Huntington Bancshares Inc (HBAN) 2019 Q1 法說會逐字稿

Greetings, and welcome to the Huntington Bancshares First Quarter Earnings Conference Call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn this conference over to your host, Mr. Mark Muth, Director of Investor Relations.

Thank you, Donna.

Welcome.

I'm Mark Muth, Director of Investor Relations for Huntington.

Copies of the slides we will be reviewing can be found on the Investor Relations section of our website, www.huntington.com.

This call is being recorded and will be available as a rebroadcast starting about 1 hour from the close of today's call.

Our presenters today are Steve Steinour, Chairman, President and CEO; and Mac McCullough, Chief Financial Officer.

Dan Neumeyer, our Chief Credit Officer, will also be participating in the Q&A portion of today's call.

As noted on Slide 2, today's discussion, including the Q&A period, will contain forward-looking statements.

Such statements are based on information and assumptions available at this time and are subject to changes, risks and uncertainties, which may cause actual results to differ materially.

We assume no obligation to update such statements.

For a complete discussion of risks and uncertainties, please refer to this slide and material filed with the SEC, including our most recent form 10-K, 10-Q and 8-K filings.

Let me now turn it over to Steve.

Thanks, Mark.

And thank you to everyone for joining the call today.

As always, we appreciate your interest and support.

We had a solid start to the year in the first quarter, reporting net income of $358 million, an increase of 10% from the year ago quarter.

Earnings per common share were $0.32, up 14% from the year ago quarter.

Our profitability ratios remain strong as our return on tangible common equity was 18% and our return on assets was 1.35%.

Average loans increased 6% year-over-year, including a 7% increase in consumer loans and a 5% increase in commercial loans.

Average core deposits increased 8% year-over-year, reflecting our intent to fully fund loan growth with core deposits.

We're pleased with our first quarter efficiency ratio of less than 56%, down from 57% a year ago, driven by a 5% year-over-year revenue growth as well as expense discipline.

Overall, asset quality remained strong as most credit ratios remained near cyclical lows.

As we foreshadowed in our remarks in 2 conferences during the first quarter, net charge-offs ticked modestly higher this quarter as a result of 2 unrelated commercial credits.

Still with these 2 items, net charge-offs were near the low end of our average through-the-cycle target range of 35 to 55 basis points.

And as we've noted previously, we expect some quarter-to-quarter volatility given the very low loss and problem loan levels at which we're operating.

Our ratios for NPAs, delinquencies and criticized loans all remain very good.

As briefly outlined on Slide 3, we developed Huntington strategies with a vision of creating a high-performing regional bank and delivering top quartile through-the-cycle shareholder returns.

Our first quarter profitability reflects continued progress towards this aspiration.

We continue to make thoughtful and meaningful long-term investments in our businesses, particularly around customer experience, in order to drive organic growth.

We also prudently allocate our capital to ensure we are earning adequate returns and taking appropriate risk, consistent with our aggregate moderate-to-low risk appetite.

We are very pleased with how we are positioned.

We've built sustainable competitive advantages in our key businesses that we believe are and will continue to deliver top quartile financial performance in the future.

We remain focused on driving sustained long-term financial performance for our shareholders.

Slide 4 illustrates our current expectations for the full year 2019 and our new long-term financial goals.

We continue to have a very constructive view of the local economies in our footprint, which we expect will translate into continued organic growth this year.

What we are hearing from our customers remains positive.

Businesses in our local markets generally continue to deliver good performance.

While the first quarter tends to be our seasonally slowest quarter for commercial lending activity, our commercial pipelines have remained steady.

Businesses in our footprint are investing in capital expenditures and expansions, while the tight labor markets continue to constrain economic growth.

Our commercial customers continue to tell us that finding employees is their biggest challenge.

Some of these businesses have also weathered the headwinds of ongoing tariff and trade disputes.

Across our footprint, consumers also remain upbeat with strong labor markets driving wage inflation.

In the 3 months ending February, 18 of our 20 largest footprint MSAs saw unemployment rates decline, while the remaining 2 MSAs were unchanged.

Additionally, consumer confidence in our region has generally stayed at the highest levels since 2000.

Job openings continue to exceed unemployment levels in most of our markets.

So to summarize, we're saying that we remain bullish on the economy in our footprint within our businesses.

We do not see signs of a near-term economic downturn.

But nonetheless, we are cognizant of recent market volatility and mixed economic data, particularly in December and earlier this year as well as the recent short-lived inversion of the yield curve.

As we communicated on the last earnings call, we've removed all rate hikes from our forecast and have been taking steps to prepare for a more challenging interest rate outlook.

We do not foresee a recession in the near term.

However, our core earnings power, strong capital, aggregate moderate-to-low risk appetite and our long-term strategic alignment position us to withstand economic headwinds.

Our strategy is designed to drive more consistent performance across economic cycles.

Our full year 2019 expectations remain unchanged from what we discussed in the fourth quarter earnings call in January.

We expect full year average loan growth in the range of 4% to 6%.

Full year average deposit growth is also expected to be 4% to 6% as we remain focused on acquiring core checking accounts and deepening customer relationships.

We expect full year revenue growth of 4% to 7%.

The full year NIM is expected to remain relatively flat on a GAAP basis versus 2018, inclusive of the anticipated reduction in the benefit of purchase accounting and the cost of the hedging strategy we began implementing in the first quarter of this year.

The full year core NIM is expected to modestly expand.

Noninterest expense is expected to increase 2% to 4%, consistent with our stated priorities we continue to target annual positive operating leverage in 2019.

Now as Mac noted in the conference presentations during the first quarter, we expect our normal seasonal increase in compensation and marketing expenses during the second quarter, resulting in a peak quarterly efficiency ratio for the year in the second quarter.

We anticipate full year 2019 net charge-offs will remain below our average due to cycle target range of 35 to 55 basis points.

Our expectation for the full year effective tax rate is in the 15.5% to 16.5% range.

So with that, Mac will now provide an overview of our financial performance.

Mac?

Thank you.

Thanks, Steve, and good morning, everyone.

Slide 5 provides the highlights for the 2019 first quarter.

Results reflected strong earnings momentum with double-digit growth rates in net income and earnings per common share along with continued improvement in our profitability ratios.

We reported net income of $358 million, an increase of 10% versus the year ago quarter.

We reported earnings per common share of $0.32, up 14% year-over-year.

Tangible book value per common share was $7.67, an 8% year-over-year increase.

Return on assets was 1.3%, return on common equity was 14% and return on tangible common equity was 18%.

Our efficiency ratio for the quarter was 55.8%, down from 56.8% in the year ago quarter.

We saw net interest margin expansion of 9 basis points to 3.39% compared to the 2018 first quarter as a result of disciplined asset and deposit pricing and a benefit of interest rate increases, partially offset by the continued runoff of purchase accounting accretion.

Turning now to Slide 6. Average earning assets increased $3.8 billion or 4% compared to the year ago quarter.

Loan growth accounted for more than the entire increase as average loans and leases increased $4.3 billion or 6% year-over-year, including a $2.5 billion or 7% increase in consumer loans and a $1.8 billion or 5% increase in commercial loans.

Aided by the strong loan production late in the fourth quarter, average commercial and industrial loans grew 8% from the first quarter of 2018 and reflected the largest component of our year-over-year loan growth.

C&I loan growth has been well diversified over the past year with notable growth in corporate banking, asset finance, dealer floor plan and middle market banking.

We're also seeing good early traction in our new specialty lending verticals that we announced as part of the 2018 strategic plan.

Alternatively, we continue to actively manage our commercial real estate portfolio around current levels, with average CRE loans reflecting a 6% year-over-year decrease.

This reflects anticipated pay-downs as well as our strategic tightening of commercial real estate lending to ensure appropriate returns on capital and to manage risk.

Consumer loan growth remains centered in the residential mortgage and RV and marine portfolios, reflecting the well-managed expansion of these 2 businesses over the past 2 years.

Average residential mortgage loans increased 18% year-over-year.

As we typically do, we sold the agency qualified mortgage production in the quarter and retained jumbo mortgages and specialty mortgage products.

Average RV and marine loans increased 33% year-over-year.

Average auto loans increased 2% year-over-year as a result of consistent disciplined loan production.

Originations totaled $1.2 billion for the first quarter, down 14% year-over-year.

As we have previously mentioned, we are executing a pricing strategy to optimize revenue via increased auto loan pricing that has resulted in lower production volumes, but that is a trade-off we like.

New money yields on our auto originations averaged 4.73% during the first quarter, up 85 basis points from the year ago quarter.

The increase in other earning assets shown on this slide reflects the inclusion of deposit balances with the Federal Reserve Bank.

These balances were treated as non-earning assets prior to the fourth quarter of 2018.

Finally, securities were down 5% year-over-year as we let the portfolio runoff and utilized the cash flows to fund higher yielding loans during 2018.

During the 2019 first quarter, we began reinvesting portfolio cash flows in new securities driving the linked quarter increase.

Turning now to Slide 7. Average total deposits and average core deposits both grew 8% year-over-year.

Core certificates of deposits were up 164% from the year ago quarter, primarily reflecting the consumer CD growth initiatives during the first 3 quarters of 2018.

Average money market deposits increased 11% year-over-year, primarily reflecting the shift in promotional pricing away from CDs to consumer money market accounts in mid-2018.

Average interest-bearing DDA deposits increased 6% year-over-year, while average non-interest-bearing DDA deposits decreased 3%.

As shown on Slide 30 in the appendix, we are very pleased that our consumer non-interest-bearing deposits increased 5% year-over-year as we continue to grow households and deepen relationships.

We continue to see our commercial customers shift balances from non-interest-bearing DDA to interest-bearing products, primarily interest checking, hybrid checking and money market.

Average savings and other domestic deposits decreased 8%, primarily reflecting a continued shift to consumer product mix, particularly among legacy FirstMerit accounts, as FirstMerit's promotional pricing strategy is focused on savings accounts compared to our primary focus on money market.

Significantly, our continued focus on core funding resulted in a 56% year-over-year reduction in average short-term borrowings.

Moving now to Slide 8. FTE net interest income increased $52 million or 7% versus the year ago quarter.

Driving this growth was the 4% increase in average earning assets, rising yields in both our consumer and commercial loan portfolios and disciplined deposit pricing.

Our GAAP net interest margin was 3.39% for the first quarter, up 9 basis points from the year ago quarter.

The net interest margin decreased 2% -- 2 basis points linked quarter.

Moving to Slide 9. Our core net interest margin for the first quarter was 3.33%, up 11 basis points from the year ago quarter.

Purchase accounting accretion contributed 6 basis points to the net interest margin in the current quarter compared to 8 basis points in the year ago quarter.

Slide 26 in the appendix provides information regarding the actual and scheduled impact of the FirstMerit purchase accounting for 2019 and 2020.

On a sequential quarter basis, the core NIM compressed 1-basis point equivalent to the linked quarter decline in the contribution from purchase accounting accretion.

As a reminder, the 2018 fourth quarter, both GAAP and core NIMs benefited from 2 basis points of higher-than-normal commercial interest recoveries.

Turning to the earning asset yields.

Our commercial loan yields increased 65 basis points year-over-year, while consumer loan yields increased 41 basis points.

Our deposit costs remain well contained with the rate paid on total interest-bearing deposits of 94 basis points for the quarter, up 51 basis points year-over-year.

Compared to the prior quarter, our total interest-bearing deposit cost increased 10 basis points.

Slide 10 illustrates our cycle-to-date interest-bearing deposit beta compared to peers.

Our cumulative deposit beta remains low at 32%.

We have been communicating that we believe that consumer core CD strategies we utilized over the first 3 quarters of 2018 would serve us well over time, effectively frontloading some of the deposit beta.

You can see those benefits over the past 2 quarters as our cumulative beta has not increased as quickly as our peers.

This quarter, the peer groups' average cumulative beta increased 4%, while we saw a 2% increase in our cumulative beta.

As we have mentioned in the last couple quarters, overall deposit pricing remains rational in our markets.

Assuming no additional rate increases, our current forecast assumes modest continued upward pressure on deposit cost, driven by continued mix shift and incremental deposit growth from higher cost products, particularly money market.

Slide 11 provides detail on our noninterest income, which increased 2% from the year ago quarter.

Gain on sale of loans and leases increased 63% year-over-year, primarily reflecting the gain on the sale of asset finance leases and higher SBA loan sales.

Mortgage banking income decreased 19%, primarily reflecting a $3 million loss on net mortgage servicing rights in the quarter and lower origination volume.

Capital market fees were relatively flat year-over-year, but there were a few notable items impacting this line.

First, during the 2019 first quarter, we recognized a $6 billion unfavorable commodity derivative mark-to-market adjustment related to a commercial customer.

Partially offsetting this, the Hutchinson, Shockey and Erley acquisition, which closed in October 2018, contributed $5 million of capital market fees during the 2019 first quarter.

Finally, when not impacting the comparisons, we moved syndication fees, which were about $3 million in the 2019 first quarter compared to $2 million in the year ago quarter, into this line item.

Syndication fees were previously included in other income.

While down sequentially due to normal seasonality, we continued to see positive momentum within our 2 largest contributors to noninterest income as deposit service charges and card and payment processing fees both posted year-over-year growth.

We have been executing our new strategic plan for 2 quarters now and we are thoughtfully investing in our colleagues' digital technology in our brand.

Slide 12 highlights the components of the $20 million or 3% year-over-year growth in overhead expense.

Personnel cost increased $18 million or 5% accounting for almost the entire increase.

This primarily reflected hiring related to our strategic initiatives, the implementation of annual merit increases in the 2018 second quarter and increased benefit cost.

We have added colleagues in our digital and technology areas and experienced bankers in our new lending verticals.

The reminder of the increase primarily reflected an $8 million or 11% increase in outside data processing and other services, which was driven by increased technology investments.

Deposit and other insurance expense decreased $10 million or 56% due to the discontinuation of the FDIC surcharge in the 2018 fourth quarter.

We remain focused on driving positive operating leverage.

As part of our commitment to manage expenses relative to the revenue environment, we self-funded a portion of the expenses related to these new hires and technology investments, with the branch rationalization completed at year-end 2018, the elimination of the FDIC surcharge and other efficiency improvement efforts.

Cost savings from the pending Wisconsin branch divestiture will further fund strategic investments going forward.

Looking ahead to the 2019 second quarter, we expect noninterest expense will reflect a linked quarter increase of approximately $40 million to $50 million, resulting in a peak quarterly efficiency ratio of the year but were trending down in the back half of the year.

Roughly 2/3 of this expected increase reflects the normal seasonal increase in compensation expense as a result of the annual grants of our long-term incentive compensation in May as well as the May implementation of annual merit increases.

Marketing expense accounts for the majority of the remainder of the expected increase, reflecting the normal timing of spring campaigns and promotions.

The magnitude of these increases is consistent with what we've experienced the past 2 years.

However, these seasonal increases were masked in both of those years by noise related to the FirstMerit acquisition and other nonrecurring items.

Our full year 2019 expense expectations remain unchanged as this is normal seasonality in our expenses and has always been incorporated into our expectations.

Slide 13 illustrates the continued strength of our capital ratios.

The tangible common equity ratio, or TCE, ended the quarter at 7.57%, down 13 basis points from a year ago, but up 36 basis points from the 2018 year-end.

The Common Equity Tier 1 ratio, or CET1, ended the quarter at 9.84%, down 61 basis points year-over-year, but up 19 basis points linked quarter.

We continue to manage CET1 within our 9% to 10% operating guideline with the bases toward the upper end of the range.

We repurchased 60.5 million common shares over the last 4 quarters.

During the 2019 first quarter, we repurchased 1.8 million common shares at an average cost of $13.64 per share or a total of $25 million of common stock.

There is $152 million of share repurchase authorization remaining under the 2018 capital plan.

We intend to complete the repurchase of the full $152 million of remaining capacity during the 2019 second quarter.

During the first quarter, we submitted our 2019 capital plan for the Federal Reserve.

Recent regulatory relief moved Huntington and other regional banks our size from annual to biannual CCAR participation, resulting in us not being required to participate in the formal CCAR process this year.

However, we will participate in CCAR again in 2020.

Therefore, we intend to maintain the normal cadence of announcing our annual capital plan and planned capital actions in June.

That said, we have previously stated that we are targeting a long-term capital return in the 70% to 80% range and a long-term dividend payout ratio target of approximately 40% to 45%.

Our submitted 2019 capital plan is consistent with those targets.

We have also previously communicated on many instances that our capital priorities are: first, to fund organic growth; second, to support the cash dividend; and finally, all that are capital uses, including the buyback and selective acquisitions.

Those capital priorities have not changed.

Slide 14 provides a snapshot of key credit quality metrics for the quarter, which remain strong.

Consistent prudent credit underwriting is one of Huntington's core principles and our financial results continue to reflect our disciplined approach to risk management and our aggregate moderate-to-low risk appetite.

We booked loan loss provision expense of $63 million in the first quarter and net charge-offs of $71 million.

Net charge-offs represented an annualized 38 basis points of average loans and leases in the current quarter, up from 27 basis points the prior quarter and from 21 basis points in the year ago quarter.

The increase was centered in 2 specific commercial credit relationships.

Consumer charge-offs remained consistent over the past year.

There is additional granularity on charge-offs by portfolio in the analyst package in the slides.

The allowance for loan and lease losses as a percentage of loans remained relatively stable at 1.02%, down 1 basis point linked quarter.

The nonperforming asset ratio increased 9 basis points linked quarter and 2 basis points year-over-year to 61 basis points.

The year-over-year increase was centered in the C&I portfolio, partially offset by decreases in the commercial real estate portfolio, residential mortgage and home equity portfolios.

There was also a year-over-year increase in other NPAs associated with the investment portfolio.

Overall asset quality metrics remain near cyclical lows.

And as we have noted previously, some quarterly volatility is expected given the absolute low levels for problem loans.

Slide 15 highlights Huntington's strong position to execute on our strategy and provide consistent through-the-cycle shareholder returns.

The graph on the top left quadrant represents our continued growth in pretax pre-provision net revenue as a result of focused execution on our core strategies.

The strong level of capital generation positions us well to support balance sheet growth and return capital to our shareholders at managed rates over the long term.

The top right chart highlights the well-balanced mix of our loan and deposit portfolios.

We are both a consumer and commercial bank and believe that the diversification of the balance sheet will serve us well over the cycle.

Our DFAST stress test results on the bottom left highlight our disciplined enterprise risk management.

We're consistently ranked in the top 4 commercial banks in the severely adverse scenario of DFAST.

Finally, the bottom right demonstrates Huntington's strong capital position.

Let me now turn it over to Mark so we can get to your questions

Thanks, Mac.

Donna, we'll now take questions.

(Operator Instructions) Thank you.

(Operator Instructions) Our first question is coming from Ken Usdin of Jefferies.

A quick question on the positive way you maintain the NIM guidance for full year flat, you took out the remaining rate hikes as you said, the curve has obviously gotten flatter, but in your slides you still talk about expected through-the-cycle 50% beta versus the low 30s you're at now.

So can you talk about the goods and bads in terms of your ability to keep that GAAP NIM flat for the year and how you expect that GAAP in quarter trend from the 3.39% this quarter?

Yes, thanks, Ken, it's Mac.

So a few things I'll point out.

I mean, we have seen good non-interest-bearing deposit growth in the consumer line on the balance sheet, which continues to help us keep the NIM at a decent level.

But we're also very focused on managing both the asset yields and the liability rates.

We're very carefully monitoring the rates that we bring on to the balance sheet on the asset side, and we're also extremely focused on what we're paying on the deposit side as well.

So it's a pretty fluid environment and we just are making sure that from a -- both on asset and liability position, we're making good decisions around the rates and yields that we're bringing things on to the balance sheet.

We continue to work through some of the headwinds that had been discussed.

I mean, clearly, purchase accounting accretion is working against us.

We do have some additional costs associated with the hedging program, which is probably 3 basis points on the margin for the full year.

But we monitor these things very frequently and we continue to take actions to make sure that we continue to support the NIM.

Okay.

And then my follow-up on that point then so that we just expect that you had mentioned that the core NIM, I think should be up from here or up year-over-year.

So just in terms of the underlying core trend, we know about the purchase accounting, but if you could just help us understand the core trend from here?

Yes.

So the core NIM will be up modestly year-over-year.

I think you can expect that it is going to drift a little bit lower on a quarterly basis, but for the year-over-year impact, it should be up probably 3 to 4 basis points, something like that.

Our next question is coming from Matt O'Connor of Deutsche Bank.

I was wondering if you could talk about the sustainability of the deposit growth, obviously very strong at 8%.

And how you're thinking about that going forward?

So we continuing to see, I think, really good results on the consumer side of the balance sheet.

As I mentioned in the previous answer, 5% year-over-year growth in non-interest-bearing is probably one of the better performances among the peer group.

We're very focused on understanding what's happening from a competitive perspective.

We're very focused on making sure that we bring things on to the sheet at the right rate.

We have many, many programs underway on the retail side of the bank in terms of sales execution, promotional pricing strategies.

We look at different products and which products make the most sense for us, given what's happening in the marketplace.

And we were able to pull those levers pretty well.

So we feel good about the consumer side of the sheet.

Commercial is a bit more challenging in terms of just rate expectations.

We're monitoring and actually responding to those customer request on a one-off basis.

Obviously, we look at the tradeoff between what we can bring on a commercial deposit versus overnight funding, but we're very focused on supporting our deep customer relationships, and making sure that we do what's right from a customer perspective in that regard.

So we're very happy with what we see from a deposit growth on the balance sheet overall.

And we continuing to believe that we have many levers to be able to continue to see that growth take place.

Okay.

And then obviously that implies solid balance sheet growth going forward.

And if you're trying to kind of pull it into your capital levels and maybe your buyback expectations for the next capital cycle, what are your thoughts on that?

I know you're within your range on a CET1, you are at the high end of the range.

So it seems like there might be some flexibility, but obviously the balance sheet growth will also likely be pretty solid.

So how you're thinking about the buybacks in the next cycle here?

Yes.

I think, look, we're going to continue to manage through -- towards the upper end of the CET1 range of 9% to 10%.

So you're going to see us be closer to the 10%.

And we feel like we have a good balance of asset growth funded through core deposits and maintaining our capital levels at that 10% -- near 10% CET1 level.

So we haven't given our specific capital return expectations for the 2019 CCAR process.

But as I had mentioned in my comments, we're going to be 70% to 80% total and 40% to 45% dividend payout.

Our next question is coming from Jon Arfstrom of RBC Capital Markets.

Just a question on credit maybe for Steve or Dan.

Just the nature of the new NPLs and give us comfort that this is truly isolated in terms of what you're seeing on overall credit?

Sure.

Yes, so it's obviously something we monitor very closely is what's coming in the bucket, and what we're seeing is no concentration by sector, geography, et cetera.

So the 4 largest NPLs we had were all different industries.

And I think the flow this quarter, if you look at what we've been experiencing over the last year or so, it is lumpy.

We've had a number of quarters where it improves and then we'll see a few move in, in an opposite direction, but if you look at our NPA and NAL ratios year-over-year, 2 basis points different than what it was.

So we remain very confident.

We're not changing our outlook based on the new flows in terms of charge-offs to provision expense.

So this -- I think it always proves itself out that quarter-to-quarter, we see ups and downs.

This happened to be a quarter we were up a bit.

Okay, that helps.

And then Steve, you've said pretty clearly you do not foresee a recession.

But if you do start to see signs, what might change in terms of your approach?

Well, we've been working for years, Jon, with a view that something has been imminent and obviously wrong.

So we've done a number of things and we're maintaining those.

So I think it was 3, 3.5 years ago, the teams led by Dan pulled back on leverage lending.

We've done a lot with commercial real estate, construction in particular.

The concentration discipline stay in flow.

This focus on portfolio management and assuming that there's something likely to occur near term, now for the couple -- last couple of years has caused us to bolster our capabilities, our MIS.

There are a whole series of things that we've already done and are maintaining.

Now if we see it turning, we'll start adjusting where we think there's going to be further impact if to the extent we think there's any policy adjustment or other things.

But it -- we're running it fairly conservatively as we said we have been for a number of years notwithstanding the growth and expect that we're going to have relatively consistent performance through the cycle.

Our next question is coming from Ken Zerbe of Morgan Stanley.

My first question just in terms of expenses, if I got it right, it was up $40 million, $50 million in 2Q, but then how should we think about the second half?

Does some of that marketing expense come down and total expenses come down for the rest of the year?

Or does it stay at that sort of 2Q level?

Yes, Ken, it's Mac.

So you will see expenses come down in the third and fourth quarters.

The spike that we see in the second quarter is normal and has been included in all the guidance that we've been giving throughout the period.

So you will see the efficiency ratio at its peak in the second quarter and it will come down in the third and fourth quarters.

Okay, that helps.

And then just second question, in terms of the hedging activities, I guess, given that the Fed fund futures curve is already pricing in a rate cut, can you just walk us through the logic, like how much more hedging do you want to do?

And does it make sense to do it if the curve's already building in potential rate cuts from here?

Yes.

Ken, so we're kind of implementing our way into the hedge position.

We have about, let's say, $4 billion on at the end of the first quarter.

We're primarily focused on putting on BOR-OIS at this point, making sure that just in case we do get a rate hike from the Fed, we still benefit from that.

But clearly, just given some of the uncertainty in direction of interest rates and given our asset sensitivity position, we just think it's a prudent exercise to go through and reduce some of that asset sensitivity, while still maintaining the upside using the BOR-OIS at this point in time.

Our next question is coming from John Pancari of Evercore.

Back to the credit topic, regarding the 19% increase in NPAs, I know you mentioned that it's not any one industry.

I know you see the largest existing NPLs are not in anyone, but how about the inflows this quarter?

It looks like a big portion of it came from auto suppliers.

Well, actually, since our numbers are so low, Jon, that the increase is in one credit.

It was our largest inflow in the quarter, but that is one deal.

And of the 4 largest inflows this quarter, they are in 4 different industries.

They're originated in different -- they're not all from one vintage, they're not all in a singular geography.

I mean that's just the dispersion happened in a few more this quarter than we typically do.

Got it.

And had that one large credit that went in, has that already been reserved for or no?

It has and we foresee a favorable outcome on that particular deal.

Later this year, actually.

So you also -- Dan has accounted for the SNCC exams in the current reserves as well.

Yes.

And we didn't have tremendous activity this quarter, but the SNCC results are incorporated in everything you see today.

Okay.

Got it.

All right.

And then separately on capital, I know you reiterated the higher end of that 9% to 10% CET1 target.

Like what keeps you near that high end?

What keeps you at that biased versus potentially moving towards the lower end of it over time?

Yes.

So we just feel more comfortable operating at the higher end of that range.

And if you take a look at us relative to our peer groups, we are a bit lower than the peer group.

We do believe that the peer group is migrating down to us as they execute on their capital actions.

But we feel comfortable at that higher level and obviously we're producing industry-leading returns at that higher capital level.

So we feel very good about how we're positioned.

John, there's a little bit of history where the capital was deployed substantially in the FirstMerit acquisition.

So we pulled capital levels down with an expectation of replenishing over time, and we thought about being or expecting that we're somewhere later in the cycle.

So that would guide us to the higher end of that range.

Our next question is coming from Steven Alexopoulos of JP Morgan.

So on the NIM, I'm trying to better understand the offsets to the higher deposit cost coming and which we think will get us modest NIM expansion on core this year.

If we look at the rates on new loans and new securities that you are adding each quarter, how much above the current earning asset yield are those coming into the book?

Yes, Steven, so virtually all of the new production that we're putting on the sheet is going to be higher than the back book on the asset side.

We've been particularly focused on indirect auto pricing.

We've been very successful in raising pricing, which has had the result of reducing origination, but we're fine with that tradeoff.

We've also been very focused on really pricing across the entire consumer loan category.

Resi mortgage has been another area of focus for us.

And then on the commercial side, we're in the middle of renewal season and we're looking for opportunities to continue to increase our pricing there.

So we're very active on the asset side in terms of things that we're doing just to make sure that we're getting every basis point to help offset some of the continued pressure on the deposit side.

We are going to see continued migration of deposit rates up over the last half of the year, but that is all factored into our guidance and we do feel comfortable with the expectations that we put out there for the NIM.

Okay.

And then just for a follow-up, if we look at the $23 billion of money market deposits, that's average you're paying around 1%.

Where do you see that topping out assuming that, that stays on hold here?

So it will continue to migrate higher.

We basically run 6 months special pricing and then it comes back to a lower rate.

I'm not quite sure that we're going to see it migrate much higher.

It's probably going to be 25, 50 basis points perhaps.

But it just depends on the level of competition, what's happening in the marketplace and how we choose to fund the balance sheet.

You saw us move to CDs in early 2018, I guess we thought that was the opportunity.

We switched back to money market kind of middle of 2018, but we're always looking at what is happening in the market from a competition perspective, and we're pretty good at finding the right levers in terms of getting the right growth.

Mac, you're seeing -- you have mentioned commercial customers still moving out of non-interest-bearing into products like this.

Is that continuing at the same pace?

Or now the rates have stabilized, are you seeing that ease?

Yes, I do think it is easing a bit.

We did see continued migration in the first quarter and it's going to continue to migrate.

But I do think that the rate of migration has slowed down.

Our next question is coming from Peter Winter of Wedbush Securities.

You guys had a very strong quarter on C&I loan growth, and I'm just wondering, do you think that type of growth rate is sustainable?

Or were there some other factors that contributed to that growth that might reverse over time?

Yes, this is Dan.

Well, I think generally, our customers continue to be fairly positive.

So the pipelines remain strong.

I think the growth was diversified in that not any one area accounted for the bulk of it, everything from middle market to our business credit asset base, health care, they all contributed.

So I think that it's within our risk appetite where -- we have certainly pulled back where we feel we can't compete within our risk appetite.

So I don't see any meaningful shifts in the volumes that we would anticipate for the balance of the year.

Okay.

And then just staying on the loan side.

Mac, I heard your comments about the increase in the auto pricing for the auto loans.

I did notice that quarter-to-quarter auto loans decline.

Would you expect that to be a temporary decline?

Peter, it's likely going to be stable to declining going forward because we're very, very pleased with the pricing actions that we're taking.

We're very pleased with the volumes that we're generating.

And we just think it's the right tactic given where we are from a rate perspective and the concentration of auto on the balance sheet.

So I would expect stable to declining going forward.

Our next question is coming from Kevin Barker of Piper Jaffray.

I just wanted to follow-up on some of the capital.

I noticed, I mean, the amount of buybacks in the first quarter were relatively low compared to first 2 quarters and then you still had a lot left over.

Is there any reason behind pulling back on the buybacks in the first quarter versus leaving significant more for the second quarter?

It really just looking at some of the volatility and some of the events in the first quarter, I mean, Brexit and other items just had us hit the pause button for a while.

We did do the $25 million and we will complete the remaining $152 million in the second quarter.

But really just taking a look at the environment and maybe being a little more cautious with the buyback, but we'll pick it up in the second quarter.

We also pulled a -- about a little less than $100 million forward from the plan as approved by the Fed for the year, put it in -- accelerated into the fourth quarter.

So if you will, we almost prefunded the fourth quarter with the first quarter.

Okay.

And then to follow up on some of the credit comments.

Was any change in the severity that you saw on any of these loans?

Or I guess, the recovery amount that you would get on some of the commercial loans than you have seen in the past given the credit losses that we saw this quarter?

Yes.

So I think severity, no.

Now recoveries are slowly dwindling.

So a small portion of the increase in net charge-offs was from lower recoveries.

So that's just a fact given how lower charge-offs have been.

But I think when you look at the portfolio as a whole, everything was really rocksteady with the exception of C&I.

And I just think for context, if you look at the C&I category, again if you average the last 4 quarters, we had 15 basis points of charge-offs.

Two quarters ago, we actually had net recoveries.

So I think it's important to look at that in total because as we've mentioned in a quarter anything can happen and I think this quarter we happened to see just a little bit more activity than normal, but overall, we feel really confident in the book.

Our next question is coming from Scott Siefers of Sandler O'Neill.

I was just hoping, Mac, you might be able to touch on some of the fee drivers that you see going through the remainder of the year.

I guess sort of underlying the question is, if we were to sort of target the midpoint of your revenue growth range, it implies a pretty substantial ramp in the remaining 3 quarters of the year relative to the base from the first quarter.

And of course, we're entering the seasonally stronger periods of the year.

But just curious to hear your thoughts on what would be the main drivers that caused that shift up in the base of fees and revenues overall?

Yes, thanks, Scott.

So it's important to remember that the first quarter is seasonally low for us and we also had about $10 million of unusual items, if you think about the MSR and then the commodities write-down.

So that -- that's roughly $9.5 million, $10 million.

So a little bit light in the first quarter driven by those 2 events and also just the normal seasonality.

Going forward, it's going to be the usual suspects.

We're going to see growth -- we'll continue to see growth in deposit service charges as we bring on new customers and we continue to see good household growth and good deep relationships.

We've got some new treasury management capabilities coming out this year in business banking that should help us significantly as we move through the year.

The capital markets line just continues to grow for us.

The Hutchinson Shockey acquisition is going to help quite a bit.

And we've made good investments in people and product in that group.

The payments line is a good grower for us.

It's debit, credit, ATM, merchant processing and that's going to continue to show good growth as well.

So I do recognize some of the weakness in the first quarter, but I feel good about the remainder of the year, with mortgage in particular coming back in the spring as we would typically see it.

So yes, I think the outlook for the year should be good.

Our next question is coming from Brock Vandervliet of UBS.

Yes, going back to the margin theme, I think other questions have covered the deposit dynamics, but could you talk about borrowings?

The sequential growth in borrowings I noted this quarter, very similar to last year where it grew very quickly in Q1 and then you tapered it down the rest of the year.

Is that likely to be the similar pattern this year?

Yes, Brock.

I would expect that to be a very similar pattern to what you saw last year.

And it does come back a bit to some of the seasonality on deposit growth and deposit usage among our customers.

And first quarter is always a bit seasonally low and then the growth comes back as we move through the year.

So that is typically what happens.

Okay.

Great.

And just as a follow-up on -- in terms of loan repricing and sort of tailwinds you may have there, could you just review of the portion of the loan book that's variable rate, how much is tied to LIBOR versus other longer term rates?

I think it's about 60% of the portfolio is tied to 1-month LIBOR.

It's floating.

It's floating, okay.

And the biggest fees would be 1-month LIBOR within that.

Ladies and gentlemen, we have reached the end of the question-and-answer session.

I would like to turn the call back over to Steve Steinour for closing comments.

So thank you.

Before I wrap up, we wanted to take a minute to thank our Chief Credit Officer, Dan Neumeyer, for his decade of service with Huntington.

Today is his final earnings conference call before his retirement in June.

And his leadership in the aftermath of the global financial crisis drove the company to be where it is today in terms of performance.

Dan's been a vital leader in instilling Huntington's credit culture and discipline and establishing our risk management -- credit risk management infrastructure.

So thank you very much, Dan.

Now we're pleased that Rich Pohle, currently our Deputy Chief Credit Officer and Senior Commercial Credit Approval Officer, will be stepping up into the Chief Credit Officer role upon Dan's retirement.

Rich has been a key member of the Huntington team for almost a decade, and our team will benefit from his disciplined approach and many years of experience.

Our first quarter results provided a good start to the year and I'm confident about our prospects for the full year.

Our top priorities remain executing our strategic plan to prudently grow revenue and to thoughtfully invest in our businesses for continued organic growth.

We're building long-term shareholder value through a diligent focus on top quartile financial performance and consistently disciplined risk management.

And finally, I always like to end with a reminder to our shareholders that there's a high level of alignment between the Board, management, our colleagues and our shareholders.

The Board and our colleagues are collectively the seventh largest shareholder of Huntington, and all of us are appropriately focused on driving sustained long-term performance.

So thank you for your interest in Huntington.

We appreciate you joining us today.

Have a great day.

This concludes today's conference.

You may disconnect your lines at this time.

Thank you for your participation.