Greetings, and welcome to the Huntington Bancshares Fourth Quarter Earnings Conference Call. At this time, As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mark Moose, Director of Investor Relations.
Thank you. Welcome. I'm Mark Muth, Director of Investor Relations for Huntington. Copies of the slides we'll 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 the call.
Our presenters today are Steve Stonauer, Chairman, President and CEO Zach Wasserman, Chief Financial Officer and Rich Polley, Chief Credit Officer, As noted on Slide 2, today's discussion, including the Q And 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 the 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, where he'll start on Slide 3.
Thanks, Mark, and thank you to everyone for joining the call today. As always, we appreciate your interest and support. We're pleased with our full year 2019 results and the continued momentum across the bank, despite
a challenging $7, an increase of 6% over 2018. Return on average assets for 2019 was 1.3% Return on average common equity was 13% and return on average tangible common equity was 17%. The Bank achieved record net income for the 5th consecutive year and positive operating leverage on an adjusted basis for the 7th consecutive year. Our balance sheet is very well positioned with robust Interest rate risk. Credit quality remains strong with 2019 net charge offs at the low end of our average through the cycle target range.
We remain prudent with our allocation of capital to ensure we are earning adequate returns and taking appropriate risks with our aggregate moderate to low risk profile. 2019 marked the 9th consecutive year of an increased cash dividend coupling the dividend with $441,000,000 of share repurchases during the year, we returned over $1,000,000,000 to our shareholders in 2019 which represented a total payout ratio of 79%. As we've previously communicated on many instances, our capital priorities are first to fund organic growth, 2nd, to support the cash dividend and finally, all other capital uses, including the buyback and selective acquisitions. These capital priorities have not changed. Now moving to the economy.
We continue to see growth and our expectation for 2020 is for continued expansion. Consumers continue to perform well across our footprint with strong labor markets driving wage inflation. The 12 months ending November 2019, unemployment rates declined or remain the same in 17 of the 20 largest MSAs in Huntington's footprint states. Job openings continue to exceed unemployment levels in the Midwest. All prices continue to appreciate with especially solid increases in Michigan, Indiana and Ohio.
Additionally, consumer confidence in our region has generally stayed at the highest levels since 2000. The positive consumer sentiment is evident in the success of our consumer lending businesses. Our home lending business achieved record mortgage originations for both full year 2019 and the 2019 fourth quarter. Our auto finance business also achieved record originations in the 4th quarter, and we expect another good year in 2020 for our consumer lending businesses, again, driven primarily by residential mortgage and auto finance. Now we have seen a slowdown in commercial loan activity consistent with the measured tone from some of our commercial commerce.
Economic uncertainty, along with tight labor markets, remain headwinds for more robust economic growth in our footprint. Overall, Huntington is performing well with disciplined organic growth. Our customers are generally confident about their performance for 2020 and we share that confidence in our performance. We continue to see good traction in our new specialty lending verticals with Mid Corporate Lending Technology Media And Telecom, our practice finance area, in which we announced as part of the 2018 strategic plan. Looking out to 2020, we proactively took actions in the fourth quarter to drive organic revenue growth, reduce our future expense growth, and increase our capacity for additional investment in
the
in the fourth quarter. On the expense side, we completed the position reduction of employees and announced the consolidation of 30 in store branches Now, these actions, along with the disposition of other properties and a technology system decommission, resulted in unusual expense of approximately $25,000,000 in the quarter. And enterprise growth initiatives going forward. I'm confident in our positioning, entering 2020, our colleagues are focused and executing our plans. We are all aligned with our strategies of creating a high performing regional bank and delivering top core style through the cycle, shareholder returns.
Zach will now provide an overview of our financial performance. Zach, Thanks, Steve, and good morning, everybody. It's a
pleasure to be with you here on my first earnings call with Huntington. Slide 4 and 5 provide highlights of our full year 2019 fourth quarter 2019 results respectively, many of which Steve already touched on. 4th quarter results include approximately $47,000,000 of pre tax impact or approximately $0.03 per share after tax. From previously announced actions that were taken to better position the bank for 2020, including the securities repositioning workforce actions and the pending in store branch closures. Let's turn to Slide 6 to discuss the key fundamental drivers behind the financial performance for the quarter.
Average earning assets increased $2,300,000,000 or 2 percent compared to the year ago quarter. Average loans and leases increased $1,300,000,000 or 2 percent year over year with balanced consumer and commercial loan growth. Average commercial and industrial loans increased 3% from the year ago quarter and reflected the largest component of our year over year loan growth. C and I loan growth has been well diversified over the past year with notable growth in specialty bank Asset Finance And Corporate Banking. Our 4th quarter commercial loan growth was below our expectations as a portion of deals we expected to close at the end of the year were pushed 2020 and seasonal declines in line utilization at year end were larger than normal.
Overall commercial activity continues to be restrained by economic uncertainty. We continue to actively manage our commercial real estate portfolio around current levels with average CRE loans reflecting a 2% year over year decrease driven by pay downs and refinancing activity. Consumer loan growth remained focused in the residential mortgage portfolio reflecting robust originations in the second half we sold the agency qualified mortgage production in the quarter and retained jumbo mortgages and specialty mortgage products. Now turning to Slide 7, average total deposits decreased less than 1% year over year, while average core deposits increased 1% year over year. Note that both of these growth rates were negatively impacted by the June 2019 sale of the Wisconsin retail branch network.
Including approximately $725,000,000 or almost 1 percent of core deposits. We continue to see a migration in deposit balances from CDs and savings into money market accounts, reflecting shifting customer preferences and where we are focused on promotional pricing. Average money market deposits increased 9% year over year, while savings decreased 9% and core CDs decreased 16% We expect this dynamic increased 1% year over year. As shown on Slide 32 in the appendix, we're very pleased that our commercial non interest bearing deposits increased deposit base through new customer acquisition and relationship deepening. Moving now to slide 8.
FTE net interest income decreased 55000000 dollars or 7% versus the year ago quarter, primarily driven by the 29 basis point decline in net margin, partially offset by 2% increase in average earning assets. Net interest margin was 3.02% 3.12 percent for the quarter, down 29 basis points from the year ago quarter, down 8 basis points linked quarter. And in line with the guidance we provided at the Goldman Sachs Conference in December. Moving to Slide 9, our core net interest margin for the fourth quarter was 3.08 percent down 26 basis points from the year ago quarter. Purchase accounting accretion contributed 4 basis points to provides information regarding the actual and scheduled impact of FirstMerit purchase accounting for 2019 2020.
Please note that this quarter is the last quarter we intend to provide core NIM and PAA breakouts as the PAA is expected to have a relatively immaterial impact in 2020. Turning to asset to earning asset yields. Our commercial loan yields decreased 52 basis points year over year consumer loan yields decreased 8 basis points and security yields decreased 16 basis points. The decrease in our earning asset yields can be primarily attributed to lower interest costs continue to move lower as CDs and money market promotional rates repriced lower and we actively manage commercial deposit costs. Total interest bearing deposit costs of 87 basis points for the quarter were up 3% year over year, though down 11 basis points sequentially.
Slide 10 summarizes the actions we have taken to reduce the unfavorable impacts of interest rate volatility and the lower interest rate environment. Our hedging strategies reduce the downside risk for lower interest rates and have significantly narrowed the band of modeled outcomes net interest income. Our current interest rate risk modeling suggests little change to net interest income from either a 25 basis point increase or 25 basis point decrease in 2020. We continuously monitor we'll continue to prudently refine our interest rate risk management as the interest rate environment, balance sheet mix and other factors necessitate. The graphs on the bottom left of the slide detail the mix of our loan portfolio as well as the significant consumer deposit balances with repricing events.
In the first half of twenty twenty. These repricing events provide an opportunity for the bank to reduce the cost of deposits as these higher priced CDs and promotional money market accounts repriced lower. Through December, the consumer deposit repricing activity is on track with our expectations. The success of our consumer deposit repricing and retention has provided us the ability to remain more disciplined our commercial deposit pricing, particularly among the highest cost deposits. The graph on the bottom right of the slide displays the impact of our actions you can continue given the significant deposit repricing opportunities that remain in the first half of twenty twenty.
Turning
to Slide 11,
you can provides the detail on our non interest income, which increased 13% from the year ago quarter. The growth was highlighted by mortgage banking income which increased 152%, primarily reflecting higher salable origination volume and secondary market spreads as well as a $12,000,000 increase in the gain on net mortgage servicing rights risk management. We also continue to see steady growth in card and payment processing income, trust and investment management and insurance. In the 2019 fourth quarter, we repositioned $2,000,000,000 of securities picking up approximately 70 basis points of yield on securities prospectively at a cost of $22,000,000 in Q4, while negatively impacting 4th quarter results, the prospective earnings pickup and the earn back on the positioning losses are very attractive and consistent with our active management of the securities portfolio. The year ago quarter in 2018 included $19,000,000 of securities losses from similar repositioning.
Slide 12 provides the components of the 1% year over year decrease in noninterest expense. The 2019 fourth quarter included $25,000,000 of expense related to the actions, which Steve discussed earlier, while the year ago quarter included $35,000,000 similar branch and facility consolidation related expense. Adjusting for these items, non interest expenses were essentially flat. We continue to drive efficiency in our core expense base to ensure robust and growing investment capacity to fuel our investments in digital mobile and cyber technology, enhanced products and services and distribution capabilities. This disciplined expense management allowed us to achieve positive operating Slide 13 illustrates the continued strength in our capital ratios.
The tangible common equity ratio or TCE ended the quarter at 7.88% 67 basis points from a year ago and common equity Tier 1 ratio or CET1 ended the quarter at 9.88 percent or 23 basis points year over year. We continue to manage CET1 to the high end of our 9% to 10% operating guidelines. During the fourth quarter of 2019, we repurchased 13,100,000 common shares at an average cost of 14.96 dollars per CECL implementation back to a CET1 level T1 year transition reinforces our commitment to maintaining strong capital ratios, which we see as a position of strength for the organization. As a result, we are currently planning to repurchase less than a third of the remaining $249,000,000 of share repurchase capacity on our 2019 capital plan in the first half of twenty twenty. Now let me turn it over to Rich to cover credit including CECL.
Thanks, Zack. Slide 14 provides an update on our
4% from the year end 2019 ACL to $1,280,000,000 or 1.70 percent of total loans and leases on an adjusted basis. As we stated on the 3rd quarter call, given our 50% mix of relatively longer dated consumer loans, the CECL lifetime loss methodology results in a higher allowance than the prior methodology. The increase in reserves is largely related to the consumer loan portfolio. As we move forward under CECL, it is a new accounting standard with will be determined using various models and incorporate multiple scenarios, historical loss and recovery rates, borrower characteristics and other factors. As a result, we expect more volatility in our quarterly provisioning expense.
Our parallel testing however indicates that key factors being held constant the aggregate annual level of provision expense is not expected to materially change from the current incurred loss methodology despite that higher quarterly variability. Slide 15 provides a snapshot of key credit quality metrics for the quarter. Despite challenges in our oil and gas portfolio, Our credit metrics remain strong. As we have noted previously, some quarterly volatility is expected given the absolute low level of problem loans. Consistent 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 to low risk appetite.
Net charge offs remain near the low end of our average through the cycle target range of 35 to 55 basis points. Net charge offs represented an annualized 39 basis points of average loans and leases in the current quarter, flat to the prior quarter and up from 27 basis points in the year ago quarter. The increase was centered on the oil and gas portfolio which made up approximately half of the total commercial net charge offs. This portfolio was primarily impacted by geological issues compounded by low commodity prices and limited capital markets activity. We have a relatively small oil and gas portfolio representing less than 2% of total loans and we believe we have it appropriately reserved for.
Consumer charge offs have remained fairly consistent over the past year There's additional granularity on charge offs by portfolio in the analyst package on the slides. Annual net charge offs excluding the $67,000,000 of oil and gas related losses were 26 basis points and just 15 basis points for the commercial portfolio. The non performing asset percent, again primarily as a result of the stress in our oil and gas book. The allowance for loan and lease losses as a percentage of loans remained relatively stable at 1.04%, down one basis point versus the linked quarter. Let me turn it back over to Zack.
Thanks, Rich.
Slide 16 illustrates our expectations for full year 2020. We expect 2020 to be another organic growth as we continue to execute and invest in our core growth strategies. We expect full year average loan growth with continued growth in both consumer and commercial portfolios. We expect growth to be modestly stronger on the consumer side, focused on home lending and auto finance, we expect slightly more measured commercial loan growth consistent with recent economic data. Full year average deposit growth is expected to be approximately 3% to 4% as we remain focused on acquiring forward checking accounts and deepening customer relationships.
Specifically, our expectation entails continued decline in CDs more than offset by growth in checking and money market. We expect full year total revenue We are projecting the NIM to rebound in the first half of twenty twenty from the 2019 fourth quarter before stabilizing in the second half of the year. Given our relatively neutralized interest rate risk positioning, we remain confident in our outlook for net interest income growth. While deposit pricing remains rational in our markets, we are closely watching the competitive environment around as this represents the primary risk and opportunity for variance to our NIM forecast. We expect non interest income on a GAAP basis to grow at a slightly higher pace than total revenue in 2020, 1% to 3%.
Based on our active management in 2019, we are comfortable with our current expense base and the run rate trajectory. Our focus is on driving continued investment in opportunities to further differentiate Huntington and drive revenue growth. We've told you previously and are demonstrating with our actions and our 2020 guidance, we remain committed to targeting annual positive operating levers. We anticipate that the full As Rich just covered fundamentally, our credit remains strong. We're taking decisive action to mitigate the risk in our oil and gas portfolio.
As a result, we have expectations for oil and gas charge offs remaining slightly elevated in the first half of twenty twenty. These charges are fully represented in our 2020 guidance. We believe we were adequately reserved at year end and with the life of loan CECL adoption. Our expectation for the effective tax rate for the remainder of the year is in the 15.5% to 16.5% range.
Operator, we'll now take questions. We ask that as a courtesy to your peers, each person ask only one question and one related follow-up. And then if that person has any additional questions, he or she can add sales back into the queue. Thank you.
One moment please while we poll for questions. Thank you. Our first question comes from the line of John Arfstrom with RBC.
Good morning. Lots to ask about, but I'll just maybe start Steve with just talked a little bit about headwinds in commercial, but we do have USMCA in phase 1 China seemingly done Just curious if you could give us a little bit more color on that and if you're seeing any changes in optimism at all from the commercial customers?
John, at U. S. MC has just recently done and obviously there are other issues and distractions going on in DC right now. So I don't think there's a meaningful change yet, but I, from what we reported at the conference and, and, I do, I do expect there's going to be a second half, optomet lift I'm optimistic in that regard, but I think it's going to be a little, little hesitant, little reluctant in talking with different customers about the start of this year. We did see more cash on balance sheets at the end of the year.
So it's 5 balances. Were, were down a bit from where we expected them to be. That was particularly true in auto as customers kept more cash on on sheet. So I think that just reflects this conservativism and just sort of, a wait and see approach Again, in the Midwest, we're hampered by lack of labor. So that is an element in this planning process as well as these uncertainties.
Okay. That's helpful. And then just one more, Zach or Rich, maybe Rich, for you, just can you talk about the day 2 CECL impact again. I think what you said is expect the provision to be roughly the same in 2020 compared to 2019. I wonder if I heard that right, and Zach, how you want us to think about provisioning in 2020.
Yes, this is Rich.
The testing that we've done and again, this is new. So we're kind of going through quarter by quarter, the testing that we did CECL to BAU showed that there were some quarterly volatility, but over the course of the year, it tended to level itself out. So we don't see a lot of we see more volatility on a quarterly basis going forward, but we don't expect a material change in the overall provision under CECL than we had under the current loss method update.
All right. That's helpful. Thank you.
Thanks.
Our next question comes from the line of David Long with Raymond James. Please proceed with your question.
Good morning,
everyone. Good
morning. With your revenue outlook for the year, what is the rate backdrop that you are assuming right now?
This is Zach. I'll take that question, David. Good to talk with you. We're essentially assuming that the forward yield curve as it existed in November, although it's relatively consistent with where it looks right now. The fed funds expectation is relatively neutral.
I think the actual forward rate look at it precisely, included, forecasted one rate cut sort of in the late summer time period. But I think as we noted in the prepared remarks, based on our hedging program, our net interest income and NIM is essentially neutralized from 1 rate increase or 1 rate decrease from today. So I would say sort of taking a step back sort of roughly flat from where we are today.
Got it. And if the if the rate backdrop goes against you, do you have additional levers that you can pull on the expense side so you can still produce positive operating leverage?
Yes, we do. I think under most realistic rate scenarios, as I mentioned, the hedging program will keep our NIM pretty constant. So we're not expecting how to pull those expense levers. But as always, we do have a number of expense levers that we've got at our disposal. I'll take down a few of them.
We can always look at the pacing and phasing of our strategic growth initiatives. We've got the number one branch share in Michigan and Ohio. And so looking at our branch network and the costs around that is an opportunity. And I think generally as we see, revenue soften, we typically see just the linked variable expense reduction from compensation tend to mitigate and offset that. So those are the levers we've got are as well that we look at all the time.
There are other levers like staffing contingency plans, which you saw us pull in, in the fourth quarter of 2019, which are at our disposal, but again, It's not our expectation that we'll have to do that in 2020. The last thing I'll just say is you commented positive operating leverage. We are managing and expecting to generate positive operating leverage in 2020.
Got it, appreciate the color. Thanks.
You're welcome.
Our next question comes from the line of John Pancari with Evercore. Please proceed with your question.
This is Rahul Patil on behalf of John. Just have a 2 part question on your auto lending business. Considering that one of the biggest players in auto lending is now becoming more active in this space. Are you seeing pressure on pricing or your ability to grow auto loans at the pace that you had previously expected? And then the second part is tied to CECL.
The CECL implementation impact your appetite for auto loans going forward. Just trying to gauge what's your 2020 auto loan growth outlook following a flattish average balance in 2019?
Yes, John, it's Rich. I'll take that. So as I'll take the second question first. So as it relates to CECL, the auto business is really neutral. The weighted average life of our typical auto loan is not that much different than what we have under the incurred loss methodology.
So it's a fairly benign impact from a CECL standpoint. As it relates to the overall business strategy, I think we have just a tremendous franchise across multiple states with thousands of dealers that we've got the ability to drive volume. I think we are in a very high FICO band that tends to be more price sensitive than others. So I don't see us having any real issues in meeting the origination goals that we've got for the indirect auto business in 2020.
Okay. And then last quarter, I believe you'd indicated that the consensus in the estimate around that time of 3 20 for full year 2020, was reasonable. But I believe that you had assumed earlier a couple of 8 cards in that 2020 NIM guidance. Could you just discuss your updated thoughts? I know you talked about it will rebound in first half and then stable, but are you still comfortable with that three twenty levels right now?
Yes. Thanks for the question. This is Zach. I'll answer that one. So the answer is yes.
We are still comfortable with the approximately 3 20 guidance that we talked about in December of the Goldman Sachs Conference and then just reiterated today in the prepared remarks. We expect the trajectory of that to be ticking higher into the first quarter, so stabilizing around that level. By mid second quarter and then oscillating around that level through the balance of the year. There's really a couple big drivers of that. So the most substantial of which is the repricing of the deposit maturities that we talked about in the prepared remarks.
There's roughly $5,000,000,000 repricing in Q1 and another $4,000,000,000 repricing in Q2. And so far, we're really pleased with both the retention and the pricing on that, which is proceeding according to our plans. The other factor, which is a little smaller, but still helpful is the 70 basis points of pickup we got on the securities repositioning that we discussed earlier. So those 2 factors are what's driving that and how us to get the NIM to back to 320. With that being said, there's a couple of factors we're watching.
Asset yields on new production, all on your previous question, around auto and residential. We continue to see them where we want them, but there's something we look at very carefully. The other one is as I mentioned in my prepared remarks, the volume and rate for the deposit costs, again, we're seeing the trend on our expectation, but it's something that we'll continue to watch. Those are the biggest factors that could cause NIM to be higher or lower than that 320.
Okay. And then I just want to clarify one thing. And that is assuming a cut, a rate cut in the summer of this year.
Yes. It's assuming the exact essentially the forward rate curve that exists in November, as I mentioned, which if you look precisely at the Fed funds expectation and that had one cut over the late summertime period. But even if it's flat, we're going to be roughly sitting down.
Okay, perfect. Thank you.
Our next question comes from the line of Ken Usdin with Jefferies. Please proceed with your question.
One more question on the deposit side of things. See what you're expecting for total growth. I'm assuming that's still coming from core customer growth. You mentioned the $5,000,000,000 that's going to reprice underneath that, can you just talk about what's happening in your markets as far as just underlying core deposit pricing? And if that's still also coming down aside from what you're just scheduled is going to reprice from the rollovers?
Yes, I mean, I think we're, as I said, we're seeing the repricing activity be pretty much in line with our expectations, ticking down but also being somewhat competitive. So we've assumed and planned for the rate environment we've got right now. We're seeing it trend in that way.
Yes. Ken, this is Mark. I would say that generally what we're seeing on the consumer side is very rational and as we would have expected and the repricing coming in both with better pricing and better retention has allowed us to then be a little more aggressive on the commercial side, which we do see as more competitive. If you were to point to some of the competitive issues out there. It definitely is on the commercial side in particular with your large dollar deposits on the commercial side.
And we've just allowed some of those to leave the bank as a result of the success we're having on consumer side.
Got it. Okay. And then one more question just on the mix of the balance sheet, with pretty good loan growth and pretty good deposit growth, what do you see happening in terms of both the size secured Curious portfolio and can you talk about the underlying dynamics of in a stable race environment, your front book, back book?
So the expectation for the securities portfolio is, Zach, roughly constant from where we are today. No material change. We like where it's at. And that's the expectation at this point. The second part of the question was
back book? Rolling off securities and rolling on how if you've reached state where they are from here, what's the dynamic happening in there? Thanks.
Let's take that offline. I don't have that detail right in front of me.
Yes. Ken, I've got that downstairs. I'll follow-up with you on that.
Okay. Thank you, guys.
Thank you.
I would like to turn the call back to Steve Steinauer for closing remarks.
I'm pleased with our 2019 performance, particularly given the environmental challenges we faced our active management position the bank to continue to execute on our strategies. I'm confident about our prospects for 2020. Our top priorities are executing our strategic plan and thoughtfully investing in our businesses for continued prudent organic growth, while delivering annual positive operating leverage. We are clearly building long term shareholder value through a diligent focus on top quartile financial performance and consistently disciplined risk management. And finally, we always like to end with a reminder to our shareholders.
There's a high level of alignment between the board, management, colleagues, and our shareholders. The board and our colleagues are collectively a top 10 shareholder of Huntington and all of us are appropriately focused on driving sustained long term performance. Thank you for your interest
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.