Greetings. Welcome to the Huntington Bank Shares Third Quarter Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mark Martin, Director of Investor Relations.
Thank you. You may begin.
Thank you, Sherry. Welcome. I'm Mark Moose, 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. This call is being recorded and will be available as a rebroadcast starting about 1 hour from the close of the call.
Today's presenters are Steve Steinauer, Chairman, President and CEO Mac McCullough, Chief Financial Officer and Rich Poley, Chief Credit Officer. As noted on Slide 2, Today's discussion, including the Q and 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 months. For a complete discussion of risks and uncertainties, please refer to this slide and material filed with the SEC, including our most recent Forms 10K, 10 Q and 8 K filings.
Let me now turn it over to Steve, and he's will start on Slide 3. Thanks, Mark,
and thank you to everyone for joining the call today. And always, we appreciate your interest and support. We had a solid third quarter, and we're pleased with the continued momentum across the bank despite a challenging operating environment. Overall, our businesses are performing well with disciplined organic growth. Credit quality remains strong and we continue to build capital while supporting organic growth.
We've been positioning the bank for a weaker economy and for a lower interest rate environment throughout the year. Our efforts are consistent shareholder returns. We are being cautious with our capital and liquidity given mixed global economic signals as well as increased global risks and volatility. Please remember our board and management collectively are among the top 10 shareholders of the company, and were required long term shareholders. Across our footprint, consumers continue to perform well with strong labor markets driving wage inflation.
In the 12 months ending August 2019, unemployment rates declined in 14 of the 20 largest MSAs in Huntington's footprint states. Job openings exceeded unemployment levels in most of our markets. Home prices continue to appreciate with especially solid increases in Michigan, Indiana and Ohio. Additionally, consumer confidence in our region has generally stayed at the highest levels since 2000. On the business side, we've adopted a slightly more cautious view of the local economies, recognizing that economic growth has slowed.
We've recently commercial customers, primarily in outlook has impacted investment. The uncertainty, along with the tight labor markets, is constraining economic growth in our footprint. Our customers are in virtually all footprint state economies. Michigan, for example, is benefiting from a growing services sector with strong recent employment growth occurring in financial, business and professional services. Ohio has multiple industries in which long term growth potential is high, including technology, financial services, health care, and research.
The visibility in the pipeline for the fourth quarter commercial loan growth remains good, though we are more cautious about 2020. In light of the more challenging an operating environment and the prevailing outlook for additional interest rate cuts, we've taken action in the 4th quarter to reduce our future expense growth. We've recently completed an internal reorganization, including the elimination of about 200 existing positions to better drive productivity. In addition, the build out of our agile development capabilities have allowed us to become more efficient and more effective in and further invest in digital technology despite an expectation of additional rate reductions. We are projecting positive operating session in the near term.
Our core earnings power, strong capital, aggregate moderate to low risk appetite, and our long term strategies position us to withstand economic headwinds. Our strategies are designed to drive more consistent performance across economic cycles. And while we, as I've said, we do not foresee a near term recession, it's important to recognize the downturns do not only bring challenges. They also bring opportunities. And we have a strong record of taking advantage of these situations.
For example, in 2009 10, when others were pulling back from auto and small business lending, we stepped in and expanded these businesses. And 10 years later, these two groups are key drivers of Huntington's success. Huntington was the largest SBA 78 lender in the nation last year for the 2nd year in a row, and we've now been number 1 in our footprint for more than a decade. Similarly, our auto finance business now operates in 23 States and we're the 10th largest bank auto lender. Also, in 2010, we introduced Fairplay Banking, which was quite controversial and disruptive at the time, but has fueled our consumer banking growth over the past decade.
We're positioned for a more challenging economy, and I'm confident in our ability to continue to build long term shareholder value. Now before I turn it over to Mac, I want to highlight our now last week that Zach Wasserman will be joining us in early November from Visa as our next CFO. As you all know, earlier this year, Mack announced he'll be hiring at year end. So this is Mac's final earnings conference call before his retirement. I wanted to take a moment to thank him for his many accomplishments and enormous contributions to Huntington.
Mack heightened the culture of financial discipline throughout the organization. He was instrumental in our acquisition of FirstMerit and the was the executive co lead for the integration, which successfully delivered the largest acquisition in our history. Under Mac's strategic leadership, we've established our long term financial metrics and exceeded the original set in 2014 and are now working on the current set. He's positioned the bank to perform well through all economic cycles. So on behalf of our board, our shareholders, and certainly our colleagues, I'd like to thank Mac as we're extremely grateful for his contributions to the company.
So with that, halo, let me now ask you to
provide the overview of financial performance. Very good. Well, thank you for those kind words, Steve. And let me say, welcome to Zack, who I'm sure is listening to the call today. Good morning to everyone on the call, and I just want to let you know how much I've enjoyed the relationship with the investment community over the last 3 decades.
I've appreciated the friendships that we've developed, and, I appreciate the learning opportunities as well. So thank you very much. Let's turn to Slide 4 and take a look at the third quarter. So we reflected strong earnings momentum with solid growth in revenue and earnings per share and a double digit growth rate in tangible book value per share. We recorded net income of $72,000,000, a decrease of 2% versus the year ago quarter.
We reported earnings per common share of $0.34 up 3% year over year. Tangible book value per common share was $8.25, a 17% year over year increase. Return on assets was 1.4%, return on common equity was 13% and return on tangible common equity was 17%. Our efficiency ratio for the quarter was Total revenue increased 4% year over year. Average loans increased 3% year over year and average core deposits increased 2% year over year.
Net charge offs modestly increased this quarter as a result of 2 commercial credits, which Rich will provide more detail on later in the call. Overall credit quality remains strong. Even with these items, net charge offs were near the low end of our average through the cycle target range of 35 to 55 basis points. As we have previously noted, we expect some quarter to quarter volatility given the very low loss and problem loan levels at which we are operating. Average earning assets increased $2,900,000,000 or 3 percent compared to the year ago quarter.
Average loans and leases increased to $2,300,000,000 or 3 percent year over year, including a $1,500,000,000 or 4 percent increase in commercial loans and a $800,000,000 or 2 percent increase in consumer loans. Average Portional And Industrial loans increased 6% from the year ago quarter and reflected the largest component of our year over year loan growth. C and I loan growth has been well diversified over the past year, with notable growth in corporate banking, dealer floor plan, and asset finance. We also continue to see good traction in our new specialty lending verticals of Mid Corporate Lending, Technology, Media And Telecom, And Practice Finance. Which we announced as part of the 2018 strategic plan.
Alternatively, we continue to actively manage our commercial real estate portfolio around current levels. With average CRE loans reflecting a of CRE lending to ensure appropriate returns on capital and to manage risk. Consumer loan growth remains centered in the residential mortgage in RV And Marine portfolios, reflecting the well managed expansion of these two businesses over the past 2 years. Average residential in the quarter and retained jumbo mortgages and specialty mortgage products. Average RV and marine loans increased 17% year over year as we continue to gain traction and market share across the 34 state footprint for this business.
Average auto loans decreased 2% year over year as a result Pricing optimization has helped us maximize revenue while minimizing balance sheet impact. However, given the changes in the we intentionally lowered paid at future rate cuts push auto loan yields lower next year. It is important to note that we are driving the increased production while maintaining our super prime customer focus and our consistent underwriting discipline. Auto originations in the quarter totaled $1,600,000,000, up 17% versus the year ago quarter, and had an average FICO score above 770. Turning now to Slide 6.
Average total deposits increased 1% year over year, while average core deposits increased 2% year over year. Note that we sold approximately $725,000,000 of core deposits as part of the sale of the Wisconsin retail branch network in June of this year. Average money market deposits increased 13% year over year, primarily reflecting the shift in promotional pricing away from CDs to consumer money market accounts in mid-twenty 18. Core certificates of deposits increased 15% from the year ago quarter. Primarily reflecting the percent year over year, while average non interest bearing DVA deposits decreased 2%.
Average total demand deposits were flat year over year. As shown on Slide 30 in the appendix, we are very pleased that our consumer and non interest bearing deposits increased 3% year over year. We continue to see our commercial customers shift balances from non interest bearing DDA to interest bearing products, primarily interest checking, hybrid checking and money market. Average savings and other domestic deposits decreased 15%, primarily reflecting a continued shift in consumer product mix. Moving on to Slide 7.
FTE net interest income decreased $5,000,000 or 1 percent versus the year ago quarter, primarily driven by the 12 basis point decline in net interest margin, partially offset by Net interest margin was 3.20 for the quarter, down 12 basis points from the year ago quarter and down 11 basis points linked quarter. Moving to Slide 8, our core net interest margin for the third quarter was 316, down 9 basis points from the year ago quarter. Purchase accounting accretion contributed 4 basis points to the net interest margin in the current quarter compared to 7 basis points in the year ago quarter. Slide 26 in the appendix provides information regarding the actual unscheduled impact of FirstMerit purchase accounting for 20192020. Turning to the earning asset yields.
Our commercial loan yields decreased 5 basis points year over year, while consumer loan yields increased 18 basis points. Security yields increased one basis point. Our deposit costs remain well contained with the rate paid on total interest bearing deposits of 98 basis points for the quarter up 25 basis points year over year and up only one basis point sequentially. Our total interest bearing deposit cost peaked in July and have moved lower every month to reduce the downside risk from lower interest rates. The incremental hedges include both asset swaps and floors.
We have now substantially completed the implementation of the incremental hedges. However, as you should expect, we will continue to fine tune the overall hedging program as the interest rate environment, balance sheet mix and other factors necessitate. It's also important to remember that the cost of the hedging program has been fully reflected in our guidance since late 2018. The graphs on the bottom left of the slide provide detail in the mix of our loan portfolio well as the significant consumer deposit balances with repricing events in the second half of twenty nineteen the first half of twenty twenty. This provides an opportunity for the bank to reduce the cost of deposits as these well timed higher priced CDs and promotional money market accounts repriced lower.
Through September, the deposit repricing activity is on track, although the maturing balances pick up in the 4th quarter. Given this timing, we expect to see On the commercial side of the business, we've developed tactics to quickly react to any rate cuts with client specific rate reductions, particularly among our highest cost deposits. We were very pleased with the results following the July September rate cuts and are ready to implement the same strategy for any future rate cuts. Slide 10 provides detail on our noninterest income, which increased 14% from the year ago quarter. Mortgage banking income increased 74%, primarily reflecting higher secondary market spreads and saleable origination volume as well as an $8,000,000 gain on net mortgage servicing rate risk managements in the current quarter.
Capital markets fees increased 38% versus the year ago quarter seen and continued core business service charges and card and payment processing fees both posted year over year growth. Slide 11 provides the components of the 2% year over position of colleagues, including the addition of nearly 200 colleagues in our digital and technology areas related to the 2018 strategic plan initiatives and the hiring of experienced bankers in our annual merit increases and other services increased 26% year over year driven by ongoing technology investment costs. Partially offsetting these increases, deposit and other insurance expense decreased 56% due to the discontinuation of the FDIC surcharge in the fourth quarter of 2018, while other expense decreased 16%. We remain focused on driving positive operating leverage in 20192020. Slide 12 illustrates the continued strength of our capital ratios.
The tangible common equity ratio or TCE ended the quarter at 8%, up 75 basis points from a year ago quarter. The common equity and tier 1 ratio ended the quarter at 10.02 percent, up 13 basis points year over year and up 14 basis points linked order. We continue to manage CET1 to the high end of our 9% to 10% operating guideline. During the third quarter of 2019, we repurchased 5,200,000 common shares at an average cost of 13.02 per share. Or a total of $68,000,000 of common stock.
Slide 13 provides a look at our current thinking around CECL. We continue to progress towards CECL implementation in 2020. At this time, we estimate our allowance for credit losses or ACL will increase in a range of 40% to 50% from current levels. Given our 50% mix of relatively longer dated consumer loans, The CECL lifetime loss methodology results in a much higher allowance than the current expected loss methodology. The increase in reserves is predominantly correlated to the consumer loan portfolio.
We reduced our buyback this quarter as we work through the expected impact of CECL. Going forward, we plan to use the share repurchase to manage our capital costs Our capital post CECL back to a 10% CET wound level on a fully implemented basis by the end of next year. These actions reinforce our commitment to maintaining our strong capital ratios which we see as a position of strength for the organization. As we have previously communicated on many instances, our capital priorities or our first to fund organic growth 2nd, to support the cash dividend and finally, all other capital uses, including the buyback and selective acquisitions. These capital priorities have not changed.
Let me now turn it over to Rich to cover
for the quarter, which remained strong. Consistent prudent credit underwriting is 1 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 loan loss provision expense of $82,000,000 in the third quarter and net charge offs of $73. Net charge offs represented an annualized 39 basis points of average loans and leases in the current quarter, up from 25 basis points in the prior quarter and up from 16 basis points in the year ago quarter. The increase was centered on 2 specific energy credit relationships, which made up nearly 3 4ths of the total commercial net charge offs.
These relationships were upstream companies operating in the same reserve basin. 1 of the credits was moved to held for sale which accounts for the credits was completely recognized in the 3rd quarter. We have a relatively small energy portfolio representing less than 2% of total loans. Consumer charge offs have remained consistent over the past year. There is additional granularity on charge offs by portfolio in the analyst package and the slides.
The allowance for loan and lease loss was a rate triple l as a percentage of loans remained relatively stable at 1.05%. Up 2 basis points linked quarter. The non performing asset ratio increased 3 basis points linked quarter and 9 basis points year over year to 0.64%. The year over year increase was centered in the C and I portfolio and other NPAs, partially offset by decreases in the residential mortgage, commercial real estate home equity portfolios. Note that these metrics include the results from the most recent Shared National Credit Exam.
The increase in commercial delinquencies this quarter as seen in the appendix on slide 54 was related to a leasing system conversion, year duration. Overall, asset quality metrics remain near cyclical lows. And as we have noted previously, some quarterly volatility is expected given the absolute low level of problems. Let me turn it back over to Mac.
Thank you, Rich. Slide 15 illustrates our updated expectations for full year 2019. We expect full We expect more measured commercial loan growth consistent with recent economic data. Full year average deposit growth is expected to be approximately 3% as remain focused on acquiring which we are 2019. This is consistent accounting and the cost of our hedging strategy.
Also, as I mentioned at the Barclays conference, we remain comfortable with current street consensus expectation for full year 2020 NIM of 3.21 percent. We expect full year non interest income growth of 9% to 12% on a GAAP basis. As we have told you previously and are demonstrating with our actions, we remain committed to delivering annual positive operating leverage. Full year noninterest expense is expected to increase 2% to 2.5%. This includes approximately net $15,000,000 to $20,000,000 of unusual expense resulting from the previously mentioned expense actions we are taking in the fourth quarter.
As we have done in the past, we are also evaluating our branches and other real estate. We anticipate that full year 2019 net charge off will remain below our average through the cycle target range of 35 to 55 basis points. Our expectation for the effective tax rate for the remainder of the year is in the 15.5 percent to 16.5 percent range. So with that, Sherry, we'll now take questions. We ask that as a courtesy to your peers, each person asks 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.
Our first question is from Erika Najarian with Bank of America. Please proceed.
Hi, good morning.
Hi, Erica.
Thank you so much for reiterating your outlook on net interest margin for next year. And I'm wondering if we could put it in context of balance sheet growth as well. The loan growth momentum continues to be solid. And I'm wondering how should we think about, how you're thinking about A, your resi growth strategy in a post CECL world And B, how earning asset growth will trend relative to loan growth from here?
Yeah. Thanks, Eric. We're not going to give 2020 guidance until later this year at a conference in December. But happy to answer your questions around resi growth and how we're thinking about going forward. We will be cautious with resi growth on the balance sheet.
I mean, obviously, we have a number of our customers who have the need for that product. A number of the balances that we've been putting on in 2019 have been a private client relationship. That we have a deep relationship with and that's how we're thinking about mortgage product going forward. Just given some of the changes CECL, we're looking for that to be more of a relationship product from a relationship pricing perspective. But still like the asset class, but that might be the one that we think about going forward.
But I guess just in net net, if we take a step back, unless you tell us something more dramatic in terms of how you're managing the securities portfolio, if I combine your outlook on margin with, let's call it, 3% to 4% loan growth, then it seems as if the net interest income growth would be sort of greater than the flat trend than what consensus is expecting? Clearly,
net interest income growth in 2020 will be driven by earning asset growth. We are seeing growth switch from the commercial categories to the consumer categories in the fourth quarter, will likely continue to be more aggressive with consumer lending in 2020 as we like the dynamics of those portfolios. If you think about some of the fixed rate nature of the portfolios, as well as the credit quality, we continue to originate a super prime consumer portfolio. So that's one change just given some of the comments we made about the look for commercial lending and what we're seeing now that you could expect to see in 2020.
Our next question is from Ken Usdin with Jefferies. Please proceed.
Hi, Ken. Hi, good morning. Hey, good morning and best of luck to you again, Mac. On the deposit side, you mentioned that you'd expect the deposits to start coming down in the 4th. They were up a touch in the quarter.
Can you just walk us through the dynamics of, the rolling off legacy CDs and how much impact you can see that have on total interest bearing costs as you do roll forward? And betas, just kind of your underlying beta expectations? Thank you.
Yes. Thanks, Ken. So, the The opportunities we have with the CD book that's re pricing and some of the money market specials that are also coming up for reevaluation prevents, I mean, it actually presents a really nice opportunity for us. I think Slide 9 actually has the mix of what's re pricing from a deposit effective. And you can see that we're actually entering some of the bigger balance changes in the fourth quarter into the first quarter of 2020.
As I mentioned in my opening comments, we've seen really good execution against being able to reprice those deposits. I would say it's ahead of our expectations. We are seeing some of the CDs move into money market because of just some rate specials that we have in the money market space. But we, we still like that activity as it retains those deposit and allows us to reprice lower. The one good trend that continues to play out well for us as the continued growth in non interest bearing on the consumer side.
Still really good activity there. And we don't see that slowing down. So all in all, I think the timing of when we put some of these deposits on our books in in 2018. And the opportunity as we see the declining rate environment is what really gives us some confidence as we move into the fourth quarter with our ability to reprice these deposits. And help to stabilize the NIM.
Got it.
I think the sale of Wisconsin is over $100,000,000 of DDA as well. So the year over year number is even more impressive.
Good point. So the $7.25 that we sold with Wisconsin, those were all core deposits. And as Steve called out, the DDA portion. So our performance needs to take into consideration that that $725,000,000 that we sold as a part of the Wisconsin branch sale.
Yep. And just one clarification, you always do guide on GAAP. So I'm presuming that the $15,000,000 to $20,000,000 of non core stuff in the fourth quarter, that's in the full year guidance.
Absolutely, Ken. That's a good co outs and a good reflection of what the guidance is.
All right.
And we should see the benefits of that next year then.
That is right.
All right. Thank you. Okay. Thanks, Ken.
Our next question is from John R. Strum with RBC Capital Markets. Please proceed.
Good morning. Good morning, John. Back, I wonder what you're going to be doing in mid January not thinking about margin guidance.
I'll be lonely.
To do us right.
Oh, that was tough time.
Yeah, non interest income growth. It's a pretty wide range. That you have, for the full year. And I'm thinking its mortgage is the variant but can you just help us understand the wide range and what would drive us drive you to the lower or higher end of the range?
Yes, that's absolutely correct. John, I mean, we continue to see good mortgage origination volume and the saleable spreads are holding up nicely. So We don't know exactly how strong the quarter is going to be, but we do think, there could be some upside there. And that's why we gave that.
Okay. And is the origination strategy? I understand a lot of it is, you know, this quarter was MSR and maybe some refinance, but the origination strategy is still, more Chicago focused or is there something more than that driving it?
Well, it is, broadly across the franchise, but I do think some of the changes that we made in Chicago and admit particular as we acquired FirstMerit and built out the mortgage origination capabilities in the Chicago market. A lot of the growth has been coming out of Chicago since FirstMerit.
Okay, all right. Thank you. We also did a lot
to strengthen both here in Michigan, Ohio and Michigan Post FirstMerit. So don't want to downplay that impact either.
But it's safe to say that it's just it's refinancing volume that's going to drive you to the higher end or lower end. That's really it.
Yes, that's exactly the way to look at it.
Yes, okay. Thank you.
Okay. Thanks, John.
Our next question is from Brian Faran with Autonomous Research. Please proceed.
Hi, good morning, everyone.
Good morning, Brian.
I guess, Steve, you mentioned you don't see a recession on the horizon, but you also kind of made some cautious comments on the commercial side. I mean, you've seen several cycles. I'm just wondering, is that something that can persist or is it kind of like 1 or the other has to win, I. E, can we have a prolonged period of a slump in commercial lending without a recession? Or is it kind of like if C and I days weaker for longer eventually that tips into recession.
And if we don't tip into recession, then eventually C and I recovers.
Right. In the commercial context, there are a lot of avenues for answering in addition to banking. Historically, it would have said, reduced bank lending would naturally translate into slower economic growth, but you do have many other options out there today for different levels of commercial customers. I think what we're trying to suggest is that the combination of factors that have occurred somewhat more in the late first half and certainly the second half of the year, have compounded the outlook a bit. So whether it's global slowdown, trade and tariffs, we have a big manufacturing sector and an export sector here in these the Midwest States were in, just as we mentioned in the last call, we're almost talking ourselves into this.
So I think a number of factors are contributing to a slowdown and we still see it as a slowdown. Many of our customers continue to suggest their number one issue is they can't get qualified employees. And so this is a labor constrained recovery that has lost a little steam, but we think it continues.
And then maybe one follow-up on the expense side. Can you remind us in kind of a normal year? How much expense flexibility do you have? So not trying to get into number for 2020, but just if you're trying to ramp up or ramp down expenses based on the environment but also trying to make the core investments you want to make in the franchise. As the year progresses, is the range plus or minus 2 percent or 200 basis points, 400 basis points, how much ability do you have to react in a typical year?
Yes, Brian, this is Max. So, we do believe that we have expense flexibility and I think we've proven that as we've moved through, what's unfolded with the economy and the interest rate outlook. We still have some flexibility we go through the process every year of taking a look at, different levels of productivity improvements that we put in place before the year begins so that we know where we're going to go in case we have to think through some changes in the environment and how we want to manage, things like operating leverage or EPS or investment back into the franchise. So it's important that as we think about what opportunities we have on the expense side in 2020, as we manage for positive operating leverage, we're also investing back into the franchise. I think that's really important for us to recognize in terms of the activities that we're going through and some of the important investments that Steve has spoken to that we're going to continue to make in 2020.
So, confident that we've got flexibility in addition to what we've already done, but we're going to be careful about the overall health of the franchise and we're going to continue to make those investments that we think will drive the top line and our competitive position going forward.
Thank you both. And Mac, congratulations.
Yes. Thank you, Brian.
Our next question is from Scott Siefers with Sandler O'Neill And Partners. Please proceed.
Good morning guys. How are you?
Good morning Scott.
Hey. I guess, first question, just sort of on kind of a qualitative one on the balance between the margin and the overall dollars of NII. Do you guys sort of have one that you'd kind of prefer to manage to over the other. So I think in the past, as you guys have looked at some of the levers you have pull on the margin you've alluded to some of the some optionality in the securities portfolio, for example. How do you sort of weigh that balance between preserving the dollars and preserving the margin rate.
And then I guess along those lines, as we look at the mix shift into next year, relatively more consumer driven, vis a vis commercial, is that going to have any discernible impact on the margin trajectory from your guys' standpoint?
Yes. Thanks, Scott. So, in this environment and just based upon feedback, we've gotten from analysts and investors, we did make the switch over to net interest income, in terms of providing guidance in this quarter. Obviously, with some of the volatility, in the marketplace as well as some of the actions that we can take to drive net interest income that will have an impact on NIM that might not necessarily tell the whole story by us just giving you the NIM guidance. So, to your point, Scott, you alluded to the levers that we have in terms of how we think about driving net interest income.
And that would be things like the securities portfolio after of the balance sheet. There are many plays that we've run over the years that we still have in our pocket that we can take a look at. And, those actions have an impact on NIM, obviously. So, so going forward, we were managing net interest income And we're managing the revenue profile of the company. NIM is a bit of an output from that as we move through what is increasingly more volatile period.
But we think that gives you the best information you need to understand where we think the organization is going.
Okay. Perfect. Thank you for that. And then, I think I'm effectively going to repeat one of the other questions here, but just so I understand it perfectly on the cost side, All of that difference in the guidance today versus, what you gave a month or so ago at the Barclays Conference. That's simply a function of the sort of one time costs that we're going to have in the fourth quarter as opposed to any change in the core trajectory, right?
Yes, that is exactly correct.
All right. Well, thank you again and then, Matt, good luck and congratulations.
Thank you, Scott.
Our next question is from John Pancari with Evercore ISI. Please proceed.
Good morning, John.
Good morning. John. On the expense topic again for, I know you're not giving formal guidance for 2020, but you did indicate that you're confident in positive operating leverage expecting it for 2020 as well. Is there any way you can help us with the magnitude and, or at least a little bit of color could operating leverage actually accelerate off of the 2019 amount that you're going to see because of the headcount reductions and the hedging that's in place? Thanks.
Thanks for the question, John. So, the way we think about expense growth what we're trying to accomplish is we understand the revenue environment that we're moving into. And once we get some confidence around a range of revenue expectations, then we decide what we can do from an expense perspective, including investment back into the franchise. So, well, I can't and won't give you any guidance around the expense for 2020. We are targeting positive operating leverage as Steve mentioned in his comments.
We're also looking to reinvest back the franchise, as I've mentioned in my comments and Steve's comments. So the activities underway and what we've done up to this point in time, give us a path to both of those objectives, making the right investments back into the franchise and achieving positive operating leverage. If we get ahead in 2020, it's more likely we're going to invest back in the franchise. Taking everything else into consideration, the revenue outlook, obviously where the economy is and where we think it's heading and what we think our performance is going to be in those scenarios. But we've got some investments underway that we think differentiating that importance and we're going to continue to make those investments.
Got it. Okay. That's helpful. And then separately on the credit side, I know the you mentioned that you implied that the one of the energy credits had impacted other NPAs. So that accounted for some of the increase in non accruals, but or in NPAs, but non accruals also saw, it looks like an additional increase.
So I just want to get little bit of color about what may have driven that? And also your criticized assets are up a bunch, is that all the MPA increase or is there something else there that's driving them higher?
Yes. I mean, the quick class number is up. It's not at a level that we have an operator that before. We've been back at this level in the 2016, 2017 timeframe. The current quarter does have some energy impacts in there as well.
As it relates to the NPAs, we did move the one deal into health sale. And then we had a couple of additional NPAs added, 1 in energy and then one, a couple others outside of energy, more on the C and I side.
Okay, thanks. And that the other stuff on the C and I side, was that, in any specific sector outside of energy?
No. It was pretty broad based. A couple of middle market credits and we're in there.
Okay. So no other deterioration, non energy to flag that you're starting to see develop in the portfolio?
No, I mean, the energy represented a significant amount of the charge offs for the quarter. If you were to exclude the energy losses, which you can't to, but the rest of the book on the commercial side, the charge offs were pretty demanding.
Thank you.
Our next question is from Matt O'Connor with Deutsche Bank. Please proceed.
Hey guys. Good
morning, Matt.
I was
wondering if you could talk a bit more about the drivers of the good growth in both service charges and card fees as we look year over year. I mean, you addressed kind of continued growth from more activity, but obviously both growth rates are quite high and maybe give us a little color on the service charges, how much is commercial versus consumer? And again, the sustainability of both of those growth rates? Thanks.
Yes. Thanks, Matt. So, the news here is that I I'm I can't really call out anything unusual that's driving the growth other than just good execution and organic growth. When you take a look at deposit service charges, we are seeing growth in consumer because we continue to add new households to the organization. Commercial is probably, being driven by treasury management to a large degree and some of the new products and services that we've implemented.
In particular, we've added some new capabilities in the business banking or small business side. That have had a nice lift in kind of the pipeline for treasury management revenue as well as closed one referral So that is a very, very nice developing trend that we think is going to continue into 2020. And payment processing, I would just tell you that's a good core organic growth in terms of new customers coming to the bank, new card, debit credit opportunities. And, it's just basically the growth of our customers organically. Capital Markets is another item to call out, which again, we continue to see really, really good growth, good execution.
We, we continue to add to the product set there. We bought the broker dealer, municipal broker dealer last year. And that has really been very complementary to our Capital Markets business. We've been able to leverage that acquisition into some of our other capabilities and business lines to actually see additional growth coming out of that opportunity. So we've got some good performance in, fee products in 2019.
I think there's some good reasons to believe that's going to continue in 2020.
And just back on the service charges, have you guys disclosed what the mix is between the consumer and commercial? And I guess there's a commercial benefit from the declining rate environment here on the, earnings credits, the way it works versus, you know, fees versus the, earnings credits and deposits?
Yes. So the mix is probably slightly more towards the consumer side, but we haven't really disclosed the exact breakout between the 2. And I'm sorry, the second part of your question.
Oh, just the outlook on the commercial, is there some benefit from the lower rates there as the earnings credit on deposits are less and get picked up in fees. Is that one of the drivers that you think about next year?
Yes, I wouldn't think that earnings credit is going to be a big, addition to, that line going forward 2020. I mean, we manage earnings credit pretty tightly. But I don't think that's going to be a big driver.
Okay. All right. Thank you.
Okay. Thanks, Matt.
Our next question is from Ken Zerby with Morgan Stanley. Please proceed.
Good morning, Ken. Great. Thanks.
Hi, Ken.
I guess maybe Steve, I know in your initial comments, it sounds like you're pretty negative on commercial loan growth. I just wanna make sure we get the right message that is it that commercial loan growth in 2020 could slow, but you're going to more or at least make up the slowness with better consumer growth Is that the right message?
Well, we're, I want to imply a cautiousness. The economy has slowed significantly year over year. We were running around 3.5 percent to 1.5, most recently. We've done 6% year over year commercial growth and And, I think we need to be a little more cautious. We're just trying to flag that for you in line with the outlook that we're hearing from our customers.
We expect to be able to grow commercial, next year. And, at the same time, we'll, we'll grow the consumer side as well.
Got you. Okay. And then I guess just one small question. In terms of your guidance for positive operating leverage, in 2019. Is that on a full GAAP basis or are you excluding the unusually high expenses in 4th quarter?
It's all on a GAAP basis.
Our next question is from Steven Alex Populos with JP Morgan. Please proceed.
Hi. Good morning, everybody.
Hey, Steve.
I wanted to drill down a little bit on CECL. How much is the reserve for auto loans expected to change under CECL?
So, Steve, we're not going to give that level of guidance at this point in time. We'll disclose those stats, obviously, in the future, but not going to disclose it here.
Okay. Let me assess, is it material enough to change your appetite to wanna add auto loans in 2020? No. No? Okay.
And then separately, for Steven, in terms of the tone shift you're talking about from your manufacturing customers, is this more coming from the macro noise, right, trade wars, etcetera? You starting to actually see pressure start to show up in financial statements for these customers?
We're total at this point. Stephen, we, again, I think there's an element of we're talking ourselves into something, but but certainly for these manufacturers, the trade tariff issues are real for some of them.
Okay. And what percent of your loans are to manufacturing companies?
Commercial loans of about 25% in
the ballpark.
That's a commercial.
Yes.
Okay. Thanks. And best of luck, Mac. Thanks very
much.
Our next question is from David Long with Raymond James. Please proceed.
Good morning, everyone. Mac, I think you said that you were comfortable. Just maybe confirm if this is accurate, but I thought I heard you say you're comfortable with the street NIM forecast of 3 21 for 2020. Is that accurate?
That is correct.
Okay. Just when you say that, what type of rate backdrop do you have in mind? How many rate cuts do you have in or what are your expectations when making that comment?
Yeah. It's a great question, Dave. So we have a assumption of 3 rate cuts, October, January, September.
Got it. Got it. Okay, great. That's all that I had.
Our next question is from Marty Mosby with Vining Sparks. Please proceed.
Thanks. Good morning. I wanted to ask, hey, good morning. I wanted to ask a question about on tangible common equity and how you're looking at the different stacks of capital. Your CET1 ratio is relatively flat.
But your TCE to TA ratio has been increasing over the last year pretty substantially. I know that some of that's related to mark to market on the security portfolio, but I wouldn't think that all of that was the difference there. So we're just curious because that increase in TCE ADTA ratio was causing the ROCE to fall off a little bit?
Yes, Marty, it's a great question. So, we're up about a $1,000,000,000 year over year in tangible common equity, about 75% of it is OCI related to securities portfolio and other pension, things like that. So So that is the primary driver of the improvement in CCE. And then
could you give us a little bit of color on the mortgage servicing rights? We've had several banks report these gains in the mortgage servicing rights. With the hedging. Given that interest rates were coming down and prepayments were, you know, kicking in, it's one of 2 things. Either the assumption on the prepays, was over, you know, exaggerated, which I think is built into the models all the time.
In the or you were over hedged. So I was just curious how the dynamics have been playing out. So this particular quarter, we had these gains on more conservative like hedging?
Yes, Marty, it's obviously been a pretty volatile environment and I would say it's a little of both in terms of the 2 suspects you threw out there. But volatility has been pretty high as you as you know, but I think that the team has done a great job of making sure that we're hedged appropriately. And some of that volatility is going to mean that you're over hedged, under hedged at any point in time. But, it's obviously something we look at very carefully spend a lot of time with and I think we've done a good job with.
Well, thanks. And, best of luck. When you go forward, it's been great working with you.
Appreciate it, Marty. Thank you.
Our next question is from Brock Vanderbilt with UBS. Please proceed.
Good morning. On the credit, credit picture. And I know you provide a a lifetime net charge off over the cycle guide, I guess, over the cycle guide. I'm a little surprised at some of the credit friction this quarter. You know, what kind of confidence do you have based on what you can see right now that you can hold, you know, net charge offs and kind of the level that we saw this quarter as opposed to having them move higher in the intermediate term?
This is Rich. Like I said, the charge offs in this quarter were really isolated to the energy book. The balance of the portfolio we believe is performing well and then we have expectations that it will continue to perform well. So if you're trying to are you trying to tie that into the CECL estimate or?
Not so much around CECL. Just trying to get a sense of, you know, I've I've felt like Huntington has been kind of battened down for for quite a while on on credit and just it it sounds like there's more, a tone of of slowing, and I just wanna make sure I'm attuned to that. That's all.
Yes. So I think it's important to differentiate the slowing with the credit discussion. We talked about energy being less than 2% of our loan portfolio and that really is where the problems have been centered. Outside of that, we really don't see anything of concern as we take a look at the portfolios and the outlooks. I think a different, different discussion on what we see in the economy and what we hear from our customers and a little bit of caution around some of the feedback we're getting and some of what we're seeing take place on the ground.
But that's how I would think about So the credit question versus what we see from a growth perspective.
And to be clear, Brock, we're not making a call on a recession. We don't see it. I think we reiterated that twice in the in the prepared comments. So this is, you know, this is, 1 a half percent, which enroll the clot back 6 years ago. It's been a reasonably good year.
So, we're just coming off of 3.5. And it's a percent GDP growth. So we think this we could be
we could be running at this level for a while. And to your earlier point, Brock, I mean, look, we're not going to put questionable assets on the balance sheet at this point in the cycle. So We've been consistent in talking about the discipline of our underwriting process. I think we're even more cautious in environments like this. Based on what we're hearing from our customers.
So we've put a note of caution out there and we've talked about the pipeline still being higher than they were this time last year. But, we're just reflecting what we hear from our customers and letting you know what we're thinking. Okay.
Appreciate the color.
Okay. Thanks, Brock.
And our final question is from Peter Winter with Wedbush Securities. Please proceed.
Good morning. I had a question on capital. And I heard you with the share buybacks being at the bottom your pecking order. But I'm just curious, are you planning on completing the, share authorization under the 2019 CCAR?
Peter, it's going to depend on balance sheet growth from here, and outlook for 2020. We are committed to getting our capital levels back to the pre CECL levels by the end of 2020. Which could mean that we curtailed the 2019 share repurchase authorization a bit. But, it's all going to come down to balance sheet growth and what it's going to take to get back to those levels at the end of 2020.
Got it. Okay. Thanks. And Mac, I've enjoyed working with you over the years. So best of luck.
Thank you, Peter.
I would like to now turn the conference back over to Steve for closing comments.
So I'm pleased with our solid results through the first 3 quarters of 2019, particularly given the significant movement in the yield curve and the amount of market volatility we witnessed. I remain confident about our prospects for the remainder of the year in 2020 as we manage through what we expect to be a challenging environment. Our top priorities are executing our strategic plan and thoughtfully investing in our businesses for continued prudent organic growth while delivering annual positive operating leverage. We're building long term shareholder value by focusing on customers and top quartile financial performance with consistently disciplined risk management. And finally, we always like to end with a reminder to our shareholders that this high level of alignment between the board management, our colleagues, and our shareholders.
The board and our colleagues are collectively a top 10 shareholder of Huntington and all of us are appropriately focused on driving sustained long term performance. So with that, thank you for your interest in Huntington. Mac, many thanks to you and congratulations. We appreciate all of you joining us today. Have a great day.
Thank you. This does conclude today's conference. You may disconnect your lines at this time and thank you for your participation.