Huntington Bancshares Inc (HBAN) 2015 Q2 法說會逐字稿

Good morning, my name is Leanne and I will be your conference operator today.

At this time, I would like to welcome, everyone, to the Huntington Bancshares' second-quarter earning conference call.

(Operator Instructions)

I would now like to turn the call over to Mr. Mark Muth, Director of Investor Relations.

You may begin your conference.

Thank you, Leanne, and welcome.

I'm Mark Muth, Director of Investor Relations for Huntington.

A copy of the slides we'll 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 one hour from the close of the call.

Slides 1 and 2 note several aspects of the basis of today's presentation.

I encourage to you 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 released this morning and the related 8-K filed today, all of which can be found on our website.

Turning to slide 3, 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 4, the presenters today are Steve Steinour, Chairman, President and 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 today.

Let's get started by turning to slide 5.

Mac?

Thanks, Mark.

Good morning and thank you for joining the call today.

We appreciate your interest in Huntington and we think we have good results to share with you this morning.

Over the past several years, we have followed a contrarian path built around our fair pay philosophy and our welcome culture.

We have a strong recognizable brand, and a differentiated product set and industry-leading customer service.

In addition, we have been investing in our franchise, building and expanding at a time when others have been focused squarely on cost cutting.

We will continue to invest in our Business, although we will pace our investments to manage for positive operating leverage on an annual basis.

Our second-quarter results, highlighted by solid revenue growth and improved margins, provide proof that our strategies are working, and the investments we've undertaken over the past few years are paying off substantially.

Our investments are not yet mature and should continue to drive future revenue growth and future performance improvement.

We remain focused on disciplined execution, and we are well positioned to finish the year strong, delivering positive operating leverage for the third consecutive year, as well as improve returns for shareholders.

Slide 5 shows some of the financial highlights for the second quarter.

Strong revenue growth drove a record-setting quarter resulting in net income growth of 19% over the same quarter of last year.

Earnings per common share of $0.23 increased 21% year over year.

These results equated to a 1.16% return to assets and a 14.4% return on tangible common equity.

The underlying strength exhibited this quarter was broad-based and included the impact of our acquisition of Macquarie Equipment Finance, which we have rebranded Huntington Technology Finance, or HTF.

Total year-over-year revenue growth of 9% benefited equally from spread revenues and fee income.

Net interest income grew 7% while fee income grew 13%.

Healthy balance sheet growth included a 6% year-over-year increase in average loans and leases and a 9% increase in average deposits.

For the second straight quarter, deposit growth was driven largely by growth in core deposits, which is very encouraging trend as we continue to focus on deepening relationships and earning primary banking status with our customers.

Core deposit growth more than fully funded loan growth over this period.

While the value of our quarter deposits may not be fully appreciated in the current rate environment, we believe that our strong core deposit franchise will provide true differentiation when interest rates begin to rise.

Our credit quality remained very strong with only 21 basis points of net charge-offs and 81 basis points of nonperforming assets.

We repurchased 8.8 million common shares at an average price of $11.20 per share, effectively returning more than $99 million of capital to shareholders.

We also completed a $750 million indirect auto loan securitization during the quarter, resulting in a net gain of $5 million.

This securitization demonstrated investors endorsement of the quality and consistency of our auto finance business, one of our distinctive capabilities.

Finally, we continue to be recognized for our focus on excellent customer service and our distinguished brand.

During the quarter we were recognized by both J.D. Power and TNS for the third consecutive year for our customer-centric focus.

We were also recognized by the American Banker for our strong reputation.

Slide 7 is a summary of our quarterly trends and key performance metrics.

We've already touched on many of these, so let's move to slide 8 for a more detailed review of the numbers.

Relative to last year's second quarter, total revenue increased 9% to $780 million.

We are very pleased with our strong revenue growth in this challenging environment.

As I mentioned previously, spread revenue and fee income accounted for roughly equal parts of the increase in revenue.

Spread revenues benefited from balance sheet growth as earning assets increased 10% year over year partially offset by continued NIM compression of 8 basis points.

Spread revenues during the second quarter included $17 million of net interest income from HTF.

Fee income for the 2015 second quarter was $282 million, a 13% increase from the year-ago quarter.

The primary components of the increase were a $16 million increase in mortgage banking income, $12 million in fee revenue from HTF and a $9 million increase on gain on the sale of loans, which included a $5 million gain on the $750 million indirect auto loan securitization.

Other fee income sources also posted double-digit year-over-year growth rates including electronic banking and capital markets.

We continue to see the benefits of consumer and commercial customer growth manifested in these areas.

Deposit service charges also benefited from our robust customer growth as we have almost grown through the $6 million per quarter impact from changes to our consumer deposit growth -- consumer deposit products including all day deposit implemented in July of last year.

Reported non interest expense in the second quarter was $492 million, an increase of $33 million, or 7% from the year-ago quarter.

Recurring expense related to HTF was $16 million or almost half of the year-over-year increase.

The second quarter also included $2 million of merger-related expense that is not reported as a significant item for the quarter but is expected to be reported as a significant item for the year as we will complete the systems integration of HTF later in 2015.

Slide 9 details the trend and our balance sheet mix.

Average loans and leases increased $3 billion, or 6% year over year including $839 million of leases from the HTF acquisition.

During last quarter's earnings call, we mentioned that we expected lower second quarter growth in C&I and CRE due to our risk return expectations.

And this was the case.

However, loan growth and our loan pipeline both strengthened later in the second quarter, providing room for increased optimism in the back half of the year.

Notably in the second quarter, we experienced year-over-year growth in every loan portfolio.

The indirect auto loan portfolio increased 10% from the year-ago quarter.

As shown on slide 53 in the appendix, our indirect auto operating model remains unchanged, with our disciplined approach to the business reflected in the credit performance metrics.

As mentioned in the opening remark, we completed a $750 million indirect auto loan securitization.

Recall that we previously removed $1 billion of auto loans to held for sale and near the end of the quarter, we moved the remaining $250 million of indirect auto loans back into the portfolio.

After reviewing the existing and projected size of the overall auto portfolio relative to our concentration limit, as well as the transaction economics, we opted to scale back the size of the securitization.

This allows to us realize the longer term benefit of keeping these high-quality assets on our balance sheet.

Previously we mentioned that we expected to complete an additional securitization during the latter half of 2015 or perhaps in early 2016.

Following completion of the securitization in the second quarter, we re-examined our appetite for indirect auto loans taking into consideration the strong consistent performance of the asset class during the past economic cycle and in the CCAR and DFAST stress test.

As a result of this review, we decided to raise our auto concentration limit from 150% of capital, defined as tier 1 capital plus reserves, to 175% of capital.

As such, we no longer anticipate the need for an off-balance sheet securitization in the back half of 2015.

Turning attention to the right side of the balance sheet, average total deposits increased 9% over the year-ago quarter, including an 8% increase in core deposits.

Average non interest bearing demand deposits increased 18% year over year reflecting our focus on consumer checking and commercial relationship growth.

Specifically commercial non interest-bearing deposits increased 19% year over year while consumer non interest-bearing deposits increased 15%.

Total core deposits from commercial customers increased 17% year over year, while total core deposits from consumers increased 2% as we continue to remix the consumer deposit base out of higher cost CDs into other less expensive deposit products.

Importantly the year-over-year growth in total core deposits more than funded our loan growth over this period.

Average short and long-term borrowings increased by $1 billion year over year, which includes $750 million and $1 billion of bank level senior debt issued during the 2014 second quarter and 2015 first quarter respectively.

We also issued $750 million of bank level senior debt on the last day of the 2015 second quarter.

Average brokered deposits increased $600 million.

These deposits provide a cost-effective means for funding balance sheet growth, including LCR related securities growth, while maintaining focus on managing core deposit expense.

Turning to slide 10 we see net interest margin plotted against earning asset yields and interest-bearing liability costs.

The NIM increased 5 basis points quarter over quarter to 3.2%, primarily due to the addition of higher yielding assets from the HTF acquisition.

In addition we recorded approximately $3 million of pre-payment penalties within the securities portfolio, which added 2 basis points to the margin.

These contributions were partially offset by continuing pricing pressure across most asset classes.

With that interest margin decreased 8 basis points from the year-ago quarter, also reflecting downward asset repricing pressure.

Going forward, we expect pricing pressure to remain a headwind as many asset classes continue to reprice lower while funding cost have limited room for improvement aside from continued remixing of our deposit base.

Slide 11, provides some detail on our current asset sensitivity and how we manage interest rate risk.

For the past several years, we have run a more neutral balance -- positioned balance sheet compared to many of our peers, in part related to our swap portfolio.

These swaps were added at a time when the outlook suggested a prolonged period of consistently low rates.

As shown in the chart on top, our models estimate that net interest income would benefit by 0.3% if interest rates were to gradually ramp 200 basis points, in addition to the increases already reflected in the current implied forward curve.

This is consistent with our estimates from the past few quarters.

In a hypothetical scenario without the $9.2 billion of asset swaps, our models estimate that net interest income would benefit by approximately 4.3% and the same up 200 basis point ramp scenario.

The chart at the bottom of the slide illustrates the weighted average life of our asset and liability swaps, as well as the net impact of the swaps on our net interest income.

As you can see in the green line, the asset swap portfolio continues to age in, and had a weighted average life of 1.5 years at 6/30/2015.

As we have stated previously, our asset swap portfolio is a laddered portfolio.

There are no cliffs looming on the horizon.

Over the next two quarters, $1 billion of these asset swaps will mature, and an additional $3.5 billion will mature during 2016.

All else equal, the maturity of these swaps would increase our estimated asset sensitivity.

Slide 12 shows the trends on our capital ratios.

Our regulatory capital ratios improved modestly from the first quarter while tangible common equity remained relatively flat.

We repurchased 8.8 million common shares over the quarter at an average price of $11.20 per share, under a $366 million share repurchase authorization.

We have $267 million of authorized capacity remaining for the next four quarters.

Slide 13 provides an overview of our credit quality trends.

Credit performance remains solid and in line with our expectations.

Net charge-offs remained well controlled at 21 basis points, below our long-term expectations of 35 to 55 basis points.

The nonperforming asset ratio fell slightly in the quarter due to lower inflows compared to the prior quarter, as well as the higher number of loans returning to accrued status.

The criticized asset ratio also improved in the quarter, aided by an increase in the volume of upgrades in the past category.

The allowance for credit losses eased modestly with the ACL ratio falling from 1.3% last quarter to 1.34% currently.

All credit metrics fully reflect the results of the recently completed annual shared national credit exam.

Slide 14 highlights trends in criticized assets, non performs assets and delinquencies.

The chart on the upper left shows a slight decrease in the MPA ratio for the quarter to 81 basis points.

The level of MPAs has been fairly consistent over the past six quarters and is in line with our expectations.

The chart on the upper right reflects continued improvement in our 90-day delinquencies with the improvement coming from both the commercial and consumer loan portfolios.

The chart in the bottom left shows the criticized asset ratio, which also improved in the quarter as new inflows of criticized assets were more than offset by upgrades and pay downs.

Finally the chart on the bottom right shows a reduction in MPA inflows as a percentage of beginning period loans falling from 30 basis points to 26 basis points.

Turning to slide 15, the loan loss provision was $20.4 million in the second quarter compared to $25.4 million of charge-offs.

The ratio of allowance to non-accrual loans remains steady at 180% compared to 181% in the prior quarter.

The ACL ratio fell modestly to 1.34% from 1.38% in the prior quarter in line with modest overall improvements in credit metrics.

We believe the allowance is appropriate and reflects the underlying credit quality of our loan portfolio.

Let me now turn the presentation over to Steve.

Thank you, Mac.

Slide 16 provides a quick snapshot of the long-term trends in our consumer and commercial customer acquisition.

Our fair pay banking philosophy coupled with our optimal customer relationship, or OCR, focus has substantially driven customer acquisition since its inception.

As you can see, we've increased our consumer checking households and business relationships by almost 9% and 6% compound annual growth rates since 2010.

We believe these are industry-leading customer acquisition rates.

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.

We're a Company focused on revenue and revenue growth and we will continue to grow revenues despite the headwinds of the interest rate environment.

We've seen our dedication to OCR pay off.

But to get the full picture we turn to slides 17 and 18.

And in doing so, I want to stress that our strategy is not just about gain in market share but also gain in share of wallet.

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 and satisfied customers as well as revenue growth.

During the first quarter, our OCR consumer cross-sell goal of six or more consumer products and services crossed over the 50% mark for the first time.

This figure increased an additional 80 basis points during the second quarter, and now 51% of our consumer checking households use six or more products and services.

Correspondingly, our consumer checking account household revenue is up 9% year over year.

Turning attention to the commercial slide of slide 18, our percentage of commercial customers with four or more accounts -- four or more products and services was 43.4%, up 70 basis points from the prior quarter and up 210 basis points from the year-ago quarter.

Again this is translated directly to revenue growth as commercial revenue increased 5% year over year.

Slide 19 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.

We significantly narrowed the gap in the second quarter, moving from negative 1.7% at the end of the first quarter to negative 40 basis points at the mid-point of the year.

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 20 for some closing remarks and expectations.

We remain optimistic about the ongoing economic improvement in our footprint.

We're bullish on the midwest economy.

While average loan growth was decent this quarter, we saw momentum building in our pipelines and in our loan growth during the latter half of the second quarter.

Customer activity remains encouraging.

Loan utilization rates showed a slight increase during the quarter, giving additional reason for optimism.

While competition remains intense, we'll continue to be disciplined in growing our commercial real estate and C&I portfolios.

We're committed to delivering strong results regardless of the interest rate environment.

Our budget has been built around the current rate environment, and our execution is not dependent on a rate increase.

We control our destiny, and our focus and execution will deliver results.

Net interest margin improved this quarter with the impact of Huntington Technology Finance.

However, we expect NIM pressure will remain a headwind until interest rates start moving up.

We expect to grow revenue despite the pressure.

Fee revenue improved this quarter with electronic banking, treasury management, capital markets and mortgage banking all demonstrating particularly strong momentum.

We continue to invest in our businesses for the future, resulting in a projected non interest expense growth of 2% to 4% for the year, excluding significant items, net MSR activity and acquisitions.

On a reported basis, we expect non interest expenses will remain near the second quarter 2015 level for the rest of the year.

We expect revenue growth in excess of expense growth, and we're committed to positive operating leverage for full year 2015.

We believe asset quality metrics will remain near current levels.

We expect net charge-offs will remain at 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 the environment where necessary.

While past investments continue to pay off, we continue to move forward with investments in enhanced sales management, digital technology, data and analytics, and optimizing our retail distribution network.

There's a high level of alignment between the Board, Management, indeed all of our employees and shareholders and while we're highly focused on our commitment to being good stewards of shareholder status.

With that I want to turn it back to Mark.

Leanne 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.

(Operator Instructions)

Our first question comes from the line of John Pancari from Evercore.

On the loan growth side, just wonder if you can give us a little bit more color on the C&I loan trend?

Average you showed pretty good growth, but on the end of period basis, they were flattish.

Wanted to see if that's a number we should grow off of, or is it the average trends that you think are more sustainable here?

Well John, this is Mac, so I do think what you're seeing in the quarter is consistent with the guidance we gave last quarter on the call.

We do have good pipelines that picked up later in the quarter, and we are being very disciplined in terms of how we think about this from our risk appetite and reward perspective.

I do think that if you adjust for the Macquarie acquisition and think about the end point of the quarter, that would be a good starting point for growing off of.

But again, we did see strength in the latter part of the quarter.

And again, it's what we expected when we announced last quarter.

Okay.

All right, and then also on the loan front as my follow up, wanted to get your thoughts on auto loan growth, the growth in on balance sheet balances given your commentary around the intent to retain more of your production.

How should we think about growth in that portfolio going forward?

Yes, I would tell you that the growth is pretty consistent with what you've seen historically.

We have made some pricing changes that have impacted volume, and some of those pricing changes have stuck.

I think that it's important just to think about the environments and the fact that it is -- there is good opportunity for auto growth, and we're going to be consistent with what we produced historically.

Okay, thank you.

Our next question comes from the line of Ken Zerbe from Morgan Stanley.

A follow up on the auto.

Why is it a good idea to increase concentration to auto?

You obviously set the 150% for a reason.

And I know you guys do great underwriting.

But it just seems that you're just intentionally adding more risk or more concentration to a single asset class.

And I would love to know the rationale why that is.

Thanks.

Sure, Ken, this is Dan.

I think when you look at our auto portfolio and we measure risk and volatility, our auto portfolio has been one of the most consistent performers over time.

And when we run our analysis and look at CCAR struck losses versus base losses, it is a very, very stable portfolio.

We haven't had to adjust our underwriting parameters in order to gain volumes.

If you look at our FICO scores, our LTDs, the terms, et cetera, they have been rock solid over the cycle.

And we just think it's a great asset class, and we don't think that at 175% of capital that is outsized at all.

So we like the asset, we think it's proven itself.

And we think that level of concentration is very responsible.

All right.

And then the second question I had in terms of the margin, the 3.20%, obviously a tick up presumably to HTF.

Is 3.20% a decent starting point next quarter?

There wasn't any unusual items and then we apply the margin compression on that 3.20%?

Is that fair?

So Ken, it's Mac.

So HTF added 7 basis points to the margin in the quarter, and then there was about 2 basis points related to some security recalls.

So I think that's how you got to think about it going forward, as least as a starting point.

And then just keep in mind that we've been pretty consistent and 2 to 4 basis points of compression on a quarterly basis, and we don't think that's unreasonable.

Great, all right, thank you very much.

Our next question comes from the line of Steven Alexopoulos from JPMorgan.

I'd like to start looking at the 2% to 4% expense guidance which implies [$1.9] billion of 2015 adjusted expense.

Given where you were at the year to date point, $946 million, that implies a range of somewhere between $450 million and $470 million for each of the next two quarters.

I'm curious, given where the second quarter run rate came out, is there realistically any chance that you end up at the low end of the range, so 2% for the year?

I was a bit surprised it didn't take up the guidance at least, maybe 3% to 4%, something like that.

Help us think about the range and why you maintain the guidance.

So Steven, it's Mac.

We do feel very comfortable that expense growth for the remainder of the year is going to be very consistent with what you see in the second quarter.

So we think it's important to be consistent in the guidance that we provide, and make sure that we report back to you on how we're performing against that guidance.

And again, even with all the investments that we have coming on later this year, we are opening more in-stores, we continue to make investments in digital and other technology.

We feel very comfortable with expenses being at the same level as second quarter of 2015.

And Mac do you think it's feasible that we could end up at the low end of that range?

I'll leave that to you to decide based upon the guidance that we've given here.

Okay.

But certainly we're comfortable with second-quarter levels.

Okay.

And I just wanted to follow up on raising the concentration limit of auto.

Could you just walk us through, so what's exactly changing?

Is it better quality business you're doing?

Are you responding to pressure in C&I and other areas, is that why you're raising the limit?

No, I think it really, again, the limit goes to when we look across the portfolio, where is there less volatility?

Where do we have the historical performance, et cetera?

What's the allocation we want in the various asset classes on a relative basis?

And we think that, one, we don't think a 150% to 175% is significant, but we think it's fully supported based on the results and past history and where we want the book to go in the future.

Okay.

Okay, thank you.

Our next question comes from the line of Ken Usdin from Jefferies.

If I could follow up on the fee side, I just wanted to ask about, you'd mentioned Steve, the really strong quarter for mortgage, partially on the production side, also on the MSR, where your outlook would be there?

And then secondly, the other line with the $12 million helper from HTF, is that consistent of a fee generator also in terms of run rating that level?

Yes, Ken, it's Mac.

So we have that good performance in mortgage and we do expect continued performance.

Keep in mind we did have $6 million in MSR pick up in the quarter.

And we certainly don't forecast either gains or losses when we put together our models.

So we do think that mortgage is going to be a good contributor to revenue growth for the remainder of the year.

And when you think about HTF and the revenue on the fee side, we do think that that's a good base to build off of.

Okay.

So my quick follow up would just be on HTF in aggregate, the revenue that we saw both on extensions across the board, this is all the right run rate aside from future growth, right?

So what was in the 7 basis points in NIM, the 12 in fees and then the amount of expense are a good go-forward spots?

Yes, feel very comfortable with that.

And one thing I'll point out is that HTF did have some operating leases, and we're not going to be booking operating leases going forward.

So you will start to see there's $8 million of revenue in the quarter and $6 million of expense in the quarter related to operating leases.

Those items will start to run off.

But they will be replaced obviously on the balance sheet with new production that won't be operating leases.

So you need to think about the timing of how you've adjusted your fee revenue and your expenses.

But just wanted to make you aware of that.

Okay, thanks for that, Mac, appreciate it.

Our next question comes from the line of Erika Najarian from Bank of America.

Your line is open.

Yes, good morning.

Good morning, Erika.

Mac, I was just wondering if you could walk us through how we should expect the balance sheet to grow, especially relative to where you are or where you want to be on LCR.

How we should think about earning asset growth relative to loan growth.

So Erika, I would tell that you where we're where we need to be for LCR for 2015.

And as we think about what we're going to do going forward, to get to 100% we're not going to increase the size of the security portfolio.

So we're basically going to be able to take cash flow from the securities portfolio and get the securities that we need to be complaint with LCR at a 100% level.

So you won't see the balance sheet grow due to coming compliant with LCR.

Got it.

And so the pace of balance sheet growth should be roughly equivalent to that of our loan growth assumption.

That's exactly right.

Okay.

Thank you.

Our next question comes from the line of Geoffrey Elliot from Autonomous Research.

Hello.

And it's Geoffrey Elliot from Autonomous Research.

Hi, Geoff.

Hi.

I wanted to ask on the new slide that you've given us on the impact of swaps and talking about what net interest and income sensitivity would look like if those swaps rolled off.

Is that an indication of intent at all?

If rates pan out as you're expecting, are you planning to bring the swap portfolio down?

Or is that really a kind of hypothetical exercise at this point?

So we've been pretty consistent in talking about our comfort with the way the swap portfolio is laddered and the way the swaps are rolling off naturally.

We've provided some guidance around $1 billion of swaps are coming off in 2015, and that additional $3.5 billion in 2016, and those are the natural maturities of the portfolio.

So we feel very comfortable with that.

And so the intention is not to replace them by putting on new swaps?

That's our current intent.

We feel like this was a very, very wise thing for us to do in the rate environment we were in.

It actually protected the margin significantly and helped us manage interest rate risk on the balance sheet.

And we think the timing of these swaps and their current maturities is advantageous for us.

Great.

Thank you very much.

The next question comes from the line of David Long from Raymond James.

Your line is open.

Good morning, guys.

Good morning, Dave.

Good morning.

In regard to your expansion in Michigan with the new in-store locations in the Meijer superstores, what kind of expenses did you see here in the second quarter from that initiative?

And then with those opening on our about July 1, what would be the pickup in expenses we should expect here in the third quarter?

David, it's Mac.

So we've got 30 new locations that open in third quarter and another 10 in the fourth quarter.

And you need to keep in mind that we do hire the bankers 60 to 90 days in advance before opening those stores.

The remainder of the expenses you can expect to see come online as we open those branches.

So I'm not going to go into detail around the specifics of incremental expense related to the expansion.

But again, I'll take you back to the expense guidance that we've given and are very comfortable with the second quarter levels.

Got, it thanks for the color.

Sure.

Our next question comes from the line of Scott Siefers from Sandler O'Neill.

Thank, good morning, guys.

Good morning.

Mac, I was hoping you could maybe you could just flesh out what's going on in overall commercial yields and just pace of degradation.

I got what you said about pricing pressure is going to continue.

But can be a little tough from the outside to see, given the impact of HCF, the pace of degradation, whether that softened at all in the second quarter.

What are your thoughts there?

Scott, this is Dan.

I think that while there continues to be pressure, I do feel that it is starting to stabilize a little bit.

So I think the pace of the pricing pressure and structural pressures is maybe levelling out a little bit.

So maybe a lesser reduction on a go-forward basis than what we've experienced to date.

Okay, perfect.

Thanks, Dan.

And then Mac, just sort of a ticky-tack question, what level, if any, of integration charges are you expecting per quarter in the second half of the year?

I would suggest it's not going to be a material number.

It's -- actually the cost to integrate HTF for [McCrory] is one of the lowest costs I've ever seen in an integration.

So it's really not material.

Okay, great.

So in other words, the expense guidance for the second half, the reported and the debt to core number you're expecting as well.

That's the way to think about it.

Terrific.

All right, thank you very much.

Thanks, Scott.

Our next question comes from the line of Terry McEvoy from Stephens.

Your line is open.

Hi, thanks, good morning.

Good morning, Terry.

You had a nice quarter over quarter increase in service charges.

Is there any way to separate what is seasonal versus what's connected to your growing customer base?

So is that growth in fee coming from just more customers, and does that more than offset what's going on across the industry in terms of declining fees?

So I think the way to think about it, a second quarter is typically seasonally strong.

And I think if you go back and take a look over time and just get an idea of what happens there, that's one way to think about it.

It's probably a little bit more difficult for us because of Fair Play, and some of the changes that we've made.

Clearly when you think about the way we've acquired new households and commercial customers, a lot of the growth and the new customers have really helped us overcome some of the charges we've made on the Fair Play side.

And then with our focus on OCR and deepening relationships, that's been very beneficial as well.

In particular, Treasury management, which some of the revenue associated with Treasury management gets reported in that line, and we have had very strong growth in Treasury management.

And the last thing I'd point out is that we did make some changes in July of last year that costs about $6 million a quarter in service charges.

And we're basically through that impact at this point.

So I would expect to see some favorable growth in service charges for the remainder of the year.

Great.

And then you've been showing he's consumer and commercial relationship product penetration slides for years, and they're all up and to the right.

And I guess my question is, what category, either consumer or commercial, is more important for achieving the positive operating leverage?

Which one should we look at before the other?

It's a great question.

I think they both have contributed in a pretty material way.

I think we have had better success in revenue growth related to new customer relationships on the commercial side.

I think the bigger opportunity going forward is on the consumer side.

So that's probably how I would think about it.

I think a lot of the investments we've made on the commercial side of the business, particularly on the fee side, have paid off very nicely for us.

And as we think about the opportunity to deepen relationships on the consumer side of the business going forward and take advantage of all the new households we've brought to the organization, that is going to be a nice driver for us going forward.

Great, thank you.

(Operator Instructions)

Our next question comes from the line of Jon Arfstrom from RBC.

Your line is open.

Thanks, morning guys.

Good morning, Jon.

A couple follow-ups here.

Just one on asset sensitivity, maybe.

Noninterest bearing deposits have become a much larger piece of your deposit base over the past several years.

I'm just curious how you expect those balances to behave in a rising rate environment.

In other words, is the growth driven by consumer household accounts or is there something in there that may leak out if rate goes up?

John, this is Steve.

We started with the strategy of share of wallets along with this share of market.

And so we measured loyalty and retention and how that was impacted as we increased share of wallet.

Therefore, we expect our DDA to be very sticky as a consequence of the cross-sell that we've been able to add on both the consumer and the commercial.

Okay.

Good, that's helpful.

And then a follow-up for maybe Mac on the accelerated expansion, you talked about the branches that are coming online in Q3 and Q4.

Is the incremental expense done at the end of Q4?

There might be a few branches that'll bleed into 2016.

But I think for all practical purposes, the incremental expense is done in Q4.

Okay, good, thank you.

Thanks Jon.

Our next question comes from the line of Marty Mosby from Vining Sparks.

Thanks, Mac, I want to talk to you a little bit about the decision to move around the interest rate sensitivity.

You've been keeping a very neutral position which has helped the net interest margins.

As you are letting things mature, you're giving up a pretty wide spread with the steepness of the [yul] curve, and you're going to take all of that 4.3% increase in asset sensitivity really to replace what you're giving up on the interest rate swap.

So there's a tradeoff, and I just wanted to you talk a little bit about how you're thinking about that.

Yes, thanks, Marty.

So I do think, and we've talked about this quite a bit historically, that the swaps that we put on, and when we put them on actually did a great job in protecting the margin and you and I have talked about that quite a bit.

But we -- when we put these on, we didn't put them on from thinking about a timing perspective.

And as we let them mature, we're not really thinking about it in terms of trying to time what's happening in the marketplace.

We do have a belief, as I think most do, that rates are going to rise.

If it's not in the third our fourth quarter, certainly it will be early next year.

And when we think about just the natural maturity of the portfolio, it seems like it's the right thing to do, just to let these swaps mature.

So that's the way we think about it, and certainly, we're not trying to thread the needle here.

The only thing I was looking at was the 4.3% of pickup gives you about $20 million worth of earnings as rates go up a full 200 basis points.

If you look at pro rating the benefit of the $26 million, how this came up with your running off all those asset swaps, you're probably going to give up about $18 million.

So it really looks like you're giving up current earnings to wait on the Fed funds' rate to go up 200 basis points, and keeping a neutral balance sheet is probably always the overall goal, not to be one way or the other.

Right, which is the way we've thought about it.

We have disclosed historically that we have historically had $4 billion to $5 billion of asset swaps on -- throughout the cycle.

So we certainly do think about how to hedge the balance sheet.

But again, we're not trying to thread the needle here.

Got you.

Thanks so much.

That ends our question-and-answer session for today.

I now turn the call back over for closing remarks.

We're pleased with what was a record-breaking second quarter.

Results show that our investments are paying off, our strategies are working, and our execution is focused and strong.

And we continue to gain market share and improve share of wallet and show no signs of slowing down.

We produced revenue growth of 9% in a challenging environment while remaining focused on pricing and underwriting discipline.

In addition, we made significant progress on the integration of Huntington Technology Finance and are excited about the return profile this business provides.

HTF will be a great deal for Huntington shareholders.

With that said, there is always work to be done.

We can do better.

And I don't want you to think we're content with one record quarter.

While we continue to make progress on improving efficiency, we still have significant opportunity for improvement to achieve our long-term goal of an efficiency ratio in the 55% to 59% range.

As our past and current investments in the businesses mature, we'll continue to become more efficient and move toward that goal.

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.

And we're well aligned in these priorities.

Thank you for your interest in Huntington.

We appreciate you joining us today.

Have a great day, everybody.

And this concludes today's conference.

You may now disconnect.