Huntington Bancshares Inc (HBAN) 2020 Q4 法說會逐字稿

Greetings, and welcome to the Huntington Bancshares Fourth Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, 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 we'll be reviewing can be found on the Investor Relations section of our website, www.huntington.com. This call is being recorded and will be available as a rebroadcast starting about 1 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 that we're driving revenue growth despite headwinds. We're 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 technology that will drive sustainable growth and outperformance, both today and for years to come.

Huntington operates an intentionally diversified business model, balanced between commercial and consumer, which provides a good mix of revenue and credit exposure. We've built a 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 2 years in a row. In 2020, we introduced several new innovative products and features that will continue to serve our customers' needs and differentiate Huntington from 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 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, which 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 on our preparations for integration later this year. We remain on track with the previously announced schedule for an expected closing date 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'm incredibly proud of the outstanding efforts of our colleagues to overcome the challenges of the pandemic as well as lookout 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 pretax 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, specialty 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 anytime 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 an 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 strengths I see 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 in November was below the national average in 5 of our 7 states, including our largest market in Ohio at 5.7%. Over 2.9 million jobs were created in our footprint between April and November, which means 24% of the national total were created in these 7 states. Further, 44% of all manufacturing jobs created during this period occurred in our footprint states.

The V-shaped manufacturing 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 floorplan utilization rates to take at least several more quarters to return to longer-term averages.

A recovery in employment boosted both the region's consumer confidence and consumer retail spending above the respective 2020 national averages. Home prices continue to appreciate, especially with solid increases in Ohio, Michigan, Pennsylvania and Indiana. The Midwest also led the country in year-over-year growth in single-family home sales in the third quarter, up 56% compared to 39% 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 enter 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'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 growth over the intermediate term. It 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 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 $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 bit more detail. Annual pretax 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're 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 balance between spread revenue and fee income. Home lending was a particular bright spot in 2020, and that remained true this quarter, continuing to drive fee income growth of 10%. Our capital markets, wealth and investment management, card and 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 4 percentage points of this growth was driven by increased technology investments. Another $20 million or 3 percentage points was 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 extinguishment costs. The underlying run rate 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 2 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're taking actions now on both sides of the balance sheet to offset the inherent pressure caused 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 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 yield. Lastly, we expect to continue to reduce our funding costs, including further optimization of wholesale funding.

Moving to Slide 8. Average earning assets increased $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 Federal Reserve. 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 stabilized and auto floorplan 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 plan 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 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, salable mortgage originations and debit card spend 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 in December as expected. Even following this flurry of activity at the 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 as they're forgiven and repaid over the next 2 quarters. There were $225 million of PPP loans forgiven in the fourth quarter. It's still too early to have a definitive view on the new phase of PPP, but we do expect that the changes in the program 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 1 that we achieved in 2020.

The top right chart reflects the continued elevated deposit balances resulting from the factors I mentioned previously, providing an attractive source of liquidity. The bottom 2 charts relate to customer activity driving 2 of our key fee income lines. Mortgage banking salable 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 at 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 of 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 adjustment opportunities.

Let me turn it over now 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 80% and curtailed CRE construction lending, such that the fourth quarter represented the lowest level of construction in terms of both absolute dollars and as a percentage of capital that we've had since the FirstMerit acquisition in 2016. We slowed leverage lending originations in 2019 and ended 2020 with leveraged loans virtually flat from year-end 2018. We transitioned our health care portfolio to diversify away from long-term care and toward publicly held 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 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'm 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 noncore 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 [crip] class crit/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 managed nearly $6 billion of loans with payment deferrals, ending the year with just $217 million of loans with a remaining deferral.

Turning now to the credit results and metrics. Slide 12 provides a walk of our allowance for credit losses from year-end 2019 to year-end 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 3 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 have improved, as have 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, a 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 impact that our oil and gas portfolio has on our overall level of NPAs. We expect modest 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 Q4, we had 4 new NPAs over $5 million and just 1 over $15 million, all COVID related. 3 of these customers are in Michigan, where the COVID restrictions have 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 7 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 in Q3 and $5 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 course as 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've 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 slides 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 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 road maps 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 '21, 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, noninterest 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 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 ads directly related to our strategic initiatives. The remaining underlying run rate of noninvestment 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 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 standalone 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. Lisa, we will now take questions. (Operator Instructions)

(Operator Instructions) Our first question comes from the line of Ken Zerbe with Morgan Stanley.

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 most banks have, this quarter, seen significant improvement in their ACL, call it, near 0 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. I would just love to just try to understand, I mean, to the extent possible, like how you're thinking about your allowance differently than what they are? And kind of why your provision expense was certainly much higher than sort of the trend that we've been seeing across the bank space this quarter?

Yes. Sure, Ken, this is Rich. I'll take that. So as I mentioned in the prepared remarks, the -- we use the November base case as the -- kind of the driver, but we use multiple scenarios. And I think if you look at the 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 amount of stimulus, the COVID assumptions that are built into that. And so as we look at not only with the economic forecast we're seeing, but some of the more qualitative and subjective assessments that we make as part of our process, most COVID related, we didn't feel that there was enough certainty in those forecasts 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 2.29%. I mean 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 had loan growth in the fourth quarter. So about $10 million of our provision expense was driven by loan growth.

All right. Great. No, that's helpful. Sort of slightly related, unrelated question. So People's United yesterday announced that they're exiting their in-store branches, the relationship they have with Stop & Shop. And on the call, they actually made kind of a compelling case for why store 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 didn't 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'll remember, we went into those almost a decade ago. 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 Meijer and Giant Eagle. But as a result of the combination with first -- with TCF in Michigan, we've been 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 branches that we have with Meijer, which we've explained to the company. Just excess distribution with nearly 500 points of distribution in the state 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 that and some -- a few ideas on the drawing board as well.

With Giant Eagle, we have consolidated a number of branches over the last year. There's 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 nature of the economics around the in-store branches, but there is a changing distribution, frankly, a thinning of distribution as we move forward. And as we've seen over the past year with the pandemic, more and more home goods delivered, including groceries. And so store traffic, while the volumes are up, the revenues are 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 2 partners. So we've liked the channel over time and continue to like aspects of it, and we're committed to, going forward, to Giant Eagle for the next several years, and then we'll assess the TCF partners as we move forward.

But again, they're roughly 2.5, 3x the average size of Huntington in-store branches. They've been at it a very long time. They have very patterned behavior. So I suspect we're going to like what we see as we get further along with it.

Our next question comes from the line of John Pancari with Evercore ISI.

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 couple of quarters here, particularly in the next quarter, just in terms of the trajectory, given the liquidity levels, how should we think about that?

Yes. This is Zach. I'll take that question. Look, I think the margin outlook is to be relatively stable here over the next several quarters and through the course of 2021. I do expect some calendarization, 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. We're expecting, by the way, about 85% of those PPP loans from round 1 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. 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, I wanted to see if you can give us a little bit of color around what you're putting money into, what types of securities and what types of yields you're seeing? And then separately, you also mentioned that you're emphasizing growth in higher-yielding asset classes. What loan areas would you flag from that perspective?

Yes. No problem. Great question. I'll take that again. This is Zach. So in Q4, as I mentioned in my script, we brought the securities portfolio back up to Q1 levels. From endpoint to endpoint, Q3 to Q4, to give you a sense, it was about $2 billion of additional securities on a net basis. And the average yield we were getting on that was 1.25% to give you a sense. Portfolio was running at 1.87%. So -- but it's still pretty solid yield. And the mix is pretty similar to what we've invested in the past, mainly mortgage backs. As we go into 2021, 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 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 levels and optimize 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're forecasting sort between 1.20%, 1.30%. So pretty similar. As we go forward, we're watching pretty closely any new rounds 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 land. But that's kind of where we're running with those. I'll pause for a second and then move on to the other element you -- other aspect 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 traction of it. And it's split about half and half from funding optimization and that asset growth mix optimization. And when you think about the asset growth mix optimization, it's really focused on higher-yielding products like small business administration production, where we're, as 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.

Our next question comes from the line of Scott Siefers with Piper Sandler.

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 that credit concerns are kind of melting away for the industry. But just sort of over the past 6 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's a few things. One, we've just had 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's really no lagging credit impact that we saw there. The other piece of it is just continued strength in 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, certainly of that magnitude, in 2021. So we brought that forecast down a little bit. But generally, we're seeing some decent traction with our commercial customers, and the consumer book continues to perform very well. So those were the major things. We tweaked the guidance, I think it's the right way to say it. 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. It's Scott. Year-end delinquency is better than a year ago pre-COVID. On the commercial side, the -- multiple quarters now of lower NPAs, lower crit/class, the economic outlook, the combination of factors. And I think the oil and gas component of our charge-offs last year were mid-teens, like 16, 17 bps.

17 basis points.

17 bps. So that's eliminated. We don't expect to have oil and gas charge-offs. And then the high-risk industries continue 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's a lot of deeper review that's triggered. And frankly, it looks good.

Okay. Perfect. And then the final question was, Zach, you've talked a couple of times about optimization of wholesale funding. Just curious as you look through the course of the year, maybe some color on the kind of opportunities or options you have there.

Yes. 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. You saw us extinguish $500 million of debt in our tender that we did in Q4. I think it's just kind of the opportunity to continue to leverage more core deposits to fund the company, frankly, over the course of this year.

Look, this question of elevated liquidity and how long it will stay is sort of the $64,000 question, but we're 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's a real opportunity there. And behind the scenes, our account acquisition are deepening and deposit gathering on a core basis is accelerating as well. So I think as we get through this year, that will just continue to be an opportunity well out into '22 and beyond.

Our next question comes from the line of Steven Alexopoulos with JPMorgan.

I wanted 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? Is this an investment in more people, systems, customer-friendly products? Like can you give us some sense of what you're investing in here?

Absolutely. As I mentioned in my prepared remarks -- this is Zach. As I mentioned in my remarks, and I'll just stress again, essentially the entirety of that growth is driven by our investments in our strategic plan. And you can think about it as 3 broad categories: it's approximately 60% technology development, around 20% marketing and around 20% select personal ads that are tied to our 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 in my remarks, digital development road maps 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 and optimization across each product line. So we're incredibly bullish about that.

The investments themselves, the expenses are going to be 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 run rate expense growth will be lower than the growth rate of revenue in the second half. But I'll just summarize, we feel that now is exactly the right time to make these investments, and we're already starting to see some of the returns from them. So feel good about it and that's the trajectory and composition of it.

Okay. That's helpful. For my follow-up question. So your commentary on loan pipeline and customer sentiment is favorable. But my question is, given this enormous buildup 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?

It's almost a tale of 2 worlds, Steve. In that regard, we have many customers that are very liquid. You see it in commercial line utilizations with us and the industry as a whole. There are some, however, that are either significantly investing, rebuilding inventory or frankly, have 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 proposed one if it's 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 clearly happening in the dealer floorplan side, for example, notwithstanding, it's -- it improved a bit in the fourth quarter. It's not where -- it's not normalized, and it will probably be several quarters before it becomes normalized. So all of that's to say that there's 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 expressing, both GDP growth and optimism as well as the potential for utilization. There will -- there's a lot of investment activity that's going on, and they're using their cash. But at some point, that will revert to a more traditional level of external financing, bank financing as well. So we're moving market share a bit with the growth that we're achieving through the fourth quarter and projecting, and we're optimistic, given the pipelines, we'll continue to do that. But at some point, we'll have a substantial tailwind as well.

Okay. And your plan is to lean in on the investment is pretty heavy early in the year and capture more of that in the back half.

It is, and as Zach said, 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.

Our next question comes from the line of Erika Najarian with Bank of America.

A follow-up question on the net interest income guide. I 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'm wondering what you're 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 income from PPP 2.0 in your guide?

Yes. Thanks, Erika. Great question. I mentioned in one of my previous comments that it is sort of the $64,000 question, frankly, in terms of how long the elevated deposits will last. But generally, what we're 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 maintain 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 had been for sort of a gradual reduction in that toward 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 the -- with that being said, we'll see about any new stimulus coming through on the fiscal side. And likely, if that does happen, we'll see that 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're not sure exactly where it's going to land. We'll see. For my guidance, I've assumed around $1 billion, but I'm hopeful and it's quite likely that it could be potentially up to double that. We'll see. In terms of the PPP forgiveness of the first round, I think I mentioned in a prior comment, but just to restate it for clarity, we're assuming 85% of the $6 million 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 modeling call on the forgiveness for PPP 2.0. The -- my second question is more for Steve. 35 to 55 basis points is quite an accomplishment 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 this downturn in that the 35 to 55 basis points represents the peak in losses that we'll see during the cycle? Or do you think they've 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 both the Federal Reserve and the -- via fiscal -- multiple rounds of fiscal stimulus that 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 history will show that very strong actions have mitigated what otherwise could have been a very ugly period in our economic history. If we think back to just the second quarter and the free fall in GDP, to be able to substantially reverse that in just a couple of quarters is remarkable, unlike anything we've seen in our history. And I think that flows then through the system with lower cum losses over time. I think we've been conservative, may be very conservative in our loss recognition thus far.

But we've tried to maintain that to -- that 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 lowering reserves in total or things like that. But I'm very optimistic and confident that we have our losses peaked in 2020.

And Mark is going to kill me, but I have to squeeze in the third question. And Steve, this is for you. It feels like the -- this is more a testing of a thesis, but expenses up 3% to 5%. It seems like you're 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 stand-alone company and as a combined company?"

Any thoughts there?

Well, that is not the intended approach. Remember, we have to call the reserves as we've seen. We had multiple economic scenarios and a peak second round, I hope a peak second round of the virus as of year-end. Now that is a possible scenario, but that's not a planned scenario [on our part]. Revert to what Zach said a minute ago, the core expenses are virtually flat in '21 versus '20. The increases are discretionary investment decisions made as a consequence of the strategic planning and the posture we want to take, principally around digital technology. So we're -- we believe we have a momentum in the business. We're one of the few banks that talked about commercial loan growth, and our pipeline year-over-year is better in a COVID environment than it 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're going to continue to play that against the backdrop of consumer and business demands changing radically as a consequence of, I think, 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, going to be a reality for our industry and certainly our company, and we're going to invest to meet those, if not get ahead of them.

Our next question comes from the line of Ken Usdin with Jefferies.

One follow-up on the NII side, Zach, just wondering if you can parse it. Just -- if you just think about the all-in PPP '20 that was in the NII versus '21 vis-à-vis how you're talking about overall NII for the year, is there a way you can help us understand that?

Yes. I think -- I'm looking at my notes here, just -- and we could follow-up on the modeling call, too. Looks like about 4 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 '20?

1 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 really good growth there, again, mid-single-digit growth. But auto has been flat for several quarters now. You've grown in some of the other categories. Just wondering specifically to auto, just how you're 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?

The auto industry was like a 16 million, 16.2 million production in 2020, and the outlook is closer to 17 million going forward for '21. So that will be part of it. There's also a market share component that will be -- I think just because of our consistency and track record, it will continue to move and yet maintain the spreads that we're looking for as well as credit quality. We are also opening up or planning to open up in a few additional states in '21 that will also supplement our production. So we're confident, and our team has been outstanding in this area for many, many years. We're confident in our ability to execute that. But we also -- I think we're #5 or #6 nationally in terms of home equity origination. So it's not just mortgage. So we're not dependent wholly on mortgage refi. We have a lot of broad-based home lending capabilities and investments in technology in that area as well, which will continue to drive more volume. We have substantial implementation of Blend, for example, that has been ramped up very quickly and will be an important -- a very important app for us as we go forward. I think we're taking about 10 days off at the close as a result of using that as an example.

Our next question comes from the line of Peter Winter with Wedbush Securities.

I was wondering, you gave some guidance that mortgage banking was going to be challenging, which is the case for all banks. I was just wondering if you could give a little bit more color how you're thinking about mortgage banking off the fourth quarter level, if you can just give a little bit more guidance.

Absolutely. This is Zach. I'll take that one. So mortgage banking, as we said, coming off 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 a shift toward purchase, not surprisingly, with refis being very substantially lower. Our -- we've actually been gaining share on app volumes over the last several years, and we expect to continue to do so. So our general expectation for app volume is sort of down in the 10% to 15% range relative to that 20% or more down at an industry level.

I think one of the things we're watching pretty closely is also the salable spread and where that trends. We, frankly, budgeted pretty conservatively on that, assuming a relatively continual trend back to more historical levels by the end of the year. We'll see. So far, they're actually holding up fairly solid in the first days of Q1, and we'll see. Those are volatile, as you know. But generally, we've budgeted fairly conservatively. So I think mortgage banking income is going to be down year-on-year. And so that's what I said, as I mentioned, really leaning into the other fee income lines that are growing smartly to offset that.

Okay. And if I can ask about the TCF acquisition. I'm just wondering, obviously, you 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 are the top 3 revenue opportunities with this deal?

Peter, I'll take that. And let me start. I think I was a bit brusque with an answer to a question you had last time. So 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 venue on both the consumer and business side. So the capacity to 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 haven't front-run that with you. But that is definitely a case.

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 technology and some of the support areas, 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're not widely known or appreciated, but we really liked what we saw in diligence and have learned subsequently. And those are just a few of the businesses and opportunities.

There's a substantial outsourcing as well, both on the capital markets side for most products. And again, it's a much more limited menu that we offer as well as their broker-dealers, their credit card. There's a variety of businesses that we'll bring back in fairly quickly as we move forward. So there's the 40% expense, and we just articulated a 43% branch consolidation. So you can see where that's coming from. It will be their systems to ours, 100%. So we've got a lot of early on, very, very good work that's getting us bullish on the expense side. But the play here is a revenue play. New markets, exciting new markets, Minneapolis, St. Paul; Denver, Colorado Springs; more than tripling us in Chicago; opening in Milwaukee; and Silicon Valley. I mean there's a lot to go for, plus the scale change in Michigan, we'll be a 1 or 2 and virtually everything in Michigan. So we really like the revenue side of this, and you'll see that reflected in '22 and beyond as we get set.

Our next question comes from the line of Bill Carcache with Wolfe Research.

I had 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're willing to compromise a bit more on pricing? Does that have, I guess -- having a greater share of new vehicle originations suggests that you guys are getting lower margins than you would if you had a larger mix of use. If you could just kind of comment on the profitability of used versus new vehicle financing, that would be helpful.

Bill, this is typical seasonality of new model introduction. And so as we look back, we'd see essentially the same ratios year-over-year, albeit this year, a bit constrained by just inventory. So that -- you're right, the OEMs will subvent. And that's why we tend to have slightly more used than new as 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 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 with 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 subvent more to try and drive more volume and 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 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 in sort of kind of a new normal post-COVID environment? Or do you think that we'll see like a reversion to historical inventory levels?

We expect a reversion to the norm at the supply chain issue at this point. For example, you would have seen Audi's manufacturing is 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 importers, in particular, are feeling constrained on the supply side. You're going to see more and more manufacturing come back into the U.S. or pick up on Mexico, Canada as a result of wanting to narrow the supply chain lines, a consequence of what's happened over the last year. And that's a benefit to us.

Our next question comes from the line of Jon Arfstrom with RBC Capital Markets.

A couple of cleanups, RV and Marine, you had some pretty strong growth and maybe some of that is COVID related last year. Do you expect some 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 of that, Jon, is for 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 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 3 or 5 years, a bit of excess. So I think we've played it -- 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 were getting to this supply/demand potential imbalance as we come back out of COVID, but that could exist right now.

There's virtually very little on marine lots as of the end of the third quarter, it's building again. But demand could outstrip supply as it did in '20, and to a 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. Your 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 used the term "snap a chalk line" in December, which I think I've never heard on the 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 in your qualitative, you're 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 they? Is that 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 too. We started -- the CECL day 1 was 1.70%, and we're up to 2.29%. I would imagine at some point, we're going to get back to the neighborhood of the 1.70% where we started. But I would say that we're also not targeting a specific time to get there. I think as I pointed out, we're going to be prudent. We were conservative on the way up, and we'll be prudent on the way down to make sure that we're 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 not only the 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 it 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 than first quarters, certainly, in a meaningful way.

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 have faced in my career. But I hope we've conveyed to you how excited we are about the opportunities we see ahead in '21 and beyond. So we're entering '21 from a position of strength. We have momentum. The disciplined execution of our strategies, coupled with the pending acquisition, set us up to capitalize on emerging opportunities to innovate, to gain share and to position 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, 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.