Greetings, welcome to the Huntington Bancshares 2023 first quarter earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Tim Sedabres, Director of Investor Relations. Thank you. You may begin.
Thank you, operator. Welcome, everyone, and good morning. Copies of the slides we will be reviewing today can be found in 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. Earnings documents, which include our forward-looking statements disclaimer and non-GAAP information, are available on the investor relations section of our website. With that, let me now turn it over to Steve.
Thanks, Tim. Good morning, everyone, welcome. Thank you for joining the call today. We're pleased to announce our first quarter results, which Zach will detail later. Huntington is very well positioned. We operate a diversified franchise with disciplined risk management. Our approach to both our colleagues and customers is grounded in our purpose to make people's lives better, help businesses thrive, and strengthen the communities we serve. During times like these, Huntington's purpose is evident in how we look out for each other and serve as a source of strength for our customers and communities. Now on to slide four. These are the key messages I want to highlight to you. First, we have one of the strongest deposit franchises of any regional bank. We have a diversified base of primary bank customer relationships, which has been built over many years, supported by our Fair Play philosophy.
We also have the leading percentage of insured deposits as of year-end. Second, we maintain a robust liquidity position consistent with our long standing approach to conservative risk management practices. Third, our capital base is solid and building. Common Equity Tier 1 has increased for three quarters in a row, and we intend to continue to build to the high end of our range. Fourth, our credit reserves are top tier. Credit quality continues to perform exceptionally well and remains a hallmark of our disciplined credit management. Fifth, we are dynamically managing through the current environment, bolstering capital and liquidity. We're also incrementally optimizing the balance sheet and loan growth while continuing to proactively manage the expense base. Finally, we are well positioned to operate through uncertainty with a focus on our long term strategy and our commitment to top quartile returns.
I believe Huntington is built to thrive during times like this and ultimately to benefit and to capture opportunities as they arise. Moments of market disruption present opportunities to take market share, to win new customers, and to hire great talent. We are confident in our strategy and strong position. Moving on to slide five. We enter this period of disruption in the best position the company has been since I've joined over a dozen years ago. The reputation our colleagues have created of best in class customer service results in customer confidence and trust in us. The 2023 J.D. Power Award for customer satisfaction reflects our colleagues' efforts. Grounded in our Fair Play philosophy, we continue to acquire and deepen primary bank relationships, resulting in our granular and diversified deposit base.
For many years, we focused on gathering deposits that are sticky operating accounts and proactively placed larger deposits off balance sheet. We continue to invest across the franchise to drive deposit growth. We are also incrementally optimizing loan growth to generate the highest returns and ensure the capital we deploy is put to the highest and best use. We remain focused on delivering the revenue synergies we previously shared, accelerating the growth of our fee businesses and deepening our customer relationships. In regards to capital, CET1 increased 19 basis points from the prior quarter to 9.55%, and we plan to build capital to the high end of our range over the course of 2023. Our credit reserves are top tier in the peer group at 1.9%. We will continue to be proactive in our expense management.
In the first quarter, we completed a number of actions to support our ongoing efficiency programs, such as the 31 branch consolidations, the voluntary retirement program, and our organizational realignment with reductions in personnel. In addition to Operation Accelerate, we have a roadmap to deliver continued efficiencies going forward. Importantly, risk management is embedded within all our business lines. At Huntington, everyone owns risk, and we continue to operate within our aggregate moderate to low risk appetite. Finally, I want to reiterate, Huntington is built for times like this. We have a strong, well-diversified franchise with a distinctive brand and loyal customers. Our high quality deposit base, robust liquidity, and solid credit metrics are the direct result of focused and disciplined execution over many years.
We have an experienced management team supported by highly engaged colleagues executing on our strategy. As you know, management is collectively a top 10 shareholder, and we are fully committed to driving top-tier performance and growing shareholder value. Zach, over to you to provide more detail on our financial performance.
Thanks, Steve, and good morning, everyone. Slide six provides highlights of our first quarter results. We reported GAAP earnings per common share of $0.39 and adjusted EPS of $0.38. Return on tangible common equity or ROTCE came in at 23.1% for the quarter. Adjusted for notable items, ROTCE was 22.7%. Further adjusting for AOCI, ROTCE was 17.8%. Pre-Provision Net Revenue expanded 41% year-over-year to $844 million. Loan balances continued to grow as total loans increased by $1.5 billion from the prior quarter. Liquidity coverage remains robust, with over $60 billion of available liquidity, representing a peer leading coverage of uninsured deposits of 136%. Credit quality remains strong, with net charge-offs of 19 basis points and allowance for credit losses of 1.9%.
Turning to slide seven. Average loan balances increased 1.3% quarter-over-quarter, driven by commercial loans, which increased by $1.5 billion or 2.2% from the prior quarter. Primary components of this commercial growth included Distribution Finance, which increased $800 million, tied to continued normalization of dealer inventory levels, as well as seasonality, with shipments of spring equipment arriving to dealers. Corporate and specialty banking increased $242 million, primarily driven by growth in mid-corp healthcare and tech and telecom. Other asset finance businesses contributed growth of $216 million. auto floorplan continued normalization with balances higher by $214 million. Business banking also increased $92 million. In consumer, growth continued to be led by residential mortgage, which increased by $316 million.
Partially offsetting this growth were home equity balances, which declined by $159 million. All other categories, including RV/marine and auto, declined by a collective $123 million. Turning to slide 8. We continued to deliver average deposit growth in the first quarter. Balances were higher by $472 million, primarily driven by consumer, which more than offset lower commercial balances. On a year-over-year basis, average deposits increased by $3.2 billion or 2.3%. Turning to slide 9. I want to share more details behind Huntington's deposit franchise. Our deposit base represents a leading percentage of insured deposits at 69% as of Q1. Our deposit base is highly diversified, with consumer deposits representing over half of our total deposits and the average consumer balance being $11,000. Turning to slide 10.
Complementing our diversified deposit base is the stability and growth of our deposits over time. During last year, we consistently delivered deposit growth well above peer levels, despite the backdrop of rising rates and quantitative tightening. Through year-end 2022, cumulative deposit growth was 2.4%, nearly six percentage points better than the peer median. Over the course of Q1, monthly average deposit balances were stable at approximately $146 billion. Within consumer deposits, balances have increased for four months in a row. Total commercial balances were modestly lower, consistent with expected seasonality. During March, in addition to seasonality, commercial customers also incrementally utilized our off-balance sheet liquidity solutions. Turning to slide 11. We have a sophisticated approach to customer liquidity management that comprises both on-balance sheet deposit products as well as off-balance sheet alternatives.
Over the past four years, we have invested substantially to build out these solutions to ensure we're managing our customers' overall liquidity needs. The enhanced liquidity solutions allow us to manage the full customer relationship with primary bank and operating deposits on balance sheet and utilizing our off-balance sheet solutions for investment or non-operational funds. Over the course of 2020 and 2021, we intentionally leveraged these off-balance sheet solutions in order to support our customers' excess liquidity. This resulted in fewer surge deposits coming on sheet, as well as less commercial deposit runoff during 2022 compared to the industry. On a year-over-year basis, our commercial banking segment on-balance sheet deposits increased 11% and our off-balance sheet liquidity balances increased 54%. During March, this approach yet again showed its value for both Huntington and our customers.
We saw customers moving a modest amount of deposit balances into treasuries and other products while we were able to maintain those primary operating accounts on our balance sheet. Of the total change in commercial segment deposit balances between March 6 and the end of Q1, we estimate that approximately half the delta was attributable to normal seasonality, and the remainder was mainly the result of shifts into our off-balance sheet solutions. The bottom table highlights these movements as well as trends in the first two weeks of April. On-balance sheet deposits have returned to the March 6 level, and off-balance sheet continues to grow. Turning to slide 12. Our liquidity capacity is robust. Our two primary sources of liquidity, cash and borrowing capacity at the FHLB and Federal Reserve represented $10 billion and $51 billion respectively at the end of Q1.
As part of our ongoing liquidity management, we continually seek to maximize contingent borrowing capacity. As of April 14th, our total cash and available borrowing capacity increased to $65 billion. At quarter end, this pool of available liquidity represented 136% of total uninsured deposits, a peer leading coverage. On to slide 13. For the quarter, net interest income decreased by $53 million or 4% to $1.418 billion, driven by lower day count and lower net interest margin. Year-over-year, NII increased $264 million or 23%. Net interest margin decreased 12 basis points on a GAAP basis from the prior quarter and decreased 11 basis points on a core basis excluding accretion.
The reduction GAAP NIM included 5 basis points from lower spreads, net of free funds due to funding mix and marginally accelerated interest costs. It also included five basis points from the first substantive negative carry impact from our long-term down rate NIM hedging program and three basis points from higher cash levels. Slide 14 highlights our ongoing disciplined management of deposit costs and funding. For the current cycle to date, our beta on total cost of deposits was 25%. As we've noted, we expect deposit rates to continue to trend higher from here over the course of the rate cycle. Given the recent market environment, at the margin, we do expect a steeper near-term trajectory. Turning to Slide 15. Our hedging program is dynamic, continually optimized, and well-diversified. Our objectives are to protect capital in uprate scenarios and to protect NIM in down rate scenarios.
During the first quarter, we added to the hedge portfolio with both of these objectives in mind. On the capital protection front, we added $1.6 billion in additional pay-fixed swaps and $1.5 billion in forward-starting pay-fixed swaptions. Throughout the quarter, we were deliberate in managing the balance sheet to benefit from asset sensitivity. We also incrementally added to our hedge position to manage possible downside rate risks over the longer term, as well as took actions to optimize the near-term cost of the program. During the quarter, we executed a net $400 million of receive-fixed swaps, terminated $4.9 billion of swaps, and entered into $5 billion of floor spreads.
We've noted before, our intention is to manage NIM in as tight a corridor as possible as we protect the downside and maintain upside potential if rates stay higher for longer. Turning to slide 16. On the securities portfolio, we saw another step-up in reported yields quarter-over-quarter. We benefited from higher reinvestment yields as well as our hedges to protect capital. From a portfolio strategy perspective, we expect to continue to add to the allocation of shorter duration exposures to benefit from the inverted yield curve and further enhance the liquidity profile of the portfolio. You will note that fair value marks at the end of March were lower than year-end, both in the AFS and HTM portfolios as market interest rates moved lower sequentially.
Importantly, we have also shown the $700 million total positive fair value mark from our pay fixed hedges, which are intended to protect capital. Moving on to slide 17. Non-interest income was $512 million, up $13 million from last quarter. These results include the $57 million gain on the sale of our retirement plan services business during the quarter. Excluding that gain, adjusted non-interest income was $455 million. This result was somewhat lower than the guidance we provided in early March, driven by lower capital markets revenues, given the disruptions at the end of Q1. The first quarter is generally a seasonal low for fee revenues.
As we've noted previously, we see Q1, excluding the RPS sale, being the low point, and for fees to grow over the course of the year, driven by solid underlying performance in our key areas of strategic focus: capital markets, payments, and wealth management. Moving on to slide 18. GAAP non-interest expense increased by $9 million. Adjusted for notable items, core expenses decreased by $18 million, driven by lower personnel expense, primarily as a result of reduced incentives and revenue-driven compensation. We're proactively managing expenses and have taken actions over the last several quarters to orient to a low level of expense growth in order to deliver positive operating leverage and self-fund strategic investments. Slide 19 recaps our capital position. Common Equity Tier 1 increased to 9.55% and has increased sequentially for three quarters.
OCI impacts to Common Equity Tier 1 resulted in an adjusted CET1 ratio of 7.6%. As a reminder, the reported regulatory capital framework does not include OCI impacts in the capital calculation. Our tangible common equity ratio or TCE increased 22 basis points to 5.77%. Note that we were holding higher cash balances at the end of Q1, which reduced the TCE ratio by 13 basis points. Adjusting for AOCI, our TCE ratio was 7.27%. Tangible book value per share increased by 7% from the prior quarter to $7.32. Adjusting for AOCI, tangible book value increased to $9.23 and has increased for the past four quarters.
Our capital management strategy for the balance of 2023 will result in expanding capital over the course of the year while maintaining our top priority to fund high return loan growth. We intend to grow CET1 to the top end of our 9%-10% operating range by the end of the year. We believe this is a prudent approach given the dynamic environment. Based on our expectation for continued loan growth, we do not expect to utilize the share repurchase program during 2023. Turning to slide 20, our capital plus reserves is top quartile in the peer group and gives us substantial total loss absorption capacity. On slide 21, credit quality continues to perform very well. As mentioned, net charge-offs were 19 basis points for the quarter.
This was higher than last quarter by two basis points and up 12 basis points from the prior year as charge-offs continued to normalize. Non-performing assets declined from the previous quarter and have reduced for seven consecutive quarters. Allowance for credit losses was flat at 1.9% of total loans. Turning to slide 22, we have provided incremental disclosures on our commercial real estate balances. This portfolio is well diversified and at 14% of total loans is in line with the peer group with no outsized exposures. The majority of the property types are multifamily and industrial. Over the last two years, we have grown our CRE book at a slower pace relative to the industry and peers. We remain conservative in our credit approach to CRE with rigorous client selection.
Total office CRE comprises less than 2% of total loans, and the majority are suburban and multi-tenant properties. Reserve coverage on our total CRE portfolio is 3%, and the office portfolio is 8%. Let's turn to our 2023 outlook on slide 23. As we have discussed, we analyze multiple potential economic scenarios to project financial performance and develop management action plans. We also remain dynamic in the current environment as we execute on our strategies. Our guidance is anchored on a baseline scenario that is informed by the consensus economic outlook. We have also based our guidance on a range of interest rate scenarios bounded on the low end using the forward curve as of the end of March to one at the higher end, where rates are higher for longer, with Fed funds remaining at approximately today's level over the rest of the year.
On loans, our outlook range continues to be growth between 5% and 7% on an average basis. As before, we expect this growth to be led by commercial with more modest growth in consumer. As we entered the year, we were trending to the middle to higher portion of that growth range. Given the market disruption and our incremental focus on optimizing loan growth for the highest returns on capital, we now expect to be in the lower half to midpoint of this range. On deposits, we are guided by our core strategy of acquiring and deepening primary bank relationships. We're narrowing our outlook with a slightly lower top end of the range and still expect to grow average deposits between 1% and 3%. The composition of deposit growth from here we now expect to be primarily consumer-led with relatively less commercial growth.
Net interest income is now expected to increase between 6% and 9%. This is driven by slightly lower loan growth and marginally higher funding costs. Non-interest income on a core full year basis is expected to be flat to down 2%. The updated guidance reflects modestly lower expected growth in capital markets fees and includes the go-forward impact of the RPS business sale. As noted, we expect Q1 to be the low point for fees growing over the course of the year led by capital markets, payments, and wealth management. On expenses, we are proactively managing with a posture to keep underlying core expense growth at a very low level. We're benefiting from our ongoing efficiency initiatives such as Operation Accelerate, branch optimization, the voluntary retirement program, and the organizational realignment, providing the capacity to self-fund sustained investment in our key growth initiatives.
Given a somewhat lower revenue outlook, we are taking actions to incrementally reduce the expense growth in 2023. For the full year, we now expect core expense growth between 1%-3%, plus the incremental expenses from the full year run rate of Capstone and Torana and the increased FDIC insurance expense. Overall, our low expense growth, coupled with expanded revenues, is expected to support another year of positive operating leverage. We continue to expect net charge-offs will be on the low end of our long term through the cycle range of 25-45 basis points. Finally, turning to slide 24.
As you heard from Steve, the foundation we have built at Huntington over the last decade has created an institution that is well prepared for this environment. We will leverage the strength of our deposit base. We're focused on growing capital and maintaining robust liquidity. We remain disciplined in our credit posture, and we're executing our core strategy. The work we have done to build the franchise positions Huntington to outperform and be ready to opportunistically seize on pockets of growth. We will remain disciplined and dynamic in our management approach as we continue to generate long-term value for our shareholders. With that, we will conclude our prepared remarks and move to Q&A. Tim, over to you.
Thanks, Zach. Operator, we will now take questions. We ask that as a courtesy to your peers, each person ask only one question and one related follow-up, and then if that person has additional questions, he or she can add themselves back in the queue. Thank you.
Thank you. At this time, we will conduct our question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. Our first question comes from Manan Gosalia with Morgan Stanley. Please state your question.
Hey, good morning.
Morning, Manan.
As I look through, your deposit flows for the quarter, you know, you've clearly done better than peers, whether it's on total deposits or even just non-interest bearing deposits. Can you break out what you saw in the background? You know, was there a lot of movement with new accounts coming in and, you know, some of those existing commercial clients moving off balance sheet? If so, can you talk about how sticky you think some of those new account openings are?
Thanks, Manan. This is Zach. I'll take that question, and it's a good one. You know, overall, what we saw in our deposit base during quarter was tremendous stability. That continued not only through the month of March but into early April. We've tried to provide some incremental disclosures around that so that you could get the visibility. You know, for us, it's not surprising, as we've noted quite a bit. It's very granular, very diversified, and overall it didn't happen by accident. You know, it's a function of a really long strategy we have to focus on primary bank relationships, as you know, and to develop this commercial off-balance sheet capability that we described in the prepared remarks.
To get to your question in particular, you know, what we saw generally, I would note, by the way, that when you're looking at balances on a day by day basis as we've provided them in that disclosure, you have to take them with a note of caution. It really matters what day of the week, what week of the month, et cetera, payroll days and tax payments, et cetera. Generally, we expect the end of March to be a seasonal low for commercial. So most of the movement, around half the movement we saw in commercial from, let's say, the average of March down to the end of March, was really just BAU movements of commercial clients largely paying out payroll.
The other half was largely movements of deposits off balance sheet as very marginal amount of customers used some of those off balance sheet solutions to leverage that product set. Interestingly, what you can see as we provide this disclosure out into the first two weeks of April is that essentially, you know, completely came back in terms of the overall balance of commercial deposits. It's, you know, very stable net sort of virtually no movement. You know, on the question of, you know, what we saw ins and outs, we of course saw some acquisition and we continue to acquire in every segment that we're operating in. Consumer continued to acquire business banking and commercial as well.
We feel good about that kind of long-term program, which is one of the things that underlies our continued expectation for deposit growth throughout the rest of this year. Just continuing to stay on strategy of acquiring and deepening primary bank relationships.
Great. Just separately, can you talk about the funding and liquidity side of the balance sheet? You know, despite the low level of deposit outflow, I think you built up some cash and liquidity levels by taking on more wholesale funding. How should we think about that as we get through the rest of this year?
Yeah. you know, in terms of overall funding mix, you know, we've talked about this a number of times in prior quarters. We really like where we are coming to this rate cycle from a perspective of lots of balanced options to fund the business. You know, we're growing loans at this point between 5% and 7%, and deposits are, you know, between 1% and 3%, around 2%, call it the midpoint of that range. That allows us to also leverage other sources of funding to overall fund the balance sheet. We're in a great position to be able to do that. I will tell you internally, we really like that.
It creates quite a bit of tension in the system of where the next unit of funding is coming and really that it's optimized from an economic perspective. You know, our expectation is to continue to essentially add to each of those funding categories over the foreseeable future while still maintaining a level that's, you know, comparatively quite good relative to history for us. That's the overall plan. On the topic of liquidity, I would just note a couple things. This is a key risk that the company has been focused on managing for more than a decade. We purposely create exceptionally robust pools of contingent liquidity to cover any potential issue.
I think, you know, we noted in the deck some of the key sources of liquidity, also noted that we continue to over time add to them. I will tell you that one of the statistics that's in the document today, you know, highlights $65 billion of contingent cash and borrowing capacity as of last Friday. I'm pleased to report that as of this morning, based on incremental efforts we've done, it's now $84 billion, which in total represents 187% of relative to our deposits. Exceptionally strong liquidity profile and as I said, kind of, you know, very balanced funding mix.
Great, thank you.
Our next question comes from John Pancari with Evercore. Please state your question.
Hey, John.
Morning.
Morning.
You mentioned the actions you're taking incrementally to lower expense growth across the firm. Are those actions factored into your 1%-3% expense guidance? Also, what are those actions involved? Thanks.
Yeah. Yep, it's a great question, John. This is Zach. I'll elaborate on that. The short answer to your question is yes. Our guidance of 1%- 3% underlying core growth includes those actions. I think just back to the sort of strategic intent of it, as we've said, you know, for a while, we are very intent on driving a low level of overall expense growth, and really leveraging our ongoing program of efficiency initiatives to do that, even while we continue to drive, you know, outsized growth and self-fund, you know, investments within that overall low growth framework.
You know, as we came into this, you know, updated guidance period, and we saw somewhat lower revenue trajectory, for us it was important, and to kind of continue to execute on the discipline of driving positive operating leverage to also ratchet down expenses. You know, I think the kind of things that we do, and we always enter the year with a contingent set of expense management options. You know, a menu you could think about it as, of different kind of options we could, we could undertake, if we need to. That's essentially what we're going to go to now. You know, we'll modulate the pace of, of hiring. We'll, we'll be very judicious in the, in the, you know, discretionary expense categories.
We will, you know, look at sort of every possible area of expense control to ratchet back expenses and, you know, and offset a good amount of what was otherwise, you know, profit and revenue pressure. That's the playbook. You know, that's something we've done, numerous times over the course of years. You know, we feel really good about our ability to execute it again now.
Okay, great. All right, thanks. On the back to the balance sheet, can you just give us your expectation in terms of an updated through cycle deposit data? I believe you had expected 35% previously. If you could update us there on what you're thinking and also what Net Interest Margin outlook is baked into your up 6%-9% Net Interest Income projection. Thanks.
You got it. You got it. Let me elaborate more on that. You know, overall, just pulling back, you know, overall the strategy we have is to continue to drive sustained growth in net interest income on a dollar basis. To do that, driving, you know, continual growth in higher return loan categories, coupling that with the management of NIM around a, you know, in as tight a corridor as we can, where the top end benefits from our continued asset sensitivity. We stand to really benefit if rates do stay a lot higher for longer. Also at the lower end, protected with our hedge portfolio. All that, you know, adds up to the 6%-9% NII growth that we're, you know, guided to.
You know, on beta, and particularly to get to your question, it clearly is a more competitive environment. Hence it's realistic to expect some higher beta and frankly, an earlier impact than we had previously seen. I do expect now a few percentage points higher than the original than the prior guidance of 35% beta. You know, I will note that, you know, we provide private guidance on beta because we want to give you an indication of where we think that's going. For us, the most important thing is the execution day-to-day of driving the deposit growth and staying incredibly disciplined in terms of the overall funding mix, as I noted in my prior response.
How beta ultimately plays out here over the end game is going to be clearly a function of where the yield curve goes. I do think that, you know, a few percent higher than 35% is a reasonable range based on the two scenarios I laid out. You know, in terms of overall spread, you know, as we noted, we've moved the guidance range from what was previously 8-11 to 6%-9%, so down about 2% in terms of that guidance range. About 40% of that is just slightly lower loan growth and the rest is spread.
You know, as I think about the kind of the way the year plays out, I would expect that kind of a more front-loaded impact of spread than we were previously expecting. We would expect to see, you know, a $1 decline in NII in Q2, about the same as we saw in Q1, then growing from there. I think the, you know, the NIM range that we have there is sort of, you know, consistent with that, with that dollar trend.
Great. Thanks, Zach.
Thank you.
Thank you. Our next question comes from Ebrahim Poonawala with Bank of America. Please state your question.
Good morning.
Morning, Ebrahim.
Morning.
Two questions. One, in terms of the deposit growth outlook, I think you mentioned, it's expected to be more consumer-led. Just give us a sense of strategically how either the interest rate environment or the events of the last month have changed how you are thinking about deposit acquisition. Has it materially changed the pricing on a new deposit growth relative to how you thought about it back in January?
Yeah. Thanks, Ebrahim. You know, overall, I would say, you know, as we noted, we've tightened the range with a kind of a lower top end, but still expect growth, and pretty consistent with what we had thought before in terms of overall amount of growth. We still see a nice traction, and I think, you know, we've seen that a little bit in some of the disclosures we've given just in the first weeks of April, for example. Well, with that being said, I think the mix will be different. You know, we now expect commercial to be largely flat from here, and really the growth to be consumer-led.
You know, frankly, from our perspective, it's a great highlight of the strength of the consumer franchise that we've got, that we can lean in now and continue to support, you know, high profit loan growth with that consumer funding. You know, I think the dust has not fully settled in terms of all of the competitive and customer behavioral impacts of the last month, but I think one of them will clearly be, you know, more moderated commercial growth. We'll just be, you know, leveraging the off-balance sheet structures that much more to ensure that what we do have on sheet is incredibly stable. On the consumer side, it's just running the same playbook that we have.
We have invested so much over the last two years in capabilities to build our marketing technology and customer targeting capability within consumer that we really have the opportunity now to optimize and to drive incremental consumer-oriented acquisition, not only of, you know, higher rate categories, but just fundamentally, you know, we're growing. We noted 2% growth in primary bank relationships on the consumer side, 4% growth in business banking. It's a very balanced source of growth, and we're just going to lean into it at this point to continue to grow overall deposits balances.
Got it. Just as a follow-up, I guess, on the lending side. Appreciate your comments in terms of where the growth has been and the outlook. If you could give us a sense of just customer sentiment, given your business mix, some of the legacy TCF businesses, just the health of the economy in terms of when you speak to your customers. Are you seeing a slowdown in demand also occurring at the same time, which increases the likelihood of a potential downturn in the recession based on what you're seeing?
Ebrahim, this is Steve, and thank you for the question. We are seeing customers become more cautious in some cases deferring investments or postponing acquisitions or other transactions. This has increased during the quarter. It's one of the reasons we've sort of guided without changing the loan range to the lower end of that loan range from where we would have been at the upper end of that loan range at the end of 2022. There's a clear, clearly more angst about is there a recession and what might 2024 look? Having said that, many of these customers are doing quite well in 2023 thus far and remain optimistic.
Again, there's been a lot of media, a lot of headline noise, and it's having an impact in addition to what the Fed's doing.
All right. Thanks, Steve. Thanks for taking my questions.
Thank you. Thanks, Ebrahim.
Thank you. Our next question comes from Scott Siefers with Piper Sandler. Please state your question.
Morning, everyone. Thank you.
Morning, Scott.
Zach, I was hoping you could expand upon some of the NII comments from a question or so ago. I think if I interpreted you correctly, I guess NII will take a step down in the second quarter. What would cause either margin or NII to start expanding from there in light of, I guess, fairly limited overall balance sheet growth through the remainder of the year? Just curious about the nuances as you see them.
Yeah. I mean, mainly it's going to be volume from there. Scott, just, you know, continue to sequentially grow loans from second into third and then third into fourth quarter is the primary driver. You know, we see the spreads, you know, much more flat in the back half than, you know, kind of accelerated impact. You know what I mean, just maybe elaborating a little bit on kind of the NIM trajectory that we see, not very overly precise. You know, when we walked into the year, we were expecting a, frankly, a pretty radical trend in NIM over the course of the year. I think, you know, at the time we had provided some guidance around single digit basis points, you know, kind of trajectory throughout the course of the year.
You know, most of that we now see kind of front-loaded just based on the shape of the curve and, and kind of how the, how the outlook has, you know, shaped up at this point. That's really the driver. Overall, my outlook for NIM is maybe five or six basis points lower on a go-forward basis, to give you a sense, a portion of which is yield, but most of which is just funding costs being slightly higher.
Okay, perfect. Thank you.
Scott, you'll remember we are a large equipment finance lender, and that generally has much more activity in the fourth quarter. That's part of this second half build that Zach referenced.
Okay, perfect. Thank you. Can you guys speak broadly to some of the trends you're seeing in the auto portfolio? I mean, I know your portfolio, just given the quality and tenure of it, tends to be a lot different than the industry as a whole. You know, at least in the media, you know, you would think the industry is sort of collapsing, I guess. Just curious the top-level trends, sort of appetite from you guys and then what you're seeing at the sort of overall.
Hey, Scott, it's Rich. I'll take that, and then Zach or Steve can tack on to it. You know, from my standpoint on the credit side, as we showcased during Investor Day, I mean, this is really a business we like through all sorts of cycles. I mean, it has become truly a core competency of the bank. If you look at what we saw in the first quarter, you know, it was a continued, you know, gradual normalization in both delinquencies and charge-offs. It's still trending well below the historic losses, you know, that we would normally see. It was 14 basis points in the first quarter, up from 12 in the fourth quarter. You know, from my standpoint, I look, you know, really closely at the origination metrics that we've got.
You know, we're still originating at FICO north of 780. You know, the loan to values are remaining, you know, relatively constant. You know, reflecting, you know, a little bit more mix in new versus used. From my standpoint, you know, we're going to expect this portfolio to continue to show year-best loss performance. You know, unemployment rates are still low, which is certainly going to help the credit metrics here. That's the big driver of losses. You know, I'm feeling good about it. You know, maybe Zach can talk about the optimization that we've got from a return on capital standpoint.
Sure. I'll just tack on to that. You know, I second the comment that Rich Pohle just made. I mean, feel great about the trajectory of the portfolio. We still see, you know, sustained demand and great relationships, by the way, with our dealers. I think we're, you know, we're a core and integral funding partner for our dealers, which really gives us great access. You know, in terms of optimization, that is one of the loan categories that we are, you know, actively, you know, modulating.
We kind of detailed this in Investor Day last November, I'm sure you remember, that's a, that's a business that is so effectively managed with respect to pricing and volume trade-offs that we can really pull those levers quite effectively to drive higher return and higher yield, you know, times that we want or need to, and this is certainly one of them. We're bringing back production a bit and seeing really strong returns, you know, as a result of it. You know, we'll see some of that and continue to optimize as we go forward for the rest of the year. You know, net-net, it's still a really important business for us, and one that we're, you know, pleased with the trends that we see in.
Okay, perfect. Thank you for all that color.
Thank you.
Our next question comes from Erika Najarian with UBS. Please state your question.
Hi, Erika.
Erika.
I just had one follow-up question for Steve. Steve, your starting point of CET1 is 9.5%. You accrete about 20 basis points of capital or more in a quarter. Like you said, your allowance already accounts for a tougher economic environment. I think your shareholders absolutely appreciate, you know, the focus on returns. Do you see an opportunity for Huntington to perhaps, as we have a little bit more clarity on the downsides of the macro backdrop, to take advantage of that capital and reserve, you know, resilience, so to speak, and perhaps start thinking about, you know, being more opportunistic in market share taking? Erika, thanks for the question.
We do, we have focused on and will continue throughout the year building the capital position of the company, strengthening it. We're quite pleased with the results delivered in the first quarter and look for comparable results as we go through the year. We're intending to be at or near the high end of our CET1 rank. We're doing that with a view that this threat of a recession is increasing. There's also a backdrop that there's going to be some kind of regulatory action at some point in the foreseeable future around capital requirements. With that in mind, that's the purpose of it. Having said that, we intend to be opportunistic.
We've got a lot of organic growth potential in the business lines. We're very focused on our execution. As you saw last year with the acquisition of Capstone Partners, we're always looking to build out ancillary fee businesses within the company. Beyond that, in times of disruptions, there tend to be people or teams that might be available, we'll again look to be opportunistic there. We see this in aggregate as a moment to take market share. That's what we're driving towards. We're investing in the businesses. The outlook that Zach has shared with you, we'll have continued investment in the businesses, all of which is designed to enhance our grow our earnings and enhance our returns.
Got it. Just to be clear, Steve, I was asking about organic opportunities. That wasn't a hidden bank acquisition question.
Well, I'm glad.
I'm glad you clarified. I thought you might be going in a different direction.
Thank you.
Yeah, absolutely. Just as a follow-up to that, you know, Zach, heard you loud and clear in terms of continuing to optimize the right-hand side of your balance sheet. You know, as you think about, you know, shooting your debt issuance, I suspect that everything that you may be doing in the future would have a lens towards the potential for TLAC eligibility.
It's certainly on the, on the thought process, Erika, yes. You know, we're watching that development carefully. It's still pretty early days, clearly, to see where that might land, but it's, but it's part of the thought process.
Thank you.
Our next question comes from Ken Usdin with Jefferies. Please state your question.
Thanks. Good morning.
Yeah.
One follow-up on the capital front. Zach, you show on that slide 19 where the current potential impact of AFS would be on CET1. I'm just wondering, do you have a rule of thumb if we kept all rates equal on just how fast that would pull to par, either on a sequential basis or, you know, maybe by the end of 2024?
Yep. It's a great question. Done considerable analysis around this. It's around 5%-10% a year, kind of depending on which year it is and what your maturities are on a sort of, like, a totally flat curve basis. I'll give you a sense. We've just run this analysis on the forward curve as of March. It'll be 42% recapture by the end of 2024 in a forward curve scenario. Obviously, it's benefiting in that one of interest rates declining relative to kind of a flat scenario.
Great. Thank you. Just one question on the assets repricing side. You guys have some fixed rate assets that are still repricing, even though I understand how you're slowing production. Just can you give us a sense on just what your front book, back book benefits are in some of your fixed rate portfolios? Have we even really started to see some of those benefits come through, you know, given where rates have moved to?
It's a great question. We can look at that very carefully, and we're seeing really nice step up in loan yields. To give you a sense, new volume rates up almost 50 basis points. Sorry, new volume up almost 70 basis points. Back book up almost 50 basis points in Q1. We estimate that our loan beta at this point through Q1 is 37%, and that could easily be over in the next couple of years approaching 60%. If you just sort of model the yield curve. We're a little further through the loan beta than we are the deposit beta, but not much. There's certainly much more room to go in terms of loan yields from here.
You know, just given kind of, you know, about just over 10% of the portfolio is in auto, that turns pretty quick, you know, just over two years. Kind of get the benefit of that repricing and a somewhat delayed but impactful beta there. You know, obviously the sort of the longer dated loan book likewise is seeing a nice reset in terms of rates, and it's a lot of benefit for us over the coming quarters as well.
Okay. Thanks, Zach.
Thank you. Next question comes from Jon Arfstrom with RBC. Please state your question.
Thanks. Good morning, everyone.
Morning, John.
Hey, a few questions here. Zach, on slide 14, that green line on the bottom, the last tightening cycle, it took a couple of quarters for deposit cost to roll over after the Fed stopped. If we're done in May, do you think that relationship holds? Is it two quarters and deposit costs stop going up? Is that fair?
That's generally the expectation we've got, John, yes, based on just prior borrowing cycles. Obviously, and you know, I know you know this well, it's going to be a, you know, kind of function of the pace with which rates might begin to decline and also what the kind of economic environment and hence the kind of loan growth environment across the industry that would affect the competitive environment around deposits. That'll clearly play into it. But generally our planning assumption is as you noted, which is very much in keeping with what we've seen, not only just in the last rate cycle, but in, you know, multiple rate cycles before that.
Okay. Fair enough. Steve or Rich, maybe for one of you. You use the term in the deck, rigorous client selection for commercial real estate. Can you talk a little bit more about that, what you go through? you know, help us understand the type of work you do and do you think this is different than what your peers are doing?
I really can't speak to what our peers are doing, but I can tell you that we, you know, for years now have developed a process of really fine-tuning who we do business with in this space. As you know, you know, real estate cycles, and you have to be able to depend on who you're doing business with to support their projects. We have really narrowed the funnel around the types of sponsors that we work with. You know, we tier them. We look at their, you know, just how long they've been in business. We look at their financial wherewithal. We look at their liquidity. More importantly, we look at how they've behaved in past cycles.
We tier them, and our tiering, drives how much we'll have out to any particular sponsor, how big of a single project we will have to them, and other metrics associated with that. We, you know, right now we are focused on serving the core and that has served us well, going forward.
John, we're always disciplined on our credit. I think that's going to prove to be the case as we come through this cycle. Obviously pleased with where we are at the moment. We'll see. I can tell you, especially in credit.
Where we had enormous challenges in 2008, 2009. We have sustained the discipline here since that time, and Rich has been a big part of it, along with our lending teams.
Yeah. Good. One more for you, Steve. I know this seems like a softball, it's not. I'm genuinely curious. What surprised you the most over the past six weeks as you managed through some of this disruption?
The speed of the run on the banks was a surprise, John. Faster than anything we've seen, that I can ever recall. I think, as a consequence, it left, you know, the regulators and others maybe a little behind because they didn't expect it either. That's why I think it took a couple of weeks to get SVB resolved, and Signature as well. Normally there's more front-end planning. They have a chance to line things up. This turned into a little bit more of a scramble. Having said that, I thought the reaction on that Sunday night from Treasury, Fed, and FDIC was just outstanding timing and fully appropriate.
Okay. All right. Thank you.
Our next question comes from Steven Alexopoulos with JPMorgan Chase. Please state your question.
Hi, everybody.
Hi, Steve.
Point to start. On the net interest income outlook, which was taken down a bit, given everything Zachary detailed on the swaps and the forward curve, as of right now, where do you see yourself trending within that? Is there a bias either to the upside or downside within that range right now?
You know, when we set these ranges, we try to set them with, you know, our general expectation being right in the midpoint. That's kind of the baseline expectation. You know, I think kind of what the puts and takes that would take you to the high and the low end could be volume on one hand, and just sort of the shape of the yield curve and the competitive environment on the other hand. It's hard to generalize, but, you know, we feel quite good about landing in that range at this point, and, you know, that's what we're driving toward.
Got it. Is the way we should think about it, if we're at the low end, say, of the NII range, should then we should be at the low end of the expense guidance? Should we just connect those two?
You know, generally speaking, that is the way we think about it. You know, we throttle the expense growth based on where the revenue trajectory is going. That's why we try to have a really disciplined forecasting process with, as we've said, you know, multiple economics scenarios. We can try to do that. Obviously, the expense lever takes some time to pull. You need to have good line of sight to where that's going. It's possible if there's a rapid move or a surprising move that that's not possible in any given, you know, short time period. Over the longer term, yes.
Got it. Okay. Thanks. Maybe just one last one for Steve. Just following up on your response just now to Jon's question, given the speed at which deposits went out Silicon Valley Bank, when you look at that, do you view that from a distance as a unique one-off event? Or are there lessons that you're now applying the way you think about managing capital, risk, liquidity, that even a stable regional bank like yourself will change potentially fairly materially in the aftermath of what we just saw? Thanks.
Steve, I think there are always lessons learned, you know, the business models of SVB and Signature were so different from us and other regional banks, particularly from us. The concentrations, the uninsured deposit level of 95%, you know, just in retrospect, it seems rather clear that the liquidity risk was very different and a huge miss, combined with their asset liability. In terms of lessons for us, it's made us even that much more aware of liquidity. We've always viewed this as a prime risk. We've always had good backup, and we've been very granular and have managed to have that best in class uninsured to total deposit ratio. you know, we'll probably be more, even more cautious.
Not probably, we will be even more cautious given the speed at which things move as we go forward. Having said all that, we're in a very strong position today. We expect to grow deposits as we continue through the year. It's like extra vigilance. We may do some policy adjustments to reinforce and strengthen further, but that will be of a minor nature. I don't think it'll impact our performance.
Okay. Thanks for taking my questions.
Thank you.
Thank you. Ladies and gentlemen, we have reached the end of the question and answer session. I would like to turn the call back to Mr. Steinour for closing remarks.
Thank you very much for joining us today. As you heard, we're operating from a position of strength with a foundation that's been built over a long period of time. We're very, very focused on continued growth and intend to be opportunistic. We're confident in our ability to continue creating value for shareholders. As a reminder, the board executives and our colleagues are a top 10 shareholder collectively, reflecting our strong alignment with our shareholders. Thank you for your support and interest in Huntington. Have a great day.
Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.