Huntington Bancshares Incorporated (HBAN) Q3 2015 Earnings Report, Transcript and Summary

Good morning. My name is Keith and I will be your conference operator today. At this time I would like to welcome everyone to the Huntington Bancshares’ Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, we will have 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 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 an 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 the reconciliations of the comparable GAAP financial measures within the presentation, the additional earnings related material we released this morning and the related Form 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. Let’s get started by turning to Slide 5. Mac?

Thanks Mark. Good morning and thank you for joining us today. We appreciate your interest in Huntington. Since 2009, we’ve executed a well-defined strategy designed to grow market share and share-of-wallet. We introduced our fair play philosophy, our welcome culture and became known for our strong recognized whole brand, differentiated product set and industry leading customer service. In addition we invested in our franchise, building and expanding at a time when others were focused fairly on cost cutting. We plan to continue to invest on our business, although as we have stated before we will pace our investments to manage proportion of operating leverage on an annual basis. Our third quarter results again provide proof that our strategies are working and the investments we’ve undertaken over the past few years are continuing to pay off. We produced solid revenue growth despite the challenging interest rate environment. Our investments none of which are mature continue to drive future performance in revenue growth. We remain focused on disciplined execution. For the second quarter in a row we closed the GAAP on year-to-date operating leverage and we’re well positioned to deliver on our commitment for positive operating leverage for the third consecutive year. Slide 5 shows some of the financial highlights for the quarter. Earnings per common share of $0.18 was flat with the year ago quarter, while tangible book value per share increased 5% year-over-year to $6.88. As we disclosed in 8K filed on September 29, we received an unfavorable ruling on a decade old legal matter resulting in a $38 million or $0.03 per share charge in the quarter as noted in the significant items disclosure. We’re fully reserved on the matter and we will be appealing the ruling. Year-over-year revenue growth was 5%, with both the net interest income and noninterest income contributing to the increase. High quality balance sheet growth including 6% year-over-year increase in average loans and leases and 10% increase in average core deposits. As we noted last quarter, while the value of core deposits may not be fully appreciated by the market in the current rate environment, we believe that our strong core deposit franchise will prove to be a key differentiator once interest rates begin to rise. Our credit quality remains very strong with only 13 basis points of net charge offs and 77 basis points of non-performing assets. Our capital ratios remain strong as well. Tangible common equity ended the quarter at 7.89% while common equity Tier 1 was 9.72%. Slide 6 provides the summary of income statement including some additional details on our noninterest income and noninterest expense for the quarter. Relative to last year’s third quarter, total revenue increased 5% to 757 million. Spread revenues accounted for the majority of the increase as we benefited from 8% average earning asset growth partially offset by 4 basis points of net interest margin compression. We continue to manage the net interest margin. We had disciplined pricing of both loans and deposits. Noninterest income increased 2% from the year ago quarter. Highlights from the quarter included a 9% increase in service charges on deposit accounts and 13% increase in electronic banking income, both reflecting continuous strong consumer and business acquisition. Recall that the year ago quarter included a 6 million per quarter negative impact of deposit service charges from changes to our consumer deposit products including all day deposit implemented in July of last year. As this quarter’s results demonstrate, we have now more than overcome that step down. Capital market fees increased 24% year-over-year reflecting the ongoing benefit of past investment and is key revenue capability for our commercial customers. Mortgage banking income declined 24% from the year ago quarter as 8 million MSR impairment more than offset 5 million increase in mortgage origination in secondary marketing revenues. Our wealth businesses were negatively impacted by the planned product substitution in our broker dealer following our 2014 transition to an open architectural platform and our strategy to move to more predictable revenue streams within the business. Trust services income decreased 11%, while brokerage income decreased 12%. During the quarter we announced agreements the transition are remaining equity and money market funds to our–to other fund families and to sell Huntington asset advisors, the current advisor for the funds. We expect these transactions will close during the fourth quarter with an immaterial impact on our 2016 run rate. Recall that we previously transitioned our fixed income funds during the second quarter of 2014. Reported noninterest expense in the third quarter was 527 million, an increase of 46 million or 10% from the year ago quarter. This quarter’s noninterest expense included two significant items, the previously mentioned 38 million addition to litigation reserves and 5 million of merger related expense from the Huntington Technology Finance acquisition earlier this year, the pending transition of the Huntington funds and the sale of Huntington Asset Advisors. Noninterest expense adjusted for significant items, increased 26 million or 6%. Slide 7 details the trends in our balance sheet mix. Average loans and leases increased 2.9 billion or 6% year-over-year as we experienced year-over-year growth in every portfolio. Average commercial and industrial loans grew 1.2 billion or 7%, while average automobile loans grew 0.9 billion or 11%. The year-over-year growth in the C&I portfolio primarily reflected growth in asset finance including the Huntington Technology Finance acquisition, corporate banking and auto dealer floorplan lending. The 2015 third quarter represented the seventh consecutive quarter of indirect auto loan originations in excess of 1 billion. Auto finance remains a core component to Huntington and is detailed on the slides and the appendix. We’ve remained consistent in our strategy which is built around a dealer centric model and focused on prime borrowers. Our underwriting has not changed and the portfolio continues to perform very well. Average securities increased 1.6 billion or 13% year-over-year. Approximately 600 million of this increase related to direct purchase of small of municipal instruments originated by our Commercial lending team. Turning attention to the right side of the balance sheet, average deposits increased 5.4 billion or 11% over the year ago quarter including 4.8 billion or 10% increase in core deposits. Average noninterest bearing demand deposits increased 21% year-over-year and average interest bearing demand deposits increased 12%. These increases reflect our continued focus on consumer checking, household and commercial relationship growth. Other core deposit categories continue to benefit from our efforts to deepen banking relationships and to increase our share of wallet. Average money market deposits increased 9% year-over-year and average savings increased 4%. We continue to remix the consumer deposit base out of higher cost CDs and to other less expensive deposit products. Average core CDs decreased 20% year-over-year. Importantly the year-over-year growth in total core deposits more than fully funded our earning asset growth over this period. The strong core deposit growth also allowed us to pay down some short-term wholesale funding as average short-term borrowings and federal home loan bank advances decreased 2.7 billion year-over-year. Average long-term debt increased 2.5 billion as a result of three bank level senior debt issuances this year including 500 million increase - issued during the 2015 third quarter. Average broker deposits increased 500 million. These wholesale funding sources provided a cost efficient means of funding balance sheet growth including LCR related securities growth for maintaining brokers on managing core deposit expense. Slide 8 shows our net interest margin plotted against earning asset yields and interest bearing liability cost. The net interest margin decreased 4 basis points year-over-year and quarter-over-quarter to 3.16%. Recall the 2015 second quarter, net interest margin benefited from $3 million of prepayment penalties within the securities portfolio which added 2 basis points, similarly the 2015 third quarter net interest margin benefited from $3 million as well, again 2 basis points from interest recoveries on nonaccrual loans. We continue to experience pricing pressure across most asset classes in the quarter in addition the bank level senior debt issuances have increased our cost of funds on the margin. Going forward we expect net interest margin pressure to remain a headwind consistent with recent experience. Slide 9 provides some details on our current asset sensitivity positioning and how we manage interest rate risk. For the past several years we have run a more neutral balance sheet in many of our peers, in part related to our swap portfolio. The swaps were added in light of the outlook for prolonged low rates and helped us support our net interest margin over this period. As shown on the chart on the top, our modeling estimates that net interest income would benefit by 0.3% if interest rates were to gradually ramp 200 basis points in addition to increases already reflected in the current implied forward curve. This is consistent with estimates of the past several quarters. In a hypothetical scenario with 9 billion of asset swaps - without the 9 billion on asset swaps, the estimated benefit would approximate positive 3.9% in the up 200 basis point ramp scenario. The chart at the bottom of the slide illustrates the weighted average life of our asset and liabilities swap portfolios as well as the net impact of the swaps and our net interest income, including an incremental 28 million in the 2015 third quarter. As you can see in the green line, the asset swap portfolio continues to age in and had a weighted average life of 1.3 years at quarter end. As we stated previously, our asset swap portfolio is a laddered portfolio. There are no cliffs looming on the horizon. During the 2015 fourth quarter an additional 800 million of these asset swaps will mature and at an additional 3.6 billion will mature during 2016. LLC for these swap maturities would increase our estimated asset sensitivity. Slide 10 shows the trends in our capital ratios. Our risk based regulatory capital ratios improved modestly from the prior quarter end, while transfer common equity or TCE remained relatively flat. We repurchased 6.8 million common shares during the third quarter at an average price of $10.66 per share, effectively returning more than 72 million of capital to shareholders. We have about 195 million of authorized capacity remaining for the next three quarters under 366 million share repurchase authorization. Slide 11 provides an overview of our provision, charge offs and allowance for credit losses. Credit performance remain solid and in line with our expectations. The loan loss provision was 22.5 million in the third quarter compared to 16.2 million of net charge offs. Net charge offs were well controlled at 13 basis points, remaining well below our long-term expectations of 35 to 55 basis points. The ACL ration fell modestly to 1.32% of loans and leases from 1.34% of the prior quarter end, in line with modest overall improvements in credit metrics. The ratio of loans to nonaccrual loans increased to 184% compared to 180% a quarter ago. We believe the allowance is appropriate and reflects the underlying credit quality of our loan portfolio. Slide 12 highlights trends and criticized assets, non-performing assets and delinquencies. The chart in the upper left shows a slight decrease in the non-performing asset ratio for the quarter to 77 basis points. The NPA ratio is slightly for the second quarter in a row due primarily for higher payments on existing problem loans. The chart on the upper right reflects [indiscernible] improvement on our 90 day delinquencies with the improvement driven by the consumer loan portfolios. The bottom left shows the criticized asset ratio which also improved for the second consecutive quarter due to a noticeable reduction in the amount of new criticized inflows in the quarter. Finally, the chart in the bottom right shows NPA inflows as a percentage of beginning period loans increasing slightly to 29 basis points from 26 basis points last quarter. I mean, I’ll turn the presentation over to Steve. Steve Steinour Thank you, Mac. Slide 14 provides the snapshot of the long-term trends in our consumer and commercial customer acquisition. Our fair play banking philosophy coupled with our optimal customer relationship or OCR focus continues to drive, we believe industry leading customer acquisition. We’ve increased our consumer checking, households and business relationships by almost 9% and 6% compound annual growth rates since 2010. These robust customer growth rates have allowed us to post the associated revenue growth you can see in the two lower charts on the slide. A particular note, the last two quarters have shown improved momentum in the consumer household revenue metrics as we’ve lapped the last fee change we implemented under our fair play philosophy last August and realized the benefit of the underlying customer growth. We remain focused revenues and we continue to grow revenues despite the headwinds of the interest rate environment. As we have stated before, our strategy is not just about gaining market share but also gaining share-of-wallet, slides 14 and 15 illustrate the success of our LCR strategy in deepening our consumer and commercial relationships. As we’ve shared with you previously the corner stone of our LCR strategy is based around increasing the number of products and services we provide to our customers, knowing that this will translate both into more loyal, satisfied and stickier customers as well as revenue growth. During the first quarter of this year our LCR crossed our goal of six or more consumer products and services, crossed over the 50% mark for the first time. At the end of the third quarter this figure improved to more than 51% of our entire consumer checking households using six or more products or services. Correspondingly our consumer checking account household revenue is up 11% year-over-year. Turning attention to the commercial slide on fifth - on slide 15, our percentage of commercial customers with four or more accounts was 43.7%, up 30 basis points from the prior quarter and up 250 basis points from the year ago quarter. Again, this is translated directly to revenue growth, as commercial revenue increased 8% year-over-year. During conferences the past few quarters and during calls with our investor relation team, many of you have expressed the desire to better understand the economic strength and underlying trends in our footprint and so we’ve added slides 16 and 17 this quarter to help address those questions. We hope you find this beneficial. Since the economic recovery began, 2008 or 2009, economic activity in the key states of Ohio, Michigan and Indiana which account for approximately 90% of our business as measured by deposits, has grown faster than the national average. This outperformance has persisted through the past three months and based on the Philadelphia’s edge state [ph] leading indexes is expected to persist for the next six months. Chart on the bottom of slide 16 shows the unemployment rates in most of our footprint states continue to trend positively and most are in line with or better than the national average. One out layer is the state of West Virginia which continues to struggle with the impact of lower coal prices. Slide 17 shows the current and year ago unemployment rates for our ten largest deposit markets. These MSAs account for more than 80% of our total deposit franchise. As detailed in the chart, all of these markets continue to trend favorably. Slide 18 shows our year-to-date operating leverage results. Full year positive operating leverage is a long-term strategic goal for Huntington and a commitment we’ve made again for 2015. For the second quarter in a row, we narrow the gap on operating leverage, moving from 1.7% negative at the end of the first quarter to negative 40 basis points at the midpoint of the year and now to negative 10 basis points at the end of the third quarter. We’ve strong revenue momentum and we’ll pace or continue to investment to franchise appropriately for the revenue outlook. Therefore we remain confident in our ability to achieve positive operating leverage for the full year, both inclusive and exclusive of the impact of Huntington Technology Finance. Turning to slide 19 for some closing remarks and expectations, we remain optimistic about ongoing economic improvements in our foot print. While we’re monitoring certain industries or sectors potentially impacted by global macroeconomic developments, we remain bullish on the mid west economy as a whole. Customer sediment is positive, loan pipelines are encouraging, loan mutualization rates showed a slight increase for the second consecutive quarter. While competition remains intense, we’ll continue to be disciplined in growing our commercial real estate and our C&I portfolios along with our consumer portfolios. We’re committed to delivering strong results regardless of the interest rate environment. A 2015 budget was built around the current rate environment and the achievement of our goals is not dependant on a rate increase. We will follow a similarly prudent approach as we plan and budget for 2016. We control our own destiny and our focus and execution will deliver results. The relative stability of our net interest margin has been a key component in our revenue growth and maintaining our pricing discipline remains a key focus for Huntington going forward. While we expect pressure will remain a headwind until interest rates start moving back up, we expect to grow revenue despite this pressure. The benefit of our robust customer acquisition and OCR cross sale strategy was apparent as fee revenue improved this quarter with service charges on deposit accounts, electronic banking, treasury management, capital markets all contributing to the performance. We continue to invest in our businesses for the future, resulting in projected noninterest expense growth of 2% to 4% for the year excluding significant item that MSR activity and acquisition. We expect fourth quarter noninterest expenses excluding significant items will remain consistent with the adjusted noninterest expense levels of the prior two quarters. We expect full year 2015 revenue growth in excess of expense growth with committed positive operating leverage for the full year of 2015, again both inclusive and exclusive of Huntington Technology Finance. We believe the asset quality metrics will remain near current levels. We expect net charge offs will remain in or below our long-term expected range of 35 to 55 basis points. Modest changes are anticipated given the absolute low levels of our credit metrics. While we try and continue to be as a franchise with an emphasis on consistent shareholder returns, we build a strong and recognizable consumer brand with differentiated products and superior customer service. We’re executing our strategies and adjusting to our environment were necessary. While past investments continue to pay off, we continue to move forward with further investments and enhance sales management, digital technology, data and analytics in optimizing our retail distribution network. None of our investments are matured. There’s a high level of alignment between the board, management and all of our employees and shareholders and we’re highly focused on our commitments to being good stewards of shareholder capital. With that I’ll turn it back over to Mark.

Thanks, Steve. Operator we’ll now take questions. We ask that as a courtesy of 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] Your first question comes from the line of John Pancari from Evercore ISI. Your line is open.

Good morning.

Good morning, John.

Just on the margin front. Just wanted to get a little bit color on the loan, this quarter they seemed they’ve head up [ph] really well and then you indicated the margins should remain under pressure here. Should we expect a similar pace of compression like you saw this quarter about the 3 to 4 basis point range?

Yes, John. So we’re very deliberately focused on making sure that we appraise loans appropriately, so we’re very focused on making sure that we go through the right process internally and maximize pricing on both the asset and liability sides of the balance sheet. That’s really helping; I think the margin performance is some of the stability that you’re seeing. We will continue to see the pressure going forward. We’ve been pretty consistent in talking about 2 to 4 basis points. Some of the longer term debts that we are putting on the balance sheet at this point to fund 2016 growth and related to some of the rating agency changes will increase the margin or increase the funding cost on the margin. So I think the higher end of the range is probably what I would think about for the fourth quarter but again I think managing the margin for consistent stable performance.

Okay, all right. Thank you. And then certainly I guess I was going to hop over to capital, just wanted to ask you about your updated thoughts on deployment priorities when it comes to the buyback, dividend and also in - importantly on M&A and if there’s been any change to those priorities given the stubborn interest environment. Thanks.

Yeah, our priorities have remained consistent with everything we’ve disclosed historically. We’re of course focused on the dividend and return of capital to our shareholders, organic growth and - but the buyback I think, certainly if Macquarie or Huntington Technology Finances agreed, example of the type of acquisition that we think is very advantageous for our shareholders performing better than we expected and when you think about it from an acquisition like Macquarie versus the share repurchase, I would do an acquisition like Macquarie any day.

Your next question comes from the line of Bob Ramsey. Your line is open.

Good morning, this is Martin Turskin [ph] for Bob Ramsey.

Hi, Martin.

I had a question, so auto loans were up almost 800 million in the quarter and there was - this morning was a general article about OCC Director Cary [ph] being concerned about the activity in the market, are you seeing anything that concerns you?

Yeah, Martin, this is Dan Neumeyer. No and industry wide I think his observations are spot on but we have said repeatedly when you look at our strategy on auto loans we’ve been very consistent. Our numbers are rock solid in terms of what’s originating [indiscernible], LTBs, the term of our loans, there is no risk layering within our portfolio, so we feel extremely confident in the performance of our book today.

Okay, thank you.

Martin, this is a sort of industry I think of the control or the control of credit is done the industry and investors of service, pointing out where they have concerns, let’s issues get addressed so we don’t - as Dan said, we’re in great shape, we don’t see us sitting with any concerns right now but obviously they must be existing at that subprime space.

Got it, thank you. And then moving on to plant [ph] sale of Huntington asset division advisors, what do you expect to be the impact on revenues and expenses and what’s the timing in the sale?

It will basically have a non-material impact on revenue and expense and it will take place in the fourth quarter.

Got it, thank you very much.

Thank you.

Your next question comes from the line of Bill Carcache from Nomura. Your line is open.

Thank you, good morning.

Hi, Bill.

Hi, you guys talked about your commitment to achieving positive operating leverage and pacing your investments to make that happen. Can you walk through for us your tucking order of investment opportunities and perhaps give a little bit of color around whether those investment opportunities are revenue generating versus compliance related, just to give us a flavor of what some of those opportunities are?

Yeah, so the opportunities that we’re looking at are very consistent with what we’ve been doing over the last two or three years and we are investing in distribution. You’ve seen us bring online a number of in-store branches which we think are going to be very advantageous for us in the future in terms of optimizing the cost of distribution. Our customers are migrating to those branches for their transactions and we actually sell very, very well in those facilities. So that clearly has been one area. Investments in technology has been another significant area for us. You’ve seen us do a number of things with image enabled [ph] ATMs with new teller platform, with our deposit image [ph] capabilities on mobile phones and we make - continue to make strong investments in the digital capabilities that we need to go forward. So these are the types of investments that we are making and we continue to make and as it relates to positive operating leverage in 2016, we’re going to make these investments as appropriate, we’re going to manage the expense base based upon the revenue environment. Steve mentioned that we are budgeting 2016 assuming an unchanged rate scenario, which means that we’re going into the year with a very conservative expense outlook based upon an unchanged rate scenario. So again we’re going to continue to manage for positive operating leverage on an annual basis and we’re going to do that by making sure that we manage the expense based upon the revenue environment that we’re in, so very confident that we’re going to be able to achieve that in 2016.

It’s helpful, thank you. Circling back on auto, can you talk about what’s happening with your participation within auto and speak to any changes and practices that you’re seeing? Yes, at the industry level as well as potentially how those could impact Huntington? I’m really just trying to, I guess assess the risk of disruption to the flow of auto loans that you get from your dealer relationships?

Yeah, this is Dan again. We don’t expect any disruption, we have a niche that we play on which is prime and super prime - we have great dealer relationships that’s been established by Nick [inaudible 0:31:32]and his team over a long period of time, so while there may be disruption in the industry as a whole, we really think that we have a value proposition that we’ve been very consistent. We know what our target market is and we really don’t expect any disruption to that.

Last time there were disruptions was ‘09 and ‘10 and we used it as an opportunity to expand. We’ve been in the business for 60 plus years and we got multi-generational relationships particularly in our corporate brand. So we feel very bullish about the business.

So the flow of auto loans that you guys get from your dealer relationships aren’t really a function of dealer participation or be more function of the long-term relationships that you’ve had?

Yeah, I would say that’s accurate. Our dealers know that they have a consistent source that has been there through every cycle and I think that dealer relationship is what drives the volumes.

That’s r very helpful. Thank you for taking my questions.

Thanks.

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

Hello, there. Thank you for taking the question. Following up on also and mark up[inaudible 0:32:47]. How do you expect the industry to evolve do you think over the next few years going to be going to the elimination mark ups, you mark ups just come down, do you think it’s kind of different with different players. If you could kind of think a few years out, what do you think the industry is going to be?

Geoff, the industry is trending towards a tighter range of pricing and we think a couple of years out it will be tighter but there will be a range, it won’t be flat pricing. And we’re basing that on the recent announcements with some banks and the safety B [ph] where those pricing discretion allowed and that discretion may be an important part of delivering sales to some segments of the market place and the population as a whole.

And then just to follow up, it looked like this quarter also was responsible for the bulk of increases in average loan balances. How do you see that changing over future quarters? When do you think the mix will shift away from also towards commercial and other categories driving loan growth?

Geoff, it’s really hard to say. I mean the - obviously the auto industry is very strong right now, record volumes and as we pointed out in our comments earlier, we’ve had seven quarters of a billion dollars or more in production. So I think it comes down to - in this environment we think the way we run this business, the quality of our portfolio from risk return perspective this is a good asset to have on our balance sheet. So we’re extremely comfortable with that. We certainly hope it continues long into 2016 and we think it will.

Thank you.

Your next question comes from the line of Ken Huston from Jeffries. Your line is open.

Thanks, good morning. On the C&I side, you guys had been very clear about watching your growth and so you’ve seen kind of a flatness over the last couple of quarters. I’m just wondering if you can help us understand what’s happening on the HTF side, within that and then what other pockets of C&I are either growing or shrinking and how do you see that planning out forward?

Yeah, Ken, this is Dan. The market remains competitive but we are seeing a nice growth in many of the segments, equipment finance continues to be a driver and Huntington Technology Finance as a part of that has macro [indiscernible] actually beating expectations, so we’re happy with what’s going on there. We had good growth in the quarter and in core middle markets, large corporate and our protocols continue to - each individual one is not huge but collectively healthcare franchise, AVL [ph] are all good contributors in the quarter. So it’s really a matter of picking our slots and which ones align best with our risk appetite. Overall, our backlogs are actually quite healthy, a little bit better even than a year ago at this time.

Okay and then on the credit side this is the first quarter we’ve seen a provision build from you guys in quite a long time, I know you did have some recoveries in CRE but is this a flip over here, what are you guys seeing as far as the macro that’s leading to that kind of decent delta from releasing to provisioning and should we expect builds going forward?

I don’t think there’s really. The numbers we’re talking about are kind of smaller side. I don’t think there’s been any dramatic shift. We did over provide a bit this quarter. I think we’ve been thinking for some time that the conversion of charge offs and provision would be more closely aligned and I think we continue - we’ll continue to operate in that general range.

Okay, thanks guys.

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

Good morning everybody.

Good morning.

On the expenses, if I look at the year-to-date adjusted expenses of 1.4 billion and then I use your guidance for there’s a [ph] consistent with the last two quarters for fourth quarter, that will imply somewhere around 1.9 billion adjusted for the year, which according to my math is 5.5% increase over the 2014 adjusted level of 1.8 billion. What am I missing there regarding to expenses in the 2% to 4% range?

Yeah, so it comes down to the fact that we added Macquarie this year. So that guidance is excluding HTF.

The guidance is excluding that transaction. So what base should we be using for 2014 then with this 2% to 4% full year adjusted guidance?

So it should be the 2014 adjusted and then 2015adjusted excluding HTF. The reason that we did that is because we gave this guidance originally before the HTF transaction and we just felt it was important to continue to give consistent guidance here. So that’s the way to think about the math, that’s the way it works.

Okay, got you. Okay. Separately given such strong growth that you’ve been having in auto are you guys planning for a securitization in the fourth quarter or may be just what’s on timing for your next one?

Yeah, we continue to look at kind of the efficiency of the securitization market and the need for us to actually that either from a risk concentration or funding perspective, we don’t see a need to do that in the near future. We have talked about perhaps doing some funding transactions in 2016 but again we don’t see that as being required at this point in time.

Okay, that’s helpful. And Mac may be if I could just go back to the prior question I had, so what is the dollar of expenses assuming the numbers right that wish that were attributable to the deal that we should be excluding?

So we gave guidance on that last quarter. Macquarie expenses were about $15 million a quarter and very consistent in terms of what we see in this quarter as well.

Okay, perfect. Thanks, guys.

Okay, thanks a lot.

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

Okay, good morning.

Hi, Ken.

Just take off with interest rates, yearly margin in particular, obviously we heard it should go down from here but when we think about sort of the new money rates that you are putting on new business versus portfolio rates, how far off are the two, right? Is it really asset yields coming down that’s still causing all the pressure or is more the liability cost going up? And the reason I want to compare that to some of the other banks in the industry who’ve been talking a lot more about NIM stability even in this environment? Thanks.

So you know up until this point in time if it really has been on the asset side of the equation, so we still are seeing as new assets come on the balance sheet. They’re actually replacing assets that are coming off at a higher yield. You know we’re starting to see because of some of the debt issuance that we’re doing a bit of a change of the liability side as well not significant. But I would tell you that we’re probably pretty close to the assets life kind of neutralizing and I would think about maybe the second half of 2016 seeing some stabilization there.

On total NIM or just the asset side?

I would say probably both, given the current rate - given the current rate environment the current competitive environment lots of factors go into that of course but second half of ‘16 probably looks reasonable.

Okay, great. And then second question I had, just on the swaps, are you guys planning to let those continue to runoff each quarter from here or just given sort of the low rate expectations about rate hikes, would you consider putting additional swaps on?

No, we do evaluate that frequently and I would tell that right now we’re comfortable with the current trajectory of how they are coming off. So again we spend a fair amount of time in ALCO, sub-ALCO reviewing the swap position and our overall asset liability position of course. And but I will stay that we’re staying of course.

Okay, what would have to happen to change your view on that in terms of rate expectations or is that something else?

Yeah, I think - I think rate expectations length of still lay perhaps in seeing any changes coming out of the fed. I think we’re just, just at a process the information that’s available to us and make decisions on that.

Alright, thank you very much.

Thank you.

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

Good morning.

Good morning, Erika.

It’s my first question, is just on credit quality, I did notice that on the auto side that both NPLs in auto and late stage delinquencies did go up year-over-year and quarter-over-quarter and I am wondering if that’s just normal seasoning of that or there something else going on there? And relative to your normal range for charge offs overall 35 to 55 basis points, where do you think auto losses would normalize to relative to the 20ish basis points that we’ve been seeing recently?

Yeah, so Erika first of all I would say that you know when we get down the performance metrics we have today are very, very well so any change from quarter-to-quarter even year-over-year at this point you know a tick up might noticeable but it’s still of a very low base. So I don’t read anything into the any quarterly variance or year-over-year grants, but there is some seasonality and we do tend to be a little bit of an uptick in the third quarter and there might be a very small impact from some of the TCPA charges ability to call on customers therefore why was impacted but only very slightly, so that might be a part of it. But overall we’re very pleased with these metrics. Obviously, overtime we could see an uptick in charge off as we move to the cycle, although we continue to originate very consistently. And so I think it would be in line with historical performance.

Got it. And my follow-up question is - a follow-up to John’s question earlier. This quarter we saw headlines that Huntington was part of shooter, so to speak for a regional that would be a large portion of the bank. And given sort of your priority list in terms of capital allocation that you listed in terms of dividend buybacks and asset, is that in our part if the equation in terms of capital allocation in terms of buying a relatively lager deposit?

You know Erika, we’ve lost you, can’t really hear the last part of the question.

Oh, I am sorry, I don’t know where I cutoff that, you know given that Huntington is boiled in rumor, so as it possible shooter for the large northeast depository, but relative to your priority list of capital allocation dividends, buybacks and asset purchases like Macquarie, should we eliminate Huntington as a potential shooter for large depository deals like that over the next year or two?

So you know first we don’t respond rumors in the marketplace, so that’s the answer of on the specific question that you asked. But the way we think about acquisition is does not changed. We’re extremely consistent; we’ve been consistent before a number of years in terms of thinking about the fixed footprint. Core depository is looking in the contiguous states is something we talked about as well. So we’ve been very consistent in how we talk about our M&A strategy.

Okay, thank you.

Your next question comes from the line of Samir Kafity [ph]. Your line is open.

Hi, thanks for talking my questions. I just wanted to follow-up a little bit about on the slops that you mentioned earlier, I might have missed it, but in terms of the outlook for the NIM going forward, what have you taken to your expectation as far as replacing that swap book as those mature because it seems like based on the benefit you’ve been receiving from those as those slops mature on this, they were pleased if the negative impact on your margin and then to the extend you enter into a new swaps, you know could it be - possibility that those are maybe less economical than your current ones, so again that causes some downward impact on the NIM where you’ve been. So if you could just help us kind of clarifying thing to the impact on the NIM from the reduction in your swap that would be helpful?

Yeah, so the - the guidance that we’ve given on our NIM historically and continue to give on our NIM assumes that we can change the assets swaps for loss, so there is no replacement in that work as we give guidance and think about the future. So again we’ve been consistent in that approach and that guidance overtime.

Okay, thank you for the clarification. The other thing I was looking to just clarify also was in terms of again the dealer market issue, just kind of flush out a little bit in terms of settlements some of your peers have had with regulators, are you saying that you haven’t needed to unsecured any sort of pricing changes or caps in terms of your relationships with the dealers given your focus on prime and super prime customers and therefore you don’t see an impact or have you already unsecured those changes and still aren’t seeing any impact on your business again because of the quality plus the account are going after? Just a clarify would be helpful.

So I don’t think that we are anticipating any changes from what was happening in the marketplace today. We’ve made changes back in 2010 around the way we think about pricing and what we’ve allowed the dealer to do. So we think that what we are doing today is very consistent with what we done sometime and that waiting time and don’t see any issues there.

Okay. And then just a quick one if I may, in terms of your digital investment, could you help us, how much you are planning to invest in 2016 and the used in vision also investing on the digital side not only on the - for consumer loans and consumer relate activities but also any potential opportunities to invest related to your commercial businesses? Thank you.

So we don’t really disclose the size of investment that we make in various aspects of the business from a technologic perspective. You know I will say that the investment they were making is broad across all segments and all lines of business and that we are accelerating that investment in digital. But again that’s something that we don’t disclose.

Okay. Thank you for talking my questions.

Okay. Thank you.

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

Thanks. Steve I wanted to ask -

Good morning.

Well, yeah, same here.

Okay.

I wanted to ask you about the, when you look at the average customer relationships. As you are adding customers so quickly, but you are also being able to increase the pool that have six plus products, are you being able to just convert new customers with significant amount of products or is there just a wholesale change in the banker relationship and is that why you are being able to accomplish both those goals at the same time?

Marty, we have invested in our brand and in our products to make them very attractive with unique, in some cases unique features. We talked in prior earnings releases about an investment we’ve made last year in date and analytics and creating the capacity to better understand our customer base and their needs and desires and our capital to fulfill with them in different channels and the combination of those investments with our ongoing efforts to provide better sales execution is leading to growth in both new customers but growth in product penetration with the entire book. And we think we’re - while we’re better, we have opportunity to further improve.

And it usually just takes a little time for the new customers to kind of rollup and add their relationships, so it’s a very positive story to build you both at same time. And then Mac, I wanted to ask you about hedging in the mortgage banking unit. If you look at the volatility that you are getting just in the last you know two quarter, you had 6 million write-up, net write-up last quarter, you got a 8 million net write down this quarter. The volatility in your results is about 50% of your average mortgage banking revenue line, if you look Wells Fargo for incidence, their volatility is around 10%, is there any way that you can try to hedge out some of that volatility in the servicing portfolio with a change in interest rate? So just wanted to see if you had a philosophy that you all had or way to adopt maybe limit that volatility a little bit more?

Yeah, Marty, we’re taking to look at that. Obviously, I think the hedges are very efficient in last couple of quarters with just given some of the volatility and rate changes and kind of that market place. So we’re talking to look at it, a strategy is there but we do feel confident in what we are doing. I just think the market has been a little, little volatile last few quarters.

Okay, we could probably just talk offline a little bit about that because we have done in the past, so we could talk about few things, so we’ve been able to do to help me on minimize some of that volatility.

That’s great. Thanks Marty.

Alright, talk to you later. Thanks.

Okay.

Your next question comes from the line of Bob Ramsey. Your line is open.

Hi, just couple of question on fees. Given the mortgage, I am thinking weakness this quarter, could you give us some color around that and what’s your outlook going forward?

Yeah, so keep in mind that the MSR impairment that we mentioned earlier on the call is embedded in that mortgage banking line, so that’s $8.4 million in the mortgage banking line, excluding that year-over-year, I think we’re up $5 million in growth. So clearly we are seeing some reduction in volume relative to where we were earlier on the year, we do see revives like everyone else in the industry dropping off and purchases becoming more important, but I do think both the volumes are solid, but that as far as they weren’t earlier in the year.

Got it. And service charges were up 5 million quarter, which kind of seems particularly strong and could you give me some color on what’s driving that up?

So this actually is the first quarter on a year-over-year basis where we no longer have the impact of changes that we made for fair play. Back in July of 2014 was the last adjustment that we made that actually impacted us by $6 million a quarter. So we’re through that now and what you are actually seeing come true on that line is more reflective of the strength household growth that we’ve able to drive really since we introduced fair play. So that I think I think is a very positive sign around the success of the strategy and what we would expect going forward.

Got it. Thank you very much.

Thank you.

[Operator Instructions] Your next question comes from the line of Peter Winter from Sterne Agee. Your line is open.

Thanks. Good morning. I appreciate the new slides on the economic date. But just curious with the global slowdown, the strong dollar, have you guys seen any impact to your businesses or is it just so much new account that you are able to growth through that?

Hey Peter, this is Dan. I would say that, yeah, we watch the dollar China commodity, but I think for our local economy, the strength of the auto industry, the strength of the housing market and the fact that low energy prices well that’s a negative for the energy businesses for many of our customers, you know energy costs are major input and to our consumers. So I think those factors combined actually have been a net positive and we’re still seeing strong demand and strong - pretty strong in our region.

Is that contracting, I know you talked about it, but is it having a little bit of an impact of the C&I side?

You know I would say it’s only epithetic, we’re not seeing any trends in any industry. You know we’re seeing you know case here and there of somebody being particularly affected but on the whole, we’ve not seen any kind of industry level that impacts, we though at this point.

Got it. Thank you.

Thanks Peter.

Your next question comes from the line of Chris Spahr. Your line is open.

Hi, good morning. I just have a question on deposit trends, I see that most accounts and the peers are down. I was wondering if we should read into that for the next few quarters?

Hi Chris, see now, I don’t think if there is anything you should really read into that. I think we continue to see very positive growth on both consumer households and on the commercial side of the business, you know some really good growth on the commercial side. So I really don’t think there is anything you should read into that.

Right, thank you.

Thanks Chris.

[Operator Instructions]

Okay, hearing no further questions. This is Steve, I want to just -

Excuse me. We did have one more question from the David Darst from Guggenheim. Your line is open.

Good morning.

Hi David.

Good morning, David.

Thanks for including me. So I just wanted to ask about the HT of fee income and then I believe you got some operating leases with that portfolio as well, so should we see that the fee income contribution grow or is that going to betide overtime?

Yeah, the operating lease income will betide overtime along with the operating lease expense. So we’re not going to do operating leases going forward as we renew that business or bringing additional lease on and all end up in the margin going forward. So you will see both the income and the expense related operating leases are trying to come.

Okay, great, thanks a lot.

Thank you. Any other questions, operator?

There are not further questions at this time. I’ll turn the call back over to the presenters.

So we’re pleased with our third quarter results. And our strategies are working, our investments are positively contributing to results and our execution is focused and strong. We continued to gain market share and improve share wallet. We produced 5% year-over-year revenue growth in a challenging environment and we’ve remained focused on pricing and underwriting discipline. We continued to invest in our businesses but we pace those investments to assure positive operating leverage. We continued to work toward out long term corporate goals including becoming more efficient and boosting returns. And finally, I want to close by reiterating that our Board and this management team are all long term shareholders. Our top priorities include managing risk, reducing volatility, achieving positive operating leverage and driving solid, consistent long term performance. We are well aligned on these priorities. So thank you for your interest in Huntington. We appreciate you joining us today. Have a great day.

This concludes today conference call. You may now disconnect.