Huntington’s anticipating economic rebound and hiring for it

A large unexpected gain allowed Huntington Bancshares in Columbus, Ohio, to expedite investments it expects will pay off as the economy rebounds.

The $126 billion-asset company’s first quarter included $144 million of interest income from a mark-to-market benefit on interest rate caps. The benefit, tied to a derivative where buyers are paid as rates rise above an agreed-upon level, was triggered by a steepening yield curve and increased market volatility.

Huntington put the caps in place in late 2020 with an expectation that rates would remain largely unchanged for at least two years.

“We didn’t budget these caps to move for years,” Steve Steinour, Huntington’s chairman and CEO, said during a Thursday interview after the company’s conference call to discuss quarterly results.

Rather than pocket the gain, Huntington incurred a series of costs, upgrading its digital banking platform and hired bankers in wealth management, capital markets, specialty banking and Small Business Administration lending. It also recorded $21 million of merger-related expenses for its pending purchase of TCF Financial.

The investments should help Huntington get “back to positive operating leverage” — where revenue rises at a faster rate than operating expenses — Steinour said during Thursday’s conference call. “We’ve got a series of near-term revenue growth initiatives that we’re executing … that will position us for the long term.”

Huntington, which also donated $25 million in the quarter to the Columbus Foundation, told analysts during Thursday’s call that 2021 operating expenses will likely rise by 7% to 9% from a year earlier, an increase from its previous projection of 3% to 5%.

“Our expectation and plan is to bring the expense growth rate back to more normalized levels during the second half of 2021,” Chief Financial Officer Zach Wasserman said during the call.

Overall, Huntington’s first-quarter earnings rose by 10% from a year earlier to $532 million.

Revenue, including the benefit from the rate caps, increased by 19% to $1.4 billion. Noninterest expenses jumped by 22% to $793 million.

The gain from the rate caps surprised many of Huntington’s analysts.

“I may not be the only one who didn’t appreciate how meaningful this could be on a mark-to-market basis for your net interest income,” Ken Zerbe, an analyst at Morgan Stanley, said during the call. The caps “definitely worked out incredibly well this quarter. No doubt about that.”

Huntington’s earnings also reflected a $125 million reserve release. Net charge-offs fell by 45% to $64 million, or 0.32% of average total loans. For 2021, Huntington is projecting net charge-offs to fall in the range of 0.3% to 0.4% of loans, an improvement from its prior guidance of 0.35% to 0.55%.

Total loans fell by 1.7% from the end of 2020 to $80.2 billion. Deposits rose by 3.3% to $102.2 billion.

Huntington is pointing to a late second quarter close for its $5.9 billion purchase of the $49 billion-asset TCF.

“It’s kind of like perfect timing,” Steinour said of the deal’s nearing completion. “The economic recovery is coming, interest rates are getting better. It’s sort of wind at our back.”

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