Zachary Wasserman
Senior Executive Vice President, Chief Financial Officer at Huntington Bancshares
Thanks, Steve and good morning, everyone. Slide 6 provides highlights of our third quarter results. We reported GAAP earnings per common share of $0.35 and adjusted EPS of $0.36. The quarter included $15 million of notable items which impacted EPS by $0.01 per common share. Return on tangible common equity or ROTCE came in at 19.5% for the quarter. Adjusted for notable items ROTCE was 20%, further adjusting for AOCI underlying ROTCE was 15.3%.
Average deposits grew during the quarter, increasing by $2.6 billion or 1.8%. Loan balances decreased by $561 million or 0.5% of 1% from Q2, driven both by seasonality and our continued optimization. Net interest income on a dollar basis expanded quarter-over quarter driven by a rising net interest margin. We continue to proactively manage expenses and have begun a new set of incremental actions in the third quarter, including branch consolidation, staffing efficiencies, and corporate real estate consolidations. These actions coupled with our ongoing long-term efficiency programs as well as the measures we implemented in Q1 of this year will help us drive rigorous baseline expense efficiency while sustaining capacity for investments in the franchise. Credit quality remained strong with net charge-offs of 24 basis points and allowance for credit losses of 1.96%. Return on capital was robust, driving capital accretion with reported CET1 now above 10%.
Turning to Slide 7. As I noted, average loan balances decreased 0.5% of 1% from Q2, driven primarily by lower commercial loan balances, which decreased by $1.2 billion or 1.7% from the prior quarter. On a year-over-year basis average loans increased 3.3%, reflective of our intentional optimization efforts. Primary components of the commercial loan change included CRE balances, which declined by $387 million driven by pay-downs. Distribution finance decreased $434 million due to normal seasonality with lower dealer inventory levels in the third quarter before the expected inventory build in the fourth quarter. Asset finance decreased by $271 million. Auto floor plan increased by $122 million. All other commercial categories, net, decreased as we continued to drive optimization towards the highest returns. In Consumer, growth was led by residential mortgage and RV/Marine, while auto loan balances declined for the quarter.
Turning to Slide 8. As noted, we continued to deliver consistent deposit growth in the quarter. Average deposits increased by $2.6 billion or 1.8% from the prior quarter.
Turning to Slide 9. We saw sustained growth in deposit balances in the 3rd-quarter including sequential increases during July, August, and September continuing the trend we have seen previously. Importantly, core deposits represented the entirety of the deposit growth for the quarter with broker deposits declining quarter-over quarter.
Turning to Slide 10, non-interest bearing mix-shift continues to track closely to our forecast with the deceleration of sequential changes that we would expect at this point in the rate cycle. The non-interest bearing percentage decreased by 120 basis points from the second quarter and we continue to expect this mix shift to moderate and stabilized during 2024.
On to Slide 11 for the quarter, net interest income increased by $22 million or 1.6% to $1,379 million, driven by expanded net interest margin. We continued to benefit from our asset sensitivity and the expansion of margins that has occurred throughout the cycle with net interest income growing at 9% CAGR over the past two years. Reconciling the change in NIM from Q2, we saw an increase of nine basis points on a GAAP basis and an increase of 10 basis points on a core basis excluding accretion. The drivers of the higher NIM quarter-over quarter were higher spread net of refunds, lower Fed cash balances versus the prior quarter and higher FHLB stock dividends in the quarter.
Interest rates rose during the quarter, particularly at the longer end. And as we expected that drove a net benefit to NIM. In addition, our optimization efforts across both loan growth and funding mix continues to perform very well. These factors resulted in the margin coming in better than we had expected when we shared our outlook in July. We continue to analyze multiple potential interest-rate scenarios. The basis of our planning and guidance continues to be a central set of those scenarios that is bounded on the low-end or the forward yield curve and at the high-end by a scenario the projects rates stay higher for longer. The higher for longer scenario today assumes one additional rate increase in 2023. Flat Fed funds through October of '24 and ends 2024, approximately 75 basis points higher than the forward curve. With the move-in rates higher, we now anticipate net interest margin for the fourth quarter to be around 305 basis points to 310 basis points. This is five basis points to 10 basis points higher than the level we shared previously. Looking further out, our modeling continues to indicate 2024 NIM trending flat to higher from the Q4 '23 endpoint.
Turning to Slide 12. Our cumulative deposit beta through Q3 was 37% up five percentage points from the prior quarter tracking closely to our expectations. Sequential increases in beta are slowing quarter-over quarter as we have forecasted as the interest-rate cycle nears or hits its peak. As we have noted in the past our beta ultimately tops out will be a function of the end game for the rate cycle in terms of the level and timing of the peak, the duration of any extended pause before a decrease. Given the outlooks for possibly a higher peak and very likely a more extended pause than was the case three months ago, our current outlook for deposit beta is to trend a few percentage points higher than our prior guidance of 40%. We will have to see how the rate environment plays out into 2024 to know with certainty. What is critical in our view is to ensure we continue to manage both deposit and loan pricing exceptionally rigorously, drive asset yields higher, deliver solid incremental returns, and deliver a better overall NIM from the higher for longer rate environment as a result.
Turning to Slide 13 and expanding on my point on loan yields. The construct of our balance sheet is approximately half fully variable-rate. 10% indirect auto, which has a shorter approximately two-year duration fixed product, 10% in arms with a five-year duration and the remainder of approximately 30% is longer duration fixed. This mix contributes to the asset sensitivity of our overall balance sheet and has helped us to benefit significantly from the current rate cycle. We are seeing solid increases in fixed asset portfolio yields. Given the higher for longer rate environment, we expect to continue to benefit from this fixed asset repricing going forward supporting the higher NIM outlook.
Turning to Slide 14, our level of cash and securities was down slightly from the prior quarter as we lowered some of the elevated cash we've been holding in Q2. During Q3, we did not reinvest securities cash flows and the securities balance moved modestly lower as proceeds were held in cash given the attractive short-term rates. We're managing the duration of the portfolio lower continuing our management approach since 2021.
Turning to Slide 15, our contingent and available liquidity continues to be robust at $91 billion and has grown quarter-over quarter. At quarter-end, this pool of available liquidity represented 204% of total uninsured deposits a peer-leading coverage.
Turning to Slide 16, we continue to be dynamic in adding to our hedging program during the quarter. Our objectives remain twofold, to protect capital and operate scenarios and to protect NIM in downright scenarios. The most substantive increase was an addition to our forward-starting pay-fixed swaps and strategy, which increased by $5.9 billion during the quarter to $15.5 billion total. This program is intended to protect capital from tail risk in substantive upgrades scenarios and once again benefited us as rates moved higher in the quarter. We also added $2 billion in collars to support our NIM against longer-term down rate scenarios.
Moving on to Slide 17, GAAP non-interest income increased by $14 million or 2.8% to $509 million for the third quarter. Excluding the mark-to-market on the PF swaptions fees were relatively stable quarter-over quarter. On an underlying basis compared to the second quarter, we saw increases in deposit service charges, including higher payment-related treasury management fees. This growth was largely offset by lower capital markets fees.
Moving on to Slide 18, we're seeing encouraging an sustained underlying trends across our three areas of strategic focus, for-fee revenue growth. Capital markets, which has grown by a 19% CAGR over the past six years benefits from a broad set of capabilities, bolstered by Capstone. While 2023 has certainly been a challenging environment for capital markets activities in both advisory and several credit-driven products, forward pipelines with an advisory are solid and we continue to foresee this as a primary contributor to fee revenue growth over the moderate term.
Our payments businesses represent one of the biggest opportunities for both relationship deepening and revenue growth across both treasury management and card categories. In Wealth Management, we see a great opportunity to increase the penetration of the offering across our customers leveraging our number-one ranking for trust, as we grow advisory relationships and drive higher managed assets with recurring revenue streams.
Moving on to Slide 19 on expenses. GAAP non-interest expense increased by $40 million and underlying core expenses increased by $25 million. As I mentioned, we incurred $15 million of notable item expenses related to the staffing efficiency program and corporate real estate consolidations. Excluding these items, core expense growth compared to the prior quarter was driven by higher personnel, occupancy, professional services and consisted of smaller items within all other expenses. We have taken proactive actions throughout the year to support the low-level of core underlying expense growth we have delivered. In the first-half of the year, we executed on a voluntary retirement program organizational realignment moving from four revenue segments to two and 31 branch consolidations.
Now, in the third quarter, we're taking another set of incremental actions. We are accelerating the implementation of our business process offshoring program and we're creating efficiencies throughout the organization with the goal of prioritizing resources for the largest growth opportunities in the near-term. We're also driving incremental saves in our corporate real estate footprint as well as implementing another set of branch consolidations with 34 plant closures, early next year. These actions demonstrate our commitment to disciplined expense management and will support the continued investment into critical areas of the company to drive long-term value. As we manage expenses, we're balancing both short-term investment and revenue growth with the longer-term opportunities we know are in front of us.
Slide 20 recaps our capital position. Reported common equity Tier-one increased to 10.1% and has increased sequentially for four quarters. OCI impacts to common equity Tier 1 resulted in an adjusted CET1 ratio of 8%. Our capital management strategy will result in expanding capital while maintaining our top priority to fund high-return loan growth. We're actively managing adjusted CET1 inclusive of AOCI, and expect to drive that ratio higher over the course of 2024.
On Slide 21, credit quality continues to perform very well with normalization of metrics consistent with our expectations. As mentioned, net charge-offs were 24 basis points for the quarter and while higher than last quarter by eight basis points are tracking to our guidance for full-year net charge-offs between 20 basis points and 30 basis points. This level continues to be at the low-end of our target through-the-cycle range for net charge-offs of 25 basis points to 45 basis points.
As previously guided, given ongoing normalization nonperforming assets increased from the previous quarter and the criticized asset ratio increased with risk rating changes within commercial real estate being the largest component. Allowance for credit losses is higher by three basis points to 1.96% of total loans and our ACL coverage ratio is amongst the highest in our peer group.
Let's turn to our outlook for the fourth quarter on Slide 22. We forecast loan growth of approximately 1% in the fourth quarter, which would put full-year loan growth at approximately 5%, matching the lower-end of our prior range. Deposits are likewise expected to grow in the fourth quarter by approximately 1%. Core net interest income for the fourth quarter is expected to decline between 4% and 5% from Q3 before expanding throughout 2024 from that level. Non-interest income on a core underlying basis is expected to be relatively stable. Expenses are expected to increase between 4% and 5% into the fourth quarter, primarily driven by revenue-related expenses associated with the expected growth in capital markets, a seasonal increase in medical claims and sustained investment in new and enhanced capabilities. We expect net charge-offs for the full-year to be near the midpoint of the 20 basis points to 30 basis points guidance range.
Finally, let me close on Slide 23, with a few thoughts on our management priorities for 2024. We're still finalizing our budget for next year, and as always, we look to share more specific guidance during our January earnings call. First and foremost, we are committed to driving continued capital expansion. While we continue to optimize the lending growth to drive the highest returns. As Steve mentioned, we're playing from a position of strength and we expect to maintain our position as we get ahead of proposed capital regulations and phase-in periods.
Related to deposits, we're continuing to acquire and deepen primary bank customer relationships. This should result in continued growth of deposits into next year, while supporting our disciplined management of deposit beta. Given the expected higher for longer rate scenario, we will continue to position the balance sheet to remain modestly asset-sensitive, which will support the margin and we expect will deliver growth in net interest income dollars on a full-year basis. Non-interest income remains a critical focus for us with sustained execution on three primary strategic areas for-fee revenue growth capital markets, payments and wealth management. Over the medium-term, we expect non-interest income has the potential to grow at a rate more quickly than both loans and spread revenues given the opportunities for these fee businesses. As I mentioned on expenses. We have taken considerable actions to hold baseline expense growth to a low-level. This is focused on sustained efficiencies including operation accelerate, business process offshoring, and the other actions will yield multiyear benefits. These actions are necessary to allow for the continued investment into new and enhanced capabilities, which will set-up growth over the course of the next few years.
We expect the net result of these actions for 2024 will be an underlying growth rate of core expenses somewhat higher than the level we saw in 2023. Our current working estimate is underlying expense growth of approximately 4% compared to the approximately 2.5% level, we were running in 2023. We believe this level of expense management is the right balance to position the company to operate within the current environment and sustain our momentum into 2025. We will also maintain our rigorous approach to credit management, consistent with our aggregate moderate-to-low risk appetite.
Finally to close, we believe we are exceptionally well-positioned to proactively stay ahead of the evolving environment. We will be dynamic and address these numerous topics head-on and over-time, we believe this will result in opportunities to benefit substantially in the coming years.
With that, we will conclude our prepared remarks and move to Q&A Tim, over to you.
