Huntington Bancshares Inc (HBAN) 2017 Q3 法說會逐字稿

Greetings, and welcome to the Huntington Bancshares third quarter earnings conference call.

(Operator Instructions) As a reminder, this conference is being recorded.

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

Thank you, Michelle, and welcome.

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

Copies of the slides we will be reviewing can be found on the IR section of the Huntington website, www.huntington.com.

This call is being recorded, and will be available as a rebroadcast starting about 1 hour from the close of the call.

Our presenters today are: Steve 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.

As noted on Slide 2, today's discussion, including the Q&A period, will contain forward-looking statements.

Such statements are based on the information and assumptions available at this time and are subject to changes, risks and uncertainties, which may cause actual results to differ materially.

We assume no obligation to update such statements.

For a complete discussion of the risks and uncertainties, please refer to this slide and materials filed with the SEC, including our most recent Forms 10-K, 10-Q and 8-K filings.

Let's get started by turning to Slide 3 and an overview of the financials.

Mac?

Thanks, Mark, and thanks to everyone for joining the call today.

As always, we appreciate your interest and support.

We are pleased with our third quarter financial performance, including record net income for the second consecutive quarter, completion of the fiscal integration of FirstMerit and substantial progress in the cultural integration of the 2 organizations.

In addition, we incurred the final charge for the integration of FirstMerit in the third quarter of 2017.

So let's get started by turning to Slide 3 to review third quarter results.

Please keep in mind that year-over-year comparisons are impacted by the inclusion of FirstMerit, as the acquisition closed during the third quarter of 2016.

Huntington reported earnings per common share of $0.23 for the third quarter of 2017, up 109% over the year-ago quarter.

This was inclusive of $0.02 per share of Significant Items related to the FirstMerit acquisition.

Also, including the impact of the Significant Items, return on assets was 1.08%; return on common equity was 10.5%; and return on tangible common equity was 14.1%.

Our reported efficiency ratio for the quarter was 60.5%.

However, net acquisition-related expense added 2.8 percentage points to the ratio.

Adjusting for the Significant Items, the adjusted efficiency ratio was 57.7%, and this reconciliation can be found on Slide 20.

Tangible book value per share increased 6% from the year-ago quarter to $6.85, and was up 2% sequentially from the second quarter.

Consistent with our 2017 CCAR submission, last week the Board declared a dividend of $0.11 per share, up $0.03 or 38% increase from the $0.08 per share in the prior quarter.

During the third quarter, we also repurchased $123 million of common stock, representing 9.6 million shares at an average cost of $12.75 per share.

Turning to Slide 4, which shows a summary of the income statement.

Total revenue was up 17% from the year-ago quarter.

Net interest income was up 21% year-over-year due to the 17% increase in average earning assets, primarily reflecting the addition of FirstMerit and an 11 basis-point increase in the net interest margin.

Net interest -- I mean noninterest income increased 9% year-over-year.

We continue to see good growth in service charges on deposit accounts and card and payment processing revenue, both of which reflect the impact of FirstMerit as well as organic customer acquisition and increased debit and credit card activity from existing customers.

A record quarter in capital markets fees was driven by a strong execution of our strategic focus on expanding the business and deepening commercial relationships.

Noninterest expense decreased 4% year-over-year.

Significant Items both for 2017 and 2016 third quarter expenses.

For the third quarter of 2017, acquisition-related expense totaled $31 million.

Adjusted noninterest expense in the third quarter grew $97 million or 18% from the year-ago quarter, primarily from the inclusion of FirstMerit.

Compared to the second quarter of 2017, adjusted noninterest expense increased $6 million or 1%.

The third quarter of 2017 included approximately $12 million of nonrecurring expense, not included in the Significant Items for the quarter.

This $12 million of expense related to personnel, operational and efficiency improvement efforts and certain expenses associated with the previously announced consolidation of 38 traditional branches, 7 drive-through locations and 3 corporate offices late in the third quarter of 2017.

For a closer look at the details behind these calculations, please refer to the reconciliations contained on Page 19 of the presentation slides or in the release.

Slide 5 illustrates that we are well on our way to delivering positive operating leverage again in 2017.

You are accustomed to hearing us talk about this every quarter stressing how important annual positive operating leverage is to us as a company.

We remain confident that 2017 will be the fifth consecutive year of positive operating leverage.

Slide 6 illustrates our balance sheet trends.

Average earning assets grew 17% from the year-ago quarter.

This increase was driven primarily by a 31% increase in average securities and a 12% year-over-year increase in average loans and leases.

The increase in average securities reflected the addition of FirstMerit's portfolio, the reinvestment of cash flows, including the proceeds of the auto securitization in the 2016 fourth quarter, and additional investments in LCR ratio level 1 qualifying the securities.

During the third quarter, average loans increased 1% compared to the prior quarter.

As you've come to expect from us, we remain disciplined in our approach to the extension of credit.

To emphasize this point, loan originations for each of the last 3 quarters were lower than our 2017 budget expectations.

However, we more than made up for lower loan volumes through disciplined pricing, resulting in net favorability to year-to-date core net interest income.

As Steve will elaborate on later in the presentation, we have reduced our period-end loan growth guidance for 2017 to a range of 3% to 4%.

This new guidance assumes that we will not execute an auto securitization in 2017.

As competition from loan growth continues to intensify, particularly on the commercial side, we are very pleased that the option to retain more of our high-quality auto loan origination volume as an earning asset substitute until we see competition in the commercial space become more rational.

At quarter-end, our indirect auto portfolio concentration represented 123% of Tier 1 capital plus ACL.

This is just below our operating guideline of 125% but still well below our concentration limit of 150%.

Based on our current expectations, we have capacity for continued growth of the portfolio into mid-2018 while remaining below our 125% operating guideline.

As you know, our auto loans are the best-performing loan category in our CCAR stress testing, and we originate the hold.

So we are very comfortable carrying it in our balance sheet as opposed to chasing riskier loan growth elsewhere.

We also like the effective duration and the risk-return profile of these loans relative to alternative investment securities.

Average C&I loans increased 11% year-over-year, primarily reflecting the FirstMerit acquisition as well as increases in core middle market, the specialty lending verticals, business banking and auto floor plan.

As we have seen throughout 2017, we continue to face headwinds in corporate banking as companies access the debt markets in order to lock in current low rates.

C&I balances were further impacted by the payoffs and paydowns of certain nonperforming loans, helping to drive a 7% sequential decline in nonperforming assets.

Average commercial real estate loans increased 13% year-over-year as a result of the FirstMerit acquisition.

On a period-end basis, commercial real estate loans decreased 1% year-over-year.

We have strategically pulled back in CRE lending, specifically in multifamily, retail and construction to remain consistent with our aggregate moderate-to-low risk appetite and to ensure appropriate returns on capital.

Average auto loans increased 3% year-over-year with the third quarter representing another solid quarter of consistent disciplined loan production.

Originations totaled $1.6 billion for the third quarter of 2017, up 7% year-over-year.

Average new money yields on our auto originations were 3.62% in the third quarter, up from 3.58% in the prior quarter, and up more than 40 basis points from the year-ago quarter.

Average residential mortgage loans increased 20% year-over-year, reflecting the addition of FirstMerit and continued strong demand for mortgages across our footprint.

As typical, we sold the agency-qualified mortgage production in the quarter and retained the [Chippenham] mortgages and specialty mortgage products.

Turning our attention to the chart on the right side of Slide 7. Average total deposits increased 17% from the year-ago quarter, including a 19% increase in average core deposits.

Average demand deposits increased 22% year-over-year.

We remain pleased with the trend in funding mix, particularly the increase in low-cost DDA.

This reflects the addition of FirstMerit's low-cost deposit base as well as our continuing focus on checking account relationship acquisition.

Moving to Slide 7. Our net interest margin was 3.29% for the third quarter, up 11 basis points from the year-ago quarter.

The increase reflected a 26 basis-point increase in earning asset yields and a 4 basis-point increase in the benefit of noninterest-bearing funds, balanced against the 19 basis-point increase in the cost of interest-bearing liabilities.

On a linked-quarter basis, the net interest margin decreased by 2 basis points, driven by a 3 basis-point improvement in earning asset yields and a 2 basis-point increase in the benefit of noninterest-bearing funds, partially offset by a 7 basis-point increase in the cost of interest-bearing liabilities.

The increase in funding cost was more heavily weighted to wholesale funding, as we continue to remain pleased with our ability to successfully lag deposit pricing, especially on consumer core deposits where the rate increased 1 basis point sequentially.

Purchase accounting contributed 12 basis points to the net interest margin in the third quarter, down from 15 basis points in the prior quarter.

After adjusting for this impact in all quarters, the core NIM was 3.18% compared to 3.16% in the prior quarter and 3.06% in the third quarter of 2016.

As I just mentioned, and calling your attention to the orange line at the bottom of the graph on the left, our cost of consumer core deposits was 22 basis points for the third quarter.

This represents a 4 basis-point increase over the year-ago quarter and a 1 basis-point increase sequentially, illustrating the strong consumer core deposit base we enjoy and our ability to successfully lag deposit pricing.

We have seen consumer and small business deposit pricing remain relatively steady in the face of recent Fed interest hikes while the majority of pricing pressure has been limited to government banking, corporate banking and the upper end of middle-market commercial.

In the quarter, we selectively increased rates to grow and retain core deposit balances on certain corporate relationships, providing better economics for the bank relative to the cost of wholesale funding.

On the earning asset side, our commercial loan yields increased 41 basis points year-over-year while consumer loan yields increased 35 basis points.

On a linked-quarter basis, commercial loan yields increased 3 basis points while consumer loan yields increased 5 basis points.

Security yields were up 8 basis points year-over-year and were flat for the prior quarter.

Slide 8 shows the expected pretax net impact of purchase accounting adjustments on an annual forward-looking basis.

We introduced this slide last fall, and believe it is useful in helping you think about purchase accounting accretion going forward.

It's important to note that the purchase accounting accretion estimates on this slide are based on current scheduled accretion, and except for what we have experienced in the first 3 quarters of 2017, do not include in the accelerated accretion from the recapture through early payoffs or extensions in the projected periods.

As we have stated previously and has been proven out in our results for the past 5 quarters, in reality, we are likely to experience loan extensions and early payoffs resulting in accelerated accretion.

Therefore, you are likely to see the accretion revenue in the green bars continue to be pulled forward as modifications and early payoffs occur.

Turning to Slide 9. This illustrates our long-term financial goals, which were set by the Board in the fall of 2014 as part of our strategic planning process.

These goals were originally set with a 5-year time horizon in mind, but we expect the economic benefits of the FirstMerit acquisition will allow us to achieve these long-term financial goals in the fourth quarter of 2017 run rate and for the full year 2018, both on a GAAP basis, 2-plus years ahead of schedule.

Year-to-date 2017 results on a reported GAAP basis reflect the cost of the ongoing integration.

Adjusting for these costs, as shown on the reconciliation Slides 23 and 24 in the appendix, we are already realizing the scale and financial benefits of the deal.

The fourth column depicts our current expectations for these metrics for the full year 2017, also in a non-GAAP adjusted basis.

I would point you in particular to our full year expectations for the efficiency ratio and return on tangible common equity.

We believe these results will distinguish our performance from our peers.

We celebrated the 1-year anniversary of the closing of the FirstMerit acquisition in August, and Slide 10 provides additional details on the cost savings and the revenue synergies from the transaction.

We have now fully implemented all of the $255 million of originally planned cost saves, and the primary focus of the organization is now executing on more than $100 million of revenue enhancement opportunities.

Turning to Slide 11.

You should recognize this slide as well from our second quarter earnings call, which we reiterates our $639 million noninterest expense target for the fourth quarter of 2017.

With all cost savings implemented, we will deliver on our cost-save commitment in the fourth quarter of 2017.

The chart on the upper right details the fourth quarter run rate.

The chart on the bottom of this page details the expense from implementing the revenue initiatives, specifically $37 million this year and an incremental $13 million in 2018.

As I mentioned during last quarter's conference call, we expect the revenue initiatives to have an incremental efficiency ratio of approximately 50% in 2018.

The incremental efficiency ratio is higher in 2017 as the ramp in revenues will naturally lag some of the upfront expense.

You've also seen Slide 12 before, which provides additional detail on the FirstMerit-related revenue enhancement opportunities.

The bar chart on the top of the slide displays our current targets for additional revenue from the initiatives.

In 2017, the revenue ramp corresponds with the hiring that is necessary to increase production and grow the portfolios.

For 2018, we are targeting at least $100 million of total revenue enhancements.

This is a $52 million increase from the $48 million expected in 2017.

Slide 13 illustrates the continued progress we've made in rebuilding our capital ratios following the FirstMerit acquisition.

Common equity Tier 1 ended the quarter at 9.94%, up 85 basis points year-over-year.

We have previously mentioned that our operating guideline for common equity Tier 1 is in the range of 9% to 10%.

Tangible common equity ended the quarter at 7.42%, up 28 basis points year-over-year.

Moving to Slide 14.

Credit quality remained strong in the quarter.

Consistent prudent credit underwriting is one of Huntington's core principles, and our financial results continue to reflect our disciplined approach to risk management and our aggregate moderate-to-low risk appetite.

We booked provision expense of $44 million in the third quarter compared to net charge-offs of $43 million.

Net charge-offs represented an annualized 25 basis points of average loans and leases, which remained below our long-term target of 35 to 55 basis points.

Net charge-offs were up 4 basis points from the prior quarter and down 1 basis point from the year-ago quarter.

As usual, there is additional granularity on charge-offs by portfolio in the analyst package and the slides.

The allowance for credit losses as percentage of loans decreased 1 basis point linked quarter to 1.10%, but the nonaccrual loan coverage ratio increased to 223% as a result of the 7% linked-quarter decline in nonaccrual loans.

Overall asset quality metrics remain strong.

Nonperforming assets decreased to $28 million or 7% linked quarter.

The nonperforming asset ratio eased 5 basis points sequentially to 56 basis points.

The criticized asset ratio increased 14 basis points from 3.66% to 3.80%.

And our 90-day plus delinquencies declined slightly.

We also continue to expect -- to experience lower nonperforming asset inflows for the fourth quarter in a row.

Let me now turn the presentation over to Steve.

Thanks, Mac.

Moving to the economy, Slide 16 illustrates selected key economic indicators for our footprint.

As we've noted previously, our footprint has outperformed the rest of the nation during the economic recovery of the last several years, and I remain optimistic on the outlook for the local economies across our 8 states.

The bottom left chart illustrates ten -- trends in the unemployment rates across our footprint.

And as you can see, unemployment rates across the majority of our footprint remain near historical lows.

Slide 17 illustrates trends in unemployment rates for our 10 largest deposit markets.

Many of the large MSAs in the footprint remain at or near 15-year lows for unemployment at the end of August.

The labor market in our footprint has proven to be strong in several markets, such as here in Columbus and in Indianapolis and Grand Rapids, where we see meaningful labor shortages.

We have noted previously that we're seeing wage inflation in our expense base and our customers are too.

Housing markets across the footprint continue to display broad-based home price inflation while remaining some of the most affordable markets in the U.S.

Finally, we continue to see optimism across our consumer and business customer base, with the consumer confidence score in our region at its highest since 2000.

These economic factors support our expectation for continued economic growth across our footprint through the -- though the recent translation in the business investment has been somewhat uneven.

Let's now turn to Slide 18 for some closing remarks and important messages.

We had another good quarter in the third quarter, including record net income.

The core franchise continues to perform very well on many fronts, and we have completed the remaining necessary integration actions for us to achieve the economics of the FirstMerit deal.

We're pleased to significantly increase our cash dividend for the fourth consecutive year, and to reinstitute our buyback program.

We remain focused on delivering consistent, through-the-cycle shareholder returns.

This strategy entails reducing short-term volatility, achieving top-tier performance over the long term and maintaining our aggregate moderate-to-low risk profile throughout.

As Mac noted, the FirstMerit acquisition accelerated our ability to achieve our long-term financial goals, and with the integration substantially complete, we expect to deliver against the goals in this year as well as next year.

We are set to realize our targeted $255 million of annual cost savings from the acquisition, with all remaining cost savings implemented during the third quarter as originally communicated.

We also continue to execute on the significant revenue enhancement opportunities, including the SBA lending, home lending and RV and marine lending expansions.

Our 2017 full year outlook continues to expect total revenue growth of 23% on a GAAP basis.

Consistent with our long-term financial goal, we are targeting annual positive operating leverage.

Importantly, we continue to appropriately manage our expenses within our revenue outlook.

We expect average balance sheet growth also in excess of 20%, we expect period-end loan growth of 3% to 4% for the full year 2017.

Consumer loan growth has remained steady throughout 2017.

Consistent with our experience over the past several years, we expect commercial loan growth for the remainder of the year to outpace what we experienced year-to-date.

However, our commercial pipelines remain strong.

However, the commercial lending environment is extremely competitive on both structures and rate.

We have reduced our overall 2017 loan growth expectations from previous guidance.

We are remaining disciplined with our aggregate moderate-to-low risk appetite, ensuring appropriate returns on capital.

Finally, we expect asset quality metrics to remain near current levels, including net charge-offs remaining below our long-term target of 35 to 55 basis points.

Now I'll turn it back over to Mark so we can get to your questions.

Mark?

Michelle, we will now take questions.

(Operator Instructions) Thank you.

(Operator Instructions) Our first question comes from the line of Scott Siefers with Sandler O'Neill and Partners.

Mac, I had a quick question, just on the holding relatively more auto than you might have were the commercial environment not as it is.

So just first, can you walk through any margin ramifications of putting on auto versus what it would have been at -- C&I been playing out as expected?

And then did pricing in the either sale or securitization market, does that have anything to do with the decision to keep on balance sheet?

Yes.

Thanks, Scott.

So, yes, I would tell you that there really wasn't any consideration given the pricing in the securitization market.

As I've said historically, I do think we always give up economics when we securitize.

I like having these assets on our balance sheet because of their performance through the CCAR process as well as the risk-adjusted deal that we get on the auto book.

Yes, I would tell you that any margin impact on a go-forward basis is immaterial relative to C&I loan growth.

We feel comfortable with the returns that we get on the auto book, and we are well within the operating guideline even through mid-2018.

So we're prepared to be able to do that and we're very comfortable keeping assets.

Okay, perfect.

And then can you just remind me, you guys don't pop the marine and RV into the concentration limits, right?

Like your limit is auto specifically as opposed to all indirect.

And then along those lines, what is the opportunity you guys see in like marine and RV?

And how's the pricing there, vis-a-vis auto or other indirect portfolios?

Okay.

Hey, Scott, this is Dan.

So you're correct, the auto concentration limit is just for auto.

We have a separate limit for boat and RV.

And we really like the boat and RV book.

We think that is a real plus that we picked up through the acquisition -- a business model and the team that are very skilled.

We've supplemented that with external hires who have experience in the business.

The profile of our customers there is very strong.

FICOs of 790 to 795.

The asset size of the boats and RVs that they're purchasing is in a range we're very comfortable with.

We're talking $75,000 average size of the vehicle.

These tend to be experienced boat and RV owners.

And given that profile, the returns are strong as well.

So just on the whole, very nice asset class for us.

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

Thanks for clarifying that $12 million in the third quarter.

So the question about forward expenses, the $639 million run rate you've held to now, can you just help us think about what that means as a starting point going forward?

And is there anything else that you're contemplating to continue to hold up a gap on operative leverage in addition to the cost saves you've seen already?

So Ken, it's Mac.

So as we've stated in the press release and the scripts, we're very comfortable achieving the $639 million target in the fourth quarter.

And I think if you adjust for the $12 million in the third quarter, you can see that's pretty much already there.

And we've talked about what that means on a go-forward basis.

Clearly, we've got opportunity to recognize the full amount of the cost saved in 2018 because we did not recognize the full cost save for full year 2017.

So we do expect to recognize some of that benefit going forward as well.

And back on the operating leverage, we are committed to positive operating leverage.

This will be the [fifth] year in a row that we're going to achieve it.

It's an important goal for us.

And we build our plan every year, understanding what the revenue opportunity is, thinking about basically a flat-rate environment and then building our expense base to provide positive operating leverage on a go-forward basis.

So very committed to that objective and feel confident that we're going to deliver that.

Okay.

And my second question is, this is the second quarter in a row where you have not built the provision on top of charge-offs, as you had indicated you would have been doing post-merger as loans move from the FirstMerit book into the regular [way] book.

Is that now a thing of the past?

Or are we know matching from here provisions in charge-offs and what would change from here, if not?

Yes.

This is Dan.

So I think what you've seen in the last couple of quarters is not what you would expect on a go-forward basis.

There are a lot of factors at play when we look at the ACL in a given quarter.

We have been aided recently by a big reduction sequentially in our NPAs.

I don't expect that type of reduction to continue.

So that has certainly contributed.

Those are loans that would have large reserves attached to them.

And I think at 49 basis points of nonaccrual loans, that certainly is below what we would expect even in these times.

And so I think that's a factor we have to take into account.

So as I referenced last quarter, I think the way to think about provision on a go-forward basis is, covering charge-offs, plus some addition for growth.

So I think what you've seen in the last couple of quarters is not -- that is not the norm and not what you should expect in on a go-forward basis.

Just a quick clarification there then, Dan.

NPAs might not be going down, but what would be replacing the charge-offs in terms of what's underlying.

There's no real -- there is negative -- there is positive trends in delinquencies and all the back stuff.

So why would you see any inflection on even the charge-off side?

Yes.

Well, I think there's going to be movement from quarter-to-quarter, and I think we've had some very positive movements.

We've said over time, we do expect -- we've been operating below our long-term goal on charge-offs for quite some time.

And I think very gradually, we are going to see that drift upwards.

So I think that's another element at work here.

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

Maybe -- Steve or Dan, a question for you on some of your commercial lending comments.

Can you just maybe give us an idea of where and what is bothering you?

Is it large corporate middle market, has it leaked into small business?

And then what you think might change that environment?

Is that something that you expect to improve at all next year?

Thanks, Jon.

This is Steve.

We have had a good year in terms of consumer loans, mortgage, home equity, RV, marine, auto across the board.

So we're running sort of spot year-to-date, 7% to 8% on that combination of portfolio.

So that has shown a consistency quarter-to-quarter and good performance.

Our middle-market lending has grown year-to-date, up 2% to 3%.

So what we've been fighting is headwinds coming off of our large corporate, and it's essentially a combination of fixed income activity.

And there's a little bit of upsizing dynamic that's been new this year where the number of banks involved in certain relationships are being reduced just so the cross sell can be provided.

I'd add to that, that market in particular has gotten extraordinarily competitive -- terms, rates, et cetera.

And so to some extent, we have backed out of that in ways that we might not have -- in ways that we wouldn't have previously.

Finally, commercial real estate market also is frothy.

And we have, as you heard from Mac, we actually have pulled back 1% year-over-year and we have constrained it in a couple of lending types -- property types on purpose and we're a bit cautious in some of our markets in particular in those asset categories.

So again, where long-term shareholders were locked in, we have this discipline around aggregate moderate to low.

If we don't like the return risk profile, we're just not going to go forward with it.

We'll look to do other things, hold the capital or asset substitute, whatever we think is more prudent than just follow the parade.

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

I just wanted to ask about the other side of the balance sheet.

You've been able to keep core deposits very low through this rate-tightening cycle.

And I'm wondering, as we look into next year, how is competition in your footprint shaping up in terms of pricing competition for retail and SME versus larger or middle market corporate?

Yes.

Erika, so we're very, very pleased what we have been able to accomplish in the -- with core deposits, in particular from a repricing perspective.

I think Slide 7 actually shows some really good trends in terms of what we've done with our core commercial and core consumer deposits.

And I think we just have to go back and think about the strategy that we put in place around Fair Play, and I think some of the benefits that we have with our customers around the experience that we deliver and the number of awards that we won, that I think illustrate the loyalty and satisfaction that our customers have for us.

Having said that, we do see a very rational environment in our footprint.

We certainly see competitors doing testing of different products and different pricing, and you see pilots or tests take place and you see them pull back.

So I would say that what we see is very rational and we do expect that to continue.

Everyone is in good shape from a liquidity perspective.

I think the lack of asset growth is also not requiring that excessive price be paid to raise deposits.

And I think that we'll just monitor and make sure that we're testing and piloting different products and different pricing opportunities as well so that we're ready in case something does change.

But we see what is happening in our footprint to be very rational.

And as a follow-up, I heard you loud and clear, Steve, about commercial real estate concern, and I think a lot of investors share that concern with the.

I'm wondering, as we try to benchmark the industry for commercial real estate credit next year, Dan, is it possible for you to share some of your underwriting standards really sort of origination, debt service coverage ratio, minimums, and at what interest rate you set that, that service coverage ratio to?

Sure.

So one, our underwriting standards haven't really changed although recently, we probably have tightened up a little bit in terms of some of the equity requirements going in.

But generally, you're going to looking at a 75% to 80% type LTV.

In multifamily, we've actually gone lower in some instances, particularly in those markets where we think there may have been overbuilding.

But we're looking at it -- debt service coverage ratio in the [1 25] range, we stress of those rates at about 6.25%, 30-year amortization.

And then on top of that, with the vast majority of our loans, we have personal recourse, and so very, very stable underwriting requirements that as I said, have either maintained or tightened modestly over the last couple of years.

Our core customer base still is less than 300 relationships in commercial real estate -- to give you a sense of the granularity of it and the consistency of strategy.

Yes.

And Erica, I would also add that -- one thing, this is all built on what we call our Tier 1 developers.

It is the majority of who we're lending to.

So we're looking very closely at their global cash flow, their liquidity and their net worth because in addition to underwriting individual properties, we are counting on the fact that they have the wherewithal to support our loans in a downturn.

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

I guess when we think about loan growth, obviously you did take your guidance down and it sounds like commercial is pretty challenging, broadly speaking.

But when we think about the factors that are driving this sort of low single-digit growth this year, are there any changes, or what do you expect to change next year in terms of the same factors?

Like, would you expect the commercial environment to get better, or autos to accelerate or vice versa?

I was just trying to get a sense of like what changes the longer-term outlook for the banks?

This has been a very unusual year, I think for commercial lending.

At least in my career.

I haven't seen one that we -- if you have GDP expansion sort of increasing over the course of the year and commercial loan activity for an extended period being flat to down as you look at H8 data.

So we believe that the combination -- a combination of factors but principally related to uncertainty around policy issues and timing are having an impact on marginal investment.

And so as we think about the next year and beyond, we're optimistic that these policy issues are going to get addressed and that will be stimulative on the whole.

And we like what we see in terms of the activity and planning in our footprint.

There's a lot of investment contemplated.

We've never had as much foreign direct inquiry in most of the markets we're in as we are experiencing today.

The diversification of the economy here sets up, I think, a series of opportunities, as we think about '18 and beyond.

So we're bullish in terms of outlook, Ken, and think that once these policy issues get addressed, the clarity will help unlock some of what's been restrained this year.

Our next question comes from the line of John Pancari with Evercore.

On that same topic, given what you just mentioned about the policy reticence that some borrowers may have -- how much of this pullback in your loan growth expectation, is it all influenced by some softening on the front-end side, on demand?

So is that apprehension of borrowers changing?

Is it getting worse and that influenced some of your pullback in your growth expectation?

Or is it primarily the things that you already flagged in terms of CRE and cap markets and competitive pressures?

Well, we think much of the cap market activity has occurred so that, we believe, is abating.

But we do see, well the tax code revisions are pending, the range of deferred activities if you're going to sell a business, trying to figure out at what time of this year, next, et cetera, for example.

So we consciously pulled back on commercial real estate this year and especially this past quarter.

We just did not like the risk-return profiles as we were looking out into '19 and beyond when a number of these loans would be coming out of construction and leasing.

So that was our decision, but there are broader market impacts that are much more policy-related at this point, John.

Okay.

And then I guess it another way to get -- to dig there is, do you have updated line utilization data for the quarter?

Basically flat on the commercial side for the quarter.

So auto is typically at a seasonal low with model change-out, so we have this every year but overall, flat.

Okay, got it.

And then one last thing, also to beat the loan growth dead horse.

On 2018, how do you think about the pace of where loan growth could go?

Is it going to -- if you think it is in this low 3% to 4% range?

Is it -- should we think about it in terms of GDP or multiple of GDP, how should we think about that?

Well, we think of it as a low multiple of GDP.

We've got consumer going up 7% to 8% year-to-date, middle market up 2% to 3% year-to-date on spots.

A lot of the corporate bond activity, we think, has occurred.

So we think it's stabilizing now.

Pipeline looks -- actually, commercial pipeline looks good in this quarter.

So if we can get the tax policy issue addressed, I think that opens up the spigot to some extent.

This deferral, we hope, will spur incremental activity almost like a burst of the activity, John.

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

Slide 8 is, I've told you several times, I don't like the way that, that presents the results.

When you look at the decline in the net benefit from $73 million to $19 million, that's about a $50 million decline when we're just looking at this once slide by itself.

But when you roll over and you look at slides 11 and 12, what you're then so showing is that the synergies of the deal, the revenue side generates about $50 million.

And if you think about $100 million of net spillover in the next year from what you get on the expense synergies -- that $50 million really gets just kind of like a prepayment to the positives that you're getting out of the synergies.

So am I thinking of that right, in the sense of netting out of those 2 things when you really get to the bottom line impact as you go from 2017 into 2018?

Yes.

Marty, I think you're absolutely right on that point.

We like Slide 8 because it does gives some visibility into what's happening with the margin, in particular.

And obviously, sliding through some of noise in the margin is important as we communicate the message.

And I think Slide 8 has been effective but I do appreciate you continuing to point out the fact that the synergies are definitely offsetting that impact.

And the other thing that I was thinking about was when you show the revenue enhancements, you're leaving out one of the bigger pieces, which is when you actually made the acquisition, you weren't really paying for or anticipating that rates were going to go up.

And as rates have now started to move higher, there is a benefit of the margin on the FirstMerit deposits was something that you really weren't counting on, which is a revenue enhancement.

And I think the end result of that is when you look at your return on tangible common equity target, it was 13% to 15%.

You're saying you're already going to be at 15% and you kind of roll these net benefits into '18.

I think you're kind of rounding up to around a 16% as you look into next year.

So I think some of that delta on the favorable could just be out of deposits that you're being able to get the profitability from?

That's another great point.

I think one of the real benefits of the FirstMerit acquisition was the quality of the core deposit base on the retail side in particular, but also on the commercial side, and tremendous, tremendous value creation, if you think about that deposit base and where the rate environment is going.

So clearly, a big benefit to the value of the transaction and we probably should talk about that more.

And just humor one last question.

If you think of the credit, your guidance kind of assumes, kind of just a general deterioration but there's really nothing in the portfolio that suggests charge-offs in the low 20s should be mid-30s until we kind of get some deterioration.

So is this really just kind of a general over the cycle we're going to be somewhere in the 35 to 55, and really, if you look at where we're at, and if this current environment sustains itself, isn't there an opportunity to remain below that guided range for a period of time?

Yes.

Marty, this is Dan.

I do believe that we will remain below the range.

Although one thing to keep in mind is even if gross charge-offs don't increase materially, the recoveries that we have available to us are shrinking just because we have not had significant charge-offs over the last few years.

So I think that's 1 component, but again, I think the increase will be modest and gradual, but nonetheless, I don't think it's reasonable to anticipate that we're going to sustain these levels long-term.

Our next question comes from the line of Emlen Harmon with JMP Securities.

Could you talk a little bit about your appetite for M&A with FirstMerit effectively kind of fully integrated here?

And what kind of opportunity you would need to see to be interested?

Well, let's back up.

We've completed the expense side of this but as we have been sharing, we have a lot of revenue synergy and that is not complete.

And there's also the full assimilation, the culture, getting the companies set.

So we're very, very focused.

Our first priority is to get that FirstMerit revenue as we go through 2018.

Okay.

And then trying to kind of beat the dead horse on loan demand.

I'm maybe going to kick it a little bit.

But you mentioned a few times tax reform is a hangup on demand.

I think we've also got some kind of building uncertainty.

We're in the [country] status in NAFTA, at least as far as the headlines are concerned.

I guess with Michigan, Ohio, 2 of the bigger exporters in North America, are you guys kind of -- are you guys talking to your borrower base at all just in terms of how that's impacting demand for those borrowers and maybe if you can talk about just loan exposure there to the exporting community?

It's a great point.

There's clearly an impact in our footprint.

There's a sense of optimism that the NAFTA negotiations are going to get to a rational conclusion, so I would start with that.

And I think I mentioned this earlier, auto is going to have its fifth best year, we believe, in history.

So there's a stability on some of the engines here as we think about going forward.

And then the diversification of the economy, just the sheer scale of the economies in our footprint are huge factors that help contribute to our optimism in terms of going forward.

Our next question comes from the line of Steve Moss with FBR Capital Markets.

This is actually Kyle Peterson on for Steve today.

I wonder if you could touch on the NIM outlook, both kind of the core and the gap in the fourth quarter.

Given that, it looks like accretion will take a leg down here.

I guess are we looking at maybe a stable-ish core NIM, and then kind of gap goes down given accretion -- or how should we think about that?

Yes.

I would say that the -- we're going to continue to see the reported NIM decline because accretion is going to continue to decline from here.

But I think the core NIM is going to continue to expand even in a flat rate environment assumption that we're making.

So clearly, the fourth quarter will fall into that trend, I believe, and as we move into 2018, even in -- the unchanged rate scenario, I think we see expansion in the core.

Okay.

So I guess a follow-up on that is the core expansion, is that mix shift?

Or are you guys seeing favorable pricing or kind of what's driving the core NIM expansion in flat rate environment?

Yes.

So we basically just have asset portfolio is being replaced at higher yields as we see runoff and replacements.

So we're originating at higher yields relative to where we were a year ago.

So I think that's the primary driver of what we're seeing.

Okay.

And is that -- that's both on the loan and securities or just 1 or the other?

Both, in both categories, loans and securities.

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

Moving to liability side of the balance sheet.

Looking at deposits, you guys had a very good quarter there on the deposit growth.

And I wanted to see if you can talk about any promotions or changes in pricing that may have impacted the growth there.

And then given the slowdown in loan expectations, what you'd expect out of that deposit growth going forward?

Yes.

David, it's Mac.

So I would say nothing really in the way of promotions.

We did, and I mentioned this in the script, we did look at some pricing on the commercial side in order to grow some of our balances there and retain some balances that we thought was a good trade-off relative to wholesale funding.

So I would tell you that on the margin, we probably did increase price on the commercial side in the quarter, but we saw a nice benefit from doing that relative to the cost of wholesale funding.

And going forward, I would tell you that -- I think it's stable and steady in terms of what we've seen and how we think about the funding from a core perspective on both the consumer and the commercial side going forward.

That will depend, of course, on what happens with the Fed, and when we see rate increases if we see rate increases.

But as I mentioned earlier, we see our market being very rational from a pricing perspective and not a lot of pressure on the liquidity side right now.

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

Within the original FirstMerit merger model, you assumed a 3%, call it, core increase in annual operate expenses.

And as we think about '18, is that still a good number to use as it relates to just core growth?

And then could you help me understand the seasonality in the expense line next year?

Would there be a bump-up in maybe the first half of the year, and then drift lower, implying maybe 4Q '18 would be below that or the earlier quarters of the year?

Yes, Terry.

So we're working through 2018 right now.

And the way we think about building a budget, we start with an unchanged rate environment and we get the revenue side of the equation right based upon where we see loan growth coming in, and obviously, some of the investments we've made in FirstMerit and fee income categories.

And then we determine what we can spend from an expense perspective based on the investments that we want to make, and we do continue to make the right investments in the business.

And of course, we've got the normal cost associated with our colleagues and infrastructure and the whole 9 yards.

So we did assume 3% in the FirstMerit merger model, that's not a bad number to think about on a long-term basis.

As I mentioned earlier, we do get additional benefits from the cost takeouts on a full-year basis in 2018.

So that should be considered as well.

On a seasonality basis, we typically see higher expenses in the second quarter and that has to do with a couple of things.

We have the Merit change for our colleagues in the second quarter.

We also have some onetime impacts from compensation -- equity compensation heading in the second quarter as well.

And then typically, the first quarter is a little bit lower than the third and the fourth quarters.

So it's, I would say, lower in the first, higher in the second, and then from a seasonality perspective, probably drifting down in the third and the fourth is the way to think about it.

And then just one question, a follow-up question, the 38 branches and drive-through locations that were consolidated in the third quarter, was that originally part of the FirstMerit transaction in the $255 million of cost saves?

And I guess, the reason I ask is I didn't see those expenses taken out in the press release in terms of, call them, a merger and acquisition-related expense.

Yes, Terry, those were not a part of the original $255 million.

When we announced this, we did disclose that we're reinvesting a good portion of the savings there back into digital and our colleagues.

So I wouldn't expect that you would see a material impact in the run rate from that transaction.

Our next question comes from the line of Kevin Barker with Piper Jaffray.

You brought up the net charge-off guidance, 1 basis point, not a big deal, but you also saw your [classified] loans move higher a bit here.

Could you just talk about the overall environment for credit and your expectations into 4Q and then into 2018?

Yes.

So I think -- this is Dan.

I think expectations are fairly stable.

We'd seen, as you've noted, criticized, did go up in the quarter, but that did incorporate the SNC results from the most recent review.

We continue to feel we have a very proactive and conservative risk rating, and I think that's underscored by the fact that you haven't seen the migration into nonaccruals and then ultimately, into charge-offs.

So while the criticized loans were up, we still feel that the portfolio is in really good shape, although we're at historic lows in many of our metrics, and I think that, as I mentioned earlier, with less recoveries on the charge-off front, that is we're going to see a mild and gradual increase there, but overall, we feel very good about the portfolio and look for stability in the quarters to come.

Okay.

And then a follow-up on some of the revenue growth numbers or at least the loan growth that questions have been asked.

In regards to your ability to continue to generate operating leverage going into 2018, do you still require some type of loan growth in the mid-single digits?

Or can you continue to generate that operating leverage given the expense savings programs that you have in place even if loan growth comes in at the lower end of your expectations?

Yes.

Kevin, I believe we can continue to generate positive operating leverage, and in particular in 2018, you have to consider the revenue synergies that we're getting out of FirstMerit.

Investments we've made in the fee income businesses in particular on the Huntington side that are taking hold.

And we do continue to have good consumer loan growth, of very high quality and attractive growth rates.

So feel confident that we'll see positive operating leverage.

Our final question comes from the line of Peter Winter with Wedbush Securities.

Just given the comments that you're a little bit cautious on commercial real estate, and you've had good success expanding the indirect auto into other markets, is that something that you would think about ramping up that expansion of the indirect auto going into newer markets?

Peter, Steve Steinour.

We like the footprint presence we have.

We do not anticipate expanding into any new markets at this time.

Okay.

And then just very quickly, a follow-up.

Can you talk about some of -- how it's going in the newer markets of Chicago and Wisconsin?

And if you see more potential revenue opportunities there?

Well, we do see growth in revenue opportunities.

We've had a very good start to small business lending, SBA lending in particular.

We're #2 in Chicago on units and dollars, and #2 and 3 in Wisconsin on units and dollars, and that's from a 0 start.

So that has ramped up quickly.

Our residential mortgage lending is ramping up.

We'll be adding to the team, including in the fourth quarter on resi mortgage.

We like what we've seen from the commercial teams.

We have some great talent joining us from FirstMerit.

So we feel really, really pleased with how that team is performing and the commercial teams, how they are performing.

And then the branches themselves, the consumer businesses, are doing well and holding deposits and growing our customer base.

So pleased with the positions we've inherited in both states.

Ladies and gentlemen, we have reached the end of our question-and-answer session.

I would like to turn the call back over to Steve Steinour for any closing remarks.

We produced solid results in the third quarter and I'm confident we're going to finish the year strong.

Our strategies are working, and the execution of our goals continue to drive positive results.

We expect to continue to gain market share and grow share of wallet.

Our top priorities are growing our core businesses and realizing the revenue synergies from FirstMerit.

The integration of FirstMerit is substantially complete with the announced expense reductions fully implemented.

We expect the fourth quarter run rate to demonstrate these benefits, and we expect to achieve all of our long-term financial goals in the fourth quarter of 2017 and into 2018.

Finally, I always like to include a reminder that there is a high level of alignment between the Board, management and our colleagues and our shareholders.

The Board and our colleagues are collectively one of the largest shareholders of Huntington.

We have hold the retirement requirements on certain shares so we will continue to proactively manage risks and volatility and are appropriately focused on driving sustained, long-term performance.

Thank you, all, for your interest in Huntington.

We appreciate you joining us today.

Have a great day.

This concludes today's conference.

You may disconnect your lines at this time.

Thank you for your participation and have a wonderful day.