Huntington Bancshares Inc (HBAN) — Q1 2022 Earnings Call Transcript

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 Steinour, 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 a 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. Let me now turn it over to Steve.

Thanks, Tim. Good morning, everyone, and welcome, and thank you for joining the call today. It's been an eventful start to the year. We entered 2022 with momentum, and we carried forward that trend to deliver a strong first quarter. We are managing through a turbulent macroeconomic environment; high inflation, persistent labor and supply chain constraints, Federal interest rate tightening, rapid moves in the yield curve and the devastating crisis in Ukraine have all made for a challenging backdrop. Now on to slide 4. I'm pleased to highlight our excellent first quarter performance. First, our colleagues are delivering on revenue-producing initiatives supporting our strong results. We are generating profitable growth and building momentum, including executing on our revenue synergies. Second, operating with disciplined expense management, we posted another quarter of sequential reductions in core expenses. Our targeted cost savings are on track for full realization this quarter, and we are capturing these benefits even earlier than originally guided. Third, we had record low net charge-offs this quarter, with overall exceptional credit quality. Our disciplined risk management continues to be a strength. Lastly, we are confident in our full year outlook and our ability to drive additional profitability. We are revising our guidance higher to incorporate the recent rate curve outlook, and we remain confident that we will achieve our medium-term financial targets in the second half of 2022. On slide 5, let me share more detail on our first quarter performance. Our robust loan growth, higher net interest income and planned reductions in expenses supported a record PPNR. Average loan balances, excluding PPP, grew 10% annualized, driven by new loan production across both commercial and consumer portfolios. We continue to see strong customer demand and growing loan pipelines, and are confident this momentum will continue over the course of this year. Our teams are fully aligned and executing on the revenue synergy opportunities from TCF. We are seeing terrific momentum in these initiatives as we expand into new markets with enhanced capabilities. In the Twin Cities, our new wealth management, business banking and mid-market teams are already contributing to revenues. Likewise, in Colorado, our business banking and middle-market teams are capturing market share and generating revenue. We're also pleased with our inventory finance business, which has seen seasonal growth and is exceeding our expectations. Additionally, we are seeing increased productivity and positive reception to the Huntington product set and customer service experience. We continue to execute on our strategic initiatives across the bank. In March, we announced the next evolution of our leading Fair Play product set, including the soon-to-be-released instant access feature as well as an enhanced credit card offering through the launch of our cash-back credit card. In addition, our continued expense discipline has enabled us to support investments that are yielding results. This is evidenced by our record first quarter of sales in Wealth Management and also by another quarter of robust growth in our capital markets businesses. Just last month, we announced the signing of a definitive agreement to acquire Capstone Partners, a top-tier middle market investment bank and advisory firm that will add significant capabilities and expertise to our capital markets businesses. The transaction is expected to close late this quarter. Capstone is a terrific fit with Huntington, both strategically and culturally, and we're excited for the synergistic growth opportunities. The addition of Capstone better positions us to serve the full range of needs for clients and our footprint as well as those we serve on an increasingly national basis. The transaction adds key verticals that complement our existing industry specialization and adds new capabilities in expanded sectors. We expect Capstone will meaningfully increase our capital markets revenues by about 50%, and we're excited to welcome our new colleagues to Huntington. Finally, we are proud to share a few of the awards we received during the quarter. We were honored to be recognized by Forbes in 2022 as one of America's best large employers, ranking number 7 in the banking and financial services industry. We were also recognized in middle market and small business banking with numerous Greenwich Excellence and Best Brand Awards for 2021. And lastly, we are proud that The National Diversity Council named Donald Dennis, our Chief Diversity, Equity and Inclusion Officer, as a Top 100 Diversity Officer nationally. Before moving on, I'd like to take a moment to welcome Brant Standridge to Huntington, who joined us earlier this month as our President of Consumer and Business Banking. Brant comes to us with a broad set of experiences, including a customer-focused foundation that aligns well with our strategies. As Brant joins us, a special thank you to Steve Rhodes, who will continue to lead our Business Banking division. Slide 6 shows our continued trajectory of profitable growth. We've been driving sustainable profitability for years supported by our prior strategic investments, and our long track record of managing positive operating leverage. We are confident that this increasing trend will continue and will further benefit from the underlying earnings power unlocked from TCF. We are poised to have outsized PPNR growth this year and expect it to expand sequentially over the remainder of the year. Zach, over to you to provide more detail on our financial performance.

Thanks, Steve, and good morning, everyone. Slide 7 provides highlights of our first quarter results. We reported earnings per common share of $0.29. Adjusted for notable items, earnings per common share were $0.32. Return on tangible common equity, or ROTCE, came at 15.8% for the quarter. Adjusted for notable items, ROTCE was 17.1%. We were pleased to see accelerated momentum in our loan balances, with total loans increasing by $1.7 billion and excluding PPP, loans increased by $2.6 billion. Total average and ending deposits also increased, driven by strong trends in both consumer and commercial balances. Pre-provision net revenue grew 4.2% from last quarter, reflecting our continued focus on self-funding revenue-producing strategic initiatives, as well as net interest income expansion. Consistent with our plan, we reduced core expenses by $27 million from last quarter, driven by the realization of cost synergies. Credit quality was exceptional, with record low net charge-offs of seven basis points and nonperforming assets reduced to 63 basis points. Turning to slide 8. Accelerated loan growth momentum continued, with average loan balances increasing 1.5% quarter-over-quarter, totaling $111.1 billion. Excluding PPP, total loan balances increased $2.6 billion or 2.4%, largely driven by commercial loans. Within commercial, excluding PPP, average loans increased by $2.2 billion or 3.8% from the prior quarter. We continue to see broad-based demand across lending categories that is supporting strong new production. We are also benefiting from slowing prepayments and modest increases in line utilization. Middle market, asset finance, corporate and specialty banking, all contributed to higher net balances within commercial and have all expanded for two quarters in a row. Commercial real estate balances also increased during the quarter by $485 million. Inventory Finance contributed to growth this quarter with balances increasing by $666 million, driven by the expansion of client relationships and the expected seasonal increase in utilization levels. Auto dealer floor plan increased with balances by $251 million as new client relationships and a modest uptick in utilization both supported growth. In Consumer, we had a record first quarter performance in indirect auto and RV marine originations. This drove balances higher in auto and RV/Marine by $108 million and $63 million, respectively. Additionally, on-sheet residential mortgage increased by $550 million. These were offset by lower home equity balances. Across the enterprise, our bankers are executing disciplined calling strategies, driving sustained growth in both early-stage and late-stage loan pipelines, both of which are higher from the prior quarter and the prior year. We are seeing strong demand from our customers, and the realization of pipelines supports our high degree of confidence in our 2022 outlook. Turning to slide nine. We delivered solid deposit growth, with balances higher by $614 million. On a spot basis, total deposit balances increased $3.7 billion, or 2.6% from prior quarter. Ending commercial balances increased by $2.5 billion and consumer balances increased by $1.5 billion from the prior quarter. This growth reflects continued consumer deposit gathering and our focused relationship deepening within commercial customers. On slide 10, we reported net interest income and NIM expansion. Core net interest income, excluding PPP and purchase accounting accretion, increased by 3% to $1.119 billion. Consistent with prior guidance, net interest margin increased compared to the prior quarter, and we are on track for further NIM expansion throughout 2022. Turning to slide 11, we are dynamically managing the balance sheet to remain asset sensitive and capture the benefit of expected higher rates while incrementally providing downside protection opportunities as they present themselves. We have a peer-leading NIM, and we're positioned to expand margin as rates increase. During the quarter, we modestly increased our downside protection by executing a net $2.7 billion of received fixed swaps. As noted on the slide, these explicit hedging actions reduced asset sensitivity in the quarter by 0.3%. The overall estimated asset sensitivity in an up 100 basis point ramp scenario ended the quarter at 3.1%, down from 4.6% at year-end. The remaining change in this metric beyond our hedging actions was driven by other ancillary modeling impacts such as the denominator impact of higher projected base net interest income, slower prepayments, and other balance sheet mix shifts. On the bottom of the slide is our loan portfolio composition. As you can see, we are well positioned for the expected higher interest rates throughout the year with an attractive mix of floating and fixed-rate loans. Furthermore, our indirect auto portfolio has a weighted average life of approximately 25 months with roughly half of that portfolio repricing each year. Moving to slide 12. Non-interest income was $499 million, up $104 million year-over-year and down $16 million from last quarter. Fee revenues were impacted by a decline in mortgage banking, primarily due to lower saleable originations as well as typical seasonality resulting in lower cards and payments activities compared to the fourth quarter. Given our robust SBA pipelines and attractive market opportunity, we reinitiated our SBA loan sales in the quarter, driving a $27 million increase. In addition, our record first quarter performance in wealth management sales contributed to an increase in investment-related revenues. Overall, we continue to be pleased with the traction and growth outlooks for our key fee-generating businesses within payments, capital markets, and wealth and advisory. Moving on to slide 13. Non-interest expense declined $168 million from the prior quarter, and excluding notable items, core expenses declined by $27 million to $1.07 billion as we delivered cost savings from the acquisition. As we shared previously, we expect core expenses to be approximately $1 billion by the second quarter. Even as we're driving down expenses, we're also investing in initiatives that are driving sustainable revenue growth throughout the company. Slide 14 highlights our capital position. Common equity Tier 1 was 9.2% at the quarter end. Our dividend yield remains at the top of our peer group at 4.6%. We did not repurchase any shares during the quarter due to our announced signing of a definitive agreement to acquire Capstone. As you can see on slide 15, credit quality continues to perform very well. As mentioned, net charge-offs were record low of seven basis points, benefiting from a net recovery position in commercial portfolios and continued strong consumer credit quality. Non-performing assets and criticized loans both declined from the previous quarter. Our ending allowance for credit losses represented 1.87% of total loans, down from 1.89% at prior quarter end. Slide 16 covers our medium-term financial targets, which remain unchanged. As Steve mentioned, we're fully committed to achieving these by the second half of 2022. As our loan growth momentum continues, our first capital priority remains funding this organic growth, and we are encouraged by these trends. To the extent that our loan growth remains as robust as we expect, I would anticipate share buybacks will be de minimis for the remainder of the year. We are comfortable operating at or around these current capital levels as we balance our expected 2022 growth plans and the possible longer-term scenarios for the global macroeconomic outlook as we had in 2023. Finally, turning to Slide 17, let me share our updated outlook. The guidance we provided in January assumed continued economic expansion aligned to market consensus as well as the interest rate yield curve expectations as of early January. Our updated guidance continues to assume further economic growth and the rate curve as of the end of March. As a result of the rate curve outlook, we are revising upward our guidance in net interest income. We now expect core net interest income on a dollar basis, excluding PPP and purchase accounting accretion, to grow in the mid to high teens. This is higher than our previous guidance of high single-digit to low double-digit growth. In fee income, while we are seeing encouraging trends in our payments, capital markets, and wealth and advisory businesses, we are also impacted by the industry-wide mortgage banking pressure. Based on this, we have revised lower our fee guidance to flat to down low single digits, excluding the impact of Capstone. On the topic of Capstone, we are anticipating closing the acquisition at the end of this quarter. Based on estimates created during due diligence, we believe the business could add approximately $20 million to $30 million of fee income on a quarterly basis. This would be incremental to the stand-alone Q4 Huntington guidance. We will provide further information on the impact of Capstone, as we complete the acquisition and finalize our financial forecast. On expenses, excluding notable items, we are still tracking to our $1 billion run rate for this quarter. And again, this guidance is excluding Capstone. Finally, given our continued exceptional credit performance across our portfolios, we are revising our full-year net charge-offs down to approximately 20 basis points from less than 30 basis points previously. Now let me pass it back to Steve for a couple of closing comments before we open for Q&A.

Thank you, Zach. Slide 18 recaps what we believe is a compelling opportunity. Huntington stands as 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 are focused on executing our strategic plan, which we believe will drive substantial value creation for our shareholders. We are well positioned to deliver sustainable revenue growth, which is bolstered by new markets, new businesses, and expanded capabilities. As our revenue synergies accelerate and gain traction, we also remain committed to our proactive and disciplined expense management. As a result, we are increasingly confident in our robust return profile with expectations for a 17-plus percent ROTCE, as we deliver on our medium-term financial targets in the second half of the year. Tim, let's open up the call for Q&A, please.

Thanks, Steve. 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. Operator, let's open up the questions.

Hi. Good morning.

Good morning.

Good morning.

I just wanted to see if you could unpack the upgraded NII guide a little bit, give us a sense as to how much of that is coming from the forward curve changes, from the loan growth from the cash redeployment, just to understand those puts and takes a little bit more thoroughly? Thanks.

Sure, thanks for the question. This is Zach. I'll address that. The main factor is the rate curve based on expected forward rates. At the time of our budget, we had around five rate hikes included in our forecast, increasing from 25 basis points to 150 basis points in Fed funds by September 2023, with 75 basis points anticipated by the end of 2022. This has significantly changed, with the yield curve now reflecting an increase of up to 300 basis points or 150 basis points better by March 2023 and $275 million by December, representing a total improvement of 200 basis points by the end of this year. That's the primary driver. Given our asset sensitivity, we are well-positioned to benefit from this, both in terms of spread and also from the reduced drag from Fed cash we experienced in Q1, which will help us achieve the peer-leading performance we expect at this point.

Okay. And then as I think about the flexibility you have in your balance sheet, I'm just wondering, how you're planning on funding the loan growth that you're anticipating getting from here? And is there anything left over to increase the redeployment into the curve?

I think at this point, we're expecting to continue to grow deposits as well. We see nice trends in continued deposit gathering, commercial growing faster than consumer, but both continue to be solid producers and that will be the main funding source as well as, as I said, utilizing some of the continued excess liquidity we've got on cash at this point.

All right. Thank you.

You’re welcome.

Good morning.

Good morning.

In terms of the – I know you mentioned that you're seeing strengthening in loan growth momentum and you cited improvement in line utilization. Could you just talk about exactly what areas you are seeing this strengthening? How much did the line utilization improve? Are you beginning to see CapEx-related demand start to drive growth?

Sure. This is Zach. I'll take that one, and my colleague could take on the next part. Generally, we're really pleased with what we're seeing in loans taking a big step back. The strength in our pipeline and the realization of that flowing through into bookings gives us confidence, and we expect to maintain momentum to achieve high single-digit loan growth by Q4. The model will be pretty similar in the second half of the year to what we've seen in the last two quarters. It is production-led, with commercial growing faster than consumer, but consumer also continuing to contribute. Within commercial, we are seeing ongoing strength in the mid-market, along with our corporate specialty areas, including equipment and inventory finance. These are contributing well, as are commercial real estate and auto dealer floor plans. On the consumer side, residential mortgages are primarily driven by the mix of purchases, along with steady growth in auto and RV/Marine. From a utilization perspective, I would describe what we observed this quarter as modest but encouraging, which I think is a healthy sign for our customers. We noted around a 1% increase in general middle market lines and several percentage points increase in inventory finance, with most of that being seasonal. This is encouraging, as it shows inventory starting to flow to dealers more steadily, allowing them to hold inventory. Additionally, the auto dealer floor plan business also saw a couple of percentage points increase, largely due to a gradually improving auto supply chain. Overall, we have a healthy mix going forward, with production being driven mainly by commercial.

And John, this is Steve. I would add that we have invested since closing with TCF in several lending units. We have significantly increased our capacity, especially in the Twin Cities, Denver, and some specialty groups. We are able to scale the businesses, and we expect to see increased volume from these investments throughout this year and beyond.

And John, it's Rich. The last part of your question had to do with CapEx spending. We are absolutely seeing an increase in capital spending, given just the tightness of the labor market. So there's an intense move to automation, and we'll continue to see that through the course of the year.

Got it. Okay. Great. Thanks. And sorry if I missed this in your prepared remarks, can you talk a little bit about the trajectory of your data and your deposit beta expectation, how the deposit cost could trend early on for the first 100 basis points of hikes and then thereafter? Thanks.

Yes. John, this is Zach, I'll take that one. Generally, across the totality of the rate hike cycle, our expectation is that we're going to see similar dynamics this rate cycle as we saw in the last one. Clearly, there are some competing forecast forces there with lower starting rates that might signal a little higher beta, but the level of excess liquidity across the industry would tend to blend to the beta and they could be lower. As I think has been noted by a number of industry participants over time. I think the general operating assumption of the industry, and we share this, is that the early impacts around beta for the first several rate moves are going to be relatively lower and it will increase as the interest rate environment reaches a higher level. But I would say two things. One is what's really important to us is how we're poised to manage against this with very robust, pretty detailed product-by-product segmented client-by-client management approaches, watching the market very carefully so that we can react and really be incredibly disciplined. And I think, secondly, we're poised to benefit quite a bit here through the cycle, given the long strategy we've had to drive for primary bank relationships and core operating accounts within our business and commercial accounts. So, we feel good about how we're positioned and really just staying very vigilant to manage through it as we go forward with the next few quarters.

Okay. In fact, what is your through-cycle beta that you're assuming in your current ALCO assumption?

Yes. It's about 30%. That's what we saw in the last cycle, which was baked into our model internally.

Got it. All right. Thanks Zach.

Welcome.

Good morning, guys. Thanks for taking the question. First question I wanted to ask was on the cost side. Once we get down to the about $1 billion per quarter in expenses coming up shortly here, is the plan hold to hover around that level for the remainder of the year, or are any of these inflationary pressures just sort of overwhelming that prior outlook?

Yes. Generally, for the latter half of this year, we are optimistic about our cost trends. We have clear visibility to achieve a $1 billion core expense run rate by Q2. This positions us well to meet the medium-term financial targets we've discussed. I expect expenses to remain roughly flat in the second half of the year. We are noticing some inflationary pressures, and as we exceed revenue expectations, there will be some related expenses. However, based on our current outlook, we anticipate expenses to be approximately flat in the second half of the year. This is primarily due to our strict expense management and focus on efficiency regarding our base expenses, as well as a commitment to self-funding the investments in our revenue growth initiatives that we've previously mentioned. Looking ahead to 2023, our long-range planning will be focused on maintaining our operating leverage, which we have successfully achieved in eight of the last nine years, and we are confident we can continue to do so as we approach 2023.

You might also be aware, Scott, that we announced the acquisition of Capstone. As that closes, we will need to incorporate that run rate as well.

Yes, thank you. Zach, as we look ahead, do you expect to change your rate sensitivity significantly again, or will any changes just result from the evolving nature of the balance sheet moving forward?

Yes. Thanks, Scott, for that one. We really like the level of asset sensitivity we have right now. As you know, we took a series of conservative actions last year to get to the point we are now, and we're really benefiting from it. But all along that way, we've talked about when opportunities came up to protect some of the downside to lock in some of that benefit, we would likely take that. And so that's what you saw us do in Q1 with the net $2.7 billion of received fixed swaps, pretty modest impact on asset sensitivity as we noted in the prepared remarks, around 0.3%. From here, I would expect us to stay very much net asset sensitive in the near term. Meanwhile, slowly adding to that downside hedge protection book over the course of the coming months, as we watch the environment. We would say dynamic, that could change, but it's the general operating posture here at this point.

Perfect. All right. Good. Thank you, guys, very much.

Thanks, Scott.

Hey, thanks. Hey, Zach, one follow-up on the cost point. So if you're in that $1 billion zone-ish plus or minus towards the end of the year, would we then add Capstone to that? And do you have an approximate calibration relative to the revenue outlook, what you'd expect on the cost side from Capstone?

Yes. Thanks for that question. I want to make sure we clarify that. So that guidance is excluding Capstone, to be clear. On Capstone, we're really diving into the modeling right now and we'll come back with further guidance as we get closer to and through the close. Based on the due diligence modeling and the company's historical run rate that we are aware of, the kind of core efficiency ratio of that business is pretty similar to what other M&A advisory boutique firms would have. On top of that in the near-term quarters, we'll have a little bit of merger-related costs. I'm not expecting very significant comp there at all. And then lastly, some incremental compensation expenses to fund retention payments, which are really important for a deal like this. So more to come, we'll give clear guidance on it as we get closer to the acquisition.

Okay, got it. And then just one question on fees. In your outlook, can you help us understand what the either incremental or total impact is of Fair Play and other changes to deposit products? And are you also assuming that you continue to sell SBA loans, like you got back into this quarter? Thanks, Zach.

Yes, no problems. Those are both important points. As it relates to the Fair Play evolution, nothing has changed from the guide we provided back in March in the RBC Conference, which is around $14 million of net impact on the fee line relative to the Q4, '21 run rate. That was slightly better than the earlier guidance we provided in January, and continues to be our expectation of the impact on the fee line. As we've noted a number of times, overtime over the course of the 18 to 24 months after that, we do expect to claw that back and to benefit from higher acquisition, better retention, more account deepening as a result of those changes, but that's the kind of immediate impact. And then – sorry, the second part of your question was?

The SBA loans and are you baking that into the outlook as well?

Yes. We expect to return to our usual practice of selling the guaranteed portion of our SBA loan production. It's worth mentioning that the team is currently performing exceptionally well and driving production effectively. We believe this will support the sustainability of those sale gains, which is excellent. In the first quarter, we saw higher gains than anticipated due to the elevated premium levels in the marketplace. However, we may see a slight adjustment from that level moving forward. Overall, we expect to maintain that run rate and continue to sell the production as we have historically.

And Ken, we've invested in the SBA unit as well over the course of last year, adding SBA capabilities in Colorado and Minnesota, in particular, and they're off to a great start. So, we should have a record year in terms of production.

Thank you.

Hey, good morning.

Good morning, Jon.

Yes. No, happy to. From our standpoint, the consumer is in very good shape, particularly in the super prime segments where we play. If you look at the delinquency numbers. From our standpoint, it's all seasonal, in terms of the normal patterns that we're following there. So, we feel good about it, particularly in the spots where we play. We do expect over the course of 2022, the consumer credit metrics will start to revert a bit to the norm, but we've remained very disciplined with our LTVs and our FICOs. So, we're very comfortable with that book. It's been a steady state performer over many cycles. We feel good about it.

And Jon, there is a phenomenon sort of lower income where the price of gas at the pump and inflation generally, including housing, is having an impact. But again, we've been super prime for more than a decade and the consistency of the performance in that, whether it's residential assets or auto will hold us in very good shape. We give the portfolio in aggregate to be on the low end of the risk spectrum when we talk about aggregate moderate to low.

Yeah, okay. Fair enough. And then, wondering if you guys can touch a little bit more on the inventory finance themes, you called that out as a growing area. And obviously, it's something we all watch particularly in auto, but I know that the TCF business was in a few other sectors. But talk a little bit about the themes and what you're seeing there?

This is a group that has been established for many years, including TCF, and we are currently working with about 14,000 dealers across the country. The distribution is strong, supported by a highly skilled and experienced team with excellent relationships with our dealers. This allows us to be flexible in certain areas of the sales process for OEMs, with various agreements in place to support our dealers. The group has performed well even through different cycles, maintaining low loss rates, and dealers tend to assist one another. OEMs also provide support during dealer transitions when necessary. The primary challenge for the group at this moment is determining the timeline for increasing supply. They are experiencing supply chain disruptions, impacting many dealers. This group is expected to naturally expand over time due to low inventories, and we anticipate strong performance over the next few years. Additionally, this group excels in customer service and has consistently added OEMs each year, with expectations that this trend will continue based on current discussions. We are very optimistic about this group, which represents a significant asset for TCF, enabling us to pursue further opportunities in consumer finance, which we will discuss at an upcoming conference.

Okay. Thank you.

Good morning. I think I asked the same question last quarter about LTVs and auto. But I guess I'm just curious, we've seen a little bit of a trend down in the LTV and really good disclosure on slide 34, I'm looking at. But just as we think about used car prices being inflated and new car prices and even like the RV and Marine, are there thoughts to further tighten some of these metrics to just insulate yourself from corrections there?

We believe that the decrease in used car prices is advantageous. If you examine the ratio of new to used vehicles, it's actually improved slightly since the third quarter of 2021, indicating an increase in new products being included in our offerings. Overall, we are a super prime lender in this segment, maintaining a high FICO score while utilizing our effective custom scorecard, which helps us avoid having to repossess vehicles. Therefore, we're not particularly worried about the recent price fluctuations in the industry. We've managed to keep the loan-to-value ratios in the mid-80s, with FICO scores hovering around the 770 to 775 range, which gives us confidence. Regarding RVs, it's important to note that our loan-to-value calculations are based on wholesale, not retail prices, which results in somewhat higher figures, but we maintain a solid 800-plus FICO score in that area. From our perspective, there is no real need for us to tighten our metrics, as both portfolios have performed exceptionally well. The RV and Marine segment has experienced its first full cycle with us over the past couple of years and has exceeded our expectations in terms of losses. Consequently, we are not concerned about either of these portfolios.

And we've been in the auto business, Matt, for more than half a century. And we were able to stress test the portfolios in 2009, where we had 10% and 14% unemployment rates. So we think we've got this really dialed in and there's a discipline with this quarterly reporting that goes back over a decade that shows this consistency. So while there may be some movement in loss rates, the overall approach has been very low to fault frequency based on the underwriting.

That's helpful. I have a similar question about the mortgage and home equity book on the next slide. It's really useful to see this data over a couple of years. However, we've observed a significant change in the loan-to-value ratio in your originations. I'm curious if this change is something you're actively driving or if it's more about your clients leveraging more equity against these loans. Thank you.

No. I think it's really a combination of both, but I would say it's more of the customers driving it than we've done any tightening. I think certainly, we've been conscious of housing prices. And I think what you're seeing on the slide there shows that we've been disciplined with our originations and making sure that there's sufficient equity going into the loan to keep us safe if there's a drop in values.

We like secured consumer lending, Matt, as we've shared in the past, and we believe that will put us in comparatively great shape through the cycles.

Hi, good morning. I wanted to follow-up with Betsy's earlier line of questioning, Zach. I'm wondering if you could quantify the earning asset growth that you're expecting. I know you're looking forward to more deposit growth from here. But just thinking about how we should think about earning asset growth relative to that high single-digit loan growth? And also at what point in absolute rates should we start modeling in or thinking about positive total deposit growth, but perhaps negative mix shift away from non-interest-bearing deposits?

Good questions. To provide some additional insight regarding the earning asset side, there are two key components. First, we expect loan growth to be in the high single digits as previously mentioned. Second, concerning the securities portfolio, we are currently at about 24.5% of our assets in securities. I anticipate that we will maintain this percentage within a range of 24% to 26% for the foreseeable future as we manage yield, liquidity, and overall balance sheet strategy. These two elements will likely align closely with our loan growth guidance. When it comes to deposits, it's difficult to pinpoint exactly when we will see movement. Our general outlook suggests a lower beta at first, increasing later, and we'll observe this trend over time. Additionally, it's important to note that our earning asset growth may be somewhat constrained by our cash allocation, as we are actively redeploying around $6 billion in cash to support loan growth, which we expect to decrease to around $1 billion, typical for our operations. While this may reduce earning asset growth, it will ultimately enhance our net interest margin as we increase earning assets.

Got it. And my follow-up question is for Steve. Steve, you've done a good job in terms of balancing, investing into the franchise and extracting cost savings, some cost savings to fund that and delivering on the TCF cost savings. I'm wondering as we think about the revenue set up from here, we clearly got from Zach the second half outlook, but good performing banks are thinking about that are sort of settled in their investment cycle have been saying something like 2% to 3% expense growth is sort of a core expense growth to think about in the future taking into account inflation. Is that something that seems reasonable for your company as you look forward perhaps the second half of 2022?

Well, we've guided for the second half of 2022 earlier. You heard Zach's comments of generally being flattish around $1 billion of expense, and that would include the expectations of inflation and other investments that we plan to make. We started with a view of 22 last August when we did a round of expense reductions to set up and deal with the inflation, Erika, and that included the 62 branches that consolidated in early February this year. So we're on track with the plan that we laid out last summer, and we're on track, if not ahead, with TCF at this point. So a lot of confidence in this year, and then we'll be adding Capstone. We think we've got revenue synergies coming with that as well. So we like how we're positioned at this stage and optimistic certainly very confident for the year and optimistic about going forward. We will be dynamic with operating expenses relative to revenues. We've committed to positive operating leverage. And I think it's eight out of nine years in the past, and you can count on that being part of our 2023 equation.

Great. Thank you so much Steve.

Thanks Erika.

Hey, good morning. I just had one question, Steve and Zach. I think you mentioned you hit the 17% plus medium term ROTCE target in the back half of the year. Just talk to us in terms of the sustainability of the ROTCE profile from here, looking into the medium term, just in terms of the downside risk as we think about maybe getting to a point where the Fed goes back to cutting interest rates, some normalization in credit. What's the level of ROTCE that you think is defensible even in a less conducive revenue backdrop?

This is Zach and I'll take the first shot at that and then Steve to see if he wants to tack on as well. Generally, feel great about the 17% level, so for the foreseeable future and forecasting that level even if the budgeted rate curve, which I mentioned before, was considerably lower than the current rate curve. So, I think that we feel good about that level over the medium term, as we said. One of the things that we're, frankly, internally really excited about is getting to the second half of the year, delivering these medium-term targets that we first put out in December of 2020 when we announced the TCF acquisition and then being able to reset and provide some updated guidance at that point. And my expectation is we'll see at or above that level that guidance as well.

So, just to add, we had a very good first quarter. We've talked since the fourth quarter about growing momentum, but we are not hitting on all cylinders. We still see a lot of upside on the TCF synergies and on some of the other investments we've made. So, there's a revenue dynamic that we hope we'll be able to continue and expect to be able to continue to develop throughout this year, and that will provide some cushion for maybe normalized provision as well as somewhat different scenarios. Like the way the businesses are positioned, we're roughly balanced, as you know, consumer and business. And on the business side, we've had a lot of scale added with TCF and investments made in new capabilities and products, and you'll continue to see that. That's part of the plan as we go forward this year. And I think that's going to position us to have a consistency over the next few years in a variety of scenarios.

The one thing I would just tack on to that, just at the end here is a key contributor to this is not only our balance sheet and capital allocation, which is just ever more robust and dialed in to drive cost returns, but also the growth of our fee businesses. Notwithstanding our guidance that we provided this quarter where fees will be growing, so it's slower than spread by Q4 of this year, just driven by the extraordinary rate environment driven by some temporal factors in mortgage and our fair play product evolution, broadly speaking, though, I think the course of the long-term, which was nature of your question, I expect fee revenues to grow as a percentage of revenues by around a percentage point per year. And I think that disciplined capital allocation driving for returns, the driving toward fee-intensive businesses and payments and capital markets at our wealth and advisory, those things are the ones that sort of contribute to that sustaining ROE even under various interest rate scenarios.

That's clear. And just as a quick follow-up to that. How do you own no buybacks this year? But when we think about capital allocation, and you mentioned on the fee side, anything that we should expect in terms of inorganic growth, be it Capstone-like transactions or anything on the fintech side or the wealth management that you're looking at?

There are some fee-based businesses that could be interesting to us if they were available, but they are generally smaller and would not impact the overall guidance that Zach provided. As we look to enhance our capabilities, we evaluate opportunities from time to time, similar to what we did with Huntington Technology Finance about four or five years ago. Over the next couple of years, there may be opportunities to complement our capabilities and increase our fee-generating potential beyond what Zach mentioned. If we identify options that make sense and would enhance our customer service and growth, we would consider them. However, our primary focus remains on maximizing the opportunities we currently have with the TCF combination and the investments we've already made.

Got it. Thanks for taking my questions.

Thank you, next one.

Thanks. I just had a quick follow-up question on indirect auto. If you could talk a little bit about the outlook for indirect auto, some of the peers are pulling back because of the loan pricing pressures. I'm just wondering what your thoughts are?

We really appreciate that asset class and have navigated through various cycles with it. The average duration is quite short, around 25 months as Zach mentioned earlier. Even when rates are rising, it remains manageable, and in a declining rate environment, the spread appears attractive. We are committed to this asset class consistently, which adds value for our dealers. Historically, we have seen a relative premium in pricing due to market consistency, and we believe we're still maintaining that. We have a strong affinity for this asset. While spreads may tighten slightly in a rising rate environment, it's a temporary situation, and this asset still outperforms many alternatives. As Rich noted, we are confident in its performance, considering it a solid one-plus ROA asset historically. Our relationship with auto dealers is robust, showcasing the depth of our cross-selling capabilities within the company.

Got it. Thanks, Steve.

Thank you, Peter.

So thank you very much for joining us today. We're very proud of our colleagues, and I want to thank them for their commitment to driving results in a great quarter. We have a lot of confidence in our teams and what we can deliver for our customers and especially our shareholders over the course of 2022 as you heard. I appreciate very much your support and interest in Huntington. Have a great day.