Huntington Bancshares Incorporated

Greetings and welcome to the Huntington Bank Shares Second Quarter Earnings Conference Call. At this time, all participants are in a 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 on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Tim Sudebria, Director of Investor Relations. Thank you. You may begin.

Thank you, Operator. Welcome, everyone, and good morning. Copies of the slides we'll 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 2, today's discussion, including the Q&A portion, 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 complete discussion of risks 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. With that, let me now turn it over to Steve.

Thanks, Tim. Good morning and welcome. Thank you for joining the call today. Our outstanding second quarter results reflect momentum across the bank as we completed the integration of TCF. While 2022 continues to bring its own set of unique challenges, our businesses are performing very well. Overall, the companies in our markets are in good shape and continue to evidence demand for loans to support business investment and expansion. Consumers are generally maintaining liquidity. Much of the government and municipal stimulus funds are yet to be invested. Importantly, Huntington and the banking industry remain very well positioned to withstand the current volatility. Now on to slide four. First, our performance in the second quarter was exceptional with record net income and PPNR. Our focused execution is driving these robust results and leading returns. Loan growth continued in the quarter as we saw higher balances in nearly every portfolio across our commercial and consumer businesses. Higher loan growth, paired with the benefit from higher interest rates, contributed to expanded net interest income. Second, we're pleased to deliver average deposit growth quarter over quarter in our commercial and consumer businesses. The focus remains on growing primary bank relationships while maintaining a disciplined deposit pricing strategy. Third, we achieved our target for core expenses below the $1 billion level as we completed the TCF Cost Synergy Program. Fourth, we delivered on our medium-term financial goals this quarter earlier than previously guided. Finally, we posted record low net charge-offs this quarter, and overall credit quality remains exceptional. This reflects our disciplined approach to customer selection and our aggregate monitor to low-risk appetite through the cycle. While we acknowledge the potential for uncertainty, to date we are not seeing substantive areas of concern within our loan portfolios. On slide five, let me share more detail on our second quarter performance. Robust loan growth, higher net interest income, and expense reductions supported our record PPNR, which increased 17% from the prior quarter. Average loan balances, excluding PPP, grew 10% on an annualized basis, and our tracking to our expectations. While growing deposits, we are maintaining deposit pricing discipline in the face of a rising rate environment. We were also honored to be once again recognized by J.D. Power for the number one mobile app amongst regional banks. This marks the fourth consecutive year earning the top rank. Last month, we announced the formation of an enterprise-wide payments organization led by a dedicated payments executive. This initiative reflects our strategic priority to accelerate our payments capabilities, expand the services we provide to our customers, and drive additional fee revenues. In May, we announced the acquisition of Toronto, now known as Huntington Choice Pay, which is a payment business focused on providing business to consumer payment services. On the commercial side, we continue to see traction in our treasury management initiatives with revenues growing 12% annualized this quarter. On the consumer side, we launched an enhanced cashback credit card offering late in the first quarter, and results so far have exceeded our expectations. We are driving organic growth opportunities by providing enhanced product offerings to the TCF customer base and growing share of wallet. We completed the acquisition of Capstone last month, which adds a top-tier middle market investment bank and advisory firm, bolstering our capital markets capabilities. We are pleased with the early contribution from our new colleagues who added $4 million of capital market fees in the last two weeks of the quarter post-closing. Looking forward, we see significant revenue synergies within our customer base as well. Turning to slide six, we extended our track record of modeled credit outperformance in the recent CCAR stress test results. This year's process included the acquired TCF loan portfolios, and the results did not materially change our model performance relative to peers. This highlighted the robust credit strength of Huntington's balance sheet, which has continued to outperform peer median benchmarks in every CCAR cycle since 2015. Finally, I want to highlight the accomplishments of the TCF combination. It's been just over a year since we closed on the acquisition, and since then, we've delivered on the commitments we shared at announcement. We closed quickly in under six months and converted systems just four months later. We delivered the cost synergies earlier than guided. The pace of digital investment spend has doubled from the prior run rate, accelerating our digital initiatives. We've delivered leading financial performance, which is evident in our results this quarter. Finally, we are capturing incremental opportunities from the addition of key markets and capabilities through our revenue synergy initiatives. Over the past year, we've added over 50 revenue producing colleagues in Minnesota and Colorado to support wealth management, business banking, middle market, and specialty banking. The middle market teams in the Twin Cities and Denver are growing relationships, increasing loans, and deposit production. We're also seeing increased productivity from the acquired branches and a positive reception to the Huntington product offerings and customer service experience. Our business banking expansion in the Twin Cities and Denver is also showing substantial momentum where we are pleased to have already achieved a top five ranking for SBA lending in both markets. We've seen early traction from our wealth management launch in the Twin Cities with AUM building year to date. As a result of this success, we've replicated that approach in Denver, and we've hired an experienced leader and other new colleagues to build out our capabilities. As for our inventory and equipment finance businesses, the teams continue to capitalize on the opportunities to harness the combined scale to better serve our clients. Today, we're the seventh largest bank-owned national platform, and I expect that ranking to increase based on the momentum we are experiencing. These initiatives are ongoing, and we expect them to contribute to our growth over multiple years. We are well positioned to grow shareholder value. Zach, over to you to provide more detail on our financial performance.

Thanks, Steve, and good morning, everyone. Slide 8 provides highlights of our second quarter results. We reported earnings per common share of 35 cents. Adjusted for notable items, earnings per common share were 36 cents. Return on Tangible Common Equity, or ROTCE, came in at 19.9% for the quarter. Adjusted for notable items, ROTCE was 20.6%. We were pleased to see sustained momentum in our loan balances, with total loans increasing by $2.8 billion, and excluding PPP, loans increased by $3.3 billion. Total average deposits also increased, with growth in both consumer and commercial balances. Pre-provision net revenue expanded sequentially and grew 17% from last quarter. Consistent with our plan, we reduced core expenses below our target of $1 billion, driven by the realization of cost synergies. Credit quality was exceptional, with record low net charge-offs of three basis points and non-performing assets reduced to 59 basis points. Slide 9 shows our continued trajectory of PPNR expansion. We see 2022 coming together quite well as we drive sustainable profitability and highlight the earnings power of the company, supported by our organic growth initiatives and harnessing the benefits from the TCF acquisition. We remain committed to our long track record of managing to positive operating leverage with disciplined expense management, even as we continue to invest in the business. Turning to slide 10, average loan balances increased 2.5% quarter over quarter, totaling $113.9 billion. Excluding PPP, total loan balances increased $3.3 billion, or 3%, driven by commercial and consumer loans. Within commercial, excluding PPP, average loans increased by $2 billion, or 3.3%, from the prior quarter. These results were supported by broad-based demand across commercial lending that is driving robust new production. Line utilization remained relatively stable during the quarter on a core CNI basis, while we saw higher balances within our inventory finance business. Commercial growth was led by middle market, corporate, and specialty banking, which collectively increased by $746 million during the quarter. Asset finance contributed meaningfully, with balances higher by $497 million. Inventory finance continues to rebuild toward a more normalized level, with average balances up $383 million during the quarter. Commercial real estate balances also increased by $213 million. Auto dealer floor plan balances were relatively stable, increasing by $45 million as supply chain constraints continued to dampen inventory levels. In consumer, growth was led by residential mortgage, which increased by $1 billion, driven by slower prepays and higher mix of on-balance sheet loan production. We also saw steady growth in RV marine and indirect auto. Average home equity balances declined by $41 million. However, we were pleased to see end-of-period balance growth, driven by robust new production of first lien refinance products. Turning to slide 11, we delivered average deposit growth of $2.1 billion. Deposit growth was led by commercial, with deposits up $2.1 billion, while consumer balances increased by $500 million from the prior quarter. This growth reflects our initiatives to drive primary bank relationships and new customer acquisition across the bank. We remain disciplined on deposit pricing, with our total cost of deposits coming in at just seven basis points for the second quarter. On slide 12, 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 $125 million, or 11%, to $1,244,000,000. Consistent with our prior guidance, net interest margin increased driven by higher earning asset yields as a result of our asset sensitivity position and lower Fed cash balances. Slide 13 highlights Huntington's deposit pricing discipline. We have a long history of managing through cycles, and we believe our deposit base today is even stronger than it was starting the last tightening cycle. For the second quarter, we've seen little change to our average cost of deposits. given the timing of rapid Fed rate moves occurring later in the quarter. That said, we are remaining dynamic in this environment. We are managing the portfolio at a very granular and segmented level, client by client in many cases, to ensure pricing discipline and growing the primary bank relationships that bring lower-cost operational deposits. Turning to slide 14, we are managing the balance sheet in order to position ourselves to benefit from higher expected rates in the short term while also being judicious on managing possible downside rate risks over the longer term. We continued to execute on our hedging strategy during the second quarter and increased our downside protection by executing a net $3.3 billion of received fixed swaps. Our expectation is to continue to add to this hedging program during the third quarter. Additionally, we are managing the securities portfolio to both capture the benefit from higher rates over time, as well as protect capital. We increased the proportion of securities and held to maturity during the quarter, and are reinvesting securities portfolio cash flows at rates well above portfolio yields. Moving to slide 15, non-interest income was $485 million, up $41 million year over year, and down $14 million from last quarter. We saw record activity within our capital markets business during the quarter, which drove revenues up $12 million from prior quarter. Additionally, we saw expansion in our cards and payments revenues and deposit service charges. Fee revenues were impacted this quarter by lower gain on sale from SBA loan sales, as we sold less balances in the second quarter compared to the prior quarter. Recall, we restarted our normal SBA loan sales earlier this year, and while loan production remains robust, this quarter's gain on sale is generally aligned to our go-forward expectations. Fees were also impacted by a decline in mortgage banking, as volumes continued to normalize from the exceptionally strong levels seen last year and due to lower saleable spreads. While we are pleased with the sales and client engagement traction in our wealth management business, we saw lower overall revenues as market-based AUM changes outweighed continued momentum in net asset flows. Moving on to slide 16, non-interest expense declined $35 million from the prior quarter. Excluding notable items, core expenses declined by $13 million to $994 million as we completed the cost savings from the acquisition and achieved our targeted expense level. Our efficiency ratio, which is an outcome of our revenue drivers and expense management activities, came in at 57% on a reported basis and adjusted for notable items was 56% for the quarter in line with our medium-term target. Slide 17 recaps our capital position. Common Equity Tier 1 ended the quarter at 9.1% and within our target operating range of 9 to 10%. As we go forward, our capital priorities remain unchanged, with our first priority to fund organic loan growth. Our expectation is that given the strong, sustained levels of loan growth, buybacks will be de minimis, if any, for the remainder of the year. With the robust return on equity we are generating, we expect to be able to fund this organic growth and see capital ratios move higher over the balance of 2022. Our tangible common equity ratio, or TCE, declined to 5.8% as a result of AOCI marks on the securities portfolio. Recall, this is an accounting construct that temporarily reduces equity as value marks are taken and then reverses over time. and this does not impact our regulatory capital ratios. Our TCE ratio, excluding the AOCI impact, has been relatively stable near 7% level. Finally, our dividend yield remains number one in our peer group at 5%. On slide 18, credit quality continues to perform very well. As mentioned, net charge-offs were a record low of three basis points, benefiting from another quarter of net recoveries in commercial portfolios and continued stability in consumer credit quality. Non-performing assets declined from the previous quarter and have reduced each of the last four quarters. We also saw lower criticized loans, which have improved both from the prior quarter and prior year. Allowance for credit losses was flat at 1.87% of total loans, reflecting a conservative reserve posture given the heightened economic uncertainty, even as our internal portfolio metrics show stability. We are proud to report on slide 19 that we have achieved our medium-term goals. Since sharing these targets, we have been intently focused on executing on our commitments and managing dynamically through the changing environment. We have been guiding that we reflect these goals by the second half of 2022. We have now achieved these results one quarter ahead of schedule. This performance represents the earnings power of the franchise. The TCF acquisition bolstered many of these areas and allowed us to gain incremental scale and profitability, as Steve mentioned earlier. And the incremental growth momentum is only just the beginning. As we stand today, we believe our return on capital is compelling compared to our peer set and demonstrates the financial rigor with which we operate that is focused on creating fundamental value for shareholders. Finally, turning to slide 20, let me update our outlook. Our guidance assumes the consensus economic outlook through 2022, and it incorporates the rate curve as of the end of June.

Our loan growth outlook remains unchanged.

As a result of our balance sheet growth and the rate curve outlook, we are again revising guidance higher for net interest income. We now expect core net interest income on a dollar basis, excluding PPP and purchase accounting accretion, to grow in the high teens to low 20s percent range. In fee income, we continue to expect growth between low and mid single digits for the fourth quarter on a year-over-year basis. We are continuing to see encouraging trends in our payments, capital markets, and wealth and advisory businesses. As we shared previously, our guidance incorporates the normalization of mortgage banking revenues and the fair play enhancements we are making over the course of the second half of the year. Note, our guidance fully captures the expected benefits of our Capstone Partners and Tarana acquisitions, which closed in the second quarter. On expenses, we are pleased to have completed the cost savings program. We are balancing continued momentum in the business and strong revenue growth with the uncertainty around the near-term macro outlook and inflationary pressures that are affecting the economy. The strong revenue performance of the business will drive a degree of associated compensation expenses, in addition to targeted investments to support key growth initiatives. Hence, our expectation is for core expenses, excluding Capstone Partners and Tarana, to grow at a modest level for the balance of 2022. Additionally, Capstone and Tarana will add incremental expenses of approximately $25 million beginning in the third quarter run rate. Finally, given our continued exceptional credit performance, we were revising our full-year net charge-offs down to less than 15 basis points, from approximately 20 basis points previously. That concludes our opening remarks. Tim, let's open up the call for Q&A, please.

Thanks, 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.

At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants 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. Our first question comes from John Picari with Evercore. Please proceed with your question. Good morning, John.

Well, let's see if you can maybe comment on your deposit growth expectation, how you're thinking about the ability to grow deposits here and possibly the makeup of that growth. I know you didn't include that in your formal guidance, so maybe if we just kind of help us think about how we should model the growth. Thanks.

Absolutely. Thanks, John. This is Zach. I'll take that one. I think just taking a step back, we were pleased to see the deposits continue to expand in the second quarter, as we talked about in a pair of remarks. We had that expectation, and we were pleased to see it come through and be delivered. The outlook going forward continues to be for modest growth, commercial growing faster, consumer likely flat to down a bit. The environment is clearly volatile here with the rate moves we've seen as of late, but that's the traction we're seeing and so far it's corroborated here just in the first few weeks of July. The focus we've got is really deepening engagement with our clients, a core operating account, certainly within the commercial business, primary bank relationships broadly across the franchise, and really balancing that growth with pricing over time, clearly.

But that's the growth view we've got for now.

Okay, thanks. And then related to that, maybe can you just elaborate a bit on your deposit beta expectations in terms of how they can begin, how they can trend in the back half?

Get dialed.

your terminal beta ultimately. Thanks.

Yep, yep. I'll take that one again as well. So thus far in the cycle, it's been pretty limited in terms of pricing changes that we've seen come through. As we highlighted in the prepared remarks, average deposit costs for Q2, just four basis points higher than Q1, so very low. That represents less than 10% beta. With that being said, clearly the rate boost happened late in the quarter in May and then more in June. And given the forecast for July, we do expect Q3 and Q4 to be higher. You know as we take a step back and just think about this cycle, you know It's clearly changing and there are factors that are driving beta to be higher than maybe the last rate hiking cycle We started from a lower starting point asset growth continues to be pretty strong here across the industry and these Multiple more than 25 basis point rate moves that are having a quick succession are clearly up factors for beta with that being said I We do think it's important to continue to recognize that the level of excess liquidity across the entire industry at this point is quite high. And inflation itself tends to increase balances over time as that filters into wages and corporate revenues. Taking it to back, it was still very early in the cycle. Our posture is to be very, very disciplined and manage this with a lot of rigor at a very detailed level, as we noted before, and with that primary bank focus. And I think everything we're seeing thus far in the incremental forecasting that we do on a monthly basis continues to corroborate that we're on the trend that we were expecting.

Okay.

Thanks, Jake. Good question.

Our next question comes from Betsy Gressick with Morgan Stanley. Please proceed with your question.

Hi. Good morning. How are you doing?

Good morning, Betsy.

Good to see you. Wanted to just get a sense on how you're thinking about the buyback resumption, what the parameters would be, and what you're looking at to turn that back on.

Yeah. Thanks for the question. This is Doc. I'll take that one as well. As we've talked about in the prepared marks for Q2, we didn't do any buybacks given the capstone acquisition closing. I think as we think about the next several set of quarters, our capital priorities are really guided by our overall priority sets. First and foremost, to fund organic growth. Given the strong ROE that we get on the organic loans we're bringing in, that's our top priority. and I'm really pleased to be able to allocate the capital, even as we also manage capital ratios upward here, trending towards the year end. It's a little too early to call what happens in 2023, and as we get closer, we'll have a better view of what the plan might be at that point, but I think you'll see us tick capital ratios up here sequentially and deploy to the loan growth for the foreseeable future.

Okay, and then you talked a bit already about the credit and what's going on with the corporate side. Could you give us a sense on the consumer book, what you're seeing? Is there any differentiation at all between either FICO bans, income bans, or whether or not you're a housing, you're a homeowner or a renter? Any dynamics there would be helpful. Thanks.

Hey, Betsy, it's Rich. I can take that one. You know, on the consumer side, we're going to see, as we talked about in some of the previous calls, just a little bit of increasing in the delinquencies, just in many respects, because they've been running at such artificially low levels, given the deferral business, you know, deferrals in 2020 and the stimulus in 2021. I would say in general, though, those books are performing very well. We have maintained our FICO disciplines across the board, and with increasing auto pricing and increasing home rates, we've also done a good job of keeping the loan-to-values constant or coming down. So we feel very good about where the consumer book is positioned right now.

Okay. Betsy, this is Steve. We published our... auto lending every quarter. So you see new lending. It's super prime. It hasn't deviated more than 5 or 10 points and has generally drifted upwards over the last 12 years. And we're super prime on the home side as well. And then the RV Marine is an average just over 800, like an 810 FICO. All of this is very low default frequency, default expectation, and it's all secured. So we feel very good about the consumer book as a whole.

Okay, thank you.

Thanks, Betsy.

Our next question comes from the line of Stephen Alexopoulos with J.P. Morgan. Please proceed with your question.

Hey, good morning, everybody. Morning, Stephen. So for Zach, somewhat of a theoretical question. So if we look at the balance sheet, the loan to deposit ratio is low, which is keeping deposit betas very low at the moment. You're hedging to stabilize loan yields. When we think about incremental loan beta versus incremental deposit beta, and this is for you and the industry, are we basically setting up where, as we look out to 2023, the full year NIM could be higher in 2023, just mechanically over 2022. But at some point, we should expect your quarter over quarter NIM to start trending down through the year as the positive betas ultimately catch up.

Well, first of all, thanks for serving me up a theoretical question. I'd love to take those. I appreciate you doing that. You know, look, I think that our outlook and best forecast that I see is for continued NIM expansion. over the next few quarters, and if you sort of stretch the forecast out, if you use the forward yield curve as guidance, that continues out into the middle part of 2023, then it starts to stabilize. My forecast doesn't show contraction, anything material, just more kind of bouncing along on a flat line as you get further out into time. Obviously, you noted in your question that I quipped about it, it is a little theoretical. forecast on forecast on forecast, you got a little too far. But that's the expectation that we've got.

Okay, got you. And in response to John's question, I just want to understand your answer. You said you thought your deposit beta could be higher this cycle than the prior cycle. Is that right?

No, that's not what I said. I think generally continue to be tracking, you know, around the same level as the last cycle. I think it's you know, the beta sort of trends over time. That was the point I was trying to make initially in the early stages of the cycle. It's quite low, and that's certainly what we saw in the second quarter, less than 10% beta in the second quarter. I think the beta will accelerate as the rate environment and cycle continues, but in totality on a cumulative basis, still seeing generally the same kind of trends and outlooks as we had seen in the last cycle.

In the last... Okay, got it. Thanks. And then... For Steve, so there's quite a bit of talk about companies onshoring supply chains right back to the U.S. I'm curious what you're seeing on the ground, and I'm not really talking about the Intel plant, but beyond that, is this something that you're starting to see, or is this just really a talking point at this point? Thanks.

Well, Steve, it's occurring. It's been occurring. I think, if anything, what we're even seeing this year with China shut down episodically with COVID is It's just reinforcing, so it's supply chain nearshore or onshore, and we're getting some of that benefit here in the Midwest, and I suspect probably in the Southeast Southwest as well. I think that's going to continue. The supply chains have gotten better in some industries, but still in most are a problem. And that level of investment required is reflected in our equipment finance results. We had a record second quarter and expect to have a very strong second half. Usually our second half is better than the first half. So the teams are seeing a lot of investment. Re-shorting is certainly a meaningful portion of it.

The other thing I was just going to tack on, the other kind of secular phenomenon that I do think is going to be a tailwind for the industry broadly, for the commercial banking space, is the investment in property and plant equipment to deal with labor supply constraints, which aren't going away anytime soon and are really driving significant corporate-level investments in automation technology and things of that nature.

Okay, great. Thanks for all the color. Thank you.

Our next question comes from the line of Ken Uston with Jefferies. Please proceed with your question.

Hey, good morning, guys. Guys, noticing the strong loan growth this quarter overall and keeping the guide for the year. As I flip through the slide deck, I noticed that the originations on some of the consumer buckets are understandably smaller than they had been. I just want to ask you to flush out again, as you think forward about commercial growth versus consumer growth, are there any changes you guys are making in either underwriting criteria or what you want to put on the books? And how do you expect commercial versus consumer growth to look going forward overall? Thank you.

Sure. This is Zach. I'll take that one. I'll see if my colleagues want to tack on as we go throughout the course of answering your question. Generally, as I noted in your question, continue to expect high single-digit loan growth by Q4. We're actually running above that level right now. Q2 was about a 10% annual escrow sense, which gives us the opportunity to optimize our capital allocation and really dial in the long-term returns of the asset growth as we go throughout the balance of this year, which we feel really good about to be in that position. The nature of the growth going forward will be pretty similar to what we've seen in the first half of this year. That is commercial-led, driven by production, and consumer-led. growing, but slower. And I think it's corroborated by what we're seeing in the, particularly the commercial loan pipelines, up, I don't think we mentioned, up 9% quarter per quarter, 33% year over year in our late-stage commercial pipelines. So notwithstanding the economic headlines, our clients are still investing. There's still opportunity to grow. On the consumer side, we're going to see slower growth in residential mortgage than we saw in the first half as we go into the second half. And auto and RV marine should continue to contribute, although at a slower level. So I think perhaps a modest shift toward commercial, but generally pretty similar to the nature of the growth we saw in the first half.

Ken, I'll just tack on a little bit. With mortgage rates up, refi volumes gone, you see it in the mortgage numbers everywhere. So some of the home lending at least on the mortgage side, will abate, maybe partially offset with HELOC. But the consumer side, I think, will tend to be a little less robust than it has been. At the same time, the sheer scale of the opportunities we have in these national businesses with TCF are really extraordinary. So the inventory of finance is like number two to one of the big four. nationally, and that just has great upside for us as supply chains get worked out. We've talked before about auto floor plan. That's almost a $2 billion number for us as it normalizes. So there's opportunity a bit in the utilization rate changes. We saw a little bit of that in second quarter. There's a lot of opportunity in utilization rate changes. But the growth dynamics here in these national businesses and new markets are are very, very good. We've got over 50 new business colleagues in Minnesota and Colorado, as I mentioned earlier. And that activity is bearing fruit and will continue to be a source of growth for us as well. So very well positioned. Zach gave you the close-in pipeline as of contemporary week. But the total commercial pipeline is almost double what it was a year ago. So a lot of opportunity in front of us.

Got it. Great. Thank you, Steve. And then just one more follow-up, just drill down into auto. Some peers, and this isn't new, some peers are saying that things are getting tougher on spreads and have pulled away. You guys tend to get that premium to the market. And just with the changing dynamics going on in terms of residual values and new versus used mix, Can you just talk about some of the dynamics there in terms of the ability to continue to produce and originate at the same level and how you're expecting credit to act as well underneath? Thank you.

Well, the credit we think will have a very consistent performance because we've been so disciplined for more than a decade. So we don't expect to see any significant credit issues emerging out of auto production. or RV Marine for that matter, because that's an 810 plus average FICO. So very, very low default frequencies. That drives more than valuation, used car valuation, or other equivalent metrics, much more to our business line than it does to most, because we frankly just don't have that many repossessions. As we think about the business going forward, there's always a lag as rates rise in terms of getting pricing at a typical level. And there's always a benefit as rates fall. So we're dynamically pricing. We're actually, you know, we don't focus on market share. It's about return and risk. And we'll continue to do that. But we've been in this business for almost three-quarters of a century. It's performed very, very well for us, and we expect it will continue to do so.

Thanks for your question, Ken. Next question?

Our next question comes from Abraham Poonwala with Bank of America. Please proceed with your question.

I just wanted to follow up on your expense guide. Two-part question. One, as we think about your strategic target, 56% efficiency ratio, just talk to us in terms of areas of investments as we look forward from here and where you're flexing expenses in terms of savings and whether there is a case to be made that the efficiency ratio is normalized for whatever rate backdrop could be structurally lower than your current target.

Yeah, thanks for the question. There's a lot to unpack in expenses, so if you could give me an opportunity to do that. You know, I think now that we have delivered the cost synergies fully and it's in the run rate, we're back to managing expenses on an ongoing basis as the business grows. And with a goal toward continuing to drive positive operating leverage and modulating expenses, relative to revenue. While we self-fund the key investments in our strategic initiatives to sustain them, and those are not changed from what we've had before, we continue to build out key commercial capabilities, build our critical fee businesses and payments, capital markets, wealth, and I think continue to build terrific digital and overall product capabilities within our consumer and business banking function. So those are the priorities we'll keep investing in them, along with clearly what Steve was just mentioning in terms of the terrific momentum we have in the PCF expansion opportunities. The efficiency ratio is an outcome, frankly, and our goal is really, in the end, drive PP&R and just continue to expand profitability over time. With that being said, I do think efficiency ratio could very well trend lower here, just given where the rate environment is going, and we'll see where that goes.

Got it. I think it's just a separate question. In your slide deck, slide 35, You talk about digital engagement or originations. Both consumer commercial deposit originations seem to have peaked a few quarters ago and declined. Just wondering if anything to read in there. And talk to us in terms of the investments you're making on the digital side from a client onboarding acquisition perspective.

Yeah. So I think in terms of... The investments we're making in digital continue, and it's all about channel development, internal process efficiency, and we've got, as we have had in the past, a series of interesting new product developments that are on our roadmap that I won't steal the thunder on now, but you'll see them come through out into the market over time as we launch them. You know, we're always throttling the dials of where we're directing our marketing funding, and that changes the mix of online versus offline account acquisition over time. But in the end, it's all about driving the most value, ultimately, from the accounts in terms of depth of relationship and ultimately customer lifetime value.

And we feel really good over that. That is trending, frankly.

Got it. Thank you.

Our next question comes from the line of John Arfstrom with RBC Capital Markets. Please proceed with your question.

Hey, thanks. Good morning. Zach, a theoretical question for you, Zach. Do you feel like there's an upper limit on your margin? I've covered your company for a long time, and I always think like 350-ish gets a little bit toppy on your margin, but Is it possible to see similar types of sequential jumps in the margin if we get another 75 basis points next week, or is there something in your business mix that would prevent that?

If you see the room here, you're seeing a lot of heads nodding and pleasure with your questions, so thanks for asking it. I mean, I think, look, the reality is that there is no top. It's a function of where the interest rate environment goes, right? And I think that it could go higher. With that being said, I think realistically, what you're saying, kind of the realistic range is right for the foreseeable future. And certainly as we do our modeling based on the yield curve where it is right now, you know, we see continued expansion, as I mentioned in one of the questions earlier. for the next few quarters and then, you know, beginning to flatten out as you get into kind of the middle part of 23 and beyond, again, based on the trajectory of the yield curve right now.

Okay. And then, Steve, a question for you. Acquisition appetite. It's probably an annoying question, but you've done some fee businesses, and I think, you know, you've done well with those. You've done well with TCF. You did fine with First Merit. any interest at all in depositories, or is that just off the table given the regulatory environment?

We have a lot of opportunity to achieve with TCF, so our expectation is just to continue to focus on that. If there are some ancillary fee businesses that help us in payments or wealth or capital markets, those would be of interest to us, but we've got a lot of We've got a lot of upside to go for over the next couple of years. And I don't know how to think about the regulatory environment for us. We got approved in record time the last time with TCF, and we had the same experience with First Merit, and that should be some indication of our standing. And DTAS would be yet another indication that the outperformance every time above median is... a reflection of the quality of the portfolio. So we're CRA outstanding and have been. So all of that suggests we're able to do things if we choose to, but our focus will continue to be drive the revenue opportunity from the TCF combination.

Okay. Fair enough. Thanks, guys.

Thanks, John.

Our next question comes from the line of David Long with Raymond James. Please proceed with your question. Good morning, everyone.

Good morning. You know, the expected pre-pandemic day one CECL reserve was much lower for Legacy Huntington and even much lower for TCF than Legacy Huntington given its shorter duration loan portfolio than your current reserve level. So with the economic forecast at very healthy levels here, just want to see, you know, why maybe your reserve today is higher than where it was pre-pandemic.

You know, the pre-pandemic, I mean, I think you have to go back. I mean, that's, you know, over two years ago. So, you know, it's a point in time. This is always a point in time. The portfolio mix has shifted over time as well. We had a big oil and gas portfolio that was part of Cecil Day One that's not here anymore. We've got more real estate today than we had back then. So, you know, a lot of it is a function of just the makeup of the portfolio. And as we're sitting here today, you know, we're looking, you know, potentially in a recession where I think if you went back to January of 2020, you didn't have that on the horizon, potentially near term. So, you know, it's a combination of everything. You know, the mechanics of CECL, you know, you look at it every quarter and you run your models and you make subjective adjustments to where you think the models might be not capturing everything. And, you know, as we sit here at the end of the second quarter, you know, we had come down for six consecutive quarters prior to this one and just thought it was time to take a little bit of a pause and see where things shake out. So, you know, it's a quarter-by-quarter analysis we do. And it's really hard to go back to CECL day one and say this is a goal or an objective to get there.

Thanks for providing that color. And then, Steve, you mentioned or talked a little bit about some of the revenue synergies with TCF, and I sense your excitement there. But is there any way you can put numbers behind it, either in incremental loan growth with any of the categories or level of dollars of revenue that you think can be created?

Well, we haven't given guidance along those lines, David, but you're hearing us allude to it in terms of equipment finance, inventory finance, the reference to SBA. TCF didn't do SBA lending in Colorado or Minnesota. In fact, they didn't do CNI lending or small business lending in Colorado. So you get a lot, or for that matter, wealth in either market. There's a lot of investment that has been made that early on is producing, and I think just gets bigger and better as we scale those businesses and those markets. And then we are a force in Michigan. We are having great growth in Michigan, and we're now able to run a full set of plays in Chicago. So you have those combinations of regional markets Our equipment finance, number seven nationally, I think will be better than that on a relative position by the end of the year based on the volumes we see. So we've got a lot of synergy that's been achieved. And we've been emphasizing OCR. We have a much better product set on both the consumer and commercial side. And that emphasis will continue to translate into revenue growth in capital markets, card and other businesses, fee businesses for us, treasury management, et cetera, as we go forward. We'll give some thought to trying to mention that over time for you and others.

But at this point, we haven't done so.

Great. Thank you.

I appreciate the additional call, Steve. Thanks, David.

Our next question is from Erica Najarian with UBS. Please state your question.

Hi. Good morning. Just had a follow-up question on how yields, the yield trajectory. Zach, the increase in AFS yields was particularly eye-popping. Was that just a function of, you know, the starting point of 165 was just so low? or was there anything sort of more one-time in nature there? And additionally, I noticed that C&I yields were only up five bps in the quarter, and I'm wondering if you expect that loan beta to accelerate as, you know, over the next few quarters.

Yeah, nothing unusual in the first category you talked about. I think we're just seeing that continued trend through and certainly in our securities portfolio broadly, we're really benefiting from expanding yields and just the reinvestment of the cash flows. Overall, broadly speaking, across the loan categories, we're seeing nice trends in new money yield with gross yields really benefiting as the yield curve is expanding here. Environment's still competitive, so it's still a factor, but we're seeing new money rates expand on almost every major product line. across the board, around 30 BIPs to give you a sense overall from Q1 to Q2. And I think that the average rate increase in Q2 versus Q1 was relatively modest. I think what you're going to see coming through related to your C&I question in Q3 is more, just given, again, the

the timing of the rate moves and the moves in SOFR late in the quarter versus what we'll see on average for Q3.

Got it. Okay. And just a follow-up question. You know, clearly the market has priced in, started to price in a mild downturn, some sort of downturn, you know, over the near term. Could you remind us, when you printed an ACL ratio of 222, in 2020, what kind of unemployment rate were you assuming then? And if we think about a mild downturn over the next six to 12 months, how much more will your ACL ratio climb from what seems to already be a pretty nice level of 187?

Yeah, I mean, as it relates to where we were a couple of years ago, I'd have to go back and dig that out. I would just say that we use you know, multiple scenarios, and, you know, each one is going to have, you know, assumptions around GDP and unemployment. So, and those are going to run a pretty wide range, but, you know, it's the mix, you know, the weighted average of all those that we can track down.

This is Zach. I would just tack on. I would not draw sort of a direct correlation in that way. I think there's just too many other factors that go into it, and And I think that it's not even necessarily the case that it would go up. I think it really depends on, I think, what the trajectory is and what the outlook is across the various scenarios. Also, you know, clearly the depth and duration of any economic softening is the most important factor of that.

Well, and I think the other thing that you have to look at is, you know, with CECL, it's really hard to predict where the actual level of reserves is going to go because, you know, not only is that a function of the portfolio, but it's also a function of loan growth. So you've got to, you know, build that in, you know. So this quarter... We kept the ACL coverage flat, but in dollars, the allowance built because of the low growth we experienced. So, you know, there's a few moving pieces in there. But I would say entering into, you know, a potential downturn with a position of strength, we would mitigate any, you know, large increases going forward.

Thank you so much.

Our next question comes from Scott Seifers with Piper Sandler. Please proceed with your question. Hey, guys. Morning.

Hey. I was hoping you might be able to sort of update your thoughts on the revenue contributions from Capstone and Toronto. And I know you had the $4 million contribution from Capstone in the second quarter. I think the disclosures you offered previously on that one in particular were based on prior year's performance. So just any updated thoughts now that they're officially under the umbrella.

Yeah, so thanks for the question, Scott. We couldn't be more pleased about closing both of those acquisitions. You know, Toronto is a relatively small capstone. It's a very scaled business, as we've talked about, and just what an amazing fit for our capital markets business, and not only bring on a great run rate, but the opportunity to expand that business within the Huntington franchise is really, really significant. So we're thrilled about it. At this point, our current forecasts are around that same kind of run right here over the next couple quarters. And I think we'll see the synergy start to manifest as we get out further into time. But really excited about that. I think Toronto over time will grow a relatively small impact in this year.

So, Scott, I think Zach gave you like a $100 million three-year average revenue. Correct. And that's the reference point to your question. I would tell you they have a very good pipeline for the third quarter, and they had a good second quarter. And as we integrate and bring them into our customer base, we know them. We've worked together. This is a really good cultural fit. We'll look to grow revenues off that base.

Okay.

Perfect.

I think the $30 million run rate is roughly where we're at.

Okay. You said $30 million run rate?

Per quarter, yeah.

Per quarter. Perfect. Okay, good. Thank you very much.

Our final question comes from David Conrad with KBW. Please state your question.

Actually, Erica already asked my question, so I guess we're all wrapped up. Thank you. Thank you.

Well, we know you had a busy morning, so thank you very much for joining us today. It was just a tremendous quarter for us at Huntington. We're obviously pleased with the results, but we're also pleased with the momentum that we have going into the third quarter coming off of record net income and PPR growth. We're well-positioned, we believe, to manage through the current uncertain economic outlook. We remain committed to and are confident of our ability to continue driving value for our shareholders. Just as a reminder, the board executives and our colleagues are a top-ten shareholder collectively, reflecting our strong alignment with shareholders. So thank you for your interest and support today, and have a great one.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.