Q1 2022 Huntington Bancshares Inc Earnings Call
Greetings and welcome to the Huntington Bancshares fourth first quarter 2022 earnings conference call. At this time, all participants are in a listen only mode.
Question and answer session will follow the formal presentation.
Why 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 call over to your House <unk> director of Investor Relations. Thank you you may begin.
Operator, welcome everyone and good morning copies of the slides, we'll be reviewing today can be found on the Investor Relations section of our website Www Dot Huntington dotcom.
As a reminder, this call is being recorded and a replay will be available starting about one hour from the close of the call.
Our presenters today are Steve Stein, our chairman President and CEO .
And Zach Wasserman, Chief Financial Officer.
Rich Polly Chief Credit Officer will join us for the Q&A.
As noted on slide two today's discussion, including the Q&A portion 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.
Complete discussion of risks and uncertainties. Please refer to this slide and material filed with the SEC, including our most recent forms 10-K, 10-Q and 8-K filings.
I'll turn it over to Steve Thanks.
Thanks, Tim Good morning, everyone and welcome and thank you for joining the call today.
It's been an eventful start to the year, we enter 2022 with momentum that we carried forward that trying to deliver a strong first quarter.
We're managing through a turbulent macroeconomic environment high inflation persistent labor and supply chain constraints.
That interest rate tightening rapid moves in the yield curve and the devastating crisis in Ukraine.
All have made for a challenging backdrop now onto slide four I'm pleased to highlight our excellent first quarter performance.
First our colleagues are delivering on revenue producing initiatives supporting our strong results, we're generating profitable growth and building momentum, including executing on our revenue synergies.
Second operating with disciplined expense management, we posted another quarter of sequential reductions in core expenses are.
Our targeted cost savings are on track for full realization this quarter and we are capturing these benefits even earlier than originally guided.
Third.
We had record low net charge offs this quarter with overall exceptional credit quality, our disciplined risk management continues to be a strong.
Lastly, we are confident in our full year outlook and our ability to drive additional profitability.
We are revising our guidance higher to incorporate the recent rate curve outlook and we remain confident that we will achieve our medium term financial targets in the second half of 'twenty two.
On slide five let me share more detail on our first quarter performance.
Our robust loan growth higher net interest income and planned reductions in expenses supported a record P. P. R.
Average loan balances excluding P. P. P grew 10% annualized driven by new loan production across both commercial and consumer portfolios.
We continue to see strong customer demand and growing loan pipelines and are confident this momentum will continue over the course of this year.
Our teams are fully aligned and executing on the revenue synergy opportunities from Tcf.
We are seeing terrific momentum in these initiatives as we expand into new markets with enhanced capabilities.
In the twin cities, our new wealth management business banking and middle market teams are already contributing to revenues.
Likewise in Colorado, our business banking and middle market teams are capturing market share and generating revenue.
Also pleased with our inventory finance business, which has seen seasonal growth and is exceeding our expectations.
Additionally, we are seeing increased productivity and positive reception to the Huntington product set and customer service experience.
We continue to execute on our strategic initiatives across the bank.
In March we announced the next evolution of our leading fair play product set including the soon to be released.
Instant access feature as well as an enhanced credit card offering to the launch of our cashback credit card.
In addition, our continued expense discipline has enabled us to support investments that are yielding results. This is evidenced by our record first quarter of sales and wealth management and also by another quarter of robust growth in our capital markets businesses.
Just last month, we announced the signing of a definitive agreement to acquire Capstone partners.
Here Middle market investment banking advisory firm that will add significant capabilities and expertise to our capital markets businesses. The transaction is expected to close like this quarter.
Capstone is a terrific fit with Huntington, both strategically and culturally and we're excited for the synergistic growth opportunities. The addition of capstone better positions us to serve the full range of needs for clients in our footprint as well as those we serve on an increasingly national basis.
The transaction adds key verticals that complement our existing industry specialization and adds new capabilities and expanded sectors.
We expect capstone will meaningfully increase our capital markets revenues by about 50%.
And we're excited to welcome our new colleagues to Huntington.
Finally, we're proud to share a few of the awards we received during the quarter.
We were honored to be recognized by Forbes in 2022 as one of America's best large employers, where we ranked number seven in the banking and financial services industry.
We were also recognized in middle market and small business banking with numerous Greenwich Excellence and Best brand Awards for 2021 and lastly, we are proud that the national diversity Council named Donald Dennis Our Chief diversity equity and inclusion officer as a top 100 diversity officer nationally.
Before moving on I'd like to take a moment to welcome Brent Standridge to Huntington, who joined US earlier this month as our president of consumer and business banking.
<unk> comes to us with a broad set of experiences, including our customer focus foundation.
Well with our strategies as.
As Brad joins Us a special thank you to Steve Rhodes, who will continue to lead our business banking division.
Slide six shows our continued trajectory of profitable growth, we've been driving sustainable profitability for years supported by our prior strategic investments in our long track record of managing to positive operating leverage.
We are confident that this increasing trend will continue and will further benefit by the underlying earnings power unlocked from Tcf.
We are poised to have outsized P. P N. Our growth this year and expect it to expand sequentially over the remainder of the year Jack.
Zach over to you to provide more detail on our financial performance. Thanks, Steve and good morning, everyone. Slide seven provides highlights of our first quarter results. We reported earnings per common share of 29 cents.
Adjusted for notable items earnings per common share was <unk> 32 cents.
Return on tangible common equity or Aro TCE came in at 15, 8% for the quarter.
Adjusted for notable items R. O TCE was 17, 1%.
We were pleased to see accelerated momentum you know loan balances with total loans, increasing by $1 $7 billion and excluding PPP loans increased by $2.6 million.
Total average and ending deposits also increased driven by strong trends in both consumer and commercial balances.
Pre provision net revenue grew four 2% from last quarter, reflecting our continued focus on self funding revenue producing strategic initiatives as well as net interest income expansion.
Consistent with our plan, we reduced core expenses by $27 million from last quarter, driven by the realization of cost synergies.
Credit quality was exceptional with record low net charge offs of seven basis points and nonperforming assets reduced to 63 basis points turning to slide eight and.
Accelerated loan growth momentum continued with average loan balances, increasing one 5% quarter over quarter totaling $111 $1 billion. Excluding P. P. T total loan balances increased $2 $6 million or two 4% largely driven by commercial loans.
Within commercial excluding P. P. P average loans increased by $2 $2 billion or three 8% from the prior quarter. We continue to see broad based demand across lending categories that is supporting strong new production. We are also benefiting from slowing prepayments and modest.
Greece's in line utilization.
Middle market asset finance, corporate and specialty banking all contributed to higher net balances within commercial and if all expanded for two quarters in a row.
Commercial real estate balances also increased during the quarter by $485 million.
Inventory finance contributed to growth this quarter with balances increasing by $666 million driven by the expansion of client relationships and the expected seasonal increase in utilization levels.
Auto dealer floor plan increased with balances up by $251 million as new client relationships and a modest uptick in utilization both supported growth in.
In consumer we had a record first quarter performance in indirect auto and RV Marine originations. This drove balances higher in auto and RV marine by $108 million and $63 million respectively. Additionally.
Additionally on sheet residential mortgage increased by $550 million these were offset by lower home equity balances.
Across the enterprise, our bankers are executing disciplined calling strategies driving sustained growth in both early stage and late stage loan pipelines, most of which are higher from the prior quarter and the prior year. We are seeing strong demand from our customers and the realization of pipelines supports our high degree of <unk>.
<unk> in our 2022 outlook.
Turning to slide nine we delivered solid deposit growth with balances higher by $614 million.
On a spot basis total deposit balances increased $3 $7 billion or two 6% from prior quarter.
Ending commercial balances increased by $2 $5 billion in consumer balances increased by $1.5 billion from the prior quarter. This growth reflects continued consumer deposit gathering and our focused relationship deepening within commercial customers.
On Slide 10, we reported net interest income and NIM expansion.
Core net interest income excluding P. P P and purchase accounting accretion increased by 3% to $1.119 billion.
Consistent with our prior guidance net interest margin increased versus prior quarter and we are on track for further NIM expansion throughout 2022.
Turning to slide 11, we are dynamically managing the balance sheet to remain asset sensitive and capture the benefit of expected higher rates, while incrementally providing downside protection as opportunities present themselves.
We have a peer leading them.
We're positioned to expand margin as rates increase.
During the quarter, we modestly increased our downside protection by executing a net $2 $7 billion of received fixed swaps.
As noted on the slide these explicit hedging actions reduced asset sensitivity in the quarter by three tenths of 1%.
The overall estimated asset sensitivity in an up 100 basis point ramp scenario ended the quarter at three 1% down from four 6% at year end. The remaining change in this metric beyond our hedging actions was driven by other ancillary modeling impacts such as the denominator impact of higher projected.
Base net interest income.
Slower prepayments and other balance sheet mix shifts.
On the bottom of the slide is our loan portfolio composition.
As you can see we are well positioned for the expected higher interest rates throughout the year with an attractive mix of floating and fixed rate loans.
Furthermore, our indirect auto portfolio has a weighted average life of approximately 25 months was roughly half of that portfolio repricing each year.
Moving to slide 12, noninterest income was $499 million up $104 million year over year and down $60 million from last quarter.
Fee revenues were impacted by a decline in mortgage banking, primarily due to lower saleable originations as well as typical seasonality, resulting in lower cards and payments activities compared to the fourth quarter.
Given our robust SBA pipelines and attractive market opportunity, we re initiated our SBA loan sales in the quarter driving a $27 million increase.
In addition, our record first quarter performance in wealth management sales contributed to an increase in investment related revenues.
Overall, we continue to be pleased with the traction and growth outlooks for our key fee generating businesses within payments capital markets and wealth advisory.
Moving on to slide 13, noninterest expense declined $168 million from the prior quarter and excluding notable items core expenses declined by $27 million to $1 billion $7 million as we delivered cost savings from the acquisition.
As we shared previously we expect core expenses to be approximately $1 billion by the second quarter.
Even as we're driving down expenses. We're also investing in initiatives that are driving sustainable revenue growth throughout the company slide 14 highlights our capital position.
Common equity tier one was nine 2% at quarter end.
Our dividend yield remains at the top of our peer group at four 6% with.
We did not repurchase any shares during the quarter due to our announced signing of a definitive agreement to acquire capstone.
As you can see on slide 15 credit quality continues to perform very well as.
As mentioned net charge offs were a record low of seven basis points benefiting.
Benefiting from a net recovery position and commercial portfolios and continued strong consumer credit quality.
Nonperforming assets and criticized loans both declined from the previous quarter.
Our ending allowance for credit losses represented 1.87% of total loans down from 1.89% at prior quarter end.
Slide 16 covers our medium term financial targets, which remain unchanged.
As Steve mentioned, we're fully committed to achieving used by the second half of 2022.
As our loan growth momentum continues our first capital priority remains funding this organic growth and we are encouraged by these trends.
To the extent that our loan growth remains as robust as we expect I would anticipate share buybacks would be de minimis for the remainder of the year.
We are comfortable operating at or around these current capital levels as we balance our expected 2022 growth plans and the possible longer term scenarios for the global macroeconomic outlook as we head into 2023.
Finally, turning to slide 17, let me share our updated outlook. The guidance. We provided in January assumed continued economic expansion aligned to market consensus as well as the interest rate yield curve expectations as of early January .
Our updated guidance continues to assume further economic growth and the rate curve as of the end of March.
As a result of the rate curve outlook, we are revising upward our guidance of net interest income.
We now expect core net interest income on a dollar basis, excluding pvp and purchase accounting accretion.
To grow in the mid to high teens.
This is higher than our previous guidance of high single digit to low double digits growth.
And fee income, while we are seeing encouraging trends in our payments capital markets and wealth advisory businesses. We were also impacted by the industry wide mortgage banking pressure.
Based on this we have revised lower our fee guidance to flat to down low single digits, excluding the impact of capstone.
On the topic of capstone.
We are anticipating closing the acquisition at the end of this quarter.
Just on estimates created during due diligence, we believe the business could add approximately $20 million to $30 million of fee income on a quarterly basis. This would be incremental to the standalone Q4 Huntington guidance.
We will provide further information on the impacts of capstone as we complete the acquisition and finalize our financial forecast.
On expenses, excluding notable items were still tracking to our $1 billion run rate for this quarter and again this guidance is excluding capstone.
Finally, given our continued exceptional credit performance across our portfolios. We are revising our full year net charge offs down to approximately 20 basis points from less than 30 basis points previously.
Now, let me pass it back to Steve for a couple of closing comments before we open for Q&A.
Thank you Zach Slide 18, recaps, what we believe is a compelling opportunity Huntington.
Huntington stands as a powerful top 10 regional bank with scale and leading market density as well as a compelling set of capabilities. Both in footprint and nationally we are focused on executing our strategic plan, which we believe will drive substantial value creation for our shareholders. We are well positioned to deliver sustainable revenue growth.
<unk>, which is bolstered by new markets, new businesses and expanded capabilities.
As our revenue synergies accelerating gain traction we also remain committed to our proactive and disciplined expense management.
As a result, we are increasingly confident in our robust return profile with expectations for 17 plus percent R. O T. C E. As we deliver on our medium term financial targets in the second half of the year, Tim Let's open up the call for Q&A. Please thanks, Steve Operator, we will now take questions, we ask that as a.
A courtesy to your peers each person ask only one question and one related follow up and then if that person has additional questions he or she can add themselves back into queue.
Thank you operator, let's open up for questions.
Thank you at this time, we will be conducting a question and answer session. 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. You May Press Star two if you would like to remove your question from the queue for participants do you think speaker equipment may be necessary to pick up.
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Okay.
Our first questions come from the line of Betsy <unk> with Morgan Stanley . Please proceed with your questions.
Hi, good morning.
Good morning.
I just wanted to see if you could unpack the upgraded NII guide a little bit give us a sense as to how much of that is coming from the forward curve changes from the loan growth from the cash redeployment I'm just to understand the puts and takes a little bit.
More thoroughly thanks sure Betsy Thanks for the question Zack I'll take that.
The main driver is the is the rate curve, we're seeing come through with expected for rates to give you a sense at the time of our budget. We had approximately five rate hikes are baked into our forecast going from 25 basis points up to 150 basis points of fed funds by September 23, and it was 75 basis points by the end of 'twenty two.
Now, obviously, it's significantly changed yield curve up to 300 basis points or 150 basis points better by March 23, and $2 75 by December So a full 200 basis points better by the end of this year. So that's the majority of what's driving it given our asset sensitivity.
We're poised to benefit from that both from spread and I would say as well from the reduced drag from free cash that we saw in Q1 that will help us to drive that purely now that we expect at this point.
Okay, and then as I think about the flexibility you have in your balance sheet I'm, just wondering how you're planning on funding the loan growth that you're anticipating getting from here and is there anything left over to you know increase the redeployment into the curve.
You know I think at this point.
Expect to continue to grow deposits as well, obviously, a nice trends and continued deposit gathering commercial growing faster than consumer, but both continue to be a solid producers and that'll be the main funding source as well as you know as I said.
Some of the continued excess liquidity, we've got on cash at this point.
Alright, thank you.
Okay.
Thank you. Our next question is come from the line of John kind of car with Evercore. Please proceed with your questions.
Good morning.
Good morning.
In terms of the I know you mentioned that Youre seeing some strengthening in loan growth momentum and you cited a.
Improvement in line utilization can you just talk about it.
Exactly what areas are you seeing that strengthening how much did the line utilization improve and are you beginning to see capex.
Capex related demand.
You start to drive drive growth. Thanks.
Sure this is <unk>.
That was my colleagues around the room here, who can talk.
Wed like me generally we're really pleased with what we're seeing in loans to take a big step back.
The strength that we're seeing in our pipeline as the realization of that flowing through into into bookings.
Gives us confidence that we'll have to see the momentum driving that high single digit loan growth by Q4 and the model for it.
Is gonna be pretty similar in the back half of this year as what we've seen in the last two quarters that is production less with commercial growing faster than consumer or a consumer continuing to to drive as well as and the sources of it within commercial we're seeing just.
<unk> strength in mid market, our corporate specialty areas equipment inventory finance also contributing very well.
Commercial real estate and auto dealer profile also delivering also on the consumer side.
On sheet residential mortgage was really driven by what we're seeing in the mix of purchase as well as the continued steady growth in auto and RV Marine what were really the drivers there from a utilization perspective, I would characterize what we saw in the quarter as modest, but encouraging and I think a healthy sign for our customers saw around.
1% increase in general Middle market was.
Several percentage point increase in inventory for the Antelope most of that was seasonal.
It is encouraging sign to see the inventory <unk> fluids those dealers on a more steady basis that allows them to hold inventory, although the auto dealer floor plan business also increased by a couple percentage points as well.
Is this a function of just gradually improving auto supply chain. So.
Overall, a pretty healthy mix in the model going forward as I said is production.
It's very much driven by commercial.
John look Steve I would add we invested.
Since closing.
Tcf.
And a number of these lending units. So we have a lot of capacity that's been brought on particularly.
Twin cities, and Denver, and some of the specialty groups. So.
We're just we were able to scale the businesses as well and so we'll we'll be picking up volume from from these investments throughout this year and beyond.
John It's rich the last part of your question had to do with Capex spending and we are absolutely seeing an increase in capital spending given just the tightness of the labor market. So there is an intense move to move to automation.
Turning to see that through the course of the year.
Got it okay, great. Thanks, and sorry, if I missed this in your prepared remarks can you talk a little bit about the.
Trajectory of your data and your deposit beta expectation deposit cost could trend early on for the first hundred basis points of hikes and then thereafter.
So Zack I'll take that one.
Generally across the totality of the rate hike cycle, our expectations is that we're going to see similar dynamics. This rate cycle as we saw in the last one.
Clearly there are some competing forecast the forces there with.
Lower starting rates that might signal, a higher beta, but the level of excess liquidity across the industry would tend to blunt the data.
Lower.
And I think that's been noted by a number of industry participants.
Over time, he was the general operating assumption of the industry and we share. This is that the early <unk>.
Baxter on beta for the first of.
Several rate moves is going to be relatively lower and it will increase as the.
Interest rates environment reaches a higher level.
But I would say two things one is what's really important to us is how well poised to manage against us with very robust very detailed property products segmented client by client.
Management approaches Washington market very carefully so that we can react really be incredibly disciplined.
And I think secondly, we're poised to benefit quite a bit here through this cycle given the long strategy, we had to to drive for primary bank relationships and core operating accounts with our.
Businesses in commercial accounts, so we feel good about where we're positioned in really interesting very vigilant to manage through it.
For the next few quarters.
Okay and in fact, what is your through cycle through cycle beta that you're assuming in your current Alco assumption yeah, it's about 30%.
What we saw in the last cycle.
So our model in general.
Got it alright, thanks Zack.
Okay.
Thank you. Our next question does come from the line of Scott <unk> with Piper Sandler. Please proceed with your questions.
Good morning, guys. Thanks for taking the question.
First question I wanted to ask was on the cost side once we get down to about $1 billion per quarter and expenses.
Coming up shortly here is the plants.
Around that level for the remainder of the year or are any of these inflationary pressures just sort of sort of overwhelming that prior outlook.
It's generally for the back half of this year, which we feel great about where the costs are driving too I think we feel.
So exceptionally strong line of sight to see the 1 billion by $1 billion of core expense run rate by Q2 and that will leave us at poised to really deliver on those medium term financial targets, we've talked about.
My expectation is roughly flat in the back half of this year, where should we see some.
Inflationary pressures.
We outperform on revenue there is a bit of expenses that will drive for that but generally speaking it's approximately flat in the back half of the year based on our current outlook and that's really driven by just very rigorous expense discipline throughout the company and driving for efficiency in our base expenses.
A mindset towards self funding the investments, we're putting into the revenue growth initiatives that we've talked about that you just mentioned a minute ago.
Longer term as we get out into 'twenty three.
We're postured.
Posturing, our Lora Pike is really guided by our commitment to operating leverage which were delivered in the last.
Nine years, and feel confident and proud of what it will do it again as we go into 'twenty. Three you might also Scott the aware, where we announced the acquisition of Capstone and so as that closes at the run rate will have to be incorporated in as well.
Perfect. Thank you and then Zach as we look forward do you anticipate altering your rate sensitivity kind of synthetically anymore or will it just sort of be a function will changes in your sensitivity. The sensitivity just be a function of kind of changes in the complexion of the balance sheet from here on out.
Thanks, Scott for that one.
You know what I read.
We like the level of asset sensitivity that we have right now.
As you know we took a series of conservative actions last year to get to the point, where now we're really benefiting from it but all along the way we've talked about.
Opportunities came up to protect some of the downside to lock in some of that benefit we would likely take that and so that's when you saw us do it in Q1 with the.
Net $2 $7 billion of received fixed swaps at a pretty modest impact on asset sensitivity as we noted in the prepared remarks about three tenths of 1%.
From here I would expect us to stay very much net asset sensitive in the near term Meanwhile, slowly adding to that downside hedge.
Protection book over the course of the coming months as we watch the environment, where we will say dynamic could change those sub general operating posture at this point.
Perfect Alright, good. Thank you guys very much thanks.
Thanks Scott.
Thank you. Our next question is coming from the line of Ken <unk> with Jefferies. Please proceed with your questions.
Hey, Thanks, Hey, Zach one follow up on the cost points. So if you're in that billion zone ish.
Or minus it towards the end of the year would we then add capstone to that and do you have an approximate calibration relative to the revenue outlook, what you'd expect on the cost side from capstone.
Thanks for that question I didn't do what make sure we clarify that so that that guidance is excluding capstone, excluding capstone to be clear.
On capital, we're really diving into the modeling right now and we'll come back with further guidance as we get closer to and through the close based on the due diligence modeling and in the company's historical run rate that we are aware of.
The core efficiency ratio of that business is pretty similar to what other M&A advisory.
Boutique firms would have on top of that in the near term quarters, we'll have a little bit of merger related cost and don't expect convert very significantly off there at all.
And then lastly, some incremental.
Compensation expenses to deferred retention.
Payments, which are really important for a deal like this so more to comparables will give clear guidance on that as we get closer to the acquisition.
Okay got it and then just one question on fees in your outlook can you help us understand what the either incremental or total impact is of fair play and other changes to deposit products and are you also assuming that you continue to sell.
So SBA loans like you've got back into this quarter. Thanks Zack.
No problem.
Important.
As it relates to the fair play evolution nothing has changed from the.
Guidance, we provided back in March and the <unk>.
<unk> conference, which is around $14 million net.
Back on the fee line relative to the Q4 'twenty one run rate, although it was slightly better than the earlier guidance. We provided in January continues to be our expectation of the effect on the fee line.
A number of times over time over the course of the.
18 to 24 months after that we do expect to claw that back in two.
And to benefit from higher acquisition better retention.
More account deepening as a result of those changes, but that's the kind of immediate impact.
And then sorry, the second part of your question was the SBA loans and are you are you baking that into the outlook as well.
So we are expecting to continue to to to get back to our historical practice of selling the guaranteed portion of our SBA loan production.
It should it bears, noting that the team is performing exceptionally strongly right now.
Really to doing really really well driving production. So we think that's going to support.
Businesses Sustainment of that.
Sealy interest rate in Q1, we had a bit of higher gains than we would've expected in the quarter just given by from the really high level premium in the marketplace. So it might turn modulate modestly from that level as we go forward, but generally that run rate will continue and the expectation is it two effects all that production.
Let me start with that.
And Ken we've invested in the SBA unit is well over over the course of last year, adding SBA capabilities in Colorado.
In particular.
To a great start so we'll have we should have a record year in terms of production.
Thank you.
Thank you. Our next question is coming from the line of Jon <unk> with RBC. Please proceed with your questions Hey, good morning.
Alright.
Rich question for U.
Can you give us your assessment of consumer health right now, there's just some mixed messages out on the market.
And.
Just give us your assessment of what Youre thinking right now.
Yes no.
Happy to do that.
From our standpoint, the consumers in very good shape krish cleared in the Super Prime segments, where we play if you look at the delinquency numbers from our standpoint, it's all seasonal.
In terms of the normal patterns that were following there. So we feel good about it particularly in the spots where we play we do expect over the course of 2022 to the consumer credit metrics will start to revert to the norm, but we've remained very disciplined with our ltvs and our FICO.
So we're very comfortable with that book.
Steady state performer over many cycles, we feel good about it.
So there is a phenomenon that sort of lower.
Income, where the price of gas at the pump.
Inflation.
Generally including housing is having an impact.
Again, we've been Super Brian .
More than a decade and the consistency of the performance of that whether it's residential assets or auto.
We will hold us in very good shape, we view the portfolio in aggregate.
On the low end of the risk spectrum.
Just about aggregate moderate to low.
Okay fair enough.
And then wondering if you guys can touch a little bit more.
Inventory.
Lance themes, you called that out as a growing area and obviously it's something.
We all watch, particularly in auto, but I know that the Tcf business was in a few other sectors, but talk a little bit about the themes and what youre seeing there.
As a group that has been in existence now EBIT Predating Tcf.
Many years ago, and we're doing business with about 14000 dealers nationally so there's great distribution.
What was the team is very high quality very steady.
An experienced team and.
We've got some just some outstanding dealer relationships.
We're able to with the Oems to two two.
The dynamics in part of their sales process and.
And there are different agreements, depending on the OEM and supported the dealers. So it's again this group performs very well it has gone through cycles.
Very low loss rates and the dealers.
Generally support each other certainly the Oems will support.
Transitions with dealers and that happens from time to time. So so the big issue for the group right now is just how to handle it.
What's the schedule for ramping up supply.
Okay.
As we talked about supply chain disruptions theyre feeling it.
In many areas, including most of that most of the dealers. So this will be a group. That's just naturally will grow over time because inventories are so low so we expect to do very well over the next few years with the group and and it's also a group that this provides great customer service and has typically been at.
Oems every year and we would expect that to continue this year based on the discussions have occurred.
Thus far this year, so very bullish on the growth rate seen one of the one of the hidden jewels.
To some extent from Tcf.
And it will allow us to do other things on the consumer finance side, and we will talk about the propylene and ethylene.
Congress.
Okay. Thank you.
Okay.
Thank you. Our next question is coming from the line of Matt O'connor with Deutsche Bank. Please proceed with your questions.
Good morning.
I asked the same question last quarter about Ltvs on auto.
But I guess I'm just curious.
We've seen a little bit of a trend down.
And the Ltvs are.
Really good disclosure on slide 34, I'm looking out, but just as we think about used car prices being inflated in kind of new car prices and how I didn't like the RV and marine.
Are there thoughts to kind of further tightening.
From these metrics.
And so it yourself from corrections there.
Hey, Brad it's rich I'll take that one.
We actually think the lower prices.
The used car prices coming down is a good thing and if you look at the mix of.
New to used it's actually ticking up a little bit.
From the third quarter of 2021, so we are seeing more new product coming out as part of the mix.
From an overall standpoint, we are a super prime lender in that space, We've got a high FICO and we use a custom scorecard that's been a very effective.
Keeping us from relying on having to take the car socket in the first place. So we arent really that concerned about the price movement that we've seen in the industry, we've been able to keep the ltvs as you mentioned in the mid eighties.
Our FICO score and that sort of 70 to 75 range. So.
We feel good about that on the RV side.
Keep in mind too that that loan to value is based on.
Wholesale costs.
Retail cost so.
That's going to show a little bit higher but.
There were in the 800 plus FICO so from our standpoint, we don't see any real need to tighten we had great experience in both of those books. The RV Marine book went through its first cycle with us really is.
The last couple of years and outperformed our expectations from a loss standpoint so.
We're not concerned at all about either one of those portfolios we have been in the auto business that for more than half a century.
And we were able to stress test the portfolios in 2009.
We had 10 and 14% on floating rates.
We think we've got this really dialed in.
This is a discipline that this quarterly reporting that goes back over a decade and it shows the consistency so.
While there may be some.
Movement in loss rates. The overall approach, it's a very low default frequency.
Based on the underwriting.
That's helpful. And then similar question on the mortgage and home equity buckets from the next slide again really helpful thing to state over a couple of years, but they are there.
There, we've seen a more material change.
And your originations and I guess I'm curious is that something that you're driving or is that something that your client base is driving.
Using more equity against Islam. Thank you.
No I think it's really.
Combination of both but I would say, it's more of the customers driving it and we've done any tightening I think certainly we've been conscious of housing.
Housing prices and I think what youre seeing on slide there shows that we've been disciplined with our originations in the third.
Sufficient equity.
Going into the low <unk>.
Let's say for Thursday.
Drop in values.
Okay.
We like secured consumer lending that as we've shared in the past and we believe that will put us in a comparatively great shape through cycles.
Thank you. Our next question is coming from the line of Erika Najarian with UBS. Please proceed with your questions.
Hi, good morning, one.
Just to follow up with Betsy's earlier line of questioning back.
I'm wondering if you could.
Quantify the earning asset growth that you're expecting I know youre looking for more deposit growth from here.
Just thinking about.
We should think about earning asset growth relative to that high single digit loan growth and also at what point and absolute rate should we start.
And our thinking about positive total deposit growth, but perhaps negative mix shifts away from noninterest bearing deposits.
Yeah. Good questions. Both of them you can see what an estimate incremental color as it relates to the earning asset side of your question.
There will really be to just two parts to that loan growth in the high single digits as we talked about secondly on the Securities book My expect it right now we're standing at about 24. It precisely is 24, 5% of assets All Securities I think we will stay within the range of 24% to 26% securities to assets here.
For the foreseeable future just as we manage yield and liquidity in just general balance sheet management. So those two factors will drive.
Earning assets likewise to be pretty similar to that loan growth guidance.
From a deposit perspective.
It's hard to sort of.
To be overly precise in terms of the <unk>.
<unk> hold level, where things start to Unstick and move our general assumption is that it.
We're going to be relatively lower beta initially higher later and so we will see that trending throughout the period.
And.
And so that's sort of generally the dynamics. The one thing I would just maybe add.
Add to my comment around the earning asset growth is just remember as well that we will have the one factor that will draw that down and that is because the cash side.
We're continuing to redeploy our cash into funding the loan growth and so that's got round.
$6 million on average now that will trend down throughout the course of the year back towards more of like the $1 billion.
Typical operating rates, we see which will pull down the curve glass's growth necessarily benefit NIM.
Yes.
As our earning assets.
Got it and my follow up question is for Steve Steve you've done a good job in Crimson.
Alan thing investing into the franchise and extra.
Extracting cost savings from cost to fund that and delivering on the Tcf.
I'm wondering as we think about the RASM guide up from here.
Clearly got from Zak with second half outlook, but you know well performing.
Thinking about.
Today's settled in their investment cycle has been saying something like 2% to 3% expense growth to sort of give a core core expense growth to think about in the future taking into account inflation.
Is that something that seems reasonable for your company.
For the second half of 'twenty two.
Well, we've guided for the second half of 'twenty two.
Earlier, you heard <unk> comments of generally being flattish around $1 billion of expense and that would include.
The expectations of inflation and other investments that we plan today.
We started with a view of 'twenty two last August when we did around the expense reductions.
To set up and deal with the inflation Eric that included the 62 branches that consolidated.
In early February of this year so.
We're on track with the plan that we laid out last summer.
We're on track if not ahead with Tcf at this point so a lot of confidence in this year and then we'll we'll be adding capstone. We think we've got revenue synergies coming with that as well. So we like how we're positioned at this stage and optimistic certainly very confident for the year and optimistic about.
Going forward, we will we will be dynamic with operating expenses relative to revenues, we've committed to positive operating leverage and I think it's eight out of nine years in the past and you can count on us being part of our 2023 equation.
Great. Thank you so much.
Thank you Sir.
Uh huh.
Thank you. Our next question is coming from the line of ever having put in a wallet with bank of America. Please proceed with your questions.
Hey, good morning, I just had one question Steve Zach I think you mentioned you would hit the 17% plus medium term, our OTC they'll get back half of the year.
Just talk to us in terms of the sustainability of the our OTC profile from here looking into the medium term.
Just in terms of the downside risk as we think about maybe getting to a point, where the fed goes back to cutting into suites, some normalization in credit.
What's the level of RPC that you think is different defensible, even in a less conducive revenue backdrop.
This is Albert I'll, just take the first shot at that and then Steve Placebos check on as well.
Generally feel great about the 17% level so for the foreseeable future.
Frankly, I was forecasting that level, even if its budgeted rate curve, which I mentioned before was considerably lower than the.
So the current rate curve, so I think that.
Feel good about that level.
Over the medium term as we said one of the things that were frankly internally. We really excited about is getting to the second half of the year delivering these medium term targets that we first put out in December of 2020, we announced the Tcs acquisition, and then being able to reset it and provide some updated guidance at that point.
And my expectation that we will see at or above that level.
That guidance as well.
So just to add we had a very good first quarter with tough since the fourth quarter of that growing momentum, but we are we are not.
Hitting on all cylinders, we still see a lot of upside on the Tcf synergies and on some of the other investments. We've made so so there's a revenue dynamics that we hope will be able to continue and expect to be able to continue to develop.
Throughout this year and that will provide some cushion for.
Normalized provision as well as.
Somewhat different scenarios.
I like the way the business is a physician were roughly balanced as you know consumer and business and on the business side, we've had a lot of scale as with Tcf and investments made in new capabilities and products.
And Youll continue to see that that's part of the plan.
As we as we go forward this year and I think that's going to position us to have a consistency.
Over the over the next few years in a variety of scenarios.
One thing I was through tuck onto that just at the end of <unk> is a key contributor to this is not only our balance sheet and capital allocation, which is ever more robust.
Dialed in to drive best in class returns, but also the growth of our fee businesses and notwithstanding our guidance that we provided this quarter where fees will be growing so slower than spread by Q4 of this year, just driven by the extraordinary rate environment driven by some.
Temporal factors in mortgage in our fair play product evolution broadly speaking, though and I think in the course of the long term nature.
The nature of your question I expect fee revenues to grow as a percentage of revenues by around one percentage point per year.
I think that disciplined capital allocation driving for returns driving toward.
Fee intensive businesses in payments and capital markets and our wealth advisory those things are the ones that sort of contribute to that sustaining.
ROE even under various interest rate scenarios.
That's kind of a quick follow up to that.
I heard you on no buybacks this year, but when you think about capital allocation and you mentioned on the fee side is there anything that we should expect in terms of inorganic growth be capstone like transactions or anything on the Fintech side management, if you're looking at.
Okay.
Well there are.
Our fee businesses.
If they were available would be would be interesting to us, but I would characterize it generally on the smaller side and will change the overall guidance.
The SEC provided to you.
We continue to build out.
Our capabilities, we will from time to time as we did with Huntington technology Finance.
I think four or five years ago.
So this is this is.
There may be some opportunities over the next couple of years to complement our capabilities.
And build the C generating potential to an even greater extent that la Z portrayed.
If we find things that make sense it would be additive.
Our customer service.
Our customer growth that we'd look at that.
We're generally very focused on driving the opportunities we have in hand, with the Tcf combination and the investments we've already made.
Thanks for taking my questions. Thank.
Thank you.
Thank you. Our next question is coming from the line of Steven Alexopoulos with Jpmorgan. Please proceed with your questions.
Hey, good morning, everyone.
Alright, good morning.
I wanted to first.
Follow up on deposits I didn't fully understand your response to Eric Good question.
Whats the deposit growth assumption, that's underlying the NII guide for 2022.
Oh, I haven't provided that guidance precisely, but I do expect continued.
Let's call it mid single digit deposit growth overall.
Commercial growing faster.
Consumer growing a little slower, but both growing.
<unk>.
<unk>.
The consumer side.
We are not seeing any imminent signs of any <unk>.
<unk> and the level of savings activity sort of trends around deposits I think the whole concept of surge balances has been somewhat debunked at this point, it's a fairly sticky and the trends are fairly stable on the consumer side.
On the commercial side.
Benefiting from just sort of penetrating operating accounts.
And our focus on Treasury management, that's driving that as well.
New client acquisition through particularly our <unk>.
Growth in middle market in a specialty area. So generally seeing a positive continued growth in deposits.
Okay.
It's helpful and then Steve on the Capstone deal is this really intended to make you more of a one stop shop right better position you to serve existing clients or is this a new focus for Huntington right are you going to invest meaningfully in this capability and do you plan to build your banking capabilities around these new verticals.
You are picking up thanks.
Capstone is.
Top ranked.
Middle market and investment banking advisory firm in its own right.
But we have a significant client base that if if if the services were made available to them will help us expand our menu of.
Of cross sell and eventually even sees our wealth businesses. So we felt this was an important additional.
Component to the core delivery.
It does give us expertise in a select number of verticals that they have as well our access to that and I think that'll help the commercial.
Thank grow overall.
I suspect we will continue to.
Just to build up their investment banking capabilities on a national basis, so that would be additive, but we really think is synergistic with us of course.
Of what we're doing.
I played out this.
As we have been working with them.
For over a year in terms of.
Our fee share arrangement for certain referrals, both ways and it really got insight into the culture of the company its capabilities and that's what this opportunity is very attractive.
And do you plan on building out the banking in areas like Fintech services energy et cetera is that part of the plan we don't have.
<unk> plans on the build out yet we haven't.
Maybe a couple of months away from from even closing.
What they have and where they have specialty capabilities now we will take advantage of those we'll look at that if there is some.
Augmentation to scale up to where they have existing capabilities and then over time, we will assess.
The new areas.
Okay, great. Thanks for taking my questions. Thank you.
Thank you. Our next question does come from the line of Ryan Zorn with Autonomous. Please proceed with your questions.
Oh, Hi, I guess.
Maybe one follow up on deposits and I'll preface it I definitely remember last time or last rising rate cycle, you're really outperformed the industry on deposit growth, especially low cost deposit growth so kind of history on your side and you've done it before but.
I guess mid single digit growth led by commercial like probably the center has to be a key areas. Despite flattish deposit growth. This year with commercial maybe declining a bit. So you listed a couple of reasons, but can you just maybe flesh out.
Kind of if you're a high single digit commercial growth in an environment, where peers are or down a little bit.
What is really.
How do you get that much differentiation.
Yeah, it's hard to say much about the comparisons appears does not knowing what's in their business and the visibility that they've got all I can tell you is we seem to be gaining market share and winning particularly on the commercial side and I think it's not surprising to us because we've been investing in our commercial businesses.
The flow through of deposits as sort of a manifestation of the returns on those investments we've been making both.
Exclusive of Tcf, and then and then as of late really capturing the Tcf opportunities are built in the middle market Street building.
Building up terrific middle market teams in the Denver, Colorado area in the twin cities.
Generally seizing the opportunity thats available.
The new Tcf geographies for for Huntington.
That space and also in business banking I would say so again, it's hard to make the comparison of others.
We are seeing those trends manifest then.
And it's encouraging.
As I said before our focus is making sure. This is a hot money. These are really core accounts.
We often use treasuries.
Management is the tip of the spear to really drive penetration of not only the capabilities in those services, but ultimately to cement those operating accounts.
In terms of the strategy so.
That's the transfers Inc feel confident about that forecast Brian .
Brian We've said optimal customer relationship or OCR approaches to deepening or cross sell for.
For more than a decade now.
The Tcs business lines did not they just didn't have the capabilities.
So there's a broad base of customers that we have access to that we're very focused on we've talked about.
A tool called edge that we've put in place a data too.
With the commercial teams that we put that in place in the fourth quarter, that's given us a lot of insight and traction.
Coming on well that overall OCR strategy so.
Good execution by the teams we also shared over over over the fourth quarter third quarter calls if I remember correctly that we were using.
And investment portal.
One of the one of our partners to move some of the deposits off balance sheet with a view that we can bring some of the backlog.
As a as rates cycle changed and.
We'll do that as well so those would be some of the contributing factors. In addition was section. Thank you for the question.
If maybe I could squeeze in one on capital and it's as much an industry question is Huntington specific but.
And I guess, the tangible common equity ratio matter at all this cycle I mean, it's certainly getting lower for you and a lot of peers than it's been it has been a long time, but you know it's driven by rates Aoc is kind of a funky concept at fair value as one line item not any other.
Is it just solely about the CET one ratio is there any level of TCE ratio that.
You view it as a floor.
Should we care about the TCE ratio at all I guess, the crux of the question.
Brian in OE.
<unk> nine that was the only ratio that we cared about right. So.
But the industry clearly has migrated the CET one surprising to me.
Your questions. The first one is probably a decade.
Out of this nature.
We're obviously focused on it as well that's why we have a fairly high HCM percentages as the investment portfolio, we've done certain other actions, including the hedging that Jack described today.
And we will continue to look at them, but it does not appear to be a driver of it does not come up in regulatory.
Conversations so so it would seem that the investment community and the regulatory community both of those trends it's easy one.
That's great. Thank you thank.
Thank you.
Thank you our final question for today will come from Peter Winter with Wedbush Securities. Please proceed with your questions.
Thanks, I just had a quick follow up question on indirect auto.
If you could talk a little bit about the outlook for indirect auto some of the peers are pulling back because of that.
Loan pricing pressures I'm, just wondering what your thoughts are.
We really like that asset class and then we've been with this in and out of cycles.
It is a short duration paper on average is that shared earlier 25 months weighted average life.
So even in rising rates it gets a little tighter and it's declining rates.
The spread looks great.
With that we will stay with it on a consistent basis and that's part of the value to the dealers and so we have shown in the past relative premium pricing.
As a consequence of the consistency in the market. We believe we are still achieving that and we like the asset a lot.
It will it will narrow a bit in terms of spreads and in a rising rate environment, but.
But it's a short lived asset and its still better than the alternatives.
And as you heard from rich we're confident in the performance. So so so this is from our perspective, a good asset a one plus ROA asset.
Sure.
Historically in.
Our dealers are auto dealers tend to be the deepest cross sell.
Total relationship cross sell that we have in the company.
Got it thanks, Steve Thanks, Peter.
Yeah.
Ladies and gentlemen, we have reached the end of the question and answer session I would like to turn the call back over to Mr. Steiner for closing remarks. So thank you very much for joining US today, we're very proud of our colleagues and I want to thank them for their commitment to driving results for the great quarter.
We have a lot of confidence in our teams and what we can deliver for our customers and especially our shareholders over the course of 'twenty two as you heard.
Thank you very much your support and interest in Huntington have a great day.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation enjoy the rest of your day.