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spk08: Greetings. Welcome to Huntington Bank Share's fourth quarter earnings call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. As a reminder, this conference is being recorded. At this time, I'd now like to turn the conference over to your host, Tim Sadabris, Director of Investor Relations.
spk00: 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 at 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 Steinauer, Chairman, President, and CEO, 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.
spk02: Thanks, Tim. Good morning, everyone, and welcome. Thank you for joining the call today. We are very pleased to announce our fourth quarter results, which included GAAP net income of $645 million and adjusted net income of $657 million. For the full year, reported GAAP net income was $2.2 billion, and adjusted net income was $2.3 billion. Both results reflect record earnings for Huntington. 2022 marked a year of numerous successes, driven by our team's execution of organic growth initiatives, realization of both expense and revenue synergies from the TCF acquisition, an unwavering focus on credit discipline, and proactive balance sheet management. We ended the year with substantial momentum. clearly the economic environment is becoming increasingly challenging. However, Huntington is better positioned today than at any time since I joined over a dozen years ago. And over those years, we've transformed the risk profile of the bank and remained highly disciplined. We are taking proactive steps now to again position Huntington to outperform. And we enter the year with solid capital levels, top-tier reserves, a growing core deposit base, and strong credit metrics. We continue to see opportunities to grow revenue and profit. Now on to slide four. First, we finished the year with our fourth consecutive quarter of record pre-provision net revenue. This was supported by higher interest income driven by earning asset growth and an expanded net interest margin. Revenue growth has been exceptional over the course of the year, and we intend to protect and grow that revenue base. Second, we delivered broad-based loan growth, XPPP, of 10% year-over-year. As we drove this growth, we also optimized for return while still exceeding our loan growth outlook. One example of this optimization is indirect auto, where our production in the quarter was approximately 15% lower than the prior quarter, while our new loan yields increased by over 100 basis points. Importantly, we continue to grow our deposit base with multiple consecutive quarters of growth. We believe this is a differentiator for Huntington in this environment. It also demonstrates the breadth of our franchise and our colleagues' ability to acquire and deepen primary bank customer relationships. Third, our financial results for the fourth quarter and full year reflect the top tier return profile and we're at or above our medium term targets. These results demonstrate the earnings power of the company and we expect to continue to deliver on these targets. As we intended, we delivered common equity Tier 1 capital to the middle of our 9% to 10% operating range. We are also very pleased to announce a new two-year share repurchase program. Fourth, we ended 22 with strong momentum across the business that we carry into this new year. We remain focused on growth aligned with our risk appetite. Importantly, we have the capital, credit reserves, and strength of balance sheet that give us confidence to continue to deliver on our organic growth priorities. Slide five highlights the tremendous earnings power of the franchise, which has improved sequentially over the course of the year. PPNR is over 60% higher than pre-pandemic levels. Our return on tangible common equity is top tier. We managed our asset sensitivity throughout the year and deliberately positioned the company to benefit from higher interest rates, which resulted in significant revenue growth. We've also been prudent in taking actions to protect this revenue base should we experience lower rates over the next few years. We will continue to be dynamic in this regard with our goal of reducing volatility and creating a tight corridor around the path of spread revenue. At our investor day in November, we shared with you our highly defined set of strategic priorities. We expect these strategies will drive sustained revenue growth and support gains in efficiency over the long term. As you also heard, this management team is a group of experienced operators. To further accelerate the execution of these strategies and support increased efficiency, we will be taking a series of actions during 23 to align our organizational structure with a focus on our critical priorities. We expect these actions will result in new growth and efficiency opportunities. We will share more details on these actions as they're finalized over the course of the first quarter. However, one element will be a voluntary retirement program for our middle and senior management. Overall, I believe this program will be important to support our colleagues and create value for our shareholders. In closing, we are well positioned for continued growth. We have the strategies, the momentum in our businesses to support growth. We also benefit from highly engaged colleagues who have consistently delivered outstanding customer service and are a true differentiator. We have the credit discipline to outperform and remain focused on rigorous expense management, investment prioritization, and capital allocation. We remain committed to our long track record of managing to positive annual operating leverage. and are intently focused on driving shareholder value. Zach, over to you to provide more detail on our financial performance. Thanks, Steve, and good morning, everyone.
spk05: Slide six provides highlights of our fourth quarter results. We reported GAAP earnings per common share of 42 cents, and adjusted EPS was 43 cents. Return on tangible common equity, or ROTCE, came in at 26% for the quarter. Adjusted for notable items, ROTCE was 26.5%. Further adjusting for AOCI, ROTCE was 19.8%. Loan balances continued to expand as total loans increased by $1.9 billion and excluding PPP increased by $2.1 billion. Deposit balances increased by $1.6 billion on an end of period basis, while average deposits were essentially flat compared to the prior quarter. Pre-provision net revenue expanded sequentially by 4.2% from last quarter to $893 million, and on a full-year basis, year-over-year increased by 36% to $3.2 billion. Credit quality remained strong, with net charge-offs of 17 basis points and non-performing assets declining to 50 basis points. Turning to slide 7, average loan balances increased 1.7% quarter-over-quarter driven by both commercial and consumer loans. Commercial loans continue to represent the majority of loan growth. Within commercial, excluding PPP, average loans increased by $1.9 billion, or 2.7% from the prior quarter. Primary components of this commercial growth included distribution finance, which increased $900 million, tied to continued normalization of dealer inventory levels, as well as seasonality, with shipments of winter equipment arriving to dealers. We also saw the continued long-term trend of demand within our asset finance businesses, which drove balances $300 million higher in the quarter. Commercial real estate balances increased by $500 million, largely as a result of production late in the third quarter and lower prepays. End-of-period balances were higher by $180 million. continued to normalize, which drove balances higher by $300 million. Additional increases in line utilization over time represents a substantial ongoing opportunity. We also saw higher balances in specialty verticals, such as mid-corporate and tech and telecom, which were offset by lower balances in other areas as a result of our return optimization initiatives. In consumer, growth was led by residential mortgage, which increased by $500 million, as on-sheet production outpaced runoff and was supported by slower prepaid speeds. Partially offsetting this growth were lower auto balances, which declined by $230 million, and RV Marine, which declined by $50 million. Turning to slide eight, we delivered $1.6 billion of deposit growth for the quarter and $4.6 billion for the year on an ending basis. On an average basis, deposits were lower by two tenths of 1%, while increasing 2.4% year over year. Competition for deposits has intensified, beginning in earnest in September and continuing into the fourth quarter. Notwithstanding that, we are pleased with the traction we saw over the course of the quarter as our teams delivered robust production, demonstrating the deposit gathering capabilities across the bank. Ending deposit growth was led by consumer which increased by $1.6 billion. We saw a mixed shift in line with our expectations, including incremental growth in both money market and time deposits. We continue to remain disciplined on deposit pricing, with our total cost of deposits coming in at 64 basis points for the fourth quarter. We will remain dynamic, balancing core deposit growth, the competitive rate environment, and the utilization of a broad range of funding options. On slide 9, we reported another quarter of sequential expansion of both net interest income and NIM. Core net interest income, excluding PPP and purchase accounting accretion, increased by $67 million, or 5%, to $1,459,000,000. Net interest margin expanded 10 basis points on a gap basis from the prior quarter and expanded 11 basis points on a core basis, excluding accretion. Slide 10 highlights our high-quality deposit base and diversified funding profile. For the current cycle to date, our beta on total cost of deposits was 17%. As we have noted, we expect deposit rates to continue to trend higher from here over the course of the rate cycle. Overall, our beta continues to track to our expectations. Turning to slide 11, Throughout 2022, we were deliberate in managing the balance sheet to benefit from asset sensitivity. We also incrementally added to our hedging program to manage possible downside rate risks over the longer term. During the quarter, we executed a net $3.2 billion of received fixed swaps and $800 million of forward starting swaption callers. At this point, based on the current rate outlook and yield curve opportunities, We believe we have optimized the size of the program. We are comfortable with our position today as we balance near-term costs versus longer-term protection. As always, we will be dynamic as we monitor the outlook and the yield curve. We maintain unused hedge capacity that we could deploy should the curve revert and or steepen to a level where we would add incremental downside rate protection hedges. On the securities portfolio, we saw another step up in reported yields quarter over quarter. We are benefiting from reinvestment as well as the hedge strategy to protect capital. We will continue to reinvest cash flows of approximately $1 billion each quarter at attractive new purchase yields around 5%. Moving to slide 12, non-interest income was $499 million, up $1 million from last quarter. We drove record activity within our capital markets businesses during the quarter and throughout 2022. Capstone continued to perform well and our underlying capital markets businesses outside of Capstone finished the year strong, up 26% year over year. We remain pleased with the client engagement we are seeing in the wealth management business with another positive quarter of net asset flows. On a year over year basis, We saw lower mortgage banking income as a result of the higher rate environment and from lower deposit service charges from fair play enhancements we implemented during 2022. Offsetting these factors were higher capital markets revenues and payments revenues. Importantly, we're executing on our strategy to drive higher value revenue streams and our fee mix continues to trend favorably. Moving on to slide 13, GAAP non-interest expense increased $24 million compared to the prior quarter. Adjusted for notable items, core expenses increased by $19 million. This quarterly increase in core expenses was primarily the result of revenue-driven compensation tied to capital markets production. Additionally, we saw seasonally higher medical claims in the quarter, which increased by $16 million. Underlying these results Core expenses were well controlled, demonstrating our commitment to disciplined expense management. Slide 14 recaps our capital position. Common equity tier one increased to 9.44%. Our tangible common equity ratio, or TCE, increased to 5.55%. Adjusting for AOCI, our TCE ratio was 7.3%. We ended the year having delivered on our plan to drive common equity tier one to the middle of our 9% to 10% operating range. Going forward, our capital priorities have not changed. Fund organic growth, support our dividend, and provide capacity for all other uses, including share repurchases. After having held back on share repurchases for the last several quarters, our expectation is that over the course of 2023 and beyond, we will now return to a more normalized capital distribution mix. including share repurchases. Our board has authorized a $1 billion share repurchase program through the end of 2024. Given the current economic outlook, our thinking is that we will not actively repurchase shares during the first half of 2023 as we watch the path of the economy. This may result in capital ratios continuing to expand in the near term. We like the flexibility the program provides, and we believe it is prudent to maintain an authorized share repurchase program as part of our overall capital management framework. On slide 15, credit quality continues to perform very well. As mentioned, net charge-offs were 17 basis points for the quarter. This was higher than last quarter by two basis points and up five basis points from the prior year as credit performance continues to normalize. Non-performing assets declined from the previous quarter and have reduced for six consecutive quarters. Criticized loans have similarly improved for four consecutive quarters. Allowance for credit losses was up slightly, driving the coverage ratio higher to 1.9% of total loans. Turning to slide 16, you will note a strong reserve position. As I mentioned, the portfolios continue to perform extraordinarily well, and we believe our disciplined approach to credit through the cycle underpins the overall strength of our balance sheet. We were pleased to update our medium-term financial targets at Investor Day in November, and these form the foundation of our expectations over our strategic planning horizon. We believe these metrics are at the core of value creation, profit growth, return on capital, and the commitment to drive positive annual operating leverage. Turning to slide 18, let me share some thoughts on our 2023 outlook. As we discussed at Investor Day, We analyze multiple potential economic scenarios to project financial performance and develop management action plans. Our targets are anchored on a baseline scenario that is informed by the consensus economic outlook and the forward yield curve as of December 31st. The baseline assumes a mild recession in 2023 with modest net GDP growth for the full year. The economy is expected to exit the year on a path toward recovery. with inflation gradually subsiding. Since Investor Day, the economic outlook is incrementally worse and is likely at the lower end of the baseline scenario outcomes. Our baseline outlook for 2023 is for average loans to grow between 5% and 7%, led by commercial with more modest growth in consumer. We will continue to focus on optimizing for returns and driving loan expansion in select areas. Deposits are expected to increase between 1 and 4%, reflecting continued growth and deepening of customer and primary bank relationships. Net interest income is expected to increase between 8 and 11%, driven by continued earning asset growth and expanded full-year net interest margin. Non-interest income is projected to be approximately flat. We expect continued robust performance from our areas of strategic focus, capital markets, payments and wealth management. During 2023, several other factors are offsetting that growth, including our anticipated holding of the majority of our SBA loan production on sheet, thereby reducing near-term fee revenue in favor of longer-term high-return spread revenue. Lower income of approximately $23 million associated with purchase accounting accretion in fees. Please refer to slide 30 for more details. Lower operating lease revenue as we continue to transition to more capital leases. Importantly, we expect this will result in lower operating lease depreciation expense as well. Lower mortgage banking income for the full year 2023 versus 2022. And finally, in light of the economic outlook, we are implementing risk mitigating deposit policy changes that will result in a lower incidence of overdrafts and related service charges. In addition, we are reducing NSF fees to zero in the first quarter. This will result in an approximate $5 million reduction in fee income per quarter, which we expect to be more than offset by lower associated charge-offs. As you know, the first quarter is generally a seasonal low for overall fee income. We expect fee income will grow sequentially throughout the remainder of the year. On expenses, as Steve noted, We intend to hold growth to a low level given the environment, even as we remain committed to funding critical long-term investments. We plan to manage core underlying expense growth between 2% and 4% for the full year. This level of expense growth benefits from the ongoing efficiency initiatives we've discussed previously, such as operation accelerate, branch optimization, and the organizational alignment actions that Steve highlighted. Added to the core expense growth, we expect approximately $60 million higher expenses from the full year run rate of Capstone and Tirana and $33 million of increased FDIC insurance expense associated with the surcharge. In addition, we expect the first half of the year to include some amount of restructuring charges associated with the expense management actions we are taking. We will provide more details about these actions later in the quarter. Overall, our low expense growth coupled with expanded revenues, is expected to support another year of positive operating leverage. We expect net charge-offs will be on the low end of our long-term through-the-cycle range of 25 to 45 basis points. Our 2023 guidance reflects the current macroeconomic outlook. We will continue to be diligent in analyzing the macro environment and will react as needed to manage as the year plays out. We ended 2022 in a position of strength and have good momentum. We have every expectation of continuing to outperform this year. With that, we will conclude our prepared remarks and move to questions and answers. Tim, over to you.
spk00: Thank you, Zach. Operator, we will now take questions. We ask that as a courtesy to your peers, each person ask only one question and one related follow-up. And then if that person has additional questions, he or she can add themselves back into the queue. Thank you.
spk08: Thank you. To ask a question at this time, you may press star 1 on your telephone keypad and the confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Thank you. Thank you. Our first question is from the line of Manon Gosselia with Morgan Stanley. Please proceed with your question.
spk01: Hey, good morning. Hey, question on deposit growth. You mentioned deposit competition has intensified. quite a bit and we can see from the CD rates that you're offering the market that you've been proactively raising the CD rates and offering more 14-month CDs. So just given all of that, can you talk about how much of the projected deposit growth in 2023 will be driven by CDs and what the overall deposit mix is likely to look like?
spk06: Sure. Yeah, this is Zach. I'll take that question. Thank you for asking it. Generally speaking, we're seeing our deposit growth continue to trend pretty well in line with the outlook that we've given between 1% and 4% growth for the full year. So we think we're on that run rate. I think it will be balanced between both consumer and commercial. And to your point, we'll continue to, the mix of that deposit gathering will continue to trend as we expected and is baked into our overall rate and beta expectations toward higher rate products like time deposits, like money markets. I think we're beginning, we're operating in this rate cycle clearly at a lower level of mix of those products than we were, for example, in the last rate cycle. So we'll continue to see that trend higher throughout the course of the next several quarters, but in line with our general expectations. It all comes back to our focus of deepening relationships with our existing customers and our primary bank relationships. And so we think it's working pretty well and we expect that it continues to go out into
spk01: Got it. And then, you know, maybe on the NIM trajectory from here, you know, can you comment on if we're close to peak? And, you know, given what you said on the hedges and the fact that you're through the program, at least for now, I mean, how should we think about a floor for NIM from here over the course of the next four to eight quarters if the Fed does start cutting rates? Thanks.
spk06: Yeah. On the topic of NIM, you know, to take a step back, we've significantly benefited over the last three quarters from our explicit actions to manage NIM and to manage asset sensitivity. Seen more than 60 basis points, NIM expansion just the last three quarters alone, and that was very intentional with the mind toward continuing our top tier performance in NIM over the course of long periods of time that we've done. As we stand now, as we start to look into 23, We do believe there's more room to go on asset betas, and we'll see yields continuing to increase out over the next three quarters. However, we're further along in that process, probably three quarters of the way through, than we are on the deposit beta side, where we also expect, as we've said, rates continue to track higher over the course of the next several quarters. We're probably only about halfway through the deposit beta cycle, and when you couple that dynamic with what is currently the expectation in the yield curve that we'll see short end rates fall toward the latter part of 2024, it is reasonable to project a somewhat downward trajectory of NIM over the course of 2023. Our goal will be to manage NIM as we've said on a number of occasions previously within as tight a corridor in 2023 as we can, really protecting the downside with that hedging program and ultimately driving toward sequential and sustained growth in interest income on a dollar basis. I think when we couple what we expect to be a pretty strong NIM level overall with The loan growth that we expect to continue to drive, again, to the guidance 5% to 7% over the course of this year, we'll see that NII dollar rates just continue to expand, and so that's another focus.
spk01: Great. Thank you.
spk06: Thank you.
spk08: Our next question is from the line of Stephen Alexopoulos with J.P. Morgan. Please just hear through your questions.
spk07: Hey, good morning, everyone. Good morning, Stephen. Good morning. So to follow up, Zach, with the NIM expected to trend down, given all the hedges and protection you've put in place, sort of tighten that band, can you frame for us how much downside could we see? What's the range?
spk06: Yeah, thank you for the question. Look, I think the trend is something on the order of single digits reduction on kind of a quarterly basis as we go throughout 2023-2024. There's a range of uncertainties, so I want to be clear not being overly precise and just think about all the factors that are going to play into that. The Fed funds' actions, which as you know from staring at the dot plots, are not aligned with the market expectations. So how that all plays out I think is going to be the most important factor. The pace and trajectory of beta, which at this point seems to be fairly well aligned linear across time, but we'll have to wait and see how that goes and include, you know, the big one is the economy and where that tracks, you know, over the near term. And so it's difficult to be overly precise, so I'm trying not to and bring back to dollar. Our goal will be to drive NII on a dollar basis. But as I said, I do expect some downward trajectory in them. probably something on the order of single digits on a sequential basis each quarter.
spk07: Got it. That's helpful. And then, Zach, when we look at, you're obviously expecting more loan growth than deposit growth, fairly large issuance of sub-debt this quarter. Can you walk us through the funding strategy? I know you said you expect overall growth in average earning assets, but what's the funding strategy? It seems like you have to do much more than just on the deposit side, and maybe what will be the cost of that. Thanks.
spk06: Yeah. It's an important point and something that we feel is a point of strength and an advantage at this point in the cycle given that we're coming to the early to middle stages of the cycle. That's still a very advantageous overall position in terms of loan to deposit ratio, the mix of important categories of deposits like time deposits and our non-customer funding relative to history. It allows us as I've mentioned on a number of previous occasions, to utilize a balanced source of funding. If you look back at what happened in 2022, we grew loans at 10%, deposits were more in the 2.5% range. Clearly, loan deposit ratios tracked up and we used a broad range of other funding sources like long-term debt, like the FHLB and other non-customer sources to balance out. the same is going to be true for 2023, albeit to a somewhat less degree. Thinking about loan growth in that, you know, mid to high single digits range, five to seven, you know, deposit growth in the one to four does imply we'll continue to see loan to deposit ratios tick up. And you'll see us, therefore, continue to utilize other balanced funding sources like the Federal Home Loan Bank and other non-customer sources of funding there. You know, the rates that we're seeing are, are pretty reasonable in the incremental economics. Certainly that loan growth continues to be very accretive to return on capital and the overall cost of deposits and funding within that beta expectation or that NIM expectation that I just talked about.
spk07: Got it. Thanks for taking my questions. Thank you, Stephen.
spk08: Our next question is from the line of Ken Houston with Jefferies. Please proceed with your question.
spk10: Hey, good morning. Hey, Zach, I wanted to ask you, I know we talked about this last quarter, the security swaps that you had added a nice amount of interest income again. And I'm just wondering, can you help us understand just the benefit from that, if ineffectiveness helped that again? And just how does that go? How do we track that going forward relative to just interest rates in terms of the benefits that you should get from there?
spk06: Yeah. They were a very powerful benefit. They've protected, as you know, about a third of what would have otherwise been AOC line mark reduction, which was their primary attention originally, but also have played out in terms of really strong reported yields in the securities portfolio. Roughly half of the approximately 50-bip increase in securities yields was from that hedging program, to give you a sense of the scale of it. Where it goes from here in terms of incremental benefit is going to be to some degree a function of just where that mid portion of the curve goes. And at this point, it's fairly well topped out. I'm not expecting a ton more lift there. The lift from that has reduced somewhat from the third quarter, but still is very accretive. We're not adding to that portfolio now. And so I think we're getting the benefit that we expected from it.
spk10: Okay, great, and then one follow up on deposit beta. 17% total cumulative so far through the cycle. Can you just remind us what you're thinking about betas from here and just be super clear for us if you don't mind on, I think you guys usually do talk on total.
spk06: Yep, sure. So it was 17, to give you a sense just from tracking across time, it was 6% in Q2, 11% in Q3, 17% in Q4. It continues to track and kind of in that additional five to six to seven percent range each quarter. And the expectation as we go out into Q1 is going to be sort of more of the same, continuing out over until we get into the middle part of the year. Our planning assumption, Ken, is something on the order of 35% total beta through the cycle, which would indicate we're about halfway through to the prior point that I made. With that being said, I will tell you where we're intently focused is on the day-to-day management. Really, very, very rigorous looking client by client in the commercial portfolio, geography by geography in the consumer portfolio, and ensuring that we can stay competitive and ensure that we've got a strong deposit franchise. We'll continue to wait and see and manage against that. The outlook changes will let you know, but at this point, it continues to track according to that broad expectation.
spk10: Okay, great. Thank you, Zach.
spk06: Thank you.
spk08: Our next question is from the line of Erica Najarian with UBS. Please proceed with your questions.
spk04: Hi, good morning. I wanted to switch topics. Good morning. You mentioned on slide 18 that you expect to be at the low end of your net charge-off range. You know, the tone very quickly changed this week from, you know, soft landing to hard landing. I guess my question here is this may be obvious to us that have covered the company for a while, but what makes you confident despite the deteriorating economic outlook that you could stay at the low end of that already pretty low range? And given some of – there was a – I wouldn't call them a peer, but there was a company that reported – pretty eye-popping delinquency numbers in auto this morning. I'm wondering if you could give us what's going on with auto credit trends underneath, and again, re-remind us why you feel confident about how that portfolio would perform in an economic downturn.
spk06: Hey, Eric, it's Rich. Let me take that. I'll answer your second question first with respect to auto. So we are seeing delinquencies in our portfolio. And again, remember, this is a prime and super prime And as we talked about at Investor Day, we've been in this business for decades, and we've got very sophisticated custom scorecards that we use in our client selection process. So we feel very good about where this business is today, and it's been through numerous cycles, and it's proven itself that it can outperform peers from a lost content through various cycles. So we feel good about that. the delinquencies right now are right where we would expect them to be uh from a seasonal standpoint uh if you go back and you look at where delinquencies uh would have been in that 2018 and 2019 area we're still trending below those you know pre-coveted levels so you know we feel good there and we've been very proactive as it relates to you know how we're managing our limited values in that space uh as well so you know i i don't have any real concerns about our indirect auto space. I feel very comfortable with how that business is running. With respect to the overall comfort that we have in our net charge-off forecast, I think it goes back to our customer makeup. Again, as I talked about it yesterday, on the consumer side, we are overwhelmingly a secure creditor, 95%. of our loans are secured. And again, we've got that prime and super prime focus and high FICO's of origination around 770. So it is a very strong book. And throughout all of that book, I know I just talked about auto, but even, you know, RV, Marine, Resi, all of those portfolios are showing very well from a delinquency standpoint. So we feel good there. On the commercial side, we have taken a lot of steps to reposition this book over the last several years, going through into more specialty businesses, more larger companies, public companies. So we feel that we've mitigated the lost content in that portfolio as well. So even though, as Zach pointed out, we're looking at more of a mild recession than a severe landing That's why we feel comfortable with where we are from a charge-off forecast, you know, that low end. Now, clearly, if the economy worsens, you know, where we land within that range is going to depend on where the economy goes and how the Fed reacts. But, you know, at this point, you know, we're comfortable with where we put that guidance. Eric, this is Steve. Remember, the guidance is through the cycle, and we've been well below the through-the-cycle average. And at this point, we're guiding to the lowest end of the range, and we've been strategic on how we position the lending activities now for a dozen years. We've been very disciplined, rich in team, along with the lending teams that have adhered to the disciplines, didn't open up in some of the areas that might have been a bit frothy in recent vintages. So we've got a really good core book on both the commercial side and as a super prime and secured lender generally on the consumer side, we actually think of that as a lower risk book. So our aggregate moderate to low risk profile and discipline over many years will serve us well, certainly in auto and frankly the entire portfolio.
spk04: Thank you for that. And my second question is, you know, on that 6% to 9% PPNR growth medium-term target, you know, clearly you expect to hit that this year. And I'm wondering, you know, obviously it gets more difficult if the Fed is cutting, which a lot of investors expect for 2024. And maybe the question is, I know we'll hear more from you on this expense management actions that you're taking for which you will, incur a restructuring charge, but is that an example of the commitment that Huntington has to deliver this PPNR growth range with consistency over the medium term on an annual basis, even if the revenue tailwinds dissipate, like rates?
spk06: Eric, this is Zach. I'll take that one. And the answer to your question is yes. in terms of that very much is a sign of our trying to look ahead, not only 2023, but also over the entirety of the strategic planning horizon and ensure that we're setting up the overall financial performance in terms of revenue and the growth rate of overall expenses such that we can achieve the objectives in terms of profit growth. That is a very deeply held objective, and we're not only looking at the short term, but at the long term to achieve it. As we talked about a fair amount yesterday, there are multiple strategic levers that we use to be able to manage overall expenses to grow less than revenue to support that PPR growth. Even as we drive a faster growth rate of the investments within expenses to drive ultimately business growth over the long term, but the efficiency drivers, operation accelerate that's going in region taking waste and costs out of the system even as we improve productivity. Our long track record of optimizing the consumer and retail branch distribution network, which is still very relevant, still really matters, but does represent an opportunity over time to reduce and to harvest expense saves. and things like this organizational alignment, which are designed to help us to improve efficiency and hold cost growth at a low level. I will note it's in the guidance that I've given in terms of overall core expense growth for 2023. but importantly also helps us to achieve our strategic objectives, align our organization yet even more toward our most important strategic priorities and to operate as efficiently and at pace as we can. So we are extremely focused on driving that long-term efficiency program which is an important component of the PP&R guidance. And I do expect we'll achieve the financial medium-term targets this year. That's what's baked into and embodied by our overall guidance. I think, Eric, that Steve if I could add on just a bit. As you'll remember from yesterday, Zach shared a number of economic scenarios. And we were asked a question and commented that we would take action if the scenarios the economy worsened and the more challenging scenario emerged. We've already closed 32 branches this month. We are taking action consistent with our prior statement and the commitment around driving towards these medium term financial goals. We're looking ahead as well to 24 with how we're positioning the reinvestment off of these best actions. The team's doing a great job. It's a quick pivot, if you will, from a record year and record quarter, but it's with a very clear set of actions and plan that we're executing. Thank you.
spk08: The next question is from the line of John Armstrong with RBC Capital Markets. Pleased to see you with your question.
spk03: Hey, thanks. Good morning, everyone. Morning, John. Just a follow-up on Erica's first question. You guys talked about your buyback being on pause because you're watching the path of the economy in the first half. You talked a little bit about the economic outlook since the investor day was slightly worse. Yet, Rich, you sound pretty confident. It feels like you feel good about your credit outlook today. Just help us square that a little bit more. Are you actually seeing erosion maybe outside of your portfolios? Or help us understand your overall thinking, because it seems like it's pretty positive from my view.
spk06: I would say it's positive right now, and we're certainly cautious as we enter a downturn. But everything that I'm looking at right now, John, is holding water exactly where we thought it would be. Our delinquencies... Both in commercial and consumer are right where we would expect them to be. We had a very sharp drop in our commercial delinquencies and our commercial real estate delinquencies are essentially nothing. The current class momentum and NPA momentum that we've got both down 20% year over year. puts us in really good stead as we enter a downturn. We're looking at everything. Every portfolio we're going deep into to make sure that we're proactive in identifying potential issues and then trying to get ahead of them in terms of working with customers as there's potential problems. You know, certainly the headwinds are there in the economy, but we feel good about where the portfolio is positioned. Like I said, we're not going to bat a thousand. We do have higher losses forecasted in 23 than we had in 22. So we understand it's going to be a more challenging environment, but we feel good where we're sitting.
spk03: And then can you guys touch on the one C-line that stood out was capital markets. Can you touch on what you're seeing there? You talked about Capstone and then some of your other businesses. Are these referrals coming to Capstone internally? Is it business generated on their own? And what do you think there in terms of the longer-term runway? Thanks.
spk06: In terms of, this is Zach, I'll take that one. Capital markets is a real bright spot for us. the core underlying capital markets excluding capstone grew 26% revenue year over year in 2022, and we expect another run rate of double-digit, you know, teens or above revenue growth as we go into 2023. So we're seeing just really sustained traction, and the underlying strategy there is to, you know, deepen relationships with, with additional clients, continue to penetrate that set of services and products into our core customer base and reap the benefits of it. You know, it's been an area, as you know, that we've been investing in considerably over time, and we're seeing that play through into incremental revenue growth. And then capstone, to your point, is you know, is a nice addition to that. And I would tell you that Capstone is doing really, really well. They beat the plan for Q3. You know, it's overall, you know, more than the $100 million run rate if you look at the back half of revenues. If you look at the back half of 22 and we expect that to continue and sustain and just continue to grow as we go into 23. It's early days, I would say, in getting client referrals from the Huntington base, but it's beginning. We are seeing, particularly as it relates to the pipeline and the future, a lot of positive engagement of core Huntington clients with the Capstone team and with the service set there. It's going to be an area that just continues to bear fruit, and we're quite bullish about the opportunity to grow capstones, what was previously $100 billion revenue run rate, up into something that continues to perform well, and above that, go forward over time. So it's definitely a strong point at this point. I'll add to that a little bit, John, if I can. So capstones had a good performance thus far. They have a very strong pipeline coming into the year. Obviously, multiples have changed. Valuation is impacted by that. Timing becomes a little more uncertain, but we're really pleased with that. The integration into the bank channels is going very, very well. The core businesses, foreign exchange, record year, institutional sales and trading, commodities has had very good performance. A number of the businesses are doing very, very well at the core and expect that they'll continue. The laggard is, as you would expect, the rates, businesses, given the inverted curve. But this is an area of strategic growth for us. We're continuing to invest in it. And the integration of both Capstone and the combined efforts of our core teams in what you heard at the investor day, make us very bullish about 2023 and beyond.
spk03: Okay. Thank you.
spk06: Thank you. Thanks, John.
spk08: The next question is from the line of Scott Seifers with Piper Sandler. Pleased to see you with your questions. Morning, guys.
spk09: Hey. I just wanted to ask one back on credit, just sort of in light of your updated economic assumptions. What sort of additional reserving needs do you think Huntington might have? I mean, you're already starting with, you know, 190 plus reserve here. So, I mean, does that seem sufficient in light of what you're thinking, or would it continue to drift upward a bit?
spk06: Hey, Scott. It's Rich. I'll take that. So, you know, as you saw, we held our coverage levels flat in the second quarter, and then we had two incremental bills in Q3 and Q4. So the 190 coverage that we're sitting with today we think is fully reflective of the current economic scenario. you know, where the reserve goes from there is really going to be a function in the short term of where the economy is heading, right? If we see significant degradation, we'll have to, you know, react to that, or if it isn't as bad, you know, we'll react there. So, you know, it's hard to answer it. We go through that process every quarter in terms of looking at the economic scenario that's in front of us and, you know, what the potential for improvement or degradation is, and You know, we make the call at the end of the quarter based on all that. So, you know, the near term is really going to depend on where the economy shakes out. I would say that, you know, longer term as we get past, you know, the downturn, you know, however long it might be, we do think that, you know, we will bring that reserve coverage down over time. You know, it's just a question of the timing around that. And then year-end reserves, that reflects this. adjusted thinking in terms of the baseline economic scenario of a softening economy and a problem.
spk09: Yep. Okay. Perfect. Thank you. And then, Zach, sort of a ticky-tack question. Just the expense guidance for the full year, I'm presuming that includes the restructuring charges to which you alluded earlier. I know you said you'd talk in more detail about those later, but do you have maybe an approximate level of what we might expect just to get a sense for what sort of underlying expense growth might look like from here on out?
spk06: Yeah, thanks, Scott, for asking the question. I wanted to take the opportunity to clarify. The guidance we've given is 2% to 4% growth in underlying core, and on top of that, the run rate for capital in Tehran, which is around $60 million, plus the FDIC surcharge, which we estimate to be $33 million, to be relatively precise about that. We have not yet fully sized the potential restructuring costs from the organizational alignment actions that Steve mentioned. That is yet to be included in that guidance, just to put a very specific point on that. I don't expect it to be overly large, but we'll have to see. Ultimately, it'll be a function of a number of factors, including the final nature of the changes. Importantly, as Steve noted, we're instituting a voluntary retirement program, which by its very name, has a function of employee selection and take up on their own. So there will be some degree of variability until we have a sense of where that program lay out. So more to come on that. There's a few opportunities during the first quarter for us to provide additional updates around the nature of the program and the size and we intend to do that as we get further out in the Q&A.
spk09: Perfect. Okay, I appreciate that clarification.
spk06: There's some pickup on that expense, that one-time expense, that we would expect to see just in the run rate in 23, and there may be other things we can do to absorb that also not in the forecast.
spk09: Okay. Perfect. Thank you all very much.
spk08: Our next question comes from the line of Matt O'Connor with Deutsche Bank. Pleased to see you with your question.
spk11: Good morning. I just wanted to push on the buybacks. You've got almost 9.5% CEQ on capital. You've got very strong reserves. You've got very strong capital generation. Solid loan growth, but not going to consume a ton of capital. I seem pretty confident on credit. So I guess I'm just trying to better understand why you wouldn't buy back stock in the first half. And then just to kind of throw it out there, It feels like the uncertainty might increase as we look to the back half. So what would make you more confident to buy back in the second half, heading into maybe more macro uncertainty?
spk06: Yeah, Matt, it's a good question. I think just taking a step back and broadly to frame it, the expectation now as we get out over the course of the totality of 23 and certainly as we think about 24 and beyond to get back to a more normal mix overall payout ratios between dividends and insured purchases and retaining capital to grow. And so I think you could see this buyback as really just in the program, with the repurchase program as being indicative of that, part of that, and I think a really healthy sign. When we thought a little more tactically, zooming in into the near term, you just really want to see the depth of the economic environment during the course of 23 before you make any substantive or significant commitments. Hopefully the logic of that is understood. How long exactly does it take to get clarity, to your point, is somewhat uncertain. I suspect we'll know a bit more over the course of Q1 and as we get into Q2. If it's more resolved at that point, then I think we'd be more active, but it's still highly uncertain. We'll have to see and be dynamic. But generally speaking, the size of the program was designed to keep us in the middle of our CET1 operating range over the course of the preceding period. And so that'll be our plan to generally manage in that way, ideally with a bit more clarity in the near term.
spk11: Okay, and then as we think about potential uses of the capital besides buybacks, just remind us your appetite for bolt-on deals, and I guess specifically within fees, right? Because we kind of step back right now in interest income. Maybe it's not peaking, but it's probably not going to be a key driver of growth as we get through this year and beyond. And I know you guys have been talking about kind of better balancing from that fee mix over time, so. What's the appetite to do something, whether it's small or maybe bigger than you've done in the past? Thank you.
spk06: Matt, Steve, we are interested in building our fee income opportunities and that revenue stream. And so if we can find things that we think make sense that would enhance our current business lines and what we offer to our customers, we would be interested. Just as last year, we were fortunate enough to get the capstone report and a FinTech payment stream called Toronto. So we'll be looking as the year progresses whether it makes sense to bolster the acquisition on the fee side of our businesses. But that's not sort of an intended set-aside on that buyback equation that I just related, you know, our capital priorities haven't changed.
spk11: Okay. Thank you very much.
spk08: Thank you. At this time, we've reached the end of the question and answer session, and I'll now turn the floor back to Mr. Steinhauer for closing remarks.
spk06: So thank you very much for joining us today. As you know, we're very pleased with the record year for Huntington and a third straight quarter of record debt income, fourth straight quarter of PPR growth. We committed this year with a lot of momentum. We think we're well-positioned to manage through a mild recession, and we remain committed to and confident of our ability to continue creating value for shareholders. And as a reminder, the board executives, our colleagues, are a top-ten shareholder collectively, reflecting our strong alignment strong alignment with our shareholders. So thank you for your support and interest in Huntington. Have a great day.
spk08: This concludes today's conference. We may disconnect at this time, and thank you for your participation.
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