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Huntington Bancshares Inc
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Greetings and welcome to the Huntington Bancshares Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded.
I would now like to turn the conference over to your host, Mr. Mark Muth, Director of Investor Relations.
Thank you, Melissa. Welcome, I'm Mark Muth, Director of Investor Relations for Huntington. Copies of the slides we will be reviewing can be found on the Investor Relations section of our website at www.huntington.com. This call is being recorded and will be available as a rebroadcast starting about one-hour from the close of the call.
Our presenters today are Steve Steinour, Chairman, President and CEO; Zach Wasserman, Chief Financial Officer; and Rich Pohle Chief Credit Officer. As noted on Slide 2, today's discussion, including the Q&A period will contain forward-looking statements. Such statements are based on information and assumptions available at this time and 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.
With that, let me now turn it over to Steve.
Thanks, Mark, and good morning everyone.
Slide 3 provides an overview of Huntington’s strategy to build the leading People-First, Digitally-Powered bank in the nation. Our 2020 results demonstrate we are driving revenue growth despite headwinds. We are focused on acquiring new customers and deepening those relationships to gain both market share and share of wallet.
We are investing in customer-centric products, services and digital technologies that will drive sustainable growth and the outperformance both today and for years to come. Huntington operates in intentionally diversified business models, balanced between commercial and consumer, which provides the good mix of revenue and credit exposure.
We’ve built competitive advantage with our consistently superior customer service and our differentiated products and services. We are committed to developing best-in-class digital capabilities like our mobile banking App, which has been recognized as the highest in customer satisfaction by J.D. Power two years in a row.
In 2020, we introduced several new innovative products and features that will continue to serve our customers' needs and differentiating Huntington from our competition. We are not done. We have a pipeline of innovative products and features that we will release throughout the year. We have a proven track record of solid execution, adjusting our operating plans to the environment in order to drive shareholder returns.
This allowed us to deliver our eighth consecutive year of positive operating leverage in 2020. Our focused execution has and will enable us to ensure investments in the products, people, and digital capabilities, which will drive sustainable long-term growth and outperformance. We are particularly excited about the TCF acquisition we announced last month. This provides additional scale and growth opportunities.
We’ve filed the bank regulatory applications last week and announced the planned consolidation of 198 branches. We are making good progress on our preparations for integration later this year. We remain on track with previously announced schedules. We are expecting closing days late in the second quarter. We are pleased with our 2020 results and continued momentum across the bank despite an extraordinarily challenging operating environment.
And I am incredibly proud of the outstanding efforts of our colleagues to overcome the challenges of the pandemic, as well as look up for our customers.
For the year, we grew revenues 3%, loans 6% and core deposits 11% while bottom-line results and EPS were down due to elevated provisioning required under the CECL reserve accounting, our pre-tax, pre-provision earnings increased 4% and these are all very strong results.
We also closed the year with strengthening commercial loan production as expected in the fourth quarter. Our consumer lending businesses, especially home lending and vehicle finance are continuing to provide very good loan originations. Our home lending business achieved record mortgage originations for the second consecutive year.
Our deposit growth parallels the entire banking system and we do not foresee this changing any time soon. Our balance sheet is very well positioned with robust capital liquidity and our hedging strategy has reduced interest rate risk.
2020 also marked the tenth consecutive year of the increased cash dividend.
Credit quality continues to improve, illustrating our decisive and conservative actions in the second quarter appropriately identifying the highest risk portions of our portfolio, allowing us to proactively work with our customers.
As we entered 2021, I am very encouraged not only by our momentum, but also the underlying strengths I’ve seen in our local economies. Economic data shows that our footprint is recovering more quickly than the nation as a whole and our conversations with our customers support this.
The unemployment rate I remember was below the national average in five of our seven states including our largest market in Ohio at 5.7%. Over 2.9 million jobs were created in our footprints between April and November which means 24% of the national total were created in these seven states. Further 44% of all manufacturing jobs created duringperiod occurred in our footprint states.
The V shaped manufacture recovery is fueling regional economic growth even though many manufacturers continue to face challenges from supply chain disruptions, skilled labor shortages and periodic plant shutdowns related to the virus.
These inventory challenges are visible in the auto, RV and marine industries and inform our belief that continued low dealer floor plan utilization rates to take at least several more quarters to return to longer term averages. The recovery in unemployment boosted both the regions consumer confidence and consumer retail spending above the respective 2020 national averages.
Oil prices continued to appreciate, especially with solid increases in Ohio, Michigan, Pennsylvania and Indiana. The Midwest also led the country in year-over-year growth and single-family home sales in the third quarter up 56%, compared to 39% for the nation.
Turning to our business, we are also seeing momentum. We saw an uptick in commercial loan activity late in the fourth quarter consistent with our prior guidance. We are also seeing continued strength in consumer lending. As we entered the first quarter, our commercial pipelines also are up from a year ago. We expect consumer lending to remain strong and commercial activity to continue to improve over the course of the year.
The consistently high level of execution we are seeing across our businesses strengthening commercial loan activity and constructive economic outlook are driving our strategy to accelerate investments leaning into the recovery to drive increasing growth over the intermediate term. We also informed our decision to pursue and ultimately enter into the TCF acquisition.
Let me now turn it over to Zach for an overview of our financial performance.
Thanks, Steve and good morning everyone.
Slides 4 and 5 provides the financial highlights for the full year 2020 and the fourth quarter respectively. For the fourth quarter, we reported earnings per common share of $0.27. Return on average assets was 1.04% and return on average tangible common equity was 13.3%. Results continue to be impacted by the elevated level of credit provision expense, although it was down meaningfully from the third quarter.
Now let's turn to Slide 6 to review our results in a little more detail. Annual pre-tax pre-provision earnings growth was 4% for 2020. We believe this is a very solid performance in light of the low interest rate environment and the economic challenges inflicted by the pandemic illustrating the underlying earnings power of the bank and the strategies we are executing.
Turning to the fourth quarter, pretax pre-provision earnings increased 6% year-over-year. Total revenue increased 7% versus last year with 81% of growth balanced between spread revenues and fee income. Sorry, $81 million of growth balanced between spread and other fee income.
Home lending was a particular bright spot in 2020, and that remained true this quarter continuing to drive a fee income growth of 10%. Our capital markets, wealth and investment management, card payments and insurance businesses all posted continued growth in the fourth quarter. I should also note that deposit service charges remained below the year-ago level as elevated customer deposit account balances continue to moderate the recovery of this line.
Total expenses were higher by $55 million or 8% from the year ago quarter. Approximately $31 million or more than four percentage points of this growth was driven by increased technology investments.
Another $20 million or three percentage points was the donations of the Columbus Foundation that we made at the year end. The remaining percentage point was primarily the net result of several unusual items including TCF legal costs, and debt extinguishment costs. The underlying runrate of all other expenses was relatively flat.
Turning to Slide 7, FTE net interest income increased 6% as earning asset growth more than offset year-over-year growth – year-over-year NIM compression. As we’ve stated previously, our main focus is driving risk-adjusted returns and revenue growth. In order to achieve this, we’ve taken actions to sustain net interest income growth, some of which as previously discussed will also help us manage our NIM around current levels for the foreseeable future.
On a linked quarter basis, the NIM decreased 2 basis points to 2.94% as shown in the reconciliation on the right side of the slide, the linked quarter decrease primarily reflected the 3 basis point impact of a change in PPP loan terms to delay the initial repayments. This revenue recognition accounting change had not been anticipated in the original Q4 guidance.
The other NIM drivers shown on the slide essentially offset each other to keep the NIM stable to slightly higher consistent with the expectations we provided on last quarter’s earnings call. The anticipated forgiveness of the majority of the first round of PPP loans over the next few quarters is expected to provide a near-term boost to net interest income and NIM on a GAAP basis during those periods from the accelerated loan fee recognition.
As we have discussed previously, we are taking actions now on both sides of the balance sheet to offset the inherent pressure caused by the margin by prolonged interest rate, low interest rate environment managing the net interest margin near current levels on an underlying basis.
On the earning asset side, we are optimizing our earning asset mix by emphasizing disciplined pricing as well as loan production in certain higher yielding asset classes. We also expect to deploy an additional $2 billion of excess liquidity into securities picking up incremental yields.
Lastly, we expect to reduce our funding costs including further optimization of wholesale funding.
Moving to Slide 8, average earning assets increased to $12 billion or 12% compared to the year ago quarter, driven by $6 billion of PPP loans and $5 billion increase in the aforementioned deposits at the Fed. Average commercial and industrial loans increased 15% from the year ago quarter, primarily reflecting the PPP loans.
On a linked quarter basis, C&I loans increased modestly, notably benefiting from strong production in asset-based lending. In addition, we saw commercial line utilization trends stabilize and auto floor plan utilization modestly increased during the quarter.
Consumer lending continues to produce steady growth with residential mortgage, RV marine and indirect auto, all posting year-over-year growth. On a linked quarter basis, average earning asset growth primarily reflected the $1 billion or 5% increase in average securities as we executed our plans to get securities back above the first quarter of 2020 quarter end level by the end of 2020.
Turning to Slide 9, we will review the deposit growth and funding. Average core deposits increased 16% year-on-year and 2% sequentially. These increases were driven by business and commercial growth related to PPP loans and increased liquidity levels in reaction to the economic downturn. Consumer growth largely related to the government stimulus and similar elevated liquidity maintenance behaviors, as well as increased consumer and business banking account production with reduced account attrition.
Slide 10 highlights the more granular trends in commercial loans, total deposits, saleable mortgage originations and debit card spends as these are key indicators of behavior and economic activity among our customers. As you can see on the top left chart, after remaining relatively stable for the prior several months, commercial loan balances excluding PPP closed the year positively. Thanks to strong production this December as expected.
Even following this slurry of activity at year end, our pipelines today are higher than they were a year ago before the pandemic. As previously mentioned, expected gradual normalization of commercial utilization rates provides additional opportunity which will help offset in the near-term headwind from 2020 PPP loans and forgiven and repays over the next two quarters.
There were $225 million of PPP loans forgiven in the fourth quarter. It’s still too early about the definitive view on the new face of PPP, but we do expect that the changes in the programs that narrow the universe of small businesses eligible to participate. We expect that the ultimate size of the new PPP loan production to be smaller than the Phase one that we achieved in 2020.
The top right chart reflects the continued elevated deposit balances resulting from the factors I mentioned previously providing attractive source of liquidity. The bottom two charts relate to customer activity driving two of our key fee income lines.
Mortgage banking saleable originations remain historically robust, particularly when taking into account the normal seasonality decline in Q4. On the bottom right, we continue to see solid year-over-year growth in both debit card transactions and spend. Aside from the brief period of turbulence of the initial imposition of stay-at-home and other restrictions in Q4, in the early days of January, we’ve actually seen a further acceleration of debit spending driven by the recent stimulus payments that is similar to the trend we saw earlier in 2020 during the first round stimulus.
Slide 11 illustrates the continued strength of our capital and liquidity ratios. The common equity Tier 1 ratio or CET1 ended the quarter at 10%, up slightly from last quarter. The tangible common equity ratio or TCE ended the quarter at 7.16% down 11 basis points sequentially. Both ratios remain within our operating guidelines and our strong capital levels position us well to execute on our growth initiatives and investment opportunities.
Let me now turn it over to Rich to cover credit. Rich?
Thanks Zach. Before we get into the credit results for the quarter and the entire year, I wanted to reinforce the disciplined credit approach we have followed over the years that has allowed our portfolio to come through this downturn with solid performance. This was due to the foundation we’ve been laying for a decade now beginning with instilling a cohesive culture that everyone in the company owns risk.
We reduced our commercial real estate portfolio from over 200% of capital to under 8% and curtailed pre-construction lending such that the fourth quarter represents the lowest level of construction in terms of both absolute dollars and as a percentage of capital that we had since the FirstMerit acquisition in 2016. This low leveraged lending originations in 2019 and ended 2020 with leveraged loans virtually flat from year end 2018.
We transitioned our healthcare portfolio to diversify away from long-term care into more publicly held products and services companies and investment-grade hospital systems, which together now make up 45% of the healthcare portfolio.
On the consumer side, we brought our expertise in indirect auto to our RV marine business and reduced our exposure to second-lien high LTV home equity. These steps and many others have fundamentally transformed the makeup of the Huntington loan portfolios since the last downturn. I am also extremely pleased with the impact of our 2020 portfolio management activities.
First, we reduced our oil and gas portfolio by $780 million or 59% since September 2019. The non-core portion of this portfolio has been reduced to just $243 million. We performed a thorough portfolio review in 2Q that resulted in a net $1.1 billion increase to our criticized loans and put heightened visibility on these and other high impact credits.
Since 2Q, we’ve been able to reduce our credit class by $771 million by working with our customers while at the same time effectively managing risk.
Finally, our total consumer and commercial delinquency numbers are better than a year ago. We manage nearly $6 billion of loans with payment deferrals ending the year with just $217 million of loans with the remaining deferral.
Turning now to the credit results and metrics. Slide 12 provides a walk of our allowance for credit losses from yearend 2019 to yearend 2020. You can see our ACL now represents 2.29% of loans. The fourth quarter allowance represents a modest $12 million reserve release from the third quarter. Like the previous quarters in 2020, there are multiple data points used to size the provision expense for the fourth quarter. The primary economic scenario within our loss estimation process was the November baseline forecast.
This scenario was much improved from the August baseline forecast we used in 3Q and assumes unemployment in 2020 ending the year at 7.2% and increasing to 7.5% for the first three quarters of 2021 to average 7.4% for the entire year. 2020 GDP ends the full year down 3.6% and demonstrates 4.1% growth for all of 2021 with that growth peaking at 5.8% in the fourth quarter.
While a number of variables within the baseline economic scenario has improved, as that many of our credit metrics for the quarter, there were still many uncertainties to deal with at December 31. The impact of the COVID resurgence we face today, the smaller than expected economic stimulus package, and ongoing model challenges related to COVID economic forecasting. We believe maintaining coverage ratios consistent with the third quarter is prudent when considering these factors.
Slide 13 shows our NPAs and TDRs and demonstrates the continued but more limited impacts that our oil and gas portfolio has on our overall level of NPAs. We expect modest gas credit impacts as we head into 2021. So this will be the last time we break out this portfolio within our overall credit results.
In Q4, we had four new NPAs over $5 million and just over $15 million, all COVID-related. Three of these customers are in Michigan with the COVID restrictions had impacted their ability to reopen. As we signaled, we also saw an increase in NPAs from our business banking portfolio. These credits were granular with only some exposures over $1 million.
Despite this, total NPAs were reduced from the third quarter by $39 million or 6% and down from the second quarter peak by $150 million or 21%.
Slide 14 provides additional details around the financial accommodations we provided to our commercial and consumer customers. As we forecasted on our third quarter call, the commercial deferrals have dropped significantly and now total just $151 million, down from $942 million at Q3, and 4% billion at Q2. We expect to have limited commercial deferral balances beyond SBA going forward.
Commercial delinquencies are very modest at just 15 basis points.
Our consumer deferrals have largely run their courses well, down to just $66 million as of December with post deferral performance in line with our expectations across all the portfolio segments. Our deferrals in auto, RV/Marine and home equity have nearly all lapsed and we are managing these portfolios consistent with our pre-pandemic strategies. We expect the remaining mortgage deferrals will continue to work their way down to a de minimis level over the next quarter.
Slide 15 provides a snapshot of key credit quality metrics for the quarter. Our credit performance overall was solid, net charge-offs represented an annualized 55 basis points of average loans and leases. I'm pleased to report our level of criticized loans was reduced by over $340 million or 11% in Q4, which is on top of the $425 million or 12% reduction we saw in the third quarter. Our active portfolio management process enabled us to identify potential problems early. Working with our customers, we continue to proactively remedy a number of these loans.
I would also add, our nonperforming asset ratio decreased 5 basis points linked quarter to 69 basis points. Our second consecutive quarterly decline in NPAs. As always, we have provided additional granularity by portfolio in the analyst package and the slides.
Let me turn it back over to Zach.
Thanks, Rich. Before we get to expectations, I want to spend a minute on our ongoing technology investments and progress on digital engagement. Looking at slide 16 and 17, you can a few select illustrations of our continued progress on digital capabilities.
In 2020, for example, we significantly expanded our new product origination capabilities to mortgage, home equity, business checking and savings and small business lending. You can also see continued growth in digital engagement and usage levels in consumer and business banking.
As we've noted, we're investing in clearly defined digital development roadmaps across all our major business lines that will help us drive momentum, delivering differentiated products and features that will drive new customer acquisition, relationship deepening with existing customers and servicing efficiencies, both internally and for our customers.
Finally, before we get to your questions, let's discuss Huntington’s expectations for the full year 2021 on a stand-alone basis excluding TCF as shown on Slide 18.
Looking at the average balance sheet for the full-year 2021, we expect average loans to increase between 2% and 4% reflecting modestly higher commercial loans inclusive of PPP and mid single-digit growth in consumer loans.
Excluding PPP, we would expect to see mid-single-digit growth in both categories. As the economy -- economic recovery progresses we expect continued acceleration of loan growth over the course of the year.
With respect to deposits, we expect average balance sheet growth of 5% to 7% due to the elevated levels of commercial and consumer core deposits, which we expect to persist for several more quarters. Compared to the fourth quarter average balances, we expect modest deposit growth, primarily among consumers during the first half of the year before stabilizing in the second half. We expect to post full-year total revenue growth of approximately 1% to 3% and full-year total expense growth of 3% to 5%.
With respect to revenues, we expect net interest income to be flat to modestly higher, driven by average earning asset growth and a relatively stable NIM compared to the fourth quarter of 2020 level. This guidance assumes the positive impact from the acceleration of PPP fees in the first half of the year before settling back down in the second half.
However, non-interest income is expected to be flat to modestly lower due to the challenging mortgage banking comparisons, partially offset by continued growth in capital markets, cards and payments and our wealth and investment management business lines.
The current economic outlook presents compelling opportunities to invest in our businesses to meaningfully gain share and accelerate growth over the moderate term and we intend to capitalize on that. Expense growth in 2021 is expected to be driven by our ongoing strategic investments in digital and technology development, marketing and select personnel adds directly related to our strategic initiatives. The remaining underlying run rate of non-investment expenses is essentially flat.
The investments we're making are heavily front-end loaded, resulting in notably higher year-over-year expense growth rates in the first half of the year.
While expense growth is expected to outstrip revenue growth over the near term, our commitment around positive operating leverage remains over the long term. Our expectation is to bring the expense run rate to a level that is lower than the growth rate of revenue during the second half of 2021.
Finally, our credit remains fundamentally sound. We expect full-year 2021 net charge-offs to be around the middle of our average through the cycle target range of 35 basis points to 55 basis points, with potential for some moderate quarterly volatility. Reserve releases remain dependent upon economic recovery and related credit performance.
As a reminder, all expectations are stand-alone for Huntington and do not include consideration made for the recently announced acquisition of TCF.
Now, let me turn it back over to Mark, so we can get to your questions.
Thanks, Zach. Melissa, we will now take questions. We [Indecipherable] each person ask only one question and one related follow-up. And then if that person has additional questions, he or she can add themselves back into the queue. Thank you.
[Operator Instructions] Our first question comes from the line of Ken Zerbe with Morgan Stanley. Please proceed with your question.
Hi. Great. Thanks. Good morning.
Good morning, Ken.
I was hoping you could provide just a little more information around the inputs to, in terms of your allowance calculation. And the reason I ask that, I think, both banks this quarter have seen significant improvement in their ACL, call it, near zero or certainly negative provision expense. And then, from what they tell us, they are also been quite conservative in terms of some of their assumptions around economic improvement.
We just want to try to understand, I mean to the extent possible, like, how you are thinking about your allowance differently than what they are and kind of why your provision expense is certainly much higher than sort of the trend that we’ve been seeing across the bank’s base this quarter? Thank you.
Yes. Sure. Ken, this is Steve. I’ll update that. So, as I mentioned in my prepared remarks, we use the November base case as the kind of the driver. But we use multiple scenarios and I think if you look at these base case assumptions, the November base case assumptions, going back to 12/31 where we snapped the chalk here, a number of them were in doubt and some of them are still in doubt today as it relates to the – on the stimulus, the COVID assumptions that are built into that.
And so, as we look at not only with the economic forecast we are saying, but some of those more qualitative and subjective assessments that we make as part of our process most COVID-related. We didn’t feel that there is enough certainty in those forecast to rely solely on those.
And so, there was a fair amount of qualitative judgment that we’ve put into the process like we do every quarter to land the 220. The stimulus is still up in the air. All those other types of things we just thought it was premature to have a significant release.
Keep in mind too that we also have loan growth in the fourth quarter. So, about $10 million of our provision expense was driven by loan growth.
All right. That’s helpful. So just a slightly related, unrelated question. So People's United yesterday announced that they are exiting their in-store branches as their relationship they have with Stop & Shop.
And on the call, they actually made kind of a compelling case for why its door branches kind of just don’t make a lot of sense anymore. I know you guys have long-term contracts with Giant Eagle, et cetera. But what is – if you did have those contracts, would it still make sense to have the in-store branches? Does that value proposition still work?
Ken, this is Steve. We’ve been loved served by the in-store branches in the past and you’ll remember we went into those almost a decade. But last week, we announced – last week we filed our Federal Reserve and OCC applications, so it’s Monday, a week ago. And in those apps, we announced the consolidation of branches and we have a very large in-store partnership with Myer and Giant Eagle. But as a result of the consolidation – the combination with first – with TCF in Michigan, we’ve been in a position where we are going to be consolidating 198 branches. So very substantially in Michigan. And that will allow us to cycle out of the in-store which we’ve explained to the company. Just excess distribution in Michigan as a consequence of the combination. So, we are adjusting that partnership. There are other things we will look forward to doing with that and so, a few ideas on the drawing board as well.
With Giant Eagle, we have consolidated a number of branches over the last year. And there is the potential to further consolidate around in-store to traditional as we go forward. We do think that we could all served by the nation, the economics around the in-store branches.
But there is plenty enough distribution as we move forward. And as we’ve seen them last year with the pandemic, more and more home goods delivered including groceries. And so, store traffic, volumes were up and revenues were up. Traffic is down and preference for doing banking activities in the in-stores is changing a bit.
Now, having said that, we see very, very strong performance in the TCF in-stores, which are in even denser metropolitan areas than we have with our two partners. So we are – we like the – we are committed to going forward to Giant Eagle for the next several years. And then we’ll assess the TCF partners as we go forward. But again, they are roughly 2.5, 3 times the average size of Huntington store branches. They’ve been having a very long time. They have – there further along with us.
All right. Thank you very much.
Thank you. Our next question comes from the line of John Pancari with Evercore ISI. Please proceed with your question.
Morning.
Good morning, John.
Good morning.
On your net interest margin outlook, I appreciate the color you gave for relative stability for the full year margin versus 2020. Could you help us little bit with how to think about the margin over the next couple quarters here, particularly in the next quarter, just in terms of the trajectory, given the liquidity levels? How should we think about that? Thanks.
Hi, this is Zach. I’ll take that question. Look, I think that the margin outlook is to be relatively stable here over the next several quarters and through the course of 2021, I do expect some calenderization whereby the first half of the year will be moderately higher than the second half given PPP loan acceleration expected from the first round of PPP or second by the way about 85% of those PPP loans from round one to be forgiven approximately half and half between Q1 and Q2. And so, that will drive some incremental net interest margin in the first couple of quarters. But generally, relatively flat over the period.
Okay. Thanks, Zach. That helps. And then, separately, also on the margin, I know you mentioned the efforts to support the stability of the margin. On the securities side and on the CET, can you give us a bit of color around what you are putting money into what types of securities and what types of yields you are seeing? And then, separately, you also mentioned that you are emphasizing growth in higher yielding asset classes. What loan areas would you flag from that perspective? Thanks.
Yes. Great question. I’ll take that again. This is Zach. So, in Q4, I’ve mentioned in my script, we brought the stressed portfolio back up to Q1 levels from endpoint-to-endpoint, Q3 to Q4 to give you a sense was about $2 billion of additional securities on a net basis. And the average yield we were getting on that was 125, to give you a sense.
Portfolio was running at 187. So, but still pretty solid yield. And the mix pretty similar to what we have invested in the past, mainly mortgage-backed. As we go into 2021, one important thing that I also said in my prepared remarks that I would highlight now is that we are intending to invest an additional $2 billion, mostly in the first quarter to bring the overall securities portfolio up to $24 billion as a result of discontinuing to monitor and wash the excess liquidity levels unlike the balance sheet.
Likewise, those purchases are expected to be in the mortgage-backed securities structures, most notably with a range of yields that we are forecasting sort of between 120, 130. So pretty similar. As we go forward, we are watching pretty closely a new round of stimulus and certainly the latest round of PPP, which could cause us to increase that goal. Over time, we’ll have to see where those ends. But that’s kind of where we are running with those.
I’ll pause for a second and then move on to the other elements – other aspects of your question you asked in terms what assets we are looking at. Just think it’s back on our balance sheet optimization program. We are very positive in it. We are already starting to see the traction of an in-split.
About half and half from funding optimization and the asset growth mix optimization and when you think about the asset growth, mix optimization is really focused on higher yielding products like small business administration, production where whereas you know the nation’s leading producer. And also commercial categories like equipment finance, asset-based lending, those are really the biggest focus areas that I would call out for you as a headline.
Great. Thanks, Zach.
You are welcome.
Thank you. Our next question comes from the line of Scott Siefers with Piper Sandler. Please proceed with your question.
Good morning guys. Thanks for taking the question.
Good morning, Scott.
Hey. Well, some of you might walk through the – sort of the tweak through net charge-off guidance from last month. I mean, it certainly seems clear that credit concerns are kind of melting away for the industry. But, just sort of over the past six weeks, what in your mind has changed to take you from sort of the upper half of the – through the cycle range to sort of lowering that band as well?
Yes. It’s Rich. I’ll be happy to take that. There is a few things. Why don’t we just have more visibility on the post-deferral experience that we’ve seen on both our consumer and commercial customers and as those deferrals are winding down, there is really no lagging credit impact that we saw there. The other piece of it is just continued strength in weak oil and gas sector.
We had a lot of charge-off activity in 2020. We do not expect to see charge-offs of that magnitude – certainly of that magnitude and in 2021, so we brought that forecast down a little bit. But generally, we are seeing some decent traction with our commercial customers and the consumer continues to perform very well.
So those were the nature. We tweaked the guidance. I think it’s the right way to say and we didn’t – it wasn’t a wholesale change. But we do feel better about the portfolio heading into 2021.
Rich, if you don’t mind, I’ll add to that Scott. Year end delinquency is better than a year ago, pre-COVID on the commercial side the multiple quarters now of lower NPAs, lower quit class, the economic outlook. There are combination of factors and I think the oil and gas component of our charge-offs last year were mid-teens, like 16, 17 BPS, basis points or BPS.
So, that’s eliminated. We don’t expect to have oil and gas charge-offs. And then the high risk industries continued to look good. We obviously spend a lot of time on those every quarter. So, at various times during the quarter, especially as we get to quarter end, there is a lot of deeper review that’s triggered and it frankly looks good.
Okay. Perfect. Thank you for that. And then, the final question was, Zach, you talked a couple of times about optimization of wholesale funding. Just to characterize as you look through the course of the year, maybe some color on the kind of opportunities or options you have there?
I think it will be kind of more of the same of what we’ve talked about before, which is leveraging the really strong liquidity and deposit gathering we’ve got to reduce over time the overall wholesale and corporate debt levels. And you saw us distinguish $500 million of debt in our tender that we did in Q4. I think just kind of the opportunity to continue to leverage more core deposits just to fund the company frankly over the course of this year.
This question of elevated liquidity, how long it will stay is, just sort of $64,000 question. But we are fairly convinced it’s going to stay for a while and it will likely go up frankly in the near term given some of the new things that are coming through. So there is a real opportunity there.
And behind the scenes, our accounts acquisitions are deepening and deposit gathering on the core basis is accelerating as well. So, I think as we get it through this year, that would just continue to be an opportunity well out into 2022 and beyond.
Okay. Perfect. Thank you guys very much.
Thank you.
Thank you. Our next question comes from the line of Steven Alexopoulos with JPMorgan. Please proceed with your question.
Hey. Good morning everybody.
Good morning, Steve.
Morning.
I want to start on the expense side, looking at the 3% to 5% guidance for 2021, it’s a bit above 2020. Steve, you said you plan to lean in and position the company better for an economic recovery. Can you give more color, just on invest in more people, systems, customer-friendly products. Can you give us some sense of what you are investing in here?
Absolutely. I mentioned in my prepared remarks - this is Zach, as I mentioned in my remarks and I want to stretch again essentially the entirety of that growth is driven by our investments and our strategic plan and if you think about this three broad categories, it’s approximately 60% technology developments, around 20% marketing, and around 20% select personnel that are tied to our strategic growth initiatives.
So it really is all about investment. In the tech side, we are just continuing to lean in on digital and as I mentioned in my remarks, digital development roadmaps cross every one of our business – major business lines to drive product origination, account deepening and sort of ease of use and sort of I think efficiencies and personalization and optimization across each product lines.
So we’re incredibly bullish about that. The investments themselves, the expenses are front-end loaded during the year. So we’ll see substantially higher levels of growth in the first half of the year and then ramping down pretty significantly in the back half of the year such that by the kind of runrate expense growth will be lower than the growth rate of revenue in the second half.
But I’d just summarize, what we feel it now is exactly the right time to make these investments and we are already starting to see some of the returns from them. So, we feel good about it and the trajectory and composition of it.
Okay. That’s helpful. For my follow-up question, so your commentary on loan pipelines and customer sentiment is favorable, but my question is, given this enormous build up of deposits, right, the whole industry is seeing, when you look at your middle market customers, are they sitting on a ton of cash, which might delay their appetite to actually draw on lines? Thanks.
It’s almost a tale of two worlds, let’s see. In that regard, we have many customers that are very liquid. You see it in the commercial line utilizations with us and the industry as a whole. There are some – however there are significantly investing to rebuild the inventory were frankly has not had the fundamental performance.
For whatever reasons it could be COVID-related. They just didn’t have a good year. I do think the stimulus will – that has been provided, plus the proposal on it is enacted will further delay sort of the rebound to the norm in terms of line utilizations. But that will be a big tailwind for us and others eventually.
We do see supply chain disruption also impacting utilization. It’s very clear happening in the dealer who will transact. For example, notwithstanding it, it improved a bit in the fourth quarter. It’s not where it’s not normalized and it will probably be several quarters from where it becomes normalized.
So all of that is to say that, if there is a tailwind building for the industry and we may see it in the second half of this year which is I think consistent with how many banks are stressing both GDP growth and optimism, as well as the potential for utilization. There is a lot of investment activity that’s going on. They are using their cash, but at some point that will revert to a more traditional level of external financing, debt financing, as well. So, we are moving market share a bit with the growth that we are achieving through the fourth quarter and projecting and we are optimistic given the pipelines will continue to do that. But at some point, we’ll have substantial tailwinds as well.
Okay. And your plans to lean in on the investments pretty heavy early in the year and capture more of that in the back half.
It is and it’s excess, particularly on the digital side, and if you think about how consumers and businesses are being trained via Apple or Amazon in terms of digital usage availability, ease capacity to accelerate transactional activity, all of that is going to impact our industry. And therefore, we’ve accelerated our existing digital plans substantially to try and continue to get, stay in front, get in front and maintain that J.D. Power leading position that we’ve had for a couple of years.
Okay. Terrific. I appreciate all the color.
Absolutely.
Thank you. Our next question comes from the line of Erika Najarian with Bank of America. Please proceed with your question.
Yes. Hi. Good morning.
Good morning, Erika.
Morning. A follow-up question on the net interest income guide. Appreciate the color on reallocating $2 billion of cash in the first quarter. As we think about average deposits up 5% to 7% against loans up 2% to 4%, Zach, I am wondering what you are assuming for liquidity build in your outlook for net interest income flat for the rest of the year? And are you contemplating any growth from PPP 2.0, as well as forgiveness incomes from PPP 2.0 in your guide?
Yes. Thanks, Erika. Good question. I mentioned in my previous comments that it’s the new sort of the $64,000 question frankly in terms of how long elevated deposits will allow. But generally what we are expecting is a relatively flat trend in our deposits at the Fed for the first half of the year, to give you a sense in Q4, it was around $5 billion and we expect to sort of retain that rough level through the first half of the year.
And then, kind of absent the new stimulus, and absent the new PPP, our operating outlook have been sort of a gradual reduction in that towards the back half of the year. But not that substantial, maybe down to $3 billion by the end of the year in terms of billion. I think, with that being said, we’ll see a new stimulus of coming through on the fiscal side and likely if that does happen, we’ll see that’d be elevated even more and it could – as I mentioned, give an opportunity to invest more in securities.
And likewise, PPP, the next round of PPP is just now kicking off. We are not sure exactly where it’s going to land. We’ll see. For my guidance, I’ve assumed around $1 billion. But I am hopeful and it’s quite likely that we are potentially up to double that, we’ll see.
In terms of the PPP forgiveness of the first round, I think I mentioned, and pretty hard that we’ll just restated for clarity, we are assuming 85% of the $6 billion that we have on sheet in Q4 to be forgiven in the first half of the year.
Got it. I’ll follow-up on the modeling call on the forgiveness or PPP 2.0. The – my second question is more for Steve, the 35 to 55 basis points is quite an accomplishment for the kind of economic downturn we have experienced.
And I am wondering, do you think that the government has been successful at redefining what the cycle peak is for this downturn and that the 35 to 55 basis points represent the peak and losses that we’ll see during the cycle or do you think just delayed it to 2022?
Erika, I don’t believe the losses are materially delayed in our case. I can’t answer for other institutions. But it seems to me that the proactive efforts by the Federal Reserve and be it fiscal - multiple rounds of fiscal stimulus, then substantial losses have been likely avoided as support has been delivered to consumers and small business and the interest rate levels at historic lows have helped businesses generally.
So, I think, yes, we will show very strong actions mitigated what otherwise could have been a ugly period in our economic history. If we think back to the second quarter and the free fall in GDP to be able to have substantially reverse that in just a couple of quarters that’s remarkable unlike anything we’ve seen in our history.
And I think that flows then through the system with lower losses over time. I think we’ve been conservative, maybe very conservative in our loss recognition thus far. But we’ve tried to maintain that to the posture as you saw with how we approach provision in the fourth quarter just to let this season and get to a high level of confidence before we do things with the lowering reserves and some of our things like that. But I am very optimistic and confident that we have our losses peaked in 2020.
Thank you. And Mark is going to kill me, but I have to squeeze in this third question and Steve this is for you. If you like the – this is more a testing of a thesis, but expense is up 3% to 5%. It seems like you are very much looking forward and saying, look, this is a year where we may likely have significant reserve release if the economic outlook pans out.
And the street is not going to give us much credit for that earnings anyway, why not pull forward the expenses and have a great first full year in 2022 for both as a standalone company and as a combined company? Any thoughts there?
Well, that is not the intended approach. We have to call the reserves as we’ve seen. We have multiple economic scenarios in a peak second round – I hope a peak second round of virus as of yearend. That is a possible scenario, but that’s not a planned scenario. Revert to what Zach said a minute ago, the court census are virtually flat in 2021 versus 2020, the increases are discretionary investment decisions made as a consequence of the strategic planning of the posture we want to take principally around our digital technology. So, we believe we have a momentum in the business.
We were one of the few banks that talked about commercial loan growth and our pipeline year-over-year is better in a COVID environment – that was in a pre-COVID environment. So, like what we’ve been able to build operating the company through this very challenging period of time in terms of momentum and focus and execution and we are going to continue to play that against the backdrop of consumer and business demands changing radically as a consequence of digital and the need for digital throughout the pandemic.
And again, I think usage is being defined by others by Amazon and Apple and others. And so, those expectations are, I believe that the reality for our industry and certainly our company and we are going to invest to meet those, in fact get ahead of them.
Got it. It makes sense to me. Thank you.
Thank you.
Thank you. Our next question comes from the line of Ken Usdin with Jefferies. Please proceed with your question.
Well, thanks. Hey, good morning, everyone. One follow-up on the NIII side, Zach. Just wondering if you can parse it. Just – if you just think about the all-in PPP 2020 that was in the NII versus 2021, vis-à -vis, how you are talking about overall NII for the year, is there a way you could help us understand that? Thanks.
Yes. I think, looking by notes here, maybe we can follow more on the online call too. Look, think about four basis points of benefit on a full year basis in the NIM from the PPP program in 2021, to give you a sense.
And what was that in 2020?
One basis point.
Okay. Got it. So, a little bit higher, it makes sense. Okay. And then the second question is on the consumer loan side, you are talking about - really good growth there again, mid-single-digit growth. But auto has been flat for several quarters now. You’ve grown some of the other categories. Just wondering specifically the auto, just how you are feeling about growing that book going ahead and then, if that’s expected to stay flat, where would you expect to see the rest of the growth coming from on the consumer side? Thanks.
The auto industry was – like a $16 million, $16.2 million production in 2020 and the outlook is close to the $17 million going forward for 2021. So that would be part of it. There is also a market share component that will be – I think, just because of our consistency and track record, it will continue to move and you have to maintain the spreads that we are looking for as well as credit quality.
We are also opening up or planning to open up in a few additional states in 2021 that will also supplement our production. So, we are confident and our team has been outstanding in this area for many, many years. We are confident in our ability to execute that. But we also – I think we are number five or six nationally in terms of home equity originations.
So that’s just mortgage. So, we are not dependent wholly on mortgage refis. We have a lot of broad based home lending capabilities and investments in technology is a area as well which will continue to drive more volume. We have a substantial application of blend for example, well that has been ramped up very quickly and will be an important – a very important add for us as we go forward. I think we’ve taken about ten days off at the close as a result of using that as an example.
Okay. Got it. Thank you, Steve.
Thank you. Our next question comes from the line of Peter Winter with Wedbush Securities. Please proceed with your question.
Good morning. I was wondering, you gave – morning. You gave some guidance that mortgage banking is going to be challenging, which is good for all banks. I was just wondering if you could give a little bit more color how you are thinking about mortgage banking off the fourth quarter level. You can give a little bit of guidance.
Absolutely. This is Zach. I’ll take that one. So, mortgage banking, we said coming off and it’s just an incredible year in 2020. To give you a sense, the industry, mortgage banking association is forecasting volumes in 2020 down about 23% with the shift toward purchase not surprisingly with refis being very substantially lower.
We are not giving gaining share on add volumes over the last couple of years and we expect to continue to do so. So it’s our general expectation for at volume is sort of down in the 10% to 15% range relative to that 20% or more down as an industry level. I think one of the things we are watching pretty closely is also the saleable trend and where that trend is.
We frankly budgeted pretty conservatively on that assuming a relatively continual trend back to more historical levels by the end of the year. We will see, so far they are actually holding up some fairly solid in the first days of Q1 and we’ll see that those are – as you know. But generally, we’ve budgeted fairly conservatively. So, like mortgage banking income is going to be down year-on-year and so, as I mentioned, really bringing into the other fee income lines that are very smartly to this after.
Okay. Thanks. And if could ask about the TCF acquisition, I am just wondering, obviously, you haven’t closed the deal. But any way you can quantify maybe a range of potential revenue synergies? I know it’s not part of your guidance and then, secondly, what would say at the top three revenue opportunities with this deal?
Peter, I’ll take that and let me start. I think that is a fit for us with an answer to the question I had last time. So, with apologies for that. But picking up on TCF, we haven’t talked a lot about revenue synergies. But they are clearly there. We have a much broader product menu on both the consumer and business side.
So the capacity of the cross-sell and people, much like we saw with FirstMerit is very substantial. And it’s hard to take that and it’s certainly not something you guys want to hear. So we haven’t front run that with you. But that we’ve been definitely. We’ve been very impressed with the quality of the teams that we’ve seen in a variety of the areas in TCF, both business line and technologies on the supporting in this for example.
And so, I think we will be a stronger company by the blend, as well and that will have upside. Then finally, they do some things extraordinarily well. Their equipment finance business. Their inventory finance business, these are little gems and they are not widely known or appreciated but we really like what we saw in the diligence and have learned subsequently. And those are just a few of the businesses and opportunities.
There is a substantial outsourcing as well both on the capital market side for most products and again, it’s a much more limited menu that we offer as well as their broker/dealer, their credit card and some variety of businesses that we will bring back in fairly quickly as we move forward. So, there is the 40% excess and we just articulated a 43% branch consolidation.
So you can see where that’s coming from. It will be their systems on ours a 100%. So, we’ve got a lot of early on very, very good work that’s getting bullish on the expense side, but the play here is a revenue play. Yet new markets – exciting new markets, Minneapolis, St. Paul, Denver, Colorado Springs, more than tripling us in Chicago, opening in Milwaukee and in Soltan Valley.
I mean, there is a lot to go for plus the scale change in Michigan will be awarded to and virtually everything in Michigan. So, we really like the resident side of this and you’ll see that reflected in 2022 and beyond as we get set.
Okay. Thanks, Steve.
Thank you. Our next question comes from the line of Bill Carcache with Wolfe Research. Please proceed with your question.
Thank you. Good morning. Hey guys. I have a follow-up question on auto, specifically, Slide 44, your mix of new originations increased to 54% this quarter. Can you speak to the notion that new vehicle financing is an area where the captives have a greater edge over indirect lenders, because their primary goal is helping their OEMs move steel? So, they are willing to compromise a bit more on pricing.
Does that have a – I guess, does that have your greater share of new vehicle originations. So just that you guys are getting lower margins than you would have had a larger mix of used. If you could just kind of comment on the profitability of used versus new vehicle financing that would be helpful?
This is typical seasonality of new modeling adoption and so, as we look back we see essentially the same ratios year-over-year. Albeit this year, a bit constrained by just inventory. So, that, you are right. The OEMs will subvent and that’s why we tend to have slightly more used than new as that’s sort of a normalized runrate.
As you know, we’ve been very, very disciplined for many, many years in this area. And so the performance of the book has been very consistent and would expect that to continue to be so. It's our best performing asset class year in, year out on DFAST as an example.
So we really like our positioning with the product, with the dealers. The consistency and speed at which we offer, we think we've got a best-in-class capability. It was clearly one of our most seasoned teams in the bay managing this area. And so I don't see a big change going on. There are times when the OEMs will subvent more to try and drive more volume. And history would tell us these things come in waves.
That’s very helpful, Steve. And I am sorry if I missed this, but wanted to follow-up on. You made a comment in your prepared remarks around dealer floor plan levels and how it will take longer for balances to return to back to historical levels. Does that presume that dealers will be running with less inventory than they have historically in sort of kind of a new normal post-COVID environment or do you think that that will see a reversion to historical inventory levels?
We sent the reversion to the norm if the supply chain issue at this point. For example, you would have seen Audi’s manufacturing interrupted by just a chip last week in terms of production. So this will come back, we believe probably at this point by the – in the second half, as opposed to earlier and some of the imports, and particular your feeling constrained on the supply side.
You got to see more and more manufacturing come back into the U.S. or a pick up on Mexico, Canada, as a result of wanting to narrow the supply chain lines as a consequence of what’s happened over the last year. And that’s a benefit to us.
Got it. That’s very helpful. Thank you. Thank you for taking my questions.
Thanks, Bill.
Thank you. Our next question comes from the line of Jon Arfstrom with RBC Capital Markets. Please proceed with your question.
Thanks. Good morning guys.
Good morning, Jon.
Thanks for let me come in here at the end of the queue. But couple of clean ups. RV Marine, you had some pretty strong growth and maybe some of that is COVID-related last year. Do you expect a mean reversion there? What are you thinking about in terms of growth potential there and just longer term thinking about asset values there?
The industry outlook on that, Jon, is for continued high purchase levels for the next couple of years. And we are positioned for that very, very well. As you know, that’s an 800 FICO for us. So, we worried a bit about oversupply in the intermediate term, but the positioning of our book, I think will very, very substantially mitigate what could be in three to five years of the next asset.
So I think we are playing it very, very well and we’ll have consistency of performance with 800 plus average FICOs for the foreseeable future and I think that’s what you are getting to this supply/demand potential imbalances. We come back out of COVID, but that could exist right now there is virtually a very little on marine lots as of the end of the third quarter building again.
But demand could outstrip supply as it did in 2020. And to a certain extent they have it with RV as well. So, I think there is a very good couple of years and where we are playing, I believe is very safe for the long-term and possible.
And Rich, a question for you. Your guidance is great, but the one thing we are all trying to plug in is the provision and reserve levels. And so, I wanted to go back one more time to this. You use the term snap a chalk line in December which I think I never heard on a call before. But it’s excellent. You talked about using the November base case. You look at December and January, at least if you use Moody’s it’s clearly better.
You talked about you are qualitative, you are waiting for stimulus, that’s a little bit uncertain. Is it as simple as if we get the stimulus and this January Moody’s holds, we get some improvement in February. The reserves just have to come down. Don’t think is that’s the right way to look at it.
Yes. I would say, absolutely the reserves have to come down. It’s just a question of the timing and where they come down to. We started, the seasonal day one was a 170 and we are up to 229. That I would imagine at some point, we are going to get back to the neighborhood of the 170 where we started. But I would say that we are also not targeting a specific time to get there.
I think as I pointed out, we are going to be prudent on – we were conservative on the way up and we will be prudent on the way down to make sure that we are not kind of whipsawing the provision on a quarter-by-quarter basis overreacting to one data point.
Along the way, I think it’s we sit here and run a very disciplined process every quarter looking at another wind of quantitative pieces of it. But the more qualitative pieces and when we feel that those are aligning and our credit quality continues to hold, which we expect that that will, we’ll bring the reserve down. And I would say that that is more likely to happen in the back half of the year and first quarter certainly.
Okay. Good. Thanks a lot. Okay. Good. Thanks a lot. I appreciate it.
Thank you. Ladies and gentlemen, that concludes our question and answer session. I’ll turn the floor back to Mr. Steinour for any final comments.
Thank you for the questions and your interest in Huntington. Certainly proud of our colleagues and the 2020 performance in light of the most challenging operating environment I faced in my career. But I hope we’ve conveyed to you how excited we are about the opportunities we see ahead in 2021 and beyond. So we are entering 2021 from a position of strength.
We had momentum. The disciplined execution of our strategies, coupled with the pending acquisition sets us to capitalize on emerging opportunities to innovate, to gain share, to reposition the company for growth for years to come, all while continuing to deliver top quartile financial performance. We approach this with a strong foundation of enterprise risk management as you know including the deeply embedded stock ownership mentality, which aligns our Board, management and colleagues.
So, again, thank you for your support and interest. Have a great day.
Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.