Huntington Bancshares Q2 2023 Earnings Call Transcript

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Provided by Quartr
July 21, 2023

There are 12 speakers on the call.

Operator

And welcome to the Huntington Bancshares Second Quarter 2023 Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Tim Sabatras, Director of Investor Relations for Huntington Bancshares.

Operator

Thank you. You may begin.

Speaker 1

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.hinington.com. As a reminder, this call is being recorded and a replay will be available starting about 1 hour from the close of the call. Our presenters today are Steve Steinauer, Chairman, President and CEO and Zach Wasserman, Chief Financial Officer.

Speaker 1

Rich Poley, Chief Credit Officer will join us for the Q and 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.

Speaker 2

Thanks, Tim. Good morning, everyone, and welcome. Thank you for joining the call today. We're pleased to announce our 2nd quarter results, which Zach will detail later. Our approach to both our colleagues and customers continues to be grounded in our purpose and served us well in the Q2.

Speaker 2

Our colleagues again demonstrated that we make people's lives better, help businesses thrive and strengthen the communities we serve. Now on to Slide 4. These are the key messages we want to highlight today. First, Huntington has a distinguished deposit franchise, which continues to benefit from our strategy to acquire and deepen primary bank customer relationships. This has fueled continued deposit growth over the year, including this quarter.

Speaker 2

2nd, we once again drove capital ratios higher with common equity Tier 1 having increased for 4 quarters In a row, we remain on track to build CET1 to the high end of our range by year end. 3rd, credit quality, which is a hallmark of the company, is performing very well and we continue to operate within our aggregate moderate to low risk appetite. 4th, we are dynamically managing through the interest rate environment. We are maintaining disciplined deposit pricing, while delivering deposit growth and maintaining a robust liquidity position. Finally, we remain intently focused on executing our strategy.

Speaker 2

We are investing in the business to drive long term sustainable revenue growth and we continue to proactively manage the expense base to align with the revenue outlook. Operation Accelerate remains on track and we will increase our use of business process outsourcing to drive sustained efficiencies Moving on to Slide 5. Over the past decade, we've transformed Huntington. This puts us in a position of strength today. This foundation includes our granular and high quality deposit base, which is supported by our leading consumer, Business and Commercial Banking Franchises.

Speaker 2

With this strong foundation in place, we can be nimble and seize on opportunities to expand our business It will arise during times like these. The hiring of the Fund Finance team we announced last month is a great example. This business was on our Commercial Banking growth roadmap and we're pleased to be able to add great talent and welcome these colleagues To Huntington, we are building capital even as we maintain loan growth. We are optimizing the level of new loan growth and remaining judicious for the loans we carry on balance sheet in order to generate the highest return on capital. As a result, capital ratios expanded in the 2nd quarter With our CET1 ratio increasing to 9.82 percent, further our adjusted CET1 ratio is 8.12% Above the peer median, our disciplined approach to risk management drives our strong credit quality with low net charge offs and the non performing asset ratio Decreasing for the 8th consecutive quarter.

Speaker 2

Our management team has a long track record of being disciplined operators with a focus on delivering value For shareholders, this execution has been awarded and recognized across the franchise, including winning the J. D. Power Mobile Award for the 5th year in a row And maintaining our strong number one SBA ranking. Regarding the macro outlook, it remains a dynamic environment. Interest rates are playing out in the higher for longer scenario that we had been anticipating for some time.

Speaker 2

Economic activity in our footprint appears to be holding up relatively well, which supports sustained loan growth and solid credit performance. That said, we are diligent watching the environment closely and are actively managing our loan portfolio. We are well prepared to operate through a range of potential scenarios. Further, we are also closely monitoring the potential regulatory adjustments to capital and other requirements. We are evaluating the proposals and thus far the potential new requirements appear broadly in line with what we had expected.

Speaker 2

We are well positioned to manage through these changes, address them expediently and over time offset a meaningful portion of the potential impacts. And finally, before I hand it over to Zach, we want to share that Rich Polley, our Chief Credit Officer, has announced his upcoming retirement effective At the end of 2023, we've greatly benefited from Rich's expertise and leadership during his nearly 12 years with Huntington. He's been a great leader of our colleagues and a great partner for me and the executive team. We have a strong bench and we're pleased Brendan Lawlor, Deputy Chief Credit Officer will succeed Rich in this role at the end of the year. Brenda joined us in 2019 After 25 plus years as a senior commercial credit executive at a large regional bank and is currently responsible for all commercial credit across the bank.

Speaker 2

Zack, over to you to provide more detail on our financial performance.

Speaker 3

Thanks, Steve, and good morning, everyone. Slide 6 provides highlights of our 2nd quarter results. We reported GAAP earnings per common share of $0.35 Return on tangible common equity or ROTCE Came in at 19.9% for the quarter. Further adjusting for AOCI, ROTCE was 15.8%. Deposits grew during the quarter, increasing by $2,700,000,000 or 1.9 percent on an end of period basis.

Speaker 3

Loan balances continue to grow as total loans increased by $900,000,000 or 0.8 percent from the prior quarter. Credit quality remains strong with net charge offs of 16 basis points and allowance for credit losses of 1.93%. As Steve mentioned, capital increased from the prior quarter. The solid capital position coupled with our robust credit reserves Puts our CET1 plus ACL loss absorbing capacity in the top quartile of the peer group. Turning to slide 7, average loan balances increased 0.8% quarter over quarter or 3.1% annualized, Driven by commercial loans, which increased by $772,000,000 or 1.1 percent from the prior quarter.

Speaker 3

Primary components of this commercial growth included distribution finance, which increased $464,000,000 Asset Finance increased by $234,000,000 Business Banking increased by $160,000,000 Auto floor plan increased by $175,000,000 Offsetting this growth, CRE balances were lower by $340,000,000 In consumer, growth continued to be led by residential mortgage, which increased by $438,000,000 and RV Marine, which increased by $112,000,000 Partially offsetting this growth were lower auto loan balances, which declined by $318,000,000 Turning to Slide 8. As noted, we continued to deliver ending deposit growth in the 2nd quarter. Balances were higher by $2,700,000,000 primarily driven by consumer, With commercial balances up modestly, on a year over year basis ending deposits increased by $2,600,000,000 or 1.8%. Turning to Slide 9. We saw sustained growth in deposit balances throughout the Q2.

Speaker 3

On a monthly basis, Total deposit average balances expanded sequentially for April, May June, with June 30 ending balances above the June monthly average, providing a strong start point as we enter Q3. Within consumer deposits, we have now seen average balances increase for 7 months in a row. Within commercial, average monthly deposits were stable over the course of the second quarter. Turning to Slide 10, I want to share more details on our non interest bearing deposits. Overall, the $33,000,000,000 of these deposits represent 23% of total balances and are well diversified across consumer, business and commercial banking.

Speaker 3

The ongoing mix shift we have seen from non interest bearing over the past two quarters has been in line with our expectations and consistent with what we saw in the last cycle. We expect this mix shift trend to moderate and then stabilize in 2024. This trend is reflected in our total deposit beta guidance. On to Slide 11. For the quarter, Net interest income decreased by $61,000,000 or 4.3 percent to $1,357,000,000 driven by lower sequential net interest margin.

Speaker 3

On a year over year basis, NII increased $90,000,000 or 7.1%. We continue to benefit significantly from our asset sensitivity and the expansion of margins that has occurred throughout this cycle. Reconciling the change in NIM from the prior quarter, we saw a reduction of 29 basis points on both a GAAP and core basis excluding accretion. During Q2, we maintained an elevated cash balance relative to Q1, which impacted NIM even as it had a relatively minor Actual cash economic cost. On a comparative basis, normalizing for cash levels, NIM was 3.17% for the quarter or a 21 basis point decline from the prior quarter.

Speaker 3

The biggest drivers of the lower NIM quarter over quarter were higher funding costs, partially offset by increased earning asset yields. We continue to analyze multiple potential interest rate scenarios As we forecast expected trends over the remainder of 2023 and into 2024, the 2 primary scenarios we incorporate include 1, which is represented by the forward yield curve and another which assumes rates stay higher for longer and end 2024 Approximately 75 basis points higher than the forward. We think this is the most likely range for short term rates over the next 6 quarters. Based on this range, we anticipate net interest margin of approximately 3% by Q4, plus or minus a few basis points. This would equate to core net interest income on a dollar basis for the 4th quarter to be down approximately 1% to 2% from Q2 levels.

Speaker 3

As we look out further into 2024, clearly, the trends will depend on both those interest rate scenarios And what is happening with the broader economy and industry factors, including loan demand and deposit growth. That said, Our modeling indicates NIM outlooks are stable to rising during 2024, which coupled with earning asset growth is expected to drive net interest income dollar expansion as we move through 2024. Turning to Slide 12, Cost of deposits moved higher in the quarter to 1.57%. Our cumulative beta through Q2 is 32%, Up 7 percentage points from the prior quarter, in line with our expectations and prior guidance. As I mentioned, we continue to expect Cumulative deposit beta of approximately 40%.

Speaker 3

Turning to Slide 13. On the securities portfolio, we saw another step up in reported yields Quarter over quarter. We did not reinvest cash flows from securities in the 2nd quarter as we allowed those proceeds to remain in cash given the attractive short term rates. Cash and securities balances on average increased by $5,000,000,000 from the prior quarter, As we maintained higher cash levels in the quarter. As of June 30th, on an ending basis, Cash and securities totaled $52,000,000,000 representing a more normalized level as we go forward into Q3.

Speaker 3

Turning to slide 14, Our contingent liquidity continues to be robust. Our 2 primary sources of liquidity, cash and borrowing capacity at the FHLB and Federal Reserve Represented $11,000,000,000 $77,000,000,000 respectively at the end of Q2. At quarter end, this pool of available liquidity Represented 205 percent of total uninsured deposits, a peer leading coverage. Turning to Slide 15, our hedging program is dynamic, Continually optimized and well diversified. Our objectives are to protect capital in up rate scenarios and protect NIM in down rate scenarios.

Speaker 3

During the quarter, we further expanded our pay fixed swaptions hedge position to protect capital from tail risk In substantive upgrade scenarios, there is a modest upfront premium associated with these swaptions And the hedges result in a mark to market each quarter as they're deemed economic hedges. On the subsequent slide, You will see that positive impact during the Q2 on our fee revenues. We also remain focused on our objective of managing NIM to protect the downside and have maintained additional upside NIM opportunity given our asset sensitivity. The interest rate movements in the 1st few weeks of Q3 Have provided opportunities for additional attractive hedging. We've incrementally added modest additional exposures to both Our capital protection and NIM protection hedge portfolios and will remain dynamic as we go throughout the quarter if further opportunities arise.

Speaker 3

Moving on to Slide 16. Non interest income was $495,000,000 for the 2nd quarter. Excluding notable items, Fees increased $40,000,000 including a $18,000,000 benefit from the positive mark to market on the PayFac swaptions. Excluding this benefit, underlying fee income would have been $477,000,000 We saw solid performance in our key areas of strategic focus, including payments and wealth management. Capital Markets revenues declined by $2,000,000 from the prior quarter, however, increased by $3,000,000 year over year.

Speaker 3

Clearly, the events of March and the U. S. Debt ceiling debate caused a fairly challenging capital markets environment in Q2. However, pipelines remain solid and there are encouraging signs pointing to opportunity in the back half of the year. Moving on to Slide 17, GAAP non interest expense decreased by $36,000,000 Adjusted for notable items in the prior quarter, Core expenses increased by $6,000,000 driven by a full quarter effect of annual merit increases and higher marketing spend.

Speaker 3

We entered the year with a posture of managing core expense growth to a very low level given the economic backdrop. We developed and executed a series of proactive actions to reduce expense run rates, including the voluntary retirement program, Organizational alignment and our continued implementation of long term efficiency programs such as branch optimization and operation accelerate. We continually calibrate the level of expense growth to revenues and we're taking additional actions to further manage the pace of expense growth, even as we remain focused on self funding investments in our key growth initiatives. We're actively working on the next set of medium term efficiency opportunities, including business process outsourcing, which represents a promising lever For us to continue to deliver a low level expense growth into 2024. Slide 18 recaps our capital position.

Speaker 3

Common Equity Tier 1 increased to 9.82 percent and has increased sequentially for 4 quarters. OCI impacts to Common Equity Tier 1 resulted in an adjusted CET1 ratio of 8.12%. Our tangible common equity ratio or TCE increased 3 basis points to 5.80%. Q2 ending cash levels were higher than Q1 end, which impacted the TCE ratio by 2 basis points. Adjusting for AOCI, our TCE ratio was 7.45%.

Speaker 3

Our capital management strategy Will result in expanding capital over the course of the year, while maintaining our top priority to fund high return loan growth. We intend to grow CET1 to the very high end of our target operating range of 9% to 10%. Adjusting for AOCI, we expect adjusted CET1 to be in the approximately mid-8s range by year end. On Slide 19, credit quality continues to perform very well. As mentioned, net charge offs were 16 basis points for the quarter.

Speaker 3

This was lower than last quarter by 3 basis points. On a year over year basis, charge offs were up 13 basis points from the prior year's historic low level. Non performing assets declined from the previous quarter and have reduced for 8 consecutive quarters. Allowance for credit losses is higher by 3 basis points to 1.93% of total loans. On Slide 20, we continue to be below our target range of net charge offs through the cycle of 25 to 45 basis points And our ACL coverage ratio is among the highest in our peer group.

Speaker 3

Let's turn to our 2023 outlook on Slide 21. As I noted, we analyze multiple potential scenarios to project financial performance and develop management action plans. Our guidance is informed by the interest rate scenarios I discussed previously and the consensus economic outlook. On loans, our outlook is 5% to 6%, consistent with our prior expectations to be near the lower end of our prior range. On deposits, we maintain our outlook of 1% to 3% growth for the full year.

Speaker 3

Core net interest income ex PAA and PPP is expected to grow between 3% 5%, inclusive of our expectations for deposit beta and loan growth. Non interest income on a core full year basis is expected to be down 2% to 4%. This range reflects the results from capital markets we've already seen in Q2 and the assumption of gradual improvement in activities throughout the balance of the year. The remainder of our fee businesses are tracking very well to our prior expectations. On expenses, as noted, We are proactively managing with a posture to keep underlying core expense growth at a very low level and calibrated to revenue growth.

Speaker 3

For the full year, we expect core underlying expense growth between 1% 2%, plus the incremental expenses From the full year run rate of Capstone and Tarana of approximately $50,000,000 and the 2 basis point increase In 2023 FDIC insurance rates of approximately $30,000,000 And finally, given the strong results posted during the first half of the year, We now expect full year net charge offs to be between 20 to 30 basis points. With that, we will conclude our prepared remarks and move to Q and A. Tim, over to you.

Speaker 1

Thanks, Zach. Operator, we will now take questions. We ask that as a courtesy to your peers, each person ask

Operator

A confirmation tone will indicate your line is in the question Our first question comes from the line of Manan Gisalia with Morgan Stanley.

Speaker 4

I wanted to dig into your comments on NIM being stable to rising in 2024 Under the two scenarios that you outlined for rates, can you expand on some of the moving parts in there, especially in the higher for longer scenario? I guess, would that put more pressure on NII than the forward curve scenario with higher deposit betas or do I have that wrong?

Speaker 5

Hey, Manav, this is Zach. I'll take that one. And thanks for the question. I think the outlook that we're seeing It's really consistent with both of those scenarios. So I think in the higher for longer scenario, it's on the top end of that scenario range.

Speaker 5

We We would benefit from asset sensitivity, asset yield would continue to rise. Likely there would be a continuation in extending out Of the liability pricing cycle, but to note those two things, we continue to expect to actually be higher overall than Given the asset sensitivity and very consistent with what we've discussed over time, at the lower end of the scenario, You see the kind of the faster blunting of the deposit pricing cycle, but also some Last increase in asset pricing and we'd likewise go to 4 of the NIM, but albeit maybe a few basis points lower than that. So generally, Higher rates for us continue to corroborate to hire them. I would note as well that during the course of 2024, We will benefit from the shifting from a negative carry on our downgrade hedging program to a much more neutral position by the end of the year. So that will be in support For a new trajectory throughout the course of 2024.

Speaker 4

Got it. And then separately, Just on regulation overall, I know you noted that the new requirements seem to be broadly coming in, in line with expectations. But maybe if you can dig into how you're managing ahead of that. I know you're keeping you're building capital levels from here, you're holding a high level of cash instead of reinvesting in securities. So maybe can you expand on Where you expect regulation to go, especially as it relates to the AOCI opt out as well as LCR?

Speaker 5

Sure. And as you noted, we are trying to be planful, anticipatory of where we think things are going and And management and I think at the most macro level, we do think we'll be able to relatively expediently address these potential new regulations And frankly, over time, offset a lot of what would otherwise be potential impacts of them. But digging in specifically, it's our working assumption The tailoring exclusion of AOCI not to be reported CET1 will likely be removed. And hence, it's our plan to continue to manage capital higher to move CET1 inclusive of AOCI higher The guidance we indicated in the mid-eighth range by the end of 2023. And if we continue on with the same operating posture in 2024, We would expect that ratio to approach 9%, essentially get to 9% by the end of 2024, so Back to essentially the low end of our operating range on that basis.

Speaker 5

We're also actively looking at the Battle III Potential new RWA changes. As you know well, there are 3 big changes in there. The fundamental review of the trading book, we think that's going to be Essentially material for Huntington given our business mix. There's operational risk requirements, which likely will be increasing RWA. We're largely keyed off of fee income.

Speaker 5

We see a slightly higher RWA from that. However, offsetting that will be credit risk RWAs, which are more nuanced, more fine tuned and on net are lower, we believe, for Huntington. Still early days and And more analysis to go, but I can see offsetting factors there, unclear whether there will be a net impact from that, but generally relatively offsetting. As it relates to other regulatory focuses like liquidity, like potential long term debt, Likewise, we're monitoring and we think we can those impacts will be relatively small over time. Happy to double click on that

Operator

Thank you. Our next question comes from the line of Matt O'Connor with Deutsche Bank. Please proceed with your question.

Speaker 6

Good morning.

Speaker 5

The next thing

Operator

that we're seeing from some

Speaker 6

of your peers is a pullback in lending as they look to build capital and alleviate from the On the flip side, obviously, you've got very strong capital, strong liquidity as you highlighted, high Just wondering how you're thinking about how you can play offense, maybe take advantage of pullback by some of your peers.

Speaker 5

It's a great question, Matt, and it's something that we really actively look at because we are in a position of strength. We want to Really seize the opportunities to win new clients, win great business. It's in times like this that companies, when they operate from a recession rate, really can gain We're balancing that clearly with 2 factors. 1, the desire to not only grow loans, but to also drive capital as I just noted in the prior question. So we are actively modulating loan growth, Bringing it down from a 10% run rate year over year level to 5% Q1, 3% Q2.

Speaker 5

I think it will be more like 1%, Probably in the back half of the year. We're also very much looking at how we could potentially optimize the balance sheet and drive Higher returns out of the assets that we do have. With that being said, we are on our front foot. You saw us hire The funds for the Evans team, which will be a great new business line for us, brings liquidity, great customer quality there. And we are continuing to look, finding pockets of strong growth even as we optimize for the highest returns for the year after margin.

Speaker 5

So Very much on the front foot and to your point, there are impact opportunity to hold, but we'll see in the future.

Speaker 6

And then I guess just Following up on the lending side, I mean everything we can track, it seems like auto spreads are at or near highs, mortgage spreads are at highs, Commercial spreads have widened. So why isn't there a leaning into this? Or is it just that the demand is not there at this point? Look,

Speaker 5

I think there continues to be pockets of demand and great clients, and we've got a Very strong set of funds that we're supporting as well. And to your point, the yields are strong. With that being said, Clearly, the deposit costs are also rising and funding costs are also rising. So we're balancing those things in a way that we think is prudent, Driving higher yields, I would say, really feel encouraged by what we're seeing on the asset yield side. The long duration of asset categories like mortgage and auto really benefiting between 10 20 bps on the portfolio and I would expect that to continue For some time to come, really sustaining that 2024 and beyond MIM that we were talking about in the previous question, even as again we optimize Matt, Steve, this is Steve.

Speaker 5

I think it's fair to say we're being a little cautious until we know the outcome of the regulatory Suggested reforms as well. There's more opportunity, I think that we will avail ourselves once we know what the rules are and the positions that we need to have going forward.

Speaker 6

Yes, fair enough. Thank you.

Speaker 5

Thank you.

Operator

Thank you. Our next question comes from the line of Steven Alexopoulos with JPMorgan. Please proceed with your question.

Speaker 7

Hey, good morning, everyone. I want to so to stack the commentary you gave about the NIM getting down to about 3% by the 4th quarter is helpful. I'd imagine once we move beyond that, because it sounds like most of the mix shift out of non interest bearing will be done, it's really going to be that incremental NIM that's Decide where we go from there. What is the spot NIM today, right? Incremental loans, incremental deposits, just how does that compare to that 3% level?

Speaker 5

Yes, it's still higher than that. I think, again, I'd point you to for the quarter adjusted for cash levels that we're kind of We're rolling at now in the Q3. The 2nd quarter was around 3.17%. And so what we're seeing at the margin is continued Modest decline in NIM here through the course of the balance of this year from that 3.17% normalized Q2 run rate down to the Excuse me, 3% by the end of the year. And I agree with your point, which is as you get into the early part Next year, a lot of the kind of major trends start to stabilize.

Speaker 5

It's really about kind of incremental fundamentally what the underlying NIM is. Likely, there will be some potential continued trends in the very early part of 2024, but I agree with your point. I would also note that For us during 2020 Q3, the reduction in negative carry from hedges will incrementally help, obviously, throughout the course of the year again.

Speaker 7

Right. Listen tailwinds there. Okay. And then for Steve. So the equity market seems to be coming around to this possibility of a soft landing.

Speaker 7

I'm curious, when you talk to your customers, what are you hearing? Are they coming around to this soft landing? And maybe a little more optimistic, what are you hearing? Thanks.

Speaker 5

Steve, I would say our customers generally are having a good year and expect to close out with a good year. They're working their margins through expenses, but inflation seems to be abating, supply chain is in better shape, We have clear line of sight to this half. And they're optimistic about 2024 and beyond, Generally. So, this would suggest, at worst case, soft landing And potentially, the ability to avoid a recession. In the Midwest, particularly our footprint, there's still a lot of economic activity, Announcements of investments, targeted growth.

Speaker 5

So, we're in a good position relative to some of the other regions. And we have significant activity going on that I think we'll see, particularly here in Ohio, Through the course of this year.

Operator

Thank you. Our next question comes from the line of Ebrahim Poonawala with Bank of America. Please proceed with your question.

Speaker 8

Hey, good morning.

Speaker 5

Good morning, Graham. Good

Speaker 8

morning, Graham. I just wanted to go Spent some time on the expense outlook. I think you've done a lot of work year to date, the project accelerate that you talk about. And Zach, I think you said The goal is to keep expense growth low for next year. Maybe give us a sense of the Size of that BPO opportunity that you talked about and how do you think about positive operating leverage going into next year given NII growth will likely be tough.

Speaker 8

Thoughts around that?

Speaker 5

Yes. Great question, Ebrahim. Thanks. Yes. So maybe framing the overall cost, it is very much to keep operating expenses at a very low level, not only this year, but next year.

Speaker 5

We've been trying to be very proactive Setting up those programs so we can implement them effectively and have them build over time. On the BPO opportunity, This is something that we have leveraged over time for a while and continually looking at from a strategic perspective what functions That we really believe must be owned or which critical value for them to be owned by Huntington versus those that We can benefit from the scale and capabilities of a partner and the more we lean in to analyze that, the more we're encouraged that there are incremental opportunities. Relatively modest in terms of size this year, but building over time. And I think really part of the portfolio of Efficiency programs that will support that low level into 'twenty four and frankly continue to build into 'twenty five and beyond also. So It's encouraging as we get the part of the portfolio of progress, but something that we're incrementally leaning in now We will see accelerate the benefits of on positive operating leverage, as we've said a lot, it's a core tenant of our operating It's one of the 3 major financial targets we've set for ourselves, something we take very seriously.

Speaker 5

Of course, we're managing the company for the medium It's really generating value and want to make sure that we're not doing anything in the short term that would damage that long term growth trajectory. It's too early to say what 2024 will look like. I think you'll clearly have a grow over on revenue that There will pressure revenue growth, but we're also very encouraged, as I said, with the opportunity to keep expense growth low. So Not going to give guidance at this moment. So I think it's within the range of reasons, and we're going to drive toward it.

Speaker 5

Ebrahim, if I could add, this is Steve. The team is also working on a longer term project called Operation Accelerate. We shared that at the Investor Day. It's changing procedures and digitizing substantially the front to back side of the bank. That is going very well.

Speaker 5

It's on track. It was multiyear, and that will help us with both efficiencies and customer set. So we've Zach has Got us focused on consolidated 31 branches. We did a voluntary retirement program with Structuring of segments and some of the business units and support units During the course of the year, what he's referencing now with BPO is additive to a very healthy

Speaker 8

Understood. And any updated thoughts, Steve? You talked about building capital, but at the same time, you've talked about See revenue opportunities, doing some targeted M and A like you've done in the past. Any thoughts there? Is the opportunity set attractive for you to do anything?

Speaker 5

Well, our focus, as you know, is always to grow the core of the business. We've got a lot of opportunity to do that in front of us. And as the Bringing some expectations around capital and liquidity, etcetera, get established. I think we're going to be in a very strong position To lean into that in an even more robust fashion, we're trying to get a position for that now. Beyond that, as you saw last year, there are fee businesses that were attractive.

Speaker 5

I suspect we'll find some Additional ones at some point in the future, but we believe we've got a lot of opportunity at hand that is not being pressing in terms of pushing We're needing to push for M and A now. And so we're very, very focused on driving the core.

Speaker 8

Thank you.

Operator

Thank you. Our next question comes from the line of Scott Siefers with Piper Sandler. Please proceed with your

Speaker 6

Good morning, everyone. Thanks for taking the question. Hey, Steve or Zach, just kind of conceptually, maybe when you think about the 40 Maybe just a thought or 2 on the major puts and takes when you think about that being the right number for you all. You guys are in Very competitive market, but I think it's clear within like the last month or so especially that the deposit flows are there. So I guess I'm Just curious what you're seeing in terms of competitive dynamic and what sort of makes that the right number to land on it?

Speaker 5

Jeff? This is Zach. Scott, I'll take that one. All of the trends and forecasts that we're creating, and as I noted in the prepared remarks, Pretty rigorous multiple scenarios underlying that. We continue to corroborate that.

Speaker 5

So we feel like it's a good forecast. As always, I always know that the best forecast we've got, we'll share an update if ever that comes to pass. But our forecast has been pretty stable around that level for a while now. And the underlying monthly trends continue to cooperate. Just double clicking into the drivers, I would say, 1, we're seeing a continued modest rise in deposit costs, but at a decelerating rate, Just like we would expect it to be.

Speaker 5

We saw a beta trend by 8% in Q1, 7% in Q2. It will be less than that as we go into Q3 clearly and then kind of topping out into Q4. So that's why I'm just sort of seeing a declining trend of increasing. The other thing is the mix shift from non interest bearing into interest bearing is occurring fairly well like we would expect it to in the cycle and that, like Most of that mix shift has happened at this point, and we're already beginning to see the signs of that, again, kind of

Speaker 7

Build up and corroborate

Speaker 5

to that 40%. On the competition side, it's a competitive environment. But to your point, Deposits are there and I think what's encouraging is it's very rational. And I think that given Decelerating loan growth throughout the industry and for us, that's the kind of escape valve pressure, which is allowing us to manage pretty well here according to our plan. So overall, just hoping that the right forecast.

Speaker 6

Perfect. And that's all I have. So thank you very much.

Speaker 5

Thanks, Scott.

Operator

Thank you. Our next question comes from the line of Erika Najarian with UBS. Please proceed with your question. Hi, good morning. Good

Speaker 5

morning, Hari.

Speaker 9

My first question is actually a clarification one. Your 40% So you know the data that's on total deposits, correct?

Speaker 5

That's correct.

Speaker 9

Yes. Because a lot of your peers give it on interest bearing. So I just wanted to make sure that Just thought of that when Scott was asking that question. And my real question is, I think the market really appreciates Sort of the expansion of the net interest income outlook. Could you tell us about how you're About the elasticity of deposit pricing on the way down, I think to your point earlier that There are a lot of investors that are thinking about rate cuts for next year.

Speaker 9

And they're wondering how much power do banks have to price down

Speaker 5

Yes. Terrific questions. Also a soft topic that gets lots of mind share with us just as rigorously as we've been on the way up On you just as rigorous on the way down, so very much planning and watching that. I think it will clearly be a function of what segments you're in, what Say what you're looking at, on the commercial side, where betas are generally higher and where there's often a very bespoke and a priori Agreement between us and our clients around where our travel trend, that will likewise trend lower. I think we're pretty Codman will drive that in a very similar measure to the way it went up.

Speaker 5

I think many of the other very Price segments like that in the middle market and business banking will likewise trend down pretty fast as rates decline. In some of the categories in which we've been drawing in consumer, there are some time dimensions to them, which we'll have to Managed at those times we last, but again, the playbook there is well trodden. And I think we feel quite good about the ability The overall lapse of consumer silo would be a function of what's going on in the economy at that point and the I will put rates forward at that point. But again, all of the playbooks in history would tend to corroborate our ability to do that pretty well.

Speaker 9

Got it. And just as a follow-up to that, if I may, you're holding a lot of cash and Obviously, there's not a lot of motivation to deploy that. Again, as we think about next In the same scenario, you're still going to be earning a lot of your cash on your cash flow, 0% risk weight if the Fed cuts moderately. And I guess outside of better loan growth, Zach, what would be the factors for you to normalize start normalizing that Cash to a level that's more appropriate or do you feel like with all the liquidity goes down the pipe, you might

Speaker 8

as well just Hold it

Speaker 9

there for now since you're getting paid for it anyway.

Speaker 5

Yes. I think that the level that we're running at for cash right now, sort of around $9,000,000,000 is the right level for the company given liquidity requirements. So I think we're generally at where we think it's the right level. Always tuning at the margin for how we're incrementally funding and kind of tuning the short term FHLB borrowing, the cash level, but I think for the most part that cash level is right sized right now. I think within the securities portfolio broadly, we'll continue to see the trend of moderately lower Duration sequentially as we've been doing frankly the last 3 quarters or And just continuing to preference liquidity.

Operator

Thank you.

Speaker 5

Thank you.

Operator

Thank you. Our next question comes from the line of Ken Usdin with Jefferies. Please proceed with your question.

Speaker 10

Hey, thanks. Good morning, guys. Zach, just a follow-up on your NII 24 comments. And you talked about earning asset I'm just wondering, your balance sheet has been elevated this quarter, a good amount. And I guess, are you expecting As you look out further that deposit growth will continue to carry the overall balance sheet side forward?

Speaker 10

And kind of I guess how do you think about the wholesale funding Part of the equation, has a balancing act in that.

Speaker 5

Yes. Terrific question. And broadly speaking, the answer is yes. So I believe that we will bring loan growth in line with deposit growth for the most parts. And I think that's what we'll see here in the back half of this year.

Speaker 5

That's my expectation for the trend into 2024 as well. I expect to see a Pretty stable, if not slightly lower, loan to deposit ratio here over the next couple of quarters. And just fundamentally, match funding, Make sure that we can benefit from one of those fundamental underlying factors that allows us to manage the deposit data and the marginal margin We're getting on the loan as I noted earlier. So it's an important dynamic. The good thing, and I think we've talked about this in the past, We are coming to this cycle and we're now operating, let's say, 3 quarters of the innings in with a pretty favorable position where We saw really attractive loan opportunities.

Speaker 5

We could, in fact, fund them with non customer sources of funding and increase loan to deposit ratio, but that's not the default position for now. I think for now, I think getting loans and deposits growing at a pretty similar rate is quite healthy and a good balance for us.

Speaker 10

Okay. And a follow-up, can you try to help us understand how the benefits from the security swaps Look this quarter and then as you go forward into next year, just your loan hedges, does that become a part of the benefit next In terms of getting that NII starting to move the right way? Thanks.

Speaker 5

Yes. It does. Great question, Ken. Let me elaborate on that. So, up through the early part of Q3, inclusive of activities we've done in the 1st few weeks of this quarter, We've got around $29,000,000,000 of down rate hedge protection through received fixed swaps, It's around $21,000,000,000 $22,000,000,000 We've got some floor spreads, which pay off under down rate scenarios And then a portfolio of callers, which will be option to enter into receive big swaps in the future and likely will Looking at the phrase, we need to try to kind of generally where they're expected to.

Speaker 5

So it's a pretty powerful portfolio. It's both extant now And even more than will be expanded over the coming 6 to 12 months as we enter into those collar based RC fixed loss. The impact obviously, I mean, the challenge in Downright hedging right now is that with an inverted yield curve and frankly with a fairly Steep decline already forecasted. You've got us in pretty dire downgrade scenarios to convince yourself that makes sense incrementally And your receive fix right now given the negative carry right now. What we are experiencing in the P and L at this moment is about 15 basis points of negative NIM drag from the received fixed that we're already in.

Speaker 5

And that will go into essentially 0 By the end of 2024, if you follow-up the forward yield curve scenario, so that's 15 basis points of tailwind And we should see them then between now and the end of 24, fairly ratable clawback throughout that period.

Speaker 10

Got it. Very helpful. Thank you.

Speaker 5

You're welcome.

Operator

Thank you. Our next question comes from the line of Jon With RBC Capital Markets. Please proceed with your question.

Speaker 11

Thanks. Good morning, guys.

Speaker 5

Good morning,

Speaker 11

Couple of credit questions. First of all, congratulations Rich on your retirement.

Speaker 5

Great. Thanks, John.

Speaker 11

You've done a great job and I've enjoyed your perspective on these calls. Commercial Real Estate and Two more questions. So on commercial real estate, how far ahead can you guys look in terms of identifying future issues? I know it's been a focus for you guys to tighten things up. But curious what you're doing now and it obviously looks very clean, but you have a fair amount of reserves allocated to the business and that's kind of why I ask.

Speaker 5

Yes. We're looking we're focused primarily right now on the 2023 2024 impacts. And it's really hard to look much further beyond that. So we're doing quarterly portfolio reviews in office. We're touching the real estate book Every month, I think we've probably gone through 90% of the loans over $5,000,000 in that book at this point.

Speaker 5

But the focus is on 2023 and 2024 and managing what we can control and that really relates to the maturities and then particularly with respect to office, The lease rollovers that might be impacting cash flow in this year and next. So that's the primary focus. Beyond that, it's tough. You mentioned the 9% reserve we've had against office. We've got a 3.4% reserve against the overall CREP.

Speaker 5

But we feel For what we know right now, both of those are adequate and we will continue to look at those on a quarter by quarter basis. Okay. Ken, there is also John Rich is also with the team getting loans rebalanced. Wherever there appear to be issues, there are proactive efforts to try to get those addressed, paydowns, possible lateral relations, Host of efforts and the primary focus is 2023, 2024, But there is also a long view, a full view of the portfolio over the next And these roles and other related issues, all of which are we are actively managing. We have been doing that We're over a year and trying to stay well ahead of where any issues may occur.

Speaker 5

And at this point, the book's in really good shape.

Speaker 11

Yes. It seems that way. Okay. And then on consumer, I look at this every quarter, just your non accruals and charge offs and it's just kind of it's nothing Maybe it goes to the soft landing comments, but you look at RV marine consumer categories, delinquencies really haven't budged. Are you seeing anything in consumer health that bothers you at all, because it just these numbers are really, really good?

Speaker 5

No, the numbers are really good. And I think it goes to the client selection and just the focus that we've got on I'm super proud. If you look across the entire consumer spectrum, there's really nothing in there that would lead you to believe that we're going to have anything more than Just a gradual return to what might be more normalized levels of charge offs, because right now, to your The only area that I would point out that's a little bit relatively higher stress than the rest of the book is HELOC and that's Because of the floating rate nature of that portfolio, so it's going to lead to a little higher level of delinquencies You might see across the book, but the analysis that we've done from a vintage standpoint on that book show that we're in the 55% to 60% below the value range. So even though we might see higher levels of delinquency, we don't think the losses will follow. The housing markets are generally tight where we are, John.

Speaker 5

So, if someone has and unemployment is very low. So if someone has an issue, their best resolution is to sell the property unlike what we might have seen in 'eight, 'nine or prior cycles. Just to give Rich a little credit here and recognition, we've been at an effort to outperform our peers for over a decade with his aggregate moderate to low risk profile. He's been very, very disciplined about that. And we expect to outperform through the cycle.

Speaker 5

We've been sharing that all along. At this point, we're looking really good in that regard and attribute to all my colleagues, especially Rich and his leadership.

Speaker 11

Yes, I agree. Steve, I was thinking you could give them a fishing boat or

Speaker 5

an RV out of the foreclosure pool, but if

Speaker 11

there's anything to give.

Speaker 5

There's some old toasters. You pull those out.

Speaker 11

Just two cleanups for you, Zach. From $60,000,000 to $50,000,000 on the Capstone Tarana, what drove that? I know it's small $10,000,000 but what happened there?

Speaker 5

Yes. And, Julie, that's reflective of the cost that we see in that previous $60,000,000 was mainly Capstone and has a factor Production and revenues that flow through into compensation expense. And so when capital markets revenues were a bit softer in the second quarter, our outlook is Somewhat lower than was originally budgeted into the back half of the year. So probably, we're just less flows through into less comp. That's basically it.

Speaker 11

Okay. And then the $30,000,000 FDIC, that's all in the Q3. Is that correct?

Speaker 5

So let me clarify that. It's really important one. That FDIC expense that we talked about in that guidance is the 2 basis points higher assessment that is being assessed across the industry It was known late last year and it's coming to every quarter. It's not the special assessment that's still being discussed.

Speaker 11

Okay. Thank you. I appreciate that.

Operator

Thank you. Ladies and gentlemen, this concludes our question and answer session. I'll turn the floor back to Mr. Steiner for any final comments.

Speaker 5

Well, thank you very much for joining us Today, we're very pleased with the 2nd quarter results as we dynamically manage through this unique environment. Yes. As you heard, we're very well positioned for times such as these with strong credit quality, improving capital ratios and robust liquidity. The deposit Brook, in particular, in its granular nature has served us very, very well as have our efforts to provide customer service and Generate great satisfaction over the years. Now, we have a team of disciplined operators, and we are executing on our strategy that we outlined last year at our Investor Day, Which to buy are driving value for our shareholders.

Speaker 5

And just as a reminder, the Board of Executives and our colleagues, we are all top 10 shareholders Collectively, so that reflects a strong alignment with our shareholders. And I think you're seeing the benefits of that through our results. Thank you for your support and interest in Huntington and have a great day.

Operator

Thank you. This concludes today's conference call. You may disconnect your lines at this time.

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Earnings Conference Call
Huntington Bancshares Q2 2023
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