Huntington Bancshares Inc (HBAN) 2015 Q1 法說會逐字稿

Good morning.

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

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

(Operator Instructions)

Thank you.

Mark Muth, you may begin your conference.

Thank you, Jackie.

Welcome.

I'm Mark Muth, Director of Investor Relations for Huntington.

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

This call is being recorded and will be available as a rebroadcast starting about one hour from the close of the call.

Slides 1 and 2 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 the comparable GAAP financial measures within the presentation, the additional earnings material we released this morning and the related Form 8-K filed today, all of which can be found on our IR website.

Turning to slide 3, 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 and materials filed with the SEC including our most recent Form 10-K, 10-Q and 8-K filings.

As noted on slide 4, the presenters today are Steve Steinour, Chairman, President and CEO of Huntington; and Mac McCullough, Chief Financial Officer.

Dan Neumeyer, our Chief Credit Officer; and Rick Remiker, our Commercial Banking Director, will also be participating in the Q&A portion of today's call.

Let's get started by turning to slide 5. Steve?

Thanks, Mark.

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

It's an exciting time for us at Huntington.

Our first-quarter results demonstrated the strength of our franchise and business model in a challenging external environment.

We're very pleased with the results and believe that the first quarter sets us up well for the remainder of the year.

We're focused on finishing 2015 strong and positioning for continued success in 2016 and beyond.

Our current focus is on improving our already strong competitive position in consumer banking, small business and middle-market banking, including the specialty lending verticals, by improving sales execution, developing new products, and deepening customer relationships through OCR.

Our commitment to smart, accretive acquisitions was on display during the first quarter as we successfully completed the acquisition of Macquarie Equipment Finance.

We also announced in the continued enhancement of our full-service branch network in a cost-efficient manner with the addition of 43 new in-store branches in Michigan.

Slides 6 and 7 show some of the financial highlights of the 2015 first quarter, Mac will discuss the details shortly, but I wanted to highlight a few of the items that I believe distinguish Huntington and illustrate our strategic execution.

Good core balance sheet growth, along with strong performances from mortgage banking and capital markets set the tone for a solid quarter.

We reported net income of $166 million, an 11% increase year over year, and EPS of $0.19, a 12% year-over-year increase.

This resulted in a 102% return on assets and a 12.2% return on average tangible common equity.

Total revenue increased 2% year over year, which includes the impact of a $17 million in securities gains in the first quarter of 2014, driven by a 7% increase in the net interest income tied to strong balance sheet growth.

Average loans and leases increased 10% from the year-ago quarter, and average total deposits increased 10% as well.

The majority of deposit growth was due to an 8% increase in core deposits, which we're very pleased with.

Our focus on deepening relationships and earning primary banking status with our customers continues to benefit core deposit growth.

And on that note and turning attention to slide 6, we continue to see industry-leading customer acquisition, with 9% growth in consumer checking households and 5% growth in commercial relationships over the past year.

With respect to the commercial growth rate in 2014, we implemented changes to our business banking products which caused approximately 10,000 lower balanced accounts to be closed over the course of the year, so the underlying core fundamentals were even stronger.

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

Slide 7 has a few additional highlights from the first quarter.

First, our 2015 CCAR capital plan received no objection from the federal reserve.

For the upcoming five quarters through the 2016 second quarter, our Board of Directors has approved the repurchase of up to $366 million of common shares.

We successfully completed the acquisition of Macquarie Equipment Finance and look forward to transitioning to the Huntington Technology Finance brand.

We continue to be recognized for our focus on excellent customer service.

For the second year in a row, Greenwich Associates named Huntington one of the best commercial and business banks in the country.

We also just received the 2014 TNS Choice Award for consumer banking in the central region, which consists of 20 states in the middle of the country.

This is the third time we've won this award, and it's based on our strong performance in attracting new customers, satisfying and retaining customers, and winning a larger share of their customers' total banking business.

Finally, we repurchased 4.9 million common shares at an average price of $10.45 per share, thus completing our previous buyback authorization from our 2014 CCAR capital plan.

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

Steve touched on several of these, so let's move on to slide 9 and drill into the details.

Growth from last year's first quarter, total revenue increased 2% to $707 million.

As Steve mentioned, this includes the impact of $17 million in securities gains in last year's first quarter.

Spread revenue accounted for the entire increase as net interest income grew by 7%.

Driving net interest income growth was an 11% increase in average earning assets.

Loans accounted for the majority of the balance sheet growth, increasing 10% over the previous year.

The remainder of the balance sheet growth came in the securities portfolio as we continue our preparation for the upcoming Basel III liquidity coverage ratio requirement.

The net interest margin compressed 12 basis points year over year to 3.15%.

This decrease reflected a 15 basis point contraction in earning asset yields, partially offset by a 4 basis point decline in funding costs.

On a linked quarter basis, the net interest margin compressed 3 basis points exclusively related to lower-earning asset yields.

Fee income for the 2015 first quarter was $232 million, a 7% decline from the year-ago quarter.

The decline was primarily driven by a $17 million decrease in securities gains.

Though overall fee income decreased, we continue to see the benefits of consumer and commercial customer growth, as both electronic banking and capital markets income growth was strong year over year.

Electronic banking increased 16% while capital markets fees increased 51%.

Capital markets had a particularly strong quarter, primarily driven by customer interest rate derivatives revenue.

I also want to highlight a particularly strong quarter for mortgage banking.

Mortgage banking income grew 64% on a linked quarter basis, and mortgage pipelines remain strong and have no signs of slowing down.

Reported noninterest expense in the 2015 first quarter was $459 million, a decrease of $1 million or less than 1% from the year-ago quarter.

Noninterest expense in the first quarter of 2014 did include $22 million in significant items, so on an adjusted year-over-year basis, noninterest expense increased 4%.

Given the challenging interest-rate environment, we are deeply focused on revenue generation and remain disciplined in managing expense in order to achieve positive operating leverage for the full year.

Slide 10 details the trends in our balance sheet mix.

As Steve mentioned earlier, average loans increased $4 billion or 10% year over year.

While pipelines remain strong, we are becoming more selective as there are certain segments within C&I and CRE where structure and price are not consistent with our risk and return expectations.

As we continue to manage credit risk to achieve lower relative volatility through the cycle, we may expect to see some moderation in C&I and CRE loan growth in the near term.

During the first quarter, we experienced growth in every portfolio.

However, indirect auto and C&I accounted for approximately three-quarters of the growth.

The indirect auto loan portfolio increased 29% from the year-ago quarter.

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.

Production remained strong even as we have increased pricing multiple times in recent quarters.

Recent new money yields have been around 3.20%.

(sic 3.20% per Press Release) We moved $1 billion of auto loans to held for sale in anticipation of an auto securitization during the second quarter as we've managed loan concentrations.

Average C&I loans increased 8% year over year, primarily reflecting trade finance in support of our middle market and corporate banking customers, asset finance related to our equipment finance business, auto dealership financing, and corporate banking.

While growth and performance in the commercial real estate sector has been solid, we are exercising caution in the space as a certain segments and geographies don't align well with our risk and return parameters.

Turning attention to the funding side, average total deposits increased 10% over the previous four quarters, including an 8% increase in core deposits.

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

Average non-interest-bearing demand deposits increased 16% from the 2014 first quarter, reflecting our focus on consumer checking and commercial relationship growth.

Average short and long-term borrowings increased by $1.4 billion year over year, which includes $1 billion of bank level debt issued during the 2015 first quarter.

Average broker deposits increased $800 million during the same timeframe.

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

Turning to slide 11, we see net interest margin plotted against earning asset yield and interest-bearing liability costs.

Though NIM compression continues due to the decreasing asset yields, strong loan growth more than offsets the lower yields.

Slide 12 shows the trends in our capital ratios.

Capital ratios trended down during the quarter driven by continued strong balance sheet growth and the Macquarie acquisition and our active capital management strategies.

We repurchased 4.9 million common shares over the quarter, completing the authorized buyback from our 2014 CCAR plan.

One thing I want to highlight, starting this quarter, we are showing our ratios on a Basel III basis including the standardized approach for calculating risk-weighted assets.

Slide 13 provides an overview of our credit quality trends.

Credit performance remains solid and in line with our expectations.

Net charge-offs remain steady from last quarter at 20 basis points, well below long-term expectations.

Net charge-offs this quarter benefited from the sixth consecutive quarter of net recoveries within our commercial real estate portfolio as well as steady recoveries overall.

The level of nonperforming loans did increase in the quarter, with the increased level of inflows compared to prior quarters due largely to one C&I credit.

The criticized asset ratio was fairly stable compared to the prior quarter as new problem inflows fell from the previous quarter's level.

The allowance for credit losses eased modestly with the ACL ratio falling from 1.40 last quarter to 1.38 this quarter.

Slide 14 shows the trends in our nonperforming assets.

The chart on the left demonstrates an uptick in the quarter to 0.84%.

The chart on the right shows the NPA inflows, which were largely from one C&I credit.

The increase over what had been a more typical level of inflows exhibited over the past quarter was primarily due to one larger credit that migrated in the quarter.

Our estimation of the potential loss exposure associated with this credit was recognized in the quarter and is reflected in the 20 basis points of charge-offs.

Turning to slide 15, the loan-loss provision was $20.6 million in the first quarter compared to $24.4 million of charge-offs.

The ratio of allowance to nonaccrual loans fell to 181% due to the increased level of nonaccrual loans in the quarter.

However, this level of coverage remains very strong.

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

Let me now turn the presentation back over to Steve.

Thanks, Mac.

Turning to slide 16, 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 9%.

The first quarter was up a little over 1% from the prior quarter.

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 customers, knowing that this will translate into revenue growth.

Our OCR cross-sell goal of six or more products and services crossed the 50% mark this quarter, up 202 basis points from a year ago.

And that's on the entire book.

Correspondingly, our consumer checking account household revenue for the fourth quarter is up 9% year over year.

As you can see on slide 17, commercial relationship growth has returned as we work through the impact of the changes we made in our business banking checking products that impacted approximately 10,000 of lower balance accounts.

Commercial relationships increased 5% year over year.

Our four or more product OCR cross-sell for commercial relationships improved to almost 43% this quarter, up more than 3% from a year ago.

Slide 18 shows our current year-to-date operating leverage results.

As I noted during last quarter's earnings conference call, year-long positive operating leverage is a long-term strategic goal for Huntington, and we remain committed to delivering on that goal for 2015.

One thing I want to note in the 2014 first quarter, we realized $17 million in securities gains as part of our effort to reposition the portfolio in preparation for the upcoming Basel III LCR rule implementation.

On a year-over-year basis, the absence of these gains in the 2015 first quarter obviously hurt us from a comparison standpoint, but regardless, we are confident in our ability to achieve positive operating leverage in 2015.

Now turning to slide 19 for some closing remarks and expectations.

We remain optimistic about the ongoing economic improvement in our footprint as well as on the national level.

And while our loan pipelines are strong, we continue to be selective in growing commercial real estate and C&I portfolios.

We are committed to delivering strong results in a flat interest rate environment.

Our current budget has been built around the current rate environment, and our execution is not dependent on a rate increase.

We will continue to reinvest cash flows of approximately $125 million to $150 million per month from the existing investment securities into LCR-compliant high-quality liquid assets.

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

We are maintaining our credit structure and pricing discipline.

We are not chasing growth where returns are inadequate or without regard to risk.

Excluding significant items, net MSR activity and acquisitions, we're committed to positive operating leverage for the full-year 2015 with revenue growth exceeding noninterest expense growth of 2% to 4%.

Finally, we expect to see asset quality metrics near current levels.

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

Modest changes are anticipated quarter to quarter given the absolute low levels of our credit metrics.

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.

We're executing our strategies and adjusting to our environment where necessary.

In addition, there's a high level of alignment between employees and shareholders, and we're highly focused on our commitment to be good stewards of shareholders' capital.

So with that, I will turn it back over to Mark.

Thanks, Steve.

Operator, we will now take questions.

And we ask that as a courtesy to your peers, each person ask only one question and one related follow-up question.

And then if that person has additional questions, he or she may add themselves back into the queue.

Thank you.

(Operator Instructions)

Scott Siefers, Sandler O'Neill.

I was hoping you could spend a quick second expanding on the nature of the one credit that slipped into nonaccrual.

You said it was commercial, but just any additional color that you could add.

And then just the follow-up would be, both Mac and Steve, you mentioned a couple times the more selective behavior on commercial and C&I growth.

So just any additional color on the trends you're seeing, what's causing you to maybe temper your growth there?

Sure.

Good morning, Scott.

This is Dan.

So on the one credit, it was steel related.

And so we brought it into NPA.

We actually have recognized what we think is the potential loss exposure, so that is included in the 20 basis points of charge-offs that we recognized this quarter.

So we feel we have the risk and that credit behind us.

With regard to the portfolio more broadly and what we're seeing, clearly the market has, as we've been saying for several quarters, been very competitive.

And so we still have a good deal pipeline, but we are being more selective, our bankers understand our risk appetite.

They are self-selecting in certain cases to not bring deals forward, but we are looking at every deal very closely.

We have our discipline in mind, and so we're sticking to those disciplines and still achieving some pretty good growth rates.

But overall, the market continues to be very competitive in both structure and pricing.

And that's really across the portfolio.

Okay.

And then -- so there's not one, for example, specific segment geography that's worse than the rest?

It's just perhaps a more conservative posture overall?

Yes.

And I would say not more conservative.

We are sticking to our discipline.

We've had our risk appetite and the corresponding parameters in place for a long time, and we're operating within those.

So as the market gets more aggressive, there are going to be more cases where we're going to opt out.

Yes.

Okay.

That makes sense.

Thank you very much.

[Gen Pentari], Evercore.

Quick question on back to the loan growth commentary that you just gave, how should we think about the pace of loan growth given the likely moderation as you step away from some of these transactions?

Is it fair to assume that we see mid-single digits or even low single digits given that as we move through 2015?

John, it's Mac.

I would suggest that we will see some moderation in C&I and CRE going forward.

I'm not going to put a growth rate out there, but clearly this isn't a deal flow issue.

This is just a risk appetite or a discipline issue.

And we're still looking at the same number of deals.

But we are applying the same lens and the same filters to how we think about whether or not we want to bring these deals into our portfolio or not.

So as Steve mentioned, we're comfortable as it relates to our plan for 2015.

We anticipated this environment, and we are going to have positive operating leverage for 2015, so all of these things factor into how we're going to perform and what we believe the expectations are for 2015.

Okay.

Great.

And then separately on auto, want to see if you could give us a little bit of color on the potential gain on sale margins that you're targeting on the pending auto securitization, and do you still plan on pursuing two securitizations in 2015?

Thank you thanks.

So we do think that the gain on sale is probably going to be about 50% of historic level relative to the last deal that we did.

And it's in line with our expectations.

It's in line with how we think about this from a budget or a forecast perspective.

We are continuing to evaluate the need for a second securitization in 2015.

We've seen some decline in growth in the indirect space, and we're evaluating whether we need to do that late in 2015 or early in 2016.

So that is still under consideration.

Okay.

And then lastly just on the deposit service charges, they were down 4% year over year.

Could you -- I'm not sure if you give any color on that.

Wanted to see if you could give us some detail.

So we made a change in the third quarter of last year related to Fair Play strategy, just giving customers more time to have their deposits count against their balance.

And that basically cost us about $6 million a quarter starting in the third quarter of 2014.

So we haven't quite swung through that yet, but that is the impact.

Okay.

Thanks.

Appreciate it.

Matt O'Connor, Deutsche Bank.

I was wondering if you could provide any of the financial impacts from the equipment finance deal that you did.

I was would assume it's accretive to earnings since you are financing with cash, but any metrics or figures around that would be helpful.

Matt, it's Mac.

We haven't given a lot of details around the transaction.

I will tell you that it is a very high-quality, very nice growth rate and very high return on capital business.

We have said that the yields on these assets are going to be the highest yields on our balance sheet.

And it's just an extremely well-run business by people that we know and have a lot of respect for.

So the return on tangible common equity is at least double of what we report as a Company.

So extremely good fit with our existing business.

We are going to be able to expand the product set into business banking, into small business, into the healthcare vertical that Rick runs, so really nice complementary business for us.

And then are there any up-front costs in terms of the deal, whether it's retention or setting aside the loss reserves?

How do you think we should look for next quarter on that?

So we did recognize the $3.4 million in the quarter related to integration and deal costs associated with the Macquarie deal.

We will see some additional expense in the remainder of the year.

It's not significantly material relative to the size of the transaction.

And really, no reserve impact this quarter.

Okay.

All right.

So it's all in the run rate here?

It is.

That's helpful.

Thank you.

Steven Alexopoulos, JPMorgan.

Regarding the linked quarter decline in the professional services fees ex-the Macquarie deal, can you help us think about is that a permanent step down just given your experience in going through CCAR, and how should we think about that ramping through the year?

Yes.

I think it is a bit lumpy as we think about some of the professional services we use for CCAR.

I think that the quarter -- probably a pretty decent run rate as we think about going forward on average, but again, there's going to be some volatility in that line.

Do you expect it to ramp the way it did in the prior year?

I think you were almost $16 million in the fourth quarter, or should we be less than that would be your guide?

It will be less than that.

Remember we had some expense associated with some strategy work that we did late last year that we're not going to repeat in this year.

Okay.

And then I just wanted to follow up on John's question.

Can you just remind us, do you would typically include the gain on auto securitizations in your calculation for positive operating leverage?

Thanks.

We do include those gains in the operating leverage calculation.

So that obviously will be in the second-quarter fee income line.

And historically we've always included those gains in that calculation.

Okay.

Thanks for the color.

Ken Zerbe, Morgan Stanley.

Question on expenses.

Just want to make sure that we are actually using the right base number, because I saw that you reiterated your 2% to 4% growth.

So I back out the one-timers, I get 2014 expenses of $1.818 billion.

Is that the right number that you are growing 2% to 4% on?

And a follow-up also, is I think you said you exclude the Macquarie expenses from that, but what are the Macquarie expenses that we should add to that number?

Thanks.

So I think the way to think about the 2014 base is you should take 2014 reported and exclude the significant items that we identified for the full year.

So remember, we had acquisition integration expense associated with Camco and with the Bank of America branches.

We also have some franchise repositioning expense in the third and fourth quarters last year.

So I think it's important to think about it from that perspective.

We have not disclosed any expense or revenue around Macquarie and won't be doing that on this call.

But, obviously, as we think about acquisitions going forward and what happens to us in 2015, the 2% to 4% is based on 2014 excluding those acquisition items.

Okay.

If you're guiding to a number that we cannot replicate, meaning just with Macquarie expenses, we should basically start with 2% to 4% then add some more ambiguous number for other expenses?

I mean, is that the message that you're trying to convey with the guidance as something more than the 2% to 4%?

It will be more than the 2% to 4% perhaps.

The 2% to 4% is the range that we're comfortable with in terms of growth for 2015.

And we do need to add the Macquarie expenses onto it.

Obviously we're getting revenue with Macquarie as well, and Macquarie has positive operating leverage as we think about the business that we are bringing into Huntington.

So it should be additive to that when you think about positive operating leverage in 2015.

I think the message that we are trying to convey is that even exclusive of an acquisition that could help us achieve positive operating leverage, we're committed to positive operating leverage on the core based upon the way we set the year up relative to the 2014 base.

Got it.

Sorry, did you provide the revenue addition for Macquarie, or is that -- do we know that yet?

We didn't provide that, no.

Okay.

All right.

Thank you much.

Bob Ramsey, FBR Capital Markets.

I know talking about Macquarie, you all mentioned that the ROEs on that business are double what the standalone Huntington ROEs are.

Just curious if that's also true on an ROA basis if you take capitalization out of the equation.

It's a great question.

I'm not sure I've looked at it that way.

We're pretty focused on ROEs.

But it is a very high ROA business, so I'd say it's probably got to be pretty close to that.

Okay.

Do you allocate a materially different amount of capital to that than your overall business, or I guess it's in the same ZIP code?

It's in the same ZIP code.

And the ROAs are definitely accretive to our ROAs.

So it's a very high-return business.

And part of that has to do with the yield on the leases themselves and certainly the credit quality continues --

Okay.

And then thinking about that piece of it as well, the yield piece, as you all put that $800 million of higher-yielding loans on the balance sheet and $1 billion moves off of lower-yielding auto loans that gets sold, how should we think about net interest margin in the second quarter?

We are going to continue to see some pressure on the margin.

If you take a look on a linked quarter basis, we're down 3 basis points, and 2 basis points of that was really due to adding securities during the quarter.

We're where we think we need to be from an LCR perspective, we're at about 90% right now, and so the incremental add in the securities book for LCR is going to be minimal.

I will tell you that we're tracking the margin exactly as we expected to see it for 2015.

So even though we're seeing the contraction, it will continue until we see some increase in interest rates.

This is all within our expectations as it relates to the positive operating leverage, revenue growth and performance for 2015.

Okay.

So even with the Macquarie higher-yielding loans coming on the second quarter, you would expect contraction in the second quarter, or you just mean from a bigger, higher-level view of 2015, the direction is down outside of the deal?

I would say yes to both.

Okay.

Thank you.

Erika Najarian, Bank of America.

Just wanted to ask a follow-up question.

I'm sorry to ask another question on the guidance, but as we think about the base for fees, for 2014 and we think about revenue growth, it does include a $17 million in securities gains, but excludes net MSR activity?

That would be correct.

Got it.

Just as a follow-up question to what -- to Bob's line of question, you mentioned Steve in your prepared remarks that you're going to invest the $125 million to $150 million per month in cash flows into HQLA.

And I think I caught that the incremental add beyond that is going to be minimal?

Did I catch that right?

And if so, that minimal add would be how much, and what would it be funded by?

You did catch it right, Erika.

We added about $500 million in the first quarter.

The monthly cash flow's going to between going to give us between $125 million and $150 million that we will substitute in as well, and net beyond that as Mac said was modest.

It's around $250 million.

So we started the year and referenced the number of up to $1 billion.

It looks like it's going to be up $750 million now as we see the cash flows adjusting.

And $500 million's already in.

Got it.

And just as a follow-up to that, would it be continue to fund by long-term debt and brokered CDs?

And what would the split be?

Well, the increment is not that large, so we got a variety of funding sources that we certainly could do a debt issuance later this year, but not committed.

We've had very good core deposit growth through the first quarter.

And looking to obviously keep as much core funded growth in deposits as possible moving forward.

Got it.

That's helpful.

Thank you so much.

Ken Usdin, Jefferies.

This is Josh in for Ken.

Could you just speak to the potential for continued asset acquisitions and the extent to which you're seeing new opportunities out there?

Josh, this is Steve.

We have continue to look at different opportunities.

And as we've said over the years, our preference would be to look at banks and nonbanks and our footprint.

But we're prepared to look at opportunities that are on the shoulders of our existing footprint.

There is a level of discussion that's in line with what we saw last year.

And so don't see a huge spike in activity at this point.

Okay.

Thanks.

That's all we have.

Bill Carcache, Nomura.

Can you talk about the attractiveness of auto securitization market pricing here versus funding directly from your balance sheet, and perhaps if you could also remind us of the primary factors that are underlying your decision to retain versus sell?

It's Mac.

The primary factor driving us to consider securitization would just be concentration limits in our portfolio.

We established these limits related to the amount of auto that we want on our balance sheet.

And what's really driving this securitization in the second quarter is starting to bump up against the level that we just wanted to get back within -- I guess giving us room to make further decisions later in the year.

So it's not really an economic decision.

Obviously economics do play into it.

But from a concentration perspective, that would be the first filter we would take a look at.

And then from a liquidity perspective, taking a look at funding sources and cost of funding and loan to deposit ratio, those types of metrics would be a secondary consideration.

And then I would put really economics as being the third consideration.

Okay.

There's no retained interest, the way that they're structured?

We're getting off-balance-sheet treatment, that's correct.

Right.

Okay.

And I'm sorry.

Can you talk about in terms of the relative attractiveness from a pricing perspective?

Is there any benefit versus funding directly from your balance sheet?

Or just overwhelmed by just the concentration limit issue that you described?

It really is being driven by the concentration issues.

Okay.

And then so to the extent even where you'd be willing to take perhaps what's a little bit less attractive pricing?

Could you give a little bit of color on what the pricing looks like?

And that's my last question.

Thanks.

Relative to keeping the loans on our balance sheet, there certainly is an economic impact here.

It's a fairly reasonable number in terms of the trade-off that we are making, but we are giving up revenue by going to the securitization.

So again, it's not the primary driver of why we're doing this.

We certainly take that into consideration, but we made a commitment, that we've got limits around how we think about concentration on the balance sheet.

Understood.

Thank you.

Andy Stapp, Hilliard Lyons.

All my questions have been answered.

Thank you.

Geoffrey Elliott, Autonomous Research.

Just a question on the credit side.

In the fourth quarter, you talked about a couple of large papers related to natural resources.

And manufacturers, parts of motor vehicle this quarter, there's a large case in the steel industry.

How do you think about when you try to identify this as a trend rather than just being a series of isolated, large incidents?

This is Dan.

We evaluate the inflow of new criticized loans every quarter, and we are looking at trends that might be developing in these larger cases.

They were idiosyncratic company-specific, industry-specific, and one of the cases the natural resources credit we've actually already had a positive outcome on that deal.

So what we are trying to do is identify the credits very early in the process so that we have more options available to us for resolution, and that has been to our advantage.

We're finding that we bring these things in early, assess our options, and so we've been able to move these problem loans through the system very quickly, generally with good outcomes.

So we are seeing I think a fairly steady flow of problem credits.

I think part of that is driven by the fact that the market's been quite aggressive going on several years now, but we are very comfortable with what we're seeing.

We do not see trends developing, but obviously watch that very closely.

And how do you think about the health of the corporate sector more broadly?

Your footprint gives you exposure to lots of manufacturers and exporters, and the macro feels conflicting.

So positives from lower input prices, but the strong dollar is a headwind for exporters.

So how are your discussions with those corporate clients who are impacted by that going?

Well, we have those conversations with all of our customers.

We look at our portfolio and done an assessment of those that have a good portion of their volumes which are export related.

We've also looked at those companies that have a large portion of their cost of goods that they're getting from overseas, and there is positives and negatives on both sides of that.

But in total, we remain comfortable.

We're obviously concentrated in the Midwest.

So we have a big manufacturing concentration, but that's also what we know and are very comparable with and are close to the industries that we serve.

So all in all, I think on the whole we feel good about where our customer base is situated.

And many of them over the last few years have been working on bolstering their balance sheets and getting in good shape, and so we're quite comfortable.

Thank you.

(Operator Instructions)

Chris Mutascio, KBW.

I don't know if this question is for Mac or for Dan, but it's on the same lines on the credit quality.

If I understand the release correctly, the one large credit that went to NPA, that's roughly $35 million or a majority of the $35 million to $37 million year-over-year increase in NPAs.

But on a sequential quarter basis, I think NPAs were up more like $65 million.

I know it's off of a low base, but I wonder if I could get some more color on the residual.

Difference between that $35 million and on a year-over-year basis and the $65 million, was your other types of large credits within the sequential quarter increase in just the one commercial credit you outlined?

Or is it smaller ones?

And if so, any specific industries?

So of the $65 million quarter-to-quarter increase, this credit did represent the majority of that.

And we're not going to get specific in terms of dollar amounts, but it did represent the majority of that increase.

And again, we have recognized what we believe is the lost potential in that credit.

We are always going to have a flow of additional deals, but there are no other large credits that drove that increase.

Okay.

Thank you.

And no particular industry.

So no emerging industry risk.

Correct.

Thanks, Chris.

There are no further questions at this time.

I turn the call back over to the presenters.

So thank you.

This is Steve.

We are grateful for your attendance.

We're obviously pleased with our performance in the first quarter.

Results reflected the ongoing disciplined execution of our strategies and the strong competitive position that we enjoy today at Huntington.

We've received ongoing recognition around superior customer service, and that helps further separate our brand from our peers.

We continue to gain market share, and we're improving our share of wallet in both of our customer segments.

We produced revenue growth in a challenging environment.

We remain focused on pricing and underwriting discipline as you heard.

We've also completed the acquisition of the Macquarie Equipment Finance and look forward to integrating their business into our franchise.

And finally, our Board and the management team, we're all long-term shareholders, so we remain focused on managing risk, reducing volatility while yet investing for top-line growth and delivering positive operating leverage consistent with our expectations of long-term performance.

So thank you for your interest in Huntington.

Have a great day.

Ladies and gentlemen, this concludes today's conference call.

You can now disconnect.