Huntington Bancshares Inc (HBAN) 2010 Q4 法說會逐字稿

Good morning.

My name is Simon and I will be your conference operator today.

At this time, I would like to welcome everyone to the Huntington Bancshares fourth-quarter earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer session.

(Operator instructions).

Mr.

Jay Gould, you may begin your conference.

Thank you, Simon, and welcome, everyone.

I am Jay Gould, Director of Investor Relations for Huntington.

Copies of the slides we will be reviewing can be found on our website, Huntington.com, and this call is being recorded and will be available as a rebroadcast starting about an hour from the close.

Please call the investor relations Department at 614-480-5676 for more information on how to access these recordings for playback, or should you have a difficulty getting a copy of the slides.

Slides 2 through 4 note several aspects of the basis of today's presentation, and I encourage you to read these, but let me point out one key disclosure.

This presentation contains both GAAP and non-GAAP financial measures where we believe it helpful to understanding Huntington's results of operations or financial position.

Where non-GAAP financial measures are used, the comparable GAAP financial measure as well as the reconciliation to the comparable GAAP financial measure can be found in the slide presentation in its appendix, in the press release, in the quarterly financial review supplement to today's earnings release or in the related 8-K filed earlier today, all of which you can find on our website.

Turning to slide 5, today's discussion including the Q&A period may contain forward-looking statements.

Such statements are based on information and assumptions available at this time and are subject to changes in 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 Form 10-K, 10-Q and 8-K filings.

Now, turning to today's presentation, as noted on slide six, participating today are Steve Steinour, Chairman, President and Chief Executive Officer; Don Kimble, Senior Executive Vice President and Chief Financial Officer; and Dan Neumeyer, Senior Executive Vice President and Chief Credit Officer.

Also present is Todd Beekman, Senior Vice President and Assistant Director of Investor Relations.

Let's get started by turning to slide seven.

Steve?

Welcome, everyone.

I'll begin with a review of the fourth-quarter performance highlight, and after my overview Don will follow with his usual overview of our financial performance.

Dan will provide an update on credit, and I will then return to discussion of our 2011 expectations and key messages to our investors.

Before getting into details, I want to make a couple of comments and provide some overall perspective.

Fourth-quarter results capped a good year, a year full of progress in repositioning the Company for better long-term growth and improved shareholder returns as we enter 2011.

The repositioning has come in two stages, first in 2009, a year we aggressively addressed our credit issues, both what was in the portfolio as well as strengthening the credit culture and overall risk management of the Bank.

We said at the end of 2009 that we believed our credit problems had peaked, and 2010 results demonstrated that was true.

Today, our credit quality is returning to normal faster than we envision even a year ago with the time frame shortening significantly.

Second was 2010.

This was a year we addressed to put behind our capital issues, particularly our lower relative level of common equity.

Our capital today is stronger than it has ever been and strong on a relative basis as well.

Throughout these two years, we've also developed and implemented a strategic plan designed to grow overall revenues.

Our fourth-quarter results reflected continued revenue growth over the last eight consecutive quarters.

We've repositioned the Bank.

Huntington's future is bright, and I believe you will see that coming through in our fourth-quarter performance.

So let's begin some more detailed discussion, starting on page 8.

We reported net income of $122.9 million, or $0.05 a share.

On a dollar basis, this represented a 22% improvement from the third quarter.

As Don will detail, the current quarter's EPS were negatively impacted by one-time $0.07 per share deemed dividend as a result of repayment of TARP capital in December.

The performance drivers were lower provision expense and higher net interest income, trends we believe will continue.

Our pre-tax pre-provision income was $260 million, down just over $5 million, or 2% from the third quarter.

We noted at the end of the third quarter that we expected pre-tax pre-provision income to be flattish with the third quarter's $265 million, so the fourth quarter's performance in this respect was less than we expected.

This reflected more pressure than expected on net interest margin and softness in non-interest income on the revenue side, and a bit more growth in non-interest expense.

We expect the level of our pretax pre-provision income will remain around these levels going forward through 2011.

Nevertheless, we anticipate continued growth in net income throughout 2011, reflecting the continued benefit of lower credit costs.

Now, I will comment on this in more detail in my closing remarks.

Fully taxable equivalent revenue increased $3.5 million, or 1%.

This reflected a $6.4 million, or 2% increase in fully taxable equivalent net interest income.

Average total loans grew at a 6% annualized rate with growth in almost every category -- auto loans, C&I loans, home equity and residential mortgages.

Commercial real estate loans continued their planned decline.

But again this quarter and on an absolute basis, core deposit growth exceeded loan growth.

This contributed to more growth than originally expected in lower-yield investment securities.

And this was the main contributing factor in the 8-basis-point point decline in our net interest margin.

We are and will stay on the short end of the curve, which reduces spread.

Non-interest income declined 1% due to lower deposit service charge income, and non-interest expense grew $7.3 million, or 2%, reflecting a number of factors, including higher mortgage repurchase, personnel, outside data processing and other services expenses, as well as a higher fraud loss we experienced in the quarter.

Credit quality again showed significant improvement with a 21% decrease in non-accrual loans with both new non-accrual and new criticized loans declining.

Net charge-offs dropped 7%.

Our provision for credit losses declined $32.3 million (sic -- see press release).

Now turning to slide nine, our reserves continued to strengthen.

With our period-end allowance for credit losses as a percentage of loans and leases declining to 3.39% from 3.6% at the end of the third quarter, but importantly our allowance for credit losses as a percentage of non-accrual loans increased significantly to 166% from 140%.

Capital was a big fourth-quarter story.

We raised all of our $1.4 billion in TARP capital -- we repaid all of our $1.4 billion in TARP capital after highly successful issuances of common equity and subordinated debt.

Our period-end tangible common equity ratio was 7.56%, up from 6.2%, and our tier 1 common risk-based capital ratio increased to 9.25% from 7.39%.

Our regulatory tier 1 and total risk-based capital ratios ended the quarter at 11.5% and 14.39%, respectively.

These were down from the end of the third quarter due to the TARP capital repayment, but remain $2.4 billion and $1.9 billion above well-capitalized regulatory thresholds.

Yesterday, we announced the repurchase of our TARP-related warrant to purchase 23.6 million shares of common stock for just over $49 million.

This removes any potential dilutive overhang and closes out our TARP-related relationship with the US Treasury.

Lastly, our liquidity position remained strong.

We saw 10% annualized core deposit growth with a stable period-end loan-to-deposit ratio of 91%.

Now, on slide 10 we continue to move forward with our positioning for growth with implementing strategic initiatives designed to grow future revenue.

Specifically, in the quarter, we opened four Giant Eagle in-store branches, and our equipment finance group launched three new verticals -- business aircraft, rail industry finance and lender finance.

We were also very pleased to have Steve Elliott join our board of directors, announced at the end of the year -- at the start of this year, I should say.

And a number of you will know, given his 23-year career as a senior banking executive at BNY Mellon.

He further strengthens our financial services industry expertise and experience on the board and is just a great addition from a practical knowledge and industry strategic perspective.

So with that, let me turn the presentation over to Don to review the details.

Don?

Thanks, Steve.

Slide 11 provides a summary of our quarterly earnings trends.

Many of the performance metrics will be discussed later in the presentation, so let's move on.

As noted on slide 12, our net income for the fourth quarter was $122.9 million, or $0.05 per share.

One significant item impacted the quarter's results.

We recognized a $56.3 million or $0.07 or share deemed dividend from the repayment of our TARP preferred stock.

This resulted in a one-time reduction to net income available per common shares and to our capital.

Slide 13 is a summary income statement that shows that the $27.3 million increase in pre-tax income reflected the benefits of a $32.2 million decline in provision expense and a $5.3 million increase in net interest income, which were partially offset by a $7.3 million increase in expense and $2.9 million decrease in non-interest income.

I'll detail these changes in subsequent slides.

Turning to slide 14, we show the trends in our revenues and pre-tax pre-provision on the left-hand side of this slide.

Revenues have continued to grow throughout the last eight quarters.

Revenues for the fourth quarter were up 10% over the fourth quarter of last year.

Our pre-tax pre-provision earnings were up 7% from last year despite the 2% decline from the last quarter.

This decline was caused by several factors, including a drop in service charge revenues of $10 million.

Highlighted in yellow, the impact of lower service charge income (multiple speakers) on total revenues.

You can see total service charge income has declined from $77 million in the year-ago quarter to $56 million this quarter.

This decline reflects the impact of Reg E, changes in consumer behavior and our Fair Play banking initiatives.

For 2011 we expect pre-tax pre-provision levels to remain relatively stable, considering the impact of regulatory changes, our Fair Play banking philosophy and lower expected mortgage banking revenues.

These challenges will be offset by continued net interest income growth and additional revenues from cross-sale activities.

Slide 15 depicts the trends of our net interest income and margin.

During the fourth quarter, our fully tax equivalent net interest income increased by $6.4 million, reflecting an 8-basis-point decline in our net interest margin to 3.37% and a $1.8 billion increase to our total average earning asset base.

The margin change reflected several impacts.

First was a 5-basis-point favorable impact of our deposit mix and pricing changes.

Mix shift from time deposits to more transaction-based core deposits both reduced our cost, but also resulted in a much more stable funding base for us as well.

Offsetting this positive impact was the asset mix change, with the deposit growth continuing to be reinvested in lower-yielding, shorter-duration securities.

Also contributing to this decline was the sale of approximately $320 million of our higher-risk, private-label and Alt-A mortgage portfolios over the last two quarters.

These securities had yields in excess of 6%, and the reinvestment yield was about 2%.

These sales did, however, reduce the overall risk associated with the portfolio.

These combined changes cost about 7 basis points to the net interest margin.

Another item impacting the quarter included the lower interest income of our interest rate derivatives due to the accretion of previous gains from termination of swaps.

This reduction in accretion will continue for the next couple of quarters.

Also, the impact of this $6 million reduction in the fourth quarter is reflected as lower yields in our consumer loan portfolio.

To manage the impact of this margin compression, we've begun more aggressive migration of promotional money market rates to current market levels.

This, combined with growth in average loan balances that are expected to be more comparable to the growth in average core deposit balances should support the net interest margin prospectively.

Continuing on to slide 16, we show the change in deposit mix over the last five quarters.

This shift from 36% of deposits in time and non-core to 29% has improved the margin by about 20 basis points.

Also of note, starting in the third quarter of 2011, we should see the start of another round of higher-rate time deposits beginning to roll off again with $1.8 billion maturing with an average rate of 2.71%.

Turning to slide 17, we showed 3% growth in average core deposits.

This was driven by strong growth in money market accounts and non-interest-bearing demand deposits.

Slide 18 shows trends in our loan and lease portfolio.

Total commercial loans were up $0.1 billion, or 1%.

The increase reflected anticipated growth in commercial and industrial loans, offset by the decline in Commercial Real Estate balances.

The $0.4 billion increase in C&I loans affected improving customer acquisition resulting from some of the early benefits of our strategic initiatives, including growth in our dealer floor plan balances as well as equipment finance areas.

Total consumer loans were up $0.5 billion, or 3% from the prior quarter.

The $0.4 billion increase in average automobile loans and leases reflected continued strong originations of about $800 million this past quarter.

These originations continue to reflect very high credit quality and reasonable returns.

Slide 19 shows the trends in our non-interest income categories.

Our non-interest income decreased by $2.9 million from the prior quarter.

This was almost entirely due to the $10.1 million decline in deposit service charges, reflecting the impact of the adoption of the changes to Reg E and the impact of our Fair Play banking philosophy.

Mortgage banking revenues increased by $1.1 million, reflecting a 35% increase in origination income on $1.8 billion of originations.

This increase was offset by a $9.6 million decline to net MSR hedging income.

Slide 20 provides an update of our Fair Play banking philosophy.

Over the second half of 2010, the reduction in service charge income related to our 24-hour grace initiative was consistent with our expectations.

Importantly, last year, checking account households grew by 6.5%, which was 1% more than expected.

However, overall service charge income over the second half of the year was slightly lower than our 2010 midyear expectations as customers continued to better manage their account balances.

Opt-in rates have continued to improve and are higher than initial estimates.

The Federal Reserve surprised us with their initial comments on interchange income from the Durbin Amendment.

We had estimated the impact would be about a 60% reduction to our annual debit card interchange income, or about $54 million.

With a $0.07 to $0.12 transaction cap, this would be a 75% to 85% reduction.

We would expect these changes to begin in August of this year.

The next slide is a summary of our expense trends.

Total expenses were up $7.3 million from the prior quarter.

This reflected a $3.9 million increase in personnel costs.

The increase reflected a number of factors, including higher salaries due to a 1% increase in staffing and higher sales commissions.

Other expenses were up $7.8 million from the previous quarter.

Contributing to this increase was a $4.1 million increase to costs associated with our repurchase obligations.

Also during the quarter, we experienced an increase of $2.4 million in operating losses related to fraud.

During the fourth quarter, we had several significant items impacting our capital position.

On the positive side, we completed our issuance of $920 million of common equity, adding 168 basis points to our TCE ratio.

Also, net income, less both common and preferred dividends, added another 16 basis points.

Partially offsetting these additions was a 32-basis-point reduction due to the impact of changes in interest rates on the market value of our investment securities, our derivatives and the annual adjustment to our net pension obligation.

The impact of the deemed dividend was also an 11-basis-point hit and a 5-basis-point reduction, reflecting the growth in assets and other changes.

Slide 24 is a summary of our capital trends.

The current quarter's significant items impacted all these ratios.

The resulting TCE ratio of 7.56% and the tier 1 common ratio of 9.25% position us quite well, even after considering the impact of Basel III.

The current-quarter regulatory capital ratios also reflect the impact of an increase to the total disallowed deferred tax asset from $113 million at December 30 to $161 million at December 31.

The deferred tax asset disallowance for regulatory capital purposes reduced the ratios by about 37 basis points.

We still expect that the impact from disallowance to decline throughout the year with no DTA disallowance at the end of 2011.

Let me turn the presentation over to Dan Neumeyer to review the credit trends.

Dan?

Thanks, Don.

Slide 25 provides an overview of our credit quality trends.

Credit trends continue on a positive path in virtually every category.

Non-performing loans fell to 2.04% at the end of the fourth quarter, down from 2.62% one quarter earlier.

Similarly, non-performing assets were reduced to 2.21% from 2.94% in September.

The level of criticized assets also saw a meaningful reduction in the quarter, falling from 11.02% to 9.15% at December 31.

The net charge-off ratio also fell from 1.98% to 1.82%.

90-day loans past due and accruing fell slightly in the quarter to 23 basis points, equaling our best result for the year.

As I'll discuss in a moment, our 30-day past due loans also declined.

This is strong performance, particularly in a quarter where seasonal patterns and consumer behavior would have suggested an uptick.

The ACL ratio fell to 3.39% at December 31 from 3.67% at September 30.

Importantly, reflecting the noticeable improvement in credit quality, the ACL coverage ratios on non-performing loans and non-performing assets showed significant strengthening, moving to 166% and 153%, respectively, up from 140% and 125%, respectively, at the previous quarter end.

The ratio of the ACL to criticized assets also improved to nearly 38% from 33%, reflecting increased coverage on our emerging problem loans.

We remain focused on further improvement in our credit quality metrics while maintaining strong underwriting standards in both the commercial and consumer lending areas.

We continue to seek reductions in our non-core commercial real estate portfolio as well and saw an 11% reduction in the portfolio in the fourth quarter.

Slide 26 is a graphical depiction of the trends in non-performing assets.

As shown on the left-and slide, non-performing loans and non-performing assets continued a meaningful downward slope and reflected fairly dramatic improvement over the last year.

The chart on the right depicts non-accrual loan inflow, which were lower in the fourth quarter than in the third, although still higher than the second quarter inflows.

Although the uneven economy does not allow us to project with complete confidence, we do believe that non-accrual inflows will continue to show decreases in future quarters.

Slide 27 outlines the nonperforming asset flows over the past year.

As mentioned, additions to NPA status were down in the fourth quarter compared to the third.

Additionally, loans returning to accruing status coupled with healthy payments and proceeds from loan sales along with charge-off resulted in a 24% reduction quarter over quarter.

In the fourth quarter, we sold nearly $40 million of residential real estate loans, which contributed to the majority of the increase in the loan sales category.

Year-over-year, NPAs declined by 59%.

Slide 28 continues our disclosure around the level of criticized commercial loans.

Criticized commercial loans saw their most significant reduction this year, falling 15% in the quarter.

Additions fell back to the level experienced in the first half of the year, while upgrades and payments remained at solid levels.

New inflow activity from commercial real estate has been fairly modest with the majority of the inflows coming from the various areas within C&I, including middle market and business banking.

Slide 29 shows a significant reduction in 30-day delinquencies, as they fell to 71 basis points from 1.08% at the end of the third quarter.

The vast majority of these loans are managed by our special assets department and receive intensive monitoring.

We continued to have no commercial loans that are 90 days past due and accruing, reflecting our aggressive stance relative to problem loans.

Slide 30 depicts the trend of our consumer portfolios, which remain positive in both the 30- and 90-day categories.

In the 30-day category, there was improvement noted in both home equity and residential mortgage with a very small uptick in auto at 4 basis points.

In the 90-day category, all three areas -- auto, home equity and residential mortgages -- showed improvement quarter over quarter.

We continue our very focused efforts to address delinquencies at an early stage, when remediation options are available.

Turning to slide 31, commercial net charge-offs fell nearly 18% and were lower in both the C&I and CRE segments.

We expect a declining trend to continue as we move through 2011.

Consumer charge-offs saw a 15% increase, due largely to charge-offs associated with the sale of $39.8 million of residential mortgages sold during the quarter that resulted in an incremental charge-off of $16.4 million.

The quarter also included a $4.4 million Franklin-related recovery.

Without these two items, overall consumer charge-offs would have declined $3 million for the quarter.

Auto and home equity net charge-offs did see small increases in the quarter, although they remained lower than the levels experienced one year ago.

We remain committed to originating high-quality auto and home equity loans and do not anticipate negative trends in charge-off levels, although home equity loans remain an area of caution as the lack of availability will result in losses in the event of default.

Reviewing slide 32, the loan loss provision for the fourth quarter was $87 million, compared to net charge-offs for the quarter of $172.3 million.

The resulting ACL-to-loan ratio now stands at 3.39%, down from 3.67% one quarter earlier.

Importantly, the coverage ratio of ACLs to NALs increased to 166% from 140%, reflecting very strong coverage due to our significantly lower level of non-accrual loans.

We are very comfortable with this level of ACL and believe it is sufficient and appropriate, given the still unstable economy.

In summary, we are very pleased with the continued credit quality improvement, which spans all areas of the organization.

Despite a still-difficult economy, we continue to see very good progress in the commercial and consumer portfolios and remain optimistic in our ability to drive further improvements over the ensuing quarters.

Let me turn the presentation back over to Steve.

So I'd like to use slide 33 to recap our current thinking regarding 2011 expectations.

Let's start with respect to the economy.

We think it will be relatively stable and potentially improving here in the Midwest.

The key driver of the net income growth for us is expected to be a lower provision for credit losses, and this reflects a continuing expectation of declines in non-performing assets, non-performing loans and net charge-offs.

Pre-tax pre-provision earnings will remain comparable to 2010 second-half performance in the $260 million to $265 million per quarter range.

The net interest margin is expected to be flat to up slightly from the fourth-quarter level of 3.37%.

There is still deposit repricing opportunities that will benefit the margin, and on an absolute basis, we expect growth in deposits will more closely match that of loans as we go forward.

So, not a lot of pressure incremental from growth in lower-yield investment securities are expected.

We anticipate modest loan growth, driven by continued strong growth in auto loans, growth in commercial and industrial loans and modest growth in home equity and residential, offset by continued declines in commercial real estate loans.

Fee income growth will be mixed with -- entering 2011 at a higher interest rate level environment.

We anticipate mortgage banking income will be under pressure, particularly in the first quarter.

While we believe that deposit service charge decline is close to bottoming out at fourth-quarter levels, there still could be some additional pressure.

Further, later in the year, we will see reductions due to lower interchange fees that are expected to be implemented in August.

So these are the headwinds on the fee side of the business.

On the other side, we do expect to see growth in fee income lines such as Treasury management, our brokerage business, insurance and trust driven by increased cross-sell results and reflecting the impact of strategic initiatives, including improved growth in households and in businesses.

Non-interest expense is expected to increase slightly from the fourth-quarter level due to continued investments to grow our business.

Taking all of these together, we anticipate continued growth in net income.

Well, slide 34, in closing, I want to remind all the investors of several important messages.

First, the balance sheet is strong.

And that covers all aspects -- liquidity, reserves and capital.

With regard to capital, our ratios are strong and will continue to strengthen as we generate more equity through growth and earnings.

We have the capacity to now consider assuming more active capital management actions, and we believe the repurchase of the TARP warrant yesterday reflects that capacity.

We are and expect to continue to see substantially improved credit quality performance.

We hear frequently, how soon will it be before charge offs and provision expense return to normal levels?

And we are continuing to attempt to answer that question.

It's clearly shortening, but we are not yet in a position where we want to make that call.

Our strategic initiatives continue to gain traction.

Every day, we are making progress in breaking away performance in a number of the units.

This is going to be an exciting year for Huntington, and we hope it will be for our investors as well.

We thank you for your interest.

So, at this point, operator, would you open for questions, please?

(Operator instructions) Dave Rochester, Credit Suisse.

Nice C&I growth this quarter.

Could you give us any additional color there on where you saw that growth?

Was that primarily middle market?

Is there a growing component that's large corporate?

And, could you quantify how much of that came from the equipment finance business?

Dave, this is Dan Neumeyer.

We really saw growth evenly spread over many of the units.

We are seeing good growth in middle market, some expansion in large corporate, although still appropriate for our size and strategic direction.

Equipment's finance is ramping up.

We have started to see increased fundings there.

I can't give you an exact dollar amount, but there definitely is -- we're starting to see the needle move there, and we'll see continued growth as we add the new verticals that Steve referenced earlier.

The ABL Group, which started up last year, is also gaining some traction, so -- and we remain very active in the SBA market.

So, really, it's very broad-based growth, encompassing all areas, all segments, as well as pretty much spread throughout the geography.

And we have a pipeline that's reasonable going into the new year, Dave, as well.

So whether that's in part a reflection of the accelerated depreciation component of the tax code that was recently passed, or more confidence in economic expansion -- perhaps it's some combination.

But, we see activity being better in 2011 that it was in 2010.

Sounds good, and just drilling down on the equipment finance, I know you've talked about that being a big opportunity for you.

Can you update us on roughly where the portfolio is today and how much you can see that grow over the next few years?

Well, we are slightly over $1 billion today in terms of outstandings, and we could see that go up by $1 billion to $2 billion over the next couple of years.

Great, and switching to the auto side real quick, could you give some color as to how much of that origination activity is coming from your new markets, and then what you ultimately see as the potential there for loan growth in the new markets in the next couple of years?

Well, we are very early in these newer markets, and so a modest amount of that growth in the quarter was reflective of new markets.

We do think they are exciting.

We're optimistic about it, and we could see originations in the combined new markets moving into the billion-dollar level over time, but that's a substantial growth from where it is currently.

Okay, and one last one, real quick -- you've got a whole lot of capital flexibility now in terms of future actions, as you said.

It sounds like you're expecting to increase the dividend later this year.

Is that a fair statement?

Well, we are not in a position to articulate any plans at this point -- nice try, Dave.

We are, as a board, having some discussions about different options, but we do not expect to do anything immediately.

All right, great, thanks guys.

Ken Zerbe, Morgan Stanley.

I know -- at the investor day that you guys had a while back, you talked a lot about building up your platform for M&A.

And I know you can't comment specifically on any deals, but maybe you could just talk about what you're seeing up in your market right now, sort of whether there's an increase in sort of what I call zombie banks versus FDIC deals.

What are you looking for?

What is it going to take for you guys, or when do you plan to start getting a little more active in thinking about M&A?

Well, Ken, I'm going to ask Don to add to this in a minute, but I'll revert to what we've been saying throughout, including on the investor day.

We have to continue to grow the core.

That is a strategic imperative, and we are very focused on that.

Having said that, we have made some investment in building out capabilities on the acquisition and integration front.

We have brought on some people beyond those which we've announced as part of expanding capability and increasing capacity to do things.

We're not feeling pressure in that regard, however, and again, the priority is grow the core.

Don, what would you like to add?

I think that's a good summary, to begin with, Stephen.

And as far as what's going on within our footprint, I would say that we have seen more interest being expressed from banks, as far as consideration for acquisitions.

I don't know I would use the phrase zombie banks, but some of the banks that are interested in having discussions have either capital and/or credit quality challenges that they are trying to address and deal with in considering all strategic options.

But we are also seeing some pickup and calls from healthy, well-capitalized, strong credit quality type of banks and institutions that may be starting the processes to consider what their strategic options might be.

So I wouldn't want to forecast this anytime soon, as far as initiating the transactions.

But I would say that the activity level has picked up from being nonexistent, say, a couple quarters ago.

Okay, that's helpful.

The other question I had was just in terms of your reserve.

Obviously, non-performers coming down dramatically, and I think we've seen really good progress over the last year.

But your reserve ratio coming down?

It's still fairly high.

It looks like your coverage is high.

How quickly would you feel comfortable bringing down your reserve ratio well below that 3% range?

Well, it's in part a function of the mix.

Now, we are bringing down -- we're reducing our commercial real estate exposure, and that has been, for the last two years, the single largest concern for us on the credit risk front.

But we still are over-concentrated.

We reduced the CRE portfolio by about $260 million, and we are running usually between $250 million-$300 million a quarter, but we are $1 billion-plus in aggregate exposure beyond that which we would prefer to be at.

And so, as we think about credit risk, to the extent we are concerned, it's more weighted towards commercial real estate than the other portfolios.

Dan, anything you want to add?

Yes.

That obviously is the single largest component of the ACL, is the commercial real estate exposure.

And as Steve mentioned, as we are going to still plan to bring that down probably by another 20%, obviously the reserve will go down just from the size of the portfolio, but also as we move out some of the problem credits and are replaced with stronger credits.

So we do see a continued downward trend.

And obviously, we still have the general reserve, which makes up about a third of the portfolio, and that's very much dependent on the economy, and we certainly are not ready to call that all clear at this point.

So it's an exercise we go through every quarter, and analyzing where we want to be.

We're going to try and be cautious and prudent with this and don't feel pressured to reduce it beyond the rate we are currently at.

And how quickly do you think you can get that 20% reduction?

Well, if the trend lines continue, it would be plus or minus a year, but we can't control that.

A lot of that is happening through refinance activity, and the CMBS market continues to open up and other things happen.

Particularly as it relates to the non-core, that should create -- that could create, even -- you can see an accelerating environment, if things go well.

All right, thank you very much.

Brian Foran, Nomura.

When I think about the pre-provision outlook, one push-back I hear a lot is it's more net interest income, it's less fees.

And the net interest income includes growth in some products like auto and like equipment leasing that historically have a tendency to be cyclical products that banks historically have gotten in and then had to pull out of.

So can you just address, as you expand into these new businesses and new geographies, how do you make sure you're getting appropriate risk-adjusted returns and make sure that today's source of growth doesn't become tomorrow's credit problem?

Well, I'll start and I'll ask Dan to add to it.

First of all, we look at our production weekly on a number of fronts, including credit quality.

So we know our FICO LTV every week for the prior week.

And these are markets that have good relative performance to other regions of the country in terms of the expansion.

And in auto, we've been in it for half a century, and we've stayed in it.

We've never been in or out.

So we have a lot of confidence on the auto front.

On the equipment finance side, in addition to Rick Remiker, we have been adding expertise both in the channel, and then we have made substantial investments in our credit and credit risk management capabilities over the last two years.

And so I'll let Dan pick up from that.

Yes, well, one, when we're looking at expansions, whether it be into new business segments or geographies, part of the analysis that goes in is, can we continue to conduct these businesses with the same risk profile?

We are not lowering our standards.

As Steve mentioned, when we look at -- we're not going to go into other geographies unless we know that we can maintain the same cutoffs and FICO scores, etc.

And, as equipment finance, for an example, there, that's an area where we are actually going up-market.

I think the quality of the type of customer we are adding today is much stronger.

We had played more in the smaller end, and so I actually think that the growth is going to be with stronger companies and that our performance will actually improve over time because of that.

So I think we are very thoughtful before we make any of these moves.

All of these ideas are vetted and we go through a process of analyzing risk/return.

So I don't think we're taking on any outsize risk or anything that we are going to have to jump into and jump out of.

And on auto specifically, as a follow-up, there some concern because one of your competitors last week cited pulling back from that business because pricing had gotten too competitive.

Can you talk about pricing?

And, if you gave this already, I missed it.

Do you have a weighted average price of new originations now?

Because I guess there's some concern that the auto yields on the balance sheet are slipping each quarter.

As far as the returns, our credit-adjusted returns have been fairly consistent over the last couple of quarters.

We did see origination volumes come down a little bit in the fourth quarter from the third quarter, but the volumes were still very strong and the declines were really more based on the activity.

We have not talked about what the go-to rate is for new originations, but typically they have been at around 2.25% to 2.5% type of credit-adjusted spread.

And so you will continue to see some declines in that yield prospectively, just because the current origination volumes are still below the current rate of roughly 5.40% that's the average yield on the portfolio.

Thank you.

Paul Miller, FBR Capital Markets.

Going back to CRE, because it's such an important topic here, what loan categories or what loan segments do you think are doing the worst, and relative, and what loan segments are doing the best?

And, can you remind us what you consider non-core in that CRE book that you would like to run off?

Sure.

The non-core are basically single loan relationships.

They also tend to include the weaker relationships, but they're basically defined as those where we do not have the full relationship, cross-selling of services and so forth.

So they are the loans that we're looking to exit unless we can develop a fuller relationship with them.

To be categorized as core, we also looked at the ability to -- you know, global debt service coverage availability, excess liquidity and so forth.

So the core customers, in addition to having a full relationship, also tend to be the stronger credits that can sustain themselves through the cycle.

And, thus far, our core portfolio has held up exceedingly well.

The biggest area of risk for us has been in retail, but we've also made our way through that portfolio.

And actually, in the last quarter we actually saw for the first time more credits being upgraded in their risk profile than being downgraded.

So, in addition to cutting the size of that portfolio, recognizing charge-offs, etc., we're also starting to see a bit of a turn there, largely because we have been working that portfolio diligently for about the last 18 months.

Many of the other areas continue to be challenged, but we also have, in all areas, reduced the level of exposure and have recognized our biggest hits.

So there's nothing out there that we are extremely concerned about, other than in the general context of, it's a still-difficult environment.

And then getting back to David Rochester's question, and I want to ask it a little bit differently, how do you view overall capital management between cap -- and between returning earnings to shareholders and M&A?

Well, at this point, we haven't articulated that point of view, and it's a discussion that is underway with our board, and we would expect to be back later this year with some guidance on that.

But we will be thoughtful in that regard and want to come forward with a sustaining view.

Anything you want to add, Don?

No; I think that's important.

We also are very focused on the fact that our dividend is at a low level, and over time that we will want to address that for our retail shareholders, especially.

But, as Steve said, we've had active dialogues with our board, as far as prioritization of the use of that capital and making sure that we are prudent in the deployment of that as well.

And the last question, because I think one of the things that has surprised me is how the deal values have recovered so quickly after everything was done with FDIC wraps, and now you are seeing some pretty rich deals going on.

Steve, can you just address that and add some color to it?

Did it surprise you also, or did you -- you just can't underestimate the willingness of guys doing -- to do a merger?

Well, you and, I'm sure, everybody else on the phone is closer to it than us.

But since you asked for a specific comment, I am surprised.

And when you take loan marks into price, I'm very surprised at this point in the cycle.

And that's why I keep coming back to our challenge and our priority is organic growth.

And with that, we would expect to have opportunities that we would find interesting from a return profile.

And I think that there will be some out there, but we're not feeling any pressure or any reason to be compelled to get in the M&A game at some of the levels we are seeing.

And, Steve, I don't know, I got cut off.

I don't know if anybody else got cut off, but I got cut off from the very beginning of you answering the question.

What did you say in the very beginning?

The rationale for why we believe growing the core is so fundamental to our priority and our focus is in part reflecting this level of pricing.

So I'm not going to comment on specific deals or other, but just, since asked, share with you, I am surprised, particularly when you take the loan marks into the overall price, I'm very surprised at some of the levels going off at this point in the cycle.

So we're not feeling pressured to pursue anything.

If we can get something that we think is an interesting return for our shareholders and will be additive to what we are trying to do strategically, then we take a hard look at it.

But it is very surprising to me how quickly it's bounced back.

Okay, thanks a lot, Steve.

Tony Davis, Stifel Nicolaus.

I just wanted to -- I hate to belabor the CRE point, Dan, but I think you've got about $2.8 billion of loans maturing or coming up for refinancing this year.

I wondered how that breaks out between core and non-core, and how much of that you have addressed at this point, and I guess maybe, say, in the last quarter or so, how many of those loans you have actually sort of put to bed?

You know, Tony, it's not that -- of that amount, it's not like these loans haven't been reviewed recently.

So when we look at what's coming up for maturity this year, many of those loans have been already reviewed and have been put on short-term extensions.

Obviously, for our non-core borrowers, we keep them on a shorter string.

And so we might do 12-month extensions just to advance them forward and see what the market will bring in a year or so.

We are not -- these loans get revisited monthly, in many cases.

So nothing looming out there where we say we have a bunch of problems to deal with.

But I would say the core loans tend to have longer maturities on them.

The non-core -- again, we're just moving those down in shorter-term extensions year to year, to see how things are going to occur over a 12-month period.

So we are not concerned about what we have maturing because we are very much aware of what's there and have plans in place to address each of them upon maturity.

Tony, the vast majority of that has already been dealt with once or more, in the context of an extension, and the strategy has always been to stay short and look to provide either the benefit of a full relationship, in a few cases, or additional incentive to refinance.

Got you.

Your earlier comment about classification sort of reaching breakeven -- looking at that now, I think that related to CRE.

Dan, I'm looking at the total portfolio.

Can you give us some color, I guess, on where we are in terms of getting to the point where rating upgrades really do begin to outnumber downgrades for everything?

Yes.

We started to see, in the middle of -- well, I guess it was in the spring, we started to see upgrades outpace downgrades.

Then, if you recall, we had the blip in the summer with a lot of the European crisis.

And after that, we saw a reversal, and so for a time we actually saw downgrades.

But now we are once again on a path of seeing upgrades.

So I think we are gaining some momentum.

And when you look at the combination of upgrades, payments, etc., we are starting to see a lot of improvement.

I think that's reflected in some of the charts we covered earlier.

Okay, thank you very much.

Erika Penala, Banc of America/Merrill Lynch.

My first question is on the pre-tax pre-provision guidance.

Does that include the option of the Durbin Amendment, as proposed?

It does include an estimate of the impact of the Durbin Amendment that we are still not sure exactly what the final proposal will be.

The range was a $0.07 and $0.12 cap, as far as per transaction, and we know that that's still being reviewed.

So our guidance for the full year does include an impact of Durbin being adopted.

But you would you be in that $0.07 to $0.12 range, or are you assuming mitigants on top of that?

I don't know that we've given specificity as far as that, but it would definitely be closer to the $0.12 range, as opposed to the $0.07 range, as far as our expectations.

Okay, and given the headwinds on the fee side and your Fair Play banking philosophy, we've heard a lot of banks sort of introduce wholesale changes to how they're charging fees on the deposit side.

Are you close to doing the same thing, or is it just an evolving process?

So we're, Erica, we are continuing to assess, and I expect we will be one of the later, if not very last, banks to articulate our position.

And I don't feel any compelling reason to take a different time line.

We have been able to grow revenue significantly over the course of the last year and a half or so, and we expect to be able to continue to grow revenue and deal with these headwinds.

So it gives us, perhaps, a bit of strength, at least relative to some of the banks in terms of how we approach this very unique moment in history of banking, at least modern history of banking.

Forgive me if I misunderstood this, but at your analyst day in the early fall it seems as if your tone was more aggressive in terms of getting ahead of the market with introducing new products.

And it sounds like you are taking the opposite tack.

Could you give us a sense of what your thought process is behind changing the timing of where you would like to be in introducing fees in your deposit product set?

Well, fees are only a feature of products.

We have product plans in our treasury management that are rolling out as scheduled.

We have other products that are coming online, and we have some deposit product changes that will be occurring later this year on a planned schedule, which is not articulating what the elements of those will be as it relates to the consumer deposit products at this point.

Okay.

I don't want to -- don't -- we are very bullish on what's going on with our treasury management products and capabilities and excited by that.

And we're just not feeling we need to play the cards yet on what we are thinking about on the consumer side.

Okay.

And my final question would be, I understand that the lack of commitment in terms of the timing to normalized credit.

But could you give us a sense in terms of how you define normalized with regards to either a normal charge-off level or what reserves would look like in a new, more stringent regulatory environment relative to your loan book?

Well, the normalized will probably start with provision, then be followed by charge-off.

There is -- I think or I hope, anyway, there will be some further guidance set of the regulators around pro-cyclical reserving sometime this year.

But we would expect -- as we've said, we would expect to continue to deliver credit quality improvement.

And we feel very adequately reserved at this point, so with continued improvement that we will create a basis for some reduction, measured reduction in the current reserves, absent other factors like extraordinary loan growth.

If the regulators are a little behind in terms of giving the industry guidance in pro-cyclicality, where would you be comfortable drawing your reserves down to relative to your loan book?

I don't think we've taken that position.

We have had internal discussions and we'll continue with that.

We do, however, believe that the historical 1% is too low, and we do not anticipate getting in or around that ZIP code.

But we haven't gone beyond that.

Okay, thanks for your time.

Ken Usdin, Jefferies.

Can you just talk a little bit about C&I competition?

That was another area where the loan yields did come in meaningfully.

Can you touch on just what you are seeing across the markets, and is it continuing to get tighter?

Before I ask Steve or Dan to talk about the competition, as far as the loan yields in commercial, they were impacted by this reduction in accretion of the swap income that we had as a result of swaps that were previously terminated, and we had gains and they were being amortized.

So there's about a $6 million reduction that flows through the commercial loan yields, as far as the impact.

And so that's a big driver of that reduction in absolute yield for that book.

So I just wanted to make sure we put that in context first.

But, Dan, any thoughts there?

Yes.

Clearly, the competitive aspect of the market is heating up.

Everybody is looking for quality credit.

And so on the larger, stronger deals, we are seeing margin compression, although I think we are still able to get a fair margin.

And no matter what loans we're looking at, we are looking to cross-sell other relationships, so we take that into account.

There's more than just the interest spread on most of these.

In fact, all the way up through our large corporate book, even in our shared national credit book, we have 70% plus of our loans are cross-sold, 40% deeply cross-sold.

So that's an element of it as well.

But in answer to your question, there is competition heating up, but we still feel that we are able to gain good-quality credits and even move some market share.

And, Don, to follow on your point about the swaps -- that was going to be my second question -- is could you remind us again the magnitude of the swap roll-off that happens throughout the year?

And is that clearly embedded in your margin guidance?

It is embedded in our margin guidance, and it's about a $6 million reduction for each of the next two quarters.

Can you expand on the margin guidance a little bit more than just the ability to keep it flat to up from here?

Is that solely going to be based on the positive repricing that we are going to see throughout the year on deposits?

Are there any other factors that we can think about as far as potentially keeping the margin flat to growing it?

One of the areas of the most pressure on our margin has been the fact that our deposit growth has exceeded loan growth.

And our outlook for next year would assume that loan growth approximates deposit growth, and so we won't have that component of the pressure prospectively.

And then we'll continue to see the improvement in the overall mix.

We continue to expect to see strong demand deposit growth and shifting from more of the time deposit book into the transaction accounts and repricing, as well as repricing the money market deposits as well.

But we had seen a lot of growth occurred with the benefit of some teaser rates, and those teaser rates are starting to be migrated back to more than normal or current levels, which should provide some additional margin expansion for us as well.

Okay, great, and my last question, just on mortgage banking -- it held up very well, certainly compared to many of your peers being flat, and you had a great performance in terms of the origination.

I was just wondering if you can help us understand what drove that sequential improvement in the origination-related revenues, and if you can help us size any understanding of just how much you might expect mortgage to normalize in 2011 versus 2010.

We did have strong refinance and origination activity throughout the fourth quarter.

We did start to see the application volumes clearly dry up later in the quarter.

And so our expectation would be to see pressure there.

So we were roughly at $50 million for each of the last two quarters, as far as mortgage income that we would expect it to return to more normal levels prospectively.

And so we will see some pressure early on as far as seeing that drop to probably in the $30 million, plus or minus, range as far as mortgage origination fees.

So that's part of the expectation.

Okay, and if you're going to have that much magnitude of drop, which is, I think, expected and understandable, plus the potential interchange stuff, can you just then talk us through, then, what are the biggest areas of other fee categories that you actually see growing to help mitigate those declines?

That number there, as we've talked about, include treasury management revenues.

And so some of those will come through deposit balances, but we'll also see a lot of fee income coming from treasury management.

And that has been a clear initiative for us over the last year, and expect to see some very strong performance for that prospectively.

Investment management, brokerage type of activities, insurance are all beneficiaries of our cross-sell/cross-referral efforts.

And so we would expect to see growth coming through those channels as well.

And as we also commented, we do expect our net interest income to continue to grow for us and help to minimize the impact for some of these either regulatory-mandated fee reductions and/or the impact of the lower mortgage origination volumes as well.

Okay, great, thanks very much.

We have reached the end of this conference call.

I turn the call back over to our presenters for closing remarks.

Thank you, Simon, and thank you, everybody, for participating in the call.

If you have further questions, feel free to call myself or Todd.

We will be here to take your questions.

Thank you again.

Ladies and gentlemen, this concludes today's conference call.

You may now disconnect.