Greetings, and welcome to the Huntington Bankshares Second 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 Booth, Director of Investor Relations.
Thank you. You may begin.
Thank you, Cher. Welcome. I'm Mark Moose, Director of Investor Relations for Huntington. Copies of the slides 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 at the rebroadcast about 1 hour from the close of the call.
Our presenters today are Mac McCullough, Chief Financial Officer and Rich Foley, Chief Credit Officer. Unfortunately, Huntington's Chairman, President and CEO, Steve Steinauer, is unable to join us today. Earlier this week, while training for the upcoming Pelotonia, charity bike ride. Steve injured his shoulder, requiring surgery, and that has prevented his participation in our 2nd quarter earnings call today. He's already on the mend and expected to return to work in the coming days.
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 update such statements For a complete discussion of risks and uncertainties, please refer to this slide and material filed with the SEC, including our most recent Forms 10K 10 Q and 8 K filing. Let me now turn it over to Matt.
Thanks, Mark, and thank you to everyone for joining the call today. As always, we appreciate your interest and support. We had a solid 2nd quarter reporting net income of $364,000,000, an increase of 3% from the year ago quarter. Earnings per common share were up $0.33, up 10% from the year ago quarter. Tangible book value per share ended the quarter at $7.97, also a 10% year over year increase.
Our profitability ratios remain strong as our return on tangible common equity was 18% and our return on assets was 1.36%. Total revenue increased 6% year over year. Average loans increased 4% year over year including the 5% increase in consumer loans, and a 4% increase in commercial loans. Average core deposits increased 4% year over Overall asset quality remains strong as most credit ratios remain near cyclical lows. As we guided to on the first quarter earnings conference call, net charge offs declined this quarter back to a level below the low end of our average through the cycle target range of 35 to 55 basis points.
As we have noted previously, we expect some quarter to quarter volatility given the very low loss and problem loan levels at which we are operating Our ratios for non performing assets delinquencies and criticized loans all remain very good. As briefly outlined on Slide 3, we developed Huntington Strategies the vision of creating a high performing regional bank and delivering top quartile through the cycle shareholder returns. We continue to make thoughtful and meaningful long term investments in our business, particularly around customer experience to drive organic growth. This quarter, we focused strategy with 2 awards from JD Power, the gold standard of customer satisfaction surveys in the U S. Huntington received the highest scores in both the J.
D. Power 2019 U. S. Online banking and mobile app satisfaction studies. While some expressed skepticism that regional banks will be able to keep up with the large money center banks in a technology driven economy, We believe this provides evidence that to remain industry turns and taking appropriate risk, consistent with our aggregate moderate to low risk appetite.
This quarter, we took several actions to better position the balance sheet from an interest rate management perspective, but also with respect to overall risk and return. We exit certain loans and high cost deposit relationships, which no longer met our return hurdles. And we repositioned a portion of the securities portfolio. I will discuss these actions in more detail in a few minutes. We are very pleased with how we are positioned.
We have built sustainable competitive advantages in our key businesses that we believe are delivering and will continue to deliver top quartile financial performance in the future. We remain focused on driving sustained long term financial performance for our shareholders. Slide 4 illustrates our updated expectations for full year 2019 compared to our prior expectations. As you know, we previously provided our expectations assuming no change in short term interest rates. However, this quarter, we are transitioning to provide our expectations based on the implied forward curve which are provided in the column on the right side.
Given the high likelihood that the Fed will reduce the Fed funds target rate that they're meeting next week, and the market expectations for multiple additional rate cuts over the coming year, we thought it was more conservative to adopt this interest rate outlook in our planning and forecasting process. Internally, as well as rate view in the middle column on the slide. This quarter, we provided both interest rate scenarios so you can see the incremental steps between the two. But do not plan to provide both views Our view of the economy has not changed since last quarter's earnings call. We continue to have a constructive view of the local economies in our footprint.
Which we expect will translate into continued organic growth this year. While the volatility in the debt markets has signaled street concerns regarding the broader economy, what we are hearing from our customers remains positive. Businesses in our local markets generally continue to deliver good performance and our commercial pipelines remain strong. Businesses in our footprint are investing in capital expenditures and expansions while the tight labor markets continue to constrain economic growth. Our commercial customers continue to tell us that finding employees is their biggest challenge.
The job openings rate for the Midwest is the highest in the nation. Some of these businesses also have weathered the headwinds of ongoing tariff and trade disputes. Despite a slowing world economy and these headwinds, the data shows that exports have continued to grow in Ohio and other areas of our region. Across our footprint, consumers also remain upbeat with strong labor markets driving wage inflation, particularly at the lower compensation levels. In the 3 months ending May of 2019, in 12 months ending May of 2019, unemployment rates declined in 18 of 20 of the largest MSAs in Huntington's footprint states.
Additionally, consumer confidence in our regions generally stayed at the highest levels since 2000. Job openings continue to exceed unemployment levels in most of our markets. I would summarize by saying we do not see signs of a near term economic downturn. Nonetheless, we are cognizant of the recent market volatility and global economic data that does not share the optimism of what As we communicated on the last earnings call, we have taken steps to prepare for a more challenging interest rate outlook. We do not foresee a recession in the near term.
However, our core earnings power, strong capital, aggregate moderate to low risk appetite and our long term strategic alignment position us to withstand economic headwinds. Our strategy is designed to drive more consistent performance across economic cycles. Let's turn to and a more competitive operating environment at the margin. We expect full year average We remain particularly focused on growing core deposits through acquiring core checking accounts and deepening customer relationships. We expect full year NIM I'm sorry, 2019 NIM is expected to be 3.25to3.30 range.
This includes the negative impacts from the anticipated reduction in the benefit of purchase accounting and the cost of the incremental hedging strategy we implemented in the second quarter. Looking further out, our current modeling suggests the NIM will bottom out during the second half of twenty nineteen. As a result, We currently expect full year 2020 NIM should remain relatively consistent with full year 2019 allowing net interest income to grow in tandem with earning asset growth next year. As we have told you previously and are demonstrating with our actions, we remain committed to delivering positive operating leverage this year. We have moderated outlook.
We have achieved this with a combination of reductions to discretionary spending and with the repacing of planned investments. Full year 2019 non interest expense is now expected to increase 1% to 2.5%. We anticipate that full year 2019 net charge offs will remain below our average Our expectation for the effective tax rate for Slide 5 provides the highlights for the 2019 second quarter. Results reflected strong earnings momentum with double digit growth rates in earnings per common share and tangible book value per share, along with contained improvements in our profitability ratios. We recorded net income of $364,000,000, an increase of 3% versus the year ago quarter.
We reported earnings per common share of $0.33 up 10% year over year and tangible book value per common share ended the quarter at $7.97, a 10% year over year increase. Return on assets was 1.36%, return on common equity of 14% and return on tangible common equity was 18%. Our efficiency ratio for the quarter was 57.6%, up from 56.6% in the year ago quarter. And again, we reminded you on the first quarter call that second quarter would be the peak efficiency ratio for the year. This modest increase reflects continued thoughtful investments in our For the full year, we continue Turning now to Slide 6.
Average earning assets increased to $2,800,000,000 or 3% compared to the year ago quarter. Loan growth accounted for more than the entire increase as average loans or leases increased $3,000,000,000 or 4 percent year over year including a $1,700,000,000 or 5 percent increase in consumer loans and a $1,300,000,000 or 4% increase in commercial loans. Average commercial and industrial loans grew 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, Asset Finance, Dealer Floor Plan And Middle Market Banking. We also continue to see good early traction in our new specialty lending verticals that were 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 6% year over year client. This reflects both anticipated and unanticipated pay downs as well as our strategic tightening of commercial real estate lending to ensure appropriate returns on capital and to manage risk. During the second quarter, we exited approximately $400,000,000 of our commercial loans at renewal are through loan sales as part of our balance sheet optimization efforts. These loans no longer met our return hurdles and their exit allowed us to redeploy the associated funding into more attractive opportunities. Consumer loan growth remains centered in the residential mortgage RV and marine portfolios, reflecting the well managed expansion of these 2 businesses since the FirstMerit acquisition.
Average residential mortgage loans increased 14% year over year. As we typically do, we sold the agency qualified mortgage production in the quarter and generally retained jumbo mortgages and specialty mortgage products. Average RV and marine loans increased 28% year over year as we continue to gain traction and market share across the 34 state footprint for this business. Average auto loans were flat year over year. Originations totaled 1,300,000,000 executing a pricing strategy to optimize revenue via increased auto loan pricing that has resulted in lower production volumes, but that is a trade off we like.
New money yields on our auto originations averaged 4.63% during the second quarter, up 41 basis points from the year ago quarter. Over the past few weeks, new money yields in both auto and RV marine have come under some pressure due to the year to date movements in the 2 to 5 year portion of the yield curve, and increased competition. Finally, securities were down 4% year over year as we let the portfolio runoff and utilize the cash flow to on higher yielding loans during part of the balance sheet optimization efforts to reduce our reliance on short term wholesale funding. We purchased $600,000,000 of securities related to the hedging program, And late in the quarter, we remixed approximately $500,000,000 of securities at a net benefit of approximately 20 basis points. Turning to Slide 7, average total deposits grew 3% year over year, while average core deposits grew 4% year over year.
Average money market deposits increased 11% year over year, reflecting the shifts in promotional pricing away from CDs to consumer money market account in mid-twenty 18. Core certificates of deposit were up 54% from the year ago quarter primarily reflecting the consumer CD growth initiatives during the 1st 3 quarters of 2018. Average interest bearing DDA deposit increased 3% year over year, while average non interest bearing DDA deposits decreased 3%. Average total demand deposits were flat year over year. As shown on Slide 32 in the appendix, we are very pleased that our consumer non interest bearing deposits increased 5% year over year as we continue to grow health holds and deepen relationships.
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 9%, primarily reflecting a continued shift in consumer product mix particularly among legacy FirstMerit accounts as FirstMerit's promotional pricing strategies focused on savings accounts, compared to our primary focus funding allowed for a 23 FTE net interest income increased 28000000 dollars or 4% versus the year ago quarter, primarily driven by the 3% increase in average earning assets. We saw net interest margin expansion of 2 basis points to 3.31% compared to the 2018 second quarter as a result of disciplined asset and deposit pricing and the benefit of interest rate increases, partially offset by the continued run off of purchase accounting accretion. Moving to Slide 9. Percent, up 4 basis points from the year ago quarter.
Purchase accounting accretion contributed 5 basis points to the net interest margin in the current quarter, compared to 8 accounting accretion for 2019 2020. Turning to the earning asset yields, our commercial loan yields increased 30 basis points year over year while consumer loan yields increased 33 basis points. Securities yields increased 8 basis points. Our deposit costs remain well contained with the rate paid on total interest bearing deposits of 97 basis points for the quarter, up 38 basis points year over year and up just three basis points sequentially. I might add that we expect total interest bearing deposit costs to decline in both the 3rd and the 4th quarters of 2019.
Turning to Slide 10. On a sequential basis, the GAAP NIM compressed 8 basis points and the core NIM compressed 7 basis points. The lower and inverted yield curve included the impact on LIBOR rates accounted for approximately 3 basis points of the NIM compression, while the continued lift in deposit costs drove 2 basis points. The incremental hedging strategy implemented in the 2nd quarter compressed the NIM by 1 basis point and is also expected to have a negative 1 basis point impact the full year 2019 NIM, modestly better than the guidance we provided at an industry conference in May. Turning to Slide 11.
Slide 11 provides an update to a slide we presented at an industry conference during the second quarter that summarizes the incremental hedging strategy to reduce the downside risk from lower interest rates. The incremental hedges include both asset swaps and floors. We have now substantially completed 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 we've had the cost of the hedging program, including the incremental hedging executed in the 2nd quarter in our guidance, since late 2018.
Turning to Slide 12. Slide 12 illustrates our cycle to date interest bearing deposit beta compared to peers. Our cumulative deposit beta remains low at were utilized over the 1st 3 quarters of 2018 with service well over time, effectively front loading some of the deposit beta. You can see those benefits over the This quarter, the peer group's average cumulative beta increased 4%, while we saw a 1% increase in our cumulative beta. Overall, commercial deposit compensation was elevated throughout the second quarter.
And competition for consumer deposits to date has not yet retrenched as much as a expected despite the likely fed rate cuts next week. Given this competitive environments and the near term rate outlook, we maintained our pricing and shortened our promotional pricing terms, such as utilizing a 6 month money market promotional rate compared to a 12 month promotion common in the marketplace. We also chose to fund loan growth through the security sale that I mentioned earlier rather than paying up for high cost commercial deposits. Looking forward, we have developed strategies down to the customer level to quickly react particularly along our highest cost deposits. Should the Fed cut rates next year as next week as expected.
We have also approximately $3,000,000,000 of securities in excess of what is needed for LCR that we could use interest income, which increased 11% from the year ago quarter. Other non interest income increased $15,000,000 gain on the sale of on economic hedges. Subsequent to quarter end, we re designated all the economic hedges as cash flow hedges. So beginning in 3Q of 2019, all the swaps and floors will be accounted for as cash flow hedges. Capital market fees were up 31% versus the year ago quarter, primarily reflecting the acquisition of Hutchison, Shockey and early in the 20 18 fourth quarter.
Mortgage banking income increased 21%, primarily reflecting higher secondary market spreads. On a linked quarter basis, mortgage banking income also benefited from seasonality and to a lesser extent, lower mortgage interest rates during the quarter. Slide 14 provides the components of the 7% year over year growth in noninterest expense. As we mentioned on the coming from normal seasonality and as well as the May implementation of annual merit increases. Personnel expense increased 8% year over year, primarily reflecting these actions.
Further increasing personnel expense year over year was the continued hiring of experienced bankers in our new lending verticals as well as adding colleagues in our digital and technology areas related to the 2018 strategic plan initiatives. And other services increased 29% year over year driven by ongoing technology investment costs. Other non interest expense increased 24 percent, primarily reflecting a $5,000,000 donation to the Columbus Foundation and the impact of decreased 56% due to the discontinuation of the FDI surcharge in the 2018 fourth quarter Slide 15 illustrates the continued strength of our equity ratio ended the quarter at 7.80 percent, up two basis points from the year ago quarter. Common equity tier 1 ratio ended the quarter at 9.88%, down 65% year over year, but up 4 basis points linked quarter. We continue to manage CET1 within our 9% to 10% operating guideline with a bias towards the upper end of the range.
We repurchased 71,800,000 common shares over the last 4 quarters. During the 2019 second quarter, we repurchased 11,300,000 common shares on average cost of $13.40 per share, representing the remaining $152,000,000 of common stock repurchase authorization in the 20 capital plan. As we announced last month, our 2019 capital plan reflects our previously articulated priorities to fund organic growth first, to support the cash dividend second and third, to pursue all other capital uses including buybacks. These capital priorities have not changed. 2019 capital plan includes a 7% increase in the quarterly dividend rate to $0.15 per share beginning with the dividend that Board declared last week and payable in October.
Last week, the board also approved a new authorization for the repurchase of up to 5 13,000,000 of common shares over the next four quarters. Let me now turn it over to Rich to cover Slide 16 with the credit trends for the quarter. Rich
Thanks, Mac. Slide 16 provides a snapshot of key quality metrics for the quarter, which remains strong. Can 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 $58,000,000 in the 2nd quarter and net charge offs of $48,000,000. Our provision expense has now exceeded net charge offs in 6 of the past 7 quarters illustrating our high quality earnings.
Net charge offs represented an annualized 25 basis points of average loans and leases in the current quarter, up from 16 basis points in the year ago quarter, and as expected, down from 38 basis points in the prior the portfolio in the analyst package on the slides, and there was no industry concentration to speak of. The allowance for loan and lease losses are 8 loans remained relatively stable at 1.03 percent, up 1 basis point linked quarter. The non performing asset ratio remained flat linked quarter, increased four basis points year over year to 61 basis points. The year over year increase was centered in the C and I portfolio partially offset by decreases in the commercial real estate residential mortgage and home equity portfolios. There was also a year over year increase in other NPAs associated with the investment portfolio.
Overall, asset quality metrics remain near cyclical and as we have noted previously, some quarterly volatility is expected given the absolute low level of problem loans. I'll now turn it back to Mac for some closing remarks.
Thanks, Rich. Slide 17 highlights the actions we have taken since 2009, resulting in our current industry leading profitability metrics. Our 14% return on common equity and 18% return on tangible common equity position Huntington as a top performing regional bank. We are building a best in class return profile at Huntington, and we are excited about the opportunities that this creates. Let me turn it back over to Mark so we can get to your questions.
Thanks, Mac. Sherry, we will 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 any additional questions, he or she can add themselves back into the queue. Thank you.
Our first question is from Scott Caesars with Sandler O'Neill. Please proceed.
Good morning, Scott.
Hey, good morning, guys. Hey, guys.
Thanks for
taking the question. Mac, just wanted to
ask a little about the margin guidance. So I guess first of all, appreciate the commentary with both the just the flat rate and the implied forward curve. That's helpful. So thank you for that. But then just as you look at the anticipated contraction in the margin for the second half of the year, just give that it implies some severe contraction in the back half.
I wonder if you could just walk through what the main nuances would be that would allow you come in towards the higher end versus the lower end? In other words, how do we get to the meaty part of the range?
Yes, Scott. I think the wildcard in the mix is going to be what happens with, core deposit growth and the cost of core deposits. Right right now, we're very pleased with the growth that we're seeing. We're being selective in terms of the commercial deposits and paying up our commercial deposits. But we're seeing good growth on the consumer side.
And I would tell you that competition in our region is rational. As I mentioned in the script, we have taken our deposit strategy and tactics to a different place relative to the peers. We've become I think less less aggressive in terms of incremental pricing as we enter this lower rate environment, but we're comfortable with that, just given some of the strength we see on the consumer deposit side, but also the excess liquidity that we have in terms of being able to release securities and use that funding to basically put higher margin loans on the balance sheet. So it's really the cost of deposits and the deposit growth in the second half, but I'm confident that we're well positioned for that.
Okay. Perfect. Thank you. And then just separately, so expenses will have to come down fairly meaningfully in the second half of the year. I know there was a lot of seasonality that hit the second quarter number.
So presumably there's some relief in sight, but just wondered if you could talk for a second about kind of the puts and takes on the cost side as we enter the second half of the year, please.
Yes, sure. So we've been, I think, pretty, pretty transparent around the opportunities that we have to adjust our expense growth in 2019 for the revenue environment and what we see happening with interest rates going forward. We've started to take those actions. A lot of the expense growth in 2019 has come out of the strategic initiatives that We put in place in 2018 through the strategic planning process. We've deferred some of those investments However, we are continuing to make investments in the initiatives that we think are most beneficial.
From a revenue growth, the risk perspective or just thinking about what we need to do from a technology development, particularly in digital. Those investments are still on the table. So we've been, I think, appropriately prudent in terms of the investments that we're continuing with. And there's always the likelihood that if the rate environment turns out better than, is what is being foreshadowed right now. That we would put more of those investments back on the table.
So, we believe we've got the capability to manage the positive operating leverage 2019. And certainly for 2020, it's going to depend on where the revenue environment goes, but we still have expense levers that we can pull.
Okay. That's perfect. Thank you very much, Mac. Appreciate it. Yes.
Thanks, Scott.
Our next question is from John Armstrong with Art Capital Markets. Please proceed.
Thanks. Good morning, guys. Good morning. Question a little bit about commercial you talked about the exit of $400,000,000 in commercial balances. I don't know if it's for you, Rich, but curious, can we expect more of that?
And can you maybe talk about some of the primary reasons behind some of those decisions?
Yes, John, it's Rich. I think a lot of the decision on the $400,000,000 was just around rate and yield and we look to optimize the balance sheet, and I think we focused on low yielding assets that may not have been part of a primary bank relationship that really just didn't make sense to continue moving forward on. So I would say that we're going to continue to look at customer profitability going forward and to the that we have borrowers that don't meet our relationships, we'll look to make adjustments either try to strengthen that relationship and make it more profitable or look to exit. So I think Q2 had a fair number of exits in there. And I would say it's just a continuing process going forward as we focus on the balance sheet and where we can be most profitable.
Yes, John, it's Max. So I might add this is the play that we ran in 2017 with great success. I think when we did this in 2017, we picked up about 41 basis points of CET1. So we do this on a regular basis. We're always looking at the balance sheet at a very granular level.
And, in this environment, we just think it's it's a prudent thing to do to make sure that our capital is working hard and that we're putting ourselves in a position to fund the balance and get the right returns in this environment.
Okay. It makes sense. And I guess that goes to my next follow-up here is just the loan growth numbers. You took in the it's very subtle and modest, but you took in a higher range of the loan growth range and also deposits. And can you just maybe talk a little bit about that, the drivers of that?
Yes. So, part of it is the, what we continue to do from an auto perspective, we continue to price for profitability as opposed to volume. So that continues to be the play that we're running. And then I think we just became on the margin a bit more conservative in terms of what we would expect from growth on the loan side in 2019. Not because the pipelines are in worse shape because they're actually in really good shape.
But I think the mood here is just one of caution and just making sure that we're careful and we put on the balance sheet what we feel comfortable with. From a deposit perspective, it has everything to do with the tactics that we're taking in the marketplace where we're, I suppose leading the market down from a CD perspective, a CD pricing perspective. And also the, the tactics that we're using to raise money market deposits, we're using a 6 month guaranteed term on rate and the market is still at a 12 month. So we do expect that this will have some incremental impact on deposit growth, but we're fine with that. As I mentioned, we've got the excess liquidity that we can always fall back on.
And I guess the other part of that is just commercial deposit pricing and not wanting to pay up for deposits in this environment. We certainly take a look at the relationships, as Rich mentioned. And to the extent, it's a deep relationship or a potential for a deep relationship, we certainly work with the client. But I have no interest in $100,000,000 deposit with no other relationship and paying up for that deposit at this point in time. So, the growth rates reflect those tactics and strategies.
Our next question is from Ryan Faran with Autonomous Research. Please proceed.
Good morning, Brian.
Hey, good morning. I wish I had $100,000,000 deposit to give you.
As long as you brought other products along with that, we'd be fine.
The so on the NIM, you kind of talked about the bottoming in the second half of twenty nineteen and I think you said stable in 2020. And I just want to clarify are you talking stable to relative to the 3 25 to 3 30 full year range or are you thinking more stable to whatever the fourth quarter exit run rate NIM is?
Yes, Brad, that's a great question. It's the full year 2019 NIM of the $3.25 to $3.30. We expect to be stable in 2020 in that range.
And I mean, I guess that seems to imply a little bit of a bounce back up in 2020. Is it deposit pricing catch up or what would kind of make the 2020 NIM maybe slightly higher than the fourth quarter exit for the year?
Yes, as you might expect, the deposit pricing is going to have a bit of a lag to it. So we actually see the largest benefit from what we expect from a deposit repricing perspective in the fourth quarter of 2019. And that will continue into 2020 along with the impacts of the hedge program, assuming we get the implied forward curve, the way it is currently forecast, the hedge program will kick in and give us some incremental margin to help offset what's happened in the rate environment.
Brian, this is Mark. Remember the CD campaign last year in the 1st 3 quarters, those all mature beginning in third quarter. So as those roll off, assuming they'll reprice down nicely. And
if I could sneak in one last clarification or expansion, think you mentioned July auto pricing and competition might have picked up a little bit. Can you just maybe give a little bit more color on what you saw there?
Yeah, we we've been pretty consistent in terms of raising pricing in the marketplace. It's been a good play for us. We typically see the competition follow. But in this environment, as we, as we've had some of the higher rates out. We felt that maybe we weren't getting the right type of customer.
Maybe a slight deterioration in some of the credit metrics. And so we quickly changed the pricing strategy and everything fell back into into place the way we would expect to see it. But that is the barometer that we use. I mean, we have a box for credit on the auto book that we don't move outside of. And we change pricing based upon what we see happening.
And that of course takes into consideration many factors what's happening in the marketplace, what's happening with competition, what's happening with interest rates. But, the one variable that we hold constant in thinking about pricing in the auto book is where we're at from a credit perspective.
Thanks. And on the Cote and our B side, we've seen a couple of new entrants into the market and one legacy participant expand nationally. And the combination of those 3 have significantly increased pricing competition for both R and D loans here over the the last few months.
Our next question is from John Pancari with Evercore.
Hi, John. Regarding your 2019 to 2021, longer term goals, or medium term goals, should we call it? I noticed you didn't include them in the in your slides or mention them. So I just want to see, if you have any updated thoughts on those targets, particularly around the efficiency guidance of $53,000,000 to $56,000,000 and also on the ROTCE outlook for 17% to 20%. Thanks.
Yes. No, we're still comfortable with those long term targets. Didn't mean to say anything by not including them in the slide deck or the presentation. So those are our targets for the next 3 to 5 years.
Okay, great. Thanks. And then separately on the 2019 revenue outlook of 3% to 4.5%. You give us a little bit more detail how that would break out between spread revenue and fees? And then also, has your fee income outlook changed at all?
And if so, what is changing that view? Thanks.
Yes. So, we're having a really good year on the fee side. Capital markets continues to perform very well. We're making smart investments in that business. We've got a terrific team and really good opportunity across the franchise.
In particular, when you think about the FirstMerit legacy customers and some of the capabilities that we bring to that customer base, we still have opportunities as it relates to, Capital markets products and being able to have deeper relationships with those customers. We've got a good product set and we feel very good about the outlook for that business. It's going to continue to grow assuming the economy cooperates. Treasury Management is another place for us that we feel very good with the momentum and what we're seeing in the field. In particular, we're seeing some new product capabilities in the business banking space that is actually producing some incremental growth that we expected and excited to see it developing.
So that's a category that works for us as well. And then mortgage we do expect that we're going to have continued good results in 2019. We're going to continue to see good refinance opportunities. And the secondary marketing spread has actually improved as well. So that helps.
And then we continue to grow households. I mean, we're continuing to grow consumer households. Continue to see deposit service charges increase in conjunction with that household growth. And we're getting, good deposit growth out of that expansion in households as well. So, the growth in 20 nineteen is going to be weighted more on a percentage basis categories that I mentioned, but also the rate environment and what's happening to the NIM.
But, very, very excited about the momentum we have on the fee side.
Okay. So that 3% to 4.5% that revenue outlook for 2019 and that, that did come down, but that was mainly all spreading then correct?
That would be correct. Yes.
Got it.
All right. Thanks, Frank.
Our next question is from Ken Zerbe with Morgan Stanley. Please proceed.
Hi, Ken. Great. Thank you. Hi, guys. I guess, my first question is in terms of the hedging that you did this quarter or accelerating your hedging.
We've heard some from some other banks this quarter that they did not do hedging or that they thought because curve was pricing in a significant decline in rates. The hedging was not the right decision for them. You just talk about why accelerating your hedging was the right decision for Huntington that may be different from other banks? And what are you assuming in terms of the rate outlook from here that makes it the right choice? Thanks.
So our implied outlook has the fed decreasing in July September of this year and May October of 2020. So basically, we began the hedge program. I think at a time when we felt the economic of putting the hedges on made sense relative to the outlook we had for the environment and what was going to happen to interest rates going forward. There certainly came a time when, I would say that the benefit was fully reflected in the price of those hedges and we pulled back. But we felt that we got the program in place to the extent that stabilized the margin going forward, which what we were trying to accomplish.
So clearly different for every bank in terms of where you're at from an asset liability position and the mix of your balance sheet and what you expect from growth going forward. But we feel that we kind of hit it right in terms of what we did the impact that it's going to have on the margin going forward.
Okay, great. And then just as a follow-up, maybe just as a clarification for us, I think you mentioned that all your swaps and floors next quarter are going to be considered cash flow hedges. Could you just remind us what that means and why it's better than something else?
So the economic hedges that we have running through fee income at this point as they get mark to market, we did not set those up to qualify for hedge accounting. So basically, we would match them up with, say, a commercial loan portfolio. And through that, we would get hedge accounting that would allow us to reflect the benefits or the detriment of those derivatives through the margin. The economic hedges that we moved up into the category to get hedge accounting they did flow through the fee income in the 2nd quarter and I think a little bit in the 1st quarter as well. But basically, I'd rather have the impact in the margin and we have the capacity to basically reflect those as qualifying for hedge accounting.
And we did that, actually early in the third quarter.
Yes, Ken, so that $5,000,000 mark to market that hit fee income this quarter. Going forward, that would run through OCI instead of through the P and L.
Got it. Perfect. Okay. Thank you very much.
Our next question is from Peter Winter with Wedbush Securities. Please proceed.
Good morning.
Good morning, Peter.
I was looking at the loan to deposit ratio and it's been creeping up a little bit. And I'm just wondering is there a certain level that you wouldn't want to see it go above?
Yes, Peter, we don't want that to go above 100%. That's the
view that
we have on that. It has been creeping up a bit. We've continued to see good asset growth. And as I mentioned, we've been a bit more conservative in terms of pricing deposits, particularly on the commercial side. So we manage that very carefully.
We obviously have levers that we can pull to manage that ratio. But that would be the limit that we would have in mind.
Okay. And then just on the borrowing side, I guess the 12,000,000,000 in borrowing. So I was just curious how much is floating versus fixed rate? I just want to get an idea how much could come down, in cost. If when the Fed starts cutting rates?
Yes, we typically swap our debt to, to the floating rates. And I believe we have all swap the floating at this point in time.
Our next question is from Steven Alexopoulos with JP Morgan. Please proceed.
Hey, good morning, Mac. Hey, Steve. Given I wanted to follow-up on the NIM questions. So given how meaningful you increased the hedges in the quarter, the NIM guidance feels worse than expected even looking at the midpoint of the guidance implies considerable pressure in the back half. Mac, with the hedges in place, what do you estimate the impact to NIM from every 25 basis point cut?
Like, what's a reasonable range?
Yes. So, 25 basis point shock would be about a $24,000,000 annual impact. So that would be a 12 month impact. After a 25 basis point shock.
Okay. That's helpful. We can work that out. Okay. And then In terms of deciding how much downward pressure to place on expense growth, is there a minimum level of positive operating leverage that you're targeting for 2019?
Stephen, I would say that there's not a minimum level. We're our target is to achieve positive operating leverage. We're very cognizant and aware of the environments and we're very careful in terms of how we think about, expense opportunities. We're continuing to invest for growth even in metrics and the numbers that I've communicated to you today. And we feel that that's an important component of being able to really create value going forward is driving the top line.
We're long term shareholders, the management team and the the board of Huntington would be in the top 10 shareholders of the company without a doubt, probably a little bit higher. So, yeah, there it probably doesn't have the impact that you might expect to see, simply because rates dropped very quickly and expecting expectations changed very quickly. And, it would have been obviously much more lucrative to put the positions on earlier, but again, we're comfortable with what we got done and feel good about, how that margin is going to perform going forward.
Okay. Thanks for taking my questions.
You
bet. Take care.
Our next question is from Kevin State Pierre with KSP Research. Please proceed.
Hi, good morning.
How are you doing? Good. So, Mac, I wanted to follow-up on your comment on the customer experience and the J. D. Power Awards and that all sounds great.
I just was wondering if you could speak to your overall mobile digital strategy, what you do in house, what you outsource and how that fits in with your overall branching strategy?
Yeah, Kevin. So, we've got a real focus on making sure that from a customer experience perspective, We are investing really across many different areas of the bank, but in particular digital technology, to just improve customer experience. So we view investments like this as really driving improved customer experience, customer satisfaction. And for us, that's the scorecard. We don't try to build every capability that some of the larger banks have, but we build the capabilities that we think we need that are going to drive the experience that we want for our customers.
So I think that's the way we approach it and we've allocated more and more expense every year or investment every year to to digital technology and what we need to do there. So when you think about maybe a proof point for that, we rolled the hub out which is our new online banking platform, probably about 8 or 9 months ago. And we believe that there's a direct correlation between the vision that we have for what we want to do and try to accomplish, which was all focused on customer experience. And customer satisfaction. And, what we've delivered with the hub, we feel actually resulted in the JD Power awards that we just won.
So again, we don't invest in technology for technology's sake. We invest in technology to make sure that we further our strategy and our differentiation around customer experience. And I think we got a good proof point this quarter with the JD Power award.
Great. And do you have any sense how you're doing with millennials versus older customers?
We believe that we're making progress there and I will tell you that it is a real focus of ours. Clearly, we have some proof points that we believe the millennials enjoy the hub in terms of what we've delivered. And it is a focus for us. I mean, clearly, when you think about who is more likely to be changing accounts or changing banks, it's likely going to be the younger generation. And we need to have the digital capabilities that will, attract them and make them feel like we're the bank for them.
And that is exactly what we're trying to accomplish. So I think we continue to make good progress there.
Great. Thank you.
Thanks Kevin.
Our next question is from Ken Usdin with Jefferies. Please proceed.
Good morning, Ken.
Hey, thanks. Good morning, guys. On the optimization that you've been doing in the loan and securities portfolio, how much more work you still have a head there that you're aiming to accomplish or did you get effectively what you wanted to do done in the second quarter? How do you think about like what buckets that still come from if there's more? Yes.
So, clearly, we still have opportunity, on the securities portfolio, if we decide to to go down that path. We think we have up to $3,000,000,000 of securities that we could take off the sheet to provide incremental funding if we go if we go down that path. What I would tell you on the loan side is that we likely still have opportunity there. We do a lot of the work today on Excel spreadsheets and some other tools we have to help us understand relationship profitability, but we're implementing a new application later this year that will allow us to do this in real time and actually start to have better information for relationship managers around the depth of their relationship and the profitability of their relationship. And their efficiency around capital usage.
So I do expect that we're going to continue to get better at this. I do think we're going to find additional opportunities. Our first preference is always to deepen the relationship and make sure that we get to a level of profitability that reflects the capital that we're allocating to that customer. But we're going to manage this appropriately and we're going to get get the right returns for our shareholders.
Okay. And then just one on credit to follow-up on that. So you had previously mentioned a need to rebuild the reserve. Credits remaining very good. You're slowing loan growth in part because of the the rationalization and a little bit on the competition as you mentioned.
Do you need to does that change the need to build the reserve at all in terms of just what's you're putting on versus what you're not and the optimization underneath?
Well, I mean, I think when we look at the reserve and where that is and what we do on a quarterly basis, I mean, there are things that we look at just beyond loan growth. I mean, certainly that's a part of it. We look at the composition and the mix of the portfolio. There's a number of factors that go into the provision. Certainly, we have an eye toward keeping the provision level at a certain percentage of loans and NPAs and other criticized measurements.
So I think we want to continue to look at the reserve quarterly and make sure that sufficient for today and going forward.
Okay. Thanks guys.
Our next question is from Brock Vandervliet with
Hi. Good morning. Great. Just wanted to actually follow on that question. Just to kind of square square the circle here, end of period growth, loan growth is virtually flat.
It sounds like you're cautious going forward. You've done a bit of repositioning. Should loan growth pick up a bit in the second half or shouldn't we expect that?
No, I think you'll see loan growth pick up in the second half. I mean, you have to remember when you're looking at period end, we did take $400,000,000 off the sheet during the quarter. Right. And but again, the thing that, that I've communicated time and time again about 2019 is the fact that we have ability in terms of how we manage our financials in 2019. The growth that we were expecting from the loan portfolio was half heroic on a period end to period end basis.
And again, some of the liquidity that we have on the balance sheet gave us flexibility in terms of how we manage deposit pricing. And then on the expense side, we had appropriate flexibility to be able to manage the positive operating leverage for 2019. So You will see continued loan growth. The pipelines are in good shape. We're going to be cautious move through 2019 and understand what's going to happen from an economy perspective.
But, you just need to take some of those factors into consideration when you take a look at the period in
Okay, great. And just quickly on hedging earlier in the year, you had mentioned a goal of down 1% and down 100 basis point ramp. You're 1.8% now. Obviously, the market's changed hedges are much more expensive. It sounds like you're not anticipating adding much much more there based on the cost and based on your view of the forward curve.
Is that accurate?
That would be correct. We will optimize our current position, but optimize is optimized. And I would tell you that we're in good shape in terms of how we're positioned right now with our hedges.
Great. Thank you very much.
That concludes
and answer session. I would like to turn the call back over to Mac for closing remarks.
Thank you, Sherry. I'm pleased with our solid results in the first half of the year, particularly given the significant amount of market volatility and the movement in the yield curve we have witnessed. I remain confident about our prospects for the Our top priorities are executing our strategic plan to prudently grow revenue and to thoughtfully invest in our businesses for continued organic growth. While also delivering annual positive operating leverage. We are building long term shareholder value through a diligent focus on top quartile financial performance and consistently disciplined risk management.
And finally as always, we'd like to end with a reminder to our shareholders that there is a 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. Thank you for your interest in Huntington. We appreciate you joining the call today. Have a great day.
Thank you. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.