Huntington Bancshares Inc (HBAN) — Q3 2018 Earnings Call Transcript

Thank you, Sherry. Welcome. I'm Mark Muth, Director of Investor Relations for Huntington. Copies of the slides we'll be reviewing can be found on the Investor Relations section of our website, www.huntington.com. This call is being recorded and will be available as a rebroadcast starting about 1 hour from the close of the call. Our presenters today are Steve Steinour, Chairman, President and CEO; and Mac McCullough, Chief Financial Officer. Dan Neumeyer, our Chief Credit Officer, will also be participating in the Q&A portion of today's call. As noted on Slide 2, today's discussion, including the Q&A period, will contain forward-looking statements. Such statements are based on information and assumptions available at this time and subject to changes, risks, and uncertainties, which may cause actual results to differ materially. We assume no obligation to update such statements. For a complete discussion of risks and uncertainties, please refer to this slide and material filed with the SEC, including our most recent forms 10-K, 10-Q, and 8-K filings. Let me now turn it over to Steve.

Thanks, Mark, and thank you to everyone for joining the call today. As always, we appreciate your interest and support. We had another very good quarter and continued to deliver high-quality earnings and expect to carry this momentum through the end of the year. It was also another clean quarter as for the third quarter in a row, there were no significant items. We reported net income of $378 million and earnings per share of $0.33, increases of 37% and 43%, respectively, over the third quarter of 2017. Return on common equity was 14% and return on tangible common equity was 19%. We had record revenue of $1.2 billion, which represented a 5% year-over-year increase and maintained strong expense discipline. We're pleased with the resulting efficiency ratio of 55.3%, an improvement of 520 basis points from the year-ago quarter. The average total loan increase was strong at 7% versus the third quarter of 2017 and 5% annualized versus the 2018 second quarter. This loan growth was driven by a 10% year-over-year increase in average consumer loans with particular strength in residential mortgage, RV and marine financing, and automobile lending. We remain focused on core funding the balance sheet with 6% growth in average core deposits. In the third quarter, we increased the quarterly common dividend to $0.14 per share, representing a 27% linked quarter increase and a 75% year-over-year increase. This year marks the eighth consecutive year that we've increased the common dividend. We believe our earnings power, capital generation, and risk management discipline will support higher dividends, including a higher dividend payout ratio over time. We also repurchased $691 million of common shares or approximately 65% of the total repurchase included in our 2018 CCAR capital plan. As briefly outlined on Slide 3, we developed Huntington strategies with a vision of creating a high-performing regional bank and delivering top quartile through-the-cycle shareholder returns. Our profitability metrics are among the best in the industry, and we have built sustainable competitive advantages in our key businesses that we believe will deliver high performance in the future. The franchise continues to perform well on many fronts, allowing us to make investments in capabilities we need to drive consistent organic growth. We're focused on driving sustained long-term performance for our shareholders. We remain committed to our aggregate moderate-to-low risk appetite, which we put in place 8 years ago. And as a reminder, we reinforced the importance of these standards by requiring the top 1,400 officers of the company to comply with hold-to-retirement restrictions on their equity awards. Slide 4 illustrates our long-term financial goals, which were approved by the board in the fall of 2014 as part of our strategic planning process. As a reminder, these goals were originally set with a 5-year time horizon in mind, and we fully expect to achieve these goals this year on a reported GAAP basis, 2 years ahead of original expectations. I've already mentioned our record revenues, continued expense discipline, and our third quarter efficiency ratio, which was below the low end of our long-term goal. Additionally, our credit metrics remain strong. The third quarter of 2018 marked the 17th consecutive quarter in which net charge-offs stayed below our average through-the-cycle target range, and we have taken loan provisions exceeding those charge-offs in 12 of the last 13 quarters. Our 19% return on tangible common equity positions Huntington as a leading regional bank. These results clearly show that our strategies are effective and will keep driving Huntington forward. Now let's move to review 2018 expectations and discuss the current economic and competitive environment in our markets. The local economies across our eight-state footprint continue to perform well, and we are optimistic about the near-term outlook. Unemployment rates are near historical lows, and we are witnessing labor shortages throughout our markets. In fact, the Midwest has the highest job opening rate in the nation so far this year. Among the four major regions of the country, the Midwest is the most dynamic for potential job growth, according to the U.S. Bureau of Labor Statistics' August JOLTS survey. The employment and growth prospects in the Midwest continue to make it an attractive economic region. 6 of our 8 footprint states experienced net population in-migration in 2017. In fact, 2017 was the first year Ohio had net immigration in a quarter of a century. As shown on Slide 70 in the appendix, the Philadelphia Fed's state leading economic indicator indices for our footprint point toward a favorable economic operating environment for the next 6 months. While the impact of the ongoing tariff issues, some positive and some negative, can be seen in specific industries, we've not yet seen a material impact to our customer base overall. The uncertainty regarding NAFTA was far more impactful to our customer base and our footprint. And we're encouraged by the new USMCA trade agreement as we believe it will be beneficial to our footprint, especially within the auto industry. Customer optimism has materialized throughout 2018 as we've seen our customers invest in capital expenditures and grow their businesses. Our commercial pipeline is up year-over-year. Consumers are doing well, with consumer loan growth remaining steady. It's a good time to be doing business in the Midwest, and we remain bullish on our local economies. Now moving to our updated 2018 expectations. We expect the full year average loan growth rate growth in the range of 5.5% to 6.5%, consistent with our year-over-year growth for the first 9 months. But the fourth quarter provides a challenging comparison given the significant amount of growth at the end of last year following the federal tax reform. Loan growth rates in the third quarter and so far in October have been encouraging. Full year average deposit growth is expected to be 3.5% to 4.5%, while full year growth in average core deposits is expected to be 4.5% to 5.5%. We remain focused on acquiring core checking accounts and deepening core deposit relationships. We expect full year revenue growth of 4% to 4.5%, and during the fourth quarter, we expect to realize approximately $20 million of security losses related to a portfolio restructuring. This will allow us to optimize the securities portfolio, improving the revenue outlook for 2019. The modest reduction in our 2018 revenue outlook is related to the cost of the portfolio restructuring as all remaining aspects of our prior revenue expectations remain intact. We continue to project the GAAP NIM for the full year will expand by 2 to 4 basis points compared to 2017. We expect NIM expansion in the fourth quarter on a GAAP and core basis will be in the range of 4 to 6 basis points. We will deliver positive operating leverage for the sixth consecutive year. We expect a 2% to 2.5% decrease in noninterest expense on a GAAP basis. Full year expenses are now projected to be slightly higher than previous guidance as we expect to incur approximately $40 million of expense in the fourth quarter related to the recently announced consolidation of 70 branches and some additional corporate facilities. The run rate cost savings associated with these consolidations will be entirely redeployed into targeted investments in both people and technology, and specifically, digital and mobile technology. We anticipate the net charge-offs will remain below our average through-the-cycle target range of 35 to 55 basis points. Our expectations for the full year 2018 effective tax rate is in the 14.5% to 15% range. Before I turn it over to Mac, I'd like to give you a quick update on the strategic planning process we began earlier in the year. We're excited about the progress we've made and the meaningful discussions conducted by our Board of Directors, the executive leadership team, and many dedicated colleagues at Huntington. In September, we had a 3-day board offsite to further refine and finalize the strategic plan. And last week, the board had another robust set of conversations as we are nearing completion of the plan. As we previously mentioned, we anticipate new long-term financial goals will be an important outcome of the new strategic plan, and we look forward to sharing those with you later this year. So Mac will now provide an overview of our financial performance. Mac?

Thank you, Steve, and good morning, everyone. Slide 6 provides the highlights of the third quarter results. As Steve mentioned, we had a strong third quarter. We recorded earnings per common share of $0.33, up 43% over the year-ago quarter. Adjusting for $31 million of acquisition-related significant items in the third quarter of 2017, core EPS was up $0.08 or 32% year-over-year. We are very pleased with the momentum we are seeing across all of our businesses as evidenced by our 5% year-over-year revenue growth and our 55.3% efficiency ratio, down 520 basis points from the year-ago quarter. Return on assets was 1.4%, return on common equity was 14%, and return on tangible common equity was 19%. We believe all 3 of these metrics distinguish Huntington among our regional bank peers. Tangible book value per share increased 3% year-over-year to $7.06, even with a considerable share repurchase in the quarter. Lastly, the tax rate was 14.1% during the third quarter, which was impacted by a $3 million benefit from stock-based compensation and a $3 million benefit related to the Tax Cuts and Jobs Act. Turning now to Slide 7. Average earning assets grew 4% from the third quarter of 2017. This increase was driven by a 7% growth in average loans and leases, including broad-based strength in consumer lending. Average residential mortgage loans increased 22% year-over-year, reflecting an increase in loan officers as well as further expansion into the Chicago market. As we typically do, we sold the agency qualified mortgage production in the quarter and retained the jumbo mortgages and specialty mortgage products. Average C&I loans increased 4% year-over-year with growth centered in middle market, asset finance, energy, and corporate banking. On an inter-period basis, C&I balances increased 5% linked quarter annualized as we saw a healthy pickup in originations in the final month of the quarter. Average auto loans increased 6% year-over-year as a result of consistent and disciplined loan production. Originations totaled $1.4 billion for the third quarter of 2018, down 15% year-over-year. This was deliberate, as we've been consistently increasing auto loan pricing, which slowed originations while optimizing revenue. The average new money yield on our auto originations was 4.62% in the quarter, up 40 basis points from 4.22% in the second quarter and up 100 basis points from 3.62% in the year-ago quarter. Average RV and marine loans increased 31% year-over-year, reflecting the success of the well-managed expansion of the business into 17 new states over the past two years. Linked quarter growth was 52% annualized, reflecting the normal seasonality during the summer months. Average commercial real estate loans were down 1% on a year-over-year basis and down 3% on a linked-quarter basis. This reflects anticipated paydowns as well as our strategic tightening of commercial real estate lending, specifically in multifamily, retail, and construction in order to remain consistent with our aggregate moderate- to low-risk appetite and to ensure appropriate returns on capital. Finally, securities were down 3% year-over-year as we continued to let the portfolio runoff and remix the cash flows into higher-yielding loan products. Turning now to Slide 8. Average total deposits grew 5% year-over-year, including a 6% increase in average core deposits. Core certificates of deposit were up 141% from the year-ago quarter, reflecting the initiatives during the past 3 quarters to grow fixed-rate term consumer deposits in light of the rising interest rate environment. Average interest-bearing DDA deposits increased 9% year-over-year, while average noninterest-bearing DDA deposits decreased 7%. This was almost entirely driven by our commercial customers as they continue to shift from noninterest-bearing to interest-bearing products, primarily interest checking, hybrid checking, and money market. However, as shown on Slide 37 in the appendix, our core consumer noninterest-bearing deposits were actually up 5% year-over-year as we continue to grow households and deepen relationships. Average money market deposits were up 6% year-over-year, driven by solid growth in consumer balances and preferences of commercial customers shifting towards higher yielding products. On a linked-quarter basis, total deposits grew $2.2 billion or 3%, reducing our average short-term borrowings in the quarter by 44%. We remain focused on core funding the balance sheet in the current rising interest rate environment. Moving now to Slide 9. Our net interest income increased $39 million or 5% versus the year-ago quarter. Driving this growth was the 4% increase in earning assets and rising yields in both our consumer and commercial loan portfolios. Our GAAP net interest margin was 3.32% for the third quarter, up 3 basis points from the year-ago quarter and up 3 basis points linked quarter. The third quarter was impacted by a slower rise in short-term rates as average 1-month LIBOR increased 14 basis points during the quarter versus 63 basis points in the first half of the year. We do not anticipate the same headwind in the fourth quarter. Moving to Slide 10. Our core net interest margin for the third quarter was 3.25%, up 7 basis points from the year-ago quarter and up 3 basis points linked quarter. Purchase accounting accretion contributed 7 basis points to the net interest margin compared to 12 basis points in the year-ago quarter. Slide 33 in the appendix provides information regarding the scheduled impact of FirstMerit purchase accounting accretion for 2018 and 2019. On the earning asset slide, our commercial loan yields increased 59 basis points year-over-year, while consumer loan yields increased 22 basis points. Our deposit costs remained well contained with the rate paid on total interest-bearing deposits of 73 basis points for the quarter up 38 basis points year-over-year. Consumer core deposits costs were up 26 basis points year-over-year, and commercial core deposits costs were up 27 basis points. Moving now to Slide 11. Our cycle-to-date deposit beta remains low at 28% through the third quarter of 2018, which is still well below our expectations. While our CD funding strategy negatively impacted our deposit beta in the second and third quarters, our core deposit growth continues to outpace peers, and we'll be better positioned for continued interest rate increases in the future. As we told you last quarter, overall deposit pricing remains rational in our markets. Slide 12 provides detail on our noninterest income for the quarter and comparison to the year-ago quarter. Our noninterest income increased $12 million or 4% from the third quarter of 2017. We are seeing momentum in our fee businesses, driven by our ongoing household and relationship acquisition and the execution of our strategies, including our Optimal Customer Relationship strategy. Slide 13 highlights the key drivers in our 4% year-over-year reduction in reported noninterest expense. Comparisons to the third quarter of 2017 are impacted by $31 million of acquisition-related significant items in the year-ago quarter. We remain focused on expense control, while also investing in our key businesses. Our efficiency ratio has trended down, reflecting the successful cost-saving initiatives from the FirstMerit acquisition. Slide 14 illustrates the continued strength of our capital ratios. Tangible common equity ended the quarter at 7.25%, down 17 basis points year-over-year. Common equity Tier 1 ended the quarter at 9.89%, down 5 basis points year-over-year and down 64 basis points linked quarter. CET1 is now back within our operating guideline of 9% to 10%. We expect to stay near the upper end of this range given the length of the current recovery and the position we believe we are in the economic cycle. Slide 15 illustrates our previously articulated capital priorities, which have been confirmed during the current strategic planning process. Our first priority is to fund organic growth of the balance sheet. Our second priority is the cash dividend. As Steve mentioned earlier, we were pleased to be able to increase our cash dividend materially this quarter. This was enabled by the significant improvement in capital generation driven over the past few years and our strong results in the DFAST and CCAR processes. Our final capital priority is everything else, which includes share repurchases and selective M&A. Our $691 million share repurchase during the third quarter included a $400 million ASR. We use the ASR to effectively offset the dilution incurred during the first quarter from our Series A preferred equity conversion as was contemplated in our CCAR submission. Excluding the one-time nature of this ASR, the total payout ratio this year would look closer to our long-term payout ratio targets versus the elevated 112% year-to-date payout ratio shown on the slide. We previously stated that we have a long-term total payout ratio target of 70% to 80% and a dividend payout ratio target of approximately 45%. We continue to view whole bank M&A as an unattractive use of capital at this time given the highly inflated seller's expectations and our view of where we are in the economic cycle. Earlier this month, we closed on a previously announced acquisition of Hutchinson, Shockey, Erley & Co, a small specialty broker-dealer with expertise in municipal underwriting. This is a small bolt-on acquisition, which is a nice addition to our government banking and capital markets businesses. Moving to Slide 16. Credit quality remained strong in the quarter. Consistent prudent credit underwriting is one of Huntington's core principles, and our financial results continue to reflect our disciplined approach to risk management and our aggregate moderate-to-low risk appetite. We booked loan loss provision expense of $49 million in the third quarter compared to net charge-offs of $29 million. The loan loss provision expense in the quarter reflected the strong loan growth and continued migration of the acquired FirstMerit portfolio into the originated portfolio. We have now booked provision expense above net charge-offs for 12 of the past 13 quarters, illustrating our high-quality earnings. Net charge-offs represented an annualized 16 basis points of average loans and leases, which remains below our average through-the-cycle target range of 35 to 55 basis points. Net charge-offs were flat from the prior quarter and down 9 basis points from the year-ago quarter. There is additional granularity on charge-offs by portfolio in the analyst package in the slides. The allowance for loan and lease losses as a percentage of loans increased 2 basis points linked quarter to 1.04%, while the allowance for credit losses as a percentage of loans also increased 2 basis points linked quarter to 1.17%. Slide 17 highlights Huntington's strong position to execute on our strategy and provide consistent through-the-cycle shareholder returns. The graph on the top left quadrant represents our continued growth in pretax preprovision net revenue as a result of focused execution of our core strategies. The strong level of capital generation positions us well to support balance sheet growth and return capital to our shareholders at an advantageous rate over the long term. The top right chart highlights the well-balanced mix of our loan and deposit portfolios. We are both a consumer and commercial bank and believe that the diversification of this balance sheet will serve us well over the cycle. Our DFAST stress test results in the bottom left highlight our disciplined enterprise risk management. And finally, the bottom right demonstrates Huntington's strong capital position. Turning now to Slide 18. This new slide highlights Huntington's continued investment in our customer experience advantage, with a focus on human-led technology-enabled delivery and solutions. We are seeing an ongoing shift towards mobile and digital usage by our customers. 62% of our households are digitally active, and we would expect that figure will continue to increase materially in the years to come. On the top right of the slide, you can see a few of the most recent mobile and digital initiatives. As you can imagine, the current strategic planning process has a significant focus on digital and mobile technology, and we will share more details once the plan is finalized. We remain focused on extending our customer experience advantage through targeted investment. As previously announced, we are consolidating 70 branches and a handful of corporate facilities in the fourth quarter. The strategic decision to consolidate these offices is the result of our continuous review of our distribution channels and our customers' perceptions, behaviors, and needs. The run rate cost savings associated with these consolidations will be entirely deployed in the targeted investments in technology, specifically digital, in order to better serve our customers. Let me now turn it back over to Mark, so we can get to your questions.

Thanks, Mac. Sherry, we'll 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.

Mac, wondering if you can just help us flush out the incremental securities loss and then the incremental charges on your previously announced restructuring charges? And maybe even more so than understanding the fourth quarter, help us understand the return on those? And how we should expect that to affect the '19 starting points for both the securities portfolio yield and also just for the cost base?

Thanks, Ken. So we're selling about $1.1 billion of investment securities in the fourth quarter, and we will replace those one-for-one. So there won't be an increase in the securities portfolio from this action. Basically, it's a shorter-duration, low-yielding securities. And the payback is pretty quick, under two years, on this transaction. We're going to get a net yield pickup of about 1.2%, which should translate into about $13 million in additional net interest income in 2019. So we do see this as good hygiene and continuing to make sure that we stay efficient with the balance sheet and think about opportunities. On the expense side, so this is basically related to the 70-branch consolidation that will take place in the fourth quarter. And there will be some corporate facilities that we will be closing, consolidating as part of that as well. And we estimate that to be approximately $40 million and it would be the typical expenses that you see in these types of activities. And when you think about the 2018 guidance and the change to the 2018 guidance for both revenue and expense, these items impacted those changes to a very large degree, entirely on the expense side and primarily on the revenue side. So shouldn't think about this really as being a change in core guidance for 2018. This is really about these actions that we're taking in the fourth quarter.

Got it. And my follow up, Mac, just on that expense point. If I follow you on that and just put in the $40 million on the expense side, it would still seem that underlying that, you're still expecting a decent increase in kind of underlying cost growth third to fourth. Can you just level set us on that versus the $651 million result you just put up, the type of underlying expense growth you're still expecting in 4Q?

Yes, Ken, so it is somewhat seasonal. We do have higher expenses in the fourth quarter. I would tell you there's not anything out of the ordinary relative to what we've seen historically in the fourth quarter, just the fact that we do have higher revenue because of seasonal actions taking place in the fourth quarter by our customers and the expenses that come along with that.

Question on lending. When you talk about your pipelines and the outlook, this mid-single-digit pace that you guys have put up, maybe even a little bit better, Steve, I'm just curious, longer term, do you see any threats to that? Or do you feel like that's a sustainable pace for the company?

Thanks, John. We are sitting with a pipeline that's largely equivalent to where we were this time last year on both the consumer and commercial side. As we look forward, we're bullish on the economy and our footprint. There is certainly a line of macro volatility right now, so that could impact things, but we're optimistic. And getting the NAFTA risk off the table is a big step forward for us in this region. Underlying commercial demand seems to, if anything, be triggered by a constraint on employment, and we have many, many customers throughout all of our regions now suggesting that they could do more if they had more labor. So there's clearly a labor supply impact going on. And then additionally, we've been outplayed a bit and have had a lot of commentary about pipelines now going into 2020. So it would appear to be consistent. And to be at this time of the year with backlogs into 2020 is a bit unusual. So very positive to the year.

Okay, good. And then, not necessarily an M&A question, but Mac's comment about having less interest in M&A because of where we are on the economic cycle. I'm just curious, where you think we are in the economic cycle? And are you, or maybe Dan, could comment, seeing any kind of stress or irrational behavior?

Yes, I believe we are observing some irrational behavior. While there are individuals being quite aggressive in their choices, this is not a new trend for us. Overall, the situation remains largely unchanged. We are several years into the cycle and have mentioned being late in the cycle for the third year now. We continue to assess our portfolio and evaluate new transactions with the understanding that we must always be ready for a downturn, whether it occurs in 18 months or three years. Our strategy and stance have not shifted.

I was hoping you could go over the margin expectations for the fourth quarter again. After the second quarter, it seemed like you were anticipating an improvement of about 3 to 6 basis points in core margins for each quarter in the second half. I understand that LIBOR may have affected your performance this quarter, potentially leading to a slower start at the lower end of that range. Could you clarify what your expectations are for core and reported margins in the fourth quarter, along with the key factors influencing those expectations?

Yes, Scott. We expect to see an expansion in the fourth quarter net interest margin, both for core and reported, by 4 to 6 basis points. This is partly due to the fact that we will not experience the same effects from LIBOR in the fourth quarter as we did in the third quarter. Additionally, we remain disciplined with our asset pricing to ensure we're compensated appropriately for the risks taken. We are also anticipating a potentially lower deposit beta in the fourth quarter. With all these factors combined, alongside the recent rate increase, we are confident that achieving a 4 to 6 basis point expansion for both core and reported metrics in the fourth quarter is very achievable.

Okay, perfect. I want to make sure I understand the expense guide. We're starting with the 2017 reported expenses and taking off the 2% to 2.5% from that. The guidance also includes $40 million in unusual expenses. Are we effectively in the middle of that range, suggesting a fourth quarter expense of about $670 million after accounting for the year-to-date expenses already incurred?

That probably sounds a little bit high. Again, the fourth quarter is seasonally higher from an expense perspective. But that would be the math that you'd want to go through, Scott, in order to be able to do that.

This is Sam Ross on for John Pancari. Just a quick question on the auto securitizations. I'm just wondering if there's any updated plans for the near term in that regard?

At this point in time, we don't have plans for auto securitization. The increased pricing that we've been able to achieve on the auto book has helped us reduce volume and maintain revenue at our expected levels, even with a higher origination number and lower rates. Therefore, we feel confident in how we're managing the exposure on the balance sheet and don't anticipate an auto securitization in the future.

That's helpful. And then, looking at your tax rate, it seems like the tax rate is coming in lower than you had previously expected. And I'm just wondering if this is a function of some of the moving parts or one-time items that you have seen? Or is this like the normalized run rate we should expect going forward?

Yes, what you need to adjust for in the third quarter is $3 million of benefit related to stock-based comp and $3 million related to the true-up of tax reform in 2017. If you adjust for that $6 million, you'll be at 15.5% for the third quarter, and that is the low end of a range that we have been giving you earlier for first, second quarter. So we're still in that 15.5% to 16.5% range, it's just these 2 unusual items this quarter that took us down.

On the deposit side, if we look at the sharp growth again in time deposits, where would you guys ultimately like to take those balances to?

Well, if you look back over time, we have significantly reduced CD balances and time deposits over the years. This is actually the first year we have begun to grow that portfolio again. We don't have a specific target for it, and the growth has slowed down. We're not currently the price leader in the market for CD products in our region, but we are still seeing decent monthly growth. We thought it was a wise decision to promote this in the first quarter since we anticipated loan growth for the year and wanted to maintain core funding without affecting backlogs in money market or savings accounts. We launched the promotion around the middle of the first quarter and have raised over $3 billion since then, which we feel good about regarding the terms and rates we provided. However, it won't become a significant part of our core deposit funding going forward; it's mainly a response to the current rate environment and ongoing market conditions.

Got you. Okay. And then, just a follow-up. If we look at deposit costs up 14 bps quarter-over-quarter and the time deposits were a part of that. How do you think that continues to trend going forward? Is 14 bps a reasonable range? Or does some pressure come off as maybe you slow time deposit growth?

Yes, I think some pressure will come off of that, Steve. And I think we are seeing time deposit growth slow down. And we're also being cautious with deposit pricing in the fourth quarter. We're thinking of a big growth at the rates that we're paying today. So I do expect the deposit beta in the fourth quarter to be lower than the year-to-date deposit beta. So that's where we stand.

Concerning your lowering the deposit beta in the fourth quarter. I mean, do you expect the deposit beta to run a little bit lower going to the first half of '19? Or do you think that's going to reaccelerate just given your guidance for 50% cumulative deposit beta?

Yes, so we still feel comfortable with that 50% cumulative deposit beta. We're at about 50% year-to-date in 2018. And I would tell you that the fourth quarter is probably somewhat situational in terms of where we are and the deposit flows that we see. I would still think about that 50% longer-term deposit beta as being the right way to model going forward.

Okay. And then can you talk about the deposit flows that you're seeing on the consumer side versus the commercial side and the betas you're seeing on commercial versus consumer, especially around noninterest-bearing deposits?

We haven't shared specific betas for consumer versus commercial, but we're pleased to see a strong 5% year-over-year growth in core checking account balances. Additionally, money market growth has been solid. Overall, we're very confident in the consumer segment and the growth we're experiencing. The commercial side remains competitive; we assess every rate increase request based on the strength of the relationship and the future opportunity before determining deposit payouts. Our process for managing this aspect of the balance sheet is effective and serving us well.

Just following up on some of these deposit questions. Borrowings and noncore deposits have been clearly headed the other way. Is the goal to effectively run those out?

Well, we do like to minimize both those balances as best we can, and we think about that as being a bit of a feeling around what we might be willing to pay on commercial deposits and thinking about how we manage that side of the balance sheet. We certainly don't have a plan to minimize other types of funding, but to the extent we can raise good core deposits at the right cost, we're going to continue to do that. And we've been actually very successful doing that in 2018. So feel good about where we're positioned and the deposit flows that we're seeing. And wouldn't be surprised if we stay around these levels in terms of overnight funding and those other types of funding sources.

And then just stepping back, I mean, the more common pattern across the industry appears to be acceleration in betas, a more violent mix shift into higher cost deposits. And you called that out as occurring more rapidly on the commercial side. But overall your deltas and deposit costs are actually down sequentially. Do you think that's more a factor of your own strategy and tactics or a lack of competitive response or a bit of both?

I would say a bit of both. I think the competition in the region has remained very rational. I don't think we see any one, really at any size of organization, doing something that looks unreasonable. So that certainly helps. And I do think that we have a bit of a unique customer base because of the Fair Play strategy and what we've done from a satisfaction and loyalty perspective. We've long-tenured customers on the consumer side, in particular. And I do believe that's certainly going to help us from a pricing and retention perspective going forward. And I think those things really contribute to the fact that we can manage our costs perhaps a little bit better than the average regional bank.

This is Brandon on behalf of Erika. So two quick questions. And the first question, sorry to be the dead horse, I just want to understand the expenses. So if we plug in the $40 million, are you basically saying that the quarter-over-quarter growth in expenses on a core basis should be around 3%. And then if we back out that $40 million, it kind of gets to the negative 2.5% for the year?

So think about it on a full year basis. That's the guidance that we've given. And just make sure you adjust for the $40 million in doing the math.

Understood. And then, separately, I know you guys have previously said that for every 25 basis point increase in rates, you guys should see about $25 million in annual net interest income growth. Is that still intact? Or do you guys see some pressure on the loan side that is compressing spreads?

Yes, I would say that has reduced a little bit. It's probably around $20 million now.

Just the growth in the RV and marine finance portfolio up $800 million year-over-year. Could you just talk about how much of that is out of footprint? And what you're doing internally to manage the risk within that portfolio?

Yes, Terry, we are now operating in 34 states, which means our growth is more dispersed. Initially, most of our growth was concentrated in our primary markets, but now we have a greater diversification. A key aspect to note is that the customer profile remains the same across all our markets, with an average FICO score of around 800, indicating a very low chance of default. We individually assess each business opportunity considering various factors, not just relying on automatic decisions. The typical size of the boats and RVs is modest, and our customers are generally repeat buyers of these assets. This results in consistent origination metrics, regardless of location, and we appreciate the benefits of the geographic diversification.

Could you discuss reserve building going forward in relation to loans? It has been increasing by 1 or 2 basis points each quarter. Given your earlier remarks about the credit cycle, do you anticipate that trend to accelerate from here?

We've said that we expect the reserve to build very gradually over time. I think we've been consistent on that going back many quarters. And I think that obviously the components of that bill have been charge-offs, the growths in the portfolio, which has been fairly strong, the marked amortization, and then we've got portfolio specifics, market dynamics, things like that built in. So I would see a fairly consistent view with a slow build going forward.

So could you walk us through the thinking as far as how you decide which branches to consolidate?

Kevin, there's a lot of work that goes into this. It's coordinated amongst multiple teams, but it's keyed off of usage patterns within the branches. And so we have #1 branch share in Ohio and Michigan. So we have a density in many of our markets to work from. And those utilization patterns are looked at with a view of not just physical but also what's going on, on a digital and ATM usage. So we have a fair amount of our distribution that's fairly close to other branches, and those patterns help us or guide us in terms of where we see opportunities.

Earlier in your prepared remarks, you mentioned the robustness and your positive outlook on your markets, but I'm interested in how your agriculture-dependent markets are performing.

Well, we're not by any stretch a meaningful ag lender. And while the states of Ohio, Illinois, to some extent Michigan are ag, they're very diversified ag states. They will have some impact from the tariffs. But there is also a fair amount of relief coming to that sector. And the ag sector has had a very robust run for a number of years. Typically, these are individuals or companies that are very, very low leveraged, and so they don't see a significant impact on any of the states we're in, in terms of ag in the near term at this point.

I just have a quick question. Could you provide some color around your fee income expectations for the fourth quarter? I mean, given all your continuous tech spend, I would like to see some very exciting things happening there.

So I think you're going to see growth in the areas that we've experienced the growth year-to-date. I think capital markets will continue to have a good year and a good fourth quarter. I think, going to continue to see growth in card and payment processing revenue, with the growth in households that we see on the consumer side of the bank, good growth in deposit service charges as well on both consumer and commercial when you think about treasury management and some of the product opportunities we have there. I think weakness will be in mortgage banking as we've seen across the industry and throughout the year. The gain on sale has been lighter this year, and that has impacted that line for the entire year. So in general, I think we're in good shape as we think about some of the lines that are performing well for us. Trust and investment management is another, just with the way the market has been performing so far this year. So I would look at the lines where you've seen growth already this year and think about those lines continuing into the fourth quarter.

Again, thank you all for joining us. Through the first 3 quarters of 2018, we've consistently produced quality earnings and look to continue the momentum into the end of the year. We're building long-term shareholder value with our top quartile financial performance and strong risk management. We have a track record of disciplined execution and delivering on our goals and commitments as you've seen. So we look forward to providing new long-term financial metrics later this quarter. And then finally, as always, we'd like to include a reminder that there's a high level of alignment between the board, management, our colleagues, and our shareholders. The board and our colleagues are collectively the seventh largest shareholder of Huntington, and all of us are appropriately focused on driving sustained, long-term performance. So thanks for your interest in Huntington. We appreciate you joining us today. Have a great day.