Huntington Bancshares Inc (HBAN) 2015 Q4 法說會逐字稿

Good morning.

My name is Chris 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)

Mark Muth, Director of Investor Relations, you may begin your conference.

Thank you, Chris.

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-IR.com, or by following the Investor Relations link on www.huntington.com.

This call is being recorded and will be available for rebroadcast starting about an hour from the close of the call.

Our presenters today are Steve Steinour, Chairman, President and CEO; and Mac McCullough, Chief Financial Officer.

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

As noted on slide 1, 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 forms 10-K, 10-Q and 8-K filings.

Let's get started by turning to slide 2 and an overview of the financials.

Mac?

Thanks, Mark.

Good morning and thank you for joining us today.

We appreciate your interest in Huntington.

We have great results to share with you today and we're very pleased with how we are positioned for 2016.

For the past six years, Huntington's customer-centric strategy has resulted in growth in market share and in share of wallet through execution of our distinctive fair play philosophy, our welcome culture and our superior customer service.

2015 was a year of continued disciplined execution of this strategy, producing solid results and delivering on our commitments to our customers, colleagues, communities and, most importantly, our shareholders.

We continue to invest in our colleagues and in the capabilities we need to continue to be an industry leader in customer experience, including digital, data analytics and cybersecurity.

We also continue to optimize our customer-centric distribution strategy, including the accelerated buildout of our in-store strategy in Michigan.

In addition, in 2015, we returned approximately $400 million of capital, or more than 55% of net income to shareholders via dividends and buybacks.

Slide 2 shows some of the financial highlights for the year.

Earnings per common share of $0.81 was up 13% from 2014, while tangible book value per share increased 4% to $6.91.

Full-year return on tangible common equity was 12.4%, which was modestly below our long-term financial goal of 13% to 15%.

Return on assets was 1.01 for the full year.

We are very pleased with our core fundamentals for the full year, including revenue growth of 6%, average loan growth of 7% and average core deposit growth of 9% and we delivered positive operating leverage for the third consecutive year.

Slide 3 shows similar financial highlights for the fourth quarter.

Earnings per common share of $0.21 was up 11% year-over-year.

Fourth quarter return on tangible common equity was 12.4%, while fourth quarter return on assets was 1%.

We again produced solid revenue growth despite the challenging interest rate environment.

Year-over-year revenue growth was 9% with both net interest income and non-interest income contributing to the increase.

We were particularly pleased with the 17% year-over-year increase in non-interest income in the fourth quarter, benefiting from performance in capital markets, mortgage banking and SBA loan sales, among others.

Expense growth was well controlled, with non-interest expense up only 3% year-over-year.

Our efficiency ratio for the quarter was 63.7%, a 250 basis point improvement from a year-ago quarter.

High quality balance sheet growth included an 8% year-over-year increase in average core deposits and a 6% increase in average loans and leases.

Growth in average core deposits more than fully funded average loan growth.

As we noted the past several quarters, while the value of core deposits may not be fully appreciated, we believe that our strong core deposit franchise will prove to be a key differentiator in a rising rate environment.

We remain pleased with our credit quality with only 18 basis points of net charge-offs in the fourth quarter and 79 basis points of nonperforming assets.

Our capital ratios remain strong as well.

Tangible common equity ended the quarter at 7.81%, while common equity Tier 1 was 9.80%.

Slide 4 provides a summary of the income statement including some additional details on our non-interest income and non-interest expense for the quarter.

Relative to last year's fourth quarter, total reported revenue increased 9% to $778 million.

Spread revenues accounted for less than half of the increase as net interest income increased 5% to $505 million.

We benefited from 8% average earning asset growth partially offset by 9 basis points of net interest margin compression.

The NIM was negatively impacted by mix shift on both sides of the balance sheet, most notably the increase in low yielding LCR compliance securities in our earning assets and higher cost senior bank notes in our funding mix.

We continue to remain disciplined in pricing of both loans and deposits.

During the 2015 fourth quarter, congress passed a provision in the Fixing America's Surface Transportation Act, more commonly referred to as the Highway Bill, which reduced and capped dividends paid by the Federal Reserve to banks with assets greater than $10 billion, including Huntington.

The reduction in this dividend is expected to negatively impact net interest income by approximately $7 million in 2016.

We were pleased with our fee income performance in the quarter as more than 60% of the year-over-year revenue increase came from non-interest income.

Specifically, reported non-interest income was $272 million, an increase of $39 million, or 17% from the year-ago quarter.

Highlights included an 8% increase in service charges on deposit accounts and continued momentum in card and payment processing income.

Mortgage banking income increased 124% from the year-ago quarter as a result of an $11 million increase in mortgage origination and secondary marketing revenues, coupled with a $5 million increase from the MSR hedging-related activities.

Other income included a $3 million gain on the sale of Huntington Asset Advisors, Huntington Asset Services and Unified Financial Services, which was included in the quarter's merger and acquisition-related significant item.

The decision to sell these non-core businesses allow us to focus on the core wealth business and continue to reposition the regional banking and Huntington private client group segment for better growth and returns in coming quarters.

The sale is expected to reduce non-interest income by approximately $14 million in 2016, primarily in the trust services line, and reduce non-interest expense by approximately $22 million in 2016, primarily in the personal expense line.

Reported non-interest expense in the 2015 fourth quarter was $499 million, an increase of $15 million, or 3%, from the year-ago quarter.

This quarter's non-interest expense included two significant items: $8 million of franchise repositioning expense related to branch closures, facilities impairments and personnel actions; and $3 million of merger-related expense from the Huntington Technology Finance acquisition and the previously mentioned sale of Huntington Asset Advisors, Huntington Asset Services and Unified Financial Services.

Non-interest expense adjusted for significant items in both quarters increased $25 million, or 5%, year-over-year.

Of this increase, approximately $14 million was related to the acquisition of Macquarie Equipment Finance, which we have rebranded Huntington Technology Finance.

During the fourth quarter the FDIC announced a surcharge on banks with assets in excess of $10 billion, including Huntington.

We expect the surcharge will negatively impact our FDIC insurance expense by approximately $13 million in 2016.

Turning to slide 5, average loans and leases increased $2.7 billion, or 6%, year-over-year as we again experienced year-over-year growth in every portfolio.

Average securities increased $2.1 billion, or 17%, primarily reflecting growth in LCR compliance securities and, to a lesser extent, growth in direct purchase municipal securities originated by our commercial segment.

Average commercial and industrial loans grew $1.3 billion, or 7%, primarily driven by a $1.1 billion increase in asset finance, $0.8 billion of which came via the Huntington Technology Finance acquisition.

The quarter also benefited from seasonal strength in auto floor plan lending and growth in corporate lending, while core middle market business banking saw modest portfolio reductions.

Average automobile loans grew $0.8 billion, or 9%, from the year-ago quarter.

The 2015 fourth quarter represented the eighth consecutive quarter of more than $1 billion of auto loan originations.

Auto finance remains a core competency of Huntington and is detailed on the slides in the appendix.

We have remained consistent in our strategy, which is built around a dealer-centric model and focused on prime borrowers.

Our underwriting has not changed.

In fact, while industry volumes were up around 5% to 6% in 2015, our origination volumes were essentially flat, reflecting our lending discipline.

Yields on new auto paper dipped slightly in the fourth quarter to the 290 to 295 range, just above the 3% in the prior quarter.

We also saw the normal seasonal shift to new car sales in the quarter resulting in a mixed shift reduction in the overall yield.

We expect the new used mix will return to more normal levels in the first quarter.

Moving to the right side of the slide and the right side of the balance sheet, average total deposits increased $4.6 billion, or 9%, over the year-ago quarter, including a $3.9 billion, or 8%, increase in average core deposits.

Average non-interest bearing demand deposits increased $2 billion, or 13%, year-over-year and average interest bearing demand deposits increased $1 billion, or 16%.

These growth numbers reflect our continued focus on new customer checking households and commercial relationship account acquisition.

Average money market deposits increased $1.4 billion, or 8%, year-over-year reflecting our continued efforts to deepen banking relationships and increase share of wallet.

We also continue to remix the consumer deposit base out of higher cost CDs into other less expensive deposit products.

Average core CDs decreased $0.6 billion, or 21%, year-over-year.

As shown on slide 5, average total demand deposits accounted for 38% of non-equity funding in 2015 fourth quarter, while money market deposits accounted for 31%.

By contrast, average core CDs accounted for only 4% of our non-equity funding in the quarter.

As we have highlighted in the last few quarters, the year-over-year growth in our total core deposits more than fully funded our average loan growth over this period.

Average long-term debt increased $2.9 billion, or 72%, as a result of four bank level senior debt issuances this year, totalling $3.1 billion, including $850 million issued in November as well as the assumption of $500 million of debt in the Huntington Technology Finance acquisition.

These long-term debt issuances allowed us to reduce average short-term borrowings by $2.2 billion, or 80%, from the year-ago quarter.

While this trade had a negative impact on the net interest margin, the long-term debt provides us with advantages of long-term stable funding.

Average broker deposits increased $500 million.

We continue to view wholesale funding sources as a cost-efficient means for funding balance sheet growth, including LCR-related securities growth, while managing core deposit expense and maintaining sales focus on acquiring core checking account customers.

Slide 6 shows our net interest margin plotted against earning asset yield and interest bearing liability costs.

Fourth quarter NIM decreased 9 basis points year-over-year and 7 basis points linked quarter to 3.09%.

Recall that the third quarter of 2015 net interest margin benefited from approximately 2 basis points of interest recoveries in the commercial portfolio.

We continue to experience pricing pressure across most asset classes, though the majority of the compression reflected unfavorable mix shift on both sides of the balance sheet, most notably the growth in LCR compliance securities funded by senior bank debt issuance.

While we were encouraged by the December interest rate increase by the FOMC, the impact on the fourth quarter's net interest margin was negligible.

Going forward, we expect modest net interest margin pressure to remain a headwind as several asset classes continue to price lower, given average portfolio rates above new money rates despite the recent increases in LIBOR and prime.

Based on our current outlook, we remain comfortable reaffirming that the net interest margin will remain above 3% in 2016.

Slide 7 provides an update on our assets sensitivity positioning and how we manage interest rate risk.

We continue to have a relatively neutral balance sheet, largely due to our swap portfolio.

As shown in the chart on top, our modeling estimates that net interest income would benefit by 0.3% if interest rates were to gradually ramp 200 basis points in addition to increases already reflected in the current implied forward curve, unchanged from a quarter ago.

In a hypothetical scenario, without the $8.5 billion of asset swaps, the estimated benefit would approximate positive 3.4% in the up 200 basis point ramp scenario.

The chart on the bottom of the slide shows our $8.5 billion asset swap portfolio and the $5.9 billion liability swap portfolio, including the respective average remaining lives and their impact on net interest income.

The incremental benefit of the swaps was $29 million in the 2015 fourth quarter, up from $28 million in the 2015 third quarter, and $24 million in the year-ago quarter.

As we have stated previously, our asset swap portfolio is a laddered portfolio.

There are no cliffs looming on the horizon.

And during the 2015 fourth quarter, $800 million of the asset swaps matured.

As we communicated a few quarters ago, we intend to allow maturing asset swaps this year to run off, gradually shifting our balance sheet positioning more asset sensitive.

As of year end, $3.6 billion of swaps were scheduled to mature over the next 12 months.

Slide 8 shows the trends in our capital ratios.

Our risk-based regulatory capital ratios improved modestly from the prior quarter end, while tangible common equity, or TCE, declined slightly.

We repurchased 2.5 million common shares during the fourth quarter at an average price of $11.59 per share and a total of 23 million common shares at an average price of $10.93 over the full year.

Coupled with cash dividends, we effectively returned $400 million of capital to shareholders during 2015.

We have $166 million of authorized repurchase capacity remaining for the final two quarters under our $366 million share repurchase authorization.

Slide 9 provides an overview of our loan loss provision, net charge-offs and allowance for credit losses.

Credit performance remains solid and in line with our expectations.

The loan loss provision was $36.5 million in the fourth quarter compared to $21.8 million of net charge-offs.

Net charge-offs remained well controlled at only 18 basis points, or well below our long-term expectations of 35 to 55 basis points.

Net charge-offs for the full year were also 18 basis points.

The ACL ratio ticked up 1 basis point to 1.33% of loans and leases compared to 1.32% at the end of the prior quarter.

The ratio of allowance to nonaccrual loans eased to 180% compared to 184% a quarter ago due to a slight uptick in NALs.

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

Slide 10 shows trends in nonperforming assets, delinquencies and criticized assets.

The chart on the upper left shows a slight increase in the nonperforming asset ratio for the quarter to 79 basis points compared to 77 basis points a quarter ago.

The increase primarily reflected two oil and gas exploration and production credits, which were placed on nonaccrual during the quarter.

The chart on the upper right reflects our 90-day delinquencies, which remain flat from a quarter ago.

The bottom left shows the criticized asset ratio, which also remains unchanged.

Finally, the chart on the bottom right shows NPA inflows as a percentage of beginning period loans at 29 basis points in fourth quarter, again, unchanged from the prior quarter.

Let me now turn the presentation over to Steve.

Thank you, Mac.

Our fair play banking philosophy, our welcome culture and our optimal customer relationship, or OCR, focus continues to drive we believe to be industry-leading customer acquisitions.

Slide 11 illustrates these long-term trends in consumer and commercial customer acquisition.

We've increased our consumer checking households and our business checking relationships by 8% and 5%, compounded annual growth rates since 2010.

While the law of large numbers might be beginning to weigh on these growth rates, the underlying customer growth rates remain impressive.

And these robust customer growth rates have allowed us to post the associated revenue growth you can see in the two lower charts on the slide.

We're particularly pleased with the recent trend visible in the chart on the bottom left, as the past three quarters have shown improved momentum in the consumer household revenue metrics, as we've lapped the last [fee] change we implemented under our fair play philosophy and continued to realize the benefit of the underlying customer growth.

You've heard me say this before, but our focus remains on growing revenues.

We will continue to grow revenues despite the challenging environment.

Although slides have been slightly redesigned from what you are used to seeing, slides 12 and 13 illustrate the continued success of our OCR strategy in deepening our consumer and commercial relationships.

As we've stated before, our strategy is not about gaining market share.

It's -- our strategy is about gaining market share and share of wallet.

Now this strategy is built around increasing the number of products and services we provide to our customers, knowing that this will translate both into more loyal, satisfied and stickier customers as well as revenue growth.

As of year end, almost 52% of our consumer checking households used six or more products and services.

And that's up from 49% a year ago.

Correspondingly, our consumer checking account household revenue was up 13% year-over-year in the fourth quarter.

Similarly, 44% of our commercial customers used four or more product or services at year end, up from 42% a year ago.

Again, this has translated directly to revenue growth as commercial revenue increased 4% year-over-year.

We introduced the next two slides to you last quarter and many of you indicated how helpful you found them.

Slide 14 illustrates trends in the unemployment rate across our six core Midwestern states as well as other leading coincident and lagging economic data for the region.

Slide 15 takes a deeper look at the trend in the unemployment rates in our largest metropolitan markets.

Despite the recent volatility exhibited in the equity and commodity markets, we remain bullish on our core Midwestern footprint.

Our small and medium-sized commercial customers continue to express confidence in their businesses and while consumers continue to benefit from recovering real estate markets, low energy prices and early signs of wage inflation in certain markets, such as here in Columbus.

The auto industry is an important component of the economy in our footprint and it appears poised for another stellar year in 2016.

Other industries that contribute meaningfully to the regional economy, such as healthcare, medical devices, medical technology and higher education, amongst others, also remain strong.

Our small business customers continue to experience strong performance and improving balance sheets.

Our SBA lending also remains quite robust.

I find the chart in the lower right on slide 14 particularly encouraging.

This chart shows the state-leading economic indices as reported by The Federal Reserve Bank of Philadelphia for our six-state footprint, all of which are projected to be positive over the next six months.

The chart on the bottom left of slide 14 shows that unemployment rates in our footprint states continue to trend positively, including recent improvement in West Virginia, following several challenging months as they dealt the impact of lower coal prices.

Unemployment rates in most of our footprint states remain in line with or better than the national average.

The chart on the bottom of slide 15 shows a similar trend for our 10 largest deposit markets, which collectively account for more than 80% of our total deposit franchise.

As detailed in the chart, the majority of these markets continue to trend favorably and 7 of the 10 markets currently enjoy unemployment rates below the national average.

And this is quite a departure from several years ago when most of these markets were above the national average.

In 2014 we introduced long-term financial goals, including positive operating leverage annually.

Slide 16 shows that we've delivered on our commitment for positive operating leverage in 2015, our third consecutive year to achieve this goal.

Further, we also delivered on our commitment for positive operating leverage both including and excluding the highly accretive Huntington Technology Finance acquisition.

Over the course of the past year, some of you expressed concern about our ability to deliver this commitment in 2015 and while others have questioned the prudence of such a commitment even in the first place.

So therefore, rather than taking a victory lap or dwelling too much on the accomplishment, I think it's important to reflect back both on the impetus for establishing annual positive operating leverage as one of our long-term financial goals and why it's made us a better Company.

Just a few years ago, some shareholders questioned our spending discipline as we invested in the future, while the related revenue growth was often difficult to ascertain because continued refinements of our fair play philosophy masked the underlying momentum and the ultimate return on those investments was not always easily enough quantified.

But we continued to invest thoughtfully, strategically and opportunistically for the future.

However, we committed to our owners that we would better pace our investments with revenue growth and improved transparency.

You can now see the fruit of these commitments in our daily culture at Huntington, a culture in which continuous improvement, a focus on driving sustained revenue growth and accountability for every dollar of investment has been established as an absolute expectation.

We've developed a culture in which our share owners should expect, more often than not, that we will deliver positive operating leverage as we constantly strive to post improved returns and top tier performance.

With that, let's turn to slide 17 for some closing remarks and our initial 2016 expectations.

We continue to manage the Company with a focus on delivering consistent, through-the-cycle shareholder returns.

This strategy entails reducing short-term volatility, achieving top-tier performance over the long-term and maintaining our aggregate moderate to low risk profile throughout.

We've successfully built a strong, distinguished consumer brand of differentiated products and superior customer service.

We continue to execute our strategies and to adaptor adjust to our environment where necessary.

We completed and integrated the highly accretive acquisition of Macquarie Equipment Finance, which we rebranded Huntington Technology Finance, or HTF.

Other past investments also continue to pay off such as our data analytics effort, which will drive better customer targeting and ongoing efforts to improve sales execution across the franchise and grow revenue.

None of our investments are mature.

We also continue to invest in enhanced sales management, digital technology, further investments in data analytics and optimizing our retail distribution network, all of which will help drive future performance.

The early anecdotal evidence from the buildout of our [Meijer] in-store strategy in the back half of 2015 is very positive, pointing towards a faster ramp than in prior in-store branch openings.

We've refined our in-store execution over the past several years to drive this improved performance.

And these new stores represented some of the best locations, which will therefore also naturally lend themselves to stronger results.

We remain bullish on the economic vitality and economic outlook of our core Midwest footprint, while we're prudently monitoring certain industries or sectors potentially impacted by global macroeconomic development such as oil and gas exploration and production.

We believe these risks remain well contained within our portfolio and the majority of our core consumer and small, medium size businesses and customers enjoy a positive near-term outlook.

Customer sentiment also remains positive.

Commercial loan utilization rates showed a slight increase for the third consecutive quarter and loan pipelines are steady.

Competitive pressures across our businesses show signs of stabilizing and while our commitment to be disciplined lenders has not wavered.

2016, our commercial teams will be refocusing on our core middle market and small business customers, following the recent year's focus on building out our specialty lending verticals.

Our commitment to consumers remains constant.

In summary, we are pleased with our 2015 results and are optimistic as we enter 2016.

Just as we did last year, we've built our 2016 budget, assuming no benefit from interest rates, and have established contingency plans should an even more challenging environment materialize.

We control our own destiny.

And once again, our focus and execution will deliver for our shareholders in 2016.

While we expect NIM pressure will remain a headwind in the near term, we expect to grow revenue despite the pressure.

That said, we continue to expect the NIM will bottom out later this year, assuming no interest rate increase and will remain above 3%.

And further, we expect to grow both net interest income and non-interest income.

We expect 2016 full-year revenue growth will be consistent with our 4% to 6% long-term financial goal, excluding significant items and net MSR activity.

As you should have come to expect from us, we will continue to invest in our businesses, but we'll pace those investments, consistent with our revenue outlook.

The bulk of these investments will remain focused in technology, including data analytics, digital and mobile and improved sales execution.

We continue to manage our loan portfolio closely, particularly sectors in specific relationships most likely to be affected by recent market volatility, the strengthening dollar, declining commodity values and other macroeconomic factors.

I'm incrementally more concerned today about our credit outlook than I was when we spoke a quarter ago, but I stress that we do not see significant deterioration on the near-term horizon.

Given the absolute low level of our credit metrics, recent global economic volatility and the strength of the dollar, we expect some volatility in our credit metrics going forward and anticipate that loan loss provisioning for both ourselves and the broader industry will likely begin to increase sometime in 2016.

On the other hand, we expect our net charge-offs will remain in or below our long-term expected range of 35 to 55 basis points.

Finally, I always like to close with a reminder that there's a high level of alignment between the Board and management and our shareholders.

The Board and our colleagues are collectively the sixth largest shareholder of Huntington.

We have holder retirement requirements on certain shares and are appropriately focused on driving sustained long-term performance.

We're highly focused on our commitment to being good stewards of shareholders capital.

So now I'll turn it back over to Mark so we can begin the Q&A.

Thanks, Steve.

Operator, we will now take questions.

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

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

Thank you.

(Operator Instructions)

Your first question comes from the line of Ken Usdin from Jefferies.

Your line is open.

Thanks.

Good morning.

Hi, Ken.

Steve, if I could ask you to talk a little bit more about your comment about credits.

So this quarter obviously you put up a bigger reserve than we had seen in a while and you mentioned a couple specific things.

Charge-offs, however, are just remarkably low.

So just in terms of the outlook, how -- can you talk to us just about where you would expect that volatility to start to come from?

And should we also expect you to continue to have to start building reserves going forward?

And why would that be the case?

Thanks.

Ken, this is Dan.

Actually, the outlook is very strong and we feel very good about charge-offs entering into 2016.

The one area that we've seen some volatility in is kind of the whole commodities and oil and gas arena.

To remind you, we have very modest exposure there.

Where all the volatility has been is in the E&P space.

We have less than -- we have 0.5% of our total loans in that area, although we did build reserves this quarter based on that book.

The majority of the provision increase was aligned with that very small portfolio because we know there's a lot of volatility and we want to continue to take a conservative stance.

But in terms of the charge-off outlook, I expect to remain below our long-term stated range.

And, Ken, I think the other thing is we've had remarkable recoveries on CRE and we won't see that continuing into 2016.

So we would naturally see some increase in charge-offs there.

Yes, okay.

And then so just to play that forward just one more, so then how do we think about if you're really confident about the loss forecast, and this was a specific reserve action, then should we anticipate you needing to build reserves incrementally?

Or is this more just about charge-off normalization to both of your points?

Since we've been at these very low levels, we've said we're going to move towards normalization.

And I guess that's the -- that's kind of the same comment I would have is we've been at a historical lows with change in the cycle and with the [book] loan growth.

Yes, I think you will see some level of reserve build.

This quarter was probably a little bit more pronounced because we did have a particular focus on our small E&P book.

Understood.

Thanks, guys.

Ken, clearly below our long-term range of 35 to 55.

We'll probably see some increase towards that range, but we'll definitely be below it.

Yes, okay.

That's helpful.

Thank you.

Your next question comes from the line of John Pancari of Evercore ISI.

Good morning.

It's Steve Moss, actually, for John here.

Hi, Steve.

On credit one more time, with regard to the inflows you had this quarter on criticized assets and commercial loans, how much of that was tied to commodities?

Well the majority of the increase in the nonaccrual loans were -- as we said, we moved two reserve based loans to nonaccrual.

The criticized category actually was much more stable.

There was a very slight uptick in that category.

But that obviously would be included in the NALs.

Okay.

And then turning to -- on the commercial loan yield side, commercial loan yields declined 11 basis points here during the quarter.

Just wondering, where is the new money yields versus the fourth quarter book yield on the commercial loan book?

You know, Steve, it's going to be mixed across the portfolio.

And I would tell you that we continue to see the same demand that we have seen historically in terms of the -- our customers wanting to borrow.

It's just a matter of us being more disciplined and making sure that we bring onto the balance sheet what we feel comfortable with.

Clearly, we still see pressure on pricing -- maybe less pressure on structure, but still some pressure on structure.

And we're just being disciplined in terms of what we do.

Okay.

And I guess to follow that up on the liability side, just wondering are we nearing a plateau on the increase in total interest bearing liabilities or should that trend continue?

Well we've done a great job of growing households and commercial operating accounts.

And we're going to continue to see that, I believe, because of the philosophy we have around customer service, our fair play strategy.

So I would expect that we're going to continue to grow households and we'll still see good non-interest bearing growth along with that.

Okay.

Thank you very much.

Your next question comes from the line of Scott Siefers of Sandler O'Neill & Partners.

Your line is open.

Good morning, guys.

Good morning, Scott.

Two questions on overall loan growth.

You guys gave a lot of color on what's going on in the markets.

I suspect I know the answer to the first one.

But, Steve, if you can offer any additional thoughts on just any changes you're seeing in overall loan demand within the footprint.

And then specifically was hoping you guys could update us as well on your thoughts on your appetite for auto production, whether it's given pricing concerns or just any other pressures perhaps building in the market.

Scott, happy to try and answer.

On the first part, from what we can tell and we've talked to businesses in all of our markets over the last couple of weeks in particular, through multiple channels, and there's generally a bullishness.

And you see that reflect in some of the economic statistics we've provided you.

But when you take it down to the customer level, it's very positive, very encouraging.

So we're -- and our pipelines would reflect that.

We have a good pipeline for this time of year on the commercial side.

And your second question, Scott, was?

Appetite for auto production, just any changes -- if it's decreased due to pricing pressures or maybe any other emerging pressures or still feeling very good about that space.

I think the team has done a pretty good job.

We essentially were flat year-over-year with origination and that reflected efforts to maintain yield.

More recently, we've been able to increase the yield on new production.

So we're back above the 3% level.

Okay.

We like the asset class.

There's no change in outlook for it.

We just remain very disciplined in it.

You get to see that discipline as we release it every quarter in terms of the different credit and other metrics.

Okay.

Great.

Thank you guys very much.

Thanks, Scott.

Thank you.

Your next question comes from the line of Bob Ramsey of FBR.

Your line is open.

Hi, good morning.

I was just curious, how much of the provision this quarter was specific to those two energy credits that you highlighted?

$10 million.

I'm sorry?

I didn't quite catch that.

Did you say $9 million?

Well, $10 million.

That applied not just to the two credits, but that was our reserve base loan portfolio in total.

We added $10 million.

So we now have a 6% reserve on our reserve base lending portfolio.

Got it.

Perfect.

Thank you.

And are these -- are any of the loans in that portfolio SNCs?

Or are these all more direct lending relationships?

No.

Actually, our strategy -- these are all -- pretty much all shared national credit.

Our target is larger, well capitalized firms that have generally had access to the capital markets, have sophisticated hedging strategies, et cetera.

So this is largely a shared national credit book.

Got it.

We have no oil field services either, as a reminder.

Perfect.

And all first lien, I take it?

Yes.

Perfect.

Thank you.

Your next question comes from the line of David Darst of Guggenheim Securities.

Your line is open.

Good morning.

Hi, David.

Mac, I guess with the swaps that are rolling off this year, that would be about 8 basis points to your commercial yield.

I guess is that the key driver behind some of the margin compression?

Or is there anything you can do to offset that?

Or would it be volume?

David, it's certainly a component of pressure to the margin.

I would tell you that some -- a good portion of it continues to be LCR and how we're funding LCR with wholesale funds.

But this is all built into our plan around the expectations for 2016.

So we're comfortable with that guidance of staying at 3% or above in 2016.

And again, we're letting these swaps roll off so we can become more asset sensitive over time and we feel very comfortable with that strategy.

Okay.

And if you had another 25 basis points midyear, would that give you enough to stabilize the core commercial yields, ex swaps?

I'm not sure about the commercial, but I think across the entire portfolio, another 25 basis points would certainly give us some relief from that pressure.

Okay, great.

Thank you.

Thank you.

Your next question comes from the line of Geoffrey Elliott of Autonomous Research.

Your line is open.

Hello there.

Another question on credit.

What are the sorts of early indicators that you typically look at to see whether the cycle might be turning?

Well obviously we look at delinquencies and all the kind of traditional measurements.

But as we're kind of even a step beyond that -- as we're talking to our customers and looking for the signals, it obviously -- we're looking at job formation and interest rates and the manufacturing base within our footprint, which continues to be strong.

But in terms of the metrics, we try to look at the early indicators, which are downgrades within the portfolio, including credit migration within the pass rated loan category and delinquencies are the primary measures.

But again, before we even get to that point, we're trying to stay in touch with our customers and look at the key indicators that they are watching.

And as Steve indicated earlier, right now in our region the indicators are actually quite positive.

So I guess to follow up, how should we reconcile the indicators being quite positive with the message that you are kind of incrementally more cautious on credit as we go through 2016 for Huntington and for the industry?

Well I think there's a lot of uncertainty out there right now.

And that is -- we always take a conservative stance.

So if we have questions in the economy, we're going to take a more cautious approach.

But I would say that there's a stark contrast today between what you see in the news and the way our customers and then folks in our region are feeling.

But nonetheless, we are paying attention to the warning signs.

And clearly the energy and commodities businesses are quite volatile and that goes into our thinking.

And I think that's the key, right?

Because we're at a very low level in terms of charge-offs and nonperforming assets and we will see more volatility in 2016.

So off of this low level is it likely that we see a trend towards the upside?

That's likely.

But we're very comfortable with how we're positioned.

Great.

Thank you.

Thanks.

To close it, we continue to manage this risk profile with an aggregate moderate to low position.

And we're coming off of a very severe cycle with absolute lows.

So we're not overly concerned about it.

In fact, we like the -- we very much like the geography we're in and what we're hearing from our customers.

Your next question comes from the line of Andy Stapp of Hilliard Lyons.

Your line is open.

Good morning.

Hi, Andy.

Hi, Andy.

All of my questions have been answered.

But I just want to make sure you said you have no exposure to oil field service companies.

That's correct.

It would be negligible.

There would probably be a couple of small deals out there that you could classify as oil field services, but we have -- as a strategy, we have specifically avoided that.

And within our energy vertical, we have zero exposure.

Okay, great.

Thank you.

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

Your line is open.

Thanks.

Good morning, guys.

Hi, Jon.

Mac, a question for you on your guidance.

It's a bit of a propeller head question, but I'll ask it this way.

This 3% -- keeping the margin above 3%, are you talking about end of the year or full-year average for that?

I would say both, Jon.

Okay.

Helpful.

And then the other part is on the buyback.

You have a tremendous amount of room left, given your share price.

Just curious how you're thinking about the buyback versus other uses of capital.

Thanks.

So we did slow the buyback down as the quarter progressed -- wanted to keep our powder dry.

We fully intend to use the remainder of the buyback over the next two quarters.

And we've talked about how we use capital in terms of supporting the core growth and supporting the dividend.

And after that comes share buybacks and M&A activity.

But obviously at this price, we like our -- we like the price very well.

And do you plan to exhaust it, Mac?

Or is this -- is that just too big of a bite?

Obviously it will depend on market conditions and where we go from here.

But certainly that is possible for us to use the entire authorization.

Okay.

Thank you.

Thanks, Jon.

(Operator Instructions)

Your next question comes from the line of Terry McEvoy from Stephens.

Your line is open.

Thanks.

Good morning.

Hi, Terry.

Hi, Terry.

Just first question, service charges on deposit accounts, it was nice to see that 8% year-over-year growth in the fourth quarter and up positive, I believe, for 2015.

Looking ahead with no regulatory changes at all on fees, do you think the growth in that revenue line should be at or above the pace of new checking account or deposit relationship growth in the deposit base?

Terry, there are two components in that line, right?

There's the commercial, the treasury management revenue and then there's the retail side.

Keep in mind that in the third quarter of 2014, we made our last fair play adjustment of $6 million.

So you're seeing the first full quarter of kind of year-over-year growth off of the consumer side of the business reflecting the great job we do in bringing new households to the bank.

And I'll also tell you that treasury management had a great year in terms of product capability, penetrating the customer base and fee growth.

So certainly encouraged by what we see this quarter and definitely expect the trends to remain intact, especially relative to what you saw previous to this quarter.

And then just a follow-up question for Steve.

You talked about contingency plans should the revenue growth in 2016 not track your kind of outlook that you discussed today.

Could you just shed a little bit of light on -- I'm guessing that's on the expense side, where you see some opportunities if that does happen to be the case this year?

Well we continue to invest in the business.

That's part of the plan.

We've been investing every year.

We pace that investment and taper it off.

And then there are other categories of expenses that we would look to.

And some of that would be some of the business expansion in terms of people and related.

Certainly if we didn't see the revenue, the incentives and commissions would be adjusted.

We may adjust some of our discretionary investments in a number of areas that we routinely want to look at.

An example might be marketing.

So hopefully that gives you -- there is a smorgasbord that we're working with.

We do this routinely.

It's part of what we deliver to our Board.

If for some reason the economy starts changing, then we have a series of levels of contingent adjustments.

Thank you both.

Thank you.

Thanks, Terry.

(Operator Instructions)

Your next question comes from the line of Peter Winter of Sterne Agee.

Your line is open.

Good morning.

Hi, Peter.

Mac, I just want to go back to the comment -- the wanting to keep the powder dry.

Can you just talk about the M&A environment right now?

And also can you talk about what your financial parameters are for a bank acquisition?

So we -- we're obviously always looking for acquisitions.

I think we've been very consistent in how we talk about it.

I would say for us, there's really no change in terms of activity.

We look at core banking franchises.

We look at opportunities like Macquarie that we had this year and continue to look into six to eight footprint contiguous states.

So I'd say, Peter, there's really no change in how we see the environment or how we approach the environment.

Have you seen an increase in maybe willingness of sellers, given what's been going on recently in the lower for longer kind of rate environment?

It's probably too early to make that call.

I would say it's been consistent in terms of what we see happening.

Got it.

Okay.

Thanks.

Thanks, Peter.

There are no further questions at this time.

I return the call to our presenters.

We're very pleased with our fourth quarter and certainly the full-year 2015 results.

We delivered 13% annual growth in earnings per share and 4% annual growth in tangible book value per share.

2015 results reflected a 12.4% return on tangible common equity and a one-on-one return on tangible -- return on assets.

And as we enter 2016, I'm optimistic -- equally optimistic, I should say, with regard to the year ahead.

Our strategies are working.

Our investments continue to drive results.

And our execution remains focused and strong.

We are gaining market share and we are taking share of wallet.

So we expect to generate annual revenue growth consistent with our long-term financial goals and we'll manage our continued investments in our businesses to the revenue environment.

We continue to work toward becoming more efficient and improving returns.

Finally, I want to close by reiterating that our Board and this management team are all long-term shareholders.

Our top priorities include managing risk, reducing volatility and driving solid, consistent long-term performance.

So I want to thank you for your interest in Huntington.

We appreciate you joining us today.

Have a great day.

This concludes today's conference call.

You may now disconnect.