Greetings, and welcome to the Huntington Bankshares First Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr.
Mark Moose, Director of Investor Relations.
Thank you, Donna. Welcome. I'm Mark Moose, Director of Investor Relations for Huntington. Copies of the slides we will be doing can be found on the Investor Relations section of our website, www.huntington.com.
This call is being recorded and will be available as
a rebroadcast starting about 1 hour from the close of today's call. Our presenters today are Steve Steinauer, Chairman, President and CEO and Mac McCullough, Chief Financial Officer. Dan Newmire, our Chief Credit Officer, will also be participating in the Q And A portion of today's call. 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 Form 10K, 10Q and 8 K filings. Let me now turn it over to Steve.
Thanks, Mark, and 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 $358,000,000, an increase of 10 up 14% from the year ago quarter. Our profitability ratios remained strong as our return on tangible common equity was 18% 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, the two conferences during the first quarter that charge offs ticked modestly higher this quarter as a result of 2 unrelated commercial credits.
Still, with these two items, net charge offs were near the low end of our average through the cycle target range of 35 to 55 basis points. And 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 3, we developed Huntington Strategies with a vision of creating a high performing regional bank and delivering top quartile through the cycle shareholder returns. Our 1st quarter profitability reflects continued progress towards this aspiration.
We continue to make thoughtful and meaningful long term investments in our businesses adequate returns and taking appropriate risk consistent with our aggregate moderate to our risk appetite. We are very pleased with how we are positioned. We 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 4 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 continued 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 2 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.
So I'd 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, but 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 Ray Hikes for 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 we remain focused on acquiring core checking accounts and deepening customer relationships. We expect full year revenue growth of 4% to 7% The full year NIM is expected to remain relatively flat on a GAAP basis versus 2018, inclusive of the anticipated reduction in the benefits 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. Non interest expense is expected to increase 2% to 4%, consistent with our stated priorities we continue to target annual positive operating leverage in 2019. Now as Mac noted in the conference presentations during the first quarter, We expect our a peak quarterly efficiency ratio for the target range of 35 to 55 basis points.
Our expectation for the full year effective tax rate is in the 15.5percentto16.5percent So with that, Mac will now provide an overview of our financial performance. Mac, thank you.
Thanks, Steve, and good morning, everyone. Slide 5 provides the highlights for the 2019 first quarter. Results reflected strong earnings momentum with double digit growth rates net income and earnings per common share, along with continued improvement in our profitability ratios. We recorded net income of 358,000,000 increase of 10% versus the year ago quarter. 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 We saw net interest margin expansion of 9 basis points 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 now to slide 6. Average earning assets increased $3,800,000,000 or 4% compared to the year ago quarter. Loan growth accounted for more than the entire increase as average loans and leases increased $4,300,000,000 or 6 percent year over year, including a $2,500,000,000 or 7% increase in consumer loans and a $1,800,000,000 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, reflective 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're 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 pay downs as well as our strategic tightening of commercial real estate lending 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 2 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 at 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 $1,200,000,000 for the first quarter, down 14% year over 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 4.73% 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 at 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 runoff and utilize the cash flows to fund higher yielding loans during 2018. During the 2019 first quarter, we we began reinvesting portfolio cash flows in new securities, driving the linked quarter increase.
Turning now to slide 7. Average total deposits and average core deposits both grew 8% year over year. Core certificates of deposits were 164 percent from the year ago quarter, primarily reflecting the consumer CD growth initiatives during the 1st 3 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-twenty 18. 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, 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 strategy 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 8. FTE net interest income increased $52,000,000 or 7 percent versus the year ago quarter. Driving this growth was disciplined deposit pricing. Our GAAP net interest margin was 3.39 percent for the first quarter, up 9 basis points from the year ago quarter.
The net interest margin decreased 2 Our core net interest margin for the Purchase accounting accretion contributed 6 basis points to the net interest margin in the current quarter compared to 8 basis points in the year ago quarter. Slide 26 in the appendix provides information regarding the actual and scheduled impact of FirstMerit purchased accounting for 20192020. On a sequential quarter basis, the core NIM compressed one basis point to pull up to the linked quarter decline and the contribution from purchase accounting accretion. As a reminder, the 2018 fourth quarter, both GAAP and core NIMs benefited from 2 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 remain well contained with the rate paid on total interest bearing deposits of 94 basis points for the quarter, up fifty one basis points year over year. Compared to the prior quarter, our total interest bearing deposit costs increased 10 basis points. Slide 10 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 1st 3 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 2 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 of 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%, 19% primarily reflecting a $3,000,000 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.
1st, during the 2019 first quarter, we recognized a $6,000,000,000 unfavorable commodity derivative mark to market adjustment related to our commercial customer. Partially offsetting this, the Hutchinson Shockey and early acquisition, which closed in October of 2018, contributed $5,000,000 of capital markets fees during the 2019 first quarter. Finally, when not impacting the comparisons, we move syndication fees which were about $3,000,000 in syndication fees were previously included in other income. While down sequentially due to normal seasonality, we continue to see positive momentum within our 2 largest contributors to non interest income as deposit service charges and card containment processing fees. Both posted planned for two quarters now and we are properly investing in our colleagues, digital technology and our brand.
Slide 12 highlights the components of the $20,000,000 or 3 percent year over year growth in overhead expense. Personnel costs increased $18,000,000 or 5 percent 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 $8,000,000 or 11 percent increase in outside data processing and other services which was driven by increased technology investments.
Deposit and other insurance expense decreased $10,000,000 or 56 percent due to the discontinuation of the FDIC surcharge in the 2018 fourth quarter. As part of our commitments to manage expenses relative to the revenue environment, we self funded a portion of the expenses related to these new hires and 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 a approximately $40,000,000 to $50,000,000, resulting in the peak quarterly efficiency ratio of the year, but we're trending down in the back half of the year. Roughly 2 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 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 2 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. Tangible common equity ratio or TCE ended the quarter at 7.57 percent, 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 a 10% operating guideline with a basis toward the upper end of the range. We repurchased 60,500,000 common shares over the last 4 quarters. During the 2019 first quarter, we repurchased 1,800,000 common shares at an average cost of $13.64 per share, which or a total of $25,000,000 of common stock.
There is $152,000,000 of share repurchase authorization remaining under the 2018 capital plan. We intend to complete the repurchase of the full $152,000,000 During the first quarter, we submitted our 2019 capital plans for 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 Therefore 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% to 80% range and a long term dividend payout ratio target of approximately 40% to 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 remains 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 $63,000,000 in the first quarter and net charge offs of 71,000,000 Net charge offs represented an annualized 38 basis points of average loans and leases in the current quarter, up from 27 basis points to the prior quarter, and from 21 basis points in the year ago quarter.
The increase was centered in 2 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 remained relatively stable at 1.02%, down one basis point linked quarter. The non performing asset ratio increased 9 basis points linked quarter and 2 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 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 remained near cyclical lows. And as we have noted previously, some quarterly volatility is expected given the absolute low levels for 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. The strong level of capital generation positions us well to support balance sheet growth and return capital to our shareholders and 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.
Consistently ranked in the top 4 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, Matt. Donna will now take questions. We ask that as a courtesy of your peers, each person ask only one question and one related follow-up. And if that person has additional questions, he or she can add themselves back into the queue. Thank you.
Thank you. Our first question is coming from Ken Usdin of Jefferies. Please go ahead.
Question on the, on the positive way you maintain the NIM guidance for full year flat. You took out the remaining rate hikes, as you said, the curves obviously gotten flatter. But in your slides, you still talk about expected through the cycle fifty percent beta versus the low 30s you're at now. So can you talk about the goods and beds in terms of your ability to keep that GAAP NIM flat for the year and how you expect that gap in quarter trend from the 339 this quarter? Thanks.
Yeah. Thanks, Ken. It's Max. So, so a few things I'll point out. I mean, 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.
But 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. So, it's a pretty, pretty fluid environment and we just are making sure that from a both an asset liability position, 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 that have been discussed. I mean, clearly purchase accounting accretion is working against us. We do have some additional costs associated with the hedging program is probably 3 basis points on the margin for the full year. But, we monitor these things very frequently and we continue to take actions to make sure that we continue to support the NIM.
Okay. And then my follow-up on that point then, so that would just expect that you'd mentioned that the core NIM I think should be up from here or up year over year. So 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.
Yes. So 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 3 to 4 basis points something like that.
Okay. Thanks, Mac.
Thank you. Our next question is coming from Matt O'Connor of Deutsche Bank. Please go ahead.
Good morning.
I was wondering if you could talk about the sustainability, the deposit growth, obviously very strong. At 8%. And how are
you thinking about that going forward? So we continue to see think really good results on the consumer side of the balance sheet. As I've 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, 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. And we were able to pull those levers pretty well. So 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 respond 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, but 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. So 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. And then obviously that implies solid balance sheet growth going forward. And if we're trying to kind of pull it into your capital, levels and and maybe your buyback expectations for the, 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. So it seems like there might be some flexibility, but obviously the balance sheet growth also likely to be pretty solid. So how are you thinking about the buybacks in the next cycle here?
Yes. I think, look, we're going to continue to manage towards the upper end of the CET1 range of 9% to 10%. So you're going to see us be closer to the 10%. And we feel like we have a good balance of of asset growth funded through core deposits and maintaining our capital levels at that 10% or near 10% CET1 level. So, we haven't given our specific capital return expectations for the 2019 CCAR process.
But as I mentioned in my in my comments, we're going to be 70% to 80% total and 40% to 45% dividend payout.
Okay, thank you. Thank
you. Our next question is coming from John Arfstrom of RBC Capital Markets. Please go ahead.
Hey, thanks. Good morning.
Just a question on credit. Maybe for Steve or Dan, just 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. So it's obviously something we monitor very closely is what's coming in the bucket. And what we're seeing is no concentration by sector, geography, etcetera. So the 4 largest NPLs we had were all different industries.
And, and I think flow this quarter. If you look at what we've been experiencing over the last year or so, it is lumpy. We've, we've had number of quarters where it improves and then we'll see a few move in an opposite direction. But, if you look at our NPA and NAL ratios, year over year to 2 basis points different than what it was. So we remain very confident.
We're not changing our outlook. Based on the new flows in terms of charge offs or provision expense. So this I think it always proves itself out that quarter to quarter we see up downs, this happened to be a quarter where up a bit.
Yes. Okay. That helps. And then, Steve, you said pretty clearly you do not foresee a recession. But if you do start to see signs, what might change in terms of your approach?
Well, we've been working for years John, with a view that something's been imminent and obviously wrong. So, we've done a number of things and we're maintaining those. I think it was 3, 3.5 years ago. The teams led by Dan pulled back on leverage lending. We've done a lot with commercial real estate construction the concentration disciplines stay in play.
This focus on portfolio management and, and, assuming that there's something likely to occur near term, Now for the last couple of years, has caused us to bolster our capabilities, our MIS, their 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 if to the extent we think there's any policy adjustment or other things, but we're running it fairly conservatively as we 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.
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.
Great guys. First question, just in terms of expenses, if I got it right, it was up $40,000,000, $50,000,000 in 2Q, but 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 sort of 2Q level?
Yes, Ken, it's Max. So you will see expenses come down in the 3rd 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. So you will see the efficiency ratio, at its peak, in the second quarter and it will come down in the third and 4th quarters.
Okay. That helps. And then just second question. In terms of the hedging activities, I guess given that the Fed Funds Futures curve is already pricing in a rate cut, can you just walk us through the logic? Like how much more hedging do you want to do and doesn't make sense to do it if the curves, already building in, potential rate cuts from here?
Yeah, Ken. So, so we're kind of implementing our way into the hedge position. We have about about, let's say, $4,000,000,000 on 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.
But 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.
Thank you. Our next question is coming from John Pancari of Evercore. Please go ahead.
Back to the credit topic. Regarding the 19% increase in NPAs, I know you mentioned that it's not any one industry. Were I know you see the largest existing NPLs are not in anyone, but how about the inflows this quarter? It looks like a big portion of it came from auto suppliers?
Is in one credit. It was our largest inflow in the quarter, but that is one deal. And of the 4 largest inflows this quarter, they're in 4 different industries. They were originated in different, they're not all from one vintage, they're not all in a singular geography. I mean, that's just the dispersion.
And it happened to have a few more this quarter than we typically do.
Got it. And has that one large credit when in has it already been reserved for or no?
It has. And we foresee a favorable outcome on that deal.
Got it. Later this year actually. So you also, Dan, have accounted for the SNCC exams in the current reserve as
well. Yes.
And we didn't have, tremendous activity this quarter, but the SNC results are incorporated in everything you see today.
Okay, got it. All right. And then separately on capital, I know you reiterated the higher end of that nine 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.
Just feel more comfortable operating at the higher end of that range. And 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. But we've we've built comfortable at that higher level and obviously we're producing industry leading returns at that higher capital level. So 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. So we pulled the capital levels down with an expectation of replenishing over time. And we've talked about being, or expecting that we're somewhere later in the cycle. So that would guide us to the higher end of that range.
Thank you. Our next question is coming from Steven Alexopoulos of JP Morgan. Please go ahead.
Good morning everybody. So on the NIM, I'm trying to better understand the offsets to the higher deposit costs coming in 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, it's Steven. So 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 And 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. So we're very active on side. We are going to see continued migration of deposit rates up over the last half of the year. But that is all factored into our guidance. And we do feel comfortable with the expectations that we put out there for the moment.
Okay. And then, thank you. And then just for a follow-up, if we look at the $23,000,000,000 of money market deposits, that's average you're paying around 1%. Where do you see that topping out assuming the Fed stays on hold here?
So it will continue to migrate higher. We basically run 6 month special pricing and then it comes back to a lower rate. I'm not quite sure that we're going to see it, migrate much higher. It's probably going to be 25, 50 basis points perhaps. But it just depends on the level of competition what's 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. But we're always looking at what is happening in the market from a competition perspective and, we're pretty good at finding the right levers in terms of getting the right growth.
Thank you. You've mentioned commercial customers still moving out of non interest bearing into products like this. Is that continuing at the same pace? Or now the 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. And it's going to continue to migrate. But I do think that the rate of migration is slow down. Okay.
Thanks for taking my questions.
Thank you. Our next question is coming from Peter Winter of Wedbush Securities. Please go ahead.
You guys had a very strong quarter on C and I loan growth. And 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?
Yes, this is Dan.
Well, I think generally, our customers continue to be fairly positive. So, 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 base healthcare, they all contributed. So I think that it's within our risk appetite. We're We have certainly pulled back where we feel we can't compete within our risk appetite.
So I don't see any meaningful shifts in in the volumes that we would anticipate for the balance of the year.
Okay. And then 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 would you expect that to be a temporary decline?
Peter, it's likely going to be stable to declining, going forward, because we're very very pleased with the pricing actions that we're taking. We're very pleased with the volumes that we're generating. And we just think it's the right tactic given where we are from a rate perspective and the concentration of auto and the balance sheet. So, I would expect stable to declining going forward.
Thank you. Our next question is coming from Kevin Barker of Piper Jaffray. Please go ahead.
I just wanted to follow-up on some of the capital. I know I mean, 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 there any reason behind pulling back on the buybacks in the first quarter versus leaving a significant more for the second quarter?
It really just looking at some of the volatility and some of the events in the first quarter. I mean, Brexit and other items just had us hit the pause button for a while. We did do the $25,000,000 and we will complete the remaining $152,000,000 in the second. Quarter. But really just taking a look at the environment and maybe being a little bit more cautious with the buyback, but we'll pick it up in the 2nd quarter.
We also pulled about a little less than $100,000,000 forward from the plan as approved by the Fed for the year. Put it in accelerated into the 4th quarter. So if you will, we almost pre funded the 4th quarter with the 1st quarter.
Okay. And then to follow-up on some of the credit comments, was there any change in the severity that you saw on any of these loans, or, 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?
Yes. So I think severity, no. Now recoveries are slowly dwindling. So a small portion of the increase in net charge offs was from lower recovery. So that's just a fact given how lower charge offs have been.
But I think when you look at the portfolio as a whole, everything was really rocksteady with the exception of C and I. And I just think for context, if you look at C and 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. So 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 happened to see just a little bit more activity than normal.
But 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.
Morning guys. 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 underlying, their 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 3 quarters of the year relative to the base from the first quarter. And of course, we're entering the seasonally stronger periods of the year. But I'm just curious, to hear your thoughts on what would be the main drivers that that, you know, cause that that shift up in the base of fees and revenues overall?
Yes. Thanks, Scott. So, it's important to remember that the first quarter is seasonally low for us. And we also had about $10,000,000 of unusual items. If you think about the MSR and then the the commodities write down.
So that that's roughly $9,500,000 to $10,000,000. So a little bit light in the first quarter, driven by those two events and also the just the normal seasonality. Going forward, it's going to be the usual suspects that we're going to see growth. 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 Hutchison Shockey acquisition is going to help quite a bit. And we've made good investments in people and product in that group. So the payments line is a good growth for us. It's debit, credit, ATM, merchant processing, and that's going to continue to show good growth as well.
So 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. So, yeah, I think the outlook for the year should be good.
Okay.
All right. I appreciate that color. Thank you very much. Thanks, Scott.
Thank you. Our next question is coming from Brock Vandervliet of UBS.
Going back to the margin theme, I think other questions have covered the deposit dynamics, but could you talk about borrowings, the sequential growth in borrowings, I noted this quarter, very similar to last year where it drew very quickly in Q1 and then you tapered it down the rest of the year. Is that likely to be the the similar pattern this year?
Yes, Brock. I would expect that to be a very similar pattern to what you saw last year. And it does come back a bit to some of the seasonality in deposit growth and deposit usage among our customers. First quarter is always a bit seasonally low. And then the growth comes back as we move through the year.
So that is typically what happens.
Okay, great. And 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?
So I think it's about 60% of the portfolio is tied to 1 month LIBOR. It's floating. It's is floating. Okay. Yes.
And the biggest piece would be 1 month LIBOR within that.
Okay. Got it. I'll follow-up offline on that. Thank you.
Thank you. Thanks, Bob.
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 Steinhauer for closing comments.
So, thank you. Before I wrap up, I wanted to take a minute to thank our Chief Credit Officer, Dan Neumayer, for his decade of service, with Huntington. Today's 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. So, thank you very much, Dan.
Now, we're pleased that Rich Polley got with 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. Which 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 and 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.
And 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 7th largest shareholder of Huntington and all of us are appropriately focused on driving sustained long term performance. So 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.