Huntington Bancshares Inc (HBAN) 2014 Q3 法說會逐字稿

Good morning ladies and gentlemen.

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

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

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

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

(Operator Instructions)

Thank you.

Mr. Todd Beekman, you may begin your conference.

Thank you, Sally and welcome.

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

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

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

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 would direct you to the comparable GAAP financial measures and the reconciliation to this comparable GAAP financial measures within the presentation, the initial earnings-related material we released this morning and related 8-K filed today, all of which can be found on our website.

Turning to slide 4, today's discussion, including the Q&A, will contain forward-looking statements.

Such statements are based on information and assumptions available at this time and are subject to change risks, 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 slide, the material filed with the SEC including our most recent Form 10-K, 10-Q and 8K filings.

Now turning to today's presentation.

As noted on slide 5, our presenters today will be Steve Steinour, Chairman, President and CEO, and Mac McCullough, our Chief Financial Officer.

Dan Neumeyer, our Chief Credit Officer, will also be participating in the Q&A portion of the call.

Let's get started.

Steve?

Thank you for joining us today.

Huntington had a solid third quarter with the underlying results showing continued disciplined execution.

Investments we've made over the last several years are paying off.

This is demonstrated by topline revenue growth, continued balance sheet growth, and what we view as industry-leading customer growth.

This quarter, you also saw us take steps to optimize not only our organization but fiscal and digital distribution.

For the quarter, we reported net income of $155 million, a 13% decrease from the year ago quarter and EPS of $0.18 per common share.

This represented a 0.97% return on assets and a nearly 10% return on equity.

It's worth noting that this quarter's results included two significant items that totaled $22.8 million of noninterest expense.

Mac and I will provide more comments in a few minutes but there are additional details on slides 22 and 23.

Revenue increased 5% from the prior year.

Net interest income increased $42 million, or 10% year over year while noninterest income decreased modestly.

Net interest income year over year benefited from two items, our investments, and our auto and commercial segments, drove a $4.1 billion, or 10% increase in loans.

And we added nearly $2.7 billion of incremental securities as we prepared for the upcoming Basel III Liquidity Coverage Ratio, or LCR rules.

The benefit of the larger balance sheet was partially offset by a 14 basis point decrease in net interest margin, driven by tighter loan spreads, and inability to materially reprice deposits lower and a larger securities portfolio, again, as we prepare for the upcoming Basel III LCR rules.

Third quarter noninterest expense increased $57 million over the same period of the prior year.

I'll discuss the details on this quarter's actions in a few slides and again, there are additional details on slide 22 but $40 million of the increase relates to $23 million of significant items in this quarter and $17 million of significant items that were a net benefit in the year-ago quarter.

Compared to second quarter 2014, our adjusted expenses were stable at around $457 million.

We continue to achieve positive operating leverage year to date and remain committed to positive operating leverage for the full year.

I will cover OCR in more detail later in the presentation.

But we continue to gain market share and share of wallet.

While there remains more than we can do to increase product penetration, we believe our robust customer growth and OCR sales process are driving long-term shareholder value.

Turning to slide 7, over the last year, our credit quality has improved.

Net charge-offs in the quarter were 26 basis points, well below our long-term target of 35 to 55 basis points.

While we continue to deploy capital and grow the balance sheet and distribute significant earnings to shareholders, our capital ratios remained strong.

At the end of the third quarter, our tangible common equity ratio was 8.35%, down 66 basis points from a year ago and 3 basis points from the last quarter.

Our Tier 1 common risk based capital ratio was 10.31%, down 54 basis points from a year ago and 5 basis points from the prior quarter.

Both of these reductions reflect the combination of our disciplined balance sheet growth, and strong capital management through increased dividends and buybacks over the last year.

We have repurchased over 32 million shares in the last year and this quarter we repurchased 5.4 million common shares at an average cost of $9.70 per share.

We have approximately $86 million of remaining share repurchase capacity through the end of the 2015 first quarter.

Slide 8 has a few additional first quarter highlights.

First, we completed the acquisition and integration 24 branches in Michigan.

Second, we continue to optimize our distribution network to better serve our customers needs today while investing to stay ahead of trends for tomorrow.

By the end of the year, we will be consolidating 26 branches, including consolidating a few traditional branches into in-store branches.

Throughout 2015, we will nearly complete our previously announced in-store buildout, with approximately 50 new branches again in 2015.

During this quarter, we completed two significant technology investments.

The installation of a new teleplatform across the entire franchise, and the completion of a year-and-a-half long effort to image enable our ATM network.

These investments are critical as we look to not only improve the customer experience but also drive efficiencies in our processes.

Deposits through the branches and ATMs are now digitally imaged and processed.

For example, we've already seen 25% of our deposits shift from the teller line to our new ATMs, and another 5% have migrated to the mobile channel with the introduction of our mobile photo deposit capture launched earlier this year.

Next I'm proud to report that as measured by a number of loans, Huntington is the number one SBA lender in the country.

We achieved this distinction despite only making SBA loans in our footprint, through our remarkable colleagues, who have made small business lending a core competency for Huntington, as well as the efforts of our continuous improvement team that have improved the overall experience for our customers and our colleagues.

Finally, consistent with our capital plans and given our continued strength in earnings and capital, our Board recently approved a 20% increase in our quarterly dividend to $0.06 a share payable to shareholders of record December 19.

So with that, let me turn it over to Mac for a more detailed review of the numbers.

Mac?

Thanks Stephen.

Good morning, everyone.

Slide 9 is a summary of our quarterly trends and key performance metrics.

Steve already touched on several of these so let's move onto slide 10 and drill into the details.

Relative to last year's third-quarter, revenue increased $36 million, or 5%, to $714 million.

Spread revenue accounted for the entire increase as net interest income increased 10%.

Driving net interest income growth was a $7 billion, or 15% increase, in earning assets.

Loans are made up more than $4 billion of the increase, with the remainder of the growth in the securities portfolio, including $1.2 billion of direct purchased municipal instruments originated by our commercial lending teams.

The remainder of the growth in the securities book was driven by our preparation for the upcoming Basel III Liquidity Coverage Ratio requirements.

The net interest margin compressed 14 basis points year over year to 3.20%.

Earning asset yields compressed 20 basis points year over year, including 4 basis points of compression due to the larger investment securities portfolio.

Funding cost improved by 9 basis points.

The net interest margin compressed 8 basis points linked quarter, but let me remind you, that last quarter's down had a 4 basis point benefits due to an interest recovery on an acquired commercial real estate loan.

Third quarter fee income was $247 million, which represented a $6 million decline, or 3% from the year-ago quarter.

Several small items drove the decline as customer activity in the quarter was slightly below the same quarter of last year and the second quarter of 2014.

As Steve mentioned earlier, there are two expense-related significant items impacting the quarter.

You may want to refer to table 2 in the press release or page 22 of the presentation as I walk through these items.

First, as we disclosed on our second quarter 10-Q as a subsequent event, on July 30 of this year, Huntington commenced organizational actions to reduce noninterest expense and improve productivity.

These actions consisted of a reduction in force and the decommissioning of certain real estate assets.

These actions are substantially complete.

We are also announcing today that we are closing 26 branches by the end of 2014, as we continue to optimize our distribution network to better accommodate the changing preferences and behaviors of our customers.

We incurred $19.3 million in the quarter for these significant items.

Second, on September 16 of this year, we announced the acquisition of 24 branches in Michigan from Bank of America.

As Steve mentioned earlier, the deal is closed and the branches are fully integrated.

Net of a small benefit from the Camco acquisition, that closed earlier this year, we incurred $3.5 million in the quarter for these acquisition-related significant items.

Reported noninterest expense in the third quarter was $480 million, an increase of $57 million, or 13% from the year-ago quarter.

However, after adjusting for the significant items I just walked you through, expense increased $17 million, or 4%.

Compared to the second quarter, and also adjusting for significant items, adjusted expenses were down $1 million.

Looking forward to 2015, we expect noninterest expense to grow modestly, somewhere in the range of 2% to 4% higher than 2014, after adjusting for significant items, as we continue to make investments in the franchise, as evidenced by the acceleration of our previously announced in-store initiative that Steve mentioned earlier.

But importantly, we are once again committing to delivering positive operating leverage for full year 2015.

While we are still finalizing our 2015 budget, it is worth noting that this commitment to positive operating leverage in 2015 is based on a scenario where the Fed does not raise rates in 2015.

Slide 11 displays of the trends in our earning asset mix, net interest income and net interest margin.

As I mentioned earlier, average loans increased $4.1 billion, or 10% year over year.

Commercial and auto remained the primary drivers of loan growth although we experienced growth in every portfolio.

Average commercial and industrial loans grew 9% year over year.

More than half of the increase occurred on our specialty lending verticals, all of which continued to mature and gain traction.

Business banking and our auto dealer floor plan lending were other key contributors to growth.

The auto loan portfolio grew $1.9 billion, or 32% from the year-ago quarter, as originations remain strong and we continue to portfolio all of our production.

As you can see on the auto loans slide in the presentation appendix, we did not sacrifice credit quality to drive this volume.

And it is worth noting, that after a multi-year decline in net new yields, we pushed pricing increases through during the quarter with new money yields back over 3%.

With respect to our auto finance business, I want to remind you that the summer months are seasonally strong.

On the other hand, the auto floor plan lending side of the business is weak in the fall as dealers liquidate the prior year's models to make room for the new model year.

Overall, utilization rates declined slightly and our auto floor plan loan utilization rates continue to run a couple percentage points lower than we would normally expect as a result of very strong auto sales for the last two quarters.

The chart on the right side of slide 11 shows the net interest margin trend which we have previously discussed.

Turning to slide 12, the right side of this slide shows our deposit mix while the left side illustrates the maturity schedule of our CD book.

Average core deposits increased $2.3 billion, or 5% year over year.

While not a meaningful impact to this average growth, the September acquisition of the 24 Bank of America branches in Michigan increased end of period deposits by approximately $700 million.

For the last several years, we have focused on increasing low-cost core deposits while reducing our dependence on higher cost CDs.

Average demand deposits increased $1.2 billion, or 6% year over year, while average money market deposits increased $2.2 billion, or 14%.

Growth in these categories more than offset the intentional $1 billion, or 24% decrease in average core certificates of deposit.

There continues to be an opportunity to drive improvement in the mix, but as you can see over the next four quarters, we have approximately $2.3 billion of CDs maturing, with a weighted average rate of 51 basis points.

Another important piece of the funding mix dynamic that you do not see on this slide is the $4.1 billion year-over-year increase in short- and long-term borrowings, $2.5 billion of which was bank and holding company debt issued over the past year.

We didn't issue any long-term debt this quarter but as we continue to focus on remixing our deposit base and managing our overall cost of funds, we expect to be active in the debt markets.

Slide 13 shows the trends in capital.

We remain well-capitalized with all of our regulatory capital ratios showing improvement from the second quarter of 2014.

We remain an active purchaser of our stock and at the end of the quarter had approximately $86 million of remaining share repurchase capacity through the end of the first quarter of 2015 under our $250 million repurchase authorization.

Slide 14 provides an overview of our credit quality trends.

Credit performance remains solid and in line with our expectations.

Net charge-offs fell noticeably from the year-ago quarter to 26 basis points as both consumer and commercial charge-offs experienced a meaningful decline.

In particular, home equity and commercial real estate experienced the largest declines.

Loans passed through greater than 90 days remained very well-controlled at 30 basis points.

Nonaccruals were down slightly in the quarter while the criticized asset ratio continues to show modest improvements.

Slide 15 shows of the trends in our nonperforming assets.

The chart on the left demonstrates continued improvement albeit at a reduced rate.

The chart on the right shows the nonperforming asset inflows, which were also fairly stable with the prior quarter.

Reviewing slide 16, the loan loss provision of $24.5 million was up from the year-ago quarter due to the implementation of enhancements to our reserve calculation for our commercial portfolios in the third quarter of 2013.

The allowance to loan ratio fell very modestly to 1.47%, down from 1.72% from the prior year, and from 1.50% in the prior quarter.

The ratio of allowance to nonaccrual loans was in line with the last several quarters at 211%.

The level of allowance is adequate and appropriate and reflects the stable credit trends discussed earlier, along with increasing loan volume.

Let me now turn the presentation back over to Steve.

Thanks Mac.

Our fair play banking philosophy, coupled with our optimal customer relationship, or OCR, continues to drive new customer growth and improved product penetration.

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

Over the last year, consumer checking account households grew by 140,000 households or 11%.

Now the third quarter's 18% linked quarter annualized growth rate includes 38,000 customers we acquired as part of the Bank of America transaction.

Our strategy is not just about market share gains but also gains in share of wallet.

We continue to focus on increasing the number of products and services we provide to those customers knowing that this will translate into revenue growth.

Our OCR cross-sells all of six or more products and services improved to almost 49% this quarter, up more than 150 basis points from a year ago.

Correspondingly, our consumer checking account households revenue is up over 9% year over year.

We've worked through the impact of the changes we've made in our business banking checking products that impacted a number of lower balance accounts.

Revenue grew just under 10% over the last year as the accounts that we've closed had little impact on revenue but did impact the optics of our commercial relationship portfolio.

That's on slide 18.

Turning to slide 19 and expectations.

For the fourth quarter, we continue to expect loan growth predominantly in auto and commercial lending.

But as we discussed before, competition remains intense and that has lowered our pull through rates.

We are closely monitoring our NIM and remain focused on pricing discipline.

Within auto, we are continuing to monitor the securitization market and will look to use it as a tool to manage our overall concentration.

It's unlikely we will be in the market during the fourth quarter but we do expect two securitizations in 2015.

We will continue to reinvest cash flows through investment securities into LCR compliant high-quality liquid assets.

In addition, securities are likely to continue to modestly increase as we buy additional level I high-quality liquid assets and a portion of the commercial team's production is placed in the securities portfolio.

The NIM is expected to remain under pressure but we expect net interest income to grow as earning asset growth more than offsets the NIM compression.

Noninterest income, excluding the net MSR impact, is expected to remain near the third quarter levels.

We also expect adjusted noninterest expense, excluding significant items, will remain near the current quarter's adjusted level.

Fourth-quarter 2014 is expected to include approximately $10 million of significant items related to the already announced franchise repositioning activities.

We will continue to look for ways to reduce expenses while not impacting our previously announced growth strategies or our high level of customer service.

On the credit front, we see credit trends are beginning to reach normal levels.

We expect net charge-offs will remain in or below our long-term expected range of 35 to 55 basis points.

Provision was below our long-term expectation during this past quarter.

Both are expected to continue to experience modest changes given their absolute low levels.

Turning to slide 20, as you can see we continue to be on track for delivering positive operating leverage for 2014.

We're committed to positive operating leverage for the full year and are committing to delivering positive operating leverage in 2015.

We still have a lot of work to do over the final quarter but I'm pleased with our year-to-date progress.

Finally, I'd like to congratulate two of our senior leaders, Mary Navarro, for being recognized as one of American Banker's 25 Most Powerful Women in Banking and Helga Houston, for being recognized as one of American Banker's 25 women to Watch in Banking.

We are very proud that they're a part of our team and so with that, I'll turn it back to Todd.

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

If that person has additional questions, he or she can add themselves back into the queue.

Thank you.

(Operator Instructions)

Scott Siefers, Sandler O'Neill & Partners.

Good morning guys.

Good morning Scott.

Steve, I was hoping you could expand a little on some of the comments you made about the competitive dynamic on the commercial side, I guess, mostly within the context of a few, the larger Ohio-based banks as, one, they're citing probably more of a slowdown on the commercial side than you did.

And then two, kind of cited that it's sort of a more direct pull back.

Just hoping to get a little additional color beyond what you made in your prep remarks of where you are in the spectrum and how are you thinking about things as you look forward?

Well, as we indicated, we have slightly lower line of credit utilizations.

We've got lower levels of pull through and that's reflecting competitive dynamics.

Half of our commercial growth has occurred in our specialty verticals, Scott.

So we made investments over the last several years in trying to position these businesses for growth and they are largely on track and those niches with dedicated personnel and industry knowledge have paid dividends today.

And I think we'll continue to help us with our growth as we go forward.

I would say generally, the economies in our region or our footprint are doing well, and that's also fueling this a bit.

We finally -- we do a lot of small business lending and so there's a component that might be thought of as a sort of a small business or business banking context that's also driving that growth.

Okay.

Perfect.

I appreciate that color and then either Steve or Mac, I was hoping you could touch on the cost side for just a moment.

First, were any of the savings from the July initiative?

Did they hit that third quarter or will that all the fourth quarter?

And then Mac you had alluded to I think 2% to 4% core expense growth next year.

I know you guys had been in the process of kind of a broader strategic review.

Does that embed the results or conclusions of that review or is that still kind of ongoing or pending?

Thanks Scott.

So there was a, I would say a slight benefit on an adjusted basis in the third quarter relative to the reduction in force that we had.

We will see that come through into the fourth quarter but also keep in mind that we're adding the Bank of America branches and we are accelerating the investment and in-store so we add back of those things in as well.

But obviously, all those things are played in with the guidance that we've given around the fourth quarter, being flat to third quarter on an adjusted basis with noninterest expense and that 2% to 4% range of growth of an adjusted 2014 base and 2015 which does include all the strategic actions that we need to take in 2015 related the process that we just came through.

Okay.

All right.

Perfect.

Thank you very much.

Bob Ramsey, FBR.

Hey.

Good morning guys.

I just wanted to talk a little bit about auto.

I know you all said on your prepared remarks that you were looking to do a couple securitizations next year after you guys had sort of stepped out of that market for a couple years.

Is that a reflection of loan concentration limits?

Or is it a question of sort of where you see the market today or what's sort of driving that shift?

Bob, we said we've had a concentration limit on auto a year or so ago and we're going to be running into that next year and so there's certainly a concentration component into this securitization.

But as we've done in the past if we see better execution where we have securitized in the past when we had room under the limit.

And next year, we'll start with the concentration but if we find an opportunity that gives us better economics in the future, we'll use that as well.

We originate to hold -- it's the same quality portfolio that we've securitized is what we hold.

It's performed very well for us.

The securities have actually outperformed expectations.

And we are confident of the quality of what we're doing and you get to see that every quarter as we give the credit metrics on our production.

And could you remind me what the concentration limit is that you guys are sort of targeting on the portfolio?

This -- we haven't given an exact number but we've expressed it as a percentage of capital in the past and I believe we've used about 150% and that was capital a couple years ago.

So you think about around numbers, $7.5 billion or $8 billion, that should put you in the ballpark.

Great.

That's helpful.

There's been a lot of talk in the media as well about the growing proportion of auto originations that are subprime.

I'm curious if you could tell me what percent of your auto production this quarter was subprime and maybe how, if at all, that has changed over the last year or two?

Yes.

We basically -- this is Dan.

We really don't originate subprime.

We've been a super prime and prime type lender and that's what we -- that's what's worked for us and that's where we continue to concentrate.

Great.

Thank you guys.

And Erika Najarian.

Bank of America.

Yes.

Thank you.

Good morning.

Good morning Erika.

I Just wanted to ask on the margin outlook that you had mentioned on slide 19.

As we think about the margin trajectory into next year, under your rate scenario where the Fed does not raise the short end, could you help us to think about what sort of the proportion of your margin impact is attributed to HQ buying and being LCR compliant versus core compression?

I mean, said another way, if not for LCR, would we be closer to the bottom on the NIM at this point?

Yes.

Thanks Erika.

So the way to think about it and in the current quarter.

If you look at it relative to third quarter of last year, we had 20 basis points of compression on the asset side.

About 4 basis points of that was related to LCR activities.

And you might remember on the last call, we talked about our outlook for the net interest margins and we thought it would bottom fourth quarter of 2014, first quarter of 2015.

Based on a rate environment where we actually thought that we were going to see an increase from the Fed much sooner than what we're planning right now.

So with our current guidance and the way we're looking at our plans for 2015 with no Fed increase planned for 2015, at least from our perspective, we're going to continue to see margin pressure.

I would tell you it's going to decelerate on a quarterly basis in 2015.

And we are going to continue to add securities, primarily Ginnie Maes as it relates to what is required from an LCR perspective as we move towards that date of January 16.

So I do think that the proportion that you're seeing related to the LCR impact is going to become larger as we move into 2015.

I'm not quite sure exactly what that's going to be but we are seeing, I would say some of the spread compression -- it's a -- I guess back up a bit as we move through the portfolio mix and change.

Got it.

And my second question is given that you've pushed through a new money rate of 3% for your new auto originations.

As you look out in terms of the competition for the credit spectrum that you do participate in, how much do you expect this to impact forward growth, if at all, into next year?

I don't think it will really impact growth.

We certainly didn't see that in the quarter when we pushed the rate increase through.

Actually had record origination volumes so I don't think that would be an impact.

Got it.

Great.

Thank you.

Ken Zerbe, Morgan Stanley.

Great.

Thanks.

I guess the first question I had was just in terms of the BofA branch deals, should we view this as kind of a one-off opportunistic opportunity to expand your footprint or when you think about the growth strategy over time, are there additional footprints or markets that you actually want to continue to build scale and we could see potentially more of these deals?

Well, the Bank of America was in footprint so that was part of our strategy to try and get more share where we are and build out and we're going to continue to prioritize growing our share in the markets we're in.

We might look at adjacent geography but the priority would be in footprint.

Got you.

Okay.

And then just the other question I had, in terms of LCR, can you just give us an update?

Where do you stand on that?

Other banks have provided percentages in terms of how, I guess, where they stand on LCR.

Thanks.

Yes.

Ken, it's Mac.

So we are probably in the neighborhood of 80% of where we need to be.

We're going to continue to add to the portfolio.

We see the ability to take basically liquidity from the existing portfolio of about $100 million a month and get the right type of securities for LCR.

So there will be a bit of a mixed change in the existing portfolio and I would expect another $750 million to $1 billion incremental coming on as we move through 2015 to get us ready for January of 2016.

Got you.

And the new securities you're putting on, does that have a meaningful impact on your NIM?

Yes, we're primarily looking to bring Ginnies on and it's hard to quote exactly where we are based on the market the last couple of days but it does have an impact on the NIM.

There's no doubt about it but I wouldn't necessarily call it material.

All right.

Great.

Thank you.

Steven Alexopoulos, JPMorgan.

Good morning everyone.

Good morning.

So the one-time cost for the July repositioning in closing 26 branches looks like around $30 million.

How much do you expect to save per year from those actions?

So the expectation was $30 million to $35 million on an annual basis.

Okay.

Perfect.

And if I look at the 2% to 4% range are talking about for expense growth next year, at least the upper end of the range seems high, particularly given the number that you just gave on cost saves.

What are some of the tailwinds pushing expense growth in 2015 and how much control do you have within that range?

So we have made significant investments in technology if you take a look back over the last couple of years.

Steve mentioned a few of those on the call today with the new teleplatform.

We're now completely image enabled in all of our branches.

We started to get the paper out of the branches so clearly, some savings related to that.

We're completely image-enabled on ATMs now and we also mentioned that we're seeing customer behavior change with the migration of deposits to the image-enabled ATMs as well as the photo mobile deposit capture, which is another investment we've been making around digital.

We have made large investments in in-stores, which we highly value.

We're seeing our customers migrate transactions into the in-stores.

We think it's a very important part of our distribution strategy going forward as we think about optimizing distribution and really getting the right costs and the right investment and distribution going forward.

So those are some investments that we've made that will have amortization expense from a technology perspective in 2015 or additional run rate expense related to bringing the new branches online.

So we do think these investments are important relative to the direction that we're taking the franchise in the future and those are some of the items that we'll see in 2015 and why the 2% to 4% range is what we expect.

Okay, that's helpful.

If I could just ask one more.

Some banks that have small auto portfolios point to that, particularly in direct auto is getting sloppy.

That's a core part of your business.

In that prime part of your business, are you seeing any frothiness there and you guys -- I know you had very strong growth this quarter but what are you doing in terms of tightening -- what are you just seeing in the market overall?

Thank you.

Yes.

This is Dan.

I think -- I don't know that there isn't a segment of the market that isn't very competitive although different lenders have their different niches that they are interested in.

And as I mentioned, we're in that prime, super prime -- there is some competition but given the fact that we were able to put through the price increase and still maintain volumes, I think that gives an indication that it's still somewhat rational so we are pleased with the segment of the market we're competing in.

Okay.

Thanks for the color.

Thank you.

Ken Usdin, Jefferies.

Thanks.

Good morning.

Good morning Ken.

Just following on auto and credit, obviously you're stacked, as Mac, as you alluded to the FICOs are the highest they've been a long time and the LTVs haven't changed but we've seen a bit of a rollover in the Manheim.

Your delinquencies have been up for the last two quarters.

I'm just wondering if you can help us understand how you're thinking about just protecting the book from a future credit perspective and what underlying trends are you seeing?

You're just kind of inside the portfolio and any signals that were about to go the wrong way on just auto credit regardless of how good of a job you guys do but just from a book perspective?

Sure.

This is Dan.

So we do -- we watch indexes like the Manheim.

That's one of our leading indicators.

I can't see that we are seeing anything right now that gives us pause but again we stick very much to our strategy of very strong FICOs, reasonable loan to values in terms of et cetera.

So no real early warning indicators even as we have expanded into new markets, we take a very cautious approach.

We take a bit more conservative stance when entering into those new markets, let them season and then go to our more traditional parameters.

So we watch it very closely but no early indications of any real problems.

Okay.

Dan, thank you and then secondly, Mac, when you talk about reentering securitization markets and potentially doing two next year, it seems like there's a spread -- the spreads are gain on sale potential is a lot tighter in the auto market than it was when you were doing them a few years ago.

Can you try to -- can you help us understand how you think about what a gain on sale might look like now versus then and also what the trade-off would be in terms of taking that gain on sale one-time through the fee side and the give up versus the give up in NII?

Yes.

So we have been monitoring the securitization markets very closely and you are correct.

The gains are much lower than they were last time that we went this direction.

I would roughly say it's probably 50% is something in that range.

And clearly, there probably is a bit of a give up by securitizing and not keeping the production on the balance sheet but we think this is the right thing to do from a concentration limit perspective and it's the direction that we've actually built the 2015 plan.

That's all embedded -- those trade-offs, taking the securitization and trade-off to the NII, that's built into the plan for 2015?

That's correct.

Okay.

Got it.

Thanks.

Matt O'Connor.

Deutsche Bank.

Good morning guys.

Dan Delmar in for Matt.

Could you just give us some color on what drove the $8 million net credit recovery in CRE this quarter and just the general outlook for recoveries going forward?

Sure.

You know we've seen a strong recoveries in the CRE book.

Obviously, we had significant charge-off activity several years back so we are starting to see the benefit of that.

I do think it is probably -- the recoveries probably aren't going to grow from here.

We'll continue to see reasonable level of recoveries going forward.

But that's all I can tell you there.

All right, thanks --

Multiple credits, Dan.

Okay, got it.

And separately, the gain on loan sales was up this quarter to about $8 million after seeing that lying around $4 million the last two quarters.

Should we expect that to continue or to get back down to the more normalized level?

Yes.

I would think of that at back at the normalized level.

Those were primarily SBA gains and I think we just have had some unusual gains in the quarter.

All right.

Thank you very much.

Thank you.

Jon Arfstrom, RBC Capital Markets.

Thanks.

Good morning guys.

Hey Jon.

Just to follow-up on the branches.

Can you just talk a little more about the decision to accelerate the in-store expansion.

I'm guessing this is just filling out Eagle and Meijer sooner rather than later.

And then maybe an update on the impact of the entire effort; you touched a little bit on it in the press release but maybe an idea of how the entire effort is tracking in terms of current year and maybe next year's P&L?

So we committed to a statewide exclusive arrangement with Giant Eagle and Meijer.

Several other banks with different store locations and as they -- and these are generally were the most attractive stores as those leases expire or there's opportunity for early exits.

We've been very interested in backfilling this as soon as possible and we're going to benefit from that in 2015 to the extent of 50 openings.

That will largely complete the program.

There will be a few more out years but the vast majority of it will be complete.

The in-stores themselves, as Mac alluded, are seeing a much higher level of customer choice than we expected.

So the transactional side of that in addition to the sales side is going very, very well and it's the convenience play we think is part of what's driving it.

We've factored the 50 expansions into the 2015 budget.

So that's a net expense guidance of 2% to 4% that Mac gave you.

And I mentioned earlier that we have 50 that have turned profitable and we expect the existing 120-plus to be profitable around the end of the year.

Okay.

End of the year meaning the end of 2015?

No.

End of 2014.

Existing 120-plus will be profitable around the end of 2014.

Okay.

That makes sense.

Thanks a lot.

So it is roughly a two or two-and-a-half year average to get them to profitability, Jon.

Yes.

Okay.

Thank you.

Thanks Jon.

Jeffrey Elliott, Autonomous Research.

Hello there.

I just wanted to touch on the two slight tweaks to the outlook.

First, the longer expecting securitization in the fourth quarter and then second, the nonperforming assets you've taken out the language around those declining.

Just wondered if you could discuss the thinking?

Could you repeat the first half of the question, please?

We had difficulty hearing.

Sure.

So the non-securitizing in the fourth quarter before it seemed like that was more of a possibility.

Now given the outlook, it sounds less likely.

And then the commentary around the nonperforming assets declining seems to have been dropped so what was the rationale for making those two changes?

So this is Mac.

Regarding the securitizations, as I mentioned earlier, we have been monitoring of the markets very carefully and just given some of the volatility and some of the rate issues that we've seen, we don't need to do the securitization in 2014.

So we've taken the guidance out related to that for specific reasons around just market conditions and making sure that we get the accounting for this right.

So 2015 looks much more probable at this point.

Yes.

And with regard to the NPA, the only real thought there is we've reached a level about our NPAs that are within our normalized range.

We do expect to see some level of continued improvement going forward.

But as you see this quarter, we are down to levels where a couple of deals can make a difference in the level of NPAs, so from quarter to quarter, you might see some modest volatility.

But we do still expect over the next couple years to see some level of continued improvement there.

So not a big shift in how we're thinking about it.

Okay.

(Operator Instructions)

Chris Mutascio, KBW.

Good morning Steve and Mac.

Hey Mac, I just want to go over the expense again.

I just want to make sure I understand how this plays out.

If I look at your adjusted expenses in 2013, it looks like about $1.78 billion and given the guidance for -- you've done already in 2014 and the guidance for the fourth quarter, it looks like it would be about $1.81 billion in 2014.

So about a 2% increase in 2014 over 2013.

And your guidance for next year is expenses is up 2% to 4%.

Now I do realize there's acquisitions involved, that will be the full run rate in 2015.

That can pressure the expense rate but it is higher than what it was in 2014 or projected to be higher in 2014.

So am I to assume that the cost-saving initiatives that are taking place are essentially be fully invested in the franchise rather than hitting the bottom line at least in the first year in 2015?

Yes.

Chris, think when you go through the math than that would be the way to take a look at it.

I think with the investments that we are making in the in-stores, and I think the Bank of America acquisition and how that plays into 2015 on a full-year basis, along with some of the technology investments that I mentioned earlier, those things would basically be 2% to 4% increase that we've talked about and that would offset the adjustments that we've made in the fourth quarter.

Okay.

Thanks Mac.

I appreciate it.

Thanks Chris.

There are no further questions at the time.

Mr. Steinour, I'll turn the call back over to.

Great.

Thank you.

In summary, we are pleased with our performance in the third quarter, as our strategies and disciplined execution drove strong results as the market acceptance of our value proposition.

It's clearly an acceptance.

Our best-in-class service, our convenience and our fair play philosophy.

And you can see this as we continue to gain market share and share of wallet.

And you can continue to see distinct examples of how we are optimizing the franchise.

We've produced 5% revenue growth in a challenging environment and are highly focused on pricing discipline as we go -- as we continue to grow our portfolio.

We recognize that the interest rate environment and competitive pressures are not going to go away overnight so we have work yet to do to finish out the year as strongly as it began.

Finally, our Board and this management team are all long-term shareholders.

We are very focused on reducing volatility and driving long-term performance.

So thank you for your interest in Huntington.

Have a good day, everybody.

This concludes today's conference call.

You may now disconnect.