Q3 2023 Huntington Bancshares Inc Earnings Call
Speaker 1: Greetings, welcome to the Huntington Bank shares third quarter earnings call. At this time all participants are in listen-only mode. A question and answer session will...
Greetings and welcome to the Huntington Bancshares third quarter earnings call. At this time, all participants are in listen only mode.
A question and answer session will follow the formal presentation.
Speaker 1: If anyone should acquire Operator Systems during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
This conference is being recorded.
Speaker 1: At this time, I would now like to turn the conference over to your host, Tim Sadaveris, Director of Investor Relations.
At this time I would now like to turn the conference over to your host Tim <unk> director of Investor Relations.
Speaker 2: Thank you, operator. Welcome everyone and good morning. Copies of the slides we will be reviewing today can be found on the investor relations section of our website, www.huntington.com.
Thank you operator, welcome everyone and good morning.
Copies of the slides, we'll be reviewing today can be found on the Investor Relations section of our website Www Dot Huntington Dot com is.
Speaker 2: As a reminder, this call is being recorded and a replay will be available starting about one hour from the close of the call.
As a reminder, this call is being recorded and a replay will be available starting about one hour from the close of the call.
Speaker 2: Our presenters today are Steve Steinauer, Chairman, President and CEO , and Zach Wasserman, Chief Financial Officer.
Our presenters today are Steve Stein, our chairman, President and CEO , Zach Wasserman, Chief Financial Officer.
Speaker 2: Rich Poli, Chief Credit Officer, and Brennan Lawler, Deputy 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.
Rich Pohle, Chief Credit Officer, and Brian Lawlor, Deputy 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.
Let me now turn it over to Steve.
Speaker 3: Thanks, Tim. Good morning, everyone, and welcome. Thank you for joining the call today.
Thanks, Tim Good morning, everyone and welcome. Thank you for joining the call today.
Speaker 3: We're pleased to announce our third quarter results, which Zach will detail later. Our approach to both our colleagues and customers continues to be grounded in our purpose. Our colleagues again demonstrated that we make people's lives better, help businesses thrive, and strengthen the communities we serve. Now on to slide four. There are five key messages we want to leave you with today. First, Huntington is extraordinarily well positioned to manage through the evolving landscape for Bay.
We're pleased to announce our third quarter results, which Jack will detail later, our approach to both our colleagues and customers continues to be grounded in our purpose. Our colleagues again demonstrated that we make people's lives better help businesses thrive and strengthen the communities. We serve now onto slide four there are five key messages, we want to leave you with today.
Huntington is extraordinarily well positioned to manage through the evolving landscape for banks.
Speaker 3: The near-term environment includes higher for longer interest rates and uncertain economic outlook, expected new capital regulations, as well as heightened regulatory requirements.
The near term environment includes higher for longer interest rates and uncertain economic outlook expected, new capital regulations as well as heightened regulatory requirements.
Speaker 3: Huntington operates in this dynamic period from a position of substantial strength. Our balance sheet and risk profile were intentionally built over more than a decade, explicitly for these times. Our market position, digital leadership, and momentum in core growth strategies put us in the top of the peer set. We intend to lean into this position of strength to drive incremental growth through existing and new capabilities.
And it's and operates in this dynamic period from a position of substantial strength.
Our balance sheet and risk profile, we're intentionally built over more than a decade explicitly for these times our market position digital leadership and momentum in core growth strategies put us in the top of the peer set we intend to lean into this position of strength to drive incremental growth through existing and new capabilities.
Speaker 3: Second, we've managed top quartile CET1 inclusive of AOCI. We will continue to drive additional capital expansion for the remainder of this year and over the course of 2024. Third, we benefit from a cultivated granular deposit franchise and have delivered consistent core deposit growth.
Second we've managed top quartile CET, one inclusive of a L C I.
We will continue to drive additional capital expansion for the remainder of this year and over the course of 'twenty 'twenty four third we benefit from a cultivated granular deposit franchise and have delivered consistent core deposit growth our balance deposit base forms the foundation of a robust liquidity framework that has been a driving factor in our well man.
Speaker 3: Our balanced deposit base forms the foundation of our robust liquidity framework and has been a driving factor in our well-managed beta over the rate cycle today. Fourth, credit quality remains strong across our portfolios, driven by our disciplined customer selection, underwriting, and rigorous portfolio management. This approach is unwavering, starting with our tone at the top as we maintain our aggregate moderate to low risk appetite.
<unk> beta over the rate cycle today fourth credit quality remains strong across our portfolio driven by our disciplined customer selection underwriting and rigorous portfolio management. This approach is unwavering starting with our tone at the top as we maintain our aggregate moderate to low risk appetite.
Speaker 3: Finally, we remain intently focused on our core strategy.
Finally, we remain intently focused on our core strategy, we are executing with discipline, while expanding with existing and new capabilities to support our long term growth and very importantly, we have remained steadfast in our commitment to drive operating efficiency over time with continued execution, our proactive expense management programs.
Speaker 3: We are executing with discipline while expanding with existing and new capabilities to support our long-term growth. And very importantly, we are remaining steadfast in our commitment to drive operating efficiency over time.
Speaker 3: with continued execution of proactive expense management programs. We expect a level of uncertainty in the near term and some level of higher expenses to manage through the realities of the current operating environment. However, these investments will also be accompanied by sustained revenue growth and the net result will be a hunting tin that continues to be a strong regional bank with significant growth opportunities ahead.
We expect the level of uncertainty in the near term and some level of higher expenses to manage through the realities of the current operating environment. However, these investments will also be accompanied by sustained revenue growth and the net result will be a huntington that continues to be a strong regional bank with significant growth opportunities ahead.
Speaker 3: I will move us on to slide five to further illustrate our position of strength. Our adjusted CET-1 ratio is strong and near the top of the peer group. We intend to drive this ratio higher throughout this year and 2024.
We'll move us on to slide five to further illustrate our position of strength, our adjusted CET. One ratio is strong and near the top of the peer group, we intend to drive this ratio higher throughout this year in 'twenty 'twenty four.
Speaker 3: This plan extends our position of strength, supports continued execution of court growth strategies, and puts us well ahead of the proposed Basel 3N game and other requirements. Deposit growth has also outperformed our peers by nearly 10 percentage points since the end of 2021. We've built one of the most granular deposit bases with a leading, insured deposit percentage, and we continue to drive the expansion of primary bank customer relations.
This plan extends our position of strength that supports continued execution of our core growth strategies and puts US well ahead of the proposed Basel III end game and other requirements deposit growth has also outperformed our peers by nearly 10 percentage points since the end of 2021 we've.
We built one of the most granular deposit bases with a leading insured deposit percentage.
And we continued to drive the expansion of primary bank customer relationships.
Speaker 3: Our liquidity is best in class for coverage of uninsured deposits, representing nearly twice the level of peers, and we already meet the liquidity coverage ratio on an unmodified base.
Liquidity is best in class for coverage of uninsured deposits, representing nearly twice the level of peers and we already meet the liquidity coverage ratio on an unmodified basis credit metrics are also a differentiator for Huntington with top quartile net charge offs compared to peers and our credit reserves are top tier.
Speaker 3: Credit metrics are also a differentiator for Huntington. With top quartile and the charge offs compared to peers, and our credit reserves are top tier.
Speaker 3: Our management team has a long track record of disciplined execution. For example, we were recently named the number one SBA lender nationally for the sixth consecutive year, and we continue to expand the reach of this business and our support of access to capital for small businesses.
Our management team has a long track record of disciplined execution. For example, we were recently named the number one SBA lender nationally for the sixth consecutive year and we continue to expand the reach of this business and our support of access to capital for small businesses interest rates continue on a path towards the higher for longer scenario, which we've been anticipating.
Speaker 3: Interest rates continue on a path towards the higher for longer scenario, which we've been anticipating for some time. As rates remain higher, the potential for economic activity to be negatively impact it has increased. However, thus far in the cycle, overall our customers are effectively managing through it. We remain highly vigilant and are proactively managing all loan portfolio.
Supporting for some time as rates remained higher the potential for economic activity to be negatively impacted has increased.
However, thus far in the cycle overall, our customers are effectively managing through it we remain highly vigilant and are proactively managing all loan portfolios.
Speaker 3: Our top-tier credit reserves and expanding capital support our approach to be front-footed to take advantage of opportunities to win new customers and grow our business.
Our top tier credit reserves and expanding capital support our approach to be front footed to take advantage of opportunities to win new customers and grow our businesses Jack over to you to provide more detail on our financial performance. Thanks, Steve and good morning, everyone. Slide six provides highlights of our third quarter results we reported.
Speaker 3: Zach, over to you to provide more detail on our financial.
Speaker 4: Thanks, Steve, and good morning, everyone. Slide 6 provides highlights of our third quarter results. We reported GAP earnings per common share of 35 cents and a just at EPS of 36 cents.
GAAP earnings per common share of 35, and adjusted EPS of <unk> 36 cents. The quarter included $15 million of notable items, which impacted EPS by one penny per common share.
Speaker 4: quarter included $15 million of notable items which impacted EPS by one penny per common share.
Speaker 4: Return on Tangible Common Equity, or ROTCE, came in at 19.5% for the quarter. Adjusted for notable items, ROTCE was 20%.
Return on tangible common equity or R. O T. C. He came in at 19, 5% for the quarter adjusted for notable items. Our TCE was 20% further adjusting for a OCI underlying R. O TCE was 15, 3%.
Speaker 4: Further adjusting for A O C I underlying R O T C E was 15.3
Speaker 4: Avers deposits grew during the quarter, increasing by $2.6 billion or 1.8%. Loan balances decreased by $561 million or 1.5% from Q2. Driven both by seasonality and our continued optimization.
Average deposits grew during the quarter, increasing by $2 $6 billion or 1.8% loan balances decreased by $561 million or one half of 1% from Q2, driven both by seasonality and our continued optimization.
Speaker 4: Nett interest income on a dollar basis expanded quarter of a quarter driven by a rising net interest margin.
Net interest income on a dollar basis expanded quarter over quarter, driven by a rising net interest margin.
Speaker 4: We continue to proactively manage expenses and have begun a new set of incremental actions in the third quarter, including branch consolidation, staffing efficiencies, and corporate real estate consolidation.
We continue to proactively manage expenses and have begun a new set of incremental actions in the third quarter, including branch consolidation staffing efficiencies and corporate real estate consolidations. These actions coupled with our ongoing long term efficiency programs as well as the measures we implemented in Q1 of this year.
Speaker 4: These actions, coupled with our ongoing long-term efficiency programs, as well as the measures we implemented in Q1 of this.
Speaker 4: will help us drive a rigorous baseline expensive efficiency while sustaining capacity for investments in the French.
It will help us drive rigorous baseline expense efficiency, while sustaining capacity for investments in the franchise.
Speaker 4: Credit quality remains strong. With net charge-offs of 24 basis points and allowance for credit losses of 1.96%.
Credit quality remained strong with net charge offs of 24 basis points and allowance for credit losses of 1.96%.
Speaker 4: Return on capital was robust, driving capital accretion with reported CET1 now above 10%. Turning to slide 7, as I noted, average loan balances decreased, one half of 1% from Q2, driven primarily by lower commercial loan balances, which decreased by $1.2 billion or 1.7% from the prior quarter.
Return on capital was robust driving capital accretion with reported CET, one now above 10%.
Turning to slide seven as I noted average loan balances decreased one half of 1% from Q2, driven primarily by lower commercial loan balances, which decreased by $1.2 billion or one 7% from the prior quarter.
Speaker 4: On a year-over-year basis, average loans increased 3.3 percent, reflective of our intentional optimization.
On a year over year basis average loans increased 3.3% reflective of our intentional optimization efforts primary components of the commercial loan change included CRE balances, which declined by $387 million driven by Paydowns distribution finance decreased $434 million due to.
Speaker 4: Primary components of the commercial loan change included CRE balances, which declined by $387 million, driven by paydown.
Speaker 4: distribution finance decreased $434 million due to normal seasonality with lower dealer inventory levels in the third quarter before the expected inventory build in the fourth
Seasonality with lower dealer inventory levels in the third quarter before the expected inventory build in the fourth quarter.
Speaker 4: asset finance decreased by $271 million. Auto floor plan increased by $122 million.
Asset finance decreased by $271 million auto floor plan increased by $122 million.
Speaker 4: All other commercial categories met decreased as we continue to drive optimization towards the highest return.
All other commercial categories net decreased as we continue to drive optimization towards the highest returns.
Speaker 4: In consumer, growth was led by residential mortgage and RV marine, while auto loan balances declined.
In consumer growth was led by residential mortgage and RV Marine while auto loan balances declined for the quarter turning to slide eight as noted we continued to deliver consistent deposit growth in the quarter.
Speaker 4: Turning to slide eight, as noted, we continued to deliver consistent deposit growth in the quarter. Averse deposits increased by $2.6 billion or 1.8% from the prior
Average deposits increased by $2 $6 billion or one 8% from the prior quarter.
Speaker 4: Turning to slide nine, we saw sustained growth in deposit balances in the third quarter, including sequential increases during July , August , and September . Continuing the trend we have seen previously. Importantly, core deposits represented the entirety of the deposit growth of the quarter, with broker deposits declining.
Turning to slide nine we saw sustained growth in deposit balances in the third quarter, including sequential increases during July August and September continuing the trend. We have seen previously importantly core deposits represented the entirety of the deposit growth for the quarter with broker deposits declining quarter over quarter.
Speaker 4: Turning to slide 10, non-intersparing mixt Shift continues to track closely to our forecast with the deceleration of sequential changes that we would expect at this point in the rate
Turning to slide 10, noninterest bearing mix shift continues to track closely to our forecast with the deceleration of sequential changes that we would expect at this point in the rate cycle. The noninterest bearing percentage decreased by 120 basis points from the second quarter and we continue to expect this mix shift to moderate and stable.
Speaker 4: but non-intersparing percentage decreased by 120 basis points from the second quarter. And we continue to expect this mixed shift to moderate and stabilize during 20-
During 2024.
Speaker 4: on to slide 11. For the quarter, net interest income increased by $22 million or 1.6% to $1,379 million. Driven by expanded net interest mark.
Onto slide 11 for the quarter net interest income increased by $22 million or 1.6% to $1.379 billion driven by expanded net interest margin. We continued to benefit from our asset sensitivity and the expansion of margins that has occurred throughout the cycle with net interest income.
Speaker 4: We continued to benefit from our asset sensitivity and the expansion of margins that has occurred throughout the cycle. With net interest income growing at 9% Kager over the past two years.
Growing at 9% CAGR over the past two years.
Speaker 4: Reconceiling the change in NIM from Q2. We saw an increase of 9 basis points on a gap basis and an increase of 10 basis points on a core basis excluding accretion.
Reconciling the change in NIM from Q2, we saw an increase of nine basis points on a GAAP basis, and an increase of 10 basis points on a core basis excluding accretion.
Speaker 4: The drivers of the higher NIM, quarter over quarter, were higher spread net of free funds.
The drivers of the higher NIM quarter over quarter, where higher spread net of free funds lower fed cash balances versus the prior quarter and higher F. H L b stock dividends in the quarter.
Speaker 4: lower FedCache balances versus the prior quarter, and higher FHLB stock dividends in the
Speaker 4: Interest rates rose during the quarter, particularly at the longer end. And as we expected, that drove a net benefit to NIM. In addition, our optimization efforts across both loan growth and funding mix continue to perform very well. These factors resulted in the margin coming in better than we had expected when we shared our outlook in July .
Interest rates rose during the quarter, particularly at the longer end and as we expected that drove a net benefit to NIM.
In addition, our optimization efforts across both loan growth and funding mix continued to perform very well. These factors resulted in the margin coming in better than we had expected when we shared our outlook in July we.
Speaker 4: We continue to analyze multiple potential interest rates scenarios.
We continue to analyze multiple potential interest rate scenarios the basis of our planning and guidance continues to be a central set of those scenarios that is bounded on the low end by the forward yield curve and at the high end by a scenario of the project's rates stay higher for longer.
Speaker 4: The basis of our planning and guidance continues to be a central set of those scenarios that is bounded on the low end by the forward yield curve and at the high end by a scenario where the projects raise stay higher for longer.
Speaker 4: The higher for longer scenario today assumes one additional rate increase in 2020.
The higher for longer scenario today assumes one additional rate increase in 2023.
Speaker 4: flat fed funds through October of 24, and ends 2024, approximately 75 basis points higher than the forward curve.
Flat fed funds through October 24, and ends 2020 for approximately 75 basis points higher than the forward curve.
Speaker 4: With the move and rates higher, we now anticipate an interest margin for the fourth quarter to be around 305 to 310 basic.
With the move in rates higher we now anticipate net interest margin for the fourth quarter to be around 305 to 310 basis points. This is five to 10 basis points higher than the level, we shared previously.
Speaker 4: This is 5 to 10 basis points higher than the level we shared previous.
Speaker 4: Looking further out, our modeling continues to indicate 2024 NIM trending flat to higher from the Q423N.
Looking further out our modeling continues to indicate 'twenty 'twenty four NIM trending flat to higher from the Q4 twenty-three endpoint.
Speaker 4: Turning to slide 12. Our cumulative deposit beta through Q3 was 37%, of 5 percentage points from the prior quarter, tracking closely to our expectation.
Turning to slide 12, our cumulative deposit beta through Q3 was 37% up five percentage points from the prior quarter.
Racking closely to our expectations.
Speaker 4: Sequential increases in beta are slowing, quarter over quarter, as we have forecasted, as the interest rate cycle nears or hits.
Sequential increases in beta are slowing quarter over quarter as we have forecasted as the interest rate cycle nears or hits its peak.
Speaker 4: As we have noted in the past, where beta ultimately tops out, will be a function of the end game for the rate cycle. In terms of the level and timing of the peak, the duration of any extended pause before a de-
As we have noted in the past where beta ultimately tops out will be a function of the end game for the rate cycle in terms of the level and timing of the peak the duration of any extended pause before a decrease.
Speaker 4: Given the outlook for possibly a higher peak and very likely a more extended pause than was the case three months ago.
Given the outlooks for possibly a higher peak and very likely a more extended pause than was the case three months ago.
Speaker 4: Our current outlook for deposit beta is to trend a few percentage points higher than our prior guidance of 40%.
Our current outlook for deposit beta is to trend a few percentage points higher than our prior guidance of 40%.
Speaker 4: We will have to see how the rate environment plays out into 2024 to know with certain
We will have to see how the rate environment plays out into 'twenty 'twenty four to know with certainty what is critical in our view is to ensure we continue to manage both deposit and loan pricing exceptionally rigorously drive asset yields higher deliver solid incremental returns and deliver a better overall NIM from the higher for long.
Speaker 4: What is critical in our view is to ensure we continue to manage both deposit and loan pricing exceptionally rigorous.
Speaker 4: Drive asset yields higher, deliver solid incremental returns, and deliver a better overall nIM from the higher for longer rate environment as a result.
Our rate environment as a result.
Speaker 4: Turn to slide 13 and expanding on my point on loan use.
Turning to slide 13, and expanding on my point on loan yields the construct of our balance sheet is approximately half fully variable rate.
Speaker 4: The construct of our ballad sheet is approximately half fully variable rate.
Speaker 4: 10% indirect auto, which is a shorter, approximately two-year duration fixed product.
10% indirect auto which is a shorter approximately two year duration fixed product.
Speaker 4: 10% in arms with a five-year duration, and the remainder of approximately 30% is longer-durated fit.
10% in arms with a five year duration and the remainder of approximately 30% is longer duration fixed.
Speaker 4: with mixed contributes to the asset sensitivity of our overall balance sheet, and has helped us to benefit significantly from the current rate play.
This mix contributes to the asset sensitivity of our overall balance sheet and has helped us to benefit significantly from the current rate cycle.
Speaker 4: We are seeing solid increases in fixed asset portfolio.
We are seeing solid increases in fixed asset portfolio yields given the higher for longer rate environment. We expect to continue to benefit from this fixed asset repricing going forward supporting the higher NIM outlook.
Speaker 4: Given the higher for longer rate environment, we expect to continue to benefit from this fixed asset repricing going forward, supporting the higher NIM outlook.
Turning to slide 14, our level of cash and securities was down slightly from the prior quarter as we lowered some of the elevated cash we've been holding in Q2.
Speaker 4: Our level of cash and securities was down slightly from the prior quarter. As we lowered some of the elevated cash we've been holding in Qt
Speaker 4: During Q3, we did not reinvest securities cash flows, and the securities balance moved modestly lower as proceeds were held in cash, given the attractive short term.
During Q3, we did not reinvest securities cash flows and the securities balance moved modestly lower as proceeds were held in cash given the attractive short term rates were managing the duration of the portfolio lower continuing our management approach since 2021.
Speaker 4: We're managing the duration of the portfolio lower, continuing our management approach since 2021.
Speaker 4: Turning to side 15, our contingent and available liquidity continues to be robust at $91 billion and has grown quarter over quarter. At quarter end, this pool of available liquidity represented 204% of total uninsured deposits appear leading cover.
Turning to slide 15, our contingent and available liquidity continues to be robust at $91 billion and has grown quarter over quarter at quarter end. This pool of available liquidity represented 204% of total uninsured deposits our peer leading coverage.
Speaker 4: Turning to slide 16, we continued to be dynamic in adding to our hedging program during the quarter. Our objectives remained twofold, to protect capital and operate scenarios and to protect NIM in downright.
Turning to slide 16, we continued to be dynamic in adding to our hedging program during the quarter, our objectives remain twofold to protect capital and operate scenarios and to protect NIM in down rate scenarios. The most substantive increase was in addition to our forward starting pay fixed swaps and strategy, which increased by five point.
Speaker 4: The most substantive increase was in addition to our forward starting pathic swaps and struts.
Speaker 4: increased by $5.9 billion during the quarter to $15.5 billion total. This program is intended to protect capital from tail risk in substantive uprate scenarios and once again benefited us as rates move higher in the
$9 billion during the quarter to $15 $5 billion. Total. This program is intended to protect capital from tail risk in substantive upgrade scenarios and once again benefited us as rates moved higher in the quarter.
Speaker 4: We also added $2 billion in callers to support our NIM against longer term down rates.
We also added $2 billion in colors to support our NIM against longer term down rate scenarios.
Speaker 4: Moving on to 517, gap non-interest income increased by $14 million or 2.8% to $509 million for the third quarter. Excluding the market market on the pay-fix options, fees were relatively stable quarter.
Moving onto slide 17, GAAP noninterest income increased by $14 million or two 8% to $509 million for the third quarter, excluding the mark to market on the pay fixed swap <unk> fees were relatively stable quarter over quarter.
Speaker 4: On an underlying basis compared to the second quarter, we saw increases in deposit service charges, including higher payment-related treasury management fees. This growth was largely offset.
On an underlying basis compared to the second quarter, we saw increases in deposit service charges, including higher payment related Treasury management fees. This growth was largely offset by lower capital markets fees.
Speaker 4: Moving on to slide 18, we're seeing encouraging and sustained underlying trends across our three areas of strategic focus for fee revenue growth. Capital markets, which has grown by a 19% cager over the past six years, benefits from a broad set of capabilities bolstered by caps
Moving on to slide 18, we're seeing encouraging and sustained underlying trends across our three areas of strategic focus for fee revenue growth capital markets, which has grown by a 19% CAGR over the past six years benefits from a broad set of capabilities bolstered by capstone, while 20 twenty-three has certainly been a challenging environment for capital market.
Operator: Greetings. Welcome to the Huntington Bancshares third quarter earnings call. At this time, all participants are in listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance or any of the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.
Speaker 4: While 2023 has certainly been a challenging environment for capital markets activities, in both advisory and several credit-driven products.
Activities in both advisory and several credit driven products.
Timothy Sedabres: At this time, I would now like to turn the conference over to your host, Tim Sedabres, Director of Investor Relations. Thank you, operator. Welcome everyone, and good morning. Copies of the slides we will be reviewing today can be found on the Investor Relations section of our website, www.honeyton.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 Steinour, Chairman, President, and CEO, and Zach Wasserman Chief Financial Officer.
Speaker 4: Ford pipelines with an advisory are solid. And we continue to foresee this as a primary contributor to fee revenue growth over the modern.
Ford pipelines with an advisory are solid and we continue to foresee this as a primary contributor to fee revenue growth over the moderate term.
Speaker 4: Our payments businesses represent one of the biggest opportunities for both relationship deepening and revenue growth across both treasury management and card category.
Our payments businesses represent one of the biggest opportunities for both relationship deepening and revenue growth across both Treasury management and card categories.
Speaker 4: In wealth management, we see a great opportunity to increase the penetration of the offering across our customers.
In wealth management, we see a great opportunity to increase the penetration of the offering across our customers leveraging our number one ranking for trust as we grow advisory relationships and drive higher managed assets with recurring revenue streams.
Speaker 4: leveraging our number one ranking for trust as we grow advisory relationships and drive higher managed assets with recurring revenue streams.
Timothy Sedabres: Rich Pohle, Chief Credit Officer, and Brennan Lawlor, Deputy Chief Credit Officer will join us for the Q&A. Earnings documents which include our forward-looking statements disclaimer and non-gap information are available on the Investor Relations section of our website.
Moving on to slide 19 on expenses.
Speaker 4: Gap non-interested expense increased by $40 million and underlying core expenses increased by 25.
GAAP noninterest expense increased by $40 million and underlying core expenses increased by $25 million.
Stephen Steinour: With that, let me now turn it over to Steve. Thanks, Tim.
Stephen Steinour: Good morning, everyone, and welcome. Thank you for joining the call today. We're pleased to announce our third quarter results, which Zach will detail later. Our approach to both our colleagues and customers continues to be grounded in our purpose. Our colleagues again demonstrated that we make people's lives better, help businesses thrive, and strengthen the communities we serve. Now on to slide four.
Speaker 4: As I mentioned, we incurred $15 million of notable item expenses related to the staffing efficiency program and corporate real estate consolidation.
As I mentioned, we incurred $15 million of notable item expenses related to the staffing efficiency program and corporate real estate consolidations.
Speaker 4: excluding these items, core expense growth compared to the prior quarter, which driven by higher personnel, occupancy, professional services, and instead of smaller items within all others.
Excluding these items core expense growth compared to the prior quarter was driven by higher personnel occupancy professional services and a set of smaller items within all other expenses.
Stephen Steinour: There are five key messages we want to leave you with today. First, Huntington is extraordinarily well positioned to manage truly evolving landscape for banks. The near-term environment includes higher for longer interest rates and uncertain economic outlook, expected new capital regulations, as well as heightened regulatory requirements. Huntington operates in this dynamic period from a position of substantial strength. Our balance sheet and risk profile were intentionally built over more than a decade, explicitly for these times.
Speaker 4: We have taken proactive actions throughout the year to support the low level of core underlying expense growth. We have delivered.
We have taken proactive actions throughout the year to support the low level of core underlying expense growth we have delivered.
Speaker 4: In the first half of the year, we executed on the voluntary retirement program, organizational re-alignment, moving from four revenue segments to two, and 31 branched consolidation.
In the first half of the year, we executed on the voluntary retirement program organizational realignment moving from four revenue segments to two and 31 branch consolidations.
Speaker 4: Now in the third quarter, we're taking another set of incremental acts.
Now in the third quarter, we're taking another set of incremental actions. We are accelerating the implementation of our business process Offshoring program and we're creating efficiencies throughout the organization with the goal of prioritizing resources toward the largest growth opportunities in the near term, we're also driving incremental saves.
Speaker 4: We are accelerating the implementation of our business process off-shoring program, and we're creating efficiencies throughout the organization with the goal of prioritizing resources toward the largest growth opportunities in the near-to-
Stephen Steinour: Our market position, digital leadership, and momentum and core growth strategies put us in the top of the peer set. We intend to lean into this position of strength to drive incremental growth through existing and new capabilities. Second, we've managed top quartile CET-1 inclusive of AOCI. We will continue to drive additional capital expansion for the remainder of this year and over the course of 2024. Third, we benefit from a cultivated granular deposit franchise and have delivered consistent core deposit growth.
Speaker 4: We're also driving incremental saves in our corporate real estate footprint, as well as implementing another set of branch consolidations with 34 planned closures early next.
And our corporate real estate footprint as well as implementing another set of branch consolidations with 34 planned closures early next year.
Speaker 4: These actions demonstrate our commitment to discipline, to expense men.
These actions demonstrate our commitment to disciplined expense management and will support the continued investment into critical areas of the company to drive long term value.
Speaker 4: and will support the continued investment into critical areas of the company to drive long-term value.
Speaker 4: As we manage expenses, we're balancing both short term investment and revenue growth with the longer term opportunities we know are in front of us. Slide 20.
As we manage expenses were balancing both short term investment and revenue growth with the longer term opportunities. We know are in front of us.
Stephen Steinour: Our balance deposit base forms the foundation of our robust liquidity framework and has been a driving factor in our well-managed beta over the rate cycle today. Fourth, credit quality remains strong across our portfolios driven by our disciplined customer selection, underwriting, and rigorous portfolio management. This approach is unwavering, starting with our tone at the top as we maintain our aggregate moderate to low risk appetite. Finally, we remain intently focused on our core strategy.
Slide 20, recaps, our capital position reported common equity tier one increased to 10, 1% and has increased sequentially for four quarters OCI impacts to common equity tier one resulted in an adjusted CET one ratio of 8%.
Speaker 4: reported common equity tier one increased to 10.1%. And has increased sequentially for four quarters.
Speaker 4: OCI impacts to Common Equity Tier 1 resulted in an adjusted CET-1 ratio of 8-
Speaker 4: Our capital management strategy will result in expanding capital while maintaining our top priority to fund high return loan.
Our capital management strategy will result in expanding capital, while maintaining our top priority to fund high return loan growth, we're actively managing adjusted C. G. One inclusive of a OCI.
Stephen Steinour: We are executing with discipline while expanding with existing and new capabilities to support our long-term growth. And very importantly, we are remaining steadfast in our commitment to drive operating efficiency over time, with continued execution of proactive expense management programs. We expect a level of uncertainty in the near term and some level of higher expenses to manage through the realities of the current operating environment. However, these investments will also be accompanied by sustained revenue growth, and the net result will be a hunting tin that continues to be a strong regional bank with significant growth opportunities.
Speaker 4: actively managing adjusted CET-1 inclusive of AOSCI and expect to drive that ratio higher over the course of 2012.
And expect to drive that ratio higher over the course of 'twenty 'twenty four.
Speaker 4: On slide 21, credit quality continues to perform very well, with normalization of metrics consistent with our expert.
On slide 21 credit quality continues to perform very well with normalization of metrics consistent with our expectations as mentioned net charge offs were 24 basis points for the quarter and while higher than last quarter by eight basis points are tracking to our guidance for full year net charge offs between 20 and 30 basis points.
Speaker 4: As mentioned, net charge offs were 24 basis points for the quarter. And while higher than last quarter by 8 basis points are tracking to our guidance for full your net charge offs between 20 and 30 basis.
Speaker 4: This level continues to be at the low end of our target through the cycle range for net charge offs of 25 to 45 base.
This level continues to be at the low end of our target through the cycle range for net charge offs of 25 to 45 basis points.
Stephen Steinour: I will move on to slide five to further illustrate our position of strength. Our adjusted CET-1 ratio is strong and near the top of the peer group. We intend to drive this ratio higher throughout this year in 2024. This plan extends our position of strength, supports continued execution of core growth strategies and puts us well ahead of the proposed Basel 3N game and other requirements. Deposit growth has also outperformed our peers by nearly 10 percentage points since the end of 2021.
Speaker 4: as previously guided, given ongoing normalization, non-performing assets increased from the previous quarter, and the criticized asset ratio.
As previously guided given ongoing normalization nonperforming assets increased from the previous quarter and the criticized asset ratio increased with risk rating changes within commercial real estate being the largest component.
Speaker 4: with risk-grading changes within commercial real estate being the largest component.
Speaker 4: Allowance for credit losses is higher by three basis points to 1.96% of total loans. And our ACL coverage ratio is amongst the highest in our peer group. Let's turn to our outlook for the fourth quote.
Allowance for credit losses is higher by three basis points to 1.96% of total loans and our ACL coverage ratio is amongst the highest in our peer group.
Let's turn to our outlook for the fourth quarter on slide 22.
Stephen Steinour: We've built one of the most granular deposit bases with a leading, insured deposit percentage and we continue to drive the expansion of primary bank customer relationships. Our liquidity is best in class for coverage of uninsured deposits, representing nearly twice the level of peers and we already meet the liquidity coverage ratio on an unmodified basis. Credit metrics are also a differentiator for Huntington. With top core talent, the charge offs compared to peers and our credit reserves are top tier.
Speaker 4: We forecast loan growth of approximately 1% in the fourth quarter, which would put full year loan growth at approximately 5%. Matching the lower end of our prior rate.
We forecast loan growth of approximately 1% in the fourth quarter, which would put full year loan growth at approximately 5% matching the lower end of our prior range.
Speaker 4: The positive are likewise expected to grow in the fourth quarter by approximately 1%.
Deposits are likewise expected to grow in the fourth quarter by approximately 1%.
Speaker 4: core net interest income for the fourth quarter is expected to decline between 4 and 5% from Q3. Before expanding throughout 2024 from that level.
Core net interest income for the fourth quarter is expected to decline between four and 5% from Q3 before expanding throughout 'twenty 'twenty four from that level.
Speaker 4: Non-interest income on a core underlying basis is expected to be relatively
Noninterest income on a core underlying basis is expected to be relatively stable.
Stephen Steinour: Our management team has a long track record of discipline execution. For example, we were recently named the number one SBA lender nationally for the sixth consecutive year and we continue to expand the reach of this business and our support of access to capital for small businesses. Interest rates continue on a path towards the higher for longer scenario, which we've been anticipating for some time. As rates remain higher, the potential for economic activity to be negatively impact it has increased.
Speaker 4: expenses are expected to increase between 4 and 5% into the fourth quarter, primarily driven by revenue-related expenses associated with the expected growth in capital markets, a seasonal increase in medical claims, and sustained
Expenses are expected to increase between four and 5% into the fourth quarter, primarily driven by revenue related expenses associated with the expected growth in capital markets, a seasonal increase in medical claims and sustained investment in new and enhanced capabilities.
Speaker 4: We expect net charge offs for the full year to be near the midpoint of the 20 to 30 basis points guys.
We expect net charge offs for the full year to be near the midpoint of the 20 to 30 basis points guidance range.
Speaker 4: Finally, let me close on slide 23 with a few softs on our management priorities for 2024.
Finally, let me close on slide 23, with a few thoughts on our management priorities for 2024.
Stephen Steinour: However, thus far in the cycle, overall our customers are effectively managing through it. We remain highly vigilant and are proactively managing all loan portfolios. Our top tier credit reserves and expanding capital support our approach to be front-footed to take advantage of opportunities to win new customers and grow our businesses.
Speaker 4: We're still finalizing our budget for next year, and as always, we look to share more specific guidance during our January earnings.
We're still finalizing our budget for next year and as always we look to share more specific guidance during our January earnings call.
Speaker 4: First and foremost, we're committed to driving continued capital expand.
First and foremost we're committed to driving continued capital expansion, while we continue to optimize lending growth to drive the highest returns as Steve mentioned, we're playing from a position of strength and we expect to maintain that position as we get ahead of proposed capital regulations and phase in periods.
Speaker 4: while we continue to optimize the lending growth to drive the highest return.
Zachary Wasserman: Zach, over to you to provide more detail on our financial performance. Thanks, Steve, and good morning, everyone. Slide 6 provides highlights of our third quarter results. We reported gap earnings per common share of 35 cents and adjusts at EPS of 36 cents. The quarter included $15 million of notable items, which impacted EPS by one penny per common share. Return on tangible common equity or ROTCE came in at 19.5% for the quarter.
Speaker 4: As Steve mentioned, we're playing from a position of strength, and we expect to maintain that position as we get ahead of proposed capital regulations and phase-in periods.
Speaker 4: related to deposits, we're continuing to acquire and deepen primary bank customer relations.
Related to deposits, we're continuing to acquire and deepen primary bank customer relationships. This should result in continued growth of deposits into next year, while supporting our disciplined management of deposit beta.
Speaker 4: This should result in continued growth of deposits into next year, while supporting our Discipline Management of Deposit Beta.
Speaker 4: Given the expected higher for longer rate scenario, we will continue to position the balance sheet to remain modestly as a sense
Given the expected higher for longer rate scenario, we will continue to position the balance sheet to remain modestly asset sensitive, which will support the margin and we expect will deliver growth in net interest income dollars on a full year basis.
Zachary Wasserman: Adjusted for notable items, ROTCE was 20%. Further adjusting for AOCI, underlying ROTCE was 15.3%. Averse deposits grew during the quarter, increasing by $2.6 billion or 1.8%. Loan balances decreased by $561 million or 1.5% from Q2, driven both by seasonality and our continued optimization. NET interest income on a dollar basis expanded quarter over quarter, driven by a rising net interest margin. We continue to proactively manage expenses and have begun a new set of incremental actions in the third quarter, including branch consolidation, staffing efficiencies, and corporate real estate consolidations.
Speaker 4: which will support the margin and we expect will deliver growth and then interest income dollars on a full year.
Speaker 4: Non-interested income remains a critical focus for us with sustained execution on three primary strategic areas for fee revenue growth capital markets, pain,
Noninterest income remains a critical focus for us with sustained execution on three primary strategic areas for fee revenue growth capital markets payments and wealth management over the medium term. We expect the noninterest income has the potential to grow at a rate more quickly than both loans and spread revenues given the opportunities for these fee.
Speaker 4: Over the medium term, we expect that non-interest income has the potential to grow at a rate more quickly than both loans and spread revenues given the opportunities for these fee-
Businesses.
Speaker 4: As I mentioned on expenses, we have taken considerable actions to hold baseline expense growth to a low level.
As I mentioned Unexpendable, we've taken considerable actions to hold baseline expense growth to a low level.
Speaker 4: This focused on sustained efficiencies, including operation accelerate, business process offshoring, and the other actions will yield multi-year benefits. This focused on sustained efficiencies, including operation accelerate, business process offshoring, and the other actions will yield multi-year benefits.
This focused on sustained efficiencies, including operation accelerate business process offshoring and the other actions will yield multiyear benefits. These actions are necessary to allow for the continued investment into new and enhanced capabilities, which will set up growth over the course of the next few years.
Zachary Wasserman: These actions, coupled with our ongoing long-term efficiency programs, as well as the measures we implemented in Q1 of this year, will help us drive rigorous baseline expense efficiency while sustaining capacity for investments in the franchise. Credit quality remains strong, with net chargeoffs of 24 basis points and allowance for credit losses of 1.96%. Return on Capital was robust, driving capital accretion with reported CET-1 now above 10%. Turning to slide seven, as I noted, average loan balances decreased, one half of 1% from Q2, driven primarily by lower commercial loan balances, which decreased by 1.2 billion dollars or 1.7% from the prior quarter.
Speaker 4: These actions are necessary to allow for the continued investment into new and enhanced capabilities, which will set up growth over the course of the next few-
Speaker 4: We expect the net result of these actions for 2024 will be an underlying growth rate of core expenses somewhat higher than the level we saw in 2023.
We expect the net result of these actions for 'twenty 'twenty four will be an underlying growth rate of core expenses somewhat higher than the level. We saw in 2023.
Speaker 4: Our current working estimate is underlying expense growth of approximately 4%.
Our current working estimate is underlying expense growth of approximately 4% compared to the approximately 2.5% level. We were running in 2023. We believe this level of expense management is the right balance to position the company to operate within the current environment and sustain our momentum into 2025.
Speaker 4: Compared to the approximately two and a half percent level, we were running in 2023. We believe this level of expense management is the right balance to position the company to operate within the current environment and sustain our momentum into 2025.
Speaker 4: We will also maintain our rigorous approach to credit management, consistent with our aggregate moderate to low risk gap.
We will also maintain a rigorous approach to credit management consistent with our aggregate moderate to low risk appetite for.
Zachary Wasserman: On a year of a year basis, average loans increased, 3.3% reflective of our intentional optimization efforts. Primary components of the commercial loan change included CRE balances, which declined by $387 million, driven by paydowns, distribution finance decreased $434 million, due to normal seasonality with lower dealer inventory levels in the third quarter before the expected inventory build in the fourth quarter. Asset finance decreased by $271 million, on a floor plan increased by $122 million, all other commercial categories net decreased as we continue to drive optimization towards the highest returns.
Speaker 4: Finally, to close, we believe we are exceptionally well-positioned to proactively stay ahead of the evolving environment. We will be dynamic and address these numerous topics head on. And over time, we believe this will result in opportunities to benefit substantially in the coming years.
Finally to close we believe we are exceptionally well positioned to proactively stay ahead of the evolving environment, we will be dynamic and address these numerous topics head on and over time. We believe this will result in opportunities to benefit substantially in the coming years.
Speaker 4: With that, we will conclude our prepared remarks and move to Q&A. Tim, over to you.
With that we will conclude our prepared remarks and move to Q&A Tim over to you.
Speaker 2: Thanks, Zach. Operator, we will now take questions. We ask that as a courtesy to your peers, each person asked 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.
Thanks, Zack 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.
Zachary Wasserman: In consumer growth was led by residential mortgage and RV Marine while auto loan balances declined for the quarter. Turning to slide eight, as noted, we continued to deliver consistent deposit growth in the quarter, average deposits increased by $2.6 billion or 1.8% from the prior quarter. Turning to slide nine, we saw sustained growth in deposit balances in the third quarter, including sequential increases during July, August and September, continuing the trend we have seen previously.
At this time, we'll be conducting a question and answer session.
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One moment, please we poll for questions.
Speaker 1: Thank you, Nr. First question is from the line of Manon Gosliya with Morgan Stanley . Please receive your question.
Thank you and our first question is from the line of Manhattan Garcia with Morgan Stanley . Please proceed with your question.
Zachary Wasserman: Importantly, core deposits represented the entirety of the deposit growth for the quarter, with broker deposits declining quarter over quarter. Turning to slide 10, non-intersparing mixed shift continues to track closely to our forecast, with the deceleration of sequential changes that we would expect at this point in the rate cycle, but non-intersparing percentage decreased by 120 basis points from the second quarter, and we continue to expect this mixed shift to moderate and stabilize during 2020.
Hey, good morning Barton.
Speaker 5: um... can you talk about uh... the puts in takes in that for percent expense growth number for next year uh... you know what sort of revenue environment is that they can uh... are that what are the areas that are pushing up expenses and uh... maybe also why you have flexibility to manage more if the revenue environment is weaker
Can you talk about the puts and takes in that 4% expense growth number for next year.
You know what sort of revenue environment does that bake in.
Oh, what are the areas that are pushing op expenses and maybe also why do you have flexibility to manage more if the revenue environment is weaker.
Speaker 4: Yep, great question. And this is Zach, I'll take that one. Just to preface it instead of framework for the answer, let me reiterate what I said in the prepared march to the minute ago, which is driving efficiency in our core expenses as a key priority for us. Well, one of the most efficient banks in the regional banking space, and that's been a product of years of efforts. And what we're trying to do right now is strike the balance.
Yes, great question, Zach I'll take that one.
Zachary Wasserman: On to slide 11, for the quarter, net interest income increased by $22 million or 1.6% to $1.379 million, driven by expanded net interest margin. We continued to benefit from our asset sensitivity and the expansion of margins that has occurred throughout the cycle, with net interest income growing at 9% keger over the past two years. Reconceiling the change in NIM from Q2, we saw an increase of nine basis points on a gap basis and an increase of 10 basis points on a core basis, excluding accretion.
Just to preface it in such a framework for the answer.
Alright, what I said in his prepared remarks.
Just driving efficiency in our core expenses is a key priority for us and one of the most efficient banks regional banking space and industrial.
Lots of years of efforts and what we're trying to do right now is trying to balance.
Speaker 4: of the short term and the median term. In the short term, managing expenses to a level of work or given the overall revenue environment. But also in the median term, we see significant growth opportunities over time for hunting tank. We want to make sure that we can maintain the momentum in our key strategies. And in fact, capture the higher revenue outlook that we just share.
The short term weakness.
In the short term managing expenses to a low level of growth given the overall revenue environment.
But also in the medium term, we see significant growth opportunities over time for Huntington motivation and will maintain.
Zachary Wasserman: The drivers of the higher NIM, quarter over quarter, were higher spread, net of free funds, lower fed cash balances versus the prior quarter, and higher FHLB stock dividends in the quarter. Interest rates rose during the quarter, particularly at the longer end, and as we expected, that drove a net benefit to NIM. In addition, our optimization efforts across both loan growth and funding mix continue to perform very well. These factors resulted in the margin coming in better than we had expected when we shared our outlook in July.
Momentum in our key strategies.
It's hard to capture the higher revenue outlook.
Speaker 4: Even as we quickly get ahead, I start that word quickly, get ahead and help the new and expanded risk management capabilities that we'll need to operate.
Sure.
As we quickly get ahead.
It would quickly get ahead of the new and expanded risk management capabilities that we need to operate.
Speaker 4: If you take a step back, it was just over a year ago, that we were fully delivering over half a billion dollars of annual expense status from the TCF merger.
Take a step back just over a year ago that we were fully delivering over half a billion dollars of annual expense saves from the Tcs merger over.
Speaker 4: Over the last year since then, we felt underlying core expenses to 2.4%. And we did that. With all of the programs I've just talked about in a couple of months. A lot of firm efficiency programs, proactive actions we took in the first quarter of this year, and now a new set of actions that were implementing in the third quarter, including another transfer branch or optimization.
Over the last year. Since then we saw underlying core expenses to two 4% and we did that with all the programs I've just talked about in the remarks, our long term efficiency programs proactive actions. We took in the first quarter of this year and now a new set of action, but work, Inc. Third quarter, including another tranche of branch optimization.
Zachary Wasserman: We continue to analyze multiple potential interest rates scenarios. The basis of our planning and guidance continues to be a central set of those scenarios that is bounded on the low end by the forward yield curve, and at the high end by a scenario that projects rates stay higher for long. The higher-for-longer scenario today assumes one additional rate increase in 2023, flat-fed funds through October of 24, and ends 2024 approximately 75 basis points higher than the forward curve.
Speaker 4: celebrating the business process offshore, driving with efficiencies across the bank, and finding efficiencies that are called a real estate portfolio.
Accelerating the business process offshore driving efficiencies across the bank.
Finding efficiencies in our corporate real estate portfolio.
Speaker 4: as we look at the 24 to your question, we're seeing the opportunity for incremental revenue upside, particularly in the movie strong performance we've seen in our new management program, which is higher than our prior outlook, and good momentum in the fee businesses, as we look forward. What a quick...
As we look at the 24 to your question, we're seeing the opportunities for incremental revenue upside, particularly in the really strong performance. We've seen in our new management program, which is higher than our prior outlook and good momentum in those businesses.
Zachary Wasserman: With the move in rates higher, we now anticipate an interest margin for the fourth quarter to be around 305 to 310 basis points. This is 5 to 10 basis points higher than the level we shared previously. Looking further out, our modeling continues to indicate 2024 NIM trending flat to higher from the Q423 endpoint. Turning to slide 12, our cumulative deposit beta through Q3 was 37% of 5 percentage points from the prior quarter, tracking closely to our expectations.
Sure.
I wanted to quickly address the lessons learned from last year's environment addressed the new regulations coming around Basel CCAR resolution planning and ultimately enhance our risk management. So we can offer.
Speaker 4: The lessons learned from the last year's environment addressed the new regulations coming around basil, seed car, resolution planning.
Speaker 4: And ultimately, it can't be on risk management. So we can operate in from a position of strength just as we are right now going forward, which will require investment. So the kind of things that are driving that roughly one and a half percent higher run rate are invested into teams like Treasury risk management technology. It's where the focus on enhancing data under like process capabilities and automation.
So from a position of strength just as we are right now going forward, which will require investment so.
Kind of thing because we're driving that roughly one 5% higher run rate our investment teams like Treasury risk management technology.
Zachary Wasserman: Sequential increases in beta are slowing quarter over quarter as we have forecasted, as the interest rate cycle nears or hits its peak. As we have noted in the past, where beta ultimately tops out will be a function of the end game for the rate cycle, in terms of the level and timing of the peak, the duration of any extended pause before a decrease. Given the outlooks for possibly a higher peak and very likely a more extended pause than was the case three months ago, our current outlook for deposit beta is to trend a few percentage points higher than our prior guidance of 40%.
Our focus on enhancing data underlying process capabilities and automation.
Speaker 4: The goal in the end of our take us to back is to get ahead of these requirements to quickly move through the security. We expect to see around a year's worth of this higher expected one rate of expenses again around 1.5 percent higher. And then that expense group will come back down again, we exit 2024 and we'll see the underlying core expense management come through.
The goal.
As to get ahead of these environments to quickly move through the securities we expect to see around a year's worth of this higher.
Expected run rate expenses runoff, one 5% higher.
And knowing that that expense growth rate will come back down as we exit 2024 seats underlying core substantially come through.
Zachary Wasserman: We will have to see how the rate environment plays out into 2024 to know with certainty. What is critical in our view is to ensure we continue to manage both deposit and loan pricing exceptionally rigorously. Drive asset yields higher, deliver solid incremental returns, and deliver a better overall NIM from the higher for longer rate environment as a result. Turn to slide 13 and expanding on my point on loan yields. The construct of our balance sheet is approximately half fully variable rate, 10% indirect auto, which is a shorter approximately two-year duration fixed product, 10% in arms with a five-year duration, and the remainder of approximately 30% is longer durated fixed.
Speaker 4: It all goes back to the goal of maintaining our vibrancy, our momentum. We really, I'm sure that Huntington continues to be the positional strength to go forward.
It all goes back to the goal of maintaining our buyers see our momentum.
Huntington continues to be the position of strength to go forward.
Speaker 3: And I'll just see, just to sort of come in over top of that. We think this is a time to be dynamic to play off us, to be front-footed in terms of a number of our businesses. And we intend to do that. And that will require investment. We'll have more college, more talented, if you will. We'll have some new capabilities, all of which are in the plan, and the numbers that share with you.
This is Steve.
And then over top of that.
We think this is a time to be dynamic.
To play offense to be front footed in terms of a number of our businesses and we intend to do that.
Our investments will have more colleagues for talent. If you will we'll have some new capabilities all of which are in place and the numbers Doug shared with you.
Speaker 5: Got it. And then you're just putting it together because you mentioned your modeling, NII trends, high R as you go through 2024. There's more upside to fees. How does that play into operating levers for next year? Do you still think you can drive positive operating levers?
Got it and then just putting it together because you you mentioned.
Zachary Wasserman: This mix contributes to the asset sensitivity of our overall balance sheet and has helped us to benefit significantly from the current rate cycle. We are seeing solid increases in fixed asset portfolio yields. Given the higher for longer rate environment, we expect to continue to benefit from this fixed asset repricing going forward, supporting the higher NIM outlook. Turn to slide 14. Our level of cash and securities was down slightly from the prior quarter as we lowered some of the elevated cash we've been holding in Q2.
Youre modeling NII trend higher as you go through 2024.
There is more upside to fees.
How does that play into operating leverage for next year do you still think you can drive positive operating leverage.
Speaker 4: You know, it's a little early, you know, you precise guidance on that, but driving toward operating leverage over time is a key element of our goal. You'll remember that it's one of the three major financial targets we've set for ourselves. And we do see, you know, solid opportunity for revenue to go next year on both SRED and fees. You know, but I would stress again, coming back, you know, what's critical for us is managing for the EG internment this morning.
It's likely give you precise guidance on that but driving toward operating leverage over time is a key element of our of our goals.
This is one of the three major financial targets, we set for ourselves and we do see solid opportunity for revenue growth this year.
Zachary Wasserman: During Q3, we did not reinvest securities cash flows, and the securities balance moved modestly lower as proceeds were held in cash given the attractive short-term rates. We're managing the duration of the portfolio lower, continuing our management approach since 2021. Turning to slide 15, our contingent and available liquidity continues to be robust at $91 billion and has grown quarter of a quarter. At quarter end, this pool of available liquidity represented 204 percent of total uninsured deposits appear leading coverage.
And fees.
It's just again coming back what was critical for us.
Speaker 4: and we want to make sure that we can maintain those critical investments, even as for driving the efficiency that the underlying expense code 3. Talk about operating numbers over time, we will absolutely part of the plan, and we will obviously, the precise outlook for 24, or 4.4 million to quantify that in the West Pacific.
We want to make sure that we can maintain critical investments even as we're driving efficiency. This underlying expense growth rate positive operating leverage over time.
We will also see the precise dollar for Q4.
Quantify.
Yes.
I appreciate the detailed answer thank you.
Zachary Wasserman: Turning to slide 16, we continued to be dynamic in adding to our hedging program during the quarter. Our objectives remain twofold. To protect capital and operates scenarios and to protect NIM in downright. The most substantive increase was in addition to our forward-starting pay-fix-swaption strategy, which increased by $5.9 billion during the quarter to $15.5 billion total. This program is intended to protect capital from tail risk in substantive up-rate scenarios and once again benefited us as rates moved higher in the quarter.
Sure.
Speaker 1: The next question is from the line of John Pancari with Evercore ISI. This is your question.
Our next question is from the line of John <unk> with Evercore ISI. Please proceed with your question.
Good morning.
Speaker 6: Martin, John . Just on the Manager's income front, I know you indicated that you implied a expect a drop in the fourth quarter and then expanding through 2024. Maybe thinking about the frame the magnitude.
Alright.
<unk>.
Just on the net interest income front I know you indicated that you implied.
Expect a trough in the fourth quarter and then expanding through 2024, maybe can you help us frame the magnitude of growth do you think is achievable under the current curve assumption.
Speaker 6: of a growth, do you think it's achievable under the current curve assumption? As you look at the NII upside, and then I guess the same question would be for your commentary around the margin in terms of expansion through the year, maybe you can help us size that up in terms of what's a fair assumption based on what you're looking at.
As you look at the.
NII upside and then I guess the same question would be for your commentary around the margin in terms of expansion through the year. Maybe you can help us size that up in terms of what's a fair assumption based on what you're looking at.
Zachary Wasserman: We also added $2 billion in callers to support our NIM against longer-term downrate scenarios. Moving on to slide 17, gap non-interest income increased by $14 million or 2.8% to $509 million for the third quarter, excluding the mark-to-market on the pay-fix-swaptions, fees were relatively stable quarter-over-corder. On an underlying basis compared to the second quarter, we saw increases in deposit service charges, including higher payment-related treasury management fees. This growth was largely offset by lower capital market fees.
Speaker 4: Yep, that's a great question. This is not going to take that one. No, I think just take it that back in the third quarter, really highlighted the effectiveness of our overall asymptotivity, mass recording, we saw NIM expand and...
Yes.
Great questions. This is Jack I'll take that one.
So you said that you saw in the third quarter really highlighted.
The effectiveness of our overall asset sensitivity advanced the program also expand.
Speaker 4: And the benefits of asset-requacing really come included into it into a stronger man.
And the benefits of asset repricing really for them to move into a stronger yen.
Speaker 4: you know, what we saw in the third quarter was about 10 basis points increasing them from the second quarter. Around half of that, I will note our items that were hemorrhagia in nature, reducing Fed cash in Q3 from Q2.
What we saw in the third quarter was about 10 basis points increase in NIM.
Zachary Wasserman: Moving on to slide 18, we're seeing encouraging and sustained underlying trends across our three areas of strategic focus for fee revenue growth. Capital markets, which has grown by a 19% cager over the past six years, benefits from a broad set of capabilities bolstered by capstone. While 2023 has certainly been a challenging environment for capital market activities in both advisory and several credit-driven products, forward pipelines with an advisory are solid, and we continue to foresee this as a primary contributor to fee revenue growth over the moderate term.
From the second quarter.
With that I will note are items that were temporary in nature of reducing fed cash in Q3 from Q2 drove roughly twice we've got some elevated levels of dividend <unk> stock that was a function of QQ official be borrowing those items will recur.
Speaker 4: We drove around three big splines. We got some elevated levels of dividend from the FHLB stock that was a function of Q2 FHLB borrowing. Those items won't recur. However, we did see a positive four-base split move in underline thread in the third quarter as I moved it.
However, we did see a positive four basis point move underlying strength in the third quarter.
Speaker 4: As we think about Q4, our expectations to have to see a name of between 305 and 310 basis points, which is around five or 10 basis points better than I would have thought this time last quarter.
Sure.
As we think about Q4, our expectation is to have to see a NIM of between 305, and 310 basis points, which was around five or 10 basis points better than I would've thought this time last quarter.
Zachary Wasserman: Our payment businesses represent one of the biggest opportunities for both relationship deepening and revenue growth across both treasury management and card categories. In wealth management, we see a great opportunity to increase the penetration of the offering across our customers, leveraging our number one ranking for trust as we grow advisory relationships and drive higher managed assets with recurring revenue streams. Moving on to slide 19, on expenses. Gap, non-interest expense increased by $40 million and underlying core expenses increased by $25 million.
Speaker 4: And it's really driven by the benefits we're seeing coming through from the higher flow on the rays in the area, which we've noted would affect the creatives overall damage, and that is very free.
And it's really driven by the benefits, we're seeing coming through from the higher for longer.
No.
But to be accretive to overall.
Is bearing fruit.
Speaker 4: Based on the trends we're seeing in earning assets, I expect the dollars of an II and Q40 down, run four to five percent from Q3 and informing a trough, both in NIM, ratio and NIM, and interest in $5 in the fourth quarter of the trending higher from there.
Based on the trends, we're seeing in earning assets I expect the dollars of NII of <unk> 40.
About 4% to 5% from Q3 and informing the trough both in NIM ratio.
Zachary Wasserman: As I mentioned, we incurred $15 million of notable item expenses related to the staffing efficiency program and corporate real estate consolidations. Excluding these items, core expense growth compared to the prior quarter was driven by higher personnel, occupancy, professional services, and a set of smaller items within all other expenses. We have taken proactive actions throughout the year to support the low level of core underlying expense growth we have delivered. In the first half of the year, we executed on the voluntary retirement program organizational re-alignment, moving from four revenue segments to two and 31 branched consolidations.
Net interest income dollars in the fourth quarterly trending higher from there.
Speaker 7: You know, the the the name outlook for 424 I expect to be flat to rise in as I noted and I think the things you're going to see are Continuing to really solid progress on the fixed asset every pricing Major asset categories on the fixed side of the score versioning again sequential increases. It's Q3 You know, especially that continuing on particularly in the higher flow on the scenario
Yes.
The NIM outlook.
$4 before I expect to be flat to rising I noticed because I think the pace of the CR continued really solid progress on fixed asset repricing.
Major asset categories on this exciting this quarter.
Again, the sequential increases in Q3.
Continuing along particularly in higher for longer scenario.
Speaker 7: Even as we do see data, continuing to trend as well, it'll be a creative step overall, so that we'll go through the course of next year's thinking. We'll also benefit, as we've noted before, during 2024 from a gradual reduction in the negative carry from the received goods swap hedge portfolio. This may roughly five basis points throughout the course of next year on that benefit, maybe in the second half of the year. So,
WCC data continuing to trend as well.
Overall said throughout the course.
We will also benefit as we noted before during FY 'twenty four from a gradual reduction in the <unk>.
Zachary Wasserman: Now in the third quarter, we're taking another set of incremental actions. We are accelerating the implementation of our business process off-shoring program and we're creating efficiencies throughout the organization with the goal of prioritizing resources toward the largest growth opportunities in the near term. We're also driving incremental saves in our corporate real estate footprint as well as implementing another set of branch consolidations with 34 planned closures early next year. These actions demonstrate our commitment to discipline expense management and will support the continued investment into critical areas of the company to drive long-term value.
Carry from the receive fixed swap hedge portfolio.
Roughly five basis points throughout the course of next year on that benefit.
Half of the year so.
Speaker 7: And I would say a couple that's laterizing them with growth in loans, growth in the greener in the assets that they go to the overall NII dollars higher. We'll get more precise with guys as we get into January , but those are the major drivers that are seeing this point.
And I would say a couple of that flat to rising NIM with growth in loans growth in interest earning assets.
Overall, NII dollars higher well get more precise with guidance as we get into January but those are the major drivers that we're seeing at this point.
Speaker 6: Very helpful, Zach. Thank you for that. And then separately on credit.
Very helpful. Thank you for that and then separately on credit criticized loans up 17%.
Speaker 6: Criticized loans, up 17% link quarter looks like, and I believe you'll be doing your comments. A lot of that was commercial real estate, can you?
Zachary Wasserman: As we manage expenses, we're balancing both short-term investment and revenue growth with the longer-term opportunities we know are in front of us. Slide 20 recaps our capital position. Reported Common Equity Tier 1 increased to 10.1%, and has increased sequentially for four quarters. OCI impacts to Common Equity Tier 1 resulted in an adjusted CET-1 ratio of 8%. Our capital management strategy will result in expanding capital while maintaining our top priority to fund high-return loan growth.
Linked quarter it looks like and then I believe you alluded to in your comments a lot of that was commercial real estate can you.
Speaker 6: And I know you added to your reserve and commercial real estate, not performers are also pretty sharply. Was there a dedicated effort to scrub the portfolio of that you were working through your exposures there that drove a lumpier move here? Or is this the deterioration that's starting to take shape as we all expect in this?
And I know you added to your reserve.
Commercial real estate non performers are also up pretty sharply was there.
A dedicated effort to scrub the portfolio that you're working through your exposures there that drove a lumpier move here or is this the.
The deterioration that's starting to take shape as we all expect in this in this sector.
Speaker 8: Hey John , it's Rich. Let me start with that, that I can turn it over to Brendan to give you a little bit more color of what happened in the third quarter. So if you could think back to Q2, our NPA level was at 46 basis points, which was the lowest level we've had since the GFC and we've had.
Hey, John It's rich, let me start with that and then I can turn it over to Brendan to give you a little bit more color on what happened in the third quarter. So if you think back to Q2, our NPA levels at 46 basis points, which was the lowest level we've had since the GSE and we passed.
Zachary Wasserman: We're actively managing adjusted CET-1 inclusive of AOSCI and expect to drive that ratio higher over the course of 2024. On slide 21, credit quality continues to perform very well, with normalization of metrics consistent with our expectations. As mentioned, net charge-offs were 24 basis points for the quarter, and while higher than last quarter by eight basis points are tracking to our guidance for full-year net charge-offs between 20 and 30 basis points. This level continues to be at the low end of our target through the cycle range for net charge-offs of 25 to 45 basis points.
Speaker 8: eight consecutive quarters of declines totaling over $450 million since that. The Q3 level that we're at today, 52 basis points, is right around where we were this time last year. So to me, it's not at a level that's concerning to your point around being proactive. We have been a lot of the ads to not a cruel that we had in the quarterward discretionary. We have about two thirds of our commercial and appeals are current.
Eight consecutive quarters of declines totaling over $450 million.
<unk>.
The Q3 level that we're at today at 52 basis points is right around this time last year. So to me it's not at a level that's concerning to your point around being proactive we have done a lot of added.
As to non accrual that we had in the quarter were discretionary.
Zachary Wasserman: As previously guided, given ongoing normalization, non-performing assets increased from the previous quarter, and the criticized asset ratio increased, with risk-grading changes within commercial real estate being the largest component. Allowance for credit losses is higher by three basis points to 1.96% of total loans, and our ACL coverage ratio is amongst the highest in our peer group. Let's turn to our outlook for the fourth quarter on slide 22. We forecast loan growth of approximately 1% in the fourth quarter, which would put full-year loan growth at approximately 5%, matching the lower end of our prior range.
Two thirds of our commercial Npls are current on their.
Speaker 8: on their principal and interest. The crit class is a similar story. We had reduction in seeing five of the six.
Principal and interest the classes of similar story.
We have reductions of five of the six.
Speaker 8: previous quarters and as you talk about credit normalizing, you would expect to see an increase in credit class on from that. So, I wouldn't categorize the movement as huge jumps, I think it's just a normalization of very little levels for us. But Brendan, aren't you give a little bit of insight into the Q3 specifics? Sure, thanks, right. To provide a little bit more color, approximately, for credit class, approximately 60% of the increase is focused on commercial real estate and R8.
Previous quarters, and as you've talked about credit normalization.
We would expect to see an increase in.
And correct class upfront, so I wouldn't categorize the.
And incentives.
Huge John setting is just.
Location off very low levels for us the French market get a little bit of insight into the Q3 specifics sure. Thanks rich to provide just a little bit more color approximately for class approximately 60% decrease this focused in commercial real estate in our ABL group.
Zachary Wasserman: Deposit our likewise expected to grow in the fourth quarter by approximately 1%, core net interest income for the fourth quarter is expected to decline between 4 and 5% from Q3, before expanding throughout 2024 from that level. Non-interest income on a core underlying basis is expected to be relatively stable. Expenses are expected to increase between 4 and 5% into the fourth quarter, primarily driven by revenue-related expenses associated with the expected growth in capital markets, a seasonal increase in medical claims, and sustained investment in new and enhanced capabilities.
Speaker 9: Two places we expect is a higher level.
Places, we expect to see higher levels.
Speaker 9: I mean, at PA side, it was split more equally between commercial real estate and CNI.
It was split equally between commercial real estate and C&I.
Speaker 9: For both NPA and per class, as you noted, the real state exploded, it was focused mostly in office. And on the C and I side, beyond the ABL concentration I mentioned, there really weren't material concentration. So I think what you're seeing in the numbers is where it's said it's just a bounce off of a very low bottom.
For both MTA into classes you noted the real estate.
State exposure was focused mostly in office.
And on the C&I side.
Concentration in that chain.
Material concentrations.
You are seeing in the numbers as Ric status.
Yes.
Oh, great. Thank you I appreciate the detail.
Zachary Wasserman: We expect net chargeoffs for the full year to be near the midpoint of the 20 to 30 basis points guidance range. Finally, let me close on slide 23 with a few thoughts on our management priorities for 2024. We're still finalizing our budget for next year, and as always, we look to share more specific guidance during our January earnings call. First and foremost, we're committed to driving continued capital expansion, while we continue to optimize lending growth to drive the highest returns.
Speaker 1: Our next question comes from the line of Abraham Paul Wallet with Bank of America. This is yours.
Our next questions come from the line of Abraham from a wallet with bank of America.
Here with your questions.
Speaker 10: Good morning. Maybe question for you Steve. I think I mean you've you've ever talked about being transported that a bank said are talking about coming back to loan good next year. But I'm just wondering if there's going to be a ton of loan demand to speak off of banks to lend into this. Give us a sense of what you're seeing across your footprint where that loan demand is coming from or are you seeing customers get increasingly cautious?
Hey, good morning.
Alright.
Maybe question for you Steve I think you all have talked about being transported set of banks that are talking about coming back to loan growth next year, but I'm just wondering if theres going to be a ton of loan demand to speak of for banks to lend into does it give us a sense of what youre seeing across.
Zachary Wasserman: As Steve mentioned, we're playing from a position of strength, and we expect to maintain that position as we get ahead of proposed capital regulations and phase-in periods. Related to deposits, we're continuing to acquire and deepen primary bank customer relationships. This should result in continued growth of deposits into next year, while supporting our discipline management of deposit beta. Given the expected higher-for-longer rate scenario, we will continue to position the balance sheet to remain modestly as a sensitive, which will support the margin and we expect to deliver growth and interest income dollars on a full-year basis.
Your footprint, where that loan demand is coming from or are you seeing customers get increasingly cautious.
Speaker 7: You've very, very question. Thank you. I believe there was a growing cautiousness, what's only wanted in Israel a bit of least. You know, it's going on in Washington. We've got a U.A.W. strike that's not have a parent resolution. And I think businesses are reacting to that. 99% of our customer base is private owned companies.
Hey, Brian Great question. Thank you.
I believe there is a growing cautiousness.
What's going on in Israel, and the Middle East, what's going on in Washington, We've got a UAW strike does.
It does not have.
And the apparent resolution.
And I think businesses are reacting to that 99% of our customer base.
Speaker 8: right to route their using their liquidity but yet uncertain economic outlook and where rates are going all sort of are headwinds to the next round of growth
Companies.
Rates are out there using our liquidity, but yes uncertain economic outlook and where rates are down.
Zachary Wasserman: Non-interest income remains a critical focus for us with sustained execution on three primary strategic areas for fee revenue growth, capital markets, payments, and wealth management. Over the medium term, we expect that non-interest income has the potential to grow at a rate more quickly than both loans and spread revenues, given the opportunities for these fee businesses. As I mentioned on expenses, we have taken considerable actions to hold baseline expense growth to a low level.
Sort of are headwinds to us to the next round of growth.
Speaker 3: Having said that our businesses have joined one of the best work we'll do with the guidance that we gave you The tech gave you earlier and we'll be up about 5% year-to-year and And we'll continue to see world next year. I believe a couple of areas in particular
Having said that our businesses are doing well.
Gross.
So we gave you earlier in the year will be up about 5% year over year.
And.
And we'll continue to see growth next year I believe.
All of the areas in particular.
Speaker 7: Our distribution finance is a powerful option.
Our distribution finance.
Zachary Wasserman: This focused on sustained efficiencies, including operation accelerate, business process offshoring, and the other actions will yield multi-year benefits. These actions are necessary to allow for the continued investment into new and enhanced capabilities, which will set up growth over the course of the next few years. We expect the net result of these actions for 2024 will be an underlying growth rate of core expenses somewhat higher than the level we saw in 2023.
This is powerful as it seasonally reduced this quarter that will be up.
Speaker 7: We do this quarter that will be up in the fourth quarter and we expect to continue to grow that by winning the business.
In the fourth quarter, and we expect to continue to grow that by winning new business.
Speaker 7: we are significant. With confidence lender and
We are a significant equipment finance.
Lender.
Speaker 7: more and more, one-shoring, more automation, that we continue to advance.
More and more onshoring more automation will be continued demand, albeit probably not at the levels. We saw in 'twenty two.
Speaker 7: I'll be at probably minor levels we saw in 22 and before. That will play well. And we're a top 10 asset based lender. So all of those asset related finance activities.
Before that will play well in Europe .
Zachary Wasserman: Our current working estimate is underlying expense growth of approximately 4%, compared to the approximately 2.5% at level we were running in 2023. We believe this level of expense management is the right balance to position the company to operate within the current environment and sustain our momentum into 2025. We will also maintain our rigorous approach to credit management, consistent with our aggregate moderate to low risk appetite. Finally, to close, we believe we are exceptionally well-positioned to proactively stay ahead of the evolving environment. We will be dynamic and address these numerous topics head on. Over time, we believe this will result in opportunities to benefit substantially in the coming years.
We're a top 10 asset based lender so all of those assets related to the S activities should do well in this environment and as you know we are a huge small business bank.
Speaker 7: should do well in this environment. And as you know, we are a huge small business bank. The small businesses will read more.
Of all businesses will need more support and we will be there for them.
Speaker 7: and we'll be there for that. And those will be sources of growth. But there's an overall more cautious outlook within our customer base.
And those will be sources of growth, but this is an overall more cautious outlook.
Within our customer base.
Speaker 7: just that we will have some moderate impact on the I think overall long-term impact.
Just.
We'll have some moderate impact was on the overall loan demand next year.
Speaker 10: God is at helpful and I follow up, Zach, you mentioned solid increases in fixed asset portfolio yields of their reprise. Just talk to us in terms of when these are coming up for reprise saying, is it just kind of playing out contractually? Is there some negotiation in terms of the spread narrowing at the time of reprise of these fixed rate loans?
Got it that's helpful.
A follow up on Zach you mentioned solid increases in fixed asset portfolio yield of daily price.
Zachary Wasserman: With that, we will conclude our prepared remarks and move to Q&A.
Talk to us in terms of when these are coming up for re pricing is it just kind of playing out contractually.
Timothy Sedabres: Tim, over to you. Thanks, Zach.
Operator: Operator, we will now take questions. We ask it as a courtesy to your peers, each person asked 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. At this time, we will be conducting a question and answer session. If you like to ask a question today, please press star one on your telephone keypad and the confirmation tone to indicate your line is in the question queue.
Is there some negotiation in terms of the spread is narrowing at the time of fee based on these fixed rate loans and.
Speaker 10: If that kind of impacting credit chains are some of these borrowers looking a bit worse in terms of their ability to serve as a debt.
Is that kind of impacting credit trends.
Some of these borrowers looking a bit worse in terms of the ability to service the debt fall asleep.
Speaker 8: Yeah, great questions, and I'm going to be able to address those. So, you know,
Yes, great questions.
Yes.
So.
What I'll say is in terms of the trajectory on assets.
Operator: You may press star two if you like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing with our keys. One moment please, we'll be holding a poll for questions. Thank you, Nour.
Back over 200 basis points through the cycle to date, it's really good a couple of things most notably potential outcome.
Speaker 8: over 200 basis points through the cycle today has been a couple things. Most notably, an intentional outcome that we've found in terms of how we're incrementally driving your loan production into and really driving for higher returns, which also is often higher than that, so we're seeing that come through in a lot of the areas where we're actively modulating and optimizing indirect auto, for example, is a great example of that with fields up tremendously under the course of the cycle. It's also though just a natural outcome of the structure of the altitude.
In terms of how we are incrementally driving new loan production in June .
Manan Gosalia: First question is from the line of Manon Gossley with Morgan Stanley. Please receive your question. Hi, good morning.
And really driving for higher returns, which also is often higher so we're seeing that come through and a lot of the areas, where we're actively module.
Zachary Wasserman: Morning, Manon. Can you talk about the puts and takes in that 4% expense growth number for next year. What sort of revenue environment does that bake in? What are the areas that are pushing up expenses and maybe also why you have flexibility to manage more if the revenue environment is weaker? Yeah, a great question. And this is Zach. I'll take that one. Just to to to practice it instead of framework for the answer, let me reiterate what I said in the prepared march to the minute ago, which is driving efficiency in our core expenses that they keep priority for us or one of the most efficient banks in the regional banking space.
Optimizing.
Direct auto for example is a great example of it fuels.
Fuel is up tremendously.
Over the course of the cycle.
Speaker 8: It felt so though, just a natural outcome of the structure of the galaxy. And one of the reasons why we added the slide we did, this quarter in terms of detail there was to just provide more transparency into that, we're allowing you 50% fully-variable to receive a benefit that the entire race comes through on that portfolio. Another roughly 10% in shorter-durated fixed-interact auto, as I just noted, we're seeing really sizable increases in portfolio we're there.
It's also though just a natural outcome of restructured balance sheet.
The reasons why we added the slide.
This quarter in terms of each other or to provide more transparency to that.
We're around 50% fully variable it's interesting.
Higher rates come through on that portfolio, another roughly 10% in shorter duration fixed indirect auto as I just noted.
Really sizeable increases in portfolio.
Zachary Wasserman: That's been a product of years of efforts. What we're trying to do right now is strike a balance of the short term and the median term. In the short term, managing the expenses to a level of work growth given the overall revenue environment. But also in the median term, we see significant growth opportunities over time for hunting tank. We want to make sure that we can maintain the momentum in our key strategies and in fact capture the higher revenue outlook that we are going to just share it.
Speaker 8: you know, 10% in arms, the five-year duration, which we're gradually seeing that come through, you know, in the higher for longer scenario, every one of those picked out that categories, including the longer-related remaining third on the portfolio are really staying at that event that we've seen.
10%.
The five year duration, which we are gradually seeing that come through.
In the higher for longer scenario every one of those fixed asset category, including the longer.
The remaining third of the portfolio are really staying because we've seen.
Speaker 8: you know, just in Q3, 50 basis points increase and then you keep on yield to crop the portfolio greater than 20 basis points increase in the back foot portfolio yield. And I do think that will continue to trend here if you want the key drivers for them stability and growth as we go inside, 2020, four.
Just in Q3 50 basis points increase in ETP bond yields across the portfolio greater than 20 basis point increase in the backlog portfolio yields and if you think that will continue to trend here.
Zachary Wasserman: Even as we quickly get ahead, stress that word quickly, get ahead, probably new and expanded risk management capabilities that we'll need to operate. You know, if you take a step back, it was just over a year ago that we were fully delivering over half a billion dollars of annual expense saves from the TCF merger. Over the last year since then, we felt underlying core expenses to 2.4%, and we did that with all the programs I've just talked about in a very large.
The drivers for stability and growth as we go into 2024.
Speaker 7: It will not see any substantive portfolio-wide cry of driven yield repricing that can have substance and really as much more fundamentally driven. As I know, if you're going to just add, you know, we've got a very diverse type portfolio. We've been very disciplined with our advocate moderate toilist staff, and having over the years, you've seen us report quarterly since 2,000 down, consumer voltage, a simple prime of prime, on auto, and resi, et cetera.
We're not seeing any substantive portfolio wide credit driven.
Yields repricing.
<unk>.
It's much more fundamentally.
Hey, Brian just to add you know, we've got a very diversified portfolio.
Zachary Wasserman: The law of firm efficiency programs, proactive actions we took in the first quarter of this year, and now a new set of actions that were implementing in the third quarter, including another trance of branch routes and optimization, accelerating the business process offshore, driving efficiencies across the bank and finding efficiencies in our core real estate portfolio. As we look at the 24 to your question, we're seeing the opportunity for incremental revenue upside, particularly in the movie strong performance we've seen in our new management program, which is higher than our prior outlook, and good momentum in the fee businesses as we look forward.
<unk> been very disciplined with our aggregate moderate to low risk appetite over the years, you've seen US report quarterly since 2000 consumer book, which is driving <unk> et cetera. So we're sitting in a position we feel strengthens our confidence in the portfolio and our ability to.
Speaker 8: So we're sitting in position where we feel it's strength, we have confidence in the portfolio and our ability to...
Speaker 7: to manage through even in a tougher cycle. And as we've said to our customer base, we've got a relationship orientation. We're here to support them. And we will, we're in position to do that, with our reserves, our capital, our robust liquidity. And that leads us to this stance of plane offense.
Sure.
We had a tougher cycle and as we've said to our customer base. We've got a relationship orientation. We're here to support them and we will we're in position to do that with our reserves and capital are robust liquidity.
And that leads us to this standstill playing offense.
Speaker 7: and moving chair during this deck these next couple of years.
Zachary Wasserman: We want to quickly address the lessons learned from the last year's environment, address the new regulations coming around basil, seed car, resolution planning, and ultimately enhance our risk management. So we can operate in from a position of strength just as we are right now going forward, which will require investment. So the kind of things that are driving that roughly 1.5% higher run rate are invested into teams like treasury risk management technology.
And moving share.
This next these next couple of years.
Got it thank you.
Thank you.
Speaker 1: Quintet questions are from the line of Scott Seifers with Piper Sandler. Please receive your questions. Some more on everyone. Thanks.
Our next questions are from the line of Scott <unk> with Piper Sandler. Please proceed with your questions.
Good morning, everyone. Thanks for taking the clients.
Speaker 11: Hey, I guess wanted to clarify if I heard correctly to fund the NII. Are we expecting it to grow full year 23? Pardon me, full year 24 over 23 or just positively off the force border.
Okay.
I guess wanted to Claire.
Clarify if I heard correctly on the NII.
We expecting it to grow full year 'twenty three.
Pardon me full year 'twenty for over 23 or positively offset fourth quarter base.
Zachary Wasserman: It's where the focus on enhancing data, underlying process capabilities and automation. The goal in the end of our take us to back is to get ahead of these requirements to quickly move through this period. We expect to see around a year's worth of this higher expected one rate of expenses again around 1.5% higher, and then that expense growth rate will come back down again. We exit 2024 and we'll see the underlying core expense management come through. It all goes back to the goal of maintaining our vibrancy, our momentum, and really ensuring the funding continues to be the positional strength to go forward.
Speaker 8: both. Scott, a great question. I'm sorry if I both expect to see trajectory of growth by about a year and on the net basis, full year growth as well, which is any function of a thing. Flacterizing in, it's been pretty comfortable overall full year and year on year, as well as growth and earning assets and months. OK.
Both Scott Great question.
Clarify both see trajectory of growth throughout the year on a GAAP basis full.
Full year growth as well.
Which is kidney function.
Flex horizon.
They've been pretty comparable overall full year.
Year.
As well as growth in earning assets loans.
Okay perfect. Thank you for that and then I wanted to.
Speaker 11: Perfect, thank you for that. And then one and two can revisit the cost equation a bit. Maybe on the initiatives that you began in the third quarter, maybe just some thoughts on the House of Chancel they are. And I guess ultimately, I guess the question becomes, we'll have about 4% expense growth despite these initiatives sort of begs what cost growth might have been without them. So just any sort of further thoughts on exactly where we're investing once these will ultimately end up driving, etc.
We can revisit the cost.
Cost equation a bit.
Maybe on the initiatives that you began in the third quarter, maybe just some thoughts on how is the channel they are and I guess ultimately.
I guess the question become we'll have about 4% expense growth. Despite these initiatives sort of sort of begs what costco it might've been.
Zachary Wasserman: Now this is Steve, just to sort of come in over the top of that. We think this is the time to be dynamic to play offense, to be front-footed in terms of a number of our businesses, and we intend to do that. And that will require investment. We'll have more college mortality, if you will. We'll have some new capabilities, all of which are in the plan, and the numbers that share with you.
Without them.
Just any sort of further.
Further thoughts on exactly where we're investing what these will ultimately end up driving et cetera.
Speaker 8: Yeah, a terrific question. I'm a little bit of a person to expand on that. You know, if I think about the equation that we're managing in 2023, we've been seeing around two and a half percent underlying expense growth. And that's with the benefit of significant efficiencies that were regenerating this year. You know, I estimate that around 1% benefit of the expenses in 2023 from these two-military issues running your lives so Iwehr that
Terrific question.
Just to expand on that.
Thinking about the equation.
Imagine in 2023, we can see around.
Zachary Wasserman: Got it. And then you're just putting it together because you mentioned your modeling NII trends higher as you go to 2024. There's more upside to fees. How does that play into operating leverage for next year? Do you still think you can drive positive operating leverage? You know, it's a little early when you give you precise guidance on that, but driving toward operating leverage over time is a key element of our goals.
Two to two 5% underlying.
Expense growth and that's with the benefit of significant efficiencies.
<unk> this year.
So around 1% benefit in expenses in 2023 fleece cumulative initiatives over the last six months.
MX and.
Speaker 8: and in self-funding underlying investments, we've talked about this model before, thriving efficiencies in the core, keeping the underlying core at a low level through the funnel, an outsized level of investment, an expense growth, and to key investments in areas like tech, marketing new additions to personnel and to support his strategies. Those underlying investments are up almost 20%.
And self funding underlying investments type of this model before driving efficiencies in the core of keeping the underlying core at a low level.
Zachary Wasserman: You'll remember that it's one of the three major financial targets we've set for ourselves. And we do see solid opportunity for revenue growth next year on both the spread and fees. But I would stress again coming back, what's critical for us is management within E&T on at this point. And we want to make sure that we can maintain those critical investments, even as we're driving the efficiency of the underlying expense co-3. Part of our operating leverage over time, we'll absolutely part of the plan. And we'll obviously, the precise outlook for 2024, before I am able to quantify that. We appreciate the detail on those.
An outsized level of investment and expense growth is a key investment areas like tech marketing.
Zachary Wasserman: Thank you.
New additions of personnel to support the strategies of those underlying investments are up almost 20% in 2023, which is what we will hold.
Speaker 8: 2023 which is what fuels all the capacities and we've got as we go into you know, the design for that model is what drove the overall The roughly two and a half percent growth of the design 23
Competitive capabilities.
As we go into.
That model is what drove the overall two 5% growth Cy 'twenty three.
Speaker 8: I think what we're seeing as we go into 2024 is roughly similar to underlying expense management program, really modulating down somewhat the underlying investments in the environment clearly. But also, some modest incremental impacts of just the cumulative inflationary environment.
I think what we're seeing as we go into 2024 is roughly similar sort of underlying expense management program.
Zachary Wasserman: Next question is from the line of Jon Pancari with Evercore ISI. This is your question. Good morning. Good morning, Jon Arfstrom. Just on the interest income front, I know you indicated that you implied a expected drop in the fourth quarter and then expanding through 2024. Maybe you can help us frame the magnitude of a growth, because you think it's achievable under the current curve assumption, as you look at the NII upside and then I guess the same question would be for your commentary around the margin in terms of expansion through the year. Maybe you can help us size that up in terms of what's a fair assumption based on what you're looking at.
Only marginally down somewhat the underlying investments.
Barbara clearly.
But also bearing some modest incremental impacts of just the cumulative inflationary environment and the efficiencies will rise as well and so the net underlying run rate, but I would expect that into next year was around two 5%.
Speaker 8: and the efficiencies will rise as well. And so the net can underline the right thing that I would have expected into next year, it's around 2.5%. And then on top of that, we are accelerating, again, these investments in regulatory response, risk management to abilities that represent the additional 1.5% expense code to go to next year. That's the 4% trajectory.
And then on top of that we are accelerating these investments.
Regulatory response risk management capabilities that represent an additional one 5% expense growth as we go into.
Next year, that's a 4% trajectory.
Speaker 8: If I think about where we're investing, it's a touch on this pretty quickly. You know, continue to focus on core strategy investments to liberate the GCF revenue synergies, growing our commercial bank, your vertical specialty, specialized, specialties, expertise.
Think about where we're investing.
They will continue to focus on core strategy investments delivered the gcs revenue synergies growing our commercial banking vertical specialty specialized.
Zachary Wasserman: Yep, that's a great question. This is not going to take that one. No, I think just to take it that back, I saw in the third quarter really highlighted the effectiveness of our overall asset sensitivity management program. We saw NIM expand and the benefits of asset recovery pricing really coming further into it into a stronger NIM. What we saw in the third quarter was about 10 basis points increase in NIM from the second quarter.
Zachary Wasserman: Around half of that, I will note our items that were temporary in nature, reducing FedCache and Q3 from Q2. For around 3 basis points, we've got some elevated levels of dividend from the FHLB stock that was a function of Q2, FHLB borrowing. Those items won't recur. However, we did see a positive four basis point move in underline thread in the third quarter as I noted. As we think about Q4, our expectation is to have to see a NIM of between 305 and 310 basis points, which is around five or 10 basis points better than what it thought this time last quarter.
<unk> expertise.
Speaker 8: Digital product development in our consumer banking and business banking division.
Digital and product development in our consumer banking.
In business banking Division.
Speaker 8: It continues to drive the fee revenue strategies in capital markets, payments and wealth. And then on top of that, clearly dealing with these additional areas around 103 C-CAR, liquidity and interest rate risk management, resolution planning, and data and other issues.
Continue to drive the fee revenue strategies and capital markets payments and well.
And then on top of that clearly dealing with this.
Additional areas of Basel, III, CCAR liquidity interest rate risk management resolution planning and data and all of Asia.
Speaker 8: You'll also see one out of the state. That state, you'll also see several new initiatives that are also included in that number of 4%. That will be announcing Q4 and Q1.
You'll also see wanted to state to state.
You'll also see several new initiatives that are also included in that.
34%.
That will.
We will be announcing our Q4 and Q1.
Speaker 11: Okay, perfect. And I guess just one final 50-pack question. The fourth quarter cost increased. Well, that includes any unusual charges the way we saw this quarter.
Okay, perfect and I guess, just one final question.
The fourth quarter cost increase would that include any unusual charges.
The way we saw it this quarter.
Speaker 8: So we saw around 15 million dollars of one time costs this quarter.
So we saw around $15 million of one time cost this quarter.
Speaker 8: Some portion of the
Zachary Wasserman: It's one of the driven by the benefits we're seeing coming through from the higher floor longer rates in our area, which we've noted would expect to be the creatives overall NIM and that is very free. Based on what the trends we're seeing in earning assets, I expect the dollars of an II and Q40 down by four to five percent from Q3 and forming a trough. Both in NIM ratio and in NIM and interest in $5 in the fourth quarter than trending higher from there.
Some portion of it.
Speaker 8: One time possibly expects to arise as a result of the new initials rotating place.
One time cost that we expect to arise as a result of the new initiatives, taking place were not able to get accounted for within the third quarter I'm expecting roughly $10 million additional one time expenses in the fourth quarter related initiatives.
Speaker 8: We're not able to be accounted for within the third quarter. I'm expecting roughly $10 million additional one-time expenses in the fourth quarter related to those same initiatives. That's not included in the diet that I gave earlier, relatively diminished, and the grant scheme of things. So the total one-tivers, related to those actions, I expect to be approximately $25 million in total, which again, we've taken $15 million, and it'll be a non-future.
Not included in the guidance.
Earlier relative to diminish the grants TSA. So the total one timers related to those actions I expected to be approximately $25 million in total.
Zachary Wasserman: The NIM outlook for Q4, Q4, Q4, I expect to be flat through rising as I noted. I think the things you're going to see are continuing to really solid progress on fixed assets every pricing. Major asset categories on the fixed side of the score versioning. Again, sequential increases in Q3, Q3, Q3 that continuing on, particularly in higher floor longer scenario. Even as we do see data continuing to trend as well, it'll be a period of overall spread throughout the course of next year.
We've taken 50 million.
Great.
Okay, Alright, perfect. Thank you all very much.
Speaker 1: Any questions in the line of Madame Conner with Dracabane? Please subscribe to our channel.
Our next question different your line of Matt O'connor with Deutsche Bank. Please proceed with your question.
Speaker 11: Good morning. Um, just circling back on capital obviously strong really any ratio you look at and you know including a OCI And I understand the logic of building capital from here given uncertain back row and you're kind of leaning the business But is there a level that you're like you know once we get here It's just more than we need under almost any scenario and you'd like to deploy it more aggressively
Good morning.
Just circling back on capital, obviously strong really any ratio you look at and conclude.
Including a OCI and I understand the logic of building capital from here, given uncertain macro and Youre trying to lean in the business, but is there a level that you like once we get here.
Zachary Wasserman: We'll also benefit as we've noted before during 2024 from a gradual reduction in the negative carry from the received goods swap hedge portfolio. This may roughly five basis points throughout the course of next year on that benefit, maybe in the second half of the year. I would say a couple that's laterizing NIM with growth in loans, growth in earning assets that go to the overall NII dollars higher. We'll get more precise with guidance as we get into January, but those are the nature of drivers that are seeing this point.
It's just more than we need under almost any scenario and you'd like to deploy it more aggressively.
Speaker 8: Yes, it's a great question. I'm not going to need to take a minute to stand on that. As you know, the driving capital higher from here is a key focus. We have fully transitioned within the company to managing the primary metric of the Johnson CET1 inclusive of the AACI.
Yes, it's a great question.
Maybe to take a minute to expand on that.
Driving capital higher from here is a key focus we have fully transitioned within the company to managing the primary metric of adjusted CET, one inclusive of ACI.
Speaker 8: And on that basis, we're 8% in the third quarter. Our operating range, the CPU-1 is between 9% and 10%. And so we want to drive that 8% ratio up into that operating range between 9% and 10% and that's the key goal. So I think, good.
And on that basis were up 8% in the third quarter, our operating range of CET. One is between nine and 10%. That's what we want to drive 8% ratio up into that operating range, but between nine and 10% and thats the key goal.
Zachary Wasserman: Very helpful, Zach, thank you for that.
John Pancari: And then separately on credit, criticize loans, up 17% link order looks like, and I believe you alluded to in your comments.
John Pancari: A lot of that was commercial, real estate, can you? And I know you added to your reserve and commercial real estate, not performers are also pretty sharply. Was there a dedicated effort to scrub the portfolio that you were working through your exposures there that drove a lumpier move here, or is this the deterioration that's starting to take shape as we all expect in this sector?
Yes.
Speaker 8: By the time we get there, I expect that we would be significantly incompetent to be able to do that, by the way, over time.
By the time, we get there I expect that.
With significant confidence in being able to do that.
Todd.
Speaker 8: By the time we get there, presumably without clarity around the final battle through your requirements, any other implications to capital coming out of the new regulatory environment.
By the time, we get there presumably will have clarity around the final Basel III requirements any other.
Implications capital coming out of the new regulatory environment.
Speaker 8: And we also realized that we're the macro environment and we're an Olympic trajectories. So I love it to the question without earlier. And so, hard to take, so exactly where within that range we will want to go. But my expectation is once we get into that range, there will be an opportunity to get back to a more normalized capital distribution model, support elevated and longer.
We will also reassess where the macro environment.
Richard Pohle: Hey John, this is Rich, let me start with that so that I can turn it over to Brendan to give you a little bit more color on what happened in the third quarter. So if you think back to Q2, our NPA level was at 46 basis points, which was the lowest level we've had since the GMC, and we've had eight consecutive quarters of declines totally more than $450 million since that. The Q3 level that we're at today, 52 basis points, is right around where we were this time last year.
The trajectory sorry. The question was asked earlier so.
Hard to peg exactly where within the range, we will want to go but my expectation is once we get into that range.
There will be an opportunity to get back to a more normalized capital distribution model stores.
Elevated longer.
Speaker 8: The ball returned to run rate levels of a longer than you've seen in the past.
Longer term run rate levels of loan growth that you've seen in the past.
Speaker 8: and we'll through it. You know, I'll just tack on your current working hypothesis in modeling the estimate around the VALZL-3 proposal, which was adopted exactly as was proposed as roughly 5% increase in RWA.
And I think we're through it.
I'll just tack on.
Working hypothesis and modeling estimates around the value of our.
Richard Pohle: So to me, it's not at a level that's concerning to your point around being proactive. We have been a lot of the ads to not a cruel that we had in the quarter work discretionary. We have about two thirds of our commercial and appeals are current on their principal and interest. The crit class is a similar story. We had reductions in five of the six previous quarters, and as you talk about credit, normalizing, you would expect to see an increase in crit class from that. So I wouldn't categorize the movements as huge jumps. I think it's just a normalization of very little levels for us.
Proposal, which was adopted exactly as was proposed is roughly 5% increase in our <unk>.
Speaker 8: You know, based on the phase in schedule that was proposed as part of the NBR, that wouldn't be phase in until 2027. And we're going to present about 40 reps of CDT1 in 2027. And again, that proposal is written. And so part of this is just quickly get ahead of that even as far out and time as ever it is.
Based on the phasing of the schedule of those proposed as part of the NPR that wouldn't be phased in until 2027.
Represent about 40 bps of CET, one and 2027.
Proposals written.
Part of this is just quickly get ahead of that far out in time set of years.
Speaker 8: and allows to move forward in front of the foot.
And allow us to move forward our funnel foot.
Speaker 4: before we get lower
It starts at 25 and beyond.
Celebrated logo.
Brendan Lawlor: But Brendan, won't you give a little bit of insight into the Q3 specifics? Sure. Thanks, Rich. To provide a little bit more color, approximately for a crit class, approximately 60% of the increase was focused on commercial real estate and our ADL group. There are two places we expect at the higher levels. On the APA side, it was split more equally between commercial real estate and CNI. For both NPA and crit class, as you noted, the real estate exposure was focused mostly in office.
Speaker 12: Got it. That was helpful. And then just quickly squeeze in the mark to market impact of the pay fixed option. Maybe it's a silly question, but do we just kind of put in some gains when rates go up and then it freaks go the other way? Is it mark to market on the negative side? Or how should we think about modeling the ad and the drivers?
Got it that's helpful. And then just quickly squeeze on the mark to market impact of our pay fixed swaps.
Maybe it's a silly question, but if we just kind of putting some gains when rates go up and then their freight still got away is that mark to market on the negative side our.
How should we think about modeling that in the drivers.
Speaker 4: Yeah, but let me explain about that. I'll put a huge contact on it, and I'll answer this just a bottom of the question. The strategy of those instruments to protect capital against really substantive upgrades and areas, when we purchased them, they were roughly two or three points out of the money. They've got about a nine to ten to twelve months of forward life.
Yes, let me expand on that.
You should contact product lines, just a modeling question.
The strategy of those instruments was to protect the capital it's really substantive operated scenarios. When we purchased them. They were roughly 200 basis points out the money <unk> got about nine to 10.
Brendan Lawlor: And on the CNI side, beyond the ADL concentration I mentioned, there really were material concentrations. So I think what you're seeing in the numbers is where it's said it's just a bounce off of a very low bottom.
Abraham Poonawala: Okay, thank you. Appreciate the detail.
12 months forward life.
Sure.
Speaker 4: and they would be designed to protect a third to maybe as much as 45% of the security value would rest in those really softens of up 200 to 300 basic points shocks and areas.
And they will be designed to protect a third maybe as much as 45% of the security value at risk in those really substance of about 200 to 300 basis point shock scenarios I think.
Abraham Poonawala: Our next question comes from the line of Abraham Paul Wallet with Bank of America. This is your third question.
Speaker 8: I think we put a lot of them on, early in the second quarter, yeah, it's that portfolio early in the third quarter. We spent probably $30 million in premium. So it's in our view, a pretty small insurance policy for very significant benefit in those shocks and areas.
Scott Siefers: Good morning. Maybe question for you Steve. I think I mean, you've already talked about being transported. There are banks that are talking about coming back to loan growth next year. But I'm just wondering if there's going to be a ton of loan demand to speak off of banks to lend into this. Give us a sense of what you're seeing across your footprint where that loan demand is coming from. Or are you seeing customers get increasingly cautious?
We put a lot of them on early in the second quarter.
That portfolio earlier in the third quarter, we've spent roughly $30 million in premium.
So in our view a pretty small insurance policies for a very significant benefit.
In those shock scenarios.
Speaker 8: What we've seen thus far is gains. It's not $18 million of gain. Q2, $33 million of gain. Q3, that's a $51 million. Q relative gain. I'll tell you if you were to strike them. Right now you see another gain. It's a quarter of a clearly. They get marched at the very end of the quarter.
We've seen thus far as teams saw $18 million gain in Q2 $33 million gain Q3 was $51 million cumulative gain.
Scott Siefers: Thank you very much. Thank you. I believe there was a growing cautiousness. You know, what's going on in Israel and the Middle East was going on in Washington. We've got a U.A.W, strike that does not have a parent resolution. And I think businesses are reacting to that. You know, 99% of our customer base is probably on companies right to route. They're using their liquidity, but yeah, uncertain economic outlook and where rates are going.
I'll tell you if you were to strike.
Right now you can see another gain in the fourth quarter, but clearly they get marked at the very end.
The quarter.
Speaker 8: The answer is yes, and in your term, it rates rise, you would see a gain in them, it rates fall, you would see a loss in them. You know, the key thought process for us is, how critical is that insurance policy to continue to maintain?
The answer is we have some near term rates rise you would see you would see a gain in them.
You would see in Boston.
Yes.
The key thought process for us.
How critical is that insurance policy to continue to maintain.
Speaker 8: And so versus the game in them, if we continue to hold them, I would expect that over time they would expire unused and out of the money. And you would see that game run back through as a negative through the income if they were to closed out. And we will be dynamic in continuing to watch the interest rate outlook with a primary focus on protection in capital. At this point, again, pretty divinibous cash out a full-run strong insurance policy.
Scott Siefers: All sort of our headwinds to the next round of growth. Having said that, our businesses have joined a lot of good growth. We'll deal with the guidance that we gave you. That's that gave you earlier in the year. We'll be up about 5% year over year. And we'll continue to see growth next year. I believe in a couple of areas in particular. Our distribution finance is a powerful engine. It seems to reduce this quarter.
And so versus the gain in that if we continue to hold up I would expect that over time, they would expire unused and out of the money.
Youll see that game.
Run back through.
Income if they were to close out and we will be dynamic and continue to watch the interest rate outlook with a primary focus on protection capital at.
At this point pretty de Minimis cash outlays.
Insurance policy.
Sure.
Scott Siefers: There will be a net in the fourth quarter, and we expect to continue to grow that by winning the business. We are a significant put in finance lender. And more and more long-shoring, more automation will be continued to demand. I'll be at probably not at the levels we saw in 22 and before. That will play well. And we're tough to ask the base lender. So all of those asset-related finance activities should do well in this environment.
Okay that makes sense, thanks for that detail.
Okay.
Speaker 1: Our next questions are from one of Ken Houston's Jeffries. Please see your three questions.
Our next questions are from the line of Ken Houston with Jefferies. Please proceed with your questions.
Hey, good morning.
Speaker 13: Steve, I know you talked about, you know, generally a little bit of, you know, softening demand out there, but I wanted to ask you on your auto business, when I did notice that your originations were up, and obviously a lot of, a lot of peers have pulled away from this business, and as a business that you've got has been historically very strong in, and now has really good incremental yield. Just wondering if that's an all in opportunity step, and have you kind of,
Steve I know you talked about generally a little bit of softening demand out there, but one I wanted to just ask you on your auto business I did notice that your originations were up and obviously a lot of a lot of peers have pulled away from this business and it's a business that you guys have been historically very strong and now has really good incremental yields just wondering if that's at all an opportunity.
Scott Siefers: And as you know, we are a huge small business bank. And small businesses will need more support, and will be there for them. And those will be sources of growth. But there's an overall more cautious outlook within our customer base. Just that we will have some moderate impact on I think overall long-term impact next year.
Sad and have you kind of how do you think through re engaging there as one of those potential.
Speaker 13: How do you think through re-engaging there as one of those potential growth engines, especially as you've been able to show the deposit stability? Thanks.
Growth engines, especially as you are.
<unk> been able to show that deposit stability. Thanks, Ken.
Speaker 7: Can great question. And auto has performed very, very well for us. We have confidence in its credit. And spreads are very attractive. It's a single-poll product. And in the past, when spreads are wide, and we've just been doing a bit more, we'll be dynamic because we look at this as the industry environment clarifies. And it's a short key, you know, to relatively short assets, roughly a two-year average duration. So we'd like this.
Yes, Great question as auto has performed very very well for us we have confidence in our credit spreads are very attractive to us it's a cyclical products.
In the past week.
Zachary Wasserman: God is at helpful, and I follow up, Zach, you mentioned solid increases in fixed asset work for your yields of their reprise. Just talk to us in terms of when these are coming up for reprise saying, is it just kind of playing out contractually? Is there some negotiation in terms of the spreads narrowing at the time of reprising of these fixed rate loans, and is that kind of impacting credit trends? Are some of these borrowers looking a bit worse in terms of their ability to serve as a debt post repressing?
And what we've just to do a bit more with these dynamics as we've looked at this as the interest rate environment clarifies a short.
Relatively short assets roughly or so here.
Average duration, so we like this asset.
Speaker 7: acid class a lot and we certainly like it counter-synchically and You know that will be something we'll be looking at closer as we go to 24 and 25
Class a lot.
We certainly like it counter cyclically.
That will be something we'll be looking at closely as we go into 'twenty four and sleep.
Speaker 13: Okay, great. And then the last thing of Zack, just looking at what you moved around a little bit on the Swapsport Boyotes, can you just kind of walk us through some of your decision trees with regards to this quarter's terminations and locking in here and any anticipated future activity you're thinking about in terms of just the book as it stands and going forward. Thank you.
Okay, Great and then last thing Zach just.
Looking at what you moved around a little bit on the swaps portfolio can you just kind of walk us through.
Zachary Wasserman: Jack, great questions, let me address those. So, you know, what I say is in terms of the trajectory on asset, you know, it takes it back, over 200 basis points through the cycle today. It's really been a couple things. Most notably, in a potential outcome that we've had in terms of how we're incrementally driving your loan production into and really driving for higher returns, which also is often higher payments, or we're seeing that come through in a lot of the areas where we're actively modulating and optimizing, you know, indirect auto, for example, is a great example of that with fields up tremendously under the approach of the course of the cycle.
Some of your decision trees with regards to this quarter's terminations and locking in here and any anticipated future activity youre thinking about in terms of just the.
As it stands going forward. Thank you.
Speaker 4: Absolutely, absolutely. You know, and I will tell you this is a very dynamic and active discussion because it's a weekly pretty rigorous and made in the analysis process that we do. And it's always focused on two key strategies. Protecting capital against authorized scenarios and protecting them against valued scenarios.
Absolutely absolutely.
I will tell you. This is a very dynamic and active discussions it's a weekly.
The analysis process that we do is always focused on two key strategies protected capital upgrade scenarios and protecting against salaries scenarios.
Speaker 8: As I know even the prior question around the pay-to-exploption is we get ads during the quarter to that Anticipating that rates had the Strong potential of moving higher and once that kept happening and that and we did and Rates in fact the tires and saw really and so that benefit of us there But what's interesting is well is that the curve has steepened and the long end has come up as much as it has
As I noted in the prior question around the swaption.
During the quarter to that.
Zachary Wasserman: It's also though just a natural outcome of the structure of the balance sheet, and then one of the reasons why we added the slide we did this quarter in terms of detail there was to just provide more transparency into that. We're allowing you 50% fully-variable to receive the benefits of higher rates come through on that portfolio. Another roughly 10% in shorter-durated fixed indirect auto, as I just noted, we're seeing really sizable increases in portfolio view there.
It is fitting that rates had the strong potential of moving higher and wants to protect capital.
And we did and the greatest piracy soft clearly.
Benefitted us there.
Interesting as well because as the curve has steepened the longer it does come up as much as it has the opportunity to optimize and can take incremental gallery hedging opportunities in a more efficient manner with less upfront Kerry is increasing.
Speaker 4: opportunity to optimize and can take incremental downgrade catching opportunities in a more efficient manner, or less upfront negative carry, is increasing.
Speaker 8: I would say as it relates to that, our view is still legging into it, the no big bets, and we're seeing very significant advantages come through in the base assets that's actually clearly. But over the longer term, think out into 25, 26, 27, we certainly want to protect.
Zachary Wasserman: You know, 10% in arms, the five-year duration, which we're gradually seeing that come through, you know, in the higher for longer scenario, every one of those fixed out that categories, including the longer-durated remaining third of the portfolio, are really staying dependent on that. And we've seen, you know, just in Q3, 50 basis points increase, and you keep on yields across the portfolio, greater than 20 basis points increase in back book portfolio yields.
As it relates to that our view is still lagging into it no big bets.
And we're seeing very significant benefits come through.
Asset sensitivity clearly, but over the longer term things out into 'twenty five 'twenty six 'twenty seven we certainly want to protect those revenue streams.
Speaker 8: those right ministries and will we see the opportunity to increase downright hedge in here if the environment continues to be what it is. At the meantime, it's more an optimization, I would say. You saw as exit, some receive fixed lobs in G3, those were really shorter duration, just less efficient structures by exiting them, we increased the capacity to be up for a lot of structures.
And we will see opportunities to increase downright hedging here at clean harbors.
Used to be what it is in the meantime, it's more of an optimization I would say you saw exit some receive fixed swaps in Q3. This will be mainly shorter duration, just less less efficient structures by exiting or increased capacity to be up for longer structures. We entered in some colors, which would <unk>.
Zachary Wasserman: And I do think that will continue to trend here, if you want, the key drivers for in stability and growth, as we go into, in, say, 2024. We're not seeing any substantive portfolio-wide, credit-driven and yield-reprisoning in substance. It really is much more fundamentally pivoting, as I know. If we're just to add, you know, we've got a very diverse type portfolio. We've been very disciplined with our aggregate moderate-toil risk appetite over the years.
Speaker 8: We entered into some collars, which would give us the option for dowry hedging, you know, the rates are attractive out of the future. And I do suspect that there'll be more of that dowry hedging opportunity that I'll just say, you know, as we go through our forum and through our next year, if the curve continues to be the worst shape.
Give us the option for downgrade hedging.
If rates are attractive out into the future.
Do you suspect that there'll be more of that salary hedging opportunities.
Zachary Wasserman: You've seen us report quarterly since 2000 down, and consumable, which is simply prime and prime, on auto, and resie, et cetera. So we're sitting in a position where we feel strength, we have confidence in the portfolio and our ability to manage through even in a tougher cycle. And as we've said, to our customer base, we've got a relationship orientation. We're here to support them. And we will, we're in position to do that, with our reserves, our capital, our robust liquidity. And that leads us to this stance of playing offense, and to, and moving chair during this next, these next couple of years.
As we go throughout Q4.
Next year.
It seems to be the issue.
Speaker 13: Okay, and is there a way of putting all that together in terms of the net impact of the swapped book on your NII and is that getting better going forward or worse? Can you just kind of help us put it in context if you can?
Okay and is there a way of kind of just putting all that together in terms of like the net impact of the swaps book on your NII.
Is that getting better going forward or worse can you just kind of help us put it in context. So if you can.
Speaker 8: That's absolutely a great question. So just zooming into 24 for a second, based on the swath we've got in the portfolio today, I do expect we're seeing roughly a 15 to 17 basis point drag.
Yes.
That's a great question. So just zooming into 'twenty four for a second just based on the swaps. We've got in the portfolio today I do expect we're seeing roughly a 15 to 17 basis point drag.
Speaker 8: In current name, it was 15 and 23. Technically roughly 17 bits of drag in June 4, 2023. From the overall swaps coming through there.
Currency was 15 in Q3, but could you roughly 70 bps of drag in Q4 of 2023 overall.
Zachary Wasserman: Water, thank you. Thank you.
Scott Siefers: My new questions are from the line of Scott Siefers with Piper Sandler. Please just hear your questions.
Swaps coming through yet.
Zachary Wasserman: Morning, everyone. Thanks for taking the course. Hi, Zach, I guess wanted to clarify if I heard correctly the time of the NII. Are we expecting it to grow full year, 23? Part of the year, 24, over 23, or just positively off the fourth quarter base? Well, Scott, great question. I'm sorry if I both expect to see trajectory of growth under the year, and on the net basis, full year growth as well, which is any function of fluctuating in pretty comfortable overall full year, year on year, as well as growth during the hours and months.
Speaker 8: As I noted, one of the earlier questions in this hour, by 2024, I expect that to reduce my amount of five bits, particularly on the little second half of the year when the curve starts to fall in the forecast.
As I noted one of the earlier questions in this hour by 2024, and I expect that to reduce by about five bps, particularly second half of the year linked with the curve starts to fall.
In the forecast.
Speaker 11: Yeah, so that's probably the best way against your question. In the end, the goal is to call in and really just support it in this type of range for years.
Yes.
The best way to answer your question.
The gold color than as it relates to support this type of range.
Thank you.
Speaker 1: The next question is from the line of Eric Ben-Dajarian with UBS. This was easier.
Our next question is from the line of Erika Najarian with UBS. Please proceed with your question.
Speaker 14: Hi, good morning. My questions have been asked and answered. Thank you.
Hi, Good morning, my questions have been asked and answered thank you.
Zachary Wasserman: Okay, perfect. Thank you for that. And then wanted to revisit the cost equation a bit. Maybe on the initiatives that you began in the third quarter, maybe just some thoughts on the House of Chancel they are. And I guess ultimately, I guess the question becomes, we'll have about 4% expense growth despite these initiatives and sort of begs what cost growth might have been without them. So just any sort of further thought on exactly where we're investing once these will ultimately end up driving, etc.
Thanks, Eric.
Speaker 1: Our next questions are from the line of John Arsh with RBC Capital Markets. This is you.
Our next questions are from the line of China with RBC capital markets. Please proceed with your question Hey, Thanks, Good morning, Brian .
Speaker 11: Hey, thanks, good morning. Welcome, Dan. Hey, Richard Brendan, what's the message you want to send us on the Outlook for provision and reserves? I mean, it feels like you feel fine on credit, but I'm curious if you feel you need to build reserves and how you want us to think about provision.
Morning, John .
Hey, Richard Brendan.
What's the message you want to send a thumb.
Outlook for provision and reserves.
Feels like you feel fine on credit, but I'm just curious if you feel you need to build reserves and how you want us to think about provision.
Speaker 8: Yeah, let me just start with kind of where we are in the quarter. We bumped out by three basis points. Our coverage ratio was really a 1% dollar increase. We went up $26 million and we put most of that into the commercial goal state research, just given the uncertainty that we got there.
Yes, let me just.
But kind of where we are and of course, we bumped up by three basis points. Our coverage ratio was really a 1% dollar increase of about $26 million, we put most of that into the commercial real estate just given.
Zachary Wasserman: Yeah, terrific question. I think about the equation that we're imagining in 2023. We've been seeing around two and a half percent underlying expense growth, and that's with the benefit of significant efficiencies that were generating this year. I estimate that around 1% benefit of the expenses in 2023 from these cumulative issues running for the last six, eight, 18 months. And self-funding underlying investments, we've talked about this model before, driving efficiencies in the core, keeping the underlying core in a low level through the funnel, an outsized level of investment and expense growth into key investments earnings like tech, marketing new additions to personality and to support strategies.
We got there.
Speaker 8: You know, where we go from here maybe don't get specific guidance around.
Where we go from here I mean, we don't give specific guidance around.
Speaker 8: The coverage ratio of virtually around the provision button.
The coverage ratio of virtually around the provision.
Speaker 8: You know, it's going to depend on where the economy goes and to the extent that we see further weakening.
Is going to depend on the road.
He goes to the extent that we see further weakness.
Speaker 8: you know, will reevaluate it, but I would imagine that any builds from here would be similar to what you would see in the third quarter, probably nominal from a dollar standpoint, we might be moving some things around. But in general, you know, we feel really good about where the reserve is right now. And you know, as we get to the other side of this, some of the economic health that starts to improve, you know, you can see us bringing the...
We'll re evaluate it but I would imagine that builds from here would be similar to what you would see.
Third quarter fairly nominal from a dollar standpoint, as it might be moving some things around.
In general we feel really good about where the reserve is right now and as we get to the other side of this.
It starts to improve sales, bringing cub.
Speaker 8: covered right show back down into that 160 range over time. So we'll look at it every quarter, John , and but we feel good about the one that he sets right down.
Average ratio back down into that 160 range.
Time so.
We'll look at it every quarter gentlemen.
Zachary Wasserman: Now those underlying investments are up almost 20% in 2023, which is what fuels all the competitive capabilities that we've got. As we go into, you know, this is not that model, it's what drove the overall, the roughly two and a half percent growth of the design, 23. I think what we're seeing as we go into 2024 is roughly similar sort of underlying expense management program, really modulating down somewhat the underlying investments and the environment clearly, but also varying some modest incremental impacts of just the cumulative inflationary environment.
We felt good about the 186 right now.
Speaker 15: Layton the call Steve but just a bigger picture question for you You had a
Okay.
Late in the call Steve but.
Just a bigger picture question for you.
You had a good quarter.
Speaker 15: But when I saw the guide for the fourth quarter for Laura and I hired Spence's and then...
When I saw the guide.
For the fourth quarter for lower NII and higher expenses and then.
Speaker 15: her de-expans guy for twenty four did get get kind of pull back some of that optimism i guess my my bigger and i think you understand that my bigger picker picture question is what what's the message for twenty four is that is it a year of investment
Heard the expense guide for 2004, it kind of pulled back some of that optimism I guess my bigger and I think you understand that but my bigger picture question is what's the message for <unk> 24 is that is it a year of investment.
Speaker 15: and you're not going to push revenue growth or are we just you know all being a little bit too pessimistic here and just focusing on the expenses and some of the near-term NII had one.
Youre not going to push revenue growth or we just all being a little bit too pessimistic here and just focusing on the expenses and some of the near term NII headwinds.
Zachary Wasserman: And the efficiencies will rise as well. And so the net could underline, I would have expected into next year, it's around 2.5%. And then on top of that, we are accelerating, again, these investments in regulatory response risk management capabilities that represent the additional 1.5% expense growth that we go into next year.
Speaker 7: Jack also talked about improving net interest income and net interest at 24. So I don't think that our outlook is not of a negative nature. We're investing in the businesses.
Zach also talked about improving net interest income and NIM.
24.
I don't think of that as well.
Okay.
Negative nature.
Investing in the businesses.
Speaker 7: We're going to do a number of things that I think will condition us really well for the medium term like 25, 26 in terms of further growth. We'll have some new capabilities and some additional talent in the company. We'll be in a position to
Two.
Zachary Wasserman: That's the 4% trajectory. If I think about where we're investing, to talk on this briefly, they'll continue to focus on core strategy investments to liberate the TCF revenue synergies, growing our commercial bank through vertical, specialty specialized, specialties, expertise, digital products development in our consumer banking and business banking division. , continue to drive the fee revenue strategies in capital markets, payments, and wealth. And then on top of that, clearly dealing with these additional areas around 10,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000. And data and automation. You'll also see one at the state. You'll also see several new initiatives that are also included in that number 4%, that will be announcing Q4 and Q1.
A number of things that I think will position us really well for the medium term like 25 26 in terms of further growth will have some new.
Capabilities additional talent in the company will be in a position to two.
Speaker 7: managed with with data and processes even better as we go forward. We're Accelerating some of our multi-year plans into 24 and as that said, you know, that's been
Vantage with data and processes, even better as we go forward, we're accelerating some of our multiyear plan inventory for and as Zach said.
Speaker 7: that that growth in outlook for expensive and 25 comes back to a more normal level. So this is a business being intentional, provisioning the company to play off its, and we think we're in that position. We're confident on our credit, we've got good and growing capital on both growth and adjusted basis. The quality is exceptional, the deposit growth continues.
<unk>.
That growth outlook.
Outlook for expenses in 'twenty five comes back to a more normal level. So this is this is us being intentional.
Positioning the company to play offense.
We think we're in that position we are confident of our credit we've got good and growing capital on global growth and an adjusted basis liquidity is exceptional deposit growth.
<unk>.
Speaker 7: As you saw in 2010, for those who were out in that period, there were moments to take advantage.
As you saw in 2010 for those who are rounded up periods.
There are moments to take advantage.
Speaker 7: So we launched their flight, that's what we did a number of things, the conversion back, and really opened up SBA loans, etc. We think this coming years will end up moments, and we intend to put it up.
Zachary Wasserman: Okay, perfect. And I get just one final 55 question. The fourth quarter cost increased. Will that include any unusual charges the way we saw this quarter? So we saw around 15 million dollars of one-time costs this quarter. Some portion of the one-time cost that we expect to arise as a result of the new initiatives were taking place, we're not able to be accounted for within the third quarter. I'm expecting roughly $10 million additional one-time expenses in the fourth quarter related to those same initiatives.
We launched airplanes as we did a number of different commercial day.
And it really opened up.
Et cetera, we think this coming year, it's one of those moments and we intend to put us.
Speaker 8: So it's it, okay, that's good. I had to ask it Steve, I'm getting asked that question, but I just needed to know if you're optimistic or pessimistic for 2024, it sounds like you're... We are optimistic about 24 and beyond.
Okay.
Okay. That's good I had to ask it is Steve I'm getting asked that question, but I just I just needed to know if you're optimistic or pessimistic for 2024 and it sounds like you are.
We are optimistic about slow for SDI.
Speaker 16: And the art job. All right. All right. Okay. Thank you.
And beyond.
Alright, alright, okay. Thanks Yep. Thank you.
Thank you.
Speaker 1: Our final question is in the line of Stephen Allen Fathillis with J.P. Morgan. This is you.
Zachary Wasserman: That's not included in the data that I gave earlier, relatively diminished in the grant scheme of things. So the total one time is related to those actions. I expect to be approximately $25 million in total, which again, we've taken 15 million. It'll be a knowledge you've written.
Our final question is from the line of Steven Alexopoulos with Jpmorgan. Please proceed with your question.
Speaker 1: Good morning everyone. I've heard all the commentary for the past hour on expenses. And I guess what I still don't understand is this step up in expense growth in 2024. Is that tied to you seeing a better revenue environment to absorb a higher level of spend for something going on that's going to require you to spend more in 2024? Ignostic for the revenue.
Hey, good morning, everyone.
Zachary Wasserman: Okay, perfect. Thank you all very much.
Alright.
Steven.
And all of the commentary for the past hour on expenses and I guess, what I still don't understand is is this step up in expense growth in 2024.
Is that tied to us seeing a better revenue environment to absorb a higher level of spend or is something going on that's going to require you to spend more in 2024 agnostic to the revenue environment.
Matt O'connor: Our next question is from the line of Matt O'Connor with Richard Banks. This is your third question.
Matt O'connor: Good morning. Okay. So just circling back on capital, obviously strong, really any ratio you look at, including AOTI. I understand the logic of building capital from here, given uncertain macro, and you're kind of leaning the business. But is there a level that you're like, you know, once we get here, it's just more than we need under almost any scenario. And you'd like to deploy it more aggressively.
Speaker 7: So we're gearing the company to manage a growth dynamic that we expect will be in place in 24 beyond.
So we are gearing the company too.
Vintage of growth dynamic.
We expect will be in place in 'twenty four and beyond.
Speaker 7: We also are accelerating certain multi-year investments into 2.24. So we're in an even better position with data. And it's principally data to manage in.
We also are accelerating certain multi year.
Investments.
24, so we're in an even better position with data it is principally data too.
Zachary Wasserman: Yes, it's a great question. Let me ask you a minute to stand on that. You know, as you know, the driving capital higher from here is a key focus. We have fully transitioned within the company to managing the primary metric of adjusted CET1, inclusive of AACI. And on that basis, we're 8% in the third quarter. Our operating range for CET1 is between 9% and 10%. And so we want to drive that 8% ratio up into that operating range between 9% and 10% and not the key goal.
The advantage in.
Speaker 7: in the names of the company. I mean, we're at different scale models.
And then as a company.
Different scale now.
Speaker 7: GCF, we saw a lot of unique activity in march around Silicon Valley. Things move very quickly. We want, you know, I want, and the board wants better data, better access to information.
We saw a lot of.
Unique activity in.
In March around Silicon Valley things moved very quickly we want.
We want.
And the board want better data better access to information.
Speaker 7: that we have and make pushing the button together. So we've been on a multi-year journey, we're gonna pull that forward and position the company to be even stronger.
But we haven't.
Pushing a button to get it so.
With that on a multi year journey with our progress forward.
Our position the company to be even stronger.
Zachary Wasserman: You know, I think by the time we get there, I expect that we would, with significant confidence in being able to do that, by the way, over time. By the time we get there, presumably we'll have clarity around the final battle through your requirements and the other implications to capital coming out of the new regulatory environment. And it was also reassessed where the macro environment is and where the lending trajectories are a little bit to the question without earlier.
Speaker 7: We've been managing market risk as you've seen with I was talking about half of our AFS portfolio since 19, but our processes
We've been managing.
Market risk as you have seen with our hedging about half of our of our <unk> portfolio since 19, but our processes.
Yeah.
Have not.
Speaker 7: that as automated as we would like them to be given the speed at which things can change.
Yes.
Automated as we would like them to be given the speed at which things can change.
Speaker 7: And so we said we would take advantage of lessons learned out of Silicon Valley and others as a most recent episode. And that has resulted in us making a number of adjustments in our treasury and alcohol policies that I think will prove to further bolster our aggregate moderate to lower capital. And then these investments.
So we said we would take advantage of lessons learned out of Silicon Valley, and <unk> and others. In this most recent episode and that is.
Zachary Wasserman: And so hard to take, sort of exactly where within that range we will want to go. But my expectation is once we get into that range, there will be an opportunity to get back to a more normalized capital distribution model, support elevated and longer term-run rate levels of a low growth that you've seen in the past. And we'll through it. You know, I'll just tack on, you know, our current working hypothesis in modeling the estimate around the Basel III proposal, which was adopted exactly as was proposed is roughly 5% increase in RWA.
It resulted in us, making a number of adjustments that I've treasured Alco policies that I think will will improve.
To further bolster our aggregate moderate to low risk appetite and then these investments.
Speaker 7: In data and some other areas in addition to the revenue area of the business will also position us to more effectively manage the company or real-time base.
Data and some other in some other areas. In addition to the revenue area of investments will also position us to more effectively manage the company on a real time basis.
Speaker 17: And will this best update some investment? Is that a 2024 story or is this a 2024 and beyond story?
Okay.
The pace of investment is that a 2024 story.
In 2024 and beyond story.
Speaker 8: We're trying to pull things forward into 24 as exit. And as we think about 25 and beyond, we'll be back to the more normalized. Again, this was an election in our part, but overall, you were trying to take advantage of the environment that we see in 24 and beyond and position the bank for growth.
Trying to pull things forward into 'twenty, four as that said and.
Zachary Wasserman: You know, based on the phase in schedule that was proposed as part of the NBR, that wouldn't be phase in until 2027. And we're going to have about 40 bits of CDT1 in 2027. Again, that proposal is written. And so part of this is just quickly get ahead of that even as far out in time as that really is and allow us to move forward in our front foot. We'll start in 25 and beyond for a little bit, celebrate a little bit with respect.
As we think about.
25, and beyond will be back to a more normalized again this is.
This was an election, a large part of our overall view of trying to take advantage of this.
The environment that we see in 'twenty, four and beyond and position the bank for growth.
Speaker 7: It's him like, I like this one. I like this one we did in 2011.
It seems like.
I'd like to add to what we did in 10 and 11.
Speaker 17: Well, it's as I get partially opportunistic and partially need to invest in systems, right? Kind of like that, that's.
Yes.
It sounds like it's partially opportunistic and partially need to invest in systems alright perfect.
Zachary Wasserman: Got it, that was helpful. And then just quickly squeeze in the market to market impact of the pay thick swapsion. Maybe it's a silly question, but do we just kind of put in some gains when rates go up? And then if rates go the other way, is it market to market on the negative side? Or how should we think about modeling to add and the drivers?
A portion of this too.
Speaker 7: We had multi-year plans that were so early, that's choice.
We have we had multi year plans that would accelerate that choice.
Speaker 17: If I could answer one last question. So I don't know if you could, Ryan, the first horizon, where you really would ask about crossing 100 billion said, well, you really don't want to cross organically, right? You don't want to be 101. But you guys at 186 billion today, how do you do this with these proposed changes coming? You think you're at a good spot at this aspect level or do you think you need to boost the size of the scale to just give you what is potentially coming.
Okay, if I could ask one last question so.
I don't know if you Brian .
Brian first horizon recently with asked about crossing a 100 billion and said you really don't want to cross organically right you'd only be 101, but you guys had 186 billion today, how do you see this with these proposed.
Zachary Wasserman: Yeah, that makes great expand on that, and I'll put a strategic context on it, and I'll introduce you to the modeling question. The strategy of those instruments was to protect capital, and it's really substantive, upgraded scenarios. When we purchased them, they were roughly two-year basis points out of the money. They've got about nine to ten to twelve months of forward life, and they would be designed to protect a third to maybe as much as 45% of the security value of risk.
<unk> is coming if you think you are in a good spot at this asset level or do you think you need to boost that scale two gigawatt is potentially countries. Thanks.
<unk>.
Speaker 7: We own the risk at risk management. We're going to maintain this aggregate moderate to low risk appetite. Where we've done things well in the past. We've continued to do them in the future. I think the size of the business is not the only agenda that I think the business model itself.
We all know risks and risk management, we're going to maintain this aggregate moderate to low risk appetite.
We've done things well in the past, we will continue to do them in the future I think that.
Zachary Wasserman: In those really substantive, about 200 to 300 basis points, shocks and areas. I think we put a lot of them on early in the second quarter. Yeah, it's that portfolio early in the third quarter, and we spent probably $30 million in premium. So in our view, a pretty small insurance policy for a very significant benefit in those shocks and areas. What we've seen thus far is gains, it's not $18 million of gain, Q2, $33 million of gain, Q3, that's a $51 million of gain.
The size of the business is not the only determinant is the business model itself is very very important part of the strategy over time is to be deeper in certain markets, where our consumer and regional bank, giving us.
Speaker 7: is very, very important. Part of the strategy over time is to be deep in certain markets.
Speaker 7: for our consumer and regional bank giving us brand awareness and other attributes that let us continue to grow the core. And then we've invested selectively in a variety of commercial businesses.
Brand awareness and other attributes that let us continue to grow the core and then we've invested selectively in a variety of commercial businesses.
Speaker 7: Our, you know, our acidification. It hasn't been guessed, they ??????.
Our assets been answered yes APL.
Speaker 7: distribution finance and number of these businesses that and beyond especially businesses that are national in nature complemented by things that we've had on the payment space last year you know the acquisition on the investment banking side all of all of which give us more pride and keep the abilities to surrender to our customer banks
Distribution finance a number of these businesses.
And beyond the specialty businesses international in nature.
Zachary Wasserman: I'll tell you if you were to strike them right now, you can see another gain into the fourth quarter, but clearly they get marked at the very end of the quarter. The answer is yes, and in your term, it rates rise, you would see a gain in them, it rates fall, and you would see a loss in them. The key thought process for us is how critical is that insurance policy to continue to maintain?
Complemented by things that we've added on the payments space last year.
The acquisition.
Zachary Wasserman: And so versus the gain in them, if we continue to hold them, I would expect that over time they would expire unused and out of the money. And you would see that gain run back through, as a negative, through an e-income, if they've already closed out. And we will be dynamic in continuing to watch the interesting outlook with a primary focus on protection capital. At this point, again, pretty divinibous cash outlet for a really strong insurance policy. Okay, that makes sense.
On the investment banking side.
All of them, all of which give us more products and capabilities into our customer base.
Speaker 7: And we're going to continue that. We're going to do additional talent and capabilities in the near term. And we expect to be in a position to start talking about that. But all of that's in that 4% guidance for you for next year.
<unk>.
Zachary Wasserman: Thanks for the detail.
We're going to continue that we've alluded to.
Additional talent and capabilities in the near term and we expect to be in a position to start talking about that but all of that's in that 4% guidance for.
For you for next year.
Okay.
Taking my questions. Thank you very much.
Speaker 7: Okay, so we grateful for you joining us today. Um, that's what a couple of memories pulling one more time. We did this last year, we just got a retirement coming.
Okay.
Grateful for you joining us today.
To complement rich fully one more time to do this last year was kind of retirement.
Speaker 7: At the end of the year, and the rich has just been a terrific leader, we've greatly done a bit of it from their experiences.
At the end of the year.
Rich has just been a terrific leader we've greatly benefited from your experiences virtually physician as well as.
Speaker 7: Richard, you've positioned us well as you've heard of the cost. Thank you very much. In closing, we're pleased with the third quarter results. I think that the dynamic they managed through this environment, we're bearing what we believe we're very well positioned for times such as these with strong credit quality, improving capital ratios and robust liquidity. And it's supported by consistent efforts from our 20,000 colleagues across the bank to deliver these results.
Ken Houston: Our next questions are from one of Ken Houston's Jeffries. Please excuse your questions.
As you've heard on costs. Thank you very much in closing we're pleased with the third quarter results as we dynamically manage this environment. We're very what we believe we're very well positioned to times such as this with strong credit quality improving capital ratios with robust liquidity and is supported by consistent efforts to about 20000 colleagues across the bank to deliver.
Stephen Steinour: Hey, good morning. Steve, I know you talked about generally a little bit of softening demand out there, but I wanted to ask you on your auto business when I did notice that your originations were up, and obviously a lot of peers have pulled away from this business, and as a business that you've got has been historically very strong, and now has really good incremental yield. It's just wondering if that's an all an opportunity step, and how do you think through re-engaging there as one of those potential growth engines, especially as you've been able to show the deposit stability.
These results.
Speaker 7: We are a team, you know, there's a discipline operator so we're executing our strategy that got on last year to invest today. And we're driving Sheryl over about it. We're optimistic we're going to continue to do that in the years to come. And as a reminder, we're all aligned. The board executives of our colleagues are top 10 Sheryl over collectively. And we feel the pain of this market pullback. We're very focused on driving consistent strong performance.
We are a team you know this a disciplined operators and we're executing our strategy that we outlined.
Last year at Investor Day.
Driving shareholder value and we're optimistic we're going to continue to do that in the years to come and as a reminder, we're all aligned the board executives and our colleagues are top 10 shareholder collectively.
Stephen Steinour: Thanks. Ken, great question. And auto has performed very, very well for us being confidence in its credit, and spreads are very attractive. You know, it's a Singapore product, and in the past, when spreads are wide, and we've chosen to do a bit more, we'll be dynamic because we look at this as the interest rate environment clarifies. And it's a short, you know, it's a relatively short asset, it's roughly a two-year average duration.
And we feel the pain.
I could pull back we're very focused on driving consistent strong performance. So thank you for your support and interest in Huntington and have a great day.
Speaker 7: So thank you for your support and interested in honey tin and have a great day.
Ladies and gentlemen.
Speaker 1: today's conference. You may disconnect your lines at this time. Thank you for your participation.
Today's conference you may disconnect your lines at this time, thank you for your participation.
Zachary Wasserman: So we like this asset class a lot, and we certainly like it counter simplically, and you know, that will be something we'll be looking at closer as we go to 24 and 25. Okay, great.
Zachary Wasserman: And then the last thing, Zach, just looking at what you moved around a little bit on the Swap Sport Boyotes, can you just kind of walk us through some of your decision trees with regards to this quarter's terminations and locking in here and any anticipated future activity you're thinking about in terms of just the book as it stands and going forward. Thank you. Absolutely, absolutely. I will tell you this is a very dynamic announcement.
Zachary Wasserman: It's an interactive discussion because it's a weekly pretty rigorous and really an analysis process that we do. And it's always focused on two key strategies, protecting capital against upgrades scenarios and protecting them against valued scenarios. I was like, no, even in the prior question, around the pig swapsions, we get ads during the quarter to that anticipating that rates had the strong potential of moving higher and wants to protect capital against that.
Zachary Wasserman: And we did. And the rates affected the tire itself really, and so that benefit of us there. But what's interesting is, well, is that the curb has steepened and the long end has come up as much as it has. The opportunity to optimize and can take incremental down rate catching opportunities in a more efficient manner with less upfront, negative carry is increasing. I would say as it relates to that, our view is still legging into it.
Zachary Wasserman: No big bets. And we're seeing the very significant events just come through in the base assets and it's terribly clearly. But over the longer term, think out into 25, 26, 27, we certainly want to protect those revenue streams. And, you know, we'll be seeking opportunities to increase down rate catching here at the environment. It seems to be what it is. At the meantime, it's more an optimization, I would say. You saw us exit.
Zachary Wasserman: Some received fixed swaps and keep three. It was a really shorter duration. Just less efficient structures by actually, then we increase the capacity to to be up for a lot of structures. We entered into some collars, which would give us the option for down rate hedging, you know, the rates are attractive out of the future. And I do suspect that they'll be more of that down rate hedging opportunity that I was just saying, you know, as we go through our forward into the right next year, if the curb continues to be the way it's shaped up.
Zachary Wasserman: Okay, and is there a way of kind of just putting all that together in terms of like the net impact of the swapped book, you know, on your NII? And is that getting better going forward or worse? Can you just kind of help us put it in context so if you can? Yes, absolutely. That's a great question. So just zooming into 24 for a second, based on the swaps we've got in the portfolio today.
Zachary Wasserman: I do expect we're seeing roughly a 15 to 17 basis point drag in current name. It was 15 to 3 to be roughly 17 bits of drag and 4 of 2023 from the overall swaps coming to them. As I noted, one of the earlier questions in this hour, by 2024, I expect that to reduce by about five bits, particularly out into the second half of the year when the curb starts to fall, you know, in the portfolio.
Zachary Wasserman: Yeah, so that's probably the best way to answer your question. You know, in the end of the goal is to call in and really just to support it in this type of range for years to come. Thank you.
Jon Arfstrom: Our next questions are from the line of Jon Arfstrom with RBC Capital Markets. This is you for your question. Hey, thanks.
Richard Pohle: Good morning. Mark down. Hey, Richard Brendan, what's the message you want to send us on the outlook for provision and reserves? I mean, it feels like you feel fine on credit, but I'm curious if you feel you need to build reserves and how you want us to think about provision. Yeah, let me just start with, you know, kind of where we are in the court. We we bumped out by a three basis points.
Richard Pohle: Our coverage ratio was really a one percent dollar increase. We went up $26 million and we put most of that into the commercial goal state reserve just given the uncertainty that we got there. You know, where we go from here. I mean, we don't get specific guidance around the coverage ratio, particularly around the provision. But, you know, it's going to depend on where the economy goes and to the extent that we see further we getting, you know, will reevaluate it.
Richard Pohle: But I would imagine that any builds from here would be similar to what you would see in the third quarter, fairly nominal from a dollar standpoint. We might be moving some things around. But in general, you know, we feel really good about where the reserve is right now. And, you know, as we get to the other side of this and the economic output starts to improve, you know, you could see us bringing the coverage ratio back down into that one 60 range over time. So we'll look at it every quarter, gentlemen, but we feel good about the one that exists right now.
Richard Pohle: Okay.
Stephen Steinour: Layton, the call Steve, but just a bigger picture question for you. You had a good quarter, but when I saw the guide for the fourth quarter for lower NII and higher expenses and then heard the expense guide for 24, you kind of pulled back some of that optimism. I guess my bigger and I think you understand that my bigger picture picture question is what's the message for 24 is that is it a year of investment and you're not going to push revenue growth or are we just, you know, all being a little bit too pessimistic here and just focusing on the expenses and some of the near term NII had once.
Stephen Steinour: Well, Jack also talked about improving net interest income and NII at 24. So I don't think of that as, you know, our output model of negative nature. We're investing in the businesses. We're going to do a number of things that I think will condition us really well for the need of term like 25, 26 in terms of further growth. We'll have some new capabilities and some additional talent in the company will be in a position to manage with data and processes even better as we go forward.
Stephen Steinour: We're accelerating some of our multi year plans into 24. And as Jack said, you know, that's that that growth in outlook for expenses in 25 comes back to a more normal level. So this is a business being intentional, position the company to play offense and we think we're in that position. We're confident on our credit. We've got good and growing capital on both the growth and adjusted basis. The quality is exceptional to the positive growth engineers.
Stephen Steinour: And as you saw in 2010, for those who are out in that period, there are moments to take advantage. That's when we launched their apply. That's when we did a number of things and commercial back and really opened up SDA loans, etc. We think this coming years one of those moments and we intend to put up. Okay, so it's it. Okay, that's good.
Stephen Steinour: I had to ask it, Steve, I'm getting asked that question, but I just I just needed to know if you're optimistic or pessimistic for 2024.
Stephen Steinour: It sounds like you're Hey, good morning, everyone. Steve, I've heard all the commentary for the past hour on expenses. And I guess what I still don't understand is this step up in expense growth in 2024. Is that tied to you seeing a better revenue environment to absorb a higher level of spend for something going on that's going to require you to spend more than 2024 agnostic for the revenue environment. So we're we're gearing the company to manage a growth dynamic that we expect will be in place in 24 beyond.
Stephen Steinour: We also are accelerating certain multi year investments into to 24. So we're in an even better position with data. And it's principally data to to manage in in in managed company, right? We're a different scale now post GCF. We saw a lot of unique activity in March around Silicon Valley. Things move very quickly. We want, you know, I want and the board wants better data, better access to information. And then we have it and make you know pushing the button together.
Stephen Steinour: So we're we've been on a multi year journey. We're going to pull that forward and position the company to be even stronger. And we've been managing market risk. As you've seen what I was hedging about half of our of our AFS portfolio since 19, but our processes have not been as automated as we would like the to be given the speed in which things can change. And so we said we would take advantage of lessons learned out of Silicon Valley and and others that's both recent episode.
Stephen Steinour: And that is resulted in us making a number of adjustments in our treasury and alcohol policies that I think will will prove to further bolster our aggregate moderate to over a step tonight. And then these investments in data and some other areas in addition to the revenue area of the business will also position us to more effectively manage the company on a real time basis. And will this best of pace of investment?
Stephen Steinour: Is that a 2024 story or is that they 2024 and beyond story? So we're trying to pull things forward into 24 as exit. And as we think about 25 and beyond will be back to more normalized. Again, this is a, this was an election in our part of the overall view of trying to take advantage of the environment that we see in 24 and beyond and position the bank for growth. I like what we did in 2011. Well, sounds like it's partially opportunistic and partially you need to invest in systems like that that's portion of this too. We have multi-year plans and we're sorry, that's true.
Stephen Steinour: If I could answer one last question, so I don't know if you could grind a first or a second, but you really don't want to cross organically, right? You don't want to be 101. But you guys at 186 billion today, how do you see this with these proposed changes coming? You think you're in a good spot at this aspect level or do you think you need to boost by the scale to just give more potentially complex things?
Stephen Steinour: We on the risk, at risk management, we're going to maintain this aggregate moderate to low risk appetite, where we've done things well in the past with the need to do them in the future. I think the size of the business is not the only determinant. I think the business model itself is very, very important part of the strategy over time, is to be deep in certain markets for our consumer and regional bank giving us brand awareness and other attributes that let us continue to grow the core.
Stephen Steinour: And then we've invested selectively in a variety of commercial businesses, our asset finance, our asset finance, AVL, distribution finance, and number of these businesses that end beyond especially businesses that are national in nature, complemented by things that we've added on the payment space last year, the acquisition of the investment banking side, all of which give us more pride and capabilities to surrender our customer base. And we're going to continue that. We're going to go into additional talent and capabilities in the near-term, and we expect to be in a position to start talking about that. But all of that's in that 4% guidance for you for next year.
Stephen Steinour: Okay. Thank you for my questions. Thank you. Great question.
Stephen Steinour: Okay, so we're grateful for you joining us today. Just for a couple of memories following one more time. We did this last year. It's got a retirement coming at the end of the year. And the rich has just been a terrific leader. We've greatly benefited from your experiences, rich, and you've positioned us well as you've heard on the cost of it.
Stephen Steinour: Thank you very much. In closing, we're pleased with the third quarter results. I think dynamically managed through this environment. We're bearing what we believe we're very well positioned for time, such as these strong credit quality improving capital ratios and robust liquidity. And it's supported by consistent efforts from our 20,000 colleagues across the bank to deliver these results. We are a team that you know is a discipline operator. So we're executing our strategy that we got last year to invest today.
Stephen Steinour: And we're driving shareholder value. We're optimistic. We're going to continue to do that in the years to come. And as a reminder, we're all aligned. The board executives of our colleagues are top 10 shareholder collectively. And we feel the pain of this market pullback. We're very focused on driving consistent strong performance.
Operator: So thank you for your support.
Operator: And interested in how you've seen and have a great day.
Operator: Ladies and gentlemen, this will conclude today's conference. You may disconnect your lines at this time.
Operator: Thank you for your participation.