Q2 2023 Huntington Bancshares Inc Earnings Call
Greetings and welcome to the Huntington Bancshares second quarter 2023 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 <unk>.
<unk> zero on your telephone keypad as a reminder, this conference is being recorded I would now like to turn the conference over to your host Tim It's about yours director of Investor Relations for Huntington Bancshares. Thank you you may begin.
Thank you operator, welcome everyone and good morning.
Copies of the slides, we will be reviewing today can be found in the Investor Relations section of our website Www Dot Huntington Dot com.
As a reminder, this call is being recorded and a replay will be available starting about one hour from the close of the call.
Our presenters today are Steve Stein, our chairman, President and CEO , and Zach Wasserman Chief Financial Officer.
Rich Poli, 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 second quarter results, which Jack will detail later, our approach to both our colleagues and customers continues to be grounded in our purpose and served us well in the second quarter our colleagues again.
Is it that we make people's lives better help businesses thrive and strengthen the communities we serve.
On to slide four.
These are the key messages, we want to highlight today.
First Huntington has a distinguished deposit franchise, which continues to benefit from our strategy to acquire and deepen primary bank customer relationships.
This is fuelled continued deposit growth over the year, including this quarter.
Second we once again drove capital ratios higher with common equity tier one having increased for four quarters in a row.
We remain on track to build CET, one to the high end of our range by year end.
Third credit quality, which is a hallmark of the company is performing very well and we continue to operate within our aggregate moderate to low risk appetite fourth we are dynamically managing through the interest rate environment, we are maintaining disciplined deposit pricing, while delivering deposit growth and.
Many a robust liquidity position.
Finally, we remain intently focused on executing our strategy.
We are investing in the business to drive long term sustainable revenue growth and we continued to proactively manage the expense base to align with the revenue outlook operation accelerate remains on track and we will increase our use of business process outsourcing to drive sustained efficiencies into 'twenty 'twenty four.
Moving on to slide five over the past decade, we've transformed Huntington.
This puts us in a position of strength today as foundation includes our granular and high quality deposit base, which is supported by our leading consumer business and commercial banking franchises.
With this strong foundation in place, we can be nimble and seize on opportunities to expand our business that will arise during times like these the hiring of the fund finance team, we announced last month is a great example.
This business was one of our commercial banking growth roadmap and we're pleased to be able to add great talent and welcome. These colleagues to Huntington, We're building capital even as we maintain loan growth. We are optimizing the level of new loan growth and remaining judicious with the loans, we carry on balance sheet in order to generate the highest return on cash.
Capital.
As a result capital ratios expanded in the second quarter with our CET, one ratio increasing to 9.82% further our adjusted CET one ratio is 8.12% above the peer median.
Our disciplined approach to risk management drives our strong credit quality with low net charge offs and the nonperforming asset ratio decreasing for the eighth consecutive quarter. Our management team has a long track record of being disciplined operators with a focus on delivering value for shareholders. This execution has been awarded and.
<unk> across the franchise, including winning the J D Power Mobile award for the fifth year in a row and maintaining our strong number one S. P. A ranking regarding the macro outlook. It remains a dynamic environment interest rates are playing out and the higher for longer scenario that we had been anticipating for some time economic activity in our foot.
Print appears to be holding up relatively well, which supports sustained loan growth and solid credit performance that said, we are diligent watching the environment closely and are actively managing our loan portfolio. We are well prepared to operate through a range of potential scenarios.
Further we are also closely monitoring the potential regulatory adjustments to capital and other requirements. We are evaluating the proposals and thus far the potential new requirements appear broadly in line with what we had expected we are well positioned to manage through these changes address them expediently and over time also.
Set a meaningful portion of the potential impacts.
And finally before I hand, it over to Zach we want to share that rich Poli, our chief credit Officer has announced his upcoming retirement effective at the end of 'twenty 'twenty. Three we have greatly benefited from rich's expertise and leadership during his nearly 12 years with Huntington He's.
He's been a great leader of our colleagues and a great partner for me and the executive team, we have a strong bench and we're pleased Brendan Lawler Deputy Chief Credit Officer will succeed rich in this role at the end of the year Brenda joined US in 2019 after 25 plus years as a senior commercial credit executive at a law.
Large regional bank and is currently responsible for all commercial credit across the bank.
<unk> over to you to provide more detail on our financial performance. Thanks, Steve and good morning, everyone. Slide six provides highlights of our second quarter results. We reported GAAP earnings per common share of 35 cents.
Return on tangible common equity or R. O T. C. He came in at 19.9% for the quarter further adjusting for a O C. I R. O T C. He was 15, 8%.
Deposits grew during the quarter, increasing by $2.7 billion or 1.9% on an end of period basis loan balances continue to grow.
As total loans increased by $900 million or 0.8% from the prior quarter.
Credit quality remains strong with net charge offs of 16 basis points and allowance for credit losses of 1.93%.
Steve mentioned capital increased from the prior quarter. This solid capital position, coupled with a robust credit reserves puts our CET, one plus ACL loss absorbing capacity in the top quartile of the peer group turning to slide seven average loan balances increased 0.8% quarter over quarter.
Order or three 1% annualized driven by commercial loans, which increased by $772 million or 1.1% from the prior quarter.
Primary components of this commercial growth included distribution finance, which increased $464 million.
Asset finance increased by $234 million.
Is this banking increased by $160 million auto floor plan increased by $175 million offsetting this growth CRE balances were lower by $340 million in consumer growth continues to be led by residential mortgage which increased by $438 million and RV marine.
<unk>, which increased by $112 million, partially offsetting this growth were lower auto loan balances, which declined by $318 million turning to slide eight as noted we continued to deliver ending deposit growth in the second quarter balances were higher by $2 $7 billion, primarily driven by consume.
<unk> with commercial balances up modestly on a year over year basis, ending deposits increased by $2 $6 billion or 1.8% turning to slide nine we saw sustained growth in deposit balances throughout the second quarter on a monthly basis total deposit average balances expanded sequentially.
Italy for April May and June with June 30th ending balances above the June monthly average, providing a strong start point as we enter Q3 within consumer deposits. We have now seen average balances increase for seven months in a row within commercial average monthly deposits were stable over the course.
For the second quarter.
Turning to slide 10, I want to share more details on our noninterest bearing deposits.
Overall, the $33 billion of these deposits represent 23% of total balances and are well diversified across consumer business and commercial banking.
The ongoing mix shift we have seen from noninterest bearing over the past two quarters has been in line with our expectations and consistent with what we saw in the last cycle.
We expect this mix shift trend to moderate and then stabilize in 2020 for this.
This trend is reflected in our total deposit beta guidance.
Onto slide 11.
For the quarter net interest income decreased by $61 million or four 3% to $1.357 billion driven by lower sequential net interest margin.
On a year over year basis, NII increased $90 million or seven 1%, we continue to benefit significantly from our asset sensitivity and the expansion of margins that has occurred throughout this cycle reconciling the change in NIM from the prior quarter, we saw a reduction of 29 basis.
Points on both a GAAP and core basis, excluding accretion.
During Q2, we maintained an elevated cash balance relative to Q1, which impacted NIM, even as it had a relatively minor actual cash economic cost.
On a comparative basis normalizing for cash levels, NIM was 3.17% for the quarter or a 21 basis point decline from the prior quarter.
The biggest drivers of the lower NIM quarter over quarter, where higher funding costs, partially offset by increased earning asset yields.
We continue to analyze multiple potential interest rate scenarios as we forecast expected trends over the remainder of 2023 and into 'twenty to 'twenty four.
The two primary scenarios. We incorporate include one which is represented by the forward yield curve and another which assumes rates stayed higher for longer and and 2024, approximately 75 basis points higher than the forward.
We think this is the most likely range for short term rates over the next six quarters base.
Based on this range, we anticipate net interest margin of approximately 3% by Q4, plus or minus a few basis points. This would equate.
Wait to core net interest income on a dollar basis for the fourth quarter to be down approximately 1% to 2% from Q2 levels.
As we look out further into 'twenty 'twenty four clearly the trends will depend on both those interest rate scenarios and what is happening with the broader economy and industry factors, including loan demand and deposit growth.
That said our modeling indicates NIM outlooks are stable to rising during 'twenty, 'twenty, four which coupled with earning asset growth is expected to drive net interest income dollar expansion as we move through 2024.
Turning to slide 12 cost of deposits moved higher in the quarter to 1.57%.
Our cumulative beta through Q2 is 32% up seven percentage points from the prior quarter in line with our expectations and prior guidance.
As I mentioned, we continue to expect cumulative deposit beta of approximately 40%.
Turning to slide 13 on the Securities portfolio, we saw another step up in reported yields quarter over quarter, we did not reinvest cash flows from securities in the second quarter as we allowed those proceeds remain in cash given the attractive short term rates cash.
Cash and securities balances on average increased by $5 billion from the prior quarter as we maintained higher cash levels in the quarter.
As of June 30th on an ending basis cash and securities totaled $52 billion, representing a more normalized level as we go forward into Q3.
Turning to slide 14, our contingent liquidity continues to be robust our two primary sources of liquidity cash and borrowing capacity at the F. H L. B and federal reserve represented $11 billion and $77 billion, respectively. At the end of Q2 at quarter end this pool of available liquidity.
Presented 205% of total uninsured deposits a peer leading coverage.
Turning to slide 15, our hedging program is dynamic continually optimized and well diversified our objectives are to protect capital and operate scenarios and protect NIM in down rate scenarios.
During the quarter, we further expanded our pay fixed swaps <unk> hedge position to protect capital from tail risk in substantive upgrade scenarios.
There was a modest upfront premium associated with the swaption and the hedges result, and a mark to market each quarter as they are deemed economic hedges.
On the subsequent slide you will see that positive impact during the second quarter on our fee revenues.
We also remain focused on our objective of managing NIM to protect the downside and have maintained additional upside NIM opportunity given our asset sensitivity the interest rate movements in the first few weeks of Q3 have provided opportunities for additional attractive hedging we.
We have incrementally added modest additional exposures to both our capital protection and NIM protection hedge portfolios and will remain dynamic as we go throughout the quarter if further opportunities arise.
Moving onto slide 16 now.
Noninterest income was $495 million for the second quarter, excluding notable items fees increased $40 million, including a $18 million benefit from the positive mark to market on the pay fix swap shins, excluding this benefit underlying fee income would've been $477 million.
We saw solid performance in our key areas of strategic focus including payments and wealth management.
Capital markets revenues declined by $2 million from the prior quarter, however, increased by $3 million year over year.
Clearly the events of March and the U S debt ceiling debate caused a fairly challenging capital markets environment. In Q2, However, pipelines remain solid and there are encouraging signs pointing to opportunity in the back half of the year moving onto slide 17.
GAAP noninterest expense decreased by $36 million adjusted for notable items in the prior quarter core expenses increased by $6 million driven by a full quarter effect of annual merit increases and higher marketing spend we entered the year with a posture of managing core expense growth to a very.
Low level, given the economic backdrop.
We developed and executed a series of proactive actions to reduce expense run rates, including the voluntary retirement program organizational alignment and our continued implementation of long term efficiency programs, such as branch optimization and operation accelerate.
We continually calibrate the level of expense growth to revenues and we're taking additional actions to further manage the pace of expense growth even as we remain focused on self funding investments in our key growth initiatives.
We're actively working on the next set of medium term efficiency opportunities, including business process outsourcing, which represents a promising lever for us to continue to deliver a low level of expense growth into 2024.
Slide 18, recaps our capital position.
Common equity tier one increased to 9.82%.
And has increased sequentially for four quarters.
OCI impacts to common equity tier one resulted in an adjusted CET one ratio of 8.12%.
Our tangible common equity ratio or TCE increased three basis points to 580%.
Q2, ending cash levels were higher than Q1, and which impacted the TCE ratio by two basis points.
Adjusting for a OCI, our TCE ratio was 7.45%.
Our capital management strategy 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 very high end of our target operating range of 9% to 10%.
Adjusting for a OCI, we expect adjusted CET one to be in the approximately mid eights range by year end.
On slide 19 credit quality continues to perform very well.
As mentioned net charge offs were 16 basis points for the quarter.
This was lower than last quarter by three basis points on a year over year basis charge offs were up 13 basis points from the prior year's historic low level.
Nonperforming assets declined from the previous quarter and have reduced for eight consecutive quarters.
Allowance for credit losses is higher by three basis points to 1.93% of total loans.
On slide 20, we continue to be below our target range of net charge offs through the cycle of 25 to 45 basis points and our ACL coverage ratio is among the highest in our peer group.
Let's turn to our 2023 outlook on slide 21.
As I noted, we analyze multiple potential scenarios to project financial performance and developed management action plans.
Our guidance is informed by the interest rate scenarios I discussed previously and the consensus economic outlook.
On loans, our outlook is 5% to 6%.
Consistent with our prior expectations to be near the lower end of our prior range.
On deposits, we maintain our outlook of 1% to 3% growth for the full year.
Core net interest income X P. A a N P. P. P is expected to grow between three and 5% inclusive of our expectations for deposit beta and loan growth.
Non interest income on a core full year basis is expected to be down 2% to 4%. This range reflects the results from capital markets. We've already seen in Q2, and the assumption of gradual improvement in activities throughout the balance of the year.
The remainder of our fee businesses are tracking very well to our prior expectations.
On expenses as noted we are proactively managing with a posture to keep underlying core expense growth at a very low level and calibrated to revenue growth.
For the full year, we expect core underlying expense growth between one and 2%.
The incremental expenses from the full year run rate of capstone in Toronto of approximately $50 million and the two basis point increase in 2023, FDIC insurance rates of approximately $30 million and finally, given the strong results posted during the first half of the year, we now expect full year net.
Charge offs to be between 20 to 30 basis points with that we will conclude our prepared remarks and move to Q&A Tim over to you. Thanks, Zack operator, we will now take questions. We ask that as a courtesy of 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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Our first question comes from the line.
With Morgan Stanley . Please proceed with your question.
Hi, good morning.
Right.
Right.
And I wanted to dig into your comments on that.
Our NIM being stable to rising in 2024 under the two scenarios that you outlined for red.
Can you expand on some of the moving parts in there, especially in the higher for longer scenario, I guess would that would that put more pressure on NII than the forward curve scenario with a with higher deposit betas or do I have that wrong.
On the payment offices.
Thanks for the question.
Yes.
The outlook that we're seeing is.
It's really consistent with both of those scenarios.
In the us and are higher for longer scenario that sort of the top end of that range, we would benefit from asset sensitivity asset yields will continue to rise likely there would be a continuation.
Extending out.
The liability pricing cycle, but the net of those two things and do you expect to actually be higher.
Given the asset sensitivity.
Consistent with what we discussed.
At the lower end of the scenario.
The faster Bluffton.
Deposit pricing cycles, but also some.
Less increase in asset pricing.
Likewise puts us, albeit maybe a few basis points lower than that so generally priorities for us.
Robert it's higher than I would note as well that during the course of 'twenty four we will benefit from the shifting from a negative carry on our gallery hedging program to much more neutral position by the end of the year, so that'll be a support for NIM trajectory.
24.
Got it.
And then separately.
Just on regulation overall, I know you noted that the new requirements seem to be broadly coming in in line with expectations, but maybe if you can dig into how you're managing ahead of that I know Youll keybanc.
Oh, you're building capital levels from here, you're holding a higher level of.
Cash and reinvesting in it security is so.
Maybe can you expand on where you expect regulation to go, especially as it relates to.
The AUC I opt out as well as well as L. P. R.
Sure.
As you know we arent planned.
Landfill anticipatory of wherever you think things are going to manage it.
No.
The most macro level, we do think we'll be able to.
Relatively expediently recipes.
Potential deregulation and frankly over time offset a lot of other IC essentially cutting back some of them.
Digging it specifically.
Our working assumption.
Salary solution.
The OCI.
You reported.
We removed.
It's our plan to continue to manage our capital higher to CGI inclusive of ACI higher.
Yes.
The mid teens range.
Q3, and if we continue on with the same operating posture.
Before.
We would expect.
That ratio to approach, 9%, so it should get to 9% by the end of 2024 also back to essentially the low end of our operating earnings basis.
Also actively looking at the Basel III potential new arguably way changes as you know well there are three big changes in their review of the trading book.
Especially material for us given our business mix, there's operational risk.
Requirements, which likely will be increasing our largest geography we.
We see a slightly higher.
However, offsetting that.
Risks.
Which are more nuanced smart buyer assumed.
Thats, our lower believed for Huntington, it's still early days.
Our analysis to go but we see offsetting factors theyre unclear, whether there'll be an impact from that.
Offsetting.
Relates to other.
Regulatory focuses like liquidity like potential long term debt Likewise, we're monitoring and we think we can.
It's actually relatively small.
Over time, how do you double click on that for the questions.
Great. Thank you.
Okay.
Thank you. Our next question comes from the line of Matt O'connor with Deutsche Bank. Please proceed with your question.
Good morning.
And that was all from some of your peers is a pullback in lending.
As they look to build capital and alleviation of funding pressure on.
On the flip side, obviously, you've got very strong capital liquidity as you highlighted by reserves and just wondering how you're thinking about how you can play offense.
With that I'll pull back by EMEA up there.
It's a great question Matt.
You would actually look at our FX issues.
Really seize the opportunities.
Lastly, great business.
Companies when the operators are strictly can.
Meaningful and three market share, we're cognizant of that we're balancing that and clearly with two factors one the desire to probably grow loans, which also drive capitalized interest.
Prior.
Question, So we're actively modulating low growth.
Bring it out to a 10% run rate.
5% to one 3% Q2 people be more like 1%, probably the back half of the year.
We're also very much looking at how we could potentially optimize the balance sheet and drive higher returns.
Yes.
That being said we are.
You saw us higher.
Yes, Jim.
She is a great business line for us brings liquidity.
Great customer quality there.
We are continuing to load.
Pockets of strong growth, even as we optimize for those clients.
So the drag on margins.
And to your point there are equal some truths.
And then I guess just following up on the lending side I mean, everything we can track it seems like auto spreads are at or near highs Boyd Fraser is commercial spreads have widened.
So why isn't there a leaning into that.
Or is it just that the demand is not there at this point.
I think there are continues to be pockets of demand.
And great clients and we've got a very strong customer support.
As well two points.
Yields are strong.
That being said clearly.
<unk> costs were also rising in funding.
Funding costs are also clients or warehousing will seasonally be fixed prudish.
Driving higher yields that you would say really feel encouraged by what we're seeing on the asset yield side.
The logged rated asset categories like mortgage and auto really benefiting between 10 and 20 bps on the.
On the portfolio.
For for some time to come really sustaining that twice going forward beyond this year.
Talking about the previous question.
Even as it gets to be optimized to swell solar capitals.
Matt.
I think it's fair to say, we're being a little cautious until we know the outcome of regulatory suggested reforms.
As well.
There's more opportunity.
We will avail ourselves once we know what the rules are.
In the past.
Physicians that we need to have.
Going forward.
Yeah fair enough. Thank you.
Thank you.
Thank you. Our next question comes from the line of Steven Alexopoulos with Jpmorgan. Please proceed with your question.
Hey, good morning, everyone.
Good morning.
So that's the commentary you gave about getting down to about 3% by the fourth quarter's helpful. I'd imagine once we move beyond that because it sounds like most of the mix shift out of noninterest bearing will be done, it's really going to be that incremental NIM, that's going to decide where do we go from there what is the spot NIM today.
Right.
Incremental loans incremental deposits, just how does that compare to that 3% level.
It's still it's still higher than that.
For the quarter adjusted for cash levels that work right now.
Now in the third quarter the second quarter.
<unk>.
So what we're seeing at the margin is continued.
A modest decline.
Of course, the balance of this year from roughly 17 normalized Q2 run rate jobs.
3% by the end of the year.
I agree with your point, which is as you get.
Into the early part.
Next year, you'll have a lot of the major trend circumstance was really about.
Incremental fundamentally what the underlying is.
Actually there'll be some potential continued trend is currently part of 'twenty four.
I would also note that.
During 2004.
The reduction in the negative tariff patches.
Throughout the course of the year.
Right, but some tailwind there okay and then.
<unk>.
For Steve So the equity market seems to be coming around to this possibility of this off later thing I'm curious when you talk to your customers. What are you hearing are they coming around to this both lending and maybe a little more optimistic what are you hearing.
Steve I would say our customers generally are having a good year unexpected close out a good year.
They're working on their margins.
Yes, the expenses.
Inflation seems to be a big change in better shape.
You have clear line of sight.
This is Sam.
Yes.
They're optimistic that 'twenty four and beyond generally so this would suggest.
At worst case law.
Randy.
Potentially the ability to avoid a recession.
In the Midwest.
So economic activity announcements.
Investments targeted growth so so.
We're in a good.
A good position.
In the regions.
And we had significant activity going on.
I think we'll see particularly your Ohio.
This year.
Okay. Thanks for all the color.
Okay.
Thank you. Our next question comes from the line.
Ebrahim <unk> with Bank of America. Please proceed with your question.
Hey, good morning.
Just wanted to go.
Spent some time on the expense outlook I think you've done a lot of work year to date. They predict accurately that you talk about and Jack I think you said the goal is to keep expense growth lower for next year.
Give us a sense of the size of the PPO opportunity that you've talked about and how do you think about positive operating leverage going into next year, given and I grow it.
We'll likely be tough.
But for all of that.
Yes.
Great Great question. Thanks.
Yes.
Breaking the overall cost of it is very much to keep operating expenses as a very low level not only this year, but next year, we've been trying to be very proactive in setting up those programs and implement them effectively and that has been built over time.
PPO opportunity.
This is something that we have leveraged overtime for awhile and continually looking at from a strategic perspective, what functions that we really believe must be owensboro English critical value for them beyond that Huntington versus those that we can benefit from the scale and capabilities to partner.
More and more.
First there are incremental opportunities are relatively modest in terms of size this year.
But building over time and I think.
Part of the portfolio efficiency programs that will support that low level is for <unk>.
Five.
So.
That's encouraging.
Again part of the portfolio of programs with some of your acreage.
So we will see.
Sorry.
<unk>.
Our positive operating leverage.
Total loss, it's a core tenet of our operating plan is one of the three major financial targets, we set for ourselves.
Very seriously.
<unk>.
The company for the medium term.
Volume and want to make sure that we're not doing anything in the short term damage that launch trajectory too early to say what 24 will look like.
You clearly have a grow over on revenue.
It will pressure revenue growth.
But we're also very interested in some of the opportunities for sensors.
Let me give guidance its moments so that gets us within the range.
Florida.
And if I could add Steve.
He is also working on.
A longer term project collaboration accelerate we shared that at Investor day.
Changing our procedures and digitizing substantially.
That side of the day that is doing very well it's on track it's multiyear.
That will help us with those efficiencies.
And customer sat.
Zach is.
Focus.
Branches.
A voluntary retirement program.
Disruption.
Segments.
<unk>.
Some of the business units.
During the course of the year.
Let me now.
PPL has entered into a very healthy level focus of activity on the expense side.
Understood and.
Any updated thoughts Steve.
You talked about building capital, but at the same time, you've talked about fee revenue opportunities doing some targeted M&A. Thank you done in the past any thoughts then.
<unk> Kennedy said attractive for you to do anything.
Our focus as you know is always to grow the business, we've got a lot of opportunity to do that.
And as the.
Regulatory expectations around capital.
Got it got established.
I think it would have been a very strong position to totally independent.
In an even more robust fashion.
We're trying to get positioned for that.
Yes, Matt as you saw last year, there are businesses that were attractive I suspect we'll find them.
So the additional ones at some point in the future.
We believe we've got a lot of opportunity if he had been stuffing pressing in terms of.
Pushing.
Yep.
We're needing to push for M&A now.
We're very very focused on driving the quarter.
Thank you.
Okay.
Thank you. Our next question comes from the line of Scot Ciccarelli with Piper Sandler. Please proceed with your question.
Good morning, everyone. Thanks for taking them.
Hey, Steve is active.
Conceptually, maybe when you think about that 40% Q beta maybe just a thought or two on the major puts and takes when when do you think about that being the right number for you. All you guys are in a very competitive market, but I think it's clear within like the last month or so, especially that the deposit flows are are there so I'm.
I'm just.
Just curious what youre, what youre seeing in terms of competitive dynamic in what what sort of makes that the right number to land on it.
Jeff This is Scott I'll take that one.
We all of the trends and forecasts that we're creating as I noted in the prepared remarks.
Pretty rigorous multiple scenarios underlying that continued to corroborate that.
Feel like that's a good forecast as always I always know the best forecast, we thought we will share an update one of if ever that come to pass, but our focus has been pretty stable around that level for a while.
And thus the underlying monthly trends between Robert.
Just double clicking into the drivers I would say the one what we're seeing.
Continued modest rise in deposit costs, but whatever the decelerating rates just like you would expect it to be we saw a big trend.
<unk> percent in Q1, 7% in Q2, it will be less of that beyond Q3, clearly and then topping Q4 plus.
Just wanted to sort of see a declining trend.
<unk>.
The other thing is the mix shift from noninterest bearing into interest bearing.
Great fairly well like we would expect it to cycle and that pipeline is decelerating and most of that mix shift that's happening at this point.
And we're already seeing signs.
Ken kind of buildup in corroborate that.
<unk>.
On the competition side.
Environment, but to your point.
The deposits are there.
You can see what the.
Encouraging it's very rational.
I think that given.
Decelerating loan growth throughout the industry and for us.
That's the kind of the <unk>.
Gaped out pressure versus allowing us to manage pretty well here.
So.
Overall.
The rate forecast.
Alright, perfect and that that's all I have thank you very much.
Thanks Scott.
Thank you. Our next question comes from the line of Erika Najarian.
With UBS. Please proceed with your question.
Hi, good morning.
My first question.
Hum.
Got it.
All right.
Right.
That's correct yes.
To me it gives us a lot of your peers gave it on interest bearing I just wanted to make sure of that.
I did that when Scott was asking that question and I have my real question.
I think the market rally.
<unk> expansion.
Trust income outlook yeah.
Could you tell us about.
About the elasticity of deposit betas on.
On the way down.
I think the point earlier that there are a lot of them that theyre thinking about rates.
Sure.
And.
Wondering how much power to do that.
Likewise if rates.
I level first of all.
Oh Wow.
Yes terrific questions also on top of it.
Lots of mind share with us.
Obviously as we penetrate all the way out quite a few adjustments for growth on the way down so very much.
In Washington.
I think you'll see liquidity a function of what segments, you're in which segment youre looking at on the commercial side.
So generally higher.
Compared to this focus and a priority agreements between us and our thoughts around how it will trend that will trend lower.
I think we're pretty.
We're confident we'll drive that.
Very similar metrics.
Went up I think.
Many of the others are very rationally priced items like that in the middle market and business banking will likewise.
Pretty fast as rates.
Decline.
Okay.
Most of the categories in which we can draw any consumer there are some time dimension to them, which will help to manage those types of outputs against the playbook, there as well and I think we feel quite good about the ability to bring that down.
The overall acquisition consumer side could be a function of what's going on in the economy at that point.
Forward at that point.
But all of those playbooks in fluids.
Our ability to do that pretty well.
Got it and just as a follow up to that if I may you know you are holding a lot of cash and you know obviously.
Yes.
There's not a lot of motivation to deploy that again as we think about next year and in the same scenarios, you're still going to be earning a lot of your cash on your attachment per cent that's great.
Hi, Bonnie.
And I guess outside of better loan growth.
What would be the factors for you to normalize that normalizing that that cash.
Oh, that's what hopefully at or do you feel like with all the liquidity.
Well its down the pipe minus I'll just hold it there for now since Youre getting Patriot anyway.
No.
I think that the level that we're running out for cash right now so around two 9 billion. This is the right level for the company given liquidity requirements. So I think were for general.
What we think is the right level.
Always tuning up the margin for how we're incrementally funding.
Tuning the short term.
But you will be borrowing for cash level.
But I think for the most part that cash level is right sized right now.
Within the securities portfolio broadly will continue to see the trend.
Moderately lower duration sequentially as we've been doing frankly, a philosophy for us.
And.
Yes.
And just continuing to preference.
Yes.
Thank you.
Okay.
Thank you, ladies and gentlemen, as a reminder, if you'd like to join the questions. Please press star one on your telephone.
Our next question comes from the line of Ken.
Jefferies. Please proceed with your peers.
Hey, Thanks, good morning, guys.
Exactly.
A follow up on.
NII 24 comments and you talked about earning asset growth and I'm just I'm just wondering if your balance sheet, it's been elevated this quarter.
A good amount and well I guess are you expecting as you look out further that deposit growth will continue to carry the overall balance sheet side forward and kind of I guess, how do you think about the wholesale funding for part of the equation as a balancing act in that.
Terrific question broadly speaking the answer is yes.
I believe that we will.
Great loan growth in.
In line with deposit growth for the most part.
That's what we'll see here in the back half of this year, that's my expectation for the fourth.
Q4 as well.
Pretty stable if not slightly lower.
Relative to cost ratio year over the next couple of quarters.
Fundamentally that match funding.
Should we can message is one of those fundamental underlying factors allows us to manage that.
The marginal margin.
On the loan side.
Earlier, so it's an important dynamic.
The good thing.
With this in the past is that we're coming to the cycle operating say three quarters of the meetings with.
With a pretty favorable position, where we saw obviously attractive loan opportunities you could impact our fund them with non customer source of funding and increased loan to deposit ratio.
The default position for now.
Getting loans and deposits growing at a pretty similar rate.
It's quite healthy and a good analysis.
Okay and a follow up can you help us understand how the.
Benefits from the security swaps look this quarter and then as you go forward into next year, just your loan hedges does that become a part of the benefit next year in terms of getting that NII.
Starting to move the right way thanks.
It's a great question, Kevin let me elaborate on that.
No.
Up through the early part of <unk>.
Q3 inclusive activities of dosing the first few weeks of this quarter.
Around $29 billion.
Downgrade hedge protection through.
Receive fixed swaps throughout 'twenty $122 billion Scott.
Awesome floor spreads, which pay off under down rate scenarios, and then portfolio callers, which was the option to enter into receive fixed swaps in the future.
We will.
Great and any trends there generally with respect to so it's a pretty powerful portfolio is fully staffed now and even more than will be extent over the coming six to.
12 months as we enter into those collared basis, our CPI swaps.
The impact obviously the biggest challenge in January hedging right now.
Inverted yield curve and budget with a fairly steep decline already forecasted you got us some pretty dire downgrade scenarios to convince yourself that makes us incrementally and you'll receive fixed right now given the negative carry right now.
What we thought we are experiencing in the field now it's small it's about 15 basis points.
Negative net drag from the receive fixed that we're already in and that will do to essentially zero by the end of 2024, if you follow up the forward yield curve scenarios.
115 basis points of tailwind and we should see in between now and the end of 'twenty four.
<unk> clawback throughout that period.
Got it very helpful. Thank you.
Yeah.
Thank you. Our next question comes from the line of John <unk> with RBC capital markets. Please proceed with your question.
Thanks, Good morning, guys.
Yes.
A couple of credit questions.
First of all congratulations congratulations rich on your retirement.
Done a great job and I've enjoyed your perspective on these calls.
Commercial real estate and consumer question. So on commercial real estate. How far ahead can you guys look in terms of identifying future issues I know, it's been a focus for you guys to tightened things up.
But curious what you're doing now and it obviously looks very clean, but you have a fair amount of reserves allocated to the business and that's kind of why I ask.
Yes.
We're looking we're focused primarily right now on the 2023 and 2024 impacts and it's really hard to look much further beyond that so.
We're doing quarterly portfolio reviews and office, we're touching our real estate book every month I think we probably got through 90% of the loans over $5 million of that book.
This point, but the focus is on 'twenty three 'twenty four and managing what we can control and that really relates to the maturities and then particularly with respect to office.
Lease rollovers that might be impacting cash flow this year and next.
So that's the primary focus beyond that it's tough.
You mentioned, the 9% reserve, we've got again softness we've got a three 4% reserve against the overall credit book, we feel for what we know right now both of those are adequate.
We'll continue to look at those on a.
Quarter by quarter basis.
Okay.
John Bridges also.
Getting luxury balanced.
Wherever there appear to be issues, they're proactive efforts to drive guest.
To get those addressed.
As far as collateral relations also.
Yes.
Okay.
The primary focus in 'twenty three 'twenty four.
But there's also.
Along with you.
Portfolio over the next decade.
These flow and other related issues all of which are.
We're actively managing that we've been doing that for over a year and trying.
Trying to stay well ahead of.
Any issues.
Sure.
Wilson.
Really good shape.
It seems that way okay.
And then on consumer I look at this every quarter just your non accruals and charge offs and it's just kind of it's nothing really.
Maybe it goes to the soft landing comments, but if you look at RV and marine consumer categories delinquencies really haven't budged.
Are you seeing anything in consumer health.
Bothers you at all.
Because it just these numbers are really really good.
No the numbers are really good.
It goes.
Client selection.
Focus that we've got.
Prime Super Prime if you look across the entire consumer spectrum, there's really nothing in there that would lead you to believe that we're going to have anything more than just a thought.
Gradual return to what might be more normalized levels of charge offs because right now look to your point are extremely low.
The only area that I would.
As pointed out a little bit relatively higher stress than than the rest of the book the CLEC business because of the floating rate nature of that portfolio.
Retail is a little higher level of delinquencies than you might see.
Cost of the book.
The analysis that we've done from.
From a vintage standpoint on that book show that we're about 55% to 60% loan to value range. So even though we might see higher levels of delinquency, we don't think the losses.
The housing markets generally tight where we are John .
If someone has an unemployment is very well so if someone has an issue isn't the best resolution some properties.
Unlike what we might've seen in Ohio.
Yes.
Just to give rich a little credit here and the recognition.
Yes.
Leave it at.
In effort to outperform our peers for over a decade.
Moderate to low risk profile and he has been very very disciplined about that and we expect to outperform through the cycle and we've been sharing that all along.
At this point.
We're looking really good.
<unk>.
Attributed to almost all of those discussions and Rich's leadership.
I agree.
But I was thinking you could give him a fishing boat and RV out of the foreclosure pool.
Okay is there anything to do.
Sure.
Yes.
Thanks, so much.
Yes.
Looking at my watch.
So model posters, we pulled our route.
Right.
Just two quick cleanups for us actually.
60 million to $50 million on the Capstone Toronto.
Drove that I know, it's small $10 million, but what's happened there.
Julien that's reflective.
The cost that we see in that previously.
Previous 6 million. This was mainly capstone and has a factor.
Production in revenue that flowed through into compensation expense and so when the capital markets revenues were a bit softer in the second quarter and our outlook is somewhat lower than especially budgeted into the back half of the year. So probably just less closer to less complex and that's basically it.
Okay, and then the $30 million FDIC, that's all in the third quarter is that correct.
Let me clarify that is really important.
The expenses that we talked about in that guidance is at two basis points higher assessments that is being assessed across the industry and that was known.
Late last year, and it's coming through every quarter, it's not as a special assessment, that's still being discussed okay. Okay. Thank you I appreciate that.
Thank you ladies and gentlemen, this concludes our question and answer session I'll turn the floor back to Mr. Steiner for any final comments well. Thank you very much for joining US today, we're very pleased with our second quarter results as we dynamically manage during this.
Unique environment.
You heard we're very well positioned to times such as these with strong credit quality, improving capital ratios and ROE.
Lots of liquidity the deposit book in particular is granular in nature has served us very very well so far.
Efforts to provide customer service and generate great satisfaction over the years now we have a team of disciplined operators and we are executing on our strategy that we outlined last year at our Investor day, which Dubai are driving value for our shareholders and just as a reminder, the board executives our colleagues were all top 10 shareholders.
Yeah.
Collectively so that reflects a strong alignment with the shareholders and I think youre seeing the benefits of that to our results. So thank you for your support and interest in Huntington and have a great day.
Thank you. This concludes today's conference call you may disconnect. Your lines at this time. Thank you for your participation.