Huntington Bancshares Incorporated (HBAN) Earnings Call Transcript & Summary

I've been given instructions by Steve to make it quick. So we're pleased to have Huntington here once again. While most banks have been operating in the defensive position, Huntington has been out on the offense, expanding across the Southeast Texas and several new verticals. Here to tell us more about the road ahead is Chairman, President and CEO, Steve Steinour. Also joining us is CFO, Zach Wasserman. Hopefully, I didn't put us to sleep, Steve. And Steve is going to make some prepared remarks, and then we'll get into Q&A.

Thank you very much, Ryan. Great to be here again along with Zach. We're very pleased to share the update on our accomplishments and progress on growth initiatives, but also our outlook. So following my brief presentation, we'll get into a Q&A and have some fun there. Before we get started, please review Slide 2, which applies to the forward-looking statements we'll make today. Now turning to Slide 3. There are 4 key messages. First, we're delivering peer-leading organic growth, and this is the result of sustained production from existing businesses, our core businesses as we refer to them, as well as increasing contributions from a variety of new initiatives. Second, our teams are executing with discipline as we manage through a dynamic rate environment. We are implementing our down beta action plan and have driven down overall cost of deposits by 29 basis points since July. Third, we continue to proactively manage credit in line with our aggregate moderate to low risk appetite and this has resulted in top quartile performance and net charge-offs as supported by peer-leading top quartile allowance for credit losses. Fourth, our actions have positioned Huntington to capture the benefit of sustained momentum as we wrap up 2024 with accelerating trends taking us into 2025. We will grow revenue in 2025, and we expect record net interest income. And this revenue growth, along with the disciplined expense management and continued investment in additional growth opportunities should set up a robust PPNR expansion into '25 and beyond. Now, turning to Slide 4. 2024 will be remembered as an important year for us as we delivered on our organic growth initiatives resulting with loan and deposit growth that we're at the top of the peer group -- leading the peer group. These results were supported by our intentional positioning entering '24 with robust liquidity and capital, along with strong credit, which collectively allowed us to lean into growth while many others were pulling back. The investments we made over the course of the year in new teams and capabilities are delivering results, collectively tracking at or above our initial business case expectations at or above. And we're confident this organic growth outperformance will sustain into 2025 and beyond as we see multiyear runways for growth in these initiatives. So let me recap a couple of highlights from the year. We continue to grow primary bank relationships or PBRs across the company with consumer PBRs increasing 2% year-over-year and business banking PBRs increasing 4% year-over-year. Now recall, this growth of customers is occurring in an industry backdrop that reflects many banks not showing an ability to grow and expand customers. We invested across our payments capabilities, including launching new card products as well as bringing in-house merchant acquiring capabilities. We continue to expand other fee businesses including wealth management, where revenues increased 18% year-over-year and households increased by 7% year-over-year. Importantly, we also maintained our conservative position on capital, driving the capital ratios higher over the course of the year and improved our loan-to-deposit ratio even as we sustain peer-leading loan growth. Credit performance, as I mentioned, continues to be top quartile. Moving to Slide 5. As I noted, we launched a substantial number of new organic growth initiatives in '24. Both our core and these new initiatives are performing exceptionally well. As an example, we've added over 60 bankers across North and South Carolina. We've got 200 colleagues. We've been in North and South Carolina for more than a decade, over 200 total colleagues, but we added 60 over the last year. We've also staffed up Dallas and Houston with commercial banking offices and added 20 new commercial bankers in the Texas market. That's in addition to about 200 that we also have in that market where we've been for more than a decade. And we added dedicated bankers with expertise across these 6 new vertical commercial businesses, and that's in addition to the numbers I just referenced. So these new initiatives are continuing to build momentum as teams on board and ramp up. Year-to-date, these new initiatives have contributed 35% of our overall net loan growth, excluding the commercial real estate balances with increasing results -- increasing growth percentage into the fourth quarter. Turning to Slide 6. Our loan and deposit growth continues to outpace both peers and the industry. In the last year, we've outperformed both peer median loan and deposit rates by roughly 6 percentage points -- 6 percentage points of outperformance. We view this tremendous execution is reflective of early stages of this growth narrative. Again, our investments are not mature, and the core is performing very, very well. In fact, quarter-to-date through the end of November, average loans have increased by $3.1 billion and average deposit balances have increased by $2.1 billion. Both of these stats are a testament to the hard work and capabilities of our colleagues, and they are differentiating results. Turning to Slide 7. We continue to drive net interest income on a dollar basis higher over time as a result of the sustained loan growth and dynamically managing net interest margin. For the fourth quarter, we now expect modestly higher net interest income compared to the third quarter, and this positive change is largely reflected from the execution of our down beta action plans, which are performing better than our modeled expectations. We continued the monthly trend of lower total cost of deposits sequentially as November cost of deposits was 10 basis points lower compared to October and represents, again, 29 bps of decline since July. Turning to Slide 8. We're growing our value-added fee businesses, revenues in our core, and we have numerous strategies in place to grow the Payments, Wealth Management and Capital Markets businesses. Our focus has yielded strong results, 12% year-over-year fee income growth in the third quarter while driving the percentage of fees to total revenues by 3% to 28% in 2024. We are very focused on deposit pricing even as we continue to drive deposit balance growth higher. Now turning to Slide 9. We're now several years into our branch network optimization and expansion strategy. We're getting good results there. We've crafted a differentiated strategy, bringing the best of our local, our branch and our digital channels to support new customer acquisitions. Our team are very, very organized and reacting locally with marketing support and part of the overall strategy and these new branch expansions are doing well, and there's also a plan to refresh branches as well. Several hundred branches will be refreshed in the coming years. Now, our strategy is to optimize the network to capture the highest growth opportunities. And in the last 3 years, we've opened 23 new branches in high-density areas. We are also expanding our presence in markets in and around Denver. You can see that on the slide, where we've recently opened 4 new branches. In the next 5 years, we plan to open 93 new branches, including the 55 that we previously announced in North and South Carolina in the 6 regions there. And finally, we're continuing to refresh branches as a high priority. So the overall distribution will be in very good shape for the years ahead. Turning to Slide 10. Our proactive credit management approach has delivered really exceptional results. I'm very pleased with where we are. Net charge-offs have been relatively stable for the last 4 quarters, delivering top quartile performance. Our allowance for credit loss is clearly top quartile. We believe we've got a trend established in our credit class declining over the last couple of quarters. So the aggregate credit outlook continues to improve. And the portfolio has been purposefully constructed and with discipline managed over the years, we're about 44% consumer. Most of that consumer book is secured. It's 95% prime -- super prime and 95% secured. So it's a very rock-solid portfolio. And in our commercial portfolio, we've diversified across both industries and geographies in a very disciplined way. Our CRE concentration I touched on earlier, this is the lowest in our peer group, 9% of total loans and our reserve coverage is top at 4.4%. So we feel good about our CRE exposure and the performance of that book. But we also have, we think, a robust level of reserves allocated against it just in case. Turning to Slide 11. So just to recap here for a moment. We are clearly building a very powerful organic engine that you see in the results for '24. We're optimistic about 2025. Our growth has been peer leading, as I mentioned earlier. The investments in these new markets and new verticals are not mature. They will continue to produce for us for years. They're ahead of their initial business cases. And clearly, we're acquiring and deepening customer relationships across the board. We've really been decisive in acting on our down beta plan. You see that in the results. I think they may be peer leading as well, and that's at a time where we're still growing deposits. We're driving net interest income higher while managing our NIM and intentionally preserving asset sensitivity. Our fee revenues continue to be a top priority. They're performing well in payments, wealth and capital markets. And on the expense front, we're continuing to invest in the business. We're managing the core expense down, very disciplined management of the core so we can increase the amount we've put into the investment in these different initiatives: technology, marketing and other areas as well. We're committed to driving positive operating leverage in '25. We've had positive operating leverage 10 of the last 12 years. As an example, that will continue as we go forward. And obviously, we're maintaining our disciplined focus on credit. We are -- as a management team of the Board, we're one of the top shareholders and this is a core discipline within the company. So as we look at '25 and beyond, it's with great excitement, we expect to drive profitability in '25 and beyond. And so with that, let's turn it over to you, Ryan, and we'll get into a Q&A. Thank you.

Great. Thank you for the in-depth presentation, Steve. So maybe, Steve, since the last time we've heard from you, obviously, a lot of things -- there's been a lot of change, particularly on the political side, presumably a more business-friendly environment. As you think about the next year, maybe start off on talking about how you think the bank is positioned for the environment we're about to enter. Obviously, there's tons of good things going on at the company, as you just articulated?

Yes. Thank you, Ryan. First, the core is performing well, and I would relate that back to the second quarter of '23. We didn't choose to shrink or take an RWA diet. We thought we had great liquidity, peer-leading liquidity and strong capital, strong reserves, and we chose to play offense, your word from the intro. And with that, we have been building momentum and building -- and you see this in the results in terms of core execution around revenue. We've been investing in the businesses, including the backroom, tech, marketing, et cetera, risk, as I mentioned. And so we are continuing -- it's almost like a snowball. We're gaining speed. We're gaining momentum as we go forward. And these investments, we -- Texas, North and South Carolina are 3 of the fastest-growing states in the country. We're really bullish about where we are with the colleagues we have. We have great colleagues who've joined us in those markets, and they're performing well ahead of expectations. These new verticals that we've added are doing well. And at the same time, we're investing in revenue-producing areas of the core in wealth and some of our regional banking areas like Chicago, et cetera. So I think Zach and the team have got us really well positioned for the foreseeable future, not just '25. We should be able to grow. We've been very disciplined over the last 1.5 decades that will continue, and we expect from ourselves that we will outperform.

And just maybe as a follow-up. I know it's obviously early days. You've put up really good results thus far in the fourth quarter. But maybe just talk a little bit about Steve when you're out in the markets. What are you hearing from clients? How are they thinking about their business and their ability to invest post election?

Well, there's clearly been a change post election. There's much more optimism. I was with 16 of them, I think, Monday night. All of them more optimistic. A number of them already talking about things that they're doing: order books, strengthening investments they're prepared to make. Some are bringing back employees they had furloughed. So there's a very significant change. I've rarely seen in my -- I think the last one might have been when Reagan took off and so you just had this momentum shift that's palpable. And so it makes me very optimistic for all of us in 2025 and beyond. But we still have a lot of stimulus behind us, too. Funds are not -- they're committed, but not spent. So this should be a longer runway, I believe.

So you talked about peer-leading loan growth. It sounds like you're tracking now above the high end of what the original guide had been. Pipelines have been really, really strong. I think you had said mid-teens. You gave an interesting slide here on Slide 5, just decomposing the growth. Can you maybe just talk about how you're seeing such strong growth in a period where the industry is not? And can you maybe just talk about as you not only think about the fourth quarter, but into next year. How you think about the evolution of these things, core growth, growth from new initiatives? And obviously, there's been some headwinds on CRE. Do you see that starting to abate?

Well, again, we were intentional about looking to expand when others -- not all, but many others, were looking to restrain growth or even reduce growth for capital or liquidity or both. So that has given us some momentum. And to some extent, our activities are momentum oriented, and we have it. And the incremental investments we've made through the third quarter, our new loan production, about 35% of it was from these different new initiatives. That will increase as they mature and we traditionally would have thought we'd do 1.5x, 2x GDP. We now think we're more likely to do 3-ish because of the new initiatives. They're not working from a base where they have amortization or run off. They're all ground up. So it's a great place to play from. And as I said, we have momentum. I think we just chose to take a different pathway than some others and it's proving, fortunately for us, to have been a sound decision. I believe that will carry forward for a number of years. But I also want to make sure we're clear, we're going to continue to invest. We like this equation of trying to drive our core expense down and increase the amount of investment capacity, and we will make those investments while delivering core positive operating leverage or positive operating leverage, but we will -- I think we're on a flywheel, and we're going to continue that.

Steve, maybe just -- or maybe Zach...

Let's get Zach in the game.

You know, Zach [indiscernible] faster. I didn't want to interrupt them. Maybe to put a finer point on the point that Steve made. Obviously, positive operating leverage is the end goal for the company. Steve highlighted 10 of 12 years, you guys have been able to deliver it. How do you think about the balance in terms of investment versus growth. And you had been talking about '25 being a year where we could see a little bit of expense relief. Given the top line growth prospects, is that no longer the case?

Yes, it's a great question, Ryan. Let me sort of address how we think about expense management generally and then come back to the specific. To us, there's 2 core principles that are really critical. One, Steve mentioned, drive for positive operating leverage. It's a core element of our business model. We think it's absolutely achievable over the long range, and so actively calibrating the growth rate of expenses relative to revenues is a core element. I do think as we go 10 of 12 years positive operating leverage, 2024 was not one of them, right? And so I do think 2025 will be. I think we expect to see solid positive operating leverage, acceleration of revenues and even faster acceleration of profitability. I think it's going to be a really solid profit year for sure. The other core principle of operating expenses is what Steve mentioned, I'll just elaborate on it, continual reengineering of the baseline operating expenses. Think on the order of $50 million to $70 million a year sustainably for the last 4 years, and I see that same growth rate through the end of the decade, that same ability to continue to reengineer. And there's a number of levers, and we can unpack that, but we're really executing on that well. And that enables us then to funnel more of the expenses into the offensive expense categories, the investments, tech dev, marketing, new people ads to build new businesses. I mean, over the last 5 years, we've more than quadrupled tech dev. So to give you a sense this year in 2024, expense growth around 4.5% in total. Within that number, investments up 25%. And that's what's fueling the competitive success. And by the way, if you look historically, the CAGR wasn't too different. And so ultimately, the way we think about it is we want to be judged on how are we driving ROI on those investments? Are we getting the returns? And I will tell you that the results we're seeing are pretty manifest evidence that we are. So that's the model. We'll see. We'll give guidance on the specific galaxies as we come into early next year, but I'm expecting a pretty solid operating leverage and profit growth next year.

Spending a minute on deposits. I mean, a message we've been hearing at the conference has been strong deposit growth in the near term. Maybe customers are sitting on a little bit of extra cash, but you guys have massively outperformed the industry in terms of deposits and maybe just talk a little bit about how you see not only do you see deposit growth, how do you see where the deposit growth is coming from? I think '24 was about a lot of consumer, you had been talking about commercial. So how are you feeling about deposit growth? And what do you see as the driver of it in '25?

I'm feeling terrific about deposit growth. I will tell you, there's just so much momentum right now in our activities. We entered the year thinking deposit growth for 2024 would be within a range of 2% to 4%. By the middle of the year, we had increased -- we had pulled that growth rate up to the top end of that range. We'll now exit north of that. We are beating the plan on deposits to be clear. And what that is setting up, by the way -- likewise, by the way, beating the plan on loan growth. Expect to exit the year of loan growth between 5% and 6% growth year-over-year. That's better than our original expectations. And so what that has set up in combination is even as loan growth has accelerated, the fact that we've been beating deposit growth so solidly throughout the last 2 years, but certainly this year also has allowed us to bring down the loan-to-deposit ratio, which now enables us to push the lever on down beta with a lot of confidence and conviction even as we continue to beat the deposit plan. I will tell you, as we came into Q4, our expectation was that deposits in sequential growth would be about flat. As we just showed in the slide, we're up $2 billion. So the team is really firing. And I don't see that stopping. We're expecting to see solid deposit growth next year even with very strong loan growth, core funding the business as we go into next year as well. If I talk about where it's coming from, consumer was a major engine of growth for us in late '23 into early '24. What we've seen over the course of the second half of '24 is commercial really coming online. This is in the core, but also in some of the new initiatives, kind of mortgage servicing vertical that's gathering a lot of deposits and also in escrow and homeowners association vertical that's doing really well, too. So those should continue to ramp up.

Does that -- maybe let's just spend 1 minute on NII. You guys -- you and Steve were talking about record NII into '25. I think you talked about improving in the first half, accelerating in the back half. Obviously, a lot of things have moved around. Maybe just talk about your degree of confidence in terms of what you've laid out. And I think you've given some color on the net interest margin. Can you maybe just talk about some of the moving pieces as we think about the changes in shifting rate and growth environment for the bank?

Sure. Absolutely. So NIM is looking like it's going to come in pretty strong for Q4, basically flat in NIM for Q4, whereas our original expectation might have seen a little bit of pressure just given the assumption of pretty rapid rate reductions. We've actually managed it to be relatively flat, which is a very strong outcome as Steve noted in his prepared remarks, essentially mainly driven by outperformance in beta, but also benefiting from asset yields as well, value of the curve a bit higher. As we go out into '25, I'm expecting a relatively stable NIM and really to drive that record NII through loan growth and really to see a fundamental growth driven picture, driving record NII in 2025. As you go out longer term into 2026 and 2027, I'm expecting continual upward drift in the NIM. And that's really driven mainly from just the assumption of a gradual restoration of an upward sloping yield curve. But I think things are shaping up quite well to floor the NIM and to really power revenue through growth.

Maybe 1 or 2 quick questions, Zach, before we go back over to Steve, in terms of -- you guys put some color in on the fourth quarter, outstanding loan growth, better deposit growth, NII to potentially be modestly up. There's a slide in there where you talked about fee income where we took out the roller to see, it looks like it's going to be pretty robust. So can you maybe just put a finer point on all the pieces that you wanted to highlight for the fourth quarter. Obviously, maybe wrap in how you're feeling about why you saw so much better success on deposit repricing?

You got it. So I'll just tick down sort of the guidance points on Q4 for you. We see loans ending the year growing roughly 5% to 6% on average year-over-year in the fourth quarter, that's better than planned. I see deposits likewise growing about 5% to 6% year-over-year in the fourth quarter, better than the original plan. Net interest income dollars. If you'd asked me in October, I would have seen, I think I said in the earnings call, maybe $15 million to $20 million lower by the [ BAB ] conference in November, I was saying roughly flat. I now see it actually higher. I see another quarter of net interest income dollar growth into the fourth quarter, modest but growing. Fee revenues are performing exceptionally well. Third quarter growth year-over-year was 12%. Our guidance for Q4 originally in October was 8% to 9%. I now see us beating that level. And we expect to see very strong performance across wealth management payments, but in particular, capital markets is going to have a very strong quarter. A record quarter for capital markets is our expectation for the fourth quarter. On credit, I think as Steve mentioned, we see a lot of stability, and we're sort of seeing charge-offs to be very stable. What that stable charge-off and delinquency path and the kind of improving and gradual clarity around the economic environment has allowed us to do is to gradually reduce credit reserves over the last 3 quarters. And so I would expect if that trend continues, there's probably an opportunity there. And then just lastly on expenses. You see roughly $20 million higher expenses, mainly driven by revenue-driven comp, right? We just -- we're outperforming on revenues, both in the spread and fee business. So we'll see a little bit of additional expenses there. And the stock has performed so well that we're seeing some reset in terms of stock-based comp true-ups. But net-net, a positive PPNR for sure, relative to the original guide.

And one small follow-up. You highlighted deposit cost down 29 bps from the peak. You had one of the more conservative expectations in terms of the ability to reprice deposits down. It's gotten a little bit more upbeat last quarter. But curious, relative to your expectations, what has -- what have you been able to execute in a more aggressive fashion? How does that set you up for the rest of the easing cycle?

Yes. Thanks for that question, Ryan. It's a good one. Look, I think what we're seeing right now is just very strong execution on the down beta action plan. And fundamentally, it's driven by 2 things. The fact that our loan deposit ratio came down, like I mentioned earlier, and just the deposit gathering being so much better than the original budget and teams are just executing so well, it really enables us to be forceable. As we prepared for the down rate environment in June, July and then begin really executing into the August-September period, we focused on 4 things: reducing the concentration of CDs and acquisition mix; reducing significantly the duration of time deposits; actually reducing back book pricing, which we have done now twice; and then lastly, actually reducing our deposit pricing within the competitive sphere in the markets in which we operate. All of those things are really working and the team are effectively sort of beating plan on every one of those elements. That's what's really performing well. I'll tell you, behind the scenes, something we don't talk about a lot, but what is really powerful. Over the last several years, we've put in a considerable investment into data and technology that enables us to be very granular about price elasticity discernment of various segments and the kind of marketing effectiveness to really go out and win new primary bank relationships that bring the deposits, and so all of that system is really working. It's giving us a lot of confidence in our overall beta guidance as we go into next year. We still see that plan being able to be affected. And ultimately, it's a key contributor to sort of keeping that NIM nice and stable as we go to next year.

Maybe to shift gears, you guys have had really strong capital. You've taken a conservative approach, but maybe holding a little dry powder for a lot of loan growth has not been a bad decision. Maybe, Steve, just talk about the capital priorities from here? And maybe, Zach, for you, now that you guys are seeing such robust loan growth. You had talked about reinstating the buyback at some point. Does it maybe make sense to hold a little extra dry powder in lieu of the strong loan growth that's happening and likely -- it sounds like it's going to continue?

I'll start and then pass it you, Zach. First of all, we want to keep the company positioned with strong capital -- strong reserves, strong capital as part of the overall aggregate moderate to low risk profile for the company. Having said that, our capital priority has always been organic growth. That hasn't changed in 15 years. We're delivering it now at an exceptional level. And we like what we see for the foreseeable future, not just '25 and believe we can continue to do this. There'll be some additional investment along the way. There may be some newer things that we do. We announced Chris Wood joining us to be part of our capital markets sponsor group to lead that activity just this past Monday. There'll be other investments and there'll be scaling of some of the existing investments that we do going forward. But we really like the orientation of the company around organic growth and believe we've got it better locked in and better managed than any time in my 15 years with the company. Zach?

Yes, look at us and just to tag on to what Steve said, the plan for capital over the last 2 years and continued this year was to really do 2 things. Firstly and most importantly, deploy internal capital generation into high-return loan growth, that is the most value-creating place that we can put the capital and we're thrilled that we're seeing everything that we expected, an acceleration of loan growth, really solid marginal return on capital and economics there. And by the way, coming through with all of the fee businesses and deposit gathering as well. So that's the top priority. But even as we did that, also drive capital higher, right? And if you think about where we landed for Q3, CET1 was 10.4%, a really strong capital level. We also look at adjusted CET1 inclusive of AOCI. That was 8.9%. The objective was to drive that adjusted capital ratio up into a 9% to 10% operating range. And I think obviously, kind of depending on where long-term interest rates are, the AOCI market changes around a little bit. So that we could cross in Q4. It could be early next year. We'll see it. I think it's just a matter of quarters away at this point. And then once we got into that range, we would consider a more normalized distribution of capital, including share repurchases. That continues to be the view. With that being said, the top priority is always loan growth, right? And so I would expect any share repurchases to be modest, but it's a healthy thing to have that in the mix, and I think we're pretty close to getting back to that period.

Given all the organic growth that you're experiencing right now, that seems like the highest and best use of capital. But you guys have had a lot of success within organic use of capital. FirstMerit, TCF, Capstone as examples. Where does that fall on the priority list, if at all? And given that the markets are a little bit more upbeat about we could see M&A coming back, do you foresee Huntington at some point participating in that?

I think the -- it's a better M&A environment that we're going into. Having said that, it's not going to be like -- I don't think a light switch in the first quarter. You got to get the appointees in place. For us, we've always looked at acquisition as an option, with Macquarie technical finance, the 2 bank deals you referenced plus Capstone. And you look back at TCF, 45% expense takeout, bulked us up in Michigan and Chicago, 2 new great markets; Twin Cities, Colorado, great businesses; scale in equipment finance, #5, #6, #4, something like that; #2 in distribution finance. These were -- and with cultures that were -- and these are community banks, and we think to ourselves largely that way. The culture -- so it just was a really compelling strategic fit. I think it's paid huge dividends for us. But we've done 2 in 15 years. Now we look all the time, we think about it all the time, but the priority is and will remain organic growth. If there's something compelling, maybe, but it's got to be compelling. Right price, we understand the risk, the culture, all that has to line up or we're just -- we don't need it. We need to drive for the organic growth at the levels we're talking about or even more.

Yes. You talked about the first quarter. Maybe as a preview for all those who have, February 6 marked down on their calendars. Huntington is going to be hosting an Investor Day. Last time you laid out some PPNR goals, you laid out ROTCE targets. Any color on what the focus of this year's event is going to be? And maybe do you expect update any targets or anything like that?

Well, we will update targets. We'll do a little bit of sharing about how did we perform versus what we said. But we're in a different scale now. TCF is absorbed, these new initiatives, the company is operating in a different orbit, and we really want to share that. And we're excited to do this. We look forward to being with all of you on February 6. And we're -- we'll be a lot deeper in each of the revenue segments in terms of the plans now with a view towards 2030, that we'll share.

Great. Well, we are out of time. So please join me in thanking the Huntington team.