Q1 2020 Earnings Call
Greetings welcome to Huntington Bancshares first quarter earnings call.
Yes, I'm all participant lines I listen only mode. It a question and answers that she will follow the formal presentation.
Funny, what's your car operators the since during the conference. Please press Star Zero and your telephone keypad.
As a reminder, this conference is being recorded I would now like to turn the conference over here those Mark <unk> director of Investor Relations.
Thanks.
Hi, Mark Muth director of Investor Relations.
But we will be reviewing can be found on the investor Relations section of our website.
Oh, you Dot dot com.
Paul is being recorded and will be available for replay starting about one hour to close the call.
Presenters today or Steve.
Chairman President and CEO.
Washington, Chief Financial Officer, enriched Poly Chief Credit Officer.
As noted on slide two.
Discussion, including the human experience will contain forward looking statements.
Statements are based on information and assumptions available.
And are subject to changes risks and uncertainties, which may cause actual results to differ materially.
So no obligation to update such date.
I'm pleased discussion of risks and uncertainties. Please refer to that spot immaterial filed with the FCC, including our most recent forms 10-K. Thank you for that gave US let me now I'll turn it over Steve I'll start on slide three thanks, Mark and thanks, everyone for joining the call today.
Before we begin I'd like to express like sympathies to those of you lost sailing members are friends.
You bet directly impacted by the virus.
Well done today with an overview of how we reacted to the also depends on both the challenges it has created as well see opportunities.
That does it cause screen caused unprecedented disruption around the world.
Stream market volatility as all through the global economic landscape.
I was just change the way we live our daily lives.
James how business is conducted in the short term.
Probably the long term as well.
How do you still I believe our purpose or do deeply rooted culture.
Our an extraordinary asset.
Purpose of looking out for people is guided our planning their responses to the pandemic.
From the beginning we recognized and debit is first and foremost.
<unk> prices there for our priority is always the safety and well being of our colleagues.
And our customers.
Many of our colleagues are the front lines with their customers every day and it's Joe just to serve our customers in new ways.
Sure there safety and our branches.
Early to drive through only <unk>.
As a person meeting supply as well.
We closed all in store branches in traditional branches, which did not have dried through.
Most other colleagues we implemented a work from home policy and now have more than 80% of our colleagues working remotely.
As possible because of the commitment and flexibility of our colleagues.
Because the tremendous work by our technology teams to keep everyone Tenaxis asked productive.
We benefited from the diligent work performed by business continuity planning teams over the years.
Also increased our communication with college now leave keep them in Florida, but also to keep them engaged in a position to help our customers.
Finally, we added new benefits for college, such as emergency page I Love and other programs for those families were directly impacted by the virus. We took actions so yes, the mental and physical wealthy.
Please.
Well, it's clear that ideally that our customers with financial hardships because of the pandemic.
We took swift action early publicly.
Now seen a variety of relief program managers that included loan payments deferrals fee waivers and the suspension of foreclosure and repossession. These matters addressed our customers critical short term needs, but we believe they also demonstrated our purpose is actually joined our customers that we are there for them now well continues to support.
In the future.
I'll leave it at our best mutual interest to work with our customers are a tough times relationships are strengthened in these moments.
As of college from across the bank mobilized to help small business in commercial customers access the SB I'd say Jeff.
Protection program and over the last three weeks, we've redeployed in trained over 700 colleagues to support the heavy volume that must be a applications.
I'm pleased to say that we process all those 26000 applications in record time long volume of more than $6.1 billion.
We were able to process almost every one of these applications into the SB a b Tran system before it closed what somebody was exhausted on April 16.
Yes, your 2020 with a relatively healthy economic backdrop across our footprint the prospects for the national economy appears to be picking up. However, the pandemic has altered that your trajectory for the foreseeable future and we believe the economy will be challenged for sometime.
We try to assess wasn't store for the economy now we informed our thinking with multiple potential economic scenarios.
The best case is characterized by a deep the shaped economy was a trough in the second quarter.
By relatively strong recovery later this year.
More likely scenario could be described as a long U shaped recovery in which the trough extends later into the year and then the economy does not recovered back to pre cobot activity levels until well into 2022.
Over the course of the last two loves the economic outlook has progressively deteriorated. It appears that to reopen in the economy will be more protracted than initially expected.
I know you shape recovery is increasingly likely scenario, so given its highly uncertain environment and rapidly evolving outlook. We do not believe we can provide any meaningful expectations for the full year at this time.
Therefore, we have withdrawn our formal twenties way full year guidance. Our visibility is generally limited to the next few months the range of potential outcomes on the key metrics is quite wide.
Instead, Zach will provide some near term expectations later in the presentation.
Conservative view on the economic outlook also as broke forms are thinking on how we manage capital liquidity and credit.
Second rich will discuss our credit metrics. All these items later, but I'd like to discuss generally how we're thinking about risk management.
As we've previously discussed over the past decade, we fundamentally changed how many tons enterprise risk management.
I believe it's now a stressed of the company as compared to a clear weakness during the prior cycle.
Slide 10 in the presentation detailed several the key improvements we've implemented but they all began with the establishment of our aggregate moderates a little risk appetite in 2009, and the alignment of our credit strategy a policy with that appetite.
We also centralized credit underwriting portfolio management implemented credit concentration limits that materially reposition the balance sheet overtime.
Well that is a deep relationship focus across the bank.
Well the sale of primary bank relationships and exiting low like relationships, it's not the appropriate return hurdles.
In subsequent years, we took actions such as taking our consumer lending standards to focus on Super Prime customers across all our consumer lending products and tightened our underwriting on commercial real estate.
We establish conservative standards and policies for leverage lending as well.
We pointed out overtime that the only comparison a potential loss for the sector is the federal reserve steep that stress test.
As shown on slide 11, our model Geo cumulative losses, the fed severely adverse scenario are consistently among the best in the peer group.
As we assess the current environment with respect to the credit impact.
Hi to be Conservative and you can see this is the level of provisioning and our allowance for credit losses.
We're taking a similar conservative conservative view conservative approach to capital.
Our capital ratios are strong.
We intend to make saying high capital ratios as a source of strength to support our customers' needs to be positioned to take advantage of growth opportunities.
That let me turn it over that.
Thanks, Steve Good morning, everyone.
Slide four provides the highlights for the 2021st quarter clearly results were significantly impacted by the cobot 19 pandemic.
While our underlying earnings momentum with strong first quarter results included provision for credit losses of $441 billion over three to five times that charge offs recognized during the course.
This was driven by the severely weakened economic outlook compared to the fourth quarter of 2019.
We'll go into more detail regarding the drivers of the increase in our provision shortly but now let's turn to slide five to review our pretax pre provision earnings.
Year over year pretax pre provision earnings growth was 2%.
We believe this is strong performance in light of the challenges of the interest rate environment and the rapid decline in short term rates year to date.
Total revenue increased 1% versus a year ago corridor as growth in fee income more than offset modest pressure on spread revenues.
Specifically robust mortgage banking income growth of 176%.
And 50% arose in capital markets fees drove a 42 million or 13% year over year growth in non interest income.
FTD net interest income decreased $33 million or 4% year over year as 25 basis points of NIM compression overwhelmed at 3% growth in average, earning assets on a linked quarter basis. The NIM expanded two basis points as it continues to be pleased with the results of our hedging program.
And our diligent efforts to reduce our deposit costs.
I would like to call your attention to two slides in the appendix the provide important additional information regarding our efforts in these two areas to support the margin.
Slide 28 summarizes the hedging actions, we've taken to reduce the unfavorable impacts of interest rate volatility and lower interest rate environment.
Continuously monitor and prudently refined our interest rate risk management as the interest rate environment balance sheet mask belching mix and other factors necessitate.
Slide 29 provides an update all the reduction in deposit cost Cds and money market promotional rates repriced lower and we actively managed commercial deposit costs.
Slide illustrates the downward trajectory of our total interest bearing deposit costs by month since July 29 team, including a 21 basis point decline from February to March.
Like this downward trend to continue given the deposit repricing opportunities that remain in twentytwenty.
Total expenses were essentially unchanged from year ago corridor.
<unk> expense discipline reflects the actions we took in the 2019 fourth quarter to reduce our overhead expense run rate.
During the reduction of 200 positions and the closure of 31 in store branches as well as actions. We took during Q1 to quickly react to the current environment valid to get the impact of continued investment in our technology capabilities.
During the quarter, we began the first steps of a multipart expense management plan for 2020, which provide some benefited the quarter by reducing the most immediately flexible expense lives.
Before I provide more details on this later.
Finally, I would like to note that the normal slides detailing comparisons for our net interest income net interest margin fee income and non interest expense can be found in the appendix.
Turning to slide six.
Average, earning assets increased $2.6 billion or 3% compared to the year ago quarter.
Average total securities increased 5% from the year ago quarter, reflecting portfolio growth and the mark to market on are available for sale securities.
No longer reinvesting securities cash flows and is that are using this liquidity to fund loan growth.
Average loans and leases increased not a $900 million or 1% year over year, primarily driven by the consumer portfolio.
Consumer loan growth remained focused on the residential mortgage portfolio.
Electing robust originations over the past four quarters.
Average commercial and industrial loans increased 1% from a year ago quarter as commercial activity was constrained by economic uncertainty during the first two months of the quarter.
However on a linked quarter basis, we saw ended period see an eye loans grow 7%, reflecting significant drawdown activity on credit lines. During March we saw $2.5 billion of commercial credit lives.
While we have seen draw activity continue with the first weeks of April with another $700 million strong through April 15th the pace of Florida has started to slow significantly.
He was uncertain, how long customers, who will retain these funds as extra liquidity and they bought and a backstop against ongoing disruption in the credit markets.
Continue to actively manage our commercial real estate portfolio around current levels with average CRM loans, reflecting a 2% year over year decrease.
Turning now to slide seven.
Average core deposits increased 1% year over year.
Note that this growth rate was negatively impacted by the June 2019 sale of the Wisconsin retail branch network, which included approximately $725 million or almost 1% of core deposits.
Oh linked quarter basis, and the period total deposits increased 5%, reflecting the aforementioned draws of commercial lines that were subsequently maintained on the balance sheet in various commercial deposit products.
Accordingly, you out of commercial deposit inflows over the past several weeks as essentially matched the amount of commercial line draws, allowing us to maintain excess liquidity to meet future customer lending needs.
Do you see a migration and deposit balances from Cds and savings into money market accounts, reflecting shifting customer preferences and a shift in the focus of our promotional pricing.
Average money market deposits increased 8% year over year, while savings decreased to 7% courses decreased 35%. We expect this dynamic to continue through 2020.
Average interest bearing PVA deposits increased 7% year over year, while non interest bearing D.D.A. increased 1%.
As shown on slide 36 in the appendix, we're very pleased as our consumer noninterest bearing deposits increased 5% year over year. This growth highlights our continued focus on new customer acquisition and relationship deepening.
Slide eight continues the continued illustrates the continued strength of our capital ratios.
The common equity tier one ratio or see EG, one ended the quarter and 9.47% down 37 basis points year over year, the tangible common equity ratio or do you see ended the quarter at 7.52% down five basis points from a year ago.
During the fourth first quarter through mid March we repurchased 7.1 million common shares at an average cost of $12 in 13 cents per share or a total of $88 million.
When the Cobot 19 pandemic first started to impact the U.S., we paused our buyback for the remainder of the first quarter.
You're not currently intend to repurchased any shares for the balance of 2020.
This morning.
The board declared the second quarter cash dividends of 15 cents per common share unchanged from the prior quarter, we expect to sustain the dividends at this level.
During periods of macro stress and market volatility managing liquidity is paramount.
Our position of strength on liquidity draws its foundation from our deposit base and the depth of our relationship with our customers.
Our ratio of loan to deposit stable at 90%. In addition, we have considerable additional sources of liquidity, including our portfolio with the securities and borrowing capacity at the federal home loan Bank and Federal reserve discount window.
Slide nine highlights our relative capital strength.
Over the past few years, we have maintained our capital position and are now in the top third reshaping peers on total risk based capital our dividend yield is also in the high end of the peer group.
Let me now I'll turn it over to rich to cover credit, including Cecil Rich. Thanks Act before I provide details on the performance of the first quarter I wanted to elaborate on comments you've touched on at the beginning on the call.
Slide 10 detailed some of these decisions we've made a credit risk management enhancements we have implemented.
2017, we heightened our underwriting standards for leverage lending.
Since we dropped in our leverage lending policy in 2015, we've used a conservative senior leverage multiple of two and a half times to qualify as a leverage loan for our borrowers with less than $500 million and revenue.
Also in 2017 began leveraging the underwriting infrastructure and standards, our auto finance business, the RV and marine portfolio that was expanded through the first married acquisition.
Recall that our indirect auto and floorplan dealer to dealer Floorplan portfolios, among the best performing to ethos.
We prepared for the eventual economic downturn, we adjusted our health care portfolio. Thanks for telling new construction originations in the long term care segment.
Our health care construction portfolio is now down 60% from where it was in 2016.
Over the past couple of years, we've continue to refine our credit underwriting consistent with our aggregate moderate to low risk appetite.
We have increased FICO score cuts across our he locking army Green books have held our commercial businesses to higher standards with respect to credit policy exceptions.
We entered the current credit environment with a portfolio that is that continually fine tune over the last several years.
Well I'm 11 illustrates the relative rankings of modeled the cumulative loan losses for Huntington and our peers in the federal reserves severely adverse scenario so the deepest exercise.
Steve just mentioned overtime. This is the only true comparison of credit risk across the sector that we know of and provides us independent validation of the credit risk management, we have implemented.
Like that our portfolio was evenly split between consumer and commercial businesses. It gives us nice diversification in periods of stress energy pass numbers reflect as much still the aforementioned steps to strengthen the quality of our loan portfolios.
Turning now to the first quarter credit results metrics.
Slide 12 provides the walk him our allowance for credit losses are PCL. Following the adoption of seasonal on January 1st 2020, and the first quarters provision.
Phil increased to 2.05% of total loans up from 1.18% that 2019 year end.
The increase was comprised of the $393 million a one adjustment.
$323 million reserve build these D to provision during the first quarter.
As you recall to do you want to increase was a function of our 50%, we and the consumer portfolio, which has a much longer weighted average line and they're far larger lifetime loss under seasonal.
Click corridor, our reserve build consistent with $258 million increase due primarily to the ongoing economic uncertainty and $65 million net increase in our specific reserves almost exclusively against our oil and gas portfolio.
Q1, Hcl now includes a 20% reserve against our oil and gas portfolio.
For multiple data points, we used to size the adjustment we made in Q1, including the Moody's baseline scenario that show the unemployment rising to near 9% and GDP levels falling by eight teen percentage in Q2 and differing levels of recovery in subsequent quarters.
We also weigh the unprecedented level of government stimulus bill to consumers as well as businesses and the potential support to the economy. It will provide these factors drove our Q1 for me.
The more recent April economic models now show further deterioration, but unemployment, reaching 12, and a half percentage and GDP falling by 30% in Q2 and an improvement in Q3 that provides less of a net recovery than the March base case showed.
We will continue to evaluate data points like these as we size our provision expense for the second quarter.
Slide 13 shows our NPS and key ours and demonstrates the impact on our oil and gas portfolio has had on our overall level of npis.
We have discussed for several quarters the challenges we see with this portfolio and had been proactive in recognizing the earnings impact we anticipate as commodity prices continued to range below economical levels for this industry.
Oil and gas some kids represented just under half of our commercial IP is and one third of our overall and he is they are also a significant contributor to our Q1 MPS increase.
Notably over 90% from a dollar standpoint of these MPT has remained current with respect to principal and interest payments.
Outside of our oil and gas portfolio commercial npls were reduced in the first quarter by $65 million.
Slide 14 demonstrates that we have a fairly modest exposure to some of the areas that have been hardest hit I covered 19 today.
We have recently completed deep dives into nearly all these portfolios and are comfortable with our teams assessment of the current situation.
Our restaurant exposure is primarily to national quick service brands that have maintained drive up operations and our sandwiches pizza chain customers have been opened for take on service to offset the declines in house.
Slide 15 details our leverage lending portfolio.
Our conservative definition uses two and a half time senior leverage for borrowers with under 500 million of revenues to account for heightened risks and leveraging smaller companies.
Leverage loan book represents under 4% of our total loans as a percentage of capital was at its lowest point several years.
We focus on borrowers that are weighted toward manufacturers as opposed to service and other asset light borrowers they tend to provide more collateral.
In the manufacturing segment of our leverage lending book or no sub segments that account for more than 20%.
We've deliberately avoided covenant light term loan b structures because to play in that market generally requires providing under structure Perry pursue revolving credit commitment as well that revolvers typically undrawn at closing, but represents potential contingent risk in a down cycle.
We hold regular reviews of this portfolio and underwriting follows a consistent corporate process with a designated leverage lending credit executive responsible for its review.
Slide 16 provides a snapshot of key credit quality metrics for the quarter.
Net charge offs, representing an annualized 62 basis points of average loans and leases in the third quarter up from 39 basis points in the prior quarter and up from 38 basis points a year ago corridor.
Chris was centered on the oil and gas portfolio and one large coal related commercial credit, which together made up approximately three four and so the total commercial net charge offs.
Oil and gas portfolio continues to be impacted by low commodity prices and limited capital markets activity.
As I mentioned earlier, we allocated significant reserves against this portfolio.
Annualized net charge offs, excluding the oil and gas and coal related losses were 30 basis points demonstrating that the balance of our portfolio performed well in Q1.
Remaining call exposures under $200 million of which 20% carries an investment grade guarantee.
Nonperforming asset ratio increased nine basis points linked quarter, and 14 basis points year over year to 75 basis points due to the oil and gas impact I described earlier.
Tumor charge offs were down to 35 basis points in Q1, as compared to 41 basis points a year ago, demonstrating our continued strong consumer portfolio.
As always we have provided additional granularity by portfolio and the analysts package on the slides, let me turn it back over to Sac.
Thank you rich as Steve mentioned earlier, we have withdrawn our twentytwenty full year guidance historically, we have refrain from providing quarterly guidance as it implies a much shorter time horizon, we get as the company that said, we want to provide you as much insight into key business trends as we can.
So we will focus on where we can frame realistic expectations. Therefore slide 17 provides comments on the second quarter.
Starting with loans the $3.2 billion of commercial line draws we saw in March and into early April will drive average commercial loans, 4% to 5% higher over the near term excluding any impact of the $6 billion of SBH PPP loans and any additional SPP p. loans made in the next phase.
We currently expect the majority of commercial line draws to remain outstanding for the next several months.
The duration of the PPD loans is uncertain, but we expect the large majority of them to be forgiven and to go off the sheet quickly.
We expect consumer loans to be flat to modestly lower the auto portfolio and to a lesser extent the RV marine portfolio is expected to reduce as vehicle sales activity declines.
We expect we expect the three existing trend of run off in home equity to continue.
And we expect the residential mortgage portfolio to be flat to modestly higher in the second quarter as the robust level of refinance act refinancing activity acts as a governor on growth.
We expect average core deposits to increase 2% to 3% linked quarter similar to our expectations for commercial loans. We expect the recent influx of commercial deposits again, excluding the impact to BBB to remain on the balance sheet through the second quarter.
We expect average consumer core deposits to be flat to slightly higher a slowing comes customer deposit acquisition is offset by similar reductions in attrition given altered branch traffic and consumer behaviors on the other hand, we expect the bulk of the proceeds of the PBP program will steadily flow out of the bank over the next day weeks consistent with.
We intend to program.
Did not expect deposit growth to fully fund loan growth in the second quarter.
Moving to the income statement provisioning as a key driver of variability in the Q2 earnings outlook, but revenue in noninterest expenses also a wider than normal range of possible outcomes.
We've modeled various realistic scenarios for the revenue and expense outlook and some of which provide the opportunity for us to achieve.
Our annual goal a positive operating leverage and some of which do not.
We continue to believe the positive operating leverage as an important part of our long term value creation model, but we will not allow a short term view of this one metric to dictate our decisions we constantly strive to find the right balance between the short and long term results.
Within these cod funds, we expect total revenue to decline, 4% to 5% linked quarter as the larger average balance sheet is more than offset by moderate pressure on the organic NIM and the co. Good 19 related declines in fiasco.
[noise] customer activity based fee income lines items, including deposit service charges card and payment processing are all expected in pressures.
Mortgage banking is expected to remain robust, but historically wide secondary marketing spreads are expected to gradually reduce.
All combined our current expectations for fee income to be down approximately 10% sequentially.
You have a little more control of us visibility into the expense outlook for the second quarter.
Expect noninterest expenses to increase between five and 6% on a sequential basis, driven primarily by the seasonal increase in compensation related expense related to the annual ramped up long term incentives an annual merit increases partially offset by our expense reduction actions on a year over year basis expenses were lower by 2%.
We got a rigorous expense management plan, we entered 2020 like prior years, having constructive expense management contingency plans and with the challenges facing 2020 became clear who began we began implementing these plans. Our approach is focused on four categories of expenses.
Discretionary expenses, such traveling sponsorships investments, including marketing the pacing and prioritization of digital technology investments and plan business expansions.
Structural expenses, such as the size and composition of our branch network and corporate facilities infrastructure.
And finally organizational expenses, which group the size of the organization and compensation levels across the company.
The actions, we will take across these categories vary in terms of how quickly they can be implemented.
The quickest expense levers, we can pull our within discretionary spending our travel and entertainment spending has been reduced dramatically as a result of the locked out and social distancing measures. We were also contribute curtailing not essential consulting and outside services expenses.
In the investment category, given the macro environment depressing customer acquisition activities were prudently, reducing near term marketing expenses.
Also scrutinizing all pre existing business expansion plans.
And have delayed some initiatives. However, we are maintaining our digital and mobile technology investments.
Well, that's the immediate impact the decisions regarding structural and organizational expenses will provide opportunities to reduce our future expense trajectory.
We will not be providing details at this time regarding the ultimate scale or timing of our expense actions, but know that we're taking decisive action.
Finally, the most uncertain item in the earnings outlook is credit provisioning. We currently expect net charge offs in the second quarter to be near the high end of our average through the cycle target range 35 to 55 basis points. This is reflective of the ongoing pressure in the oil and gas portfolio as well as broader economic considerations.
Fundamentally our credit remains sound. However, the economic outlook has continued continued to deteriorate since quarter end and remains highly uncertain. As it was this will result in elevated provisioning and additional reserve building in the second quarter and most likely for the next several quarters is too much is much too early to estimate the ultimate size of the additional reserve build.
But you should expect us to remain conservative in our approach to credit risk management I will now I'll turn it over to Mark. So we can get to your questions Mark.
Exactly shirt will now take questions, we have taken as a courtesy of your peers. Each person ask only one question and one related follow up.
And then if that person has any additional questions here she can add themselves back into the queue. Thank you.
If he would like to ask your question. Please press star one I knew telephone keypad. They come from makes him tell indicate your line is in the question kill you May Press Star kill if he would like Dream of your question from they killed and for participants using speaker equipment, maybe necessary to pick up your handset before pressing the sorry. He is.
Our first question is from Erica.
No Carryanne with Bank of America. Please proceed.
Hi, good morning, Thank you.
My question is right Oh, My first question, it's for Rich I'm wondering if you could give us and on.
Tell me your allowance was allocated by loan category. Please.
Yes by loan category I mean, we've got.
The consumer.
144, and commercial is to 61.
To get to the 2.05 total allowance of breakdown that we've gotten for that.
I think you got it or can you have to.
The challenge that we have with of the allowance in this quarter as you know the models really words trained for this right and so we have the severe decline in the economic scenario and then though the government stimulus that you know is forthcoming, but really hasn't hasnt shown up yet at the end of the first quarter. So there's a lot of.
It's meant that went into.
Setting the provision this quarter or various economic models that.
Came out throughout the month of March.
We did look at a number of factors on receptive provision and believe that we've got the coverage ratio in the quarter, but we want them.
Hi, My follow up question is appreciate the detail on reserves relative to de fast losses.
And I look at the fed run test and even your comfort company around Katz from 2018, it seems like there's a pretty significant contribution still from commercial real estate.
And I'm wondering if we think about how sees how future charge offs and in this type of recession can play out for Huntington, what are sort of model biases and the stress test model and I guess I I, leading the question a little bit by referring to commercial real estate my distort.
How we're thinking about.
What can actually be incurred in terms of of charge offs in other words.
What part of that stress test is back we're very backward looking in terms of historical losses in theory, and what part of the stress test. Obviously unemployment is is one place seems to be not severe right now.
So as it relates to I think you hit the nail on any of the defense numbers are backwards looking so.
The the fundamental change that has transpired over this company since the last downturn.
It's been remarkable and I would say that commercial real estate is probably the one area, where we are so fundamentally different today than we were going back I mean, we had close to 5000 customers on commercial real estate side going into the last downturn.
300 today, so there's a clear focus on.
Sure on sponsors tier two sponsors institutional sponsors and so we really focus on knowing the developer and not only the projects that we're financing, but the projects that might be finance somewhere else to make sure that were not over extended there. We also from a percentage of capital standpoint, we're over 200% of capital.
In the last downturn.
We're under 100% of capital today, and with very strict limits on various sub limits within the commercial real estate space. So I think thats. The biggest one yes as it relates to some of the other things clearly unemployment is going to be a big driver.
Of losses on the consumer side I think the de fast results there.
Been very consistent overtime in our consumer charge offs in the defense scenarios had been at the top of our peer group. So I feel very good about where we stand.
In a lot of the consumer categories relative to the defense results from Tony.
Eric My that this is Steve the.
Joblessness or unemployment levels in Ohio, Michigan were double digit one well we made the.
Changes to the consumer lending policies and the models. We you have you subsequently have that thanks.
In that so.
But I think 10.3% in Ohio, and 14 at a fraction, Michigan. So that has drove us to a super prime level of origination we use our prop score, but the equivalent fly goes you've seen quarterly for 10 years and we have to the book So we.
We believe we've got.
Very sounds consumer loan portfolio and the performance expectations around that will will these we believe supported through this cycle, notwithstanding higher unemployment and somewhat higher losses.
And weve the talking for several quarters about oil and gas as.
An outsize exposure for us in terms of risk of loss clearly outside of our aggregate moderates alone appetite and.
And and we've also showed that we expect to address that substantially.
Early this year and having started to do that last year. So these are all these oil and gas credits are all snicks.
Our losses from what we can tell our comment we're taking them earlier than certainly earlier than required including the the non accrual decisions and I think we're frankly going to be slightly ahead are ahead of others in the industry in that regard.
Thank you Steve.
Our next question is from Scott Siefers with paper Sandmeyer. Please proceed.
Morning, guys. Thanks for taking my question.
Hi, I was hoping for maybe a little more detail on the overall modifications and deferrals definitely get the the number of customers that maybe if there are some.
Dollars, a total modifications in both the consumer and commercial portfolios.
Sure happy to answer that price cuts rich, yes on the.
Consumer side, it's about $2 billion and deferrals that we've we've process. We also have you made some deferrals for some of the mortgages.
That we're servicing agent, but for our book is about 2 billion.
On the commercial side.
It's about 6 billion, but I would say half of that is in our auto floor plan dealerships and we're counting the curtailments.
In that number and most of what we're doing in the auto Portland spaces, more curtailment and payment deferral clearly the we need the cars to be on the lots of little bit longer than they have been historically just given the current environment. So.
If you digging into some of the other areas where we've provided.
Deferrals on the commercial real estate and hospitality space and retail is one other area on the commercial side and then and the franchise restaurant space. We've also been active with deferrals.
Okay. That's perfect. Thank you and then just on started the does latter points you made maybe if we exclude the floor plan because that that makes plenty of sense logically, but in the remaining commercial deferrals do you have a sense for how much of those deferrals you would say are hard kinda necessary are needed versus how much is.
Customers sort of taking advantage of.
Kind of insurance in the in this environment.
Yeah, I would say that you know I was sitting at the commercial real estate deferrals are needed for the most part of the hotel occupancy rates given where they are.
I felt like obviously only one in the hotel I was out last night. So I think you know.
Anecdotally there that's a need I think the cash crunch in commercial real estate is real.
You know we.
We generally did not have a high bar on proving that you needed. It you don't part of our looking out for customers is being there when they need us and so our thought was if you're asking for deferral, we're generally going to give a too but I haven't come back and site typically determine who really needed in who didnt <unk>.
At this point to commercial real estate is probably the area that needed at most and of the 6 billion of floor plan was for me.
The reason sick Scott so.
And many of the showrooms just frankly are an open so yeah, though.
Understandable there.
We take a slightly different view on the consumer side just to share with you.
We actually.
The fact that they've asked for deferrals are taken as a good segment they intend to.
To.
Stay the residents are.
Keep the card or other things.
With the rapid increase in unemployment.
The these indications that are actually.
Positive from our perspective versus all eight or nine what it was hard to communicate with.
With customers they tended to less houses go.
I think the nature of this.
Health crisis will being much more likelihood to protect the house then we would have seen in the prior cycle.
Yeah, that's the other 20 twos at a time when the deferral.
90% of our consumer and even a higher number of our commercial customers weren't current so it wasn't as though.
This was you know kind of the delinquent customers, reaching out for our health is due for good customers and you need to be assistance.
Yep.
Okay perfect. Thank you guys very much I appreciate it.
Our next question is from a job.
Pancari with Evercore ISI. Please proceed.
Good morning.
Oh My God.
I appreciate the color just gave regarding the prior.
The stress testing and the changes in your business mix over time that how that can impact fewer through cycle losses.
Just wondering if you could maybe back there for a help us think about.
What a fair through cycle loss level would be given your current mixing given what your where you're looking at now in terms of your assessment of the economic outlook I know, it's tough, but I think we want to try to get a better idea of what we're looking at and then separately.
On Slide 11, you pointed to.
The reserve being 42% of the 2018 severely adverse being bad.
But you also indicated that the April data is 22 or did point a worsening.
Do you think a.
Incremental reserve additions could go to here, what do you pick an appropriate a relative percentage against the Deepak foods.
Is it likely fair here. Thanks.
Yeah, Hey, John I'm going to be challenge to answer both your questions I think as it relates to.
Through the cycle losses, I think the challenge that we all faced is just the uncertainty that we're dealing with right now as to how long. This is kind of last and what the new.
Behaviors are coming out of this.
We feel good about the book.
Going into it on the consumer side, we know very good credit quality. There we have pointed out on the commercial side that we're going to have likely elevated charge offs and oil and gas beyond that it's really hard to to come up with a forecast for charge offs through the through the cycle here.
So John where we're hoping to get a better view this quarter. If this return to work.
Status changes right now next week, Ohio looks like it's going to add to that all day first.
Michigan following that have been little thing and as as these industry started school lead up again, we'll we'll we'll get a better sense of of what the recovery might look like but I think this is gonna be dynamic.
At Best case would be to have a view this quarter I think it's more likely going to be third or fourth quarter before we really understand what the what the.
The.
Growth.
Rates could be to come off what will be this very challenging moment in time and the sustainability of these these businesses and ultimately how they're going to advance yeah. So as you know as it relates to what you might see though in the second quarter were clearly.
You know.
The snap that line at the end of the quarter, we'll we'll take a look at all the.
Two scenarios will look at the impact of the stimulus.
I mentioned a lot of that's just kind of reaching.
The businesses and customers now they'll be a lot more data that will happen at the end of the second quarter decides what the provision expense would be for the quarter, it's going to just really tough to estimate that right now.
Okay. That's helpful. Thanks for that color.
I mean, you indicated that Eric your prepared remarks.
We expect.
Stand the dividend can you just give us your thought process around that.
And does that incorporate the updated data that you see coming in now post the quarter and just your thought process around the developing thanks.
Okay.
Our intention is to maintain the dividends at the current level.
You think about or we've gotten though right and capital levels to support that and.
We'll continue to monitor that and model, but we think it from the appropriated and sustainable level for now.
Okay. Thank you.
Welcome Thanks, John.
Our next question is from Steven Alexopoulos JP Morgan. Please proceed.
Hi, good morning, everyone.
Hey.
So to start just a follow up on or it doesn't John's question around the path I think what a lot of us are struggling with is that when we look at sea. So it's supposed to look at lifetime losses.
Global economy is basically shut down and I think we're trying to understand if you look at that framework, you're coming up with reserved roughly 40% of defense losses. It seemed to really low and I think we're trying to get that isn't a large reserve build again coming like how do we reconcile the framework or what.
Going on in the economy and the size of the reserve versus your own internal stress test.
I said it.
Steve its rich I think defense and CSR, a really two different exercises that you can try to link them together, but.
There are fundamental differences in the assumptions to reach the defense scenario.
The severely adverse is a deep scenario that continues for an extended period of time.
And it also assumes that you're continuing to make loans during that period that are all sorts of dynamics that go into that piece on the other hand.
Who is you're looking at something that is reasonable supportable over a period of time that eventually returns to the me.
And so you're running in the scenario that.
We'll have a two or three year life and then there was a reversion to the mean on it and it's also assuming you don't make another loans so.
Well I think the seasonal to de past comparison. This is a good data point I also don't think you can necessarily draw too much.
From it.
Conclusion wise.
Okay.
That's fair and just for a follow up so we look at slide 14, the co been impacted sectors I'm surprised you're not calling out some of your auto exposure as you know I think about floor plan or RV, you're not expecting to see material decline in revenues for these these sectors right, particularly auto.
Yeah, I mean, we you know we've talked about auto we feel that there is going to be a short term impact to auto we don't necessarily think it's kind of fall under the same category as hotels and at some of the other areas where it could just be a protracted.
Longer impact I think ultimately.
People are going to get out and buy cars.
Probably at a reduced level, but we don't see though the impact of to auto and to a lesser extent RV that we do with some of them are the ones that we've got in here. So the floor plan love season, our to do.
Dealers that have multiple.
Flags.
And that the illegal 910 cycle, we didnt have a delinquency.
The strategy. Its consistent these are very strong typically multi generation family dealerships that have enormous well.
Created over that time and dealers that we believe we'll see we'll be very supportive except they need to part of our underwriting also looks at the coverage ratio of service and parts to two to 260 charge and and and most of these are really strong in that regard.
Just a feedback on that mean this obviously, we didn't do a deep dive on the auto portfolio, even though it's not listed here and from a liquidity standpoint, we feel the book isn't very good shape.
We haven't had a charge off that auto that's it.
Well I have two decades.
And what Weve originated and we certainly have a lot of conviction going forward the quality that book.
Okay fair enough. Thanks for taking my question.
Yes.
Great. Thanks.
I guess, just really quick question in terms of the energy portfolio I heard if I heard correctly. It was a 20% reserve you have against this portfolio.
There's other banks day, we heard like yesterday has just over a 2% reserve and their energy portfolio can you just talked about the characteristics of the your energy loans and how it might be different from somebody other banks that you would need such a materially higher reserve on this portfolio. Thanks.
Okay well.
As we all know these are all snacks. So you know there's there's good company in the credits that that we're in so I don't know that it's necessarily so much that our portfolio is any worse off than others I think as Steve as mentioned, we've been very proactive in recognizing the risks that we see in this.
Book, and we have taken losses in this book over the last five quarters that are pretty significant and you know it's reasonable to assume that we're going to have further losses. So you know when do you see.
Lines around the big banks, starting to form SPE is to take ownership of these credits rather than go through a liquidation process. I think it tells you you know where the where the industry is heading into in terms of dealing with troubled situations. Here. So you know we looked at as our book.
And you know we feel that the long term fundamentals in particularly for for natural gas are still not strong and I think we've sized the reserve around this taking into account.
The where we see long term prices not you know not so much on where they are today, but longer term and you know just the fact that there is a lack of capital markets activity in this space right now is completely different than what transpired in last downturn. So we think it's appropriate to put higher levels of reserves, there and we'll continue to review.
As we go through the spring borrowing base Redeterminations and you know kind of size that reserve going forward.
We think this is much more like the early mid eighties were beginning with Penn square at 83 that the industry got clobbered and.
Stayed in a tough shape for four or five years and so we're just trying to be realistic with with that view as to what we think the likely outcomes are for this this portfolio. It certainly we've seen subsequent price deterioration as result of Oh.
Okay, and Russia issues on the oil side, there's some spillover that's benefited gas in the short term but.
These are gonna be longer term workouts, you're going to see a lot of these cup companies combined.
We do think the S. P is a way to go as we did in the mid eighties I.
I would add direct experience with this or that type right and it leads.
Me and I think us as a consequence to b to B.
Clear eyed about what to expect in the future and perhaps a bit conservative relative to some others, but but we'll see that overtime.
Got it Okay. That's helpful. And then just my follow up question. If I heard right. I think you said you expect elevator provisions for the next several quarters.
You just talked more it's more of a conceptual question, but if I guess, we would think that Cecil should clearly front end load a lot of the provision expense, but I guess, there's a lot of uncertainty out there. He is talking about that dynamic, which as you know how much can you really front load for your reserve build versus like wanted to get to say fourth quarter.
You are you still maintaining a really high reserve, even if and then provision expense even if the economy is not weakening at that point seems a provision should be a lot lower by fourth quarter, if I'm not mistaken.
Yeah.
So I mean, the whole concept around Cecil is that you are recognizing losses today on the book that you have today right. So in a perfect World. If you had perfect foresight into what the economic variables were and they didn't change you wouldn't have to make any further adjustments, but clearly.
We're in a very dynamic market, where the economic assumptions that we have to use for the life of alone are down materially change over the next several quarters and that's what's going to drive the additions or you know down the road hopefully the release of reserves under the Cecil.
At the dollar tree.
Do you think tenants it's.
You know, we're at a downdraft moment, but as we reopened in these different states, let's start to get a floor and stabilization and resiliency and and recovery.
And that could very well have to the timeframe. So you you mentioned based on the fiscal stimulus.
We'll be part of that the banking industry Huntington will as well and.
For the sake of the country, it's great to see the industry such good shape. So I.
I I think we've got a ball this year full quarter, so couple of quarters, where where things are a bit uncertain, but I think the picture will clarify is in the in the foreseeable future and that clarity will give us the basis to have more confidence and projections and and Sherry those.
With you.
Collectively and and I think it will lead us to.
A position we're having good.
Essentially a conservative.
Well, we'll see a better day on the horizon, where I hope there'll be some reserve recovery.
All right great. Thank you.
Our next question is from Ken you seen with Jefferies. Please proceed.
Hey, Thanks, a lot guys. One question on the capital front, so you're right in the middle of that night and a half percent seats you won nine to 10 zone.
Got you enjoy <unk> do you want to try to stay around that and also how does Tc if at all come into your.
Thought process around maintaining capital ratios. Thanks.
Yeah. This is Chuck I'll take this one so yes or CZ. One for Q1 ended at just about 5.5%. Our goal was to be in high end of the 9% to 10% range over time and I would expect continued growth in capital towards the yearend. That's the that's the plan intention at this point I think.
The fact that we mentioned we paused on share repurchases for the time being front for the foreseeable future will be that a major driver about and we could do to model as you might imagine innumerable scenarios around where the the European play out here, but the expectation that sort of continually.
Rising towards the end of the or excuse me.
To be the Hyatt and potentially the range of subs on CG. One you talked about T.C.D.C. and that just about 7.5 percents I think that's up from five to precisely.
Likewise, the our goal was to be in the.
Somewhat higher that level, it's I expected that that ratio to trend higher throughout the year as well.
We think about both for the metrics to be honest, we look at both of them just as much internally as each other and see what is a critical regulatory measure. It's also very comparable across banks and so it's helpful. I think for US it for you to understand the relative position Tc. He is a key governor though as well.
And particularly the last downturn.
You know when when capital was was precious that that measure loomed large and so.
Josh that both matter.
And we've tried to both into our decisions I think that said as I look at the trajectory in both of them they are pretty similar shapes.
I would expect both to be rising modestly toward the back half of this year.
Okay got it I'm just a follow up on the auto and RV Marine side, just in terms of the growth outlook. You generally mentioned it in terms of your outlook on the consumer side I haven't we notice that the loan originations in the first quarter 116 in auto probably the lowest we seen in a long time. It did you give a way of helping us understand given the out and so.
And do you, albeit that just what you expect volume growth or traject bike in auto and RV Marine.
We really don't have a great view on it kind of longer term when the euro that's what we tried to realistically give you what what what Q2 looked like it like we do expect continued modest downdrafts in auto just given the dynamics, we've been talked before about auto dealerships being largely shuttered and and therefore sales are.
Have you been being lower.
It really will depend on the pace of the recovery what it looks like to see to what this degree we start to see re growth sequentially quarter to quarter than in the back half of the year from a Murray our RV Marine perspective, I think respecting less downdraft because that portfolio was always very very super Prime very focused on the regions, where that was a key lifestyle.
Ill.
A purchase for people and it was relatively smaller book too. So I think probably expect more flattish to down this there, but but we're also.
You know watching that pretty carefully I think you didnt ask what you on the on the residential mortgage side. We expect continued robust demand as you might expect it essentially pretty pretty flat growth there just given.
That demand offsetting portfolio.
Run off you know us a smoke.
Huh.
Redo their their mortgages almost.
Got it appreciate that thank you.
Okay.
Yeah meets the had never question and answer session I would like to turn the conference back over this team for closing remarks.
You. Thank you all we've talked a lot of today that pandemic.
We reviewed the resulting economic challenges, perhaps most importantly, what we don't know yet.
I'd like to ask you to take a step back and I'll offer you some perspective.
And then this industry for for decades.
Seen uncertainty before and well just endemic in the elevated can sort of brings is very different than any prior periods of my career, we will get through this as a country. One thing we know from history as Americans are resilient at the core Weve. The nation I believe had much better days ahead, we're going to learn and adapt as we have in the past and build strong.
Longer more nimble organizations as a result, this will be at time of changing innovation, resulting in growth I believe Huntington is well positioned to move forward. We will emerge stronger that are as result of the hard work more colleagues and their concern for our customers their commitment to be clearly seen in the way they quickly reorders.
Added two new working arrangements responding to customer needs and of course tilt the businesses in our local communities through the S. Big TPP program.
Their unwavering commitment to our purpose has been inspiring <unk>.
I'm proud of what our colleagues stand for and the ways they've looked out for our customers.
As I remind you frequently in the past our colleagues along with our board are among the largest shareholders money to selectively among the 10 largest this is the challenges we face today are exactly why we changed our compensation plans in 2010 to make sure we are aligned with long term share.
Holders.
Sorry for times like this was also why we took actions the new graded on slide 10 amongst others.
Position Huntington to outperform through the cycle I remain confident about our long term prospects as we manage through this challenging environment.
With that I want to thank you very much for your interest and I think that.
Have a great day.
Thank you. This concludes today's conference you may disconnect your lines at this time and thank you for your participation.
[laughter].
Yeah.