Huntington Bancshares Inc (HBAN) 2012 Q1 法說會逐字稿

Good morning.

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

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

(Operator Instructions).

Thank you.

Todd Beekman, you may begin your conference.

Thank you, Matthew, and welcome.

I'm Todd Beekman, the Director of Investor Relations for Huntington.

Copies of the slides that we will be reviewing will be found on our website at www.huntington.com.

This call is being recorded and will be available for re-broadcast starting about an hour after the call.

Please call the Investor Relations department at 614-480-5676 for more information or how to access this recording playback should you have difficulties.

Slide two, there are several aspects of basis of today's presentation.

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

This presentation contains GAAP and non-GAAP financial measures where we believe it is helpful to understand Huntington's results of operations or financial performance with the non-GAAP financial measures used, the comparable GAAP financial measures, 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 the related 8-K filed today, all of which can be found on our website.

Turning to slide three, today's discussion includes a Q&A period that may contain forward-looking statements.

Such statements are based on information and assumption available at this time and are subject to change, risk and uncertainty, which may cause actual results to differ materially.

We assume no obligation to update such statements.

For a complete discussion of risk and uncertainties, refer to the slide and material found with the SEC, including our most recent 10-K, 10-Q and 8-K filings.

Now turning to today's presentation.

As noted on slide four, participating today will be Steve Steinour, Chairman, President and CEO; Don Kimble, our CFO; Dan Neumeyer, Chief Credit Officer; Mary Navarro, head of Retail and Business Banking Director.

Let's get started, turning to slide five, Don?

Thanks, Todd, and welcome, everyone.

We are going to mix up the order a little bit today, and I will begin with a view of our first-quarter performance highlights.

Then Dan will provide a review of credit, Mary will continue with an update on our in-store partnership with Giant Eagle, Steve will then provide you with an update of our OCR strategy, a review of our Fidelity Bank acquisition and close with a discussion of our expectations for this year.

Turning to slide six, we reported net income of $153.3 million or $0.17 per share.

That is up 21% from a year ago and also from the fourth quarter.

There were two significant items that impacted this quarter's results.

First was an $11.4 million gain relating to our recently announced FDIC-assisted purchase of Fidelity Bank in Dearborn, Michigan.

The other was a $23.5 million addition to our litigation reserves related to previously existing actions taken against us.

Total revenues increased $58.6 million or 9% over the fourth quarter.

Our non-interest income growth drove most of this improvement up $56 million, reflecting the benefit of a $23 million gain from our first-quarter auto securitization, an $11.4 million gain from our Fidelity Bank acquisition, and a $22.3 million increase in mortgage banking revenues.

Fully taxable equivalent net interest income increased $2.6 million or 1%.

For the quarter our net interest margin increased by 2 basis points as we continue to lower our deposit and other funding costs.

We also had a 5% annualized growth in average earning assets.

This growth reflected the benefit of continued strong commercial loan growth up 17% annualized from the fourth quarter.

The other securitization negatively impacts auto loan growth for the quarter as we transfer the balances to loans held for sale at the end of last year.

Average total core deposits were stable this quarter with the mix continuing its shift to lower-cost demand deposits.

Total demand deposits increased $0.6 billion or 16% annualized.

Non-interest expense increased $32.4 million as the quarter included the $23.5 million increase to our litigation reserves.

Also, the prior quarter included a $9.7 million gain on the extinguishment of debt related to our TruPS exchange.

Adjusted for these items, expenses were essentially flat.

Turning to slide seven, our OCR methodology is continuing to derive success throughout the Company.

On the consumer side, we grew checking account households by an annualized 14.2% this past quarter.

This represented an 11.7% growth rate since the first quarter of 2011.

More importantly, our cross-sell performance also continued to improve.

At the end of the quarter, 75.1% of our consumer checking account households have over four products or services.

This compares with 70.5% a year ago, an almost 5 percentage point improvement.

We continue to derive similar success on the commercial side.

Annualized growth in commercial relationships was 13.3% this quarter.

Our cross-sell measures were also impressive.

At the end of the quarter, 32.7% of our commercial relationships used over four products and services, up from 25.4% a year ago or up over 7 percentage points.

These cross-sell metrics continue to reinforce the message that our strategy of acquiring customers and deepening the relationships with those customers through additional sales of Financial Services is working.

Turning to credit quality, our metrics continue to improve as well.

Non-accrual loans were up 14%.

This reduction is after reflecting an $8.7 million addition to our home equity nonaccrual loans, resulting from the application of new regulatory standards to our portfolio.

Our allowance for credit losses as a percentage of non-accrual loans increased to 206%, which we believe will continue to compare favorably to our peers.

Net charge-offs declined 1% on an annualized basis point of 85 basis points remaining consistent with last quarter.

Our capital position remains strong.

Our tangible common equity ratio rose 3 basis points to 8.33%.

Our regulatory capital ratio strengthened further with most improving by 10 to 15 basis points from the prior quarter.

These ratios reflect the impact of the Fidelity Bank acquisition which closed on March 30, but they do not reflect any of the capital actions included in our first-quarter capital plan.

Turning to slide eight, other highlights for the quarter included a $400 million purchase of an equipment finance portfolio, which closed in March, allowing us to leverage our equipment finance team expertise.

We continue to reposition our branch network, completing a consolidation of 29 of our full-service branches in March, providing some efficiency improvements that help fund our investments in strategic initiatives, including our in-store expansion where we added 14 new locations in the first quarter.

We also were again recognized for outstanding customer service with the APECS 2011 Top Advocacy Award for customer service in our region.

Huntington had the highest net advocacy rating for customer service for three years in a row.

Slide nine provides a summary of our quarterly earnings trends.

Many of the performance metrics will be discussed later in the presentation.

Turning to slide 10, we show a summary income statement.

We have also adjusted the revenues and expenses for the impact of significant items.

On this adjusted basis, revenues were up 8% over the prior year with expenses up 6%.

This 2% operating leverage is critical for our long-term success and reflects our early stage results for many of the strategic initiatives we have started over the last several years.

Slide 11 depicts the trends in our net interest income and margin.

During the first quarter, our fully taxable equivalent net interest income increased by $2.6 million, reflecting the benefit of a $0.6 billion increase to our average earning assets and a 2 basis point increase to our net interest margin to 3.40%.

The increase in net interest margin reflected the impact of the following -- a 7 basis point increase related to the reduction in deposit rates and the improvement in the deposit mix.

This was offset by a 4 basis point reduction related to the impact of the extended low rate environment on loan yields.

Slide 12 shows the trends in our loan and lease portfolio.

Average total loans and leases decreased $0.4 billion or 1%, which is 4% annualized from the fourth quarter and primarily reflected a $1.1 billion or 19% decline in average automobile loans.

The decline from the fourth-quarter average balances reflected the December 31 reclassification of $1.3 billion of auto loans to held for sale.

Originations remain strong in the quarter with over $950 million of loans booked this past quarter.

This decline in average automobile loans was partially offset by a $0.6 billion or 4%, which is 17% annualized growth in average commercial and industrial loans, reflecting increased activity from multiple business lines, including equipment finance, large corporate and dealer services.

C&I utilization rates were down slightly from the prior quarter due to an increase in unfunded loan commitments.

Very little benefit was recognized from either the Fidelity Bank acquisition or the equipment finance portfolio purchase due to the timing in the current quarter.

Continuing on to slide 13, we have shown continued improvement in our deposit mix over the last five quarters as we have increased the non-interest-bearing DDA balances to 26% from 18% of total average deposits.

The improved deposit mix reflects the success of fair play ranking on growing consumer DDA, and our treasury management and OCR focus on growing commercial demand deposits.

Turning to slide 14, we show a stable level of total average core deposits.

This reflected a $0.6 billion increase in total demand deposits, offset by declines in money market deposits of $0.5 billion and core CDs of $0.3 billion.

The demand deposit growth reflected strong growth in consumer households, which again increased an annualized 14% pace and similar growth in our commercial relationships, up an annualized 13%.

As mentioned last quarter, about $1 billion of our commercial balances reflect temporary deposits, which are expected to decline over the next couple of quarters.

Slide 15 shows the trends in our non-interest income, which increased $56 million or 24% from the prior quarter.

The increase reflected the $23.9 million of higher gains on loan sales as the current quarter included $23 million of gain associated with our automobile loan securitization.

We expect to have about two securitizations a year going forward.

This quarter also showed a $22.3 million increase in mortgage banking income, driven by a $10 million increase in originations and secondary marketing income, as well as a net improvement of about $12 million in our MSR hedging activity, as the current quarter included a gain of $7.7 million compared with a $4 million MSR loss last quarter.

Other income included an $11.4 million gain related to the Fidelity Bank acquisition.

This was offset by a $7.2 million decline in mezzanine investment gains.

The next slide summarizes expense trends.

Non-interest expense increased $32.4 million or 8%.

Again, this included the impact of the $23.5 million increase in our litigation reserves for previously existing actions recorded in other non-interest expense.

In addition, it reflects the prior quarter's benefits and the $9.7 million gain on the early extinguishment of debt related to our trust preferred securities.

Other areas of note include a $15.4 million increase in personnel costs as this quarter reflected a $9 million increase in benefit expense, primarily seasonal payroll tax-related and a $6 million increase in performance-based incentives.

It also reflected an $11.4 million reduction outside data processing and other services.

This is primarily due to the prior quarter costs associated with the conversion to a new debit card processor.

Slide 17 reflects the trends in our capital position.

These are all as of end of period balances and reflect the addition of over $700 million of assets from the Fidelity Bank acquisition.

The tangible common equity ratio increased to 8.33%, up from 8.3% the prior quarter.

The Tier 1 common risk-based capital ratio increased to 10.15%, up from 10% the previous quarter.

We believe this increase is noteworthy during a quarter when we grew risk-weighted assets by nearly $1 billion.

With that, let me turn the presentation over to Dan Neumeyer to review the credit trends.

Dan?

Thanks, Don.

Slide 18 provides an overview of our credit quality trends.

The first quarter continued to show good overall improvement in our credit quality metrics.

Net charge-offs fell by $1 million.

The net charge-off ratio remains flat at 85 basis points, reflecting slightly lower average loans, particularly due to the March automobile securitization.

We do expect a positive trend in charge-offs for the balance of the year, although the pace of improvement will likely remain more modest as we move closer to normalized charge-off levels.

Loans 90-plus days delinquent and accruing were down in the quarter, falling to 15 basis points.

This is an improvement from the prior quarter and also an improvement over the prior year.

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

The non-accrual loan ratio fell noticeably to 1.15% from 1.39%.

This was the largest quarterly reduction in the non-accrual loan ratio in over a year.

The criticized asset ratio also showed a meaningful reduction in the quarter, falling to 5.8% from 6.53%.

The allowance for loan loss, loan and lease loss and the ACL to loans ratios fell to 2.24% and 2.37% from 2.48% and 2.60% respectively due to the asset quality improvement.

However, the ACL to NAL ratio increased from 187% in the prior quarter to 206%, even with the addition of $8.7 million of performing second-lien home equity loans that are sitting behind delinquent first mortgage as we implemented the new regulatory guidance that was issued earlier this quarter.

Slide 19 shows the trends in our non-accrual loans.

The charts on the left demonstrate the continued reduction and the level and percentage of our non-accrual loans.

The 14% reduction in the first quarter was the largest percentage reduction experienced in the last year.

As shown on the charts on the right, during the quarter we also experienced the lowest level of new inflows than we have seen in several years.

The performance of the commercial book was very strong.

We did see a modest increase in consumer non-accruals due in large part to the addition of $8.7 million of the home equity non-accrual loans due to the new regulatory guidance just mentioned.

As we reach a more normalized level of non-performers, the change between quarters may have some level of variability, although we expect the overall trend to remain positive.

Slide 20 provides a reconciliation of our nonperforming asset flows.

NPAs fell by 11% in the quarter compared to a 4% reduction in the prior quarter.

Inflows were down 29% from the prior quarter and was the primary driver of the overall decline.

Turning to slide 21, we provide a similar flow analysis of commercial criticized loans.

The inflow of new criticized loans was 28% lower in the first quarter compared to the fourth and was the primary contributor to the 8% reduction in criticized loans for the quarter.

Upgrades to pass were steady for the quarter, while paydowns were somewhat lower.

Moving to slide 22, commercial loan delinquencies were up modestly from the prior quarter, although they remain very well controlled and within expectations for current and future periods.

We continue to have no 90-day plus commercial delinquencies and as a result of our early identification and treatment of problem loans.

Slide 23 outlines consumer loan delinquencies, which were down modestly in the quarter in both the 30- and 90-day categories.

This is consistent with typical seasonal patterns.

Year-over-year performance was flat in a 30-day category and showed modest declines in the 90-day segment.

The black line on the left side of the slide excludes government guaranteed loans and shows an improvement in the 30 plus day category to 1.87% from 2.06% in the prior quarter.

Auto and home equity both showed improvement in the quarter, while residential delinquencies were up slightly.

On the right, the 90-day plus delinquency fell to 32 basis points from 40 basis points in the prior quarter.

In the 90-day category, all consumer segments saw improvement in the quarter.

Reviewing slide 24, the loan loss provision of $34.4 million was lower than the prior quarter and was less than charge-offs by $48.6 million.

The ratio of ACL to NALs improved to 206%.

The ACL to loans declined to 2.37% compared to 2.6% last quarter, although we believe this to be a very solid ratio given the continued improvement in the risk profile of the portfolio.

Overall, despite the continued challenges presented by the economic environment, we remain pleased with the direction of credit quality across the portfolio and expect continued improvement throughout 2012.

Let me now turn the presentation over to Mary Navarro to provide an update on our in-store channel.

Mary?

Thank you, Dan.

Turning to slide 25, now that we are 18 months into our partnership with Giant Eagle, we wanted to provide you an update on the progress we made and the great results we are seeing.

We signed a 15-year agreement with Giant Eagle, one of the largest groceries in Ohio.

Giant Eagle has significant market share in most of the state.

We wanted to have full-service branches in grocery stores because convenience is very important to customers, both consumers and small businesses.

As you can see from slide 25, adding 104 in-store branches significantly improves our branch market share in many markets.

In fact, when we complete 2012, we will have more branches in Ohio than any other bank, again making it more convenient for our customers.

When the buildout is complete, we will have almost 500 branches across the state with a population of nearly 12 million.

Turning to slide 26, the grocery store branch is a very efficient point of distribution.

The average Giant Eagle store has 5 to 6 times more customer visits per week than a traditional branch, and those customers are usually there more than 2 times per week.

When you look at Giant Eagle's customer demographics, they are very attractive.

The income, net worth, homeownership and college degree percentages are all higher than our overall customer base and a standout when compared with the higher average.

Giant Eagle's customer base is a great fit for us, and we are acquiring them at a fast clip.

10% of our new customer households have come from our 40 Giant Eagle branches, which is less than 6% of our total branch count.

This is happening because our colleagues are out in the grocery store aisles helping customers find what they need in the store.

They are also using an iPad to download coupons to the customer's Giant Eagle foodperks!

account, so that when they check out, they actually get the advantage of those coupons right there that day.

They also can be seen occasionally bagging groceries.

They are really looked at as the friendly banker.

The transactions have also ramped up in these branches, faster than a new traditional branch, proving out the fact that customers appreciate the added convenience.

The cost to build an in-store branch is 1/8 of a traditional branch.

Plus, there is less ongoing overhead.

We have three branches that have been open to 18 months, and they are already close to breaking even and are on track to meet our 24-month goal.

As customers continue to use more and different technologies to do their banking, fewer customers will use the branches for transactions.

We think the full-service bank branch inside a grocery store will be a convenient alternative for new product purchases like mortgage, investments or insurance.

We are doing this very differently than other banks.

We have a different type of colleague.

They are all universal bankers that do more than just take deposits.

We have all full-service branches, and the bankers working there are goaled like the colleagues at a traditional branch.

Their focus is on acquiring new customers and building deep relationships.

We are also open more hours, seven days a week totaling 75 hours.

We are very excited about the results so far and are thrilled to have Giant Eagle as our in-store partner, not only because they have a great customer base, but because we are able to work together to come up with new ways to grow both of our customer bases.

Now let me turn it back to Steve.

Thank you.

Turning to slide 27, as mentioned in Don's opening comments, our fair play banking philosophy, coupled with our optimal customer relationship -- we call that OCR -- is clearly driving accelerated new customer growth and product penetration.

This slide recaps the continued strong upward trend in consumer checking account households.

In the first quarter, consumer checking account household growth accelerated to 14.2% and has grown by 11.7% from a year ago.

Importantly, 75% of total households use over four products or services, a significant improvement from 73.5% at the end of last year.

For the first quarter, related revenue was $237 million, up 2.6% from the fourth quarter of 2011.

However, it was $12 million lower than a year ago, due mainly to the impact of the Durbin Amendment's mandated reduction and debit card interchange fees.

Now notably related revenue was up $8 million since the first quarter of 2010, which is pre-Reg E and pre-Durbin.

We continue to analyze potential opportunities to expand the product offering and most recently began developing our own credit card product, which we plan to roll out into 2013.

Slides 36 and 37 in the appendix provide additional details on consumer quarterly OCR trends.

We are seeing similar trends in our commercial relationships as shown on slide 28.

Commercial relationship growth was also strong and also accelerating.

After growing just over 8% in 2011, commercial relationships in the first quarter grew at an annualized rate of 13.3% and are up nearly 10% from a year ago.

At the end of fourth quarter, 32.7% of our commercial relationships utilized four or more products or services, up from 25.4% a year ago.

Related revenue, while experiencing its usual seasonal first-quarter decline, increased $12 million or 8% since this time last year and by over $30 million since the first quarter of 2010.

Slides 38 and 39 in the appendix provide additional details.

On slide 29, as we announced on March 30, we acquired Fidelity Bank in Dearborn, Michigan through an FDIC-assisted transaction.

As we have told you for several years, we are looking for acquisition targets that are between $500 million and $2.5 billion in size within our footprint, which are financially attractive.

Fidelity definitely fits these criteria.

We acquired approximately $800 million in assets and assumed a similar amount in liabilities.

After performing due diligence on more than half the loan portfolio, we bid $150 million asset discount that eventually led to the $11.4 million bargain purchase gain that Don described earlier.

This is a strong franchise with 15 branches that are north and west of Detroit and stretched to Ann Arbor.

We had some overlap and plan on consolidating six branches out of the combined network.

Importantly, the acquisition is a nice little tuck-in deal that will add more than 18,000 Fidelity customers to our platform where we can provide a broader range of products and some of the highest rated customer service in the industry.

This acquisition, coupled with the recent CapPR result, provides a good opportunity for us to review our longer-term capital priorities.

Those priorities coincidently align with the timeline of the last two years.

After ensuring appropriate capital and risk levels, growing the core business is our top priority.

Over the last two years, Huntington has invested in people, products and services required to become a top quartile performing bank.

We analyzed those investments monthly to our goals and are nimble enough to be able to quickly reallocate resources.

You can clearly see the benefits of those investments through the growth of our customer relationships.

Since the first quarter of 2010, we have added nearly 200,000 consumer checking households and over 20,000 commercial relationships.

Much of the groundwork of those investments is behind us, but there are still some pieces like the completion of the Giant Eagle and store buildout to be completed.

Our next capital priority is dividends.

During the middle of last year, the Board raised the dividend from $0.01 per share per quarter to $0.04, and we announced a target payout range of 20% to 30% of net income available to common shareholders.

We will continue to evaluate the dividend, but have a view that the regulators with their comments on increased scrutiny have placed a cap on the dividend payout ratios of most banks at around 30%.

As we announced in mid-March, the Federal Reserve had no objection to our proposed capital actions, which included the potential repurchase of up to $182 million of common stock.

As a result, the Board of Directors authorized a share repurchase program consistent with that capital plan.

Like the other aspects of our approach to capital management, we will be disciplined in this activity and see a direct relationship between the price of our stock and the number of shares we may repurchase during any given quarter.

The next capital priority is to use it for other strategic actions, and we are defining strategic actions very broadly.

And that would include possibly acquisitions, portfolio purchases or re-mixing our liabilities.

Disciplined management of capital to improve long-term shareholder risk-adjusted returns is of paramount importance.

Hopefully you all can see the clear progression we have made over the last several years and know that Huntington's management with their requirement to hold 50% of their net stock awards to retirement is standing right alongside our long-term shareholders.

Turning to slide 30, over the course of the last six months, investors have been asking about our view that the Midwest is recovering faster than the rest of the country.

We believe that there is strong evidence that the Midwest is turning from the Rust Belt historically to a Recovery Belt with that being led by a growth in manufacturing, education, medical and natural resource investments.

According to the March Philadelphia Fed Coincident Economic Activity Index, our footprint states are predicted to grow faster than the country as a whole, and the recovery in unemployment is leading the nation in some states.

For example, in February Ohio's unemployment rate dropped to 7.6%, Pennsylvania to the same number, Indiana to 8.4%, and Michigan is now back to levels not seen since 2008 and under 9%.

Manufacturing generally is strong or at least returning.

For example, auto companies are predicted to increase production over 14 million units in 2012, up from 10 million units just a years ago.

Several major manufacturers have opened or expanded new plants, investing hundreds of millions dollars in Midwest-based facilities.

The natural resources boom from the Utica and Marcellus Shale covers half the states in our footprint, and the multiplier effect of the E&P exploration and production investment is clearly evident within the Commercial Real Estate and the growth in jobs relating to steel, construction and broader chemical, industrial complexes.

With the investments we have been making since 2009, our OCR, sales process and focus, we are clearly capitalizing on the benefits of this recovery as evidenced by improving credit quality, growth in SBA loans and eight consecutive quarters in commercial loan growth.

The Midwest is an exciting place to be, and Huntington is right in the middle and capturing a disproportionate benefit from this recovery.

Slide 31 is our last slide and recaps our expectations for 2012.

With regard to the economic environment, some of the encouraging signs seen late last year continue to build throughout the quarter.

While our footprint states are clearly benefiting from this recovery, the US and global economies continue to experience elevated levels of volatility and uncertainty.

This requires that we remain cautious.

With regard to net interest income, we anticipate modest growth.

The momentum we are seeing in total loan growth, excluding any future impacts of additional auto securitizations, is expected to continue as is growth in low cost deposits.

So the benefit from this growth is expected to be mostly offset by net interest margin pressure.

C&I loans are expected to show meaningful growth, reflecting the benefits of our strategic initiatives to expand our business and commercial lending expertise and the related verticals like healthcare, asset-based lending and equipment finance.

Commercial Real Estate loans are expected to decline from current levels, but at a slowing pace than that which we have seen over the last several years, as we begin to approach a level that is more in line with our overall aggregate moderate to low risk profile and concentration limits.

Residential mortgages and home equity loan growth is expected to remain modest.

We continue to expect to see strong automobile loan originations, though on balance sheet growth will be muted due to the expectation of completing occasional securitizations.

Growth in low and no-cost deposits remain our focus.

Growth in overall total deposits, however, is expected to be slightly less than growth in total loans.

Fee income is expected to show modest growth from the first-quarter level when you exclude the bargain purchase game, auto securitization and any net impact from the MSR.

This modest growth we expect will be driven by increased cross-sell success, growth in key activities related to customer growth, as well as increased contribution from our capital markets activities, treasury management and brokerage business.

For the full year, we anticipate positive operating leverage and modest improvement in our expense efficiency ratio.

This will likely reflect the benefit of revenue growth as expenses could increase slightly.

While we will continue our focus on improving expense efficiencies throughout the Company, additional regulatory costs and expenses associated with strategic actions, including the planned opening of over 40 in-store branches, along with the integration of Fidelity Bank, may offset any efficiency improvements.

On the credit front, we expect to see continued improvement.

The level of provision expense, as mentioned earlier, is at the low end of our long-term expectations, and there could be some quarterly volatility given the uncertain and uneven nature of the economic recovery.

As we have done for the last two years, our focus is on continuing to execute our core strategy and make selective investments in initiatives to grow long-term profitability.

We will remain disciplined in our growth and pricing of loans and deposits.

There is still some leverage there.

Our fair play banking, coupled with OCR, is proving to be absolutely the right strategy and market positioning for us.

We will remain focused on improving cross-sell.

We believe 2012 will be another year of marked progress in positioning Huntington for better, sustained, long-term earnings growth and profitability.

Thank you for your interests.

Operator, we will now take questions.

(Operator Instructions).

Erika Penala, Bank of America/Merrill Lynch.

My first question relates to two loan categories that everybody in the industry has talked about is very competitive, commercial C&I and auto.

Regular yields were respectively flat to up 7 basis points.

Could you give us a little bit more color on the reasons why the yields held in had so much this quarter and, relative to your margin guidance, what your expectations are for future potential pressure?

Great question.

This is Don.

I will take the first crack and ask Dan to comment additionally on the commercial.

But as far as the auto, the reason for the increase there linked-quarter really reflects the impact of taking some of the more recent production originations and transferring them into held for sale at the end of the fourth quarter.

And so those were a lower yielding loan compared to the portfolio in the aggregate.

Now that being said, we were very pleased with our production in the current quarter that originations, as I said, were in excess of $950 million.

Spreads were still in that [$2.00 to $2.25] credit adjusted range that we had targeted before, and then they were actually slightly from the previous quarter.

And so we have been pleased with our ability to continue to maintain the appropriate yields on that portfolio and have good success in originating volumes at those levels.

On the commercial loan side, you are right that the market is very competitive.

Especially if you look at the upper middle market and large corporate books, we are seeing more pressure downstream as well that our guidance prospectively says that our margin should be relatively stable, having some slight pressure because of lower interest rates, but that is also given the expectation that we are going to continue to see some pressure on commercial loan yields.

Dan, any other thoughts on that?

Yes, I mean I concur with those comments.

We are obviously -- the C&I side is quite competitive.

I think everybody is feeling that pressure.

I think we have worked hard to maintain those margins.

We will continue to see some pressure going forward, but we are pretty pleased with what we are able to maintain at the present time.

Okay.

And the second question before I move back into the queue, your guidance on the expense side for modest growth, does that exclude the litigation -- the addition to the litigation reserve that you booked this quarter in that the actual run-rate that we should be growing from would be closer to $439 million on a quarterly basis?

You are absolutely right, and it would reflect the impact of the Fidelity acquisition and other initiatives we have.

That is correct.

Brian Foran, Nomura.

I guess a follow-up on the auto.

The cumulative loss expectations back in the appendix are going up.

I guess what is driving the higher cumulative loss expectations fully recognizing that they are still at pretty low levels?

We would consider those very low levels.

I think for the past quarter they are up a little bit because of the mix of used versus new.

And, as I mentioned, we were actually seeing a slight increase in the credit-adjusted spread during the past quarter, and that is reflective of a little bit higher loss expectation.

But we have not changed our underwriting standards.

Again, very pleased with the overall credit outlook, and so that is more of an indication of why we are seeing the higher loss rate.

You will see a slight tickdown in average FICO scores there, too, but not meaningful.

And then just as we think about the overall level of gain on sale that we should kind of expect over time, the $23 million versus $1.3 billion of securitizations, do you have any historical context?

I mean is that kind of 1.7%, 1.8% gain on sale rate -- I recognize in the short term it will fluctuate based on auto rates and to your swap spreads -- but is that a normal level of gain on sale, or are we historically high right now, or where would you peg it?

That is a good question.

I wish we had a crystal ball to more accurately predict that, but our third-quarter securitization last year was at a 1.5% gain.

We were at $15 million of gain on a $1 billion securitization.

This quarter was helped because it was a publicly registered transaction as opposed to a private transaction in the third quarter of last year.

So we hope that with our continued familiarity in the market as far as our asset quality and the performance of our underlying indirect auto loans in those securitizations, we will be able to maintain appropriate spreads in pricing, but don't want to put any guarantees out there as far as any market condition changes.

But that is a reasonable expectation based on what we are seeing right now.

And the last one I had was just competitive environment in Ohio.

Some of your competitors, I guess, have highlighted it as particularly bad on the commercial lending side.

How would you see the competitive environment in Ohio?

I don't know that I would consider it any more competitive than -- we are only in the Midwest.

So I think we generally feel like the competitive environment is fairly consistent across that footprint.

And I think now folks are realizing that with the recovery, it is a good place to be.

So I would expect that will continue, but I would not say that we feel it is really that much more competitive than what we have been seeing.

We feel that we have been seeing that for the last couple of years.

Matt O'Connor, Deutsche Bank.

A couple of unrelated questions.

Just, first, to follow-up on the comment about rolling out a credit card sometime next year, I guess, first, is there a current Huntington-branded credit card that somebody else owns in services that you might be able to take back or purchase?

There is a credit card that is branded Huntington.

We will not be taking that back, however.

Okay.

So I assume your relationship with that provider ends this year, which is why you can get it next year?

That is correct.

Okay.

And just any thoughts on the target customer base and how quickly you can grow that and how meaningful that can be over time?

Well, this is intended to be a customer-focused offering, and we would expect to at least get to industry norms with that product.

Okay.

And any idea what that means in terms of outstandings if you had a penetration of, I guess, maybe 20%, 25%, which is what some others have?

I don't think we have provided any direction on that at this point.

It is so far out.

Okay.

It sounds interesting, though.

And then just separately, you have rolled out some of these or a number of the in-store branches.

You have consolidated some of the traditional branches, which obviously will save you some money.

Is there opportunity as you look out the next couple of years to consolidate more traditional branches?

Yes, and it is something we look at, and we think about as any good retailer would, how can you become more efficient with your distribution?

Care to share any numbers or not at this point?

Not at this point, thank you.

Okay.

Fair enough.

Thank you.

Nice try, Matt.

Craig Siegenthaler, Credit Suisse.

First, just on your near-term strategy in terms of the size of the securities portfolio, we grew a lot in the first quarter.

Before that it was declining.

I'm just wondering kind of what your plans are here, what is driving it, and also what type of securities have you been adding in terms of duration and also type?

As far as the securities portfolio, some of that was really related to the timing of the securitization transaction, the buildup there that we would expect our period imbalances that we are showing in a securities portfolio to migrate more back toward the average position as far as the balances.

The duration of our portfolio actually dropped a little bit from the fourth quarter end of 3.2 years to the first quarter of 3.1 years.

And so we have been continuing to purchase more of our agency-backed CMOs and other similar structures to what we have had in the past.

So we really have not changed the mix significantly from the previous quarters.

Okay.

And when you think about credit quality generally in the indirect auto business, it seems like it has really benefited from really a robust kind of used-car market.

But if trends do reverse, do you think there is any risk, and this is broadly for the industry, of any rep and warranty issues in this market?

As far as rep and warranties, I don't know that I see issues similar to what you would have seen in mortgage that as far as our sales to the securitizations, we really don't have the same type of exposure from a put back risk perspective there.

As far as the expected losses, the losses that we will model out and also the rating agencies model out in connection with the securitization transactions do not assume that we will continue to have the benefit of the stronger used car prices.

And so the cumulative losses that you will see in the back slides do not reflect the current robust used-car prices and show more of a normalized level.

So our expectation is that should not have a significant change to our outlook from that perspective.

And in terms of risk management there, what kind of oversight do you have to make sure dealers are not filling in the paperwork, saying that this individual is a teacher, a doctor and that they are not unemployed?

I want to know how do you oversee that risk?

As far as the risk that we have been in the business for 50 years and we have got very good relationships with our dealers and really picked the dealerships that we can have an ongoing trust-based relationship with them.

And so that is really where that confidence starts with is our client selection and our partnership with those dealerships.

Beyond that, we have developed an internal scorecards that are using historic information that we have been able to accumulate that are helpful for more predictive models.

Dan, any other thing?

Yes, I would just say if there were any kind of trends developing, that would be picked up very quickly because it would start to show up in the credit reports, in the custom scores, etc.

So not that something like that could not ever happen, but I think that our controls would catch it very early on, and obviously we have not had any experience like that in our long history.

Ken Usdin, Jefferies.

Don, I just wanted to ask you a question about the operating leverage.

As you guys are talking about, we will see it better in the second half of the year.

And I'm just wondering if you can help us think about when the jaws really start to occur and any type of magnitude that you think you are going to be able to deliver, whether it is in terms of a growth gap between percent revenue growth and percent expense growth or helping us kind of understand at least the point in time at which we really start to see that wedge start to increase?

Good question.

And, as far as the operating leverage, we came into this year with all the headwinds we were facing between Durbin and the low interest rate environment, that if we could have revenues slightly exceed our expense growth given the initiatives that we have in place, that we would have been very pleased.

I think the 2% year-over-year -- first quarter over first quarter kind of positive operating leverage is a very good operating leverage for us, and we hope to see it continue in showing growth that exceeds -- the growth in revenues exceeds the growth in expenses.

And I would not expect it to widen dramatically from there at this point in time.

Okay.

I would just think with your continued comments about, you know, starting to see season some of the investments that are starting to show, that it would naturally improve and widen over time.

What would prevent that from happening?

Would it be just continue to reinvest some of it and just managing to it or something else that we would not necessarily be able to see in the operating environment?

Well, we will continue to see benefits from the reinvestments.

The challenge that I think that we will see as far as continued revenue growth at this pace is that the first quarter did include the securitization transactions, which we will have twice a year, and it did include a much stronger mortgage revenues, including the MSR gain.

And I would not want to assume that we are going to have an $8 million linked-quarter MSR gain every quarter after quarter.

And so those are some of the things that are more cautionary as far as the expansion of that operating leverage.

Okay.

Got it.

And my second question is just one -- two small things on credit.

Just you guys mentioned that the provision has gone down to the low end of your range, but obviously we see continued improvement in most of the metrics.

I wanted to ask you about two in specific.

We did see a bit of a C&I bump-up, and I know the commentary was that it was made up of smaller credits.

But I was wondering if you could comment on whether we are seeing some type of seasoning in C&I.

And then secondly, the residential mortgage MPs have gone up for several quarters in a row, and I know you have talked about values and such.

But any color in terms of should that start to improve given what we have seen on the unemployment side?

Yes, so I guess taking your comment on commercial first, on page 88, if you look at what the charge-off trends have been over the last year, commercial as a category actually has been on a nice steady downward projection.

C&I this last quarter was up, but it was at abnormally low levels this past quarter.

So we are going to see some variability from quarter to quarter just based on the specific mix of credit.

So I don't see any trends there.

I think the overall trend will continue to be positive.

On residential that is obviously a continued area of stress, but yes, it goes along with unemployment in home prices.

And so we hope to see some stabilization there with the improvement, but that has been one of the stubborn areas that we are working on.

And then, Steve, just one for you on M&A.

You talked about broad thoughts about size, but obviously you guys just did a FDIC deal.

Can you just talk to us about what you guys would be considering or looking at from a broad perspective of what maybe left in FDIC land versus regular way deals, and what is happening as far as the conversation levels about potential sellers out there in the marketplace?

Well, the FDIC -- the level of FDIC activity, frankly, has been a lot lower than we would have estimated, and it may be through the cycle a substantially lower number than many would have thought.

So I don't think they are at the absolute end of the line in terms of resolutions, but it is not clear that there is any significant additional level of activity in our footprint, and we are only interested in our footprint.

There is some level of conversation occurring in a more traditional sense, and it is a little more active at the moment than it might have been the last couple of years.

But there is still a wide gulf in terms of value, and I don't think activity necessarily picks up in 2012.

Ken Zerbe, Morgan Stanley.

So you are obviously seeing very good growth in C&I given the resurgence in the Midwest.

I guess my question, though, is when the broader economy does start to pick up, right, is it fair to assume that the Midwest could benefit even more than it is now, or is the growth right now as good as it potentially could get given a broader economic recovery?

We are more bullish on the Midwest and for a number of reasons.

This energy play between the Marcellus and Utica is going to provide local manufacturers with very, very long-term stable supplies of probably low-cost energy, certainly on a relative basis.

And so we are of a belief that that is going to continue to expand the manufacturing sector in the footprint.

There is a tremendous amount -- additionally there is just a tremendous amount of investment that is going on in a variety of related areas, education and medical.

It seems to us that there is much more coordinated economic development activity also occurring now of a strategic nature in Michigan and Ohio and possibly some of the other states we are in, which should be very good for us long term as well.

So we are bullish on the economic expansion continuing and not just being in a defined early phase.

Okay.

And then the other question I had, in terms of asset yields, I guess if you look out over the next year or so, are there any quarters where there is any kind of cliff drop in terms of asset yields or loans that reprice moreso than other quarters?

No, I would not say that there is any cliff quarters.

There are quarters where there is a little higher propensity as far as repayments and renewals, but I would not consider anything cliff or out of the ordinary.

Okay.

And have you matched up the liability side against those quarters that could see greater repricing?

That is part of our challenge is managing that asset liability position, and we try to match that up the best we can.

Right now we are slightly asset-sensitive.

So, if you can do something for us to help get those short-term rates up, that will be helpful for us.

But I think we are pretty well set up.

I will do my best.

Thanks a lot.

Kevin St.

Pierre, Sanford Bernstein.

On the litigation reserve, could you just give us a little bit more color and perhaps why we should consider that nonrecurring?

What drove the increase to the litigation reserve?

I don't know that we can provide a whole lot more commentary there.

We did have developments during the quarter on some previously existing cases, and that resulted in us taking a fresh look at the reserves that we had established and resulted in a $23.5 million increase.

We do review those reserves at least quarterly.

As I said, there were a few developments this quarter that resulted in us wanting to increase this.

And, again, as far as the issues themselves, they are several years old, and they are not new cases and are not new developments that had not previously been assessed.

Okay.

Thank you.

And then separately with a 30%-ish payout ratio and the announced or proposed share repurchase plan, it would seem as if Tier 1 common, which ticked up 15 basis points this quarter, is probably going to continue to build over the foreseeable future.

Can you anticipate a time or can you think about when and if you might start managing that down and how you would do so?

Great question.

I think, as far as the outlook, that we would agree with our announced capital plan absent any unusual or extraordinary type of events that we would see our capital ratios flat to up.

As far as managing that down, we will continue to review that at least annually with the regulators as far as our capital plan.

We did between the Fidelity Bank acquisition and the municipal loan purchase acquired over $1 billion of assets this past quarter.

And so to the extent that there are opportunities for us to continue to evaluate other potential purchases, that could be one tool that could be useful to help manage that position.

Matthew, we have time for one more question.

Jon Arfstrom, RBC Capital Markets.

A question on the demographics that you laid out for your in-store customer.

It looks like it's a little different kind of customer, and you typically see fee income as a driver rather than credit, and it looks like this is a little bit different.

I'm curious what you are seeing so far in terms of credit growth on the in-store branches?

Well, they are full-service branches, so we are doing consumer loans out of those locations.

And it is pretty new, so we have an entire almost all new colleagues that are learning a lot of this as we go here.

But if you look at our more seasoned locations, they do have pretty solid loan balances on the books.

So I would not say that they are more credit-focused versus deposit-focused.

We are in a pretty low deposit rate environment right now.

So we are seeing -- the biggest thing here is we are seeing a lot more checking account household growth than what we had anticipated when we started this.

So that is proving out to be profitable as well.

That is helpful.

Just a quick question on the buy-back, Steve.

I don't necessarily want to pin you down on it, but what makes sense in terms of the buy-back?

You said it is stock price driven.

I'm curious if you view the stock price as attractive here, or are there some other limits that you are taking into account?

Well, the Board has had a lot of time to have robust discussions.

There are a number of elements, including market conditions and outlook.

But nothing that we are prepared to be more specific with at this time, though.

Thank you very much for joining the call.

If you have got any other follow-up questions, please feel free to reach out to me, 614-040-3878.

Thank you very much.

Have a good day.

This concludes today's conference call.

You may now disconnect.