Q3 2021 Huntington Bancshares Inc Earnings Call

Greetings and welcome to Huntington Bancshares third 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 being recorded.

Now I'd like to turn the conference over to Mr. Tim <unk> director of Investor Relations. Please proceed.

Thank you Latanya 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 dot com and dot com.

This call is being recorded and a replay will be available starting about one hour.

Yes.

Our presenters today are Steve Stein, our chairman, President and CEO, Zach Wasserman, Chief Financial Officer.

Rich Pohle, Chief Credit officer will join us for the Q&A.

As noted on slide two today's discussion, including the Q&A portion will contain forward looking statements such statements are based on information and assumptions available at this time and are subject to changes risks and uncertainties, which may cause actual results to differ materially.

Assume no obligation to update such statements for a complete discussion of risks and uncertainties. Please refer to this slide immaterial filed with the SEC, including our most recent forms 10-K, 10-Q and K filings.

Let me now turn it over to Steve Thanks, Tim Good morning, everyone.

I'm very pleased with our third quarter, we delivered good core performance and data enormous progress with Tcf integration.

Let me begin on slide three.

Thanks to the hard work of our colleagues were on track to complete the Tcf integration as planned and deliver the resulting deal economics. This combination adds scale density new markets and new specialty businesses at.

At the core of Huntington, we are a purpose driven company with a vision to build a leading people first digitally powered bank in the nation. We remain focused on our core objectives to drive organic growth and to deliver sustainable top quartile financial performance on slide four our third quarter performance as includes included a full quarter benefit.

From Tcf and record total revenue.

We delivered good growth in fee income that low growth, excluding TTP and improving credit metrics just over a week ago. We successfully completed the conversion of Tcf. The Huntington assistance and we now offer an integrated set of products capabilities and experiences to our customers as a result of the great efforts of our colleagues.

We're able to complete the conversion in just 10 months since the announcement of the transaction.

We've completed most of the actions to drive our targeted cost synergies and are on track to deliver all of the announced cost reductions.

With the conversion behind US, we're now able to focus thousands of colleagues on new business development activities to closeout, the year strong and carry that momentum into 'twenty two.

We are investing in these revenue producing colleagues as well as new capabilities and the expanded markets.

We're seeing substantial momentum in many of our initiatives, including targeted areas of fee revenue generation like wealth and capital markets as well as cards and payments.

Consumer and commercial loan production continued to be robust and commercial pipelines are up over 30% from a year ago and new production activity has nearly doubled.

Additionally, we were pleased to be ranked number one nationally for the SBA seven lender by volume, marking the fourth consecutive year, we've been recognized in the top spot as.

As the recovery continues we will dynamically manage our overall expense base and look for ways to drive incremental efficiencies across the day.

We intend to self fund the investment capacity necessary for strategic initiatives that will drive additional revenue growth in the years ahead.

Our strategy is centered on supporting customers banking, where and when they want and meeting them through their preferred channel as part of that strategy. We are continually optimizing our distribution network, we will be consolidating 62 branches in the first quarter of 'twenty two equal to 6% of the combined branch network and these are.

In addition to the 188 branch closures announced as part of the Tcf transaction.

Importantly, we will continue to retain the number one share of branches in both Ohio and Michigan.

In addition to branch consolidations, we are continuing to diligently optimize roles and resources within the Bay, we're committed to delivering positive operating leverage as we did annually for a decade, leading up to 'twenty one.

Finally on the capital front, we accelerated our share repurchase in the quarter as well as announced an increase to the quarterly dividend.

These actions demonstrate our confidence in the performance and outlook for Huntington as well as our commitment to our shareholders to actively manage our capital levels.

Slide five provides an update on the Tcf integration when we announced the transaction we saw a strong potential for expense synergies as we leverage the benefits of scale, but will also drive additional organic growth and today I can say that we're even more excited about the revenue opportunities in front of us.

The combination of new growth markets and increase density.

The addition of more than one 5 million customers.

And expanded specialty capabilities collectively set up our future revenue growth.

Sure a couple of the most compelling aspects and middle market is it corporate banking, we're now bringing greater scale in Chicago, Milwaukee, and addition of new capabilities in the twin cities and Denver with expanded coverage and product offerings.

We're already gaining traction with early wins.

<unk> capital markets, and Treasury management fees, and consumer and business banking, we are deploying huntington's capabilities products and services across the entire customer base following conversion.

Combined with our fair play philosophy. This will greatly enhance the customer experience and as we've demonstrated previously will accelerate customer acquisition and improved retention.

And with Huntington's digital and competitive product set we will deepen our customer relationships.

Additionally, we are bringing award winning SBA lending platform and growing our wealth and private banking customer base in our newly expanded markets.

Our investments are well timed as we're seeing continued robust economic recovery in our footprint our regions have seen economic activity experienced year to date faster than the national average as well as higher Labor force participation we.

We see a unique moment in time to capitalize on these revenue opportunities as our local economies continue to perform very well.

We are entering a new era at Huntington with momentum and we look forward to growth in the years ahead.

That over to you to provide more detail on our financial performance, Thanks, Steve and good morning, everyone.

Turning to slide six we reported GAAP earnings per common share of 22 sets for the third quarter, which included acquisition expenses of $234 million.

Earnings per common share adjusting for these notable items were 35 cents.

Return on tangible common equity or Aro TCE came in at 11, 5% for the quarter.

Adjusted for the acquisition related notable items Aro TCE was 17, 9%.

As we expected and consistent with guidance. We provided in September we were pleased to see loan balances ex PPP grow in the third quarter driven by robust new production.

With continued strong liquidity, we are actively managing the balance sheet and have grown the securities portfolio by $3 $7 billion from the end of the second quarter.

Deposit balances were reduced by $847 million as a result of the branch divestiture.

Excluding the divestiture deposit balances remained relatively stable on a period end basis loans associated with the divestiture totaled $209 million.

Fee income was another bright spot, where we continue where we saw continued momentum in our capital markets cards and payments Treasury management and wealth and investment businesses as Steve noted, we've been actively managing our capital and we were pleased to complete $500 million of share repurchases in the third quarter, We also announced a half set.

Increase of the common stock dividend in the fourth quarter, which takes us to an annualized dividend rate of 62 cents per share.

Finally credit quality continued to improve with net charge offs of 20 basis points, while nonperforming assets decreased 12% from the prior quarter.

Turning to slide seven.

Period end loan balances totaled $110 6 billion.

Excluding PPP loan balances increased by $367 million during the quarter with underlying growth in C&I mortgage auto and RV and marine portfolios.

On the commercial side, while PPP and auto dealer floor plan balances were lower all other C&I loans increased by net $466 million during the quarter driven by growth in asset finance and core C&I.

We're seeing very encouraging trends for new commercial loan production and pipelines that continues to grow both year over year and sequentially.

Consumer growth was somewhat offset by margin pressure from the continued runoff of the home equity portfolio.

Additionally, we continued to observe solid activity levels in our consumer portfolios with residential mortgage RV marine and automobile all continuing to post sequential quarter balanced growth.

Auto saw it saw its strongest third quarter for production activity to date.

With while mortgage continues to see robust origination activity in the quarter.

Excluding PPP, we believe the trough for underlying loan balances is behind us and we expect continued modest stroke from these levels in the fourth quarter with.

With respect to commercial portfolio, specifically, we expect to see momentum accelerate as we move through the fourth quarter and throughout 2022.

Moving on to slide eight.

<unk> noted previously total deposit balances excluding the divestiture relatively stable, we continue to optimize funding given our strong liquidity levels and reduced higher cost Cds by $395 million.

Overall, we continue to see much of the excess liquidity remained fairly sticky as core commercial deposit balances increased during the quarter.

Turning to slide nine FTE net interest income increased primarily driven by the full quarter benefit of Tcf TCE Tcf.

Net interest income increased by $323 million, while net interest margin was two 9% both driven by the acquired Tcf assets extra.

Excess liquidity moderate slightly during the quarter with $8 $1 billion of cash at the fed at quarter end Odyssey.

On an average basis for the quarter excess liquidity represented a drag on margin of approximately 23 basis points.

Core net interest income, excluding PPP and accretion was $1 $85 million, we expect core net interest income to grow from these levels on an absolute dollar basis in the fourth quarter and throughout 2022.

We're positioned to be asset sensitive today, and we are dynamically managing the balance sheet to become increasingly asset sensitive to capture the benefit from expected future higher interest rates. This includes the hedge rollouts as well as the addition of pay fixed swaps.

On June 30, our modeled net interest income asset sensitivity in an up 100 basis points scenario was two 9% based.

Based on the deliberate actions we took during the quarter, we increased our asset sensitivity to four <unk> percent and we continue to dynamically manage the balance sheet going forward.

Over the course of the quarter, we terminated select downside risk protection hedges and added $6 billion.

A forward pay fixed swaps.

Turning to slide 10, noninterest income increased primarily driven by the addition of Tcf fee income.

All of our businesses performed quite well within the quarter cards and payments benefited from higher customer transaction volumes mortgage banking performed well due to higher production and relatively high.

Higher sales of spreads.

And wealth and investment continues to be driven by positive net asset flows capital markets income also grew driven by solid performance in interest rate derivatives foreign exchange and syndications.

Turning to slide 11 total non interest expense came in at approximately $1 3 billion for the quarter, including the $234 million of notable items excluding these.

These items noninterest expense totaled $1 5 billion.

Primarily driven by the full quarter of Tcf expenses.

Our overall outlook for the magnitude of expense reductions is unchanged from prior guidance.

The timing to realize these benefits however has accelerated due to our actions to drive realization of cost savings as a result, we continue to expect that while Q3 was the high watermark for core expenses. They should benefit earlier than we previously thought as they stepped out into the fourth and first quarters.

Core expenses on an absolute dollar basis should should trail down throughout 2022, as we recognize the benefits of the Tcf cost synergies, while continuing to invest in the initiatives to drive top line revenue growth.

Slide 12 highlights our well capitalized balance sheet as well as a few highlights from the recent capital return actions.

Common equity tier one ended the quarter at nine 6% well within our medium term, 9% to 10% operating guideline.

Over the past quarter, we focused on returning capital to our shareholders in alignment with our capital priorities, we executed over half the $800 million share repurchase program. Following the authorization as I noted and we're pleased to have recently announced an increase to the common stock dividend.

As you can see on slide 13, our.

Our quarter ending allowance for credit losses represented 199% of total loans down.

Down from two 8% at prior quarter end the.

The improved economic outlook and our stable credit quality resulted in a reserve release of $117 million for the third quarter.

Additional key credit quality metrics are slow are shown on slide 14.

Further, reflecting our improving credit profile net.

Net charge offs represented an annualized 20 basis points of average loans and leases most of the lowest levels in recent history, well below our target range of 45 to 55 basis points on average through the cycle.

<unk> charge offs remained low in this quarter at seven basis points with net recoveries and auto home equity RV and marine.

Our NPA ratio declined 12% as portfolios continue to perform as expected and the ECL coverage of NPA has increased to 247%.

Finally, turning to our outlook on slide 15, as we operate in a dynamic macro environment. We're focused on managing what we can control we remain committed to investing in our people first digitally powered strategy driving sustained revenue growth, while managing expenses with it.

Achieving a 17% return on tangible common equity.

We expect a peer group, leading efficiency ratio and our normalized effective tax rate of 18% to 19%.

We believe these key metrics revenue growth return on capital and annual positive operating leverage or a compelling set of financial performance indicators and closely aligned with value creation for our shareholders now let me turn it back over to Tim. So we can get to your questions.

Thank you, we'll now take questions, we ask that as a courtesy of your peers. Each person ask only one question and one related follow up and then if that person has additional questions. He can add themselves back into the queue. Thank you operator, let's open up for questions.

Thank you at this time, we will conduct a 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, while we poll for our first question.

Our first question comes from Scott <unk> with Piper Sandler Sandler. Please proceed.

Good morning, guys.

Thanks for taking the question.

Dan I was hoping maybe there might be a way to put sort of a finer point on the degree to which you might expect costs to come down in future quarters from this quarter's roughly $1 $5 billion core base. You of course mentioned b. The acceleration just trying to get a sense for sort of the core investment spending minus the cost saves.

And then along the lines of acceleration. So when do we think that cost savings will be 100% baked into the results.

Yeah, Yeah. Thanks, Scott Great question overall as I noted in my prepared remarks.

Really really pleased with our delivery of the cost synergies and the trajectory.

I'm not going give you specific guidance, but I would say that.

We do expect sequential reduction each quarter and for the next couple of quarters for that to be a larger amounts.

And the double digit millions is likely.

The level, you would think about but in the end what I would point you to is the overall expense guidance that I've, given which is net of the cost synergies and the investments that we're making to self fund those revenue synergy investments. It's generally drive the revenue growth across the business so slightly more frontloaded.

Diving sequential growth throughout the balance of the next five quarters.

Perfect. Thank you and then maybe switching gears just a bit you sound pretty constructive on overall lending momentum I was curious if you could maybe.

Hi.

Sort of how that translates into aggregates.

Sort of an aggregate outlook for ex PPP loan growth I think previously you guys have been saying underlying loans kind of flattish through the remainder of the year and then they grow thereafter does the more constructive tone suggests maybe we get a little more growth sooner.

Yes, it's a great question, Luke will elaborate a bit more I think as we talked at the Barclays Industrial Conference in September I noted I expect to see some modest growth between then and the end of Q3 and Thats ultimately, what we deliver and really pleased with that I would characterize the growth we're expecting for Q4 as well to be modest so we do expect growth.

Likely modest I think it's really driven by the continuation of the factors we've seen for the last several quarters and we noticed a bit in the prepared remarks.

That is.

Really strong calling activity and pipelines driving continued robust new production and commercial and.

Quite a bit of momentum in business banking and then in the consumer space continued strength in residential mortgage and auto and arguably we continue to perform pretty well also the other thing I'll say is now that we have the conversion behind US. We've got we're able to now focus thousands of colleagues on growth and so we do expect.

Modest growth as we go into Q4, and then continuing and continuing to frankly accelerating as we go out throughout the course of next year as well.

Wonderful alright, thank you very much.

Our next question comes from Ebrahim <unk> with Bank of America. Please proceed.

Good morning.

Alrighty.

First wanted to follow up on Zack on the expense question. So you've.

Can you talk about the core in terms of them.

I guess merger related or the notable items that you called out.

When do you think those completely go away or does some of that stick around as you think about just the overall expense run rate.

Great question.

Q4 should it should be remain relatively elevated.

Similar to the levels, we've seen overall, taking a step back overall our outlook for the.

Merger related costs.

Back in December at the time of the announcement was $890 million and we continue to expect it to be relatively near that level. So I think the timing of that we've seen in more than $500 million at this point through this quarter and so we'll see a bit more come in Q4, and then likely a lot.

<unk> in Q1, perhaps a tiny bit trailing into Q2 and then by the end of Q2 is essentially should be done.

Got it and I guess just shifting tool.

Tcf integration sort of nearing an end Steve.

<unk> been an acquisitive bank, adding some concerns around just the taken Lucky Stan said on bead, making getting tough just give us a sense of what your priorities are from.

From a capital deployment is M&A still a piece of the puzzle in terms of how you think about growing the bank.

Hello, Hey, Brad we've done two larger.

Combinations in 12 years.

I don't really think we are.

The characterization is at but beyond that as.

We've said before our focus is on driving the core performance. We think we have tremendous revenue upside here.

We've got greenfield opportunities for a number of businesses in Denver and.

And certainly the twin cities, we've got a scale that we've never had in Chicago.

Thankfully, we've got density in Michigan.

Significant to us so we are.

We're very focused on driving revenue and and getting the benefits of that part of the combination equation.

We've done a few nonbank things in the past I would say more likely over the next years, possibly to do some of that but.

But our focus.

Our entire focus is on driving the quarter.

That's great. Thank you.

Our next question comes from Bill Clark with Wolfe Research. Please proceed.

Thank you.

Good morning can you remind.

Remind us how much relative gearing you have to the short versus long into the curve and how you think about performance in an environment, where the short end.

It rises perhaps a bit faster than the long end.

Yeah.

Yes, we are most sensitive to the first of all thanks for the question dealt with the SEC.

Were most sensitive to the two to four range within two to four year range within the yield curve to give you a sense.

And look I think we're going to benefit as rates move up irrespective of the steepening, but but certainly we would appreciate it if that two four range continue to move up as it has been doing in this and our continued expectation and we're positioning.

To benefit from that as I noted in my prepared remarks by driving incremental asset sensitivity.

To give you a sense of the average duration of our correct.

Delta hedging portfolio was one and a half years versus the almost five years for the duration of our pay fixed swaps at a little benefit as we as rates start to rise so I think.

We're positioned now in the quarter by more than a point of asset sensitivity as I noted in and we'll look to be dynamics to improve that even as we go forward.

Thanks, Matt that's super helpful.

Following up on that as you look ahead to higher short rates and better loan growth as utilization rates normalize how comfortable are you with the rate at which you've been reducing the amount of liquidity that you have parked at the fed and then as we look ahead over the next few quarters I guess should we expect you to continue to grow the securities portfolio.

From here.

Just curious about the extent to which you would consider preserving liquidity.

Through through the rest of this year.

Based on that.

Just based on the outlook yes.

Terrific question, and it's certainly something that we watch very very carefully.

I would say full stop we feel great about our liquidity levels and we think it is.

We're managing exceptionally well.

But the cash at the fed as a key area that we watch very very carefully and so we're I would say I would characterize our approach is intentionally incremental.

Watching the behaviors and our clients and deposit holding activities and seeking to kind of optimize incrementally period by period as more information comes out.

As we have guided for a couple quarters now we expect it to add to the securities portfolio I think the last quarter. We mentioned the number 4 billion, we completed that during the third quarter, we will see where it goes from here.

Do if liquidity trends continue as we expect I also expect that we will add some additional securities in the fourth quarter.

Currently at about 22% securities as a percentage of assets and we'd be comfortable with that rose modestly over time here.

Given the acceptable returns, we're seeing and the fact that it's accretive to NIM versus holding that cash, but but as you noted that the priority is funding growth and so we will sit ticket ticket very much incremental approach watching both trends.

Understood. That's super helpful. Thank you for taking my questions Youre.

Youre welcome. Thank you.

Our next question comes from Ken Zerbe with Morgan Stanley. Please proceed.

Alright, great. Thanks, good morning.

In terms of in terms of the core NIM I know there is a bit of confusion around why your guidance was or wasn't.

If we did our math right I think your core NIM just ex the <unk> sorry, the PAA.

About 281, which is a fair bit lower than the $2 92, and I think we were shooting for can you just talk about I guess two things. So one what drove sort of the weaker NIM ex the PAA, but also how do you think about that core now on a go forward basis. Thanks.

Sure. Thanks for the question Ken.

Fully reported NIM came in at 290.

And excluding PAA as you noted it was two to eight 1%. So it was a few basis points lower than we expected.

Your guidance had been.

Just a few basis points lower than June idea that came in and ultimately 201, so a bit lower than that that the two biggest drivers of that were.

Are the things we've just talked about the last question actually interestingly elevated fed cash contributed several basis points additional drag in the quarter than we had previously expected.

We did accelerate the purchase of our securities, which also impacted the mix and drove yields lower generally spreads were sort of spot on our our expectation relative to the core loan level.

I think what I would tell you going forward I am expecting stable from these levels.

A function of what happens with the elevated liquidity and free cash and the rate environment with generally stable from these levels.

Is a fair assumption.

Our key focus at this point is trying to drive net interest income dollars at $1 $85 million of net interest income excluding PAA excluding PPP.

Given the sequential loan growth that we're projecting given that rate stability my expectations when they grow those dollars into Q4 and grow them throughout 2022.

Got it okay, perfect and then.

Just in terms of the 62 branch closures that you talked about.

And first quarter, that's all wrapped up into your expense guidance just want to make sure that we're not we shouldn't take the expense guidance plus anything else because that's just part of the outlook correct.

<unk> so.

As Steve noted in his prepared remarks, we continue to optimize the network.

Dynamically manage expenses and ensure that we can invest to capture those really powerful revenue synergies and overall the guidance I gave on expenses net of all of those things and ultimately lower.

What this is all driving toward is achieving our moderate term financial targets that we've talked about over time, the 17% return on capital.

Revenue growth accelerating positive operating leverage to drive to that.

In the second half of 'twenty two.

Alright, Thank you very much.

Thank you. Our next question comes from Steven Alexopoulos with Jpmorgan. Please proceed.

Hey, good morning, everyone.

Hey, good morning, I wanted to follow up on Scott's initial question on loan growth in your response, you guys sound pretty bullish on loan momentum right. Steve you talked about how much the commercial pipelines are black you talked about how momentum is building why are you not looking for stronger loan growth here in the fourth quarter.

Okay.

Steve and Great question. This is Steve.

This is this is a funny quarter because of the holidays interrupting. So we will have very good asset finance origination, but we've had a substantial effort around the conversion we've had.

800 ambassadors out in our different business lines for a couple of weeks, we pulled pulled in at sort of peak production moments.

A lot of the talent to focus on making sure we got a great conversion and we think we did so.

So it's harder to do new business.

<unk>.

Thanks, giving and year end, if its not already in the pipeline. So we're talking about another 3354 weeks Max for the pipeline and other pipelines are up.

As we indicated they are up year over year, they are up quarter over quarter sequentially.

So thats contributing to the bullishness, but it's an odd quarter.

Two.

To be driving that we're very optimistic about how this will translate that for full year 'twenty two.

As we go forward, we have some great capabilities that have come to us with Tcf and we've already put in place much of the management and.

And a number of the RMS and other revenue producers that were looking to do in.

In the twin cities and Denver.

<unk>.

Increasingly in Chicago. So so the pieces are coming together very nicely and ahead of schedule and that's also contributing to the optimism.

Yes.

That's helpful.

It's Steve for my follow up we all know Huntington scores really well from a client satisfaction view did the branch consolidations have a notable negative impact on satisfaction levels and how long do you think it will take to move Tcf.

Below peer client satisfaction up to huntington's level. Thanks.

Okay.

Just the sheer amount of activity has required substantial efforts and resources during the course of the year. So we would expect to see.

A very modest.

Decline.

And customer sat and frankly.

It could be we could be flat, but we wouldn't expect to see an increase with respect to the tcf the new branches from Tcf and our colleagues who are new from Tcf. They are embracing fair play and the product set.

We sold during the conversion was just outstanding efforts with our customers and so we're very encouraged it will it will take maybe a couple of quarters, but it won't take a couple of years in order to get the customer service level.

And equivalency in those newer branches, we're very very pleased we've got a great group of colleagues, who have joined us from from Tcf.

Great. Thanks for taking my questions absolutely.

Thank you. Our next question comes from John <unk> with Evercore. Please proceed.

Good morning.

Okay.

I know you've.

And given your expectations here you've indicated your expectation for continued positive operating leverage how do you think about that for 2022, maybe if you can help us with the magnitude I know you're not specifically guiding on the top line or the expense growth expectation, but maybe if you can help us with the magnitude.

Positive operating leverage on a core basis that you think is reasonable for next year. Thanks.

Thanks for the question.

You noted in your question and I will repeat that I'm not going to give specific guidance, but I will try to characterize to answer your question.

I think next year's financials are going to be challenging to look at it from a year over year growth perspective, and to some degree to calculate that metric just given the continued two quarters a grow over impact of adding the tcf foot business, but.

But we do expect full year positive operating leverage in total and the big thing that we're very focused on just driving to the point, where the momentum coming into the second half of the year and certainly exiting the year is is on the levels that we've targeted for those moderate term targets and so at that point as we sort of get into a clean year over year growth.

Period to be able to see it better and.

Look I think it will be dynamic as we always have been to ensure that we can modulate the expenses, given where revenue is trending well.

While continuing to invest in Mike vacation, we'll see solid.

Positive operating leverage.

Not going to characterize the level specifically at this point.

Okay, Alright, that's helpful and then I guess.

Related question is on the <unk>.

Medium term efficiency goal of a 56%.

Currently on an as adjusted basis, your 61 spot too and curious on how you're thinking about that glide path.

Down to the 56% what type of timing do you think is reasonable updated based upon updated trends in the business that you're seeing when do you think you can hit the 56.

Yes, it's a good one.

We're going to drive towards that.

Note that the efficiency ratio was sort of an outcome frankly in the <unk>.

Most important metrics are revenue growth return on capital and positive operating leverage that we're driving to but but the efficiency is a key metric and so we are watching it carefully.

My expectation at this point is sort of.

During the second half of the year, we will see those emerge.

We're still doing some of the budgeting to modulate.

Precision with respect to quarters, but certainly I think by the second half of the year and the exit run rate in Q4 is my expectation.

Second half of 'twenty two correct.

Correct, correct, I said boy I Misspoken that no no no I just want to clarify okay alright. Thank you.

Yes.

Our next question comes from Terry Mcevoy with Stephens. Please proceed.

Hi, Thanks, good morning.

Tcf had about a two plus billion dollar inventory finance portfolio I'm curious where is that portfolio today and then the auto dealer floor plan balances at Huntington kind of pre COVID-19 versus today and what I'm getting at is whats the upside to the balance sheet when inventories in both of those portfolios.

Hypothetically normalized.

Yes, I think of it as we as we.

Talked about a bit over time <unk>.

Interestingly.

Each of the three major what kind of line line.

The businesses that we've got auto inventory in general middle market each of them represented roughly $2 billion opportunities when those utilization rates returned to normalized pre COVID-19 levels.

Sort of to give you an order of magnitude.

The trends we're seeing at this point in auto we're down a couple of more percentage points three to be precise between the end of Q2 and the end of Q3 to 25% at this point I'm seeing relative stability in the auto floor plan business to some degree some of the chip issues out of the supply chain just reserve.

We can produce some incremental pressure. We're also getting some defined didn't known new commitments and some term debt into those.

Businesses, such as my expectation is relatively flat in that space and interestingly inventory finance has similar opportunities we're creating some some very known planned uses of of those lines.

We expect stability, perhaps even a modest uptick actually into Q4 that the general middle market should continue to be flat year for the time being however.

I'm going to finish the answer to your question, but I would pulling back a second.

Highlight that it's our planning expectation at this point that the totality of these lines when you're relatively flat throughout the course of 'twenty two there could well be an opportunity against that but at this point for planning purposes. We're we're trying to zero that out, but we still expect pretty good loan growth and I think that's really just about pointing back to the robust.

Production activity that we're seeing so this could be ultimately a tailwind and we do expect over time it will be in the <unk>.

<unk> nature is largely moderate at this point, we expect generally flat.

Thank you and then as a follow up the $114 million of service charges on the Tcf part where the the fee adjustments made right. After the conversion I remember there was some revisions that we're gonna made that would result in lower fees and I'm just looking at that run rate and asking if that's a.

Sustainable going forward.

Yes.

Great question.

And.

Upon conversion.

We completed over the Columbus day weekend, all the Tcf customers, who now onto the Huntington products the platform and all of our fair play.

Product dynamics, and so we will expect to see a modestly lower.

The trajectory for that line into Q4.

Overall over the longer term, we feel great about the conversion to the fair play business as we've talked about a lot and this is a play we have run many times.

Very confident in the returns this generates typically the dynamic is sort of a higher degree of fee income reduction in the early periods offset over time by incremental deepening and incremental acquisition in the market from those products generally about 18 months payback and so sort of the dynamic we are expecting to see a bit lower into Q4.

And then the clawing back and paying back over that kind of roughly a year and a half period.

Great. Thank you Zack.

Okay.

Our next question comes from John Armstrong with RBC capital. Please proceed.

Thanks, Good morning.

John.

Just.

Back on the loan growth topic, you highlighted the late stage middle market.

36%.

<unk>.

Curious what you think is behind that and how much things have changed over the last couple of quarters and then.

Steve or rich do you have any feedback on the supply chain loosening up from your borrowers.

John I'll start this is Steve Richards Zach they choose to add.

The supply chain issues continue to be a challenge you are seeing some Oems.

Ship and deliver without without shifts even some of the autos are doing that but we've got auto dealers with no new inventory a lot.

As shocking.

To illustrate the challenges here as I think you saw with Ford and GM earnings announcements expectations Thats going to go deep into next year before the before it gets normalized so that's why exact earlier comment is we're not counting on on utilization normalization in inventory finance or auto.

To be a tailwind next year if it happens that's great.

We do see supply chain.

Issues.

Getting resolved or getting to a resolution over time.

And we'd expect that to continue.

Again through next year, maybe even a little bit beyond depending on the industry, but theres a lot of activity in the footprint about.

Truly <unk> and.

Additional manufacturing capabilities.

With adjacency in North America, including in our footprint states that we're in it so we'd like.

We like how this sets up over time in terms of additional opportunity for us and we're bullish but we clearly have both a supply chain and labor issue.

Virtually every business.

That's out there today.

Okay.

Rich, maybe just to piggyback on that I think as it relates to middle market loan demand. We are seeing that a couple of places that Steve mentioned.

Increased capex given the labor issues I think there is a bigger push to automate.

Production to garner that productivity.

We'll offset some of the labor issues. The other thing that we're seeing is just a heightened level of M&A I think as we're coming out of it.

The COVID-19 fog here with respect to EBITDA levels of things, there's just a greater sense of certainty around cash.

Cash flows and I think buyers are aggressively looking to expand.

If they can and sellers.

I think some of them have just.

A little tired.

Kind of going through college environment and when their cash flows are picking back up in a position where maybe they want to sell and so we are seeing increased M&A in the middle market space as well.

So Jonathan dynamic.

In the twin cities and Denver.

<unk> did not.

Middle market banking there were a series of things that just didn't so these are greenfield every customers net new.

The teams are in place as earlier mentioned and that will be building them out further but we've got core in place we're seeing success.

Translating into additional cross sell revenue as well and thats contributing to this optimism.

SBA following that as well is that correct, yes. It does.

Okay.

And then can you just touch on your repurchase appetite from here.

Yes. This is Jack I'll take that one job I think of it.

We're being pretty dynamic audit, we have we had a very intentional plan going into the third quarter as we noted in July.

July call to accelerated Frontloaded.

We felt great about the the $500 million I think we're going to.

Likely continue to be somewhat front loaded with the balance of that here in Q4, and as we go into Q1, but still working through it and I think looking to be dynamic as we do that.

Alright, thank you.

Once again, ladies and gentlemen to ask a question. Please press star one on your telephone keypad. Our next question comes from Ken Goldman with Jefferies. Please proceed.

Thanks, Good morning.

I was just wondering.

In the third quarter did you have.

Some gross savings in there.

And can you tell us what they were I know youre only kind of telling us we're going to decline from here, but just wondering what you might have already captured.

Yes, I would say that they were quite modest in the third quarter I think if you. If you think about the cost savings.

Came largely from.

Ultimately.

Branch.

Rationalization employees.

Level.

Reductions technology synergy is supporting the Tcf business essentially onto the Huntington Tech stack and that's sort of a long tail of other savings, including a number of vendor in sourcing related opportunities coupled with some increased scale and for the most part most of those really well.

Beginning to be executed on during the third quarter with sort of effect more into the fourth and as we go into the into the first quarter.

The decisions around them and the planning and actions necessary to achieve them have essentially all been completed and now we are in the execution mode of just realizing them. So not much I guess is a long winded answer in the third quarter more substantively in the fourth quarter, which is partially why we are we're talking about sort of this large.

<unk> stepped down in the fourth quarter then.

But then we thought before and then if we go into the first quarter. So if yet again, a similar level of step down as my current expectation then a bit of a more of an asymptotic function as you get into Q3, and Q4, but still stepping down.

And a follow up on that do you have any change to your view of the original 490 in total that you expect I know youre, telling us that maybe we see a little bit more of a pull forward from a timing perspective, but what about the absolute amount.

The absolute amount is solid at that level I mean, we're kind of within rounding errors higher higher than that so nothing overly substantive that I would call out I point you to the 490 days that's the number we're looking to achieve.

Okay and last cleanup one just PPP in the deck you show that you have $54 million of the fees left how do you expect the NII related to PPP to traject from here fourth quarter and beyond.

The 40 something.

It's kind of like a half life function I would tell you over the next three quarters, we're expecting roughly 50% of the ETB to reduce into the fourth quarter.

And then roughly 50% of that reducing into the first and then yet again.

Secondly, these are planning assumptions I've given you Shouldnt, we should note that it's pretty dynamic and the SBA to their credit has been accelerating forgiveness quite substantively recently and so.

Numbers move around but from a planning perspective, that's essentially.

Kind of outlook function that we've got.

Okay got it thank you welcome.

Our next question comes from David Long with Raymond James. Please proceed.

Good morning, everyone.

Good morning, just I wanted to drill down on the service charge on deposits here and a good quarter from I think expectations and when Steve When you look at the price the headlines that gets talked about a lot that theres going to be some restrictions on overdraft and just curious how are you thinking about that and how that may impact you.

Fees going going forward and then <unk>.

Me when I think of the overdraft side of things Fair play banking something that you guys have I think your overdraft fees would be.

Smaller portion of revenue to peers, but yet your screen a little bit higher there.

Just curious as to why you think that may be the case as well thanks.

So David Great questions.

We put 24 hour grace in more than a decade ago.

It continues to this day, we open it up last year for small business.

And.

And we're continuing to do certain things to help our customers standby cash is a classic example of that there's no limit to the use of that those funds.

Yes.

With our customers.

We put up.

A little over $50.

Last year for an overdraft and public safety zone. So we have been continuously over time working to benefit our customers as part of this fair play banking philosophy.

We tend to be.

Very strong on a relative basis in terms of customer acquisition.

As a constant.

Of the.

The different features and functions of our checking products.

And that's.

Ameliorated.

The revenue would be above over the last decade, or so very very substantially.

Uh huh.

As Ed pointed out.

A bit of a step down in the fourth quarter for a couple of quarters thereafter, with the Tcf customers, but theyre going to have the same advantage of products and services that all of our previously existing customers have as well so so.

And it will accompany our expectation around both customer retention and customer acquisition, it's hard to.

I can't speculate on what regulators they Jennifer.

Again, we've been trying to do things to help consumers businesses for quite some time.

Not just with overdraft fees, but other types of eliminations.

Eliminations reductions notice requirements, we've put a new alert system and in that regard a year and a half ago. So there's a lot of.

Of tools available to help customers manage their money budget et cetera, and avoid overdraft fees.

Got it thank you Steve I appreciate that color.

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 over to Mr. Steve Bryan I will for closing remarks. So thank you for joining us today.

We completed the majority of the actions leading to achievement of Tcf cost synergies.

And expect to achieve all of the planned reductions we're coming off the conversion with significant momentum across the bank and are confident that our disciplined execution will create substantial value for our shareholders. We have a deeply embedded stock ownership mentality, which aligns the interest of our board vantage mint with colleagues with our shareholders.

So appreciate your support and interest in Huntington have a great day.

Okay.

This concludes today's conference you may disconnect your lines at this time and thank you for your participation.