Q3 2022 Huntington Bancshares Inc Earnings Call
Greetings and welcome to the Huntington Bancshares third quarter earnings call.
At this time off distance are in a listen only mode.
Question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
I'd now like to turn the conference over to your host Jim <unk> director of Investor Relations.
Thank you.
Welcome everyone and good morning.
Copies of the slides, we will be referencing today can be found in 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 , 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.
For a complete discussion of risks and uncertainties. Please refer to this slide and material filed with the SEC, including our most recent farms 10-K, 10-Q, and 8-K filings, let me now turn it over to Steve.
Thanks, Tim Good morning, and welcome. Thank you for joining the call today, we are extremely pleased to announce our third quarter results.
Which reflected adjusted net income of $575 million and represented another quarter of record earnings for the company.
We continue to execute on our plan for 'twenty to 'twenty, two and the business is performing very well despite macroeconomic uncertainties.
We are seeing sustained demand from customers across the footprint, which is reflected in the robust pipelines and our growth trends.
We are closely monitoring economic developments and continue to believe we are operating from a position of strength as we head into the fourth quarter and 2023 now onto slide four.
First the performance in the third quarter was exceptional with our third consecutive quarter of record P. PNR.
Loan growth continued to be broad based and combined with the benefit from higher interest rates net interest income again expanded at a double digit rates in the prior quarter and fee income also expanded sequentially.
As a result of these factors adjusted P. P N our increased by 14% in the quarter.
This performance was driven by execution of our revenue producing initiatives and reflected our continued discipline expense management.
Second we delivered another quarter of sequential growth in average deposits driven by commercial.
Third we were pleased to drive double digit annualized loan growth again this quarter.
With this robust loan momentum and continued pipeline strength.
We are optimizing asset growth at the margin to maximize the return profile as we enter the fourth quarter.
Fourth we are increasing our revenue and profitability guidance to incorporate the recent rate curve outlook <unk>.
Mark will provide you with more details on that later.
Finally, we are positioned very well for a potential economic uncertainty.
With balance sheet stress, including higher capital levels, and our reserve profile that is near the top of the peer group. Additionally, our profitability and return on capital outlook is expected to continue to support further building capital ratios.
This places Huntington in a position of strength with an outlook that will continue to be guided by our disciplined approach to customer selection and our aggregate moderate to low risk appetite through the cycle.
On slide five let me share more details of our third quarter performance.
As I mentioned earlier, we reported record net income, which reflects our earnings power and ability to generate sustained top tier returns.
We have positioned the company to benefit from higher interest rates with our asset sensitivity and we continue to grow our fee income businesses.
This level of robust revenue supports our continued investment in key strategic initiatives, which will sustain growth.
Importantly, we remain committed to a disciplined expense management and guided by our commitment to positive operating leverage.
Finally, as we previously delivered on the Tcf integration program and cost savings, we remain focused on driving the incremental revenue opportunities from the acquisition. Let me provide a few updates on our progress to date.
We've added over 60 revenue producing colleagues in Minnesota, and Colorado to support wealth management business banking middle market and specialty banking.
The commercial teams in the twin cities and Denver are continuing to gain traction, adding new customers and building pipelines. In addition to the expanding middle market teams. We are seeing accelerated loan growth in some of our specialty areas such as health care and asset based lending, where we have recently closed a handful of sizable new relationships.
Colorado is a function of our expertise and local presence.
We are also driving increased productivity from the acquired branches, where we have grown primary banking relationships nearly every month since conversion.
We believe this demonstrates relationship deepening and a positive reception to Huntington product offerings.
Our business banking expansion in Minnesota, and Colorado is also showing substantial momentum.
We're pleased to have already achieved the top three ranking or better for SBA lending, which were startups in both markets.
The launch of wealth management in the twin cities continues to track better than our initial projections.
The team has been fully built out and we are pleased with the caliber of talent, we were able to add in this market. While it is still early team is already contributing to relationship growth.
Building pipelines reflect a significant customer opportunity even against a difficult market backdrop.
Based on early successes, we are seeing it in twin cities, we've expanded the wealth management business to Denver with key hires added during the third quarter in our asset finance business, which includes equipment finance and distribution finance, which was formerly known as inventory finance our teams continue to capitalize on the opportunities.
Harnessed the combined scale to better serve our customers. The business is significantly benefiting from that scale driving increased momentum in client acquisition and deepening of existing relationships, where now the fifth largest bank owned equipment finance platform in the U S. An increase from number seven only a year.
Go.
These initiatives are ongoing and we expect them to be a significant contributor to our growth over the longer term, we look forward to our Investor day next month, when we can spend more time on our overall business strategies as well as how these tcf revenue synergies factor into our consolidated outlook Zach over to.
For you to provide more detail on our financial performance, Thanks, Steve and good morning, everyone.
Slide seven provides highlights of our third quarter results.
We reported GAAP and adjusted earnings per common share of 39 cents.
Return on tangible common equity or R. O T C. He came in at 21.9% for the quarter.
Adjusted for notable items R. O T C. He was 22, 2%.
As you saw on slide four if you were to normalize TCE for the noncash accounting impact of other accumulated comprehensive income that arises from unrealized losses on our securities portfolio R. R. O T C. He would have been 18, 6%.
We are pleased with the sustained momentum in our loan balances with total loans, increasing by $3 billion and excluding P. P. P loans, increasing by $3 $3 billion.
Total average deposits also increased $1 billion quarter over quarter, and $3 $7 billion year over year. This growth reflects the focus on primary bank relationships.
Pre provision net revenue expanded sequentially by 17% from last quarter to $857 million credit quality remains strong with net charge offs of 15 basis points and nonperforming assets declining to 53 basis points.
Slide eight shows our continued trajectory of P. P. N. Our expansion, we expect Q4 to be another strong quarter as we drive sustainable profitability and highlight the earnings power of the company supported by organic growth initiatives and harnessing the benefits from the Tcs acquisition.
We remain committed to our long track record of managing to positive operating leverage even as we continue to invest in the business.
Turning to slide nine average loan balances increased two 6% quarter over quarter totaling $117 billion. Excluding P. P. P. Total loan balances increased $3 $3 billion or 2.9% driven by both commercial and consumer loans within commercial excluding PPP.
Average loans increased by $2 billion or three 3% from the prior quarter.
These results were supported by broad based demand across our commercial businesses that is fueling robust new production.
Line utilization remained relatively stable during the quarter on a core C&I basis, while we saw higher balances within distribution finance.
Asset finance, which includes equipment finance and distribution finance contributed with balances higher by $1 billion. This included $300 million from distribution finance during the quarter.
Commercial real estate balances also increased by $800 million.
Commercial growth continued in our middle market, corporate and specialty banking segments, which collectively increased by $200 million during the quarter.
In consumer growth was led by residential mortgage which increased by $1 billion driven by slowing prepays and higher mix of on balance sheet loan production. We also saw steady growth in our vehicle finance business.
Turning to slide 10, we delivered average deposit growth of $1 billion deposit growth was led by commercial up $1.4 billion. This expansion reflects our initiatives to drive primary bank relationships and new customer acquisition.
We remain disciplined on deposit pricing with our total cost of deposits coming in at 25 basis points for the third quarter.
On slide 11, we reported another quarter of sequential expansion of both net interest income and NIM.
Core non interest income excluding P. P P and purchase accounting accretion increased by $148 million or 12% to $1.392 billion.
Net interest margin increased primarily driven by higher earning asset yields as a result of our asset sensitivity position.
Slide 12 highlights Huntington's deposit pricing discipline.
Our low deposit rate relative to the third quarter of 2015, along with an improved funding profile gives us the flexibility to remain disciplined on deposit pricing for the third quarter. We've started to see our average cost of deposits tick up as expected. We are remaining dynamic in this environment we can.
To manage the portfolio at a very granular and segmented level to ensure pricing discipline and with a focus on growing the primary bank relationships that bring lower cost deposits.
Turning to slide 13, we have been dynamically managing the balance sheet against the volatile rate backdrop.
This quarter, we continued to execute on our hedging strategy to manage possible downside rate risks over the longer term, while positioning ourselves to benefit from higher expected rates in the short term.
In Q3, we increased our downside protection by executing a net $6 $6 billion of receive fixed swaps and $2 billion of callers, we will be proactive in managing our downside risk while closely monitoring the rate outlook. Our expectation is to continue to deploy downside hedging.
Strategies over the coming months.
Additionally, we are actively managing the securities portfolio to both capture the benefit from higher rates overtime and to protect tangible capital. We maintained the proportion of securities and held to maturity flat during the quarter and are reinvesting securities portfolio cash flows at rates above portfolio yields.
Moving to slide 14, noninterest income was $498 million up $13 million from last quarter.
We drove record activity within our capital markets businesses during the quarter with revenues, increasing $19 million, which includes the full quarter impact from capstone.
Capstone deal pipeline is healthy and we expect it to contribute to additional growth in the fourth quarter.
We remain pleased with the client engagement, we are seeing in the wealth management business with positive net asset flows year to date.
The momentum in net flows has been outweighed by market based changes in assets under management, resulting in lower overall revenue.
Deposit service charges were also lower by $12 million, reflecting the expected $9 million impact from fair play enhancements that were implemented in July .
Our outlook for the impact of these fee adjustments is unchanged from prior guidance. Our fair play philosophy is at the center of our strategy and is directly aligned with our mission of looking out for people. We believe the effect of fair play continues to be a compelling value proposition for our customers and supports sustainable growth.
For the bank.
Fee revenues were also impacted this quarter by a decline in mortgage banking driven by a lower return on our MSR asset and lower saleable spreads.
Moving onto slide 15.
Noninterest expense increased $35 million from the prior quarter ally.
Aligned to our prior guidance core expenses, excluding notable items increased $49 million to $1.043 billion.
This increase was mainly driven by the full quarter impact from capstone in Toronto.
It also included additional compensation expenses related to the strong revenue and production we are seeing in 2022.
And impacts from Merit and day count.
The underlying expense run rate remains very well controlled.
Our efficiency ratio, which is an outcome of our revenue drivers and expense management activities came in at 54, 4% on a reported basis and adjusted for notable items was 53.9% for the quarter on an adjusted basis. This reflects a decrease of 210 basis points quarter over quarter.
Slide 16, recaps our capital position.
Common equity tier one ended the quarter at 9.3% within our targeted operating range of 9% to 10%.
As we go forward our capital priorities remain unchanged with our first priority to fund organic loan growth.
With a robust return on equity we are generating from our core assets. We are deploying our incremental capital to fund organic growth and drive C. G. One toward the middle of our target operating range by year end.
Our tangible common equity ratio or TCE declined to five 3% as a result of a OCI marks on the securities portfolio.
Recall this temporarily reduces equity as value marks are taken and then accrete back overtime.
Importantly, this does not impact our regulatory capital ratios.
Our TCE ratio, excluding the OCI impact increased 19 basis points to seven 2%.
Finally, our dividend yield remains well above the median and our peer group at four 5%.
On slide 17 credit quality continues to perform very well.
As mentioned net charge offs were 15 basis points for the quarter.
This was higher than last quarter by 12 basis points and down five basis points from the prior year.
Our consumer and commercial portfolios continued to demonstrate stability and credit quality.
Nonperforming assets declined from the previous quarter and have reduced for five consecutive quarters criticized loans have reduced both from the prior quarter and prior year.
Allowance for credit losses was up two basis points to 1.89% of total loans, reflecting our conservative reserve posture, given the heightened economic uncertainty, even as our internal portfolio metrics show stability.
Turning to slide 18, let me update our latest forecast for Q4.
Our guidance assumes the consensus economic outlook through year end and incorporates the rate curve as of the end of September .
Our loan growth guidance remains unchanged at high single digit growth rate on a year over year basis. We are currently tracking toward the higher end of this range.
As a result of balance sheet growth and the rate curve outlook. We are again revising guidance higher for net interest income.
We now expect core net interest income on a dollar basis, excluding P. P. P in purchase accounting accretion to be up in the high twenty's to load thirty's percentage growth rate for the fourth quarter on a year over year basis in fee income, we now expect it to be down low single digits for the fourth quarter on a year over year basis.
This guidance is reduced from our prior level, we continue to see encouraging trends in core strategic growth areas within fees, namely our capital markets wealth and advisory and payments businesses.
And the prior trends, we had been seeing in other major fee lines, including mortgage are within expected levels.
The change in our guidance is related to the decision to hold on sheet. The guaranteed portion of our SBA loan production.
Market sale premiums for those assets have reduced and is now more advantageous for us to hold that production on sheet in Q4 as opposed to selling.
We will forgo an acceleration of fees this quarter, but benefit from higher spread income out into 2020 three and beyond we.
We believe this is a good economic return, but will cause fee recognition in Q4 to be lower than prior expectations.
On expenses, our expectation is for core expenses to be up low single digits in the fourth quarter compared to the prior quarter. We continue to maintain tight control of underlying core expenses will also seeing some impacts from compensation driven by the strong performance on profitability. We are seeing in our 2022 results.
Given the higher earnings we now expect our tax rate to be approximately 19%.
Finally, before we move to Q&A I'd like to end with a few key points.
As Steve mentioned earlier, our business is performing exceptionally well right now with solid momentum in the underlying drivers and expanding profitability.
We also continue to see strength in our customer trends, where they appear to be managing through the environment, well and with solid credit performance.
Notwithstanding these clear positives, we are mindful of the heightened uncertainty and risks in the environment.
We are closely monitoring the impacts from persistently high inflation rising interest rates.
Geopolitical instability and market volatility.
The cone of uncertainty around the near term economic environment has widened and the probability of a recession is increasing.
A bedrock part of the way we manage our business is to be dynamic to ensure we have game plans ready and are positioned to act to manage through a multitude of scenarios, while sustaining top tier performance.
And as always we are guided by our moderate to low risk appetite through the cycle.
We are operating from a position of strength.
And we are confident in our ability to successfully manage a range of economic environments.
We're looking forward to hosting many of you at our upcoming Investor Day on Thursday November 10th in New York City and via webcast. We are excited to share more about our strategic growth objectives, and our targets to continue to drive top performance and value creation over the years to come.
With that we will conclude our prepared remarks and move to Q&A Tim over to you.
Operator, 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 additional questions he or she can add themselves back into the queue. Thank you.
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One moment. Please so we poll for questions.
Thank you and our first question is from the line of Betsy <unk> with Morgan Stanley . Please proceed with your question.
Hi, good morning, thanks for them.
All the time this morning.
I wanted to just dig into is how we should be thinking about momentum into 'twenty three from a loan growth perspective.
No you've got.
Accelerating growth there and you've got <unk>.
Some NIM benefits that are coming from the mix shift and I just wanted to understand the dynamic as we should be thinking about loan growth versus peak dam given in particular, the hedges that you are adding thanks.
Sure Great question. Thank you Zach I'll take that I think in terms of loan growth, we continue to see quite a bit of momentum as we discussed in the prepared remarks, even as we're taking opportunities here in the fourth quarter to optimize where we're <unk>.
Driving that incremental production for four higher capital returns and so.
We expect to see continued momentum into the fourth quarter and and that'll continue into the into 2023.
Withstanding the economic uncertainty, we continue to see demand from our clients and in pipelines that even as they're pulling through our refilling and so that that indicates continued momentum out into 2023 and beyond and I think now as we drive that will also benefit from from her.
Asset yields to the point of your question and that will support.
Expanding NIM here into the into the fourth quarter in the near term.
And the hedge impact can you just talk through how we should be thinking about that as we go migrate through the next four to eight quarters.
Sure.
As it relates to hedging we do you know sort of taking a step back we purposely took a series of actions in 2021 as we've discussed to increase the asset sensitivity of the business in and to benefit from higher rates and not really or through over the course of the last several quarters just in in Q2 and Q3 of this year 55.
Basis points of total core NIM expansion and.
And there is more opportunity ahead the strategy that were.
Working through is really based on history, where if you look at the long term our history around rate cycles, typically medium to long term rates begin to fall right at the peak of the fed hiking cycle and so even as we're continuing to benefit from our asset sensitivity over the course of the early part.
This year, we have been adding incrementally to the downside hedge protection portfolio, so as to protect against potential downside rate scenarios in 'twenty three 'twenty four 'twenty five and beyond at this point, we've completed around 60% of that total potential capacity for hedging which.
Based on what we've done so far would protect around 35% to 45% of NIM in downrange ramps scenarios out into those years that I mentioned.
From here I expect it to stay asset sensitive and that will based on our expectations drive additional NIM expansion into Q4, even as we're continuing likely to continue to add to that hedge.
Portfolio here over the over the next over the coming months staying dynamic watching some interest rates.
But continuing to to protect against the downside. So the net of those things should support continued loan growth as I said.
And and helped to protect and maintain a really strong levels of NIM as we go forward.
Thank you.
Thank you. Our next question is from the line of Scott <unk> with Piper Sandler. Please proceed with your question.
Morning, guys. Thanks for taking the question so.
So Zack I appreciate the comments on the NII into the fourth quarter, yes. So the guidance indeed looks like another another step up that the growth rate will moderate as as one might expect you know once we are sort of done with the fed tightening cycle, maybe if you can just comment.
Oh give me your thoughts around ability to sustain positive.
And momentum after that after that I'll finish it sounds like certainly the volume side, it sounds pretty pretty optimistic but would just be curious to hear your thoughts on on the puts and takes.
Yeah, Yeah. It's a great question, you know and I think that the.
The the model will be that sustained.
Growth rate in loans, coupled with the rising in the near term and then stable NIM out into the future to really drive sustained.
Growth in NII on a dollar basis the trajectory around NIM in 2023 is it's very much a function of what happens with the economy clearly.
And where the rate curve is trending so it's a I won't give you a clear guidance at this point, what we'll talk more about that as we go in.
Gage and in future sessions, but our expectation is that the 'twenty 'twenty three will look quite good from a NIM perspective and that the volume growth will really support sustained continued growth in NII.
Okay perfect. Thank you and then if I could switch gears to the expense side for for a moment.
The.
Cost base, maybe a little higher than I would've expected into the fourth quarter.
Is are the compensation pressures will those sort of I mean are those related to just the strong earnings performance for this year, where the well does that base that we've got in the fourth quarter continue into them.
Into next year as well.
In other words, there's something called.
Kind of transitory versus ongoing.
Yeah. It's a good question really that that the portion of expenses in the third quarter that we're calling out as compensation related here are really are in fact related to the exceptionally strong levels of production and revenue and ultimately profitability, we're seeing in 2022.
And Oh, our baseline posture for expense management at this point is to be a keeping the core underlying growth of expenses, you know very well controlled and as a low level.
The the model you know as we've talked about quite.
Quite a bit over time is for us to self fund investments in our strategic initiatives.
Execution on the Tcf revenue synergies in our continued technology development program by driving efficiencies and in the core operating expense base of the company through scale process automation et cetera.
Oh, you know an indication of that as we continuing to optimize our branch network, we just announced.
A week or so ago. Another 31 branch closures that will be implemented as we in the early part of next year and that's just sort of how we will drive that efficiency to continue to keep.
<unk> is growing at a low level and of course drive positive operating leverage as we go forward. So.
That's the run rate that we see as we get out into into 2023 and of course, we'll provide more clear guidance as we get closer to the beginning of next year.
Perfect Alright, Thank you very much I appreciate the time.
Thank you.
Thank you. The next question is from the line of Steven Alexopoulos with Jpmorgan. Please proceed with your question.
Hey, good morning, everyone.
Alright in Florida.
To start on the deposit side. So in the quarter you grew average loans by $3 billion, but deposits by $1 billion and we saw some.
Mix shift out of noninterest bearing into brokered.
What do you see as the risk of noninterest bearing outflows I talk about the funding strategy and where do you see the mix evolving too.
Yeah, It's a it's a really good question and so there's obviously a key area of considerable focus we we really like the results we're seeing on the deposit side in Q3 and solid.
Execution of our strategy of driving toward primary bank relationships and operating accounts, even as we're staying very dynamic and really managing interest expense.
And in the trajectory we're on that exceptionally closely.
What I expect into the fourth quarter is is more of the same so I expect to see deposits grow into the fourth quarter.
Commercial led.
And.
So even as of course beta and interest expense costs are beginning now to tick up.
As we go into the fourth quarter, just kind of take a step back in terms of the overall funding mix to the point of your question.
Sure.
As we see it we're starting to cycle and beginning into the early stages of it from a really solid position relative to.
Cycles that the loan to deposit ratio is relatively low.
Non customer sources of funding are also relatively low and that leaves us in a good position to leverage diversified funding sources to fund.
We've got <unk>.
Of course deposits are the core and that's why we're pleased that they're growing but but we do have the opportunity to leverage <unk>.
Short term and long term other sources of funding, which will do in a diversified way to balance the funding sources and to be Frank to put good tension in the system to really support our disciplined approach to pricing.
And deposit growth over time, and so that's the model that we'll use and I think.
As we go out into the future.
We will see that balance funding.
Okay.
That's helpful and then to follow up so based on the ranges that you are giving for the updated fourth quarter guidance, we can get to a scenario, where NIM is flat or even down a little bit in the quarter fourth quarter could you frame for us how much NIM expansion youre thinking about for <unk>.
And was your answer to Scott's question do you think NIM could hold flattish next year or is that the base case.
Yeah.
So I do expect to see NIM expansion into the fourth quarter. It won't be at the same rate that we've seen for the last couple of quarters, but I do think we'll see that continue to expand into the fourth quarter. You know honestly go into 2023.
What happens kind of over the longer term out into the back half of 'twenty three is really going to be a function of where we see the yield curve going in the economy as I mentioned and so.
You could see stability you could see some downdraft, we'll see I think it's a it's going to be a function of those drivers with that being said.
Our focus as I said before is really.
On growing net interest income on a dollar basis and I think the loan growth, we're bringing through will help to sustain and support that overtime.
Thanks, Steve Zach deserve some type of award for the way he is.
<unk> balance sheet, so far this environment. Thanks for taking my questions.
Thank you it's a team effort I appreciate the recognition.
It's also early innings. Thank you.
The next question is from the line of Ken <unk> with Jefferies. Please proceed with your question.
Oh, Hey, thanks, good morning.
In fact, if I can follow up on on the Securities book I was wondering if you could just help us understand how the the pay fix received variable swaps have helped the securities book, noting that your yields were up 50 basis points in that book this quarter on top of our prior 50 basis points. It seems like you're really getting that extra juice off the securities book. So can you kind of.
Just help us understand like what is it how long does that help you for.
On that swap side, and then you know.
What are you expecting just overall size of the book to look like going forward. Thanks.
Yeah, Great Great question in terms of size, we think the securities portfolio is right sized with respect to the size of the balance sheet. At this point, it's about 24% of total assets, 26% of earning assets and I expect it to say proportionately the same at the same level for the foreseeable future.
It's we're essentially managing it for our liquidity.
You know us as a corporation at this point.
In terms of yields we did see 50 basis point increase in portfolio yield into the third quarter, which was obviously very helpful. For NIM. If I was to reconcile that for you about 30 basis points of that 50 was from the hedge portfolio.
Just under 10 basis points was from the impact of new money yields are coming in during the quarter and the remainder of roughly 11 basis points was driven by a reduction in premium amortization.
You know I I expect it will continue to see.
A rising yields out of the securities portfolio, partly as a function of that just continued reduction in premium am or are the the hedge portfolio should continue to benefit us as well as the rate curve has ticked up just a bit incrementally from the end of the third quarter here and new money yields are.
Pretty attractive relative to existing portfolio yield to give you a sense team is currently investing somewhere between 5.15 or 535% yields here as we enter October so that'll continue to be accretive to yield as we go forward.
Okay, and just the follow up I'll ask Scott on that just been jacked that 30 basis points help like how long is that helper in that part of the portfolio you know the swaps on the Securities book, how long does that carry forward for.
It will continue to carry forward for for a while here the the tenor of those is our multiple years and so we'll obviously have to see where the trajectory of the yield curve goes to the extent that they drive incremental benefit on a quarter to quarter basis, but they they will protect us for some time to come to accept that rig rates keep rising.
Right. Okay. Thank you Zack.
Thank you.
Thank you. Our next question is from Atlanta, Jon <unk> with RBC. Please proceed with your question.
Good morning.
Got it.
Okay.
Steve or rich can you can you talk a little bit about how you're balancing growth with I think Steve Your your comment most potential economic uncertainty your numbers look clean but.
You did have a higher provision and you took your reserves up a little bit so talk a little bit about credit and rich maybe give us some help on what you're thinking on provision and reserves.
Let me start and I'll turn it over to rich John Thanks for the question.
First of all credit was really good again this quarter and we feel very very.
Good about our position.
We talked about a turn on being a strong position that we're playing from and you'll hear us occasionally referenced it externally as well balanced.
Balanced book balance portfolio lot of discipline about aggregate moderate to low risk appetite over many years, you've seen our credit metrics quarter over quarter on the consumer side Super Prime.
It's.
We're feeling you know.
We're feeling.
Obviously, we're feeling very good about it obviously.
Working it diligently theres a lot of portfolio reviews, as very active portfolio management underway constantly and the teams are doing a great job. So now that I stole most of Rich's Thunder, Let me turn it over to rich I was going to say, there's not a whole lot to add there.
No.
As Steve mentioned I mean, the credit.
Looks really good.
Yes, eight basis points of charge offs for the year and correct class and.
And <unk> are both trending down for several quarters with respect to the increase in the AR.
Reserve coverage I mean, the allowance went up by $64 million in the quarter and most of that was coming from loan growth. So we've taken this consistently a prudent approach since.
To our ACL since Covid hit in 2020, and we think that we've.
Got it good position of strength right now heading into <unk>.
A possible downturn as it relates to how we're managing the growth versus where we are in the cycle I mean, we are fundamentally.
We're focused on client selection and we underwrite our clients at all times to how do they perform through the cycle and clearly with one coming up.
Potentially we're paying heightened attention to that but you know, we're always sensitizing for higher rates for.
Stress with inflation and other variables as we.
You're right our credits and that's not changing so we feel that we can.
So the balance sheet and growth prudently.
We'll move forward from there so we feel good about where we are.
Okay, just as a follow up on client selection. Your comment can you talk a little bit about the consumer as well I mean your numbers are incredibly clean but are you expecting some deterioration there overtime.
Or just give us your overall thoughts there rich.
Yeah, we are expecting it and really when you talk about deterioration I mean, you are coming off a very low base rate with with all the stimulus money that.
Came into the system and in 'twenty and into 2020 one.
The levels of delinquencies and our level of charge offs are really unsustainable. So what we're looking at is more of a return to normal we're closely watching the early stage delinquencies.
And there are exactly where we thought they would be I mean, they are up off of those historic lows, but if you go back and you look at where delinquencies would abandon in 2018 in 2019, we're not at those more normal levels and with respect to charge offs. We had net recoveries in many of our consumer portfolios in the first second and.
Even into the third quarter and we do expect over time that those are kind of return to the norm, but right now we feel very good about where the consumer book is positioned.
Okay. Thank you.
Okay.
Thank you as a reminder to ask a question today you May press star one from your telephone keypad.
The next question is coming from the line of Matt O'connor with Deutsche Bank. Please proceed with your question.
Hi, Good morning, I guess, just following up on the last question first.
Yes.
Specifically on indirect auto I mean, we're seeing some pockets of distress.
Glass normalization elsewhere, I think Mexico is a lot different.
Higher quality been so consistent obviously, you have two 3 million of losses, but.
Specifically for Eric can you talk about what you're seeing and if there is any changes that youre, making.
On the origination side or I guess, we are hearing about collections being tricky as well.
Hey, Matt it's rich I'll take that so you know as we've been in this business for 75 years and we've been through all sorts of cycles and as you know our model was one of focusing on prime and Super Prime customers and you know one of the benefits that we've developed over time is the ability to put in heavily predict.
Dave custom scorecards with response to.
Default expectation, so we're underwriting to not getting the car back in.
In the first place and we are mindful of the fact that used car prices are coming down and we build that into our decisioning and if you look on slide 37 of the earnings deck, you'll see that you know.
While we're maintaining really strong FICO some custom scorecard ratings, our ltvs have come down steadily since the third quarter.
Of 20, and so we've got a very disciplined.
And sophisticated underwriting approach.
The fact that we're.
I think prudently, bringing the ltvs down over time speaks well to how that book is going to perform.
It's a core competency of the bank.
We are expect the charge offs returned to normal but for right now we're enjoying what we think is a really strong.
Core competency that we bring to that business.
Even the normal bad as is on a comparative basis to the industry.
Excellent so.
We underwrite for roughly 2025 bps of loss.
And obviously, we're not seeing that now.
Okay. That's helpful and then just separately.
Care to give us maybe a 32nd.
Kind of a preview of the Investor day in terms of what you're looking to accomplish when you talked about strategic update and.
Target, but anything you want to.
So I'll preview off right.
Sure. This is Jack I'll take that one thanks for thanks.
Thanks for serving up to that question. We are really excited about the opportunity to engage on November 10th Thursday in New York City and via webcast for Investor Day, We've got quite a robust agenda plant will go through each of our major business lines.
Each of our key functions like like credit and and risk management.
And human resources and will share kind of an overview not only of the strategy and generally but also what our updated long term expectations are for financial performance and kind of the roadmap for us to get there so it's going to be.
A robust discussion and I think.
We will serve as a great launching off point for a series of additional conversations thereafter, so really excited about it and look forward to our two three weeks from now.
Okay. Thanks see you there.
See you.
Thank you we do have a question coming from the line of Erika Najarian with UBS. Please proceed with your questions.
Hi, good morning.
Good morning.
My first question was for Steve and Steve I was laughing at your response to Steve Alexopoulos comment that's classic Yeah your efficiency ratio.
56%.
And obviously with the help of your the business strength in rates he went down to 54%.
In the corner and I'm wondering if the medium term range still holds and that you know them. You know you look you'll look to continue to reinvest back in the business, especially as rates are helping the denominator side of that equation.
Erica if we could defer that question to Investor day, I would be very pleased but I also very much appreciate the inquiry.
Got it.
Right.
Yeah.
Certainly.
Second question is a follow up.
I'm going to ask the question another way I think it was.
It is an accomplishment that your period end deposits grew and you kept your cost of deposits of 25 debt now well below where I think everybody was expecting you to do so.
You know your outlook for good loan growth and some NII growth next year.
How should we think about deposit growth from here fully understand your message that you never got to search deposits in the first place, but how should we think about core deposit growth outside of mix shift and Additionally, how youre thinking about the terminal.
Deposit beta from here.
Sure Great question, Eric and let me see if I can.
Expand on some of that so in terms of deposits you know our expectation is to grow core deposits into the fourth quarter as I mentioned earlier commercial led.
Commercial just continues to perform very well I think we're really benefiting from all of the investments that we've made to expand the strength of the team and expertise and capabilities not to mentioned the boost around tcf synergies, which are really contributing and so that'll be the core driver into Q4.
What's interesting on the consumer side I do expect to see some doubt continued downdraft in consumer core into the fourth quarter, but actually pretty encouraging underlying trends.
What's happening in consumer is a bit of a tale of two cities, where the underlying trend in customer acquisition household acquisition and primary bank relationship growth and the deepening efforts that we've got both in our offline channels and increasingly now on the digital channels are really working and we're seeing nice expanding.
Deposit gathering from those activities whats offsetting that.
Is is what.
The well documented phenomenon of the elevated level of savings and you'll so called surge deposits from the Covid area era or are running down in the and the net of those two things has been a you know a modest reduction over the last several quarters I expect that to continue into the fourth quarter before that the surge balance.
Downdrafts sort of start to wane in the underlying growth that we're seeing in that core activity within consumer start to come to the fore and so we're encouraged about the longer term trends in consumer and as I look out over the 2023 period I expect to see deposit growth.
We will continue to see commercial probably growing faster, but consumer are contributing with net positive growth.
As it relates to beta you know, we'll see I think.
We're we're pretty safe.
Sanguine on this point that that we've seen low deposit beta thus far and I think thats been shared very much across the industry in a number of the peers have seen that through through the third quarter.
The market is becoming more active as I said earlier in the back half of Q3 and continuing now into Q4, so I expect to see.
Beta rising in the fourth in the fourth quarter, it's kind of as we expected so not overly different than what we've been planning for all along but but that is trending and where it ultimately goes in my opinion is a bit theoretical everything continues to track generally to our plan, thus far but where we're focused is on our strategy.
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<unk> the primary bank and operating account relationships stay very rigorous in terms of the detailed management and very dynamic and watching the market and ultimately ensure that we can keep supporting our customers and growing those relationships, which so far has been working and that's what we'll keep doing.
Thanks, Tim three weeks.
Look forward to it thanks.
Thank you at this time I would like to turn the floor over to Mr. Steiner for closing remarks.
Well. Thank you for joining US today. This was a tremendous quarter for all of US at Huntington, We're very pleased to see our second straight quarter of record net income and third straight quarter of record P. PNR.
We believe we are well positioned to manage through the current uncertain economic outlook.
We remain committed to and we're confident of our ability to continue to create value for our shareholders and just as a reminder, the board executives and our colleagues we are a top 10 shareholder collectively reflect reflecting our strong alignment with shareholders.
So thank you for your support and interest today, and we hope we will see many of you in three weeks have a great day.
This concludes today's conference you may disconnect your lines at this time and thank you for your participation.