Greetings and welcome to the Huntington Bankshares Third Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference call over to your host, Mark Moose, Director of Investor Relations.
Thank you, Michelle, and welcome. I'm Mark Moose, Director of Investor Relations for Huntington. Copies of the slides we'll be reviewing can be found on the IR section of the Huntington website, www.huntington.com. This call is being recorded and will be available as a rebroadcast starting about 1 hour from the close of the call. Our presenters today are Steve Steinauer, Chairman, President and CEO and Mac McCullough, Chief Financial Officer.
Dan Newmayer, our Chief Credit Officer, will also be participating in the Q And A portion of the call. As noted on Slide 2, today's discussion, including the Q And A period, will contain forward looking statements. Such statements are based on the 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 the risks and uncertainties, please refer to this slide and material filed with the SEC, including our most recent forms 10 K, 10 Q and 8 K filings.
Let's get started by turning to Slide 3 an overview of the financials. Matt? Thanks, Mark, and thanks to everyone for joining the call today. As always, we appreciate your interest and support. We are pleased with our 3rd quarter financial performance, including record net income for the 2nd consecutive quarter, completion of the fiscal integration of FirstMerit and substantial progress in the cultural integration of the 2 organizations.
In addition, we incurred the final charge for the integration of FirstMerit in the third quarter of 2017. So let's get started by turning to slide 3 to review 3rd quarter results. Please keep in mind that year over year comparisons are impacted by the inclusion of FirstMerit as the acquisition closed during third quarter of 2016. Huntington reported earnings per common share of $0.23 from the third quarter of 2017, up 109% over the year ago quarter. This is inclusive of $0.02 per share of significant items related to the FirstMerit acquisition.
Also including the impact of the significant items, return on was 1.08%, return on common equity was 10.5% and return on tangible common equity was 14.1%. Our reported efficiency ratio for the quarter was added 2.8 percentage points to the ratio. Adjusting for the significant items, the adjusted efficiency ratio was 57.7% and this reconciliation can be found on slide 20. Tangible book value per share increased 6% from the year ago Consistent with our 2017 CCAR submission, last week, the board declared a dividend of $0.11 per share, a $0.03 or 38 percent increase from the $0.08 per share in the prior quarter. During the third quarter, we also repurchased $123,000,000 of common stock, representing 9,600,000 shares at an average cost of $12.75 per share.
Turning to slide 4, which shows a summary of the income statement, total revenue was up 17% from the year ago quarter. Net interest income was up 21% year over year due to the 17% increase in average earning assets primarily reflecting the addition of FirstMerit and an 11 basis point increase in the net interest margin. Net interest I mean, non interest income increased 9% year over year. We continue to see good growth in service charges on deposit accounts and card and payment processing revenue, both of which reflect and credit card activity from existing customers. A record quarter in capital markets fees was driven by strong execution of our strategic focus on expanding the business and deepening commercial relationships.
Non interest expense decreased 4% year over year. Significant items both for 2017 2016 third quarter expenses. For the third quarter of 20 7 acquisition related expense totaled $31,000,000. Adjusted non interest expense in the 3rd quarter grew $97,000,000 or 18% from the year ago quarter. Primarily from the inclusion of FirstMerit.
Compared to the second quarter of 2017, adjusted non interest expense increased $6,000,000 or 1%. The third quarter of 2017 included approximately $12,000,000 of non recurring expense, not included in the significant items for the quarter. This $12,000,000 of expense related to personnel, operational and efficiency improvement efforts and certain expenses associated with the previously announced consolidation of 38 traditional branches, 7 drive thru locations, and 3 corporate offices late in third quarter of 2017. For a closer look at the details behind these calculations, please refer to the reconciliations contained on page 19 of the presentation slides or in the release. Slide 5 illustrates that we are well on our way to delivering positive operating leverage again in 2017.
You are accustomed to hearing us talk about this every quarter stressing how important annual positive operating leverage is to us as a company. We remain confident that 2017 will be the 5th consecutive year of positive operating leverage. Slide 6 illustrates our balance sheet trends. Average earning assets grew 17% from the year ago quarter. This increase was driven primarily by a 31% increase in average securities and a 12% year over year increase in average loans and leases.
The increase in average securities reflected the addition of FirstMerit's portfolio, the reinvestment of cash flows including the proceeds of the auto securitization in the 2016 fourth quarter and additional investments in LCR ratio level 1 qualifying securities. During the third quarter, average loans increased 1% compared to the prior quarter. As you have come to expect from us, we remain disciplined in our approach to the extension of credit. To emphasize this point, loan originations for each of the last three quarters were lower than our 2017 budget expectation. However, we more than made up for lower loan volumes through disciplined pricing resulting in net favorability for 2017 to a range of 3% to 4%.
This new guidance assumes that we will not execute an auto securitization in 2017. As competition for loan growth continues to intensify, particularly on the commercial side, we are very pleased have the option to retain more of our high quality auto loan origination volume as an earning asset substitute until we see competition in the commercial space become more rational. At quarter end, our indirect auto portfolio concentration represented 123 percent of Tier 1 capital plus ACL. This is just below our Based on guideline. As you know, our auto loans are the best performing loan category in our CCAR stress testing and we originate the hold.
So we are of duration year over year, primarily reflecting the FirstMerit acquisition as well as increases in core middle market, especially lending verticals, business banking and auto floor plan. As we have seen throughout 2017, we continue to face headwinds in corporate banking as companies access the debt markets in order to lock in current low rates. C and I balances were further impacted by sequential decline in non performing assets. Average commercial real estate loans increased 13% year over year as a result of the FirstMerit acquisition. On a period end basis, commercial real estate loans decreased 1% year over year.
We have strategically pulled back in 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 3% year over year with the third quarter representing another solid quarter of consistent disciplined loan production. Originations totaled 1 point $6,000,000,000 for the third quarter of 2017, up 7% year over year. Average new money yields on our auto originations were 3.62% in the 3rd quarter, up from 3.58% in the prior quarter and up more than 40 basis points from the year ago quarter. Average originals from mortgage loans increased 20% year over year, reflecting the addition of FirstMerit and continued strong demand for mortgages across our footprint.
As typical, we sold the agency qualified mortgage production in the quarter and retained the Chevron Mortgages in specialty mortgage products. Turning our attention to the chart on the right side of slide 7, Average total deposits increased 17% from the year ago quarter, including a 19% increase in average core deposit. Average demand deposits increased 22% year over year. We remain pleased with the trend in funding mix particularly about increase in low cost DDA. This reflects the addition of FirstMerit's low cost deposit base as well as our continuing net interest margin was 3.29 percent for the third quarter, up 11 basis points from the year ago quarter.
The increase reflected a 26 basis point increase in earning asset yields and a 4th basis point increase in the benefit of non interest bearing funds, balanced against a 19 basis point increase in the cost of interest bearing liabilities. On a linked quarter basis, the net interest margin decreased by 2 basis points, driven by a 3 basis point improvement in earning asset yields and a 2 basis point increase in the benefit of non interest bearing funds partially offset by a 7 basis point increase in the cost of interest bearing liabilities. The increase in funding costs was more heavily weighted to wholesale funding we continue to remain pleased with our ability to successfully lag deposit pricing, especially on consumer core deposits where the rate increased one basis point sequentially. Purchase accounting contributed 12 basis points to the net interest margin in the third quarter, down from 15 basis points in the prior quarter. After adjusting for this impact in all quarters, the core NIM was 3.18% compared to 3.16% in the prior quarter and calling your attention to the orange line at the bottom of the graph on the left, our cost of consumer core deposits was 22 basis points for the third quarter.
This represents a 4 basis point increase over the year ago quarter and a 1 basis point increase sequentially. Illustrating the strong consumer core deposit base pricing remained relatively steady in the face of recent Fed interest rate hikes. While the majority of pricing pressure has been limited to government banking, corporate banking and the upper end of middle market commercial. 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 41 basis points year over year, while consumer loan yields increased 35 basis points.
On a linked quarter basis, commercial loan yields increased 3 basis points, while consumer loan yields increased 5 basis points. Security yields were up 8 basis points year over year and were flat to the prior quarter. Slide 8 shows the expected pretax debt impact of purchase accounting adjustments on annual counting accretion going forward. It is important to note that the 1st accounting accretion estimates on this slide are based on current scheduled accretion except for what we've experienced in the 1st 3 quarters of 2017, do not include any accelerated accretion from the recapture through early payoffs or extensions in the projected periods. As we have stated previously and has been proven out in our results for the past five quarters, In reality, we are likely to experience loan extensions and early payoffs resulting in accelerated accretion.
Therefore, you're likely to see the depression revenue in the green bars continue to be pulled forward as modifications and early payoffs occur. Turning to slide 9. This illustrates our long term financial goals, which were set by the board in the fall of 2014 as part of our strategic planning process. These goals were originally set will allow us to achieve these long term financial goals in the fourth quarter of 2017 run rate and for the full year 2018, both on a GAAP basis 2 plus years ahead of schedule. Year to date 2017 results on a reported GAAP basis, reflect the cost of the ongoing integration.
Adjusting for these costs, as shown on the reconciliation slides 2324 in the appendix, We are already realizing the scale and financial benefits of the deal. The fourth column depicts our current expectation for these metrics for full year expectations for the efficiency ratio and return on tangible common equity. We celebrated the 1 year anniversary of the closing of the FirstMerit acquisition in August and slide 10 provides additional details on the cost savings and revenue synergies from the transaction. We have now fully implemented all of the $255,000,000 of originally planned cost saves And the primary focus of the organization is now executing more than $100,000,000 of revenue enhancement opportunities. Turning to slide 11, you should recognize this slide as well.
From our 2nd quarter earnings call, which reiterates our $639,000,000 non interest expense target for the fourth quarter of 2017. With all cost savings implemented, we will deliver on our cost save commitment in the fourth quarter of 2017. The chart on the upper right details the 4th quarter run rate. The chart on the bottom of $13,000,000 in 2018. As I mentioned during last quarter's conference call, we expect the revenue initiatives to have an incremental efficiency ratio of approximately 50% in 2018.
The incremental efficiency ratio is higher in 2017 as the ramp in revenues will naturally lag some of the upfront expense. You've also seen slide 12 before, which provides additional detail on the FirstMerit related revenue enhancement opportunities. The bar chart on the top of the slide displays our current targets for additional revenue from the initiatives. In 2017, the revenue ramp corresponds with the hiring that is necessary to increase production This is a $52,000,000 increase from the $48,000,000 expected in 2017. Slide 13 illustrates the continued progress we've made in rebuilding our capital ratios following the FirstMerit acquisition.
Common Equity Tier 1 ended the quarter at 9.94 percent, up 85 basis points year over year. We have previously mentioned that our operating guideline for common equity Tier 1 is in the range of 9% to 10%. Tangible common equity ended the quarter at 7.42 percent, up 28 basis points year over year. Moving to slide 14, credit quality remains strong in the quarter. Consistent prudent credit underwriting is 1 of Huntington's core principles and our financial results continue to reflect our disciplined approach of $44,000,000 in the 3rd quarter compared to net charge offs of $43,000,000.
Net charge offs represented an annualized 25 basis points of average loans and leases, which remained below our long term target of 35 to 55 basis points. Net charge offs were up 4 basis points from the prior quarter and down one The allowance for credit losses as a percentage of loans decreased 1 basis point linked quarter to 1.10%. But the non accrual loan coverage ratio increased to 2 23% as a result of the 7% linked quarter decline in non accrual loans. Overall asset quality metrics remained strong. Nonperforming assets decreased $28,000,000 or 7% linked quarter.
Non performing asset ratio eased 5 basis points sequentially to 56 basis points. The criticized asset ratio increased 14 basis points from 3.66 percent to 3.80 percent. And our 90 day plus delinquencies declined slightly. We also continue to expect to experience lower non performing asset inflows in the 4th for the fourth quarter in a row. Let me now turn the presentation over to Steve.
Thanks, Mac. Moving to the economy, slide 16 illustrates selected key economic indicators for our footprint As we've noted previously, our footprint has outperformed the rest of the nation during the economic recovery of the last several years, and I remain optimistic on the outlook for the local economies across our 8 states. The bottom left chart illustrates trends in the unemployment rates across our footprint, as you can see, unemployment rates across the majority of our footprint remain near historical lows. Slide 17 illustrates trends in unemployment rates for our 10 largest deposit markets, many of the large MSAs in the footprint remain at or near 15 year lows for unemployment at the end of August. The labor market in our footprint has proven to be strong with several markets such as here in Columbus and in Indianapolis, and Grand Rapids, where we see meaningful labor shortages.
We have noted previously that we're seeing wage inflation in our expense base and our customers are too. Housing markets across the footprint continue to display broad based home price inflation, while remaining some of the most affordable markets in the U. S. Finally, we continue to see optimism across our consumer and business customer base with a consumer confidence score in our region at its highest since 2000. These economic factors support our expectation for continued economic growth across our footprint through the though the recent translation into business investment has been somewhat uneven.
Let's now turn to slide 18 for some closing remarks and important messages, but another good quarter to 3rd quarter, including record net income. The core franchise continues to perform very well on many fronts and we have completed the remaining necessary integration actions for us to achieve the economics of the FirstMerit deal. We were pleased to significantly increase our cash dividend for the 4th consecutive year and to reinstitute our buyback program. We remain focused on delivering consistent through the cycle shareholder returns. This strategy entails reducing short term volatility, achieving top tier performance over the long term and maintaining our aggregate moderate to low risk profile throughout.
As Mac noted, the FirstMerit acquisition accelerated our ability to achieve our long term financial goals and with the integration substantially complete, $55,000,000 of annual cost savings from the acquisition, with all remaining cost savings implemented during the third quarter as originally communicated. We also continue to execute on the significant revenue enhancement opportunities, including the SBA lending, home lending, and RV and marine lending expansions. Our 2017 full year outlook continues to expect total revenue growth of 23% on a GAAP basis, Consistent with our long term financial goal, we are targeting annual positive operating leverage. Importantly, we continue to appropriately manage our expenses within our revenue outlook. We expect average balance sheet growth also in excess of 20%.
We expect period end loan growth up 3% to 4% for the full year 2017. Consumer loan growth has remained steady throughout 2017, Consistent with our experience over the past several years, we expect commercial loan growth for the remainder of the year to outpace what we experienced year to date. However, our commercial pipelines remain strong. However, the commercial lending environment is extremely competitive on both structures and rate. We've reduced our overall 2017 loan growth expectations from previous guidance.
We are remaining disciplined with our aggregate moderate to low risk appetite ensuring appropriate returns on capital. Finally, we expect asset quality metrics to remain near current levels, including net charge offs remaining below our long term target of 35 to 55 basis points. Now I'll turn it back over to Mark so we can get to your questions. Mark? Michelle, we will now take questions.
We ask that as a courtesy of your peers, each person asks only one question and one related follow-up, And then if that person has additional questions, he or she can add themselves back into the queue.
Our first question comes from the line of Scott Siefers with Sandler O'Neill And Partners. Please proceed with your question.
Good morning guys.
Hi, Scott. Good morning, Scott.
Matt, I had a quick question just on
the, holding relatively more auto than you might have, were the commercial environment not as it is. So just first, can you walk through any margin ramifications of putting on, auto versus what it would have been had C and I been playing out as expected. And then did pricing in the either sale or securitization market? Did that have anything to do with the decision to keep on balance sheet?
Yeah. Thanks, Scott. So, yeah, I would tell you that there really wasn't any consideration given the pricing in securitization market. As I've said historically, I do think we always give up economics when we securitize I like having these assets on our balance sheet because of their performance through the CCAR process as well as the risk adjusted yield that we get on the auto book. Yeah, I would tell you that any margin impact on a go forward basis is immaterial relative to C and I loan growth We, you know, we feel comfortable with the returns that we get on the auto book and we are well within the operating guideline even through mid 2018.
So, we're prepared to be able to do that and we're very comfortable with keeping the assets. Okay,
perfect. Thanks. And then can you just remind me, you guys don't pop the marine and RV into the concentration limit like that, your limit is auto specifically as opposed to all indirect. And then along those lines, what is the opportunity you guys see on like marine and RV? And how's the pricing there vis a vis auto or other indirect portfolios?
Okay. Hey, Scott, this is Dan. So you're correct. The auto concentration limit is just for auto. We have a separate limit for, for both Narbeh And, we really liked the boat and RV book.
We think that is a real plus that we picked up through the acquisition, you know, a business model and a team that are very skilled. We've supplemented that with external hires who have experienced in the business the profile of our customer there is very strong FICO is of $7.90 to $7.95. The asset size of the votes and RVs that they're thing is, in a range we're very comfortable with. We're talking $75,000 average size of the vehicle. These tend to be boat and RV owners.
And given that profile, the returns are strong as well. So just on the whole, very nice asset class for us.
Thank you. Our next question comes from the line of Ken Usdin with Jefferies. Please proceed with your question.
Quarter. So the question about forward expenses, the $6.39 run rate you've held to now, can you just help us think about what that means as a starting point going forward? And is there anything else that you're contemplating to continue to hold up a gap on operating leverage in addition to the cost saves you've seen already?
So, Ken, it's Mac. So as we've stated in the press release and in the scripts, we're very comfortable achieving the $6.39 target in the 4th quarter. I think if you adjust for the $12,000,000 in the 3rd quarter, you can see that pretty much already there. And we've talked about what that means on a go forward basis. Clearly, we've got opportunity to recognize the full amount of the cost save in 2018 because we did not recognize the full cost save for full year 2017.
So we do expect, to recognize some of that benefit going forward as well. And back on operating leverage, we are committed to positive operating leverage. This will be the here in a row that we're going to achieve it. It's an important goal for us and we build our plan every year. Understanding what the revenue opportunity is, thinking about basically a flat rate environment and then building our expense base to provide positive operating leverage on a go forward basis.
So very, very committed to that objective and feel confident that we're going to deliver that.
Okay. And my second question is, this is the 2nd quarter row where you have not built the provision on top of charge offs as you had indicated you would have been doing post merger as loans move from the 1st merit book. Into the regular way book. Is that now a thing of the past or are we now matching from here provisions and charge offs and what would change from here, if not?
Yes, this is Dan. So I think, what you've seen the last couple is not what you would expect on a go forward basis. There are a lot of factors at play when we look at the ACL in a given quarter. We have been aided recently by a big reduction sequentially in our NPAs. I don't expect that type of reduction to continue.
So that has certainly contributed. Those are, those are loans that would have large reserves attached to them. And I think at 49 basis points non accrual loans, that certainly is below what we would expect even in these times. And so I think that's a factor we have to take into account. So last quarter.
I think the way to think about provision on a go forward basis is covering charge offs plus some addition for growth. So I think what you've seen the last a couple of quarters is not, that is not the norm and that's what you should expect on a go forward basis.
Just a quick clarification there then Dan, NPAs might not be going down, but what would be replacing the charge offs in terms of what's underlying there's no real there's negative there's positive trends and delinquencies and all the back stuff. So why would you see any inflection on even the charge off side?
Yes. Well, I think there's going to be movement from quarter to quarter. And I think we've had some very positive, movements. We've said over time, we do we've been operating below our long term goal on charge offs for quite some time. And I think very gradually, we are going to see that drift upwards.
So I think that's another element
from the line of John Armstrong with RBC.
Maybe Steve or Dan, a question for you on some of your commercial lending comments. Can you just maybe give us an idea of where and what is bothering you? Is it large corporate middle market? Is it leaked into small business? And then what you think might change that environment?
Something you expect to improve at all next year?
Thanks, John. This is Steve. We have had a good year in terms of consumer mortgage, home equity, RV, marine auto, across the board. So we're we're running, sort of spot year to date 7% to 7% to 8% on on that combination of the portfolio. So that has shown a consistency quarter to quarter and good performance.
Our middle market lending has grown, year to date, up 2% to 3% So, so what we've been fighting is headwinds coming off of our large corporate. And it's essentially a combination of fixed income activity. And there's a little bit of upsizing, dynamic that's that's been new this year where the number of banks involved in, in, in, certain relationship are being reduced, just so the cross sell can be, can be provided. I'd add to that, that, that market in particular has gotten extraordinarily competitive terms rates, etcetera. And so to some extent, we have backed out of that in ways that we might not have in ways that we wouldn't have previously.
Finally, commercial real estate market also is frothy. And we have, as you as you heard from Mac, we actually have pulled back a percent year over year. And we have constrained it in a couple of lending types, property types, on purpose. And we're a bit cautious in some of our markets, in particular, in those asset categories. So Again, we're long term shareholders.
We're locked in. We have this discipline around aggregate moderate to low. If we don't like the return risk profile, which is not going to go forward with it, We'll look to do, other things, hold the capital or asset substitute, whatever we think is more prudent than just follow the parade.
Our next question comes from the line of Erica Najarian with Bank of America. Please proceed with your question.
Hi, good morning.
Hi, Erica. Hey, Erica.
I just wanted to ask about
the other side of the balance sheet. You've been able to keep core deposits very low through this rate tightening cycle. And I'm wondering as we look into next year, how is competition in your footprint shaping up in terms of pricing competition for retail and SME versus larger or middle market corporates?
Yeah, Erica. So, you know, we're very, very pleased with what we've been able to accomplish in the core deposits in particular from a repricing perspective, I think the slide 7 actually shows some really good trends in terms of what we've done with our core commercial and core consumer deposits. And I think you just have to go back and think about the strategy that we put in place around Fairplay and think some of the benefits that we have with our customers, around the experience that we deliver and the number of awards that we've won that I think illustrate the loyalty and satisfaction that our customers have for us. Having said that, we do see a very rational environment in our footprint we certainly see competitors doing testing of different products and different pricing. And you see pilots are test take place and you see them pull back.
So I would tell you that what we see is very rational and we do expect that to continue. Everyone is in good shape from a liquidity perspective. I think the lack of asset growth is also not requiring that excessive price be paid to raise deposits. And I think, that we'll just monitor and make sure that we're testing and piloting different products and different pricing opportunities as well so that we're ready in case something does change. But we see what is happening in our footprint to be very rational.
And as a follow-up, heard you loud and clear, Steve, about commercial real estate concern. And I think a lot of investors share that concern with you I'm wondering as we try to benchmark the industry for commercial real estate credit next year, Dan, is it possible for you to share some of your underwriting standards really sort of origination debt service coverage ratio minimums and at what interest rate you set that debt service coverage ratio to?
Sure. So one, our underwriting standards haven't really changed, although recently, we probably have tightened up a little bit in terms of some of the equity requirements going in, but generally, you're going to be looking at a 75% to 80% type LTV. In multifamily, we've actually on lower in some instances, particularly in those markets where we think there may have been overbuilding. But we're looking at a debt service coverage ratio in the $125,000,000 range, we stress those rates at a 6.25 percent 30 year amortization. And then on top of that, with the vast majority of our loans, we have personal recourse.
And so very, very stable underwriting requirements. That, as I said, have either maintained or tightened modestly over the last couple of years.
Our core customer base still is less than 100 relationships in commercial real estate to give you a sense of of of the granularity of it and the consistency of strategy.
Yes. And Erica, I would also add that one thing, this is all built on what we call our tier 1 developers is the majority of who we're lending to. So we're looking very closely at their global cash flow, their liquidity and their worth because in addition to underwriting the individual properties, we are counting on the fact that they have the wherewithal to support, our loans in a downturn.
Got it. Thank you.
Our next question comes from the line of Ken Zerbe with Morgan Stanley. Please proceed with your question.
Great, thanks. I guess when you think about loan growth, obviously, you did take your guidance down. It sounds like commercial is pretty challenging broad speaking. But when we think about the factors that are driving this low single digit growth this year, are there any changes or what do you expect to change next year in terms of those same factors? Like would you expect the commercial environment to get better or orders to accelerate or vice versa?
I'm just trying to get a sense of like what changes the longer term growth outlook for the bank.
This has been a very unusual year, I think, for commercial lending. And at least in my career, I haven't seen one that where you have, GDP expansion sort of increasing over the course of the year. And, commercial loan activity, for an extended period being flat to down, as you look at that data. So I I we believe that the combination of factors but principally related to uncertainty around policy, issues and timing. Are having an impact on marginal investment.
And so as we think about the next year and beyond, we're optimistic that these policy issues are going to get addressed and that will be stimulative on the whole. And, we like what we see in terms of activity and planning, in our footprint. There's a lot of plated. There's a there's I've never we've never had as much foreign direct inquiry in most of the markets we're in as we're experiencing today. The diversification of the economy here sets up, I think a series of opportunities as we think about 'eighteen and beyond.
So, so we are we're bullish, on, in terms of outlook, Ken, and, and think that Once these policy issues get addressed, the clarity will help unlock some of what's been restrained this year.
Got it. Okay.
I will definitely keep my fingers crossed about policy clarity going forward. So thank you very much.
Thanks, Ken.
Thank you. Our next question comes from the line of John Pancari with Evercore. Please proceed with your question.
Good morning. Good morning, Don. On that same topic, the given what you just mentioned about the C reticence that some borrowers may have, how much of this pullback in your loan growth expectation is it all influenced by some softening on the front end side on demand? So is that apprehension of borrowers changing? Is it getting worse and that influenced some of your pullback in your growth expectation?
Or is it primarily the things you already flagged in terms of CRE and CAP markets and competitive pressures? Thanks.
Well, we think much of the the cat market activity has occurred so that we believe is abating. But we do see while the the the the tax code revisions are pending, you know, range of deferred activities. If you're going to sell a business, trying to figure out how to toggle this year next, etcetera, for example. So We, we consciously pulled back on commercial real estate, this year, and especially this past quarter. We just did not like the risk return profiles as we were looking out into 'nineteen and beyond when a number of these loans would be coming out of construction and leasing.
So So that was our decision, but there are broader market impacts and that are much more policy related at this point, John.
Okay. And then I guess another way to get to dig there is, do you have updated line utilization data for the quarter?
Basically flat on the commercial side for the quarter.
So auto is typically at a seasonal low with model change out. So we have this every year. But overall flat.
Okay. Got it. Got it. And then one last thing also to beat the loan growth dead horse. On 2018, how do you think about the pace of where loan growth could go?
Is it going to You know, if you think it is in this low, you know, 3% to 4% range, is it should we think about it
in terms of GDP or a multiple
of GDP how should we think about that?
We think of it as a low multiple of GDP. Got consumer going up 7 to 8 percent year to date, middle market up 2 to 3 year to date on spots. A lot of the corporate bond activity we think has occurred. So we think it's stabilizing now. The pipeline looks actually commercial pipeline looks good.
In in this quarter. So, so so if we can get, the tax policy issue address, I think that opens up the spigot to some extent, this deferral we hope will spur cramental activity, almost like a burst of activity, John.
Okay. Thank you. Thank you. Thanks, John.
Thank you. Our next question comes from the line of Marty Mosby with Vining Sparks. Please proceed with your question.
Thanks. Hi, good morning. Slide 8 is I've told you several times, I don't like the way that that presents the results. When you look at the decline in the net benefit from $73,000,000 to 'nineteen, that's about a $50,000,000 decline that when you're just looking at this one slide, by itself, but when you roll over and you look at slides 1112, what you're then showing is that the synergies of the deal the revenue side generates about $50,000,000. And if you take about $100,000,000 of net spillover into next year from what you get on the expense synergies, that $50,000,000 really gets just kind of like a prepayment to the positives that you're getting out of the synergies.
So am I thinking of that right in the sense of netting out those 2 things when you really get to the bottom line impact as you go from 2017 into 2018?
Yeah, Marty, I think you're absolutely right on that point. You know, we, we like slide 8 because it does give some visibility into what's happening with the in particular. And obviously fighting through some of the noise in the margin is important as we communicate the message. And I think but I do appreciate you continuing to point out the fact that the synergies are definitely offsetting that impact.
And the other thing that I was thinking about was when you show the revenue enhancements, you're leaving out one of the bigger pieces, which is when you actually made the acquisition, you weren't really paying for or anticipating that rates were going to go up. And as rates have now started to move higher, there's a benefit of the margin on the first merit deposits was something that really weren't counting on, which is a revenue enhancement. And I think the end result of that is when you look at your return on tangible common equity target, it was 13% to 15%. You're saying you're already going to be at 15% and you kind of roll these net benefits into 'eighteen think you're rounding up to around the 16% as you look into next year. So I think some of that delta on the favorable could just be out of the deposit that you're being able to get the profitability from?
No, that's another great point. I think one of the real benefits the FirstMerit acquisition was the quality of the core deposit base on the retail side in particular, but also on the commercial side. And a tremendous tremendous value creation, if you think about that, that deposit base and where the rate environment is going. So clearly, big benefit to the value of the transaction and we probably should talk about that more.
And just, humor one last question. If you think of the credit, your guidance kind of assumes kind of a just general deterioration, but there's really nothing in the portfolio that suggest charge offs in the low 20s should be mid-30s until we kind of get some deterioration. So is this really just kind of a general over the cycle, we're going to be somewhere in the $35,000,000 to $55,000,000. And really if you look at where we're at and that this current environment sustains itself, Isn't there an opportunity to remain below that guided range for a period of time?
Yes. Marty, this is Ann. I do believe that we will remain below the range. Although one thing to keep in mind is even if gross charge offs don't increase materially the recoveries that we have available to us are shrinking just because we have not had significant charge offs over the last few years. So I think that's one component that again, I think the increase will be modest and gradual.
But nonetheless, I don't think it's reasonable to anticipate that we're going to sustain these these levels long term.
Thanks. Thanks Marty.
Thanks Marty.
Thank you. Our next question comes from the line of Emily Harman with JMP Securities.
Steve, could you talk a little bit about your appetite for M and A with FirstMerit effectively kind of fully integrated here? And what kind of opportunity you would need to see to be interested in?
Well, let's back up. We've completed the spent side of this, but as we have been sharing, we have a lot of revenue synergy and that is not complete. And And there's also the full assimilation, the culture, getting the company set. So we're very, very focused. Our first priority is to get that 1st merit revenue as we go through 2018.
Okay. Thanks. And then if John kind of beat the dead horse on loan demand, I'm going to maybe kick it a little bit, but you mentioned a few times tax reform as a hang up on demand. Seems like we've also got just kind of building uncertainty regarding the country status in NAFTA, at least as far as the headlines are concerned, I guess with Michigan, Ohio, 2 of the bigger exporters to North America, have you guys kind of are you guys talking to your borrower base at all just in terms of how that's impact in demand for those borrowers? And if you thought about just loan exposure there, it's the exporting community?
But it's clear that's a great point. There's clearly an impact in our footprint. There's a sense of optimism that the NAFTA negotiations are going to get to a rational conclusion. So I would start with that. And And I think I mentioned this earlier, auto is going to have its 5th best year, we believe, in history.
So there's a stability on on some of the engines here as we think about going forward. And then the diversification of the economy, just the sheer scale of the economies in our footprint our huge factors that help contribute to our optimism in terms of going forward.
Great. Thanks for taking the questions.
Thanks, Emma.
Thank you. Our next question comes from the line of Steve Moss with FBR Capital Markets. Please proceed with your question.
Hey, good morning guys. This is actually Kyle Peterson on for Steve today. I wondered if you could touch on the NIM outlook, both kind of the core and the gap in the fourth quarter, given that it looks like accretion will take a leg down here. Or I guess are we looking at maybe a stable ish coordinate and then kind of gap goes down with the accrete given the accretion or how should we think about that?
Yes, I would say, that the we're going to continue to see the the reported NIM, it declined because accretion is going to change a decline from here. But I think the core NIM is going to continue to expand even in a flat rate environment assumption that we're making. So, clearly fourth quarter will fall into that trend, I believe. And as we move into 2018, even in the unchanged rate scenario, I think we see expansion. In the core.
Okay. So I guess to follow-up on that is the core expansion, is that mix shift or are you guys seeing favorable pricing or kind of what's driving the core NIM expansion and flat rate environment?
Yes. So we basically just have asset portfolios being replaced at higher yields as we see runoff and replacement. So we're originating at higher yields relative to where we were a year ago. So I think that's the primary driver in what we're seeing.
Okay. And is that that's both on the loans and securities or, just one or the other?
Both categories, loans and securities.
All right. Great. Thank you guys.
Thanks. Thanks, Kyle.
Thank you. Our next question comes from the line of David Long with Raymond James. Please proceed with
you guys had a very good quarter there on the deposit growth. And I wanted to see if you could talk about any promotions or changes in pricing that may have impacted the growth there. And then given the slowdown in loan expectations, what you'd expect out of that deposit growth going forward?
Yes, Dave, it's Max. So I would say, nothing really in the way of promotions. You know, we did and I mentioned this in script, we did, look at some pricing on the commercial side in order to, grow some of our balances there and and retain some balances that we thought was a good trade off relative to wholesale funding. So, you know, I would tell you that on the margin, we we probably did increased price on the commercial side in the quarter. But we we saw a nice benefit from doing that relative to the cost of wholesale funding.
And going forward, I I would tell you that I think it's stable and steady in terms of what we've seen and how we think about the funding from a core perspective on both the consumer and the commercial side forward. That will depend of course on, what happens with the Fed and when we see rate increases, if we see rate increases, But as I mentioned earlier, we see our market being very rational from a pricing perspective and not a lot of pressure on liquidity side right now.
Excellent. Thanks for the color, Mac. That's all I have.
Thanks, Dave.
Thank you. Our next question comes from the line of Terry McEvoy with Stephens, Inc.
Hi. Within the original first merit merger model, you assumed a 3% call it core increase in annual operating expenses. And as we think about 'eighteen, is that still a good number to use as it relates to just core growth? And then could you help me understand the seasonality and the expense line next year? Will there be a bump up in maybe the first half of the year and then drift lower implying maybe 4Q 2018 would be below that of the earlier quarters of the year?
Yes, Terry. So, we're working through 2018 right now. And, the way we think about building a budget, we start with, an unchanged rate environment and we get the revenue side of the equation, right, based upon where we see loan growth coming in and obviously some of the investments we've made in FirstMerit and fee income categories. And then we determine what we can spend from an expense perspective based on the investments that we want to make and we do continue to make the right investments in the business. And of course, we've got the normal costs associated with our colleagues and infrastructure and, the whole nine yards.
So we, we did assume, 3% in the FirstMerit, merger model, that's not a bad number to think about on a long term basis. As I mentioned earlier, we do get additional benefits from the cost takeouts on a full year basis in 2018. So that should be considered as well. On a seasonality basis, we typically see higher expenses in the 2nd quarter and that has do with a couple of things. We have, the merit change for our colleagues in the second quarter.
We also have some one time impacts from compensation, equity compensation hitting in the 2nd quarter as well. And then typically the 1st quarter is a little bit lower than the 3rd and the 4th quarter. So it's I would say lower in the first, higher in the second. And then, from a seasonality perspective, probably drifting down in the 3rd 4th is the way to think about it.
Great. Thank you. And then just one question, follow-up question. 38 branches and drive thru locations that were consolidated in the third quarter. Was that originally part of the FirstMerit transaction in the $255,000,000 of cost saves.
And I guess the reason I ask is I didn't see those expenses taken out press release in terms of, called a merger and acquisition related expense?
Yes, Terry, those were not a part of the original $255,000,000. When we announced this, we did disclose that we're reinvesting a good portion of the savings there into digital and in our colleagues. So I wouldn't expect that you would see a material impact in the run rate from from that transaction.
Thank you. Our next question comes from the line of Kevin Barker with Piper Jaffray. Please proceed with your question.
You brought up the net charge off guidance and one basis point. Not a big deal, but you also saw your classified loans to move higher a bit here. Could you just talk about the overall environment for credit and your expectations, into 4Q and then into 2018?
Yes. So I think this is Dan. I think, expectations are fairly stable. We've seen, as you noted, criticized did go up in the quarter, but that did incorporate, the SNC results from the most recent review We continue to feel we have a very proactive and conservative risk rating. And I think that's underscored by the fact that you haven't seen the migration into non accruals and then ultimately into charge offs.
So while the criticized loans were up, still feel that the portfolio is in really good shape. That is we're going to see a mild and gradual increase there. But overall, we feel very good about the portfolio and look for stability in the quarters to come.
Okay. And then a follow-up on, some of the revenue growth numbers or at least the loan growth that questions I've been asked. In regards to your ability to continue to generate operating leverage going into 2018, do you still require some type of loan growth in the mid single digits Or can you continue to generate that operating leverage, given the expense saving programs that you have in place even if loan growth comes in at the lower end of your expectations?
Yes, Kevin, I believe we can continue to generate positive operating leverage and in particular in 2018, you have to consider the revenue synergies that we're getting on a 1st merit investments we've made in the fee income in particular on on the Huntington side that are, that are taking hold. And we, we do continue to have good consumer loan growth of very high quality and attractive growth rates. So feel confident that, we'll we'll see positive operating leverage.
Our final question comes from the line of Peter Winter with Wedbush Securities. Please proceed with your question.
Good morning. Just given the comments that you're a little bit more cautious on commercial real estate and you've had good success expanding the indirect auto into other markets. Is that something that you would you think about ramping up that expansion of the indirect auto going into newer markets?
Peter, Steve Steinauer, we we like the footprint presence we have. We do not anticipate expanding into any new markets, at this time.
Okay. And then just very quickly follow-up. Can you talk about some of how it's going in the newer markets of Chicago and with constant and see more potential revenue opportunities there?
Opportunities. We've had a very good, start to small business lending, SBA lending in particular. We're number 2 in Chicago. On units and dollars and number 23 in Wisconsin on units and dollars. And that's from a 0 start.
So that has ramped up quickly. Our residential mortgage lending is ramping up. We'll be adding to the team, including in the 4th quarter on resi mortgage. We like what we have seen from the commercial teams. We had some great talent joining us from FirstMerit.
So feel really really pleased with, with how that team is performing, the commercial teams, how they're performing. And then the branches themselves, the consumer businesses are doing well and holding deposits and growing, growing our customer base. So pleased with the positions we've inherited in both states.
Great. Thank you.
Thanks Peter.
Ladies and gentlemen, we have reached the end of our question and answer session. I would like to turn the call back over to Steve Steinauer for any closing remarks.
So we produced solid results in the 3rd quarter and I'm confident we're going to finish the year strong. Our strategies are working and the execution of our goals continue to drive positive results. We expect to continue to gain market share and grow share of wallet. Our top priorities are growing our core businesses, and realizing the revenue synergies from FirstMerit. The integration of FirstMerit is substantially complete with the announced expense reductions fully implemented.
We expect the 4th quarter run rate to demonstrate these benefits and we expect to achieve all of our long term financial goals in the fourth quarter of 2017 and into 2018. Finally, I always like to include a reminder that there's a high level of alignment between the board, management and our colleagues and our shareholders. The board and our colleagues are collectively one of the largest shareholders of Huntington. We have hold the retirement requirements on certain shares So we will continue to proactively manage risks and volatility and are appropriately focused on driving sustained long term performance. Thank you all for your interest in Huntington.
We appreciate you joining us today. Have a great day.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.