Huntington Bancshares (HBAN) Q1 2022 Earnings Call Transcript

Huntington Bancshares (HBAN 1.88%)
Q1 2022 Earnings Call
Apr 21, 2022, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Huntington Bancshares first quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. Question-and-answer sessions will follow the formal presentation. [Operator instructions] As a reminder, this conference is being recorded.

I would now like to turn the call over to your host, Tim Sedabres, director of investor relations. Thank you. You may begin.

Tim Sedabres -- Director of Investor Relations

Thank you, operator. Welcome, everyone, and good morning. Copies of the slides that will be reviewed 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 2, 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 that 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 Form 10-K, 10-Q, and 8-K filings. Let me now turn it over to Steve.

Steve Steinour -- Chairman, President, and Chief Executive Officer

Thanks, Tim. Good morning, everyone, and welcome, and thank you for joining the call today. It's been an eventful start to the year, we entered 2022 with momentum and we carried forward that trend to deliver a strong first quarter. We are managing through a turbulent macroeconomic environment, high inflation, persistent labor, and supply chain constraints, that interest rate tightening, rapid moves in the yield curve, and the devastating crisis in Ukraine all have made for a challenging backdrop.

Now on to Slide 4. I'm pleased to highlight our excellent first quarter performance. First, our colleagues are delivering on revenue-producing initiatives, supporting our strong results. We're generating profitable growth and building momentum including executing on our revenue synergies.

Second, operating with disciplined expense management, we posted another quarter of sequential reductions in core expenses. Our targeted cost savings are on track for full realization this quarter and we are capturing these benefits even earlier than originally guided. Third, we had record low net charge offs this quarter with overall exceptional credit quality. Our disciplined risk management continues to be a strength.

Lastly, we are confident in our full-year outlook and our ability to drive additional profitability. We are revising our guidance higher to incorporate the recent rate curve outlook and we remain confident that we will achieve our medium-term financial targets in the second half of '22. On Slide 5, let me share more detail on our first quarter performance. Our robust loan growth, higher net interest income, and planned reductions in expenses are supported by our record PPNR.

Average loan balances, excluding PPP, grew 10% annualized and are driven by new loan production across both commercial and consumer portfolios. We continue to see strong customer demand and growing loan pipelines and are confident this momentum will continue over the course of this year. Our teams are fully aligned and executing on the revenue synergy opportunities from TCF. We are seeing terrific momentum in these initiatives as we expand into new markets with enhanced capabilities.

In the Twin Cities, our new wealth management, business, banking, and middle-market teams are already contributing to revenues. Likewise in Colorado, our business banking and middle-market teams are. Capturing. Market share and generating revenue.

We're also pleased with our inventory finance business, which has seen seasonal growth and is exceeding our expectations. Additionally, we are seeing increased productivity and positive reception to the Huntington product set and customer service experience. We continue to execute our strategic initiatives across the bank. In March, we announced the next evolution of our leading Fair Play product set, including the soon-to-be-released instant access feature, as well as an enhanced credit card offering through the launch of our cash-back credit card.

In addition, our continued expense discipline has enabled us to support investments that are yielding results. This is evidenced by a record first quarter of sales in wealth management and also by another quarter of robust growth in our capital markets businesses. Just last month, we announced the signing of a definitive agreement to acquire Capstone Partners, a top-tier middle-market investment bank and advisory firm that will add significant capabilities and expertise to our capital markets businesses. The transaction is expected to close late this quarter.

Capstone is a terrific fit with Huntington, both strategically and culturally, and we're excited about the synergistic growth opportunities. The addition of Capstone better positions us to serve the full range of needs of clients in our footprint, as well as those we serve on an increasingly national basis. The transaction adds key verticals that complement our existing industry specialization and adds new capabilities and expanding sectors. We expect Capstone will meaningfully increase our capital markets revenues by about 50% and we're excited to welcome our new colleagues to Huntington.

Finally, we are proud to share a few of the awards we received during the quarter. We were honored to be recognized by Forbes in 2022 as one of America's best large employers, where we ranked number 7 in the banking and financial services industry. We were also recognized in the middle market and small business banking with numerous Greenwich Excellence and Best Brand Awards for 2021. And lastly, we are proud that the National Diversity Council named Donald Dennis, our chief diversity equity and inclusion officer, as a top 100 Diversity Officer nationally.

Before moving on, I'd like to take a moment to welcome Brant Standridge to Huntington, who joined us earlier this month as our president of consumer and business banking. Brant comes to us with a broad set of experiences, including a customer-focused foundation that aligns well with our strategies. As Brant joins us, a special thank you to Steve Rhodes, who will continue to lead our business banking division. Slide 6 shows our continued trajectory of profitable growth.

We've been driving sustainable profitability for years, supported by our prior strategic investments and our long track record of managing positive operating leverage. We are confident that this increasing trend will continue and will further benefit from the underlying earnings power unlocked from TCF. We are poised to have outsized PPNR growth this year and expect it to expand sequentially over the remainder of the year. Zach over to you to provide more detail on our financial performance.

Zach Wasserman -- Chief Financial Officer

Thanks, Steve, and good morning, everyone. Slide 7 provides highlights of our first quarter results. We reported earnings per common share of $0.29. Adjusted for notable items, earnings per common share were $0.32.

Return on tangible common equity or ROTCE came in at 15.8% for the quarter, adjusted for notable items ROTCE was 17.1%. We were pleased to see accelerated momentum in our loan balances, with total loans increasing by $1.7 billion and excluding PPP loans increasing by $2.6 billion. Total average and ending deposits also increased, driven by strong trends in both consumer and commercial balances. Pre-provision net revenue grew 4.2% from last quarter, reflecting our continued focus on self-funding, revenue-producing strategic initiatives, as well as net interest income expansion.

Consistent with our plan. We reduced core expenses by $27 million from last quarter, driven by the realization of cost synergies. Credit quality was exceptional with record low net charge offs of 7 basis points and non-performing assets reduced to 63 basis points. Turning to Slide 8.

Accelerated loan growth momentum continued with average loan balances increasing 1.5% quarter over quarter, totaling $111.1 billion. Excluding PPP, total loan balances increased by $2.6 billion or 2.4%, largely driven by commercial loans. Within commercial, excluding PPP, average loans increased by $2.2 billion or 3.8% from the prior quarter. We continue to see broad-based demand across lending categories that is supporting strong new production.

We are also benefiting from slowing prepayments and modest increases in line utilization. The middle market, asset finance, corporate, and specialty banking all contributed to higher net balances within commercial and have all expanded for two quarters in a row. Commercial real estate balances also increased during the quarter by $485 million. Inventory finance contributed to growth this quarter, with balances increasing by $666 million, driven by the expansion of client relationships and the expected seasonal increase in utilization levels.

Auto Dealer floorplan increased with balances up by $251 million as new client relationships and a modest uptick in utilization both supported growth. In consumers, we had a record first quarter performance in indirect auto and RV/Marine originations. This drove balances higher in auto and RV/Marine by $108 million and $63 million, respectively. Additionally, on the sheet, residential mortgages increased by $550 million.

These were offset by lower home equity balances. Across the enterprise, our bankers are executing disciplined calling strategies, driving sustained growth in both early stage and late-stage loan pipelines. Both of which are higher from the prior quarter and the prior year. We are seeing strong demand from our customers and the realization of pipelines support our high degree of confidence in our 2022 outlook.

Turning to Slide 9, we delivered solid deposit growth with balances higher by $614 million. On a spot basis. Total deposit balances increased by $3.7 billion or 2.6% from the prior quarter. Ending commercial balances increased by $2.5 billion, and consumer balances increased by $1.5 billion from the prior quarter.

This growth reflects continued consumer deposit gathering and our focused relationship deepening within commercial customers. On Slide 10, we reported net interest income and NIM expansion. Core net interest income excluding PPP and purchase accounting accretion increased by 3% to $1.119 billion. Consistent with our prior guidance net interest margin increased versus the prior quarter.

And we are on track for further NIM expansion throughout 2022. Turning to Slide 11, we are dynamically managing the balance sheet to remain asset sensitive and capture the benefit of expected higher rates while incrementally providing downside protection as opportunities present themselves. We have a peer-leading NIM and we're positioned to expand margin as rates increase. During the quarter, we modestly increased our downside protection by executing a net $2.7 billion of received fixed swaps.

As noted on the slide, these explicit hedging actions reduced asset sensitivity in the quarter by 0.3% to 1%. The overall estimated asset sensitivity at an up 100 basis point ramp scenario ended the quarter at 3.1%, down from 4.6% at year-end. The remaining change in this metric beyond our hedging actions was driven by other ancillary modeling impacts, such as the denominator impact of the higher projected base, net interest income, slower prepayments, and other balance sheet mix shifts. At the bottom of the slide is our loan portfolio composition.

As you can see, we are well-positioned for the expected higher interest rates throughout the year with an attractive mix of floating and fixed-rate loans. Furthermore, our indirect auto portfolio has a weighted average life of approximately 25 months, with roughly half of that portfolio repricing each year. Moving to Slide 12. Non-interest income was $499 million, up to $104 million year over year and down $16 million from last quarter.

Fee revenues were impacted by a decline in mortgage banking, primarily due to lower saleable originations. As well as typical seasonality resulting in lower cards and payments activities compared to the fourth quarter. Given our robust SBA pipelines and attractive market opportunity, we reinitiated our SBA loan sales in the quarter, driving a $27 million increase. In addition, our record first quarter performance and wealth management sales contributed to an increase in investment-related revenues.

Overall, we continue to be pleased with the traction and growth outlooks for our key fee-generating businesses within payments, capital markets, and wealth advisory. Moving on to Slide 13. Non-interest expenses declined $168 million from the prior quarter and excluded notable items, core expenses declined by $27 million to $1.07 billion as we delivered cost savings from the acquisition. As we showed previously, we expect core expenses to be approximately $1 billion by the second quarter.

Even as we're driving down expenses, we're also investing in initiatives that are driving sustainable revenue growth throughout the company. Slide 14 highlights our capital position. Common equity Tier 1 was 9.2% at quarter-end. Our dividend yield remains at the top of our peer group at 4.6%.

We did not repurchase any shares during the quarter due to our announced signing of a definitive agreement to acquire Capstone. As you can see on Slide 15, credit quality continues to perform very well. As mentioned, net charge offs were a record low of 7 basis points. Benefiting from a net recovery position in commercial portfolios and continued strong consumer credit quality.

Non-performing assets and criticized loans. Both declined from the previous quarter. Our ending allowance for credit losses represented 1.87% of total loans, down from 1.89% prior to quarter-end. Slide 16 covers our medium-term financial targets, which remain unchanged.

As Steve mentioned, we're fully committed to achieving this by the second half of 2022 as our loan growth momentum continues, our first capital priority remains to fund this organic growth. And we are encouraged by these trends to the extent that our loan growth remains as robust as we expect. I would anticipate share buybacks will be de minimis for the remainder of the year. We are comfortable operating at or around these current capital levels as we balance our expected 2022 growth plans and the possible longer-term scenarios for the global macroeconomic outlook as we head into 2023.

Finally, turning to Slide 17. Let me share our updated outlook. The guidance we provided in January assumes continued economic expansion aligned to market consensus, as well as the interest rate yield curve expectations as of early January.  Our updated guidance continues to assume further economic growth and the rate curve as of the end of March. As a result of the rate curve outlook, we are revising upward our guidance in net interest income.

We now expect core net interest income on a dollar basis excluding PPP and purchase accounting accretion to grow in the mid to high teens. This is higher than our previous guidance of high single-digit to low double digits growth. In fee income, while we are seeing encouraging trends in our payments, capital markets, and wealth advisory businesses, we are also impacted by the industrywide mortgage banking pressure. Based on this, we have revised and lowered our fee guidance to flat to down low single digits, excluding the impact of Capstone.

On the topic of Capstone, we are anticipating closing the acquisition at the end of this quarter. Based on estimates created during due diligence, we believe the business could add approximately $20 million to $30 million of fee income on a quarterly basis. This would be incremental to the stand-alone Q4 Huntington guidance. We'll provide further information on the impacts of Capstone as we complete the acquisition and finalize our financial forecasts.

On expenses excluding notable items, we are still tracking our $1 billion run rate for this quarter and again, this guidance is excluding Capstone. Finally, given our continued exceptional credit performance across our portfolios, we are revising our full year net charge offs down to approximately 20 basis points from less than 30 basis points previously. Now let me pass it back to Steve for a couple of closing comments before we open for Q&A.

Steve Steinour -- Chairman, President, and Chief Executive Officer

Thank you, Zach. Slide 18 recaps what we believe is a compelling opportunity. Huntington stands as a powerful top ten regional bank with scale and leading market density, as well as a compelling set of capabilities both in footprint and nationally. We are focused on executing our strategic plan, which we believe will drive substantial value creation for our shareholders.

We are well-positioned to deliver sustainable revenue growth, which is bolstered by new markets, new businesses, and expanded capabilities. As our revenue synergies accelerate and gain traction, we also remain committed to our proactive and disciplined expense management. As a result, we are increasingly confident in our robust return profile, with expectations for 17% plus ROTCE as we deliver on our medium-term financial targets in the second half of the year. Tim let's open up the call for Q&A, please.

Tim Sedabres -- Director of Investor Relations

Thanks, Steve. Operator, we will now take questions. We ask it as a courtesy to your peers, each person asks only one question and one related follow-up, and then if that person has additional questions he or she can add themselves back in the queue. Thank you.

Operator, let's open up for questions.

Questions & Answers:

Operator

Thank you. At this time, we will be conducting our question-and-answer session. [Operator instructions] Our first question comes from the line of Betsy Graseck with Morgan Stanley. Please proceed with your questions.

Betsy Graseck -- Morgan Stanley -- Analyst

Hi. Good morning.

Steve Steinour -- Chairman, President, and Chief Executive Officer

Good morning.

Zach Wasserman -- Chief Financial Officer

Good morning.

Betsy Graseck -- Morgan Stanley -- Analyst

I just wanted to see if you could unpack the upgraded NII guide a little bit. Give us a sense as to how much of that is coming from the forward curve changes from the loan growth from the cash rate deployment. Just to understand those puts and takes a little bit more thoroughly? Thanks.

Zach Wasserman -- Chief Financial Officer

Sure. Betsy, thanks for the question. This is Zach. I'll take that.

The main driver is the rate curve what we're seeing come through with expected forward rates. To give you a sense, at the time of our budget, we had approximately five rate hikes baked into our forecast, going from 25 basis points up to 150 basis points in Fed funds by September of '23, and it was 75 basis points by the end of '22. Now, obviously, it's significantly changed the yield curve up to 300 basis points or 150 basis points better by March 23 and to $275 by December. So a full 200 basis points better by the end of this year.

So that's the majority of what's driving it. Give it our asset sensitivity. We're poised to benefit from that both from the spread and I would say as well from the reduced drag from Fed cash that we saw in Q1 that will help us to drive that purely down that we expect at this point.

Betsy Graseck -- Morgan Stanley -- Analyst

OK. And then as I think about the flexibility you have in your balance sheet, I'm just wondering how you're planning on funding the loan growth that you're anticipating getting from here. And is there anything left over to increase the redeployment into the curve?

Zach Wasserman -- Chief Financial Officer

I think at this point we're expecting to continue to grow deposits as well. Obviously nice trends of continued deposit gathering commercial growing faster than consumer but both continue to be solid producers and that'll be the main funding source as well as I said, utilizing some of the continued excess liquidity we've got on cash at this point.

Betsy Graseck -- Morgan Stanley -- Analyst

All right. Thank you.

Zach Wasserman -- Chief Financial Officer

You're welcome.

Operator

Thank you. Our next question comes from the line of John Pancari with Evercore. Please proceed with your questions.

John Pancari -- Evercore ISI -- Analyst

Good morning.

Steve Steinour -- Chairman, President, and Chief Executive Officer

Good morning.

John Pancari -- Evercore ISI -- Analyst

In terms of the -- I know you mentioned that you're seeing some strengthening in loan growth momentum and you cited an improvement in line utilization. Can you just talk about exactly what areas have you seen this strengthening? How much did the line utilization improve? And are you beginning to see capex-related demand start to drive, drive growth? Thanks.

Zach Wasserman -- Chief Financial Officer

Sure. This is Zach. I'll take that one. And my colleague from room here could take on the like me.

Generally, we're really pleased what we're seeing in loans takes a big step back. The strength that we're seeing in our pipelines, but the realization of that flowing through into bookings is what gives us confidence that we'll see the momentum drive to that high single-digit loan growth by Q4. And the model for it is going to be pretty similar in the back half of the year to what we've seen the last two quarters. That is production lags with commercials growing faster than consumers, but consumers continue to drive as well.

And the sources of it within commercial we're seeing just continued strength in mid-market. Our corporate specialty areas equipment inventory finance also contributes very well. Commercial real estate and auto dealers for a time also delivering also on the consumer side. On sheet residential mortgage is really driven by what we're seeing in the mix of purchases as well as the continued steady growth in auto and RV/Marine will really be the drivers there.

From a utilization perspective, I would characterize what we saw in the quarter as modest but encouraging. And I think a healthy sign for our customers saw a round of 1% increase in general middle market lines. Several percentage point increases in inventory financial and most of that were seasonal. It is encouraging signs to see the inventory now beginning to flow to those dealers on a more steady basis that allows them to hold the inventory.

Then the auto dealer floorplan business also increased by a couple of percentage points as well. And I guess that's a function of just gradually improving the auto supply chain. So overall, a pretty healthy mix. And the model going forward, as I said, is the production and very much driven by commercial.

Steve Steinour -- Chairman, President, and Chief Executive Officer

And John, this is Steve. I would add. We invested since closing with TCF in a number of these lending units. So we have a lot of capacity that's been brought on, particularly in Twin Cities and Denver and some of the specialty groups.

So we're just -- we were able to scale the businesses as well. And so we'll be picking up the volume from these investments throughout this year and beyond.

Rich Pohle -- Chief Credit Officer

And John, it's Rich. The last part of your question had to do with capex spending. We are absolutely seeing an increase in capital spending given just the tightness of the labor market. So there's an intense move to automation and we'll continue to see that through the course of the year.

John Pancari -- Evercore ISI -- Analyst

Got it. OK. Great. Thanks.

And sorry if I missed this in your prepared remarks, can you talk a little bit about the trajectory of your data and your deposit beta expectation, how the deposit cost could trend early on for the first 100 basis points of hikes and then thereafter? Thanks.

Zach Wasserman -- Chief Financial Officer

Yeah. John, this is Zach, I'll take that one. Generally, across the totality of the rate hike cycle, our expectation is that we're going to see similar dynamics this rate cycle, as we saw in the last one. Clearly, there are some competing forecasts of forces there with lower starting rates that might signal a higher beta, but the level of excess liquidity across the industry would tend to blunt the data and they could be lower.

As I think has been noted by a number of industry participants over time, I think there's the general operating assumption of the industry and we share this is that the early impacts are on beta for the first several rate moves are going to be relatively lower and it will increase as the interest rate environment reaches a higher level. But I would say two things. One is what's really important to us is how poised to manage against this with very robust, very detailed primary product, segmented client by client management approaches, watching the market very carefully so that we can react and really be incredibly disciplined. And I think secondly, we're poised to benefit quite a bit here through this cycle, given the long strategy we've had to drive our primary bank relationships and core operating accounts with our business and commercial accounts.

So we feel good about our position and really just being very vigilant to manage through those fees as we go forward in the next few quarters.

John Pancari -- Evercore ISI -- Analyst

OK. And Zach, what is the through-cycle beta that you're assuming in your current outgo assumption?

Zach Wasserman -- Chief Financial Officer

Yeah, it's about 30%. That's what we saw in the last cycle. And that's what's baked into our modeling generally.

John Pancari -- Evercore ISI -- Analyst

Got it. All right. Thanks, Zach.

Zach Wasserman -- Chief Financial Officer

You're welcome.

Operator

Thank you. Our next question comes from the line of Scott Siefers with Piper Sandler. Please proceed with your questions.

Scott Siefers -- Piper Sandler -- Analyst

Good morning, guys. Thanks for taking the question. The first question I wanted to ask was on the cost side. Once we get down to about $1 billion per quarter and expenses coming up shortly, here is the plan to hover around that level for the remainder of the yearare any of these inflationary pressures just sort of overwhelming that prior outlook?

Zach Wasserman -- Chief Financial Officer

Yes. Generally, for the back half of this year, I mean, we feel great about where the costs are driving to. And, I think, we feel -- we've got an exceptionally strong line of sight to see the $1 billion by -- $1 billion of core expense run rate by Q2. And that will leave us then poised to really deliver on those medium-term financial targets we've talked about.

My expectation is roughly flat in the back half of this year. We're certainly seeing some inflationary pressures. And as we outperform on revenue, there's a bit of expense that will drive for that. But generally speaking, it's approximately flat in the back half of the year based on our current outlook.

And that's really driven by, just very rigorous expense discipline throughout the company and driving for efficiency in our base expenses and with a mindset toward self-funding the investments, we're putting into the revenue growth initiatives that we've talked about that you just mentioned a minute ago. Longer-term, as we get out into '23, the way we're posturing or our long-range planning is really guided by our commitment to operating leverage, which we've delivered, even the last nine years, and feel confident and probably able to do that again as we go into '23.

Steve Steinour -- Chairman, President, and Chief Executive Officer

You might also, Scott, be aware, we're -- we announced the acquisition of Capstone and so --

Scott Siefers -- Piper Sandler -- Analyst

Yup.

Steve Steinour -- Chairman, President, and Chief Executive Officer

As that closes, that run rate will have to be incorporated in as well.

Scott Siefers -- Piper Sandler -- Analyst

Yeah. Perfect. Thank you. And then, Zach, as we look forward, do you anticipate altering your rate sensitivity kind of synthetically anymore, or will it just sort of be a function? Will changes in your sensitivity? Sensitivity just be a function of kind of changes in the complexion of the balance sheet from here on out?

Zach Wasserman -- Chief Financial Officer

Thanks, Scott, for that one. We really like the level of asset sensitivity that we have right now. As we took a series of concerted actions last year to get to the point we are now. And we're really benefiting from it.

But all along the way, we've talked about when opportunities came up to protect some of the downsides, to lock in some of that benefit, we would likely take that. And so that's what you saw us doing in Q1 with a net $2.7 billion of receiving fixed swaps, a pretty modest impact on asset sensitivity as we noted in the prepared remarks, around 0.3%. From here, I would expect us to stay very much net asset sensitive in the near term. Meanwhile, slowly adding to that downside hedge protection book over the course of the coming months, as we watch the environment.

We would say dynamic, that could change, but it's the general operating posture here at this point.

Scott Siefers -- Piper Sandler -- Analyst

Perfect. All right. Good. Thank you guys very much.

Zach Wasserman -- Chief Financial Officer

Thanks, Scott.

Operator

Thank you. Our next question comes from the line of Ken Usdin with Jefferies. Please proceed with your question.

Ken Usdin -- Jefferies -- Analyst

Hey, thanks. Hey, Zach, one follow-up on the cost point. So if you're in that billion zone-ish, plus or minus toward the end of the year, would we then add Capstone to that? And do you have an approximate calibration relative to the revenue outlook, what you'd expect on the cost side from Capstone?

Zach Wasserman -- Chief Financial Officer

Yes. Thanks for that question. I want to make sure we clarify that. So that guidance is excluding Capstone to be clear.

On Capstone, we're really diving into the modeling right now and we'll come back with further guidance as we get closer to and through the close based on the due diligence modeling and the company's historical run rate that we are aware of, the kind of core efficiency ratio of that business is pretty similar to what other M&A advisory boutique firms would have. On top of that in the near term, quarters will have a little bit of merger-related costs in not expecting very, very significant costs there at all. And then lastly, some incremental compensation expenses to fund retention payments, which are really important for a deal like this. So more to come.

Will we get clear guidance on it as we get closer to the acquisition?

Ken Usdin -- Jefferies -- Analyst

OK. Got it. And then just one question on fees. In your outlook, can you help us understand what either incremental or total impact is of Fair Play and other changes to deposit products? And are you also assuming that you continue to sell SBA loans like you got back into this quarter? Thanks, Zach.

Zach Wasserman -- Chief Financial Officer

Yeah, no problem. Those are the most important points as it relates to the Fair Play evolution. Nothing has changed from the guide we provided back in March at the RBC conference, which is around $14 million in net impact on the fee line relative to the Q4 '21 run rate. That was slightly better than the earlier guidance we provided and in January continues to be our expectation of the impact on the fee line.

Like as we've noted a number of times over time, over the course of the 18 to 24 months after that, we do expect to claw that back and to benefit from the higher acquisition, that better retention of more account deepening as a result of those changes. But that's the kind of immediate impact. And then sorry, the second part of the question was.

Ken Usdin -- Jefferies -- Analyst

The SBA loans and are you baking that into the outlook as well?

Zach Wasserman -- Chief Financial Officer

Yeah. So we are expecting to continue to get back to our historical practice of selling the guaranteed for a portion of our SBA loan production. It should be worth noting that the team is performing exceptionally strongly right now and really doing really, really well-driving production. So we think that's going to support the sustainment of that sale gains, which is great.

In Q1, we had a bit higher gains than we would have expected in the quarter, just given by -- from the really high level of premium in the marketplace. But so might kind of modulates modestly from that level as we go forward. But generally, that run rate will continue and the expectation is that we will continue to in fact sell out production as we have historically done.

Steve Steinour -- Chairman, President, and Chief Executive Officer

And Ken, we've invested in the SBA unit as well over the course of last year, adding SBA capabilities in Colorado and Minnesota in particular. And they're off to a great start. So we'll we should have a record year in terms of production.

Ken Usdin -- Jefferies -- Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Jon Arfstrom with RBC. Please proceed with your questions.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Hey, good morning.

Steve Steinour -- Chairman, President, and Chief Executive Officer

Good morning, Jon.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Rich, the question for you. Can you give us your assessment of consumer health? Right now, there are just some mixed messages out in the market. And, just give us your assessment of what you're thinking right now?

Rich Pohle -- Chief Credit Officer

Yeah. No, happy to. From our standpoint, the consumer is in very good shape, particularly in the super-prime segments where we play. If you look at, the delinquency numbers, from our standpoint, it's all seasonal in terms of the normal patterns that we're following there.

So we feel good about it. Particularly, in the spots where we play, we do expect over the course of 2022, the consumer credit metrics will start to revert a bit to the norm. But we have remained very disciplined with our LTVs and our FICOs. So we're very comfortable with that book.

It's been a steady-state performer over many cycles. We feel good about it.

Steve Steinour -- Chairman, President, and Chief Executive Officer

And Jon, there is a phenomenon of sort of lower-income where the price of gas at the pump and inflation generally, including housing, is having an impact. But again, we've been super prime for more than a decade and the consistency of the performance in that, whether it's residential assets or auto, will hold us in very good shape. We view the portfolio in aggregate to be on the low end of the risk spectrum when we talk about aggregate over the low.

Jon Arfstrom -- RBC Capital Markets -- Analyst

OK. Fair enough. And then wondering if you guys can touch a little bit more on the inventory finance themes. You called that out as a growing area.

And obviously, it's something we all watch, particularly in auto. But I know that the TCF business was in a few other sectors. But talk a little bit about the themes and what you're seeing there.

Steve Steinour -- Chairman, President, and Chief Executive Officer

Well, this is a group that has been in existence now, even predating TCF that sort of formed it many years ago. And we're doing business with about 14,000 dealers nationally. So there's a great distribution with the team. It's a very high quality, very steady, and experienced team.

And we've got some just some outstanding dealer relationships. So we're able to, with OEMs be a dynamic part of their sales process. And there are different agreements depending on the OEM in support of the dealers. So again, this group performs very well.

It's gone through cycles with very little loss rates and the dealers will generally support each other. Certainly, the OEMs will support transitions of dealers and that happens from plants. And so so the big issue for the group right now is just how to -- what's the schedule for ramping up supply. And as we talk about supply chain disruptions, they're feeling it in many areas, including most of the dealers.

So this will be a group that just naturally will grow over time because inventories are so low. So we expect to do very well over the next few years with the group. And it's also a group that provides great customer service and has typically been adding OEMs every year, and we would expect that to continue this year based on the discussions that occurred thus far in the year. So very bullish on the group, great team.

One of the hidden jewels to some extent of TCF. And it will allow us to do other things on the consumer finance side. And we'll talk about that probably in an upcoming conference.

Jon Arfstrom -- RBC Capital Markets -- Analyst

OK. Thank you.

Operator

Thank you. Our next question comes from the line of Matt O'Connor with Deutsche Bank. Please proceed with your questions.

Matt O'Connor -- Deutsche Bank -- Analyst

Good morning. I think I asked the same question last quarter about LTVs and auto. But I guess I'm just curious, we've seen a little bit of a trend down in the LTV and really good disclosure on Slide 34, which I'm looking at. But just as we think about used car prices being inflated and new car prices and even like the RV and Marine, are there thoughts to further tighten some of these metrics to just insulate yourself from corrections there?

Rich Pohle -- Chief Credit Officer

Hey, Matt, it's rich. I'll take that one. We actually think the lower prices, the used car prices coming down is a good thing. And if you look at the mix of newly used, it's actually picking up a little bit, from the third quarter of 2021.

So we are seeing more new products coming in as part of the mix. From an overall standpoint, we are a super-prime lender in that space. We've got a FICO and we use our custom scorecard that's been very effective in keeping us from relying on having to take the cars back in the first place. So we aren't really that concerned about the price movement that we've seen in the industry.

We've been able to keep the LTVs as you mentioned in the mid-80s and our FICOs from the 770 to 775 range, so we feel good about that. On the RV side, keep in mind too, that that loan to value is based on wholesale cost, not the retail cost. So that's going to show a little bit higher. But, there was an 800 plus FICO.

So from our standpoint, we don't see any real needs to tighten. We've had a great experience and both of those books, the RV/Marine book went through their first cycle with us really in the last couple of years and outperformed our expectations from a loss standpoint. So, we're not concerned at all about either one of those portfolios.

Steve Steinour -- Chairman, President, and Chief Executive Officer

And we've been in the auto business, Matt, for more than half a century. And we were able to stress test the portfolios in 2009 when we had 10%, and 14% unemployment rates. So we think we've got this really dialed in. And it's there's a discipline with this quarterly reporting that goes back over a decade that shows this consistency so well.

While there may be some movement in loss rates, the overall approach is the very low default frequency based on the underwriting.

Matt O'Connor -- Deutsche Bank -- Analyst

That's helpful. And then, yeah, a similar question, on the mortgage on home equity book two from the next slide. Again, really helpful things this data over a couple of years but there we've seen a more material change in the LTVs from your originations. And I guess I'm curious, is that something that you're driving or is that something that your client base is driving, using more equity against these loans? Thank you.

Rich Pohle -- Chief Credit Officer

No, I think it's really a combination of both. But I would say it's more of the customers driving than we've done any tightening. I think certainly we've been conscious of housing prices. And, I think what you're seeing on the slide shows that we've been disciplined with our originations and making sure that there's sufficient equity going into the loan to keep us safe if there is a drop in values.

Matt O'Connor -- Deutsche Bank -- Analyst

Thank you.

Steve Steinour -- Chairman, President, and Chief Executive Officer

We like secure consumer lending, but as we've shared in the past, we believe that will put us in comparatively great shape through cycles.

Operator

Thank you. Our next question comes from the line of Erika Najarian with UBS. Please proceed with your questions.

Erika Najarian -- UBS -- Analyst

Hi. Good morning. I wanted to follow up with Betsy's earlier line of questioning Zach. I'm wondering if you could quantify the earning asset growth that you're expecting.

I know you're looking forward to more deposit growth from here, but just thinking about how we should think about earning asset growth relative to that high single-digit loan growth? And also at what point in absolute rate should we start modeling in our thinking about positive total deposit growth, but perhaps negative mix shift away from non-interest-bearing deposits?

Zach Wasserman -- Chief Financial Officer

Yeah. Good questions, both. Let me just see it as some incremental color. As it relates to, some of the earning asset sides of your question, there would really be two parts to it.

One, is about loan growth in the high single digits, as we talked about. Secondly, in the securities book. My expectation -- right now, we're standing at about 24%. I think precisely 24.5% of assets are on securities.

I think we will stay within the range of 24% to 26% of securities assets here for the foreseeable future just as we manage yield and liquidity and just general balance sheet management.t. So those two factors will drive the -- I think the earning assets likewise to be pretty similar to that loan growth guidance. From a deposit perspective, it's hard to sort of be overly precise in terms of the threshold level where things start to unstick and move. Our general assumption is that it's going to be a relatively lower beta initially, higher later and so we'll see that trending throughout the period.

And so that's sort of generally the dynamic. The one thing I would just maybe add to my comment around the earning asset growth is just to remember as well that we will have -- the one factor that will draw that down a bit is the cash side where we're continuing to redeploy our cash into funding the loan growth. And so that we've got around $6 billion on average now that will trend down throughout the course of the year back toward more like the $1 billion to typical operating range we'd see, which will pull down in earning assets growth, but that really will benefit NIM as we higher-earning assets.

Erika Najarian -- UBS -- Analyst

Got it. And my follow-up question is for Steve. Steve, you've done a good job in terms of balancing, investing in the franchise, and extracting cost savings from some cost savings to fund that and deliver on the TCF cost savings. I'm wondering, as we think about the revenue side up from here.

We clearly got from Zach the second-half outlook. But, performing things are thinking about that is sort of settled in their investment cycle have been saying something like 2% to 3% expense growth in sort of a core expense growth to think about in the future, taking into account inflation. Is that something that seems reasonable for your company as you look forward past the second half of '22?

Steve Steinour -- Chairman, President, and Chief Executive Officer

Well, we've guided for the second half of '22. Earlier, you heard Zach's comments of generally being flattish, around $1 billion of expense, and that would include the expectations of inflation and other investments that we plan to make. We started with a view of '22 last August when we did a round of expense reductions to set up and deal with the inflation, Erika, and that included the 62 branches that consolidated in early February this year. So we're on track with the plan that we laid out last summer, and we're on track, if not ahead with TCF at this point.

So a lot of confidence in this year. And then we'll be adding Capstone. We think we've got revenue synergies coming with that as well. So we like how we're positioned at this stage and optimistic, certainly very confident for the year, and optimistic about going forward.

We will be dynamic with operating expenses relative to revenues. We've committed to up positive operating leverage. And I think it's eight out of nine years in the past, and you can count on that being part of our 2023 equation.

Erika Najarian -- UBS -- Analyst

Great. Thank you so much, Steve.

Steve Steinour -- Chairman, President, and Chief Executive Officer

Thank you.

Zach Wasserman -- Chief Financial Officer

Thanks, Erika.

Operator

Thank you. Our next question will come from the line of Ebrahim Poonawala with Bank of America. Please proceed with your questions.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Hey. Good morning. I just had one question. Steve and Zach, I think you mentioned you hit the 17% plus medium-term ROTCE target back half of the year.

Just talk to us in terms of the sustainability of the ROTCE profile from here, looking into the medium term, just in terms of the downside risk as we think about maybe getting to a point where the Fed goes back to cutting interest rates, some normalization in credit. What's the level of ROTCE that you think is defensible even in a less conducive revenue backdrop?

Zach Wasserman -- Chief Financial Officer

This is Zach and I'll take the first shot at that and then Steve to see if he wants to tack on as well. Generally, I feel great about the 17% level. So for the foreseeable future and frankly, I was forecasting that level even at the budgeted rate curve, which I mentioned before was considerably lower than the current rate curve. So I think that I feel good about that level, over the medium term, as we said.

One of the things that we're frankly eternally, really excited about is getting to the second half of the year, delivering these medium-term targets that we first put out in December of 2020 when we announced the TCF acquisition, and then being able to reset and provide some updated guidance at that point. And my expectation is that we'll see at or above that level of that guidance as well.

Steve Steinour -- Chairman, President, and Chief Executive Officer

So just to add, we had a very good first quarter. We've talked since the fourth quarter about growing momentum. But we are not hitting on all cylinders. We still see a lot of upsides on the TCF synergies and on some of the other investments we've made.

So there's a revenue dynamic that we hope will be able to continue and expect to be able to continue to develop throughout this year. And that will provide some cushion for the normalized provision as well as for some of the different scenarios like the way that the businesses are positioned which roughly balances consumer and business. And on the business side, we've had a lot of scales added with TCF and investments made in new capabilities and products and you'll continue to see that that's part of the plan as we go forward this year. And I think that's going to position us just to have consistency over the next few years in a variety of scenarios.

Zach Wasserman -- Chief Financial Officer

The one thing I would talk to that just at the end here is a key contributor to this is not only our balance sheet and capital allocation, which is just ever more robust and dialed in to drive best-in-class returns. But also the growth of our fee businesses, notwithstanding our guidance that we provided this quarter where fees will be growing. So a slower than spread by Q4 of this year, just driven by the extraordinary rate environment, driven by some, temporal factors in mortgage and our Fair Play product evolution. Broadly speaking, though, and I think in the course of the long term, which was the nature of your question, I expect fee revenues to grow as a percentage of revenues by around a percentage point per year.

And I think that disciplined capital allocation driving for returns to driving toward fee intensive businesses and payments and capital markets that are wealth advisory, those things are the ones that sort of contributing to that sustaining ROE we even under various interest rate scenarios?

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

That's helpful. And just as a quick follow-up to that. How do you own no buybacks this year? But when we think about capital allocation, and you mentioned on the fee side, anything that we should expect in terms of inorganic growth, be it Capstone-like transactions or anything on the fintech side of the wealth management that you're looking at?

Steve Steinour -- Chairman, President, and Chief Executive Officer

Well, there are of fee businesses that if they were available would be interesting to us. But I would characterize them generally on the smaller side and will change the overall guidance that Zach provided to you. As we continue to build out our capabilities, we will from time to time, as we did with Huntington Technology Finance, I think four or five years ago. And so this is -- there maybe are some opportunities in the next couple of years to complement our capabilities and build the seed generating potential to an even greater extent than what Zach portrayed.

And if we find things that make sense, that would be additive to our customer service and our customer growth then we'd look at that. But we're generally very focused on driving the opportunities we have in hand with the TCF combination and the investments we've already made.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Got it. Thanks for taking my questions.

Steve Steinour -- Chairman, President, and Chief Executive Officer

Thank you.

Zach Wasserman -- Chief Financial Officer

Thanks a lot.

Operator

Thank you. Thank you. Our next question comes from the line of Steven Alexopoulos with J.P. Morgan.

Please proceed with your questions.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Hey, good morning, everyone.

Zach Wasserman -- Chief Financial Officer

Good morning.

Steve Steinour -- Chairman, President, and Chief Executive Officer

Good morning, Steven.

Steven Alexopoulos -- J.P. Morgan -- Analyst

I wanted to first follow up on deposits. I didn't fully understand your response to Erika's question. What's the deposit growth assumption that's underlying the NII guide for 2022?

Zach Wasserman -- Chief Financial Officer

Well, I haven't provided that guidance precisely, but I do expect continued, let's call it mid-single digits deposit growth overall, commercial growing faster, consumer growing a little slower, but both growing. And I think, on the consumer side, we are not seeing any imminent signs of any change in the level of savings activity and sort of trends around deposits. I think the whole concept of surge balances has been somewhat debunked at this point, that they're fairly sticky and the trends are fairly stable on the consumer side. On the commercial side, we're really benefiting from just, sort of penetrating operating accounts, and our focus on treasury management that's driving that.

As well as new client acquisition through particularly our growth in middle-market and our specialty area. So generally seeing positive continued growth in deposits, that kind of single-digit growth.

Steven Alexopoulos -- J.P. Morgan -- Analyst

OK. That's helpful. And then, Steve, on the Capstone deal, is this really intended to make you more of a one-stop-shop, right? Better position you to serve existing clients? Or is this a new focus for Huntington, right? Are you going to invest meaningfully in this capability? And do you plan to build your banking capabilities around these new verticals you're picking up? Thanks.

Steve Steinour -- Chairman, President, and Chief Executive Officer

Capstone is a top-ranked middle-market investment banking advisory firm in its own right. But we have a significant client base that that if the services were made available to them would help us expand our menu of cross-selling and eventually even feed our wealth businesses. So we felt this was an important additional component to the core delivery. It does give us the expertise in a select number of verticals that they have as well or access to that.

And I think that will help the commercial bank grow overall. I suspect we'll continue to build out their investment banking capabilities on a national basis. So that will be additive. But we really think it's synergistic with us at the core of what we're doing and are quite optimistic about this.

We have been working with them for over a year in terms of a fee share arrangement for certain referrals both ways and have really got an insight into the culture of the company and its capabilities. And that's what made this opportunity very attractive.

Steven Alexopoulos -- J.P. Morgan -- Analyst

And do you plan on building out the banking in areas like fintech services, energy, etc.? Is that part of the plan?

Steve Steinour -- Chairman, President, and Chief Executive Officer

We don't have plans for the build-out yet. We have a -- we're maybe a couple of months away from even closing on what they have and where they have specialty capabilities now, we will take advantage of those. We'll look at that if there's some augmentation to scale up to where they have existing capabilities. And then over time, we'll assess new areas.

Steven Alexopoulos -- J.P. Morgan -- Analyst

OK. Great. Thanks for taking my questions.

Steve Steinour -- Chairman, President, and Chief Executive Officer

Thank you.

Operator

Thank you. Thank you. Our next question comes from the line of Brian Foran with Autonomous. Please proceed with your questions.

Brian Foran -- Autonomous Research -- Analyst

Hi. I guess maybe one follow-up on deposits and I'll preface it. I definitely remember last time or last rising rate cycle, you really outperformed the industry on deposit growth, especially low-cost deposit growth. So kind of history is on your side and you've done it before.

But I guess mid-single-digit growth led by commercial, as I say, probably the center of your peers like flattish deposit growth this year with commercial maybe declining a bit. But you listed a couple of reasons. But can you just maybe flesh out, kind of your high single-digit commercial growth in an environment where peers are down a little bit What is really -- how do you get that much differentiation?

Zach Wasserman -- Chief Financial Officer

It's hard. To say much about the comparison to peers not knowing, what's in their business and the visibility that they've got. All I can tell you is we seem to be gaining market share and winning particular on the commercial side. And I think it's it's not surprising to us because we've been investing in our commercial business and the flow-through of deposits is sort of the manifestation of the returns on those investments we are making.

Both, exclusive of TCF and then as of late really capturing the TCF opportunities to build in the middle market. As we said, we're building out terrific middle-market teams in the Denver and Colorado area in the Twin Cities. And just generally seizing the opportunities that are available within the new TCF geographies for Huntington in that space and also business banking, I would say. So, again, it's hard to make the comparison.

Others say we are seeing those trends manifest. And, it's encouraging. As I said before, our focus is on making sure that this is our hot money. These are really core accounts.

We often use the treasury as sort of the treasury management is the tip of the spear to really drive the penetration of not only those capabilities in those services, but ultimately to cement those operating accounts in terms of the strategy. So that's the trends we're seeing. We feel confident about that forecast.

Steve Steinour -- Chairman, President, and Chief Executive Officer

Brian, we've had optimal customer relationship or OCR approaches to deepening or cross-sell for more than a decade now. And the TCF business lines did not. They just didn't have the capabilities. So there's a broad base of customers that we have access to that we're very focused on.

We talked about a tool called EDGE that we've put in place as a data tool for the commercial teams, and that we put in place in the fourth quarter. That's giving us a lot of insight and traction coming on that overall OCR strategy. So good execution by the teams. We also shared over the fourth quarter -- third-quarter calls if I remember correctly, that we were using an investment portal with one of our partners to move some of the deposits off-balance-sheet with the view that we'd bring some of them back one, as rate cycle change, and we'll do that as well.

So those maybe some of the contributing factors in addition to what Zach shared. Thank you for the question.

Brian Foran -- Autonomous Research -- Analyst

If maybe I could squeeze in one on capital, and it's as much an industry question is Huntington specific. But I guess the tangible common equity ratio matter at all this cycle. I mean, it's certainly getting lower for you and a lot of peers than it has been in a long time. But driven by rates, AOCI is kind of a funky concept.

It fair values one-line item, not any other. Is it just solely about the CET1 ratio? Is there any level of TCE ratio that you view as a floor? Should we care about the TCE ratio at all, I guess, is the crux of the question?

Steve Steinour -- Chairman, President, and Chief Executive Officer

Brian, in '08 and '09, that was the only ratio that we cared about, right? So -- but the industry clearly has migrated to CET1. It's surprising to me your question is the first one is probably a decade path of this nature. And we're obviously focused on it as well. That's why we have a fairly high HCM percentage of the investment portfolio.

We've done certain other actions, including the hedging that's described today. And we'll continue to look at that. But it does not appear to be a driver. It does not come up in regulatory conversations.

So it would seem that the investment community and the regulatory community both moved on to CET1.

Brian Foran -- Autonomous Research -- Analyst

That's great. Thank you.

Steve Steinour -- Chairman, President, and Chief Executive Officer

Thank you.

Operator

Thank you. Our final question for today will come from Peter Winter with Wedbush Securities. Please proceed with your question.

Peter Winter -- Wedbush Securities -- Analyst

Thanks. I just had a quick follow-up question on indirect auto. If you could talk a little bit about the outlook for indirect auto, some of the peers are pulling back because of the loan pricing pressures. I'm just wondering what your thoughts are?

Steve Steinour -- Chairman, President, and Chief Executive Officer

We really like that asset class and we've been with it in and out of cycles. It is a short duration paper on average, as Zach shared earlier, 25 months weighted average life. So even with rising rates, it gets a little tighter. And in declining rates, the spread looks great.

We're with it. We will stay with it on a consistent basis. And that's part of the value to the dealers. And so we have shown in the past that a relative premium pricing as a consequence of the consistency in the market, we believe we're still achieving that.

And we like the asset a lot. It will narrow a bit in terms of spreads in a rising rate environment. But it's a short-lived asset and it's still better than many of the alternatives. As you heard from Rich, we're confident in the performance.

So this is, from our perspective, a good asset of one-plus ROA asset historically. And our dealers, our auto dealers tend to be the deepest cross-sell of total relationship cross-sell that we have in the company.

Peter Winter -- Wedbush Securities -- Analyst

Got it. Thanks, Steve.

Steve Steinour -- Chairman, President, and Chief Executive Officer

Thanks, Peter.

Operator

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. Steinour for closing remarks.

Steve Steinour -- Chairman, President, and Chief Executive Officer

Thank you very much for joining us today. We're very proud of our colleagues, and I want to thank them for their commitment to driving results in a great quarter. We have a lot of confidence in our teams and what we can deliver for our customers and especially our shareholders over the course of '22, as you heard. Appreciate very much your support and interest in Huntington.

Have a great day.

Operator

[Operator signoff]

Duration: 64 minutes

Call participants:

Tim Sedabres -- Director of Investor Relations

Steve Steinour -- Chairman, President, and Chief Executive Officer

Zach Wasserman -- Chief Financial Officer

Betsy Graseck -- Morgan Stanley -- Analyst

John Pancari -- Evercore ISI -- Analyst

Rich Pohle -- Chief Credit Officer

Scott Siefers -- Piper Sandler -- Analyst

Ken Usdin -- Jefferies -- Analyst

Jon Arfstrom -- RBC Capital Markets -- Analyst

Matt O'Connor -- Deutsche Bank -- Analyst

Erika Najarian -- UBS -- Analyst

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Steven Alexopoulos -- J.P. Morgan -- Analyst

Brian Foran -- Autonomous Research -- Analyst

Peter Winter -- Wedbush Securities -- Analyst

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