Greetings, and welcome to the Huntington Bancshares 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. 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. You may begin.
Thank you, Melissa. Welcome. I'm Mark Muth, Director of Investor Relations for Huntington. Copies of the slides we'll be reviewing can be found on the investor relations section of our website, www.huntington.com. This call is being recorded and will be available as a rebroadcast starting about one hour from the close of 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 portion of today's call. As noted on slide two, today's discussion, including the Q&A period, will contain forward-looking statements. Such statements are based on information and assumptions available at this time and are subject to changes, risks, and uncertainties, which may cause actual results to differ materially. We assume no obligation to update such statements.
For a complete discussion of risks and uncertainties, please refer to this slide and material filed with the SEC, including our most recent Form 10-K, 10-Q, and 8-K filings. 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 million 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 17.5%. Average loans increased 9% annualized versus the fourth quarter of 2017, driven by disciplined, broad-based growth in both commercial and consumer loans. We're pleased with our first 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's strategies with the 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 risks. 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.
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 17.5% 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. I'd also like to take this opportunity to remind you of the considerable improvement in our financial performance since 2014, when we introduced these goals. In the first quarter of 2014, our return on tangible common was 11.3%, and our efficiency ratio was 66.4%.
Through our disciplined execution over the years, we've elevated Huntington from the middle of the peer group to peer-leading financial performance, driving a greater than 600 basis point improvement in ROTCE and almost 1,000 basis point improvement in the efficiency ratio alone. Let's now turn to slide 5 to review 2018 expectations 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. As we've noted previously, our footprint has outperformed the rest of the nation during the economic recovery that began in mid-2009. Unemployment 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, and 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. Four of our states, including Ohio, are expected to grow significantly faster than the nation as a whole. As a result of federal tax reform, we can expect continued business investment and expansion. We are seeing increased capital expenditures. It's important to remember that our commercial focus is primarily privately held businesses, and these companies are likely to reinvest tax benefits into their businesses to fund growth. As an aside, Site Selection Magazine's Governor's Cup for capital investments and new jobs created in 2017 support our expectations. Five of our 8 states placed in the top 10 of the nation for total qualifying new projects, with Ohio earning the number 2 spot overall.
These rankings and leading indicators confirm our optimism. Importantly, our loan pipelines remain solid across all footprints. As we get out and as I talk to different business owners, I can confirm this is a widespread level of optimism. In fact, 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. We're also seeing businesses now that are working on next year's pipelines of activity. 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. While the growth trends will likely not be linear, we remain optimistic with our full-year outlook.
We expect full-year average loan growth in the range of 4%-6%, inclusive of a $500 million auto loan securitization in the back half of the year. Full-year average deposit growth is expected to be 3%-5%. 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. While it appears likely that the Fed might act again this year, it serves us well to take a more conservative approach in our forecasting process. We expect full-year revenue growth of 4%-6%. We are projecting the GAAP NIM for the full year to be flat, and the core NIM to be up modestly in 2018. On the expense side, we are expecting a 2%-4% decrease from the 2017 GAAP non-interest expense of $2.7 billion.
Our expectations include improvement in the efficiency ratio to a range of 55%-57%, as well as we are targeting positive operating leverage for the sixth consecutive year. We anticipate net charge-offs will remain below our long-term goal of 35-55 basis points. Importantly, we've lowered our expectation for the effective tax rate to the 15.5%-16.5% range. The range is fully reflective of federal tax reform. Now looking beyond 2018, we recently began a new three-year strategic planning process. Our past two 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 are, 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. With that, let me now turn it over to Mac for an overview of the financials. Mac?
Thanks, Steve. Slide six 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%. Tangible book value per share increased 2% sequentially and 9% year-over-year. During the first quarter, we repurchased $48 million of common stock, representing three million shares at an average cost of $15.83 per share.
This completed the $308 million buyback authorization under our 2017 CCAR plan. Turning to Slide seven. 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 in the year-ago quarter. While both mortgage and SBA originations were higher year-over-year, compression in 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 million 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 million 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 million 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 estimates.
For a closer look at the income statement details, please refer to the analyst pack and press release. Turning to Slide eight. Average earning assets grew 5% from the first quarter of 2017. This increase was driven by a 5% increase in average loans and leases 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 segment. Average C&I loans increased 1% year-over-year, with growth centered in middle market banking. On a linked quarter basis, average C&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 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 $1.4 billion for the first quarter of 2018, up 1% year-over-year. Average new money yields on our auto originations were 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 two 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 deposit 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 the year ago and linked quarter. Purchase accounting accretion contributed eight 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 322, compared to 320 in the prior quarter and 314 in the 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 2018 and 2019. Our deposit costs remain well contained as consumer core deposits were up five 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 rates 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 three basis points. Moving to Slide 10.
Our cycle-to-date 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. 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 two additional rate increases in 2018, our current forecast assumes a deposit 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 million of high-cost Series A Preferred equity into common shares and subsequently issued $500 million of attractively priced Series E Preferred equity, improving our capital ratios. Note that the first quarter preferred dividend expense does not include any dividend on the new Series E due to the issuance timing. Therefore, the total second quarter preferred dividend expense will be approximately $21 million, or $3 million higher than the future quarterly run rate of approximately $18 million to account for the partial quarter Series E dividend. Tangible common equity into the quarter at 7.70%, up 42 basis points year-over-year. Common equity tier one, or CET1, ended the quarter at 10.49%, or 75 basis points year-over-year, and above our 9%-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, our capital priorities are, first, organic growth, second, 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 two preferred transactions, which pushed CET1 above the high end of our operating guideline of 9%-10%. Moving to slide 12. Credit quality remained strong in the quarter. Consistent, prudent credit underwriting is one of Huntington's core principles, and our financial results continue to reflect our disciplined approach to risk management and our aggregate moderate-to-low risk appetite. We booked provision expense of $68 million in the first quarter compared to net charge-offs of $38 million. The level of provision expense in the quarter reflected the strong commercial loan originations, as well as continued migration of the acquired FirstMerit portfolio into the originated portfolio.
Net charge-offs represented an annualized 21 basis points of average loans and leases, which remained below our long-term target of 35-55 basis points. Net charge-offs were down three basis points from the prior quarter and the year ago quarter. CRE had net recoveries again this quarter, driven by one large relationship. As usual, there is additional granularity on charge-offs by portfolio in the analyst package in the slides. The allowance for loan and lease losses as a percentage of loans increased two basis points linked-quarter to 1.01%, and coverage of nonaccrual loans was 188%. Turning to slide 13, non-performing assets increased $31 million, or 8%, linked-quarter. The NPA ratio increased four basis points sequentially to 59 basis points. The criticized asset ratio increased seven basis points from 3.53%-3.60%. Our 90-day plus delinquencies declined two basis points. NPA inflows increased six 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. We are both a consumer and commercial bank 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&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. 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. 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 key. Our first question comes from the line of Scott Siefers with Sandler O'Neill & Partners. Please proceed with your question.
Good morning, guys.
Morning, Scott.
Morning, Scott.
First question, Steve, maybe for you. Just wanted to talk about the outlook a bit. 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. In a sense, that difference ends up becoming found money. I guess if we were to get another hike or two, what is, at a top level, the plan? Do you allow that simply 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, et cetera? What would be your thinking at a top level?
Well, we budget. We plan for no rate increases. We obviously run scenarios around it. Mac shared that with 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 a meaningful way. Pleased with the first quarter. We closed with good pipelines as we come into the second quarter. We would expect the organic growth to continue, in that construct, look to continue to grow 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. We ended up seeing a lot more of a construction nature than we've had before. It's a sign of capital investment.
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, Mac?
Scott, the way I think about it is a 25 basis point increase in rates on an annual basis is about $25 million in margin on an annual basis.
That obviously takes a lot of assumptions around what we're expecting from deposit betas and competition in the marketplace. Of course, the flattening yield curve has not been conducive to that either. We're a little bit cautious as we move through this. We do think there will be opportunities from increasing rates. 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.
Yeah. Okay. All right. I appreciate that. I guess what I was getting at is, let's say you get some portion of the $25 million. Do you just 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've anticipated? Just given the sort of the disconnect between how you're likely to pan out in terms of rate moves versus what you guys are forecasting in the guide.
Scott, we have significant investment built into the 2018 budget already. Clearly, we will be opportunistic as we think about what might happen from a rate increase perspective. I would expect that the majority of that would drop to the bottom line. We'll selectively take a look at investment opportunities on the digital front and in particular in customer experience and our colleagues.
Okay. All right, perfect. Then just maybe one sort of ticky-tack follow-up. What was it that allowed you guys to improve the tax rate guide just a little bit? I know it's not huge, but just curious your thoughts.
What it really came down to, Scott, is we like to give you ranges that are meaningful in terms of actually being able to achieve and fall within the range. The fact of the matter is 17% was just too high.
Okay.
That's why we felt 15.5%-16.5% was a better range for us to consider going forward.
Okay. Perfect. All right. Thank you guys.
Thanks.
Thank you.
Thank you. Our next question comes from the line of John Pancari with Evercore ISI. Please proceed with your question.
Good morning. This is actually Sam Ross on for John this morning.
Sam.
I just had a question about the ROTCE guidance. I appreciate the fact that you guys are currently reviewing your three-year plan. I'm just wondering, given the fact of where your 1Q ROTCE came in, what do you guys think is an appropriate level for 2018 for you guys to operate in?
Sam, it's Mac. I would expect to be in that range. We're in the process of going through the long-term strategic plan. We're going to come out later this year with our new expectations 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. A 17.5% ROTCE with an aggregate moderate to low risk appetite is pretty good in our estimation. I wouldn't expect that you're going to see significant change in that goal going forward. We'll go through the strategic planning process, and we'll let you know later this year.
Fair enough. 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 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 the sizable decline in non-interest-bearing deposits? I think that'd be helpful. Thanks.
Yeah. 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. We're seeing them move balances from non-interest-bearing into interest-bearing, which I think you would expect in this environment. That would be an additional factor on top of seasonality.
Would you expect that dynamic to continue into 2018, or what should we think about in terms of that?
Yeah. At some point, they complete the movement 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. I think the mix shift should probably slow down as we move forward.
Got it. Thanks for taking the 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.
Hi, Josh.
Hey, Josh.
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? How are you thinking about funding loan growth going forward?
Yeah. 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 of cost of overnight funding or cost of wholesale funding. 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 the trade-off and the rate improvement when we move to commercial deposits. I think if you take a look at the end of period, in particular, you'll see that's already down significantly, that being the overnight funding. 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're looking at some money market opportunities as well. I think core deposit funding will be the primary way we're going to fund going forward.
Okay. 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, 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 the first quarter. We evaluate some of the debt swaps we have from time to time, that could present an opportunity for us, have not taken any action there as of yet. Josh, does that answer your question?
I was actually referring more to the rolling over the spreads, better kind of new money spreads versus what's rolling off as that liability side swap portfolio rolls.
Clearly, 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 JPMorgan. Please proceed with your question.
Hey, good morning, everybody.
Steven.
I want to start first on the loan growth. You guys had really solid C&I loan growth in the quarter. 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 second quarter? 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 surge in activity late in the year. The first quarter was 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. There's an underlying sense of economic activity that we're able to participate in 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 quite a few years at this stage, Steven.
Okay. Is that why the average was so strong in the quarter? Is it your customers spending? I mean, did line utilization increase in the quarter?
This is Dan. Line utilization was up just a tick. That really didn't 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 other verticals as well. It's good broad-based contribution. As Steve said, the pipeline remains fairly strong.
Okay. 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.
Yeah. Steven, we don't disclose the spend on technology. I will tell you that it's up year-over-year in terms of what we're investing in technology development. I would also tell you that the proportion of that allocated to digital is up significantly year-over-year.
It's up significantly year-over-year? Is that what you said?
Yes.
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.
Good morning, guys. This is actually Ricky Dodds on from Matt O'Connor'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 releases 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. That's a large piece of it. The FirstMerit impact is still there, although that's lessening each quarter. We did have some modest migration in the criticized and non-accrual loans that also contributed to the build. 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 expectations. As we've said, a slow build back up in the reserve, but it'll be modest and a slow ramp.
Got it. Then maybe just to follow up on loan growth, it was particularly strong, 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 obviously in our heavy manufacturing markets, Detroit in particular, we're seeing strong demand there. Throughout our region, we have many areas 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 on manufacturing, wholesale, et cetera. 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 Vining Sparks. Please proceed with your question.
Good morning.
Hi, Marty.
Hey, Marty.
I wanted to ask, the only weakness really on the revenue side was in two categories: loan sale gains and mortgage banking. Was curious in a sense of, I know you had some balance sheet optimization coming out of the merger. I was trying to figure out was the $15 million-$18 million kind of that, and now we're back down to $8 million-$10 million on loan sale. Is mortgage banking seasonal? Have you seen any pickup or improvement in pricing as well as originations for the second quarter in that fee line item?
Marty, it's Mac. On the loan sale question, I would say that a lot of it is timing of SBA in the first quarter. Originations are actually up year-over-year. Good continued progress there, particularly as we move into Chicago and Wisconsin. I view this as 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. Those are lumpy, as you know. That again, is kind of a timing issue. On the mortgage origination side, again, volumes are up, but saleable spreads are down. A lot of the origination pickup has come from the FirstMerit expansion into Chicago and into Wisconsin. I would also say kind of getting stronger in some of the core markets, primarily on the FirstMerit side.
We're pleased with what we're seeing from an origination perspective. Again, just with the sale of spreads being down, that's impacted the fee line.
Purchase accounting accretion is one of those things that is forced upon us but has been having some impact when you start looking at just how the market views your earnings. Now that we got a year to kind of look back, you've cut your purchase accounting accretion in half, but held your margin flat and actually grown net interest income. Do you feel like 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 begin to really pick up some pace relative to whatever loss you might have in purchase accounting accretion?
I'm very pleased with what we're seeing in the core margin. We've increased it two basis points per quarter since the first quarter of 2017. We expect that to continue in 2018 as well. 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 the positive pricing goes and what it's going to take to fund the balance sheet. Very pleased with how we've kind of come through the runoff of purchase accounting. I think it really is disciplined pricing on both the asset and the liability side that's allowed us to do that.
Just the last thing, if you look at flat Fed funds from here, but your core margin's still improving, is that just like what I think you highlighted, the fact that the market rates are higher than the portfolio, both in securities and loans. Rounding up those yields just with kind of stagnant rates where they're at right now is a very possible 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. We still have some purchase accounting impact that we're swimming through there. Again, we're very disciplined how we think about pricing the asset side of the balance sheet. 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 second quarter. I'm just wondering, would that be offset with a seasonal increase on the revenue side, and so therefore, maybe the efficiency ratio should be at least steady in the second quarter?
Yeah, Peter, it's Mac. Yeah, typically we do see a seasonal increase in revenue in the second quarter. The two 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 fourth quarter. Based on that, it wouldn't surprise me if the efficiency ratio stayed in the same level, because we do see seasonality in revenue to the upside in the second quarter.
Okay. A separate question. It's minor, but there was that uptick in non-performing assets. I understand that there's 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. Not industry-driven. It happens from time to time when you're down at very low levels of NPAs, any couple of credits can move it. We had three credits in the quarter in unrelated industries. No trends that we're overly concerned about. It was really idiosyncratic events particular to those three individual credits.
Okay, great. Thank you.
Thank you. Our next question comes from the line of Brock Vandervliet with UBS. Please proceed with your question.
Good morning. Thanks for taking my question.
Morning.
Morning. I just wanted to circle back on the comment on deposit betas. It seemed like you may just be being conservative with a 50% deposit beta that's clearly not visible in the numbers at the moment. Is this caution on the commercial side that you noted the potential change in category that's driving some of that commentary?
Yep, Brock, it's Mac. The 50% reference would be to any rate increases in 2018. That might be a little conservative as we think about it. 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. 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 continue to grow core deposits.
Got it. Okay. 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?
This is Dan. We do see 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. 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. We're originating at 790-plus FICO's for mid-priced boats and RVs with folks with demonstrable liquidity. All these deals are individually underwritten. We believe that there is good potential out there for high-quality assets. We have established a concentration limit, so our growth will be moderated by that limit. We have plenty of runway that we think will serve us well as we develop that business further.
Great. Thank you.
Thank you. Our next question comes from the line of Jon Arfstrom with RBC Capital Markets. Please proceed with your question.
Thanks. Good morning.
Hey, Jon.
Just following up on Brock's question. I hate to go back to deposit beta again, basically what you're saying is, at this point, you're performing just like everybody else in the mid-teens. Going forward from here, you expect the pressure to step up. That's all you're saying. Is that right?
Jon, I think we're kind of building that into the way we're thinking about the forecast. Again, we like to be conservative from a rate outlook perspective. We like to understand what the revenue environment is going to be, then from that determine what investments we want to make and how we manage the expense line. It just keeps us from whipsawing the business segments and the colleagues in terms of every day out there doing their job.
Yeah, I think that's exactly right the way you stated that.
Okay. Related question on the revenue growth guidance is the same at 4%-6% as the prior quarter. We did get the March increase. If we get a couple more, is the Mac view of the world that the margin can drift higher?
Yeah, I mean, keep in mind that, as I mentioned earlier, kind of a 25-basis point increase is worth $25 million on a full-year basis.
Yeah.
That's about a half a percent growth in revenue. The 25-basis point increase in March wouldn't cause us to do anything to change our revenue guidance of 4%-6%.
Yeah.
Clearly, in a rising rate environment, if we get the increases as might be expected, I would expect the margin to move higher.
Good. 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 that 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 in the context of the full year. The outlook and optimism we see that we've communicated is abundant throughout the marketplace. If anything, there may be a little upside.
Okay. Thanks, guys. Appreciate it.
Thanks, Jon.
Thank you. Ladies and gentlemen, as a reminder, if you'd like to join the question queue, please press star one at this time. Our next question comes from the line of Terry McEvoy with Stephens Inc. Please proceed with your question.
Good morning.
Hey, Terry.
Hi. The consumer auto yields were down about five 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.
Yeah, no tweaks. Terry, it's probably purchase accounting related. We're seeing runoff and some purchase accounting entries on that book, and that's likely what's driving it.
Okay. 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 solid growth here in the first quarter?
Yeah. CRE can be a bit lumpy because the various projects can move the needle. 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, been careful on multifamily and retail. We're continuing to originate. We're still seeing good deal flow. We are choosing those products or projects where we can get adequate structure and reasonable pricing. We'll continue business as usual in the CRE space.
Great. Thanks, Dan.
Okay.
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 Steinour for closing comments.
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. Like the performance and position, but feel we have upside or opportunities to do better in a number of our businesses. 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 seventh largest shareholder in Huntington, and all of us are appropriately focused on driving sustained, I want to emphasize, long-term performance.
Thanks for your interest in Huntington. We appreciate you joining us today, and have a great day.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.