Good morning. My name is Keith and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Huntington Bancshares Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, we will have a question and answer I would now like to turn the call over to Mr.
Mark Moose, Director of Investor Relations. You may begin your conference.
Thank you, and welcome. And Mark Moose, Director of Investor Relations for Huntington. Copies of the slides we will be reviewing can be found on our IR website at www.huntington.com. This call is being recorded and will be available as a rebroadcast starting about an hour from the close of the call. Slides 1 and 2 note several aspects of the basis of today's presentation.
I encourage you to read these, but let me point out one key disclosure. This presentation will reference non GAAP financial measures. And in that regard, I would direct you to the comparable GAAP financial measures and the reconciliation to the comparable GAAP financial measures. Within the presentation, the additional earnings related material we released this morning and related Form 8 K filed today, all of which can be found on our website. Turning to slide 3, 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. As noted on slide 4, the presenters today are Steve Steinauer, Chairman, President and CEO and Mac McCullough, Chief Financial Officer. Dan Newmayer, our Chief Credit Officer, will also be participating in the Q And A
portion of the call. Let's get started by turning to slide 5. Mac? Thanks Mark. Good morning and thank you for joining us today.
We appreciate your interest in Huntington. Since 2009, we have executed a well defined strategy designed to grow market share and share of wallet. We introduced our Fairplay philosophy, our Welcome Culture and became known for our strong recognizable brand differentiated product set and industry leading customer service. In addition, we invested in our franchise, building and expanding at a time when others were focused squarely on cost cutting. We plan to continue to invest in our Our third quarter results again provide proof that our strategies are working and the investments we've undertaken over the past few years continue to pay off.
We produced solid revenue growth despite the challenging interest rate environment. Our investments, none of which are matures should continue to drive future performance and revenue growth. We remain focused on disciplined execution. For the 2nd quarter in a row, we closed the gap on year to date operating leverage and we are well positioned to deliver on our commitment for positive operating leverage for the 3rd consecutive year. Slide 5 shows some of the financial highlights for the quarter.
Earnings per common share of $0.18 was flat with the year ago quarter, while tangible book value per share increased 5% year over year to 6 point $8.8. As we disclosed in May K filed on September 29, we received an unfavorable ruling on a decade old legal matter resulting in a $38,000,000 or $0.03 per share charge in the quarter, as noted in the significant items disclosure. We are fully reserved on the matter and we will be appealing the ruling. Year over year revenue growth was 5% with both net interest income percent year over year increase in average loans and leases and a 10% increase in average core deposits. As we noted last quarter, while the value of core deposits may not be fully appreciated by the market and the current rate environment, we believe that our strong core deposit franchise will prove to be a key differentiator once interest rates begin to rise Our credit quality remains very strong with only 13 basis points of net charge offs and seventy seven basis points of non performing assets.
Our capital ratios remained strong as well. Tangible common equity ended the quarter at 7.89 percent, while Common Equity Tier 1 was 9.72 percent. Slide 6 provides a summary of income statement, including some additional details on our non interest income and non interest expense for the quarter. Relative to last year's third quarter, total revenue increased 5% $757,000,000. Spread revenues accounted for the majority of the increase as we benefited from an 8% average earning asset growth partially offset by 4 basis points of net interest margin compression.
We continue to manage the net interest margin via disciplined pricing of both loans and deposits. Non interest income increased 2% from the year ago quarter. Highlights from the quarter included a 9% increase service charges on deposit accounts and a 13% increase in electronic banking income. Both reflecting continued strong consumer and business acquisition. Recall that the year ago quarter included a $6,000,000 per quarter negative impact to deposit service charges from changes to our consumer deposit products including all day deposit implemented in July of last year.
As this quarter's results demonstrate, we have now more than overcome that step down. Capital market fees increased 24% year over year, reflecting the ongoing benefit of past investment in this key fee revenue capability for our commercial customers. Mortgage banking income declined 24 percent from the year ago quarter more than offset a 5,000,000 increase in mortgage origination and secondary marketing revenues. Our wealth businesses were negatively impacted by planned product substitution in our broker dealer following our 2014 transition to an open architecture platform and our strategy to move to more predictable revenue streams within the business. Trust services income decreased 11% while brokerage income decreased 12%.
During the quarter, we announced agreements to transition our remaining equity and money market funds to our to other fund families and to sell Huntington asset advisors the current advisor for the funds. We expect these transactions will close during the fourth quarter with an immaterial impact on our 2016 run rate. Recall that we previously transitioned our fixed income funds during the second quarter of 2014. Reported non interest expense in the 3rd quarter was $527,000,000, an increase of 46000000 dollars or 10% from the year ago quarter. This quarter's non interest expense included 2 significant items.
The previously mentioned $38,000,000 addition to litigation reserves and $5,000,000 of merger related expense from the Huntington Technology Finance acquisition earlier this year, the pending transition of the Huntington Funds and the sale of Huntington Asset Advisors. Non interest expense adjusted for significant items increased 26000000 dollars or 6%. Slide 7 details the trend in our balance sheet mix. Average loans and leases increased $2,900,000,000 or 6 percent year over year as we experienced year over year growth in every portfolio. Average commercial and industrial loans grew 1.2000000000 dollars or 7% while average automobile loans grew $900,000,000 or 11 percent.
Year over year growth in the C and I portfolio primarily reflected growth in asset finance including the Huntington Technology Finance Acquisition, Corporate Banking And Auto Dealer Floor Plan Lending. The 2015 third quarter represented the 7th consecutive quarter of indirect auto loan originations in excess of $1,000,000,000 Auto Finance remains a core competency of Huntington and as detailed on the slides in the appendix, we have remained consistent in our strategy, which is built around the dealer centric model and focused on prime borrowers. Our underwriting has not changed and the portfolio continues to perform very well. Average securities increased 1,600,000,000 related to direct purchase municipal instruments deposits increased $5,400,000,000 or 11 percent over the year ago quarter, including a $4,800,000,000 or 10% increase in core deposits. Average non interest bearing demand deposits increased 21% year over year and average interest bearing demand deposits increased 12%.
These increases reflect our continued focus on consumer checking household and commercial relationship growth. Other core deposit categories continue to benefit from our efforts to deepen banking relationships and increase our share of wallet. Average money market deposits increased 9% year over year and average savings increased 4%. We continue to remix the consumer deposit base out of higher cost CDs into other less expensive deposit products. Average core CDs decreased 20% year over year.
Importantly, the year over year growth in total core deposits more than fully funded our earning asset growth over this period. The strong core deposit growth also allowed us to pay down some short term wholesale funding as average short term borrowings and federal home loan bank advances decreased $2,700,000,000 year over year. Average long term debt increased $2,500,000,000 as a result of 3 bank levels senior debt issuances this year. Including $500,000,000 increase issued during the 2 15 third quarter. Average broker deposits increased $500,000,000.
These wholesale funding sources provide a cost efficient means of funding balance sheet growth, including LCR related securities growth, while maintaining focus on managing core deposit expense. Slide 8 shows our net interest margin plotted against earning asset yields and interest bearing liability costs. The net interest margin decreased four basis points year over year and quarter over quarter to 3.16%. Recall the 2015 second quarter net interest margin benefited from $3,000,000 of prepayment penalties within the securities portfolio, which added 2 basis points. Similarly, the 2015 third quarter net interest margin benefited from $3,000,000 as well, again, 2 basis points from interest recoveries on non accrual loans.
We continue to expect to experience pricing pressure across most asset classes in the quarter. In addition, the bank level senior debt issuances have increased our cost of funds on the margin. Going forward we expect net interest margin pressure to remain a headwind consistent with recent experience. Slide 9 provides some details on our current asset sensitivity positioning and how we manage interest rate risk. For the past several years, we have run a more neutral balance sheet than many of our peers in part related to our swap portfolio.
The swaps were added in light of the outlook for prolonged low rates and help us support our net interest margin over this period. As shown in the chart on the top, our modeling estimates that net interest income would benefit by 0.3 percent if interest rates were to gradually ramp 200 basis points in addition to increases already reflected in the current implied forward curve. This is consistent with estimates the past several quarters. In a hypothetical scenario with the $9,000,000,000 of asset swaps, without the $9,000,000,000 on asset swaps, the estimated benefit with approximate positive 3.9 percent in the up 200 basis point ramp scenario. The chart at the bottom of the slide illustrates the weighted average life of our asset and liability swap portfolios as well as the net impact of the swaps on our net interest income.
Including an incremental 28,000,000 in the 2015 third quarter. As you can see in the green line, the asset swap portfolio continues to age in and had a weighted average life of one point 2 years at quarter end. As we have stated previously, our assets swap portfolio is a laddered portfolio. There are no cliffs looming on the horizon. During the 2015 fourth quarter, an additional $800,000,000 of these asset swaps will mature and at an additional $3,600,000,000 will mature during 2016.
All else equal, these swap maturities would increase our estimated asset sensitivity. Slide 10 shows the trends of our capital ratios. Our risk based regulatory capital ratios improved modestly from the prior quarter end, while tangible common equity or TCE remained relatively flat. We repurchased 6,800,000 common shares during the third quarter at an average price of $10.66 per share, which effectively returning more than 72,000,000 capacity remaining for the next Slide 11 provides an overview of our provision, charge offs and allowance for credit losses. Credit performance remains solid and in line with our expectations.
The loan loss provision was $22,500,000 in the 3rd quarter compared to $16,200,000 of net charge offs. Net charge offs were well controlled at 13 basis points remaining well below our long term expectations of 35 to 55 basis points. The ACL ratio fell modestly to 1.3 percent of loans and leases from 1.34 percent of the prior quarter end, in line with modest overall improvements in credit metrics. The ratio of allowance to non accrual loans increased to 184% compared to 180% a quarter ago. We believe the allowance is appropriate and reflects the underlying credit quality Slide 12 highlights trends in criticized assets, non performing assets and delinquencies.
The chart on the upper left shows a slight decrease the non performing asset ratio for the quarter to 77 basis points. The NPA ratio eased slightly for the 2nd quarter in a row, due primarily to higher payments on existing Folias. The bottom left shows the criticized asset ratio which also improved for the 2nd consecutive quarter due to a noticeable reduction in the amount of criticized inflows in the quarter. Finally, the chart on the bottom right shows NPA inflows as a percentage of beginning period loans increasing slightly to 29 basis points 26 basis points last quarter. Let me now turn the presentation over to Steve.
Thank you, Mac. Slide 14 provides a snapshot of the long term trends in our consumer and commercial customer acquisition. Our Fairplay banking philosophy coupled with our optimal customer relationship or OCR focus continues to drive what we believe to be industry leading customer acquisition. We've increased our consumer checking households and business relationships by almost 9% 6% compound annual growth rates. Since 2010, these robust customer growth rates have allowed us to post the associated revenue growth you can see in the 2 lower charts on the slide.
Of particular note, the last two quarters have shown improved momentum in the consumer household revenue metrics as we've lapped the last fee change we implemented under our Fairplay philosophy last August and realized the benefit of the underlying customer growth. We remain focused on revenues and we'll continue to grow revenues despite the headwinds of the interest rate environment. As we've stated before, our strategy is not just about gaining market share, but also gaining share of wallet. Slides 1415 illustrates the success of our OCR strategy and deepening our consumer and commercial relationships. We've shared with you previously, the cornerstone of our OCR strategy is based around increasing the number of products and services we provide to our customers, knowing that this will translate both into more loyal, satisfied and stickier customers, as well as revenue growth.
During the first quarter of this year, our OCR cross sell goal of 6 or more consumer products and services crossed over the 50% mark for the first time. At the end of third quarter, this figure improved to more than 51% of our entire consumer checking households using 6 or more products or services. Correspondingly, our consumer checking account household revenue is up 11% year over year. Our percentage of commercial customers with 4 or more accounts was 43.7 percent, up 30 basis points from the prior quarter, and up 250 basis points from the year ago quarter. Again, this has translated directly to revenue growth as commercial revenue increased 8% year over year.
During conferences the past few quarters and during calls with our Investor Relations team, many of you expressed a desire to better understand the economic stress and underlying trends in our footprint. And so we've added slides 1617 this quarter to help address those 2008 or '9, economic activity in the key states of Ohio, Michigan and Indiana, which accounts for approximately 90% of our businesses as measured by deposits has grown faster than the national average. This outperformance has persisted through the past 3 months, And based on the Philadelphia Fed's state leading indexes, is expected to persist for the next 6 months. Chart on the bottom of slide 16 shows that unemployment rates in most of our footprint states continue to trend positively and most are in line with or better than the national average. 1 outlier is the state of West Virginia, which continues to struggle with the impact of lower coal prices.
Slide 17 shows the current and year ago unemployment rates for our 10 largest deposit markets. These MSAs account for more than 80% of our total deposit continue to trend favorably. Slide 18 shows our year to date operating leverage results. Full year operating positive operating leverage is a long term strategic goal for Huntington and a commitment we've made again for 2015. First quarter, the negative 40 basis points at the midpoint of the year and now negative 10 basis points, at the end of the third quarter.
For the revenue outlook. Therefore, we remain confident in our ability to achieve positive operating leverage for the full year both inclusive and exclusive of the impact of Huntington Technology Finance. Turning to Slide 19 for some closing remarks and expectations, We remain optimistic about ongoing economic improvements in our footprint. While we are monitoring certain industries or sectors, potentially impacted by global macroeconomic developments, we remain bullish on the Midwest economy as a whole. Customer sentiment is positive Loan pipelines are encouraging.
Loan utilization rates showed a slight increase for the 2nd consecutive quarter. While competition remains intense, we'll continue to be disciplined in growing our commercial real estate and our C and I portfolios along with our consumer portfolios. We are committed to delivering strong results regardless of the interest rate environment, Our 2015 budget was built around the current rate environment, and the achievement of our goals is not dependent on a rate increase. We will We control our own destiny and our focus and execution will deliver results. The relative stability of our net interest margin has been a key component in our revenue growth and maintaining our pricing discipline remains a key focus for Huntington going forward.
While we expect NIM pressure will remain a headwind until interest rates start moving despite this pressure. The benefit of our robust customer acquisition and OCR cross sell strategy was apparent as fee revenue improved this quarter with service charges on deposit accounts, electronic banking, treasury management, capital markets, all contributing to the performance. 2% to 4% for the year, excluding significant items, net MSR activity and acquisitions. We expect 4th quarter non interest expenses excluding significant items will remain consistent with the adjusted non interest expense levels of the prior two quarters. We expect full year 2015 revenue growth in excess of expense growth for committed positive operating leverage for the of Huntington Technology Finance.
We believe asset quality metrics will remain near current levels. We expect net charge offs will remain in or below our long term expected range of 35 to 55 basis points. Modest changes are anticipated given the absolute low levels. Of our credit metrics. Longer term, we continue to manage the franchise with an emphasis on consistent shareholder returns.
We've built a strong and recognizable consumer brand with differentiated products and superior customer service. We're executing our strategies and adjusting to our environment where necessary. While past investments continue to pay off, We continue to move forward with further investments in enhanced sales management, digital technology, data and analytics and optimizing our retail distribution network. None of our investments are mature. There's a high level of alignment between the board, management, indeed all of our employees and shareholders.
And we're highly focused on our commitment to being good stewards of shareholder capital. With that, I'll turn it back over to Mark. Thanks, Steve. Operator, we will now take questions.
We ask that as a courtesy to your peers, each person ask only one question and one related follow-up. And then if that person has additional questions, he or she can add themselves back into the queue. Thank you.
Your first question comes from the line of John Pancari from Evercore ISI. Your line is open.
Good morning, John.
Just on the margin front, we just wanted to get a little bit of color around
the loan yields this quarter.
They seem to have held up really well. And then you indicated the margins should remain under pressure here. Should we expect a similar pace of compression like you saw this quarter about the, 3 to 4 basis point range?
Yes, John. So, yeah, we are very deliberately focused on making sure that we have price loans appropriately. So we're very focused on making sure that we go through the right process internally and maximize pricing on both the asset and liability side of the balance sheet. That's really helping, I think, the margin performance and some of the stability that you're seeing. We will continue to see the pressure going forward we've been pretty consistent in talking about 2 to 4 basis points.
Some of the longer term debt that we're putting on the balance sheet at this point to fund 2016 growth and related to some of the rating agency changes will increase the margin or increase the the funding cost on the margin. So I think the higher end of the range is probably where I would think about for the fourth quarter. But again, I think, managing the margin for consistent, stable performance.
Okay. All right. Thank you. And then separately, I guess I'm just going to hop over to capital. Just wanted to ask you about your updated thoughts on deployment priorities when it comes to the buyback dividend and also importantly on M And A.
And if there's been any change to those priorities given the stubborn interest rate environment? Thanks.
Yeah, our priorities have remained consistent with everything we've disclosed historically. We're, of course, focused on the dividend in return of capital to our shareholders, organic growth and the buyback, I think Certainly Macquarie or Huntington Technology Finance is a great example of the type of acquisition that we think is very advantageous for our shareholders. Performing better than we expected. And when you think about it from an acquisition like Macquarie, versus a share repurchase, I would do an acquisition like Macquarie any day.
Your next question comes from the line of Bob Ramsey. Your line is open.
Good morning. This is Martin Turschen for Bob Ramsey.
Hi, Martin.
I had a question. So auto loans were up almost $800,000,000 in the quarter And with this morning, we'll speak general article about OCC Director Curry being concerned about the activity in the market. Are you seeing anything that concerns you?
Martin, this is Dan Newman. No. And, industry wide, I think, the, you know, his observations are spot on, but we have said repeatedly, when you look at our strategy around auto loans, we've been very consistent. Our numbers are rock solid in terms of what we're originating FICO scores, LTV, the term of our loans. There's no risk layering within our portfolio.
So we feel extremely confident in
the performance of our book today.
Martin, this is the sort of industry Warranty, I think, the Comptroller, Comptroller has done the industry and investors of service. Pointing out where they have concerns, let's issues get addressed. And so we, we, we don't, as Dan said, we don't we're in great shape. We don't see us sitting with any concerns right now. But obviously, they must be existing at that subprime space.
Got it. Thank you. And then, moving on to Plant Sale of Hunt And Asset Division, advisors, what do you expect to be the impact on revenues and expenses and what's the timing of the sale?
It will basically have a nonmaterial impact on revenue and expense and it will take place in the 4th quarter.
Got it. Thank you very much.
Thank you.
Your next question comes from the line of Bill Karkashi from Nomura. Your line is open.
Thank you. Good morning. You guys talked about your, your commitment to achieving positive operating leverage and pacing your investments to make that happen. Can you walk through for us your pecking order of investment opportunities and perhaps a little bit of color around whether those investment opportunities are revenue generating versus compliance related, just to give us a flavor of what some of those opportunities are?
Yes. So the opportunities that we're looking at are very consistent with what we've been doing over the last 2 or 3 years We are investing in distribution. You've seen us bring online a number of in store branches, which we think are going to be very innovative changes for us in the future in terms of optimizing the cost of distribution. Our customers are migrating to those branches with their transactions and we actually sell very, very well in those facilities. That clearly has been one area.
Investments in technology has been another significant area for us. You've seen us do a number of things with image enabled ATMs, with a new teller platform, with our deposit image capabilities on our mobile phones and we make continue to make strong investments in the digital capabilities that we need to go forward. So these are the types of investments that we are making and that we continue to make. And as it relates to positive operating leverage in 2016, we're going to continue to make these investments as appropriate. We're going to manage the expense base based upon the revenue environment.
Steve mentioned that we are budgeting 2016 assuming an unchanged rate scenario, which means that we're going into the year with a very conservative expense outlook based upon an unchanged rate scenario. So again, we're going to continue to manage for positive operating leverage on an annual basis and we're going to do that by making sure that manage the expense base based upon the revenue environment that we're in. So very confident that we're going to be able to achieve that in 2016.
That's helpful. Thank you. Circling back on auto, can you talk about what's happening with dealer purchase patient within auto and speak to any changes and practices that you're seeing, I guess, at the industry level, as well as potentially how those could impact Huntington. I'm really just trying to, I guess, assess the risk of disruption to the flow of auto loans that you get from your dealer relationships.
Yes, this is Dan again. We don't expect any disruption. We have a niche that we play in, which is, prime and super prime We have great dealer relationships that have been established by Nick Stanas and his team over a long period of time. So while there may be a disruption in the industry as a whole, we really think that we have a value proposition that we've been very consistent. We know what our target market is and we really don't expect any disruption to that.
The last time there were disruptions was 910 and we used it as an opportunity to expand. We've been in the business for 60 plus years and we've got multi generational relationships particularly in our core footprint. So we feel very bullish about the business.
So the flow of auto loans that you guys get from your dealer relationships aren't really a function of dealer participation? Are they more of a function of the long term relationships that you've had?
Yes, I would say that's accurate. Our dealers know that they have a consistent source that has been there through every cycle and and I think that dealer relationship is what drives the volumes.
Thanks.
Your next question comes from the line of Jeffrey Elliott from Autonomous Research. Your line is open.
Following up on auto and dealer markup, how do you expect the industry to evolve? Do you think with over the next few years going to be going to, the elimination of mark up, you think mark ups just come down? Do you think it's kind of different for different players? If you could kind of think a few years out, where do you think the industry is going to be?
Jeff, the industry is trending towards a tighter range of pricing. And we think a couple of years out it will be tighter, but that there will be a range. It won't be flat pricing. And we're basing that on the recent announcements with some banks and the CFPB where there's pricing discretion allowed. And that discretion may be an important part of delivering sales to some segments of the marketplace and the population as a whole.
And then just to follow-up, it looked like this quarter also was responsible for the bulk of increases in average loan balances. How do you see that changing over future quarters, when do you think the mix will shift away from also in towards commercial and other categories driving loan growth?
Jeff, it's really, really hard to say. I mean, obviously the auto industry is very strong right now, record volumes. And, as we pointed out, In our comments earlier, we've had 7 quarters of $1,000,000,000 or more in production. So I think it comes down to in this environment, we think the way we run this business, the quality of our portfolio from a risk return perspective, this is a good asset to have on our balance sheet. So we're extremely comfortable with that we certainly hope it continues to log into 2016 and we think it will.
Your next question comes from the line of Ken Houston from Jefferies. Your line is open.
Thanks. Good morning. On the C and I side, you guys have very clear about watching your growth. And so we've seen kind of a flatness for the last couple of quarters just wondering if you can help us understand what's happening on the HDF side within that and then what other pockets of C and I are either growing or shrinking? And how do you see that playing out forward?
Yeah. Ken, this is Dan. The market remains competitive, but we are seeing nice growth in many of the segments. You know, equipment finance continues to be a driver and you know, hunting Huntington Technology Finance as a part of that, as Mac referenced earlier is actually beating expectations. So, we're happy with going on there.
We had good growth in the quarter in core middle market as large corporate and our verticals continue to, each each individual one is not huge, but collectively healthcare franchise ABL were all good contributors, in the quarter. So it's really a matter of picking our spots and which ones align best with our risk appetite. Overall, our backlogs are actually quite healthy, a little bit better even than a year ago at this time.
Okay. And then on the credit side, this is the first quarter we've seen a provision build from you guys quite a long time. I know you did have some recoveries in CRE, but is this a flip over here? What are you guys seeing as far as the macro that that's leading to that kind of decent delta from releasing to provisioning and should we expect build going forward?
Well, I don't think there was really the numbers we're talking about are kind of small, so I don't think there's been any dramatic shift. We did over provide a bit this quarter. I think we've been saying for some time that the conversion of charge offs and provision would be more closely aligned. And I think we continue to we will continue to operate in that general range.
Okay. Thanks guys.
Your next question comes from the line of Steven Alexopoulos from JP Morgan. Your line is open.
Good morning, everybody.
Good morning.
On the expenses, if I look at the year to date adjusted expenses of $1,400,000,000 and then I use your guidance for basically consistent with the last 2 quarters for the 4th quarter. That implies somewhere around $1,900,000,000 adjusted for the year. Which according to my math is a 5.5 percent increase over the 2014 adjusted level 1,800,000,000. What am I missing that you're guiding to expenses thing in the 2% to 4% range?
Yes, so it comes down to the fact that we added Macquarie this year. So that that guidance is excluding HTF.
The guidance is excluding that transaction. So what base should we be using for 2014 then? With this 2% to 4% full year adjusted guidance?
So it should be the 2014 adjusted and then 2015 adjusted excluding HTF. And the reason we did that is because we gave this guidance originally before the HTF transaction. And we just felt it was important to continue to give consistent guidance here. So that's the way to think about the math. That's the way it works.
Okay. Okay. Separately given such strong growth that you've been having in auto, are you guys planning for securitization in the fourth quarter or maybe just thoughts around timing for your next one?
Yeah, we, you know, we can say to look at kind of the efficiency of the securitization market and the need for us to actually do that either from a risk concentration or funding perspective, we don't see a need to do that in the near future. You know, we have talked about perhaps doing some funding transactions in 2016, but, again, we don't see that as being required at this point in time.
Okay, that's helpful. And then maybe if I could just go back to the prior question. I had what is the dollar of expenses that's when we drive the numbers, right, that we're attributable to the deal that we should be excluding?
So, we gave guidance on that last quarter. The Macquarie expenses are about $15,000,000 a quarter. And very consistent in terms of what we see in this quarter as well.
Your next question comes from the line of Ken Zerbe from Morgan Stanley.
Just starting off with interest rates or margin in particular, obviously we heard should go down from here, but when we think about sort of the new money rates that you're putting on new business at versus portfolio rates, how far off are the 2, right? Is it really asset yields coming down that's still causing a lot of pressure or is it more of the liability costs going up? And the reason I want to compare that some of the other banks in the industry who've been talking a lot more about NIM stability, even this environment. Thanks.
So, up until this point in time, it really has been on the asset side of the equation. So we still are seeing as new assets come on the balance sheet, they're actually replacing assets that are coming off at a at a higher yield. We are starting to see because of some of the debt issuance that we're doing, a bit of a change on the liability side as well. Not significant. But I would tell you that we're probably pretty close to the assets I had kind of neutralizing.
And I would think about maybe the second half of twenty sixteen. Seeing some stabilization there.
On total NIM or just the asset side?
I would say probably both. Given the current rate environment, the current competitive environment, a lot of factors go into that of course, but, second half of 'sixteen probably looks reasonable.
Okay, great.
And then second question I had just on the swaps. Are you guys planning to let those continue to run off each quarter from here or just given sort of the low rate expectations about rate hikes, would you consider putting additional swaps on?
No, we do evaluate that frequently and, I'll tell you that right now, we're comfortable with the current trajectory of a fair amount of time in Alco Sabalco redoing the swap position and our overall asset liability position, of course. And, but I will tell you that we're staying the course.
What would have to happen to change your view on that? Terms of rate expectations? Or is it something else?
Yes, I think rate expectations length of a delay perhaps and seeing any changes coming out of the Fed. Think we just have to process the information that's available to us and make decisions on that accord.
Your next question comes from the line of Erika Najarian from Bank of America. Your line is open.
Good morning.
Good morning, Erica.
My first question is just on credit quality. I did notice that on the auto side that both NPLs in auto and late stage delinquencies did go up year over year and quarter over quarter And I'm wondering if that's just normal seasoning, if there's something else going on there? And relative to your normal range for charge offs overall of 35 to 55 basis points, where do you think auto losses would normalize to relative to the 20 ish basis points that we've been seeing recently?
Yes. So, Erica, first of all, I would say that when we get down to the performance metrics we have today are very, very low. So any change from quarter to quarter, even year over year at this point, you know, a tick up might be noticeable, but it is still off of a very based. So I don't read anything into the, you know, any quarterly variance, or year over year variance. So there is some seasonality, and we do tend to see a little bit of an uptick in the third quarter.
And there might be a very small impact from some of the TCP ruling their ability to call on customers there for a while was impacted, but only, you know, very slightly. So that might be a part of it. But overall, we're very pleased with these metrics. Obviously, over time, we could see an uptick in, in charge offs as we move through the cycle, although we continue to originate very consistently. And so I think it would be in line with, with historical performance.
Got it. And my follow-up question is a follow-up to John's question earlier. This quarter, we saw headlines that Huntington was part of a suit or less, so to speak, for a regional that would be a large portion of the bank. And that you listed in terms of dividends, buybacks and asset. Is that not part of the equation in terms of capital allocation, in terms of buying a relatively large deposit
Erica, we've lost you. Can't really hear the last part of the question.
Oh, I'm sorry. I'm not sure where I cut off, but given that Huntington's name is embroiled in rumors for as a possible suit for a large northeast depository but relative to your priority list of capital allocation, dividends, buybacks and asset purchases like Macquarie, should we eliminate Huntington as a potential suitor for large depository deals like that over the next year or 2?
So, first, we don't respond to rumors in the marketplace. So that's that's the answer on the specific question that you ask. But the way we think about acquisitions has not changed. We're extremely consistent. We've been consistent for a number of years in terms of thinking about the 6 to 8 footprint core depositories.
Looking in the contiguous states is something we've talked about as well. So we've been very consistent in how we talk about our M and A strategy.
Your next question comes from the line of Sameer Goughley. Your line is open.
Hi, thanks for taking my questions. Just want to follow-up a little bit about on the swaps that you mentioned earlier and I might have missed it. But in terms of the outlook for the NIM going forward, what have you baked into your expectation as far as replacing that swap book as those mature because it seems like based on the benefit you've been receiving from those as those swaps mature unless they were placed to be a negative impact on your margin? And then to the extent you reiterated a new swaps, could there be a possibility that those are maybe less economical than current ones. So again, that causes some downward impact on the NIM relative to where you've been at.
So, if you could just help us kind of clarify and think through the impact on the from the reduction in your swap book, that'd be helpful.
Yes. So the guidance that we we've given on our NIM historically and continue to give on our NIM, assumes that we continue to let the asset swaps roll off. So there there is no replacement, in that book as we give guidance and think about about the future. So Again, we've been consistent in that approach and that guidance over time.
Okay. Thank you for that clarification. The other thing I was hoping to just clarify also was in terms of again the dealer markup issue just to kind of flesh out a little bit in terms of settlement some of your peers have had with regulators. Are you saying that you haven't needed to execute any sort of pricing changes or caps in terms of your relationships with the dealers given your focus on prime super prime customers and therefore you don't see an impact or have you already those changes and still aren't seeing any impact on your business again because of the quality of the accounts are going after just clarify will be helpful.
So, I don't think that we are anticipating any changes from what is happening in the marketplace today. We've made changes back in 20 can around the way we think about pricing and what we've allowed the dealers to do. So, we think that what we are doing today is very, consistent with what we've done since that part in time, at that point in time, and don't see any issues there.
Okay. And then just a quick one, if I may, in terms of your digital investments, could you help us size how much you're planning to invest in 2016 And do you envision also investing on the digital side not only on the consumer loans and can related activities, but also any potential opportunities to invest related to your commercial businesses?
So, yeah, we don't really disclose the size of investment that we make in various aspects of the business from a technology perspective. I will tell you that the investment that we're making is broad across all segments and all lines of business and that We are accelerating that investment in digital. But again, that's something that we don't disclose. Okay.
Thank you for taking my question.
Your next question comes from the line of Marty Mosby. Your line is open.
Thanks. Steve, I wanted to ask, yes, I'm here. Wanted to ask you about the, when you look at the average, customer relationships as you're adding customers so quickly, but you're also being able to increase the pool that has 6 plus products, are you being able to just convert new customers with significant amount of products. So is there just a wholesale change in the banking relationship? And is that why you're being able to accomplish both those goals at the same time?
Marty, we have invested in our brand and in our products to make them very attractive with unique, in some cases, unique features. We talked in prior, earnings releases about an investment we've made last year in data and analytics and creating the capacity to better understand our customer base and their needs in and desires and our capacity to, fulfill with them in different channels and the combination of those investments with our ongoing efforts to provide better sales execution is leading to growth in both new customers, but growth in product penetration for the entire book. And we think we're, while we're better, we have needed to further improve.
It usually just takes a little time for the new customers to kind of roll up in the average relationship. So it's very positive story to be able to do both at the same time. And then, Mack, I wanted to ask you about hedging in the mortgage banking unit if you look at the volatility that you're getting just in the last two quarters, you had $6,000,000 write up net write up last quarter, you got a $8,000,000 net write down this quarter. The volatility in your results is about 50 percent of your average mortgage banking revenue line. If you look at Wells Fargo for instance, their volatility is around 10%.
Is there any way that you can try to hedge out some of that volatility in the servicing portfolio with the change in interest rates? So just wanted to see if there's philosophy that y'all had or a way to adapt maybe limit that volatility a little bit more? Yes, Marty, we're taking a look
at that. Obviously, I think that the hedges have not been very efficient last couple of quarters we've just given some of the volatility and rate changes in the marketplace. So we are taking a look at at strategies there, but we do feel confident in what we're doing. I just think the market has been a little, little, little volatile the last few quarters.
Okay. We could probably just talk offline a little bit about that because we've I've done that in the past, so we could talk about a few things that we've been able to do to help minimize that volatility.
That's great. Thanks Marty.
Alright. Talk to you later.
Thanks. Okay.
Your next question comes from the line of Bob Ramsey. Your line is open.
Hi. Just a couple of follow-up questions on fees. Given the mortgage banking weakness this quarter, could you give us some color around that and what's your outlook going forward?
Yes. So, so keep in mind that the MSR impairment that we mentioned earlier on the call is embedded net mortgage banking line. So that's $8,400,000 in the mortgage banking line. Excluding that year over year, I think we were up $5,000,000 in growth. So, clearly, we're seeing some reduction in volume relative to where we were earlier in the year.
We do see refis like everyone else in the industry dropping off and purchases becoming more important. But I, but I do think, you know, the volumes are solid But again, that as they were earlier in the year.
Got it. And service charges were up $5,000,000 this quarter, which kind of seems particularly strong. And could you give me some color on what's driving that up?
So this actually is the first quarter on a year over year basis where we no longer have the impact of changes that we've made for Fairplay. Back in July of 2014 was the last adjustment that we've made that actually impacted us by $6,000,000 a quarter. So we're through that now and what you're actually seeing come through on that line is more reflective of the type of household growth that we've been able to drive really since we introduced Fairplay. So that I think is a very positive sign around the success of the strategy and what we do expect going forward
Got it. Thank you very
Your next question comes from the line of Peter Winter from Stern AG. Your line is open.
Thanks. Good morning. I appreciate the new slides on the economic data, but just curious with the global slowdown, the strong dollar, have you guys seen any impact to your businesses or is it just so much new account growth that you're able to grow through that?
Hey, Peter, this is Dan. I would say that, yes, we watch the dollar, China, commodities, etcetera. But I think for our local economy, the strength of the auto industry, the strength of the housing market, and the fact that low energy prices, while that's a negative for the energy businesses for many of our customers, energy costs are a major input. And for our consumers. So I think those factors combined actually have been a net positive and we're still seeing, strong demand and strong pretty strong growth in our region.
Is that impacting? I know you talked about it, but having a little bit of an impact on the C and I side?
I would say it's only episodic. We're not seeing any trends in any industry. We're seeing a case here and there of somebody being particularly, affected, but on the whole, we have not seen any kind of industry level impacts, at
least not at this point.
Your next question comes from the line of Chris Spire. Your line is open. Hi, good morning. I just have a question on deposit trends. I see that most accounts on the end of period basis are down.
I was wondering if we should read into that for the next few quarters?
Yeah. Hi, Chris. I don't think if there's anything you should really read into that. I think, we continue to see very positive growth on both consumer households and on the commercial side of the business, some really good growth on the commercial side. So I really don't think anything you should read into that.
Hey, hearing no further questions. This is Steve. I wanted just to
Okay, Steve. We did have one more question from the line of David from Guggenheim.
TF fee income. And then
I believe you've got some operating leases
with that portfolio as well. So should we see that the fee income contribution to grow or is that going to, a trite over time?
Yes, the operating lease income will to try it over time along with the operating lease expense. So we're not going to do operating leases going forward as we renew that business bringing additional leases on, they'll all end up in the margin going forward. So you will see both the income and the expense related to operating a trade over time.
Okay, great. Thanks a lot. Thank you. Any other questions, operator? There are
no further questions at this time. Turn the call back over to the presenters.
So, we're pleased with our 3rd quarter results. Our strategies are working our investment positively contributing to results and our execution is focused We produced 5% year over year revenue growth in a challenging environment and we remain focused on pricing and underwriting discipline. We continue to invest in our businesses, but we've paced those investments to assure positive operating leverage. We continue to work toward our long term corporate goals including becoming more efficient and boosting returns. And finally, I want to close by reiterating that our board and this management team are all long term shareholders.
Our top priorities include managing risk, reducing volatility, achieving positive operating leverage and driving solid, consistent long term performance. We are well aligned on these priorities. So thank you for your interest in Huntington. We appreciate you joining us today. Have a great day.
This concludes today's conference call.