Huntington Bancshares Inc

NASDAQ:HBAN

Earnings Call Transcript 2018-Q1

[Operator]

Greetings, and welcome to the Huntington Bancshares’ First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation [Operator Instructions]. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Mark Muth, Director of Investor Relations. Thank you. You may begin.

[Mark Muth, Director of Investor Relations]

Thank you, Melissa. Welcome. I’m Mark Muth, Director of Investor Relations for Huntington. Copies of the slides we will be reviewing can be found on the Investor Relations section of our Web site, www.huntington.com. This call is being recorded and will be available as a rebroadcast starting about one hour from the close of the call. Our presenters today are Steve Steinour, Chairman, President and CEO and Mac McCullough, Chief Financial Officer. Dan Neumeyer, our Chief Credit Officer, will also be participating in the Q&A portion of today’s call.

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 the slides and material filed with the SEC, including our most recent Forms 10-K, 10-Q and 8-K filings.

Now I’m turning it over to Steve.

[Steve Steinour, Chairman, President and Chief Executive Officer]

Thanks Mark. And thank you to everyone for joining the call today. As always, we appreciate your interest and support. We had a solid first quarter and entered 2018 with momentum. We reported net income of $326 million and earnings per share of $0.28, up 65% from the year ago quarter.

Return on common equity was 13% and return on tangible common equity was 17.5%. Average loans increased 9% annualized versus the fourth quarter 2017, driven by disciplined broad-based growth in both commercial and consumer loans. We’re pleased with our first quarter efficiency ratio of 57%, driven by 3% year-over-year revenue growth and expense discipline. The franchise continues to perform well on many fronts as a result of focused execution and the realized economics of the FirstMerit deal.

As previously outlined on Slide 3, we developed Huntington strategies with a vision of creating a high performing regional bank and delivering top quartile trough the cycle shareholder returns. We prudently allocate our capital to ensure we’re earning adequate returns and taking appropriate risk. We also continued to make meaningful long-term investments in our businesses, particularly around customer experience to drive organic growth. We’re very pleased with how we're positioned with the sustainable competitive advantages we've created.

And Slide 4 illustrates our long-term financial goals, which were approved by the Board in the fall of 2014 as part of our strategic planning process. These goals were originally set with a five year time horizon in mind and we fully expect to achieve these goals this year on both a reported GAAP basis and an adjusted non-GAAP basis. Now our first quarter efficiency ratio was near the low end of our long-term goal as a result of the successful integration of FirstMerit, our expense discipline and focus on revenue growth. Charge-offs remain below our long term expectation.

Our 17.5% return on tangible common equity positions Huntington as a top performing regional bank. And these peer leading results demonstrate that our strategies are working and will continue to drive Huntington forward. We're pleased with our first quarter performance against all of these metrics. Also, I’d like to take this opportunity to remind you of the considerable improvement in our financial performance since 2014 when we introduced these goals.

So in the first quarter of 2014, our return on tangible common was 11.3% and our efficiency ratio was 66.4%. So through our disciplined execution over the years, we’ve elevated Huntington from the middle of the peer group to peer leading financial performance, driving a greater than 600 basis point improvement in ROTCE and almost 1,000 basis point improvement in the efficiency ratio alone.

Let's now turn to Slide 5 to review 2018 expectations and discuss the current economic and competitive environment in our markets. We remain optimistic on the outlook for the local economies across our eight states footprint. And as we've noted previously, our footprint has outperformed rest of the nation during the economic recovery that began in mid-2009.

Unemployment rates across the majority of our footprint remain near historical lows. The labor market in our footprint has proven to be strong with several markets such as Columbus, Indianapolis and Grand Rapids, where we see meaningful labor shortages given metro unemployment rates, which are well below national averages. Philadelphia Fed’s state leading indicator indices for our footprint point toward a favorable economic operating environment in 2018, most of the states are expected to see an acceleration in economic activity over the next six months. Four of our states, including Ohio, are expected to grow significantly faster than the nation as a whole.

As a result of federal tax reform, we expect continued business investment and expansion. We are seeing an increased capital expenditure. It's important to remember that our commercial focus is primarily privately held businesses and these companies are likely to reinvest tax benefits into their businesses to fund growth. As in aside Site Selection Magazine’s Governor’s Cup for Capital Investments and New Jobs created in 2017 support our expectations, five of the eight states placed -- five of our eight states placed in the top 10 of the nations for total qualified new projects with Ohio earning the number two spot overall. These rankings and leading indicators confirm our optimism.

But importantly, our loan pipelines remain solid across all footprints. And as we get out and as I talk to different business owners, and I can confirm this is a wide spread level of optimism. In fact, if anything we’re being held back by labor supply shortages. We’re clearly seeing impacts in construction and other businesses where they just can't get enough labor. And as a consequence, we’re starting to see labor inflation, but we’re also seeing businesses now that are working on next year's pipelines of activity. So backlogs are looking good in many of our businesses, manufacturing, construction are two examples. And we’re feeling very good on the whole about this year and stress going into next.

And so while the growth trends will likely not be linear, we remain optimistic with our full year outlook. We expect full year average loan growth in the range of 4% to 6% inclusive of $500 million auto loan securitization in the back half of the year. Full year average deposit growth is expected to be 3% to 5%, and you know for internal forecasts and the guidance purposes. We continue to assume no additional interest rate changes consistent with our approach over the last few years. And while it appears likely that the fed might act again this year, it served us well to take a more conservative approach in our forecasting process.

We expect full year revenue growth of 4% to 6%. We are projecting the GAAP NIM for the full year to be flat and the core NIM to be up modestly in 2018. On the expense side, we are expecting a 2% to 4% decrease from the 2017 GAAP non-interest expense of $2.7 billion. Our expectations include improvement in the efficiency ratio to a range of 55% to 57%, as well as we are targeting positive operating leverage for the sixth consecutive year. We anticipate net charge-offs will remain below our long-term goal 35 to 55 basis points. And importantly, we’ve lowered our expectation for the effective tax rate to the 15.5% to 16.5% range. The range is fully reflective of federal tax reform.

Now looking beyond 2018. We recently began a new three-year strategic planning process. Our pass-through strategic plan significantly advance the Company's financial performance and competitive positioning. To continue this momentum, our initial areas of focus for the 2018 strategic planning process, are number one; top line revenue growth; two, capital optimization; and three, business model evolution incorporating expected disruption. As we stated previously, an important outcome of the strategic planning process will be new long-term financial goals for the Company, and we expect to be in a position to communicate those later in the year.

So with that, let me now turn it over to Mac for an overview of the financials. Mac?

[Mac McCullough, Chief Financial Officer]

Thanks Steve. Slide 6 provides the highlights of the first quarter. As Steve mentioned, we had a good first quarter, but also a clean quarter as there were no significant items. We reported earnings per common share of $0.28 for the first quarter, up 65% over the year ago quarter. The year ago quarter included $0.04 per share reduction due to significant items related to the FirstMerit integration. Return on assets was 1.27%, return on common equity was 13% and return on tangible common equity was 17.5%. We believe all three of these metrics distinguish Huntington among our regional bank peers.

Our efficiency ratio for the quarter was 56.8%. Tangible book value per share increased 2% sequentially and 9% year-over-year. During the first quarter, we repurchased $48 million of common stock, representing 3 million shares at an average cost of $15.83 per share. This completed the $308 million buyback authorization under a 2017 CCAR plan.

Turning to Slide 7. Total revenue was up 3% from the year ago quarter. Net interest income was up 5% year-over-year due to a 5% increase in average earning assets while the net interest margin was unchanged. Non-interest income increased 1% year-over-year with increases in capital market fees, card and payment processing revenue and trust and investment management fees, partially offset by lower mortgage banking income and a reduction in gains on the sale of loans, primarily related to the sale of an equipment finance loan in the year ago quarter.

While both mortgage and SBA originations were higher year-over-year, compression in secondary market spreads in mortgage banking and the timing of SBA loans sales resulted in year-over-year declines in these fee categories. FirstMerit related revenue enhancement opportunities remain on track to deliver over $100 million of revenue in 2018 with an efficiency ratio below 50%. As we stated before, these projections are included in our 2018 guidance.

Non-interest expense decreased 10% year-over-year due entirely to $73 million of significant items expensed in year ago quarter related to the integration of FirstMerit versus no significant items expensed in the current quarter. Expenses were flat versus prior quarter. It should be noted that expenses are historically higher in the second quarter, primarily driven by the timing of compensation associated with long-term incentives and seasonally higher marketing expense, which combined could add up to $20 million compared to the first quarter.

However, these are just timing differences, and as Steve mentioned earlier, we remain comfortable with full year guidance, including full year expectations for non-interest expense per analyst estimate. For a closer look at the income statement details, please refer to the analyst pack and press release.

Turning to Slide 8. Average earning assets grew 5% from the first quarter of 2017. This increase was driven by 5% increase in average loans and leases and 3% increase in average securities. The increase in average securities primarily reflected an increase in direct purchase instruments in our commercial banking segment.

Average C&I loans increased 1% year-over-year with growth centered in middle market banking. On a linked quarter basis, average C&I loans increased 3% or 12% annualized with broad-based growth in specialty, corporate and middle market banking. Average commercial real estate loans were flat year-over-year as we have conservatively tightened CRE lending, specifically in multi-family, retail and construction to remain consistent with our aggregate moderate to low risk appetite and to ensure appropriate returns on capital.

Average auto loans increased 9% year-over-year as a result of consistent and disciplined loan production. Originations totaled $1.4 billion for the first quarter of 2018, up 1% year-over-year. Average new money yields on our auto originations were 3.86% in the first quarter, up from 3.52% in the prior quarter.

Average RV and marine loans increased 32% year-over-year, reflecting the success of our expansion of the business into 17 new states over the past two year. Average residential mortgage loans increased 18% year-over-year, reflecting continued strong demand for mortgages across our footprint, as well as the benefit of our ongoing investment in former FirstMerit geographies, particularly Chicago. As typical, we sold the agency qualified mortgage production in the quarter and retained jumbo mortgages and specialty mortgage products.

Turning attention to the chart on the right side of slide. Average total deposits increased 1% from the year-ago quarter, including 3% increase in average core deposits. In the first quarter, we began to see customer migration into higher yielding deposit products such as CDs and money market accounts.

Moving to Slide 9. Our net interest margin was 3.30% for the first quarter, unchanged from both year ago and linked quarter. Purchase accounting accretion contributed 8 basis points to the net interest margin in the first quarter, down from 10 basis points in the prior quarter and 16 basis points in the year ago quarter. After adjusting for purchase accounting accretion in all quarters, the core NIM was 322 compared to 320 in the prior quarter and 314 in the first quarter of 2017. Growth in core NIM over the past year has more than offset the benefit in purchase accounting accretion.

Slide 29 in the appendix provides information regarding the scheduled impact of FirstMerit purchase accounting for 2018 and 2019. Our deposit cost remained well contained as consumer core deposits were up 5 basis points year-over-year and commercial core deposits were up 18 basis points. With the market outlook for continued rate hikes and increasing deposit competition, we locked in fixed-rate term deposits and selectively increased rates to grow and retain core relationships, providing better economics for the bank relative to the cost of wholesale funding.

On the earnings asset side, our commercial loan yields increased 36 basis points year-over-year, while consumer loan yields increased 11 basis points. On a linked quarter basis, commercial loan yields increased 14 basis points while consumer loan yields increased 3 basis points.

Moving to Slide 10. Our cycle to-date deposit beta remains low at 17% through the first quarter of 2018, and roughly in line with the average of our peers that have reported so far. As we told you last quarter, we are seeing increased deposit competition as competitors conduct various product and pricing tests across our footprint. As a result, we anticipate a continued increase in deposit betas this year, driven by both mix and cost. Assuming two additional rate increases in 2018, our current forecast assumes the deposit beta of approximately 50% for calendar year 2018 with a higher proportion of incremental deposit growth coming in from higher cost of products, including money markets and CDs.

Slide 11 illustrates the continued strength of our capital ratios. During the first quarter, we converted 363 million of high cost Series A preferred equity into common shares, and subsequently issued 500 million of attractively priced Series E preferred equity, improving our capital ratios. Note that the first quarter preferred dividend expense that that include any dividend on the new Series E due to the issuance timing. Therefore, the total second quarter preferred dividend expense will be approximately $21 million or $3 million higher than the future quarterly run rate of approximately $18 million to account for the partial quarters Series E dividend.

Tangible common equity ended the quarter at 7.70%, up 42 basis points year-over-year. Common equity Tier 1 or CET 1 ended the quarter at 10.49% or 75 basis points year-over-year and above our 9% to 10% operating guideline. We believe our earnings power capital generation and risk management discipline will support a higher dividend payout ratio over time.

As we have previously stated, our capital priorities are first organic growth, second support the dividend, and third everything else, including buybacks. With respect to this year’s CCAR, we have a unique opportunity as a result of the two preferred transactions, which pushed CET 1 above the high-end of our operating guideline of 9% to 10%.

Moving to Slide 12. Credit quality remains strong in the quarter. Consistent prudent credit underwriting is one of Huntington’s core principles. And our financial results continue to reflect our disciplined approach to risk management and our aggregate moderate to low risk appetite. We booked provision expense of $68 million in the first quarter compared to net charge-offs of $38 million. The level of provision expense in the quarter reflected the strong commercial loan originations, as well as continued migration of the acquired FirstMerit portfolio into the originated portfolio.

Net charge-offs represent an annualized 21 basis points of average loans and leases, which remain below our long-term target of 35 to 55 basis points. Net charge-offs were down 3 basis points from the prior quarter and the year ago quarter. CRE had net recoveries again this quarter, driven by one large relationship. As usual, there is additional granularity on charge-offs by portfolio in the analyst package in the slides. The allowance for loan and lease losses as a percentage of loans increased 2 basis points linked-quarter to 1.01%, and coverage of non-accrual loans was 188%.

Turning to Slide 13. Non-performing assets increased $31 million or 8% linked-quarter. The NPA ratio increased 4 basis points sequentially to 59 basis points. The criticized asset ratio increased 7 basis points from 3.53% to 3.60%. Our 90-day plus delinquencies declined 2 basis points. NPA inflows increased 6 basis points. Overall, asset quality metrics remain cyclical lows and some quarterly volatility is expected given the adequate low level of problem loans.

Turning to Slide 14. We highlight Huntington’s strong position to execute on our strategy and provide consistent through-the-cycle shareholder returns. The graph on the top left quadrant represents our continued growth in pretax, pre-provision net revenue as a result of the focused execution of our core strategies. The strong level of capital generation positions us well to fund organic growth and return capital to our shareholders, consistent with our capital priorities.

The top right chart highlights the well-balanced mix of our loan and deposit portfolios. We are both a consumer and commercial bank, and believe that the diversification of the balance sheet will serve us well over the cycle. We were pleased with the 2017 DFAST and CCAR results, which provide an instant quarterly industry comparison. The results illustrate our strong enterprise risk management and our discipline to operate within our aggregate moderate to low risk appetite. Our DFAST stress test results are highlighted in the bottom left.

Finally, the bottom right demonstrates Huntington’s strong capital position. As we return to the key messages on Slide 15, let me turn the presentation back over to Mark for Q&A.

[Mark Muth, Director of Investor Relations]

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 additional questions, he or she can add themselves back into the queue. Thank you.

[Operator]

Thank you. At this time, we’ll be conducting a question-and-answer session [Operator Instructions]. Our first question comes from the line of Scott Siefers with Sandler O’Neill and Partners. Please proceed with your question.

[Scott Siefers, Sandler O’Neill and Partners]

First question, Steve maybe for you, I just wanted to talk about the outlook that you guys have always been extraordinarily conservative on the rate outlook. It looks like it’s going to come in more accommodative than is embedded in your outlook for no rate increases. So in a sense that difference end up becoming kind of found money. So I guess if we were to get another hike or two, what is at a top level the plan? If you allow that similarly to drop to the bottom line or do you think about maybe reinvesting accelerating some costs, may be being even more aggressive on taking deposit market share, et cetera. What would be your thinking at the top level?

[Steve Steinour, Chairman, President and Chief Executive Officer]

We budget, we plan for no rate increases, but we obviously run scenarios around it. Mac shared that with, Scott, on the call in terms of deposit betas. We do think this environment is one that’s conducive to us growing organically in a meaningful way. Pleased with the first quarter and we closed with good pipelines as we come into the second quarter. So we would expect the organic growth to continue. And in that construct look to continue to grow both the deposit and lump side, we’re very focused on the fee side of the quarter and what we can do prospectively on that front as well.

We had good SBA activity, for example, but we ended up seeing a lot more of a construction nature than we’ve had before. So it’s a sign of capital investment. There is a belief that by operating in this more conservative fashion, we’ll be a little more agile as we move forward with the benefit of rate increases. Anything you want to add, Mac?

[Mac McCullough, Chief Financial Officer]

Scott the way to think about it is a 25 basis point increase in rates on an annual basis is about $25 million in margin on an annual basis. So that obviously says a lot of assumptions around what we're expecting from the deposit betas and competition in the marketplace. And of course the lapping yield curve has not been conducive to that either. So we’re a little bit cautious as we move through this. We do think there will be opportunities from increasing rates, but at the same time, we’ve never focused on growing core deposits. We had great core deposit growth year-over-year at about 3%, and we aim to continue to do that.

[Scott Siefers, Sandler O’Neill and Partners]

And I guess what I was getting at it, let's say, you get that some portion of the $25 million, you just let that drop straight to the bottom line use that as an opportunity to maybe spend a little more than you would have anticipated? Just given the disconnect between how you’re likely to pan out in terms of rate moves versus what you guys are forecasting in the guidance?

[Steve Steinour, Chairman, President and Chief Executive Officer]

Scott, we have significant investment built into the 2018 budget already. So clearly, we will be opportunistic as we think about what might happen from a rate increase perspective. And I would expect that majority of that would drop to the bottom line, but we’ll selectively think to look at the investment opportunities on the digital front and in particular in customer experience and our colleagues.

[Scott Siefers, Sandler O’Neill and Partners]

And then just maybe one follow-up. What was it that lapping you guys to improve the tax rate guide just a little bit. I mean I know it’s not huge, but just curious your thoughts.

[Steve Steinour, Chairman, President and Chief Executive Officer]

What it really came down to Scott is we’d like to give you ranges that are meaningful in terms of actually being able to achieve and fall within the range. And the fact of the matter is 17% would just be fine. So that’s why we felt 15.5% to 16.5% was a better range for us to consider going forward.

[Operator]

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

[Sam Ross, Evercore ISI]

This is actually Sam Ross on for John this morning. I just had a question about the ROTC guidance. I appreciate the fact you guys are currently reviewing your three year plan. I am just wondering given the fact where your 1Q ROTC came in. What do you guys thinking is an appropriate level for 2018 for you guys to operate in?

[Mac McCullough, Chief Financial Officer]

So I would expect to be in that range. I mean, we’re in the process of going through the long-term strategic plan. We’re going to come out later this year with our new expectations for all those metrics. It's really important to keep in mind that we're going to operate within an aggregate moderate to low risk appetite, and a 17.5% ROTCE with an aggregate moderate to low risk appetite is pretty good in our estimation. So I wouldn’t expect that you're going to see significant change within that goal going forward, but we’ll go through the strategic planning process and we’ll let you know later this year.

[Sam Ross, Evercore ISI]

And then just looking at the balance sheet. In terms of the non-interest bearing deposits, I know you guys touched up on it in your prepared remarks about a mix shift that you guys are seeing into more higher interest rate products. I am just wondering was there anything outside of seasonality, you can maybe provide a little bit more color on if the sizeable decline in non-interest bearing deposits, I think that would be helpful. Thanks.

[Mac McCullough, Chief Financial Officer]

I think what’s happening, Sam, as you're seeing our commercial customers in particular being much more sensitive in terms of what's happening in the rate environment. And we're seeing them move balances from non-interest bearing into interest bearing, which I think you would expect in this environment. So that would be an additional factor on top of seasonality.

[Sam Ross, Evercore ISI]

And would you expect that dynamic to continue into 2018 or what do we think about in terms of that?

[Mac McCullough, Chief Financial Officer]

At some point, they complete the movement that they want to make from one category to the other. Clearly, as rates continued to increase, we’re going to have commercial customers ask for some sharing of rates. But I think the mix shift should probably slowdown as we move forward.

[Operator]

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

[Unidentified Analyst]

This is actually Josh on for Ken. Average wholesale funding showed a large sequential increase this quarter. Do you think there's potential to remix these wholesale sources into deposits, and then how you’re thinking about funding the loan growth going forward?

[Mac McCullough, Chief Financial Officer]

So we are actively thinking about what we need to do from a deposit rate perspective to bring wholesale funding down, particularly the overnight category. When we think about what we do on the commercial customer deposit pricing, we think about what rate we would provide to them relative to cost of growth overnight funding or across wholesale funding. So I would expect that you’re going to see that continue to come down over time, and it should be an opportunity for us as we think about just the trade off and the rate improvement when we move the commercial deposits.

So I think if you take a look at in the period, in particular you’ll see this already down significantly that’d be in the overnight funding. And then going forward, we are focused on core deposit growth. Like I’ve mentioned in my comments, we grew 3% in core deposits year-over-year, which I think is a pretty good showing relative to our peers in the industry. We've had a lot of success with CD products and we were looking at some money market opportunities as well. So I think core deposit funding will be the primary way we’re going to fund going forward.

[Unidentified Analyst]

And we've heard from some of your peers that they’re seeing a pretty benefit from the rollover of their swap portfolios. Could you just speak to what you're seeing in regards to this?

[Mac McCullough, Chief Financial Officer]

So at this point, all of our asset swaps are off at this point. We have no assets swaps on. The last asset swap rolled out in the first quarter. We evaluate some of the debt swaps we have inside the time, and that represent an opportunity for us, but have not taken any action there as of yet. Josh does that answers your question.

[Unidentified Analyst]

I was actually referring more to the rolling over the spreads, so better new money spreads versus what's rolling off as that liability side swap portfolio rolls.

[Mac McCullough, Chief Financial Officer]

Clearly, we probably do have opportunities there. I don’t think it would be large in the scheme of things for us.

[Operator]

Our next question comes from the line of Steven Alexopoulos with J.P. Morgan. Please proceed with your question.

[Steven Alexopoulos, J.P. Morgan]

I want to start first on the loan growth. You guys have really solid C&I loan growth in the quarter. And Steve, you’re very optimistic in regard to business confidence, the economic strength of the footprint. As you look at the pipeline, could the high single digit growth you put up this quarter on average loans continue in the second quarter or is that really just an anomaly the way you look at it?

[Steve Steinour, Chairman, President and Chief Executive Officer]

The pipeline that we came into the year with was very strong. We had a surge in activity late in the year. So first quarter was very, very good with the carryover pipeline. As we come into the second quarter, we also have a sound pipeline across all the segments all of our businesses. And so there is an underlying sense of economic activity that we’re able to participate in through our customers that we would expect to carry forward with the year. We clearly are seeing more CapEx related investments than we have in quite a few years at this stage Steven.

[Steven Alexopoulos, J.P. Morgan]

So is that why the average was so strong in the quarter as your customers spending, I mean the line utilization increase in the quarter?

[Dan Neumeyer, Chief Credit Officer]

Our line utilization was off just a tick, so that really didn't benefit all that much. I do think we’ve seen more of an evening out of where the growth is coming from. Core middle market has been good. I think we are not seeing the impact we saw last year in the large corporate space. I think we’re actually seeing a bit of a pickup there and then some of the [indiscernible] as well. So it’s good broad based contribution. And as Steve said, the pipeline remains fairly strong.

[Steven Alexopoulos, J.P. Morgan]

And then for my other question, I want to follow-up on the commentary around digital initiatives and what you’re doing on the customer experience side. What the expected spend on technology this year and how does that compared to last year? Thanks.

[Mac McCullough, Chief Financial Officer]

Steven, we don't disclose the spend on technology. I will say that it’s up year-over-year in terms of what we're investing in technology development. And I would also tell you that the portion of that allocates to digital is up significantly year-over-year.

[Steven Alexopoulos, J.P. Morgan]

It is up significantly year-over-year, is that what you said?

[Mac McCullough, Chief Financial Officer]

Yes.

[Operator]

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

[Ricky Dodds, Deutsche Bank]

This is actually Ricky Dodds for Matt. I just wanted to hear your thoughts on or is there a build going forward. We’ve seen a number of your peers have large reserve releases this quarter. Just wondering if you could provide some color for Huntington going forward, I know you have some FirstMerit renewals and you have stronger loan growth. But wondering if you just provide a little more color there?

[Steve Steinour, Chairman, President and Chief Executive Officer]

Well, in the quarter clearly with the loan growth that is going to come as additional reserve, so that's a large piece of it. The FirstMerit impact is still there although that’s lessening each quarter. And then we did have some modest migration in the credit side and non-accrual loans that also contributed to the build. But as we’ve said over time, we expect the level of provision to moderate with both loan growth and more normalizing credit performance. Although, we expect the net charge-offs to continue to be below our long term expectation. So as we’ve said, it’s low build back up in the reserve but it will be modest and a slow ramp.

[Ricky Dodds, Deutsche Bank]

And then maybe just a follow-up on loan growth, it was particularly strong and you guys called out the core middle market. I was wondering if you could provide any specific colors on industries or geographies, and maybe outperforming our verticals, just wondering if you add any color there.

[Steve Steinour, Chairman, President and Chief Executive Officer]

Well, I think obviously in our heavy manufacturing market rates, in particular we're seeing strong demand there. But throughout our region, we have many areas that are involved in manufacturing. Chicago continues to be a strong growth market and that is far more diversified. I would say really most industries that we're looking at, I would say would have a positive outlook manufacturing wholesale, et cetera. And so really pretty good reads from all of our customers across most industries.

[Operator]

Thank you. Our next question comes from the line of Marty Mosby with Vining Sparks. Please proceed with your question.

[Marty Mosby, Vining Sparks]

I wanted to ask, the only weakness really on the revenue side was in two categories, loan sale gains and mortgage banking. I was curious in a sense of -- I know you had some balance sheet optimization coming out of the merger. So I was trying to figure out was the $15 million to $18 million that and now we're back down to $8 million to $10 million of loan sale. And then is mortgage banking seasonal, have you seen any pick up or improvement in pricing as well as originations for the second quarter in that fee line item?

[Mac McCullough, Chief Financial Officer]

So on the loan sale question, I would tell you that a lot of in this timing of SBA in the first quarter. So originations are actually up year-over-year. So good continued progress there, particularly as we move into Chicago and Wisconsin. So I view this as really a timing issue on the most part. In the first quarter of last year, we did have a large equipment sale that contributed at the first quarter. And those are lumpy, as you know, so that again is a timing issue.

On the mortgage origination side, again volumes were up but favorable spreads are down. And a lot of the origination pickup has come from the FirstMerit expansion into Chicago and Wisconsin. And I would also tell you getting stronger in some of the core markets, primarily on the FirstMerit side. So we’re pleased with what we’re seeing from origination perspective. But again, the sale of spread being down that’s impacted the fee line.

[Marty Mosby, Vining Sparks]

And then purchase accounting accretion is one of those things that is forced upon us, but has been having some impacts when you start looking at just how the market views your earnings. Now that we got a year to look back, you cut your first accounting accretion in half, but held your margin flat and actually grown net interest income. Do you feel like -- with the guidance, it seems like you’re feeling very comfortable but as that headwind comes slows down that the balance sheet growth and then the core margin expansion would actually begin to really pick up some pace relative to whatever loss you might have in purchase account accretion?

[Steve Steinour, Chairman, President and Chief Executive Officer]

I am very pleased with what we are seeing in the core margin. We’ve increased a few basis points per quarter since the first quarter of 2017, and we expect that to continue in 2018 as well. So right now, the guidance we’re giving is flat to reported margin as we continue to burn off the purchase accounting accretion. Could it be a little bit better, it might be. It just depends on where deposit pricing goes and what it’s going to take to fund the balance sheet. But very really pleased with how we come through the runoff in purchase accounting. And I think it really is disciplined pricing on both the asset and the liability side that’s allowed us to do that.

[Marty Mosby, Vining Sparks]

And then just the last thing, if you look at flat fed funds from here, but your core margin is still improving. Is that just like -- I think you highlighted the fact that the market rates are higher than the portfolio, both in securities and loans. So rounding up those yields just with stagnant rates where they’re at right now is a very possible and reasonable outcome?

[Steve Steinour, Chairman, President and Chief Executive Officer]

Yes, I would agree with that. As we look at new money rates, they are generally higher than what’s in the portfolio. We still have some purchase accounting impact that we’re swimming through there. But again, we’re very disciplined in how think about pricing, the asset side of the balance sheet. And even in a flat environment, we’re going to continue to see new money come on at higher rates in the portfolio.

[Operator]

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

[Peter Winter, Wedbush Securities]

You guys talked about the seasonal increase in expense in the second quarter. I’m just wondering would that be offset with a seasonal increase on the revenue side and so therefore, maybe the efficiency ratio should be at least steady in the second quarter?

[Mac McCullough, Chief Financial Officer]

So typically, we do see a seasonal increase in revenue in the second quarter. The two are disconnected of course, because the increase in expense has primarily to do with just the timing long-term equity compensation, as well as seasonal marketing, which typically is higher in the second and third quarters and then declines in the fourth quarter. So based on that, it wouldn’t surprise me if the efficiency ratio stayed in the same level, because we do see seasonality in revenue to the up side in the second quarter.

[Peter Winter, Wedbush Securities]

And then second separate question, it’s minor but there was that uptick in non-performing assets. And I understand there’s volatility at the bottom. But could you just give us a little bit of color on the increase in NPAs this quarter?

[Dan Neumeyer, Chief Credit Officer]

So not industry driven, we have from time-to-time when you’re down at very low levels of NPAs any couple of credits can move that we had three credits in the quarter in unrelated in industries. So no trends that we’re overly concerned about. It was really idiosyncratic events, particularly to those three individual credits.

[Operator]

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

[Brock Vandervliet, UBS]

I just want to circle back on the comment on deposit betas. It would seem like you may just be being conservative with 50% deposit beta that’s clearly not visible in the numbers at the moment. Are you seeing -- is this caution on the commercial side? You noted the change in potential changing category that’s driving some of that commentary.

[Mac McCullough, Chief Financial Officer]

So the 50% reference would be to any rate increases in 2018. So that might be a little conservative as we think about it. But again, we’re very focused on growing core deposits. If you take a look at across our region and who we compete with, we think it’s very rational. We see what’s happening and there is lots of testing from a pricing and product perspective. We’re doing the same thing. But clearly, I think it’s a good assumption for us to think about for 2018 just given the environment and the desire for us to continue to grow.

[Brock Vandervliet, UBS]

And separately marine and RV. Clearly, growing very rapidly as that’s been a new initiative for you. How large is that likely to become given that we are late in the cycle?

[Dan Neumeyer, Chief Credit Officer]

Well, we do see growth opportunity out there. And we feel very comfortable because the quality of the borrowers that we’re originating credit for is really in the super prime range. So I think given the fact that we’ve expanded our markets, there is a big universe out there. The competition is not as robust as in say indirect auto. But we’re originating at 90 plus FICOs for bid price both in RVs with folks with demonstrative liquidity, all these deals are individually underwritten. So we believe that there is potential out there for high quality assets. We have established a concentration limit so our growth will be moderated by that limit. But we have plenty of run way that we think will serve us well as we develop that business further.

[Operator]

Our next question comes from the line of Jon Arfstromwith RBC Capital Markets. Please proceed with your question.

[Jon Arfstrom, RBC Capital Markets]

Just following up on Brock’s question, I hate to go back to deposit beta again. But basically, what you’re saying is at this point you're performing just like everybody else in the mid-teens. But going forward from here, you expect the pressure to step up. That's all you’re saying. Is that right?

[Mac McCullough, Chief Financial Officer]

Jon, I think we’re building that into the way we’re thinking about the forecast. Again, we like to be conservative from a rate outlook perspective. We like to understand what’s the revenue environment is going to be. And then from that determine what investments we want to make and how we manage the expense line. So it just keeps us from web selling but the business segments and the colleagues in terms of everyday out there doing their job. So I think that’s exactly the way we stated that.

[Jon Arfstrom, RBC Capital Markets]

Related question on the revenue growth guidance is the same at 4% to 6% as the prior quarter but we did get the March increase. It would get a couple more is the mac view of the world that the margin can drift higher?

[Mac McCullough, Chief Financial Officer]

Yes, I think it can. I mean keep in mind that as I mentioned earlier, 25 basis point increase is worth $25 million in the full year basis. That’s about 0.5% growth in revenue. So the 25 basis point increase in March wouldn’t cause us to do anything to change our revenue guidance of 4% to 6%. But clearly in a rising rate environment, if we get the increases as might be expected, I would expect the margin to move higher.

[Jon Arfstrom, RBC Capital Markets]

And then if I can just squeeze in one more. Steve, you made a comment on loan growth, you don't expect it to be linear. Just the nuance comment or is there any point you're trying to make on that?

[Steve Steinour, Chairman, President and Chief Executive Officer]

No, we just have a really strong first quarter. And while we are in the second quarter with good pipelines across all products just trying to be a bit cautious with -- in the context for the full year, the outlook and optimism we see that we’ve communicated is abundant throughout the marketplace. So if anything there maybe a little upside.

[Operator]

[Operator Instructions] Our next question comes from the line of Terry McEvoy with Stephens Inc. Please proceed with your question.

[Terry McEvoy, Stephens Inc]

The consumer auto yields were down about 5 basis points quarter-over-quarter, and that’s after trending higher throughout 2017. I believe you changed the credit scoring model early in last year. Were there any tweaks made to that model earlier in the first quarter and what are your thoughts on yields coming down?

[Steve Steinour, Chairman, President and Chief Executive Officer]

No tweaks and Terry, it’s probably purchase accounting related. So we’re seeing run-off from purchase accounting entries on that book and that’s likely what’s driving.

[Terry McEvoy, Stephens Inc]

And then as a follow-up, maybe question for Dan. A few of your peer banks or national banks have scaled back expectations on CRE growth this year just based on, call it, market competition. What are your thoughts on incremental growth going forward after pretty solid growth here in the first quarter?

[Dan Neumeyer, Chief Credit Officer]

I mean, the CRE can be a bit lumpy, because the various projects can move the needle. So we are continuing to support our core customers. But we've been pretty cautious in making sure that we have lessened our construction exposure recently, as we’ve noted before been careful on multi-family and retail. But we’re continuing to originate. We’re still seeing good deal flow, and we are choosing those products or projects that are -- where we can get adequate structure and reasonable pricing. So we’ll continue business as usual in the CRE space.

[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 to Steve Steinour for closing comments.

[Steve Steinour, Chairman, President and Chief Executive Officer]

So thank you very much. We feel very good about where we are. We obviously produce good results in the first quarter. And we're confident about our year, going forward. Our top priority is growing our core businesses and that's continuing. And we think there's more opportunity at hand, certainly throughout the year. We're building long-term shareholder value with top quartile financial performance, and we're maintaining strong risk management with disciplined execution across our strategies. So like the performance and position but feel we have upside opportunities to do better in a number of businesses.

So finally, I'd like to include a reminder that there's a high level of alignment between the board, management, our colleagues and our shareholders. Collectively, the Board and colleagues are the seventh largest shareholder in Huntington and all of us are appropriately focused on driving sustained, and want to emphasize long-term performance. So thanks for your interest in Huntington. We appreciate you joining us today. And have a great day.

[Operator]

Thank you. This concludes today’s [Call ended abruptly].