moving on to Slide 18, we're seeing encouraging and sustained underlying trends across our three areas of strategic focus for fee revenue growth. Capital markets, which has grown by a 19% CAGR over the past six years, benefits from a broad set of capabilities bolstered by Capstone. While 2023 has certainly been a challenging environment for capital markets activities, in both advisory and several credit-driven products, forward pipelines within advisory are solid, and we continue to foresee this as a primary contributor to fee revenue growth over the moderate term. Our payments businesses represent one of the biggest opportunities for both relationship deepening and revenue growth across both treasury management and card categories. In wealth management, we see a great opportunity to increase the penetration of the offering across our customers, leveraging our number one ranking for trust as we grow advisory relationships and drive higher managed assets with recurring revenue streams. Moving on to Slide 19, on expenses. GAAP non-interest expense increased by $40 million and underlying core expenses increased by $25 million. As I mentioned, we incurred $15 million of notable item expenses related to the staffing efficiency program and corporate real estate consolidations. Excluding these items, core expense growth compared to the prior quarter was driven by higher personnel, occupancy, professional services, and a set of smaller items within all other expenses. We have taken proactive actions throughout the year to support the low level of core underlying expense growth we have delivered. In the first half of the year, we executed on the voluntary retirement program, organizational realignment, moving from four revenue segments to two, and 31 branch consolidations. Now in the third quarter, we're taking another set of incremental actions. We are accelerating the implementation of our business process offshoring program, and we're creating efficiencies throughout the organization with the goal of prioritizing resources toward the largest growth opportunities in the near term. We're also driving incremental saves in our corporate real estate footprint, as well as implementing another set of branch consolidations with 34 planned closures early next year. These actions demonstrate our commitment to disciplined expense management and will support the continued investment into critical areas of the company to drive long-term value. As we manage expenses, we're balancing both short-term investment and revenue growth with the longer-term opportunities we know are in front of us. Slide 20 recaps our capital position. Reported common equity Tier 1 increased to 10.1% and has increased sequentially for four quarters. OCI impacts to common equity Tier 1 resulted in an adjusted CET1 ratio of 8%. Our capital management strategy will result in expanding capital, while maintaining our top priority to fund high-return loan growth. We're actively managing adjusted CET1, inclusive of AOCI, and expect to drive that ratio higher over the course of 2024. On Slide 21, credit quality continues to perform very well, with normalization of metrics consistent with our expectations. As mentioned, net charge-offs were 24 basis points for the quarter, and while higher than last quarter by 8 basis points, are tracking to our guidance for full-year net charge-offs between 20 basis points and 30 basis points. This level continues to be at the low end of our target through the cycle range for net charge-offs of 25 basis points to 45 basis points. As previously guided, given ongoing normalization, non-performing assets increased from the previous quarter and the criticized asset ratio increased, with risk rating changes within commercial real estate being the largest component. Allowance for credit losses is higher by 3 basis points to 1.96% of total loans, and our ACL coverage ratio is amongst the highest in our peer group. Let's turn to our outlook for the fourth quarter on Slide 22. We forecast loan growth of approximately 1% in the fourth quarter, which would put full-year loan growth at approximately 5%, matching the lower end of our prior range. Deposits are likewise expected to grow in the fourth quarter by approximately 1%. Core net interest income for the fourth quarter is expected to decline between 4% and 5% from Q3 before expanding throughout 2024 from that level. Non-interest income on a core underlying basis is expected to be relatively stable. Expenses are expected to increase between 4% and 5% into the fourth quarter, primarily driven by revenue-related expenses associated with the expected growth in capital markets, a seasonal increase in medical claims, and sustained investment in new and enhanced capabilities. We expect net charge-offs for the full year to be near the midpoint of the 20 basis points to 30 basis points guidance range. Finally, let me close on slide 23 with a few thoughts on our management priorities for 2024. We're still finalizing our budget for next year, and as always, we look to share more specific guidance during our January earnings call. First and foremost, we're committed to driving continued capital expansion, while we continue to optimize lending growth to drive the highest returns. As Steve mentioned, we're playing from a position of strength, and we expect to maintain that position as we get ahead of proposed capital regulations and phase-in periods. Related to deposits, we are continuing to acquire and deepen primary bank customer relationships. This should result in continued growth of deposits into next year, while supporting our discipline management of deposit beta. Given the expected higher for longer rate scenario, we will continue to position the balance sheet to remain modestly asset sensitive, which will support the margin, and we expect will deliver growth and then interest income dollars on a full year basis. Non-interest income remains a critical focus for us, with sustained execution on three primary strategic areas for fee revenue growth

Operator:

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Thank you. And our first question is from the line of Manan Gosalia with Morgan Stanley. Please proceed with your question.

Steve Steinour:

Good morning, Manan.

Zach Wasserman:

Yep, great question. And this is Zach. I'll take that one. Just to preface it and set a framework for the answer, let me reiterate what I said in the prepared remarks a minute ago, which is driving efficiency in our core expenses is a key priority for us. We're one of the most efficient banks in the regional banking space, and that's been a product of years of efforts. What we're trying to do right now is strike a balance of the short term and the medium term. In the short term, managing expenses to level up with growth given the overall revenue environment. But also in the medium term, we see significant growth opportunities over time for Huntington. And we want to make sure that we can maintain the momentum in our key strategies. And, in fact, capture the higher revenue outlook that we just shared. Even as we quickly get ahead, and I stress that word quickly, get ahead of the new and expanded risk management capabilities that we'll need to operate. If you take a step back, it was just over a year ago that we were fully delivering over $0.5 billion of annual expense saves from the TCF merger. Over the last year since then, we've felt underlying core expenses to 2.4%. And we did that with all the programs I've just talked about in prepared remarks. The long-term efficiency programs, proactive actions we took in the first quarter of this year, and now a new set of actions that we're implementing in the third quarter, including another tranche of branch optimization, accelerating the business process offshoring, driving efficiencies across the bank, and finding efficiencies in our corporate real estate portfolio. And as we look at the 2024, to your question, we're seeing the opportunity for incremental revenue upside, particularly in the really strong performance we've seen in our NIM management program, which is higher than our prior outlook, and good momentum in the fee businesses as we look forward. We want to quickly address the lessons learned from the last year's environment, address the new regulations coming around Basel, C-CAR, resolution finding, and ultimately enhance our risk management, so we can operate from a position of strength just as we are right now going forward, which will require investment. So the kind of things that are driving that roughly 1.5% higher run rate are invested into teams like Treasury, risk management, technology. It's with a focus on enhancing data, underlying process capabilities and automation. The goal, in the end, if I take a step back, is to get ahead of these requirements to quickly move through this period. We expect to see around a year's worth of this higher expected run rate of expenses, again, around 1.5% higher. And then that expense growth rate will come back down again as we exit 2024, and we'll see the underlying core expense management come through. It all goes back to the goal of maintaining our vibrancy, our momentum, and really ensuring that Huntington continues to be in the position of strength to go forward.

Manan Gosalia:

Got it. And then just putting it together because you mentioned you’re modeling NII trends higher as you go through 2024. There's more upside to fees. How does that play into operating leverage for next year? Do you still think you can drive positive operating leverage?

Manan Gosalia:

Appreciate the detailed answers. Thank you.

John Pancari:

Good morning.

John Pancari:

Just on the net interest income front, I know you indicated that you implied -- you expect a trough in the fourth quarter and then expanding through 2024. Maybe can you help us frame the magnitude of growth that you think is achievable under the current curve assumption as you look at the NII upside? And then I guess the same question would be for your commentary around the margin in terms of expansion through the year? Maybe if you can help us size that up in terms of what's a fair assumption based on what you're looking at.

John Pancari:

Very helpful, Zach. Thank you for that. And then separately on credit. Criticized loans up 17% linked quarter. It looks like -- and I believe you alluded to in your comments, a lot of that was commercial real estate. Can you -- and I know you added to your reserve and commercial real estate nonperformers are also up pretty sharply. Was there a dedicated effort to scrub the portfolio that you're working through your exposures there that drove a lumpier move here? Or is this the deterioration that's starting to take shape as we all expect in this sector?

Brendan Lawlor:

Sure. Thanks, Rich. To provide us a little bit more color approximately -- per crick class, approximately 60% of the increase was focused in commercial real estate and our ABL group. There are two places you'd expect to see higher levels. On the FDA side, it was split more equally between commercial real estate and C&I. For both NPA and crick class, as you noted, the real estate exposure was focused mostly in office. And on the C&I side, beyond the ABL concentration I mentioned, there really weren't material concentration. So I think what you're seeing in the numbers, as Rich said, it's just a bounce off a very low bottom.

Operator:

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

Steve Steinour:

Good morning, Ebrahim.

Steve Steinour:

Ebrahim, great question. Thank you. I believe there's a growing cautiousness in what’s going on in Israel and the Middle East, what's going on in Washington. We've got a UAW strike that does not have an apparent resolution. And I think, businesses are reacting to that. 99% of our customer base, privately owned companies rates are up. They're using their liquidity, but the uncertain economic outlook and where rates are going, all sort of are headwinds to the next round of growth. Having said that, our businesses are doing well. We'll have good growth. We'll be within guidance that we gave you, that Zach gave you earlier in the year, we will be up about 5% year-over-year. And we'll continue to see growth next year, I believe, in a couple of areas in particular. Our distribution finance is a powerful engine. It seasonally reduced this quarter. It will be up in the fourth quarter, and we expect to continue to grow that by winning new business. We are a significant equipment finance lender. And more and more onshoring, more automation, there'll be continued demand, albeit probably not at the levels we saw in 2022 and before. That will play well. And we're top 10 asset-based lender. So all of those asset related finance activities should do well in this environment. And as you know, we are a huge small business bank. The small businesses will need more support and we'll be there for them. And those will be sources of growth. But there's an overall more cautious outlook within our customer base, just that will have some moderate impact on, I think, on overall loan demand next year.

Zach Wasserman:

Yes. Great questions, and let me address those. So what I'd say is, in terms of the trajectory on asset yield, taking a step back, over 200 basis points through the cycle to date, and it's really been a couple of things, most notably an intentional outcome that we've had in terms of how we're incrementally driving new loan production into -- and really driving for higher returns, which also is often higher NIM. And so we're seeing that come through in a lot of the areas where we're actively modulating and optimizing indirect auto, for example, is a great example that fuels up tremendously on the [indiscernible] course of the cycle. It's also though just a natural outcome of the structure of the balance sheet. And one of the reasons why we added the slide we did this quarter in terms of -- detail there was to just provide more transparency into that. We're around 50% fully variable. So you're seeing benefits of higher rates come through on that portfolio. Another roughly 10% in shorter durated fixed indirect auto. As I just noted, we're seeing really sizable increases in portfolio yield there. Another 10% in arms with a five-year duration, which we're gradually seeing that come through. In the higher for longer scenario, every one of those fixed asset categories, including the longer durated remaining third of the portfolio are really seeing the benefit and we've seen just in Q3, 50 basis points increase in the coupon yields across the portfolio, greater than 20 basis point increase in back book portfolio yields. And I do think that will continue to trend here be more than a key drivers for NIM stability and growth as we go into 2024. We're not seeing any substantive portfolio-wide credit-driven yield repricing [indiscernible] and really, it's much more fundamental as I noted.

Ebrahim Poonawala:

Got it. Thank you.

Operator:

Our next question is from the line of Scott Siefers with Piper Sandler. Please proceed with your question.

Zach Wasserman:

Well, Scott, a great question. [indiscernible] to clarify both [indiscernible] trajectory of growth out the year and on a net basis, full year growth as well, which is going to be a function of flat to rising NIMs and been pretty comparable overall full year NIM year-on-year as well as growth in earning assets and loans.

Zach Wasserman:

Yes, terrific question. [indiscernible] to expand on that. If I think about the equation that we were managing in 2023, we've been seeing around a 2%, 2.5% underlying expense growth. And that's with the benefit of significant efficiencies that we're generating this year. I estimate that’s around 1% benefit in expenses in 2023 for these cumulative initiatives we are running for the last six, 18 months and self-funding underlying investments. We've talked about this model before, driving efficiencies is the core, keeping the underlying core at a low level with the funnel and outsized level of investment and expense growth into key investment earnings like tech, marketing, new additions of personnel to support new strategies, those underlying investments are up almost 20% in 2023, which is what we will hold the competitive capabilities that we’ve got. As we go into -- that model is what drove the overall roughly 2.5% growth that we saw in 2023. I think what we're seeing as we go into 2024 is roughly similar sort of underlying expense management program, really modeling down somewhat the underlying adjustments in light of the environment, clearly, but also bearing some modest incremental impacts of just the cumulative inflationary environment and the efficiencies will rise as well. And so, the net kind of underlying run rate that I would have expected into next year is around 2.5%. And then on top of that, we are accelerating, again, these investments in regulatory response, risk management capabilities that represents the additional 1.5% expense growth as we go into next year. That's the 4% trajectory. If I think about where we're investing just to touch on this briefly, continued focus on core strategy investments, delivering the TCF revenue synergies, growing our commercial bank through vertical specialized – specialties, expertise, digital and product development in our Consumer Banking and Business Banking division, continue to drive the fee revenue strategies and capital markets, payments and wealth. And then on top of that, clearly dealing with these additional areas around Basel III, CCAR, liquidity, interest rate risk management, resolution planning and data and alteration.

Scott Siefers:

Okay. Perfect. And I guess just one final ticky-tack question. The fourth quarter cost increase, will that include any unusual charges the way we saw this quarter?

Scott Siefers:

Okay. Perfect. Thank you all very much.

Matt O'Connor:

Good morning. So just circling back on capital, obviously, strong, really any ratio you look at including AOCI and I understand the logic of building capital from here given uncertain macro and you're kind of leading in the business. But is there a level that you're like once we get here, it's just more than we need under almost any scenario, and you'd look to deploy it more aggressively?

Matt O'Connor:

Got it. That was helpful. And then just quickly squeeze the mark-to-market impact of the swaptions, maybe it's a silly question, but do we just kind of put in some gains when rates go up and then if rates go the other way, is it mark-to-market on the negative side? Or how should we think about modelling that and the drivers?

Matt O'Connor:

Okay. That makes sense. Thanks for the detail.

Ken Usdin:

Hi. Good morning. Steve, I know you talked about generally a little bit of softening demand out there. But I wanted to ask to ask you on your auto business, I did notice that your originations were up, and obviously, a lot of peers have pulled away from this business, and it's a business that you guys have been historically very strong and now has really good incremental yield. Just wondering if that's at all an opportunity set and have you kind of -- how do you think through reengaging there as one of those potential growth engines, especially as you've been able to show the deposit stability? Thanks.

Ken Usdin:

Okay. Great. And then last thing, Zach, just looking at what you moved around a little bit on the swaps portfolios. Can you just kind of walk us through some of your decision trees with regards to this quarter's terminations and locking in here and any anticipated future activity you're thinking about in terms of just the book as it stands going forward? Thank you.

Ken Usdin:

Okay. And is there a way of kind of just putting all that together in terms of like the net impact of the swaps book on your NII and is that getting better going forward or worse? Can you just kind of help us put it in context, if you can?

Ken Usdin:

Thank you.

Erika Najarian:

My questions have been asked and answered. Thank you.

Zach Wasserman:

Thank, Erika.

Jon Arfstrom:

Hi. Thanks. Good morning.

Jon Arfstrom:

Rich or Brendan, what's the message you want to send us on the outlook for provision and reserves. I mean it feels like you feel fine on credit, but I'm curious if you feel you need to build reserves and how you want us to think about provision?

Jon Arfstrom:

Okay. Late in the call, Steve, but just a bigger picture question for you. You had a good quarter. But when I saw the guide for the fourth quarter for lower NII and higher expenses and then for the expense guide for 2024, you kind of pulled back some of that optimism. I guess my bigger -- and I think you understand that. But my bigger picture question is, what's the message for 2024? Is that -- is it a year of investment and you're not going to push revenue growth? Or are we just all being a little bit too pessimistic here and just focusing on the expenses and some of the near-term NII headwinds?

Jon Arfstrom:

Okay. So it's -- okay, that's good. I had to ask it, Steve, I'm getting asked that question, but I just needed to know if you're optimistic or pessimistic for 2024, and it sounds like you're…

Jon Arfstrom:

All right. All right. Thank you.

Operator:

Our final question is from the line of Steven Alexopoulos with JPMorgan. Please proceed with your question.

Steve Steinour:

Good morning, Steven.

Steve Steinour:

So we're gearing the company to manage a growth dynamic that we expect will be in place in 2024 and beyond. We also are accelerating certain multiyear investments into 2024, so that we're in an even better position with data, and it's principally data to manage in -- managing company, right? We're at different scale outpost TCF. We saw a lot of unique activity in March around Silicon Valley, things move very quickly. We want -- and board wants better data, better access to information that we have and make pushing a button together. So -- we've been on a multiyear journey. We're going to pull that forward and position the company to be even stronger. We've been managing market risk as you've seen with us hedging about half of our AFS portfolio since 2019. But our processes have not been as automated as we would like them to be, given the speed at which things can change. And so we said we would take advantage of lessons learned out of Silicon Valley and others in this most recent episode, and that has resulted in us making a number of adjustments in our treasury and core policies that I think will prove to further bolster our aggregate moderate to low risk appetite and then these investments in data and some other areas in addition to the revenue area investments, will also position us to more effectively manage the company on a real-time basis.

Steve Steinour:

But we're trying to pull things forward into 2024 as Zach said, and as we think about 2025 and beyond, we'll be back to a more normalized. Again, this is -- this was an electional part, an overall view of trying to take advantage of the environment that we see in 2024 and beyond and position the bank for growth. [indiscernible].

Steve Steinour:

We had multiyear plans that were accelerating. That's choice.

Steve Steinour:

We own the risk at risk management. We're going to maintain this aggregate moderate to low-risk appetite. We've done things well in the past. We'll continue to do them in the future. I think the size of the business is not the only determinant. I think the business model itself is very, very important. Part of the strategy over time is to be deep in certain markets for our consumer and regional bank, giving us brand awareness and other attributes that let us continue to grow the core. And then we've invested selectively in a variety of commercial businesses. Our asset finance, our equipment finance and distribution finance. A number of these businesses that and beyond the specialty businesses that are national in nature, complemented by things that we've added on the payment space last year. The acquisition on the investment banking side, all of which give us more pride and capabilities to [indiscernible] to our customer base. And we're going to continue that. We've alluded to additional talent and capabilities in the near term, and we expect to be in a position to start talking about that. But all of that's in that 4% guidance for you for next year.

Steve Steinour:

Thank you.

Steve Steinour:

Thank you. Okay. So we're grateful for you joining us today. I just want to compliment [indiscernible] one more time into this last year, Rich got a retirement I mean at the end of the year. And Rich has just been a terrific leader. We've greatly benefited from their experiences. Rich, you position us well as you've heard on the call. So thank you very much. In closing, we're pleased with the third quarter results as we dynamically manage through this environment. We're bearing what we believe we're very well positioned for times such as leased with strong credit quality, improving capital ratios and robust liquidity and it’s supported by consistent efforts from about 20,000 colleagues across the bank to deliver these results. We are a team, you know we are disciplined operators and we're executing on our strategy that we outlined last year's Investor Day, and we're driving shareholder value. We're optimistic we're going to continue to do that in the years to come. And as a reminder, we're all aligned, the Board executives and our colleagues, our top 10 shareholder collectively, and we feel they're paying this market pull back. We're very focused on driving consistent strong performance. So thank you for your support and interest in Huntington, and have a great day.

Tim Sedabres:

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 1 hour from the close of the call. Our presenters today are Steve Steinour, Chairman, President and CEO; and Zach Wasserman, Chief Financial Officer. Rich Pohle, Chief Credit Officer, will join us for the Q&A. 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.

Zach Wasserman:

Thanks, Steve and good morning, everyone. Slide 6 provides highlights of our second quarter results. We reported GAAP earnings per common share of $0.35. 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 continue to grow as total loans increased by $900 million or 0.8% from the prior quarter. Credit quality remains 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 balances 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 floorplan 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 8; 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 30 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 7 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 noninterest-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 noninterest-bearing over the past 2 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 billion, 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 the cycle. Reconciling the change in NIM from the prior quarter, we saw a reduction of 29 basis points on both a GAAP 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 2 primary scenarios we incorporate include

Manan Gosalia:

I wanted to dig into your comments on NIM being stable to rising in 2024 under the 2 scenarios that you outlined for it. 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?

Manan Gosalia:

Got it. And then separately, just on regulation overall, I know you noted that the new requirements seem to 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 keeping 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 the AOCI opt-out as well as LCR.

Operator:

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

Zach Wasserman:

It's a great question, Matt and it's something that we really have to look at because we are in a position of strength. We want to really seize the opportunities to win new clients in a great business. It's in times like this that companies when they operate [indiscernible] can being meaningfully during market share and we're cognizant of that. We're balancing that clearly with 2 factors

Zach Wasserman:

Look, I think there are continues to be pockets of demand and great clients. And we've got a very strong set of workforce 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. So we're balancing those things in the way 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 bps and 20 bps on the portfolio. And I expect that to continue for some time to come really sustaining that 2024 beyond NIM that we were talking about in the previous question, even as again, we optimize to also allow capital to us.

Operator:

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

Zach Wasserman:

It's still higher than that. I think, again, I'd point you to for the quarter adjusted for cash levels that we're kind of running at now in the third quarter, the second quarter was around 3.17%. And so what we're seeing at the margin is continued modest decline in them here through the course of the balance of this year from that 3.17% normalized Q2 run rate 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 kind of major trends starting to stabilize and it's really not incremental fundamental what the underlying is. Likely, there will be some potential continued trends in the very early part of '24 but I agree with your point. I would also note that for us during the quarter, the reduction in the negative carrier from hedges will incrementally help obviously do the course of the year again.

Steve Steinour:

Steve, I would say our customers generally are having a good year and expect to close out with the good year. They're working their margins through expenses but inflation seems to be a big and the supply chain is in better shape. Clearer line sites 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, we still have 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.

Ebrahim Poonawala:

Just wanted to go -- spend some time on the expense outlook. I think you've done a lot of work year-to-date, the project actual rate that you talk about. In fact, I think you said the goal is to keep expense growth low for next year. Maybe give us a sense of the size of the 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 down. What's around that?

Steve Steinour:

Ebrahim, if I could add, this is Steve. The team is also working on a longer-term project 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 multiyear and that will help us with both efficiencies and customer set. So we've Zach has got us focused on consolidated 3 branches. We did a voluntary retirement program. We've done some restructuring and segments and some of the business units and support units during the course of the year. What he's referencing now with BPL is additive to a very healthy level of focus and activity on the expense management side so far this year.

Steve Steinour:

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 regulatory expectations around capital and liquidity, et cetera, get established, I think we're going to be in a very strong position to [indiscernible] that in an even more robust fashion. We're trying to get positioned for that now. the outlet, as you saw last year, there are a few 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.

Scott Siefers:

Steve or Zach, kind of conceptually, maybe when you think about the 40% cumm-beta [ph], 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 like 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 dynamics? What sort of makes that the right number to land on it?

Operator:

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

Zach Wasserman:

That's correct.

Zach Wasserman:

Yes, terrific questions. Also in soft topics, it's got lots of mind share just as vigorously as we anticipated on the way up on the just as our growth on the way down. So very much planning watching. I think it will clearly be a function of what segments you're in, what segment you're looking at. On the commercial side, where betas are generally higher and stone bespoke and prior agreement between us and our clients on how we'll trend that will likewise trend low. I think we're pretty confident will drive that as 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. Again, in some of the categories in which we've been growing in consumer, there are some time dimensions to them which we'll have to manage at those times to lapse. But again, the playbook there is well trod and I think you feel quite good about the ability to bring that down. The overall last on the consumer side will clearly be a function of what's going on in the economy at that point and the outlook for a forward at that point but of the playbooks in history would tend to grow our ability to do that pretty well.

Zach Wasserman:

Yes. I think that the level that we're running at for cash right now is sort of around $8 billion to $9 billion is the right level for the company given the 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 kind of tuning the short-term FHLB borrowings at the cash level. But I think for the most part, that cash level is right sized right now. I think within the securities portfolio broadly, we'll continue to see the trend of moderately lower duration sequentially as we've been doing, frankly, the last 3 quarters in a row; and just continuing to preference liquidity.

Ken Usdin:

Is that just a follow-up on your NII '24 comments. And if you talked about earning asset growth. I'm just wondering if 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 on that?

Ken Usdin:

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?

Operator:

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

Rich Pohle:

Yes. We're looking -- we're focused primarily right now on the 2023 and 2024 impacts. And it's really hard to look much further beyond that. So 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 softness. We've got a 3.4% reserve against overall prebook. 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.

Jon Arfstrom:

It seems that way. Okay. And then on consumer, I look at this every quarter, just your nonaccruals and charge-offs and it's just kind of -- it's 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's just -- these numbers are really, really good.

Steve Steinour:

Housing markets are generally tight where we are, John. So if someone has -- and unemployment is very low. So if someone has an issue, the best resolution is to sell a property, unlike what we might have seen in '08, '09 or prior [indiscernible]. 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 this 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. At this point, really, really good in that regard and a tribute to all my comments especially Rich and his leadership.

Steve Steinour:

We just don't have any other assets. On my lunch at some at posters. We pull those out.

Zach Wasserman:

Yes. And Julie, 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. And so when capital markets revenues were a bit softer in the second quarter, our outlook somewhat lower than was originally budgeted into the back half of the year, so proud which is less flow through into less cost. That's basically it.

Zach Wasserman:

So let me clarify that it's really important one. That FDIC expense that we talked about in that guidance is the 2 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.

Steve Steinour:

Well, thank you very much for joining us today. We're very pleased with the second quarter results as we dynamically manage 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, both in particular in strangler nature has served us very, very well as head of our efforts to provide customer service and generate great satisfaction over the years. And we have a team of disciplined operators and we are executing our strategy that we outlined last year at our Investor Day which provides are driving value for our shareholders. And just as a reminder, the Board of Executives and our colleagues were all top 10 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.

Tim Sedabres :

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 Steinour, 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.

Zach Wasserman :

Thanks, Steve. And good morning, everyone. Slide 6 provides highlights of our first quarter results. We reported GAAP earnings per common share of $0.39, and adjusted EPS of $0.38. Return on tangible common equity, or ROTCE came in at 23.1% for the quarter, adjusted for notable items. ROTCE was 22.7%. Further adjusting for AOCI, ROTCE was 17.8%. Pre-provision net revenue expanded 41% year-over-year to $844 million. Loan balances continued to grow, as total loans increased by $1.5 billion from the prior quarter. Liquidity coverage remains robust, with over $60 billion of available liquidity representing a peer leading coverage of uninsured deposits of 136%. Credit quality remains strong, with a net charge-offs of 19 basis points and allowance for credit losses of 1.9%. Turning to Slide 7. Average loan balances increased 1.3% quarter-over-quarter driven by commercial loans, which increased by $1.5 billion, or 2.2% from the prior quarter. Primary components of this commercial growth included distribution finance, which increased $800 million tied to continued normalization of dealer inventory levels, as well as seasonality, with shipments of spring equipment arriving to dealers. Corporate and specialty banking increased $242 million, primarily driven by growth in mid-corp, healthcare and tech and telecom. Other assets financed businesses contributed growth of $216 million. Auto floorplan continued normalization, with balances higher by $214 million. Business banking also increased $92 million. In consumer, growth continued to be led by residential mortgage which increased by $316 million. Partially offsetting this growth were home equity balances, which declined by $159 million. All other categories including RV Marine and auto declined by a collective $123 million. Turning to Slide 8. We continued to deliver average deposit growth in the first quarter. Balances were higher by $472 million, primarily driven by consumer, which more than offset lower commercial balances. On a year-over-year basis, average deposits increased by $3.2 billion or 2.3%. Turning to Slide 9. I want to share more details behind Huntington's deposit franchise. Our deposit base represents a leading percentage of insured deposits at 69% as of Q1. Our deposit base is highly diversified with consumer deposits representing over half of our total deposits and the average consumer balance being $11,000. Turning to Slide 10. Complementing our diversified deposit base is the stability and growth of our deposits over time. During last year, we consistently delivered deposit growth well above peer levels despite the backdrop of rising rates and quantitative tightening. Through year-end 2022, cumulative deposit growth was 2.4%, nearly 6 percentage points better than the peer median. Over the course of Q1, monthly average deposit balances were stable at approximately $146 billion. Within consumer deposits, balances have increased for four months in a row. Total commercial balances were modestly lower, consistent with expected seasonality. During March, in addition to seasonality, commercial customers also incrementally utilized our off-balance sheet liquidity solutions. Turning to Slide 11. We have a sophisticated approach to customer liquidity management that comprises both on balance sheet deposit products as well as off-balance sheet alternatives. Over the past four years, we have invested substantially to build out these solutions to ensure we're managing our customers' overall liquidity needs. The enhanced liquidity solutions allow us to manage the full customer relationship with primary bank and operating deposits on balance sheet and utilizing our off-balance sheet solutions for investment or non-operational funds. Over the course of 2020 and 2021, we intentionally leveraged these off-balance sheet solutions in order to support our customers' excess liquidity. This resulted in fewer surge deposits coming on sheet as well as less commercial deposit runoff during 2022 compared to the industry. On a year-over-year basis, our Commercial Banking segment on balance sheet deposits increased 11% and our off-balance sheet liquidity balances increased 54%. During March, this approach yet again showed its value for both Huntington and our customers. We saw customers moving a modest amount of deposit balances into treasuries and other products, while we were able to maintain those primary operating accounts on our balance sheet. Of the total change in Commercial segment deposit balances between March 6 and the end of Q1, we estimate that approximately half the delta was attributable to normal seasonality, and the remainder was mainly the result of shifts into our off-balance sheet solutions. The bottom table highlights these movements as well as trends in the first two weeks of April. On-balance sheet deposits have returned to the March 6 level and off-balance sheet continues to grow. Turning to Slide 12. Our liquidity capacity is robust. Our two primary sources of liquidity, cash and borrowing capacity at the FHLB and Federal Reserve represented $10 billion and $51 billion, respectively, at the end of Q1. As part of our ongoing liquidity management, we continually seek to maximize contingent borrowing capacity. And as of April 14, our total cash and available borrowing capacity increased to $65 billion. At quarter-end, this pool of available liquidity represented 136% of total uninsured deposits, a peer leading coverage. On to Slide 13. For the quarter, net interest income decreased by $53 million or 4% to $1.418 billion driven by lower day count and lower net interest margin. Year-over-year, NII increased $264 million or 23%. Net interest margin decreased 12 basis points on a GAAP basis from the prior quarter and decreased 11 basis points on a core basis, excluding accretion. The reduction in GAAP NIM included 5 basis points from lower spreads, net of free funds, due to funding mix and marginally accelerated interest costs. It also included 5 basis points from the first substantive negative carry impact from our long-term downrate NIM hedging program and 3 basis points from higher cash levels. Slide 14 highlights our ongoing disciplined management of deposit costs and funding. For the current cycle to date, our beta on total cost of deposits was 25%. As we've noted, we expect deposit rates to continue to trend higher from here over the course of the rate cycle. Given the recent market environment, at the margin, we do expect a steeper near term trajectory. 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 to protect NIM in down-rate scenarios. During the first quarter, we added to the hedge portfolio with both of these objectives in mind. On the capital protection front, we added $1.6 billion in additional pay fixed swaps and $1.5 billion in forward starting pay fixed swaptions. Throughout the quarter, we were deliberate in managing the balance sheet to benefit from asset sensitivity. We also incrementally added to our hedge position to manage possible downside rate risks over the longer term as well as took actions to optimize the near-term cost of the program. During the quarter, we executed a net $400 million of received fixed swaps, terminated $4.9 billion of swaps and entered into $5 billion of floor spreads. As we've noted before, our intention is to manage NIM in as tight a corridor as possible as we protect the downside and maintain upside potential if rates stay higher for longer. Turning to Slide 16. On the securities portfolio, we saw another step up in reported yields quarter-over-quarter. We benefited from higher reinvestment yields as well as our hedges to protect capital. From a portfolio strategy perspective, we expect to continue to add to the allocation of shorter duration exposures to benefit from the inverted yield curve and further enhance the liquidity profile of the portfolio. You will note that fair value marks at the end of March were lower than year-end, both in the AFS and HTM portfolios, as market interest rates moved lower sequentially. Importantly, we have also shown the $700 million total positive fair value mark from our pay fixed hedges, which are intended to protect capital. Moving on to Slide 17. Non-interest income was $512 million, up $13 million from last quarter. These results include the $57 million gain on the sale of our retirement plan services business during the quarter. Excluding that gain, adjusted non-interest income was $455 million. This result was somewhat lower than the guidance we provided in early March, driven by lower capital markets revenues given the disruptions at the end of Q1. The first quarter is generally a seasonal low for fee revenues. As we've noted previously, we see Q1, excluding the RPS sale, being the low point and for fees to grow over the course of the year, driven by solid underlying performance in our key areas of strategic focus capital markets, payments and wealth management. Moving on to Slide 18. GAAP noninterest expense increased by $9 million. Adjusted for notable items, core expenses decreased by $18 million, driven by lower personnel expense, primarily as a result of reduced incentives and revenue driven compensation. We're proactively managing expenses and have taken actions over the last several quarters to orient to a low level of expense growth in order to deliver positive operating leverage and self-fund strategic investments. Slide 19 recaps our capital position. Common equity Tier 1 increased to 9.55% and has increased sequentially for three quarters. OCI impacts to common equity Tier 1 resulted in an adjusted CET1 ratio of 7.6%. As a reminder, the reported regulatory capital framework does not include OCI impacts in the capital calculation. Our tangible common equity ratio, or TCE, increased 22 basis points to 5.7%. Note that we were holding higher cash balances at the end of Q1, which reduced the TCE ratio by 13 basis points. Adjusting for AOCI, our TCE ratio was 7.27%. Tangible book value per share increased by 7% from the prior quarter to $7.32. Adjusting for AOCI, tangible book value increased to $9.23, and has increased for the past four quarters. Our capital management strategy for the balance of 2023 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 top end of our 9% to 10% operating range by the end of the year. We believe this is a prudent approach given the dynamic environment. Based on our expectation for continued loan growth, we do not expect to utilize the share repurchase program during 2023. Turning to Slide 20. Our capital plus reserves is top quartile in the peer group and gives us substantial total loss absorption capacity. On Slide 21, credit quality continues to perform very well. As mentioned, net charge-offs were 19 basis points for the quarter. This was higher than last quarter by 2 basis points and up 12 basis points from the prior year as charge-offs continue to normalize. Non-performing assets declined from the previous quarter and have reduced for seven consecutive quarters. Allowance for credit losses was flat at 1.9% of total loans. Turning to Slide 22. We have provided incremental disclosures on our commercial real estate balances. This portfolio is well diversified and at 14% of total loans is in line with the peer group with no outsized exposures. The majority of the property types are multifamily and industrial. Over the last two years, we have grown our CRE book at a slower pace relative to the industry and peers. We remain conservative in our credit approach to CRE with rigorous client selection. Total office CRE comprises less than 2% of total loans, and the majority are suburban and multi-tenant properties. Reserve coverage on our total CRE portfolio is 3% and the office portfolio is 8%. Let's turn to our 2023 outlook on Slide 23. As we have discussed, we analyze multiple potential economic scenarios to project financial performance and develop management action plans. We also remain dynamic in the current environment as we execute on our strategies. Our guidance is anchored on a baseline scenario that is informed by the consensus economic outlook. We have also based our guidance on a range of interest rate scenarios, bounded on the low end using the forward curve as of the end of March to one at the higher end, where rates are higher for longer with Fed funds remaining at approximately today's level over the rest of the year. On loans, our outlook range continues to be growth between 5% and 7% on an average basis. And as before, we expect this growth to be led by commercial with more modest growth in consumer. As we entered the year, we were trending to the middle to higher portion of that growth range. Given the market disruption and our incremental focus on optimizing loan growth for the highest returns on capital, we now expect to be in the lower half to midpoint of this range. On deposits, we are guided by our core strategy of acquiring and deepening primary bank relationships. We're narrowing our outlook with a slightly lower top end of the range and still expect to grow average deposits between 1% and 3%. However, the composition of deposit growth from here, we now expect to be primarily consumer-led with relatively less commercial growth. Net interest income is now expected to increase between 6% and 9%. This is driven by slightly lower loan growth and marginally higher funding costs. Non-interest income on a core full year basis is expected to be flat to down 2%. The updated guidance reflects modestly lower expected growth in capital markets fees and includes the go-forward impact of the RPS business sale. As noted, we expect Q1 to be the low point for fees, growing over the course of the year, led by capital markets, payments and Wealth Management. On expenses, we are proactively managing with a posture to keep underlying core expense growth at a very low level. We're benefiting from our ongoing efficiency initiatives, such as Operation Accelerate, branch optimization, the voluntary retirement program and the organizational realignment, providing the capacity to self-fund sustained investment in our key growth initiatives. Given a somewhat lower revenue outlook, we are taking actions to incrementally reduce the expense growth in 2023. For the full year, we now expect core expense growth between 1% and 3%, plus the incremental expenses from the full year run-rate of Capstone and Torana and the increased FDIC insurance expense. Overall, our low expense growth, coupled with expanded revenues, is expected to support another year of positive operating leverage. We continue to expect net charge-offs will be on the low end of our long-term through-the-cycle range of 25 to 45 basis points. Finally, turning to Slide 24. As you heard from Steve, the foundation we have built at Huntington over the last decade has created an institution that is well prepared for this environment. We will leverage the strength of our deposit base. We're focused on growing capital and maintaining robust liquidity. We remain disciplined in our credit posture, and we're executing our core strategy. The work we have done to build the franchise positions Huntington to outperform and be ready to opportunistically seize on pockets of growth. We will remain disciplined and dynamic in our management approach as we continue to generate long-term value for our shareholders. With that, we will conclude our prepared remarks and move to Q&A. Tim, over to you.

Operator:

Thank you. And at this time, we will conduct our question-and-answer session. [Operator Instructions] First question comes from Manan Gosalia with Morgan Stanley. Please state your question.

Tim Sedabres :

Good morning, Manan.

Zach Wasserman :

Thanks, Manan. This is Zach. I'll take that question, and it's a good one. Overall, what we saw in our deposit base during the quarter was tremendous stability and that continued, not only through the month of March, but into early April. And we've tried to provide some incremental disclosures around that, so that you could get the visibility. And for us, it's not surprising as we've noted quite a bit. It's very granular, very diversified and, overall, it didn't happen by accident, it was a function of a really long strategy we have to focus on primary bank relationships, as you know. And to develop this commercial off balance sheet capability that we described in the prepared remarks. To get to your question, in particular, what we saw generally, I would note, by the way, that when you're looking at balances on a day-by-day basis as we've provided them in that disclosure, you have to take them with a note of caution. It really matters what day of the week what week of the month, et cetera payroll days and tax payments, et cetera. Generally, we expect the end of March to be a seasonal low for commercial. And so most of the movement, around half the move we saw in commercial from, let's say, the average of March down to the end of March was really just BAU movements of commercial clients largely paying out payroll. The other half was largely movements of deposits off balance sheet as very marginal amount of customers used some of those off-balance sheet solutions to leverage that product set. Interestingly, what you can see, we provide this disclosure out into the first two weeks of April is that essentially completely came back in terms of the overall balance of commercial deposits. So it's very stable net, virtually no movement. On the question of what we saw ins and outs, we, of course, saw some acquisition and we continue to acquire in every segment that we're operating in, consumers, continue to acquire [ph] business banking and commercial as well. And so we feel good about that kind of long-term program, which is one of the things that underlies our continued expectation for its positive growth throughout the rest of this year, just continuing to stay on strategy of acquiring and deepening primary banking relationships.

Zach Wasserman :

Yeah. In terms of overall funding mix, we've talked about this a number of times in prior quarters. We really like where we are coming to this rate cycle from a perspective of lots of balanced options to fund the business. We're growing loans at this point between 5% and 7% and deposits are between 1% and 3%, around 2%, call it, the midpoint of that range. So that allows us to also leverage other sources of funding to overall fund the balance sheet, and we're in a great position to be able to do that. I will tell you, internally, we really like that. It creates quite a bit of attention in the system where the next unit of of funding is coming and really that is optimized from an economic perspective. And so our expectation is to continue to essentially add to each of those funding categories over the foreseeable future while still maintaining a level that's comparatively quite good relative to history for us. So that's the overall plan. On the topic of liquidity, I would just note a couple of things. This is a key risk that the company has been focused on managing for more than a decade. We purposely create exceptionally robust pools of convention liquidity to cover any potential issue. I think we noted in the prepared -- in the deck some of the key sources of, and also noted that we continue to, over time, add to them. I will tell you that one of the statistics that's in the document today highlights $65 billion of contingent cash and borrowing capacity as of last Friday. I'm pleased to report that as of this morning, based on incremental efforts we've done now $84 million, which, in total, represents 187% of relative to our term deposits. So exceptionally strong liquidity profile, and, as I said, kind of very balanced funding mix.

Operator:

Our next question comes from John Pancari with Evercore. Please state your question.

Zach Wasserman :

Yeah. It's a great question, John. This is Zach. I'll elaborate on that. So the short answer to your question is yes. Our guidance of 1% to 3% underlying core growth includes those actions. And I think just back to the sort of strategic intent of it, as we've said for a while, we are very intense on driving a low level of overall expense growth and really leveraging our ongoing program of efficiency initiatives to do that even while we continue to drive outsized growth and self-fund investments within that overall low growth framework. And so as we came into this updated guidance period, and we saw somewhat lower revenue trajectory. For us, it was important and to kind of continue to execute on the discipline of driving the positive operating leverage to also ratchet down expenses. I think the kind of things that we do, we always enter the year with a contingent set of expense management options menu, you could think about it as a different kind of options we could undertake if we need to. And that's essentially what we're going to go through now. We'll modulate the pace of hiring. We'll be very judicious in the discretionary expense categories, and we will look at sort of every possible area of expense control to ratchet back expenses and offset a good amount of what was otherwise profit and revenue pressure. So that's the playbook, and we -- that's something we've done numerous signs over the course of the years. And so we feel really good about our ability to do it again now.

Zach Wasserman :

You got it. Let me elaborate more on that. Overall, pulling back, overall, the strategy we have is to continue to drive sustained growth in net interest income on a dollar basis, and to do that, driving continual growth in higher-term loan categories coupling that with the management of NIM around in a tight corridor as we can, where the top end benefits from our continued asset sensitivity and we stand to really benefit if rates do stay a lot higher for longer, but also at the lower end, protected with our hedge portfolio. And all that adds up to the 6% to 9% NII growth that we're guiding to. On beta, in particular to your question, it clearly is a market-positive environment, and, hence, it's realistic to expect some higher beta and, frankly, an earlier impact than we had previously seen. I do expect now a few percentage points higher than the original -- than the prior guidance of 35% beta. I will note that we provide a guidance on beta because we want to give you an indication of where we think that's going. But for us, the most important thing is the execution day-to-day of driving the deposit growth and staying incredibly disciplined in terms of the overall funding mix as I noted in my prior response. How beta ultimately plays out here over the end game is going to be clearly a function of where the yield curve goes. But I do think that a few -- a few percent higher than 35% is a reasonable range based on the new scenarios I laid out. In terms of overall spread, as we noted, we've moved the guidance range from what was previously 8% to 11% to 6% to 9%, so down about 2% in terms of that guidance range. About 40% of that is just slightly lower loan growth and the rest is spread. As I think about the kind of the way the year plays out, I would expect that kind of a more front-loaded impact of spreads than we were previously expecting. So we would expect to see $1 decline in NII, in Q2 about the same as we saw in Q1, but then growing from there. And I think the NIM range that we have there is sort of consistent with that dollar trends.

Zach Wasserman :

Thank you.

Ebrahim Poonawala :

Hey, good morning.

Ebrahim Poonawala :

Two questions. One, in terms of the deposit growth outlook, I think you mentioned it's expected to be more consumer-led. Just give us a sense of strategically how either the interest rate environment or the events of the last month have changed how you're thinking about deposit acquisition? And has it materially changed the pricing on new deposit growth relative to the how you thought about it back in January?

Ebrahim Poonawala :

Got it. And just as a follow-up, I guess, on the lending side. So I appreciate your comments in terms of where the growth has been in the outlook. But if you could give us a sense of just customer sentiment, given your business mix, some of the legacy TCF businesses, just the health of the economy in terms of when you speak to your customers, are you seeing a slowdown in demand also occurring at the same time, which increases the likelihood of a potential downturn and a recession based on what you're saying?

Ebrahim Poonawala :

Thanks, Steve. Thanks for taking my questions.

Operator:

Thank you. Next question comes from Scott Siefers with Piper Sandler. Please state your question.

Zach Wasserman :

Yeah. I mean, mainly, it's going to be volume from there, Scott, just continue to sequentially grow loans from second into the third and third into the fourth quarter is the primary driver. We see the spreads much more flat in the back half than kind of accelerated impact. What I -- just to make elaborating a little bit on kind of the NIM trajectory that we see overly precise. When we walked into the year, we were expecting, frankly, a pretty ratable trend in NIM over the course of the year. I think at the time we provided some guidance around single-digit basis points kind of trajectory throughout the course of the year. Most of that we now see kind of front-loaded just based on the shape of the curve and kind of how the outlook has shaped up at this point. So that's really the driver. Overall, my outlook for NIM is going to be 5 or 6 basis points lower on a 400 basis to give you a sense a portion of which is yield with both of which is just funding costs being slightly higher.

Steve Steinour :

Remember, we are a large equipment finance lender. And that generally has much more activity in the fourth quarter. That's part of this second half build-a-tech, records.

Rich Pohle :

Scott, it's Rich. I can take that and then Zach and Steve can tack on to it. So from my standpoint, on the credit side, as we showcased during Investor Day, I mean, this is really a business we like through all sorts of cycles. I mean it just become truly the core competency of the bank. If you look at what we saw in the first quarter, it was a continued gradual normalization in both delinquencies and charge-offs. But it's still trending well below the historic losses that we would normally see. It was 14 basis points in the first quarter, up from 12 in the fourth quarter. From my standpoint, I look really closely at the origination metrics that we've got, we're still originating at FICOs north of 17-18 and the loan to values are remaining relatively constant, reflecting a little bit more mix in new versus used. So from my standpoint, we're going to expect this portfolio to continue to surpass [ph] that past performance. And unemployment rates are still low, which is certainly going to help the credit metrics here. That's the big driver of losses. So I'm feeling good about it. And maybe Zach can talk about the optimization that we've got from a return on capital standpoint.

Scott Siefers :

Okay. Perfect. Thank you for all the color.

Operator:

Our next question comes from Erika Najarian with UBS. Please state your question.

Erika Najarian :

I just had 1 follow-up question for Steve. Steve, your starting point of CET1 is 9.5%. You accrete about 20 basis points of capital or more in the quarter. And like you said, your allowance already accounts for a tougher economic environment. I think your shareholders absolutely appreciate the focus on returns. But do you see an opportunity for Huntington to perhaps, as we have a little bit more clarity on the downside to the macro backdrop, take advantage of that capital and reserve resilience, so to speak, and perhaps start thinking about being more opportunistic in market share taking?

Erika Najarian :

Got it. And just to be clear, Steve, I was asking about organic opportunities. That wasn't a hidden bank acquisition question.

Erika Najarian :

Yeah, absolutely. And just as a follow-up to that, Zach, heard you loud and clear in terms of continuing to optimize the right-hand side of your balance sheet. As you think about senior debt issuance, I suspect that everything that you may be doing in the future would have lens towards the potential for TLAC eligibility.

Erika Najarian :

Thank you.

Ken Usdin :

Thanks. Good morning. Just 1 follow-up on the capital front. Zach, you show on that Slide 19, where the current potential impact of AFS would be on CET1. I'm just wondering, do you have a rule of thumb if we kept all rates equal on just how fast that would pull to par either on a sequential basis or maybe by the end of '24?

Ken Usdin :

Great. Thank you. And just 1 question on the asset repricing side. You guys have some fixed rate assets that are still repricing even though I understand how you're slowing production. Just can you give us a sense on just what your front book, back book benefits are in some of your fixed rate portfolios? And have we even really started to see some of those benefits come through given where rates have moved to?

Ken Usdin :

Okay. Thanks, Zach.

Jon Arfstrom :

Thanks. Good morning, everyone. A few questions here. Zach, on Slide 14, that green line on the bottom, the last time you said, it took a couple of quarters for deposit cost to roll over after the Fed stop. If we're done in May, do you think that relationship holds? Does it -- is it two quarters and deposit costs stopped going up? Is that fair?

Jon Arfstrom :

Okay. Fair enough. Steve or Rich, maybe for one of you. You used the term in the deck rigorous client selection for commercial real estate. Can you talk a little bit more about that, what you go through? Help us understand the type of work you do and do you think this is different than what your peers are doing?

Steve Steinour :

Jon, we're always disciplined in our credit. And I think that's going to prove to be the case as we come through the cycle. Obviously, pleased with where we are at the moment. So we'll see. But I can tell you, especially in [indiscernible] where we had enormous challenges in '08-'09 we have sustained a discipline here since that time. And Rich has been a big part a bit along with that, our lending fees.

Steve Steinour :

The speed of the one on the banks was a surprise, Jon, faster than that we've seen that I can ever recall. And I think, as a consequence, it lead -- the regulators and others, maybe a little behind what they would become they didn't expected either. And that's why I think it's a couple of weeks to go as we be resolved and signature as well. Normally, there's more front-end planning. They have a chance to line things up. This turned into a little bit more of a scramble. Having said that, I thought the reaction that something from treasury and as just -- it was just outstanding timing and fully appropriate.

Operator:

Our next question comes from Steven Alexopoulos with JP Morgan Chase. Please state your question.

Steve Steinour :

Hi, Steven.

Zach Wasserman :

When we set these ranges, we try to set them with our general expectation to be the right at the midpoint. So that's kind of the baseline expectation. I think kind of what -- the puts and takes that would take you to the high and the low end codes volume on one hand just sort of the shape of the yield curve and the competitive drive on the other hand. So it's hard to generalize, but we feel quite good about landing in that range at this point, and that’s what we're driving for.

Zach Wasserman :

Generally speaking, that is the way we think about it. We throttled the expense growth based on where the revenue trajectory is going. And that's why we try to have a really disciplined forecasting process with as we've said, multiple economics in there so we try to do that. Obviously, the expense level takes some time to pull. And so you need to have a good line of sight to where that's going and it's possible if there's a rapid move but a surprising movement, but that's not possible at given short time period, but over the longer term, yes.

Steve Steinour :

Steve, I think there are always lessons learned. But the business model is of SVB and Signature were so different from us and other regional banks, but particularly from us. The concentrations of the uninsured deposit level of 95%, just in retrospect, it seems rather clear that the liquidity risk was very, very different and a huge miss combined with their asset liability. In terms of lessons for us, even that much more aware of liquidity. We've always seen this as a prime risk. We've always had good back up, and we've been very granular and advantaged to have that best-in-class uninsured to total deposit ratio. But we'll probably be even more cautious, not probably, we will be even more cautious given the speed at which things move as we go forward. Having said all that, we're in a very strong position today. We expect to grow deposits as we continue through the year. And so it's like extra vigilance. We may give some policy adjustments to reinforce and strengthen further, but that will be of a minor nature, I don't think it will impact our performance.

Zach Wasserman :

Thank you.

Steve Steinour :

So thank you very much for joining us today. And as you've heard, we're operating from a position of strength with the foundation that's been built over a long period of time. We're very, very focused on continued growth and intend to be opportunistic. We're confident in our ability to continue creating value for shareholders. And as a reminder, the Board executives and our colleagues are a top 10 shareholder collectively, reflecting our strong alignment with our shareholders. So thank you for your support and interest in Huntington. Have a great day.

Tim Sedabres :

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 at www.huntington.com. As a reminder, this call is being recorded and a replay will be available starting about one hour from the close of the call. Our presenters today are Steve Steinour, Chairman, President and CEO; 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.

Zach Wasserman:

Thanks, Steve. And good morning, everyone. Slide 6 provides highlights of our fourth quarter results. We reported GAAP earnings per common share of $0.42 and adjusted EPS was $0.43. Return on tangible common equity, or ROTCE, came in at 26% for the quarter. Adjusted for notable items, ROTCE was 26.5%. Further adjusting for AOCI ROTCE was 19.8%. Loan balances continued to expand as total loans increased by $1.9 billion and excluding PPP, increased by $2.1 billion. Deposit balances increased by $1.6 billion on an end-of-period basis, while average deposits were essentially flat compared to the prior quarter. Pre-provision net revenue expanded sequentially by 4.2% from last quarter to $893 million. And on a full-year basis, year-over-year increased by 36% to $3.2 billion. Credit quality remained strong with net charge-offs of 17 basis points and nonperforming assets declining to 50 basis points. Turning to slide seven. Average loan balances increased 1.7% quarter-over-quarter driven by both commercial and consumer loans. Commercial loans continue to represent the majority of loan growth within commercial, excluding PPP, average loans increased by $1.9 billion or 2.7% from the prior quarter. Primary components of this commercial growth included distribution finance, which increased $900 million tied to continued normalization of dealer inventory levels, as well as seasonality with shipments of winter equipment arriving to dealers. We also saw the continued long-term trend of demand within our asset finance businesses, which drove balances $300 million higher in the quarter. Commercial real estate balances increased by $500 million largely as a result of production late in the third quarter and lower prepays. End-of-period balances were higher by $180 million. Auto floor plan utilization continued to normalize, which drove balances higher by $300 million. Additional increases in line utilization over time, represents a substantial ongoing opportunity. We also saw higher balances in specialty verticals. Such as mid-corporate and tech and telecom, which were offset by lower balances in other areas as a result of our return optimization initiatives. In Consumer, growth was led by residential mortgage which increased by $500 million as on sheet production outpaced runoff and was supported by slower prepaid speeds. Partially offsetting this growth were lower auto balances, which declined by $230 million and RV Marine, which declined by $50 million. Turning to slide eight. We delivered $1.6 billion of deposit growth for the quarter and $4.6 billion for the year on an ending basis, on an average basis, deposits were lower by two-tenth of 1% while increasing 2.4% year-over-year. Competition for deposits has intensified, beginning in earnest in September and continuing into the fourth quarter. Notwithstanding that, we are pleased with the traction we saw over the course of the quarter as our teams delivered robust production, demonstrating the deposit gathering capabilities across the bank. Ending deposit growth was led by consumer, which increased by $1.6 billion. We saw a mix shift in line with our expectations, including incremental growth in both money market and time deposits. We continue to remain disciplined on deposit pricing with our total cost of deposits coming in at 64 basis points for the fourth quarter. We will remain dynamic balancing core deposit growth, the competitive rate environment and the utilization of a broadrange of funding options. On slide nine, we reported another quarter of sequential expansion of both net interest income and NIM. Core net interest income, excluding PPP and purchase accounting accretion, increased by $67 million or 5% and to $1.459 billion. Net interest margin expanded 10 basis points on a GAAP basis from the prior quarter and expanded 11 basis points on a core basis, excluding accretion. Slide 10 highlights our high-quality deposit base and diversified funding profile. For the current cycle to date, our beta on total cost of deposits was 17%, as we have noted, we expect deposit rates to continue to trend higher from here over the course of the rate cycle. Overall, our beta continues to track to our expectations. Turning to slide 11. Throughout 2022, we were deliberate in managing the balance sheet to benefit from asset sensitivity. We also incrementally added to our hedging program to manage possible downside rate risks over the longer term. During the quarter, we executed a net $3.2 billion of received fixed swaps and $800 million of forward-starting swaption collars. At this point, based on the current rate outlook and yield curve opportunities, we believe we have optimized the size of the program. We are comfortable with our position today as we balance near-term costs versus longer-term protection. As always, we will be dynamic as we monitor the outlook and the yield curve. We maintain unused hedge capacity that we could deploy should the curve revert and/or steepen to a level where we would add incremental downside rate protection hedges. On the securities portfolio, we saw another step-up in reported yields quarter-over-quarter. We are benefiting from reinvestment as well as the hedge strategy to protect capital. We will continue to reinvest cash flows of approximately $1 billion each quarter, at attractive new purchase yields around 5%. Moving to slide 12. Non-interest income was $499 million, up $1 million from last quarter. We drove record activity within our capital markets businesses during the quarter and throughout 2022. Capstone continued to perform well and our underlying capital markets businesses outside of Capstone finished the year strong, up 26% year-over-year. We remain pleased with the client engagement we are seeing in the wealth management business with another positive quarter of net asset flows. On a year-over-year basis, we saw lower mortgage banking income as a result of the higher rate environment and from lower deposit service charges from fair play enhancements we implemented during 2022. Offsetting these factors were higher capital markets revenues and payments revenues. Importantly, we're executing on our strategy to drive higher value revenue streams and our fee mix continues to trend favourably. Moving on to slide 13. GAAP noninterest expense increased $24 million compared to the prior quarter. Adjusted for notable items, core expenses increased by $19 million. This quarterly increase in core expenses was primarily the result of revenue-driven compensation tied to capital markets production. Additionally, we saw seasonally higher medical claims in the quarter, which increased by $16 million. Underlying these results, core expenses were well controlled, demonstrating our commitment to disciplined expense management. Slide 14 recaps our capital position. Common equity Tier 1 increased to 9.44%. Our tangible common equity ratio, or TCE, increased to 5.55%. Adjusting for AOCI, our TCE ratio was 7.3%. We ended the year having delivered on our plan to drive common equity Tier 1 to the middle of our 9% to 10% operating range. Going forward, our capital priorities have not changed, fund organic growth, support our dividend and provide capacity for all other uses, including share repurchases. After having held back on share repurchases for the last several quarters, our expectation is that over the course of 2023 and beyond, we will now return to a more normalized capital distribution mix, including share repurchases. Our Board has authorized a $1 billion share repurchase program through the end of 2024. Given the current economic outlook, our thinking is that we will not actively repurchase shares during the first-half of 2023. And as we watch the path of the economy. This may result in capital ratios continuing to expand in the near-term. We like the flexibility the program provides, and we believe it is prudent to maintain an authorized share repurchase program as part of our overall capital management framework. On slide 15, credit quality continues to perform very well. As mentioned, net charge-offs were 17 basis points for the quarter. This was higher than last quarter by 2 basis points and up 5 basis points from the prior year as credit performance continues to normalize. Nonperforming assets declined from the previous quarter and have reduced for six consecutive quarters. Criticized loans have similarly improved for four consecutive quarters. Allowance for credit losses was up slightly, driving the coverage ratio higher to 1.9% of total loans. Turning to slide 16. You will note a strong reserve position. As I mentioned, the portfolio has continued to perform extraordinarily well, and we believe our disciplined approach to credit through the cycle underpins the overall strength of our balance sheet. We were pleased to update our medium-term financial targets at Investor Day in November, and these form the foundation of our expectations over our strategic planning horizon. We believe these metrics are at the core of value creation. Profit growth, return on capital and the commitment to drive positive annual operating leverage. Turning to slide 18. Let me share some thoughts on our 2023 outlook. As we discussed at Investor Day, we analyze multiple potential economic scenarios to project financial performance and develop management action plans. Our targets are anchored on a baseline scenario that is informed by the consensus economic outlook and the forward yield curve as of December 31. The baseline assumes a mild recession in 2023 with modest net GDP growth for the full-year. The economy is expected to exit the year on the path toward recovery with inflation gradually subsiding. Since Investor Day, the economic outlook is incrementally worse and is likely at the lower end of the baseline scenario outcomes. Our baseline outlook for 2023 is for average loans to grow between 5% and 7%, led by commercial with more modest growth in consumer. We will continue to focus on optimizing for returns and driving loan expansion in select areas. Deposits are expected to increase between 1% and 4%, reflecting continued growth and deepening of customer and primary bank relationships. Net interest income is expected to increase between 8% and 11%, driven by continued earning asset growth and expanded full-year net interest margin. Non-interest income is projected to be approximately flat. We expect continued robust performance from our areas of strategic focus

Operator:

[Operator Instructions] Our first question is from the line of Manan Gosalia with Morgan Stanley. Please proceed with your question.

Zach Wasserman:

Sure. Yes. This is Zach. I'll take that question. Thank you for asking it. Generally speaking, we're seeing our deposit growth continue to trend pretty well in line with the outlook that we've given between 1% and 4% growth for the full-year. So, we think we're on that run rate. I think it will be balanced between both consumer and partial and to your point, we'll continue to the mix of that deposit gathering will continue to trend as we expected and it is baked into our overall rate and beta expectations for higher rate products like time deposits like money market et cetera. I think we're beginning -- we're operating in this rate cycle clearly at a lower level of mix of those products than we were, for example, the last rate cycle. So, we'll see that trend higher throughout the course of the next several quarters, but in line with our general expectations, it all comes back to our focus on deepening relationships with our existing customers and our primary bank relationships. And so, we think it's working pretty well and expected to continue as we go to…

Zach Wasserman:

Yes. On the topic of NIM, I think just take a step back, we've significantly benefited over the last two quarters from explicit actions to manage asset sensitivity seen more than 60 basis points NIM expansion in the last three quarters alone. And that was very intentional with in mind towards continuing our top-tier performance in NIM over the course of long periods of time that we've done. As we stand now, as we start to look into, we do believe there's more room to go on asset bases, and we'll see yields continuing to increase out over the next few quarters. However, we're further along in that process probably three quarters of the way through than we are on the deposit beta side, but we also expect, as we said, rates continue to track higher over the course of the next several quarters, we're probably only about halfway through the deposit beta cycle. And when you couple that dynamic with what is currently expectation, the yield curve that we'll see short-end rates fall towards the latter part of 2024. It is reasonable to project a somewhat downward trajectory of NIM over the course of 2023. Our goal will be to manage NIM, as we've said on a number of occasions previously within a tighter corridor in 2023 as we can, really protecting the downside hedging program and ultimately driving towards sequential and sustained growth in net interest income on a dollar basis. And I think when we couple what we expect to be a pretty strong NIM level overall with the loan growth that we expect to continue to drive, again, to the guidance 5% to 7% over the course of this year, we'll see that NII on dollar rate is continuing to expand, and it's about focus.

Zach Wasserman:

Thank you.

Steven Alexopoulos:

Hey, good morning, everyone.

Steven Alexopoulos:

I want to start sort of follow-up, Zach. With the NIM expected to trend down given all the hedges and protection you've put in place to sort of tighten that ban. And can you frame for us how much downside could we see what's the range?

Steven Alexopoulos:

Got it. That's helpful. And then Zack, when we look at, you're obviously expecting more loan growth than deposit growth, a fairly large issuance of sub debt this quarter. Could you walk us through the funding strategy? I know you said you expect the overall growth in average earning assets. But what's the funding strategy? It seems like you have to do much more than just on the deposit side? And maybe what will be the cost of that?

Steven Alexopoulos:

Got it. Thanks for taking my questions.

Operator:

Our next question is from the line of Ken Usdin with Jefferies. Please proceed with your questions.

Zach Wasserman:

Yes. They were a very powerful benefit. I think it's -- they're protected, as you know, about one-third a whole would have otherwise been AOCI Mark reduction, which was their primary attention originally, but also have played out in terms of really strong reported yields in the securities portfolio. Roughly half of the approximately 50 bps increase in securities yield was from that hedging program to give you a sense of the scale of it. And I think where it goes from here in terms of incremental benefit is going to be, to some degree, a function of just where that mid-portion of the curve goes and at this point, it's fairly well topped out. I'm not expecting a ton more lift there. The lift from that has reduced somewhat from the third quarter, but it still is very accretive we're not adding to that portfolio now. And so, I think we're getting the benefit that we expected from it.

Zach Wasserman:

Yes, sure. So, it was 17%, to give sense is kind of tracking across time, it was 6% in Q2, 11% Q3, 17% in Q4. So, continues to track and kind of in the additional 5 to 6% to 7% range each quarter. And the expectation is to go out into Q1, it can be sort of more of the same, continuing out over until we get into the middle part of the year. Our planning assumption Ken, is something on the order of 35% total through the cycle, which would indicate we're about halfway through to the prior point that I made. With nothing that I'll tell you where we're intently focused is on the day-to-day management and really very, very rigorous looking client by client in the commercial portfolio, geography by geography in the in the consumer portfolio and ensuring that we can stay competitive and ensure we've got a strong deposit franchise. And so, we'll continue to wait and see and manage against that. If the outlook changes will let you know. But at this point, it continues to track according to that broad expectation.

Zach Wasserman:

Thank you.

Erika Najarian:

Hi, good morning. You mentioned on slide 18 that you expect to be at the low end of your net charge-off range. The tone very quickly changed this week from some land into hard landing. I guess my question here is this may be obvious to us that have covered the company for a while, but what makes you confident despite the deteriorating economic outlook that you could stay at the low end of that already pretty low range and given some of -- there was a -- I wouldn't call them up here, but there was a company that reported pretty eye-popping delinquency numbers in auto this morning. I'm wondering if you could give us what's going on with auto credit trends underneath. And again, we remind us why you feel confident about how that portfolio would perform in an economic downturn.

Steve Steinour:

But Erika, this is Steve. A number of the guidance is through the cycle, and we've been well below the through-the-cycle average. And at this point, we're guiding to the lowest end of the range. And we've been strategic on how we position the lending activities now for a dozen years. We've been very disciplined Richard team, along with the lending teams that have adhere to the discipline, didn't open up in some of the areas of my benefit to frothy and recent vintages. So, we've got a really good core book on both the commercial side. And as a super prime and secured lender generally on the consumer side, we actually think of that as a lower risk book. So, our aggregate out low risk profile and discipline over many years will serve us well, certainly in auto and frankly, the entire portfolio.

Zach Wasserman:

Erika, this is Zach. I'll take that one. And the answer to your question is yes. We in terms of that very much is a sign of our trying to look ahead. Look at not only 2023 but also over the entirety of the strategic plan in Horizon and ensure that we're setting up the overall financial performance in terms of revenue and the growth rate of overall expenses such that we can achieve the objectives in terms of profit growth -- that is a very deeply held objective and we're not looking in the short term, but in the long term to achieve it. As we talked about at Fairmont Investor Day, there are multiple strategic levers that we use to manage overall expenses to grow less than revenue to support that PPNR growth. And even as we drive a faster growth rate of the expenses -- or sorry, the investments within expenses to drive ultimately business growth over the long term, but the efficiency drivers, operation accelerate that is going in reengineering, major customer-facing processes, taking waste and cost out of the system as we improve productivity our long track record of optimizing the consumer and retail branch distribution network, which is still very relevant, still it made, but it does represent an opportunity over time to reduce and to harvest expense saves and things like this organizational alignment, which are designed to help us to improve efficiency and hold cost growth at a low level. I will note, it's in the guidance that I've given in terms of overall core expense growth for 2023. But importantly, also helps us to achieve our strategic objectives. Align our organization yet even more towards our most important strategic priorities and to operate as efficiently and at pace as we can. So, we are extremely focused on driving that long-term efficiency program, which is an important component of the PPNR guidance. And I do expect we'll achieve the financial medium-term targets this year. That's what's baked into an implied by our overall guidance.

Erika Najarian:

Thank you.

Operator:

The next question is from the line of Jon Arfstrom with RBC Capital Markets. Please proceed with your questions.

Zach Wasserman:

Good morning, Jon.

Rich Pohle:

Well, I would say it's positive right now, and we're certainly cautious as we enter a downturn, but everything that I'm looking at right now, Jon, is holding water exactly where we thought it would be our delinquencies, both in commercial and consumer are right where we would expect them to be. We had a very sharp drop in our commercial delinquencies and our commercial real estate delinquencies are essentially nothing. The [indiscernible] momentum and NPA momentum that we've got both down 20% year-over-year, puts us in really good stead as we enter a downturn. So, we're looking at everything. Every portfolio we're going deep into to make sure that we're proactive in identifying potential issues and trying to get ahead of them in terms of working with customers as there's potential problems. But certainly, the headwinds are there in the economy, but we feel good about where the portfolio is positioned. Like I said, we're not going to bat 1,000. We do have higher losses forecasted in ‘23 than we had in ‘22. So, we understand that it's going to be a more challenging environment, but we feel good where we're sitting.

Zach Wasserman:

In terms of -- so this Zach. I'll take that one. Capital markets is a real bright spot for us. the core underlying capital markets, excluding Capstone, grew 26% revenue year-over-year in 2022, and we expect another run rate of double-digit teams are above revenue growth as we go into '23. So, we're seeing just really sustained traction in the underlying strategy there is to deepen relationships with additional clients continue to penetrate that set of services and products into our core customer base and reap the benefits of it. It's been an area as you know that we've been investing in considerably over time, and we're seeing that play through into incremental revenue growth. And then Capstone to your point, is a nice addition to that. And I would tell you that Capstone is doing really, really well. They beat the plan for Q3. Overall, more than the $100 million run rate, if you look at the back half of revenues. I look at the back half of '22, and we expect that to continue and sustain and continue to grow as we go into '23. It's early days, I would say, in getting client referrals from the Huntington base, but at the beginning, we are seeing, particularly as late to the pipeline and in the future, a lot of positive engagement of core Huntington clients with the Capstone team and with the service set there. And so, it's going to be an area that there's continues to bear fruit and we're quite bullish about the opportunity to grow capstones what was previously $100 million revenue run rate up into something that continues to perform well and above that as we go forward over time. So, it's definitely a strong point at this point.

Jon Arfstrom:

Okay. Thank you.

Operator:

The next question is from the line of Scott Siefers with Piper Sandler. Please proceed with your question.

Rich Pohle:

Scott, it's Rich. I'll take that. So, as you saw, we held our coverage levels flat in the second quarter then we had two incremental builds in Q3 and Q4. So, the 190 coverage that we're sitting with today, we think is fully reflective of the current economic scenario. Now where the reserve goes from there is really going to be a function in the short-term where the economy is having, we see significant degradation to react to that or that isn't as bad will react there. So, it's hard to answer it. We go through that process every quarter in terms of looking at the economic scenario that's in front of us and what the potential for improvement or degradation is, and we make the call at the end of the quarter based on all that. So, the near term is really going to depend on where the economy shapes up. I would say that longer term, as we've been past the downturn, however long it might be, we do think that we will bring the reserve coverage down over time. It's just a question of the timing around that. And then year-end reserves that reflects this adjusted thinking in terms of the baseline economic scenario goes off in the comment and a problem.

Zach Wasserman:

Yes. Thanks, Scott, for asking the question. I want to take the opportunity to clarify. The guidance we've given is 2% to 4% growth in underlying core. And then on top of that, the run rate for Capstone, which is around $60 million plus the FDIC surcharge we estimate to be $33 million to be relatively precise about that. We have not yet fully sized the potential restructuring costs from the organizational alignment actions that Steve mentioned. So that is yet to be included in that guidance, just to put a very specific point on that. And there I don't expect it to be overly large, but we'll have to see, ultimately, it will be a function of a number of factors, including the final nature of the changes and importantly, as Steve noted, we're instituting a voluntary retirement program, which by a certain name has a function of employee selection and take up on their own and so they'll be some degree of variability until we have a sense of where that program lay in. So that -- more to come on that. There's a few opportunities during the first quarter for us to provide additional updates around the nature of the program and the size of our on and we intend to do that as we to get further out in the Q1.

Zach Wasserman:

There's some pickup on that expense, that one-time expense that we would expect to see just in the run rate in ‘23, and there may be other things we can do to absorb that also not the forecast.

Operator:

The next question comes from the line of Matt O'Connor with Deutsche Bank. Please proceed with your question.

Zach Wasserman:

Yes, Matt, it's a good question. I think just take a step back to probably to frame it. the expectation now as we get out over the course of the totality of '23 and certainly as we think about '24 and beyond to get back to a more normal mix overall payout ratios between dividends and share purchases and retaining capital to grow. And so, I think you could see this buyback is really just the program with the repurchase program as being indicative of that part of that, and I think a really healthy sign. And when we thought a little more tactically zooming in into the near term, I just really want to see the depth of the economic environment during the course of '23 before you make any substantive or significant commitments. And hopefully, the launch of that is understood. How long exactly does it take to get clarity to your point, is somewhat uncertain. I suspect we'll know a bit more over the course of Q1 and as we get into Q2. It's more resolved at that point than I think we'd be more active but still highly uncertain we'll have to see and be dynamic. But generally speaking, the size of the program was designed to keep us in the middle of our CET1 operating range over the course of the proceeding periods. And so that will be our plan to generally manage in that way. More clarity in the near term.

Steve Steinour:

Matt, it’s Steve. We are interested in building our fee income opportunities and net revenue stream. And so, if we can find things that we think make sense, that would enhance our current business lines and/or what we can offer to our customers, we would be interested. Just as last year, we were fortunate to get cash on the board and a fintech opinions [indiscernible] So we’ll be looking at the as the year progresses, whether it makes sense to bolster the acquisition on the fee side of our businesses. But that’s not sort of an intended set aside on that buyback conclusions that just related. Our capital priorities haven’t changed.

Operator:

Thank you. At this time, we've reached the end of the question-and-answer session. And I will now turn the floor back to Mr. Steinour for closing remarks.

Operator:

This concludes today's conference. You may disconnect at this time, and thank you for your participation.

Tim Sedabres:

Thank you, operator. Welcome, everyone, and good morning. Copies of the slides we will be referencing today can be found on the Investor Relations section of our website, www.huntington.com. As a reminder, this call is being recorded and a replay will be available starting about one hour from the close of the call. Our presenters today are Steve Steinour, Chairman, President and CEO; and Zach Wasserman, Chief Financial Officer; Rich Pohle, Chief Credit Officer, will join us for the Q&A. As noted on Slide 2, today's discussion, including the Q&A portion, will contain forward-looking statements. Such statements are based on information and assumptions available at this time and are subject to changes, risks and uncertainties, which may cause actual results to differ materially. We assume no obligation to update such statements. For a complete discussion of risks and uncertainties, please refer to this slide and material filed with the SEC, including our most recent Forms 10-K, 10-Q and 8-K filings. Let me now turn it over to Steve.

Zach Wasserman:

Thanks, Steve, and good morning, everyone. Slide 7 provides highlights of our third quarter results. We reported GAAP and adjusted earnings per common share of $0.39. Return on tangible common equity or ROTCE, came in at 21.9% for the quarter. Adjusted for notable items, ROTCE was 22.2%. As you saw on slide 4, if you were to normalize TCE for the non-cash accounting impact of other accumulated comprehensive income that arises from unrealized losses on our AFS securities portfolio, our ROTCE would have been 18.6%. We are pleased with the sustained momentum in our loan balances, with total loans increasing by $3 billion and excluding PPP, loans increasing by $3.3 billion. Total average deposits also increased $1 billion quarter-over-quarter and $3.7 billion year-over-year. This growth reflects the focus on primary bank relationships. Pre-provision net revenue expanded sequentially by 17% from last quarter to $857 million. Credit quality remained strong with net charge-offs of 15 basis points and non-performing assets declining to 53 basis points. Slide 8 shows our continued trajectory of PPNR expansion. We expect Q4 to be another strong quarter as we drive sustainable profitability and highlight the earnings power of the company, supported by organic growth initiatives and harnessing the benefits from the TCF acquisition. We remain committed to our long track record of managing to positive operating leverage even as we continue to invest in the business. Turning to slide 9. Average loan balances increased 2.6% quarter-over-quarter, totaling $117 billion. Excluding PPP, total loan balances increased $3.3 billion, or 2.9% driven by both commercial and consumer loans. Within commercial, excluding PPP, average loans increased by $2 billion or 3.3% from the prior quarter. These results were supported by broad-based demand across our commercial businesses that is fueling robust new production. Line utilization remained relatively stable during the quarter on a core C&I basis, while we saw higher balances within distribution finance. Asset Finance, which includes equipment finance and distribution finance, contributed with balances higher by $1 billion. This included $300 million from distribution finance during the quarter. Commercial real estate balances also increased by $800 million. Commercial growth continued in our middle market, corporate and specialty banking segments, which collectively increased by $200 million during the quarter. In Consumer, growth was led by residential mortgage, which increased by $1 billion, driven by slowing prepays and higher mix of on-balance sheet loan production. We also saw steady growth in our vehicle finance business. Turning to slide 10. We delivered average deposit growth of $1 billion. Deposit growth was led by commercial, up $1.4 billion. This expansion reflects our initiatives to drive primary bank relationships and new customer acquisition. We remain disciplined on deposit pricing, with our total cost of deposits coming in at 25 basis points for the third quarter. On slide 11, we reported another quarter of sequential expansion of both net interest income and NIM. Core net interest income, excluding PPP and purchase accounting accretion, increased by $148 million, or 12% to $1.392 billion. Net interest margin increased primarily driven by higher earning asset yields as a result of our asset sensitivity position. Slide 12 highlights Huntington's deposit pricing discipline. Our low deposit rate relative to the third quarter of 2015 along with an improved funding profile gives us the flexibility to remain disciplined on deposit pricing. For the third quarter, we have started to see our average cost of deposits tick-up as expected. We are remaining dynamic in this environment. We continue to manage the portfolio at a very granular and segmented level to ensure pricing discipline and with a focus on growing the primary bank relationships that bring lower-cost deposits. Turning to Slide 13. We have been dynamically managing the balance sheet against the volatile rate backdrop. This quarter, we continued to execute on our hedging strategy to manage possible downside rate risks over the longer-term, while positioning ourselves to benefit from higher expected rates in the short-term. In Q3, we increased our downside protection by executing a net $6.6 billion of received fixed swaps and $2 billion of callers. We will be proactive in managing our downside risk, while closely monitoring the rate outlook. Our expectation is to continue to deploy downside hedging strategies over the coming months. Additionally, we are actively managing the securities portfolio to both capture the benefit from higher rates over time and protect tangible capital. We maintained the proportion of securities in held to maturity, flat during the quarter and our reinvesting securities portfolio cash flows at rates above portfolio yields. Moving to Slide 14. Non-interest income was $498 million, up $13 million from last quarter. We drove record activity within our capital markets businesses during the quarter, with revenues increasing $19 million, which includes the full quarter impact from Capstone. Capstone's deal pipeline is healthy, and we expect it to contribute to additional growth in the fourth quarter. We remain pleased with the client engagement we are seeing in the wealth management business with positive net asset flows year-to-date. The momentum in net flows has been outweighed by market-based changes in assets under management, resulting in lower overall revenue. Deposit service charges were also lower by $12 million reflecting the expected $9 million impact from Fair Play enhancements that were implemented in July. Our outlook for the impact of these fee adjustments is unchanged from prior guidance. Our Fair Play philosophy is at the center of our strategy and is directly aligned with our mission of looking out for people. We believe the effect of Fair Play continues to be a compelling value proposition for our customers and supports sustainable growth for the bank. Fee revenues were also impacted this quarter by a decline in mortgage banking driven by a lower return on our MSR asset and lower saleable spreads. Moving on to Slide 15. Non-interest expense increased $35 million from the prior quarter. Aligned to our prior guidance, core expenses, excluding notable items, increased $49 million to $1.043 billion. This increase was mainly driven by the full quarter impact from Capstone and Torana. It also included additional compensation expenses related to the strong revenue and production we are seeing in 2022, and impacts from Merit and day count. The underlying expense run rate remains very well controlled. Our efficiency ratio, which is an outcome of our revenue drivers and expense management activities came in at 54.4% on a reported basis and adjusted for notable items was 53.9% for the quarter. On an adjusted basis, this reflects a decrease of 210 basis points quarter-over-quarter. Slide 16 recaps our capital position. Common equity Tier 1 ended the quarter at 9.3% within our targeted operating range of 9% to 10%. As we go forward, our capital priorities remain unchanged with our first priority to fund organic loan growth. With the robust return on equity, we are generating from our core assets, we are deploying our incremental capital to fund organic growth and drive CET1 toward the middle of our target operating range by year-end. Our tangible common equity ratio, or TCE, declined to 5.3% as a result of AOCI marks on the securities portfolio. Recall, this temporarily reduces equity as value marks are taken and then accretes back over time. Importantly, this does not impact our regulatory capital ratios. Our TCE ratio, excluding the AOCI impact, increased 19 basis points to 7.2%. Finally, our dividend yield remains well above the median in our peer group at 4.5%. On slide 17, credit quality continues to perform very well. As mentioned, net charge-offs were 15 basis points for the quarter. This was higher than last quarter by 12 basis points and down five basis points from the prior year. Our consumer and commercial portfolios continue to demonstrate stability and credit quality. Nonperforming assets declined from the previous quarter and have reduced for five consecutive quarters. Criticized loans have reduced both from the prior quarter and prior year. Allowance for credit losses was up two basis points to 1.89% of total loans, reflecting a conservative reserve posture given the heightened economic uncertainty, even as our internal portfolio metrics show stability. Turning to slide 18. Let me update our latest forecast for Q4. Our guidance assumes the consensus economic outlook through year-end and incorporates the rate curve as of the end of September. Our loan growth guidance remains unchanged at high single-digit growth rate on a year-over-year basis. We are currently tracking toward the higher end of this range. As a result of balance sheet growth and the rate curve outlook, we are again revising guidance higher for net interest income. We now expect core net interest income on a dollar basis, excluding PPP and purchase accounting accretion to be up in the high 20s to low 30s percentage growth rate for the fourth quarter on a year-over-year basis. In fee income, we now expect it to be down low single digits for the fourth quarter on a year-over-year basis. This guidance is reduced from a prior level. We continue to see encouraging trends in core strategic growth areas within fees, namely our capital markets, wealth and advisory and payments businesses and the prior trends we have been seeing in other major fee lines, including mortgage, are within expected levels. The change in our guidance is related to the decision to hold on sheet, the guaranteed portion of our SBA loan production. Market sale premiums for those assets have reduced and it is now more advantageous for us to hold that production on sheet in Q4, as opposed to selling. We will forgo an acceleration of fees this quarter, but benefit from higher spread income out into 2023 and beyond. We believe this is a good economic return, but will cause fee recognition in Q4 to be lower than prior expectations. On expenses, our expectation is for core expenses to be up low single digits in the fourth quarter compared to the prior quarter. We continue to maintain tight control of underlying core expenses, while also seeing some impacts from compensation driven by the strong performance and profitability we are seeing in our 2022 results. Given the higher earnings, we now expect our tax rate to be approximately 19%. Finally, before we move to Q&A, I'd like to end with a few key points. As Steve mentioned earlier, our business is performing exceptionally well right now with solid momentum in the underlying drivers and expanding profitability. We also continue to see strength in our customer trends, where they appear to be managing through the environment well and with solid credit performance. Notwithstanding these clear positives, we are mindful of the heightened uncertainty and risks in the environment. We are closely monitoring the impacts from persistently high inflation, rising interest rates, geopolitical instability and market volatility. The cone of uncertainty around the near-term economic environment has widened and the probability of a recession is increasing. A bedrock part of the way we manage our business is to be dynamic to ensure we have game plans ready and are positioned; to act to manage through a multitude of scenarios while sustaining top-tier performance; and as always, we are guided by our moderate to low risk appetite through the cycle. We are operating from a position of strength, and we are confident in our ability to successfully manage a range of economic environments. We're looking forward to hosting many of you at our upcoming Investor Day on Thursday, November 10, in New York City and via webcast. We are excited to share more about our strategic growth objectives and our targets to continue to drive top performance and value creation over the years to come. With that, we will conclude our prepared remarks and move to Q&A. Tim, over to you.

Operator:

Operator

Zach Wasserman:

Sure. Great question. Thank you. This is Zach. I'll take that. I think, in terms of loan growth, we continue to see quite a bit of momentum as we discussed in the prepared remarks, even as we're taking opportunities here in the fourth quarter to optimize where we're driving that incremental production for higher capital returns. And so expect to see continued momentum into the fourth quarter and that will continue into 2023. Notwithstanding the economic uncertainty, we continue to see demand from our clients and pipelines that even as they're pulling through are refilling and so that indicates continued momentum out into 2023 and beyond. And I think as we drive that, we'll also benefit from higher asset yields to the point of your question, and that will support expanding NIM here into the fourth quarter in the near term.

Zach Wasserman:

Sure. As it relates to hedging, we – sort of taking a step back, we purposely took a series of actions in 2021 as we discussed to increase the asset sensitivity of the business, and to benefit from higher rates that really or through over the course of the last several quarters, just in Q2 and Q3 of this year, 55 basis points of total core NIM expansion and there's more opportunity ahead. The strategy that we're working through is really based on history, where if you look at the long-term history around rate cycles, typically medium to long-term rates begin to fall right at the peak of the Fed hiking cycle. And so even as we're continuing to benefit from our asset sensitivity over the course of the early part of this year, we have been adding incrementally to the downside hedge protection portfolio, so as to protect against potential downside rate scenarios in 2023, 2024, 2025 and beyond. At this point, we've completed around 60% of that total potential capacity for hedging, which based on what we've done so far, would protect around to 35% to 45% of NIM in down ramp scenarios out into those years that I mentioned. From here, I expect to stay asset sensitive, and that will, based on our expectations, drive additional NIM expansion into Q4. Even as we're continuing likely to continue to add to that hedge portfolio here over the next over the coming months, staying dynamic, walk through of interest rates, but continuing to protect against that downside. So the net of those things should support continued loan growth, as I said, and help to protect and maintain really strong levels of NIM as we go forward.

Operator:

Thank you. Our next question is from the line of Scott Siefers with Piper Sandler. Please proceed with your question.

Zach Wasserman:

Yeah. Yeah, it's a great question. And I think that, the model will be that sustained growth rate in loans, coupled with the rising in the near-term and then stable NIM out into the future to really drive sustained continued growth in NII on a dollar basis. The trajectory around NIM in 2023 is very much a function of what happens with the economy, clearly and where the rate curve is trending. So it's – I won't give you a clear guidance at this point. We'll talk more about that as we engage in future sessions, but our expectation is that 2023 will look quite good from a NIM perspective and that the volume growth will really support sustained continued growth in NII.

Zach Wasserman:

Yes. It's a good question. Really, that -- the portion of expenses in the third quarter that we're calling out is compensation related or really are, in fact, related to the exceptionally strong levels of production and revenue and ultimately profitability we're seeing in 2022. And our baseline posture for expense management at this point is to be keeping the core underlying growth of expenses very well controlled and at a low level. The model, as we've talked about, quite a bit over time is for us to self-fund investments in our strategic initiatives, execution on the TCF revenue synergies and our continued technology development program by driving efficiencies in the core operating expense base of the company through scale, process, automation, et cetera. An indication of that is we're continuing to optimize our branch network. We just announced a week or so ago, another 31 branch closures that will be implemented in the early part of next year, and that's just sort of how we'll drive that efficiency to continue to keep expenses growing at a low level and of course, drive positive operating leverage as we go forward. So that's the run rate that we see as we get out into 2023. And of course, we'll provide more clear guidance as we get closer to the beginning of next year.

Zach Wasserman:

Thank you.

Steven Alexopoulos:

Hey, good morning everyone.

Zach Wasserman:

Good morning.

Zach Wasserman:

Yes. It's a really good question, and it's obviously a key area of considerable focus. We really like the results we're seeing on the deposit side in Q3 and solid execution of our strategy of driving toward primary bank relationships and operating accounts, even as we're staying very dynamic and really managing interest expense and the trajectory on that exceptionally closely. What I expect into the fourth quarter is more of the same. So I expect to see deposits grow into the fourth quarter commercial led -- and even as, of course, beta and interest expense costs are beginning now to tick up as we go into the fourth quarter, just kind of taking a step back in terms of the overall funding mix to the point of your question. As we see it, we're starting this cycle and beginning into the early stages of it from a really solid position relative to cycles. The loan-to-deposit ratio is relatively low. Non-customer sources of funding are also relatively low. And that leaves us in a good position to leverage diversified funding sources to fund that we've got. Of course, deposits are the core and that's why we're pleased that they're growing. But we do have the opportunity to leverage short-term and long-term other sources of funding, which we'll do in a diversified way to balance the funding sources, and to be frank, to put good tension in the system to really support our disciplined approach to pricing and deposit growth over time. And so that's the model that we'll use. And I think as we go out into the future, we'll see that balance of funding.

Zach Wasserman:

Yes. So, I do expect to see NIM expansion into the fourth quarter. It won't be at the same rate that we've seen for the last couple of quarters, but I do think, we'll see that continue to expand into the fourth quarter. As we go into 2023, what happens kind of over the longer term out into the back half of '23 is really going to be a function of where we see the yield curve going and the economy as I mentioned. And so, you could see stability, you could see some downdraft. We'll see. I think it's going to be a function of those drivers. With that being said, our focus, as I said before, is really on growing net interest income on a dollar basis. And I think the loan growth we're bringing through will help to sustain and support that over time.

Steve Steinour:

Thank you. It's a team effort, but appreciate the recognition.

Operator:

The next question is from the line of Ken Usdin with Jefferies. Please proceed with your question.

Zach Wasserman:

Great question. In terms of size, we think the securities portfolio is rightsized with respect to the size of the balance sheet at this point. It's about 24% of total assets, 26% of earning assets. And I expected to say, proportionately the same -- at the same level for the foreseeable future. It's -- we're essentially managing it for our liquidity as a corporation at this point. In terms of yields, we did see a 50 basis point increase in portfolio yield into the third quarter, which was obviously very helpful for NIM. If I was to reconcile that for you, about 30 basis points of that 50 was from the hedge portfolio. Just under 10 basis points was from the impact of new money yields coming in during the quarter and the remainder of roughly 11 basis points was driven by a reduction in premium amortization. I expect that we'll continue to see rising yields out of the securities portfolio, partly as a function of that just continued reduction in premium amort, the hedge portfolio should continue to benefit us as well as the rate curve has ticked up just a bit incrementally from the end of the third quarter here and new money yields are pretty attractive relative to existing portfolio yield. To give you a sense, team is currently investing somewhere between 5.15% and 5.35% yields here as we enter October. So that will continue to be accretive to yield as we go forward.

Zach Wasserman:

It will continue to carry forward for a while here. The tenure of those are multiple years. And so we'll obviously have to see where the trajectory of the yield curve goes to the extent to they drive incremental benefit on a quarter-to-quarter basis, but they will protect us for some time to come to the extent that rates keep rising.

Zach Wasserman:

Thank you.

Jon Arfstrom:

Thanks. Good morning.

Jon Arfstrom:

Steve or Rich, can you talk a little bit about how you're balancing growth with -- I think, Steve, your comment was potential economic uncertainty. Your numbers look clean, but you did have a higher provision and you took your reserves up a little bit. So talk a little bit about credit, and Rich, maybe give us some help on what you're thinking on provision and reserves.

Rich Pohle:

I was going to say there's not a whole lot to add there. But as Steve mentioned, I mean, the credit looks really good. We've got eight basis points of charge-offs for the year in crit-class and NPAs are both trending down for several quarters. With respect to the increase in the reserve coverage, I mean, the allowance went up by $64 million in the quarter, and most of that was coming from loan growth. So we've taken this consistently a prudent approach since -- to our ACL since COVID came in 2020. And we think that we've got a good position of strength right now heading into a possible downturn. You know, as it relates to how we're managing the growth versus where we are in the cycle, I mean, we are fundamentally laser-focused on client selection, and we underwrite our clients at all times to how do they perform through the cycle. And clearly, with one coming up potentially, we're paying heightened attention to that. But we're always sensitizing for higher rates for stress with inflation and other variables as we underwrite our credits, and that's not changing. So we feel that we can grow the balance sheet and grow it prudently, and we'll move forward from there. So we feel good about where we are.

Rich Pohle:

Yes. We are expecting it. And really, when you talk about deterioration, I mean, you are coming off a very low base, right? With all the stimulus money that came into the system in 2020 and into 2021. The levels of delinquencies and the level of charge-offs are really unsustainable. So what we're looking at is more of a return to normal. We're closely watching the early-stage delinquencies and they're exactly where we thought they would be. I mean, they are up off of those historic lows. But if you go back and you look at where delinquencies would have been in 2018 and 2019, we're not at those more normal levels. And with respect to charge-offs, we've had net recoveries in many of our consumer portfolios in the first, second and even into the third quarter. And we do expect over time that those are going to return to the norm. But right now, we feel very good about where the consumer book is positioned.

Operator:

[Operator Instructions] The next question is coming from the line of Matt O'Connor with Deutsche Bank. Please proceed with your question.

Rich Pohle:

Hey, Matt, it's Rich. I'll take that. So as we've been in this business for 75 years, and we've been through all sorts of cycles and as you know, our model is one of focusing on prime and super prime customers. And one of the benefits that we've developed over time is the ability to put in highly predictive custom scorecards with response to fall expectations. So we're underwriting to not getting the car back in the first place. And we are mindful of the fact that used car prices are coming down, and we build that into our decisioning. If you look on slide 37 of the earnings deck, you'll see that, while we're maintaining really strong FICOs and custom scorecard ratings, our LTVs have come down steadily since the third quarter of 2020. And so we've got a very disciplined and sophisticated underwriting approach, and the fact that we're, I think, prudently bringing the LTVs down over time speaks well to how that folk is going to perform. It's a core competency of the bank. We are – expect the charge-offs to return to normal. But for right now, we're enjoying what we think is a really strong core competency that we bring to that business.

Matt O'Connor:

Okay. That's helpful. And then just separately, you care to give us maybe a 30-second kind of preview of the Investor Day in terms of what you're looking to accomplish. You talked about strategic update and financial targets, but anything you want to give a full review of? Thanks

Matt O'Connor:

Okay. Thanks. See you there.

Operator:

Thank you. We do have a question coming from the line of Erika Najarian with UBS. Please proceed with your question.

Steve Steinour :

Good morning, Erika.

Erika Najarian:

My first question was for Steve. And Steve, I was laughing at your response to Steven Alexopoulos' comment is classic. Your efficiency ratio medium-term target is 56% and obviously, with the help of your -- the business strengths and rates went down to 54% in the quarter. And I'm wondering if the medium-term range still holds in that you'll look to continue to reinvest back in the business, especially as rates are helping the denominator side of that equation.

Erika Najarian:

Got it. I tried.

Erika Najarian:

Second question is a follow-up for Zach. I'm going to ask Steve's question another way. I think it was -- I saw it as an accomplishment that your period end deposits grew and you kept your cost of deposits to 25 bps, well below where I think everybody was expecting to go -- so as we think about your outlook for good loan growth and some NII growth next year, how should we think about deposit growth from here? I fully understand your message that you never got to search deposits in the first place. But how should we think about core deposit growth outside of mix shift. And additionally, how you're thinking about the terminal deposit beta from here?

Erika Najarian:

Thanks. See you in three weeks.

Steve Steinour:

Thanks.

Operator:

Thank you. At this time, I would like to turn the floor over to Mr. Steinour for closing remarks.

Operator:

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

Tim Sedabres:

Thank you, operator. Welcome, everyone, and good morning. Copies of the slides we'll be reviewing today can be found on the Investor Relations section of our website, www.huntington.com. As reminder, this call is being recorded, and a replay will be available starting about one hour from the close of the call. Our presenters today are Steve Steinour, Chairman, President and CEO and Zach Wasserman, Chief Financial Officer. Rich Pohle, Chief Credit Officer, will join us for the Q&A. As noted on slide two, today's discussion, including the Q&A portion, will contain forward-looking statements. Such statements are based on information and assumptions available at this time and are subject to changes, risks, and uncertainties, which may cause actual results to differ materially. We assume no obligation to update such statements. For a complete discussion of risks and uncertainties, please refer to this slide and material filed with the SEC, including our most recent Forms 10-K, 10-Q, and 8-K filings. With that, let me now turn it over to Steve.

Zach Wasserman:

Thanks, Steve, and good morning, everyone. Slide eight provides highlights of our second quarter results. We reported earnings per common share of $0.35. Adjusted for notable items, earnings per common share were $0.36. Return on tangible common equity, or ROTCE, came in at 19.9% for the quarter. Adjusted for notable items, ROTCE was 20.6%. We were pleased to see sustained momentum in our loan balances with total loans increasing by $2.8 billion. And excluding PPP, loans increased by $3.3 billion. Total average deposits also increased, with growth in both consumer and commercial balances. Pre-provision net revenue expanded sequentially and grew 17% from last quarter. Consistent with our plan, we reduced core expenses below our target of $1 billion, driven by the realization of cost synergies. Credit quality was exceptional, with record low net charge-offs of 3 basis points and nonperforming assets reduced to 59 basis points. Slide nine shows our continued trajectory of PPNR expansion. We see 2022 coming together quite well, as we drive sustainable profitability and highlight the earnings power of the company, supported by our organic growth initiatives and harnessing the benefits from the TCF acquisition. We remain committed to our long track record of managing to positive operating leverage, with disciplined expense management, even as we continue to invest in the business. Turning to slide 10. Average loan balances increased 2.5% quarter-over-quarter, totaling $113.9 billion. Excluding PPP, total loan balances increased $3.3 billion or 3%, driven by commercial and consumer loans. Within commercial, excluding PPP, average loans increased by $2 billion or 3.3% from the prior quarter. These results were supported by broad-based demand across commercial lending that is driving robust new production. Line utilization remained relatively stable during the quarter on a core C&I basis, while we saw higher balances within our inventory finance business. Commercial growth was led by middle market, corporate and specialty banking, which collectively increased by $746 million during the quarter. Asset finance contributed meaningfully with balances higher by $497 million. Inventory finance continues to rebuild towards a more normalized level, with average balances up $383 million during the quarter. Commercial real estate balances also increased by $213 million. Auto dealer floor plan balances were relatively stable, increasing by $45 million, as supply chain constraints continue to dampen inventory levels. In Consumer, growth was led by residential mortgage, which increased by $1 billion, driven by slower prepays and higher mix of on-balance sheet loan production. We also saw steady growth in RV/Marine and indirect auto. Average home equity balances declined by $41 million. However, we were pleased to see end-of-period balance growth, driven by robust new production of first-lien refinance products. Turning to slide 11. We delivered average deposit growth of $2.1 billion. Deposit growth was led by commercial, with deposits up $2.1 billion, while consumer balances increased by $500 million from the prior quarter. This growth reflects our initiatives to drive primary bank relationships and new customer acquisition across the bank. We remain disciplined on deposit pricing, with our total cost of deposits coming in at just 7 basis points for the second quarter. On slide 12, we reported another quarter of sequential expansion of both net interest income and NIM. Core net interest income, excluding PPP and purchase accounting accretion, increased by $125 million or 11% to $1.244 billion. Consistent with our prior guidance, net interest margin increased driven by higher earning asset yields as a result of our asset sensitivity position and lower Fed cash balances. Slide 13 highlights Huntington's deposit pricing discipline. We have a long history of managing through cycles, and we believe our deposit base today is even stronger, than it was starting the last tightening cycle. For the second quarter, we have seen little change to our average cost of deposits, given the timing of rapid Fed rate moves occurring later in the quarter. That said, we are remaining dynamic in this environment. We are managing the portfolio at a very granular and segmented level, client by client in many cases, to ensure pricing discipline and growing the primary bank relationships to bring lower-cost operational deposits. Turning to Slide 14. We are managing the balance sheet in order to position ourselves to benefit from higher expected rates in the short-term, while also being judicious on managing possible downside rate risks over the longer term. We continued to execute on our hedging strategy during the second quarter, and increased our downside protection by executing a net $3.3 billion of received fixed swaps. Our expectation is to continue to add to this hedging program during the third quarter. Additionally, we are managing the securities portfolio to both capture the benefit from higher rates over time, as well as protect capital. We increased the proportion of securities and held to maturity during the quarter and our reinvesting securities portfolio cash flows at rates well above portfolio yields. Moving to Slide 15. Non-interest income was $485 million, up $41 million year-over-year and down $14 million from last quarter. We saw record activity, within our capital markets business during the quarter, which drove revenues up $12 million from prior quarter. Additionally, we saw expansion in our cards and payments revenues and deposit service charges. Fee revenues were impacted this quarter by lower gain on sale from SBA loan sales, as we sold less balances in the second quarter compared to the prior quarter. Recall, we restarted our normal SBA loan sales earlier this year. And while loan production remains robust, this quarter's gain on sale is generally aligned to our go-forward expectations. Fees were also impacted by a decline in mortgage banking as volumes continue to normalize from the exceptionally strong levels seen last year and due to lower saleable spreads. While we are pleased with the sales and client engagement traction in our Wealth Management business, we saw lower overall revenues as market-based AUM changes outweighed continued momentum in net asset flows. Moving on to Slide 16. Non-interest expense declined $35 million from the prior quarter. Excluding notable items, core expenses, declined by $13 million to $994 million as we completed the cost savings from the acquisition and achieved our targeted expense level. Our efficiency ratio, which is an outcome of our revenue drivers and expense management activities, came in at 57% on a reported basis, and adjusted for notable items was 56% for the quarter, in line with our medium-term target. Slide 17, recaps our capital position. Common equity Tier 1 ended the quarter at 9.1% and within our target operating range of 9% to 10%. As we go forward, our capital priorities remain unchanged with our first priority to fund organic loan growth. Our expectation is that given the strong sustained levels of loan growth, buybacks will be de minimis, if any, for the remainder of the year. With the robust return on equity we are generating, we expect to be able to fund this organic growth and see capital ratios move higher over the balance of 2022. Our tangible common equity ratio, or TCE, declined to 5.8%, as a result of AOCI marks on the securities portfolio. Recall, this is an accounting construct that temporarily reduces equity as value marks are taken and then reverses over time and this does not impact our regulatory capital ratios. Our TCE ratio, excluding the AOCI impact has been relatively stable near 7% level. Finally, our dividend yield remains number one in our peer group at 5%. On Slide 18, credit quality continues to perform very well. As mentioned, net charge-offs were a record low of 3 basis points, benefiting from another quarter of net recoveries in commercial portfolios and continued stability in consumer credit quality. Non-performing assets declined from the previous quarter and have reduced each of the last four quarters. We also saw lower criticized loans, which have improved both from the prior quarter and prior year. Allowance for credit losses was flat at 1.87% of total loans, reflecting a conservative reserve posture, given the heightened economic uncertainty even as our internal portfolio metrics show stability. We are proud to report on Slide 19 that we have achieved our medium-term goals. Since sharing these targets, we have been intently focused on executing on our commitments and managing dynamically through the changing environment. We have been guiding that we were as expected reflect these goals by the second half of 2022. We have now achieved these results one quarter ahead of schedule. This performance represents the earnings power of the franchise. The TCF acquisition bolstered many of these areas and allowed us to gain incremental scale and profitability, as Steve mentioned earlier. And the incremental growth momentum is only just the beginning. As we stand today, we believe our return on capital is compelling compared to our peer set and demonstrates the financial rigor with which we operate that is focused on creating fundamental value for shareholders. Finally, turning to Slide 20. Let me update our outlook. Our guidance assumes the consensus economic outlook through 2022, and it incorporates the rate curve as of the end of June. Our loan growth outlook remains unchanged. As a result of our balance sheet growth and the rate curve outlook, we are again revising guidance higher for net interest income. We now expect core net interest income on a dollar basis, excluding PPP and purchase accounting accretion, to grow in the high teens to low 20s percent range. In fee income, we continue to expect growth between low and mid-single digits for the fourth quarter on a year-over-year basis. We are continuing to see encouraging trends in our payments, capital markets and wealth and advisory businesses. As we shared previously, our guidance incorporates the normalization of mortgage banking revenues and the fair play enhancements we are making over the course of the second half of the year. Note, our guidance fully captures the expected benefits of our Capstone Partners and Torana acquisitions, which closed in the second quarter. On expenses, we are pleased to have completed the cost savings program. We are balancing continued momentum in the business and strong revenue growth with the uncertainty around the near-term macro outlook and inflationary pressures that are affecting the economy. The strong revenue performance of the business will drive a degree of associated compensation expenses in addition to targeted investments to support key growth initiatives. Hence, our expectation is for core expenses, excluding Capstone Partners and Torana to grow at a modest level for the balance of 2022. Additionally, Capstone and Torana will add incremental expenses of approximately $25 million beginning in the third quarter run rate. Finally, given our continued exceptional credit performance, we are revising our full year net charge-offs down to less than 15 basis points from approximately 20 basis points previously. That concludes our opening remarks. Tim, let's open up the call for Q&A, please.

Operator:

At this time, we will be conducting a question-and-answer session. Our first question comes from John Pancari with Evercore. Please proceed with your question.

John Pancari:

Good morning. I want to see if you could maybe comment on your deposit growth expectation? How you're thinking about the ability to grow deposits here and possibly the makeup of that of that growth? I know you didn't include that in your formal guidance. So maybe if you could just kind of help us think about how we should model the growth. Thanks.

John Pancari:

Okay. Thanks. And then related to that, maybe could you just elaborate a bit on your deposit beta expectations in terms of how they begin to -- how they could trend in the back half your terminal beta ultimately? Thanks.

John Pancari:

Okay. Thanks for taking the questions.

Betsy Graseck:

Hi. Good morning. How you are doing?

Zach Wasserman:

Good morning, Betsy.

Zach Wasserman:

Yeah. Thanks for the question. This is Zach. I'll take that as well. As we talked about in the prepared remarks for Q2, we didn't do any buybacks given the Capstone acquisition closing. And I think as we think about the next several set of quarters, our capital priorities are really guided by our overall party sets and first and foremost, to fund organic growth and given the strong ROE that we get on the organic loans we're bringing in, that's our top priority. That's where we intended, and I'm really pleased to be able to allocate the capital. Even as we also manage capital ratios upward here, trending towards the year-end. It's a little too early to call what happens in 2023. And as we get closer, we'll have a better view of what the plan might be at that point. But I think you'll see us tick capital ratios up here sequentially and deploy it to the loan growth for the foreseeable future.

Rich Pohle:

Hey, Betsy, it's Rich. I can take that one. On the consumer side, we see as we've talked about in some of the previous calls, just a little bit of increasing in the delinquencies just in many respects because they've been running at such artificially low levels given the deferral business – deferrals in 2020 and the stimulus in 2021. I would say in general, though, those books are performing very well. We have maintained our FICO disciplines across the board. And with increasing auto pricing and increasing home rates, we've also done a good job of keeping the loan to values constant or coming down. So we feel very good about where the consumer book is positioned right now.

Steve Steinour:

Betsy, this is Steve. We put the – we published our auto lending every quarter. So you see new lending at super prime, it just hasn't deviated more than 5 or 10 points and has generally drifted upwards over the last 12 years. And we're super prime on the home side as well. And then the RV/Marine is an average just over 800 like an FICO. All of this is very low to fault frequency, default expectation and it's all secured. So we feel very good about the consumer book as a whole.

Steve Steinour:

Thanks, Betsy.

Steven Alexopoulos:

Hey, good morning everybody.

Steven Alexopoulos:

So for Zach, somewhat of a theoretical question. So if we look at the balance sheet, the loan-to-deposit ratio is low, which is keeping deposit betas very low at the moment. You're hedging to stabilize loan yields. When we think about incremental loan beta versus incremental deposit beta, this is for you and the industry, are we basically setting up where as we look out to 2023, the full year NIM could be higher in 2023, just mechanically over 2022. But at some point, we should expect your quarter-over-quarter NIM to start trending down through the year as deposit betas ultimately catch up?

Steven Alexopoulos:

Okay. Got it. And in response to John's question, I just want to understand your answer. You said you thought your deposit beta could be higher this cycle than the prior cycle, is that right?

Steven Alexopoulos:

In the last -- okay, got it. Thanks. And then for Steve. So there's quite a bit of talk about companies onshoring supply chains, right, back to the US. I'm curious what you're seeing on the ground? I'm not really talking about the Intel plant, but beyond that, is this something that you're starting to see or is this just really a talking point at this point? Thanks.

Zach Wasserman:

And the other thing I just -- this is Zach. The other kind of secular phenomenon, but I do think it's going to be a tailwind for the industry broadly for the commercial banking space in the investment in property plant equipment to deal with labor supply constraints, which aren't going away anytime soon and are really driving significant corporate level investments in automation technology things of that nature.