Huntington Bancshares Incorporated (HBAN) Earnings Call Transcript & Summary

Good morning, and welcome back. Next up, we have, from Huntington Bank, I would like to welcome Zach Wasserman, Chief Financial Officer. Zach joined Huntington as CFO in November 2019 and who actually presented at this conference this time last year. So Zach, welcome back and thank you for taking the time.

That's great. Thanks so much, and good morning. Thanks, Ebrahim, for that welcome, and thanks to Bank of America for hosting us today. I'd like to start by welcoming everyone listening today and also appreciating very much your interest in Huntington. For today's event, I'm joined by Tim Sedabres, our Head of Investor Relations. Before we get started, let's turn to Slide 2. Please review this slide regarding forward-looking statements that I'll make today. I'll start off this morning with a couple of brief opening remarks related to our strategy and recent initiatives, and then I'm going to turn it over to Ebrahim to spend the majority of time together on questions and answers. If we look at Slide 3 for a moment, if we could advance to that slide, please. At Huntington, we're a purpose-driven company. We're guided by our mission to make people's lives better, to help businesses thrive and to strengthen the communities we serve. And we're inspired by our vision to the country's leading people-first, digitally powered bank. At Huntington, the strength of our culture has always been the foundation of delivering on that purpose, the combination of highly engaged colleagues, delivering great service drives the success of our customer relationships. And we're seeing high levels of engagement from our colleagues across the bank. And now after we've gotten through the TCF system conversion, we're poised to accelerate our efforts to grow new and expanded customer relationships. Our purpose not only drives this performance of clients. It also supports our objectives to deliver organic growth and sustainable top quartile financial performance. If you shift to Slide 4, please, I'd like to summarize 4 key points that I want to convey today. First, we've successfully completed the vast majority of the TCF integration, with cost savings on track to be fully realized in 2022. And we're executing now on revenue synergies. We have full line of sight to the achievement of the cost savings, as I said, which totaled 37% of the TCF cost base. And we're very pleased to have completed the conversion in 10 months after announcing the transaction. And we're seeing strong customer trends in retention to date. Our primary focus up to now has been delivering on that successful conversion experience for our customers. Now with that milestone behind us, we carry the momentum into revenue growth and relationship expansion initiatives. Secondly, we continue to see really good momentum across the bank, with healthy loan pipelines, extraordinarily high calling activities that support all that business development on a very broad basis. The robust activity levels that we're seeing there fueled continued growth momentum in loans ex-PPP in the month of October and that built on the progress we saw in Q3. As they expected to drive -- as they are expecting to drive continued growth in the fourth quarter as well with accelerating trends as we continued throughout 2022, this loan growth ex-PPP, coupled with stable NIM, is expected to drive continued expansion in net interest income dollars over the coming quarters. Third, we're dynamically managing the expense base of the company even as we deliver on the cost savings from the TCF acquisition. An example of that is we announced 62 branch consolidations just in the last quarter, which will close in the first quarter of 2022 and which we -- and we continue to optimize roles and resources across the bank in order to fuel reinvestment into our strategic revenue growth initiatives, which will deliver top line returns in the years to come. Fourth and finally, we remain committed to delivering on the financial goals we laid out earlier this year, including sustainable revenue growth, positive operating leverage and a 17% plus return on tangible common equity. If you shift to Slide 5, please. This slide gives an overview of our 5 primary businesses and the associated strategy for each. In the Consumer business, our Fair Play philosophy is at the center of our efforts and is directed -- and directly aligned with our mission of looking out for people. Recall that Huntington was an early leader in this space, having launched 24-hour grades over a decade ago, and we continue to innovate with new and compelling products that drive acquisition and relationship deepening. In our Business Banking division, we are the #1 SBA 7(a) lender in the country, and we're bringing together our expertise in this space with our Fair Play products and our very strong digital capabilities to expand our relationships with customers and acquire new ones. Activity levels continue to be robust. And with -- and pipelines are up over 40% year-on-year in this space. In Commercial Banking, we have substantial opportunity across the footprint, especially given the addition of new and expanded growth markets from the TCF acquisition. We're gaining transaction and seeing momentum accelerate in key growth areas, including middle market and mid-corporate in addition to specialty verticals such as health care, capital markets and our equipment and inventory finance business. Commercial late-stage pipelines have continued to strengthen since the end of last quarter and remain up substantially from year ago levels. We're focused on leveraging our expertise here as well as our enhanced capabilities within treasury management and cap markets to deepen customer relationships and accelerate fee revenues. In wealth, our teams are delivering underlying new and expanded customer relationships, resulting in record positive net asset flows and assets under management growth. When you look across the bank, our collection of payments-related businesses continues to show robust growth trends in many areas. We've got building momentum in treasury management, in commercial card and merchant acquiring and in our card businesses, debit and credit card. Growing these continue to be a major focus of the company and we're seeing sustained revenue growth in all these areas. There's a significant long-term upside here, and we're focused on capturing it. As we look to Slide 6, let me highlight a little bit some of the key revenue synergy areas that we're focused on from the TCF acquisition. One of them that's really important is the expansion of our middle market and mid-corporate and specialty verticals in the commercial space into the TCF geographies. The transaction added sizable and really attractive new and expanded markets for us such as the Twin Cities, Minneapolis-Saint Paul, and Denver, and then Chicago. And we've got not only a strong branch presence in these areas and brand awareness, but also the opportunity to extend on what had been an area that TCF hadn't been as focused on in the past, so we can expand the commercial business that we're doing there. And we're doing that through hiring key sales leadership, which we now have in place, as well as adding to very experienced teams of bankers in these businesses across each of these markets. Secondly, deploying our consumer product set to the legacy TCF customers. Now that we've completed the conversion, we're bringing this extremely strong Huntington product set and servicing capability through both our branch and digital channels to over 1.5 million new customers. Over the years, we've seen the benefits of our Fair Play philosophy and our products that drive new customer acquisition, improve retention and relationship deepening that results in both consumer deposits and lending. This is a very well-practiced playbook, and we expect it to fuel the same kind of expansion in the historic TCF customer base. Third, Business Banking. With over 2 million small businesses in Minnesota, Colorado and Illinois, we intend to leverage our leading SBA platform that I mentioned earlier and our strong digital capabilities and overall product set to really drive growth in these markets. We've already added a team of business bankers in the Twin City and continue to add similar practice, finance and business banking capabilities across the footprint. Fourth, wealth management. We're extremely focused on penetrating the customer base and bringing the Huntington capabilities to these new markets in private banking, in trust and in investments. In the Twin Cities, we've added a really strong wealth management executive to the market. And by the end of the year, we expect to have a substantial portion of that team in place. And then lastly, equipment and inventory finance. The teams here have come together exceptionally well, and we couldn't be more excited about the long-term opportunity for this business given the combined breadth and market position that we've got now across the totality of that business. Finally, let me turn to Slide 7 and talk about our medium-term financial goals. We believe collectively, these are a compelling set of financial metrics that are aligned with top quartile return, particularly compared to our peer set. These metrics, coupled with the sustained top line revenue growth over time that we expect to drive, will add substantial value for our shareholders. In closing, we're focusing our teams to deliver solid performance to end the year. And we're delivering on the cost savings we've announced even while transitioning to drive revenue synergies that will fuel market share and revenue growth for 2022 and the future. With those opening remarks, let me turn it back to Ebrahim to open the Q&A.

Zach, thank you for that overview. I guess maybe -- and I want to drill down on a few things that you talked about. But just big picture, I think coming out of third quarter earnings, it -- talking to investors and I relay the same to Tim when we caught up, it seems like Huntington is in a pretty good place as you think about some of the deal integration work running ahead of schedule. As you look into 2022, a lot of expense leverage, capital return coming back, likely for some of the businesses rebounding. It sounds like there's a pretty bullish case to be made in terms of what the outlook could look like, both due to macro and for idiosyncratic reasons. Just talk to me in terms of -- I mean, Steve, you, the rest of the team sits around the table, do you share that optimism? And what are the one or 2 things that you're really focused on as you look forward to '22?

Yes. So the answer is yes. We showed that optimism, and I think we're collectively quite bullish about how we're going to see the coming quarters perform here and that we're going to see really strong continued execution across the company. I think it's, a, the economy -- the economic recovery is certainly continuing, the fact that we were able to execute on the TCF conversion in 10 months in a way that was very high quality and really additive to the customer experience. Now that we've got that behind us, we can really start to move and run against the revenue synergies. And when you couple that with full line of sight to the cost synergies that I mentioned before, that's a very powerful combination that will drive revenue acceleration even while bringing the absolute level of cost down over time. And so feel great about that. And I think at this point, we're really focused on executing and continuing that momentum, growing loans sequentially every quarter as we go forward here throughout the course of '22 ex-PPP, seen the momentum that we saw in Q3 extend into Q4. As I mentioned in my prepared remarks, we already saw in the first month of the quarter, and we expect that to continue throughout Q4 and then accelerating as we get into 2022. That should drive the continued growth and net interest income dollars and those expenses trending lower. So we're bullish, and I think the outlook here is quite strong.

That's helpful. And I think your expense guidance on the call was very clear. So it was very good way to provide some visibility to the state on expenses. Just remind us again, as you go through the integration, what are the 2 or 3 key drivers that are providing cost save opportunities or cost cut opportunities?

Yes. There's really 4 big buckets of the cost synergies that came from the combination with TCF. One of them is branch consolidations. We reduced about 188 branches in the first tranche of consolidations. Last quarter, we announced another 62 branches that were -- will also contribute to cost savings over time. And so the branch network is one that we're continually optimizing like any good retailer and still incredibly relevant channel but doesn't represent the opportunity to consolidate while still maintaining #1 share in Michigan and Ohio, which we feel great about. Second category is system conversion. One of the really important strategies that the company has had for a while is to ensure that our core tech stack is scalable. And a great example of the manifestation of that was the ability to port over the vast majority of the TCF business onto the current Huntington tech stack. And so that represented a very sizable cost synergy opportunity. Organization and personnel alignment is another one. And then there's a long tail of other cost synergy opportunities, but some important ones include vendor consolidation. We're seeing quite a bit of opportunity to leverage the combined economies, the combined scale of the company to get economies of scale in sourcing and vendor related costs, real estate. Lots of opportunity to harmonize real estate and to take costs out as a function of that. So overall, as I said, equal to or more than 37% of the TCF cost base, we could get that industrial scale out of. And that really -- as you take a step back from just the cost synergies, if you look at the overall expense base of the company, including our continued investment into our strategic initiatives, and dynamically managing all the other elements of the expense base, we expect to drive the absolute dollars of expenses lower in Q4 and during 2022. Just as a reminder, Q3 on a core expense level was $1,055,000,000. We expect to get expenses down below $1 billion on that core basis by the second quarter of 2022 to give you a sense of the trajectory. So we're really pleased that we're able to kind of accelerate the realization of those cost saves and to have line of sight to get down to that level over the next 3 quarters.

Got it. That was helpful. And I guess in terms of just cost related, I think when you think about the organic cost and inflation and wage pressure, something that's come up frequently during recent conversations, just talk to us around how meaningful is that in terms of having an upward push to your expense base as you think about the next year or 2.

Yes. Inflation is certainly out there in the environment. And I will tell you, as we talk to our clients, particularly those that are in more labor-intensive or commodity-intensive businesses, they're feeling it. For us, in our business in Huntington, I don't see a substantial impact at this time on our cost structure. And to be clear, our outlook for costs are included in the guidance that I just provided a moment ago. And I think that we're seeing, not surprisingly, like many, a war for talent to make sure that we can keep and acquire the best people in the industry, which really are the core to our mission and purpose, as I mentioned before. But in terms of cost inflation at this point, it's relatively de minimis within our own business.

Got it. You're able to keep and retain teams. So you're already winning the war on talent. So good to see. I guess maybe shifting gears a little bit to loan growth. You've talked about like sequential growth ex-PPP. Just give us a sense in terms of what are the 1 or 2 loan categories or verticals that you expect will be the kind of driving growth moving forward?

Yes. I think we're feeling terrific about loan growth. And I would tell you what's really encouraging about it is it's quite broad in terms of the demand that we're seeing and where the pipelines are stacking up. And as I mentioned in my prepared remarks, it's really supported by extraordinarily high levels of calling across the organization. With that being said, I do think in the near term, commercial will be the driver for the net growth in the next couple of quarters that we're seeing very strong sustained demand. And a lot of the areas we've seen for the last quarter or 2, which is anything sort of asset or equipment finance-related, is seeing strong demand. I'm encouraged, though, by broadening out of that demand across the breadth of the middle market and in small -- large corporate space fueled certainly by some of our expertise categories and health care, tech and telecom. But it's quite broad-based. In the Consumer space, we likewise have seen a fair amount of resilience in the consumer and continue the demand for auto, RV/Marine, new loan production and residential mortgage continues to hold up relatively well, albeit on a trajectory to normalize over a period of time, but as we stand right now, continues to have momentum. And then in the Business Banking space, I mentioned our fifth consecutive #1 position in SBA 7(a) lending. And I think when you come off of the period of PPP, and as we get into this economic recovery cycle, we're seeing a fairly strong sustained momentum in the Business Banking space and leveraging SBA and other capabilities to drive new production in that segment as well. So it's encouragingly broad. But certainly, I think on a net basis, commercial will be a key driver in the near term.

And any areas like -- we heard other banks talk about paydowns on the CRE side, in particular, staying elevated. Anything when you look at the portfolio where payoffs or paydowns are still a relatively meaningful headwind?

I think you noted that probably one of the areas I would call out, commercial real estate is an area where we have seen some levels of elevated paydown. And to some degree, our companies -- our clients leveraging the capital markets and broader opportunity to raise funding to just reduce their own costs. So it's certainly a healthy thing, but it is driving some elevated paydowns in that space. Another one I might probably call out is there's been a long-term secular decline in the home HELOC portfolio in the Consumer space. And so we're certainly seeing that continue as well. But generally, we expect the production to offset that overall on a net basis, as I said, and drive loan growth here in the fourth quarter and accelerating into '22.

And to the extent you can, Zach, I mean, I think TCF had pretty decent exposure to the inventory finance, dealer finance businesses, just give us a perspective in terms of how you see the recovery for those portfolios. They've been a little more harder hit because of supply chain issues. I would love -- is there any color you can add?

Yes. We feel great about those businesses, by the way. The TCF inventory and equipment finance businesses were gems, extremely well managed and great capabilities. And so we're thrilled to add them to the existing equipment finance business that we had on the Huntington side to really be quite a scale player. I think when you look at that business, there's lots of opportunity to extend and drive new production. And so that's certainly the focus. On the line utilization side, I would say of the areas that are impacted by supply chains, inventory finance is the one where we expect to see the earliest recovery. Those products are personal, motor craft, side-by-side vehicles, motorcycles, things of that nature, and lawn and garden, home and other kind of small machinery equipment, which are just less complicated to build, have less parts in them, less reliance on computer chips and other key areas of supply and challenge. And so we do expect to see those inventory levels likely rebound earlier. To be clear, the loan guidance I've given at this point assumes no recovery in inventory finance utilization, but I do think there's an opportunity, particularly as we get through the next few quarters and into the balance of 2022 as the supply chain challenges are slowly worked through here over the course of the next 5 or 6 quarters.

Got it. Got it. And I guess just shifting gears to -- you mentioned about the 62 branches that you expect to close in addition to the 188. Just remind us, I mean, I think if I go back close to 10 years, like Huntington has always, in the recent past, had a relatively differentiated strategy on the consumer side, Fair Play banking, give us a perspective -- you've talked so much about digitization of banking services over the last 18 months and the acceleration there. Give us a perspective in terms of once we get through these 62 branch closures, how much more is left in terms of branch optimization? And even are you thinking about the brand strategy differently today than you did 2 years ago pre-pandemic?

Yes. It's a great question. It's something we think about a lot. Just to put some facts on, to give you a sense of magnitude. Over the last several years before the pandemic, we had been on a steady optimization path managing the shift over time to enable more and more digital traffic while still recognizing the importance of branches, 4% annualized historic run rate reduction to the branch network. The 62 branches that we consolidated, we announced the consolidation of -- in just the last quarter, would represent 6%. So modestly above that trajectory, but not extraordinarily so. And I think as we look forward -- look, the way we think about it is optimizing a retail network, and there's always opportunities to go in and really see how we can optimize that to best locate those locations. And yet, it's, I'd point out, still exceptionally important to have the branch network. We're seeing it -- the role of branches is not only sustaining, but it's also changing over time to be more about advisory and higher value-added interactions. So it's a really important role for them even while we build and continue to manage more and more customer adoption around digital channels and capabilities. So I do think, to answer your question, that there is more opportunity to optimize over the longer term. And we'll just continually watch and see where our customers want to be and how we can best leverage the network.

And are you adding branches anywhere? Any particular markets where you have gaps that you're opening new branches?

Yes. I mean [indiscernible] probably just said before, which is it's an optimization exercise, which has some [ new adds ] we're all looking to optimize. So yes is the answer. We're adding some new branches in a couple of areas in the market. And really, it's a very precise geo-targeting approach. The team is quite sophisticated in the analytics of where the market opportunity is, where the conversing transaction activity is, and frankly, just going back to kind of the basics of it, where our customers are and where they want to be.

Got it. I guess just moving maybe a little bit on the revenue side, one on fees. Talk to us as we think about both in terms of the emergence of the economy from the pandemic, the merger. What are the one or 2 areas within fee income that you see the most growth potential? Any headwinds -- we've talked about overdraft in the past, that could mitigate some of that growth?

Yes. fees is a really important area for the business, and it's a bright spot. And I would tell you, we don't go at it with the intention of growing fees in and of themselves, but rather that they are the outcome of the execution of our strategic priorities for growth, particularly if you had to call out capital markets. I mentioned a little bit in my prepared remarks, we've been investing in capabilities there for a long time. It's very much commercially-led platform to support what our customers need and to broaden the kind of services that we can provide to our commercial clients. And so that's an area that's performing exceptionally well and continues to grow really nicely. Payments is another area. Payments is often the tip of the spear for us to engage a new client and to forestall thread of attrition for our clients. And so it's critical to have those capabilities for client service and to drive the revenues that they represent. And so we're seeing just terrific capabilities and execution within our treasury management business. In our card business, both debit and credit continues to grow really nicely and represents considerable additional upside. And then there's a number of other payments businesses like the ones I mentioned in my remarks, merchant acquiring, commercial card, they continue to grow at outsized rates. And so payments is a key area of focus and lots of growth to come. And then wealth management is the third one I would really call out. We have been for quite a while driving growth in that business, focused on the affluent private banking space and the mass affluent financial adviser space to really drive toward assets under management, planning and relationship-based approach that will drive recurring revenues. And that business is performing exceptionally well. So all 3 of those are really performing really, really nicely. Mortgage has been an exceptionally strong contributor for the last 1.5 years and continues to perform very well. I do think over the coming year, we'll see a continued normalization of that just given how long the mortgage cycle has been going on now. But as we stand today, it continues to perform exceptionally well, and we're really pleased with how that's going. And then deposit service charges, I do expect a near-term step down as we convert the legacy TCF customers to the Huntington Fair Play products. But I would tell you, that's a great trade. It's a playbook that we've run a number of different times. We're exceptionally confident in the payback that we will get from incremental relationship deepening and account acquisition as those products are introduced into the TCF markets like I mentioned earlier. So there are some near-term fee step down, but we'll see that really contribute to revenue growth over the coming quarters as we execute that playbook.

Got it. And you mentioned, Zach, earlier about the tech stack. It allowed you to sort of make the integration much easier in terms of moving the TCF systems. When you think about just compared to the -- how you're positioned versus to some of your peers, larger and smaller, just give us a perspective, if you can, in terms of how big of an advantage is that? And does it actually help in terms of client acquisition efforts?

Yes. I mean the short answer is yes. Technology is critical. It will be the vector of competitive differentiation over the next decade in banking. And we feel great about the strategy we've got and the resource and platform that we're putting in place. And what's exceptionally encouraging about it is we're directing the resources toward digital customer-facing products or product originate -- new products themselves, the ability to originate products fully digitally and then the ability to engage, service and manage client accounts digitally, both from the client side and internally on our side as well. So that's where the resources and focus is going because the tech stack itself is very robust, very scalable. And as I said, it was a considerable source of cost synergy as we brought the TCF business onto it. And so I think what we're focused on at this point is ensuring every one of our businesses, our Consumer business, our Business Banking, commercial, our wealth business, our payments business and some of our specialty businesses like vehicle finance, all have their own robust tech road map that's designed to drive differentiation and competitive advantage over the coming days and months and quarters. And just tremendous amount of momentum there. So I do think Huntington is well positioned, and our -- we purposely set the vision of being people first, ensuring that we maintain the legacy levels of service and engagement with our clients that we have always done with a local advantage, but augmenting that with digitally powered. And that was an intentional aspirational statement to really guide us and to inspire us, and we're executing on it.

Got it. Two more topics I wanted to hit up on. One, obviously, a lot of focus in terms of interest rates going up, asset sensitivity of balance sheet. Remind us where Huntington stood? I know on the call, you talked about increasing the asset sensitivity of the balance sheet. How do you do that?

Yes. So we took asset sensitivity in a modeled 100 basis point ramp scenario from 2.9% net interest income sensitivity in Q2 to 4.0% in Q3. And we think it's a great level of asset sensitivity for us right now. Frankly, we look at this that every week, we come in and we want to be dynamic. We want to look at the market opportunities that present themselves to potentially increase sensitivity, while minimizing the downside risk, likewise, potentially looking to be dynamic to seize downside risk protection opportunities as they present themselves. What we did in the third quarter was exit some floor positions and enter into some new forward start, future starting fixed pay swaps with increased asset sensitivity. As we go forward, we'll be dynamic on both upside opportunity and downside protection as those opportunities present themselves. And I think given where short-term rates have moved, in particular, as of late, there's more and more downside hedging opportunities that have presented themselves that augment those upside sensitivity opportunities that have been there for a while. So overall we like the level of sensitivity we're at today, but we look at it on a weekly basis to really optimize.

Got it. And I guess just one last question, Zach, around capital management. I think your CET1 is right bang in the middle at all, 9.6% within the 9% to 10% target. Remind us of your capital deployment priorities. I think Steve was very -- indicated like a lack of appetite for bank M&A anytime soon, but would love to hear your thoughts around nonbank M&A. It's something that's come up a lot when talking to some of your peers in the area of interest. So if you could share some perspective on that.

Yes. We're very actively managing the capital stack. And as I noted in my prepared remarks, part of the medium-term guidance was to manage the CET1 ratio in the middle of -- the lower half of the range of our 9% to 10% operating guideline. So that's the plan and expectation at this point. Our capital priorities have not changed. We're focused on funding organic growth first, and that's the key, particularly in the near term. And that's where we're focused as a company. We want to, over time, sustain and support growth in the dividend as earnings power increases. And so we're pleased to increase the dividend by another 3% here in the fourth quarter of this year, and we'll continue to support the dividend going forward. And then optimizing the remaining capital stack for buybacks and other uses, and I do expect that we'll continue to front load the remaining capacity of the buyback and overweight that into the early quarters of the capital planning period. On the topic of M&A, I would tell you, we just completed roughly exactly a month ago, the conversion of the TCF portfolio onto the Huntington product set. And so we are laser-focused on executing our organic growth strategy. Just I'll say it again, focus on our organic growth strategy. Over time, M&A opportunities may present themselves, and you can rest assure, we'll be very disciplined as we go about that. I think it's more likely for those to be in the bolt-on smaller inventory business variety than bank. But in the near term, our focus as a company is on executing our organic growth strategy at this point.

That's great. Zach, at that, I'd like to thank you, and Tim, thank you for taking the time and joining us. Have a wonderful day.

Great. Thanks, everybody.

Thanks.