Huntington Bancshares Inc

NASDAQ:HBAN

Earnings Call Transcript 2023-Q1

[Operator]

Greetings and welcome to the Huntington Bancshares' 2023 First Quarter Earnings Conference Call. At this time all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now let's turn the conference over to our host, Tim Sedabres, Director of Investor Relations. Thank you, you may begin.

[Tim Sedabres, VP & Head of IR]

Thank you, operator. Welcome, everyone and good morning. Copies of the slides we will be reviewing today can be found in the Investor Relations section of our website www.huntington.com. As a reminder, this call is being recorded, and a replay will be available starting about one hour from the close of the call.

Our presenters today, are Steve Steinour, Chairman, President and CEO; and Zach Wasserman, Chief Financial Officer. Rich Pohle, Chief Credit Officer will join us for the Q&A. Earnings documents which include our forward-looking statements disclaimer and non-GAAP information are available on the Investor Relations section of our website.

With that, let me now turn it over to Steve.

[Steve Steinour, Chairman, President & CEO]

Thanks, Tim. Good morning, everyone and welcome. Thank you for joining the call today. We're pleased to announce our first quarter results which Zach will detail later.

Huntington is very well positioned. We operate a diversified franchise with disciplined risk management. Our approach to both our colleagues and customers is grounded in our purpose, to make people's lives better, help businesses thrive and strengthen the communities we serve. And during times like these, Huntington's purpose is evident in how we look out for each other and serve as a source of strength for our customers and communities.

Now onto Slide 4. These are the key messages I want to highlight to you. First, we have one of the strongest deposit franchises of any regional bank. We have a diversified base of primary bank customer relationships, which has been built over many years supported by our fairplay philosophy. We also have the leading percentage of insured deposits as of year-end.

Second, we maintain a robust liquidity position consistent with our longstanding approach to conservative risk management practices. Third, our capital base is solid and building. Common equity tier one has increased for three quarters in a row, and we intend to continue to build to the high end of our range.

Fourth, our credit reserves our top tier. Credit quality continues to perform exceptionally well and remains a hallmark of our disciplined credit management. Fifth, we are dynamically managing through the current environment, bolstering capital and liquidity. We're also incrementally optimizing the balance sheet and loan growth while continuing to proactively manage the expense base. Finally, we are well positioned operate through uncertainty with a focus on our long-term strategy and our commitment to top quartile returns.

I believe Huntington is built to thrive during times like this, and ultimately to benefit and to capture opportunities as they arise. Moments of market disruption present opportunities to take market share, to win new customers and to hire great talent. We are confident in our strategy and strong position.

Moving on to Slide 5, we entered this period of disruption in the best position the company has been since I've joined over a dozen years ago. The reputation our colleagues have created a best-in-class customer service, results in customer confidence and trust in us. The 2023 JD Power award for Customer Satisfaction reflects our colleagues' efforts. Grounded in our fairplay philosophy, we continue to acquire and deepen primary bank relationships, resulting in our granular and diversified deposit base. For many years, we focused on gathering deposits that are sticky operating accounts, and proactively placed larger deposits off balance sheet. We continue to invest across the franchise to drive deposit growth.

We are also incrementally optimizing loan growth to generate the highest returns and ensure the capital we deploy is put to the highest and best use. And we remain focused on delivering the revenue synergies we previously shared, accelerating the growth of our fee businesses and deepening our customer relationships.

In regards to capital CET1 increased 19 basis points from the prior quarter to 9.55%. And we plan to build capital to the high end of our range over the course of 2023. Our credit reserves are top tier in the peer group at 1.9%. We will continue to be proactive in our expense management. In the first quarter, we completed a number of actions to support our ongoing efficiency programs such as the 31 branch consolidations, the voluntary retirement program, and our organizational realignment with reductions in personnel. And in addition to operation accelerate, we have a roadmap to deliver continued efficiencies going forward.

Importantly, risk management is embedded within all our business lines. At Huntington, everyone owns risk, and we continue to operate within our aggregate moderate to low risk appetite. Finally, I want to reiterate, Huntington is built for times like this. We have a strong well diversified franchise with a distinctive brand and loyal customers.

Our high-quality deposit base, robust liquidity, and solid credit metrics are the direct result of focused and disciplined execution over many years. We have an experienced management team supported by highly engaged colleagues executing on our strategy. And as you know, management is collectively a top 10 shareholder. And we are fully committed to driving top tier performance and growing shareholder value.

Zach over to you to provide more detail on our financial performance.

[Zach Wasserman, CFO & Senior EVP]

Thanks, Steve. And good morning, everyone. Slide 6 provides highlights of our first quarter results. We reported GAAP earnings per common share of $0.39, and adjusted EPS of $0.38. Return on tangible common equity, or ROTCE came in at 23.1% for the quarter, adjusted for notable items. ROTCE was 22.7%. Further adjusting for AOCI, ROTCE was 17.8%. Pre-provision net revenue expanded 41% year-over-year to $844 million.

Loan balances continued to grow, as total loans increased by $1.5 billion from the prior quarter. Liquidity coverage remains robust, with over $60 billion of available liquidity representing a peer leading coverage of uninsured deposits of 136%. Credit quality remains strong, with a net charge-offs of 19 basis points and allowance for credit losses of 1.9%.

Turning to Slide 7. Average loan balances increased 1.3% quarter-over-quarter driven by commercial loans, which increased by $1.5 billion, or 2.2% from the prior quarter. Primary components of this commercial growth included distribution finance, which increased $800 million tied to continued normalization of dealer inventory levels, as well as seasonality, with shipments of spring equipment arriving to dealers. Corporate and specialty banking increased $242 million, primarily driven by growth in mid-corp, healthcare and tech and telecom. Other assets financed businesses contributed growth of $216 million. Auto floorplan continued normalization, with balances higher by $214 million. Business banking also increased $92 million.

In consumer, growth continued to be led by residential mortgage which increased by $316 million. Partially offsetting this growth were home equity balances, which declined by $159 million. All other categories including RV Marine and auto declined by a collective $123 million.

Turning to Slide 8. We continued to deliver average deposit growth in the first quarter. Balances were higher by $472 million, primarily driven by consumer, which more than offset lower commercial balances. On a year-over-year basis, average deposits increased by $3.2 billion or 2.3%.

Turning to Slide 9. I want to share more details behind Huntington's deposit franchise. Our deposit base represents a leading percentage of insured deposits at 69% as of Q1. Our deposit base is highly diversified with consumer deposits representing over half of our total deposits and the average consumer balance being $11,000.

Turning to Slide 10. Complementing our diversified deposit base is the stability and growth of our deposits over time. During last year, we consistently delivered deposit growth well above peer levels despite the backdrop of rising rates and quantitative tightening. Through year-end 2022, cumulative deposit growth was 2.4%, nearly 6 percentage points better than the peer median. Over the course of Q1, monthly average deposit balances were stable at approximately $146 billion.

Within consumer deposits, balances have increased for four months in a row. Total commercial balances were modestly lower, consistent with expected seasonality. During March, in addition to seasonality, commercial customers also incrementally utilized our off-balance sheet liquidity solutions.

Turning to Slide 11. We have a sophisticated approach to customer liquidity management that comprises both on balance sheet deposit products as well as off-balance sheet alternatives. Over the past four years, we have invested substantially to build out these solutions to ensure we're managing our customers' overall liquidity needs. The enhanced liquidity solutions allow us to manage the full customer relationship with primary bank and operating deposits on balance sheet and utilizing our off-balance sheet solutions for investment or non-operational funds.

Over the course of 2020 and 2021, we intentionally leveraged these off-balance sheet solutions in order to support our customers' excess liquidity. This resulted in fewer surge deposits coming on sheet as well as less commercial deposit runoff during 2022 compared to the industry.

On a year-over-year basis, our Commercial Banking segment on balance sheet deposits increased 11% and our off-balance sheet liquidity balances increased 54%. During March, this approach yet again showed its value for both Huntington and our customers. We saw customers moving a modest amount of deposit balances into treasuries and other products, while we were able to maintain those primary operating accounts on our balance sheet.

Of the total change in Commercial segment deposit balances between March 6 and the end of Q1, we estimate that approximately half the delta was attributable to normal seasonality, and the remainder was mainly the result of shifts into our off-balance sheet solutions.

The bottom table highlights these movements as well as trends in the first two weeks of April. On-balance sheet deposits have returned to the March 6 level and off-balance sheet continues to grow.

Turning to Slide 12. Our liquidity capacity is robust. Our two primary sources of liquidity, cash and borrowing capacity at the FHLB and Federal Reserve represented $10 billion and $51 billion, respectively, at the end of Q1. As part of our ongoing liquidity management, we continually seek to maximize contingent borrowing capacity. And as of April 14, our total cash and available borrowing capacity increased to $65 billion. At quarter-end, this pool of available liquidity represented 136% of total uninsured deposits, a peer leading coverage.

On to Slide 13. For the quarter, net interest income decreased by $53 million or 4% to $1.418 billion driven by lower day count and lower net interest margin. Year-over-year, NII increased $264 million or 23%. Net interest margin decreased 12 basis points on a GAAP basis from the prior quarter and decreased 11 basis points on a core basis, excluding accretion. The reduction in GAAP NIM included 5 basis points from lower spreads, net of free funds, due to funding mix and marginally accelerated interest costs. It also included 5 basis points from the first substantive negative carry impact from our long-term downrate NIM hedging program and 3 basis points from higher cash levels.

Slide 14 highlights our ongoing disciplined management of deposit costs and funding. For the current cycle to date, our beta on total cost of deposits was 25%. As we've noted, we expect deposit rates to continue to trend higher from here over the course of the rate cycle. Given the recent market environment, at the margin, we do expect a steeper near term trajectory.

Turning to Slide 15. Our hedging program is dynamic, continually optimized and well diversified. Our objectives are to protect capital in up-rate scenarios and to protect NIM in down-rate scenarios. During the first quarter, we added to the hedge portfolio with both of these objectives in mind. On the capital protection front, we added $1.6 billion in additional pay fixed swaps and $1.5 billion in forward starting pay fixed swaptions. Throughout the quarter, we were deliberate in managing the balance sheet to benefit from asset sensitivity. We also incrementally added to our hedge position to manage possible downside rate risks over the longer term as well as took actions to optimize the near-term cost of the program.

During the quarter, we executed a net $400 million of received fixed swaps, terminated $4.9 billion of swaps and entered into $5 billion of floor spreads. As we've noted before, our intention is to manage NIM in as tight a corridor as possible as we protect the downside and maintain upside potential if rates stay higher for longer.

Turning to Slide 16. On the securities portfolio, we saw another step up in reported yields quarter-over-quarter. We benefited from higher reinvestment yields as well as our hedges to protect capital. From a portfolio strategy perspective, we expect to continue to add to the allocation of shorter duration exposures to benefit from the inverted yield curve and further enhance the liquidity profile of the portfolio. You will note that fair value marks at the end of March were lower than year-end, both in the AFS and HTM portfolios, as market interest rates moved lower sequentially.

Importantly, we have also shown the $700 million total positive fair value mark from our pay fixed hedges, which are intended to protect capital.

Moving on to Slide 17. Non-interest income was $512 million, up $13 million from last quarter. These results include the $57 million gain on the sale of our retirement plan services business during the quarter. Excluding that gain, adjusted non-interest income was $455 million. This result was somewhat lower than the guidance we provided in early March, driven by lower capital markets revenues given the disruptions at the end of Q1.

The first quarter is generally a seasonal low for fee revenues. As we've noted previously, we see Q1, excluding the RPS sale, being the low point and for fees to grow over the course of the year, driven by solid underlying performance in our key areas of strategic focus capital markets, payments and wealth management.

Moving on to Slide 18. GAAP noninterest expense increased by $9 million. Adjusted for notable items, core expenses decreased by $18 million, driven by lower personnel expense, primarily as a result of reduced incentives and revenue driven compensation. We're proactively managing expenses and have taken actions over the last several quarters to orient to a low level of expense growth in order to deliver positive operating leverage and self-fund strategic investments.

Slide 19 recaps our capital position. Common equity Tier 1 increased to 9.55% and has increased sequentially for three quarters. OCI impacts to common equity Tier 1 resulted in an adjusted CET1 ratio of 7.6%. As a reminder, the reported regulatory capital framework does not include OCI impacts in the capital calculation.

Our tangible common equity ratio, or TCE, increased 22 basis points to 5.7%. Note that we were holding higher cash balances at the end of Q1, which reduced the TCE ratio by 13 basis points. Adjusting for AOCI, our TCE ratio was 7.27%.

Tangible book value per share increased by 7% from the prior quarter to $7.32. Adjusting for AOCI, tangible book value increased to $9.23, and has increased for the past four quarters. Our capital management strategy for the balance of 2023 will result in expanding capital over the course of the year, while maintaining our top priority to fund high-return loan growth. We intend to grow CET1 to the top end of our 9% to 10% operating range by the end of the year. We believe this is a prudent approach given the dynamic environment.

Based on our expectation for continued loan growth, we do not expect to utilize the share repurchase program during 2023.

Turning to Slide 20. Our capital plus reserves is top quartile in the peer group and gives us substantial total loss absorption capacity. On Slide 21, credit quality continues to perform very well. As mentioned, net charge-offs were 19 basis points for the quarter. This was higher than last quarter by 2 basis points and up 12 basis points from the prior year as charge-offs continue to normalize.

Non-performing assets declined from the previous quarter and have reduced for seven consecutive quarters. Allowance for credit losses was flat at 1.9% of total loans.

Turning to Slide 22. We have provided incremental disclosures on our commercial real estate balances. This portfolio is well diversified and at 14% of total loans is in line with the peer group with no outsized exposures. The majority of the property types are multifamily and industrial. Over the last two years, we have grown our CRE book at a slower pace relative to the industry and peers. We remain conservative in our credit approach to CRE with rigorous client selection. Total office CRE comprises less than 2% of total loans, and the majority are suburban and multi-tenant properties. Reserve coverage on our total CRE portfolio is 3% and the office portfolio is 8%.

Let's turn to our 2023 outlook on Slide 23. As we have discussed, we analyze multiple potential economic scenarios to project financial performance and develop management action plans. We also remain dynamic in the current environment as we execute on our strategies. Our guidance is anchored on a baseline scenario that is informed by the consensus economic outlook. We have also based our guidance on a range of interest rate scenarios, bounded on the low end using the forward curve as of the end of March to one at the higher end, where rates are higher for longer with Fed funds remaining at approximately today's level over the rest of the year.

On loans, our outlook range continues to be growth between 5% and 7% on an average basis. And as before, we expect this growth to be led by commercial with more modest growth in consumer.

As we entered the year, we were trending to the middle to higher portion of that growth range. Given the market disruption and our incremental focus on optimizing loan growth for the highest returns on capital, we now expect to be in the lower half to midpoint of this range. On deposits, we are guided by our core strategy of acquiring and deepening primary bank relationships. We're narrowing our outlook with a slightly lower top end of the range and still expect to grow average deposits between 1% and 3%. However, the composition of deposit growth from here, we now expect to be primarily consumer-led with relatively less commercial growth.

Net interest income is now expected to increase between 6% and 9%. This is driven by slightly lower loan growth and marginally higher funding costs. Non-interest income on a core full year basis is expected to be flat to down 2%. The updated guidance reflects modestly lower expected growth in capital markets fees and includes the go-forward impact of the RPS business sale. As noted, we expect Q1 to be the low point for fees, growing over the course of the year, led by capital markets, payments and Wealth Management.

On expenses, we are proactively managing with a posture to keep underlying core expense growth at a very low level. We're benefiting from our ongoing efficiency initiatives, such as Operation Accelerate, branch optimization, the voluntary retirement program and the organizational realignment, providing the capacity to self-fund sustained investment in our key growth initiatives.

Given a somewhat lower revenue outlook, we are taking actions to incrementally reduce the expense growth in 2023. For the full year, we now expect core expense growth between 1% and 3%, plus the incremental expenses from the full year run-rate of Capstone and Torana and the increased FDIC insurance expense.

Overall, our low expense growth, coupled with expanded revenues, is expected to support another year of positive operating leverage. We continue to expect net charge-offs will be on the low end of our long-term through-the-cycle range of 25 to 45 basis points.

Finally, turning to Slide 24. As you heard from Steve, the foundation we have built at Huntington over the last decade has created an institution that is well prepared for this environment. We will leverage the strength of our deposit base. We're focused on growing capital and maintaining robust liquidity. We remain disciplined in our credit posture, and we're executing our core strategy.

The work we have done to build the franchise positions Huntington to outperform and be ready to opportunistically seize on pockets of growth. We will remain disciplined and dynamic in our management approach as we continue to generate long-term value for our shareholders.

With that, we will conclude our prepared remarks and move to Q&A. Tim, over to you.

[Tim Sedabres, VP & Head of IR]

Thanks, Zach. Operator, we will now take questions. We ask that as a courtesy of peers, each person ask only one question and one related follow-up. And if that person has additional questions, he or she can add themselves back in the queue. Thank you.

[Operator]

Thank you. And at this time, we will conduct our question-and-answer session. [Operator Instructions] First question comes from Manan Gosalia with Morgan Stanley. Please state your question.

[Manan Gosalia, Morgan Stanley]

Hey, good morning.

[Tim Sedabres, VP & Head of IR]

Good morning, Manan.

[Manan Gosalia, Morgan Stanley]

As I look through your deposit flows for the quarter, you've clearly done better than peers, whether it's on total deposits or even just non-interest-bearing deposits. Can you break out what you saw in the background? Was there a lot of movement with new accounts coming in and some of those existing commercial clients moving off balance sheet? And if so, can you talk about how sticky you think some of those new account openings are?

[Zach Wasserman, CFO & Senior EVP]

Thanks, Manan. This is Zach. I'll take that question, and it's a good one. Overall, what we saw in our deposit base during the quarter was tremendous stability and that continued, not only through the month of March, but into early April. And we've tried to provide some incremental disclosures around that, so that you could get the visibility.

And for us, it's not surprising as we've noted quite a bit. It's very granular, very diversified and, overall, it didn't happen by accident, it was a function of a really long strategy we have to focus on primary bank relationships, as you know. And to develop this commercial off balance sheet capability that we described in the prepared remarks.

To get to your question, in particular, what we saw generally, I would note, by the way, that when you're looking at balances on a day-by-day basis as we've provided them in that disclosure, you have to take them with a note of caution. It really matters what day of the week what week of the month, et cetera payroll days and tax payments, et cetera.

Generally, we expect the end of March to be a seasonal low for commercial. And so most of the movement, around half the move we saw in commercial from, let's say, the average of March down to the end of March was really just BAU movements of commercial clients largely paying out payroll.

The other half was largely movements of deposits off balance sheet as very marginal amount of customers used some of those off-balance sheet solutions to leverage that product set. Interestingly, what you can see, we provide this disclosure out into the first two weeks of April is that essentially completely came back in terms of the overall balance of commercial deposits. So it's very stable net, virtually no movement.

On the question of what we saw ins and outs, we, of course, saw some acquisition and we continue to acquire in every segment that we're operating in, consumers, continue to acquire [ph] business banking and commercial as well. And so we feel good about that kind of long-term program, which is one of the things that underlies our continued expectation for its positive growth throughout the rest of this year, just continuing to stay on strategy of acquiring and deepening primary banking relationships.

[Manan Gosalia, Morgan Stanley]

Great. And then just separately, can you talk about the funding and liquidity side of the balance sheet? So despite the low level of deposit outflow, I think you built up some cash and liquidity levels by taking on more wholesale funding. So how should we think about that as we get through the rest of this year?

[Zach Wasserman, CFO & Senior EVP]

Yeah. In terms of overall funding mix, we've talked about this a number of times in prior quarters. We really like where we are coming to this rate cycle from a perspective of lots of balanced options to fund the business. We're growing loans at this point between 5% and 7% and deposits are between 1% and 3%, around 2%, call it, the midpoint of that range. So that allows us to also leverage other sources of funding to overall fund the balance sheet, and we're in a great position to be able to do that.

I will tell you, internally, we really like that. It creates quite a bit of attention in the system where the next unit of of funding is coming and really that is optimized from an economic perspective. And so our expectation is to continue to essentially add to each of those funding categories over the foreseeable future while still maintaining a level that's comparatively quite good relative to history for us. So that's the overall plan.

On the topic of liquidity, I would just note a couple of things. This is a key risk that the company has been focused on managing for more than a decade. We purposely create exceptionally robust pools of convention liquidity to cover any potential issue. I think we noted in the prepared -- in the deck some of the key sources of, and also noted that we continue to, over time, add to them.

I will tell you that one of the statistics that's in the document today highlights $65 billion of contingent cash and borrowing capacity as of last Friday. I'm pleased to report that as of this morning, based on incremental efforts we've done now $84 million, which, in total, represents 187% of relative to our term deposits. So exceptionally strong liquidity profile, and, as I said, kind of very balanced funding mix.

[Manan Gosalia, Morgan Stanley]

Great. Thank you.

[Operator]

Our next question comes from John Pancari with Evercore. Please state your question.

[John Pancari, Evercore ISI]

Good morning. You mentioned the actions you've taken incrementally to lower expense growth across the firm. Are those actions factored into your 1% to 3% expense guidance? And also what are those actions involved? Thanks.

[Zach Wasserman, CFO & Senior EVP]

Yeah. It's a great question, John. This is Zach. I'll elaborate on that. So the short answer to your question is yes. Our guidance of 1% to 3% underlying core growth includes those actions. And I think just back to the sort of strategic intent of it, as we've said for a while, we are very intense on driving a low level of overall expense growth and really leveraging our ongoing program of efficiency initiatives to do that even while we continue to drive outsized growth and self-fund investments within that overall low growth framework.

And so as we came into this updated guidance period, and we saw somewhat lower revenue trajectory. For us, it was important and to kind of continue to execute on the discipline of driving the positive operating leverage to also ratchet down expenses.

I think the kind of things that we do, we always enter the year with a contingent set of expense management options menu, you could think about it as a different kind of options we could undertake if we need to. And that's essentially what we're going to go through now. We'll modulate the pace of hiring. We'll be very judicious in the discretionary expense categories, and we will look at sort of every possible area of expense control to ratchet back expenses and offset a good amount of what was otherwise profit and revenue pressure.

So that's the playbook, and we -- that's something we've done numerous signs over the course of the years. And so we feel really good about our ability to do it again now.

[John Pancari, Evercore ISI]

Okay. Great. All right. And then on the -- back to the balance sheet. Can you just give us your expectation in terms of an updated through cycle deposit beta? I believe you had expected 35% previously. But if you can update us there on what you're thinking, and also what net interest margin outlook is baked into your up 6% to 9% net interest income projection? Thanks.

[Zach Wasserman, CFO & Senior EVP]

You got it. Let me elaborate more on that. Overall, pulling back, overall, the strategy we have is to continue to drive sustained growth in net interest income on a dollar basis, and to do that, driving continual growth in higher-term loan categories coupling that with the management of NIM around in a tight corridor as we can, where the top end benefits from our continued asset sensitivity and we stand to really benefit if rates do stay a lot higher for longer, but also at the lower end, protected with our hedge portfolio. And all that adds up to the 6% to 9% NII growth that we're guiding to.

On beta, in particular to your question, it clearly is a market-positive environment, and, hence, it's realistic to expect some higher beta and, frankly, an earlier impact than we had previously seen. I do expect now a few percentage points higher than the original -- than the prior guidance of 35% beta. I will note that we provide a guidance on beta because we want to give you an indication of where we think that's going. But for us, the most important thing is the execution day-to-day of driving the deposit growth and staying incredibly disciplined in terms of the overall funding mix as I noted in my prior response.

How beta ultimately plays out here over the end game is going to be clearly a function of where the yield curve goes. But I do think that a few -- a few percent higher than 35% is a reasonable range based on the new scenarios I laid out.

In terms of overall spread, as we noted, we've moved the guidance range from what was previously 8% to 11% to 6% to 9%, so down about 2% in terms of that guidance range. About 40% of that is just slightly lower loan growth and the rest is spread. As I think about the kind of the way the year plays out, I would expect that kind of a more front-loaded impact of spreads than we were previously expecting. So we would expect to see $1 decline in NII, in Q2 about the same as we saw in Q1, but then growing from there. And I think the NIM range that we have there is sort of consistent with that dollar trends.

[John Pancari, Evercore ISI]

Great. Thanks, Zach.

[Zach Wasserman, CFO & Senior EVP]

Thank you.

[Operator]

Thank you. And our next question comes from Ebrahim Poonawala with Bank of America. Please state your question.

[Ebrahim Poonawala, Bank of America Merrill Lynch]

Hey, good morning.

[Zach Wasserman, CFO & Senior EVP]

Good morning, Ebrahim.

[Ebrahim Poonawala, Bank of America Merrill Lynch]

Two questions. One, in terms of the deposit growth outlook, I think you mentioned it's expected to be more consumer-led. Just give us a sense of strategically how either the interest rate environment or the events of the last month have changed how you're thinking about deposit acquisition? And has it materially changed the pricing on new deposit growth relative to the how you thought about it back in January?

[Rich Pohle, EVP & Chief Credit Officer]

Yeah. Thanks, Ebrahim. Overall, I would say, as we noted, tighten the range with a kind of a lower top end but still expect growth and pretty consistent with what we had thought before in terms of the overall amount growth. So we still see nice traction -- and I think we've seen that a little bit in some of the disclosures we've given just in the first month of the first week of into, for example.

With that being said, I think the mix will be different. And we now expect commercial to be largely flat from here. And really the growth to be consumer-led. Frankly, from our perspective, it's a great highlight of the strength of the consumer franchise that we've got that we can lean in now and continue to support high profit loan growth with that consumer funding. I think the dust has not fully settled in terms of all of the competitive and customer behavioral impacts of the last month, but I think one of them will clearly be more moderated commercial growth that will just be leveraging off-balance sheet structures that much more. So I'm sure that what we do have on sheet is incredibly stable.

And on the consumer side, it's just running the same playbook that we have. And we have invested so much over the last few years and capabilities to build our marketing technology and customer targeting capability with the consumer that we really have the opportunity to optimize and to drive incremental consumer-oriented acquisition, not only of higher rate categories, but just fundamentally, we're growing -- we noted 2% growth in primary bank relationships on the Consumer side, 4% growth in business banking. And so it's a very balanced source of growth, and we just going to lead into it at this point to continue to grow overall balances.

[Ebrahim Poonawala, Bank of America Merrill Lynch]

Got it. And just as a follow-up, I guess, on the lending side. So I appreciate your comments in terms of where the growth has been in the outlook. But if you could give us a sense of just customer sentiment, given your business mix, some of the legacy TCF businesses, just the health of the economy in terms of when you speak to your customers, are you seeing a slowdown in demand also occurring at the same time, which increases the likelihood of a potential downturn and a recession based on what you're saying?

[Steve Steinour, Chairman, President & CEO]

Ebrahim, this is Steve, and thank you for the question. We are seeing customers become more cautious, in some cases, deferring investments and/or postponing on acquisitions or other transactions. And this has increased during the quarter, it's one of the reasons we've sort of guided without changing the loan range to the lower end of that low range from where we would have been at the upper end of that loan rate at the end of '22.

There's a clear -- clearly more angst about, is there a recession, and what 2024 looks. Having said that, many of these customers are doing quite well in '23 thus far and remain optimistic. But again, there's been a lot of media, a lot of headline noise and it's having an impact in addition to what the Fed's doing.

[Ebrahim Poonawala, Bank of America Merrill Lynch]

Thanks, Steve. Thanks for taking my questions.

[Steve Steinour, Chairman, President & CEO]

Thanks, Ebrahim.

[Operator]

Thank you. Next question comes from Scott Siefers with Piper Sandler. Please state your question.

[Scott Siefers, Piper Sandler]

Good morning, everyone. Thank you. Hey, Zach, I was hoping you could expand upon some of the NII comments from a question or so ago. So I think if I interpreted you correctly, I guess, NII will take a step down in the second quarter. What would cause that margin or NII to start expanding from there in light of, I guess, fairly limited overall balance sheet growth through the remainder of the year? Just curious about the nuances as you see them.

[Zach Wasserman, CFO & Senior EVP]

Yeah. I mean, mainly, it's going to be volume from there, Scott, just continue to sequentially grow loans from second into the third and third into the fourth quarter is the primary driver. We see the spreads much more flat in the back half than kind of accelerated impact. What I -- just to make elaborating a little bit on kind of the NIM trajectory that we see overly precise. When we walked into the year, we were expecting, frankly, a pretty ratable trend in NIM over the course of the year. I think at the time we provided some guidance around single-digit basis points kind of trajectory throughout the course of the year.

Most of that we now see kind of front-loaded just based on the shape of the curve and kind of how the outlook has shaped up at this point. So that's really the driver. Overall, my outlook for NIM is going to be 5 or 6 basis points lower on a 400 basis to give you a sense a portion of which is yield with both of which is just funding costs being slightly higher.

[Scott Siefers, Piper Sandler]

Okay.

[Steve Steinour, Chairman, President & CEO]

Remember, we are a large equipment finance lender. And that generally has much more activity in the fourth quarter. That's part of this second half build-a-tech, records.

[Scott Siefers, Piper Sandler]

Okay. Perfect. Thank you. And then can you guys speak broadly to some of the trends you're seeing in the auto portfolio. I mean I know your portfolio, just given the quality and tenure of it, it tends to be a lot different than the industry as a whole. But at least in the media, you would think the industry is sort of collapsing, I guess. Just curious at top level trying to sort of appetite from you guys and then what you're seeing at sort of overall?

[Rich Pohle, EVP & Chief Credit Officer]

Scott, it's Rich. I can take that and then Zach and Steve can tack on to it. So from my standpoint, on the credit side, as we showcased during Investor Day, I mean, this is really a business we like through all sorts of cycles. I mean it just become truly the core competency of the bank.

If you look at what we saw in the first quarter, it was a continued gradual normalization in both delinquencies and charge-offs. But it's still trending well below the historic losses that we would normally see. It was 14 basis points in the first quarter, up from 12 in the fourth quarter. From my standpoint, I look really closely at the origination metrics that we've got, we're still originating at FICOs north of 17-18 and the loan to values are remaining relatively constant, reflecting a little bit more mix in new versus used.

So from my standpoint, we're going to expect this portfolio to continue to surpass [ph] that past performance. And unemployment rates are still low, which is certainly going to help the credit metrics here. That's the big driver of losses. So I'm feeling good about it. And maybe Zach can talk about the optimization that we've got from a return on capital standpoint.

[Zach Wasserman, CFO & Senior EVP]

Sure. I'll just tack on to that. Just I second the comment that the first feel great about the trajectory of the portfolio and we still see sustained demand and great relationships by the way, by a dealer. So I think we're a core and integral funding partner for our dealers, which really gives us great access.

In terms of optimization, that is one of the loan categories that we are actively modulating. We kind of detailed this at Investor Day last November, should you remember, that's a business that is so effectively managed with respect to pricing and volume trade-offs that you can really pull those levers quite effectively to drive higher return and higher yield times that we want to need to, and this is certainly one of them. And so we're bringing back production a bit and seeing really strong returns as a result of it.

So we'll see some of that and continue to optimize as we go forward for the rest of the year. But that is still a really important business for us and one we're pleased with kind of where we have seen it.

[Scott Siefers, Piper Sandler]

Okay. Perfect. Thank you for all the color.

[Zach Wasserman, CFO & Senior EVP]

Thank you.

[Operator]

Our next question comes from Erika Najarian with UBS. Please state your question.

[Zach Wasserman, CFO & Senior EVP]

Hi, Erika.

[Erika Najarian, UBS]

I just had 1 follow-up question for Steve. Steve, your starting point of CET1 is 9.5%. You accrete about 20 basis points of capital or more in the quarter. And like you said, your allowance already accounts for a tougher economic environment. I think your shareholders absolutely appreciate the focus on returns. But do you see an opportunity for Huntington to perhaps, as we have a little bit more clarity on the downside to the macro backdrop, take advantage of that capital and reserve resilience, so to speak, and perhaps start thinking about being more opportunistic in market share taking?

[Steve Steinour, Chairman, President & CEO]

Yeah, Erika, thanks for the question. We do -- we have focused on and will continue throughout the year building the capital position of the company, strengthening it. We're quite pleased with the results delivered in the first quarter and look for comparable results as we go through the year. We're intending to be at or near the high end of our CET1 rank. And we're doing that with a view that this threat of a recession is increasing. And there's also a backdrop of that there's going to be some kind of regulatory action at some point in the foreseeable future around capital requirements. So with that in mind, that's the purpose of it.

Having said that, we intend to be opportunistic. We've got a lot of organic growth potential in the business lines. We're very focused on our execution. And as you saw last year with the acquisition of Capstone and Torana, we're always looking to build out ancillary fee businesses within the company.

Beyond that, in times of disruptions, there tend to be people or teams that might be available, and we will again be -- look to be opportunistic there. And we see this in aggregate as a moment to take market share, and that's what we're driving towards. We're investing the businesses. The outlook Zach has shared with you, we'll have continued investment in the businesses, all of which is designed to enhance our flow our earnings and enhance our returns.

[Erika Najarian, UBS]

Got it. And just to be clear, Steve, I was asking about organic opportunities. That wasn't a hidden bank acquisition question.

[Steve Steinour, Chairman, President & CEO]

Well, I'm glad you clarified that. I thought, you might go in a different direction.

[Erika Najarian, UBS]

Yeah, absolutely. And just as a follow-up to that, Zach, heard you loud and clear in terms of continuing to optimize the right-hand side of your balance sheet. As you think about senior debt issuance, I suspect that everything that you may be doing in the future would have lens towards the potential for TLAC eligibility.

[Zach Wasserman, CFO & Senior EVP]

It's certainly on the thought process, yes, we're watching that development carefully. Still pretty early days, clearly to see where that might play in, but it's part of the thought process.

[Erika Najarian, UBS]

Thank you.

[Operator]

Our next question comes from Ken Usdin with Jefferies. Please state your question.

[Ken Usdin, Jefferies]

Thanks. Good morning. Just 1 follow-up on the capital front. Zach, you show on that Slide 19, where the current potential impact of AFS would be on CET1. I'm just wondering, do you have a rule of thumb if we kept all rates equal on just how fast that would pull to par either on a sequential basis or maybe by the end of '24?

[Zach Wasserman, CFO & Senior EVP]

Yeah, it's a great question, and a considerable analysis of this. It's around 5% to 10% a year kind depending on which year in it is which our maturities are so like a totally flat curve basis. I'll give you a sense, we've just read this analysis on the forward curve as of March, it will be 42% recaptured by the end of 2024 in a forward curve scenario is benefiting in that one of interest rates declining relative to [indiscernible] scenario.

[Ken Usdin, Jefferies]

Great. Thank you. And just 1 question on the asset repricing side. You guys have some fixed rate assets that are still repricing even though I understand how you're slowing production. Just can you give us a sense on just what your front book, back book benefits are in some of your fixed rate portfolios? And have we even really started to see some of those benefits come through given where rates have moved to?

[Zach Wasserman, CFO & Senior EVP]

Yeah, it's a great question. We look at that very carefully. And we're seeing really nice step-up in loan yields. To give you a sense, new volume rates up almost 50 basis points -- sorry, new volume up almost 70 basis points, back book up almost 50 basis points in Q1. We estimate that our loan beta at this point through Q1 is 37%, and that could easily be over the next couple of years approaching 60% so if you just sort of model the yield curve.

So we're a little further through the loan beta than we are at the deposit beta, but not much. And there's certainly much more room to go in terms of loan yields from here. Just given kind of about just over 10% of the portfolio in auto, that turns pretty quick, just over two years. So going to get the benefit of that repricing and some at delays but impactful beta there. And then obviously, the sort of the longer-dated loan book likewise is seeing a nice reset in terms of rates, and it's about a benefit for us over the coming quarters as well.

[Ken Usdin, Jefferies]

Okay. Thanks, Zach.

[Operator]

Next question comes from Jon Arfstrom with RBC. Please state your question.

[Jon Arfstrom, RBC Capital Markets]

Thanks. Good morning, everyone. A few questions here. Zach, on Slide 14, that green line on the bottom, the last time you said, it took a couple of quarters for deposit cost to roll over after the Fed stop. If we're done in May, do you think that relationship holds? Does it -- is it two quarters and deposit costs stopped going up? Is that fair?

[Zach Wasserman, CFO & Senior EVP]

That's generally the expectation we've got, John, yes, based on just the prior basis. Obviously, the [indiscernible], it could be a kind of function of the pace with which rates might begin to decline and also what the kind of economic environment, hence, the loan growth environment across the industry that would affect the competitive environment of deposits. So that will clearly play into it. But generally, our planning assumption is, as you know, which is very much in keeping with what we've seen, not only in the last year's cycle, but in multiple recycles for that.

[Jon Arfstrom, RBC Capital Markets]

Okay. Fair enough. Steve or Rich, maybe for one of you. You used the term in the deck rigorous client selection for commercial real estate. Can you talk a little bit more about that, what you go through? Help us understand the type of work you do and do you think this is different than what your peers are doing?

[Rich Pohle, EVP & Chief Credit Officer]

I really can't speak to what our peers are doing, but I can tell you that we, for four years now, have developed a process of really fine-tuning who we do business with in this space. As you know, real estate cycles and you have to be able to depend on who you're doing business with to support the projects. And so we really narrowed the funnel around the types of the sponsors that we work with. And we said -- we cure them. We look at their -- just how long they've been in business. We look at their financial wherewithal. We look at their liquidity. And more importantly, we look at how they've behaved in past cycles.

And we cure them and are curing how much we'll have out to any particular sponsor how [indiscernible] single project we will have to them and other metrics associated with that. So we -- right now, we are focused on serving the core and that has served us well going forward.

[Steve Steinour, Chairman, President & CEO]

Jon, we're always disciplined in our credit. And I think that's going to prove to be the case as we come through the cycle. Obviously, pleased with where we are at the moment. So we'll see. But I can tell you, especially in [indiscernible] where we had enormous challenges in '08-'09 we have sustained a discipline here since that time. And Rich has been a big part a bit along with that, our lending fees.

[Jon Arfstrom, RBC Capital Markets]

Good. One more for you, Steve. I know this seems like a softball, but if not, I'm genuinely curious. But what surprised you the most over the past six weeks as you manage through some of this disruption?

[Steve Steinour, Chairman, President & CEO]

The speed of the one on the banks was a surprise, Jon, faster than that we've seen that I can ever recall. And I think, as a consequence, it lead -- the regulators and others, maybe a little behind what they would become they didn't expected either. And that's why I think it's a couple of weeks to go as we be resolved and signature as well.

Normally, there's more front-end planning. They have a chance to line things up. This turned into a little bit more of a scramble. Having said that, I thought the reaction that something from treasury and as just -- it was just outstanding timing and fully appropriate.

[Jon Arfstrom, RBC Capital Markets]

Okay. All right. Thank you.

[Operator]

Our next question comes from Steven Alexopoulos with JP Morgan Chase. Please state your question.

[Steven Alexopoulos, JPMorgan]

Hi, everybody.

[Steve Steinour, Chairman, President & CEO]

Hi, Steven.

[Steven Alexopoulos, JPMorgan]

I want to start. So on the net interest income, outlook, which has taken down a bit. Given everything is actually detailed on the swaps and the forward curve, as of right now, where do you see yourself trending within that? Is there a bias either to the upside or downside within that range right now?

[Zach Wasserman, CFO & Senior EVP]

When we set these ranges, we try to set them with our general expectation to be the right at the midpoint. So that's kind of the baseline expectation. I think kind of what -- the puts and takes that would take you to the high and the low end codes volume on one hand just sort of the shape of the yield curve and the competitive drive on the other hand.

So it's hard to generalize, but we feel quite good about landing in that range at this point, and that’s what we're driving for.

[Steven Alexopoulos, JPMorgan]

Got it. And is the way we should think about it, so if we're at the low end, say, of the NII range, should then we should be at the low end of the expense guidance? Should we just connect those 2?

[Zach Wasserman, CFO & Senior EVP]

Generally speaking, that is the way we think about it. We throttled the expense growth based on where the revenue trajectory is going. And that's why we try to have a really disciplined forecasting process with as we've said, multiple economics in there so we try to do that. Obviously, the expense level takes some time to pull. And so you need to have a good line of sight to where that's going and it's possible if there's a rapid move but a surprising movement, but that's not possible at given short time period, but over the longer term, yes.

[Steven Alexopoulos, JPMorgan]

Got it. Okay. So maybe just one last one for Steve. Just following up on your response just now to Jon's question, given the speed at which deposits went out, Silicon Valley Bank, when you look at that, do you view that from a distance as a unique one-off event? Or are there lessons that you're now applying the way you think about managing capital risk, liquidity that even a stable regional bank like yourself will change potentially fairly materially than the aftermath of what we just saw? Thanks.

[Steve Steinour, Chairman, President & CEO]

Steve, I think there are always lessons learned. But the business model is of SVB and Signature were so different from us and other regional banks, but particularly from us. The concentrations of the uninsured deposit level of 95%, just in retrospect, it seems rather clear that the liquidity risk was very, very different and a huge miss combined with their asset liability. In terms of lessons for us, even that much more aware of liquidity.

We've always seen this as a prime risk. We've always had good back up, and we've been very granular and advantaged to have that best-in-class uninsured to total deposit ratio. But we'll probably be even more cautious, not probably, we will be even more cautious given the speed at which things move as we go forward.

Having said all that, we're in a very strong position today. We expect to grow deposits as we continue through the year. And so it's like extra vigilance. We may give some policy adjustments to reinforce and strengthen further, but that will be of a minor nature, I don't think it will impact our performance.

[Steven Alexopoulos, JPMorgan]

Okay. Thanks for taking my questions.

[Zach Wasserman, CFO & Senior EVP]

Thank you.

[Operator]

And ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back to Mr. Steinour for closing remarks.

[Steve Steinour, Chairman, President & CEO]

So thank you very much for joining us today. And as you've heard, we're operating from a position of strength with the foundation that's been built over a long period of time. We're very, very focused on continued growth and intend to be opportunistic. We're confident in our ability to continue creating value for shareholders. And as a reminder, the Board executives and our colleagues are a top 10 shareholder collectively, reflecting our strong alignment with our shareholders.

So thank you for your support and interest in Huntington. Have a great day.

[Operator]

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.