Greetings, and welcome to Huntington Bancshares' Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Tim Sedabres, Director of Investor Relations. Please proceed.
Thank you, Latonya. Welcome everyone, and good morning. Copies of the slides we will be reviewing today can be found in the Investor Relations section of our website, www.huntington.com. As a reminder, this call is being recorded and a replay will be available starting about one hour from the close of the call. Our presenters today are Steve Steinour, Chairman, President, and CEO, and Zach Wasserman, Chief Financial Officer. Rich Pohle, Chief Credit Officer, will join us for the Q&A. As noted on slide two, today's discussion, including the Q&A portion, will contain forward-looking statements. Such statements are based on information and assumptions available at this time and are subject to changes, risks, and uncertainties which may cause actual results to differ materially. 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, Tim. Good morning, everyone. I'm very pleased with our third quarter. We delivered good core performance and made enormous progress with the TCF integration. Let me begin on slide three. Thanks to the hard work of our colleagues, we're on track to complete the TCF integration as planned and deliver the resulting deal economics. This combination adds scale, density, new markets, and new specialty businesses. At the core of Huntington, we are a purpose-driven company with a vision to build the leading people first digitally powered bank in the nation. We remain focused on our core objectives to drive organic growth and to deliver sustainable top quartile financial performance. On slide four, our third quarter performance is included a full quarter benefit from TCF and record total revenue. We delivered good growth in fee income. Net loan growth excluding PPP and improving credit metrics.
Just over a week ago, we successfully completed the conversion of TCF to Huntington systems, and we now offer an integrated set of products, capabilities, and experiences to our customers. As a result of the great efforts of our colleagues, we were able to complete the conversion in just 10 months since the announcement of the transaction. We've completed most of the actions to drive our targeted cost synergies and are on track to deliver all of the announced cost reductions. With the conversion behind us, we're now able to focus thousands of colleagues on new business development activities to close out the year strong and carry that momentum into 2022. We are investing in these revenue producing colleagues as well as new capabilities in the expanded markets.
We're seeing substantial momentum in many of our initiatives, including targeted areas of fee revenue generation like wealth and capital markets, as well as cards and payments. Both consumer and commercial loan production continue to be robust, and commercial pipelines are up over 30% from a year ago, and new production activity has nearly doubled. Additionally, we were pleased to be ranked number one nationally for the SBA 7(a) lending by volume, marking the fourth consecutive year we've been recognized in the top spot. As the recovery continues, we will dynamically manage our overall expense base and look for ways to drive incremental efficiencies across the bank. We intend to self-fund the investment capacity necessary for strategic initiatives that will drive additional revenue growth in the years ahead. Our strategy is centered on supporting customers banking where and when they want, and meeting them through their preferred channel.
As part of that strategy, we are continually optimizing our distribution network. We will be consolidating 62 branches in the first quarter of 2022, equal to 6% of the combined branch network. These are in addition to the 188 branch closures announced as part of the TCF transaction. Importantly, we will continue to retain the number one share of branches in both Ohio and Michigan. In addition to branch consolidations, we are continuing to diligently optimize roles and resources within the bank. We're committed to delivering positive operating leverage as we did annually for a decade leading up to 2021. Finally, on the capital front, we accelerated our share repurchase in the quarter, as well as announced an increase to the quarterly dividend.
These actions demonstrate our confidence in the performance and outlook for Huntington, as well as our commitment to our shareholders to actively manage our capital levels. Slide five provides an update on the TCF integration. When we announced the transaction, we saw strong potential for expense synergies as we leverage the benefits of scale, but to also drive additional organic growth. Today, I can say that we're even more excited about the revenue opportunities in front of us. The combination of new growth markets and increased density, the addition of more than 1.5 million customers, and expanded specialty capabilities collectively set up our future revenue growth. Let me share a couple of the most compelling aspects.
In middle market and mid-corporate banking, we're now bringing greater scale in Chicago and Milwaukee, in addition to new capabilities in the Twin Cities and Denver, with expanded coverage and product offerings. We're already gaining traction with early wins, including capital markets and treasury management fees. In consumer and business banking, we're deploying Huntington's capabilities, products, and services across the entire customer base following conversion. Combined with our Fair Play philosophy, this will greatly enhance the customer experience. As we've demonstrated previously, we'll accelerate customer acquisition and improve retention. With Huntington's digital and competitive product set, we will deepen our customer relationships. Additionally, we are bringing award-winning SBA lending platform and growing our wealth and private banking customer base in our newly expanded markets. Our investments are well-timed as we're seeing continued robust economic recovery in our footprint.
Our regions have seen economic activity expand year to date faster than the national average, as well as higher labor force participation. We see a unique moment in time to capitalize on these revenue opportunities as our local economies continue to perform very well. We are entering a new era at Huntington with momentum, and we look forward to growth in the years ahead. Zach, over to you to provide more detail on our financial performance.
Thanks, Steve, and good morning, everyone. Turning to slide six, we reported GAAP earnings per common share of $0.22 for the third quarter, which included acquisition expenses of $234 million. Earnings per common share adjusted for these notable items were $0.35. Return on Tangible Common Equity, or ROTCE, came in at 11.5 for the quarter. Adjusted for the acquisition related notable items, ROTCE was 17.9%. As we expected and consistent with guidance we provided in September, we were pleased to see loan balances ex-PPP grow in the third quarter, driven by robust new production. With continued strong liquidity, we are actively managing the balance sheet and have grown the securities portfolio by $3.7 billion from the end of the second quarter.
Deposit balances were reduced by $847 million as a result of the branch divestiture. Excluding the divestiture, deposit balances remained relatively stable on a period end basis. Loans associated with the divestiture totaled $209 million. Fee income was another bright spot where we saw continued momentum in our capital markets, cards and payments, treasury management, and wealth and investment businesses. As Steve noted, we've been actively managing our capital, and we were pleased to complete $500 million of share repurchases in the third quarter. We also announced a half cent increase to the common stock dividend in the fourth quarter, which takes us to an annualized dividend rate of $0.62 per share. Finally, credit quality continued to improve with net charge-offs of 20 basis points while non-performing assets decreased 12% from the prior quarter.
Turning to slide seven. Period-end loan balances totaled $110.6 billion. Excluding PPP, loan balances increased by $367 million during the quarter, with underlying growth in C&I, mortgage, auto, and RV/marine portfolios. On the commercial side, while PPP and auto dealer floor plan balances were lower, all other C&I loans increased by a net $466 million during the quarter, driven by growth in asset finance and core C&I. We're seeing very encouraging trends for new commercial loan production and pipelines that continue to grow both YoY and sequentially. Consumer growth was somewhat offset by marginal pressure from the continued runoff of the home equity portfolio. Additionally, we continue to observe solid activity levels in our consumer portfolios with residential mortgage, RV/marine, and automobile all continuing to post sequential quarter balance growth.
Auto saw its strongest third quarter for production activity to date, while mortgage continued to see robust origination activity in the quarter. Excluding PPP, we believe the trough for underlying loan balances is behind us, and we expect continued modest growth from these levels in the fourth quarter. With respect to commercial portfolios specifically, we expect to see momentum accelerate as we move through the fourth quarter and throughout 2022. Moving on to slide eight. As noted previously, total deposit balances excluding the divestiture were relatively stable. We continue to optimize funding given our strong liquidity levels and reduced higher cost CDs by $395 million. Overall, we continue to see much of the excess liquidity remain fairly sticky as core commercial deposit balances increased during the quarter. Turning to slide nine.
FTE net interest income increased primarily driven by the full quarter benefit of TCF. Net interest income increased by $323 million, while net interest margin was 2.9%, both driven by the acquired TCF assets. Excess liquidity moderated slightly during the quarter with $8.1 billion of cash at the Fed at quarter end. On an average basis for the quarter, excess liquidity represented a drag on margin of approximately 23 basis points. Core net interest income, excluding PPP and accretion, was $1.085 billion. We expect core net interest income to grow from these levels on an absolute dollar basis in the fourth quarter and throughout 2022.
We're positioned to be asset sensitive today, and we are dynamically managing the balance sheet to become increasingly asset sensitive to capture the benefit from expected future higher interest rates. This includes the hedge roll-offs as well as the addition of pay fixed swaps. On June 30th, our modeled net interest income asset sensitivity in an up 100 basis point scenario was 2.9%. Based on the deliberate actions we took during the quarter, we increased our asset sensitivity to 4.0%, and we continue to dynamically manage the balance sheet going forward. Over the course of the quarter, we terminated select downside rate protection hedges and added $6 billion of forward pay fixed swaps. Turning to slide 10, non-interest income increased, primarily driven by the addition of TCF income. Several of our businesses performed quite well within the quarter.
Cards and payments benefited from higher customer transaction volumes. Mortgage banking performed well due to higher production and relatively higher salable spreads. Wealth and investment continued to be driven by positive net asset flows. Capital markets income also grew, driven by solid performance in interest rate derivatives, foreign exchange, and syndications. Turning to slide 11, total non-interest expense came in at approximately $1.3 billion for the quarter, including the $234 million of notable items. Excluding these items, non-interest expense totaled $1.05 billion, primarily driven by the full quarter of TCF expenses. Our overall outlook for the magnitude of expense reductions is unchanged from prior guidance. The timing to realize these benefits, however, has accelerated due to our actions to drive realization of cost savings.
As a result, we continue to expect that while Q3 was the high watermark for core expenses, they should benefit earlier than we previously thought as they step down into the fourth and first quarters. Core expenses on an absolute dollar basis should trail down throughout 2022 as we recognize the benefits of the TCF cost synergies while continuing to invest in the initiatives that drive top-line revenue growth. Slide 12 highlights our well-capitalized balance sheet, as well as a few highlights from the recent capital return actions. Common Equity Tier 1 ended the quarter at 9.6%, well within our medium-term 9%-10% operating guideline. Over the past quarter, we focused on returning capital to our shareholders in alignment with our capital priorities.
We executed over half the $800 million share repurchase program following the authorization as I noted, and we are pleased to have recently announced an increase to the common stock dividend. As you can see on slide 13, our quarter-ending allowance for credit losses represented 1.99% of total loans, down from 2.08% at prior quarter end. The improved economic outlook and our stable credit quality resulted in a reserve release of $117 million for the third quarter. Additional key credit quality metrics are shown on slide 14, further reflecting our improving credit profile. Net charge-offs represented an annualized 20 basis points of average loans and leases amongst the lowest levels in recent history, well below our target range of 35 basis points -55 basis points on average through the cycle.
Consumer charge-offs remained low in this quarter at 7 basis points, with net recoveries in auto, home equity, RV, and marine. Our NPA ratio declined 12% as portfolios continued to perform as expected, and the ACL coverage of NPAs increased to 247%. Finally, turning to our outlook on slide 15. As we operate in a dynamic macro environment, we're focused on managing what we can control. We remain committed to investing in our people-first digitally powered strategy, driving sustained revenue growth while managing expenses within our long-term commitment to positive operating leverage and achieving a 17% return on tangible common equity. We expect a peer group leading efficiency ratio and a normalized effective tax rate of 18%-19%.
We believe these key metrics, revenue growth, return on capital, and annual positive operating leverage, are a compelling set of financial performance indicators and closely align with value creation for our shareholders. Now, let me turn it back over to Tim so we can get to your questions.
Thank you, Zach. We'll now take questions. We ask that as a courtesy to your peers, each person ask only one question and one related follow-up, and then if that person has additional questions, they can add themselves back into the queue. Thank you. Operator, let's open up for questions.
Thank you. At this time, we will conduct a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we poll for our first question. Our first question comes from Scott Siefers with Piper Sandler. Please proceed.
Morning, Scott.
Good morning, guys. Hey, thanks for taking the question. Zach, I was hoping maybe there might be a way to put sort of a finer point on the degree to which you might expect costs to come down in future quarters from this quarter's roughly $1.05 billion core base. You of course mentioned the acceleration. Just trying to get a sense for sort of the core investment spending minus the cost savings. Along the lines of acceleration, sort of when do we think the cost savings will be 100% baked into the results?
Yeah, yeah. Thanks, Scott. Great question. You know, overall, as I noted in my prepared remarks, just really pleased with our delivery of the cost synergies and the trajectory. I'm not going to give you specific guidance, but I would say that we do expect sequential reduction each quarter and for the next couple of quarters for that to be a larger amount, you know, in the double-digit millions is likely the level you could think about. But in the end, what I'd point you to is the overall expense guidance that I've given, which is net of the cost synergies and the investments that we're making to self-fund those revenue synergy investments and to generally drive the revenue growth across the business.
Slightly more front loaded, driving sequential growth throughout the balance of the next five quarters.
Perfect. Thank you. Maybe switching gears just a bit, you sound pretty constructive on overall lending momentum. I was curious if you could maybe let us know sort of how that translates into aggregate, the sort of an aggregate outlook for ex-PPP loan growth. I think previously you guys have been saying underlying loans kind of flattish through the remainder of the year, and then they grow thereafter. Does the more constructive tone suggest maybe we get a little more growth sooner?
Yeah. It's a great question. Let me elaborate a bit more. You know, I think as we talked at the Barclays Investor Conference in September, I noted I expect to see some modest growth between then and the end of Q3, and that's ultimately what we delivered, and we're really pleased with that. I would characterize the growth we're expecting for Q4 as well to be modest. We do expect growth, likely modest. I think, you know, it's really driven by the continuation of the factors we've seen for the last several quarters, and we noted a bit in the prepared remarks. You know, that is, you know, really strong calling activity and pipelines driving continued robust new production and commercial and, you know, quite a bit of momentum in business banking.
Then, in the consumer space, continued strength in residential mortgage and auto and RV/Marine continued to perform pretty well also. You know, the other thing I would say is now that we have the conversion behind us, we're able to now focus thousands of colleagues on growth. We do expect, you know, modest growth as we go into Q4 and then continuing and frankly accelerating as we go on throughout the course of next year as well.
Wonderful. All right. Thank you very much.
Our next question comes from Ebrahim Poonawala with Bank of America. Please proceed.
Good morning.
Hi, Ebrahim.
I guess just first wanted to follow up, Zach, on the expense question. You talked about the core. In terms of the merger related or the notable items that you call out, when do you think those completely go away? Or does some of that stick around as you think about just the overall expense run rate?
Yeah. Great question, Ebrahim. I think Q4 should remain relatively elevated, similar to the levels we've seen overall. You know, taking a step back, overall, our outlook for the merger related cost that we, you know, guided back in December at the time of the announcement was, you know, $890 million, and we continue to expect it to be relatively near that level. I think the timing of that, we've seen, you know, more than $500 million at this point through this quarter, and so we'll see a bit more come in Q4 and then likely a last bit in Q1, perhaps a tiny bit trailing into Q2. By the end of Q2, it essentially should be done.
Got it. I guess just shifting to with the TCF integration sort of nearing. Steve, strategically, I mean, you've been an acquisitive bank. We are hearing some concerns around just the regulatory stance around deal-making getting tough. Just give us a sense of what your priorities are from a capital deployment. Is M&A still a piece of the puzzle in terms of how you think about growing the bank?
Well, Ebrahim, we've done two larger bank combinations in 12 years. I don't really think the characterization is apt. Beyond that, as we've said before, our focus is on driving the core performance. We think we have tremendous revenue upside here. We've got greenfield opportunities for a number of businesses in Denver and certainly the Twin Cities. We've got a scale that we've never had in Chicago. Frankly, we've got density in Michigan that's significant to us. We're very focused on driving revenue and getting the benefits of that part of the combination equation. We've done a few non-bank things in the past. I'd say more likely over the next years, possibly to do some of that.
Our entire focus is on driving the core.
That's great. Thank you.
Our next question comes from Bill Carcache with Wolfe Research. Please proceed.
Thank you. Good morning. Can you remind us how much relative gearing you have to the short versus long end of the curve and how you think about performance in an environment where the short end rises perhaps a bit faster than the long end?
We're most sensitive to the two to four-year range within the yield curve, to give you a sense. I think we're going to benefit here as rates move up, you know, irrespective of the steepening. Certainly we'd appreciate it if that two to four range continued to move up as it has been doing and is in our continued expectation. We're positioning to benefit from that, as I noted in some of my prepared remarks, by driving incremental asset sensitivity.
You know, to give you a sense, the average duration of our current, you know, downside hedging portfolio is 1.5 years versus the almost five years for the duration of our pay fixed swaps that'll benefit as rates start to rise. I think, you know, we're positioned now in the quarter by more than a point of asset sensitivity as I noted, and we'll look to be dynamic to improve that even as we go forward.
Thanks, Zach. That's super helpful. You know, following up on that, as you look ahead to higher short rates and better loan growth as utilization rates normalize, how comfortable are you with the rate at which you've been reducing the amount of liquidity that you have parked at the Fed? As we look ahead over the next few quarters, I guess, should we expect you to continue to grow the securities portfolio from here? Just curious about the extent to which you'd consider preserving liquidity, you know, through the rest of this year, you know.
Based on, you know, just based on the outlook.
Yeah. It's a terrific question, and it's certainly something that we watch very, very carefully. Like, I would say full stop, we feel great about our liquidity levels, and we think we're managing exceptionally well. But the cash at the Fed is a key area that we watch very, very carefully. I would characterize our approach as intentionally incremental, watching the behaviors in our clients and deposit-holding activities and, you know, seeking to kind of optimize incrementally period by period as more information comes out. As we've guided for a couple quarters now, we expected to add to the securities portfolio. I think last quarter we mentioned a number $4 billion. We completed that during the third quarter.
We'll see where it goes from here. If liquidity trends continue as we expect, I also expect that we will add some additional securities in the fourth quarter. We're currently at about 22% securities as a percentage of assets, and we'd be comfortable if that rose modestly over time here, you know, given the acceptable returns we're seeing and the fact that it's accretive to NIM versus holding that cash. But as you noted, the priority is funding growth. We'll, as I said, take a very much incremental approach watching both trends.
Understood. That's super helpful. Thank you for taking my question, Zach.
You're welcome. Thank you.
Our next question comes from Ken Zerbe with Morgan Stanley. Please proceed.
Hi, guys. Thanks. Good morning.
Hi, Ken.
In terms of the core NIM, I know there was a bit of confusion around what your guidance was or wasn't. If we did our math right, I think your core NIM just ex the PAA is about 2.81, which is a fair bit lower than the 2.90 that I think we were sort of shooting for. Can you just talk about two things? One, what drove sort of the weaker NIM ex the PAA? Also, how do you think about that core NIM on a go-forward basis? Thanks.
Sure. Yeah, thanks for the question, Ken. Fully reported NIM came in at 2.90. Excluding PAA, as you noted, it was 2.81%. It was a few basis points lower than we expected. My prior guidance had been, you know, sort of just a few basis points lower than 2.90, and then it came in ultimately 2.81. It was a bit lower than that. The two biggest drivers of that were the things we've just talked about in the last question, actually, interestingly. Elevated Fed cash contributed several basis points additional drag in the quarter than we had previously expected. We did accelerate the purchase of our securities, which also impacted the mix and drove yields lower.
Generally, spreads were sort of spot on our expectation overall at a core loan level. Look, I think what I would tell you is going forward, I'm expecting stable from these levels. You know, it'll be a function of what happens with the elevated liquidity and Fed cash and the rate environment. Generally stable from these levels is a fair assumption. Our key focus at this point is trying to drive net interest income dollars. That $1.085 billion of net interest income, excluding PAA, excluding PPP. You know, given the sequential loan growth that we're projecting, given that rate stability, my expectation is we're going to grow those dollars into Q4 and grow them throughout 2022.
Got it. Okay, perfect. Just in terms of the 62 branch closures that you talked about in first quarter, that's all wrapped up into your expense guidance. I just want to make sure that we shouldn't take the expense guidance plus anything else because that's just part of the outlook, correct?
You're spot on, Ken. The, you know, as Steve noted in his prepared remarks, you know, we continue to optimize the network, dynamically manage expenses, ensure that we can invest to capture those, you know, really powerful revenue synergies. Overall, the guidance I gave on expenses is net of all of those things. Ultimately, you know, what this is all driving toward is achieving our moderate term financial targets that we've talked about over time, the 17% return on capital, the, you know, revenue growth accelerating, positive operating leverage, and to drive to that, you know, in the second half of 2022.
All right. Thank you very much.
Thank you. Our next question comes from Steven Alexopoulos with JP Morgan. Please proceed.
Hey, good morning, everyone.
Hi, Steven. Good morning.
I wanted to follow up on Scott's initial question on loan growth and your response. You guys sound pretty bullish on loan momentum, right? Steve, you talked about how much the commercial pipeline's up. Zach, you talked about how momentum's building. Why are you not looking for stronger loan growth here in the fourth quarter?
Steven, great question. This is Steve. You know, this is a funny quarter because of the holidays interrupting. We'll have very good asset finance origination, but we've had a substantial effort around the conversion. We've had 800 ambassadors out in our different business lines for a couple of weeks. We pulled in at sort of peak production moments a lot of the talent to focus on making sure we got a great conversion, and we think we did. It's harder to do new business between Thanksgiving and year-end if it's not already in the pipeline. We're talking about another 3.5, 4 weeks max for the pipeline. Now, the pipelines are up. As we indicated, they're up YoY. They're up QoQ sequentially.
That's contributing to the bullishness, but it's an odd quarter to be driving in. We're very optimistic about how this will translate for full year 2022 as we go forward. We have some great capabilities that have come to us with TCF, and we've already put in place much of the management and a number of the RMs and other revenue producers that we're looking to do in the Twin Cities, in Denver, and increasingly in Chicago. The pieces are coming together very nicely and ahead of schedule, and that's also contributing to the optimism.
Okay. That's helpful. Steve, for my follow-up, we all know Huntington scores really well from a client satisfaction view. Did the branch consolidations have a notable negative impact on satisfaction levels? How long do you think it'll take to move TCF's below peer client satisfaction up to Huntington's level? Thanks.
The sheer amount of activity has required substantial efforts and resources during the course of the year. We would expect to see a very modest decline in customer sat. Frankly, it could be flat, but we wouldn't expect to see an increase. With respect to the TCF, the new branches from TCF and our colleagues who are new from TCF, they are embracing Fair Play and the product set. What we saw during the conversion was just outstanding efforts with our customers. We're very encouraged. It will take maybe a couple of quarters, but it won't take a couple of years in order to get that customer service level at an equivalency in those newer branches. We're very pleased.
We've got a great group of colleagues who've joined us from TCF.
Okay. Great. Thanks for taking my questions.
Absolutely.
Thank you. Our next question comes from John Pancari with Evercore. Please proceed.
Morning.
Good morning, John .
I know you've in giving your expectations here, you've indicated your expectation for continued positive operating leverage. How do you think about that for 2022? Maybe if you can help us with the magnitude. I know you're not specifically guiding on the top line or expense growth expectation, but maybe if you can help us with the magnitude of positive operating leverage on a core basis that you think is reasonable for next year. Thanks.
Yeah. John, thanks for the question. You noted in your question, and I will repeat it. I'm not going to give you the specific guidance, but I will try to characterize, you know, to answer your question. You know, I think next year's financials are going to be challenging to look at from a YoY growth perspective and to some degree to calculate that metric, just given the continued two quarters of growth-over impact of adding the TCF business. We do expect full year positive operating leverage in total.
The big thing that we're very focused on is driving to the point where the momentum coming into the second half of the year and certainly exiting the year is on the levels that we've targeted for those moderate term targets. You know, at that point, as we sort of get into a clean YoY growth period, you'll be able to see it better. You know, look, I think we'll be dynamic as we always have been to ensure that we can modulate the expenses, you know, given where revenue is trending while continuing to invest. You know, my expectation, we'll see you know, some solid positive operating leverage, but not going to characterize the level specifically at this point.
Okay. All right. That's helpful. I guess a related question is on the medium-term efficiency goal of 56%. Currently on an adjusted basis, you're 61.2. Curious on how you're thinking about that glide path down to the 56%. What type of timing do you think is reasonable updated based upon updated trends in the business that you're seeing? When do you think you can hit the 56? Thanks.
Yeah. I think, I mean, we're going to drive towards that. I would note that the efficiency ratio is sort of an outcome, frankly. The most important metrics are revenue growth, return on capital, and positive operating numbers that we're driving to. The efficiency is a key metric, and so we are watching it carefully. You know, my expectation at this point is sort of during the second half of the year, we will see those emerge. We're still doing some of the budgeting to modulate the precision with respect to quarters. Certainly, I think by the second half of the year and the exit run rate of Q4 is my expectation.
Second half of 2022?
Correct. I said 2021, I misspoke. I meant.
No, no. I just wanted to clarify. Okay. All right. Thank you.
Yep.
Our next question comes from Terry McEvoy with Stephens. Please proceed.
Hi. Thanks. Good morning.
Morning, Terry.
Hi. TCF had about a $2+ billion inventory finance portfolio. I'm curious, where is that portfolio today? The auto dealer floor plan balances at Huntington kind of pre-COVID versus today. What I'm getting at is what's the upside to the balance sheet when inventories in both of those portfolios hypothetically normalize?
Yeah, I think, I mean, as we've talked about a bit over time, interestingly, each of the three major kind of line businesses that we've got, auto inventory and general middle market, each of them represented roughly $2 billion opportunities when those utilization rates return to normalized pre-COVID levels. So that's sort of give you an order of magnitude. The trends we're seeing at this point in auto were down a couple more percentage points off three, to be precise, between the end of Q2 and the end of Q3 to 25%. At this point, I'm seeing relative stability in the auto floor plan business. To some degree, you know, some of the chip issues and other supply chain issues are produce some incremental pressure.
We're also getting some defined and known new commitments and some term debt into those businesses such that my expectation is relatively flat in that space. Interestingly, inventory finance has similar opportunities where we're creating some very known planned uses of those lines. Expect stability, perhaps even a modest uptick actually into Q4 into that. The general middle market should continue to be flat here for the time being. However, I'm going to finish to answer your question, but I would, pulling back a second, just highlight that it's our planning expectation at this point that the totality of these lines is going to be relatively flat throughout the course of 2022. There could well be an opportunity against that.
At this point, for planning purposes, we're trying to zero that out. We still expect pretty good loan growth, and I think that's really just sort of pointing back to, you know, the robust new production activity that we're seeing. This could be ultimately a tailwind. We do expect over time it will be. The headwind nature has largely moderated at this point. We expect it generally flat.
Thank you. As a follow-up, the $114 million of service charges on the TCF part, were the fee adjustments made right after the conversion? I remember there was some revisions that were going to made that would result in lower fees, and I'm just looking at that run rate and asking if that's sustainable going forward.
Yeah. That's a great question. Upon conversion that we completed over the Columbus Day weekend, all the TCF customers are now onto the Huntington products, the platform, and all of our Fair Play product dynamics. We will expect to see a modestly lower trajectory for that line into Q4. You know, overall, over the longer term, we feel great about the conversion to the Fair Play business as we've talked about a lot. This is a play we have run many times, and we're very confident in the returns that it generates. Typically the dynamic is sort of a higher degree of fee income reduction in the early periods, offset over time by incremental deepening and incremental acquisition in the market, you know, from those products.
Generally, about an 18-month payback. That's sort of the dynamic we're expecting to see a bit lower into Q4, and then climbing back and paying back over that kind of roughly year-and-a-half period.
Great. Thank you, Zach.
You're welcome.
Our next question comes from Jon Arfstrom with RBC Capital. Please proceed.
Hey, thanks. Good morning.
Morning, Jon. How are you?
Just back on the loan growth topic, you highlighted the late-stage middle market up 36%. Just curious what you think is behind that and how much things have changed over the last couple of quarters. You know, Steve or Rich, any feedback on the supply chains loosening up from your borrowers?
Jon, I'll start this. This is Steve. Rich or Zach may choose to add. The supply chain issues continue to be a challenge. You're seeing some OEMs ship and deliver without chips. Even some of the autos are doing that. We've got auto dealers with no new inventory on the lot. It's shocking to illustrate the challenges here. As I think you saw with the Ford and GM earnings announcements, expectations that it's going to go deep into next year before it gets normalized. That's why Zach's earlier comment is we're not counting on utilization normalization and inventory finance or auto to be a tailwind next year. If it happens, that's great.
Now, we do see supply chain issues getting resolved or getting to a resolution over time, and would expect that to continue again through next year, maybe even a little bit beyond, depending on the industry. There's a lot of activity in the footprint about tooling and additional manufacturing capabilities with adjacency in North America, including in the footprint states that we're in. We like how this sets up over time in terms of additional opportunity for us and we're bullish, but we clearly have both a supply chain and a labor issue in virtually every business that's out there today.
Yeah. Steve, it's Rich. Maybe just to piggyback on that. I think, you know, as it relates to middle market loan demand, we're seeing it in a couple places. I think Steve mentioned, you know, increased CapEx. You know, given the labor issues, I think there is a bigger push to automate production to garner that productivity that will offset some of the labor issues. The other thing that we're seeing is just a heightened level of M&A. I think as we're coming out of, you know, kind of the COVID fog here with respect to EBITDA levels and things, there is just a greater sense of certainty around, you know, cash flows. I think buyers are aggressively looking to expand if they can.
Sellers, I think some of them have just gotten a little tired, you know, kind of going through a COVID environment. When their cash flows are picking back up, in a position where maybe they want to sell. We are seeing increased M&A in the middle market space as well.
There's also, Jon, a dynamic in the Twin Cities, in Denver. TCF had no market banking. There were a series of things they just didn't do. These are greenfield. Every customer's net new. And that's the teams are in place as earlier mentioned. And I will be building them out further. We've got core in place. We're seeing success, and that's translating into additional cross-sell revenue as well, and that's contributing to this optimism.
Yeah. I'm guessing SBA falls in that as well. Is that fair?
Yes. It does indeed.
Okay. Can you just touch on your repurchase appetite from here?
Yeah. This is Zach. I'll take that one, Jon. I think, you know, look, we're being pretty dynamic on it. We had a very intentional plan going into the third quarter, as we noted in the, you know, in the July call to accelerate and front load, and we felt great about the $500 million. I think we're gonna likely continue to be somewhat front loaded with the balance of that here in Q4 and as we go into Q1, but still working through it and I think looking to be dynamic as we do that.
Okay. All right. Thank you.
Once again, ladies and gentlemen, to ask a question, please press star one on your telephone keypad. Our next question comes from Ken Usdin with Jefferies. Please proceed.
Thanks. Good morning.
Hi.
Zach, I was just wondering in the third quarter did you have some gross savings in there or and can you tell us what they were? I know we're you know you're only kind of telling us we're going to decline from here but just wondering what you might have already captured.
Yeah. I would say that they were quite modest in the third quarter. You know, I think if you think about the cost savings, you know, they came largely from ultimately, you know, branch rationalization, employee, you know, level of reductions, technology synergies of porting the TCF business essentially onto the Huntington tech stack. Then sort of a long tail of other savings, including, you know, a number of vendor and sourcing related opportunities that come with, you know, with sort of increased scale. For the most part, most of those really were beginning to be executed on during the third quarter with sort of effect more into the fourth and as you go into the first quarter.
The decisions around them and the planning and actions necessary to achieve them have essentially all been completed. Now we're in the execution mode of just realizing them. Not much, I guess, is the long-winded answer in the third quarter. More substantively in the fourth quarter, which is partially why we're, you know, we're talking about sort of a larger step down in the fourth quarter than we had thought before. As we go into the first quarter, sort of yet again, a similar level of step down is my current expectation. You know, a bit more of an asymptotic function as you get into Q3 and Q4, but still stepping down.
A follow-up on that. Do you have any change to your view of the original 490 in total that you expect? I know you're telling us that maybe we see a little bit more of a pull forward from a timing perspective, but what about the absolute amount?
No. I think the absolute amount is solid at that level. I mean, we're kind of within rounding errors higher than that. Nothing overly substantive that I would call out. I budgeted $490 as, you know, that's the number we're looking to achieve, and we've got, you know-
Okay. Last cleanup one, just, PPP in the deck, you show that you have $54 million of the fees left. How do you expect the NII related to PPP to project from here, fourth quarter and beyond?
Yeah.
From the 40 something.
It's kind of like a half-life function. I would tell you over the next three quarters, we're expecting roughly 50% of the ADB to reduce into the fourth quarter. Then roughly 50% of that reducing into the first and then yet again into the second. These are planning assumptions I'm giving you. We should note that it's pretty dynamic, and the SBA, to their credit, has been accelerating forgiveness quite substantively recently. You know, these numbers move around. From a planning perspective, that's essentially the kind of outlook function that we've got.
Okay, got it. Thank you, Zach.
You're welcome.
Our next question comes from David Long with Raymond James. Please proceed.
Good morning, everyone.
Morning, David.
Just, I wanted to drill down on the service charge on deposits here. A good quarter from, I think, expectations. When, you know, Steve, when you look at the press, the headlines, it gets talked about a lot that there's going to be some restrictions on overdraft. Just curious how you're thinking about that and how that may impact your fees going forward. Secondly, when I think of the overdraft side of things, Fair Play Banking, something that you guys have, I think your overdraft fees would be a smaller portion of revenue than peers, but yet yours seem a little bit higher there. Just curious as to, you know, why you think that may be the case as well. Thanks.
David, great questions.
We put 24-Hour Grace in more than a decade ago, and that continues to this day. We opened it up last year for small business. We're continuing to do certain things to help our customers. Standby Cash is a classic example of that. There's no limit to the use of those funds with our customers. We put a minimum of $50 in last year for an overdraft. We call that Safety Zone. We have been continuously over time working to benefit our customers as part of this Fair Play Banking philosophy. We tend to be very strong on a relative basis in terms of customer acquisition as a consequence of the different features and functions on our checking products.
That's ameliorated the revenue give up over the last decade or so very substantially. As Zach pointed out, there'll be a bit of a step down in the fourth quarter and for a couple of quarters thereafter for the TCF customers. They're gonna get the same advantage of products and services that all of our previously existing customers have as well. It will accompany our expectation around both customer retention and customer acquisition. It's hard to. You know, it's I can't speculate on what regulators may do, but we've again, we've been trying to do things to help consumers and businesses for quite some time, not just with overdraft fees, but other types of fee eliminations, reductions, notice requirements.
We put a new alert system in that regard a year and a half ago. There's a lot of tools available to help customers manage their money, budget, et cetera, and avoid overdraft fees.
Got it. Thank you, Steve. I appreciate that color.
Thank you.
Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back over to Mr. Steve Steinour for closing remarks.
Thank you for joining us today. We've completed the majority of the actions leading to achievement of TCF cost synergies and expect to achieve all of the planned reductions. We're coming off the conversion with significant momentum across the bank, and I'm confident that our disciplined execution will create substantial value for our shareholders. We have a deeply embedded stock ownership mentality, which aligns the interests of our board, management and colleagues with our shareholders. Appreciate your support and interest in Huntington. Have a great day.
This concludes today's conference. You may disconnect your lines at this time and thank you for your participation.