Huntington Bancshares Incorporated (HBAN) Earnings Call Transcript & Summary

All right. Up next, we are pleased to have Huntington joining us once again. It's been a busy year for Huntington, starting with driving best-in-class loan and deposit growth as it continued to expand its footprint across the Carolinas and Texas. And more recently, it's two announced acquisitions of Veritex and Cadence should position the bank well for the next few years. Here to tell us more about the story. We're pleased to have Chairman, President and CEO, Steve Steinour; CFO, Zach Wasserman. The team is going to give -- go through some slides and before we get into Q&A. So let me turn it over to Steve.

Well, thanks, Ryan, and your team. I appreciate the opportunity to be with you along with Zach. We're very pleased to share an update on Huntington's accomplishments. And following the presentation, we'll have an engaged Q&A. But before we get started, we ask you to review Slides 2 through 4, which apply to forward-looking statements we're going to make today. Moving on to Slide 5, there's an overview of how we think about value creation, and it starts with a differentiated operating model, which powers sustained above peer growth. We believe this is the strategically important aspect of how we're driving this growth. And we have our specialty banking verticals in support of both the regional banking teams as well as the business they do nationally. This growth allows us to reinvest our capabilities that compound our competitive advantage and drive powerful operating leverage. We've got a disciplined capital allocation and robust risk management that's been in place for many years that protects the balance sheet and enables us to capitalize on periods of industry disruption or consolidation. And our focus on execution and proven track record of integration with TCF as a precedent gives us confidence that our partnerships with Veritex and Cadence will compound our organic growth trajectory. Slide 6 is four key messages, which we'll address in more detail. First, the organic growth remains our foundation. I'm just going to repeat that, so we all understand it. Organic growth remains our foundation. We're performing extremely well at our core, and we're not going to lose our focus on that. Our fourth quarter results will be consistent with prior quarters as Zach shared during our last earnings call. We're on track. Second, our proven integration track record gives us confidence in the intentionally sequenced integration of Veritex followed by Cadence, and we're well underway under this process. And third, we view M&A as a springboard for organic growth, not as an alternative to it. Our two recent partnerships help create a platform that will sustain above peer growth trajectory long into the future. Importantly, this focus on growth is within our aggregate moderate to low risk appetite. And then finally, we have a unique and compelling flywheel for value creation. If we go to Slide 7, our organic growth remains outstanding. Since the third quarter of last year, our loan and deposit growth has significantly outpaced peers and quarter-to-date, our performance has maintained this trend. This performance is supported by our -- by contributions from across our franchise from both legacy and newer markets from middle market banking and our national specialty banking verticals and from both consumer and commercial customers. There has been no disruption to our focus on execution. On the basis of our current pipelines, we expect to maintain strong momentum coming into 2026. Now turning to Slide 8. Our strategy has not changed. Our focus is on organic growth. Periodically, we expand our organic growth opportunity set through partnerships. When we do this is with a partner that is aligned with our culture, advances our strategic priorities and is undertaken in a disciplined financial manner. Importantly, we've developed a playbook that enables us to seamlessly integrate a partner without disrupting our core mission of growing organically, including the partner's legacy markets. This focus on growth opportunity has enabled us to outperform initial financial forecasts. Our partnership with TCF provides an example of this. At the time we announced -- at the time of the announcement, we expect to earn back tangible book value dilution in about 3 years, driven by forecasted cost synergies. In reality, we achieved that earn back in roughly 1.5 years, well ahead of plan and that outperformance came from three key areas. First, we exceeded our cost synergy targets. Second, we captured revenue synergies that were part of our vision, but not embedded in the original deal model. And third, and most importantly, we accelerated results through our ongoing and unwavering execution across the combined footprint, driving strong performance throughout the entire enterprise. This next slide shows how TCF amplified the performance of our combined company, both in our legacy markets and in the augmented ones. The takeaway is simple. We had strong performance everywhere. So Slide 9 gives an overview of how we accomplished the accelerated earn-back with TCF and improved our company's overall growth trajectory. Before partnering with TCF, Huntington grew a little over 4% annually a level above peer median of 2.7%. After the combination, our growth rate rose to 5% annually, a rate of increase that was much stronger than the increase in the peer median. This acceleration in our growth rate was driven by several factors, including the density of the TCF market, the TCF partnership created for us in certain deposit markets like Michigan, and the growth platform and scale created for us in cities like Chicago and Denver. So we're going to double-click on that for a moment. So turning to Slide 10, on the left side of the slide, you can see the loan growth we've experienced in several regions that were augmented by TCF. And since the time of TCF integration in 2021, we've grown loans in these markets, at rates that are -- that at rates that are higher than the level of the predecessor organization and substantially faster than their local economies. Importantly, this outcome is equally true in markets we enter entirely organically. On the right side of the slide, you can see the loan growth rates in North and South Carolina and Texas since we made the decision to enter these markets on a de novo basis in 2023. These data points underscore how the combination of our differentiated model and focus on execution drives improved growth across a broad range of environments. For this reason, you can understand why we're so excited about our partnership with Cadence given the breadth of attractive market it adds to our combined organization. Slide 11 provides a view of our pro forma franchise. And through this combination, Huntington will become a multi-region powerhouse, the tenth largest bank in the country with deeply rooted strength in our core markets, a strategic foothold in high-growth markets across the South and immediate scale and density in Texas and particularly in that [ Texaplex ] region. Dallas, Fort Worth, Houston, San Antonio, Austin, that triangle. Our combined organization will serve a dynamic and growing customer base and have a presence in 12 of the top 25 fastest-growing large MSAs and numerous fast-growing smaller ones. The Cadence and Veritex's partnerships are really attractive for us in many ways. They bring significant growth markets and immediate scale in places with very strong demographic tailwinds. As an example, we'll have #8 deposit share in Texas, particularly focused within [ Texaplex ], where there's about 200,000 new households are migrating each year. And this partnership reinforces the platform we've built to sustain robust competitive success over the long term. With our capabilities and products, we see real opportunity to accelerate growth. There are several areas where we can create momentum together, building on our strengths and amplifying theirs. Slide 12 summarizes the four broad categories of revenue synergies. We expect with cadence. First, the Cadence bankers will be able to offer this full suite of Huntington products and capabilities to the more than 1.3 million customers. supported by our digital marketing capabilities. Second, by meeting a more expanded set of customer needs, we're going to build deeper and more optimized customer relationships, the OCR playbook will be put in place. Third, we'll be able to offer our strategic value-added capabilities, including payments, wealth management and capital markets to the Cadence customer and prospect base. And lastly, by virtue of all these dynamics, we're going to attract new customers across these legacy markets and beyond. Turning to Slide 13. Our strong growth story and history of successful partnership underscores that we have a powerful flywheel for value creation. The flywheel begins with our focus on uniting our colleagues with our purpose-driven culture, getting hearts and minds, aligning expectations of teamwork through goals and incentives very important to us, and we're off to a great start. It continues with our differentiated growth model that's characterized by service delivery through local bankers with local relationships and introducing our national capabilities when beneficial to our local customers. And our specialty businesses will grow organically on a national basis as well. And this approach generates sustainable above peer revenue profitability and growth. That profitability combined with continued reengineering of our expense base allows us to invest in our capabilities, and these capabilities drive sustainable long-term competitive advantage. So concluding on Slide 14, we believe our flywheel creates sustainable long-term competitive advantage. It drives strong PPNR and earnings expansion and top-tier returns on capital, and it generates substantial value for our customers, our colleagues and our shareholders. So with that, Ryan, let me turn it over to you, please.

Great. And thank you for prepared remarks, Steve. That's great. So maybe, Steve, we'll start off with some high-level questions. You've been able to deliver best-in-class loan growth in a relatively slower growth environment and most of your financial metrics continue to be best-in-class. Maybe just talk a little bit about, one, what has driven this? And can this success continue into 2026?

Well, we certainly think the foundation that's been built over the years, OCR, aggregate moderate to low-risk appetite, gives us a strong platform. But we saw with the combination, the partnership with TCF and ability to really get to another scale of operations. And we chose to invest when others weren't, post Silicon Valley, that ramped up both our specialty banking verticals in a very powerful way when that continues today, and they're not mature. But it also allowed us to operate in a number of new regions, North and South Carolina and Texas, that set up an expansion opportunity. And all of this is done with -- at the same time, we were reconfiguring our local model, our operating model locally and putting more emphasis on local delivery at a time when cost cuts and other things were happening and many of our competitors were pulling out. So those three combination of factors, I think, put us in an extraordinary advantage position. We continue to benefit from that today. And I think we've got a very strong operating model to go forward with both locally and nationally, and we've got momentum in all these businesses. We're very optimistic about what we've been able to achieve. These partnerships, and I can't emphasize that word enough partnerships, Dan Rollins has been spectacular. And so has Malcolm Holland. We got record time to close with Veritex. We're off to a great start. The commercial pipeline looks very strong. We're going to convert on January 17 on that MLK weekend when we expect to close cadence on Feb 1, and then convert on June 10. And so by the end of the first half, we're on common systems, platforms and an ability to go forward with standard goals and operating procedures.

Makes total sense. So Steve, when I think back, you laid out a strategy to expand in Carolinas and Texas at your Investor Day. And obviously, between recent announcements, of expansion. Others have branch expansion plans, there's a lot of banks that are attempting to grow in these areas, right? So how is all this activity changing the competitive dynamics in the markets that you're growing into?

All of our markets are competitive. We have the big [ 4 G-SIBs ] that we overlap in different markets on a combined basis and even the next year. Think of PMC, Truist, USB. So they're very competitive. The opportunity set for us in the South and Texas is one we've never experienced, right? At best, the Midwest markets grow at national average. Now we're in markets that are growing much faster, expecting to grow 35% or more above national average for the back half of the decade. This is a wonderful new dynamic that we'll have to be able to operate in. And we're doing well on these -- in the core Midwest markets. We're growing significantly. We expect to continue to do that and take share. And the strategy of being deep with share -- deep in these markets, establish the brand, get our reputation out and be attractive to colleagues and customers has proven to be a successful track record over the last 1.5 decades. And we'll extend that now into the south in Texas.

We're going to get to Zach shorts, but just a couple more here for you, Steve. So you talked about -- you announced two acquisitions in reasonably short order, one in July with Veritex and more recently, Cadence in late October. Talk about the strategies in place to embed Huntington's operating model in to these banks. You referenced some of it in the slides and talk about what you're doing to retain the top talent at these institutions.

Well, first of all, these are partnerships. And so the ability to combine these companies is led, not just by the Huntington team but by the Veritex and Cadence team. Malcolm Holland has been just a tremendous partner. He's got an ongoing very active role. We'll be announcing some things in golf in the near future that are coming because of Malcolm and his relationships and focus, along with other activities, the Veritex's commercial loan pipeline is surprisingly strong to me at this point in advance of a conversion 30 days out. This is -- it's. I haven't seen this often in my career. And then Dan Rollins has just been spectacular. Literally, the 3, 4 months we had in conversation and planning to get things right, have advanced our actual plans very significantly. And he's been deeply involved along with his team, just great partners. So as we sit here today, the organization decisions are done. The people -- there are over 5,000 people that have been -- that as of the end of this week, will have been notified. The system conversion activities are well underway. Now we'll do MCI for Veritex this weekend, and the activities for Cadence are in a parallel stream to set up that conversion as we go forward. And all of this happens because there's an ongoing interest, if you will. And we're very delighted both Malcolm and Dan, and largely, their teams are going to be with us going forward.

Now so as I said, you've obviously done two deals in relatively short order, expanded the footprint. And maybe just as you think about the potential for further M&A, right, what are your guardrails for future M&A in terms of strategic or financial metrics? And how should investors interpret your appetite for additional deals over the next 12 to 24 months.

So our approach has always been we must grow organically in order to earn the right to potentially partner. And I come back to that word. If we can't grow organically as we expect to, we won't partner. We'll just put a full stop on it. The core has to perform well. And that will be consistent over years. That's not just a '26 perspective. Secondly, if we do any further M&A, it will be with partners. It's highly unlikely we're going to show up in an auction. We're not interested in MOEs. We're not looking to go beyond the geography that Cadence gives us. The strategy that works so well for us over the years in the Midwest is what we're looking to employ, share of market, share of wallet, go deep, where we are, and we've got plenty to work on. Texas itself is the seventh largest economy in the world. There's plenty for us to do. So we're not going to be trying to go national or West Coast or in Northeast or other stuff. It's just get better and do more where we are in this expanded footprint. And I think, again, because of the partnerships, we're going to have a lot of opportunity going forward. to attract new colleagues and build our customer base. And so this organic thrust is really important to us.

Awesome. So a lot of opportunity out there for you guys.

I think so.

So Steve, I noted earlier you've had best-in-class loan and deposit growth, looks like that's continued into the quarter. We'll hit that next act. How will you sustain this organic loan and deposit growth while integrating these deals? Is there any risk that your integration efforts distract you from your organic strategy?

Short answer is no. They're better not be because I'm holding our team accountable delivering it, and I will hold them accountable. The emphasis we have on organic growth transcends the M&A. And we talk about that as we look to partner -- we're quite clear with our executive team that they have -- we have to deliver the organic growth. And the plans are and the activities are there to support it, as we talked about in the first quarter. Now Veritex and Cadence are sequential, right? So we'll complete Veritex in the middle of January in terms of the conversion activities and then move on in more full scale to Cadence as we go forward. But our playbook in terms of how we operate locally is well established. We will execute that playbook. You'll hear us talk about OCR in the South and in Texas as we go forward, as we've done for the last 15 years. So we're not trying to do something new. We will bring a lot of additional product and service capabilities and business lines into our Cadence and Veritex customer base. We're much deeper in payments, wealth, capital markets than they are. As you'd expect, because we're a multiple of their size. But we have great new colleagues joining us. And there -- many of them have come from environments from Veritex, so they're larger banks, so they know how to sell the capabilities we're going to be bringing. And in Cadence, we just have a terrific group of colleagues. And the fact that we have the leadership aligned the first 2 weeks after we announced Cadence, we visited 22 markets, we saw almost 2/3 of the colleagues. This is about hearts and minds and getting our new colleagues to feel embraced to feel welcome and stay with us and deliver the service and support that those customers are looking for and get us through the conversion and then we move on. And we really get after the growth post conversion.

Zach, I appreciate your patience and waiting for us to get to your part...

Whenever you're ready.

I'm always ready. So maybe just to start off, you guys obviously gave loan to deposit growth updates. You gave some commentary on full year. Maybe just give a little bit of color on, one, what you're seeing in the quarter? And then two, how is it setting Huntington up for 2023?

Sure. So we probably provide a bit of an update on quarter-to-date to continue to see strong loan growth sequentially into the fourth quarter at or above the high end of the growth range we provided before. The components of that growth that we're seeing come through in Q4, very similar to the components and contribution we've seen throughout this year, which is both our core business, about 60% of the growth coming from the core but also benefiting from the new initiatives that we've been driving for a number of years now and about 40% of the growth coming in that way. Pipelines, I will tell you, as we look at the end of this quarter and into the early part of next quarter, continue to also be very strong to indicate for us that this is a pretty sustainable environment. So feel good about where that's tracking.

So maybe just to dig in back to some of the pieces. Deposit growth and yet another outstanding quarter of growth. You're now saying high end of the full year range. Maybe just talk about what is driving that? And how sustainable do you think it is given competition and pricing pressure across all the banks?

Likewise, continue to see deposit gathering, which is aligned with our plan and our objectives. And so we very much just an indication of the team executing very well. Fundamentally, our objective over the long term is to match fund loan growth with core deposit growth, and that's a foundational element of our strategy. For us, it really all comes from, first and foremost, customer acquisition that is well above industry rates, very strong levels of customer acquisition across every one of our major customer segments. And then deepening, deepening customer relationships with not only additional deposit products, but further depth across loan and value-added services as well. So that program is executing exceptionally well. I will tell you, the environment is, as Steve noted, every one of our markets is competitive and it will remain so. With that being said, our teams are executing on both volume growth and on pricing discipline. In the last 2 weeks of September, we had a 40% down beta after the Fed action in late September. We'll see what happens today. I'm sure we're all waiting to see. But my expectation is we'll see something similar here in the second 2 weeks of December as well. So strong execution across the board.

Got it. That's super helpful. You reiterated the 7% fee income guidance, including Veritex, you gave a specific number. So even I could understand what that means. But maybe just help us understand some of the moving pieces within there. Obviously, there was tougher comps because capital markets was so strong last year. Maybe just walk us through some of the moving pieces within there.

Our value-added services fee businesses have been a real bright spot throughout the rest of the course of this year. And over the moderate term, we're expecting to see very strong continued growth. Longer term, our objective is to grow those in the high single-digit growth rate, really powered by three core areas: payments, wealth management and capital markets, all of which are growing not only high single digits but often low double digits in terms of year-over-year growth in revenue. That program continues to execute exceptionally well. We're seeing in payments, strong commercial payment activity, treasury management in wealth management, it's all underpinned by very strong levels of household growth that's driving net flows and in AUM gathering. And then the capital markets business continues to power ahead, really continuing to couple to strong commercial lending activity. And so outlook there looks on track for the fourth quarter and solid into '26.

So Steve didn't make it easy on you into 2026 with one deal closing and then converting another deal closing and then converting. So obviously, there's going to be -- it's going to be a messy year. Well, I know we'll get formal guidance early next year and revisions once [indiscernible] closes. Just any broad strokes on your expectations or how we should think about into 2026.

Look, we're trying to be pretty clear on our Investor Day, the focus of the organization is on long-term value creation and really driving that through sustainable above-market rates of earnings. And so my expectation will see another strong year for loan and deposit production, the value-added fee services will continue to grow very well. Our expense management program is executing exceptionally well. This year, 250 basis points of positive operating leverage. We'll continue to see the outlook for positive operating leverage will go into next year, that should drive strong profitability. I will tell you, and as Steve noted this in some of his remarks, that the executional quotient around these partnerships is extraordinarily disciplined and high we've closed already the Veritex partnership. It's scheduled to convert about a month from now. We will expect to close cadence on February 1 and then to convert that in June. And it's just the sequence of that activity alongside uninterrupted organic growth has really been exceptionally well executed.

So Zach, when I think about Huntington has had tremendous success in terms of managing your funding cost even while growing at a really fast pace. As you think about optimizing your overall funding cost, how do you expect to leverage Cadence and Veritex deposit franchises to both improve the funding mix? And obviously reduce the cost of funding.

Yes. There's a real opportunity there. And I think there's both a kind of a short-term one to -- in the case of Veritex, they had a couple of relatively higher cost sources of funding that we can optimize within the Huntington funding base. But more importantly, longer term, these are great deposit markets. And I think you heard Steve talked about that earlier, just depth, very sticky granular deposit relationships. In many cases, multi-generational deposit relationships that we think will really endure to our favor. One of the things that we know well and we're very adept at deploying is the full Huntington playbook. We've got a very broad set of services and products, extraordinarily good digital capabilities. And so over time, we'll also see the benefit of that coming through in terms of additional deposit gathering, acquisition of primary bank relationships and augmenting what was already a pretty strong base with the capabilities of a larger bank.

Right. Ryan, just to add, we also have a set of teams that have come together and have come to us. And -- so those teams know how to operate together. So we have -- we've got to do some product training and some other stuff, but they're going to hold their customer base, and they're going to be able to offer that base a wider array of new capabilities. And they're excited by this. They're excited by this. And we hear that and then those capabilities will put us in a competitively advantaged position in those markets. And they like that. I mean we're getting -- when we did a debt placement this week off of Veritex customer, where the colleague knew the call and we got in the lineup. So there are a whole series of things that are happening on an accelerated basis because of the nature of the partnerships, the quality of the people, and they want to help their customers. And we're going to put them in a position where they can do that.

So Steve, sort of a hallmark of your tenure as CEO has been the ability to generate positive operating leverage almost every single year that you've been in charge. How do you guys maintain positive operating leverage and expense flexibility during this integration. Obviously, lots of different moving pieces going on. Maybe just talk through that and Steve, if you have any comments. Go ahead Zach.

Happy to take all the tough ones. Look, I think the model for expense management, we've discussed many times in different forums. It all starts with a commitment to drive positive operating leverage. We support that by systematically driving reengineering into the baseline operating cost of the company, that allow us to funnel outsized resources into investment categories of expenses like technology development, marketing, building out new teams and verticals. The facts would show in the last 6 years between 2019 and 2026 -- or 2025, excuse me, we have reengineered more than 1% of the cost base of the company out. Every single year, it's almost $1.2 billion. And we've deployed every dollar of that into investments. Investments growing more than 20% CAGR over that period of time. It puts us in an extraordinarily strong position now in terms of the capabilities and breadth of services that we have. All of that within an expense growth rate of only 6.5% and revenue at 9.5%. So that model is working very, very well. As we go into the cadence and Veritex partnerships, we obviously know that part of the value creation opportunity is incremental efficiency. As Steve noted, we already have line of sight toward both of those efficiency goals now just in execution mode, that will generate meaningful additional lift in efficiency that will then further power that ability to reinvest back in the business.

Yes. This is very exciting. I'm sorry to come on top, but I'm obviously excited about what we have in front of us.

Nobody wants there for me.

I could say that, too. But the -- those early years you were referring to positive operating leverage, we were like bootstrapping and we were thrift-like we've now got a revenue engine, and we're in a much better growth markets. It's very exciting. Like if we could do it in the Midwest, why can't we do it because the markets that are much more much faster growth. And so I look at this and think we've got the rest of this decade. We're in really good shape and very optimistic. And the company now has the products and capabilities, technology, digital and otherwise, the things we didn't have in those early years in the '09, '10, '11, '12, sort of thing. When we got into that model. So there's a financial discipline that Zach has heightened. And at the same time, we've done that with, I think, smart investment in a contrarian moment, but we expect to have positive operating leverage as we go forward.

And Slide 12 talks about your ability to unlock revenue synergies. You've outlined the potential for these. Maybe just talk a little bit about when will these begin to contribute? And is there any investment needed to start to see these revenue synergies kicking in?

I think we're to see them right away. In fact, I mean, Interestingly, the very second day after we had closed the Veritex partnership, we already saw capital markets activities coming through from Veritex customers. So these will begin to endure quite quickly. And as we come into early next year, my expectation will share some detailed guidance with you around that. But they'll be meaningful and I think lift our growth rate. You saw some of the facts in Steve's presentation earlier, a meaningful lift to long-term sustainable organic growth from the TCF partnership. The same will be even more true now with incredibly strong markets that will come to us from these two partners.

Whenever we see deals like this, I think investors worry what could happen in terms of customer retention. And maybe just talk a little bit about what assumptions you made about customer attrition post merger? And what actions are you taking to outperform these assumptions?

So there's always a risk of customer attrition. And so that's a focal point from diligence on and the planning builds on the prior experiences and plans, and we just try to keep getting better and better with it. But it starts with, can we get the hearts and minds, can met the engagement of our new colleagues. And that's why the partnership is so important. The message is that Malcolm and Dan said right from the start with us and the management team, we're incredibly positive, and we're seeing that by interim surveys. So it's up to us now to continue to build that trust, the transparency. The reason we did the notification to all the colleagues now as we wanted them to know their status before Christmas and the holiday season versus after. So they had assurances where that's appropriate, 80%, roughly 80% got those assurances. So we're trying to do things that are sensitive and build, again, trust show the care and concern and therefore, the allegiance to us that they, in turn, will bring about the customer base. So we're going to have good conversions. We have to have good conversions. And again, this is where the partnering is so helpful. The tech teams at Cadence are working very closely with our tech teams now on making sure we get good conversions with Cadence. So we're in an execution mode. We build we build on -- we learn and build and get better, hopefully, as we go forward and do things better for both our new colleagues and customers.

Zach, maybe just talk a little bit about category 3 designation, how it will impact both your expenses and capital strategy? And are you prepared for all the requirements that come with this?

We're fully down the track of preparation will be complete by the middle of 2026, well in advance of becoming Category 3. We discussed at length over the course of the last 2 years, investing in data and automation. A lot of that was with a mind toward building the capabilities necessary. So there's no incremental expense run rate that we'll see from here as a result of that.

So as we wrap up here, you can see we're very confident. We're excited. We've got great new partners. The core is performing well. These new markets are extraordinary especially banking investments we've made are all coming about. We've got all the ingredients. It's up to us to deliver it. but we think we have a great second half to this decade in front of us, and we're very, very confident. Appreciate the interest today. Happy holidays, everybody. Thanks so much, Ryan.

Absolutely. And please join me in thanking the Huntington team.