Q2 2019 Earnings Call
Greetings and welcome to the Huntington Bancshares second quarter earnings call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone what's your require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded I would now like to turn the conference over here Whos Mark Muth director of Investor Relations. Thank you you may begin.
Thank you you're welcome I'm, Mark Muth director of Investor Relations for Huntington.
Copies of the slides will be reviewing can be found on the investor Relations section of our website Www Dot Huntington dotcom.
This call is being recorded and will be available as a rebroadcast starting about one hour from the close of the call.
Our presenters today are Mac, Mccullough, Chief financial Officer, and rich polling Chief credit Officer.
Unfortunately, Hudson's Chairman, President and CEO , Steve Dot our is unable to join us today.
Earlier this week, while training for the upcoming pellet Tanya charity bike ride.
Steve entered his shoulder requiring surgery and that is prevented his participation in our second quarter earnings call today.
He is already on the man and expected to return to work in the coming days.
As noted on slide two today's discussion, including the Q and a period will contain forward looking statements.
Such statements are based on information and assumptions available at this time.
And are subject to changes risks and uncertainties, which may cause actual results to differ materially.
We assume no obligation to update such statements.
Perfectly discussion of risks and uncertainties. Please refer to this slide and material filed with the FCC, including our most recent forms 10-K, 10-Q and 8-K filings.
Let me now turn it over to Matt.
Thanks, Mark and thank you to everyone for joining the call today as always we appreciate your interest and support.
We had a solid second quarter reporting net income of 364 million, an increase of 3% from the year ago quarter.
Earnings per common share were 33 cents up 10% from the year ago quarter.
Tangible book value per share ended the quarter at $7. A 97 cents also at 10% year over year increase.
Our profitability ratios remain strong as our return on tangible common equity was 18% and our return on assets was 1.36%.
Total revenue increased 6% year over year average loans increased 4% year over year, including a 5% increase in consumer loans.
And a 4% increase in commercial loans.
Average core deposits increased 4% year over year as we continue to fully fund loan growth with core deposits.
Overall asset quality remains strong as most credit ratios remain near cyclical lows.
As we guided to on the first quarter earnings conference call net charge offs declined this quarter back to a level below the low end of our average through the cycle target range of 35 to 55 basis points.
As we have noted previously we expect some quarter to quarter volatility given the very low loss and problem loan levels at which we are operating.
Our ratios for nonperforming assets delinquencies and criticized loans all remain very good.
As briefly outlined on slide three we developed Huntington strategies with a vision of creating a high performing regional bank and devote delivering top quartile through the cycle shareholder returns.
We continue to make thoughtful and meaningful long term investments in our business, particularly around customer experience to drive organic growth.
This quarter, we were pleased to receive an important independent confirmation of our digital technology investments and our customer experience focused strategy with two awards from JD power the gold standard.
Customer satisfaction surveys in the U.S.
Financial received the highest scores in both the JD power 2019, us online banking and mobile App satisfaction studies.
While some have expressed skepticism that regional banks will be able to keep up with the large money center banks and a technology driven economy.
We believe this provides evidence that our focused technology investments and our strategy provide having said not just the opportunity keep up.
But to remain industry, leading and our client acquisition and our customer satisfaction.
We also prudently allocate our capital to ensure we are earning adequate returns and taking appropriate risk consistent with our aggregate matter, it's a low risk appetite.
This quarter, we took several actions to better position the balance sheet from an interest rate management perspective.
But also with respect to overall risk and return.
We exited certain loans and high cost deposit relationships, which no longer met our return hurdles.
And we repositioned a portion of the securities portfolio.
I will discuss these actions in more detail in a few minutes.
We're very pleased with how we are positioned we have built a sustainable competitive advantages in our key businesses that we believe are delivering and will continue to deliver top quartile financial performance in the future.
We remain focused on driving sustained long term financial performance for our shareholders.
Slide four illustrates our updated expectations for full year 2019 compared to our prior expectations.
As you know we previously provided our expectations assuming no change in short term interest rates.
However, this quarter, we are transitioning to provide our expectations based on the implied forward curve, which are private which are provided in the column on site.
Given the high likelihood that the fed will reduce the fed funds target rate that they're meeting next week.
And the market expectations for multiple additional rate cuts over the coming year. We thought it was more conservative to adopt this interest rate outlook in our planning and forecasting process internally.
As well as externally and the expectations, we communicated to you.
We also have provided an unchanged rate view in the middle column on the slide.
This quarter, we provided both interest rate scenarios. So you can see the incremental steps between the two but do not plan to provide both views going forward.
For the remainder of 2019, we intend to only provide expectations based on the implied forward rate scenario.
Our view of the economy has not changed since last quarters earnings call. We continue to have a constructive view of the local economies in our footprint.
Which we expect will translate into continued organic growth this year.
While the volatility in the debt markets as signaled street concerns regarding the broader economy. What we are hearing from our customers remains positive.
Businesses in our local markets generally continue to deliver good performance in our commercial pipelines remained strong.
Businesses in our footprint or investing in capital expenditures and expansions, while up tight labor markets continue to constrain economic growth.
Our commercial customers continue to tell us that finding employees is their biggest challenge.
The job openings rate for the Midwest is the highest in the nation.
Some of these businesses also have weathered the headwinds of ongoing tariff in trade disputes.
Despite a slowing world economy, and these headwinds the data shows that exports of continue to grow in Ohio, and other areas of our region.
Across our footprint consumers also remain upbeat with strong labor markets driving wage inflation.
Particularly at the lower compensation levels.
In the three months ending may of 2019, and the 12 months ending may of 2019 unemployment rates declined in 18 of 20 of the largest Dms A's and Huntingtons footprint states.
Additionally, consumer confidence in our regions generally stayed at the highest levels since 2000.
Job openings continue to exceed unemployment levels in most of our markets.
I would summarize by saying that we remain bullish on the economy in our footprint.
As I have stated on several occasions. This year, we do not see signs of a near term economic downturn.
Nonetheless, we are cognizant of the recent market volatility and global economic data that does not share the optimism of what we're seeing here in the Midwest.
These ultimately could drive the fed to adjust short term interest rates lower.
As we communicated on the last earnings call, we have taken steps to prepare for a more challenging interest rate outlook.
We do not foresee a recession in the near term however, our core core earnings power strong capital aggregate moderate to low risk appetite.
And our long term strategic alignment position us to withstand economic headwinds.
Our strategy is designed to drive more consistent performance across economic cycles.
Let's turn to our revised full year 2019 expectations.
We have modestly reduced our balance sheet growth expectations, reflecting the balance sheet optimization efforts from the second quarter and a more competitive operating environment environment that the margin.
We expect full year average loan growth in the range of 4% to 5%.
And full year average deposit growth in the range of 2% to 3%.
We remain particularly focused on growing core deposits through acquiring core checking accounts and deepening customer relationships.
We expect full year revenue growth of 3% to 4.5%.
On a GAAP basis full year 2018 NIM.
Im sorry, 2019, NIM is expected to be three in a quarter to 330 range.
This includes the negative impacts from the anticipated reduction in the benefit of purchase accounting and the cost of the incremental hedging strategy, we implemented in the second quarter.
Looking further out our current modeling suggests the NIM will bottom out during the second half of 2019.
As a result, we currently expect full year 2020, NIM should remain relatively consistent with full year 2019.
Allowing net interest income to grow in tandem with earning asset growth next year.
As we have told you previously and are demonstrating with our actions we remain committed to delivering positive operating leverage this year.
We have moderated the expense growth outlook for 2019 in conjunction with the reduced revenue growth outlook.
We have achieved this with a combination of reductions to discretionary spending.
And with the re pacing of planned investments.
Full year 2019, noninterest expense is now expected to increase 1% to 2% to 2.5%.
We anticipate that full year 2019, net charge offs will remain below our average through the cycle target range of 35 to 55 basis points.
Our expectation for the effective tax rate for the remainder of the year is in the 15.5% to 16.5% range.
Slide five provides the highlights for the 2019 second quarter results reflected strong earnings momentum with double digit growth rates in earnings per common share.
And tangible book value per share along with continued improvements in our profitability ratios.
We recorded net income of $364 million, an increase of 3% versus the year ago quarter.
We reported earnings per common share of 33 cents up 10% year over year.
And tangible book value per common share ended the quarter at $7.97 at 10% year over year increase.
Return on assets was 1.36% return on common equity of 14% and return on tangible common equity was 18%.
Our efficiency ratio for the quarter was 57.6% up from 56.6%.
In the year ago quarter, and again, we reminded you in the first quarter call that second quarter would be the peak efficiency ratio for the year.
This modest increase reflects continued thoughtful investments in our colleagues and technology.
For the full year, we continue to expect modest year over year improvements in our efficiency ratio consistent with driving annual positive operating leverage.
Turning now to slide six.
Average, earning assets increased to $2.8 billion or 3% compared to the year ago quarter.
Loan growth accounted for more than the entire increases average loans and leases increased 3 billion.
Or 4% year over year, including a $1.7 billion or 5% increase in consumer loans, and a $1.3 billion or 4% increase in commercial loans.
Average commercial and industrial loans grew 6% from the year ago quarter and reflected the largest component of our year over year loan growth.
Senile loan growth has been well diversified over the past year with notable growth in corporate banking asset finance dealer floor plan and middle market banking.
We also continue to see good early traction and our new specialty lending verticals that were announced as part of the 2018 strategic plan.
Alternatively, we continue to actively manage our commercial real estate portfolio around current levels with average CRT loans, reflecting a 6% year over year decline.
This reflects both anticipated and unanticipated pay downs as well as our strategic tightening of commercial real estate lending to ensure appropriate returns on capital and to manage risk.
During the second quarter, we exited approximately $400 million of our commercial loans at renewal or through loan sales as part of our balance sheet optimization efforts.
These loans no longer met our return hurdles and their exit allowed us to redeploy the associated funding into more attractive opportunities.
Consumer loan growth remains centered in the residential mortgage and RV and marine portfolios.
Reflecting the well managed expansion of these two businesses since the first merit acquisition.
Average residential mortgage loans increased 14% year over year.
As we typically do we sold the agency qualified mortgage production in the quarter and generally retain the jumbo mortgages and specialty mortgage products.
Average RV and marine loans increased 28% year over year, as we continue to gain traction and market share across the 334 state footprint for this business.
Average auto loans were flat year over year.
Originations totaled $1.3 billion for the second quarter down 19% year over year.
As we have previously mentioned, we are executing a pricing strategy to optimize revenue via increased auto loan pricing that has resulted in lower production volumes.
But that is a trade off we like.
New money yields on our auto originations averaged 4.63% during the second quarter up 41 basis points from the year ago quarter.
Over the past few weeks, new money yields in both auto and RV Marine have come under some pressure due to the year to date movements in the two to five year portion of the yield curve.
And increased competition.
Finally securities were down 4% year over year as we left the portfolio run off and utilize the cash flow to fund higher yielding loans.
During 2019.
During the 2019 and second quarter, we sold 1 billion of securities as part of the balance sheet optimization efforts to reduce our reliance on short term wholesale funding.
We purchased $600 million of securities related to the hedging program and late in the quarter, we remixed approximately $500 million of securities at a net benefit of approximately 20 basis points.
Turning to slide seven.
Average total deposits grew 3% year over year, while average core deposits grew 4% year over year.
Average money market deposits increased 11% year over year, reflecting the shift in promotional pricing away from Cds to consumer money market accounts in mid 2018.
Core suffer certificates of deposit were up 54% from the year ago quarter.
Primarily reflecting the consumer CD growth initiatives during the first three quarters of 2018.
Average interest bearing DDA deposits increased 3% year over year, while average noninterest bearing DDA deposits decreased 3%.
Average total demand deposits were flat year over year.
As shown on slide 32 in the appendix.
We are very pleased that our consumer non interest bearing deposits increased 5% year over year as we continue to grow households, and deepen relationships.
We continue to see our commercial customers shift balances from noninterest bearing DDA to interest bearing products, primarily interest checking hybrid checking and money market.
Average savings and other domestic deposits decreased 9%, primarily reflecting a continued shift in consumer product mix.
Particularly among legacy Firstmerit accounts as Firstmerit promotional pricing strategies focused on savings accounts compared to our primary focus on money market accounts.
Importantly, our continued focus on core funding allowed for a 23% year over year reduction in non core deposits.
Moving now to slide eight.
Ft, net interest income increased $28 million or 4% versus the year ago quarter, primarily driven by the 3% increase in average earning assets.
We saw net interest margin expansion of two basis points to 3.31% compared to the 2018 second quarter as a result of disciplined asset and deposit pricing and the benefit of interest rate increases partially offset by the continued run off of purchase accounting accretion.
Moving to slide nine.
Our core net interest margin for the second quarter was 3.26% up four basis points from the year ago quarter.
Purchase accounting accretion contributed five basis points to the net interest margin in the current quarter.
Compared to eight basis points in the year ago quarter.
Slide 28 in the appendix provides information regarding the actual unscheduled impact of the Firstmerit purchase accounting accretion for 2019 and 2020.
Turning to the earning asset yields our commercial loan yields increased 30 basis points year over year, while consumer loan yields increased 33 basis points.
Securities yields increased eight basis points.
Our deposit costs remain well contained with the rate paid on total interest bearing deposits of 97 basis points for the quarter.
Up 38 basis points year over year, and up just three basis points sequentially.
I might add that we expect total interest bearing deposit costs to decline in both the third and the fourth quarters of 2019.
Turning to slide 10.
On a sequential basis, the GAAP NIM compressed eight basis points and the core NIM compressed seven basis points.
The lower an inverted yield curve included the impact.
On LIBOR rates accounted for approximately three basis points of the NIM compression.
While the continued lift in deposit costs drove two basis points.
The incremental hedging strategy implemented in the second quarter compressed the NIM by one basis point.
And is also expected to have a negative one basis point impact on the full year 2019 NIM.
Modestly better than the guidance, we provided at an industry conference in May.
Turning to slide 11.
Slide 11 provides an update to a slide we presented at an industry conference during the second quarter. This summarizes the incremental hedging strategy to reduce the downside risk from lower interest rates.
The incremental hedges include both asset swaps and floors.
We have now substantially completed implementation of the incremental hedges.
However, as you should expect we will continue to fine tune. The overall hedging program as the interest rate environment balance sheet mix and other factors necessitate.
It's also important to remember that we've had the cost of the hedging program, including the incremental hedging executed in the second quarter in our guidance since late 2018.
Turning to slide 12.
Slide 12 illustrates our cycle to date interest bearing deposit beta compared to peers.
Our cumulative deposit beta remains low at 33%.
We have been communicating that we believe the consumer core CD strategies, we utilized over the first three quarters of 2018 with service well over time.
Effectively frontloading some of the deposit beta.
You can see those benefits over the past three quarters as our cumulative up a cumulative beta has not increased as quickly as peers and is now below the peer average.
This quarter the peer groups average cumulative beta increased 4%, while we saw a 1% increase in our cumulative beta.
Overall commercial deposit competition was elevated throughout the second quarter.
And competition for consumer deposits to date has not yet retrenched as much as expected despite the likely fed rate cuts next week.
Given this competitive environments and the near term rate outlook, we remain we maintained our pricing discipline and shortened our promotional pricing terms.
Such as utilizing a six month.
The money market promotional rate compared to a 12 month promotion common in the marketplace.
We also chose to fund loan growth through the security sale that I mentioned earlier, rather than paying up for high cost commercial deposits.
Looking forward, we have developed strategies down to the customer level to quickly react, particularly among our highest cost deposits should the fed cut rates next year as next week as expected.
We have also approximately $3 billion of securities in excess of what is needed for LCR that we could use as a funding source should market deposit pricing become unattractive.
Slide 13 provides detail on our noninterest income, which increased 11% from the year ago quarter.
Other noninterest income increased 48% year over year, primarily due to the $15 million gain on the sale of our west constant retail branches as well as a $5 million mark to market adjustments.
On economic hedges.
Subsequent to quarter end, we read we re designated all the economic hedges as cash flow hedges. So beginning in Threeq you have 19, all the swaps and floors will be accounted for as cash flow hedges.
Capital market fees were up 31% versus the year ago quarter, primarily reflecting the acquisition of Hutcherson Shockey, an early in the 2018 fourth quarter.
Mortgage banking income increased 21%.
Primarily reflecting higher secondary market spreads.
On a linked quarter basis mortgage banking income also benefited from seasonality and to a lesser extent.
Lower mortgage interest rates during the quarter.
Slide 14 provides the components of the 7% year over year growth in noninterest expense.
As we mentioned on the last earnings call, we expected non interest expense to increase $40 million to $50 million linked quarter with two thirds of that coming from normal seasonality in compensation expense as a result of the annual grants of our long term incentive compensation in may.
As well as the May implementation of annual Merit increases.
Personnel expense increased 8% year over year, primarily reflecting these actions.
Further increasing personnel expense year over year was the continued hiring of experienced bankers in our new lending verticals as well as adding colleagues and our digital and technology areas related to the 2018 strategic plan initiatives.
Outside data processing and other services increased 29% year over year, driven by ongoing technology investment costs.
Other noninterest expense increased 24%, primarily reflecting a 5 million dollar donation to the Columbus Foundation, and the impact of new lease accounting standards on personal property tax expense.
Partially offsetting these increases deposit and other insurance expense.
Decreased 56%.
Due to the discontinuation of the FDIC surcharge and the 2018 fourth quarter.
Slide 15 illustrates the continued strength of our capital ratios.
The tangible common equity ratio ended the quarter at 7.80% up two basis points from the year ago quarter.
The common equity tier one ratio ended the quarter at 9.88% down 65% year over year, but up four basis points linked quarter.
We continue to manage the easy one within our 9% to 10% operating guideline with a bias towards the upper end of the range.
We repurchased 71.8 million common shares over the last four quarters.
During the 2019 second quarter, we repurchased 11.3 million common shares on average cost of $13.40 per share.
Representing the remaining $152 million of common stock repurchase authorization in the 2018 capital plan.
As we announced last month or 2019 capital plan reflects our previously articulated priorities to fund organic growth first to support the cash dividends second.
And third to pursue all other capital uses including buybacks.
These capital priorities have not changed.
The 2019 capital plan includes a 7% increase in the quarterly dividend rate to 15 cents per share beginning with the dividend that the board declared last week and payable in October .
Last week. The board also approved a new authorization for the repurchase up of up to $513 million of common shares over the next four quarters.
Let me now turn it over to rich to cover slide 16, with a credit trends for the quarter rich. Thanks back on 16 provides a snapshot of key credit quality metrics for the quarter, which remains strong.
Consistent prudent credit underwriting as one of Huntington's core principle.
In our financial results continue to reflect our disciplined approach to risk management, and our aggregate moderate to low risk appetite.
The book loan loss provision expense of $58 million in the second quarter and net charge offs of $48 million.
Our provision expense has now exceeded net charge offs in six of the past quarter illustrating our profit.
Net charge offs represented an annualized 25 basis points of average loans and leases in the current quarter up from 16 basis points, a year ago quarter and as expected down from 38 basis points in the prior quarter Theres additional granularity on charge offs by portfolio and analysts pathogens slides and there was no industry concentrations as Vito.
The allowance for loan and lease losses, or a triple as a percentage of loans remained relatively stable at 1.03%.
Up one basis points linked quarter.
The nonperforming asset ratio remained flat linked quarter and increased four basis points year over year to 61 basis points.
The year over year increase was centered in the CNS portfolio, partially offset by decreases in the commercial real estate residential mortgage and home equity portfolios.
There was also a year over year increase in other npis associated with the investment portfolio.
Overall asset quality metrics remained near cyclical and as we have noted previously some quarterly volatility as expected given the absolute low level of problem loans.
I'll now turn it back to Matt for some closing remarks.
Thanks, Rich slide 17 highlights the actions we have taken since 2009, resulting in our current industry leading profitability metrics.
Our 14% return on common equity and 18% return on tangible common equity.
Physician Huntington as a top performing regional bank.
We are building a best in class return profile timings and we are excited about the opportunities that this creates.
Let me turn it back over to Mark So we can get to your questions.
Thanks, Matt.
Sherri, we will 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 has any additional questions he or she can add themselves back into the queue. Thank you.
We would like to ask a question. Please press star one and your telephone keypad a confirmation tele indicate your line is in the question queue. You May Press Star two if you would like.
A question from the Q.
Participants using speaker equipment, it may be necessary.
Before pressing the star keys.
Our first question is from Scott Caesars with Sandler Oneill. Please proceed.
Hey, good morning, guys, Hey, thanks, taking the question.
Mike just wanted to ask a little about the margin guidance. So I guess first of all just appreciate the.
Commentary with both the just a flat rate and implied forward curve. That's helpful. So thank you for that.
But then just as you look at the anticipated.
Contraction in the margin for the second half of the year.
Just given that it implies some severe contraction in the back half I Wonder if you could just walk through what the main.
Nuances would be that would allow you to come in towards the higher end versus the lower end and not in other words.
We get to the meaty part of the range.
Yes, Scott.
I think the the wildcard in the mix is going to be what happens with.
Core deposit growth and the cost of core deposits.
Right right now were very pleased with the growth that we're seeing we're being selective in terms of the commercial deposits and paying up for commercial deposits.
But we're seeing good growth on the consumer side.
And I would tell you that competition and our region is rational.
As I mentioned in the script, we have taken are.
Deposit strategy and tactics to at a different place relative to the peers, we've become I think less.
Less aggressive in terms of.
Incremental pricing as we enter this lower rate environment.
But we're comfortable with that just given some of the strength, we see on the consumer deposit side, but also the excess liquidity that we have.
In terms of being able to release securities and use that funding.
Basically put that higher margin loans on the balance sheet.
So it's really the cost of deposits and the deposit growth in the second half, but I'm confident that we're well positioned for that.
Okay perfect. Thank you and then just separately.
So expenses will have to come down fairly meaningfully in the second half of the year I know there was.
Lot of seasonality that.
Hit the second quarter numbers, though presumably there's there's some relief in sight, but just wondering if you could talk for a second about kind of the puts and takes on the cost side as we enter the second half of the year. Please.
Yes sure.
So we've been I think pretty pretty transparent around the opportunities that we have to adjust.
Our expense growth in 2019.
For the revenue environments, and what we see happening with with interest rates going forward.
We have started to take those actions.
A lot of the.
The the expense growth in 2019 is come out of the strategic initiatives that we.
We put in place in 2018 through the strategic planning process.
We've we've deferred some of those investments.
However, we are continuing to make investments and the initiatives that we think are most beneficial.
From a revenue growth the risk perspective, or just thinking about what we need to do from a technology developments, particularly in digital.
Those investments are still on the table.
So we've been I think appropriately prudent in terms of the investments that were continuing with.
And there's always the likelihood that that rate environment turns out better than.
Is what is being foreshadowed right now that we would put more of those investments back on the table.
So.
We believe we've got the.
The capability to manage to positive operating leverage in 2019.
And certainly for 2020 is going to depend on where the revenue environment goes, but we still have expense levers that we can pool.
Okay Thats perfect. Thank you very much I appreciate it thanks guys.
Our next question is from Jon Arfstrom.
RBC capital markets. Please proceed.
Thanks, Good morning, guys.
Hi, John .
Hum question, a little bit about commercial lending.
You talked about the exit of 400 million on commercial balances.
I don't know if it's for you rich, but curious can we expect more of that and can you maybe talk about some of the primary reasons behind some of those decisions.
Yes, John it's rich I think a lot of the decision on the $400 million was just around rate and yield and as we look to optimize the balance sheet. I think we focused on low yielding assets that may not have been part of the primary bank relationship that really just didnt make sense to continue.
Moving forward on so I would say that we're going to continue to look at.
Customer profitability going forward and to the extent that we have bar that don't meet our relationships will look to to make adjustments.
Yes, either try to strengthen that relationship and make it more profitable or look to exit so.
I think Q2 had a fair number of exits in there and I would say, it's just a continuing process going forward as we focus on the balance sheet and where we can be most profitable.
Yes, John its Max I might add this the play that we ran in 2017 with with Great success and I think when we did this in 2017, we picked up about 41 basis points of CP one.
So we do this on a regular basis, we're always looking at the balance sheet at a very granular level and.
In this environment, we just think it's good.
Prudent thing to do to make sure that our capital is working hard and that were.
Putting ourselves in a position to fund the balance sheet and get the right returns in this environment.
Okay.
It makes sense and I guess that I guess my next follow up here is just the loan growth numbers you took him it's very subtle and modest but you took them a high range of the loan growth.
Ranjan also deposits some of those.
Can you just maybe talk a little bit about the drivers of that.
Yes so.
Part part of it is the.
Well, we continue to do from a auto.
Prospective we continue to price for profitability as opposed to volume.
So that continues to be the play that we're running and and I think we just became.
On the margin a bit more conservative in terms of.
What we would expect from growth on the loan side in 2019.
No not not because the pipelines are in worse shape, because theyre actually in really good shape.
But I think.
The the the mood here is one of caution and just making sure that.
We're we're careful and we've put on the balance sheet, we feel comfortable with.
But from a deposit perspective, it has everything to do with the tactics that were taking in the marketplace, where we are.
I suppose leaving the market down from a CD perspective, CD pricing perspective.
And also be the tactics that were using to raise money market deposits, we're using a six month guaranteed term on rate.
And the market is still at a 12 month.
So we do expect that this will have some incremental impact on deposit growth, but we're fine with that.
As I mentioned, we've got the excess liquidity.
But we can always fall back on.
And I guess the other the other part of that is just.
Commercial deposit pricing and not wanting to pay up for deposits in this environment.
We certainly take a look at the relationships as rich mentioned and to the extent, it's a deep relationship or potential for deep relationship. We certainly work with the client.
But I have no interest in $100 million deposit with no other relationship and paying up for that deposit at this point in time.
So the growth rates reflect those those tactics and strategies.
All right. Thanks, guys, yes, thanks Jessica.
Our next question is from Ryan for ran with Autonomous Research. Please proceed.
Morning, Brian .
Good morning, I would add $100 million deposit to give you.
As long as you brought other products along with that we'd be fine.
The.
So on the NIM you kind of talked about the bottoming in the second half 19, and I think you said stable in 2020 and I just want to clarify when you talking stable to relative to the 325 to 30 full year range are you thinking more stable to whatever the.
Fourth quarter exit run rate NIM is.
Yes right.
Great question, it's the full year 2019, NIM of 325 to 330, we expect to be stable in 2020 in that range.
And I mean, I guess that seems to imply a little bit of a bounce back up in 2020 is it deposit pricing catch up or.
What would kind of.
Make the 2020 NIM may be slightly higher than the fourth quarter.
Exit for the year.
Yes, as you might expect the present deposit pricing is going to have a bit of a lag to it so.
We actually see the largest benefit from what we expect from a deposit repricing perspective in the fourth quarter of 2019.
And that will.
Continue into 2020, along with the impacts of the hedge program, yes, assuming we get the implied forward.
Curve for the way. It is currently forecast the hedge program will kick in and give us some incremental margin to help offset what's happened in the rate environment. Brian . This is mark remember the CD campaign last year in the first three quarters those all mature beginning in the third quarter. So as those roll off we are assuming they'll reprice down nicely.
And if I could sneak in one last clarification or per expansion I think you mentioned July auto pricing and competition might have.
Picked up a little bit.
Can you just maybe give a little bit more color on what you saw there.
Yes, we.
We've been pretty.
Pretty consistent in terms of raising pricing in the marketplace.
It's been a good play for US we typically see the competition follow.
But in this environment as we as we have some of the higher rates Alf.
We felt that maybe we were getting the right type of customer.
Maybe a slight deterioration in some of the credit metrics and so we quickly.
Changed the pricing strategy and everything fell back into into place the way, we would expect to see it.
But that that is the the barometer that we use I mean, we have a box for credit on the auto book that we don't move outside of and we changed pricing based upon what we see happening and that of course takes into consideration many factors.
What's happening in the marketplace, what's happening with competition, what's happening with interest rates.
But the one variable that we hold constant and thinking about pricing in the auto book is we're ready from a credit perspective.
And on the phone RV side, we've seen a couple of new entrants into the market and one legacy participant expand nationally and the combination of those three have significantly increased pricing competition for both RV loans here within the last few months.
Thank you.
Thanks Brent.
Our next question is from John .
Hey, Gary with Evercore. Please proceed.
Hi, John .
Regarding your 2019 to 2021.
Longer term goals.
Or medium term goal should we call it.
I notice you didn't include them in the in your slides you mentioned them. So I just wanted to see if you have any updated thoughts on news on those targets, particularly around the.
Efficiency guidance of 53 to 56 and and also on the ROTC.
Outlook for 17, 20% thanks.
Yes, no we're still comfortable with those long term targets.
Didnt mean to the signal anything by not including them in the in the slide deck or the presentation.
So those are our targets for the next three to five years.
Okay, great. Thanks, and then separately on the.
2019 revenue outlook of 3% to 4.5% can you give us a little bit more detail, how that would break out between spread revenue and fees and then also as your fee income outlook changed at all and if so what is changing that view. Thanks.
Yes, so we were having a really good year on the on the fee side.
Capital markets continues to perform very well, we're making smart investments in that business.
We've got a terrific team and really good opportunity across the franchise in particular, when you think about the firstmerit legacy customers and some of the capabilities that we bring to that customer base, we still have opportunities as it relates to capital markets products and being able to.
To to be have deeper relationships with those customers.
We've got a good product sets and we feel very good about the outlook for that for that business, it's going to continue to grow assuming the economy cooperates.
Treasury management is another place for us that we feel very good.
With that momentum and what we're seeing.
In the field.
In particular, we're seeing.
Some new new product capabilities in the the business banking space.
That is actually producing some incremental growth that we expected and excited to see developing.
So that's a category that that works for us as well.
And then mortgage we do expect that we're going to have continued good results. In 2019, we are going to continue to see good.
Refined finance opportunities.
And the secondary marketing spread has actually improved as well so that that helps.
And then we continue to grow households from mean, we're continuing to grow consumer households will continue to see deposit service charges increased.
In conjunction with that household growth.
And we're getting.
Good good deposit growth out of that out of that expansion in households, as well.
So.
The growth in 2019 is going to be weighted more on a percentage basis to to fee income.
Which is partially some of the strength in the categories that I mentioned, but also the rate environment and what's happening to the NIM.
But.
Very very excited about the momentum we have on the fee side.
Okay, Okay, so thats, 3% to 4.5% revenue outlook for 19 in that that did come down but that was mainly all spread income then correct that that would be correct, yes got it all right. Thanks.
Yes.
Our next question is from Ken Zerbe with Morgan Stanley . Please proceed.
Again, thank you hey, guys.
I guess my first question is in terms of the hedging that you did this quarter accelerating your hedging.
We've heard from some other banks this quarter that they did not do hedging or that they side because the curve was pricing and significant decline in rates to hedging.
It was not the right decision for them can you just talk about why accelerating your hedging was the right decision for Huntington and may be different from other banks and what are you assuming in terms of the rate outlook from here.
That makes it the right choice. Thanks.
So our.
Our implied outlook has the fed decreasing in July and September of this year and May and October of 2020.
So so so basically we we began the hedge program I think at a time when we felt of the the economics of.
Putting the hedges and made sense relative to the outlook, we had for the environments and what was going to happen to interest rates going forward.
There are certainly came at a time when.
I would I would say that the benefit was fully reflected in the price of those hedges and we we pulled back but we felt that we got the program in place to the extent that stabilize the margin going forward, which is what we were trying to accomplish.
So clearly different for every bank in terms of where you're at from an asset liability position and the mix of your balance sheet and what you expect from growth going forward.
But we feel that we we kind of hit it right in terms of what we did and the impact that it's going to have on the margin going forward.
Okay, Great and then just as a follow up maybe just as a clarification for us.
I think you mentioned all your swaps on floors next quarter is going to be considered cash flow hedges can you just remind us what that means.
Better than something else. Thanks.
So the economic hedges that we have running through fee income at this point as they get mark to market.
We did not set those up to qualify for hedge accounting.
So basically we would match them up with say a commercial loan.
Of portfolio and through that we would get hedge accounting that would allow us to reflect the benefit or the detriment of those derivatives through through the margin.
The economic hedges that we moved up into.
The the category to get hedge accounting.
But they did flow through the fee income in the second quarter, and I think a little bit in the first quarter as well.
But basically I'd, rather have the impact in the margin and we have the capacity to basically reflect those as qualified for hedge accounting.
And we did that.
Actually early in the third quarter.
Yes, Ken said that $5 million Mark to market that had fee income this quarter going forward that would run through OCI instead of through the canal.
Got it perfect. Okay. Thank you very much.
Our next question is from Peter Winter with Wedbush Securities. Please proceed.
Good morning.
Thank you Doug.
At the.
I was looking at the loan to deposit ratio and its been creeping up a little bit and I'm. Just wondering is there a certain level that you wouldn't want to see it.
Go above.
Yes, Peter we don't want that to go above 100%.
That's the view that we have on that it has been creeping up a bit.
We have continued to see good good asset growth.
And as I mentioned, we've been a bit more conservative in terms of pricing deposits, particularly on the.
We'll side.
So we manage that very carefully.
We obviously have levers that we can pull to manage that ratio.
But that would be the the limit that we would have in mind.
Okay and then.
Just on the borrowing side I guess to $12 billion in borrowings. So I was just curious how much is floating versus fixed rate I just want to get an idea.
How much could come down.
In costs when the fed starts cutting rates.
Yes, we typically swapped our debt to.
To the floating rate I believe we have all swapped the floating at this point in time.
Got it that's great.
Thanks, Max Okay. Thanks, Peter.
Our next question is from Steven Alexopoulos.
With Jpmorgan. Please proceed.
Hey, good morning, Matt.
Thanks, David.
Given I wanted to follow up on the NIM questions. So given how meaningful you increase the hedges in the quarter that NIM guidance feels worse than expected even looking at the midpoint of the guidance implies considerable pressure in the back half.
I'm back with the hedges in place what do you estimate the impact to NIM from every 25 basis point cut.
What's a reasonable range.
Yes so.
25 basis points shock would be about a $24 million annual impact so that would be a 12 month impact.
After a 25 basis point shock.
Okay Thats helpful. We've worked that out okay, and then in terms of deciding how much downward pressure to place on expense growth.
Is there a minimum level of positive operating leverage that you are targeting for 2019.
Steven I would say that there is not a minimum level, where our target is to achieve positive operating leverage.
You know, we're we're very.
Cognizant and aware of.
The environments and.
We're we're very careful in terms of how we think about.
Expense opportunities.
We're we're continuing to invest for growth even in the metrics and the numbers that I've communicated to you today.
And we feel that that's an important component of being able to.
Really create value going forward is driving the topline.
We're long term shareholders the management team and the board of Huntington would be in the top 10 shareholders of the company without a doubt probably a little bit higher.
So yes, it probably doesnt have the impact that you might expect to see.
Simply because rates dropped very quickly and expectations expectations changed very quickly.
And.
Yes, it would have been obviously much more lucrative to put the positions on earlier, but again, we've we're comfortable with what we got done and feel good about how that margin is going to perform going forward.
Okay. Thanks for taking my questions you bet take care.
Our next question is from.
Kevin State.
Okay Espeed research. Please proceed.
Hi, good morning.
How you doing good so Mike I wanted to follow up on your comments on the customer experience and the and the JD Power Awards and it all sounds great I just was.
Wondering if you could.
Speak to your overall mobile digital strategy, what you do in house, what you outsource and how that fits in.
With your overall branching strategy.
Yes, Kevin so.
We've got a real focus on making sure that from a customer experience perspective.
We are investing.
Really across many different areas of the bank, but in particular digital technology.
Two to just improve customer experience. So we we view.
Investments like this.
As really driving improved customer experience customer satisfaction and for us that's the scorecard.
We don't try to to build every.
Every capability that some of the larger banks have but we build the capabilities that we think we need that are going to drive the experience that we won for our customers.
So I think.
That that's the way we approach it and we've allocated more and more expense every year or two or investment every year or two.
The digital technology, and what we need to do there.
So when you when you think about maybe a proof point for that we rolled the hub out which is our new online banking platform.
Probably about.
The eight or nine months ago and.
We believe that there is a direct correlation between the the vision that we had for what we want to be we'll try to try to accomplish which was all focused on customer experience and customer satisfaction and what we've delivered with the hub we feel actually resulted in the JD power awards that that we just won.
So again, we don't invest in technology for technology sake, we invest in technology to make sure that we further our strategy and our.
Differentiation around customer experience.
And I think we've got a good proof point this quarter with the JD Power Award.
Great and then do you have any sense, how are you doing with millennials versus older customers.
We we we believe that we're making progress there and I will tell you that it is a real focus of ours.
Clearly we have.
Some proof points that we believe the millennials and enjoy the hub in terms of what we've delivered.
And it is a focus for us I mean, clearly when you think about who is more likely to be exchanging accounts are changing banks.
It's likely going to be the younger generation and we need to have the digital capabilities that will.
Attract them and make them feel like we're the bank for them.
And that is exactly what we're trying to accomplish so I think.
We continue to make good progress there.
Great. Thank you.
Thanks, Kevin.
Our next question is from Ken.
Justin with Jefferies. Please proceed.
All right again, thanks, Hi, Thanks, good morning, guys.
Mac.
On the on the optimization that you've been doing in the loan and securities portfolio. How much more work do you still have ahead, there that you're aiming to accomplish or did you get effectively what you wanted to do Don in the second quarter. How do you think about like what buckets that would still come from if there's more.
Yes so.
Clearly, we still have opportunity.
On the securities portfolio, if we decide to to go down that path.
We think we have up to $3 billion of.
Securities that we could take off the sheep to provide incremental funding. If we go if we go down down that path.
What I would tell you on the.
On the on the loan side is that we likely still have opportunity there.
We do a lot of the work today.
On excel spreadsheets and some other tools that we have to help us understand relationship profitability, but we're implementing a new application later this year that will allow us to do this in real time and actually.
Start to have better information for relationship managers around the death of their relationship in the profitability of their relationship and.
There were efficiency around capital usage. So I do expect that we're going to continue to get better at this I do think we're going to find additional opportunities.
Our first preference is always to deepen the relationship and make sure that we get to a level of profitability that reflects the capital that we're allocating to that customer.
But we're going to manage this appropriately and we're going to get get the right returns for our shareholders.
Okay and then.
Just one on on credit to follow up on that so you had previously mentioned need to rebuild the reserve.
Credits remaining very good you're slowing loan growth part in part because of that the rationalization and a little bit on the competition as you mentioned do you need to.
Does that change the need to build the reserve at all in terms of just whats you are putting on versus what you're not and the optimization underneath.
Yes, well yes.
I think when we look at the reserve and where that is and what we do on a quarterly basis. I mean, there are things that we look at just beyond loan growth I mean, certainly that's a part of it we look at the composition and the mix of the portfolio Theres a number of factors that go into the provision you know certainly we have an eye toward keeping the provision level at a certain percentage of loans and PA is.
Other criticized measurements so.
I think we want to continue to look at the reserve quarterly and make sure that a sufficient for today and going forward.
Okay. Thanks, guys.
Our next question is from Brock Vandervliet with GBM. Please proceed.
Hi, Good morning, Great just wanted to actually follow on that question.
Just to kind of square square the circle here end of period growth loan growth was virtually flat.
It it sounds like.
Your your cautious going forward youve done a bit of repositioning.
Sure loan growth pick up a bit in this in the second half or should we expect that.
No I think you will see loan growth pickup in the second half I mean, you have to remember when you are looking at period end, we didn't take 400 million off the sheep during the quarter.
Yes.
Right and.
But again the thing.
But I've communicated time and time again about 2019 is the fact that we have a lot of flexibility in terms of how we manage our financials and 2019.
The growth that we were expecting from the loan portfolio was not heroic on a period end to period end basis.
And again.
Some of the liquidity that we have on the balance sheet gave us flexibility in terms of how we manage deposit pricing.
And then on the expense side, we had appropriate flexibility to be able to manage to positive operating leverage for 2019. So.
You will see continued loan growth.
But the pipelines are in good shape.
We're going to be cautious as we move through 2019 and understand what's going to happen from an.
Kind of a perspective.
But.
You just need to take some of those factors into consideration when you take a look at the period end numbers.
Okay, Great and just quickly on hedging earlier in the year you had mentioned the goal of down 1% and then down 100 basis points ramp.
Your your 1.8% now.
Obviously, the market's changed hedges are much more expensive.
It sounds like you're you're not anticipating adding much much more there.
Based on the cost and based on your view of the forward curve is that accurate.
That would be correct.
We will optimize our current position, but optimize is optimized and I would I would tell you that we're in good shape in terms of how were positioned right now with our hedges.
Great. Thank you very much.
Thank you.
That concludes our question and answer session I would like to turn the call back over to Matt for closing remarks.
Thank you Sherri I'm pleased with our solid results in the first half of the year.
Particularly given the significant amount of market volatility and the movement in the yield curve we have witnessed.
I remain confident about our prospects for the full year as we manage through what we expect to be a changing a challenging environment.
Our top priorities are executing our strategic plan to prudently grow revenue and to thoughtfully investing our businesses for continued organic growth.
While also delivering annual positive operating leverage.
We are building long term shareholder value through a diligent focus on top quartile financial performance and consistently disciplined risk management.
And finally as always we'd like to end with reminder, to our shareholders that there is a high level of alignment.
Between the board management, our colleagues and our shareholders.
The board and our colleagues are collectively a top 10 shareholder of Huntington and all of US are appropriately focused on driving sustained long term performance.
Thank you for your interest in Huntington. We appreciate you joining the call today have a great day.
Thank you. This concludes today's conference you may disconnect your lines at this time and thank you for your participation.