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Greetings, and welcome to the Huntington Bancshares First Quarter 2026 Earnings Call. Operator provided instructions. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Eric Wasserstrom, Director of Investor Relations. Please go ahead.
Thank you, operator, and good morning, everyone. Welcome to our first quarter call. Our presenters today are Steve Steinour, Chairman, President and CEO; and Zach Wasserman, Chief Financial Officer. Brant Standridge, President of Consumer and Regional Banking; and 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 and copies of the slides we'll be reviewing are available on the Investor Relations section of our website, which is www.ir.huntington.com. As a reminder, this call is being recorded, and a replay will be available starting about 1 hour after the close of the call. With that, let me now turn it over to Steve.
Thanks, Eric. Good morning, and thank you for joining us. We delivered an outstanding first quarter by all measures, driven by disciplined execution across the franchise that is translating into strong profitability and returns. The essential question that we, our peers across the industry and our customers all face in this moment is about the outlook for the economy. So let me open with our perspective. We're operating in a dynamic global environment with geopolitical developments adding complexity to the outlook. We're watching these factors closely. And currently, we characterize conditions across our footprint as remaining consistent with prior quarters. We see broad-based strength across commercial end markets. Our clients are taking a thoughtful long-term approach to decisions, and we're not seeing any signs of a material shift in underlying demand. The consumer story is a bit more mixed with middle and upper income consumers continuing to spend in a manner supportive of the overall economy, while lower income households continue to feel pressure from the cumulative impacts of inflation. Importantly, these factors do not change our outlook for performance this year. We delivered a strong first quarter. Pipelines for the second quarter are healthy and customer activity continues to be steady. What differentiates Huntington in this environment is the flexibility and resilience of our operating model. We are a well-diversified superregional bank supported by strong capital, liquidity and credit fundamentals, and we are well positioned to perform in a range of scenarios. As we look ahead, we believe the firm is approaching an inflection point where strong core performance, combined with the benefits of our new partnerships, will drive higher returns and accelerate our earnings and tangible book value growth. There are 5 key messages I'd like to leave with you. First, we operate a differentiated super regional bank model with multiple growth engines, and that model is working exceptionally well. We've continued to invest in strategic areas, including our Carolinas expansion, the build-out of our vertical specialty businesses, partnerships with Cadence and Veritex and the Janney and TM Capital acquisitions, which will support durable earnings generation for years to come. Second, our core continues to perform very well. Organic growth remains the foundation of our strategy with strong performance across our businesses and geographies and standout results in value-added fee services, including record capital markets performance in the first quarter. Third, our balance sheet, grounded in our aggregate moderate to low risk appetite provides us the confidence and flexibility to perform well in an uncertain future. We have very strong liquidity as well as good capital and reserves and remain vigilant in our outlook. Consistent with this, we made the decision to temporarily build additional liquidity, improving our already peer-leading liquidity position. Fourth, our partner integrations are on track to deliver expected cost and revenue synergies from Veritex and Cadence, and we remain excited about the extraordinary growth opportunities we continue to see in our core and across Texas and the South. We also successfully integrated the Janney and TM Capital acquisition, which became accretive within 3 months and contributed to a record quarter for our capital markets businesses, reflecting strong execution by the team. And fifth, our earnings power generates significant capital, grows tangible book value and supports consistent shareholder returns. That strength enables us to reinvest in the franchise while returning excess capital in a value-creating way. We bought back shares in Q1 and continued buying quarter-to-date. Turning to Slide 4. On an adjusted basis, we generated 9% earnings per share growth, 36% PPNR growth and 9% tangible book value growth. Importantly, over the last 5 quarters, we have consistently delivered ROTCE at the target range we set at our 2025 Investor Day of 16% to 17% on a rolling 12-month basis. Building on that performance, we raised our ROTCE target to 18% to 19%, driven by expected synergies from our partnerships, growth in high-return value-added services as well as continuing capital return. We remain confident in our ability to deliver that level of profitability in 2027. Slide 5 highlights the strength of our balance sheet. Our liquidity, capital and credit profile put us in a position of strength to deliver consistent performance across a wide range of operating environments. Liquidity is a clear point of differentiation. We added cash to our balance sheet this quarter and available contingent liquidity now represents approximately 173% of uninsured deposits. 69% of our total deposits are insured, and our unmodified liquidity coverage ratio is 118%. All of these metrics are well above peer median. Capital remains strong. Our adjusted CET1 ratio is well above regulatory minimums and within our 9% to 10% operating range. We expect Basel III Endgame to be beneficial to our regulatory capital position. As you know, we manage credit with rigor and conservatism. Our reserve levels remain well above peers, while net charge-offs continue to trend well below the peer median. Taken together, this balance sheet strength enables consistent performance throughout economic cycles and the ability to selectively capture organic growth opportunities. Turning to Slide 6. We remain exceptionally focused on disciplined, rigorous execution of the integration of our partnerships, which is proceeding very well. Importantly, our core business continues to perform at a very high level as we execute this integration. Dedicated integration teams are operating with clarity and discipline across 3 priorities: First, welcoming new colleagues and customers into the franchise. This includes aligning regional leadership, expanding specialty banking and targeted fee capabilities and successfully onboarding over 6,000 new colleagues and 1.5 million new customers. Second, executing the operational and systems integration is advancing on schedule. The Veritex conversion was completed in the first quarter, and we're on track for the Cadence conversion in June. And third and most exciting, we are delivering the expenses and revenue synergies we've committed to. Cost initiatives are tracking on schedule, and we're already seeing revenue benefits as customers adopt more of the Huntington platform, particularly through deeper engagement across capital markets and payments, increased card usage and new consumer account openings. Because of this focus on realizing the synergies, combined with the continued outstanding performance of our historical core, we are approaching an inflection point where execution will compound earnings power and higher returns, engaging our flywheel that drives powerful long-term value creation. And with that, I'll turn it to Zach to discuss the quarter's financial results in detail.
Thank you, Steve, and good morning, everyone. Turning to Slide 7, I'll cover our financial performance. We delivered another quarter of exceptional execution and profitability in Q1, reflecting strong underlying performance across the franchise. For the quarter, earnings per common share was $0.25. On an adjusted basis, excluding acquisition-related expenses and other notable items, EPS was $0.37, up 9% year-over-year. Growth was driven by strong organic execution across the company and contributions from recent partnerships. That performance translated into higher net interest income and strong fee revenue generation. Fee revenues were a particular bright spot for the quarter, exceeding our plan and reflecting strong customer activity trends across the businesses. We also managed our expenses with discipline, targeting baseline efficiencies and continuing investments to drive future revenue growth initiatives. Pre-provision net revenue increased 36% on an adjusted basis. Cadence and Veritex were not included in the prior year quarter, and their addition meaningfully increased average balances and revenue. Overall, the quarter demonstrated our ability to drive strong organic growth while simultaneously integrating our recent partnerships and executing against our cost and revenue synergy objectives. I'll review the drivers of this performance in detail on the next several pages. Turning to loan growth on Slide 8. We delivered solid organic momentum again in the quarter. Excluding the addition of Cadence, on an end-of-period basis, loan balances increased 1.5% or $2.2 billion, reflecting solid fundamental performance across the franchise. Organic growth was driven by continued strength in our core markets and commercial verticals. Within commercial, we saw meaningful contributions from our corporate specialty banking verticals, including financial institutions, tech and telecom and industrials as well as growth from asset finance and middle market banking across both legacy and new geographies. Overall, our first quarter performance demonstrates consistent organic execution, highlighting the durability and breadth of our multiple growth engines and supporting continued earnings expansion. Turning to deposits on Slide 9. We delivered solid deposit growth while maintaining disciplined pricing. On an end-of-period basis, excluding Cadence, core deposits increased $3.8 billion or 2.3% quarter-over-quarter, driven by continued growth in primary banking relationships in both consumer and commercial. This reflects our sustained focus on relationship-led deposit gathering. Cadence deposits contributed materially to growth this quarter, and we intentionally optimized select acquired funding categories, consistent with our plan and prior guidance. Overall, our deposit strategy continues to support revenue growth and provide robust core funding for organic loan growth. On to Slide 10. Turning to net interest income. We delivered strong dollar growth and continued margin expansion in the first quarter. Net interest income increased $301 million or 18.7% sequentially and was up 33% year-over-year. Net interest margin was 3.24%, up 9 basis points from the prior quarter. The increase in NIM was driven by lower funding costs, reduced hedge drag and purchase accounting, partially offset by lower free funds benefit and higher Fed cash balances. As Steve mentioned, during the quarter, we elected to add approximately $4 billion of higher cash balances at the Fed to further strengthen our liquidity profile. This has a negligible impact on revenues. However, the denominator effect of holding higher cash will reduce the reported NIM calculation. I'll cover this in more detail in our guidance outlook. Moving to fee income on Slide 11. We had an absolutely outstanding quarter of fee income generation. This performance reflects continued underlying momentum across our core fee businesses with contributions from both organic activity and recent acquisitions. On an adjusted basis, excluding all acquisition and divestiture activity this year and last, fee income grew 18% year-over-year. Payments revenue increased 21% year-over-year, supported by continued client activity and product penetration. On an organic basis, excluding the impact of acquisitions, overall payments grew approximately 10%, primarily driven by growth in commercial payments. Wealth Management revenue grew 19%, driven by ongoing household acquisition and positive assets under management net inflows. Excluding M&A and the impact of lower revenue from our corporate institutional custody and trust business, underlying growth was approximately 10%, reflecting strong and broad-based client engagement. Capital Markets delivered its strongest revenue quarter on record and beat our initial plan with broad-based contributions across loan syndications, advisory, debt capital markets, fixed income sales and trading and rate hedging as well as the inclusion of recently acquired capabilities. This was a truly phenomenal quarter of performance for our capital markets teams, with revenue, excluding the impact of all acquisitions, growing nearly 60% year-over-year. Loan and deposit fees also continued a trend of robust growth, supported by our commercial lending activity. These fees were up 28% year-over-year, driven by strong loan commitment fees. Excluding acquisition-related impacts, loan and deposit fee growth was approximately 18%. Moving to expenses on Slide 12. On a normalized basis, excluding onetime costs and the impact of absorbing Cadence's expense base as well as Janney and TM Capital, operating expenses increased just $20 million sequentially. This reflects continued cost discipline and ongoing expense reengineering, which are core elements of our value creation flywheel. These efficiencies are supporting sustained reinvestment in the business while also enabling delivery of strong positive operating leverage, which was 220 basis points this quarter on a trailing 4-quarter basis, excluding onetime items. And to provide more detail on a very important area of investment for a moment, we have a comprehensive enterprise-wide AI program underway that is gaining momentum and already contributing to productivity and efficiency across the company. We're applying AI in 5 key areas. The first is in technology, where we're rapidly improving the software delivery life cycle. The second is in agentic process transformation. We're driving efficiencies in major processes throughout the company. The third is in customer-facing use cases, where we're identifying opportunities to embed AI into key products and services going forward. The fourth is in colleague productivity and training, where we're expanding significantly the tool set for our colleagues and increasing their readiness to deploy AI in their day-to-day work. And lastly is in our data and platforms to support future customer-facing capabilities. This investment and activity is disciplined, focused on generating real operating outcomes, and we see AI as an increasingly important enabler of expense efficiency and operating leverage over time. Turning to Slide 13. Our capital position remains strong, supporting organic growth, solid dividend yield and increased capital return through share repurchases. Over the past year, we've increased adjusted CET1 by 30 basis points and continue to manage adjusted capital to our 9% to 10% operating range. Our capital priorities remain unchanged, funding high-return loan growth, supporting our dividend and then all other uses, including returning excess capital to shareholders. As noted at a conference in March, we increased our 2026 share repurchase plans to $550 million. This reflected our expectation of strong capital generation as well as lower-than-expected upfront dilution from the Cadence marks. Year-to-date repurchases have totaled more than $250 million with $150 million in the first quarter and more than $100 million thus far in Q2. In total, that represents retiring approximately 15 million shares. Finally, including our strong capital generation and confidence in our outlook, the Board approved a new $3 billion share repurchase authorization, replacing the prior program. Turning to Slide 14. We are creating shareholder value through disciplined execution as reflected in our ability to consistently generate returns at our targeted levels. Today, we are operating at a return on tangible common equity that is consistent with the 16% to 17% range we outlined at our 2025 Investor Day, demonstrating the strength of our underlying earnings power and the delivery of our commitments. As we complete the Cadence integration and we realize targeted synergies, we are well positioned to further expand returns. This positions the business to increase return on tangible common equity by 200 basis points in 2027 to a range of 18% to 19%. This reinforces the power of our operating leverage, capital generation and disciplined management approach. Turning to Slide 15. Credit performance remains stable and well controlled across the portfolio. Net charge-offs were 26 basis points, reflecting continued strong credit outcomes. Forward-looking credit metrics also remained stable with the criticized asset ratio at 4.3%, well within our historical range. The nonperforming asset ratio was 72 basis points, consistent with our expectations post-merger with the Cadence portfolio. Let's turn to Slide 16 for our outlook for 2026. As we look ahead, our plan is broadly tracking within our range of expectations, and the underlying fundamentals of the franchise remains solid. Organic growth is strong. Cost and revenue synergies are tracking as expected, and the Cadence integration remains firmly on plan. Importantly, we continue to have strong line of sight to 2 important milestones. The first key milestone is our Q4 performance that will fully include the run rate benefits of the cost synergies from both Veritex and Cadence and where we expect to deliver a Q4 efficiency ratio in the mid- to low 54% level, a clarification and improvement from the prior guidance of less than 55%. This is indicative of the significant expense efficiencies we are driving. This reflects our ongoing reengineering of baseline operating expenses as well as the benefits of the cost synergies. As we've noted, Veritex cost synergies will fully be reflected in the run rate in the second quarter with Cadence reaching full run rate in the fourth quarter. The Q4 efficiency ratio will also benefit from incremental targeted cost management actions we're now taking. I'll expand on those more in a moment. The second key milestone is our 2027 earnings per share projection of $1.90 to $1.93 with a return on tangible common equity of between 18% and 19%. We're fully on track to deliver these results. As we update our outlook for this year, the macro environment is certainly more uncertain now. As Steve noted, we're not yet seeing material impacts in our business. However, it is clear our customers across all segments are also watching the environment cautiously. Hence, at the margin, economic growth this year will likely be lower than originally forecasted. Starting with net interest income, we now expect to be at the low end of our guided range. This reflects 2 primary dynamics. First, on loan growth, we're fine-tuning our plan to reflect the current environment and actively manage portfolio mix, and we now expect growth to track closer to the midpoint of our range versus the high end of the range earlier in the year. Second, on funding, we continue to drive strong deposit growth. Q1 was yet again another quarter of approximately 2% sequential growth, and our outlook throughout the remainder of 2026 is for continued strong organic growth. We are consistently acquiring new primary bank customers at peer-leading rates and gathering core funding as we deepen those relationships, supported by highly analytical and segmented pricing management capabilities. The environment continues to be competitive, while also rational and predictable. We expect to hold and improve on deposit costs. However, the improvement we're seeing is modestly less than our prior assumption. This reinforces our focus on optimizing loan growth rather than pursuing volume at the expense of marginal returns. Additionally, as mentioned earlier, we have elected to carry approximately $4 billion of incremental Fed cash, which has no material impact on actual net interest income dollars, but does reduce reported NIM. Putting these factors together, we now expect 2026 NIM to trend into the high 3.20s compared to our prior expectation in the mid-3.30s. 5 basis points of this change is related to the higher Fed cash balances, which reduced the NIM metric with de minimis impact on revenue. Approximately 2 to 3 basis points of the impact is from the combination of asset optimization and deposit costs. As we work through the integration and optimization of the Cadence portfolio, we would also expect some quarter-to-quarter variability in reported NIM, though the full year trajectory remains consistent with this outlook. And as before, we continue to forecast a rising NIM in the back half of this year and further increases into 2027. While these dynamics move our NII outlook to the low end of our range, we're largely offsetting the impact to earnings through 2 factors. First, we're generating outstanding fee income growth. We have made extensive investments in payments, wealth management and capital markets, and our teams are executing exceptionally well. Based on our current pipeline of activity, we're raising our expectations for fee revenue growth by 4 percentage points to 31% to 33%. And second, we are calibrating expense growth with the revenue environment. As we've consistently said, if revenue conditions were to soften, we will modulate expenses accordingly. Against this backdrop, we're accelerating targeted efficiency initiatives and rephasing select investments. As a result, we're tightening our 2026 expense growth range to the lower half of the 32.5% to 33.5% range. Importantly, this is inclusive of higher variable costs from the projected higher fee revenues. All of this will likely result in full year operating leverage that is modestly lower than our initial guidance, and we now expect it to be in the range of 400 to 450 basis points for this year. Importantly, as I indicated earlier, we expect to exit 2026 with a fourth quarter efficiency ratio in the mid- to low 54% level. One last item to call out. Our share count for 2Q will be approximately 2.055 billion shares, including the first full quarter impact from the Cadence partnership. We continue to anticipate share repurchases totaling at least $550 million this year, including the approximately $250 million we've completed year-to-date. Concluding on Slide 17. Our operating model continues to perform, generating strong revenue, earnings and tangible book value growth. This supports the investments we're making in our capabilities, which will enable our long-term competitive vibrancy and substantial value creation we create for shareholders. With that, we'll conclude our prepared remarks and move to Q&A.
Thank you, Zach. We will now take questions. Operator provided instructions.
分析師問答
Operator provided instructions. Our first question is from Jon Arfstrom with RBC Capital Markets.
Just a couple of guidance clarification questions. Zach, can you talk a little bit more about the balance sheet optimization project, just kind of why you're pursuing it, the overall goal, the time line and then how you measure success with the strategy of what you're pursuing?
Yes. Great question, Jon. Thank you. And as I noted in the prepared remarks, what we're doing is a few things really primarily to calibrate against what we see as the economic environment, which continues to be supportive generally of the plan, but at the margin, is a little softer in terms of economic growth outlook. And so it's more realistic for us to forecast loan growth in the midpoint of the range. And as we do that, as you noted, we're looking to further optimize the balance sheet. I would characterize that the strength we're seeing in loan growth is quite broad-based. One area, though, that we continue to see the opportunity to tune lower is commercial real estate, in particular, construction within commercial real estate. So that's a long-term strategic expectation of seeing that reduce as a percent of the overall loan base. And certainly, that's an area that we will optimize further in light of this environment. The other dynamic is clearly we will want to continue to match fund the loan growth with core deposit growth. And my expectation is we will continue to see deposits growing at or above the growth of loans on a sequential basis from here. But clearly, there's an opportunity to calibrate that level and to really make sure we're being very judicious about managing the NIM ultimately as well. So those are really the primary drivers. And as I noted, that will bring NII to the low end of our growth range, offset, however, by stronger fees, lower expenses and a profit-neutral outcome for this year.
Okay. Fair enough. And then there are so many questions to ask here. But I just wanted to ask about the authorization, the $3 billion buyback authorization. Why that size? What's the plan for utilizing that? It's just a big gap between $3 billion and the recently updated $550 million plan?
Yes. Great question, Johnny. This is Zach. I'll take that one as well. A couple of things I would say. Firstly, I think what we're seeing now emerge in the industry as a best practice is to have an evergreen authorization that's extant for a period of time. So part of this is just ensuring that we can have a good functioning program over a multiple year time period. With that being said, I would also highlight that our guidance we've given is for approximately $550 million of share repurchases this year and next year, $1.1 billion to $1.2 billion. So already, you're north of the $1 billion that we had before in terms of an authorization. The last thing I'll say, and we may touch on this with further questions, so I'll be brief. But clearly, Basel III represents an opportunity. And we'll work through what that is over the course of time. But our expectation is that, that would represent additional share repurchase opportunity in 2027.
Operator provided instructions. Our next question is from Erika Najarian with UBS.
I guess this is a two-parter. Zach, could you further unpack the incremental cost actions? I heard you loud and clear that you would always modulate the expense outlook to reflect the revenue environment, but I'm wondering what the incremental cost savings you identified are. And to that end, Steve, we're hearing from some of your smaller peers that they have been able to hire away Cadence producers and have talked about a culture clash. Those firms are obviously your rivals, so I wanted to hear from you about retention.
Great questions, Erika. I'll take the first one, and then we'll pass it over to Brant to take the second one. So in terms of cost efficiencies, look, a couple of things I'd say. One is, and I noted you highlighted in your question, but we really are genuinely very committed to this management of positive operating leverage, delivery of the efficiency ratio improvements that we've talked about for the fourth quarter and into 2027 and continuing this approach of very rigorous, disciplined reengineering of our baseline costs. We've taken out more than 1% of the cost base each year for 6 years in a row. This will be the seventh consecutive year of doing that, but also reinvesting significantly into the business. And so I would characterize what we're doing now is very much tuning. We're bringing the growth of expenses down to the low end of the range. And that's inclusive, by the way, of incremental expenses that will come from higher fee revenues. The baseline kind of tuning action that we did for expenses was about $50 million. And generally, what we look at when we do those kind of things is twofold. One, can we accelerate our efficiency programs? And frankly, we are. What we're seeing is very encouraging momentum, particularly in agentic process transformation. And so we're leaning into that, and we'll see incremental benefit here. The second thing is looking at our overall investment program and seeing where there are valuable but slightly longer payback, maybe less critical investments that we can rephase. And so that's really the approach. Again, pretty marginal in the grand scheme of our overall expense growth this year, but important for us to demonstrate that discipline, and that's the actions we're taking. We don't believe it has any substantive impact on our growth this year or expectations for next year. I'll stop there and turn it over to Brant to address the other question.
Erika, this is Brant. Thank you for the question on talent. First of all, we operate today in a number of markets that are very competitive from a talent perspective. And when you think about a partnership like with Cadence, turnover is something that we expect and plan at some level. And in some cases, it's initiated by us. I would share that overall retention remains very, very strong. We have been successful at retaining leadership, and that's translated to the teams. Our leaders on the ground and our leadership has been very focused from the beginning on communicating and delivering an outstanding colleague value proposition. And it's focused on very fast decisions on talent and/or early on support as we go through the process and providing those bankers with even more capability to serve their customers. I would also note that we've been successful in hiring new talent to support these teams. And you may have saw this week, we made some pretty significant announcements in both Austin and Dallas that support that effort. We feel very good about where we are with talent and our opportunities going forward.
This is Steve. I'll comment over the top, Erika, and maybe pick up a little bit on Jon's question. We're in a position now where we can see a clear line of sight to full expense synergies. Revenue synergies are off to a very good start. These are calibration moves, at least the way we think about them, and we are very confident in our ability to get to our 2027 run rate. We're generating a lot of capital at these return levels, and it will support the buyback complemented by the new capital regulations. In the context of the cost actions, we've always said that as the situation requires some level of adjustment, we'll adjust. While our customers are generally in the same position they were 90 days ago in terms of confidence and activity this year, loan growth has been good. There is increasing concern about the impact of inflation and the consequences of what's going on in the Middle East, so we're trying to be a little more cautious, get ahead of it, and stay ahead of it. We think these are prudent actions in a variety of ways. With respect to our colleagues, we have great people who joined us from Veritex and Cadence. Some of the activities of a couple of these groups are not really in line with our credit philosophy, so there is an adjustment. We are not going to compromise on our credit views, and that creates a bit of friction for some colleagues. Over time this will position us where we want to be with the portfolios as a whole, and these are marginal areas in terms of the overall adjustments. We have a tremendous amount of hiring. We announced some of it this week and there is a fair amount more already in the pipeline, so more to come. We are going to be net investing. We are even more pleased and confident in Texas as the springboard we characterize it to be. The management team and I have been in Dallas and Houston for the last couple of weeks, and we are really excited about what we're seeing there. We are quite optimistic about our future. Thank you, both.
And if I could just ask my second question. And given the stock reaction to begin, I just have to compound this. So first, Zach, could you give us more detail on what the potential RWA deflation is going to be under the revised standardized approach for Basel III Endgame? And just to compound this, I guess I'm scratching my head a little bit. The stock is underperforming the BKX and you essentially told us your earnings outlook is the same. You're still growthy, but you're continuing to balance growth and profitability. You gave us upside on buyback. You connected the Basel III opportunity to the buyback. So again, I'm sorry to compound this question. What do you all think the market is not fully understanding about your story?
Thanks, Erika. And I'll note with humor that I think that was the third question, but I'll take it anyway because it's a great question. In terms of Basel III, the teams continue to dive in and really analyze this. From what we can see at this point, it's fairly constructive, and we're pleased that the proposal is out so the industry can work through it and get to finality with the Federal Reserve. The RWA delta we see at this point under the standardized approach is about 7.7 percent, roughly in the range of a 7.5 to 8 percent reduction in RWA. That should represent approximately an 80 basis point reported CET1 benefit. The drivers of that are the typical categories you’re seeing elsewhere: the mortgage book, retail loans, commercial and industrial, etc. So it’s quite positive. Clearly, more needs to happen before this is finalized and before we have certainty on the implementation date, but it’s very constructive. One thing I will highlight, and we’ve talked about this a lot, is that we already have moved to an internal capital management framework that is inclusive of AOCI. While there will be a phase-in of AOCI on a reported basis, that really won't affect the way we think about capital or our capital management plan. So this is quite a net benefit for us. Presuming the economy remains in a sound position and the outlook stays good, our expectation is this would represent a meaningful opportunity to increase capital distributions, both in the form of share repurchases and dividends, which underlies the point I made earlier. In terms of how the market is valuing the company, a couple of things I would say: we are very frustrated that the fundamentally strong performance of the company is not being reflected in its valuation. That said, we can only focus on what we can control. For us, delivering what we discussed at our last conference between 2025 and 2027 — 30 percent earnings per share growth, an increase of 200 basis points of return on capital to a peer-leading level, and a 53 percent efficiency ratio, which will represent meaningful improvement and repositioning and continue to position the franchise for significant long-term growth — is the plan. We think that as those results are delivered, and importantly by the fourth quarter when you really see the run rate, it will be so manifestly obvious that the company’s valuation can only recover from there.
Operator provided instructions. Our next question is from Manan Gosalia with Morgan Stanley.
Zach, on the NII guide, how much of this is coming from lower spreads on loans and higher deposit costs given that you're competing in basically highly competitive growth markets?
Yes. Thanks for the question, Manan. The revenue outlook is driven by both lower loan growth, which will be nearer the middle of the range rather than the high end we had been tracking to, and a modestly lower net interest margin. I expect margin to trend into the high 3.20% range versus the mid-3.30% we discussed earlier, about 7 to 8 basis points lower. Roughly 5 basis points of that reflects holding higher cash balances, and the other 2 to 3 basis points reflects a slightly lower core NIM from a modestly higher deposit-cost trajectory. We still expect deposit costs to come down, just not as rapidly, and we expect slightly lower asset yields as we optimize. The outcome is a function of both of those factors. Brant may add some color on what we're seeing in deposits.
Yes. Manan, you mentioned deposit competition. Obviously, it's competitive, but we view it as rational, and we're used to competing. The Midwest is one of the most competitive regions from a deposit perspective, and Huntington has been successful for a number of years and, in fact, this quarter. Our focus has been for many years and continues to be on driving primary customer household growth, and we've been able to successfully do that at a rate of 3% to 5% a year for many years. This puts us at the very top of the industry. That top quartile customer growth translates to very strong and leading deposit growth. And with the growth initiatives and efforts in the new partnerships, we have a number of new levers that create opportunity for us. Our new markets and branch expansion in the Carolinas is turning out to be quite successful. In fact, our first seven branches now, in less than a year, have $215 million in new deposits. We've just turned on digital in the South and have done so already in Texas. In the Veritex footprint in the first two months, deposit production is up 30% year-over-year. We ran our first deposit growth campaign in the new Cadence footprint, and we're seeing year-over-year increase in production of 160%. In their commercial bank, we have two new deposit verticals that are contributing significant growth and one very scaled deposit vertical that continues to grow. So it is competitive. We're watching it very, very closely, but we have a number of levers that allow us to continue to expand our deposit base with the foundation of growing new customers.
Got it. That's great. And then as my follow-up, it's good to see that you're recalibrating the expenses based on the macro environment. I was wondering if you could unpack a little bit what flexibility you have on the expense side. And as you think about that $1.90 to $1.93 EPS for 2027, if some of these macro headwinds continue, what opportunity you have to continue to recalibrate the expenses?
Yes. Thanks, Manan. This is Zach. I'll take it. As we come into every year, we develop a pretty rigorous and clear expense contingency management plan so that if revenues outperform, we know where we'll manage and accelerate investments, or if revenues are slightly lower, where we will modulate them. We effectively just deployed that plan. Certainly, there are further increments of that plan that are possible. We have a very strong ability to pull the levers of the business from an expense perspective to manage through. The question we will always ask ourselves, of course, is what's the best posture to ensure the long-term value creation plan and the long-term growth of the company. With that being said, our default would be to offset and to manage positive operating leverage. The ways we would do that are very much indicative of what I said. Generally, you can continue to allocate more resources to efficiency programs than we had previously done and shift resources to that, and that would be the first area we go. The second is dialing back overall expenses, hunting for opportunities in every area. And the last is around investments. To the extent that any revenue diminution is economically driven, it's prudent to pull back the pace of investment spending. Those are the typical modus operandi, and we have quite a bit of flexibility to do that. At this point, to be clear, we're not seeing that environment come through. Our expectations for this year are within percentage points of where they had been before, and the outlook for next year is likewise very much consistent with what we had planned before.
Manan, we've made an extraordinary amount of investments over the last three years and yet have managed core expenses quite dynamically. What we're talking about is just tuning the rate of investment at this stage. But we have multiple planned levels of reduction, should at some point there be a downturn. We don't think it's this year or in the foreseeable future, but we have a recession readiness playbook, and that includes what we're going to do on the expense side when it occurs.
Operator provided instructions. Our next question is from John Pancari with Evercore.
On the net interest income front on your updated guide, on the loan side, I know you noted the optimization impact. Can you give us a little bit of color on loan pricing and spreads? Has that impacted your outlook at all? And then on the cash at the Fed and that component of the updated margin expectation, what drove that change in the need of cash at the Fed? Wouldn't that have already been something that would have been baked into your expectation?
Thanks, John. I'll address that. In terms of loan optimization and spreads, as I noted earlier, we are not seeing any significant spread movements. For really high-quality commercial borrowers in competitive markets, we are seeing some modest spread compression, roughly in the range of 5 to 15 basis points, but it is not overly significant. Looking at forward pipelines, we do not expect further changes from here. The whole industry is focused on driving loan growth while carefully calibrating deposit growth to match it and being judicious about marginal spreads. The environment looks rational and predictable, which enables us to calibrate effectively. That is what we are seeing on the ground. On cash, no, that level of cash had not been included in our prior plan and we increased cash levels. It is a modest change and effectively a neutral revenue impact, so it is not economically material. Consider this another example of Huntington’s discipline to ensure we are always in a position of strength. Liquidity is a critical risk pillar and can move quickly, and we have no concern about our own liquidity or our customers’ confidence in us. With that said, the environment could change quickly, and we want to ensure we remain in an incredibly strong position. Our unmodified LCR of 118% is one of the highest in the industry, especially among large banks, which further demonstrates that strength.
And John, the Middle East issues are what drove us to that decision.
Got it. All right. And then secondly, on the capital front, I appreciate the priorities that you mentioned in your commentary earlier, and I appreciate the buyback color. I guess, Steve, if you could just maybe update us on your thoughts around potential incremental M&A interest. Obviously, you are very busy integrating the 2 deals. But can you update us on how you're thinking about potential incremental opportunities that may come around just given the regulatory backdrop? And if you do have interest, how can we think about the size of a potential deal on the whole bank side, if there was something you would pursue?
John, I was waiting for that question. Thank you. Our stance hasn't changed; we're consistent on this issue. Our primary focus is driving organic growth. We are very pleased with what we are seeing develop, but it's early in Texas and the South, so we are spending a lot of time in those markets. The underlying historic core franchise is performing exceptionally well. There was a question of whether we could do two of these partnerships, integrate them and still drive the core. I think we are answering that question very strongly. We will continue to focus on the core; there is no reason to change our focus. We've always said that if we can't drive the core, we will not pursue inorganic opportunities, and that hasn't changed. In terms of scale, I don't see us doing anything big. You look at a company that's going to be around $300 billion, and if it's 5 percent or 10 percent maybe someday, perhaps, but nothing imminent. We can grow at that 5 percent level just by driving the core, and that's the focus. We're going to get to those 2027 returns and deliver the goods, and that's our priority.
Operator provided instructions. Our next question is from Ken Usdin with Autonomous Research.
I wanted to ask on fee income. Can you just walk through the raised expectations for the fee income guide and what drove some of that better performance in payments, wealth and capital markets? And then like what types of growth rates should we expect out of these businesses on a go-forward basis once the acquisitions are fully integrated? And then did you include any revenue synergies in the fee income outlook?
Thanks, Ben. I counted three questions in there, but I'll address them all. They're all on the topic of fees, so they're fair game. As I said in the prepared remarks, we had really strong fee performance in the quarter. Effectively, we're pulling that through and continuing to forecast the exceptional performance we're seeing, which we have a lot of confidence in. Every one of our businesses is exceeding the plan. Payments is doing exceptionally well. Wealth continues to grow sustainably with customer acquisition and asset gathering, and capital markets had an absolutely phenomenal quarter. I want to personally congratulate our capital markets team on 60% year-on-year organic growth and on the additions of TM Capital and Janney, and we're thrilled to have our new colleagues contributing meaningfully as well. The broad preponderance of other fees continues to perform well. Loan and deposit fees, which are tied to activity in our commercial lending, are also growing nicely. The increase in our guidance is a function of those things continuing. We are very encouraged by early progress on revenue synergies. As we discussed in a mid-quarter conference this year, we expect between $50 million and $75 million of revenue synergies in our plan for this year, although much of that was already in our guidance, so I wouldn't characterize the guidance increase as being driven by that. That said, we expect to see those synergies and are already seeing meaningful progress in capital markets and payments, with wealth coming alongside over time. As you think about the long term, at our 2025 Investor Day we talked about high single-digit fee growth, growing faster than the balance sheet and as a percentage of company revenue, and that the three major power alleys for fee growth would grow in the double digits. That remains our general long-term assumption. However, over the next couple of years I expect even faster growth, driven by revenue synergies that are weighted heavily toward fee revenues. I might...
Ben, this is Brant. Just to add to Zach's comments. First of all, from a revenue synergy perspective, the 3 areas, cap markets, payments and wealth is the place we're seeing a lot of significant early wins. In some cases, it's because there's new product capability that we offer in either payments or cap markets that were not offered for Cadence and Veritex customers in the past, and that creates an opportunity. And in some cases, the scale of those is much greater. For example, in the wealth business, we now have across the South and across Texas, access to a much larger group of advisers that can serve even more of the customers. In the wealth business specifically, we've just in the last month announced a major platform upgrade. In fact, we are upgrading both of our wealth platforms that really make us best-in-class. We have seen over the course of the last year, one, AUM growth that's north of 13%. Now the market has helped, but net flows have actually doubled year-over-year. So we're seeing very strong growth in the wealth business. Early results from a payments perspective, especially as it relates to Cadence and Veritex have been very, very strong. And Zach mentioned earlier, the record quarter from a capital markets perspective. So we feel great about the long-term trajectory of those 3 businesses. They're places that we're investing, and they're absolutely at the center of our revenue synergy opportunity and springboard that we have with the Veritex and Cadence partnership.
I see, Ben, you've taken advantage of Erika's precedence. Thank you for the questions.
Operator provided instructions. Our next question is from David Chiaverini with Jefferies.
This is Brian Violino on for Dave. Just a follow-up on the revenue synergy discussion from the prior question. I think you talked about reinvesting a portion of those synergies back into the business. Is that still the plan? And I guess, could you talk about which areas you're looking to grow with those synergy dollars?
Brian, I'll take that question. Yes, we do have reinvestment. That's one of the advantages of these partnerships is our ability to be able to do that. I would mention a couple of areas. One is in the form of bankers and teams. And we made an announcement this week where we've expanded our middle market presence in Austin and also adding to regional banking and middle market banking in Texas. We will be adding more capabilities across the footprint with more teams. So that's one example of how we're reinvesting back. Another example is digital. We've been able to launch digital now in Texas beginning of this year. Cadence, the Southern footprint, we've been able to launch just this month. And this will give us the ability to substantially upgrade and reimagine, reengineer the digital capabilities that we offer customers today. We have leading capabilities. We intend to make them even better. So those would be 2 very large examples of things that we will do to invest back in the business. We're going to continue to invest in our payments business and ensure that we have world-class products and capabilities to serve the growing commercial and regional bank that we have within the company. And then lastly, I just mentioned earlier the major platform upgrades that we're doing in the wealth business to continue to support its growth. Those would be some of the examples of things that we're doing to invest back in the business.
Operator provided instructions. Our next question is from Chris McGratty with KBW.
This is Sean Culhane on for Chris. Really appreciate the color you guys have given so far this morning. But just a quick one on credit and underwriting and reserve expectations from here. Saw you reiterated the 25% to 35% NCO guide that's kept your reserve comfortably above peers. But is there any industries you guys are watching or anything in terms of how we should think about the rest of the year?
Thanks, Sean, for the question. This is Brendan. I'll take that. You noted the strong credit quarter that we've had and the top quartile peer reserve that we have as well. And I think that positions us for the future. As we look out over the horizon, one of the areas that we've talked about being a little bit more measured in is commercial real estate and particularly on the construction side. And that's an area that, over time, we will reduce our exposure to, but it will be in an organic fashion over the next 2-plus years. So it's a place we're watching. We're always vigilant on the entire portfolio. But we feel good about our positioning, and this quarter is just another example of that.
Thank you very much. And let me conclude with 3 key thoughts. First, we continue to have tremendous organic growth momentum across our franchise. This is evident in our strong core loan and deposit growth and in the outstanding contributions from our strategic value-added fee services, payments, wealth management and capital markets, which are all contributing meaningfully to the results. And second, our integration activities are fully on track. Veritex is fully integrated and the Cadence systems migration in June marks the final major milestone in that process. So we're focused on delivering the cost synergies from these partnerships, which we expect to accelerate in the third quarter and be fully run rated into our earnings power in the fourth quarter. Executing against these commitments is a key priority for us ahead of other strategic actions. And third, we are firmly on track to deliver our key financial targets. We continue to see a clear path to our 2027 EPS target of $1.90 to $1.93, driven by organic revenue growth, disciplined expense management and realization of the cost and revenue synergies from these partnerships. Fourth quarter of this year will provide a clear view of the earnings power of our go-forward franchise. We've got strong momentum, a clear plan and a team that knows how to execute, and we are performing at a very high level. So finally, let me say thank you to the more than 25,000 colleagues for everything you do to serve our customers and strengthen the franchise every day. Thank you all for your interest in Huntington. Have a great day.
This concludes today's conference. You may disconnect your lines at this time. Thank you again for your participation.