Greetings, and welcome to the Huntington Bancshares second quarter 2023 conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Tim Sedabres, Director of Investor Relations for Huntington Bancshares. Thank you. You may begin.
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 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.
Thanks, Tim. Good morning, everyone, and welcome. Thank you for joining the call today. We're pleased to announce our second quarter results, which Zach will detail later. Our approach to both our colleagues and customers continues to be grounded in our purpose and served us well in the second quarter. Our colleagues again demonstrated that we make people's lives better, help businesses thrive, and strengthen the communities we serve. Now on to slide 4. These are the key messages we want to highlight today. First, Huntington has a distinguished deposit franchise, which continues to benefit from our strategy to acquire and deepen primary bank customer relationships. This has fueled continued deposit growth over the year, including this quarter. Second, we once again drove capital ratios higher, with Common Equity Tier 1 having increased for 4 quarters in a row.
We remain on track to build CET1 to the high end of our range by year-end. Third, credit quality, which is a hallmark of the company, is performing very well, and we continue to operate within our aggregate moderate to low risk appetite. Fourth, we are dynamically managing through the interest rate environment. We are maintaining disciplined deposit pricing while delivering deposit growth and maintaining a robust liquidity position. Finally, we remain intently focused on executing our strategy. We are investing in the business to drive long-term, sustainable revenue growth, and we continue to proactively manage the expense base to align with the revenue outlook. Operation Accelerate remains on track, and we will increase our use of business process outsourcing to drive sustained efficiencies into 2024. Moving on to slide 5. Over the past decade, we've transformed Huntington. This puts us in a position of strength today.
This foundation includes our granular and high-quality deposit base, which is supported by our leading consumer, business, and commercial banking franchises. With this strong foundation in place, we can be nimble and seize on opportunities to expand our business that will arise during times like these. The hiring of the fund finance team we announced last month is a great example. This business was on our commercial banking growth roadmap, and we're pleased to be able to add great talent and welcome these colleagues to Huntington. We are building capital even as we maintain loan growth. We are optimizing the level of new loan growth and remaining judicious for the loans we carry on balance sheet in order to generate the highest return on capital. As a result, capital ratios expanded in the second quarter, with our CET1 ratio increasing to 9.82%.
Further, our adjusted CET1 ratio is 8.12% above the pure median. Our disciplined approach to risk management drives our strong credit quality, with low net charge-offs and the non-performing asset ratio decreasing for the eighth consecutive quarter. Our management team has a long track record of being disciplined operators with a focus on delivering value for shareholders. This execution has been awarded and recognized across the franchise, including winning the J.D. Power Mobile Award for the fifth year in a row and maintaining our strong number one SBA ranking. Regarding the macro outlook, it remains a dynamic environment. Interest rates are playing out in the higher for longer scenario that we had been anticipating for some time. Economic activity in our footprint appears to be holding up relatively well, which supports sustained loan growth and solid credit performance.
That said, we are diligent, watching the environment closely and are actively managing our loan portfolio. We are well prepared to operate through a range of potential scenarios. Further, we are also closely monitoring the potential regulatory adjustments to capital and other requirements. We are evaluating the proposals, and thus far, the potential new requirements appear broadly in line with what we had expected. We are well positioned to manage through these changes, address them expediently, and over time, offset a meaningful portion of the potential impacts. Finally, before I hand it over to Zach, we want to share that Rich Pohle, our Chief Credit Officer, has announced his upcoming retirement, effective at the end of 2023. We've greatly benefited from Rich's expertise and leadership during his nearly 12 years with Huntington.
He's been a great leader of our colleagues and a great partner for me and the executive team. We have a strong bench. We're pleased Brendan Lawlor, Deputy Chief Credit Officer, will succeed Rich in this role at the end of the year. Brendan joined us in 2019 after 25+ years as a senior commercial credit executive at a large regional bank and is currently responsible for all commercial credit across the bank. Zach, over to you to provide more detail on our financial performance.
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 continued to grow as total loans increased by $900 million or 0.8% from the prior quarter. Credit quality remained strong, with net charge-offs of 16 basis points and allowance for credit losses of 1.93%. As Steve mentioned, capital increased from the prior quarter.
This solid capital position, coupled with our robust credit reserves, puts our CET1 plus ACL loss absorbing capacity in the top quartile of the peer group. Turning to slide 7. Average loan 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 and 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 30th ending balances above the June monthly average, providing a strong start point as we enter Q3. Within consumer deposits, we have now seen average balances increase for seven months in a row. Within commercial, average monthly deposits were stable over the course of the second quarter. Turning to slide 10. I want to share more details on our non-interest-bearing deposits. Overall, the $33 billion of these deposits represent 23% of total balances and are well diversified across consumer, business, and commercial banking. The ongoing mix shift we have seen from non-interest-bearing over the past two quarters has been in line with our expectations and consistent with what we saw in the last cycle. We expect this mix shift trend to moderate and then stabilize in 2024.
This trend is reflected in our total deposit beta guidance. On to slide 11. For the quarter, net interest income decreased by $61 million, or 4.3% to $1,357 million, driven by lower sequential net interest margin. On a year-over-year basis, NII increased $90 million, or 7.1%. We continue to benefit significantly from our asset sensitivity and the expansion of margins that has occurred throughout this cycle. Reconciling the change in NIM from the prior quarter, we saw a reduction of 29 basis points on both a 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 two primary scenarios we incorporate include one, which is represented by the forward yield curve, and another which assumes rates stay higher for longer and end 2024 approximately 75 basis points higher than the forward. We think this is the most likely range for short-term rates over the next six quarters. Based on this range, we anticipate net interest margin of approximately 3% by Q4, ± a few basis points.
This would equate to core net interest income on a dollar basis for the fourth quarter to be down approximately 1%-2% from Q2 levels. We look out further into 2024, clearly the trends will depend on both those interest rate scenarios and what is happening with the broader economy and industry factors, including loan demand and deposit growth. That said, our modeling indicates NIM outlooks are stable to rising during 2024, which, coupled with earning asset growth, is expected to drive net interest income dollar expansion as we move through 2024. Turning to slide 12, cost of deposits moved higher in the quarter to 1.57%. Our cumulative beta through Q2 is 32%, up 7 percentage points from the prior quarter, in line with our expectations and prior guidance.
As I mentioned, we continue to expect cumulative deposit beta of approximately 40%. Turning to slide 13. On the securities portfolio, we saw another step up in reported yields quarter over quarter. We did not reinvest cash flows from securities in the second quarter as we allowed those proceeds to remain in cash, given the attractive short-term rates. Cash and securities balances on average increased by $5 billion from the prior quarter as we maintained higher cash levels in the quarter. As of June 30th, on an ending basis, cash and securities totaled $52 billion, representing a more normalized level as we go forward into Q3. Turning to slide 14. Our contingent liquidity continues to be robust. Our two primary sources of liquidity, cash and borrowing capacity at the FHLB and Federal Reserve, represented $11 billion and $77 billion, respectively, at the end of Q2.
At quarter end, this pool of available liquidity represented 205% of total uninsured deposits, a peer leading coverage. Turning to slide 15. Our hedging program is dynamic, continually optimized, and well diversified. Our objectives are to protect capital in upright scenarios and protect NIM in down rate scenarios. During the quarter, we further expanded our pay fixed swaptions hedge position to protect capital from tail risk in substantive upright scenarios. There was a modest upfront premium associated with these swaptions, and the hedges result in a mark-to-market each quarter as they're deemed economic hedges. On the subsequent slide, you will see that positive impact during the second quarter on our fee revenues. We also remain focused on our objective of managing NIM to protect the downside and have maintained additional upside NIM opportunity, given our asset sensitivity.
The interest rate movements in the first few weeks of Q3 have provided opportunities for additional attractive hedging. We've incrementally added modest additional exposures to both our capital protection and NIM protection hedge portfolios and will remain dynamic as we go throughout the quarter if further opportunities arise. Moving on to slide 16. Non-interest income was $495 million for the second quarter. Excluding notable items, fees increased $40 million, including an $18 million benefit from the positive mark-to-market on the pay fix swaptions. Excluding this benefit, underlying fee income would have been $477 million. We saw solid performance in our key areas of strategic focus, including payments and wealth management. Capital markets revenues declined by $2 million from the prior quarter, however, increased by $3 million year-over-year.
Clearly, the events of March and the U.S. debt ceiling debate caused a fairly challenging capital markets environment in Q2. Pipelines remain solid, and there are encouraging signs pointing to opportunity in the back half of the year. Moving on to slide 17. GAAP non-interest expense decreased by $36 million. Adjusted for notable items in the prior quarter, core expenses increased by $6 million, driven by a full quarter effect of annual merit increases and higher marketing spend. We entered the year with a posture of managing core expense growth to a very low level, given the economic backdrop. We developed and executed a series of proactive actions to reduce expense run rates, including the voluntary retirement program, organizational alignment, and our continued implementation of long-term efficiency programs such as branch optimization and Operation Accelerate.
We continually calibrate the level of expense growth to revenues, and we're taking additional actions to further manage the pace of expense growth, even as we remain focused on self-funding investments in our key growth initiatives. We're actively working on the next set of medium-term efficiency opportunities, including business process outsourcing, which represents a promising lever for us to continue to deliver a low-level expense growth into 2024. Slide 18 recaps our capital position. Common Equity Tier 1 increased to 9.82% and has increased sequentially for 4 quarters. OCI impacts to Common Equity Tier 1 resulted in an adjusted CET1 ratio of 8.12%. Our tangible common equity ratio, or TCE, increased 3 basis points to 5.80%. Q2 ending cash levels were higher than Q1 end, which impacted the TCE ratio by 2 basis points.
Adjusting for AOCI, our TCE ratio was 7.45%. Our capital management strategy will result in expanding capital over the course of the year, while maintaining our top priority to fund high return loan growth. We intend to grow CET1 to the very high end of our target operating range of 9%-10%. Adjusting for AOCI, we expect adjusted CET1 to be in the approximately mid-8s range by year-end. On slide 19, credit quality continues to perform very well. As mentioned, net charge-offs were 16 basis points for the quarter. This was lower than last quarter by 3 basis points. On a year-over-year basis, charge-offs were up 13 basis points from the prior year's historic low level. Non-performing assets declined from the previous quarter and have reduced for 8 consecutive quarters.
Allowance for credit losses is higher by 3 basis points to 1.93% of total loans. On Slide 20, we continue to be below our target range of net charge-offs through the cycle of 25-45 basis points, and our ACL coverage ratio is among the highest in our peer group. Let's turn to our 2023 outlook on Slide 21. As I noted, we analyzed multiple potential scenarios to project financial performance and develop management action plans. Our guidance is informed by the interest rate scenarios I discussed previously and the consensus economic outlook. On loans, our outlook is 5%-6%, consistent with our prior expectations to be near the lower end of our prior range. On deposits, we maintain our outlook of 1%-3% growth for the full year.
Core net interest income, ex PAA and PPP, is expected to grow between 3%-5%, inclusive of our expectations for deposit beta and loan growth. Non-interest income on a core full year basis is expected to be down 2%-4%. This range reflects the results from capital markets we've already seen in Q2, and the assumption of gradual improvement in activities throughout the balance of the year. The remainder of our fee businesses are tracking very well to our prior expectations. On expenses, as noted, we are proactively managing with a posture to keep underlying core expense growth at a very low level and calibrated to revenue growth.
For the full year, we expect core underlying expense growth between 1% and 2%, plus the incremental expenses from the full year run rate of Capstone and Torana of approximately $50 million, and the 2 basis point increase in 2023 FDIC insurance rates of approximately $30 million. Finally, given the strong results posted during the first half of the year, we now expect full year net charge-offs to be between 20-30 basis points. With that, we will conclude our prepared remarks and move to Q&A. Tim, over to you.
Thanks, Zach. Operator, we will now take questions. We ask that as a courtesy to your peers, each person ask only one question and one related follow-up, and then if that person has additional questions, he or she can add themselves back into the queue. Thank you.
Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Manan Gosalia with Morgan Stanley. Please proceed with your question.
Hi, good morning. I wanted to dig into your comments on NIM being stable to rising in 2024, under the two scenarios that you outlined for rates. Can you expand on some of the moving parts in there, especially in the higher for longer scenario? I guess, would that put more pressure on NII than the forward curve scenario with higher deposit betas, or do I have that wrong?
Hey, Manan, this is Zach. I'll take that one, and thanks for the question. You know, I think the outlook we're seeing is really consistent with both of those scenarios. I think, you know, in the higher for longer scenario, that's on the top end of that scenario range, we would benefit from asset sensitivity. Asset yield would continue to rise. Likely, there would be a continuation and kind of an extending out of the liability pricing cycle. Those two things, we continue to expect to actually be higher overall NIM, given the asset sensitivity and very consistent with what we've discussed over time.
At the lower end of the scenario, you know, you'd see the kind of the, the faster blunting of the deposit pricing cycle, but also some less increase in asset pricing, and we'd likewise, be able to for the NIM, but albeit maybe at a few basis points lower than that. Generally, higher rates for us continue to corroborate a higher NIM. I would note as well that during the course of 2024, we will benefit from the shifting from a negative carry on our down-rate hedging program to a much more neutral position by the end of the year. That'll be in support for NIM trajectory throughout the course of 2024.
Got it. Then separately, just on regulation overall, I know you noted that the new requirements seem to be broadly coming in in line with expectations, but maybe if you can dig into, you know, 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. Maybe can you expand on where you expect regulation to go, especially as relates to, you know, the AOCI opt-out as well, as well as LCR?
Sure. As you know, we are trying to be planful, anticipatory of where we think things are going and manage ahead of it. I think, you know, at the most macro level, we do think we'll be able to relatively expediently address these potential new regulations, and frankly, over time, offset a lot of what would otherwise be potential impacts of them. Digging in specifically, you know, it's our working assumption that-
... the tailoring exclusion of AOCI not to be reported CET1 will likely be removed, and hence it's our plan to continue to manage capital higher to move CET1 inclusive of AOCI higher. In the guidance, we indicated in the, you know, the mid-8% range by the end of 2023. If we continue on with the same operating posture into 2024, we would expect that ratio to approach 9%, essentially get to 9% by the end of 2024. Back to essentially the low end of our operating range on that basis. We're also actively looking at the Basel III potential new RWA changes. As you know well, there are three big changes in there.
The Fundamental Review of the Trading Book, we think that's going to be essentially material for Huntington, given our business mix. There's operational risk requirements, which likely will be increasing RWA. They're largely keyed off of fee income. We see a slightly higher RWA from that. Offsetting that will be credit risk RWAs, which are more nuanced, more fine-tuned, and on net are lower, we believe, for Huntington. Still early days and we have more analysis to go, but we see offsetting factors there. Unclear whether there'll be a net impact from that, but they're generally relatively offsetting. You know, as it relates to other, you know, regulatory focuses like liquidity, like potential long-term debt, likewise, we're monitoring, and we think we can, those impacts will be relatively small over time.
Happy to double-click on that if any further questions from folks want.
Great. Thank you.
You're welcome.
Thank you. Our next question comes from the line of Matt O'Connor with Deutsche Bank. Please proceed with your question.
Good morning. One thing that we're seeing from some of your peers is a pullback in lending, as they look to build capital and alleviate some of the funding pressures. You know, on the flip side, obviously, you've got very strong capital, strong liquidity, as you highlighted, high reserves. Just wondering how you're thinking about how you can play offense and maybe take advantage of pullbacks by some of your peers?
It's a great question, Matt, and it's something that we, you know, really actively look at because we are in a position of strength. We want to really seize the opportunities to win new clients, win great business. You know, it's in times like this that the companies, when they operate in a position of strength, really can gain meaningful and enduring market share, and we're cognizant of that. You know, we're balancing that clearly with two factors. One, the desire to not only grow loans, but to also drive capital on errors, as I just noted in the prior question. We're actively modulating loan growth, bringing it down from a 10% run rate year-over-year level to 5% Q1, 3% Q2.
I think it'll be more like 1% probably in the back half of the year. We're also, you know, very much looking at how we can potentially optimize the balance sheet and drive higher returns out of the assets that we do have. With that being said, we are on our front foot. You saw us hire the funds and assets team, which will be a great new business line for us. Brings liquidity, great customer quality there. We are continuing to loan, finding pockets of strong growth, you know, even as we optimize for the highest returns for the year on the margin. Very much on the front foot, and to your point, there are, in fact, opportunities that we'll see come through this.
I guess, just following up on the lending side, I mean, everything we can track, it seems like auto spreads are at or near highs, mortgage spreads at highs, commercial spreads have widened. Like, why isn't there a leaning into this, or is it just that the demand's not there, at this point?
You know, look, I think there are continues to be pockets of demand, and great clients, and we've got a very strong set of clients that we're supporting as well. To your point, the yields are strong. You know, with that being said, you know, clearly, the deposit costs are also rising, and funding costs are also rising. We're balancing those things in a way that we think is prudent. You know, driving higher yields, I would say, you know, really feel encouraged by what we're seeing on the asset yield side. You know, the long-durated asset categories like mortgage and auto, really benefiting between 10 and 20 basis points on the portfolio.
I would expect that to continue for some time to come, really sustaining that 2024 and beyond NIM that we were talking about in the previous question. you know, even as, again, we optimize to also allow capital to rise.
Matt, Steve, this is Steve. I think it's fair to say we're being a little cautious till we know the outcome of the regulatory suggested reforms as well. There's more opportunity, I think that we will avail ourselves once we know what the rules are and you know, the positions that we need to have going forward.
Yep, fair enough. Thank you.
Thank you.
Thank you. Our next question comes from the line of Steven Alexopoulos with J.P. Morgan . Please proceed with your question.
Hey, good morning, everyone.
Morning, Steven. Good morning.
Zach, the commentary you gave about the NIM getting down to about 3% by the fourth quarter is helpful. I'd imagine once we move beyond that, because it sounds like most of the mix shift out of non-interest bearing will be done, it's really going to be that incremental NIM that's going to decide where do we go from there. What is the spot NIM today, right? Incremental loans, incremental deposits, just how does that compare to that 3% level?
It's still, it's still higher than that. You know, I think, again, I pointed to for the, 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 you know, 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, excuse me, 3% by the end of the year. I, and I agree with your point, which is, you know, as you get into the early part of next year, you know, a lot of the kind of major trends start to stabilize, and it's really about, you know, kind of incremental, fundamentally, what the underlying NIM is.
likely there'll be some potential continued trends at the very early part of 2024, but I agree with your point. I would also note that, you know, for us, during 2024, the reduction in the negative carry from the hedges will incrementally help, you know, throughout the course of the year.
Right. Some tailwinds there. Okay. Then, for Steve. The equity market seems to be coming around to this possibility of a soft landing. I'm curious, when you talk to your customers, what are you hearing? Are they coming around to this soft landing and maybe a little more optimistic? What are you hearing? Thanks.
Steve, I would say our customers generally are having a good year and expect to close out with a good year. They're working their margins, you know, through expenses, but inflation seems to be abating, supply chain's in better shape, you know, clearer line of sights to this half. They're optimistic about 2024 and beyond, generally. This would suggest at worst case, a soft landing and potentially the ability to avoid a recession. The Midwest, particularly our footprint, you know, there's still a lot of economic activity, announcements of investments, targeted growth. We're in a good position relative to some of the other regions.
We have significant activity going on, that, I think we'll see, particularly here in Ohio, through the course of this year.
Okay. Thanks for all the color.
You're welcome.
Thank you. Our next question comes from the line of Ebrahim Poonawala with Bank of America. Please proceed with your question.
Hey, good morning.
Morning, Ebrahim.
Hi, Ebrahim.
I just wanted to go spend some time on the expense outlook. I think you've done a lot of work here today to project the Operation Accelerate that you talk about. Zach, I think you said the goal is to keep expense growth low for next year. Maybe give us a sense of the size of that BPO opportunity that you talked about, and how do you think about positive operating leverage going into next year, given NII growth will likely be tough? Thoughts around that?
Yep. Great, great question, Ebrahim. Thanks. Just so maybe framing the overall posture, it is very much to keep operating expenses at a very low level, not only this year, but next year. We've been trying to be very proactive in setting up those programs so we can implement them effectively and have them build over time. You know, on the BPO opportunity, you know, this is something that we have leveraged over time for a while and continually looking at, from a strategic perspective, what functions that we really believe must be owned or there's critical value for them to be owned by Huntington versus those that, you know, we could benefit from the scale and capabilities of a partner.
I think the more we lean in to analyze that, I think the more we're encouraged that there are incremental opportunities. You know, relatively modest in terms of size this year, but building over time. I think, you know, really, you know, part of a portfolio of efficiency programs that'll support that low level into 2024 and frankly, continue to build into 2025 and beyond also. It's, it's encouraging. You know, again, part of a portfolio of programs, but something that we're incrementally leaning in now to be able to accelerate the benefits of. You know, on positive operating leverage, as we've said a lot, it's a core tenet of our operating plan. It's one of the three major financial targets we've set for ourselves, something we take very seriously.
Of course, we're managing the company for the medium term, to really generate value and wanna make sure that we're not doing anything in the short term that would damage that long-term growth trajectory. Too early to say what 2024 will look like. You know, I think you'll clearly have a grow over on revenue that'll pressure revenue growth. We're also very encouraged, as I said, with the opportunity to keep expense growth low. Not gonna give guidance at this moment. Still think it's within the range of reasonableness, and we're gonna drive toward it.
Ebrahim, if I could add, Steve, the team is also working on a longer-term project called Operation Accelerate. We've 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 sat. We've Zach has got us focused. We've consolidated 31 branches. We did a voluntary retirement program. We've done some restructuring and of segments and some of the business units and support units during the course of the year. What he's referencing now with BPO is additive to a very healthy level of focus and activity on the expense management side so far this year.
Understood. Any updated thoughts, Steve, you talked about building capital, but at the same time, you talked about fee revenue opportunities, doing some targeted M&A like you've done in the past. Any thoughts there? Is the opportunity set attractive for you to do anything?
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. 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 lean into that even in an even more robust fashion. We're trying to get positioned for that now. Beyond that, as you saw last year, there are key 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, and there's nothing pressing in terms of pushing them, you know, or needing to push for M&A now. We're very, very focused on driving the core.
Thank you.
Thanks, AG.
Thank you. Our next question comes from the line of Scott Siefers with Piper Sandler. Please proceed with your question.
Good morning, everyone. Thanks for taking the call.
Hey, Scott.
Hey, Steve or Zach, just kind of conceptually, maybe when you think about the 40% cum beta, maybe just a thought or two on the major puts and takes when you think about that being the right number for you all. You know, you guys are in a very competitive market, but, you know, I think it's clear within, like, the last month or so, especially, that the deposit flows are there. I guess I'm just curious what you're seeing in terms of competitive dynamic and what sort of makes that the right number to land on it from?
Yeah. This is Zach. Scott, I'll take that one. You know, all of the trends and forecasts that we're creating, and as I noted in the prepared remarks, you know, we're pretty rigorous, multiple scenarios, underlying that, continue to corroborate that. We feel like it's a good forecast. As always, I always note that the best forecast we've got, we'll share an updated one if ever that comes to pass. Our forecasts have been pretty stable around that level for a while now, and the kind of underlying monthly trends continue to corroborate it. Just double-clicking into the drivers, I would say, you know, one, we're seeing a continued modest rise in deposit costs, but at a decelerating rate, just like you would expect it to be.
We saw a beta trend by 8% in Q1, 7% in Q2. It'll be less than that as we go into Q3, clearly, and then kind of topping out into Q4. That's one, just sort of seeing a declining trend, albeit increasing. You know, the other thing is the mix shift from non-interest bearing into interest bearing, is occurring fairly well, like we would expect it to in the cycle, and that likewise is decelerating. Most of that mix shift has happened at this point, and we're already beginning to see the signs of that, again, kind of build up and corroborate to that 40%. You know, on the, on the competition side, you know, it's a, it's a competitive environment, but to your point, the deposits are there.
I think, you know, what's encouraging is it's very rational. I think that given a decelerating loan growth throughout the industry and for us, that's the kind of escape valve and pressure, which is allowing us to manage, you know, pretty well here according to our plan. Overall, still think that's the right forecast.
Right. Perfect. That's all I have, so thank you very much.
Thanks, Scott.
Thank you. Our next question comes from the line of Erika Najarian with UBS. Please proceed with your question.
Hi, good morning.
Hi, Erika.
My first question is actually a clarification one. Your 40%, you know, the data, that's on total deposits, correct?
That's correct.
Yes, because a lot of your peers give it on interest bearing. I just wanted to make sure that, just thought of that when Scott was asking that question. My real question is, I think the market really appreciates sort of the expansion of the net interest income outlook. You know, could you tell us about how you're thinking about the elasticity of deposit pricing on the way down? You know, I think to your point earlier, Zach, there are a lot of investors that are thinking about rate cuts for next year. You know, they're wondering how much power do banks have to price down if rates stay at a relatively high level versus what we've seen in a while?
Yep. Terrific questions. Also a top topic that gets lots of mind share with us, you know, just as rigorously as we've managed beta on the way up, want to be just as rigorous on the way down. Very much planning and watching that. You know, I think it'll clearly be a function of what segments you're in, which segment you're looking at. You know, on the commercial side, where betas are generally higher and where there's often a very bespoke and a priori agreement between, you know, us and our clients around where, how we'll trend, that will likewise trend lower. I think pretty confident we'll drive that, you know, at a very similar measure to the way it went up.
I think many of the other very rationally priced segments like that, in the middle market and business banking will likewise trend down, you know, pretty fast as rates decline. You know, 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 as those times elapse. Again, the playbook there is well-trodden, and I think, you know, feel quite good about the ability to spring that down. You know, the overall lapse is going to consumer cycle will clearly be a function of what's going on in the economy at that point and the outlook for rates forward at that point. Again, all of the playbooks in history would tend to corroborate our ability to do that pretty well.
Got it. Just as a follow-up to that, if I may, you know, you're holding a lot of cash, and, you know, obviously, you're, there's not a lot of motivation to deploy that. Again, as we think about next year, you know, in the same scenario, you know, you're still going to be earning a lot of your cash on your cash for 0% risk weight if the Fed cuts moderately. I guess, outside of better loan growth, you know, Zach, what would be the factors for you to, you know, normalize, start normalizing that cash, you know, to a level that's more appropriate? Or do you feel like with all the liquidity rules down the pipe, you might as well just hold it there for now since you're getting paid for it anyway?
Yeah. You know, I think that the level that we're running at for cash right now to around $8 billion-$9 billion is the right level for the company, given liquidity requirements. I think we're generally at where we think is the right level. You know, always tuning at the margin for how, you know, we're incrementally funding and kind of tuning the short-term FHLB borrowing, the cash level. I think for the most part, that cash level is right-sized right now. You know, I think within the securities portfolio broadly, you know, we'll continue to see the trend of moderately lower duration sequentially, as we've been doing, frankly, for the last three quarters in a row and just continuing to preference, you know, liquidity.
Thank you.
Thank you.
Thank you. Ladies and gentlemen, as a reminder, if you'd like to join the question queue, please press star one on your telephone keypad. Our next question comes from the line of Ken Usdin with Jefferies. Please proceed with your question.
Hey, thanks. Good morning, guys. Zach, just a follow-up on your NII 24 comments, you talked about earning asset growth. I'm just wondering, you know, your balance sheet has, it's been elevated this quarter, a good amount. Well, I guess, are you expecting, as you look out further, that deposit growth will continue to carry the overall balance sheet side forward? Kind of, I guess, how do you think about the wholesale funding for part of the equation, as a balancing act in that?
Yeah. Terrific question. Broadly speaking, the answer is yes. You know, I believe that we will bring loan growth, you know, in line with deposit growth for the most part. I think that's what we'll see here in the back half of this year. That's my expectation for the, for the trend into 2024 as well. I expect to see a pretty stable, if not slightly lower, loan-to-deposit ratio here over the next couple quarters and just, you know, fundamentally match funding, making sure that we can, you know, it's one of those fundamental underlying factors that allows us to manage the deposit beta and the marginal margin, you know, for the forgetting on the loans, as I noted earlier. It's an important dynamic.
You know, with the good thing, and I think we've talked about this in the past, is that we are coming to this cycle, and we're now operating, let's say, you know, three-quarters of the innings in, with a pretty favorable position where if we saw really attractive loan opportunities, we could, in fact, fund them with non-customer sources of funding and increase the loan-to-deposit ratio. That's not the default position for now. I think for now, I think getting loans and deposits growing at a pretty similar rate is quite healthy and a good balance for us.
Okay, a follow-up. Can you try to help us understand how the benefits from the security swaps look this quarter? As you go forward into next year, just, you know, your loan hedges, does that become a part of the benefit next year in terms of getting that NII starting to move the right way? Thanks.
Yeah, it does. Great question, Ken. Let me elaborate on that. You know, up through the early part of Q3, inclusive activities, we've done this in the first few weeks of this quarter. We've got around $29 billion of downrate hedge protection through received fixed swaps. It's around $21 billion, $22 billion. We've got some floor spreads which pay off under downrate scenarios, and then a portfolio of callers, which are the option to enter into receive fixed swaps in the future, and likely will, if rates continue to trend, you know, generally where they're expected to. It's a pretty powerful portfolio. It's both extant now and even more that will be extant over the coming six to 12 months as we enter into those caller-based received fixed swaps.
The impact Obviously, I mean, the challenge in downrate hedging right now is that with an inverted yield curve, and frankly, with a fairly steep decline already forecasted, you've got to assume pretty dire downrate scenarios to convince yourself to make sense to incrementally hedge or receive fix right now, given the negative carry right now. What we are experiencing in the PAA at this moment is about 15 basis points of negative NIM drag from the received fix that we're already in, and that will go to essentially zero by the end of 2024 if you follow out the forward yield curve scenario. That's, you know, 15 basis points of tailwind that we should see in then between now and the end of 2024, fairly radical clawback throughout that period.
Got it. Very helpful. Thank you.
You're welcome.
Thank you. Our next question comes from the line of John Armstrong with RBC Capital Markets. Please proceed with your question.
Thanks. Good morning, guys.
Good morning, John.
Couple of credit questions. First of all, congratulations, Rich Pohle, on your retirement.
Great. Thanks, John.
You've done a great job, and I've enjoyed your perspective on these calls. Commercial real estate and consumer question. On commercial real estate, how far ahead can you guys look in terms of identifying future issues? I know it's been a focus for you guys to tighten things up, but curious what you're doing now, and it obviously looks very clean, but you have a fair amount of reserves allocated to the business then, and that's kind of why I ask.
We're looking, you know, we're focused primarily right now on the 2023 and 2024 impacts, and it's really hard to look much further beyond that. 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. 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. That's the primary focus. Beyond that, it's tough. You mentioned the 9% reserve we've got against office.
We've got a 3.4% reserve against the overall CRE, but we feel for what we know right now, both of those are adequate, and we'll continue to look at those on a quarter-by-quarter basis.
Okay.
There's also, John, Rich has also included the team getting loans rebalanced. Wherever there appear to be issues, there are proactive efforts to try and get those addressed, you know, pay downs, possible lateralizations, a host of efforts. The primary focus is 2023, 2024, but there's also a long view, a full view of the portfolio over the next decade and lease rolls and other related issues, all of which are we're actively managing. We've been doing that for over a year and trying to stay well ahead of where any issues may occur. At this point, the book's in really good shape.
It seems that way. Okay. 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, you look at RV and Marine consumer categories, delinquencies really haven't budged. Are you seeing anything in consumer health that bothers you at all? Because it just, you know, these numbers are really, really good.
No, the numbers are really good, and I think it goes to the client selection and just, you know, the focus that we've got on prime and super prime. You know, if you look across the entire consumer spectrum, there's really nothing in there that would lead you to believe that we're gonna have anything more than just a, you know, a gradual return to what might be, you know, more normalized levels of charge-offs. Right now, to your point, they're running extremely low. You know, the only area that I would, I would point out that's, you know, a little bit, you know, relatively higher stress than the rest of the book is HELOC, and that's because of the floating rate nature of that portfolio.
It's gonna, you know, lead to a little higher level of delinquencies than you might see across the book. The, you know, the analysis that we've done, you know, from a vintage standpoint on that book show that we're in the 55%-60% loan-to-value range. Even though we might see higher levels of delinquency, we don't think the losses will follow.
The housing markets are generally tight where we are, John. If someone has... Unemployment's very low. If someone has an issue, you know, their best resolution is to sell the property, unlike what we might have seen in 2008, 2009 or prior cycles. You know, just to give Rich Pohle a little credit here and recognition, we've been at an effort to outperform our peers for over a decade with his aggregate moderate to low risk profile. He's been very disciplined about that, and we expect to outperform through the cycle. We've been sharing that all along. You know, at this point, we're looking really good in that regard, and attribute to all my colleagues, but especially Rich Pohle and his leadership.
Yep. Yep, I agree. I, Steve Steinour, I was thinking you could give him a fishing boat or an RV out of the foreclosure pool, there's anything to give.
True. We just don't have any other assets. Sorry, Rich.
Look at my watch.
There's some old toasters. We pull those out.
All right. just two cleanups for you, Zach. from $60 million to $50 million on the Capstone, Torana, what drove that? I know it's small, $10 million, but what happened there?
Yeah. That's reflective of, you know, the cost that we see in that previous $60 million was mainly Capstone and has a factor of production and revenues that flow through into compensation expense. When capital markets revenues were a bit softer in the second quarter, our outlook, you know, somewhat lower than was originally budgeted into the back half of the year. Still growing, but just less flow through into less comp. That's basically it.
Okay. The $30 million FDIC, that's all in the third quarter. Is that correct?
Let me clarify that. It's a 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, you know, late last year, and it's coming through every quarter. It's not the special assessment that's still being discussed.
Okay. Okay. Thank you. I appreciate that.
Thank you. Ladies and gentlemen, this concludes our question and answer session. I'll turn the floor back to Mr. Steinour for any final comments.
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 book in particular, and its granular nature, has served us very, very well, as have our efforts to provide customer service and generate great satisfaction over the years. We have a team of disciplined operators, we are executing on our strategy that we outlined last year at our Investor Day, which combines our driving value for our shareholders.
Just as a reminder, the board, the executives, and our colleagues, we're 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. Thank you for your support and interest in Huntington, and have a great day.
Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you.