Greetings, and welcome to the Huntington Bankshares Second Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn your conference over to your host, Mark Moose, Director of Investor Relations.
Thank you. You may begin.
Thank you. Welcome. I'm Mark Moose, Director of Investor Relations for Huntington. Copies of the slides we will be reviewing can be found on the IR website of Huntington's website, huntington.com. This call is being recorded and will be available as a rebroadcast starting about 1 hour from the close of the call.
Our presenters today are Steve Steinauer, Chairman, President and CEO and Mac McCullough, Chief Financial Officer. Dan Newmayer, our Chief Credit Officer, will also be participating in the Q and A portion of today's call. As noted on slide 2, today's discussion, including the Q And A period, will contain forward looking statements. Such statements are based on information and assumptions available at this time and are subject to changes, risks and uncertainties, which may cause actual results to differ materially. We assume no obligation to update such statements.
For a complete discussion of risks and uncertainties, please refer to this slide and material filed with the SEC, including our most recent Forms 10 K, 10 Q and 8 K filings. Let's get started by turning to Slide 3. An overview of
the 1st 2nd quarter results. Mack? Thanks, Mark, and thanks to everyone for joining the call today. As always, we appreciate your interest and support. We are pleased with our second quarter financial performance including record net income and we continue to make solid progress with FirstMerit integration completing the remaining FirstMerit systems conversions during the quarter.
Steve will provide a more detailed update on the integration later in the call. During the quarter, we also We believe our DFAST credit losses to distinguish Huntington among our peers again this year. Our cumulative stress losses and the very diverse scenario where the 4th lowest, our 3rd consecutive year to be among the 4 lowest regional banks. We also received no object from the Federal Reserve to our proposed capital plan submitted in the CCAR process. The capital plan includes an increase in the cash dividend from $0.08 per share $1.11 per share beginning with the fourth quarter of 2017 dividend, subject to board approval at that time.
The repurchase of up to $308,000,000 of common stock over the fourth quarter period through June of 2018. The reinstatement of the buyback is an important milestone for Huntington as we have completely replenished our CET1 capital ratio following the strategic capital deployment in the FirstMerit transaction. Let's now turn to slide 3 and review 2nd quarter results. Please keep in mind that all Unnington reported, earnings per common share of $0.23 for the second quarter of 2017, up 21% over the year ago quarter. This is inclusive of $0.03 per share of significant items related to the FirstMerit acquisition, which also impacted the financial metrics that I will highlight on this slide.
Also included, including the significant impact of the impact of significant items, return on assets was 1.09% Return on common equity was 10.6 percent and return on tangible common equity was 14.4%. Cashable book value per share decreased 8% from the year ago quarter to $6.74. Tangible book value per share was up 3% sequentially from the first quarter. Total revenue increased 2.95 dollars or 37% year over year, which included 47% growth in net interest income and 20% growth in non interest income. Non interest expense increased $171,000,000 or 33 percent year over year.
Non interest expense adjusted for the year over year change in significant items increased $141,000,000 or 28 percent year over year, reflecting the addition of FirstMerit and ongoing investments in technology, including digital, mobile and cyber and ongoing investments in our colleagues. Our reported efficiency ratio for the quarter was 62 0.9%. However, net acquisition related expense added 4.6 percentage points to the efficiency ratio. Adjusting for the significant items, the adjusted efficiency ratio was 58.3%. The reconciliation for this number can be found on slide 16.
Moving on to the balance sheet, average total loans grew 30% year over year while average deposit growth fully funded loan growth increasing by 39% year over year. Credit quality remains strong. With improvement in the quarter. Consistent prudent credit underwriting is one of Huntington's core principles. And our financial results continue to reflect our disciplined risk management.
Net charge offs were 21 basis points of average loans remaining well below our long term financial goal of 35 to 55 basis points. This is up from 13 basis points in the year ago quarter but down slightly from 24 basis points in the first quarter of 2017 consistent with normal seasonality. The NPA ratio decreased by 32 basis points from a year ago, benefiting in part from the impact of purchase accounting, and the acquired portfolio. We managed Finally, our capital ratios continue to increase. As of quarter end, our CET1 ratio was 9.88% well within our 9% to 10% operating guideline, while our TCE ratio was 7.41%.
As I mentioned previously, our CET1 ratio is now above our pre 1st merit level from a year ago, while other capital ratios continue to replenish. Turning to slide 4. Total revenue was up 37% from the year ago quarter, primarily driven by net interest income. Was up 47% reflecting the addition of FirstMerit and disciplined organic growth. The net interest margin was 3.31% for the second quarter, up 25 basis points from a year ago and up 1 basis point on a linked quarter basis.
Purchase accounting had a favorable impact of 15 basis points on the net interest margin in the 2nd quarter compared to 16 basis points in the 1st quarter. Non interest income increased 20% 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 the FirstMerit acquisition as well as organic customer acquisition and continued increased customer debit and credit card activity. Non interest expense increased 33% year over year.
Significant items again impacted both 20172016 second quarter expenses. For the second quarter of 2017, acquisition related expense totaled 50,000,000 Adjusted non interest expense in the 1st quarter grew 28% from the year ago quarter, primarily from the inclusion of 1st merit. Compared to the first quarter of 2017, adjusted non interest expense increased $10,000,000 or 2 percent driven primarily by the seasonal increase in marketing and the seasonal increase in personnel expense related to the implementation of annual merit increases and long term incentive grants in the second quarter. These increases were partially offset by the benefits from the first merit cost takeouts. For a closer look at the details behind these calculations, please refer to the reconciliations on page 15 of the presentation slides or in the release.
Let me also reiterate we remain on communicated when we announced the FirstMerit acquisition. The successful FirstMerit conversion and branch consolidations particularly with respect to consumer deposit retention positions us to re examine our fiscal distributions sooner than we would have otherwise expected. As a result of this review, we recently announced the planned consolidation of 38 branches plus 7 drive through only locations, all of which are expected to close late in third quarter. These locations included both legacy Huntington and legacy FirstMerit branches. This could be viewed as a modest upsizing of our cost savings expectation by a couple $1,000,000 per quarter.
However, the additional savings are not expected to fall to the bottom line as we have recently accelerated some of our ongoing technology investments, especially digital. 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. In 2016, we enjoyed our 4th consecutive year of positive operating leverage we remain confident that 2017 will be the 5th consecutive year. Moving to slide 6.
Average earning assets grew 35% from the year ago quarter. This increase was driven primarily by in average securities and a 31% increase in average C and I loans. 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 fourth quarter of 2016 and additional investments and liquidity coverage ratio level 1 qualifying securities. During the second quarter, average total loans increased about 0.5% compared to the prior quarter. In light of normal seasonality coupled with our expectation for a modest increase in economic activity in our footprint over the remainder of the year, we are reiterating our expectation for period end loan growth of 4% to 6% for the full year 2017.
The year over year increase in especially lending verticals, business banking and auto floor plan. During the second quarter, we continue to face headwinds in corporate banking as a of these large borrowers paid down their bank debt by accessing the debt markets in order to lock in current low rates. This quarter also saw an elevated amount of runoff from FirstMerit loans targeted to exit the bank as they did not fit our strategy or risk appetite. These were all loans identified during the due diligence and included both auto floor plan and middle market commercial credits. C and I balances were further impacted by payoffs and paydowns of certain non performing loans, helping to drive a 9% sequential decline in non performing assets.
We also experienced paydowns and runoffs within the commercial real estate portfolio, which declined 4% sequentially. Average auto loans increased 12% year over year with the 2nd quarter representing another strong quarter of consistent disciplined loan production. Originations totaled $1,700,000,000, up 6% year over year. Average new money yields on our auto originations were quarter, up from 3.54 percent in the prior quarter and up almost 50 basis points from the year ago quarter. Average residential mortgage loans increased 29% year over year as we continue to see strong demand for mortgages across our footprint.
As typical, we sold the agency qualified mortgage production in the quarter and retained jumbo mortgages and specialty mortgage products. Turning attention to the chart on the right side of slide 7. Average total deposits increased 38% from the year ago quarter. Including a 39% increase in average core deposits. Average demand deposits increased 56% year over year.
We remain pleased with the trend in funding mix, particularly the increase in low cost VDA. This reflects the addition of FirstMerit's low cost deposit base as well as our continuing focus on checking account relationship acquisition. We continue to experience a late modest core deposit attrition so far from the FirstMerit acquisition limited primarily to certain governments and corporate deposits. Further, we have had tremendous success on the consumer side as consumer deposits from FirstMerit customers and former FirstMerit branches were up 2% between August 2016 June 2017. Importantly, we remain ahead of our original pro form a model with respect to retention of deposit balances.
Moving to slide 7. Our net interest margin was threethirty 1 for the second quarter of 25 basis points from the year ago quarter. Increase reflected a 34 basis point increase in earning asset yields and a 2 basis point increase in the benefit of non interest bearing deposits. Balanced against an 11 basis point increase in funding costs. On a linked quarter basis, the net interest margin increased by 1 basis point driven by a 5 basis point improvement in earning asset yields and a 3 basis point increase in the benefit of non interest bearing deposits.
Partially offset by a 7 basis point increase in funding costs. The increase in funding costs was more heavily weighted to wholesale funding As we remain pleased with our ability to successfully lag deposits, pricing so far as our cost of total deposits only increased three basis points. Purchase accounting contributed 15 basis points to the net interest margin in the 2nd quarter, down from 16 basis points in the prior quarter. After adjusting for this impact, the core NIM was 3.16% compared to 3.14% in the first quarter. Also adjusted for the impact of purchase accounting and 3.06 percent in the second quarter of 2016.
The linked quarter comparison improves by approximately one basis point if you adjust for day count. As I just mentioned in calling your attention to orange line at the bottom of the graph on the left. Our cost of total deposits was only 22 basis points for the second quarter. This represents a 6 basis point increase over the year ago quarter and a 3 basis point increase sequentially. Clearly illustrating the strong deposit base we enjoy and our ability to successfully lag deposit pricing.
We have seen consumer and small business deposit pricing remain relatively steady in the face
commercial. On the
earning asset side, our commercial loan yields increased 57 basis points year over year and consumer loan yields increased 48 basis points. On a linked quarter basis, commercial loan yields increased 11 basis points while commercial loan yield consumer loan yields increased 4 basis points. Security yields were relatively flat with both the prior and year ago quarters. Approximately $625,000,000 of asset swaps matured in the second quarter and we intend to continue to allow the remaining swaps to run off by the first quarter of 2018 is scheduled. Accounting adjustments on an annual forward looking basis.
We introduced this slide last fall and believe it is useful in helping you think about purchase accounting accretion going forward. It is important to note that the purchase accounting accretion estimates on this slide are based on current scheduled accretion and except for what we experienced in the first half of twenty seventeen do not include any accelerated accretion from the accelerated recapture through early payoffs or extensions in the projected periods. As we have stated previously in our results, the past 4 quarters illustrate 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 in the green bars continue to be pulled forward as modifications and early payoffs occur. Let me also remind you that some of and we established a loan loss reserve in normal course.
As a result, we intend to continue to provide regular updates of this schedule going forward until the majority of the purchase accounting accretion has been recognized. Turning to slide 9. From the very beginning, we made it clear that value creation for the FirstMerit acquisition was built upon the significant cost savings inherent in the deal. And that our financial projections did not depend on revenue synergies. That said, we believe there is a significant revenue enhancement opportunities some near term and some longer term which will be additive to the baseline economics of the deal.
Slide 9 is an update of a slide you have seen numerous times in the past 3 quarters discussing our expectations for achieving the full $255,000,000 of annualized cost savings and illustrating our $609,000,000 adjusted non interest expense target for the fourth quarter of 2017. As we have stated previously, the $609,000,000 adjusted expense target excludes expense from intangible amortization the FDIC's temporary surcharge and the incremental expense from FirstMerit related revenue enhancement initiatives. The chart on the upper right details these items and provides our initial estimate of the incremental expense from the revenue initiatives, dollars of total incremental expense from the revenue initiatives this year and $50,000,000 in 2018. As I mentioned during last conference call, we expect the revenue initiatives to have an incremental efficiency ratio of approximately 50% in 2018, and higher this year as they ramp in revenues will naturally lag some of the upfront expense. Slide 10 provides additional detail on the first merit related revenue enhancement opportunities.
The bar chart on the top of the slide displays our current targets for additional revenue from the initiatives which are detailed below. In 2017, the revenue ramp corresponds with incremental hiring and the corresponding increase in production. For 2018, we are targeting the $100,000,000 of total revenue enhancements that we have discussed since we announced the deal. The bottom half of the slide details some of the specific revenue enhancement opportunities we have discussed in prior presentations. First, there is a significant opportunity to deepen our relationships with legacy first our OCR strategy, our more robust products and capabilities, and our deep commitment to excellent customer service.
We are encouraged by the early Next, our interest into Chicago and Wisconsin represent attractive opportunities in two areas where we've made significant investments and developed strong capabilities. SBA Lending And Mortgage Banking. Our past results illustrate that SBA Lending is a distinctive area of expertise and strength for Huntington. We're excited to expand our SBA expertise into these new markets, especially Chicago, where there are more small businesses in the entire states of Ohio or Michigan. We are fully staffed on SBA lenders in these 2 new markets and we are highly confident in our success based on our results.
In fact, as of June, Huntington has increased from basically 0 presence a year ago, to the number 4 most active SBA 7A lender in both Illinois and Wisconsin. We also feel there is an opportunity to expand our mortgage banking business in these markets and our overlap markets. We have made significant investments in our mortgage banking platform in the past few years, and the expansion provides further opportunity to leverage our enhanced capabilities. Again, we have already added new mortgage lenders in these new markets and are especially pleased with the talent and production we are seeing out of the Chicago market. Finally we believe there is an opportunity to expand FirstMerit's recreational vehicle and marine finance business.
Nick Stannitz, who is the head of our highly successful auto finance business, runs RV And Marine Finance, with the same discipline, risk management protocols, and in some cases, technology that he applies to our super prime auto finance business. We have expanded this business from its prior 17 state footprints to 34 states and the earlier results are already exceeding our business plan. Slide 11 illustrates the continued progress we've made in rebuilding our regulatory capital ratios following the FirstMerit acquisition. Common Equity Tier 1 or CET1 ended the quarter at 9.88 percent, up 8 basis points year over year. We have mentioned previously that our operating quarter at 7.41 percent, down 55 basis points year over year, but up 13 basis points linked quarter.
Moving to slide 12, we booked provision expense of $25,000,000 in the 2nd quarter compared to net charge offs of $36,000,000. The lower provision expense this quarter reflected the overall improvement in credit quality and reduced purchase accounting mark amortization. Net charge offs represented an annualized 21 basis points of average loans and leases which remains below our long term target of 35 to 55 basis points. Net charge offs were down 3 basis points from the prior quarter and up eight basis points from the year ago quarter. As usual, there is additional granularity on charge offs by portfolio in the analyst package in the slides.
In particular, I would point out to you the improvement in auto net charge offs this quarter. The ACL as a percentage of loans decreased three basis points linked quarter to 1.11%. But the NAL coverage ratio increased to 2 7% as a result of the 9% linked quarter decline in non accrual loans. Overall asset quality metrics remained strong. Nonperforming assets decreased $43,000,000 or 9% linked quarter.
The NPA ratio eased 7 basis points sequentially to 61 basis points. The criticized asset ratio decreased 6 basis points from 3.72% to 3.66%. Our 90 day plus delinquencies remained essentially flat. We also continue to experienced lower NPA inflows in the third quarter in a row. Let me now turn the presentation over
to Steve. Thanks Mac and good morning to all of you. On the homestretch of our prepared remarks. So, moving to the economy slide 14, we illustrate selected key economic indicators for our footprint. Now, previously noted, our regional footprint has outperformed the rest of the nation during the economic recovery over the last several years, I remain bullish on the outlook for the local economies across our 8 states.
The bottom left chart illustrates trends in the unemployment rates across our footprint, And as you can see, unemployment rates across the majority of our footprint continued to trend favorably. The chart on the top and bottom right show coincident and leading economic indicators for the region. As shown in the top chart, 5 of the 8 states and our footprint produced stronger economic growth in the nation as a whole and during 3 months through May, which is the most recent data available further as depicted in the bottom chart, the leading indexes of for our footprint as of May showed that 70 eight states expect positive economic growth over the next 6 and many of the large MSAs in the footprint remain at or near 15 year lows for unemployment as of the end of May. Labor markets in our footprint have proven to be strong with several markets such as here in Columbus and in Indianapolis and Grand Rapids, where we see labor shortages Now we previously noted 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. There are also exciting pockets of innovation centers developing in our footprint, including here in Columbus, in Pittsburgh and in Ann Arbor, Michigan, for example. In fact, there was a recent article in the New York Times discussing some of the innovation centers related to the auto industry. Can tell you the Transportation Research Center at Ohio State is world class and is incredibly significant to the future of sighting element to the economic outlook for our footprint. And finally, we continue to see optimism across our consumer and business customer base.
Our loan pipelines have remained steady. We continue to expect that economic activity and thus loan production will modestly improve in the second half of the year. So, let's turn to Slide 16 for some closing remarks and important messages. We've delivered good results in the second quarter, a record quarter of net income Our financial performance in the first half of the year was solid and we successfully completed the FirstMerit Systems conversion. We're very focused on driving revenue and achieving the financial benefits inherent in the FirstMerit acquisition.
We remain focused on delivering consistent through the cycle shareholder returns and this strategy entails reducing short term volatility and achieving top tier performance over the long term and maintaining our aggregate moderate to low risk profile throughout. We were pleased with the DFAST and CCAR results released in June, which provided important industry comparisons and illustrates our strong enterprise management and our discipline to operate within our credit risk appetite. The non objection from the Fed to our CCAR capital plan sets us up to significantly increase our cash dividend for the 4th consecutive year and reinstate our buyback program. The FirstMerit acquisition accelerated our ability to achieve our long term financial goals. And with the integration largely complete, We expect to deliver against goals from the acquisition, with the only unlimited number left to be implemented in the third quarter.
All remaining cost savings will be completed by including the SBA and home lending expenses in Chicago and Wisconsin and the RV And Marine Lending expansion. This is combined with the OCR opportunity from bringing our superior products and services to our expanded customer base. Now all of which have been discussed on previous earnings calls and investor conferences. It's very exciting to build on these initiatives and to see them perform a these levels. We continue to execute on delivering a differentiated customer experience built upon our welcome culture and our relationship focus to drive sustained core deposit and loan growth.
We've invested and as we've often indicated, we'll continue to invest in our businesses particularly within our customer facing teams and in mobile and digital technologies as well as data analytics. Importantly, we plan to continue to appropriately manage our expenses within expenses when conditions high level of alignment between the board management, our colleagues and our shareholders. The board and our colleagues are collectively the 5th largest shareholder of Huntington. We have hold your retirement requirements on certain shares and are appropriately focused on driving sustained long term performance. Our outlook for the full year of 2017 is unchanged from what we We continue to expect total revenue growth in excess of 20%.
Consistent with our long term financial goal, we are targeting annual positive operating leverage. Expect average balance sheet $55,000,000 of annualized cost savings from the first Merit acquisition by the third quarter. 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. So with that, I'll turn it back over to you, Mark, so we can get to
your questions. Thanks, Steve. Operator, we'll 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.
Our first question is from Steve Ken Usdin from Jefferies. You may state your question.
Mac, just wondering, just on the loan growth outlook, you talked about the pay downs in commercial and CRE and just wondering, are you expecting loans to get better as you go through the second half to get to that 4 to 6 range? And are you still contemplating an auto digitization within that 4% to 6% outlook? Thanks.
Yes. Thanks, Ken. So we do expect the second half of the year to improve from organic growth perspective. And we did have the headwinds that we talked about with the FirstMerit exits. We're all all were anticipated, all we actually identified during the due diligence process.
And I would tell you that there's probably $200,000,000 there that came out in the quarter. We do anticipate an auto securitization yet this year, which is included in the 4 to percent guidance that we've given. And would tell you that the pipelines are where we've seen them in terms of the the strength and what's coming through. So again, we do expect to see some improvement as the year progresses.
Also had Ken about a 2% drop in commercial utilization. So a fair amount of of headwind in the second quarter with the combination of those factors and, and we came through that. And so the pipeline, as we sit here today, reflects essentially what we had, at the end of the first quarter. And, and a lot of we think a lot of the headwinds that now have been adjusted.
Okay. And just a follow-up on another side of the balance sheet. So Mac, your point about the reserve build related to the First Merit New Loans. This quarter, you had not only really low charge offs but a reserve release. So just can you just try to walk us through what are these components moving on?
And do we kind of go back to the reserve builds or just this one seemed to be a zag within that broader commentary of continuing to expect reserve to build over time? Thanks.
Yes. Hey, Ken, this is Dan. So this was an unusual quarter for us. So,
obviously, we
did have the credit quality improvements, particularly in C and I, a big reduction in non accrual loans of about 9%.
The interesting thing was this quarter,
a number of those loans had large specific reserves tied to them. So our largest single specific reserve, we got paid out of that credit And then we had a couple of our, 2 of our next three largest credits were energy deals where we had pay downs of the loans and improvement in the collateral and cash flows negating the need for specific reserves on those. So that that combination was an unusual dynamic. So On a go forward basis, we would expect, that natural curve, we would expect, as we've said, a slow and gradual move back towards the coverage ratios you would have seen prior to the FirstMerit deal. Think about charge offs plus some room for a growing portfolio is how we think about it.
Ken, I just point out I'd point out that we had good performance in auto. So across the board, the metrics really were quite strong. It's unusual where it were literally everything comes positive in a given quarter. And in this so we had one of those. This is exceptional and not the norm.
Understood. Good to see the underlying though as well. So thanks Steve.
Absolutely. Thank you. Thanks, Ken.
Our next question is from Steve Moss with
Hey, guys. This is actually Kyle Peterson on for Steve today.
I was wondering if we
could start on margin, specifically kind of the core when you kind of strip out the accretion, got a couple of bps of expansion this quarter. I'm just wondering what you guys were kind of thinking between the loan and deposit side benefit from a June rate hike?
Yes. So, Kyle, we're going to continue to see expansion in the core margin. We haven't seen all the benefit on the loan side, from the tune increase. And we continue to manage the cost of deposit really well as you can see with a 3 basis point increase on a linked quarter basis. So so clearly, we think that there's expansion in the core margin from here.
And, yeah, adjusting for day basis in the second quarter, we're probably up three basis points from the first quarter
Okay, great. And then I guess if you just expand a little bit on that, kind of on the swaps. I know you guys have been kind of paring back some of that exposure, just kind of potential impacts that could have on NIM with any future rate
hikes kind of once those are all rolled off?
Yes. So the asset swaps continue to roll off as scheduled and we don't have any plan to replace those. We're currently about 6.4% asset sensitive and actually without the asset swap it only adds 10th of a percent to asset sensitivity. So really the asset swaps are pretty much non event at this point.
Okay, great. Thanks guys.
Thanks a lot.
Our next question is from Scott from Sandler O'Neill And Partners.
So first of all, thank you guys for adding those slides, 910 with the 4Q expense expectation as well as the sort of the walk forward on the revenue side. I don't mean to pin you down too much on the near term expectation, Mac, but could you kind of walk us through the expense trajectory for the remainder of the year? Because I guess what's implied is you come down a little from this quarter's call it $645,000,000 to the $6.39 in the remainder of the year. And just there were a few puts and takes, right? I guess you have seasonally updated a couple of areas in the 2Q, but then you also presumably have the branch consolidation benefits.
I think though you said there are some offsets on the digital investment side. So how should we expect expenses to progress through the remainder of this year?
Yes, Scott. So, so a few things. I mean, we are highly confident in the 609 for the fourth quarter excluding the intangible amortization and the FirstMerit revenue initiatives. The 2nd quarter that we're looking at is seasonally higher. We have merit increases in this quarter.
We have the impact of some stock compensation expense that hits this quarter and is one time in nature as it relates to the year. And we also have some seasonally higher marketing this quarter. So those three things alone are probably $10,000,000 to $15,000,000, closer to $15,000,000. So very, very confident as we move from this level down to the 609 in the fourth quarter as I described. Okay.
All right.
I think that actually does it for me. So that's a helpful, sort of walk through. So I appreciate that.
Thanks, Scott.
Okay. Our next question is from John Afstrom from RBC Capital Markets.
Did have a bigger question, but
I just wanted to ask on the swaps, Mac, buried in the details, it looks like the swaps maybe cost you a little bit of money on commercial loan yields this quarter. Is that am I looking at that correctly?
That would be correct.
Okay.
And is it a bit of
a headwind again in Q3 and Q4? And then as we see these swaps roll off, it's maybe helpful in 2018 to commercial loan yields?
Yes, absolutely. It'll be a headwind through the first quarter of 2018, but really pretty small in the scheme of things. And then once they're gone, we get the full benefit of the rate increase coming through on the adjustable C and I loans.
Okay, okay. Good. That helps. On the incremental reduction in branches, Steve, is it, do you view this as a one time item or is this something that's ongoing? And could we see more of this as things progress?
John, we've been, suggesting that we would review the branches like any good retailer periodically. We tend to do it about every year and the track record would show a fairly consistent period of activity between every year, year and a half. For the last 5, 6 years. So we will continue to operate with that. But again, like any good retailer, we'll be looking at our distribution.
We are seeing continued, in particular, mobile take up by our customers, both consumers and business. It's one of the reasons we're investing more, if you will, accelerating some of our plans And, and so you could expect to see more distribution consolidation from us over time.
Okay.
We remain John with number 1 brand share in Ohio and Michigan. So you think about that over an extended period of time, and as this transition to more and more mobile occurs, think it gives us a really significant set of opportunities over time.
Okay. Does this change your thinking at all on distribution in Chicago, in terms of maybe looking at a more digital expansion of your retail business in Chicago?
No, it doesn't change our strategy because it's been consistent. We're looking for niche opportunities principally business focused. We're not going to run the same plan in Chicago that we're doing in Ohio and Michigan in terms of, of, dense distribution. We will, we do think of Ohio Chicago as a opportunity to pilot some of what we want to get done with mobile and, and we'll continue to use it on that base. The combination of, mobile and digital and data and analytics, in a market as dense as Ohio is very attractive to us with the current distribution.
We're subscale. I don't think we we're highly unlikely to build it out. So we'll be coming at it differently.
Okay. All right. Thank you. Thanks Sean.
Our next question is from Kevin Reevey with D. A. Davidson. You may proceed.
Good morning, Kevin. So it
looks like 2nd quarter you had some very strong performance in your Capital Markets business. What's the pipeline going forward into the third quarter? Do you expect this line of business to continue to remain strong? Is this kind of more seasonal than anything else?
Kevin, we had a really good quarter in second order and a lot of that activity can be tied to either market circumstances volatility or commercial activity. And as we've said, we think commercial activity in the second half of the year is better than the first half or will be. And and we're off to a pretty good
pricing. It sounds like you were able to continue to lag your deposit pricing in the quarter, which should help you a little bit on the on the margin. How many rate hikes do you think it will take before you will have to kind of start moving your deposit pricing up?
Kevin, it's going to be really based on what's happening in the marketplace. We are seeing a little bit more competition in our markets, but feel very confident in our core deposit base because of the strategy that that we put in place starting in 2010 around building relationships, the quality of the Fairplay product sets and mindset and how do we actually service the customer? We think it gives us an advantage in times like this when we see increases in deposit pricing and we can maybe lag a little bit more than the competition even. We're really pleased with what we've been able to do so far. The deposit betas are very attractive for us at this point in time, but I would think by the time we get at least into the second increase from here.
We'll see a bit more pressure in what's happening.
Our next question is from Jeffrey Elliot with Autonomous Research. You may proceed.
Good morning. Thank you. Hi. Thank you for taking the question. I wondered if you could speak a little bit more about also you had some growth this quarter.
What's your appetite for growing also like at the moment? And how is the competitive environment shaping up?
Jeff, we, we, remain highly confident in, in, the quality of what we're underwriting. We're very, very disciplined and you see the statistics every quarter. The credit quality performance, you know, we've been there's been an anxiety around auto for the last 3 years. The credit quality performance and the consistency of it I think is clearly coming through as it did in this quarter in particular. And So, we will, we have limits in place in terms of what we believe on balance sheet.
We use securitization as a as an outlet. We'll continue to do that as you heard Mac talk about it. It's not a business where we expect to to adjust the limits that we have now and we'll operate within those guidelines. We ramped it up a bit, post QE3 and just believe them that with our discipline on credit that we were getting a better risk return trade off than what was available in securities. We continue to believe that as we look at the business today and compare it to alternative risk returns.
And on the competitive side, how are how things shipping up there. We've seen some of the other banks pulling back a bit. Is that creating opportunities?
There is, This industry cycles on the finance side. And, we think we're entering 1 of the more attractive periods like 20 101112 were attractive. So there's a bit less competition, as others pull back, those that bought deep are clearly feeling the challenges from the credit risk they saw. And so a combination of factors, I think, are making it even more interesting to us prospectively. We're also applying some of our data and analytic to this portfolio.
We've been managing, with some unique tools over the last year and a half. We think we're making better, better trade off decisions. And pricing clearly has gone up as we wrap that's up about 50 basis points, Q2 last year to this year.
Great. Thank you very much.
Thank you.
Our next question is from Kevin Barker with Piper Jaffray. You may proceed.
Good morning. Hi, Kevin. In regards to the comment about the swaps earlier, would you expect some of that incremental entry income or at least the interest headwind to start to be released over the 3rd fourth quarter before the swaps actually expire in the first quarter. Or is it something where it just happens as a full maturity in the first quarter?
Well, it's it basically will run off pro rata along with the runoff of the swaps themselves. It's very laddered Yeah, it is. So it's very gradual from this point to the first quarter of 2018. It's actually a very amounts in the first quarter of 2018.
So at the short end of the yield curve stays where that stays stable from where it is today until the first quarter. How much of a tailwind would you expect on interest income?
Related to the swaps? Yes. Yes. It's a very small number. I mean, I think it's probably $1,000,000,000 or $2,000,000,000.
I mean, it's not large at all.
The specific details will be in the footnotes in the queue, here in a few weeks. Okay.
And then in regards to the revenue synergies that you're generating off of the $50,000,000 investment, What specifically have you seen so far in the second quarter? Start to benefit and start to come through on the income statement?
Well, we obviously have our mortgage production and pipeline and we're seeing that flow through very significantly. 1st, Merrick was not an SBA lender, so for us to number 3 in Chicago, 4 in Chicago depending on what you want to measure and the same with Wisconsin. That's all a result of the initiatives. We're starting to break out some of the RV marine portfolio, as well for you so you can see the the growth in that portfolio. And it's a portfolio that has performed very well through the cycle for First Merit.
And we have some experience in terms of the team we put in place about 2 years ago now to help us understand and manage that. And so we're able to leverage the skill sets and technology somewhat in auto and apply it to that book as well. So we see in terms of broadly the OCR activity, whether it's cross sell of products, at the branch level or through phone or other distribution channels, we're able to track that and we see that coming on as well. So, we're We like what we see, occurring now and there's been a lot of effort to make sure the conversion and integration activities went really well through the first half of this year. So second half is entirely a focus on driving that revenue.
Further. And Kevin on slide 10, you can see the progression by quarter of the revenue related to the initiatives for 2017. And you can see it for 2018 as well with the expected expenses with those initiatives on slide 9.
Thank you
for taking my questions.
Operator, next question.
Our next question is from Marty Mosby with Finings Sparks. You may proceed.
Thanks. Martie, I wanted to back up a second because we've been talking about a lot of minutiae and details, and we really haven't talked about the key result from what you've been able to do with FirstMerit acquisition. And that is the improvement in return on tangible common equity It's the one thing that we don't have a trend in this massive presentation to give out, but yet looking at how that's stepping up, And then, you know, Mac, you just talked about the impact of the seasonality in expenses, which actually held back this particular quarter. So, a step up from what was a 12% return before the acquisition now is getting to when you look into next quarter and take that seasonality out something north of 15% and even could be close to 16% next quarter. So you're seeing that kind of benefit come through.
And as you're then going to generate synergies going forward, where do you think we kind of push forward on that particular metric? Because I think that's the end result of the combination you've made here.
Well, Marty, when we announced the deal, we talked about it as accelerating and enhancing our long term financial goals. And one of those is a TCE, a return on TCE of 13% to 15% and At the announcement, we suggested we saw our way to the upper end of that and we in fact expect to deliver that and potentially go beyond it depending on what is occurring in the economy and sort of the interest rate environment. But we're we're very, very focused on those metrics and that's an important one. Maybe one of the most important ones for us And as we've talked before, our board will be reviewing performance against the metrics, and, and coming into next year, terminating whether they should be adjusted or not. We do feel this was a very powerful, transformational opportunity for us and we think we're executing it very well.
So, that combination should put us in a position over just another couple of quarters where we can show without one time expense or transactional related expenses, a pretty strong performance. Anything we're adding?
I got sums it up really well. I mean, That's one of the reasons why we did the deal. It's obviously a great strategic fit, risk appetite was right. Customers we know, great colleagues and improving the return profile. So, we feel like we're right on track in terms of what we expect.
And then, Mac, just in the follow-up in that kind of vein is, when you look at the purchase accounting accretion, way that kind of works out, you have been offsetting most of that benefit from building allowance. This particular quarter you had some events that didn't turn out that particular way. But when you're looking at personnel accounting accretion versus the eventual synergies that you pick up, it's almost like that little schedule that you put down there and show that versus the, intangible, again, kind of write off You ought to put the synergies on there too to show the 3 elements. In other words, the other piece of the puzzle is the synergies you're going to build instead of a positive number that's going to go negative over time, you actually have the reverse. You have the synergies kind of come in and over swamp this particular diagram.
So, it's a little misleading in a sense that feels like, oh my gosh, we're accelerating the benefit when in reality you have things to offset the PAA as it rolls off?
No, that's a great observation, Marty. We appreciate you bring that up.
Thanks.
Thank you.
I would like to turn the call back over to Steve Seinauer for closing remarks.
So, thank you all. The first half of twenty seventeen produced solid results And as you can tell, we're excited about our prospects to finish the second half of the year strong. The integration of FirstMerit is largely complete we're now focused on the revenue upside. Our success with the integration accelerates the achievement of our long term financial goals as we were just talking about and our strategies are clearly So finally, I just want to reiterate that our board and management team are all long term shareholders, our top priority Our top priority is realizing revenue synergies from FirstMerit as well as growing our core business. And at the same time, We'll continue to manage risks and volatility and drive solid consistent long term performance.
We remain optimistic about our future performance, thank you for your interest in Huntington. We appreciate you joining us today. Have a great day.
Thank you. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.