Greetings, welcome to the Huntington Bancshares first quarter earnings conference call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. Mark Muth, Director of Investor Relations.
Thank you, Donna. Welcome. I'm Mark Muth, Director of Investor Relations for Huntington. Copies of the slides we'll be reviewing can be found on the investor relations section of our website, www.huntington.com. This call is being recorded and will be available as a rebroadcast starting about one hour from the close of today's call. Our presenters today are Steve Steinour, Chairman, President, and CEO, and Mac McCullough, Chief Financial Officer. Dan Neumeyer, our Chief Credit Officer, will also be participating in the Q&A portion of today's call. As noted on slide two, today's discussion, including the Q&A period, will contain forward-looking statements. Such statements are based on information and assumptions available at this time and are subject to changes, risks, and uncertainties, which may cause actual results to differ materially. We assume no obligation to update such statements.
For a complete discussion of risks and uncertainties, please refer to this slide and material filed with the SEC, including our most recent Form 10-K, 10-Q, and 8-K filings. Let me now turn it over to Steve.
Thanks, Mark, thank you to everyone for joining the call today. As always, we appreciate your interest and support. We had a solid start to the year in the first quarter, reporting net income of $358 million, an increase of 10% from the year-ago quarter. Earnings per common share were $0.32, up 14% from the year-ago quarter. Our profitability ratios remained strong as our return on tangible common equity was 18% and our return on assets was 1.35%. Average loans increased 6% year-over-year, including a 7% increase in consumer loans and a 5% increase in commercial loans. Average core deposits increased 8% year-over-year, reflecting our intent to fully fund loan growth with core deposits.
We're pleased with our first quarter efficiency ratio of less than 56%, down from 57% a year ago, driven by a 5% year-over-year revenue growth as well as expense discipline. Overall asset quality remains strong as most credit ratios remain near cyclical lows. As we foreshadowed in our remarks at 2 conferences during the first quarter, net charge-offs ticked modestly higher this quarter as a result of 2 unrelated commercial credits. Still, with these 2 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've noted previously, we expect some quarter-to-quarter volatility given the very low loss and problem loan levels at which we're operating. Our ratios for NPAs, delinquencies, and criticized loans all remain very good.
As briefly outlined on slide three, we developed Huntington strategies with the vision of creating a high-performing regional bank and delivering top quartile through the cycle shareholder returns. Our first quarter profitability reflects continued progress towards this aspiration. We continue to make thoughtful and meaningful long-term investments in our businesses, particularly around customer experience, in order to drive organic growth. We also prudently allocate our capital to ensure we are earning adequate returns and taking appropriate risks consistent with our aggregate moderate to low risk appetite. We are very pleased with how we are positioned. We've built sustainable competitive advantages in our key businesses that we believe are 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 four illustrates our current expectations for the full year 2019 and our new long-term financial goals.
We continue to have a very constructive view of the local economies in our footprint, which we expect will translate into continued organic growth this year. What we are hearing from our customers remains positive. Businesses in our local markets generally continue to deliver good performance. While the first quarter tends to be our seasonally slowest quarter for commercial lending activity, our commercial pipelines have remained steady. 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. Some of these businesses have also weathered the headwinds of ongoing tariff and trade disputes. Across our footprint, consumers also remain upbeat with strong labor markets driving wage inflation.
In the 3 months ending February, 18 of our 20 largest footprint MSAs saw unemployment rates decline, while the remaining two MSAs were unchanged. Additionally, consumer confidence in our region has generally stayed at the highest levels since 2000. Job openings continue to exceed unemployment levels in most of our markets. To summarize by saying that we remain bullish on the economy in our footprint. Within our businesses, we do not see signs of a near-term economic downturn. Nonetheless, we are cognizant of recent market volatility and mixed economic data, particularly in December and earlier this year, as well as the recent short-lived inversion of the yield curve. As we communicated on the last earnings call, we've removed all rate hikes from our forecast and have been taking 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. Our full-year 2019 expectations remain unchanged from what we discussed in the fourth quarter earnings call in January. We expect full-year average loan growth in the range of 4%-6%. Full-year average deposit growth is also expected to be 4%-6%, as we remain focused on acquiring core checking accounts and deepening customer relationships. We expect full-year revenue growth of 4%-7%. The full-year NIM is expected to remain relatively flat on a GAAP basis versus 2018, inclusive of the anticipated reduction in the benefit of purchase accounting and the cost of the hedging strategy we began implementing in the first quarter of this year.
The full-year core NIM is expected to modestly expand. Noninterest expense is expected to increase 2%-4%, consistent with our stated priorities. We continue to target annual positive operating leverage in 2019. As Mac noted in the conference presentations during the first quarter, we expect our normal seasonal increase in compensation and marketing expenses during the second quarter, resulting in a peak quarterly efficiency ratio for the year in the second quarter. We anticipate full-year 2019 net charge-offs will remain below our average through the cycle target range of 35-55 basis points. Our expectation for the full year effective tax rate is in the 15.5%-16.5% range. With that, Mac will now provide an overview of our financial performance. Mac, thank you.
Thanks, Steve, and good morning, everyone. Slide five provides the highlights for the 2019 first quarter. Results reflected strong earnings momentum with double-digit growth rates and net income and earnings per common share, along with continued improvement in our profitability ratios. We recorded net income of $358 million, an increase of 10% versus the year ago quarter. We reported earnings per common share of $0.32, up 14% year-over-year. Tangible book value per common share was $7.67, an 8% year-over-year increase. Return on assets was 1.3%, return on common equity was 14%, and return on tangible common equity was 18%. Our efficiency ratio for the quarter was 55.8%, down from 56.8% in the year ago quarter.
We saw net interest margin expansion of nine basis points to 3.39% compared to the 2018 first quarter as a result of disciplined asset and deposit pricing and the benefit of interest rate increases, partially offset by the continued runoff of purchase accounting accretion. Turning to slide six. Average earning assets increased $3.8 billion or 4% compared to the year ago quarter. Loan growth accounted for more than the entire increase as average loans and leases increased $4.3 billion or 6% year-over-year, including a $2.5 billion or 7% increase in consumer loans and a $1.8 billion or 5% increase in commercial loans. Aided by the strong loan production late in the fourth quarter, average commercial and industrial loans grew 8% from the first quarter of 2018 and reflected the largest component of our year-over-year loan growth.
C&I loan growth has been well diversified over the past year, with notable growth in corporate banking, asset finance, dealer floorplan, and middle market banking. We are also seeing good early traction in our new specialty lending verticals that 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 6% year-over-year decrease. This reflects anticipated paydowns as well as our strategic tightening of commercial real estate lending to ensure appropriate returns on capital and to manage risk. Consumer loan growth remains centered in the residential mortgage and RV and marine portfolios, reflecting the well-managed expansion of these two businesses over the past two years. Average residential mortgage loans increased 18% year-over-year.
As we typically do, we sold the agency-qualified mortgage production in the quarter and retained the jumbo mortgages and specialty mortgage products. Average RV and marine loans increased 33% year-over-year. Average auto loans increased 2% year-over-year as a result of consistent disciplined loan production. Originations totaled $1.2 billion for the first quarter, down 14% year-over-year. As we have previously mentioned, we are executing a pricing strategy to optimize revenue via increased auto loan pricing that has resulted in lower production volumes. That is a trade-off we like. New money yields on our auto originations averaged 4.73% during the first quarter, up 85 basis points from the year ago quarter. The increase in other earning assets shown on this slide reflects the inclusion of deposit balances with the Federal Reserve Bank.
These balances were treated as non-earning assets prior to the fourth quarter of 2018. Finally, securities were down 5% year-over-year as we let the portfolio run off and utilized the cash flows to fund higher yielding loans during 2018. During the 2019 first quarter, we began reinvesting portfolio cash flows into new securities, driving the linked quarter increase. Turning now to slide seven. Average total deposits and average core deposits both grew 8% year-over-year. Core certificates of deposit were up 164% from the year ago quarter, primarily reflecting the consumer CD growth initiatives during the first three quarters of 2018. Average money market deposits increased 11% year-over-year, primarily reflecting the shift in promotional pricing away from CDs to consumer money market accounts in mid-2018. Average interest-bearing DDA deposits increased 6% year-over-year, while average non-interest bearing DDA deposits decreased 3%.
As shown on slide 30 in the appendix, we are very pleased that our consumer non-interest bearing deposits increased 5% year-over-year as we continue to grow households 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 8%, primarily reflecting the continued shift to consumer product mix, particularly among legacy FirstMerit accounts, as FirstMerit's promotional pricing strategies focused on savings accounts compared to our primary focus on money market. Significantly, our continued focus on core funding resulted in a 56% year-over-year reduction in average short-term borrowings. Moving now to slide eight. FTE net interest income increased $52 million or 7% versus the year ago quarter.
Driving this growth was the 4% increase in average earning assets, rising yields in both our consumer and commercial loan portfolios, and disciplined deposit pricing. Our GAAP net interest margin was 3.39% for the first quarter, up nine basis points from the year-ago quarter. The net interest margin decreased two basis points linked-quarter. Moving to slide nine. Our core net interest margin for the first quarter was 3.33%, up 11 basis points from the year-ago quarter. Purchase accounting accretion contributed six basis points to the net interest margin in the current quarter, compared to eight basis points in the year-ago quarter. Slide 26 in the appendix provides information regarding the actual and scheduled impact of FirstMerit purchase accounting for 2019 and 2020.
On a sequential quarter basis, the core NIM compressed one basis point, equivalent to the linked-quarter decline in the contribution from purchase accounting accretion. As a reminder, the 2018 fourth quarter, both GAAP and core NIMs benefited from two basis points of higher than normal commercial interest recoveries. Turning to the earning asset yields, our commercial loan yields increased 65 basis points year-over-year, while consumer loan yields increased 41 basis points. Our deposit costs remained well contained with the rate paid on total interest-bearing deposits of 94 basis points for the quarter. Up 51 basis points year-over-year. Compared to the prior quarter, our total interest-bearing deposit costs increased ten basis points. Slide ten illustrates our cycle-to-date interest-bearing deposit beta compared to peers. Our cumulative deposit beta remains low at 32%.
We have been communicating that we believe the consumer core CD strategies we utilized over the first three quarters of 2018 would serve us well over time, effectively front-loading some of the deposit beta. You can see those benefits over the past two quarters as our cumulative beta has not increased as quickly as our peers. This quarter, the peer group's average cumulative beta increased 4%, while we saw a 2% increase in our cumulative beta. As we had mentioned in the last couple quarters, overall deposit pricing remains rational in our markets. Assuming no additional rate increases, our current forecast assumes modest continued upward pressure on deposit costs, driven by continued mix shifts and incremental deposit growth from higher cost products, particularly money market. Slide 11 provides detail on our non-interest income, which increased 2% from the year-ago quarter.
Gain on sale of loans and leases increased 63% year-over-year, primarily reflecting the gain on the sale of asset finance leases and higher SBA loan sales. Mortgage banking income decreased 19%, primarily reflecting a $3 million loss on net mortgage servicing rights in the quarter and lower origination volume. capital markets fees were relatively flat year-over-year, but there were a few notable items impacting this line. During the 2019 first quarter, we recognized a $6 billion unfavorable commodity derivative mark-to-market adjustment related to a commercial customer. Partially offsetting this, the Hutchinson, Shockey, Erley acquisition, which closed in October of 2018, contributed $5 million of capital markets fees during the 2019 first quarter.
Finally, while not impacting the comparisons, we moved syndication fees, which were about $3 million in the 2019 first quarter compared to $2 million in the year ago quarter into this line item. Syndication fees were previously included in other income. While down sequentially due to normal seasonality, we continue to see positive momentum within our two largest contributors to non-interest income. The deposit service charges and card and payment processing fees both posted year-over-year growth. We have been executing our new strategic plan for two quarters now, and we are thoughtfully investing in our colleagues, digital technology, and our brand. Slide 12 highlights the components of the $20 million or 3% year-over-year growth in overhead expense. Personnel costs increased $18 million or 5%, accounting for almost the entire increase.
This primarily reflected hiring related to our strategic initiatives, the implementation of annual merit increases in the 2018 second quarter and increased benefit cost. We've added colleagues in our digital and technology areas and experienced bankers in our new lending verticals. The remainder of the increase primarily reflected an 8 million or 11% increase in outside data processing and other services, which was driven by increased technology investments. Deposit and other insurance expense decreased 10 million or 56% due to the discontinuation of the FDIC surcharge in the 2018 fourth quarter. We remain focused on driving positive operating leverage. As part of our commitment to manage expenses relative to the revenue environment, we self-funded a portion of the expenses related to these new hires in technology investments through the branch rationalization completed at year-end 2018, the elimination of the FDIC surcharge, and other efficiency improvement efforts.
Cost savings from the pending Wisconsin branch divestiture will further fund strategic investments going forward. Looking ahead to the 2019 second quarter, we expect non-interest expense will reflect a linked quarter increase of approximately $40 million-$50 million, resulting in a peak quarterly efficiency ratio of the year, but we're trending down in the back half of the year. Roughly two-thirds of this expected increase reflects the normal seasonal increase in compensation expense as a result of the annual grants of our long-term incentive compensation in May, as well as the May implementation of annual merit increases. Marketing expense accounts for the majority of the remainder of the expected increase, reflecting the normal timing of spring campaigns and promotions. The magnitude of these increases is consistent with what we've experienced the past two years.
However, these seasonal increases were masked in both of those years by noise related to the FirstMerit acquisition and other non-recurring items. Our full year 2019 expense expectations remain unchanged, as this is normal seasonality in our expenses and has always been incorporated into our expectations. Slide 13 illustrates the continued strength of our capital ratios. The tangible common equity ratio, or TCE, ended the quarter at 7.57%, down 13 basis points from a year ago, but up 36 basis points from the 2018 year-end. The common equity Tier 1 ratio, or CET1, ended the quarter at 9.84%, down 61 basis points year-over-year, but up 19 basis points linked quarter. We continue to manage CET1 within our 9% to 10% operating guideline with a basis toward the upper end of the range. We repurchased 60.5 million common shares over the last four quarters.
During the 2019 first quarter, we repurchased 1.8 million common shares at an average cost of $13.64 per share, or a total of $25 million of common stock. There is $152 million of share repurchase authorization remaining under the 2018 capital plan. We intend to complete the repurchase of the full $152 million of remaining capacity during the 2019 second quarter. During the first quarter, we submitted our 2019 capital plan to the Federal Reserve. Recent regulatory relief moved Huntington and other regional banks our size from annual to biannual CCAR participation, resulting in us not being required to participate in the formal CCAR process this year. However, we will participate in CCAR again in 2020. We intend to maintain the normal cadence of announcing our annual capital plan and planned capital actions in June.
That said, we have previously stated that we are targeting a long-term capital return in the 70%-80% range and a long-term dividend payout ratio target of approximately 40%-45%. Our submitted 2019 capital plan is consistent with those targets. We have also previously communicated on many instances that our capital priorities are, first, to fund organic growth, second, to support the cash dividend, and finally, all other capital uses, including the buyback and selective acquisitions. Those capital priorities have not changed. Slide 14 provides a snapshot of key credit quality metrics for the quarter, which remain strong. Consistent, prudent credit underwriting is one of Huntington's core principles, and our financial results continue to reflect our disciplined approach to risk management and our aggregate moderate to low risk appetite. We booked loan loss provision expense of $63 million in the first quarter and net charge-offs of $71 million.
Net charge-offs represented an annualized 38 basis points of average loans and leases in the current quarter, up from 27 basis points the prior quarter and from 21 basis points in the year ago quarter. The increase was centered in two specific commercial credit relationships. Consumer charge-offs remain consistent over the past year. There is additional granularity on charge-offs by portfolio in the analyst package in the slides. The allowance for loan and lease losses as a percentage of loans remains relatively stable at 1.02%, down one basis point linked quarter. The non-performing asset ratio increased nine basis points linked quarter and two basis points year-over-year to 61 basis points. The year-over-year increase was centered in the C&I portfolio, partially offset by decreases in the commercial real estate portfolio, 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 lows, and as we have noted previously, some quarterly volatility is expected given the absolute low levels of problem loans. Slide 15 highlights Huntington's strong position to execute on our strategy and provide consistent through the cycle shareholder returns. The graph on the top left quadrant represents our continued growth in pre-tax, pre-provision net revenue as a result of focused execution on our core strategies. This strong level of capital generation positions us well to support balance sheet growth and return capital to our shareholders at advantage rates over the long term. The top right chart highlights the well-balanced mix of our loan and deposit portfolios.
We are both a consumer and commercial bank, and believe that the diversification of the balance sheet will serve us well over the cycle. Our DFAST stress test results in the bottom left highlight our disciplined enterprise risk management. We consistently rank in the top four commercial banks in the severely adverse scenario of DFAST. Finally, the bottom right demonstrates Huntington's strong capital position. Let me now turn it over to Mark so we can get to your questions.
Thanks, Mac. Donna will now take questions. We ask that as a courtesy to your peers, each person ask only one question and one related follow-up. If that person has additional questions, he or she can add themselves back into the queue. Thank you.
Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that is star one to register questions at this time. Our first question is coming from Ken Usdin of Jefferies. Please go ahead.
Thanks. Good morning, guys.
Morning.
Hey, quick question on the positive way you maintain the NIM guidance for full year flat. You took out the remaining rate hikes, as you said. The curve's obviously gotten flatter. In your slides, you still talk about expected through the cycle 50% beta versus the low 30s you're at now. Can you talk about the goods and bads in terms of your ability to keep that gap NIM flat for the year, and how you expect that gap in core to trend from the 339 this quarter? Thanks.
Yeah. Thanks, Ken. It's Mac. A few things I'll point out. We have seen good non-interest-bearing deposit growth in the consumer line on the balance sheet, which continues to help us keep the NIM at a decent level. We're also very focused on managing both the asset yields and the liability rates. We're very carefully monitoring the rates that we bring onto the balance sheet on the asset side, and we're also extremely focused on what we're paying on the deposit side as well. It's a pretty fluid environment, and we just are making sure that from both an asset and liability position, that we're making good decisions around the rates and yields that we're bringing things onto the balance sheet. We continue to work through some of the headwinds that have been discussed. Clearly, purchase accounting accretion is working against us.
We do have some additional costs associated with the hedging program, which is probably three basis points on the margin for the full year. We monitor these things very frequently, and we continue to take actions to make sure that we continue to support the NIM.
Okay. My follow-up on that point then, that would just expect that you had mentioned that the core NIM, I think, should be up from here or up year-over-year. Just in terms of the underlying core trend, we know about the purchase accounting, if you could just help us understand the core trend from here. Thanks.
Yeah. The core NIM will be up modestly year-over-year. I think you could expect that it is going to drift a little bit lower on a quarterly basis, but for the year-over-year impact, it should be up probably three to four basis points, something like that.
Okay. Thanks, Mac.
Yep.
Thank you. Our next question is coming from Matthew O'Connor of Deutsche Bank. Please go ahead.
Morning, Matt.
Good morning. I was wondering if you could talk about the sustainability. The deposit growth, obviously very strong at 8%, how are you thinking about that going forward?
We continue to see, I think, really good results on the consumer side of the balance sheet. As I mentioned in the previous answer, 5% year-over-year growth in non-interest-bearing is probably one of the better performances among the peer group. We're very focused on understanding what's happening from a competitive perspective. We're very focused on making sure that we bring things onto the sheet at the right rate. We have many programs underway on the retail side of the bank in terms of sales execution, promotional pricing strategies. We look at different products and which products make the most sense for us given what's happening in the marketplace. We're able to pull those levers pretty well. We feel good about the consumer side of the sheet. Commercial is a bit more challenging in terms of just rate expectations.
We're monitoring and actually responding to those customer requests on a one-off basis. Obviously, we look at the trade-off between what we can bring on a commercial deposit versus overnight funding. We're very focused on supporting our deep customer relationships and making sure that we do what's right from a customer perspective in that regard.
We're very happy with what we see from a deposit growth on the balance sheet overall, we continue to believe that we have many levers to be able to continue to see that growth take place.
Okay. Obviously, that implies solid balance sheet growth going forward. If we try to pull it into your capital levels and maybe your buyback expectations for the next capital cycle, what are your thoughts on that? I know you're within your range on the CET1. You are at the high end of the range. It seems like there might be some flexibility, obviously the balance sheet growth is also likely to be pretty solid. How are you thinking about buybacks in the next cycle here?
Yeah. Look, we're going to continue to manage towards the upper end of the CET1 range of 9%-10%. You're going to see us be closer to the 10%. We feel like we have a good balance of asset growth funded through core deposits and maintaining our capital levels at that near 10% CET1 level. We haven't given our specific capital return expectations for the 2019 CCAR process. As I mentioned in my comments, we're going to be 70%-80% total and 40%-45% dividend payout.
Okay. Thank you.
Yep.
Thank you. Our next question is coming from Jon Arfstrom of RBC Capital Markets. Please go ahead.
Great. Thanks, [good morning].
Hi, Jon.
A question on credit, maybe for Steve or Dan. The nature of the new NPLs and give us comfort that this is truly isolated in terms of what you're seeing on overall credit.
Sure. Yeah. It's obviously something we monitor very closely, is what's coming in the bucket. What we're seeing is no concentration by sector, geography, et cetera. The four largest NPLs we had were all different industries. I think the flow this quarter, if you look at what we've been experiencing over the last year or so, it is lumpy. We've had a number of quarters where it improves, and then we'll see a few move in an opposite direction. If you look at our NPA and NAL ratios year-over-year, it's two basis points different than what it was. We remain very confident. We're not changing our outlook based on the new flows in terms of charge-offs or provision expense. I think it always proves itself out that quarter-to-quarter we see ups and downs.
This happened to be a quarter we're up a bit.
Yep. Okay, that helps. Then, Steph, you said pretty clearly you do not foresee a recession. If you do start to see signs, what might change in terms of your approach?
Well, we've been working for years, Jon, with a view that something's been imminent and obviously wrong. We've done a number of things, and we're maintaining those. I think it was three and a half years ago the teams led by Dan pulled back on leverage lending. We've done a lot with commercial real estate construction in particular. The concentration disciplines stay in play. This focus on portfolio management and assuming that there's something likely to occur nearer term now for the last couple of years has caused us to bolster our capabilities and our MIS. There are a whole series of things that we've already done and are maintaining. Now, if we see it turning, we'll start adjusting where we think there's going to be further impact to the extent we think there's any policy adjustment or other things.
We're running it fairly conservatively as we sit. We have been for a number of years, notwithstanding the growth, and expect that we're going to have relatively consistent performance through the cycle.
Yep. Okay. All right. Thank you.
Thank you.
Thank you. Our next question is coming from Ken Zerbe of Morgan Stanley. Please go ahead.
Great, thanks. Morning, guys. First question, just in terms of expenses. If I got it right, it was up $40 million-$50 million in 2Q. How should we think about the second half? Does some of that marketing expense come down and total expenses come down for the rest of the year, or does it stay at that 2Q level?
Yeah. Ken, it's Mac. You will see expenses come down in the third and fourth quarters. The spike that we see in the second quarter is normal and has been included in all the guidance that we've been giving throughout the period. You will see the efficiency ratio at its peak in the second quarter, and it will come down in the third and fourth quarters.
Okay. That helps. Just the second question. In terms of the hedging activities, I guess given that the Fed fund futures curve is already pricing in a rate cut, can you just walk us through the logic? How much more hedging do you want to do, and does it make sense to do it if the curve's already building in potential rate cuts from here? Thanks.
Yeah. Ken. We're kind of implementing our way into the hedge position. We have about, let's say, $4 billion at the end of the first quarter. We're primarily focused on putting on floors at this point. Making sure that just in case we do get a rate hike from the Fed, we still benefit from that. Clearly, just given some of the uncertainty in direction of interest rates and given our asset sensitivity position, we just think it's a prudent
Exercise to go through and reduce some of that asset sensitivity, while still maintaining the upside using the floors at this point in time.
All right, perfect. Thank you.
Yeah, thanks, Ken.
Thank you. Our next question is coming from John Pancari of Evercore. Please go ahead.
Morning.
Good morning.
Back to the credit topic. Regarding the 19% increase in NPAs, I know you mentioned that it's not any one industry. I know you said your largest existing NPLs are not in any one, but how about the inflows this quarter? It looks like a big portion of it came from auto suppliers.
Well, actually, since our numbers are so low, John, that the increase is in one credit. It was our largest inflow in the quarter, but that is one deal. Of the four largest inflows this quarter, they're in four different industries. They're not all from one vintage. They're not all in a singular geography. That's just the dispersion. Happened to have a few more this quarter than we typically do.
Got it. Has that one large credit that went in, has it already been reserved for or no?
It has, we foresee a favorable outcome on that particular deal.
Got it.
Later this year, actually.
Yeah.
You also, Dan, have accounted for the SNC exams
Yeah
in the current reserve as well.
Yes. We didn't have tremendous activity this quarter, but the SNC results are incorporated in everything you see today.
Okay, got it. All right. Separately on capital, I know you reiterated the higher end of that 9%-10% CET1 target. What keeps you near that high end? What keeps you at that bias versus potentially moving towards the lower end of it over time? Thanks.
Yeah. We just feel more comfortable operating at the higher end of that range. If you take a look at us relative to our peer groups, we are a bit lower than the peer group. We do believe that the peer group is migrating down to us as they execute on their capital actions. We feel comfortable at that higher level, and obviously, we're producing industry-leading returns at that higher capital level. We feel very good about how we're positioned.
John, there's a little bit of history where the capital was deployed substantially in the FirstMerit acquisition. We pulled capital levels down with an expectation of replenishing over time, and we've talked about expecting that we're somewhere later in the cycle. That would guide us to the higher end of that range.
Got it. Okay, thanks, guys.
Thank you. Our next question is coming from Steven Alexopoulos of JPMorgan. Please go ahead.
Hey, good morning, everybody. On the NIM, I'm trying to better understand the offsets to the higher deposit costs coming, and which we think will get us modest NIM expansion on core this year. If we look at the rates on new loans and new securities that you're adding each quarter, how much above the current earning asset yield are those coming into the book?
Yes, Steven. Virtually all of the new production that we're putting on the sheet is going to be higher than the back book on the asset side. We've been particularly focused on indirect auto pricing. We've been very successful in raising pricing, which has had the result of reducing origination, but we're fine with that trade-off. We've also been very focused on really pricing across the entire consumer loan category. Resi mortgage has been another area of focus for us. Then on the commercial side, we're in the middle of renewal season, and we're looking for opportunities to continue to increase our pricing there. We're very active on the asset side in terms of things that we're doing just to make sure that we're getting every basis point to help offset some of the continued pressure on the deposit side.
We are going to see continued migration of deposit rates up over the last half of the year. That is all factored into our guidance. We do feel comfortable with the expectations that we put out there for the NIM.
Okay. Thank you. Just for a follow-up, if we look at the $23 billion of money market deposits, that is average, you are paying around 1%. Where do you see that topping out, assuming the Fed stays on hold here?
It will continue to migrate higher. We basically run six months special pricing. It comes back to a lower rate. I am not quite sure that we are going to see it migrate much higher. It is probably going to be 25, 50 basis points perhaps. It just depends on the level of competition, what is happening in the marketplace, and how we choose to fund the balance sheet. You saw us move to CDs in early 2018 because we thought that was the opportunity. We switched back to money market kind of middle of 2018. We are always looking at what is happening in the market from a competition perspective, and we are pretty good at finding the right levers in terms of getting the right growth.
Mac, are you seeing? You have mentioned commercial customers still moving out of non-interest bearing into products like this. Is that continuing at the same pace? Now that rates have stabilized, are you seeing that ease? Thanks.
Yeah, I do think it is easing a bit. We did see continued migration in the first quarter.
It's going to continue to migrate. I do think that the rate of migration has slowed down.
Okay. Thanks for taking my questions.
Yeah, thanks.
Thank you.
Thank you. Our next question is coming from Peter Winter of Wedbush Securities. Please go ahead.
Good morning.
Morning, Peter.
You guys had a very strong quarter on C&I loan growth. I'm just wondering, do you think that type of growth rate is sustainable, or were there some other factors that contributed to that growth that might reverse over time?
Yeah. This is Dan. Well, I think generally, our customers continue to be fairly positive. The pipelines remain strong. I think the growth was diversified in that not any one area accounted for the bulk of it. Everything from middle market to our business credit, asset-based healthcare. They all contributed. I think that it's within our risk appetite. We have certainly pulled back where we feel we can't compete within our risk appetite. I don't see any meaningful shifts in the volumes that we would anticipate for the balance of the year.
Okay. Just staying on the loan side. Mac, I heard your comments about the increase in the auto pricing for the auto loans. I did notice that quarter-to-quarter auto loans decline. Would you expect that to be a temporary decline?
Peter, it's likely going to be stable to declining, going forward. We're very pleased with the pricing actions that we're taking. We're very pleased with the volumes that we're generating. We just think it's the right tactics given where we are from a rate perspective and the concentration of auto on the balance sheet. I would expect stable to declining going forward.
Okay. Thanks, Mac.
Yeah. Thanks, Peter.
Thank you. Our next question is coming from Kevin Barker of Piper Jaffray. Please go ahead.
Yeah. I just wanted to follow up on some of the capital. I notice the amount of buybacks in the first quarter were relatively low compared to the first two quarters, and then you still have a lot left over. Was there any reason behind pulling back on the buybacks in the first quarter versus leaving a significant more for the second quarter?
Looking at some of the volatility and some of the events in the first quarter. Brexit and other items just had us hit the pause button for a while. We did do the $25 million, and we will complete the remaining $152 in the second quarter. Taking a look at the environment and maybe being a little bit more cautious with the buyback. We'll pick it up in the second quarter.
We also pulled a little less than $100 million forward from the plan as approved by the Fed for the year. Accelerated it into the fourth quarter. If you will, we almost pre-funded the fourth quarter with the first quarter.
Okay. To follow up on some of the credit comments, was there any change in the severity that you saw on any of these loans? I guess the recovery amount that you would get on some of the commercial loans than you have seen in the past given the credit losses that we saw this quarter?
Yeah. I think severity, no. Now recoveries are slowly dwindling. A small portion of the increase in net charge-offs was from lower recovery. That's just a fact given how low our charge-offs have been. I think when you look at the portfolio as a whole, everything was really rock steady with the exception of C&I. I just think for context, if you look at the C&I category, again, if you average the last four quarters, we have 15 basis points of charge-offs. Two quarters ago, we actually had net recovery. I think it's important to look at that in total because as we've mentioned, in a quarter, anything can happen, and I think this quarter we happen to see just a little bit more activity than normal. Overall, we feel really confident in the book.
Thank you very much.
Thank you. Our next question is coming from Scott Siefers of Sandler O'Neill. Please go ahead.
Good morning, guys.
Morning, Scott.
Thanks for taking the question.
Okay. I was just hoping, Mac, you might be able to touch on some of the fee drivers that you see going through the remainder of the years. I guess sort of underlying the question is if we were to sort of target the midpoint of your revenue growth range, it implies a pretty substantial ramp in the remaining three quarters of the year relative to the base from the first quarter. Of course, we're entering the seasonally stronger periods of the year. Just curious to hear your thoughts on what would be the main drivers that caused that shift up in the base of fees and revenues overall.
Yeah. Thanks, Scott. It's important to remember that the first quarter is seasonally low for us. We also had about $10 million of unusual items if you think about the MSR and then the commodities write down. That's roughly $9.5, $10 million. A little bit light in the first quarter driven by those two events and also just the normal seasonality. Going forward, it's going to be the usual suspects. We'll continue to see growth in deposit service charges as we bring on new customers, and we continue to see good household growth and good deep relationships.
We've got some new treasury management capabilities coming out this year in business banking that should help us significantly as we move through the year. The capital markets line just continues to grow for us. The Hutchinson Shockey acquisition is going to help quite a bit, and we've made good investments in people and product in that group. The payments line is a good grower for us. It's debit, credit, ATM, merchant processing, and that's going to continue to show good growth as well. I do recognize some of the weakness in the first quarter, but I feel good about the remainder of the year, with mortgage in particular coming back in the spring, as we would typically see it. Yeah, I think the outlook for the year should be good.
Okay. All right. I appreciate that color. Thank you very much.
Thanks, Scott.
Thanks, Scott.
Thank you. Our next question is coming from Brock Vandervliet of UBS. Please go ahead.
Good morning.
Morning.
Morning. Going back to the margin theme, I think other questions have covered the deposit dynamics. Could you talk about borrowings? The sequential growth in borrowings, I noted this quarter, very similar to last year, where it grew very quickly in Q1, then you tapered it down the rest of the year. Is that likely to be the similar pattern this year?
Yes, Brock, I would expect that to be a very similar pattern to what you saw last year. It just does come back a bit to some of the seasonality in deposit growth and deposit usage among our customers. The first quarter is always a bit seasonally low, then the growth comes back as we move through the year. That is typically what happens.
Okay, great. Just as a follow-up on in terms of loan repricing and sort of tailwinds you may have there, could you just review of the portion of the loan book that's variable rate, how much is tied to LIBOR versus other longer-term rates?
I think it's about 60% of the portfolio is tied to one-month LIBOR.
It's floating.
It's floating. Okay.
Yeah. The biggest piece would be one-month LIBOR within that.
Okay. Got it. I'll follow up offline on that. Thank you.
Thank you.
Thanks, Brock.
Ladies and gentlemen, we have reached the end of the question and answer session. I would like to turn the call back over to Steve Steinour for closing comments.
Thank you. Before I wrap up, I wanted to take a minute to thank our Chief Credit Officer, Dan Neumeyer, for his decade of service with Huntington. Today is his final earnings conference call before his retirement in June, and his leadership in the aftermath of the global financial crisis drove the company to be where it is today in terms of performance. Dan's been a vital leader in instilling Huntington's credit culture and disciplines and establishing our risk management, credit risk management infrastructure. Thank you very much, Dan. We're pleased that Rich Pohly, currently our Deputy Chief Credit Officer and Senior Commercial Credit Approval Officer, will be stepping up into the Chief Credit Officer role upon Dan's retirement. Rich has been a key member of the Huntington team for almost a decade, and our team will benefit from his disciplined approach and many years of experience.
Our first quarter results provided a good start to the year. I'm confident about our prospects for the full year. Our top priorities remain executing our strategic plan to prudently grow revenue and to thoughtfully invest in our businesses for continued organic growth. We're building long-term shareholder value through a diligent focus on top-quartile financial performance and consistently disciplined risk management. Finally, I'd always like to end with a reminder to our shareholders that there's a high level of alignment between the board management, our colleagues, and our shareholders. The board and our colleagues are collectively the seventh largest 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 us today. Have a great day.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.