Q1 2021 Huntington Bancshares Inc Earnings Call
Greetings and welcome to the Huntington Bancshares first quarter earnings call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
I'd now like to turn the conference over to your host Mark Muth director of Investor Relations.
Thank you Derek.
From a mark Muth director of Investor license price.
Copies of the slides, we'll be reviewing can be found on the Investor Relations section of our website at Www Huntington Dot Com. This call is being recorded and will be available as a rebroadcast starting about one hour from the clauses call.
Our presenters today are Steve <unk>, our chairman President and CEO, Zach Wasserman, Chief Financial Officer, Rich Pollock, Chief Credit Officer will join us for the Q&A session.
As noted on slide two today's discussion, including the Q&A period will contain forward looking statements such statements are based on information and assumptions available.
And 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 net material filed with the SEC, including our most recent form 10-K, and 8-K filings. Let me now turn it over Steve. Thanks, Mark Good morning, everyone slide.
Slide three provides an overview of Huntington strategy to build the leading people first digitally powered bank in the nation. We continued to execute against the strategic vision and are pleased with our progress to date, we see significant opportunities ahead of us as we position our businesses for the recovery of hands over the past year, we updated our multiyear strategic plan with that.
Focus on driving long term revenue growth continuing to build our brand based on best in class products and increasing our industry, leading customer satisfaction across our businesses. We also announced the planned acquisition of Tcf financial which will will provide a powerful opportunity to grow revenue expand our.
Our market presence and provide scale to our businesses, while increasing our investments in digital and other areas.
This combination will increase our capacity to invest and we will become more efficient with the significant expected expense takeout.
We accelerated our digital investments as part of our strategic vision and are encouraged by the digital adoption trends due to the investments we've already made for the first time over half of new customer deposits accounts were originated digitally in the last quarter with double digit growth in active digital and mobile.
Jason This is similarly encouraging.
As we look ahead, we are optimistic about a strong economic recovery unemployment has decreased significantly across our footprint.
Again here you crescendo commentary from our customers regarding labor constraints and wage inflation.
Zuma confidence has meaningfully improved on average consumers are less leverage and more liquid or debit card trends have consistently posted double digit year over year growth rate for the past several quarters.
Consumer spending and service industries as expected to broadly accelerates this year as demand returns consumer low production also continues to be strong.
Well the commercial side sentiment is encouraging our pipelines are up across the board increasing our confidence in a recovery in commercial loan demand later this year.
While supply chain constraints, such as the semiconductor shortages will likely challenge some manufacturers in the near term progress of the recovery and visibility into growing customer orders are causing outlets to strengthen.
Let me also share some high level remarks from our first quarter results, which provided a strong start to the year and included solid core performance with our momentum building.
Personal loan originations were in line with expectations. However, overall growth was constrained by both for gives us the PPP loans and continued headwinds in dealer floor plan in commercial line utilization.
Both of which are temporary channel challenges.
Residential mortgage auto and RV marine produced seasonally strong originations in face of tight inventory.
And consumer loans balances was obscured by unprecedented levels of Paydowns. Following the two recent round from stimulus.
Deposit growth continues to consistently exceed expectations.
Finally on slide four I'd like to give an update on the pending <unk> acquisition, we believe the timing could not be better as the strengthening recovery dovetails with the growth in scale opportunities presented by this combination.
We continue to make good progress toward our anticipated closing late in the second quarter and to complete the majority of system conversions late in the third quarter in March Huntington at Tcf shareholders approved the transaction and our integration plan is on track we completed the self selection of key management and.
Rate, receiving the outstanding regulatory approvals, including the required branch divestiture in the coming weeks, we've begun the major components of the cost reduction plan, including the closure of 44 Meyer branches later this quarter now.
Now, let me turn it over to Jack for more detail on our financial performance. Thanks, Stephen Good morning, everyone.
Slide five provides the financial highlights for the first quarter, we reported earnings per common share of <unk> 48 assets.
Return on average assets was 176% and return on average tangible common equity was 23, 7%.
Bottom line results were augmented by two notable items. The first was a 144 million dollar mark to market benefit on our interest rate caps, driven by the steepening yield curve and increased market volatility.
Second was $125 million or 7% reserve release, resulting from the improving economic outlook and credit metrics, partially offsetting these were $21 million of Tcs acquisition related expenses, which are broken out as a significant item in the earnings release granularity provided in table eight.
Now, let's turn to slide six to review our results in more detail.
We continue to be pleased with our sustained growth in pretax pre provision earnings, which increased 15% year over year in the first quarter total revenue increased 19% versus the year ago quarter. Net interest income grew 23% driven by solid underlying loan growth and a 34 basis point increase in NIM, which were positively impacted by the substantial Martin.
The market gain dimension in our interest rate cap derivatives, and the $44 million of accretive accelerated PPP loans fee accretion.
The income growth of 9% was aided by a record first quarter from mortgage banking income a salable mortgage originations set its own record was 89% year over year growth.
And secondary marketing spreads remained elevated.
Our wealth and investment management businesses experienced its best quarter ever with respect to net asset flows and also benefited from positive equity market performance over the prior 12 months card and payments continue to post strong consistent growth.
Deposit service charges remained below the year ago level of elevated consumer deposit account balances continued to moderate the recovery of the slide.
Total expenses were higher by $141 million or 22% from the year ago quarter three percentage points of this growth can be attributed to the approximately $21 million of significant items related to the Tcs acquisition there.
There were also approximately $45 million of expenses in the quarter or approximately seven percentage points of growth, resulting from the pull forward of these three expenses that otherwise would have been incurred in the future. The first of which was a 25 billion dollar contribution to the Columbus Foundation second we moved our annual long term incentive grants to me.
<unk> from the historical timing of day.
Third we retired some expense related to our colleagues' health savings accounts, which would otherwise have been occurred in the balance of 2021.
These two compensation related items that together totaled approximately $20 million. The remaining approximately 11, 5% underlying expense growth rate was driven primarily by the accelerated investment in strategic growth initiatives, which we have been communicating for the past several quarters.
Turning to slide seven FTE net interest income increased 23% as earning asset growth was coupled with year over year NIM expansion.
On a linked quarter basis net interest margin increased 54 basis points to 348% as shown in the reconciliation on the right side of the slide the <unk>.
Linked quarter increase primarily reflected a 49 basis point net change in the interest rate caps.
As we've discussed previously we're taking actions on both sides of the balance sheet to offset the inherent margin pressure caused by the prolonged low interest rate environment managing the underlying core net interest margin near current levels.
Given the significant impact on NIM from the interest rate caps slide eight provides additional information on this aspect of our comprehensive hedging strategy.
As we disclosed in December we purchased $5 billion of interest rate caps with an average tenor of seven years to reduce the impact on capital from rising rates.
This hedging action performed very well this quarter.
In March we subsequently sold $3 billion of new interest rate caps at a higher strike price to create a color light position.
This is expected to dampen further mark to market impacts and recovered approximately half of the premium paid on the initial cash while maintaining the majority of the capital protection from the position.
Turning to slide nine average, earning assets increased $12 billion of 12% compared to the year ago quarter, driven by the $6 billion of PPP loans and the $5 billion increase in deposits.
Average commercial and industrial loans increased 11% from the year ago quarter, primarily reflecting the PPP loans on a linked quarter basis, C&I loans decreased 1%, primarily reflecting the forgiveness of PPP loans.
And a decline in dealer floor plan utilization.
We indicated at the RBC conference in March commercial loan pipelines remained up significantly from year ago, and we're seeing that manifest in new commercial loan production.
Residential mortgage RV and marine all posted year over year growth in new production.
Average consumer loan balances declined sequentially, a stimulus related paydowns more than offset strong new production in the quarter.
On a linked quarter basis average, earning asset growth, primarily reflected the $2 billion or 9% increase in average securities as we executed our previously announced plans to deploy excess liquidity through the purchase of securities during the quarter.
Turning to slide 10, we will review deposit growth and funding.
Average core deposits increased 20% year over year, and 4% sequentially driven by increased consumer liquidity levels relative to the downturn consumer growth largely related to stimulus increased production and reduced attrition.
Slide 11 provides an update on PPP forgiveness and expectations for the current program.
And total Huntington approved $6 $6 billion of PPP loans than the original program and has approved an additional $1 $8 billion of loans in the current program.
In light of the recent congressional extension of the program and our current application activity. We now anticipate the total amount for the current route to reach approximately $2 billion.
We continue to expect approximately 85% of those balances from the original program and the new program ultimately to be forgiven.
Through the end of March $2 4 billion of loans from the original trial shopping forgiven and we anticipate approximately $2 3 billion will be forgiven during the second quarter.
The current program, we expect the majority of the forgiveness or for this year, particularly in the second half of the year.
Slide 12 illustrates the continued strength of our capital and liquidity ratios with tangible common equity ratio or TCE ended the quarter at $7, one 1% down five basis points sequentially.
The common equity tier one ratio or CET, one ended up the quarter at 10, 33% up 33 basis points from the last quarter.
The CET one ratio was modestly above our 90, 10% operating guideline.
And we feel it is prudent to maintain strong capital levels going into the Tcs acquisition.
It also positions us well to execute on our growth initiatives and investment opportunities going forward.
As we have previously communicated we paused share repurchases until we have substantially completed the Tcs acquisition.
And integration slide.
Slide 13 provides a walk of our allowance for credit losses. The first quarter included a $125 million reserve release, primarily from consumer while the quarter at ACL represents $2, 107% loans and $2, 33% of loans excluding PPP.
We believe this is a prudent level to address remaining economic uncertainty, while reflecting the improved overall credit metrics and economic outlook.
Slide 14 provides a snapshot of key credit quality metrics for the quarter.
Our overall credit performance continued to strengthen.
Net charge offs for the purpose.
Represented an annualized 32 basis points of average loans and leases slightly below the low end of our average through the cycle target range from 35 to 55 basis points or.
Our criticized assets and NPA ratios were both relatively stable.
As always we provide additional granularity by portfolio in the analyst package on the slides.
I want to spend a minute on our ongoing investments and progress on digital engagement and origination.
Looking at Slide 15, we continue to invest in a focused set of strategic initiatives to drive revenue acceleration and competitive differentiation. In addition to a variety of digital and product investments, we are adding personnel and core revenue generating roles to support strategic growth in our capital markets specialty banking small business administration and vehicles.
Finance businesses, we have also increased marketing expense back to pre pandemic levels and to promote new launches related to fair play banking.
Slide 16 illustrates several key digital engagement and origination trends showing some of the benefits of our ongoing tech investments on the left side of the slide you can see continued growth in monthly digital engagement and usage levels and consumer and business banking the digital origination trends on the right side of the slide our <unk>.
Particularly encouraging as it shows strong customer uptake of the new consumer business digital origination capabilities, we introduced over the course of the last year.
We are executing robust technology roadmaps across our business lines that will drive sustainable revenue momentum via improved customer acquisition retention and deepening.
Finally, slide 17 provides our updated expectations for the full year of 2021 on our Huntington Standalone basis, we now expect full year average loan growth of 1% to 3% down slightly from prior expectations. As a result of the elevated levels of pay downs and a delayed recovery of commercial and vehicle floor plan line utilization.
<unk>.
These expectations reflect flat to modestly higher commercial loans inclusive of PPP.
And low single digit growth in consumer loans.
Excluding PPP, we would expect to see low single digit growth in both.
For deposits, we now expect full year average balance growth of 9% to 11% higher than previous expectations, given the stronger than anticipated deposit inflows inflows in the first quarter and the overall elevated levels of core deposits, which we expect to persist for several more quarters.
We're also adjusting our expectations for full year total revenue growth higher to a range of three from 3% to 5% we.
We expect net interest income growth to be in the mid single digits. While noninterest income is expected to be modestly lower for the full year.
Full year growth expectations for noninterest expense are now between seven and 9%.
On a non-GAAP basis, excluding $21 million of significant items I discussed previously, we expect noninterest expense to increase between 6% and 8%.
This increase relative to our prior expectations is driven by the foundation donation in the first quarter and increases in compensation expenses related to the higher revenue expectation for the year.
The large majority of the underlying expense growth continues to be driven by investments in our strategic growth initiatives as we've discussed previously.
While expense growth is expected to outstrip revenue growth over the near term our commitment to positive operating leverage remains over the long term our expectation and plan is to bring the expense growth rate back to more normalized levels. During the second half of 2021.
Finally credit remains fundamentally sound.
We now expect full year 2021, net charge offs to be between 30 to 40 basis points, reflecting improving economic conditions and stable charge offs in both commercial and consumer portfolios.
Further reserve releases remains dependent on the economic recovery and related credit performance.
As a reminder, all expectations are standalone for Huntington and do not include consideration paid for the pending acquisition of Tcs now, let me turn it back to Mark. So we can get to your questions. Thank you Zack Sarah we'll now take questions. We ask that as a courtesy to your peers. Each person ask only one question and one related follow up and then if that person.
<unk> has additional questions he or she can add themselves back into the queue. Thank you.
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Thank you our first questions come from the line of Ken Zerbe with Morgan Stanley. Please proceed with your questions.
Alright, great. Thank you and good morning.
On a GAAP.
Why don't we start with <unk> just in terms of the interest rate caps.
Probably it may not be the only one who didn't appreciate how meaningful this could be on a mark to market basis for NII.
I I get that you added the short cap position, but it still seems that you are or you have a fair amount of long exposure outstanding can you just talk about the volatility that we should expect.
<unk>.
Long day this volatility last.
Over time in 90 day is it right to assume that we could be looking at maybe.
Maybe not a $100 million swings but.
50, $60 million swings in NII in any given quarter up or down.
Thanks, Ken This is Jack I'll take that question and you guys look I would start by saying the priority of our goal for this position and our strategy here was to look around the corner to manage risks to protect capital and to be dynamic and proactive to do that.
And we thought it was a really smart moving and as you saw I think it has benefited us substantially and so that also underlies our decision to continue to maintain this position, albeit somewhat color as we as we discussed before.
For the foreseeable future.
So we'll have to see what happens these get marked to market every day and ultimately we posted the results that's extent at the very last day of the quarter, but we believe it's the rate position.
As we go forward here so.
We'll have to see we'll keep you posted but over the long term we think it's the.
A really smart position for us to protect our capital Ken I'll just add when we execute these in the fourth quarter remember the outlook was the rates will be flat through 'twenty well into 'twenty. Three so we thought the benefit of this capital protection would be in the out years 456, plus.
And.
Obviously, the interest rate outlook changed very rapidly after the election.
But but it wasn't our intent to sort of.
View this as some kind of short term position when we originated it.
It was this protection of capital over time.
Got it no that's definitely worked out incredibly well this quarter.
No doubt about that.
Second sort of related follow up question.
There's a little more in the weeds that day, I think I'm missing something but would love your clarification on debt.
If we look at just the change in net interest income from last quarter to this quarter and we back out only the change if the way I understand it the change in the caps of call. It a $140 million to the positive and then we back out another $40 million change in P. P. P income it implies the net interest income actually.
Went down by $32 million sort of on an all else equal basis am I missing something in that in that calculation.
Well I think you've I think you've got it right I think we saw as we noted in the commentary.
A bit of pressure on underlying loans in the quarter just from headwinds.
Headwinds, we're seeing in line utilization, but that was offset by a really strong fee income growth during the quarter. The NIM. If you were to strip.
Strip out that.
Cascade was 297 to give you a sense of that interest margin.
And can you also had the impact of day count if youre looking at the dollars.
On a sequential business growth.
Got it okay, alright, perfect. Thank you very much.
Thank you. Our next question comes from the line of Matt O'connor with Deutsche Bank. Please proceed with your questions.
Hi, good morning.
I know you've talked about it in the past, but here and there, but as we think about the increase investment spend this year.
Typically on technology. That's at all I was just wondering if you could summarize what a couple of the kind of bigger initiatives. They just spend is Ah that's driving that higher investment spend this year.
Yeah, I think Zack I'll take that and Steve may want to check out as well here.
What we really like about our strategic plan is it's incredibly focused and it's driven by key initiatives across each of our business slides. So.
In our consumer business slide.
Once you've talked about for a while much of the increased investment is around digital with three major focus areas.
As we've talked about over the last several years and it's really last year, improving our digital point of sale product origination capabilities. We've largely completed that last year and now the teams are working through how to best optimize and incorporate that within the.
Omni channel.
That engagement process, we offer client origination also a lot of focus around engagement and deepening through personalization and ease of use client accounts servicing.
In the commercial business significant amount of digital investment as well around new client onboarding.
Relationship manager.
Digital tool sets as well as focused investment in new.
People for example in specialty banking and in our capital markets business. We're also really pleased with the investments, we're putting into our wealth and investment management business, which I guess or a mixture.
Both technology too.
Improve the client adviser interaction experience and relationship management tools as well as select people hires as we bring on a new relationship managers, which as I mentioned in my script really driving substantial sales growth and performance and lastly, I would highlight vehicle finance.
For the last several years, we've been working to digitize the customer experience as.
As well as to continue to expand the geographic footprint of that business in a way that's a that's really constructive.
Steve do you want talk all day, but that's a very helpful summary.
So as we think have the costs associated with Tcf deal you'd mentioned you know long term expense growth like what is a good I'll call. It three to five year outlook on expense growth and I understand it might be.
From what revenue dependent but yes, if you think about most revenue growth coming from.
Loans.
NIM expansion hopefully.
Things that aren't Super high on the efficiency ratio what would a good range for underlying expense growth day.
It's a great question and I would note that for the next several years based on our forecast for the integration of the Tcs acquisition overall reported revenue and expense growth levels will be substantially impacted by the receipt.
Quite high levels of growth in both as we incorporate that that business and measure the year over year growth, but kind of on an underlying basis, which I know was the basis of your question.
My expectation and goal is that we're growing the top line at or above nominal GDP with revenue lower than that and driving positive operating leverage I think over the long term something like one and a half to three 5% sort of inflationary growth as is logical and if revenue was stronger than perhaps expenses are stronger than that.
But generally that's why broad expectation, Ken just want to reiterate the commitment to positive operating leverage after nine years.
<unk> this year to make investments coming off the strategic plan in particular because of the economic.
Volatility that we saw last year with the virus and the expected recovery.
We are playing.
In terms of timing exactly right, we've got a series of.
Of near term revenue growth initiatives that we're executing and that will position us for the long term, but we will be back to positive operating leverage.
Thank you.
Thanks, Matt.
Thank you. Our next question is coming from the line of Ken Houston with Jefferies. Please proceed with your question.
Hey, Thanks, Good morning, Hey, just the one follow up on the expense side. So you know clearly you have the excess revenues helped by the swaps and then a bit.
Higher expected growth rate this year on the expenses, which makes sense that you're continuing to accelerate but yeah, just Jack when you mentioned <unk>.
Last quarter, a different cadence between first half expense growth in second half expense growth I just want to try to understand is the increment that's embedded in.
The new expense growth rate also good to show and in the in the first half.
Uh huh.
Due to the items in the first just kind of if you can walk us through how things traject from here would be helpful. Thank you.
Yes, Ken. Thanks, So thanks for the question I appreciate the chance to clarify.
I would say approximately three quarters of the incremental expenses were what we saw come through in Q1. So there is a small lift in the balance of year, but most of it was what we saw come through in Q4, Q1, and the but the key thing with our plan as it were Frontloading. These investments into the first half of the 20th 2021.
The expectation is really the same as it was before elevated expense growth.
Core run rate basis in the first half coming down to more normal levels in the second half of the year.
About 6% to 8% underlying core expense approximately five percentage points of that is is our long term strategic investments and the other 1% to 3% is really sort of a natural expense inflation that you might expect.
And some normalization of company wide programs like Merit and TNT in medical costs and things of this nature and some additional expenses to support the additional revenue as I noted in my prepared remarks, So front end loaded back end back to historical levels.
Really no change other than in those two factors I just talked about.
Helpful and then the same kind of debt.
Our.
Thought process on the NII side, obviously NII outlook helped by the 144 just underneath that can you just talk about just the underlying changes to your prior views on that.
NII versus the fees.
Look as well thanks, Yep Yep overall, I expect mid single digits.
Excuse me in net interest income for the full year I think.
Driven by in part by our.
Modest growth in assets that we've indicated in the guidance between.
One, 3% and in spread NIM spread overall, it'll be roughly flat for the full year I think just touching on NIM for a second.
Next couple of quarters will likely be in the mid <unk> in terms of NIM biggest impact just changing our expectations somewhat continued elevated levels of fed cash driven by the elevated levels of liquidity across the system.
Many folks have commented on here in the earning cycle.
And to some degree at the beginning of the roll off of our hedges, which will be down about seven basis points into Q2. So Q2 will be a trough to mid $2 <unk> for the next several quarters, but pulling off FY 'twenty still looks at like a NIM of 290 or better and long term still forecasting to maintain those levels in the store.
Well to a rising NIM over the longer term.
Got it thank you Jack.
Okay.
Okay.
Thank you. Our next question is coming from the line of Scott seekers with Piper Sandler. Please proceed with your question.
Good morning, guys. Thank you for taking the question.
Hi.
I just wanted to ask I used to follow up on the.
The rate cap so between the what do you sort of captured in the first quarter than the sale of the $3 billion new caps in March. So does this do anything to your sort of your forward rate sensitivity I think exactly I'm sort of thought about the hedges is more balance sheet protection and then really adjusting.
Your rate sensitivity. So is there any change to that dynamic.
So.
Well I think I think you got it right the position was around protecting capital.
And.
And I think you saw the slide 52%.
Offset of the OCI Mark on Securities.
What was protected by this so it's really good we got our treasurer, Derek Mire of the room I don't Dare do I comment a little bit on assets sensitivity in your and your outlook there.
Thank you so we've continued to.
Look at that obviously, we already stated this is primarily thinking of a capital play there is a knock on effect because it comes through earnings on our margin most of our Decisioning had been too rich.
Retain as much downside protection, while capturing the upside as these rates have gone up and that is these captive obviously made us even more sensitive in that respect.
We are evaluating our next hedging moves to protect that downside without giving up that upside opportunity. So it does change the posture.
That's also a big part of what we're thinking about as we evaluate our positioning with Tcf, which is a separate set of decisions, but that is another set of levers that we have to incorporate into our forward view broadly.
Broadly speaking just pulling back for a second I think really like where the assets sensitivity kind of strategy in trend is going in that over time.
Our existing edge position slowly rolls off we will become more and more exposed to what will be likely a gradually increasing interest rate environment as well. So I think it's.
Well timed for us to be exposed in that way as rates begin to rise over the next several years.
Got it that's helpful. Thank you and then I guess as a follow up if I think back at a point you had mentioned the sale of the new <unk>.
Recaps, the the $3 billion that that should sort of dampen the new mark to market.
Impacts is there a way to sort of speak to how much protection you have against future volatility like we saw this quarter, both up and down.
Yeah. It's a good question, we estimate is between 15 and 30% impact on dampening. So important we wanted to maintain kind of a net long exposure there because we do think to the extent that there is a.
Probability of moves substantially off the forward curve is likely to be higher, but but but that dampening is sort of between 15% and 30% as we go forward.
Got it alright. Thank you guys very much appreciate it.
Yep.
Thank you. Our next question is coming from the line of Peter Winter with Wedbush Securities. Please proceed with your questions.
Good morning.
I was wondering.
Could you talk about.
You mentioned the loan pipelines are very strong I'm. Just wondering can you talk about what youre hearing from your customers about making investments in <unk>.
<unk> is kind of the appetite to draw down on lines of credit versus using that excess liquidity maybe delaying.
Drawdowns.
Peter This is Steve.
So in the last four or five weeks I've had about 50 C E O.
Ceos and small meeting virtual conversations and.
The outlook.
By them as virtually all very positive about this year pipelines their backlogs.
Very very encouraging and their overall economic outlook for the next couple of years also very positive.
He has in a number of situations have supply chain constraints some of it from mundane items.
Some of it for chips, but theres a theres a curtailment that I think is being experienced at least in part by these companies on the supply chain universally they talk about his ability to get adequate labor very high turnover.
Clear wage inflation at the low end.
Consequence of that will be more investments by many of them into automation, all the way through including packaging. So we.
We expect there'll be a fair amount of equipment finance activity. This year and will be combined with Tcf will have a seven day its largest equipment finance company.
Country that should position us very well, we have a very good technology finance team.
That will play well with with automation on the factory side.
But but even as in the health care health care products side, we're seeing.
A strong uptick.
Health care systems are doing better.
Been able to reopen.
Sustained activity that was diminished during that during the peak of the virus.
No.
You know the.
The people, we're talking to the Ceos.
That arena.
I'm really very very confident going forward. So we think the strong pipelines, we're seeing we're up about 40% of the commercial pipeline year over year is reflective of.
What will be demand as weak as we go through the year, probably more in the second half than first but this.
Because many of them had very good years of liquidity.
And they're using that liquidity as opposed to line utilization and other things inventories are low and many of these companies.
So that supply chain, but some of it's it's significant demand inflation on the commodity side would lumber just a whole host of areas, where there's cost push.
Think that will engender further borrowing is as the liquidity gets soaked up so.
So we're.
From these conversations where we're optimistic about about the.
Our continuing improvement, especially seen in the second half.
Okay. Thanks Stephen.
If I can ask just a follow up on.
The P. P. P. You gave some pretty good disclosure on slide 11.
But what what's the outlook Zak from for the rest of the year.
So net interest income from PPP.
Yeah, I think as we said the expectation is that we'll see a <unk>.
Substantial amount of.
Additional.
Forgiveness in the second quarter I think give you a sense of Q1 revenue in total from PPP was around $76 million of which $45 million was the have accelerated at $31 million was the underlying yield.
My expectation for Q2 is around $50 million total revenue of which 20 basically half and half between yield and.
Accelerating.
The acceleration.
And that will represent.
Andre the PPP revenues from the first program, we'll see a little bit of a tail as we go into the balance of the year. The round two I mentioned is about $2 billion.
About 85%, we think we've forgiven much of it in 'twenty, one that will add around $1 $3 billion of ETB and $60 million from revenue, we estimate to the year I know we have we'll have the analyst modelling call. After this and we can probably double click into more of the details during that but that's about the rate high level comments for you now.
Got it.
Thanks for taking my questions.
Okay. Thanks.
Thank you. Our next question is come from the line of Bill Kirk Patchy with Wolfe Research. Please proceed with your question.
Thanks, Good morning, Stephen back up some investors have expressed concern around the risks that internal combustion engine engine vehicles will lose value compared to electronic vehicles as they take over and obviously there is debate around when thats going to happen, but can you speak to how each band is thinking about this risk. What you guys are doing about it and yes net.
Which you do you expect to play a role in helping consumers.
One tier III V purchases as well.
From a from the standpoint of risk of declining collateral values for your existing book, if you could comment on that as well.
So bill Steve good.
Good question. Thank you.
We think theres going to be an extended transition here I believe the industry as well.
That belief as well.
EV is building in the country visibility at a very slow rate now that may accelerate with the climate the posture of the administration and for other reasons.
Including consumer awareness around environmental and it changes a bit but combustion engines.
We think we're gonna be here through the decade.
And in terms of.
Demand.
Substantially there, it's not fully through production.
Having said that in terms of the impact of US we're super Prime lender, so whether it's a combustion engine or a hybrid or EV.
We work with a view a very low default rates and so marginal loss rates might increase a bit and then probably would anyway because we're at record highs in terms of of Blue book values for us So.
But we don't see that as a big event in terms of opportunity for us. It's one of the areas of Av.
Environmentally sensitive financing that we're looking at there are a series of other areas, where we're actively engaged in extending credit.
Over time as we look back in the billions of dollars and there may be an opportunity for us to do something unique.
With the hybrids or E vs. As we go forward.
That's very helpful and just a follow up Steve can you give a bit more color on some of the things you're doing ahead of the Tcf closing just to make sure you hit the ground running next year as is most of the initial focus ensuring smooth integration vs.
Maybe is it just too early to be thinking about the revenue synergy opportunity that debt debt is down the road or is that in the mix as well any color around that would be helpful.
So when we announced we talked about the expense synergies.
Early definitive, but we also alluded to revenue synergies or are just start with our offerings, both consumer and business are much more expensive.
The Tcs so it sets up a cross sell something we've been working on and we call we refer to it as optical customer relationships. So we've been doing this growth decade, we have very good experience.
With cross sell into the Firstmerit customer base, we expect it to do.
Absolute or even better based on the learnings and experiences and our relative position.
Tcf also outsources outsourced, a number of businesses or products, which which we.
Which we manage directly and so we will.
We will expect lift out of out of those so there's a variety of revenue initiatives, which we are pursuing in some cases, we've already activated.
Such as SBA money in Minneapolis.
And activity.
Tcf didn't didn't have.
And so as we go forward, we will expect these revenue initiatives, we'll share them at a future point will be significant upside to what we've we've presented.
Yeah.
Uh huh.
At a summary level, so we will detail.
We expect to get the as we as we proceed with the first order of business is to execute the committed expense takeout and to get the synergies on that front that we expected with the closing expected later this quarter and a conversion later in the third quarter.
Yeah.
Got it thank you for taking my questions.
Thank you.
Thank you. Our next question is coming from the line of Steve Alexopoulos of J P. Morgan. Please proceed with your questions.
Good morning. This is Kenneth Lee on for Steve Alexopoulos.
Just digging deeper into your commercial loan growth guidance I understand that in your guidance of commercial loans being flat to modestly higher for 'twenty 'twenty. One what is your assumption around the level of commercial utilization for your C&I customers as compared to the current level.
Could you also provide more color around like how that compares to pre pandemic levels.
Sure. Thanks, Joe for the question Zack I'll take it overall as I as I mentioned from the comments the expectation is excluding PPP low single digit.
Growth in commercial loans, and an approximately one and a half percentage of that is from some modest why utilization overall the expectation for line utilization.
Has been reset, but I'll come back and speak more specifically about the pre pandemic comparisons you asked which is generally characterized the expectation and what we've seen is relatively flat and general middle market lines. My baseline expectation is a modest improvement.
Likewise, what we've seen on the vehicle for plant side is actually some retrenchment from the end of last year to where we stand now.
As we go forward, we're expecting some modest improvement in both of those together those represent just under 1% asset growth expectation with my total asset growth, but even if you were to normalize it I think the level of strong production, we've got across across both consumer and commercial we do expect to drive accelerated loan growth overall.
Net basis as we go forward just double clicking into the line utilization expectations pre.
Pre pandemic, we were running in the middle market line utilization sort of low 40, percents and right now we're in the high 30 percents to give you a sense, it's been roughly flat now for several months in a row.
And I would expect it will be flat for a time before it starts to rise later in the year, but I think as has been well publicized elevated levels of liquidity across.
The system.
Are contributing to our clients just not meeting those lines are at this point, but everything we're hearing from them because that ultimately they expect to go back to a more typical financing posture that those will start to slowly normalize probably more in the back half of 2021 and continuing into 2022.
On the vehicle Floorplan side.
Historical levels or from just around 80% line utilization by the end of the year, we had gotten to almost 61% to be precise in December.
By the end of this quarter, we were at 51% to give you a sense of which it continues to tick down and has ticked down even a little bit more into April. So we'll have to see that that one is really driven by the point specifics.
Auto manufacturer issues that have been.
Very well documented the popular press around micro chip shortages and other component shortages.
We are hearing though is that slowly but surely that they are chipping away at that as that issue the manufacturers and debt.
Vehicles will begin to flow faster.
Faster rate in the back half of the year My general expectations are relatively flat in that for the next several months before it starts to normalize and rise more again towards the very late part of 'twenty one.
Longer term expectation based on our client expert discussions that they'll go back to historical levels of utilizing that financing.
Well into the middle of 2022 based on supply.
That's very helpful. Thank you.
And just turning to <unk> I want to.
Talk to with the new money yield debt, what yields new purchased securities.
Or being put onto the books versus what's rolling off and same for new loan production and also what's your plan around deploying excess cash and how much how much of that could be deployed into securities over the next.
Several quarters.
I'll take the prescribing listen the depth of our charge was in the relative as well maybe tack on.
As we go on the security side, we feel really good actually about where the yields are and what we were able to deploy with a roughly $2 billion of net adds during the quarter came on sort of around the 160 basis point level.
<unk>.
As we think about other new money yields generally some modest pressure, but not overly so I think in the commercial business around a quarter point lower as we went into Q1 from Q4.
CRE Likewise around 30 to 35 basis points lower auto roughly stable. So we're seeing some modest downdrafts on new money, but not overly material I would say at this point most of the current impacts have been.
Got into the pricing.
As we take a step back and think about the.
Posture around elevated liquidity I would say that as we've continued to update our forecast we've ratcheted higher the expectation for elevated levels of liquidity and deposits as is indicated by our.
Deposit guidance and.
And likewise Rochester out in time.
Duration that this phenomenon will last.
Until it begins to normalize so likely will take several more quarters for that to slowly start to wane and it will go all the way into 2022, so that.
That gives us the cost to really look at the best ways to deploy that over time, you've seen us optimize our our funding structure and we'll continue to look for opportunities to do that to bring down funding costs using that.
But I think as well looking at whether its appropriate over time to invest in growth of securities is also part of the discussion to be clear liquidity as the as the the.
The primary objective of making sure that we're managing that well, so we'll leg into and step into what kind of fee basis, any any incremental moves on that.
And still working through it and nothing for us specifically to talk about there.
We will continue to be dynamic and looking at it and just watching those trends and optimizing anything Derek you tack on to what I said I think you've covered it we have reached the point with our <unk> security strategy.
The new money yields are sort of equal to or run off yields plus or minus.
0.5%, so a lot of it was going to happen with prepayment speeds and then with the yield curve shape is I don't see a big change in trajectory.
Alright, thank you.
Thank you good question.
Thank you. Our next question is come from the line of John <unk> with RBC capital markets. Please proceed with your questions Hey, Thanks, Good morning, everyone.
Good morning, John most.
Most of it's been handled but can.
Can you Steve can you talk a little bit about.
Retention.
And synergies that you saw on the Firstmerit.
And you can also touch on what keeps me up at 44 branches that you're closing what kind of retention you get from those.
And how youre thinking about Tcf in terms of retention as well.
We have.
Set of opportunities. Thanks, John Good morning, I'm, sorry, we had a set of opportunities with Tcs that are substantial.
Substantial in terms of retaining customers.
If we think about Michigan for example, even after our consolidations of branches and in aggregate there'll be more than 200 branches affected by consolidation and divestiture. We will still have number one branch here in Michigan by a factor of about 50%. So it will be.
Quite a bit larger than the next thing.
With physical distribution. So that provides an enormous set of opportunities for us in terms of retention and we have had very high retention coming out for spirit and other in store.
<unk> consolidations remember within Sweden solid at 4% of the franchise every year on average.
And so our retention efforts, where we decided to drop the remaining Atms outreach, we have a process we call white glove treatment, that's been well defined over the years and developed.
The combination of those activities the uniqueness of the product set all day deposits 24 hour rate safety zone now things like that also gives us a distinct retention advantage. So we expect to have very high retention on the tcf side of the consumer and on the business side again better products more.
<unk> as we go forward, but it starts with leading minds and hearts of our soon to be new colleagues and we're actively working that we would expect debt.
The success was the list with Firstmerit debt will set up that this retention of those.
Customers true through the conversion and beyond and the product then you're just being.
Essentially different.
Much more much less.
Bigger and better in many respects.
Will be to the benefit of the customer base, both consumer as small and medium sized businesses. So we're very very optimistic on the specialty finance side.
Their equipment financing ours is almost hand in glove.
The combination will be extraordinarily effective but they have a great team, we think we do as well in it.
This had the globe will give us opportunities to further grow that business. We're excited about their inventory finance business.
Some great people in these business lines as well as the company generally and we're going to be a stronger company as a consequence of the combination.
So very bullish about the expectations, both on retention and revenues.
Revenue synergies as we go forward and we will get the expense synergies largely complete this year.
Okay. Thank you that's very helpful.
Is that can you touch on mortgage expectations for the second quarter I know, it's kind of a mixed bag, but it looks like originations were pretty flat what kind of thoughts do you have for the next quarter.
Yeah, It'll Q2 right in front of me, but just broadly still thinking mortgage.
To beat expectations frankly.
And be very robust I think the overall for the full year, we're expecting our revenues to be down between 15, and 20% a year on year year over year basis, just off of the torrid pace that the 2020 represented but most of that grow over challenge really occurs in the second half of the year.
Volumes continue to be very very robust and I think just on an industry level, you've probably seen even the mortgage bankers Association.
<unk> higher volume expectations for the year I think if there is something that we're watching carefully is the saleable spreads.
And that continues to be elevated above historical levels, but it can move quickly. So we'll see but so far it seems to be holding up relatively well also so.
Expectations are that we've got.
Okay got it. Thank you guys appreciate it thanks Tom.
Ladies and gentlemen, we have reached the end of the question and answer session I would like to turn the call back to Mr. Stein for closing remarks.
Thank you for your questions and interest in Huntington I'm pleased with our strong start to what will be an important year for Huntington as we execute on our strategic initiatives as well as close and integrate the Tcs acquisition I am increasingly optimistic about the opportunities we see in 2021 and beyond and I'm confident of our ability to capitalize on the accelerating economic Rick.
Covered the disciplined execution of our strategies, coupled with the pending acquisition set us up to grow revenue from a larger customer base from which we will deepen existing and acquired customer relationships, resulting in top quartile financial performance. We have a strong foundation of enterprise risk management and deeply embedded stock ownership.
<unk>, which aligns our board management and colleagues.
Thank you for your support and interest.
Good day.
Yeah.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
Yes.