Huntington Bancshares Inc Barclays 24th Annual Global Financial Services Conference

Jason, thank you very much, and thank you for 31 great years, and thank you to Barclays as well for hosting us. Welcome to everyone who is joining us today. This morning, I want to walk you through where Huntington stands today, how the operating environment has evolved over the course of this year, how our management team has responded, and why we remain confident in the earnings power and long-term value creation of our franchise. Let us begin on slide 3. There are four key messages that will frame the discussion today. First, Huntington's strategically well-positioned national franchise with scale in markets that are expected to sustainably grow above the national average and numerous value-added fee businesses. We expect to drive strong organic growth through the decade and beyond.

Second, we are driving solid operating performance amidst an operating environment that is materially different and more challenging than we had anticipated at the start of the year. Third, our integrations of Veritex and Cadence are tracking at or ahead of our expectations. Fourth, all of these factors support our ability to deliver robust long-term value creation for our shareholders. Turning to slide 4. Today, Huntington is a super regional bank positioned for strong organic growth. We operate a powerhouse consumer and regional banking franchise across 21 states alongside a leading national commercial bank and have a comprehensive set of payment solutions, a full spectrum wealth management platform, and capital markets businesses with broad capabilities. Across all the elements of the franchise, we operate with an aggregate moderate to low-risk appetite. This combination of operating scale and risk management discipline is what enables us to sustain strong risk-adjusted growth.

Turning to slide 5. Our company looks fundamentally different than it did a decade ago, and that is the outgrowth of deliberate execution of our strategic vision and substantial investments. In 2015, we had a strong share in the Midwest with $50 billion in loans and $55 billion in deposits. Our national presence, however, was very limited to auto finance and a few specialty verticals, and our fee businesses were largely nascent. Looking today, we have an expanded geography and substantial scale, $189 billion in loans and $222 billion in deposits. Combining Midwest leadership with meaningful and growing scale in Texas and the South. We are now present in 12 of the top 25 fastest growing MSAs in the country, positioning us squarely in some of the nation's most attractive markets.

Then we have a leading national presence, including asset finance and 17 national specialty commercial lending and deposit verticals, and commercial clients across all 50 states. Our value-added capabilities have broadened across a full range of services, including an expansive payment suite, a wealth and private banking platform, and a full service capital markets business spanning advisory and investment banking, risk management, and capital raising and distribution. This is the result of sustained investment, organic expansion, and disciplined partner integrations. It's produced a franchise with greater customer relevance, multiple sources of organic growth, and greater fee diversification. These factors position Huntington to deliver sustained revenue growth with top-tier returns and value creation. Now on to slide six. Our franchise investments are resulting in a highly differentiated performance. For several years now, our organic loan and deposit growth has meaningfully outpaced peers.

This has been driven by the expansion of our national specialty verticals, accelerating performance from our consumer and regional bank, and our organic expansion into the Carolinas as well as Texas prior to our recent partnerships. This is clear evidence of our powerful investments in organic growth engines. Building on that same investment story, slide seven shows that the growth engine is not limited to lending and deposit gathering. We've also broadened and accelerated strategic value-added fee businesses, which have grown at a 14% CAGR since the second quarter of 2024 on an entirely organic basis. Entirely organic basis, excluding the benefits of any acquisition. Unpacking this performance for a moment. In capital markets, we added a strong base of capabilities, expanding and syndicated in leveraged finance, debt and equity capital markets, and financial sponsor coverage, driving a 30% CAGR.

In wealth and private banking, continued platform and capability investments have driven 10% growth in households, resulting in a 37% increase in AUM and a revenue CAGR of 10%. In payments, several initiatives, including bringing merchant acquiring in-house and expanding corporate treasury management capabilities, have driven a 9% revenue CAGR. Over the last several years, fee growth has meaningfully outpaced the organic growth in our balance sheet, a reflection of the sustained investment we've made in capabilities across these businesses. One that increasingly positions Huntington as a trusted resource for our customers. As a result, our expectation is to drive high single to low double-digit growth rates across all of these areas going forward. Turning to slide eight. Another significant area of management focus this year has been on our integrations of Veritex and Cadence, and that's been a huge success for us.

We converted both banks onto our systems on accelerated time frames with minimal issues, and we're achieving or exceeding the synergies we've targeted. Cost synergies are on schedule, with the $70 million target from Veritex achieved in Q2, and Cadence tracking toward $365 million run rate by the fourth quarter. More significantly, revenue synergies are tracking better than our original forecast, with our cumulative outlook now at approximately $600 million through 2028, compared with our original expectation of $500 million. It's also important to recognize future earnings growth associated with these partnerships. Our focused execution will provide additional earnings power and investment capacity beyond the franchise performance we're discussing today. I'm turning to slide nine for discussion of our performance year to date. Our execution against the priorities we laid out at the start of the year remains solid, even as the environment around us has changed.

The key takeaway is that most of our key operational drivers are tracking in line or better than our expectations coming into the year. However, the impact of interest rates and competitive dynamics on deposit costs and asset yields have constrained our NIM expansion to a level below our original expectations. Double-click on this for a moment. Balance sheet growth is on track, with loan growth of approximately 36% year-over-year, and deposit growth of approximately 33%, levels consistent with our growth expectations coming into the year. Fee income growth has accelerated to approximately 32% year-over-year, well ahead of our original 26.5%-29.5%. As we just discussed, our partner synergies are at or above goal. Where the expectation has changed is around net interest margin. We came into the year expecting significant NIM expansion, supported by a favorable yield curve and rational pricing conditions.

Instead, higher short-term rates and elevated loan and deposit pricing competition have moderated NIM expansion, even as we continue executing against the Cadence deposit cost optimization. We've navigated this change in environment by managing the things we can control. I want to spend the next few slides explaining that change in the environment and our response to it in more detail, as well as our updated expectations. Turning to slide 10. There are two significant changes to the deposit pricing environment over the past several months. The first is the outlook for reference rates. As you all know, the market-implied Fed funds path has shifted sharply higher since the start of the year, swinging from expectations of rate cuts to expectations for rate hikes. That flatter higher for longer rate path has elevated deposit costs above the level we had anticipated at the start of the year.

Compounding that dynamic is that deposit demand has intensified industry-wide. As a result, we've seen our effective cost of deposits inflect higher beginning in the first quarter after a long period of improvement, and has continued to increase through the course of this year, including by another few basis points after we reported the second quarter. Amidst all of this, we continue to win customers, deepen relationships, and grow deposits across the franchise. The change, however, is that the economics of incremental growth have become tighter than we anticipated at the start of the year. Turning to slide 11. We're seeing similar dynamics impact both loan origination volume and yields. For example, industry loan growth has accelerated sharply from around 3% in June of last year to 7% in June of this year. This appetite for loan growth is evident across various asset classes.

For example, indirect auto is a product area where increased competition is compressing risk-adjusted returns, as some large bank competitors have been ramping production at the expense of spreads. Rather than expand our credit box or cut yields to chase volume, we've held our underwriting and return standards. We've chosen to accept lower production where incremental spreads did not justify the additional lending, thereby conceding some origination volume but sustaining our overall returns for the portfolio. Commercial real estate's another area of pressure. We've seen payoffs in this portfolio accelerate as underwriting, deal structure, and pricing from some banks and private credit sources have moved to levels we consider uneconomic. In addition to that, the permanent capital providers, Fannie Mae/Freddie Mac, are also in an accelerated refinance mode.

While this is creating a headwind to our growth, we view it as constructive to the desired risk profile of our commercial real estate portfolio. As we've discussed, we intended to lower the concentration of commercial real estate loan portfolio over the course of several years. We announced that at the beginning of the year. It's currently happening at a much faster pace than we envisioned. Turning to slide 12. What have we done to mitigate these pressures? First, we've not compromised our disciplined risk-adjusted returns. Second, across the balance sheet, we've continued to optimize loan mix and deposit pricing, and we've successfully driven fee-based revenues, including treasury management and capital markets. We accelerated our expense reengineering program for this year with expectations of additional expense control in 2027.

For example, we've increased our cost reengineering target for 2026 and more than doubled it for next year. What has changed more recently? In Q3, the factors I noted on the prior two slides, deposit cost pressure and asset yield compression, have persisted beyond what we had recently anticipated, and accelerating pay downs in commercial real estate have increased. This has reduced our loan growth and net interest income outlook for this year beyond the level that could be offset by further fee growth or additional efficiency actions. For this reason, we're recalibrating our outlook for this year and 2027 to reflect the current operating environment. We continue to see strong demand across the franchise, and we remain disciplined in growing and allocating capital where returns meet our hurdles.