管理層發言
Greetings, and welcome to the Huntington Bancshares 2024 Third Quarter Earnings Review. At this time, all participants will be in a listen-only mode. A question-and-answer session will follow the formal presentation. 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. Please go ahead.
Thank you, operator. Welcome, everyone, and good morning. Copies of the slides we will be reviewing today can be found on the Investor Relations section of our website, www.huntington.com. As a reminder, this call is being recorded and a replay will be available starting about one hour from the close of the call. Our presenters today are Steve Steinour, Chairman, President and CEO; and Zach Wasserman, Chief Financial Officer. Brendan Lawlor, Chief Credit Officer, will join us for the Q&A. Earnings documents, which include our forward-looking statements disclaimer and non-GAAP information, are available on the Investor Relations section of our website. With that, let me now turn it over to Steve.
Thanks, Tim. Good morning, everyone, and welcome. Thank you for joining the call today. We are very pleased to report outstanding results for the third quarter, which Zach will detail later. 2024 continues to be a dynamic year, and our year-to-date results demonstrate Huntington's strength and consistent performance. These strong results reflect the dedication of our nearly 20,000 colleagues across the bank who live our purpose every day as we make people's lives better, help businesses thrive, and strengthen the communities we serve. Now on to Slide 4. There are five key messages we want to share with you today. First, we are driving accelerated loan growth along with sustained deposit growth. These results are supported by our core businesses, as well as the successful execution of new initiatives, including expanded geographies and commercial banking verticals. Second, we are actively executing our down beta playbook as the market enters a declining Fed rate cycle.
We are dynamically managing the balance sheet, and coupled with our growth outlook, we expect to deliver record net interest income in 2025. Third, we continue to drive fee revenues higher with sustained momentum across our three major focus areas: payments, wealth management, and capital markets. Fourth, our credit performance remained strong during the quarter with stable net charge-offs as well as lower non-performing and criticized assets. This is a direct result of our consistent disciplined credit management and our aggregate moderate to low risk appetite. Finally, our performance during the quarter set the foundation for continued organic growth and increased profitability into 2025 and beyond. I will move us on to Slide 5 to recap our performance. We delivered accelerated loan growth in the quarter, with average balances growing by 3% from a year ago. End-of-period loans increased at a 6.3% annualized rate.
Average deposit growth continued at a robust pace, increasing by $8.3 billion or 5.6% over the past year. We drove capital ratios higher again, with adjusted common equity Tier-1 of 8.9%. This benefited both from capital accretion from earnings as well as reduced AOCI. Our fee revenue strategies are delivering, with GAAP fee income increasing by 3% year-over-year. On an adjusted basis, core fee revenues demonstrated robust growth, increasing by 12% from a year ago, driven by payments, wealth management, and capital markets. We are sustaining momentum in the growth of primary bank customer relationships. As we continue to acquire new customers across the footprint, consumer PBRs have increased by 2% and business banking PBRs have increased by 4% year-over-year. We have delivered PBR growth consistently with year-over-year increases for over a dozen consecutive quarters. We have continued to invest across the company to drive sustained organic growth.
Last month, we were pleased to announce our full franchise and branch expansion into the Carolinas. This builds upon the success of our earlier investments in the commercial and regional banking teams over the past year. These markets represent some of the most attractive geographies nationally, given their size and growth characteristics. We've hired well-established colleagues with local expertise in these markets, and the results today are tracking much better than our initial business case. We've also invested substantially in our payments businesses, particularly in treasury management, including bringing in-house our merchant acquiring capabilities. The merchant acquiring business completed its final testing phase in September and implemented its full commercial launch in early October. The opportunity within merchant is substantial. And when at scale, we expect it will add 1 percentage point to overall fee revenue growth.
Credit trends overall are holding up very well, supported by our long track record of disciplined client selection. Our consumer portfolios are constructed around prime and super-prime exposures. Within these portfolios, consumer delinquency rates remain stable. We are continuing to see sound fundamentals from our commercial customers. They've managed this rate cycle and inflationary changes well with stable revenue and profitability trends. Overall, our customers continue to show strength and resiliency, which supports a constructive outlook for sustained organic growth. We exited the third quarter with robust production levels in September and with momentum that has carried into the fourth quarter. As an example, our Regional Banking group posted record loan production ex-PPP in the third quarter. Heading into the fourth quarter, late-stage commercial pipelines at quarter-end are up 68% from a year ago.
Our teams are actively implementing our down beta action plans. Fee revenue growth was robust in the third quarter, and we have confidence in our many initiatives including merchant acquiring, as well as the outlook for capital markets and advisory revenues, given strong pipelines as we enter the fourth quarter. We are maintaining disciplined expense management while continuing to invest. The additional efficiency actions we took in the third quarter will support our ability to sustain investment into revenue-producing initiatives into 2025. Credit remains a hallmark of Huntington with stable charge-offs and improved non-performing and criticized assets. In closing, we have confidence in our ability to sustain our organic growth outlook as we finish the year and move into 2025. Zach, over to you to provide more detail on our financial performance.
Thanks, Steve, and good morning, everyone. Slide 6 provides highlights of our third quarter results. We reported earnings per common share of $0.33. The quarter included $6 million of notable items on a net basis and did not have an impact on earnings per share. Return on tangible common equity or ROTCE came in at 16.2% for the quarter. Adjusted for notable items, ROTCE was 16.3%. Pre-provision net revenue or PPNR increased by 8.3% from the prior quarter. This was driven by net interest income, which expanded by 2.9%, and fee revenues, which increased by 6.5% from the prior quarter. Average loan balances increased by $3.7 billion or 3.1% versus last year. Average deposits continued to grow, increasing by $8.3 billion or 5.6% on a year-over-year basis. Credit quality remains strong with net charge-offs of 30 basis points. Allowance for credit losses decreased by 2 basis points and ended the quarter at 1.93%.
Adjusted CET1 ended the quarter at 8.9% and increased roughly 30 basis points from last quarter. Supported by earnings as well as the recapture of AOCI from lower rates, tangible book value per share has increased by 21.5% year-over-year. Turning to Slide 7. Consistent with our plan and prior guidance, year-over-year average loan growth is accelerating. Q3 loan growth was 3.1% year-over-year, rising from last quarter's 1.7% growth and the 1.3% we posted in Q1. Average loan balances increased sequentially by $1.1 billion. Excluding runoff from commercial real estate, loans increased by $1.6 billion or 1.3%. As Steve mentioned, end-of-period loans increased by 1.6% and represented a 6.3% annualized growth rate. Loan growth in the quarter was supported by strong contributions from core businesses and from new initiatives. Our new initiatives collectively represented $700 million of growth in the quarter and included Carolinas, Texas, fund finance, healthcare asset-based lending, and Native American Financial Services.
Note, this pace of growth was above the second quarter level as teams continue to ramp up, and we expect growth in the fourth quarter to be further above these levels. Other drivers of loan growth in the third quarter included $595 million from consumer auto, $268 million from regional banking, $165 million from residential mortgage, $137 million from auto floor plan, $80 million from RV/Marine, $131 million from all other consumer categories on a net basis, and $109 million from all other commercial categories on a net basis. This growth was partially offset by a seasonal decline in distribution finance, which was lower by $747 million. Generally, we see the third quarter as the seasonal low point in the year for this business given inventory levels across our mix of programs. We expect inventories to build into the fourth quarter, and resulting balances to be higher in the fourth quarter on average compared to the third quarter.
Turning to Slide 8. As noted, we drove another quarter of solid deposit growth. Average deposits increased by $2.9 billion or 1.9% in the third quarter. On a full-quarter basis, total cost of deposits increased by 2 basis points in the third quarter, and interest-bearing deposit costs were flat for the quarter. Within the quarter, there were notable declines in deposit costs. We saw total cost of deposits decline sequentially in both August and September with September costs lower by 7 basis points. This is a direct result of our proactive and disciplined execution of our down beta action plans in advance of the Fed's 50 basis point rate cut in September and continuing into Q4. These actions reflect our active balancing of deposit volumes and rates. Given our robust deposit growth over the past year, we're in a strong position to optimize rates from here. We will remain very dynamic in managing the business and our action plan as this interest rate environment evolves.
Our forecast is aligned with a forward curve, which projects two additional 25 basis point rate cuts by year-end and a further five 25 basis point rate cuts in 2025. As we noted in the past several quarters related to guidance on up beta, the performance and trajectory of down beta will be a function of the actual and projected path of rates and importantly, customer expectations for that path. Based on the current rate outlook, we continue to project a cumulative down beta in the mid to high 30s by the fourth quarter of 2025 and in the mid-40s range by the fourth quarter of 2026. Turning to Slide 9. Our cumulative deposit growth since early 2023 totaled 7.1%. This level continues to well outpace the peer group. As a result, we've been able to decisively implement the down beta strategy, fund loan growth with deposits, and at the same time manage the loan-to-deposit ratio lower over the past year, which will support the continued acceleration of lending.
On to Slide 10. For the quarter, net interest income increased by $39 million or 2.9% to $1.364 billion. We delivered sustained growth off of the trough levels from the first quarter of this year, consistent with our guidance. Net interest margin was 2.98% for the third quarter. Reconciling the change in NIM from Q2, we saw a decrease of 1 basis point. This was due to spread net of free funds lower by 2 basis points, higher cash balances driving margin lower by 2 basis points, partially offset by lower drag from the hedging program, which improved by 3 basis points. We continue to project full-year net interest income to be within our prior guidance range. The fourth quarter level is expected to be flat to up 1% on a year-over-year basis and then resume growth over the first half of 2025 and accelerate in the second half. This is expected to result in record net interest income for 2025 based on current rate curve expectations.
We continue to benefit from fixed rate loan repricing with loan yields expanding by 4 basis points from the prior quarter. As a reminder, we continue to analyze and develop action plans for a wide range of potential economic and interest rate scenarios for both short-term rates and the slope and belly of the curve. As I noted earlier, our working assumption includes two additional rate cuts by year-end and a further five cuts in 2025 and underlies this net interest income outlook. Turning to Slide 11. Our level of cash and securities increased as we benefited from higher funding balances from sustained deposit growth. We expect cash and securities as a percentage of total average assets to remain at approximately 28% as the balance sheet grows over time. We are reinvesting securities cash flows in treasuries and expect to manage the unhedged duration of the portfolio at approximately the current range.
We have increased the average duration of new securities purchases from very short half-year duration to slightly longer two to three-year durations, which is a component of our strategy to systematically reduce asset sensitivity over the next several quarters. Turning to Slide 12. Over the course of the rate cycle, we've positioned the company to benefit from asset sensitivity as the rate environment moved higher and are now reducing our level of asset sensitivity as market expectations are increasingly weighted toward a down rate path. That strategy has worked well to maximize the benefit from the rate cycle and to protect capital while managing NIM within a tight corridor. On the bottom of the slide, there is an illustration of the asset sensitivity path over the next several quarters. In Q3, we lowered our asset sensitivity by more than one-third from the second quarter. Looking forward, we expect the total cumulative reduction in asset sensitivity from Q2 to be greater than 50% by year-end 2024 and moving to above 60% by mid-2025.
As always, we will continue to dynamically manage our hedging program to achieve our objectives of capital protection and NIM stabilization. Moving on to Slide 13. On an overall level, GAAP non-interest income increased by $32 million to $523 million for the third quarter. Adjusting for the impacts of CRT transactions and the pay fix swaptions mark-to-market from the prior year, fee revenues increased by $55 million or 12% on a core underlying basis. Moving on to Slide 14. Our strategy to increase the penetration and usage of value-added fee services is building on momentum we've created over the last several years. Adjusted fee revenues as a percentage of total revenues have increased from 25% a year ago to 28% in Q3. This reflects the focused effort on key initiatives across payments, wealth management, and capital markets. Within payments, revenues have increased by $4 million in the third quarter and have increased by $6 million year-over-year.
Commercial payments revenues, including treasury management fees, have grown strongly, increasing by 8% from the prior year. Debit card revenue grew by 3% year-over-year, reflecting performance higher than industry averages yet clearly impacted by the relatively slower levels of consumer spending growth we are seeing economy-wide. Other card-based revenues continued to grow year-over-year, supported by consumer credit card spending trends. The addition of merchant acquiring in-house capabilities will further support our overall payments revenue growth as we enter the fourth quarter and carry into 2025. As Steve noted earlier, we see this initiative adding approximately 1 percentage point to overall fee revenue growth next year. Within wealth management, revenue growth was outstanding, increasing 18% from the prior year. Advisory relationships have increased by 7% year-over-year and assets under management have increased 22% on a year-over-year basis.
These results benefited from sustained positive net asset flows. Within capital markets, we saw exceptionally strong revenue growth, increasing by $26 million or 50% from the prior year to $78 million. These results were driven by commercial banking related capital markets revenues, which are accelerating as we have previously guided as a result of higher commercial loan production. As we look out into Q4, we expect to post another quarter of sequential growth in capital markets driven by continued underlying core banking-related services and a robust advisory pipeline. We expect this positive momentum to carry into 2025. Moving on to Slide 15 on expenses. GAAP non-interest expense increased by $13 million, and underlying core expenses also increased by $13 million. During the quarter, we incurred $13 million of expenses related to efficiency programs, which will benefit our 2025 expense outlook and allow us to reinvest savings into key revenue producing initiatives.
Additionally, this was partially offset by a $7 million benefit from the FDIC special assessment. Net, notable items for the quarter totaled $6 million. Excluding these items, core expenses came in slightly better than our expectations for the quarter at $1.124 billion. The increase in core expenses quarter-over-quarter was primarily driven by personnel expenses due to higher salaries and benefit costs. We also saw $3 million of higher expenses related to merchant acquiring as we brought that business in-house and launched our services in October. We continue to forecast approximately 4.5% core expense growth for the full year. Slide 16 recaps our capital position. Common equity Tier-1 ended the quarter at 10.4%. Our adjusted CET1 ratio, inclusive of AOCI, was 8.9% and has grown 90 basis points from a year ago. Our capital management strategy remains focused on driving capital ratios higher while maintaining our top priority to fund high return loan growth.
We intend to drive adjusted CET1 inclusive of AOCI into our operating range of 9% to 10%. On Slide 17, credit quality is coming in as we expected and continues to perform very well. Net charge-offs were 30 basis points in Q3, relatively stable over the past four quarters. The allowance for credit losses at 1.93% declined by 2 basis points from the prior quarter and reflects both a modestly improved economic outlook as well as an increased loan portfolio. On Slide 18, the criticized asset ratio decreased by 9% from the prior quarter to 4.09%. The non-performing asset ratio declined by 1 basis point to 62 basis points. Turning to Slide 19, our outlook for the full year remains unchanged from our prior guidance. Our expectations for the fourth quarter include accelerating loan growth at approximately 4% to 5% on a year-over-year basis. Deposit growth is expected to increase between 4% and 5% on a year-over-year basis.
We see full-year net interest income unchanged from our prior guidance range. The fourth quarter level is expected to be flat to up 1% on a year-over-year basis and then resume growth in the first half of 2025 and accelerate in the second half. Core fee revenues adjusted for the swaptions and CRT items are expected to grow at approximately 8% to 9% year-over-year in the fourth quarter. Core expenses are well managed and tracking to our full-year outlook. For the fourth quarter, we expect growth of approximately 3% year-over-year, subject to some variability given revenue-driven compensation levels as well as expenses related to the insourcing of our merchant acquiring business, which brings with it direct offsetting fee revenues. This is consistent with our previous commentary to exit the year at a low single-digit year-over-year expense growth rate. Credit is performing well, aligned with our expectations, and net charge-offs are projected to be relatively similar to Q3. Our tax rate for the fourth quarter is likely to be between 18% and 19%. With that, we'll conclude our prepared remarks and move over to Q&A.
Thank you, Zach. Operator, we will now take questions. We ask that as a courtesy to your peers, each person ask only one question and one related follow-up, and then if that person has additional questions, he or she can add themselves back into the queue. Thank you.
分析師問答
Thank you. At this time, we'll be conducting a question-and-answer session. And our first question is from the line of Manan Gosalia with Morgan Stanley. Please proceed with your questions.
Hey, good morning.
Good morning, Manan.
Good morning. So the guidance for 4Q NII I think implies that NII should be flat to slightly down versus 3Q. Can you talk about what's driving that? Is that just a timing difference between those floating-rate asset yields coming down and deposit costs coming down?
Thanks, Manan. This is Zach. I'll take that one. And the short answer to the question is yes. Just a short timing difference between the really powerful and very effective actions we've seen on reducing deposit costs, which you saw some of the trends we illustrated in the third quarter. Those will continue into the fourth quarter, just not fully offsetting on a short-term basis the reductions in variable yields. I think we'll exit Q4 having a positive run rate benefit from deposit costs relative to asset yields; but in the early part of the quarter, assuming, again, two more rate cuts, which is our forecast here, will likely be a little lower quarter-to-quarter.
Got it. And can you share more color on the deposit growth there? It looks like you continue to grow deposits faster than loans this quarter. Is that mostly coming from new account growth? And I guess the question there is, why not pay down some of the higher cost CDs to help NII and have deposits grow a little bit slower than loans given that you pre-funded a lot of the loan growth in the first half of the year?
A terrific question, Manan, and that is effectively the plan. We're really pleased to see how much deposit growth we've seen throughout the course of this year, obviously, very significantly faster than the industry average overall. And that really puts us in a pretty strong position now with having brought down loan-to-deposit ratio and just given how strong that deposit gathering has been to now turn and drive down beta and to begin to decelerate deposit growth even as loan growth is accelerating. So if you look at the guidance we've given for deposits into the fourth quarter, I would expect the balances to be relatively flat actually quarter-to-quarter, even if they still grow year-on-year, and that's really an indication that we're doing exactly what you just said, leveraging that position to really drive funding costs lower.
Got it. Thank you.
Our next question is from the line of Ebrahim Poonawala with Bank of America. Please proceed with your questions.
Hey, good morning.
Good morning, Ebrahim.
Two things. One, I guess Zach, just wanted to follow-up. I think you mentioned NII, I guess you have the guidance for fourth quarter and then did you mean to say that the growth accelerates from the 4Q versus 3Q level as we think about first half 2025 and then get even faster through the course of 2025? If you could just clarify that. And with that, what's the sensitivity to rate cuts, right? Like we had very strong retail sales so the market's actively recalibrating what the Fed may or may not do. Just talk to us whether getting three to four cuts versus not getting those cuts means much in terms of your NII outlook?
Yes, thank you for the question. I appreciate the opportunity to provide some clarity. We generally anticipate that our net interest margin will decrease slightly by a few basis points in the fourth quarter. This is primarily a short-term effect before we see an acceleration in beta that will fully counterbalance the variable impacts on our variable loans. It's important to highlight that our hedging program will also play a significant role in our net interest margin. In the third quarter, we experienced about 12 basis points of hedge drag, which we expect to decrease to 7 basis points in the fourth quarter, ultimately transitioning to a 5 basis point benefit by the end of 2025, according to the forward yield curve. The factors of accelerating beta and declining hedge drag—transforming into a hedge benefit throughout next year—are key to our expectation of sustained net interest margin growth from the fourth quarter into the first, second, and third quarters of next year, and continuing thereafter. Therefore, we expect to see a nice upward trend in net interest margin from the fourth quarter level throughout 2025. Coupled with our strong loan growth, these elements will lead to an increase in net interest income over the course of 2025. As I mentioned in my prepared remarks, we anticipate record net interest income dollars in 2025, driven by these two factors.
Understood.
I'll expand on your question regarding sensitivities. Your point is well taken that we are in a dynamic environment. Our forecast assumes a couple more rate cuts this quarter and five into next year, but it's possible that those may not happen as you've noted. In the short term, if there are fewer rate cuts, we would likely see improved NIM performance and a stronger NII dollar performance. Of course, the reasoning behind the lack of rate reductions would significantly affect customer and market expectations about future rates. While the long-term impact remains uncertain, having fewer rate cuts would be overall beneficial for us in the short term. Conversely, if we see more rate cuts, the reason behind them would also be important. Earlier this year, when market expectations for rate reductions surged, it was beneficial in facilitating actions around down beta. So, while more rate reductions could introduce some short-term challenges, in the long term, it might be favorable for down rate deposit pricing. Therefore, there remains some uncertainty about the long-term implications if rates decline more rapidly.
That's helpful. And I guess just one thing. You talked earlier about traction in the Carolinas, just how loan growth was evolving. Talk to us in terms of deposit growth. You did hire sort of a big team on the mortgage side. Are we seeing mortgage rates pull back? But either that team or just the overall deposit-gathering strategy beyond promotional rates, where do you see deposit growth coming from?
Yes. Throughout the year, we've observed that consumer deposit performance has been very strong. However, in recent quarters, commercial deposits are starting to catch up. This is driven by our core commercial business as well as some new verticals and markets. The mortgage service vertical, in particular, has performed well, generating a couple of billion dollars in incremental deposits in the third quarter. As we have mentioned before, this growth could continue in the long term. Commercial deposits are beginning to accelerate, and looking ahead to 2025, we generally expect continued deposit growth, with a slightly greater emphasis on commercial deposits compared to consumer deposits as we move into next year.
Noted. Thank you.
Our next question comes from the line of Jon Arfstrom with RBC Capital Markets. Please proceed with your questions.
Hey, thanks. Good morning, guys.
Good morning, Jon.
I have a quick clarification, which is probably a simple question. You're stating that the fourth quarter NII is around $1.330 billion to $1.340 billion. Am I understanding that correctly?
We are expecting between $15 million to $25 million lower sequentially, Jon. That will be around flat to up 1% on a year-over-year basis. Again, assuming not only the variables, but another 225 sort of in the last few months of this year.
Thank you for the clarification. I have a simple question about the chart on Slide 10. The bar chart for the fourth quarter of 2025 suggests higher net interest income. Is there any scaling involved in that, or what kind of acceleration do you anticipate for net interest income growth throughout the year?
I'm expecting pretty steady NII dollar growth from Q1 to Q2, from Q2 to Q3, and continuing on, Jon. I think kind of the path of NIM is starting now to get into a bit of overly level precision at this point given all the uncertainties. But generally speaking, I'm expecting to see nice sustained NIM expansion in Q1, Q2, Q3, and a bit topping out into Q4, but we'll see where the rate environment is at that point. And the dollars really be pretty steady growth throughout the year as lending sustains at a fairly solid level. It's probably the best way I can answer your question.
Yes, okay, good. If I can ask one more question and I apologize for doing this. Regarding the merchant acquiring, are you indicating that the 1% growth in overall fee revenues could suggest it might become a $200 million business?
Currently, we make roughly $25 million on an annual run rate for merchant acquiring under our old outsourced model. As we transition to in-sourcing that business, we anticipate that next year could contribute an additional $25 million, bringing total revenue to around $50 million. This represents about 1% of the overall fee revenue base as we move into next year.
Yes. Okay. All right. Thank you for clarifying this.
Yes. Good questions.
Our next question is from the line of Erika Najarian with UBS. Please proceed with your questions.
Good morning, Erika.
Erika, perhaps your line may be muted. Your line for questions.
Can you hear me?
Yes, we can hear you now. Go ahead.
Apologies for the oversight. Zach, as you can understand, everyone is inquiring about the gap in the fourth quarter of 2025 on Slide 10. Let me frame it this way. The consensus is looking to fill that gap, which would suggest an 8% year-over-year growth based on your estimated fourth-quarter of 2024. I assume this includes loan growth and also the change in net interest margin. With the consensus projecting an 8% quarter-over-quarter increase, are they on the right track considering your loan growth momentum and the balance sheet dynamics?
I'm not going to give you that level of guidance precision at this point in the year, Erika. As you know, we will give guidance as we get into the early part of next year. But I don't think that's directionally wrong, frankly. I think we're expecting to see NIMs rise throughout the course of 2025. I mentioned earlier, I see NIM above 3% in the second half of next year. If you compare that to where we'll be this year, that will be a nice NIM expansion off of our forecast for Q4. So that will drive some year-over-year growth. And then our current run rate on loan growth is around 6% on an annualized pace right now, and there's nothing that indicates we will not be able to sustain that pace into next year. In fact, the fourth quarter looks outstanding in terms of loan growth and the momentum we've got across the business. And so, those are relatively good underlying drivers to get to the number you're talking about without being overly clear on guidance at this point.
That's helpful. Thank you. Regarding the expense run rate, what you and Steve have discussed about investments is reflected in your 3% year-over-year guidance for the fourth quarter in comparison to this year's run rate. We're also witnessing loan growth. As we look ahead to next year, considering that Huntington under this management team and Board is consistently investing, should we anticipate a more sustainable growth rate for the fourth quarter year-over-year instead of the previous 5% to 5.5%?
Yes, that's a great question. We are very focused on expenses, and this year is unfolding as we anticipated, achieving around 4.5% year-over-year growth, gradually slowing down as you mentioned. We are committed to our model, working on improving efficiency and managing baseline expenses. In the third quarter, we implemented further measures that are ongoing. This is a continuous effort to optimize our engineering resources to manage the strategic expense categories related to investments, technology development, marketing, and hiring to support new revenue-generating initiatives. Our plan for 2025 remains unchanged, aiming for positive operating leverage. I anticipate a strong revenue growth trajectory, and we do not intend to enter a harvest mode. Our goal is to maintain growth while achieving solid improvements in operating leverage and efficiency ratios, sustaining that progress moving forward.
Got it. Thank you so much.
Thanks, Erika.
Our next question comes from the line of Matt O'Connor with Deutsche Bank. Please proceed with your questions.
Good morning. Question on fee revenues. It came in a decent amount better than you expected with the intra-quarter guide. I assume a lot of that swing is the capital markets and maybe the loan sale. But just anything else that surprised you that you'd want to call out? I mean all the categories actually did pretty well. So I guess, I'm just wondering was that kind of better than what you thought a month ago? Thanks.
Yes, that’s a great question, Matt. We were anticipating a solid Q3 for capital markets, but it exceeded our expectations. Overall, we are very pleased with the execution and the consistent performance we are seeing in our three key focus areas. A 12% year-over-year growth in fees is impressive from our perspective. The outlook for Q4 also looks strong, particularly in capital markets, where we expect another good quarter of sequential growth. We will continue to drive solid household acquisition and net flows, and payments are progressing well, especially with the addition of merchant acquiring, which should provide a nice boost to growth.
Okay. And then on the credit risk transfer or the CRTs as you call it. Now that you've got – you are approaching your targeted capital level even including AOCI and you've got all the funding and all those positives, is that something that you're looking to do less of going forward or unwind them?
Yes, that's a great question. We're feeling very positive about our capital growth plan. As we've mentioned several times, the main factor driving our capital increase is our core organic earnings and strong return on capital. We view the CRT transactions as tactical and opportunistic, representing an interesting innovation in the market that provides good low returns on capital for specific asset classes. For instance, in the second quarter, we were able to unlock 17 basis points of capital at a cost of less than 3%, with just $7 million plus transaction costs, making it highly efficient. While we may take advantage of similar opportunities in the future, we primarily focus on our core underlying return on capital and organic earnings.
Got it. Okay. Thank you.
Thank you.
Our next question comes from Sean Sorahan with Evercore ISI. Please go ahead with your questions.
Good morning. I was hoping you could address your trends and strategy in the auto business. Production stepped up again linked-quarter in 3Q. Can you talk about the growth outlook there a little bit? And then maybe shifting to credit, there was a big update mid-quarter from an auto peer and you saw a little bit of a step-up in 3Q this quarter. Can you address expected credit trends given shifting auto values? Thanks.
Yes. Sean, thanks for the question. This is Zach. I'll take the first part and then Brendan will tack on to the second part around credit. So really pleased actually with what we're seeing in the auto lower production area. Auto for us is a terrific asset to lean into at times like this when the general expectation for rates is to be reducing. A nice fixed asset class, got about a two-year duration. Remember this is prime and super-prime credit quality, so very solid underlying returns, and also incredibly efficient business for us. It's a 10% efficiency ratio business for us that is very, very optimizable. We can put in pricing in the market on Friday, see the impacts of it over the weekend, dial it back in again the next Tuesday as we go into the next week. And so really, really optimizable and precision return calibration for us here. So, we like this one. I think the production levels for the fourth quarter look to be around the same as the third quarter here. So I think we've hit a nice run rate at this point, and then we'll see where it goes out into the course of next year. But for right now, nice fixed asset that we're getting very significant fixed asset repricing benefits coming through into the NIM. Maybe Brendan, over to you on credit.
Sure. Sean, this is Brendan. And given our history in this industry, we have the ability to utilize our custom scorecard to really drive the customer selection that Zach was referencing. And that continues to be a strength for us. We've seen late-stage delinquency and charge-offs have remained right within our historical levels. So we're not seeing broad deterioration at all here. And frankly, with our deep industry expertise, we are traditionally lower than the peer set when it comes to charge-offs or delinquencies, and that trend continues this quarter. So, we feel real confident in this book.
Sean, this is Steve. We have been very disciplined with a 15-year track record. It remains an area of focus and discipline, and we've refined the model multiple times during that period. We are pleased with what we're seeing and have strong confidence in it. With our current disciplines in place, we don't expect to experience what you mentioned regarding the auto institution.
Got it. Very helpful. Thank you. And then Zach, shifting over to the hedge program slide, it's always helpful. I noted the received fixed balance in the back half of 2025 came down a bit this quarter versus last. Can you update us on any adjustments made there in the quarter and then maybe highlight any future adjustments you're thinking about? Thanks.
Thanks for bringing that question up, Sean. So what we tried to illustrate on that slide is really the continued dynamic management of asset sensitivity, really bringing down asset sensitivity a lot, a third reduction in sensitivity just in the third quarter alone. We'll get to 50% reduction from Q2 by the end of this year and then to 60% by the middle of next year. And one of the things we try to highlight all the time in this is we're very dynamic. So we're continually looking at the most efficient way to really do those two objectives of protecting capital and maximizing and stabilizing NIM. So, we'll always make adjustments here as we deem it most efficient. An example of that. We just did another $1 billion of forward-starting receivers just in the early part of this quarter that are really starting out into the second half of 2025 that will just continue to drive asset sensitivity lower at the time we really want it.
So, we're always doing this. Really primarily at this point the game plan vis-a-vis asset sensitivity is gradually allow the pay fix swaptions to reduce and to expire, put on more forward-starting receivers when we see nice opportunities in the market to do that, gradually lengthen the duration in our U.S. treasury securities portfolio, and really optimize the kind of funding mix for lower structurally fixed funding, more structurally variable funding, and optimize lower levels of Fed cash. And so, those are really the components that drive the overall reduction in asset sensitivity.
Perfect. Thank you.
Ladies and gentlemen, we have reached the end of the question-and-answer session. I would now like to turn the call back to Mr. Steinour for closing remarks.
Thank you for joining us today. In closing, we delivered exceptional results for the third quarter highlighted by the successful execution of organic growth initiatives. Net interest income expanded, fee revenues grew strongly, expenses were well managed, and credit remained stable. Our strategy is working well and our investments in the franchise are delivering returns. We remain in an attractive competitive position, and we continue to seize opportunities to add talented bankers across our businesses. Collectively, the Board, executives, and our colleagues are Top 10 shareholders. So, we have strong alignment to deliver sustained value creation for our shareholders. As a reminder, we have an Investor Day scheduled in the New Year on February 6 and you're invited to that. And finally, thank you to all our Huntington colleagues for driving these outstanding results. Thank you very much for joining us today. Have a great day.
This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.