Huntington Bancshares Incorporated (HBAN) Earnings Call Transcript & Summary

Good morning, everyone. Welcome back to the Morgan Stanley Financials Conference. Our next presentation is Huntington. We're very pleased to have Zach Wasserman, Chief Financial Officer of Huntington with us today. Zach is going to go through some prepared remarks, and then we're going to go into Q&A right afterwards. I do -- before we begin, I do have to read this very important disclosure that if you do want to see our disclosure -- important disclosures, please see Morgan Stanley research disclosure website, morganstanley.com/researchdisclosures. If you have any questions, definitely feel free to reach out to your Morgan Stanley sales representative. With that, Zach, why don't I turn it over to you.

Good morning. Thanks, Ken, and thanks to Morgan Stanley for hosting us today. I also want to start off with a welcome to everyone listening today. We really appreciate your interest and support of Huntington. Similarly, just last week, we closed the TCF transaction, and we welcomed over 6,000 new colleagues to Huntington. This acquisition is a major step forward in our strategy to build the leading People-First, digitally powered bank in the nation and to deliver outstanding shareholder returns. For today's event, I'm joined by Mark Muth, our Director of Investor Relations; as well as Tim Sedabres, who joined us from TCF. Mark will be taking on a new leadership role as CFO of our Vehicle Finance division. And as such, we've named Tim as our incoming Director of Investor Relations. Tim and Mark will work closely during the earnings release in July as they transition into their new roles. Congrats to Mark on his new job, and welcome to Tim. Before we get started, let's turn to Slide 2. Please review the slide regarding forward-looking statements we will make today. This morning, I will start by sharing a quick update after having closed the TCF acquisition last week, then I'll share an overview of our strategy and recent initiatives. And finally, I'll turn it back over to Ken for Q&A. Slide 3 provides a brief overview of the company. Huntington is now an approximately $175 billion asset institution, placing us in the top 25 bank holding companies in the United States. The TCF transaction added incremental scale and density to markets such as Michigan; substantially expanded our presence in Chicago; and added new growth markets in the twin cities, Denver and Milwaukee. Our breadth of products and services allows us to bring expanded offerings to customers in these markets, some of which are well underway, such as the expansion of our #1 in the nation ranked small business administration lending to the Twin Cities. We are now intensely focused on delivering the expected cost synergies and revenue synergies for our shareholders. Our integration team brings a successful track record of execution, and their efforts are well underway. Several systems were consolidated immediately, such as the human resources, treasury, mortgage and auto origination platforms. And the bulk of the remaining TCF systems conversions are slated for October on Columbus Day weekend. The branch consolidations will occur in 4 phases between now and October, including the first phase of 44 Meijer branch locations this week. We remain on track and ahead -- on track or ahead for all of our key integration activities. On the bottom of the slide, you can see a couple of examples of the recognition we have received in recent months. These accolades from J.D. Power and Greenwich demonstrate that our work is being recognized and embraced by our customers across the bank. Just last week, J.D. Power announced Huntington ranked highest in customer satisfaction among regional banks or a mobile app for the third consecutive year. Recognitions like these, coupled with the resoundingly positive feedback from our customers, provide important validation of the investments we've made the past several years. Now turning to Slide 4. Let's briefly discuss Huntington's strategy. We are building the leading People-First, digitally powered bank in the nation. I want to take the opportunity to expand on that strategy. First, a purpose-driven company is more than just words on the page. Our commitment to look out for people truly is the center of how we think about our business. It serves as a call to action for our colleagues and how they support each other, our customers and our communities every day. Second, organic growth is key, and you've heard me talk about ensuring we consistently produce top line growth. Many of the investments we're making are designed to do just that, capturing customer relationships and growing the company across all portfolios and businesses. The TCF acquisition adds to this organic growth opportunity. Third, delivering sustainable top quartile financial performance is achieved through a combination of growing the company while managing efficiently to drive strong returns for shareholders. You'll see that we've added language on this slide, referencing leveraging the increased scale from the TCF acquisition as a driver of our top quartile financial performance. We're confident in the value creation we've achieved from the deal, and we remain committed to delivering those results. Finally, ensuring our risk approach serves as a strong foundation that allows for resiliency and strength of our company throughout economic cycles. Huntington entered the pandemic very well positioned with an aggregate moderate to low risk profile and strong balance sheet. Now we're positioned to accelerate out of this trough as the economic growth rebounds. Turning to Slide 5. Let me dive deeper into what People-First and Digitally-Powered means to Huntington. At its heart, People-First is about fulfilling our purpose to make people's lives better, help businesses thrive and strengthen the communities we serve. It rests on a foundation of our culture and our brand that are in a category of one. By category of one, we mean the kind of excellence and importance in the lives of our customers that they view Huntington truly in a class unto itself in terms of differentiated customers' experience, capabilities and innovation. Secondly, our Fair Play banking philosophy adds to that promise and looking out for people. We design our offerings to be transparent, easy to use to eliminate pain points and nuisent fees and to do the right thing for our customers. Third, multichannel delivery will continue to be increasingly important. The pandemic accelerated by multiple years the digital adoption trends we were seeing. And we must support people banking where they want, when they want and meeting them through their preferred channel, be it digital or otherwise. Fourth, local matters. We leverage our local team's leadership and deep local market knowledge to truly understand the needs of our markets and to serve our customers, and we use that as a competitive advantage. Finally, being a destination workplace ensures our colleagues want to work for Huntington and that we provide them with the best place they've ever worked. Moving on to Digitally-Powered, as outlined on the right side of Slide 5. Digitally-Powered harnesses the power of technology to expand our capabilities and enhance the customer experience. To be clear, our goal is not simply a baseline level of functionality or parity with competitive averages. We intend to differentiate and lead on digital. While we do -- while we may not have the resource levels of the largest banks, we also don't have their need to invest across hundreds of different areas. We're focused, highly prioritized in developing our digital strengths rapidly. Customer experience increasingly matters as more interactions with our customers are taking place through a mobile device, online loan application portals and other digitally assisted channels. Our continual journey to enhance customer-facing digital capabilities is enabled by our scalable infrastructure. We built a technology infrastructure that's shown its scalability through the TCF transaction as we were able to migrate many incremental customers and platforms onto our existing technology capabilities and deliver very significant cost savings. We've demonstrated success with adaptable technology that allows us to be flexible and to capture optionality. Add to that, our in-house development approach, leveraging the agile delivery method that supports faster go-to-market times and a continual stream of new feature launches. Holistically, our approach to Digitally-Powered is supported by a commitment to sustained investment capacity. Technology and digitization efforts continue to be at the top of our budgeting priorities, ensuring that we self-fund these items is ingrained in how the executive leadership team manages the company. While we leaned in during late 2020 and in the first half of this year to substantially accelerate investments, you will see us return to our target of delivering annual positive operating leverage in 2022 and beyond as we have for the prior 8 years. In summary, while People-First and Digitally-Powered would both be compelling strategies on their own, we believe the true power of our strategy lies in the intersection of the 2. Turning to Slide 6, I want to highlight a few of the results from this strategy and our approach within our consumer business. Over the past year, we've made tremendous progress in building out a full set of digital origination capabilities. Today, we have digital capabilities to originate consumer deposit products as well as mortgage, home equity and credit card. Adoption rates have been strong, with 64% of new checking household acquisitions this year being driven through our online channels. Just this month, we launched a set of additional capabilities for consumer banking. Standby cash, gives consumer checking customers the ability to access a digitally based line of credit linked to their checking account, providing support for customers who need short-term funds. The dollar amount and approval are based on a customer's deposit account history with Huntington and not a traditional credit score. If a customer opts for automatic repayment, there is no interest or fee. It's a great example of us looking out for the customer by removing the traditional headaches and approval process otherwise for small dollar unsecured lines of credit. The product launch is off to a phenomenal start with over 140,000 accounts enrolled just in the last couple of weeks. Early Pay provides customers with the ability to access their direct deposit up to 2 days early. Existing customers are automatically offered this feature for those who have 3 months of direct deposit history. This covers payroll from an employer, payments from social security or other pension payments. We expect the combination of standby cash and Early Pay to continue to drive new household acquisition, heighten our brand and increase customer loyalty. The result of these differentiated offerings and enhancements is clear momentum in our consumer businesses. Our average monthly digital users have grown at a 10% CAGR since 2019 and are up 17% annualized this year through May. Trends in mobile app usage are even stronger, growing at a 17% CAGR since '19 and up 26% annualized May year-to-date. Our consumer checking households have grown by a 4% CAGR since 2019. And here again, growth rates have accelerated more recently, growing 9% annualized year-to-date. This significant year-to-date acceleration and these engagement and customer acquisition metrics illustrates that our consumer banking investments are working. With the deepening and expansion of our presence in key markets from the TCF transaction, we believe we have a robust runway to continue to bring new customers to Huntington across all of our expanded footprint. Similarly, we're seeing success in business and commercial banking for our People-First, Digitally-Powered approach, as highlighted on the next slide, Slide 7. We have continued to expand digital capabilities across business banking, including full digital origination of checking and savings as well as both conventional and SBA loans. These digital origination capabilities launched late in the fourth quarter and were already seeing strong adoption, with 12% of all business deposit accounts opened digitally in the first 2 months of the second quarter. Our business checking relationships have grown at a 6% CAGR since '19, accelerating to 9% annualized growth year-to-date in 2021. Similar to the consumer metrics on the prior slide, the acceleration demonstrated on Slide 7 validates that our business and commercial investments are also working. Post conversion, we will leverage these digital offerings to expand the customer base and our markets. Today, TCF does not offer digital account opening for business accounts and we believe that bringing this offering to Chicago, the Twin Cities, Denver and Milwaukee will give us a substantial lift. To continue to expand the digital capabilities of the commercial bank, we've also built the same quality of dedicated agile development teams that we previously implemented in our consumer business. Another incredibly important investment has been a 5% increase in our customer-facing commercial banking team through targeted hires, most notably in the middle market, corporate banking and our specialty lending verticals as well as capital markets. We're live now with real-time payments, both send and receive, and we had the eighth highest level of received transaction volume of all banks participating in the Clearing House's RTP network in May. This new functionality as well as investments in our treasury management products more broadly has resulted in double-digit growth in year-over-year growth in treasury management revenue so far this year. Today, we have a full suite of commercial banking capabilities that can compete with any of our middle-market competitors. We're seeing momentum across our commercial banking business, and we also have significant organic growth tailwind at some point in the future. Based on our loan utilization data as of May, a rebound to normalized utilization levels would equate to approximately $3.6 billion of higher loan balances across our commercial and industrial and dealer for land portfolios. With that, let me turn it back to Ken to open up the Q&A portion of the discussion.

All right. Great. Thanks, Zach. Why don't we just start off with the TCF merger since that's obviously very, very new. Where do you think the biggest synergies are by products by combining your 2 portfolios?

Yes, I think there's more that I would call out for you in terms of synergies on the revenue side. One, as I mentioned in the prepared remarks, bringing our products and services to the TCF customers is going to be incredibly compelling. Just think about the fair play products that we've developed and all the traction that you've gotten and continue to get as evidenced by some of the trends I showed earlier. In addition to this, broadly the digital capabilities that we offer. Other areas that we're really excited about are wealth, private banking, credit card, all of which represent significant retail opportunities to bring those products to TCF customers. On the commercial side, likewise, there's tremendous opportunity for us. We're already underway expanding our small business administration lending platform into the TCF geographies. But treasury management, capital markets, really the ability to bring a stronger and more complete commercial banking product set to the TCF customer base is going to be a huge opportunity. The other thing I would say is really leveraging the expanded scale in some of the markets that we were already in and the new access to markets that we weren't in before is going to be really powerful. We're really quite substantially deepening our market presence in Chicago and across all of Michigan, including Detroit, which is, as you know, a big commercial hub. And then the new markets that we'll gain access to, and we've now begin to work to expand into the Twin Cities in Minnesota, Denver, and the kind of the whole Denver, Colorado Springs corridor in Colorado and Milwaukee represent terrific growth opportunities. Last thing I'd highlight is just really the opportunity to harness the combined scale in a couple of the great businesses that we got from TCF and combine them with similar businesses that we already had within Huntington, mainly the inventory and equipment finance businesses are going to be real gems. Not only are they terrific businesses under themselves, but they represent great opportunities to deepen and not only in the business-to-business sense, but also with their end customers. And so there's significant opportunity there. So that's just touching on the revenue synergies. Clearly, we've got lots of cost synergies work underway as well.

Got it. Maybe speaking of which, what is your expectation for the time line in terms of branch closure after the deals closed?

Yes. Thanks for the question, Ken. Overall, at this point, the plan is to reduce the branch network by about 190 -- 189 precise branches. The first 44 of those, as I noted in my prepared remarks, will actually occur tomorrow. And it's reducing our Meijer branch footprint. And then the remaining 3 tranches will take place between September and October, one smaller tranche in September and the 2 fairly equally sized tranches in the beginning and latter parts of October.

All right. Great. Now given your updated loan guidance, which I think is on Slide 10 of your debt to EBITDA, can you just talk about how you see loan growth for the various businesses progressing from here, or say, over the next few quarters?

Yes. Overall, we continue to feel good about the full year 2020. This is now a stand-alone Huntington, to be clear, loan guidance that I gave in April of 1% to 3% on an annual basis. I think sort of just getting a little more into that topic, I would highlight 2 major forces at work there. One is on the new production side, quite strong and very much in line, if not beating our expectations, really solid production in commercial, particularly in our specialty verticals like health care, equipment finance, asset-based lending. And I would say pipelines continue to be quite strong to grow and I think, to corroborate the broadly publicized business confidence metrics that have been noted in the popular press. Our Business Banking segment also has a lot of momentum, I think you saw from some of the stats I showed, it's really growing well. I think interestingly, leveraging our strength in SPA, lending, leveraging the PPP program to really -- and now our digital capabilities to really drive customer acquisition momentum, and that's picking up a lot of steam. And then on the consumer side, I think mortgage sustaining quite strong levels, actually, a $2 billion pipeline in mortgage right now is almost the same as we were seeing at the latter part of last year and into Q1 of this year, which, as we all know, was really running at a very, very historically high pace. So seems to hold up pretty solid. And even smaller areas for us, but important harbingers like credit card are starting to show sequential growth now. And lastly, I would say, the indirect auto, RV/Marine business continues to be budget and grow really nicely. So that's sort of one side, new production, quite strong. On the other side, it's line utilization of existing outstanding lines, that remains under pressure. On the general middle market line size, we've basically been locked for about 9 months in the same utilization band within 1%. Although now as we look at the data and we watch it very carefully, it appears that we bottomed in that trend in February. And we have been ticking up ever so slightly over the last 3 months. And there are indications that, that will continue and that we'll expect a slow recovery in general middle market lines into the back half of this year and then through 2022. That overall represents a $1.8 billion loan opportunity if we recover back to pre-pandemic levels. On the auto dealer floor plan side, that utilization trend continues to retrench. I think it's been, again, well publicized the issues in the auto manufacturing supply chain microchips, but beyond that, I think everything we're seeing is that this is a temporary phenomenon. And then we would expect the dealers to get back to the loan posture that they've had in the past and the equipment manufacturers likewise to be able to ramp up their production over time. What we're hearing is that come the end of the summer, we'll start to see manufactured products flow at a much faster rate. Although at this point, many of those autos are actually already purchased -- prepurchased. With that being said, I think that inventory flow -- starting to flow here bodes well for that recovery in the back half of this year, and again, probably further into '22 on the auto side. So those are sort of 2 competing factors that are offsetting each other, but generally overall, still continue to see that same level of growth that I provided in the guidance in April.

Okay. Perfect. I guess moving to sort of NIM or NII, if you kind of back out the impact of PPP, which obviously is kind of there. And then you back up the cash is all this -- you had great positive inflow, of course, this quarter. Can you just provide some update in terms of your core NIM dynamics? And also if you can just weave in so where are your new loan and security yields are versus those rolling off?

Sure. Sure. Absolutely. It's a great question. It's something we spend a tremendous amount of time looking at analyzing and ultimately really managing. In April, I provided guidance that we expected the second quarter, this quarter we're in right now to be the lowest quarter for our kind of underlying run rate NIM, as you described it, excluding the cap derivative position. Q2 to be the lowest in 2020. And I'll confirm that outlook now that is our current view. And I would say Q2 is experiencing a bit more pressure even than we expected in April, single-digit basis points but still slightly marginally more pressure. With that being said, as we run forecast out into the back half of '21 and out into '22, continues to expect an increasing trend and the long-term forecast continue to show that we'll be able to maintain the NIM at the levels you're seeing at the tail end of 2020 out over the next several years. If I sort of double-click into Q2 to give you a bit more color, sort of 3 drivers of incrementally more pressure in Q2. One is, as we noted in April, we have the first of a portion of our existing hedge program that rolls off, that's about 7 basis points reduction. We are seeing slightly slower PPP forgiveness in Q2 than in Q1. That's about 5 bps of pressure. Outlook there continues to look solid for the back half of the year, but just a little deceleration activity in the beginning of this quarter. That's now ramped back up. And then probably mid-single digits basis points of additional loan spread pressure just from rates marginally ticking down, a bit of competitive pressure and then a little bit higher securities in the mix. Over the long term, we expect many those factors to wane, the excess liquidity levels that we've got across the system to start to wane and modest tick-ups in the yield curve expected in the back half of this year that should drive that incremental sequential increase in NIM here in the back half of the year. And TCF will be accretive to NIM for us, which is really healthy. But just lastly, just touching on your point on securities yields. Actually, seeing pretty good yields. So new purchases in the quarter coming in on average at 166 basis point yield. The existing portfolio to give you a sense is around 150 and the runoff that we've seen recently is at 152. So actually being accretive to the securities yield over time and new purchases we're doing now.

Great. Now you had some pretty big gains in -- on your interest rate caps last quarter. I know I asked this on the earnings call back then. But like how should we think about the magnitude and serve this mark-to-market gain going forward and obviously, the potential drive, what are the drivers of how we even think about this?

Yes. It's a great question, and I very much understand the interest. I think it's important just to take a step back and position -- I'm sorry, the position of this within our overall dynamic hedging program. Really, we continually look at opportunities to hedge. And the goal is really threefold, to look around the corner to identify risks, ultimately to develop efficient hedge structures to address them and then to seize market opportunities as they arise to get into those positions. And for our caps, the goal was to protect capital. from the impact of rising rates on our securities portfolio. When we entered these caps prior to the November presidential and general election, we did not expect to see the kind of rapid increase in interest rates that we saw at the very tail end of 2020 and then mainly into the first quarter of 2021, that generated almost $150 million gain cumulatively. With that being said now, in Q2, we've seen some decline in rates, clearly. We'll have to wait until the last day of the quarter to see where everything lands, but your guess is as good as mine in terms of where rates are going to be. But I do expect, to be clear, to give back a portion of that Q1 gain through negative mark-to-market impact in Q2. Cumulatively, it's been an extremely effective hedge for us in a very positive position. Going forward, We'll continue to evaluate this position and see how we should maintain it or modulate it and certainly give another update as we get to the quarter end. The biggest thing that I watch day-to-day to understand where that's going is the 7-year swap rate. To give you a sense, and at the end of the year, that rate was 56 basis points. By the end of Q1, it had risen by 77 basis points to 133 -- 1.33%. And up till yesterday, it had given up about 30 basis points of that 77 basis point gain down to 1%. So that could give you a bit of an indication of how the dollars might move.

Okay. No, that is helpful. It's a complicated topic. So I appreciate the insight. In terms of your guidance, your 2021 expense guidance, you talked about doing a lot of investments in digital marketing, personnel, et cetera. Can you just talk about -- a little bit about how those investments fit into the overall strategy of the bank? And also, how do you know you're making the right investments in the right places?

Yes. Well, so let me just preface my statement by just reiterating the guidance that I provided last April -- this past earnings call in April, on a Huntington stand-alone basis, not including the impact of TCF acquisition, we saw -- we were expecting full year expense growth of around 7% to 9%, excluding the modest amount of merger-related expenses that had come through by that point, it was really 6% to 8% on year-over-year growth. With elevated first half, bringing back down to the historical growth rates in the second half to support our commitment to positive operating leverage into 2022, is that's sort of the baseline. I think it's important to recognize. Look, turning to the actual investments themselves. This is something I couldn't be more proud of, and I think we're managing quite well to be laser-focused on putting those investments directly against our strategic growth initiatives, many of which we sort of highlighted some of which today, about half of the investments go into tech. And the other half split roughly 50-50 between incremental marketing and incremental new personnel adds to drive revenue, for example, the 5% growth in commercial bankers that I referenced earlier. And I think the key to this is that prioritization that I referenced. And then ultimately as well, a rigorous program to track the returns. Every single month, we look at an updated forecast for how these initiatives are doing. Coated on a red, amber, green scale vast majority of them in green status and really performing quite well. But that visibility allows us to, frankly, double down on ones that are working, and we're already doing that and/or pivot and readjust or reprioritize if something is not working. By and large, we're seeing quite good traction, and I think you're seeing the early returns of that in some of the metrics I showed earlier in terms of how rapidly customer acquisition is accelerating. Over time, it will manifest itself into revenue acceleration of the business and ultimately a stronger competitive position and market share gains as well.

Okay. And I guess we have time for one last question. So I'll just -- staying with the expense piece, like, how should investors sort of measure the success of those investments? Like again, if we see an acceleration of revenue that makes sense because we always think sort of financially, what's the impact to the bottom line. I mean how do we judge whether these have been the right moves?

Yes. Look, I think the scorecard that we look at internally and the one I would urge others to look at is revenue growth and revenue versus competition, efficiency ratio and our ability to manage costs and a really rigorous and ultimately drive efficiency across the business and scale. And then finally, return on capital, where we want to have top quartile returns on capital. And importantly, across all 3 of those to drive earnings per share to the levels that we've committed as part of the TCF deal announcement and sort of over time as well.

All right. Perfect. All right. Well, looks like we're right at time. So Zach, I want to thank you very much for being with us today. And thanks all of Huntington for being here. So thank you.

Thanks, Ken. Have a good day.