Greetings and welcome to the Huntington King Bankshares First Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr.
Mark Moose, Director of Investor Relations. Thank you. You may begin.
Thank you, Melissa. 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 Newmayer, our Chief Credit Officer, will also be participating in the Q And A portion of today's call. As noted on Slide 2, today's discussion, including the Q And A period, will contain forward looking statements. Such statements are based on information and assumptions available at this time and are subject to changes, risks and uncertainties, which may cause actual results to differ materially. We assume no obligation to update such statements.
For a complete discussion of risks and uncertainties, please refer to this slide and material filed with the SEC, including our most recent Form 10K, 10 Q and 8 K filings.
Now, I'll
turn it over to Steve. Thanks, Mark, and thank you to everyone for joining the call today. As always, we appreciate your interest and support. We had a solid first quarter and entered 2018 with Momentum. We reported net income of $326,000,000 and earnings per share of $0.28, up 65% from the year ago quarter.
Return on common equity was 13% and return on tangible common equity was 17 a half percent. Average loans increased 9% annualized versus the fourth quarter of 2017, driven by discipline broad based growth in both commercial and consumer loans. We're pleased with our 1st quarter efficiency ratio of 57% driven by 3% year over year revenue growth and expense discipline. The franchise continues to perform well on many fronts as a result of focused execution and the realized economics of the FirstMerit deal. 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.
We prudently allocate our capital to ensure we're earning adequate returns, and taking appropriate risk. We also continue to make meaningful long term investments in our businesses, particularly around customer experience, to drive organic growth. We're very pleased with how we are positioned with the sustainable competitive advantages we've created. 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. These goals were originally set with a 5 year time horizon in mind, and we fully expect to achieve these goals this year on both a reported GAAP basis and an adjusted non GAAP basis.
Now our first quarter efficiency ratio is near the low end of our long term goal as a result of the successful integration of FirstMerit, our expense discipline, and focus on revenue growth. Charge offs remain below our long term expectations. Our 17 a half percent return on tangible common equity positions Huntington as a top performing regional bank. And these peer leading results demonstrate that our strategies are working and will continue to drive Huntington forward. We're pleased with our first quarter performance against all of these metrics.
Also like to take this opportunity to remind you of the considerable improvement in our financial common was 11.3% and our efficiency ratio was 66.4%. So through our disciplined execution over driving a greater than 600 basis point improvement in ROTCE and almost a 1000 basis point improvement in the efficiency ratio alone. Let's now turn and discuss the current economic and competitive environment in our markets. We remain optimistic on the outlook for the local economies across our 8 state footprint. And as we've noted previously, our footprint has outperformed the rest of the nation during the economic recovery that began in mid-two thousand and nine.
Employment rates across the majority of our footprint remain near historical lows. The labor market in our footprint has proven to be strong with several markets such as Columbus, Indianapolis, Grand Rapids, where we see meaningful labor shortages given metro unemployment rates, which are well below national averages. Philadelphia Fed's state leading indicator indices for our footprint point toward a favorable economic operating environment in 2018. Most of the states are expected to see an acceleration in economic activity over the next 6 months. 4 of our states including Ohio, are expected to grow expect continued business investment and expansion, we are seeing increased capital expenditures.
It's important to remember that our commercial focus primarily privately held businesses, and these companies are likely to reinvest tax benefits into their businesses to fund growth. As an aside, site selection magazines, Governor's cup for capital investments and new jobs created in 2017 support our expectations 5 of the 8 states placed 5 of our 8 states placed in the top 10 of the nation for total qualified new projects with Ohio earning the number 2 spot overall. Now these rankings and leading indicators confirm our optimism. But importantly, our loan pipelines remain solid across all footprints. And as we get out and as I talk to different business owners, I can confirm this is a widespread level of optimism.
In fact, the if anything, we're being held back by labor supply shortages. We're clearly seeing impacts in construction and other businesses where they just can't get enough labor And as a consequence, we're starting to see labor inflation, but we're also seeing businesses now that are working on next year's pipelines of activity. So backlogs are looking good in many of our businesses. Manufacturing construction, are two examples. And we're feeling very good on the whole about this year and, strength going into next.
And so while the growth trends will likely not be linear, We remain optimistic with our
full
inclusive of a $500,000,000 auto loan securitization in the back half of the year. Full year average deposit growth expected to be 3 to 5%. And you you know it for internal forecasting and guidance purposes, we continue to assume no additional interest rate changes. Consistent with our approach over the last few years. And while it appears likely that the Fed might act again this year, it serves us well to take a more conservative approach.
In our core NIM to be up modestly in 2018. On the expense side, we are expecting a 2 to 4% decrease decreased from the 2017 GAAP non interest expense of $2,700,000,000. Our expectations include improvement in the efficiency ratio to a range of 55 to 57% as well as we are targeting positive operating leverage for the 6th consecutive year. We anticipate net charge offs will remain below our long term goal of 35 to 55 basis points. And importantly, we've lowered our expectation for the effective tax rate to the 15 a half to 16 a half percent range.
The range is fully reflective of federal tax reform. Now looking beyond 2018, we recently began a new year through 3 year strategic planning process. Our past 2 strategic plans significantly advanced the company's financial performance and competitive positioning. To continue this momentum, our initial areas of focus for the 2018 strategic planning process, our number 1 top line revenue growth 2, capital Optimization, and 3, business model evolution incorporating expected disruption. As we've stated previously, an important outcome of the strategic planning process will be new long term financial goals for the company.
And we expect to be in a position to communicate those later in the year. So with that, let me now turn it over to Mac for an overview of the financials. Mac?
Thanks, Steve. Slide 6 provides the highlights of the first quarter. As Steve mentioned, we had a good first quarter. It was also a clean quarter as there were no significant items. We reported earnings per common share of $0.28 for the first quarter, up 65% over the year ago quarter.
The year ago quarter included a $0.04 per share reduction due to significant items related to the FirstMerit integration. Return on assets was 1.27%, Return on common equity was 13% and return on tangible common equity was 17.5%. We believe all three of these metrics distinguish Huntington among our regional bank peers. Our efficiency ratio for the quarter was 56.8%. Cancel book value per share increased 2% sequentially and 9% year over year.
During the first quarter, we repurchased $48,000,000 of common stock, representing 3,000,000 shares at an average cost of 15.83 per share. This completed the 308,000,000 buyback authorization under our 2017 our plan. Turning to Slide 7. Total revenue was up 3% from the year ago quarter. Net interest income was up 5% year over year due to a 5% increase in average earning assets, while the net interest margin was unchanged.
Non interest income increased 1% year over year with increases in capital market fees, card and payment processing revenue, and trust and investment management fees, partially offset by lower mortgage banking income and a reduction in gains on the sale of loans, primarily related to the sale of an equipment finance loan into the year ago quarter. While both mortgage and SBA originations were higher year over year, compression and secondary market spreads in mortgage banking, and the timing of SBA loan sales resulted in year over year declines in these fee categories. FirstMerit related revenue enhancement opportunities remain on track to deliver over $100,000,000 of revenue in 2018 with an efficiency ratio below 50%. As we stated before, these projections are included in our 2018 guidance. Non interest expense decreased 10% year over year due entirely to $73,000,000 of significant items expense in the year ago quarter, related to the integration of FirstMerit versus no significant items expense in the current quarter.
Expenses were flat with the prior quarter. It should be noted that expenses are historically higher in the second quarter, primarily driven by the timing of compensation associated with long term incentives and seasonally higher marketing expense, which combined could add up to $20,000,000 compared to the first quarter. However, these are just timing differences. And as Steve mentioned earlier, we remain comfortable with full year guidance, including full year expectations for non interest expense per analyst estimate. For a closer look at the income statement details, please refer to the analyst pack and press release.
Turning to Slide 8. Average earning assets grew 5% from the first quarter of 2017. This increase was driven by a 5% increase in average loans and lease and a 3% increase in average securities. The increase in average securities primarily reflected an increase in direct purchase municipal instruments in our commercial banking sector Average C and I loans increased 1% year over year with growth centered in middle market banking. On a linked quarter basis, average C and I loans increased 3% or 12% annualized with broad based growth in specialty, corporate and middle market banking.
Average commercial real estate loans were flat year over year as we have conservative conservatively tightened CRE lending. Specifically in multi family retail and construction to remain consistent with our aggregate moderate to low risk appetite and to ensure appropriate returns on capital. Average auto loans increased 9% year over year as a result of consistent and disciplined loan production. Originations totaled $1,400,000,000 for the first quarter of 2018, up 1% year over year. Average new money yields on our auto originations 3.86% in the first quarter, up from 3.52% in the prior quarter.
Average RV and marine loans increased 32% year over year reflecting the success of our expansion of the business into 17 new states over the past 2 years. Average residential mortgage loans increased 18% year over year, reflecting continued strong demand for mortgages across our footprint as well as the benefit of our ongoing investment in former FirstMerit geographies, particularly Chicago. As typical, we sold the agency qualified mortgage production in the quarter, and retained Jumbo mortgages and specialty mortgage products. Turning attention to the chart on the right side of the slide. Average total deposits increased 1% from the year ago quarter, including a 3% increase in average core deposits.
In the first quarter, we began to see customer migration into higher yielding positive products, such as CDs and money market accounts. Moving to Slide 9. Our net interest margin was 3.30% for the first quarter, unchanged from both a year ago and linked quarter. Purchase counting accretion contributed 8 basis points to the net interest margin in the first quarter, down from 10 basis points in the prior quarter, and 16 basis points in the year ago quarter. After adjusting for purchase accounting accretion in all quarters, the core NIM was 3.22 compared to $3.20 in the prior quarter and $3.14 in first quarter of 2017.
Growth in core NIM over the past year has more than offset the benefits in purchase accounting accretion. Slide 29 in the appendix provides information regarding the scheduled impact of FirstMerit purchase accounting for 20182019. Our deposit costs remain well contained as consumer core deposits were up 5 basis points year over year and commercial core deposits were up 18 basis points. With the market outlook for continued rate hikes and increasing deposit competition, we locked in fixed rate term deposits and selectively increased rate to grow and retain core relationships, providing better economics for the bank relative to the cost of wholesale funding. On the earning asset side, our commercial loan yields increased 36 basis points year over year, while consumer loan yields increased 11 basis points.
On a linked quarter basis, commercial loan yields increased 14 basis points, while consumer loan yields increased 3 basis points. Moving to Slide 10, our cycle of 8 deposit beta remains low at 17% through the first quarter of 2018, and roughly in line with the average of our peers that have reported so far. As we told you last quarter, we are seeing increased deposit competition as competitors conduct various product and pricing tests across our footprint. As a result, we anticipate a continued increase in deposit betas this year, driven by both mix and cost. Assuming 2 additional rate increases in 2018, our current forecast assumes a positive beta of approximately 50% for calendar year 2018, with a higher proportion of incremental deposit growth coming from higher cost products, including money markets and CDs.
Slide 11 illustrates the continued strength of our capital ratios. During the first quarter, we converted 363,000,000 of high cost Series A preferred equity into common shares. And subsequently, if $500,000,000 of attractively priced Series E preferred equity, improving our capital ratios. Note that the 1st quarter preferred dividend expense does not include any dividend on the dollars will be approximately $21,000,000 or $3,000,000 higher than the future quarterly run rate of approximately 18,000,000 to account for the partial quarter Series E dividend. Tangible common equity ended the quarter at 7.70 percent up forty two basis points year over year.
Common Equity Tier 1 or CBT 1 ended the quarter at 10.49 percent, or 75 basis points year over year and above our 9% to 10% operating guideline. We believe our earnings power capital generation and risk management discipline will support a higher dividend payout ratio over time. As we have previously stated, capital priorities are 1st organic growth, 2nd, support the dividend, and third, everything else, including buybacks. With respect to this year's CCAR, we have a unique opportunity as a result of the 2 preferred transactions which pushed CET1 above the high end of Credit quality remains strong in the quarter. Consistent prudent credit underwriting is 1 of Huntington's core principles, and our financial results continue to reflect our disciplined approach to risk management and our aggregate matter to low risk appetite.
We booked provision expense of $68,000,000 in the first quarter compared to charge offs of $38,000,000. The level of provision expense in the quarter reflected the strong commercial loan originations as well as continued migration of the acquired FirstMerit portfolio points of average loans and leases, which remained below our long term target of 35 to 55 basis points. Net charge offs were down 3 basis points from the prior quarter the year ago quarter. CRE had net recoveries again this quarter, driven by one large relationship. As usual, there's 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 increased 2 basis points linked quarter to 1.01% and coverage of non accrual loans was 188 percent. Turning to Slide 13, non performing assets increased $31,000,000 or 8% linked quarter. The NPA ratio increased 4 basis points sequentially to 59 basis points. From 3.53 percent to 3.60 percent. Our 90 day plus delinquencies declined 2 basis points.
MPA inflows increased 6 basis points. Overall asset quality metrics remain near cyclical lows, and some quarterly volatility is expected given the absolute low level of problem loans. Turning to Slide 14, We highlight 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 the focused execution of our core strategies. The strong level of capital generation positions us well to fund organic growth and return capital to our shareholders, consistent with our capital priorities.
The top right chart highlights the well balanced mix of our loan and deposit portfolios. And believe that the diversification of the balance sheet will serve us well over the cycle. We were pleased with the 2017 DFAST and CCAR results which provided important industry comparisons. The results illustrate our strong enterprise risk management and our discipline to operate within our aggregate moderate to low risk appetite. Our DFAST stress test results are highlighted in the bottom left.
Finally, the bottom right demonstrates Huntington's strong capital position. As we return to the key messages on Slide 15, let me turn the presentation back over to Mark for Q And A.
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. And then if that person has additional questions, He or she can add themselves back into the queue. Thank you.
Thank you. At this time we'll be conducting a question and answer session. First question comes from the line of Scott Siefers with Sandler O'Neill And Partners. Please proceed with your question.
Good morning guys. Good morning Scott.
First question, Steve, maybe for you, just wanted to talk about, the outlook a bit. So you guys have always been extraordinarily conservative on the rate outlook. It looks like it's going to come in more accommodative. Than is embedded in your outlook for no rate increases. So in a sense that difference ends up becoming kind of found money.
So I guess if we were to get another HEICO too, what is at a top level of the plan? Do you allow that somebody to drop to the bottom line or Do you think about maybe reinvesting, accelerating some costs, maybe being even more aggressive on taking deposit market share, etcetera? And what would be your thinking at a top level?
Well, we budget, we plan for for no rate increases, but we obviously run scenarios around it. Mark, Max shared that with you, you, Scott, on the call in terms of deposit betas, We do think this environment is one that's conducive to us growing organically. In in in a meaningful way, pleased with the first quarter and, and we closed with good pipelines as we come into the second quarter. So we would expect the organic growth to continue. And in that construct, look to continue to grow of both the deposit and loan side.
We're very focused on the fee side of the quarter and what we can do prospectively on that front as well. We had good SBA activity, for example, but we ended up seeing a lot more of a construction nature than we've had before. So it's a sign of of capital investment. There is a, there's a belief that by operating in this more conservative fashion, we'll be a little more agile as we move forward with
the benefit of rate increases. Anything you want to add that? Scott, the way I think about it is, a 25 basis point increase in rates on an annual basis is about $25,000,000 in margin an annual basis. So that obviously takes a lot of assumptions around what we're expecting from the deposit betas and competition in the marketplace. And of course, the flattening yield curve has not been conducive to to that either.
So, we're a little bit cautious as we move through this. We do think there will be opportunities for increasing rates But at the same time, we're focused on growing core deposits. We had great core deposit growth year over year at about 3% and we aim to continue to do that.
Yes. Okay. I appreciate that. And I guess what I was getting at is, let's say, you get that, some portion of the $25,000,000 let that drop straight to the bottom line? Or do you use that as an opportunity to maybe spend a little more than you would have anticipated?
Just given that sort of the disconnect between how the seems likely to pan out in terms of rate moves versus what you guys are forecasting in the guide.
Yes. So Scott, we have a significant investment built into the 2018 budget already. So, clearly, we will be opportunistic as we think about what might happen from a rate increase perspective. And I would expect that the majority of that would drop from the bottom line, but we'll selectively take a look at investment opportunities on the digital front and and customer experience and our colleagues.
Okay. All right. Perfect. And then just maybe one sort of TTEC follow-up. What was it that led you to you guys to improve the, tax rate guide just a little bit.
I mean, I know it's not huge, but just curious your thoughts
Yeah, what it really came down to, Scott, is we'd like to give you ranges that are meaningful in terms of actually being able to achieve and fall within the range. And the back matter is 17% was just too high. So that's why we felt 15.5% to 16.5% was a better a better range for us to consider going forward.
Thank you. Our next question comes from the line of John Pancari with Evercore ISI. Please proceed with your question.
Morning. This is actually Sam Ross on for John this morning. I just had a question about the ROTC guidance. I appreciate fact, you guys are currently, reviewing your your 3 year plan. I'm just wondering given the fact of where your 1Q ROTC came in, What do you guys think is an appropriate level for 2018 for you guys to operate in?
So, so, Sam, it's Max. So I, I, I would expect to, to be in that, in that range. I mean, we're in the process of going through the the long term strategic plan. We're going to come out later this year with our new expectations, for for all those metrics. It's really important to keep in mind that we're going to operate within an aggregate moderate to low risk appetite and a 17.5% RoTCE with an aggregate moderate to low risk appetite is pretty good in our estimation.
So I wouldn't expect that, you're going to see significant change in that goal going forward, but we'll go through the strategic planning process and we'll, let you know later this year.
Fair enough. And then just looking at the balance sheet, in terms of the non interest bearing deposits, I know you guys touched upon it in your prepared remarks. About, about a mix shift that you guys were seeing into more higher interest rate products. I'm just wondering, Was there anything outside of seasonality that you can maybe provide a little bit more color on of, of the sizable decline in noninterest bearing deposits? I think that'd be helpful.
Thanks.
Yes, I think what's happening, Sam, is you're seeing our commercial customers in particular, be much more sensitive in terms of what's happening in the rate environment. And we're seeing them move balances from non interest bearing into interest bearing, which I think you would expect in this environment. So that would be an additional factor on top of seasonality.
And would you expect that dynamic to continue in 2018 or, what what should we think about in terms of that?
Yeah. At some point, you know, they they complete some movements that they want to make from one category to the other. Clearly, as rates continue to increase, we're going to have commercial customers ask for some sharing of those rates. But I think the mix shift should probably slow down as we move forward. Got it.
Thanks for taking my questions.
Thank you.
Thank you. Our next question comes from the line of Ken Usdin with Jefferies. Please proceed with your question.
Hi, good morning. This is actually Josh on for Ken. Hey guys. Average wholesale funding showed a large sequential increase this quarter. Do you think there's potential to remix these wholesale sources into deposits?
And then how are you thinking about funding loan growth going forward?
Yes. So we, we are actively thinking about what we need to do from a deposit rate perspective to bring wholesale funding down, particularly the overnight category. When we think about what we do on the commercial customer deposit pricing, we think about, what rate we would provide to them relative to the cost of overnight funding or our first wholesale funding. So I would expect that you're going to see that continue to come down over time. And it should be an opportunity for us as we think about, just to train off and the rate improvement when we move to commercial deposits.
So I think, if you take a look at the period. In particular, you'll see that's already down significantly, that being the overnight funding. And then Going forward, we are focused on core deposit growth. Like I mentioned in my comments, we grew 3% in core deposits year over year. Which I think is a pretty good showing relative to our peers in the industry.
We've had a lot of success with, a CD product And we were looking at some money market opportunities as well. So I think core deposit funding will be the primary way we're going to fund going forward.
Okay. And we've heard from some of your peers that they're seeing a pretty healthy benefit from the rollover of their swap portfolios, Could you just speak to what you're seeing in regards to this?
Well, it's, so at this point, All of our asset swaps are off at this point. We have no asset swaps on. The last asset swap rolled off in in the first quarter. You know, we, we evaluate some of the debt swaps we have from time to time and that can present an opportunity for us. But have not taken any action there as of yet.
Josh, thank you for your question. I was
actually referring more to the
ruling over the spreads. So, better, kinda new money spreads from versus what's rolling off. As that liability side swap portfolio rules?
So
clearly, so we're we probably do have opportunities there. I don't think it would be large in the scheme of things though for us.
Got it. Okay. Thanks for the questions guys.
Thank you. Our next question comes from the line of Steven Alexopoulos with JP Morgan. Please proceed with your question.
Hey, good morning, everybody. I'll start. First on the loan growth. You guys had really solid C and I loan growth in the quarter. And Steve, you're very optimistic in regards to business confidence, right, and the economic strength of the footprint.
As you look at the pipeline, Could the high single digit growth you put up this quarter on average loans continue in the 2nd quarter, or is that really just an anomaly the way you look at it?
The pipeline that we came into the year with was very strong. We had a surgeon activity late in the year. So, first quarter was very very good with the carryover pipeline. As we come into the second quarter, we also have a sound pipeline across all the segments. All of our businesses.
And so there's a there's an underlying sense of economic activity that we're able to participate in with our to our customers that we would expect to carry forward with the year. We clearly are seeing more CapEx related investment than we have in in quite a few years, at this stage, Steven.
Okay. So is that why the average was so strong in the quarter? Is that your customers spending? I mean, did line utilization increase in the quarter?
This is Dan. Line utilization was up just a tick. So, that really benefit us all that much. I do think we've seen more of an evening out of where the growth is coming from core middle market has been good. I think we are not seeing the impact we saw last year in the large corporate space.
I think we're actually seeing a bit of a pickup there. And then some of the medicals as well. So It's a good broad based contribution. And as Steve said, the pipeline remains fairly strong.
Okay. And then for my other question, I wanted to follow-up on the commentary around digital initiatives and what you're doing on the customer experience side. What's the expected spend on technology this year and how does that compare to last year? Thanks.
Yes. So, Steven, we don't disclose the spend on tech I will tell you that it's up year over year, in terms of what we're investing in technology development. And I would also tell you that, proportion of that allocated to digital is up significantly year over year.
It's up significantly year over year, is that being said?
Yes. Okay.
Okay. Thanks for taking my questions.
Thank you.
Thank you. Our next question comes from the line of Matt O'Connor with Deutsche Bank. Please proceed with your question.
This is actually Ricky Dodds on for Matt's team.
Hey, Ricky.
Hi, just wanted to hear your thoughts on reserve build going forward. We've seen a number of your peers have large reserve leases this quarter. Just wondering if you could provide some color for Huntington going forward. I know you have some FirstMerit renewals and you have stronger loan growth, but wondering if you could just provide a little more color there.
Sure. Well, in the quarter, clearly, with the loan growth, that is going to come with additional reserves. So that's a large piece of it. The first merit impact is still there, although that's lessening each quarter. And then we did have, some modest migration in the criticize and non accrual loans that also contributed to the build.
But as we've said, Over time, we expect the level of provision to moderate with both loan growth and more normalizing credit performance, although we expect the net charge offs to continue to be below our long term expectation. So, as we've said, a slow build back up in the reserve, but it'll be modest than the flow ramp.
Got it. And then maybe just a follow-up on loan growth. It was particularly Sean and you guys called out the core middle market. I was wondering if you could provide any specific colors on industries or geographies that may be outperforming or verticals. Just wondering if you had any color there?
Well, I think in our obviously in our heavy manufacturing markets, Detroit, in particular, we're seeing strong demand there. But throughout our region, we have many areas that are that are involved in manufacturing. Chicago continues to be a strong growth market and that is far more diversified. I would say Really, most industries that we're looking at, I would say would have a positive outlook, manufacturing wholesale etcetera. And so really pretty good reads from all of our customers across most industries.
Okay. Thanks guys.
Thank you. Our next question comes from the line of Marty Mosby with Reining Sparks. Please proceed with your question.
Good morning.
Hi, Marty.
I wanted to ask, the only weakness really on the revenue side was in 2 categories, loan sale gains and mortgage banking, was curious in a sense of know, I know you had some balance sheet optimization coming out of the merger. So I've I I was trying to figure out was the, you know, 15 to $18,000,000 kind of that. And now we're back down to a $8,000,000 to $10,000,000 of loan sale. And then as mortgage banking seasonal, have you seen any pickup or improvement in pricing as well as originations for the 2nd quarter in that feed line item.
Yes, Marty, it's Max. So, on the loan sale, question, I would tell you that a lot of it is timing of SBA in the first quarter. So originations are actually up year over year. So good continued progress there, particularly as we move into Chicago and Wisconsin. So I thought you this is really a timing issue for the most part.
In the first quarter of last year, we did have a large, equipment sale, that contributed to the first quarter. And those are lumpy, as you know, so that again is kind of a timing issue. On the mortgage origination side, again, volumes are up, but available spreads are down. And a lot of the origination pickup has come from the First Marriott expansion in Chicago and Wisconsin. And I would also tell you kind of getting stronger in some of the core markets, primarily on the FirstMerit side.
So we're pleased with what we're seeing from an origination perspective. But again, with the sale of spread being down, that's impacted the feeling.
And then, you know, purchase accounting accretion is, one of those things that is forced upon us but has been having some impacts when you start looking at just, you know, kinda, you know, how the market, you know, views your earnings. You know, now that we got a year to kinda look back, you've cut your purchase kind of accretion in half, but, you know, held your margin flat and actually grown net interest income. Do you feel like, you know, with the guidance, it seems like you're feeling very comfortable that as that headwind kind of slows down that the balance sheet growth and then the core margin expansion would actually, you know, begin to really pick up some pace relative to whatever loss you
might have in purchase accounting accretion. Yes, I'm very pleased with what we're seeing in the core margin. We've increased at two basis points per quarter since the first quarter of 2017. And we expect that can continue in 2018 as well. So, right now, the guidance we're giving is kind of a flat reported margin as we continue to burn off the purchase accounting accretion.
Could it be a little bit better? It might be. It just depends on where where deposit pricing goes and what it's going to take to fund the balance sheet. But, you know, very, very pleased with how we've kind of come through the run off of purchase accounting And I think it really is a disciplined pricing on both the asset and the liability side that's allowed us to do that.
And then just the the last thing, if you look at, you know, flat, you know, fed funds from here, but your core margin is still improving, is that just like what I think you've highlighted the fact that, market rates are higher than the portfolio, both in securities and loans? So rounding up those yields, just with, you know, kind of stagnant rates where they're at right now is a very possible, you know, and reasonable outcome.
Yeah. I would agree with that. As we look at new money, rates, they're generally higher than what's in the portfolio. You know, we still have some purchase accounting impact that we're swimming through there. But again, we're very disciplined on how we think about pricing and the asset side of the balance sheet.
And, even in a flat environment, we're going to continue to see new money come on at higher rates than the portfolio.
Thanks. Thanks Marty.
Thank you. Our next question comes from the line of Peter Winter with Wedbush Securities. Please proceed with your question.
Good morning.
Hey, Peter.
You guys talked about the seasonal increase in expenses in the 2nd quarter. I'm just wondering would that be offset with a a seasonal increase on the revenue side? And and so, therefore, maybe the efficiency ratio should be at least steady. In the second quarter?
Yes, Peter, it's Max. So yes, typically we do see a seasonal increase in revenue, in the second quarter. It does the 2 are disconnected, of course, because the increase in expense has primarily to do with just the timing of long term equity compensation, as well as seasonal marketing, which typically is higher in the second and third quarters and then declines in the 4th quarter. So, based on that, it wouldn't surprise me if, if the efficiency ratio stayed in the same level, because we do see seasonality in revenue to the upside in the second quarter.
Okay. And then a separate question, it's minor, but there was that uptick in non performing assets. And I understand that there was volatility at the bottom, but could you just give a little bit of color on the increase in NPAs this quarter?
Sure. This is Dan. So, not industry driven. We've had happens from time to time when you're down at very low levels of NTA. So any couple of credits can move it.
We had 3 credits in the quarter in unrelated industries. So no trends that were overly concerned about. It was really idiosyncratic events, particularly to those 3 individual credits.
Okay.
Thank you.
Thank
you. Our next question comes from the line of Brock Vandervliet with
Good morning. I just want to circle back on the comment on deposit betas. I it would it seemed like, you may just be being conservative with a, you know, 50% deposit beta that's clearly not visible in the numbers at the moment. Are you seeing, is this, you know, caution on the on the commercial side, you noted the change in potential change in category that's, driving some of that commentary?
Yeah, Brock, it's Max. So, you know, the 50% reference would be to any rate increases in 2018. So, that might be a little conservative as we think about it. But again, we're very focused on growing core deposits. If you take a look across our region and who we compete with, we think it's very rational.
We see what's happening and there's lots of testing from a pricing and product perspective. We're doing the same thing. But clearly, I think it's a good assumption for us to think about for 2018, just given the environment and the desire for us to contain the group.
Got it. Okay. And separately, Marine and RV, clearly growing very rapidly as that's been a new initiative for you. How large is that likely to become given that we are late in the cycle?
Yes, this is Dan. Well, we do see a growth opportunity out there and we feel very comfortable because the quality of the borrowers that we're originating credit for is really in the super prime range. So I think given the fact that we've expanded our markets, there's a big universe out there. The competition is not as robust as in, say, indirect auto. But we're originating at 790 plus FICO for bid priced, boats and RVs with, folks with the demonstrable liquidity, all these deals are individually underwritten.
So believe that there is a good potential out there for high quality assets. We have established a concentration limit. So our growth will be moderated by that limit, but we have plenty of runway that we think will serve us well as we build that business further.
Our next
question comes from the line of John Strum with RBC Capital Markets. Please proceed with your question.
Just following up on Brock's question, I hate to go back to deposit beta again, but basically what you're saying is at this point, you're performing just like everybody else in the mid teens But going forward from here, you expect the pressure to step up. That's all you're saying. Is that right?
John, I think we're, we're kind of building that into the way we're thinking about the forecast. Again, we we we like to to be conservative from a rate outlook perspective. We like to understand what the revenue environment is going to be. And then from that, determine what investments we want to make and how we manage the expense line. So It just keeps us from whipsawing the business segments and the colleagues in terms of every day out there doing their job.
So yeah, I think that's exactly right, the way you stated that.
Okay, okay. Related question on the revenue growth guidance is the same at 4% to 6%. As the prior quarter, but we did get the March increase. If we get a couple more is is the MAC view of the world that the margin can drift higher?
Yes, I think it can. I mean, keep in mind that as I mentioned earlier, kind of a 25 basis point increase is worth $25,000,000 on a full year basis. That's about a 0.5% growth in revenue. So the 25 basis point increase in March, wouldn't cause us to do anything to change. Our revenue guidance of 4% to 6%.
But clearly, in our rising rate environment, if we get the increases as might be expected, I would expect the margin to move forward.
Okay, good. And then if I can just squeeze in one more, Steve, you made a comment on loan growth, where you don't expect it to be linear. Is it just a nuanced comment? Or is there any point you're trying to make on that?
No, we just had a really strong first quarter and while we enter the second quarter with good pipelines across all products. Just trying to be a bit cautious with in the context of the full year. The outlook and optimism we see that we've communicated is abundant throughout the marketplace. So, if anything, there may be a little upside.
Okay. Okay. Thanks guys. I appreciate it.
Our next question comes from the line of Terry McEvoy with Stephens Inc.
Good morning. Hi, Gary. Hi. The consumer auto yields were down about 5 basis points quarter over quarter and that's after, kind of trending higher throughout 2017. I believe you changed the credit scoring model early last year.
Were there any tweaks made to that model earlier in the first quarter and what are your thoughts on yields coming down?
No tweaks. Yes, no tweaks and sorry, it's probably just accounting related. So we're seeing the run off and some purchase accounting entries on that book and that's likely what's driving it.
Okay. And then as a follow-up, maybe
a question for Dan, a few of your peer banks or national banks have scaled back expectations on CRE growth. This year, just based on, call it, market competition, what are your thoughts on incremental growth going forward after pretty, pretty solid growth here in the first quarter?
Yes, I mean, CRE can be a bit lumpy because the various projects can move the needle So we are continuing to support our core customers, but we've been pretty cautious in making sure that we have lessened our construction exposure recently, as we've noted before, being careful on multifamily and retail. But we're continuing to originate. We're still seeing good good deal flow. And we are choosing those products or projects that are, where we can get adequate structure and reasonable pricing. That will continue business as usual, in the series space.
Thank you. Ladies and gentlemen, we have reached the end of our question and answer session. I would like to turn the call back to Steve Steinauer for closing comments.
So, thank you very much. We feel very good about where we are. We obviously produced good results in the first quarter. We're confident about our year going forward. Our top priority is growing our core businesses, and that's continuing and we think there's more opportunity at hand, certainly throughout the year.
We're building long term shareholder value with top quartile financial performance, and we're maintaining strong risk management, with disciplined execution across our strategy. So like the performance and position, but feel we have upside, our opportunities to do better in a number of our businesses. So finally, I'd like to include a reminder that there's a high level of alignment between the board, management, our colleagues, and our shareholders. Collectively, the board and colleagues are the 7th largest shareholder in Huntington, and all of us are appropriately focused on driving sustained and want to emphasize long term performance. So thanks for your interest in Huntington.
We appreciate you joining us today, and have a great day.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.