管理層發言
Greetings, and welcome to the Huntington Bancshares Second Quarter 2025 Earnings Call. 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, and good morning, everyone. Welcome to our second quarter call. Our presenters today are Steve Steinour, Chairman, President and CEO; Brant Standridge, President of Consumer and Regional Banking; and Zach Wasserman, Chief Financial Officer. Brendan Lawler, 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 will 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 turn it over to Steve.
Thanks, Eric. Good morning, everyone, and welcome. Thank you for joining the call today. Now turning to our results. I'll begin by outlining some key highlights, then Brant will talk about our opportunity with Veritex, and Zach will follow with a detailed review of the second quarter financials. As the environment around us continues to evolve, we remain committed to our vision of being the leading people-first, customer-centered bank in the country. We are focused on our core growth strategies and excited by the opportunities in front of us, including our recently announced acquisition of Veritex, which will greatly accelerate our growth in Texas. These opportunities are consistent with our long-standing aggregate moderate to low-risk appetite, which has delivered strong and consistent results through the years. For this reason, we are well positioned to maintain our strong performance.
On Slide 5, there are 4 key messages we want to leave you with today. First, we're delivering a strong operating performance with robust organic growth in loans, deposits and fees. The business is performing exceptionally well. And through the second quarter, we are ahead of our plans for the year. I'd like to thank all of my colleagues for their extraordinary efforts this quarter and everything they do for our customers and company every day. Second, we're driving strong revenue and profit growth year-over-year, consistent with the strategy we shared at Investor Day in February. This performance is supported by our earning asset growth, expanded net interest margin, value-added fee services and positive operating leverage. Third, credit performance continues to be stable at a low level of losses, reflecting the proactive management of our loan portfolios and our rigorous credit screening and disciplined customer selection.
And fourth, our strong financial foundation enables us to outperform through a range of potential economic scenarios. All of these factors contribute to our ability to support our customers, colleagues and the communities we serve while driving value for our shareholders. Turning to Slide 6. I'll recap our performance in the second quarter. We grew average loans by almost $10 billion year-over-year, supported by both core businesses and new initiatives. Average deposit growth also increased by almost $10 billion over the same time frame, highlighting the power of our deposit franchise to fund asset growth. Our deposit strategy remains focused on acquiring and deepening primary bank relationships, which we grew by 4% and 6% year-over-year in consumer and business banking, respectively. Importantly, we maintain disciplined deposit pricing while delivering this growth. Our investments in value-added fee services continue to deliver with 11% growth year-over-year in our strategic fee income areas of payments, wealth and capital markets.
In the quarter, we drove adjusted CET1 higher to 9%, hitting the lower bound of our targeted operating range of 9% to 10%. Credit performance remains top tier as net charge-offs further improved by 6 basis points from the prior quarter to just 20 basis points. Our liquidity remains strong with 2x coverage of uninsured deposits. Notably, our tangible book value increased 16% year-over-year. This growth in capital per share, coupled with our strong level of adjusted ROTCE at 17.6%, illustrates how our model is a powerful driver of value creation. We also advanced several strategic initiatives. We added a new middle market team in Florida and continue to roll out our full franchise expansion in North and South Carolina with branch openings. But most significant among our strategic advancements was our announced acquisition of Veritex. This combination will significantly accelerate our already strong organic growth in Texas. To recap the key elements of this important announcement, let me turn it over to Brant.
Thanks, Steve. Looking at Slide 7. As we spoke about earlier this week, this partnership with Veritex brings 4 key benefits to Huntington. First, Veritex has a meaningful presence in Dallas-Fort Worth and Houston and will serve as a springboard for substantial future growth in the state. Second, it brings together an outstanding group of new colleagues who have deep local relationships and a strong commercial banking franchise. We are especially pleased Malcolm Holland will be joining us as Chairman of Texas. Third, this combination is fully aligned with our model of delivering broad-based capabilities and industry expertise through local relationships and enables us to bring our full portfolio of products and services to customers in Texas. And fourth, we view this transaction as financially attractive for both sets of shareholders and expect a seamless integration. Turning to Slide 8. We expect that our partnership with Veritex will generate several significant areas of opportunity.
First, Veritex's reach and relationships will help us accelerate commercial lending and capital markets opportunities across commercial real estate, corporate, middle market and regional banking. Second, there are a range of incremental fee income streams we believe that will grow across both commercial and consumer customers, including in payments and wealth management. And third, we see the opportunity to fast track the build-out of a Texas consumer franchise. Veritex has more than 30 branches in the Dallas-Fort Worth and Houston MSAs, and we plan to add the full breadth of our branch-based and digital capabilities. In summary, the acquisition of Veritex is an important milestone for Huntington, and we're looking forward to closing this transaction in the fourth quarter. Now let me turn it to Zach to cover Huntington's financial results for the quarter.
Thanks, Brent, and good morning, everyone. Slide 9 provides highlights of our second quarter results. On a reported basis, earnings per common share were $0.34. As a reminder, this includes a $0.04 impact related to a securities repositioning and a notable item. EPS, excluding these items, grew 27% from last year. Return on tangible common equity, or ROTCE, was 16.1% for the quarter. As Steve noted, adjusted for the items this quarter, ROTCE was 17.6%. Average loan balances grew by $2.3 billion or 1.8% from the prior quarter. Average deposits increased by $1.8 billion or 1.1% versus the prior quarter. Reported common equity Tier 1 ended the quarter at 10.5%. Adjusted CET1 was 9%, up 40 basis points from last year and ended Q2 at the lower bound of our target operating range. As Steve mentioned, tangible book value per share continued to grow, increasing 16% year-over-year. We continue to demonstrate strong credit performance with net charge-offs of 20 basis points.
Allowance for credit losses ended the quarter at 1.86%. Let's turn to Slide 10. We generated 8% year-over-year revenue growth and 8% year-over-year PPNR growth on a reported basis. On an adjusted basis, PPNR grew 15% year-over-year. As Steve said, the business is performing exceptionally well and continues to build momentum. Turning to Slide 11. Loan balances grew 7.9% year-over-year, driven in particular by strength in commercial loans and contributions from our new initiatives. During the quarter, new initiatives grew $900 million, accounting for approximately 40% of the total loan growth. The primary drivers within new initiatives were our Texas and North and South Carolina regions and among our national specialty verticals, the Financial Institutions Group and Funds Finance. Of the remaining $1.4 billion of loan growth from existing businesses, we delivered $500 million from regional banking, $500 million from indirect auto, $400 million from middle market and $200 million from Corporate and Specialty Banking.
Partially offsetting this growth was a $240 million decline in commercial real estate balances. As we have highlighted previously, we are seeing a deceleration in the pace of balance decline in CRE as originations are accelerating while the rate of runoff is decreasing. Turning to Slide 12. Like Steve mentioned earlier, our results continue to demonstrate the strength of our deposit franchise. As I noted, average balances increased by $1.8 billion or 1.1%, driven by continued household growth and the deepening of primary bank relationships. Our overall cost of deposits declined by 1 basis point this quarter, reflecting our disciplined deposit pricing. On to Slide 13. During the quarter, we drove $42 million or 2.9% sequential growth in net interest income. This is almost 12% growth on a year-over-year basis. Net interest margin was 3.11% for the second quarter, up 1 basis point from the prior quarter.
This increase included a 2 basis point benefit from lower drag from the hedging program. This was partially offset by a 1 basis point impact from higher average cash balances. As I noted at a mid-quarter conference, our expectations for our run rate NIM for 2025 have increased by a few basis points from the prior outlook, and we saw the benefit coming through in the second quarter. Turning to Slide 14. As just discussed, we held modestly higher average cash balances in the quarter, and our average level of cash and securities at quarter end remained at 28% of total assets. Turning to Slide 15. We continue to manage our hedging program to accomplish our core objectives of protecting capital from a potential higher rate environment while protecting NIM from a potential lower rate environment. Over the last year, we have reduced our asset sensitivity to a near neutral position, and we expect to maintain that relative neutrality for the next year.
As you know, we frequently review the most likely paths of interest rates and actively modulate our positioning to the most likely scenario. Moving to Slide 16. On an adjusted basis, noninterest income increased by 7% or $34 million compared to the prior year. Our key areas of strategic focus, payments, wealth and capital markets collectively grew 11% year-over-year. These areas now represent 66% of the fee income mix, an increase of 6 percentage points from 2 years ago. Looking ahead, we see strong momentum across these businesses and expect them to remain key drivers of fee growth going forward. Moving to Slide 17. Within payments, we delivered 7% year-over-year growth in the second quarter, driven by an 18% increase in commercial payment revenues. Treasury management fees grew 10%, driven by continued success, deepening relationships across our customer base and growing contributions from our new merchant acquiring model.
Our commercial card portfolio also performed well, achieving the second highest growth rate in commercial card spend across the industry in 2024 according to the recent Nielsen report. Moving to Wealth Management on Slide 18. Wealth fees continued to gain momentum and increased by 13% on a year-over-year basis. Assets under management grew 12% from the prior year, supported by a 12% increase in advisory households. Over the last 12 months, we have gathered approximately $1.8 billion in net flows as we deepen our advisory penetration into our customer base. Moving to Slide 19. Capital Markets grew 15% year-over-year, supported by commercial loan production-related capital markets activity, including notable strength in underwriting, syndications and financial risk management products. Turning to Slide 20. GAAP noninterest expense in the quarter was $1.2 billion, in line with the guidance I provided in the mid-quarter update.
Growth from the prior quarter was primarily driven by incentive and performance-related compensation due to our increased outlook for revenue and profit growth this year. Our posture on expense management remains focused on driving positive operating leverage, both this year and over the long-range financial plan. We're pleased with the continued solid trend of operating efficiency improvements we are delivering. We continue to see strong traction in our programs to drive reengineering efficiency in our baseline operating costs, supporting sustained growth and investments to drive revenue. Slide 21 recaps our capital position. We continue to increase our common equity Tier 1. Our capital management strategy remains focused on our top priority of funding high-return loan growth while also driving adjusted CET1 inclusive of AOCI higher into our target operating range of 9% to 10%. Turning to Slide 22.
We are executing on our strategic initiatives and achieving strong growth while maintaining our disciplined credit management approach. Credit quality continues to perform very well. The allowance for credit losses grew $37 million from last quarter and ended Q2 at 1.86%. Turning to Slide 23. Forward-looking credit metrics remain stable. The criticized asset ratio was 3.82%, while the nonperforming asset ratio has been in a tight range for several quarters. Let's turn to Slide 24. While economic uncertainty remains elevated, we are encouraged by signs of improving sentiment compared to earlier this year. The growth environment improved month by month during the second quarter, and Q3 is starting off quite strongly. The outlook illustrated on this page is for stand-alone Huntington, excluding the potential impacts from closing our acquisition of Veritex. We will provide an update on those impacts as we get closer to the close, which we expect to occur in the fourth quarter.
On loans, we're seeing strong growth above our prior outlook, and thus, we are increasing our growth range to 6% to 8%. This reflects the robust performance in Q2 and our expectation for continued momentum into the second half. On deposits, we're raising our range to 4% to 6%. We are highly focused on expanding primary bank relationships and acquiring new households while remaining disciplined in our deposit pricing. For net interest income, we're increasing full year guidance to 8% to 9% from a prior range of 5% to 7%, reflecting the outlook for higher loan and asset growth and the benefits from the increased NIM outlook I referenced earlier. This level would represent record net interest income on a full year basis. We are maintaining the range for the expected growth in fee income at 4% to 6%. Where we end up in this range will largely be a function of the second half performance of capital markets.
We are currently tracking to the lower end of this range. However, the pipeline for advisory revenues is strong, creating the potential for a robust finish to the year, similar to what we saw in the fourth quarter of last year. If that occurred, we could end up in the higher part of the range. On expenses, we forecast full year expense growth of 5% to 6%. Given the increased revenue and profit outlook for the year, expenses from incentive compensation and volume-related drivers will be higher than the original budget. We remain focused on driving positive operating leverage this year. Our latest outlook represents a larger amount of positive operating leverage for 2025 than the outlook from the beginning of the year. On credit, given the strong performance in the first half, we're lowering our full year net charge-off guidance to 20 to 30 basis points. I will also take the opportunity to share some color on expectations for the third quarter.
We expect approximately 1% sequential growth in average loans. Deposits are expected to be approximately flat into Q3 with expected sequential growth into Q4. We anticipate net interest income to be relatively stable sequentially in the third quarter. Fee revenues are expected to be around $550 million. We expect expenses of approximately $1.220 billion, which will be about $20 million higher than Q2. Most of that increase is from the calendarization of marketing activities that are weighted this year to the third quarter tied to the rollout of the new Huntington brand campaign. We're very excited to unveil a new suite of TV, print and digital branding and messaging. We think it is a phenomenal representation of our legacy and where we're going in the future and will continue to power leading pace of growth in customer acquisition and deepening. Lastly, tax rate in the second half of the year is expected to be around 19%, consistent with our statutory rate and a bit higher than the first half level, which benefited from some discrete items.
Turning to Slide 25. In closing, our focus remains squarely on driving long-term shareholder value creation, and our performance is a direct reflection of our disciplined execution. We operate a powerful scaled franchise with multiple growth levers, and our performance in the quarter underscores the durability of our model and ability to deliver on our medium-term guidance. Risk management is deeply embedded in our culture, and we've consistently demonstrated top-tier performance in stressed environments as measured by DFAST and CCAR results. Our focus on adjusted CET1 reflects the rigor of our capital management approach and our liquidity remains top tier in the industry. The organic growth we are driving continues to significantly outpace our peer group, supporting the attractive revenue and profit growth we're delivering and reinforcing our long-term value creation strategy and this position of strength opens up strategic options like the Veritex acquisition that will further contribute to our long-term growth.
Our sustained growth in tangible book value per share and our strong return on capital are driving robust continued growth in the fundamental drivers of shareholder value. With that, we will conclude our prepared remarks and move to Q&A.
Thank you, Zach. We will now take questions.
分析師問答
Our first question is from Jon Arfstrom with RBC Capital Markets.
Zach, a question for you on the new net interest income guidance range. It feels like you have enough momentum to hit the higher end of that range. But curious in your mind what you see as the threats to hitting that higher end.
Yes. Great question, Jon. Thank you. And I would agree, we are well on track to potentially hit the higher end of that range. As we give these ranges, we always want to be a little conservative given the uncertainty, but I think hitting the higher end of the range is certainly in the cards for us. And when I think about the kind of the ingredients to that, we are tracking well in the loan growth range, feeling really good about the momentum in loans, particularly even just into the third quarter here starting off very, very nicely. And then NIM, I think I'm sure we'll unpack NIM in further questions, but generally expecting NIM to be quite stable here in the back half of the year, and those 2 things together should be the product of that. I think I don't feel, to be honest, a lot of threat against that range. But I think the biggest thing that we're watching clearly is just the stability of the economic environment and the stability of the environment vis-a-vis some of the uncertainties that emerged earlier in the year. It doesn't appear that those are coming back in any substantial way, but were they too that, that could potentially present a headwind.
Okay. And then Steve or Brant, can you give us some of the feedback you've heard maybe pro and cons from internal and external partners on the Veritex acquisition announcement? I think some expected you to be acquisitive, others did not, given the core momentum. But just curious what kind of feedback maybe positive or negative that you received?
I'll begin and then pass it to Brant, who has been leading the efforts and will also guide the integration. We've received very positive feedback and encouragement from our long-term shareholders over the past few years to pursue strategic acquisitions, especially given the success of TCF. This opportunity came together quickly and was perfect for us, as our focus has been on Dallas and Houston. As noted in our announcement on Monday, we already have a significant presence in Texas, having been here since 2009. We are very impressed with the Veritex team, and having Malcolm join us is a significant advantage. We visited on Wednesday and Thursday and met many of the employees; we are excited about the great new colleagues coming on board. Brant, what would you like to contribute?
Jon, that's a great question. As Steve mentioned, we were there for the last two days, and I can say we left even more impressed with our colleagues and even more optimistic about the opportunities that lie ahead. As we stated on the call Monday, there are various synergies we believe exist, such as expanding our retail banking and wealth offerings, growth in our commercial bank and some of our specialty services, and new regions that this could potentially open up. Overall, we are even more encouraged about the opportunities ahead.
Our next question is from Erika Najarian with UBS.
My first question is for Zach. It seems like we're noticing differences in deposit trends this quarter among regional banks. Given your loan growth, it was notable that deposit costs decreased by 2 basis points. Could you discuss the competition you're experiencing, particularly in relation to some of the organic growth initiatives you may have, and how we should approach deposit growth and deposit cost trends, especially in the absence of any rate cuts and what changes we might expect if the Fed does cut rates?
Yes. Great question, Erika. Thank you. And just to kind of set it up, very pleased with how deposits are performing here. We came into the second quarter expecting deposits to be around flat in the quarter and ended up growing more than 1% and on a core basis, even faster than that. So the deposit gathering teams are just performing really, really well and obviously driven underlying by growth in primary bank relationships. And as you noted, we did see deposit costs continue to trend down into the second quarter. Our working expectation at this point is we'll continue to drive solid deposit growth over the back half of the year here, just given the slightly stronger loan growth as well that we're seeing. That will likely drive deposit costs in a pretty stable range from here, assuming no rate reductions. Obviously, if there are some rate reductions, I would expect to see further opportunities to drive down costs in light of that and beta performance like we've seen in the past. Not seeing any notable major change in the competitive environment. With that being said, across the industry, we are seeing an encouraging, frankly, sign of growth reoccurring now on the loan side broadly. And so presumably over time, that will drive some higher competition, but we're not seeing that at this point. And that's the posture we've got.
And my second question would be for Steve and Brant. I think Jon asked about the feedback from the community and investors. And I'm wondering sort of what the feedback was from the lenders. I think Steve had a really good quote on Monday about a Texas bank for Texas businesses or something like that. And I guess I'm wondering how the Veritex lender sort of embraced Huntington coming from out of state. And also, you've mentioned that as you make impacts in the community, you started getting inbound inquiries. And I guess I'm also wondering as a follow-up to that, if that deal sort of also started maybe some inbound inquiries with other Texas teams.
Erika, I'll start, and Steve may add to that. First of all, as Steve mentioned, we were there the last 2 days, and we had a chance to meet with many of the Veritex colleagues. And I will say that the general reaction from that group is excitement. Having Huntington will bring more capabilities to the table. They have a great customer base that they've established deep relationships with. And now there's a view that potentially they can do quite a bit more for those customers. There's also been quite a bit of customer outreach on the part of the Veritex colleagues. And from the customers, there is a view that there will be more opportunity, more opportunity to expand a larger balance sheet, more capabilities. There's also a level of excitement around our local structure. This is an organization that's obviously been headquartered in Texas. And now with our regional structure and regional presidents in Texas, Malcolm as the Chairman of our Texas organization, that creates a level of comfort, a level of sense that, that team will own the success of our Texas business. And I think there's a great deal of optimism as to what the collective team and what we can do in this partnership together to really expand there in Texas.
Erika, I'll add that we also met with our team in Texas and felt a similar level of enthusiasm. Our decision to make this move is partly based on the success and growth we've experienced since 2009. We have a few hundred colleagues in Texas, including 100 customer-facing bankers, who have been doing an excellent job for us. The combined teams will consist of several hundred new business-oriented individuals, allowing us to fully implement our capabilities. This is a significant step for us, and we see it as a launching pad. We are very excited and will continue to invest in Texas, receiving inquiries as we have in the past. We plan to expand there. Texas, as Brant mentioned, is a huge economic engine and will become our third largest state in terms of deposits after we finalize this. We are very thankful for the opportunity to collaborate with Malcolm and the outstanding team at Veritex.
Our next question is from Manan Gosalia with Morgan Stanley.
Zach, I was wondering if you can unpack the change in the expense guide. I think you mentioned incentive compensation being higher, and that's, I guess, fair given the better top line. But if NII reaches the higher end of your guidance range, is it fair to assume that expenses will reach the higher end, too?
Yes, that's a great question, Manan. Thank you. As I mentioned in the prepared remarks, the main reason for a slightly increased expense outlook is the higher revenue and profit expectations for the year, which is reflected in the incentive compensation. Additionally, generally higher volumes have also contributed to increased costs, which is clearly a favorable situation. Overall, we feel positive about how things are progressing. We now have more operating leverage than in our original budget, possibly an increase of 0.5 to 1 point. It's important to note that when a year is performing strongly, as this one is, we need to catch up on some of the accrued incentive compensation. Some of the growth in Q2 was due to a catch-up of accruals that would have been made earlier if we had anticipated the outperformance sooner. We're very optimistic about this situation. We also aim to make sure our ranges are consistent, so if we're on the higher end of the revenue projections, you can expect to see expenses also at the higher end.
Got it. And then secondly, on loan growth to maybe nitpick on what is a good story. The growth from the new initiatives slowed this quarter. Is it getting more competitive as some of your peers ramp up? Is it just a base effect? Or maybe I'm just reading too much into a quarter number?
So you may be nitpicking Manan a little bit more than probably is reasonable. Honestly, we see just a terrific level of production, something like $1 billion of growth here. And as you look out into the back half of the year, we're expecting to see that or better continued contribution. Remember, there's seasonality in all these businesses here. So I wouldn't attribute too much to it. We obviously had a very, very strong fourth quarter and first quarter here. But I think the run rate we're on is pretty solid and should continue to support as we look out into '26 and beyond, not to give formal guidance, but we continue to see the opportunity to drive mid- to high single-digit loan growth and those new initiatives being a big part of that.
And Manan, we had a number of loans and capital markets activities just spill into July. So we actually had a very strong start for what's typically a slow couple of weeks.
Our next question is from Ebrahim Poonawala with Bank of America.
Maybe I guess, given all the Texas focus, maybe I was wondering if you or Brad could spend some time on just give us a mark-to-market on Carolinas in terms of the build-out. Are we still looking to hire new bankers, kind of the time line of new branch openings? Just would love to know how all of that is gaining traction and kind of outlook there.
Ebrahim, it's a very good question. We remain incredibly optimistic about Texas, North Carolina and South Carolina. In fact, as you know, if you look at the performance of those markets from an economic perspective, those combined are outpacing the rest of the country in job growth and population growth by almost 2x. And so we're going to continue to invest in both. We continue to look for really strong bankers to support what we're doing in North and South Carolina, and we feel good about where we are today. We are continuing to build out our branch network. We've opened 2 already. We have several more opening between now and the end of the year. And next year will be our big year for that. We'll have more than 20 open next year. So we continue to invest there. Obviously, we've talked a lot about Texas this week and the investment, and this will create a springboard for potentially more.
And just on that, and I appreciate that probably for now, the strategic priorities are clear over the next 6 to 12 months to get VBTX done, what you said. As you look forward, from an inorganic standpoint, would it make more sense to do additional deals in Texas versus Carolinas. Just are there differences in the markets where M&A is a better way to incrementally grow versus the other?
The way we think about Ebrahim is we're going to drive the core. That is our focus. We've had a terrific couple of years. We have clear momentum as we go into the back half of this year. and many of the investments are not mature, they're not performing at what will be their mature levels. So we're optimistic about '26 and beyond in terms of core growth. We happen to find an opportunity to combine with a terrific organization, great people, the leadership that Malcolm will provide on an ongoing basis, an important part of our overall consideration. And we do think Texas is like to do business with Texas, and we now have hundreds of bankers in Texas once we close this partnership. But we're going to look to drive the core in Texas as we do in the Carolinas and elsewhere in the franchise.
Our next question is from Steven Alexopoulos with TD Cowen.
I wanted to first ask about the funding strategy. It appears you plan to use some of your excess liquidity in the second and even into the third quarter. What is the reasoning behind not increasing deposits more aggressively to support loan growth? Is it due to the competitive environment, or do you expect interest rates to be lower in the coming quarters? What leads you to adopt a patient approach here?
Yes. Steven, thank you. You were clipping out a little bit as you spoke, but I think I got the gist of your question. So I'll take that. And look, really, what I would characterize what we're doing now is just intense optimization of funding and loan growth to drive the best NIM outlook that we can. And I mentioned in the prepared remarks that we were running with a little bit of cash in the second quarter, frankly, as a function of how strong the deposit gathering had been. It just gives us the opportunity now to fund leveraging some of that and optimize NIM and really just continue to keep everything in a great balance. I do think the deposit gathering program is very much continuing. And as we get into Q4, I would expect sequential growth again and generally, as we look out over time, and certainly, that's our advanced planning for 2026 at this point. I expect to see deposit growth fairly well matching loan growth over the longer term.
Got it. I noticed that noninterest-bearing deposits decreased this quarter. I'm wondering if this marks a low point and whether it's due to customers holding more cash in their businesses, which could indicate potential for loan growth, or if customers are moving their funds into higher-yielding products.
Yes, that’s a good question. We are observing fairly stable trends in the overall noninterest-bearing mix and do not anticipate any significant changes in the next couple of quarters. Our perspective is focused on low-cost funding, with checking accounts being a significant part of that. One of the slides in our presentation showcases the growth in checking accounts, which is beneficial for us due to their lower cost. This segment has been growing fairly well. Therefore, while there may be some modest shifts in the noninterest-bearing category, we expect minimal changes. Our main objective is to continue expanding this lower-cost funding category, particularly with checking accounts, and we have seen strong performance in that area throughout this year.
Our next question is from Ken Usdin with Autonomous Research.
I have a quick question about the net interest income for the third quarter; it seems stable. We have a day back, and there’s significant momentum on the balance sheet. I'm curious about what is leading to the flat potential results for the third quarter and if there are reasons it could improve, as well as what the negatives might be that could offset that.
Good questions. This is Zach. I'll take that one. It could well come in better. I think I'm expecting a couple of bps likely lower NIM, probably trending around the 308 to 310 level for Q3 and Q4. So that's just a little bit of extra headwind there. I think if I unpack the NIM into the third quarter, 1 thing that we're seeing is a bit more a few basis points of hedge drag coming back up as some of our forward starting to receive fixed swaps come online and some of the pay fixed swaps that we've had over the last couple of years begin to mature. Obviously, still also benefiting, however, from strong asset repricing trends. And as I just noted in Steven's question, a bit of optimization of cash and securities into the third quarter. So that's really the modest headwind there, but it will still represent, I think, an 8% to 9% year-over-year growth in spread revenues are really, really strong, and that's what the full year is tracking to also over the course of this year.
Okay. And then just 1 on the fees and similar, you mentioned towards the low end, but with capital markets, a bit of a flex factor. Can you just talk about the growth drivers that you're seeing on the fee side aside from the plus or the minus around capital markets?
Yes, that's a great question, Ken. When we look at our fee drivers, as outlined during our Investor Day in February, payments, wealth management, and capital markets are the three main areas of growth. Together, these segments grew 11% year-over-year in the second quarter, which reflects the long-term growth rate we anticipate from these significant opportunities over time. In payments, we are seeing strong growth in commercial payments, treasury management, and our merchant acquiring business. I expect to see similar growth rates in the second half of the year as we move forward over the next few quarters. Wealth management is also performing exceptionally well, with the team effectively executing our plan by growing households and assets under management, largely fueled by new asset acquisitions and positive net flows. These year-over-year growth trends in wealth management are expected to remain consistent in the coming quarters.
Our next question is from Peter Winter with D.A. Davidson.
I understand that you are focused on achieving top quartile profitability and have strong ROTCE. You experienced positive operating leverage this quarter, but how are you considering the efficiency ratio in the medium term? It has remained stable over the past five quarters, around 59%, while top quartile banks tend to be in the mid-50s.
Yes. Good question, Peter. I'll take that. And a couple of things I'd say. One is, we don't look at the level of efficiency ratio per se as any sacrosanct target it is so much, as you know, a function of the mix of the revenue characteristics of the company between spread and fee revenue and even kind of the mix of fee revenues, as you know. So what is much more important to us than the level is the trend. And ultimately, I think I mentioned earlier on questions that we're expecting to see very, very strong expansion in operating leverage this year, and that really contribute to a continued improvement in the efficiency ratio as we go into the back half of this year and our working range plan continues to integrate positive operating leverage each year as we go forward as well, just to continue to grind that lower.
Peter, this is Steve. We believe we still have substantial investment opportunities in a number of these newer businesses and certainly the geographies that we're in. And assuming we can drive profitable growth at the levels that we have historically, we would continue to invest and so that will put a little bit of restraint on translating the operating leverage into a better efficiency ratio over time. Over time, we will clearly meaningfully improve that efficiency ratio.
Sure, Peter. This is Brendan. I'll address that for you. Regarding criticized loans, we saw a decrease to 3.82% of the total loan book, mainly due to a 5% reduction in our substandard category. This indicates improvement in the more substantial portion of the portfolio. The NPAs for the quarter increased, but as you mentioned, we've been maintaining a range between 60 to 63 basis points for the past six quarters. Concerning the $76 million you mentioned, there isn't anything significant; it consists of one-off transactions that transitioned to that category as we actively manage the portfolio.
Our next question is from Chris McGratty with KBW.
Zach, on the optimum leverage, I think in your prepared remarks, you talked about you're getting more than you thought at the beginning of the year. I'm interested, does this narrative get easier, harder about the same as you kind of go into next year?
Yes, that's a great question, Chris. Thank you. The level of operating leverage we're generating right now, between 1.5% and 2%, is quite solid. Typically, when we plan for the long term, we aim for about 1% to 1.5% operating leverage annually, so it's not drastically different. This year, we've observed a significant increase in net interest margin compared to last year, which is a key factor in this improvement, alongside robust fee growth. Our expense management program is effectively in place, and I'm very pleased with our ability to implement reengineering within our operations, allocating more expense capacity towards investment areas while maintaining well-controlled overall expenses. So, while it's not dramatically altered, I'm very satisfied with our performance this year.
Great. And as my follow-up, I'm interested in just deposit pricing differences in your legacy and new markets, trying to think about funding the growth initiatives, the 60-40 that you're kind of running with now? Is there notable differences in your Midwest markets versus your Southeast?
Look, I mean, every market is different. So it's really hard to generalize in that way. I would say the places where we have just great depth and density in our business, we often have the strongest deposit gathering performance, but it's really hard to generalize. We're seeing good performance across the board. And I'll tell you just it's an exceptionally rigorous process as we optimize for the next unit of where deposit gathering is happening. And so really, really efficient kind of across the board here.
Our next question is from Matt O'Connor with Deutsche Bank.
I would like to inquire about the targeted capital levels from a medium-term perspective. You've reached the low end of your range, including AOCI. I understand that you won't be buying back stock until the deal is finalized. However, how do you view the medium term, specifically regarding whether you'll stay at the lower end or move toward the higher end of the 9% to 10% range? You perform well in Key CAR, and there are positive indicators for others in this recent cycle. I feel optimistic about the upcoming years, and there may be some easing from the rating agencies. How do you assess that 9% to 10% in light of these factors?
The 9% to 10% operating range for adjusted CET1 is beneficial for us. Our approach to capital focuses on maintaining a position of strength, not just in capital but also in liquidity and credit, allowing us to support our customers throughout various cycles and seize opportunities, especially during economic disruptions, which has proven effective in recent years. We aim to remain on the conservative side. That said, we're pleased to have reached the low end of that operating range in the second quarter. We anticipate moving higher towards the midpoint of this range. As we do this, we can achieve our goal of funding high-return loan growth while gradually initiating capital distributions through repurchases after completing the Veritex acquisition. What encourages us is our ability to strategically enhance our return on capital, as evidenced by the 17.6% adjusted return in the second quarter. The internal earnings capacity and capital generation of our model will provide significant flexibility to meet these objectives.
There are no further questions at this time. I'd like to hand the floor back over to management for any closing remarks.
So thank you for joining us today. In closing, our teams continue to deliver exceptional results. We're very pleased with the quarter, highlighted by our leading loan, deposit and PPNR growth. We have never been better positioned, and we're confident in our ability to drive continued strong performance. So finally, thank you to the nearly 20,000 colleagues. We obviously would not be able to take care of our customers to drive this outstanding performance without your phenomenal efforts. And let me say welcome to our new colleagues who have been joining us from Veritex. Thank you for your interest in Huntington. Have a great day.
This concludes today's conference. We thank you for your participation. You may now disconnect your lines.