Huntington Bancshares Incorporated (HBAN) Earnings Call Transcript & Summary

All right. Thank you, everyone. Sorry for the slight delay. Just a little over a year ago, we took our conference from live to virtual and Zach hung in there with us. And here we are a year later with a slight technical delay, but we're here. So welcome 25th Annual RBC Financial Institutions Conference. We have Zach Wasserman and Mark Muth here from Huntington Company and management team I have a lot of respect for. And basically, we're going to have some prep comments by Zach. He's going to go through a little bit on the deck that they filed this morning, and then we'll get into some Q&A. And as always, for those of you listening on the line if you're interested in Q&A., there's a box there where you can ask your questions. So with that, take it away, Zach.

Thanks, John, and thank you to you and to RBC for hosting us today, and thank you to everyone watching online for your continued interest in and support of Huntington. I'm joined today, as John's mentioned, by our Director of Investor Relations, Mark Muth. John, can you hear me?

John, can you still hear us?

Yes, I can, I can.

Okay. There seems to be a disruption there. I'm joined by -- today by our Director of Investor Relations, Mark Muth. Before we get started, let's turn to Slide 2. Please read and understand this slide as we will be making forward-looking statements today. I'll start by providing an update on progress with select strategic investments. I'll also share some short remarks on the current market environment and some insights on what we're seeing from our customers, and I will provide a brief update on the recent credit trends and some insights on the PPP program. Then I'll turn it back to John for questions. Our strategy, as you can see on Slide 3, is to build the leading people first digitally powered bank in the nation. This vision guides the development and execution of all of our strategic initiatives. For the past several quarters, we have been discussing the acceleration of investments to drive our strategic plan, supported by the market opportunities presented by the continuing economic recovery. Several of you have asked for additional insights into these investments. As Steve mentioned in his annual report letter, we have some exciting new products and services that will be rolled out this year. While we will wait for those to be formally launched before we comment on them specifically, I want to provide some additional color on the major growth initiatives we have underway in each area of the bank that are listed on Slide 4. These generally fall within 3 areas: digital and technology development, marketing and select personnel ads. We're funding a range of new digital and technology initiatives across the enterprise and our major business lines that will help us acquire customers, deepen relationships and improve customer experiences. A few of these listed on the slide that I would draw your attention to include digital commercial relationship management tools, a digital and in branch unified experience for wealth customers and a new digital onboarding experience and payment technology enhancements in vehicle finance. We are adding personnel in SBA lending and vehicle finance-related to geographic expansion efforts as well as in key commercial banking specialty areas. And we're investing in marketing related to recent and upcoming products and feature releases that will support our fair-play banking philosophy. We've accelerated our investments in the second half 2020, and we expect this elevated growth rate to continue for the first 2 quarters of 2021. This is the perfect time for us to be making these investments to capture the opportunities to accelerate growth and market share in the recovery. As we've stated previously, we expect expense growth in the back half of 2021 to return to more sustainable long-term growth rates. In addition, let me remind you that we regularly engage in expense contingency planning, where if our outlook for economy or from the revenue from any of these initiatives deteriorates, we maintain the ability to adjust course as necessary. Importantly, our philosophy of driving long-term positive operating leverage remains. On Slide 5, we share a mid-quarter performance update. What we're seeing now is a bit of a tale of 2 cities. Q1 is shaping up to be mainly consistent with our original expectations, albeit still showing some choppiness. We are seeing impacts of highly elevated liquidity, affecting outstanding line utilization and some sector-specific supply issues. However, the economic trends and forward indicators, the size and growth of pipelines for new loan production and what we're hearing from clients to point to an acceleration of business and demand over the course of 2021. Our outlook for '21 and beyond remains positive. The underlying health of the economy across our footprint continues to strengthen is recovering faster than the nation as a whole. The average unemployment rate in the footprint is lower than the national average of 6.3% versus national 6.7%, while payrolls in our footprint have also grown faster than the nation. Consumer confidence also continues to improve and track the recovery in employment within footprint confidence rising to 103 on the index in February versus 91 across the nation. In the corporate banking space, we're also seeing positive trends, with overall market activity picking up, M&A increasing, credit facilities opening up. Commercial and real estate clients are also expressing improved sentiment with the reduction of COVID cases and the vaccine rollout and sales activity is beginning to pick up. Middle market sentiment is increasingly positive on the future, though these customers largely remain in a wait-and-see mode at the present. That said, average total loans are $80.5 million quarter-to-date, a modest decrease in Q4 on a sequential basis, which reflects the PPP forgiveness process and the continued impact of high commercial saving rates and liquidity, driving existing commercial loan utilization, excluding floorplan, to be approximately flat. Dealer floorplan has declined modestly due to very real manufacturer supply chain and production challenges from the global microchip shortage. We're also seeing normal seasonality in indirect auto and RV/Marine. While utilization rates continue to be under some pressure in Q1 given these factors, we continue to expect utilization to improve in both commercial and auto floorplan lending as we go throughout the year. Commercial loan pipelines remain up significantly, up 44% from a year ago and 9% linked quarter. Private client loan and personal trust pipelines are also strong. Mortgage originations, both salable and on balance sheet remain robust. From a credit perspective, we believe charge-offs peaked in 2020. First quarter charge-offs are trending to be in line with our full year expectation, while overall portfolio credit metrics continue to show improvement. Average total deposit balances are $98.4 billion quarter-to-date, reflecting strong commercial and consumer production, both ahead of expectations, partly offset by a $1.4 billion reduction in brokered deposits. There's no change to the stand-alone full year 2020 expectations we preside -- that we provided on our first quarter earnings call. Let's talk -- let's turn to Slide 3 -- sorry, let's turn to Slide 6 to discuss what we're seeing with PPP forgiveness and the expectations for the new program. In total, Huntington approve $6.6 billion in loans as part of the original round of PPP, making us the 11th largest PPP lender in the country. As we disclosed in the 8-K -- sorry the 10-K, so far, we received over 17,000 applications, totaling $1.9 billion for PPP round 2 loans. As normally occurs, some of these applications will fail to be approved or to fund for a variety of reasons. We currently expect approximately $1.5 billion ultimately to be approved in round 2. We continue to expect approximately 85% of balances from both the original program and the new PPP program to be forgiven, while the timing of forgiveness continues to be somewhat difficult to estimate. We expect that most of the remaining loans from the original program will be forgiven in the first half of 2021 with the bulk in Q2. For the new PPP loans, we expect 1/3 of forgiveness in Q4 of '21 and the remaining 2/3 of that to occur in the first half of 2022. Finally, we're making good progress on the TCF acquisition. We are meeting, and in some cases, beating the time lines that we've set to be ready to close acquisition during Q2 and complete conversion in Q3. We completed our regulatory application filing in January. We are executing our integration plans with progress on product and data mapping, vendor conversion planning and systems integration road maps. The next milestone is scheduled to occur in about 2 weeks when the 2 companies hold their respective shareholder meetings to vote on the transaction. Finally, we remain very confident in our ability to execute the cost synergy plans, while our excitement about the incremental scale and revenue growth opportunities coming from this combination are only increasing. With that, let me turn it back over to Jon to begin the fire side questions.

All right. Thanks, Zach. And just a reminder if anyone has questions, feel free to send them in. Seems like a pretty optimistic view on loan growth, Zach, and 1 of the things we've heard from a lot of your peers is that there's a real belief that the second half will see an acceleration of loan growth. It feels like you're saying something similar. But maybe just give us your thoughts on degree of confidence that, that second half growth really comes through?

Yes. I remain very confident in it, Jon. And I think it's -- as I mentioned in my prepared remarks, it's very much a function of -- we're in the last stages of choppiness coming out of the COVID environment. All the indications are that the vaccine rollouts are progressing well and indeed accelerating. And that the economic outlook and other temporal supply chain factors that have affected the various industries are also getting under control and will be during the course of the early part of this year and into the middle part of this year. So confidence remains high. And I think when we talk to our clients, what we're hearing is the expectation of a robust snap back in demand, their own profitability actions that they took during the pandemic are putting them in a great position to be ready to expand and that they're beginning to plan to do so and that they are -- have every expectation that they'll begin to substantially reinvest in their business, inventories and their own growth plans over the course of this year. And so I think that's reflected in the pipeline data that I mentioned, which is, frankly, only increasing quarter-on-quarter and month-to-month here. And so I think we're seeing really in this last period is just a bit of remaining pressure on existing line utilization. New loan production on plan, outlook for new low production very solid, existing line utilization under some pressure given the excess liquidity that's out there in the marketplace but every indication would say that, that will start to normalize during 2021.

Okay. Good. And you've -- just to remind people, you've laid out kind of a mid- single-digit loan growth number, ex-PPP, is that -- that's right? That's still what you're saying?

Correct. Our loan outlook is around 1% to 3% -- 2% to 4% of topologies, and our expectation continues to be in that range.

Okay. Great. And what about the consumer, Zach? I mean there's this this feeling that maybe some of the stimulus is too much stimulus, and that leads to lower balances and you've flagged an area where refinance has pressured some of these balances. But what are you seeing in terms of consumer activity?

Generally, consumer confidence and activity seems quite healthy and solid. Interestingly, in the first round of stimulus that came out into several different packages early in the COVID pandemic period, we observe consumer behavior where there was a lot of saving of that stimulus money and just generally savings, rates increased a lot. Not surprisingly, there was understandable concerns broadly about employment and where the course of the recession would go. What we've seen recently has been a change in that. And in the stimulus round, it was approved December and then payments being made in January. We saw most of that be sent in prudent ways paying down auto loans, credit card loans, home equity loans. But generally spending that liquidity, which I think was a positive indicator about the health of the consumer. And so our expectation for this next round of stimulus, if and when it's approved in the next several days, is likely to see something similar to that. From a demand perspective, I'll just comment as well that we're seeing continued strength in auto sales, continued very robust mortgage origination, both refinances and purchase market. And so I think generally, we're seeing equal to or better strength in consumer than we would have thought this time last quarter.

Okay. Okay. Good. I did you -- you just touched on auto. I did have 1 question come in on auto lending. How are you feeling about that? I know it's -- you have a couple of different looks at it with the floorplan business and your retail exposure, but talk a little bit about what you're seeing there? It feels like there's some support for that industry other than maybe the floorplan piece?

Yes. I think -- I mean, it's -- I'll touch on the 2 different sides of it. On the dealer side, dealers are well positioned right now. 2020 was a year of record profitability for many dealers. And I think they're well positioned as we go into '21. And they're seeing very strong consumer demand, as I mentioned. So inventory is sort of flying off the lots on a quick basis. If there's a concern, it's supply, as it's been well documented in the popular press, the semiconductor shortage is very real and is causing a slowdown in production from manufacturers and even other lingering supply chain issues, the major storm that was in Texas recently, disrupted a number of ports, all pressuring supply. I think everything we're seeing and hearing, both from manufacturers and from dealers would say that, that supply issue will be sorted out by the second half of the year. And that dealers expect to return to kind of a normal way of running their business, leveraging floorplan lines to fund their inventory as they go throughout 2021. If there's a watch out, it's just the timing of that. I think we had originally been seeing that nicely kind of return back to normal in the fourth quarter. We've seen some retrenchment in that trajectory in the first quarter, just given the supply issues. And so I think we'll be digging out of this trough as we go throughout 2021. But I think by the end of the year, what we're hearing from our clients and manufacturers is we'll get back to that. On the consumer side, we're really excited about our vehicle finance business. It's performing quite well and not only the demand -- on the demand side, just generally with the consumer, but also power execution of our business plan. So 1 of the things that I referenced in my prepared remarks was a slide that we included in the deck that talked about some of the strategic initiatives we're investing in. One of them is expanding in our vehicle finance business, growing to another 4 states on top of the 23 that we're in now. It's just a great example of rolling out a business that's really working and executing well to drive additional growth. So -- and we think that will largely offset, by the way, on a net basis, some of the pressure on the floorplan side with new consumer loan origination.

Okay. Okay. Good. On deposits, you've obviously -- looks like another very strong quarter for deposits maybe the ability to change the mix a bit to a more favorable mix? What's your view in terms of when some of this growth will abate? And when customers will start using some of those deposits and business activities or spending?

I think that is the key question that the industry has been wrestling with and trying to get to the answer around. But my point of view on it continues to be the same as it has been for a while, which is it will heavily driven and correlated by the pace of the economic recovery and the pace of actions to stem the COVID pandemic. And so I think realistically, our expectation is that these levels of excess liquidity will stay around for a while here. And that was part of why we made a decision in the fourth quarter to increase by $2 billion investments in our securities portfolio. At this point, we were standing pat on that strategy and waiting and watching what -- how the liquidity trends and deposit trends move from here. But my expectations, you're going to see the first half of the year be relatively consistent with this level that we're at. And by the back half of the year as the vaccine rollout is essentially completed, and the economic growth accelerates that, that will conversely start to show a draw down in deposit and excess liquidity levels.

Okay. Okay. On the margin, Zach, you've talked about a relatively stable margin. I'm just curious what your thoughts are on the steepening of the yield curve? And what kind of an impact that could have on the margin outlook for Huntington? Are you balanced? Are you still more asset sensitive? Do you benefit from the steeper curve. Just seem to big picture thoughts?

Yes. I mean, generally, what I would tell you is that the movements in the curve are very constructive to our long-term outlook and expectations and so we welcome them. With that being said, the impact on the near-term margin is going to be relatively low. And that's really driven by the fact that what we've seen is, as you said, the steepening, the long end of the curve has risen, but the short end has not, in fact, anything, the short end has come down a little bit. And our business is really keyed off of 1-month LIBOR, prime, and so the 2 to 4-year period of the yield curve. So until we see those rates start to move up, we won't see substantial direct impact on our net interest margin. With that being said, we're actually really pleased with how the yield curve and yield outlook appears to be shaping up at this point. Our hedging program, which we've talked about a lot, it is benefiting us very considerably right now, will slowly run off over the next 2 to 3 years precisely the time want to become more sensitive and exposed to the short end of the curve. And so essentially, the hedging program has brought forward the benefits of those expected future short-term interest rate increases today and -- but will leave us when it wanes off, exposed to those extended rates and really benefiting from that. I'll pin point a fact on it. As we model asset sensitivity, in 2022, we expect to be roughly double the asset sensitivity that we have in 2021, which is, again, sort of exactly what you want to see given the expected move, if you believe how the yields will play out. If there's any watch out, and we're watching this very carefully, it's mortgage. Mortgage has contributed very strongly to Huntington's performance in the last year to 2 years and while it's continuing to be very robust in Q1, 1 could easily surmised that over time as those rates continue to drive mortgage rates that you'll see some dampening of demand for refinance and just like a cumulative amount of refinance that's happened, start to dampen that demand. But that being said, we're not seeing it yet, and the fact the pipelines continue to be at or above the levels for mortgage production that we saw in the extremely robust third and the fourth quarter of last year. So that seems to be holding up quite well at this point.

Okay. Good. I did have a question, and then somebody touched it, but it feels like maybe mortgage is the key or 1 of the key drivers in terms of the lower or higher end of that revenue guidance that you've laid out there?

I think that's 1 of them. I think if we think about the revenue guidance, firstly, on spread, really, what we want to see is the volumes continue to track to where we'd expected them to do. And every expectation is that they will. We're seeing new production be quite good. Pipelines, as I mentioned in my comments, strong and growing. And notwithstanding the choppiness and utilization in Q1. What we're hearing from clients and everything that was -- all our modeling would indicate that the utilization will also be a tailwind as we go throughout this year on volumes. On rates, I think our outlook is largely trend like at this point relative to what we had seen before, just given my comments about the interest rates move as of late, not really affecting the short-term net interest margin. So I think it's mainly about volume. And then the other thing that we're watching carefully is our fee businesses, capital markets, our payments business and, of course, the mortgage, as you said. So everything seems to be tracking at this point, but those are the big drivers of it.

Okay. And you must be doing a good job, Zach. I just saw Steve rip by quickly in the background. He went on a mission. So he didn't feel the need to come in. So nice job so far. I wanted to talk about expenses, but kind of in the interest of time, it feels like you're committed to these early -- and I think Mark and I have talked about this, some people were a little disappointed with the higher expense guidance, but I think you made your case on that. But I guess on credit, it feels to me that you and a lot of others maybe have been surprised by the credit performance, reserves are high. And it feels like directionally, reserves have to come down. Would you quibble with that? Do you feel like that's the right thinking? And if so, kind of the cadence and magnitude of reserve releases we could see?

Yes. I mean I think we've talked about this a number of times over the last several quarters. You wanted to be strongly and conservatively reserved for what could ultimately come to pass, but we're expecting, over the course of the recovery, we would see credit begin to improve and and every indication is that it's doing that, which is great and good for economic for the economy in the United States, which is great. Look, I think as it relates to reserves, I can't say with precision what that trajectory is. My expectation is as we go throughout the course of 2021, you'll see a return to the beginning of moving back to pre-COVID levels of reserves. The pace of it is going to be the thing that we'll have to work through, and we're just beginning the modeling for the first quarter CECL reserve process now. We're just in the middle of it. So too early to say. But I do expect that reserves will come down throughout the course it.

Okay. Okay. Buyback, that was another -- I don't want to say a point of contention, but you delayed it a bit to what -- relative to what people were expecting with the acquisition. Any update in terms of your thoughts on the buyback and timing and what's possible there?

Yes. Nothing has changed from our expectation and what we've communicated before. We paused our share repurchase activity now and have no expectation of getting back to it until we get to the integration of the TCF acquisition. We're just in the process of completing our updated capital plan submission that we'll do as part of the acquisition process and and we'll see where that goes as we go throughout this year. But I would just reiterate, our capital priorities haven't changed, and we're really focused on driving organic growth, sustaining and over the moderate term, continued to move the dividend and then share repurchases in all other uses. And so I think we're -- it will be towards the back end of this year that we can, I think, share with more certainty what any updated outlook is.

Okay. Almost out of time, but I think the summary, tell me if I'm wrong, but you feel good about commercial growth. You feel good about overall growth, feel good about the economy, stable on the margin, but maybe the better funding mix helps somewhat and the steeper's curve helps, feel good on expenses, even though elevated in the near term, second half of the year shapes up pretty well for you. Is that fair? Did I miss anything?

I think you nailed it, Jon. We're pretty bullish about how this year, and certainly, as we go into next year, will play out. Eager to move forward and complete the acquisition that we're in process to do and to execute on that plan. And I think we've got the right strategies to win in the market, and we're investing it on right now. I think you'll see them really bear fruit and accelerated growth in market share as we go throughout this year and get into next.

Okay. Good. Well, thanks for the time. Sorry for the difficulty in the beginning, but I think we got through it all. And I appreciate it. Thanks.

Yes. Thank you. Appreciate it. Bye everybody.

Thank you, Jon.

Thank you so much.

Bye.