Greetings, and welcome to the Huntington Bankshares Fourth Quarter Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mark Moose, Director of Investor Relations.
Thank you, Melissa, and welcome. I'm Mark Moose, Director of Investor Relations for Hunt. Copies of the slides we will be reviewing can be found on our IR website at www.huntingtonir.com. Or by following the Investor Relations link on www.huntington.com. This call is being recorded and will be about 1 hour from the close and Mac McCullough, Chief Financial Officer.
Dan Newmayer, our Chief Credit Officer, will also be participating in the
Q And A portion of the 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. Recent forms 10 K, 10 Q and 8 K filings. Let's get started by turning to Slide 3 and an overview of the financials for 2016.
Mac? Thanks, Mark, and thanks to everyone joining the call today. As always, we appreciate your interest and support. 2016 was a transformational year for Huntington. As you know, we closed the acquisition of FirstMerit in the third quarter, and much of our efforts since close has been focused on ensuring a smooth and seamless integration.
We are extremely pleased with the progress we are making in bringing the 2 companies together as 1. As evidenced by 4th quarter results, we are already seeing significant benefit in our efficiency ratio and return on tangible common equity. We are looking forward to introducing the distinctive Huntington brand the Chicago and Wisconsin markets later this quarter helping to accelerate our long term growth rate. All of our colleagues are engaged and excited by the opportunities in front of in 2017 longer term. Before we move to the detailed financials, I want to provide a few quick comments on the integration.
As Steve will discuss later in the call, we are ahead of schedule as we completed a number of significant milestones in the fourth quarter. Our new colleagues are embracing our fair play philosophy and welcome culture and they are excited to have access to Huntington's more robust product set and capabilities. We are very pleased with our progress thus far but we know the work is not yet finished. We are focusing on achieving flawless execution with the conversion resulting in minimal disruption for our customers that in mind, let's move to Slide 3 and discuss the full year 2016 financials. As I mentioned, 2016 was a transformational year for Huntington.
And there were acquisition related significant items, which affected bottom line results. I want to emphasize that legacy Huntington performance, including our net interest margin, operating leverage and balance sheet growth continued to meet, if not exceed our expectations in 2016. We delivered core revenue growth well within the range of our long term goal, positive operating leverage for the 4th consecutive year, and a NIM greater than 3% 16 fourth quarter of 2016, please note the comparisons to previous periods are inclusive of 1st merit. Huntington reported earnings per common share of $0.67 for full year 2016. This is inclusive of $0.20 per share of significant items related Tangible book value per share decreased 7 percent from the year ago quarter to $6.41.
Return on tangible common equity was 10.2% while return on assets was 0.82%. Full year revenue increased 18%, which included 11% growth in non interest income. Full year non interest expense grew 24 percent, although after adjusting for FirstMerit acquisition expense, full year non interest expense growth was 13%. Average total loans grew 18% for the full year while average core deposit growth fully funded loan growth also increasing by 18% year over year. Credit quality remained strong in 2016.
Consistent prudent credit underwriting is 1 of Huntington's core principles. And 2016's financial results continue to reflect that. Net charge offs were 19 basis points of loans, relatively flat from 2015, while remaining well below our long term financial goal of 35 55 basis points. The NPA ratio decreased 7 basis points from year end 2015. We managed the bank an aggregate moderate to low risk appetite and our results illustrate this disciplined focus.
Finally, our capital ratios declined midyear effectively deployed capital via the acquisition of FirstMerit. Assisted by the balance sheet optimization strategy that we detailed on the 3rd quarter earnings call, and that was completed in the fourth quarter, we have strengthened our capital ratios since acquisition close. And as of year end 26 18, our CET1 ratio was 9.53 percent, well within our 9% to 10% operating guideline. Moving to slide 4, let's take a look at some of the financial metrics for the fourth quarter of 2016 compared with the year ago quarter. 4th quarter earnings per share was $0.18, inclusive of $0.06 per share of significant items related to the FirstMerit acquisition.
Also including the impact of significant items, ROA was 0.84% and return on tangible common equity was 11.4%. Compared to the fourth quarter of 2015, revenue grew by 39% with net interest income up 48 percent and non interest income up 23%. Non interest expense increased 45% from the year ago quarter, although adjusted for significant items, non interest expense growth was 29%. Our reported efficiency ratio for the quarter was 65.4%. However, FirstMerit related acquisition expense added 8.8 percentage points to the efficiency ratio in the quarter.
The reconciliation for this $5,000,000 of net hedging activity on mortgage servicing rights, a $5,600,000 gain on our November auto loan securitization $5,000,000 of gains on the sale of loans resulting from our balance sheet optimization strategy and a $6,500,000 benefit from the extinguishment of trust preferred balance sheet, average total loans for the 4th quarter grew 33% year over year. Average core deposits grew 40% year over year, once again, fully funding loan growth. 4th quarter net charge offs were 26 basis points, up 8 basis points from a year ago. Again, this remains below our long term financial goal and is consistent with our outlook of gradual reversion to our long term range of 35 to 55 basis points. Turning to Slide 5, let's take a closer look at the income statement.
4th quarter revenue was up 39% from the year ago quarter. Primarily driven by net interest income, which was up 48%, reflecting the addition of FirstMerit and disciplined organic loan growth. The net interest margin was 3.25 percent for the fourth quarter, up 16 basis points from a year ago. And up 7 basis points on a linked quarter basis. Purchase accounting had a favorable impact of 18 basis points on a net interest margin in the 4th quarter.
For the fourth quarter net interest income increased 23% year over year. Noninterest The expense increased 45%, but adjusted for significant items. Non interest expense in the 4th quarter grew 29% from the year ago quarter. For a closer look at the details behind these calculations, please refer to the reconciliations contained on pages 1617 of the presentation slides. Or in the release.
While around the subject of expenses, I want to reiterate our confidence in achieving $55,000,000 in total annual expense savings that we communicated when we announced the FirstMerit acquisition. All the cost savings have been identified and we have already realized roughly 50 percent of our cost savings goal. We expect to realize the majority of the remainder of the cost savings during the branch and systems conversion over President's state weekend next month. In total, we plan to consolidate 103 branches at conversion or roughly 9% of the combined post divestiture branch network. Recall that there is a significant amount of overlap in the 2 branch networks as 39% of legacy First Merit branches are within one mile of Huntington branches.
In addition, in connection with our normal periodic review of our distribution network, We will be consolidating 9 legacy Huntington branches unrelated to the FirstMerit acquisition during the first quarter. Slide 6 shows the expected pre tax We introduced this slide at a recent conference and we think it will be 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 do not include any experienced some level of early payoffs and accelerated accretion, just as we already did in 3Q of 2016 4Q of 2016, you are likely to see the accretion Some of the accelerated accretion may be offset by provision expense as acquired FirstMerit loans renew and we establish a loan loss reserve in normal course. As a result, we intend to provide regular updates of this schedule going forward until the majority of the purchase accounting accretion has been recognized.
Slide 7 illustrates the achievement of positive operating leverage for full year 2016. Of course, we talk about this every quarter and stress how important annual positive operating leverage is to us as a company. In 2016, we enjoyed our 4th consecutive year of positive operating leverage, realizing adjusted revenue growth of 17.8 percent, which outpaced adjusted expense growth of 13.1%. As you know, annual positive operating leverage is one of our long term financial goals. We continue to target positive operating leverage on an annual basis, and we have budgeted to meet this goal for the 5th consecutive year in 2017.
Turning to slide 8, let's look at balance sheet trends. As you look at the left side of the slide, you can see that the addition of FirstMerit has not had a material impact on our earning asset mix. Recall that last quarter, we announced certain actions to optimize the balance sheet in order to improve capital efficiency and flexibility. With that in mind, during the fourth quarter, we completed a $1,500,000,000 auto securitization and invested the proceeds into 0% risk weighted securities. We also repositioned approximately $2,000,000,000 of higher risk weighted securities into 0% risk weighted securities.
Finally, we sold almost $1,000,000,000 of non relationship C and I and CRE loans completing all announced actions during the 4 quarter adds approximately 40 one basis points to CET1 at year end, positioning us well for the 2017 CCAR cycle. Turning back to 4th quarter performance. Average earning assets grew 41% from the year ago quarter. This increase was driven primarily by a 54% increase in average securities and a 37% increase in average C and I loans. The increase in average securities reflected the addition of FirstMerit's portfolio the reinvestment of cash flows and additional investments in liquidity coverage ratio level 1 qualifying securities.
The increase in C and I loans primarily reflected First Merit as well as increases in the automobile floor plan and corporate banking loans. Average auto loans increased 17% year over year, with the acquired 1,500,000,000 FirstMerit portfolio essentially offsetting the impact of the 1,500,000,000 securitization. Average new money yields on our auto originations were 3.25% in the 4th quarter, up 5 basis points from the prior quarter, and up almost 35 basis points from the year ago quarter. Turning to the right slide of slide 8, I want to call attention to the trend in funding mix particularly the increase in low cost DDA. Average total deposits increased 39% from the year ago quarter, including a 40% increase average core deposits.
This reflects the addition of FirstMerit's low cost deposit base. It has been almost 2 full quarters since the acquisition closed and are extremely pleased with customer 16 basis points from the year ago quarter. The increase reflected a 23 basis point increase in earning asset yields balanced against the 7 basis point increase in funding costs. On a linked quarter basis, the net interest margin increased by 7 basis points driven by an 8 basis point improvement in earning asset yields. Purchased accounting contributed 18 basis points to the net interest margin in the 4th quarter.
After adjusting for this impact, the core NIM was 3.07, up one basis point from the third quarter of 2016. Also adjusted for the impact of purchase accounting. In addition, similar to what we have seen in recent quarters, the 4th quarter and M includes one basis point favorable impact related to 1 large interest recovery. Recall our core NIM included 2 basis points of favorable impact last quarter from interest recoveries. Slide 10 illustrates the progress we've made in rebuilding our regulatory capital ratios following the FirstMerit acquisition.
CET won the quarter at 9.53 percent, down 26 basis points year over year. And up 44 basis points from the previous quarter. We mentioned previously that our operating guideline for CET1 is 9% to 10%. We are very pleased to have reached the midpoint level only 1 quarter following the close of the FirstMerit acquisition. Tangible common equity ended the quarter at 7.14 percent, down 68 basis points year over year and flat linked quarter.
Moving to Slide 11. For the fourth quarter, we booked provision expense of $75,000,000 compared to net charge offs of $44,000,000. The higher provision expense was due to several factors, including the migration of FirstMerit loans from the acquired portfolio to the originated portfolio. Portfolio growth and transitioning the FirstMerit portfolio to Huntington's reserving methodology. Net charge offs represented an annualized 26 basis points of average loans and leases consistent with the prior quarter.
Which remains below our long term target of 35 to 55 basis points. The ACL as a percentage of loans increased to 1.10% from 1.06% at the end of the 3rd quarter, while the non accrual loan coverage ratio remained stable at 174%. Asset quality metrics were largely favorable in the quarter. The NTA ratio remained flat at 72 basis points. The criticized asset ratio increased modestly from 3.54percentto3.62percent driven largely by risk rating calibration within the FirstMerit book, which increased our Olam loans in the quarter.
Importantly, some substandard loans, the most severe category of problem loans actually decreased in the quarter due to paydowns and refinancings. Also of note, 58% of our non performing commercial loans remain current. Other indicators of credit quality include very low 90 day delinquencies, at 19 basis points and lower NPA inflows in the quarter. Let me now turn the presentation over to Steve. Thanks, Mac.
Moving to the economy. Slide 13 contains what we believe to be some of the more meaningful economic indicators for our footprint. The footprint that has outperformed the rest of the nation during the economic recovery. The bottom left chart illustrates trends in the unemployment rates across our eight for Midwestern States. And as you can see, despite a leveling off of economic growth during recent periods, the majority of our footprint remains at or below the national unemployment rates relative to the national average.
The charts on the top and bottom right show coincident and leading economic indicators the region. I want to call particular attention to the bottom chart, which shows leading indexes for our footprint as of November. This is the chart we look to for insights into expected future growth within our footprint. And as you can see, the chart shows that all eight states expect positive economic growth specifically for teen year lows for unemployment as of the end of November. The auto industry remains a major economic contributor within our footprint.
Housing markets are strong as well, home price stability and affordability are some of the best in the nation right here in our footprint. And we continue to see broad based home price growth in all of our footprint states. The labor market in our footprint has proven to be strong in 2016 with several markets such as here in Columbus where we are at structural full employment. We are seeing wage inflation in our expense base and our customers are too State local governments continue to operate with surpluses. The election is behind us and many of the businesses in our footprint have expressed optimism about a new business friendly environment expected from the administration and regulatory regime.
Overall, the underlying trends and fundamentals remain strong. We are confident in our footprint Midwest economy based on the sustained job growth and economic production. So with that, let's turn to Slide 15 for some closing remarks and important messages. We remain focused on delivering consistent through the cycle shareholder returns as strategy entails reducing short term volatility achieving top tier performance over the long term and maintaining our aggregate moderate to low risk profile throughout. And as you heard Mac mention earlier, the acquisition and integration of FirstMerit provides an opportunity to achieve significant cost savings and improve our overall efficiency.
We are progressing as planned toward realizing our targeted $255,000,000 of annual cost savings from the acquisition with a significant portion of the planned savings roughly half of them already implemented. The majority of the remaining savings will be implemented during the branch conversion this quarter over the President's Day weekend. We continue to win new customers through a strong distinguished brand with differentiated products and superior customer service. Across all of our businesses. We are now 5 months past the close of the FirstMerit acquisition, and we've seen little attrition from the FirstMerit accounts.
This is a testament to our emphasis on customer service and the progress of our combined teams coming together. We've maintained momentum in our core businesses throughout the integration. We've invested and will 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 continue to manage our expenses appropriately within our revenue outlook. The board, management, our employees and our shareholders.
The board and our colleagues are collectively amongst the largest shareholders of Huntington. We have holder retirement requirements on certain shares and are appropriately focused on driving sustained long term performance. We're highly focused on our commitment to being good stewards of shareholders' capital. And looking towards 2017, we expect total revenue growth in excess of 20%. This includes an expected benefit from 1 rate hike around midyear of this year.
We continue to target positive operating leverage on an annual we expect to We believe asset quality metrics will remain near current levels, including net charge offs remaining below our long term target of 35 to 55 basis points. Finally, we continue to be extremely The divestiture of 13 branches, primarily in the Canton Ohio market, was completed during the fourth quarter of 2016, and we've completed the onboarding and initial training of our new colleagues and fully implemented the organizational changes for the combined entity that we announced last summer. 103 branch consolidations will occur coincident with the branch conversions in February, and our system conversion efforts continue to progress well. As you can see, it was an exciting quarter and indeed an exciting year. And we're very focused on the future we are building.
We have a lot of momentum across our businesses, and we're ready to build on the hard work that got us to this point. So I'll now turn it back over to Mark so we can get to your questions.
Listen, we'll now take questions. We ask that as a courtesy of 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 comes from the line of John Arfstrom with RBC Capital Markets. Please proceed with your question.
Thanks. Good morning guys. Hey, John. Sounds like things are going well. On the integration from the expense side.
And I guess what I was curious about was the revenue synergy piece. I know that you did not include that in the accretion guidance. Initially from the acquisition, but in your important messages, you're saying that you're executing on the revenue synergies. Maybe give us an idea and update on in terms of how that's going so far?
Yes. So, John, it's actually going very well. We're continuing to make investments into a number of areas, including SBA lending, home home equity and home mortgage origination. And the other the other fact is that we're seeing really good acceptance and interest capital markets products with the FirstMerit customer base, interest rate derivatives, foreign exchange, those types of things. So really good traction there as well.
And then, as we take FirstMerit's RV and the portfolio and capabilities and expand that into our markets and further we think that's a great growth opportunity. So, if you add to that, just performance that we've seen from a customer retention perspective, a deposit retention perspective with FirstMerit I would tell you that we're really hitting on all cylinders there. Okay. And
the other number that you laid out was percentage of revenues from non interest income? And if you raise the 1st merit average to your average, that there's more accretion in the acquisition. Anything that you see right now that would prevent you from hitting that corporate average?
No, no, we think that there's probably, close to $100,000,000 of revenue if you normalize, 1st merits fee income to total revenue to ours. And we really have that identified in terms of where we think that's coming from And we've got the incremental expenses and capabilities built into 20172018. So we feel pretty comfortable achieving that number. Okay, alright. Thank you.
Thanks, Ron. Thank
you. Our next question comes from the line
Just a question on cost and efficiency progress to your clear points about getting to the cost saves run rated by the second half in the third quarter. And then also with this planned accretion runoff, just wondering if you can help us understand how you expect the efficiency ratio to traject. I mean, you've got that long term goal 50, 6 59. Just wondering if you think you can get inside of that by the end of next year, kind of like how do you think about like exiting 4Q 17 to your point about moving, there is still commitment to positive operating leverage, but with a lot of these moving parts back and forth. Thanks.
Yes, thanks, Ken. So, we're very comfortable with the range we put out there, the 56% to 59% longer term. And clearly as we start to see increases in interest rates, we do think that's going to help us get towards the bottom end of that range. We do go through system conversion branch closures in the February timeframe. And we'll see the expense come out in the 2nd quarter.
There might be a little bit that'll come out in the 3rd quarter as well. So I would expect that in the fourth quarter of this year, we'll be at a run rate that will certainly reflect, the range that we've signed up for longer term.
Okay. So you think you can get into the range. And I guess you've given the 20% revenue outlook on the top line and I'm just wondering I think we're all wondering what that magnitude of operating leverage is that you're thinking through? Is there any way to help us understand like you did for the fourth quarter just around what you think the rate of expense growth will be versus that 20% plus on the top?
Well, we've come out and told you what we expect the 4th quarter expense number to be at a regional conference in the fourth quarter. So, yeah, that's $609,000,000.
Okay. Do that still on track?
That's still on track. That gets us to the 255 $1,000,000 cost takeout we've signed up for, growing at 3% and achieved, in the fourth quarter of 2017.
Okay, got it. Thanks very much.
Our next question comes from the line of Matt O'Connor with Deutsche Bank. Please proceed with your question.
Good morning. Good morning, Matt. Obviously,
some moving pieces on the NIM, the purchase accounting accretion was a lot better this quarter, but it seems like the core NIM was also better. Wondering if you can help us, shape what both components could look like in the first quarter of 2017.
Yes. So, Matt, there are a number of moving parts here. And as we discussed, the core NIM of 307,306 if you exclude the interest recovery that we saw in the quarter. We do think the core NIM is going to expand from this point. We are 6% asset sensitive We're going to continue to see the swap book on the asset side roll off.
We have about a little over $3,000,000,000 in asset swaps that will come off by the end of the year. That will increase asset sensitivity by probably another 0.7.8. And we did see some impact from the December rate increase. So I would I would suggest that the going to be difficult to project the NIM because of the purchase accounting impact and some of the accelerated accretion. That we do expect to happen that we have seen happen in both the 3rd and 4th quarters, but feel good about the core margin, expanding from this point.
And can you help size the impact of, call it, the 25 basis point increase in rates that we saw in December? Obviously, the industry is not experiencing a lot of deposit repricing. So I think we're seeing more nim lift than expected, from the 1st couple of rate increases. But maybe size, how much benefit you expect to get from a December's hike?
Yes. So we we're assuming probably a 40% to 50% beta. On that change. And, I think as you play that through, it really is going to depend a lot on what happens with competition and how we see pricing change, in the environment. So I don't think the impact of this first increase is going to be hugely material.
But certainly it'll be a positive to the core margin going forward.
Thank you. Our next question comes from the line of John Pancari with Evercore ISI. Please proceed with your question.
Morning. Hi, John.
On the auto side, I wanted
to see if you can give us an update on on some of the dynamics you're seeing there in the industry, just given that we've been seeing some of the auto lenders see some volatility there. So just curious about the competitive dynamic, your appetite for ongoing growth there, maybe your growth outlook as well as credit trends, how they're moving along? Thanks.
Yes. This is Dan. And so I would say in terms of the credit trends, we feel very good as we've stated in the past. What goes on in the market isn't completely relevant to what we're doing since we haven't adjusted our origination strategies in terms of FICO, LTV, term, etcetera. So we're still a prime super prime lender and, our results have been quite consistent.
Lot of noise in what's going on in the market, but I think that relates more to those who are in the subprime or near prime space. So we still see good originations as Matt noted earlier, we actually saw some margin expansion. We think on a risk adjusted basis, we are going to really in a great spot. So, trends are good delinquencies remain well controlled. And so on the whole, very solid outlook We continue to plan for more growth, but very steady origination strategy.
Our expectation, John, is, is the dealers will continue to have a good year roughly in line with last year. And we have, we're very well positioned in that regard, both on the direct side floor plan, the indirect and, and to finance some of the, some of the supply base. And all that's broken out for you in the different, schedules that we provide.
Yes. And just I would add that there are a couple of items this quarter that are worth noting. So we do have the First Merit portfolio included. And so when you look at the charge off numbers on page 46, we provide a table that outlines. They do have a higher charge off rate, but part of that is impacted by the fact that recoveries do not reduce gross charge offs because an acquired book and therefore, the recoveries flow through, in the income line.
And so that one factor to consider. The other thing is we had securitizations. So we had $1,500,000,000 move out of the denominator, and there are no delinquencies in that that pool of loans. So when you really make those adjustments, our originated book continues to be very steady, 1 to 2 basis points higher than last year. Either if you're looking at quarter over quarter, it was 1 basis point year over year, 2 basis points.
So again, very steady performance that we're very pleased with.
Got it. Thank you. And then, Steve, I just would love to get your thoughts on the capital deployment here and how you're thinking about, deployment going into 2017 CCAR. Do you see an opportunity to get more aggressive there in returns and how would you prioritize buybacks versus dividends?
Well, our capital priorities haven't changed, from what we've had over the years. Organic growth dividend and, and then other actions. The act the, the balance sheet optimization activities of the fourth quarter were all successfully completed. And that was with a view of giving us the capacity to come into CCAR with a strong foundation. And, the board will make decisions later.
We don't even have CCAR scenarios yet. So it would be very premature for me to comment at this point.
Our next question comes from the line of Bob Ramsey with FBR Capital Markets. Please proceed with your question.
Hey, good morning guys. This is actually Kyle Peterson on for Bob today. It looks like your tax rate has been little bit lower here. It looks like even when backing out the merger charges, it's running kind of more in that 24, 25 percent range. I just want to see if you guys could give any color moving forward on where we should expect that to run.
Yes, that's pretty, pretty consistent with where we've been. And the guidance that we provide is in that same range, I think 25% to 27% is what we said in the press release. And that excludes significant items. So when you Tax effect, the significant items of 35 percent, it does make that rate look lower on a GAAP basis. But if you adjust for the significant items, you get to the 25%.
And if you actually Feet each adjusted that, it would actually be higher. But that's a range we're very comfortable with going forward.
Okay, great. And I guess just a little bit on margin. I know you guys mentioned your guidance includes a rate hike in the middle of the year. I guess where do you guys see the core margin going in the event of no additional rate hikes throughout the year?
Higher. We're going to see, we're going to see the core margin continue to expand. Again, it's not going to be, it's not going to be hugely significant, but we've talked about, probably 1 to 2 rate hikes, requiring to take place in order for us to start to see margin expansion. We actually think we're going to get that with the 1 rate hike now. And again, it's going to be, Marshall will be a bit volatile this year because of what's happening with purchase accounting and accelerated accretion, but we'll be sure to keep you informed in terms of what we see there and update it as it rolls through.
Thank you.
Thank you. Our next question comes from the line of Scott Siefers with Sandler O'Neill And Partners. Please proceed with your question.
Good morning guys. I was hoping
you could expand on your comments on the just sort of the nuance of the purchase accounting pull forward. Just curious specifically on Slide 6, if you can sort of walk through, the changes, and sort of what drove those relative to when you guys had given that slide out at the Goldman Conference last month. Just kind of curious, is that just initial behavior of the acquired portfolio or sort of what changed in that time period?
Yes, Scott. So the best way to think about it is, if the loan pays off and renews early, then we accelerate the purchase accounting adjustment and that comes into the margin. And that, that happened in the fourth quarter to the tune of about $10,000,000. Okay. Okay.
So, now what you have to also realize the flip side of that as an acquired loan moves from the acquired portfolio to the originated portfolio we have to establish a reserve for that. So in the fourth quarter, roughly half of the increase or the reserve build, is due to acquired loans from FirstMerit coming into the originated portfolio. So we're going to continue to see accelerated accretion in the margin. And we're going to continue to see some higher provision expense as we reserve for those loans that come into the originated Okay. That's where it gets a little complex and we can't actually predict what is going to renew on a forward basis, but we'll give you this chart every quarter updated for what's happened.
And let you know what the influence and outflows are.
Okay. Perfect. I appreciate that. And then
Scott, if I could, if I could just add to try and Normally, you would expect to see renewal activity 1st And Second Quarter on these commercial loans. And, and so we're trying to share with you an expectation that there will be, in addition to schedule maturities, there will be, we think just more economic activity associated with the outlook, the improved outlook expansions of working capital lines, maybe more CapEx, things like that. So it's we could be in a period that's more active than what we've had recently as we go through the first half of twenty seventeen.
Yes. Okay. That all makes sense. Thank you. And then,
was just curious as I think when
you originally gave the guidance for 17 on that 20 percent plus revenue growth, that was, there's been no rate increases, either the one we got in December or anything this year. So would the 20% still hold true even if we get, nothing else? And just out of curiosity, you guys have always been so conservative on the rate outlook, which basically always assuming. I'm just curious why you decided to, to add even the one into the outlook?
So yes, Scott, I think the guidance still holds true. And we just felt that it feels more certain this time and that it just made more sense from a reality perspective and how we built out the budget and how we thought about 2017. So we did put the one additional increase in mid year. And that's, that's rolling through our budget for 2017. Okay.
And Scott, like prior years, we've we have contingent expense reduction should we find the environment to be different than we anticipate.
Okay, good. All right. Perfect. Thank you guys very much.
Thanks, Scott.
Thank you. Our next question comes from the line of Najarian with Bank of America. Please proceed with your question.
Hi, good morning. I just wanted to ask a question on how, given that rate hikes could potentially be more certain in 2017 and especially beyond I'm wondering if you could help us think about how your asset sensitivity could have changed with the FirstMerit acquisition now fully in your book for the next rate hike. So in 1Q of 'sixteen, your margin went up 2 basis points. And I'm wondering given the comments on a potentially structurally higher NIM anyway, core NIM in 2017 plus a 25 basis point rate hike plus the fact that your deposit costs haven't moved, whether the expansion quarter over quarter in core NIM is likely going to be greater than that 2 basis points in 1Q 2016?
So, First merit balance sheet actually didn't change our, asset sensitivity or interest rate risk significantly. So, if anything, FirstMerit might have been a little bit more asset sensitive. So we don't really think that this has had a huge impact on how we're positioned, either before or after the FirstMerit acquisition. And clearly, it's all going to depend on what happens in the marketplace and what happens with competition. We're new environment for liquidity based on new regulations and requirements.
And certainly when did the first rate hikes come through on an increasing cycle. You typically don't see as much up pricing on the deposit side as quickly. We might be conservative with a 40% to 50% beta in what we're assuming. But we feel comfortable with those assumptions and we're going to continue to monitor what's happening in the environment just to make sure that we're a competitive from a liquidity perspective.
Got it. Thank you.
Thanks.
Our next question comes from the line of David Long with Raymond James. Please proceed with your question.
Thank you. Good morning, everyone. Good morning, David. I just wanted to see if you guys can talk
a little bit about your strategy on the tail banking side in your newly acquired Chicago market here after the 1st Merrick deal. In the Chicago market, you guys may not have the critical mass like several of the comp attent larger banks here. I just want to see how you plan to compete and then also how you look to invest in that market in the
future? David, we've, we've outlined it and I'll try and cover this again. Mac may want to add to it. We've outlined that will continue with the strategy that FirstMerit had, which was a niche approach for emphasizing commercial or business lending. We have made a commitment to SBA Lending in Chicago and the team largely is in place now.
The same with home lending and with our mortgage capabilities. We've added significantly. We're continuing to add, at this point, into our Chicago team on the mortgage front. So we like our distribution in terms of the spread it's not concentrated given the size of that market. It's obviously grossly under scale.
And so that will cause us to focus on these niches and growing these niches and perhaps growing in some other areas over time. But the emphasis will be to maintain the discipline that FirstMerit had in terms of growing commercial lending activities in Chicago principally.
Got it. Thanks for the
Thank you. Our next question comes from the line of Terry McEvoy with Stephens Inc. Please proceed with your question.
Hi, thanks. Good morning. I just wanted to circle back to Ken's question on that 4Q expense target of 609. If I remember that presentation last quarter, it did not include some personnel expenses, the FDIC insurance premiums. I'm wondering if you could help us with the GAAP number and also just the amortization as well to just better understand what 4Q could look like, again, from a gas standpoint?
Yes, Terry. So the 609 does not include, intangible amortization. That's a number excluding the that figure. And certainly, the 609 is a quantitative measurement looking at the 255 growing at 3%. And we are making investments in revenue producing capabilities, personnel technology for the basically for FirstMerit markets where we have additional opportunities.
We've talked about SBA. We've talked about home lending. And we will be adding some expense relative to those investments without a doubt, but we'll also be adding revenue associated with those investments too. So, certainly the 609, as we get closer to that, we'll reconcile in terms of what those investments look like. But feel very comfortable that we're going to get the cost takeouts that we've signed up for and we're going to make it investments into revenue opportunities that we think are available to us.
And then earlier you said, for the most part, you'd get the full cost saves by the end of 2Q with a little bit moving into Q3. You be a little more specific in terms of what you expect to realize by the middle point of 2017?
Well, I mean, it's going to depend a bit on how we move through the conversion integration process. There are still some expenses that we're working to get out that might be more longer term in nature around real estate and those types of things. To the extent anything bleeds into the 3rd quarter, I don't expect it to be material, but there will be some third quarter impact. Great.
Thanks for taking my questions. I appreciate it.
Our next question comes from the line of Kevin Barker with Piper Jaffray. Please proceed with your question.
Just wanted to follow-up in regards to some of the questions around capital. Your CET1 ratio obviously appears to have very healthy and plenty of excess capital will be deployed over time, but it seems like your TCE ratio is relatively low compared to the peer group Are you comfortable bringing down the TCE ratio below 7% as long as you have the CET1 ratio well above an 8% ratio?
Kevin, it's Max. So, so we are focused on CET1. And we do have an operating range of 9% to 10% for CET1. As you see, the $950,000,000, which is where we are today, it kind of calibrates, translates to a 72 TCE. And, we do monitor the tangible common ratio.
It is something that we pay close attention to. I'm not sure I see it going below 7%. But, it certainly is calibrated CET1 and that's the ratio that we're able to focus on.
Okay. That's helpful. And then when you You're obviously building the provision given the purchase accounting accretion that's coming off of FirstMerit. And you'll probably see that continue to grow. How long at what point do you feel like you would be at a more I guess, a normalized level on a reserve to loan ratio.
And how long do you think it take to get to that point
So Kevin, I'd probably refer you to slide 6 in terms of what the kind of the accretion around purchase accounting. I mean, basically as the, the acquired portfolio moves into an originated portfolio as those loans renew, we'll see the purchase accounting adjustments decline and you'll see us over that period of time replenishing the reserve, building a reserve on those loans as they move from acquired to organic So, clearly, what you see on slide 6 would be an elongated view, because we are going to see this pulled forward as loans renew early. So I would just ask you to kind of think about slide 6 and calibrate around the numbers on that page, understanding that it's going to be accelerated.
Okay. And when you think about the risk profile, pro form a, the FirstMerit acquisition, do you feel that your reserve delivery ratio should run higher than it was in the past, or do you feel like could run a little bit lower than what it was in previous quarters prior to the acquisition.
Well, we're, you know, I think as we move towards normalization, you're probably going to be a little bit higher than than previously. So I would site because, you know, we're just our base charge off level. You know, we still remain below the long term target, but we are definitely moving towards more normalization as recoveries decrease.
Our next question comes from the line of Peter Winter with Wedbush Securities. Please proceed with your question.
Thanks Peter.
Thank you. Our next question comes from the line of Brian Clark with KBW. Please proceed with your question.
Good morning and thanks for taking my question. I want to follow-up just really quickly, Mack, on an earlier question about the deposit beta assumptions. I know you I think you said 40% to 50%. Is that what you're expecting from the December hike that just happened in 'sixteen? Or is that what your asset sensitivity assumptions are or is it yes
to both?
That would be yes to both. The 40 to 50 is average across the entire deposit portfolio. And we've been pretty consistent in talking about a 50% beta over time. And as we think about the December hike, we've modeled something in that range.
Okay. Okay. And then I guess a follow-up question. Steve, you mentioned some of the improved commercial sentiment post election. Actually guys in the fourth quarter, your C and I loan growth was pretty solid relative to some others that we've seen some softness in middle market.
So maybe you can talk about what kind of trends you're seeing in the C and I book. And is there that potential for some enhanced and increased capital expenditures that may actually finally happen in the Midwest?
I think the early read from many of our customers is one of more optimism and what our what they're telling us and what our more broadly, our various line management, and RMs are telling us is much more activity compared to prior periods in terms of of potential investments. So we are, I think better positioned than we've been for maybe a decade in terms of CapEx and expansion in the different businesses here in the Midwest.
Great. And if I could throw one more in. I don't know, Mac, do you have the growth that you did get in loans this quarter from FirstMerit? Versus HBM?
Yes, I don't have that.
Okay. Thanks for your time guys.
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 closing remarks.
Thank you all again. 2016 was highlighted by the acquisition of FirstMerit and our continued strong core financial performance. And then we're encouraged by the focused activities of our colleagues and the sentiment of our customers with sound fundamentals in place at the start of the year were positioned for solid performance in the We expect to continue to and new markets provide opportunities for us to further accelerate achievement of our long term financial goals. We're already realizing revenue synergies in several areas, And finally, I want to close by reiterating that our board and this management team are all long term shareholders, our top priority is integrating FirstMerit and growing our core business. At the same time, we'll continue to manage risks and volatility and do so with the intent of driving solid, consistent, long term performance.
So thank you for your interest in Huntington. We appreciate you joining us today. Have a great day.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.