Huntington Bancshares Inc (HBAN) 2014 Q4 法說會逐字稿

Good morning.

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

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

(Operator Instructions)

Thank you.

Todd Beekman, Director of Investor Relations, you may begin your conference.

Thank you, Anastasia, and welcome.

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

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

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

Slides 2 and 3 note several aspects (technical difficulty) 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'd direct you to the comparable GAAP financial measures, and the reconciliation of the comparable GAAP financial measures, within the presentation, the initial earnings-related material we released this morning, and the 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 period, will contain forward-looking statements.

Such statements are based on information and assumptions available at this time, and are subject to changes, risks and uncertainties which may cause actual results to differ materially.

We assume no obligation to update such statements.

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

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

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

Let's get started by turning to slide 6. Steve?

Thanks, Todd.

I'd like to thank everyone on the call for joining us today.

At Huntington, we enjoy a unique and advantaged position in the industry, and we believe our future is bright.

We're focused on executing our strategic plan, and we're very pleased with the results we are achieving.

For the past several years, we've invested in the Company at a time when most of the industry has been pulling back.

We've expanded and optimized our distribution, both physical and digital.

We've invested in small business and commercial specialty lending verticals.

We've added new products, such as our consumer and commercial credit cards, and our new business and consumer checking accounts; and these represent just a handful of the investments we've made.

Our 2014 earnings reflected results from these investments.

Yet, significant opportunity remains, as none of these investments are mature.

We have a strong outlook for the future.

Slides 6 and 7 show some of the financial highlights of the full year and the fourth quarter.

Mac will go through more of the detail shortly, but I wanted to highlight a few of these items that I believe distinguish Huntington, and illustrate our strategic execution.

Huntington had a solid year in 2014, reporting net income of $632 million or $0.72 per common share, while absorbing $0.06 per share of significant items.

Return on assets for the year was 1.01%, and the return on tangible common equity was 11.8%.

Underlying fundamental trends were somewhat obscured by a net $75 million of significant items over the two years.

Specifically, in 2014 results were negatively impacted by a net $65 million of significant items, while 2013 results benefited from a net $10 million of significant items.

So, these significant items largely related to two acquisitions and other strategic decisions that we believe have better positioned the Franchise for improved efficiency and profitability going forward.

There are additional details regarding the significant items on slides 22 and 23.

For the full year, we reported a $3.6 billion or 9% increase in average loans and leases.

Revenues increased $100 million or 4% in 2014.

Importantly, we delivered positive operating leverage for the second year in a row; a commitment we have renewed for 2015, and in fact, installed in our updated long-term financial goals.

We continue to post industry-leading customer acquisition rates, with 10% growth in consumer checking households and 3% growth in commercial relationships over the past year.

Now, with respect to the commercial growth rate, I'd like to remind you that early in 2014 we implemented some changes to our business banking products, which caused approximately 10,000 lower balance accounts to be closed over the course of the year.

So, the underlying core fundamentals were actually much stronger.

We also continue to sell deeper across both our consumer commercial relationships, so almost half of our consumer relationships now have six or more products and services from Huntington, while 42% of the commercial relationships have a cross-sell 4% or higher.

Fourth-quarter net income of $164 million represented a 3% year-over-year increase, while EPS of $0.19 was $0.01 higher than the year-ago quarter.

Return on assets for the fourth quarter was 1%, and return on the tangible common equity was 11.9%.

The 2014 fourth quarter included $20 million of significant items, while the year-ago quarter included $7 million of significant items.

Total revenues for the fourth quarter increased $25 million or 4% from the year-ago quarter, despite a $10-million headwind in mortgage banking income.

A 10% increase in net interest income drove the overall revenue growth, as a 13% increase in average earning assets more than offset continued pressure on the net interest margin.

Our NIM decreased 10 basis points year over year, but only 2 basis points from the third quarter.

We remain focused on minimizing this net interest margin compression through disciplined pricing of loans in the face of increasing competition for quality loans in our markets, and through continued improvement in our funding mix, via our focus on core checking account relationship growth and balance growth.

While there is limited opportunity remaining in terms of deposit pricing levers, we still have significant opportunity remaining to increase non-interest-bearing deposits and further improve our funding mix.

The increase in our securities portfolio related to compliance with the Basel III Liquidity Coverage Ratio Rules has also negatively impacted our margin.

And we expect additional further pressure, as we continue to add approximately $1 billion of incremental assets to the portfolio in 2015.

We continue to enjoy improvement in our credit quality.

We stated last quarter that we expect credit metrics will begin to stabilize, given where we are in the credit cycle, but this quarter exhibited particularly strong credit performance.

Net charge-offs in the fourth quarter were 20 basis points, bringing net charge-offs for the full year to 27 basis points; both well below our long-term target of 35 to 55 basis points.

This quarter's net charge-offs benefited from some large recoveries within our C&I book, as well as net recoveries in our commercial real estate portfolio, and I should add, for the fifth consecutive quarter.

Capital ratios remained strong.

We continue to be good stewards of shareholder capital, via disciplined balance sheet growth and capital return.

At the end of the year, tangible common equity ratio was 8.17%, down 65 basis points from a year ago, and 18 basis points from the last quarter.

The Tier 1 common risk-based capital ratio is 10.23%, down 67 basis points year over year, and 8 basis points sequentially.

Despite these declines, tangible book value per share increased 6% year over year to $6.62 due to our share repurchase program.

For the full year, we repurchased almost 36 million shares at an average cost of $9.37 per share.

During 2014, we returned approximately 84% of earnings to common shareholders through the combination of the dividend and buyback.

Just to repeat -- approximately 84% of earnings to common shareholders through the combination of the dividend and buyback.

During the fourth quarter, our cash dividend increased $0.01 or 20%, and we repurchased 3.6 million shares.

We have approximately $52 million of remaining share repurchase capacity through the end of the 2015 first quarter, and we intend to complete this authorization.

Slide 8 has a few additional highlights for the fourth quarter.

First, as we continue to optimize distribution to better reflect changes in customer behavior, we completed the consolidation of 26 branches at year end.

We introduced our new Huntington 5 and Huntington 25 checking account products, as we continue to improve customer choice and value related to our industry-leading checking account products.

Once again, Huntington was recognized for our superior customer service; this time honored as the highest ranking in customer satisfaction with small business banking in the Midwest region by JD Power.

Then finally, in December, we disclosed our new, long-term, through-the-cycle financial goals.

You will not see what we consider material changes from our prior goals, but rather refinement as we re-examine the Franchise and the banking environment.

We've replaced our former ROA target with a goal of a return on tangible common equity in order to bring focus on this measure of profitability, more closely aligned with value creation for our shareholders.

There is a slight increase in our efficiency ratio from the prior mid-50%s level, which is an acknowledgment of the higher inherent costs of today's banking industry from increased regulatory burdens.

Last, you'll see that a new goal is positive operating leverage annually.

We've committed to and delivered positive operating leverage in each of the past two years.

We're committed to delivering positive operating leverage again in 2015, and this new goal formally recognizes this as an annual goal for the Company going forward.

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

Mac?

Thanks, Steve, and 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 on to slide 10, and drill into the underlying details.

Relative to last year's fourth quarter, total revenue increased $25 million or 4% to $714 million.

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

Driving net interest income growth was a $7-billion or 13% increase in average earning assets.

Loans made up $4 billion of the increase, with the remainder of the growth in the securities portfolio, including $1.3 billion of direct purchase municipal instruments originated by our commercial lending teams.

The net interest margin declined 10 basis points year over year to 3.18% in the fourth quarter of 2014.

This decrease reflected a 17-basis-point contraction in earning asset yields, including 4 basis points related to the increase in the size of the securities portfolio as we prepare for the upcoming Basel III Liquidity Coverage Ratio requirement, and a 3-basis-point decline in the benefit from non-interest-bearing funds.

These reductions were partially offset by 10 basis points of improvement in funding costs.

On a linked-quarter basis, the net interest margin compressed 2 basis points, exclusively related to declining earning asset yields.

Fourth-quarter fee income of $233 million, which represented a $17-million or 7% decline from the year-ago quarter.

Lower mortgage banking income accounted for $10 million of the decline, while the remainder of the decrease primarily related to lower fees associated with commercial customer activity in the other income line.

Negative impacts to fee income during the fourth quarter included $6 million of net MSR hedging-related activity, and a full quarter's impact of July's changes to our consumer deposit accounts, which were previously estimated at $6 million per quarter.

On a positive note, we continue to see the benefits of consumer and commercial customer growth, with both electronic banking and capital markets revenue increasing more than 10% year over year.

Reported non-interest expense in the fourth quarter was $483 million, an increase of $37 million or 8% from the year-ago quarter.

The current quarter included two significant items impacting non-interest expense.

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

First, we incurred $9 million of franchise repositioning expense related to the consolidation of 26 branches at year end, and other organizational actions announced last year.

Second, we had a $12-million addition to the litigation reserve.

After adjusting for significant items, non-interest expense increased $24 million or 5% from the year-ago quarter.

Of this increase, $4 million related to the incremental impacts from the Camco acquisition and the Bank of America branch transaction.

Other contributing factors included an increase in healthcare costs, higher professional services expense, and higher equipment expense related to technology investments.

Table 8 and 9 in the press release provide more detail related to non-interest expense.

Compared to the third quarter, and also adjusting for significant items in both quarters, adjusted expenses increased $5 million.

The primary drivers of the linked-quarter increase were higher healthcare costs and professional services expense.

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

As I mentioned earlier, average loans increased $4 billion or 9% year over year.

Indirect auto, and commercial and industrial, or C&I, accounted for more than $3 billion of this loan growth; although we experienced growth in every portfolio.

The indirect auto loan portfolio increased $2 billion or 31% from the year-ago quarter, as originations remained strong, and we continue to portfolio all of our production.

As shown on slide 54 in the appendix, we continue to focus on the super prime space, and have not sacrificed credit quality to drive volume.

In addition, we continue to drive improvements in pricing.

On last quarter's earnings call, we announced that we achieved price increases late in the quarter.

Earlier this month, we raised pricing again.

As a result, new money yields averaged 3.08% during the fourth quarter; and more recently, new money yields have been in the 3.10% range.

We continue to expect two auto loan securitizations during 2015, as we manage loan concentrations.

Average C&I loans increased more than $1 billion or 7% year over year, primarily reflecting trade finance in support of our middle market and corporate banking customers.

The chart on the left side shows the net interest margin trend, which we previously discussed.

Turning to slide 12: The right side of this slide shows the quarterly trends in our deposit mix and average cost of deposits, while the left side illustrates the maturity schedule of our CD book.

Average core deposits in the 2014 fourth quarter increased $2.9 billion or 6% year over year.

This increase benefited from $1.1 billion of core deposits acquired in the Camco acquisition and the Bank of America branch transaction.

We remain focused on re-mixing our deposit base by increasing low-cost core deposits, while reducing our dependence on higher-cost CDs.

Average non-interest-bearing demand deposits increased $1.8 billion or 14% compared to the 2013 fourth quarter, while average money market deposits increased $1.6 billion or 9%.

Growth in these categories more than offset the intentional $0.9 billion or 22% decline in average core certificates of deposit.

As shown in the chart on the left side of the slide, the opportunity to reduce CD costs has diminished, but we remain focused on the opportunity to drive further improvement in the mix.

There are two pieces of the funding mix dynamic that you do not see on this slide.

First, average short- and long-term borrowings increased $2.9 billion or 78% year over year, which includes $1.25 billion of bank debt issued during 2014.

Second, average broker deposits increased $1 billion or 74% from the 2013 fourth quarter.

Both of these funding sources provide a cost-efficient means for funding balance sheet growth, including LCR-related securities growth, while maintaining an intense focus on managing our core deposit expense.

Slide 13 shows the trends in our capital ratios.

We remain well capitalized, with reductions in our capital ratios throughout 2014 being driven by robust balance sheet growth, as well as our active capital management strategies.

We've repurchased $334 million of our common stock over the course of the year, including $35 million during the fourth quarter.

At year end, we had approximately $52 million of capacity remaining under our share repurchase authorization, which we intend to complete in the first quarter of 2015.

Slide 14 provides an overview of our credit quality trends.

Credit performance remains quite strong, and in line with our expectations.

Net charge-offs decreased to 20 basis points in the fourth quarter, an improvement over both the prior and year-ago quarters, and well below our long-term expectation of 35 to 55 basis points.

Net charge-offs this quarter benefited from the fifth consecutive quarter of net recoveries within our commercial real estate portfolio, as well as a couple large recoveries within the C&I book.

Non-performing assets and non-performing loans also posted continued improvement.

The allowance for credit losses eased modestly, consistent with the improvement in the overall portfolio.

Criticized assets represented one of the few credit metrics that increased sequentially, with about half of the increase due to two large unrelated credits that moved into special mention this quarter.

Slide 15 shows the trends in our non-performing assets.

The charts on the left demonstrate continued improvement, albeit at a reduced rate.

The charts on the right show the NPA inflows, which also improved modestly from the prior quarter.

Turning to slide 16, the loan-loss provision decreased to $2.4 million in the fourth quarter, reflecting primarily continued improvement within the commercial real estate portfolio.

The allowance-to-loan ratio decreased to 1.40%, down 7 basis points sequentially and 25 basis points year over year.

The ratio of allowance to non-accrual loans improved to 222%, up slightly from the prior quarter, and roughly in line with the year ago.

We believe the allowance is appropriate, and reflects the continued improvement of the underlying credit quality of our loan portfolio.

Let me now turn the presentation back over to Steve.

Thank you, Mac.

Turning to slide 17: As I alluded to in my opening remarks, 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.

And over the last year, consumer checking account households grew by 129,000 households, or 10%.

And the fourth quarter was relatively unchanged from the prior quarter, due to seasonality of customer activity and a reduction of our marketing programs made earlier in the year.

If we exclude the impact of the Camco and Bank of America branch acquisitions, organic growth in consumer checking households was a healthy 6% for the year.

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 these customers, knowing that this will translate into revenue growth.

Our OCR cross-sell goal of six or more products and services improved almost 50% in our consumer account households this quarter, up 174 basis points from a year ago.

Correspondingly, our consumer checking account household revenue for the fourth quarter is up 12% year over year.

As you can see on slide 18, commercial relationship growth has returned, as we work through the impact of the changes made in our business banking checking products that impacted a number of lower balance accounts.

Commercial relationships increased 3% year over year.

Excluding the impact of the Camco and Bank of America branch acquisitions, organic growth in commercial relationships was 2% for the year.

Our four-or-more-product OCR cross-sell for commercial relationships improved almost 42% this quarter, up more than 4% from a year ago.

Commercial relationship revenue for the fourth quarter grew 12% year over year.

Slide 19 shows that we once again delivered on our commitment for positive operating leverage for the full year for 2014.

We've re-committed to delivering positive operating leverage for the full-year 2015.

And as I noted earlier, positive operating leverage is now a long-term goal for the Company.

Turning to slide 20 for some closing remarks and expectations: As we enter 2015, we're bullish on the economy and our footprint, particularly for consumers with home prices rebounding, at least a near-term opportunity for additional mortgage refinancing, and the benefit of the dramatic recent decline in energy costs just starting to be appreciated.

State governments in our footprint are all operating with surpluses, and most municipalities are on solid footing.

Automobile sales were very strong last year, and appear poised for another great, if not even better, year in 2015.

Our loan pipelines are stable.

They're consistent with fourth quarter, and we remain optimistic regarding the outlook for continued growth.

We'll continue to reinvest cash flows of approximately $100 million to $125 million per month from existing investment securities into LCR-compliant, high-quality, liquid assets.

In addition, we expect to add another $1 billion of additional Level 1 HQLA as we prepare for LCR, while a portion of the commercial team's production also will continue to be placed in the securities book.

We expect NIM pressure will remain a headwind until interest rates start moving back up, but, we expect to grow revenue despite this pressure.

We are maintaining our pricing discipline.

We continue to monitor the securitization market, and will look to use it as a tool to manage our overall concentration of indirect auto loans.

We expect to do two securitizations in 2015.

We will continue to invest in the Franchise, with expected expense growth of 2% to 4% for the full year.

Excluding significant items, if any, and net MSR activity, we're committed to positive operating leverage on an annual basis, which means revenue growth exceeding expense growth.

We will grow revenues in 2015, both fee and net interest income.

We will not change our underwriting standards.

We are long-term shareholders in management and at the Board level.

I'm pleased to report we've got good momentum in many of our business lines, and in my opinion, this is the best entry position for a new year we've had in my tenure here over the last six years.

Finally, we continue to expect to see stabilization in credit trends.

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

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

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

Longer term, we're managing the Franchise to deliver consistent, strong shareholder returns.

We've built a strong consumer brand with differentiated products and superior customer service, and we're executing our strategies and adjusting to operating environments whenever necessary.

And there's a high level of alignment between employees and shareholders.

We are both cognizant of, and highly focused on, our commitment to be a good steward of shareholders' capital.

So with that, let me turn it back to Todd.

We will now take questions, and ask as a courtesy to your peers, each person ask only one question and one related follow-up.

And if that person has additional questions, we ask to add themselves back to the queue.

Thank you.

Anastasia?

(Operator Instructions)

Scott Siefers, Sandler O'Neill.

Morning, Scott.

Morning, guys.

Let's see, Mac, maybe the first one is for you.

You talked about the possibility of margin pressure and gave the puts and takes.

I wonder if you can spend a second just talking about order of magnitude of margin pressure.

We've got the funding remix that's an opportunity, but the LCR that is still a bit of a headwind.

You've been doing maybe 1 or 2 basis points of core compression a quarter for a while.

Is that still something that seems fair going forward?

Well thanks, Scott.

Thanks for the question.

I think the way to think about it, we continue to see compression in certain loan portfolios as we see the repricing take place.

Certainly, there are some portfolios where we've already crossed that line, and we're not seeing significant or any repricing.

We will see some pressure as we add securities for LCR.

We'll add about $1 billion incremental, along with kind of having to repurchase about $100 million to $130 million a month from maturities.

So those things will add to margin pressure as well.

Certainly, there's not much room on the deposit side going forward.

We do continue to grow demand deposits very nicely, and that is certainly going to help as we remix the deposits.

But continued pressure on the margin that will be outpaced by earning asset growth in 2015.

Okay.

Thank you.

And let's see, maybe just a separate question.

So I think we have a good sense for how [you are seeing] on auto pricing, giving your comments, Mac.

But maybe, Mac or Steve, just given the amount of attention that auto lending gets these days.

If you could spend maybe another second talking about the growth and credit prospects as you see them from your position?

Well we have been very consistent with our auto lending.

We show it to you every quarter.

If you look back over the last five years, our FICO bands are incredibly tight.

Our loan to values, new used mix moves a little bit depending on the year and new production by the auto manufacturers.

But we're very bullish on auto.

We think we're going to come off a very good year and have an even better one.

Certainly, this consumer benefit coming by the refinance potential that exists today, compounded with the lower price at the pump for gas should help drive auto.

To even -- to no worse than last year, we're optimistic it's going to be a better year on the whole.

And our discipline will remain in place, and we expect our performance to continue at or better than prior periods.

All right.

That's perfect.

Thank you very much, guys.

Thank you.

Ken Usdin, Jefferies.

Hey, guys.

This is actually Josh covering for Ken.

Can you speak to what you saw in mortgage banking this quarter?

We saw from other banks that this held up a little stronger, and you guys saw little more weakness?

So on a year-over-year basis, we did have an MSR gain in the fourth quarter of 2013.

We had an MSR impairment in the fourth quarter of 2014, so I think that certainly impacted us quite a bit.

Other than that, I think our production stats were in line with what we saw in the industry.

And we certainly are seeing a pickup as we see what's happening today in the market.

So we do expect probably better improvement in this line in 2015.

Okay.

And then just more generally, can you speak to the revenue drivers for fee income in 2015?

Where you're expecting to see the most growth or less growth?

Well, we certainly have seen a few areas in the fee income area that are showing strength due to our growth in households and also businesses, as Steve mentioned earlier.

We see capital markets increasing.

We see the ATM and debit card fees increasing significantly, both double-digit growth in the quarter.

We do expect to see better growth in non-interest income in 2015 relative to what we saw in 2014, as we probably bottomed out in mortgage banking.

And again, as we discussed earlier, we are going to see good earning asset growth that will certainly offset any NIM compression we see in 2015.

Okay.

Great.

Thanks for the time, guys.

Thank you.

Matthew O'Connor, Deutsche Bank.

Good morning.

Morning, Matt.

I was wondering if you could elaborate on the two credits that drove the increase in criticized assets?

I guess first, what industries were they in?

Hey, Matt, this is Dan.

Yes, one was in metals, the supplier to the auto industry, and the other was in natural resources.

Both legacy credits.

Both, we feel, very positive about their ultimate disposition.

But we're trying to call these things early, and make sure we leave all of our options open for resolution.

So that comprised the majority of what would be considered more than normal inflow, and then we also have, throughout the fourth quarter, taken a very deep dive into all portfolios as we attempt to stay in front of any developing problems.

So again, calling these credits early and giving ourselves every opportunity for rehabilitation.

And then I realize there's some moving pieces, because most of the credit metrics were quite good in times of charge-offs, non-performers.

But as we think about the higher criticized assets and then the loan loss reserve, at least this quarter.

I guess I was surprised how much reserve release there was given the increase in criticized assets.

Yes.

So there's a lot of components as to how we look at making sure we have an adequate and appropriate ACL.

And most of the metrics, as you know, were very strong.

So we had really low level of charge offs, NPAs coming down, an improving economy.

And so when you factor all those in, and if we see a trend developing, we'll modify, but we don't believe we've seen a trend here.

We think this is a one quarter phenomenon, and the increase in criticized.

So we feel very good about the level of ACL today.

And again, we continue to have improvements in the C&I portfolio, continued recoveries in CRE, which drove a lot of the reduction.

So on the whole, we think we're right where we need to be.

And as we think about the reserve levels going forward, should we think of them being closer to charge-offs, or you start building a little bit, or --?

Well clearly, we don't expect -- we're at our lower where we expect to be on charge offs.

So I certainly don't see things getting better on that front from here.

So I think you can make your own assessment out of that.

Okay.

Thank you.

Bob Ramsey, FBR.

Hey, Bob.

Good morning, guys.

I was hoping you could just touch on some of the through the cycle long-term goals you talked about, specifically your new return on tangible common equity goal and the efficiency number.

Are those numbers that you hope to be able to touch at some point in 2015, or are these numbers that you really need higher rates or some other catalyst to bring you into that zone?

Yes, thanks, Bob, it's Mac.

So you certainly touched on one variable that is going to impact how soon we achieve the bottom end of some of these ranges, and that is the rate environment.

But clearly, we're doing other things to make sure that we move in that direction.

We've talk about positive operating leverage, we've talked about making sure that we manage our expense base as it relates to the revenue opportunity that we have in any one year.

And that certainly is going to continue to move us towards the efficiency ratio target.

As it relates to a return on tangible common equity, we are continuing to make the right investments and the businesses that we think have the best returns going forward.

We are looking for opportunities to optimize the existing balance sheet.

In some cases, making sure that we're being efficient in how we're using our balance sheet.

And certainly investing in higher return on equity businesses.

So this is going to be -- it's not going to happen over night, but certainly, the things that we do every day to head in the right direction are going to help us get there.

And I would expect late 2015, 2016, we'll start to see the achievement of some of these ratios.

And will you see them in late 2015 or 2016, even if rates don't move up as expected, or do you really need that rate move?

I know you said it's helpful, but is it absolutely necessary I guess?

What I'll commit to is we're going to continue to make progress in the right direction, and that rates will certainly help us get there.

But there are a lot of other things that we're doing that are going to help us achieve those ratios.

Okay.

And then I guess similarly, as you all talk about your revenue growth expectations and the outlook for this year.

Does it move materially if you do get a 50 basis point move in rates in the back half of 2015?

Does it materially move the revenue numbers for 2015, or is it more of an impact the year after?

Well clearly, it would be a larger impact for the year after given any rate change later in the year.

We're only going to get a partial year benefit.

Clearly, we'll get some pick up as rates increase.

And certainly, mid year or later seems to be what would be the best that we could hope for.

But the bigger impact would come in 2016.

Okay.

All right.

Thank you, guys.

Thank you.

Jon Arfstrom, RBC Capital Markets.

Thanks.

Good morning, guys.

Morning, Jon.

Just clarification maybe for Dan or Mac on the provision.

Are you saying you expect a provision to come back in line with charge-offs again starting in 2015?

Actually we didn't say that.

Again, we are at a low point in terms of in charge-offs, so provision clearly was lower this quarter than we have seen.

Much of it is going to depend on loan growth and the state of the economy.

But I would say that it's probably likely the provision is not going to remain at this level or lower on a go forward basis.

John, it's Mac.

Obviously, the provision is the outcome of how we think about what we need from an appropriate reserve perspective, and we just had a lot of very positive actions in the fourth quarter that moved us to this provision number.

I think the inflow of classified that we saw -- criticized, that was also obviously incorporated into the fourth-quarter number.

And we do feel comfortable with credit quality where it's at today.

So clearly, we're at a low level relative to what we expect longer-term.

There could be some volatility as we move forward, because we are at such a low level.

But I think a lot of things came together in the right direction this quarter to make that happen.

Okay, good.

Just another clarification point on the operating leverage number.

Are you assuming the $1.8 billion expense base in terms of expense growth, the fully loaded expense number?

That's correct.

Okay.

And then just one more if I can, Steve, you talked a little bit about energy prices.

You do have some Marcellus and Utica overlap, on the other hand you have a big consumer base.

And how do you think about the puts and takes of low energy prices?

I think it's tremendous for our region.

Both at the consumer, but I'd also say at a commercial level.

Our businesses whether they're manufacturers, distributors, service companies they're all going benefit from lower energy costs, price at the pump, whatever.

Our energy exposure is very modest.

It was part of a strategy of purposeful selection in a particular slice in that market.

And if you will, a go slow approach to make sure we were fully absorbing and understanding as we built a little portfolio.

Okay.

All right.

Thank you.

Thank you.

(Operator Instructions)

Geoffrey Elliott, Autonomous Research.

It's Geoff Elliott from Autonomous.

Hello, Geoff.

On the natural resources, you mentioned that one of the new criticized loans was in that sector.

So could you just give us a bit more detail on what the total exposure to that sector looks like, and how it breaks down between oil and gas, mining, [outlet], and the components of natural resources?

Okay.

That's a pretty broad category.

When we talk about what we have, natural resources is the broadest of categories.

Our E&P book, which is always been our energy vertical, that has about $500 million of commitments and about $300 million or so in outstanding.

And that is largely reserve-based syndicated deals that have broad geographic diversity.

The entire energy category can define that a number of different ways, but I think in terms of the oil and gas it's primarily reserved-based lending.

You might comment further about oil versus gas, Dan.

Sure.

And our energy book is weighted towards natural gas.

We do have about a half-dozen borrowers that are oil heavy, but the majority of the book is weighted towards natural gas.

And again, reserve-based for the most part.

We do have a few midstream names in there as well.

There's no tie-in.

I should emphasize that in that portfolio, none of that was in the move to criticized.

Okay.

So it wasn't oil, it wasn't natural gas, it was some other part of natural resources?

Correct.

Right.

Great.

Thank you very much.

Thank you, Geoff.

Erika Najarian, Bank of America.

Morning, Erika.

I just had one follow-up question.

And I just wanted to make sure that I got the message clearly.

And thank you so much for giving us so much detail for 2015.

The message that I'm getting is, regardless of the rate backdrop on the short or long end, Huntington will grow revenues in 2015 and post positive operating leverage.

Hello, Erika, it's Mac.

So we are going to manage the expense base based upon the revenue environment to achieve positive operating leverage.

So we do continue to see good earning asset growth, which we believe will overcome any NIM pressure that we have in 2015.

And we are going to see better growth in fee income in 2015 as well.

So, yes, I think the positive operating leverage comment is a strong comment that we're committed to.

Got it.

Thank you.

Thanks, Erika.

There are no further questions at this time.

I turn the call back over to the presenters.

So in summary, we're pleased with our performance for the full year 2014, and especially the fourth quarter.

Results reflected the disciplined execution of our strategies, and the strong competitive position of Huntington and our brand, highlighted by superior customer service which is separating us from our peers.

We continue to gain market share and improve share of wallet.

We've produced 4% annual revenue growth, and positive operating leverage in a challenging environment.

We also took demonstrable steps to improve efficiency and optimize the franchise.

And finally, our Board and this Management team, we're all long-term shareholders.

We remain focused on actively managing risk, reducing volatility, while investing for top line growth and achieving positive operating leverage.

We're here to drive long-term performance.

So thank you for your interest in Huntington, and have a great day.

This concludes today's conference call.

You may now disconnect.