Huntington Bancshares Inc (HBAN) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Huntington Bancshares first-quarter earnings call.

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

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

(Operator Instructions)

Thank you.

I would now like to turn the conference over to Mr. Todd Beekman, Director of Investor Relations.

Sir, you may begin your conference.

Thank you, Paula.

Welcome.

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

Copies of the slides can be reviewed -- can be found on our website at www.Huntington.com.

This call is being recorded and will be available as a rebroadcast starting about an hour after the call.

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

Slides 2 and 3 note several aspects of the basis of today's presentation.

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

This presentation will reference non-GAAP financial measures, and in that regard, I direct you to the comparable GAAP financial measures and reconciliation to the comparable GAAP financial measures within the presentation, the additional earnings-related material released this morning as an 8-K, and it all can be found on our website.

Turning to slide 4. Today's presentation, including the Q&A, may contain forward-looking statements, as such statements are based on information assumptions available at the time and are subject to risks, change and uncertainties, which may cause actual results to differ materially.

We assume no obligation to update such statements.

For a complete discussion of the risks and uncertainties, please refer to this slides, the material filed with the SEC including our most recent Forms 10-K, 10-Q, and 8-K filings.

Now turning to today's presentation.

As noted on slide 5, participating are Steve Steinour, Chairman, President and CEO, Don Kimble, our Chief Financial Officer, and Dan Neumeyer, our Chief Credit Officer.

Let's get started.

Don?

Thanks, Todd, and welcome everyone.

I'll begin with a review of some of the quarter's financial performance highlights, and will be followed by Dan, who will provide a brief update on credit.

Steve will then wrap up with an update on our continued household and commercial relationship growth, and a discussion of our 2013 expectations.

Turning to slide 7, the first quarter of 2013 was a solid start for the year for Huntington.

For the quarter, we reported EPS of $0.17 per share, resulting in a 1.1% return on assets, and a 12.4% return on tangible common equity.

This quarter's performance reflected a $24 million or 3% decline in total revenues from the first quarter of last year, driven by a $33 million decline in non-interest income.

This decline reflected the absence of a securitization transaction, which contributed $23 million in 2012, and the $11.4 million bargain purchase price gain last year.

Offsetting this decline was a $9 million increase in net interest income.

Net interest margin increased by two basis points to 3.42%.

Loans increased 4% over the year, led by commercial and industrial loans, up 14% from last year, and auto loans, which were up 6%.

Expenses declined $20 million from the year-ago quarter as we recognized the $23 million increase to litigation reserves last year.

This quarter, we delivered a positive operating leverage, and a slight improvement to our efficiency ratio to 63.3%.

Turning to slide 8, Steve will provide additional detail later in the call, but you can see that our OCR methodology is continuing to drive success throughout the Company.

Consumer households and commercial relationships continue to grow at a pace well above that of our Midwest footprint, and importantly, customers are building deeper relationships with Huntington.

Turning to credit quality, net charge-offs decreased by $31 million over last year, to an annualized pace of 51 basis points.

This represents the first time since the first quarter of 2008 that we've been in our long-term targeted range of 35 to 55 basis points.

Even with the addition last year of $63 million related to Chapter 7 consumer loans, non-accrual loans were down $87 million, or 19% over the course of the year, and our allowance for credit losses as a percent of non-accrual loans increased 1 percentage point to 207%.

Our capital remains strong.

Our TCE and Tier 1 common ratios were both up around 0.5%.

Our Tier 1 and total risk-based capital ratios were both impacted by last year's redemption of $230 million of our higher-cost trust preferred securities.

Turning to slide 9 for comparisons with the fourth quarter of 2012.

In addition to some of the earlier observations, the comparisons with the fourth quarter reflected a reduction in our net interest margin, as the 2012 fourth quarter included 5 basis points of purchase accounting and other temporary benefits, while the current quarter included only 2 basis points of similar items.

Also, $16.5 million of lower mortgage banking income, reflecting 3.6% lower origination volumes, and tighter spreads on sales and mortgages.

We also completed the share repurchases under our 2012 capital plan, with the repurchase of 4.7 million shares at average cost of $7.07.

Turning to slide 10 and other highlights for the quarter.

As previously disclosed, we received a non-objection from the Federal Reserve for our 2013 annual capital plan.

This plan included a 25% increase to our common dividend to $0.05 per share, and also included a share repurchase totaling $227 million for the four quarters.

We completed a sale of certain low income housing investments, resulting in a $7.6 million gain, and we exceeded our $4 billion 2010 lending commitment to small businesses.

We are pleased with additional third-party validation of our commitment to service quality and strong growth.

We were the recipient of the TNS Choice Award for the central region, or about a third of the US, for our outstanding customer acquisition, retention, and satisfaction.

And for the fourth time, we were recognized for outstanding customer service, with the APEX 2012 Top Advocacy Award for Customer Service in our region.

Turning to slide 11, this is a summary of our quarterly earnings trends.

Many of these performance metrics will be discussed later in the presentation, so turning to slide 12, we show our break down of our operating leverage for the first quarter.

Several people have asked to clarify how we think about operating leverage, and simply put, revenue outgrows expenses when we adjust for significant items, and the volatility of the MSR, and the timing of our auto securitizations.

As shown here, we produced positive operating leverage for the period.

On this adjusted basis, revenues increased by 1.2%, and expenses increased by 0.8%.

Slide 13 displays the trends of our net interest income and margin.

The right side displays a 2 basis point increase in our net interest margin over the last year to 3.42% for the quarter, which reflected the impact of a 23 basis point increase from the reduction in deposit rates and lower non-core funding, reflecting the continued remix of our deposits, and the redemption of the trust preferred securities.

This is offset by a 16 basis point decline in earning asset yield, and 5 basis points of lower benefit from net free funds.

Turning to slide 14, on the right, we have shown continued improvement in our deposit mix.

The improved deposit mix reflects the success of fair play banking on growing consumer DDA, as well as the focus on growing commercial demand deposits.

This improving mix has contributed to the 17 basis point decline in the average rate paid on total deposits over the last five quarters.

The current quarter balances reflected efforts to reduce the level of collateralized deposits.

On the left-hand side of the slide, you see that the maturity schedule of our CD portfolio, and another wave of higher-cost CDs are expected to mature in the second quarter of 2013.

Slide 15 provides a summary income statement and some color on items impacting the linked quarter performance.

Items of note last quarter included $17 million of securitization gains, as we completed the $1 billion auto loan sale for the fourth quarter.

As we continue to be well below our overall concentration limit of 20%, there is a clear opportunity, given the environment to retain more of our auto loan production, compared to other investment alternatives.

These loans carry shorter duration and a higher yield than the securities we otherwise would have purchased, but do not have the OCI risk.

The interest income nearly offsets the lost fee income in 2013, with the net impact being well less than $0.01 of unfavorability in 2013.

However in 2014, the net impact increases EPS by about $0.01.

We also had $16.5 million linked quarter decline in mortgage banking revenues.

This reduction reflected lower secondary marketing gains and a 3.6% decline to origination volumes.

We also recorded a $10 million positive net MSR benefit for this quarter, essentially equal to that of the fourth quarter.

Non-interest expenses decreased by $27.8 million this quarter, reflecting a $15 million decrease to professional services, primarily related to temporary regulatory costs incurred last year.

Marketing costs were down seasonally by $5.5 million, and other personnel costs were up $5 million this quarter, the majority related to increases in employee-related taxes this quarter, which were partially offset by lower Commission expense.

Slide 16 reflects the trends in capital.

The tangible common equity ratio increased 59 basis points from the prior year's quarter and slightly up from the 2012 fourth quarter to 8.92%.

The Tier 1 common risk-based capital ratio increased to 10.62% from 10.15% at the end of the year-ago quarter.

These ratios reflected the impact of repurchasing 28.1 million common shares at an average price of $6.48.

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

Dan?

Thanks, Donald.

Slide 17 presents an overview of our credit quality trends.

Credit quality trends in the first quarter were very positive, led by the net charge off rates which fell to 51 basis points on an annualized basis, compared to 69 basis points in the prior quarter.

This level of charge-offs falls within our long term targeted range of 35 to 55 basis points.

It is worth noting that given the absolute low level of charge-offs, some volatility from quarter to quarter is possible, although we expect the overall trend to continue to be positive.

Loans past due greater than 90 days and still accruing were stable in the quarter, and remain very well-controlled.

You'll recall that the second quarter uptick in last year, in past dues was caused by the acquired Fidelity portfolio.

Fidelity loans include accruing purchased impaired loans, which were recorded at fair value upon acquisition, and will remain in accruing status.

The non-accrual loan ratio showed continued modest improvement in the quarter, falling to 0.92% of total loans.

The NPA ratio showed similar improvement, due to the continued reduction in commercial OREO balances in the quarter.

The criticized asset ratio also showed improvement, falling from 4.79% to 4.49%.

The allowance for loan and lease loss, and the allowance for credit loss to loans ratios fell in the quarter to 1.81% and 1.91% respectively, down from 1.89% and 1.99% in the prior quarter, reflecting continued asset quality improvement.

The ALLL and ACL coverage ratios both increased modestly due to the reduction in non-performers in the quarter.

Slide 18 shows the trends in our non-performing assets.

The chart on the left demonstrates continued reduction in our NPAs, decreasing 21% over the last year.

The chart on the right shows the NPA inflows, which fell on the quarter to 28 basis points of beginning of period loans.

Slide 19 provides a reconciliation of our non-performing asset flows.

NPAs fell by 7% in the quarter.

The level of NPA inflows was the lowest experienced in the last year, and the lower inflows drove the overall reduction.

Turning to slide 20, we provide a similar flow analysis of commercial criticized loans.

This quarter saw a similar level of inflow as the prior quarter with upgrades, pay downs, and charge-offs contributing to a 6% reduction for the quarter.

Moving to slide 21, commercial loan delinquencies remain elevated in both the 30- and 90-day categories, or over what we hedged on from the first quarter of 2011 through the first quarter of 2012.

Again, the increase is due to the addition of the Fidelity portfolio.

All of the 90-day delinquencies are related to the Fidelity purchased impaired loans, which are recorded at fair value upon acquisition, and remain in accruing status.

However, delinquencies remain very well controlled in the aggregate.

Slide 22 outlines consumer loan delinquencies, which are in line with expectations, and reveal a generally improving trend.

In aggregate, 30-day consumer delinquencies showed noticeable improvement quarter-over-quarter, as depicted on the chart on the left.

All of the individual consumer loan categories showed improvement quarter-over-quarter.

90-day delinquencies showed modest improvement in the quarter with auto, home equity and other consumer all showing reductions.

Reviewing slide 23, the loan loss provision of $29.6 million was down $10 million from the prior quarter, and was $22 million less than net charge-offs.

The ratio of ACL to non-cash accrual loans rose from 199% to 207%, due to the previously-noted reduction in non-performers.

The ACL to loans was lower at 1.91%, compared to 1.99% last quarter.

Most of the major credit metrics showed continued improvement, and therefore, we believe these coverage levels remain adequate and appropriate.

In summary, we are pleased with this quarter's credit results.

We expect continued volatility but overall improvement in our credit metrics, including lower criticized loans and lower NPAs.

Let me turn the presentation over to Steve.

Turning to slide 24, our fair play banking philosophy, coupled with our optimal customer relationship or OCR, continues to drive new customer growth and strengthen product penetration.

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

For the quarter, consumer checking account households grew at an annualized rate of 11.8%.

Our four-plus products or services penetration grew to 80%, an increase of 5% since this time last year.

It's worth noting that in the second quarter, we anticipate making a change in our product and service count to a more conservative definition, that will be most noticeable as a modest decrease in our four-plus percentage.

This change is a natural evolution, as we've made significant strides towards our four-plus cross-sell threshold, and as we hold ourselves to a higher standard, we are increasing our goals and measurement to drive six-plus products and services for our consumer customers.

For the fourth quarter(Sic-see press release "first quarter"), related revenue was $239 million, down $12 million from the quarter in 2012, mainly due to two items.

First, there are two fewer number of days in the resulting lower net interest income, and secondly, a decrease in service charges on deposit accounts.

That decline reflects typical seasonality in the February implementation of a new posting order for consumer transaction accounts.

The full year impact from the new posting order, which was incorporated into previous 2013 guidance, is estimated to be between $25 million and $30 million.

From here we expect service charges on deposits to trend with overall household growth.

Turning to slide 25, commercial relationships grew at an annualized rate of nearly 12%, as we experienced very strong growth in small business.

At the end of the quarter, 36% of our commercial relationships utilized four or more products or services.

This is 3% higher than this time last year.

Related commercial revenue of $175 million, while up $5 million from a year ago, is down $15 million from the fourth quarter of 2012.

While the fourth quarter was particularly strong, the decline was larger than we expected, as we saw a noticeable change in commercial customer activity.

Capital markets activity started off very slow, as many companies moved up transactions into December, given the uncertainties that existed at that time.

Late in the quarter, we saw the pipeline rebuild, and the second quarter is off to a solid start.

Turning to slide 26 and 2013 expectations.

For the most part, we aren't changing our expectations all that much from what we stated in January, but there are a few changes and I will note these.

We continue to benefit from the strength in the Midwest, and believe our strategies will continue to drive growth and improve profitability.

With regard to interest rates, we expect the interest rate environment will remain relatively stable, with the opportunities for deposit repricing and mix shift, we expect net interest margin to remain fairly stable, and for the full year, do not expect it to fall below the mid 3.30%.

Modest total loan growth, excluding any future impacts of additional auto securitizations is expected to continue.

The C&I pipeline is robust, yet with the current economic uncertainties, we expect this to translate to stronger growth in the second half of this year.

Auto loan originations remain strong, as we said last quarter, with the opportunity to change the size and timing of securitizations, and one change is that we are currently planning only one securitization for later in the year.

Even with this change, we expect to continue to be well below our overall concentration limit of 20%.

There's a clear opportunity given the environment to trade some of the securities reinvestments for auto loans.

These loans carry a shorter duration and higher yield, and do not have the OCI risk.

The interest income gained by not securitizing nearly offsets the lost fee income in 2013, with the net impact being well less than $0.01 unfavorable in 2013.

However in 2014, the net impact due to higher interest income increases EPS by about a $0.01.

CRE balances, commercial real estate balances, should stabilize in 2013, but we now expect that to be around $5 billion.

Other consumer loan categories should reflect modest growth.

Deposit balances will reflect continued growth in low cost deposits, resulting in total deposit growth, in line with the slightly less than total loan growth.

Non-interest income for the full year, excluding any impact from securitizations or change in net MSR, is expected to be relatively stable, as the expected slowdown in mortgage banking will be offset by the benefit of our growth in new relationships, and increased cross-sell success.

Non-interest expenses in the first quarter were $10 million to $20 million lower than the quarterly run rate we expect for the remainder of the year.

The slide lists a few areas we expect to see an increase next quarter, but even with these increases, we remain committed to positive operating leverage for the full year.

On the credit front, overall credit quality is expected to experience continued improvement, and net charge-offs, while in the normalized range this quarter, this past quarter, are expected to remain volatile, but reach sustainable normalized levels by the end of 2013.

The level of provision for credit losses was at the low end of our long term expectation.

In summary, the environment remains challenging, but 2013 is off to a solid start.

The first quarter had some strong areas of performance.

Double digit annualized, consumer and commercial relationship growth.

Net interest margin up 2 basis points from a year ago, as the cost of funds dropped another 23 basis points during that period.

Nearly $20 million in linked quarter decline in expenses, increased cross-sell across-the-board, 25% increase in our declared dividend, and the approved buyback authorization, 5% annualized loan growth.

Now, as with all banks, there were some challenges.

Pricing is tight, and structure is loosening, but I think you're starting to see some separation between banks.

The few of us that continue to invest are just starting to see some of the long-term benefits of these multi-year investments.

Our differentiated strategies are working, and we will grow where we have relationship advantages and competitive advantages.

We, our Board, our management team, and our employees, are all long term shareholders, so above all else, we'll remain disciplined in the use of our capital to drive appropriate risk adjusted returns.

Thanks for your interest in Huntington.

Operator, we'll now take questions, and we ask that as a courtesy to your peers, each person ask only one question and one related follow-up.

Then if that person has additional questions, he or she can add themselves back to the queue.

Thank you.

Paula?

(Operator Instructions)

Your first question comes from the line of Scott Siefers of Sandler O'Neill.

Steve, I was hoping you could just expand upon some of the comments you made, both in the text of the outlook and then just toward the end of your prepared remarks there, about some of the deterioration in structure, and just not only pricing that you're seeing just in the market as a whole?

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

Dan, why don't you go ahead?

Sure.

As we have said for a number of quarters, obviously pricing has been under pressure for some time.

I think in the last quarter, we actually saw more instances of structural give-ups, and so there were probably more instances where we actually had to walk away from deals because of structure, and that could be a reduction in the amount of recourse on some of the commercial real estate loans, higher cash flow multiples, looser covenants, et cetera.

All senior deals being done where we may have seen a strip of mezzanine in the past are deals where we would apply and SBA guarantee, that are getting done on a conventional basis, so those are some of the things that probably increased a bit more in the last quarter.

Scott, I'll add to that auto pricing is a bit sharper, and these are normal recovery competitive dynamics at play, and probably even further accentuated by this artificial rate environment.

Okay, definitely makes sense, and then I was just hoping to ask a question on auto, specifically.

If you have any thoughts on that recent CFPB guidance anything to do either to profitability of the business, the way you look at it, et cetera?

Well, we of course are following it.

There's a lot still to evolve.

We started with the view of this business consistent with our fair play overall, so we don't have any intended changes at this point, and we like the business that we're able to produce today, and we watch this every week, so no change at this point, but obviously focused on what the CFPB is intending to do, by way of new regulation.

Okay, sounds good.

Thank you very much.

Your next question comes from the line of Ken Zerbe of Morgan Stanley.

My question is on auto.

What exactly prompted the change in your thought process, in terms of the securitizations?

And I ask because, I think the answer, Steve, you gave in your prepared remarks, you probably could have given that same answer last quarter, or two or three quarters ago.

What changed to make you want to retain more?

And I guess also should we now assume that the balances, I know you got plenty of room before you get to your 20%, but should we assume instead of a $4 billion to $5 billion number, we average something much higher?

Thanks.

Ken, this is Don.

As far as the thought process behind that, you hit on some of the key points, with making sure we keep below or we are well below the 20% limitation there, and so we do have a lot of additional room to move up.

And part of it too is that -- part of the benefit is really the capital efficiency associated with this transaction, and with our current capital actions, we felt that there was capacity to go ahead and keep some of those on balance sheet.

Another component that we're focusing on a lot more is just this is a very liquid asset for us, and it is a substitute for certain other investments that we might choose to make, and those other investments in our portfolio would result in potential OCI risk to us, and so that step is another benefit that we're pursuing, as far as the securitization transaction decision.

It's much more discussion about the Fed policy and when does it end, how does it end, and timing, Ken, and that's caused us to relook at OCI risk.

And frankly, other balance sheet-related risk.

Got it, okay, and just a quick follow-up.

The sale of your tax credit investments, or a portion, does that have an impact on your effective tax rate going forward?

It will have a slight increase to the tax rate as a result of that, but not material.

Got it.

Okay thanks.

Your next question comes from the line of Ryan Nash of Goldman Sachs.

Steve, can you give us just a little bit more color on what drove the policy change in the ordering of transactions?

Was it regulatory-driven, and can you remind us what the current policy is at this point relative to what it changed from?

There was no regulatory effort or initiative around this, Ryan, but as we looked at fair play, and as we continue to look at fair play, and how we're proceeding, we look at our all of our products, and this is one where we felt it was prudent to make a change.

We planned for that change last year, and incorporated it into the forecast for this year.

We have gone with a change in the logic, so that it's a more chronological and sequential approach, so it starts with the electronic transactions, debit and ATM, principally, getting posted chronologically, and so that's based on time of transaction, and then checks getting posted sequentially based on check number.

Anything else with a date and time stamp, we post low to high, and then fees and interest post last, so that's, we think the fairest approach.

We've studied a number of banks that have made changes.

Two banks haven't made changes yet, but we thought this was completely consistent with our philosophy, and something that we planned for last year, and are pleased to have implemented.

Great, thank you for the clarity.

As a follow-up, just in terms of your expectations for loan growth, particularly in the C&I business, you are assuming a pick up in the back half of the year.

Are you still assuming no change to the economic environment, is this more about on-boarding clients and getting pipelines converted?

Well there was a sense and a hope that we would have more stability it out of Washington fiscal policy, that would somehow together in the first half of the year, that the outlook was based on, because heading into the New Year with the first cliff on January 9, to us presented a higher risk, and our calling activities for the first quarter were very consistent month to month, but we just found deferrals of decisions going on.

And to some extent, there was a bit of pull-forward, more than we expected out of the capital markets business that was probably tax related at year-end.

So we're sitting as we come into the second quarter, or as we went through the first quarter, January was a disappointing month.

February got a bit better.

March, much closer to normal.

As we come into the second quarter, we're sitting with a strong pipeline in commercial, but the overall activities month to month for the first three months, and continuing through April, are essentially the same in terms of calling activity and contact, so I think that second half will continue, and we may given where the pipeline is, we expect to have a good second quarter.

Okay, if I could squeeze one last one in.

Steve, you commented that auto is sharper.

Are you just seeing competitors conceding on price, or are you actually seeing loosening of standards, things around like lease term residuals and stuff?

Any clarity there?

There's more leasing activity to be sure, that's emerging, and that becomes challenging in terms of volume.

That's particularly true on the new side, so the pricing on new is -- I should have clarified my earlier remark.

It's much more around new car pricing than used.

Even though we do the majority of our lending on used and we're seeing that mix continue to shift up a bit, so that has given us more capacity to adjust and retain pricing at the levels we want.

Your next question comes from Ken Usdin of Jefferies.

Don, a couple of questions on the fee side.

So with the mid February change, can we assume that the fee change impact is halfway through, from a run rate perspective?

To get to that $25 million, how do we think about the $25 million to $30 million as far as what was in the first quarter run rate?

I would assume those changes as far as check order were done in early February, so the impact in the current quarter was roughly about a $5 million impact.

Keep in mind too, there is some seasonality to the fees with the fourth quarter tending to be higher than what the first-quarter activity level would be.

Yes, okay, got it.

And my second question is, I just want to try to understand the base starting point for that stable fee comparison?

So last year, fees were $1.1 billion.

You talk about going X auto sales, X MSR, so that was 40 and 14, and then X the bargain purchase gain, so is it fair to say that core base is about $1.03 billion as a start, and then you think about the moving parts, the fee change, core growth, mortgage challenges, and then you go from there?

I think you summed it up pretty well, yes.

To where we would be backing out the impact of the auto securitization gains and MSR for both periods, and then on a core basis, we would expect the growth in core revenues to offset some of the challenges we're seeing, mainly on the mortgage side compared to the previous year.

Your next question comes from Matt O'Connor of Deutsche Bank.

Hi, this is actually Adam Chaim in for Matt O'Connor.

I have a couple for you.

Looking back two to three years, you expanded your auto business into new geographies.

I don't think you've done much since.

Is there additional opportunity for expansion possibly to continue, to fuel the securitization sales?

Sorry, Adam didn't mean to cut you off.

This is Steve.

We are always thinking about expansion and we don't have any commitments to do so at this point, but we like the asset class and we like the performance of it over time, and believe we've got some competitive advantage with it, so there's a continuous assessment.

Okay, and the second one is, last quarter, you noted that in response to your economic outlook, you moderated the pace and size of timing and investments.

This might be looking a little bit further out, but what signs are you looking for to reset investment spend back to previous levels?

We would, I think if we get a fiscal plan in Washington, that there's an economic expansion that will be stronger than the current outlook for GDP, and that would be something I think we could confirm fairly quickly in our commercial base with the decisions that have been deferred.

And in that context, if we see an expansion, our customer is actually moving more dynamically, then we would follow.

Your next question comes from Josh Levin of Citigroup.

Steve, can you just elaborate on something, the answer to one of the previous questions.

What specifically are you seeing that gives you confidence that the C&I loan growth will pick up in the back half of the year?

Is it primarily the pipeline?

Well the pipeline activity, and then discussions with the different customers that went into a wait-and-see mode in the first quarter.

They have plans.

They are very specific.

They actually have sales outlooks, and in some cases even demand that will cause them to expand.

Here in the Midwest, we talk about auto manufacturing and energy as being drivers in our commercial book, but emerging in the first quarter is also the housing side, there's been a stabilization, an increase in new housing start in many of the markets, that will also, I think, be sustained and felt during the year.

Okay, and just a quick question about credit.

It looks like the TDRs were up quarter over quarter and year over year.

Any color on that?

Yes, so the increase in the TDRs was primarily in the home equity category.

We've got some of our 10-year balloons starting to mature, and so in many cases, the best alternative for both the customer and ourselves is to put them into a 20-year amortizing product, and so that's what we've done here, but the reason they're categorized as TDRs is, in some or many of these cases, based on their FICO score or the LTV on the property we wouldn't have originated a new loan with a 20 year am, and therefore we view that as the concession, so I think it's a great outcome for the customer.

It's the right outcome for the bank, but we are designating those as TDRs.

Thank you very much.

Your next question comes from Bob Ramsey of FBR.

This is actually Tom Frick for Bob.

On mortgage banking, looks like your originations held up relatively well this quarter compared to peers.

Can you tell us how much of your production is HARP and how the recently announced HARP extension will impact your mortgage banking going forward?

Roughly about 25% of the production is HARP-related.

That's fairly consistent with what we saw toward the end of last year, and we think that the extension for two years will be net incremental, but some of the things that we're excited about are just some of the increased activity, as far as purchased mortgages as well, and so our pipeline and our activity level will give us a pretty good clarity as far as the next 30 to 60 days, as far as closing and we've seen a lot of strong volumes there, just given the recent rate limits as well.

Okay, great and then to follow-up, on gain on sale margins, looks like you experienced 140 basis points of contraction this quarter.

Do you expect that to stabilize from these levels?

Well, one, the origination volumes includes those that we keep in portfolio, and so if you just look at the volume that we actually sold in the secondary market, the reduction would be about 19%, and so what we did see as far as the actual contraction and gain on sale is about 30 basis points.

So it was far less than what you're showing there, but that's mainly because of the difference of what we're keeping on books versus selling.

Okay, so how much did you sell?

We sold roughly $800 million this year out of the $1.1 billion in originations.

Okay, great.

Thank you.

Your next question comes from Keith Murray of Nomura.

Could we focus in on the loan pricing?

Is there a floor whether it's related to ROE or related to a spread, where it hits a limit, and you decide to walk away?

Yes.

We clearly have that at every individual product and every individual relationship and we have pricing grids for our commercial, and also for consumer.

Dan's team is part of the credit approval process, where we view the return we're getting on, the extension of credit, and making sure we're remaining disciplined there.

That's one of the reasons why we believe that we've been able to maintain a very stable margin compared to many in the business, and combine that with the aggressive management of our deposit costs, has allowed us to keep that stability.

In the first quarter, we've walked away from more than we have in any prior quarter, as a consequence of that risk-return tradeoff.

Okay, and any specifics on what the ROE limit might be?

We haven't publicly stated what our floor ROE, is and we do have guidelines for each of our bankers and they are well aware of it, but they haven't provided any additional guidance there, and we remain very disciplined on that.

Okay, and then on Basel III, have you -- are you willing to provide an update where you are in Basel III?

We really haven't.

The last time we provided that was second quarter of last year, and it was about 150 basis point hit to our Tier 1 common, and we feel that it's in our best interest to wait until the rules are finalized before we update those, that we're reluctant to provide any clarity there, until we get clarity on what the new rules will be.

Okay, thank you.

Your next question comes from the line of Kevin St.

Pierre of Sanford Bernstein.

A couple points on net interest margin dynamics sequentially.

Your spread was stable, but the contribution from non-interest bearing deposits was down about 3 basis points.

There was about $1 billion decline, almost $1 billion decline in non-interest bearing, average non-interest bearing, but the period end balances were significantly higher than the average.

Was there anything unusual with respect to non-interest bearing deposits during the quarter?

Well throughout the quarter, and some of this occurred late in the fourth quarter, but we had three impacts that really drove some of the changes.

One was the impact of our decision to reduce some of our collateralized deposits.

Again, we mentioned earlier in the call concerns about OCI risk prospectively, and for collateralized deposits, we're required to keep 105% of those balances in basically agency-backed securities, which today in the market are earning somewhere between 150 and 175 basis points, and we feel that there's a real risk to our OCI for maintaining that, and there isn't sufficient reward for those deposit relationships.

Second was the expiration of [TAGP], and that had a $200 million type of impact to our balances, and has resulted in much more stability there after that, so it's not a large impact, but did have some.

And the third was a combination of normal seasonal trends that we see going through fourth quarter to first quarter, but also, we did see some of our small business banking customers start to utilize some of their cash positions as opposed to draw-down on lines, and ask for additional credit, and so those really contributed to the remaining piece of the impact on DDA balances.

Okay, and then somewhat related, as you look forward to an eventual rise in rates, could you talk about your assumptions in terms of your rate sensitivity, and what you give us quarterly and around the impact of a potential rise in rates on what your assumptions are around the retention of non-interest bearing deposits, and whether the fair play sticky customers might actually mute that?

We think that clearly will have a benefit and advantage for us as we look at our deposit mix, and to date, our deposit mix is more biased toward the retail side than the commercial side, compared to many of our peers, and as a result of that, we'll have greater stability in that deposit mix, and base even when rates do increase.

We continue to watch, and try to anticipate what the impact will be for our commercial borrowers, but keep in mind that a significant portion of those balances are being utilized to help offset deposit service charges and activity fees that will require them to still maintain some of those balances even as rates go up and so we think that we'll be well positioned as far as retention of those balances.

Great, thank you.

Your next question comes from the line of Erika Penala of Bank of America - Merrill Lynch.

My first question is a follow-up to Scott's question on the CFPB release on dealer mark-ups.

Some investors have concluded that this could potentially have further downward impact on spreads on that business.

I just wanted to get your thoughts.

Is it way too early to draw that conclusion, or does the way the release is written lead you to believe that would have no impact to the dynamics of pricing?

It's too early, Erika, to reach that conclusion.

There's a lot of ongoing discussion, I believe, with some in the industry, some of the larger ones in the industry, and the CFPB, and obviously a lot of industry concern where auto is recovering, not to somehow inadvertently dislocate financing in the market.

Okay, and my follow-up question is one to Ken Usdin's question.

I think the investor community looks at the year over year progression on deposit service charges as part of their measure of the success of fair play, and Don, to your point, if the posting order change added or deducted $5 million from the run rate, and we look at that comparison year over year, and you add that back, is it fair to conclude then that the year over year progression on an apples-to-apples basis on this line item was up 9%?

I think that's a fair analysis, Erika, yes.

Okay, thank you.

Your next question comes from the line of Jon Arfstrom of RBC Capital markets.

Question, you have a comment in the release about expecting to keep a greater portion of mortgages on the balance sheet.

Could you talk a little bit about that decision and what makes sense and what doesn't make sense?

This is Don.

As far as that decision, we're keeping some of our 10 and 15-year fixed-rate fully amortizing mortgage loans on balance sheet.

Over the last year or so, we've been signing those off as far as the production.

The benefit to us there is that right now, with the Fed in the market on a monthly basis buying $85 billion of the same type of product, we would usually buy and put in our investment portfolio, we feel that the spreads are tight there, and by keeping the mortgage loans on our balance sheet, it still provides us a very active source of liquidity, and minimizes the OCI risk again for us.

So that again is another substitute that we feel is appropriate.

The 10- and 15-year paper is fairly predictable as far as cash flows and is under written by Huntington, and so we're very confident with the underlying credit quality associated with that as well.

So similar in some ways to the auto decision but maybe a little different duration dynamic?

Very consistent, yes.

And then just a follow-up to the many follow-ups on auto, but how do we think about the size of the held-for-sale portfolio, meaning the size of the securitization later in the year?

And how do you make a determination in terms of what to put on the balance sheet or what to put in held for sale?

Thanks.

Well we originate the same quality and have.

So from a credit, we're indifferent whether we securitize or hold it, and then as we approach year-end, we'll have a number of factors to look at, including where we think interest rates are going and response to QE and OCI risk, as well as our outlook in terms of 2014 production, we have a fair amount of room with our 20% cap, but we're originating $4 billion plus a year now so we will have combination of factors.

So there's no plan to keep it all on the balance sheet?

It could go in either bucket?

Well, essentially we put it all in our loans initially, and then as we get closer to making a decision for securitization, at that point where it becomes probable, we do transfer those balances into a held-for-sale type of category, so what goes into the securitization is almost identical to what we keep on the balance sheet so there isn't a designation at the time of origination.

This loan is for the securitization and the other loan is for our portfolio, and so we make those decisions and transfers as we get clarity on the timing of the securitization transaction.

Okay, that helps, thanks.

Your next question comes from the line of Craig Siegenthaler of Credit Suisse.

Just wanted to make sure I heard one of your points in the prepared remarks near the end of the call.

Steve, did you guide up NIE for the remaining quarters of 2013 by $12 million?

I may have missed what you said there.

We said $10 million to $20 million, and that will be comprised of seasonal differences in marketing, principally along with commission and related incentive, with incremental capital markets, and other fee products that are sold.

And does that also cover professional services and also litigation and travel, which I think were also low, or do you think those items will remain kind of at this new base here?

We don't provide a lot of guidance on individual line items.

I'd say that in general, some of those categories were closer to the long-term rates but there are some variability in some of those categories, based on activity.

And then can you just help us with your expectations for the securities portfolio here, given both what you're thinking on loan growth and deposit side, and also securities yields are actually still quite elevated, and I'm wondering is that really held to maturity math driving that, or is it short-term lower yielding securities that are running off?

As far as our guidance, we would show that securities portfolio coming down over the remainder of the year, reflecting both the decision on the mortgages and also the indirect auto, and it wouldn't be quite a dollar-for-dollar offset but it clearly would have some impact there.

And as far as the yield holding up, it's a combination of the factors you did talk about, that some of the lower yielding securities have matured.

We did have some variable rate securities or short duration type securities that have either matured or have been sold off.

And we have seen a little bit of a shift in some of the mix that some of the purchases that we have been making over the last quarter or so, have been slightly longer in duration, but less extension risk, so we've been looking at more bullet-type of securities than what we had historically.

Great, thanks for taking my questions.

Your next question comes from the line of Steven Alexopoulos of JPMorgan.

I want to start looking at the growth in consumer checking accounts in the first quarter, was around 36,000.

Can you give us a sense, what was the average balance of these accounts when the account was initially opened?

I don't think we've provided a lot of details on that, because as those accounts that are initially opened usually take at least 90 days to season, to build up, and so I would say that generally, the new accounts that we've been adding, we probably had an outsize proportion coming from our in-store.

And we have publicly stated that the in-store deposit balances on average have been coming in at a lower level, that the customer base there tends to be a little bit younger, still high income levels and good demographics, but as a result of their age, coming in at a little slightly lower balance, but again, generally we've been pleased with the accounts that we've been picking up.

Okay, when I look at the consumer checking revenue, I guess is up $2 million or $7 million if you adjust for the check ordering, and the new checking households are up 131,000 year over year, what am I missing that it doesn't appear you're making that much of a return on the new customers you're bringing over?

Well what's impacting our retail business in general and it's impacting all retail businesses throughout the country is just this lower rate environment, continues to phase in, so the credit that they're receiving as a business segment for those deposit balances continues to shrink, and so the margin that we're seeing for that business is lower than where it was historically.

The benefit for that is offset in other areas, which a lot of us maintain a stable margin, but low rates have a clear negative impact on the margin for retail.

So the funds transfer pricing reduces if we did this on a constant basis, you'd see a much different number.

Part of the reason we like this rate of expansion, when we get to a normalized curve, there will be a significant incremental contribution coming off of that deposit base.

That's helpful, and just one follow-up on the margin, where do you see the portfolio loan yields bottoming?

We really haven't talked about that explicitly either.

What we continue to talk about is that our guidance would suggest that margin will still remain above the mid 3.3% type of level throughout the year, and that anticipates further compression on loan yields.

So that's mid 3.3%.

Mid 3.3%.

Steve did you say in your comments you thought the margin would be relatively stable this year?

No, I think we've tried to guide that outlook from the fourth quarter as for the full year Mid 3.3%.

We were pleased with the first quarter at 3.42%.

Okay, thanks for all of the color.

Your next question comes from the line of David Long of Raymond James.

So within your footprint, are there any MSAs where you're seeing a stronger pipeline of C&I, or where your business customers seem to be more bullish?

We have, I think, strength in a number of the MSAs.

It's hard to compare one versus another, David, not to ignore the question.

The economy in Pittsburgh is doing quite well.

The economy in Indianapolis equally strong, so the three larger cities in Ohio are doing well, so, Michigan is doing well, so can't distinguish one from another.

What about on pricing pressure within C&I?

Is it more intense in any particular MSA that you can talk about?

Not really.

Okay.

Easy enough, thanks.

Your next question comes from Jack Micenko of SIG.

On the marketing line, I know, Don, you don't give guidance and the press release talked about a ramp up on the marketing program at the end of the quarter.

You've been around $75 million in 2011 and $12 on the full year.

Is it reasonable to think that the full-year number reversed back to that historical trend, with that new program coming on late in the quarter?

The $75 million is more on a historic definition of marketing that we did change and move some of the things out of marketing that were more contract-related, and not necessarily marketing-specific.

So if you look at the last calendar year that we had about $64 million of marketing and our $11 million of marketing in the first quarter of this year would be fairly comparable to that general type of trend, with various seasonal changes.

Okay, great and then, Steve, you were talking about earlier a definitional change in cross-sell, and I was wondering if you could, as you did with the transaction ordering, maybe talk about to and from, so to speak.

Where it is, what the material changes maybe would be, and what to look for next quarter, when those new numbers come out?

Well they won't have financial impact and we're still working through it, so I don't want to be, it would be premature for me to comment.

And it's consistent with us moving from four to six products per household, and just re-looking at it.

We're trying to focus on quality and revenue as we do this, so we'll have more to talk about next quarter.

Okay, great fair enough.

Thank you.

Your next question comes from Terry McEvoy of Oppenheimer.

First question, are you seeing different competitors on the lending side in the Midwest, or has the competitive landscape changed at all in terms of the names?

The reason I ask is a bank that reported yesterday showed loan growth in Michigan for the first time in a while, and it's a well-known bank in that state.

Well it's essentially the same list of competitors.

Some may be more active or have had more focus than recently, but we've been competing against the same group over the last four years or more.

Terry, this is Dan.

I would say that basically the competitors are the same.

We have seen a few of our competitors move a little bit more in and out of the market over the last few years, as they've been looking at either to move away from commercial real estate or auto exposure, et cetera.

I think now some of them are starting to come back in, so that would be the one difference, is maybe a couple of the banks starting to be more interested in Michigan again.

And then my follow-up, a week doesn't pass without an article about the growing acceptance of prepaid debit cards.

I'm just wondering how does that trend, if it does, impact the Asterisk-Free product, the 24-hour grace product that you guys have, and is that a threat at all to future growth?

Well we don't offer a reloadable or a prepay at this time.

We do not see it having a meaningful impact on our Asterisk-Free, and the uniqueness of 24-hour grace continues to be compelling, even though the vast majority of our customers will never use that feature.

Great.

Thank you.

Thank you, Terry.

This will be our last question.

Your final question comes from the line of Brian Foran of Autonomous.

I guess you've referenced a couple different changes around OCI risk and maturity extension, and is the general thought process that you're looking at the market and actually worried about Fed coming out earlier, have a specific rate view versus how much of it is driven by some increased concern around rates being part of the stress test, and you don't want it to affect your capital planning going forward?

I guess more broadly just why so much focus on OCI and maturity extension this quarter incrementally?

It has nothing to do with stress test.

It's more a view, and a forward positioning in trying to be in a position where we've got a very sound balance sheet in a different rate environment, and so we saw a back-up early in the year in rates, and as a consequence, we reacted and we think what we're doing is prudent for the long term interest of the shareholders.

That was it for me.

Thank you very much.

We're very grateful for the interest, appreciate the questions and the exchange today.

Todd is available, as he has been in the past, if there are follow-ups to any of the questions.

Have a great day, thank you.

Thank you.

This concludes your conference.

You may now disconnect.