Huntington Bancshares Incorporated (HBAN) Q2 2015 Earnings Report, Transcript and Summary

Good morning. My name is Leanne and I will be your conference operator today. At this time I would like to welcome everyone to the Huntington Bancshares’ Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]. I would now like to turn the call over to Mr. Mark Muth, Director of Investor Relations. You may begin your conference.

Thank you, Leanne and welcome. I’m Mark Muth, Director of Investor Relations for Huntington. Copies of the slides we will be reviewing can be found on our IR website at www.huntington.com. This call is being recorded and will be available as a rebroadcast starting about one hour from the close of the call. Slides 1 and 2 note several aspects of the basis of today’s presentation. I encourage you to read these but let me point out one key disclosure. This presentation will reference non-GAAP financial measures. And in that regard, I would direct you to the comparable GAAP financial measures and a reconciliation to the comparable GAAP financial measures within the presentation, the additional earnings related material we released this morning and the related 8-K filed today, all of which can be found on our website. Turning to Slide 3, today’s discussion, including the Q&A period, will contain forward-looking statements. Such statements are based on information and assumptions available at this time and are subject to changes, risks and uncertainties, which may cause actual results to differ materially. We assume no obligation to update such statements. For a complete discussion of risks and uncertainties, please refer to this slide and material filed with the SEC including our most recent forms 10-K, 10-Q and 8-K filings. As noted on Slide 4, the presenters today are Steve Steinour, Chairman, President and CEO; and Mac McCullough, Chief Financial Officer. Dan Neumeyer, our Chief Credit Officer will also be participating in the Q&A portion of the call today. Let’s get started by turning to Slide 5. Mac?

Thanks Mark. Good morning and thank you for joining the call today. We appreciate your interest in Huntington and we think we have good results to share with you this morning. Over the past several years, we have followed a contrarian path built around our fair play philosophy and our welcoming culture. We have strong recognizable brands and differentiated product set and industry leading customer service. In addition we have been investing in our franchise building and expanding in a time when others have been focused squarely on cost cutting. We will continue to invest in our business although we will pace our investments to manage our positive operating leverage on an annual basis. Our second quarter results highlighted by solid revenue growth and improved margins provide proof that our strategies are working and the investments we’ve undertaken over the past few years are paying off substantially. Our investments are yet mature and should continue to drive future revenue growth and future performance improvement. We remain focused on disciplined execution and we are well positioned to finish the year strong, delivering positive operating leverage for the third consecutive year as well as improved returns for shareholders. Slide 5 shows some of the financial highlights for the second quarter. Strong revenue growth for the record setting quarter resulting in net income growth of 19% over the same quarter of last year. Earnings per common share of $0.23 increased 21% year-over-year. These results equated to a 1.16 return on assets and a 14.4 return on tangible common equity. The underlying strength exhibited this quarter was broad based and included the impact of our acquisition of Macquarie Equipment Finance which we have rebranded Huntington Technology Finance or HTF. Total year-over-year revenue growth of 9% benefited equally from spread revenues and fee income. Net interest income grew 7% while fee income grew 13%. Healthy balance sheet growth included a 6% year-over-year increase in average loans and leases and a 9% in average deposits. For the second straight quarter deposit growth was driven largely by growth in core deposits which is a very encouraging trend as we continue to focus on deepening relationships and earning primary banking status with our customers. Core deposit growth more than fully funded loan growth over this period. While the value of our core deposits may not be fully appreciated in the current rate environment, we believe that our strong core deposit franchise will provide true differentiation when interest rates begin to rise. Our credit quality remained very strong with only 21 basis points of net charge-offs and 81 basis points of non-performing assets. We repurchased 8.8 million common shares at an average price of $11.20 per share effectively returning more than 99 million of capital to shareholders. We also completed a 750 million indirect auto loan securitization during the quarter resulting in a net gain of 5 million. This securitization demonstrated investor’s endorsement of the quality and consistency of our auto finance business, one of our distinctive capabilities. Finally we continue to be recognized for our focus on excellent customer service and our distinguished brand. During the quarter we were recognized by both J.D. Power and TNS for the third consecutive year for our customer’s centric focus. We were also recognized by the American Banker for our strong reputation. Slide 7 is a summary of our quarterly trends and key performance metrics. We've already touched on many of these, so let's move to Slide 8 for a more detailed review of the numbers. Relative to last year's second quarter, total revenue increased 9% to 780 million. We are very pleased with our strong revenue growth in this challenging environment. As I mentioned previously spread revenue and fee income accounted for roughly equal parts of the increase of the revenue. Spread revenues benefited from balance sheet growth as earning assets increased 10% year-over-year partially offset by continued NIM progression of 8 basis points. Spread revenues during the second quarter included 17 million of net interest income from HTF. Fee income for the 2015 second quarter was 282 million, a 13% increase from a year ago quarter. The primary components of the increase were a 60 million increase in mortgage banking income, 12 million in fee revenue from HTF and a 9 million increase on gains on the sale of loans which included a 5 million gain on the 750 million indirect auto loan securitization. Other fee income sources also posted double digit year-over-year growth rates including electronic banking and capital markets. We continue to see the benefits of consumer and commercial customer growth manifested in these areas. Deposit service charges also benefited from our robust customer growth as we have almost grown through the 6 million per quarter impact from changes to our consumer deposit growth -- our consumer deposited products including All Day Deposits implemented in July of last year. Reported non-interest expense in the second quarter was 492 million, an increase of 33 million or 7% from the year ago quarter. Recurring expense related to HTF was 16 million or almost half of the year-over-year increase. The second quarter also included 2 million of merger related expense that is not recorded as a significant item for the quarter but is expected to be recorded as a significant item for the year as we will complete the systems integration of HTF later in 2015. Slide 9 details the trends of our balance sheet mix. Average loans and leases increased 3 billion or 6% year-over-year including 839 million of leases from the HTF acquisition. During last quarter's earnings call we mentioned that we expected lower second quarter growth in C&I and CRE due to our risk return expectations, and this was the case. However loan growth in our loan pipeline will strengthened later in the second quarter providing room for increased optimism in the back half of the year. Notably in the second quarter we experienced year-over-year growth in every loan portfolio. The indirect auto portfolio increased 10% from the year ago quarter. As shown on Slide 53 in the appendix our indirect auto operating model remains unchanged with our disciplined approach to the business reflected in the credit performance metrics. As mentioned in the opening remarks we completed a 750 million indirect auto loan securitization. Recall that we previously moved 1 billion of auto loans to help our sale and near the end of the quarter we moved the remaining 250 million of indirect auto loans back into the portfolio. After reviewing the existing and projected size of the overall auto portfolio relative to our concentration limit as well as the transaction economics, we opted to scale back to size of the securitization. This allows us to realize the longer term benefit of keeping these high quality assets on our balance sheet. Previously, we mentioned that we expected to complete an additional securitization during the latter half of 2015 or perhaps in early 2016. However completion of the securitization in the second quarter, we reexamined our appetite for indirect auto loans taking into consideration the strong consistent performance of the asset class during the past economic cycle and in the CCAR and DFAST stress test. As a result of this review we decided to raise our auto concentration limit from 150% of capital defined as Tier 1 capital plus reserves to 175% of capital. As such we no longer anticipate the need for an off balance sheet securitization in the back half of 2015. Turning attention to the right side of the balance sheet, averaged total deposits increased 9% over the year ago quarter including an 8% increase in core deposits. Average non-interest bearing demand deposits increased 18% year-over-year reflecting our focus on the consumer checking and commercial relationship level. Specifically, commercial non-interest bearing deposits increased 19% year-over-year while consumer non-interest bearing deposits increased 15%. Total core deposits from commercial customers increased 17% year-over-year while total core deposits from consumers increased 2% as we continue to remix the consumer deposit base out of higher cost CDs into other less extensive deposit products. Importantly, the year-over-year growth in total core deposits more than funded our loan growth over this period. Average short and long-term borrowings increased by 1 billion year-over-year which includes 750 million and 1 billion of bank level senior debt issued during the 2014 second quarter and 2015 first quarter respectively. We also issued 750 million of bank level senior debt on the last day of the 2015 second quarter. Average brokerage deposits increased 600 million. These deposits provide a cost effective means for funding balance sheet growth including LCR related securities growth while maintaining focus on managing core deposited expense. Turning to Slide 10, we see net interest margins spotted against earning asset yields and interest bearing liability cost. The NIM increased 5 basis points quarter-over-quarter to 3.20% primarily due to the addition of higher yielding assets from the HTF acquisition. In addition we recorded approximately 3 million of prepayment penalties within the securities portfolio, which added 2 basis points for the margin. These contributions were partially offset by continuing pricing pressure across most asset classes. The net interest margin decreased 8 basis points from the year ago quarter, also reflecting downward asset reprising pressure. Going forward, we expect pricing pressure to remain a headwind, as many asset classes continue to re-price lower while funding cost have limited room for improvement besides from continuing remixing them on deposit base. Slide 11 provides some detail on our current asset sensitivity and how we manage interest rate risk. For the past several years we have run a more neutral about position balance sheet compared to many of our peers in part related to our swap portfolio. These swaps were added at a time when the outlook suggested a prolonged period of consistently low rates. As shown in the top of -- the chart on top, our models estimate that net interest income will benefit by 0.3% if interest rates were to gradually ramp 200 basis points in addition to increase that’s already reflected in the current implied forward curve. This is consistent with our estimates from the past few quarters. In a hypothetical scenario without the 9.2 billion of asset swaps our models estimate that net interest income will benefit by approximately 4.3% in the same up 200 basis point ramp scenario. The chart at the bottom of the slide illustrates the weighted average life over asset and liability swaps. As well as the net impact of the swaps on our net interest income. As you can see on the green line, the asset swap portfolio continues to age in and had a weighted average life of 1.5 years at 6/30/15. As we have said it previously, our asset swap portfolio is the laddered portfolio. There are no cliffs looming on the horizon. Over the next two quarters 1 billion of these asset swaps will mature and an additional 3.5 billion will mature during 2016. The maturity of these swaps would increase our estimated asset sensitivity. Slide 12 shows the trends in our capital ratios. Our regulatory capital ratios improved modestly from the first quarter, while tangible common equity remained relatively flat. We repurchase 8.8 million common shares over the quarter at an average price of $11.20 per share under our 366 million share repurchase authorization. We have 267 million in authorized capacity remaining from the next four quarters. Slide 13 provides an overview of our credit quality net trends. Credit performance remain solid and in line with our expectations. Net charge-offs remain well controlled at 21 basis points, below our long-term expectations of 35 to 55 basis points. The non-performing asset ratio fell slightly in the quarter due to lower inflows compared to the prior quarter as well as the higher number of loans returning to recurring [ph] status. The criticized asset ratio also improved in the quarter aided by an increase in the volume level upgrades in the past category. The allowance for credit losses ease modestly with the ACL ratio falling from 1.3% last quarter to 1.34% currently. All credit metrics fully reflect the results of the recently completed annual shared national credit exam. Slide 14 highlights trends in criticized assets, non-performing assets and delinquencies. The chart in the upper left shows a slight decrease in the NPA ratio for the quarter to 81 basis points. The level of NPAs has been fairly consistent over the past six quarters and is in line with our expectations. The chart in the upper right reflects continued improvement in our 90-day delinquencies with the improvement coming from both the commercial and consumer loan portfolios. The chart in the bottom left shows the criticized asset ratio which also improved in the quarter as new inflows of criticized assets were more than offset by upgrades and pay downs. Finally the chart on the bottom right shows a reduction in NPA inflows as a percentage of beginning period loans fall in from 30 basis points to 26 basis points. Turning to Slide 15, the loan loss provision was 20.4 million in the second quarter compared to 25.4 million of charge-offs. The ratio of allowance for non-accrual loans remain steady at 180% compared to 181% in the prior quarter. The ACL ratio fell modestly to 1.34% from 1.38% in the prior quarter in line with modest overall improvement in credit metrics. We believe the allowance is appropriate and reflects the underlying credit quality of our loan portfolio. Let me now turn the presentation over to Steve.

Thank you, Mac. Slide 16 provides a quick snapshot for the long-term trends in our consumer and commercial customer acquisition. Our Fair Play banking philosophy coupled with our optimal customer relationship or OCR focus has substantially driven customer acquisition since its inception. As you can see we’ve increased our consumer checking households and business relationships by almost 9% and 6% compound annual growth rates since 2010. We believe these are industry leading customer acquisition rates. These robust customer growth rates have allowed us to post the associated revenue growth you can see in the two lower charts on the slide. We’re a company focused on revenue and revenue growth and we will continue to grow revenues despite the headwinds of the interest rate environment. We have seen our dedication to OCR payoff but to get the full picture we turn to Slide 17 and 18 and in doing so I want to stress that our strategy is not just about gaining market share but also gain in share of wallet. As we have shared with you previously the cornerstone of our OCR strategy is based around increasing the number of products and services we provide to our customers knowing that this will translate both into more loyal and satisfied customers as well as revenue growth. During the first quarter, our OCR consumer cross-sell goal of six or more consumer products and services crossed over the 50% mark for the first time. This figure increased an additional 80 basis points during the second quarter and now 51% of our consumer checking household use six or more products and services. Correspondingly our consumer checking account household revenue is up 9% year-over-year. Turning attention to the commercial side of Slide 18, our percentage of commercial customers with four or more accounts -- four or more products and services was 43.4%, up 70 basis points from the prior quarter and up 210 basis points from the year ago quarter. Again this is translated directly to revenue growth as commercial revenue increased 5% year-over-year. Slide 19 shows our year-to-date operating leverage results. Full year positive operating leverage is a long-term strategic goal for Huntington and a commitment we have made again for 2015. We significantly narrowed the gap in the second quarter moving from negative 1.7% at the end of the first quarter to negative 40 basis points at the midpoint of the year. We have strong revenue momentum and we will pace our continued investment in the franchise appropriately for the revenue outlook. Therefore, we remain confident in our ability to achieve positive operating leverage for the full year both inclusive and exclusive of the impact of the Huntington Technology Finance. Turning to Slide 20 for some closing remarks on expectations. We remain optimistic about the ongoing economic improvement in our footprint. We are bullish on the Midwest economy. While average loan growth hit was decent this quarter we saw momentum building in our pipelines and in our loan growth during the latter half of the second quarter. Customer activity remains encouraging. Loan utilization rates showed a slight increase during the quarter giving additional reason for optimism. While competition remains intense, we will continue to be disciplined in growing our commercial real estate and C&I portfolios. We are committed to delivering strong results regardless of the interest rate environment. Our budget has been built around the current rate environment and our execution is not dependent on a rate increase. We control our destiny and our focus and execution will deliver results. Net interest margin improved this quarter with the impact of Huntington Technology Finance, however we expect NIM pressure will remain a headwind until interest rates start moving up. We expect to grow revenue despite the pressure. Fee revenue improved this quarter with electronic banking, treasury management, capital markets and mortgage banking, all demonstrating particularly strong momentum. We continue to invest in our businesses for the future resulting in projected non-interest expense growth of 2% to 4% for the year excluding significant items, net MSR activity and acquisitions. On a reported basis, we expect non-interest expenses will remain near the second quarter 2015 level for the rest of the year. We expect revenue growth in excess of expense growth and we are committed to positive operating leverage for full year 2015. We believe the asset quality metrics will remain near current levels. We expect net charge-offs will remain at or below our long-term expected range of 35 basis points to 55 basis points. Modest changes are anticipated given the absolute low levels of our credit metrics. Longer term we continue to manage the franchise with an emphasis on consistent shareholder returns, we've built a strong and recognizable consumer brand with differentiated products and superior customer service. We are executing our strategies and adjusting to the environment when necessary. While past investments continue to payoff we continue to move forward with investments in enhanced sales management, digital technology, data and analytics and optimizing our retail distribution network. There is a high level of alignment between the Board, management and indeed all of employees and shareholders, and while we are highly focused on our commitment to being good stewards of shareholders' capital. With that, I am going to turn it back to Mark

Leanne we will now take questions. We ask that as a courtesy to your peers each person ask only one question and one related follow-up. And then if that person has additional questions, he or she can add themselves back into the queue. Thank you.

[Operator Instructions] And our first question comes from the line of John Pancari from Evercore. Your line is open.

On loan growth side, just wondering if you can give us a little bit more color on the C&I loan trends average show a pretty good growth, but on the end of period basis they were flattish, wanted to see if that’s a number we should grow off of or is it the average trends that think are more sustainable there?

This is Mac. So I do think what you're seeing in the quarter is consistent with the guidance we gave last quarter on the call. We do have good pipeline that picked up later in the quarter and we are being very disciplined in terms of how we think about this from our risk appetite and reward perspective. You know, I do think that if you adjust for the Macquarie acquisition and think about the end point of the quarter that would be a good starting point for growing off of. But again we did see strength in the latter part of the quarter and again it's what we expected when we announced last quarter.

And then also on the loan fund as I follow-up, wanted to get your thoughts on auto loan growth, the growth on balance sheet balances given your commentary around the intent to retain more of your production. How should we think about growth in that portfolio going forward?

I would tell you that the growth is pretty consistent with what you've seen historically. We have made some pricing changes that have impacted volume and some of this pricing changes have stuck. I think that it's important just to think about the environments and the fact that it is, but there is good opportunities for auto growth and we’re going to be consistent with what we produce historically.

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

I guess just sort of follow-up on the auto, why is it a good idea to increase concentration to auto, you obviously set that 150% for a reason and I know you guys do great underwriting. But it just seems that you're intentionally adding more risk and more concentration to a single asset class and I would love to know the rational to why that is?

This is Dan. I think when you look at our auto portfolio and we measure a risk in volatility our auto portfolio has been one of the most consistent performers overtime and when we run our analysis and look at struck [ph] losses versus base losses is a very, very stable portfolio. We haven’t had to adjust our underwriting perimeters in order to gain volumes, if you look at our FICO scores, our LTV's, the term, et cetera they have been rock solid over the cycle and we just think it's a great asset class and we don’t think that at 175% of capital that that is outside at all. So we like the asset, we think it's proven itself and we think that level of concentration is very responsible.

And then the second question I had just in terms of the margins at 320 obviously pick up presumably due to HTF is 320 a decent starting point next or there was any unusual items and then we applied the margin compression on that 320, is that fair?

It's Mac, so HTF added 7 basis points to the margin in the quarter and then there was about 2 basis points related to some security calls. So I think that’s how you got to think about it going forward at least at the starting point. And then just keep in mind that we’ve been pretty consistent in 2 to 4 basis points of compression on a quarterly basis and we don’t think that’s unreasonable.

Our next question comes from the line of Steven Alexopoulos from JP Morgan. Your line is open.

Let's just start looking at the 2% to 4% expense guidance which implies 1.9 billion of 2015 adjusted expenses, given where you were at the year-to-date point 946 million that implies a range of somewhere between 450 million and 470 million featuring the next two quarters. I am just curious given where the second quarter run rate came out, is there realistically any chance that you end up at the low end of the range, so 2% for the year, I was a bit surprised you didn’t take up the guidance to at least maybe three to four something like that. Help us think about the range and why you are maintaining the guidance?

It's Mac, so we do feel very comfortable that expense growth from the remainder of the year is going to be very consistent with what you see in the second quarter, so we think it's important to be consistent in the guidance that we provide and make sure that we report back to you on how we are performing against that guidance. And again even with all the investments that we have coming on later this year we are opening more in-stores, we continue to make investments in digital and other technology. We feel very comfortable with expenses being at the same level second quarter of 2015.

You think it's feasible that we could end up at the low end of that range?

I’ll leave that to you to decide based upon the guidance that we’ve given here. But certainly we’re comfortable stuck in second quarter levels.

Okay. And I just wanted to follow up on raising the concentration limit of auto, can you just walk us through? So what's exactly is changing, is it better quality business reviewing, are you responding to pressure in C&I and other areas, is that way you are raising the limit?

I think it really, again the limit goes to when we look across the portfolio where is there less volatility, where we have the historical performance, et cetera. What's the allocation we want in the various asset classes on a relative basis and we think that one, we don’t think 150 to 175 is significant, but we think it's fully supportive based on the results, and past history and where we want to book to go in the future.

Okay, okay. Thank you.

Our next question comes from the lines of Ken Usdin from Jefferies. Your line is open.

Thanks. Good morning guys. If I could follow up on the fee side. I just wanted to ask about you mentioned been really strong quarter for mortgage partially on the production side, also on the MSR, what your outlook would be there? And then secondly, the other line with the 12 million helper from HTF, is that consistent of a fee generator also in terms of run rating that level?

Yes, Ken, it's Mac. So we have a good performance in mortgage and we do expect continued performance. Keep in mind we did have 6 million in MSR pickup in the quarter and we certainly don’t forecast either gains or losses when we put together our models. So we do think that mortgage is going to be a good contributor to revenue growth for the remainder of the year. And when you think about HTF and the revenue on the fee side, we do think that that’s a good base to build off of.

Okay. So my quick follow up here would just be on HTF in aggregate the revenue that we saw both -- and expenses across the board, this is all kind of the right run rate aside from future growth, right. So what was in the 7 basis points in NIM, the 12 in fees and then the amount of expenses accounted [ph] with good go forwards spots?

Yes, so, very, very comfortable with that. And one thing I would point out is that HTF did have some operating leases and we're not going to be booking operating leases going forward. So you will start to see, if there's $8 million of revenue in the quarter and $6 million of expense in the quarter related to operating leases, those items will start to run off. But they will be replaced, obviously, on the balance sheet with new production that won’t be operating leases. So you need to think about the timing of how you adjust your fee revenue and your expenses, but just want to make you aware of that.

Okay thanks for that Mac, appreciate it.

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

Mac I was wondering if you could walk us through how we should expect the balance sheet to grow especially relative to where you are or where you want to be on LCR. How we should think about earning asset growth relative to loan growth?

So Erika I would tell you that where we need to be for LCR for 2015 and as we think about what we're going to do going forward to get to 100% we're not going to increase the size of the security portfolio. So we are basically going to be able to take cash flow from the securities portfolio and get the securities that we need to be compliant with LCR at a 100% level. So you won't see the balance sheet grow due to selling compliant with LCR.

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

That’s exactly right.

Okay. Thank you.

Our next question comes from the line of Geoffrey Elliott from Autonomous Research. Your line is open.

I wanted to ask on the new slide that you've given us on the impact of swaps. I am talking what net interest income sensitivity would look like if those swaps rolled off. Is that an indication of intend to at all? If rates pan out as you are expecting, are you planning to bring the swap portfolio down or is that purely kind of hypothetical exercise at this point?

So we've been pretty consistent in talking about our comfort with the way the swap portfolio is laddered and the way the swaps are rolling off naturally. We provided some guidance around 1 billion of swaps coming off in 2015 and an additional 3.5 billion in 2016 and those are the natural maturities of the portfolio. So we feel very comfortable with that.

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

That our current intent, we feel like this was a very wise thing for us to do in the rate environment we were in, it actually protected the margin significantly and helped us manage interest rate risk on the balance sheet and we think the timing of these swaps and their current maturities is advantageous for us.

Your next question comes from the line of David Long from Raymond James. Your line is open.

In regard to your expansion in Michigan with the new in-store locations in the Meijer Superstore, what kind of expenses did you see here in the second quarter from that initiative? And then with those opening I know about July 1st, what will be the pickup in expenses we should expect here in the third quarter?

It's Mac, we’ve got 30 new locations set to open in third quarter, another 10 in the fourth quarter. And you need to keep in mind that we do hire the bankers 60 to 90 days in advance for opening those stores. The remainder of the expenses you can expect to see come online as we open those branches. So not going to go into detail around those specifics of incremental expense related to the expansion, but again I’ll take you back to the expense guidance that we’ve given and we’re very comfortable with second quarter levels.

Our next question comes from the line of Scott Siefers from Sandler O’Neill. Your line is open.

Mac I was hoping you could maybe just flash out, sort of what’s going on in overall commercial yields and I guess just kind of pace of degradation. I get what you said about pricing pressure is going to continue, but it can be little tough from outside to given the impact of HTF kind of the pace of degradation whether that softened at all in the second quarter, what are your thoughts there?

This is Dan, I think that while there continues to be pressure, I do feel that it is starting to stabilize a little bit. So I think the pace of the pricing pressure and structural pressures is maybe leveling out a little bit. So maybe a lesser reduction on a go forward basis than what we’ve experienced today.

And Mac just sort of tricky-tact question, what level if any of integration charges are you expecting per quarter in the second half for the year?

I would suggest it's not going to be a material number, it's actually the cost to integrate HTF on full rate [ph] is one of the lowest cost I have ever seen in immigration. So it's really not material.

So in other words the expense guidance for the second half you reported and that’s a core number you're expecting as well?

That’s a way to think about it.

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

You have nice quarter-over-quarter increase in service charges is there any way to separate what is seasonal versus what’s connected to your growing customer base and so is that growth in fees coming from just more customers and does that more than offset what’s going on across the industry in terms of declining fees?

So I think the way to think about it, second quarter is typically seasonally strong and I think if you go back and take a look overtime and just get an idea what happens there that’s one way to think about it. It’s probably a little bit more difficult for us because a Fair Play and some other changes that we’ve made. Clearly when you think about the way we acquired new households and commercial customers, a lot of the growth in the new customers have really helped us overcome, some of the changes we’ve made on the Fair Play side. And then with our focus on OCR and deepening relationships that’s been very beneficial as well. And particular treasury management which -- some of the revenue associated with treasury management gets recorded in that line and we’ve had very strong growth in treasury management. And the last thing I’d point out is that we did make some changes in July of last year that costs us about $6 million a quarter in service charges and we’re basically through that impact at this point. So I would expect to see some favorable growth in service charges for the remainder of the year.

And then you’ve been showing these consumer and commercial relationship product penetration slides for years and they are all up into the right and I guess Mac my question is, what category either consumer commercial is more important for achieving the positive operating leverage, which one should we look at before the other?

It's a great question, I think they both have contributed in a pretty material way. I think we’ve had better success in revenue growth related to new customer relationships on the commercial side, I think the bigger opportunity going forward is on the consumer side. So that’s probably how I would think about it. I think a lot of the investments we’ve made on the commercial side of the business particularly on the fee side have paid-off very nicely for us and as we think about the opportunity to deepen relationships on the consumer side of the business going forward and take advantage of all the new households, we’ve brought to the organization that is going to be a nice driver for us going forward.

[Operator Instructions]. Our next question comes from the line of Jon Arfstrom from RBC. Your line is open.

Couple of follow ups here, just one on asset sensitivity, may be, but non-interest bearing deposits have become a much large piece of your deposit base over the past several years. I am just curious how you expect those balances to behave in a rising rate environment? In other words, is the growth driven by consumer household accounts or something else in there that may [indiscernible]?

This is Steve, we started with a strategy of share of wallet along with the share of market. And so we measured loyalty and retention and how that was impacted as we increased share of wallet. Therefore we expect our DDA to be very sticky as a consequences of cross-sell that we've been able to add on both the consumer and the commercial.

Okay, good. That's helpful. And then a follow up for may be Mac on the accelerated expansion you talked about the branches that are coming online in Q3 and Q4. The incremental expenses done at the end of Q4?

There might a few branches that will meet into 2016, but I think for all practical purposes we accrue no expenses around Q4.

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

Thanks. Mac I want to touch a little bit about the decision to move around the interest rate sensitivity. You have been keeping it very neutral position which has helped the net interest margin. As you are letting things mature you are giving up a pretty wide spread with the steepness of your curve, and you are going to take all of that 4.3% increase in asset sensitivity really to replace what you are giving up on the interest rate swap. So there is trade off and I just wanted you to kind of talk a little bit on how you are thinking about that?

Yes, thanks Marty. So I do think, and we talked about this quite a bit historically that the swaps that we put on and when we put them on, actually did a great job in protecting the margin and you and I talked about that quite a bit. But when we put these on, we didn’t put them on from thinking about a timing perspective and as we let them mature we're not really thinking about it in terms of trying to time what's happening in the market place. We do have a belief as I think most do, the rates are going to rise, if it's not in third or fourth quarter, certainly it will be early next year. And when we think about just the natural maturity of the portfolio it seems like it's the right thing to do just to let these swaps mature. So that's the way we think about it and certainly we're not trying to thread the needle here.

The only thing I was, kind looking at is the 4.3% of pickup, gives you about $20 million worth of earnings as rates go up, a full 200 basis points if you look prorating the benefit of the 26 million that is kind of came up with your running off all those asset swaps, you were planning on giving up about $18 million. So it really looks like you are giving up current earnings to wait on the fed funds rate to go up 200 basis points and keeping a neutral balance sheet is always probably the overall goal not be one way or the other.

Right, which is the way we thought about it and we have disclosed historically, that we had historically 4 billion to 5 billion of asset swaps on throughout the cycle. So we certainly do think about how to hedge the balance sheet but again we are not trying to thread the needle here.

Got you. Thanks so much.

And this concludes our question and answer session for today. I'll now turn the call back over for closing remarks.

We are pleased with what was a record breaking second quarter. Results show that our investments are paying off, our strategies are working, and our execution is focused and strong, and we continue to gain market share and improve share of wallet and show no signs of slowing down. We have produced revenue growth of 9% in a challenging environment while remaining focused on pricing and underwriting discipline. In addition, we made significant progress on the integration of Huntington Technology Finance and are excited about the return profile this business provides. HTF will be a great deal for Huntington shareholders. With that said, there's always work to be done. We can do better and I don’t want you think we’re content with one record quarter. While we continue to make progress on improving efficiency, we still have significant opportunity for improvement to achieve our long-term goal of an efficiency ratio in the 55% to 59% range. As our past and current adjustments in the businesses mature, we will continue to become more efficient and move towards that goal. I want to close by reiterating that our Board and this management team are all long-term shareholders. Our top priorities include managing risk, reducing volatility, achieving positive operating leverage and driving solid, consistent, long-term performance and we’re well aligned in these priorities. Thank you for your interest in Huntington. We appreciate you join us today. Have a great day everybody.

And this concludes today’s conference. You may now disconnect.