Huntington Bancshares Inc (HBAN) 2011 Q1 法說會逐字稿

Good morning, my name is Sara and I will be your conference operator today.

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

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

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

(Operator Instructions)

I would now like to turn the call over to Mr.

Jay Gould.

Mr.

Gould, you may begin.

Thank you, Sara, 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.

This call is being recorded and will be available as a re-broadcast starting about one hour from the close of the call.

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

Slides 2 through 4 note several aspects of the basis today's presentation.

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, its appendix, the earnings press release, the quarterly financial review, the quarterly performance discussion, or in the related 8-K filed today, all of which can be found on our website.

Turning to slide 5, today's question 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, risk, 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.

Now, turning to today's presentation on slide 6, 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 7.

Steve?

Welcome, everyone.

I'll begin with a review of our first-quarter performance highlights.

After my overview, Don will follow with his usual recap of our financial performance.

Dan will provide an update on credit.

I will then return with a discussion of our expectations and key messages to our investors.

Turning to slide 8, we reported net income of $126.4 million or $0.14 per share.

This represented a 3% improvement to net income from the fourth quarter.

As Don will detail, the current quarter's earnings per common share were negatively impacted by one significant item of $17 million or $0.01 per common share of additions to litigation reserves.

The first-quarter results were consistent with our expectations and set the stage for continued earnings growth throughout this year, as pretax pre-provision income is expected to rebound from this quarter's levels and provision for credit losses remain low.

Our pretax pre-provision income was $240.9 million, down $19.1 million or 7% from the fourth quarter.

As always, the first quarter of the year has several seasonal factors, a lower day count, which affects revenue, with FICA and other benefit costs impacting expenses.

We estimate this seasonality reduced pretax pre-provision by roughly $16 million.

Fully-taxable equivalent revenue decreased $38 million or 5.6%.

This reflected a $10.7 million or 2.6% decrease in net interest income and a $27.3 million or 10.3% decrease in noninterest income.

Net interest income declines were primarily driven by lower day count and a 2% reduction in average earning assets, reflecting a $643 million or 25% annualized reduction in available-for-sale and other securities, partially offset by a $298 million or 3% growth in average total loans.

The net interest margin increased 5 basis points to 3.42% and continued to be positively impacted by strong growth in consumer checking account households.

This growth increased at a 9% annualized rate during the first quarter and helped support growth in lower-cost core deposits at a 3% annualized rate.

The primary negative influences on net interest margin were the continued amortization of swap gains, lower loan yields, and the interest expense associated with the issuance of $300 million of subordinated debt related to last quarter's repayment of TARP.

Total noninterest income declined $27.3 million or 10.3%.

This reflected a $30.5 million or 57% decline in mortgage banking income.

As we noted in our last quarterly call, average quarterly mortgage banking income in the second half of 2010 was running roughly $20 million above normal levels.

Mortgage originations declined 49% versus the fourth quarter as mortgage rates increased late last year.

We experienced relatively stable mortgage origination trends over the quarter; and absent additional market volatility, we expect mortgage banking income to be relatively stable at the first-quarter level for the remainder of the year.

There were two notable positives with noninterest income.

Trust service income increased 5%, and brokerage income increased 21%.

Noninterest expense declined $3.9 million or just under 1%, reflecting a number of factors including reductions in legal costs as collection activities declined, consulting expenses, OREO and foreclosure costs.

These were partially offset by additions to litigation reserves as well as higher personnel expenses related to seasonal FICA.

Credit quality again showed significant improvement with an 18% linked-quarter decline in nonaccrual loans, with both new nonaccrual and new criticized loans declining 19% and 41%, respectively.

Net charge-offs dropped 4%.

Our provision for credit losses declined $37.6 million to $49.4 million and represented an annualized rate of 52 basis points of period-end loans.

Turning to slide 9, our reserves continued to strengthen.

Our reserve coverage of nonaccrual loans strengthened to 185% from 166% in the fourth quarter.

Reflecting the continued and rapid improvement of credit quality, period-end allowance for credit losses as a percentage of loans and leases decreased to 3.07% from 3.39%, but is still at levels we consider healthy given the stable yet delicate nature of the economic recovery.

Internal capital generation continue to improve.

Our period-end tangible common equity ratio was 7.81%, up 25 basis points.

Our Tier 1 common risk-based capital ratio increased to 9.75% from 9.29%.

Our regulatory Tier 1 and total risk-based capital ratios ended the quarter at 12.04% (sic - see slide 9) and 14.85%, respectively.

As we discussed in the last quarter's earnings call, in January 2011 we repurchased our TARP-related warrant to purchase 23.6 million shares of common stock for $49.1 million, and closed our TARP-related relationship with the US Department of Treasury.

So now let me turn the presentation over to Don to review in further detail.

Great.

Thanks, Steve.

Slide 10 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 shown on slide 11, our net income for the first quarter was $126.4 million or $0.14 per share.

One significant item impacted the quarter's results.

We added $17 million or $0.01 per share to our litigation reserves.

These additions generally related to a few long-standing, unrelated cases.

We believe we have established meaningful and appropriate reserves on these cases.

Slide 12 is a summary income statement and shows the $3.2 million increase in pretax income reflected the benefits of a $37.6 million decline in provision expense and a $3.9 million decrease in noninterest expense, which were partially offset by an $11 million decrease in net interest income and a $27.3 million decrease in noninterest income.

I will detail these changes in subsequent slides.

Turning to slide 13 we show the trends in our revenues and pretax pre-provision on the left-hand side of the slide.

The decline in revenues and pretax pre-provision income this past quarter was primarily related to seasonal trends in our business which negatively impacted PTPP by roughly $16 million, and the $30.5 million decline in our mortgage revenues.

We expect to reverse the recent declining trends in our pretax pre-provision over the next several quarters.

Adjusting for the seasonal impact, our pretax pre-provision would have been approximately $257 million.

We expect continued balance sheet growth and fee income initiatives will bring this performance back into the $260 million per quarter range.

Slide 14 depicts the trends in our net interest income and margin.

During the first quarter our fully-taxable equivalent net interest income decreased by $10.7 million despite a 5 basis point increase in our net interest margin to 3.42%, and a $1 billion decrease in (technical difficulty).

The net interest income change reflects the (technical difficulty).

First was the day count impact, resulting in $7 million less revenue compared to the fourth quarter.

Second was the impact of TARP repayment and the related issuance of $300 million of debt to repurchase the TARP preferred equity.

The incremental cost for this issuance was $2.3 million compared to the prior quarter.

Finally, our average earning assets shrank by $1 billion.

The combination of repurchasing TARP and allowing $400 million of noncore deposits to mature, and a reduction in available-for-sale loan balances due to a smaller mortgage pipeline drove most of this reduction.

Our outlook projects modest balance sheet growth over the remainder of the year, led by the continued loan growth in the C&I and auto lending portfolio segments.

The increase in our net interest margin reflects the benefits of better deposit pricing and mix, and the day count for the quarter.

These positives were positives were offset by lower loan yields and the reduction in income from interest rate derivatives, as our deferred gain continues to amortize.

Continuing on to slide 15 we show the continued improvement in our deposit mix.

Over the last five quarters we reduced our noncore deposits and CDs from 32% to 26% of total average deposits.

Also of note, starting in the third quarter of 2011 we anticipate the start of another round of higher-rate time deposit maturities, with $1.9 billion maturing with an average rate of 2.65%.

Turning to slide 16 we showed $0.3 billion of growth in total average core deposits.

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

This growth in checking account balances reflects an annualized 9% growth in consumer households.

Slide 17 shows the trends in our loan and lease portfolio.

Total commercial loans were up $0.1 billion.

This increase reflected the anticipated growth in commercial industrial loans, offset by the decline in commercial real estate balances.

The $0.4 billion increase in C&I loans came from several business segments.

But most importantly, nine of our 11 regions showed growth on a linked-quarter basis in middle-market lending.

The consumer loans were up $0.2 billion or 1% from the prior quarter.

The $0.2 billion increase in average automobile loans and leases reflected continued strong originations of $795 million this past quarter.

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

Slide 18 shows the trends in our noninterest income categories.

Our noninterest income decreased by $27.3 million from the prior quarter.

This was almost entirely due to the $30.5 million decline in mortgage banking revenues.

Origination volume declined by 49% from the fourth quarter, but originations were actually up 7% from the first quarter of 2010.

Adding to the decline in mortgage banking revenue was a $7 million swing in our net MSR hedging activity, as this quarter included a $3.5 million loss.

On a positive note, our retail brokerage revenues were up 21% over the last quarter, reflecting the impact of our cross-sell initiatives.

This next slide is a summary of our expense trends.

Total expenses were down $3.9 million from the prior quarter despite the $17 million increase in litigation reserves mentioned earlier.

In addition, this also reflected a $6.8 million increase in personnel costs.

This increase reflected the seasonal impact of higher employment taxes of $6.9 million as these taxes reset with the start of the new year.

Offsetting this increase were declines in professional services of $7.6 million; OREO and foreclosure related expenses of $6.6 million; and deposit and other insurance costs of $5.4 million.

Reductions in legal collection costs and OREO reflect the continued improvement in credit quality and the lower workout-related expenses.

Slide 20 reflects the trends in our capital position.

Each of our capital ratios improved over the prior quarter, reflecting the strong internal capital generation.

The TCE ratio increased by 25 basis points to 7.81% despite the 9 basis point reduction to TCA from the redemption of the TARP warrants.

The 46 basis point increase in our Tier 1 common ratio to 9.75% reflects the impacts of stronger earnings, the TARP warrant repurchase, and a reduced impact from our deferred tax assets as the disallowed portion of our DTA declined by $71 million this quarter.

We have $89 million of disallowed DTA remaining which should be recognized over the next couple of quarters.

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

Dan?

Thanks, Don.

Slide 21 provides an overview of our credit quality trends.

These trends continue to be positive in virtually every category.

Nonperforming loans fell to 1.66% at the end of the first quarter, down from 2.04% one quarter earlier.

Similarly, nonperforming assets were reduced to 1.8% from 2.21% in December.

The level of criticized assets also saw a meaningful reduction in the quarter, falling from 9.15% at December to 7.9% at March 31.

The net chargeoff rate also fell from 1.82% to 1.73%.

90-day loans past due and accruing were reduced in the quarter to 19 basis points, equaling our best performance in some time.

The ACL ratio fell to 3.07% at March 31 from 3.39% one quarter earlier.

The ACL coverage ratio on nonperforming loans and nonperforming assets showed significant strengthening, however, moving to 185% and 170%, respectively; and that is up from 166% and 153% at the previous quarter end.

The ratio of ACL to criticized assets also improved to nearly 39% from 37%, reflecting increased coverage of our emerging problem loans.

Slide 22 depicts the trends in commercial loan delinquencies.

30-day delinquencies were steady from the prior quarter at 73 basis points.

This level of delinquency is noticeably better than what was experienced throughout most of 2010.

We have no commercial loans in the 90-day past due category and accruing, as we continue our aggressive recognition and treatment of problem loans.

Slide 23 outlines the trends of our consumer delinquencies.

30-day delinquencies were down noticeably quarter-over-quarter.

That is a continuation of a trend exhibited throughout 2010.

Similarly, 90-day delinquencies were also reduced, continuing a similar pattern.

All consumer segments were flat to down in delinquencies quarter-over-quarter.

This is one predictor of positive consumer performance in the coming quarters.

Slide 24 continues with a view of commercial and consumer chargeoffs.

Commercial chargeoffs were up modestly in Q1 to $110 million from $104 million in the prior quarter.

This increase was all within the commercial real estate segment, as both C&I and business banking chargeoffs were lower in the quarter.

We continue to see a reduction in appraised values of partially complete, nonincome-producing real estate due to a lack of interested buyers.

And therefore we took additional charges in the quarter as warranted.

Additionally, we executed on a number of note sales in the quarter, as in certain cases we determined this to be a better economic decision versus a long-term hold strategy.

Both actions increased our resolution velocity and position us very well for future quarters.

We are very confident that this increase in CRE chargeoffs is a one-quarter event.

We expect to see lower CRE and lower overall chargeoffs in subsequent quarters.

Consumer chargeoffs were lower in the quarter, falling to $55 million from $68 million.

This reduction is despite a change in policy wherein we adjusted our net chargeoff policy on residential real estate from 180 days to 150 days.

This change resulted in recognition of $6.8 million of chargeoffs in the quarter.

In total, overall chargeoffs were down 4% for the quarter.

Slide 25 shows trends in our nonaccrual loans and nonperforming assets.

The chart on the left demonstrates the continued reduction in the level of both nonaccrual loans and nonperforming assets.

Nonaccrual loans fell another 18% in the quarter.

With regard to nonaccrual inflows, depicted in the right-hand slide, as we projected last quarter new inflows of nonaccruals were lower, falling 19% in the first quarter.

Slide 26 provides a reconciliation of our nonperforming asset flows.

NPAs fell by 18% in the quarter aided by lower inflows and a combination of returns to accruing status, payments, note sales, and chargeoffs.

We expect this type of trend to continue in future quarters with inflows influenced by the economic environment.

Turning to slide 27 we provide a similar flow analysis on commercial criticized loans.

Over the past year we have seen a consistent decline in the level of commercial criticized loans.

The first quarter of 2011 saw a continuation of that trend.

Due to the effects of early problem loan identification that has been ongoing over the last 24 months, coupled with the modestly improving economic environment, Q1 saw fewer inflows of new problem loans.

Although the level of upgrades and paydowns were lower than previous quarters, the combined result was a healthy 13% reduction in period-end criticized loans.

Reviewing slide 28, the loan-loss provision for the fourth quarter was $49.4 million, which was $115.7 million lower than total net charge-offs of $165.1 million.

The resulting ACL-to-loan ratio now stands at 3.07%, down from 3.39% linked-quarter earlier.

Importantly, though, the coverage ratio of ACL to NALs increased to 185% from 166%, reflecting very strong coverage due to significantly lower level of nonaccrual loans.

We are very comfortable with this level of ACL and believe it is sufficient and appropriate given the current economic conditions.

Overall, this is a very positive quarter on the credit quality front.

All the major metrics showed continued improvement, and we believe that we are postured to deliver improved results in ensuing quarters as we drive to a normalized environment.

Let me turn this presentation back to Steve.

Thanks.

I would like to use slide 29 to recap our current thinking regarding the remainder of 2011.

With respect to the economy, even with the added uncertainty related to recent events in Japan that have negatively impacted the global supply chain, and the continued instability in Northern Africa and the Middle East, we expect the US economy will remain relatively stable, with some potential improvement in the second half of the year.

The primary driver of net income growth throughout the rest of the year for us is an expected rebound of pretax pre-provision income from this quarter's level, coupled with continued low provisions for credit losses.

Net interest income should grow as we continue to see loan and deposit growth and a relatively stable net interest margin.

Specifically on loan growth, we expect recent trends to continue, with overall modest loan growth driven by continued strong growth in auto, meaningful growth in commercial and industrial loans, modest growth in home equity and residential mortgages.

These increases are expected to be partially offset by the continued decline in commercial real estate loans.

We anticipate fee income growth will be mixed.

We expect mortgage banking income to remain near current levels with service charge income beginning to show modest growth later in this year, as the benefits from our Fair Play banking philosophy continue to gain momentum, producing strong consumer checking account household growth and increased product penetration.

Assuming implementation of the Durbin amendment, the electronic banking income is expected to decline.

Noninterest expense is expected to be relatively stable as continued investment in strategic initiatives should be offset by continued low credit-related costs and improved expense efficiencies.

Nonaccrual loans are expected to continue to decline meaningfully throughout the year.

Turning to slide 30, in closing I want to remind all of our investors and customers of several important messages.

Our balance sheet is strong and getting stronger every day.

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

Credit quality continues to rapidly improve.

Over the last year, nonaccrual loans and nonperforming assets are both down over 60%.

And while we don't expect to maintain those rates of decline, we do expect to see continued meaningful improvement in overall credit quality throughout the year.

Our strategic initiatives continue to gain traction.

Most importantly and from a long-term revenue and earnings growth opportunity, our Fair Play banking philosophy is increasingly and positively differentiating us from our peers.

Huntington is creating this category of one in Midwest banking.

Lastly, our strong capital ratios and the expectation for continued growth in earnings and capital positions us to actively explore capital management opportunities, including raising the dividend at some point.

So thanks for your interest in Huntington.

Sara, we will now open for questions.

(Operator Instructions) Ken Usdin, Jefferies.

Thanks.

Good morning.

Guys, I just wanted to ask you on the expense guidance.

This quarter it had the $17 million reversal and it also included some of the seasonal step-up from the FICA tax as well.

So when you are talking about flat expenses, can you talk about whether that is ex those items or inclusive of those items?

Ken, this is Don.

As far as the guidance, what we are saying, it's generally flat; and that would suggest that over time we will continue to make some investments in strategic initiatives.

We have talked publicly about some of our branding which results in advertising and other components associated with it.

We have talked about Giant Eagle, and so we will have some expense increases that will over time offset those seasonal and/or one-time related items.

I guess if you could just then talk to the magnitude, because it would seem that, if I normalize for those two, expenses should be more somewhere in the like $405 million type of range.

So to get to flat, that means that you are just expecting to invest a tremendous amount of money in the second quarter.

So I just wanted to make sure that I am reading that right, that you are really plowing through with the magnitude of expense management -- investing, I should say.

Sorry.

Ken, I think where I would not want to specify is, as you are suggesting, that is second-quarter specific.

I wouldn't want to say that that is where we would be returning the expense levels necessarily in that quarter.

I'd just say over time we would have investments in marketing and expansion associated with initiatives and other things that could offset some of those one-time or seasonal type of issues.

Okay, so it is very possible that just sequentially that expenses could be down in the second quarter, below that level.

But over time this is a reasonable run rate just from a broader, longer-term perspective?

Ken, you can draw your own conclusions.

We'd prefer not to provide specific quarterly guidance, but just more general trend information.

Okay.

That's fine.

Second question, is just on -- Steve, to your points about the dividend and capital management.

With a 9.75% Tier 1 Common, you are sitting on plenty of excess capital.

Can you just remind us again of your priorities then as far as dividends, eventual maybe buybacks, and M&A, versus the internal investment; and how that has, if at all, changed given the rapid growth of capital?

Thanks again.

Thank you, Ken, for the interest.

We have always consistently stated that we want to grow the core.

So capital for core growth is vital to us.

Beyond that we haven't provided guidance about relative priority -- dividend, acquisition, buyback, or anything else.

We are looking at a forward capital plan.

Now having the benefit of the actions taken with the [SCAT19] late in the first quarter, and assessing our plans at this point, Ken.

Thanks, again.

Ken Zerbe, Morgan Stanley.

Good morning.

I was hoping you could provide just a little more detail about if you have collected any metrics on the profitability of the new household, I guess, checking account growth related to Fair Play.

In terms of those customers in particular that you are winning in the market, the new customers, are you able to cross-sell to those customers?

I am trying if possible to separate it out from your existing customer base where you are pushing more cross-sell.

Also maybe talk a little bit about the size of the accounts coming in, in your new checking accounts, that might be related to Fair Play.

Thanks.

Sure, Ken.

This is Don.

As far as just some indications that our checking account balances on an annualized basis were up 8% and our households grew at a 9% pace, so we think that they are generally keeping in line as far as growth rates.

We have been very pleased with the cross-sell impact of the new account growth and very pleased overall with the trajectory as far as the most recent originations.

We plan on early or sometime middle of May providing a little bit more clarity as far as the impact of some of these initiatives and providing a little bit more guidance there from a performance perspective at the next, upcoming conference we'd be at.

So that would probably be a better time to seek a little bit more additional information.

Okay, all right.

No, that's fair.

Then the other question, I think back in your Investor Day you talked about growing your M&A platform or hiring people, building out systems.

At this point are you completely done with the, I guess, potential M&A buildout?

And you are ready to go if you find something that is of interest?

We never I think will be considering ourselves complete.

There will always be room for improvement.

But we are -- we have made substantial progress.

We are -- I like the robustness of what we have built at this point, Ken.

And the anticipated hiring that was alluded to has been completed.

Okay, great.

Thank you.

Scott Siefers, Sandler O'Neill.

Good morning, guys.

Let's see.

I think first, Don, probably most appropriate for you.

I just wanted to follow up on that expense guidance.

It looks like the expense guidance aggregates both the provision and noninterest expenses.

So, one, am I reading that correctly?

So does that suggest also that we have probably seen pretty much all that we will see of the lower level of provision?

Then second, just also for you Don, was just hoping you could speak a little more about the margin; and specifically how you will hold it just in that -- imagine core deposit growth is still going to continue to outpace loan growth.

So you have the lift from some higher-cost stuff rolling off.

But you have that tough excess liquidity issue; and then you also have the swap book.

So can you just talk about some of the countervailing items that you see impacting your margin over the rest of the year?

That's great, Scott.

First as far as the expense guidance, we allude to a credit cost or collection cost as opposed to provision expense included in that.

So that is more working through OREO-related properties and the cost of maintaining those types of assets, and legal costs in connection with the overall collection efforts.

So that was more the implication as opposed to provision expense.

Okay, perfect.

So I just wanted to make sure that was clarified.

As far as the margin guidance prospectively, we do think that we will see a better alignment between the deposit growth and loan growth prospectively.

So we think that we will see margin being able to remain relatively stable, because we won't see a lot of excess funds like we saw last year being put into the investment portfolio.

So we think loan growth can absorb the deposit growth that we are projecting.

During the quarter, we did take some management action associated with some of the money market (technical difficulty) specifically.

And we continue to manage some of our time deposit rates down.

Each of those have a positive impact from a couple different sources.

One is that it reduces the rate of existing relationships on the money market side.

And, two, it controls the growth on the deposit side, so that that loan growth is supported from just a core funding base.

Okay, perfect.

Thank you very much.

Tony Davis, Stifel Nicolaus.

Good morning, everybody.

Steve, I have to admit we hear often that you guys are being pretty aggressive, I guess, in small-business middle-market C&I pricing.

I note here in the last quarter the C&I embedded yield dropped 37 points.

That is almost twice the linked-quarter declines we saw in the September and December quarter.

So I guess a couple questions.

One, could you give us some color on the degree to which you have lowered pricing above cost of funds, if you have recently?

And secondly, has there been any change as well to underwriting standards?

Tony, this is Don.

I will take a first crack at that.

But we have talked in previous quarters about the impact of our interest rate swaps.

We had closed some of those out at a net gain position; and that gain amortizes down over quarters.

From a disclosure perspective, the margin associated with those swaps goes into primarily that C&I loan yield category because we are swapping out those variable-rate or LIBOR-based commercial loans into a fixed rate with these swaps.

So that was the majority of the decline.

I think it was around 28, 29 basis point type of impact or thereabout for the C&I decline, including that amortization, along with the fact that during the quarter we reduced our overall swap position from about $11 billion to $7 billion to take us to a little bit more asset-sensitive position than where we were previously.

Okay.

So those two actions really result in that 28 to 29 basis point reduction.

We did see a slight increase in the impact of new nonaccruals coming through that commercial loan yield as well.

So very little of that compression in margin had anything to do with new loan originations being at tighter spreads.

I would say generally that we have been maintaining a fairly strong discipline to our pricing grids that we put in place.

We do agree that we are aggressive in going after customers from a growth perspective; but it is not being led with price in the tables.

So I think that we are trying to maintain that discipline as appropriate.

Yes, Tony, this is Dan.

I would just add that we also have not compromised the underwriting standards.

The market is getting a little bit more frothy, and while there been some pricing pressure we have tried to maintain a discipline both on pricing and on structure.

We have had to pass on certain credits.

We have seen a few of the covenant-light deals come through.

We have not participated in those and really are sticking to our existing underwriting standards all along the way.

I wonder if that same policy or approach, Dan -- maybe Nick is there too -- would apply to the indirect business?

Obviously the captives have gotten a lot more aggressive here recently.

Nick is not here, but that would be the case, Tony.

Don and I look at our production weekly on spread and credit quality and mix.

So we are very tightly managing it and we can assure you we have had consistency.

Just one last thing, guys.

It would be the unfunded C&I loan backlog at the quarter end.

What you are seeing I guess in your discussions with businesses in terms of borrowing intentions, it doesn't look like there has been any drawdown on commercial DDA at this point, which would be a precursor about that.

And finally the C&I draw rate, you mentioned it was about steady.

But I just wonder where it was.

Yes, the utilization rate is almost unchanged from last quarter.

We are just under 42%, and I think we were right at 42% last quarter.

Now, just in the last couple of weeks, though, we have seen more discussions with customers indicating actually building up inventories and so forth.

So it is still anecdotal at this point, but we feel we might be seeing some signs of increased borrowing in the upcoming quarter.

Thanks.

Erika Penala, Bank of America Merrill Lynch.

Good morning.

I wanted to follow up on both of the Ken's questions regarding capital management priority.

With regards to M&A, could you give us a sense of where you are looking or where you are poking around, and what size range?

And also, has the propensity to sell increased from some of these smaller properties?

Also give us a sense of what pricing is like in the markets that you are looking at.

Great.

Erika, this is Don.

As far as the size range that we're looking at we're, one, looking in our Midwest footprint.

We are not looking to use acquisitions for us to enter into new markets.

So that is important and that is a key criteria for M&A activity.

Second, as far as size, we are really looking for smaller transactions.

So it would be in the $0.5 billion to $2 billion type of range in our footprint.

Again we like the model of being able to over time aggregate several smaller transactions that help to fill out our existing footprint from that type of activity, as opposed to look at necessarily larger transactions or institutions.

Then as far as a propensity to sell, you definitely hear about those types of comments from investment bankers.

I would say that we haven't seen a lot of transactions announced in our footprint and haven't had a lot of assisted transactions in our footprint as of late.

While we still believe that this is an opportunity for growth for us over time, that we are still very focused on growing our core book of business.

What about pricing?

Do you have any sense of where the -- is that what is keeping the conversations from picking up in your footprint?

Don't know if it is pricing or not, because we obviously haven't seen any transactions take place really in our footprint.

So it is not a good benchmark yet.

Okay.

My last question is just a clarification question.

The $260 million that you mentioned in terms of the per-quarter range for PPNR, that does include the Durbin impact if it is passed as is?

That would include our current estimate as far as the Durbin impact for the second half of the year.

That's correct.

Okay.

Thank you.

Matt O'Connor, Deutsche Bank.

This is actually Adam Chaim calling in for Matt O'Connor.

How are you guys doing?

You guys had previously mentioned you had a target level of 15% of earning assets for the securities portfolio.

How should we be looking at the overall trajectory of earning assets?

I guess if loan growth continues, should we be expecting most of that to be offset with securities sales?

Our expectation prospectively would be that our loan growth would be funded through core deposit growth.

So we would expect to continue to see those two offset each other and not to have a significant impact on the overall investment book.

We do believe that our investment portfolio is higher than where we would like to see it long term as a percentage of our total earning asset base.

But initially we think the loan growth will be funded through that deposit growth.

Okay, great.

One other question.

On the auto loans side, it looks like growth has slowed a bit over the last couple quarters.

Also it looks like FICA has been trending down as well over this period, not too meaningfully though.

You guys have also been moving into more, I believe, used car loans versus new car loans.

Are competitive pressures behind this?

Where can we expect the overall auto loan portfolio to top out as a percentage of the overall loan portfolio?

Good question.

As far as the indirect auto business, in third quarter of last year we had $1 billion of originations; in fourth quarter of last year and first quarter of this year we had $800 million of originations.

If you assume a two-year average life for the auto loan, which is about where we are at, that would imply about a $6.4 billion portfolio.

So what the slowdown in as far as the growth rate over the last couple quarters is, is we are getting closer to that matured portfolio level at these type of origination volumes, and so you shouldn't expect the necessarily the same type of incremental growth rates that you were seeing throughout 2010, 2011 if the origination volumes are at that level.

As far as our origination quality, we are very pleased with that.

We haven't seen any significant change in FICO scores for our origination levels.

We do see from time to time mix changes as far as the new car versus used car.

But the credit quality characteristics of the used car portfolio is really right in line with what we are seeing for new car.

What you might see there as far as mix changes is when some of the captives get more engaged in some of the originations.

So that may fluctuate a little bit, the percentage new versus used.

Okay, great.

I guess as a percentage of the overall portfolio, where are you comfortable in terms of the size of the auto portfolio?

Well, we're very comfortable with where it is today, which is at 15%.

But we want to keep it below where it was at one point in time of 33%.

But I think if we are in that 15% to 20% of the portfolio (technical difficulty) still comfortable.

We really like the credit profile of this book.

We like the predictability of the cash flows.

And we like the incremental yield that we are receiving for these originations.

It is a much better use of funds for us than options we have at this point in time.

Okay, thank you.

Paul Miller, FBR.

This is Kevin Barker filling in for Paul Miller.

Good morning.

Just had a question about loan growth, and some of the -- are you seeing your pipeline increase or anything?

Maybe some stabilization in the CRE portfolio?

Is there any markets in particular where CRE may be starting to see some type of bottom?

I know we are seeing a lot more securitizations out there in 2011; maybe that may be contributing to it.

But is there anything you see on your end and maybe the pipeline increasing?

We are not trying to grow the book.

We are trying to shrink it.

So our stance with commercial real estate has been one of accommodation for our core customers, working with them, trying to be supportive; but in aggregate expecting to reduce that concentration.

We expect to be in that mode through this year.

Anything you want to add, Dan?

No, just -- we are trying to support our core customers.

So in the first quarter we actually had a few more originations for a select group of folks.

So we are trying to balance our overall goal of reducing the exposure, with still supporting the core book; and we are continuing to do that.

But I mean are you seeing plenty of people out there looking to take down some of that CRE?

Are you seeing prices get better in particular areas?

Is there anything outside of what you are trying to shut off the portfolio?

The markets are clearly stabilized from where they were in, say, '09 and early '10.

I would say that is across the board, with land or stranded development construction still being the two toughest categories.

But it is certainly getting better and there is varying levels of activity depending on product and location.

Okay, thank you.

Dave Rochester, Credit Suisse.

Hey, good morning, guys.

I had a couple of quick ones on the margin.

You highlighted you had a good chunk of higher-rate CDs in the second half repricing.

I was just wondering where you are pricing the bulk of your CD product today.

Are you below 1% on most of that money that is rolling?

Yes, we are well below 1% on most of the new money.

The money that is rolling in the second half of this year really relates to three-year product that was put on the balance sheet at the time of some of the financial challenges back in '08.

So we have not typically been originating a lot of CDs in that three-year bucket right now.

So you would anticipate most of that to roll at 12 months or less, I would imagine?

That's correct.

And on the auto side, you talked about growth and whatnot.

I was wonder if you could talk about the blended rate on the product you saw in the first quarter and if that changed meaningfully from the fourth quarter.

The blended rate as far as the new originations on indirect auto?

Exactly.

And the yields you are getting.

We tend to look at that as far as the credit-adjusted spread on the originations.

So it has been very much in line with where we have been over the last several quarters, which -- taking the yield minus our cost of funds we assign to that business, which is close to securitization rates, minus the credit costs associated with that.

And we are looking at a 2.25 type of net credit-adjusted spread.

That is right in line with where it has been over recent quarters.

Okay.

And just one last one real quick.

In terms of your loan growth guidance, are you expecting to see just a similar runoff rate that we have seen in the noncore CRE over the last, let's say, couple quarters, the $200 million each quarter, for the rest of the year?

Yes, in that range; $200 million to $300 million would probably be a good estimate.

All right, great.

Thanks, guys.

David Konrad, KBW.

Hi, good morning.

I guess all my questions have been asked and answered, but just a follow-up I guess on the indirect auto.

Some of your competitors this quarter said that competition was getting so aggressive that they pulled away from the growth aspects.

But from your comments from the last question it doesn't feel like you guys are seeing that type of competition and pressure in your markets.

Is that correct?

I think we saw it really step up in the fourth quarter, where we saw some of the captives and others get more involved.

That is why our production levels came down from where they were at that time.

We again have been very pleased with the production levels and the quality and also the pricing.

Okay, great.

Thank you.

Brent Erensel, Portales Partners.

Thanks.

Brent Erensel from Portales.

I have got a question with regard to the second half.

It is relating to reconciling the expense management; the CD repricing, which are going to be beneficial; and then the tax rate and Durbin, which are not.

It is hard to see earnings going up much from here, just putting all those four things together.

Can you -- without giving guidance, what is your reaction?

I think we will have some headwinds associated with Durbin if it does pass as originally -- or gets implemented as it has been passed.

I would say that our guidance has been that we expect pretax pre-provision earnings in the $260 million to $265 million range for the full year.

We provided a reconciliation or walk-forward of our $241 million to roughly a $256 million or $257 million level for the current quarter, if you back out the seasonal impacts and the day count.

So that $260 million to $265 million would imply a relatively small step-up.

We would be relying on areas of growth including balance sheet growth and fee income growth to help offset or minimize the impact of Durbin.

So that would be where we get comfortable with continuing to provide that level of guidance.

Okay.

Do you see the provision coming down meaningfully from current levels?

What we provide as far as guidance there, again, is continued improvement as far as nonaccrual loans, criticized classified, and other measures as far as credit quality.

We have not provided any more specific guidance as to where we think the provision expense will go prospectively.

Dan, any thoughts there?

No.

We are moving hopefully towards a normalized environment.

Again all of our credit metrics are going in the right direction.

We analyze the provision in detail each quarter, and that is probably all I have to say on that.

Excellent.

Thank you.

Arthur Winston, Pilot Advisors.

Thank you.

The fastest growing parts of financial statements are the shares outstanding and the expenses.

And now we hear -- it's probably not new news -- that we are looking for acquisitions.

I am just curious, is the plan to give out shares to make these acquisitions?

A second question.

Is there anything afoot to give the shareholders a break and curb or actually reduce the number of shares outstanding or the expenses to just give them a better return?

Again, as far as our comments on M&A that -- we have said that we want to continue to focus on the core first.

To the extent that there are opportunities for us to grow through acquisitions in our footprint, we will evaluate those.

But we want to make sure that we are focused on making sure that we have the appropriate return for our existing shareholders and make sure that we have the appropriate returns from those types of activities, when and if they do come through.

So again I think that is a priority for us.

As Steve talked earlier, we believe with the growth in our capital and the strength of our earnings position that we are now in a better position to start to evaluate future capital management actions.

That could include changes to our dividends, but we haven't provided any more clarity or guidance beyond that.

Thank you.

Terry McEvoy, Oppenheimer.

Thanks.

Good morning.

In the press release you go through five areas where you saw C&I loan growth.

I was wondering if you could just maybe put some at the top of the list and the bottom of the list.

And in terms of the regions where there was not growth, where you did not see growth in the first quarter, was it simply because they are not in some of those specialty businesses?

Suggesting maybe that middle-market lending was closer to the bottom of the list in terms of growth last quarter?

Terry, I wouldn't draw any conclusions about the two (technical difficulty) didn't have middle-market growth during the quarter.

We'd expect them to come through, and there is always some variation.

We were very pleased in aggregate by the middle-market activities.

When we say middle market, for many banks it would be considered lower middle-market.

Good traction; and that is predominantly the type of lending that fueled the expansion that was referenced in the press release and elsewhere.

Then just one last question.

On the mortgage business have you looked to cut costs?

Have cost-cutting plans been put in place?

Or is there an opportunity in future quarters to bring down some of your mortgage-related expenses?

We took action on mortgage, frankly, before we even had the earnings release at year-end.

So there is always room for improvement on expenses, and we will keep working it.

But our people actions and overhead reductions were dealt with I think it was the second, certainly the third week in January.

Appreciate it.

Thanks, Steve.

Greg Ketron, Citigroup.

Good morning, guys.

Just a couple of questions, one on the Durbin amendment.

If it passes as it is drafted, do you have a sense for how much of that impact you can cover in other places as we move forward?

What we have disclosed is that using that $0.07 per transaction item, I think it is a $45 million or thereabout hit to the second half of the year's revenues.

What we would suggest as far as how we are covering that is that we think that we do have a lot of areas that are contributing to our growth prospectively.

We think net interest income will grow from the first quarter, led by continued growth in loans and overall balance sheet expansion.

We saw in the first quarter some good growth in brokerage revenues and trust revenues.

And those are just indicators of some of the initiatives we have taken on to enhance our cross-sell throughout our customer base.

And we think that we will see some similar impacts from some of the treasury management activities and others that will help drive fee income.

So we don't have any specific or explicit plans to offset Durbin with any other side fees or other adjustments to service charges for our customers at this point in time.

Great.

Then one last question.

Don, you had talked about you had reduced your swap position from $11 billion down to $7 billion.

Right.

Assuming rates -- if we follow the forward curve, they go up in 2012.

How would you anticipate managing the swap book going forward in light of rates going up in like 2012?

What kind of impact could that have on commercial loan yields and the margin?

As far as where we take that swap book, that depends on, one, what we can do organically on the balance sheet; and two, how we would want to continue to position our overall net interest income at-risk position.

You will probably see later in the slide deck, I think it is slide 39 in the appendix, that we have taken a little bit more of a position here showing that we are more asset-sensitive for an increase in rates prospectively than what we have been over the last several quarters.

To the extent that we want to continue to maintain that, we can allow swaps to mature prospectively.

But I would say that our initial thoughts are more continuing to manage the overall rate position, which could result in some slight fluctuations in that swap position, and should have a less of an impact prospectively as far as the margin or reported yield on the commercial loans.

Okay, but you anticipate you can transition through the swap book into rising rates without any negative impact to the net interest margin?

That's correct.

Because if it is a rising rate, by allowing those swaps to mature, it positions us to better increase our net interest income going forward, because it eliminates that received fixed portion of the swap book.

Okay, great.

Thank you.

This concludes the Q&A portion of today's call.

I'll turn the call back over to the presenters for any closing remarks.

Thank you, Sara, and thank you, everybody for participating again this quarter.

If you have follow-up questions, please give myself, that is Jay Gould, or Todd Beekman a phone call.

We will be happy to continue to carry on the dialog.

Thanks for participating.

Bye.

This concludes today's conference call.

You may now disconnect.