Huntington Bancshares Incorporated (HBAN) Earnings Call Transcript & Summary

I am showing 9:00 on the dot. So in keeping with this conference a long standard intuition of staying on schedule, we will do that. I'm Jason Goldberg, I cover the U.S. large-cap bank stocks here at Barclays, and thank you for coming to our 22nd Annual Global Financial Services Conference. We have a full slate of banks, large-cap banks today, a lot of them in this room, particularly this morning. I'm very pleased to have Huntington Bank kicking off this morning from the company of Zach Wasserman, Chief Financial Officer; and Brant Standridge, President of the Consumer and Regional Banking. Though Zach and Brant are going to take us through some quick slides, and then we're going to do some Q&A. So with that, let me turn over to Zach.

Good morning, and thanks, Jason, and thank you to Barclays for hosting us today. I'd like to start by welcoming everyone listening. We really appreciate your interest in Huntington. Joining me today is my colleague, Brant Standridge, who serves as Huntington's President of Consumer and Regional Banking. Following our overall business update, Brant will share some details regarding exciting franchise expansion we're announcing today. We will then turn it back to Jason for Q&A. Before we get started, please review Slide 2 which applies to forward-looking statements we'll be making today. Turning to Slide 3. 2024 continues to be a dynamic year, and Huntington strength and consistency of performance has shown clearly during this time. That strength and commitment to our purpose is, as always, supported by our nearly 20,000 engaged colleagues across the bank. Moving to Slide 4. There are 5 key messages I want to leave you with today. First, we are leveraging our position of strength to execute organic growth strategies, which are supported by our robust liquidity and capital base. Secondly, we are delivering high-quality loan growth and deposit growth through performance in our core businesses and new markets and verticals. Third, we are driving net interest income dollars higher after having troughed in the first quarter. This is driven by the expanding earning asset levels as well as our dynamic balance sheet hedging strategies, which have supported the margin. Additionally, we're executing a proactive and disciplined down beta action plan in advance of expected rate cuts. Fourth, we are building on our success to date from our Carolinas initiative, and are now expanding those efforts to bring the entire Huntington franchise to these attractive geographies. Brant will provide greater detail on these efforts shortly. Finally, the net result of these actions we expect to result in expanded profitability throughout the year and into 2025. Turning to Slide 5. We continue to outperform peers on both loan and deposit growth over the past 1.5 years. Loan balances have increased by 2.5%, while peer median balances have been declining over this period. For the third quarter, average loan balances through August 30 have increased by $800 million. Excluding the continued reduction of commercial real estate balances, loans have increased by $1.1 billion on average quarter-to-date. Quarter-to-date loan growth has benefited from sustained new commercial and industrial production, both from our existing core businesses as well as new geographies and verticals with C&I up $800 million. Distribution finance balances, which are typically seasonally lower in the third quarter, have declined by $700 million on average. We anticipate these balances to begin to rebuild as we exit the quarter and result in higher averages in the fourth quarter compared to the third quarter. Consumer loan balances in total have increased by $800 million quarter-to-date. On the deposit front, balances have further expanded in the third quarter, increasing by $2.2 billion quarter-to-date. This continues the trend of substantial outperformance relative to our peer group. Importantly, we have given $8 billion of deposit growth over the past year, and we are well-positioned to fund both accelerated loan growth and take decisive proactive steps in implementing our down beta action plans. Turning to Slide 6. We continue to forecast growing net interest income on a dollar basis driven by our sustained loan growth and stable near-term net interest margin. Our full year guidance for net interest income is unchanged and expect to come in between our range of down 1% to 4% on a full year basis. On the bottom of the slide, we've recapped our asset sensitivity position and expectations to reduce that position over the coming quarters. As you know, we intentionally increased asset sensitivity prior to the interest rate cycle to capture the benefit of rising rates and to protect capital, that strategy worked very well. Late last year and early this year, as rate expectations were reaching their top we began systematically reducing that sensitivity for an eventual down rate environment. As always, the goals of our hedging program remain the same: protect capital and upgrade scenarios and protect NIM in down rate environments with the objective of remaining in a position of strength and reducing volatility in our business model. We have already reduced our asset sensitivity in a down 100 basis point ramp scenario from 4% level in late 2021, to the 2.5% we reported at the end of the second quarter. We expect to further reduce that level by approximately 40% by the end of this year and over 50% by the middle of 2025. This is driven by the maturity of our pay fixed swaps, which will begin to mature next year as well as forward starting to receive fixed swaps, which become effective increasingly over the course of 2025. Additionally, we're managing the balance sheet mix, duration and funding costs to support all these efforts to reduce down rate asset sensitivity. We remain very dynamic in managing the business as this interest rate environment evolves. As we discussed in the Q2 earnings call, we're actively executing our down beta action plans. The latest market outlook for something like 8 rate cuts from the Fed by the end of 2025 is incrementally more supportive for down rate action plans than the outlook we shared in July. Should we see that roughly 200 basis point reduction in Fed funds by the end of next year, we believe our cumulative down rate beta through the end of 2025 would be in the mid- to high 30% range. This is higher than the mid- to high 20% range we discussed in the Q2 call. We would expect that down beta to trend even higher into the mid-40% range into 2026 as the rate cycle stabilizes to a new level. Briefly turning to Slide 7. Credit continues to perform exceptionally well. Net charge-offs have been relatively stable over the past 3 quarters, and our allowance for credit losses is top tier compared to our peers. On Slide 8, I would like to recap our operating approach. We're leveraging our position of strength to drive the organic growth I mentioned earlier. Loan balance growth for the full year, we see coming in at approximately 3% and we continue to forecast year-over-year growth in loan growth rates accelerating in both the third and the fourth quarters. Our dynamic balance sheet management and hedging program as well as our down beta action plan, we believe supports a relatively stable near-term margin with opportunity to expand margins as we move later into 2025 as the hedging program incrementally benefits. Fee revenues remain a critical priority for us and our 3 key areas of focus: capital markets, payments and wealth management are the drivers of growth. We expect core fee revenues for the third quarter to come in at approximately $500 million, and we remain on track for our full year outlook. On the expense front, we continue our rigorous expense management focus, taking actions to drive cost savings across the organization and allocating those savings to fund revenue-producing investments. We continue to see core expenses for the third quarter at around $1.130 billion level. Additionally, we expect to record approximately $20 million of additional notable expenses in the third quarter tied to ongoing efficiency programs. These actions will support expense savings, which we reinvested to self-fund many of our revenue-producing initiatives. We are maintaining our disciplined focus on credit through the cycle, aligned with our aggregate moderate to low risk appetite. Finally, before I hand the mic over to Brant, I am pleased to announce that Huntington will be hosting a 2025 Investor Day on February 6, of next year in New York City. We look forward to updating everyone on our comprehensive set of strategies at that meeting. Now over to Brant to share an update on our Carolinas initiatives.

Thank you, Zach, and thank you, Jason, for having us today. On Slide 9, let me step back for a moment and highlight the series of new growth initiatives we have launched over the past year. We've added 6 new commercial specialty verticals ranging from deposit only to full relationship opportunities. In addition, we've expanded our presence into the Carolinas and Texas with middle market and regional banking. And just last week, we announced the addition of a mortgage service lending team that closely complements our existing teams focused on mortgage servicing deposits and funds finance. For today's discussion, I would like to specifically focus on the opportunity in the Carolinas. The top left slide of 10 recaps our Carolina initiatives to date. We've established a presence across 5 markets in North and South Carolina, each served by dedicated bankers on the ground in both commercial and regional banking. We've also added resources in our Auto Finance business, and our national SBA practice, where we've already achieved a #2 ranking in the state of North Carolina. As of today, these teams are staffed with 60 bankers across the markets. The quality of these teams is top tier and reflects some of the strongest banking talent operating in the markets. We have a full relationship banking focus, and our offering reflects that, deposits, loans, treasury management, payments and other services. We've been very pleased with the early successes from these teams as we're seeing strong new customer acquisition, solid revenue performance and accelerating pipelines across loans, deposits and fees. Turning to Slide 11. The opportunity set represented by these markets is substantial which is why we were drawn to the Carolinas first through our national specialty verticals and then through our launch of our local commercial business. Each of the Carolinas markets illustrated here represents a sizable population base with attractive growth rates that would rival many of our existing markets. These new markets have the potential to all rank within our top 20 largest markets by population, adding nearly 10 million consumers and over 150 billion in deposits to our target market opportunities. This concept is not new to us. We have, for some time, been focused on expanding our presence into larger and growing geographies like these. For example, our efforts to leverage the opportunities in Denver and the Twin Cities, afforded through the TCF acquisition, provide another great example of this focus. If I can direct your attention to Slide 12. After driving strong success in the initial Carolinas launch and observing firsthand some of the most attractive high-growth geographies in the country. We've decided to bring the full Huntington franchise offering to these 5 markets and also out of 6, Columbia, South Carolina. This investment will expand on our full relationship approach with wealth management, consumer deposits and consumer lending. This will be supported by an expanded local branch network. We believe this investment will also support the continued acceleration of our commercial and regional banking activities. Our full launch will be executed over several years with branch site selection ongoing as we speak, and construction slated to begin in '26 and beyond. Importantly, the cost associated branch builds, CapEx and staffing are well within our business as usual investment capacity that we planned in '25 and beyond. And these efforts will not impede our ability to continue the disciplined expense management that you just heard Zach described. Turning to Slide 13. Given the significance of this branch investment, it is important to understand that we have established a proven de novo playbook. This playbook incorporates a distribution strategy focused on acquiring the right locations, a launch program that leverages regional leadership aligned across business units as well as a customized marketing plan that incorporates the best of both brand building and lower funnel marketing in order to drive new customer acquisition. Our process is disciplined and differentiated. We are intently focused on hiring the right team, and we leverage data and conduct proprietary market research to select A+ sites with high traffic visibility, convenience and growth potential. Upon branch opening, we strive to create an exceptional experience for our customers that delivers highly personalized service and leads to full primary banking relationships for consumers and businesses. Through our digital marketing and multichannel access, we magnify the impact of the population served near our physical footprint with a goal of achieving 25% unaided awareness over time. The good news, our strategy works. And this year alone, we opened 5 new branches in growth markets within our footprint. All of which had secured the loan and deposit business plan 4 months, 6 to 12 by the time they had opened their doors. We're confident the Huntington franchise value proposition with the top-tier service and award-winning digital capabilities will be a compelling proposition in these markets. In summary, Huntington has demonstrated an ability to leverage our local presence and scale to acquire and deepen customer relationships. With those remarks, let me turn it over to Jason for Q&A.

Thank you, both. That was a lot in there in a short amount of time, which will kind of maybe come back to some of that. Maybe Zach, maybe you should start off kind of big picture on your thoughts on kind of the overall economic landscape in your markets, fairly close to your customers and just kind of what that means for overall growth trends through the balance of this year and maybe into 2025?

Sure. Generally speaking, what we're seeing is continued economic growth across our businesses and our footprint. As you know, we have national businesses, and so we're exposed to the totality of the economic growth in the United States, but clearly a weighting towards the Midwest. And I think, as has been widely reported, the Midwest continues to benefit from an ongoing set of investments into it that are really supporting economic growth. With that being said, we are seeing lower levels of economic growth and some degree of slowdown relative to what we saw 6 or 9 months ago. And I think you're seeing signs of consumer activity, which is marginally lower and also caution on the part of corporations in terms of their activity. With that being said, unemployment continues to be fairly low in the scope of history. And so what we're seeing is continued economic growth, albeit at a slightly lower level. And I think what that means for loan growth as your question is it's a somewhat more challenging environment to grow loans today than we would have expected it to be 6 or 9 months ago, and yet our strategies are still really working as we noted, seeing solid growth in our core businesses and execution on or better than planned in our new growth initiatives. And that's what's underlying the growth forecast we have around 3% loan growth this year and continue to expect acceleration on the year-over-year basis as we go throughout the rest of this year and into next year.

I guess up 3% this year, well, I guess, better than peers is, I guess, up 3% to 4% was your guidance back in July. So still I would think that's going to end up at the upper end of the peer group. Maybe, Brant within that, maybe just talk to what you're hearing from your customers and just kind of where do you see the pockets of opportunities to grow loans?

Yes. Just to echo Zach's comments. One, A number of our customers are still cautious. Two, there is some slowing in consumer activity, but it's really more normalizing, not an example of or indication of some type of cliff event. We see a lot of opportunities, and Zach described it correctly, one in our core businesses. Our Auto Finance business, a number of banks have pulled back from that space. It's given us a chance to lean in and it's something we know really well, and it's created opportunity for growth and for margin improvement in that business. Our regional banking franchise, we made some organizational changes a year ago to make that business even more locally focused. And that is absolutely paying dividends, and we're seeing strong growth there. Our SBA franchise, we made a decision a little over 1.5 years ago to begin portfolioing assets there versus selling assets. And we're seeing strong growth there and continued strong performance with that core business. And then in the commercial area, our Health Care Finance Vertical is an area that is having very strong pipelines and doing well. And then when you combine that with a number of new initiatives you heard Zach described, Carolinas would be an example of that. Our traveling gaming team, another example, Funds Finance. Another example, when you combine the strength of the core businesses with these new initiatives, it contributes to the really top of the peer loan growth guidance that we've provided.

And then if we could get the first ARS question up on the screen. So for those new to this conference, we do this every year, there's clickers in front of you for each company. The first question will be the same is kind of what your overall position is in Huntington. And we'll publish all these answers tonight, so you can see I'm not going to spend time at least on the first one. I guess, Brant, maybe just sticking with that on the Carolinas. I mean you're not the first bank to say, let's go build branches in the Carolinas. There's obviously well on tranche players like BofA and Truist and U.S. banks expanding energy from Morgan and others. I guess, what gives you confidence you could be successful there? Why is this the right time? And maybe kind of what are some of your targeted outcomes?

Yes, absolutely. So first of all, it's important to know that we've been there for some time with our national and specialty businesses. So we have a good sense of the market because of their presence there, to the concept of expanding the franchise into faster-growing geographies is not new to the company. I mentioned earlier in the comments, the expansion that we're making in Colorado and also the Twin Cities, and we have larger markets in our core footprint, like Chicago, for example, that provide a lot of upside opportunity for us. We've been very pleased with the level of talent that we've been able to attract in a short period of time. We've been very pleased with the growth and vitality of the market. Obviously, that's the reason that many organizations are going there. And because of that momentum and the speed in which these bankers have been able to achieve really payback, that gives us some confidence to now take the next step and bring a larger portion of the franchise to the table. We also, because of our efforts in the markets that I just mentioned, we've perfected or continue to -- and refine a playbook for a de novo branch expansion. We've learned a lot in Denver and the Twin Cities, and we will apply that in the Carolinas, and we believe the start that we already have, the entrenched presence through the national businesses, combined with the learnings and the playbook that we've developed give us a lot of confidence that this will be a very successful endeavor for Huntington.

Got it. And Zach, one question we've gotten is from your slides this morning is you kept the NII guidance unchanged, but the rate environment has obviously evolved since July when you last spoke to us. Maybe just talk to, I think when you were expecting 2 cuts this year. Kind of what's the store rate assumption in your ad hoc.

The rate curve that we're using now has between 3 and 4 cuts in it this year and 200 basis points of cut through the end of 2025. And in that environment, we see margin quite stable in the near term with the opportunity to actually expand and rise over the longer term. So a few drivers of that. We continue to benefit from fixed asset repricing, around 50% of our loan book is fixed and continues to benefit as new production yields are significantly higher than roll-off yields. We also -- as we noted a couple of times in the prepared remarks, are already taking actions to reduce deposit costs. We're seeing those top out and begin to prepare to come down. A number of actions were taken on the down beta playbook, including shortening CD duration, shifting production to money market, which is a faster down rate beta management product and even selective back book pricing reductions, which we have done. And so we'll continue to do those efforts. And I think to the extent the yield curve and the rate cuts from the Fed are even faster than expected, that's incrementally more supportive of that down beta action plan, which I noted before. And then lastly, I would highlight that in the second quarter net interest margin, we had about 16 basis points of drag from hedging activities. And we've moved it for some time that, that would go down to about neutral by the middle of next year, clearly, as the rate environment has come down, that outlook is even more positive than it was before. And so it's really the contributing factor is to keep the margin generally pretty stable here in the range in the near term and then to expand as the slope gets into a more kind of upward sloping normal shape over time.

I guess you showed good deposit growth in that quarter-to-date slide. Any, I guess, talk either on kind of mix shift kind of within the quarter from noninterest-bearing, interest-bearing? And also just you kind of mentioned executing the down beta playbook. Any pricing actions you're taking now deposit in the last quarter, you were a bit more aggressive in terms of taking up deposit pricing. Clearly, the rate environment has kind of shifted since then.

Yes. I think the deposit growth plan has been performing exceptionally well. It's been beating our plan. As you probably know from several quarters ago, we updated our guidance during the year to move the deposit growth range to the high end of the initial budget range that we have given of 2% to 4%, we're growing between 3% and 4%. We continue to see that now from a deposit growth perspective. So acquisition is doing exceptionally well. And the mix shift dynamics that we would expect to see at this point in the cycle are playing out. i.e., noninterest-bearing deposit mix is stabilizing. We may see that drift just a tiny bit into the third quarter, but it's effectively flat at this point, as you would expect it to be before beginning to grow again as the rate environment reduces. And as we just discussed, taking a number of actions from a pricing and competitive perspective to drive the down beta playbook, including back book pricing, but also front book pricing.

Maybe going up to the next ARS question. We're going to ask this beta question for a lot of the regional banks or looking all the regional banks and some others, and we'll kind of look to see what the audience expectations are beta. But Brant, I'm going to turn it over to you and get your perspective. I guess it used to be mid- to high 20s beta question, Zach kind of mentioned the high 30s data. Maybe just provide some additional color on kind of the down beta strategy, how quickly is the reprice deposits. The Fed, say, cuts, let's say, 25 basis points next week on September 18. What do you do September 19? And just how we should think about that?

Well, so our second quarter guidance for beta, obviously, the market's improved since then. That was not a full rate cycle guidance, it was a '25 guidance. And so we would expect, as you get into a full rate cycle, that beta number will be larger. And given the recent pricing -- I mean, interest rate changes or views of interest rate changes, we believe we'll outperform that as Zach described. A couple of things I'd mention. Number one, our favorable loan deposit ratio and the improvement of that, along with the growth that we've seen over this last 18 months, really gives us, we believe, an advantage going into this cycle. We are seeing customers begin to accept lower rates. And in fact, for the last number of months now, our landed rates on renewing dollars are actually coming down. So that gives us a lot of confidence. We also have been testing for a number of months tactics in each of the deposit portfolios on what our actions would be in a down market. We've begun shortening duration. So we've gone from 7-month CDs to now 5-months CDs to continue to prepare us for that. And then to your question about tactics and how quickly do we move. Essentially have every pool of deposits in the company. We're looking at those separately. So we know specifically for a pool of deposit, what is the beta opportunity that exists for that pool somewhere 100%. Some are much less than that because of where they sit today. And we have very specific tactics for each of those. So if there were to be a rate movement in the next Fed meeting, there would be a number of those where you would take immediate action. There would be others where you could not take immediate action, and our beta guidance really reflects that granular view of the deposit base.

Got it. Maybe put up the next ARS question, which had to do with next year's net interest margin. And I guess, Zach, before I kind of move on towards the balance sheet. It sounded like your outlook for NII and NIM next year is a bit more constructive, I think, that investors kind of fear in terms of with respect to margin and just overall net interest income. I guess just kind of what gives you maybe some confidence with the Fed expected to materially cut rates? And just how do you think about NII and NIM for next year?

Yes. Well, look, I think that a couple of things just I mentioned earlier, but I'll just expand on it now. In terms of the margin as we go into next year and expecting flat to rising. And the driver of that is really, a, like I said, continued benefit in fixed asset repricing. Effective execution of a down beta and reduction of liability costs as we go throughout the course of this rate reduction cycle. We've demonstrated that on many numerous prior cycles that have a high degree of confidence of achieving that. And then the benefit of our hedging program and the reduction of asset sensitivity. I referenced in my prepared remarks that we've already reduced asset sensitivity quite a bit, and there will be a very significant reduction over the last -- over the next couple of quarters here which will also help to maintain the margin. It's a very concerted plan to keep the margin within a tight range, and that's the playbook we managed to achieve that. Of course, as yield curve gets to be kind of more normally upward sloping, that will also be constructive to a higher NIM over time.

And then just maybe shifting to fee income. I guess you reiterated the guidance of about 5% to 7% for the year. Kind of for the first half of the year was only up closer, I think, 5%, 5.5%, call it. So that implies an acceleration. Just maybe talk to some of the drivers of that?

Sure. The 3 key drivers of our fee revenue growth, our capital markets business, payments businesses and wealth management, all of them doing quite well. In terms of cap markets, as we've noted for some time, as we see commercial loan origination and loan production activity increase, which it is doing, we're seeing now the follow-through in terms of capital markets-related revenues as well. And so we saw a solid growth in capital markets into the first quarter -- sorry, into the second quarter from the first quarter. And that core commercial banking-related capital markets activity should be quite strong into the third quarter. We're seeing a lot of activity around debt capital markets, debt syndication, et cetera. The other roughly 1/3 of our capital markets revenues is advisory, M&A advisory. And of course, that's been somewhat choppy in the environment over the last year. Q4 of last year was a little soft, Q1 was 2, Q2 was very strong, though, just past quarter was very strong. And so we're seeing the beginning of another upward movement in terms of M&A and advisory activity as well. Back half of the year, pipelines look pretty solid. So cap markets looks to be doing pretty well. And our payments and Wealth Management business continued to perform also quite well in line with the guidance.

I guess Brant, Zach mentioned Wealth Management, a bunch of times there. I know it's something you're really focused on. Just maybe some color on your strategy for future growth, just like the Carolinas Wealth Management is another competitive area.

Yes, there's no doubt. And the good news is that we've proven that we can grow it. The business has doubled over the last 5 years. It's still relatively undersized for the size of the company. So we have a low percentage of our overall customer base that we manage assets for and that presents an opportunity, and we're continuing to improve that penetration rate. We also have approximately 13% of our commercial customers that have a wealth relationship with us. And that presents a substantial opportunity for us to grow the penetration into that customer base. We've made up quite a bit of investment over the last 3 to 4 years. Specifically, we've made investment to bring banking and our private bank closer together and offer products and services that are more tailored to our private banking and wealth customers. A great example of that is a program that we launched to capture savings balances with our wealth customers called Smart Invest. We have more than $2.5 billion in deposits now in that product. Those are new incremental deposits. Second, we -- you take that award-winning digital capability and customize it for more digital capabilities for our private banking and wealth customers. And then we made some organizational shifts to bring our teams in consumer banking and our wealth teams closer together. So those things give us a lot of optimism going forward. This past 12 months, our AUM is growing 17%. And what we watch more closely than that because that obviously has market movement in it, it's what's happening with advisory households, the net number of customers that we actually manage money for, and that is up 8% on a net basis year-over-year, which we're very pleased with. When we think about the future, we have a number of commercial customers who much of their net worth is tied to the business that they own. And with the advisory capabilities that we have now with Capstone and our active role in advisory in the middle market space, we are shifting our focus to be even more focused on planning. Planning allows us to bring the banking component of wealth to our wealth customers and it also puts us in the driver seat when there is some type of transition event with these businesses. And we've had some really early successes of that partnership and how it can work.

Got it. And maybe shifting gears to expenses. I guess you didn't say, Zach, but expense growth, I think this year was supposed to be 4.5%. Is that number still right, excluding the $20 million charge you referenced?

Correct.

Got it. And then I guess that would imply I guess, a slowdown in the back half of the year. Just maybe just talk to your expense growth this year is higher than peers accelerating some investments in tech and risk management. Just kind of where are you in that life cycle? I mean you kind of -- I think one of the questions was got ahead of the curve or behind the curve?

Yes. That's -- appreciate the question. We as we've noted on a number of other opportunities to provide remarks over the last year, really focused in 2024 on maintaining a very disciplined expense management focus. The core activity is to drive continual reengineering in our baseline operating expenses and then reinvest those savings into offensive and growth-related investments in technology development, marketing and the addition of new capabilities. And so you saw us launch as Brant noted 6 new commercial verticals launched into 3 new states, but also in 2024, to pull forward and to make a significant investment into data and technology capabilities that really underlie the capability of the firm to operate in a more real-time basis and continue to be just as strong and resilient through cycles as we have ever been. But with a view that, that was a temporary elevation of expense growth, 4.5% expense growth this year, but trending toward a much lower level of growth by the end of the fourth quarter and as we go into 2025 to bring expense growth down from that level. And that continues to be our expectation and all of the activities underlying our execution of the plan this year very much aligned to that.

Got it. And I guess as we start to think about expenses for 2025, maybe just talk to how you're approaching the budgeting process and just thinking about expense growth for next year?

Yes. As I just noted, I am expecting growth in 2025 for expenses to be lower than the 4.5% growth that we've seen in 2024. And in terms of budgeting, I think, if everything we can see at this point, sort of the level of ongoing inflationary pressures in the business are pretty stable and mild and predictable the level of investment that we've made into the business and continue to drive very much calibrated to that overall plan to bring expense growth down to the third quarter, while continuing to drive really solid loan growth accelerating and sustaining on deposits and fees.

Now in your prepared remarks left out asset quality. In the past, you guys have talked to, I guess, 25 to 35 basis point charges for this year, which is kind of the lower half of your kind of long-term guidance? Just maybe is that still a good number? And just how you're thinking about credit in the current environment?

Yes. Thanks, Jason. So credit is performing exceptionally well, very stable. The last couple of quarters, we've seen roughly 30 basis points of charge-offs. Our guidance range for this year is between 25 and 35 basis points. So we've been seeing kind of right in the middle of that range is the performance, and it looks very stable from here, aligned with those recent trends. And it really just goes to show the strength of the asset quality, as you noted in your question. We've been focused for more than a decade on an aggregate moderate to low risk appetite disciplined underwriting and client selection and I think it's really showing through at this point. So that's the expectation for the near term.

And then on capital, you were kind of 8.6% CET1 ex AOCI, 2Q, I suspect AOCI is much less of a drag in 3Q kind of approaching that 8%, 9% to 10% operating range. Just how do you think about capital? I know you want to grow loans, but investors seem to like buybacks and just how you're thinking about capital management?

Yes. Our capital priorities have not changed, and our first and foremost priority is to fund high-return loan growth. And we're really pleased with what we're seeing coming through and accelerating loan growth and making that the primary location for where we're putting incremental capital. But we also, over the last year, have had an objective of driving adjusted CET1 inclusive of AOCI, up into our long-term target operating range of 9% to 10%. As of Q2, we were at 8.6%. And as you know in your question, I'm expecting to see another upward step in that adjusted CET1 as we go into the third quarter really is a function of what's been going on in the rate environment. And so I think we're probably just now 1 or 2 quarters away, we're actually achieving that objective of driving adjusted CET1 into that target operating range. As we've noted on a number of recent occasions, it's our intention to continue to drive capital higher up into that range towards the middle of it, but also to -- and then, of course, to evaluate what's going on with the economy at that point as we go into the early part of next year, we'll see likely the finalization of the Basel regime, which wasn't expected to be substantive for us but was a consideration. And then, at that point, determine what other uses of capital we may want to provide for other things like share repurchases. It is my expectation, however, that once we get into that target range of 9% to 10% that we'll begin to have the opportunity to do share repurchases as we have done in the past.

And then just lastly, about a minute remaining, acquisitions TCF went well. I think by most accounts, just how do you think about the overall environment for bank acquisitions?

Yes. For our part, we're focused on organic growth. It's -- the organic growth plan is working so well. The expansionary initiatives we have within our commercial business, launching into North Carolina, South Carolina, Texas, we're just performing exceptionally well there and doubling on to that with this new full launch into the Carolinas is our focus.

Perfect. With that, please join me in thanking Zach and Brant for their time today.

Thanks guys.