Huntington Bancshares Inc
NASDAQ:HBAN
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Huntington Bancshares Inc
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Greetings, and welcome to the Huntington Bancshares 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. [Operator Instructions] As a reminder, this conference is being recorded.
I'd now like to turn the conference over to your host, Mark Muth, Director of Investor Relations.
Thanks Joe. Welcome. I'm Mark Muth, Director of Investor Relations for Huntington. Copies of the slides we'll be reviewing can be found on the Investor Relations section of our website, www.huntington.com. This call is being recorded and will be available as a rebroadcast starting about one hour from the close of the call.
Our presenters today are Steve Steinour, Chairman, President and CEO; and Zach Wasserman, Chief Financial Officer; Rich Pohle, Chief Credit Officer will join us for the Q&A session. As noted on Slide 2, 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 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 the slides and the material filed with the SEC, including our most recent Forms 10-K, 10-Q and 8-K filings.
Let me now turn it over to Steve.
Thanks Mark and happy birthday. Welcome everyone. Slide 3 provides an overview of Huntington with our top 0.5 bank holding company with $175 billion in total assets. The TCF acquisition expanded our leadership position and equity in Michigan both through scale and market such as Chicago and added new growth markets in the twin cities Denver and Milwaukee.
Importantly, we have number one branch share within our footprint, which allows us to leverage our brands, convenience and digital channels to continue to officially grow the customer base. Huntington brings an expanded tariff capabilities to these markets and through the TCF customer base, including middle-market and corporate banking with specialty verticals, treasury management, capital markets, trusted investment and insurance products in addition to our number one in the nation SBA 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 the customer centered products and services we've introduced just last month. Date hour announced it's been 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 hikes and 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 core tile, financial performance remain core tenants 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 core tile 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 it to continue to capture market share, gains, and increase, share of wallet in the second half of '21 and beyond. On a macro basis, labour 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, from the unprecedented levels of liquidity, which continue the way along the line Legalization 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 labour constraints.
But nonetheless, our loan pipelines are strong and continue to build, and we remain optimistic that conditions favorable for improved long robe will strengthen during the second half of 21 and as we move into '22.
Turning to slide 5 , I'd like to give an update on the GCF integration. We continue to be on track for all key integration activities. We've closed the acquisition in early June and completed phase one, a branch consolidations closing 44 Meyer in-store branches.
We expect to close the required branch divestiture in the third quarter and the 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 then October.
In addition to our focus on systems, product and customer conversion, we're also focused on fully integrating our new TCF colleagues into Huntington's culture. I think the strategy of building the nation's leading people first digitally powered bank begins with our people, our colleagues, both legacy and TCF colleagues acting together are the key to our success. And I have seen 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 GCs, such as inventory finance and better finance to name a few continue to be complimentary and additive to our overall strategy. And consumer banking TCF had progressed on customer experience, but now the opportunity to introduce our digital capabilities, our products or services combined with our fair play philosophy will significantly bolster the customer experience as they convert to Huntington.
As we introduced the Huntington brand or product serve that products and services and the commitment of our colleagues to our new markets and expanded 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 had each increased by 8% annualized years, day, 8% annualized year to date. Last month we launched compelling new digital products and please stand by cash and early pay, which are part of our roadmap to continue to innovate and advance our customer centric, Fairplay 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 creep endemic levels. So as we continue to build out our specialty thing, you have roots within commercial. We're seeing strong sales activities, broadly 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 Steve Steinour, as our new director of IR. Congratulations to Mark on your new role and welcome to [Indiscernible]. With that 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 includes closing the TCF transaction, delivering strong new loan production and maintaining solid credit quality as well as robust liquidity and capital positions.
On a fully reported basis, including all impacted the acquisition. We reported a net loss for common share of $0.05. For the second quarter earnings were impacted by acquisition expenses of $269 million. And the so-called Cecil double counts provision expense of $294 million earnings per common share adjusted for these notable items were positive $0.35 per share.
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 the $145 million of reserve release from the legacy Huntington book. Detailed loan and credit marks related at TCF are included on slide 25 of the attendance.
Liquidity remained elevated as we continue to see growth in deposit balances. This gives us ample opportunity to deploy and doing incremental lending opportunities and securities to support minister's income growth in the coming quarters.
Additionally, we fully exited the capital protection hedging position that utilized 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 8, FTE net interest income increased primarily driven by the additional TCF and 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 more -- looking for a moment at the underlying NIMdynamics,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 in NPA was approximately 2.8% for the second quarter. This compares the 2.98% on the same basis, in the prior quarter.
As we have noted in previous calls, we had expected a reduction in them two into two 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 280, the underlying 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 point -- 18 basis point drag on the NIM in the quarter.
Looking ahead, we continue to expect you to -- to be the low point for them 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 costs, 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 a dusk.
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 the impacts from the roll off of hedges, as illustrated on the next slide. Also, these changes are expected to bring us the net interest margin in the 219’s.Next quarter, our outlook continues to point to NIM stability at approximately those levels for the foreseeable future.
Going forward, turning to slide nine in the second quarter, the interest rate caps resulted in a $55 million negative mark to market driven by lower rates at quarter end. However, cumulatively over the life of these caps, the strategy was highly effective and resulted in a $94 million pre-tax gain seventy-five million dollars 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 the 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 from, for sale into health for maturity during the quarter, in order to further minimize volatility in OCI, as a result of the changes.
Turning to slide 10, average load balance, it has 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 the sequential quarter growth. Despite the inventory constraints in auto and RV/Marine consumer demand remains very high driving, continue to strengthen 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 continues to be robust.
However, overall commercial growth is constrained by pressure on utilization rates, auto dealer floor plan balances remains a headwind in the quarter driven by inventory supply constraints, but we're optimistic that as 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 out standings have been near multi-year loans.
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 five 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 activity. We continue to expect approximately 85% of balances from the programs to ultimately be forgiven. PPP loans,total full $4.2 billion at quarter end with a significant acceleration in the pace of forgiveness during June.
We anticipate forgiveness of the re 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 it's increased 13% sequentially due to the acquisition of TCF and increased customer liquidity levels at Huntington. To continue to leverage excess liquidity to manage wholesale funding balances and costs lower.
Slides 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 -- program earlier than previously expected.
The board has authorized $800 million of common stock repurchases over the next four quarters that will likely be over-weighted towards 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 card portfolio and our confidence and 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 TCF represents 2.08% of total loans down from 2.17% a 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 are represented annualized 28 basis points of average loans and leases below are 35 to 55 basis points 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 reported net recoveries year-to-date consumer net charge offs have been nine basis points are 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 NPA 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 commitments 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 operating leverage are a compelling set of financial performance indicators and closely aligned with value creation for our shareholder shareholders.
Now, let me turn it back over to Mark and we'll get to your questions.
Thank you, Zach. We will now take questions. Yeah. That as a courtesy to your peers, each person asked one question and one related follow-up and then if that person had any additional questions, he or she can add themselves back into the queue. Thank you.
[Operator Instructions].Our first question is from Scott Siefers 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 the, 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, on from sort of the standalone Huntington basis.
I wonder if you could just speak or provide some colour on you know, how we can feel confident that sort of, that guide that you offered earlier in the year about Huntington's stand-alone growth indeed peaking and we'll normalize from here how, how does that play out? What should we be watching for from the outside to understand the expense control, et cetera?
It's a great question, Scott. Thanks. This is Zach. I'll take that one. So sort of two big vendors I would, 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 -- we're completely executing to that plan and everything I've seen in terms of forecast for standalone Huntington our in our track up until the close of the acquisition mid-June was very much corroborating that in fact, due to was coming in a bit lower in terms of overall expense growth. And the outlook continues to be, as we disclosed in terms of overall expense growth and the outlook continues to be, as we disclosed.
Then secondly, 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 the comments right away, the systems conversion is planned. Personnel decisions are finalized. We've completed a lot of the vendor conversion exceeding the progress on real estate consolidations.
So the majority of those cost saves from the TCF acquisitional benefit 2022, which was the full run rate of being present in the back half of the year. And then as we go into '23, excluding one-time cost, which, 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 of Q4 over the next six quarters, see gradual reduction each quarter as the synergies are realized pretty steady, no, no major step down through this point in our outlook.
Okay, Perfect. So, absolute declines and expenses sort of starting in the -- in the fourth quarter, sounds like that. Okay, perfect. And then switching gears a little, I think Zach, you talked about the margin going into the two nineties beginning in the third quarter. Can you sort of specify and I apologize if I miss this and taking my notes, but what would be included in that and is 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 the quarter to quarter basis. But, but doesn't include the benefit of PAA will be a couple basis points of benefit. So it's not overly significant. I think PAA give you a sentence. It's three basis points in Q3 and a negative two to 22. So it's relatively small on PAA. So it really the core underlying NIM that will be in the two nineties.
Perfect. Okay, good. Thank you guys very much.
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, the merger with TCF this quarter. Can you just talk about, I guess 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, 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 three healers? It pretty split between the two?
Yeah. Great question. Kind of all this is that I'll take it just a couple of things I would share with you one to answer your question about kind of the underlying Huntington growth. And I will call caveat out to say that we're, we're deeply integrating the businesses at this point. So over time it'll be more and more difficult for us to kind of segregate 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, the decline of PPP a quarter-to-quarter. Going forward, the more importantly, I think the two dynamics that we've been seeing, we tried to kind of illustrate it in the prepared remarks, continue to be very much think the thing to focus on.
Firstly, new production is quite strong at, or better than our plan know on the, on the consumer side, surprising Canadian strength in mortgage and auto and then other commercial side record calling activity, driving pipelines up both sequentially from Q1. And I would also say very, very healthy growth versus 2019.
And so that's giving us a lot of confidence in where new production is going. And it's really just a question of watching therefore, the second factor, which is the impacts from 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 one to 3% loan growth and then by June at the Morgan Stanley conference that we were talking about sort of the low end of that range, my expectation now is sort of roughly flat 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 sides, Rocky wisdom here. I think on the on the places where their supply chains are really pressuring inventory utilization and auto and it certainly in the new TCF acquired inventory finance book, we're seeing OEM production increase and our clients want to use these lines.
So I think over the course of 22 and 23, we'll see that $5billion to $6 billion come back. And the new production really shows no signs of slowing down at this point. So, and the new production really shows no signs of slowing down at this point. So we're bullish about the future. And I think that throughout the course of '22, you see those conditions.
All right. Perfect. And then just as a -- as a up question dock on the NIM, the 10 basis point increase the second and three Q, 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 initiatives that you guys talked about?
Sequentially much of it is driven by the TCF acquisition, but I think so 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, that's probably the best answer I can give you.
Our next question is from Steven Alexopoulos with JPMorgan. Please proceed.
Hey, good morning, everyone. Let's start for you, Zach. So there's obviously a lot going on this quarter. Well, 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, is good. Given the TCF synergies coming in, clearly, it's going to be a noisy couple quarters here just with closing the acquisition, but our expectations will continue to drive forward. Very much according to the expectation we've done 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? If you really need to turn the focus internal to make sure this integration goes seamless as possible,
We've been doing both all along the court has been executing really well. We still have some good products just launched last month on the consumer side. And I think what Zach earlier subject to the, the, the reduction in in your line utilizations and floor plan rates the, the pipelines have been good and we're closing at or above budget. So we've come into this quarter strong and in comparison to the 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 break teams are doing a great job on the integration where either on schedule or schedule, and we've been able to make some really good decisions around the talent within TCF combined to make, to make Huntington a stronger company.
So they're, they're pleased with what we see 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, and we're -- we're to enter '22 substantially set, which is probably close to a record time with a June closing for, for the TPF transaction.
Really like what we see we're competent about both being able to deliver the poor. We're very focused on that as well as get the economics of the integration.
Our next question is from Ebrahim Poonawala with Bank of America. Please proceed.
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 I guess to me two things, one, the competitive pressure that you're seeing from either the fintechs or the Neo banks 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 deposit customer base, which seems to be the target for some of these banks that are coming up with different texts and Neo banks? Thank you.
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 grades off the Astro street checking product. That's been a core product, and we build 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, we're disrupting ourselves against the game plan of 10 different things. So we're, we're disrupting ourselves against the game plan of, of trying to be the premier consumer bank in our footprint. And I think we were achieving that. I think in the last nine years, we've had 60, 80 power number ones in consumer bank.
In our footprint, you have 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, through this year and well into next to, to further distinguish and provide growth opportunities for us.
Now, in the context of TCF, I see a fair blanket thanking philosophy just as a huge advantage for that customer base. And I think from the early reaction of our, our new colleagues from TCF and the branches they're wildly enthusiastic, and I think the customer base will, will be as well. I see that as a big growth opportunity for us, including our capacity across process.
So the operating processes, procedures, et cetera, we have complimented by our Fairplay products and, and this emphasis and focus on customer service, I think, is going to make our, our, our, our combination incredibly powerful on the consumer side. I'm very bullish there and we were competing with the -- and the the larger banks in our footprint for years it's, it's actually made us better. So we're, we'll we'll look forward to, to continuing to adapt and innovate and get growth on the consumer banking business.
That's helpful to you. Thank you. And this is 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, he didn't tell me the scale or expanding geography is like, is any of that a priority over the medium term or not?
The focus is on yeah, completely this integration. Well, the reason the economics were better and driving before and, and, and that that's, that's the focus. So we're, 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 and again, that's where we're focused.
Thank you. Oh, that's the question is from Brian Cohen with Autonomous, please proceed.
Hi. I'm just thinking over the next couple of quarters. I mean it's always tough with these deals to figure out what's really going on. What 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 if you put yourself in our shoes for the next 6 to 9 months, and, and you're kind of picking up the financial separate quarter are there two or three things that you would say, look, these are the, you should watch for these three metrics and this kind of what's, what's going to be good?
And this is what's going to be this is what would be the benchmark you should really focus on for the next six to nine months. Basically 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 I can I fully understand it. And, and, and frankly internally what, we're very much focused on ensuring we have visibility as well what I'm watching. Cause I think the same things you should have, which is this sequential loan growth from where we stand today.
As I mentioned, I think it will be somewhat flattish here in the back half of the year, but, but I do think that conditions will be improving, but we'll be watching that line utilization that drag, that it added goes away will kind of reveal the underlying strength in the new production. Well I think the, the driver has that's sort of point 1. Point 2 is that as we talked about, our expectation is in the two nineties. 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 that our forecasts are with 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, but fees are a real bright spot for us in terms of the focus areas for our strategy and, and the growth that is driving principally in those four areas.
I mentioned in my comments, carton payments, debit, and the commercial card business card, just on fire treasury management, continuing to try to track forward very, very well. Our capital markets business growing very nicely year over year and sequentially, and then wealth and investments, which we're seeing record sales activity, really strong revenue growth as well. So I watched those very carefully.
And then I think lastly, the expenses I think and then I think lastly, the expenses I think we've got a question earlier about, about the trajectory of expenses. I do think it'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, you'll see it every quarter, take it down on a nominal basis over the next few quarters, as, as our synergies are realized and kind of wave by way of 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, that's our operating plan. And and that's certainly what I would urge you to stay focused on as well.
Additionally the, the credit profile will continue to improve. We've tried to be conservative with both our marks and our use of discretion or not pool as it relates to the new GCF portfolio. And you'll see, you'll see a improvement on credit class, NPA, NPL net charge offs as well.
That's really great. I appreciate all the detail from both of them.
Our next question is from David Konrad with KBW
Good morning. I was just wondering if you had help us out a little bit on next quarters expenses make sure we're all kind of in the range of the same, the same starting point as you put TCF together with, with H1for the full quarter?
I hate them to give so overly precise guidance, but implication X-one timers will pop up a couple of $100 million. This is the run rate into next quarter. So around $1billion of runway expenses X-one timers and then started to tick down from there.
Ladies and gentlemen, we have reached -- so there's one more question from Jon Arfstrom with RBC Capital Markets. Please proceed.
Good job. Thanks for letting me sneak in a question for you back on Steve on, 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 Jon, it's Zach. Let me take that, so from my standpoint we've been releasing reserves now for, for two quarters and, and within that we're seeing the positive impacts on the economy and our product metrics are continuing to improve with the TCF mark.
We spent a lot of time on that. We feel we have an absolutely right. And so we would not expect to have to build reserves from here. We continue to expect the economy to improve and, and our credit metrics, as Steve just mentioned we also expect to see reductions in a credit class and MPA's, and charge offs continuing a downward trend. So if all of that holds true, I would expect to see continued releases looking forward.
Okay, good. Steve, when does Fairplay come into the TCF markets and what, what kind of impact do you expect that to have?
John will be introducing Huntington products when we do the conversion on Columbus day. And I think that will be the moment where with, with some advertising or marketing, along with the highly engaged a new college from TCF, we'll be able to, to really make that case with what we're talking about here.
We have to get through the conversion and, and, and settle it down. Usually takes a couple of weeks, but, but we had such great products in comparison that they're very, our branch colleagues are, they're very enthusiastic. And so it's an exciting moment for us. We will translate that into our customer base and, and we'll be launching marketing campaigns in advance to sort of set up the momentum that we hope to deliver.
Number one, we -- when we announced the DCF deal, we talked about the expense, take out the half the equation, but we were optimistic about, about the revenue potential in this. And it's not been sized. It wasn't sized for discussion that it's not today, but, but it's looking really good. And and we have a great group of new colleagues that will be able to deliver this worth. So we're, we're, we're, we're, we're very optimistic about our future together.
Okay. You kind of had on what I wanted to ask okay. You kind of had 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 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. We've never, 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 a, I think it was yesterday with a very large middle market company, and they're asking us questions on a detailed basis about the venue.
TCF just didn't have those products and capabilities. And, and, and, and so being able to introduce those into a discussion are look very, very promising. I think there'll be a 40 year relationship removed 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 of the service side are very encouraging.
This is to tack onto that one to me, if I think about the synergies I'm equally bullish and opposite, you just isn't. I was thinking about them sort of in, in, in a few major buckets, there's the sort of deepening engagement with products, commercial capital markets, treasury management, our card and commercial card, or payments businesses in consumer, all the things that Steve just referenced in terms of elevated level of share of wallet, given the stronger products and, and, and an accelerated acquisition with the particularly the digital capabilities.
And then lastly, geographic opportunity for, for us to expand it to the new, big markets, Denver, Minneapolis, deepening into a lot of the markets that we exist today, I think already beginning to hire staff and really start to penetrate those markets to big three buckets that I'm seeing. So we're moving fairly quickly just to pick up on Zack so we can emanate this a little bit.
We've we're, ahead of the hiring that we had at the pro-forma on our commercial or wealth and business. Thank you 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 where 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, and mark congrats and thanks over the years. I appreciate it.
Our next question from Ken Usdin with Jefferies, please proceed.
Good morning guys. Just, can you remind us on your, on the medium term goals for Row 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. So medium term for us, it was really kind of the next four to eight quarters. As I mentioned in my prepared remarks and in a few questions, I think you'll see that 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 is particularly the second half of the year will be very much evidence of that.
And then the full year '23 should, should very much be those, those metrics. And so that's our focus. So back half '22 to '23 and I think the, the credit environment that we're visioning and the part in is continued tracking forward of benefits as rich just noted in this this answer just a few moments ago that that probably will rubber that 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, on the Ford yield curve as it exists today. So and you can, you can, you can see that too still represents a constructive environment, particularly as you get kind of through '22 and into the, the, the course of '23 but, but really on a NIM basis that, that will manifest itself into the two nineties, which is my forecast sort of what would 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 run rate full run rate saves in, in one queue and then on top of that, like, 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 what could you reinvest some of it? Thanks guys.
Yeah. Good, good. It's a good additional question in terms of the cost, they are still very much on track to deliver what we committed and that's the number we're really aiming for. And it's not, it's not sort of a perfect step down of costs as you, as you sort of alluded potentially as a form of your question, really, there was sort of thinking about traunches of, of cost reductions.
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 by the second half of the year, you'll sort of see the full totality of it. There's a few pieces that will carry forward in terms of additional execution into the early part of next year. So so we'll see a steady reduction in expenses for starting for Q4 and then continuing for about four or five quarters thereafter.
Our next question again from Brian Ford, please proceed.
Oh, hi. I just wanted to circle back to that three Q 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. So you're saying start with a billion and then add a couple hundred million. So, so something like $1.2 billion, $1.25 billion, but with a wide range is I just want to make sure, like?
No, well, let me, let me clarify. Let me clarify. I think I would be looking at the numbers. It's roughly a $250 million higher quarter to quarter on a growth rate, just a nominal basis from Q2 and Q3. That's just the sort of quarter realization if you will, of the full quarter of GCF a run rate expenses before many of the synergies started to take place. So precisely roughly $250 million quarter to quarter hiring in expenses, X-one timers into Q3.
And the base that's higher off of is roughly $1billion even, or, or what what's $250 million higher than what?
Yeah, the numbers I'm looking at $800 million. I'm not sure that the numbers you're looking at and you can take it offline to help you clarify more precisely.
Okay. But you said the number you're looking at is what?
The number in the earnings release X, the one-time items that the 803 it's the starting point.
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 think about it. I appreciate that. I was about to plug in a number that was about 20% too high in my model.
Our next question is from Bill Carcache with Wolfe Research, please proceed.
Thanks. Good morning. I wanted to follow up on the outlook for low growth to be flat in the second half, but improving in 2022 and one to ask if you could tie that outlook in with what's implicit in that outlook relative to the, the, the, the commentary you had around labor force shortages continuing and, 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 for Barrett's and other stimulus sort of a bait, is that sort of the expectation that's, that's contributing to that, or maybe, maybe just some color on, on what's implicit in that outlook?
It's -- this is Steve. Bill, you have an environment that is, is changing is improving. We hope on the employment side that is the number one issue for businesses. At least in our footprint, they just can't get enough labor. And so the, the change in benefits, we, we hope will spur more employment, which -- which will translate over time to higher growth rates and financing needs.
But it's, it's, it's not an immediate correlation. It just takes some, some period of time to burn in. And, and we expect that we'll, we'll, we'll see that feel it and experiences during the fourth quarter, but there's also with the ten-year reduction, there's some level of prepayment that we would expect to occur on some of our portfolio.
So we're, we're trying to incorporate all of the changes with the guidance that you, you got from, from Zack. We're not optimistic that live utilizations improve in any material sense this year at this point. And that is that that's a bit of a change from where we were at the end of the first quarter.
Understood. And 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 on your discussions with your dealer clients, in terms of what you're hearing and hearing from them around their appetite for keeping four plan levels, lower versus history, even, even 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 bankruptcy is occurred and inventories were drawn down and that's like, everybody's going to keep floor levels lower than the the car companies are going to be more judicious and try and get pricing versus volume. And that lasted for a couple of quarters, but there is a volume share game that, that history has shown that, that the OEM's want.
And they -- they have the ability to push delivery. It's not just the dealers pulling it. So, so we believe over time, the floorplan 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 and, and they're, they're getting deliveries and it's in a good percentage of the cases. They're all those are pre-sold.
So they're on the last very briefly, and they're still phenomenal where people come in thinking they know what they want, but they're, they're there once they experience the next version of, or, or the additional features that are available in the car that there's a, there's a sales process and generally a selection that still has some physical components.
So at Sonic, I think the dealers will be essentially in the position they were back in '18 and '19 over time though. I don't think that's a '21, and it may not even fully be in '22, but by '23, we think that, that that'll be normalized assuming that the pandemic stays under control.
Thank you, Steve. That's helpful.
Before we move on to the next just real quick, we got an email question. Question is you talked about the buyback, but you didn't talk about the dividend. Could you give us what your thinking on the dividend?
Well, we typically make a dividend decisions in the fourth quarter. It's a board decision. We'll, we'll be rerunning models now with TCF data and, and and look at that on our priority, send that changed organic growth dividends and all of the use at this point. That's about as far as like, go at this point.
So Joe's next question? 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 as you heard earlier, and I'm confident we'll drive both near term and long-term returns for our shareholders. We're all patient committed to deliver the economics and the recently closed TCF acquisition while the organic growth will them driven by our investments remains intact.
So we're optimistic about the opportunities in front of us confident in our ability to capitalize on the improving economic recovery. I believe the disciplined execution of our strategy will drive top ports out 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.