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spk15: Greetings and welcome to the Huntington Bank Shares, fourth quarter earnings call. At this time, all participants will be in listen-only mode. The 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. I'd now like to turn the conference over to your host, Tim Sedalves, Director of Investor Relations.
spk11: Thank you, operator. Welcome, everyone, and good morning. Copies of the slides we will be reviewing today can be found on 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 Steinauer, Chairman, President, and CEO, and Zach Wasserman, Chief Financial Officer. Rich Pohle, Chief Credit Officer, will join us for the Q&A. As noted on slide two, today's discussion, including the Q&A period, will contain forward-looking statements. Such statements are based on information and assumptions available at this time and are subject to changes, risks, and uncertainties, which may cause actual results to differ materially. We assume no obligation to update such statements. For a complete discussion of risk and uncertainties, please refer to this slide and material filed with the SEC, including our most recent forms 10-K, 10-Q, and 8-K filings. Let me now turn it over to Steve.
spk03: Thanks, Tim. Good morning, everyone, and thank you for joining the call today. Let me begin on slide three. 2021 was a transformational year for Huntington. We continued to live our purpose and remain focused on our vision to become the country's leading people-first digitally powered bank. We executed on our organic growth initiatives along with a timely closing of the TCF acquisition. In the fourth quarter, we began by successfully completing conversion activities. And by the time we exited the quarter, we'd refocused our teams on driving growth. We delivered record new loan production and continued to build on revenue initiatives. We entered 22 with added scale, density, new markets, and specialty businesses. We are intently focused on driving growth and delivering top-tier financial performance. On slide four, we're pleased to report our excellent fourth quarter results centered on four key areas. First, we finished 21 with record full-year revenue growth and broad-based loan production. We delivered strong performance across the board in our commercial businesses. Second, our targeted cost savings are on track for full realization. This includes both the synergies resulting from TCF as well as the additional expense actions we announced last quarter. Third, we are executing on key initiatives to deliver sustainable growth. Pipelines are robust entering 22, and our teams are focused on driving revenue growth, including the revenue synergy initiatives related to our new markets and capabilities. Finally, we are very confident in our outlook for 2022 and beyond. Slide 5 recaps our year in review. Our financial results reflect the hard work of our teams over the course of 2021. Return on tangible common equity came in at 19%, excluding notable items. Credit performed very well, and we returned significant capital to our shareholders. We delivered robust organic growth in both consumer and business checking households, with year-over-year growth of 4.5% and 7%, respectively. We continue to invest in revenue-producing colleagues and initiatives, including new and expanded commercial banking verticals, capital markets, cards and payments, and wealth management. In the commercial bank, we launched Edge, an innovative analytics tool that supports our bankers' deepening efforts incorporating advanced data and insights tailored to each customer. In consumer banking, we built upon our fair play approach and launched new and compelling products and services such as standby cash and early pay. We expanded our leading SBA lending program to new states as well as added to our practice finance capabilities. We were honored to be recognized for our expertise, evidenced by being ranked number one by J.D. Power for both customer satisfaction within our region as well as the top consumer mobile app amongst regional banks for the third consecutive year. Impressively, this was all achieved while our team successfully completed the closing and conversion of TCF. On the capital front, we were pleased to accelerate our share repurchase program as well as increase the common stock dividend. In closing, our teams accomplished a tremendous amount of work over the course of the year, and I want to thank all of our colleagues and our management team who supported these efforts. I am increasingly bullish on the year ahead. The level of excitement is building across the organization, and our colleagues are energized and focused. We look forward to sharing our successes with all of you as we move throughout the year. Zach, over to you to provide more detail on our financial performance.
spk04: Thanks, Steve, and good morning, everyone. Slide 6 provides highlights of our fourth quarter results. We reported gap earnings per common share of $0.26, adjusted for notable items, earnings per common share were $0.36. Return on tangible common equity, or ROTCE, came in at 13.2% for the quarter. Adjusted for notable items, ROTCE was 18.2%. We were pleased to see loan balances rebound substantially during the quarter, driven by robust new production activity, as total loans increased by $1.4 billion, and including PPP runoff, loans increased by $2.4 billion. Consistent with our plan, we reduced core expenses, excluding notable items, by $21 million from last quarter, driven by the realization of cost synergies and ongoing highly disciplined expense management. We managed absolute core expense dollars lower while continuing to grow investments in strategic areas across the bank, such as digital capabilities, marketing to drive new customer acquisition, and relationship deepening, and select new personnel additions to support our revenue growth initiatives. Within fee income categories, we saw continued momentum in our capital markets as well as wealth and investment businesses. Strong credit performance continued to be a hallmark, with net charge-offs of 12 basis points and non-performing assets declining by 16% from the prior quarter. We actively managed our capital base, repurchasing $150 million of common stock in the fourth quarter. To date, we have completed $650 million of our $800 million share repurchase program. Turning to slide seven, period end loan balances increased by 1.2 percent quarter over quarter, totaling $111.9 billion. Total loan balances excluding PPP increased 2.4 billion, or 2.2 percent, during the quarter. driven by commercial loans. Within commercial, excluding PPP, loans increased by $2.5 billion, or 4.4%, compared to the prior quarter. This growth was broad-based across all major portfolios and was driven by record new commercial loan production. Growth was led by middle market, corporate, and specialty banking, which increased by $1 billion and represented 40% of total commercial loan growth this quarter. Inventory finance increased by $597 million. Auto dealer floor plan increased by $276 million. Asset finance increased by $160 million. And commercial real estate increased by $267 million. Within corporate and specialty banking, each of our commercial verticals contributed to growth this quarter, including corporate banking, tech and telecom, healthcare, and franchise. Inventory finance growth was driven by a combination of seasonally higher balances due to inventory shipments in the corridor, as well as expansion of existing customer programs. Higher utilization levels drove approximately two-thirds of the increased balances. In auto floor plan, we are continuing to add new dealer relationships and growing our overall commitment levels. In addition, balances benefited from improved utilization rates, which increased from the mid-20s to approximately 30% in the quarter. Even as we delivered record loan production, calling activities across the business continued at a rapid pace. We ended the quarter with commercial loan pipelines 34% higher versus the prior quarter and 49% higher than prior year, supporting our outlook for continued loan growth, ex-PPP, throughout 2022. On the consumer side, residential mortgage increased by $334 million, and auto increased by $129 million. This was offset by home equity, which declined by $369 million. Turning to slide eight, deposit balances increased by $1.4 billion as we continue to experience elevated customer liquidity and optimize our funding, reducing CD balances by over $700 million. Consumer deposit balances increased by $1.6 billion from the prior quarter. commercial balances increased by $300 million from the prior quarter. On slide nine, reported net interest income declined modestly from the prior quarter as a result of lower PPP revenue. Core net interest income, excluding PPP and purchase accounting accretion, was stable at $1,085,000,000. With ending loan balances well above average balances for the quarter, we enter the first quarter of 2022 with a solid launch point from which to grow core net interest income going forward. Additionally, we continue to manage excess liquidity by funding loan growth and adding to the securities portfolio, reducing excess cash of the Fed to $3.7 billion from $8.1 billion at prior quarter end. On an average basis for the quarter, excess liquidity represented a drag on margin of approximately 14 basis points. Turning to slide 10, we are dynamically managing the balance sheet to increase asset sensitivity and provide downside protection. During the fourth quarter, we added $2.8 billion of securities and we continue to optimize our hedging program. We terminated $3.9 billion of received fixed swaps and floors, and we entered into new pay fixed swaps in order to bolster our asset sensitivity. As rates move higher, we opportunistically added $5 billion of received fixed swaps in order to manage downside risks. At year end, our modeled net interest income asset sensitivity in an up 100 basis point scenario was 4.6%. We have steadily increased this metric over the past 18 months, supporting our ability to continue to capture upside opportunity as interest rates increase. Moving to slide 11, Non-interest income was $515 million, up $106 million year-over-year, and down $20 million from last quarter. Lower fee revenues in the fourth quarter were driven by a decline in mortgage banking, primarily as a result of lower saleable spreads. Our targeted focus on growing strategic fee revenue streams continued to bear fruit, with capital market fees up $7 million, or 18% from the prior quarter. Wealth and investments and insurance also performed quite well. Card and payments revenues, which are typically seasonally flat from Q3 to Q4, declined slightly from the prior quarter, impacted at the margin by ATM volumes and the debit card conversion for TCF customers during the month of October. The underlying core business activity in cards and payments continues to be very solid, and we saw a restoration of ongoing growth in that business as the quarter progressed after conversions. Deposit service charges declined $13 million compared to the prior quarter as a result of TCF customers transitioning onto the Huntington Fair Play product set. Moving on to slide 12, non-interest expense declined $68 million from the prior quarter. And excluding notable items, core expenses declined by $21 million to $1,034,000,000 as we captured cost savings from the acquisition and exercised disciplined expense management. As we shared previously, we expect our core expenses to trend down in the first and second quarters fairly radibly over that period to approximately $1 billion by the second quarter. Even as we work to bring down expense levels, we're continuing to invest in initiatives that will drive sustainable revenue growth while being disciplined in managing our overall expense base. As you saw last quarter, we took additional actions in order to free up capacity to support these investments. while remaining committed to the absolute core expense declines in the near term. Over the longer term, we expect expense growth to be a function of revenue growth as we manage within our commitment to positive operating leverage. Slide 13 highlights our capital position. Common equity Tier 1 ended the quarter at 9.3%, consistent with our prior guidance to operate within the lower half of our 9% to 10% operating guideline. we have $150 million remaining of our current share repurchase program. As you can see on slide 14, credit quality continues to perform well. Net charge-offs declined for the fourth consecutive quarter. Our non-performing assets declined 16% from the previous quarter. Our ending allowance for credit losses represented 1.88% of total loans, down from 1.99% at prior quarter end. The improving economic outlook and our stable credit quality resulted in a reserve release of $98 million in the fourth quarter. Slide 15 covers our median term financial goals. We are focused on driving sustained revenue growth while managing expenses within our long-term commitment to positive operating leverage and achieving a 17% plus return on tangible common equity. We expect to begin seeing this performance in the second half of 2022. Finally, turning to slide 16, Let me share a couple thoughts on our expectations for 2022. Our outlook is based on the starting point of our most recent quarterly results with expectations for year-over-year comparisons for the fourth quarter of 2022. It also assumes continued economic expansion aligned to market consensus, as well as interest rate yield curve expectations as of early January. We expect average loan growth, XPPP, to be up high single digits based on our starting point of $107.9 billion. As a result of loan growth and modestly higher net interest margin, we expect core net interest income on a dollar basis, excluding PPP and purchase accounting accretion, to grow in the high single digit to low double digits range. Fee revenues are expected to be up low single digits, driven by robust growth in key categories aligned to our strategies, including capital markets, our card and treasury management payments businesses, and wealth and advisory, with offsetting impact from lower year-over-year revenues in mortgage banking and the continued evolution of our Fair Play products. As mentioned, we expect to continue to drive sequential reduction in core expenses for the next several quarters, as we fully realize the TCF cost synergies and benefit from broader expense management. At the same time, We are continuing to invest in our strategic growth initiatives and new revenue synergy opportunities. We expect the quarterly run rate of core expenses to be approximately $1 billion by the second quarter, and then remaining relatively stable over the second half of the year from that level. In closing, we're keenly focused on the revenue opportunities ahead of us. We have the teams directed toward these key initiatives, and we're confident in our 2022 outlook to deliver on this plan. We believe these drivers of our outlook are aligned with our goals for sustained revenue growth, a 17% plus return on tangible common equity, and our commitment to annual positive operating leverage. Now let me pass it back to Steve for a couple closing comments before we open up for Q&A.
spk03: Thank you, Zach. Slide 17 summarizes what we believe is a compelling opportunity. Huntington Stans is a powerful top 10 regional bank with scale and leading market density as well as a compelling set of capabilities, both in footprint and nationally. We're focused on driving sustainable revenue growth, which is bolstered by new markets and new businesses. This growth opportunity augments our underlying businesses, in many cases where we have top 10 market positions. As a result of these factors, we've demonstrated robust financial performance that we expect to further improve as we move throughout 22. We believe our return on capital will be in the top tier versus peers, which results in substantial value creation for shareholders.
spk11: Tim, let's open up the call for Q&A. Thanks, Steve. Operator, we'll 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.
spk15: Thank you. We'll now be conducting the question and answer sessions. To ask a question at this time, please press star 1 from your telephone keypad and a confirmation tone to 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. As a reminder, we ask that you please ask one question and one follow-up. Thank you. And our first question today is from the line of Abraham Poonwala with Bank of America. Please proceed with your questions.
spk00: Hey, good morning. I guess maybe just wanted to follow up around the expense guidance, Zach. You mentioned about billion dollars flatlining in the back half, but just give us a little bit of puts and takes in terms of where the savings are coming right now. I'm sure much like everyone else, you're investing in the franchise. So if you don't mind giving us a lens of how we should think about a little bit of a medium-term expense growth outlook, or are there saving opportunities at the bank where expenses could be around these levels for more than just 2022?
spk04: Yeah, thanks for the question. I think it's an area of important focus for us as well. And, you know, just taking a step back, we're really pleased with the trajectory that we're on here. You know, as we've talked about for a while, we've committed to take our expenses from the high water mark in Q3 of 21 of $1 billion and $55 million down to that billion dollars over a three-quarter period. And we saw the first step down in Q4, $21 million. We expect to see the remaining fairly rabidly in Q1 and Q2, and then fairly steady for the balance of 22. I think as you get beyond 22 and out into the future, the way we're looking at it is to manage within the confines of our commitment to positive operating leverage, just as we have for the eight of the last nine years. Given our revenue growth trajectory and what we expect to be pretty solid and sustained revenue growth, That'll provide the capacity to maintain expenses within that level and still invest back in the business. And clearly there will be plenty of opportunities as we go forward to continue to drive scale, efficiencies, process improvement, automation, and lots of ways to drive efficiencies that'll allow us to plow back investments into the key initiatives while still achieving that positive operating leverage.
spk00: Got it. And just as a follow-up, as part of the loan growth guidance, if you could remind us, I mean, TCF obviously had a bunch of businesses that are levered towards CapEx and inventory rebuilds, both in auto dealer and outside of that. How much of that is baked into this loan growth guidance? And what's the potential for loan growth actually exceeding expectations that you outlined?
spk04: Yeah. So the guidance, as we talked about, was high single digits for loan growth. overall, it'll be driven by production, I think, will look pretty similar to what we saw in Q4. That is commercial-led, driven by production, and really supported by what we're seeing from our customers and just really robust pipeline and calling activities at this point. And it's across all the commercial sectors, including those that we've now incorporated from TCF, you know, middle market, corporate banking, our specialty verticals, but also really important contributors from the inventory finance business, the vendor and asset finance business that we picked up from TCF as well. In addition, I would point out continued contribution from the consumer side as well. We are expecting sustained growth in resi on-sheet auto, RV, marine, and also likely benefiting there from your lower prepays as we go forward. We have assumed a modest contribution from utilization improvement during the year, and that will contribute to some degree, but I would note that that $5 billion of line utilization below pre-pandemic levels is just a massive coiled spring that will enable us to fuel growth. It'll likely some in the back half of 22, much more as we go out into the future into 23 and beyond.
spk00: Thank you for taking my questions.
spk15: Thank you. Our next question is coming from the line of Scott Seifers with Pfeiffer Sandler.
spk06: Good morning, guys. Thanks for taking the question. I wanted to start by maybe drilling down a little into the Zach, maybe sort of your best thoughts on how you see the margin projecting throughout the year. I guess maybe the best starting point is probably the adjusted 278 margin. And to the extent that you're comfortable, any thoughts on sort of your best estimate for how much benefit you would get from each Fed rate hike?
spk04: Yeah, that's a great question. You know, the guidance implies, you know, stable to slightly higher, and that's my expectation, to continue to kind of trend radically higher here as we go forward. And I think the dynamic that we'll see is very similar to what we've been talking about for a while. We'll see a slow roll off of our previous, pre-existing hedging program, but that'll be offset by benefits and reductions in the level of excess liquidity and the drag on margin that that represents. We talked about a 14 basis point drag. in Q40 who says they do expect a lot of that to run off, not all of it to run off during 2022, which will be a benefit. And then the rate environment, which to the point of your question is somewhat uncertain just given where the expectations of rate hikes are at this point in the forward yield curve, but I do expect that to be a positive contributor as we go forward here.
spk06: Okay, perfect. And just sort of to be clear, I think in your prepared remarks, you noted that the NII guide was based on early January market expectations. So does that embed then three Fed rate hikes into the guidance?
spk04: Yeah, correct. So the planning and budgeting that we completed was based on the early January rate curve that had three rate hikes in it. Over the last few weeks, clearly the curve has moved and sort of roughly pulled about a month forward. what had previously been the trajectory around the forward yield curve, such that now there's, I think, a fourth hike now forecasted in the very last period in the year. That should be helpful for our Q4 guidance, but I would point you back to the guidance as likely being the key range there, inclusive of that.
spk06: Perfect.
spk15: All right. Thank you.
spk04: Thanks, guys.
spk15: Our next question is coming from the line of Stephen Alexopoulos with J.P. Morgan. Please proceed with your questions.
spk14: Hey, good morning, everybody.
spk08: Morning, Stephen.
spk14: I wanted to start, so the net interest income outlook for 2022 has a pretty wide range, high single digit to low double digit. Can you walk through, because you're basing it on the forward curve, so what is the swing factor that will take you either to the low end of that range or high end of that range?
spk04: Yeah. I would say it's mainly driven by where we end on asset growth. The more asset growth we have, the more kind of incremental NII lift we'll have on a growth basis, just given the fact that the yield will be stable to up. That's the big driver there. I think as well, just further to the last question, where the rate curve ends up going throughout the course of the year. It's clearly been somewhat volatile here over the last several months. At where it is now, I think our guidance stands. But those are the dynamics that drive the range within it. We're confident we'll be within that range at some point.
spk14: Okay. So if average loans come out up high single digits, you'd be somewhere on the midpoint. Is that safe to assume of the NII guide?
spk04: Correct. Okay.
spk14: Thanks. And then on expenses, you guys seem to be one of the few banks not lifting the expense outlook given all this talk on inflation. Are you just not seeing as much wage pressure and inflation in your footprint, or are you just finding more offsets that others aren't finding? Thanks.
spk04: Yeah, look, I think we're clearly seeing some indicators of inflation within the business. Most notably, hiring new talent and some of the compensation expectations from our top talent. And I would note when we talk to our clients, particularly those that are in commodity-intensive businesses or labor-intensive businesses, they're feeling it, having to adjust to manage it. At this point, the direct impacts on our expense base have been relatively limited. And, you know, we anticipate some wage inflation as we're going into the year and trying to get ahead of it. We took a series of actions around compensation. We announced an increase to our minimum wage across the company to $19 an hour from what had previously been $17. We made a number of other kind of priority adjustments. And so we think we've got it boxed now in the 2022 plan and included in our guidance. Lastly, I guess I would close with, I think there's a unique point in time that we have, that perhaps some others don't, where we've got the benefits of scale coming from the TCF acquisition. Both the cost synergies that we've already defined and are executing against, but over the long term, we see more opportunities to continue to refine and get scale efficiency. So that also, I think, contributes to helping us to maintain that really solid expense growth, less than revenue.
spk03: Stephen, just to add on, we took some actions in the third quarter, and that includes 62 branch consolidations that will happen in early February. And we took some other management, we stylized those organization issues as well. So we anticipated some level of inflation coming into the year. We try to get ahead of it with those actions taken in the third quarter. Okay.
spk14: Very good. Thanks for taking my questions.
spk03: Thank you.
spk15: The next question is coming from the line of Ken Esten with Jefferies. Please proceed with your questions.
spk07: Hey, thanks. Good morning, guys. Good morning. I was wondering, Zach, you know, in the outlook for NII, you talked about the loan growth side. I'm just wondering if you could fill that in and tell us how you're thinking about both the growth and mix on the deposit side.
spk04: Yeah, I do expect to see deposit growth begin to accelerate here, and I think it will be a pretty balanced mix between consumer and commercial as we go forward. You know, for the last year, Several quarters, we've been putting a sort of smaller emphasis on that, just given how strong liquidity has been throughout the system. And the teams are re-pivoting back to drive that growth. And so that'll be a good balance to fund what we expect to be, as I noted, accelerating loan growth throughout the year.
spk07: Right. That's why I was wondering, are you expecting earning assets to still grow, or is it more about remixing the left side of the balance sheets?
spk04: I think we'll see a bit of incremental growth in a securities portfolio. We're watching the elevated liquidity situation pretty closely and same playbook we've been operating with the last several quarters, just taking an incremental view month by month, looking at where that trend is and optimizing to see if it's appropriate to add additional securities. But I do think there's some remixing as we see loan growth start to accelerate to hit the high single digit guidance that we've given.
spk07: Right, okay. And just can you tell us in your fee guide what you're using in terms of fair play impact and outlook on overdrafts and related fees? Thanks.
spk04: Sure. Yeah, let's talk about that.
spk03: Okay, let me start. You know, we introduced fair play 12 years ago, brought out 24-hour rates and asterisk-free checking. We've been doing things almost every year.
spk00: The
spk03: 2014 we noted all-day deposits, but more recently in 20 we put the safety zone in, $50 minimum, and we took 24-hour breaks to our business customers because of the pandemic and the impact on small businesses, and we felt that was the right time and thing to do to help those businesses at that point in time. And last year we came forward with standby cash and early pay, and obviously we've rolled all that out effective with the conversion to the TCF customers. So we pointed out an expected drag off that. Now we also, we've gotten ourselves into a leadership position, I think, for more than the last decade in this area. It's added to our brand value, our customer household growth, our relationship retention and expansion, and significant deepening across products. So that has added to our brand. and our loyalty and I think as we go forward we'll still retain this leadership role. There are plans we have in place going back now a number of months to do some more looking out for our customers with Fair Play. Obviously with what the industry is doing and pivot in the last month or so, we're watching that closely and we would expect to react to that and we'll communicate more going forward. But that's guidance range. includes what we're contemplating as we move forward this year in Fair Play and other fees. Maybe, Zach, you could embellish the guidance, if you will.
spk04: Yeah, let me tack on to what the comments Steve just made. When we construct these product changes, we think about the economics holistically. There are fees that we see on a gross basis, like overdraft, but there are also a lot of other levers in the consumer checking product economics. like other related account fees, other product features, and over time, really importantly, the impact that that market leadership position has on elevated acquisition, the kind of retention, and the relationship deepening that we can drive. And so to be clear, included in my guidance on the overall fee line is the assumption of a net fee reduction of approximately $16 million in Q4 from these changes. I would expect them to be in place by the middle of the year. I would highlight that notwithstanding that impact, we do expect to see continued growth on the overall fee line, as indicated by my guidance, and low single digits driven by those strategic categories, cap markets, payments, wealth, and advisory. In addition to the fee impacts from the changes we're anticipating in our consumer products, we also expect to see a reduction of between three and five million dollars per quarter in charge-offs, as the lower overdraft fees that we charge on a gross basis create just fewer incidences of uncollectible fees and hence lower charge-offs. Just taking a step back, maybe kind of concluding on this discussion, We really believe that the positioning of our products is critical, and as we maintain that market leadership, you know, this is a play we've run many times before. And the benefits we see in acquisition, retention, and deepening as we maintain that leadership, we would expect to earn back that run rate fee loss in approximately 18 to 24 months, very much consistent with what we've seen in the past.
spk10: Thank you. Thanks, guys.
spk15: Our next question comes from the line of John Arson with RBC Capital. Please proceed with your questions.
spk12: Hey, thanks. Good morning, guys. Good morning. Question for you guys. Obviously, the expense guidance and the revenue guidance looks pretty good. There's one piece of it we haven't tackled, and that's provisions. Just curious how you feel about credit and risk. You still have fairly high reserves relative to peers. I know some of that's accounting, but with the loss expectations, and Zach, what you just said as well on charge-offs. Can you help us think through the provision expectations?
spk02: Yeah, I mean, this is Rich. Let me take that. You know, we feel very good about the condition of the portfolio right now, the charge-offs for the year and the reduction in the MPAs, both notable and both very positive. You know, as it relates to the provision and the allowance, we have always been on the conservative side of the allowance. We started CECL Day 1 on the high end and you know, we've been very conservative on the way up and I think very prudent on the way down. And we'll continue that way. And, you know, there's things that we're looking at in the economy as it relates to supply chain and labor, that type of thing. And, you know, just the continuing impacts of COVID that are just giving us pause as it relates to where we set the allowance, but it's a very disciplined process that we go through. Every quarter, we've had five consecutive reductions in the ACO ratio since we peaked in the third quarter of 2020, and we'll look at it every quarter as we always do with a very disciplined approach, and if the supply chain conditions ease and labor conditions start to improve, I would expect that we'll have continued reductions over time.
spk03: John, our outlook is for reductions during 22, and and charge-offs below the historic range. And we ended the year with very good credit quality and very pleased with the performance of the portfolio that came over with TCF. So the loans have been re-graded, so there's consistency now as of end of year, and the economic outlook plus what we see in the customer base gives us a lot of optimism as we go forward on the provision line.
spk12: Okay, that helps. And then just as a follow-up, Steve, maybe more of a medium-term view on credit. It seems like you obviously have strong growth, and I know you're a risk person by nature, but the entire industry has strong growth expectations as well. Curious how long you think this all lasts without any real concerns on credit. Thanks.
spk03: My current belief, John, is that we're going to go through 24 months. with a fairly robust GDP growth and performance on credit. And there's just an enormous amount of stimulus that's been enacted thus far, and some of it is multi-year. The economy has performed well, but it's been labor constrained. As that sorts out, I think that puts longer legs into the growth. The supply chain issues that we face that are constraining Production did constrain at 21. We'll do so for much of 22. If not all the year, we'll get abated over time. We think things will get better a bit in the second half, but in some of these industries, 23 will become a more normal year. So, those factors and others give us confidence that we've got a multi-year positive slope on on low growth and GDP and underlying credit quality. Rich will remain disciplined. We published the quarterly results for consumer and there's literally no variance over the last decade plus. So we're quite confident of our capabilities to manage the risks at these levels. We're very pleased with the additional talent we gathered from TCF, both in the origination side and in in credit areas as we think about the future. So, you know, 25 or beyond would be where we're a little more concerned than we will be over the next few years.
spk15: Thanks a lot, Steve.
spk10: Thanks, John.
spk15: Our next question comes from the line of Peter Winter with Wedbush. Please receive your questions.
spk08: Good morning. um zach i wanted to follow up on on ken's questions just with regards to the outlook for service charges on deposit uh with the fair play you know it was down 13 million uh this quarter can you just go through what what the outlook is from fourth quarter levels just with the puts and takes that you talked about again sure absolutely good question you know we converted the tcf customers on uh
spk04: the second week of October, so we had almost the entire quarter's worth of run rate of the TCF customers onto the Fair Play product in Q4. There might be a very marginal incremental impact into Q1, but for the most part, we're kind of at the new level, trending. And as we said, we're continuing to roll out new product changes, frankly, of the same kind of nature that we've been doing across the last 10 years. But we do expect to respond to what's happening and to do that by the middle of this year. And that'll drive the roughly $16 billion incremental quarterly run rate reduction in fees on a net basis by Q4, just to be clear in the guidance. So those are the puts and takes here, kind of a relatively flat level. And then we'll see those new changes come into place mid-year with that roughly $16 million quarterly reduction in Q4.
spk08: Got it. Got it. And that's helpful. And then just, I was wondering, could you just give an update on revenue synergies from TCF, where you're seeing the biggest opportunities and what's happening in some of the newer markets and If I think back to the first merit deal, I think it was about 100 million in revenue synergies. I'm just wondering if maybe you could quantify what the impact could be with TCF.
spk04: Yeah, we're really, really pleased with where they're going. We've talked about this a little bit in multiple conferences, but there are four or five big buckets of them. Expanding our corporate business in the middle market, the corporate space, our specialty businesses into the major commercial hubs within the formerly TCF geographic footprint, like Expanding in Chicago, expanding in Detroit, Denver is brand new, Minneapolis and St. Paul, brand new to Huntington, so that's a big one. Bringing the consumer product set to the TCF customers is the second major bucket. We're seeing terrific early signs of engagement in how folks are reacting to not only the product set, but the digital channels and capabilities. Third, expanding our business banking and market leading SBA production into the TCF geographies and we're well underway hiring out those teams and beginning to get early traction. Wealth management and private banking is an enormous fourth opportunity for us, and we've already begun to build out very significant teams, for example, in Minneapolis, Twin Cities, and in Denver. And then lastly, just leveraging the really now quite sizable and scaled equipment and inventory finance business, combining what we had before and then the great businesses that we brought over from GCF. So those are the five big buckets, and we're seeing traction and wins already. We haven't given precise guidance on that in the past, and I'm not ready to do that today, but it's already contributing to the growth outlook and helping us to drive the kind of acceleration that we expect to see in both fees and loans in 2022. And as we go forward, we'll continue to provide more and more color on that as those continue to develop.
spk03: Zach, if I could add, you know, the capital markets fee income lift in the fourth quarter was at least in part related to the combination with TCF. Middle market banking didn't exist in Chicago or the Twin Cities or Denver for TCF. The broker-dealer was outsourced. We talk about wealth. There are a number of product categories and capabilities that we have that will be bringing in these expanded markets. And then in the context of the things that TCF did incredibly well, asset finance, inventory finance, et cetera, we have now the ability to cross-sell into that customer base which historically was not done. So on the consumer side, a million and a half consumers, we have a much more robust product venue set that we'll be offering, and we're a multiple on home equity, and again, which was not offered in a branch delivery system by TCF, as well as mortgage. So excited across the board. We think we have a lot of consumer and business That's great. Thanks, Steve.
spk15: Thank you. Our next question is from the line of Erica Najarian with UBS. Please proceed with your question.
spk01: Hi. Good morning. I just had a few cleanup questions on NII sensitivity. But, Steve, I thought it was very interesting when a large bank kicked off earnings saying 24-hour grace and, you know, something you kicked off 12 years ago. My first question is for Zach. Zach, can you tell us in the 4.6% NII sensitivity what you're assuming for deposit repricing and that analysis, and what do you expect to actually happen as you think about the first few rate hikes?
spk04: Yeah, that's a great question, Erica. Thank you. As it relates to deposit betas, I think it's a little too early to tell. similar dynamics to the last major rate cycle. You know, we do believe there'll be competing forces here. To some degree, the extremely low level of starting rates where we're at right now would tend to indicate a higher beta. With that being said, the level of, you know, extraordinary levels of excess liquidity across the system would tend to mute that and indicate a lower beta. So, you know, so I'd say we're watching the situation very carefully on liquidity and the pace of loan growth. And, you know, we will be disciplined and dynamic as we go forward. In the actual modeling of the asset sensitivity, those models are intended to be stable on average over time irrespective of the current level of interest rates to model the ramp. And so the assumptions in that are around 25 to 30% beta. which has been sort of the long-term average we've seen. I would tell you I believe there's an opportunity that it will be lower than that in the initial rate moves, and that's my general expectation. But, again, I think we'll have to be dynamic and watch it really carefully.
spk01: And my follow-up question to that is yesterday, and this kind of follows up to what Ken used and was asking about earlier, you know, a few regional banks, We're now expecting negative deposit growth. You know, to your earlier point, Zach, you know, the system is awash with liquidity, and a few big banks kicked off earnings season saying that deposit growth won't be negative. And a few regional banks mentioned yesterday that they expect deposit growth to be negative. And I'm wondering, you know, Huntington has always been known for its core operational deposit base, plus you added TCF. I'm wondering how you're thinking about deposit growth. You mentioned it's going to be positive this year, but as we have more maturity in the rate cycle, how do you expect deposit growth to behave on an overall basis?
spk04: Our current expectation and the trends we're seeing in the business would indicate we'll continue to see deposit growth in 2022. I think there's sort of two factors we've been watching that are slightly offsetting each other. On one hand, we are observing, particularly in the consumer space, some degree of normalization of the elevated liquidity we saw build up at the tail end of 2020 and certainly into 2021, largely influenced by stimulus and other factors like that and the savings behavior around COVID. That is a gradual normalization. With that being said, our customer acquisition and the ongoing work we're doing to deepen relationships, certainly augmented by the TCF synergy opportunities, are offsetting that. We expect to drive net growth in consumer, offsetting that pandemic deposit normalization trend that I noted. On the commercial side, we're seeing just continued robust liquidity in our clients, and that's driving solid deposit growth. And as we focus on that even more going forward to continue to fund this accelerating loan growth, we'll see that contribute as well. So overall, I'm expecting pretty balanced deposit growth between the two, and I think those are the underlying drivers of it.
spk03: Zach, if I could add to Erica's question. We put a liquidity portal in play for our commercial customers about a year and a half ago to try and take excess deposits and move them off balance sheet, Erica. So we're not sitting with a cumulative super jumbo set of commercial depositors in the portfolio. We just didn't want that risk profile. Plus, we felt we could do a better job looking out for the customers by putting them into this portal. So that will help cushion us as whatever normalization, if there is any, out of the customer base occurs. Secondly, we've introduced a digital tool, an analytics tool, that has great promise for us. We've got roughly 500,000 business customers and we're now able to get at the data in a much more real-time way in terms of product needs based on usage and other characteristics. So we expect that will drive our TM business in a significant way in the years ahead.
spk01: Very helpful. Thank you. Thanks for your questions.
spk15: The next question is coming from the line of Matt O'Connor with Deutsche Bank. Please proceed with your questions.
spk13: Good morning. You guys are the number one SBA lender and I was wondering if you could talk about what you're seeing in terms of demand there now that PPP is kind of mostly done or winding down. I would imagine when PPP was going on there was kind of little to no demand and wondering how that's been trending more recently.
spk03: Matt, we had a cumulative with TCF over $12 billion of PPP lending. And notwithstanding that, we had robust SBA lending almost in parallel through the last two years. As we entered the fourth quarter, we continue to see demand for that product. And we expect it will actually increase this year in part because of the new markets that we're we're going to be able to expose our capabilities to. Twin Cities, great business market. Denver on fire, really terrific. Colorado's a terrific state to be doing business in. And now we're roughly at scale in Chicago with 150 plus points of distribution versus 30. That will help those three regions drive our lending activity overall, including SBA.
spk13: Interesting. And then separately, Credit quality question. You're a very big auto underwriter on the consumer side and commercial, but I'm focused on the consumer side. We've had this massive increase in used car prices. Any thoughts in terms of tightening standards as we think about LTVs? You've had a little bit of a trend down there with your disclosure of the appendix, but just how do you think about underwriting to these used cars that have increased 40%, 45% versus a year ago?
spk02: Yeah, Matt, it's Rich. I'll take that. And as you noted in the slides, the LTVs have come down. We peaked in 2019 at 90% and we ended 2021 at 85%. So we have reacted to the increase in auto prices by bringing the LTVs down. But first and foremost for us, the auto business is really based on client selection. We are a super prime lender and we've developed a custom scorecard over many, many years in this business that very effectively predicts, you know, those customers that are not going to have a payment issue. And so, you know, for us, it's really avoiding the situation where you have to get the car back in the first place. And we've done a phenomenal job of doing that over time. You know, we also feel that, you know, we've been in this business a long time and, you know, we have to be a consistent provider of capital to our dealers. And so we've, uh, over the course of many cycles, you know, work through, you know, high prices, you know, low prices, you know, high demand, low demand. Um, and, and we've had learnings from all of that as we've, you know, been one of the leading, uh, auto dealer, our auto financers in the country. going back in time. I feel that we've got a good handle on the risk here, notwithstanding the increase in car prices. We've adjusted our custom scorecards appropriately and feel that we're going to come through this in really good shape, as we always have.
spk03: Matt, we haven't had a delinquency on the floor plan side of this business in, I'm going to say decades, certainly more than a decade. since I've been around, and we really like the underlying credit quality performance that the dealers have been able to generate in the last couple of years. So the fundamentals of the business with a low expected default rate in the indirect side and an incredibly low risk on the dealer side continue to keep us very bullish on the business. Thank you. Thank you.
spk15: The next question comes from the line of John Vankari with Evercore. Pleased to see you with your questions. Morning.
spk09: Hey, John. How's it going?
spk05: I guess back to that auto question, I know in your loan growth outlook for high single digits for 2022, you do mention auto growth as a driver. I mean, on the growth side, can you just talk about how you're thinking about the portfolio growth as you look at the year, particularly if we get some moderation in used auto demand as the, you know, let's call it a reopening continues and everything. So I wanted to get your updated thoughts on that portfolio specifically in terms of growth.
spk03: So, John, we would expect that portfolio will continue to grow. We're going to open up in another five or so states. this year. We've had this gradual rollout now for a number of years and that'll complete us. Eventually we'll be in the lower 48 with this business. But we have a fundamental expectation that the new car market's going to come back off of last year's production probably by a million and a half, two million cars to get 15, 15 and a half total on the new side. So that will pick up a bit. The mix will slightly shift again back to where it has historically or closer to that on the mixed side of the equation. As you know, we like the business. We think of it as low risk. It's a two and a quarter year average traded asset. And we're highly now automated. We have almost half our apps coming through on a digital basis, and it's end-to-end digital for us. So we're very, very efficient with it.
spk05: Okay, great. And then also related to that, I believe the utilization comment you gave earlier in terms of increasing from the mid-20s to the 30%, that's for the floor plan business, I believe, if you can just correct me if I'm wrong. And then if it is, what is your utilization trend for the non-floor plan commercial revolvers?
spk04: This is Zach. I'll take that. We saw nice upticks, modest upticks in utilization in every one of our three major line utilization categories. Auto, just to your point, rose from 23% to 30% in the quarter. Inventory finance rose from 25% to 32% to some degree seasonally. That's typical in the fourth quarter of that business. And then the general middle market revolvers went from 40 to 41 in the quarter. So we saw good early signs here, encouraging signs of that utilization recovering. We saw, as I said in my earlier remarks, $5 billion of additional line utilization, the one we expect to recover back to pre-pandemic levels over the longer term.
spk05: Got it, got it. If I could ask just one more high-level one, just some news this morning about Intel looking to build a pretty sizable chip facility there near Columbus. I just wanted to get your thoughts on the implications of something like that. Do you think there's follow-on benefits to the to loan demand there in your markets? And do you think there's a start of something where more of these tech companies could be building operations there in your markets?
spk03: John, for the benefit of everybody, what you're referencing is Intel's announcing a large chip plant. The CEO of Intel called it the largest chip plant in the world. It'll be about a million square feet. is initially a land set aside of 1,000 acres to accommodate this. It's expected that there'll be follow-ons and that there'll be other businesses, large businesses, suppliers to that plant that will co-locate as part of that 1,000 acre site. Now this will be enormously impactful. I think the CEO Pat Geisinger referenced this as Silicon Heartland because typically these plants with the supplier base create some level of co-location that you've seen in Arizona and certain other markets. This is incredibly impactful. It's a great move by the DeWine administration. I think it'll benefit certainly all of Ohio and much of the Midwest and I think it's a bit of a game changer for us. We'll We're going to have more than 10,000 construction jobs on that site and roadway and water expansion. And then ultimately, there'll be 3,000 very high-paying jobs in the plant itself just with Intel. Again, there's an expectation of other businesses coming in for co-location, significant other businesses. All of that will feed and fuel, I think, what's already a very robust real estate market, there's gonna be housing needs, there'll be additional transportation needs, the small businesses around these areas will do very, very well. So it's a huge moment for us here in all of Ohio, certainly central Ohio. But I think this has the potential to be enormous. If I reflect back on 2009 when I joined Huntington, this was termed the Rust Belt. And that term has receded significantly over the years. And I think Intel's gonna be a game changer in terms of technology in the region. And I'm very excited about what's going on. So again, kudos to Governor DeWine and his administration. Lieutenant Governor John Houston was enormously important here as well. But this came together in an incredibly efficient and quick fashion. and there's insight about it on both the local paper, Columbus Dispatch, as well as I think Time has a lead article featuring it. We're really, really pleased, and I believe this is, again, a huge moment for us and a game-changing moment for Ohio.
spk05: Very helpful. Thanks, Steve.
spk03: Thanks, John.
spk15: Thank you. Our final question today is from the line of Terry McEvoy with Stevens. Pleased to see you with your question.
spk16: Hi, thanks. I was hoping to get your thoughts on capital management and just appetite for share repurchase in the first half of 2022 with capital at about 9.3% at the end of the year.
spk04: Yeah, great question. Thanks, and I appreciate the chance to close on this one. We are really pleased with what we've done so far. in the $800 million share repurchase authorization that we had. As we noted, consistent with our guidance, front-loaded $650 million of that through the end of 2020 One, you know, I think as we go forward, our capital priorities have not changed. We're still very much focused on funding asset growth first, supporting our dividend, and then sort of all other uses, including this. So, you know, as we see loan growth accelerating, we're pleased to be able to put the capital back toward that. As we share our purchases, sorry for the background noise there, we intend to be dynamic here. and also to think about it in the context of our ongoing work around our next capital plan submission, which will reset the balance of 2022 as well with a submission in early April. So dynamic, seizing opportunities here in the next couple quarters, I think, is where we're going to go.
spk16: Great. I'll end it there and let everybody get on with their day. Thanks, Zach, and thanks, Steve. Have a good day.
spk03: Thanks, Jerry. Thank you all for joining us today. We're very proud of our colleagues' effort to deliver a successful finish to 21, and we look forward to building on that as we enter the new year. I have a great deal of confidence in our teams and what Huntington can deliver for our colleagues, customers, and shareholders over the course of 22. We have a deeply embedded stock ownership mentality, which aligns the interests of our board, management, and colleagues with our shareholders, as you know, and thank you very much for your support and interest in Huntington. Have a great day, everybody.
spk15: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
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