Greetings, welcome to the Huntington Bancshares fourth quarter earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the 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 the conference over to your host, Mark Muth, Director of Investor Relations. Thank you. Please go ahead.
Thank you, Brenda. Welcome. I'm Mark Muth, Director of Investor Relations for Huntington Bancshares. Copies of the slides we will be reviewing can be found on the investor relations section of our website, www.huntington.com. This call is being recorded and will be available as a rebroadcast starting about one hour from the close of the call. Our presenters today are Steve Steinour, Chairman, President, and CEO, and Mac McCullough, Chief Financial Officer. Dan Neumeyer, our Chief Credit Officer, will also be participating in the Q&A 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 subject to changes, risks, and uncertainties, which may cause actual results to differ materially. We assume no obligation to update such statements.
For a complete discussion of risks and uncertainties, please refer to this slide and material filed with the SEC, including our most recent Forms 10-K, 10-Q, and 8-K filings. Let me now turn it over to Steve Steinour.
Thanks, Mark Muth, thank you to everyone for joining the call today. As always, we appreciate your interest and support. We produced very good results in the fourth quarter and for the full year 2018. For the full year, we reported net income of $1.4 billion, an increase of 17% over 2017, which marks the fourth consecutive year of record net income. Full-year earnings per common share were $1.20. Importantly, we achieved all five of our long-term financial goals on a full-year GAAP basis in 2018, two years ahead of schedule. We're especially pleased with our full-year efficiency ratio of 57%, a 400 basis point improvement versus the prior year. This was the result of managing to our sixth straight year of positive operating leverage, an annual goal we began targeting in 2014. Our return on tangible common equity was also very strong at 18%.
Our strong financial performance also enabled us to increase our capital return to our shareholders in 2018. Last year marked the eighth consecutive year of an increased cash dividend, which as you know, is our second highest capital priority behind support for organic growth. Coupling the increased dividend payout with $939 million of share repurchases during the year, we returned nearly $1.5 billion to our shareholders, which represented a total payout ratio of 112% of our 2018 earnings. We believe our earnings power, capital generation, and risk discipline will continue to support strong capital distribution with a targeted total payout ratio of 70%-80% going forward. As briefly outlined on slide three, we developed Huntington Bancshares' strategies with the vision of creating a high-performing regional bank and delivering top quartile through the cycle shareholder returns. Our full-year profitability metrics are among the best in the industry.
We've built sustainable competitive advantage in our key businesses that we believe will deliver top quartile performance in the future. Our franchise continues to perform well on many fronts, allowing us to make investments in capabilities we need to drive consistent organic growth. We're focused on driving sustained long-term financial performance for our shareholders. We remain committed to our aggregate moderate to low risk appetite, which we implemented nine years ago. As a reminder, we reinforce the importance of these risk standards by requiring the top 1,400 officers of the company to comply with holder retirement restrictions on their equity awards. Slide four illustrates our previous long-term financial goals. As I've already mentioned, as you can see on the slide, we successfully achieved each of these five targets on a GAAP as well as an adjusted basis during 2018.
We had record revenue of $4.5 billion, a 4% increase over 2017. Our expenses remained well controlled, declining 2% year-over-year on a GAAP basis and up 3% on an adjusted basis. Our commitment to positive operating leverage, coupled with the scale we achieved through the FirstMerit acquisition, drove our efficiency ratio down from 64% in 2015, the first full year under the plan, to 57% in 2018. This exemplifies that our strategies are carefully decisioned, well executed, and certainly driving impressive results. Our credit metrics remain very strong. Our net charge-off ratio for 2018 remained below our average through the cycle target range of 35 to 55 basis points. Loan loss provisions in excess of net charge-offs have now been taken in each of the past six quarters, demonstrating our high-quality earnings. Our 18% return on tangible common equity positions Huntington Bancshares as a top-performing regional bank.
Now, slide five provides our new three-year financial targets that are a result of our 2018 strategic planning process. Through thoughtful investment and disciplined execution, our two previous strategic plans build out our capabilities, strengthened our competitive advantages in key businesses, and positioned us as an industry leader in customer experience. The new 2018 strategic plan is designed to drive continued improvement in financial performance as well as customer experience. We introduced some details of the 2018 plan at an industry conference in November. The initiatives will build upon momentum from our previous strategic plans and will extend our customer experience advantage across our businesses to improve customer acquisition, reduce customer attrition, and deepen relationships with our customers. Further, we've planned investments in digital data and technology enhancements that will bolster our existing capabilities and infrastructure with the goal of making banking intuitive, easier, and faster for our customers.
Finally, we've retained our capital priorities, including our 9%-10% CET1 operating range. Now, let's turn to slide six to review the 2019 expectations and discuss the current economic and competitive environment in our markets. As we look to the year ahead, we are cognizant of recent market volatility, mixed economic data, and changing interest rate outlook. We're very focused on and closely working with our customers and reacting to their views of the economy. We call it over the years, we've communicated actions that we've taken to de-risk our portfolios and strengthen our risk management disciplines. In 2009, we centralized credit risk management rather than delegate it to the regions, and this change was to ensure that the bank had a standard set of enterprise-wide risk management capabilities and appetite, as well as credit metrics.
We eliminated products that didn't meet our risk profile, such as auto leasing and home equity lines of credit requiring balloon payments at the end of the draw period. Three years ago, we pulled back on leverage lending and commercial real estate, specifically multifamily, retail, and construction. We have remained disciplined in these areas, and as a percentage of capital, all of these have lower exposure today than at 2016 year-end. Our consumer lending is targeted to prime plus consumers across all of our consumer loan portfolios. We disclose detailed origination data each quarter, and the slides include annual data for the past nine years. We believe these actions over the past decade, including the consistency of underwriting and detailed metrics that we disclose to you every quarter, have prepared us well to perform well across economic cycles. What we're hearing from our customers is positive.
Businesses in our local markets generally continue to deliver good performance. The strong C&I activity in the fourth quarter suggests that businesses are investing in capital expenditures and business expansions. Uniformly, we hear from our customers that their biggest issue is the tight labor markets constraining economic growth in a period where we already have strong GDP growth. The Midwest has had the highest job opening rate in the nation for the last two years, some of these businesses have weathered the headwinds of ongoing tariff and trade disputes. Further, consumers also remain upbeat with strong labor markets driving wage inflation. Consumer confidence in the Midwest was the second highest level in December in nearly two decades and was also higher than the nation as a whole.
Additionally, in the 12 months ending November, 19 of our 20 largest footprint MSAs saw employment growth and unemployment rates remain at historic low levels. I'd summarize by saying that we're bullish on our footprint and our customers. 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 core deposit relationships. In light of recent market volatility, the flattening of the yield curve, as well as the softer tone coming from the Federal Reserve, we have removed the assumption of two additional rate hikes in our 2019 forecast. We are now utilizing the same unchanged rate scenario that has been part of our annual plan for the last several years.
Given that change in modeling assumptions, we now expect full-year revenue growth of 4%-7%. Full-year NIM is expected to remain relatively flat on a GAAP basis versus 2018 as modest core NIM expansion offsets the anticipated reduction in the benefit of purchase accounting. With the change in revenue outlook, we've paced our planned investments for 2019. We now expect a 2%-4% increase in non-interest expense. Consistent with our stated priorities, we continue to target annual positive operating leverage in 2019. We anticipate that net charge-offs will remain below our average through the cycle target range of 35-55 basis points. Our expectation for the full year 2019 effective tax rate is in the 15.5%-16.5% range. With that, Mac McCullough, I'll turn it over to you to provide an overview of financial performance for the fourth quarter and the full year.
Thanks, Steve Steinour, and good morning, everyone. Slide seven provides the highlights for the full year 2018. As Steve Steinour mentioned, we are very pleased with our 2018 results. We recorded earnings per common share of $1.20, up 20% compared to 2017. We continue to see solid growth in core customer relationships and disciplined execution of our business models, driving full-year revenue growth of 4%, a 2% decline in non-interest expense, 6% average loan and lease growth, and 5% core deposit growth. Our full-year efficiency ratio was 57%. Return on assets was 1.3%, return on common equity was 13%, and return on tangible common equity was 18%. We believe all three of these metrics distinguish Huntington Bancshares among our regional bank peers. Tangible book value per share increased 5% year-over-year to $7.34, even with the increased dividend and substantial share repurchases during the year.
Slide eight provides similar financial highlights for the fourth quarter. Please note that comparisons to the year ago quarter are impacted by the $123 million tax benefit recognized in the fourth quarter of 2017 related to federal tax reform. We posted record quarterly revenue of $1.2 billion, up 4% versus the year ago quarter, as we continue to see momentum build across the franchise. We reported earnings per common share of $0.29, down 22% year-over-year. Excluding the $123 million tax benefit in the year ago quarter, earnings per common share were up $0.03 or 12% year-over-year on an adjusted basis. Return on assets was 1.3%, return on common equity was 13%, and return on tangible common equity was 17%.
We saw net interest margin expansion of 11 basis points to 3.41% compared to the 2017 fourth quarter as a result of disciplined asset and deposit pricing and the benefit of interest rate increases, partially offset by the runoff of purchase accounting accretion. Turning now to slide nine. We had very good balance sheet growth during the fourth quarter as average earning assets grew 4% from the fourth quarter of 2017. This increase was driven by a 7% growth in average loans and leases, which included broad-based strength in both consumer and commercial portfolios. Average residential mortgage loans increased 20% year-over-year, reflecting an increase in loan officers, as well as the expansion into the Chicago market. As we typically do, we sold agency qualified mortgage production in the quarter and retained jumbo mortgages and specialty mortgage products.
Average C&I loans increased 8% year-over-year, with 10% linked quarter annualized, reflecting the ongoing strength we are seeing in the Midwest economy. We once again saw heavy C&I activity during the final weeks of the year, centered in middle market, asset finance, and corporate banking. Average auto loans increased 4% year-over-year as a result of consistent disciplined loan production. Originations totaled $1.4 billion, down 9% year-over-year. As we have previously mentioned, we execute a pricing strategy during the second half of the year to optimize revenue. We consistently increased auto loan pricing throughout 2018, with new money yields on our auto originations averaging 4.60% during the fourth quarter, up 109 basis points from the year ago quarter.
Average RV and marine loans increased 34% year-over-year, reflecting the success of our well-managed expansion of the business into 17 new states over the past two years. Average commercial real estate loans were down 4% on a year-over-year basis and down 3% on a linked quarter basis. This reflects anticipated paydowns as well as our strategic tightening of commercial real estate lending, as Steve Steinour mentioned earlier, to ensure appropriate returns on capital. Finally, securities were down 7% year-over-year as we let the portfolio run off and utilize the cash flows to fund higher yielding loans during 2018. Turning now to slide 10. Average total deposits grew 7% year-over-year, including a 7% increase in average core deposits. Core certificates of deposits were up 193% from the year ago quarter, primarily reflecting the consumer deposit growth initiatives during the first three quarters of 2018.
Average interest-bearing DDA deposits increased 9% year-over-year, while average non-interest bearing DDA deposits decreased 6%. 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. However, as shown on slide 38 in the appendix, our consumer non-interest bearing deposits actually increased 5% year-over-year as we continue to grow households and deepen relationships. Average money market deposits were up 4% year-over-year, driven by solid growth in consumer balances and changing preferences of commercial customers shifting to the higher yielding products. As you can see in the bottom left of the page, our percentage of core deposit funding has increased three quarters in a row. Our focus on core funding resulted in a 65% year-over-year reduction in average short-term borrowings. Moving now to slide 11.
Our net interest income increased $59 million, or 8%, versus the year ago quarter. Driving this growth was the 4% increase in average earning assets, higher yields in both our consumer and commercial loan portfolios, and disciplined deposit pricing. Our GAAP net interest margin was 3.41% for the fourth quarter, up 11 basis points from the year ago quarter and up nine basis points linked quarter. Moving to slide 12. Our core net interest margin for the fourth quarter was 3.34%, up 14 basis points from the year ago quarter and up nine basis points linked quarter. Both the GAAP and core NIMS in the fourth quarter benefited from two basis points of higher than normal commercial interest recoveries. Purchase accounting accretion contributed seven basis points to the net interest margin in the current quarter, compared to 10 basis points in the year ago quarter.
Slide 34 in the appendix provides information regarding the actual and scheduled impact of FirstMerit purchase accounting for 2018 through 2020. As you will see, purchase accounting accretion is becoming less and less material to the net interest margin and certainly to the bottom line when all the income statement components of purchase accounting are considered together. As Steve Steinour mentioned, assuming no further increases from the Fed in 2019, the full year 2019 NIM is expected to remain relatively flat on a GAAP basis versus 2018, as modest core NIM expansion offsets the anticipated reduction in the benefit of purchase accounting. The 2019 NIM guidance also reflects certain costs to begin to reduce our asset sensitivity position. Turning to earning asset yields, our commercial loan yields increased 71 basis points year-over-year, while consumer loan yields increased 36 basis points.
Our deposit costs remain well contained, with the rate paid on total interest-bearing deposits of 84 basis points for the quarter, up 47 basis points year-over-year. Consumer core deposit costs were up 36 basis points year-over-year, and commercial core deposits were up 30 basis points. Moving now to slide 13. Our cycle-to-date beta, positive beta remains low at 30% through the fourth quarter of 2018, which is still well below our expectations. We have been communicating that we believe our consumer core CD strategies initiated at the beginning of 2018 would serve us well over time, and you can see that beginning to happen here on the slide. This quarter, we saw only a 2% increase in our cumulative beta, while the peer group increased 4%. As we have mentioned the last couple of quarters, overall deposit pricing remains rational in our markets.
Slide 14 provides detail on our non-interest income for the quarter in comparisons to the year ago quarter. Our non-interest income decreased $11 million or 3% from the fourth quarter of 2017. This decline was primarily driven by $19 million of securities losses resulting from a 2018 fourth quarter portfolio repositioning. Early in the quarter, we remixed approximately $1.1 billion of securities with an incremental yield pickup of almost 120 basis points by modestly extending duration and without taking additional credit risk. The restructuring of the portfolio was completed in the first half of the fourth quarter and added approximately $3 million of incremental quarterly run rates to the revenue line. We are seeing positive momentum in our three largest contributors to fee income. As deposit service charges, cards and payments processing fees, and trust and investment management fees were all higher year-over-year.
Further, we continue to see strong momentum in our capital markets business as demonstrated by a 26% increase versus the year ago quarter. The acquisition of Hutchinson, Shockey and Erley contributed $4 million of capital market fees during the quarter. Mortgage banking income was down $11 million, driven by pressure on secondary marketing spreads. Slide 15 highlights the components of the $78 million or 12% year-over-year growth in expenses. Expenses related to branch and facility consolidations total $35 million, including $28 million in net occupancy expense and $7 million of equipment expense. Results also included almost $4 million of expense related to the closing of the HSE acquisition and the announcement of the divestiture of our Wisconsin retail branch network. As we execute on our new strategic plan, we have not lost sight of the need to control expenses in a more uncertain economic environment.
To that end, we remain focused on driving positive operating leverage while making disciplined investments in our colleagues and businesses. Slide 16 illustrates the continued strength of our capital ratios. Tangible common equity ended the quarter at 7.21%, down 13 basis points year-over-year and four basis points linked quarter. Common equity tier one ended the quarter at 9.65%, down 34 basis points year-over-year and 24 basis points linked quarter. These declines were driven by balance sheet growth and accelerated share repurchase activity. We will continue to manage CET1 within our 9%-10% operating guideline with a bias towards the upper end of the range. Slide 17 illustrates our previously articulated capital priorities. First, fund organic growth. Second, support the cash dividend. Finally, everything else, including share repurchases and selected M&A.
Our strong capital management and profitability allowed us to execute on these priorities accordingly in 2018. First, we grew full year average loans by 6% year-over-year while maintaining consistent underwriting discipline. During 2018, we increased the common dividend by 43%, to $0.50 per share for the full year. Our end of year dividend yield was 4.7%, the highest in the peer group. Finally, we repurchased $939 million of common stock during the year. Recall that in the 2018 first quarter, we converted $363 million of our Series A preferred stock to common shares. This set us up well going into the 2018 CCAR planning process and allowed us to submit a request that would result in a full year total payout ratio above 100%.
We have previously stated that we have a long-term payout ratio target of 70%-80% and a long-term dividend payout ratio target of approximately 45%. During the fourth quarter, we received no objection from the Federal Reserve to our proposal to adjust the path of common stock repurchases. This allowed us to pull forward repurchases from 2019 into the fourth quarter in order to take advantage of market volatility. As a result, during the fourth quarter, we repurchased $200 million of common shares at an average cost of $13.36 per share. We have $177 million of share repurchase capacity remaining under our 2018 CCAR capital plan. Moving on to slide 18. Credit quality remains strong in the quarter.
Consistent, prudent credit underwriting is one of Huntington Bancshares' core principles. 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 $61 million in the fourth quarter, and net charge-offs of $50 million. The loan loss provision expense in the quarter reflected the strong loan growth that we saw. We have now booked loan loss provision expense above net charge-offs for 12 of the past 13 quarters, illustrating our high-quality earnings. Net charge-offs represented an annualized 27 basis points of average loans and leases, which remains below our average through-the-cycle target range of 35-55 basis points. Net charge-offs were up 11 basis points from the prior quarter and up three basis points from the year-ago quarter. There is additional granularity on charge-offs by portfolio in the analyst package and the slides.
The allowance for loan and lease losses as a percentage of loans decreased one basis point linked quarter to 1.03%, while the non-performing asset ratio came down three basis points to 0.52%. Slide 19 highlights Huntington Bancshares' strong position to execute on our strategy and provide consistent through-the-cycle shareholder returns. The graph in the top-left quadrant represents our continued growth in pre-tax, pre-provision net revenue as a result of focused execution of our core strategies. The strong level of capital generation positions us well to support balance sheet growth and return capital to our shareholders at an advantage rate 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 a severely adverse scenario of DFAST. Finally, the bottom right demonstrates Huntington Bancshares' strong capital position. Let me turn it back over to Mark Muth so we can get to your questions.
Thanks, Mac McCullough. Brendan, we will now take questions. We ask that as a courtesy to your peers, each person ask only one question and one related follow-up. 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 the question and answer session. If you'd 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'd 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. Again, that is star one to ask a question at this time. Our first questions are from the line of Scott Siefers with Sandler O'Neill.
Good morning, Scott Siefers.
Mac McCullough, I was hoping you could expand a little on your thoughts on how the core margin kind of trajects throughout the course of the year. I think if I've done the math correctly, in other words, was the couple basis points of benefit from interest recoveries in the fourth quarter, but the full year guide looks like it would imply kind of flat to down from here, despite some of the balance sheet restructuring actions in the fourth quarter. I mean, that would be, of course, understandable given the environment, but just curious how you see things playing out from where you sit.
Yeah, thanks, Scott Siefers. The guidance that we're giving as we move to an unchanged rate curve is very consistent with the guidance that we've given historically over the past few years as we've used the unchanged rate curve to build our budget. Basically, you captured the two basis points of, I would say, over normal interest recoveries in the fourth quarter, so you have to adjust for that as a starting point. Then , we'll actually lose three basis points in full year 2019 related to purchase accounting accretion. It's about four basis points additive to the 2019 margin versus seven basis points to the 2018 margin.
From there, I think it's just a matter of taking a look at the core NIM and believing that that's going to increase modestly. We've talked about a basis point or two. I would say for the full year, we're likely looking for a three or four basis point increase. That is driven both by the fact that we took the two rate increases out of the forecast and also the shape of the curve. It's much flatter than when we've done this historically, and that also impacted the guidance for the NIM in 2019.
Thanks.
Those are the components that bring it all together. Again, kind of a flat reported NIM and a modestly improving core NIM.
Okay. All right, perfect. Thank you. I guess just as we look at the overall revenue growth guide, I guess it's going to be driven relatively a little more by fee income as opposed to NII this year. I know you have the benefit of the acquisition from second half of last year, but as you look out through the year, main drivers of that fee momentum as you see them?
Yeah, we have really good momentum in capital markets, as I mentioned in the script, we also see continued good improvements in deposit service charges as we continue to build households very impressively. We also see good performance in the card and payments line and also in trust and investment management fees. We see good performance across those four categories, partially offset by what we see in mortgage banking in this quarter. Certainly, we have really good momentum in those other lines.
Perfect. All right, great. Thank you very much.
Thanks, Scott Siefers.
Our next questions are from the line of Ken Usdin with Jefferies.
Hey, Mac McCullough.
Yes.
The fourth quarter NIM was 341 with the two interest recoveries. That's 339. Can you just explain sequentially? I'm not sure I understand the magnitude of a 6 basis point drop. Then staying there for the rest of the year, especially with the help you just mentioned from the portfolio purchase, knowing that there's the accretion runoff. Can you help us a little bit more understand just the step down because I get the moving parts among the positive versus the negative, but the delta from that kind of underlying, can you help us understand what drives such a big step down?
Yeah. Ken Usdin, I do think a portion of it is going to be based on what we're assuming around the shape of the curve in 2019. There is incremental impact from that based on what we've modeled for the budget and the forecast in 2019. We could also have some deposit costs may be front-loaded into the first and second quarters. As we continue to see good momentum and good flow of deposits across both commercial and consumer, we just want to make sure that we keep that momentum going. We've done a good job in reducing our short-term borrowings, and we want to continue to stay in that position. I think at this point, just thinking about the full year and thinking about the core NIM increasing three to four basis points is the way to think about it.
There could be some conservatism built in this, but it all comes down to what we're assuming around the rate environment and also how we're thinking about liability costs and what we want to do to stay core funded.
Okay. Just a follow-up on the full-year guide, then in your total revenue guide, which I always understand is on a, it's GAAP but inclusive of the FTE, do you include anything, either on a gain from the branch sales or also the effect of removing that business from the total revenue base? Thanks.
Yeah. We certainly have impacts when you think about the 70 branch consolidations and you think about the sale of the Wisconsin branches. There's no doubt that there's revenue impact from that. Most of that is going to come in the form of net interest income. We have factored those impacts into 2019. You're right, we look at it on an FTE basis, but there really are no other adjustments in 2019 to speak of.
Okay.
Okay?
Yeah. There's no gain baked into that as well?
Yeah. There's no gain on sale baked into any of these numbers for 2019.
Understood. Okay. Thank you, Mac McCullough.
Thank you.
Our next questions are from the line of Ken Zerbe with Morgan Stanley.
Great, thanks.
Morning, Ken Zerbe.
Sorry to ask another question on margin. I just want to be really clear because that is a pretty steep drop that you guys are building in on a core basis. If we go from the 3.41%, 3.39%, ex cluding the two basis points, I get it. You said your deposit costs are going to be front-loaded. Are we looking at a meaningful step down in first quarter specifically? Or to get your full year guidance, is it more of just this gradual reduction over the course of the year?
It would definitely be a gradual reduction over the course of the year. That would be primarily the reported. The core NIM, even adjusting for the two basis points in the fourth quarter of, I would say, over-normal interest recoveries. You could see a step up in the first quarter in the core NIM. It really is the impact of purchase accounting and the impact of the interest recoveries that would be impacting the reported NIM.
Got you.
We're not talking about huge changes here and either, we're talking about basis points. That should help to explain some of that drop fourth quarter to first quarter.
Got you. It does. By the end of the year, maybe you're, I'm going to pick a number, but let's call 3.30% as your sort of reported NIM heading into 2020. That seems like the right way to think about it.
Yeah. That's not unreasonable.
Got you. Okay. Then, sorry, to my sort of follow-up question, if you will. Can you just talk a little bit more about what you're doing specifically to help reduce your asset sensitive position, and how much is that dollar impact in terms of your NII? Thanks.
Yeah. What we're looking at right now would be out-of-the-money interest rate floors. You might see us also add some additional investment securities to reduce some of that asset sensitivity. Overall, we think that there's a slight cost to the out-of-the-money interest rate floors, but not significant in the scheme of things based upon the way we're thinking about it right now. We're continuing to evaluate that position based upon how 2019 unfolds. You could see us further reduce that asset sensitivity position, but we're comfortable with how we're positioned right now and the actions that we're taking.
All right. Perfect. Thank you.
Thank you.
Our next questions are from the line of John Pancari with Evercore ISI.
Morning.
Morning, John Pancari.
Hey, John Pancari.
On your long-term goals, it seems like you maintained your long-term revenue target of 4%-6%, despite removing the Fed hikes from your 2019 assumptions and assuming a flatter curve and everything, and I'm assuming dialing in some of the hedging plans and everything. Does that mean in terms of the long-term revenue expectation, you can come in at the lower end of that 4%-6%? Or do you still have a high degree of confidence in the attainability of the mid or higher end?
Yeah. John Pancari, it's Mac McCullough. We feel comfortable with the range that we've put out. When we put a range out like this, we typically are not at the low end or at the high end. And we probably do have some conservatism built into 2019 from a revenue perspective as we think about this. Still very comfortable with the 4%-7% range we put out there for revenue. We did bring it down. It was 5%-8% that we disclosed in November at an industry conference. That certainly would reflect the impact that we see from the rate increases coming out of the forecast.
I would tell you that from a fundamental balance sheet growth fee income perspective, we really haven't made any changes to what we see based upon what Steve Steinour talked about, the strength of the Midwest economy and what we're hearing from our customers. We also did take the expense guidance down by 1% on either end, just recognizing the fact that in this environment, we've got to manage the expense to fit the revenue outlook and continue to drive to positive operating leverage. Feel very comfortable with the ranges that we've put out. Again, the revenue impact is entirely due to the change in the rate outlook.
Got it. Okay. Thanks. Separately, I just want to ask around credit. I just wanted to see if we can get a little bit more color on the $21 million increase in charge-offs. I know you indicated that it's C&I. Just want to see if you have any more color there that you can give us, what type of industries and if there's any kind of leverage lending in there. Separately, your 30- to 89-day delinquencies in C&I increased, it looks like 43%. The ratio went from 19 to 26 basis points. Not a big jump in the ratio, but still a pretty big jump dollar-wise. I want to get some color there. Thanks.
Sure. Just in terms of the charge-offs, I think it's important to obviously point out that we're operating at a very low level. In the entire C&I book in the last year, I think we took $15 million of total charge-offs. That's commercial and commercial real estate. Just to kind of level set there. Last quarter, we actually had net recoveries in the entire commercial book. In terms of concentrations, there certainly aren't any because the numbers are so low. We had no charge-off in the last quarter larger than $4 million. We had one for $3 million, one for $2 million. They were all in different industries. There were no leverage loans in that population. If you look year-over-year in terms of our charge-off stats, they're very consistent, 24 basis points to 27 basis points.
That's largely due to the fact that fourth quarter, the consumer loans are generally, you'll see delinquencies and charge-offs bump up. From that standpoint, I think that's the story on the charge-offs. Then on the delinquencies. Commercial delinquencies are, you can have a single deal that moves the numbers may hit over 30 days. That's what we've got going on here. That's not the indicator of any trend there. No concerns at all.
Okay. Thank you.
Our next questions are from the line of Peter Winter with Wedbush.
Good morning.
Morning, Peter Winter.
I wanted to ask about mortgage banking. Obviously, given the market conditions, under a lot of pressure. Should we think about the fourth quarter being close to bottoming here?
Peter Winter, it's really going to depend on where we end up with secondary marketing. That's been the pressure point for the entire year. We've actually performed well from a volume perspective as we've added mortgage originators in the Chicago market performing at a very high level. We've also, I would say, upgraded talent across the franchise from a mortgage perspective. Feel very comfortable with the health of the business. We completed an in-depth analysis of the business in 2018 and feel very comfortable with how we're positioned and how we're managing that business. It just depends on where we go from secondary marketing from here.
Okay. Mac McCullough, if I could just follow up on your comments about the securities portfolio. In 2018, you kind of rammed it off partly, I guess, as a funding for loan growth. You said, you might actually add to securities to reduce the asset sensitivity.
Yes.
Can you just talk about what we should expect 2019 to see that portfolio actually grow a little bit and more reliance on core deposits is the way to think about it?
Yeah, Peter Winter. We are going to start to reinvest cash flow in 2019 back into the portfolio as well as maybe get a little bit more aggressive in building the portfolio if we decide that's the best action to take to manage our asset sensitivity. We did let the portfolio run down in 2018. We did replace those assets with resi mortgage that we kept on the balance sheet to a certain extent. You'll start to see us grow that portfolio in 2019. The degree to which we use that as a hedge against asset sensitivity is still under consideration, but you could see that.
Thanks, Mac McCullough.
Yep. Thanks, Peter Winter.
Our next questions are from the line of Marty Mosby with Vining Sparks.
Good morning.
Hi, Marty Mosby.
Hi, Marty Mosby.
I had two questions. One is, Mac McCullough, when we look at this net interest margin, I don't want to go back to the details of that. We've hammered that pretty hard. What I want to do is combine that with the other side, which is you've been building your allowance coverage as this PAA is being recognized. It's kind of just a natural shift between kind of the PAA that's over there, and then all of a sudden it comes out and becomes a regular loan, and then you put it back into the build. There is kind of a natural offset. You've had $20 million of average build in your allowance through each quarter in 2018. Just wondering, because a lot of the margin compression that's really kind of getting communicated here is the purchase accounting accretion. Is there a natural offset?
You just don't have to build as much in your allowance that helps to compensate for some of that impact.
Yeah, Marty Mosby, I think we laid that out pretty well on slide 34 in the deck, where you can see that for 2019, we're anticipating that the overall impact of purchase accounting is actually a loss or minus $8 million for full year 2019. We are seeing purchase accounting accretion come down. We're seeing what we need to add to the allowance for the FirstMerit portfolio to come down since we're cycling through that. We still have a bit to go, but as you can see on slide 34, we still anticipate some provision expense related to FirstMerit in 2019. I think this slide does lay out how all these things play together and the impact on the bottom line. Clearly, PAA is becoming less material, and will have less of an impact on the margin in 2019, but certainly still does have that impact.
The build also kind of comes down, I guess, as well. The need to build for the FirstMerit is less. There's still some, because there's still some PAA, but it's less than what it was in 2018.
That would be absolutely correct.
Okay. Steve Steinour, you kind of threw something in there early on about this, almost like a vesting till retirement for equity positions of members of your team. Just was curious about how you envision that, why you chose to highlight it, and how you think that affects culture and the way that the employees kind of look at equity ownership.
Marty Mosby, we may not have been totally clear in the past, but we made this change in 2010, and we put a percentage of equity granted net of tax into a hold-to-retirement requirement for colleagues. Over time, it's accumulated to where we have 1,400 colleagues in some position with a hold to retirement. It gets tracked. These are shares that are segregated in a separate account with a third party. We believe when we did it, and continue to believe, that it aligns the management of the company with our shareholders' interests. I think we've seen over time a greater focus on risk management across the board, but especially in credit throughout the company as a consequence. There's definitely skin in the game as a result of this. In 2009, we as a group, were not a top 100 shareholder.
Today, we're generally the seventh largest shareholder with a growing position off of equity grants made every year. Fundamental change in philosophy going back to 2010 by the board and very supportive in making the change we recommended to make sure that there's complete alignment between management and shareholders over time and through cycles. Does that answer your question?
It did. It was not 100%, but there's a portion or an amount that's actually set aside that would be vested at retirement.
It's 25%-50% of equity granted net of taxes. There's no ceiling, so it compounds.
No, that's great. That's an industry angle. I saw that stat about the seventh-largest shareholder. I thought that was very impactful and interesting. Thanks.
Thank you.
Our next question comes from the line of Lana Chan with BMO.
Hi, Lana Chan. Morning.
Just a first question about what you're seeing with competition. It seems like there's some new bigger banks moving into some of your markets and also any comments about non-bank competition, any changes in the recent quarter?
Lana Chan, this is Steve Steinour. We monitor through a number of different data points impacts of non-bank competition. It remains very muted and essentially no change quarter to quarter from what we can see. Separately, we have some larger banks expanding into the footprint, but we have a lot of large banks already here. The old Bank One presence here in Columbus, JPMorgan Chase is very large in Columbus in terms of employees. We see B of A in Michigan. There's a presence from the large banks already. We've, through our strategies and focus, have managed to compete okay or adequately and somewhat successfully over time. We'd expect to continue to do that, recognize that there are some target investments in the Midwest. I actually view that as a positive in some sense. The Midwest was clearly a disinvestment region for years and years.
It's an affirmation of what's going on in the economy here to see that recent focus.
Okay. Thank you. Second question was around capital. Just wondering, the way you look at the CET1 ratio targeted upper end of the 9%-10% range. Is there also a binding constraint on that in terms of sort of the old school capital ratios that we used to look at prior to the financial crisis, the TCE to TA ratio?
Yes, Lana Chan, we do take a look at tangible common equity quite carefully. We do monitor that ratio relative to CET1. CET1 is our primary constraint as we think about the CCAR process and what we set goals around. We do have a bit of a larger gap between TCE and CET1 because of the size of our investment security portfolio and the makeup of that investment security portfolio. At this level, we're comfortable with TCE, but CET1 is the measure that we basically measure and goal against.
Okay. Thanks, Mac McCullough.
Thank you.
Our next questions are from the line of Jon Arfstrom with RBC.
Hey, thanks. Good morning.
Hey, Jon Arfstrom.
Hi. Steve Steinour, maybe a quick one for you. It sounds like you're optimistic on lending in the economy, and you talk about the labor issue, I'm just curious if you're hearing anything new that causes you any concerns or anything from your customers that might be a little bit different than what you've heard in previous quarters.
Jon Arfstrom, we've done more outreach in the last 60 days or so than at any time since I've been here to customers just to get a sense of what their plans are and the impacts of the market volatility. At least at this point, it is very benign. There are some companies impacted both ways on the tariffs, as we'd expect, but the market volatility has not impacted, at this point, in any material way outlook. There's a continued expectation of growth. Many of these companies have backlogs or pipelines that are committed. I think I shared on the last call, you get contractors and others with long lead times that are well out into next year, was with a group that has commitments through 2020, 2021, in fact. It's getting extended.
Again, this tightness of labor is benefiting sort of the competitive dynamics in some of these industries. The fact that they can just deliver is giving them a locked-in opportunity of a longer duration than they've seen.
Okay, good. Thank you. That helps. Then a question on the expense guidance in terms of the change in expense growth basically by taking rates out of your revenue side. These aren't big numbers, but can you give us an idea of the types of projects you might delay a bit? If we do get a couple more hikes, does that change your spending plans again? Where would that money go?
Sure. Jon Arfstrom, we have a fair amount of reinvestment coming off of the branch consolidations that are completed, or were completed around the end of the year, and the sale of Wisconsin. We're self-funding a fair amount of investment in digital data and other technology, in addition to building out a number of our revenue groups. You'll see expansions in business banking, commercial banking, some of our fee businesses on the private banking side, and capital markets in particular. We'll pace the rate of investment, we've talked about this in prior quarterly calls and analyst sessions. We'll pace the rate of investment to match the expected revenue. It's not like we're going to walk away from these. This is just a pacing thing.
If interest rates come our way or with other reasons we're generating revenue at or beyond the high end level of that range, we would look to accelerate some of the investments. We'll continue to manage it. We'll pace it or moderate it as we see the economy and the outlook.
Okay. All right. Thank you.
Thank you.
Our next questions come from the line of Kevin Barker with Piper Jaffray.
Morning, Kevin Barker.
Good morning. I just wanted to follow up on, you mentioned the capital markets pipeline was really strong, you had a really good quarter in the fourth quarter, and there could be some seasonality in there. When you're looking into 2019, where do you see the run rate from the $29 million you have today? Do you expect it to come down in the first half and then accelerate in the back half? Just give us some color on the capital markets side.
Yeah. Kevin Barker, it's Mac McCullough. It's usually a little bit slower in the first quarter, but we do expect capital markets revenue to increase as the year progresses. We've made I think some smart investments into that business and really executing at a very high level when it comes to the people we have on that team and how they interact and support our lending groups.
The pipelines as we enter the year are consistent with third, fourth quarter sort of pipeline. We have reasonable volumes that we're expecting over the first half of the year from the pipeline. A lot of that C&I. Again, our capital markets activity is customer focused. The continued strength of the pipeline gives us some confidence as we move forward, in addition to the investments in additional capabilities.
Okay, the follow-up on the expense side. You had the $28 million you called out on the branch consolidation and $7 million in equipment. We assume the run rate associated with occupancy and equipment to be significantly lower going into 2019, and the 2%-4% expense growth on a GAAP basis would be primarily due to investments, maybe in salaries or other portions of the business.
Kevin Barker, I think that's the right way to take a look at it. We'll definitely see reduced run rates related to the facilities actions that we've taken in the fourth quarter, both branches and kind of corporate facilities. Steve Steinour mentioned some of the investments that we're doing as we think about the expense that we took out related to Wisconsin or the 70 branch consolidation. We're comfortable with how we're investing in 2019, and it would be in the typical lines that you would expect to see. Personnel and certainly anything that relates to technology development. Those are the areas that I would look for growth. Beyond that, I would say nothing out of the ordinary.
Okay. Thank you.
Thanks, Kevin Barker.
Our next questions are from the line of Matt O'Connor with Deutsche Bank.
Good morning. I was just wondering from a strategic point of view, any further bolt-on, whether it's deals or divestitures. Obviously, you're not going to tell us exactly what you're going to do, but just thoughts on if there's further tinkering to the franchise. Then, of course, as you think longer term, strategic opportunities that might be bigger that could be interesting.
Matt O'Connor, we're always looking at opportunities. I will tell you that what we're focused on is probably less around core banking franchises as we've talked about historically, and maybe more focused on things like HSE or Macquarie Equipment Finance. I think that we haven't stopped in terms of what we're looking at from an M&A perspective, but we're very comfortable with the businesses that we have. It's not that we're out looking for something in particular. Anything we can find, like an HSE or a Macquarie that helps to strengthen our position in businesses that we're already in, bring us additional capabilities and talent. Those are very attractive opportunities that we think we've acquired at a very attractive price. Like I said, we're always looking but in this market, I wouldn't expect that we're going to be doing a lot, if anything.
We think we can improve the core performance as you've seen in those long-term financial metrics, Matt O'Connor, as well. That's the focus, drive the core.
Just the thoughts on maybe something bigger that would get you more scale. Do you feel like you need more scale as we look out kind of more medium and long term?
We're comfortable with how we're positioned right now. I think the FirstMerit transaction was extremely beneficial to us from a scale perspective. Steve Steinour pointed out the improvement in the efficiency ratio early in this call. We've been pretty direct in saying that at this point in the cycle and based upon valuations and expectations, it's very unlikely that we're going to be doing a core deposit franchise at this point in the cycle. Very unlikely, Matt O'Connor. Like I said, we're focused on some of the specialty things that are few and far between, but good opportunities when we can find them.
Okay. Thank you.
Yep. Thanks, Matt O'Connor.
Ladies and gentlemen, we've reached the end of the question and answer session. I'd like to turn the call back to Steve Steinour for closing remarks.
2018 was highlighted by the achievement for the first time of all five of our long-term financial goals implemented with the 2014 strategic plan on a GAAP basis. We're really pleased with that. The focused execution of our strategic initiatives over the years has built a company that we believe will produce consistent high-quality earnings and attractive returns to our shareholders. 2019 commences the first year of the new three-year strategic plan. We've raised the bar for ourselves once again, as you've seen. While the plan involves important investments in our businesses that will improve our customer experience, the core strategies remain the same. We expect to continue to gain market share and grow share of wallet through our differentiated products, distinctive brand, and superior customer service. We see this as a lower risk set of initiatives over the next three years.
We look forward to carrying the momentum that we've built into 2019 and beyond. Finally, there's a high level of management alignment between the board management, our colleagues, and our shareholders. The board and our colleagues are collectively the seventh largest shareholder of Huntington. 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.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.