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Huntington Bancshares Incorporated  (NASDAQ:HBAN)
Q4 2018 Earnings Conference Call
Jan. 24, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Huntington Bancshares Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the presentation. (Operator Instructions) And as a reminder, this conference is being recorded.

I'd now like to turn the conference over to your host, Mark Muth, Director of Investor Relations. Thank you. Please go ahead.

Mark Muth -- Director of Investor Relations

Thank you, Brenda. Welcome. I am Mark Muth, Director of Investor Relations for Huntington. Copies of the slides we will be reviewing can be found on the Investor Relations section of our website 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.

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 of today's call.

As noted on Slide 2, 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 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.

Let me now turn it over to Steve.

Stephen D. Steinour -- Chairman, President and Chief Executive Officer

Thanks, Mark, and thank you to everyone for joining the call today. As always, we appreciate your interest and support. We produced very good results in the fourth quarter and for the full year 2018. For the full year, we reported net income of $1.4 billion, an increase of 17% over 2017, which marks the fourth consecutive year of record net income. Full year earnings per common share were $1.20.

Importantly, we achieved all five of our long-term financial goals on a full year GAAP basis in 2018, two years ahead of schedule. We are especially pleased with our full year efficiency ratio of 57%, a 400 basis point improvement versus the prior year and this was the result of managing to our sixth straight year of positive operating leverage and annual goal we began targeting in 2014.

Our return on tangible common equity was also very strong at 18%. Our strong financial performance also enabled us to increase our capital return to our shareholders in 2018. Last year marked the eighth consecutive year of an increased cash dividend, which as you know is our second highest capital priority behind support for organic growth. Coupling the increased dividend payout with $939 million of share repurchases during the year, we returned nearly $1.5 billion to our shareholders, which represented a total payout ratio of 112% of our 2018 earnings. We believe our earnings power, capital generation and risk discipline will continue to support strong capital distribution with a targeted total payout ratio of 70% to 80% going forward.

As briefly outlined on Slide 3, we developed Huntington strategies with a vision of creating a high performing regional bank and delivering top quartile through the cycle shareholder returns. Our full year profitability metrics are among the best in the industry. We've built sustainable competitive advantage in our key businesses that we believe will deliver top quartile performance in the future.

Our franchise continues to perform well on many fronts, allowing us to make investments in capabilities we need to drive consistent organic growth and we're focused on driving sustained long-term financial performance for our shareholders. We remain committed to our aggregate moderate to low risk appetite which we implemented nine years ago. And as a reminder, we reinforced the importance of these risk standards by requiring the top 1,400 officers of the company to comply with hold-to-retirement restrictions on their equity awards.

Slide 4 illustrates our previous long-term financial goals and as I've already mentioned and as you can see on this slide, we successfully achieved each of these five targets on a GAAP as well as an adjusted basis during 2018. We had record revenue of $4.5 billion, a 4% increase over 2017. Our expenses remained well controlled declining 2% year-over-year on a GAAP basis and up 3% on an adjusted basis. Our commitment to positive operating leverage coupled with the scale we achieve through the FirstMerit acquisition drove our efficiency ratio down from 64% in 2015, the full -- first full year under the plan to 57% in 2018. And this exemplifies that our strategies are carefully decisioned, well executed and certainly driving an impressive results.

Our credit metrics remain very strong. Our net charge-off ratio for 2018 remain below our average through the cycle target range of 35 to 55 basis points. Loan loss provisions in excess of net charge-offs have now been taken in each of the past six quarters demonstrating our high-quality earnings. Our 18% return on tangible common equity positions Huntington as a top performing regional bank.

Now Slide 5 provides our new three-year financial targets that are result of our 2018 strategic planning process. Through thoughtful investment and disciplined execution, our two previous strategic plan, build out our capabilities, strengthened our competitive advantages in key businesses and positioned us as an industry leader in customer experience. The new 2018 strategic plan is designed to drive continued improvement in financial performance as well as customer experience.

We introduced some details to the 2018 plan at an industry conference in November, the initiatives will build upon momentum from our previous strategic plans and will extend our customer experience advantage across our businesses to improve customer acquisition, reduce customer attrition and deepen relationships with our customers.

Further, we planned investments in digital, data and technology enhancements that will bolster our existing capabilities and infrastructure with the goal of making banking intuitive, easier and faster for our customers. Finally, we retained our capital priorities including our 9% to 10% CET1 operating range.

Now let's turn to Slide 6 to review the 2019 expectations and discuss the current economic and competitive environment in our markets. As we look to the year ahead, we are cognizant of recent market volatility, mixed economic data and changing interest rate outlook. We're very focused on and closely working with our customers and reacting to their views of the economy. Recall it over the years we've communicated actions we've taken to derisk our portfolios and strengthened our risk management discipline. In 2009, we centralized credit risk management rather than delegated to the regions and this change was to ensure that the bank at a standard set of enterprisewide risk, management capabilities and appetite as well as credit metrics.

We eliminated products that didn't meet our risk profile such as auto leasing and home equity lines of credit requiring balloon payments at the end of the draw period. Three years ago we pulled back on leverage lending and commercial real estate, specifically multifamily, retail and construction. We have remained disciplined in these areas and as a percentage of capital, all of these have lower exposure today than at 2016 year end.

Our consumer lending is targeted to prime plus consumers across all of our consumer loan portfolios. We disclosed detailed origination data each quarter and the slides include annual data for the past nine years. We believe these actions of the past decade, including the consistency of underwriting and detailed metrics that we disclosed to you every quarter have prepared us well to perform well across economic cycles. What we're hearing from our customers is positive. Businesses in our local markets generally continue to deliver good performance. The strong C&I activity in the fourth quarter suggest the businesses are investing the capital expenditures and business expansions. Uniformly we hear from our customers that their biggest issue is the tight labor markets constraining economic growth in a period where we already have strong GDP growth.

The Midwest has had the highest job opening rate in the nation for the last two years and some of these businesses have weathered the headwinds of ongoing tariff and trade disputes. Further, consumers also remain upbeat with strong labor markets driving wage inflation. Consumer confidence in the Midwest was the second highest level in December in nearly two decades, and was also higher than the nation as a whole.

Additionally, in the 12 months ending November, 19 of our 20 largest footprint MSAs, saw employment growth and unemployment rates remain at historic low levels.

So I'd summarize by saying that we're bullish on our footprint and our customers. We expect full year average loan growth in the range of 4% to 6%, full year average deposit growth is also expected to be 4% to 6% as we remain focused on acquiring core checking accounts and deepening core deposit relationships.

In light of recent market volatility, the flattening of the yield curve as well as the softer term coming from the Federal Reserve, we have removed the assumption of two additional rate hikes in our 2019 forecast. We are now utilizing the same unchanged rate scenario that has been part of our annual plan for the last several years. And given that change in modeling assumptions, we now expect full year revenue growth of 4% to 7%, full year NIM is expected to remain relatively flat on a GAAP basis versus 2018, as modest core NIM expansion offsets the anticipated reduction in the benefit of purchase accounting.

With the change in revenue outlook, we paced our planned investments for 2019. We now expect a 2% to 4% increase in non-interest expense. Consistent with our stated priorities, we continue to target annual positive operating leverage in 2019.

We anticipate the net charge-offs will remain below our average through the cycle target range of 35 to 55 basis points. Our expectation for full year 2019 effective tax rate is in the 15.5% to 16.5% range.

So with that, Mac, I'll turn it over to you to provide an overview to financial performance for the fourth quarter and the full year.

Howell D. "Mac" McCullough III -- Senior Executive Vice President, Chief Financial Officer

Thanks, Steve and good morning, everyone.

Slide 7 provides the highlights for the full year 2018. Steve mentioned, we are very pleased with our 2018 results. We reported earnings per common share of $1.20, up 20% compared to 2017. We continue to see solid growth in core customer relationships and disciplined execution of our business models driving full year revenue growth of 4%, a 2% decline in non-interest expense, 6% average loan and lease growth and 5% core deposit growth.

Our full year efficiency ratio was 57%. Return on assets was 1.3%, return on common equity was 13% and return on tangible common equity was 18%. We believe all three of these metrics distinguish Huntington among our regional bank peers. Tangible book value per share increased 5% year-over-year to $7.34 even with the increased dividend and substantial share repurchases during the year.

Slide 8 provides similar financial highlights for the fourth quarter.

Please note that comparisons the year ago quarter are impacted by the $123 million tax benefit recognized in the fourth quarter of 2017 related to Federal Tax Reform. We posted record quarterly revenue of $1.2 billion, up 4% versus the year ago quarter. As we continue to see momentum build across the franchise. We reported earnings per common share of $0.29, down 22% year-over-year.

Excluding the $123 million tax benefit in the year ago quarter, earnings per common share were up $0.03 or 12% year-over-year on an adjusted basis. Return on assets was 1.3%, return on common equity was 13% and return on tangible common equity was 17%. We saw net interest margin expansion of 11 basis points to 3.41% compared to the 2017 fourth quarter, as a result of disciplined asset and deposit pricing and the benefit of interest rate increases partially offset by the run-off of purchase accounting accretion.

Turning now to Slide 9.

We have very good balance sheet growth during the fourth quarter, as average earning assets grew 4% from the fourth quarter of 2017. This increase was driven by a 7% growth in average loans and leases, which include a broad-based strength in both consumer and commercial portfolios. Average residential mortgage loans increased 20% year-over-year, reflecting an increase in loan officers as well as the expansion into the Chicago market.

As we typically do, we sold the agency qualified mortgage production in the quarter and retained jumbo mortgages and specialty mortgage products . Average C&I loans increased 8% year-over-year with 10% linked quarter annualized, reflecting the ongoing strength we are seeing in the Midwest economy. We once again saw heavy C&I activity during the final weeks of the year centered in middle market, asset finance and corporate banking.

Average auto loans increased 4% year-over-year as a result of consistent disciplined loan production. Originations totaled $1.4 billion, down 9% year-over-year. As we have previously mentioned, we executed a pricing strategy during the second half of the year to optimize revenue. We consistently increased auto loan pricing throughout 2018 with new money yields on our auto originations averaging 4.60% during the fourth quarter, up 109 basis points from the year ago quarter.

Average RV and marine loans increased 34% year-over-year, reflecting the success of our well-managed expansion of the business into 17 new states over the past two years. Average commercial real estate loans were down 4% on a year-over-year basis and down 3% on a linked quarter basis. This reflects anticipated paydowns as well as our strategic tightening of commercial real estate lending, as Steve mentioned earlier to ensure appropriate returns on capital. Finally, securities were down 7% year-over-year, as we let the portfolio run-off and utilize the cash flows to fund higher yielding loans during 2018.

Turning now to Slide 10. Average total deposits grew 7% year-over-year, including the 7% increase in average core deposits. Core certificates of deposits were up 193% from the year ago quarter, primarily reflecting the consumer deposit growth initiatives during the first three quarters of 2018.

Average interest-bearing DDA deposits increased 9% year-over-year, while average non-interest bearing DDA deposits decreased 6%. We continue to see our commercial customer shift balances from non-interest bearing DDA to interest-bearing products, primarily interest checking, hybrid checking and money market.

However, as shown on Slide 38 in the appendix, our consumer non-interest bearing deposits actually increased 5% year-over-year, as we continue to grow households and deepen relationships. Average money market deposits were up 4% year-over-year driven by solid growth in consumer balances and changing preferences of commercial customers shifting to higher yielding products. As you can see in the bottom left of the page, our percentage of core deposit funding has increased three quarters in a row. Our focus on core funding resulted in a 65% year-over-year reduction in average short-term borrowings.

Moving now to Slide 11. Our net interest income increased $59 million or 8% versus the year ago quarter. Driving this growth was the 4% increase in average earning assets, higher yields in both our consumer and commercial loan portfolios and disciplined deposit pricing. Our GAAP net interest margin was 3.41% for the fourth quarter, up 11 basis points from the year ago quarter and up 9 basis points linked quarter.

Moving to slide 12. Our core net interest margin for the fourth quarter was 3.34%, up 14 basis points from the year ago quarter and up 9 basis points linked quarter. Both the GAAP and core NIMs in the fourth quarter benefited from 2 basis points of higher than normal commercial interest recoveries. Purchase accounting accretion contributed 7 basis points to the net interest margin in the current quarter compared to 10 basis points in the year ago quarter.

Slide 34 in the appendix provides information regarding the actual and scheduled impact of FirstMerit purchase accounting for 2018 through 2020. As you will see, purchase accounting accretion is becoming less and less material to the net interest margin and certainly the bottom line when all of the income statement components of purchase accounting are considered together.

As Steve mentioned, assuming no further increases from the Fed in 2019, the full year 2019 NIM is expected to remain relatively flat on a GAAP basis versus 2018, as modest core NIM expansion offsets the anticipated reduction in the benefit of purchased accounting. The 2019 NIM guidance also reflects certain costs to begin to reduce our asset sensitivity position.

Turning to earning asset yields. Our commercial loan yields increased 71 basis points year-over-year, while consumer loan yields increased 36 basis points. Our deposit cost remained well contained with the rate paid on total interest-bearing deposits of 84 basis points for the quarter, up 47 basis points year-over-year. Consumer core deposit costs were up 36 basis points year-over-year and commercial core deposits were up 30 basis points.

Moving now to Slide 13. Our cycle-to-date beta -- deposit beta remains low at 30% through the fourth quarter of 2018, which is still well below our expectations. We have been communicating that we believe our consumer core CD strategies initiated at the beginning of 2018 will serve us well over time and you can see that beginning to happen here on the slide. This quarter we saw only a 2% increase in our cumulative beta, while the peer group increased 4%. As we have mentioned the last couple of quarters, overall deposit pricing remains rational in our markets.

Slide 14 provides detail on our non-interest income for the quarter and comparisons to the year ago quarter. Our non-interest income decreased $11 million or 3% from the fourth quarter of 2017. This decline was primarily driven by $19 million of securities losses resulting from for 2018 fourth quarter portfolio repositioning. Earlier in the quarter, we remixed approximately $1.1 billion of securities with an incremental yield pickup of almost 120 basis points by modestly extending duration and without taking additional credit risk.

The restructuring of the portfolio was completed in the first half of the fourth quarter and added approximately $3 million of incremental quarterly run rate for the revenue line.

We are seeing positive momentum in our three largest contributors to fee income as deposit service charges, cards and payments processing fees and trust and investment management fees were all higher year-over-year. Further, we continue to see strong momentum in our capital markets business as demonstrated by a 26% increase versus the year ago quarter.

The acquisition of Hutchinson, Shockey and Erley contributed $4 million of capital market fees during the quarter. Mortgage banking income was down $11 million driven by pressure on secondary marketing spreads.

Slide 15 highlights the components of the $78 million or 12% year-over-year growth in expenses. Expenses related to branch and facility consolidations totaled $35 million including $28 million in net occupancy expense and $7 million of equipment expense. Results also included almost $4 million of expense related to the closing of the HSE's acquisition and the announcement of the divestiture of our Wisconsin retail branch network.

As we execute on our new strategic plan, we have not lost sight of the need to control expenses in a more uncertain economic environment. To that end, we remain focused on driving positive operating leverage, while making disciplined investments in our colleagues and businesses.

Slide 16 illustrates the continued strength of our capital ratios. Tangible common equity ended the quarter at 7.21%, down 13 basis points year-over-year and 4 basis points linked quarter. Common equity Tier 1 ended the quarter at 9.65%, down 34 basis points year-over-year and 24 basis points linked quarter. These declines were driven by balance sheet growth and accelerated share repurchase activity. We will continue to manage CET1 within our 9% to 10% operating guideline with a bias toward the upper end of the range.

Slide 17 illustrates our previously articulated capital priorities. First, fund organic growth; second, support the cash dividend and finally, everything else including share repurchases and selective M&A. Our strong capital management and profitability allowed us to execute on these priorities accordingly in 2018 . First, we grew full year average loans by 6% year-over-year, while maintaining consistent underwriting discipline. During 2018, we increased the common dividend by 43% to $0.50 per share for the full year. Our end of year dividend yield was 4.7%, the highest in the peer group.

Finally, we repurchased $939 million of common stock during the year. Recall that in the 2018 first quarter, we converted $363 million of our Series A preferred stock to common shares. This set us up well going into the 2018 CCAR planning process and allowed us to submit a request that would result of in a full year total payout ratio above 100%.

We have previously stated that we have a long-term payout ratio target of 70% to 80% and a long-term dividend payout ratio target of approximately 45%. During the fourth quarter, we received no objection from the Federal Reserve to our proposal to adjust the path of common stock repurchases. This allowed us to pull forward repurchases from 2019, end of the fourth quarter at order to take advantage of market volatility.

As a result, during the fourth quarter, we repurchased $200 million of common shares at an average cost of $13.36 per share. We have $177 million of share repurchase capacity remaining under a 2018 CCAR capital plan.

Moving onto Slide 18. 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 loan loss provision expense of $61 million in the fourth quarter and net charge-offs of $50 million. The loan loss provision expense in the quarter reflected the strong loan growth that we saw.

We have now booked loan loss provision expense above net charge-offs for 12 of the past 13 quarters illustrating our high-quality earnings. Net charge-offs represented an annualized 27 basis points of average loans and leases, which remains below our average through the cycle target range of 35 to 55 basis points.

Net charge-offs were up 11 basis points from the prior quarter and up 3 basis points from the year ago quarter. There is additional granularity on charge-offs by portfolio in the analyst package in the slides. The allowance for loan and lease losses as a percentage of loans decreased 1 basis point linked quarter to 1.03%, while a non-performing asset ratio came down 3 basis points to 0.52%.

Slide 19 highlights Huntington strong position to execute on our strategy and provide consistent through the cycle shareholder returns. The graph in the top left quadrant represents our continued growth in pre-tax, pre-provision net revenue as a result of focused execution of our core strategies. The strong level of capital generation positions us well to support balance sheet growth and return capital to our shareholders at an advantage rate over the long term.

At the top right chart highlights the well balanced mix of our loan and deposit portfolios. We are both a consumer and commercial bank and believe that the diversification of the balance sheet will serve us well over the cycle. Our DFAST Stress Test results in the left highlight our disciplined enterprise risk management. We consistently rank in the top four commercial banks in the severely adverse scenario DFAST. Finally, at the bottom right demonstrates Huntington's strong capital position.

Let me turn it back over to Mark. So we can get to your questions.

Mark Muth -- Director of Investor Relations

Thanks, Mac. Brenda, 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 if that person has additional questions he or she can then add themselves back into the queue. Thank you.

Questions and Answers:

Operator

Thank you. At this time, we'll be conducting the question-and-answer session. (Operator Instructions) Our first question is from the line of Scott Siefers with Sandler O'Neill.

Stephen D. Steinour -- Chairman, President and Chief Executive Officer

Good morning, Scott.

R Scott Siefers -- Sandler O'Neill & Partners LP -- Analyst

Mac, I was hoping you could expand a little on your thoughts on how the core margin kind of trajects throughout the course of the year. I think I've done math correctly, in other words, was the couple of basis points of benefit from interest recoveries in the fourth quarter, but the full year guide, it looks like it would imply kind of flat to down from here despite some of the balance sheet restructuring actions in the fourth quarter. So I'm just curious -- I mean that would be of course understandable given the environment, but just curious how you see things playing out from where you sit?

Howell D. "Mac" McCullough III -- Senior Executive Vice President, Chief Financial Officer

Yes. Thanks, Scott. So the guidance that we're giving as we move to an unchanged rate curve is very consistent with the guidance that we've given historically over the past few years, as we've used the unchanged rate curve to build our budget. So basically you capture the 2 basis points of -- I would say over normal interest recoveries in the fourth quarter. So you have to adjust for that as a starting point. And then we'll actually lose 3 basis points in full year 2019 related to purchase accounting accretion, it's about four basis points additive to the 2019 margin versus 7 basis points to the 2018 margin. So from there I think it's just a matter of taking a look at the core NIM and believing that that's going to increase modestly, we've talked about 1 basis point or 2, I would say for the full year we're likely looking for a 3 or 4 basis point increase and that is driven both by the fact that we took the two rate that increases out of the forecast and also the shape of the curve. You know it's much flatter than when we've done this historically and that also impacted the guidance for the NIM in 2019. So those are the components that bringing all together. So again kind of a flat reported NIM and modestly improving core NIM.

R Scott Siefers -- Sandler O'Neill & Partners LP -- Analyst

Okay. All right, perfect. Thank you. And then I guess just as we look at the overall revenue growth guide I guess, it's going to be driven relatively a little more by fee income as opposed to NII this year. And I know you have the benefit of the acquisition from second half of last year. But as you look out through the year main drivers of that fee momentum as you see them.

Howell D. "Mac" McCullough III -- Senior Executive Vice President, Chief Financial Officer

We have really good momentum in capital markets, as I mentioned in the script and we also see continued good improvements in deposit service charges that we continue to build households very impressively. We also see good performance in the card and payments line and also in trust and investment management fees. So we see good performance across those four categories, partially offset by what we see in mortgage banking in this quarter, but certainly we have really good momentum in those other lines.

R Scott Siefers -- Sandler O'Neill & Partners LP -- Analyst

Perfect. All right, great. Thank you very much.

Howell D. "Mac" McCullough III -- Senior Executive Vice President, Chief Financial Officer

Thanks, Scott.

Operator

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

Kenneth M Usdin -- Jefferies -- Analyst

Hey, Mac. So in fourth quarter NIM was 3.41% with the two interest recoveries, that's 3.39%. So can you just explain sequentially, I'm not sure I understand the magnitude of a 6 basis point dropped and then staying there for the rest of the year, especially with the help you just mentioned from the portfolio purchase knowing that there is the accretion run-off. So can you help us a little bit more understand just the step down and -- because I don't -- I get the moving parts of among the positive versus the negative, but the delta from that kind of underlying, can you help us understand what drives such a big step down?

Howell D. "Mac" McCullough III -- Senior Executive Vice President, Chief Financial Officer

Yes. So can I -- I do think a portion of it is going to be based on what we're assuming around will be the shape of the curve in 2019. There is incremental impact from that based on what we've modeled for the budget in the forecast in 2019. We could also have some deposit cost maybe front-loaded into the first and second quarters. As we continue to see good momentum and good flow of deposits across both commercial and consumer, we just want to make sure that we keep that momentum going. We've done a good job in reducing our short-term borrowings and we want to continue to stay in that position. So I think at this point, just thinking about the full year and thinking about the core NIM increasing 3 to 4 basis points is the way to think about it, there could be some conservatism built in this, but it all comes down to what we're assuming around the rate environment and also how we're thinking about liability cost and what we want to do to stay core funded.

Kenneth M Usdin -- Jefferies -- Analyst

Okay. And then just a follow-up on the full year guide, then in your total revenue guide, which I always understand is on a -- its GAAP, but inclusive of the FTE. Do you include anything either on a gain from the branch sales or also the effect of removing that business from the total revenue base? Thanks.

Howell D. "Mac" McCullough III -- Senior Executive Vice President, Chief Financial Officer

Yes. So we certainly have impact when you think about, the 70 branch consolidations and you think about the sale of the Wisconsin branches. There's no doubt that there's revenue impact from that and most of that is going to come in the form of net interest income. So we have factored those impacts into 2019. And you're right, we look at it on an FTE basis, but there really are no other adjustments in 2019 to speak of.

Kenneth M Usdin -- Jefferies -- Analyst

Okay.

Howell D. "Mac" McCullough III -- Senior Executive Vice President, Chief Financial Officer

Okay?

Kenneth M Usdin -- Jefferies -- Analyst

Yes. So there is no gain baked into that as well?

Howell D. "Mac" McCullough III -- Senior Executive Vice President, Chief Financial Officer

Yes, there is no gain on sale baked into any of these numbers for 2019.

Kenneth M Usdin -- Jefferies -- Analyst

Understood. Okay. Thank you, Mac.

Howell D. "Mac" McCullough III -- Senior Executive Vice President, Chief Financial Officer

Thank you.

Operator

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

Howell D. "Mac" McCullough III -- Senior Executive Vice President, Chief Financial Officer

Hey, Ken.

Ken Zerbe -- Morgan Stanley -- Analyst

Sorry to ask another question on margin. I just want to be really quick is that is a pretty steep drop that you guys are building in on a core basis. So if we go from the 3.41%, 3.39% excluding 2 basis points, I get it. You say that your deposit cost is going be front-loaded. I mean, are we looking at a meaningful step down in first quarter specifically or to get your full year guidance, is it more of just this gradual reduction over the course of the year?

Howell D. "Mac" McCullough III -- Senior Executive Vice President, Chief Financial Officer

Yes, it would definitely be a gradual reduction over the course of the year and that would be primarily the reported. The core NIM even adjusting for the 2 basis points in the fourth quarter, I would say over normal interest recoveries. You could see a step-up in the first quarter in the core NIM. So it really is the impact of purchase accounting and the impact of the interest recoveries that would be impacting the reported NIM. So we're not talking about huge changes here and either, we're talking about basis points, but that should help to explain some of that drop fourth quarter to first quarter.

Ken Zerbe -- Morgan Stanley -- Analyst

Got you. It does, it does. So then by the end of the year, maybe your, I mean I pick a number, plus cost 3.30% is your sort reported NIM heading into 2020. That seems like the right way to think about it.

Howell D. "Mac" McCullough III -- Senior Executive Vice President, Chief Financial Officer

Yes, that's not unreasonable.

Ken Zerbe -- Morgan Stanley -- Analyst

Got it. Okay. And then sorry there might sort of follow-up question, if you will. Can you just talk a little bit more about what you're doing specifically to help reduce your asset sensitive position and how much is that dollar impact in terms of your NII? Thanks.

Howell D. "Mac" McCullough III -- Senior Executive Vice President, Chief Financial Officer

Yes. So what we're looking at right now would be out of the money interest rate floors. You might see us also add some additional investment securities to reduce some of that asset sensitivity. Overall, we think that there is a slight cost to the out of money interest rate floors, but not significant in the scheme of things based upon the way we're thinking about it right now. But we continue to evaluate that position based on how 2019 unfolds. You could see us further reduce that asset sensitivity position, but we're comfortable with how we're positioned right now and the actions that we're taking.

Ken Zerbe -- Morgan Stanley -- Analyst

All right. Perfect, thank you.

Howell D. "Mac" McCullough III -- Senior Executive Vice President, Chief Financial Officer

Thank you.

Operator

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

Stephen D. Steinour -- Chairman, President and Chief Executive Officer

Good morning, John.

Howell D. "Mac" McCullough III -- Senior Executive Vice President, Chief Financial Officer

Hi, John.

John Pancari -- Evercore ISI -- Analyst

Good morning. On your long-term goals, just seems like you maintained your long-term revenue target of 4% to 6% despite removing the Fed hikes from your 2019 assumptions and assuming a flatter curve and everything, and I'm assuming dialing in some of this hedging plans and everything. So does that mean in terms of long-term revenue expectation you can come in at the lower end of that 4% to 6%? Or do you still have a high degree of confidence in the attainability of the mid or higher end?

Howell D. "Mac" McCullough III -- Senior Executive Vice President, Chief Financial Officer

Yes, John, its Mac. So we feel comfortable with the range that we've put out. When we put a range out like this, we typically earn that at the low-end or at the high-end and we have -- we probably do have some conservatism built into 2019 from our revenue perspective as we think about this. But feel very comfortable with the 4% to 7% range we put out there for revenue. We did bring it down, it was 5% to 8% that we disclosed in November at an industry conference. So that certainly would reflect the impact that we see from the rate increases coming out of the forecast. But I would tell you that from a fundamental balance sheet growth fee income perspective, we really haven't made any changes to what we see based upon what Steve talked about the strength of the Midwest economy and what we're hearing from our customers. We also did take the expense guidance down by a 1% on either end just recognizing the fact that in this environment we've got to manage the expense to fit the revenue outlook and continue to drive the positive operating leverage. So we feel very comfortable with the ranges that we put out and, again, the revenue impact is entirely due to the change in the rate outlook.

John Pancari -- Evercore ISI -- Analyst

Got it. Okay, thanks. And then separately I just want to ask around credit for the 20 -- I just wanted if you can get a little bit more color on the $20 million -- $21 million increase in charge-offs, I know you indicated that at C&I, just want to see if you have any more color there that you can give us what type of industries and if there's any kind of leverage lending in there? And then separately, your 30 to 89 day delinquencies in C&I increase, it looks like 43%, so the ratio went from 19 to 26 bps, not a big jump in the ratio, but still pretty big jump dollar wise. So want to get some color there? Thanks.

Stephen D. Steinour -- Chairman, President and Chief Executive Officer

Sure. So just in terms of the charge-offs. I think it's important to obviously to point out that we're operating at a very low level. So in the entire C&I book in the last year, I think we took $15 million of total charge-offs that's commercial and commercial real estate. So just to kind of level set there, last quarter, we actually had net recoveries in the entire commercial book. So in terms of concentrations, there certainly aren't any because the numbers are so low. We had no charge-off in the last quarter larger than $4 million. We had one for $3 million, one for $2 million. They are all in different industries. There were no leverage lending, no leveraged loans in that population. So -- and if you look year-over-year in terms of our charge-offs that's there they are very consistent, 24 basis points to 27 and that's largely due to the fact that fourth quarter of the consumer loans are generally, you'll see delinquencies and charge-offs bump up. So we -- so from that standpoint, I think that's the story on the charge-offs. And then on the delinquencies, commercial delinquencies are you can have a single deal that moves the numbers may hit over or over 30 days and that's what we've got going on here. That's not the indicator of any trend there, so no concerns at all.

John Pancari -- Evercore ISI -- Analyst

Okay. Thank you.

Operator

Our next question is from the line of Peter Winter with Wedbush.

Peter Winter -- Wedbush Securities -- Analyst

Good morning.

Stephen D. Steinour -- Chairman, President and Chief Executive Officer

Good morning, Peter.

Peter Winter -- Wedbush Securities -- Analyst

I wanted to ask about mortgage banking. Obviously given the market conditions under a lot of pressure. But should we think about the fourth quarter being close to bottoming here?

Howell D. "Mac" McCullough III -- Senior Executive Vice President, Chief Financial Officer

So, Peter, it's really going to depend on where we end up with the secondary marketing, that's been the pressure point for the entire year. We've actually performed well from a volume perspective as we've added mortgage originators in the Chicago market at -- performing at a very high level and we've also, I would say upgraded talent across the franchise from a mortgage perspective. So feel very comfortable with the health of the business we completed a in-depth analysis for the business in 2018 and feel very comfortable with our position and how we're managing that business, but it just depends on where we go from secondary marketing from here.

Peter Winter -- Wedbush Securities -- Analyst

Okay. And then Mac, if I could just follow-up on your comments about the securities portfolio. In 2018, you kind of ran it off as partly, I guess as of funding for loan growth and then you said you might actually add to securities to reduce the asset sensitivity?

Howell D. "Mac" McCullough III -- Senior Executive Vice President, Chief Financial Officer

Yes.

Peter Winter -- Wedbush Securities -- Analyst

Can you just talk about with the -- so we should expect 2019 to see that portfolio actually grow a little bit in more reliance on core deposits just the way to think about it.

Howell D. "Mac" McCullough III -- Senior Executive Vice President, Chief Financial Officer

Yes. Peter, so we are going to start to reinvest cash flow in 2019 back into the portfolio as well as maybe get a little bit more aggressive in building the portfolio if we decide that's the best action to take to manage our asset sensitivity. So we did let the portfolio run down in 2018, we did replace those assets with resi mortgage that we kept on the balance sheet to a certain extent. But you'll start to see us grow that portfolio in 2019 and the degree to which we use that as a hedge against asset sensitivity is still under consideration, but you could see that.

Peter Winter -- Wedbush Securities -- Analyst

Thanks, Mac

Howell D. "Mac" McCullough III -- Senior Executive Vice President, Chief Financial Officer

Yes. Thanks, Peter.

Operator

And our next question is from the line of Marty Mosby with Vining Sparks.

Marty Mosby -- Vining Sparks -- Analyst

Morning.

Stephen D. Steinour -- Chairman, President and Chief Executive Officer

Hi, Marty.

Howell D. "Mac" McCullough III -- Senior Executive Vice President, Chief Financial Officer

Hi, Marty.

Marty Mosby -- Vining Sparks -- Analyst

Had two questions. One is, Mac, when we look at this net interest margin, I don't want to go back to the details of that, we've hammer that pretty hard. What I want to do is combine that with the other side, which is, you've been building your allowance coverage as this PAA is being recognized. So it's kind of just a natural shift between kind of the PAA that's over there and then also and it comes out it and becomes a regular loan and then you put it back into the build. So there is kind of a natural offset. You've had $20 million of average build in your allowance through each quarter in 2018. So just wondering, because a lot of the margin compression that's really kind of getting communicated here is the purchase accounting accretion. So is there a natural offset, you just don't have to build as much in your allowance that helps to compensate for some of that impact.

Howell D. "Mac" McCullough III -- Senior Executive Vice President, Chief Financial Officer

Yes, Marty. I think we lay that up pretty well on Slide 34 in the deck, where you can see that for 2019 we're anticipating that the overall impact of purchase accounting is actually a loss or minus $8 million for full year 2019. So we are seeing the first accounting accretion come down, we're seeing what we need to add to the allowance for the FirstMerit portfolio to come down since we're cycling through that, we still have a bit to go. But as you can see on Slide 34, we still anticipate some provision expense related to FirstMerit in 2019. So I think this slide does layout how all these things play together and the impact on the bottom line, but clearly PAA is becoming less material and we'll have less of an impact on the margin in 2019, but certainly still does have that impact.

Marty Mosby -- Vining Sparks -- Analyst

And just the build also kind of comes down I guess as well, the need to build for the FirstMerit is less there's still some because there's still some PAA, but it's less than what it was in 2018.

Howell D. "Mac" McCullough III -- Senior Executive Vice President, Chief Financial Officer

That would be absolutely correct.

Marty Mosby -- Vining Sparks -- Analyst

Okay. And then Steve, you kind of threw something in there early on about this almost like a vesting till retirement for equity positions of members of your team. Just was curious about how you envision that, why you chose to highlighted and how you think that affects culture in a way that the employees kind of look at equity ownership?

Stephen D. Steinour -- Chairman, President and Chief Executive Officer

So, Marty, we may not have been totally clear in the past, but we made this change in 2010 and we put a percentage of equity granted, net of tax into a hold to retirement requirement for colleagues and overtime its accumulated to where we have 1,400 colleagues in some position with a hold to retirement and it gets track, these are shares that are segregated in a separate account with the third-party. And we believe what we did it and continue to believe that it aligns the management of the company with our shareholders' interests. And I think we've seen over time a greater focus on risk management across the board, but especially in credit with -- throughout the company as a consequence. So there's definitely skin in the game as a result of this and we -- 2009, we as a group were not a top 100 shareholder, today with generally the seventh largest shareholder with a growing position off of equity grants made every year. So fundamental change in philosophy going back to 2010 by the Board and very supportive in making the change we recommended to make sure that there is complete alignment between management and shareholders overtime and through cycles. That answer your question?

Marty Mosby -- Vining Sparks -- Analyst

It did and it was not a 100%, but there's a portion or amount that's actually set aside, that would be vested at retirement.

Stephen D. Steinour -- Chairman, President and Chief Executive Officer

It's 25% to 50% of equity granted net of taxes and there is no ceiling. So it compounds.

Marty Mosby -- Vining Sparks -- Analyst

No, that's great as an industrially angle and not -- so all that's that about the seventh holder of shareholder I thought that was very impactful and interesting. So thanks.

Stephen D. Steinour -- Chairman, President and Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Lana Chan with BMO.

Lana Chan -- BMO Capital Markets -- Analyst

Good morning.

Stephen D. Steinour -- Chairman, President and Chief Executive Officer

Hey, Lana.

Howell D. "Mac" McCullough III -- Senior Executive Vice President, Chief Financial Officer

Good morning.

Lana Chan -- BMO Capital Markets -- Analyst

I just -- first question about what you're seeing with competition. It seems like there's some new bigger banks moving into some of your markets and also any comments about non-bank competition any changes in the recent quarter?

Stephen D. Steinour -- Chairman, President and Chief Executive Officer

Lana, this is Steve. We monitor through a number of different data points impacts of non-bank competition is remains very, very muted and essentially no change quarter-to-quarter from what we can see. And then separately, we have some banks -- larger banks expanding into the footprint. But we have a lot of large banks already here. So the old bank, one presence here in Columbus, JPM Chase is very, very large in Columbus in terms of employees. We see BBVA (ph) in Michigan. So there is a presence from the large banks already and we've -- through our strategies and focus have managed to compete OK or adequately and somewhat successfully over time, we'd expect to continue to do there, but recognize that there are some targeted investments in the Midwest. Actually view that as a positive in some sense. The Midwest was clearly a disinvestment region for years and years and it's an affirmation of what's going on in the economy here to show -- to see that recent focus.

Lana Chan -- BMO Capital Markets -- Analyst

Okay, thank you. And second question was around capital. Just wondering the way you look at the CET1 ratio targeting at upper end of the 9% to 10% range. Is there also a binding constraint on that in terms of -- sort of the old school capital ratios that we used to look at prior to the financial crisis the TCE to TA ratio?

Howell D. "Mac" McCullough III -- Senior Executive Vice President, Chief Financial Officer

Yes, Lana, we do take a look at tangible common equity quite carefully and we do monitor that ratio relative to CET1. CET1 is our primary constraint as we think about the CCAR process and what we've set goals around. And we do have a bit of a larger gap between TCE and CET1 because of the size of our investment security portfolio and the makeup of that investment security portfolio. So -- at this level we're comfortable with TCE, but CET1 is the measure that we basically measure and go against.

Lana Chan -- BMO Capital Markets -- Analyst

Okay. Thanks, Mac.

Howell D. "Mac" McCullough III -- Senior Executive Vice President, Chief Financial Officer

Thank you.

Operator

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

Jon G Arfstrom -- RBC Capital Markets -- Analyst

Great. Thanks. Good morning.

Stephen D. Steinour -- Chairman, President and Chief Executive Officer

Hey.

Howell D. "Mac" McCullough III -- Senior Executive Vice President, Chief Financial Officer

Good morning, Jon.

Jon G Arfstrom -- RBC Capital Markets -- Analyst

Steve, maybe a quick one for you. It sounds like you're optimistic lending in the economy, but just -- and you talk about the labor issue, I'm just curious if you're hearing anything new that causes you any concerns? Or anything from your customers that might be a little bit different than what you've heard in previous quarters?

Stephen D. Steinour -- Chairman, President and Chief Executive Officer

Jon, we've done more outreach in the last 60 days or so than at any time since I've been here. The customer assistant to get a sense of what their plans are and the impacts of the market volatility and at least at this point, it is very, very benign. There are some companies impacted both ways on the tariffs as we'd expect, but the market volatility has not impacted at this point in any material way outlook. So there is a continued expectation of growth, maybe these companies have backlogs or pipelines that are committed. And I think I shared in the last call, we get contractors and others with long lead times that are well out into next year was with the group that's -- has commitments to 2020-2021. In fact, so it's getting extended, again, this tightness of labor is benefiting, so the competitive dynamics in some of these industries, the fact that they can just deliver is giving them a locked in opportunity of a longer duration that they've seen.

Jon G Arfstrom -- RBC Capital Markets -- Analyst

Okay. Okay, good. Thank you, that helps. And then a question on the expense guidance in terms of the change in expense growth by basically by taking rates out of your revenue side. Can you give us some -- these aren't big numbers, but can you give us an idea of the types of projects you might delay a bit and if we do get a couple of more hikes, does that change your spending plans again and where would that money go?

Stephen D. Steinour -- Chairman, President and Chief Executive Officer

Sure. Jon, we have a fair amount of reinvestment coming off of the branch consolidations that are completed and were completed around the end of the year and the sale of Wisconsin. And so we're self-funding a fair amount of investment in digital, data and other technology. In addition to building out a number of our revenue groups and so you'll see expansions in business banking, commercial banking, some of our fee businesses on the private banking side and the capital markets in particular. We'll pace the rate of investment and we've talked about this in prior quarterly calls and an analyst sessions, we'll pace the rate of investment to match the expected revenue, it was not like we're going to walk away from these. This is just a pacing thing. So if interest rates come our way or for other -- with other reasons where we're generating revenue add or beyond the high-end level of that range, we would look to accelerate some of the investments, but we'll continue to manage it, we'll pace it or moderate it as we see the economy in the outlook.

Jon G Arfstrom -- RBC Capital Markets -- Analyst

Okay, all right. Thank you.

Stephen D. Steinour -- Chairman, President and Chief Executive Officer

Thank you.

Operator

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

Stephen D. Steinour -- Chairman, President and Chief Executive Officer

Good morning, Kevin.

Kevin Barker -- Piper Jaffray -- Analyst

Good morning. I just want to follow-up, you mentioned the capital markets pipeline was really strong . You had a really good quarter, fourth quarter and it could be some seasonality in there, but when you look into 2019, where do you see the run rate from the $29 million you have today expected to come down in the first half and then accelerate in the back half. Just give us some color on the capital market side?

Howell D. "Mac" McCullough III -- Senior Executive Vice President, Chief Financial Officer

So Kevin, its Mac. So it will be, it's usually a little bit slower in the first quarter, but we do expect capital markets revenue to increase as the year progresses. We've made some, I think some smart investments into that business and really executing at a very high level when it comes to the people we have on that team and how they interact and support of lending groups.

Stephen D. Steinour -- Chairman, President and Chief Executive Officer

Well the pipelines as we enter the year are consistent with third, fourth quarter sort of pipeline. So we have reasonable volumes that we're expecting over the first half of the year from the pipeline and a lot of that C&I, again, our capital markets activity is customer focused. And -- so the carry -- the continued strength of the pipeline gives us some confidence as we move forward in addition to the investments and additional capabilities.

Kevin Barker -- Piper Jaffray -- Analyst

And then the follow-up on the expense side, you had the $28 million you called out in the branch consolidation and $7 million in equipment. So we assume the run rate associated with occupancy and equipment to be significantly lower going into '19 and then the 2% to 4% expense growth on a GAAP basis will be primarily due to investments, maybe in salaries or other portions of the business.

Howell D. "Mac" McCullough III -- Senior Executive Vice President, Chief Financial Officer

Yes, Kevin, I think that's the right way to take a look at it, we'll definitely see reduced run rates related to the facilities actions that we've taken in the fourth quarter branches and kind of corporate facilities. And Steve mentioned some of the investments that we're doing as we think about the expense that we took out related to Wisconsin or the 70 (ph) branch consolidation. So we're comfortable with how we're investing in 2019 and it would be in a typical lines you would expect to see it, personnel and certainly anything that relates to technology development. So those are the areas that I would look for growth, but beyond that, I would say nothing out of the ordinary.

Kevin Barker -- Piper Jaffray -- Analyst

Okay. Thank you.

Howell D. "Mac" McCullough III -- Senior Executive Vice President, Chief Financial Officer

Thanks, Kevin.

Operator

Our next question is from the line of Matt O'Connor with Deutsche Bank.

Matthew D. O'Connor -- Deutsche Bank -- Analyst

Good morning. I was just wondering from a strategic point of view any further bolt on whether its deals or divestitures? And then obviously you're not going to policies what you do, but just thoughts on if there is further tinkering to the franchise and then of course some -- as you think longer term strategic opportunities that might be bigger that could be interesting?

Howell D. "Mac" McCullough III -- Senior Executive Vice President, Chief Financial Officer

So, Matt, we're always looking at opportunities and I will tell you that what we're focused on is probably less around core banking franchises, as we've talked about historically and maybe more focused on things like HSE or Macquarie Equipment Finance. So I think that we haven't stopped in terms of what we're looking at from an M&A perspective, but we're very comfortable with the businesses that we have and it's not that we're out looking for something in particular, but anything we can find like an HSE or Macquarie that helps to strengthen our position in businesses that we're already in, bring us additional capabilities and talent. Those are very attractive opportunities that we think we've acquired at a very attractive price. So like I said, we're always looking, but in this market, I wouldn't expect that we're going to be doing a lot if anything.

Stephen D. Steinour -- Chairman, President and Chief Executive Officer

We think we can improve the core performance as you've seen in the long-term financial metrics that as well. And so that's the focus drive the core.

Matthew D. O'Connor -- Deutsche Bank -- Analyst

And then just thoughts on maybe something bigger that will get you more scale, do you feel like you need more scale as we look out kind of more medium to long-term?

Howell D. "Mac" McCullough III -- Senior Executive Vice President, Chief Financial Officer

So we're comfortable with how we're positioned right now. I think the FirstMerit transaction was extremely beneficial to us from a scale perspective. Steve pointed out, the improvement in the efficiency ratio earlier in this call. We've been pretty direct in the saying that at this point in the cycle and based upon valuations and expectations, it's very unlikely that we're going to be doing a core deposit franchise at this point in the cycle. So very, very unlikely math and like I said, we're focused on some of the specialty things that are few and far between, but good opportunities when we can find them.

Matthew D. O'Connor -- Deutsche Bank -- Analyst

Okay, thank you.

Howell D. "Mac" McCullough III -- Senior Executive Vice President, Chief Financial Officer

Yes. Thanks, Matt.

Operator

Ladies and gentlemen, we've reached the end of the question-and-answer session. I'd like to turn the call back to Steve Steinour for closing remarks.

Stephen D. Steinour -- Chairman, President and Chief Executive Officer

2018 was highlighted by the achievement for the first time of all five of our long-term financial goals implemented with the 2014 strategic plan on a GAAP basis. We're really pleased with that. The focused execution of our strategic initiatives over the years spill the company that we believe will produce consistent high-quality earnings and attractive returns to our shareholders.

2019 commences the first year of the new three-year strategic plan. We've raised the bar for ourselves once again, as you've seen. And while the plan involves important investments in our businesses that will improve our customer experience, the core strategies remain the same. We expect to continue to gain market share and grow share wallet through our differentiated products, distinctive brand and superior customer service. So we see this as a lower risk set of initiatives over the next three years. We look forward to carrying the momentum that we've built into 2019 and beyond and finally, there's a high level of management alignment between the Board, management, our colleagues and our shareholders.

The Board and our colleagues are collectively the seventh largest shareholder of Huntington and all of us, all of us are appropriately focused on driving sustained long-term performance.

So thank you for your interest in Huntington. We appreciate you joining us today and have a great day.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.

Duration: 61 minutes

Call participants:

Mark Muth -- Director of Investor Relations

Stephen D. Steinour -- Chairman, President and Chief Executive Officer

Howell D. "Mac" McCullough III -- Senior Executive Vice President, Chief Financial Officer

R Scott Siefers -- Sandler O'Neill & Partners LP -- Analyst

Kenneth M Usdin -- Jefferies -- Analyst

Ken Zerbe -- Morgan Stanley -- Analyst

John Pancari -- Evercore ISI -- Analyst

Peter Winter -- Wedbush Securities -- Analyst

Marty Mosby -- Vining Sparks -- Analyst

Lana Chan -- BMO Capital Markets -- Analyst

Jon G Arfstrom -- RBC Capital Markets -- Analyst

Kevin Barker -- Piper Jaffray -- Analyst

Matthew D. O'Connor -- Deutsche Bank -- Analyst

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