Earnings Call: Q3 2015

Oct 22, 2015

Good morning. My name is Keith. 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 speaker's remarks, we will have a question and answer session. If you'd like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you'd like to withdraw your question, press the pound key. I would now like to turn the call over to Mr. Mark Muth, Director of Investor Relations. You may begin your conference. Thank you. Welcome. I'm Mark Muth, 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 one and two note several aspects of the basis of today's presentation. I encourage you to read these. Let me point out one key disclosure. This presentation will reference non-GAAP financial measures. In that regard, I would direct you to the comparable GAAP financial measures and the reconciliations 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 three. Today's discussion, including the Q&A period, will contain forward-looking statements. Such statements are based on information and assumptions available at this time and are subject to changes, risks, and uncertainties, which may cause actual results to differ materially. We assume no obligation to update such statements. For a complete discussion of risks and uncertainties, please refer to this slide and material filed with the SEC, including our most recent Forms 10-K, 10-Q, and 8-K filings. As noted on slide four, the presenters today are Steve Steinour, Chairman, President, CEO, and Mac McCullough, Chief Financial Officer. Dan Neumeyer, our Chief Credit Officer, will also be participating in the Q&A portion of the call. Let's get started by turning to slide five. Mac? Thanks, Mark. Good morning. 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 Fair Play 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 business, although, as we have stated before, we will pace our investments to manage for positive operating leverage on an annual basis. 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 mature, should continue to drive future performance and revenue growth. We remain focused on disciplined execution. For the second 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 third consecutive year. Slide five 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 $6.88. As we disclosed in an 8-K filed on September 29, we received an unfavorable ruling on a decade-old legal matter, resulting in a $38 million or $0.03 per share charge in the quarter, as noted in the significant items disclosure. We are fully reserved on the matter. We will be appealing the ruling. Year-over-year revenue growth was 5%, with both net interest income and non-interest income contributing to the increase. High-quality balance sheet growth, including a 6% 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 in 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 77 basis points of non-performing assets. Our capital ratios remain strong as well. Tangible common equity ended the quarter at 7.89%, while common equity tier 1 was 9.72%. Slide six 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% to $757 million. Spread revenues accounted for the majority of the increase as we benefited from an 8% average earning asset growth, partially offset by four 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 in 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 million 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% from the year-ago quarter as an $8 million MSR impairment more than offset a $5 million increase in mortgage origination and secondary marketing revenues. Our wealth businesses were negatively impacted by the 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 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 third quarter was $527 million, an increase of $46 million or 10% from the year-ago quarter. This quarter's non-interest expense included two significant items: the previously mentioned $38 million addition to litigation reserves and $5 million 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 $26 million or 6%. Slide seven details the trend in our balance sheet mix. Average loans and leases increased $2.9 billion or 6% year-over-year, as we experienced year-over-year growth in every portfolio. Average commercial and industrial loans grew $1.2 billion or 7%, while average automobile loans grew $0.9 billion or 11%. Year-over-year growth in the C&I portfolio primarily reflected growth in asset finance, including the Huntington Technology Finance acquisition, corporate banking, and auto dealer floorplan lending. The 2015 third quarter represented the seventh consecutive quarter of indirect auto loan originations in excess of $1 billion. 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 a dealer-centric model and focused on prime borrowers. Our underwriting has not changed, and the portfolio continues to perform very well. Average securities increased $1.6 billion or 13% year-over-year. Approximately $600 million of this increase related to direct purchase municipal instruments originated by our commercial lending team. Turning attention to the right side of the balance sheet, average deposits increased $5.4 billion or 11% over the year-ago quarter, including a $4.8 billion 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 $2.7 billion year-over-year. Average long-term debt increased $2.5 billion as a result of three bank-level senior debt issuances this year, including $500 million issued during the 2015 third quarter. Average broker deposits increased $500 million. 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 eight 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 million of prepayment penalties within the securities portfolio, which added two basis points. Similarly, the 2015 third quarter net interest margin benefited from $3 million as well, again, two basis points from interest recoveries on non-accrual loans. We continue 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 nine 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% 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 without the $9 billion on asset swaps, the estimated benefit would approximate positive 3.9% 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 million 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 1.2 years at quarter end. As we have stated previously, our asset swap portfolio is a laddered portfolio. There are no cliffs looming on the horizon. During the 2015 fourth quarter, an additional $800 million of these asset swaps will mature, and an additional $3.6 billion will mature during 2016. All else equal, these swap maturities would increase our estimate of asset sensitivity. Slide 10 shows the trends in 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 6.8 million common shares during the third quarter at an average price of $10.66 per share, effectively returning more than $72 million of capital to shareholders. We have about $195 million of authorized capacity remaining for the next three quarters under the 366 million share repurchase authorization. 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 $22.5 million in the third quarter, compared to $16.2 million 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 1.32% of loans and leases from 1.34% at 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 of our loan portfolio. Slide 12 highlights trends in criticized assets, non-performing assets, and delinquencies. The chart in the upper left shows a slight decrease in the non-performing asset ratio for the quarter to 77 basis points. The NPA ratio eased slightly for the second quarter in a row, due primarily to higher payments on existing problem loans. The chart on the upper right reflects continued improvement in our 90-day delinquencies, with the improvement driven by the consumer loan portfolios. The bottom left shows the criticized asset ratio, which also improved for the second consecutive quarter due to a noticeable reduction in the amount of new 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 from 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 Fair Play 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% and 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 two 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 Fair Play philosophy last August and realized the benefit of the underlying customer growth. We remain focused on revenues and will 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 14 and 15 illustrate the success of our OCR strategy in deepening our consumer and commercial relationships. As 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 six or more consumer products and services crossed over the 50% mark for the first time. At the end of the third quarter, this figure improved to more than 51% of our entire consumer checking households using six or more products or services. Correspondingly, our consumer checking account household revenue is up 11% year-over-year. Turning attention to the commercial slide on slide 15, our percentage of commercial customers with four or more accounts was 43.7%, up 30 basis points from the prior quarter and up 250 basis points from the year-ago quarter. 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 strength and underlying trends in our footprint. We've added slides 16 and 17 this quarter to help address those questions. We hope you find this beneficial. Since the economic recovery began in 2008 or 2009, economic activity in the key states of Ohio, Michigan, and Indiana, which account for approximately 90% of our business As measured by deposits, has grown faster than the national average. This outperformance has persisted through the past three months, and based on the Philadelphia Fed's state leading indexes, is expected to persist for the next six 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. One 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 franchise. As detailed in the chart, all of these markets continue to trend favorably. Slide 18 shows our year-to-date operating leverage results. Full-year positive operating leverage is a long-term strategic goal for Huntington, and a commitment we've made again for 2015. For the second quarter in a row, we narrowed the gap on operating leverage, moving from 1.7% negative at the end of the first quarter to negative 40 basis points at the midpoint of the year, and now negative 10 basis points at the end of the third quarter. We have strong revenue momentum and will pace our continued investment in the franchise appropriately 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 second consecutive quarter. While competition remains intense, we'll continue to be disciplined in growing our commercial real estate and our C&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 follow a similarly prudent approach as we plan and budget for 2016. 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 back up, we expect to grow revenue 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, and capital markets all contributing to the performance. We continue to invest in our businesses for the future, resulting in projected non-interest expense growth of 2%-4% for the year, excluding significant items, net MSR activity and acquisitions. We expect fourth 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. We're committed to positive operating leverage for the full year of 2015, again, both inclusive and exclusive 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 35-55 basis points. Modest changes are anticipated given the absolute low levels of our credit metrics. Longer term, we continue to advance 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. Then if that person has additional questions, he or she can add themselves back into the queue. Thank you. At this time, I'd like to remind everyone, in order to ask a question, press star one on your telephone keypad. Your first question comes from the line of John Pancari from Evercore ISI. Your line is open. Morning 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. 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 3-4 basis point range? Yeah, John. We are very deliberately focused on making sure that we price loans appropriately. 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 2-4 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 funding cost on the margin. I think the higher end of the range is probably where I would think about for the fourth quarter. Again, I think managing the margin for consistent, stable performance. Okay. All right. Thank you. 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&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 and 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. 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 Terskin for Bob Ramsey. Hi, Martin. I had a question. Auto loans were up almost $800 million in a quarter. With this morning The Wall Street Journal article about OCC Director Curry being concerned about the activity in the market, are you seeing anything that concerns you? Yeah, Martin, this is Dan Neumeyer. No. Industry-wide, I think his observations are spot on. 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, LTVs, the term of our loans. There's no risk layering within our portfolio. We feel extremely confident in the performance of our book today. Okay. Thank you. Martin, this is the sort of industry warning, I think, the Comptroller Thomas Curry has done the industry and investors a service. Pointing out where they have concerns lets issues get addressed. As Dan said, we're in great shape. We don't see us sitting with any concerns right now. Obviously, they must be existing at that subprime space. Got it. Thank you. Moving on to planned sale of Huntington Asset Advisors. What do you expect to be the impact on revenues and expenses, and what's the timing of the sale? It'll basically have a non-material impact on revenue and expense, and it will take place in the fourth quarter. Got it. Thank you very much. Thank you. Your next question comes from the line of Bill Carcache from Nomura. Your line is open. Thank you. Good morning. Hello. Hi. You guys talked about 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 give 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. Yeah. The opportunities that we're looking at are very consistent with what we've been doing over the last two or three 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 advantageous 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 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. We continue to make strong investments in the digital capabilities that we need to go forward. These are the types of investments that we are making and that we continue to make. 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. 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 we manage the expense base based upon the revenue environment that we're in. Feel 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 participation within auto and speak to any changes or 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 Stanutz and his team over a long period of time. While there may be 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 2009 and 2010, and we used it as an opportunity to expand. We've been in the business for 60+ years, and we've got multi-generational relationships, particularly in our core footprint. We feel very bullish about the business. The flow of auto loans that you guys get from your dealer relationships aren't really a function of dealer participation. They're more of a function of the long-term relationships that you've had. Yeah, I would say that's accurate. Our dealers know that they have a consistent source that has been there through every cycle, and I think that dealer relationship is what drives the volumes. That's very helpful. Thank you for taking my questions. Thanks. Your next question comes from the line of Geoffrey Elliott from Autonomous Research. Your line is open. Oh, hello there. Thank you for taking the question. Right. Following up on auto and dealer markup, how do you expect the industry to evolve? Do you think we're, over the next few years, going to be going to the elimination of markup? Do you think markups 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? Geoff, the industry is trending towards a tighter range of pricing, we think a couple of years out it will be tighter, but there will be a range. It won't be flat pricing. We're basing that on the recent announcements with some banks and the CFPB where there's pricing discretion allows. That discretion may be an important part of delivering sales to some segments of the marketplace and the population as a whole. 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 courses? When do you think the mix will shift away from auto and towards commercial and other categories driving loan growth? Geoff, it's really hard to say. Obviously, the auto industry is very strong right now, record volumes. As we pointed out in our comments earlier, we've had seven quarters of $1 billion or more in production. 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. We're extremely comfortable with that. We certainly hope it continues long into 2016, we think it will. Thank you. Your next question comes from the line of Ken Usdin from Jefferies. Your line is open. Thanks. Good morning. Good. On the C&I side, you guys have been very clear about watching your growth. We've seen kind of a flatness for the last couple of quarters. I'm just wondering if you can help us understand what's happening on the HTF side within that, and then what other pockets of C&I are either growing or shrinking. How do you see that playing out forward? Yeah. Ken, this is Dan. The market remains competitive. We are seeing nice growth in many of the segments. Equipment finance continues to be a driver, and Huntington Technology Finance as a part of that, as Mac referenced earlier, is actually beating expectations. We're happy with what's going on there. We had good growth in the quarter in core middle market, large corporate. Our verticals continue, each individual one is not huge, but collectively, healthcare franchise, ABL were all good contributors in the quarter. 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. Then on the credit side, this is the first quarter we've seen a provision build from you guys in quite a long time. I know you did have some recoveries in CRE. Is this a flip over here? What are you guys seeing as far as the macro that's leading to that kind of decent delta from releasing to provisioning, and should we expect build going forward? The numbers we're talking about are kind of small. 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, I think we will continue to operate in that general range. Okay, thanks, guys. Your next question comes from the line of Steven Alexopoulos from JPMorgan. Your line is open. Good morning, everybody. Morning. On the expenses, if I look at the year-to-date adjusted expenses of $1.4 billion, and then I use your guidance for basically consistent with the last two quarters for the fourth quarter, that implies somewhere around $1.9 billion adjusted for the year, which according to my math is a 5.5% increase over the 2014 adjusted level of $1.8 billion. What am I missing that you're guiding to expenses saying in the 2%-4% range? Yeah. It comes down to the fact that we added Macquarie this year. That guidance is excluding HTF. The guidance is excluding that transaction. What base should we be using for 2014 then with this 2%-4% full year adjusted guidance? It should be the 2014 adjusted and then 2015 adjusted excluding HTF. 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. Oh, okay. That's the way to think about the math. That's the way it works. Okay. Got you. Okay. Separately, given such strong growth that you've been having in auto, are you guys planning for a securitization in the fourth quarter or maybe just thoughts around timing for your next one? We continue 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. We have talked about perhaps doing some funding transactions in 2016. Again, we don't see that as being required at this point in time. Okay. That's helpful. Maybe if I could just go back to the prior question I had. What is the dollar of expenses, just want to make sure I have the numbers right, that were attributable to the deal that we should be excluding? We gave guidance on that last quarter. The Macquarie expenses are about $15 million a quarter, very consistent in terms of what we see in this quarter as well. Okay. Perfect. Thanks, guys. Okay. Thanks a lot. Your next question comes from the line of Kenneth Zerbe from Morgan Stanley. Your line is open. Okay. Good morning. Hi, Ken. Ken. Just starting off with interest rates or margin in particular. Obviously, we heard it should go down from here. 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 two, right? Is it really asset yields coming down that's still causing a lot of pressure, or is it more the liability costs going up? The reason I want to compare that to some of the other banks in the industry who've been talking a lot more about NIM stability, even in this environment. Thanks. Up until this point in time, it really has been on the asset side of the equation. We still are seeing as new assets come on the balance sheet they're actually replacing assets that are coming off 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. I would tell you that we're probably pretty close to the asset side kind of neutralizing. I would think about maybe the second half of 2016 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 2016 probably looks reasonable. Okay. Great. 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? We do evaluate that frequently. I'll tell you that right now we're comfortable with the current trajectory of how they're coming off. Again, we spend a fair amount of time in ALCO, Sub-ALCO reviewing the swap position and our overall asset liability position, of course. I will tell you that we're staying the course. What would have to happen to change your view on that in terms of rate expectations? Is it something else? Yeah, I think rate expectations, length of delay perhaps in seeing any changes coming out of the Fed. I think we just have to process the information that's available to us and make decisions on that accord. All right. Thank you very much. Thank you. Your next question comes from the line of Erika Najarian from Bank of America. Your line is open. Good morning. Morning, Erika. 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. I'm wondering if that's just normal seasoning, or if there's something else going on there. Relative to your normal range for charge-offs overall of 35-55 basis points, where do you think auto losses would normalize to relative to the 20-ish basis points that we've been seeing recently? Yeah, Erika, first of all, I would say that when we get down to the performance metrics we have today are very low. Any change from quarter-to-quarter, even year-over-year at this point, a tick up might be noticeable, but it is still off of a very low base. I don't read anything into any quarterly variance or year-over-year variance. There is some seasonality, we do tend to see a little bit of an uptick in the third quarter. There might be a very small impact from some of the TCPA rulings. Our ability to call on customers there for a while was impacted, but only very slightly. That might be a part of it. Overall, we're very pleased with these metrics. Obviously, over time, we could see an uptick in charge-offs as we move through the cycle, although we continue to originate very consistently. I think it would be in line with historical performance. Got it. My follow-up question is a follow-up to John's question earlier. This quarter, we saw headlines that Huntington was part of a suitor list, so to speak, for a regional that would be a large portion of the bank. Given sort of your priority list in terms of capital allocation 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? Erika, 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. Given that Huntington's name was embroiled in rumors as a possible suitor for a large Northeast depository. 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 two? First, we don't respond to rumors in the marketplace. That's the answer on the specific question that you asked. 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 six-state footprint, core depositories. Looking in the contiguous states is something we've talked about as well. We've been very consistent in how we talk about our M&A strategy. Okay. Thank you. Your next question comes from the line of Sameer Gokhale. Your line is open. Hi. Thanks for taking my questions. I just want to follow up a little bit about on the swaps that you mentioned earlier, and I might have missed it. 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're replaced, there'd be a negative impact on your margin. Then to the extent you enter into new swaps, could there be a possibility that those are maybe less economical than your current ones? Again, that causes some downward impact on the NIM relative to where you've been at. If you could just help us kind of clarify and think through the impact on the NIM from the reduction in your swap, that'd be helpful. The guidance that 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. There is no replacement in that book as we give guidance and think about the future. 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 that out a little bit in terms of settlements some of your peers have had with regulators. Are you saying that you haven't needed to institute any sort of pricing changes or caps in terms of your relationships with the dealers, given your focus on prime and super prime customers, and therefore you don't see an impact? Or have you already instituted those changes and still aren't seeing any impact on your business, again, because of the quality of the accounts you're going after? Just to clarify, that would be helpful. I don't think that we are anticipating any changes from what is happening in the marketplace today. We've made changes back in 2010 around the way we think about pricing and what we allow the dealers to do. We think that what we are doing today is very consistent with what we've done since that point in time, and don't see any issues there. Okay. Then just a quick one, if I may. In terms of your digital investment, could you help us size how much you're planning to invest in 2016? Do you envision also investing on the digital side, not only for consumer loans and consumer-related activities, but also any potential opportunities to invest related to your commercial businesses? Thank you. 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. Again, that's something that we don't disclose. Okay. Thank you for taking my question. Good. Thank you. Your next question comes from the line of Marty Mosby. Your line is open. Thanks. Steve, I wanted to ask- Marty? Yes, I'm here. Okay. I 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 six-plus products, are you being able to just convert new customers with significant amount of products? 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, 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 and desires and our capacity to fulfill with them in different channels. 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. We think while we're better, we have opportunity to further improve. It usually just takes a little time for the new customers to kind of roll up an average relationship. It's a very positive story to be able to do both at the same time. Mac, 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 million net write-up last quarter, you got an $8 million net write-down this quarter. The volatility in your results is about 50% 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 could try to hedge out some of that volatility in the servicing portfolio with the change in interest rates? Just wanted to see if there was a philosophy that y'all had or a way to adapt to maybe limit that volatility a little bit more. Yeah, Marty, we're taking a look at that. Obviously, I think the hedges have not been very efficient last couple of quarters with just given some of the volatility and rate changes in the marketplace. We are taking a look at strategies there, but we do feel confident in what we're doing. I just think the market has been a little volatile the last few quarters. Okay. We could probably just talk offline a little bit about that because I've done that in the past, we could talk about a few things that we've been able to do to help minimize some of that volatility. That's great. Thanks, Marty. All right. 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? Keep in mind that the MSR impairment that we mentioned earlier on the call is embedded in that mortgage banking line. That's $8.4 million in the mortgage banking line. Excluding that year-over-year, I think we were up $5 million in growth. 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. I do think the volumes are solid. Again, not as high as they were earlier in the year. Got it. Service charges were up $5 million this quarter, which kind of seems particularly strong. Could you give me some color on what's driving that up? 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 Fair Play. Back in July of 2014, was the last adjustment that we made that actually impacted us by $6 million a quarter. 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 Fair Play. That, I think, is a very positive sign around the success of the strategy and what we would expect going forward. Got it. Thank you very much. Thank you. Again, I would like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. Your next question comes from the line of Peter Winter from Sterne Agee. Your line is open. Thanks. Good morning. Hi, Peter. I appreciate the new slides on the economic data. 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, yeah, we watch the dollar, China, commodities, et cetera. 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. I think those factors combined actually have been a net positive, and we're still seeing strong demand and pretty strong growth in our region. Is that impacting, I know you talked about it, is it having a little bit of an impact on the C&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, on the whole, we have not seen any kind of industry-level impacts, at least not at this point. Got it. Thank you. Thanks, Peter. Your next question comes from the line of Christopher Sparro. Your line is open. Hi, good morning. I just have a question on deposit trends. I see that most accounts on an 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 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. I really don't think there's anything you should read into that. All right, thank you. Thanks, Chris. Again, if you'd like to ask a question over the phone, press star one on your telephone keypad. Okay. Hearing no further questions, this is Steve. Excuse me. We did have one more question from the line of David Darst from Guggenheim. Your line is open. Good morning. Good morning, David. Thanks for including me. I just want to ask about the HTF fee income, and then I believe you got some operating leases with that portfolio as well. Should we see that the fee income contribution grow, or is it going to attrite over time? Yeah, the operating lease income will attrite over time, along with the operating lease expense. We're not going to do operating leases going forward. As we renew that business or bring additional leases on, they'll all end up in the margin going forward. You will see both the income and the expense related to operating leases attrite over time. Okay, great. Thanks a lot. Thank you. Any other questions, operator? There are no further questions at this time. I'll turn the call back over to the presenters. We're pleased with our third quarter results. Our strategies are working, our investments are positively contributing to results, and our execution is focused and strong. We continue to gain market share and improve share of wallet. 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 pace those investments to assure positive operating leverage. We continue to work toward our long-term corporate goals, including becoming more efficient and boosting returns. 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. Thank you for your interest in Huntington. We appreciate you joining us today. Have a great day. This concludes today's conference call.