Q1 2023 Huntington Bancshares Inc Earnings Call
Greetings and welcome to the Huntington Bancshares 2023 first quarter earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.
I'd now like turn the conference over to our host Tim Saddam direct.
<unk> of Investor Relations. Thank you you may begin.
Thank you operator, welcome everyone and good morning.
Copies of the slides, we'll be reviewing 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 Pohle, Chief Credit officer will join us for the Q&A.
Earnings documents, which include our forward looking statements disclaimer and non-GAAP information are available on the Investor Relations section of our website.
With that let me now turn it over to Steve.
Thanks, Tim Good morning, everyone and welcome. Thank you for joining the call today, we're pleased to announce our first quarter results, which Jack will detail later Huntington.
Huntington is very well positioned we operate a diversified franchise with disciplined risk management, our approach to both our colleagues and customers is grounded in our purpose to make people's lives better help businesses thrive and strengthen the communities we serve and during times like these huntington's purposes.
As evident in how we look out for each other and serve as a source of strength for our customers and communities.
Now on to slide four these are the key messages I want to highlight to you.
First we have one of the strongest deposit franchises of any regional bank.
We have a diversified base of primary bank customer relationships, which has been built over many years supported by our fair play philosophy. We also have the leading percentage of insured deposits as of year end SEC.
We maintain a robust liquidity position consistent with our long standing approach to conservative risk management practices third our capital base is solid and building common equity tier one has increased for three quarters in a row and we intend to continue to build to the high end of our range.
Fourth our credit reserves are top tier credit quality continues to perform exceptionally well and remains a hallmark of our disciplined credit management.
Fifth we are dynamically managing through the current environment bolstering capital and liquidity.
We're also incrementally optimizing the balance sheet and loan growth, while continuing to proactively manage the expense base.
Finally, we are well positioned to operate through uncertainty with a focus on our long term strategy and our commitment to top quartile returns.
I believe Huntington is built to thrive during times like this and ultimately to benefit and to capture opportunities as they arise.
Moments of market disruption present opportunities to take market share to win new customers and to hire great talent.
We are confident in our strategy and strong position.
Moving on to slide five we entered this period of disruption in the best position. The company has been since I've joined over a dozen years ago. The reputation of our colleagues have created a best in class customer service results in customer confidence and trust in us.
The 20th twenty-three J D Power award for customer satisfaction reflects our colleagues' efforts grounded in our fair play philosophy, we continue to acquire and deepen primary bank relationships, resulting in our granular and diversified deposit base.
For many years, we focused on gathering deposits that are sticky operating accounts and proactively placed larger deposits off balance sheet. We.
We continue to invest across the franchise to drive deposit growth.
We are also incrementally optimizing loan growth to generate the highest returns and ensure the capital we deploy just put to the highest and best use and we remain focused on delivering the revenue synergies. We previously shared accelerating the growth of our fee businesses and deepening our customer relationships and <unk>.
Guards to capital C. T. One increased 19 basis points from the prior quarter to 9.55% and we plan to build capital to the high end of our range over the course of 'twenty to 'twenty three.
Our credit reserves are top tier in the peer group at 1.9%, we will continue to be proactive in our expense management in the first quarter. We completed a number of actions to support our ongoing efficiency programs such as the 31 branch consolidations the voluntary retirement program.
And our organizational realignment with reductions in personnel.
And in addition to operation accelerate we have a roadmap to deliver continued efficiencies going forward.
Portly risk management is embedded within all our business lines at Huntington, everyone owns risk and we continue to operate within our aggregate moderate to low risk appetite.
Finally, I want to reiterate Huntington is built for times like this we have a strong well diversified franchise with a distinctive brand and loyal customers are high quality deposit base robust liquidity and solid credit metrics are the direct result of focused.
And disciplined execution over many years.
We have an experienced management team supported by highly engaged colleagues executing on our strategy.
And as you know management is collectively a top 10 shareholder.
And we are fully committed to driving top tier performance and growing shareholder value.
Jack over to you to provide more detail on our financial performance.
Thanks, Steve and good morning, everyone Slide six provides highlights of our first quarter results. We reported GAAP earnings per common share of 39, and adjusted EPS of <unk> 38 cents.
Return on tangible common equity or R. O T. C. He came in at 23, 1% for the quarter adjusted for notable items R. O T C. He was 22.7%.
Further adjusting for a O C. I R O T C. He was 17.8% pre.
Pre provision net revenue expanded 41% year over year to $844 million.
Loan balances continued to grow as total loans increased by $1.5 billion from the prior quarter.
Liquidity coverage remains robust with over $60 billion of available liquidity, representing a peer leading coverage of uninsured deposits of 136%.
Credit quality remains strong with net charge offs of 19 basis points and allowance for credit losses of 1.9%.
Turning to slide seven average loan balances increased 1.3% quarter over quarter, driven by commercial loans, which increased by $1.5 billion or two 2% from the prior quarter.
Primary components of this commercial growth included distribution finance, which increased $800 million tied to continued normalization of dealer inventory levels as well as seasonality with shipments of spring equipment, arriving to dealers.
Corporate and specialty banking increased $242 million, primarily driven by growth in mid Corp, healthcare and tech and telecom.
Other asset finance businesses contributed growth of $216 million.
Auto Floorplan continued normalization with balances higher by $214 million.
Business banking also increased $92 million.
In consumer growth continued to be led by residential mortgage which increased by $316 million, partially offsetting this growth were home equity balances, which declined by $159 million.
All other categories, including RV Marine and auto declined by a collective $123 million.
Turning to slide eight we continued to deliver average deposit growth in the first quarter balances were higher by $472 million, primarily driven by consumer which more than offset lower commercial balances.
On a year over year basis average deposits increased by $3 $2 billion or 2.3%.
Turning to slide nine I want to share more details behind Huntington's deposit franchise.
Our deposit base represents a leading percentage of insured deposits at 69% as of Q1.
Our deposit base is highly diversified with consumer deposits representing over half of our total deposits and the average consumer balance being $11000.
Turning to slide 10 cars.
Complementing our diversified deposit base is the stability and growth of our deposits overtime.
During last year, we consistently delivered deposit growth well above peer levels. Despite the backdrop of rising rates and quantitative tightening.
Through year end 2022 cumulative deposit growth was 2.4% nearly six percentage points better than the peer median.
Over the course of Q1 monthly average deposit balances were stable at approximately $146 billion within consumer deposits balances have increased for four months in a row.
Total commercial balances were modestly lower consistent with expected seasonality.
During March in addition to seasonality commercial customers also incrementally utilized our off balance sheet liquidity solutions.
Turning to slide 11, we have a sophisticated approach to customer liquidity management that comprises both on balance sheet deposit products as well as off balance sheet alternatives.
Over the past four years, we have invested substantially to build out these solutions to ensure we're managing our customers' overall liquidity needs.
The enhanced liquidity solutions allow us to manage the full customer relationship with primary bank and operating deposits on balance sheet and utilizing our off balance sheet solutions for investment or non operational funds.
Over the course of 'twenty, 2020 'twenty, one we intentionally leveraged these off balance sheet solutions in order to support our customers excess liquidity.
This resulted in fewer surge deposits coming on sheet as well as less commercial deposit runoff during 2022 compared to the industry.
On a year over year basis, our commercial banking segment on balance sheet deposits increased 11% and our off balance sheet liquidity balances increased 54%.
During March this approach yet again showed its value for both Huntington and our customers. We saw customers moving a modest amount of deposit balances into treasuries and other products. While we were able to maintain those primary operating accounts on our balance sheet.
Of the total change in commercial segment deposit balances between March 6th and the end of Q1, we estimate that approximately half the delta was attributable to normal seasonality and the remainder was mainly the result of shifts into our off balance sheet solutions.
The bottom table highlights these movements as well as trends in the first two weeks of April .
On balance sheet deposits have returned to the March six level and off balance sheet continues to grow.
Turning to slide 12, our liquidity capacity is robust our two primary sources of liquidity cash and borrowing capacity at the F. H L B and federal reserve.
Represented 10 billion and $51 billion, respectively. At the end of Q1 as part of our ongoing liquidity management, we continually seek to maximize contingent borrowing capacity and as of April 14th our total cash and available borrowing capacity increased to $65 billion at quarter end.
This pool of available liquidity represented 136% of total uninsured deposits, our peer leading coverage.
Onto slide 13.
For the quarter net interest income decreased by $53 million or 4% to $1.418 billion, driven by lower day, count and lower net interest margin.
Year over year, NII increased $264 million or 23% net interest margin decreased 12 basis points on a GAAP basis from the prior quarter and decreased 11 basis points on a core basis, excluding accretion.
The reduction GAAP NIM included five basis points from lower spreads net of free funds due to funding mix and marginally accelerated interest costs.
It also included five basis points from the first substantive negative carry impact from our long term Downrate NIM hedging program and three basis points from higher cash levels.
Slide 14 highlights our ongoing disciplined management of deposit costs and funding.
With the current cycle to date, our beta on total cost of deposits was 25%.
As we've noted we expect deposit rates to continue to trend higher from here over the course of the rate cycle give.
Given the recent market environment at the margin, we do expect a steeper near term trajectory.
Turning to slide 15, our hedging program is dynamic continually optimized and well diversified our objectives are to protect capital in up rate scenarios and to protect NIM in down rate scenarios. During the first quarter, we added to the hedge portfolio with both of these objectives in mind.
On the capital Protection front, we added $1.6 billion and additional pay fixed swaps and $1.5 billion in forward starting pay fixed swap trends throughout the quarter, we were deliberate in managing the balance sheet to benefit from asset sensitivity. We also incrementally added to our hedge position to manage possible.
Downside rate risks over the longer term as well as took actions to optimize the near term cost of the program.
During the quarter, we executed a net $400 million of receive fixed swaps.
Terminated $4.9 billion of swaps and entered into a $5 billion of floor spreads.
As we've noted before our intention is to manage NIM and is tied to corridor as possible as we protect the downside and maintained upside potential if rates stay higher for longer.
Turning to slide 16.
On the Securities portfolio, we saw another step up in reported yields quarter over quarter.
We benefited from higher reinvestment yields as well as our hedges to protect capital.
From a portfolio strategy perspective, we expect to continue to add to the allocation of shorter duration exposures to benefit from the inverted yield curve and further enhance the liquidity profile of the portfolio.
You will note the fair value marks at the end of March were lower than year end, both in the a F S and H T M portfolios as market interest rates moved lower sequentially.
Importantly, we have also shown the 700 million dollar total positive fair value Mark from our pay fixed hedges, which are intended to protect capital move.
Moving on to slide 17 non.
Noninterest income was $512 million up $13 million from last quarter.
These results include the 57 million dollar gain on the sale of our retirement plan services business during the quarter excluding that.
That gain adjusted noninterest income was $455 million.
This result was somewhat lower than the guidance. We provided in early March driven by lower capital markets revenues given the disruptions at the end of Q1.
The first quarter is generally a seasonal low for fee revenues as we've noted previously we see Q1, excluding the Rps sale being the low point and for fees to grow over the course of the year driven by solid underlying performance in our key areas of strategic focus capital markets payments.
In wealth management.
Moving on to slide 18.
GAAP noninterest expense increased by $9 million adjust.
Adjusted for notable items core expenses decreased by $18 million driven by lower personnel expense, primarily as a result of reduced incentives and revenue driven compensation.
We're proactively managing expenses and have taken actions over the last several quarters to Orient to a low level of expense growth in order to deliver positive operating leverage and self fund strategic investments.
Slide 19, recaps our capital position.
Common equity tier one increased to 9.55% and has increased sequentially for three quarters OCI impacts to common equity tier one resulted in an adjusted CET one ratio of seven 6% as a reminder, the reported regulatory capital framework does not include OCI impacts in the capital.
Sure.
Our tangible common equity ratio or TCE increased 22 basis points to 5.77%.
Note that we were holding higher cash balances at the end of Q1, which reduced the TCE ratio by 13 basis points.
Adjusting for a OCI, our TCE ratio was 7.27%.
Tangible book value per share increased by 7% from the prior quarter to $7.32.
Adjusting for a OCI tangible book value increased to $9.23 and has increased for the past four quarters, our capital management strategy for the balance of 'twenty twenty-three will result in expanding capital over the course of the year, while maintaining our top priority to fund high return loan growth.
We intend to grow CET, one to the top end of our 9% to 10% operating range by the end of the year.
We believe this is a prudent approach given the dynamic environment.
Our expectation for continued loan growth, we do not expect to utilize the share repurchase program. During 2023, turning to slide 20, our capital plus reserves is top quartile in the peer group and gives us substantial total loss absorption capacity.
On slide 21 credit quality continues to perform very well as.
As mentioned net charge offs were 19 basis points for the quarter. This was higher than last quarter by two basis points and up 12 basis points from the prior year as charge offs continued to normalize.
Nonperforming assets declined from the previous quarter and have reduced for seven consecutive quarters.
Allowance for credit losses was flat at 1.9% of total loans.
Turning to slide 22.
We've provided incremental disclosures on our commercial real estate balances.
This portfolio is well diversified and it's 14% of total loans is in line with the peer group with no outsized exposures. The majority of the property types are multifamily and industrial.
Over the last two years, we have grown our CRE book at a slower pace relative to the industry and peers, we remain conservative in our credit approach to CRE with rigorous client selection.
Total office CRE comprises less than 2% of total loans and the majority are suburban and multi tenant properties.
Reserve coverage on our total CRE portfolio is 3% and the office portfolio is 8%.
Let's turn to our 2023 outlook on slide 23.
As we have discussed we analyze multiple potential economic scenarios to project financial performance and developed management action plans. We also remain dynamic in the current environment as we execute on our strategies.
Our guidance is anchored on a baseline scenario that is informed by the consensus economic outlook. We have also based our guidance on a range of interest rate scenarios bounded on the low end using the forward curve as of the end of March two one at the higher end where rates are higher for longer with fed.
Funds remaining at approximately today's level over the rest of the year.
On loans, our outlook range continues to be growth between five and 7% on an average basis and as before we expect this growth to be led by commercial with more modest growth in consumer.
As we entered the year, we were trending to the middle to higher portion of that growth range.
Given the market disruption and our incremental focus on optimizing loan growth for the highest returns on capital.
We now expect to be in the lower half to midpoint of this range on.
On deposits, we are guided by our core strategy of acquiring and deepening primary bank relationships, we're narrowing our outlook with a slightly lower top end of the range and still expect to grow average deposits between one and 3%.
However, the composition of deposit growth from here, we now expect to be primarily consumer led with relatively less commercial growth.
Net interest income is now expected to increase between six and 9%.
This is driven by slightly lower loan growth and marginally higher funding costs.
Noninterest income on a core full year basis is expected to be flat to down 2%.
The updated guidance reflects modestly lower expected growth in capital markets fees and includes the go forward impact of the Rps business sale.
As noted we expect Q1 to be the low point for fees growing over the course of the year led by capital markets payments and wealth management on expenses, we are proactively managing with a posture to keep underlying core expense growth at a very low level.
We're benefiting from our ongoing efficiency initiatives, such as operation accelerate branch optimization, the voluntary retirement program and the organizational realignment.
Providing the capacity to self fund sustained investment in our key growth initiatives.
Given a somewhat lower revenue outlook, we are taking actions to incrementally reduce the expense growth in 2023.
For the full year, we now expect core expense growth between one and 3% plus the incremental expenses from the full year run rate of capstone in Toronto, and the increased FDIC insurance expense.
Overall, our low expense growth coupled with expanded revenues is expected to support another year of positive operating leverage.
We continue to expect net charge offs will be on the low end of our long term through the cycle range of 25 to 45 basis points.
Finally, turning to slide 24, as you heard from Steve The Foundation, we have built at Huntington over the last decade has created an institution that is well prepared for this environment.
We will leverage the strength of our deposit base, we're focused on growing capital and maintaining robust liquidity we remain.
And disciplined in our credit posture and.
And we're executing our core strategy.
The work, we have done to build a franchise positions huntington to outperform and be ready to opportunistically seize on pockets of growth.
We will remain disciplined and dynamic and our management approach as we continue to generate long term value for our shareholders.
With that we will conclude our prepared remarks and move to Q&A Tim over to you.
Zach 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.
Thank you and at this time, we will conduct a question and answer session if.
If you would like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
And our first question comes from Mononokai Italia with Morgan Stanley . Please state your question.
Hey, good morning Martin.
And as I look through your deposit flows for the quarter, you've clearly done better than peers, why that Sean na total deposits or even just our noninterest bearing deposits.
Can you breakout what you saw in the background you know was there a lot of movement with new accounts coming in and out.
As existing commercial clients moving off balance sheet.
And if so can you talk about how sticky you think simple joys Jack do you account openings are.
Thanks, Manav this is Doug I'll take that.
Question and it's a good one.
Overall, what we saw in our deposit base during the quarter was tremendous stability.
Continued.
Most of March.
Early April we've tried to provide some incremental disclosures.
Get the visibility.
For us it's not surprising because nobody is quite good.
It's very granular very diversified and overall it didn't happen by accident is a function of really long strategy to focus on primary bank relationships as you know.
To develop this commercial off balance sheet capabilities, and just driving the marks to.
To get to your question in particular, what we saw generally.
I would note by the way we're looking at balances on a day by day basis as we provided the disclosure you havent taken with with another caution it really matters one day of the week.
What week of the month et cetera payroll days.
<unk> payments.
Generally we expect.
And of course to be a seasonal low for commercial.
This was most of the movement around half Moon resort in commercial from let's say the average of a March down to the end of March was really just via your movements.
Sure.
Commercial clients largely paying out payroll.
The other half was largely movements deposits off balance sheet is very marginal amount of customers used to those off balance sheet solutions too.
To just to leverage the product says interested in what we can what you can see by this.
Disclosure out into the first weeks of April .
Please.
It came back.
In terms of the overall balance of commercial deposits.
Very stable naturally verge.
No movement.
On the question of.
What we saw even as announced we of course saw some acquisition and we continue to acquire in every segment that we're operating in the Americas is required.
King in commercial as well.
And so we feel good about the long term program, which is one of these otherwise our continued expectation for responds to across the rest of this year just continuing to stay on.
<unk> you are acquiring.
The primary relationships.
Great.
And then just separately can you talk about the funding and liquidity side of the balance sheet. So you know despite the low level of deposit outflow I think he buildout sent back some cash and liquidity levels by taking on more wholesale funding. So how should we think about that as we get through the rest of this year.
Yeah.
In terms of overall funding mix.
We've talked about this a number of times in prior quarters, we really like where we are coming to this rate by adult from a perspective of.
Lawsuit balanced options to fund the business, we're growing loans display with between five and 7% and deposits are.
Between one and 3% around 2% call the midpoint of that range.
How's us to also leverage other sources of funding.
Huge overall on the balance sheet.
We're in a great position to build into that.
I will tell you internally, we really liked that created quite a bit of tension in the system, where the next junipers lending was coming and really this optimized from an economic perspective and so on.
Expectation is to continue to essentially as each of those funding categories over the foreseeable future, while still maintaining a level that's comparatively quite good relative to history for us. So so that's the overall plan.
On the topic of liquidity I would just note a couple of things.
This is a key risks that the company has been focused on managing.
We purposely pretty exceptionally robust pools of contingent liquidity to cover any potential issue.
I think we know.
In the period reject some of the key sources of liquidity.
I'd also note that we continue to over time.
No.
I will tell you that one of the statistics within the documents today.
Highlights $65 billion of contingent cash and borrowing capacity as of last Friday I'm pleased to report that this morning is incremental efforts, we've done now $84 billion.
In total represents a 187%.
Relative to Orange and deposit so.
With a strong liquidity profile and as I said very balanced.
Great. Thank you.
Our next question comes from John Pam Kearney with Evercore. Please state your question.
Yeah.
Morning.
You mentioned the actions you've taken incrementally two.
Two to lower expense growth.
Firm.
These actions are factored into your 1% to 3% extended guidance.
And.
And also would it be a.
When do those actually evolved thanks.
It's a great question, Jonathan Zach I'll elaborate on that so the short answer to your question is yes, our guidance of 1% to 3% underlying core growth includes those actions.
Just back to the sort of strategic intent of it.
We've said for.
For awhile.
Very intent on driving a low level of overall expense growth.
And it really leveraging our ongoing progress with efficiency initiatives to do that even while we continue to drive.
Outside of this growth and to self fund investments within overall low growth framework and so.
We came into this.
Updated guidance period, we saw somewhat lower revenue trajectory for us it was important.
And you kind of continue to execute on the discipline of driving positive operating leverage also ratchet down expenses.
It kind of seems to be too we always enter the year with a contingent setup expense management options on our menu.
Thanks.
As of June in.
Awesome.
If we need to and that's essentially what we're going to go through now.
We'll modulate the pace of hiring.
We'll be very judicious in the us.
No.
Discretionary expense categories.
We will look at sort of every possible areas of investment expense control to ratchet back expenses.
Offsetting a good amount of what was otherwise.
Revenue pressure so the playbook.
We've done numerous times over the course of the year.
Each of them.
No.
Okay, Great Alright, Thanks, and then on the.
On the back to the balance sheet.
Can you just give us your expectation.
Terms of an updated through cycle deposit data.
Believe you had expected the 35% previously, but if you can update us there on what you're thinking and also what net interest margin outlook is baked into your up six 9% net interest income.
Got it.
Let me elaborate more on that.
Overall as <unk> pointed out the overall the strategy. We have is to continue to drive.
Same growth in interest income on a dollar basis.
Did you that driving continual growth and higher term loan categories.
With some near term NIM around us.
And of course, we can we're the top and benefits from our continued asset sensitivity.
We can really benefit if rates do stay a lot higher for longer but also at the lower end projected with our hedge portfolio and all of that.
It's up to the 6% to 9% NII growth.
Got you.
On data in particular to your question. It clearly is a more competitive environment.
Is it realistic to expect some higher beta began frankly earlier impact.
Previously seen.
I do expect a few.
Few percentage points higher than the original bid within the prior guidance of 35% Beta no I will note that.
We provide guidance on May I, just wanted to give you an indication of where we think thats going but for us. The most important thing is the execution day to day driving the deposit growth has been incredibly disciplined in terms of you.
The overall funding.
Those prior response.
Obeida ultimately plays out here over the endgame is going to be clearly a function of where the yield curve.
It goes but I do think that.
A few basis or 2% higher than 35% is a reasonable range based on the two scenarios I believe.
No.
In terms of overall spread.
As we noted.
Move the guidance range from what was previously each of 11, 6% to 9% so down about 2% in terms of that guidance range.
40% of that was just slightly lower loan growth and the rest is spread.
If you think about the kind of the way.
Year plays out I would expect that kind of a more of a frontloaded impacts of spreads than we were previously expecting so we would expect to see a dollar decline in NII in Q2 about the same as we saw in Q1, but then growing from there.
Thanks.
The NIM range that we have there.
Consistent with the dollar trends.
Great. Thanks, Jack.
Thank you.
Thank you and our next question comes from Ebrahim <unk> with Bank of America. Please state your question.
Hey, good morning.
Alrighty.
Two questions one.
Just the deposit growth outlook I think you mentioned, it's expected to be more consumer led.
Just give us a sense of strategically how you did.
Interest rate environment or de Ven shaft last month has changed how you are thinking about deposit acquisition and has it materially changed the pricing on our new deposit grew extended it to them have you talked about it back in January .
Thank you.
Overall, I would say that as we noted.
The range.
Lower.
We still expect growth.
It's been pretty consistent.
The overall amount of growth so you'll see a nice traction.
Sure.
Just the first one.
Yeah.
What would that be sort of in the mix will be different.
We now expect commercial to be largely flat from here.
And really the growth to be consumer led.
Frankly from our perspective it.
As it highlights the strength of the consumer version.
We can leave it down and continue to support.
Profit loan growth was.
That consumer funding.
The doctors are fully settle in terms of all the competitive.
Couple of behavioral impacts over the last month, but I think one of them.
It's a more moderated commercial growth it will just be leveraging your off balance sheet structures that much more from here.
We do have our cheapest.
So on the consumer side.
Running the same playbook that we have.
We have invested so much over the last few years and capabilities to build.
Our marketing technology and customer targeting two buildings in consumer we really have the opportunity to optimize.
And to drive incremental.
Consumer oriented acquisition by the way.
Oh boy.
Hi, Recalibrate, which is fundamentally growing.
Noted a 2% growth.
Very big relationships with consumers like 4% growth in business banking and so it's a very bad outsources most of them initially go into it.
Thanks.
For overall spouses.
Got it and just as a follow up I guess on the lending side. So I appreciate your comments in terms of it.
It always has been and be outlook, but if you could give us a sense of just customer sentiment.
Given your business mix some of the legacy Tcf businesses gives the health of the economy in terms of when you speak to your customers are you seeing a slowdown in demand also cutting at the same time, which increases the likelihood of a potential downturn in the recession based on what you've seen.
Hey, Brian This is Steve and thank you for that.
The question.
We are seeing.
Customers become more cautious.
In some cases deferring investments.
We will close both of these acquisitions or other transactions.
And this has increased during the quarter, it's one of the reasons.
Guidance without changing the loan Greg.
To the lower end of that range from where we would've been at the upper end of that low rates.
Yes.
'twenty two.
Theres a clear.
Clearly.
Is there a recession and what slide 24 look.
He said that they'd be these customers are doing quite well in 'twenty, three thus far and remain optimistic but again, there's been a lot of a lot of headline noise and it's having an impact in addition, Westin said soon.
Thanks, Steve Thanks for taking my questions. Thank you.
Thank you. Our next question comes from Scott Cyphers with Piper Sandler. Please state your question.
Good morning, everyone and thank you.
Hoping you could pay that.
I was hoping you could expand upon some of the NII comment from a question or so ago. So I think if I. If I interpreted you correctly, yes, NII will take a step down in the second quarter, what would cause either margin or NII to start expanding from there in light of that.
I guess fairly limited.
Overall balance sheet growth through the remainder of the year just curious about the nuances as you see them.
I mean, mainly to meet volume from there Scott just to continue to sequentially grow loans.
From second to third to fourth quarter.
The primary driver to achieve this.
Spreads.
We were flat in the back half then.
Celebrated impact.
Just maybe elaborating a little bit.
The trajectory that we see that being overly precise.
Walked into the year, we were expecting frankly pretty profitable trend and narrow over the course of the year.
We provided some guidance around single digit basis points.
Kind of trajectory throughout the course of the year.
Most of that we now see kind of Frontloaded.
With the curve.
The outlook is.
Well shaped up at this point, so that's really the driver overall by by outlook for the industry five or six basis points lower.
A portion of which is yield which is funding costs being slightly higher.
Okay perfect. Thanks, So remember we are a large equipment finance.
Lender.
And that generally as before activities in the fourth quarter as part of this second half.
Bill.
Yes.
Okay perfect. Thank you and then can you guys speak broadly too.
The trends Youre seeing in the auto portfolio I mean, I know your your your portfolio just given the quality and tenure of it tends to be a lot different than the industry as a whole but at.
At least in the media you would think the industry sort of collapsing.
Curious that top level trying to sort of appetite from you guys and then what youre seeing at that sort of overall.
Hey, Scott.
So christy tack onto that so you know from my standpoint.
As we showcased during Investor day. This is really a business through all sorts of cycles become truly a core competency.
If you look at what we saw in the first quarter. There was a continued gradual normalization in both delinquencies and charge offs, but it's still tracking well below the historic losses.
Lucy was 14 basis points in the first quarter up from 12 in.
Fourth quarter.
I can't.
Really closely at origination metrics that we've got we're still originating at FICO north of 70.
Loan to values.
You know relatively constant reflecting also a little bit more mixed.
And new versus used social my standpoint.
We're going to expect this portfolio to continue to invest loss performance.
Unemployment rates are so low which is certainly going to help other credit metrics here, that's the big driver of lawsuit.
I'm feeling good about it.
Maybe.
Documentation.
Our return on capital standpoint.
Sure.
I apologize.
Second the comment.
But the trajectory of the portfolio.
The sustained demand and great relationships by the way.
So we are at.
For digital marketing.
This is Julie.
Great access.
In terms of optimization that is one of those loan categories that we are actively so modulating.
Modulating.
We have detailed at Investor Day last November .
Remember.
That's a business that is so.
With respect to pricing and volume trade off so you can really pull those levers quite effectively to drive higher return and higher yield types that we also need to necessarily.
So we're bringing back production a bit.
And seeing really strong returns.
So we will see some of that.
By the Eagle Ford for the rest of the year.
So those are important business for us.
I'm pleased to see it.
Okay perfect. Thank you for all the color.
Yes.
Our next question comes from Erika Najarian with UBS. Please state your question.
On a year ago.
I just had one follow up question.
Christie you see.
Steve Youre starting clean.
Paul P line.
And a half percent accretive at 20 basis points of capital or more.
Corner.
And like you said your ear, allowing alrighty and count for a tougher economic environment I.
I think your shareholders absolutely appreciate you know the focus on return.
Resilience, so to speak and perhaps start thinking about.
Being more opportunistic in market share taking.
Yeah. Thanks for the question we do.
We are focused on and will continue throughout the year building the capital position of the company strengthen it.
I'm pleased with the results delivered in the first quarter and look for comparable results as we go through the year.
We're intending to be at or near the high end.
Of our CET, one right and we're doing that with a view that this threat of a recession is zinc.
It's increasing and there's also a backdrop as it should there be some kind of regulatory.
Actions at some point in the foreseeable future around capital requirements. So so so with that in mind, that's the purpose.
Having said that we intend to be opportunistic.
<unk> got a lot of organic growth potential in the business lines, where we are.
We're very close the store execution as you saw last year with the acquisition of Capstone Toronto, We're always looking to build out ancillary fee businesses within the company.
And that in.
In times of disruptions there.
B.
People or teams that might be available and we will again be look to be opportunistic there.
<unk>.
We see this in aggregate.
Moment to take market share.
And that's where we're driving towards.
Investing in businesses.
The outlook exactly shared with you we'll have continued investment in the businesses all of which is designed to enhance our well.
While our earnings are again servicers.
Got it and just to be clear, Steve I was asking about organic opportunities that wasn't a hidden bank acquisition.
Yeah.
Glad you clarified.
You might be going in a different direction.
Uh huh.
Yeah, absolutely and just as a follow up to that.
As I've heard you loud and clear in terms of continuing to optimize the right hand side of your balance sheet now as you think about you know senior debt issue and I suspect that everything that you may be doing in the future. It would have a lens towards the potential for HELOC eligibility.
It's certainly on the on the thought process yes.
We're watching the developments carefully.
It's pretty early days, clearly to see where that might play out.
It's part of the thought process.
Thank you.
Our next question comes from Ken <unk> with Jefferies. Please state your question.
Thanks, Good morning.
One follow up on the capital front Zach you show on that slide 19, where the current.
Potential impact of FX could be on seats you want I'm. Just wondering do you have a rule of thumb. If we kept all rates equal on just how how fast that would pull to par either on a sequential basis or maybe by the end of 'twenty four.
Yeah.
Great question, Doug considerable analysis, it's around 5% to 10% a year ago, depending on which areas with huge maturities are totally totally flat curve basis I'll give you said she can give you a sense.
This analysis on the forward curve.
As of March it will be 42% recapture.
But before any forward scenario.
Interest rates declining relative to other parts of it.
Great. Thank you and just one one question on the on the on the asset repricing side.
You guys have some fixed rate assets that are still repricing, even though I understand how you're slowing production just can you give us a sense on just what you're <unk>.
Front book back book benefits are in some of your fixed rate portfolios and have we even really started to see some of those benefits come through given where rates have moved too.
It's a great. It's a great question and you can look at that very carefully and we're seeing really nice step up in loan yields.
New volume Grace up almost 50 basis points, sorry, new volume up almost 70 basis points back book.
Almost 50 basis points in Q1, we estimate that our loan beta at this point through Q1 is 37% and that could easily be over the next couple of years approaching 60%.
Could you just sort of model of the yield curve. So we're we're a little further through the loan beta that we are the deposit beta but not much and there is certainly much more room to go in terms of loan yields from here.
Just given you know.
About just over 10% of the portfolio.
In auto the turns pretty quick.
Two years, so can we get the benefit of that repricing in a somewhat delayed but impactful data there and then obviously the sort of longer dated.
Likewise.
Sure.
The reset in terms Grace.
Right.
So.
Cortisol.
Okay. Thanks, Matt.
Thank you.
Next question comes from John Armstrong with RBC. Please state your question.
Morning, everyone.
Uh huh.
A few questions here Zach on slide 14.
The Green line on the bottom the last tightened it's like it's like it looks like a couple of quarters for deposit.
Cost of rollover after the fed stopped if if we're done in may.
Do you think that relationship holds does it is it two quarters in deposit cost stopped going up is that fair.
That's generally the expectation gotcha.
Basis.
Obviously.
Well it could be a.
The pace with which rates began to decline Intel.
So what we're looking.
Uh huh.
Loan growth environment across the industry.
This kind of environment.
So that will clearly play into it.
But generally our planning assumption is as you know which is very much in keeping with what we've seen over the last rate cycle.
Okay fair enough.
Steve or rich maybe for one of you you you used the term in the deck rigorous client selection for commercial real estate.
Can you talk a little bit more about what you go through you know help us understand the type of work you're doing yet and do you think this is different than what your peers are doing.
I look at Sito, Florida peers, but I can tell you that.
For years now.
Well the process.
Really unchanged.
So as you know.
Real estate cycles, and you have to be able to in the past.
To support those projects and so.
Really narrows the funnel around.
Sponsors that we work with.
Sure.
We look at there.
Along these lines of business, we look at their financial wherewithal.
Liquidity and more important when you look at it.
Past cycles.
Sure.
Sure.
Drives how much we'll have all the tankers to our sponsor.
A single project, we will have to them.
The metrics associated with that so.
Right now we are focused on serving the core.
That has served us well.
Forward.
John we're always disciplined.
Right.
This proved to be.
This is as we go through the cycle, obviously pleased with where we are at the moment.
So we'll see but I can tell you, especially a degree where we had.
Enormous challenges.
We have sustained the discipline here.
Since that time rich that a big part of it along with us.
It is.
That's good.
One more for you Steve I know this seems like a softball, but if not I'm genuinely curious but.
What surprised you the most over the past six weeks as you manage through some of the disruption.
The speed of the.
Rather than the banks was a surprise Jon faster than anything we would see.
That I can ever recall.
I think as a consequence.
No.
Regulators and others, maybe is a little behind.
The company is as expected.
That's why it gives it a couple of weeks to get intermediate risk.
And signature as well.
Normally there is more front end planning.
Yes July things up.
There's a little bit more of a scramble, having said that I thought the reaction.
From Treasury.
It was just us.
Any timing.
That's really appropriate.
Okay alright, thank you.
And our next question comes from Steven Alexopoulos with J P. Morgan Chase. Please state your question.
Hi, everybody.
Yeah.
Well at the start so in the net interest income outlook, which was taken down a bit given everything that you've detailed on the swaps and the forward curve as of right now where do you see you got yourself trending within that.
Is there a bias either to the upside or downside within that range right now.
When we set these rigs as we try to set some with <unk>.
General expectations.
Baseline expectation.
I think kind of what the puts and takes that would take you to the high and the low included volume on one hand and.
And just sort of.
The shape of the yield curve.
Yes.
It's hard to generalize.
We feel quite good about that.
At this point.
Sure.
Got it.
Is the way we should think about it. So if we're at the low end they have that NII range should we should then we should be at the low end of the expense guidance should we just connect those two.
Generally speaking that is the way, we think about we throttled the expense growth based on where the revenue trajectory.
And that's what I'm trying to have a really disciplined forecasting process.
Yes.
<unk> tried to do that obviously the expense lever it takes some time people.
Need to have good line of sight.
It is possible for some rapid movement, a surprising move that that's not possible if you could give them.
Short time periods that over the longer term yes.
Got it okay. Thanks, and maybe just one last one.
For Steve just following up on your response, just now to John's question, given the speed at which deposits went out.
Silicon Valley Bank. When you look at that do you view that from a distance as a unique one off event or.
Are there lessons that you're now applying the way you think about managing capital risk liquidity that even a stable regional bank like yourself will change potentially fairly materially in the aftermath of what we just saw.
Steve.
I think there are always lessons learned but the business models of SPD in signature.
So different from us and other regional banks, particularly from us.
Concentrations uninsured deposit level of 95%.
Just in retrospect, it seems rather clear.
Yes.
The liquidity risk was.
Very very different and a huge miss.
With their asset liability.
In terms of lessons for us I'd say is even that much more aware of liquidity. We've always seen this as a prime risk. We've always had good backed up and we've been very granular.
And an advantage to have the best in class.
Uninsured to total deposits ratio, but but.
We will probably be more even more cautious now probably moving into the more cautious given the speed at which they see as.
As you go forward, having said all that we're in a very strong position today, we expect to grow deposits as weak as we've been doing for the year.
Hum.
So it's just like extra vigilant with majors and policy adjustments due to reinforce and strengthen further.
That would be minor in nature.
In fact, our performance.
Okay. Thanks for taking my questions. Thank you.
Thank you and ladies and gentlemen, we have reached the end of the question and answer session I would like to turn the call back to Mr. Steiner for closing remarks. So thank you very much for joining us today and as you've heard we're operating from a position of strength with a foundation. That's been built over a long period of time are very very focused on continued growth and in terms of the opportunity.
We're confident in our ability to continue creating value for shareholders and as a reminder, the board executives and our colleagues are a top 10 shareholder collectively reflecting our strong alignment with.
Our shareholders. So thank you for your support and interest in <unk>.
Have a great day.
Thank you.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.