Q3 2020 Huntington Bancshares Inc Earnings Call
Greetings and welcome to the Huntington Bancshares third quarter earnings call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host Mr., Mark Muth Director of Investor Relations. Please go ahead.
[music] director Investor Relations.
Well I will be reviewing can be found on the investor Relations section of our website.
[music]. This call is being recorded and will be available as a rebroadcast starting about one hour close the call.
Noted on slide two today's discussion, including the Q1 <unk> period will contain forward looking statements.
Such statements are based on information and assumptions available at this time.
And are subject to changes risks and uncertainties, which may cause actual results to differ materially.
We assume no obligation to update such statements.
For a complete discussion of risks and uncertainties. Please refer to this slide and material filed with the FTC, including our most recent forms 10-K 10-Q 8-K, Bob Let me now turn it over to Steve Thanks, Marc and thank you to everyone for joining the call today.
Slide three provides an overview of Huntington strategy to build the leading people first digitally powered bank in the nation.
It's the board affirmed this year, our multi year strategic planning process. I mean, just strategies are delivering long term revenue growth.
Our third quarter results demonstrate we are driving revenue growth despite.
Well the current environment, we're focused on acquiring new customers and deepening those relationships to gain both market share and share of wallet, we are investing and customer centric products services and infrastructure that will drive sustainable growth and outperformance both today and for the years to come.
Because it's still a competitive advantage with our consistently superior customer service and our differentiated products and services were committed to developing best in class digital capabilities like our mobile banking App, which has been honored by JD power two years in a row yeah.
Yeah, our online banking, which was number two and this year's JD power study.
In the past few weeks, we introduced several new innovative products and features that will continue to serve our customers' needs and differentiate honey just from our competition personally extend the 24 hour Grace. The businesses. We then introduced are no fee overdrafts $50 safety zone for both consumers and businesses the filing earlier this week.
We announced our latest innovation honey to live local business, the $25 million micro lending program that capitalizes on our best in the nation, that's being lending expertise to better serve minority women veteran of businesses.
We've intentionally diversified business models.
Balance between commercial and consumer which provides diversification of revenue and credit risk.
<unk> proven track record of solid execution, adjusting our operating plans to the environment in order to drive shareholder returns. This allows us to deliver a seventh consecutive years of positive operating leverage and I expect 2020 will be our hey this.
This focused execution has and will enable us to ensure investment the products people and digital capabilities that will drive sustainable long term growth and outperformance turning to slide four for an update on our digital and bread strategies always.
Completion of the Firstmerit acquisition in 2016, we began the evolution of our consumer go to market strategy for being bred centric to a powerful multi channel. Both model that includes leading digital channels, we introduced the hub, which forms the backbone of our award winning mobile App as our online banking platform.
That evolution has accelerated the share with increased customer adoption of mobile and digital products and services. We are successfully driving digital sales and originations as well as changing and expanding the branch experienced include virtual and digital digitally assisted deliberate our branch sales activity is almost back to.
We told you the level to about 95% today, but were.
What we're seeing in accelerating evolution of the way our consumer customers use branches simpler transactions are rapidly moving into the faster and easier mobile and digital then yes. This transition is allowing our branch bankers to focus on providing more valuable advice and focusing on deepening our customer relationships all.
All ways of looking out for our customers as we've discussed previously and as shown on the bottom of the slide I think should regularly evaluates and Optimizes our branch distribution since the completion of the Firstmerit acquisition. It twice its thing we've reduced our branch count by 263 branches or 24% so.
Close the consolidation of 99 branches or 9% as part of the integration.
Sale of 32 branches in Wisconsin, and the consolidation of an additional 132 branches were 4% annually on average since 2016.
Last month, we announced the planned consolidation 27 additional branches were 3% of the two.
2021 first quarter.
Pleased with the high retention levels post consolidation of deposits due to the strong foundational relationships with our customers on the close proximity to other Huntington branches as we maintained our brand share position in almost all markets.
His thoughtful branch network optimization strategy allows us to continue to capitalize on our competitive advantages around convenience our brand promise and customer service if you didnt.
If you did not listen to any harmonies presentation on our digital transformation at an Investor Conference in early September I encourage you to visit our Investor Relations website, we listen to the replay and see the presentation materials I believe our digital strategy and our execution of that strategy is generating.
<unk> industry, leading results.
We delivered very strong third quarter results, including a record level of pre tax pre provision earnings. Thanks to continued solid execution across the bank in the face of a continued challenging operating environment I'm, particularly pleased with our year over year revenue growth as earning asset growth more than offset NIM compression to drive spread.
Revenue modestly higher well see it sub growth was bolstered by the second consecutive quarter of record mortgage banking income the performance of our home lending team was outstanding.
They originated more than $3.8 billion of mortgage as well the second consecutive quarter to frame that for you our previous high watermark for any quarter was two and a half billion of mortgage originations in the fourth quarter of last year, our combined mortgage production over the past two quarters was greater than we did in all of 2018 at a run.
Actually the same as in all of 29 thing. So these accomplishments are the direct result of the successful build out of this team and our investments in our digital mortgage lending platform over the past several years, we are well positioned to capitalize on the current mortgage environment and the near term.
Outlook remains strong given the.
Given the prolonged low interest rate outlook, we've implemented a comprehensive action plan to stabilize in the near current levels over the long term that will cover this in this and more in his remarks.
We continue to closely manage our expenses a significant portion of the year over year increase expenses resulted from restructuring costs related to implementation of expense management program, we announced last quarter and elevated variable cost to support our record home lending business lines as we previously discussed our.
Then to manage expenses, so that we can allocate investments to our strategic role in it.
Initiatives.
Looking forward, we remain optimistic that the continuing economic recovery.
Precedented level of government stimulus has supported both individuals and many companies were very pleased with the number of customers exiting forbearance arrangements.
Our consumer lending businesses, which as you've seen in our quarterly originations David provided for a decade are focused on super prime customers and there.
And they are performing very well mortgage auto and RV Marine are all continuing to post strong originations.
Commercial lending has been restrained by the economic uncertainty that many customers shepherding elevated levels of liquidity pay down revolvers and putting on new investment spending we can.
We continue to see improvement in commercial pipelines that we mentioned last quarter based on the conversations we've had with our customers. We expect these levels of elevated liquidity to persist for some time, we're cautiously optimistic that seems high loan growth will improve later this year and early next year.
The timing of forgiveness around the PPP loans remains uncertain.
I would like to take a moment to share the honey girls the nations largest SP, a 70 lender for the third consecutive year and the SPX fiscal year ended September thirtyth.
As the largest 70 lender in our footprint with a 12 year in a row. So.
Small businesses are such a vital component of our time in the nascent economic recovery see consistently account for the lion's share of jobs created in our country, particularly this pandemic these businesses deserve and need our support I hope. These businesses are the focus of any future government stimulus package.
Our third quarter credit metrics reflect stable to improving trends across most portfolios.
The elevated charge offs from the sale of more oil and gas loans during the quarter that any customer successfully exited prior pandemics related deferral programs. The underlying portfolio metrics reflect our continued expectation for outperformance through the cycle, our credit loss reserves take into consideration the economic uncertainty that we can do.
The need to have the virus both in duration and so there would be.
We believe we're adequately covered should the pandemic continue to prolong the economic recovery our capital ratios remain within our targeted ranges. This morning, we announced that the board declared a fourth quarter cash dividend of 15 cents per common share unchanged from the prior quarter. We're currently finalizing our submission for the off cycle C car.
We are seeking approval and expect to increase our capital returned to shareholders in 2021.
In closing I'm encouraged by the momentum I could see building across our businesses. Our colleagues are actively engaging with our customers and prospects customer activity is improving month by month.
We see improved debit card activity sales activity in the branches is almost back to pre carbon levels and our pipeline has been replenished in many of our businesses over the past several months. We recently made some key additions to our commercial team, notably within our asset finance capital markets and corporate banking teams and have conversation.
This is ongoing with additional revenue producers.
We're receiving very very positive feedback and early results from the new 24 hour Grace for business in the $50 safety zone product features for consumers and businesses and we rolled out in September or credit.
Our credit quality to the early most of this pandemic and sell them well and we're confident in the quality of our loan portfolios I'm conscious that the economic outlook remains somewhat in certainly in the near term, but overall I like what is the and optimistic about our outlook overtime.
Now, let me turn it over to Zach for an overview of financial performance say, thanks, Steve and good morning, everyone. Slide five provides the financial highlights for the 2023rd quarter. We reported earnings per common share of 27 cents return on average assets was 1.1% and return on average tangible common equity was 13.2%.
[noise] results continued to be impacted by the elevated level of credit provision expenses, we added $57 million to the reserve during the quarter.
Let's turn to slide six to review our results in more detail.
Year over year pre tax pre provision earnings growth was 2% we believe us.
We believe this is solid performance in light of the current interest rate environment and uncertain economic outlook.
Total revenue increased 5% versus the year ago quarter due to strong fee income growth paired with modest spread revenue growth.
As Steve mentioned earlier home lending was a particular bright spot this quarter driving a record $122 million of mortgage banking income.
We also saw deposit service charges and card and payment processing revenues rebound off of the two Q lows as customer activity continued to rebound and pandemic related fee waiver programs expired I should say.
I should also note that deposit service charges remain below the year ago level of elevated consumer deposit account balances continue to moderate the recovery of the slot.
Total expenses were higher by 45 million or 7% from the year ago quarter as Steve mentioned approximately two percentage points of this growth were $15 million was driven by restructuring cost from our 2020 expense management program.
Another three percentage points or $18 million was related to year over year increases in commissions overtime contract help and other variable costs in our home lending business driven by the record level of mortgage originations the balance of the expense growth approximately 2%, reflecting a sustained level of investment in our strategic priorities, including.
Digital and mobile technology.
Turning now to slide seven F.
F to eat net interest income increased 2% as earning asset growth more than offset year over year NIM compression.
On a linked quarter basis, the net interest margin increased two basis points to 2.96%.
As shown in the walk on the right side of the slide the linked quarter increase included a seven basis point benefit from our hedging program.
Including the full quarter impact of the $1.6 billion of forward starting outside hedges that became active in the second quarter.
There was also a two basis point benefit during the third quarter related to changes in balance sheet mix and other items. These two positive impacts were partially upset by the elevated balance sheet liquidity that contributed a seven basis point incremental headwind in the third quarter.
As Steve mentioned, we're taking decisive actions to maintain the net interest margin near current levels. While we are diligently working across the organization to identify and pull levers to manage the margin. It's important to note that our core optimization objective is revenue growth with the highest possible return on capital within our risk appetite.
That said NIM is one of the key drivers about return AD revenue growth. So we're actively managing various levers to stabilize the NIM as a key component in that calculus. We've.
We expect to continue to optimize our funding costs, including further reductions to deposit costs and optimizing our wholesale funding.
On the earning asset side. We're currently in the midst of a broad reexamination of all business and lending.
Commercial relationships for repricing opportunities I believe will yield several basis points of incremental NIM overtime as well as associated deepening of noninterest income fee opportunities.
Similarly, we are optimizing our earning asset mix by emphasizing loan production in certain higher yielding asset classes, such as small business residential mortgage asset backed lending equipment leasing while de emphasizing growth in some of our thinner priced lending products.
Finally, our comprehensive hedging strategies continued to provide some relief from the yield curve as we expect they will continue to do for the next several years, while this hedging benefit will begin to gradually weighing over the next several years. There are no looming clips as we have strategically built a well laddered hedging portfolio.
Moving to slide eight average, earning assets increased $11 billion or 11% compared to the year ago quarter, driven by the $6 billion of PPP loans, and a $5 billion increase in deposits at the fed.
Average commercial and industrial loans increased 13% from the year ago quarter, primarily reflecting the PPP loans.
During the quarter see Eni benefited from a full quarters impact of a PPP loans, however, downward pressure on the business and commercial utilization rates, especially within dealer floor plan more than offset thus, resulting in a modest linked quarter decline.
Consumer lending has also been a bright spot this year as indirect auto residential mortgage and our RV marine portfolios have posted steady growth a trend, we expect to persist in coming quarters.
Turning to slide nine we will review the deposit growth.
Average core deposits increased 14% year on year, and 2% sequentially do you.
These increases were driven by business and commercial growth related to the PPP loans and increased liquidity levels in reaction to the economic downturn.
Consumer growth largely related to the government stimulus and increased consumer and business banking account production and reduced account attrition.
Like the industry as a whole this very strong core deposit growth for the past several quarters has resulted in significantly elevated levels of deposits at the Federal Reserve Bank. These elevated.
These elevated levels of liquidity have proven to be much stickier than we anticipated and our revised outlook is that they are likely to persist for several quarters world before these customers deploy the funds while this did for.
While this did pressure the Q3 NIM more than originally expected. It is also providing us the opportunity to more aggressively managed out our deposit costs going forward.
Slide 10 highlights the more granular trends in commercial loans total deposits salable mortgage originations originations and debit card spend as these are key indicators of behavior and economic activity amongst our customers as you can see on the top left chart the decline in commercial loan balances exco.
Putting PPP loans leveled off in July and remained relatively flat during the third quarter early stage.
Early stage pipelines are refilling, providing room for optimism of a return to new commercial loan growth later this year and into next year.
We expect this coupled with the expected gradual normalization of commercial utilization rates and the typical seasonal build in dealer floor plan will provide some offset for the headwinds from PPP loans as they are forgiven and repaid over the next several quarters the top.
The top right chart reflects the continued elevated deposit balances, resulting from the factors I've mentioned previously providing attractive source of liquidity during these uncertain times.
The bottom two charts relate to customer activity driving two of the four key fee income lines for us mortgage banking saleable originations remain robust. Although there has been a very slow decline since the peak in June.
As we mentioned on the second quarter call debit card usage quickly rebounded once the economy rebid began to reopen and we continue to see healthy year over year increases in both transactions and dollar spend.
Slide 11 illustrates the continued strength of our capital and liquidity ratios.
A common equity tier one ratio or C T. One.
Ended the quarter at 9.89% relatively stable with last quarter, the tangible common equity ratio or TC eat ended the quarter at 7.27% again in line with last quarter both.
Both ratios remain within our operating guidelines and our strong capital levels position us well to execute on growth initiatives and investment opportunities.
Let me turn it over to rich fully to cover credit rich. Thanks.
I'd first like to reinforce the steps we've taken over the last several years to position us for this downturn.
In commercial we scale back leverage lending healthcare construction and commercial real estate.
We stopped originating retuned in oil and gas loans about 18 months ago, and reduce that portfolio to well under 1% of total loans the balance.
We have also repositioned our business banking portfolio with a significant reduction in commercial real estate exposure and a shift toward SBK. It's about 20% of our loans are now SPJ as opposed to only about 5% heading into the last downturn.
We were the number one bank in the entire country last year for SB seven A. originations for the third consecutive year.
On the consumer side, we've continued our focus on prime and Super Prime profile customers and leveraged our expertise in auto into our RV Marine business.
Turning now to the credit results and metrics so.
Slide 12 provides a walk of our allowance for credit losses, or Hcl premiering 2019 to the third quarter you can see our ace deal now represents 2.31 per cent of loans and excluding the PPP loan balances are easier would be 2.5% as of September thirtyth the third.
The third quarter allowance represents a modest $57 million reserve build from the second quarter.
Like the previous quarters in 2020, there are multiple data points use the size the provision expense for Q3.
The primary economic scenario within our loss estimation process was the August baseline forecast. This scenario will somewhat improved from the main baseline forecast we used in Q2 and assumes elevated unemployment through 2020, ending the year at 9% followed by slower paced economic recovery through the first half of 2021.
That accelerates as the year progresses.
2020, GDP and the full year down, 4.9% and demonstrates 2.6% growth for all of 2021 with that growth also accelerating in the back half of the year.
Well a number of variables within the baseline economic scenario have improved as some of our credit metrics for the quarter. There are still many uncertainties to deal with a likely.
The likely cobot, a resurgence in the winner a stalemate on additional economic stimulus.
The impact of the upcoming upcoming election, as well as ongoing model imperfections relating to the cobot economic forecasting.
We believe maintaining coverage ratios consistent with the second quarter is prudent when considering these factors.
Slide 13 shows our NPS and TD, Lars and demonstrates the continued impact on our oil and gas portfolio has had on our overall level of MPS oil.
Oil and gas M. P is a Q3 represented 26% of our overall and P. is which were down from the second quarter by 111 million or 16% as we proactively reduced the oil and gas portfolio and were able to return other credits to accruing status.
Slide 14 provides additional details around the financial combination has been provided in our commercial customers as we have.
As we forecasted on our Q2 call the commercial deferrals have dropped significantly and now total just 942 million down from 5 billion at June 30.
80% of the remaining deferrals represent second 90 day deferrals that are centered on hospitality retail and travel related customers over 70% of the remaining deferrals expire this month and we expect to have limited commercial deferral balances at the end of Q4.
Some SB eight customers might seek an initial deferral just Q4 following the end of the six month payment support the SB provided us with the carriers.
Commercial delinquencies are within a normal range at 19 basis points reinforcing the deferrals that not negatively impacted credit quality.
Slide 15 shows our consumer deferrals and the news here is good as well our auto RV Marine and he left portfolios are performing as we would have expected with very modest post deferral delinquencies in fact, nearly all of the auto where d. marine he liked the Folsom labs, we are operating in a pre cobot risk management environment.
With respect to those portfolios the mortgage.
The mortgage accommodations have come down 78% since June and are also meeting our expectations request for second deferrals or further modifications equal just 10% of the post deferral population today.
Mortgage deferrals will remain elevated for the next quarter or so given the longer initial deferral period 180 days in many cases versus 90 for other markets as well as the more formal deferral exit process, which requires a second round of documentation with wet signatures and new order, it's like the commercial deferrals, the consumer deferrals or.
Not indicating additional credit risk at this time consumer delinquencies were down across all loan categories on a year over year basis.
Slide 16 provides an update to the industry's hardest hit by COVID-19, we continue regular reviews of our commercial loan portfolio and believe we have the risks identified and appropriately manage any adverse cobot impacts as well as the most recent snick exam results are reflected in our current class and other credit metrics for the quarter.
[music].
As we have previously mentioned our hotel exposure centered on five primary sponsors with most of whom we've enjoyed long term relationships, including through the last downturn these spot.
These sponsors continue to demonstrate the financial strength to see their way through the longer term recovery period, we forecast for this industry.
Our restaurant exposure is primarily in the National quick service brands. We believe this book to be in very good shape overall, who will continue to closely monitor the heightened risk in a single location and other non franchise names in the portfolio.
There are currently no material credit concerns in the other high impact portfolios and you can see that the credit metrics since June and a relatively stable.
Recall in the second quarter as part of our active portfolio management process.
We did the cobot related impacts across all portfolios. It took appropriate actions to downgrade those severely impacted credits to criticize status.
This review resulted in a significant increase to our criticized asset level in Q2.
I'm pleased to report or level of criticized loans was reduced by over 425 million or 12% in the third quarter validating that the portfolio review we undertook in Q2 was comprehensive and served to identify potential problems are really working with our customers. We were able to proactively remedy a number of these loans.
Slide 17 provides a snapshot of key credit quality metrics for the quarter, our credit performance overall was strong now.
Net charge offs represented an annualized 56 basis points of average loans and leases.
Commercial charge offs were again centered in the oil and gas portfolio, which made up approximately 44% of the total commercial net charge offs like Q2, nearly all of these oil and gas charge offs resulted from a 127 million of loan sales close your contracted for sale during the quarter as we prudently reduce our exposure to this industry.
Annualized net charge offs, excluding the oil and gas related losses were 36 basis points demonstrating that the balance of our portfolio continued to perform well in Q3.
Consumer charge offs were just 24 basis points in Q3, highlighting our strong consumer portfolio, our super Prime originations of auto and RV Marine loans in particular continue to perform at very high levels.
I would also add our nonperforming asset ratio decreased 15 basis points linked quarter to 74 basis points.
As always we have provided additional granularity by portfolio in the analyst package in the slides.
Let me turn it back over to Zack.
Thank you rich.
Steve alluded to earlier, we are confident that our businesses and are cautiously optimistic that the economic recovery will continue particularly longer term as we move past the election, and what the potential for vaccine and improved therapeutic medical treatments for the virus. We also expect to finish out 2020 strong.
Slide 18 provides our expectations for the full year 2020.
Looking at the average balance sheet for the full year 2020, we expect average loans average deposits to increase approximately 6% and 10% respectively compared to last year for the remainder of the year, we expect consumer loans more specifically residential mortgage auto RV marine to be the primary driver of average loan growth.
As commercial loan growth remains muted.
Our current projections assume the majority of PPP balances will remain on balance sheet through the end of the year.
With respect to deposits, we expect continued growth in consumer core deposits from new customer acquisition relationship deepening and low attrition as I meant.
As I mentioned earlier, we expect the elevated level of business and commercial deposits persists through Europe.
We expect to record record or we expect to record excuse me full year total revenue growth of approximately 3%, 3.5% and full year total expense growth of 2% to two and a half perception.
With respect to revenues, we expect Q4 revenues to be in line with Q3 up 7% to 8% year over year.
We expect full year NIM to be approximately 300 basis points and we expect to have flat to moderately higher NIM in the fourth quarter, driven primarily by further reductions to the cost of interest bearing deposits, which we expect to be below our prior historic low low of 22 basis points, Let me step back in the third quarter of 2016.
This guidance includes no positive impact in Q4 from the acceleration of BBP fees and includes a continuation of elevated liquidity that we discussed earlier.
We expect full year non interest income growth of 8% to 10%.
Primarily driven by robust mortgage income, while our fourth quarter outlook includes moderation in mortgage banking, we expect an uptick in capital markets fees as well as several other fee lines to help the cushion that decline.
On expenses, we expect the fourth quarter to be up 3% to 5% from the third quarter as we.
As we've discussed before we believe the current economic outlook presents the opportunity to invest in our businesses north it meaningfully gain share and accelerate growth over the moderate term out the recovery continues to solidify as such we're accelerating investments in technology and other key strategic initiatives across our businesses as we exit 2020.
While delivering full year positive operating leverage for the eighth consecutive year five.
Finally, our credit remains fundamentally sound, we expect full year net charge offs to be approximately 50 to 55 basis points. This is reflective of the cleanup of the oil and gas portfolio as well as the broader economic conditions now let me turn it back over to Mark. So we can get to your questions.
Operator, we'll now take questions, we ask that 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 he or she can add themselves back into the queue. Thank you.
Thank you.
This time, if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
Let me first start to if you'd like to remove your question from Nick you for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star key.
Our first question comes from the line of Scott Siefers with Piper Jaffray. Please proceed with your question.
Morning, guys.
I appreciate it Hey, I think you guys that you answered a lot of my questions on the sort of the potential for commercial to.
Got it.
Resumed some some grass I certainly appreciate that I wanted to ask specifically on that the dealer business and that's been kind of a headwind and granted it's not necessarily huge for you guys. But was just curious to hear about your thoughts on sort of any window and as to how quickly we should expect that dealer business in particular to recover and <unk> in other words, how much about.
Growth driver can it end up being.
Hey, Scott, it's rich I'll take that we've seen you know really low utilization rates across the dealer floor plan.
Portfolio, you know in what had been typically in the 75% range are now down below 50%. The the challenge with that business is just getting inventory back on the lots and well the Oems are ramping up deliveries to the dealers new car levels are continuing at a pretty low levels.
So we would expect that we would see a steady build for.
From that 50% up toward the end of the year and provide a gradual build over the years. This isn't something that's going to ramp up very quickly, but it is going to be something that we see steady state.
Slowly building throughout the balance of 2020 and into 2021.
Okay perfect. Thank you and then exact just on the guidance for the full year and I guess implicit in the fourth quarter, if I'm doing the math correctly I think the implied that <unk> fourth quarter would be up fairly significantly from the third quarter. It sounds.
Like you know margin you know sort of flattish I guess, just what are the what are the puts and takes that you see for and I in particular in the fourth quarter sure.
Sure. So thanks again for the question. So I think our outlook for for loans sequentially is up in total about 1% or $800 million and we are expecting our kind of baseline underlying forecast is a couple basis points of incremental NIM as we go into Q4, and so thats really going to drive spread revenues up somewhere around $30 million.
Just to be clear does not include any PPP acceleration there could be some revenue.
Some revenue come through from that we're not banking on that.
Okay, perfect and then not baked and so that was the fallen so alright terrific. Thank you very much.
Welcome.
Thank you. Our next question comes from the line of Jon Arfstrom with RBC capital markets. Please proceed with your question Hey, Thanks, Good morning.
Good morning.
Question for either a richer exactly on the provision can you talk about some of the provision drivers for the quarter and what.
You want the overall message to be as we look forward on that it seems like some of this with growth driven as well, but can you just talk about provision drivers than expectation.
Sure John its rich I'll start with that yes. As you pointed out you know we didnt have a relatively modest reserve build and in Q3. It was about 3% up from Q2, the coverage ratio moved up four basis points from 227 to 31.
I would first point out that we did have over $1 billion and point to point loan growth in Q3, which accounted for about 25% of the reserve build clearly was Cecil youre, taking a life of loan approach to any risk of harm to any portfolio built that you have but I would tie the build really to ongoing on.
Certainty with respect to both the virus and the type of stimulus if any that's that's coming our way you know we are seeing cobot cases, increasing across much of our footprint and while we don't expect to see.
Return to full stayed home orders, we do believe that that is going to be a drag.
On the economy going forward and with respect to stimulus you know we can see that there's a deadlock right now and the timing in the makeup of what that stimulus ends up looking like it's going to be important to the recovery I think you have to keep in mind too that all of the economic scenarios have assumptions with respect to both the dollar amount and the timing.
Stimulus and to the extent that not stimulus is delayed or isn't you know earmarked for.
We are the model thinks its going is going to have also an impact so when we look at that.
Factoring all of that in the uncertainty, that's what really drove us to keep them.
Keep the reserve about where it was I think you know the four basis points as you know pretty much a plateau for the quarter those were the big drivers.
But the message that you're adequately reserved for what you see today I forgot a couple extra.
Yes, absolutely.
Then just one one small one to kind of get the noise in your numbers at this point, but quarter your nonperformers about half the charge offs or.
Oil and gas.
Zach you use the term clean up what's left there and what kind of the time on that.
Yeah. The only thing we just had you know.
We sold 127 million in the third quarter, we've got.
We've got that portfolio down 50% from where it was a year ago. When we talk about clean up you know the book right now is that the point, where with the reserves that we have we will be opportunistic sellers I think over the course of the last several quarters. There was more of a desire to get.
The overall numbers down and the pricing that we were able to get allowed us to do that within the coverage ratio that we had I don't believe in the fourth quarter that were going to be aggressive sellers, we will certainly looks to sell it if it makes sense and to the extent that the fall borrowing base redeterminations.
Acquire additional charge offs will take them. So we're going to move into what I would consider more of a traditional problem loan management scenario with oil and gas going forward.
Okay, Alright, thanks, guys.
Thank you. Our next question comes from the line of Erika.
With Bank of America. Please proceed with your question.
Hi, good morning.
Morning Erika.
Hi, My first question is for you now.
No I'd have all your de fast participate peers I think you know this is probably the first statement. We've heard in terms of you know expectation to increase capital return 2020 line you know assuming restrictions don't stretch out for too long.
And knowing the bank you know you've always prioritize dividend dividend growth and also of course funding your gross.
And I'm wondering if that balance shifts a little bit to buybacks and 21, you know given where your stock is relative to your Rick.
Well.
Thank you Erica we.
We do have a rather.
Relatively high dividend yield compared to the peer group and that will influence the proper.
The appropriate time, I believe our board's decisions.
We would be more oriented towards buyback.
Versus a dividend increase, but but no decision were not that threshold yet.
But but the historic guidance, we would have provided will substitute.
We're likely substitute.
Other uses of capital for.
As a second alternative.
And that dividend.
In balance with that.
Historically wouldn't say core growth dividends and other uses you will see a much more balanced approach certainly with the stock trading it at these levels that seems like a lot sounds to us.
Again subject to set up and other regulatory support.
Got it.
And my second question is for for that I think you know of course, there was you know some chatter about you know swap income potentially rolling off and you mentioned in your prepared remarks that are there no looming clip and if I'm doing the back of the ongoing math right. They wrote a book.
Help net interest income about maybe 19 to 20 million this quarter and of course, correct me, if I'm wrong and I'm wondering as we think about the outlook for 2022, you know in your well Laddered strategy. You know what is the dollar impact from the derivative portfolio.
If you could confirm for this quarter and what you expect it to be for 2021, yeah.
Yeah.
The dollar in front of 11 basis points in 2020 for the full year. The derivative portfolio is benefiting us by about 22 basis points.
Next year, we expect that to rise somewhat several basis points up to 25 and.
And that it sort of gradually runs off through 22, 23, and 24 to 22 is about 12%.
12 to 13 basis points run off 23 is about seven basis point run off within 24 hours actually flat. There's no massive CWIP is clearly a drop in a gradual overdone.
Gradual reduction over time, but as I also mentioned my prepared remarks, we're pulling all the levers of balance sheet optimization is really offset can drive that and we do have confidence will for the NIM near current levels over the long term leveraging three key strategies funding optimization.
Asset growth mix and that customer level pricing.
I think I'll say I'll, just pull back and see if that answers. Your question is for next year, there will likely be a from a quarter to quarter volatility driven by PPP loan forgiveness acceleration, we'll see but we suspect that that will be the first couple of quarters.
No that was very helpful and clear thank you.
Thank you. Our next question comes from the line of Kenya in with Jefferies. Please proceed with your question.
Hey, Thanks, good morning, everyone.
On the following up on the expense side document in three to five expense growth in the fourth quarter and I think you said it was mostly investment just wondering can you help us just understand what were the restructuring costs that were in the third quarter number and also what you're expecting in the fourth quarter number sure in the third quarter, we had $15 million of restructuring costs.
In the fourth we expect that to be kind of around just left the five so itself. So the incremental 10 benefit quarter to quarter.
In that 3% to 5% expense guide I would tell you is pulling back that really didnt investments are essentially entirely driven by that investment.
Suddenly expenses are essentially driven by the investment growth, we see a little bit of continued quarter to quarter growth in.
Variable cost is driven by a customer activity continued to rebound out of the coal would lows.
But those are the main drivers.
Okay, and then so if I take that then that theres not much restructuring.
<unk> costs in that fourth quarter number is that kind of the right base to grow off of or is this more of a one time step up there just get stuff.
Accelerated or ER and you know relative to what you expect to spend as you go forward to your prior comments last quarter about the flexibility within the cost save numbers. Yeah. I think it's a good question I know you're much Doug I mean, it's a little too early for us to give you kind of a longer term outlook, we'll do that more fulsomely in the next quarter update when we talk in January.
But I think that.
What you're going to see is this elevated level of investments continuing for for a few more quarters you.
You can't turn on a dime with this kind of stuff. So we're going to we're wrapping up toward the end of this year as we as we've talked about over time.
To capture the opportunities that are.
We think we are present in the recovery in and that will sustain for few more quarters, but the key for US is really these things drive revenue growth that we are very focused investment plan very tied to our strategic growth initiatives and the expectation is we'll start to see the benefits of that flowing through to accelerating revenue growth as we go throughout 21 and certainly into 22.
Okay, and then just one underneath that you know what what's also I think Steve mentioned a bunch. This in his prepared remarks, but like how it how do you go forward and and help offset some of that natural inflation from the spending in terms of things you can either see starting to become more efficient in or as Steve mentioned earlier, you know you could start to rethink some of the branch location.
Over time et cetera.
Yeah, I mean, you saw it tick down a bit less right. There I think the the investments you've got some of which drive our shorter term and more productivity related benefits others are longer term in our customer acquisition and customer relationship deepening related.
And behind the scenes you just continue to be incredibly rigorous with our non investment expenses per program and I think the way I look at expenses as you've got growth investments that we would I be drive the return on that and then you've got the rest of the business expenses that we just squeeze.
Perpetually lower so you know the the items that we look at are a lot of what you just said.
Got it okay. Thanks, a lot Jack.
Okay. Thank you.
Thank you. Our next question comes from the line of Dave George with Baird. Please proceed with your question.
Good morning had a question just moving to the fee side of things there was a good rebound this quarter in deposit service charges and just kind of curious how you're thinking about that line item in Q.
In Q4, and then kind of a run rate starting in 2021, obviously, given the amount of liquidity that puts in consumer checking accounts, that's going to put a damper on it but I would imagine that that spend has gotten better. So that's obviously driving some of the improvement so curious how you're thinking about that yeah.
Yes. This is Chuck will take us, perhaps others may want to weigh in as well. So we did see a a bit of a snapback in personal service charges in Q3, a $15 million higher although was continues to run a fair amount lower than last year and you know as we as we look forward to the future I don't expect a lot of growth in that line.
I think that the <unk>, particularly the elevated levels of deposits and Weve seen that I for one believe theyre going to be quite sticky for for some time I think it's fundamentally related people's uncertainty about the economy, and therefore, just protecting themselves with what I'll be liquidity and we've seen kind of a flight to quality in flight to to proximity from.
Our customers and leveraging Huntington as a place to hold those deposits I think thats going to hold personal service charges lower for a while it's really not our focus for growth.
What we're really driving the value added felines overtime.
Makes sense I appreciate it.
Good.
Thank you. Our next question comes from the line of Ken Zerbe with Morgan Stanley. Please proceed with your question.
Thanks.
Oh, Yes, I guess, what warning so one of your peers decided to exit indirect auto can you just talk about the economics of that business and how the economics change since the beginning of the pandemic.
Yes, Ken this is rich I'll take a stab at that we'd love the indirect auto business. I mean, this is a foundation and a core competency that we've had for.
For several years now and you know.
We would grow this business as opposed to exit the visa credit quality performs incredibly well for de fast its our one of our best performing portfolios I think if you look at the.
Recent deferral activity that we've had in this book and the post the deferral delinquencies. They are excellent and right in line with that so from a credit standpoint.
We couldn't be happier with the performance of this portfolio over time, and we're very enthusiastic about the growth of this business over time. So we we have a contrarian approach and I think it's based on the fact that so we've got great dealer relationships, we've built up over the years and you know.
That is proven out very well so that you want to touch I'll, just touch almost a tack on that metric.
I totally agree with everything risk et cetera is this business has incredible risk adjusted returns to give you a sense the yields were seeing right now.
New volume coming in or 3.5%, so that's sort of.
Constructive and helpful for the NIM trajectory. It's also relatively short lived assets. So it helps us continue to play as rates potentially move higher over the longer term and lastly, I would say is just it may come into the business. There was it's great to see these these business lines that Huntington has that are.
Got such a diversification of the business side, you've got that when something else is weak like commercial that we talked about this other one it's been.
Really a real source of strength and growth for us. So, yes, I wouldn't say enough about how much we like.
All right Great and then just the second question you guys talked about seeing growth in commercial that later this year I think you referenced a few times just to be clear is this specifically a honey tennis civic like issue that you're <unk> or is this or do you envision the broader industry also growing season.
Off a low base.
Hi, David.
Without a position to comment on the industry, but we're looking at our pipeline.
What were they making that sharing that comment Ken we have.
Pipeline today, that's comparable to last year and.
In both business banking and our commercial banking teams and typically fourth quarter is a is one of our best quarters year in year out I would expect.
Based on the the weighting of that pot pipeline probability of closing to have pretty good fourth quarter revenue and.
All indications are positive what we're we're hearing from customers is is a continued recovery members. The Midwest is recovering nicely.
Particularly the manufacturing sector. The biggest issue we hear that regard as they just can't get enough employees.
Our jolts numbers for the Midwest are higher than any other region of the country. So there's a there's a labor issue that's constraining some of the potential on the investment side and maybe holding back some of the London met so we're actually reasonably bullish about a fourth quarter and beyond.
All right great. Thank you.
Thank you. Our next question comes from the line of John Pancari with Evercore ISI. Please proceed with your question.
Morning.
Good morning.
On just back on the on the loan growth topic on that on the commercial side I. Appreciate the color you just gave in terms of.
[noise] the in your markets and you know and some of the trends outside of dealer services from an industry perspective, where are you seeing the improving growth dynamics is it is it manufacturing like you just said is that where you're starting to see demand or is that you're just optimize.
Pick up that materializing or are there other portfolios, where you are seeing some momentum begin.
Well, we're clearly seeing that the manufacturing sector jobs as I mentioned, but but it's more broadly based there is a level of business activity. That's that's occurring on on the buy outside on a generational transfers.
Beyond that there's there's activity that we're we're never world principally of a lower middle market Bank.
In the commercial side and as inventories are getting replenished and and revenue as well.
Rebuilt there's a there's working capital was a man we do a lot of equipment finance and asset based lending as well you're seeing particularly on the asset base side. Good demand fourth quarter is generally good for equipment finance.
Our health care activity is very very strong.
Well so it's it's it's it's broad based.
Let me just talk on this is not good just as an indication about the pipelines are up to almost the level of last year just to give you a sense off of considerably lower crude during copaxone and production during the quarter during Q3 ramped quite substantially.
Yep got it no. That's helpful. Thanks for that added color there and then on the on the credit side just to confirm did you indicate that your criticized assets are down did you say, 12% in the quarter and also can you just talk about what areas that you saw improvement and if you think that decline continue where do you think.
There's going to be some pressure to the upside as some of the.
The pressure on borrowers as they come off a forbearance and uncertainty on stimulus what are you doing.
Yes, 12% was right at about 425 million was the reduction over the quarter. It was very wide widespread. We did have you know the oil and gas sales, which was about 125 million or $127 million all of that just about all that was was criticized but beyond that it was very broad based across just about all of.
Our.
Lines of business, which was was heartening to see.
No we didn't do that.
Very comprehensive.
Review in the second quarter.
Which caused the spike in credit in Q2, and so seeing it come down in Q3, we expected that to some extent and I would say that we will continue to see a downward trend in criticized it may be a bit bumpy.
Quarter to quarter things will move and things will move out within different portfolios. I think that's just the kind of the cobot environment that were dealing and things are going to pop up that might.
We somewhat unexpected, but I would generally expect our credit quality to begin migrating the couric class migrating down overtime.
Got it okay, great. That's helpful. Thank you.
Thank you. Our next question comes from the line of Bill Carcache with Wolfe Research. Please proceed with your question.
Thank you good morning.
Richard.
Following up on your auto segment comments. It looks like you guys had recently been seeing a growing mix of used car originations, but we saw a mix shift back to do this quarter that goes on slide 44.
Can you discuss some of the dynamics, there and give us a sense of the relative profitability of new versus used just at a high level.
Yeah, I think it was a cycle I'll start off and maybe Mark you probably want to tack on to the styrofoam. You'll numbers went from I think generally this is really influenced by the supply dynamics that rich was talking about earlier, so earlier in the year when the supply.
Interruptions were had on the original equipment of size just demand actually shifted so the so the used side and so we saw that mix change I think what you're seeing now is a gradual normalization back to a kind of a longer term.
Typical mix of new versus used cars.
The yield on used is a bit higher than new.
But I don't have the numbers right in front of me to come more specifically what to call you on that.
Yeah, Bill I don't have the specific breakout on the yields between new and used but you did always.
Quite a bit higher than new and so on a risk adjusted return basis, it's actually slightly better than that.
And the new.
Yeah, Thanks, guys, you're going up and then separately back on your comments around mix optimization and remix you more towards small business. In particular can you discuss how you guys are thinking about growing into that from a relationship from a customer relationship standpoint timing credit risk perspective, particularly with all the uncertainty around stimulus.
[music].
Yeah, maybe I'll touch on that a little bit like a rich very much luck on as well as I think.
And the the list of assets, we'd like to grow faster.
Includes small business was not certainly exclusive to that as we as we noted what lot of others, but I think what we're seeing in our strategy is to really deepen penetration to provide terrific products and experiences to this segment, particularly through the digital investments, we're making and.
And we're really seeing it works a tremendous demand coming through I think partly leveraging the real success, we had with PPP and so it's pretty broad based but over to attack on terms of how we're thinking about.
Absolutely the PPP success that we had certainly a driver.
The growth and we are really focused on Sps.
Within small business as a continued lever for growth. We obviously have a core competency in SPD will continue to leverage that going forward, but also on the conventional side no business banking, which you know the non SP a piece of it we've seen very good growth as well and that's been pretty widespread across across industries health care.
And others.
Thanks, Richard that if I could squeeze one last one in for Steve you guys have done a lot to improve each bands ROTC profile since the great recession can you discuss your.
Our expectations for the kind of ROTC.
Generation that we can we can expect from each band it to the extent that were to persist for an extended period.
Well, we haven't changed our long term metrics on the ROTC D.
At this point, we'll be out as Zach mentioned with an outlook for next year in January so.
I think thats fair to use based on the work that we've done looking forward over the last couple of years as a as a rough guideline now.
Okay.
Thank you. Our next question comes from the line of Steve Alexopoulos with JP Morgan. Please proceed with your question.
Good morning, this is definitely on for Steve.
My first question.
My first question is on margin, obviously lots of moving pieces, there, but if I put it all together liquidity remaining near term and excessive repricing looking into 2021 is the direction of men.
Modest downward trend from here or do you think you can manage it more stable given hedges benefit.
Yeah. Good question. Thank you. This is I'll take that one so I think 22.
So the 2020 will likely land around 300 basis points from just a just a tick higher and our expression expectation for 21, excluding PPP for a second is just a few ticks higher than that so about flat.
And my baseline outlook is a few basis points higher we'll have I think I mentioned earlier kind of the next few years hedge benefits in basis point.
In basis points. This year was 22 next year's 20 fives not forecast that's up three basis points better interest bearing liabilities I expect to be down also kind of over around or over 30 basis points. We do expect yield pressure largely offsetting that so that's the sort of flat to a few basis points higher outlook I've covered for 21.
At this point again were to do a fair amount of work around this will come back in a more clear guidance. Later there are wildcard that's a DPP timing that I mentioned potentially also some we'll continue to look at.
Hedging in the portfolio and and that could also throw a few basis points volatility in there, but generally that's my outlook.
That's very helpful.
My next question is on operating leverage combined with expense savings from the branch consolidations and I have more bullish outlook on moly going into <unk>, you can't increasingly likely that Huntington can achieve positive operating leverage in 2021 again.
No. It's really too early for us to talk about the totality of the full year of 2021, I do expect that a lot of the trends that we're seeing right now to kind of continue for the next few quarters, just given the momentum and.
And.
The trends of the business that we're seeing right now and so we'll see we'll come back and talk more about that our commitment around positive operating leverage is a long term what do we think it's the right one for the company, but we're really focused on making the investments now to drive revenue acceleration and the other thing we feel pretty good about it so we'll come back and talk more.
Words, Steve we're bullish about coming out of this cycle and taking advantage of it that has been our orientation in the past and we're continuing with that so we'll we'll be.
Looking to drive growth revenue growth and you're getting a sense of that off third quarter earnings.
Great. Thanks for taking my question.
Yeah.
Thank you. Our next question comes from the line of broadband.
Yes. Please proceed with your question.
Hi, good morning, Thanks for taking my question.
Just just in terms of Oh lost content and the cadence of net charge offs going forward. One I guess, how are you feeling about loss content now versus say April I'm, I'm, assuming that's better but one.
The asking them to as you look at charge offs and they've been relatively stable here is there.
It's a bit of a catch up in other words, an increase from here that we should continue to be to be aware of or how are you anticipating that you can kind of hold at this point.
More at this level.
Rob This is Steve just that go through your April comment, it's night and day different for I think about the volatility uncertainty.
Period of time versus today so.
You should be inferring that off the comments about the economy in recovery et cetera, and that would be true with that.
That expectation of credit quality will mirror, the economic recovery, there's still uncertainty and as rich said it may be lumpy, but.
But we don't have a catch up quarter.
We've already caught up so we're we're in word.
We're we're in good shape as of the end of the third quarter, given the volatility and.
Expect that the team will manage.
With consistency as we go forward.
Maybe a little lumpy because of the recovery in the nature of it the virus, but but but.
But like the footing, we have very much.
Got it okay.
The mix optimization could you look to to move some of this but fed deposits into investment securities.
Or.
Is that not something you're you're looking at.
Yes. So this is Doug it's really not something were looking at at this time, we do expect to begin to reinvest our securities cash flow. This quarter as we've talked about a little bit over last few few calls and to get back to in the securities portfolio to around Q1 levels. So that's about a billion and half billion six.
Incremental securities investments in the <unk> in the fourth quarter, but but not really with a mind toward utilizing those deposits.
Rather we're focused on deploying those for core organic growth and in some degree as a funding optimization opportunity that I mentioned earlier, so that's the plan.
Got it okay. Thanks for the color.
Thank you.
Thank you ladies and gentlemen, we have reached the end of our question and answer session I would like to turn the floor back to Mr. Steiner for closing comments.
Thank you for the questions and your interest in Huntington, We're very pleased with third quarter performance and we continue to be optimistic about our future and the economic recovery, but acknowledge volatility uncertainty remains in the economy.
Our disciplined enterprise risk management provides a strong fundamental foundation and you're seeing that in our numbers were executing our strategies will continue to capitalize on opportunities, we're investing investing in strategic growth initiatives, while continuing to deliver solid performance I am confident of our ability to manage the challenges.
We face and excited about our future and finally as I'm fond of reminding you we are closely aligned.
The interest of the board Executive management and colleagues would the other owners of the company via via mechanisms such as our holder retirement equity requirements and we've collectively been one of the 10 largest shareholders of the company for the past five years, So we feel the pain and.
We're looking forward to a better day ahead. Thank you again for your support and interest in Huntington have a great day.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.