Greetings, and welcome to Huntington Bankshares Third Quarter Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mark Moose, Director of Investor Relations.
Thank you, Sherry. Welcome. I'm Mark Moose, Director of Investor Relations for Huntington. Copies of the slides we'll be reviewing can be found on the Investor Relations section of our website www.huntington.com. This call is being recorded and will be available as a rebroadcast starting about 1 hour from the close of the 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 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 balance. 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 another very good quarter and as we continued to deliver high quality earnings and expect to carry this momentum through the end of the year. It was also another clean quarter as for the 3rd quarter in a row, there were no significant items. We reported net income of 378,000,000 dollars and earnings per share of $0.33 increases of 37% 43%, respectively, over the third quarter of 2017.
Return on common equity was 14% and return on tangible common equity was 19%. We had record revenue of $1,200,000,000, which represented a 5% year over year increase and maintain strong expense discipline. We're pleased with the resulting efficiency ratio of 55.3 percent, an improvement of 5.20 basis points from the year ago quarter. The average total loan increase was strong at 7% versus the third quarter of 2017 5 percent annualized versus the 2018 second quarter. The slow growth was driven by a 10% year over year increase in average consumer loans with particular strength in residential mortgage, RV and marine financing, and automobile lending.
We remain focused on core funding the balance sheet with 6% growth in average core deposits. In the third quarter, we increased the quarterly common dividend to $0.14 per share, representing a 27% linked quarter increase. And a 75% year over year increase. This year marks the 8th consecutive year that we've increased the common dividend. We believe our earnings power, capital generation, and risk management discipline will support higher dividends, including a higher dividend payout ratio over time.
We also repurchased 691,000,000 dollars of common shares or approximately 65 percent of the total repurchase included in our 2018 CCAR capital plan. 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 profitability metrics are among the best in the industry, and we have built sustainable competitive advantages in our key businesses that we believe will deliver high performance in the future. The franchise continues to perform well on many fronts, allowing us to make investments and capabilities we need to drive consistent organic growth. We're focused on driving sustained long term performance for our shareholders.
We remain committed to our aggregate moderate to low risk appetite, which we put in place 8 years ago. As a reminder, we reinforced the importance of these standards by requiring the top 1400 officers of the company to comply with holder retirement restrictions on their equity awards. Slide 4 illustrates our long term financial goals, which were approved by the board in the fall of 2014 as part of our strategic planning process. As a reminder, these goals were originally set with a 5 year time horizon in mind, and we fully expect to achieve these goals this year on a reported GAAP basis 2 years ahead of original expectations. I've already touched on our record revenues, continued expense discipline, and our 3rd quarter efficiency ratio, which was below the low end of our long term goals.
In addition to our credit metrics, our credit metrics remain excellent. The third quarter 2018 was 17th consecutive quarter where net charge offs remained below our average through the cycle target range. And loan provisions in excess of net charge offs have been taken in 12 of the last thirteen quarters. Our 19% return on tangible common equity positions Huntington as a top performing regional bank. Now these results demonstrate that our strategies are clearly working and will continue to drive Huntington Forward.
So let's turn to slide 5 to review 2018 expectations and discuss the current economic and competitive environment in our markets. The local economies across our 8 state footprint continued to perform well, and we remain optimistic on the near term outlook. Unemployment rates remain near historical lows and we continue to see labor shortages throughout our footprint markets. The Midwest, in fact, has the highest the Midwest is the most dynamic region for potential jobs growth according to the US Bureau of Labor Statistics, August Jolts Survey. The employment and growth opportunities in the Midwest continue to make it a favorable economic region.
6 of our 8 footprint stake experienced debt population in migration in 2017. In fact, 2017 was the 1st year Ohio had net immigration in a quarter of a century. As shown on slide 70 in the appendix, the Philadelphia Fed State leading economic indicator indices for our footprint point toward a favorable economic operating environment for the next 6 months. While the impact of the ongoing tariff issues, some positive and some negative can be seen in specific industries, we've not yet seen a material impact to our customer base overall. The uncertainty regarding NAFTA was far more impactful to our customer base and our footprint.
And we're encouraged by the new USMCA trade agreement as we believe it will be beneficial to our footprint, especially within the auto industry. Customer optimism has materialized throughout 2018 as we've seen our customers invest in capital expenditures, and grow their businesses. Our commercial pipeline is up year over year. Consumers are doing well with consumer loan growth remaining steady. It's a good time to be doing business in the Midwest, and we remain bullish on our local economies.
Now moving to our updated 2018 expectations, we expect the full year average loan growth rate growth in the range of 5a half to 6.5%, consistent with our year over year growth in the first time months. For the fourth quarter, provides a challenging comparison given the significant amount of growth at the end of last year following the federal tax reform. Loan growth rate in the third quarter and so far in October have been encouraging. Full year average deposit growth is expected to be 3 a half to 4 a half percent, while full year growth in average core deposits is expected to be 4.5to5.5percent. We remain focused on acquiring core checking accounts and deepening core deposit relationships.
We expect full security losses related to portfolio restructuring. This will allow us to optimize the securities portfolio, improving the revenue outlook for 2019. The modest reduction in our 2018 revenue outlook is related to the cost of the portfolio restructuring as all remaining aspects of our prior the GAAP NIM for the full year work will expand by 2 to 4 basis points compared to 2017. We expect NIM expansion in the fourth quarter on a GAAP and core basis will be in the range of 4 to 6 basis points. We will deliver positive operating leverage for the 6th consecutive year, we expect a 2% to 2.5% decrease in non interest expense on a GAAP basis.
Full year expenses are now projected to be slightly higher than previous guidance as we expect to incur approximately $40,000,000 of expense in the fourth quarter related to the recently announced consolidation of 70 branches and some additional corporate facilities. The run rate cost savings associated with these consolidations will be entirely redeployed into targeted investments in both people and technology and specifically digital and mobile technology. We anticipate net charge offs will remain below our average through the cycle target range of 35 to 55 basis points. Our expectations for the full year 2018 effective tax rate is in the 14.5% to 15% range. And before I turn it over to Mac, I'd like to give you a quick update on the strategic planning process we began earlier in the year.
We're excited about the progress we've made and the meaningful discussions steered by our board of directors, executive leadership team, and many dedicated colleagues in Huntington. In September, we had a 3 day board off-site to further refine and decision. The strategic plan in last week, the board had another robust set of conversations as we're nearing completion of the plan. As we've previously mentioned, we anticipate new long term financial goals will be an important outcome of the new strategic plan, and we look forward to sharing those with you later this year. So Mac will now provide an overview of our financial performance.
Zach?
Thank you, Steve, and good morning, everyone. Slide 6 provides the highlights of the 3rd quarter results. As Steve mentioned, we had a strong 3rd quarter We reported earnings per common share of $0.33, up 43% over the year ago quarter. Adjusting for $31,000,000 of acquisition related to significant items in the third quarter of 2017, core EPS was up 0 point 0 $8 or 32 percent year over year. We are very pleased with and our 55.3 percent efficiency ratio, down 5.20 basis points from the year ago quarter.
Return on assets was 1.4%. Return on common equity was 14% and return on tangible common equity was 19%. We believe all three of these metrics distinguished Huntington among our regional bank peers. Tangible book value per share increased 3% year over year, to $7.06, even with the considerable share repurchase in the quarter. Lastly, the tax rate was 14.1% during the third quarter.
Which was impacted by a $3,000,000 benefit from stock based compensation and a $3,000,000 benefit related Turning now to Slide 7. Average earning assets grew 4% from the third quarter of 2017. This increase was driven by a 7% Average residential mortgage loans increased 22% year over year, reflecting an increase in loan officers, as well as further expansion into the Chicago market. We typically do, we sold the agency qualified mortgage production in the quarter and retained jumbo mortgages and specialty mortgage products. Average C and I loans increased 4% year over year with growth centered in middle market, asset finance, energy and corporate banking.
On an end of period basis, C and I balances increased 5 percent linked quarter annualized as we saw a healthy pickup in originations in the final month of the quarter. Average auto loans increased 6% year over year as a result of consistent and disciplined loan production. Originations totaled $1,400,000,000 for the third quarter of 2018, down 15% year over year. This was deliberate as we have been consistently increasing auto loan pricing, which slowed originations while optimizing revenue. The average new money yield on our auto originations was 4.62% in the quarter, up 40 basis points from 4.22% in the 2nd quarter and up 100 basis points from 3.62% in the year ago quarter.
Average RV and marine loans increased 31% year over year, reflecting the success of the well managed expansion of the business into 17 new states over the past 2 years. Linked quarter growth was 52% annualized, reflecting the normal seasonality during the summer months. Average commercial real estate loans were down 1% on a year over year basis and down 3% as well as our order to remain consistent with our aggregate moderate to low risk appetite and to ensure appropriate returns on capital. Finally, securities were down 3% year over year as we continue to let the portfolio runoff and remix the cash flows into higher yielding loan products. Turning now to Slide 8.
Average total deposits grew 5% year over year including a 6% increase in average core deposits. Core certificates of deposits were up 141 percent from the year ago quarter, reflecting the initiatives during the past three quarters, to grow fixed rate term consumer deposits in light of the rising interest rate environment. Average interest bearing DDA deposits increased 9% year over year while average non interest bearing DDA deposits decreased 7%. This was almost entirely driven by our commercial customers as they continue to shift from non interest bearing to interest bearing products, primarily interest checking, hybrid checking and money market. However, as shown on slide 37 in the appendix, our core consumer and non interest bearing deposits were actually up 5% year over year, as we continue to grow households and deepen relationships.
Average money market deposits were up 6% year over year, driven by solid growth and consumer balances and preferences of commercial customers shifting towards higher yielding products. On a linked quarter basis, total deposits grew 2.2000000000 dollars or 3%, reducing our average short term borrowings in the quarter by 44%. We remain focused on core funding the balance sheet and the current rising interest rate environment. Moving now to Slide 9. Driving this growth was the 4% increase in earning assets and rising yields in both our consumer and commercial loan portfolios.
Our GAAP net interest margin was 3.32 percent for the 3rd quarter, up 3 basis points from the year ago quarter and up 3 basis points linked quarter. The 3rd quarter was impacted by a slower rise in short term rates as average 1 month LIBOR increased 14 basis points during the quarter versus 63 basis points in the first half of the year. We do not anticipate the same headwind in the 4th quarter. Moving to Slide 10, our core net interest margin for the 3rd quarter was 3.25%, up 7 basis points from the year ago quarter, and up 3 basis points late quarter. Purchased accounting accretion contributed 7 basis points to the net interest margin compared to 12 basis points in the year ago quarter.
Slide 33 in the appendix provides information regarding the scheduled impact of FirstMerit purchase accounting accretion for 20182019. On the earning asset slide, our commercial loan yields increased 59 basis points year over year, while consumer loan yields increased 22 basis points. Our deposit costs remained well contained with the rate paid on total interest bearing deposits of 73 basis points for the quarter, up 38 basis points year over year. Consumer core deposit costs were up 26 basis points year over year and commercial core deposit costs were up 27 basis points. Moving now to Slide 11.
Our cycle to date deposit beta remains low at 28% through the third quarter of 2018, which is still well below our expectations. While our CD funding strategy negatively impacted our deposit beta in the second And Third quarters, our core deposit growth continues to outpace peers. And we will be better positioned for continued interest rate increases
us.
Slide 12 provides detail on our non interest income for the quarter in comparisons to the year ago quarter. Our non interest income increased $12,000,000 or 4 percent from the third quarter of 2017. We are seeing momentum in our fee businesses driven by our ongoing House and relationship acquisition and the execution of our strategies, including our optimal customer relationship strategy. Slide 13 highlights the key drivers in our 4% year over year reduction in reported non interest expense. Comparison to the third quarter of 2017 impacted by $31,000,000 of acquisition related significant items in the year ago quarter.
We remain focused on expense control while also investing in our key businesses. Our efficiency ratio has trended down, reflecting the successful cost save initiatives from the FirstMerit acquisition. Slide 14 illustrates the continued strength of our capital ratios. Tangible common equity ended the quarter at 7.25%, down 17 basis points year over year. Common Equity Tier 1 ended the quarter at 9.89%, down 5 basis points year over year, and down 64 basis points linked quarter.
CET1 is now back within our operating guideline of 9% to 10%. We expect to stay near the upper end Slide 15 illustrates our previously articulated capital priorities, which have been confirmed during the current strategic planning process. Our first priority is to fund organic growth of the balance sheet. Our second priority is the cash dividend. As Steve mentioned earlier, we were pleased to be able to increase our cash dividend materially this quarter.
This was enabled by the significant improvement in capital generation driven over the past few years and our strong results in the DFAST and CCAR processes. Our final capital priority is everything else, which includes share repurchases and selected
M and A.
Our $691,000,000 share repurchase during the third quarter included a $400,000,000 ASR. We used the ASR to effectively offset the dilution in Peru during the first quarter from our Series A preferred equity conversion as was contemplated in our CCAR submission. Excluding the one time nature of this ASR, the total payout ratio this year was a closer to our long term payout ratio targets, versus the elevated 112 percent year to date payout ratio shown on the slide. Recall, we have previously stated that we have a long term total payout ratio target of 70% to 80% and a dividend payout ratio target of approximately 45%. You continue to view whole bank M and A as an unattractive use of capital at this time, given highly inflated sellers' expectations, and where we believe we are in the economic cycle.
Earlier this month, we closed on the previously announced acquisition of Hutchison Shockey early in company, a small specialty broker dealer with expertise and municipal underwriting. This is a small bolt on acquisition, which is a nice addition to our government banking and capital markets businesses. Moving to slide 16. Credit quality remained strong in the quarter. Consistent prudent credit underwriting is one of Huntington's core principles and 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 49,000,000 in the third quarter compared to net charge offs of $29,000,000. The loan loss provision expense in the quarter reflected the strong loan growth continued migration of the acquired FirstMerit portfolio into the originated portfolio. We have now booked provision expense above net charge off were 12 of the past 13 quarters illustrating our high quality earnings. Net charge offs represented an annualized 16 basis points of average loans and leases, which remains below our average through the cycle target range of 35 to 55 basis points. Net charge offs were flat from the prior quarter and down leo in the analyst package and the slides.
The allowance for loan and lease losses as a percentage of loans increased two basis points linked to 1.04%, while the allowance for credit losses as a percentage of loans also increased 2 basis points for each quarter to 1.17%. Slide 17 highlights Huntington's 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 rates over the long term. The verification of this balance sheet will serve us well over the cycle.
Our DFAST stress test results in the bottom left highlight our disciplined enterprise risk management And finally, as the bottom right demonstrates Huntington's strong capital position. Turning now to Slide 18. This new slide highlights Huntington's continued investment in our customer experience advantage with a focus on human led technology enabled delivery and solutions. We are seeing an ongoing shift towards mobile and digital usage by our customers. 62% of our households are digitally active we would expect that figure will continue to increase materially in the years to come.
On the top right of the slide, you can see a few of the most recent mobile on digital initiatives. As you can imagine, the current strategic planning process has a significant focus on digital and mobile technology, and we will share more details once the plan is finalized. We remain focused on extending our customer experience advantage through targeted investment. As previously announced, we are consolidating 70 branches and a handful of corporate facilities in the fourth quarter. The strategic decision to consolidate these offices is the result of continuous review of our distribution channels and our customer's perceptions, behaviors, and needs.
The run rate costs savings associated with these consolidations will be entirely deployed into targeted investments in technology, specifically digital in order to better serve our customers. Let me now turn it back over to Mark so we can get to your
Thanks, Matt. Sherry, we will now take questions. We ask that as a courtesy of your peers, each person asks only one question and one related follow-up. And then if that person
remove your question from Our first question is from Ken Utslyn with Jefferies. Please proceed with your question.
Good morning, Ken. Hi.
Good morning, guys. Mac, wondering if you can just help us flush out the incremental securities loss and then the incremental charges on your previously announced restructuring charges? And maybe even more so than understanding the fourth quarter, help us understand the return on those and how we should expect that to affect the 2019 starting points for both the securities portfolio yield and also just for the cost base? Thanks.
So we're selling about $1,100,000,000 of investment securities in the 4th quarter and we will replace those one for one. So there won't be an increase in the securities portfolio from this action. Basically, it's a shorter duration, low yielding securities and the payback is pretty quick under 2 years on this transaction. We're going to get a net yield pickup of about 1.2%, which should translate into about $13,000,000 in additional net interest income in 2019. So we do see this as good hygiene and continuing to make sure that we stay efficient with balance sheet and think about opportunities.
On the expense side, so this is basically related to the 70 branch consolidation that will take place in the fourth quarter. And there will be some corporate facilities we will be closing, consolidating as a part of that as well. And, we estimate that to be approximately $40,000,000 and it would be the typical expenses that you see in these types of activities. And when you think about the 2018 guidance, and the change to the 2018 guidance for both revenue and expense. These items impacted those changes to a very large degree entirely on the expense side and primarily on the revenue side.
So shouldn't think about this really as being a change in core guidance for 2018. This is really about these actions that we're taking in the fourth quarter.
Got it. And my follow-up, Mac, just on that expense point, If I follow you on that and just put in the $40,000,000 on the expense side, it would still seem that underlying that you're still expecting that a decent increase in kind of underlying cost growth third to 4th, can you just level set us on that, versus the 51 result you just put up, the type of underlying expense growth you're still expecting in 4Q?
Yes, Ken. So it is somewhat seasonal. We do have higher expenses in the fourth quarter. I would tell you that's anything out of the ordinary relative to what we've seen historically in the fourth quarter. Just the fact that we do have higher revenue because of seasonal actions taking place in the fourth quarter by our customers and expenses that come along with that.
Okay. Thanks, Mac.
Our next question is from John Armstrong with RBC Capital Markets. Please proceed with your question.
Hey, thanks. Good morning, guys.
Good morning, John.
Question on lending, when you talk about your pipelines and the outlook. This mid single digit pace that you guys have put up maybe even a little bit better. Steve, I'm just curious longer term, do you see any threats to that? Or do you feel like that's sustainable pace for the company?
Are sitting with pipeline that's largely equivalent to where we were this time last year on both the consumer and commercial side. As we look forward, we're bullish on the economy, our footprint, there's certainly a lot of macro volatility right now. So that that could impact things, but, but we're optimistic and getting the NAFTA risk off the table was a big step forward for us in this region. Underlying commercial, demand seems to, if anything, be triggered by the constraint on employment. We have many, many customers throughout all of our regions now suggesting that they could do more if they had more labor.
So there's clearly a labor supply impact going on. And then additionally, been, out quite a bit and have had a lot of commentary about pipelines now going into 2020. So it would appear to be, it would appear that business is consistent. And to be at this time of the year with backlogs into 2020 is a bit unusual. So very positive indicator.
Okay, good. And then not necessarily M and A question, but Max comment about having less interest in M And A because of where we're on the economic cycle. I'm just curious, where you think we are in the economic cycle? And are you or maybe Dan could comment seeing any kind of stress or irrational behavior?
Yes. No, I think that, you know, irrational behavior, I mean, we're definitely seeing people pick their spots in terms being quite aggressive, but that really is nothing new. We've seen that for some time. So I think it's pretty much the status quo.
In terms of where we
are in the cycle, we've said we're late in the cycle. I think this is the 3rd year that we've said we're late in the cycle. So we continue to plan and look at our portfolio and view new transactions in light of the fact that we have to be prepared at all times for a downturn whether that happens 18 months now or 3 years from now. So it really hasn't changed our posture.
Okay. All right. Thank you.
Thanks, Don.
Our next question is from Scott Siefers with Sandler O'Neill And Partners. Please proceed.
Good morning guys. I was hoping you could sort of re walk through the margin expectations for the fourth quarter. I know Mac, after the second quarter, you guys had been thinking somewhere in the neighborhood of, 3 to 6 basis points of core margin improvement per quarter in the second half. So I know LIBOR was sort of an issue for you and others this quarter, so maybe got off to a slower start, at kind of bottom end of the range. But if you can re walk through what the expectations for core and reported would be for the fourth quarter and then the main puts and takes as you see them?
Yes, Scott. So we believe that we're going to see expansion in the fourth quarter and then both for core and reported 4 to 6 basis points. Part of that is just understanding that we're not going to have the same impacts with LIBOR in the 3rd like we did in the 3rd quarter 4th quarter. You know, the other part of it is we continue to remain very disciplined on asset pricing. And, just making sure that we're getting paid appropriately for the risk that we're taking.
And we also are anticipating maybe a lower, deposit beta in the fourth quarter. So those things coming together along with the recent rate increase, we built confident that the 4 to 6 basis point expansion for both quarter reported and the 4th quarter is very doable.
Okay. All right. Perfect. Thank you. And then I just want to make sure, sorry, this might sound a little ignorant, but I just want to make sure I understand the expense guide.
So We're starting off the 2017 reported dollars of expenses. And now we're taking, I guess it's the to the 2.5% off of that. And then the guidance includes the $40,000,000 are we effectively at the middle of the range implying a 4th quarter expense number of about $670,000,000 when you net out the year to date expense expenses you've already incurred?
That probably sounds a little bit high, but Again, the fourth quarter is seasonally high from an expense perspective, but that, that would be the math that you'd want to go through Scott more to do that.
Okay. All right, perfect. Thank you very much.
Our next question is from Jonathan Pancari with Evercore ISI. Please proceed.
Good morning. This is Sam Ross on for John Bank Carey.
Hi, Sam.
Just a quick question on the auto securitizations. I'm just wondering if there's any updated plans the near term in that regard?
At this point in time, we don't have plans for auto securitization. We've The increased pricing that we've been able to execute on the auto book has helped us pull volume back and really maintain revenue where we expected it to be even at the higher origination number with lower rates. So we feel confident in terms of how we're managing the exposure on the balance sheet and don't really see an auto securitization in the future.
That's helpful. And then looking at your tax rate, it seems like the tax rate's coming in lower than you previously, expected. And I'm just wondering if this is a function of some of the moving parts or one time items that you have seen, or is this like a the normalized run rate we should expect on forward?
What you need to adjust for in the third quarter is $3,000,000 benefit related to stock based comp and $3,000,000 related to the true up of tax reform in 2017. If you adjust for that $6,000,000, you'll be at 15.5% for the 3rd quarter. And that is the low end of our range that we had been giving you earlier for second quarter. So we're still in that 15.5to16.5 range. It's just these 2 unusual items this quarter that took us down.
Thanks for taking the questions.
You bet. Thanks, Ann.
Our next question is from Steven Alexopoulos with JP Morgan. Please proceed.
Hey, good morning, everybody.
Good morning, Steve.
On the deposit side, if we look at the sharp growth again in time deposits, Where would you guys ultimately like to take those balances to?
Well, you know, we've, if you take a look over time, Steven, we've actually run CD balances, time deposits off pretty significantly over years. This really is the 1st year that we've started to grow that portfolio again. We don't really have a target for it. The growth has slowed down. Basically, we're not the price leader in the market right now and the region right now on the CD products.
But we're still getting decent growth, I would say, on a monthly basis. We just felt that that was a smart move for us in the first quarter as we saw the loan growth materializing for the year and wanting to stay core funded without impacting some of the back books, say, in money market or savings. So, we put the promotion in place in kind of the middle of the first quarter and we've raised probably over $3,000,000,000 since then. And feel really good about the term and the rates that we've paid. So, it's not going to be become a significant portion of our core deposit funding going forward.
It's more situational just given the rate environment and what's happening right now.
Got you. Okay. And then just a follow-up, if we look at deposit costs up 14 bps quarter over quarter and the time deposits were part of that. Do you think that continues to trend going forward? Is 14 bps a reasonable range, or does some pressure come off as maybe a slow time deposit growth?
Thanks.
Yeah, I think some pressure will come on, but that's Steven. I think, you know, we are seeing time deposit growth, slow down. And we're also, being, being, cautious with the positive pricing in the fourth quarter, we think of good growth at the rates that we're paying today. So I do expect the deposit beta in the fourth quarter to be lower than the year to date deposit beta. So That's what we're saying.
Our next question is from Kevin Barker with Piper Jaffray. Please proceed with your question.
Lowering the deposit beta in the in the fourth quarter, I mean, do you expect the deposit beta to run a little bit lower going to
the first half of nineteen, or do you think that's gonna reaccelerate just given your guidance for 50% cumulative deposit beta?
Yes. So, we still feel comfortable with that 50% cumulative explosive data. We're at about 50% year to date in 20 18. And I would tell you that the fourth quarter is probably somewhat situational in terms of where we are the deposit flows that we see. I would still think about the 50% longer term deposit beta as being the right would widen the model going forward.
Okay. And then can you talk about the deposit flows that you're seeing on the consumer side versus the commercial side? And the betas you're seeing on commercial versus consumer, especially around non interest bearing deposits.
Yes, so we haven't disclosed betas consumer versus commercial, but we do continue to see good consumer growth. 5% year over year growth and in core checking account balances is really strong. And we've also seen good money market growth as well. So very, very comfortable with what's happening on consumer side of the business and the growth that we're seeing. And commercial, as you know, is competitive.
We evaluate every request that we get for a rate increase. And we look at the depth of the relationship and the strength of the opportunity going forward in deciding if we're going to pay up for those deposits. So I think we have a very good process in place that's serving us well and we're managing that side of the balance sheet appropriately.
Thank you very much.
Our next question is from Brock Vandervliet with UBS. Please proceed with your question.
Great. Good morning. Hi. Just following up on some of these deposit questions. Borrowings and noncore deposits have been clearly headed the other way.
Is the goal to effectively run those out?
Well, we do like to minimize those balances as best we can. And, we think about that as being a bit of a ceiling around what we might be willing to pay on commercial deposits and thinking about how we manage that side of the balance sheet. We certainly don't have a plan to minimize other types of funding, but to the extent we can raise good core deposits at the right at the right cost. You know, we're going to continue to do that and we've been actually very successful doing that in 2018. So feel good about where we're positioned and the deposit flows that we're seeing.
And, wouldn't be so that we stay around these levels in terms of overnight funding and those other types of funding sources.
And just stepping back, I mean, the more common pattern across the industry appears to be an acceleration in betas are more violent mix shift into higher cost deposits. And you called that out as occurring more rapidly on the commercial side, but overall, your deltas and deposit costs are actually down sequentially. Do you do you think that's, you know, more a factor of your own strategy and tactics or or a lack of competitive response or a bit of both?
I would say a bit of both. I think the competition in the region has remained very rational. I don't think we see anyone, really at any size of organization doing something that looks unreasonable. So that certainly helps. And I do think that we have a bit of a unique customer base because of the Fairplay strategy and what we've done from a satisfaction and loyalty perspective, we have long tenured customers on the consumer side in particular.
And I do believe that's certainly going to help us from a pricing and retention perspective going forward. And I think those things really contribute to the fact that we can manage our costs perhaps a little bit better than the average, regional bank.
Got it. Thank you.
Thanks Rob.
Our next question is from Eric Najarian with Bank of America Merrill Lynch. Please proceed with your question.
Good morning. This is Brandon on behalf of Erica. How are you?
Hey, Brandon.
So two quick questions. And the first question, sorry to beat a dead horse. I just want to understand the expenses. So if we plug in the 40, are you basically saying that, the quarter over quarter growth and expense on a core basis should be around, you know, 3% And then if we back out that 40, it kind of gets to the negative 2.5% for the year?
So think about it on a full year basis. That's the guidance that you've given and just make sure you adjust for the $40,000,000 in doing the math.
Understood. And then, and then separately, I know you guys have previously said that for every 25 basis point increase in rates, you guys should see about $25,000,000 in, annual net interest income growth. Is that still intact, or do you guys see, some, some pressure on the loan side that is compressing spreads?
Yes, I would say that has reduced a little bit. It's probably around $20,000,000 now.
Our next question is from Terry McVoy with Stephens. Please proceed with your question.
Just the growth in the RV and marine finance portfolio up $800,000,000 year over year. Could you just talk about how much of that out of footprint and what you're doing internally to manage the risk within that portfolio.
Yes, it's Terry. So the growth is, we're now in 34 states. So the growth is going to be dispersed early on. Obviously, it was majority in footprint, I would say now where we've got a greater diversification. The important thing is you know, the profile of the customer, which is identical in all of our markets.
You'll note that we're at about an 800 and FICO score in that business. So very low probability of default. And we do underwrite this business individually We're looking at liquidity. We're looking at other measurements. They're not auto decisions.
Average size of the boats and RVs are modest tend to be second time buyers of these assets. So very consistent origination metrics regardless of geography. And frankly, we like the geographic diversification.
Thanks. And then just as a follow-up, could you maybe discuss reserve building going forward relative to loans that's been up on the ticking up a basis point or 2 each quarter. And just going back to your comments on the credit cycle, do you expect that bill to accelerate from here? Just based on some of those earlier comments?
We've said that we expect the reserve to build very gradually over time we've been consistent on that, you know, going back many quarters. You know, and I think that, obviously, the components of that build has been charge offs, the growth in the portfolio, which has been, fairly strong, the mark amortization. And then we've got portfolio specifics, market dynamics, things like that built in. So I would see a fairly consistent view with a slow build going forward.
Great. Thank you.
Our next question is from Kevin Reevey with DA Davidson. Please proceed with your question.
Good morning.
Good morning, Kevin.
So could you walk us through the thinking in far as how you decide which branches to consolidate?
Kevin, there's a lot of work that goes into this and it's coordinated amongst multiple teams. But it's keyed off of usage patterns within the branches. And so we have a number one brand share in Ohio and Michigan. So we have a density in many of our markets, to work from. And those utilization patterns are looked at with a view of not just physical, but also what's going on in the digital an ATM usage.
So we have a fair amount of our distribution that's fairly close in to, to other branches. And, and those patterns help us or guide us in terms of where is the opportunity.
And then, earlier in your and Steve, earlier in your prepared you talked about, the strength and your bullish outlook on your markets, but I'm just curious just how your ag and dependent markets are faring.
Well, we're not, we're not, by any stretch, a meaningful ag lender. And, While the states, Ohio, Illinois, to some extent, Michigan are ag they're very diversified ag states. They will have some impact from the tariffs but there's also a fair amount of relief coming to that that sector. And the ag sector has had a very robust run for a number of years. Typically, these are individuals or companies that are very, very low leveraged and So don't see a significant impact on any of the states we're in in terms of Ag in the near term at this point.
Our
next question is from Peter Winter with Wedbush. Securities. Please proceed with your question.
Hi. This is Ada Lee in for, Peter Winter today. I just have Hi. I just have a quick question. Could you provide some color around your fee income expectations for fourth quarter?
I mean given all your continuous tech spend, I would like to see some very exciting things happening there.
So I I think, you're gonna see growth in in the areas that we've, we've experienced a growth year to date. I think, Capital markets will continue to have, a good, a good year and a good fourth quarter. I think, gonna con continue to see growth in, card and payment processing revenue. You know, with with the growth in households that we see on the consumer side of the bank, you know, good growth in deposit service charges, as well on on both consumer and commercial when you think about treasury management and some of the product opportunities we have there. I think weakness will be in mortgage banking as we've seen, across the industry and throughout the year, the gain out sale has been lighter this year and that has impacted that line for the entire entire year.
So, in general, I think we're in good, in good shape. As we think about some of the lines that are performing well for us. Trusted Investment Management is another just with the way the market has been performing so far this year. So I would look at the lines where we've seen growth already this year and think about those lines continuing into the fourth quarter.
Thank you.
Ladies and gentlemen, we have reached the end of our question and answer session. I would like to turn the conference back over to Steve Steinauer for closing comments.
Again, thank you all for joining us. Through the 1st 3 quarters of 2018, we've consistently produced quality earnings and look to continue the momentum into the end of the year. We're building long term shareholder value with our top quartile financial performance and strong risk management. We have a track record of disciplined execution and delivering on our goals and commitments as you've seen. So we look forward to providing new long term financial metrics later this quarter.
And then finally, as always, we'd like to include a reminder that there's a high level of alignment between 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 thanks for your interest in Huntington. We appreciate you joining us today. Have a great day.
Thank you. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.