Huntington Bancshares Incorporated (NASDAQ:HBAN) Q2 2023 Earnings Conference Call July 21, 2023 9:00 AM ET

Company Participants

Tim Sedabres - Vice President & Head of Investor Relations
Steve Steinour - Chairman, President & Chief Executive Officer
Zach Wasserman - Senior Executive Vice President & Chief Financial Officer
Rich Pohle - Executive Vice President & Chief Credit Officer

Conference Call Participants

Manan Gosalia - Morgan Stanley
Matt O'Connor - Deutsche Bank
Steven Alexopoulos - JPMorgan
Ebrahim Poonawala - Bank of America
Scott Siefers - Piper Sandler
Erika Najarian - UBS
Ken Usdin - Jefferies
Jon Arfstrom - RBC Capital Markets

Operator

Greetings and welcome to the Huntington Bancshares Second Quarter 2023 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Tim Sedabres, Director of Investor Relations for Huntington Bancshares. Thank you. You may begin.

Tim Sedabres

Thank you, operator. Welcome, everyone and good morning. Copies of the slides we will be reviewing today can be found in the Investor Relations section of our website, www.huntington.com. As a reminder, this call is being recorded and a replay will be available starting about 1 hour from the close of the call. Our presenters today are Steve Steinour, Chairman, President and CEO; and Zach Wasserman, Chief Financial Officer. Rich Pohle, Chief Credit Officer, will join us for the Q&A.

Earnings documents which include our forward-looking statements disclaimer and non-GAAP information are available on the Investor Relations section of our website.

With that, let me now turn it over to Steve.

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. 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 all 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 road map and we're pleased to be able to add great talent and welcome these colleagues to Huntington. We are building capital even as we maintain loan growth. We are optimizing the level of new loan growth and remaining judicious for the loans we carry on balance sheet in order to generate the highest return on capital.

As a result, capital ratios expanded in the second quarter with our CET1 ratio increasing to 9.82%. Further, our adjusted CET1 ratio is 8.12% above the peer median. Our disciplined approach to risk management drives our strong credit quality with low net charge-offs and the nonperforming asset ratio decreasing for the eighth consecutive quarter. Our management team has a long track record of being disciplined operators with a focus on delivering value for shareholders. This execution has been awarded and recognized across the franchise, including winning the J.D. Power Mobile Award for the fifth year in a row and maintaining our strong number one SBA ranking.

Regarding the macro outlook, it remains a dynamic environment; interest rates are playing out in the higher for longer scenario that we had been anticipating for some time. Economic activity in our footprint appears to be holding up relatively well which supports sustained loan growth and solid credit performance. That said, we are diligent watching the environment closely and are actively managing our loan portfolio. We are well prepared to operate through a range of potential scenarios. Further, we are also closely monitoring the potential regulatory adjustments to capital and other requirements. We are evaluating the proposals and thus far, the potential new requirements appear broadly in line with what we had expected. We are well positioned to manage through these changes, address them expediently and over time, offset a meaningful portion of the potential impacts.

And finally, before I hand it over to Zach, we want to share that Rich 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 and 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-plus years as a Senior Commercial Credit Executive at a large regional bank and is currently responsible for all commercial credit across the bank.

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

Zach Wasserman

Thanks, Steve and good morning, everyone. Slide 6 provides highlights of our second quarter results. We reported GAAP earnings per common share of $0.35. Return on tangible common equity, or ROTCE, came in at 19.9% for the quarter. Further adjusting for AOCI, ROTCE was 15.8%. Deposits grew during the quarter, increasing by $2.7 billion or 1.9% on an end-of-period basis. Loan balances continue to grow as total loans increased by $900 million or 0.8% from the prior quarter.

Credit quality remains strong with net charge-offs of 16 basis points and allowance for credit losses of 1.93%. As Steve mentioned, capital increased from the prior quarter. This solid capital position, coupled with our robust credit reserves, puts our CET1 plus ACL loss-absorbing capacity in the top quartile of the peer group.

Turning to Slide 7; average loan balances increased 0.8% quarter-over-quarter or 3.1% annualized, driven by commercial loans which increased by $772 million or 1.1% from the prior quarter. Primary components of this commercial growth included distribution finance which increased $464 million; asset Finance increased by $234 million; Business Banking increased by $160 million; Auto floorplan increased by $175 million. Offsetting this growth, CRE balances were lower by $340 million. In Consumer, growth continued to be led by residential mortgage which increased by $438 million; and RV Marine which increased by $112 million. Partially offsetting this growth were lower auto loan balances which declined by $318 million.

Turning to Slide 8; as noted, we continued to deliver ending deposit growth in the second quarter. Balances were higher by $2.7 billion, primarily driven by consumer with commercial balances up modestly. On a year-over-year basis, ending deposits increased by $2.6 billion or 1.8%.

Turning to Slide 9; we saw sustained growth in deposit balances throughout the second quarter. On a monthly basis, total deposit average balances expanded sequentially for April, May and June, with June 30 ending balances above the June monthly average, providing a strong start point as we enter Q3. Within consumer deposits, we have now seen average balances increase for 7 months in a row. Within Commercial, average monthly deposits were stable over the course of the second quarter.

Turning to Slide 10; I want to share more details on our noninterest-bearing deposits. Overall, the $33 billion of these deposits represent 23% of total balances and are well diversified across Consumer, Business and Commercial Banking. The ongoing mix shift we have seen from noninterest-bearing over the past 2 quarters has been in line with our expectations and consistent with what we saw in the last cycle. We expect this mix shift trend to moderate and then stabilize in 2024. This trend is reflected in our total deposit beta guidance.

On to Slide 11; for the quarter net interest income decreased by $61 million or 4.3% to $1,357 billion, driven by lower sequential net interest margin. On a year-over-year basis, NII increased $90 million or 7.1%. We continue to benefit significantly from our asset sensitivity and the expansion of margins that has occurred throughout the cycle. Reconciling the change in NIM from the prior quarter, we saw a reduction of 29 basis points on both a GAAP and core basis excluding accretion. During Q2, we maintained an elevated cash balance relative to Q1 which impacted NIM even as it had a relatively minor actual cash economic cost. On a comparative basis, normalizing for cash levels, NIM was 3.17% for the quarter or a 21 basis point decline from the prior quarter.

The biggest drivers of the lower NIM quarter-over-quarter were higher funding costs partially offset by increased earning asset yields. We continue to analyze multiple potential interest rate scenarios as we forecast expected trends over the remainder of 2023 and into 2024. The 2 primary scenarios we incorporate include: 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 6 quarters. Based on this range, we anticipate net interest margin of approximately 3% by Q4, plus or minus a few basis points. This would equate to core net interest income on a dollar basis for the fourth quarter to be down approximately 1% to 2% from Q2 levels.

As we look out further into 2024, clearly, the trends will depend on both those interest rate scenarios and what is happening with the broader economy and industry factors, including loan demand and deposit growth. That said, our modeling indicates NIM outlooks are stable to rising during 2024 which, coupled with earning asset growth, is expected to drive net interest income dollar expansion as we move through 2024.

Turning to Slide 12; cost of deposits moved higher in the quarter to 1.57%. Our cumulative beta through Q2 is 32%, up 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 30, 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 2 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 uprate scenarios and protect NIM in downrate scenarios. During the quarter, we further expanded our Pay Fix swaptions hedge position to protect capital from tail risk in substantive upgrade scenarios. There is a modest upfront premium associated with these swaptions and the hedges result in a mark-to-market each quarter as they're deemed economic hedges.

On the subsequent slide, you will see that positive impact during the second quarter on our fee revenues. We also remain focused on our objective of managing NIM to protect the downside and have maintained additional upside NIM opportunity given our asset sensitivity. The interest rate movements in the first few weeks of Q3 have provided opportunities for additional attractive hedging. We have incrementally added modest additional exposures to both our capital protection and NIM protection hedge portfolios and will remain dynamic as we go throughout the quarter if further opportunities arise.

Moving on to Slide 16; non-interest income was $495 million for the second quarter. Excluding notable items, fees increased $40 million, including 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. However, pipelines remain solid and there are encouraging signs pointing to opportunity in the back half of the year.

Moving on to Slide 17; GAAP noninterest 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 are 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% to 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. Nonperforming 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 to 45 basis points and our ACL coverage ratio is among the highest in our peer group.

Let's turn to our 2023 outlook on Slide 21. As I noted, we analyzed multiple potential scenarios to project financial performance and develop management action plans. Our guidance is informed by the interest rate scenarios I discussed previously and the consensus economic outlook. On loans, our outlook is 5% to 6%, consistent with our prior expectations to be near the lower end of our prior range. On deposits, we maintain our outlook of 1% to 3% growth for the full year. Core net interest income ex PAA and PPP is expected to grow between 3% and 5%, inclusive of our expectations for deposit beta and loan growth. Non-interest income on a core full year basis is expected to be down 2% to 4%. This range reflects the results from capital markets we've already seen in Q2 and the assumption of gradual improvement in activities throughout the balance of the year. The remainder of our fee businesses are tracking very well to our prior expectations.

On expenses, as noted, we are proactively managing with a posture to keep underlying core expense growth at a very low level and calibrated to revenue growth. For the full year, we expect core underlying expense growth between 1% and 2%, plus the incremental expenses from the full year run rate of Capstone and Torana of approximately $50 million and the 2 basis point increase in 2023 FDIC insurance rates of approximately $30 million.

And finally, given the strong results posted during the first half of the year, we now expect full year net charge-offs to be between 20 to 30 basis points.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Manan Gosalia with Morgan Stanley.

Manan Gosalia

I wanted to dig into your comments on NIM being stable to rising in 2024 under the 2 scenarios that you outlined for it. Can you expand on some of the moving parts in there, especially in the higher for longer scenario? I guess, would that put more pressure on NII than the forward curve scenario with higher deposit betas or do I have that wrong?

Zach Wasserman

Manan, this is Zach. I'll take that one and thanks for the question. I think the outlook that we're seeing is really consistent with both of those scenarios. So I think -- in the higher for longer scenario that's sort of the top end of that scenario range, we would benefit from the asset sensitivity, asset yields would continue to rise, likely there would be a continuation in kind of an extending out of the liability pricing cycle. But [Indiscernible] 2 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 see the kind of the faster [indiscernible] of the deposit pricing cycle but also some less increase in asset pricing and we likewise [indiscernible] for the NIM but albeit maybe a few basis points lower than that. So generally, higher rates for us continue to corroborate to higher NIM. I would note as well that during the course of 2024, we will benefit from the shifting from a negative carry on our downrate hedging program to much more neutral position by the end of the year. So that will be a support for NIM trajectory throughout the course of '24.

Manan Gosalia

Got it. And then separately, just on regulation overall, I know you noted that the new requirements seem to be broadly coming in, in line with expectations. But maybe if you can dig into how you're managing ahead of that. I know you're keeping - you're building capital levels from here. You're holding a high level of cash instead of reinvesting in securities. So maybe can you expand on where you expect regulation to go, especially as it relates to the AOCI opt-out as well as LCR.

Zach Wasserman

Sure. As you know, we are trying to be planful anticipatory of where we think things are going and manage [Indiscernible]. And I think 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 otherwise would be potential impact of them. But digging in specifically, it's our working assumption that the tailoring exclusion of AOCI, [indiscernible] CET1 will likely be removed. And hence, it's our plan to manage capital higher to CET1 inclusive of AOCI higher in the guidance we indicated in the mid-8s range by the end of 2023. And if we continue on with the same operating posture to 2024, we would expect that ratio to approach 9%, essentially get to 9% by the end of 2024; so back to essentially the low end of our operating range on that basis.

We're also actively looking at the Basel III potential new RWA changes. As you know well, there are 3 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 [key-off] (ph) of fee income. We see a slightly higher RWA from that. However, offsetting that, will be credit risk RWAs which are more nuanced, more fine-tuned and on-net are lower, we believe, for Huntington. Still early days and we have more analysis to go but we see offsetting factors there unclear whether there will be a net impact from that but generally relatively offsetting.

As it relates to other 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 and any further questions if folks want.

Operator

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

Matt O'Connor

We're seeing from some of your peers is a pullback in lending as they look to build capital and alleviate some funding pressure. On the flip side, obviously, you've got very strong capital, strong liquidity as you highlighted, high reserves. I'm just wondering how you're thinking about how you can play offense and maybe [Indiscernible] the pull back by some of your peers?

Zach Wasserman

It's a great question, Matt and it's something that we really have to look at because we are in a position of strength. We want to really seize the opportunities to win new clients, win great business. It's in times like this that companies when they operate from a position of strength really can be meaningful [Indiscernible] market share and we're cognizant of that. We're balancing that clearly with 2 factors: One, the desire to not only grow loans but to also drive capital [Indiscernible] as I just noted in the prior question. So we're actively modulating loan growth, bringing it down from a 10% run rate year-over-year level to 5% in Q1, 3% in Q2.

I think will be more like 1% probably the back half of the year. We're also very much looking at how we can potentially optimize the balance sheet and drive higher returns out of the assets that we do have. With that being said, we are on our front foot. You saw us hire the fund finance team which will be a great new business line for us, brings liquidity, great customer quality there. And we are continuing to look finding pockets of strong growth, even as we optimize for the highest returns for the year at the margin. So very much on the front book. And to your point, there are [Indiscernible] opportunity pools that we'll see come [true] (ph).

Matt O'Connor

And then, I guess just following up on the lending side. I mean everything we can track, it seems like auto spreads are at or near highs, mortgage spreads at highs, commercial spreads have widened. So why isn't there a leaning into this? Or is it just that the demand is not there at this point?

Zach Wasserman

Look, I think there continues to be pockets of demand and great clients. And we've got a very strong set of clients that we’re supporting as well. And to your point, the yields are strong. With that being said, clearly, the deposit costs are also rising and funding costs are also rising. So we're balancing those things in a way that we think is prudent. Driving higher yields, I would say, really feel encouraged by what we're seeing on the asset yield side. The long-durated asset categories like mortgage and auto really benefiting between 10 bps and 20 bps on the portfolio. And I expect that to continue for some time to come really sustaining that 2024 beyond NIM that we were talking about in the previous question, even as again we optimize to also allow capital to rise.

Steve Steinour

Matt, this is Steve. I think it's fair to say we're being a little cautious until we know the outcome of the regulatory suggested reforms as well. There's more opportunity. I think that we will avail ourselves once we know what the rules are and the positions that we need to have going forward.

Operator

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

Steven Alexopoulos

I want to -- so at 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 noninterest-bearing will be done, it's really going to be that incremental NIM that's going to decide where we go from there. What is the spot NIM today, right, incremental loans, incremental deposits? Just how does that compare to that 3% level?

Zach Wasserman

It's still higher than that. I think, again, I'd point you to for the quarter adjusted for cash levels that we're kind of running at now in the third quarter, the second quarter was around 3.17%. And so what we're seeing at the margin is continued modest decline in them here through the course of the balance of this year from that 3.17% normalized Q2 run rate down to the 3% by the end of the year. And I agree with your point which is as you get into the early part of next year, a lot of the kind of major trends starting to stabilize and it's really not incremental fundamental what the underlying is. Likely, there will be some potential continued trends in the very early part of '24 but I agree with your point. I would also note that for us during the quarter, the reduction in the negative carrier from hedges will incrementally help obviously do the course of the year again.

Steven Alexopoulos

Right for some tailwinds there, okay. And then for Steve, so the equity market seems to be coming around to this possibility of the soft landing. I'm curious, when you talk to your customers, what are you hearing? Are they coming around to the soft landing and maybe a little more optimistic what are you hearing.

Steve Steinour

Steve, I would say our customers generally are having a good year and expect to close out with the good year. They're working their margins through expenses but inflation seems to be a big and the supply chain is in better shape. Clearer line sites to this half and they're optimistic about '24 and beyond generally. So this would suggest at worst-case soft landing and potentially the ability to avoid a recession. In the Midwest, particularly our footprint, we still have a lot of economic activity, announcements of investments, targeted growth. So we're in a good position relative to some of the other regions and we have significant activity going on that I think we'll see particularly here in Ohio through the course of this year.

Operator

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

Ebrahim Poonawala

Just wanted to go -- spend some time on the expense outlook. I think you've done a lot of work year-to-date, the project actual rate that you talk about. In fact, I think you said the goal is to keep expense growth low for next year. Maybe give us a sense of the size of the BPO opportunity that you talked about? And how do you think about positive operating leverage going into next year given NII growth will likely be down. What's around that?

Zach Wasserman

Yes. Great question, Ebrahim. Thanks. So maybe framing the overall [indiscernible] 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 and setting up those programs and can implement them effectively and have to build over time. On the BPO opportunity, this is something that we have leveraged over time for a while and continually looking at from a strategic perspective, what functions that we really believe must be owned or the critical value for the real by Huntington versus those that we can benefit from the scale capabilities of partnering [ph]. The more we need in to analyze that, the more we're encouraged there are incremental opportunities. Relatively modest in terms of size this year but building over time. And I think really part of the portfolio of efficiency programs that will support that low level of '24 and frankly, to continue to build into '25 and beyond also. So it's encouraging to get part of the portfolio of programs with something that we're incrementally leading in now to be able to accelerate the benefits of.

On positive operating leverage, as we've said a lot, it's a core tenet of our operating plans, one of the 3 major financial targets we set for ourselves, it's something we take very seriously. Of course, we're managing the company for the medium term to really generate value and want to make sure that we're not doing anything in the short term that we've damaged that long-term growth trajectory. Too early to say what '24 will look like. I think you'll clearly have a grow over on revenue that will pressure revenue growth but we're also very encouraged with the opportunity to keep expense growth low. So not going to give guidance at this moment. I still think it's within the major reason that we're going to drive order.

Steve Steinour

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

Ebrahim Poonawala

Understood. And any updated thoughts? Steve, you talked about building capital but at the same time, you've 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?

Steve Steinour

Well, our focus, as you know, is always to grow the core of the business. We've got a lot of opportunity to do that in front of us. And as the regulatory expectations around capital and liquidity, et cetera, get established, I think we're going to be in a very strong position to [indiscernible] that in an even more robust fashion. We're trying to get positioned for that now. the outlet, as you saw last year, there are a few businesses that were attractive. I suspect we'll find some additional ones at some point in the future. But we believe we've got a lot of opportunity at hand. There's nothing pressing in terms of pushing or needing to push for M&A now. And so we're very, very focused on driving the core.

Operator

Our next question comes from the line of Scott Siefers with Piper Sandler.

Scott Siefers

Steve or Zach, kind of conceptually, maybe when you think about the 40% cumm-beta [ph], maybe just a thought or two on the major puts and takes when you think about that being the right number for you all. You guys are in a very competitive market but I think it's clear within like the last month or so, especially that the deposit flows are there. So, I guess I'm just curious what you're seeing in terms of competitive dynamics? What sort of makes that the right number to land on it?

Zach Wasserman

This is Zach, I'll take that one. We -- all of the trends and forecasts that we're creating and as I noted in the prepared remarks, pretty rigorous multiple scenarios underlying that continue to corroborate that. So we feel like it's a good forecast. As always -- I always know the best forecast we've got, we'll share an update on if ever that pass. But our focus has been pretty stable around that level for a while now and the kind of underlying monthly trends continue to cooperate. But just double-clicking into the drivers, I would say, one, we're seeing 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 will be less than that we go to Q3, clearly and then kind of topping out into Q4. So that's why we're just sort of seeing a declining trend all be increasing.

The other thing is the mix shift from noninterest-bearing into interest-bearing is occurring fairly well like we would expect it to in the cycle and that lifeline is decelerating. And most of that mix shift has happened at this point. And we're already going to see the signs of that again kind of buildup and corroborate to that 40%. On the competition side, it's a competitive environment. But to your point, the deposits are there. And I think it's what's encouraging is it's very rational. And I think that given decelerating loan growth throughout the industry and for us, that's the kind of escape valve and pressure which is allowing us to manage pretty well here according to our plan. So overall, still in the right forecast.

Operator

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

Erika Najarian

My first question is actually a clarification one, your 40% to the data, the unfold deposits, correct?

Zach Wasserman

That's correct.

Erika Najarian

Yes. Because a lot of your peers gave it on interest-bearing. So I just wanted to make sure that just touted that one, Scott was asking that question. And my real question is, I think the market really close sort of the expansion of the net interest income outlook. Could you tell us about how you're thinking about the elasticity of deposit license on the way down? I think to your point earlier, Zach, there are a lot of investors that are thinking about where you cut for next year. And they're wondering how much power do banks have price down if rates stay at a relatively high level versus what we've seen in a while?

Zach Wasserman

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

Erika Najarian

Got it. And just as a follow-up to that, if I may. You're holding a lot of cash. And obviously, there's not a lot of motivation to deploy that. Again, as we think about next year in the same scenario, you're still going to be earning a lot of your cash on your cash flow 0% risk weight if the Fed moderately. And I guess outside of better loan growth, Zach, what would be the factors for you to normalize, start normalizing that cash to a level that's more appropriate? Or do you feel like with all the liquidity rolls down the pipe, you might as well just hold it there for now since you're getting paid for it anyway?

Zach Wasserman

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

Operator

[Operator Instructions] Our next question comes from the line of Ken Usdin with Jefferies.

Ken Usdin

Is that just a follow-up on your NII '24 comments. And if you talked about earning asset growth. I'm just wondering if your balance sheet has been elevated this quarter a good amount. And I guess are you expecting as you look out further that deposit growth will continue to carry the overall balance sheet side forward? And kind of, I guess, how do you think about the wholesale funding part of the equation as a balancing act on that?

Zach Wasserman

Yes, terrific question. Broadly speaking, the answer is yes. So I believe that we will rate loan growth in line with deposit growth for the most parts. And I think that's what we'll see here in the back half of this year. That's my expectation what the trend is to 2024 as well. I tend to see a pretty stable but slightly lower the loan-to-deposit ratio here over the next couple of quarters. And just fundamentally match funding making sure we can one of those fundamental underlying factors that allows us to manage the deposit beta and the marginal margin that we're getting up on the loan as I noted earlier. So it's an important dynamic. 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, in 3 quarters of the innings and a pretty favorable position where we saw really attractive loan opportunities, we could, in fact, fund them with noncustomer sources of funding and increase loan-to-deposit ratio but as not the default position for now. I think we're now, I think, getting loans and deposits growing at a pretty similar rate. It's quite healthy and a good balance for us.

Ken Usdin

Okay. And a follow-up, can you try to help us understand how the benefits from the security swaps look this quarter? And then as you go forward into next year, just your loan hedges, does that become a part of the benefit next year in terms of getting that NII starting to move the right way?

Zach Wasserman

Yes, it does. Great question, Ken. Let me elaborate on that. So up through the only part of Q3, inclusive of activities we've done in the first few weeks of this quarter, we've got around $29 billion of downgrade hedge protection through -- received fixed swaps it's around $21 billion, $22 billion. We've got some floor spreads which pay off under downgrade scenarios and then a portfolio of collars which will the option to enter into received fixed swaps in the future. And likely will, if rates continue to trend generally what they're expected to. So it's a pretty powerful portfolio that both extent now and even more than will be extent over the coming 6 to 12 months as we enter into those color-based RSG fixed loss.

The impact, obviously, I mean, the challenge in hedging right now is that with an inverted yield curve and by me, with a fairly steep decline already forecasted, you've got some pretty dire downgrade scenarios to convince yourself that makes sense to incrementally entree things right now, given that they carry right now. What we are experiencing in the P&L at this moment is about 15 basis points of negative NIM drag from the receipt fix that we're already in. And that will go into essentially 0 by the end of 2024, if you follow out the forward yield curve scenarios. So that's 15 basis points of tailwind which we should see between now and the end of '24, fairly ratable clawback throughout that period.

Operator

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

Jon Arfstrom

A couple of credit questions. First of all, congratulations -- congratulations, Rich, on your retirement. Done a great job and I've enjoyed your perspective on these calls. Commercial real estate and consumer question. So on commercial real estate, how far ahead can you guys look in terms of identifying future issues? I know it's been a focus for you guys to tighten things up. But curious what you're doing now and it obviously looks very clean but you have a fair amount of reserves allocated to the business and that's kind of why I ask.

Rich Pohle

Yes. We're looking -- we're focused primarily right now on the 2023 and 2024 impacts. And it's really hard to look much further beyond that. So we're doing quarterly portfolio reviews in office. We're touching the real estate book every month. I think we've probably gone through 90% of the loans over $5 million in that book at this point. But the focus is on '23 and '24 and managing what we can control and that really relates to the maturities. And then particularly with respect to office, the lease rollovers that might be impacting cash flow in this year and next. So that's the primary focus. Beyond that, it's tough. You mentioned the 9% reserve. We've got against softness. We've got a 3.4% reserve against overall prebook. We feel for what we know right now, both of those are adequate and we'll continue to look at those on a quarter-by-quarter basis.

Steve Steinour

Jon, Rich is also with the team getting long rebalanced wherever there appear to be issues that are proactive efforts to try to get those addressed paydowns [indiscernible]; almost of the efforts -- the primary focus is '23 '24. But there's also a long view full view of the portfolio over the next decade 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 any issues may occur at this point to put in really good shape.

Jon Arfstrom

It seems that way. Okay. And then on consumer, I look at this every quarter, just your nonaccruals and charge-offs and it's just kind of -- it's nothing really. Maybe it goes to the soft landing comments but you look at RV marine consumer categories, delinquencies really haven't budged. Are you seeing anything in consumer health that bothers you at all because it's just -- these numbers are really, really good.

Rich Pohle

No, the numbers are really good. And I think it goes to the client selection and just the focus that we've got on prime and super prime. If you look across the entire consumer spectrum. There's really nothing in there that would lead you to believe that we're going to have anything more than just a gradual return what might be more normalized levels of charge-offs. Because right now, to your point, they're running extremely low. The only area that I would point out that's a little bit relatively higher stress than the rest of the book is and that's because of the floating rate nature of that portfolio. So it's going to lead to a little higher level of delinquencies than you might see across the book but the analysis that we've done from a vintage standpoint, on that book show that we're in the 55% to 60% loan-to-value range. So even though we might see higher levels of delinquency. We don't think the losses will follow.

Steve Steinour

Housing markets are generally tight where we are, John. So if someone has -- and unemployment is very low. So if someone has an issue, the best resolution is to sell a property, unlike what we might have seen in '08, '09 or prior [indiscernible]. Just to give Rich a little credit here and recognition. We've been at an effort to outperform our peers for over a decade with this aggregate moderate to low risk profile and he's been very, very disciplined about that. And we expect to outperform through the cycle. We've been sharing that all along. At this point, really, really good in that regard and a tribute to all my comments especially Rich and his leadership.

Jon Arfstrom

Yes, I agree. Steve, I was thinking you could give them a fishing boat or an RV out of the foreclosure pull there's anything to give.

Steve Steinour

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

Jon Arfstrom

Just to clean up for you, Zach. The $60 million to $50 million on the Capstone, Torana. What drove that? I know it's small $10 million but what happened there?

Zach Wasserman

Yes. And Julie, that's reflective of -- the cost that we see in that previous $60 million was mainly Capstone and has a factor of production and revenues that flow through into compensation expense. And so when capital markets revenues were a bit softer in the second quarter, our outlook somewhat lower than was originally budgeted into the back half of the year, so proud which is less flow through into less cost. That's basically it.

Jon Arfstrom

Okay. And then the $30 million FDIC, that's all in the third quarter. Is that correct?

Zach Wasserman

So let me clarify that it's really important one. That FDIC expense that we talked about in that guidance is the 2 basis points higher assessment that is being assessed across the industry and that was known late last year and it's coming through every quarter. It's not the special assessment that's still being discussed.

Operator

Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Steinour for any final comments.

Steve Steinour

Well, thank you very much for joining us today. We're very pleased with the second quarter results as we dynamically manage through this unique environment. As you heard, we're very well positioned for times such as these with strong credit quality, improving capital ratios and robust liquidity. The deposit, both in particular in strangler nature has served us very, very well as head of our efforts to provide customer service and generate great satisfaction over the years. And we have a team of disciplined operators and we are executing our strategy that we outlined last year at our Investor Day which provides are driving value for our shareholders. And just as a reminder, the Board of Executives and our colleagues were all top 10 shareholders collectively. So that reflects a strong alignment with our shareholders and I think you're seeing the benefits of that through our results. So thank you for your support and interest in Huntington and have a great day.

Operator

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