Huntington Bancshares Incorporated (NASDAQ:HBAN) Q2 2024 Earnings Conference Call July 19, 2024 8:00 AM ET

Company Participants

Tim Sedabres - Director, Investor Relations
Steve Steinour - Chairman, President and CEO
Zach Wasserman - Chief Financial Officer
Brendan Lawlor - Chief Credit Officer

Conference Call Participants

Manan Gosalia - Morgan Stanley
Erika Najarian - UBS
Steven Alexopoulos - JPMorgan
Scott Siefers - Piper Sandler
Ebrahim Poonawala - Bank of America
Matt O'Connor - Deutsche Bank
Jon Arfstrom - RBC Capital Markets
Peter Winter - D.A. Davidson

Greetings, welcome to the Huntington Bancshares Second Quarter 2024 Earnings Conference Call. At this time all participants’ are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

At this time I’ll now turn the call conference over to your host Tim Sedabres, Director of Investor Relations. Please go ahead, sir.

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.

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: capital markets, payments, and wealth management. Fourth, we are achieving strong credit performance with stable net charge-offs, which are tracking as expected for the year. This is a direct result of our sustained and disciplined approach to credit over many years and our aggregate moderate to low-risk appetite. Finally, we believe the net result of these actions will deliver expanded profitability from here and into 2025 and beyond.

I will move us on to slide five to recap our performance. We delivered accelerated loan growth with average balances growing by $2 billion from a year ago. Annualized loan growth in the quarter was 4.7%. Average deposit balances also increased, growing $8 billion or 5.5% over the past year. Capital further strengthened with reported common equity Tier 1 of 10.4% and adjusted common equity Tier 1 of 8.6%, inclusive of AOCI. Liquidity remains top tier with coverage of uninsured deposits of 204%, a peer-leading level.

Credit quality was stable as net charge-offs improved by 1 basis point from the first quarter to 29 basis points. We are sustaining momentum in the growth of our primary bank relationships, with consumer and business increasing by 2% and 4%, respectively year-over-year. Again, this past quarter, we seized the opportunity to add talented bankers. We're pleased to add new deposit-focused capabilities in the mortgage servicing and homeowners association, title, and escrow areas. These new teams build upon the prior investments we've made in the Carolinas, Texas, and three new specialty commercial verticals.

As we shared last month, we are bringing in-house our merchant acquiring business within our payments organization to further accelerate revenues and capabilities. As I mentioned, our disciplined positioning of robust capital and liquidity enables our ability to sustain a growth posture. Capital continues to increase, with adjusted CET1 up approximately 50 basis points from a year ago. Liquidity continues to be robust, supported by sustained deposit gathering.

We were pleased to once again deliver top quartile results in this year's CCAR stress test exercise with Huntington’s modeled credit losses second best in the peer group. Our stress capital buffer was reduced and came in at the minimum level of 2.5%. Across our markets, we see the broader economy continuing to hold up. Our new initiatives, teams, and geographies provide growth opportunities, even as the broader environment for customer loan demand remains somewhat muted.

Zach, over to you to provide more detail on our financial performance.

Zach Wasserman

Thanks, Steve, and good morning, everyone. Slide six provides highlights of our second quarter results. We reported earnings per common share of $0.30. The quarter included a $6 million notable item related to the updated FDIC Deposit Insurance Fund Special Assessment. This did not have an impact on EPS.

Return on tangible common equity or ROTCE, came in at 16.1% for the quarter. Adjusted for notable items, ROTCE was 16.2%. Average loan balances increased by $2 billion or 1.7%, versus Q2 last year. Average deposits continued to grow, increasing by $8 billion, or 5.5%, on a year-over-year basis.

Credit quality remains strong, with net charge-offs of 29 basis points. Allowance for credit losses decreased by 2 basis points and ended the quarter at 1.95%. Adjusted CET1 ended the quarter at 8.6% and increased roughly 10 basis points from last quarter. Supported by earnings, tangible book value per share has increased by nearly 8% year-over-year.

Turning to slide seven, consistent with our plan and prior guidance, loan growth is accelerating quarter-over-quarter. Our sequential growth in loans into Q2 of $1.5 billion was more than double the sequential dollar growth into the first quarter. This likewise drove acceleration of loan growth on a year-over-year basis from 1.2% in Q1 to 1.7% in Q2. At our current run rate of growth 4.7% annualized, we are on track for the full-year plan. We expect the pace of future year-over-year loan growth to accelerate over the course of 2024.

Loan growth in the quarter was supported by both commercial and consumer loan categories. Total commercial loans increased by $689 million. Excluding commercial real estate, commercial growth totaled $1.1 billion for the quarter. Over the past year, CRE balances have declined by $1.3 billion, with the concentration of CRE as a percent of total loans declining 1.5 percentage points from 10.9% to 9.6% today.

Even as we have managed CRE balances lower, all other loan balances have increased by over $4 billion or 4% from the prior year. Drivers of commercial loan growth in the second quarter included $600 million from new geographies and specialty verticals. This included fund finance, Carolinas, Texas, healthcare asset-based lending and Native American financial services.

Auto floor plan increased by $279 million. Regional and business banking increased by $233 million. In total consumer loans, average balances grew by $757 million or 1.4% for the quarter. Within consumer, average auto balances increased by $436 million. Residential mortgage increased by $199 million, benefiting from production, as well as slower prepay speeds. RV and marine balances increased by $74 million.

Turning to slide eight. As noted, we drove another quarter of solid deposit growth. Average deposits increased by $2.9 billion or 1.9% in the second quarter. Total cumulative deposit beta was 45%. Cost of deposits increased by 9 basis points in the second quarter, which matched the increase in earning asset yields. This was half the rate of change in deposit costs we saw into the first quarter, a continuation of the decelerating trends in funding costs even as deposit growth increased.

Within the quarter, there was notable further deceleration with June deposit costs only slightly higher than May. We are actively implementing our down beta action plan, which is further supported by the robust deposit growth we have delivered. This position is allowing us to selectively reduce rates and change other terms across the portfolio in advance of potential rate cuts later this year.

Turning to slide nine. Our cumulative deposit growth since the start of the rate cycle of 7.9% is differentiated versus the preponderance of peers. We have outperformed by double-digit percentage points on deposit growth over this time. As a result, we've been able to fund loan growth with deposits, and at the same time, manage the loan to deposit ratio lower over the past year, which will support continued acceleration of lending.

Turning to slide 10. Non-interest bearing mix shift is tracking closely to our forecast. Average non-interest-bearing balances decreased by $280 million or 0.9% from the prior quarter. This represents a continued deceleration of mix shift, consistent with our expectations. Within the consumer deposit base, average non-interest-bearing deposits were modestly higher quarter-over-quarter. This was offset by a modest decelerating trend of lower non-interest-bearing balances from commercial depositors.

On to slide 11. For the quarter, net interest income increased by $25 million or 1.9% to $1,325 million. We are pleased to have delivered growth off the trough levels from last quarter and believe this inflection in revenues will continue into the third and fourth quarters.

Net interest margin was 2.99% for the second quarter. Reconciling the change in NIM from Q1, we saw a decrease of 2 basis points. This was due to higher cash balances, with spread net of free funds flat versus the prior quarter. We continue to benefit from fixed-rate loan repricing with loan yields expanding by 9 basis points from the prior quarter.

As a reminder, we continue to analyze and develop action plans for a wide range of potential economic and interest rate scenarios for both short term rates as well as the slope and belly of the curve. Our working assumption for the second half of the year is aligned with a forward curve, which projects two rate cuts by year-end. Based on that outlook, we see net interest margin relatively stable over the next two quarters at or around the 3% level, plus or minus a few basis points.

Turning to slide 12. Our level of cash and securities increased, as we benefited from higher funding balances from sustained deposit growth. We expect cash and securities as a percent of total average assets to remain approximately 28% as the balance sheet grows over time. We are reinvesting securities cash flows in short duration HQLA, consistent with our approach to manage the unhedged duration of the portfolio at approximately the current range.

Turning to slide 13. As a reminder, our hedging program is designed with two primary objectives, to protect margin and revenue in down rate environments, and to protect capital in potential up rate scenarios. As of June 30, our effective hedge position included $17.4 billion of received fixed swaps, $5.5 billion of floor spreads, and $10.7 billion of pay fixed swaps. The pay fixed swaps, which successfully protected capital, have a weighted average life of just over three years and will begin to mature over the course of 2025. As these instruments mature, our asset sensitivity will reduce.

Furthermore, at a measured pace over the past several quarters, we have added more forward-starting receive fix swaps, with effective dates starting generally in the first-half of 2025. The impact of both the maturities of the pay fix swaps and the beginning effectiveness of the receive fix swaps will reduce asset sensitivity in a down rate scenario by approximately one-third by the middle of next year. As always, we will continue to dynamically manage our hedging program to achieve our objectives of capital protection and NIM stabilization.

Moving on to slide 14, our fee revenue growth is driven by three substantive areas, capital markets, payments, and wealth management. Collectively, these three areas represent nearly two-thirds of our total fee revenues. Within capital markets, revenues increased $17 million from the prior quarter, driven by higher advisory revenues. Commercial banking-related capital markets revenues were stable quarter-to-quarter. We expect to sustain and build upon this level over the back half of the year, supported by robust advisory pipelines in Capstone, as well as expected new commercial loan production.

Payments in cash management revenue was up $8 million in the second quarter and increased 5% year-over-year. Treasury management fees within payments continue to grow strongly at 11% year-over-year as we deepen customer penetration. Our wealth and asset management revenues increased 8% from the prior year. Advisory relationships have increased by 8% year-over-year, and assets under management have increased by 17% on a year-over-year basis.

Moving on to slide 15. On an overall level, GAAP non-interest income increased by $24 million to $491 million for the second quarter, increasing from the seasonal first quarter low. Excluding the impacts of the CRT transactions, non-interest income increased by $31 million, quarter-over-quarter.

Moving on to slide 16 on expenses. GAAP non-interest expense decreased by $20 million, and underlying core expenses increased by $13 million. During the quarter, we incurred $6 million of incremental expense related to the FDIC Deposit Insurance Fund Special Assessment. Excluding this item, core expenses came in better than our expectations for the quarter, with approximately half of the lower-than-expected result driven by discrete benefits not expected to occur.

The increase in core expenses quarter-over-quarter was primarily driven by personnel expenses, as we saw higher revenue-driven compensation and incentives due to production, as well as the full quarter impact of merit increases effective in March. We continue to forecast 4.5% core expense growth for the full-year. As we look into the third quarter, we expect core expenses to be higher at approximately $1.140 billion. There may be some variability given revenue-driven compensation.

Slide 17 recaps our capital position. Common equity Tier 1 ended the quarter at 10.4%. Our adjusted CET1 ratio, inclusive of AOCI, was 8.6% and has grown 50 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%.

Slide 18 highlights our results from this year's CCAR exercise. We were pleased to once again continue our trend of top quartile performance for expected credit losses from the stress test. This year's result was second best, compared to peers. Our SCB improved to the 2.5% minimum, and our modeled stress CET1 ratio was the second best in our peer group. Our ACL, as a percentage of CCAR modeled losses, continued to be the highest level, compared to our peers. These results validate the consistency of our long-standing approach to maintaining an aggregate moderate to low risk appetite.

On slide 19, credit quality is coming in as we expected and continues to perform very well. Net charge-offs were 29 basis points in Q2, 1 basis point lower than the prior quarter. They remain in the lower half of our through-the-cycle target range of 25 to 45 basis points. Allowance for credit losses at 1.95% declined by 2 basis points from the prior quarter, effectively flat and reflects both modestly improved economic outlook, as well as an increased loan portfolio.

On slide 20, the criticized asset ratio declined 7% from the prior quarter, driven by broad-based improvements across commercial portfolios. Non-performing assets increased approximately 5% from the previous quarter to 63 basis points, while remaining below the prior 2021 level.

Turning to Slide 21. Our outlook for the full-year remains unchanged from our prior guidance. As we discussed, we expect loan growth to accelerate and deposit growth to sustain its quarterly trend. We drove net interest income higher from its trough and expect that trend to continue sequentially in the second-half.

Core expenses are well-managed and tracking to our full-year outlook, subject to some variability, given revenue-driven compensation levels and the timing of staffing adds and expenses related to the insourcing of our merchant acquiring business. We expect to exit the year at a low single-digit year-over-year growth rate. Credit is performing well, aligned with our expectations.

With that, we'll conclude our prepared remarks and move over to Q&A. Tim, over to you.

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.

Question-and-Answer Session

Operator

Well, thank you. We'll now be conducting the question-and-answer session. [Operator Instructions] And our first question is from the line of Manan Gosalia with Morgan Stanley. Please proceed with your question.

Manan Gosalia

Hey, good morning.

Steve Steinour

Morning, Manan.

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?

Steve Steinour

Yes. Thanks, Manan. Good morning. A great question. Appreciate the chance to elaborate on this one. Well, as I noted in the prepared remarks, we're already beginning the early stages of the down beta playbook. I think reducing acquisition rates, shifting the acquisition mix from time deposits toward more money market, which is easier and faster to manage on a down beta trajectory, shortening the duration of CDs and making targeted rate reductions in certain client segments. So already beginning these actions and they've benefited us in the second quarter.

As we look forward, clearly, the performance and trajectory of our beta will be a function of what not only the core yield curve projects, but importantly what clients in the markets generally believe to be the rate environment. With that being said, what we're seeing set up now is very conducive to continuing this action, being ready to actually implement the full down beta playbook when we presumably see a rate reduction later this year. So there's good confidence in where things are going in terms of that. It's a little early to give precise guidance here because clearly the trajectory on beta over the course of the first year. So it will be a function of those market expectations. But it's our general working assumption that we'll be in the mid to high-20s percent down beta range over a kind of first year period and then continuing from there. And as I said, sort of shaping up pretty well here in the early days a bit.

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?

Steve Steinour

No. Look, it is certainly a competitive environment. And we're driving growth, as we said, into the second quarter. On a dollar basis, we saw double the growth into the second quarter than we saw in the first quarter. So the acceleration that we have been calling for some time we're seeing. And so we feel pretty pleased about that.

Part of the question on loan spreads for us overall on a net basis is where are we growing, what segments, what categories are we growing in. And where we're focused is driving growth in a lot of the new areas we've been investing in, which typically come on with pretty attractive spreads relative to the average. I would characterize the spread environment generally as pretty flat on a product and category level. And for us, we're really focused on trying to drive capital optimization, obviously, in the areas with the highest return that often have good spreads, but it could also come with fee business performance as well.

Manan Gosalia

Great. Thank you.

Operator

Our next question is from the line of Erika Najarian with UBS. Please proceed with your questions.

Erika Najarian

Hi, good morning.

Steve Steinour

Morning, Erika.

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.

Zach Wasserman

Thanks, Erika for the question. This is Zach. I'll take it. Your line was clipping a little bit as I went over. But I think what I heard was what is our expectation for loan growth and kind of deposit price -- sorry, deposit growth, I'm sorry, and deposit pricing here in the back half of the year and will we have enough to fund loans going forward and what the kind of rate trajectory is around that. So let me see if I can address that. And if I haven't covered it, you can follow-up.

Look, I think we're really pleased with how things are going on deposit gathering, for sure. If you take a big step back, 15% outperformance versus the peer median over the course of the rate cycle with a beta that compares pretty favorably to both history and peer. So really doing well. I think what that's allowing us to do is, to your question, prefund to some degree our future loan growth that we've seen the loan to deposit ratio just the last year go from 84% this time last year to 81% now the quarter we disclosed.

So sort of sets up that ability to fund with core deposits, decelerating loan growth that we expect. But also I would note and it sort of goes back to Manan's question a second ago, it gives us a lot of flexibility to really manage down beta and to be selective and disciplined in terms of where that next unit of funding will come from. And so that is sort of the intention and we've been performing really well. So I mean, to some degree, I will share that we're actually outperforming our initial budget on deposit growth, is one of the reasons why we elevated the deposit growth forecast up to the high end of our initial guidance range.

I think we saw extraordinary level of growth into the second quarter, almost $3 billion. I don't expect that same level of sequential growth into the second quarter, but I do expect it to grow and I would see some nice sequential growth into the fourth quarter too, and to be within that overall guidance range of 3 to 4 for the full-year. So I think that will allow us to kind of absorb the increased lending volumes that we're projecting and core fund them and set up the ability to manage down beta.

In terms of pricing strategy, we'll sort of go back a little bit to the answer I gave to Manan, which is we're being judicious. We're still in acquisition mode, but we're very much cognizant that we are in a position of strength and that can allow us to execute the early stages of down beta. So we're seeing it in the marketplace, reductions in go-to-market acquisition pricing. We're likewise doing that and taking that opportunity. And I believe that if we do get rate reductions here in September, which just seems to be a certainty based on the market expectations, we'll be able to continue that and to drive it forward even further.

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.

Steve Steinour

Yes, great, question. So let me sort of address some of the thinking around NIM trajectory, asset sensitivity plans. But the objective we've had vis-a-vis asset sensitivity management over the last year, year and a half even has been to allow our natural asset sensitivity to really maximize the value of the up rate environment, which works pretty well. Clearly, now as we think about rates topping out and then presumably beginning to fall, where we are strategically reducing asset sensitivity.

And in the prepared remarks, I highlighted that the combination of increasing forward-starting received fixed swaps and expiration of pay fixed swaps will reduce asset sensitivity by about a third between now and the end of -- I'm sorry, the middle of next year. And we'll continue to be dynamic in managing that, but that's a very intentional reduction in asset sensitivity to manage in the presence of reduced trades.

I think on NIM, generally seeing pretty stable trends here over the next several quarters. And there are two substantive positive factors we've discussed over time. Fixed asset repricing will continue to benefit the NIM. We -- second factor hedge drag, about 16 basis points of net hedge drag in the second quarter that we just closed. So that will go down to almost a neutral position by the middle of next year in an implied forward scenario. So we'll get some benefits from that pretty steadily here over the next several quarters.

The other two factors that are very rate path-dependent, clearly are what happens with variable yields, what happens with interest-bearing liability costs. But in our expectation, you'll see an accelerating and an effective down beta that will help to mitigate variable yield reductions. And the net of those things will be a pretty flat NIM here. But I think over the longer term, we do see certainly the opportunities to drive NIM higher in a more upwards curve -- upward sloping yield curve environment. And so, that is I think what the market is expecting. So we're pretty positive about where NIM will go over the longer-term after we get through this initial stages of that rate.

Erika Najarian

Thank you.

Steve Steinour

Thank you.

Operator

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

Steven Alexopoulos

Hey, good morning, everyone.

Steve Steinour

Morning, Steven.

Steven Alexopoulos

I want to start -- maybe Zach for you. So if we do get two cuts this year, say, September, December. Zach, what's your bias as it relates to the NII outlook, the down 1 to down 4? Where in the range do you think we lean?

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.

Steven Alexopoulos

So middle of the range, is that what you said?

Zach Wasserman

That's the baseline.

Steven Alexopoulos

That's your baseline. Okay, that's helpful. And then it's funny when you look at slide seven, you're calling out the $600 million, that was the increase in average loans from new initiatives, right, I don't know, call it, $2.5 billion a year. And I'm curious, because you could look at that and say, well, that's sort of a catch-up, you have new bankers and new verticals bring over their books, but then you're saying momentum is building. So when we look out from here, we think about that $2.5 billion run rate or so, do you see upside to that? As the quarters roll forward, should we see more contribution from new initiatives in a dollar perspective?

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.

Steven Alexopoulos

Got it. Okay. Thanks for taking my questions.

Steve Steinour

Thank you.

Operator

Our next questions are from the line of Scott Siefers with Piper Sandler. Please proceed with your questions.

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.

Steve Steinour

Scott, this is Steve. I'll take the question. And our auto business has performed very well this year and in the second quarter, we expect it will continue. We don't -- we're not using it as a buffer. I think that was essentially what you were asking. We just see it as a terrific opportunity. Some of the other banks in the last year or so pulled back on auto. It's created a bit of an opportunity for us and we'd expect to continue generating significant volume and growth. As you saw at the CLM, and as we've done in the past with auto securitization, we'll manage aggregate exposure with the book, but we've got quite a bit of work at this point.

In terms of quality of the book, it's a super prime book. And so very low default, and we've talked about this for years. We focus on default frequency. On the margin, the used car pricing can have a slight impact on incremental loss or avoided loss, but -- on each repossession, but it's not going to be a big number for us either way. We've shown that this book performs very well over the years, we expect it will continue to do so.

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?

Zach Wasserman

On track for that is the headline answer there. I feel really good about how we're managing expenses for the year. There's clearly been a little bit of timing delta from where we would have initially expected to where we are now, but the full-year looks quite in line where we would have thought initially and in line with our guidance. What that will set up is, as we've discussed on previous calls, a steady deceleration in the rate of year-over-year growth as we go throughout the course of this year.

I think expense growth last quarter was about 5% year-over-year. This is like around 6%, I think, effectively in Q2 we disclosed. That will trend toward low-single-digits by the time we get to the fourth quarter on a year-over-year basis. And our expectation we'll see that -- run that trend down into 2025.

Scott Siefers

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

Steve Steinour

Thank you.

Operator

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

Ebrahim Poonawala

Hey, good morning.

Steve Steinour

Good morning, Ebrahim.

Ebrahim Poonawala

I guess, Zach, I'm not sure if I've missed it. Just talk to us around the loan to deposit ratio, 80%. Do you expect that to stay as is? The guidance kind of implies that. But as we think about all this loan growth coming up, should we expect the loan to deposit ratio to stay flat, like that's where the Bank is going to be managed? And talk to us also about the mix of these deposits that are coming in, if you can talk about like blended rates or what the NIB mix of these deposits is, that would be helpful. Thanks.

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.

Ebrahim Poonawala

Got it. And I guess, just one quick follow-up. You mentioned expenses, we'll do low-single digits, if I heard you correctly, by the end of the year. Does that -- should we be reading into that in terms of '25 expense growth being higher, lower, or same as '24?

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.

Steve Steinour

Ebrahim, Zach has shared in the past, efforts to lower growth rates in core expense levels of the Bank in order to continue to invest in different opportunities, revenue-producing opportunities primarily. You should expect to see that from us in '25 and beyond as well.

Ebrahim Poonawala

Got it. Thanks, Stephen and Zach.

Zach Wasserman

Thank you, Ebrahim.

Operator

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

Matt O'Connor

Good morning. I was hoping…

Steve Steinour

Good morning, Matt.

Matt O'Connor

I was hoping you guys could talk about the risk transfers that you guys have executed on. Just there's been some coverage about it, what you've done and some others in the media. And, I guess, I'm just trying to figure out the logic. I mean, you've got strong capital, you're building capital. I realize you've got kind of the strong loan growth outlook. But the rate that was kind of put out there in the media seems pretty high for what's a very high-quality auto book as you show in the slides here. So just trying to understand kind of the logic about it and the cost to the media is like 7.5%. So anything around the logic and financial impact? Thanks.

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.

Matt O'Connor

Okay, that's super helpful. Thank you.

Steve Steinour

Thank you.

Operator

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

Jon Arfstrom

Hey, thanks. Good morning, guys.

Steve Steinour

Good morning, Jon.

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.

Steve Steinour

Well, our pipelines go out a couple of quarters. And so, we have visibility through -- not full visibility, but partial visibility through the fourth quarter. We don't yet have significant visibility into '25. Certain businesses, though, because of the nature of their relationships, our distribution finance, we tie back into to the supply base and we get some insight from them as to what they intend to produce. But on the whole, we don't have significant multi-quarter visibility, Jon. But we do see from our customer base, however, they're performing well this year. I think there's an expectation as rates come down that they'll be doing more -- even more business next year. And that's a general sentiment they sort of share with you.

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.

Steve Steinour

So credit continues to perform very well. We're very pleased with performance year-to-date. The outlook looks good. As you know, we spent a lot of time on portfolio reviews and management and it's looking good. So there'll be some lumpiness in commercial real estate over the next couple of years for us and others in the industry. But outside of that are looking good. And on the whole, for us, it's not going to be an issue.

As you know, our CRE concentration continues to reduce. So I think we had a little over $250 million of office payouts over the last six quarters. The hack with construction unused commitments have been absorbed. So books in -- the CRE book's in good shape.

Jon Arfstrom

Okay. Thank you.

Steve Steinour

Thank you.

Operator

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

Peter Winter

Hi. Good morning.

Steve Steinour

Good morning, Peter.

Peter Winter

You guys had a -- good morning. You guys had a nice rebound in fee income. And then you've got the merchant acquiring coming on back in-house, starting in the third-quarter, which I think adds about $6 million to fees. Just do you think fee income that you can continue with this momentum and kind of maybe come in at the upper end of that 5% to 7% range?

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.

Peter Winter

Okay. And then just -- last question just on credit. I mean, as you talked about, credit trends are really good. If I look at the ACL ratio, you're at the top end of peers. Just how are you thinking about reserving going forward? Is it kind of like keep the ACL ratio fairly steady at current levels and support loan growth? And I guess what do you need to see to start lowering the ACL ratio?

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.

Peter Winter

Got it. Thanks for taking the questions.

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.

Steve Steinour

Well, thank you for joining us today. In closing, we're pleased with our second quarter results, having delivered sequential growth in both spread and fee revenues. We're expecting our organic growth strategies and our investments are bearing fruit with momentum building across the Bank. Our competitive position remains strong with robust capital liquidity. We continue to seize the opportunities to add talented bankers across our businesses. We remain focused on our long-term strategic objectives.

And collectively, the Board, executives and our colleagues are a top 10 shareholder. We have a strong alignment of delivering meaningful value for our shareholders. Finally, special thank you to our nearly 20,000 colleagues here at the Bank who support our customers every day and are the backbone of these results.

Thank you for your support and interest in Huntington. Have a great day.

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.