Huntington Bancshares Inc (HBAN) 2011 Q3 法說會逐字稿

Good morning.

My name is Steve, and I will be are conference operator today.

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

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

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

(Operator Instructions).

Thank you.

Jay Gould, you may begin your conference.

Thank you Steve.

Welcome.

I'm 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 rebroadcast starting about one hour from the close.

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 the slides.

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

I encourage you to read these but let me point out one key disclosure.

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

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

Now, 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 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.

Now, turning to today's presentation, as noted on Slide 6 participating today are Steve Steinour, Chairman, President, and Chief Executive Officer, Don Kimble, Senior Executive Vice President and Chief Financial Officer, Dan Neumeyer, Senior Executive Vice President and Chief Credit Officer.

Also present is Nick Stanutz, Senior executive vice president and head of Automobile Finance and Commercial Real Estate.

Let's get started by turning to Slide 7.

Steve?

Welcome.

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

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

Dan will provide an update on credit.

I'll then return with an update on our "Fair Play" and OCR what we refer to as our Optimal Customer Relationship strategy, and close with a discussion of our expectations for the next few quarters.

So Turning to Slide 8, we reported net income of $143.4 million, or $0.16 a share, essentially flat with the second quarter.

Nevertheless, third-quarter results represented good progress against our strategic plan designed to improve long-term profitability and shareholder returns despite significant headwinds from the operating and interest rate environment.

We're clearly focused on the long-term and the level of returns we generate for the owners of the Company.

This quarter's ROA was 1.505%.

We were still able to produce a solid 13% return on tangible common equity, even as we took several steps to continue to reduce risk and bolster liquidity during a quarter marked by political and economic uncertainty.

Our $240.7 million in pretax preprovision income was in line with last quarter.

Don will provide additional details in a few minutes.

Fully taxable equivalent revenue increased $5.8 million or 1%.

This reflected a $3 million or 1% increase in net interest income.

We saw several -- we saw average total loans grow at an 8% annualized rate with C&I and indirect automobile loans with strong annualized growth rates of 9% and 17% respectively.

Demand deposits grew at a very strong 28% annualized rate.

Consumer non-interest-bearing DDAs increased to the 21% annualized rate, reflecting in large part the success of Asterisk-Free Checking.

Commercial DDA inflows were particularly strong and above normal growth levels and therefore not likely to be repeated.

The net interest margin decreased 6 basis points to 3.34%.

This was more of a decline than we outlined in last quarter's call as we were unwilling to add credit or duration risk during this time of record low rates.

Don will have a more detailed walk forward in a few minutes.

Non-interest income increased $2.8 million, or 1%, reflecting a $15.5 million gain on the sale of automobile -- from the automobile securitization.

We view this as core earnings as we expect to use such securitizations from time to time to manage overall concentration risk of our auto portfolio.

Several charges on deposit accounts increased -- service charges on deposit accounts increased $4.5 million, or 7%, primarily driven by increased customer activity and new account growth.

It's noteworthy that service charges on deposit revenue is back within 1% of the level seen a year ago.

I think that performance will compare favorably to most regional banks.

Importantly, we did it without adding any new fees.

We view this as very meaningful.

Our customer growth, along with our ability to increase product penetration, have virtually eliminated the financial impacts of an amendment to Reg.

E relating to certain overdraft fees, plus our voluntary decision last year to reduce or eliminate a number of other deposit-related fees and introduce 24-hour Grace.

We believe our strategy to drive revenue by driving customer growth and product penetration is working.

Partially offsetting the auto securitization gain and growth in deposit service charges was an $11 million decline in mortgage banking income, primarily driven by a negative $13.9 million linked-quarter change in net MSR valuation.

The majority of the MSR decline occurred in the last two weeks of the quarter, concurrent with the Fed's implementation of Operation Twist.

Non-interest expense increased $10.7 million, or 2%, with personnel costs up $8.3 million, relating to an increase in salaries, severance, and healthcare costs, and a $5.7 million increase in outside data processing and other services as we converted to a new debit card processor.

Turning to Slide 9, last quarter, we introduced some of our metrics around OCR with our consumer businesses.

Earlier this quarter, we introduced similar metrics for our commercial businesses.

These metrics are now part of our regular quarterly disclosure.

In the third quarter, we continued to see strong results across both groups of customers.

Year-to-date consumer checking account households were growing at nearly an 11% annualized rate.

These new households are not just focused around a single service.

We've been able to continue to grow our share of wallet with new and existing customers.

Almost 73% of our consumer checking customers now have four or more products or services.

On the commercial side, we saw an increase in growth with commercial relationships growing for the first nine months at an 8.6% annualized rate.

As expected, credit quality showed continued linked-quarter improvement with a 7% decline in net charge-offs and 8% decline in nonaccrual loans.

With our allowance for credit losses as a percentage of period end loans declined to 2.71%, given the decline in nonaccrual loans, our reserve coverage nevertheless increased to 187%.

Internal capital generation remains strong.

Our period-end tangible common equity ratio was stable at 8.22% as tangible assets grew $1.9 billion and were temporarily inflated by the increased liquidity reflecting the proceeds of the automobile securitization.

Our Tier 1 common risk-based capital ratio increased to 10.17%, up 25 basis points.

Our regulatory Tier 1 and total risk-based capital ratios ended the quarter 12.37% and 15.11% respectively.

Turning to Slide 10, we continued to move forward with our positioning for long-term growth and increased profitability with the ongoing implementation of strategic initiatives designed to grow customers, improve convenience, and increase revenue while controlling costs.

As I just mentioned, in September, we completed a $1 billion automobile loan securitization.

Our super prime indirect auto business has performed extraordinarily well over this cycle.

We've seen significant growth in this business as our high level of customer service and commitment to the business has strengthened our relationships with targeted dealers.

This allows us to take advantage of dislocations and expand into new markets.

The growth trajectory of the auto portfolio is such that we would likely reach our internal concentration limit within a year.

By restarting our securitization program, we can maintain the size of the portfolio at appropriate levels while freeing up balance sheet capacity for continued expansion of that business.

As an example, shortly after the third quarter ended, we announced the expansion of our Auto Dealer Finance business into Wisconsin and Minnesota.

Those markets are in a state of flux due to recently announced bank deals.

This has allowed us to hire a seasoned team with local market knowledge for each state.

We also continue to increase convenience to create the best experience for our customers.

We have 23 Giant Eagle in-store branches open and plan to have 28 opened by the end of the year.

While it's still early, the initial in-store branches are ahead of plan and look to be on a path to break even before our goal of 24 months.

We also opened three traditional branches in the Detroit area with the leadership team we announced that Helga Houston would succeed Kevin Blakely as our Chief Risk Officer.

Kevin is retiring at year end, after almost 40 years in banking and three years with us here at Huntington.

I'd like to take just a moment to thank Kevin for his efforts over those three years in helping to turn the Bank around and fundamentally strengthening in very significant ways our risk management capabilities and risk culture throughout the organization.

Helga has 30 years of diversified banking experience in risk management, business development and client relationships and we're excited to have her on board.

Finally, shortly after the quarter's end, Moody's upgraded the credit ratings of the Bank and parent company level A-three and BAA-1 respectively.

I'll not go into details here, but I do recommend you review Moody's press release.

In particular, I call your attention to the comments on the results of stress testing all of our real estate portfolios and views on our auto portfolio.

Now let me turn the presentation over to Don to review the financial details.

Don?

Thanks Steve.

Turning to Slide 11, it provides a summary of our quarterly earnings trends.

Many of the performance metrics will be discussed later in the presentation, so let's turn to Slide 12.

It shows that our net income for the third quarter was $143.4 million, or $0.16 per share.

The $12.6 million decrease in pretax income reflected the impacts of the $10.7 million increase in non-interest expense and the $7.8 million increase in provision expense, which were partially offset by a $3.1 million increase in net interest income and a $2.8 million increase in non-interest income.

I'll detail these changes in subsequent slides.

On Slide 13, we show the trends in our revenues and our pretax preprovision on the left-hand side of the slide.

The third quarter showed a slight decline in pretax preprovision, most of which can be attributed to an $11 million linked-quarter increase in expenses.

As we'll detail later, much of this increase was related to conversion costs to our debit card products and higher personnel costs driven by higher salary, severance and healthcare costs.

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

During the third quarter, our fully taxable equivalent net interest income increased by $3 million, reflecting the benefit of a $0.8 billion increase in our average earning asset base, partially offset by the negative impact with 6 basis point decrease in net interest margin to 3.34%.

The 6 basis point decline in net interest margin reflected the impact of four primary factors.

First was a 9 basis point reduction related to the impact of the extended low rate environment on loan yields.

In the quarterly financial review, we have provided the impact of swaps on our commercial loan yields.

This summary shows that our total commercial loan yield declined by 4 basis points this past quarter after excluding the impact of interest rate swaps.

This decline was primarily attributed to $1 million or 2 basis points of lower income coming from nonaccrual loans.

We also had a 2 basis point reduction coming from a lower benefit of investment securities and a meaningfully higher level of liquidity on the balance sheet.

Reinvestment of proceeds from cash flows were 45 basis points lower this past quarter than they were in the second quarter.

We also maintain higher levels of cash during the quarter given the heightened uncertainty surrounding the US debt ceiling issue and the overall volatility that we experienced during the remainder of the quarter.

We also had a basis point negative impact from the securitization as loans yielding in excess of 4% were replaced with the investment securities in a 1.3% yield level.

These negatives were partially offset by the benefit of 6 basis points from the reduction in deposit rates and the improvement in deposit mix.

Continuing onto Slide 15, we show the continued improvement in our deposit mix over the last five quarters as we reduced the non-core and court time deposits to 23% from 29% of total average deposits.

Perhaps more important was the increase in DDA balances over the same five quarters, as this category has increased to 34% from 30% of total average deposits.

The improved deposit mix reflects the efforts of Fair Play banking on our consumer customers and our treasury management focus for our commercial businesses.

During the quarter, we also increased the focus on deposit pricing, including plans to continue to drive the cost of funds lower to help offset the continued pressure from what we now view as an extended low rate interest environment, low interest rate environment.

The impact of these efforts will be more visible in the fourth-quarter results.

Turning to Slide 16, we showed a 2% increase in total core deposits.

This increase reflected the efforts to drive core checking account household growth on both the Consumer and Commercial customer segments.

On the Consumer side, our year-to-date checking account households increased at an 11% annualized rate.

The strong growth in commercial deposit balances primarily reflected the results of our treasury management efforts and our OCR program to deepen the relationships with our customers.

Keep in mind about $300 million of the Commercial demand deposit growth reflected some temporary balances that will decline over the next couple of quarters.

Slide 17 shows trends in our loan and lease portfolio.

Loan growth was broad-based with every category of loans growing except commercial real estate, which continued its planned decline.

Growth in the C&I area reflected the benefit of many of our initiatives, including our focus on equipment finance, large corporate, business banking, and middle market.

Average automobile loans increased at a 17% annualized rate, including the impact of a $1 billion securitization of automobile loans completed in September.

Residential mortgages also experienced growth of 5%, reflecting the continuation of a year-long trend of customer preference for shorter-term fixed and/or variable rate mortgage products, which we are traditionally retaining on our balance sheet.

Slide 18 shows the trend in our non-interest income which increased $2.8 million or 1% from the prior quarter.

This was driven by a $15.1 million increase in Other Income, reflecting the $15.5 million gain from the sale of automobile securitization, which was also partially offset by a $6.8 million decline in SBA servicing income.

Service charges on deposit accounts and electronic banking income increased $4.5 million, or 7%, and $1 million, or 3%, respectively, reflecting increased customer activity and new account growth.

The service charge income is now within 1% of a year ago level, reflecting the benefit of our strong household growth offsetting the impact of the amendment to Reg.

E and other Fair Play banking initiatives implemented over the last several quarters.

Electronic banking income is expected to decline approximately 50% in the fourth quarter as a result of the implementation of the Durbin Amendment on October 1.

Mortgage income declined by $11 million despite a 4% increase in originations.

During the quarter, we recognized a $9.2 million net MSR loss.

Originations over the last two years have resulted in recording the mortgage servicing asset on a lower cost or market basis.

Given the low rate for the time and the expectation that rates would increase along with the amortization of the asset, we made the decision not to hedge the value of this asset.

During the last quarter, the net loss recognized on the lower cost or market asset was in excess of $11 million.

Comparing the net $9.2 million loss recognized this quarter with the $4.7 million gain last quarter, it result in a reduction in the linked-quarter change in mortgage revenue of $14 million, essentially offsetting the impact of the auto loan securitization.

This next slide is a summary of expense trends.

Total expenses were up $10.7 million, or 2%, from the prior quarter.

This reflected an $8.3 million increase in personnel costs, including the impact of severance costs, $2 million of higher healthcare costs, and also $1 million of lower benefit from loan origination cost deferral.

Outside data processing and other services were also up this past quarter, and they were up $5.7 million, primarily related to the conversion costs associated with our new debit card processor.

Additional conversion costs are expected in the fourth quarter, which should be more than offset by the future economic benefits from this change.

Slide 20 reflects the trends in our capital.

Virtually all of the ratios improved over the prior quarter and reflecting the strong internal capital generation and also capital relief from the auto securitization transaction.

Our Tier 1 common ratio improved by 25 basis points to 10.17%.

The TCE ratio was flat at 8.22%, reflecting the increase of our cash position at quarter end of $1.2 billion.

Slide 21 lays out the rationale for our $1 billion auto securitization this past quarter, as we see this as an ongoing part of our auto business.

Such securitizations provide three primary benefits.

First, it helps manage our overall concentration of auto loans on our balance sheet.

We see continued opportunities to grow our auto loan book faster than the rest of our loan portfolio.

The securitization allows us to keep the concentration below 20% of our total loan book.

This structure also allows us to efficiently manage our capital attributed to this business.

The residual interest that we sold with this structure represented 2.8% of the total loan balances.

This compares with our 10% Tier 1 common ratio, allowing us to benefit from this market leverage.

Finally, securitizations helped to provide a funding source for this business, allowing us to more appropriately price other funding sources.

So with that, let me turn the presentation over to Dan to review credit trends.

Dan?

Slide 22 provides an overview of our credit quality trends.

The third quarter continued to show improvement in our credit quality metrics despite continued economic challenges.

Notably the net charge-off ratio fell from 1.01% annualized in the second quarter to 0.92% in the third quarter.

This is the lowest level of charge-offs since the third quarter of 2008.

Both Commercial and Consumer loans contributed to this linked-quarter improvement.

While we expect continued improvement in our charge-off trends, the pace of improvement will remain more modest given weak economic growth, relatively high unemployment and still unstable home values.

Loans 90-plus days past due delinquent and still accruing were basically flat quarter-over-quarter, up 1 basis point.

We continue to have no commercial delinquencies in the 90-day-plus category.

The nonaccrual loans, nonperforming assets and criticized asset ratios all showed continued improvement in the quarter, although the improvement slowed somewhat by an uptick in problem loan inflows.

The allowance for loan loss and allowance for credit loss to loan ratios fell modestly to 2.61% and 2.71% respectively.

Nonetheless, coverage ratios increased due to lower nonaccrual loans and nonperforming assets.

Slide 23 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 8% in the quarter.

With regard to nonaccrual inflows depicted on the right-hand chart, we once again saw a reduction in new inflows in the quarter after experiencing an increased inflow in the second quarter.

As I mentioned in last quarter's discussion, we did not believe at that time that the second quarter inflow was the beginning of a trend, rather simply more indicative of the uneven nature of the commercial portfolio when individual credits can account for fairly large movements.

This type of linked-quarter lumpiness is not unexpected.

Slide 24 provides a reconciliation of our nonperforming asset flows.

NPAs fell by 6% in the quarter, up from a 5% reduction in the prior quarter.

The reduction in inflows was the primary driver, along with charge-offs and payments.

The quarter also saw a lower level of loans returning to accrual status as well as a lower level of loan sales.

Turning to Slide 25, we provide a similar flow analysis of commercial criticized loans.

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

Although that trend continued with total criticized loans down 4%, it was less of a decline than the 11% that we experienced in the prior quarter as current quarter criticized inflows increased.

The inflows consisted of both C&I and CRE loans.

The largest downgrade comprised a group of CRE loans that had significant sponsor support which we believe provides an opportunity to come to a resolution and eventual upgrade.

Several other large downgrades have impending events which may also allow for upgrades in subsequent quarters.

Because of uncertain economic outlook, we continue to be very conservative in our early identification of problem loans, which allows for exercising a larger number of alternatives for restructuring and eventual upgrade.

We do not believe that the vast majority of these early downgrades are at risk of further migration to nonaccrual status, given the action plans and alternatives already developed.

At this time, we believe the risk of loss on these new criticized loans is negligible.

Moving to Slide 26, commercial loan delinquencies rose to 43 basis points from 32 basis points in the prior quarter.

While C&I delinquencies were flat quarter-over-quarter, CRE delinquencies were up and accounted for the entire increase.

As mentioned earlier, we have no 90-day accruing delinquencies, which is consistent with prior quarters.

Slide 27 outlines consumer loan delinquencies, which were up modestly in the quarter in both 30- and 90-day categories.

This is also consistent with typical seasonal patterns.

The gray line in the chart of a left displays 30-day delinquencies, excluding government-guaranteed loans, and shows a linked-quarter uptick to 1.95% from 1.83%.

This reflected modestly higher home equity and auto delinquencies, partially offset by a slight decline in residential delinquencies.

Now, accounting for the $1 billion auto securitization, consumer delinquencies are basically flat for the quarter.

The 90-day increase shown in the chart on the right was more modest and saw delinquencies, excluding government-guaranteed loans, rising to by 2 basis points in the quarter.

Again, home equity and auto saw modest increases while residential delinquencies experienced a small reduction.

Again, when we take into account the auto securitization, 90-day delinquencies were actually down 1 basis point or 2.

Year-over-year results in both 30- and 90-day delinquencies continued to demonstrate improvement despite the ongoing challenges faced by consumers.

Reviewing Slide 28, the loan loss provision of $43.6 million was lower than net charge-offs by $47 million.

The ACL to total loans was lower at 2.71% compared to 2.84% last quarter, although we believe this is a very solid ratio given our continued improvement in the gross profile of the portfolio.

Importantly, the ratio of ACL to nonaccrual loans actually increased to 187% from 181%.

We believe this coverage ratio should compare favorably to our peers.

Overall, we remain pleased with the direction of credit quality across the portfolio and expect continued improvements in subsequent quarters.

Let me turn the presentation back to Steve.

So as I mentioned in my opening comments, our Fair Play banking philosophy and our optimal customer relationship, or OCR, strategy has been resonating strongly in the market and driving accelerated new customer growth.

Along with those new customers, we continue to benefit from higher retention rates as current customers feel an even stronger level of loyalty to Huntington.

As a result, related revenue is increasing.

This slide recaps trends in consumer checking account households, Slide 29.

First-quarter 2011 growth was running at a 9.1% annualized rate.

By the second quarter, year-to-date annualized growth increased to 9.8%.

Now for the first nine months, this has increased even further to an annualized 10.8%.

Throughout this period, several competitors announced they were adding fees or reducing product features to try to offset the lost revenue.

Customers are clearly reacting positively to our strategy.

Now, in addition, we're selling more to all of our consumer households.

For the third quarter, 72.8% of consumer checking account households used over four products or services, up from 71.3% in the second quarter and significantly higher than the 68.5% just a year ago.

We hear competitors saying we're attracting low profitability consumers.

Some of you have told us our competitors have even said they're glad to lose these customers.

We hope they continue to believe that.

All we can say is our related revenue is increasing with third-quarter related revenue 5% higher than a year ago, and on an absolute basis above pre Reg.

E amendment levels.

In a low interest rate environment, the earnings potential from a consumer demand deposit is less than in a higher rate environment.

Perhaps that accounts for some of our competitors' remarks.

What we also know is that loyalty matters.

Loyalty matters.

When rates rise, and they will eventually, we have a fully-developed, highly-penetrated, and extremely loyal customer base, which I believe will be a huge competitive advantage.

We're seeing similar trends in our commercial relationships, as shown on Slide 30.

I think it's important to note that our definition of commercial relationship is a business banking or commercial banking customer with a checking account relationship.

A business with just a loan relationship is excluded.

That's because we believe a checking account anchors a business relationship and creates the opportunity to increase cross-sell and ultimately total profitability effectively what we've done with our consumer household and how we look at it, both of which benefit from our optimal customer relationship strategy.

As shown on this slide, commercial relationships growth is also accelerating.

After growing 4.9% in 2010, commercial relationships for the first nine months of this year grew at an 8.6% annualized rate, a 75% improvement.

For the third quarter, 29.2% of our commercial relationships utilized four more products or services, up from 26.7% in the second quarter and significantly above the 23% penetration a year ago.

Related revenue is also increasing.

Related revenue for the third quarter was $176 million or up from $167 million in the second quarter and 15.5% more than just a year ago.

There are slides in the Appendix that provide additional details.

We believe we are winning the battle for retail and business customers in our markets.

I'd like to use Slide 31 want to recap our current thinking regarding our expectation for the next several quarters.

Last quarter, we noted our concern that economic environment was becoming increasingly uncertain.

Third-quarter events in Europe, Washington's handling of the debt ceiling, the Fed's comments about targeting a low interest rate environment through 2013, and their latest Operation Twist designed to bring down long-term interest rates relative to shorter interest rates have all increased economic uncertainty.

We see that uncertainty continuing.

As such, we expect the economic growth, if any, will be limited.

But notwithstanding these pressures on the banking system, we believe our Fair Play banking philosophy and the value propositions of our products, which we've created for customers, sets us apart from the industry.

That value proposition is driving our growth and it allows us to continue to invest in strategic actions that we believe will translate into long-term shareholder value.

With regard to net interest income, we expect to see modest growth.

This will be driven by a modest loan growth and continued remixing of our deposit base to lower-cost deposits.

These benefits are expected to be partially offset by modest net interest margin pressure reflecting the effect of an extended low interest rate environment.

If the current interest rate environment remains unchanged through 2012, it could cause our net interest margin to drop modestly below this level.

With regard to loan growth, we expect recent trends to continue with overall modest loan growth.

This should reflect strong growth in auto loans off the September 30 base, meaningful growth in commercial and industrial loans, and modest growth in residential mortgages.

These increases, however, are expected to be partially offset by the continued decline in non-core commercial real estate loans.

Core deposits are expected to continue to grow.

As has been our objective, we expect the absolute level of deposit growth to mirror the loan growth opportunities, given the inability to invest excess deposits at attractive risk-weighted returns.

We anticipate fee income growth will continue to be mixed.

We expect to see growth in key activities related to customer growth and improved mortgage banking income, excluding any MSR impacts.

We expect the implementation of the new interchange fee structure to reduce electronic banking income by approximately 50%, or around $16 million from third-quarter levels.

Non-interest expense is expected to decline modestly in the coming quarters with improved expense efficiencies, though strategic actions like this quarter's debit conversion may cause short-term fluctuations.

Nonaccrual loans and net charge-offs are expected to continue to decline.

In closing, we made a lot of progress in the third quarter.

Much of this was centered on building our customer base, increasing product penetration, and growing related revenue.

The fourth quarter should see -- continue to see many of these same trends, though with the additional headwinds of the interchange fee reduction and margin pressure challenges given the low interest rate environment.

So thanks for your interest in Huntington.

Steve, we'll now take questions.

(Operator Instructions).

Tony Davis, Stifel Nicolaus.

Good morning Steve, Don.

I just wondered.

Following the expansions into New England here and Wisconsin and Minnesota, how much broader a footprint do you envision for the auto business, number one?

Number two, are acquisitions such as TCF Gateway One deal a realistic growth option for you?

We're essentially defined now in terms of our automobile geography.

We could add a state or two, but it won't be anything broad-based.

While we admire a lot of what TCF does and has done, we don't have plans to follow their expansion to a national indirect lender.

Okay.

And one quick follow-up.

Last quarter, it was so early I guess you really couldn't give us much color on how it was rolling out.

I but I wonder if you could talk a little bit more, Steve, about Asterisk-Free.

how it's progressed relative to expectations, and what you're seeing out there I guess in terms of competitive response today.

Asterisk-Free is part of our Fair Play philosophy.

When we announced it about a year ago, Fair Play and that we were going to with 24-hour Grace and certain other fee give-ups in addition to Reg.

E take a fee setback.

We shared with the investment community just the fee give-ups and 24-hour Grace would cost us $30 million.

We're very pleased and we're well ahead of schedule to be back essentially flat year-over-year in the same time frame.

Asterisk-Free, as you heard from those statistics and seeing the pages, it's accelerating our household growth.

It's early, as we've said and as you acknowledge, but we like what we see so far in the mix.

We're continuing to get good cross-sell penetration in addition to the mix.

But it's early, and so we're not sharing a lot more; we're not prepared to share a lot more until we have a better view of a sustainable run rate so we don't create a misperception.

Good enough.

Thanks.

Ken Zerbe, Morgan Stanley.

With the resumption of your auto securitizations program, what does that imply about how aggressive you might be with writing new originations on the auto side?

Should we think about this as maybe you step down from super prime to prime and securitize more of the prime stuff?

Also, at the end of the day, what I'm trying to figure out is how often would we start seeing these [pro] $15 million gains from securitizations?

Thanks.

Ken, I'll do the credit in the first case.

Don, why don't you talk about timing of securitization if you would, and Nick, chime in as well.

But Ken, we don't anticipate changing our lending policy at all at this point, and there are no discussions to do so in the future.

So we would expect to continue to generate super prime.

We look at it weekly, as we've shared with you in the past, and Nick and team of course are on it every day, all day.

As far as frequency and timing of the securitizations, I would say that, as a general expectation, we're probably looking at a couple a year.

In some years, you might even have three, some might even have fewer and the size of the securitizations probably will be similar to what we just did.

But I wouldn't say that's an absolute guidance, but generally be met based on growth and balance sheet capacity and other funding considerations.

We articulated a concentration limit for auto.

I think there was a little concern with just how much as a percentage of portfolio and the rate of growth this was.

We shared internally that 20% limit for total loans.

As we were cresting to 16% knowing we had a further expansion on the horizon, we want to get ahead of it this quarter.

I would just add one comment, and that is we have a reputation that we've worked very hard to build in the marketplace.

The dealers are very connected for a variety of reasons.

We want to stay very focused on what we are known to do and do really well, that's where we want to continue to play in that space.

That make sense.

Then just the one other question I had.

On the MSR loss in the quarter, I may have missed this, but were you making any directional bets one way or the other?

I think I heard a comment that you are not hedged on some piece of it, but I wasn't sure if that related to the MSR.

Basically I'm just wondering why you took more of a loss that I guess some of your peers.

Thanks guys.

Ken, good question.

We essentially have been including new mortgage loan originations on a lower cost or market basis over the last two years.

For that portion of the portfolio, we believe that interest rates over the long haul would increase from where they were before.

As a result of the amortization associated with that asset, we really didn't need to hedge it, and we monitored it but we didn't hedge it.

As a result of that, the marked to market on that low comb really hit for the first time this past quarter and cost us $11 million of write-downs.

So if you just look at fair value portion of the MSR, we actually had a slight gain of about $2 million, which is consistent with what we've seen in previous quarters before that activity.

But it really was a reflection of the long-end rates coming down 90 basis points in the early part of the quarter.

Then as Steve referenced, we had another 30 basis point drop in the last two weeks of the quarter, which caused $7 million of that impairment.

And so it was more market-driven one-time related.

We have taken a position to do a partial hedge of that asset going forward, but it's a reflection of the strategy we played up until now.

We originally moved the low com because we thought it was a more conservative basis for covering the MSR.

While we had it partially -- the low com portion partially hedged was inadequate given the magnitude of the moves.

As Don referenced, it's now more substantially hedged at this point going forward.

But if you look at it on a two-year continuum, we're net way ahead, having left it unhedged, but kicking ourselves a bit for missing these last couple of weeks in particular and the impact of it.

Great, thank you.

Ken Usdin, Jefferies.

Good morning.

You guys have always done a very good job of continuing to focus on the long-term in terms of investing in the footprint, you continue -- and franchise and you continue to put that forth.

But I'm just wondering, with acknowledging that the revenue environment is harder, the fourth-quarter pressures and just the low rate environment, what else can you do in terms of that efficiency initiative?

Can you help to size it for us?

Because it seems like the expense trajectory has continued to move up, notably this quarter even on the comp line in a flat revenue quarter.

So I'm just wondering how you're figuring through that balance, and what structural things can you do to more than offset some of those investments that you're continuing to make?

Great question.

As far as the expenses, I just want to highlight a few things.

There really are some unusual items in the quarter that drove that $11 million increase.

We talked about roughly a $6 million increase in outside processing and other services.

A good portion of that relates to the conversion costs associated with our debit card efforts that we have going on.

We've mentioned an increase in personnel costs.

They're up $8 million linked-quarter.

We had a $2 million increase in healthcare benefits primarily related to three specific claims that were of a large dollar amount that were outside the normal cause.

We had $2 million of severance costs this quarter.

We had a host of other items of about $1 million each that I wouldn't suggest are core and recurring, but just ended up hitting this past quarter.

As far as the severance cost, it really was related to some continuous improvement efforts we have in place.

We haven't targeted or sized a specific initiative as to what we want to do as far as bringing down some of the expenses, but we do want to be able to focus on continuous improvement, making sure we're able to support investing in other initiatives where appropriate, but also keeping in mind the impact of the economy over the next several quarters and the need to make sure that we're managing our expense base prudently and trying to keep that down.

As a result of the one-time items I talked about, our guidance was for expenses to be lower, but just as we referenced with the conversion costs, we expect those costs to continue into the fourth quarter, but we'll see benefits in future quarters from the impact of that conversion.

We're very focused around the efficiency ratio and the expense lever and will be as we go forward.

Got it.

My second question, just in regard to the comment that we see in the press release about next year's margin potentially going below the low end of the 3.30% to 3.70%.

I'm just wondering.

Is that commentary more on a 2012 full-year basis, or about where it could get to by the end of the year type of comment?

I'm just wondering, trying to understand the magnitude of compression that you think you might see as we look ahead to the next year or so.

It's first to point out that we do expect to see increases in net interest income even though the margin could show pressure.

But the guidance, as far as it could drop modestly or slightly below that long end of the guidance -- of the long-term end of the guidance of 3.30% more is a reflection of the fact that we're at a 3.34% for the current quarter.

We think there will be continued pressure just because we don't want to extend the duration of our investment portfolio in this low rate environment, and we want to make sure that we're managing that risk position appropriately.

Erika Penala, Bank of America.

Good morning.

Steve, I know you alluded to this a bit on the call, but we're quite aware of what the national banks are doing with regards to checking fees.

I guess give us a sense on what your regional competitors are doing and whether or not they're being thrown for a loop by the Fair Play banking strategy.

It's hard to project what they're doing.

We have -- we've got the rearview-mirror focus, but I would say there's generally an effort to try and make up some of the Reg.

E and Durbin.

You'd have to look at it bank by bank to see how they're doing it.

Some of it's obvious and some of it's sort of what I call junk fees that are just getting added in, like an ATM look-up -- balance look-up fee, things like that, none of which we're doing and all of which sort of work for us in this Fair Play philosophy much like more commonly known Bags Fly Free thing from Southwest has resonated.

We expect that will continue.

Our growth, in terms of competition, we believe it has some runway undefined, has some runway yet.

We intend to be driving aggressively and tried to foreshadow that in terms of the expectations of household and business unit growth in the near-term.

My follow-up question is around capital distribution.

Do you get a sense that being part of the CCAR might limit your flexibility despite your stronger Tier 1 common ratios with regards to near-term distribution?

I think the regulatory environment and the Fed in particular will look at the SIFI banks as a class going forward.

Being the midget in the room will still put us in the room.

So we have -- we're going to go through a CCAR process first time, which we outlined in the release.

Unknown prospective, I think it would be conjecture on our part to take some kind of extended-view comment right now, but our capital plan will be holistic in terms of uses of capital.

We're trying to be efficient in our use, as you saw with the auto securitization, and our outlook for continued securitizations.

Have you disclosed over the long-term where you'd like your total payout ratios to be, taking into account those potential dividend increases and reinstatement of a buyback?

We haven't disclosed that.

It gets -- we have an organic growth dynamic that we're also conscious of.

At the moment, in some respects, it appears to be accelerating.

We clearly want to continue that and fuel it, and then separately from time to time could be an acquisition here or there.

So the standard uses of capital, and we're working through all that, we'll work that through with the Fed and the CCAR process.

Thanks for taking my questions.

Craig Siegenthaler, Credit Suisse.

Good morning everyone.

Just looking at Slide 27, if you look at 30- to 89-day delinquencies ex-the guaranteed Ginnie Maes, delinquencies look to be basing and increasing.

Then if I turn to slide over and look at even commercial criticized loan inflows, they also peaked up in the quarter.

I know you gave a little bit of color on here, but is your outlook for additional improvement in early-stage credit quality indicators in the next few quarters and is this kind of a near-term or seasonal hiccup?

I just want to hear your outlook on some of these earlier signs.

Yes, I think, on the consumer side, I do think that this, as I mentioned with -- you take the securitization out and we basically have flat.

And resi was down a little bit, home equity was up a little bit, so I don't -- we're not troubled at this point that this is a trend.

We think there will be modest continued improvement there.

Similarly, on the Commercial side, in terms of new inflows, obviously you can't argue with the numbers.

Inflows were up.

However, there were a few events in the quarter that boost that number up higher than what we think is just normal downgrade activity.

Therefore, we're watching it closely but feel that -- don't feel that is necessarily the beginning of a trend either.

so we're on top of it.

We feel pretty good where we stand today.

Again, on the Commercial side, as I mentioned, we think there's negligible loss content in the new inflows.

Then just a follow-up.

On the $1 billion auto securitization, I was wondering if you could give us a few details on this structure.

So I was kind of looking for what was the aggregate size of the equity tranche of the residual and how much did you retain, and then also under what circumstances would Huntington be required to consolidate some of the more senior tranches back on its balance sheet.

Great question.

As far as the securitization, it was $1 billion.

The residual interest represented about $28 million out of that $1 billion.

It was sold through, so we retained zero of the securitization.

Now, we do have a mirror pool of that that represents about 5% of that balance that we do keep on our balance sheet.

It's more in response to the expected regulatory guidance as far as how to keep a similar retained interest, but do not have any expectations at this point in time that would come back on the balance sheet.

But we do have the opportunity once it narrows I believe to less than 5% of the outstanding balances, we might have an opportunity to repurchase, but that would be a de minimis cleanup type of transaction.

Thank you.

Brian Foran, Nomura.

Actually one follow up to what you just said.

So if, going forward, let's say there was a big drop in the Mannheim one quarter that affected auto valuations, would the $15.5 million gain ever be subject to a true-up or is it just once you book the $15.5 million, it's booked and there is no risk of a true-up going forward?

There is no risk there as far as that true-up.

We do have a servicing asset on our balance sheet that's light and will continue to value that over time.

But there is no risk to the recapture of that $15 million.

Then I missed the beginning of the call, so if you already went over this, just stop me.

But in the mortgage business on origination (inaudible) gain on sale, most of the banks seem to be down 20% on origination and almost flat on gain on sale margin, maybe down a little bit year-over-year, whereas your business has shrunk more than that.

Was that a conscious decision, or did you pull back from some geography, or I guess why are originations down so much and gain on sale down further still?

On a year-over-year basis, we did have much stronger origination volumes in the third and fourth quarter of last year, that the three quarters this year are all fairly consistent as far as the originations ranging from $916 million in the second quarter to $953 million in the third quarter.

We did not change origination locations or any other sources to any extent, but our book today is a primarily retail source from our MLOs and doesn't have anything in the way of third-party sources as far as the origination stream.

I guess does that imply that, going forward, when refi goes up and down, we should expect your originations to not move as much?

Or I guess I'm not clear why originations would only be up, whatever it was, 5% quarter-over-quarter when a lot of the other banks saw much bigger increases on a linked-quarter basis from the refi boom.

I'd say that we're trying to maintain or manage our pricing there to best deliver the bottom line for us.

We probably will see a little less volatility than many of our peers from that perspective.

I'd say application volumes are up significantly, and so we should see some higher origination volumes for the fourth quarter based on that pipeline, but probably not as volatile as many of the peers might show.

Okay, thank you.

Paul Miller, FBR.

Yes, I also missed the beginning of the call.

On your loan growth can you talk about what industry -- if you already addressed this, I apologize.

But on your loan growth, I know you're mainly Ohio or Michigan.

What state is going better versus the other?

We hear Michigan is doing a lot better than I think a lot of people expected.

And then what industries seems to be doing very well up in that area?

This is Dan.

I think the -- industrywide, the new originations really are coming -- they're very much in line with what our typical portfolio distribution is.

Manufacturing has served us very well; you're right.

In Michigan, the auto suppliers have -- they're now healthy.

We've had the fallout of the weak players and the survivors are quite strong, and so we've been very interested in that market.

But if you look at the new originations compared to our overall portfolio, you would see very consistent numbers, and that would be whether you're looking at business banking, middle-market or large corporate, you would not see a big change.

Now, we are targeting certain business lines.

Obviously, our large corporate has gotten up to speed over the last year, more activity in ABL equipment finance and so forth, but we have good organic growth coming out of the middle-market, both -- in all our regions but I would say Ohio and Michigan particularly.

Then on the acquisition front, I believe there was a couple of questions on would you expand your footprint on the auto.

Is there any other areas you could expand your footprint in?

You've seen some other companies getting equipment leasing or other asset type classes.

Are there any plans to expand in those areas?

We made investments in late '09 and '10 in equipment finance and in large corporate.

We're generally set at this point.

What about -- then on the M&A front, you haven't really -- a lot of people predicted a lot more M&A that we're seeing out there.

I think it's because the bid-ask prices are so wide apart.

Are you getting any inquiries from small local guys that maybe want to get out of the business because of overregulation, or is it still pretty quiet out there?

We are getting inquiries.

They don't quite phrase it that way, but there may be a little bit of fatigue and angst about combination of reinvest challenge, concentration risk issues, regulatory activity, including pending Dodd-Frank impacts.

But there is I would say generally [it's] still a bid-ask [off].

We grow every quarter now what we used to grow in a year in terms of consumer checking households.

In 2010, we had 30,000 household growths.

We're doing that in a quarter.

So we're going to keep driving the machine organically and hopefully aggressively.

If something comes along that makes sense at the right price, we'd looked hard at it, but it would have to be on our terms.

Thank you very much.

David Long, Raymond James.

Good morning guys.

Looking at the third quarter, you had almost $2 billion of core CDs mature.

I was curious as to when in the quarter most of those may have matured, and then where did they go and what types of yields would they have been reinvested in?

Great question.

We did have about $2 billion of maturities and the average rate on that maturity was 2.63%.

It's interesting.

Each of the months throughout third quarter, the average rate for that maturity bucket increased to where in the third quarter -- third month of the quarter, September, it was over a 3% kind of rate for that.

So we really haven't seen a lot of a benefit from that repricing in the third quarter that we will see in the fourth quarter.

The average go-to rate for our CD originations was under 70 basis points.

I think it was around the 65 basis point range and tended to have around a two-year average duration to it.

As you look forward, David, it's sort of our cost of funds and compares to other regionals.

We have some pricing opportunity in the portfolio, and some of that will come through a change in mix and some of it's probably of an opportunity within the class.

So you had mentioned a formal initiative to lower the cost of funds, and that the impact would be more visible in the fourth quarter.

On that initiative, is that separate from the CDs maturing?

Then what may have been the impact in the third quarter versus what we can see in the fourth quarter?

I would say it's part of it.

I'd say later in the third quarter, we implemented a little bit more rigor in some of those pricing strategies, and so our go-to rates for our time deposits are lower now today than what they were throughout most of the third quarter.

We've also had some similar efforts on the money market deposit pricing.

Towards the end of the quarter, we also started see a lot more benefit from some of the commercial relationships bringing in some additional balances to their existing relationships, which helped to drive the cost down.

So I think it will be a part of the overall effort.

I think we've got time for one more question.

Andrew Marquardt, Evercore Partners.

Good morning guys.

Can you just help me understand on the credit quality MPAs and net charge-offs should continue to decline, but how should we think about provisions?

Should that match charge-offs from here on or should we continue to see reserve release?

I think we've pretty much if you look at our level of provisions, it's pretty much at a kind of core level, what we would expect to see on an ongoing basis.

It may move quarter-to-quarter a little bit, but I think we're generally in the range.

I guess there might be a little bit of movement, but that's based on quarterly developments.

But (multiple speakers)

But does that imply actually maybe if charge-offs continue to decline, that reserves would actually build from here?

I think right now we have very strong coverage levels and the portfolio is improving, so I wouldn't necessarily see a build, no.

But we have a lot of -- when we periods of a lot of volatility, like the third quarter, we talked -- I mentioned briefly concerns with Europe, concerns with change in confidence as a consequence of the debt issues in Washington, that we're going to be prudent.

We're going to be conservative with our views on risk.

Got it.

That's helpful.

Then lastly, pretax preprovision earnings, any sense of how that should trend from here?

It came in a little bit lighter than what you were looking for obviously last quarter.

Should it hold at kind of the $240 million level or should it kind of continue to drift down because of the Durbin and other things near-term?

I would say that it's a little lower than what we probably would've thought coming into the quarter, but it's more reflective of some of the costs what we had talked about, whether it's the conversion cost or some of the other items that caused that to be slightly lower than expectations.

As far as the impact, we talked about our guidance shows that we do expect the Durbin impact to have about a $16 million reduction fee income.

We think offsetting that will be continued modest improvement net interest income.

We think we'll see continued improvement in other fee categories, like deposit service charges were up $4.5 million this past quarter.

We think the expense levels, absent the conversion type of costs, will return to more normal levels.

So we think those efforts will offset the impact of Durbin.

This is probably a good run rate for now until kind of the macro improves?

Is that fair?

I'd say generally, that's in line with expectations, that just because of the challenges you've talk about, whether it's the macroeconomic outlook or interest rate environment overall.

Great, thanks guys.

This is Jay Gould.

I want to thank you all for participating in the call today.

If you have further questions, feel free to call me, as you always do.

We will see you next quarter.

Thank you.

This concludes today's conference call.

You may now disconnect.