Huntington Bancshares Incorporated

Greetings, and welcome to the Huntington Bank Shares second 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 your host, Mark Muth, Director of Investor Relations.

Thank you, Joe. Welcome.

I'm Mark Booth, Director of Investor Relations for Huntington. Copies of the slides we'll be reviewing can be found on the Investor Relations section of our website, www.huntington.com. This call is being recorded and will be available to rebroadcast starting about one hour from the close of the call. Today's presenters are Steve Steinauer, Chairman, President, and CEO, and Zach Wasserman, Chief Financial Officer. Rich Foley, Chief Credit Officer, will join us for the Q&A. As noted on slide two, today's discussion, including the Q&A period, will contain forward-looking statements. Such statements are based on information and assumptions available at this time and are subject to changes, risks, and uncertainties, which may cause actual results to differ materially. We assume no obligation to update such statements. For a complete discussion of risks and uncertainties, please refer to this slide and material filed with the SEC, including our most recent forms 10-K, 10-Q, and 8-K filings.

Let me now turn it over to Steve. Thanks Mark, and happy birthday. Welcome everyone. Slide three provides an overview of Huntington. We're now a top 25 bank holding company with $175 billion in total assets. The TCF acquisition expanded our leadership position and density in Michigan, bolstered scale in markets such as Chicago, and added new growth markets in the Twin Cities, Denver, and Milwaukee. Importantly, we have number one brand share within our footprint which allows us to leverage our brand, convenience, and digital channels to continue to efficiently grow the customer base. Huntington brings an expanded set of capabilities to these markets and to the TCF customer base, including middle market and corporate banking with specialty verticals, treasury management, capital markets, trust and investment, and insurance products, in addition to our number one in the nation SKA lending program. So we're excited by the opportunity to introduce our fair play approach, and leading digital offerings to our customers in these markets. Over the past several years, we've been pleased by the number of independent affirmations of the superior customer service our colleagues provide and the customer-centric products and services we've introduced. Just last month, DAD Power announced Huntington ranked highest in customer satisfaction amongst regional banks for our mobile app for the third consecutive year. Additionally, we were ranked first in our region for consumer banking customer satisfaction. Now, these are important affirmations of the considerable investments we've made in our culture and digital technology. Slide four provides an overview of Huntington's strategy to build the leading people-first digitally-powered bank in the nation. Huntington is a purpose-driven company, and organic growth and sustainable top quartile financial performance remain core tenets of our strategic vision. The acquisition of TCF is additive on both fronts, as it supports continued organic growth opportunities and allows us to leverage the incremental scale to drive efficiencies and deliver top quartile financial returns. We're very well positioned to benefit from the strength of the economic recovery. Our accelerated investments during the past year are driving new customer acquisition and retention, and we expect to continue to capture market share gains and increase share of wallet in the second half of 21 and beyond. On a macro basis, labor constraints and wage inflation remain a concern for many of our business customers. However, confidence levels are very high and leading economic indicators are positive. Many of our customers continue to see record cash flows and profitability drive the unprecedented levels of liquidity, which continue to weigh along growth and line utilization rates. We expect borrowers may opt to carry more liquidity than they had previously. Given what we all experienced with the pandemic, the supply chain issues, and ongoing labor constraints. But nonetheless, our loan pipelines are strong and continue to build, and we remain optimistic the conditions favorable for improved loan growth will strengthen during the second half of 21 and as we move into 22. Turning to slide five, I'd like to give an update on the TCF integration. We continue to be on track for all key integration activities, We closed the acquisition in early June and completed phase one of branch consolidations, closing 44 Meijer in-store branches. We expect to close the required branch divestiture in the third quarter and to complete the majority of the remaining system conversions over Columbus Day weekend. The final three phases of branch consolidations are expected to be completed by month end October. In addition to our focus on systems, product, and customer conversion, we're also focus on fully integrating our new TCF colleagues into Huntington's culture. Huntington's strategy of building the nation's leading people-first digitally-powered bank begins with our people, our colleagues, both legacy and new TCF colleagues acting together are the key to our success. And I see and appreciate our colleagues and the differences they make in customers' lives and our communities every day. We're very fortunate. We have a tremendous team. With commercial banking, the businesses we've added from TCF, such as inventory finance and vendor finance, to name a few, continue to be complementary and additive to our overall strategy. In consumer banking, TCF has progressed on customer experience, but now the opportunity to introduce our digital capabilities, our products, our services, combined with our fair play philosophy, will significantly bolster the customer experience as they convert to Huntington. As we introduce the Huntington brand, our products and services, and the commitment of our colleagues to our new markets and expanding customer base, we clearly see opportunity to gain additional market share to deepen relationships and to drive organic revenue growth. Turning to slide six, while the TCF acquisition is an important part of our growth plan, we remain focused on the larger organic growth strategies we have been executing. Our investments in digital and technology continue to drive strong returns for our business. Nearly half of new consumer deposit accounts are now open digitally, while consumer checking households as well as business checking relationships have each increased by 8% annualized year-to-date, 8% annualized year-to-date. Last month, we launched compelling new digital products, including standby cash and early pay, which are part of our roadmap to continue to innovate and advance our customer-centric fair play banking philosophy. We are continuing to innovate with additional new products and features to be launched later this year and next. And we're seeing traction in customer acquisition, and we've restored marketing investments to pre-pandemic levels. So as we continue to build on our specialty banking efforts within commercial, we're seeing strong sales activities, growing pipelines, and momentum in originations. Before I turn it over to Zach, I want to take a moment to say thank you to Mark for his hard work and dedication to Huntington as he's led our investor relationship team for the last eight years, seven years. Mark will be taking on a finance leadership role as CFO of our important vehicle finance division. We're pleased to welcome Tim Sedavaris as our new director of IR. Congratulations to Mark on your new role, and welcome to Tim. Zach, over to you to provide more detail on our financial performance.

Thanks, Steve, and good morning, everyone. Slide 7 provides the highlights for the second quarter, which included closing the TCF transaction, delivering strong new loan production, and maintaining solid credit quality, as well as robust liquidity in capital positions. On a fully reported basis, including all impacts of the acquisition, we reported a net loss per common share of 5 cents for the second quarter. Earnings were impacted by acquisition expenses of $269 million and the so-called CECL double count provision expense of $294 million. Earnings per common share adjusted for these notable items were positive $0.35 per share. As Steve mentioned, we closed the TCF acquisition in June, and we remain on track for the realization of the deal economics. Even as we brought on TCF, our teams did not lose focus on driving organic growth across the bank. We saw underlying loan growth ex-TCF in many of our consumer loan portfolios, namely mortgage, auto, and RV marine. We also saw encouraging new commercial loan production and building pipelines. Fee income was also a bright spot in the quarter, as we saw increases on our underlying Huntington business, including treasury management, card and payments, capital markets, and our wealth and investment businesses. With respect to credit, net charge-offs were 28 basis points. The allowance for credit losses ended the quarter at 2.08%, and was driven by provisioning of $294 million from the acquired TCF loan book, offset against $145 million of reserve release from the legacy Huntington book. Detailed loan and credit marks related to TCF are included on slide 25 of the appendix. Liquidity remained elevated as we continue to see growth in deposit balances. This gives us ample opportunity to deploy into incremental lending opportunities and securities to support net interest income growth in the coming quarters. Additionally, we fully exited the capital protection hedging position that utilize interest rate caps, closing out a very useful hedge, and replacing them with alternative capital protection tools which have less earnings volatility as they qualify for hedge accounting. Finally, common equity tier one ended the quarter at 9.97%. Turning to slide eight, FTE net interest income increased, primarily driven by the addition of TCF in the quarter. On a linked quarter basis, net interest margin decreased 82 basis points, 2.66%. primarily driven from the net change in the interest rate caps from the prior quarter. Looking for a moment at the underlying NIM dynamics, the impact in the second quarter from the mark-to-market on the caps was negative 17 basis points, while we saw three basis points benefit from purchase accounting accretion. Therefore, the underlying NIM, excluding the caps and PAA, was approximately 2.8% for the second quarter. This compares to 2.98% on the same basis in the prior quarter. As we had noted in previous calls, we had expected a reduction in NIM into Q2, driven in part by a nine basis point step down in the benefit of our existing interest rate hedging positions, as well as forecasted PPP dynamics and yield curve impacts on spread. At the Morgan Stanley Conference in June, we got it to a second quarter NIM in the low 280s. a second quarter NIM of 2.80 was a few basis points below expectations due to the additional impact of excess liquidity as deposits yet again increased in the quarter and elevated Fed cash represented an 18 basis point drag on the NIM in the quarter. Looking ahead, we continue to expect Q2 to be the low point for NIM for the year. Driving a positive trend will be the addition of TCF assets that will benefit margin as we get a full quarter impact of those acquired assets in the third quarter. Also, the continued execution of our balance sheet optimization program will provide benefits from our ongoing focus on funding cost optimization, asset mix, and customer level pricing. And over time, we expect the elevated liquidity levels that I mentioned to normalize, reducing that 18 basis point drag back down to zero as it does. These positive factors will offset some continued spread pressure from competition for high quality assets and the absolute level of interest rates, as well as impacts from the roll-off of hedges, as illustrated on the next slide. All told, these changes are expected to bring us a net interest margin in the 290s next quarter. Our outlook continues to point to NIM stability at approximately those levels for the foreseeable future going forward. Turning to slide 9, in the second quarter, the interest rate caps resulted in a $55 million negative mark-to-market, driven by lower rates at quarter ends. However, cumulatively, over the life of these caps, the strategy was highly effective and resulted in a $94 million pre-tax gain, $75 million net of tax, that as we intended, offset approximately 46% of the negative impact on capital from rising rates. As the securities portfolio gradually grew during the last two quarters, and prepayment speeds on that portfolio have reduced, We now have the opportunity to utilize a more traditional hedging structure to accomplish the same capital protection objective. Hence, we fully exited the caps during the second quarter and replaced them with $4 billion of forward starting swaps, which qualify for hedge accounting and reduce earnings volatility while achieving a similar level of capital protection. Additionally, we moved $4.5 billion of securities from available for sale into help for maturity during the quarter in order to further minimize volatility in OCI as a result of the changes in interest rates. Turning to slide 10, average loan balances increased by 9% year over year, driven by the added TCF balances and continued growth in our consumer loan portfolios. Period end loan balances ended the second quarter at $112 billion. We continue to have near-record origination levels in our consumer portfolios in the second quarter, with RV marine, automobile, and residential mortgage all continuing to post sequential quarter growth. Despite the inventory constraints in auto and RV marine, consumer demand remains very high, driving continued strength in originations. The same can be said for home lending, where origination activity is quite robust, despite ongoing home inventory constraints. The calling activity and origination volumes in the commercial portfolios also continue to be robust. However, overall commercial growth is constrained by pressure on utilization rates. Auto dealer floor plan balances remain the headwind of the quarter, driven by inventory supply constraints, but we're optimistic that we're nearing the floor for these balances. The outlook is expected to slowly recover from these levels as OEMs deliver increased inventory to dealers. The inventory finance business from TCF has been facing a similar headwind as inventory levels have been depressed and outstandings have been near multi-year lows. Commercial utilization rates for our middle market and corporate portfolios remained relatively stable in the second quarter. Cumulatively, these three areas of commercial lending combined represent $5 to $6 billion of incremental loan growth opportunity as utilization rates recover. With respect to investment securities, we completed a repositioning of the acquired TCF portfolio to improve both yield and to reduce duration. We also deployed an incremental $4 billion of excess liquidity into additional securities. Inclusive of these actions, the securities portfolio ended the quarter at $35 billion. Given the level of excess liquidity we had at quarter end, we would expect to grow the securities portfolio incrementally by approximately $4 billion over the remainder of 2021. Slide 11 provides an update on PPP. In total, we originated $11.4 billion of PPP loans, inclusive of TCF's activity. We continue to expect approximately 85% of balances from the programs to ultimately be forgiven. PPP loans totaled $4.2 billion at quarter end, with a significant acceleration in the pace of forgiveness during June. We anticipate forgiveness of the majority of balances to be completed in the second half of the year, with a portion trailing into early 2022. Turning to slide 12, average total deposits increased 13% sequentially due to the acquisition of TCF and increased customer liquidity levels at Huntington. We continue to leverage excess liquidity to manage wholesale funding balances and costs lower. Slide 13 illustrates strength of our capital and liquidity ratios. As I mentioned, common equity tier one ended the quarter at 9.97% and is near the top of our nine to 10% operating guideline. These strong capital levels coupled with the ongoing economic recovery and our merger integration proceeding as planned gave us confidence to relaunch our share buyback program earlier than previously expected. The board has authorized $800 million of common stock repurchases over the next four quarters that will likely be overweighted toward the earlier part of that time. Our capital plan entails managing our CET1 ratio toward the lower half of our 9% to 10% operating range over the medium term. This plan is supported by our finalization of the marks on the acquired portfolio and our confidence in the pro forma earnings power and return on capital profile of the company. Slide 14 provides a view of our allowance for credit losses. The second quarter ending ACL represents 2.08% of total loans, down from 2.17% at prior quarter end. The allowance includes the previously mentioned TCF credit mark, which was partially offset by an 8% reserve release on the legacy Huntington portfolio. Slide 15 provides a snapshot of key credit quality metrics for the quarter. Our overall credit performance remains strong. Net charge-offs represent an annualized 28 basis points of average loans and leases, below our 35 to 55 basis point through the cycle average target range. Consumer charge-offs were quite low this quarter, at just two basis points, as auto and home equity portfolios both recorded net recoveries. Year-to-date, consumer net charge-offs have been nine basis points. Our criticized assets and NPA ratios were both modestly higher as a result of the TCF acquired portfolios. These portfolios came over as expected consistent with our detailed due diligence work, and we remain comfortable with the acquired book. The ACL coverage on MPAs is strong at 229%. Finally, turning to our outlook on slide 16, we've provided a set of medium term financial targets, including a 17% return on tangible common equity, a 56% efficiency ratio, while remaining committed to investing in our people first digitally powered strategy. These metrics, in addition to sustainable top line revenue growth, slightly above nominal GDP, will drive earnings per share growth over time. Our efficiency ratio will benefit from expense synergies from the TCF acquisition and incorporates our commitment to continued investment in technology and digital capabilities. Annual positive operating leverage remains a core principle of our strategy. We believe these metrics, Revenue growth, return on capital, and annual positive offering leverage are a compelling set of financial performance indicators and closely align with value creation for our shareholders. Now let me turn back over to Mark, and we'll get to your questions. Thank you, Zach. 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 any additional questions, he or she can add themselves back into the queue.

Thank you.

Thank you. If you would like to ask a question, please press star 1 on your cell phone keypad and a confirmation tone will indicate your line is in the queue. You may press star 2 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 poll for questions. Our first question is from Scott Seavers with Piper Sandler. Please proceed.

Good morning, guys. Thanks for taking the question. Hey, so I think one of the main issues over the past few months has been sort of the higher expense guides and a couple of those. Now that TCF is in the mix, it's a little tougher to tell exactly what's going on from sort of the standalone Huntington basis. I wonder if you could just speak or provide some color on how we can feel confident that sort of that guide that you offered earlier in the year about Huntington's standalone growth indeed peaking and will normalize from here. How does that play out? What should we be watching for from the outside to understand the expense control, et cetera?

Yeah, that's a great question, Scott. Thanks. This is Zach. I'll take that one. So two big messages I would offer to you. One is on an underlying Huntington basis, as you noted, very much executing to our prior plan, which has been elevated levels of expense in the first two quarters of the year driven by our investments. bringing that growth rate back down into the low single digits by the second half of the year. Everything that we're completely executing to that plan and everything I've seen in terms of forecast for standalone Huntington in our track up until the close of the acquisition mid-June was very much corroborating that. In fact, Q2 was coming in a bit lower in terms of overall expense growth, and the outlook continues to be as we've disclosed. the TCF cost synergies are very much on track, and we're executing on that as we speak. The branch rationalization, as Steve noted in his comments throughout the way, the systems conversion is planned, the personnel decisions are finalized, we've completed a lot of the vendor conversion, exceedingly progress on real estate consolidations. So the majority of those cost saves from the TCF acquisition will benefit 2022, which would be the full run rate of being present in the back half of the year, and then it would go into 23. Excluding one-time costs, which clearly would be noisy, on an organic basis, we expect a step up into Q3 as we get a full quarter of the TCF expense base. And then from there, beginning in Q4 and over the next six quarters, see gradual reductions each quarter as the synergies are realized. So pretty steady, no major step down at this point in our outlook.

Okay, perfect. So absolute declines in expenses sort of starting in the fourth quarter. It sounds like that.

Correct, Scott.

Okay, perfect. And then to switch gears a little, I think, Zach, you had talked about the margin going into the 290s beginning in the third quarter. Can you sort of specify, and I apologize if I missed this in taking my notes, but what would be included in that? Does that include PPP, forgiveness fees, purchase accounting benefits, et cetera?

It does include the dynamics we see around PPP, which move around in single digits on a quarter-to-quarter basis. but doesn't include the benefit of PAA. PAA will be a couple basis points of benefit, so it's not overly significant. I think PAA gives you a sense it's three basis points in Q3 and negative two with the 22. So it's relatively small in PAA, so really it's the core underlying NIM that will be in the 290s.

Perfect. Okay, good. Thank you guys very much.

Thanks, Scott.

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

All right. Great. Thanks. Good morning. In terms of loans, obviously, it's kind of hard to see the sort of the core loan growth just given the merger with TCF this quarter. Can you just talk about, I guess, you know, what was sort of that underlying growth in loans? And I'm also kind of curious, I know you guys sound pretty positive about the growth outlook in the second half of the year for loan balances, but how does that play out in the near term, just given supply chain constraints and sort of generally weaker overall industry growth? I mean, is your positive outlook more weighted towards the fourth quarter than 3Q, or is it pretty split between the two?

Yeah, great question, Kendall. This is Zach. I'll take it. Just a couple things I would share with you. One, to answer your question about kind of the underlying hunting growth, and I will caveat to say that we're deeply integrating the businesses at this point. So over time, it'll be more and more difficult for us to kind of disaggregate in this way. But generally, what we were seeing was consumer growth kind of close to 1% and commercial growth just slightly less than flat. So overall, it was pretty flat, particularly when you strip out the decline in PVP quarter to quarter. Going forward, though, more importantly, I think the two dynamics that we've been seeing, and we tried to kind of illustrate in the prepared remarks, continue to be very much the thing to focus on. Firstly, new production is quite strong. At or better than our plan, you know, on the consumer side, surprising continued strength in mortgage and auto. And then on the commercial side, record calling activity, driving pipelines, both sequentially from Q1, but I would also say very, very healthy growth versus 2019. And so it's giving us a lot of confidence in where new production is going. And it's really just a question which is the impacts of the elevated liquidity in the system and supply chain issues on existing line utilization. And so I think the net outcome of this, from what we're seeing, is probably about 1% additional growth pressure in the back half of this year. And whereas at the beginning of the year, I guided for 1% to 3% loan growth, and then by June at the Morgan Stanley Conference, we talked about sort of the low end of that range, My expectation now is sort of roughly flat on average in the second half of the year, with growth really starting to rebound as we get out into 2022 and go forward. I think there's some pretty clear signs for optimism here. I think on the places where their supply chains are really pressuring inventory utilization in auto and certainly in the new TCF-acquired inventory finance book, We're seeing OEM production increase, and our clients want to use these lives. So I think over the course of 22 into 23, we'll see that $5 to $6 billion come back, and the new production really shows no signs of slowing down at this point. So we're bullish about the future, and I think throughout the course of 22, you see those conditions improve.

All right, perfect. And then just as a follow-up question, back on the NIMH, The 10 basis point increase that you expect in 3Q, how much of that is driven just simply by the addition of TCF and all the purchase counting kind of issues versus the balance sheet optimization or management initiative that you guys talked about?

Yeah. Sequentially, much of it is driven by the TCF acquisition. But I think sort of over time, the balance sheet optimization program is providing a great floor for us and really contributing to what would have otherwise been yield curve impacts pushing it lower. So that's probably the best insight I can give you.

All right, perfect. Thank you very much. You're welcome.

Our next question is from Steven Alexopoulos with JPMorgan. Please proceed.

Hey, good morning, everyone. Morning, Steve. The start for you, Zach, so there's obviously a lot going on this quarter. When we look at the $0.35 of adjusted EPS, is that a run rate that you can grow from?

Yeah, I think the outlook we've got for earnings is good, given the TCF synergies coming in. Clearly, it's going to be up. a noisy couple quarters here just with closing the acquisition. But, you know, our expectations will continue to drive forward very much according to the expectations we set, you know, going all the way back to December of last year. Okay.

That's helpful. And then in terms of staying on offense, right, over the last few quarters you guys have discussed increasing the pace of investment, right, new hires. And we know M&A deals are quite distracting, right, when you're trying to put two companies together. Are you able to keep that momentum on offense, or do you really need to turn the focus internal to make sure this integration goes seamless as possible?

Steve, this is Steve Steinhauer. We've been doing both all along. The core has been executing really well. We saw some new products just launched last month on the consumer side, and I think what Zach shared earlier, subject to the pandemic, the reduction in new line utilizations and floor plan rates, the pipelines have been good and we're closing at or above budget. So we come into this quarter strong and in comparison to 2019 where we had a more normalized comparison. So we like what we see in the core and we're at the same time really doing a great, teams are doing a great job of integration, we're either on schedule or ahead of schedule, and we've been able to make some really good decisions around the talent within TCF, combining to make Huntington a stronger company. So very, very pleased with what we see, a lot of work yet to do, but we're moving rapidly, and by the end of October, the branch consolidations are done, the major systems conversions are done, and we're gonna enter 22 substantially set, which is probably close to a record time with a June closing for the TTF transaction. Really like what we see. We're confident about both being able to deliver the core. We're very focused on that, as well as get the economics of the integration.

Okay. Great. Thanks for taking my questions.

Thank you. Thank you.

Thank you. Our next question is from Abraham Punawalla with Bank of America. Please proceed.

Good morning. Just a question, a couple of questions. One, talk to us a little bit on the consumer side. Like you've done a lot, Steve, since taking over in terms of making it a very consumer-friendly bank. Address to me two things. One, the competitive pressure that you're seeing from either the fintechs or the neobanks around consumer fees and how you're thinking about it. Where do you see the most risk? And do you see a particular risk to TCF's deposit customer base, which seems to be the target for some of these banks that are coming up, either fintechs or neobanks? Thank you.

Ibrahim, we've been focused on the consumer side since 2009. We launched Fair Play in 2010. We've had a series of feature function benefits starting with 24-hour grays. of the Astros free checking product, that's been a core product. And we've built out the product lines, we've continued to innovate over the last decade, all day deposit, and more recently safety zone a year ago at this time, and different things. So we're disrupting ourselves against the game plan of trying to be the premier consumer bank in our footprint. And I think we're achieving that. I think in the last nine years we've had six J.D. Power number ones in consumer banking in our footprint. You've got the three mobile apps in a row. Like what we're seeing, we're not done. We have some really interesting ideas that we'll be working on through this year and well into next to further distinguish and provide growth opportunities for us. Now in the context of TCF, I see our fair banking philosophy just as a huge advantage for that customer base. And I think from the early reaction of our new colleagues from TCF and the branches, They're wildly enthusiastic, and I think the customer base will be as well. I see that as a big growth opportunity for us, including our capacity to cross-sell. So the operating processes, procedures, et cetera, we have, complemented by our Fair Play products and this emphasis and focus on customer service, I think is going to make our combination incredibly powerful on the consumer side. I'm very bullish there. And we've been competing with FinTechs and the larger banks in our footprint for years. It's actually made us better. So we'll look forward to continuing to adapt and innovate and yet grow on the consumer banking business.

That's helpful, Steve. Thank you. And just as a follow-up, I think the other side of Steve's question, you have been relatively acquisitive over the last few years. As you get through the TCF integration over the next few quarters, just talk to us in terms of need for M&A, either in terms of scale or expanding geographies. Is any of that a priority over the medium term or not?

Our focus is on completing this integration well, delivering the economics or better, and driving the core. And that's the focus. So we're really grateful and pleased with the talented new colleagues we have joining us. There's a training natural absorption that will go on over the next year or so. And, again, that's where we're focused.

Good. Thank you.

Thank you.

Our next question is from Brian with Autonomous. Please proceed.

Hi. I'm just thinking over the next couple of quarters, I mean, you know, it's always tough with these deals to figure out what's really going on. We'll clearly have the benefit of your qualitative comments and you've been very clear that you're upbeat on what's going on so far. But, you know, if you put yourself in our shoes for the next six to nine months and you're kind of picking up the financials every quarter, you know, are there two or three things that you would say, look, these are the, you should watch for these three metrics, and this is kind of what's going to be good, and this is what's going to be, you know, this is what would be the benchmark you should really focus on for the next six to nine months. Basically, you know, I pick up the third quarter financials, and I'm trying to figure out, are things going well? What would be the two or three things you would really key in on?

Yeah, it's a great question. This is Zach, and, you know, I fully understand it, and frankly, internally we're very much focused on ensuring we have visibility as well. What I'm watching is I think the same thing as you should, which is the sequential loan growth from where we stand today. As I mentioned, I think it'll be somewhat flattish here in the back half of the year, but I do think the conditions will be improving. And we're watching that line utilization, that drag that as it goes away will kind of reveal the underlying strength in the new production will, I think, be the driver. That's sort of point one. Point two is the new, that as we talked about, our expectation is in the 290s. I think that'll move potentially based on the pace of the deposit runoff and that kind of 18 basis points of elevated liquidity drag coming off. I have confidence in our forecast. There's a lot of actions and specific plans to drive it, but I think that's the thing I would watch secondly. Third, we haven't talked about it a lot here, but fees are a real bright spot for us in terms of the strategic focus areas for our strategy and the growth that it's driving, principally in those four areas I mentioned in my comments. Card and payments. just debit and commercial card, business card just on fire. Treasury management continued to track forward very, very well. Our capital markets business growing very nicely year over year and sequentially. And then wealth and investments, which is seeing record sales activity and really strong revenue growth as well. So I've watched those very carefully. And then, you know, I think lastly, the expenses. You know, I think we got a question earlier about the trajectory of expenses. I do think they'll pop up just from a kind of calendarization perspective into the third quarter as we have a full quarter of TCF. But then you'll see it every quarter tick down on a nominal basis over the next few quarters as our synergies are realized, you know, kind of wave by wave basis. And then getting to that run rate level of performance that are in our medium term targets as we get into the second half of 22, and as we certainly go into the full year of 23. So that's our operating plan, and that's certainly what I would encourage you to stay focused on as well.

Brian, additionally, the credit profile will continue to improve. We've tried to be conservative with both our marks and our use of discretionary non-accrual as it relates to the new CCF portfolio. And you'll see improvement on credit class, NPA, NPL, net charge office as well.

That's really great. I appreciate all the detail from both of you.

Thanks, Brad.

Our next question is from David Conrad with KPW. Please proceed.

Yeah, good morning. I was just wondering if you could help us out a little bit on next quarter's expenses. Make sure we're all kind of in the range of the same starting point as you put TCF together with HVAN for the full quarter.

Yeah, I hasten to give sort of overly precise guidance, but my expectation X one-timers is we'll pop up a couple hundred million dollars just as the run rate into next quarter, so around a billion dollars of run rate expenses X time. one-timers, and then starting to tick down from there.

Okay, thank you.

Ladies and gentlemen, we have reached the, oh, so there's one more question from John Armstrong with RBC Capital Markets.

Please proceed. Hey, John, go ahead. John, you're on. John Arkstrom.

I'm here. Thank you. Sorry. Thanks for letting me sneak in. Question for you. Back on Steve's on the EPS question, it sounds like you're pretty optimistic on credit. Can you give us some idea of what you're thinking in terms of provisioning as well? Are we still in this reserve reduction credit improvement mode for the company, or are there any nuances in terms of how you've marked TCF and what you see on credit where we're going to flip back to a positive provision?

Hey, John. It's Rich. Let me take that. You know, so from my standpoint, you know, we've been releasing reserves now for two quarters, you know, and within that, you know, we're seeing the positive impacts on the economy and our credit metrics are continuing to improve. With the TCF mark, you know, we spent a lot of time on that. We feel we have it absolutely right. And so we would not expect, you know, to have to build reserves from here. We continue to expect the economy to improve. And our credit metrics, as Steve just mentioned, we also expect to see, you know, reductions in credit class and MPAs and, you know, charge-offs, you know, continuing a downward trend. So if all of that holds true, I would expect to see continued releases moving forward.

Okay, good. Steve, when does fair play come into the TCF markets and what kind of an impact do you expect that to have?

Well, John, we'll be introducing Huntington products when we do the conversion on Columbus Day. And I think that will be the moment where, with some advertising or marketing, along with the highly engaged new colleagues from TCF, we'll be able to really make hay with what we're talking about here. We have to get through the conversion and settle it down. It usually takes a couple of weeks. But we had such great products in comparison that our branch colleagues are very, very enthusiastic. And so it's an exciting moment for us. We'll translate that into our customer base, and we'll be launching marketing campaigns in advance to sort of set up the momentum that we hope to deliver. Remember when we announced the TCF deal, we talked about the expense takeout being half the equation, but we were optimistic about the revenue potential in this And it's not been sized – it wasn't sized for discussion then. It's not today. But it's looking really good. And we have a great group of new colleagues that will be able to deliver this for us. So we're very optimistic about our future together.

Okay. You kind of hit on what I wanted to ask also, but do you have any early revenue synergy examples that you can share? I know you don't want to size it, but any examples so far?

Well, I'm doing a lot of calling, and so the vignettes that I'm picking up from customers, our customers, TCF customers, even prospects, are very, very encouraging. Remember, we have a much broader set of products and services than TCF, so when we're sitting around talking about what we can do, like I think it was yesterday with a very large no-market company, and they're asking us questions on a detailed basis about the venue. CCF just didn't have those products and capabilities. And so being able to introduce those into a discussion looked very, very promising. I think there will be a 40-year relationship we're going to move from one of our competitors. So again, this combination has a lot of potential. And the breadth of our products and services, both on the business or commercial side and consumer side, are very encouraging.

This is Zach. I might just tack on to that one. To me, if I think about the synergies, I'm equally bullish about it as Steve just is. I always think about them sort of in a few major buckets. There's the sort of deepening engagement with products think commercial capital markets Treasury management our card and commercial card payments businesses in consumer all the things that the Steve just referenced in terms of elevated level of share of wallet given the stronger products and an accelerated acquisition given the particular the digital capabilities and then lastly geographic opportunity for us to expand into the new big markets Denver Minneapolis deepening into a lot of the markets that we exist today. I think we're already beginning to hire staff and really start to penetrate those markets. So those are the big three buckets that I'm seeing.

We're moving fairly quickly, just to pick up on Zach so we can emanate this a little bit. We're ahead of the hiring that we had in the pro forma on our commercial, our wealth, and business banking in a couple of those new markets. And the power of the combination in terms of just the sheer magnitude of what we have in Michigan and Chicago is very, very exciting to us. So a lot of work to do in front of us. That's why we're focused on driving organic growth and getting this integration in great shape. But we like what we see.

Okay. Thanks a lot. Very helpful. And, Mark, congrats and thanks for all the help over the years. I appreciate it.

Thanks, John. Well said.

Our next question is from Ken Houston with Jefferies. Please proceed.

Hi. Good morning, guys. Just can you remind us on the medium-term goals for ROE and efficiency ratio, just what your timeframe is for that, and then also how do you contemplate what rates and credit you build into that?

Yeah. This is Zach. I'll take that one. Great question. I appreciate the opportunity to elaborate and be more specific. Medium term for us is really kind of the next four to eight quarters. As I mentioned in my prepared remarks and a few questions, I think you'll see the deal economics sort of accrue very substantially into 22, and they'll kind of build over the course of the year where the run rate, particularly in the second half of the year, will be very much evident of that. And then the full year 23 should very much be those metrics. And so that's our focus. So back half 22 into 23. And... No, I think the credit environment that we're envisioning and the rate environment is on credit. We've continued tracking forward of benefits. As Rich just noted in his answer just a few moments ago, that probably will represent some incremental reserve releases here, mainly in the back half of 21, I would expect. And then on the forward yield curve basis, really just planning on the forward yield curve as it exists today. So you can see that too. Still represents a constructive environment, particularly as you get kind of through 22 and into the course of 23. But really on a NIM basis, that'll manifest itself into the 290s, which is my forecast sort of over that entire period.

Got it. And then just one follow up on the merger saves. So with the conversions finalizing in October, is it fair to say that we'll get full run rate saves in one queue? And then on top of that, how do you feel just about your original cost save forecast? Do you see any potential upside? And if there were to be upside, do you expect to let that fall or could you reinvest some of it? Thanks, guys.

Good additional question. In terms of the cost, they're still very much on track to deliver what we committed, and that's the number we're really aiming for. And it's not sort of a perfect step down of cost, as you sort of alluded, you know, potentially as a form of your question. Really, they're sort of, think about tranches of cost reduction that'll begin, as I mentioned, in the fourth quarter and start to kind of, each quarter thereafter, drive incremental benefits on a quarter-to-quarter basis. Really, really by the second half of the year, you'll sort of see the full totality of it. There's a few pieces that we'll carry forward in terms of additional execution into the early part of next year. So we'll see steady reduction in expenses for starting at Q4 and then continuing to about four or five quarters thereafter.

Hopefully that's helpful.

Our next question is, again, from Brian Foran with Autonomous. Please proceed.

Oh, hi. I just wanted to circle back to that 3Q expense number and definitely recognize you mentioned you're not trying to give point guidance, but now I'll ask you about point guidance to make sure I'm not misinterpreting it. So you're saying start with a billion and then add a couple hundred million? So something like 1.2, 1.25 billion, but with a wide range? I just want to make sure.

No, no. Let me clarify. Let me clarify. I think I would be looking at the number. It's roughly $250 million higher quarter to quarter on a growth rate, just a nominal basis from Q2 into Q3. That's just the sort of quarterization, if you will, of the full quarter of TCF run rate expenses before many of the synergies start to take place. So precisely, you know, roughly $250 million quarter-to-quarter higher in expenses X one-timers into Q3.

And the base that's higher off of is?

roughly a billion even or what what's 250 million higher than what yeah the numbers i'm looking at 800 million dollars i'm not sure that the numbers you're looking at we can take it offline to help you clarify more precisely okay but you said the number you're looking at is what it's the brian it's the number in the earnings release x the one-time items the 803 is the starting point oh 803 okay perfect no that's that's exactly what i was trying to clarify i was

working off the wrong base. Okay, so 250 million higher off 803 with obviously lots of moving parts around integration and stuff, so that's kind of a range to start rather than a point guidance.

That's a good way to take it away.

I appreciate that. I was about to plug in a number that was about 20% too high to my model, so thanks for fixing that. I appreciate it. Thanks, Brad.

Our next question is from Bill Koresh with Wolf Research. Please proceed.

Thanks. Good morning. I wanted to follow up on the outlook for loan growth to be flat in the second half, but improving in 2022. And I wanted to ask if you could tie that outlook in with what's implicit in that outlook relative to You know, the commentary you had around labor force shortages, you know, continuing and just to the extent that the expectation is that that's going to improve as we look to the fall and beyond as extended unemployment benefits, forbearance, and other stimulus sort of abate. Is that sort of the expectation that's contributing to that or, you know, maybe just some color on what's implicit in that outlook?

This is Steve, Bill. You have an environment that is changing, is improving, we hope, on the employment side. It is the number one issue for businesses, at least in our footprint. They just can't get enough labor. And so the change in benefits, we hope, will spur more employment, which will translate over time to higher growth rates and financing needs. but it's not an immediate correlation. It just takes some period of time to burn in. And we expect that, we'll see that, feel it, and experience it during the fourth quarter. But there's also, with the 10-year reduction, there's some level of prepayment that we would expect to occur on some of our portfolios. So we're trying to incorporate all of the changes with the guidance that you got from Zach. optimistic that line utilizations improve in any material sense this year at this point. That's a bit of a change from where we were at the end of the first quarter.

Understood. I wanted to follow up on some of the commentary on the auto side of the business and ask if you could give some color in your discussions with your dealer clients in terms of what you're hearing from them around their appetite for keeping floor plan levels lower versus history even after the supply chain issues are resolved. How are you guys thinking about the possibility that we could end up below historical levels of inventory?

Well, it reminds me of 2010 and 11 when the bankruptcies occurred and inventories were drawn down. And, you know, at that point, everybody's going to keep floor plan levels lower. You know, the car companies are going to be more judicious to try and get pricing versus volume, and that lasted for a couple of quarters. There is a volume share game that history has shown that the OEMs want, and they have the ability to push delivery. It's not just the dealers pulling it. So we believe over time the floor plan inventories will essentially get back to where they were. A lot of the dealers, particularly in this low rate environment, would love to have a lot more inventory. You know, they're getting deliveries, and in a good percentage of the cases, those are pre-sold, so they're on the line very briefly. And there's still a phenomenon where people come in thinking they know what they want, but once they experience, you know, the next version of, or the additional features that are available in the cart, that there's a sales process and generally a selection that still has some physical components to it. So I think the dealers will be essentially in the position they were back in 18 and 19 over time. Now, I don't think that's a 21, and it may not even fully be in 22, but by 23, we think that that'll be normalized, assuming the pandemic stays under control. Thank you, Steve. That's helpful. Thanks, Bill.

Steve, before we move on to the next, just real quick, we got an email question. The question is, you talked about the buyback, but you didn't talk about the dividend.

Could you give us what you're thinking on the dividend?

Well, we typically make dividend decisions in the fourth quarter. It's a board decision. We'll be rerunning models now with TCF data and And look at that, our priorities haven't changed. Organic growth, dividend, and all other use at this point.

That's about as far as I can go at this point. So, Joe, next question?

There are no more questions. So, Steve, I would like to turn the call back to you for any closing remarks.

Well, thank you all for your interest in Huntington. We continue to execute our core strategies, as you heard earlier, and I'm confident we'll drive both near-term and long-term return for our shareholders. We're on pace and committed to deliver the economics of the recently closed TCF acquisition while the organic growth momentum driven by our investments remains intact. So we're optimistic about the opportunities in front of us and confident in our ability to capitalize on the improving economic recovery. I believe the disciplined execution of our strategies will drive top quartile financial performance over the medium and long term and we clearly build a strong foundation of enterprise risk management and a deeply embedded stock ownership mentality, which aligns our board management colleagues with our shareholders. So thank you for your support and interest in Huntington. Have a great day.

This concludes today's conference. You may disconnect your lines at this time. Thank you very much for your participation. Have a great day.