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Huntington Bancshares Incorporated (NASDAQ:HBAN)
Q2 2020 Earnings Call
Jul 23, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Huntington Bancshares Second Quarter Earnings Call. [Operator Instructions]

It is now my pleasure to introduce your host, Mr. Mark Muth, Director of Investor Relations. Thank you, sir. You may begin.

Mark Muth -- Director, Investor Relations

Thank you, Michelle. Welcome. I'm Mark Muth, Director of Investor Relations for Huntington. Copies of the slides we will be reviewing can be found on the Investor Relations section of our website, www.huntington.com. The call is being recorded and will be available as a rebroadcast starting about one hour from the close of the call. Our presenters today are Steve Steinour, Chairman, President and CEO; Zach Wasserman, Chief Financial Officer; and Rich Pohle, Chief Credit Officer.

As noted on Slide 2, today's discussion including the Q&A period will contain forward-looking statements. Such statements are based on information and assumptions available at this time and are subject to changes, risks and uncertainties, which may cause actual results to differ materially. We assume no obligation to update such statements. For a complete discussion of risks and uncertainties, please refer to this slide and material filed with the SEC, including our most recent Forms 10-K, 10-Q and 8-K filings.

Let me now turn it over to Steve for opening remarks.

Stephen D. Steinour -- Chairman, President and Chief Executive Officer

Thanks, Mark, and thank you to everyone for joining the call today. We're pleased with our second quarter results, which reflect solid execution across the bank despite an incredibly dynamic and challenging operating environment. Revenue was essentially level with the year ago quarter as record mortgage income offset pandemic-related headwinds. The actions we've taken to reduce our deposit costs along with the hedging strategy we implemented in 2019 are helping to offset the impact from lower rates.

Expenses were down year-over-year as a result of the proactive expense actions we took in the fourth quarter of '19 as well as the new program we are implementing in 2020. Our business model balanced between commercial and consumer provides diversification of revenue where good performance is offsetting challenges. Our increased PPNR year-over-year reflects consistent execution of our strategies.

Our purpose of looking out for people has guided our actions during these difficult times. I'm extremely proud of my colleagues and their continued efforts to communicate with and support our customers as well as each other. Over the past months, the bank funded more than 37,000 loans with a total volume of more than $6 billion through the SBA's Paycheck Protection Program or PPP to aid small and medium-sized businesses across our footprint.

Huntington is well positioned with robust capital and liquidity to remain supportive of our customers and communities going forward. Huntington received the highest score in the J.D. Power Mobile -- 2020 Mobile App Satisfaction Study for regional banks. And this is the second year in a row we've been recognized by J.D. Power providing evidence that our focused technology investments are being well received by our customers.

As we assess the outlook for the economy, we are guardedly optimistic for a gradual economic recovery. The unprecedented level of government stimulus has supported both individuals and many companies. that support has brought financial stability in markets. Recent economic headlines generally appear more positive with home builder, auto and RV and marine sales and settlements exceeding pre-pandemic levels.

U.S. consumer retail sales rose 7.5% in June as businesses have resumed operations. In our businesses, we saw record consumer mortgage origination activity in the second quarter. Our commercial pipelines have improved over the past few weeks and our customers are becoming more optimistic for the future with many manufacturing customers expecting to be back to pre-pandemic activity levels during the second-half of the year.

Our outlook reflects a consensus view of economists that the recovery is taking hold but progress will be uneven. While we do see signs for optimism, we remain vigilant to possible risks and our visibility is generally limited to the next few months. The range of potential outcomes on key metrics remains wide. We are monitoring economic and customer data closely and tightly managing our businesses. As a result of low interest rate levels, we are taking actions to manage expenses this year, which Zach will further describe.

We remain disciplined on expense growth while making further investments in technology and other strategic business initiatives as the economy recovers and as we've discussed previously over the past decade, we have fundamentally changed Huntington's enterprise risk management. It's now a strength of the company as compared to a weakness during the prior cycle. The most recent DFAST results demonstrate superior credit performance for our fifth consecutive DFAST filing.

Our model cum loss -- loan losses in the Fed's severely adverse scenario remain among the best in the peer group while our stress capital buffer established at the minimal level of 2.5%. Our commitment to an aggregate moderate-to-low risk profile is illustrated through the DFAST results. Our second quarter credit metrics remain sound as we address the issues in our oil and gas portfolio. With our second quarter provision, we believe we have the loss exposure in the oil and gas portfolio fully reserved.

Our underlying portfolio metrics continue to reflect our expectation for outperformance through the cycle. We restrained our commercial lending in 2019 with a fourth quarter average year-over-year growth rate of 1.8%, which gives us a more a seasoned portfolio of commercial loans at this point in the cycle.

This morning we announced that the Board declared the third quarter cash dividend of $0.15 per common share unchanged from the prior quarter. Based on what we know today, management expects to maintain the quarterly dividend rate in the fourth quarter subject to the Board's normal quarterly approval process and you'll hear more about the dividend from Zach as well.

So Zach, I ask you now to provide an overview of the financial performance and carry forward.

Zachary Wasserman -- Senior Executive Vice President, Chief Financial Officer

Thanks, Steve, and good morning, everyone. Slide 3 provides the highlights for the 2020 second quarter. We reported earnings per common share of $0.13, return on average assets was 51 basis points, return on average common equity was 5%, and return on average tangible common equity was 6.7%. Clearly, results were significantly impacted by the elevated level of credit provision expense as we added $218 million to the reserve during the quarter.

Now let's turn to Slide 4 to review our results in more detail. Year-over-year pre-tax pre-provision earnings growth was 4%. We believe this is solid performance in light of the challenges of the interest rate environment and the rapid decline in short-term rates year-to-date. Total revenue was relatively flat versus the year ago quarter as pressure on spread revenues was nearly offset by growth in fee income. Specifically, record mortgage banking income of $96 million was partially offset by waivers to assist our customers, reduced customer activity and to the higher levels of consumer deposit account balances, the reduced -- the deposit service charges and cards and payment fee line items.

Total expenses were lower by $25 million or 4% from the year ago quarter. This expense discipline reflects the actions we took in the 2019 fourth quarter to reduce our overhead expense run rate, including a reduction of 200 positions and the closure of 31 in-store branches. As well as the actions we have taken to adapt to the current environment balanced against the impact of continued investment in our technology capabilities. Finally, I would like to note that the normal slides containing comparisons for our net interest income, fee income and non-interest expense can be found in the appendix.

Turning to Slide 5. Net interest margin was 2.94% for the quarter, down 20 basis points linked quarter, in line with the guidance we provided at the Morgan Stanley conference in June. The second quarter NIM was negatively impacted by a few unusual items that I would like to highlight. Elevated deposits held at the Fed during the quarter reduced NIM by 7 basis points versus the first quarter. This impact would have been larger but for our active management to move several billion dollars of non-primary bank relationship account balances off the sheet during the quarter.

Reduced loan late fees, primarily in our auto portfolio compressed NIM by 3 basis points. Additionally in Q2, NIM was negatively impacted by 3 basis point derivative ineffective this mark while in Q1 the mark was a positive 4 basis points. Thus, 7 basis points of the 20 basis points of quarter-to-quarter NIM compression was driven by this item.

Our underlying NIM performed quite well despite the challenging interest rate environment. Given our strong liquidity position, we continue to actively manage down our cost of funds. Our average cost of interest bearing deposits was 25 basis points in the month of June and we see some continued opportunity for modest further reduction. Our hedging actions continue to reduce the unfavorable impacts of interest rate volatility and the lower interest rate environment. In the second quarter, we had $1.6 billion of forward starting asset hedges become active providing NIM benefit going forward.

Moving forward to Slide 6. Average earning assets increased $9.9 billion or 10% compared to the year ago quarter. Average commercial and industrial loans increased 15% from the year ago quarter and 14% linked quarter, reflecting the addition of $4.1 billion in average PPP loans.

As at quarter end, the total PPP loan balance was just over $6 billion. Outside of PPP lending, we saw solid growth in healthcare and asset finance in the quarter. Offsetting this growth, auto floorplan line utilization was suppressed due to lack of new inventory from OEMs and we continue to actively manage the non-core exposure in our oil and gas portfolio down, including $170 million of loans sold or under contract to be sold in the second quarter. Consumer loan growth remained focused on the -- in the residential mortgage portfolio reflecting robust originations over the past four quarters. Also, as a result of the elevated deposit levels in the quarter, we saw a material increase in interest-bearing deposits being held at the Fed.

Turning to Slide 7, we will review the deposit growth. Average core deposits increased 13% year-over-year and 12% versus the first quarter, primarily driven by commercial loan growth related to the PPP loans and commercial line draws, consumer growth related to government stimulus and reduced account attrition. During the quarter, we saw dramatic shifts in the retail deposit acquisition trends as consumer and business banking customers adapted to the COVID environment. We saw utilization of online account opening channels increase 13% quarter-over-quarter and 61% year-over-year. We are now seeing traditional branch-based acquisition approaching pre-COVID levels.

Slide 8 highlights the trends in commercial loans, total deposits, salable mortgage originations and debit card spend, which is consistent with what we disclosed at last month's Morgan Stanley conference. Slide 9 illustrates the continued strength of our capital and liquidity ratios. The Common Equity Tier 1 ratio or CET1 ended the quarter at 9.84% down 4 basis points year-over-year. The tangible common equity ratio or TCE ended the quarter at 7.28% down 52 basis points from a year ago.

Let me turn it over now to Rich to cover credit. Rich?

Richard Pohle -- Executive Vice President, Chief Credit Officer

Thanks, Zach. Before I get into the second quarter credit results, I want to turn your attention to Slide 10, which illustrates the relative rankings of model cumulative loan losses for Huntington and our peers in the Federal Reserve's severely adverse scenarios of the 2020 DFAST exercise. As Steve has mentioned over time, this is the only true comparison of credit risk across the sector that we know of, and it provides us independent validation of the credit risk management discipline and practices we have been implementing for over a decade now to achieve an aggregate moderate-to-low risk profile. Our 2020 DFAST result puts us at the top of our peer group. And we've been a top quartile peer performer in each DFAST exercise since 2015. Our portfolio composition evenly split between consumer and commercial businesses gives us diversification in periods of economic stress and our DFAST numbers reflect as much.

Turning now to the credit metrics and results. Slide 11 provides a walk of our allowance for credit losses or ACL from year-end 2019 to the second quarter. You can see our ACL has more than doubled during this period increasing by just under $1 billion to 2.27% of loans. Excluding the PPP loan balances, our ACL would be 2.45% as of June 30th. The second quarter allowance represents a $218 million reserve build from the first quarter. Like the first quarter, there are multiple data points used to size the provision expense for Q2. The primary economic scenario within our loss estimation process was the main Moody's baseline forecast. This scenario assumes weak employment in Q2 2020 of 15%, followed by a rebound to 9% by the end of 2020 and a slow recovery to 8.5% by the fourth quarter of 2021.

GDP recovers from a 33% decline in 2Q 2020, to end the full year, down almost 6% and demonstrates 1.5% growth in 2021 with most occurring in the second half of the year. In Q2, ACL now includes a 30% reserve against our oil and gas portfolio. We believe we have the loss content in this portfolio fully reserved. We have bifurcated this portfolio into core and non-core segments with the non-core portion representing just under 60% of oil and gas borrowings. Our 30% coverage includes a 44% coverage ratio against the non-core portfolio and a 9% reserve against the core portfolio. Recall that our oil and gas portfolio represents about 1% of total wealth.

Slide 12 shows our NPAs and TDRs and demonstrates the impact that our oil and gas portfolio has had on our overall level of NPAs. We have discussed for several quarters the challenges we see with this portfolio. Commodity prices continue to range below economical levels for this industry. Oil and gas NPAs represent 40% of our overall NPAs and are also a significant contributor to our Q2 NPA build. Notably, over 95% of our oil and gas NPAs were current pay with respect to principal and interest as of quarter end.

Slide 13 provides additional details around the financial accommodations we provided our commercial customers. The commercial deferrals are now graduating to amendments and waivers and outside of the hospitality and other travel-related businesses, we do not see a widespread need for additional payment relief. Our other dealers and franchise restaurant customers, two of our larger deferral users are both exiting those deferral periods in strong shape and we expect nearly all those deferrals to run their course in Q3. To-date, request for additional deferral periods have been limited in the other commercial portfolios as well.

Slide 14 shows our consumer deferrals and the early news here is good as well. Our auto, RV/marine and HELOC portfolios are performing as we would have expected with modest close deferral delinquencies. Our focus on high FICO customers here has shielded us somewhat from job losses we have seen. The mortgage accommodations are a two-step process as the new forbearance agreement is necessary upon the expiration of the first. As a result, we have limited visibility into the resolution here.

Slide 15 provides a update to the industries hardest hit by COVID-19 to date. We have thoroughly reviewed these portfolios as well as 75% of our total commercial loan portfolio since April and believe we have the existing risks identified and appropriately managed. Our hotel exposure is centered on five primary sponsors, most of them are long-term relationships including through the last downturn. We believe these sponsors have the liquidity and financial flexibility to see their way through the longer-term recovery period we forecast for this industry.

Our restaurant exposures, primarily in the national quick service brands that have maintained drive up operations and our sandwich and pizza customers have been open for takeout service to offset the declines of in-house seating. We believe this book to be in good shape overall but we'll continue to closely monitor the heightened risk in the single location and other non-franchise names in the portfolio.

As a leading SBA lender in the country, we also have guarantees on over $400 million of the restaurant, child care, physicians' practices and other sectors, which provides us additional opportunities for recoveries. In the second quarter, as part of our active portfolio management process, we evaluated the COVID-related impacts across all portfolios and took appropriate actions as required by regulatory guidance to downgrade those severely impacted credits to criticized status. This review resulted in an increase to our criticized asset level of $1.1 billion in the quarter.

As you would expect they were centered on the industries referenced in the chart, hospitality, retail, airport parking and other suppliers. The customers in these effected industries except for auto will have longer pass back to a full recovery and thought it prudent to move those credits to criticized status. We will take a patient approach to working with these customers and currently do not see a significant loss content. Of the 30% of the downgrades we did not attribute to COVID, most of that was in our oil and gas portfolio.

Slide 16 provides a snapshot of key credit quality metrics for the quarter. Our credit performance on the whole was strong. Net charge-offs represented an annualized 54 basis points of average loans and leases. The commercial charge-offs were centered in the oil and gas portfolio, which made up approximately 75% of the total commercial net charge-offs. I would also point out that nearly all of these oil and gas charge-offs resulted from loan sales closed or contracted for sale during the quarter as we prudently reduce our exposure to this industry.

Annualized total net charge-offs excluding the oil and gas-related losses were 24 basis points, demonstrating that the balance of our portfolio continue to perform well in Q2. Consumer charge-offs were down to 30 basis points in Q2 demonstrating our continued strong consumer portfolio. As always, we have provided additional granularity by portfolio in the analyst package in the slides. The non-performing asset ratio increased 14 basis points linked quarter and 28 basis points year-over-year to 89 basis points due to the oil and gas impact I described earlier.

Let me turn it back over to Zach.

Zachary Wasserman -- Senior Executive Vice President, Chief Financial Officer

Thank you, Rich. Turning to Slide 17, I will provide our expectations for the third quarter. As was the case last quarter, we feel it's prudent to limit our guidance to the current quarter due to the ongoing uncertainty around the economic outlook. As Steve alluded to earlier, we have confidence in our businesses and are pleased with our second quarter results given the headwinds in the quarter. Our sentiment has improved from 90 days ago due to the recent trends we're seeing and the actions we've taken to better position the Bank for success going forward.

Looking at the average balance sheet for the third quarter, we expect average loans to be approximately flat on a linked quarter basis. Consumer loans are expected to increase approximately 2% driven by continued growth in the residential mortgage and RV/marine lending. Commercial loans are expected to decrease approximately 1% as the full quarter impact of PPP is more than offset by continued reductions in dealer floorplan and commercial loan utilization rates.

Our current projections assume the majority of the PPP balances will remain on the balance sheet through the end of the year. Our early stage commercial pipelines have been building over the past several weeks, supporting the expectation of accelerating growth in the latter part of the year. We balanced this customer optimism with an acknowledgment of the fluidity of the current economy and some concern that the recent upward trend in the infection could dampen the pace of the economic recovery.

We expect average total deposits to decrease approximately 1% linked quarter. Commercial deposits are expected to decrease approximately 3% assuming gradual usage of deposit inflows from the government stimulus. We expect total revenue to increase approximately 2% linked quarter with the net interest income increasing 2% to 4%. We expect GAAP NIM to expand approximately 7 to 10 basis points versus the second quarter NIM of 2.94% as a result of the hedging strategy and the elimination of notable items, which negatively impacted the second quarter. Namely 3 basis points of reduced loan rate fees and 3 basis points of derivative ineffectiveness mark.

Our NIM expectation does not include material benefit from the acceleration of PPP fees from the repayment or forgiveness of those loans in the third quarter. We expect fee income to be approximately flat as mortgage banking activity remains robust and pandemic impacted revenue lines rebound. Based on the debit card trends, we would expect a slight pickup in card related fees in the third quarter. Deposit account activity volumes are increasing yet given the elevated level of consumer deposits, we do not expect a full recovery in deposit service charges. These increases are expected to be offset by reduced other income as the second quarter contained gains of $18 million related to the annuitization of a retiree health plan and the retirement plan services record keeping business sale.

As I mentioned earlier, we are benefiting from the expense actions we took in the fourth quarter of 2019. In addition, given both the significant economic challenges of 2020 and the desire to self-fund some of the compelling initiatives being identified in our ongoing strategic planning process, we are now executing the expense management program we have previewed for you on prior calls. As I mentioned previously, our outlook to this plan is focused on four categories of expenses. The size and compensation level of the organization, structural expenses including our branch and corporate facilities, investments primarily the optimization of the level of marketing and lastly other discretionary expenses.

This program is sized to generate approximately $75 million of annual savings in 2020 and 2021. In 2020, this cost rationalization will allow the bank to prudently manage expenses given the economic and business uncertainty that exists this year. We've modeled numerous scenarios for the 2020 financial outlook with the majority of these forecasts achieving positive operating leverage for 2020, inclusive of the expected approximately $25 million of restructuring costs related to the expense management program.

Importantly, we have been positioning the company for some time to be ready to capitalize on opportunities to drive accelerated revenue and market share growth that will arise when the economy -- economic recovery begin to solidify. While our longer-term planning for 2021 is still a work in process, our current expectation is that we continue to see positive signs of economic stabilization and regrowth. We will accelerate investments in digital technology capabilities, product differentiation and other strategic initiatives in the latter part of 2020 and into next year, potentially utilizing up to the full amount of these savings for this purpose in calendar year 2020. Thus, this program provides the opportunity to fund these initiatives while generally maintaining a strong expense efficiency level in 2020.

Focusing on the expense outlook for the third quarter. We expect non-interest expenses to increase approximately 5% on a linked quarter basis. Approximately 2% of this growth is driven by the $15 million of the total approximately $25 million restructuring costs associated with the expense management actions that we recognized in the third quarter. The remaining approximately 3% is driven by investments in technology and marketing as well as the return of customer and sales activity closer to pre-pandemic levels. Finally, we expect net charge-offs in the third quarter to be near 65 basis points. This is reflective of the potential charge-offs in the oil and gas portfolio as well as broader economic considerations. Fundamentally, our credit remains sound. However, the economic outlook remains uncertain and we are likely to see elevated provision expense through the remainder of 2020.

Mark Muth -- Director, Investor Relations

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Jon Arfstrom with RBC Capital. Please proceed with your question.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Thanks. Good morning, guys.

Stephen D. Steinour -- Chairman, President and Chief Executive Officer

Good morning, Jon.

Zachary Wasserman -- Senior Executive Vice President, Chief Financial Officer

Good morning.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Nice job. There's a lot of places to go but let's just talk oil and gas to get that out of the way. Longer term, what's the plan there? Is it just to get down to $500 million or $600 million, what you call your core portfolio? And if you could maybe project, is it -- are you done in Q3 or are you done in Q4, when does the noise start to go away from this portfolio?

Richard Pohle -- Executive Vice President, Chief Credit Officer

Hey Jon, this is Rich. With respect to the oil and gas piece of it, we've got it bifurcated into a core and non-core sector. And the focus is really on getting that non-core piece of portfolio down and through whatever methods we have. And you just saw in Q2 that we sold about $170 million to the extent that we've got opportunities where we think the sale prices that are than what a recovery might be. If the credit got into trouble, we will certainly do that. As it relates to the ongoing strategy, we're not originating any new loans in that space. We haven't for over a year now. I think, we're really just focused on the portfolio we have now and managing the risk there.

Stephen D. Steinour -- Chairman, President and Chief Executive Officer

Jon, this is probably the last quarter we're going to distinguish ourselves with reporting out the oil and gas like this because we believe we've got it boxed now fully reserved. And while you will see metrics around that, we don't feel a need to call it out like we have this quarter as it's picking up in the normal course. And we'll look to maximize the portfolio, particularly not core over time.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay, all right. And then, just a follow-up. The rest of it looks so clean from a credit perspective. And Zach, you talked about the third quarter, fourth quarter provisions remaining elevated. I see a 2.45% ACL in relatively 10 credit metrics. I guess, the question is how much of reserve build do you think you still need and how do you want us to think through that third quarter and fourth quarter provisioning level?

Richard Pohle -- Executive Vice President, Chief Credit Officer

Hey, Jon, this is Rich. I'll take that.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay.

Richard Pohle -- Executive Vice President, Chief Credit Officer

We haven't really thought about whether build in the third quarter would look like. As you work through the CECL methodology, this is a point in time process. And so, similar to what we did in Q2, we will do the same process in Q3. We will look at what the change in the economic outlook might be for the end of September. We're certainly not going to reason to anything earlier in the quarter. We're going to take every available day we have to look at the economic condition and the forecast that we see.

We will also have another quarter of portfolio activity to see how the portfolio is behaving relative to our expectations and based on those two factors, we'll look at where the think the provision ought to be. So it's really hard for us to sit here and really -- CECL with having forecast additional build, it's really a quarter-by-quarter kind of step-by-step process.

Stephen D. Steinour -- Chairman, President and Chief Executive Officer

But Jon, we do like generally how the portfolio has performed thus far and feel good having looked at a very substantial amount of the commercial portfolio in depth during the quarter and try to have a realistic if not conservative lens on it, which is reflected in some of the metrics like the criticized loan increase.

But it -- the performance for the quarter was frankly better than we would have expected it to be at the core. And we're -- but we're -- we've got a recurrence of the virus it looks like coming and we know the word fourth round if it happens, and so there's a lot of unknowns here. So it's very, very difficult to project where this is left out.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay, all right. Thank you.

Operator

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

John Pancari -- Evercore ISI -- Analyst

Good morning.

Stephen D. Steinour -- Chairman, President and Chief Executive Officer

Hi, John.

Zachary Wasserman -- Senior Executive Vice President, Chief Financial Officer

Good morning.

John Pancari -- Evercore ISI -- Analyst

On your comment right that you just mentioned to Jon about looking at the reserve each quarter. You just mentioned, you look at the behavior of your credits versus your expectations. Isn't that a dynamic that under CECL sort of already been factored into the reserve in terms of how the credits are actually behaving versus what you model because now you're providing at a lifetime loss expectation?

Richard Pohle -- Executive Vice President, Chief Credit Officer

That's right. And I thought, my comment was meant to mean that we will look at how the portfolio, if there are changes in the portfolio from the end of Q2 to the end of Q3.

John Pancari -- Evercore ISI -- Analyst

Okay. So more about the growth than versus the underlying credit?

Richard Pohle -- Executive Vice President, Chief Credit Officer

Well, it could be growth, it could also be changes in underlying credit. I mean to the extent that there is further deterioration or improvement either way in the portfolio that gets reflected in the modeled outputs for what would go into Q3.

John Pancari -- Evercore ISI -- Analyst

Okay, got it. And then, I guess, so if the 2.45% reserve right now excluding PPP loans does represent your best expectation of the lifetime loss content of your loan portfolio, what -- how do you attribute the difference between that ratio and your company-run most recent DFAST estimate that you did. Does it all comes down to the macro assumptions and the amount of stimulus that you're factoring in?

Richard Pohle -- Executive Vice President, Chief Credit Officer

Yeah. And we haven't disclosed the company run DFAST scenarios but certainly, there's going to be a number of factors that will go into what we've provided in our forecast versus what -- we're just running through the models.

John Pancari -- Evercore ISI -- Analyst

Okay. I got it. Then lastly, I just want to ask about the cadence of the cost saves with the $75 million. Could you talk about how -- I know you mentioned a portion in 2020 and then the rest in 2021. Could you just talk about how we can expect the timing of that to play out?

Zachary Wasserman -- Senior Executive Vice President, Chief Financial Officer

Sure. This is Zach, John. Thanks for the question. So as I mentioned, it's about the $75 million save in both years. And over time, the -- like we've said many times in the past, we want to manage the expense-base based on the revenue outlook. And so, a very substantial chunk of that $75 million we would expect to flow to the bottom line in 2020 and not be reinvested to the extent that we see the economy improving as we go forward and the pace and level of that recovery because we're certain we would expect to start to ramp up the investments as I mentioned in my prepared remarks and therefore, have a less transparency with neutral net benefit from that in '21 as we go forward.

But for 2020, just to kind of come back to your question, specifically around a third of that save accrued to the second quarter as it was around $50 million left on a gross basis before any modest acceleration investments in the back half of the year and before the $25 million restructuring costs in Q3 and Q4.

John Pancari -- Evercore ISI -- Analyst

Got it. Thanks, Zach. That's helpful.

Zachary Wasserman -- Senior Executive Vice President, Chief Financial Officer

Welcome.

Operator

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

Ken Usdin -- Jefferies & Company -- Analyst

Hey guys, good morning. I was just wondering if you could help us walk through the impact of PPP in terms of the yield you're seeing on that portfolio, what it added to NII? And Zach, I know you said that forgiveness is not built into the forecast. But how are you generally anticipating it to go going forward? Thanks.

Zachary Wasserman -- Senior Executive Vice President, Chief Financial Officer

Yeah. Thanks for the question. Let me try to put some math behind this for you. Just starting first with the yield. It was accretive to yield in the second quarter by and by as we've noted about 2 basis points of net interest margin. Really what drives that is that the portfolio rate that we were seeing in June was 3.43% on an accrual basis for those loans in June, which was made up of 1% of the underlying yield and then the amortization of what for us based on the size mix of our loan of PPP -- our PPP loans was around 3% placement fee over the life of the loan.

So the combination of those two things for June was 3.43% and hence, additive to the overall NIM by around said, 2 basis points. It was around $35 million of revenue in Q2 as well. As we go forward into Q3 from a NIM perspective, I think it's accretive by around 1 basis point is our current estimate. So it's a tiny drag on a quarter-to-quarter basis of 1 basis point down, but pretty neutral in that respect into the third quarter.

In terms of the forgiveness, I think it was the other part of your question. This continue to be a function of estimates as you might imagine. But our planning estimate at this point is that a roughly 85% of the loans outstanding will be forgiven. The process around that is the thing that's driving the most uncertainty around the timing. And so, right now, we're assuming that the loans less than $150,000 each, which is around $1 billion of the $6 billion loans will be on a -- likely on a fast track forgiveness process and hence will likely be forgiven in the fourth quarter. So that's our planning assumption for that.

And then, let's say around 10% of the remaining greater than $150,000 loans are forgiven in Q4. So, which would make about one quarter of the total $6 billion forgiven in Q4 with the remainder of 75% forgiven -- of what's going to be forgiven in Q1. So I think by the end of the year, we expect on an average basis in Q4, we still expect to see around $4.7 billion of PPP in the fourth quarter coming down to around $700 million by Q1 of next year. Does that....?

Ken Usdin -- Jefferies & Company -- Analyst

Okay.

Zachary Wasserman -- Senior Executive Vice President, Chief Financial Officer

Does it work?

Ken Usdin -- Jefferies & Company -- Analyst

Yeah. And just a follow-up. The $35 million recognized in 2Q when you get a full quarter of it in 3Q, what are you ball parking that to turn into? I know you put it in NIM terms directionally but in terms of dollar terms?

Zachary Wasserman -- Senior Executive Vice President, Chief Financial Officer

That's a good question. $50 million roughly, Q3.

Ken Usdin -- Jefferies & Company -- Analyst

Got it. Thanks very much.

Zachary Wasserman -- Senior Executive Vice President, Chief Financial Officer

Welcome.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Steve Alexopoulos with J.P. Morgan. Please proceed with your question.

Stephen D. Steinour -- Chairman, President and Chief Executive Officer

Good morning, Steve.

Janet Lee -- J.P. Morgan & Co. -- Analyst

This is Janet Lee on for Steve. I have a follow-up question on energy. So your energy levels are at 30% of total exposure and is being fully reserved for the loss content. Can you just share with us some of the key underlying assumptions baked into the reserve levels, such as a trajectory of energy charge offs, NPLs and criticize going from here as well as some of the macro factors like where you think the oil price is kind of headed? Thanks.

Richard Pohle -- Executive Vice President, Chief Credit Officer

Yeah. I mean, we took a note -- this is Rich, Janet. We took a number of factors as we kind of sized the reserve build there. When we looked at the core and non-core portfolios, there are a number of factors that went into that designation, whether its liquidity but a big piece of that is borrowing base coverage. And that lasts as long as the hedges last. And so our challenge with the book in general is just our view on where commodity prices are going to go. And as the hedges roll-off, there is just more exposure to what we think is a pretty uneconomical level of price to support drilling and more important to support capital.

So you know, the seasonality of the oil and gas business will drive some of the charge-off decisions as you would expect the spring in all of our industry determinations are big driver of kind of a fresh look at where the loans are, relative to the collateral and that's part of what we saw in the second quarter was the spring redetermination results kind of flowing through and then we thought we're very proactive in terms of getting out of products. There were four structural over advances and deals in our book in the fourth -- in the second quarter, we sold two of them I mean, the other two to NPAs. So I think as it relates to further NPA growth, that will be really based more around borrowing base redetermination periods. The charge-offs will be a function largely of our sale opportunities and also around borrowing base redetermination.

Janet Lee -- J.P. Morgan & Co. -- Analyst

All right, that's helpful. And I think last quarter you disclosed $3 billion exposure in leverage lending comprised of a number of different industries. Some of your peers experienced some charge-offs in the leverage lending portfolio. I just want to see like how this portfolio is performing anything at normal you're seeing on the credit fund? Thanks.

Richard Pohle -- Executive Vice President, Chief Credit Officer

Yes. As it relates to the leverage lending, the portfolio did go up modestly in the second quarter. It went up by about 5% to 6% really due to fallen angel activity, more than anything as it relates to new originations. As you might recall, we've got a fairly modest leverage threshold for leveraged loans, it's 2.5 times senior as opposed to most people did 3 times. So to the extent that these credits with this first quarter results kind of fell into that criteria, we designated them fallen angels into the leverage lending bucket. We did not have any leveraged lending originated charge-offs in Q2. We are keeping an eye on that from a credit loss standpoint. There were some downgrades within that book as you might expect but nothing significant.

Janet Lee -- J.P. Morgan & Co. -- Analyst

Great. Thanks for taking my question.

Richard Pohle -- Executive Vice President, Chief Credit Officer

Sure.

Operator

Thank you. Our next question comes from the line of Terry McEvoy with Stephens Inc. Please proceed with your question.

Terry McEvoy -- Stephens Inc. -- Analyst

Hi, thanks. Good morning.

Stephen D. Steinour -- Chairman, President and Chief Executive Officer

Hey, Terry.

Terry McEvoy -- Stephens Inc. -- Analyst

Hi. I just was wondering if you could discuss the health of the auto dealer portfolio. I know it's an area of focus last quarter. You mentioned earlier on the call that inventory levels are lower and there was some incremental reserve build here in the second quarter.

Richard Pohle -- Executive Vice President, Chief Credit Officer

Yeah. The auto floorplan business is actually bouncing back in very good shape. We had about $0.5 million -- $0.5 billion of deferrals, deferred P&I in that book and that is all going to roll off in the third quarter. There is very -- the demand notwithstanding the fact that new car inventories are down, June results were very strong across our dealer book. And so, we expect that book, barring any further shutdowns or things like that, to bounce back pretty quickly. The challenge for that sector is just getting inventory and they don't think that they'll be back to full inventory levels on their lots before the end of the year. So there was not much in the way at all of reserve build as it relates to the floorplan level.

Stephen D. Steinour -- Chairman, President and Chief Executive Officer

And the indirect, do you want to comment on, Rich?

Richard Pohle -- Executive Vice President, Chief Credit Officer

Sure, the indirect is performing very well. You can see the deferral piece of that was fairly modest to start with about 8%. I'm sorry, about 3% of the book and coming out of the deferral of payment rates are very strong. We got here 92% paying has increased coming out of the deferrals. So we are watching that like we're watching all the consumer portfolios, just given the impact of the deferrals on the overall book. But that is a high FICO book. We have a custom scorecard and that book has performed very well through the DFAST exercises and we expect it to continue to perform well.

Terry McEvoy -- Stephens Inc. -- Analyst

Thank you. And then just as a follow-up. Thanks for Page 8, the bottom right, the volume. Thanks for updating that exhibit. Just the decline in the last couple weeks or maybe the last month and volume and transactions. Is that just a short-term blip or are you seeing just the increase in number of COVID cases beginning to impact volume overall?

Zachary Wasserman -- Senior Executive Vice President, Chief Financial Officer

You're talking about the debit card volume, Terry?

Terry McEvoy -- Stephens Inc. -- Analyst

Correct. Correct. Bottom right.

Zachary Wasserman -- Senior Executive Vice President, Chief Financial Officer

Yeah, this is Zach. So we've seen -- it's like a roughly 2% year-over-year reduction in the last week versus the prior 10 days. So I think in the first 10 days of July, the volumes were up about 20% year-on-year. In the last week, they were up 18.7%. So not even 2%, I guess as I talked about the numbers. And I think as we look across industries, we are seeing a little bit of a blip down. I was studying the numbers this morning and one of the industries where we're seeing the most potential blips not surprisingly is in restaurants and bars. So likely that is to some degree impacted by what we're seeing in terms of some of the economic reopening guidance changing and things of that nature, but we're still seeing pretty robust snapping back in year-over-year growth overall.

Terry McEvoy -- Stephens Inc. -- Analyst

Right. Thanks, Zach.

Zachary Wasserman -- Senior Executive Vice President, Chief Financial Officer

Thank you.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Brock Vandervliet with UBS. Please proceed with your question.

Brock Vandervliet -- UBS Equity -- Analyst

Thanks. Most of the high points have been covered. I was wondering if you could just talk about mortgage and what your expectations are for the remainder of the year. It seems a bit like COVID has kind of pushed out the spring selling season. Obviously, we've got a massive change in rates. Can you sustain your performance here longer than you would in a normal year, I guess?

Stephen D. Steinour -- Chairman, President and Chief Executive Officer

Brock, look, what we're seeing in the market here is that it's a lack of inventory. We've had very good, very strong sales. So the construction is not keeping pace with demand. And you've seen that flow through in terms of a number of levels of inventory in a number of markets, I should say. So we've had a very strong performance on the housing front and we think that will continue as a consequence of the virus. So that means it is somewhat labor constraint on the build or supply side.

Brock Vandervliet -- UBS Equity -- Analyst

Yeah. And the primary, secondary mortgage spreads have been kind of juiced up with all the damage and the fixed income markets, do you see that rapidly coming in here in the third quarter or is that more sustainable, which would support mortgage banking reps?

Zachary Wasserman -- Senior Executive Vice President, Chief Financial Officer

Yeah, this is Zach. I will just stack on to some of Steve's comments and try to get that answer to you question. Generally, I think the outlook for Q3 is pretty similar to Q2 in terms of volumes and a modest tightening of spread was of around 15 basis points -- 10 to 15 basis points lower spread as that trend continues to be seen for a while. I think the outlook for Q4 is harder to ascertain at this point, just based on the timing of pipeline and things of that nature. And clearly, the pipeline for Q2 or for Q3 looks pretty similar to what it did for Q2. With that being said, our planning assumption is that the spreads will continue to come down in Q4 and that volumes are typically seasonally a fair amount lower. Q4 will also see that downdraft as well. So I think the trends you noted are in fact happening. The velocity with which they happen is still a question mark.

Brock Vandervliet -- UBS Equity -- Analyst

Okay, great. And on the deposit fees, due to some of those waivers fees were kind of wider, how quickly can that come back?

Zachary Wasserman -- Senior Executive Vice President, Chief Financial Officer

Yeah, it's a -- we're assuming that some of them come back in the third quarter. I think, really it's going to be a function of how quickly the deposits on the sheet start to get used. I think this is a phenomenon that we've noted across the entire industry, the deposit gathering activities in second quarter were just extremely robust. And what we've seen in our own portfolio was around 70% we estimate on the consumer side of the government stimulus and some of the unemployment benefits are being saved in accounts and that's only taking down single-digit percentage points per month as we go forward. So it's hard to say because that's going to be the key drivers, is what happens with overall deposits and therefore, sort of overdraft activity. With that being said, we are expecting a modest increase as we go into the third quarter and then -- as sort of indicated in our comments, Q4 is harder to ascertain at this point.

Brock Vandervliet -- UBS Equity -- Analyst

Got it. Thank you.

Zachary Wasserman -- Senior Executive Vice President, Chief Financial Officer

You're welcome.

Operator

Thank you. Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back over to Steve Steinour for any closing remarks.

Stephen D. Steinour -- Chairman, President and Chief Executive Officer

So thank you all for your questions and interest in Huntington. Obviously, we're pleased with second quarter performance, particularly given the challenges we face. And while I'm guardedly optimistic today, we acknowledge volatility and the uncertainty in the economy. With the expense actions we announced today, we are positioned to invest in growth initiatives and opportunities while continuing to deliver solid performance. Our disciplined enterprise risk management provides a strong fundamental position. And during these past several months, we've positioned the bank to continue to execute on our strategies to further invest in our businesses and technology and to capitalize on opportunities that present themselves. I'm confident about our ability to manage the challenges we face and I'm excited about our prospects going forward.

Finally, we always like to end with a reminder to our shareholders that there's a high level of alignment between the Board, management, our colleagues and our shareholders. The Board and our colleagues are collectively among the 10 largest shareholders of Huntington and all of us are appropriately focused on driving sustained long-term performance. Thank you, again. Have a great day.

Operator

[Operator Closing Remarks]

Duration: 51 minutes

Call participants:

Mark Muth -- Director, Investor Relations

Stephen D. Steinour -- Chairman, President and Chief Executive Officer

Zachary Wasserman -- Senior Executive Vice President, Chief Financial Officer

Richard Pohle -- Executive Vice President, Chief Credit Officer

Jon Arfstrom -- RBC Capital Markets -- Analyst

John Pancari -- Evercore ISI -- Analyst

Ken Usdin -- Jefferies & Company -- Analyst

Janet Lee -- J.P. Morgan & Co. -- Analyst

Terry McEvoy -- Stephens Inc. -- Analyst

Brock Vandervliet -- UBS Equity -- Analyst

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