Greetings, welcome to the Huntington Bancshares fourth quarter earnings conference call. At this time, all participants are on 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, Mr. Mark Muth, Director of Investor Relations. Please go ahead.
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 broadcast 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 Neumeier, our Chief Credit Officer, will also be participating in the Q&A portion of the 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 materials filed with the SEC, including our most recent Forms 10-K, 10-Q, and 8-K filings. Let me now turn it over to Mac for an overview of the financials.
Thanks, Mark, thanks to everyone for joining the call today. As always, we appreciate your interest and support. We are very pleased with our fourth quarter financial performance, including record net income for the third consecutive quarter and the accelerated achievement of all five of our long-term financial goals in the quarter. As I turn to slide three to review full-year results, please keep in mind that comparisons to 2016 are impacted by the inclusion of FirstMerit as the acquisition closed during the third quarter of 2016. We reported earnings per common share of $1 for full-year 2017, up 43% over 2016. This includes $0.09 per share of significant items related to the FirstMerit acquisition and $0.11 per share of reasonably estimated benefit from federal tax reform.
Also including the impact of the significant items, return on assets was 1.17%, return on common equity was 11.6%, and return on tangible common equity was 15.7%. Turning to slide four, we reported earnings per common share of $0.37 for the fourth quarter, up 85% over the year-ago quarter. This includes $0.11 per share of reasonably estimated benefit from federal tax reform. Also including the impact of significant items, return on assets was 1.67%, return on common equity was 17%, and return on tangible common equity was 22.7%. Our reported efficiency ratio for the quarter was 54.9%. As a reminder, this is the first quarter since the acquisition of FirstMerit that we did not incur merger-related expense, having completed the physical integration of FirstMerit in the third quarter of 2017. Tangible book value per share increased 2% sequentially and 8% year-over-year to $6.97 per share.
During the fourth quarter, we repurchased $137 million of common stock, representing 9.8 million shares at an average cost of $14 per share. Turning to slide five, total revenue was up 4% from the year-ago quarter. Net interest income was up 5% year-over-year due to a 3% increase in average earning assets and a five basis point increase in the net interest margin. Non-interest income increased 2% year-over-year on strength in capital markets fees, card and payment processing revenue, and trust and investment management fees, partially offset by a reduction in gains on the sale of loans related to the balance sheet optimization strategy executed in the fourth quarter of 2016.
Non-interest expense decreased 7% year-over-year due entirely to $53 million of significant items expense in the fourth quarter of 2016 related to the integration of FirstMerit, versus no significant items expense in the fourth quarter of 2017. Excluding significant items, non-interest expense in the fourth quarter of 2017 grew $5 million, or 1% from the year-ago quarter, primarily due to the impact of annual compensation increases. For a closer look at the details behind the calculations, please refer to the reconciliations contained on pages 21 and 22 of the presentation slides or in the release. Slide six illustrates that we delivered positive operating leverage again in 2017. This is an important annual goal for us, and we are pleased that we accomplished this for the fifth consecutive year. Turning to slide seven, average earning assets grew 3% from the fourth quarter of 2016.
This increase was driven by an 8% increase in average securities and a 4% year-over-year increase in average loans and leases, which were partially offset by a reduction in held-for-sale assets due to the balance sheet optimization strategy executed in the fourth quarter of 2016. The increase in average securities reflects the reinvestment of cash flows, including the proceeds of the auto securitization in the fourth quarter of 2016 and additional investments in liquidity coverage ratio Level 1 qualifying securities. Average C&I loans decreased 1% year-over-year, primarily reflecting the headwinds in corporate banking discussed in the first three quarters of 2017. While not impacting average balances materially C&I balances ended the quarter on a strong note, with period-end balances up 2.3%, or just over 9% annualized versus the prior quarter end.
We saw the bulk of the growth in the final few weeks of the quarter, likely in part resulting from the removal of uncertainty regarding federal tax reform, coupled with the normal late quarter growth in commercial loans that we have experienced for the past few years. Average commercial real estate loans were flat year-over-year as we have strategically 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 10% year-over-year, with the fourth quarter representing another solid quarter of consistent and disciplined loan production. Originations totaled $1.4 billion for the fourth quarter of 2017, up 9% year-over-year. Average new money yields on our auto originations were 3.52% in the fourth quarter, down from 3.62% in the prior quarter.
This decline was primarily driven by the normal seasonal mix shift to new car sales in the fourth quarter. Average RV and marine loans increased 30% year-over-year, reflecting the successful expansion of the business into 17 new states over the past year. Note that the fourth quarter is seasonally the weakest for loan production in this business, but this quarter's production exceeded the business plan, and we remain optimistic for growth in 2018. Average residential mortgage loans increased 15% 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 the jumbo mortgages and specialty mortgage products. On a period end basis, total loans increased 5% from a year ago, driven by strength in consumer lending.
Turning attention to the chart on the right side of slide seven, average total deposits increased 1% from the year ago quarter, including a 3% increase in average core deposits. Average demand deposits increased 4% year-over-year. We remain pleased with the trend in core deposits, particularly the increase in low-cost DDA. This reflects the addition of FirstMerit's low-cost deposit base, as well as our continuing focus on checking account relationship acquisition. The decline in period-end total deposits from the prior quarter was primarily due to seasonal decreases in government banking and expected fluctuations within our specialty banking deposit relationships. Moving to slide eight. Our Net Interest Margin was 3.30% for the fourth quarter, up five basis points from the year ago quarter.
This increase reflects a 23-basis point increase in earning asset yields and a seven-basis point increase in the benefit of non-interest-bearing funds, balanced against a 25-basis point increase in the cost of interest-bearing liabilities. Importantly, our cost of core interest-bearing deposits was only up 12 basis points. On a linked-quarter basis, the Net Interest Margin increased by one basis point, driven by a five-basis point improvement in earning asset yields and a one-basis point increase in the benefit of non-interest-bearing funds, partially offset by a five-basis point increase in the cost of interest-bearing liabilities. The increase in funding cost was more heavily weighted to wholesale funding as we continue to remain pleased with our ability to successfully lag deposit pricing, especially on core consumer deposits where the rate paid remained flat sequentially.
Purchase accounting accretion contributed 10 basis points to the net interest margin in the fourth quarter, down from 12 basis points in the prior quarter. After adjusting for purchase accounting accretion in all quarters, the core NIM was 3.20% in the fourth quarter of 2017 compared to 3.18% in the prior quarter and 3.07% in the fourth quarter of 2016. Growth in core NIM over the past year has more than offset the reduction in the benefit from purchase accounting accretion. As I just mentioned, and calling your attention to the orange line at the bottom of the graph on the left, our cost of core consumer deposits was 22 basis points for the fourth quarter. This represents a four-basis point increase over the year ago quarter and was flat sequentially, illustrating the strong core consumer deposit base we enjoy and our ability to successfully lag deposit pricing.
We have seen consumer and business banking deposit pricing remain relatively steady in the face of recent Fed interest rate hikes, with the majority of pricing pressure being limited to government banking, corporate banking, and the upper end of commercial middle market. In the quarter, we selectively increased rates to grow and retain core deposit balances on certain corporate relationships, providing better economics for the bank relative to the cost of wholesale funding. On the earning asset side, our commercial loan yields increased 37 basis points year-over-year, while consumer loan yields increased 18 basis points. On a linked-quarter basis, commercial loan yields increased eight basis points, while consumer loan yields decreased one basis point, primarily related to the impact of purchase accounting. Security yields were up six basis points year-over-year and were up nine basis points compared to the prior quarter. Moving to slide nine.
We expanded the information provided regarding the impact of FirstMerit purchase accounting for 2017 and 2018 at a recent conference, and we have updated it here. Except for what we experienced in 2017, we do not include any accelerated accretion from recapture through early payoffs or extensions in the projected period. As we have stated previously, and has been proven out in our results the past six quarters, in reality, we are likely to experience loan extensions and early payoffs, resulting in accelerated accretion. Therefore, you are likely to see the accretion revenue scheduled for 2019 continue to be pulled forward as modifications and early payoffs occur.
Purchase accounting accretion is currently expected to represent a net interest income headwind of approximately $62 million in 2018 compared to 2017. However, the majority of the $62 million decline in purchase accounting revenue is expected to be offset by a $41 million reduction in provision expense related to the acquired FirstMerit loans, which is shown in the yellow bars. Importantly, as we think about quality of earnings, looking at the two circled orange bars, the net impact of pre-tax income from purchase accounting was approximately $13 million in 2017 and is currently expected to decline to only $3 million in 2018. Turning to slide 10, let's take a look at the progress against 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 five-year time horizon in mind, yet we achieved these long-term financial goals on a quarterly basis in the fourth quarter of 2017 due to the realization of the economic benefits of the FirstMerit acquisition. Fourth quarter 2017 results on a reported GAAP basis reflect the benefit of federal tax reform. Even with adjusting for this benefit, as shown on slide 27 in the appendix, we are realizing the scale and financial benefits of the acquisition. We are proud to have achieved all five of our long-term financial goals this quarter on both a GAAP and non-GAAP basis. Full year 2017 results on a reported GAAP basis reflect the cost of the FirstMerit integration and the tax benefit. Adjusting for these items, as shown on slides 26 and 27 in the appendix, we are already meeting the targets on an annual basis.
Importantly, we expect to achieve all five financial goals on a GAAP basis for full year 2018, two years ahead of schedule. We have recently begun our 2018 strategic planning process and will be sharing new long-term financial goals for the company later this year. Slide 11 highlights the FirstMerit-related cost savings and strategic revenue synergies. As promised, we are fully realizing the original announced $255 million of annualized cost savings, as evidenced by beating our $639 million non-interest expense target for the fourth quarter of 2017. Going forward, our focus is on executing the FirstMerit deal-related revenue enhancement opportunities. In 2017, we realized revenue of $48 million and expense of $36 million on these initiatives. The initiatives remain on track to deliver more than $100 million of revenue in 2018 with an efficiency ratio of 50%. These projections are included in our 2018 guidance.
Early success in the introduction of the full Huntington product suite through our Optimal Customer Relationship strategy and the strong results from SBA, RV and marine, and home lending expansion provide optimism for continued revenue growth. Slide 12 illustrates the continued strength of our capital ratios and a successful replenishment of our capital following the FirstMerit acquisition. Common equity tier one ratio, or CET1, ended the quarter at 9.89%, up 33 basis points year-over-year. As a reminder, our operating guideline for CET1 is 9%-10%. Tangible common equity ended the quarter at 7.34%, up 18 basis points year-over-year.
Moving to slide 13, I want to draw your attention to the fact that for the first time, our Series A convertible preferred is included in our fully diluted common shares calculation, since the conversion would actually be dilutive to earnings per share, albeit by an immaterial amount. This is why average fully diluted common shares increased by approximately 24 million shares from the third quarter of 2017 to the fourth quarter of 2017. On a separate and unrelated note, our common stock is currently trading at a level that would allow us to force mandatory conversion of the Series A convertible preferred as early as February 9th. The potential conversion would have a positive impact on our tangible common equity capital ratio and our CET1 capital ratio with an immaterial impact on earnings per share.
Should the conversion happen, we would take the opportunity to optimize our capital ratios subject to non-rejection in the 2018 CCAR submission. Moving to slide 14, 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 $65 million in the fourth quarter compared to net charge-offs of $41 million. Net charge-offs represent an annualized 24 basis points of average loans and leases, which remain below our long-term target of 35 to 55 basis points. Net charge-offs were down one basis point from the prior quarter and down two basis points from the year ago quarter. As usual, there is an additional granularity on charge-offs by portfolio in the analyst package and the slides.
The allowance for credit losses as a percentage of loans increased one basis point linked quarter to 1.11%, and the non-accrual loan coverage ratio remained flat at 223%. Turning to slide 15. Overall asset quality metrics remain strong. Non-performing assets increased $2 million or 1% linked quarter. The NPA ratio eased one basis point sequentially to 55 basis points. The criticized asset ratio decreased 27 basis points from 3.80% to 3.53%. Our 90-day delinquencies slightly declined. NPA inflows increased four basis points. Let me now turn the presentation over to Steve.
Thanks, Mac. Moving to the economy, slides 16 and 17 illustrate selected key economic indicators for our footprint. As we've noted previously, our footprint states have outperformed the rest of the nation during the economic recovery over the last several years. I remain optimistic on the outlook for the local economies across our eight states. The bottom left chart on slide 16 and the chart on slide 17 illustrate trends in unemployment rates across our footprint. As you can see, unemployment rates across the majority of our footprint remain near historical lows. The labor markets in our footprint have proven to be strong with several markets, such as here in Columbus, in Indianapolis, and Grand Rapids, where we've seen meaningful labor shortages. We've noted previously that we are seeing wage inflation in our expense base and certainly our customers are as well.
Housing markets across the footprint continue to display broad-based home price inflation while remaining some of the most affordable markets throughout the U.S. Consumer confidence in our region is at its highest level since 2000. Perhaps more importantly, I'd like to direct your attention to the map on the bottom right of slide 16, which illustrates the Philadelphia Fed's state leading indicator indices for our footprint. These leading indicators point toward a very favorable economic operating environment in 2018, as six of our eight states are expected to see an acceleration in economic activity over the next six months. The optimism illustrated by these leading indicators confirm our own optimism, which is based on the daily interactions our bankers have with our small business, commercial, and consumer customers. Our customer calling efforts have found widespread confidence across all of these customer segments.
Our loan pipelines remain good, including our commercial and business pipelines, which are stronger today than they were a year ago. While the near-term impact may be less predictable, we believe longer-term impact of the enactment of federal tax reform is positive for our customers, our region, and for Huntington. We expect positive economic impact on the manufacturing and business expansion throughout our footprint from increased capital expenditures across a wide array of industries and businesses from the reduced corporate tax burdens, as well as the impact of repatriation of foreign earnings by a number of corporations. In addition, it's important to remember that our commercial focus is primarily on privately held businesses. These businesses stereotypically were more likely to pay the full statutory tax rate, and therefore are going to see materially improved profitability and cash flow.
Importantly, these companies are also likely to reinvest those tax benefits into their businesses to fund growth. Moving to slide 18, Huntington's strong position to deliver consistent through the cycle shareholder returns. The strategy entails reducing volatility of results and returns, achieving top-tier performance over the long term, and maintaining our aggregate moderate to low risk profile throughout. I'd like to highlight the graph in the top left quadrant, which represents our continued growth in pre-tax, pre-provision net revenue as a result of the focused execution of our core strategies, plus the economics of FirstMerit. This strong level of capital generation positions us well to fund organic growth and to return capital to our shareholders consistent with our previously communicated capital priorities. Let's now turn to slide 19 to review our 2018 expectations.
As we look forward to 2018, we expect a 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%. We continue to budget expecting no change in interest rates as we have for the last few years. While it appears likely that the Fed might act again this year, it has served us well to take a more conservative approach in our budgeting process and plan accordingly. We've continued to do so with respect to our plans and budget for this year. We expect full year revenue growth of 4%-6%. We're projecting the GAAP NIM to be flat and the core NIM to be up modestly in 2018 under those assumptions.
On the expense side, we're expecting a 2%-4% decrease from the 2017 GAAP non-interest expense of $2.7 billion. Our expectations include improvement in the cash efficiency ratio to a range of 55%-57%, as well as the positive operating leverage for the sixth consecutive year. We anticipate the net charge-offs will remain below our long-term goal of 35 to 55 basis points, and we expect the effective tax rate to be in the 16%-17% range, fully reflective of federal tax reform. Let's turn to slide 20 for some closing remarks and important messages, please. We had a very good fourth quarter, including record net income for the third consecutive quarter. The core franchise continues to perform well on many fronts, but we believe we can further improve our core performance. We're optimistic on the outlook for the local economies across our footprint.
As Mac noted, the FirstMerit acquisition accelerated our ability to achieve our long-term financial goals. We delivered on those goals for the first time on a GAAP basis in the fourth quarter. We expect to achieve them on a full-year GAAP basis in 2018, two years sooner than we planned when we originally announced the revised goals in December of 2014. We are fully realizing the $255 million of annualized cost savings from the acquisition as originally communicated. We also continue to execute on the significant revenue enhancement opportunities, delivering $48 million in 2017 through OCR, small business, home lending, and RV and marine lending initiatives. As I look back on our announcement of the FirstMerit acquisition two years ago, we delivered on our promises.
Our promises to improve the efficiency ratio by greater than 400 basis points, our promise to improve return on assets by 15 basis points, and our promise to improve return on tangible common equity by more than 300 basis points. In fact, versus the 2015 fourth quarter, right before we announced the deal, our efficiency ratio improved by 880 basis points, and our core ROTCE improved by more than 360 basis points to 16%. Today, our teams are fully integrated, they're focused, and they're performing well, and we expect them to continue to perform at an even higher level. We're optimistic about 2018 and coming into the year with business line momentum. We remain focused on delivering consistent through-the-cycle shareholder returns. The strategy entails reducing short-term volatility, achieving top-tier performance over time, and maintaining our aggregate moderate to low risk profile throughout.
I'll now turn it back over to Mark so we can get to your questions. Thank you.
Melissa, 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. Then if that person has additional questions, he or she can add themselves back into the queue. Thank you.
Thank you. If you'd like to ask a question, please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press *2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Matt O'Connor with Deutsche Bank. Please proceed with your question.
Hey, guys. It's actually Ricky from Matt's team.
Hey, Ricky.
Just wondering if you could quickly touch on your fee expectations for the year. I know you gave some of the revenue outlooks, but I was wondering if you could maybe touch on that, and then maybe specifically talk about some of the strengths you've had in the capital markets business over the past few quarters. I think you had a nice step up there, so maybe if you can talk about that as well. Thanks.
We are seeing, I think, good strength in the fee businesses. I think you need to keep in mind some of the investments that we made around the FirstMerit acquisition in SBA lending, in mortgage banking in particular. I think those investments are paying off for us very well. I would say we're ahead on SBA, and I think we're catching up on mortgage. We might have been a little bit behind in terms of hiring in some markets, but I think we're in good shape as we enter 2018. I would expect to see good growth in those lines. Capital markets is a real opportunity for us. They had a record quarter in the fourth quarter in terms of revenue.
When we think about the opportunities to sell into the FirstMerit customer base with capital markets, with treasury management, our products on the Huntington side are much stronger. Our expertise from a sales perspective, I think, is much better. We're seeing real opportunities there as we think about penetrating that customer base. It all ties into our Optimal Customer Relationship strategy, which we continue to focus on across the entire organization. While we believe the opportunities are higher on the FirstMerit side, we definitely have opportunities on the Huntington side as well. I would say that 2018 is going to be a good year for fee income growth relative to what we've seen historically because of those investments and because of our focus on OCR.
Perfect. Thank you.
Thanks.
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 Rawlston for John Pancari. I know you guys talked about your loans picking up at the end of the quarter. I'm just hoping you can maybe talk about where your line utilization rate ended the quarter and maybe sort of what you're seeing at your line utilization currently.
Yeah. This is Dan. Actually, line utilization was down just a tick. I think we were down two-tenths of a % in the quarter. The dynamics kind of changed throughout the course of the quarter where we had a lot of year-end activity very much close to the year-end. I think there was a lot of built-up demand that had been delayed throughout the year, and so we have seen an uptick there. I would expect that in the first quarter, utilization is difficult to pinpoint, and with the benefits of tax reform, you don't know if it's going to be an immediate impact or whether you might see it later on. I think as the year goes on, I would expect we will see an uptick in utilization, but really hard to estimate in the first quarter.
Maybe just a following cleanup question. I know you guys gave your NIM expectation for full year 2018, but given the impact of tax reform, what are you guys seeing from your NIM expectations for Q1?
I think one impact you need to think about is just the impact of FTE. It's about a three basis point reduction in the NIM related to normalizing for the tax reform on the FTE adjustment. Other than that, I wouldn't expect a material change.
Great. Thanks for taking the questions.
You bet.
Thank you. Our next question comes from the line of Scott Siefers with Sandler O'Neill + Partners. Please proceed with your question.
Morning, guys.
Hey, Scott.
Steve, I was hoping you could spend maybe just a moment or two offering a little bit of your thoughts on kind of reinvestment of the tax benefits, if any, or basically how you look at the balance of allowing it to flow through to the bottom line versus just ongoing or increased investments.
Scott, we've been working with a long-term set of strategies now for almost a decade. That informs our plans every year. It certainly has in 2018. As I mentioned, we try and approach it conservatively in terms of assuming no interest rate changes. We've been investing every year in the businesses since 2010. We will continue to do that. The tax reform does not change our plans in any meaningful way. We're set with those. We would expect the benefits of the tax reform to flow very substantially to the bottom line. If some of it tends to get competed away over time, we think we're in a tremendous position to respond with the relatively strong performance in both returns and NIM. Expecting for 2018 that very substantially it goes to the bottom line, and we'll see how the market reacts over time.
Okay, perfect. Thank you. Then, Mac, was just hoping to ask just a quick question on the potential conversion of the Series A preferred. If I understand it correctly, even though you could potentially force conversion as soon as next month if the right circumstances occur, would you guys have to resubmit CCAR if you wanted to do it this year? Is this something that for all intents and purposes maybe it's just any conversion would be part of the next CCAR process period regardless of whether or not you can force based on stock price movements?
Yes, Scott. We wouldn't need to resubmit our 2017 CCAR in order to force the conversion. In terms of thinking through how we might optimize capital going forward and the opportunities that that creates, that would be a part of the 2018 CCAR process.
Okay, I understand. You do have plenty of flexibility should you choose to in very short order potentially, I guess.
Absolutely.
Okay. All right, perfect. Thank you guys very much. Appreciate it.
Thanks, Scott.
Thank you. Our next question comes from the line of Ken Usdin with Jefferies. Please proceed with your question.
Hey, good morning, guys. A follow-up on that capital structure question, Mac. Just trying to understand the ins and outs. Currently we've got the share count in, and I think your point about flat is if we were to then leave those shares in and take out this preferred, that would be neutral. Would that also consider the line on 13 about additional potential new preferred issuance?
Yeah, Ken. The way to think about it, we're paying 8.5% on the Pref A that has the potential to convert here in the first quarter. It basically is neutral to EPS as we bring those shares back in because of the yield that we're paying on that pref. What that does for us when we think about the 2018 CCAR process, obviously this is going to increase our TCE and our CET1 ratios, again, with no impact to EPS. It'll give us the opportunity to optimize capital in the 2018 CCAR process at even if we issue additional preferred to offset the preferred that we're converting, it's likely going to be neutral to EPS because of the high rate that we're paying on the current pref versus where we are currently in the market for a similar instrument.
Then thinking about how we use the common equity that's been created in the 2018 CCAR process.
Okay. Yep.
I think in terms of where we sit today, it's neutral to positive.
Understood. Okay, got it. We should think about both the potential preferred, but also the potential that you could do more on the equity side in CCAR also. It's more than just okay, I got it. Second question, just then on the credit outlook continues to be very good, taking all of Steve's points about the strength across the footprint. You did have a bit of that continued provision step up which I would still presume was mostly related to the legacy portfolio. Can you help us just understand that push and pull about that provision movement on the old book and then just how you expect underlying credit? I know below the 35-50, but it's been for such a long time. Just kind of differentiate the provision for the legacy book and then also just how you think about the core. Thanks.
Sure, Ken. This is Dan. Provision in the quarter, there were three primary drivers. One is just loan growth. We did have good period end loan growth despite the fact that average balances weren't really up. We did have a surge at quarter end, and that's on the basis on which reserves are based. The second component would be that we had a couple of credits with some specific reserves. Nothing huge, but nonetheless, a driver there. Then third were the FirstMerit renewals. As you know, these are loans that were marked, had no reserves established, but when we extend or restructure, they now have a reserve attached to them. It's those three components that make up what happened in the quarter.
I would point out that when you look at the year as a whole, because clearly this is a dynamic process, there's going to be fluctuation from quarter to quarter. On average, we had about $50 million of provision expense per quarter and about $40 million per quarter of charge-offs. We've said that we would very slowly build the reserve. I think if you looked a year ago, we were at 110 coverage on an ACL basis, and we end the year at 111. I think that qualifies as a slow build. That's really the dynamics going on there.
That's what you continue.
Yes. Now the impact on FirstMerit as that book continues to mature and more and more is flipped to Huntington origination, the impact there is going to lessen and lessen as the years go by.
Okay. Thanks, guys. Appreciate it.
Thanks.
Thank you. Our next question comes from line of Peter with Wedbush Securities. Please proceed with your question.
Good morning.
Good morning, Peter.
I know your outlook assumes no rate hikes. I'm just curious, what would be the impact to net interest income and net interest margin with a 25 basis point rate hike?
Yeah, Peter, it's Mac. If you think about 25 basis points short end for the full year, it's probably in the neighborhood of $25 million pickup for the full year is the way to think about it.
I'm sorry. That's assuming two rate hikes?
Well, that would be the impact of 25 basis points. If it's two rate hikes, it'll be twice that.
Got it. Then secondly, you talked about that you're selectively increasing certain deposit costs. Could you just give a little bit more color how much you increased the deposit cost and what the impact would be in the first quarter?
We're just looking, I think, more closely at, on the commercial side, the relationships and the depth of the relationships when we think about how we pass through any additional price increases. As you know, we're a relationship bank, and we deeply value those deep relationships with our customers. That's exactly the way we're thinking about it. I think we've pretty much worked our way through the most recent rate hike. There still might be a few additional opportunities that we're considering. We're very focused on the commercial side in terms of making sure that we're doing the right thing from a rate increase perspective with our deep customer relationships.
Okay. Thank you.
Peter, if I could just go back to your first question. What I gave you was the full year impact of 25 basis points. You need to decide the timing and kind of factor in how that would impact full year 2018.
Right.
Okay.
Thank you.
Thank you. Our next question comes from line of Marty Mosby with Vining Sparks. Please proceed with your question.
Thanks. Steve,
Hey, Marty.
Oh, yes. Can you hear me?
Yes. Yep.
Perfect. Steve, I wanted to ask you about the goals, the five goals you talked about going into 2018. I wasn't sure. I thought for a while there I was getting it right, but I just want to make sure that without the impact from taxes, you're saying that you would have accomplished those in the fourth quarter of this year, or you would accomplish those in 2018, or do you need tax benefit to even get it in 2018?
No, Marty, to clarify then. We accomplished those in the fourth quarter excluding tax benefit, we would have expected to accomplish them in 2018, excluding tax benefit. They'll only be further embellished, if you will, with the tax benefit.
Okay. That's what I thought we were getting at, and then I kind of got confused there for a second. Now, Mac, on the provision number, I want to go back to that kind of walk forward because I think that's where some of this can get a little bit, in a sense, convoluted in the way that you got in the slide that you showed the reduction of the purchase accounting accretion. You also show a reduction in provision of $50 million. If we look at your provision for this year at $200 million roughly. When we're itemizing net interest income and saying basically margin's flat on a GAAP basis, so we kind of take that as a guidance. The next thing to do would take that all else being the same in a sense of charge-offs, you would end up with $50 million less.
You'd have a walk down of provision $200 million to $150 million in that kind of cocoon of assumptions and guidance. Just wanted to make sure that was kind of the way to look at that.
Yeah, Marty, that is correct. I mean, the year-over-year impact is about $51 million reduction in provision related to FirstMerit, simply because we have less loans moving from the acquired portfolio to the originated portfolio.
That's what I thought, and I think that's where you can probably get some layering effect that I was wondering why other estimates weren't kind of catching up to where we were. I think that was the missing piece, that if people kind of start looking at their models and start thinking, okay, well, the NII's pretty clear, but the next guidance is you really got to pull down that extra build in allowance of $50 million that then helps lower your provisioning as you go into 2018. Thanks. I appreciate that clarity.
Yeah. Now, Marty, as we think about 2018 and how Dan kind of described the provision and the reserve build, obviously it's going to depend on the environment, it's going to depend on the strength of loan growth in 2018. We do expect that we're going to be working into a gradual build of the reserve going forward. I would tell you that a lot of factors go into that. I think we saw probably better performance in 2017 than we expected on both the Huntington and the FirstMerit side of the equation. Things are shaping up well as we think about 2018. I do think longer term, we have a gradual reserve build.
Understood.
Okay.
Thank you. Our next question comes from the line of Kevin Barker with Piper Jaffray. Please proceed with your question.
Thank you. Your guidance assumes that we're going to see core operating expenses go up by roughly 1%, and you have GAAP expenses going down about 2%-4%. With that core operating expense going up 1%, do you expect that to be a two to three year run rate on growth for operating expenses, given some of the follow through from the FirstMerit transaction and any other big investments you have out there?
Kevin, it's Mac. Clearly we're getting a full year benefit of the cost takeouts from FirstMerit in 2018. That's the way I would think about the 1% that you quote in 2018. I would not expect that to be the longer term growth rate going forward. We continue to invest in the business. As you know, personnel costs are the biggest component of our expense lineup, and we continue to give merit increases and those types of things. When we modeled FirstMerit, we kind of assumed a 3% core growth rate and expense going forward. I would just point out that we've achieved the cost takeouts. We've achieved the metrics that we expected from efficiency and ROTCE, and we continue to get benefit in the expense growth rate in 2018.
Okay, you've made that reinvestment of roughly, was it about $100 million to generate additional revenue? Do you see any other large investments that need to be made on the horizon following, after you've digested FirstMerit fully?
Just to go back, the investment we made in the FirstMerit revenue initiatives is $50 million. We expect $100 million in incremental revenue, $50 million would be the assumption we made, assuming a 50% efficiency ratio. Going back to the $100 million in revenue, that was the number that we expected at a minimum. We do believe that we're going to see additional revenue opportunities coming out of the FirstMerit transaction as these initiatives mature. In particular, as we execute on OCR, which actually is the biggest opportunity of all the revenue initiatives coming out of FirstMerit. As Steve pointed out, we make investments in the business based upon what we need to do based upon what's happening in the environment and what we feel we need to do from a colleague perspective, from a customer perspective.
I think we've done a really good job of that over time. We're going to continue to focus on positive operating leverage going forward. As Steve mentioned also, we're just kicking off our strategic planning process. We're evaluating different opportunities to grow the business. The primary focus of that process is on revenue growth and thinking about the customer and thinking about what we can do to improve customer experience.
Thank you for taking my questions.
You bet.
Thank you. Our next question comes from the line of Kevin Reevey with D.A. Davidson. Please proceed with your question.
Good morning.
Hey, Kevin.
This question is for Steve or Mac. Your revenue outlook for 2018 is 4%-6%, which is similar to your revenue outlook for last year, I'm just curious why not have a higher, stronger outlook given the fact now that we have corporate tax reform and it seems like there's a lot more optimism today than there was last year?
Yeah, Kevin, it's Mac. The 4%-6% range we think is reasonable given our risk appetite and how we think about what we want to put on the balance sheet. Obviously, it wasn't until late in the year that we knew that tax reform was going to get passed, and we still don't know exactly how to think about it in 2018, although we did see a strong close to 2017 in terms of loan growth on the commercial side in particular. We definitely have the opportunities around the FirstMerit investments. We think we are going to perform better on those than what we expected. Offsetting that, we've got some headwinds around purchase accounting accretion that we've just talked about, and we're still in a 2%-3% GDP growth economy.
I think 4%-6% is the right range for us, in particular, as we think about managing risk appropriately in terms of what we put on the balance sheet.
Just to follow up on the FirstMerit synergies, how should we think about how the $100 million of synergies are spread out in 2018? Do you think that's going to be more back half loaded, or should it be, or was that more evenly spread out?
Kevin, there'll be some seasonality to certain of those products, mortgage and RV and marine. By the second quarter, those should be performing well. Short seasonality first quarter and then, remember, we've said $100 million plus in the revenue side. We kind of lock into this $100 million. We had a very good year. We put a lot of the baseline expense in, coming back to an earlier question. $48 million of revenue, $37 million of expense in. Now we get the operating leverage off those initiatives as we move forward. Obviously, we're pretty bullish about how the integration of FirstMerit has been achieved.
Thank you.
Thanks, Kevin.
Thank you. Our next question comes from the line of Terry McEvoy with Stephens Inc. Please proceed with your question.
Hi, good morning.
Morning.
A question maybe for Dan. I'm just looking for your comments on some fourth quarter trends and the outlook as it relates to the C&I and CRE loans with retail exposure.
I think over time, one, we feel very good about on the C&I side, as we pointed out, our exposures are very well diversified. We didn't have any exposures to those entities filing for bankruptcy, et cetera. Many of our exposures are in auto parts supply, investment grade, et cetera. Feel really good there. With the CRE, a little more challenging because obviously with every announcement of a new bankruptcy, that's going to impact some of our properties. Now, up until this point, we've seen a very slow migration of credits into criticized status because of some of these bankruptcies. We've also seen some challenges in terms of delayed projects. Frankly, there's labor shortages in some areas that are causing projects to fall behind.
We've seen some very modest deterioration there, but again, due to the diversification of our portfolio, the strength of our core developers, et cetera, we feel really good about where we're sitting today.
Thanks. Just as a follow-up, when I look at the revenue synergy, Chicago comes up a couple times. When I look at Huntington, in most of your major markets, your top five, Ohio, Detroit, Indianapolis, whereas in Chicago, you're closer to 20. I guess my question is, do you have the scale that's necessary to accomplish and generate the revenue synergies that we've been talking about on the call specific to that market?
Well, this is Steve, the revenue synergies are across the board, but in Chicago, we have very select focus on our different business initiatives there. We're not trying to play a broad-based consumer strategy, for example, given the limited distribution. We definitely feel very good about what we're accomplishing in Chicago. We have a great set of teams there and are bullish about our ability to get to $100 plus million on these FirstMerit synergies this year and obviously expect to keep going. We like the niches we have in Chicago, and that's how we're playing.
Great. Thank you both.
Thank you.
Thanks.
Thank you. Ladies and gentlemen, as a reminder, if you'd like to join the question queue, please press star one at this time. We'll pause a moment to allow for any other questions.
Any questions? Operator?
We have one question from Jon Arfstrom with RBC Capital Markets. Please proceed with your question.
Hey, thanks. Sorry about that.
You got it.
Hey, Steve, you may not like this question, but I'll ask it anyway. Just following up on Terry's question a little bit. Just strategic thinking, big picture thinking for the company. With FirstMerit, obviously, you guys have had ups and downs, but it's now really coming through, and you've proved that you can do an acquisition and integrate it, get the expenses, and get the revenues. What is the Steve Steinour and board big picture thinking on M&A? Willing to do it again?
Well, Jon, we always look at things, but the priority for us in 2018 is getting this strategic plan process really robustly and well completed. Then secondarily, making sure we deliver these
Revenue metrics. We've been saying for several years, we think we're in late innings. The game looks like it just got extended into extra innings. We're in a cautious posture. Dan referenced that in terms of some of the things that we're doing earlier and in prior calls around limits on construction, commercial real estate, a host of things. We'll continue those. We'll look for other areas where we think we need to adjust and during the good times with a view that we'll have lower volatility through cycles and continue. As we advance the strategic plan, the emphasis is on core, not M&A, and that's our focus.
Okay, fair enough. Thank you.
Thanks, Jon. I think we have to wrap up here. We're coming into the home stretch. I just thank you very much for joining the call. As you can see, we produced very good results in the fourth quarter and for the full year of 2017. You can tell we're confident as we come into 2018 that we have momentum in our businesses. Strategies are working. We expect to drive positive results for 2018. We believe we're going to continue to gain market share and grow share of wallet. Our top priorities are growing our core businesses and continuing to realize the revenue synergies from FirstMerit, which are not capped at $100 million. We've always said $100 million plus. Our fourth quarter results demonstrate the core economic benefits of the acquisition of FirstMerit.
We've achieved all of our long-term financial goals. There's more opportunity at hand in 2018 and beyond. Finally, I'd like to include a reminder that there's just a unique and high-level alignment between the board management, our colleagues, and our shareholders. The board and colleagues are collectively one of the largest shareholders in Huntington. We uphold the retirement requirements on certain shares, which is very unique. We'll continue to proactively manage risks and volatility. We're appropriately focused on driving sustained long-term performance. Appreciate again your interest in Huntington. Thanks for joining us today, and have a great day.