Q4 2020 Huntington Bancshares Inc Earnings Call
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. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as.
A reminder of this conference is being recorded.
I'd 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.
And on the Investor Relations section of our website Www Dot Huntington Dot Com. This call is being recorded and will be available as a rebroadcast starting about one hour from the close of this call.
Our presenters today are based on our chairman President and CEO, Zach Wasserman, Chief Financial Officer, and Rich Polly Chief Credit Officer.
As noted on slide two of todays discussion, including the Q&A period will contain forward looking statements.
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 the statements for a complete discussion of risks and uncertainties. Please refer to this slide the material filed with the SEC, including our most recent forms 10-K 10-Q.
With that let me now turn it over to Steve Thanks, Mark and good morning, everyone. Slide three provides an overview of the Huntington strategy to build the leading people first digitally powered banks in the nation. Our 2020 results demonstrates that we are driving revenue growth. Despite headwinds we're focused on acquiring new customers of deepening those relationships the gainesville market share.
And the share of wallet, we are investing in customer centric products services and digital technology that will drive sustainable growth and the outperformance both today and for years to come on.
<unk> operates in intentionally diversified business model of balance between commercial and consumer which provides the good mix of revenue of credit exposure with build the competitive advantage with a consistently superior customer service and our differentiated products and services. We are committed to developing best in class digital capabilities like our mobile Bay.
<unk> App, which has been recognized as the highest in customer satisfaction by J D power two years in a row in total.
On the 20th we introduced several new innovative products and features that will continue to serve our customers' needs and differentiate Huntington from of the 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.
The plants to the environment in order to drive shareholder return 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 Tcs acquisition, we announced last month that provides additional scale and growth opportunities. We filed the bank regulatory applications last week and announced the planned consolidation of 198 branches.
We are making good progress all of our preparations for integration later this year, we remain on track with the previously announced schedule for an expected closing day.
In the second quarter, we are pleased with our 2020 results and continued momentum across the day, despite an extraordinarily challenging operating environment and I'm incredibly proud of the outstanding efforts of our colleagues to overcome the challenges of the pandemic as well as look out for our customers.
For the year, we grew revenues, 3%, one 6% of core deposits, 11% well of bottom line results on EPS were down due to elevated provisioning required under the seasonal reserve of county, our pretax pre provision earnings increased 4% and these are all very strong results.
We also closed the year with strength in the commercial loan production as expected in the fourth quarter of.
The consumer lending businesses, especially home lending of 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 types of are bad.
She is very well positioned with robust capital liquidity and our hedging strategy has reduced interest rate risk.
'twenty 'twenty also marked the 10th consecutive year of the increased cash dividend.
Credit quality continues to improve illustrating that our decisive and conservative actions in the second quarter appropriately identified the highest risk portions of our portfolio, allowing us to proactively work with our customers.
As we enter 2021, I'm very encouraged not only by our momentum, but also the underlying strength I see on our local economies.
Economic data shows that our footprint is recovering more quickly than the nation as a whole.
Conversations with our customer support this.
The unemployment rate of November was below the national average of five of our seven states, including our largest market in Ohio at five 7% of.
There were $2 9 million jobs were created in our footprint between April and November which means 24% of the national total were created in the seven states.
Further 44% of all manufacturing jobs created during this period occurred in our footprint states. The V shaped the manufacturer 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 the continued low dealer floor plan utilization rates to take at least several more quarters to return to longer term averages.
The recovery.
On the employment boosted both the region's consumer confidence and consumer retail spending above the respective 2020 national averages pulp prices continue to appreciate especially with solid increases in Ohio, Michigan, Pennsylvania in India. The Midwest also led the country in year over year growth.
And single family home sales for the third quarter up 56% compared to 39 per cent for the nation.
Turning to our business. We're 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 ended the first quarter. Our commercial pipelines also are up from a year ago, we expect consumer lending to remain.
Strong commercial activity to continue to improve over the course of the year the consistently high level of execution, we're 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.
Over the intermediate term.
Also informed our decision to pursue and ultimately enter into the Tcs acquisition.
Let me now turn it over to Jack for an overview of our financial performance. Thanks, Stephen Good morning, everyone.
Slides four and five provide the financial highlights for the full year 2020, and the fourth quarter, respectively for the fourth quarter, we reported earnings per common share of <unk> 27.
Return on average assets was one of 4% and return on average tangible common equity was 13, 3%.
The 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 six to review our results in a low of more detail.
Annual pretax pre provision earnings growth was 4% for 2020, we believe 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're executing.
Turning to the fourth quarter pre tax pre provision earnings increased 6% year over year total revenue increased 7% versus last year.
With 81% of growth balance between the spread revenues and fee income.
I'm, sorry, $81 million of growth balance between spread revenue and fee income home lending was of particular bright spot in 2020 and that remained true this quarter continuing to drive fee income growth of 10% of.
Our capital markets wealth, and investment management cards, and payments and insurance businesses. All posted continued growth in the fourth quarter.
I should also note the deposit service charges remained below the year ago level of elevated customer deposit account balances continue to moderate in the recovery of the slide.
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 and other $20 million or three percentage points with the donation to 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.
Penguin moving costs, the underlying run rate of all other expenses was relatively flat.
Turning to slide seven 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 two basis points to 294% as shown on the reconciliation of on the right side of the slide the linked quarter decrease primarily reflected the three basis point impact of a change in PPP loan terms to delay the initial repayments this revenue recognition accounting.
<unk> 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 of near term boost to net interest income and NIM on a GAAP basis during those periods from the accelerated loan fees recognition.
We have discussed previously we're taking actions now on both sides of the balance sheet to offset the inherent pressure.
Cause on 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 price pricing as well as loan production and certain higher yielding asset classes.
We also expect to deploy an additional $2 billion of excess liquidity into securities picking up incremental yield lastly, we expect the continued to reduce our funding costs, including further optimization of wholesale funding.
Moving to slide eight.
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 for deposits at the Federal reserve.
Average commercial of 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 and asset based lending and.
In addition, we saw commercial line utilization trends stabilized in auto floor plan utilization modestly increased during the quarter.
The 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 plan to get securities back above the first quarter of 2020 quarter end level by the end of 2020.
Turning to slide nine we will review the deposit growth and funding.
Average core deposits increased 16% year on year and 2% sequentially.
These <unk> credit 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 government stimulus and similar elevated liquidity maintenance of behaviors as well as the increased consumer and business banking account production with reduced account Patricia.
Slide 10 highlights of the more granular trends in commercial loans total deposits salable mortgage originations and debit card spend as these are key indicators of behavior and economic activity among our customers on it.
You can see on the top left chart after remaining relatively stable for the prior several months of commercial loan balances. Excluding PPP closed the year positively thanks to strong production of December as expected.
Even following this flurry of activity of the year and our pipelines today are higher than they were of 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 headwinds from 2020, PPP loans as they're forgiven and repaid over the next two quarters, there were $225 million of PPP loans forgiven in the fourth quarter.
It's still too early to of a definitive view on the new phase of the PPP, but we do expect that the changes in the program that narrowed the universe of small business is eligible to participate.
We expect of 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 charge related 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 the debit card transaction.
<unk> and spend of <unk>.
<unk> for the brief period of turbulence of the initial imposition in position of stay at home on other restrictions in Q4 and the early days of January we've actually seen a further acceleration of debit spending driven by the recent stimulus payments that are similar to the trend. We saw earlier in 2020 during the first round of the stimulus.
Slide 11 illustrates the continued strength of our capital and liquidity ratios the common equity tier one ratio of our CET. One ended the quarter of 10% up slightly from last quarter. The tangible common equity ratio of our TCE ended the quarter of seven 6% down 11 basis points sequentially both ratio.
<unk> remained within our operating guidelines and our strong capital levels position us well to execute on our growth initiatives and investment opportunities. Let me turn it over now the rich to cover credit rich. Thanks, Jack 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 a lot of our portfolio to come through this.
Now I'll turn the solid performance the.
This was due to the foundation, we've been laying for a decade now beginning with instilling a cohesive culture the everyone in the company owns risk.
We reduced our commercial real estate portfolio from over 200% of capital Tom for 80% curtailed Creek construction lending such that the fourth quarter to represent the lowest level of construction in terms of both absolute dollars and as a percentage of capital that we have.
Since the Firstmerit acquisition.
2016.
The slow leveraged lending originations in 2019 and ended 2020 with leverage loans virtually flat from year end 2018.
We transitioned our health care portfolio to diversify away from long term care and towards publically health products and services companies and investment grade Hospital systems, which together now make up 45% of the health care portfolio.
On the consumer side, we brought our expertise in indirect auto to our RV marine business and reduced our exposure to the second lien high LTV home equity.
These steps and many other so fundamentally transformed the makeup of the Huntington loan portfolios since the last downturn.
I'm also extremely pleased with the impact of our 2020 portfolio management activities first we reduced our oil and gas portfolio of $780 million for 59% of since September 2019. The noncore portion of this portfolio has been reduced to just $243 million.
We performed a thorough portfolio review of <unk> 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 <unk> been able to reduce our crit class by $771 million by working with our customers while at the same time of effectively managing risk.
Finally, our total consumer commercial delinquency numbers, our plans on a year ago, we managed nearly $6 billion of loans with payment deferrals ending the year of just 217 million of of loans with the remaining deferral.
Turning now to the credit results and metrics slide.
On Slide 12 provides the work of our allowance for credit losses from year end 2019 for year end 2020, you can see our ACL now represents 229% 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 to use the size of the provision expense for the fourth quarter. The primary economic scenario within our loss estimation process was the November of baseline forecast.
The scenario was much improved from the August baseline forecast, we used in <unk> and assumes unemployment in 2020, ending the year at seven 2% and increasing to seven 5% for the first three quarters of 2021 to average seven 4% for the entire year.
2020, GDP and for the full year down three 6% and demonstrates for 1% growth for all of 2021 with that growth, peaking at five 8% in the fourth quarter.
While the number of variables within the baseline economic scenario has improved as of many of our credit metrics for the quarter. There were still many uncertainties to deal with at December 31 the.
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 NPS and <unk> and demonstrates the continued but more limited impact federal oil and gas portfolio has on our overall level of NPS, we expect modest the oil and 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 <unk>.
Q4, we had for new Npa's over $5 million in just one over $15 million all COVID-19 related.
Three of these customers are in Michigan, where the COVID-19 restrictions of impacted their ability to reopen.
As we signaled we also saw an increase in <unk> from our business banking portfolio.
These credits for granular with only seven exposures over $1 billion.
Despite this total npls 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 our commercial and consumer customers as we forecasted on our third quarter call. The commercial deferrals have dropped significantly and now totaled just $151 million down from $942 million of Q3 and $5 billion at Q2.
We expect to have limited commercial deferral balances beyond the SBA going forward commercial.
Commercial delinquencies are very modest debt, just 15 basis points.
Our consumer deferrals of largely run their course as well down to just 66 million as of December with post deferral performance in line with our expectations across all of the portfolio segments are deferrals on auto RV Marine and home equity have nearly all of that 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 with solid net charge offs represented an annualized 55 basis points of average loans and leases on them.
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 of a number of these loans.
I would also had on nonperforming asset ratio decreased five basis points linked quarter to 69 basis points, our second consecutive quarterly decline in mpls.
As always we have provided additional granularity by portfolio in the analyst package in the slides, let me turn it back over to Zach. Thanks, Rich before we get the 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 see 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 in small business lending you can also see continued growth in digital engagement and usage levels and 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 of 2021 on a standalone basis, excluding Tcf as shown on slide 18, looking at the average balance sheet for the full year 'twenty. One 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.
With respect of 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 for 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 of 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 carbon payments and our wealth and investment management business lives.
The current economic outlook presents compelling opportunities to invest in our businesses to meaningfully gained share and accelerate growth over the moderate term and we intend to capitalize on that.
<unk> 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 result of mix, resulting in notably higher year over year expense growth growth rates in the first half of the year.
While expense growth is expected to outstrip revenue growth over the near term our commitment are on 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 to 55 basis points with potential for some moderate quarterly volatility reserve releases remain dependent on economic recovery and related credit performance.
As a reminder, all expectations of our Standalone for Huntington and do not include consideration made for the recently announced the acquisition of Tcf now, let me turn it back over to Mark. So we can get to your questions.
Thanks, Matt.
Most of the what we will now take questions. We ask that as a courtesy of your peers. 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.
Thank you.
If you'd like to ask a question. Please press star one on your telephone keypad of confirmation tone will indicate your line is on the question. Kim You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Our first question comes from the line of Ken Zerbe with Morgan Stanley. Please proceed with your question.
Alright, great. Thanks, good morning good.
Morning, Ken.
I was hoping you could provide on just a little more information around the inputs to in terms of your of your allowance calculation and the reason I asked that I think.
The most banks this.
This quarter has seen significant improvement in the ACL of call it near zero or certainly negative provision expense and from what they tell us they're also being quite conservative in terms of some of their assumptions around economic improvement.
So I'm just trying to understand I mean to the extent possible like how you're thinking about your allowance differently than what they are and kind.
Kind of why your provision expense was certainly much higher the sort of the trend that we've been seeing across the bank space. This quarter. Thank you.
Sure Ken This is rich I'll take that so as I mentioned in the prepared remarks the.
We use the November base case of.
Kind of the driver.
We use multiple scenarios and.
If you if you look at.
On the base case assumptions of the November base case assumptions going back to 12, 31, where we snap the chalk here.
Number of the burned out and some of them are still in doubt today as it relates to the amount of stimulus. The COVID-19 assumptions that are built into that and so as we looked at not only looking at economic forecasts for saying, but some of the more qualitative and subjective.
Assessments that we make as part of our process most COVID-19 related.
We didn't feel that the debt there was enough certainty in those forecast to rely solely on those and so there was a fair amount of qualitative judgment that we put into the process like we do every quarter.
To land the $2 20 on you mean.
The stimulus is still up in the air on.
All of 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.
Alright, great Thats helpful.
For the slightly related unrelated question, so people's United Yesterday announced that they are exiting the in store branches out of the relationship they have a stop and shop.
On the call they actually made kind of a compelling case for whites 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.
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 the.
We've been well served by the in store branches in the past and you will remember we went into those almost a decade ago.
But last week, we announced last week, we filed our federal reserve an LCC applications. So it's Monday, a week ago and those apps, we announced the consolidation of branches.
And.
We have a very large and store partnership with Meyer and giant Eagle, but as the result of the the the.
The consolidate the <unk>.
Combination with first with with Tcf in Michigan, we've been on.
In a position where we're going to be consolidating 198 branches very substantially in Michigan and that will allow us to cycle out of the in store.
Of branches that we have with Myer.
Which we've explained to the company just excess distribution with nearly 500 points of distribution in the state of of Michigan as a consequence of the combination.
So we are adjusting that partnership.
There are other things, we will look forward to doing with them that's of a.
A few ideas on the drawing board as well with giant Eagle, we have consolidated a number of branches over the last.
Year, there is the potential to further consolidate around in store to traditional as we go forward.
We do think the we've been well served by the the nature of the economics around the in store branches, but there is a changing.
The distribution frankly of thinning of distribution as we move forward and as we've seen of the past year with the pandemic.
More and more homegoods delivered including groceries and so the store traffic.
On the volumes are up and revenues are up the traffic as is the.
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 the than we have with with our two partners. So we will we are we like the CIT, we'd like the channel over time and continue to sort of like aspects of it and.
We're committed to going forward to two giant eagle for for the next several years and the.
And then we will assess the the Tcf partners as we move forward, but again, they're there they're roughly 253 times the average size of Huntington in store branches, they've been added of very long time they have.
The pattern behavior. So I suspect we're going on we're going to like what we see as we get further along with it.
Alright, Thank you very much.
Thank you. Our next question comes from the line of Jonathan <unk> with Evercore ISI. Please proceed with your question.
Good morning.
Alright.
On your net interest margin outlook I. Appreciate the color you gave for relative stability for the full year margin versus 2020 can you help us a little bit with how to think about the margin over the next.
A couple of quarters here, particularly in the next quarter.
Just in terms of the trajectory given the liquidity levels.
Should we think about that thanks.
Yeah.
Types of Zach I'll take that question look I think the the margin outlook is to be relatively stable here over the next several quarters and through the course of 2021 I do expect some characterization whereby the first half of the year will be.
Moderately higher than the second half given the PPP loan acceleration expected from the first round of PPP, we're expecting by the way of about 85% of those PPP loans from round one to be forgiven approximately half on half between Q1, and Q2, and so that will drive some incremental net interest margin of the <unk>.
First couple of quarters, but generally relatively flat over the period.
Okay. Thanks that helps and then separately also on the margin I know you mentioned the efforts to support the stability of the margin.
On the security side wanted to see if you can give us a little bit of color on what you're putting money into.
The types of securities and what types of yields you are seeing and then separately. You also mentioned that you are emphasizing growth in the higher yielding asset classes, what loan areas would you flag from that perspective.
No problem credit Great question I'll take the against the Zack so.
In Q4 as I mentioned in my script, we brought the securities portfolio of backup to the Q1 levels of.
For from endpoint to endpoint of Q3, and Q4 give you a sense of about $2 billion.
Of additional securities on a net basis on the App.
Average yield we're 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've invested in the past mainly mortgage backs.
As we go into 2021, one of the one important thing that I.
Also said in my prepared remarks, but I would highlight now is that we are intending to invest an additional $2 billion mostly.
Mostly in the first quarter to bring the overall securities portfolio up to $24 billion.
As a result of just continuing to monitor and watch the excess liquidity the liquidity levels and optimize the balance sheet. Likewise, the those purchases are expected to be in the mortgage backed.
The securities.
Structures, most notably with a range of yields that we're forecasting sort of between $1 $20 30, so pretty similar.
As we go forward, we're watching pretty closely and the new rounds of stimulus and certainly the latest round of PPP, which could cause us to increase that goal over time will have to see where those land, but that's kind of where we're for running with those.
I'll pause for a second and then move on to the.
The other element other.
The outbreak of the question you asked in terms of what assets. We're looking at just taking a step back on our balance sheet optimization program. We are.
Very confident in it we're already starting to see the the the traction evidenced split about half and half from funding optimization and net asset growth mix optimization and when you think about the asset growth mix optimization of its really focused on higher yielding products like small business administration production, where we are as you know the nation's leading of producer and also <unk>.
Actual categories like equipment finance asset based lending those are really the biggest focus areas that I would call out for you.
As the headline.
Great. Thanks, Nick.
Youre welcome.
Thank you. Our next question comes from the line of Scott <unk> with Piper Sandler. Please proceed with your question.
Good morning, guys. Thanks for taking the question on them.
Scott you might.
Hey, I was hoping you might walk through the sort of the tweak to net charge off guidance from last month I mean, it certainly seems clear the credit concerns of 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.
The through the cycle range to sort of lowering net debt band as well.
Yes, it's rich all of you have ticked up a few things one we just got more visibility on the post deferral.
Of experience that we've seen on both our consumer and commercial customers and as those deferrals are winding down Theres really no lagging credit impact that we saw there. The other piece of it is just continued strength in.
Of the 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 of certainly of that magnitude and in 2021, So we brought that forecast down a little bit but generally.
We're seeing some decent traction with our commercial customers in the consumer book continues to perform very well. So those were the the major things we tweaked the guidance I think that's the right way to say it we didn't know it was.
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 yearend delinquencies better than a year ago pre COVID-19.
On the commercial side the multiple quarters now.
The lower NPA has lowered could class the the economic outlook the combination of factors.
The oil and gas component of our charge offs last year were mid teens like 16, 17 BMT basis for 70 bps.
That's eliminated we don't expect to have oil and gas charge offs.
And then the the high risk industries continue to look good. We obviously spent a lot of time on those every quarter. So.
At various times during the quarter, especially as we get the quarter and Theres a lot of of of deeper review of that that's triggered and.
And frankly it looks good.
Okay perfect. Thank you and thank you for that and then the final question was that you talked a couple of times about optimization of.
Wholesale funding.
Curious as you look through the through the course of the year, maybe some color on the kind of opportunities or options you have there.
Yes, I think it'll be kind of more of the same of what we've talked about before which is leveraging the the really strong liquidity.
On deposit gathering we've got to reduce over time, the overall wholesale and corporate debt levels, you saw us extinguished $500 million of debt on our tender that we did in Q4 and I think just kind of the.
The opportunity to continue to to leverage more.
Core deposits to fund the company frankly.
Over the course of this year.
This question of elevated liquidity, how long it'll stay as sort of the 64000. Other 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.
Of that are coming through so there's a real opportunity there and behind the scenes our accounts acquisition are deepening and and.
And deposit gathering on a core basis is accelerating as well so I think as we as we get through this year.
That will just continue to be an opportunity well out into 'twenty two and beyond.
Yeah, Okay perfect. Thank you guys very much.
For you.
Thank you. Our next question comes from the line of Stephen Alexopoulos with Jpmorgan. Please proceed with your question.
Hey, good morning, everybody.
Hi, Stephen Florida.
I wanted to start on the expense side looking at the 3% to 5% guidance for 2021 for 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 is this an investment of more people systems customer friendly products like you give us some sense of what your what you're investing in here absolutely.
Absolutely.
As I mentioned on my prepared remarks on the back of as.
As I mentioned in my remarks on that on distressed again, essentially the entirety of that growth driven by our investments in our strategic plan and you could think about the three broad categories.
Approximately 60% of technology development around 20% marketing at around 20% select personal personnel personal ads that are tied to our.
The strategic growth initiatives. So it really is all about investments in the tech side, we're just continuing to lean in on digital and as I mentioned on my remarks digital development Roadmaps across every one of our business major business lines to drive.
Product origination.
Account deepening and sort of ease of use and servicing efficiencies and personalization.
Optimization across each product lots of of incredibly bullish about that.
But the investments themselves the expenses on the front end loaded during the year. So we will see substantially higher.
<unk> of growth in the first half of the year of then ramping down pretty significantly in the back half of the year of such that by.
On the kind of run rate.
Expense growth will be lower than the growth rate of revenue in the second half, but just to summarize we feel like now is exactly the right time to make these investments and we're already starting to see some of the returns from them. So.
We feel good about it.
Trajectory of the composition of it.
Okay.
Helpful.
For my follow up question. So your commentary on loan pipelines of customer sentiment is favorable for my question is given the enormous buildup of deposits right. The whole industry is seeing when you look at your middle market customers are the sitting on a ton of cash which might delay their appetite to actually draw on line.
Thanks.
Yes.
It's almost a tale of two worlds steep.
In that regard we of many customers that are.
A very liquid you'll see it in commercial line utilization with us and the industry as the whole.
There are some however that are either significantly investing rebuilding inventory, where frankly have not had the the the fundamental performance for whatever reasons it could be COVID-19 related they just didn't have.
The good year.
I do think the.
Stimulus will continue that was that has been provided plus of the proposed one if it is enacted.
We will further.
The delay sort of the rebound to the norm in terms of line Utilizations.
But that will be a big tailwind for us and others.
Naturally.
We do see supply chain disruption also impacting utilization.
It's very clear we happening in the dealer Floorplan side for example, notwithstanding.
It improved a bit in the fourth quarter, it's not.
Where it's not normalized and it will probably several quarters before it becomes normalized so all of that is to say that theres. This tailwind building for the industry.
And we makes the it and the second half of this year, which is I think consistent with how many banks are expressing both the GDP growth and optimism as well as the potential for utilization.
There will there is a lot of investment activity, that's going on and they are using their cash but at some point debt will revert to a more traditional level of of external financing bank financing.
As well so.
Where we're moving market share of bid with the growth that were achieving two of the fourth quarter and projecting.
We're optimistic given the pipelines will continue to do that but at some point, we'll have the substantial tailwind as well okay.
It's the lean in on the investments pretty heavy early in the year of capture more of that on the back half.
It is and its exit, particularly on the digital side and if you think about how consumers and businesses are being trained the apple or Amazon.
In terms of digital usage availability ease capacity to accelerate transactional activity on.
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 of get in front.
And maintain debt.
J D power of 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.
And final question morning follow up question on the net interest income guide.
Appreciate the color on reallocating 2 billion of cash in the first quarter now as we think about average deposits of 37% against wound up to the 4% I'm wondering what you're assuming for liquidity build in your outlook for net interest income flat for the rest of the.
The year.
And are you contemplating any growth from PPP to Plano as well as forgiveness income from PPP to point out in your guide.
Thanks, Eric Great question.
I mentioned in one of my previous comments that it is sort of the 64000. Other question frankly in terms of how long the elevated deposits will last but generally what we're expecting is a relatively flat trend.
Our deposits at the fed for the first half of the year to give you a sense of in Q4 was around $5 billion.
We expect to sort of maintain that rough level through the first half of the year, and then kind of absent the new stimulus and absent the new Pvp.
Our our operating outlook had been for sort of a gradual reduction in that of toward the back half of the year, but not that substantial maybe down to three by the end of the year in terms of $1 billion I think the with that being said.
We'll see about on any new stimulus.
Coming through on the fiscal side and likely if that does happen, we will see that the elevated even more.
As I mentioned given opportunities.
More of an securities of likewise PPP the extra on the Pvp.
Is just now kicking off we're not sure exactly where it's going to land we'll see.
For my guidance of assumed a round of $1 billion.
Hopefully, it's quite likely that could be potentially up to up to double of that we'll see.
In terms of of the Pvp forgiveness of the first round I think I mentioned the per Paragon for just to restate it for.
Clarity or some 85% of the $6 billion that we had on sheet in Q4 to be forgiven in the first half of the year.
Got it I'll follow up on the on the modeling call on the forgiveness for P. P P to Plano.
On the.
The.
My second question.
It is more for Steve.
35 to 55 basis points is quite an accomplishment for.
For the kind of economic downturn, we have experienced and I'm wondering do you think that the government has been successful at.
Redefining what the cycle peak is for the 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 of just delayed it.
'twenty two.
Erika I don't believe the losses are on materially delayed.
In our case I can't answer for other institutions.
But.
It seems to me that the.
The proactive efforts by the 12th of the Federal reserve and the physical.
Multiple rounds of the fiscal stimulus that.
Substantial losses have been.
Likely avoided as <unk>.
Support has been delivered to <unk>.
Consumers and small business and the.
Interest rate levels are at historic lows have helped.
This is generally.
So I think history will show.
Very strong actions have.
Mitigated what otherwise could have been on.
A very ugly period in our our economic history of if we think back just the second quarter of the free fall in GDP to be able to have substantially reversed that and just a couple of quarters is remarkable.
Anything we've seen in our history and I think that flows than through the system with lower <unk> losses.
Over time I think.
We've been conservative.
May be very conservative in our our loss recognition thus far.
But we.
We've tried to maintain that too and that the.
Posture.
As you saw with how we approach of provision in the fourth quarter.
Just to let this season.
And get to a high level of confidence for for.
For a week.
We do things with lowering reserves in total or things like that but I'm very optimistic and confident.
We have on losses.
The peaked in.
2020.
Thank you and Mark is going to kill me, but I have to squeeze and the third question and Stephen.
It feels like the.
This is more of a testing of the thesis, but expenses up three to five per se. It seems like youre very much looking for it and saying look this is the 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 for the expenses and have a.
Great first full year in 2022 it.
For both at the Standalone company and as the combined company.
Any any thoughts there.
That is not.
The intended approach remember we have to call on the reserves as we said we have multiple economic scenarios.
And of.
The peak second round I hope of peak second round of the virus as of year end.
No.
That is a possible scenario, but that's not a plan scenario.
On our part.
Revert to what Zach said a minute ago. The core expenses are virtually flat.
The 21 versus 'twenty. The increases are discretionary investment decisions made as a consequence of the strategic planning of the posture, we want to take principally around technology digital technology, So where we are.
We believe we have of momentum in the business.
We one of the few banks the talked about the commercial loan growth in our pipeline year over year is better than of Covid environment than it wasn't of pre COVID-19 environment. So.
What we've been able to build.
On.
Operating the company through this.
For this very challenging period of time in terms of momentum and focus and execution and we're going to continue to play of that against the backdrop of consumer and business demand is changing radically as the consequence of.
I think of digital and the need for digital and throughout the pandemic.
And again I think usage is being defined by others by by Amazon and Apple and others and so those expectations are are.
I believe kind of be a reality for our industry and certainly on our company and we're going to we're going to invest to meet those if not get ahead of them.
Got it it makes sense to me thank you.
Yes.
Thank you. Our next question comes from the line of Ken Houston with Jefferies. Please proceed with your question.
Thanks, Hey, good morning, everyone.
The one follow up on the NII side.
Zach just just wondering if you can parse day. It just if you just think about the all in PPP.
<unk> 'twenty that was in the NII versus 'twenty, one vis vis how youre talking about overall NII for the year because the way you can help us understand that thanks.
Yes, I think I'm looking at my notes here just to the community.
We can follow up more on the on the modeling call two of it looks like about four basis points of benefit on a full year basis in the NIM from the PPP.
The program in 2021 to give you a sense.
And what was that in 'twenty.
One basis point, Okay got it so a little bit higher makes sense okay.
And then the second question is on the consumer loan side, you're talking about the really good growth there again mid single digit growth but.
Auto has been flat for several quarters now.
Growing in some of the other categories just wondering specifically the auto just how youre feeling about growing that debt.
But going ahead and then if that is 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 the <unk> 16 million to production in 2020, and the outlook is closer to 17 going forward.
For 'twenty, one so that will be part of it. There's also of market share component that will be.
I think just because of our consistency of track record. It will continue to move and yet maintain the spreads that we're looking for it as well as credit quality. We are also opening.
Up or planning to open up with a few additional states in 'twenty one.
We will also supplement our production so we're.
We're confident on our team has been outstanding in this area for many many years, we're confident in our ability to execute the.
But we also I think we are number five or six nationally in terms of home equity origination. So it's not just mortgage so the ore.
We're not dependent wholly on mortgage refi with a lot of broad based home lending capabilities.
And investments in technology of that area, as well, which will continue to drive more volume.
We have.
Substantial implementation of blend for example, the has been.
Ramped up very quickly.
And we will be.
An important share of <unk>.
Important for US as we go forward I think we're taking about the 10 days of 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.
Alright, good morning.
Good morning, you gave some guidance net mortgage banking can be challenging.
For all of all banks I was just wondering if you could give a little bit more color, how you're thinking about mortgage banking of the fourth.
Order level.
Sure I'll give a little bit of guidance.
Absolutely. This is <unk> I'll take that one so the mortgage banking as we sort of kept coming off of.
On the incredible year in 2020 to give you a sense of the industry mortgage making association is forecasting volumes in 2020 down about 23% with the shift towards purchase not surprisingly with revised being being very substantially lower our volume, we'd actually been gaining share.
On App volumes over the last several years and we expect the continue to do so so are our general expectation for App volume of sort of down on the 10% to 15% range relative to the 20% or more down at the industry level of I think one of the things we're watching pretty closely is also the saleable spread and where that trends.
Frankly budgeted pretty conservatively on that assuming a relatively.
Continue will trend back to more historical levels by the end of the year, we'll see.
So far there are actually holding up fairly solid in the first days of Q1.
We will see the those are volatile as you know but generally.
Budgeted fairly conservatively, so like mortgage banking income going be down.
<unk>.
The year on year, and so that's why I said of as I mentioned really leaning into the other fee income lines that are growing smartly to offset that.
Okay, Thanks, and if I.
Can I ask about the.
Tcf acquisition.
I'm just wondering.
We haven't even 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 you say at the top three revenue.
Opportunities with this deal.
Peter I'll take that and let me start I think it was a bit brusque with an answer to the question you had last time, so with apologies for that.
The picking up of 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 business side. So the the capacity of the cross sell and deepen much like we saw with Firstmerit is very substantial.
And it's hard to bake that in and certainly not something you guys want to hear so we havent, we havent front run that.
With you, but we that is definitely the case, we've been very impressed with the quality of the teams that we've seen in a variety of of the areas in MCC of both business line in technology and some of the support areas. For example, and so I think we will be a stronger company by the plant as.
As well and that will have upside and then finally, they do some things extraordinarily well.
Their equipment finance business the inventory finance business. These are little Janice.
And theyre not widely known or appreciated, but we really like what we saw on diligence and I've learned subsequently and those are just a few of the businesses and opportunities Theres a substantial outsourcing as well both on the capital market side for most products and again the third.
It's a much more limited menu that we offer as well as the broker dealer the credit card as of <unk>.
Variety of businesses that will bring back in <unk>.
Really quickly.
As we move forward on.
There's the 40% expense and we just articulated of 43% branch consolidations. So you can see where that's coming from it will be their systems the hours of one.
100% so.
We've got a lot of of early on very very good work, that's getting is bullish on the expense side.
But the the play here is the revenue play it new markets exciting new markets Minneapolis St. Paul.
Denver, Colorado Springs tripled more than tripling us in Chicago.
Opening in Milwaukee.
Soften Valley I mean, there's a lot to go for plus the scale change in Michigan.
The of one or two on virtually everything in Michigan. So we really like the revenue side of this and you'll see that reflected.
In 'twenty, two and beyond as we get set.
Okay. Thanks, Steve.
Thank you. Our next question comes from the line of Bill Kirk <unk> with Wolfe Research. Please proceed with your question.
Good morning, Hey, guys kind of follow up question on auto specifically slide 40 for you.
<unk> 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 of 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 price pricing does that have the I guess that would be a greater share of new vehicle origination suggests that you guys are getting lower margins than you would if you 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. So this is typical seasonality of new.
The model introduction and so.
As we look back we'd see the essentially the same ratios year over year, albeit this year of it constrained by just inventory.
So youre right the Oems will some of that and that's why we tend to have slightly more used the new.
Sort of a normalized run rate.
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 it to continue to be so it's our best performing asset class year on year round of DFAST. As an example, so we really like our positioning with the product with the dealers.
Okay.
The consistency and speed at which we offer we think we've got the best in class capability was clearly one of our most seasoned teams.
In the bank managing this area.
And so I don't see a big change going on there are times when the Oems will sirvente more to try and drive more volume.
On the history would tell us these things come in waves.
That's very helpful. Steve I'm, sorry, if I missed this but wanted to follow up on you made a comment in your prepared remarks around dealer floorplan levels and how it.
We will take longer for balances to return back to historical levels does that presume that dealers will be running with less inventory than they have historically and sort of kind of a new normal post COVID-19 environment or do you think that that will see the outcome of a reversion to historical inventory levels, we expect the reversion to the norm in the supply chain issue.
At this point for example, you would've seen all of these manufacturing of interrupted but just the chip last week.
In terms of production. So this will come back we believe.
Probably at this point by the <unk> in the second half as opposed the earlier and some of the imports in particular of feeling.
Constrained on the supply side, youre going to see more and more manufacturing.
Come back into the U S or pick up of on Mexico, Canada.
As a result of of.
Of of wanting to narrow the supply chain lines.
The consequence of what's happened over the last year.
And that's the 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 John Armstrong with RBC Capital markets. Please proceed with your question.
Thanks, Good morning, guys.
For Joe.
For let me coming here at the end of the queue, but.
A couple of cleanups.
RV and marine.
<unk> had some pretty strong growth on maybe some of that is COVID-19 related last year.
We expect the mean reversion there what are you thinking about in terms of growth potential there.
The longer term you know thinking about asset values there.
The industry outlook on that John is for <unk>.
Continued high.
Purchase levels for the next couple of years.
And.
We're positioned for that very very well.
As you know that's an 800 FICO for us so we worry of a bit about oversupply in the intermediate term, but the the the.
The positioning of our book I think will of.
Very very substantially mitigate what could be of.
And three of five years of a bit of excess.
So.
I think we've played it we're playing it very very well and we will have consistency of performance.
800, plus average when it goes for the foreseeable future.
That's what you were getting to this the supply demand potential imbalances, we come back out of the Covid, but.
That could exist right now there is virtually very little.
On marine lots.
As of the end of the third quarter, it's building again.
But.
The demand could ask strip supply as it did at 20.
To certain extent that happened with RV as well so.
I think there's a very good couple of years and where we're playing I believe is very safe for the long term.
And profitable.
Okay.
And rich a question for you.
The guidance is great.
But the one thing we're 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 the chalk line in December, which I think ive never heard on the call before but thats excellent.
You talked about using the November base case, you look at December January we still can you use the Moody's it's clearly better.
You talked about on your qualitative.
Waiting for stimulus, that's a little bit of uncertainty is it as simple as if we get the stimulus.
And the January Moody's holds we'd get some improvement in February the reserve.
Just have to come down don't pick 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 the.
Started.
The.
The seasonal day, one was on <unk>.
70, and we're up to $2 29.
I would imagine at some point, we're kind of get back to the neighborhood of of the $1 70 from where we started but I would say that we're also.
Not targeting a specific.
Time to get there I think of as I pointed out we're going to be prudent.
We were conservative on the way up and we will be prudent on the way down to.
To make sure that we're not kind of whipsaw the per.
Provision on it on a quarter by quarter basis.
Overreacting to one one data point.
Along the way I think as we sit here and run of very disciplined process every quarter looking at.
Not only the the quantitative pieces of it but the.
The more qualitative pieces and when.
When we feel that those are aligning and our credit quality continues to hold which we expect that it will.
We'll bring the reserve down.
I would say that that is more likely to happen in the back half of the year than first quarters for certainly.
Okay. Okay.
Thanks, a lot.
Okay. Thanks, a lot I appreciate it.
Thank you, ladies and gentlemen that concludes our question and answer session I will turn the floor back to Mr. Steiner for any final comments.
For the questions and your interest in Huntington certainly proud of our colleagues in 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 'twenty, one and beyond so we're entering 'twenty one from the position of strength, we have momentum the.
Disciplined execution of our strategies, coupled with the pending the acquisition set us up to capitalize on emerging opportunities to innovate the gain share the position of 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 the enterprise risk management as you know, including the deeply embedded stock ownership mentality, which aligns our board management of colleagues.
So again, thank you for your support and interest and have a great day.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.